Business Law: Lecture no 1

By: Atty. Aive Marelia P. Vargas

Obligations and Contracts
Obligation
ARTICLE 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

It is a tie of law or a juridical bond by virtue of which one is bound in favor of another to render
something — and this may consist in giving a thing, doing a certain act, or not doing a certain act.
Juridical Necessity
Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be
called upon to enforce its fulfillment or, in default thereof, the economic value that it represents.

In other words, the debtor must comply with his obligation whether he likes it or not;
otherwise, his failure will be visited with some harmful or undesirable legal consequences.
Nature of Obligations
1. Civil Obligations
2. Natural obligation
Civil Obligations
Obligations which give to the creditor or obligee a right of action in courts of justice to
enforce their performance
Examples of Civil Obligations:
• Pay damages in case of causing damage to someone else’s property.
• A deposit agreement.
• A restraining order.
• The obligations that arise from marriage.
• Comply with what is stipulated in a contract.
• Pay the copyright in the corresponding cases.
• The prohibition of smoking in certain places.
• The obligations of a father towards his children.
• The prohibition of parking in a certain place.
RECITATION: Identify if it is an obligation to give, to do or not to do.
 Natural Obligation
An obligation that can no longer be imposed.
It is not based on positive law but on equity and natural law, it does not grant a right of
action to enforce their performance although in case of voluntary fulfillment by the
debtor, the latter may not recover what has been delivered or rendered by reason thereof
Examples of Natural Obligations:
Examples of Natural Obligations
1.A minor who lends money to another.
2.A gambling debt.
3.Opposition of debts in compensation, from a debt not formally constituted.
4.An insane person who buys a product without being at full capacity.
5.Payment of a debt without obligation, having believed to be obliged to pay it.
Recitation: What makes them a natural obligation?
Essential Requisites of an Obligation:
(1) A passive subject (called debtor or obligor) or the person who is bound to the
fulfillment of the obligation; he who has a duty;
(2) An active subject (called creditor or obligee) or the person who is entitled to demand
the fulfillment of the obligation; he who has a right;
(3) Object or prestation (subject matter of the obligation) or the con- duct required to be
observed by the debtor. It may consist in giving, doing, or not doing. Without the
prestation, there is nothing to perform.
(4) A juridical or legal tie (also called efficient cause) or that which binds or connects the
parties to the obligation. The tie in an obligation can easily be determined by knowing
the source of the obligation. (Art. 1157.)
 Example: Under a building contract, X bound himself to construct a house for Y for
P1,000,000.00.

Recitations Questions:
1: Who is the passive subject?
2. Who is the active subject?
3. What is the object or the prestation?
4. What is the juridical tie?
Suppose X had already constructed the house and it was the agreement that Y would pay X after the
construction is finished

Recitation: Who is now the passive subject? Active subject?

Sources of obligations.
ART. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.(1089a)
(1) Law. — when they are imposed by the law itself, e.g., obligation to pay taxes;
obligation to support one’s family (see Art. 195, Family Code.);
(2) Contracts. — when they arise from the stipulation of the parties (Art. 1306.), e.g., the
obligation to repay a loan by virtue of an agreement;
(3) Quasi-contracts. — when they arise from lawful, voluntary and unilateral acts and
which are enforceable to the end that no one shall be unjustly enriched or benefited at
the expense of another. In a sense, these obligations may be considered as arising from
law;
(4) Crimes or acts or omissions punished by law. — when they arise from civil liability which
is the consequence of a criminal offense (Art. 1161.), e.g., the obligation of a thief to
return the car stolen by him; the duty of a killer to indemnify the heirs of his victim; and
(5) Quasi-delicts or torts. — when they arise from damage caused to another through an
act or omission, there being fault or negligence, but no contractual relation exists
between the parties (Art. 2176.), e.g., the obligation of the head of a family that lives in a
building or a part thereof to answer for damages caused by things thrown or falling
from the same (Art. 2193.); the obligation of the possessor of an animal to pay for the
damage which it may have caused. (Art. 2183.)
The enumeration by the law is exclusive; hence, there is no obligation as defined in
Article 1156, if its source is not any of those enumerated.
Contractual obligations
Arising from contracts or voluntary agreements.
Contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. (Art. 1305.)
It is the formal expression by the parties of their rights and obligations they have
agreed upon with respect to each other.
 Binding force
-Obligations arising from contracts are governed primarily by the agreement of the
contracting parties.

• The law, recognizing the obligatory force of contracts will not permit a party to be set free
from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof.
• Courts have no alternative but to enforce contracts as they were agreed upon and written
when the terms thereof are clear and leave no room for interpretation.

• Recitation: Does this mean that the contract is superior to the law?
Quasi – Contracts:
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.
REMEMBER: No contract was entered into by the parties

In other words, the law consid- ers the parties as having entered into a contract, irrespective of their
intention, to prevent injustice.
 Kinds of quasi-contracts.
1) Negotiorum gestio is the voluntary management of the property or affairs of another without the knowledge or
consent of the latter. (Art. 2144.)
2) Solutio indebiti is the juridical relation which is created when something is received when there is no right to
demand it and it was unduly delivered through mistake. (Art. 2154.)
Recitation:
1. Thus, if through the efforts of X, a neighbor, the house of Y was saved from being burned. Does Y
have the obligation to reimburse X for the expenses X incurred although Y did not actually give his
consent? Yes or No? Why?
2. Taxpayer Y overpaid his taxes for taxable year 2022. should the government refund said
overpayment? Yes or No? Why?
Civil Liability arising from crimes/ Delicts
The commission of an offense has a two-pronged effect: one, on the public and the other, upon the
private.
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 felony17 is also civilly
liable.
 Recitation:
X stole the car of Y. If X is convicted, the court will order X to what?
Obligations arising from quasi-delicts
A quasi-delict20 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.21
(Art. 2176.)

Requisites of quasi-delict.
Before a person can be held liable for quasi-delict, the following requisites must be present:
(1) There must be an act or omission by the defendant;
(2) There must be fault or negligence of the defendant;
(3) There must be damage caused to the plaintiff;
(4) There must be a direct relation or connection of cause and effect between the act or omission
and the damage; and
(5) There is no pre-existing contractual relation between the parties.
II: Nature and Effect of Obligations
ART. 1163. Every person obliged 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.

The thing to be given can either be

1. specific or determinate thing- particularly designated or physically segregated from all others
of the same class. he debtor cannot substitute it with another although the latter is of the
same kind and quality without the consent of the creditor. Example: 1) Toyota car with Plate
No. AAV 344.
2. generic or indeterminate -refers only to a class or genus to which it pertains and cannot be
pointed out with particularity. Is identified only by its specie.Thedebtorcan give anything of
the same class as long as it is of the same kind. Examples: 1) one cavan of rice, a Japanese car
Duties of debtor in obligation to give a
determinate thing.
(1) To preserve or take care of the thing due;
(2) To deliver the fruits of the thing (see Art. 1164.);
(3) To deliver its accessions and accessories(seeArt.1166.);
(4) To deliver the thing itself
(5) To answer for damages in case of non-fulfillment or breach.
Obligation to take care of the
thing due.
Diligence of a good father of a family. — In obligations to give, the obligor has the incidental duty to
take care of the thing due with the diligence of a good father of a family pending delivery. The
phrase has been equated with ordinary care or that diligence which an average (a reasonably
prudent) person exercises over his own property.
While parties may agree upon diligence which is more or less than that of a good father of a family,
it is contrary to public policy (see Art. 1306.) to stipulate for absolute exemption from liability for
any fault or negligence.
Reason for debtor’s obligation. — The debtor must exercise diligence to insure that the thing to be
delivered would subsist in the same condition as it was when the obligation was contracted.
 Who has the right to the fruits
of a thing?
By law, the creditor is entitled to the fruits of the thing to be deliv- ered from the time the obligation to make
delivery of the thing arises.

Different kinds of fruits:

(1) Natural fruits are the spontaneous products of the soil, and the young and other products of animals, e.g.,
grass; all trees and plants on lands produced without the intervention of human labor.
(2) Industrial fruits are those produced by lands of any kind through cultivation or labor, e.g., sugar cane;
vegetables; rice; and all products of lands brought about by reason of human labor.
(3) Civil fruits are those derived by virtue of a juridical relation, e.g., rents of buildings, price of leases of lands and
other property and the amount of perpetual or life annuities or other similar income. (Art. 442.)
When does obligation to deliver arises?
Rises from the time of the perfection of the contract.
If the obligation is subject to a suspensive condition or period (Arts. 1179, 1189, 1193.), it arises upon
fulfillment of the condition or arrival of the period.

Example:
Iin a contract of sale, the obligation arises from the perfection of the contract even if the obligation is
subject to a suspensive condition or a suspensive period where the price has been paid.

In obligations to give arising from law, quasi-contracts, delicts, and quasi-delicts, the time of
performance is determined by the specific provisions of law applicable.
Recitation:
S sold his horse to B for P15,000.00. No date or condition was stipulated for the delivery of the horse.
While still in the possession of S, the horse gave birth to a colt.
Who has the right to the colt?
Meaning of personal right and real right.
(1) Personal right is the right or power of a person (creditor) to demand from another (debtor), as a definite
passive subject, the fulfillment of the latter’s obligation to give, to do, or not to do.
(2) Real right is the right or interest of a person over a specific thing (like ownership, possession, mortgage, lease
record) without a definite passive subject against whom the right may be personally enforced.

A personal right is, therefore, binding or enforceable only against a particular person while a real right is
directed against the whole world.

EXAMPLE:
X is the owner of a parcel of land under a torrens title registered in his name in the Registry of Property. His
ownership is a real right directed against everybody. There is no definite passive subject.
If the land is claimed by Y who takes possession, X has a personal right to recover from Y, as a definite passive
subject, the property.
If the same land is mortgaged by X to Z, the mortgage, if duly registered, is binding against third persons. A
purchaser buys the land subject to the mortgage which is a real right.
Ownership acquired by delivery.
- Ownership and other real rights over property are acquired and transmitted by law, by donation, by
testate and intestate succession, and in consequence of certain contracts by tradition (Art. 712.) or de-
livery. Delivery in sale may be actual or real, constructive or legal, or in any other manner signifying an
agreement that the possession of the thing sold is transferred from the vendor to the vendee. (see Arts.
1496-1501.)
Meaning of accessions and accessories.
(1) Accessions are the fruits of, or additions to, or improvements upon, a thing (the principal), e.g., house or
trees on a land; rents of a building; airconditioner in a car; profits or dividends accruing from shares of
stocks; etc.
The concept includes accession in its three forms of building, planting, and sowing (see Art. 445.), and
accession natural, such as alluvion (see Art. 457.), avulsion (see Art. 459.), change of course of rivers (see Arts.
461-462.), and formation of islands. (see Arts. 464-465.) “Fruits of the thing” are specifically provided for in
Article 1164.
(2) Accessories are things joined to, or included with, the principal thing for the latter’s embellishment, better
use, or completion, e.g., key of a house; frame of a picture; bracelet of a watch; machinery in a factory; bow of
a violin.
Note that while accessions are not necessary to the principal thing, the accessory and the principal thing must
go together but both accessions and accessories can exist only in relation to the principal.
Principle: Accessory follows the
principal
Exception:Unless otherwise stipulated, an obligation to deliver the accessions or
accessories of a thing does not include the latter.
 ART. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone. (1098)
It contemplates three situations:
(1) The debtor fails to perform an obligation to do; or
(2) The debtor performs an obligation to do but contrary to the terms thereof; or
(3) The debtor performs an obligation to do but in a poor manner.

Remedies of creditor in positive personal obligation.

(1) If the debtor fails to comply with his obligation to do, the creditor has the right:
(a) to have the obligation performed by himself, or by another unless personal considerations are involved,
at the debtor’s expense; and
(b) to recover damages. (Art. 1170.)
(2) In case the obligation is done in contravention of the terms of the same or is poorly done, it may be
ordered (by the court) that it be undone if it is still possible to undo what was done.
ILLUSTRATIVE CASE:
Liability of debtor who fails to comply with an obligation to do.
Facts: A delivered to B, a typewriter repairer, a portable typewriter for routine cleaning and servicing. B was not
able to finish the job after some time despite repeated reminders made by A. Finally, B returned the typewriter
unrepaired, some of the parts missing. A had the typewriter repaired by F Business Machines, and the repair
job cost him P58.75 for labor or service and P31.10 for the missing parts or a total of P89.85.
The lower court rendered judgment ordering B to pay only P31.10.
Issue: Is B liable also for P58.75, the cost of the service expended in the repair?
Held: Yes. B contravened the tenor of his obligation (see Art. 1170.) because he not only did not repair the
typewriter but returned it “in shambles.” For such contravention, he is liable under Article 1167 for the cost of
executing the obligation in a proper manner, which in the case should be the cost of the labor or service
expended in its repair, because the obligation or contract was to repair it.
In addition, he is liable under Article 1170 for the cost of the missing parts for in his obligation to repair the
typewriter he was bound, but failed or neglected to return it in the same condition it was when he received it.
(Chaves vs. Gonzales, 32 SCRA 547 [1970]; see Tanguilig vs. Court of Appeals, 266 SCRA 78 [1997].)
Obligation NOT to do
ART. 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense. (1099a)

Remedies of creditor in negative personal obligation.

In an obligation not to do, the duty of the obligor is to abstain from an act. The very obligation is fulfilled
in not doing what is forbidden.
As a rule, the remedy of the obligee is the undoing of the forbidden thing plus damages. (Art. 1170.)
However, if it is not possible to undo what was done, either physically or legally, or because of the rights
acquired by third persons who acted in good faith, or for some other reason, his remedy is an action for
damages caused by the debtor’s violation of his obligation. (see 8 Manresa 58.)

Recitation:
S sold a land to B. It was stipulated that S would not construct a fence on a certain portion of his land
adjoining that sold to B. S constructed a fence. What is the remedy of B?