Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Law on Obligations
General Principles
An obligation is a juridical necessity to give, to do or not to do. (Art. 1156)
It is a juridical relation or a juridical necessity whereby a person (creditor) may demand
from another (debtor) the observance of a determinative conduct (giving, doing, or not
doing), and in case of breach, may demand satisfaction from the assets of the latter.
It is a juridical necessity because in case of non-compliance, the courts of justice may be
called upon by the aggrieved party to enforce its fulfillment or, in default thereof, the
economic value that it represents.
Art. 1156 refers only to civil obligations which are enforceable in court when breached. It
does not cover natural obligations.
GR: the law does not require any form in obligations arising from contract for their
validity or binding force. (Art. 1356)
XPNs:
o When the form is essential to the validity of the contract as required by law (Art.
1346)
o When the contract is unenforceable unless it is in a certain form, such as those
under the Statute of Frauds as formulated in Art. 1403.
Different Kinds of Prestation
BASIS
OBLIGATION
OBLIGATION
TO GIVE
TO DO
As to what the
obligation
consists of
Consists in the delivery
of a thing to the creditor
Covers the rendering of
works or services
whether physical or
mental
Refraining from doing
certain acts
Examples
Sale, Deposit, Pledge,
Donation
Contract for
professional services
(e.g., singing, modeling)
Negative easement,
Restraining order or
Injunction
1|P age
OBLIGATION NOT
TO DO
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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General Principles
Elements of an Obligation
1. Juridical tie
2. Active subject
3. Passive subject
4. Object or prestation
To be valid; it must be:
a. Licit or lawful;
b. Possible, physically and
judicially;
c. Determinate or determinable;
and
d. Pecuniary value or possible
equivalent in money.
Sources of Obligations
Law
Contracts
Quasi-contracts
Delict
Quasi-delict
NOTE: the list is EXCLUSIVE
Sources of Law
Constitution;
Legislation;
Administrative or executive orders,
regulations, and rulings;
Judicial decisions or jurisprudence;
Custom – habits and practices which
through long and uninterrupted usage
have become acknowledged and
approved by society as binding rules
of conduct.
OBLIGATION EX LEGE: Obligations derived from law are not presumed.
Characteristics of a legal obligation:
– Does not need the consent of the obligor
– Must be expressly set forth in the law creating it and not merely presumed: and
– In order that the law may be a source of obligation, it should be the creator of the
obligation itself
OBLIGATION EX CONTRACTU
Requisites of a contractual obligation
o It must contain all the essential requisites of a contract
o It must not be contrary to law, morals, good customs, public order, and public
policy
Rules governing the obligations arising from contracts
o GR: these obligations arising from contracts shall be governed primarily by the
stipulations, clauses, terms, and conditions of the parties’ agreements
o XPN: contracts with prestations that are unconscionable or unreasonable
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Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Binding force of obligation ex contractu – obligations arising from contracts have the
force of law between the parties and should be complied with in good faith (Principle of
Obligatory of Contracts).
OBLIGATION EX QUASI-CONTRACTU
• Quasi-contract – a juridical relation arising from lawful, voluntary, and unilateral acts
based in the principle that no one shall be unjustly enriched or benefited at the expense of
another (NCC, Art. 2142)
• Characteristics of a quasi-contract (LUV):
– It must be LAWFUL
– It must be UNILATERAL
– It must be VOLUNTARY
• Principal Forms of Quasi-Contracts
– Negotiorum gestio (inofficious manager) - Arises when a person voluntarily
takes charge of the management of the business or property of another without
any power from the latter (NCC, Art. 2144)
– Solutio indebiti (unjust enrichment) – takes place when a person received
something from another without any right to demand for it, and the thing was
unduly delivered to him through mistake (NCC, Art. 2154).
CONTRACT
QUASI-CONTRACT
There is meeting of the minds or consent; the
parties must have deliberately entered into a
formal agreement.
There is no consent, but the same is supplied
by fiction of law; to prevent injustice.
OBLIGATION EX DELICTO: An act or omission punishable under the law
Basis
– GR: Art. 100 of the RPC provides: “Every person criminally liable for a felony is
also civilly liable”
– XPN: crimes of treason, rebellion, espionage, contempt and others wherein no
civil liability arises on the part of the offender either because there are no
damages to be compensated or there is no private person injured by the crime
Implied institution of the civil action in a criminal case
– GR: When a criminal action is instituted, the civil action for the recovery of the
civil liability arising from the offense charged shall be deemed instituted with the
criminal action
– XPN: when the offended party
o Waives the civil action;
o Reserves the right to institute it separately; and
o Institutes the civil action prior to the criminal action.
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Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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OBLIGATION EX QUASI-DELICTO: An act or omission arising from fault or
negligence which causes damage to another, there being no pre-existing contractual
relations between the parties (NCC, Art. 2176)
Elements of a Quasi-Delict:
– Negligent or wrongful act or omission;
– Damage or injury caused to another;
– Causal relation between such negligence or fault and damage; and
– No pre-existing contractual relationship between parties (NCC, Art. 2176).
Classification of Obligations
Creation
–
Legal – imposed by law
–
Conventional – by agreement of parties
Nature
–
Personal – to do, not to do
–
Real – to give
Object
–
Determinate/Specific – particularly or physically designated
–
Generic – merely by its class or genus
–
Limited generic – generic objects confined to a particularly class or source
Performance
–
Positive – to give, to do
–
Negative – not to do
Person obliged
–
Unilateral – only one party is bound
–
Bilateral – both parties are bound.
Existence of burden or condition
– Pure – not burdened by any condition or term; immediately demandable
– Conditional – subject to a condition which may be suspensive or resolutory.
Classification of Obligations
Character of responsibility or liability
– Joint: each debtor is liable only for a part of the whole liability and to each
creditor shall belong only a part of the correlative rights
– Solidary: debtor is answerable for the whole of the obligation without
prejudice to his right to collect from his co-debtors the latter’s shares in the
obligation
Susceptibility of partial fulfillment
– Divisible – obligation is susceptible of partial performance
– Indivisible - obligation is not susceptible of partial performance
Right to choose and substitution
– Alternative – obligor may choose to completely perform one out of several
prestations
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Notes in Regulatory Framework in Business Transactions (RFBT)
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– Facultative – only one prestation has been agreed upon, but the obligor may
render one in substitution of the first one
Imposition of penalty
– Simple – there is no penalty imposed for violation of the terms thereof
– Obligations with a penal clause – obligation which imposes a penalty for
violation of the terms thereof
Sanction
– Civil – gives a right of action to compel their performance
– Natural – not based on positive law but on equity and natural law; does not
grant a right of action to enforce their performance
Specific v. Generic
Duties of debtor in obligation to give a determinate thing
– Preserve the thing
– Deliver the fruits of the thing
– Deliver the accessions and accessories
– Deliver the thing itself (e.g., particular brand)
– Answer for damages in case of non-fulfillment or breach
Diligence required
– Depending on agreement of parties, on the nature of the obligation and
corresponds with the circumstances of the person, of the time, and of the
place; and
– Diligence of a good father of the family.
Duties of debtor in obligation to give a generic thing
– To deliver a thing which is of the quality intended (no particular brand) by
parties taking into consideration the purpose of the obligation and other
circumstances; and
– To be liable for damages in case of fraud, negligence, or delay, in the
performance of his obligation, or contravention of the tenor thereof.
Fruits
Kinds of fruits
– Natural
– Industrial
– Civil
Right of creditor to the fruits
– The creditor is entitled to the fruits of the thing to be delivered from the time
the obligation to make delivery arises.
When obligation to deliver fruits arises
– GR: the obligation to deliver the thing due and, consequently, the fruits
thereof, if any, arises from the time of the perfection of the contract
– If the obligation is subject to a suspensive condition or period, it arises upon
the fulfillment of the condition or arrival of the term.
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Notes in Regulatory Framework in Business Transactions (RFBT)
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– In a contract of sale, the obligation arises from the perfection of the contract
even if the obligation is subject to a suspensive condition or a suspensive
period where the price has been paid.
– In obligations to give arising from law, quasi-contract, delict, quasi-delicts,
the time of performance is determined by the specific provisions of law
applicable.
Accessions v. Accessories
Accessions – fruits of a thing or additions to or improvements upon a thing
Accessories – thing joined to or included with the principal thing for the latter’s
embellishment, better use, or completion.
Right of creditor to accessions and accessories
– GR: all accession and accessories are considered included in the obligation to
deliver a determinate thing although they may not have been mentioned.
(Accessory follows the principal)
– XPN: if exclusion is stipulated.
Breaches of Obligations
Forms of breach of obligations
– Voluntary – debtor is liable for damages if he is guilty of:
• Default (mora)
• Fraud (dolo)
• Negligence (culpa)
• Breach through contravention of the tenor thereof (NCC, Art. 1170)
– Involuntary – debtor is unable to perform the obligation due to fortuitous event
thus not liable for damages
Effects of breach of obligation
– If a person obliged to do something fails to do it, or if he does it in
contravention of the tenor of the obligation or what has been poorly done be
undone, the same shall be executed at his cost (NCC, Art. 1167)
– When the obligation consists in not doing and the obligor does what has been
forbidden him, it shall also be undone at his expense (NCC, Art. 1168).
Delay (Mora)
Those obliged to deliver or to do something incur in delay from the time the obligee
(creditor) judicially or extrajudicially demands from them the fulfillment of their
obligations.
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 fulfills his obligations, delay by the other begins (NCC,
Art. 1169)
Kinds of delay
– Ordinary delay – mere failure to perform an obligation at the stipulated time
– Extraordinary or legal delay – equates to non-fulfillment of the obligation and
arises after the extrajudicial or judicial demand has been made upon the debtor
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Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Kinds of Legal Delay or Default
– Mora solvendi – default on the part of the debtor/obligor
– Mora accipiendi – default on the part of the creditor/obligee
– Compensatio morae – default on the part of both the debtor and creditor in
reciprocal obligations.
Mora Solvendi
Requisites:
– Obligation pertains to the debtor;
– Obligation is determinable, due and demandable, and liquidated
– Obligation has not been performed on its date;
– There is judicial or extrajudicial demand by the creditor; and
– Failure of the debtor to comply with such demand.
GR: Demand is necessary. Thus, no demand, no delay.
Exceptions:
– The obligation or the law expressly so declares; or
– From the nature and the circumstances of the obligation it appears that the
designation of time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; (e.g.
wedding gown has to be ready before the wedding) or
– Demand would be useless, as when the obligor has rendered it beyond his
power to perform. [NCC, Art. 1169 (2)]
Effects of Mora Solvendi:
– Debtor may be liable for damages or interests; and
– When the obligation has for its object a determinate thing, the debtor may bear
the risk of loss of the thing even if the loss is due to fortuitous event;
– Rescission or resolution.
The creditor incurs in delay when debtor tender’s payment or performance, but the
creditor refuses to accept it without just cause.
Mora Accipiendi
Requisites:
– Offer of performance by the capacitated debtor;
– Offer must be to comply with the prestation as it should be performed; and
– Refusal of the creditor without just cause
Effects of Mora Accipiendi
– Responsibility of debtor is limited to fraud and gross negligence;
– Debtor is exempted from risk of loss of thing, creditor bears risk of loss;
– Expenses by debtor for preservation of thing after delay is chargeable to
creditor;
– If the obligation bears interest, debtor does not have to pay it from time of
delay;
– Creditor liable for damages; and
– Debtor may relieve himself of obligation by consigning the thing.
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Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Delay on both sides in reciprocal obligations, cancel each other out.
Compensation Morae
Requisites:
– Offer of performance by the capacitated debtor;
– Offer must be to comply with the prestation as it should be performed; and
– Refusal of the creditor without just cause.
Rules on Compensatio Morae
Time of delay
XPNs:
Unilateral Obligations
Reciprocal Obligations
Default or delay begins from
extrajudicial or judicial
demand – mere expiration of
the period fixed is not enough
in order that the debtor may
incur delay.
Delay by the other party
begins from the moment one
of the parties fulfills his
obligation.
1. The obligation or the
law expressly so
dictates;
2. Time is of the essence;
3. Demand would be
useless, as debtor has
rendered it beyond his
power to perform; or
4. Debtor has
acknowledged that he
is in default.
When different dates for the
performance of the obligation
is fixed by the parties.
Fraud (Deceit or Dolo)
As used in Art. 1170, it is the deliberate or intentional evasion of the normal
fulfillment of an obligation.
Effects of Fraud
– Creditor may insist on proper substitute or specific performance
– Rescission or resolution (Art. 1191)
– Damages in either case.
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Incidental Fraud (dolo incidente)
Causal Fraud (dolo causante)
Art. 1170
Art. 1338
Committed in the performance of an obligation
already existing because of the contract
Fraud employed in the execution of a
contract, which vitiates consent.
S obliged himself to deliver to B 20 bottles of
wine, of a particular brand. S delivered 20
bottles knowing that they contain cheaper
wine.
B bought the 20 bottles of wine on the false
representation of S that the wine is that as
represented by the labels.
(without this fraud, B would not have given
his consent to the contract.)
Remedy: claim damages
Remedy: annulment of contract
Waiver of action for future fraud
– A waiver of an action for future fraud is void (no effect, as if there is no
waiver) as being against the law and public policy.
– A contrary rule would encourage the perpetration of fraud because the obligor
knows that even if he should commit fraud, he would not be liable for it, thus
making the obligation illusory.
Waiver of action for past fraud
– A waiver of an action for past fraud is valid
– A past fraud can be subject of a valid waiver because the waiver can be
considered as an act of generosity and magnanimity on the part of the party
who is the victim of the fraud.
– Here, what is renounced is the effect of the fraud, that is, the right to
indemnity of the party entitled thereto.
Negligence
Negligence – any voluntary act or omission, there being no malice, which prevents
the normal fulfillment of an obligation; it is the absence of due diligence
Like fraud, negligence results in improper performance. But unlike fraud which is
characterized by malice, negligence is characterized by lack of care
“Lack of care” – lack of due diligence or the care of a good father of the family under
Art. 1163
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Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Effects of Negligence
– Creditor may insist on proper substitute or specific performance (Art. 1233)
– Rescission or resolution (Art. 1191)
– Damages in either case (Art. 1170)
Example: a taxi runs into an accident as a result of entering a one-way street.
Responsibility arising from negligence demandable – in the performance of every
kind of obligation, the debtor is also liable for damages resulting from his negligence.
Kinds of negligence according to source of obligation
– Contractual negligence (culpa contractual) – negligence arising from
contracts resulting in their breach. This kind of negligence is not a source of
obligation. It merely makes the debtor liable for damages in view of his
negligence in the fulfillment of a pre-existing obligation. (Passenger vs.
Operator/owner only)
– Civil negligence (culpa aquiliana) – negligence which by itself is the source of
an obligation between the parties not so related before by any pre-existing
contract. It is also called tort or quasi-delict. (Passenger vs. Driver and
Operator).
– Criminal negligence (culpa criminal) – negligence resulting in the
commission of a crime. The same negligent act causing damages may produce
civil liability arising from a crime under Art. 100 of the RPC, or create an
action for quasi-delict under Art. 2176. (Passenger vs. Driver only).
Contravention of the terms of obligation: This is the violation of the terms and conditions
stipulated in the obligation. The contravention must not be due to a fortuitous event or force
majeure.
Fortuitous event
Fortuitous event – any event which cannot be foreseen, or which, though forseen, is
inevitable.
Kinds of fortuitous events:
– Ordinary fortuitous events – those events which are common and which the
contracting parties could reasonably foresee (e.g. rain)
– Extra-ordinary fortuitous events – those events which are uncommon and
which the contracting parties could not have reasonably foreseen (e.g.
earthquake, fire, war)
Requisites of a fortuitous event:
– The event must be independent of the human will or at least of the debtor’s
will
– The event could not be foreseen, or if foreseen, is inevitable
– The event must be of such a character as to render it impossible for the debtor
to comply with his obligation in a normal manner
– The debtor must be free from any participation in, or the aggravation of, the
injury to the creditor, that is, there is no concurrent negligence on his part.
10 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Fortuitous events
GR: a person is NOT responsible for loss or danage caused to another resulting from
fortuitous events. His obligation is EXTINGUISHED.
Exceptions:
– When expressly specified by law
o The debtor is guilty of fraud, negligence, or delay, or contravention of
the tenor of the obligation. (e.g. S is obliged to deliver a horse to B on
August 10. S did not deliver the horse on said date. If, on August 11,
the horse died because it was hit by lightning, S is not liable IF NO
DEMAND was made by B. his obligation is extinguished. If the horse
died AFTER A DEMAND WAS MADE by B, S is liable for damages
because he is guilty of delay)
o The debtor has promised to deliver the same (specific) thing to two or
more persons who do not have the same interest. (e.g. If S promised to
deliver the same car to B and C separately, S is liable even for a
fortuitous event.)
o The obligation to deliver a specific thing arises from a crime. (e.g. S
stole a carabao of B. S has the obligation, arising from the crime, to
return the carabao. Even if the carabao dies or is lost through a
fortuitous event, S is still liable for damages unless B is in mora
accipiendi)
o The thing to be delivered is generic. (e.g. loss of the thing such as rice
or corn does not extinguish an obligation).
Exceptions:
– When declared by stipulation (basis: freedom of contract)
– When the nature of the obligation requires assumption of risk (e.g. B insured
his house against fire for P100,000 with C, an insurance company. Later, the
house was destroyed by accidental fire. Although the cause of the loss is
fortuitous event, B may recover the amount of the policy).
Kinds of Obligations
Pure and Conditional Obligations
Pure obligation – not subject to any condition and no specific date is mentioned for its
fulfillment and is, therefore, immediately demandable
Conditional obligation – one whose consequences are subject in one way or another to
the fulfillment of a condition
CONDITION – future and uncertain event, upon the happening of which, the
effectivity or extinguishment of an obligation (or right) subject to it depends.
Two principal kinds of condition:
– Suspensive condition – one the fulfillment of which will GIVE RISE to an
obligation; the demandability of the obligation is suspended until the
happening of the uncertain event which constitutes the condition; (e.g. I will
give you my car if you pass the board exam.)
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– Resolutory condition – one the fulfillment of which will EXTINGUISH an
obligation (e.g. I will let you use my car until you pass the board exam.)
Conditional Obligation
Classification of conditions:
As to effect:
– Suspensive – the happening of which gives rise to the obligation; the
demandability of the obligation is suspended until the happening of the
condition.
– Resolutory –the happening of which extinguishes the obligation; the
obligation is demandable at once but it shall be extinguished upon the
happening
As to possibility:
– Possible – condition is capable of fulfillment, legally and physically
– Impossible – condition is not capable of fulfillment, legally or physically
o Physically impossible conditions – when they, in the nature of things,
cannot exist or cannot be done
– “I will pay you P1,000.00 if it will not rain for one year in the
Philippines”
– “I will pay you P1,000.00 if you can carry twenty cavans of
palay in your shoulders”
o Legally impossible conditions – when they are contrary to law, morals,
good customs, public order, or public policy
– “I will give you P1,000,000.00 if you kill X” (against the law)
– “I will give you P1,000,000.00 if you will be my common-law
wife” (against morals)
– “I will give you P1,000,000.00 if you slap your father” (against
good customs)
– “I will give you P1,000,000.00 if you advocate to overthrow
the government” (against public order)
– “I will give you P1,000,000.00 if you will not appear as witness
in a criminal case against me” (against public policy).
As to form:
– Express – condition is clearly stated
– Implied – condition is merely inferred
As to mode:
– Positive – condition consists in the performance of an act
– Negative – condition consists in the omission of an act
As to numbers:
– Conjunctive– there are several conditions and all must be fulfilled;
– Disjunctive –there are several conditions and only one or some of them must
be fulfilled
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As to divisibility:
– Divisible – condition is susceptible of partial performance
o “I will give you a car if you finish your law course and P1,000,000.000
if you top the Bar”
– Indivisible – condition is not susceptible of partial performance
o “I will give you a car if you finish your law course and top the Bar”
(Both conditions must be complied)
As to cause or origin:
– Potestative – condition depends upon the will of one of the contracting parties
o Potestative on the part of the debtor:
✓ If suspensive – the obligation is VOID; “D is to give C a car if
D goes to Baguio”
✓ If resolutory – the obligation is VALID; “D is to allow the use
of his car by C until D returns from Baguio”
o Potestative on the part of the creditor:
✓ The obligation is VALID whether the condition is suspensive
or resolutory. “D is to give C a car if D goes to Baguio”, “D is
to allow the use of his car by C until D returns from Baguio”
– Casual – condition depends upon chance or upon the will of a third person;
“D is to give C P1,000,000.00 if D wins the lotto”, “D is to give C
P1,000,000.00 if X goes to Baguio”
– Mixed - condition depends partly upon chance and partly upon the will of a
third person; “D is to give C P1,000,000.00 if C will marry X”.
Rules in case of loss, deterioration or improvement of determinate thing before the
fulfillment of the suspensive condition
Loss of the thing
– Without debtor’s fault – obligation is extinguished
– With debtor’s fault – debtor is obliged to pay damages
Example: D is to give C his only ring if C passes the CPA Board examination. If the ring is
lost without the fault of D beofre C passes the Board, the obligation is extinguished even if C
thereafter passes the Board. However, if the ring is lost through D’s fault, he is to pay
damages should C pass the Board.
• Deterioration of the thing
– Without debtor’s fault – impairment shall be borne by the creditor; no liability
on the part of the debtor to pay damages
– With debtor’s fault – creditor may choose between (a) rescission plus damages
or (b) fulfillment plus damages
Example: D is to give C a specific car if C passes the CPA Board examination. If the car
deteriorated due to wear and tear before C passes the Board, the deterioration will be borne
13 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
by C when he later passes the Board. However, if the car is damaged due to D’s fault and C
later passes the Board, C may choose to rescind the contract and ask for damages, or ask D to
still deliver the car in its deteriorated condition plus damages.
• Impprovement of the thing
– By nature or by time – the improvement shall inure to the benefit of the
creditor
– At the expense of the debtor – the debtor will have the rights granted to a
usufructuary; he can have the enjoyment of the use of the improved thing and
its fruits; he may remove the improvement if no damage is caused to the
principal thing. If the improvement cannot be removed without causing
damage to the principal, the thing and the improvement shall be delivered to
the creditor without any right on the part of the debtor to indemnity. He may,
however, set off the improvements against any damage.
Obligations with a Period
One whose demandability or extinguishment is subjected to the expiration of the term
which must necessarily come. In other words, there is a day certain when the
obligation will arise or cease.
A future and certain event upon the arrival of which the obligation subject to it either
arises or is extinguished
Kinds of period
o Ex die – a period with suspended effect. The obligation becomes demandable
upon the lapse of the period. “D is to give C his car on May 1, 2021”
o In diem – a period with a resolutory effect. The obligation is demandable at
once but is extinguished upon the lapse of the period. “D allowed C to use his
car until May 1, 2021”
o Legal – a period that is fixed by law
o Voluntary – fixed by the parties
o Judicial – fixed by the court
Alternative Obligations v. Facultative Obligations
Alternative Obligations
Facultative Obligations
Several prestations are due, but the
performance of one is sufficient to extinguish
the debt.
Only one prestation, the principal obligation,
is due.
Example: D is obliged to give a specific ring,
a specific watch, or a specific bracelet to C.
the delivery of any of the three articles will
extinguish the obligation.
Example: D is obliged to give a specific ring
to C with the agreement that D may deliver a
specific watch as a substitute.
14 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
If there are void prestations, the other may
still be valid, hence, the obligation remains.
If the principal obligation is void, the debtor
is not required to give the substitute.
The right of choice is with the debtor, unless
expressly given to the creditor.
The right of choice belongs to the debtor
only.
If all prestations are impossible except one,
that which is possible must still be given.
If the principal obligation is impossible, the
debtor is not required to give the substitute.
Joint Obligations v. Solidary Obligations.
Joint Obligations
Solidary Obligations
Each debtor is liable only for a proportionate
part of the credit, and each creditor is entitled
only to a proportionate part of the credit.
Each debtor is liable for the whole obligation,
and each creditor is entitled to demand
payment of the whole obligation.
Example: A and B are indebted to X for
P10,000.00. A is liable only for P5,000.00; B
is liable only for P5,000.00.
Example: A and B are solidary debtors, are
indebted to X for P10,000.00. X can demand
payment of P10,000.00 from either A or B. if
A pays X P10,000.00, the obligation is
extinguished. A can demand reimbursement
of P5,000.00 from B representing the latter’s
share in the debt.
Other terms:
Proprtionately, Pro rata, Mancomunada,
Mancomunada simple
Other terms:
Jointly and severally, Individually and
collectively, In solidum, Macomunada
solidaria, Juntos o separadamente
Rule: if there is a concurrence of two or more debtors and/or two or more creditors in one and
the same obligation
GR: the obligation is presumed to be joint
XPNs:
– When the obligation expressly so states
– When the law requires solidarity (Example: where the instrument containing
the word “I promise to pay” is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.)
– When the nature of the obligation requires solidarity (Example: AA, a security
guard of BC Partnership, was killed in line of duty. The heirs of AA demanded
compensation under Workmen’s Compensation Law for the whole amount
from B. B claimed that he should only be liable for one-half thereof, and the
other half to be shouldered by C, the other partner. The court ruled that the
15 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
partners’ liability is solidary since the nature of the obligation requires
solidarity. The evident intention of WCL is to give full protection to workers.)
Extinguishment of Obligations
Payment – means not only the delivery of money but also the performance, in any other
manner, of an obligation
How must the payment be made
1. There must be delivery of the thing or rendition of the service that was contemplated
a. The debtor of a thing cannot compel the creditor to accept a different one
although the latter may be of the same value as, or more valuable than that
which is due.
b. In obligation to do or not to do, an act or forbearance cannot be substituted by
another act or forbearance against the obligee’s will.
c. In obligations to give a generic thing whose quality and circumstances have
not been stated, the creditor cannot demand a thing of superior quality. Neither
can the debtor deliver a thing of inferior quality.
d. If the obligation is monetary obligation, the payment must be in legal tender.
2. The payment or performance must be complete. Exceptions:
a. If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been strict and complete fulfillment, less
damages suffered by the obligee;
b. When the obligee accepts the performance knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.
Who must make the payment?
Payment must be made by the debtor who must possess the following:
1. Free disposal of the thing due (property delivered should not be subject to any claim
by encumbrances in favor of third persons)
2. Capacity to alienate the thing (debtor must be capable of giving consent)
Payment by a third person – creditor is not bound to accept payment or performance by a
third person except:
1. When there is a stipulation to that effect
2. When the third person has an interest in the fulfillment of the obligation such as a
guarantor or a co-debtor
Rights of a third person who makes the payment
1. Payment with knowledge and consent of the debtor
a. Right to reimbursement
b. Right to subrogation
2. Payment without the knowledge or against the will of the debtor
a. He can recover only insofar as the payment has been beneficial to the debtor.
He is not entitled to subrogation.
16 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational purposes.
Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as Intellectual
Property Code of the Philippines. All rights reserved to the copyright owners.
To whom shall payment be made
1. To the creditor
2. To the creditor’s successors in interest
Payment to an incapacitated person – NOT valid, except:
1. If he kept the thing delivered (e.g. Debt of P10,000.00 was paid to C who became insane.
C kept P4,000.00 and threw away the rest. The payment is valid only up to P4,000.00)
2. Insofar as the payment has been beneficial to him (e.g. C used only P3,000.00 to buy his
food and lost the remaining balance. The payment is valid only up to P3,000.00, the
amount beneficial to him)
Payment to unauthorized person – NOT valid, except
1. If the payment has redounded to the benefit of the creditor
2. If the payment is made in good faith to a third person in possession of the credit
Where payment must be made
1. Place stipulated
2. If there is no stipulation
a. If the obligation is to give a determinate thing, wherever the thing might be at the
time the obligation was constituted
b. If the obligation is to give a generic thing or an obligation to do, then at the
domicile of the debtor.
Special forms of payment
1. Dacion in payment (Dacion en pago)
2. Payment by cession
3. Application of payment
4. Tender of payment and consignation
Dacion in payment
Payment by cession
Ownership of property is transferred to his
creditor to pay a debt in money (property is
given as payment in lieu of money)
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
Plurality of creditors in not required
There must be two or more creditors
The debtor may not be insolvent
The debtor is insolvent
Does not affect all the debtor’s properties
Affects all the debtor’s properties, except those
exempts from execution.
17 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational purposes.
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The creditor becomes the owner of the
properties given as payment
The creditors are authorized to sell only the
debtor’s properties
The debtor is released as a rule
The debtor is not released as a rule
Application of Payment – the designation of the debt to which payment shall be applied when
the debtor owes several debts in favor or the same creditor
Requisites of application of payment
1. There must be two or more debts
2. The debts must be of the same kind
3. The debts are owned by the same debtor to the same creditor
4. All debts are due, except:
a. When the parties have stipulated that payment may be applied to a debt not yet
due, or
b. When the application is made by the party for whose benefit the term has been
constituted
How application is made
1. The debtor who is given the preferential right to apply the payment designates the debt to
be paid
2. If the debtor does not make the designation, the creditor makes it by indicating the debt
being paid in his credit
3. If neither the debtor nor creditor makes the designation, or application cannot be inferred
from the circumstances, payment shall be applied by operation of law as follows:
a. Payment shall be applied to the debt, among those due, which is the most onerous
to the debtor
b. If the debts are of the same nature and burden, payment shall be applied to all due
debts proportionately.
Tender of payment and consignation
Tender of payment – the act of the debtor of offerering to his creditor what is due him.
Consignation – the act of depositing the sum or thing due with the judicial authorities whenever
the creditor refuses without just cause to accept the same, or in cases when the creditor cannot
accept it.
Requisites for tender of payment and consignation to extinguish the obligation
a. There must be a valid tender of payment (the payment being tendered must be the
thing contemplated, in legal tender, complete, among other requisites for a valid
payment);
b. The creditor refuses without just cause to receive the payment;
c. The persons interested in the fulfillment of the obligation must be notified by the
debtor of his intention to deposit the sum or thing due with the judicial authorities;
18 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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d. The sum or thing due is deposited with judicial authorites; and
e. The persons interested in the fulfillment of the obligation must again be notified
by the debtor that the consignation has been made (without this subsequent notice,
the consignation is void).
Effect of consignation duly made – if the consignation has been duly made, the debtor may ask
the judge to order the cancellation of the obligation
When consignation, without a previous tender of payment, will produce the same effect
1. When the creditor is absent or unknown or does not appear at the place of payment
2. When he is uncapacitated to receive the payment at the time is due
3. When, without just cause, he refuses to give a receipt
4. When two or more persons claim the same right to collect
5. When the title of the obligation has been lost
Loss of the thing due
Loss, concept – a thing is considered lost when it perishes, or goes out commerce, or diappears
in such a way that its existence is unknown or cannot be reccovered (Art. 1189, par. 2). It
includes physical or legal impossibility of the service in which the obligation consists.
Effect of loss on the obligation
Loss of a determinate thing
GR: Obligation is extinguished
XPNs:
1. When loss is due to the fault of the debtor;
2. When the debtor has incurred in delay;
3. When so provided by law (e.g. when the debtor has promised to deliver the same
thing to two or more persons who do not have the same interest)
4. When it is stipulated by parties;
5. When the nature of the obligation requires assumption of risk;
6. When the debt proceeds from a criminal offense.
Loss of a generic thing
GR: Obligation is NOT extinguished
XPN: In the case of a “delimited generic thing”, such as “100 cavans of rice from my
harvest this year” when such harvest is completely destroyed
Loss in personal obligations
1. When the prestation becomes legally or physically impossible without the fault of
the debtor, the obligation is EXTINGUISHED.
2. 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.
19 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Condonation
Condonation or remission, concept – the gratuitous abandonment by the creditor of his
right; the forgiveness of an indebtedness; to extinguish the obligation, it requires the debtor’s
consent
Remission involving immovable property – remission and acceptance must be in a public
instrument;
Remission involving movable property
1. If the value of the property exceeds P5,000.00, the remission and acceptance must be
in writing (public or private)
2. If the value of the property is P5,000.00 and below, the remission and the acceptance
may be in any form (e.g. oral or in writing, public or private); the remission however,
if made orally, requires simultaneous delivery of the thing or document representing
the right remitted.
Effect of Remission of Principal Obligation on the Accessory Obligation and vice-versa
1. The remission of the principal debt extinguishes the accessory obligation (accessory
follows the principal rule)
2. The remission of the accessory obligation does not carry with it that of the principal
debt.
Confusion or Merger
Confusion or Merger, concept – the meeting in one person of the qualities or the
cahracteristics of creditor and debtor
Effect of merger when there is a guarantor
1. Merger which takes place in the principal debtor or creditor benefits the guarantors.
Here, both the principal obligation and the guaranty are extingusihed
2. Merger which takes place in the person of the guarantor does NOT extinguish the
obligation. Here, only the guaranty is extinguished.
Merger in a joint obligation – extinguishes only the share of the joint debtor or creditor in
whom the characters of debtor or creditor concur
Merger in a solidary obligation – extinguishes the whole obligation.
Compensation/Novation
Compensation, concept – two or more persons, in their own right, are debtors and creditors
of each other.
Novation, concept – the modification or extinguishment of an obligation by another, either
by changing the object or principal condition (e.g. D owes C P10,000.00. Later they agree
that D should give instead a ring to C), substituting the person of the debtor, (parties agree
that T shll take the place of D as debtor) or subrogating a third person in the rights of the
creditor (parties later agree that X shall take the place of C as the new creditor.
Novation serves two functions – to extinguish an existing obligation, to substitute a new one
in its place
20 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Requisites of Novation
1. There must be a previous valid obligation;
2. There must be an agreement between the parties to modify or extinguish the
obligation;
3. There must be the extinguishment of the old obligation;
4. There must be validity of the new obligation.
Effect if new obligation is void – novation is void. In such a case, the original one shall
subsist, unless the parties intended that the former relation will be extinguished in any event.
Effect if original obligation is void – novation is void. If the original obligation is void,
there is no obligation to extinguish since it is non-existent.
Effect if original obligation is voidable – novation is valid provided that annulment may be
claimed only by the debtor or when ratification extinguishes acts which are voidable. The
novation here cures whatever defects present in the original obligation.
Effect if original obligation is subject to a suspensive or resolutory condition – the new
obligation shall be subject to the same condition unless otherwise stipulated by the parties
(Art. 1299).
Kinds of Novation
1. According to object or purpose
A. Real or objective – novation by changing the object or principal condition
(Art. 1291)
B. Personal or subjective – novation by change of the parties (debtor or
creditor)
I.
Substituting the person of the DEBTOR (always with the creditor’s
consent)
a. Expromission – here, third person initiates the substitution
and assumes the obligation even without knowledge or against
the will of the debtor
i.
Rights of the new debtor if he makes payment – if the
substitution was without the knowledge or against the
will of the original debtor, the new debtor can only
recover insofar as the payment has been beneficial to
the debtor.
ii. Effect if new debtor is insolvent or does not fulfill
obligation – the new debtor’s insolvency or nonfulfillment of the obligation shall not give rise to any
liability on the part of the original debtor. (Art. 1294)
The original debtor is released from liability.
b. Delegacion – here, it is the debtor who initiates the
substitution, which requires the consent of all parties (original
debtor, creditor, new debtor)
21 | P a g e
Notes in Regulatory Framework in Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material were grasp from the excerpt of the books. This is limited to, in so far as for educational
purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise known as
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i.
ii.
Rights of the new debtor if he makes payment – he can
recover what he has paid and is entitled to subrogation.
(Arts. 1236, 1237, and 1293)
Effect if new debtor is insolvent or does not fulfill
obligation – the creditor’s right right to proceed against
the original debtor is not revived, except:
1) When the insolvency of the new debtor was
already existing and of public knowledge when
the original debtor delegated his debt;
2) When the insolvency of the new debtor was
already existing and known to the original
debtor at the time he delegated his debt
II. Subrogating a third person in the rights of the creditor. Subrogation transfers to the
person subrogated the credit with all the rights appertaining thereto, either against the debtor
or against third persons, be they guarantors or possessors of mortgages, subject to stipulation
in conventional subrogation.
Kinds of subrogation
a. Conventional subrogation – change of creditor by the
agreement of the parties (the original parties and the new
creditor)
b. Legal subrogation – subrogation by operation of law. It is
presumed that there is legal subrogation in the following cases:
i.
When a creditor pays another creditor who is preferred,
even without the debtor’s knowledge.
ii. When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor.
iii. When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to
the latter’s share.
B. Mixed – change of object and parties to the obligation. (e.g. D owes C
P50,000.00. Later, the aprties agree that a ring will be used to pay the debt
with X making the payment.
◼ To be continued…
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