Lecture Discussion

BUSINESS LAW( LAW 1)

MODULE 1: INTRODUCTION, MEANING OF OBLIGATION AND ELEMENTS OF AN OBLIGATION

OBLIGATION, CONCEPT

An obligation is a juridical necessity to give, to do or not to do. (Art. 1156, Civil of the Philippines)
Juridical necessity means that the court may be asked to order the performance of an obligation if the
debtor does not fulfil it. If an obligation cannot been forced through the courts, it may be disregarded
with impunity.

In other words, the debtor must comply with his obligation whether he likes it or not; otherwise, his
failure will be visited with some harmful or undesirable consequences. (Note: Unless otherwise
indicated, articles of law refer to provision of the Civil Code of the Philippines.)

Requisites and Essential Elements of an Obligation

1. Active subject (creditor or obligee) The person who has the right to demand the fulfillment of the
obligation. The party who has the right to demand performance/compliance of the obligation to give, to
do or not to do.

2. Passive subject (debtor or obligor) The person from whom the obligation is juridically demandable.
The party who has the obligation to give, to do or not to do.

3. Prestation (object or subject matter of the obligation )The fact, prestation or service. It is the
particular conduct of the debtor or obligor which consist in giving, doing or not doing something.

4. Efficient cause (vinculum or the legal or juridical tie) It is which creates the relation between the
passive subject or obligor and the active subject or oblige. The efficient cause of an obligation may be
any of the five sources of obligation.

Examples:

1. D is obliged to give C P50, 000.00 with interest at 12% per annum on December 31, 2015 pursuant to
a contract of loan. D is the passive subject; C is the active subject; the giving of P50, 000.00 with 12%
interest is the prestation; and the contract of loan is the efficient cause. The obligation here is unilateral,
i.e., only one party is required to perform a particular conduct.

2. D is obliged to transport the goods of C from Manila to Cebu, and C is obliged to pay d P1, 000.00 as
transport costs, under a contract of carriage. As regards the transport of the goods which is the
prestation, C is the active subject and D is the passive subject. As regards the payment of transport costs
which is the prestation, C is the passive subject and D is the active subject. The contract of carriage is the
efficient cause for the obligations of both D and C. The obligations here are bilateral, i.e., each party is
required to perform a particular conduct.

LAW 1 MODULE
Form of obligations.

1. Oral

2. In writing

3. Partly oral and partly in writing.

Note:

1. As a general rule, the law does not require. Any form in obligation arising from contracts for their
validity or binding force. (see Art. 1356.)

2. Obligation arising from other sources (Art.1157) do not have any form at all.

Differences: Obligation, right, and wrong

1. Obligation is the act or performance which the law will enforce.

2. Right, on the other hand is the power which a person has under the law, to demand from another any
prestation.

3. A wrong (cause of action), according to its legal meaning, is an act or omission of one party in
violation of the legal right or rights (i.e., recognized by law) of another. In law, the term injury is also
used to refer to the wrongful violation of the legal right of another.

The essential elements of a legal wrong or injury are;

a. a legal right in favor of a person (creditor/oblige/plaintiff);

b. A correlative legal obligation on the part of another (debtor / obligor / defendant); to respect or not
to violate said right; and

c. An act or omission by the latter in violation of said right with resulting injury or damage to the former.

An obligation on the part of a person cannot exist without a corresponding right in favor of another, and
vice versa. A wrong or cause of action only arises of the moment a right has been transgressed or
violated Civil obligation and natural obligation distinguished

A civil obligation (as defined in Art. 1156) is based on positive law, hence, it is enforceable by court
action.

A natural obligation, on the other hand, is based on natural law; hence, it is NOT enforceable by court
action. The obligation, however, exists in equity and moral justice, such that if debtor voluntarily
performs it, he can no longer recover what he has given.

Example:
M is the maker of a promissory note P as payee for P20, 000.00. If M does not pay on due date, P can
enforce payment by filling a court action. If P does not file a court action against M within 10 years from
due date which is the prescriptive period for action upon a written contract, P loses the right to enforce
payment by court action. However, if M voluntarily makes the payment to P although the obligation has
prescribed, M will no longer be allowed to recover the payment because in equity and moral justice, he
still owed P the amount of P20, 000.00

MODULE 2: SOURCES OF OBLIGATION

Sources of obligation (Art. 1157)

1. Law – A rule of conduct just and obligatory, laid down by legitimate authority for common
observance and benefit. (Sanchez Roman). Obligations derived from law are not presumed.
Only those expressly determined in the Civil Code or in special laws are demandable, and shall
be regulated by the precepts of the law which establishes them; and as to what has not been
for seen, by the provisions on Obligations. (Art 1158)

Examples: The National Internal Revenue Code which provides for the payment of taxes; the
Anti-Mendicancy Law which prohibits the giving of aims to beggars. Corporation Code,
Negotiable Instruments Law, Insurance Code, Revised Penal Code, Labor Code, etc.

2. Contracts – 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.
1305).Obligations arising from contracts have the force of law between the contacting parties
and should be complied with in good faith. (Art 1159)

Examples: A contract of lease which provides for the payment of rental by the lessee: a contract
of sale which requires the seller to deliver the thing sold and the buyer to pay the price.

Contractual obligations.

A contract is a meeting of minds between two (2) persons whereby one binds himself, respect
to the other, to give something or to render some service. (Art.1305.)

a. Binding force.

1. contract must be valid and it cannot be valid if it is against the law;

2. contracts have the force of law between the contracting parties.

b. Requirement of a valid contract (assuming all the essential element are present; Art.
1318.)If the contract is NOT contrary to:

1. Law;
2. Morals;

3. good customs;

4. Public order; and

5. Public policy.

Note: In the eyes of the law, a void contract does not exist. (Art. 1409.). Consequently, no
obligations will arise. A contract may be valid but cannot be enforced. This is true in the case of
unenforceable contracts. (see Arts. 1317, 1403.)

c. Breach of contract

1. May be breached or violated by a party in whole or in part.

2. Takes place when a party fails or refuses to comply, without legal reason or justification, with
his obligation under the contract as promised.

Compliance in good faith.

Compliance in good faith means compliance or performance in accordance with the stipulation
or terms of the contract or agreement. Sincerity and honesty must be observed to prevent one
party from taking unfair advantage over the other. Non-compliance by a party with his
legitimate obligations after receiving the benefits of the contract would constitute unjust
enrichment on his part.

3. Quasi-contracts – They refer to certain lawful, voluntary and unilateral acts giving rise to a
juridical relation to the end that no one shall be unjustly enriched at the expense of another.
(Art. 2142).

Examples:

a. Negotiorum gestio – This refers to the voluntary administration of the property, business or
affairs of another without his consent or authority. It creates the obligation to reimburse the
gestor for necessary and useful expenses. (Art. 2150)

Example: D and C are the owners of adjacent vegetable farms. One day, D was not around to
tend to his farm. When C noticed that D had not been around for almost a week, he himself
cultivated the soil and placed fertilizer on it, watered the plants, removed the weeds and wilted
leaves. C incurred necessary and useful expenses in the process. D must reimburse C for such
expenses. Otherwise, he will be unjustly enriching himself at C’s expense.

Gestor – the person who took possession of the property.

1. The property was abandoned and neglected

2. The person who took over the possession is not authorized to do so.

(3. Voluntary )

Obligations of a Gestor

1. Take care of the property until the owner returns.

2. Take care of the property with the due diligence of a good father.

3. Return the property to the owner

Obligation of the Owner

1. Reimburse the gestor of all his expenses which are necessary and desirable to the property

General Rule:

The gestor shall be liable for the damage caused to the property while it is under his
management.

Exception:

If the property was damaged through fortuitous event

Exception to the Exception:

1. When the gestor undertakes risky operation which the owner is not accustomed to embark
upon

2. If he has preferred his own interest to that of the owner

3. If he fails to return the property after the demand of the owner

4. If he assumed the management in bad faith.

A gestor is liable for the damage to property if:

1. He is manifestly unfit to manage the property

2. He prevented a more qualified person to take over the management

3 kinds of Delay (Mora)

1. Mora Solvendi (delay by the debtor)

2. Mora Accipiendi (delay by the creditor)

3. Compensation Morae (delay by both)

b. Solutio indebiti – This refers to payment by mistake of an obligation which was not due when
paid. It creates the obligation to return the payment. (Art. 2154)

Example: D, the payee of check for P5, 000.00 cashes it with drawer bank, but the teller gives
him P6, 000.00 by mistake. D is duty bound to return the excess of P1, 000.00 to the bank.
Otherwise, he will be unjustly enriching himself at the expense of another.

2 Kinds of Solutio Indebiti

1. Delivery by Mistake

2. Payment before due

Delivery by mistake

 Anyone who receives something by mistake is obliged to return the same to:

1.) The person entitled to receive it.

2.) The person who sent the property

3.) The person who delivered the property.

 Should the property produces fruits, he shall be liable to deliver the same together with the
property

 The person who returns said property is entitled to be reimbursed for his expenses in
preserving and returning the thing

Payment before due

Should payment be made before it was due, anyone who receive said payment is obliged to
return the same to the payor.

Payment by Third Party

 Should the creditor accepts the payment, the third party will acquire all the

rights of the creditor

 Except when the debtor objects to the payment by third party, in which case,

the debtor shall only be liable to the third party up the extent that he was benefitted.

Finder of Lost Property

 involves only personal or movable property.

 if the owner is known, return to owner.

 if not, must deposit it with the mayor’s office.

 the mayor’s office must publicly announce the find for two consecutive weeks, through the
means he deems fit. (2 notices in 2 public places).

 if the property is perishable, it must be auctioned 8 days after publication.

 after 6 months, should the owner fails to retrieve the property, it shall be awarded to the
finder. The fidner however is liable to pay the expenses of the state.

 should the owner claims the property, he shall be obliged to give 1/10 of the value of the
property to the finder as a finder’s fee. He is also liable to pay the expenses of the state.

Obligations imposed by Law

1. Obligation to reimburse a stranger who provided support without the knowledge of the
person obliged to give support.

2. Obligation to reimburse anyone who paid for the funeral expenses of a deceased.

3. Obligation to reimburse a person who provided support because the person obliged to give
support refuses to do so.

4. Obligation to reimburse a person who aided another whose life was in imminent danger by
reason of calamity or natural disaster.
5. Obligation to reimburse the state in the event that a person who is obliged to comply with
any health or safety regulation fails to do so and the state performed the necessary task for
him.

c. Other quasi-contracts

c.1. Finder of Lost Property

c.2. Payment by Third Party

c.3. Obligations Imposed by Law

1) When, without the knowledge of the person obliged to give support, it is given by a stranger,
the latter shall have the right to claim the same from the former, unless it appears that he gave
it out of piety and without intention of being paid. (Art. 2164)

2) When funeral expenses are borne by a third person, without knowledge of those relatives
who were obliged to give support to the deceased, said relatives shall reimburse the third
person, should the latter claim reimbursement. (Art. 2165)

3) When the person obliged to support an orphan, or an insane or other indigent person
unjustly refuses to give support to the latter, any third person may furnish support to the needy
individual, with right of reimbursement from the person obliged to give support. This provision
applies when the father or mother of a child under eighteen years of age unjustly refuses to
support him. (Art. 2166)

4) When through an accident or other cause a person is injured or becomes seriously ill, and he
is treated or helped while he is not in a condition to give consent to a contract, he shall be liable
for the services of the physician or other person aiding him, unless the service has been
rendered out of pure generosity. (Art. 2167)

5) When during a fire, flood storm or other calamity property is saved from destruction by
another person without the knowledge of the owner; the latter is bound to pay the former just
compensation. (Art. 2168)

6) When the government, upon failure of any person to comply with health or safety
regulations concerning property, undertakes to do necessary work, even over his objection, he
shall be liable to pay the expenses. (Art. 2169)

7) When by accident or other fortuitous event, movables separately pertaining to two or more
persons are commingled or confused, the rules on coownership are applicable. (Art. 2170)

8) When in a small community, a majority of the inhabitants of age decide upon a measure of
protection against lawlessness, fire, flood, storm or other calamity, any one who objects to the
plan and refuses to contribute to the expenses but is benefited by the project as executed shall
be liable to pay his share of said expenses. (Art. 2174)

2. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter. (Art. 2175)

4. Acts or omissions punishable by law – These are crimes or felonies.’’ The commission of a
crime makes the offender civility liable. (Act. 100 Revised Penal Code.) Such civil liability
includes restitution, reparation of the damage caused, and indemnification of consequential
damages. (Art. 104, R.P.C.)

Example: If D steals the carabao of C, D’s civil liability consists of returning the carabao, paying
for its value if he cannot return it, and indemnifying the consequential damages suffered not
only by C but also those of his family or by a third person by reason of the crime. This will be in
addition to any prison term or other penalty that may be imposed by the court.

Civil liability arising from crimes delicts or felonies

1. Oftentimes, the commission of a crime causes not only moral evil but also material damage.
From this principle, the rule has been established that every person criminally liable for an act
or omission is also civilly liable for damages. (Art. 100, Revised Penal Code.)

2. In crimes, however, which cause on material damage (like contempt, insults to persons in
authority, gambling, violations of traffic regulations, etc.), there is no civil liability to be
enforced. But a person not criminally responsible may still be liable civilly (Art.29;Sec.2[c], Rule
111, Rules of court.), such as failure to pay a contractual debt; causing damage to another’s
property without malicious or criminal intent or negligence, etc.

Scope of civil liability

The extent of the civil liability for damages arising from crimes, this civil liability includes:

1. Restitution;

2. Reparation for the damage caused; and

3. Indemnification for consequential damages. (Art. 104, Revised Penal Code.)

EXAMPLE:

X stole the car of Y. If X is convicted, the court will order X: (1) to return the car or to pay its
value if it was lost or destroyed; (2) to pay for any damage caused to the car; and (3) to pay
such other damages suffered by Y as a consequence of the crime.
Causes of Action

a. Civil Action

 There must be a right possessed by the claimant

 There was a violation of said right by the respondent

 The respondent has the obligation to respect the right of the claimant

b. Criminal Action

 There must be a law prohibiting an act or omission

 There is a violation of such prohibition

 The accused is not justified or excused in the violation

Note:

 Civil action and criminal action may be instituted separately

 Should the claimant fails to file a separate civil action, it is deemed instituted together with
the criminal action.

In case the criminal and civil action were instituted in the same case:

 If the accused dies before the final judgment, both the criminal and civil liability shall be
extinguished.

 if the accused dies after the final judgment, only the criminal liability will be extinguished and
the civil liability will survive

Kinds of Damages

1. Moral

2. Exemplary

3. Nominal

4. Temperate

5. Actual
6. Liquidated

5. Quasi-delicts (also known as “tort” or “culpa aquiliana”) – these are acts or omission that
cause damage to other, there being fault or negligence but without any pre-existing contractual
relation between the parties. (Art. 2176) (See Equitable Banking Corporation vs. Special Steel
Products, Inc., G.R. No. 175350, June 3, 2012.)

Example: If a person, while cleaning his window, causes a flower pot to fall through his
negligence thereby injuring someone passing by, the former is liable for damages to the latter.

Element s of Quasi-delict

1. There must be an act or omission;

2. There must be fault or negligence;

3. There must be damage caused;

4. There must be a direct relation or connection of cause and effect between the act of
omission and the damaged; and

5. There is no pre-existing contractual relation between the parties.

 Proximate Cause – that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have
occurred.

 Direct cause – that which actually caused the injury.

 Quasi-delict may be due to the negligence of a person in the performance of his duty or his
negligence in the supervision or management of another person.

 The defense against a quasi-delict is to prove that the person in question exercised the
diligence required of him.

Who are liable for quasi-delict?

1. Father, or in his absence or incapacity, the mother – for damage or injury caused by minor
child.

2. Guardian – for damage or injury caused by ward

4. Employer – for damage or injury caused by household helpers

5. State – for damage or injury caused by special agents, or for faulty or damaged public
structures and utilities

6. Teacher or School Administration – for damage or injury caused by students who are under
their care or supervision

7. Guardian of insane person – for damage or injury caused by insane person under their
guardianship

8. Pet Owner – for damage or injury caused by unrestrained pets, unless the pet escaped due to
fortuitous event

9. Owner of Vehicle – for damage or injury caused by his driver where the owner was a
passenger in the vehicle when the incident occurred

10. Manufacturer – for damage or injury caused by a product produced by the manufacturer.
(toxic torts)

Effects and Nature of Obligation

 the default diligence required in fulfilling an obligation is the diligence of agood father.

 any person who is obliged to deliver something is also required to deliver the fruits of the
thing after it was overdue. It shall also include all the accessories and accessions.

 if the obligation is deliver a generic thing, the loss of the object does not extinguish the
obligation.

 if the obligation if deliver a specific thing, the loss of the object extinguishes the obligation,
but if the thing was lost due to the fault of the debtor, he shall be liable for damages.

 if the debtor fails to deliver the goods on time, in contravention of tenor, negligently or
through fraud, he shall also be liable for damages.