REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Nature and Effects of Obligations
However, the demand by the creditor shall not be
necessary in order that delay may exist:
Art. 1163. Every person obliged to give something
is also obliged to take care of it with the proper
diligence of a good father of a family, unless the
law or the stipulation of the parties requires
another standard of care. (1094a)
Art. 1164. The creditor has a right to the fruits of
the thing from the time the obligation to deliver it
arises. However, he shall acquire no real right over
it until the same has been delivered to him. (1095)
Art. 1165. When what is to be delivered is a
determinate thing, the creditor, in addition to the
right granted him by Article 1170, may compel the
debtor to make the delivery.
If the thing is indeterminate or generic, he may ask
that the obligation be complied with at the
expense of the debtor.
If the obligor delays, or has promised to deliver the
same thing to two or more persons who do not
have the same interest, he shall be responsible for
any fortuitous event until he has effected the
delivery. (1096)
Art. 1166. The obligation to give a determinate
thing includes that of delivering all its accessions
and accessories, even though they may not have
been mentioned. (1097a)
Art. 1167. If a person obliged to do something fails
to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has
been poorly done be undone. (1098)
(1) When the obligation or the law expressly so
declare; or
(2) When from the nature and the circumstances
of the obligation it appears that the designation of
the time when the thing is to be delivered or the
service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the
obligor has rendered it beyond his power to
perform.
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 obligation, delay by the other
begins. (1100a)
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages. (1101)
Art. 1171. Responsibility arising from fraud is
demandable in all obligations. Any waiver of an
action for future fraud is void. (1102a)
Art. 1172. Responsibility arising from negligence
in the performance of every kind of obligation is
also demandable, but such liability may be
regulated by the courts, according to the
circumstances. (1103)
Art. 1168. When the obligation consists in not
doing, and the obligor does what has been
forbidden him, it shall also be undone at his
expense. (1099a)
Art. 1173. The fault or negligence of the obligor
consists in the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the
persons, of the time and of the place. When
negligence shows bad faith, the provisions of
Articles 1171 and 2201, paragraph 2, shall apply.
Art. 1169. Those obliged to deliver or to do
something incur in delay from the time the obligee
judicially or extrajudicially demands from them
the fulfillment of their obligation.
If the law or contract does not state the diligence
which is to be observed in the performance, that
which is expected of a good father of a family shall
be required. (1104a)
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Art. 1174. Except in cases expressly specified by
the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be
responsible for those events which could not be
foreseen, or which, though foreseen, were
inevitable. (1105a)
Art. 1175. Usurious transactions
governed by special laws. (n)
shall
Duties of Debtor in Obligation to Deliver a
Determinate Thing
1. To preserve or take care of the thing due;
2. To deliver the fruits of the thing;
3. To deliver its accessions and accessories;
4. To deliver the thing itself; and
5. To answer for damages in case of nonfulfillment or breach.
be
Art. 1176. The receipt of the principal by the
creditor without reservation with respect to the
interest, shall give rise to the presumption that
said interest has been paid.
The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise
raise the presumption that such installments have
been paid. (1110a)
Art. 1177. The creditors, after having pursued the
property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring
all the actions of the latter for the same purpose,
save those which are inherent in his person; they
may also impugn the acts which the debtor may
have done to defraud them. (1111)
Art. 1178. Subject to the laws, all rights acquired
in virtue of an obligation are transmissible, if there
has been no stipulation to the contrary.
Determinate or Specific Thing
It is one that is individualized and can be
identified or distinguished from others of its kind
(e.g., car with plate number AX1234).
Generic or Indeterminate Thing
It is only indicated by its kind, without
being designated and distinguished from others
of the same king (e.g., Mitsubishi Car).
Delimited Generic Thing
It refers to a generic thing which has been
subject to a limitation of such object to a
particular group of things (e.g., 10 kilos of lakatan
banana from an identified lakatan banana tree).
Duties of Debtor in Obligation to Deliver a Generic
Thing
1. To deliver a thing which is of the quality
intended by the parties taking into
consideration the purpose of the
obligation and other circumstances; and
2. To be liable for damages in case of fraud,
negligence, or delay, in the performance of
his obligation, or contravention of the
tenor thereof.
Types of Diligence
Extraordinary Diligence
It means that extreme care and caution
which very prudent and thoughtful persons use in
securing and preserving their own property.
Ordinary Diligence or Diligence of a Good Father
of a Family
It is that degree of care which is exercised
by ordinarily prudent persons under the same or
similar circumstances.
Slight Diligence
It is that degree of care which every man of
common sense, however inattentive he may be,
exercises under the same or similar
circumstances.
***
Diligence Required in the Preservation of the
Determinate Thing
In order of priority:
1. Diligence required by law (e.g., Common
carriers
are
bound
to
observe
extraordinary diligence in the vigilance
over the goods and for the safety of the
passengers transported by them.)
2. Diligence agreed upon by the parties
(stipulation)
3. Diligence of a good father of a family
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Fruits
1. Action for specific performance,
2. Action to rescind the obligation; or
3. Action for damages exclusively or in
addition to either of the first two actions.
It refers to the income or goods derived or
produced from property without a diminution of
the property's inherent value.
Kinds of Fruits
Natural Fruits
These are the spontaneous products of
the sold, and the young and other products of
animals (e.g., trees and plants on lands produced
without the intervention of human labor).
Industrial Fruits
These are those produced by lands of any
kind through cultivation or labor (e.g., sugar cane,
vegetables, rice, etc.).
Civil Fruits
These are those derived by virtue of a
juridical relation (e.g., rents of buildings, price of
leases of land, etc.).
***
Personal Right
It is the power belonging to one person to
demand of another, as a definite passive subject,
the fulfillment of a prestation to give, to do or not
to do.
Real Right
It is the power belonging to a person over
a specific thing, without a passive subject
individually determined, against whom such right
may be personally exercised. It can be exercised
against any person.
Point When the Creditor Obtains Personal Rights
Over the Fruits of the Determinate Thing
From the time the obligation to deliver the
determinate thing arises.
Point When the Creditor Obtains Real Rights Over
the Fruits of the Determinate Thing
General rule: From the time the fruits are
delivered physically or constructively.
Exception: In a contract of sale, from the
time of the perfection of the contract of sale of
determinate thing.
Rescission
It is the remedy allowed by law to the
contracting parties and even to third persons, to
secure the reparation of damages caused to them
by a contract, even if it should be valid, by means
of the restoration of things in their condition at the
moment prior to the celebration of said contract.
Remedy of the Creditor in Case the Debtor Fails to
Comply with His Obligation to Deliver a
Determinate Thing
Action for specific performance in addition
to damages under Article 1170.
Remedy of the Creditor in Case the Debtor Fails to
Comply with his Obligation to Deliver an
Indeterminate Thing
Either:
1. Filing of an action for specific performance
with damages only; or
2. Ask the obligation to be complied with at
the expense of the debtor with damages
only.
Accessions
These include everything which is
produced by a thing, or which is incorporated or
attached thereto, either naturally or artificially
(e.g., house or tees on a land, rents of a building,
etc.).
Accessories
These refer to those which destined for the
embellishment, use or their preservation of
another thing of more importance, have for their
object the completion of the latter for which they
are indispensable or convenient (e.g., key of a
house, frame of a picture, bracelet of a watch,
etc.).
Remedies Available to Creditor When a Debtor
Fails to Comply with His Obligation (General Rule)
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Obligation to Deliver Accessions and Accessories
The obligation to give a determinate thing
includes that of delivering all of its accessions and
accessories even if they may not have been
mentioned.
Damages
These refer to the harm done and the sum
of money that may be recovered in reparation for
the harm done.
Injury
Remedy of the Creditor in Case the Debtor Fails to
Perform His Obligation to Do a Certain Act
The creditor or third person may do the
obligation in a proper manner at the expense of
the debtor with the right to recover damages. In
this case, specific performance is not available
because such remedy would be tantamount to
involuntary servitude which is prohibited by the
Constitution.
Involuntary Servitude
It is, at its core, forced labor for the benefit
of another. Such labor may be compelled by
physical force or coerced.
Remedy of the Offended Party in Case a Public
Official Who Has Ministerial Duty to Perform a
Particular Obligation or Public Duty Under the Law
Fails to Do Such Obligation
The creditor may file a specific civil action
for mandamus (which has a similar effect to an
action for specific performance).
Remedy of the Creditor in Case the Obligation Is
Done in Contravention of the Terms of the Same
or Is Poorly Done
It may be ordered by the court that it be
undone if it is still possible to undo what was
done.
Remedy of the Creditor in Case the Debtor Fails to
Comply with His Obligation Not to Do a Certain Act
It shall be undone at the expense of the
debtor with indemnification for damages. If the
same cannot be undone, the creditor may still
recover damages.
Grounds for Liability to Pay Damages
1. Fraud
2. Negligence
3. Delay
4. Contravention of the tenor
obligation
of
the
It refers to the wrongful, unlawful or
tortuous act which causes the loss or harm to
another.
Kinds of Damages
Actual or Compensatory Damages
These refer to the pecuniary loss (any loss
that can be measured in financial terms) that may
be recovered. It includes the value of loss suffered
and profits not realized.
Moral Damages
These include physical suffering, mental
anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury.
Nominal Damages
These refer to damages to vindicate
(justify) a right in case the plaintiff has not
suffered or is not able to prove he has suffered
substantial losses.
Temperate or Moderate Damages
These are more than nominal but less than
compensatory damages, but may be recovered if
the court finds some pecuniary loss has been
suffered but its amount cannot, from the nature of
the case, be proved with certainty.
Liquidated Damages
These are those agreed upon by the
parties to a contract, to be paid in case of breach.
Exemplary or Corrective Damages
These are imposed by way of example or
correction for public good, in addition to the moral,
temperate, liquidated or compensatory damages.
Ordinary Delay
It is merely the failure to perform an
obligation on time.
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Legal Delay, Default, or Mora
It is the failure to perform an obligation on
time which constitutes a breach of the obligation.
Requisites for Legal Delay to Occur
1. The obligation must be demandable and
already liquidated.
2. The debtor delays performance of the
obligation.
3. The debtor demands the performance
judicially (filing of complaint in court) or
extrajudicially (in a manner outside of
court).
4. The debtor fails to comply with such
demand.
Effects of Mora Solvendi
a.
The debtor shall be liable for the payment
of damages.
b.
If the obligation consists in the delivery of
a determinate thing, he shall be responsible for
any fortuitous event until he has effected the
delivery.
Effects of Mora Accipiendi
1. The creditor shall bear the risk of loss and
shoulder the expenses for the preservation
of the thing.
2. The debtor may resort to the consignation
of the thing due.
Fraud
Kinds of Delay
It is the deliberate and intentional evasion
of the normal fulfillment of obligations.
Mora Solvendi
It is the delay on the part of the debtor to
fulfill his obligation (to give or to do) by reason of
a cause imputable to him.
Mora Accipiendi
It is the delay on the part of the creditor
without justifiable reason to accept the
performance of the obligation.
Compensatio Morae
It is the delay of the obligors in reciprocal
obligations (i.e., the parties are debtors and
creditors of each other). The delay of one party
cancels the delay of the other and vice versa.
***
Instances When Demand by the Creditor Is Not
Necessary in Order for Debtor’s Delay to Exist
1. When the law so provides (e.g., obligation
to pay taxes)
2. When the obligation expressly so declares
3. When time is of the essence of the contract
(e.g., obligation to provide for the bridal car
during a wedding at a particular date, time,
and place)
4. When demand would be useless (e.g.,
when the thing to be delivered has been
destroyed through the debtor’s fault)
5. In reciprocal obligations, where the
obligations arise out of the same cause
and must be fulfilled at the same time,
from the moment one of the parties fulfills
his obligation
Kinds of Fraud According to Meaning
Casual Fraud or Dolo Causante
It refers to fraud without which consent
would not have been given. It renders the contract
voidable.
Incidental Fraud or Dolo Incidente
It refers to fraud without which consent
would have still been given but the person giving
it would have agreed on different terms. The
contract is valid but the party employing it shall be
liable for damages.
Fraud in the Performance of the Obligation
It is the deliberate act of evading the
fulfillment of an obligation in a normal manner. It
has no effect on the validity of the contract since
it was employed after perfection.
Kinds of Fraud According to Time of Commission
Future Fraud
It refers to fraud to be committed after the
perfection of contract. A waiver of an action for
this type of fraud cannot be made. If there is an
agreement for its waiver, the same is void.
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Past Fraud
It refers to fraud committed already before
the perfection of contract. A waiver of an action
for this type of fraud may be made, since the
commission of fraud can no longer be
encouraged. Such waiver is an act of liberality on
the part of the creditor.
***
Negligence
It is the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of he person,
of the time, and of the place.
Kinds of Negligence
Fortuitous Events
These are those events that could not be
foreseen, or which, though foreseen, are
inevitable.
Acts of Man
It refers to an event independent of the will
of the obligor but not of other human wills (e.g.,
war, robbery, murder, etc.)
Acts of God (Force Majeure)
They are those events which are totally
independent of the will of every human being (e.g.,
earthquake, flood, rain, etc.).
Kinds of Fortuitous Events
Culpa Contractual (Contractual Negligence)
It refers to negligence in the performance
of a contract (e.g., negligence by the bus driver
hurting a passenger tantamount to breach of
contract of carriage).
Ordinary Fortuitous Events
These are those events which are common
and which the contracting parties could
reasonably foresee (e.g., rain).
Culpa Aquiliana (Civil Negligence)
It refers to an act or omission that causes
damage to another, there being no contractual
relation between the parties (e.g., negligence by
the driver hurting a pedestrian).
Extraordinary Fortuitous Events
These are those events which are
uncommon and which the contracting parties
could not have reasonably foreseen (e.g.,
earthquake, fire, war, etc.).
Culpa Criminal (Criminal Negligence)
It refers to negligence that results in the
commission of a crime (e.g., bringing a court
action for culpa criminal against the bus driver for
reckless imprudence resulting in physical
injuries).
***
Liability in Case of Fortuitous Events
General rule: A person is not responsible
for loss or damage resulting from fortuitous
events. In other words, his obligation is
extinguished.
Exceptions:
1. When expressly specified by law
• If the debtor delays
• If the debtor has promised to deliver
the same thing to two or more persons
who do not have the same interest
2. When declared by stipulation
3. When the nature of the obligation requires
the assumption of risk (e.g., obligation of
the insurer in an insurance contract)
Factors to Be Considered in Determining the
Occurrence of Negligence
1. Nature of the obligation (e.g., smoking
while carrying flammable materials as
opposed to smoking away from those
materials)
2. Circumstances of the person (e.g., healthy
guard sleeping while on duty)
3. Circumstance of time (e.g., driving a car
without headlights during the night as
opposed to doing it during the day)
4. Circumstances of the place (e.g., driving
60 kph on the highway as opposed to
driving at the same speed in Quezon Blvd.)
Simple Loan or Mutuum
It is a contract whereby one of the parties
delivers to another money or other consumable
thing, upon the condition that the same amount of
the same kind and quality shall be paid It may be
gratuitous or with a stipulation to pay interest.
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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Obligations (General Principles)
Usury
It is the act of contracting for or receiving
interest in excess of the amount allowed by law
for the loan or use of money, goods, chattels, or
credits.
Kinds of Interest
Simple Interest
It exists when the rate of interest is
stipulated by the parties.
Compound Interest
It exists when the interest earned is upon
interest due.
Legal Interest
It exists when the rate of interest intended
by the parties is presumed by law, as when the
loan mentions interest but does not specify the
rate thereof. It is equal to 12% before July 1, 2013
but 6% on or after July 1, 2013.
Lawful Interest
It exists when the rate of interest is within
the maximum allowed by (usury) law.
Unlawful Interest
It exists when the rate of interest is beyond
the maximum fixed by law.
***
Presumption
It means the inference of a fact not
actually known arising from its usual connection
with another which is known or proved.
Kinds of Presumption
Conclusive Presumption
It is one which cannot be contradicted
(e.g., presumption that everyone knows the law).
Disputable or Rebuttable Presumption
It is one which can be contradicted or
refuted by presenting proof to the contrary (e.g.,
presumption that a person is innocent of crime).
***
Receipt of Principal without Reservation as to
Interest
This shall give rise to the (rebuttable)
presumption that the interest has been paid.
Receipt of Later Installment without Reservation
as to Prior Installments
This shall give rise to the (rebuttable)
presumption that such prior installments have
been paid.
Instances When Presumptions in Article 1176 Do
Not Apply
1. When there is reservation as to interest
2. Receipt for a part of principal
3. Receipt without indication of particular
installment paid
4. Payment of taxes
5. If non-payment is proven
Remedies of Creditor to Enforce Payment of His
Claims Against Debtor
In order of priority as applicable:
1. Exact fulfillment (specific performance)
with the right to damages;
2. Pursue the property in the possession of
the debtor except those exempt by law
(e.g., debtor’s necessary clothing and that
of his family);
3. Exercise all the rights and bring all the
actions of the debtor except those
personal to him (accion subrogatoria); and
4. Impugn the acts which the debtor may
have done to defraud his creditors (accion
pauliana).
Rule on Transmissibility of Rights
General rule: All rights by virtue of an
obligation are transmissible.
Exceptions:
1. If the law prohibits the transmission of the
right (e.g., rights of a general partner in a
partnership)
2. If the parties agreed against transmission
3. If the right is by nature not transmissible
(e.g., scholarship grant)
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