MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

MODULE 5
Law on Obligation and Contracts,
Meaning and Elements of Contract

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

LAW ON CONTRACTS AND OBLIGATION

The law on contracts is actually an integrated subject with the law on

obligation. Thus, in order for one to have a complete framework of study on
this particular business law subject, it is only proper that the law of obligation
be discussed ahead of the law of contracts.
The law on obligations and contracts are governed by Articles 1156 to
1430 of the New Civil Code of the Philippines which took effect on August 30,
1950.
The term “obligation” comes from the Latin word ”obligar” meaning to
bind. The Civil Codes defines obligation as a judicial necessity to give, to do or
not to do. Under this definition, an obligation consists either in a) giving
b) doing, c) not doing something.
Examples of Obligation
1) Obligation to give – B entered into contract with C whereby the former
found himself to deliver to C a specific car on Sept 5, 2020.
2) Obligation to do – C and D entered into an agreement whereby the
former obliged himself to fix the car of B.
3) Obligation not to do – D is an actor who entered into a contract of a
certain TV station. The duration of the contract is 2 years prohibiting
the said actor to appear in another TV stations. This is an example of
obligation not to appear or not to do.

Every obligation has four essential requisites, to wit:

1. A passive subject - The person who is bound or has the duty to fulfill
obligation, called the debtor or obligor.

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

2. An active subject - The person who can demand the fulfillment of the
object or subject matter called the creditor or obligee.
3. An object- It is either the giving of a thing, or doing, or not doing of
something. This is the subject matter of the obligation.
4. A juridical tie, legal tie or the vinculum- It is that which binds the
parties to the obligation. It is known as the efficient cause.

Example
B promised to construct a house for C for 2 Million Pesos by virtue
of a contract signed by them. In this example, B is the passive subject
and C is the active subject. The construction of the house is the object,
and the contract is the juridical or the legal tie. If the agreement is that
C would pay B amounting to 1 million as a down payment and another
1 million after construction, B then becomes the active subject and C
becomes the passive subject and the amount to be paid will be the
object.

SOURCES OF OBLIGATION
Article 1157 of the New Civil Code provides that obligation arises
from any of the following:
a) Law
b) Contracts
c) Quasi-contracts
d) Delicts
e) Quasi-delicts
a) Obligations derived from Law- Examples of this is the obligation of
spouses to mutually support each other, the obligation to pay taxes
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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

pursuant to the Bureau of Internal Revenue (BIR), the obligation

mandating every person to act with justice, give everyone his due and
observe honesty and good faith in the exercise of hid rights and to the
performance of his duties.
b) Obligation derived from Contracts – obligations arising from
contracts have the force of law between the contracting parties and
should be complied within god faith. However, this said contract must
be valid so that it can be legally enforceable and must not be contrary
to law, morals, good customs, public order and public policy.
Example
B, a contractor signed a contract with C the owner, stating that B will
construct C’s house in the amount of 6 Million Pesos within ten
months. B asked C to give him a down payment of 30% of the contract
amount and will collect a prorated billing per month based on
accomplishment with a retention of 10% to be collected 3 months
thereafter. B promised also to finish the house within 10 months
according to the submitted specifications of materials and agrees to
pay a penalty of 0.01% per day of delay.
c) Obligation derived from Quasi-contracts – a quasi-contract is the
juridical relation resulting from lawful, voluntary and unilateral acts by
virtue of which the parties become bound to each other to the end that
no one will be unjustly enriched or benefited at the expense of the
other. It is considered a quasi-contract when there is lack the element
of consent. Hence there is no formal contract between the parties.
However, the law considers them to have entered into an agreement
purposely to prevent injustice.

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

There are two kinds of quasi-contracts namely

a) Negotiorum gestio and
b) Solutio indebiti

Negotiorum Gestio is the voluntary management of the property or

affairs of the other without the knowledge or consent of the latter.

Example
B went abroad with his family without leaving anybody to look after his
house. While abroad, a strong earthquake occurred resulting to
destruction of B’s fence made of CHB wall and exposed his property to
strangers. Because of the sympathy of C who is B’s neighbor, the
fence was repaired but incurred expenses. In this case, B is obliged to
reimburse the expenses of C in a legal relationship known as
negotiorum gestio.

Solutio Indebiti - it is a juridical relation which takes place when

something is received when there is no right to demand it, and it was
unduly delivered through mistake, giving rise to the obligation to return
it.
Example
X pays Y through his sister B an amount of P3,500 and received by
B in good faith and turn over it to Y. Later, X realized that his debt to Y
is only P2500 and not P3500. In this example, Y is duty bound to
return the excess of P1000 based on the principle of solutio indebiti.
d) Obligation derived from delicts or crimes – under the law, a person who
commits a criminal offense, such as murder, is obliged to pay for the injury

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

thus inflicted. Under the Revised Penal code, “every person criminally liable
is also civilly liable.
Example
X boloed Y resulting in the latter’s death. If X is found guilty thereof, he is
liable and has an obligation civilly and criminally enforceable in court.
e) Obligation derived from quasi-delicts – under the law, a quasi-delict is an
act by one person which causes damage to another giving rise to the
obligation to pay for the damage done.
Example
A pedestrian who was hit by a speeding car in a pedestrian lane due to
negligence may claim damages by person of quasi-delict or culpa aquiliana.

KINDS OF OBLIGATIONS

The primary classifications of obligation under the Civil Code are:

1) Pure Obligation
2) Conditional Obligation
3) Obligation with a period
4) Alternative Obligation
5) Facultative Obligation
6) Joint Obligation
7) Solidary Obligation
8) Divisible Obligation
9) Indivisible Obligation
10) Obligation with a penal Clause

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

1) Pure Obligation- An obligation which is not subject to any condition or

burden and whose performance does not depend upon a
future or uncertain event. Example: B promised to give C the
sum of P10000. The obligation to pay is demandable at once
because there is no specific date mentioned for its
performance. It is also not subject to any condition imposed
for its fulfillment.

2) Conditional Obligation- An obligation whose performance is subject to any

condition is a conditional obligation. An example of this is the
COD obligation or cash on delivery. Example: B orders
goods to C and promised to pay the sum of P3,000 once he
delivers his order goods. The obligation is demandable only
upon the fulfillment of the condition and that is upon delivery
of goods.

3) Obligation with a period - An obligation whose performance is subject to

the expiration of said period or terms in an obligation with a
specific period. This is common obligation in paying our
monthly bills or our loans in which there is a specific time of
payment. Example: B enter into an agreement with C to get
a car loan which should be paid on or before every 5 th day of
the month with a monthly amortization of P18,000. In this
case, B should pay the said amount on time, otherwise he
will pay extra penalty.

4) Alternative Obligation - An alternative obligation is one where in various

demands are due but the performance of one of them is

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

already sufficient to comply with the obligation. Example: C

enter into an agreement with B stating that in paying the debt
of C to B, C is willing to give up either his owned Mitsubishi
Montero sport or his Toyota Fortuner. In this case, either C
may deliver any one of the two mentioned cars in good
condition to perform his obligation.

5) Facultative Obligation - An obligation which is due but can be substituted

is called facultative obligation. Example: “C” binds himself to
deliver to “B” a Honda Civic car, but they mutually agree that
in a case that Honda Civic is not available, C may deliver
either Toyota Vios or Mitsubishi Mirage or any available car
with almost the same value as Honda Civic instead, as
substitute.

6) Joint Obligation - An obligation where the whole obligation is to be fulfilled

proportionally by the different debtors and each one of the
creditors is entitled to a proportionate part of the credit.
Example: B and C are jointly indebted to D in the sum of
P20000. In this case, D can only demand P10000 each to B
and C. Thus B is liable for P10000 only and C is likewise
liable for P10000 only.

7) Solidary Obligation - An obligation where each of the debtors is liable for

the whole obligation. In this case, one of the debtors cannot
be freed from the obligation separately with the other debtors
unlike in jointly which is possible. Example: B and C are
solidary debtors of D in the sum of P8000. In joint

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

obligation, once B had paid P4000, he is then free from the

obligation. But in the solidary obligation, he will only free
from the obligation after the whole P8000 is paid, either by
him or by C.

8) Divisible Obligation - An obligation where the obligation can be divided

and partially paid such as in two gives, three gives or four
gives. Example: B has a debt of P6000 to C. C demands a
payment from B, then they both agree that B will pay in three
installment every pay day. The obligation is divisible because
it is capable of partial performance.

9) Indivisible Obligation - An obligation not capable of partial performance is

indivisible obligation. Example: B agrees to deliver a car to
D. Is it possible to say that B will deliver first the tires, to be
followed by the body of the car? No he cannot, B should
deliver the car as a whole because the obligation is cannot
be divided.

10) Obligation with a penal clause- An obligation which contains an

accessory undertaking to assume greater liability in case of
breach. This obligation is usually seen in a construction
contract. Example: Engr Ben T. Lador signed a contract with
Mrs. Madie Lim, stating that Engr Ben T. Lador will construct
Mrs. Madie Lim’s house in the amount of 8 Million Pesos
within ten months. With a penal clause that the 10% will not
be collected and serve as the retention for the back job that
may arise later within 3 months after completion. In addition

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

to this, the contractor will pay a penalty of 0.01% of the

contract amount per day of delay based on their agreed
target of completion.

MEANING OF CONTRACT

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.

Elements of a Contract - a contract consists of three elements namely;

1) Essential elements – are those without which no contract can validly

exist. They are requisites of a contract, namely; a) consent of the
contracting parties; b) object which is the subject matter of the contract
and c) cause or consideration of the obligation.
2) Natural Elements – are those that are presumed to exist in certain
contracts unless the contrary is expressly stipulated by the parties.
Example of this is the warranty against hidden defects in a contract of
sale.
3) Accidental Elements – are the particular clauses, or terms, or
conditions established by the parties in their contract. Example of this is
the retention, penalties and the like.

Reference: Engineering Law, Contracts and Ethics by Anselmo Castro and

Augustus Cezar

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

Name: ______________________________________________ Section: ___________

Teacher: ____________________________________________ Date: ___________

ACTIVITY 5
Law on Obligation and Contract, Meaning and Elements of Contract
Give an example scenario for each kind of obligation.
1. Solidary Obligation

2. Divisible Obligation

3. Facultative Obligation

4. Obligation with a penal Clause

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 MODULE 5: Law on Obligation and Contract, Meaning of and Elements of Contract

5. Conditional Obligation

6. Obligation with a period

7. Joint Obligation

8. Pure Obligation

9. Alternative Obligation

10. Indivisible obligation

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