Article 1281-
1286
Kirsten C. Sazon
Article 1281
Compensation may be total or
partial. When two debts are of
same amount, there is a total
compensation.
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Total - when both obligations are of
the same amount and are entirely
extinguished.
Partial- when two (2) obligations are
of different amounts and a balance
remains.
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Total and Partial Compensations
Total or partial compensation applies to all
the different kinds of compensation.
Total compensation results when two debts
are of same amount. If they are of different
amounts, compensation is total as regards
the smaller debt, and partial only with
respect to the larger debt.
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Example:
• A owes B the amount ₱1,000.
• B owes A the amount ₱1,000.
If two debts are of the same amount, there is total compensation.
• A owes B amount ₱1,000.
• B owes A amount ₱700.
If two debts are unequal, the one who’s lacking shall be liable for the unsettled debt.
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Article 1282
The parties may agree upon the compensation
of debts which are not yet due.
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Conventional or Voluntary
Compensation
a. This applies to conventional
or voluntary compensation.
Conventional or Voluntary -
When it takes place by
agreement of the parties. (Art.
1282)
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b. It is sufficient in conventional
compensation that the agreement or
contract which declares the
compensation should itself be valid;
thus among other things, the parties
must have legal capacity and must
freely give their consent.
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Illustration:
• Jay bought grocery items worth P30,000
from Aling Jessalyn’s store under a line of
credit, with a maturity date of three months.
Just after two months, both Jay and Aling
Jessalyn agreed to settle the obligation.
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Voluntary or conventional
compensation includes any compensation
which takes place by agreement of the
parties even if all the requisites for legal
compensation (Art. 1279) are not present.
This kind of compensation has no special
requisites. It is sufficient that the contract of
the parties, which declares the
compensation, is valid. (Art. 1306)
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Article 1283
If one of the parties to a suit
over an obligation has claim for
damages against the other, the
former may set it off by proving
his right to said damages and
the amount thereof.
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Judicial compensation
Compensation may also take place when so
declared by a final judgement of court in a
suit. A party may set off his claims for
damages against his obligation to the other
party by proving his right to said damages
and the amount thereof.
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Illustration:
Regina owes Cady ₱10,000. When
Cady demanded payment, Regina
failed to pay.
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Illustration:
In anger, Cady damaged the
property of Regina to the extent of
₱8,000.
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Regina can set off the obligation of Cady to pay her damages in
the amount of ₱ 8,000 against his debt of ₱ 10,000.
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b.
Judicial • All the requisites mentioned in Art. 1279 must be
Compensation or present, except that at the time of pleading, the
claim need not yet be liquidated. The liquidation (or
Set-off
fixing of the proper sum) must be made in the
proceedings.
a. c.
• Unless pleading and proof are made, the court
• This refers to judicial compensation or set –off.
cannot of its own accord declare the compensation.
Pleading and proof of the counterclaim must be
This is because of “the supplicatory character of
made.
our civil procedure.” The compensation takes place
by the judgement, as to the date the compensation
was pleaded. (Reyes and Puno)
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• Rescissible (Art.1381) and voidable
Article 1284 obligations (Art. 1390) are valid
until they are judicially rescinded or
When one or both avoided. Prior to rescission or
debts are rescissible or annulment, the debts may be
voidable, they may be compensated against each other.
compensated against • To avoid unfairness if rescission or
each other before they annulment is later on decreed by
the court, it is as if NO
are judicially rescinded compensation ever took place. The
or avoided. decree thus acts retroactively.
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Example:
• A owes B ₱ 1 million. Later, A forced B to sign a promissory
note for ₱ 1 million in A’s favor. The first debt is valid; the
second is voidable. But if all the requisites for legal
compensation is present, both debts are extinguished since
B’s debt is not yet annulled. This is obvious unfair if, later on,
B’s debt is annulled by the court. Thus, here, the
compensation that has taken place will be cancelled.
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Article 1285
The debtor who has consented to the assignment
of rights made by a creditor in favor of a third
person, cannot set up against the assignee the
compensation which would pertain to him against
the assignor, unless the assignor was notified by
the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him
but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge
of the debtor, he may set up the compensation of
all credits prior to the same and also later ones
until he had knowledge of the assignment. (1198a)
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Effect of Assignment on Compensation of
Debts
Under Art. 1290, “when all the requisites mentioned in
Art. 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and
debtors are not aware of the compensation” Thus
compensation takes place automatically or ipso jure (by
the law itself). Now then, if AFTER compensation has
taken place one of the extinguished debts is assigned to
a stranger, ordinarily this would be a useless act since
there is nothing more to assign. The defense of
compensation could then be set up.
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Exception: This takes place when the
assignment (after compensation has already
taken place) was made WITH THE CONSENT of
the debtor. Such consent operates as a WAIVER
of the rights to compensation.
Exception to the Exception: occurs when “at
the time he gave his consent, he reserved his
right to the compensation.
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Example:
A owes B ₱30,000 due yesterday.
B owes A ₱20,000 due also yesterday.
Both debts are extinguished up to the amount ₱10,000.
Hence, A still owes B ₱10,000 today.
Now, if B assigns his right to C, the latter can collect
only ₱10,000 from A.
However, if A gave his consent to the assignment before
it was made or subsequently (par.1.), A loses the right to
set up the defense of compensation. So A will be liable
to C for ₱30,000 but he can still collect the ₱20,000
owed by B. In other words, the compensation shall be
deemed not to have taken place.
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The Three Cases Covered by the
Article
a. The assignment may be made with the
consent of the debtor. (Par.1, Art.1285)
b. The assignment may be made with the
knowledge but without the consent (or
against the will) of the debtor. (Par.2, Art.
1285)
c. The assignment may be made without the
knowledge of the debtor. (Par.3, Art.1285)
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The First Case- The Assignment May Be
Made with the Consent of the Debtor
Effect: Compensation cannot be set up
(because there has been consent and,
therefore, a waiver)
Exception: If the right to the compensation
(that has already taken place) is reserved.
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Example:
• A owes B ₱ 30,000 due on December 15
• B owes A ₱ 10,000 due on December 15
• B assigned his right to C on December 1 with the consent of A.
• On December 15, A cannot set up against C, the assignee, the
compensation which would pertain to him against B, the assignor.
In other words, A is liable to C for ₱ 30,000 but he can still collect
the ₱10,000 debt of B.
• However, if A, while consenting to the assignment, reserved his
right to the compensation, he would be liable only for ₱ 20,000 to
C. (par.1)
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The Second Case-Assignment Made with
the Knowledge but without the Consent
of Debtor.
Effect: Compensation can be set up
regarding debts previous to the cession or
assignment. This refer to debt maturing
before the assignment (that is, before the
NOTICE); hence here, legal compensation
has already taken place.
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Example:
• A owes B ₱ 10,000 due on November 1.
• B owes A ₱ 20,000 due on November 10.
• A owes B ₱ 10,000 due November 15.
• A assigned his right to C on November 12. A notified B but the later did not
give his consent to the assignment. How much can C collect from B?
• B can set up the compensation of debts on November 10 which was before the
cession on November 12. (par.2.) There being partial compensation, the
assignment is valid only up to the amount of ₱ 10,000.
• But B cannot raise the defense of compensation with respect to the debt of A
due on November 15 which has not yet matured.
• So, on November 12, B is liable to C for ₱ 10,000. Come November 15, A will
be liable for his debt of ₱ 10,000 to B.
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The Third Case-Assignment Made
without the Knowledge of Debtor.
Effect: Debtor can set up compensation as a
defense for all debts maturing PRIOR to his
knowledge of the assignment (whether the
debts matured before or after the
assignment).
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Example:
• In the preceding example, let us suppose that the assignment was made
without the knowledge of B who learned of the assignment only November 16.
• In this case, B can set up the compensation of credits before and after the
assignment. The crucial time is when B acquired knowledge of the assignment
and not the date of the assignment.
• If B learned of the assignment after the debts had already matured, he can
raise the defense of compensation; otherwise, he cannot.
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Reason for the Article
Art. 1285 has for its purpose the
prevention of fraudulent deprivation of
the benefits of total and partial
compensation.
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Article 1286
Compensation takes place by
operation of law, even though the
debts may be payable at different
places, but there shall be an
indemnity for expenses of
exchange or transportation to the
place of payment. (1199a)
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Compensation by Operation of Law
a. This applies to compensation by
operation of law.
b. “Indemnity for expenses of
transportation” (this applies to
transportation of the goods or of the
object).
c. “Indemnity for expenses of
exchange” this refers to monetary
exchange , in case the debts are money
debts).
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Example:
• Jessel owes Gab ₱ 1 million payable in
Manila and Gab owes Jessel ₱ 1 million
payable in England. Whoever claims
compensation must pay for the
exchange rate of currency.
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Foreign Exchange
- the conversion of an amount of money
or currency of one country into an
equivalent amount of money or currency
of another.
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• Mirjam Nilsson
• www.contoso.com
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