Module 3 - The Laws on Obligations and Contracts

Objectives:

1. Discuss the provisions on the Obligations and Contracts

2. Identify the different elements of obligations.
3. Classify the different sources of obligations
4. Acquainted with the different sources of damages or liabilities

Introduction

Obligations and Contracts are among the subjects

of the Civil Code of the Philipines. This subject is very
important considering that entering into different
contracts is almost a part and parcel of the operation
of the tourism and hospitality business. In the same
manner, one should understand that there are
obligations that must be faithfully observed as there
are obligations other than those arising from contract
which if violated may lead to legal controversy.
It must also be very clear that a violation of the
contract and civil obligations will hold that the person
at fault liable for damages only. Imprisonment is not a
penalty for civil cases.

This module aims to explain the basic principles of

the law on obligations and contracts, and to
understand how this law creates a relationship and the
effects in case of breach thereof.
Applicable Provisions of the Law on Obligations and Contracts

Article 1156. Obligation is a juridical

necessity, to give, to do, or not to do.
The obligation referred to in the above
article is a civil obligation, meaning,
only those obligations which if not
performed by one party, the other party may
go to court to enforce the obligation or
simply to hold such person to pay for
damages.
 Therefore, not all obligations are
enforceable before the courts. For example,
it is the obligation of students to study
hard but supposing they were not, can their
parents sue their children for not
studying? The answer is NO, because that
obligation is not a civil obligation.
What then are considered civil
obligations? Cuvil obligations are those
that arise from any of the following
sources:
1. Law
2. Contracts
3. Quasi-contracts
4. Acts or omissions punishable by law
(delicts)
Quasi-delict (ronnalyn report)

Elements of Obligation

1. Passive subject- is the person or party who has the duty to fulfill the obligation or
the prestation. Passive subject is sometimes called the obligor or debtor.
Example:
Mr. Y obliged himself to deliver 10 boxes of red wine to XXX Restaurant.
Mr Y is the obligor or the passive subject because he is the one who has the duty
to fulfill the obligation that is to deliver red wine.

2. Active subject - is the person who has the power to demand the fulfillment of the
obligation, he is sometime called the creditor or obligee.
Example:
Mr. Y obliged himself to deliver 10 boxes of red wine to
XXX restaurant owned by Cristine.
In this example the active subject/creditor/obligee is Cristine because in the case
of the failure of Mr. Y to perform his obligation, Cristine may demand from Mr. Y
to deliver the same.
3. Prestation- is the objectf the obligation either to give, to do, or not to do.

3. Juridical Tie- is the vinculum ( pl. Vincula, a unifyng bond) or that which binds the
debtor and the creditor.

Sources of Obligation
1.Law- Obligations arising from the law are not presumed only those obligations
expressly determined by law are demandable.
Examples:
1. Obligation to pay tax
2. Obligation to secure a licence to operate business from the local government unit.
3. Obligation to register the corporation before the Securities and Exchage
Commission.
4. Obligation to support the child

2. Contracts - Under article 1305, contract is a meeting of the minds whereby one
binds himself with respect to other to give something or render some services.
If a person entered into a contract, an obligation will arise. For example, in a
contract of sale, one of the parties has the obligation to tranfer ownership; in a
contract of loan one of the parties has the obligation to pay the indebtedness, in
a contract of transportation, the common carrier (public transportation) has the
obligation to carry passenger/goods in utmost diligence.

In the case of non-fulfillment of these obligation, the injured party can sue
the other before the court for breach of contract.

3. Quisi-Contract - This source of obligation is based on the principle of unjust

enrichment, meaning no one shall benefit at the expence of the other. Unlike
the contracts, there is no meeting of the minds between parties in this source of
obligation, however, equity and law dictates that the person benefited from the
act of the other has the obligation to reimburse or pay whatever expenses
incurred by the latter.

4. Acts or Omission Punishable by Law (Delicts) - Under the Revised Penal Code of
the Philipines, any person criminally liable is also civilly liable. The civil liability
pertains to the damages that must be paid arising from the offense/crime
committed.
5. Quisi-Delicts ( Culpa Aquiliana)- Under article 2176 of the Civil Code, whoever
by act or omission causes damage to another, there being fault or negligence, is
oblige to pay for the damages done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called quisi- delicts.

Requisites of Quisi-Delicts

To sustain a claim based on quisi-delicts, the following requisites must

concur:
a. Damage suffered by the plaintiff (the injured party)
b. Fault or negligence of defendant (the party at fault); and
c. Connection of cause and effect between the fault or negligence of defendant and
the damage incurred by the plaintiff;
d. There is no pre-existing contractual relation.
 If the foregoing requisites are present the person who suffered injury or
damage may go to court to file a case for damages based on quisi-delicts or
culpa aquiliana.

Owners and Managers of an establishment or Employer are liable for the

negligent act of their Employee based on Quisi-Delicts.

As a gereral rule, one is only responsible for his own act or omission.
Thus, a person will generally be held liable only for the wrong doings
committed by him and not by another.

However, one of the exceptions of the above rule is found on article 2180
(4) and (5) of the Civil Code.

Article 2180 paragraph (4) states that, “ The owners and managers of an
establihment or enterprises are responsible for damages caused by their
employees in the service of the branches in which the employee is
employed or on the occassion of their functions.”

Article 2180 paragraph (5) stipulates that, “Employers shall be liable for
the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not
engaged in any business or industry.”

Based on the foregoing, one may file a case against the employer or
manager as the case may be, although the latter is not the one who
committed the danage the another.

But before the employer may be held liable for the negligence of his
employee, the act or omission which caused damage must have occured
while an employee was in the actual performance of his assigned tasks or
duties.

The law makes the employer vicariously liable on the basis of the civil
law principle of pater familias ( a good father of the family) for failure to
exercise due care and vigilance over the acts of one’s subordinates to
prevent damage to another.
In the last paragraph of article 2180 of the Civil Code, the employer may
invoke the defense that they observed all the diligence of a good father to
prevent damage.

The liability of the owner or manager or the employer, however, is

relieved on a showing that he exercised the diligence of a good father of the
family in the selection and supervision of its employees. Once evidence is
 introduced showing that the empoyer exercised the required amount of
care in selecting his employees half of the employer’s burden is overcome.
The question of diligent supervision, however, depends on the
circumstances of employment.

Sources of Damages ( Liability)

Article 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.

The sources of damages under article 1170 of the new Civil Code are
Fraud, Negligence, Delay, and Contravention of the Tenor of the
Obligation.

1. Fraud - There are two kinds of fraud,

a. Incidental Fraud (Dolo Incidente). The fraud is committed during the performance
of the obligation and the remedy for this kind of fraud is to demand for damages.

b. Casual fraud ( Dolo Causante) The fraud is committed at the very beginning
of the transaction in order to induce or convince the other person to enter into a
contract. The remedy in this kind of fraud is to annul the contract plus damages.

2. Negligence - It is the omission of that diligence required by the nature of an

obligation and corresponds to the circumstances of person, time and place. One of
the obligations of the Obligor is to observe due diligence in the performance of his
oblogation, Hence, if the diligence rerquired was nor observed there may liability.

Two kinds of Diligence

a. Diligence of a good father of a family or the ordinary didligance. This is the kind of
diligance that must be observed by the obligor in general.
b. Utmost diligence or extraordinary diligence. This is the highest degree of care. This
must be observed only when the law so provides or when the parties so agree.
Under the law, a common carrier must observe extraordinary diligence in
vigilance over the goods and for the safety of the passenger transported by
them.

3. Delay - the delay referred herein is legal delay. This means that when the maturity
date within which to perform the obligation was not performed, the creditor should
demand its fulfillment in order for the debtor to be considered in delay.
The general rule therefore is that “ No Demand, No delay.” As a
consequence, if the creditor did not demand for the performance of the
obligation, the creditor cannot got to court to sue the debtor. Hence demand is
necessary.
Ways to Demand the Fulfillment of the Obligation
a. Judicial Demand - The creditor goes to court to fix the period within which the
debtor performs the obligation.
b. Extra- Judicial Demand - The creditor writes a demand letter or demand orally.
Exceptions to the rule “ No Demand, No Delay”
There are instances however where the demand is not necessary to
consider the debtor in delay. Thus, in any of the following instances, the creditor
may sue right away the debtor in case of none fulfilment of the obligation on the
due date:
a. When the law so provide;
b. When the obligation so provides;
c. When time is the essence;
d. When the demand would useless

4. Contravention of the Tenor of the Obligation. It is the failure to perform that

which is incumbent upon him. The non-performance or failure of the party to fulfil
his duty is liable for damages.

Different kinds of Damages

If there are injuries committed either due to wrongful or negligent act or if a

certain obligation or contract has been violated, the party so injured shall be
entitled to any of the following damages.
1. Actual or Compensatory Damages
2. Moral Damages
3. Nominal Damages
4. Temperate or moderate Damages
5. Liquidated Damages
6. Exemplary or corrective Damages

Different Kinds of Obligation

1. Pure Obligation
2. Conditional Obligation
3. Obligation with a period
4. Joint and Solidary Obligation
5. Alternative Obligation
6. Facultative Obligation

1. Pure Obligation. The obligation is not subject to a period or condition and is

demandable at once.
Example:
Robie promised to give a chef hat to Anthony. The obligation of Robie in this
example is immediately demandable because his obligation is not subject to any
condition or period.
 2. Conditional Obligation. The obligation is subject to a condition, it is demandable
upon the happening of the condition.
Example:
Morris will give a set of kitchen utensils to Alex, if the latter will be able to
finish his culinary course. This is a suspensive conditional obligation. I Alex is able
to finish his course, he can now demand from Morris the set of kitchen utinsels.
3. Obligation with a Period. A period is an event which will certainly happen Thus,
the happening or the arrival of the period gives , rise to an obligation or
extinguishment of it.
Example:
Leonard promised to give Lizel a roudtrip to Hong Kong on December 25, 2020.
Lizel may demand the ticket on December 25, 2020.

4. Joint Obligation. There are several debtors and one or more creditors, but each
debtors is only liable for his share of the debt and each of the creditors to his share
of credit. It is always presumed that the obligation is Joint.

Example:
X,Y, and Z need 90,000.00 pesos for their business. Hence, they entered into
a contract of loan with their friends A,B, and C. In the contract of loan, X, and Z
agreethat their obligation is joint to be paid on April 15, 2015.
On the maturity date, can A compel X to pay the whole obligation alone?
No, since the obligation is joint, X is only liable to his share in the debt which is
30,000 pesos, and A is only entitled to his share in the credit which is 30,000
pesos.

5. Solidary Obligation. In this type of obligation, each of the debtors is liable for the
entire obligation and each of the creditors is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. The liability is solidary only
when,
1. the obligation expressly so states,
2. The law so provides or when
3. The nature of the obligation so requires.

Just like obligation, there are several debtors and creditors in solidary
obligation. However, in solidary debtors to perform the entire obligation.
Consequently, the one who performed the entire obligation has the right to
collect the share of his co-debtors.
There are however, words to signify that the obligation is solidary, such as “
in solidum, joint and severally, solidary.” If there are words like these, then the
obligation is solidary.

Contract
 Article 1305 states that “ Contract is a meeting of the minds between
two persons, whereby one binds himself, with respect to the other, to give
something or render some service.”
As previous discussed, contract is one of the sources of obligation; hence, if
the obligation in the contract was not performed, on of the parties may have the
right to sue the other.
The definition clearly states that contract is actually the meeting of the
minds. From the moment the parties concur or agree to the object, price or the
the terms and conditions, the contract is perfected except real contracts.
Contrary to some beliefs, the contract is not the paper. The contract as stated is
the meeting of the minds, while the paper where the contract was written is
called instrument. The instrument is as a general rule the evidence of the
contract.

Formalities of Contract

As to the formalities , generally contracts shall be obligatory in whaever form.

Contract may be made orally or in writting as long the three essential requisites
are present.
However, the above rule admits certain exceptions, namely;

a. When the law that they be in some particular form (writing)in order to make them
valid and enfroceable ( the so-callrd solemn contract)
Example:
Facts: The donation of immovable property, the law ( Article 749) requires
that the deed of donation must be in public instrument( meaning it must be
in writing and notarized) in
order that the donation may be valid.

The donation of movables worth more than P 5,000.00 must be in writing;

otherwise, the donation shall be void.
In a contract of Partnership, when one of the partners contributes
immovable property, the contract must be in public instrument; otherwise the
contract of partnership is void.

In the sale of a piece of land or any interest therein made through an agent,
the authority of the agent must be in writing, otherwise the sale shall be void.

b. When the law requires to be proved by some writing ( memorandum) of

its terms, as in those covered by the Statute of Frauds, in Article 1403 (2) of the
Civil Code.
Their existence not being provable by the mere oral testimony ( unless
wholly or party executed), these contracts are exceptional in requiring a writing
embodying the terms thereof for the enforceability by action in court.
 Stages of Contract
The stages of contract will help the student and industry practitioner to
prepare of draft a contract. In drafting a contract, just remember the essential
requisites.
In the contract is in writing, the parties may use their vernacular language.
Any dialect can be used as long as both parties understand the same.

In general, contracts undergo three distinct stages: negotiation, perfection

or birth; and consummation.
1. Negotiation Stage or the Generation Stage. This is the first step. It begins from the
time prospective contracting parties manifest their interest in the

contract and ends at the moment of agreement of the parties. In this stage,
the parties will bargain or negotiate as to the terms and conditions. No
meeting the minds yet. Hence, there is still no contract at this stage.
2. Perfection or Birth of the Contract takes place when the parties agree upon the
essential elements of the contract.
3. After the bargaining or negotiation, the parties shall determine whether to accept,
the terms and conditions. Once it is accepted then there is a contract (there is
already the meeting of the minds). This is a stage where the contract is perfected,
and therefore, both parties must comply.
4. Consummation/Termination. This is the stage where the contract is ended
because the parties have fulfilled with their obligations.
After paying the amount and on the said date everything was served and all
the obligations have been fulfilled then the contract is terminated.
( Consummation stage)

Characteristics of Contract

1. Mutuality of Contract. The validity or performance or compliance of which cannot

be left to the will of only one of the parties.
The ultimate purpose of the mutuality principle is, thus, to nullify a contract
containing a condition which takes its fulfillment or pre-termination dependent
exclusively upon the uncontrolled will of one of the contracting parties.
2. Autonomy of Contract. The contracting parties may establish such stipulation,
clauses, terms, and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
3. Obligatory Force. Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be
in keeping with good faith, usage and law.
 Once the contract is perfected, the parties must faithfully observed the
terms and conditions established. Otherwise, a cause of action for breach of
contract will arise.

4. Relativity of Contract. This means that the contract entered into by the parties are
binding only between them, their heirs and assigns, except in case where the rights
and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable behond the value of the
property he received from the decedent.

Defected Contracts and their Effects

1. Rescissible Contracts. Contractc which are rescissible are valid contracts

having all the essential requisites of a contract, but by reason of injury or
damage caused to either of the parties therein or to third persons are
considered defective and, thus, may be rescinded.

Example: Those contracts entered into by the debtor to another person is fraud
of his creditors when the said creditor cannot in any other manner, collect the
claims due them. The creditor can file an action to rescind the contract entered
in fraud of the former

One the conttract is rescinded, it is terminated and the parties will return to
their original position as if there was no contract entered into. Or if the property
or the object of the contract has been deposed, the value thereof shall be
returned.

2. Voidable contracts. Voidable means those contracts which are valid until annuled.
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.
These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification.
3. Unenforceable Contract. A Contract which cannot be enforced unless ratified, due
the the following reasons:
a. The contract was entered into the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his powers.
b. The contract did not comply with the statute of frauds. In the Statute of Frauds,
some transactions must be in writing to effect its enforceability such as the sale of
real property, sale of goods, chattel or things if the price is not less than PhP 500.00
an agreement to lease(rent) for more than one year. If these contracts were not in
writing, the party may not sue the one who violated it before the court.Both parties
are incapable of giving consent.
4. Void and Inexistent Contract. It is equivalent to nothing and is absolutely wanting
in civil effects. It cannot be validated either by ratification or prescription. But,
although a void contract has no legal effects even if no action is taken to set it aside,
when any of its terms have been performed, in action to declare its terms have been
performed, an action to declare its inxexistence is necessary to allow restitution of
what has been given under it.

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, and public policy;
2. Those which are absolutely simulated or fictitious;
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; and
7. Those expressly prohibited or declare void by law.