CHAPTER 3: UNDERSTANDING CONTRACTS AND OBLIGATIONS

AFFECTING THE TOURISM AND HOSPITALITY SECTORS

INTRODUCTION
Managing a business is not an easy task. It involves different kinds of obligations that
should be given full attention by both the debtors and creditors considering the effects that may
give to them as contracting parties.
In three or four years from now, the students of the hospitality management may be
acquainted with different transaction involving obligations and contracts once they are
convinced that these students should be briefed as early as now, the basic principles of
obligations and contracts.

OBLIGATION DEFINED
Article 1156 of the Civil Code of the Philippines provides that an obligation is a juridical to
give, to do or not to do.
Generally, a person who has an obligation arising from whatever sources should comply
with its corresponding requirements considering the damage it may produce to one of the
contracting parties or even to a third person, if not complied. Non- compliance of what is
demanded by the obligation may give the aggrieved party different courses of action such as
demand for payment and damages.
There are 3 kinds of obligation under the law, to wit: obligation to give, to do or not to do.
In an obligation to give, the debtor is obliged to deliver the movable or immovable thing
to the creditor. Example: Obligation to deliver the thing in sale, deposit, pledge, donation.
All kinds of works or services, whether physical or mental is covered by the obligation to do.
Example: Contract for events organizing, professional services like painting, modeling, singing.
The obligation not to do means refraining from doing some acts like the obligations of a
building proprietor to refrain from committing nuisance through noise, offensive odor, smoke,
heat, etc.

ELEMENTS OF OBLIGATION
The Following Elements Should Concur In Order To Determine The Obligation Of Any Person:
Active Subject; Passive Subject; Prestation Or Object; Efficient Cause.

1. ACTIVE SUBJECT. It is one who is demanding the performance of the obligation. It is he

who in his favor the obligation is constituted, established or created. He is called the
creditor or obligee.
2. PASSIVE SUBJECT. The one bound to perform the presentation to give, to do or not to
do. He is called the debtor or obligor.
3. PRESENTATION OR OBJECT. It is the subject matter of the obligation which has an
economic value or susceptible of pecuniary substitution in case of non-compliance.
4. EFFICIENT CAUSE. The one bound to perform the presentation to give, to do or not to
do. He is called the debtor or obligor.
KINDS OF OBLIGATION AS TO JUDICIAL ENFORCEABILITY
Obligation May Be Classified According To Its Judicial Enforceability, To Wit: Civil Obligation,
Natural Obligation And Moral Obligation.

1. CIVIL OBLIGATION. This is an obligation, which if not fulfilled when it becomes due and
demandable, may be enforced in court through action.
Example: A promissory note was executed by Penduko in favor of Pedro because of the
money that the former lent into the latter. Penduko committed to pay his obligation to
Pero within the period of 6 months. 12 years had passed without Penduko having
enforced the note. The obligations already prescribed under Article 1144 which means
that the note cannot be enforced. On the contrary, Penduko can still voluntarily pay
Pedro despite the prescription. Such act is still considered legal.

2. MORAL OBLIGATION. It arises not from positive law but from the moral law developed
by the church and not enforceable by the court.
Example: The obligation of the church to express its views issues affecting morality, such
as RH bill, Divorce Bill. The obligation to have title by some religious sects in the
Philippines; abstinence and fasting imposed upon Catholics during Good Fridays.

KINDS OF OBLIGATIONS AS TO NUMBER OF PERSONS BOUND TO PERFORM

Obligation May Also Be Classified According To The Number Of Persons Bound To Perform, Such
As: Unilateral Obligation And Bilateral Obligation.
1. UNILATERAL OBLIGATION. It is a kind of obligation in which only one of the parties is
bound to fulfill prestation.
Example: Parents have unilateral obligation to provide the basic necessity of their
children, such as: food, shelter, medicine and education.

2. BILATERAL OBLIGATION. This kind of obligation in which both parties are bound to
perform a part in the obligation.
Example: In sale, the customers are obliged to pay for any food that they ordered. On the
other hand, the restaurant is obliged to deliver the food to the customers. The
obligations of the parties here are reciprocal. They are dependent to each other.

SOURCES OF OBLIGATION
1. Obligations Arising from Delicts or Crimes. The penal provision of the law specifically
provides the obligation to be done by the culprit on his/her victim.
Example: Duty of the culprit to pay actual damages for causing the death of a person
2. Obligations Arising from Quasi-delict or Tort. Duty of the tortfeasor to pay damages for
injuries or damages due to his fault, omission or negligence.
DILIGENCE NEEDED
Article 1163 of the Civil Code of the Philippines provides that every person with
obligation to give something is also obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the parties requires another standard of
care.
Note: A good father does not abandon his family; he is always ready to provide their needs and
protect them at all times.
OTHER IMPORTANT CIVIL CODE PROVISIONS NECESSARY IN THE CONDUCT OF HOSPITALITY
BUSINESS
Article 1169, those who are obliged to deliver or to do something incur in delay from the
time they oblige judicially or extra-judicially demands from them the fulfillment of their
obligation. However, the demand by the creditor shall not be necessary in order that delay may
exist:
1. When the obligation or the law expressly so declines; and
2. 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 controlling motive for the establishment of the contract; or
3. When the demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply one is not
ready to comply in a proper manner with what in incumbent upon him. From the moment one
of the parties fulfills his obligation, delay by other begins.
Article 1170 provides that those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
According to Article 1171, the responsibility arising from fraud is demandable in all obligations.
Any waiver of an action for future fraud is void.

MODES OF EXTINGUISHING OBLIGATION

An obligation may be extinguished through any of the following modes: (a) payment or
performance; (b) lost of the thing due; (c) condonation or remission of the debt; (d) confusion
or merger of the rights of the creditor and debtor; (e) compensation; (f) novation; (g)
annulment; (h) rescission; (i) fulfillment of the resolutory condition; (j) prescription.
In a fine dining restaurant, the obligation of the customer to the management who served
them sumptuous food shall be extinguished upon payment by the customer of the exact amount
of the food consumed; obligation by the entertainer to the events manager may be extinguished
upon the performance of the obligation for which the entertainer was commissioned.
Obligation arising from a contract may also be extinguished upon the loss of the thing due. Article
1189 par. 2 explained the meaning of the term “loss.” it is understood that the thing is lost when
it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown
or it cannot be recovered.” The wedding coordinator shall be absolved from any liability to the
spouses, if prior to happening in the fortuitous event, the wedding coordinator was in good faith.
CONDONATION OR REMISSION pertains to the act of liberty on the part of the creditor
wherein she/he forgives or remits a debt. Even if the proprietor is indebted to his supplier of
beef and chicken, the obligation shall be extinguished if the supplier will gratuitously give the
amount in issue to the proprietor as advance gift for the latter’s continuous patronage to its
supplies.
Article1275 of the Civil Code of the Philippines provides that the obligation is extinguished from
the time the characters of the creditor and debtor are merged in the same person. Be it noted
that the merging or convergence of the rights of the creditor and a debtor in one and in the same
person makes the obligation extinguished considering that the right of one over the other can
no longer be exactly determined.
COMPENSATION as a means of extinguishing an obligation is the offseting of the
respective obligations of two persons who stand as principal creditors and debtors of each other,
resulting to the extinguished of their obligations to their concurrent amount.
Example: MJJs Food Corporation is indebted to its oil supplier amounting to Php 80,000. Two
months thereafter, the oil supplier borrowed Php 30,000 from MJJs Food Corporation to which
the latter adhered. The effect of the transaction would have been the offseting of indebtedness
of MJJs Food Corporation to the oil supplier up to the extent of Php 50,000 only.
NOVATION pertains to the change or modification of an obligation by another, resulting
to the extinguishment of an obligation. The following are the requisites for valid novation: There
must be a previous valid obligation; there must be an agreement by the parties to extinguish or
modify the old obligation; the validity of the new obligation.
Example: An event organizer commissioned your services as a performer in two wedding
occasions scheduled on June. The event organizer gave you an advance payment of Php 10,000
for the said occasions. A day before the event, the event organizer informed you that the two
wedding occasions wherein you were commissioned to perform will no longer be viable to
happen. In lieu of the cancelled occasion, the event organizer gave you another five more
scheduled dates of wedding for the month of July. Instead of giving back to the event organizer
the amount of Php 10,000 which earlier she gave to you, the same amount can be considered as
an advance payment for the five wedding occasions scheduled for the amount of July wherein
you are also set to perform.
CONTRACT DEFINED it is the meeting of the minds between two persons whereby one
binds himself, with respect to the others, to give something or to render some service.
Essential Elements of a Contract
The following are the essential elements of a contract:
a. consent; b. object certain; and c. cause
CONSENT signifies the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. It comprises the following elements: a. concurrence
of the offer and the acceptance (expressly stated in the Civil Code;) b. contracting parties must
possess the necessary legal capacity (implied); c. consent must be intelligent, free,
spontaneous and real (implied).
It is the meeting of the minds of the contracting parties. There should be an acceptance and an
offer to manifest and consent. The offer must be certain and, whether the acceptance is
expressed or implied, it must be absolute. The offer or may fix the details of the offer including
the date, time, place, and mode of acceptance, in which all must be complied with.
It must be noted that the following are incapacitated to give consent: 1. Minors; 2. Insane or
demented; 3. Deaf-mutes who do not know how to write; 4. Married women of age in cases
specified by law; 5. Civil interdicted persons; 6. Incompetents under guardianship;

VICES OF CONSENT
The following are vices of consent which can produce direct effect on the contract entered into
between parties: a. violence; b. intimidation; c. mistake; d. fraud; e. undue influence.
For a VIOLENCE to be considered as a vice that could vitiate consent. It must be serious or
irresistible. The contract would have been a void contract if the consent given by one of the
parties was obtained only because of the use of violence-meaning that there is a physical pain.
The use of INTIMIDATION by one of the parties to the contract to obtain the consent of the party
can vitiate the consent if there is an inflicted of mental pain. There is no chance that a contract
can be perfected if the intimidation is very evident. A threat to a family or friends might be
considered as a form of intimidation.
MISTAKE may be attributed to the nature of human to commit error whether in fact or in law.
Mistake of fact may arise if there is an ignorance or lack of knowledge on the object of the
contract. However, there are some mistakes that do not vitiate or affect the consent given by
the parties like the following: a. Mistake as to incidents of things stipulated in the contract except
if there is fraud; b. Mistake as to the quantity or amount requires only for a correction of the
mistake. It does not vitiate the contract. If it is however the essence of the contract, reformation
is need instead; c. Mistake which could have been avoided by the alleging it. The mistake of facts
on the other hand arises from the ignorance or lack of knowledge on applicable provisions of law,
erroneous interpretation and conclusions as to the legal effect of the agreement.
The presence of FRAUD is evident if there are insidious words or if there is a scheme or
machination which induces the other party to enter into a contract. Fraud could either be causal
or incidental. Causal fraud is committed by one party in order that the other party would agree
to the terms and conditions of the contract. It may be committed through the concealment or
non-statement of the material facts. Incidental fraud on the other hand pertains to the fraud
without which consent would have still been given but the person giving it would not have
agreed. This fraud is incidental to the performance of an obligation.
UNDUE INFLUENCE is the direct influence that overpowers the mind of the party to decide based
on the ideas and principles of the others. There must have a proof that the one induced to
perform an obligation was a weaker party; that influence is improperly exerted. There is no
vitiation of contract if the influence is obtained because of one’s generosity or liberality.
OBJECT CERTAIN. It could be any of the following: a . thing; b. right; c. service
The object certain must have the following requisites:
1. Objects should be within the commerce of men;
2. It should be real or possible. It should exist at the moment of celebration of contract or
at least it can exist subsequently or in the future;
3. Objects should be licit or not be contrary to law, morals, good customs, public order or
public policy;
4. It should be determinate or at least possible of determination as to its kind.
CAUSE. It is the why of the contract or the essential reason which moves the contracting parties
to enter into the contract. It must have the following requisites:
1. should be in existence;
2. should be licit or lawful, and;
3. should be true.
CLASSIFICATIONS OF CONTRACTS ACCORDING TO CAUSE
Contracts may be classified according to cause, to wit:
a) Onerous;
b) Remuneratory;
c) Gratuitous
The parties are reciprocally obligated to each other in onerous contract;
The purpose of remunerative contract is to give remuneration to the services previously
rendered or given by the other party;
In a contract that is gratuitous, one party is giving something out of his or her generosity or
liberality. The one giving is not expecting something in return. It is basically a gift to the other
party without any consideration. One perfect example of this is donation.
PERFECTION OF CONTRACTS
In general, contracts are perfected from the moment that there is a manifestation of the
concurrence between the offer and the acceptance with respect to the object and the cause
which shall constitute the contract.
According to the CC Art 1319, par, the contract is perfected from the moment that the offeror
has knowledge of such acceptance, while according the Article 54 of the Code of Commerce, the
contract is perfected from the moment an answer is made accepting the offer.
CONTRACT STAGES
1. Generation. It is the preliminary stage or process for the formation of the contract. It
includes the bargaining of the subject of obligation and the consideration.
2. Perfection or the birth of the contract
3. Consummation. It is fulfillment of the purpose for which the contract was constituted.
Characteristics of Contracts
Contracts may be characterized as follows: obligatory; autonomy; mutuality; relativity
1. Obligatory Force. Once the contract is perfected, it shall be of obligatory force upon both
of the contracting parties.
2. Autonomy of the Contracts. Contracting parties are free to enter into a contract and to
establish such stipulations, clauses, terms and conditions as they may deem convenient.
3. Mutuality of the Contracts. The contract must bind both parties.
4. Relativity of the Contracts. Contract takes effect only between the parties.

LIMITATIONS UPON THE ESTABLISHMENT OF STIPULATION; CLAUSES, TERMS AND CONDITION

According to Article 1306 of the Civil Code of the Philippines, the stipulations, clauses, terms and
conditions established by the contracting parties must not be: contrary to law, moral, good
customs, public order, public policy
DEFECTIVE CONTRACTS
A contract is considered defective because of its legal insufficiency due to its incompleteness or
incorrectness. It cannot be enforced. There are four defective contracts as enunciated in the Civil
Code of the Philippines, to wit: Rescissible, Voidable, Unenforceable, and Void.
1. A Rescissible Contract is a valid contract because it contains all of the essential requisites
prescribed by law, but which is defective due to injury or damage to either of the
contracting parties or to third persons as a consequence of which it may be rescinded by
means of a proper action for rescission.

2. Voidable. It is a contract which is valid until annulled. All of the essential elements for
validity are present, but the element of consent is vitiated either by lack of legal capacity
of one of the contracting parties, or by mistake, violence, intimidation, undue influence,
or fraud. The following are the characteristics of a voidable contract: a. there is a defect
in the contract because of the consent of one of the contracting parties is vitiated; b. the
contract binds the parties until the contract is annulled; c. the defect can be convalidated
by ratification or by prescription; d. the voidable character of the contract cannot be
invoked by third person.
3. Unenforceable contracts. Those that cannot be enforced by a proper action in court
UNLESS they are ratified, because they are either entered into without or in excess of
authority or they do not comply with the Statue of Frauds OR both of the contracting
parties do not possess the required legal capacity. An unenforceable contract has the
following characteristics: a. it cannot be enforced by proper action; b. it is susceptible to
ratification; c. it cannot be assailed by third persons.

4. A Void Contract is considered to be inexistent by operation of law, thus, confers no right

to any party thereto. It has the following characteristics: a. it cannot produce effect
whatsoever either against or in favor of anyone; b. there is no need to file an action for
annulment; judgment of nullity is merely declaratory; c. they can neither be confirmed
nor ratified; d. the defect of nullity may be invoked by anyone against whom the effect
of the contract are asserted.