Short answer. No. Article 1278 of the Civil Code defines compensation as taking place only when two persons, in their own right, are creditors and debtors of each other. The offset must be between the same two parties. You cannot apply a debt owed to you by A against what you owe to B.
What the law says
Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
Civil Code, Article 1278 — Compensation Defined. Read the full provision →
The mutual identity requirement
Article 1278 frames compensation as a bilateral arrangement: two persons, in their own right, are creditors and debtors of each other. Both the debt and the credit must be between the same two parties. If A owes you money, and you owe B money, you cannot use A's debt to offset what you owe B — even if the amounts happen to be identical. A and B are different persons. Compensation requires a closed circuit: the same person who is your debtor must also be your creditor in some other transaction.
What "in their own right" means
The phrase in their own right excludes situations where one party is acting as an agent or representative. If you hold a debt on behalf of a principal — as an attorney-in-fact, for instance — you cannot offset that debt against something owed personally to you, because the credit belongs to your principal, not to you in your own right. Conversely, a debt owed to you as an individual cannot be offset against a debt you owe in your capacity as the administrator of an estate. The creditor-debtor relationship must be direct and personal on both sides.
Triangular debts: no automatic offset
Situations where three or more parties are involved — what you might think of as triangular debts — fall outside legal compensation. If you are owed by A and you owe B, the only way those obligations can be set off is through agreement: A, B, and you would need to reach a mutual arrangement, or you would need to first collect from A and then pay B. The law does not grant you the right to unilaterally reassign your credit against A to cover your debt to B. Each obligation is separate and must be discharged on its own terms, or extinguished by a separate voluntary agreement.
When to consider voluntary compensation
Legal compensation under Article 1278 is automatic when the conditions are met, but it is limited to direct mutual debts. Where the parties are not the same, a conventional or agreed compensation is possible — but only if all parties agree. If you are in a situation where you owe one person and are owed by another, the practical path is to collect the debt owed to you, then settle your own obligation separately. A lawyer can help structure a multi-party settlement if the debts are interrelated, but do not assume the law has extinguished anything simply because amounts roughly correspond.
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.
- Citibank, N.A. (Formerly First National City Bank) vs. Modesta R. Sabeniano, G.R. No. 156132, October 12, 2006 — read the decision on LawPhil →
- Bangko Sentral ng Pilipinas vs. Commission on Audit, et al, G.R. No. 168964, January 23, 2006 — read the decision on LawPhil →
- Jennefer Figuera vs. Maria Remedios Ang, G.R. No. 204264, June 29, 2016 — read the decision on LawPhil →
- Bank of the Philippine Islands vs. Court of Appeals, et al, G.R. No. 136202, January 25, 2007 — read the decision on LawPhil →