INTRODUCTION:

Understanding the Law on Obligations and

Contracts is very important in studying various concepts
and reasons behind the provisions, that will be
discussed in the succeeding law subjects underthe
curriculum of Business Administration students.

THE LAW ON Students must be familiar with legal jargons that

business laws, and other law for that matter, usually

OBLIGATIONS
use.

This module is designed to deliver to the students

AND the rudiments of the Law on Obligations and Contracts.

But only those concepts and provisions, which this
humble author considers to be most essential, aretaken

CONTRACTS up.

There are cases provided in this module. These

will help the students understand better the discussed
PRELIM PERIOD topics, and appreciate more the applications of laws in
MODULE 1 TO MODULE 3 real life through Supreme Court’s decisions.

Atty. Rey S. Rabago, C.P.A.

Pasay City
August 2020

1

MODULE 1
Obligation
- “juridical necessity, to give, to do, or not to do.” 1
Juridical necessity
- There are many kinds of obligations. A lot of those will not
result to a legal problem in case of non-performance.
Example:
It is one of the obligations of the students to attend
synchronous on-line class on the agreed time. But in case
student x will not attend it as agreed, the school will not file
a case against that student. It cannot ask the court to force
the student to religiously attend on-line class on the agreed
time.
But in case the obligation falls under the ambit of civil
code, non-performance of which may result to a filing of case
in court to protect the interest of the aggrieved party. One
can ask the court to legally force the non-performing party to
make good what he have promised. This gives us the
meaning of the term juridical necessity.
Requisites of an obligation
1) Debtor (Obligor or Passive subject)
2) Creditor (Obligee or Active subject)
3) Prestation (object or subject matter of obligation)
4) Juridical tie (legal tie or efficient cause)
(Requisite – dapat nandun lahat)
1
Art. 1156 of the Civil Code
Prestation
- will dictate the conduct of the debtor.
- He may be required to give something, to do or perform an
act, or not to do a particular act. This is the very reason why
the contracting parties enter into a contract.
Real obligation & Personal obligation
Personal obligation - (to do or not to do)
Real obligation - (to give) is the delivery of a thing;
- The obli. to give may require debtor to delivery either:
*Generic thing - there are 2/ more objects of the same kind,
any of which can be delivered to comply the agreed obli.
Examples: Sports car
House and lot
* Specific thing - can be segregated from all other of the
same class (one can easily identify with particularity as to
what object should be delivered to comply the agreed
obligation.)
Examples: Ford Mustang car, model 2020, with engine
number 1234xyz, color white;
House and lot located in 1765 M. Malakas
Street, Panglao, Bohol. With Transfer Certificate
of Title number T-789.
Juridical tie
- is the imaginary tie that binds the contracting parties to
the obligation (set by any of the sources of obligation)
- To s
2
 the cardinal principle that the parties in that juridical
Sources of obligation relation must act with justice, honesty and good faith.”
1. Law;
2. Contracts; Quasi-contracts
3. Quasi-contracts; 1. Negotiorum gestio – when a person voluntarily manages
4. Acts or omissions punished by law; the property or business of another person without the
5. Quasi-delicts. knowledge or consent of the latter.

2. Solutio indebiti–if someone receives a thing from a

*Law
person who unduly delivered it through mistake.
Family Code: Father, Mother, Children (has obligation to
support children; children has obligation to respect parents)

Compliance in good faith

- The binding effect of a contract requires compliance of an
obligation (to give, to do, or not to do) in accordance to what
has been agreed upon by the parties = Compliance in
good faith. Cases for class discussion:
- Any degree of non-compliance of agreement can be 1. Wassmer v. Velez, G.R. No. L-20089, 26 December
1964 [Actionable wrong]
considered as breach of contract, which may expose the
non-compliant party to a possible legal problem.
2. Bricktown Development Corp., et al. v. Amor Tierra
Development Corp., et al., G.R. No. 112182, 12
December 1994 [Compliance in good faith]
In one case, the Supreme Court said:

“A contract, once perfected, has the force of law 3. PNB v. Court of Appeals, et al., G.R. No. 97995, 21
between the parties with which they are bound to January 1993 [Quasi-contracts]
comply in good faith and from which neither one may
renege without the consent of the other. The autonomy END OF MODULE 1
of contracts allows the parties to establish such
stipulations, clauses, terms and conditions as they may
deem appropriate provided only that they are not
contrary to law, morals, good customs, public order or
public policy. The standard norm in the performance of
their respective covenants in the contract, as well as in
the exercise of their rights thereunder, is expressed in

3
MODULE 2
Kinds of fruits
- fruits that may be included in the stipulation as part of the
things to be delivered. These are:
1. Natural fruits –produced by nature, such as:
Trees and herbs that naturally grow on a parcel of land.
2. Industrial fruits –produced through manual labor, such as:
Laptop, Cellphone, Furniture
3. Civil fruits–produced by virtue of an existing agreement,
Rent of an apartment
Personal right and Real right, distinction
* When enforcing one’s right
Personal right – can be enforced only against a particular
person
Real right - can be enforced against anybody.
Example of Personal right:
Assuming that Mr. A executed a promissory
note wherein he promised to pay the amount of
Php2,000,000 in favor of Mr. B.
Here, Mr. B has a personal right to collect
Php2,000,000 from Mr. A. This right can only be
enforced, as a general rule, against Mr. A.
Example of Real right:
Assuming that Mr. A owns a parcel of
agricultural land covered with a Transfer
Certificate of Title (TCT).
Here, Mr. A has a real right over the said land
which can be enforced against anybody. He can
assert this right against anybody who will
attempt to occupy the said property without his
consent.
Accessions and accessories, distinction
Accession – refers to an object which will add value to a
principal object. But this thing (accession) is not really
necessary for the usage of the principal object. (even without
the accession, the object can still be used easily)
Example: House is an accession of land.
Accessories – an object which are included to the principal
object so that the latter can be properly and easily used.
Example: Key is an accessory to a car.
*Under the law, whenever a property is sold, all of its
accessions and accessories are deemed included in the
absence of stipulation reserving ownership of the said thing.
*Simply put, if the seller would want to retain ownership
over the accessions or accessories of the principal object, he
must expressly indicate in the contract such reservation.
Otherwise, he will be obliged to deliver all of it, together with
the principal object, even if those were not mentioned in the
contract.
Example:
Mr. S and Mr. B, entered into a contract wherein the
former sold his specific parcel of land. Assuming that the
same land have house on it, such house must be delivered to
Mr. B, even if the Deed of Sale did not mention the inclusion
of the said house.
4

Grounds for asking damages
A party may file a case for damages using any of the
following grounds:
1. Delay (mora)
2. Fraud (dolo)
3. Negligence (culpa)
4. Contravention of the tenor of obligation
Legal meaning of delay (mora)
Delay (“ default”) in law has different meaning compared to
layman’s usage.
- Ordinarily, there will be delay when a person fails to pay or
perform his obligation on the agreed date. But this is not
automatically legally correct.
- The law generally requires prior action on the part of the
creditor before legal delay may be incurred.
*Prior demand from the creditor is essential before he may
hold the debtor liable for delay, in case the latter fails to
perform his obligation on the stipulated date.2
Example:
Mr. D executed the promissory note below.
I promise to pay Mr. C or order the
sum of Php2,000,000 on December 12, 2019.
(Sgd) Mr. D
Assuming that Mr. D did not pay his obligation
on December 12, 2019. Mr. C cannot hold Mr. D
2 3
See Art. 1169 of the Civil Code
liable for the delay of payment. This is because
Mr. C did not send a demand letter to Mr. D,
asking him to pay his obligation. There can be
no legal delay in this case.
The above example tells us the importance of sending
demand letter expressly asking the debtor to comply his
obligation. Otherwise, the creditor cannot legally hold the
debtor liable. The general rule is: If there is no demand,
there will be no delay.
The law, however, enumerated exceptions to the general
rule, “no demand, no delay”, to wit:
- “When the obligation or the law expressly so declares; or
- When from the nature and the circumstances of the
obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the
contract;or
- When demand would be useless, as when the obligor has
rendered it beyond his power to perform.”3
Kinds of delay
1.Mora Accipiendi – delay on the part of the creditor
2 Mora Solvendi – delay on the part of the debtor
3. Compensatio Morae – delay of both parties in reciprocal
obligation
Waiver of action against fraud (dolo)
Fraud
supra
5
- presupposes a deliberate action of one party to
shortchange the other party. If this is proven, it can be a
strong basis for the court to award damages in favor of the
injured party.
- Just like other rights, this right to file a case asking for
damages may be waived by the injured party.
In relation to the above example, Mr. S and Mr.
B entered into another contract. And in the new
contract it was expressly stipulated that if ever Mr. S
will deliver another variety of rice, even if it is of inferior
quality, Mr. B will not file any case against Mr. S.

However, only waiver of action for past fraud is considered
valid.
If a waiver pertains to action for future fraud, it will be
considered void. It will be deemed as if the waiver does not
exist from the very beginning.
Such stipulation can be considered as waiver for
future fraud. Hence, it will be considered as void. In
other words, it is as if such stipulation was not agreed
upon.

Example: Cases for class discussion:

Waiver for past fraud

Mr. S and Mr. B entered into an agreement wherein the
former will deliver 1,000 sacks of Dinorado rice on December
12, 2019. On the agreed date, Mr. S delivered the goods and
the complete payment was made immediately upon receipt
of it. Mr. B later found out that the rice delivered were not
Dinorado but of inferior quality. When Mr. S was confronted,
he immediately admitted such wroingdoing and apologized
for it.
1. Adorable, et al. v. Court of Appeals, et al., G.R. No.
119466, 25 November 1999. [Personal right v. Real
right]
2. Pantaleon v. American Express International, Inc.,
G.R. No. 174269, 8 May 2009 [Delay]
3. Castro, et al. v. Court of Appeals, et al., G.R. No.
97401, 6 December 1995 [Accessions]

In this case, Mr. B has a strong ground (fraud) that will

END OF MODULE 2
support the filing of a case for damages. But he can opt to
waive it expressly. That is to say, he will not anymore file a
case against Mr. S. And this waiver is perfectly valid.

Waiver for future fraud

6
MODULE 3
Obligation arising from negligence (culpa)
- In negligence (“ fault”), there is no deliberate intention to
cause injury to another. But because of human limitations
and lack of foresight, sometimes accident happens resulting
to damage to property, or physical injury upon hapless
victim. This incident will necessarily result in, among others,
civil obligation to indemnify the owner of the damaged
property, or pay for the hospitalization of the injured person.
Three kinds of negligence
1. Culpa contractual (contractual negligence) – negligence
incurred during the execution of contractual obligation.
2. Culpa aquiliana (civil negligence) – this is also known as
quasi-delict or tort. This kind of negligence happens between
two persons who do not have pre-existing contract.
3. Culpa criminal (criminal negligence) – this kind of
negligence is expressly covered by the Revised Penal Code.
It is important to note that a criminal act will result to
criminal liability (punishable by imprisonment) and civil
liability (damages).
Kinds of diligence
A close perusal of Article 1173 will show that there are three
(3) kinds of diligence, to wit:
1. Diligence agreed by the contracting parties;
2. Diligence expressly mandated by law;
3. Diligence of a good father of a family.
Diligence of a good father of a family
Whenever there is a contract, debtor must observe the
degree of diligence in performing his obligation as stipulated
by the contracting parties, or as required by law. In the
absence of stipulation or law, the debtor is mandated to
observe the diligence of a good father of a family.4 The
diligence of a good father of a family means an ordinary care
which a prudent person will observe in taking care of his own
property.
It is important to note that the diligence of a good
father of a family will only be proper in the absence of
stipulation or clear provision of law requiring degree of
diligence to be observed.
Fortuitous event
As a general rule, no one should be liable for the loss of the
thing due to fortuitous event.
*Fortuitous event - is an event which could not be foreseen,
or which though foreseen, cannot be avoided.5
Ex of fortuitous event:
Flood, Earthquake, tsunami, volcanic eruption, war.
However, fortuitous event is not a valid defense to avoid civil
liability in the following instances:
4
See Art. 1173 of the Civil Code
5
See Art. 1174 of the Civil Code
7

1. There is an express provision of law. A good example
is Article 1170 of the Civil Code which provides:
“Those who in the performance of
their obligations are guilty of fraud,
negligence, or delay, and those who
in any manner contravene the tenor
thereof, are liable for damages.”
2. There is an agreement between the contracting parties
maintaining the right to ask for damages if the thing is
lost due to fortuitous event;
3. The obligation requires assumption of risk. This is
applicable in insurance contract.
Remedies available to creditors
One cannot really avoid a situation wherein the debtor
will fail to comply his contractual obligation. Whenever this
happens, the usual first recourse of the contracting parties is
to have a compromise. They will try to explore a middle
ground that both parties’ rights are amply protected. If they
fail to agree on how to resolve their problem, court may be
asked to intervene.
Below are the possible remedies that may be resorted
by the creditor to satisfy his claim:
1. File a case for specific performance (exact fulfillment) and
ask for damages;
2. Pursue the properties in possession of the debtor;
3. If the levied property is not enough, exercise all the rights
and bring all the actions of the debtor, except those inherent
in his person;
4. Impugn the fraudulent acts of the debtor.6
Example:
Mr. D obtained a loan amounting to Php3,000,000
from Mr. C. It was agreed to be paid on August 21,
2019. But, despite the demand letters sent by Mr. C,
the obligation remains unpaid.
Assume the following:
A. Mr. D own gold bar worth Php2,000,000
B. Mr. X owes Php500,000 to Mr. D
C. A day before the due date, Mr. D sold his car with
a fair market value of Php1,000,000, to Mr. Q for
Php100,000.
In this case, Mr. D may do the following:
1. File a case in court for specific performance plus
damages. Ask the court to compel Mr. D to pay
Php3,000,000 and the amount of damages;
2. If there will be no payment still, ask the court to
attach the gold bars of Mr. D. If granted, the gold
bars will be sold, and the proceeds thereof will be
applied to Mr. D’s obligation;
3. Ask the court to issue an order to Mr. X to give his
payment to Mr. C, instead of Mr. D.
4. Ask the court to impugn the selling of Mr. D’s car
to Mr. Q. This may be granted if it will be proven that
the said transaction was done to defraud Mr. C.
Cases for class discussion:
6
See Art. 1177 of the Civil Code
8
1. Ramos, et al. v. Pepsi-Cola Bottling Co., G.R. No. L-
22533, 9 February 1967 [Diligence of a good father of
a family]

2. Expert Travel & Tours, Inc. v. C.A., et al., G.R. No.

130030, 25 June 1999 [culpa]

3. Hambon v. C.A., et al., G.R. No. 122150, 17 March

2003 [civil liability and criminal liability]