(Arts. 1156-1304.
) obligations are discussed under the Title dealing with
Chapter I
GENERAL PROVISIONS
 ARTICLE 1156. An obligation is a juridical
necessity to give, to do or not to do. (n)
Meaning of obligation
The term obligation is derived from the Latin word
“obligatio” which means a “tying” or “binding.
(1) It is a tie of law or a juridical bond by virtue of which
one is bound in favor of another to render something
— and this may consist in giving a thing, doing a
certain act, or not doing a certain act.
(2) Manresa defi nes the term as “a legal relation
established between one party and another, whereby
the latter is bound to the fulfillment of a prestation
which the former may demand of him.” (8 Manresa
13.)
(3) Article 1156 gives the Civil Code defi nition of
obligation, in its passive aspect. Our law merely
stresses the duty of the debtor or obligor (he who has
the duty of giving, doing, or not doing) when it speaks
of obligation as a juridical necessity.
Meaning of juridical necessity.
Obligation is a juridical necessity because in case of
non-compliance, the courts of justice may be called
upon to enforce its fulfi llment or, in default thereof,
the economic value that it represents. In a proper case,
the debtor may also be made liable for damages,
which represent the
sum of money given as a compensation for the injury
or harm suffered by the creditor or obligee (he who
has the right to the performance of the obligation) for
the violation of his rights.
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 legal consequences. If obligations were
not made enforceable, then people can disregard them
with impunity. If an obligation cannot be enforced, it
may be only a natural obligation.
Nature of obligations under the Civil Code.
Obligations which give to the creditor or obligee a right of
action in courts of justice to enforce their performance
are known as civil obligations. They are to be
distinguished from natural obligations which, not
being based on positive law but on equity and natural
law, do not grant a right of action to enforce their
performance although in case of voluntary fulfi llment
by the debtor, the latter may not recover what has
been delivered or rendered by reason thereof. (Art.*
1423.)
“Natural Obligations.” (Title III, Arts. 1423-1430.)
Essential requisites of an obligation.
An obligation as defined in Article 1156 is constituted
upon the concurrence of the four (4) essential
elements thereof, namely:
(1) A passive subject (called debtor or obligor) or the
person who is bound to the fulfillment of the
obligation; he who has a duty.
(2) An active subject (called creditor or obligee) or the
person who is entitled to demand the fulfillment of the
obligation; he who has a right.
(3) Object or prestation (subject matter of the obligation)
or the conduct required to be observed by the debtor.
It may consist in giving, doing, or not doing. (see Art.
1232.) Without the prestation, there is nothing to
perform. In bilateral obligations (see Art. 1191.), the
parties are reciprocally debtors and creditors; and
*Unless otherwise indicated, refers to article in the Civil Code
(4) A juridical or legal tie (also called effi cient cause) or
that which binds or connects the parties to the
obligation. The tie in an obligation can easily be
determined by knowing the source of the obligation.
(Art. 1157.)
EXAMPLE:
Under a building contract, X bound himself to
construct a house for Y for P1,000,000.00.
Here, X is the passive subject, Y is the active subject,
the building of the house is the object or prestation,
and the agreement or contract, which is the source of
the obligation, is the juridical tie.
Suppose X had already constructed the house and it
was the agreement that Y would pay X after the
construction is fi nished. X, then, becomes the active
subject and Y, the passive subject.
Form of obligation.
(1) As a general rule, the law does not require any form in
obligations arising from contracts for their validity or
binding force. (see Art. 1356.)
(2) Obligations arising from other sources (Art. 1157.) do
not have any form at all.
Obligation, right, and wrong (cause of action)
distinguished.
(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 of
another, causing injury to the latter;
*In a breach of contract, the contract violated is the
subject matter, while the breach thereof by the
obligor is the cause of action. The subject matter is
the item with respect to which the controversy has
arisen or concerning which the wrong has been done,
and is ordinarily the right, the thing or the contract
under dispute.
Essential elements of cause of action,
(1) Its essential elements are:
(a) a legal right in favor of a person (creditor/plaintiff) by
whatever means and under whatever law it arises or is
created;
(b) a correlative legal obligation on the part of another
(debtor/defendant) to respect or not to violate said
right; and
(c) an act or omission in breach or violation of said right
by the defendant with consequential injury or damage
to the plaintiff for which he may maintain an action
for the recovery of damages
or other appropriate relief. (see Ma-ao Sugar Central
Co. vs. Barrios, 79 Phil. 66 [1948]; Teves vs. People’s
Homesite and Housing Corp., 23 SCRA 1141 [1968];
Development Bank of the Phils. vs.Pundogar, 218
SCRA 118 [1993]; Parañaque King Enterprises vs.
Court of Appeals, 269 SCRA 727 [1997]; Nadela vs.
City of Cebu, 411 SCRA 315 [2003].)
(2) If any of these elements is absent, the complaint
becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action. (San
Lorenzo Village Assoc., Inc. vs. Court of Appeals,
288 SCRA 115 [1998]; Uy vs. Evangelista, 361
SCRA 95 [2001].) The presence of a cause of action
rests on the sufficiency, and not on the veracity, of the
allegations in the complaint, which will have to be
examined during the trial on the merits. (Pioneer
International, Ltd. vs. Guadiz, Jr., 535 SCRA 584
[2007].) The test is whether the material allegations of
the complaint, assuming to be true, state ultimate facts
which constitutes plaintiff’s cause of action such that
plaintiff is entitled to a favorable judgment as a matter
of law. (Rovels Enterprises, Inc. vs. Ocampo, 391
SCRA 176 [2002].)
(3) A cause of action only arises when the last element
occurs, i.e. at the moment a right has been
transgressed.
(a) It is to be distinguished from right of action or the right
to commence and maintain an action, in that the
former is governed by the procedural law while the
latter depends on substantive law.
The right of action springs from the cause of action,
but does not accrue until all the facts which constitute
the cause of action have occurred.
The action shall be brought in the name of the party
who by law is entitled to the right to be enforced.
(b) An obligation on the part of a person cannot exist
without a corresponding right existing in favor of another,
and vice-versa, for every right enjoyed by a person, there is
a corresponding obligation on the part of another to respect
such right.
ILLUSTRATIVE CASE:
"S" rejected or cancelled a contract to sell his property
even before the arrival of the period in the exercise of
the option to buy by the purchaser who has already
made a downpayment.
Facts: S and B entered into a contract to sell, whereby B,
after making a downpayment, was given the option to pay
the balance of the purchase price of a parcel of land. Later,
S “rejected the contract to sell’’ even before the arrival of
the period for the exercise of said option on the ground that
the terms and conditions of the contract are grossly
disadvantageous and highly prejudicial to his interest. S
sent two (2) checks to B in an apparent effort to return the
downpayment.
S contends that the complaint was prematurely fi led
because at the time of the institution of the complaint,
B has yet to exercise his option under the “Option of
Buyer’’ clause of the contract.
Issue: Has B a cause of action against S for prematurity?
Held: Yes. (1) All the elements of a cause of action
are present. — First, there is a legal right in favor of
B, i.e., the right to complete the payment of the
purchase price should he choose to do so; there is an
obligation on the part of S to sell the subject property
exclusively to B upon full payment of the purchase
price; and there was a breach of S’s obligation to sell
the property, when S rejected the contract to sell even
before B could exercise his option to buy
notwithstanding that he had already made a
downpayment.
(2) S rejected contract to sell in no uncertain terms. — The
fact that the rejection or cancellation of the contract
by S was not made judicially or by notarial act (see
Art. 1592.) is of no moment. It is enough for purposes
of determining the existence of a cause of action that
S has declared in no uncertain terms his refusal to be
bound by the contract to sell. Such declaration,
coupled with S’s act of returning B’s down payment,
clearly indicates S’s rejection of the contract to sell.
(Leberman Realty Corporation
vs. Typingco, 293 SCRA 316 [1998].)
Cause of action based upon a written contract.
Actions based upon a written contract should be
brought within 10 years from the time the right of
action accrues. (Art. 1144.) The accrual refers to the
cause of action. Accordingly, an action based on a
contract accrues only when an actual breach or
violation thereof occurs. (China Banking Corp. vs.
Court of Appeals, 461 SCRA 162 [2005]; see Art.1169.)
Therefore, the period of prescription commences, not
from the date of execution of the contract but from
the occurrence of the breach. The cause of action
resulting from breach of contract is dependent
on the facts of each particular case. (Pilipinas Shell
Petroleum Corporation vs. John Bordman Ltd., 473
SCRA 151 [2006].)
(1) In an action to rescind a contract of sale on installment
basis, for non-payment, the cause of action arises at
the time the last installment is not paid. (Nabus vs.
Court of Appeals, 193 SCRA 732 [1991].)
(2) Where an overdraft agreement stipulates that the
obligation is payable on demand, the breach starts
only when demand is made. (Elido vs. Court of
Appeals, 216 SCRA 637 [1992]; China Banking
Corporation vs. Court of Appeals, supra.)
(3) In a contract of loan with real estate mortgage,
whereby the creditor could unilaterally increase the
interest rate, where the creditor foreclosed the
mortgage when the debtor failed to pay the loan, the
cause of action for the annulment of the foreclosure
sale should be counted from the date the debtor
discovered the increased interest rate
(Banco Filipino Savings & Mortgage Bank vs. Court
of Appeals, 388 Phil. 27, 332 SCRA 241 [2000].)
(4) Where the agreement to buy and sell was conditioned
upon the conduct of a preliminary survey of the land
to verify, whether it contained
the area stated in the tax declaration, the right of
action for specific performance arose only when the
plaintiff discovered the completion of the survey.
(Cole vs. Gregorio, 202 Phil. 226, 116 SCRA 670
[1982].)
(5) With respect to money claims arising from a contract
of employment, which would prescribe in three (3)
years from the time the cause of action accrued, the
cause of action would arise from the date the
employer made a definite denial of the employee’s
claim, for prior to such denial, it is deemed that the
issues had not yet been joined because the employee
could have still been reinstated (Serrano vs. Court of
Appeals, 415 Phil. 447, 363 SCRA 223 [2001].)
(6) In an action for reformation of a contract, where the
plaintiff alleged, among others, that the contract was
one-sided in favor of you the defendant, and that
certain events had made the arrangement inequitable,
the cause of action for
reformation would arise only when the contract
appeared disadvantageous. (Naga Telephone Co. vs.
Court of Appeals, 230 SCRA 351 [1994].)
(7) The nature of the product sold is a major factor in
determining when the cause of action has accrued. For
example, when fuel oil is delivered in drums, a buyer
readily assumes that the agreed volume can be and
actually is, contained in those drums. He is not
expected to make a meticulous measurement of each
and every delivery. In case of short deliveries, the
cause of action will arise only from the discovery of
the same with certainty. (Pilipinas Shell Petroleum
Corporation vs. John Bordment, Ltd., supra.)
Injury, damage, and damages distinguished.
The words “injury,” “damage,’’ and “damages’’ are
sometimes used synonymously, although there is a
material difference among them.
(1) Injury is the illegal invasion of a legal right; it is the
wrongful act or omission which causes loss or harm to
another, while damage is the loss, hurt, or harm which
results from the injury. On the other hand, damages
denote the sum of money recoverable as amends for
the wrongful act or omission; and
(2) Injury is the legal wrong to be redressed, while
damages are the recompense or compensation
awarded or recoverable for the damage or loss
suffered. (Custodio vs. Court of Appeals, 253 SCRA
483 [1996].)
Existence of one without the other.
There may be injury without damage and
damage without injury.
(1) Proof of loss for injury. — A wrongful violation of his
legal right is not sufficient to entitle a person to sue
another in a court of justice for the enforcement or
protection of said right. As a rule, there must be, in
addition, loss or damage caused to him by the
violation of his right. But except for actual or
compensatory damages (Art. 2199.), no pecuniary
proof is necessary in order that moral, nominal,
temperate, liquidated, or exemplary damages may be
awarded. (Art. 2216.)
(2) Liability for damages of a person for exercising
his legal rights. — A person has the right to take
all legal steps to enforce his legal and/or
equitable rights. One who makes use of his legal
right does no injury. Qui jure suo utitur mullum
damnum facit. If damage results from a person’s
exercising his legal rights, it is damnum absque
injuria (damage without injury). (Auyong Hian
vs. Court of Appeals, 59 SCRA 110 [1974].) The
plaintiff must establish that the damage to him
resulted from a breach or violation of legal duty
which the defendant owned to him; otherwise,
the consequences must be borne by the plaintiff
alone.
In other words, in order that the law will give
redress for an act
(or omission) causing damage, that act must be
not only hurtful,
but wrongful.2 (Custodio vs. Court of Appeals,
supra; see Philippine National Bank vs. Court of
 Appeals, 367 SCRA 198 [2001].)
ILLUSTRATIVE CASE:
Acts of importer contesting forfeiture, delay in the
delivery of goods to highest bidder.
Facts: X imported certain goods. The Collector of
Customs declared the goods forfeited in favor of
the government and ordered the sale thereof at
public auction. The bid of Y was approved and
the goods were awarded to him. Under the law,
X has the right to have the decision of the
Collector of Customs reviewed by the
Commissioner of Customs, and from the
decision of the latter, to appeal to the Court of
Tax Appeals (Secs. 2313, 402, Tariff and
Customs Code.), and from the latter’s decision,
to the Supreme Court. X will be prejudiced if the
sale is not set aside. (see Art. 1397.)
Issue: Is X liable to Y for damages from the
consequent delay in the delivery of the goods?
Held: Such delay is an incident to the exercise
by X of his right to contest the forfeiture and the
sale of his goods. (see Auyong Hian vs. Court of
Appeals, supra.)
Art. 19. Every person must, in the exercise of his
rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.
The principle of damnum absque injuria does not
apply when there is an abuse of a person’s right.
Article 19 prescribes a “primordial limitation on
all rights’’ by setting certain standards that must
be observed in the exercise thereof. It does not
permit an abuse of rights which is committed
when the defendant acts with bad faith or intent
to prejudice the plaintiff in the exercise of a
right. Such abuse will give rise to liability for
damages. Good faith, however, is presumed.
Kinds of obligation according to subject matter.
From the viewpoint of the subject matter, obligation
may either be:
(1) Real obligation (obligation to give) or that in
which the subject matter is a thing which the
obligor must deliver to the obligee; or
(2) Personal obligation (obligation to do or not to do)
or that in which the subject matter is an act to be
done or not to be done.
There are thus two (2) kinds of personal obligation:
(a) Positive personal obligation or obligation to do or
to render service (see Art. 1167.); and
(b) Negative personal obligation or obligation not to
do (which naturally includes obligations “not to
give”). (see Art. 1168.)
 ART. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)
Sources of obligations.
An obligation imposed on a person and the
corresponding right granted to another must be
rooted in at least any of the following
sources:
(1) Law. — when they are imposed by the law
itself, e.g., obligation to pay taxes; obligation to
support one’s family (see Art. 195, Family Code.);
(2) Contracts. — when they arise from the
stipulation of the parties (Art. 1306.), e.g., the
obligation to repay a loan by virtue of an
agreement;
(3) Quasi-contracts. — when they arise from
lawful, voluntary and unilateral acts and which
are enforceable to the end that no one shall be
unjustly enriched or benefi ted at the expense of
another (Art. 2142.), e.g., the obligation to return
money paid by mistake or which is not due. (Art.
2154.) In a sense, these obligations may be
considered as arising from law;
(4) Crimes or acts or omissions punished by
law. — when they arise from civil liability which
is the consequence of a criminal offense (Art.
1161.), e.g., the obligation of a thief to return the
car stolen by him; the duty of a killer to
indemnify the heirs of his victim; and
(5) Quasi-delicts or torts. — when they arise
from damage caused to another through an act
or omission, there being fault or negligence,
but no contractual relation exists between the
parties (Art. 2176.), e.g., the obligation of the
head of a family that lives in a building or a part
thereof to answer for damages caused by things
thrown or falling from the same (Art. 2193.); the
obligation of the possessor of an animal to pay
for the damage which it may have caused.
(Art.2183.)
The enumeration by the law is exclusive; hence,
there is no obligation as defined in Article 1156,
if its source is not any of those enumerated.
Sources classified.
The law enumerates five (5) sources of
obligations. They may be classified as follows:
(1) Those emanating from law; and
(2) Those emanating from private acts which may be
further subdivided into:
(a) those arising from licit acts, in the case of
contracts and quasi-contracts; and
(b) those arising from illicit acts, which may be
either punishable by law in the case of delicts, or
not punishable in the case of quasi-delicts.
Actually, there are only two (2) sources: law and
contracts, because obligations arising from
quasi-contracts, crimes, and quasi-delicts are
really imposed by law.
Where the source of the obligation is a private
act, the law merely recognizes or acknowledges
the existence of the obligation.
ILLUSTRATIVE CASE:
Liability of sheriff lawfully enforcing a judgment
in an ejectment suit.
Facts: A judgment was rendered by a justice of
the peace court (now municipal court) in favor
of X who brought an ejectment suit against Y,
the owner of the house built on the land of X. Z,
the deputy sheriff who executed the judgment,
was obliged to remove the house of Y from the
land according to the usual procedure in the
action for ejectment.
Issue: Is Y entitled to indemnity arising from the
destruction of his house?
Held: No proof has been submitted that a contract
had been entered into between plaintiff (Y) and
the defendants (X and Z) or that the latter had
committed illegal acts or omissions or incurred
in any kind of fault or negligence, from any of
which an obligation might have arisen on the
part of X and Z to indemnify Y. For this reason,
the claim for indemnity, on account of acts
performed by the sheriff, while enforcing a
judgment, cannot under any consideration be
sustained.
 ART. 1158. Obligations derived from law are
not presumed. Only those expressly
determined in this 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 foreseen, by the
provisions of this Book. (1090)
Legal obligations.
Article 1158 refers to legal obligations or
obligations arising from law. They are not
presumed because they are considered a
burden upon the obligor. They are the exception, not
the rule. To be demandable, they must be clearly set
forth in the law, i.e., the Civil Code or special laws.
Thus:
(1) An employer has no obligation to furnish free
legal assistance to his employees because no law
requires this, and, therefore, an employee may
not recover from his employer the amount he
may have paid a lawyer hired by him to recover
damages caused to said employee by a stranger
or strangers while in the performance of his
duties.
(2) A private school has no legal obligation to
provide clothing allowance to its teachers
because there is no law which imposes this
obligation upon schools. But a person who wins
money in gambling has the duty to return his
winnings to the loser. This obligation is provided
by law. (Art. 2014.)
Under Article 1158, special laws refer to all
other laws not contained in the Civil Code.
ILLUSTRATIVE CASES:
1. Liability of husband for medical assistance
rendered to his wife but contracted by his
parents.
Facts: X, by virtue of having been sent for by B
and C, attended as physician and rendered
professional services to a daughter-in-law of B
and C during a diffi cult and laborious childbirth.
Issue: Who is bound to pay the bill: B and C, the
parents-in-law of the patient, or the husband of
the latter?
Held: The rendering of medical assistance in
case of illness is comprised among the mutual
obligations to which spouses are bound by way
of mutual support. If spouses are mutually
bound to support each other, there can be no
question that when either of them by reason of
illness should be in need of medical assistance,
the other is to render the unavoidable obligation
to furnish the services of a physician and is
liable for all expenses, including the fees for
professional services.
This liability originates from the above-
mentioned mutual obligation which the law has
expressly established between the married
couple. B and C not having personally bound
themselves to pay are not liable.
—-— —-— —-—
2. Title to property purchased by a person for
his own benefit but paid by another.
Facts: X, of legal age, bought two vessels from
B, the purchase price thereof being paid by C,
X’s father. Subsequently, differences arose
between X and C. The latter brought action to
recover the vessels, he having paid the purchase
price.
Issue: Is there any obligation on the part of X to
transfer the ownership of the vessel to C?
Held: None. If any such obligation was ever
created on the part of X, said obligation must
arise from law. But obligations derived from law
are not presumed. Only those expressly
determined in the Civil Code or in special laws
are demandable. Whatever right C may have
against X either for the recovery of the money
paid or for damages, it is clear that such
payment gave him no title, either lega or
equitable, to these vessels.
Note: If X were a minor, the vessels would belong to
C in ownership and usufruct under Article 161 of the
old Civil Code. (now Art. 324.5) Under Article
1448,6 the payment may give rise to a gift or an
implied trust.
 ART. 1159. Obligations arising from
contracts have the force of law between the
contracting parties and should be complied
with in good faith. (1091a)
Contractual obligations.
The above article speaks of contractual
obligations or obligations arising from contracts
or voluntary agreements.
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.) It is the formal
expression by the parties of their rights and
obligations they have agreed upon with respect
to each other.
(1) Binding force. — Obligations arising from
contracts are governed primarily by the
agreement of the contracting parties. Once
perfected, valid contracts have the force of law
between the parties who are bound to comply
there with in good faith, and neither one may
without the consent of the other, renege
there from.
In characterizing contracts as having the force
of law between the parties, the law stresses the
obligatory nature of a binding and valid
agreement, absent any allegation that it is
contrary to law, morals, good customs, public
order, or public policy. (Art. 1306.)
(a) The law, recognizing the obligatory force of
contracts (Arts. 1139, 1308, 1315, 1356.), will
not permit a party to be set free from liability for
any kind of misperformance of the contractual
undertaking or a contravention of the tenor
thereof. (Art. 1170.) The mere proof of the
existence of the contract and the failure of
its compliance justify, prima facie, a
corresponding right of relief.
(b) In law, whatever fairly puts a person on
inquiry is suffi cient notice, where the means of
knowledge are at hand, which if pursued by
proper inquiry, the full truth might have been
ascertained.
Thus, where a purchaser of a memorial lot, on
installment basis, had full knowledge of the
terms and conditions of the sale, including the
rules and regulations issued by the seller
governing the memorial park, to which she
obliged herself to abide, cannot later feign
ignorance of said rules.
(c) If it occurs to one of the contracting parties
to allege some defect in a contract as a reason
for invalidating it, such alleged defect must be
proved by him by convincing evidence since its
validity or compliance cannot be left to will of
one of them. (see Art. 1308.) “An experienced
businessman who signs important legal papers
cannot disclaim the consequent liabilities
therefor after being a signatory thereon.’’ (Blade
International Marketing Corp. vs. Court of
Appeals, 372 SCRA 333 [2001].) It behooves
every contracting party to learn and to know the
contents of an instrument before signing and
agreeing to it. (Dio vs. St. Ferdinand Memorial
Park, Inc., supra.)
(d) Courts have no alternative but to enforce
contracts as they were agreed upon and written
when the terms thereof are clear and leave no
room for interpretation. (Art. 1370.). This does
not mean, however, that contract is superior to
the law. Although a contract is the law between
the contracting parties, the provisions of
positive law which regulate such contracts are
deemed included and shall limit and govern the
relations between the parties.
(e) A compromise agreement is immediately
executory and not appealable, except for vices
of consent (Art. 1330.) or forgery. Upon the
parties, it has the effect and the authority of res
judicata, once entired into. To have the force of
law between the parties, it must comply with the
requisites of contracts. (Art. 1318.) It may be
either extrajudicial (to prevent litigation) or
judicial (to end a litigation).
(2) Requirements of a valid contract. — As a
source of obligation, a contract must be valid
and enforceable. (see Art. 1403.) A contract is
valid (assuming all the essential elements are
present, Art. 1318.) if it is not contrary to law,
morals, good customs, public order, and public
policy. It is invalid or void if it is contrary to law,
morals, good customs, public order, or public
policy. (Art. 1306; see Phoenix Assurance Co.,
Ltd. vs. U.S. Lines, 22 SCRA 675 [1968].)
In the eyes of the law, a void contract does not exist.
(Art. 1409.) Consequently, no obligations will arise.
(3) Where contract requires approval by the
government. — Where a contract is required to
be verifi ed and approved by the government
before it can take effect (e.g., contract for
overseas employment must be approved by the
Philippine Overseas Employment Administration
[POEA] under Art. 21[c] of the Labor Code), such
contract becomes the law between the
contracting parties only when approved, and
where there is nothing in it which is contrary to
law, etc., its validity must be sustained.
(4) Compliance in good faith. — It means
compliance or performance in accordance with
the stipulations or terms of the contract or
agreement. Good faith and fair dealing must be
observed to prevent one party from taking unfair
advantage over the other. Evasion by a party of
legitimate obligations after receiving the
benefits under the contract would constitute
unjust enrichment on his part.
(5) Liability for breach of contract. — Although
the contract imposes no penalty for its violation,
a party cannot breach it with impunity. Our law
on contracts recognizes the principle that
actionable injury inheres in every contractual
breach.
Interest may, in the discretion of the court, on
equitable grounds, be allowed upon damages
awarded for breach of contract. (see Art. 2210.)
The failure of either party to a contract to
performance of the obligation of the other for
an unreasonable length of time may render the
contract ineffective where the contract does not
provide for the period within which the parties
may demand the performance of their
respective undertakings but the parties did not
contemplate that the same could be made
indefinitely.
The mere failure of a party to respond
to a demand letter in the absence of other
circumstances making an answer requisite or
natural does not constitute an implied
admission of liability.
(6) Preservation of interest of promisee. — A
breach upon the contract confers upon the
injured party a valid cause for recovering that
which may have been lost or suffered. The
remedy serves to preserve the interest of the
promisee of having the benefi t of his bargain, or
in being reimbursed for loss caused by reliance
on the contract, or in having restored to him any
benefi t that he has conferred on the other party.
The effect of every infraction is to create a new
duty, that is, to make recompense to the one
who has been injured by the failure of another
to observe his contractual obligation unless he
can show extenuating circumstances.
ILLUSTRATIVE CASES:
1. Binding force of an oral agreement
inconsistent with a prior written one.
Facts: X verbally agrees to pay Y the balance of
an account in advance, notwithstanding the
different stipulation of a prior written agreement.
Issue: Is X bound to perform said obligation?
 Held: Yes. Since he agreed to pay Y the balance
of the account independently of the terms of the
written contract, he must perform his obligation
to pay according to the tenor of his verbal
agreement which has the force of law between
them.
—-— —-— —-—
2. Validity of contract stipulating that in case of
failure of debtor to pay amount of loan, his
property shall be considered sold to creditor.
Facts: D borrowed from C money to be paid
within a certain period, under the agreement that,
if D fails to pay at the expiration of said period,
the house and lot described in the contract
would be considered sold for the amount of the
loan. D failed to pay as promised. C brought
action for the delivery of the house and lot.
Issue: Are both contracts valid and, therefore,
should be given effect?
Held: Yes. The fact that the parties have agreed
at the same time, in such a manner that the
fulfillment of the promise of sale would depend
upon the non-payment or return of the amount
loaned has not produced any change in the
nature and legal conditions of either contract, or
any essential defect which would nullify them.
As the amount loaned has not been paid and
continues in possession of the debtor, it is only
just that the promise of sale be carried into
effect,and the necessary instruments be
executed. That which is agreed to in a contract
is law between the parties, and must be
enforced.
Note: In the above case, the court found that no
contract of mortgage, pledge, or antichresis was
entered into. (see Arts. 2088, 2137.)
—-— —-— —-—
3. Validity of contract for attorney’s fees where
amount stipulated is unreasonable
Facts: D executed a promissory note in favor of
C for the purchase price of a truck sold by the
latter. In the note, D bound himself to pay an
additional 25% as attorney’s fees in the event of
becoming it necessary for C to employ counsel
to enforce its collection.
Issue: Has the court the power to ignore the
contract as to attorney’s fees, considering that a
contract has the force of law between the
contracting parties?
Held: Yes. Where no special agreement is made
by the parties with reference thereto, the courts
are authorized to determine the amount to be
paid to an attorney as reasonable compensation
for his professional services; and even where
parties have made a written agreement as to the
fee, the courts have the power to ignore their
contract, if the amount fixed is unconscionable
or unreasonable, and to limit the fee to a
reasonable amount.
—-— —-— —-—
4. A big corporation, to avoid cancellation of
contract it has breached, pleaded
considerations of equity.
Facts: The contract between the parties (two
big real estate corporations) was a contract to
sell or conditional with title expressly
reserved in S (seller) until the suspensive
condition of full and punctual payment of the full
price by B (buyer) shall have been met on pain of
automatic cancellation of the contract upon
failure to pay any of the monthly installments.
B failed to pay the P5,000.00 monthly
installments notwithstanding that it was
punctually collecting P10,000.00 monthly rentals
from the lessee of the property.
Issue: The main issue posed by B is that there has
been no breach of contract by it; and assuming there
was, S was not entitled to rescind or resolve the
contract without recoursing to judicial process.
Held: B only pleads that it be given special
treatment and that the cancellation of its
contract be somehow rejected notwithstanding
S’s clear right under the contract and the law to
do so.
The contract between S and B, entered into with
the assistance of counsel and with full
awareness of the import of its terms and
conditions, is the binding law between them and
equity cannot be pleaded by one who has not
come with clean hands nor complied therewith in
good faith but instead willfully breached the contract.
“Its time to put an end to the fi ction that
corporations are people. The business of big
corporations such as the protagonists at bar is
business. They are bound by the lawful
contracts that they enter into and they do not
ask for nor are they entitled to considerations of
equity.”
5. Corporation unconditionally undertook to
redeem preferred shares at specified dates.
Facts: The terms and conditions of the
Purchase Agreement shows that the parties
intended the repurchase of the preferred shares
in question on the respective dates to be an
absolute obligation made manifest by the fact
that a surety was required to see to it that the
obligation is fulfi lled in the event of the
corporation’s inability to do so.
Defendant corporation contends that it is
beyond its power and competence to redeem
the preferred shares due to fi nancial reverses.
Issue: Can this contention serve as a legal
justification for its failure to perform its
obligation under the agreement
Held: No. The unconditional undertaking of the
corporation does not depend upon its fi nancial
ability: it constitutes a debt which is defined
“as an obligation to pay money at some fi xed
future time, or at a time which becomes defi nite
and fixed by acts of either party and which they
expressly or impliedly agree to perform in the
contract.” The Purchase Agreement constitutes
the law between the parties.
 ART. 1160. Obligations derived from quasi-
contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book. (n)
Quasi-contractual obligations.
Article 1160 treats of obligations arising from
quasi-contracts or contracts implied in law.
A quasi-contract is that juridical relation
resulting from certain lawful, voluntary and
unilateral acts by virtue of which the parties
become bound to each other to the end that no
one will be unjustly enriched or benefited at the
expense of another. (Art. 2142.)
It is not, properly, a contract at all. In a contract,
there is a meeting of the minds or consent; the
parties must have deliberately entered into a
formal agreement. In a quasi-contract, there is
no consent but the same is supplied by fiction of
law. In other words, the law considers the
parties as having entered into a contract,
irrespective of their intention, to prevent
injustice. Corollarily, if one who claims having
enriched somebody has done so pursuant to a
contract with a third party, his cause of action
should be against the latter, who, in turn may, if
there is any ground therefor, seek relief against
the party benefi ted.
Quasi-contracts are governed by the Civil Code,
more particularly, by Articles 2142-2175, Chapter
I, Title XVII.
Facts: By virtue of an agreement between X and
Y, X assisted Y in improving a large tract of land
which was later declared by the court as
belonging to C.
Issue: Has X the right to be reimbursed by Z for
X’s services and expenses on the ground that
the improvements are being used and enjoyed
by Z?
Held: No. From the language of Article 2142, it
is obvious that a presumed quasi-contract
cannot emerge as against one party when the
subject matter thereof is already covered by an
existing contract with another party. X’s cause
of action should be against Y who, in turn, may
seek relief against Z.
2. Bank paid the seller of goods under an
expired letter of credit but the goods subject
thereof were voluntarily received and kept by the
buyer which refused to pay the bank.
Facts: X opened with B (bank) a domestic letter
of credit (LC) in favor of Y for the purchase from
the latter of hydraulic loaders. B paid Y for the
equipment after the expiration of the letter of
credit. X refused to pay B claiming that there
was breach of contract by B which acted in bad
faith in paying Y knowing that Y delivered the
loaders to X after the expiry date of the subject
LC. X offered to return the loaders to B which
refused to take possession three (3) years after
X accepted delivery, when B made a demand for
payment.

ILLUSTRATIVE CASES:
1. When a party benefi ted at the expense of
another not liable to the latter.