SECTION 5 – COMPENSATION

STUDY GUIDE

I. DEFINITIONS III. PROBLEMS

Define or give the meaning of the following:
1. Compensation – It is the extinguishment to the
concurrent amount of the debts of two persons who,
in their own right, are debtors and creditors of each
other.
2. Legal compensation – It is the compensation
when it takes place by operation of law even without
the knowledge of the parties.
3. Facultative compensation – It is the
compensation when it can be set up only by one of
the parties.
II. DISCUSSIONS
1. What are the distinctions between confusion
and compensation as modes for
extinguishing an obligation?
The distinctions between confusion and
compensation include the following:
 In confusion, there is only one person who is
a creditor and debtor of himself, while in
compensation, there are two persons
involved, each of whom is a debtor and a
creditor of the other.
 In confusion, there is but one obligation,
while in compensation, there are two
obligations.
 In confusion, there is impossibility of
payment, while in compensation, there is
indirect payment.
2. In what way is compensation similar to
payment?
According to Article 1289, compensation and
payment is similar in a way due to the fact that
the rules on the application of payments can be
applied to compensation if a person should have
against him several debts which are susceptible
of compensation.
3. May there be compensation although the
things due are not consumable? Explain.
NO. According to article 1279, there will be no
compensation if both debts are not in the form of
sums of money or consumable things of the
same kind and quality.
Explain or state briefly the rule or reason for your
answer.
1. D borrowed P50,000 as character loan (no
security) from a bank. Despite demands for
payment after the loan fell due, D did not pay
the bank. D has a savings deposit of P40,000
with the bank. Has the bank the right to apply
the deposit to the payment of D’s debt?
Yes, according to article 1287, since the other
party is a bank deposit. It may apply the deposit
to the payment of D’s debt.
2. D owes C P10,000 payable on November 20.
C owes D P10,000 payable on October 20.
Can compensation also take place although
the debts are not payable on the same date?
According to article 1282, the parties may agree
upon the compensation of the debts which are
not yet due. Thus if C and D would agree,
compensation can take place. It can also
happen if by October 20 D hasn’t paid C yet.
3. Illustrate compensation which can be set up
only by one parties.
According to articles 1287, 1288, if A deposited
an object to B, B the depository cannot claim
compensation. However, A can set up his
deposit as a compensation to B. Also if B
borrowed the thing, only A can set up the
compensation.
4. After contracting a debt in the amount of
P10,000 in favour of C, D succeeded through
fraudulent means to make C liable to him in
the same amount. Assuming that both
obligations are now due, may the two debts
be compensated against each other? What is
the effect if the debt of C is later annulled in
court at the instance of D?
According to article 1284, they may be
compensated, However, when C’s debt is later
annulled, D is still liable to C because the
annulment will make it seem like as if there had
been no compensation.

4. When may compensation take place when

only one of the debts is due?

According to article 1279, compensation may

take place when A has not yet paid B on the
date that B’s obligation becomes due, and the
compensation will be on that date.