Louisiana Civil Law Obligations

Professor Trahan



Retrojet (comme fait)

for

Section 5, Chapter 6, Title III, Book III of the Civil Code

entitled

"Compensation"

avec commentaire



Section 5. Compensation



Introductory Comment to Section 5



Compensation is a juridical operation whereby, when each of two persons is as to the other obligor and obligee (that is, each is indebted personally to the other), their reciprocal obligations are extinguished to the extent of the lesser obligation.



§ 1. Varieties of compensation



Introductory Comment to § 1



There are three types of compensation: legal (by operation of law), conventional (by effect of contract), and judicial (by order of a court).



Art. 1893. Legal compensation: prerequisites



Legal compensation takes place when (i) two persons owe debts to each other (ii) whose objects are identical and (iii) that are (a) liquidated and (b) exigible.



The objects of two obligations are identical if and only if both obligations are for the giving and delivery of things that, as between themselves, are (i) fungible and (ii) identical in kind.



An obligation is liquidated if and only if (i) it is certain and (ii) its amount is determined.



An obligation is exigible if and only if (i) it is a civil obligation and (ii) it is not, at the moment at which the qualification is to be made, subject to any suspensive temporal modalities. An obligation is not inexigible merely because the obligor has been granted a delay of grace within which to perform.



Comments



(a) The first paragraph of this article reproduces the substance of the first paragraph of CC art. 1893 (rev. 1984). It would not change the law.



(b) The second and third paragraphs and the first sentence of the fourth paragraph of this article are new. They would not, however, change the law. They merely make explicit rules that were implicit in CC art. 1893 (rev. 1984) and that have been recognized by Louisiana jurisprudence and Louisiana civil law doctrine and, to some extent, French civil law doctrine.



(c) The second sentence of the fourth paragraph of this article reproduces the substance of the third paragraph of CC art. 1893 (rev. 1983). It would not change the law.



(d) Fungible things are those that conform to some generic description and that, as between themselves and from the standpoint of the persons who are concerned with them, are freely interchangeable. Examples include money, agricultural commodities, and minerals.



(e) An obligation can be liquidated by stipulation of the parties, judgment of the court, or a combination of the two.



(f) Once the obligation is liquidated, it becomes susceptible of legal compensation. If legal compensation then takes place, it is deemed to occur as of the moment at which the obligation became liquidated, not at the moment at which the obligation was first created.



(g) An obligation is "certain" if and only if and only as of the moment at which it is determined that the obligation in fact exists.



(h) An obligation can be liquidated in part and unliquidated in part. That is true if (i) the obligation is certain and (ii) the parties thereto, though in disagreement as to the full value of the obligation, agree that the obligation is worth "at least" this or that specified amount. In such a case, the obligation is liquidated up to that amount and unliquidated beyond that amount.



(i) A natural obligation is not susceptible of legal compensation. The same is true of an obligation that is subject to a suspensive term or a suspensive condition. The reason, in all three cases, is the same: the obligation is not exigible.



A civil obligation that is not subject to any suspensive temporal modalities but is subject to a resolutory term or a resolutory condition is susceptible of legal compensation. Unlike suspensive temporal modalities, resolutory temporal modalities do not preclude exigibility.



Art. 1893.1. Legal compensation: different sources



Legal compensation takes place regardless of the sources of the obligations.



Comments



(a) This article reproduces the first paragraph of CC art. 1894 (rev. 1984) without modification. It would not change the law.



(b) By virtue of this article, there is no obstacle to the legal compensation of, for example, a delictual obligation and a conventional obligation.





Art. 1893.2. Legal compensation: different places of performance



Legal compensation takes place even though the obligations are not to be performed at the same place, but allowance must be made in that case for the expenses of remittance.



Comment



This article reproduces CC art. 1895 (rev. 1984) without modification. It would not change the law.



Art. 1894. Legal compensation: impediments



Legal compensation does not take place if (i) one of the obligations is (a) for the return of a thing of which the owner was unjustly dispossessed or (b) for the return of a thing given in deposit or in loan for use (commodatum) or (ii) the object of one of the obligations is exempt from seizure.



Comments



(a) This article reproduces the second paragraph of CC art. 1894 (rev. 1984) with only minor stylistic variations. It would not change the law.



(b) The rules set forth in this article are suppletive. The parties to an obligation that falls within the scope of this article may, therefore, agree that it shall be compensated. But in that case, of course, the compensation would be conventional rather than legal.



Art. 1895. Legal compensation: renunciation



Legal compensation may be renounced, except when the renunciation would prejudice rights previously acquired by third parties.



Comments



(a) The first clause of this article is new. It would not, however, change the law. It merely renders explicit a rule that was implicit in CC art. 1899 (rev. 1984) and that was recognized in Louisiana civil law doctrine.



(b) The second clause of this article reproduces part of CC art. 1899 (rev. 1984), namely, the part of it that restricts the right to renounce legal compensation. It would not change the law.



(c) A right is "previously acquired," for purposes of this article, if it was acquired before the time at which the compensation that is the object of the supposed renunciation took place.



Art. 1896. Conventional compensation



Compensation of obligations may take place by agreement of the parties even though the requirements for legal compensation are not met.



Comment



This article reproduces CC art. 1901 (rev. 1984) with only one minor stylistic variation. It would not change the law.



Art. 1897. Judicial compensation



If an obligation is insusceptible of legal compensation only because it is unliquidated and if the obligation is nevertheless susceptible of prompt and easy liquidation at least in part, the court can order compensation as to that part of the obligation.



Comment



(a) This article reproduces the substance of CC art. 1902 (rev. 1984). It would not change the law.



(b) The court can exercise the extraordinary power accorded it by this article if and only if, as the text of the article now makes clear, the sole obstacle to legal compensation is that the obligation is unliquidated. If there is, in addition to or in lieu of that obstacle, some other obstacle, for example, the obligation in question and the obligation against which it is to be compensated have different objects or the obligation in question is inexigible or is for the return of a deposited thing, then the court cannot order compensation.



§ 2. Effects of compensation



Introductory Comment to § 2



The effects of compensation, without exception, can be induced from its very function and mechanism. The function is to enable the parties to avoid having to receive and then return the same performance. The mechanism is to permit each of the parties (i) to act as if both performances have in fact been rendered and (ii) to treat the performance that he owed as if it had been rendered back to him. It follows, then, that compensation should have the same effects as an actual performance.



Art. 1898. Compensation: effects: in general



When compensation takes place, both obligations are extinguished to the extent of the lesser obligation.



Comment



This article reproduces the substance of the second paragraph CC art. 1893 (rev. 1984). It would not change the law.



Art. 1899. Compensation: effects: imputation of payment



If an obligor owes more than one obligation that is subject to compensation, the rules of imputation of payment must be applied.



Comment



This article reproduces CC art. 1896 (rev. 1984) with only one minor stylistic variation. It would not change the law.



Art. 1900. Compensation: effects: principal & accessory



Compensation between obligee and principal obligor extinguishes the obligation of a surety.



Compensation between obligee and surety effects a legal subrogation of the surety to the rights of the obligee against the principal obligor.



Comments



(a) The first paragraph of this article reproduces the first paragraph of CC art. 1897 (rev. 1984) without change. It would not change the law.



(b) The second paragraph of this article is new. It does not, however, change the law. To the contrary, it merely reflects more accurately and in a less misleading fashion the rules that the second paragraph of CC art. 1897 (rev. 1984) was designed to express.



(c) According to the second paragraph of CC art. 1897 (rev. 1984), "[c]ompensation between obligee and surety does not extinguish the obligation of the principal obligor." If the term "extinguish" as used in this proposition is taken in an absolute sense, the proposition is accurate: the obligation of the principal obligor does subsist as to some parties and for some purposes. But if the term "extinguish" as used in this proposition is taken in a relative sense, the proposition becomes problematic. To be sure, the proposition is right from the standpoint of the principal obligor and the surety, but that's only because, when compensation between obligee and surety takes place, the surety becomes legally subrogated to the obligee's rights against the principal obligor, just as he (the surety) would have been had he (the surety) rendered an actual performance. See CC art. 1839(3) (performance of an obligation owed "for others"). From the standpoint of the obligee, however, the proposition is down right wrong, for compensation between obligee and surety extinguishes the principal obligation as to the obligee, just as would an actual performance by the surety. See 1 Saśl Litvinoff, The Law of Obligations § 19.19, at 658, in 5 Louisiana Civil Law Treatise (1992).



Art. 1901. Compensation: effects: passive solidarity



Compensation between the obligee and one solidary obligor extinguishes the solidary obligation of that obligor and his co-obligors only to the extent of the obligee's obligation to that obligor. As to any part of the solidary obligation that thereafter remains, the obligors, including the one as to whom compensation takes place, remain solidary.



The compensation provided for in this Article does not operate in favor of a liability insurer.



Comments



(a) The first paragraph of this article is new. It does not, however, change the law. To the contrary, it merely reflects more accurately and in a less misleading fashion the rules that the first paragraph of CC art. 1898 (rev. 1984) was designed to express.



(b) According to the first paragraph of CC art. 1898 (rev. 1984), "[c]ompensation between the obligee and one solidary obligor extinguishes the obligation of the other solidary obligors only for the portion of that obligor." The term "portion" as used in connection with a solidary obligor nearly always refers to that obligor's "virile share" of the obligation, which is a fixed fractional or percentage share of the total debt. But if one were to attribute that meaning to the term as used in CC art. 1898 (rev. 1984), then the article would fail to express the rule that it was intended to express. Under that article, compensation between the obligee and a solidary obligor was supposed to extinguish the solidary obligation dollar-for-dollar up to the value of the obligation that the obligee owed the solidary obligor, just as would have happened had the solidary obligor rendered performance to the obligee in that amount. To square the text of the article with this rule, Louisiana civil law doctrine has been forced to reject identifying "portion" as used in the article with "virile share" as used in the articles on passive solidarity and, further, to adopt a definition of "portion" as used in the article that can only be described as tortured. See Litvinoff, supra, § 19.20, at 659 ("In that context ["[c]ompensation between the obligee and one solidary obligor"], the precise meaning of the portion of that obligor must be properly understood. . . . In other words, compensation between the obligee and one solidary obligor extinguishes the solidary obligation not for the amount of that obligor's virile portion, but only for the amount, and to the extent, of the reciprocal debts compensated between the obligee and that obligor.")



(c) The second paragraph of this article reproduces the third paragraph of CC art. 1898 (rev. 1984) without change. It would not change the law.



Art. 1901.1. Compensation: effects: active solidarity



Compensation between one solidary obligee and the obligor extinguishes the obligation of that obligee and his co-obligees only to the extent of that obligee's obligation to the obligor. As to any part of the solidary obligation that thereafter remains, the obligees, including the one as to whom compensation takes place, remain solidary.



Comments



(a) This article is new. It does not, however, change the law. To the contrary, it merely reflects more accurately and in a less misleading fashion the rules that the second paragraph of CC art. 1898 (rev. 1984) was designed to express.



(b) According to the second paragraph of CC art. 1898 (rev. 1984), "[c]ompensation between the one solidary obligee and the obligor extinguishes the obligation only for the portion of that obligee." The term "portion" as used in connection with a solidary oblige nearly always refers to that obligee's "virile share" of the obligation, which is a fixed fractional or percentage share of the total debt. But if one were to attribute that meaning to the term as used in CC art. 1898 (rev. 1984), then the article would fail to express the rule that it was intended to express. Under that article, compensation between the obligor and a solidary obligee was supposed to extinguish the solidary obligation dollar-for-dollar up to the value of the obligation that the solidary obligee owed the obligor, just as would have happened had the obligor rendered performance to that solidary obligee in that amount. To square the text of the article with this rule, Louisiana civil law doctrine has been forced to reject identifying "portion" as used in the article with "virile share" as used in the articles on active solidarity and, further, to adopt a definition of "portion" as used in the article that can only be described as tortured. See Litvinoff, supra, § 19.20, at 660 ("Also in that context ["compensation between one solidary obligee and the obligor"], the precise meaning of the portion of that obligee must be properly understood in the manner already explained for the portion of a solidary obligor.").



Art. 1902. Compensation: effects: rights acquired by third parties



Compensation cannot take place to the prejudice of rights previously acquired by third parties.



Comments



(a) This article reproduces part of CC art. 1899 (rev. 1984), namely, the part of it that precludes compensation where it would prejudice third-party rights. The article would not change the law.



(b) A right is "previously acquired," for purposes of this article, if it is acquired before the time at which compensation would otherwise have taken place.



Art. 1902.1. Compensation: effects: assignment by obligee



An obligor who has consented to an assignment of the credit by the obligee to a third party may not claim against the latter any compensation that he otherwise could have claimed against the former.



An obligor who has been given notice of an assignment to which he did not consent may not claim compensation against the assignee for an obligation of the assignor that arises after receipt of that notice.



Comments



This article reproduces CC art. 1900 (rev. 1984) with only minor stylistic variations. It would not change the law.