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Compensation

Compensation has intuitively similar but distinct usages in the Civil Code of Québec (“CCQ”), distinguishable by context and by comparison to the French text. For example, the owner’s discretion to pay compensation (Fr. verser une indemnité) to a possessor who has improved the owner’s property in art 959(1) CCQ is distinct from the owner’s right, recognized in the same provision at art 959(2) CCQ, to effect compensation (Fr. opérer la compensation) for fruits and revenues owed to him by a possessor. The two senses are discussed below.

     (1) More commonly, compensation may refer to the object of an obligation to rectify a loss, or the object of an obligation arising in respect of benefits received. This form of compensation, which is closer than (2) to the lay sense of the word, typically appears in the context of damages to property or in obligations arising in contract. For example, a person is “liable for compensation” when he or she owes a debt to another as a result of a juridical fact involving loss.[1] The creditor of such a debt may be said to be “entitled to compensation”,[2] or have a “right to obtain compensation”.[3] In these instances, the French equivalents used are typically indemnité; réparation; en compensation des pertes; or similar. Elsewhere, the CCQ may require that certain obligations be performed “for compensation” of a benefit previously received.[4] In these instances, the phrase en compensation de l’apport (or similar) is the French equivalent.

     (2) In more particular usage, “compensation” appears in the regime of the CCQ governing the extinction of obligations. Certain obligations are said to be extinguishable “by compensation”.[5] The effect of compensation is the mutual reduction of reciprocal debts whose objects are of the same type.[6] To take a rudimentary example, where two people owe each other a debt, one for $60 and the other for $40, the effect of compensation will be such that the debt of the first person ($60) will be reduced to $20, while the debt of the second person ($40) will be extinguished outright.

     Compensation is effected by operation of law, when the requirements of art 1673 CCQ are met. It is automatic and irreversible.[7] Thus, neither party in the above example could, absent previous agreement, insist the debts be paid over two transactions instead of one. However, not all reciprocal debts are subject to compensation. Either party in an agreement involving reciprocal debts may argue against compensation by claiming that the debts do not meet the requirements for compensation under the CCQ.

     The criteria for the mechanism of compensation set out in the CCQ pertain to (a) characteristics of the debts involved, and (b) the objects of these debts. (a) First, only debts that are certain, liquid, and exigible are subject to compensation.[8] The requirement of certainty rules out debts whose existence is contestable, as well as debts attached to contingencies (as those arising in conditional obligations).[9] The requirement of liquidity rules out debts whose value is not easy to calculate.[10] In principle, this means that a person cannot, by arguing compensation, withhold a portion of payment to a contractor who has performed his task poorly.[11] This is because while the debt to the contractor is liquid, losses arising from poor services are generally not.[12] However, in such instances, the CCQ allows the application for judicial liquidation before setting up compensation.[13] The requirement of exigibility rules out claims of compensation based on obligations that are not actionable in law, such as natural obligations.[14]

     (b) The second criterion for compensation requires the object of each debt to be either money or fungible property identical in kind.[15] The object of the debts cannot be exempt from seizure.[16] In practice, compensation is rarely claimed for debts of fungible property, as the parties are likely to have made contractual arrangements for mutual extinguishment of debts.

     In addition to the basic requirements above, the CCQ imposes a number of restrictions that further limits the scope of compensation. For example, an act intended to harm another cannot be the basis for a claim of compensation.[17] Compensation cannot be claimed for a debt owed to someone who is bankrupt, unless the reciprocal obligations were taken on prior to bankruptcy.[18] The state may claim compensation against individuals, but individuals may not claim compensation against the state.[19]

[1]See e.g. art 1016 CCQ.
[2]See e.g. art 1067 CCQ.
[3]See e.g. art 2092 CCQ.
[4]See e.g. art 427 CCQ.
[5]See e.g. art 1671 CCQ.
[6]Jean-Louis Baudouin, Les obligations, 7th ed (Cowansville, Que : Yvon Blais, 2013) at para 1059 and 1059 [Baudouin].
[7]Ibid at para 1058.
[8]Art 1673 CCQ (although of course it may give rise to a claim for compensation in sense (1)).
[9]Baudouin, supra note 6 at para 1062.
[10]Ibid at para 1063.
[11]Ibid.
[12]Ibid.
[13]Art 1673 CCQ; Baudouin, supra note 6 at para 1064.
[14]Ibid at para 1065.
[15]Art 1673(1) CCQ.
[16]Art 1676(2) CCQ.
[17]Art 1676(2) CCQ.
[18]Baudouin, supra note 6 at para 1076.
[19]Art 1672 CCQ; Baudouin, supra note 6 at para 1075.