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The Laws on Obligations and Contracts

The laws on obligations and contracts are contained in the Civil Code of the Philippines.
Obligations
Article 1156. An obligation is a juridical necessity to give, to do or not to do.
An obligation is a legal duty, in any way created, the violation of which may become the basis of a legal action.
This means that any 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 with what is demanded by the obligation may give the
aggrieved party different courses of action such as demand for payment and damages.
There are three (3) kinds of an obligation under the law: 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. An example is the obligation to deliver the thing in sale, deposit, or donation.
• All kinds of works or services, whether physical or mental is covered by the obligation to do. Examples
include a contract of events organizing or professional services like painting or modeling.
• 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 or offensive odor, smoke, and heat.
Elements of an Obligation
Every obligation has four (4) definite elements, without which no obligation can exist. These are (Maranan et
al., 2019):
• Active subject. It is the one who is demanding the performance of the obligation. He is also called the
creditor or obligee.
• Passive subject. It is the one bound to perform the prestation to give, to do or not to do. He is also
called the debtor or obligor.
• Object or prestation. It is the subject matter of the obligation which has an economic value or
susceptible of pecuniary substitution in case of noncompliance.
• Juridical or legal tie. It is the vinculum that binds the contracting parties (e.g., sales contract; service
contract).
The sources of liability (for damages) of a party in an obligation are as follows:
• Fraud. The fraud is incidental fraud which is fraud incident to the performance of an obligation (e.g.,
delivering a used, instead of a new, mobile phone). In fraud, there is an intent to evade the normal
fulfillment of the obligation and to cause damage.
• Negligence. The negligence referred here, in the case of contracts, i.e., common carrier, is culpa
contractual (negligence incident to the performance of a contractual obligation), the lack of diligence,
or carelessness. Negligence consists in the omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstances of the persons, or the time and of the place.
• Delay. As a general rule, those obliged to deliver or to do something incur in delay from the time the
stipulated period for the fulfillment of the obligation has lapsed, and the obligee judicially or
extrajudicially demands the fulfillment of their obligation.
Sources of an Obligation
Article 1157 enumerates the sources of obligation, namely: law; contracts; quasi-contracts; delicts or acts or
of omissions punishable by law; and quasi-delicts.

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• Law. The obligation of a party to fulfill an obligation arises from the law itself. An example of this is
the taxpayer’s duty to pay taxes.
• Contracts. This is the duty of the party to fulfill his undertaking in a contract. An example of this is the
duty of the party to pay for the excess number of persons attending a catering event as stipulated in
the contract.
• Quasi-contracts. It refers to a lawful, voluntary, and unilateral act based on the maxim that no one
shall enrich himself at the expense of another. The two (2) common forms of quasi-contract are solutio
indebiti, which is the payment by mistake, where there is an obligation to return the payment; and
negotiorum gestio, which takes place when a person without the consent of the owner, assumes the
management of an abandoned business, where the obligation is to attend to the business until the
completion of the undertaking and its incidents, or to call upon the owner to relieve him of it, should
he be able to do so.
• Delicts. It refers to obligations arising from delicts or crimes, which are governed by the provisions of
the Revised Penal Code (i.e., restitution, reparation of the damage caused, indemnification of
consequential damages; and by the provisions of the Civil Code on damages (i.e., moral, exemplary,
and nominal damages). An example of this is the duty of the culprit to pay actual damages for causing
the death of a person.
• Quasi-delicts. Quasi-delict is any act or omission which causes damage to another, there being fault or
negligence, and there being no preexisting contractual relationship between the parties. An example
of this is the duty of the tortfeasor to pay damages for injuries or damages due to his fault, omission,
or negligence.

Diligence Needed
Article 1163 provides that every person with an 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.

Modes of Extinguishing Obligation

Article 1231. Obligations are extinguished by payment or performance; loss of the thing due; condonation
or remission of the debt; confusion or merger of the rights of the creditor and debtor; compensation; and
novation.
Other causes of extinguishment of obligations such as annulment, rescission, the fulfillment of the
resolutory condition, and prescription are governed in the other parts of the Civil Code.
Below are examples to illustrate the modes of extinguishing obligations (Maranan et al., 2019):
• In a restaurant, the obligation of the guest to the management who served him a sumptuous food
shall be extinguished upon payment by the guest of the exact amount of the food consumed.
• An obligation arising from a contract may also be extinguished upon the loss of the thing due,
provided there is no fault or negligence on the part of the obligor. Article 1189 (2) explained the
meaning of the term “loss.” It states that 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.”
For instance, the wedding coordinator in the wedding crashed by a tornado in Marikina City, Metro
Manila shall be absolved from any liability to the couple in such a fortuitous event.
A fortuitous event, also known as force majeure, is a term that exempts an obligor from liability.
Fortuitous events are extraordinary events not foreseeable or avoidable, events that could not be
foreseen, or which, though foreseen, were inevitable (Article 1174).

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These may be produced by two (2) general causes (Cabulay & Carpio-Aldeguer, 2015):
o By nature, such as earthquakes, storms, and flood; and
o By the act of men, such as armed invasion, attack by bandits, and robbery. For the acts of man
to constitute a fortuitous event, they must have the force of an imposition which the debtor
could have not resisted (3 Salvat 83-84). Thus, the outbreak of war that prevents performance
exempts a party from liability (PNB v. Court of Appeals, 94 SCRA 357). A fortuitous event
includes unavoidable accidents, even if there has been an intervention of human elements,
provided fault or negligence cannot be imputed to the debtor. If the thing has been lost
through robbery with violence, the debtor must show that he could not resist the violence. If
the thing is lost through theft, the debtor is considered negligent in having placed the thing
within reach of thieves and not in a secure or safe place; hence, the debtor will be liable for
damages.
• Condonation or remission pertains to the act of liberty on the part of the creditor wherein s/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 an advance gift for the latter’s continuous patronage to its supplies.
Article 1275 provides that the obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person. The merging or convergence of the rights of the creditor and
debtor in one and the same person makes the obligation extinguished considering that the right of
one over the other can no longer be determined. For example, Ms. Santos issues a promissory note in
favor of Ms. Reyes. Then, Ms. Reyes indorses the same promissory note by way of payment to Mr.
Ramos. Then, Mr. Ramos indorses the promissory note by way of payment to Ms. Santos who
originally issued the same. In this case, the obligation of Ms. Santos to pay the amount stated in the
promissory note is extinguished because she has become both the debtor and creditor.
• Compensation as means of extinguishing an obligation is the offsetting of the respective obligations
of two persons who stand as principal creditors and debtors of each other, resulting in the
extinguishment of their obligations to their concurrent amount. For example, Flora Hotel is indebted
to its linen supplier amounting to Php80,000. A month thereafter, the linen supplier requested a
catering service from Flora Hotel amounting to Php50,000 to which the latter adhered. The effect of
the transaction would have been the offsetting of the indebtedness of Flora Hotel to the linen supplier
up to the extent of Php50,000 only.
• Novation pertains to the change or modification of an obligation by another, resulting in the
extinguishment of an obligation. These 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;
and the validity of the new obligation. For example, Aike, an event organizer commissioned the
services of Arjel, a singer, for two (2) wedding occasions scheduled in June. Aike gave Arjel an advance
payment of Php10,000 for the said occasions. A day before the event, Aike informed Arjel that the
wedding occasions will no longer be viable. In place of the canceled occasions, Aike gave Arjel another
five (5) more scheduled wedding dates in July. Instead of giving back to Aike the Php10,000, the same
amount can be considered as an advance payment for the five (5) wedding dates in July where Arjel is
set to perform. In this case, Arjel may no longer be compelled to perform in the June wedding
celebrations.
There are other causes of extinguishment of obligation which are not expressly provided under the above
provision. Death extinguishes obligations that are purely personal such as partnership and agency.

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Application of the Law

Case: Mr. Danny Ramos, the owner of Danny’s Grill, a fine dining restaurant, entered into a contract with
Chona Romulo and Michael Aldeguer, proprietors of CM Wine Company, with the following stipulation:
“In case of failure to deliver the agreed 150 bottles of Emperor’s White Wine on or before December 30, 2020,
Chona Romula and Michael Aldeguer shall be liable to Dan Ramos, jointly and severally, for damages in the
total amount of Php10,000.
CM Wine Company was not able to fulfill its obligation without any justifiable cause to Mr. Ramos. For three
(3) days that the wines were not delivered, many complaints arose from dining customers for wines ordered
that were out of stock. Can Mr. Ramos hold Mr. Aldeguer liable for damages?

Contracts
Article 1305. A 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.
The essential elements of a contract are consent, object certain, and cause of the obligation. (These are
discussed in 03 Handout 1 under the requisites of a contract of sale.)
A contract of adhesion is defined as one in which almost all the provisions have been drafted by only one
party, usually a corporation or insurance company. The only participation of the other party is the affixing of
his signature or his adhesion. Contracts of adhesion are not invalid per se but are as binding as any other
contract. The Supreme Court has struck down contracts of adhesion as void when the weaker party has been
imposed upon in dealing with the dominant bargaining party as to be reduced to the alternative of taking it or
leaving it, being completely deprived of the opportunity to bargain on equal footing.
Characteristics of a Contract
The following are the characteristics of a contract (Cabulay & Carpio-Aldeguer, 2015):
• Mutuality of Contracts. Its validity and performance cannot be left to the will of only one of the parties.
• Autonomy of Contracts. The parties are free to stipulate terms and provisions in a contract, as long as
these are not contrary to law, morals, good customs, public order, and public policy.
• Relativity of Contracts. Contracts are binding only upon the parties and their successors-in-interest.
Exception: Stipulation in favor of a third person as in a beneficiary of an insurance policy.
• Consensuality of Contracts. Contracts are perfected by mere consent, and no form is prescribed by law
for their validity. An exception to this are real contracts such as loan or deposit, and contracts covered
by the Statute of Frauds.
• Obligatory Force of Contracts. By the obligatory force of contracts, it constitutes the law as between
the parties who are compelled to perform under the threat of being sued in the courts of law.
Contract Stages
These are the stages of a contract (Maranan et al., 2019):
A. 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 or cause.
B. Perfection. It is the birth of the contract.
C. Consummation. It is the fulfillment of the purpose for which the contract was constituted.
Defective Contracts
The defective contracts are found in Articles 1380 to 1422 of the Civil Code. These are the following:
• Rescissible Contract. It is a valid contract because it contains all of the essential requisites prescribed
by law, but is defective due to injury or damage to either of the contracting parties or to third persons

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as a consequence of which it may be rescinded through a proper action for rescission. Under Article
1380, the following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Example: Brent’s parents died and he inherited a fine dining restaurant worth P40,000,000.
Brent is still a minor so Terry was appointed as his guardian. Later, Terry sold the restaurant
on behalf of Brent for Php29,000,000. In this case, Terry sold the restaurant for a price lower
by more than ¼ of its market value to the prejudice of Brent. Brent can ask for the rescission
of the sale.
• Voidable Contract. It is a contract that is valid until annulled. 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. Under Article 1390, the
following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
Example: Carlo is an owner of a fine dining restaurant in a major business district. Marlon
wanted to buy the restaurant but Carlo does not want to sell it. To force Carlo to enter into a
contract, Marlon shoots Carlo at his left arm with his caliber 45 to force him to sign the
contract of sale. In this example, the contract was entered into using violence, hence Carlo
can file a case to annul the contract because the contract is voidable.
• Unenforceable Contract. It is a contract that cannot be enforced by a proper action in court unless it
is ratified, because they are either entered into without or in excess of authority or they do not comply
with the Statute of Frauds or both of the contracting parties do not possess the required legal capacity.
In the Statute of Frauds, some transactions must be in writing to effect its enforceability.
Example: In a social event, Zaira who is a businesswoman talked and agreed with Aika, a
commercial property owner, that she will be renting the only remaining commercial space in the
latter’s property for a period of five (5) years. After a few days, Zaira visited the property and
another business has already occupied the space. Since there was no written contract between
Zaira and Aika, Zaira cannot file any complaint against Aika.
Note: Contract is unenforceable if the parties in their verbal lease agreement agreed to a lease
period of more than one (1) year.
• Void Contract. It is considered to be inexistent by operation of law, thus confers no right to any party.
Under Article 1409, the following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order
or public policy;
(2) Those which are absolutely simulated or fictitious;

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(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained;
(7) Those expressly prohibited or declared void by law.
Example: A contract between a drug dealer and buyers is a void contract because the terms
of the contracts are illegal.

References:
Cabulay, D. A., & Carpio-Aldeguer, C. P. (2015). Philippine tourism laws: A comprehensive guide to studying
laws relevant to the Philippine tourism industry (2nd ed.). Rex Printing Company, Inc.
Maranan, M. H., Maranan, J. D., Caluza, C. N., & Dela Cruz, K. G. (2019). Legal aspects in tourism and
hospitality. Mindshapers Co., Inc.
Official Gazette. (June 18, 1949). Republic Act No. 386.
https://www.officialgazette.gov.ph/1949/06/18/republic-act-no-386/

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