1.

0 Law on Business Transactions

1.1 Obligation
1.1.1 Definition

Article 1156
An obligation is a juridical necessity to give, to do, or not to do

- a tie or bond - in case of non

recognized by law compliance, the
by virtue of which courts of justice
one is bound in may be called
favor of another to upon to enforce its
render something fulfillment

 Civil Obligation
- gives the creditor/oblige a right under the law to enforce their performance in courts of justice
 Natural Obligation (good conscience)
- do not grant a right of action to enforce their performance
- in case of voluntary fulfillment, debtor may not recover what has been delivered or rendered

 Essential Requisites (Elements of Obligations):

 Personal Elements:
1) Passive subject – debtor
2) Active subject – creditor

 Objective Element:
1) Object/ prestation – subject matter or conduct
 Kinds of prestation:
1) To give (real obligation)
2) To do (positive personal obligation)
3) Not to do (negative personal obligation)
 Requisites:
1) Physically and juridically possible
2) Determinable
3) Possible equivalent of money

 Juridical/ legal tie (vinculum juris) – relation between obligor and obligee
1) By law
2) By bilateral acts
3) By unilateral acts

-OR – debtor
-EE – creditor

1.1.2 Sources of Obligations and their Concepts

Article 1157
Obligations arise from:
1) Law;
2) Contracts;
3) Quasi-contracts;
4) Acts or omissions punished by law;
5) Quasi-delicts

1.1.2.1 Law
Article 1158
Obligations derived from law are NOT PRESUMED. Only those expressly determined in this Code or
in special laws are demandable, and shall be regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the provisions of this book.

1.1.2.2 Contracts
Article 1159
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.

1.1.2.3 Quasi-Contract
Article 1160
Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII.
(Article 2142-2175)
 - Resulting from certain lawful, voluntary, and unilateral acts by virtue
- No one will be unjustly enriched or benefited at the expense of another

 Kinds of Quasi-contracts
1) Negotiorum gestio
- voluntary management
2) Solutio indebiti
- Something is received when there is no right to demand it and it was unduly
delivered through mistake
3) Other quasi-contract
- The basic concepts of reimbursing someone for the benefits received, and of
returning something that is not deserved are embraced

1.1.2.4 Delicts
Article 1161
Civil obligations arising from criminal offense shall be governed by the penal laws, subject to the
provisions of Art 2177, and of the pertinent provisions of Chapter 2, Preliminary Title on Human
Relations and of Title XVIII of this Book, regulating damages.

 Civil liability arising from crimes or delicts

- Breaches the social order
- Causes personal sufferings or injury
- Not only moral evil but also material damage

 Scope of civil liability

- Restitution – to return the stolen thing
- Reparation for damage caused – to pay the damages
- Indemnification for consequential damage – to pay the damages suffered by the offended party

1.1.2.5 Quasi-delicts
Article 1162
Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of
this Book and by special laws. (Article 2176-2194)

- Causes damage to another by giving rise to an obligation to pay for the damage done
 Requisites of Quasi-delict
1) Act or omission
2) Fault or negligence
3) Damage caused
4) Direct relation or connection of cause and effect between the act or omission and the damage
5) No pre-existing contractual relation between the parties

 Crime vs. Quasi-delict

Crime Quasi-delict
- Criminal/malicious intent or criminal - Negligence only
negligence
- Punishable - Indemnification
- Affects public interest - Private interest
- Criminal and civil liability - Civil liability
- Cannot be compromised by the parties - Can be compromised as any civil
themselves liability
- The guilt of the accused must be proved - Need only be proved by preponderance
beyond reasonable doubt of evidence

Culpa criminal – enforcement of civil liability

Culpa aquilana – recovery of damages

1.1.3 Kinds of Obligations

1.1.3.1 Pure/Conditional/Obligation with a Term

 Pure and Conditional Obligation (Article 1179-1192)

Article 1179
Every obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to
the effects of the happening of the event.
  Pure Obligation
- Not subject to any condition
- No specific date of fulfillment
- Immediately demandable

 Conditional Obligation
- Consequences are subject in one way or another to the fulfillment of a condition

Condition
- Future and uncertain event
- Upon the happening of which, the effectivity or extinguishment of an obligation
- Characteristics:
 Future and uncertain
 Past but unknown – the knowledge to be acquired in the future of a past
event which at the moment is unknown to the parties interested
- Principal kinds:
 Suspensive condition
 The fulfillment of which will give rice to the obligation
 The demandability of the obligation is suspended until the
happening of the uncertain event (condition)
 The obligation is a mere hope
 Resolutory condition (obligation is demandable at once)
 The fulfillment of which will extinguish an obligation already
existing
 The effect of the obligation flow but over it hovers the possibility
of termination

Article 1180
When the debtor binds himself to pay when his means permit him to do so, the obligation shall be
deemed to be one with a period, subject to the provisions of Article 1197.

a) “little by little”
b) “as soon as possible”
c) “from time to time”
d) “at any time I have the money”
e) “in partial payments”
f) “when I am in a position to pay”

Article 1181
In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition.

Acquisition of rights – subject to a suspensive condition by the creditor

Loss of those already acquired – subject to resolutory condition

Article 1182
When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation
shall take effect in conformity with the provisions of this Code.

 Classification of conditions

1) As to effect:
a) Suspensive
b) Resolutory

2) As to form:
a) Express – clearly stated
b) Implied – merely inferred

3) As to possibility:
a) Possible – capable of fulfillment, legally and physically
b) Impossible – not capable of fulfillment

4) As to cause or origin: Suspensive Condition

a) Potestative – depends upon the will of one contracting parties
 Suspensive condition
 Depends upon the debtor:
 Conditional obligation is void
 Only the condition is void – pre-existing obligation and
does not depend upon the fulfillment of the debtor
  Depends upon the creditor: valid
 Resolutory condition
 Depends upon the debtor: valid
b) Casual – depends upon chance or upon the will of a third person
c) Mixed – depends partly upon chance and partly upon the will of a third person

5) As to mode:
a) Positive – performance of an act
b) Negative – omission of an act

6) As to number:
a) Conjunctive – all must be fulfilled; and
b) Disjunctive – only one or some of them must be fulfilled

7) As to divisibility
a) Divisible – susceptible of partial performance
b) Indivisible – not susceptible of partial performance.

Article 1183
Impossible conditions, those contrary to good customs or public policy and those prohibited by law
shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof
which is not affected by the impossible or unlawful condition shall be valid.

The condition not to do an impossible thing shall be considered as not having been agreed upon.

- Refers to suspensive condition

 Kinds of impossible condition

1) Physically impossible conditions
2) Legally impossible conditions

 Effects of impossible conditions

1) Conditional obligation void – obligation depends upon the impossible condition
2) Conditional obligation is valid – not to do impossible thing
3) Only the affected condition void – divisible obligation
4) Only the condition is void – the obligation does not depend upon the fulfillment of the
condition

Article 1184
The condition that some event happen at a determinate time shall extinguish the obligation as soon as
the time expires or if it has become indubitable that the event will not take place.

- Positive suspensive condition

 Expires without the event taking place
 Although the time specified has not expired, it has become indubitable that
the event will not take place

Article 1185
The condition that some event will not happen at a determinate time shall render the obligation
effective from the moment the time indicated has elapsed, or if it has become evident that the event
cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably
been contemplated, bearing in mind the nature of the obligation.

- Negative condition
 Elapsed without the even taking place
 It has become evident that the event cannot occur although the time
indicated has not elapsed

Article 1186
The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

 Constructive fulfillment
1) Suspensive condition – debtor should not be allowed to profit from his own fault or bad faith
 Requisites:
a) Suspensive condition
b) Obligor actually prevents the fulfillment of condition
c) Obligor acts voluntarily
2) Resolutory condition – debtor who is bound to return what he has received upon the fulfillment
of the condition
Article 1187
The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to
the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal
prestations upon the parties, the fruits and interests during the pendency of the condition shall be
deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate
the fruits and interests received, unless from the nature and circumstances of the obligation it should
be inferred that the intention of the person constituting the same was different.

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.

Retroactivity of Obligation
- Refers to effect of the happening of suspensive conditions.
- Creditor cannot enforce his right between the creation of conditional obligation and
fulfilment of suspensive condition.
- Condition is only accidental, not essential elements of obligation.

Contracts of Debtor
- Debtor has no authority to make such an act before the happening of suspensive
condition.
- It will abrogate the contract, cause of retroactivity of obligation.
- Creditor retains a superior right

Contracts of Creditor
- Pendente Conditione, when the creditor disposed of his expected right before
happening of the condition.

Increase in Value
- Inures to the creditor, the increase in value which the thing acquires before happening
of suspensive condition.

Limitations on Retroactivity
- Not Absolute, subject to certain limitations dictated by justice and required by
practicability or convenience.

Acts of Administration
- Performed by debtor before happening of suspensive condition.
- Can be asserted against the creditor after happening of the condition.

Fruits and Interests

- Not required before the happening of the suspensive condition.
- When obligation to give is reciprocal, fruits and interest pending the happening of the
condition are deemed to mutually compensate each other

Obligation to Do, Not to Do

- Court determined retroactive effect of the fulfillment of condition.
- Determine to what date retroactivity shall be allowed, or it may refuse to permit
retroactivity depending upon the circumstances.

Article 1188
The creditor may, before the fulfillment of the condition bring the appropriate actions for the
preservation of his right.

The debtor may recover what during the same time has paid by mistake in case of suspensive
condition.

Preservation of Creditor’s Rights.

Pending the happening of the suspensive condition, the creditor cannot compel the debtor to perform the prestation.
All that the creditor has in the meanwhile is a mere expectancy contingent to the happening of the condition.

Remedies that the creditor may avail for the preservation of the prestation.
1) Action for prohibition restraining the alienation of the thing pending the happening of the suspensive
condition;
2) Petition (with the appropriate Registry of property like land is involved), for the annotation of the
creditor’s right;
3) Action to demand security if the debtor has become insolvent;
4) Action to set aside alienation made by the debtor in fraud of creditors; or
5) Action against adverse possessors to interrupt the running of the prescriptive period.
Example:
Whenever, Mr. A who is a father of Mr. B promised to give a parcel of land, provided that the latter finished his
Bachelor of Law. Mr. B, in order to preserve his right against Mr. A may take appropriate actions such as causing
registration and put annotation at the back portion of the title covering said parcel of land, so that even if the parcel
of land is alienated by Mr. A, the buyer will take that land subject to the right to Mr. B.

No Preference
It is not a preference for debtor for what obligation he has to owe credit constantly, otherwise the appropriate
action would be better for the creditor’s right preservations.
Payment Before Condition
If the payment made by mistake or ignorance of the debtor before the conditions happens, it should be recovered by
means of accion reivindicatoria if it was a determinate thing or solutio indebiti.
If the payment made with knowledge of the conditions herein stipulated, whatever has been paid cannot recovered,
because it impliedly waived such conditions.

Fruits from Thing

Solution indebiti should apply Article 2159- whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or which should or should have been
received if the thing produces fruits.

Article 1189
When the conditions have been imposed with the intention of suspending the efficacy of an obligation
to give, the following rules shall be observed in case of the improvement, loss or deterioration of the
thing during the pendency of the condition:

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is
understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a
way that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of
the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the
usufructuary.

Requisites:
1) The obligation is REAL OBLIGATION
2) The object is SPECIFIC/DETERMINATE THING
3) The obligation is subject to SUSPENSIVE CONDITION
4) The condition is FULFILLED
5) There is LOSS, DETERIORATION, IMPROVEMENT of the thing during the pendency of the condition

Kinds of Loss
1) Physical loss – the thing perishes (burned house to ashes)
2) Legal loss – the thing goes out of commerce or thing legal becomes illegal
3) Civil loss – the thing disappear that its existence is unknown; or even known, it cannot be recovered

Rules in case of Loss, Deterioration, or Improvement during pendency of Suspensive Condition

1) Loss of thing without debtor’s fault – obligation is extinguished
2) Loss of thing through debtor’s fault – obligation to pay damages
3) Deterioration of thing without debtor’s fault – when its value is reduced or impaired
4) Deterioration of thing through debtor’s fault
a. Rescission or cancellation of the obligation with damages
b. Fulfillment of the obligation also with damages
5) Improvement of thing by nature or time – when its value is increased or enhanced by nature or by time or
at the expense of the debtor or creditor
6) Improvement of thing at the expense of debtor – debtor have right granted to a usufructuary

Usufruct – the right to enjoy the use and fruits of a thing belonging to the another

Article 1190
When the conditions have for their purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the
debtor, are laid down in the preceding article shall be applied to the party who is bound to return.
 As for obligations to do and not to do, the provisions of the second paragraph of article 1187 shall be
observed as regards the effect of the extinguishment of the obligation.

RESOLUTORY CONDITION HAPPENING

General rule:
- If the condition does not happen, the rights of the creditor will become absolute. But
if the condition happens, such rights will be extinguished, and the obligation will be
treated as if it did not exist.
- Each party is bound to return to the other whatever has received. Every vestige of
obligation is wiped out through the process of mutual restitution.

RIGHTS OF THIRD PERSON

- Third persons cannot be sued for the recovery of the thing by an accion
reinvindicatoria during the happening of the resolutory condition.
- That party has no real right that can be enforce against third person in good faith.

LOSS, DETERIORATION, IMPROVEMENT

- Provisions of Article 1189 shall be applicable if there is a loss, deterioration or
improvement that took place before the resolutory condition occurs.
- The thing lost before the happening of the resolutory condition must be borne by the
owner at the time of the loss; that is the party bound to return it.

FRUITS AND INTERESTS

- The duty of mutual restitution is not only applicable on object and price but also to
the fruits and interest. This is the only way by which the parties can be restored to
their status quo.
- In determining the fruits to be returned, Article 443 of the Code states “he who
receives the fruits has the obligation to pay the expenses made by a third person in
their production, gathering, and preservation.
- Expenses incurred by the person obliged to make restitution should be deducted from
the gross value of the fruits to be returned.

PROTECTION OF RIGHTS
- Parties during the pendency of the resolutory condition are entitled to take the same
action allowed to the creditor under the first paragraph of Article 1188.

DEFINITION OF TERMS
Accion Reinvindicatoria
- An action to recover ownership over real property
Ipso jure
- By the act of the law itself; by mere operation of law

Real right
- Refers to a right that is attached to a thing rather than a person. Real rights include
ownership, use, pledge, usufruct, mortgage, habitation and predial servitude.

Article 1191
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the Mortgage Law.

Rescission referred to in this Article is RESOLUTION or cancellation of the contract which is:
- A principal action that is based on breach of a party
- Abrogate and undo a contract from the beginning
- Annul the contract and Restore the parties to the relative positions which they would
have occupied if no such contract had ever been made.
- Requires mutual restitution of the benefits received

Breach of Contract – Failure of a party without legal reason/excuse to comply with the terms of a contract
incumbent upon him.
Breach of Faith – the obligor’s failure to comply with an obligation already extant, not a failure of a condition to
render binding that obligation. There can be no rescission of an obligation that is non-existent, considering that
the suspensive condition therefore has not yet happened.
Application:
- Article on applies to Reciprocal Obligations where both parties are mutually Debtor
& Creditor of each other in the same transaction.

Non-Payment of the purchase price constitute a very good reason to rescind a contract of sale.

Article 1191 is not Applicable to the following:

1) Sales of Real Property by Installments
2) Sales of Personal Property by Installments
3) Contracts of Partnership

Remedies Available to the Aggrieved Party

1) Specific performance or fulfillment of the obligation with damages;
2) Rescission of the contract with damages

The injured party cannot seek both, except:

1) If fulfillment had been chosen but the same had become impossible, rescission may still be sought
2) If there is a valid basis for the extension of the performance of reciprocal obligation, the court will not
decree rescission but will rather fix a period for the fulfillment of the obligation.

The Power to Rescind an Obligation

ü The party who has the right to cancel or resolve the reciprocal obligation in case of non-fulfillment on the part of
one contracting parties.
ü The party who is ready, willing and able to comply with his own obligations
ü The party who is in the position to return whatever he may be obliged to return to the other party
In reciprocal obligations, the power to (rescind) resolve is given to the injured/aggrieved party because the party
who is at wrong cannot use his own wrong for his own benefit or protection.
**RTC has the jurisdiction over cases of rescission**
Restrictions:
1.Due Process must be observed; “the court shall decree the rescission , unless, there be a just cause authorizing a
period fixing it” (Art 1191 par 3)
Right to rescind is subordinated to the rights of third persons who acquired the thing in good faith (Art 1191 par4)
He must respect the power of the Court to fix period in lieu of decreeing decision
Slight breaches of the contract will not justify rescission