Short answer. Generally no, if the claim was properly communicated. Article 1279 requires, as a condition of legal compensation, that over neither debt is there any retention or controversy commenced by third persons and communicated in due time to the debtor. A garnishment or third-party claim, once notified, blocks the automatic set-off.
What the law says
That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
Civil Code, Article 1279 — Requisites of Legal Compensation. Read the full provision →
Legal compensation needs all five requisites
Legal compensation is the automatic cancelling-out of two debts by operation of law, but it only happens when every condition in Article 1279 is met. The article requires that each person be principally bound and be a principal creditor of the other; that both debts be sums of money or the same kind of consumable thing; that both debts be due; that they be liquidated and demandable; and, finally, the requisite that concerns you: that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. Miss any one of these and legal compensation does not take place; the debts do not simply erase each other.
A garnishment or third-party claim defeats set-off
This last requisite is exactly what a garnishment or third-party claim triggers. When an outsider garnishes the debt owed to your creditor, or otherwise commences a controversy or asserts a right of retention over it, that debt is no longer free and clear. Article 1279 says compensation is improper where such a retention or controversy has been commenced by third persons and communicated in due time to the debtor. The reason is protective: a third person who has seized or laid claim to the credit should not be defeated by the two original parties quietly wiping the debt out between themselves. So once you are duly notified of the garnishment, you cannot rely on automatic set-off to extinguish it.
Timing and the limits of the rule
Two things sharpen the picture. First, the claim must be communicated in due time to the debtor — a controversy the debtor never learns of, or learns of too late, may not have prevented a compensation that had already operated. Second, this requisite governs legal compensation. The parties are not necessarily barred from agreeing to offset by their own contract, but a voluntary set-off cannot be used to prejudice the third person's garnished or retained interest. The safe course, once a garnishment or third-party claim over the debt has been served on you, is to withhold the amount claimed and let the competing claims be sorted out, rather than treating the mutual debts as cancelled.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Banco De Oro Unibank, Inc. vs. Edgardo C. Ypil, Sr., et al, G.R. No. 212024, October 12, 2020 — read the decision on LawPhil →
- Union Bank of the Philippines vs. Development Bank of the Philippines, G.R. No. 191555, January 20, 2014 — read the decision on LawPhil →
- Philippine National Bank vs. Court of Appeals, et al, G.R. No. 108052, July 24, 1996 — read the decision on LawPhil →
- United Planters Sugar Milling Co., Inc. vs. The Hon. Court of Appeals, et al, G.R. No. 126890, July 11, 2007 — read the decision on LawPhil →