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Obligations and Contracts (30-35%)

Based on Bar Exam trends over the past five years, here’s an estimated percentage breakdown for Obligations and Contracts topics:

 

1.  Types of Obligations – 15-20%

    • Pure, conditional, joint, solidary, divisible, and indivisible.

 

2. Breach of Contract and Remedies – 15-20%

    • Remedies include rescission, damages, and specific performance.

3. Requisites and Elements of a Valid Contract – 10-15%

    • Includes offer, acceptance, consent, object, and cause.

4. Extinguishing Obligations – 10-15%

    • Covers payment, loss of the object, condonation, and novation.

6. Defective Contracts – 10-15%

    • Void, voidable, unenforceable, and inexistent contracts.

 

7. Sources of Obligations – 5-10%

    • Focus on obligations arising from contracts, quasi-contracts, crimes, and quasi-delicts.

Types of Obligations – 15-20%

1. Pure and Conditional Obligations: Articles 1179-1192.
    • Pure obligations: Article 1179
    • Conditional obligations: Articles 1181-1192

2. Obligations with a Period: Articles 1193-1198.
    • Article 1193 defines obligations with a period.

3. Joint and Solidary Obligations: Articles 1207-1222.
    • Article 1207 distinguishes joint and solidary obligations.

4. Divisible and Indivisible Obligations: Articles 1223-1225.
 
5. Alternative and Facultative Obligations: Articles 1199-1206.
    • Article 1199 explains alternative obligations.

1. Pure and Conditional Obligations:
    Articles 1179-1192.

Here are some notable cases that deal with Pure and Conditional Obligations under Articles 1179-1192 of the Civil Code of the Philippines:
 
1. Hongkong and Shanghai Banking Corp. Ltd. v. Sps. Broqueza (G.R. No. 178610, November 17, 2010)
This case involved a pure obligation, where promissory notes did not contain a specific period for repayment. The Supreme Court applied Article 1179 of the Civil Code, ruling that the obligation was demandable at once since no condition or period was attached.

2. Mercantile Insurance Co., Inc. v. DMCI-Laing Construction, Inc. (G.R. No. 205007, September 16, 2019)
In this case, the Court ruled that the Performance Bond issued by the insurance company was a pure obligation since it was callable on demand, meaning the liability attached immediately upon the obligee’s request for payment, without any future or uncertain event.
 
These cases illustrate how pure obligations become immediately enforceable, while conditional obligations depend on the occurrence of a future event. These rulings reflect the principles outlined in Articles 1179-1192 of the Civil Code.

Civil Code - Pure v Conditional Obligations_edited.jpg
2. Obligations with a Period:
Articles 1193-1198.

Obligations with a Period refer to obligations whose performance is either deferred or extinguished based on a certain date or period. The key feature of these obligations is the presence of a future and definite event upon which the demandability or termination of the obligation depends.
 
Types of Periods:
 
1. Suspensive Period (Ex Die): The obligation begins only when the period arrives. For example, a debt payable in 30 days starts when the period elapses.
 
2. Resolutory Period (In Diem): The obligation exists immediately but will end once the period lapses. For instance, a lease contract valid for a year ceases once that period ends.
 
Key Provisions:
 
• Article 1193: Differentiates obligations with a suspensive or resolutory period.
• Article 1196: The debtor can perform the obligation before the period expires unless it is stipulated that the performance must be deferred.
 
In cases where the period is not specified, the court may set a reasonable time for the performance of the obligation, considering the nature of the obligation and other circumstances.
 
Obligations with a period provide flexibility, allowing parties to control the timing of the performance, while ensuring fairness through legal protections when the period is unclear.
 
Leading cases (Obligations with a Period) Articles 1193-1198 of the Civil Code of the Philippines):
 
1. Central Philippine University v. Court of Appeals, G.R. No. 112127, July 17, 1995
This case deals with the obligation’s period when no specific date is provided. The Court ruled that the courts can fix the period when it can be inferred that the parties intended for the obligation to have a time limit. However, the court also pointed out that fixing the period is unnecessary if a reasonable period has already passed.

2. Gregorio Araneta, Inc. v. Philippine Sugar Estates Development Company, Ltd., G.R. No. L-22558, May 31, 1967
In this case, the Court clarified that when the parties have agreed on a reasonable time period, the courts should only assess whether the agreed-upon period has elapsed. It held that if the period has passed, the obligation can be declared breached.
 
3. Camp John Hay Development Corporation v. Charter Chemical and Coating Corporation, G.R. No. 206164, April 30, 2014
This recent case involved disputes over a contract with a fixed period for obligations. The Supreme Court reiterated that the parties must adhere to the agreed period, and failure to comply within the timeframe results in legal consequences.
 
These cases emphasize that when an obligation’s fulfillment depends on a period, the courts may intervene to determine or enforce the obligation depending on the circumstances of the case. These decisions align with the principles outlined in Articles 1193-1198 of the Civil Code.
 
 

2. Breach of Contract and Remedies – 15-20%
 

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1. Breach of Contract (Non-Performance or Violation)

Article 1191 (Rescission)
This article allows the injured party to either demand fulfillment of the contract or rescind (cancel) the contract if the other party fails to comply with their obligations. The innocent party may also claim damages.

Key Point: Rescission is not automatic; it requires judicial approval, except in cases where automatic rescission is stipulated.

UP v. De Los Angeles, G.R. No. L-28602, May 28, 1970
In this case, the Supreme Court held that under Article 1191, a party may seek rescission of the contract if the other party fails to comply with their obligations. However, rescission is not automatic and must be judicially confirmed unless expressly stated in the contract. The decision also emphasized that rescission is a remedy for the injured party, who may opt for either performance or rescission.

Central Bank of the Philippines v. CA, G.R. No. 47895, October 3, 1991
This case clarified that Article 1191 provides the injured party with the option to either demand the fulfillment of the contract or its rescission, along with damages. However, the party in breach can still perform the obligation before the final rescission decree, provided that it does not prejudice the injured party.
 
Article 1170 (Negligence)
This provision holds that any party guilty of fraud, negligence, or delay in the performance of their obligations is liable for damages. Breach of contract can arise from either intentional violation or failure to act with due diligence.

Spouses Caguioa v. Lim, G.R. No. 193273, April 15, 2015
The Court held that under Article 1170, a party guilty of fraud, negligence, or delay in the performance of obligations is liable for damages. In this case, the defendants were found negligent, which resulted in damage to the plaintiffs. The ruling emphasized that even slight negligence is sufficient for liability under this provision.

Gaw v. CA, G.R. No. 92088, February 8, 1993
This case dealt with the fraudulent performance of a contract, where the Supreme Court ruled that fraud or bad faith in the performance of obligations is actionable under Article 1170, and the breaching party is liable for damages. The case reinforced that any fraudulent or negligent act in fulfilling an obligation gives rise to damages.
 
2. Remedies for Breach of Contract
 
A. Specific Performance
 
Article 1233 (Complete Performance)
​This article establishes that an obligation is only considered performed when all stipulated acts have been fulfilled completely. In case of partial performance, the creditor may demand full performance.
 
B. Damages
 
Article 1170 (Liability for Damages)
​A party guilty of breach is liable for damages, which could be in the form of actual, moral, exemplary, or nominal damages under Articles 2195-2220.
 
Article 2201 (Extent of Damages)
​The defaulting party is responsible for damages that are the natural and probable consequence of the breach. In cases of fraud, bad faith, or gross negligence, even foreseeable damages may be awarded.
 
C. Rescission of Contract
 
Article 1191 (Rescission Due to Breach)
​Rescission allows the non-breaching party to terminate the contract. It can be demanded if the other party breaches or fails to perform their obligations.
 
D. Penalty Clause
 
Article 1226 (Penalty Clause)
​This article allows the parties to agree in advance on the penalty for non-performance. The penalty clause serves as compensation for breach unless the parties agree otherwise.
 
E. Consignation and Tender of Payment
 
Articles 1256-1261
These provisions govern consignation (deposit of payment) and tender of payment. When a debtor is ready to fulfill their obligation, but the creditor refuses to accept payment, the debtor can deposit the payment with the court.
 
These provisions ensure that a party who suffers a breach has several remedies, depending on the nature of the breach and the contract itself. They can demand the performance of the contract, claim damages, or seek its cancellation, while being compensated for any losses incurred.

3. Requisites and Elements of a Valid Contract – 10-15%

A contract is defined under Article 1305 of the Civil Code, which states that:

 

"A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service."

 

For a contract to be valid and enforceable, it must meet the requisites outlined in          Article 1318 of the Civil Code, which provides that:

 

Requisites of a valid contract:

  1. Consent of the contracting parties;

  2. Object certain which is the subject matter of the contract;

  3. Cause of the obligation which is established.

 

1. Consent: Consent refers to the agreement or the meeting of minds between the parties to the contract on the subject matter and cause. Consent must be freely given, mutual, and with the full understanding of the terms.

  • Articles 1320 to 1346 of the Civil Code regulate consent, including rules on vices of consent (e.g., mistake, violence, intimidation, undue influence, or fraud).

  • Sps. Serrano v. CA (G.R. No. 139420, January 28, 2003), the Supreme Court emphasized that consent must be freely given for a contract to be valid. If consent is obtained through vices (e.g., fraud or undue influence), the contract may be voidable.

 

2. Object: The object of the contract is the thing, right, or service that is the subject matter of the agreement. It must be lawful, possible, and determinate (or capable of being determined).

  • Article 1347 of the Civil Code requires the object of the contract to be within the commerce of men, lawful, and determinate.

  • Heirs of San Miguel v. CA (G.R. No. 116162, October 9, 1997), the Court ruled that the object of the contract must be determinate. If the object is illicit or impossible, the contract becomes void.

 

3. Cause: refers to the reason or purpose why parties enter into a contract. It is what each party stands to gain from the transaction (e.g., the purchase price in a contract of sale).

  • Articles 1350 to 1355 of the Civil Code govern cause. The cause must be lawful, and when the cause is not stated, it is presumed to exist unless proven otherwise.

  • Development Bank of the Philippines v. CA (G.R. No. 130570, March 12, 2002), the Court emphasized that the cause of the contract must be lawful. If the cause is illegal or immoral, the contract will be void.

Additional Essential Elements:

In addition to the three requisites above, other elements and principles may affect the validity of a contract, such as:

  1. Form of the Contract: Generally, contracts are valid regardless of the form, but some contracts must be in writing (e.g., sale of real property, as per Article 1358).

    Leading Case: Spouses Francisco v. CA (G.R. No. 108747, January 30, 1995) stressed that certain contracts, such as the sale of real property, need to be in a public instrument for enforceability.

  2. Capacity of the Parties: Both parties must have the legal capacity to enter into a contract. Minors, insane persons, and incapacitated individuals cannot validly give consent (Article 1327).

  3. Absence of Defects in Consent: The contract must be free from defects like mistake, violence, intimidation, undue influence, or fraud (Articles 1330 to 1346).

 

Nullity and Voidable Contracts:

 

Contracts can be null and void if:

  • They lack any of the essential elements (e.g., illegal object or absence of cause).

  • There are defects in consent that make the contract voidable (e.g., contracts entered into under duress or fraud).

5. Defective Contracts

Defective contracts are those that, while executed, suffer from certain vices that may render them void, voidable, unenforceable, or rescissible under the law. The Civil Code of the Philippines, particularly in Articles 1300 to 1422, outlines the types of defective contracts, their causes, and the consequences that may follow.

1. Void Contracts
Void contracts are those that lack legal effect from the beginning. They cannot be ratified or validated by the parties and are considered non-existent under the law.

Article 1409 provides that "Contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order, or public policy" are void. Similarly, contracts entered into without the consent of one party are also void.

Leading Case: Sps. Loyola v. Court of Appeals, G.R. No. 120696, September 11, 1996. The Supreme Court held that contracts which are contrary to law or public policy are void ab initio (from the beginning) and cannot be given effect.

2. Voidable Contracts
Voidable contracts are valid until annulled. They may be validly performed but can be annulled due to defects in consent, such as mistake, violence, intimidation, undue influence, or fraud.

Under Article 1390, "A contract where consent is vitiated by any of these factors is voidable but can be annulled by the party whose consent was compromised."

Leading Case: Ong v. Court of Appeals, G.R. No. 119777, February 10, 1997. This case established that fraud vitiates consent, making the contract voidable, but the party must act within the prescribed time limits to annul the contract.

3. Unenforceable Contracts
Unenforceable contracts are those that cannot be enforced unless ratified, usually due to lack of proper authority or non-compliance with formalities required by law.

Article 1403 outlines unenforceable contracts, such as those entered into in the name of another person without authority, or those that do not comply with the Statute of Frauds.

Leading Case: Robleza v. Court of Appeals, G.R. No. L-39555, April 30, 1982. The Court ruled that an unenforceable contract could not be performed or enforced by either party unless ratified or confirmed by the proper formalities.

4. Rescissible Contracts
Rescissible contracts are valid but are subject to rescission because they cause injury to one of the parties or to third persons.

Under Article 1381, examples of rescissible contracts include those entered into in fraud of creditors or contracts that cause economic damage to a party who lacks legal capacity.

Leading Case: Filinvest Land, Inc. v. Court of Appeals, G.R. No. 143794, November 23, 2006. The Supreme Court explained that rescissible contracts, though valid, can be rescinded when they cause damage or harm to a party, especially if entered into in fraud of creditors.

4. Extinguishing Obligations

Obligations are extinguished through various modes, as provided under Articles 1231 to 1304 of the Civil Code. The most common ways to extinguish obligations include payment or performance, loss of the thing due, condonation or remission of debt, confusion or merger of rights, compensation, and novation.

1. Payment or Performance
The most straightforward way to extinguish an obligation is by fulfilling it.
Article 1232: "Payment means not only the delivery of money but also the performance, in any other manner, of an obligation."

Javellana v. Lim, 67 Phil. 737 (1939), where the Supreme Court ruled that the debtor is discharged from liability once he has paid the correct amount in accordance with the obligation.

2. Loss of the Thing Due
Obligations involving specific things are extinguished if the thing is lost without the debtor's fault.
Article 1262: "An obligation which consists in the delivery of a determinate thing shall be extinguished if it is lost or destroyed without the fault of the debtor and before he has incurred in delay."

Manresa v. Sarte, G.R. No. L-36957, April 25, 1934, clarified that if the loss of the thing happens without fault or negligence on the debtor's part, the obligation is extinguished.

3. Condonation or Remission of Debt
Condonation or remission of the debt refers to the voluntary renunciation by the creditor of his right to collect the debt.

Article 1270, "Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly."

Labagala v. Santiago, G.R. No. 164270, February 12, 2014, where the Court ruled that a creditor may validly forgive a debt, thus extinguishing the obligation, provided the remission is accepted by the debtor.

4. Confusion or Merger of Rights
Confusion happens when the characteristics of both debtor and creditor meet in one person, thus extinguishing the obligation.

Article 1275:"The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person."

Aparri v. CA, G.R. No. L-30057, February 28, 1979, confirmed that confusion extinguishes the obligation when the creditor becomes the debtor for the same obligation.

5. Compensation
Compensation occurs when two parties are mutually debtors and creditors of each other.

Article 1278 states that "Compensation shall take place when two persons, in their own right, are creditors and debtors of each other."

Dizon v. Valdes, 46 Phil. 187 (1924), where the Court held that compensation extinguishes the obligation when the amounts owed by the parties to each other are equal and are extinguished to the amount of the lesser debt.

6. Novation
Novation extinguishes an obligation by substituting it with a new one.

Article 1291, "Obligations may be modified by: (1) changing their object or principal conditions; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor."

Philippine National Bank v. CA, G.R. No. 121362, March 9, 1999, clarified that novation requires the concurrence of a valid previous obligation, agreement to the new obligation, and the extinguishment of the old obligation.

5. Sources of Obligations

Under the Civil Code of the Philippines, obligations arise from five main sources: law, contracts, quasi-contracts, delicts (crimes), and quasi-delicts (torts). These sources are explicitly mentioned in Article 1157 of the Civil Code, which states that "Obligations arise from: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or omissions punished by law; and (5) Quasi-delicts."

1. Law
Obligations arising from law are imposed directly by statutory provisions. These obligations are not dependent on the will of the parties but are created by the legal system itself. Article 1158 provides that "Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable."

Republic v. Lacap, G.R. No. 158253, June 16, 2006. The Supreme Court emphasized that obligations arising from law must be expressly provided by legal provisions, and courts cannot create obligations without legal basis.

2. Contracts
Obligations arising from contracts are voluntary agreements between parties. A contract binds the parties to perform or refrain from performing certain acts. According to Article 1305,"A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service."

Serra v. Court of Appeals, G.R. No. 105917, September 3, 1993. The Court held that obligations arising from contracts have the force of law between the parties and must be complied with in good faith, following Article 1315 of the Civil Code.


3. Quasi-contracts
Quasi-contracts are lawful, voluntary, and unilateral acts that create obligations to avoid unjust enrichment. Article 2142 defines quasi-contracts as "certain lawful, voluntary, and unilateral acts by which the parties become bound to each other to the end that no one shall be unjustly enriched or benefited at the expense of another."

The most common quasi-contracts are solutio indebiti (payment by mistake) and negotiorum gestio (voluntary management of another's affairs).

Estel v. Samson, G.R. No. 169402, June 16, 2010. The Court ruled that under quasi-contracts, a person who receives something by mistake must return it under the principle of solutio indebiti.

 

4. Delicts (Crimes)
Obligations arising from delicts (criminal offenses) are those that result from acts or omissions punishable by law. Under Article 1161, "Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages."

People v. Sandiganbayan, G.R. No. 114637, July 16, 1998. The Supreme Court reiterated that civil liability automatically attaches to the commission of a crime, obligating the offender to pay for damages, without the need for a separate civil action.

 

5. Quasi-delicts (Torts)
Quasi-delicts, or torts, refer to acts or omissions that cause damage to another without pre-existing contractual relations. The injured party may claim damages. Article 2176 provides that "Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done."

Picart v. Smith, 37 Phil. 809 (1918). This landmark case established the doctrine of "reasonable care" in quasi-delicts, holding that any person who causes damage to another through negligence must compensate the injured party.

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