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LAW ON OBLIGATIONS
1. Sources of obligations
a. Law
b. Contracts
c. Quasi-contracts (Negotiable gestio: Solutio Indebiti)
d. Delict (act or omission punished by law)
e. Quasi-delicts; Tort; Culpa aquiliana
2. Kinds of Obligations
Primary classification of obligations
1. Pure obligation
2. Conditional Obligation
3. Obligation with a period
4. Alternative obligation
5. Facultative obligation
6. Joint obligation
7. Solidary obligation
8. Divisible obligation
9. Indivisible obligation
10. Obligation with the penal clause
When the debtor is unable to fulfil his obligation because of fortuitous event of force
majeure, his obligation to comply is extinguished subject to the following exceptions:
a. When stipulated by the parties
b. When the law expressly provide
c. When the nature of the agreement requires the assumption of risk
Conditions must concur in order that the obligor will be exempted from liability:
a. The cause of the breach of obligation must be independent of the will of the debtor
b. The event must be either unforeseeable or unavoidable
c. The event must be such as to render it impossible for the debtor to fulfil his obligation in
a normal manner
d. The debtor must be free from any participation in, or aggravation of, the injury to the
creditor
b. Fraud (Dolo)
Fraud consists in the conscious and intentional proposition to evade the normal fulfilment of
an obligation.
Kinds of Fraud:
a. Fraud in obtaining consent- dolo causanti
b. Fraud in performing a contract- dolo incidenti
c. Negligence (Culpa)
Negligence, fault or culpa of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time abd the place.
If the law contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.
Kinds of delay:
a. Mora solvendi- debtor’s part
b. Mora accipiende- creditor’s part
c. Compensatio morae- both parties defaulted
Exceptions:
a. When stipulated by the parties
b. By provision of law
c. When the time is of the essence
d. When demand would be useless
The liability of employers for acts of employees is based upon the principle that the
negligence of the employee is conclusively presumed to be the negligence of the employer.
Proof of diligence in the selection and supervision of the employees is not available as a
defense.
5. Extinguishment of obligation
a. Payment of debts in money
All monetary obligations shall be settled in the Philippine currency which is the legal tender
in the Philippines. However, the parties may agree that the obligation or transaction shall be
settled in any other currency at the time of payment.
Legal tender refers to such currency which may be used for the payment of all debts, wheter
public or private.
Exceptions:
a. When the mercantile document has been encashed;
b. When through the fault of the creditor, it is impaired.
Strictly, application of payment, by its very nature, is not a special form of payment.
LAW ON CONTRACTS
1. Elements
a. Essential elements ( Consent; object; cause )
b. Natural elements ( Presumed to exist )
c. Accidental elements ( Stipulation )
Examples of limitations:
a. Pactumcommissorium is null and void.
b. Upset price is not allowed in mortgage contract ( An upset price is a specified price below
which the mortgaged property is not supposed to be sold at the execution sale. )
c. The parties to a contract cannot deprive the court of competent jurisdiction.
3. Consent
Persons capable of giving consent to a contract:
a. Unemancipated minors;
b. Insane or demented persons;
c. Deaf mutes who do not know how to write;
d. Persons who are suffering from civil interdiction;
e. Incompetents under guardianship.
Requisites of consent:
a. Must be given by 2 or more persons;
b. Parties are capacitated to a contract;
c. Consent must be intelligently or freely given;
d. Express manifestation of the will of the contracting parties.
Vices of consent:
a. Mistake or error;
b. Intimidation or threat;
c. Violence or force;
d. Undue influence;
e. Fraud or deceit.
There is violence when in order to wrest consent, serious or irresistible force is employed.
There is undue influence when a person takes improper advantage of his power over the will of
another, depriving the latter of reasonable freedom of choice.
4. Objects of contracts
Object of contract ( thing, rights or services )
a. Must be within the commerce of men
b. Transmissible
c. Licit
d. Possible
e. Determinate
5. Consideration of contracts
In onerous contracts, the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other.
In contracts of pure beneficence the ( gratuitous ), the mere liberality of the benefactor.
Cause is the essential and impelling reason why a party assumes an obligation.
In reciprocal contracts, the subject matter for one is the cause for the other.
6. Formalities of contracts
A contract shall be obligatory or binding in whatever form it may have been entered into provided
all the essential requisites ( consent, object and cause; and in certain specified contracts, delivery
or form of for its validity are present.
7. Reformation
Reformation is that remedy in equity by means of which a written instrument is made or
constructed so as to express or conform to the real intention of the parties when some error or
mistake has been committed.
Requisites of reformation:
1. Meeting of the minds between the parties;
2. Instrument does not express the true intention of the parties;
3. The failure of intention is due to mistake, fraud, inequitable conduct or accident;
4. There must be clear and convincing proof.
8. Interpretations of contracts
Basic rules in the interpretation of contracts:
1. If the term of the contracts are clear, the literal meaning of its stipulations shall control;
2. The evident intention of the parties shall prevail over the words of the contract;
3. The contemporaneous and subsequent acts of the parties shall be principally considered in
order to ascertain their intention;
4. Obscure words or stipulations in a contract shall not favour the party who caused the
obscurity;
5. Doubts in gratuitous contracts shall be settled in such a way that the least transmission of
rights and interests shall prevail;
6. Doubts in onerous contracts shall be settled in favour of the greatest reciprocity of interests.
9. Defective contracts
a. Rescissible contract;
b. Voidable contract;
c. Unenforceable contract;
d. Void contract.
Rescissible contracts
1. Those made by guardians when their wards suffer lesion by more than ¼ of the value of the
things which are the object thereof;
2. Those agreed upon in behalf of absentees if the latter suffer the lesion stated above;
3. Those made in fraud of creditors provided the following requisites are present:
a. There must be credit prior to the contract to be rescinded;
b. Fraud on the part of the debtor;
c. Creditor cannot recover his credit in any other manner.
4. Those which refer to things under litigation made by defendants without the knowledge and
approval of the litigants or of competent judicial authority;
5. All other contracts especially declared by law to be subject to rescission.
LAW ON SALES
1. Contract of sale
By the contract of sale one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefore a price certain or its
equivalent.
In cession in payment, the debtor transfers all the properties not subject to execution in favour of
his creditors so that the latter may sell them and apply the proceeds to their credits.
By the contract of barter or exchange one of the parties binds himself to give one thing in
consideration of the other’s promise to give another thing.
If the consideration of the contract consists partly in money, and partly in another things, the
transaction shall be characterized by the manifest intention of the parties. If such intention does
not clearly appear, it shall be considered a barter if thing given as a part of the consideration
exceeds the amount of the money or its equivalent; otherwise, it is a sale.
A contract for the delivery at a certain price of an article which the vendor in the ordinary course
of his business manufactures or procures for the general market, whether the same is on hand at
the time or not is a contract of sale , but if the goods are to be manufactured especially for the
customer and upon his special order, and not for the general market, it is a contract for a piece of
work.
6. Warranties
Implied warranties of seller
1. Warranty against eviction
2. Warranty against hidden defects or unknown encumbrances
3. Warranty as to fitness or merchantability.
8. Installment sales
Recto Law ( Amendment to Art. 1484 )
In the third case, the vendor shall have no further action to recover any unpaid balance of the price (
deficiency ) and any agreement to the contrary shall be void.
LAW ON AGENCY
1. Contract of agency
Agency is a contract whereby a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.
It is consensual, nominate, bilateral (unilateral, if gratuitous), principal, and preparatory contract.
3. Guaranty commission
Del credere commission (guarantee commission) is an additional commission by which the agent (who
also gets his ordinary commission) shall bear the risk of collection and shall pay the principal the
proceeds of the sale on the same terms agreed upon with the purchaser.
4. Modes of extinguishment of agency
a. By its revocation by the principal;
b. By the withdrawal of the agent;
c. By the death, civil interaction, insanity or insolvency of the principal or of the agent;
d. By the dissolution of the firm or corporation which entrusted or accepted the agency;
e. By the accomplishment of the object or purpose of the agency; and
f. By the expiration of the period for which the agency was constituted.
2. The other models of extinguishment of obligations in general may also apply.
1. Pledge
Pledge is a contract by virtue of which the debtor delivers to creditor or to a third person a movable, or
instrument evidencing corporeal rights, for the purpose of securing the fulfilment of a principal
obligation with the understanding that when the obligation is fulfilled the thing delivered shall be
returned with all its fruits and accessions.
It is a real, accessory, and unilateral contract. It is also a subsidiary contract because the obligation
incurred does not arise until the fulfilment of the principal obligation which is secured.
Pactum commissorium
Pactum commissorium is a stipulation authorizing the creditor to appropriate the things given by way
of pledge or mortgage or to dispose of them. It is declared null and void by law.
The appropriation must be automatic without need of further act on the part of the debtor. Hence, the
prohibition, does not apply to:
1. Subsequent voluntary act of the debtor of making cession of the property; or
2. A promise to assign or sell said property in payment of the debt.
2. Mortgage
Mortgage (otherwise known as real estate mortgage or real mortgage) is a contract whereby the debtor
secures to the creditor the fulfilment of the principal obligation, especially subjecting to such security
immovable, property or real rights over immovable property in case the principal obligation is not
complied with at the time stipulated.
Effects of a mortgage
8. It creates a real right. It directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfilment of the obligation for whose security it was
constituted;
9. The mortgagee (creditor) may, therefore, demand payment from any possessor of the mortgaged
property;
10. He may alienate or assign the mortgage credit (his right as mortgagee) to a third person; and
11. The mortgage does not extinguish the title of the mortgagor (debtor) who does not, therefore, lose
his right to dispose of the mortgaged property. The law considers void any stipulation forbidding
the owner from alienating the property mortgaged.
3. Chattel mortgage
Chattel mortgage is a contract by virtue of which personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation.
It is an accessory, unilateral, and formal contract.
LAW ON PARTNERSHIP
1. Definition of Partnership
By the contract of partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
3. Rules of management
The partner who has been appointed manager in the articles of partnership may execute all acts of
administration despite the opposition of his partners, unless he should act in bad faith; and his power is
irrevocable without just or lawful cause. The vote of the partners representing the controlling interest
shall be necessary for such revocation of power.
A power granted after the partnership has been constituted may be revoked at any time.
If two or more partners have been entrusted with the management of the partnership without
specification of their respective duties, or without a stipulation that one of them shall not act without
the consent of all the others, each one may separately execute all acts of administration, but if any of
them should oppose the acts of the others, the decision of the majority shall prevail. In case of a tie, the
matter shall be decided by the partners owning controlling interest.
In case it should have been stipulated that none of the managing partners shall act without the consent
of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or
disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable
injury to the partnership.
When the manner of management has not been agreed upon, the following rules shall be observed:
a. All the partners shall be considered agents and whatever any one of them may do alone shall bind
the partnership.
b. None of the partners may, without the consent of the others, make any important alteration in the
immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of
the consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s
intervention may be sought.
Exceptions to the rule that payment must be in proportion, if receipt is in the name of the managing
partner:
a. If the debt of the partnership is not yet due on the date of payment
b. If the debt to the managing partner is more onerous
III. The designation of profit and loss sharing may be entrusted to a third person. The designation
made by the third person is binding upon the partners unless such is manifestly inequitable.
(Designation cannot be entrusted to one of the partners.)
II. Obligations incurred after admission- all partners, the original and the new partner shall be
liable to the extent of their separate property in satisfying, such obligation of the partnership.
Liability of accommodation party – liable of the instrument to the holder for value,
notwithstandingsuch holder at the time of taking the instrument knew him to be only
accommodation party.
5. A holder in due in courseis a holder who has taken the instrument under the folloeing conditions:
a. He took the instrument and regular upon its face;
b. He becomes the holder before it was overdue, and without notice that it had been previously
dishonored, it such was the fact;
c. He took it in good faith and for value;
d. That at the time it was negotiated to him, he had no notice of an infirmity in the instrument or
defect in the title of the person negotiating it.
6. Kinds of defenses
a. Real, absolute or legal ( incapacity of the party; illegal contract; forgery; fraud in factum;
fraudulent alteration; incomplete and undelivered instrument)
b. Personal or equitable (absence or failure of consideration; fraud in inducement; filling up of
blanks not in accordance with authority given; want of delivery of complete instrument;
innocent alteration or spoliation; acquisition of the signature in the instrument by force or
fear)
Although an instrument subject to real defense cannot be enforced, this refers only against the
person to whom the legal defense is available. This can be enforced against those to whom such a
defense is not available.
Fraud in factum distinguished from fraud in inducement –in fraud in factum, the issuer no
intention to issue the instrument; while in fraud inducement, the issuer has the intention to issue
the instrument voluntarily, only to be deceived as to the character, quality or cause of the
instrument.
7. General indorser vs. Qualified indorser
A general indorser warrants that the instrument that he is indorsing is valid and subsisting
regardless of whether he is ignorant of that fact or not, while a qualified indorser or person
negonating by delivery warrants that he is ignorant of any fact that will render the instrument
valueless or impair its validity.
8. Where a signature is gorged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefore, or to enforce payment thereof against any party thereto, can be
acquiredthrough or under such signature unless the party against whom it is sought to enforce
right is preclude from setting up the forgery or want or authority.
9. Alteration
Where a negotiable instrument is materially altered without the assent of all parties liable thereon,
it is avoided, except as against a party who has himself made, authorized or assented to the
alteration or subsequent indorsers. (But when an instrument has been materially altered and is in
the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof
according to the original tenor.)
MISCELLANEOUS TOPICS
1. Guaranty
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarity with the principal debtor, the contract is called a
surety ship.
The parties thereto are the guarantor and the creditor. Strictly speaking the contract
between the debtor and the guarantor is called the contract of indemnity.
2. Commission Agent vs. Broker
A commission agent is one engaged in the purchase and sale for a principal or personal
property, which for this purpose, has to be placed in his possession at his disposal.
A broker maintains no relation with the thing which he purchases or sells. He is supposed
to be merely a go-between, an intermediary between the sellers and the buyer.
3. Aleatory contract
By an aleatory contract one of the parties or both reciprocally bind themselves to give or
to do something in consideration of what the other shall give or do upon the happening of
an event which is uncertain, or which is to occur at an indeterminate time. (The element
of risk is present.) Examples: Sale of sweepstakes ticket; insurance.
4. Aleatory contract vs. Contract with surpensive condition
In aleatory contracts whether or not the event happens the contract remains only the
effects and extent of profit and losses are determined.
In contracts with suspensivecondition, if the condition does not happen, the obligation
never becomes effective.
5. Loan (Mutuum and Commodatum)
Mutuum (Simple Loan) – the object loan is money or other consumable thing upon the
condition that the same amount or the same kind and quality shall be paid.
Commodatum–the object loaned is not consumable, the borrower may use the same for a
certain time and return it.
Commodatum is essentially gratuitous.
Mutuum may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned; while in matuum,
ownership passes to the borrower.
6. Law on Business Organizations and Law on Business Transactions
Law on Business Organizations:
1. Law on Partnership (Civil Code)
2. Corporation Code
Date of effectivity: