section 5 compensation

Compensation (Art. 1278)

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Compensation vs Confusion

Compensation: TWO PERSONS who are both creditor and debtor of each other with AT LEAST TWO OBLIGATIONS

Confusion: ONE PERSON becomes both creditor and debtor in the SAME obligation.

Kinds of Compensation - as to cause

a. legal

b. voluntary or conventional

c. judicial

d. facultative

legal compensation

Takes effect by law automatically (ipso jure) once all legal requisites are present.

voluntary or conventional compensation

When it takes place by agreement of the parties.

requisites of conventional compensation

1. each party CAN DISPOSE the credit he seeks to compensate

2. they AGREE to the mutual extinguishment of their credits

judicial compensation

when it takes effect by judicial decree

facultative compensation

when the compensation can be set up only by ONE of the parties

Kinds of Compensation - as to effect

a. total

b. partial

total compensation

when the two debts are of the SAME AMOUNT

partial compensation

when two debts are NOT OF THE SAME amount

(Art. 1279) in order The compensation may be proper, it is necessary:

PSDLN → “Please Send Debt Like Normal”

P – Principal parties

S – Same kind

D – Due

L – Liquidated & demandable

N – No third-party claim

Claimed Liquidated

A claim is liquidated when the amount of the debt is

Debt

a claim whose exact amount is already determined. It is a claim that has been officially decided by a court or a quasi-judicial body and declared to be a debt.

Claim

A claim is like a debt that is not yet final (in embryo). It is only proof that a debt might exist and must still go through the legal process before it becomes an official debt.

Right of Guarantor to Set Up Compensation (Art. 1280)

A guarantor may set up compensation with respect to what the creditor owes the principal debtor

agreement for compensation (Art. 1282)

The parties may agree upon the compensation of debts which are not yet due

Legal Compensation vs Conventional Compensation

Legal compensation occurs automatically when the legal requisites exist while conventional compensation occurs by agreement of the parties

Set-off of damages in a lawsuit (Art. 1283)

A party in a suit may offset the damages owed to him by proving his right to the damages and their amount.

Compensation despite rescissible or voidable debts (Art. 1284)

Debts that are rescissible or voidable may still be compensated before they are judicially rescinded or annulled.

Art. 1381. the following contracts are rescissible:

G – Guardian (ward suffers lesion)

A – Absentee representation with lesion

F – Fraud of creditors

L – Litigation property transferred

O – Other rescissible contracts by law

Art. 1390. Voidable or Annullable Contracts

1. Incapacity – One party cannot legally give consent.

2. Vitiated consent – Consent is affected by mistake, violence, intimidation, undue influence, or fraud (MVIUF).

Debtor’s compensation rights in assignment of claims (Art. 1285)

Debtor can only offset debts against the assignee if he reserved the right when consenting; if unaware of the assignment, he may offset all prior and subsequent debts until notified.

Assignment of Rights

The transfer of rights, especially contractual rights, from one party to another

Effect of Assignment of Rights (With Debtor’s Consent without reservation)

debtor cannot set up compensation against the assignee

Effect of Assignment of Rights (Consent with reservation)

Debtor can offset against the assignee.

Effect of Assignment of Rights (No knowledge of assignment)

Debtor can offset all prior and later debts until notified.

Compensation applies despite different payment locations (Art. 1286)

Compensation happens automatically by law even if debts are payable in different places, but the debtor must pay for exchange or transportation costs.

(Art. 1287) Compensation cannot be used if the debt comes from:

1. Deposit or depositary/bailee obligations, or

2. Support owed gratuitously (except as allowed by law).

No compensation for debts from crimes (Art. 1288)

Compensation cannot be applied if one of the debts comes from civil liability for a crime.

Debts Which Cannot Be Compensated

mnemonics: DCSC → “Don’t Cancel Special Claims!”

1. Debts arising from DEPOSIT

2. Debts arising from COMMODATUM

3. Claims for SUPPORT due by gratuitous title

4. Civil liability arising from a CRIMINAL OFFENSE

Order of compensation when multiple debts exist (Art. 1289)

If a debtor owes several compensable debts, the rules for applying payments determine which debts are offset first.

Automatic effect of legal compensation (Art. 1290)

When all requisites are met, compensation happens by law and extinguishes both debts up to the concurrent amount, even if parties don’t know.