Distinguished from Merger What does Conventional Compensation intend to

COMPENSATION MERGER eliminate or overcome?

-There must always be 2
obligations
-There are 2 persons who
are mutually debtors and
creditors of each other in
two separate obligations,
each arising from a
different cause
-Involves only 1 -Obstacles which prevent ispo jure extinguishment of
obligation their obligations
-Only 1 person in whom
the characters of creditor Requisites of Conventional Compensation:
and debtor meet, with 1. That each of the parties can dispose of the
respect to the same credit he seeks to compensate
obligation 2. That they agree to the mutual extinguishment
of their credits

Distinguished from Counterclaim
COMPENSATION COUNTERCLAIM
--Takes place by operation -Must be pleaded to be
of law and extinguishes effectual
reciprocally the two debts
as soon as they exist
simultaneously, to the
amount of their concurrent
sums
Kinds of Compensation
What are the kinds of compensation as to their effects?
-Total:
 When the two obligations are of the same
amount
-Partial:
 When the amounts are not equal
What are the kinds of compensation as to origin?
-Legal:
 When it takes place by operation of law
because all the requisites are present
 According to Colin & Capitant, this is the true
compensation
-Facultative:
 When it can be claimed by one of the parties
who has the right to object it, such as when
one of the obligations has a period for the
benefit of one party alone and who renounces
that period so as to make the obligation due
-Conventional:
 When the parties agree to compensate their
mutual obligations even if some requisite is
lacking, such as that provided in Art. 1282
-Judicial:
 When decreed by the court in a case where
there is a counterclaim, such as that provided
in Art. 1283
Conventional Compensation
What is Conventional Compensation?
-Compensation by agreement of the parties, even if
some requisite provided by law should be wanting
Facultative Compensation
What is Facultative Compensation?
-Compensation which can be set up only at the option
of a creditor, when legal compensation cannot take
place because of the want of some legal requisites for
the benefit of the creditor
-The creditor can renounce his right to oppose the
compensation and he himself can set it up
Ex: A owes B an Arabian horse. B owes A (generic).
 There can be no legal compensation here because
of lack of identity in the quality of the things due.
 Since B can deliver any horse to A, so long as it is
not of poor quality, B can set up compensation which
would have the same effect as if B demanded the
Arabian horse from A and then delivered it back to A
in the performance of B’s obligation
Ex: A receives 100 cavanes of rice in deposit from B,
who also owes A 100 cavanes of rice.
 There can be no compensation here because under
Art. 1287, it is not allowed
 But B, the depositor, may waive the benefit given
him by law and assert compensation if A sues him for
his debt
 It would be the same as if B recovers his deposit of
100 cavanes from A and then pays his debt to A by
returning the same rice to A
Facultative Conventional
Compensation Compensation
-Unilateral -Depends upon the
agreement of both parties
Judicial Compensation
What is Judicial Compensation?
-Compensation which takes place when the defendant,
who is creditor of the plaintiff for an unliquidated
amount, sets up his credit as a counterclaim against the
plaintiff and his credit is liquidated by the judgment 
Compensating it with the credit of the plaintiff
*Two debts arising from final and executory
judgments may be extinguished due to compensation
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they
be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor.
Mutual Debtors and Creditors
Requisites for Compensation to take place, the parties
must be mutually debtors and creditors:
1. In their own right and
2. As Principals
What if there is no relationship of mutual creditors and
debtors?
-There can be no compensation
Ex: A share of stock in a corporation
 Not a credit in favor of the stockholder and cannot
be compensated against a debt of the stockholder to the
corporation
Parties must be mutually debtors and creditors in their
own right:
What if one party is occupying a representative
capacity (such as guardian or an administrator and he
is personally liable as a debtor)?
-There can be no compensation because of the first
requirement that the parties must be mutually debtors
and creditors in their own right
What happens when one party is in his representative
capacity as creditor?
-The real creditor is the ward under guardianship or the
estate under administration
What if one party is debtor on a personal obligation
and belongs to a partnership which has a credit against
his personal creditor?
-There can be no compensation of the two obligations
-In other words: There can be no compensation if one
owes a debt personally to the other, and has a claim in
a representative capacity against the latter
Escaño vs Heirs of Escaño
Facts:
 Plaintiff Escaño is indebted to the heirs of
Fernando Escaño
 Fernando, in his lifetime transferred to a
partnership by the name of “Viuda e Hijos de
Escaño” certain sums belonging to the
Plaintiff, thereby making said partnership
liable to the plaintiff for said sums
 The heirs individually constitute such
partnership
 The Plaintiff, admitting her indebtedness to
the heirs, claim that there should be no
compensation for the sums claimed by her
Held:
 There can be no compensation in this case
because the heirs personally are not debtors
of the Plaintiff
 It is the partnership which is the debtor of the
Plaintiff, while the Plaintiff is indebted to the
heirs individually
 There are no mutual creditors and creditors in
their own right
Parties should be mutually debtors and creditors as
principals:
What does the second requirement mean?
-That there can be no compensation when one party is
a principal creditor in one obligation but only a surety
or guarantor in the other
Can a principal debtor set up by way of compensation
what his creditor owes to his surety?
-No
Can a solidary debtor set up the obligation of the
creditor in favor of a co-debtor?
-No, except as to the share of the co-debtor
What if the requisites are satisfied?
-Compensation will take place
Ex: The defendant was sentenced to pay a certain sum
to the plaintiff in the plaintiff’s capacity as
administrator of the estate of his father and the plaintiff
in turn was ordered to pay to defendant a certain
amount which was a debt of plaintiff’s father and
chargeable against the estate under administration
 Compensation was proper
Ex: A stockholder had a claim against a corporation
for overpayment of his stock and the corporation in
turn had a claim against him for amounts which he had
collected as treasurer of the corporation
 Compensation was allowed
Ex: A depositor in a bank has an indebtedness in favor
of the bank
 Compensation may take place between his deposit
and his indebtedness
Fungible Things Due
What does the Code require?
-For the things to be “consumable” (this is a mistake)
What are consumable things under Art. 418?
-Those which cannot be used in a manner appropriate
to their nature without their being consumed
Ex: Reciprocal obligations are to deliver horses
 The things due would not be consumable yet there
can be compensation
What term do the French Code (Art. 1291) and
Argentine Code (Art. 820) use?
-Fungible
What does the Italian Code (Art. 1287) refer to?
-Things of the same kind which in payment can be
substituted for each other  Our Code follows this
*The things due in both obligations must be fungible
or things which can be substituted for each other
What will be dependent largely on the will of the
parties?
-Whether prestations refer to fungibles
Ex: Two obligations to deliver a certain number of
cows or a certain number of carabaos
 There can be compensation
 All that is necessary is that the specie of the things
is determined
What if the obligations refer to determinate or specific
things?
-There can be no compensation
Maturity of Debts
What must be due to permit compensation?
-Both debts
What if there is an existing debt not yet matured?
-It will not prevent the enforcement by action of that
which is already due
What if before payment of that which matured first, the
second debt also matures?
-There will be compensation
Debts Both Demandable
What does it mean when debts are both demandable?
-The debts are enforceable in court, there being no
apparent defenses inherent in them
What must the obligations be?
-Civil obligations, excluding those that are purely
natural
What if the obligations are subject to suspensive
conditions?
-Cannot be set up by way of compensation before the
fulfillment of the condition, although once fulfilled,
the provisions of Art. 1187 should be observed as to
the retroactive effect of the happening of the condition
What if one of the debts has already prescribed?
-There can be no more compensation
What if one of the parties is in a state of suspension of
payments?
-Compensation cannot take place because his
obligation is not demandable
Cases where obligation is not demandable and not
subject to compensation:
1. When there is a period which has not yet
arrived, including the case when one party is
in a state of suspension of payments
2. When there is a suspensive condition that has
not yet happened
3. When the obligation cannot be sued upon, as
in natural obligation
Prescription
What must be considered to determine whether
compensation is barred by prescription of one of the
obligations?
-The moment when the two credits co-existed and
NOT when the compensation is set up
What if at the time the two debts co-exist and neither
has prescribed?
-The prescription of one afterwards will not prevent
compensation
What if the requisites for compensation have co-
existed?
-There will be mutual extinguishment even if it be for
one day before the prescription of one of the
obligations because this takes place ispo jure
Rescissible or Voidable Debts
When is a rescissible or voidable debt valid and
demandable?
-Before a judicial decree of rescission or annulment,
thus it can be compensated (Art. 1284)