Short answer. Yes, where the two claims qualify. Article 1278 provides that compensation takes place when two persons, in their own right, are creditors and debtors of each other. If the requisites in Article 1279 are all present it happens by operation of law, whether or not either of you acts on it.
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 →
What compensation is, and what the phrase adds
Article 1278 of the Civil Code defines it economically: Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. The point of the mechanism is to spare two parties the pointless exercise of paying each other in opposite directions. The words in their own right do real work: each must be principally bound in his own name. A debt you owe the supplier cannot be set off against something the supplier owes your affiliate, your spouse or a company you control, however plainly the money ends up in the same place.
The requisites decide whether it applies
Article 1279 lists what has to be true for legal compensation: each obligor is bound principally and is at the same time a principal creditor of the other; both debts consist in a sum of money, or if the things due are consumable, they are of the same kind and quality where quality has been stated; the two debts are due; they are liquidated and demandable; and over neither of them is there any retention or controversy commenced by third persons and communicated in due time to the debtor. Your refund claim usually stumbles on liquidated — a rejected or unquantified claim is not yet a set-off.
When it applies, it applies by itself
Where all the requisites are present, nothing needs to be done. Article 1290 provides that 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 it. So the offsetting happens on the day the second debt becomes due, not on the day someone raises it, and interest and default on the extinguished portion stop then. Article 1281 adds that compensation may be total or partial: where the amounts differ, only the smaller is wiped out and the balance remains owing on the larger.
If it does not apply automatically, agree to it
Most commercial set-offs are agreed rather than legal, and that is perfectly proper. Article 1282 allows the parties to agree upon the compensation of debts that are not yet due, which covers the ordinary case of a credit note applied against a future order. Put it in writing: identify both invoices by number and amount, state the exact sum being set off, and record what remains payable on each side. A set-off applied silently in your own ledger, without the supplier's agreement, is indistinguishable from non-payment when the account is later reviewed.
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 →
Related provisions
- Civil Code, Article 1278 — Compensation Defined
- Civil Code, Article 1279 — Requisites of Legal Compensation
- Civil Code, Article 1281 — Total or Partial Compensation
- Civil Code, Article 1282 — Voluntary Compensation
- Civil Code, Article 1290 — Compensation by Operation of Law