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Law On Contracts
The law of contracts is actually an integrated subject with the law of obligations. Thus, in
order for one to have a complete framework of study on this particular business law
subject, it is only proper that the law of obligations will be discussed ahead of the law of
contracts.
MEANING OF OBLIGATION
The term “obligation” comes from the latin word “obligare”, meaning to bind. The
civil code defines obligation as a juridical necessity to give, to do or not to do. Under this
definition, an obligation consists either in (a) giving, (b) doing, or (c) not doing
something.
EXAMPLE
Obligation to give. “A” entered into a contract with “B” whereby the former
bound himself to deliver to “B” a specific car on June 5, 2006.
Obligation to do. “A” and “B” entered into an agreement whereby the former
obliged himself to fix the car of “B”.
Obligation not to do. “A” and “B” signed a contract whereby the former bound
himself with “B” not to construct a fence on a land belonging to the latter for the period
of (5) years.
SOURCES OF OBLIGATIONS
Article 1157 of the New Civil Code provides that obligations arise from: Law, Contracts,
Quasi-contract, Acts or omissions punished by law, Quasi-delicts.
(b) Solutio indebiti- It is a juridical relation which takes place when something is
received when there is no right to demand and was unduly delivered through mistake.
The obligation to return it arises.
EXAMPLE: “A” owes “B” the sum of P2,000.00. “A” paid “B” the sum of P3,000.00 not
knowing that the former incurred only a debt amounting to P2,000.00. In this example,
“B” is duty-bound to return the excess of P1,000.00 based on the principle of solution
indebiti.
SCOPE OF QUASI-DELICTS
Whether punishable by law or not
Whether criminal or not criminal in character
Whether intentional or voluntary
Or negligent, which result in damage to another
OBLIGATION TO DO
Article 1167 of the New Civil Code states that if a person obliged to do something
fails to do it, the same shall be executed at his cost. The same rule shall apply if he does it
in contravention of the tenor of the obligation. Moreover, if he performs his obligation in
a poor manner, it can be ordered undone.
OBLIGATION NOT TO DO
This is a negative obligation. It is the mandate of Article 1168 of the New Civil
Code that when the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall be undone at his expense.
OBLIGATION TO DELIVER
The obligor may bind himself to deliver either a specific (determinate) or generic
(indeterminate) thing. It is generic or indeterminate when it refers only to a class or
genius and cannot be pointed out with particularly, such as a dog, a car, a calendar watch.
RIGHT TO THE FRUITS
The creditor has a right to the fruits of the thing from the time the obligation to
deliver it arises. However, he acquires no real right over it until the same has been
delivered to him.
NATURAL FRUITS- They are the spontaneous products of the soil, and the young and
other products of animals.
INDUSTRIAL FRUITS- They are produced through cultivation; thus, with intervention
of labor such as vegetables planted in the garden.
CIVIL FRUITS- They pertain to those derived by virtue of juridical or legal relations
such as rents on houses or buildings by virtue of a lease contract.
KINDS OF OBLIGATION
The primary classifications of obligation under the Civil Code are: (a) Pure and
conditional, (b) Obligations with a period, (c) Alternative and facultative obligations, (d)
Joint and solidary obligations, (e) Divisible and indivisible obligations, and (f)
Obligations with a penal clause.
The secondary classifications of obligations includes: (a) Unilateral and bilateral
obligations, (b) Real and personal obligations, (c) Determinate and generic obligations,
(d) Civil and natural obligations, and (e) Legal, conventional, and penal obligations.
PURE OBLIGATION
An obligation which is not subject to any condition or burden and whose performance
does not depend upon a future or uncertain event or upon a past event unknown to the
parties and immediately demandable.
Example
“A” promise to give “B” the sum of P1000.00. The obligation to pay is
demandable at once because there is no specific date mentioned for its performance.
CONDITIONAL OBLIGATION
An obligation whose performance is subject to any condition. A condition is classified
into suspensive and resolutory. A suspensive condition is one the fulfillment of which
gives rise to an obligation. Ex. “A” binds himself to give “B” a car as soon as “A’s”
mother arrives from Canada. The obligation is demandable only upon the fulfillment of
the condition. A resolutory condition is one the fulfillment of which extinguishes an
obligation already existing. Ex. I will allow you to use my car until you pass the Bar
Examinations. Here, the obligation is immediately demandable but it will be extinguished
upon the happening of the condition.
ALTERNATIVE OBLIGATION
An alternative obligation is one wherein various prestations are due, but the performance
of one of them is sufficient. The right to choose belongs to the debtor (obligor) unless it
has been granted expressly to the creditor (obligee).
Example:
“A” binds himself to deliver to “B” either gold ring or gold watch. “A” should
deliver any of the two.
FACULTATIVE OBLIGATION
An obligation where one prestation is due but the obligor (debtor) may substitute another.
Example:
“A” binds himself to deliver to “B” a Volkswagen car but they mutually agree that
the former may deliver a Toyota car as a substitute.
JOINT OBLIGATION
An obligation where the whole obligation is to be fulfilled proportionately by the
different debtors and each one of the creditors is entitled to a proportionate part of the
credit. Other terms used to indicate joint liability are : (a) mancomunada;
mancomunadamente; pro rata; proportionately; individually; separately. “We promise to
pay” signed by two or more persons.
Example:
“A” and “B” are jointly indebted to “C” in the sum of P2000.00. In this example
“C” can only demand P1000.00 each from “A” and “B”. Thus, “A” is liable for P1000.00
and “B” is likewise liable for P1000.00.
SOLIDARY OBLIGATION
An obligation where each of the debtors is liable for the whole obligation and each of the
creditors has a right to demand compliance of the entire obligation. Observe that there is
solidary liability when: (a) the obligation expressly so states; (b) the law require
solidarity; or (c) the nature of the obligation requires solidarity. Other terms used to
indicate solidarity are: (a) jointly and/or severally ; solidaria ; in solidum; together and/or
separately; individually and/or collectively; juntos separadamente ; “I promise to pay”
signed by two or more persons.
Example:
“A” and “B” are solidary debtors of “X” and “Y” in the amount of P10000.00. In this
example, either “A” or “B” maybe compelled by either “X” or “Y” to pay the entire
obligation of P10000.00. If “A” pays P10000.00 to “X” the obligation is extinguished,
but he is entitled to be reimbursed by his co-debtor “B”.
DIVISIBLE OBLIGATION
An obligation capable of partial performance.
Example:
If “A” agrees to pay “B” P6000.00 in two installments, the obligation is divisible
because it is capable of partial performance.
INDIVISIBLE OBLIGATION
An obligation not capable of partial performance.
Example:
If “A” agrees to deliver a car to “B”, the car must be delivered as a whole for the
car itself is indivisible.
Example:
“A” promised to paint the house of “B” in the amount of P5000.00. An agreement
with a penal clause was signed that in case of breach, “A” would have to pay P500.00. If
“A” fails to perform his principal obligation, he can be compelled to pay the amount of
P500.00.
MODES OF EXTINGUISHING OBLIGATIONS
Under the New Civil Code obligations are extinguished by the following
namely:
• Payment or performance
• Compensation and
• Novation
• Impossibility of fulfillment
• Compromise agreement
PAYMENT OR PERFORMANCE
• Ordinarily, payment is the delivery of money. As a concept in civil law, the term
payment consists of not only the delivery of money but also the performance, in
any other manner, of an obligation. Thus, a debt is not considered to have been
paid unless the thing or service in which the obligation consists has been
completely delivered or rendered, as the case may be.
Example.
“ A” binds himself to deliver to “B” P5,000.00, but he delivered only P4,500.00. In this
example, there is no payment of “A”.
Example.
“A” binds himself to paint the house of “B” with the brand name Dutch Boy. Due to
scarcity of such brand in the market the remaining portion of the house , the patio was not
painted with such brand, despite his desire to comply in good faith his obligation . In this
example, “A” can recover less the damages suffered by the obligee (creditor).
INCOMPLETE PERFORMANCE
When the obligee (creditor) accepts the performance knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed
complied with.
Example.
“A” binds himself to deliver to “B” (10) bottles of Carlos Primero on the latter’s birthday.
“A” delivered only (9) bottles and “B” did not make any protest. In this example, the
obligation is deemed complied with because “B” knowing the incompleteness or
irregularity of the delivery did not make any objection and instead accepted the
performance.
WHO MAY MAKE PAYMENT.
Naturally, payment must be made by one having an interest in the performance of an
obligation. Under the law, the creditor is not bound to accept payment or performance by
a third person who has no interest in the fulfillment of the obligation, unless there is an
agreement to the contrary. Whoever pays for another may demand form the debtor what
he has paid, except that if he paid without the knowledge or against the will of the debtor,
he can recover only in so far as the payment has been beneficial to the debtor.
Example.
“A” owes “B” the amount of P5,000.00. Here “A” is the one who has an interest in the
performance of the obligation. “B” the obligee (creditor) cannot be compelled to accept
payment from “X”, a third person. If, however, “B” accepts payment without the
knowledge or against the will of “A”, the latter (debtor “A”), shall be liable to “X” only
to the extent the payment benefited him.
PLACE OF PAYMENT
The following rules should apply in determining place of payment:
• If there is stipulation, the payment shall be made at the place designated in the
obligation.
Example
• “A” binds himself to deliver to “B” a specific car. In the contract, it shall be to the
place of “B”.
• In the above example, if there is no agreement and the car is located in the place of
“A” at the time of the perfection of the contract, the delivery shall be made at
“A’s” place.
• If “A” binds himself to pay “B” a sum of money, payment shall be made at the
place designated in the agreement. Otherwise, the law mandates “B” the creditor
to accept payment from the place of “A” the domicile of the debtor. However, “A”
would liable for whatever expenses “B” incured in going to “A’s” place.
MANNER OF PAYMENT
The debtor of a thing cannot compel the creditor to receive a different one although the
latter maybe of the same value as, or more valueble than which is due. In obligation to do
or not to do, an act or forbearence cannot be substituted by another act or forbearance
against the obligee’s will. Observe that in faculative obligations, the obligator is given the
right to perform another prestation in suostation. This is by virtue of a valid contract.
Example
“A” binds himself to deliver to “B” a 2006 Toyota Corolla Sedan. In this example, “B”
cannot be compelled to accept another brand, say, a 2006 Lancer Lambda. However, if
“A” delivered another brand, and “B” willingly accepted it, it is valid.
It simply means giving by the debtor (obligor) and receipt by the creditor (obligee) of
something in payment of debt, instead of a sum of money. Note that under this type of
payment, consent of the parties is needed for it governed by the law on sales.
Example
“A” is indebted to “B” for the sum of P5,000.00. Instead of paying the amount, “A”
delivered a gold watch worth P5,000.00, which “B” willingly accepted.
b) APPLICATION OF PAYMENT
It is the designation of the debt to which payment should be applied made by a debtor
who has various debts of the same kind in favor of one and the same creditor.
Example
“A” owes “B” the amount of P5,000.00 payable june 5, another P5,000.00 with legal in
june 5 or june 21 obligation. However, if “A” chose to apply it to the second obligation, it
is not deemed paid until and unless the legal interest is also paid.
CONFUSION OR MERGER
It is the union of the qualities of debtor and creditor in the same person, the effect of
which is generally to extinguish the debt.
Example:
“A” owes “B” P5,000.00 for which “A” issued a promissory note in favor of “B”
bearer. “B” indorsed the promissory note to “C”, and then to “D”. “D” indorsed back
promissory note to “A. in this example, the obligation arising from the issuance of
promissory note becomes absurd. “A” cannot enforce the obligation against himself.
COMPENSATION
As a concept in civil law, compensation is set-off. Under the law, compensation takes
place when two persons, in their own right are creditors and debtors of each other. In
other words, compensation takes effect by operation of law and extinguishes the
concurrent amount of both debts although the parties (creditors and debtors) are not
aware of the compensation.
Example:
“A” owes “B” P5,000.00. In return, “B” owes “A” the sum of P5,000.00. Both
debts are due and demandable. Compensation takes place because “A” and “B” in their
own right, are creditors and debtors of each other.
KINDS OF COMPENSATION
• LEGAL. It takes place by operation.
• VOLUNTARY OR CONVENTIONAL. It takes place by agreement of the parties.
• JUDICIAL. It takes place with the concurrence of the court of competent
jurisdiction.
• PARTIAL. It takes place when two obligations are of different amounts and a
balance remains unextinguished.
• TOTAL. It takes place when two debts are the same amount.
NOVATION
A novation takes place when it substitutes a new party and discharges one of the original
parties to a contract by agreement of all parties. A new contract is created with the same
terms as the original one, but only the parties are changed.
REQUISITE OF A NOVATION ARE:
• A previous valid obligation;
• The agreement of all the parties to the new contract;
• The extinguishment of the old obligations; and
• The validity of the new one.
KINDS OF SUBSTITUTION
• EXPROMISION. It takes place when a third person at his own initiative and
without the knowledge or against the will of the original debtor assumes the
latter’s obligation with the consent of the creditor.
Example:
“A” owes “B” P5,000.00. A third person, “X” went to “B” and told the
latter that he will be the one to make the payment. If “B” agrees that “X” will take
the place of “A” even without the consent of knowledge of the later, there will be
a novation of obligation known as “expromision”.
• DELEGACION. Takes place when the creditor accepts a third person to the place
of the debtor with the consent of the latter. It is necessary that all the parties, the
old debtor, the new debtor and the creditor must agree to the substitution.
Example:
“A” bind himself to deliver to “B” three (3) sacks of rice. Subsequently,
“A” brought with him his friend “X”, to “B”, and requested the latter to accept
“X” as the one who will undertake the delivery of three (3) sacks of rice. If “B”
agreed to the proposal of “A”, “A’s” obligation will thus be extinguished and
substitution by delegacion took place.