Short answer. Not where what they owe you is civil liability arising from a criminal offence. The Civil Code shuts off set-off in that situation, so the wrongdoer must actually pay what the offence made him liable for and pursue his own claim against you separately.
What the law says
Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.
Civil Code, Article 1288 — Civil Liability From a Crime. Read the full provision →
What the Code means by 'compensation' here
The word is a trap for non-lawyers. In this part of the Civil Code, compensation does not mean payment for injury — it means set-off, the extinguishing of two debts against each other when two people happen to be each other's creditor and debtor. Ordinarily this is convenient and the law encourages it. Article 1288 carves an exception out of it: neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. Where that description fits one side of the ledger, the two debts stay separate and neither cancels the other.
Why the law refuses to let the two net out
The reason is that indemnity owed because of a crime is not an ordinary commercial debt. Allowing it to be wiped out by an unrelated obligation would let a wrongdoer discharge the consequences of the offence with a bookkeeping entry, and would give anyone contemplating fraud an incentive to first become the victim's creditor. So the rule points in one direction: the person carrying the liability from the offence cannot invoke set-off to avoid satisfying it. His own claim against you does not disappear — he keeps it, and may enforce it — but he has to bring it on its own feet rather than use it as a shield.
The condition most people skip over
The article speaks of civil liability arising from a penal offense. That qualifier does real work. A dispute you regard as fraudulent is not automatically within it; the liability must be one that arises out of a criminal offence rather than out of a broken promise or a bad bargain. If no criminal case has been pursued and the claim rests purely on breach of contract or on negligence, this provision is not the answer and the ordinary rules on set-off apply. Establishing which side of that line you are on is the first substantive question, and it usually decides the argument.
What to sort out before you argue about it
Separate the two obligations on paper: what he owes you, on what basis and when it arose, against what you owe him, on what basis and when. Keep the documents for each in its own bundle, because the arguments do not overlap and mixing them is how a strong position gets muddled. If the debt you owe him is genuine, acknowledge it and deal with it on its own terms rather than pretending it away. Then take both bundles to a lawyer, who will need to see whether the liability against him truly arises from an offence before advising on how this article applies.
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.
- Metropolitan Bank and Trust Company vs. Joaquin Tonda and Ma. Cristina Tonda, G.R. No. 134436, August 16, 2000 — read the decision on LawPhil →
- Amado F. Cabaero and Carmen C. Perez vs. Hon. Alfredo C. Cantos, et al, G.R. No. 102942, April 18, 1997 — read the decision on LawPhil →