FAR EASTERN UNIVERSITY

LAW ON HOSPITALITY & TOURISM

February 23, 2019 ║ Atty. Edwardo D. Parungao, CPA, MBA

OBLIGATIONS AND CONTRACTS

OBLIGATIONS

Definition:

• A juridical necessity to give, to do, or not to do. (Article 1156, Civil Code)
• A legal relation established between one party and another whereby the latter is bound to
the fulfillment of a prestation which the former may demand of him.

Elements or Requisites of an Obligation:

1. Active Subject – one who can demand the fulfillment of the prestation; he who in his
favor, the obligation is constituted or created. He is called the obligee/creditor.
2. Passive Subject – one bound to perform the prestation. He is called the obligor/debtor.

• Obligations of the debtor/obligor in obligations to give specific or determinate thing:

a. To deliver the thing which he has obliged to deliver.
b. To take of the thing with the proper diligence of a good father of a family.
c. To deliver all its accessions and accessories.
d. To pay damages in case of breach of obligation.
• Obligations of the debtor/obligor in obligations to give generic or indeterminate
thing:
a. To deliver the thing of the quality intended by the parties, taking into
account the purpose of the obligation, intent of the parties and other
circumstances; and
b. To pay damages in case of breach of obligation.
• Obligations of the debtor/obligor in obligations to do:
a. To do it;
b. To shoulder the cost if someone else does it;
c. To undo what has been poorly done;
• To pay damages in case of breach of obligation Obligations of the debtor/obligor
in obligations NOT to do:
a. Not to do what should NOT be done;
b. To shoulder the cost to UNDO what should not have been done;
c. To pay damages in case of breach of obligation

3. Juridical Tie or Vinculum Juris – the efficient cause which creates the relation between
the obligor/debtor and obligee/creditor and is established by:
a. Law;

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 b. Bilateral Acts (Contracts giving rise to the obligations stipulated therein); and
c. Unilateral Acts (Crimes & Quasi-Delicts).
4. Prestation/ Object – the particular conduct of the debtor which may consist in giving,
doing, or not doing something which constitutes the object of the obligation.

Example:

Under a building contract, X bound himself to build a house for Y for P1,000,000.

Here, X is the passive subject, Y is the active subject, the building of the house is the object
or prestation, and the agreement or contract, which is the source of the obligation, is the
juridical tie.

Sources of obligations:

Obligations arise from:

1. Law – when they are imposed by law itself.

Examples: (1) Obligation to pay taxes; (2) obligation to support one’s family.

2. Contracts – when the arise from the stipulation of the parties.

Example: The obligation to repay a loan or indebtedness by virtue of an agreement.

3. Quasi-contracts – when they arise from lawful, voluntary and unilateral acts which are
enforceable to the end that no one shall be unjustly enriched or benefited at the expense
of another.
Example: The obligation to return money paid by mistake or which is not due.

4. Crimes or acts or omissions punished by law – when they arise from civil liability which
is the consequence of a criminal offense.
Examples: (1) The obligation of thief to return the car stolen by him; (2) the duty of a killer
to indemnify the heirs of the victim.

5. Quasi-delicts or torts – when they arise from damage caused to another through an act
or omission, there being fault or negligence, but no contractual relation exists between the
parties.
Example: The obligation of the head of a family that lives in a building or part thereof to
answer for damages caused by things thrown or falling from the same.

Sources of liability (for damages) of a party in an obligation:

1. Fraud (Dolo)

• It is the deliberate or intentional evasion of the normal fulfillment of an obligation.

• It implies some kind of malice or dishonesty and cannot cover cases of mistake and errors
in judgment made in good faith. In such case obligor can be held liable for damages.
• Kinds of Fraud:

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 a. Incidental fraud (Dolo incidente) – fraud committed in the performance of an
obligation already existing because of contract.
b. Causal fraud (Dolo causante) – fraud employed in the execution of a contract
which vitiates consent.

2. Negligence (Fault or Culpa)

• It is any voluntary act or omission, there being no bad faith or malice, which prevents the
normal fulfillment of an obligation.
• Kinds of negligence:
a. Contractual negligence (culpa contractual) – negligence in contracts resulting
in breach. It makes the debtor liable for damages in view of his negligence in the
fulfillment of a pre-existing obligation.
b. Civil negligence (culpa aquiliana) – negligence which by itself is the source of
an obligation between the parties not so related before any pre-existing contract.
It is also called tort or quasi-delict.
c. Criminal negligence (culpa criminal) – negligence resulting in the commission
of a crime.

3. Delay (Mora)

• Failure to perform an obligation on time which failure constitutes a breach of the obligation.
• Kinds of delay:
a. Mora solvendi – delay on the part of the debtor to fulfill his obligation (to give or
to do).
b. Mora accepiendi – delay on the part of the creditor to accept the performance of
the obligation.
c. Compensation morae – delay of the obligors in reciprocal obligations (like in
sale).
• General Rule: No demand, no delay.
• When is demand not necessary:
a. When the obligation so provides.
b. When the law so provides.
c. When time is of the essence.
d. When demand would be useless.
e. When there is performance by a party in reciprocal obligations.

4. Contravention of the tenor (terms) of the obligation

• This is the violation of the terms and conditions stipulated in the obligation. The
contravention must not be due to a fortuitous event or force majeure.

Fortuitous Event or Force Majeure

• Any event which cannot be foreseen, or which, though foreseen, is inevitable.

• It is an event which is either impossible to foresee or impossible to avoid.
• A fortuitous event may either be an act of man or an act of God.

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 a. Acts of man – event independent of the will of the obligor/debtor but not of other
human wills.
▪ Examples: War, fire, robbery, murder, insurrection, etc.
b. Acts of God – events that are totally independent will of every human being.
▪ Examples: Earthquake, flood, rain, shipwreck, lightning, volcanic eruption,
etc.
• Requisites of a fortuitous event:
a. The event must be independent of human will or at least of the debtor’s will;
b. The event could not be foreseen, or if foreseen, is inevitable;
c. The event must be such a character as to render it impossible for the debtor to
comply with his obligation in a normal manner; and
d. The debtor must be free from any participation in, or the aggravation of, the injury
to the creditor, that is, there is no concurrent negligence on his part.

Diligence of a good father of a family

• Ordinary care or that diligence which an average (a reasonably prudent) person

exercises over his own property.

Kinds of Obligations

I. Primary classification of obligations:

1. Pure and conditional obligations

• Pure obligations – Obligations whose performance does not depend upon
a future or uncertain event or upon a past event unknown to the parties is
demandable at once.
• Conditional obligations – Obligations in which the acquisition of rights as
well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.

2. Obligations with a period - obligations whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes.

3. Alternative and facultative obligations

• Alternative obligations – it is one where out of two or more prestations
which may be given, only one is due.
• Facultative obligations - An obligation wherein only one object or prestation
• has been agreed upon by the parties to the obligation, but which may be
complied with by the delivery of another or the performance of another
prestation in substitution.

4. Joint and solidary obligations

• Joint obligations – the whole obligation is to be paid or fulfilled
proportionately by different debtors or demanded proportionately by
different creditors.
• Solidary obligations – each one of the debtors is bound to render, and/or
each one of the creditors has a right to demand entire compliance with the
prestation.

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 5. Divisible and indivisible obligations
• Divisible obligations – those which have as their object a prestation which
is susceptible of partial performance without the essence of obligation
changed.
• Indivisible obligations – those which have as their object a prestation
which is not susceptible of partial performance, otherwise, the essence of
the obligation will be changed.

6. Obligations with a penal clause – an obligation to which an accessory

undertaking (penal clause/ penalty) is attached for the purpose of insuring its
performance by virtue of which the obligor is bound to pay a stipulated indemnity
or perform a stipulated prestation in case of breach.

II. Secondary classification of obligations:

1. Unilateral and bilateral obligations

2. Real and personal obligations
3. Determinate and generic obligations

Determinate or specific obligation – obligation to deliver a determinate thing.

Indeterminate or generic obligation – obligation to deliver a generic thing.

Determinate or specific thing – a thing that can be particularly designated or

physically segregated from other s of the same class.

It is identified by its individuality. The debtor cannot substitute it with another

although the latter is of the same kind and quality without the consent of the
creditor.
Examples: The watch I am wearing; A Toyota car with plate number ABC123; My
dog named “Brownie”.

Indeterminate or generic thing – a thing which refers only to class or genus to

which it pertains and cannot be pointed out with particularity.
Examples: A casio watch; a 1983 Toyota car; a cavan of rice; a police dog.

4. Civil and natural obligations

5. Legal, conventional and penal obligations

Modes of Extinguishing Obligations

Obligations are extinguished:

1. By payment or performance;
• Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation.
2. By the loss of the thing due;

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 • An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and
before he has incurred in delay.
• When by law or stipulation, the obligor is liable even for fortuitous event, the loss
of the thing does not extinguish the obligation, and shall be responsible for
damages.
3. By the condonation or remission of debt;
• Condonation or remission is the gratuitous abandonment by the creditor oh his
right against the debtor.
• It is a form of donation.
4. By the confusion or merger of the rights of creditor and debtor;
• Confusion or merger is the meeting in one person of the qualities of creditor and
debtor with respect to the same obligation.
5. By compensation;
• Compensation takes place when two persons are creditors and debtors of each
other.
6. By novation;
• Novation is the partial or total extinction of an obligation through the creation of a
new one which substitutes it.
7. Other causes:
• Annulment;
• Recession;
• Fulfillment of resolutory condition;
• Prescription
• Death of a party in case of obligation requiring personal service;
• Mutual desistance or withdrawal;
• Arrival of resolutory period;
• Compromise;
• Impossibility of fulfillment; and
• Happening of a fortuitous event.

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CONTRACTS

Definition:
• A juridical necessity to give, to do, or not to do. (Article 1156, Civil Code)

Elements of contracts:
1. Essential* elements – those without which no contract can validly exist regardless of the
intentions of the parties.
a. Common elements – present in all contracts.
i. Consent
ii. Object or subject matter
iii. Cause or consideration
b. Special elements – present only in certain contracts (e.g., delivery in real
contracts or form in solemn ones).
2. Natural elements – those that are presumed to exist in certain contracts unless the
contrary is expressly stipulated by the parties, like warranty against eviction or warranty
against hidden defects in sale.
3. Accidental elements – are the particular stipulations, clauses, terms, or conditions
established by the parties in their contract, like conditions, period, interest, penalty, etc.,
and therefore, they exist only when they are expressly provided by the parties.

*Essential elements of contracts:

1. Consent – is the conformity or concurrence of wills (offer and acceptance) and with
respect to contracts, it is the agreement of the will of one contracting party with that of
another or others, upon the object and terms of the contract.
• It is the meeting of minds or mutual assent between the parties on the subject
matter and the cause which are to constitute the contract even if neither has been
delivered.
2. Object – the thing, right or service which is the subject matter of the obligation arising
from the contract.
• Must be within the commerce of men;
• Should be real or possible;
• Should be licit;
• Should be determinate, or at least possible of determination as to its kind.
3. Cause – is the essential reason or purpose which the contracting parties have in view at
the time of entering into the contract.
• It is the immediate, direct or most proximate reason which explains and justifies
the creation of an obligation through the will of the contracting parties.

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Characteristics or Principles of Contracts

1. Mutuality – contract must bind both the contracting parties; its validity and compliance
cannot be left to the will of one of them.
2. Autonomy – the contracting parties may establish such stipulations, clauses, terms and
conditions as they deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
3. Relativity - Contracts take effect only between parties, their assigns and heirs, except in
case where the rights and obligations are not transmissible by their nature, or by stipulation
or by provision of law.
a. The heir is not liable beyond the value of the property he received from the
decedent.
4. Consensual
a. General Rule: Contracts are perfected by mere consent and from that moment,
the parties are bound to the fulfillment of what has been expressly stipulated and
to all consequences which, according to their nature may be in keeping with good
faith, usage and law.
b. Exceptions:
i. Real contracts (e.g., deposit, pledge and commodatum) are perfected not
merely by consent but by the delivery, actual or constructive, of the object
of the obligation.
ii. Solemn contracts – when the law requires that a contract be in some form
to be valid (donation of real property must be in a public instrument)
5. Obligatory force - It is a rule that once the contract is perfected, the parties are bound to
fulfill what has been expressly stipulated and to fulfill all the consequences thereof.

Reformation of Instrument
• It is a remedy allowed by law by means of which a written instrument is amended or
rectified so as to express or conform to the real agreement or intention of the parties when
by reason of mistake, fraud, inequitable conduct, or accident, the instrument fails to
express such agreement or intention.

Interpretation of contracts
• It is the determination of the meaning of the terms or words used by the parties in their
written contract. It is the process of ascertaining the intention of the parties from the written
words contained in the contract.
• General rule: If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall control.

Vices of consent
1. Mistake – false notion of a thing or a fact material to the contract.

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 • In order that mistake may invalidate a contract, it should refer to the substance of
the thing which is the object of the contract, or to those conditions which have
principally moved one or both of the parties to enter into contract.

2. Intimidation – when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the
person or property of his spouse, descendants or ascendants, to give his consent.

3. Violence – there is violence when in order to wrest consent, serious or irresistible force is
employed.
• It requires the employment of physical force.

4. Undue influence – there is undue influence when a person takes improper advantage of
his power over the will of another, depriving the latter of a reasonable freedom of choice.
• It is an influence of a kind that so overpowers the mind of a party as to prevent him
from acting understandingly and voluntarily to do what he would have done if he
had been left to exercise freely his own judgment and discretion.

5. Fraud – there is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, would
not have agreed to.

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Kinds of Defective Contracts:

1. Rescissible Contracts – are those validly agreed upon because all the essential
elements exist and, therefore, legally effective, but in the cases established by law, the
remedy of rescission is granted in the interest of equity.
• They are valid and enforceable although subject to rescission by the court when
there is economic damage or prejudice to one of the parties or to a third person.
• Contracts that are rescissible:
a. Those entered into by guardians where the ward suffers lesion of more
than ¼ of the value of the things which are objects thereof;
b. Those agreed upon in representation of absentees, if the latter suffer lesion
by more than ¼ of the value of the things which are subject thereof;
c. Those undertaken in fraud of creditors when the latter cannot in any
manner claim what are due them;

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 d. Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants and
the court;
e. All other contracts especially declared by law to be subject to rescission;
and
f. Payments made in a state of insolvency for obligations whose fulfillment
the debtor could not be compelled at the time they were effected.

2. Voidable or Annullable Contracts – are those which possess all the essential requisites
of a valid contract but one of the parties is incapable of giving consent, or consent is
viatiated by mistake, intimidation, violence, undue influence, or fraud.
• These contracts are binding, unless they are annulled by proper action in court.
• They are susceptible of ratification.

3. Unenforceable Contracts – are those that cannot be enforces or given effect in a court
of law or sued upon by reason of certain defects provided by law until and unless they are
ratified according to law.
• Those which cannot be enforced by proper action in court unless they are ratified,
because, either:
a. They are entered into without or in excess of authority;
b. They do not comply with the statute of frauds; or
c. Both contracting parties do not possess the required legal capacity.
• While rescissible and voidable contracts are valid and enforceable unless they are
rescinded or annulled, unenforceable contracts, although valid, are unenforceable
in court unless they are cured or ratified. Once ratified, these contracts may then
be enforceable.
• Contracts covered by Statute of Frauds:
a. An agreement that by its terms is not to be performed within one year from
the making thereof;
b. A special promise to answer for the debt, default or miscarriage of another;
c. An agreement made in consideration of marriage, other than a mutual
promise to marry;
d. An agreement for the sale of goods, chattels or things in action, at a price
not less than 500 pesos, unless the buyer accepted and received such
goods and chattels or evidences or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales book, at
the time of sale, of the amount and kind of property sold, terms, price,
names of the purchasers and persons to whose account the sale is made,
it is a sufficient memorandum;
e. An agreement for the leasing for a longer period than one year; or for the
sale of real property or interest therein; and
f. A representation as to the credit of a third person.

4. Void or Inexistent Contracts –

• Void contracts are those which, because of certain defects, generally produce no
effect at all. They are considered inexistent from its inception or from the beginning.
• Inexistent contracts refer to agreements which lack one or some or all of the
essential elements or do not comply with formalities which are essential for the
existence of a contract.

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 • Contracts which are inexistent and void from the beginning:
a. Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
b. Those which are absolutely simulated or fictitious;
c. Those whose cause or object did not exist at the time of the transaction;
d. Those whose object is outside the commerce of men;
e. Those which contemplate an impossible service;
f. Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained; and
g. Those expressly prohibited or declared void by law.

Classifications or Kinds of Contracts

1. According to their relation to other contracts:

a. Preparatory – preliminary step towards the celebration of another subsequent
contract.
b. Principal – can subsist independently from other contracts.
c. Accessory – can exist only as a consequence of, or in relation with, another prior
contract.
2. According to their perfection:
a. Consensual – perfected by mere agreement of the parties.
b. Real – requires consent of the parties and delivery of the object for their perfection.
3. According to their form:
a. Common or informal – requires no particular form.
b. Special or formal -- requires some particular form.
4. According to their purpose:
a. Transfer of ownership – e.g. sale
b. Conveyance of use – e.g. commodatum
c. Rendition of service – e.g. agency
5. According to their subject matter:
a. Things – e.g. sale, deposit, pledge
b. Services – e.g. agency, lease of services
6. According to the nature of the vinculum which they produce:
a. Unilateral – those which give rise to an obligation for only one of the parties (e.g.
commodatum, gratuitous deposit)
b. Bilateral – those which give rise to reciprocal obligations for both parties (e.g. sale,
lease)
7. According to their cause:
a. Onerous – those in which each of the parties aspires to procure for himself a
benefit through the giving of an equivalent or compensation. (e.g. sale, insurance,
common carrier)
b. Gratuitous – those in which one of the parties proposes to give to the other a
benefit without any equivalent or compensation (e.g. commodatum, donation)
8. According to the risk involved:
a. Commutative – those where each of the parties acquires equivalent of his
prestation and such equivalent is pecuniary appreciable and already determined
from the moment of the celebration of the contract (e.g. lease)
b. Aleatory – those where each of the parties has to his account the acquisition of an
equivalent of his prestation, but such equivalent, although pecuniary appreciable,

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 is not yet determined at the moment of the celebration of the contract, since it
depends upon the happening of an uncertain event, thus charging the parties with
the risk of loss or gain. (e.g. insurance)
9. According to their names or norms regulating them:
a. Nominate – have their own individuality; regulated by special provisions of law
b. Innominate – lack individuality; not regulated by special provisions of law

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