COLLEGE OF ACCOUNTANCY

C-AE1 (Law on Obligations and Contracts)

First Semester | AY 2020-2021

Module 1

A. Course Code – Title : Law 1-3 – Law on Obligations & Contracts

B. Module No. – Title : MO1 – Basic Concepts of Law and Obligations
C. Time Frame : One week – 3 hours
D. Materials : Course guide, reference books and writing materials

1. Overview

This module contains a summary discussion of two lessons: first, the basic concepts of law,
in general, together its definitions, characteristics and sources; second, the basic concepts of
obligations and the sources thereof, as embodied in the general provisions, Book IV of the
New Civil Code of the Philippines.

Students taking up this course are highly encouraged to read and study carefully the
prescribed textbook and to use this handout together with the online lecture and
discussions as supplementary tool in learning and understanding the subject course.

2. Desired Learning Outcome

After the discussion, students are expected to explain:

a. The basic concerns of law, in general, including its characteristics, sources and
importance;
b. The basic concepts of obligations, in general, including the exclusive sources thereof
and the different laws governing the same

3. Content / Discussion

Lesson 1 – BASIC CONCEPTS OF LAW

What is law?

LAW, in strict sense, is defined as a rule of conduct, just and obligatory, promulgated by competent
authority for common observance and benefit.
Do' s and Don’ts:

Most people would agree that the law governs human behaviour by rules. It forbids certain ways of
behaving, for instance stealing, killing or exceeding speed limits and prescribes others. For example
paying taxes or driving on the right lane. Legal rules are also called norms.

The law does not stop at setting up rules. It also secures compliance with them by threatening
persons who disregard a rule with some disadvantage, like being imprisoned or having to pay
money. This consequence is called a sanction.

The task of the state is to put the sanction into effect, for instance to put the offender into prison or
to take the money from him. We say: the sanction is enforced by the state.

Is and Ought:

The legal rules do not describe facts: they do not tell us anything about reality. Instead they specify
facts and describe what should happen if they are fulfilled. It says what ought to happen in certain
situations and what consequences should follow if this does not happen.

Example: If a newspaper reports: "Obama Bin Trump was sentenced to jail for life for killing his
wife", it describes facts. The relevant legal provision says: "Whoever kills another person will be
sentenced to jail for life or to be imprisoned between 10 and 20 years". It has several effects: First,

Faculty: ATTY. ARNEL S. SANTOS 1|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

it prohibits murder; second, specifying that a murder has been committed, it describes what should
happen to the perpetrator.

Right and Wrong:

Many people think that the law not only prescribes or forbids certain acts but also indicates what is
right and what is wrong. But how do we know whether the rules set up by the law are
fundamentally right?; how can we be sure that they are just?

The Doctrine of Natural Law tries to answer this question by referring to meta-legal authority.
According to its adherents, law is correct if it conforms to the human nature (Plato), to divine
revelation (Augustinus, St.Thomas Aquinas, John Duns Scotus, William Ockham) or to reason (Cicero,
Grotius, Hobbes, Locke, Rousseau, Kant).

The Positivist Doctrine accepts that we have no means of deriving law from a higher authority. It
points out that the law is made up of social norms which are generally accepted and adhered to
(Jellinek) or are formally enacted (Radbruch) or are regularly enforced (Austin, Holmes, Llewllyn).

Question: What are the aims of law? What do they provide?

A lawyer's description

Law-books usually describe the law as a system of rules enforceable by public authority requiring
the members of a community to meet certain standards of conduct. They go on to 3 state that the
law makes sure that the society remains stable and its members are able to pursue their interests
and that disputes are settled efficiently. To this purpose the law should conform to public morality,
without, however turning all moral norms into legal rules.

Why study the Law?

The law addresses itself to all members of a community or all persons living within the state. A
state has power to regulate any set of facts with the exception of an exempt sphere guaranteed by
the Human Rights. The legislator is free to make rules for specific groups of the community (e.g.
entrepreneurs) and for specific fields of activity. Every member of the society is supposed to know
the law. Not to know the law is no excuse. In business, like in ordinary life, managers and their
companies may become liable to damages or penalties if they do not conform with the legal
requirements of their business. Knowing the law improves one's understanding of the courses of
action available

What are the sources of law?

1. Constitution – 1935, 1972 and 1987 Philippine Constitution.

2. Statutes – laws enacted by the legislative body (Congress of the Philippines).
3. Ordinances – ordinances passed / adopted by the Local Government Units (provinces, cities,
municipalities and barangays).
4. Rules and regulations and orders issued by different government agencies (DOLE, DAR, SEC,
NTC, LTFRB, DOTr, DICT, MMDA, etc.).
5. Decisions of the Supreme Court of the Philippines, form part of the law of the land.
6. Public international laws

What are characteristics of law?

It is created and maintained by the state. It has certain amount of stability, fixity and uniformity. It
is backed by coercive authority. Its violation leads to punishment. It is the expression of the will of
the people and is generally written down to give it definiteness.

Faculty: ATTY. ARNEL S. SANTOS 2|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

Lesson 2 – BASIC CONCEPTS OF OBLIGATION

What is Obligation?

Art. 1156, NCC, states that an obligation is the juridical necessity to give, to do, or not to do (Art.
1156, NCC). It is a legal relation established between one person and another, whereby the latter is
bound to the fulfillment of a prestation which the former may demand of him.

• “Juridical Necessity” – it means the aggrieved party may file a judicial action to make the
defaulting party comply with the prestation. In case of non-compliance the court of justice
may be called upon to enforce its fulfillment or in default thereof, the economic value it
represents.
• “Prestation” – refers to the subject matter / object of an obligation, it may either be:
1. Obligation to give – a prestation which consists in the delivery of a movable or an
immovable thing in order to create a real right or for the use of the recipient or for
its simple possession or in order to return it to its owner. Example: to pay a loan, to
deliver the thing sold;
2. Obligation to do – includes all kinds of work or service. Example: to sing in a party,
to construct a house;
3. Obligation not to do – consists in abstaining from doing some act. This obligation
includes the obligation “not to give”. Example: deed of restrictions, i.e., not to
construct a house beyond a specified height; not to put a concrete fence in front of
the house.

Obligation is classified as civil obligation and natural obligation.

Civil obligation is one which has binding force in aw , and which gives to the obligee or creditor the
right of enforcing it against the obligor or debtor in a court of justice.

Natural obligation is one which cannot be enforced by action, but which is binding on the party who
makes it in conscience and according to natural law.

Requisites of Obligation. It has four essential requisites:

1. A juridical or legal tie, which binds the parties to the obligation, and which may arise from
bilateral or unilateral acts of persons. It is the efficient cause established by various sources
of obligation (law, contracts, quasi-contracts, delicts, and quasi-delicts).
2. An active subject known as the oblige or creditor, who can demand the fulfillment of the
obligation;
3. A passive subject known as the obligor or debtor, against whom the obligation is juridically
demandable; and
4. The fact, prestation or service which constitutes the object of the obligation.

Question: Is form, in which the obligation is manifested, considered an essential requisite of

obligation?

Answer: As a rule, form is not an essential element. Obligations arising from law, acts or omissions
punished bylaw (crime), quasi-contract and quasi-delict do not require form whatsoever, yet, there
can be no question regarding their validity or binding force. It is only in obligations arising from
certain contracts that form becomes essential, such as in donation of real property – the donation
and acceptance must be in public instrument; in sale of real property through an agent – the
authority of the agent must be in writing.

Sources of Obligation: (Art. 1157, NCC)

1. Law – (note: basic concept already discussed)

Obligations arising from law are never presumed. Consequently only those expressly
determined in the Civil Code or special law are demandable. These obligations are regulated

Faculty: ATTY. ARNEL S. SANTOS 3|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

by the precepts of the law that establishes them, and as to what has not been foreseen, by
the provisions of Book IV of the New Civil Code (Art. 1158, NCC).

Question: How can we determine whether an obligation arises from law or from other
sources, such as contract, quasi-contract, criminal offense , or quasi-delict?

Answer: When the law establishes the obligation and the act or condition upon which it is
based is nothing more than a factor for determining the moment when it becomes
demandable, then the law itself is the source of the obligation. However, when the law
merely recognizes or acknowledges the existence of an obligation generated by an act which
may constitute a contract, quasi-contract, delict, or quasi-delict, and its only purpose is to
regulate such obligation, then the act itself is the source of the obligation and not the law.
Example of obligations arising from law: obligation of spouses to support each other,
obligation of employers under the Labor Code.

2. Contract – it is a meeting of the mind between two persons whereby one binds himself,
with respect to the other, binds himself to give something or to render some service.

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith (Art. 1159, NCC)

It is to be noted that unlike other obligations, those arising from contracts are governed
primarily by the agreement of the contracting parties. In this connection, the law recognizes
the right of such contracting parties to establish such stipulations, clauses, terms and
conditions

3. Quasi-Contract – are those juridical relations 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. (Art. 2142, NCC). The most important of these juridical relations which
are governed and regulated by the Civil Code, are:

a. Negotiorum Gestio – is the juridical relation which arises whenever a person

voluntarily takes charge of the agency or management of the business or property of
another without any power or authority from the latter. In this type of quasi-
contract, once the gestor or officious manager has assumed the agency or
management of the business or property, he shall be obliged to continue such
agency or management until the termination of the affair and its incidents,
exercising such rights and complying with such obligations as provided for in the
Civil Code.

Requisites of Negotiorum Gestio:

The essential requisites of negotiorum gestio are as follows
1. No meeting of the minds
2. Taking charge of another’s business or property;
3. Property or business must have been abandoned or neglected;
4. The officious manager must not have been expressly or implicitly authorized; and
5.The officious manager (gestor) must have voluntarily taken charge – there must
be no vitiated consent, such as error in thinking that he owned the property or the
business.

b. Solutio Indebiti – is the juridical relation which arises whenever a person unduly
delivers a thing through mistake to another who has no right to demand it. In this
type of quasi-contract, once the delivery has been made, the person to whom the
delivery is unduly made shall have the obligation to return the property delivered or
the money paid.

Requisites of Solutio Indebiti:

The principle of solutio indebiti applies where:

Faculty: ATTY. ARNEL S. SANTOS 4|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

1. A payment is made when there exists no binding relations between the payor,
who has no duty to pay, and the person who received the payment; and
2. The payment is made through mistake, and not through liberality or some other
cause.

Quasi-contracts are based on the principles that:

1. No one must unjustly enrich himself at another’s expense;
2. If one benefits, he must reimburse; and
3. Justice and equity

In other words, the law considers the parties as having entered into a contract, irrespective
of their intention, to prevent injustice.

Other Quasi-Contracts Recognized under Civil Code (Art. 2164 to Art. 2175):

1. Right to claim support given by a stranger, from the person obliged to give support.
2. Right to reimburse the funeral expenses, borne by a third person, from the relatives
obliged to give support to the deceased.
3. Right of reimbursement of stranger who furnishes support to an orphan, an insane
person, or other indigent person. From the person obliged to give support to the latter.
4. Obligation of the person injured or seriously ill to pay for the services of the physician
or other person, who treated or helped him while he is not in a condition to give
consent.
5. Obligation of the owner of the property to pay a just compensation to the person who
saved it from destruction.
6. Obligation of the person who failed to comply with health or safety regulations to pay
the expenses of the government in undertaking to do the necessary work.
7. Co-ownership of movables commingled or confused by accident or other fortuitous
event.
8. Rights and obligations of the finder of lost personal property.
9. Right of every possessor in good faith to reimbursement for necessary and useful
expenses.
10. Right to beneficial reimbursement by a third person who pays the debt of another
without his knowledge.
11. Obligation of a person benefited by measure for protection against lawlessness, fire,
flood, storm or other calamity to pay his share of expenses.
12. Right of reimbursement by a person constrained to pay the taxes of another from the
latter.

4. Delict or acts or omission punished by law

Obligations Arising from Criminal Offenses – As a rule, every person liable for a felony is
also civilly liable. This principle is based on the fact that, generally, a crime has a dual aspect
– the criminal aspect and the civil aspect. Although these two aspects are separate and
distinct from each other in the sense that one affects the social order and the other, private
rights, so that the purpose of the first is to punish or correct the offender, while the purpose
of the second is to repair the damages suffered by the aggrieved party, it is evident that the
basis of the civil liability is the criminal liability itself.

Delict (Ex-Delicutor Culpa Criminal)

Civil obligation arising from criminal offense shall be governed by the penal laws

Every person criminally liable for a felony is also civilly liable

Every crime gives rise to:

1. A criminal action for the punishment of the guilty party; and
2. A civil action for the restitution of the thing, repair of damage, and indemnification for
the losses.

Faculty: ATTY. ARNEL S. SANTOS 5|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

Reason of Civil Liability Ex Delicto

A crime has dual character:
1. As an offense against the state because of the disturbance of the social order; and
2. As an offense against the private person injured by the crime.

Scope of Civil Liability Ex Delicto

1. Restitution of property taken;
2. Reparation of damage caused; or
3. Indemnification for consequential damages

No Civil Liability for “Victimless Crimes”

No civil liability rises on the part of the offender in some crimes such as Treason, Gambling,
or Illegal Possession of Firearms, because there are no damages to be compensated or there
is no private persons injured by the crime.

Effect of Exempting Circumstances to Civil Liability Ex Delicto:

Under Article 12 of the Revised Penal Code, persons exempted from criminal liability are
not necessarily exempted from civil liability except under Article 12, par. 4.

Effect of Extinguishment of Criminal Liability on Civil Liability:

If criminal liability was extinguished on the ground that the accused was not the author of
the acts complained of as a felony or offense, no civil liability arises in relation thereto.

If criminal liability is extinguished by some other manner, but where it is clear that the
accused was the author of the act or omission complained of as having caused damage or
injury to a private complainant. The civil liability is not extinguished and can be enforced in
the same action or a separate action.

5. Quasi-Delict – It may be defined as the fault or negligence of a person, who, by his act or
omission, connected or unconnected with, but independent from, any contractual relation,
causes damage to another person.

Requisites of liability - In actions based on quasi-delicts, before the person injured can
recover damages from the defendant, it is necessary that he must be able to prove the
following facts:
(1) The fault or negligence of the defendant;
(2) The damage suffered or incurred by the plaintiff; and
(3) The relation of cause and effect between the fault or negligence of the defendant and the
damage incurred by the plaintiff.

Negligence
Negligence is defined as the failure to observe for the protection of interest of another
person that degree of care, precaution, and vigilance which the circumstances justly
demand, whereby such other persons suffer injury.

Negligence is the omission of that diligence which is required by the circumstances of

person, place, and time. Thus, finding of negligence is a question of fact.

Test of Negligence: The test of negligence is objective. It is measured by the act or omission
of the tortfeasor with a perspective as that of an ordinary reasonable person who is
similarly situated. The test whether or not the tortfeasor, under the attendant
circumstances, used that reasonable care and caution which an ordinary reasonable person
would have used in the same situation.

Proximate Cause - the negligent act or omission must be the proximate cause of the injury. It
is defined as that cause, which, in natural and continuous sequence, unbroken by any

Faculty: ATTY. ARNEL S. SANTOS 6|P a ge

 COLLEGE OF ACCOUNTANCY
C-AE1 (Law on Obligations and Contracts)
First Semester | AY 2020-2021

efficient intervening cause, produces the injury, and without which the result would not
have occurred.

Necessity of Proving Negligence – In order for liability from negligence to arise, there must
be not only proof of damage and negligence, but also proof that the damage was the
consequence of the negligence.

However, since negligence may in some cases be hard to prove, the doctrine of res ipsa
loquitor (the thing speaks for itself) may be applied. It recognizes that parties may
establish prima facie negligence without direct proof, thus, it follows the principle to
substitute for specific proof of negligence. It permits the plaintiff to present along with the
proof of accident, enough of the attending circumstance to invoke the doctrine, create an
inference or presumption of negligence and thereby place on the defendant the burden of
proving that there was no negligence on his part.

The requisites of res ipsa loquitor are as follows:

1. The event is of a kind which does not ordinarily occur unless someone is negligent;
2. The cause of the injury was under the exclusive control of the person in charge; and
3. The injury suffered must not have been due to any voluntary action or contribution on
the part of the person injured.

4. Progress Check

a. Define law, in general, and state its sources and characteristics

b. Define obligation and state its essential requisites and sources

5. Assignment (optional)

Read and understand the Introduction and Chapter 1 –General Provisions (Article 1156 to
Article 1162, New Civil Code), including the comments / discussions / cases cited in your
textbook (Law on Obligations and Contracts by Professor Hector De Leon).

6. Assessment

Briefly explain civil obligation by citing one complete and detailed example for every source
of obligation.

7. References

a. Jurado, Comments and Jurisprudence on Obligations and Contracts, 1983 Revised

Edition
b. Soriano, Notes in Business Law, 2011 Edition
c. Memory Aid in Civil Law, San Beda University, College of Law, 2019 Edition
d. Related Supreme Court Decisions on Obligations and Contracts

Prepared by:

ATTY. ARNEL S. SANTOS

Faculty: ATTY. ARNEL S. SANTOS 7|P a ge