G.R. No. 174882 ; January 21, 2013
MONDRAGON PERSONAL SALES, INC., Petitioner, vs. VICTORIANO S. SOLA, JR., Respondent.

FACTS

Petitioner Mondragon Personal Sales, Inc. and respondent Victoriano S. Sola, Jr. entered into a three-year Contract of Services, whereby respondent would provide a bodega cum office for petitioner’s operations in General Santos City in exchange for a service fee based on monthly sales. Prior to this contract, respondent’s wife had an existing franchise distributorship debt with petitioner. On January 26, 1995, respondent wrote a letter to petitioner’s Vice-President for Finance, acknowledging and confirming his wife’s indebtedness of ₱1,973,154.73 and binding himself, together with his wife, to pay this obligation on installment. Consequently, petitioner withheld respondent’s service fees from February to April 1995, applying them as partial payments toward this debt. Respondent then closed his operations and filed a Complaint for accounting and rescission, alleging that the withholding of his fees paralyzed his business.

ISSUE

Whether the Court of Appeals erred in reversing the trial court’s decision which upheld the validity of compensation (offsetting) by petitioner of respondent’s service fees against the debt he confirmed, and in ordering petitioner to pay respondent the withheld fees.

RULING

The Supreme Court granted the petition, reversing the Court of Appeals and reinstating the trial court’s decision. The legal logic centers on the proper application of legal compensation under Article 1279 of the Civil Code. For compensation to take effect by operation of law, the following requisites must concur: (1) that each 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; and (4) that they be liquidated and demandable. The Court found all these requisites present. Respondent, through his January 26, 1995 letter, validly bound himself as a principal debtor for his wife’s obligation, creating a debt to petitioner. Simultaneously, petitioner owed respondent his service fees for February to April 1995. Both obligations were liquidated, demandable sums of money. Therefore, legal compensation extinguished both debts to the concurrent amount. The offsetting was valid, and respondent remained liable for the resulting balance of ₱1,543,643.96. The Court also upheld the awarded interest and attorney’s fees.