CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS CPA REVIEW

LAW ON OBLIGATIONS

An obligation is a juridical necessity to give, to do or not to do.

Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and natural law, do not grant a right of action to
enforce their performance but authorize the retention of what has been delivered or rendered by reason
thereof. but after voluntary fulfillment by the obligor.
Essential Elements or Requisites of an Obligation
1. An active subject, who has the power to demand prestation, also known as the obligee or creditor.
2. A passive subject, who is bound to perform the prestation, also known as the obligor or debtor.
3. Object or prestation, which is the promise or particular conduct to be performed in the performance of
an obligation, and may consist of giving, doing or not doing a thing.
4. Efficient cause, the tie which binds the parties to the obligation, also known as juridical tie or vinculum
juris.
Sources of obligation
1. Law - Obligations derived from law are not presumed. Only those expressly determined in Civil Code
or in special laws are demandable and shall be regulated by the precepts of the law.
2. Contract - Obligations arising from contracts have the force of law between contracting parties and
should be complied with in good faith.
3. Quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral acts, to
the end that no one may be unjustly enriched or benefited at the expense of another.
Two Common Types of Quasi-Contracts
a. Negotiorum Gestio refers to the voluntary management of the property or affairs of another without
the knowledge or consent of the latter.
b. Solutio Indebiti refers to the juridical relation which is created when something is received when
there is no right to demand it and it was unduly delivered through mistake.
4. Quasi-delict or culpa aquiliana or torts or civil negligence refers to a source of an obligation wherein
a person by act or omission causes damage to another, there being fault or negligence and no pre-existing
contractual relation between the parties.
5. Crime or delict refers to any act or omission which is punishable by law. Every person criminally liable
for a felony is also civilly liable.
Kinds of thing or object
1. A determinate or specific thing is one that is individualized and can be identified or distinguished from
others of its kind.
2. A generic or indeterminate thing is only indicated by its kind, without being designated and distinguished
from others of the same kind.
Obligation to give something which is determinate
a. To deliver the thing
b. To take care of the thing with the proper diligence of good father of a family
c. To deliver all accessions and accessories
Accessions include everything which is produced by a thing, or which is incorporated or attached thereto,
either naturally or artificially.
Accessories are those things used for the embellishment, use or their preservation of another thing or
more importance.
d. To pay damages in case of breach of obligation.
Obligation to give something which is indeterminate
a. To deliver a thing which must be neither superior nor inferior quality.
b. To pay damages in case of breach of the obligation

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Diligence required
a. By provision of law – Extraordinary diligence is required of common carrier with respect to passengers.
b. By stipulation of parties
c. Diligence of a “good father of a family” means that if a person is obliged to give something, he must
take good care of it as if he is the real owner. Short of that expectations, he must answer for damages.

Right of creditor in an obligation to do

1. If the debtor fails to perform the obligation, the creditor may demand that the obligation be performed
by the debtor himself or by a third person at the expense of the debtor.
2. If the debtor performed the obligation but in contravention of the agreement, the creditor may ask another
person perform the obligation at the expense of the debtor.
3. If the obligation is poorly done, the creditor may ask that it be undone at the expense of debtor.
4. If the debtor does what has been forbidden, the creditor can ask that it be undone at the expense of the
debtor with indemnification for damages.

Delay, default or mora

Delay/Default/Mora refers to the nonfulfillment of the obligation with respect to time and would constitute a
breach of contract. The kinds of delay or mora are:
1. Mora solvendi – delay on the part of debtor
2. Mora accipiendi -delay on the part of creditor
3. Compensatio Morae – delay by both parties

Requisites of mora solvendi

a. The obligation must be liquidated, due and demandable.
b. The debtor is guilty of nonperformance
c. There was demand made either judicially or extrajudicially.

Effects of mora solvendi

a. The creditor may ask for damages
b. The debtor is liable even if the loss is due to fortuitous event
c. The debtor shall bear the risk of loss of the determinate thing

Requisites of mora accipiendi

a. Offer of performance by debtor
b. Refusal of the creditor to accept without first cause

Effects of mora accipiendi

a. The creditor shall bear the risk of loss of the thing.
b. All expenses for the preservation of the thing after the delay shall be borne by the creditor
c. The creditor is liable for damages.

Effect of compensatio mora – the delay on both parties will be compensated.

1. Specific circumstances wherein the debtor can be held liable to pay damages

2. Fraud/Dolo refers to the deliberate and intentional evasion of the normal fulfilment of obligations.
3. Negligence/Fault/Culpa is the failure to observe for the protection of the interests of another person, that
degree of care, precaution and vigilance which the circumstances justly demand, whereby such person
suffers injury.
4. Delay /Default/Mora refers to the nonfulfilment of the obligation with respect to time.
5. Contravention of the tenor of obligation refers to illicit act which impairs the strict and faithful fulfilment
of the obligation or every kind of defective performance.

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Kinds of fraud
1. Fraud in obtaining consent
2. Fraud in performing a contract
3. Future fraud cannot be renounced because the advance renunciation of the creditor would practically
leave the obligation without effect
4. Past fraud can be renounced.
5. The fraud contemplated in the law is the malice or bad faith in the performance of obligation.

Kinds of culpa or negligence

1. Culpa Aquiliana – the wrong or negligence committed independent of contract and without criminal
intent.
2. Culpa contractual – the wrong or negligence in the performance of contract.
3. Culpa criminal – the wrong or negligence in the commission of a crime.

Classifications of obligations
1. Pure and conditional
2. With a period or term
3. Alternative and facultative
4. Joint and solidary
5. Divisible and indivisible
6. With a penal clause

Pure obligation – One without a condition or term and therefore, demandable at once.

Conditional obligation - an obligation when there is a condition imposed on its performance. A condition is
a future and uncertain event upon which an obligation is subordinated or made to depend. The essential
requisites of a condition are futurity and uncertainty.

Kinds of condition
a. Suspensive - the fulfilment or happening of the condition will give rise to an obligation.
b. Resolutory - the fulfillment or happening of the condition will extinguish the obligation.
c. Potestative – the fulfilment or happening of the condition depends upon the will of one of
the contracting parties.
d. Casual – depends upon chance or will of a third person
e. Mixed – depends partly upon chance and partly upon the will of a third person.
f. Impossible – physically or legally impossible
g. Positive – performance of an act
h. Negative – omission of an act

Effects of fulfillment of suspensive condition

The fulfillment of the suspensive condition shall retroact on the day the obligation is constituted. If unilateral
obligation, the fruits and interest shall insure to the benefit of to debtor, unless there is stipulation to the
contrary. If reciprocal, the fruits and interests during the pendency of the condition shall be deemed to have
been mutually compensated.

Effects of fulfillment of resolutory condition

a. The obligation is extinguished.
b. The parties should return or restore to each other what they have received including fruits and interest.

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Period
A period is a certain length of time which determines the effectivity or the extinguishment of an obligation.
The day certain will necessarily come whether the parties like it or not. It is presumed that period is for the
benefit of both creditor and debtor in the absence of contrary agreement.
a. Suspensive period or ex die – upon the arrival of the period, the obligation becomes
demandable.
b. Resolutory period or in diem - upon the arrival of the period, the obligation is extinguished.
c. Conventional or voluntary – fixed by parties
d. Legal – fixed by law
e. Judicial – fixed by the court

Condition vs. period

a. A condition is an uncertain event while a period is an event that must necessarily come. A
condition may or may not happen but a period will surely come to pass.
b. Condition gives rise to an obligation or extinguishes an existing obligation while a period
has no effect upon the existence of an obligation but only its demandability or performance
c. Condition may refer to a past event and unknown to parties while a period always refers to the
future.

Alternative obligation vs. facultative obligation

a. In alternative obligation, there are several prestations but the fulfillment of one is sufficient and
such is determined by the choice of the debtor unless the right of choice is given to the creditor,
while in facultative obligation, only one thing is due, but the debtor may render another in
substitution.
b. In alternative obligation, the right of choice may be granted to the creditor if expressly made,
while in facultative obligation, the right of choice can never be granted to creditor.

Joint Obligation vs. Solidary Obligation

Joint obligation - each debtor is liable only for a proportionate part of the debt and each creditor
is entitled only to a proportionate share of the credit.
Solidary obligation - each debtor is liable for the entire obligation and each creditor is entitled to
demand the whole obligation.
In joint obligation and solidary obligation, the credit or debt shall be presumed to be divided into
as many shares as there are creditors or debtors, the credits or debts being considered distinct
from one another unless the law or the wording of the obligation provides otherwise.

The indivisibility of an obligation does not imply solidarity. The solidarity of an obligation does
not imply indivisibility.

Synonyms for joint and solidary obligation

Joint Solidary
a. Prorata a. In solidum
b. Proportionate b. Jointly and severally
c. Mancomunada c. Individually and collectively
d. Mancomunada simple d. Mancomunada solidaria

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Divisible obligation vs indivisible obligation

Divisible Obligation - susceptible of partial performance, that is, the debtor can legally perform the obligation
by parts and the creditor cannot demand a single performance of the entire obligation.

Indivisible Obligation - not susceptible of partial performance. The law provides that the performance of the
obligation is indivisible or the contract provides that the performance of the obligation is indivisible.

A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does
not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not
contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the
service in which the obligation consists.

Obligations to give definite things and those which are not susceptible of partial performance shall be deemed
to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the accomplishment
of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it
shall be divisible.

However, even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.

Obligation with a penal clause

A penal clause is an accessory undertaking to assume greater liability in case of breach.

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the contrary.

The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal
obligation carries with it that of the penal clause.

Modes of extinguishing an obligation

1. By payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger of the rights of creditor and debtor
5. Compensation
6. Novation

Payment of performance
Payment or fulfillment consists in the delivery of a sum of money or a thing, or doing a thing, or not doing
something. How payment or performance is made:
1. If obligation is monetary, by delivery of the money in full
2. If obligation is a thing or an object, by delivery of the thing or object.
3. If obligation is to do something, by performance of the same undertaking.
4. If obligation is not doing a thing, to desist or refrain from doing the thing.

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Payment by a third person

1. The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary.
2. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor.
3. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or
penalty.
4. Payment shall be made to the creditor or his successor in interest, or any person authorized to receive it.
5. Payment by a third person who does not intend to be reimbursed by the debtor is deemed a donation
which requires the debtor’s consent but lack of this consent does not affect the validity of the payment
made to the creditor who has accepted the same.

Payment to a third person

Payment to a third person is not valid, except:
1. When the third person is authorized to receive it.
2. When the payment to the third person has redounded to the benefit of the creditor.
3. When the third person is in possession of the credit and payment was made in good faith.

Legal tender
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
Legal Tender in Philippines – refers to the currency which the creditor cannot refuse to accept as payment.
a. 1 centavo, 5 centavos, 10 centavos, 25 centavos – Up to P100 only.
b. P1, P5, P10 – Up to P1,000 only.
c. P20, P50, P100, P200, P500, P1,000 – Unlimited legal tender power.

Delivery of commercial instrument as payment

1. A check is not a legal tender even if it is a manager’s check. So, the creditor cannot be compelled to
accept.
2. Acceptance of the check is equivalent to payment:
a. When the creditor is in estopped or the creditor had previously promised accept the check
b. When the check has lost its value because of the fault of the creditor.
c. When the check has been cashed.

Place of payment of an obligation

1. If there is a stipulation – at the place designated.
2. If there is no stipulation:
a. Delivery of a determinate thing – at the place where the thing was at the time of perfection
b. Delivery of an indeterminate thing – at the domicile of the debtor.

Special modes of payment

1. Dation in payment or dacion en pago
2. Application of payment
3. Cession or assignment
4. Tender of payment and consignation

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Dacion en pago
Dacion en pago is the mode of extinguishing an obligation whereby the debtor alienates property in favor of
the creditor in satisfaction of a monetary obligation. In short, the obligation is money and the payment is
property. The other names are datio in solutum, adjusdicacion en pago and payment in kind.

Application of payment
Application of payment is the designation of the debt to which should be applied when payment is made by
the debtor who owes several debts in favor of the same creditor. The purpose is to know which debt out of
two or more debts should be extinguished.
If no application of payment is made, the payment should be applied to the most onerous in case the debts are
of different nature. If the debts due are of the same nature and burden, the payment shall be applied
proportionately.
In the payment of an obligation producing interest, when the amount being paid is not sufficient to cover
principal and interest, the amount paid must apply first to the interest and the excess to the principal.

Cession
Payment by cession is the process by which a debtor transfers all his properties in favor of his creditors so
that the latter may sell them and apply the proceeds to their credits.
The debtor is released from his obligation to the extent of the net proceeds from sale. The creditors shall
collect credits in order of preference as agreed upon or in the order established by law.

Tender of payment and consignation

Tender of payment - manifestation made by the debtor to the creditor of his willingness to comply with his
obligation.
Consignation – deposit of the thing or money due to the proper judicial authorities.

Essential requisites of valid consignation

a. The debt must be due.
b. Tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it.
c. Previous notice of the consignation has been given to the persons interested in the performance of the obligation.
d. The amount or thing was placed at the disposal of the court.
e. After the consignation, the persons interested were notified thereof.

Condonation or remission
It is a mode of extinguishing obligation by which the creditor renounces the enforcement of the obligation.
It is essentially gratuitous and requires acceptance by the debtor.
The renunciation of the principal shall extinguish the accessory obligation. The renunciation of the
accessory obligation shall not extinguish the principal debt.

Confusion or merger
Confusion or merger is a mode of extinguishing obligation which takes place when there is meeting in one
person of the qualities of creditor and debtor with respect to the same obligation.
a. It must take place between the creditor and the principal debtor.
b. The very same obligation must be involved
c. The confusion or merger must be total or the entire obligation.
Merger which takes place in the person of the principal debtor benefits the guarantor. Merger which takes
place in the person of the guarantor does not extinguish the principal obligation.

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Compensation
Compensation - takes place when two persons, in their own right, are creditors and debtors of each other.
Legal compensation is a compensation which takes place by operation of law. Facultative is a compensation
whereby one party can claim compensation and the other cannot.
Conventional compensation is a compensation by agreement of the parties. Judicial compensation is a
compensation decreed by the court in a case where there is a counterclaim.

Requisites of legal compensation or compensation by operation of law

a. Each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other.
b. Both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
of the same quality if the latter has been stated.
c. Both debts must be due, liquidated and demandable.
d. That over neither of the debts must there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

Novation
Novation is the substitution or change of the obligation by a subsequent one which extinguishes or modifies
the first obligation. Obligation may be modified by:
a. Changing the object or principal conditions (real novation)
b. Substituting the person of the debtor (personal novation)
c. Subrogating a third person in the rights of the creditor (Legal Subrogation or Conventional Subrogation)

Requisites of Novation
a. There must be a previous valid obligation.
b. There must be agreement of all parties to the new contract.
c. There must be extinguishment of the old contract.
d. The new obligation must be valid.

Expromission and delagacion

Expromission takes place when a third person on his own initiative and without the knowledge or against the
will of the original debtor assumes the obligation. If the substitution is without the knowledge or against the
will of the debtor, the new debtor's insolvency or nonfulfillment of the obligations shall not give rise to any
liability on the part of the original debtor.
Delegacion takes place when the creditor accepts a third person to take the place of the debtor at the instance
of the latter. The insolvency of the new debtor, who has been proposed by the original debtor and accepted
by the creditor, shall not revive the action of the latter against the original debtor, except when said insolvency
was already existing and of public knowledge, or known to the debtor, when he delegated his debt.

Subrogation
Subrogation is the transfer to a third person of all the rights appertaining to the creditor, including the right to
proceed against the guarantor, possessors of mortgages, subject to any legal provision or any modification
that maybe agreed upon.
Conventional subrogation refers to substitution of creditor by agreement of original parties and the new
creditor. Legal subrogation is the substitution of new creditor in exceptional cases provided by law. It is
presumed that there is legal subrogation:
1. When a creditor pays another creditor who is preferred, even without the debtor's knowledge.
2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor
3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the latter's share.

*Supplementary notes are largely based on the Pointers in Business Law by Atty. Carlos B. Suarez and
Atty. Alexander Q. Suarez and Supplemental notes from Atty. Kenneth Dela Cruz.

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