Extinguishment of obligation by compensation example

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.

Kung lahat ng kailangan na naisaad sa Artikulo 1279 ay naroon, ang kompesasyon ay magkakaroon ng bisa dahil sa batas, at buburahin ang utang ng magkabilang partido, kahit na ang mga nangutang at nagpautang ay hindi batid ang kompesasyon.

Discussion:

This provision talks about the moment compensation takes effect in legal compensation. In contrast to voluntary compensation where compensation takes effect from the time agreed upon by the parties, or judicial compensation where compensation takes effect from the moment judgement becomes final and executory, legal compensation takes effect only when the following requisites are present:

  1. Each one of the obligors are bound principally, and that the obligors are at the same time creditors of each other.
  2. Both debts consists in a sum of money, or if the things due are consumable, they are of the same kind, and also of the same quality if the latter has been stated.
  3. That both debts are due.
  4. That both debts are liquidated and demandable.
  5. That both debts are not subject retention or controversy commenced by third parties and communicated in due time to the debtor.

Case Illustration:

BPI vs CA G.R. No. 116792 (1996)

Edvin Reyes opened two joint savings accounts at the Bank of the Philippine Islands, one with his wife and the other with his grandmother, where he regularly deposited the U.S. Treasury Warrants payable to the order of his grandmother as her monthly pension.

Three days prior to the grandmother’s death, a check was sent by the U.S. Treasury. When it was sent to the U.S. for clearing, the treasury dishonored it as it was discovered that the grandmother died 3 days prior to its issuance. The BPI then contacted Reyes, and he gave verbal authorization to debit it from his account.

Thereafter, however, Reyes demanded from the bank the reinstitution of the debited amount, in a suit for Damages filed before the RTC of Quezon City, Branch 79. BPI counterclaimed for moral and exemplary damages. The court dismissed the case for lack of cause of action. On appeal, however, the Court of Appeals reversed the decision. Hence, this petition seeking a review of the decision.

Issue: Whether or not compensation must be made by BPI.

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Article 1290 of the New Civil Code provides that “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.” Legal compensation operates even against the will of the interested parties even without the consent of them. Since the compensation takes place ipso jure, its effect arise on the very day on which all its requisites concur. When used as a defense, it retroacts to the date when its requisites are fulfilled.

Article 1279 stats that 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.

The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the same time creditors of each other. BPI stands as debtor of Reyes, a depositor. At the same time, BPI is the creditor of Reyes with respect to the dishonored U.S. Treasury Warrant which Reyes illegally transferred to his joint account. The debts involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a third person.