I.

OBLIGATIONS AND CONTRACTS

A. OBLIGATION : a juridical necessity to give, to do or not to do

Real obligation – obligation to give

Personal obligation – obligation to do or not to do

B. ELEMENTS/REQUISITES OF AN OBLIGATION

1. Active subject – obligee or creditor. The one who possesses the right.
2. Passive subject – obligor or debtor. The one who has the duty of giving.
3. Object or prestation – subject matter of the obligation
4. Efficient cause – vinculum juris or juridical tie. The consideration in which the obligation
exists.

C. SOURCES OF OBLIGATIONS

1. Law
a. Obligation of taxpayers to pay their taxes to the government
2. Contracts – a meeting of minds between two persons whereby one binds himself , with
respect to the other, to give something or to render some service
a. Contract of Loan
b. Contract of Sale

3. Quasi-contract – the juridical relation that arises from certain lawful, voluntary and
unilateral acts to the end that no one shall be unjustly enriched or benefited at the
expense of another
a. Negotiorum gestio – a person voluntarily takes charge of the agency or
management of the business or property of another, without any power or
authority from the latter. The owner of the business or property must reimburse
the officious manager the necessary and useful expenses the latter may have
incurred in the performance of his duties.
b. Solutio indebiti – a person receives something when he has no right to demand
it, thus, he is obliged to return it

4. Acts or omissions punished by law – a person criminally liable is also civilly liable when
the crime committed caused material damage
a. Civil liability arising from crime includes:
i. Restitution
ii. Reparation of the damage caused
iii. Indemnification for consequential damages
5. Quasi-delict – that fault or negligence where a person causes damage to another in the
absence of a contractual relation between the parties.

D. NATURE AND EFFECT OF OBLIGATIONS

1. The RIGHTS OF THE CREDITOR in obligations to give:

a. Obligation to give specific or determinate thing

i. To compel specific performance
ii. To recover damages in case of breach
b. Obligation to give a generic or indeterminate thing
i. To ask for performance of the obligation
ii. To ask that the obligation be complied with the expense of the debtor
iii. To recover damages in case of breach of the obligation

2. The DUTIES OF THE DEBTOR in obligations to give:

a. Obligation to give specific or determinate thing

i. To deliver the thing which he has obligated himself to give.
ii. To take care of the thing with the proper diligence of a good father of a
family.
iii. To deliver all accessions and accessories.
iv. To pay damages in case of breach of the obligation.

b. Obligation to give a generic or indeterminate thing

i. To deliver a thing which must be neither of superior nor inferior quality.
ii. To pay damages in case of breach of the obligation.

E. KINDS OF OBLIGATIONS

1. Pure Obligation – one which is not subject to any condition and no specific date is
mentioned for its fulfillment
Example: D obliges to pay C P 10,000.

2. Conditional Obligation – one whose consequences are subject in one way or another to
the fulfillment of a condition
Condition – a future and uncertain event, upon the happening of which, the effectivity
or extinguishment of an obligation subject to it depends.
a. KINDS OF CONDITION
i. Suspensive condition- the fulfillment of which will give rise to an
obligation
Example : D obliges to give C P 10,000 if C passes the CPA exam.
 ii. Resolutory condition - the fulfillment of which will extinguish an
obligation
Example : D binds himself to give C P 1,000 monthly allowance until C
graduates from college.
iii. Potestative – when the fulfillment of the condition depends upon the will
of a party to the obligation
iv. Casual – when the fulfillment of the condition depends upon chance or
upon the will of a third person
v. Mixed - when the fulfillment of the condition depends upon chance and
upon the will of a third person
vi. Possible – when the condition is possible of realization according to law,
nature, public policy or good customs
vii. Impossible - when the condition is not possible of realization according to
law, nature, public policy or good customs
viii. Positive – when the condition involves the performance of an act
ix. Negative – when the condition involves the non-performance of an act

b. Effects of loss, improvement, deterioration of the specific thing during the

pendency of the condition:
i. If the thing is lost without the fault of the debtor, the obligation is
extinguished
ii. If the thing is lost through the fault of the debtor, he shall be obliged to
pay damages
iii. When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor
iv. When the thing deteriorates through the fault of the debtor, the creditor
may choose between:
a. Rescission of the obligation with indemnity for damages
b. Fulfillment of the obligation with indemnity for damages
v. If the thing is improved by its nature or by time, the improvement shall
inure to the benefit of the creditor
vi. If it is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary

3. Obligation with a period-one whose consequences are subject in one way or another to
the expiration of said period or term.
Period – a future and certain event upon the arrival of which the obligation (or right)
subject to it either arises or is terminated

a. Kinds of Period
 i. Suspensive period – the obligation begins only from a day certain upon
the arrival of the period.
Example : I will pay you P 5,000 on October 31, 2013.
ii. Resolutory period – the obligation is valid up to a day certain and
terminates upon the arrival of the period.
Example: I will give you P 500 a month until the end of the year.
iii. Legal – when it is granted by law
iv. Conventional – when it is stipulated by parties
v. Judicial – when it is fixed by the courts
b. The debtor shall lose every right to make use of the period:
i. The debtor becomes insolvent
ii. When he does not furnish to the creditor the guaranties/securities he
promised
iii. When by his own acts, he has impaired said guaranties/securities and
when through fortuitous event they disappear, unless he gives new ones
equally satisfactory
iv. When the debtor violates any undertaking in consideration of the period
agreed by the creditor
v. When the debtor attempts to abscond

4. Simple obligation – one where there is only one prestation or subject matter.
5. Alternative Obligation – one where several prestations are due but the performance of
one is sufficient.
Example : D obliges himself to give D P 10,000, or a television set or a cellphone.

a. Right of choice belongs to the debtor unless granted to the creditor

b. Effect of loss or deterioration
i. Right of choice belongs to the debtor, loss is due to fortuitous event
a. If two or more of the objects remain, the obligation is still
alternative
b. If only one remains, the obligation still subsists but ceases to be
alternative
c. If none remains, the obligation is extinguished
d. The debtor cannot be held liable in all cases

ii. Right of choice belongs to the debtor, loss is due to the fault of debtor
a. If two or more of the objects remain, the obligation is still
alternative. Debtor cannot be held liable for damages for he can
still comply with the obligation.
b. If only one remains, the obligation still subsists but ceases to be
alternative. Debtor cannot be held liable for damages for he can
still comply with the obligation.
 c. If none remains, the obligation is converted into an obligation to
indemnify for damages. The indemnity shall consist of the value of
the LAST object to be lost.

iii. Right of choice belongs to the creditor, loss is due to fortuitous event
- The effects are the same as where the right of choice belongs to the
debtor
iv. Right of choice belongs to the creditor, loss is due to the fault of debtor
a. If two or more of the objects remain, the obligation is still
alternative.
i. Debtor cannot be held liable for damages if creditor
chooses any of those remaining.
ii. If creditor chooses any of the lost object, bebtor is liable
for the value of the object plus damages.
b. If only one remains, the obligation still subsists but ceases to be
alternative. The creditor may choose:
i. Fulfillment of obligation to deliver the remaining object.
Debtor not liable for damages
ii. Any of the objects which were lost, debtor is liable for the
value of the object plus damages
c. If none remains, the obligation is converted into an obligation to
indemnify for damages. The indemnity shall consist of the value of
ANY object chosen by the creditor plus damages.

6. Facultative Obligation- one where only one prestation is due but the debtor may
substitute another.
Example: I will give you my piano but I may give my television set as a substitute.
a. Effect of loss of principal item
i. Before substitution, qualify if the loss is due to fortuitous
event or fault of the debtor
ii. After substitution – no effect
b. Effect of loss of the substitute
i. Before substitution, no effect
ii. After substitution – qualify if the loss is due to fortuitous
event or fault of the debtor

7. Joint Obligation – one where the whole obligation is to be paid or fulfilled

proportionately by the different debtors and/or is to be demanded proportionately by
the different creditors.
 8. Solidary Obligation – one where each one of the debtors is bound to render, and/or each
one of the creditors has a right to demand from any of the debtors, entire compliance
with the prestation.
a. Effect of payment made by one of the solidary debtors:
i. Obligation is extinguished
ii. There arises a consequent right of the paying debtor to claim from his co-
debtors the share which corresponds to them
b. Effect of remission of solidary obligation effected by the solidary creditor
i. If the remission is total, the entire obligation is extinguished
ii. The solidary creditor responsible for the remission shall be liable to the
other solidary creditors
iii. Upon the solidary debtor:
a. If the remission covers the entire obligation, the obligation is
extinguished
b. If the remission covers only the share of a solidary debtor, he is
released from the creditor but he is still bound to his co-debtors

9. Divisible Obligation – one the object of which, in its delivery or performance, is capable
of partial fulfillment.
Example: D obliges to pay C P 2,000 in four equal monthly installments.
10. Indivisible Obligation – one the object of which, in its delivery or performance, is not
capable of partial fulfillment.
Example : D obliges to deliver to B a specific car on December 25, 2013.
11. Obligation with a penal clause – one which contains an accessory undertaking by virtue
of which the obligor assumes a greater liability in case of breach of the obligation.
Example : S is required to deliver to B certain products, otherwise he shall pay a penalty
in the amount of P 10,000.

Penal clause – an accessory obligation attached to a principal obligation by virtue of

which the obligor is bound to pay a stipulated indemnity or to perform an agreed
prestation for the purpose of ensuring the performance of the principal obligation.

Penalty : considered as substitute for damages. Proof of actual damages suffered by the
creditor is not necessary in order that the penalty may be demanded.

F. SPECIFIC CIRCUMSTANCES AFFECTING OBLIGATIONS

1. Fortuitous event- any event which cannot be foreseen, or which, though foreseen, is
inevitable.
2. Force majeure – used interchangeably with fortuitous event; applicable only to those
fortuitous events which are dependent upon human intervention, such as wars,
strikes, riots.
a. Rules as to liability in case of fortuitous event
i. General rule – a person is not responsible for loss or damage caused
to another resulting from fortuitous event. The obligation is
extinguished if the loss of a specific thing is due to fortuitous event.
1. The cause of the breach of the obligation must be
independent of the will of the debtor
2. The event must be either unforeseeable or unavoidable
3. The event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner
4. The debtor must be free from any participation in, or
aggravation of, the injury to the creditor
ii. Exemptions:
1. When expressly specified by law
a. The debtor is guilty of fraud, negligence, or delay or
contravention of the tenor of the obligations
b. The debtor has promised to deliver the same specific
thing to two or more persons
c. The obligation to deliver a specific thing arises from a
crime
d. The thing to be delivered is generic.
2. When declared by stipulation.
3. When the nature of the obligation requires the assumption of
risk.
3. Those who in the performance of their obligations are guilty of fraud, negligence or
delay and those who in any manner contravene the tenor thereof, are liable for
damages.
a. Fraud – the deliberate or intentional evasion of the normal fulfillment of an
obligation. Responsibility arising from fraud is demandable in all obligations.

i. Dolo incidente –fraud in the performance of a pre-existing

obligation
1. Employed for the purpose of evading the normal fulfillment of
an obligation
2. Results in non-fulfillment or breach of the obligation
3. Gives the creditor the right to recover damages
ii. Dolo causante – fraud in the perfection of the contract
1. Employed for the purpose of securing the consent of the other
party
 2. Results in the vitiation of consent; the reason why the other
party entered into a contract
3. Gives the innocent party the right to ask for the annulment of
the contract
b. Negligence (Culpa)– any voluntary act or omission, there being no malice,
which prevents the normal fulfillment of an obligation

i. Contractual negligence (Culpa contractual) or negligence in

contracts resulting in their breach.
ii. Civil negligence (Culpa aquiliana) or negligence which by itself is
the source of an obligation between the parties not so related before
by any pre-existing contract.
iii. Criminal negligence (Culpa Criminal) or negligence resulting in the
commission of a crime.

c. Delay – those obliged to deliver or to do something incur in delay from the

time the obligee judicially or extra-judicially demands from them the
fulfillment of their obligation.
i. Kinds of delay
1. Mora solvendi – delay on the part of the debtor
2. Mora accipiendi – delay on the part of the creditor
3. Compensatio morae – delay of the obligors in reciprocal
obligations (like in sale)
ii. Effects of delay
1. The debtor is guilty of breach or violation of the obligation
2. He is liable to the creditor for interest or damages
3. He is liable even for a fortuitous event when the obligation is
to deliver a determinate thing.
iii. When is demand not necessary in order that delay may exist
1. When the obligation or the law expressly so declares (tax,
partnership)
2. When, from the nature and the circumstances of the
obligation, it appears that the designation of time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
3. When demand would be useless, as when the obligor has
declared it beyond his power to perform.
d. Breach of contract – violation of the terms and conditions stipulated in the
obligation.
i. The debtor fails to perform an obligation to do
 ii. The debtor performs an obligation to do but contrary to the terms
thereof
iii. The debtor performs an obligation to do but in a poor manner

G. EXTINGUISHMENT OF OBLIGATIONS

1. By payment or performance
a. Special forms of payment
i. dation in payment – the conveyance of ownership of a thing as an accepted
equivalent of performance
ii. payment by cession- the assignment or abandonment of all the properties of
the debtor for the benefit of his creditors in order that the latter may sell the same and
apply the proceeds thereof to the satisfaction of their credits
iii.tender of payment and consignation
 tender of payment- the act, on the part of the debtor, of offering
to the creditor the thing or amount due
 consignation-the act of depositing the thing or amount due with
the proper court when the creditor does not desire or cannot
receive it
c. To whom payment must be made:
i. To the person in whose favor the obligation has been constituted
ii. His successor in interest
iii. Any person authorized to receive it
2.By the loss of the specific thing due
a. a thing is lost when it perishes, or goes out of commerce or disappears in such a way
that its existence is unknown
b. Requisites
i. The thing which is lost is determinate
ii. The thing is lost without the fault of the debtor
iii. The thing is lost before the debtor has incurred in delay
3. By the condonation or remission of the debt – the gratuitous abandonment by the creditor of
his right against the debtor. Must be accepted by the debtor.
4. By the confusion or merger of the rights of creditor and debtor – the meeting in one person
of the qualities of creditor and debtor with respect to the same obligation
5. By compensation – the extinguishment to the concurrent amount of the debts of two persons
who, in their own right, are debtors and creditors of each other.
a. Requisites of a legal compensation
i. The parties are principal debtors and creditors of each other
ii. Both debt must consist in money, if consumable, they must be of the same
kind and quality
iii.Both debts must be due
iv.Both debts must be liquidated and demandable
 v.There must be no retention or controversy commenced by third persons over
neither of the debts
b. Debts which are not susceptible of compensation
i. Debts arising from contracts of depositum
ii.Debts arising from contracts of commodatum
iii.claims for support due by gratuitous title
iv. obligations arising from criminal offense
6. By novation – the extinction of an obligation through the creation of a new one which
substitutes it.
3. Changing their object or principal conditions
4. Substituting the person of the debtor
5. Subrogating a third person in the right of the creditor

CONTRACTS

Definition : A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.

Classification of contracts :

A. According to perfection
1. Consensual contract – perfected by mere consent (sale,lease, agency)
2. Real contract – perfected by the delivery of the thing subject matter of the contract
(depositum, pledge, commodatum)
3. Solemn contract – requires compliance with certain formalities prescribed by law
(donation of real property must be in a public instrument)

B. According to their relation to other contracts

 1. Preparatory-necessary as a preliminary step towards the celebration of another
subsequent contract (partnership,agency)
2. Principal – can susbsist independently from other contracts (sale, lease)
3. Accessory – can exist only as a consequence of, or in relation with, another prior
contract (pledge, mortgage)

C. According to their cause

1. Onerous- each of the parties aspires to procure for himself a benefit through the
giving of an equivalent or compensation (sale)
2.Gratuitous –one of the parties proposes to give to the other a benefit without any
equivalent or compensation (donation, commodatum)

D. According to their names or norms regulating them

1. Nominate-given a specific name and regulated by special provision of law (sale ,lease)
2. Innominate- not regulated by special provision of the law

Essential characteristics of contracts

a. obligatory force or character of contracts – once a contract is perfected, it shall be of

obligatory force upon both of the contracting parties
b. autonomy of contracts – the parties are free to enter into a contract and establish such
stipulations, clauses, terms and conditions as they may deem convenient
c. mutuality of contracts – essential equality of the contracting parties whereby the
contract must bind both of them
d. relativity of contracts- contract takes effect only between the parties , their assigns and
heirs

Stages in the life of a contract

1. Preparation or negotiation
2. Perfection or birth
3. Consummation or termination

Elements of a contract

1. Consent of the contracting parties

2. Object certain
3. Cause of the obligation

CONSENT – concurrence of the wills of the contracting parties with respect to the object and
the cause which shall constitute of the contract

Elements:
 1. Consent must be manifested by the concurrence of the offer and acceptance
2. Parties must possess the necessary legal capacity
3. Consent must be intelligent, free, spontaneous and real

Persons incapacitated to give consent to a contract

1. Minors
2. Insane or demented persons
3. Deaf-mutes who do not know how to write

Characteristics of consent:
1. It is intelligent – there is capacity to act
2. It is free and voluntary – there is no vitiation of consent by reason of violence or
intimidation
3. It is conscious or spontaneous – there is no vitiation of consent by reason of mistake,
undue influence or fraud

Perfection of contracts- the moment when there is manifestation of the concurrence between
the offer and the acceptance with respect to the object and the cause which shall constitute the
contract.

Option without consideration – the offeror may withdraw his offer by communicating such
withdrawal to the offeree at any time before acceptance
Option founded upon a consideration- the offeror cannot withdraw his offer

Vices of consent – the presence of any of these vices will render the contract voidable
1. Error or mistake – must refer to the substance of the thing which is the object of the
contract
2. Violence or force – employment of serious or irresistible physical force
3. Intimidation or threat or duress – a party is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon
the person or property of his spouse, descendants or ascendants
4. Undue influence – a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice
a. Confidential, family, spiritual and other relations between the parties
b. Mental weakness
c. Ignorance
d. Financial distress
5. Fraud or deceit – use of insidious words or machinations of one of the contracting
parties which induced one person to enter into a contract
OBJECT OF A CONTRACT – the subject matter of a contract

1. The thing must be within the commerce of men, can legally be the subject of
commercial transaction
2. It must not be impossible, legally or physically
3. It must be in existence or capable of coming into existence
4. It must be determinate or determinable without the need of a new contract between
the parties

Things, rights or services which cannot be the object of a contract:

1. Things which are outside the commerce of men

2. Intransmissible rights
3. Future inheritance
4. Impossible things or services
5. Services which are contrary to law. morals, good customs, public order or public policy

CAUSE OR CONSIDERATION – the essential or more proximate purpose which the contracting
parties have in view at the time of entering into a contract

Requisities:
1. It must exist at the time the contract is entered into (simulated or fictitious contract
is inexistent and void)
2. It must be lawful
3. It must be true or real

Cause versus motive

1. Cause is the direct or proximate reason of a contract, motives are indirect or remote
reasons
2. Cause is the objective or juridical reason of a contract, motives are personal reasons
3. Cause for a certain contract is always the same, motives will differ or vary depending
upon who the parties are
4. Cause can affect the validity of a contract, motives cannot

FORM OF CONTRACTS

General rule : Contracts are binding whatever may be the form in which the contract has been
entered into, provided all the essential elements are present.
Exceptions:
1. When the law requires that a contract be in some forms to be valid
a. Donation of real property-must be in public instrument
 b. Sale of land through an agent- the authority of the agent must be in writing
c. Stipulation to pay interest – must be in writing
2. When the law requires that a contract be in some form to be enforceable – Statute of
Frauds requires that certain contract be in writing to enforceable. Said contracts, if not in
writing, are valid but it cannot be proved and therefore cannot be enforced unless it is
ratified (sale of real property, pre-nuptial agreement)
3. When the law requires that a contract be in some form (e.g. public instrument) for the
convenience of the parties or for the purpose of affecting third persons, that it may be
registered in the property registry to make effective as against third persons (Contract of
sale of real property)

REFORMATION OF CONTRACTS
- The remedy by means of which a written instrument is amended or rectified so as to
express or conform to the real agreement or intention of the parties when by reason
of mistake, fraud, inequitable conduct or accident, the instrument fails to express
such agreement or intention

INTERPRETATION OF CONTRACTS
- The determination of the meaning of the terms or words used by the parties in their
contract

Rules:
1. Literal meaning controls when language is clear
2. Evident intention of parties prevails over terms of contract
3. Special intent prevails over a general intent

Rules in case doubt impossible to settle

1. Gratuitous contract – the least transmission of rights shall prevail (donation vs

commodatum)
2. Onerous contract – doubt shall be settled in favor of the greatest reciprocity of interests
3. Doubt refers to the principal object of a contract – null and void

DEFECTIVE CONTRACTS

1. Rescissible contracts – are valid but by reason of injury or damage to one of the parties
or to third persons, such as creditors, the contract may be rescinded
a. Examples:
i. Those entered into by guardians whenever wards whom they represent
suffer lesion by more than one-fourth of the value of the object
 ii. Those agreed upon in representation of absentees, if the latter suffer
lesion by more than one-fourth
iii. Those undertaken to defraud creditors
iv. Those refer to things under litigation
b. Prescriptive period – four (4) years
2. Voidable contracts-are valid until annulled unless there has been ratification. The defect
is caused by vice of consent
a. Examples:
i. Those where one of the parties is incapable of giving consent to a
contract
ii. Those where the consent is vitiated by mistake, fraud, violence,
intimidation or undue influence
b. Prescriptive period – four (4) years
c. Ratification extinguishes the action to annul a voidable contract
3. Unenforceable contracts – cannot be sued upon or enforced unless they are ratified
a. Examples:
i. Those entered into in the name of another by one without, or acting in
excess of, authority
ii. Those that do not comply with the Statute of Frauds (contracts must be in
writing)
1. Agreement which is not to be performed within a year from the
making thereof
2. Special promise to answer for the debt or default of another
3. Pre-nuptial agreement
4. Sale of goods at price not less than P 500
5. Sale of real property
6. Lease contract with a term of more than one year
iii. Those where both parties incapable of giving consent
4. Void or inexistent contracts – absolutely null and void, cannot be ratified
a. Object or purpose is contrary to law, morals, good customs, public order or policy
b. Absolutely simulated or fictitious
c. Cause or object did not exist at the time of the transaction
d. Object is outside the commerce of men
e. Impossible service
f. Intention of the parties relative to the principal object cannot be ascertained
g. Those expressly prohibited or declared void by law
i. Sale of future inheritance
ii. Sale of property between husband and wife