Effect of assignment of rights in compensation

The effect of assignment of rights by the creditor to a third person is discussed in Article 1285 of the Civil Code of the Philippines, to wit:
ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a)
The above provision addresses cases of compensation which takes place after an assignment of rights made by the creditor to a third party. If the assignment is with the consent of the debtor, he cannot set up against the asignee (third person) the compensation which would pertain to him against the assignor, UNLESS the assignor was notifies by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the assignment is with debtor's knowledge but did not give his consent, the debtor may set up compensation of debts previous to the assignment but not of subsequent ones. The amendment of the second paragraph of Article 1285 has been proposed in such a way as to make the determining point of time not the act of cession itself but the receipt of the notice of the cession, as this is more in consonance with the rule stated in Article 1626.[1][2]

If the assignment is without the knowledge of the debtor, the debtor may set up compensation of all credits prior and also later to the assignment until he had knowledge of the assignment


[1] J.B.L. Reyes, Observation on the New Civil Code, XVI L.J., p. 49, Jan. 31, 1951.

[2] De Leon. (2014). Obligations and Contracts.

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