Download INTRODUCTION-TO-CONTRACTS

INTRODUCTION TO
CONTRACTS
Module 2
Topic Outcome
1. Discuss what is an obligation, requisites and sources of an
obligation
2. Explain the different kinds of and the modes of extinguishing
obligations
Obligation defined
• An obligation is a juridical necessity to give, to do or not to do. It
comes from the Latin word “obligare” which means to bind
through giving, doing or not doing something. It is a juridical
necessity because the rights and duties emanating from obligation
may be enforced in courts of justice which may order their
performance if refused or neglected.
Meaning of obligation to give, to do or not to
do
• The obligation to give is in the essence of a real obligation
because a physical thing is involved and delivery of the same
extinguishes the obligation.
• Example: X obliged to give Y a bicycle.
Requisites of an obligation
• Every obligation has four essential requisites, namely:
• a) juridical tie or vinculum which is the link that binds the parties;
• b) the prestation which is the giving, doing or not doing of something;
• c) the active subject which is the person who holds the right to demand
the prestation, called oblige or creditor; and
• d) the passive subject which is the person against whom the prestation
may be demanded, called obligor or debtor
Sources of obligation
• Article 1157 of the Civil Code enumerates the sources of obligatins,
namely:
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1)laws;
2) contract;
3) quasi-contract;
4) acts or omissions punishable by law; and
5) quasi-delicts.
Sources of obligation
Obligations arising from law
• Law is a rule of conduct, just, obligatory and laid down by the
legitimate authority for common observance and benefit. Without it
there will be no order in a society which will be ruled by the maxim of
what is might is right. Thus, everyone is presumed to know the law, as
ignorance of the law excuses no one from compliance therewith.
• This kind of obligation is dictated bylaw like the obligation of husband
and wife to live with each other, observe mutual respect and fidelity,
and render mutual support, the obligation to pay taxes under the
National Internal Revenue Code, and the obligation of an employer to
pay minimum wage to the workers.
Sources of obligation
Obligations arising from contracts
• A contract is the meeting of minds between two persons whereby one
binds himself with respect to the other to give something or render
some services. When duly entered into, the obligation arising from
contract has the full force of law between the parties, hence should be
complied with in good faith.
• The contracts enumerated and treated in the Civil Code, among others,
are sale, barter, lease, partnership, agency, loan, deposit, insurance,
guaranty, pledge, mortgage and antichresis.
Sources of obligation
Obligations arising from quasi-contracts
• There are two kinds of quasi-contracts, namely: negotorium gestio and
solutio indebiti. Negotorium gestio is the voluntary administration or
management of an abandoned business or property belonging to another
without his consent. Solutio indebiti is the juridical relation which is created
by virtue of a payment by mistake consequently obliging the payee to return
to payor what he received.
Sources of obligation
Obligations arising from crimes
• Acts or omissions punishable by law are better known as crimes or delicts,
like homicide or damage to property through reckless imprudence. Under
the law a person who is convicted for a criminal offense may be imprisoned,
and in addition, will be required to indemnify the heirs of the victim. This
obligation is what is known as civil liability arising from crimes may be
complied with in the form of restitution, indemnification, or reparation of
damages.
Sources of obligation
Obligations arising from quasi-delict
• A quasi-delict is a legal wrong committed through fault or
negligence causing damage to a person or property thereby
obliging the wrongdoer to pay for the damage done, provided that
there exists no contractual relation between them. A typical
example of this is a pedestrian who was hit and suffered injuries
by reason of a speeding vehicle and death due to poisoning from
beverages, foods, etc. against the fabricators.
Diligence required in the performance of an
obligation
• Every person obliged to give something is also obliged to take care of it with the
diligence of a good father of the family, unless the law or stipulation of the parties
requires another standard of care. This means that pending the delivery of the
thing, the obligor shall take care of it with the diligence and concern that a prudent
man will exercise in taking care of his property depending upon the nature of the
obligation and the circumstances of time, person and place. On the other hand, if
the obligation is personal in that it consists in doing or not doing something, and
the same is not done, or done in contravention with the tenor of the obligation, the
same shall be done or undone, as the case may be, at the expense of the guilty party.
Rights to the fruits of the thing to be delivered
• The creditor has the right to the fruits of the thing from the time the
obligation to deliver arises. However, he shall acquire no real right over it
until the same has been delivered. This means that while the thing and the
fruits have not been delivered, the obligee acquires only a personal right. But
once the thing is delivered, the obligee acquires the real right of ownership.
Rule when obligor incurs delay
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extra-judicially demands from them the fulfillment of their
obligation. However, the demand by the creditor shall not be necessary in
order that delay may exist:
• (1) When the obligation or the law expressly so declares; or
• (2) When from the nature and circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was the controlling motive for the establishment of the contract; or
• (3) When demand would be useless, as when the obligor has been rendered it beyond
his power to perform.
Rule when obligor incurs delay
• In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfill his obligation, delay
by the other begins.
Liability of obligor for fraud, negligence, delay,
etc
• Those who in the performance of their obligation are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof are liable for
damages. Delay exists when the obligor fails to fulfill his obligation on the date
agreed upon and after a demand by the oblige, either judicially (with court
intervention) or extra-judicially (outside a court) orally or in writing, has been made
on the obligor, whereas, fraud is simply the voluntary and deliberate act of the
obligor to evade or cheat for personal gain the fulfillment of the obligation. In
connection with negligence or fault, it consists in the failure to observe for the
protection of the interest of another person, that degree of care, precaution and
vigilance which is demanded by the circumstances, and because of which the other
party suffers damage or injury.
Liability arising from fortuitous event
• Except in cases expressly authorized by law, or when it is
otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or
which though foreseen, were inevitable. A fortuitous event is an
unexpected event or act of God which cannot be foreseen or
resisted, like floods, earthquakes, torrents, ship wreck, lightnings,
and conflagration, to mention a few.
Kinds of obligations
• The Civil Code classifies obligation into
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a) pure and conditional;
b) obligation with a period;
c) alternative and facultative;
d) joint and solidary;
e) divisible and indivisible; and
f) obligation with a penal clause.
Pure obligation
• A pure obligation is one which is not subject to any condition or
burden and whose fulfillment is neither dependent upon a future
or uncertain or even a past event unknown to the parties, hence,
immediately demandable.
• Example: X promises to deliver a specific guitar to Y. This
obligation is immediately demandable because there is no specific
date or condition mentioned for its fulfillment.
Conditional obligation
• A conditional obligation is one whose performance is subject to a
condition which may either be suspensive or resolutory in effect.
A suspensive condition is one which upon fulfillment gives rise to
the obligation dependent upon it.
• Example: X promises to give Y a car if he passes the Board
Exam for Mechanical Engineers.
Conditional obligation
The Civil Code provides that in case of improvements, loss or deterioration of the
thing before the fulfillment of the suspensive condition, the following rules shall
govern:
(1)If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2)If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes or goes out of
commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;
Conditional obligation
3) When the thing deteriorates without the fault of the debtor, the impairment is
to be borne by the creditor; the creditor may chose between rescission of the
obligation and its fulfillment, with indemnity of damages in either case;
4) If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor; and
5) If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufructuary
If the condition is resolutory, the happening of the condition extinguishes the
obligation and the parties are obliged to make mutual restitution of whatever they have
received by reason thereof.
Obligation with a period
• An obligation with a period is one in which a day certain has been
fixed for its fulfillment. This obligation is different from a
conditional obligation because the condition imposed therein may
or may not happen, whereas, the period fixed in this obligation is
sure to com although the time as to when is uncertain, as in the
death of a person.
Alternative obligation
• An alternative obligation is one where various prestations
are due, but the performance of one, usually chosen by
the obligor, is sufficient.
• Example: X binds himself to deliver to Y a color TV or
betamax.
Facultative obligation
• In this obligation, only one prestation is due but the
obligor or debtor may substitute another in lieu of the
prestation due
Joint obligation
• A joint obligation is one where the entire obligation is to be fulfilled
proportionately by the various obligors or debtors, and each one of the
obliges or creditors is entitled and can demand a proportionate part of the
credit due from each of them.
• Example: X and Y signed a promissory note binding themselves to pay Z the
sum of P10,000.00. Z can demand from X P5,000.00, and from Y the same
amount because the rule in a joint obligation is that the debt or credit is
divided into as many parts as there are creditors or debtors or to each his
own.
Solidary Obligation
• A solidary obligation is exactly the opposite of a joint
obligation in the sense that each of the solidary debtors is liable
for the entire obligation as long as the same has not been
performed, and each of the creditors can demand compliance.
A solidary obligation may exist only when
• a) the obligation so provides;
• b) when the law so provides; and
• c) the nature of the obligation requires solidarity.
Solidary Obligation
• Example: X and Y bind themselves jointly and severally to pay Z and M the
sum of P10,000.00. In this case, X or Y may be compelled by Z or M to pay
the entire amount, and after payment, the paying debtor can compel the
other solidary debtor to contribute his share. Among the terms usually
indicating solidarity are “jointly and severally”, “in solidum”, and
“individually and collectively.”
Divisible obligations
• A divisible obligation is one capable of being performed partially.
• Example: X obliged himself to deliver 600 cubic feet sand within
a week. This may be complied with in two or three days. It is not
the rule, however, that because the subject matter id divisible the
obligation is divisible if the intent is to make it divisible.
Indivisible obligation
• This is the exact opposite of divisible obligation as no partial
performance is permitted.
• To determine whether the obligation is divisible or indivisible the
test is, did the parties intend partial performance? Thus, the
object of the obligation may be physically divisible, but they
intended it to be indivisible or if so provided by law the object is
divisible.
Obligation with a penal clause
• An obligation which contains an accessory undertaking to assume a
greater liability in case of breach is an obligation with a penal clause.
The penal clause is attached to the principal obligation to insure its
fulfillment. The penalty may either be subsidiary as when only the
penalty is demandable, or joint when both the principal and the penalty
can be enforced.
• Example: X borrowed from Y the sum of P20,000.00 payable on May
31, 1985. They agreed in writing that if X fails to pay the same on the
said date, X shall in addition pay P4,000.00 as penalty.
Modes of extinguishing obligations
• Article 1231 of the Civil Code provides that obligations are extinguished as
follows:
• 1) by payment or performance;
• 2) by loss of the thing due;
• 3) by condonation or remission of the debt;
• 4) by confusion or merger of the rights of creditor and debtor;
• 5) by compensation;
• 6) by novation. Elsewhere in the Code are other relative modes, among which are:
annulment, rescission, fulfillment of a resolutory condition and prescription.
Payment or performance
• This mode consist not only of delivery of money but also the performance of an obligation
in any other manner. It is the essence of this mode that there must be a pre-existing
obligation (not option) otherwise, no payment could be made. Thus, a debt is not
considered to have been paid unless the thing or service in which the obligation consists
have been completely delivered or rendered, as the case may be.
• Payment may also be effected in various special forms, namely:
• 1) dacion in payment or dacion en pago;
• 2) payment by cession; and
• 3) tender of payment and consignation.
Payment or performance
Dacion in payment
• Dacion en pago is the conveyance of the ownership of a
thing which is accepted by the oblige (creditor) as a payment
of a debt in lieu of money, thereby extinguishing the
obligation.
• Example: X is indebted to Y in the amount of P10,000.00.
Instead of paying money, X delivered a cd player worth the
same amount which is accepted by Y.
Payment or performance
Payment by cession
• Payment by cession consists of the assignment of all the properties of
the debtor to his creditors in order that the same may be solf by the
creditors to satisfy their credits. Unless there is a stipulation to the
contrary, the cession shall extinguish the liability of the debtor to the
extent of the net proceeds in the sale.
• Example: M is indebted to X, Y and Z in the amount of P30,000.00.
If M is insolvent, partially or totally, he may assign or cede his
properties to X, Y and Z who may sell them and apply the proceeds to
the payment proportionally to his various debts.
Payment or performance
Payment by cession
• Cession or assignment may be of two kinds, namely:
• (1) the voluntary cession in which the consent of the creditors
is needed, and
• (2) the legal or judicial where the approval of the court is
required. The latter is governed by the Insolvency Law.
Payment or performance
Tender of payment or consignation
• This special form of payment is done through the actual offering (not just a proposal) by the debtor to
the creditor of the thing or sum which he considers to be due. If this tender is unjustly refused, the
debtor shall complete this by making a consignation by depositing the thing or the amount due with
the court of competent jurisdiction in accordance with the formalities required by law. Consignation
shall be made also to extinguish the obligation in the following cases:
• a) when the creditor is absent or is unknown, or does not appear at the place of payment;
• b) when he is incapacitated to receive payment at the time it is due;
• c) when without just cause, he refuses to give a receipt;
• d) when two or more persons claim the same right to collect; and
• e) when the title to the obligation has been lost.
Loss of the thing
• The thing due is considered lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is
unknown or cannot be recovered. When the obligation consists
of doing something, there is loss when the prestation becomes
legally or physically impossible. On the other hand, an obligation
consisting in the delivery of a determinate thing shall be
extinguished if it is destroyed without fault of the debtor and
before he has incurred delay.
Loss of the thing
• Example: X obliged himself to deliver a specific Australian horse
to Y. Before the agreed date of delivery, the horse died without
X’s fault. In this case the obligation is extinguished because it
consists of the delivery of a determinate thing. But if the
obligation is to delivery a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
Condonation or remission
• It is an act of liberality by which the oblige, who receives no price or
equivalent thereof, renounces the enforcement of an obligation, which is
extinguished in whole or in part.
• Example: Y is indebted to X in the amount of P5,000.00. On the due date
of the obligation, Y offered to pay but X renounces his right to collect as he
won in the sweepstakes. This is a complete remission. But if the
renunciation is only one-half, Y should still pay P2,500.00.
Confusion or merger
• This mode takes place when the qualities of the obligor and that of the
obligee meet I one person, the effect of which generally extinguishes the
obligation.
• Example: X is indebted to Y for P10,000.00 for which he issued a
promissory note. Later, Y indorsed it to Z who then indorsed it back to X.
In this case, the obligation is extinguished since X had become his own
creditor and debtor.
Compensation
• Compensation takes place when two or more persons, in their own rights, are
creditors and debtors to each other. This means that by operation of law, the
debts of the parties who are creditors and debtors in their own rights are
extinguished to the concurrent amount even if they do not know it.
• Example: X is indebted to Y in the amount of P20,000.00 while Y is
indebted to X in the same amount. If both debts are due and demandable
and no prohibition against any of them exists, compensation shall take place
since both are creditors and debtors in their own right.
Distinction between confusion and
compensation
• The differences are:
• (1) In confusion, there is only one person who becomes both a creditor
and debtor but in compensation, the personality of the debtors and
creditors is preserved; and
• (2) There is only one obligation in confusion but not in the other where
there are two.
Novation
• Novation is the change, substitution, or renewal of an obligatory relation,
with the intention of extinguishing or modifying essentially the former,
debitum pro debito (new debt for an old debt). It may take place by
changing the object or principal conditions of the obligation or substitution
of another person in the place of the debtor or in subrogation to the rights
of the creditor or combination of both through a change in the person of
the parties or the object or principal condition.
Novation
• Personal novation may either be in the form of expromision or delegacion.
Expromision takes place when a third person of his own accord and even
without the knowledge of the original debtor assumes the obligation, with
the consent of the creditor
Novation
• Example: X is indebted to Y in the amount of P10,000.00. Then Z, a third
person, goes to Y and tell him that he will be the one to pay the P10,000.00.
If Y agrees, a novation by expromision takes place even if X does not know
or consent to it. Delegacion takes place when the debtor asks the creditor to
accept a third person to take his place as the obligor. The creditor may
withhold his approval. Thus in the same example, if X goes to Y bringing Z
and proposes to Y that Z who is willing will pay the P10,000.00 and Y
consents to it, the novation by delegacion extinguishes the obligation.
QUESTIONS AND PROBLEMS
1. What is an obligation and explain with illustrations its requisites?
2. What are the sources of obligations?
3. What is a quasi-contract and explain each kind?
4. What is a quasi-delict and how it is differentiated with delicts?
5. Enumerate and explain the special forms of payment.
6. When may an obligor be relieved from his obligation by reason of loss of thing due?
7. X promises the use of his one-door apartment to Y provided the latter passes the Board Examination
for Mechanical Engineers. IN this case, what kind of obligation is established? Explain.
References:
• De Leon, Hector S., The Law on Obligations and Contracts. Quezon City: Rex Book store, Inc.,2003
• Jurado, Desiderio P., Civil Law Reviewer. Quezon city: Rex Book Store, Inc., 1999.
• Jurado, Desiderio P., Comments and Jurisprudence on obligations and Contracts. Quezon city: Rex
Book Store, Inc., 2002.
• Mendoza, Quintin C., Engineering Contracts, specifications and Ethics. Quezon City: Rex Book Store,
Inc., 2000.