Far Eastern University Institute of

Accounts, Business & Finance

Law on
Obligations and
Contracts in the
Philippines

(An Overview)

By: Atty. Christine P. Carpio-

Aldeguer
 INTRODUCTION
To begin, the Law on Obligations and
Contracts is defined as s a kind of positive law
which deals with the nature and sources of
obligations as well as the rights and duties arising
from agreements in contracts. (1)
Before discussing the particular concepts on
the Law on Obligations and Contracts, it is
important to know that in every obligation, one
must always observe the general principles on
human relations, to wit:
“ART. 19. Every person must, in the exercise of
his rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.(2)

Failure to observe the above principle makes a

person civilly liable.

Basic provisions on Law on Obligations and

Contracts based on the Civil Code of the
Philippines will be tackled in this paper. Cases and
applications
related to business will also be discussed.
 OBLIGATION

The Law
Article 1156. An obligation is a juridical
necessity to give, to do or not to do.

Discussion of the Law

An obligation is a legal duty, however created,
the violation of which may become the basis of an
action of law. (3)

De Leon, Law on Obhgations and Contracts, 1995

Revised Edition, Rex Bookstore.
page 14.Crvil Code of the Philippines.

Every obligation has four definite elements,

without which no obligation can exist, to wit: (1)
an active subject, also known as the obligee or
creditor, who has the power to demand the
prestation; (2) a passive subject, also known as the
debtor, who is bound to perform the prestation; (3)
an object or the prestation, which is an object or
undertaking to give, to do or not to do; (4) The
juridical or legal te, the vinculum which binds the
contracting parties. The juridical tie or vinculum is
based on the sources of obligation arising from
either the law or contract. Law is defined as a rule
of conduct, just and obligatory, promulgated by
the legitimate authority, for common observance
and benefit. ‘ On the other hand, contract is
defined as “meeting of minds between two persons
whereby one binds himself, with respect to the
other, to give something or render service.”(5)

It is important to identify the prestation in a

certain obligation. Once the prestation is
identified, you can determine who the passive
subject is whom the active subject can demand
fulfillment of the obligation.
A contract of sale and a contract of loan are
examples of prestations to give; A contract of labor
or a service contract is an example of a prestation
to do.

To illustrate:
In an obligation to pay taxes, the passive
subject is the taxpayer, the active subject is the
government through the Burea u of Internal
Revenue, the prestation is “to give,” specifically to
pay taxes, the juridical tie is a source of obligation
arising from law.

In an obligation to give Avon Products, the

passive subject is the seller, the active subject is
the buyer, the pre station is “to give,” specifically
to deliver the Avon Products, and the juridical tie is
a source of obligation ansing from contract.

3. The Philippine Legal Encyclopedia. by Jose

Agaton R Sibal. 1986 edition, page 635.
4.Hector De Leon, Law on Obhyations and
Contracts, 1996 Revised Ldition, Rex Bookstore.
page 5.

__________________________________________________________
______
5. Article 1305, Civil Code of the Philippines.
OBLIGATIONS ARISING FROM LAW
 _______________ BIR
TAXPAYERS

__________________
SELLER BUYER

The Law
Article. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punishable by law; and
(5) Quasi-delicts.

Discussion of the Law

There are only two (2) sources of obligations,
namely: (1) law; and (2) contracts because
obligations arising from quasi-contracts, crimes
(No. 4, Article 1157, Civil Code of the Philippines),
and quasi-delicts are really imposed by law. (Leung
Ben vs. O'Brien, 38 Phil. 182).

A contract is a “meeting of the minds between two

persons whereby one binds himself, with respect
to the other, to give something or to render some
service.”
Civil Code of the Philippines
Quasi-contract refers to a lawful, voluntary and
unilateral act based on the maxim that no one shall
unjustly enrich himself at the expense of another. *
The two common forms of quasi-contract are: (1)
Solutio indebiti, which is payment by mistake; (2)
Negotiorum gestio, which takes place when a
person without the consent of the owner, assumes
the management of an abandoned business; (3)
Article 2169 (NCC) - Government undertaking to do
necessary work; and (4) Artcle 2175 (NCC) -
Constrained to pay taxes of another.

Civil obligations arising from criminal offenses

are governed: (1) by the provisions of the Revised
Penal Code (i.e. restitution, reparation of the
damage caused, indemnification of consequential
damages; (2) by the provisions of the Civil Code on
damages (i.e. moral, exemplary and nominal
damages).

Quasi-delict (also called culpa aquiliana) is any

act or omission which causes damage to another,
there being fault or negligence, and there being no
preexisting contractual relation between the
parties.(9)

The following are some who may be liable for

damages ansing from quasi delict:

✓ The owners and managers of an establishment

with respect to damage caused by their employees
in the service of their branches in which the latter
are employed or on the occasion of their function.

✓ Employers, with respect to damages caused by

their employees or household helpers acting within
the scope of their assigned tasks.
 In order to escape liablity on the ground of quasi-
delict, one must prove diligence of a good father of
a family to
prevent the damage. (10)

__________________________________________
_____
Arnele 1305, Civil Code of the Philippines.
Refer to Anucle 2142, Civil Code of the Philippines.
Phihppine Legal Encyclopedia, by Jose Agaton R.
Sibal. page 809. See Article 2180, Civil Code of the
Philippines

Application of the Law

 Case: Anabel was crossing the street coming from
the hotel to the nearby shopping mall. She was
accidentally hit by a hotel car driven by Leandro, a
dnver employed by the hotel. Can Anabel sue to
driver? Can she sue the hotel?

Legal Opinion: Yes, Anabel may sue the driver and

the hotel for damages on the ground of culpa-
aquiliana. The pedestrian may also sue the driver
and the owner of the hotel for damages for
reckless imprudence ansing from a crime under the
Revised Penal Code.
Nature and Effects of Obligations The following
are the rights available to a creditor in obligations
to give:

If it is a determinate thing:

1. To compel specific performance

2. To recover damages in case of breach
3. Acquires personal right to the fruits of the thing
from the time the obligation to deliver arises
4. Acquires real right over the thing once the thing
has been delivered to him
5. Rights over the accessories and accessions.
If it is a generic thing:

1. To ask for performance of the obligation 2. To

ask that the obligation be complied with at the
expense of the debtor.

A determinate thing is one that is particularly

designated or physically segregated from all
others of the same class.'' A generic thing is one
whose determination is confined to that of its
nature, to the genus to which it pertains such asa
horse, a chair. '? A contract of sale uses a
determinate thing, while a contract of loan uses a
generic thing.

The following are the obligations of the passive

subject in:

__________________________________________
___
1.” Article 1460, Civil Code of the Philippines 2 __
De Leon +s. Soriano, 87 Phil. 196.
a) Obligations to give a determinate thing:
1. To deliver the thing which he has obligated
himself to give.
2. To take care of the thing with the proper
diligence of a good father of a family.
3. To deliver all its accessories and accessions.
4. To pay damages in case of breach of
obligation.

b) Obligations to do:
1. If the debtor fails to do what he is obliged to
do, it will be done at his expense.
2. If the work is done in contravention of the
tenor of the obligation, it will be re-done at
debtor's expense.
3. If the work is poorly done, it will be re-done at
debtor's expense.

In obligations to do, you will note that you

cannot compel the passive subject to perform,
otherwise, it will constitute involuntary servitude
which is in violation of the Constitution. However,
the passive subject may be held liable for
damages.

The sources of liability (for damages) of a party

in an obligation are as follows: (1) Fraud. The fraud
is incidental fraud (dolo incidente) which is fraud
incident to the performance of an obligation. In
fraud, there is an intent to evade the normal
fulfillment of the obligation and to cause damage.

__________________________________________
____ Article 1168, Civil Code of the Phihppines
Arucle 1163, Civil Code of the Philippines.
Article 1166, Civil Code of the Philippines.
Article 1170, Civil Code of the Philippines.
Article 1167, Civil Code of the Philippines. e+ Refer
to Articles 2199-2201 of the Civil Code of the
Philippines.

The fraud is causal (dolo causante) or when fraud

used to induce a person to agree to a contract.
This kind of fraud is a ground for annulment of the
contract plus damages;

(2) Negligence. The negligence referred here, in

the case of contracts (i.e. common carrier) is culpa
contractual, 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.

Application of the Law

Case: Dr. Felipa Pablo, an associate professor in

the University of the Philippines, and a research
grantee of the Philippine Atomic Energy Agency
was invited to take part at a meeting of the
Department of Research and Isotopes of the Joint
FAO-IAEA Division of Atomic Energy tn Food and
Agriculture of the United Nations in Ispra, Italy. To
fulfill this engagement, Dr. Pablo booked passage
with Alitalia, an Italian airline company. She
arrived in Milan on the day before the meeting in
accordance with the itinerary and time table set
for her by Alitalia. She was however told by the
Alitalia personnel there at Milan that her luggage
was “delayed inasmuch as the same xxx (was) in
one of the succeeding flights from Rome to Milan.”

Her luggage consisted of two (2) suitcases: one

contained her clothing and other personal items;
the other, her scientific papers, slides and other
research matenal. But the other flights arriving
from Rome did not have her baggage on board.

Feeling desperate, she went to Rome to try to

locate her bags herself. There, she inquired about
her suitcases in the domestic and international
airports, and filled out the forms prescnbed by
Alitalia for people in her predicament. However,
her baggage could not be found. Completely
distraught and discouraged, she returned to
Manila without attending the meeting in Ispra,
Italy.

As it turned out, Dr. Pablo's suitcases were,in

fact.located and forwarded to Ispra, Italy, but only
on the day after her scheduled appearance and
participation at the U.N. meeting there. Of
course,Dr. Pablo was no longer there to accept
delivery; she was already on her way home to
Manila. And for some reason. the suitcases were
not actually restored to Prof. Pablo by Alitalia until
eleven (11) months later.

Is Dr. Pablo entitled to damages for the negligence

committed by Alitalia?

Legal Opinion: Yes, Prof. Pablo should be entitled

to nominal damages. Apart from this, there can be
no doubt that Dr. Pablo underwent profound
distress and anxiety, which gradually turned to
panic and finally despair, from the trme she
learned that her suitcases were missing up to the
tme when, having gone to Rome. she finally
realized that she would no longer be able to take
part in the conference. As she herself put it, she
“was really shocked and distraught and confused.”
Certainly, the compensation for the injury suffered
by Or. Pablo cannot under the circumstances be
restricted to that prescribed by the Warsaw
Convention for delay in the transport of baggage.
'*

(3) Delay (Mora). The debtor can be held liable for

the delay or default in the fulfillment of his
obligation only after the creditor has made a
demand, judicial or extrajudicial, on the debtor,
except:
 ✓When the law expressly provides that demand is
not necessary:

✓When the contract expressly stipulates that

demand is not necessary;

✓When time is of the essence;

✓When demand would be useless.

In a contract of loan, if a particular rate of interest

has been expressly stipulated by the parties, such
stipulated interest shall be apphed. If the exact
rate of interest is not mentioned, the legal rate
shall be payable (which is 12% per annum under
Sec. 1 of the Usury Law).

It is only in contracts of loan, with or without

secunty, that interest may be Stipulated and
demanded. This interest by way of compensation,
must be in writing, otherwise, no interest by way
of compensation may be collected.
 The debtor in delay is also liable to pay legal
interest by way of indemnity for damages, which
interest may be agreed upon, and in the absence
of any stipulation, the legal interest shall be 12%
per annum.

In all cases, interest due shall earn legal interest

from the time it is judicially demanded although
the obligation may be silent upon this point.

(4) Contravention of the tenor of the obligation.

Performance in contravention of the tenor or terms
of the obligations means where performance is
contrary to what is
agreed upon or stipulated thus making the debtor
liable for damages.

__________________________________________________________
__

Alitalia vs. Intermediate Appellate Court. G

R. No. 71929, December 4, 1990. 2.
Article 1170, Civil Code of the Philippines.
 Application of the Law
Case: This is an action for damages for alleged
breach of contract. Nicolas L. Cuenca, then
Commissioner for Public Highways of the Republic
of the Philippines filed a case against Northwest
Airlines, Inc. The facts reveal that Mr. Cuenca
boarded Northwest Airlines in Manila with a first
class ticket to Tokyo. Upon arrival at Okinawa, Mr.
Cuenca was transferred to the tourist class
compartment. Although he revealed that he was
traveling in his official capacity as official delegate
of the Republic to a conference in Tokyo, an agent
of Northwest Airlines rudely compelled him, in the
presence of other passengers, to move, over his
objection, to the tounst class, under threat of
otherwise leaving him in Okinawa. In order to
reach the conference on time. respondent had no
choice but to obey. Is Mr. Cuenca entitled to
damages for culpa contractual?

Legal Opinion: Yes, Mr. Cuenca is entitled to

nominal damages. At any rate, considering that
petitioner's agent had acted in a wanton, reckless
and oppressive manner, said award may, also, be
considered as one for exemplary damages. 7! Case:
Mr. Rafael Carrascoso is a civil engineer who was a
member of a group of 48 Filipino pilgrims that left
Manila for Lourdes on March 30, 1958. On March
28. 1958, Air France, through tts authorized agent.
Philippine Air Lines, Inc., issued to Mr. Carrascoso
a ‘first class’ round trip airplane ticket from Manila
to Rome. From Manila to Bangkok, Mr. Carrascoso
traveled in ‘first class’, but at Bangkok, the
Manager of the Air France airline forced him to
vacate the ‘first class’ seat that he was occupying
because there was a ‘white man’, who, the
Manager alleged. had a ‘better nght to the seat.’
When asked to vacate his ‘first class’ seat, Mr.
Carrascoso, as was to be expected, refused. A
commotion ensued but Mr. Carrascoso reluctantly
gave his ‘first class’ seat in the plane.”

In its defense, Air France alleged that although

Mr. Carrascoso was issued a first-class ticket, it
was no guarantee that the passenger to whom the
same had been tssued would be accommodated in
the first-class compartment. for the passenger has
yet to make arrangements upon arrival at every
station for the necessary first class reservation.

Is Mr. Carrascoso entitled to the ‘first-class’ seat?

Is Mr. Carrascoso entitled to damages?

Legal Opinion: Mr. Carrascoso should have been

entitled to the ‘first-class’ seat and must not have
been forced by the Airine Manager to vacate his
seat. There was a contract to furnish Mr.
Carrascoso a first class passage. The reservation
for a ‘first class' accommodation for him was
confirmed. Hence, said contract was breached
when Air France failed to furnish first class
transportation. As a rule, a written document
speaks a uniform language. If only to achteve
stability in the relations between passenger and
air carrer, adherence to the ticket so issued is
desirable.

Lastly. passengers do not contract merely for

transportation. They have to be treated by the
carrier's employees with kindness, respect,
courtesy and due consideration. They are entitled
to be protected against personal misconduct,
injurious 2".

_________________________________________________________

Northwest Airlines, Inc. va. Cuenca, GR No. L-

22425, August 31, 1965.
language, indignittes and abuses from such
employees. Any rude or discourteous conduct on
the part of employees towards a passenger gives
the latter an action for damages against the
carrier. There was bad faith when the employee of
Air France forced Mr. Carrascoso fo leave his first
class accommodaton berth “after he was already
seated" and to take a seat in the tourist class, by
reason of which he suffered inconvenience,
embarrassmentand humilation, thereby causing
him mental anguish, serious anxiety, wounded
feelings and social humiliation, resulting in moral
damages. In addition, exemplary damages are well
awarded. The Civil Code gives the Court ample
power to grant exemplary damages — in contracts
and quasrcontracts. The only condition is that
defendant should have “acted in a wanton,
fraudulent, reckless, oppressive, or malevolent
manner.” The manner in which Mr. Carrascoso was
ejected
from his first class seat fits into this legal precept.
77

Rule when a determinate thing is lost through a

fortuitous event:
The obligation is extinguished and the debtor is
not liable, except:
a) When to object is generic
b) When the debtors incurs in delay c) When the
law or contract expressly provides that the
obligation will not be
extinguished.

Effect when goods are lost through a fortuitous

event in a contract of sale:

✓ Before perfection of a contract — the seller bears

the loss.

✓ After perfection but before delivery — the seller

bears the loss as he remains to be the owner.
There is no transfer of ownership until there is
delivery of the goods. In case down payment has
been made before delivery, the buyer may recover
the price. Since a contract of sale is reciprocal in
nature, once the obligation to deliver is
extinguished, the correlative obligation to pay the
price
must also be extinguished. This is also based on
equity and justice and in line with the principle of
“res perit domino”
✓ After the delivery buyer bears the loss as he
now becomes the owner

_________________________________________________________

Aur France vs. Carrascoso, G R. No. L 21438, September

28, 1966, 18 SCRA 155,

Remedies of the Creditor against his debtor:

1. Sue the debtor for collection;

2. Attachment of debtor's property, real or
personal, except those which are exempt from
execution;
3. Exercise all the rights and actions which the
debtor may have against third persons, except
those which are inherently personal to the debtor:
4. To impugn or contest acts of debtor which are
intended to defraud his creditor

(Action pauliana);
Transmissibility of rights: Subject to such laws, all
rights acquired by virtue of an obligation are
transmissible. Heirs shall be liable only to the
extent of what they stand to inherit. Exceptions: 1)
When the law prohibits transmission of rights 2)
When the contract stipulates no transmission of
rights 3) When the nature of the obligation does
not permit transmission of rights, as when the
obligation is personal in nature.

The Law Classification of Obligations

(1) Primary classification of obligations under the

Civil Code:

(a) Pure and conditional obligations (Articles

1179-1192);
(b) Obligations with a penod (Articles 1193-
1198):
(c) Alternative (1199-1205) and facultative
obligations (Article 1206);
(d) Joint and solidary obligatons (Articles 1207-
1222);
(e) Divisible and indivisible obligations (Articles
1223-1225); and
(f) Obligations with a penal clause (Articles 1226-
1230)
(2) Secondary classification of obligations under
the Civil Code:

(a) Unilateral and bilateral obligations (Articles

1169-1191);
(b) Real and personal obligations (Articles 1163-
1168);
(c) Civil and natural obligations (Articles 1423);
and

(d) Legal, conventional, and penal obligations

(Articles 1157, 1159, 1161)

Discussion of the Law

A pure obligation is one which is not subject to

any condition and no specific date is mentioned for
its fulfillment and is, therefore, immediately
demandable. Example: Ariel promises to pay
Brenda P1,000.

A conditional obligation is one whose

consequences are subject in one way or another to
the fulfillment of a condition. Example: Carol
promises to pay B P1,000.00 if Darren remains to
become an outstanding employee of the hotel for
the month of May. A condition is defined as future
and uncertain event which may or may not happen.

The following are the different kinds of condition:

✓SUSPENSIVE CONDITION -the happening of which

gives rise to an obligation

✓ RESOLUTORY CONDITION — the happening of

which extinguishes the obligation

✓ POTESTATIVE CONDITION -where the fulfillment

depends upon one’s will (either the debtor,
creditor or a third person)

✓ CASUAL CONDITION — when the fulfillment of the

condition depends upon chance

✓ MIXED CONDITION — when the fulfillment of the

condition depends pa rtty upon one's will and
partly upon chance.
✓ IMPOSSIBLE CONDITON — that which is not
capable of fulfillment because it is contrary to the
law of nature or contrary to law, morals, public
order or public policy.

An obligation with a period is one whose

consequences are subject in one way or another to
the expiration of the said period or term. 7?
Example: Alfredo (the owner of the hotel) promises
to pay Bntney (employee of the hotel) P5,000.00
on or before December 30, 2007 as part of the staff
incentive program. A judicial period is a period

_________________________________________________________

Phihppine Legal Encyclopedia, by Jose Agaton R

Sibal. page 639.

which is fixed by the courts. The courts are

empowered to fix the duration of a period in an
obligation in the following instances: 1. If the
debtor binds himself when his means permit him to
do so. 2. If the obligation does not fix a penod but
it can be inferred that a period was intended by
the parties.

JOINT OBLIGATIONS are those where, although

there concur two or more creditors and debtors, in
one and the same obligation, there is no right to
demand nor a duty on the part of each of the latter
to render entire compliance of the entire
obligation. Solidary obligations are those in which
concur several debtors or creditors or both, and
where each creditor has the right to demand, and
each debtor is bound to perform, in its entirety,
the prestation constituting the object of the
obligaton. The term “joint and several” used in
contracts is applied to liability in an obligation
made by several obligors when the obligee may at
his option hold one or all liable together. However,
this situation arises only when the obligation
expressly so states or when the law or nature of
the obligation requires solidarity. 74

The contract is presumed to be joint unless the

obligation expressly states for its solidarity; or
when the law expressly provides for its solidarity,
The term ‘joint and several" used in contracts is
applied to liability in an obligation made by several
obligors when the obligee may at his option hold
one or all liable together. Situations where the law
expressly states solidarity are as follows:

✓ When by any wrongful act or omission caused by

a partner acting in the course of the business of
the partnership against a third person, the
partnership and the partner so acting is liable.

_________________________________________________________

Article 1207, Civil Code of the Philippines.

Article 1882, Civil Code of the Philippines

✓ When a partner acting within the scope of his

authority receives money and misapplies it, or
misapplies the money received by the partnership,
the partnership is solidarily liable with the partner.

✓ Solidary liability of the directors and trustees of

corporation who are guilty of gross negligence or
bad faith in directing the affairs of the corporation.
✓ Solidary liability of a labor-only contracting and
the indirect employer.

Application of the Law

Case: Mr. Danny Ramos, owner of Danny's Grill (a

fine dining restaurant), enter ed into a contract
with Chona Romulo and Michael Aldeguer
(propnetors 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, 2007, Chona Romulo and Michael Aldeguer
shall be liable to Dan Ramos, joint and severally,
for damages in the total amount of P100,000.00.”

CM Wine Company was not able to fulfill their

obligation to Mr. Ramos. For three days that the
wines were not delivered, many complaints arose
from dining customers for wines ordered that were
out of stock. Can Mr. Ramos only hold Mr. Aldeguer
liable for damages?

Legal Opinion: In this situation, Mr. Danny Ramos

may at his option hold either Chona Romulo or
Michael Aldeguer, or both liable when filing a case
in court for damages incurred.

An obligation with a penal clause is an obligation

which contains an accessory obligation imposing
upon the obligor added burdens or which operates
as a previously stipulated indemnity, for the
purpose of securing the performance of the
principal obligation. [It substitutes the indemnity
for damages and, therefore, it does away with
proof of damages suffered in case of breach of the
obligation. 7° Obligations with a penal

clause may be seen from contracts of loan with

mortgage, and service contracts.

_________________________________________________________
Article 1883. Civil Code of the Philppines. 7
Section 31. Corporation Code of the Philippines.
Labor Code of the Philippines.
Handbook on Obligations and Contracts, by Jose N
Nolledo, Revised Ldition, page 138.