THE LAWS ON OBLIGATIONS AND CONTRACTS

Note to student: There are some scenarios and cases included in this lesson, kindly
note down your answers for the discussion during Zoom or Hangout meeting.

• Obligations and contracts are among the subjects of the Civil Code of
the Philippines. In this lesson, we will study some civil obligations
which, when violated, have legal effects or consequences.
• In tourism and hospitality establishments, entering into different
contracts are part of the operation of the business. Once the contract
is executed, the parties must abide with the terms and conditions
stated therein and consider it as if it is the law that governs them.
• A breached or violation of the terms and conditions may give rise for
damages.
• This lesson aims to explain the basic principles of the law on
obligations and contracts and to understand how this law creates a
relationship between the parties.

Applicable Provisions of the Law on Obligations and Contracts

Article 1156: Obligation is a juridical necessity, to give, to do or not

to do.

• The obligation referred to in the above article is a civil obligation,

meaning, only those obligations which is not performed by one party,
the other party may go to court to enforce the obligation or simply to
hold such person to pay for damages. ‘
• Not all obligations are enforceable before the courts.

What are considered as civil obligations?

The following are sources of civil obligations:

1. Law
2. Contracts
3. Quasi-contracts
4. Acts or omissions punishable by law (delicts)
5. Quasi-delicts

Elements of Obligation

1. Passive Subject – known also as obligor or debtor; the person who has
the duty to fulfill the obligation or the prestation.

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 o Mr. Cruz obliged himself to deliver 500 sets of tour kit to AAA
Tours and Travel.
o Who is the obligor? Mr. Cruz because he is the one who has the
obligation

2. Active Subject – the person who has the power to demand the
fulfillment of the obligation; also called the creditor or obligee

o Mr. Cruz obliged himself to deliver 500 sets of tour kit to AAA
Tours and Travel owned by Ms. Calle
o Who is the obligee? Ms. Calle is the obligee / creditor. In case of
the failure of Mr. Cruz to perform his obligation, Ms. Calle may
demand the fulfillment of the obligation of Mr. Cruz.

3. Prestation – the object of the obligation to give, to do or not to do.

4. Juridical Tie – the vinculum or that which binds the debtor and creditor

Sources of Obligation

1. Law – obligations arising from law are not presumed only; those
obligations expressly determined by law are demandable.

Scenario 1: Obligation to pay tax. Obligation to secure a business

permit. Obligation to support a child.

Case: “Mabuhay Travel and Tours” is earning a lot of income; the

trouble is that it does not pay its taxes. Can the business be sued?

Answer: Yes, Mabuhay Travel and Tours can be sued because it is the
obligation of every tax payer to pay taxes. The obligation is imposed
by the National Internal Revenue Code of the Philippines which is a
law. In short, this obligation is one that arises from law.

2. Contracts – Under Article 1305, Contract is a meeting of the minds

whereby one binds himself with respect to other to give something or
render some services. If a person entered into a contract, an obligation

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 will arise. In case of non-fulfillment of these obligations, the injured
party can sue the other before the court for breach of contract.

For example: In a contract of sale, one of the parties has the

obligation to transfer ownership; in a contract of loan, one of the
parties has the obligation to pay the indebtedness; in a contract of
transportation, the common carrier has the obligation to carry
passengers/goods using utmost diligent.

3. Quasi-Contract – this is based on the principle of unjust enrichment,

meaning no one shall be enriched at the expense of others. There is no
meeting of the minds between parties in this source of obligation,
however, equity and law dictates that the person benefited from the
act of the other has the obligation to reimburse or pay whatever
expenses incurred by the latter.

Scenario 2: Consider the following example of a quasi contract:

Teresa’s brother, Eric, tries to talk her into building an additional
stockroom in at the back of her restaurant. She declines, but Eric is
convinced that, if she were surprised by having an additional stockroom,
she would be happy with the additional space for the restaurant’s
equipment and other things. Knowing that Teresa makes good money,
and could easily afford additional stockroom, Eric contacts builder John,
and arranges to have him erect the structure while his sister is attending
an out of town work for a week.
Teresa is not happy by her brother’s initiative, but the deed is done. Eric
has directed John to bill his sister for the stockroom, and that turns out to
be the biggest surprise for her. She declines to pay, and Eric tells John he
cannot afford it. John is now out, not only payment for his many hours of
hard work, but cash for the materials he used.
John has no choice but to file a civil lawsuit against Teresa, seeking
payment. No contract exists between Teresa and John, however the court
might allow John to recover the costs involved with building the
stockroom from Teresa, in order to prevent Teresa from being unjustly
enriched. This is because, whether Teresa planned on it or not, she now
has a brand new stockroom at the back of her restaurant.
What will be the decision of the court?

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4. Acts or Omissions Punishable by Law (Delict) – Under the Revise Penal
Code of the Philippines, any person criminally liable is also civilly liable.
The civil liability pertains to the damages that must be oaid arising
from the offense committed.

Scenario 3:

Mr. A was employed as a flight attendant in ZZZ Airways. One day, Mr.
A had a heated argument with Mr. B, who is also one of the flight
attendants of the company. Thereafter, Mr. A fired his gun towards Mr.
B causing his death.

Is Mr. A liable criminally, civilly or both? Explain your answer. In this

case, Mr. A is liable criminally. However, aside from imprisonment (the
criminal liability) he is also liable civilly, meaning Mr. A has the obligation
to pay for damages suffered by the family such as, funeral expenses,
medical expenses, moral damages, among others.

5. Quasi-Delicts (Culpa Aquiliana) – Under the Civil Code, whoever will

cause damage or injury to another due to fault or negligence, there
being no pre-existing contractual obligation, shall be held liable for
damages.

Requisites of Quasi-Delicts

a. There is negligence on the part of the defendant (the person who

committed such)
b. That the negligence causes damage or injury to another
c. There must be no pre-existing contractual obligation between
the parties

If the above requisites are present, the person who suffered injury or
damage may go to court to file a case for damages based on quasi-
delicts or culpa aquiliana.

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Owners and Managers of an Establishment are Liable for the Negligent
Act of their Employees based on Quasi-Delicts

Article 2180

The owners and managers of an establishment or enterprises

are responsible for damages caused by their employees in the
service of the branches in which the employee is employed or
on occasion of their functions.

o Before an employer may be held liable for the negligence of his

employee, the act of omission which caused damage must have
occurred while an employee was in the actual performance of his
assigned tasks or duties.

Scenario 4:

Juan dela Cruz is one of the drivers of ABC Tours and Transport. One
of his functions is to fetch a guest from the airport back to the hotel.
One day, Juan dela Cruz was tasked to fetch Anna Santos from the
airport. On their way to the hotel, Juan dela Cruz accidentally bumps
Jane Doe, a pedestrian that caused her instant death.

Can the family of Jane Doe sue the employer of Juan dela Cruz for
damages based on quasi-delicts?

Answer: YES, because in case of quasi-delicts, the owners or managers of

an establishment are responsible for the damage cause by their
employees. However, if the owner or manager had shown evidence that it
exercises the diligence of a good father of the family in the selection and
supervision of its employee, they will not be held liable for damages.

When is Employer or Manager not liable for the Negligence of its

Employees?

The liability of the owner or manager is relieved if he shows that he

exercised the diligence of a good father of the family in the selection and
supervision of his employees. Once evidence is introduced showing that
the employer exercised the required amount of care in selecting his
employees, half of the employer’s burden will be overcome. The

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 question of diligent supervision, however, depends on the
circumstances of employment.

Sources of Damages

Article 1170. 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.

o The sources of damages under Article 1170 of the New Civil

Code are Fraud, Negligence, Delay and Contravention of the
Tenor of the Obligation

1. Fraud – there are 2 kinds of fraud

a. Incidental Fraud (Dolo Incodente) – the fraud was committed
during the performance of the obligation and the remedy for this
is to demand for damages.

Scenario 5:

Mr. Z is the owner of ZZZ Restaurant. He ordered 10 sacks of

Jasmine Rice (1st class) from Mr. X. On the day of the delivery,
Mr. X placed 1 cavan of NFA rice to each sacks of rice.

What is this considered as incidental fraud?

b. Casual Fraud (Dolo Causante) – the fraud was committed at the

very beginning of the transaction in order to induce or convince
the other person to enter into a contract plus damages.

Scenario 6:

Mr. So went to the office of Mr. Lee to sell a diamond ring worth 1
million pesos. Mr. So convinced Mr. Lee that the ring is genuine,
and it is a good investment. Mr. Lee paid Mr. So PHP 500,000 and
entered into a contract to pay the remaining balance next month.

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 After a week, Mr. Lee went to a pawnshop to have the diamond
ring be checked. The pawnshop declared that it is fake.

Why is this considered as casual fraud?

2. Negligence – the omission of that diligence required by the nature of

an obligation and corresponds to the circumstances of person, time
and place. One of the obligations of the Obligor is to observe due
diligence in the performance of his obligation. Hence, if the diligence
required was not observed, there may be liability.

Two Kinds of Diligence

a. Diligence of a good father of a family or ordinary diligence - a

kind of diligence that must be observed by the obligor in general

b. Utmost diligence or extraordinary diligence – this is the highest

degree of care. This must be observed only when the law so
provides or when the parties so agree.

Under the law, a common carrier must observe extraordinary

diligence in vigilance over the goods and for the safety of the
passenger transported by them.

Scenario 7:

Ms. Ana flew to Palawan for a business meeting. He checked in 2

traveling bags in Air XXX and boarded the plane. When she
reached Palawan, her traveling bags are missing.

Is Air XXX liable for damages?

YES, Air XXX in negligent. As a common carrier, it has the

obligation to observe utmost diligent in transporting goods.
Since it failed to observe that obligation, Air XXX was held liable
for damages for the loss of the traveling bags.

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3. Delay – the delay referred herein is legal delay. This means that when
the maturity date within which to perform the obligation was not
performed, the creditor should demand its fulfillment for the debtor to
be considered in delay.

The general rule is that “NO DEMAND, NO DELAY.” Therefore, if the

creditor did not demand for the performance of the obligation, the
creditor cannot go to court to sue the debtor. Hence, demand is
necessary.

Ways to Demand the Fulfillment of the Obligation

a. Judicial Demand – the creditor goes to court to fix the period

within which the debtor will perform the obligation
b. Extra Judicial Demand – the creditor writes a demand letter or
demand orally

Scenario 8:

Mr. Bee, who is a resort owner, entered into a contract of loan

with Mr. Cee amounting to PHP500,000 to be paid on December
5, 2018. When the said date, came, Mr. Bee failed to pay.

Is Mr. Bee already in legal delay? Not yet, because Mr. Cee did
not demand the fulfillment of obligation.

On December 15, 2018, still no payment was made, is Mr. Bee

already in delay? No, net yet because Mr. Cee did not demand
yet. Can Mr. Cee go to court to demand the fulfillment of the
obligation? No, the case will be dismissed, because no demand
has been made.
On December 28, 2018, Mr. Cee wrote a letter to Mr. Bee
demanding the payment of PHP500,000. He also gave Mr. Bee
10 days to settle his due. However, after 10 days, Mr. Bee did
not settle the loan.

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 Is Mr. Bee already in delay? Yes, because there was already a
demand. Can Mr. Cee go to court to sue Mr. Bee to perform the
obligation? Yes, he can because there was already a demand.

4. Contravention of the Tenor of the Obligation – it is the failure to

perform that which is incumbent upon him. The non-performance or
failure of the party to fulfill his duty is liable for damages.

Scenario 9:

On August 15, 2018, Aaron and Cathy Smith booked a tour package
from ABC Travel and Tours. The tour package includes: roundtrip
airfare with roundtrip transfers, 3D/2N accommodation in a 5-star
hotel, half day Hong Kong City tour, whole day Disneyland Tour and
full board meals.

Upon arrival in Hong Kong, Mr. and Mrs. Smith was booked in a 3-star
hotel only. Meals served are breakfast and lunch with no dinner. And
no one fetch them during their supposedly city tour. They were very
angry and sued ABC Travel and Tours for the damages.

Is there a contravention of the tenor of the obligation? Yes, there was

because some part of the contract which was paid in full by the client
was not performed. Therefore, the travel agency is liable for damages.

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 Scenario 10: (Illustrative Case):

AIR FRANCE versus RAFAEL CARRASCOSO

G.R. No. L-21438
September 28, 1966

Fact:

The plaintiff, Rafael Carrascoso, paid for and was issued a “First class” ticket
by Air France from Manila to Rome. During a stopover in Bangkok, the
manager of Air France asked the plaintiff to vacate his seat because a white
man has a “better right” than him. At first, the plaintiff protested, but, as
things got heated up, he was asked by the other Filipinos on board to give
up his seat and transfer in the tourist class. After the trip, Carrascoso sued
Air France for the embarrassment and inconvenience he suffered.

Issue: Is Air France liable for contravention of the tenor of obligation?

The trail court awarded damages to the plaintiff which was affirmed by the
Court of Appeals. Air France assailed the decision. According to them, the
issuance of a first class ticket does not guarantee Carrascoso a seat in the
first Class.

Decision: Yes. Air France is liable based on culpa contractual and culpa
aquiliana. Why? Explain your answers.

For Culpa Contractual - There exists a contract of carriage between Air

France and Carrascoso. There was a contract to furnish Carrascoso a first
class passage; Second, That said contract was breached when Air France
failed to furnish first class transportation at Bangkok; and Third, that there
was bad faith when Air France ’ s employee compelled Carrascoso to leave
his first class accommodation berth “after he was already seated” and to
take a seat in the tourist class, by reason of which he suffered
inconvenience, embarrassments and humiliations, thereby causing him
mental anguish, serious anxiety, wounded feelings and social humiliation,
resulting in moral damages. The Supreme Court did not give credence to Air
France’s claim that the issuance of a first class ticket to a passenger is not
an assurance that he will be given a first class seat. Such claim is simply
incredible.

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For Culpa Aquiliana - Here, the SC ruled, even though there is a contract of
carriage between Air France and Carrascoso, there is also a tortuous act
based on culpa aquiliana. Passengers do not contract merely for
transportation. They have a right to be treated by the carrier’s employees
with kindness, respect, courtesy and due consideration. They are entitled to
be protected against personal misconduct, injurious language, indignities
and abuses from such employees. So it is, that any rule or discourteous
conduct on the part of employees towards a passenger gives the latter an
action for damages against the carrier. Air France’s contract with Carrascoso
is one attended with public duty. The stress of Carrascoso’s action is placed
upon his wrongful expulsion. This is a violation of public duty by the Air
France — a case of quasi-delict. Damages are proper.

Different Kinds of Damages

1. Actual or Compensatory Damages

2. Moral Damages
3. Nominal Damages
4. Temperate or Moderate Damages
5. Liquidated Damages
6. Exemplary or corrective Damages

Different Kinds of Obligation

1. Pure Obligation - one which is not subject to a period or condition and is
demandable at once.
2. Conditional Obligation - is one where the obligation is subject to a condition. It is
demandable upon the happening or non-happening of the condition.
3. Obligation with a period - an event which will certainly happen; Thus, the
happening or the arrival of the period gives rise to an obligation or extinguishment of
it.
4. Joint and Solidary Obligation - there are several debtors and one or more
creditors, but each debtor is only liable for his share of the debt and each of the
creditors to his share of credit. It is always presumed that the obligation is Joint.
5. Alternative Obligation
6. Facultative Obligation

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