CHAPTER 5 : LAW OF OBLIGATION
 Characteristics of an obligation
 Must be two parties
 Creditor has the right to claim performance from the debtor
 Debtor has the duty to perform the obligation
 Can be more than one person/juristic person in a party, for example, joint debtors and joint creditors.
 Must be a juristic relation to establish rights and duties
 Obligation creates the right to claim for creditor and duty to perform for debtor.
 Juristic relation can be beneficial to both parties (reciprocal).
 Must be subjects of obligation
 Three types of subjects of obligation: i.
Delivery of a property. o Example: Billy sold his iphone to Jenny. He has the duty to deliver the phone to her. In this case, iphone is the subject of obligation. ii.
Doing some act. o Example: Jake hires Anna to tutor his son. Anna has the duty to teach the son. In this case, the act of teaching is the subject of obligation. iii.
Forbear from doing some act. o Example: Nikki is a superstar. She has a contract to only advertise for Pepsi for four years. She has the duty NOT to work for other companies. In this case, the subject of obligation is the act of not advertising for other companies.
 Sources of Obligation
 Contract
 A contract is a bilateral or multilateral juristic act made between two or more parties to create rights and obligations enforceable by law.

 When the parties signed the contract, they are bound to it.
Therefore an obligation is formed.
 Legal Causes
 Legal causes are the circumstances which create legal consequences.
 May be the acts of human or natural events. i.
Tort o Creates obligation from a willful or negligent act of debtor in which debtor must pay compensation to the creditor. o Example: Dianne accidentally broke a glass in a restaurant. She is the debtor who has to perform duty by paying compensation to the restaurant. ii.
Management of Affairs without Mandate o Creates an obligation when someone takes charges of the principal’s affair manages it in accordance with the interest and the presumptive wishes of the principal. Then, that person can claim for expense paid for the principal. o Example: Jimmy went on a business trip. While he was gone his dog got hit by a car. Katie, Jimmy’s neighbor, took the dog to the clinic without the consent of Jimmy. However, when Jimmy came home, Katie has the right to claim the money paid for the dog from him. iii.
Undue Enrichment(Unjust Enrichment) o A person who has got any property from the other without any legal ground should return the property to the person who gives it to him. o Example: Peter was drunk. He unconsciously gave his car to Matt. In this case, the car given to Matt is undue enrichment that Matt has no right in

obtaining. Therefore, Matt is a debtor to Peter because he has to return the car to him.
 Legal Provisions
 The duties of people for the peace and development of the country or public policy which is stated in the law. o Example: The Civil Commercial Code provides that a finder of lost property may claim from the person entitled to receive it up to 10% of the value of the property. o Example: Law of Taxation provides that any person who can earn a certain sum of money must pay income tax. o Example: The Labor Protection Act provides that the employers shall compensate the employees for any injuries arising out of work.
 Consequences of Obligation
 When the debtor ignores his duty, the creditor has the right to enforce the performance.
 Creditor has to file a law suit against the debtor.
 In order to file a lawsuit, the obligation must be mature and the debtor must default.
 Maturity of an obligation
 Due date for the debtor to perform the obligation. Depends on several factors: i.
Without specified time for performance o Mature once the contract is made. o Example: Rita let Nick borrow $100 but they did not say when Nick would pay her back. In this case, the obligation is due at once, therefore, Rita can demand repayment from that point onward. ii.
With specified time of performance(with doubt) o Creditor cannot demand the performance before the maturity.

o Debtor can choose to perform earlier if he wishes. o Example: Angela lends $500 to Kevin and they agree to a contract which says that he should repay her within June 10. Because of the word
“within”, Kevin has the choice of repaying Angela before June 10. On the other hand, Angela cannot demand the money from him before June 10. iii.
Mature as per calendar o Mature or falls due exactly on the date of the calendar. o Example: Manny borrows Eric’s belt on November
1 and agrees to return it on November 7. The obligation will be mature on November 7. iv.
Mature on fixed period assuming from the circumstances o Due date of the obligation is assumed from the circumstances. o Example: Alexandra borrows Jennifer’s dress for her prom. Even though they did not say when
Alexandra will return the dress, it is assumed that after the prom she will return it to Jennifer. Thus, the obligation is mature after prom.
 Default
 When the debtor performs his obligation after the due date and causes damages to the creditor.
 Debtor must pay compensation for the damages.
 The default take places in three cases: i.
An obligation without specified time and unable to infer from the circumstance o This obligation is already mature but the debtor did not perform, he is not yet in default. He will default when the creditor gives him a warning. ii.
An obligation with specified date as per calendar

o If debtor does not perform his obligation on the date, he is automatically in default. iii.
Obligation from tort o Debtor is in default from the time committed tort.
 The debtor’s excuse of default
 If debtor wants to claim he is not in default, he must be able to prove that he is not responsible for the circumstances that cause him to be unable to perform the obligation.
 Consequences of default
 Debtor is liable for the damages he caused for the creditor. i.
If debtor does not perform the obligation in accordance with the true intention and purpose, creditor may claim compensation for any damage caused thereby. ii.
If by result of default the performance becomes useless, the creditor may claim compensation for non-payment. iii.
Debtor is responsible for all negligence during his default. He is also responsible for the impossibility arising during the default, unless the injury would have arisen even if he had performed in due time. iv.
A money debt bears interest during default at 7.5% per annum. v.
If the debtor already has to pay compensation to the creditor during default, the creditor may demand interest on the compensation.
 When creditor is in default
 Creditor is in default in the following cases: i.
If creditor does not accept the performance without legal ground. ii.
If the creditor does not perform his part. o Example: Michael agrees to sell a house to Linda on May 5. When the time comes, Michael is not ready to transfer the ownership of the house. It is said that Michael the creditor is in default.

 Effects of the creditor’s default
 When creditor is in default, debtor will not be responsible for: i.
Paying compensation for delayed performance, ii.
Useless performances, or iii.
Any damages that is not debtor’s fault.
 Performance becomes impossible
 When the obligation becomes impossible after the obligation was created and before debtor is in default.(During the obligation) i.
Impossible in the circumstance for which debtor is responsible. o Debtor must be responsible for causing such impossibility. o Debtor does not have to perform because there is nothing left to perform. o Debtor is liable for damages to the creditor. o Example: Belle agrees to sell a ring to Thomas who will pay and get it next week. The next day, Belle lost the ring. Now it is impossible for Belle to perform her duty because the ring is gone, but she will have to pay compensation to Thomas. o If the performance is PARTIALLY IMPOSSIBLE because of the debtor’s fault makes the obligation useless to the creditor. The creditor can refuse to receive part of that performance and claim for non-performance of the entire obligation.
ii.
Impossible in the consequence for which the debtor is not responsible o Impossible due to circumstances o Creditor must bear all the damages a) Impossible by third person’s action or without debtor’s responsibility

b) Impossible by force majeure(natural disasters)
 Extinction of an Obligation
 Obligation comes to an end when: i.
By performance o When debtor fulfilled the obligation ii.
By release o Creditor release an obligation iii.
By set-off o More than one obligation of the same kind of subject. o Debtor my be discharge of his obligation by setting-off the extent to which the amount of the obligation responds. o Example: Melissa borrows $100 from Blake and
Blake already owed Melissa $250. By setting-off,
Blake now owes Melissa only $150. iv.
By Novation o Substitution of a new contract, debt, or obligation. o Can be the same or different parties o Old debts are extinguished while new obligation is created. o Example: Jessica wants to buy a phone from Elle for $700, but she does not have enough money.
She then asks Elle if she will accept a payment of
$350 plus a golden ring worth $400 or not. If Elle agrees then the old obligation of paying $700 is extinguished and the new obligation is created. v.
By merger o If the right and liabilities in an obligation become vested in the same person, the obligation is extinguished.

o Example: Henry borrows $50,000 from his grandfather. If Henry happens to be inheriting his grandfather’s money, then if his grandfather were to die, he does not have to pay $50,000 back anymore.