The Law on

Obligations and
Contracts
By: Mary Chris Austria-Cruz, PH. D.
Marilou P. Pascual, PH.D.
Introduction to Law and the Philippine Legal System

Law
Law is a system of rules that are created and enforced through social or
governmental institutions to regulate behavior. It has been defined both as
"the Science of Justice" and "the  Art  of Justice". Law is a system that regulates and
ensures that individuals or a community adhere to the will of the state. State-enforced
laws can be made by a collective legislature or by a single legislator, resulting
in statutes, by the executive through decrees and regulations, or established by judges
through precedent, normally in common law jurisdictions. Private individuals can
create legally binding contracts, including arbitration agreements that may elect to
accept alternative arbitration to the normal court process. The formation of laws
themselves may be influenced by a constitution, written or tacit, and the
rights encoded therein. The law shapes politics, economics, history and society in
various ways and serves as a mediator of relations between people.
A general distinction can be made between (a) civil law jurisdictions, in which a
legislature or other central body codifies and consolidates their laws, and (b) common
law systems, where judge-made precedent is accepted as binding law.
Historically, religious laws played a significant role even in settling of secular
matters, and is still used in some religious communities. Islamic Sharia law is the
world's most widely used religious law, and is used as the primary legal system in
some countries, such as Iran and Saudi Arabia.
The adjudication of the law is generally divided into two main areas. Criminal
law deals with conduct that is considered harmful to social order and in which
the guilty party may be imprisoned or fined. Civil law (not to be confused with civil
law jurisdictions above) deals with the resolution of lawsuits (disputes) between
individuals and/or organizations.
Law provides a source of scholarly inquiry into legal
history, philosophy, economic analysis and sociology. Law also raises important and
complex issues concerning equality, fairness, and justice.

The Philippine legal system

The Philippine legal system is a mixture of customary usage, Roman (civil law)
and Anglo-American (common law) systems, and Islamic law. The legal system is the
result of the immigration of Muslim Malays in the fourteenth century and the
subsequent colonization of the islands by Spain and the United States. The civil law
operates in areas such as family relations, property, succession, contract and criminal
law while statutes and principles of common law origin are evident in such areas as
constitutional law, procedure, corporation law, taxation, insurance, labor relations,
banking and currency.
The main sources of Philippine Law are:

1. CONSTITUTION - the fundamental and supreme law of the land.

2. STATUTES - including Acts of Congress, municipal charters, municipal legislation,
court rules, administrative rules and orders, legislative rules and presidential issuances.
3. TREATIES AND CONVENTIONS - these have the same force of authority as
statutes.
4. JUDICIAL DECISIONS - Article 8 of the Civil Code provides that “judicial decisions
applying to or interpreting the laws or the Constitution shall form a part of the legal
system of the Philippines”. Only decisions of its Supreme Court establish jurisprudence
and are binding on all other courts.

To some extent, customary law also form part of the Filipino legal system. Article
6, par. 2 of the Constitution provides that “the State shall recognize, respect, and protect
the rights of indigenous cultural communities to preserve and develop their cultures,
traditions and institutions.
The primary source of Muslim law / Shariah are the Quran, Sunnaqh, Ijma and
Qiyas.

TITLE I
OBLIGATIONS
 (Arts. 1156-1304)
Chapter 1
GENERAL PROVISIONS ON OBLIGATIONS

ARTICLE 1156. An obligation is a juridical necessity to give, to do or not to do.

I.1 Definition of obligation

The definition of obligation in law refers to the responsibility to follow through on actions

agreed upon in a contract, promise, law, oath, or vow.
The term obligation is derived from the Latin word “obligatio” Which means a “tying” or
“binding?”
(1) It is a tie of law or a juridical bond by virtue of which one is
a. Bound in favor of another to render something — and this may consist
b. In giving a thing, doing a certain act, or not doing a certain act.
(2) Manresa defines the term as “a legal relation established between none party and
another, whereby the latter is bound to the fulfillment of a prestation which the
former may demand of him.” (8Manresa 13.)
(3) Article 1156 gives the Civil Code definition of obligation, in its passive aspect. Our
law merely stresses the duty of the debtor or Obligor (he who has the duty of
giving, doing, or not doing) when it Speaks of obligation as a juridical necessity.

1.2 Elements
An obligation has the following essential elements:
 Parties - the actors involved in an obligation:
o Active subject (creditor/obligee) - one who demands the fulfillment of an
obligation.
o Passive subject (debtor/obligor) - one who has the duty to fulfill an
obligation.
 Object or Prestation - the conduct to be performed by the passive subject for the
active subject.
 Juridical Tie (efficient cause) - the relation that binds the parties to an obligation.
Example: Under a contract of sale, D agreed to deliver a book to C for Php1000.
 C is the active subject
 D is the passive subject
 the delivery of the book is the prestation
 contract of sale is the juridical tie that binds X and Y
Suppose X had already delivered the book but Y has not yet paid for it. In this
case, X becomes the active subject and Y is the passive subject.
 The active subject has the right to go to court in case of non-performance by the
passive subject. The passive subject should hence comply with the obligation to avoid
civil action against him.

1.3 Kinds of Obligation according to:

Viewpoint of Sanction
1. Civil obligations. There is juridical tie between the parties enforceable by court
action.
2. Natural obligations. There is juridical tie between the parties which is not
enforceable by court action. Voluntary fulfillment of natural obligations by the
obligor produces legal effects which the courts will recognize and protect.
3. Moral obligations. There is no juridical tie between the parties. Voluntary
fulfillment of moral obligations does not produce any legal effect which courts
will recognize and protect.

Viewpoint of subject matter

1. Real obligation (obligation to give) or that in which the subject matter is a thing
which the obligor must deliver to the oblige.
2. Personal obligation (obligation to do or not to do) or that in which the subject
matter is an act to be done or not to be done. Kinds of personal obligation:
a. Positive obligation. The obligor is obliged to give or to do something.
b. Negative obligation. The obligor is obliged not to give or not to do
something.

ARTICLE 1157. Obligations arise from:

1. Law;
2. Contracts;
3. Quasi-contracts;
4. Acts or omission punishable by law; and
5. Quasi-delicts. (1089a)

Sources of obligations

An obligation can arise from:

a. Law - when there is an enforcement of law itself; the obligation cannot be presumed,
and should be expressly or clearly provided for in the law in order to
demandable; such as the obligation of income earning persons to pay taxes according
to the National Internal Revenue Code.
b. Contract - when there is a meeting of the minds between the parties; the obligation
have the force of law and should be complied with in good faith; such as the contract
of sale of a book for Php1000.
c. Acts or omissions punishable by law- Felony is defined under the code as an act or
omission punishable by law, committed through culpa or dolo. The words
 “punishable by law” means that the act or omission must be defined and punished by
the Revised Penal Code and no other law.
d. Quasi-contract - when there is no meeting of the minds between parties, but one
party benefited at the expense of the other party; there is an obligation to pay for
compensation so that no one shall be unjustly enriched or benefited at the expense of
another.
o Negotiorum Gestio - if one (the officious manager) voluntarily takes charge
of the agency or management of another person's property on his behalf
without his consent or authority; such as the obligation to reimburse the
expenses incurred by someone who voluntarily saved your abandoned house
from fire.
o Solutio Indebiti - if one received something that does not rightfully and
legally belong to him; such as the obligation to return money received by
mistake.
e. Delict - when there is a civil liability resulting from criminal offense; should be
governed by the penal laws; such as the obligation of a thief to return the money he
had stolen.
f. Quasi-delict - when there is fault or negligence that causes damage on another, there
being no prior meeting of the minds between the parties; there is an obligation to pay
for the damage done; such as the obligation of a driver to pay for the damages he
caused to another due to negligence.

ARTICLE 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be regulated by the
percepts of the law which establishes them; and as to what has not been foreseen, by the
provisions of this Book. (1090)

Legal obligations
Article 1158 refers to legal obligations or obligations arising from law. They are not
presumed because they are considered a burden upon the obligor. They are the exception, not
the rule. To be demandable, they must be clearly set forth in the law, i.e., the Civil Code or
special laws. Thus:
(1) An employer has no obligation to furnish free legal assistance to his
employees because no law requires this, and therefore, an employee may not
recover from his employer the amount he may have paid a lawyer hired by him to
recover damages caused to said employee by a stranger or strangers while in the
performance of his duties. (De la Cruz vs. Northern Theatrical Enterprises, 95
Phil. 739 [1954].)
(2) A private school has no legal obligation to provide clothing allowance
to its teachers because there is no law which imposes this obligation upon schools.
But a person who wins money in gambling has the duty to return his winning to
the loser. This obligation is provided by law. (Art. 2014.)

ARTICLE 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. (1091a)
Contractual obligations
The above article speaks of contractual obligations or obligations arising from
contracts or voluntary agreements.
A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or too render some service.

(1) Binding force. – Obligations arising from contracts are governed

primarily by the agreement of the contracting parties. Once perfected, valid
contracts have the force of law between the parties who are bound to comply
therewith in good faith, and neither one may without the consent of the other,
renege therefrom. In characterizing contracts as having the force of law between
the parties, the law stresses the obligatory nature of binding and valid agreement,
absent any allegation that is contrary to law, morals, good customs, public order,
or public policy.

(2) Requirements of a valid contract. – As a source of obligation, a

contract must be valid and enforceable. A contract is valid (assuming all the
essential elements are present, Art. 1318.) if it is not contrary to law morals, good
customs, public order, and public policy. It is invalid or void if it is contrary to
law morals, good customs, public order, or public policy.

In the eyes of law, a void contract does not exist. (Art. 1409.) Consequently, no
obligations will arise.

(3) Where contract requires approval by the government. — Where a

contract is required to be verified and approved by the government before it
can take effect (e.g., contract for overseas employment must be approved by
the Philippine Overseas Employment Administration [POEA] under Art.
21[c] of the Labor Code), such contract becomes the law between the
contracting parties only when approved, and where there is nothing in it
which is contrary to law, etc., its validity must be sustained.
(4) Compliance in good faith. — It means compliance or performance
in accordance with the stipulations or terms of the contract or agreement.
Good faith and fair dealing must be observed to prevent one party from taking
unfair advantage over the other. Evasion by a party of legitimate obligations after
receiving the benefits under the contract would constitute unjust enrichment on
his part. (see Royal Lines, Inc. vs. Court of Appeals, 143 SCRA 608 [1986].)
(5) Liability for breach of contract. — Although the contract imposes no
penalty for its violation, a party cannot breach it with impunity. Our law on
contracts recognizes the principle that actionable injury inheres in every
contractual breach. Interest may, in the discretion of the court, on equitable
grounds, be allowed upon damages awarded for breach of contract. (see Art.
2210.)
 (6) Preservation of interest of promisee. — A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interest of the promisee
of having the benefit of his bargain, or in being reimbursed for loss caused by
reliance on the contract, or in having restored to him any benefit that he has
conferred on the other party.

ARTICLE 1160. Obligations derived from quasi-contracts.

Quasi-contractual obligations.
Article 1160 treats of obligations arising from quasi-contracts or contracts implied in law.

A quasi-contract is that juridical relation resulting from certain lawful, voluntary and
unilateral acts by virtue of which the parties become bound to each other to the end that no one
will be unjustly enriched or benefited at the expense of another. (Art. 2142.)

It is not, properly, a contract at all. In a contract, there is a meeting of the minds or consent;
the parties must have deliberately entered into a formal agreement. In a quasi-contract, there is
no consent but the same is supplied by fiction of law. In other words, the law considers the
parties as having entered into a contract, irrespective of their intention, to prevent injustice.
Corollary, if one who claims having enriched somebody has done so pursuant to a contract
with a third party, his cause of action should be against the latter, who, in turn, may, if
there is any ground therefor, seek relief against the party benefited. (Cruz vs. J.M. Tuason &
Co., Inc., 76 SCRA 543 [1977].)

Quasi-contracts are governed by the Civil Code, more particularly, by Articles 2142-2175,
Chapter I, Title XVII.

ARTICLE 1161. Civil obligations arising from criminal offenses shall be governed by the penal
laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2,
Preliminary Title on Human Relations

Civil liability arising from crimes or delicts.

This article deals with civil liability arising from crimes or delicts.

(1) The commission of an offense has a two-pronged effect: one, on the public as it
breaches the social order and the other, upon the private victim as it causes personal sufferings
or injury, each of which is addressed, respectively, by the imposition of heavier punishment
on the accused and by an award of additional damages to the victim.
(2) Oftentimes, the commission of a crime causes not only moral evil but also material
damage. From this principle, the rule has been established that every person criminally liable
for a felony is also civilly liable. (Art. 100, Revised Penal Code; see Albert, the Revised Penal
Code Annotated, p. 276.) In crimes, however, which cause no material damage (like
contempt, insults to person in authority, gambling, violations of traffic regulations, etc.), there
 is no civil liability to be enforced. But a person not criminally responsible may still be liable
civilly.
ARTICLE 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws. (1093a)

Obligations arising from quasi-delicts.

The above provision treats of obligations arising from quasi-delicts or torts.

A quasi-delict is an act or omission by a person (tort feasor) which causes damage to
another in his person, property, or rights giving rise to an obligation to pay for the
damage done, there being fault or negligence but there is no pre-existing contractual
relation between the parties.