STUDY GUIDE FOR PRELIM EXAM IN BUSINESS LAW

1 Definition and elements of obligation

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
Elements:
1. ACTIVE SUBJECT- Obligee/Creditor; the person who has the RIGHT or power to
demand the prestation.
2. PASSIVE SUBJECT- Obligor/Debtor; the person bound to perform the prestation
3. PRESTATION – Object; the conduct required to be observed by the debtor/obligor
(to give, to do or not to do)
4. VINCULUM JURIS – Juridical or legal tie; efficient cause; that which binds or
connects the parties to the obligation.
2 The definition of obligations establishes the unilateral act of the debtor either to give, to
do, or not to do as a patrimonial obligation. It means that the debtor has the obligation,
while the creditor has its rights.
3 Natural obligations are those not being based on a positive law but on equity and natural
law, do not grant a right of action to enforce their performance, although in case of
voluntary fulfillment by the debtor, the latter may not recover what has been delivered or
rendered by reason thereof; precept based on “do good and avoid evil”.
4 Requisites of an obligation to be valid:
1. Must be licit.
2. It must be possible, physically and juridically.
3. It must be determinate and determinable.
4. It must have pecuniary value.
5 Rights and causes of action
 Right- is a claim or title to an interest in anything whatsoever that is enforceable
by law.
 For every right enjoyed by any person, there is a corresponding obligation on the
part of another person to respect such right.
 Civil action- is one by which a party sues another for the enforcement or
protection of a right, or the prevention or redress of a wrong.
 Cause of action – is the act or omission by which a party violates a right of
another.
 Essential elements of a cause of action-
1. The legal RIGHT of the plaintiff;
2. The correlative OBLIGATION of the defendant; and
3. The ACT or OMISSION of the defendant in violation of said legal right.

6 Real obligation (obligation to give)

 The obligation of the debtor or obligor to deliver a thing, movable or immovable,
to the creditor or obligee for the purpose of transferring ownership or for the use
or possession of the recipient.
 Kinds of Real Obligation:
1. Determinate or Specific Real Obligation
2. Indeterminate or Generic Real Obligation

7 Personal obligation (to do and not to do)

1. Positive Personal Obligation (obligation to do) – the obligation of the debtor or
obligor to perform or service for the creditor or obligee.
2. Negative Personal Obligation (obligation not to do) – the obligation of the debtor
or obligor not to perform some act in favor of the creditor or obligee.

8 Sources of obligation-
Art. 1157. Obligations arise from:
1. Law;
2. Contracts;
3. Quasi-contracts;
4. Acts or omissions punished by law; and
5. Quasi-delicts
  Practice or custom are NOT a source of a legally demandable or enforceable
right.
 LAW – a rule of conduct, just, obligatory, promulgated by legitimate authority,
and or common observance and benefit.
 CONTRACT – a meeting of minds between two persons whereby one binds
himself, with respect to another, to give something or to render some service.
- Stages of a contract: negotiation, perfection and consummation.
 QUASI-CONTRACTS – are lawful, voluntary and unilateral acts which give rise
to a juridical relation, to the end that no one shall be unjustly enriched or
benefited at the expense of another.
 Kinds of Quasi-contracts
1. Negotiorum Gestio
2. Solutio Indebiti
3. Other Kinds

9 Kinds of Quasi-contracts
1. Negotiorum Gestio- whoever voluntarily takes charge of the agency or management of
the business or property of another, without any power from the latter is obliged to
continue the same until the termination of the affair and its incidents, or to require the
person concerned to substitute him, if the owner is in a position to do so.
 Read Articles 2144 to 2153 of the New Civil Code
2. Solutio Indebiti – if something is received if there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.
 Read Arts. 2154 to 2163 of the New Civil Code
3. Other Kinds – those support given by strangers as defined and enumerated in Arts.
2164 to 2175 of the New Civil Code.
10  DELICT – a violation of the law, especially a wrongful act or omission giving
rise to a claim for compensation.
 Basis is Art. 100 of the Revised Penal Code (RPC), which states that every
person criminally liable for felony is also civilly liable.
 Civil liabilities in delict
1. Restitution – restoration of the thing
2. Reparation of the damage caused
3. Indemnification for consequential damages
11  QUASI-DELICTS- act or omission which causes damage to another, there being
fault or negligence, and which gives rise to the obligation to pay for the damage done.
 Also known as Quasi Ex-delicto, tort or culpa-aquiliana
Read Arts. 2176 to 2194 of the New Civil Code
 Elements of Negligence
1. The fault or negligence of the defendant.
2. The damage suffered or incurred by the plaintiff; and
3. The relation of cause and effect between the fault or negligence of the defendant
and the damage incurred by the plaintiff.
 Kinds of Negligence
1. Culpa Aquiliana or Quasi-delict – negligence resulting from the failure to observe the
required diligence which causes damage to another person.
2. Culpa Contractual- negligence in the performance of a pre-existing contract.
3. Culpa Criminal – known as criminal negligence; negligence which results in the
commission of a crime.

12 Art. 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.
13 Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book.
 Take note of the duties of an OFFICIOUS MANAGER.
14 Art. 1161. Civil obligations arising from criminal offenses shall be governed by 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.
Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws.
15 Chapter 2: Nature and Effect of Obligation
 Specific or determinate thing – when a thing is particularly or physically
designated from all others of the same class.
 Generic or indeterminate thing – the thing is designated merely by its class or
genus without any particular designation or physical segregation from all others
of the same class.
Take note: Genus nunquan perit - Genus of a thing can never perish.

16 Art. 1163. Every person obliged to give something is also obliged to take care of it with
the proper diligence of a good father of a family, unless the law or the stipulation.
 Diligence – is the care, caution, the attention required from a person in a given
situation.
 Due diligence- the diligence reasonably expected from, and ordinarily exercised
by a person who seeks to satisfy a legal requirement or to discharge an obligation
 Diligence of a good father of a family- ordinary care or that diligence which an
average or reasonably prudent person would exercise over his own property.
 Extraordinary diligence – Extreme care that a person of unusual prudence
exercises to secure rights or property.
 Diligence required in real obligation – diligence of a good father of a family
 Diligence required in common carrier – utmost diligence
 A common carrier is bound to carry the passenger safely as far as human care
and foresight can provide, using the utmost diligence of very cautious persons,
with regard for all circumstances.
 Diligence required of banks – more than that of a good father of a family; high
standards of integrity and performance.
 Negligence – the omission of that diligence required by the nature of the
obligation and corresponds with the circumstances of the persons, of the time and
of the place.
17 Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation
arises. However, he shall acquire no real right over it until the same has been delivered to
him
1. Actual delivery – the act of giving real and immediate possession to the buyer or
the buyer’s agent.
2. Constructive delivery – an act that amounts to a transfer of title by operation of
law when actual transfer is impractical or impossible.
 Personal right – is the power of one person to demand of another, as a definite
passive subject, the fulfillment of a prestation to give, to do or not to do.
 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.
Kinds of Fruits
 Natural Fruits – spontaneous products of the soil, and the young and other
products of animals
 Industrial Fruits – those produced by lands by any kind through cultivation or
labor
 Civil Fruits – rents of building, the price of leases of lands and other property
and the amount of perpetual or life annuities or other similar income.
18 Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to
the right granted him by Art. 1170 , may compel the debtor to make a delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied
with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons
who do not have the same interest, he shall be responsible for any fortuitous even until
 he has effected the delivery.
 Specific performance – the remedy requiring exact performance of a contract in
the specific form in which it was made, according to the precise terms agreed
upon.
 Reciprocal obligation – are those which arise from the same cause, and which
each party is a debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other.
19 Art. 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned.
 Accessions – those things which are produced by the thing which is the object of
the obligation as well as those which are naturally or artificially attached thereto.
 Accessories – those things which have for their object the embellishment, use or
preservation of another thing which is more important and to which they are not
incorporated or attached.
- includes those things which are necessary or convenient for the perfection of
another thing.
20 Art. 1167- what has been poorly done be undone.
Art. 1168 – when obligation consists in not doing, what has been done must be undone
21 Summary:
1. Obligation to give specific thing
 Duties of the Debtor
a. To preserve and take care of the thing due
b. To deliver the thing itself
c. To deliver the fruits of the thing
d. To deliver the accessions and accessories
e. To pay for damages in case of breach
 Rights of the Creditor
a. To compel specific performance
b. To recover damages in case of breach of obligation, exclusive or in addition
to specific performance
c. Entitlement to fruits and interests from the time the obligation to deliver
arises
2. Obligation to give generic thing
 Duties of the Debtor
a. To deliver a thing of the quality intended by the parties taking into
consideration the purpose of the obligation and other circumstances
b. Creditor cannot demand a thing of superior quality neither can the debtor
deliver a thing of inferior quality
c. To be liable for damages in case of breach.
 Rights of the Creditor
a. To ask for performance of the obligation
b. To ask that the obligation be complied with by a third person at the expense
of the debtor
c. To receive damages in case of breach of obligation
3. Obligation to do
 Duties of the Debtor
a. To ask for performance of the obligation
b. To ask that the obligation be complied with by a third person at the expense
of the debtor
c. To receive damages in case of breach of obligation
 Rights of the Creditor
a. To compel performance
b. To recover damages where personal qualifications of the debtor are
involved
4. Obligation not to do
 Duties of the Debtor
a. Not to do what should not be done
b. To shoulder the cost of undoing what should not be done
c. To pay for damages in case of breach
  Rights of the Creditor
a. To ask to undo what should not be done
b. To recover damages, where it would be physically or legally impossible to
undo what has been undone, because of: the very nature of the act itself,
rights acquired by third persons who acted in good faith, when the effects of
the acts prohibited are definite in character and will not cease even if the
thing prohibited be undone.
22 Art. 1169 – delay in the performance of obligation
 Delay begins from the time the obligee judicially or extrajudicially demands from
the obligor the performance of the obligation.
 Mora or delay – is the failure to perform the obligation in due time because of
dolo (malice) or culpa (negligence).
Requisites for default:
1. The obligation is demandable and liquidated.
2. The debtor delays performance.
3. The creditor judicially or extrajudicially requires the debtor’s performance.
Kinds of delay
 Mora solvendi – debtor’s default – delay in the fulfillment of an obligation, by
reason of cause imputable to the debtor.
 Mora accipiendi – delay of the obligee or creditor to accept the delivery of the
thing which is the object of the obligation.
 Compensatio morae – default on the part of both parties; Effect: as if there is no
default.
23 Breach of Obligation - Arts. 1169-1178, NCC
Classifications-
1. Voluntary – fraud, negligence, delay or contravention of tenor of the obligation
2. Involuntary- fortuitous event
Types of Breach
1. Substantial breach- total breach; amounts to non-performance; basis for
rescission and payment of damages.
2. Partial breach – Obligation is partially performed; Gives rise to liability for
damages only.
Kinds of Breach of Obligations
1. Fraud - deliberate or intentional evasion of the normal fulfillment of an obligation
2. Negligence or fault (culpa) - omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the person, of
the time and of the place (Art. 1173, NCC)
3. Delay or default (mora) - failure to perform an obligation on time which
constitutes breach of the obligation
4. Contravention of the tenor - Violation of the terms and conditions stipulated in
the obligation, which must not be due to a fortuitous event or force majeure
Take note:
1. Any waiver of action for future fraud is void (Art. 1171).
2. Fraud must vitiate consent.
3. Contributory negligence reduces or mitigates the recoverable damages.
4. Diligence required- by stipulation, by law, diligence of a good father of a family.
5. Test of Negligence- Did the defendant in doing the alleged negligent act use the
reasonable care and caution which an ordinary and prudent person would have
used in the same situation? If not, then he is guilty of negligence. -Mandarin Villa
vs. CA (1996)
6. Fraud vs. negligence

FRAUD NEGLIGENCE
There is a deliberate intention to There is NO deliberate intention to cause
cause damage damage
Liability cannot be mitigated Liability may be mitigated
Waiver for future fraud is void. Waiver for future negligence maybe
allowed in certain cases: gross negligence
vs. simple negligence
 7. No mora solvendi in negative obligation because delay is impossible, and in
natural obligations.
24 Effects of Mora Solvendi
a) The debtor is liable for damages.
b) The debtor is liable even if the loss is due to fortuitous events.
c) For determinate objects, the debtor shall bear the risk of loss.
25 Effects of Mora Accipiendi
a) The responsibility of the debtor is reduced to fraud and gross negligence.
b) The debtor is exempted from risk of loss of the thing which is borne by the
creditor.
c) Expenses incurred by the debtor for the preservation of the thing after the mora
shall be chargeable to the creditor.
d) If the obligation bears interest, the debtor does not have to pay from the time of
delay.
e) The creditor is liable for damages.
f) The debtor may relieve himself of obligation by consigning the thing
26 FORTUITOUS EVENTS (Force Majeure)
- Any event which could not be foreseen, or which though foreseen are inevitable
(Art. 1174)
- A happening independent of the will of the debtor and which makes the normal
fulfillment of the obligation impossible.
Kinds of Fortuitous Events
1. Act of God – an incident, due directly or exclusively to natural causes without
human intervention, which by no amount of foresight, pains or care, reasonably
to have been expected, could have been prevented.
2. Act of Man- force majeure is a superior or irresistible force, which is essentially
an act of man; includes unavoidable accidents, even if there has been an
intervention of human element, provided that no fault or negligence can be
imputed to the debtor
LIABILITY in case of fortuitous event- no person shall be responsible for fortuitous
events, UNLESS:
1. Expressly specified by law (Arts. 552(2), 1942, 2147, 2148, 2159)
2. Liability specified by stipulation
3. The nature of the obligations requires assumption of risk (Art. 1174)
4. When debtor is guilty of concurrent or contributory negligence.
5. Debtor has promised to deliver the same thing to two or more persons who do not
have the same interests (Art. 1165, par. 5)
6. The thing is lost due to the obligor’s fraud, negligence, delay or contravention of
the tenor of the obligation (Art. 1170).
7. The obligation to deliver a specific thing arises from a crime (Art. 1268)
8. The object is a generic thing, i.e. the genus never perishes.
Requisites for Exemption:
1. The event must be independent of the debtor’s will (fraud or negligence)
2. The event must be unforeseeable or inevitable.
3. The event renders it impossible for debtor to fulfill his obligation in a normal
manner.
4. The debtor must be free from any participation in the aggravation of the injury of
the creditor.
5. It must be the only and sole cause, not merely a proximate cause.
27 REMEDIES TO CREDITORS
Take note:
1. Art. 1178- transmissibility of rights
2. Primary remedies of creditors-
a) Specific performance
b) Substituted performance
c) Equivalent performance
d) Rescission
e) Pursue the leviable
28 USURIOUS TRANSACTIONS AND RULES ON INTEREST
Take note:
1. Usury- stipulation of interest rates higher than the ceiling provided by law.
2. Art. 1176- presumption of payment of interest and presumption of payment of
prior installments.