LLAW 113: OBLIGATIONS AND CONTRACTS

TOPIC 1.1:  DEFINITION, ELEMENTS, AND SOURCES OF OBLIGATIONS

Obligation

• A juridical necessity to give, to do, or not to do

• Juridical necessity: Enforcing something through legal means

• Can be oral, written, digital, electronic, virtual, in SMS, etc.

Juridical Necessity

• Civil obligation

• Creditor/obligee may file a case in court to demand or enforce their rights

• Even if the creditor never actually files a case, the fact that they can legally enforce the obligation through the court system is what classifies it as a civil obligation. 

• The fact that the creditor or obligee can resort to legal or court action that makes it necessary for the debtor or obligor to perform an obligation. It is the “invisible” threat of being sued that compels one to fulfil the obligation.

• Most obligations do not need to be enforced by means of a court order

• Customers are obligated to pay the bill in restaurants; the restaurant does not have to go to court in order to get paid

Natural obligation

• Obligations that cannot be enforced in court

• The court cannot compel their performance but they ought to be performed because it is the moral and proper thing to do

• Even if the debtor does not comply, the creditor cannot sue them to force payment or performance. However, if the debtor chooses to fulfill the obligation voluntarily, they cannot take it back afterward.

Elements of an Obligation

• Active Subject

  • Creditor or obligee (often interchanged): person who has the right to demand an obligation

  • Creditor: used in obligations to give

  • Obligee: used in obligations to do

• Passive Subject

  • Debtor or obligor (often interchanged): person who must fulfill or perform the obligation

  • Debtor: used in obligations to give

  • Obligor: used in obligations to do

• Object or Prestation

  • To give, to do, or to not do 

  • To not give is included in to not do

  • What is needed to be performed in order to say that it’s been performed

• Juridical Tie

  • Known as the vinculum juris (bond of law)

  • The reason that causes an obligation to arise

  • Creates a legal relationship between the parties, one this is forged in law that grants all the rights and remedies to the parties with respect to the obligation

Sources of Obligations

1. Law - e.g. Tax Code, Family Code, Labor Code

2. Contracts - Binding agreements

3. Quasi-contracts - No contract, but obligation exists nonetheless

4. Acts or omissions punished by law - Liability arising from crime; Criminal liability = Civil obligations

5. Quasi-delicts - negligent acts not punished as crime, but caused damage

Damages refers to the sum of money which the law awards as compensation.

TOPIC 1.2:  NATURE AND EFFECTS OF OBLIGATIONS

Obligations To Give:

1. To take care of it (Art. 1163)

• Standard of care: Proper diligence of a good father of a family unless the law provides or the parties agree to another standard of care

• Thing is preserved from the perfection of the contract

• Minimum standard of care is required unless another standard or care is agreed upon

2. To give the fruits (Art. 1164)

• Creditor has the right to the fruits upon time obligation to deliver arises

• Fruits are not demandable if the object is not either

• Creditor acquires REAL right only upon delivery such that:

1. Before delivery, creditor can only go enforce against debtor

2. After delivery, creditor can enforce against the world/third party

3. To give the thing (Art. 1165)

• Creditor will have ownership only when the object is delivered to them, NOT when it is agreed upon

• If determinate (i.e. specific, particular; e.g. iPhone with SN1234)

• Give the thing

• Includes accessions and accessories (Art. 1166)

• In case of failure: Legal remedy is a specific performance

• If indeterminate (i.e. generic; e.g. any iPhone)

• If not given, creditor may ask a 3rd party to give it at the expense of the debtor

Presumptions in Obligations to Give (Art. 1176)

• If principal amount is received without reserving right to interest, presumption is interest has been paid

• If later installment is received without reserving prior installments, presumption is earlier investments have been paid

Obligations To Do (Art. 1167)

1. If obligor fails to do the service (e.g. paint house), a 3rd party may be asked to do it at the obligor’s expense

2. If done in a contravention of tenor of agreement, i.e. breach, (e.g. painted house red instead of yellow as agreed), a 3rd party may be asked to do it at the obligor’s expense

3. If poorly done (e.g. bad/incomplete paint job), can be treated as undone and a 3rd party be asked to redo it at the obligor’s expense

💡 If not done, done with breach, or poorly done, obligee cannot compel obligor to do or redo it via specific performance because it would be involuntary servitude which is prohibited under the Philippine Constitution.

Obligations Not To Do

• If the obligor does what is forbidden, it will be undone at the obligor's expense (Art. 1168)

• Obligor can be liable for the damages of doing what is forbidden

Legal Delay (Art. 1169)

• Failure to give or do on the due date is ordinary delay and not immediately legal delay

• Legal delay is delay with legal consequences like liability for fortuitous events, damages, and interest, which are not demandable in ordinary delay

  • Creditor is required to make a judicial or extrajudicial demand on the debtor for it to be legal delay

  • If no demand, it is just an ordinary delay and debtor cannot be liable for damages

• General rule: to be in legal delay, there must be judicial (through courts) or extrajudicial (oral or written, but best in writing) demand

  • Exceptions (when demand if not necessary for there to be legal delay):

    • Obligation expressly declares (ex. Stated in the contract)

    • Law expressly declares (ex. Tax payment)

    • Demand is useless (e. Debtor’s fault)

  • In reciprocal obligations (both parties required to give or do something in relation to the other):

    • No one’s in delay if both are not ready to perform

    • When one party fulfils their obligation, delay by the other may begin if they are unable to fulfill their obligations

• Legal delay classifications

  • Mora solvendi - delay of the debtor in fulfilling his obligations

  • Mora accipiendi - delay on the part of the creditor in accepting the performance of the debtor

  • Compensatio morae - the delay of both the creditor and debtor in reciprocal obligations

Damages (Arts. 1170-1173)

– One is liable for damages if in the performance of an obligation there is any of the following:

1. Fraud (Art. 1171)

• There is bad faith; deliberate and intentional evasion of the normal fulfillment

• Voluntary execution of a wrongful act

• Demandable in all obligations (to do/give)

• Waiving rights for remedy against future fraud is void (not allowed); fraud is yet to be committed after a contract

• e.g. selling an imitation product as an authentic one

2. Negligence (Art. 1172)

• Omission of that diligence required by the nature of the obligation (failure to exercise required care and caution)

• No element of deliberate intent (which fraud has)

• Liability may be tempered by the courts

• If with bad faith, Arts. 1171 and 2201(2) will apply

3. Delay

• See previous notes

4. Contravene tenor of obligation

• When there is breach, performance is contrary to the terms and conditions of the contract

• The party who dances when the contract says to sing is liable for damages

– In case of fraud, bad faith, negligence, malice, or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation

Fortuitous Events (Art. 1174)

• General rule: No person shall be responsible for for events which could not be foreseen or even if foreseen, were inevitable or could not be avoided except in the following cases:

  • Law expressly specifies liability (i.e. delay)

    • If obligor delays (legal) or promises to deliver the thing to 2 persons who do not have the same interest, he shall be liable for fortuitous event until delivery (Art. 1165 par. 2)

  • Stipulation (or agreement) by the parties expressly specifies liability

  • Nature of obligation requires assumption of risk

  • Delivery of generic thing (genus never perishes; can easily be replaced, does not extinguish liability

• Requisites:

  • Independent of human will

  • Impossible to avoid

  • Impossible for obligor/debtor to fulfill obligation in a normal manner

  • Obligor/debtor is free from any participation

Creditor Remedies (Art. 1177)

– In case debtor fails to give or pay, the creditor can do the following in successive order:

1. Pursue the property in possession of the debtor to satisfy the claim (i.e. exhaust debtor properties through legal remedies of levy and executions)

2. Exercise all rights and bring all actions of the debtor (i.e. run after debtor of debtors)

3. Impugn acts done by debtor in fraud of creditor (i.e. debtor sold his property to a third party)

Transmissible (Act. 1178)

• General rule: All rights by virtue of an obligation are transmissible (i.e. You can assign or pass on an obligation to another creditor or debtor, as the case may be)

• Exceptions: 

1. If the parties to an obligation stipulate that it cannot be transmissible

2. Law prohibits such as in partnerships

TOPIC 1.3: DIFFERENT KINDS OF OBLIGATIONS

Different Kinds of Obligations

1. Pure and Conditional (Arts. 1179-192)

• Pure - the effectivity or extinguishment does not depend upon the fulfillment or non-fulfillment of a condition or upon the expiration of a period and is demandable at once

• Conditional - one whose effectivity is subordinated to the fulfillment or non-fulfillment of a future AND uncertain event (you don’t know if it is going to happen or not such a passing a subject or a government licensure exam) or upon a past event unknown to the parties

• Condition - future and uncertain event or a past event unknown to the parties

  • Suspensive

    • The happening of the condition creates or gives rise to the obligation

    • Effects:

      • Effectivity retroacts to the day of the constitution of the obligation

      • No retroactivity with reference to fruits or interest and prescription

  • Resolutory

    • The happening of the condition ends or extinguishes the obligation

    • Effects:

      • No retroactive effect

      • Obligation extinguished

      • Restore to each other what was received plus give interest/fruits

  • Potestative

    • The happening of the condition is dependent on the sole will of one party

    • If suspensive and depends upon will of debtor = VOID

    • If it depends upon sole will of creditor = VALID

    • If it depends upon sole will of 3rd party = VALID

  • Impossible (cannot be done) and illegal (against the law) = VOID

    • General rule: They shall annul the obligation which depends upon them

    • Exceptions:

      • Won’t affect pre-existing obligations

      • If obligation is divisible

      • Condition not to do an impossible thing

2. With a Period (Arts. 1193-1198)

• With a period - an obligation which depends upon a future and certain event (ex. When it rains)

• When stipulation says “payable when able” – it is with a period

  • Remedy:

    • Parties should agree on a specific period

    • Court will fix period if parties don’t agree

• Kinds

  • Resolutory (in diem)

    • Demandable at once but terminates upon arrival of the day certain

    • Day certain - that which must necessarily come, though it may not be known when

  • Suspensive (ex die)

    • Obligation becomes demandable on the day stipulated

3. Alternative and Facultative (Arts. 1199-1205)

• Facultative - there is only one prestation agreed upon but debtor may give another in substitution

• Alternative - there are several prestation but only one is due

4. Joint and Solidary (Arts. 1207-1222)

• Situation

  • Legal arrangement with 2 or more debtors and/or 2 or more creditors

• Joint

  • Creditor can only demand the proportionate share from each debtor; Debtor only obliged to give proportionate share of the obligation

• Solidary (sometimes referred to as "joint and several")

  • Creditor can demand the entire obligation from any debtor; Debtor obliged to give entire the obligation upon demand.

• General rule: The default presumption is JOINT when two or more creditors or two or more debtors concur in one and the same obligation.

  • Exceptions to the joint presumption when:

    • Solidarity is expressly stated

    • Law requires solidarity

    • Solidarity is imposed by court final judgment

• Effects of Joint Liability:

  • Demand on one debtor produces delay only with respect to the debt of such debtor.

  • Interruption in payment by one does not benefit or prejudice the other;

  • Insolvency of one debtor does not affect other debtors

• Joint Divisible Obligations:

  • Each creditor can demand for the payment of his proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt

  • A joint creditor cannot act in representation of the other creditors while a joint debtor cannot be compelled to answer for the acts or liability of the other debtors

• Joint Indivisible Obligations:

  • If there are 2 or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share. The obligation can be enforced only by proceeding against all of the debtors.

  • If there are 2 or more creditors, the concurrence or collective act of all the creditors, although each for his own share, is also necessary for the enforcement of the obligation

• Solidary: Expressed by law, stipulation, nature

• Active (on the part of creditor or obligee)

  • Death of 1 solidary creditor transmits share to heirs (but collectively).

  • Each creditor represents others in recovering payments.

  • Credit is divided equally between creditors.

  • Debtor may pay any solidary creditor.

• Passive (on the part of debtors or obligors)

  • Each debtor may be requested to pay whole obligation with right to recover from co-debtors.

  • Prescription for one creditor affects all.

  • Interest from delay on 1 debtor is borne by all.

• Mixed (On the Part of Creditors and Debtors)

• Conventional (By agreement of the parties)

• Legal – imposed by law

  • Obligations arising from tort

  • Obligations arising from quasi-contracts

  • Obligation of devisees and legatees (Wills)

  • Liability of principals, accomplices, and accessories of a felony

  • Bailees in commodatum

5. Divisible and Indivisible (Arts. 1223-1225)

• Divisible - Capable of partial performance

  • Execution of certain number of days work

  • Expressed by metrical units

  • Susceptible of partial fulfillment

• Indivisible - Not capable of partial performance

  • To give definite things

  • Not susceptible to partial performance

  • Provided by law

  • Intention of parties

6. With a Penal Clause (Arts. 1226-1230)

• One to which an accessory undertaking is attached for the purpose of insuring its performance by virtue of which the obligor is bound pay a stipulated indemnity or perform a stipulated prestation in case of breach

• Characteristics of Penal Clauses:

  • Subsidiary - As a general rule, only penalty can be demanded, principal cannot be demanded, except: penalty is joint or cumulative

  • Exclusive - Takes place of damage; damage can only be demanded in the ff. cases

    • Stipulation - granting right

    • Refusal to pay penalty

    • With fault (not of creditor)

• Causes for reduction of penalty:

  • Partial/irregular performance

  • Penalty provided is iniquitous/unconscionable

DIAGNOSTICS QUIZ

1. What is an obligation?

• Legal necessity to give, do, or not do something

• Not every moral duty is an obligation because it cannot always be enforced by the juridical system

• Not all obligations have to be signed on or written in a contract, it can be made in a verbal agreement, etc.

• Every contract is an obligation

• Written agreements are more powerful than verbal agreements

2. Which of the following is not a source of obligation?

• Prestation: an element instead of a source

• Law, contracts, and quasi-contracts: a source of obligation

3. What is an active subject in an obligation?

• Creditor and/or obligee

4. Which of the following is a requisite of an obligation?

• Efficient cause

• Passive subject

• Active subject

5. What is the term for the subject matter of an obligation?

• Prestation: obligation to give, to do, or to not do; what is needed to be performed in order to say that it’s been performed

6. What is the term for the failure to perform an obligation on time?

• Delay

7. What is the term for the voluntary administration of the property of another without their consent?

• Negotiorum gestio: When someone voluntarily but with no authority takes charge) of the abandoned business or property of another, they’re responsible for the obligations incurred and must reimburse the officious manager for expenses to the extent that the owner has benefited from such take over

8. Which of the following is not a type of obligation?

• Moral obligation: subjective, ethics and values of people are different

Mortgage

• An agreement between you and a lender that gives the lender the right to take your property if you don't repay the money you've borrowed.

An obligation to give the thing (Art. 1165) can be DETERMINATE OR INDETERMINATE

A creditor may NOT waive an action

LECTURE: FEB 5

Obligations to give:

1. Care

• Generally good father of a family

2. Fruits

• Fruits that accrue from the time of the obligation

• Becomes a real right upon delivery

• Fruits: something that grows on something (ex. interest)

3. Delivery

• Determinate

• Indeterminate, in case of a break, 3P, at debtor’s expense

FACT PATTERN 1: Mia and Christy were standing outside UPTC waiting for their car to fetch them. Mia asked Christy to hold her phone while she fished for something in her bag.

1. What is Christy’s obligation to give with respect to Mia’s phone?

• Obligation to give the phone back

• Obligation to take care of the phone

2. Does the obligation involve a determinate or indeterminate thing?

• Determinate: it is something specific and personal that belongs to Mia

3. If Christy drops the phone on the steps, is she exercising the appropriate amount of care?

• Not enough facts; what if somebody bumped her?

4. If Christy did not observe proper standard of care, what is Mia’s remedy?

• When there is negligence and something is damage, there should be compensation

FACT PATTERN 2:  Mia and Christy were standing outside UPTC waiting for their car to fetch them. Mia asked Christy to hold her phone while she fished for something in her bag. Christy ran away with Mia’s phone and Mia has not been able to contact her anymore.

1. Is there a juridical necessity involved?

• Yes

2. What is the source of the obligation?

• Law: the phone is Mia’s property and Christy running away with it could imply malicious intent and could imply theft

• Delicts: violation of the law

3. What if we change the facts and Mia and Christy weren’t friends. What if Christy was just a person known to Mia because she is a cafeteria attendant.

• Contributory Negligence: You took part in the negligence and the loss

Reciprocal Obligations

• Where parties are both creditors and debtors of each other

Obligations to do

At the debtor’s expense to do:

• Not done then 3rd party

• Done in breach then 3rd party

• Badly done then 3rd party

Officious manager

• Someone who did something without the owner’s authorization

Fact pattern 5

• Quasi-delict: it caused damages

• Can be delict if you think about how it’s vandalism of somebody else’s property

Delay (NCC 11690)

• Ordinary Delay: failure to give or do on due date

+

• Demand: Judicial or extrajudicial 

=

• Legal delay: gives rise to legal consequences like liability for fortuitous events, damages, and interest

Fortuitous Events

• No person shall be responsible for events which could not be foreseen or even if foreseen, were inevitable or could not be avoided.

• Only excuses you for a certain period of time, but does not excuse you from performing the obligation (unless deliverable was damaged due to fortuitous event)

• Normally excuses somebody for delay or breach

Requisites:

• Independent of human will

• Impossible to avoid

• Impossible for debtor to fulfill obligation in a normal manner

• Debtor is free from any participation

Still there is liability

• Law expressly specifies so (e.g. delay)

• Stipulated by the parties

• Assumption of risk

• Obligation to give is regarding a generic thing

Negligence

• Failure of a person to observe for the protection of the interests of another

• Not using the standard of care; lack of care

• Those who are guilty are liable for damages

Contributory Negligence

• A person who suffers harm is partly at fault for their own injury due to their own negligence or lack of care. 

• If proven, it can reduce or even eliminate the compensation they can receive from another party.

Bad Faith

• Intentional dishonest act by not fulfilling legal or contractual obligations

• Bad behavior, lying, deceiving, fraud

• Those who are guilty are liable for damages

• Punishable; has consequences because of damages

TOPIC 2: VARIOUS MODES OF EXTINGUISHING OBLIGATIONS

• Extinguishing → Terminating / settling the obligation

• Obligation is no longer due or demandable

1. Payment or Performance

• If to give a determinate thing - the exact thing must be given

• If to give an indeterminate thing - same genus or species must be given

• If to do - complete performance must be given

• If not to do - not doing anything that will contravene the obligation

Judging compliance with delivery requirements:

• Substantial delivery in good faith - how to determine what is substantial

  • Substantial is not the same for everyone!

• Incomplete delivery - extinguishes the portion paid (what was given can no longer be demanded)

  • Partial delivery - if acceptable

  • Delivery in installments - divisible obligations

  • Delivery where complete quantity is unknown - debtor can pay known portion first

To whom is payment made to?

• Payee or person in possession of the credit

• Successor in interest (ex. Heirs or assignees)

• Representative (ex. agents) 

• Payment to an incapacitated person or wrong person WILL NOT extinguish the obligation unless it benefits the creditor, which must be proven

Dation in Payment

• Dacion En Pago

• Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation (must be a money obligation)

2. Confusion of Merger of Rights

• Character of debtor and creditor are merged in the same person

• Usual causes:

  • Succession (compulsory, testate, intestate)

  • Donation

  • Negotiation of a negotiable instrument

• Ex. If ABC Corp owes debt to XYZ Corp, then an acquisition by XYZ Corp of ABC Corp will result in confusion of merger of rights, and the debt is extinguished

3. Loss of the Thing Due

• A thing is lost when it perishes, goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered

• If there is no fault on the part of the debtor + no delay

• Exceptions:

  • Stipulation

  • Assumption of risk

• Loss of a determinate thing → Obligation extinguished

• Loss of an indeterminate thing → Obligation not extinguished

• Partial loss due to a fortuitous event

  • Does not extinguish the obligation

  • Thing shall be delivered in its current condition with no liability on the debtor unless part loss makes the thing useless then it is extinguished

4. Condonation

• Gratuitous

• Requires acceptance of the debtor

• Express condonation must comply with formal requirements for donations

• Must not be inofficious (impair inheritance rights)

• Delivery of evidence of the credit to the debtor raises presumption:

  • That the same was voluntarily delivered

  • Implied renunciation of the debt

• Waiver of principal waives accessory but not vice versa

5. Compensation

• Offsetting of two obligations which are reciprocally extinguished if they are of the same value, or extinguished to the concurrent amount if of different values

Elements:

1. Parties are principal debtor and creditor of each other

2. Both debts are for a sum of money or for consumable, are of same kind and quality

3. Both debts are due

4. Both debts are liquidated and demandable

5. No retention or controversy has been commenced by 3P or known to debtors

Two obligations, two people who are mutually creditors and debtors of the each other

• Legal by operation of law, even without knowledge of the parties. All elements are present

• Voluntary - both parties agree to the mutual extinguishment of obligations even if not all elements are present

• Judicial (set off) - case of suit and counterclaim (court proceedings)

• Facultative

6. Novation

• Extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first 

Elements:

1. Previous valid obligation

2. Parties agree to a new contract

3. Extinguishment of the old obligation

4. Birth of a new obligation

How is it done?

• Changing the object or the principal condition

• Substituting person of the debtor

• Subrogating a third party in the rights of the creditor