COURSE DESCRIPTION: LAW ON OBLIGATIONS AND CONTRACTS

SUBJECT CODE: BA3

UNIT 1 MODULE: GENERAL PRINCIPLES OF OBLIGATION AND THE SOURCES OF

OBLIGATION

LESSON 1

WHAT IS AN OBLIGATION?

ARTICLE 1156 of the New Civil Code (NCC) of the Philippines states that “An obligation is a juridical
necessity, to give, to do, or not to do.

 It is a juridical relation or a juridical necessity whereby a person (creditor) may demand

from another (debtor) the observance of a determinative conduct (giving, doing or not
doing) and in case of breach may demand satisfaction from the assets of the latter (Makati
Stock Exchange versus Campos, G.R. 138814, April 16, 2009)

 It is a juridical necessity because in case of non-compliance, the courts of justice may be

called upon by the aggrieved party to enforce its fulfillment, or in default thereof the
economic value that it represents.

NOTA BENE:

 ART. 1156 refers only to civil obligations which are enforceable in court when breached and
it does not cover natural obligations (Article 1423 – 1430, NCC) because the latter are
obligations that cannot be enforce in court on equity and natural law and not in positive law
(Pineda, 2000 edition)

 When there is a right there is a corresponding obligation. Right is the active aspect while
obligation is the passive aspect. Thus, the concepts of credit and debt are two distinct
aspects of unitary concept of obligation (Pineda, 2000)

GENERAL RULE:

The law does not require any form in obligation arising from contracts for their validity or binding
force (Art. 1356)

EXCEPTIONS:

1. When the form is essential for the validity of the contract as required by law (Article
1346);
 2. When the contract I unenforceable unless it is in a certain form such as those under the
Statute of Frauds as formulated in Art. 1403.

 Obligations arising from other sources (Article 1157) do not have any form at all (De Leon,
2010)

WHAT ARE THE ELEMENTS OF AN OBLIGATION?

The following are the elements of an obligation:

1. Juridical tie or vinculum juris or efficient cause – the efficient cause by virtue of which the
debtor becomes bound to perform the prestation (Pineda, 2000)

NOTA BENE: The vinculum juris is established by:

a. Law;
b. Bilateral Acts (e.g. Sale, lease, barter);
c. Unilateral acts (e.g. Donation) (Tolentino, 2000)

2. Active Subject (creditor or obligee) – The person demanding the performance of the
obligation. It is to be in whose favour the obligation is constituted, established or created.
(Pineda, 2000)

3. Passive subject (debtor or obligor) - The person bound to perform the prestation to give, to
do, or not to do (Pineda, 2000)

4. Object or prestation – The subject matter of the obligation which has a corresponding
economic value or susceptible of pecuniary substitution in case of non-compliance. It is a
conduct that may consist of giving, doing, or not doing something (Pineda, 2000)

NOTA BENE: In order to be valid, the object or prestation must be:

1. Licit or lawful;
2. Possible, physically or judicially;
3. Determinate or determinable; and
4. Pecuniary value or possible equivalent in money

 In the absence of any of the first three requirement makes the object void (invalid).

 In the Book of Tolentino, some writers add a fifth requirement: the form in which the
obligation is manifested. This element However, cannot be considered as essential. There is
no particular form required to make obligations binding, except in certain rare cases.

DIFFERENT KINDS OF PRESTATIONS

NATURE OBLIGATION TO GIVE OBLIGATION TO DO OBLIGATION NOT TO
DO
 As to what the Consist in the delivery Covers rendering of Refraining from doing
obligation consist of a thing to the works or services certain acts
creditor whether physical or
intellectual

Examples Sale, Deposit, Pledge, Contract for Negatiive Easements,

donations, Antichresis professional services restraining orders,
such as painting, Right of way (Pineda,
modeling, singing 2000)
among others.

LESSON 2

WHAT ARE THE DIFFERENT CLASSES OF OBLIGATIONS?

From the viewpoint of:

1. Creation

a. Legal - imposed by law (Art. 1158)

b. Conventional – established by the agreement of parties (e.g. Contracts)

2. Nature

a. Personal - to do or not to do
b. Real - To give

3. Object

a. Determinate/Specific – particularly designated or physically segregated from all other

of the same class;
b. Generic – designated merely by its class or genus;
c. Limited Generic – generic objects confined to a particular class or source (Tolentino,
2002) (e.g. An obligation to deliver one of my cars in my garage)

4. Performance

a. Positive – to give; to do;

b. Negative – not to do (e.g. An obligation not to block the right of way)

5. Person obliged

a. Unilateral – only one party is bound

b. Bilateral – both parties are bound
 TAKE NOTE: A bilateral obligation may be reciprocal or non-reciprocal. Reciprocal
obligations are those which arise from the same cause wherein each party is a debtor or a
creditor of the other such that the performance of one is conditioned upon the simultaneous
fulfillment of the other

6. Existence of burden or condition

a. Pure – Not burdened by any condition or term. It is immediately demandable (Article

1179)
b. Conditional – subject to a condition which may be:
a. Suspensive – happening of which shall give rise to an obligation
b. Resolutory – happening of which terminates the obligation

7. Character of responsibility or liability

a. Joint – each debtor is liable only for a part or a whole liability and to each creditor shall
belong only a part of the correlative rights (Art. 1207 NCC)
b. Solidary – debtor is answerable to whole obligation without prejudice of his right to
collect from his co-debtors the latter’s share in the obligation (Art. 1207 NCC)

8. Susceptibility of Partial Fulfillment

a. Divisible – obligation is susceptible of partial performance (NCC. 1223; and 1224);

b. Indivisible – obligation is not susceptible of partial performance (NCC. 1225).

9. Right to choose and substitution

a. Alternative – obligor may choose to completely perform one out of the several
prestations (NCC. 1199);
b. Facultative – only one prestation has been agreed upon, but the obligor may render one
in substitution of the first one (NCC. 1206).

10. Imposition of penalty

a. Simple – there is no penalty imposed for violation of the terms thereof (NCC. 1226);
b. Obligations with a penal clause – obligation which imposes a penalty for violation of the
terms there of (NCC. 1226; Pineda, 2000).

11. Sanction
a. Civil – gives a right of action to compel their performance;
b. Natural– not based on positive law, but on equity and natural law; does not grant
a right of action to enforce their performance, but after voluntary fulfillment by the
obligor, they authorize retention of what has been delivered rendered by reason
thereof.
 Moral – cannot be enforced by action but are binding on the party who makes it in
conscience and natural law.

LESSON 3

SOURCES OF OBLIGATIONS
1. Law;
2. Contracts;
3. Quasi-contracts;
4. Delict;
5. Quasi-delict.
This enumeration is exclusive. No obligation exists if its source is not one of those enumerated in
Art. 1157 of the NCC (Navales v. Rias, G.R. No. L3489, September 7, 1907).

Note: Actually, there are only two sources (i.e., law and contracts) because obligations arising from
quasi-contracts, delicts, and quasi-delicts are imposed by law (Leung Ben v. O’Brien, 38 Phil. 182).

Time of perfection
GR:
1. Law – from the time designated by the law creating or regulating them;
2. Contracts –from the time of the perfection of the contract.
e.g. Meeting of the minds

XPNs:
a. When the parties made a stipulation on the right of the creditor to the fruits of the thing;
b. When the obligation is subject to a suspensive condition, from which it arises upon
fulfillment of the condition;
c. When the obligation is with a period; there is already an existing obligation, but it is
only demandable when the period expires or becomes due

3. Quasi Contracts, delicts, quasi-delicts – from the time designated by the law creating
or regulating them.
 OBLIGATION EX LEGE

Obligations derived from law are not presumed. Only those expressly determined in the Code or
in special laws are demandable and shall be regulated by the precepts of the law which
establishes them and as to what has not been foreseen by the provisions of Book IV of NCC
(NCC, Art. 1158).

NOTE: If there is conflict between the NCC and a special law, the latter prevails unless the
contrary has been expressly stipulated in the NCC (NCC, Art. 18; Paras, 2008).

Characteristics of a legal obligation

1. Does not need the consent of the obligor;

2. Must be expressly set forth in the law creating it and not merely presumed; and
3. In order that the law may be a source of obligation, it should be the creator of the
obligation itself (NCC, Art. 1158).
Determining whether an obligation arises from law or from some other source

1. Arises from law if it establishes obligation;

2. Arises from the act itself if the law merely recognizes the existence of an obligation
generated by an act (Manresa).
e.g.
1. According to Art. 2014 of the NCC, a loser in a game of chance may recover his loss from
the winner, with legal interest from the time he paid the amount lost (Leung Ben v.
O’Brien, G.R. No. L-13602, April 6, 1918);
2. The obligation of the spouses to support each other;
3. The obligation of the employers under the Worker’s Compensation Act;
4. The obligations of the owners of the dominant and servient estates in legal easements
and others scattered in the NCC and in special laws (Jurado, 2009);
5. The obligation to pay taxes (Rabuya, 2017).

OBLIGATION EX CONTRACTU

Requisites of a contractual obligation

1. It must contain all the essential requisites of a contract (NCC, Art. 1318); and
 2. It must not be contrary to law, morals, good customs, public order, and public policy (NCC,
Art. 1306).
Rules governing the obligations arising from contract
GR:
These obligations arising from contracts shall be governed primarily by the stipulations, clauses,
terms, and conditions of the parties’ agreements.

XPN:
Contracts with prestations that are unconscionable or unreasonable (Pineda, 2009).

Binding force of obligation ex contractu

Obligations arising from contracts have the force of law between the parties and should be
complied with in good faith (NCC, Art. 1159). This is known as the “principle of obligatory force of
contracts” (Rabuya, 2017).

Good faith is performance in accordance with the stipulation, clauses, terms, and conditions of the
contract (Pineda, 2000).

GR:
Neither party may unilaterally evade his obligation in the contract.

XPNs:
Unilateral evasion is allowed when the:
1. Contract authorizes such evasion; or
2. Other party assents thereto.

Case study
Q: FBDC entered into a Trade Contract with MS Maxco Company, Inc. (MS Maxco) for the execution
of the structural and partial architectural works of one of its condominium projects. The Trade
Contract likewise provided that MS Maxco is prohibited from assigning or transferrings any of its
rights, obligations, or liabilities under the said Contract without the written consent of FBDC. FBDC
received a letter from the counsel of Fong informing it that MS Maxco had already assigned its
receivables from FBDC to him. Despite Fong’s repeated requests, FBDC refused to deliver to Fong
the amount assigned by MS Maxco. Is FBDC bound by the assignment between MS Maxco and Fong?
A: No. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. The Court finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights, obligations, or liabilities under the Trade Contract
without the written consent of FBDC (Fort Bonifacio Development Corporation vs. Valentin L. Fong,
G.R. No. 209370, March 25, 2015).

OBLIGATION EX QUASI – CONTRACTU

Quasi-contract

A juridical relation arising from lawful, voluntary, and unilateral acts based on the principle that no
one shall be unjustly enriched or benefited at the expense of another (NCC, Art. 2142).

Distinguished from “implied contracts”

An implied contract, in the proper sense, is a contract which arises when the intention of the parties
is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their
acts, or where there are circumstances which show a mutual intent to contract. An implied contract
requires consent while a quasi-contract, being a unilateral contract, does not. The basis of an
implied contract is the will of the parties while the basis of a quasi-contract is law, to the end that
there be no unjust enrichment (Rabuya, 2017).

Characteristics of a quasi-contract (LUV)

4. It must be Lawful;
5. It must be Unilateral; and
6. It must be Voluntary (Pineda, 2000).

Presumptive consent

Since a quasi-contract is a unilateral contract created by the sole act(s) of the gestor, there is no
express consent given by the other party. The consent needed in a contract is provided by law
through presumption (Pineda, 2000).

Principal forms of quasi-contracts

 1. Negotiorum gestio (inofficious manager) – Arises when a person voluntarily takes charge of
the management of the business or property of another without any power from the latter
(NCC, Art. 2144);
2. Solutio indebiti (unjust enrichment) – Takes place when a person received something from
another without any right to demand for it, and the thing was unduly delivered to him
through mistake (NCC, Art. 2154).

NOTE: The delivery must not be through liberality or some other cause.

Solutio indebiti (SI) v. Accion in rem verso (AIRV)

1. Mistake is an essential element in SI which is not necessary in AIRV;

2. An AIRV is merely an auxilliary action, available only when there is no other remedy on
contract quasi-contract, crime or quasi-delict (Rabuya, 2017).
Rule in case of excess of payment of interest

If the borrower pays interest when there has been no stipulation therefor, the provisions of the
Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be.

If the payment of interest is made out of mistake, solutio indebiti applies; hence, the amount must
be returned to the debtor. If the payment was made after the obligation to pay interest has already
prescribed, natural obligation applies; hence, the creditor is authorized to retain the amount paid.
Contract v. Quasi-contract

CONTRACT QUASI-CONTRACT
There is a meeting of the minds or consent; There is no consent, but the same is supplied by
the parties must have deliberately entered fiction of law; to prevent injustice
into a formal agreement

*For further discussion on quasi contracts, please see the discussion of quasi contract on Credit
Transactions.
 OBLIGATIONS EX DELICTO
Delict

An act or omission punishable under the law.

Basis

GR:
Art. 100 of the RPC provides: “Every person criminally liable for a felony is also civilly liable.”

XPNs:
Crimes of treason, rebellion, espionage, contempt and others wherein no civil liability arises on the
part of the offender either because there are no damages to be compensated or there is no private
person injured by the crime (Reyes, 2008).

Implied institution of the civil action in a criminal case

GR:
When a criminal action is instituted, the civil action for the recovery of the civil liability arising from
the offense charged shall be deemed instituted with the criminal action (Sec. 1, Rule 111, Rules of
Court).
XPNs:
When the offended party:
1. Waives the civil action;
2. Reserves the right to institute it separately; and
3. Institutes the civil action prior to the criminal action (Rule 111, Sec. 1, Rules of Court).
4.
Scope of civil liability (IRR)

1. Restitution;
2. Reparation for damage caused; and
3. Indemnity for consequential damages (Art. 104, RPC).
Acquittal in criminal case

GR:
The acquittal of the accused in criminal case on the ground of reasonable doubt does not preclude
the filing of a subsequent civil action and only preponderance of evidence is required to prove the
latter.

XPNs:
When the acquittal is on the basis that:
1. The accused did not commit the crime charged; or
2. There is a declaration in the decision of acquittal that no negligence can be attributed
to the accused and that the fact from which the civil action might arise did not exist
(NCC, Art. 29).
Q: Petitioner was charged with estafa. Respondent averred that on February 20, 1996, she
entrusted merchandise worth P35,300.00 to petitioner as evidenced by an acknowledgment
receipt. However, petitioner was only able to remit the amount of P3,300.00 and thereafter, failed
to make further remittances and ignored respondent's demands to remit the proceeds or return the
goods. As a defense, petitioner admitted having previous business dealings with respondent not as
an agent but as a client who used to buy purchase order cards (POCs) and gift checks (GCs) from
respondent on installment basis. The RTC acquitted petitioner of the charge of estafa but held her
civilly liable to pay respondent the amount of P32,000.00, with interest from the filing of the
Information on March 11, 1999 until fully paid, and to pay the costs. The RTC adjudged petitioner
civilly liable "having admitted that she received the [GCs] in the amount of P32,000.00." In this
relation, it further considered the relationship of respondent and petitioner as in the nature of a
principal-agent which renders the agent civilly liable only for damages which the principal may
suffer due to the non-performance of his duty under the agency. CA upheld petitioner's civil
liability. Should the petitioner be held civilly liable? If yes, what is the rate of interest?

A: Yes. Respondent was able to prove by preponderance of evidence the fact of the transaction, as
well as petitioner's failure to remit the proceeds of the sale of the merchandise worth P32,000.00,
or to return the same to respondent in case such merchandise were not sold. This was established
through the presentation of the acknowledgment receipt which, as the document's name connotes,
shows that petitioner acknowledged receipt from respondent of the listed items with their
corresponding values, and assumed the obligation to return the same on March 20, 1996 if not sold

With the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB
Circular No. 799, series of 2013, there is a need to partially modify the same in that the interest
accruing from the time of the finality of this Decision should be imposed at the lower rate of six
percent (6%) p.a., and not twelve percent (12%) p.a. as imposed by the CA. (Dolores Diaz v. People,
GR No. 208113, December 2, 2015)

OBLIGATIONS EX QUASI – DELICTO

Quasi-delict or tort

An act or omission arising from fault or negligence which causes damage to another, there being no
pre-existing contractual relations between the parties (NCC, Art. 2176).

NOTE: A single act or omission may give rise to two or more causes of action. Thus, an act or
omission may give rise to an action based on delict, quasi-delict, or contract.

In negligence cases, prior conduct should be examined, that is, conduct prior to the injury that
resulted, or in proper case, the aggravation thereof.

Elements of a quasi-delict

1. Negligent or wrongful act or omission;

2. Damage or injury caused to another;
3. Causal relation between such negligence or fault and damage; and
4. No pre-existing contractual relationship between the parties (NCC, Art. 2176).

Instances when Art. 2176 is inapplicable

a) When there was a pre-existing contractual relation because the breach of contract is the
source of the obligation (Robles v. Yap Wing, 41 SCRA 267, G.R. No. L-20442, October 4,
1971);

NOTE: However, if the act that breaches the contract is tortuous, the pre-existing
contractual relation will not bar the recovery of damages (Singson v. BPI, G.R. No. L-24837,
June 27, 1968);

b) When the fault or negligence is punished by law as a crime, Art. 100 of RPC shall be
applicable;
 c) If the action for quasi-delict is instituted after four years, it is deemed prescribed (Afialda v.
Hisole, G.R. No. L-2075, November 29, 1949);

d) When the injury suffered by a person is the result of a fortuitous event without human
intervention;

e) If there is no damage or injury caused to another (Walter A. Smith & Co., Inc. v. Cadwallader
Gibson Lumber Company, G.R. No. L-32640, December 29, 1930).

Delict v. Quasi-delict

BASIS DELICT QUASI-DELICT

Presence of criminal or
As to the kind of intent
malicious intent or criminal Only negligence
present
negligence.

Presence of criminal or
As to the whether private or Concerned with private
malicious intent or criminal
public interest is concerned interest.
negligence

Generally, the act or omission

The act or omission gives rise
As to the kind of liability arises gives rise to two liabilities:
only to a civil liability.
criminal and civil liability.

As to availability of a Criminal liability is not subject The civil liability can be

compromise to a compromise compromised.

As to the quantum of evidence Guilt must be proved beyond Guilt may be proved by
is required reasonable doubt. preponderance of evidence.

NOTE: Inasmuch as civil liability co-exists with criminal responsibility in negligence cases, the
offended party has the option between an action for enforcement of civil liability based on culpa
criminal under Art. 100 of the RPC and an action for recovery of damages based on culpa aquiliana
under NCC, Art. 2177.