LAW ON OBLIGATIONS AND CONTRACTS

PART 1: OBLIGATIONS
1. Concept

Basic Concepts:

Definition: An obligation is a juridical necessity to give, to do, or not to do.1 It is also

defined as a juridical relation whereby a person (creditor) may demand from another
(debtor) the observance of a determinate conduct, and in case of breach, may obtain
satisfaction
from the assets of the latter.

Essential Elements:

(1) juridical tie or vinculum juris -the efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts, and quasi-delicts);
(2) object - the prestation or the particular conduct required to be observed by the debtor
(to give, to do, or not to do);
(3) active subject (called the obligee or creditor) - the person who can demand the
fulfillment of the obligation; and
(4) passive subject (called the obligor or debtor) - the person from whom the obligation is
juridically demandable.

2. Sources of Obligations
Five Sources: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or omissions punished
by law (Delicts); and (5) Quasi-delicts. This enumeration is exclusive.

 Law:
Must Be Expressly Provided: Obligations derived from law are not presumed.
Hence, only those expressly determined in the Civil Code or in special laws are
demandable. These obligations are regulated: (1) by the precepts of the law which
establishes them; and (2) as to what has not been foreseen, by the provisions of Book IV
of the Civil Code.
When Source of Obligation: Law is the source of obligation when it does not
merely limit itself to enforcing compliance with an obligation originating from the acts of
the parties, but by itself establishes the obligation, making the act of the party or parties
only a moment, or determining the occasion in order that the obligation contained in the
legal precept may begin to be demandable.

 Contracts:
Definition: A contract is defined as "a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give something or to render some
service. The definition lays stress on the meeting of the minds of the contracting parties,"
for consent is the essence of a contract. It is the element of consent which distinguishes
contracts from the other sources of obligations.
Obligatory Force of Contracts: Obligations arising from contracts have the force
of law between the contracting parties and should be complied with in good faith. In
contract law, this principle is known as the obligatory force of contracts, which
presupposes the existence of a valid and enforceable contract.

 Quasi-contracts:

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 Definition: It is a juridical relation arising from certain lawful, voluntary, and
unilateral acts with the objective of preventing unjust enrichment or benefit at the expense
of another.
Forms of Quasi-contracts: There are several forms of quasi-contracts
enumerated in the Civil Code, but the enumeration is not exclusive. The obligation is not
contractual in nature in the absence of the element of consent, whether express or implied.
Neither is the obligation based on delict or quasi-delict, if the act which gives rise to it is
not unlawful. In those instances where there is no pre-existing contractual relation, and
there being neither a delict nor a quasi-delict, a juridical relation known as quasi-contract
may arise between the parties to avoid a case of unjust enrichment.
Negotiorum Gestio:
(a) Definition: It is a juridical relation which arises when a person
voluntarily takes charge of the agency or management of another’s abandoned or
neglected business or property without the owner’s authority.
(b) Requisites: (1) a person (called the officious manager or gestor)
voluntarily assumes the management or agency of the business or property of
another; (2) the property must be neglected or abandoned; otherwise, what results
is a case of unauthorized/unenforceable contract and not negotiorum gestio; (3)
there is no authorization from the owner, whether express or implied; otherwise,
what results is a contract of agency and not negotiation gestio; and (4) the
assumption of agency or management must be done in good faith. If the owner
ratifies the management of the business, the effects of an express agency shall be
produced, even if the business may not have been successful.
(c) Obligations of officious manager:
(1) he is obliged to continue with the agency or management until
the termination of the affair and its incidents and he can only require the
owner to substitute him if the latter is in a position to do so;
(2) in the performance of his duties, he is obliged to observe the
diligence of a good father of a family—if the owner suffers damage by
reason of the fault or negligence of the officious manager, the latter is liable
to pay damages to the former, but the courts may, however, increase or
moderate the indemnity according to the circumstances of each case;
(3) he is personally liable for contracts which he has entered into
with third persons, insofar as the latter shall be concerned, even though he
acted in the name of the owner, hence, there shall be no right of action
between the owner and such third persons, except (i) if the owner has
ratified the management, either expressly or tacitly; or (ii) when the contract
refers to things pertaining to the owner of the business;
(4) if he delegates to another person all or some of his duties, he is
liable for the acts of the delegate, without prejudice to the direct obligation
of the delegate to the owner;
(5) the obligation of two or more officious managers is solidary,
unless when the management was assumed to save the thing or business
from imminent danger, in which case, their obligation is merely joint; and
(6) he is not, as a rule, liable for any loss or damage to the property
or business by reason of fortuitous event. But in the following situations, he
is liable for any fortuitous event if he: (i) undertakes risky operations which
the owner was not accustomed to embark upon; (ii) prefers his own interest
to that of the owner; (iii) fails to return the property or business after demand
by the owner; (iv) assumes the management in bad faith; (v) is manifestly
unfit to carry on the management, except when the same was assumed to

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 save the property or business from imminent danger; and (vi)prevents, by
his intervention, a more competent person from taking up the management,
except when the same was assumed to save the property or business from
imminent danger.
(d) Obligations of owner: The owner is liable to the officious manager for
the following: (1) obligations incurred in his interest; (2) necessary and useful
expenses; and (3) damages suffered by the officious manager in the performance
of his duties, in the following situations: (i) if the owner enjoys the advantages of
the officious management; (ii) If the management had for its purpose the
prevention of an imminent and manifest loss, although no benefit may have been
derived; or (iii) even if he did not derive any benefit and there has been no imminent
and manifest danger to the property and business provided that the officious
manager has acted in good faith and the property or business is intact, ready to be
returned to the owner.
Solutio Indebiti:
(a) Definition: It is a juridical relation which arises when something is received
when there is no right to demand it, and it was unduly delivered thru mistake.
(b) Requisites: (1) payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received the payment;
and (2) payment is made thru mistake, and not thru liberality or some other cause."
(c) Similarities with action in rem verso: (1) the plaintiff suffers a loss; (2) the
defendant is correspondingly enriched; (3) the enrichment of the defendant is unjustified
because the delivery or payment to him is without legal or just cause; (4) the defendant
has the obligation to return what was unduly delivered to him; and (5) the objective is to
prevent unjust enrichment,
(d) Distinctions between solutio indebiti and in rem verso: (1) the source of
obligation in solutio indebiti is quasi-contract; while in in rem verso, it is law; (2) in
solutio indebiti, the undue payment is by reason of mistake of fact or mistake in a
doubtful or difficult provision of law; while in in rem verso, the undue payment need
not be by reason of mistake, or if there was mistake, it was a mistake of law that
is not doubtful nor difficult,
(e) Obligations in solutio indebiti:
1) the recipient has the obligation to return what has been unduly delivered;
(2) if he acted in bad faith, he is also liable: (i) to pay legal interest, if a sum
of money is involved; (ii) to return the fruits he received or those which should have
been received, if the thing produces fruits; (iii) to answer for any loss or impairment
of the thing from any cause, until it is recovered; and (iv) to pay damages to the
person who delivered the thing, until it is recovered;
(3) if there are two or more payees, their responsibility is solidary.
Other Forms of Quasi-Contracts:
(a) Support and funeral expenses:
(1) if support was given by a stranger, without the knowledge of the person obliged
to give support the former has the right to claim reimbursement for the latter unless he
gave it out of piety and without intention of being repaid;
(2) when support is unjustly refused by the person obliged to give it and a third
person furnished the same when urgently needed, the latter has the right to demand
reimbursement from the former unless the same was given without the intention of being
reimbursed—also applicable when the father or mother of a minor unjustly refuses to
support or fails to give support to the child when urgently needed;

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 (3) when funeral expenses are borne by a third person, without the knowledge of
the relatives who were obliged to give support to the deceased, the former may claim
reimbursement from the latter;
(b) Accident and calamities: (1) when during a fire, flood, storm, or other calamity, property
is saved from destruction by another person without the knowledge of the owner, the latter
is bound to pay the former just compensation; (2) when through an accident or other cause
a person is injured or becomes seriously ill, and he is treated or helped while he is not in
a condition to give consent to a contract, he shall be liable for the services of the physician
or other person aiding him, unless the service has been rendered out of pure generosity;
(3) when in a small community a majority of the inhabitants of age decide upon a measure
for protection against lawlessness, fire, flood, storm, or other calamity, anyone who objects
to the plan and refuses to contribute to the expenses but is benefited by the project as
executed shall be liable to pay his share of said expenses;
(c) Other situations: (1) a third person who pays the debtor’s indebtedness without the
latter’s knowledge is entitled to demand reimbursement but only up to the extent that the
payment has benefited the debtor; (2) any person who is constrained to pay the taxes of
another shall be entitled to reimbursement from the latter; and (3) when the government,
upon the failure of any person to comply with health or safety regulations concerning
property, undertakes to do the necessary work, even over his objection, he shall be liable
to pay the expenses.

 Delicts:
Basis of Civil Liability Ex Delicto: Criminal liability will give rise to civil liability
only if the same felonious act or omission results in damage or injury to another and is the
direct and proximate cause thereof. Damage or injury to another is evidently the
foundation of the civil action.
Effect of Acquittal: (a) If accused is declared not author of act or omission
complained of: There is no civil liability ex delicto. This is the situation contemplated in
Rule 111 of the Rules of Court, which says that the civil action based on delict shall be
deemed extinguished if there is a finding in a final judgment in the criminal action that the
act or omission from which the civil liability may arise did not exist.” (b) If based on
reasonable doubt: He is not exempt from civil liability based on delict which may be
proved by preponderance of evidence only. This is the situation contemplated in Article
29 of the Civil Code, where the civil action for damages is "for the same act or omission.
‘’
Effect of Death Pending Appeal of Judgment of Conviction: Both the criminal
liability and the civil liability (arising from the crime) are extinguished. However, the civil
liability based on other sources of obligations (other than the delict) is not extinguished
but may be recovered only by filing a separate civil action. The statute of limitations on the
civil liability (based on other sources than delict) is deemed interrupted during the
pendency of the criminal case.

 Quasi-delicts:

Requisites for Recovery: To sustain a claim based on quasi-delict, the following

requisites must concur: (1) damage suffered by the plaintiff; (2) fault or negligence
of the defendant; and (3) connection of cause and effect between the fault or
negligence of defendant and the damage incurred by the plaintiff.

Distinguished from Delict: (1) crimes affect the public interest, while quasi-delicts
are only of private concern; (2) the Penal Code punishes or corrects the criminal
act, while the Civil Code, by means of indemnification, merely repairs the damage;
and (3) delicts are not as broad as quasi-delicts, because the former are punished
only if there is a penal law clearly covering them, while the latter, quasi-delicts,
include all acts in which any kind of fault or negligence intervenes.

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 Scope of Quasi-delicts:

(a) Covers acts or omissions criminal in character: Article 2176 of the Civil
Code, where it refers to “fault or negligence,” covers not only acts “not punishable
by law" but also acts criminal in character, whether intentional and voluntary or
negligent. Hence, the same intentional, voluntary, or negligent act causing
damages and punished by law may produce two kinds of civil liability: (1) civil
liability arising from the crime under Article 100 of the Revised Penal Code (RPC);
or (2) civil liability arising from quasi-delict under Article 2176 of the Civil Code.

(b) But double recovery not allowed: The Civil Code expressly prohibits the
plaintiff from recovering damages twice under delict and quasi-delict “for the same
act or omission” of the defendant.

(c) Effect of pre-existing contractual relations: As a rule, the pre-existing

contract between the parties may bar the applicability of the law on quasi-delict.
However, by way of exception, the existence of a contract between the parties
does not bar the commission of a tort (quasi-delict) by one against the other and
the consequent recovery of damages
therefor, when the act that breaks the contract is also a tort.

(d) Culpa contractual distinguished from culpa extra contractual (culpa

aquiliana);
(1) in the first, the source of obligation is contract; while in the second, the
source of obligation is quasi-delict;
(2) in the first, the negligence is merely incidental to the performance of
an already existing obligation (arising from contracts) and that the vinculum juris
exists independently of the negligence; while in the second, the negligence is
substantive and independent in that it is the negligence itself which creates the
vinculum; and
(3) in the first, proof of the contract and of its non-performance is sufficient
prima facie to warrant recovery, hence, it is not necessary to prove the negligence;
while in the
second, the burden of proof rests upon the plaintiff to prove the negligence and
failure to do so shall result in the dismissal of the action.

3. Kinds of Obligations: Civil and Natural

Classification of Obligations Based on Juridical Quality/Efficaciousness:

Civil Obligation: One which gives a right of action to compel its performance. In
other words, a civil obligation is one which provides for a legal sanction in case of its
breach.

Natural Obligation: One which does not grant a right of action to enforce its
performance, but after voluntary fulfillment by the debtor, it authorizes the retention of what
has been delivered or rendered by reason thereof. In other words, this kind of obligation
does not provide
for a legal sanction in case of non-performance.

Legal Consequences of Natural Obligations:

Effect of Voluntary Fulfillment: While it does not grant a right of action to enforce its
performance, a natural obligation grants the creditor the right to retain what has been delivered
by reason thereof after the same has been voluntarily fulfilled by the debtor.

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 May Be Converted Into Civil Obligation: A natural obligation may again be converted
into a civil obligation, either by reason of novation or when it has been made the subject matter
of a contract of guaranty, pledge, or mortgage. In novation, its first requisite is that there must be
a valid previous obligation. The first requisite does not require that the obligation be a civil one
because even a natural obligation can be novated. The Court held that a prescribed debt is a
natural obligation which can be the subject matter of novation.
Cannot Be Subject Matter of Legal Compensation: Since legal compensation requires
that both obligations be demandable, a natural obligation cannot be the subject matter of legal
compensation because it is not legally demandable.
Important Examples of Natural Obligations:
When Right to Sue Has Prescribed: When the right to sue upon a civil obligation has
lapsed by extinctive prescription (or barred by statute of limitations), the obligation is converted
into a natural obligation. In relation thereto, when without the knowledge or against the will of the
debtor, a third person pays a debt which the obligor is not legally bound to pay because the action
thereon has prescribed, the latter may not demand reimbursement from the former because such
payment has not been beneficial to the debtor. The obligation of the debtor to the third-party payor
is not civil, but a natural one. Hence, if the debtor later voluntarily reimburses the third person, he
cannot recover what he has paid.
No Agreement in Writing for Payment of Monetary Interest: The debtor may not be
compelled to pay monetary interest on a loan unless the same has been expressly stipulated in
writing. However, if the borrower voluntarily pays the monetary interest in the absence of
stipulation therefor, he cannot recover the same because such voluntary payment is a case of
natural obligation. But if the payment of the interest was by reason of mistake, the debtor may still
recover it pursuant to solutio indebiti.
When Action Has Failed: When, after an action to enforce a civil obligation has failed,
the defendant voluntarily performs the obligation, he cannot demand the return of what he has
delivered or the payment of the value of the service he has rendered.
When There is No Legal Obligation To Pay in Succession Bv Will: The rule is that an
heir is not liable beyond the value of the property he received from the decedent. But when he
voluntarily pays a debt of the decedent exceeding the value of the property which he received by
will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be
rescinded by the payor. In the same way, when a will is declared void because it has not been
executed in accordance with the formalities required by law, the estate shall pass to the legal or
intestate heirs by the law of intestacy. But if one of the intestate heirs, after the settlement of the
debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment
is effective and irrevocable.

4. Kinds of Obligations: Real and Personal

Classifications of Obligations Based on Prestation:
Kinds of Obligations: (a) Real Obligation - One which involves an obligation to give or
to deliver; (b) Personal Obligation - One which involves an obligation to do or not to do.

Two Kinds of Real Obligations:

(1) Determinate or Specific Obligation - One which involves an obligation to deliver a
determinate or specific thing;

Legal Consequences of Determinate Obligations:

As to Performance: The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more valuable than that
which is due.

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 Three Accessory Obligations: In every determinate obligation, there are three
accessory obligations, in addition to the obligation to deliver the specific thing due:
(1) to preserve the thing to be delivered with the proper diligence of a good father
of a family, unless the law or the stipulation of the parties requires another standard of
care;
(2) to deliver also all the accessions and accessories, even though they may not
have been mentioned; and
(3) to deliver also the fruits if the creditor is already entitled to the same. The
creditor acquires a right to demand for the delivery of the fruits of the determinate thing
due from the time the obligation to deliver the determinate thing arises. In obligations to
deliver a determinate thing by reason of contract, the obligation to deliver the principal
thing arises at the time of perfection of the contract, unless the obligation is subject to a
suspensive condition, in which case, the obligation arises only upon the happening of the
said condition.
Remedies in Case of Breach: The creditor can compel the debtor to deliver the
determinate thing due in an action for specific performance, with a right to recover
damages.
Susceptibility to Extinguishment by Way of Loss: A determinate obligation can
be extinguished by reason of loss if: (1) the loss is without the debtor’s fault; and (2) it was
lost before he has incurred in delay.
(2) Indeterminate or Generic Obligation - One which involves the obligation to deliver
an indeterminate or generic thing. A thing is considered determinate or specific when
it has been particularly designated or physically segregated from all others of the same
class or species.’8 A thing is generic if it has been designated merely by its class or
genus.

Legal Consequences of Generic Obligations:

As to Performance: When the obligation consists in the delivery of an

indeterminate or generic thing, whose quality and circumstances have not been stated,
the creditor cannot demand a thing of superior quality. Neither can the debtor deliver
a thing of inferior quality.
Remedies in Case of Breach: The creditor can either: (I) ask another person to
comply with the obligation at the expense of the debtor; or (2) compel the debtor
himself to make the delivery, plus damages in either case.

Not Susceptible to Extinguishment by Way of Loss: A generic obligation is not

susceptible to extinguishment by reason of loss because the genus of a thing never
perishes (genus- nunquam peril).

Two Kinds of Personal Obligations: (1) Positive Personal Obligation -One which
involves an obligation to do; (2) Negative Personal Obligation - One which involves an
obligation not to do.

Legal Consequences of Positive and Negative Personal Obligations:

Remedies in Case of Breach of Obligation to Do:

(a) When considered breach: Not only in case of non-performance but also when
the performance is either poor or in contravention of the tenor of the obligation;
(b) Remedies: In case of non-performance, the remedy is to ask another person
to execute the act at the cost of the debtor, plus damages; however, if the obligation is

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 personal only to the debtor, the only remedy is to recover damages. The debtor may not
be compelled to execute the act against his will because the same is tantamount to
involuntary servitude, which is prohibited by the Constitution. If the obligation to do was
done poorly or in contravention of the tenor of the obligation, there is an additional remedy
of demanding for the undoing of what has been done at the expense of the debtor.
Remedies in Case of Breach of Obligation Not To Do:
(a) When considered breach: If the obligor does what he is forbidden to do.
(b) Remedies: To demand for the undoing of what has been done at the expense
of the obligor, in addition to the creditor’s right to recover damages. If it becomes physically
or legally impossible to exercise the right to demand the undoing of what has been done,
the remedy of the creditor to simply to recover damages from the debtor.
5. Breach of Obligations
Causes of Non-Performance of Obligations:
a. Involuntary Cause: A cause which is without the debtor’ fault, or independent of his
will, such as fortuitous event or force majeure, or fault of someone else.

 Fortuitous Event (Caso Fortuito)

Definition: Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is, therefore, not enough that the event should not have been foreseen or
anticipated, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same. It may either be an act
of God, or natural occurrences such as floods or typhoons (known as “fortuitous event
proper”), or an act of man (force majeure) such as riots, strikes, or wars.

Effect and Requisites: The rule is that no person shall be responsible for a fortuitous
event. Hence, the obligor, as a rule, is not liable for any loss or deterioration caused
by a fortuitous event. However, to exempt the obligor from liability for a breach of
an obligation by reason of a fortuitous event, the following requisites must
concur: (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; and (4) the debtor must be free from any participation in, or aggravation of,
the injury to the creditor. If the negligence or fault of the obligor coincided with the
occurrence of the fortuitous event, and caused the loss or damage or the aggravation
thereof, the fortuitous event cannot shield the obligor from liability for his negligence.
In other words, the whole occurrence is humanized and removed from the rules
applicable to a fortuitous event.
Exceptions to Fortuitous Event: The obligor remain liable for a breach of an obligation
by reason of a fortuitous event in the following instances: (1) when the law expressly so
specifies; (2) when it is otherwise declared by the parties; and (3) when the nature of the
obligation requires the assumption ofrisks.

b. Voluntary Cause: Causes which are due to the debtor’s fault, or by reason of his will,
such as (1) mora or delay; (2) dolo or fraud; (3) culpa or negligence; and (4)
contravention of the tenor of the obligation.

 Mora or Delay:

Kinds of Delay: (a) mora solvendi - delay on the part of the debtor; (b) mora accipiendi-
delay on the part of the creditor; and (c) compensation morae - delay on the part of both
parties because neither has completed their part in their reciprocal obligation.

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 Mora Solvendi:
(a) Requisites: (1) the obligation be demandable and already liquidated; (2; the
debtor
delays performance; and (3) the creditor requires the performance judicially or extra-
judicially. Once the creditor makes a demand, whether judicial or extra-judicial, the debtor
incurs mora or delay. Hence, absent any demand from the obligee, the obligor does not
incur delay.
(b) Exceptions to requirement of demand: (I) when the obligation expressly so
declares; (2) when the law expressly so declares; (3) when from the nature and the
circumstances of the obligation it appears that time was the controlling motive for the
establishment of the contract; or (4) when demand would be useless, as when the obligor
has rendered it beyond his power
to perform.
(c) Effects of mora solvendi: (1) the debtor becomes liable for damages,101
referred to as “compensatory interests"; (2) the debtor remains liable if the thing was lost
after he has incurred in delay even if the loss was without his fault or by reason of fortuitous
event; and (3) the prescriptive period within which the obligee may bring an action against
the obligor does not
commence to run until a demand is made.

Mora Accipendi:
Requisites of Mora Accipiendi-. (1) An offer of performance by the debtor who
has the required capacity; (2) the offer must be to comply with the prestation as it should
be performed; and (3) the creditor refuses the performance without just cause.
Delay in Reciprocal Obligations:
(a) Concept of reciprocal obligations: Reciprocal obligations are those which
arise from the same cause, and which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon the obligation of the other. They are to
be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.
(b) When delay exists: The mutual inaction of the parties gives rise to
compensation morae. In other words, if both did not perform, the delay of one is cancelled
out by the delay of the other. Hence, there is no delay. But from the moment one of the
parties fulfills his obligation, delay by the other begins, without the necessity of a demand.
But demand is necessary when different dates for performance are fixed for the obligations

 Dolo (Fraud) and Culpa (Negligence):

Dolo (fraud):
(a) Concept: It is the deliberate and intentional evasion of the normal fulfillment of
obligations,
(b) Prohibited Waiver: Any waiver of an action for future fraud is void.

 Negligence (culpa contractual)

(a) Concept: It is the fault or negligence incident in the performance of an obligation which
already existed, and which increases the liability from such already existing obligation,
(b) Prohibited waiver: When negligence shows bad faith it is tantamount to fraud. Hence,
any waiver of an action for future negligence showing bad faith is also void