LAW ON BUSINESS

TRANSACTIONS
1.0 – OBLIGATIONS AND
CONTRACTS

References: Soriano, Fidelito, Notes in Business Law, 2016 Edition

 OBLIGATION CONCEPT
⮚ An obligation is a juridical necessity to give, to do or not to
do. (Article 1156, Civil Code of the Philippines)
⮚ Juridical necessity means that the court may be asked to order
the performance of an obligation if the debtor refuses to
perform it.
⮚ If an obligation cannot be enforced through the courts, it may
be disregarded with impunity.

Requisites of Obligation
1. Active Subject (creditor or obligee) – the party who has the
right to demand performance of the obligation.
2. Passive subject (debtor or obligor) – the party who is obliged
to perform the obligation.
3. Prestation – the object or subject matter of the obligation. It
may consist of giving, doing or not doing something.
4. Efficient cause – the vinculum or legal or juridical tie which
binds the parties to an obligation. The efficient cause of an
obligation may be any of the five sources of obligation.
 EXAMPLES:
1. D is obliged to give C P50,000 with the interest at 12% per annum on
December 31, 2022 pursuant to a contract of loan. D is the passive
subject; C is the active subject; the giving of P50,000 with
interest of 12% is the prestation; and the contract of loan is the
efficient cause. The obligation here is unilateral which means only
one party (D) is required to perform a particular conduct.

2. D is obliged to transport the goods to C from Manila to General

Santos City, and C is obliged to pay D P1,000 as transport costs,
under a contract of carriage. As regards the transport of the goods
which is the prestation, C is the active subject and D is the
passive subject. The contract of carriage is the efficient cause for
the obligations of both D and C. the obligations here is bilateral,
which means both is required to perform a particular conduct.
Civil obligation and natural obligation distinguished
A civil obligation (as defined in Article 1156) is based on
positive law; hence it is enforceable.
A natural obligation, on the other hand, is based on natural law;
hence it is not enforceable by court action. The obligation however,
exists in equity and moral justice, such that if the debtor voluntarily
performs it, he can no longer recover what he has given.

EXAMPLE:
M is the maker of promissory note with P as payee for P20,000. If M
does not pay on due date, P can enforce payment by filing a court
action. If P does not file a court action against M within 10 years
from due date which is the prescriptive period for actions upon a
written contract, P loses the right to enforce for payment by court
action. However, if M voluntarily makes the payment to P although the
obligation has prescribed, M will no longer be allowed to recover the
payment because in equity and moral justice, he still owed P the amount
of P20,000.
 Prescription is generally used with reference to the acquisition (or
loss) of a right by the lapse of time. The prescriptive period refers to
the time within which an action must be brought; otherwise, such right to
file action is lost.

Sources of obligation (Article 1157)

1. Law – a rule of conduct, just and obligatory, laid down by legitimate
authority for common observance and benefit. (Sanchez Roman).
Obligations derived from law are presumed. Only those expressly
determined in the Civil Code or in special laws are demandable, and
shall be regulated by the precepts of the law which established them;
and has not been foreseen, by the provisions of obligations (Article
1158)

Examples: The National Internal Revenue Code which provides for the
payment of taxes; the Anti-Mendicancy Law which prohibits the giving
of alms to beggars.
2. Contracts – 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 (Article 1305)

Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith (Article
1159)

Examples: A contract of lease which provides for the payment of rental by

the lessee; a contract of sale which requires the seller to deliver the
thig sold and the buyer to pay the price.

3. Quasi-contracts – refer to certain lawful, voluntary and unilateral acts

giving rise to a juridical relation to the end that no one shall be
unjustly enriched at the expense of another (Article 2142). There is
unjust enrichment “when a person unjustly retains a benefit to the loss
of another, or when a person retains money or property of another against
the fundamental principles of justice, equity and good conscience.”

a. Negotiorum gestio – refers to the voluntary administration of the

property, business or affairs of another without his consent or
authority.
b. Solutio Indebiti – refers to payment by mistake of an obligation which
was not due when paid. It creates the obligation to return the payment
(Article 2154)

c. Other quasi-contracts
1. When, without the knowledge of the person obliged to give support, it
is given by a stranger, the latter shall have the right to claim the
same from the former, unless it appears that he gave it out of piety
and without intention of being paid (Article 2164)

2. When funeral expenses are borne by a third person, without knowledge

of those relatives who were obliged to give support to the deceased,
said relatives shall reimburse the third person, should the latter
claim reimbursement (Article 2165)

3. When the person obliged to support an orphan, or an insane or other

indigent person unjustly refuses to give support to the latter, any
third person may furnish support to the needy individual, with right
of reimbursement from the person obliged to give support. This
provision applies when the father or mother of a child under eighteen
years of age unjustly refuses to support him (Article 2166)
4. When through an accident or other cause a person is injured or becomes
seriously ill, and he is treated or helped while he is not in a condition to
give consent to a contract, he shall be liable for the services of the
physician or other person aiding him, unless the service has ben rendered
out of pure generosity (Article 2167)

5. When during a fire, flood, storm or other calamity property is saved from
destruction by another person without the knowledge of the owner, the latter
is bound to pay the former just compensation(Article 2168)

6. When the government, upon failure of any person to comply with health or
safety regulations concerning property, undertakes to do necessary work,
even over his objection, he shall be liable to pay the expenses (Article
2169)

7. When by accident or other fortuitous event, movables separately pertaining

to two or more persons are commingled or confused, the rules on co-ownership
are applicable (Article 2170)

8. When in a small community, a majority of inhabitants of age decide upon a

measure of protection against lawlessness, fire, flood, storm or other
calamity, any one who objects to the plan and refuses to contribute to the
 9. Any person who is constrained to pay the taxes of another shall be entitled
to reimbursement from the latter(Article 2175)

4. Acts or omission punishable by law – these are crimes or felonies. The

commission of a crime makes the offender liable (Article 100, Revised
Penal Code). Such civil liability includes restitution, reparation of
the damage caused, and indemnification of consequential damages
(Article 104, Revised Penal Code)

5. Quasi-delicts (also known as “tort” or “culpa aquiliana”)- these are

acts or omissions that cause damage to another, there being fault or
negligence but without any pre-existing contractual relation between
the parties (Article 2176)

For a quasi-delicts to prosper, the complainant must establish:

a. damages to the complainant
b. negligence, by act or omission of the defendant or by some person for whose
act the defendant must respond, was guilty
c. the connection of cause and effect between such negligence and damages.
With respect to the third element, the negligent act or omission must be
the proximate cause of the injury.
 NATURE AND EFFECT OF OBLIGATIONS
Determinate thing and generic thing
1. Concept - a thing is determinate when it is particularly designated or
physically segregated from all others of the same class (Article 1460).
A thing is indeterminate or generic when it is not particularly
designated or physically segregated from all others of the same class.

2. Importance of knowing whether a thing is determinate or generic – as a

rule, the loss of a determinate thing through a fortuitous event
extinguishes the obligation (Article 1262)

Obligations of one obliged to give a determinate thing

3. To take good care of the thing with the diligence of a good father of a family unless the
law or agreement of the parties requires another standard of care (Article 1163)

Diligence of a good father of a family means the ordinary care that an average person
exercises in taking care of his property.

2. To deliver the thing (Article 1163)

This involves placing the thing in the possession or control of the creditor either
actually or constructively.

3. To deliver the fruits of the thing (Article 1164)

Kinds of fruits
1. Natural fruits – they are the spontaneous products of the soil and the young and other
products of animals (Article 442). Thus, the trees that grow naturally on the soil
without the intervention of man and the colt delivered by a mare are natural fruits.

2. Industrial fruits – they refer to those produced by land of any kind through cultivation
or labor (Article 442)

3. Civil fruits – they refer to fruits which are the result of a juridical relation such as
the rent of a building, price of lease of land and other property and the amount of
perpetual or lifetime annuities (Article 442)

When creditor has a right to the fruits of a determinate thing?

the creditor has the right to the fruits of a thing from the time the obligation to
deliver it arises. However, he shall acquire no real right over it until the thing has been
delivered to him (Article 1164).

When obligation to deliver the thing arises?

4. If the obligation is a pure obligation or one whose performance is not subject to a
suspensive period or suspensive condition, the obligation to deliver arises from
perfection.
5. If the obligation is subject to a suspensive period or suspensive condition, the
obligation to deliver arises upon the arrival of the term or upon the fulfillment of the
condition.
Rights of the creditor
1. Personal Right – this is a right that may be enforced by one person on another, such
as the right of the creditor to demand the delivery of the thing and its fruits from
the debtor. This is also called jus in personam or jus ad rem.

2. Real Right – this refers to the right or power over a specific thing, such as
possession or ownership, which is a right enforceable against the whole world. This is
the right acquired by the creditor over the thing and its fruits when they have been
delivered to him. This is called jus in re.

4. To deliver its accessions and accessories even if they have not been mentioned (Article
1166)

a) Accessions – they include everything that is produced by a thing or is

incorporated or attached thereto, either naturally or artificially (Article
440) such as alluvium, the soil gradually deposited by the current of a
river on a riverbank, or whatever is built, planted or sown on a parcel of
land.

b) Accessories – those joined to or included with the principal thing for the
latter’s better use, perfection or enjoyment (such as the keys to a car or a
house, or the bracelet of a wristwatch)
Remedies of the creditor
1. If the debtor fails to perform his obligation to deliver a determinate thing
a. To compel the debtor to make the delivery (Article 1165)
b. To demand damages from the debtor (Article 1170)

2. If the debtor fails to perform his obligation to deliver a generic thing

a. To ask the obligation be complied with at the expense of the debtor (Article 1165)
b. To demand damages from the debtor (Article 1170)

3. If the debtor fails to perform his obligations to do

a. If the debtor fails to perform the obligation or performs it but contravenes the
tenor thereof(Article 1167)
1. Creditor may have the obligation executed at the expense of the debtor (Article
1167)
2. He may also demand damages from the debtor (Article 1170)

b. If the debtor performs the obligation but does it poorly(Article 1170)

1. Creditor may have the same be undone at debtor’s expense (Article 1167)
2. Creditor may also demand damages from the debtor (Article 1170)

4. If the debtor does has been forbidden him

a. The creditor may demand that what has been done ne undone
b. He may also demand damages from the debtor (Article 1168)