RFBT 04 01 Law on ObligationLecture notes or reviewer better in enhancing your fundamental knowledge in accountancy as a step closer to Your CPA journey and achieving dreams PDF

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Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone : (043) 723 8412 Gmail : icarecpareview@gmailRegulatory Framework for Business TransactionsLaw on Obligation Definition of Obligation: Article 1156 of the Civil Code defines an obligation as a juridical necessity to give, to do or not...

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No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

Regulatory Framework for Business Transactions Law on Obligation

1. Definition of Obligation: Article 1156 of the Civil Code defines an obligation as a juridical necessity to give, to do or not to do. Civil obligation may be defined as the juridical relation, created by virtue of certain facts, between two or more persons, whereby one of them, known as the creditor or oblige, may demand of the other, known as the debtor or obligator, a definite prestation. It is also a juridical relation whereby a person called the creditor may demand from another person called the debtor the observance of a determinate conduct, and in case of breach, may obtain satisfaction from the assets of the latter. 2. Essential Elements or Requisites of an Obligation (Civil Obligation) a. Active subject a.k.a. obligee or creditor refers to the party who has the right or power to demand the performance of prestation from the obligor or debtor. b. Passive subject a.k.a. obligor or debtor refers to the party who has the juridical necessity of adjusting his conduct to the demand of the creditor or obligee pursuant to the obligatory tie. c.

Object or prestation refers to the promise or particular conduct to be performed in the fulfilment or rendition of the obligation. Object or prestation may consist of giving, doing or not doing a thing. i. Requisites of an Object or Prestation of an Obligation 1. It must be possible, physically and juridically. 2. It must be determinate, or, at least, determinable according to preestablished elements or criteria. 3. It must have possible equivalent in money.

d. Efficient cause a.k.a. vinculum refers to the juridical tie which binds the parties to the obligation. i. Examples of juridical tie or vinculum or efficient cause 1. Relation established by law 2. Relation established by contract 3. Relation established by quasi-contract such as (1) negotiorum gestio and (2) solutio indebiti 4. Relation established quasi-delict or culpa aquiliania or tort 5. Relation established by crime or delict 3. Types of Civil Obligation based on the definition under the Civil Code a. Positive obligation refers to an obligation which consists of giving or doing something. i. Types of Positive Obligation 1. Real obligation (Civil Obligation to Give) refers to a positive obligation which consists of the delivery or giving of personal or real object. The examples of real obligations are the obligations of the parties in a contract of sale or barter or deposit or loan. 2. Personal obligation (Civil Obligation to Do) refers to a positive obligation which consists of doing a particular prestation but not delivery of an object An example of personal obligation is rendition of services . b. Negative obligation (Civil Obligation Not to Do or Not to Give) refers to an obligation which consists of abstaining from some act. An example of a negative obligation is the legal obligation not to commit jay walking. i. Note: Delay or Default or Mora is not applicable in negative obligation.

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RL ACO/DSALES/ NVALDERRAM A

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

4. Distinctions between Civil Obligation and Natural Obligation I.

As to binding force, Civil Obligations derive their binding force from positive law or substantive law (Civil Obligation of Parents to give support to their children under Family Code), while Natural Obligations derive their binding effect from equity and natural justice (1) Natural Obligation of successors or heirs to pay the debts of predecessor beyond the property they inherited or (2) Civil obligations that have already prescribed)

II.

As to enforceability, Civil Obligations can be enforced by court action or the coercive power of public authority while the fulfillment of natural obligations cannot be compelled by court action but depends exclusively upon the good conscience of the debtor. However, after voluntary fulfilment by the debtor of a natural obligation, the creditor is authorized to retain what has been delivered or rendered by reason thereof.

III.

As to examples, the examples of Civil Obligations are: (1) Legal obligation of parents to give support to their children under Family Code and (2) Contractual obligation of review center to provide preweek lectures to their reviewees despite cancellation of board exam while the examples of Natural Obligations are: (1) Natural Obligation of successors or heirs to pay the debts of predecessor beyond the property they inherited and (2) Unpaid civil obligations that have already prescribed.

5. Sources of civil obligation demandable in a court of law a. Law refers to the principles and regulations established in a community by some authority and applicable to its people, whether in the form of legislation or of custom and policies recognized and enforced by judicial decision. i. Principles applicable to legal obligation 1. The obligations derived from law are never presumed. 2. Only obligations expressly determined in the Civil Code or in special laws are demandable. 3. The law cannot exist as a source of obligations, unless the acts to which its principles may be applied exist. 4. The obligations and correlative rights arising from law shall be governed by the law by which they are created. b. 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. i. Principles application to contractual obligation 1. Obligations arising from contracts have the force of law between contracting parties. 2. Obligations arising from contracts should be complied with in good faith. c.

Quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral act, to the end that no one may be unjustly enriched or benefited at the expense of another. Quasi-contract is based on fairness and equitable principle of unjust enrichment. i. Two Types of Quasi-Contracts 1. Negotiorum Gestio refers to the voluntary management of the property or affairs of another without the knowledge or consent of the latter. i. Nature of Liability of Officious Managers in Negotiorum Gestio - The nature of liability of officious managers in negotirum gestio is generally solidary unless the officious management was done under imminent danger which will make their obligatio joint.

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RL ACO/DSALES/ NVALDERRAM A

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

ii.

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

Examples of Negotiorum Gestio a. A person voluntary takes charge of the agency or management of business or property of another without authority or consent of the latter. b. A stranger gives support to a child of another person without the knowledge of the person obliged to give support. c. A person saves the property of another person during fire, flood, storm or other calamity without the knowledge of the owner.

2. Solutio Indebiti refers to the juridical relation that is created when something is received when there is no right to demand it and it was unduly delivered through mistake. i. Nature of Liability of Payees in Solutio Indebiti – The nature of liability of payees in solutio indebiti is solidary. ii. Example of Solutio Indebiti a. A person receives something when there is no right to demand it or it was unduly delivered through mistake. d. Quasi-delict or culpa aquiliana or torts refers to a source of a civil obligation wherein a person by act or omission causes damage to another, there being fault or negligence. i. Nature of Liability joint tortfeasors or two or more persons liable for quasi-delict - The nature of liability of joint tortfeasors or two or more persons liable for quasi-delict is solidary. Requisites of Civil Action based on Quasi-Delict or Culpa-Aquiliana or Tort i. There is no pre-existing relation (contract) between the offender (respondentdependant) and offended parties (complainant-plaintiff). (However, exceptional cases allow filing of civil action based on quasi-delict despite the presence of contractual relations if the act that violated the contract constitutes a tortuous act on itself.) ii. There exists a wrongful act or omission imputable on the defendant by reason of his fault or negligence. iii. There exists a damage or injury which must be proved by the person (plaintiffcomplainant) claiming recovery. iv. There must be a direct causal connection or a relation of cause and effect between the fault or negligence of respondent and the damage or injury to the plaintiff, or that the fault or negligence of the respondent be the cause of the damage or injury to the plaintiff. e. Crime or delict refers to any act or omission which is punishable by law. i.

Nature of Liability of Criminals – The nature of liability of two or more persons guilty of a crime is solidary.

i. Persons who are exempted from criminal liability (imprisonment and fines) but still civilly liable (civil damages) for the crime they have committed 1. 2. 3. 4.

An imbecile or an insane person A person under 18 years of age a.k.a. minor Any person who acts under the compulsion of an irresistible force Any person who acts under the impulse of an uncontrollable fear of an equal or greater injury

ii. Persons who are exempted from both criminal liability (imprisonment and fines) and civil liability (civil damages) 1. Any person who acts in defense of one-self, in defense of relatives or in defense of strangers 2. Any person who acts in the performance of his legal duties 3. Any person who acts in the performance of his contractual obligations 4. Any person suffering from battered woman syndrome

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RL ACO/DSALES/ NVALDERRAM A

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

iii. Components of Civil Liability arising from Crime or Delicto 1. Restitution refers to the restoration of the thing itself even though it be found in the possession of a third person who has acquired it by lawful means. 2. Reparation of the damage caused shall be determined by the Court taking into consideration of the price of the thing and its sentimental value. 3. Indemnification for consequential damages shall include not only those caused the injured party but also those suffered by his family or by a third person by reason of the crime. 6. Distinctions between quasi-delict (tort or culpa aquiliana) and crime (delict) a. As to the nature of right violated, the right violated by a quasi-delict is a private right while the right violated by a crime is a public right. b. As to the name of the case, in quasi-delict the name of the case is Private-Plaintiff vs. Respondent or Defendant while in crime the name of the case is People of the Philippines vs. Accused. c. As to award of civil damages, every quasi-delict gives rise to liability for damages to the injured party but there are crimes from which no civil liability arises. d. As to possibility of compromise, quasi-delict can be compromised but criminal liability for imprisonment and fines can never be compromised except in case of criminal negligence. e. As to requirement of criminal intent, in quasi-delict , criminal intent is not necessary, while in crime, criminal intent is necessary except in (1) criminal negligence and (2) mala prohibita or crimes where good faith is not a defense, thus, criminal intent is not required. f. As to quantum of evidence, claims arising from quasi delict must be proven by preponderance of evidence while conviction for crime must be proven by proof beyond reasonable doubt although civil damages arising from crime may be proven only by preponderance of evidence by the private offended party plaintiff or victim of the crime. 7. Principles on Sources of Civil Obligations and Awarding of Damages a. A single act by the defendant-respondent may result to two or more sources of civil obligation. However, the plaintiff cannot recover twice damages for all cases filed involving the single act because the purpose of awarding civil damages is to compensate the plaintiff for the injury suffered by him but not to unjustly enrich the plaintiff at the expense of the defendant. b. The constitutional prohibition against double jeopardy applies to criminal cases only but neither civil nor administrative proceedings. That means, for example, that a defendant convicted or acquitted of a crime is not immune from a civil lawsuit for damages from the victim (private offended party) of the crime. 8. Kinds of Thing or Object in Obligation to Deliver a Thing a. A generic thing or indeterminate thing is only indicated by its kind, without being designated and distinguished from others of the same kind. (Note: Generic thing never perishes.) b. A determinate thing or specific thing or delimited generic thing is one that is individualized and can be identified or distinguished from others of its kind. i. Note: Loss of thing due to fortuitous event as a mode of extinguishing an obligation is applicable only to obligation to deliver a determinate thing or specific thing or delimited generic thing but not to obligation to deliver a generic thing or indeterminate thing because generic thing never perishes.

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RL ACO/DSALES/ NVALDERRAM A

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

9. Incidental or Accessory obligations in an Obligation to Deliver a Determinate Thing or a Specific Thing or a Delimited Generic Thing a. Obligation to Preserve the Determinate Thing or Specific Thing or Delimited Generic Thing with Due Care i. Degree of Diligence to be Exercised by the Obligor or Debtor in the Preservation of Determinate Thing or Specific Thing or Delimited Generic Thing 1. Diligence Required by Law a. Contract of common carrier - Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods transported by them, according to all the circumstances of each case. b. Necessary deposit (Things brought in hotel or motel) – Hotel business is imbued with public interest, which demands that hotelkeepers are bound to provide not only lodging for hotel guests but also security to their persons and belongings with extraordinary diligence. The law does not allow such duty to the public to be negated or diluted by any contrary stipulation that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. 2. Diligence Validly Stipulated by the Contracting Parties a. Based on autonomy of contract, the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The stipulated degree of diligence must be valid. Waiver of future fraud or future gross negligence is null and void because that is contrary to law and public policy. 3. Ordinary Diligence or Diligence of a Good Father of a Family or Diligence of a Reasonably Prudent Person a. Diligence of a good father of a family means an ordinary care. Just like a father of a family, it is a care that an average person would do in taking care of his property. Diligence of a good father of a family depends upon the facts and circumstances of each case. b. Obligation to Deliver the Fruits of the Determinate Thing if the Fruits occur After the Obligation to Deliver the Determinate Thing arises i. Kinds of Fruits under the Civil Code 1. Natural fruits are the spontaneous products of the soil, and the young and other products of animals. 2. Industrial fruits are those produced by lands of any kind through cultivation or labor. 3. Civil fruits are fruits as a result of civilization or fruit arising out of a juridical relation or contracts such as are the rents of buildings, the price of leases of lands and other property and the amount of perpetual or life annuities or other similar income. c. Obligation to Deliver the Accessions and Accessories of the Determinate Thing i. Accessories refer to those which are destined for the embellishment, use or for the preservation of another thing which is of more importance, have for their object the completion of the latter for which they are indispensable or convenient. ii. Accessions include everything which is produced by a thing, or which is incorporated or attached thereto, either naturally or artificially.

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RL ACO/DSALES/ NVALDERRAM A

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile

: 0927 283 8234

Telephone

: (043) 723 8412

Gmail

: [email protected]

10. Types of Rights of Creditor over the Determinate Thing and its Fruits and the Specific Moment the Right is acquired by Creditor a. A personal right 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. It refers to a right that can be exercised only against a specific person thereby prohibiting an action to recover the ownership or possession of a specific thing if it is already with a third person but it only allows action for damages against a specific person. Personal right over a determinate thing is acquired from the moment provided by the Civil Code or Special Law. b. A real right 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 refers to a right that can be exercised against the whole world thereby allowing an action to recover the ownership or possession of a specific thing regardless of the possessor of such thing. Real right over a determinate thing or its fruits is acquired from the moment of its or their actual delivery or constructive delivery. 11. General Remedies Available to Creditor when the Debtor Fails to Comply with his Obligation a. Action for specific performance of obligation (exact fulfillment of obligation) with damages; or b. Action to rescind the obligation (cancellation of obligation) with damages; or c. Action for damages (indemnification for damages) 12. Successive Remedies of the Creditor in case the Debtor Fails to Comply with his Obligation to Deliver a Determinate Thing or a Specific Thing or a Delimited Generic Thing a. Action for specific performance of obligation (exact fulfilment of obligation) plus damages for breach of obligation under Article 1170; then b. Action for damages if action for specific performance becomes legally impossible 13. Alternative Remedies of the Creditor in Case the Debtor Fails to Comply with his Obligation to Deliver an Indeterminate Thing or a Generic Thing a. Action for specific performance of obligation (exact fulfilment of obligation) with damages; or b. He may ask the obligation to be complied with by a third person at the expense of the debtor with damages. i. Note: For practicality, the second remedy of asking a third person to comply the obligation at the expense of the debtor plus damages is more practicable. 14. Remedy of the Creditor if the Debtor Fails to do the Prestation in Obligation to do that can be done by other persons a. The creditor or third person may do ...