Obligations and Contracts

Atty. Rheneir P. Mora, CPA

Mentor
Topic Outline
• Definition of obligation
• Sources of obligations
• How to extinguish obligations
• Definition of contract
• Requisites of a contract
• Forms of contracts
• Interpretations of contracts
• Defective contracts
Obligation
Art. 1156
An obligation is a juridical necessity to give,
to do or not to do.

“legal relation established between one person

and another, whereby the latter is bound to the
fulfillment of a prestation which the former
may demand of him.”
Obligation
Example
• Mr. A enters into a contract of sale with Mr.
B who paid the purchase of a Motorcycle.
• Is Mr. A obligated to deliver the Motorcycle?
• Can Mr. B demand for the delivery of the
Motorcycle?
Obligation
Art. 1157. Obligations arise from:
1) Law;
2) Contracts;
3) Quasi-contracts;
4) Acts or omissions punished by law; and
5) Quasi-delicts.
Obligation
• Law
The law must expressly state the obligation or
there must be a specific provision of the law
creating the obligation. In other words, if there
is no law, there is no obligation.
Example:
the duty to pay taxes
to support one’s family.
Obligation
• Contracts
Obligations from contracts shall have the
force of law between the contracting parties
and shall be complied with in good faith.
This means that neither party may escape his
obligations under the contract, unless the
other party agrees thereto, or unless for
causes sufficient in law.
Obligation
Example
• Mr. A borrowed from Mr. B P1,000,000
and agreed that in case of non-payment on
the date stipulated, Mr. A’s house and lot
would be sold to Mr. B for the amount of
P1,000,000.
• Is the stipulation valid?
Obligation
Example
• Is the stipulation valid?
• Yes. If Mr. A does not pay, he should sell
the house and lot for P1,000,000 to Mr. B.
The agreement is not contrary to law.
Obligation
• Quasi-contracts
(1) Solutio Indebiti (Payment by mistake)
• It is the juridical relation which arises
when a person is obliged to return
something received by him through error
or mistake.
Obligation
• Quasi-contracts
(1) Solutio Indebiti (Payment by mistake)
Example-
Mr. A owed Mr. B the sum of P1,000.00. By mistake,
Mr. A paid P2, 000.00. Mr. B has the obligation to
return the P1,000.00 excess because there was
payment by mistake.
Obligation
• Quasi-contracts
(2) Negotiorum gestio (management of
another’s property)
• It is the voluntary management or
administration by a person of the
abandoned business or property of another
without any authority or power from the
latter.
Obligation
• Quasi-contracts
(2) Negotiorum gestio (management of
another’s property)
Example
Mr. A, a wealthy landowner suddenly left for abroad
leaving his livestock farm unattended. Mr. B, a
neighbor of Mr. A managed the farm thereby
incurring expenses. When Mr. A returns, does he have
the obligation to reimburse John for the expenses
incurred by him and to pay him for his services?
Obligation
• Acts or omissions punished by law
Every person criminally liable for a felony is
also civilly liable.
The commission of a crime causes not only
moral evil but also material damage.
Obligation
Example:
Mr. A was convicted and sentenced to imprisonment
by the Court for the crime of theft, the gold necklace,
of Mr. B.
In addition to whatever penalty that the Court may
impose, Mr. A may also be ordered to return
(restitution) the gold necklace to Mr. B. If restitution
is no longer possible, for Mr. A to pay the value
(reparation) of the gold wrist watch.
In addition to either restitution or reparation, Mr. A
shall also pay for damages (indemnification) suffered
by Mr. B.
Obligation
• Quasi-delicts
Quasi-delict is one where whoever by act or
omission causes damage to another, there
being fault of negligence, is obliged to pay
for the damage done.
Such fault of negligence, if there is no pre-
existing contractual relation between the
parties.
Obligation
• Quasi-delicts
Example:
Mr. A drives his car negligently and because
of his negligence hits Mr. B, who is walking
on the sidewalk of the street, inflicting upon
him physical injuries.
Is Mr. A liable for damages for injuries
suffered by Mr. B?
Obligation
• Art. 1163. Every person obliged to give
something is also obliged to take care of it
with the proper diligence of a good father
of a family, unless the law or the
stipulation of the parties requires another
standard of care.
Obligation
Example:
Mr. A obliged to give to Ms. B a wedding
ring five days from now. When the promise
was due, Mr. A, for being too busy, lost the
wedding ring he promised to Ms. B.
Is Mr. A liable to Ms. B for loosing the ring
he promised?
Obligation
• Art. 1164. The creditor has a right to the
fruits of the thing from the time the
obligation to deliver it arises. However, he
shall acquire no real right over it until the
same has been delivered to him.
Obligation
Example:
 Mr. A sold his dog to Mr. B for P30,000.00.
No date or condition was stipulated for the
delivery of the dog. While still in the
possession of Mr. A, the dog gave birth to 5
puppies.
Who has the right to the puppies?
Obligation
Who has the right to the puppies?
• A sold to B = Buyer’s obligation to pay
• B paid to A = Seller’s obligation to deliver
• B is already the owner of the dog at the point, B
paid A.
• B has the right to the puppies, given that B already
paid A.
• A will have the right if there is no payment and not
yet delivered.
• Even if not delivered as long as it is paid, B will
have the right to the puppies.
Obligation
• Art. 1167. If a person obliged to do
something fails to do it, the same shall be
executed at his cost.
• This same rule shall be observed if he does
it in contravention of the tenor of the
obligation. Furthermore, it may be
decreed that what has been poorly done be
undone.
Obligation
Example:
 Mr. A promised to construct a two-storey
house for Mr. B. Few hours after
constructing the house of Mr. B, the roofing
system of the garage fell down.
Can Mr. B demand Mr. A to undo the defect
and reconstruct the garage roof at his
expense since it was made poorly?.
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of
creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such
as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in
this Code
Payment or Performance
Art. 1232. Payment means not only the
delivery of money but also the performance, in
any other manner, of an obligation. (n)
Ex. Mr. A is indebted to Mr. B for
P1,000.00. Mr. A’s obligation is to deliver to
Mr. B the amount and to perform his
obligation which is to pay Mr. B the said
amount.
Loss of the thing due
Art. 1262. 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 events, the loss of the thing does not
extinguish the obligation, and he shall be responsible
for damages. The same rule applies when the nature
of the obligation requires the assumption of risk.
Condonation
Art. 1270. Condonation or remission is essentially
gratuitous, and requires the acceptance by the obligor.
It may be made expressly or impliedly.
Remission- is an act of liberality by which the
obligee, without receiving any price or equivalent,
renounces the enforcement of the obligation, as a
result his right against the debtor
Merger of the Rights
of Debtor and Creditor
Art. 1275. The obligation is extinguished from the
time the characters of creditor and debtor are merged
in the same person.
Example
Mr. A issued a promissory note for P10,000 in favor
of Mr. B payable 30 days after sight. Before the
maturity of the note, Mr. A indorsed it to Mr. C; Mr.
C indorsed it to Mr. D; Mr. D indorsed it to Mr. A.
The obligation of Mr. A to Mr. B is extinguished because there
is here a merger of the qualities of the debtor and creditor in
one and the same person
Compensation
Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors
of each other.
Example
Mr. A owes Mr. B the amount of P10,000.00.
Mr. B owes Mr. A the amount of P7,000.00. Both
debts are due and demandable today.
Here, the compensation takes place partially, that is,
to the concurrent amount of P7,000.00. So, Mr. A is
now liable to Mr. B for only P3,000.00.
Novation
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor.
Novation
Example
Mr. A agreed to deliver to Mr. B a car. Later, they
entered into another contract whereby, instead of Mr.
A delivering a car, he would deliver ten (10) air
conditioners. The obligation to deliver the car is
extinguished by the obligation to deliver the ten air
conditioners. The change may involve the principal
terms of the obligation.
Contracts
Art. 1305. A contract is a meeting of minds between
two persons whereby one binds himself, with respect
to the other, to give something or to render some
service
Art. 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public
policy. .
CONTRACTS
Article 1318. There is no contract unless the
following requisites concur:
1) Consent of the contracting parties;
2) Object certain which is the subject matter of the
contract;
3) Cause of the obligation which is established.
CONSENT
Article 1319. Consent is manifested by the meeting
of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.
(CONSENT)
The offer must be certain and the acceptance
absolute.
A qualified acceptance constitutes a COUNTER-
OFFER.
CONSENT
QUERY:
A offered 20 fountain pens to B for P1,000 each. B
answered by letter that he was willing to purchase 30
fountain pens at said price at P1,000 each.
Is the contract perfected?
CONSENT
ANSWER:
• It depends.
• If B wanted 30 pens and would not be satisfied with
less, the acceptance can be considered as qualified,
so there has been no perfection yet.
• If B was contented with 20 pens, but desired, if
possible to get 10 more, there is perfected sale
regarding the original 20, and an offer with respect
to the extra ten. Unless accepted in turn, there
would be no contract yet with respect to the
additional 10 fountain pens.
CONSENT
Article 1327. The following cannot give
consent to a contract:
1) Unemancipated minors;
2) Insane or demented persons, and deaf-
mutes who do not know how to write.

.
CONSENT
Article 1330. A contract where consent is
given through mistake, violence, intimidation,
undue influence, or fraud is voidable.

NOTE: These contracts in general are valid until

annulled; however annulment cannot prosper when
they have been ratified
OBJECTS OF CONTRACTS
Article 1347. All things which are not outside the
commerce of men, including future things, may be
the object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized by
law.
All services which are not contrary to law, morals,
good customs, public order or public policy may
likewise be the object of a contract.
CAUSE OF CONTRACTS
Article 1350. In ONEROUS CONTRACT, the cause
is understood to be, for each contracting party, the
prestation or promise of a thing or service by the
other;
In REMUNERATORY ones, the service or benefit
which is remunerated; And in
CONTRACTS OF PURE BENEFICENCE, the mere
liberality of the benefactor.
CAUSE OF CONTRACTS
Article 1350. In ONEROUS CONTRACT, the cause
is understood to be, for each contracting party, the
prestation or promise of a thing or service by the
other;
In REMUNERATORY ones, the service or benefit
which is remunerated; And in
CONTRACTS OF PURE BENEFICENCE, the mere
liberality of the benefactor.
FORM OF CONTRACTS
Article 1356. Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their validity
are present.
However, when the law requires that a contract be in
some form in order that it may be valid or
enforceable, or that a contract be proved in a certain
way, that requirement is absolute and indispensable.
In such cases, the right of the parties stated in the
following article cannot be exercised.
INTERPRETATION OF
CONTRACTS
Article 1370. If the terms of a contract are clear and
leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over
the former.
DEFECTIVE CONTRACTS

1) RESCISSIBLE CONTRACTS

2) VOIDABLE CONTRACTS

3) UNENFORCEABLE CONTRACTS

4) VOID CONTRACTS
DEFECTIVE CONTRACTS
Art. 1381. The following contracts are rescissible:
1. Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of
the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer
the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to
rescission. (1291a)
DEFECTIVE CONTRACTS

Example:
Mr. A is the guardian of Mr. B (minor). Mr. A sells
the property of Mr. B worth P20,000 for only
P15,000.
The contract of sale cannot be rescinded because the
lesion. (Art. 1355) is not more than 1/4.
However, if the property is sold for less than
P15,000, Mr. B can rescind the sale by proper action
in court upon reaching the age of majority.
VOIDABLE CONTRACTS

Art. 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.
DEFECTIVE CONTRACTS

2. VOIDABLE CONTRACT – This is valid until

annulled; it cannot be annulled, however, if there
has been ratification. The defect is more or less
intrinsic, as in the case of vitiated consent.

There must be clear and convincing evidence of the

presence of vitiated consent.
Mere preponderance of evidence on this matter is not
sufficient
VOIDABLE CONTRACTS
Article 1335. There is violence when in order to wrest
consent, serious or irresistible force I employed.
(VIOLENCE)
There is 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. (INTIMIDATION)
To determine the degree of intimidation, the age, sex and
condition of the person shall be borne in mind. A threat to
enforce one's claim through competent authority, if the claim
is just or legal, does not vitiate consent.
DEFECTIVE CONTRACTS

3. UNENFORCEABLE CONTRACT – This

contract cannot be enforced in court or sued upon
by reason of defects provide by law until unless
they are ratified according to law.
They are contracts either entered into without or in
excess of authority or do not comply with the statue
of frauds or both of the contracting parties do not
possess the required legal capacity
UNENFORCEABLE CONTRACTS

Example
Without my authority, my brother sold my car, in my
name to Mr. X.
The contract is unauthorized and cannot affect me
unless I ratify the same expressly or implicitly, as by
accepting the proceeds of the sale.
DEFECTIVE CONTRACTS

4. VOID CONTRACT – This is really inexistent or

illegal. It has no effect at all. It cannot be ratified or
validated.

a) It cannot be ratified. (Art 1409)

b) The right to set up the defense of illegality cannot be
waived.
c) The action or defense for the declaration of its inexistence
does not prescribed. (art. 1410)
d) The defense of illegality is not available to third persons
whose interests are not directly affected; and
e) it cannot give rise to a valid contract. (Art. 1422)
VOID CONTRACTS
Art. 1409. 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 or 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;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.
THANKS…..