Northern CPAR: Business Laws – Obligations and Contracts

NORTHERN CPA REVIEW

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4 Floor Pelizloy Centrum, Lower Session Road, Baguio City
Contact Numbers: 09294891758; 09272128204
E-mail: ncpar@yahoo.com
Atty. ANDRIX DOMINGO, CPA

BUSINESS LAWS
The Beautiful Law on Obligations

LAW ON OBLIGATIONS
OBLIGATION – a juridical necessity to give, to do or not to do.
SOURCES:
1. Law
2. Contracts
3. Quasi- Contracts
→ lawful, voluntary and unilateral acts which are enforceable to the end that no
one shall be unjustly enriched or benefited at the expense of another.
Common Kinds:
a. Negotiorum Gestio
Whoever voluntarily takes charge of the agency or management of the
business or property of another without the knowledge or consent of the
latter.
b. Solutio Indebiti
If something is received when there is no right to demand it, and it was
unduly received through mistake, the obligation to return it arises.
4. Delicts – (crimes) – acts or omissions punishable by law.
5. Quasi- Delicts
Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done but there is no pre-existing
contractual relation between the parties.

ESSENTIAL REQUISITES OF AN OBLIGATION

1. PASSIVE SUBJECT
2. ACTIVE SUBJECT
3. OBJECT OR PRESTATION
4. JURIDICAL OR LEGAL TIE

Two Kinds of obligation according to subject matter.

(1) Real Obligation
(2) Personal Obligation
(a) Positive personal obligation
(b) Negative personal obligation

Two Kinds of real obligation

(1) Specific real obligation - Obligation to deliver a specific or determinate thing.
(2) Generic real obligation - Obligation to deliver an indeterminate or generic thing.

Duties of the Obligor in an obligation to give a determinate thing

1. To take good care of the thing pending delivery;
2. To deliver its accessions and accessories; and
3. To deliver the thing itself.
4. To pay damages
In Generic Obligations:
1. deliver the things which is neither of superior nor inferior quality;
2. to pay damages

ACCESSIONS AND ACCESSORIES

ACCESSION
- are fruits of a thing, or additions to, or improvements upon, a thing
ACCESSORIES
- are things joined to a principal thing for the latter’s embellishment, better use, or
completion

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Northern CPAR: Business Laws – Obligations and Contracts
REMEDIES OF THE CREDITOR IN A REAL OBLIGATION IN CASE THE DEBTOR
FAILS TO COMPLY WITH HIS OBLIGATION
(1) SPECIFIC REAL OBLIGATION
(a) To demand specific performance or fulfillment of the obligation with a right to
indemnity for damages; or
(b) To demand rescission or cancellation (in certain cases) of the obligation also with
a right to recover damages.

(2) GENERIC REAL OBLIGATION

(a) To ask that the obligation be performed by a third person at the expense of the
debtor; and
(b) To make the debtor liable for damages.

REMEDIES OF THE CREDITOR IN A PERSONAL OBLIGATION

(1) POSITIVE PERSONAL OBLIGATION
(a) To have the obligation performed by himself (creditor) or by another, unless
personal considerations are involved at the debtor’s expense; and
(b) To obtain damages.
(2) NEGATIVE PERSONAL OBLIGATION
(a) To have the thing undone (if still possible) at the expense of the obligor; and
(b) To obtain damages.

WHAT ARE THE GROUNDS FOR LIABILITY WHICH MAY ENTITLE THE INJURED
PARTY TO DAMAGES?
(1) (INCIDENTAL) FRAUD
NOTA BENE:
Article 1170 refers to INCIDENTAL FRAUD (dolo incidente) committed in the
performance of an obligation already existing because of the contract. It is to be
differentiated from CAUSAL FRAUD (dolo causante) or fraud employed in the
execution of a contract under Article 1338, which vitiates consent.

(2) NEGLIGENCE
FACTORS TO CONSIDER IN DETERMINING THE ISSUE OF NEGLIGENCE
(1) Nature of the obligation;
(2) Circumstances of the person;
(3) Circumstances of time;
(4) Circumstances of the place.

KINDS OF DILIGENCE REQUIRED

(1) That agreed upon by the parties
(2) that required by law
(3) diligence expected of a good father of a family.

(3) DELAY

THREE KINDS OF DELAY

(1) Mora Solvendi
- delay of the obligor or debtor to perform his obligation.
TWO KINDS OF MORA SOLVENDI
(a) Mora Solvendi ex re
- When the obligation is an obligation to give.
(b) Mora Solvendi ex persona
- When the obligation is an obligation to do.
(2) Mora Accipiendi
- delay of the obligee or creditor to accept the delivery of the thing
(3) Compensatio Morae
- delay of the parties or obligors in reciprocal obligations.

When is demand by the creditor not necessary in order that delay may exist?
Ans:
(1) When the obligation itself so stipulates that demand is not necessary
(2) When the law so declares
(3) When time is of the essence of the contract

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(4) When demand would be useless as when the obligor has rendered it beyond his
power to perform
(5) When there is performance by a party in reciprocal obligations delay by the other
begins

(4) CONTRAVENTION OF THE TENOR OF THE OBLIGATION

•MEANING OF FORTUITOUS EVENT

A fortuitous event is any event which cannot be foreseen, or which, though
foreseen, is inevitable.

RULES ON LIABILITY FOR FORTUITOUS EVENT

(1) General Rule
The debtor is not liable for the non-performance of his obligation due to a
fortuitous event.
(2) Exceptions: He is liable:
(a) when stipulated by the parties;
(b) when the law so provides; and
(c) when the obligation involves the assumption of risk

DIFFERENT KINDS OF OBLIGATIONS

(1) Pure Obligation;
(2) Conditional Obligations;
(3) Obligation with a period;
(4) Alternative Obligation;
(5) Facultative Obligation;
(6) Joint Obligation;
(7) Solidary Obligation;
(8) Divisible Obligation;
(9) Indivisible Obligation; and
(10) Obligation with a Penal Clause.

(1) PURE OBLIGATION

→not subject to any condition and no period attached to the obligation
(2) CONDITIONAL OBLIGATION
→subject to a condition
2 PRINCIPAL KINDS OF CONDITION
(1) SUSPENSIVE
→fulfillment of which will give rise to the obligation
(2) RESOLUTORY
→fulfillment of which will extinguish the obligation
Other Kinds:
a. possible – capable of fulfillment
b. impossible – if the condition is not capable of fulfillment,
c. Positive – an act is supposed to be performed
d. Negative – an act is supposed to be omitted
e. Potestative – the condition depends upon the will of one of the contracting
parties
f. Casual – the condition depends upon the chance or upon the will of a third
person
g. Mixed – the condition depends partly upon chance and partly upon the will of
a third person.

Nota Bene:
When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period

RULES IN CASE OF LOSS, DETERIORATION, OR IMPROVEMENT OF THE THING

TO BE DELIVERED DURING THE PENDENCY OF A SUSPENSIVE CONDITION
(1) IF THE THING IS LOST-
(a) without the fault of debtor, the obligation is extinguished;
(b) with the fault of debtor, the latter shall be obliged to pay damages;
(2) IF THE THING DETERIORATES
(a) without the fault of debtor, the impairment is borne by the creditor;
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Northern CPAR: Business Laws – Obligations and Contracts
(b) through the fault of debtor, the creditor may choose between rescission with
damages and fulfillment also with damages;

(3) IF THE THING IS IMPROVED BY ITS NATURE OR BY TIME

→The improvements shall inure to the benefit of the creditor
(4) IF THE THING IS IMPROVED AT THE EXPENSE OF THE DEBTOR
The latter (debtor) has the same right as a usufructuary
•USUFRUCTUARY
Is one given the right to possess and enjoy property belonging to another.
NOTA BENE
•A condition is an uncertain event that may or may not happen; a period is a
certain event that must necessarily come, at a date known beforehand, or at a time that
cannot be determined.
•A condition may refer to the future or to a past event unknown to the parties; a
period always refers to the future.

3) OBLIGATION WITH A PERIOD

Is one for whose fulfillment a period or term has been fixed.
PERIOD = Is a future and certain event

KINDS OF PERIODS
(a) Suspensive (ex die)
A day certain the arrival of which makes the obligation demandable
(b) Resolutory (in diem)
A day certain the arrival of which terminates the obligation

WHEN DEBTOR LOSES HIS RIGHT TO MAKE USE OF THE PERIOD IF IT IS FOR
HIS BENEFIT: (ART.1198) [the creditor may demand immediate payment even
before due date of the obligation (because obligation becomes pure)]
(1) When debtor becomes insolvent unless he gives a guaranty or security for the debt.
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.
(3) When by his own acts, he has impaired said guaranties or securities or when through
a fortuitous event they disappear, unless he gives new ones equally satisfactory
(4) When he violates any undertaking, in consideration of which the creditor agreed to
the period.
(5) When he attempts to abscond

KINDS OF OBLIGATIONS ACCORDING TO THE NUMBER OF PRESTATIONS

1. SIMPLE
Where there is only one prestation.

2. COMPOUND
When there are several prestations. This may be:
(a) CONJUNCTIVE
Several prestations are due but all must be performed.
(b) DISTRIBUTIVE OR DISJUNCTIVE
This may either be alternative or facultative.

4) ALTERNATIVE OBLIGATION
Is one where several prestations are due but the complete
performance of one of them is sufficient to extinguish the obligation

RULES IN CASE OF LOSS OF THINGS OR IMPOSSIBILITY OF SERVICES WHICH

ARE ALTERNATIVELY THE OBJECT OF THE OBLIGATION
1. When right of choice is with the debtor
(a) If only one or some are lost through a fortuitous event or through the
debtor’s fault
→the debtor may deliver any of the remainder, or that which remains if only one
subsists.
(b) If all are lost through a fortuitous event
→the obligation is extinguished
(c) If all are lost through the debtor’s fault
→the debtor shall pay the value of the last thing that was lost plus damages
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Northern CPAR: Business Laws – Obligations and Contracts
2. When the right of choice is expressly granted to the creditor
(a) If only one or some are lost through a fortuitous event
→the debtor shall deliver that which the creditor should choose among the
remainder, or that which remains if only one subsists.
(b) If all are lost through a fortuitous event
→the obligation shall be extinguished.
(c) If only one or some are lost through the debtor’s fault
→the creditor may claim any of those subsisting, or the price of those which
were lost through the debtor’s fault plus damages.
(d) If all are lost through debtor’s fault
→the creditor may claim the price of any of them plus damages.

5) FACULTATIVE OBLIGATION
→ An obligation where only one prestation is due but the debtor may render another in
substitution

RULES IN CASE OF LOSS OF PRINCIPAL THING AND SUBSTITUTE

1. BEFORE SUBSTITUTION
a. PRINCIPAL THING
1) If lost due to fortuitous event, the obligation is extinguished.
2) If lost due to the debtor’s fault, debtor shall pay damages.
b. SUBSTITUTE
→The debtor has still to deliver the principal thing.

2. AFTER SUBSTITUTION
a. PRINCIPAL THING
→After the substitution has been communicated, the thing due is the
substitute.
b. SUBSTITUTE
1) If lost through a fortuitous event, the obligation is extinguished.
2) If lost through the debtor’s fault, the debtor shall pay damages.

6) JOINT OBLIGATION
→ Is one where the obligation is to be paid or fulfilled proportionately by the different
debtors and or is to be demanded proportionately by the different creditors.

7) SOLIDARY OBLIGATION
→ Is one where each of the debtors is bound to render, and/or each of the creditors has a
right to demand entire compliance with the prestation.

GENERAL RULE IF THERE IS A CONCURRENCE OF TWO OR MORE DEBTORS

AND/OR TWO OR MORE CREDITORS IN ONE AND THE SAME OBLIGATION.
The obligation is presumed to be joint. There is solidary liability only in the
following cases:
1. When the obligation expressly so states.
2. When the law requires solidarity.
3. When the nature of the obligation requires solidarity

•WHAT ARE THE DEFENSES AVAILABLE TO THE SOLIDARY DEBTOR WHO IS

SUED?
They are:
(1) Defenses derived from the nature of the obligation like payment, fraud,
prescription, remission, etc.;
(2) Defenses personal to, or which pertain to his share, such as incapacity,
mistake, violence, etc.; and
(3) Defenses which are personal to others, but only as regards that part of the
debt for which he is liable.

DIVISIBLE AND INDIVISIBLE OBLIGATIONS

8) DIVISIBLE OBLIGATION
→ Is one the object of which in its delivery or performance is capable of fulfillment by
parts.
9) INDIVISIBLE OBLIGATION

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→ Is one the object of which in its delivery or performance is not capable of fulfillment by
parts.
10) OBLIGATIONS WITH A PENAL CLAUSE
→ Is one which contains an accessory undertaking (penal clause) to pay a previously
stipulated indemnity (penalty) in case of breach.

RULES IN CASE OBLIGATION HAS A PENAL CLAUSE

General Rule: The penalty takes the place of the damages and interest in case of non-
compliance.
Exceptions:Aside from the penalty, damages and interest may also be demanded:
1. When there is a stipulation to that effect.
2. When the debtor refuses to pay the penalty.
3. When the debtor is guilty of fraud in the performance of the obligation

MODES OR CAUSES OF EXTINGUUISHMENT OF AN OBLIGATION

1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt.
4. Confusion or merger or the rights of creditor and debtor;
5. Compensation
6. Novation; and
7. Other causes, such as:
a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription
e. Death of a party in case the obligation is a personal one
f. Mutual dissent or withdrawal
g. Arrival of a resolutory period
h. Impossibility of fulfillment
i. Happening of a fortuitous event
j. Renunciation or waiver

PAYMENT OR PERFORMANCE
→ means not only the delivery of money but also the performance, in any other manner, of
an obligation.

•WHO ARE THE PERSONS FROM WHOM THE CREDITOR IS BOUND TO ACCEPT
THE PAYMENT OR PERFORMANCE?
1. The debtor
2. Any person who has an interest in the obligation
3. A third person who has no interest in the obligation when there is a stipulation that he
can make payment

•TO WHOM PAYMENT SHALL BE MADE?

1. The creditor or obligee
2. To the creditor’s successor in interest such as his heirs or assigns
3. To any person authorized by the creditor or by law to receive payment.

•IN WHAT CURRENCY SHALL PAYMENT OF DEBT IN MONEY BE MADE?

→ Payment of domestic obligations shall be made in the currency stipulated; in the
absence of stipulation, the currency which is legal tender in the Philippines.

•WHAT IS THE MEANING OF LEGAL TENDER?

Is that currency which a debtor can compel a creditor to accept in payment of a
debt in money, when tendered in the right amount.

GIVE THE RULES REGARDING PLACE WHERE PAYMENT SHALL BE MADE

→ They are:
(1) If there is a stipulation, payment shall be made in the place designated;
(2) If there is no stipulation:
(a) Where the thing to be delivered is specific, it shall be at the place where the
thing was at the perfection of the contract;

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(b) Where the thing to be delivered is generic (like money), it shall be the domicile
of the debtor

WHO BEARS THE EXPENSES OF PAYMENT?

(1) They are paid by the party liable according to stipulation;
(2) In the absence of stipulation:
(a) Extra-judicial expenses required by the payment are for the account of the
debtor;
(b) Judicial costs are governed by the Rules of Court; and
•Where the place of payment is the domicile of the debtor and he changes his
domicile in bad faith or after he has incurred in delay, the additional expenses
shall be borne by him

WHAT ARE THE SPECIAL FORMS OF PAYMENT?

(1) Application of payment
(2) Dation in payment
(3) Payment by cession
(4) Tender of payment and consignation

•DATION IN PAYMENT
Dation in payment , is a special form of payment where the ownership of property
belonging to the debtor is transferred to his creditor to pay a debt in money.

•APPLICATION OF PAYMENTS
→ Is the designation of the debt to which should be applied the payment made by a
debtor who owes several debts to the same creditor

HOW IS APPLICATION OF PAYMENT MADE?

a. The debtor who is given the preferential right
b. If the debtor does not make the designation, the creditor makes it
c. payment shall be applied by operation of law as follows:
1) Payment shall be applied to the debt, among those due, which is the most
onerous to the debtor.
2) If the debts are of the same nature and burden, payment shall be applied to all
due debts proportionately.

PAYMENT BY CESSION
→ is the abandonment or assignment by the debtor of all his property in favor of his
creditors so that the latter may sell them and recover their claims out of the proceeds.

TENDER OF PAYMENT AND CONSIGNATION

•TENDER OF PAYMENT
→ It is the act on the part of the debtor of offering to the creditor the thing or amount
due.

•CONSIGNATION
→ It is the act of depositing the thing or amount due with the proper court when the
creditor does not desire or cannot receive it, after complying with the formalities
prescribed by law.

•GIVE THE CASES WHEN CONSIGNATION ALONE, WITHOUT NEED OF TENDER OF

PAYMENT, PRODUCES THE EFFECT OF PAYMENT.
1. When the creditor is absent or unknown or does not appear at the place of
payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect; and
5. When the title of the obligation has been lost.

LOSS OF THE THING DUE

•WHEN IS A THING CONSIDERED LOST?
A thing is considered lost when:
a. It perishes; or
b. Goes out of commerce; or
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c. Disappears in such a way that its existence is unknown or it cannot be
recovered.

ENUMERATE THE CASES WHEN THE OBLIGOR IS LIABLE FOR DAMAGES BY THE
LOSS OF THE THING DUE
1. If the loss of the determinate thing is due to his fault;
2. When it is lost after he has incurred in delay;
3. When by law or stipulation he is liable even for fortuitous events;
4. When the nature of the obligation requires the assumption of risk; and
5. When the obligation to deliver a specific thing arises from a crime.

•WHEN WILL LOSS OF THING EXTINGUISH AN OBLIGATION?

1. In obligations to deliver specific or determinate things, it shall be extinguished if
the thing should be lost or destroyed without fault of the debtor and before he has
incurred in delay.

Nota Bene: If the loss is due to the fault of a third person, the creditor is given
the right to recover damages from the former.
2. In obligations to deliver generic things, the loss or destruction of anything of the
same kind does NOT extinguish the obligation

LOSS IN PERSONAL OBLIGATIONS (OBLIGATIONS TO DO)

a. When the prestation becomes legally or physically impossible without the fault
of the debtor, the obligation is extinguished.
b. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released in whole or in part

CONDONATION OR REMISSION OF DEBT

→It is the gratuitous abandonment by the creditor of his right. It is, in effect, a donation.
→This refers to the forgiveness of an indebtedness.
→To extinguish the obligation it requires the debtor’s consent.

•GIVE THE EFFECT OF THE RENUNCIATION OF THE PRINCIPAL DEBT.

→It shall extinguish the accessory obligation.
Nota Bene:
→Based on the accessory follows the principal rule

GIVE THE EFFECT OF THE WAIVER OF THE ACCESSORY OBLIGATION.

→It shall leave the principal obligation in force

CONFUSION OR MERGER
→It is the meeting in one person of the qualities of creditor and debtor with respect to the
same obligation.

GIVE THE EFFECT OF MERGER IN THE PERSON OF THE PRINCIPAL DEBTOR OR

CREDITOR
→It extinguishes the principal obligation.
→It benefits the guarantors because the accessory obligation of guaranty is also
extinguished.

GIVE THE EFFECT OF CONFUSION IN A JOINT OBLIGATION

→It does not extinguish a joint obligation except as regards the share corresponding to
the creditor or debtor in whom the two characters concur.

GIVE THE EFFECT OF CONFUSION IN A SOLIDARY OBLIGATION

→It extinguishes the entire obligation because it is also a merger in the other solidary
debtors.

COMPENSATION
→Is the extinguishment to the concurrent amount of the debts of two persons who, in
their own right, are debtors and creditors of each other

ENUMERATE THE CASES WHEN COMPENSATION IS PROHIBITED.

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1. If one of the debts arises from a depositum or from the obligation of a
depository;
2. If one of the debt arises from the obligation of a bailee in commodatum;
3. If one of the debts arises from a claim from support due by gratuitous title; and
4. If one of the debts consists in civil liability of the offender arising from a penal
clause.

NOVATION
→It is the substitution or alteration of an obligation by a subsequent one that substitutes
or modifies the one preceding.

WHAT ARE THE KINDS OF NOVATION?

•AS TO ORIGIN:
a. Legal
That which takes place by operation of law; and
b. Conventional
That which takes place by agreement of the parties.
•AS TO ITS OBJECT:
a. Real or Objective
→When the change is in the obligation itself, i.e., the cause, object, or principal
condition
b. Personal or Subjective
→Where the change is in the parties (i.e., the person of the debtor is
substituted (substitution) and/or a third person is subrogated in the rights of
the creditor (subrogation); and
c. MIXED
→Where there is a change both in the parties and the obligation itself.

•WHAT ARE THE KINDS OF PERSONAL NOVATION?

1. SUBSTITUTION
When the person of the debtor is substituted, and it may be either:
a. Expromision
→When a third person without the knowledge or against the will of the
original debtor assumes the obligation with the consent of the creditor; or
b. Delegacion
→When the creditor accepts a third person to take the place of the debtor at
the instance of the latter.
2. SUBROGATION
When a third person is subrogated in the rights of the creditor, and it may either:
a. Conventional
When it takes place by agreement of the original parties (the debtor and the
original creditor) and the third person (the new creditor); or
b. Legal
When it takes place by operation of law.

GIVE THE EFFECTS OF EXPROMISION

1. The old debtor is released; and
2. The new debtor’s insolvency or non-fulfillment of the obligation does not give rise
to any liability on the part of the original debtor.

GIVE THE EFFECTS OF “DELEGACION”

1. The old debtor is not liable in case of non-fulfillment of the obligation
2. He is not liable even in case of insolvency of the new debtor except when:
a. The said insolvency was already existing and of public knowledge at the time of
the delegacion; or
b. It was already existing and known to the debtor at the time of the delegacion.

ENUMERATE THE CASES WHEN THE LEGAL SUBROGATION OF THE CREDITOR IS

PRESUMED
1. When a creditor pays another creditor who is preferred even without the debtor’s
knowledge;
2. When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor; and

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3. When even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation (e.g., guarantor) pays, without prejudice to the effects
of confusion as to the latter’s share.

----- End of Handouts ------

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