NOTES- Obligation and Contracts

jkyap, cpa

(part 1)

Source: Fidelito Soriano books

1. Determinate thingsthat which is particularly designated or physically segregated from all

others of the same class
2. Indeterminate thingexample is 10,000 pesos.
It is important to know whether a thing is determinate or generic because as a rule the
loss of a determinate thing through a fortuitous event extinguishes the obligation
Obligation when giving determinate thing:
1. Diligence of a good father of a family ordinary care that an average person exercises
in taking care of his property.
2. Deliver the thing actual or constructive
3. Deliver the fruits ( 3 kinds) :
a. Natural
--products of the soil and animals
b. Industrial - produced by land through intervention of labor
c. Civil -- that is produced thru juridical relation such as the rent of the building, lease
price, life annuities.
The creditor has the right to the fruits of the thing from the time the obligation to
deliver it arises (personal right). If the things has been delivered to him, he shall
acquire REAL right over it
Personal right right to demand the delivery of the things and its fruits.
Real right ownership or possession. Enforceable against the whole world upon the
receipt of the object.
4. Deliver the accessions and accessories even if they are not mentioned.
a. Accessions produced by a thing or attached thereto.
b. Accessory that is joined or included with the principal thing for the latters
better use. Essential part of the thing.

REMEDIES of the creditor (if the debtor fails to make delivery)

1. Compel the debtor to make the delivery ( determinate thing)/obligation be complied with
in good faith at the expense of the debtor ( indeterminate thing, obligation to do)
2. Demand damages
In obligation to do, the creditor cannot compel the debtor because it will amount to
involuntary servitude.
Grounds for Liability to pay damages
1.
2.
3.
4.

Fraud
Negligence
Delay
Contravention of the tenor of the obligation

Damage harm done and the sum of money that may be recovered.
Injury wrongful unlawful act.
Kinds of damages :
a. Actual or compensatory value of the loss suffered and profits not realized. Proof is
required.
b. Moral ( court discretion)
c. Nominal (court discretion)
d. Liquidated damages agreed by the parties to be paid in case of breach.
e. Exemplary damage correction for public good ( court discretion)
Fraud deliberate or intentional evasion by the debtor of the normal compliance of his obligation
Kinds of fraud:
1. Fraud in obtaining consent (affects the validity of the contract):
a. Causal fraud Consent would not have been given
- Voidable
b. Incidental fraud Consent would have still been given but the person giving it would
have agreed on different terms.
- Valid
- Liable for damages
2. Fraud in the performance of obligation
- Does not affect the validity of the contract because it happens after perfect
of the contract.
- Party employing it shall be liable to damages
Waiver of an action for future fraud is void because it will encourage
commission of fraud. Thus, the debtor will still be liable for damages if he
commits fraud in the performance of his obligation despite the waiver.
Waiver of an action for past fraud is ok because it happened already. Such
waiver is an act of liberality on the part of the creditor.
Negligence omission of diligence which is required by the nature of the obligation.
The test of negligence is whether the defendant used that reasonable care and caution which
an ordinary person would have used in the same situation.
Kinds of negligence (culpa):
1. Culpa contractual example is breach of contract of carriage as when the a passenger in
the bus is hurt during trip.
i. Master servant rule applies. The negligence of the employee is the
negligence of the master.
2. Culpa aquiliana quasi-delict. Master-servant rule does not apply.
3. Culpa criminal negligence that results to crime or DELICT.

Delay or default or more is the non-fulfillment of an obligation on time.

a. Mora solvendi - delay on the part of the debtor

b. Mora accipiendi creditor

c. Compensatio morae delay in reciprocal obligation. Both parties are in delay.
Hence, as if there is no delay.
General rule: No Demand, No Delay
Exception to the rule:
a. When the law so provides. Example. In the payment of taxes.
b. When the contract expressly so declares. Stipulation
c. Time is the essence of the contract.
d. When demand would be useless. If the thing he is obliged to deliver has been
destroyed through his fault or he has delivered it to another person.
e. In reciprocal obligation from the moment one party fulfills his obligation and the other
party cannot comply at the same time.
Fortuitous event one that is inevitable. Example, act of GOD and act of MAN.
General rule : No person shall be liable for fortuitous event. His obligation will be extinguished.
Exceptions:
1. The debtor is in delay or he has promised to deliver it to two or more person who do not
have the same interest
2. When there is stipulation
3. When the nature of the obligation requires the assumption of risk. Example, the liability of
the insurer.
Receipt of principal payment without reservation as to interest, shall give rise to the
presumption that the interest has been paid or covered.
Receipt of later installment without without reservation as to prior installments shall give
rise to the presumption the prior installments have been paid.
These presumptions however are disputable. Meaning, evidence may be introduced to the
contrary.
Remedies of the creditor to enforce payment of his claims:
1. By Attachment the creditor may ask the court to set aside a property belonging to the
debtor and ordered it to be sold and the proceeds applied to the payment of the
obligation
2. Accion subrogation. The creditor will take the rights of the debtor.
3. Accion pauliana. Cancel the acts the debtor may have done to defraud his creditors
General rule. All rights are transmissible.
Exceptions:
1. Law prohibits the transmission of the right. Rights of the general partners are not
transmitted to the heirs upon his death.
2. Stipulation
3. The right by nature is not transmissiblewhen the right is strictly personal.
An obligation with a period is one where there is a day certain when the obligation will arise or
cease.

Period is a space of time which determines the effectivity or extinguishment of an obligation.

Day certain is that which must necessarily come. Example: death.
C ondition:
1. may or may not happen
2. refers to future or to a past event unknown to the parties
while period must necessarily come (day certain) and only refers to future event.
Potestative debtor, period ---court fixes the duration
Potestative debtor, condition-suspensive -- VOID

Designating a period shall be presumed to have been established for the benefit of the
creditor and debtor.
At the benefit of the debtor, he cannot be compelled to pay before the maturity date. He can
pay anytime he wishes
At the benefit of the creditor means the creditor can at any time demand or accept payment
when he wishes.
The debtor loses his right to make use of the period if it is for his benefit under the ff
circumstances:
1.
2.
3.
4.
5.

He becomes insolvent unless he gives a guarantee or security

He fails to furnish the guarantee or security he promised
The guaranty or security is impaired or lost
Violates any covenant
He attempts to abscond

Alternative obligation is one where several prestations are due but complete performance of one
of them is sufficient . The right of choice belongs to the debtor unless it has been expressly given
to the creditor.
When the debtor or the creditor communicated his choice, the obligation ceases to be alternative
and becomes simple obligation.
I f all prestations are lost thru debtors fault (debtor has the right to choose), the debtor shall
pay the value of the last thing that was lost plus damages.
If the other things were lost due to fortuitous and the last one was lost thru the debtors fault,
the debtor shall just pay damages; if it was lost thru fortuitous event, obligation is extinguished.
If things were lost thru debtors fault (creditor has the right to choose), the creditor may claim
any of those subsisting or the price of those which were lost thru debtors fault plus damages. If
all things were lost thru debtors fault, creditor may claim the price of any of them plus damages.
Facultative obligation. Only one prestation is due but the debtor may render another in
substitution. If the principal is impossible or void, the debtor is not required to give the
substitute.

IMPORTANT NOTE: A solidary creditor who has caused the extinguishment of an obligation by
remission, novation, compensation or confusion, or who has collected the debt shall be liable to
the others for the shares corresponding to them. A solidary creditor may not do anything
prejudicial to his co-solidary creditors.
In case the debt has been totally paid by any of the solidary debtors before the remission of a
proportionate share in an obligation corresponding to the other solidary debtor, the latter is still
responsible to the paying co-debtor.
X, Y and Z are solidary creditors. X makes a demand against A. A must pay to X. if A pays to
other creditor, his payment is valid only with respect to other creditors share. A can still be held
liable if the other creditors did not receive their share from the receiving co-creditor.
So long as the debt has not been collected, a creditor may proceed against any of the solidary
debtors or some or all of them simultaneously.*
Interest from the date of payment accrues to the benefit of the paying solidary debtor.
If an insolvent debtor cannot reimburse his share to the paying debtor, such share shall be borne
by all his co-debtors, in proportion to the debt of each.
Payment by a solidary debtor after the obligation has prescribed does not entitle him to
reimbursement.
The solidary debtor making the payment can recover what he paid from the guilty debtor ( price
of the thing, damages and interest)
A solidary creditor cannot assign his right to a 3 rd person without the consent of the other
solidary creditors (bound by mutual trust and confidence).
Joint indivisible obligation. Debtors or creditors are jointly bound bound but the prestation or
object is indivisible :
1. Creditors must act collectively: all of them must make the demand unless one is
authorized to act for the others.
2. The demand must be made against all the debtors since compliance is possible only if
debtors act together.
3. A renunciation made by a joint creditor extinguishes only his own share. In such case, the
obligation is converted into a monetary obligation to pay the value of the thing
4. If one of the debtors does not comply with his undertaking, he has to pay damages.
5. If one of the debtors is insolvent, the others shall not be liable for his share.
Indivisibility of an obligation refers to subject matter or object not capable of partial
performance. Examples:
1. Obligation to give definite things
2. Those personal (to sing one song in a program)
3.
Examples of Divisible obligation (capable of partial performance):
1. Execution of a certain number of days of work.
2. Accomplishment of work by metrical units
3. Provision of law ( full payment of tax)

4. By stipulation of the parties

Penal clause attached to an obligation is an accessory undertaking on the part of the debtor
which provides that in case of non-compliance, debtor assumes a greater liability. This is to
insure performance.
Proof of actual damages is not necessary in order that penalty may be demanded. It is sufficient
that there is breach of contract.
General rule: Penalty takes place of the damages and interest in case of non-compliance
Exceptions:
1. When there is stipulation to that effect
2. The debtor refuses to pay the penalty
3. Debtor is guilty of fraud in the performance of an obligation
Creditor cannot demand fulfillment of the obligation and the payment of penalty at the
same time unless the right has been granted to him.
Payment must be made in legal tender in the Philippines. However, parties may stipulate
currency other than Philippine legal tender.

Legal tender:
1. All peso coins (1 5 10) for 1000php and up
2. All centavo coins for 100pesos and below
3. All bills up to any amount
Inflation effects:
1. Increase in currency in the circulation
2. Sharp rise in prices
3. Fall in currency value.
The value of the currency at the time of the establishment of the obligation shall be the basis of
payment
Effects of deflation or inflation shall only be applied if there is an official pronouncement or
declaration by competent authorities
Promissory notes, bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed or actually realized or when through the fault of
the creditor they have been impaired.
General rule: Payment or performance must be complete
Exceptions:
1. Obligation substantially performed
2. Obligee accepts the performance without expressing any protest. (deemed fulfilled).

Debtor must possess the following for the payment to be valid:

1. He has FREE DISPOSAL OF THE THING DUE. There should be no encumbrances or liens
or claims by third parties.
2. CAPACITY TO ALIENATE THE THING. The guardian of the incapacitated or the
incapacitated person himself when he regains or attains his capacity may annul the
payment.
Payment made by the debtor after the court has ordered him to retain debt is not valid.
He can be required to pay again the to the creditor who asked for the retention of debt.
Creditor is not bound to accept payment or performance by a third person except :
1. By stipulation
2. The third person is a guarantor or co-debtor
If a third party pays with the consent of the debtor, the third party is subrogated in the rights of
the original creditor. He is now the new creditor.
If he pays without the knowledge and against the will of the debtor, he is not subrogated. He can
recover the payment to the extent of the amount that was beneficial to the debtor.
If a third party doesnt want to be reimbursed, it shall be deemed as a DONATION, which requires
the consent of the debtor. If the debor does not consent, it is still valid to the creditor who has
accepted the payment. Third party is not subrogated.
Payment to an incapacitated creditor is not valid except:
1. It has kept the thing delivered. Valid to the extent of the amount kept.
2. To the amount beneficial to him

Payment to an unauthorized third person is not valid except:

1.
2.
3.
4.

Third person acquires the creditors rights

Creditor ratifies the payment
By the creditors conduct the debtor believes he can pay to the 3 rd person.
Payment in good faith to a 3rd person in possession of the credit

If there was no stipulation as to the place of payment, it would be at wherever the thing
might be at the time the obligation was constituted if the obligation is to give a
determinate thing.
If the obligation is to give a generic thing or an obligation to do, then at the domicile of the
debtor
Dation in payment is where the ownership of property is transferred to the creditor to pay a debt
in money. It partakes the nature of a sale with the creditor in effect buying the property of the
debtor.
Dation is actually objective novation (changing the object), a thing is substituted in place of
paying the obligation in money.

Debtor/creditor cannot apply payment to the debt not yet due unless the period is for his benefit
or that he is allowed by stipulation
Only apply payment to the debt of the same kind.
Cession requirements:
1. 2 or more creditors
2. The debtor is insolvent
Effects:
All properties are assigned to the creditors, except those exempt from execution. Title is not
passed, however, creditors are authorized to sell the properties and have the proceeds applied to
their claims.
Requisites of valid tender of payment and consignation:
1. There is valid payment. (it must be the thing contemplated, in legal tender and
complete)
2. Creditor refuses to accept the payment without just cause
3. Notify the persons interested in the fulfillment of the obligation (guarantors, sureties,
co-debtors)
4. The sum is deposited with the judicial authorities
5. The persons interested is again notified of the consignation.
The debtor may withdraw the sum or thing consigned before the creditor accepts the
consignation or before the judge has declared that the consignation has been properly made.
The debtor may withdraw the sum even after the creditor accepted the consignation only with
the consent of the creditor. The effects would be:
1. The guarantors are released unless they consented
2. The obligation will become joint
3. Creditor can no longer proceed against the guarantor if later on the debtor cannot pay.
Consignation without tender of payment is still valid if:
1.
2.
3.
4.
5.

The debtor cannot see the creditor at the place of payment.

Creditor is incapacitated to receive payment at the time it is due.
He refuses to give receipt
2 or more persons claim the same right to collect
Title of the obligation has been lost

Generic thing does not perish. Obligation remains in force.

Creditor has the right to proceed against the 3 rd person who has caused the lost of the
prestation.

Condonation or remission forgiveness of indebtedness. To extinguish the obligation, consent of

the debtor is required.

Formalities of donation must be observed in express condonation (oral or in writing):

1.

IF the remission involves an immovable property , the remission and the acceptance must
be in public instrument
2. If the remission involves personal or movable property, the remission and acceptance
must be in writing if the value of the property exceeds 5,000.
3. If the value is 5000 or less, remission and acceptance may be in any form. The remission
however if made orally, requires the simultaneous delivery of the thing or the document
representing the right remitted
The private document is presumed to have been delivered voluntarily by the creditor to the
debtor if it is found in the possession of the debtor
Legal compensation can take place when:
1.
2.
3.
4.

Debtors and creditors of each other are bound principally

Both consist in money or things that can be interchanged (same kind and quality)
Both debts are due
There should be no order of retention
Damages claimed can be set-off against the obligation to pay.
If it is a contract of deposit (different from bank deposit)/ commodatum, the period is for
the benefit of the depositor/lender meaning he is the one to oppose or claim
compensation.
Reservation of right is needed for compensation to take place against the credit assignee
(i.e, if the debtor consented to the assignee, he cannot set up against the assignee the
compensation that would pertain to him against the assignor unless he reserved his right
to the compensation).
If the debtor was notified but did not consent, he can claim compensation against the
assignee for debts due before before the assignment but not of subsequent ones.
If the debtor has no knowledge of the assignment, he can set up compensation for debts
due as of the date he learns of the assignment.
Compensation in solidary obligation is possible.
Novation means modification or extinguishment of an obligation, either by:
1. Changing the object or principal obligation
2. Substitution of the person of the debtor/creditor
a. Expromision (with creditors consent always). 3 rd person initiates the substitution. If
the old debtor has no knowledge or he did not consent, the new debtor can only
recover insofar as the payment has been beneficial to the old debtor (i.e, he is not
entitled to subrogation).
The old debtor is released from liability in any case, by the mere fact the creditor
consented.
b. Delegacion (consent of all parties is required) Debtor initiates the substitution. The
new debtor can fully recover from the old debtor with subrogation.

Creditor has the right to proceed against the original debtor if the former acted in bad
faith, meaning he knows that the new debtor is insolvent when he initiates the
substitution or that, the insolvency is of public knowledge.
Effect: extinguishment of old obligation giving rise to a new obligation
The original and new obligation must be valid for novation to be valid.
Novation is still valid even if there is a defect in the original obligation (voidable).
Here, a novation cures whatever defects present in the original obligation.
If the original obligation is subject to a condition, the new obligation shall be subject
to the same condition.
The original creditor shall be preferred over another creditor subrogated for the
partial payment of the credit.
Novation executed by any of the solidary creditor shall render him liable to the
others for the share in the obligation corresponding to them.
A debtor who is adjudged to be insolvent and subsequently discharged by the court
shall be released from the obligation of all debts.
In order to be discharged, one has to comply with the law requirements in the: (1)
surrender of property (2) rendition of an account of assets and liabilities (3) not
guilty of fraud.
No discharge shall be granted to any corporation.