LAW ON OBLIGATIONS AND CONTRACTS

MODULE 1: NATURE OF OBLIGATIONS

INTRODUCTION TO LAW
Welcome to Law on Obligations and Contracts. It is safe to assume this is the first time that you will take
a law course. On this assumption, this course will guide you in reading and studying law course in
general so that in the future you will not have hard time finishing law courses. However, before we go
to the course proper let me introduce you some tips in studying law courses.

The first thing you need to know is studying a law course involves a lot of reading. Unlike most
accounting courses that involves problem solving, law courses involve reading the text of the law and
understanding the reason behind the law and applying it to real situations. Thus, you should have ready
materials like textbooks and reference materials before you start studying this course. If you have then
let us begin.

Our legal system here in the Philippines is a mixture of different legal systems from various areas. First,
our legal system is influenced by Roman Law, which is the prevailing legal system for most of European
countries which Spain is included. Our country is under Spanish rule for more than 3 centuries.

Next, it is also influenced by common law system, which is the prevailing legal system in the United
States for which the Philippines in under in the early 20 th century. Lastly, it is also influenced by customs
and traditions that dated back before the occupation.

The Philippines as a state is divided into three co-equal branches: executive, legislative and judiciary. It
starts which legislative which enacts and passes laws. Once the laws is passed, the executive branch is
tasked to implement the law. However, there some ambiguities and possible abuses may be committed
during the implemented. Then comes judiciary in which a citizen seeks remedies and it also tasked to
interpret the law.

HIERARCHY AND SOURCES OF LAWS

1987 Constitution

Our laws are classified based on hierarchy. The highest law in the Philippines is the 1987 Philippine
Constitution. All laws enacted by legislative branch of government should be in accordance with the
1987 Constitution, otherwise it will be invalid and the 1987 Constitution will prevail.

Statutes

Next in the hierarchy is statutes. This is the law that is enacted by Congress or legislative. These statutes
have designations that are changed in the course of our history. You will encounter this designations as
a citation for many of the published books, journals and court decisions. Some of the oldest remaining
statutes are from American period designed as Act No. An example, would be Act. No 2031 also known
as Negotiable Instruments Law. During the Commonwealth Period, our statutes are designated as
Commonwealth No. An example would be Commonwealth Act No. 63 which the naturalization law for
foreigners who want acquire Philippine citizenship. Then in the period of First Philippine Republic, our

1
statutes are designated as Republic Act No. The Civil Code of the Philippines, which the law on
obligations and contracts are based, is designated as Republic Act No. 386.

However, this designation was discontinued during the martial law period where President Marcos
exercise both executive and legislative functions. His issuance of statutes became known as Presidential
Decrees. The Labor of the Philippines, for example, is designated as Presidential Decree No 442. During
EDSA Revolution, President Aquino temporarily enacts statutes while they were working on the 1987
Constitutions and restoring to Congress its legislative power. The statutes are designated as Executive
Orders (EO). The example, The Family Code of the Philippines is designated as EO No. 209. When the
Congress was restored of its legislative powers, the designation was back to Republic Acts.

Implementing Rules and Regulations

At present there are more than 11,000 Republic Acts enacted by Congress, but some of them are
already repealed. Once these statutes are passed and published, the executive branch will issue
implementing rules for the said statute. This will aid the executive department in implementing the law.
However, these implementing rules and regulations should not be in conflict with the statue enacted
otherwise it will be declared as invalid.

An example of implementing rules and regulations is the Revenue Regulations issued by the BIR to
execute tax laws.

Memorandum, Circulars and Instructions

In the bottom of the hierarch is the memorandums, circulars and instructions. These are issued by
various branches within the executive department to aid it in its administrative operations within the
said agency. Example would be Revenue Memorandum Circulars issued by the BIR prescribing method
of payment of taxes.

Supreme Court Decisions

The Supreme Court of the Philippines being the final arbiter of cases has the final say in the
interpretation of law in the Philippines. Its decisions form part of the legal system of the Philippines,
meaning form part of the law itself. However, decision of lower court are excluded as these are subject
to review by the Supreme Court. The decisions of the Supreme Court are published in their official
website and designated as General Register (GR No.). It is also complied in publications such as Supreme
Court Reports Annotated (SCRA) and Philippine Reports (Phil). Many books and court decisions cite
Supreme Court decisions either as GR No., SCRA or Phil.

AREAS OF LAW PRACTICE

The areas of law practice are based on 8 subjects of the bar examination prescribed by the Supreme
Court. These are: Political Law, Labor and Social Legislation, Taxation, Civil Law, Criminal Law,
Commercial Law, Remedial Law and Legal Ethics. Law on obligations and contracts are part of Civil Law.
Civil law are laws that governs the relations between private persons or entities.

The law on obligations and contracts is under Book IV of the Civil Code. This is the basic business law
course that every business must take. For accountancy students, upon finishing this course, they will
take later special contract courses and special laws.

2
PART I: OBLIGATIONS

NATURE OF OBLIGATIONS

Definition

Obligations is defined under Civil Code as follows:

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

Based on this definition, it gives rise to the classifications of obligations

Real obligation is the obligation TO GIVE

Positive personal obligation is the obligation TO DO

Negative personal obligation is the obligation NOT TO DO

Together, this three comprises of civil obligation which gives one party a right of action to compel
performance. In other words, one party can go to court to compel the other party to perform his/her
obligation. For instance, if you sell something and deliver it to the buyer, the buyer is obliged to pay you
for the price. If he does not pay, you can sue him to the court to compel him to pay.

Compare this to natural and moral obligations. Natural obligations

Sources of Obligation

The sources of obligations as mentioned in the Civil Code are as follows:

Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.

Obligations arising from law is not presumed. It must be expressly or impliedly set forth by the enacted.
The provisions of the Civil Code being general law shall apply in absence specific law imposing
obligations. A good example of obligation created by law is the obligation of Filipino citizen to pay taxes.
(Art 1158, CC)

An agreement between parties constitute a contract between and gives rise to rights obligations
between parties. This has an effect of law between them and shall be complied with. For instance, in
contract of sale, if the buyer agrees to the offer made the seller, the deal is made and the buyer must
pay the price that he agreed upon. (Art 1159, CC)

3
Quasi-contract refers to judicial relation resulting from lawful, voluntary and unilateral acts, which has
for its purpose, the payment of indemnity to the end that no one shall be unjustly enriched at the
expense of another. There are 2 kinds of quasi contract: Negotiorum gestio, or unauthorized
management and Solutio indebiti, or payment by mistake.

Obligations from delicts (crime) comes from the penal law that every person criminally liable is also
civilly liable (Art. 100, Revised Penal Code). This is the reason that guilty verdict by courts comes with
award of damages as part civil liability of guilty person concerned.

Quasi-delict (tort) is an act or omission arising from fault or negligence which causes damage to another,
there being no pre-existing contractual relations between the parties. Let’s have an example. If the taxi
driver because of his overspeeding, causes accident resulting to injuries to both his passenger and the
pedestrian walking in the street.

The driver will be liable to his passenger. His obligation is based on pre-existing contract of carriage in
which he agrees to carry the passenger in the latter’s destination. His obligation to the passenger, on the
other hand, is based on quasi-delict because the driver has no pre-existing contractual relationship to
the injured passenger.

Nature and Effect of Obligations

Personal Obligation. Personal obligation consist of obligation to do or not to do.

Real Obligation. This is an obligation to give where the subject matter is a thing which the obligor must
deliver to the obligee. This thing consist of:

Deteminate or specific thing – object is particularly designated or physically segregated from all other
thing of the same class.

Generic thing – object is designated by its class or genus.

Effect of Obligations

Duties of the Debtor

Let’s talk first about the duties of the debtor with respect to obligation to give a specific thing. His first
duty is to deliver the specific thing himself. His second duty is to preserve or take care of the thing due
with the diligence of a good father of a family. This diligence means ordinary care or reasonable
prudent person would exercise over his own property. This is the default diligence required by law.

Third duty is to deliver the fruits of the thing. Right to the fruits of the thing from the time obligation to
deliver it arises (Art 1164, CC).

There are three kinds of fruits referred here. Natural fruits are products of earth or animals without
human intervention. Industrial fruits are those produce by lands of any kind through cultivation or
labor. Civil fruits are revenues derived from a thing by operation of law or by reason of a juridical act,
such as rentals, interest, and certain corporate distributions like dividends.

The creditor shall have no real right to the fruits until it is delivered to him (Art. 1164, CC). There are two
kinds of right. A personal right is power demandable by one person of another – in obligations to do or
not to do. A real right is a power is a power over a specific thing and is binding on the whole world.

4
Fourth duty is the delivery of accessions and accessories. Accessories are those joined to or included
with the principal for the latter’s better use, perfection or enjoyment. Accessions are additions to or
improvements upon a thing.

Fifth duty is to pay damages in case of breach of the obligation by reason of delay, fraud, negligence or
contravention of the tenor of the obligation.

For obligations to deliver a specific thing, the debtor’s obligation are as follows: first, to take care of the
thing (1163); second, to deliver a thing of the quality intended by the parties taking into consideration
the purpose of the obligation and other circumstances (1246); third, to pay damages in case of breach
(1170). In this case, the creditor cannot demand a thing of superior quality; neither can the debtor
deliver a thing of inferior quality.

Rights if the Creditor

Now let’s go to the rights of the creditor. These are the available remedies to the creditor if the debtor
failed to perform his obligation to deliver specific thing.

First, the creditor has the right to compel delivery. This is also known as specific performance. Second is
to recover damages in case of breach, exclusive or in addition to specific performance (Art 1165; 1170
CC). Third is the right to fruits from the time the obligation to deliver arises (Art 1164 CC). Fourth is not
to be compelled to receive a different one, although of the same value as, or more valuable than that of
what is due (Art 1244).

In obligation to deliver a generic thing, these are the remedies available to the creditor. First, to ask that
the obligation be complied with (1165). Second, to ask that the obligation be complied with by a third
person at the expense of the debtor. This is also known as substitute performance. Third, to recover
damages in case of breach (1165). Fourth, not to be compelled to receive a different one, although of
the same value as, or more valuable than that which is due (1244)

Obligations To Do or Not To Do

In obligation to do, the duties of debtor are as follows:

1. To do it
2. To shoulder the cost of execution should he fail to do it
3. To undo what has been poorly done (1167)
4. To pay damages in case of breach (1170)

The right of the creditor are as follows:

1. To have the obligation executed at the cost of the debtor (1167)

2. To recover damages in case of breach (1170)

Note however the debtor cannot be compelled to perform his obligation. The ultimate sanction of civil
obligations is indemnification of damages. This would be tantamount to involuntary servitude.

In obligation not to do, the duties of debtor are as follows:

1. Not to do what should not be done

2. To shoulder cost of undoing what should not have been done (1168)

5
 3. To pay damages in case of breach (1170)

The remedies of the creditor are as follows:

1. To ask to undo what should not be done, at the debtor’s expense. (1168)
2. To recover damages, where it would be physically or legally impossible to undo what should not
have been done, because of: (a) the very nature of the act itself; (b) rights acquired by third
persons who acted in good faith; (c) when the effects of the acts prohibited are definite in
character and will not cease even if the thing prohibited be undone.