ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

RFBT-01
REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS J. DOMINGO  N. SORIANO

LAW ON OBLIGATIONS
OBLIGATIONS IN GENERAL
1. DEFINITION

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

JURIDICAL NECESSITY: Art. 1423 provides that obligations are either natural or civil. Art. 1156 provides the definition of civil
obligations. Under Art. 1423, civil obligations give a right of action to compel their performance or fulfillment. In this sense,
there is juridical necessity to perform the obligation because it can result in judicial or legal sanction.

2. KINDS OF OBLIGATIONS AS TO BASIS AND ENFORCEABILITY

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set forth in the following articles.

EXAMPLES OF NATURAL OBLIGATIONS:

a. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not
legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third
person, the obligor cannot recover what he has paid. (Art. 1425)
b. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he
cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. (Art. 1428)
c. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which
he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded
by the payer. (Art. 1429)

3. ESSENTIAL ELEMENTS OF OBLIGATION

a. Active subject (creditor/oblige) – the person in whose favor the obligation is constituted or the one who can demand the
performance of the obligation
b. Passive subject (debtor/obligor) – the person who is required to perform the obligation
c. Prestation – subject matter of the obligation – either to give, to do or not to do.
d. Vinculum Juris/Efficient Cause/Juridical Tie - the reason why the obligation exists which can be any of the 5 sources of
obligations

Transmissibility of Obligation: all rights acquired in virtue of an obligation are transmissible, except:
a. When the nature of the obligation is that it is not transmissible: when the rights are purely or strictly personal in nature,
i.e., the qualifications and skills of the person have been considered in the constitution of the contract.
b. By stipulation: e.g. the right to sublease is granted by law - but may be prohibited by stipulation.
c. By provision of law: e.g. heirs as to the usufruct. The law provides that the rights of a usufructuary shall not be transmitted
to the heirs, unless the parties stipulate otherwise.

SOURCES OF OBLIGATIONS
1. LAW (Obligations ex lege)
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 [Civil Code].

The above article means that the obligation must be clearly set forth in the law.

Examples of obligations arising from law are:

a. Duty of support;
b. Duty to pay taxes.

2. CONTRACTS (Obligations ex contractu)

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

Art. 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.

Once a contract is entered into, the parties are bound by its terms and cannot, without valid reason withdraw therefrom.
3. QUASI-CONTRACTS (Obligations ex quasi-contractu)

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 another.

NOMINATE QUASI-CONTRACTS:
A. 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. This juridical
relation does not arise in either of these instances:
1. When the property or business is not neglected or abandoned;
2. If in fact the manager has been tacitly authorized by the owner. (Art. 2144)

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B. SOLUTIO INDEBITI – the juridical relation which is created when something is received when there is no right to demand
it and it was unduly delivered through mistake.
Requisites:
1. There is no right to receive the thing delivered
2. The thing was delivered through mistake

Other example of Quasi-Contracts: When funeral expenses are borne by a third person, without the knowledge of those
relatives who were obliged to give support to the deceased, said relatives shall reimburse the third person, should the
latter claim reimbursement. (Art. 2165)

4. DELICT (Obligations ex maleficio or ex delicto)

Delict is an act or omission punishable by law which may be governed by the Revised Penal Code, other penal laws, or the Title
on Human Relations under the Civil Code.

Revised Penal Code:

Art. 100. Civil liability of a person guilty of felony. — Every person criminally liable for a felony is also civilly liable

Note, also, that under the Rules of Court, whenever a criminal action is instituted, the civil action for the civil liability is impliedly
instituted therewith.
Art. 104. What is included in civil liability. — The civil liability established in Articles 100, 101, 102, and 103 of this Code
includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.

Proof necessary:
a. Criminal liability – proof beyond reasonable doubt
b. Civil liability – preponderance of evidence
Acquittal of accused:
a. Acquittal because the accused did not do the act complained of – no civil liability
b. Acquittal due to reasonable doubt – there can still be civil liability.

5. QUASI-DELICTS (Obligations ex quasi-delicto or ex quasi-maleficio)

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-
delict and is governed by the provisions of this Chapter.

Requisites:
a. There must be an act or omission;
b. There must be fault or negligence;
c. There must be damage caused;
d. There must be a direct relation of cause and effect between the act or omission and the damage;

Vicarious Liability: Under Art. 2180 of the Civil Code, the following are responsible for the damages caused by:
Acts done by: Who is responsible?
Minor children who live in their company The father, in case of his death or
incapacity, the mother
Minors and incapacitated persons Guardians
Employees in the service of the branches in which they are employed or on the Owners and Managers of establishment
occasion of their functions or enterprise
Employees and household helpers acting within the scope of their assigned tasks, Employers
even if the employer is not engaged in any business or industry
Special agent, except when the damage was caused by the official to whom the The State
task done properly pertains
Pupils and student or apprentices, so long as they remain in their custody Teachers or Heads of Establishments of
Arts and Trade

Defense: the responsibility shall cease when the persons above-mentioned prove they observed all the diligence of a good
father of a family to prevent damage.

For the employer, specifically, if he is able to prove due diligence in the selection and supervision of the employee.

Note that this defense is not available against the employer’s subsidiary liability arising from a delict or crime.

Multiple Sources of Obligations: a single act can be the source of multiple sources of obligations.

Double recovery not allowed: Responsibility for fault or negligence under the preceding article is entirely separate and
distinct from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice for
the same act or omission of the defendant. (Art. 2177)

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KINDS OF CIVIL OBLIGATIONS

1. AS TO PERFECTION AND EXTINGUISHMENT

PURE OBLIGATIONS: an obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, and is demandable at once.
CONDITIONAL OBLIGATIONS: 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. (Art. 1181)
Conditions: are uncertain events which wields an influence on a legal relationship.
Kinds of Conditions
as to when the obligation should suspensive happening of which gives rise to the obligation
be performed resolutory happening of which extinguishes the rights already existing
potestative depends on the will of the party to the juridical relation
as to whom or where it depends casual depends on chance
mixed partly depends on will of the party or partly on chance
as to capacity to be performed divisible can be performed in parts
in parts indivisible cannot be performed in parts
as to number of obligations are conjunctive all must be performed
to be performed when there are alternative only one must be performed
several of them
positive act
as to nature
negative omission
as to how made known to the express stated
other party implied merely inferred
as to whether the obligation can possible can be fulfilled
be fulfilled impossible cannot be fulfilled either physically or legally
Potestative Condition: a condition dependent solely on the will of one of the parties.
When void: if it is dependent solely on the will of the debtor and the condition is suspensive in character. (Art. 1182) This is
so, because if it were allowed by law, there is a possibility that the obligation will never arise.

Constructive or Presumed Fulfillment: The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (Art. 1186)

Impossible Conditions: 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. (Art. 1183)

Impossibility: can either be:

1. Physically impossible – such as a condition requiring the debtor to go to the sun; or
2. Legally impossible – such as when it is contrary to law, good customs, public policy, such as a condition requiring the debtor
to kill somebody.
Effect:
1. When an impossible condition is imposed in an obligation to do, the obligation and the condition are treated as void since
the debtor knows that no fulfillment can be done and therefore is not serious about being liable.
2. In obligations not to do or if the condition is negative, the impossible condition can just be disregarded and the obligation
remains.

Effect of fulfillment of conditions:

General Rule: Once the condition has been fulfilled, it shall retroact to the day of the constitution of the obligation.
Except:
1. Fruits or interests
a. Reciprocal Obligations – the fruits are deemed mutually compensated.
b. Unilateral obligations: in unilateral obligations, the debtor as a rule, is entitled to the fruits, unless a contrary intention
appears.
2. Period of prescription – counted still from the time the condition was fulfilled.

Condition where obligation is treated as one with a period: 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. (Art. 1180)

Suspensive conditions with a deadline: 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.

Rules as to improvement, loss or deterioration: Art. 1189 provides that in case of obligations to give a specific or
determinate thing is subject to a suspensive condition, the following rules shall be observed in case of the improvement, loss
or deterioration of the thing during the pendency of the condition:
Without fault of the debtor Obligation is extinguished
LOSS
With the fault of the debtor Debtor is liable for damages
Without the fault of the debtor Impairment is borne by the creditor
With fault of the debtor Creditor can either:
DETERIORATION
1. Exact fulfillment and ask for damages
2. Ask for rescission and damages
By nature or time Improvement will inure to the benefit of the creditor
At the expense of the debtor The debtor shall have no other right than that granted to
IMPROVEMENT
a usufructuary, e.g., he may remove the improvement if
it will not cause damage to the thing

The above rules likewise apply to obligations with a period.

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Effect of happening of a resolutory condition: 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

OBLIGATIONS WITH A PERIOD/TERM: A period is a certain length of time which determines the effectivity or the
extinguishment of the obligation. Unlike a condition, a period is certain to arrive or must necessarily come even though it may
not be known when.

KINDS OF TERM:
1. Definite – specific date, e.g. Dec. 31, end of the year this year, within 6 months;
2. Indefinite – period may arrive upon the fulfilment of a certain event which is certain to happen. E.g., death.
3. Legal – imposed or provided by law, e.g. filing of taxes; obligation to give support – within the first 5 days of the month.
4. Voluntary – agreed upon by the parties.
5. Judicial – those fixed by courts.

As to effect, a term/period may be:

1. Ex die – a period with a suspensive effect.
2. In diem – a period with a resolutory effect.
The courts can fix the period in the following circumstances:
1. Under Art. 1191, par. 3: in reciprocal obligations, when one party asked for the rescission of obligation, the court shall
decree such rescission claimed, unless there be just cause authorizing the fixing of a period.
2. Under Art. 1197:
a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
b. The courts shall also fix the duration of the period when it depends upon the will of the debtor.

Benefit of the period: GENERAL RULE: Whenever in an obligation a period is designated, it is presumed to have been
established for the benefit of both the creditor and the debtor,

EXCEPTION: from the tenor of the obligation or other circumstances it should appear that the period has been established in
favor of one or of the other. (Art. 1196)

Consequences of general rule:

1. The debtor cannot be made to pay before the period;
2. The creditor cannot be made to accept payment before the period.

Debtor’s loss of benefit of the period: the debtor loses the right to make use of the period in the following cases:
a. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt;
b. When he does not furnish to the creditor the guaranties or securities which he has promised;
c. When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous
event they disappear, unless he immediately gives new ones equally satisfactory;
d. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
e. When the debtor attempts to abscond.

An attempt on the part of the debtor to abscond is a sign of bad faith and intention not to comply with the obligation. What
is material here is the intent of the debtor in absconding. Thus, if he merely went out of the country for a vacation, the
debtor does not lose the benefit of the period since there was no intention to defraud the creditor.

2. AS TO PLURALITY OF PRESTATION

a. CONJUNCTIVE usually use the word “and”, e.g., deliver a cow, a car AND a diamond ring. In this case, all the
prestations must be complied with in order to fulfill the obligation.
b. ALTERNATIVE usually use the word “or”, e.g., deliver a cow, a car OR a diamond ring. In this case, performance of
the one of the prestations fulfill the obligation.

1. Where several objects are due, the fulfillment of one is sufficient.

2. Right of Choice: generally, it belongs to the debtor, except:
a. When expressly granted to the creditor, i.e., it cannot be implied; or
b. When the right of choice is given to a third party.
3. The debtor’s right of choice is limited in such a way that he cannot choose any prestation which is impossible or
unlawful or that which could not have been the object of the obligation.
4. The choice, to take effect, must be communicated. The communication of the choice made is technically called
“concentration.”
5. The choice cannot be part of one and part of another.
6. When from all the choices, only one is practicable, the debtor shall lose the right of choice. Logically, the obligation
would be to deliver that which remains.
7. Effect of Loss:

Right of choice belongs to:

Fortuitous Event Extinguished
All things were lost
Fault of debtor Value of the last + Damages
DEBTOR Fortuitous Event/Fault of Debtor Deliver remaining
Some were lost Fault of creditor – debtor cannot Rescission + Damages
make a choice Perform + Damages

Fortuitous Event Extinguished

All things were lost
Fault of debtor Value of any + Damages
CREDITOR Fortuitous Event Demand from remaining
Some were lost Price of that which was lost + Damages
Fault of Debtor
Demand from Remaining + Damages

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c. FACULTATIVE: When only one prestation has been agreed upon, but the obligor may render another in substitution,
the obligation is called facultative

Right to substitute: is always with the debtor. He cannot be compelled to make the substitution.
What is lost through fortuitous event The obligation
is the
Principal Extinguished
BEFORE substitution
Substitute Not extinguished
Principal Not extinguished
AFTER substitution
Substitute Extinguished

3. AS TO RIGHTS AND OBLIGATIONS OF MULTIPLE PARTIES

a. SOLIDARY OBLIGATION

A solidary obligation is one in which each debtor is liable for the entire obligation or each creditor is entitled to demand the
whole obligation.

Solidary obligation arises when the obligation:

1. Expressly so states (stipulated): Terms which may indicate solidarity: Mancomunada solidaria; Joint & several; In
solidum; Juntos o separadamente; Individually and collectively; Individually; Collectively; Separately; Distinctively;
Respectively; Severally; “I promise to pay” signed by more than one individual
2. When the law requires solidarity;
a. When two or more heirs take possession of the estate, they are solidarily liable for the loss or destruction of a thing
devised or bequeathed. (Art. 927)
b. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed
the latter to act as though he had full powers. (Art. 1911)
c. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (Art.
1945)
d. The responsibility of two or more payees, when there has been payment of what is not due, is solidary. (Art. 2157)
e. The responsibility of two or more persons who are liable for quasi-delict is solidary. (Art. 2194)
3. When the nature of the obligation requires solidarity.

ENFORCEMENT OF SOLIDARY OBLIGATIONS:

1. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one
of them, payment should be made to him.
2. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation:
a. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
b. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter
from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.
c. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement
from his co-debtors.
3. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of
the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally
belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

Examples of Total Defenses:

a. Payment by another co-debtor, as to a subsequent demand of a creditor;
b. If the contract is void;
c. If the obligation has prescribed.

4. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept.
5. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for
the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be
demanded.
6. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation,
such share shall be borne by all his co-debtors, in proportion to the debt of each.
7. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected.
8. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or become illegal.
9. Solidarity can exist even if the debtor are not bound in the same manner.

b. JOINT OBLIGATIONS:

If none of the above circumstances which would give rise to solidarity, are present, the obligation is considered joint.

A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt or each creditor is
entitled only to a proportionate part of the credit. In joint OBLIGATIONS, there are as many OBLIGATIONS as there are debtors
multiplied by the number of creditors.
Each debt/credit is considered independent of each other.

EFFECTS:
1. The demand by one creditor upon one debtor, produces the effects of default only with respect to the creditor who
demanded & the debtor on whom the demand was made, but not with respect to the others;

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2. The interruption of prescription by the judicial demand of one creditor upon a debtor does not benefit the other creditors
nor interrupt the prescription as to other debtors. On the same principle, a partial payment or acknowledgement made by
one of several joint debtors does not stop the running of the statute of limitations as to the others;
3. The vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation
or rights of the others;
4. The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorize a creditor to demand
anything from his co-creditors;

c. DISJUNCTIVE

This is not covered by New Civil Code. In this case, there are 2 or more creditors and 2 or more debtors but they are named
disjunctively as debtors and creditors in the alternative.
The rules on solidary obligations must apply because if rules on alternative obligations will be applied then the debtor will
generally be given the choice to whom shall he give payment.

4. AS TO PERFORMANCE OF PRESTATION

Indivisibility does not necessarily connote solidarity. Whenever there are multiple parties to an obligation, the rules on
solidarity and joint are still observed. Thus, if the obligation involves an indivisible prestation, the liability of multiple debtors
remain to be joint if there is no law or stipulation that requires solidarity or the nature of the obligation does not require
solidarity.

Obligations deemed indivisible:

1. Obligation to give definite things
2. Those not susceptible of partial performance
3. If capable of partial performance but the law or the intention of the parties treats it as indivisible.

Obligations deemed divisible:

1. The object of the obligation is the execution of a certain number of days of work
2. When the object is the accomplishment of work by metrical units
3. When the purpose of the obligation is to pay a certain amount in installments
4. When the object of the obligation is the accomplishment of work susceptible of partial performance.

a. Joint Indivisible: If the division is impossible, the right of the creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others
shall not be liable for his share.

A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with
his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond
the corresponding portion of the price of the thing or of the value of the service in which the obligation consists.

b. Solidary Indivisible

Unlike in joint indivisible obligations, if the liability of the debtors is solidary, even the innocent debtor or the one ready to
comply with his part, can be made liable for damages, but he is given the right to seek reimbursement from the debtor at fault
or the one not ready to comply.

5. OBLIGATION WITH A PENAL CLAUSE

GENERAL RULE: the penalty shall substitute the indemnity for damages and payment of interests in case of non-compliance.

EXCEPTIONS:
1. If there is stipulation to the contrary;
2. If the debtor refuses to pay the penalty;
3. If the debtor is guilty of fraud in the fulfilment of the obligation.

Payment of penalty instead of fulfillment of the obligation: as a rule, the debtor cannot exempt himself from the
performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him.
Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless
this right has been clearly granted him.
However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced.

REDUCTION OF PENALTY: the courts can reduce the penalty whenever:

1. The principal obligation has been partly or irregularly complied with.
2. The penalty same is iniquitous or unconscionable.

6. OTHER CLASSIFICATIONS OF OBLIGATIONS

As to subject matter Real – obligation to give

Personal – obligation to do or not to do
As to affirmativeness Positive – obligation to give or to do
Negative – obligation not to do or not to give
As to persons obliged Unilateral – where only one of the parties is bound
Bilateral – where both parties are bound

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NATURE AND EFFECT OF OBLIGATIONS

Concurrent Obligations in Obligations to Give a Determinate Thing: To deliver the thing, which may be either actual or
constructive.
1. To take care of it with the proper diligence of a good father of a family (bonus pater familia), unless there is stipulation or
the law requires another standard of care.
2. To deliver the fruits of the thing from the time the obligation to deliver it arises. Note, however, that the creditor will not
acquire real rights over the fruits until it is delivered to him.
Kinds of Fruits:
a. Natural – spontaneous product of the soil, young and other products of animals
b. Industrial – those derived from human intervention, cultivation or labor
c. Civil – those derived from the juridical relation of parties.
3. To deliver all accessions and accessories, even though they may not have been mentioned.

Accessories – those joined to or included with the principal for the latter’s better use, perfection or enjoyment. Example:
keys to a house.
Accessions – additions or improvements upon a thing which may include an alluvium and whatever is built, planted or sown
on a parcel of land. Example: building constructed on land.

NOTE: In an obligation to give a generic thing, no such concurrent obligations exist.

REMEDIES FOR BREACH OF OBLIGATIONS

Obligations to give:
1. Determinate thing – specific performance only if it is legally and physically possible. Substitute performance is not possible.
2. Generic thing – specific or substitute performance. The creditor can have another person to have such kind of thing be
delivered at the cost of the debtor plus damages.

Obligations to do: substitute performance only, since forcing the obligor to comply would violate the constitutional prohibition
against involuntary servitude.

Obligations not to do: and the obligor does it, the creditor may have it undone at the expense of the debtor.

RESCISSION AS A REMEDY: TWO KINDS:

1. Rescission in reciprocal obligations, which should’ve been properly termed as “resolution”, is a primary remedy where the
cause of action is substantial or fundamental breach or non-compliance.
2. Rescission under Art. 1301/1303 in rescissible contracts is a remedy of last resort where the cause would normally be
lesion or economic injury to a party.

Damages; KINDS (MENTAL):

1. Moral – for mental and physical anguish
2. Exemplary – corrective or to set an example
3. Nominal – to vindicate a right when no other kind of damages may be recovered
4. Temperate – when the exact amount of damages cannot be determined
5. Actual – actual losses incurred. This is the only type of damage that would require proof.
6. Liquidated – predetermined beforehand.

SPECIFIC CIRCUMSTANCES AFFECTING OBLIGATIONS IN GENERAL

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

a. FRAUD

There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to. (Art. 1338)

Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (Art. 1171)

Kinds of Fraud:
1. Dolo causante – or fraud in obtaining consent, is applicable only to contracts where consent is necessary and thus affects
the validity of the contract, making it voidable.
Under this kind of fraud, the party would not have entered into the contract were it not for the fraud; annulment is the
remedy of the party who’s consent was obtained through fraud.

2. Dolo incidente – or fraud in the performance of the obligation and applicable to obligations arising from any source. This
kind, however, does not affect the validity of the contract and makes the party guilty of fraud liable for damages.

Under this kind, a party would have entered the obligation with or without the fraud. Remedy is damages.
b. NEGLIGENCE
Negligence: consists in the omission of that diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place.
Degree of care required:
1. As a rule
a. That required by law: e.g., a common carrier is required to exercise extraordinary care; or
b. That agreed upon by the parties.
2. In the absence of the two above, diligence of a good father of a family.

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Kinds of Negligence as to SOURCE:
1. Culpa Contractual – contractual negligence – or that which results in a breach of contract.
2. Culpa Aquiliana – civil negligence or quasi-delict
3. Culpa Criminal – criminal negligence – or that which results in the commission of a crime or a delict.

Negligence on the part of the supposed creditor:

1. If his negligence was the immediate and proximate cause of the injury, there is no recovery for damages.
2. If his negligence was only contributory – he may still recover damages, BUT the courts can mitigate or reduce the same.

c. DELAY
Kinds of Delay:
1. Mora Solvendi – delay on the part of the debtor, which may either be:
a. Mora solvendi ex re: in real obligations
b. Mora solvendi ex persona: in personal obligations
2. Mora Accipiendi – delay on the part of the creditor;
3. Compensatio Morae – delay on the part of both parties.

WHEN CONSIDERED IN DEFAULT: General Rule: upon demand, which may be judicial or extra-judicial.
Exceptions:
1. When stipulated – a due date in itself is not enough, what should be stipulated is that there is no need for demand to
consider the debtor in default
2. When the law so declares – e.g., delivery of a partner’s share in the partnership
3. When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing
is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract – e.g.,
a florist for a wedding
4. When demand would be useless – e.g., when the debtor already transferred the thing to another; or had it destroyed or
hidden.
5. In reciprocal obligations, where the respective obligations must be performed simultaneously, and one party was not
ready

d. ANY OTHER MANNER OF CONTRAVENTION (VIOLATIO)

In general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused
thereby. The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and
faithful fulfillment of the obligation or every kind or defective performance.
FORTUITOUS EVENT: is an excuse for non-performance.

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the
event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to
avoid.

Elements: To constitute a fortuitous event, the following elements must concur:

a. The cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will;
b. It must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible
to avoid;
c. The occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and,
d. The obligor must be free from any participation in the aggravation of the injury or loss.

General Rule: is that no personal shall be responsible for those events which could not be foresee, or which, though foreseen,
were inevitable.

Exceptions:
1. Declared by stipulation;
2. When the nature of the obligation requires the assumption of risk: e.g., insurance contracts.
3. Expressly specified by law: examples:
a. A possessor in bad faith. (Art. 552)
b. If the obligor is already in delay or has promised the same thing to two or more persons who do not have the same
interests. (Art. 1165)
c. The officious manager may be liable for any fortuitous event under Art. 2147.
4. When negligence, delay or fraud concurred with the fortuitous event.

MODES OF EXTINGUISHMENT OF OBLIGATIONS

Art. 1231. Obligations are extinguished:

(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations:

a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription

These other causes are governed elsewhere in the Civil Code.

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PAYMENT OR PERFORMANCE

Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.

a. Provisions as to the PAYOR

Payment made by a third person:
With consent of the Without knowledge/consent of
debtor/With interest in the the debtor
fulfillment of the obligation
Compel the creditor to accept payment Yes No
Subrogation to the rights of the creditor Yes No
Amount of reimbursement Full Reimbursement Beneficial Reimbursement
Person who has interest in the fulfillment of the obligation: include those subsidiarily liable such as guarantors and co-
debtors (including joint co-debtors), even third party-mortgagors whose properties secure the obligation.

If third party payor does not intend to be reimbursed: the payment may be treated as a donation. As such it is necessary
that the debtor accept the same for validity.

If the debtor did not consent, there would be no valid donation, and the third party-payor can seek reimbursement from the
debtor.

In any case, payment is still valid as to the creditor and the obligation is still extinguished.
Capacity and Free Disposal: the payor should have capacity to alienate and the free disposal of the thing due for payment
to be effective. Such that minors (who don’t have capacity) and those suffering the penalty of civil interdiction (no free disposal)
cannot make a valid payment.

b. Provisions as to the PAYEE

Payment may be made to:
1. Person in whose favor the obligation has been constituted – not necessarily a party to the constitution of the obligation.
2. His successor in interest – who may not be creditors at the time of constitution, but may be creditors at the time of
fulfilment.
3. Any person authorized to receive it – agents are creditors because they have the right to collect, but not in their own right.
(This is relevant as to Compensation as a mode of extinguishing obligation)
4. Third party – if it redounds to the benefit of the creditor.

The benefit to the creditor need not be proven in the following cases:
a. after the payment, the third person acquires the creditor's rights;
b. the creditor ratifies the payment to the third person;
c. by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment.
(Art. 1241)
d. If the third party is in possession of the credit. (Art. 1242)

Payment to an incapacitated person: is valid only if the incapacitated person kept the thing delivered or insofar as it was
beneficial to him.

c. THING to be paid or delivered

Delivery of a specific thing: The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
Delivery of a generic thing: whose quality and circumstances have not been stated, the creditor cannot demand a thing
of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other
circumstances shall be taken into consideration.

Obligations to do or not to do: an act or forbearance cannot be substituted by another act or forbearance against the
obligee's will.

LEGAL TENDER: refers to payment which the creditor can be compelled to accept. Under the New Central Bank Act, coins and
currencies issued by the BSP have legal tender power. For currency notes, there is no limit as to the amount it can be used as
legal tender. However, for coins, the following are the limits:
1. P1 coins and above - shall be legal tender in amounts not exceeding P1,000;
2. Coins below P1 – legal tender not exceeding P100.

Negotiable Instruments and Checks: are not considered legal tender and their acceptance is dependent on the creditor.
However, should the creditor accept the same, they do not produce the effect of payment, or extinguish the obligation, until:
1. At the time the check or other mercantile documents have been encashed;
2. Its value becomes impaired.

Extraordinary inflation or deflation: of the currency stipulated should supervene, the value of the currency at the time of
the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
d. Place of payment
1. Payment shall be made in the place designated in the obligation.
2. If there was no stipulation and the obligation consists in the delivery of a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation was constituted.
3. In any other case the place of payment shall be the domicile of the debtor.
4. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by
him.

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SPECIAL FORMS OF PAYMENT
Dation in Payment

Dation in payment is the delivery or transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.

It may consist not only of a thing but also of rights, i.e., usufruct or credit.
Extent of extinguishment: General rule: to the extent of the value of the thing delivered as agreed upon or as may be proved.
Exception: if the parties consider the thing as equivalent to the obligation through an express or implied agreement or by
silence.

Application of Payments

Application of Payment: is the designation of the debt which is being paid by a debtor who has several obligations of the
same kind in favor of the creditor to whom payment is made.

Requisites:
1. There is only one debtor;
2. There are several debts;
3. The debts are of the same kind;
4. There is only one and the same creditor.

Right to apply payment: generally, the debtor has the right to apply the payment at the time of making the payment, subject
to the following LIMITATIONS:
1. Creditor cannot be compelled to accept partial payment. (Art. 1248);
2. Debtor cannot apply payment to principal if interest has not been paid. (Art. 1253)
3. The debt must be liquidated, except when the parties agree otherwise;
4. Cannot be made when the period has not arrived and such period was constituted in favor of the creditor, except with the
consent of the creditor (Art. 1252);
5. When there is agreement as to which debt must be paid first.

If the debtor did not designate, to which debt shall payment apply? That which was chosen by the creditor as reflected
in the receipt which is accepted by the debtor without protest. (Art. 1252, 2nd par.)

If debtor and creditor did not designate:

1. If the debts are of different nature and burden – to that debt which is most onerous to the debtor;
2. If the debts are of the same nature and burden – applied proportionately.

Payment by Cession or Assignment

Cession is when the debtor delivers to all his creditors all his properties for the purpose of selling and applying the proceeds
to settle his obligations to them.

Kinds:
1. Voluntary – Under Art. 1255, the debtor may cede or assign his property to his creditors in payment of his debts; extent
of extinguishment is only upto the amount of the proceeds.
2. Judicial – under the Financial Rehabilitation and Insolvency Act.

Advantages of judicial cession is that the court discharges the debtor of his debts and the obligations are extinguished.

Properties exempt from Execution: are generally not covered by cession. Except if the debtor waives such exemption.

Dation in payment vs. Cession:

Dation in payment Cession or Assignment

both are substitute of performance of an obligation
Art 1245 Art 1255
Ownership of the thing is transferred to the creditor No such transfer
Obligation may be totally extinguished if agreed upon by Obligation is extinguished only insofar as the net proceeds
the parties or by their silence, consider the thing equivalent (except: otherwise stipulated)
to the obligation.
does not involve plurality of creditors involves plurality of creditors
Involves a specific thing Involves all the properties of the debtor unless exempt from
execution.
may be made even by a solvent debtor; merely involves a supposes financial difficulty on the part of the debtor
change of the object of the obligation by agreement of the
parties and at the same time fulfilling the same voluntarily

How proceeds distributed to the creditors:

1. Stipulation;
2. Preference of credit.

Tender of Payment and Consignation

Tender of Payment is the manifestation made by the debtor to the creditor of his desire to comply with his obligation, with
the offer of immediate performance. It is a PREPARATORY ACT to consignation and in itself DOES NOT extinguish the obligation.

Consignation is the deposit of the object of the obligation in a competent court in accordance with rules prescribed by law,
AFTER the tender of payment has been refused or because of circumstances which render direct payment to the creditor
impossible. It extinguishes the obligation.

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Applies only to extinguish of obligation not to exercise a right: such that in a situation where a party would exercise his
right of repurchase and the buyer refused to accept. The right to redeem is a RIGHT, not an obligation, therefore, there is no
consignation required. (Immaculata vs. Navarro)
Requisites:
1. There exists a valid debt that is due;
2. There is legal cause to consign, that is there has been a valid tender of payment and the creditor unjustly refuses, or even
without tender of payment in the following cases:
a. When the creditor is absent or unknown, or does not appear at the place of payment;
b. When he is incapacitated to receive the payment at the time it is due;
c. When, without just cause, he refuses to give a receipt;
d. When two or more persons claim the same right to collect;
e. When the title of the obligation has been lost.

3. There is previous notice to consign to the persons having interest in the fulfilment of the obligation;
4. The amount or thing due is deposited in court.

Withdrawal of the Thing Deposited:

Withdrawal as a matter of right: debtor withdraws before acceptance by the creditor or before judicial declaration of propriety
of consignation. In this case, no extinguishment yet of the obligation. As such, no revival since the obligation has not been
extinguished to begin with.

Withdrawal after acceptance or declaration: only with the consent of the creditor. In this case, the obligation is revived.
As such, creditor can no longer run after the guarantor, unless the latter consented. This is because the obligation has been
extinguished. The revival will not revive the guaranty.

LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE

Loss: means when the thing goes out of commerce, perishes or disappears in such a way that its existence is unknown or that
it cannot be recovered.

If the loss is due to fortuitous event: generally, the debtor is not liable for damages if the thing is lost due to fortuitous
event, EXCEPTIONS:
1. When the law so provides;
2. When stipulation so provides;
3. When the nature of the obligation requires the assumption of risk.
4. Obligations arising from a criminal offense, unless the creditor is in mora accipiendi.
5. Obligations to give a generic thing, except in cases of limited generic.

Partial Loss: Partial loss may be determined by the court as so important to extinguish the obligation.

In doing so, intent of the parties must necessarily be considered. E.g., A promised to deliver a cellphone with its casing. The
cellphone was stolen but A managed to save the casing. Would A still be liable to deliver the casing? Yes, if the primary
consideration of the creditor was to obtain the casing.

The test is whether the parties would not have entered into the obligation without the thing that have been lost, then the
obligation is extinguished.

Presumptions of fault: Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due
to his fault, unless there is proof to the contrary.

This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

Impossibility of Performance: Loss of the thing may likewise cover impossibility of performance, e.g., a debtor is obliged
to paint a building and the building was destroyed (physical impossibility) or a law took effect making the obligation illegal
(legal impossibility).

When: In impossibility, the law should take effect, or the impossibility happened DURING the existence of the obligation
so as to extinguish it. If the law took effect or the impossibility arose BEFORE the existence of the obligation, the obligation is
void.
Types of Impossibility:
1. As to nature: Physical (by reason of its nature); and Legal (through some subsequent law);
2. As to whom impossibility refers:
a. Objective – impossibility of the act or service itself without considering the person of the debtor;
b. Subjective - impossibility refers to the fact that the act or service can no longer be done by the debtor but may still be
performed by another person
3. As to extent: Partial or Total;
4. As to period of impossibility: Permanent or Temporary.

Difficulty of prestation: When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part.

Court action: when the performance of the obligation is difficult, it does not, on its own, warrant extinguishment of the
obligation. However, when it has become so difficult beyond the contemplation of the parties, the debtor may go to court to
release him from the obligation but not to modify the terms of the contract.

Right of creditor to go against third parties: The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by reason of the loss.

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CONDONATION OR REMISSION OF THE DEBT

Condonation/Remission is an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces
the enforcement of an obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission
refers.

Gratuitous: If not gratuitous, it will be considered:

1. Dation in payment – when the creditor receives a thing different from that stipulated;
2. Novation – when the subject or principal conditions of the obligation should be changed;
3. Compromise – when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.

Kinds of Condonation:
1. As to form:
a. Express – when made formally; should be in accordance with the forms of ordinary donations.
i. Movable property must comply with the form prescribed under Art. 748, i.e., if it is made orally, there must be
simultaneous delivery, or if the value exceeds more than P5,000, it must be in writing.
ii. Immovable property must comply with the form prescribed under Art. 749, i.e., it must be in a public document,
specifying the property donated.
iii. Acceptance, which must be in the same form as the donation.

b. Implied – when it can be inferred from the acts of the parties:

i. delivery of the promissory note to the debtor or the voluntary destruction or
ii. cancellation of the evidence of credit by the creditor with intent to renounce the right.
iii. As to pledge, if the thing pledged, after delivery to the creditor-pledgee, is found in the possession of the debtor,
or a third person who owns the thing.

2. As to extent
a. Total – when the whole obligation is extinguished.
b. Partial – which may be as to the amount; as to the accessory obligation; or as to a certain amount of debt (in case of
solidarity).

3. As to manner of remission
a. Inter vivos – during the lifetime of the creditor.
b. Mortis causa – will take effect upon death which must be in done through a will.

CONFUSION OR MERGER OF RIGHTS

Merger/Confusion: the meeting in one person of the qualities of the creditor and debtor with respect to the same obligation.
Requisites:
a. Must take place between the credit and the principal debtor;
b. Must involve the very same obligation;
c. Must be total.

Examples:
a. PNB is indebted to Allied. PNB and Allied Bank entered into a merger agreement. In this case, the indebtedness of PNB is
extinguished due to the merger.
b. H is indebted to his father T. When T dies and H is his only heir, the obligation becomes extinguished since H will inherit
the credit. The characters of the creditor and debtor in the said obligation are merged in his person.
Guarantors: Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which
takes place in the person of any of the latter does not extinguish the obligation. Which means, if the debt is assigned by the
creditor to the guarantor, and the latter becomes the creditor of such obligation, there is no extinguishment, because he is NOT
the principal debtor of the obligation.

COMPENSATION

Compensation: a mode of extinguishment to the concurrent amount, the obligations of those persons who in their own right,
are reciprocally creditors and debtors of each other.

Kinds of Compensation:
1. As to effects/extent:
a. Total – when the two obligations are of the same amount;
b. Partial – when the amounts are not equal. This is total as to the debt with lower amount.

2. As to origin/cause:
a. Legal – takes effect by operation of law because all the requisites are present;
b. Facultative – can be claimed by one of the parties who, however, has the right to object to it

Example: when one of the obligations has a period for the benefit of one party alone and who renounces that period
so as to make the obligation due
c. Conventional – when the parties agree to compensate their mutual obligations even if some of the requisite are lacking.
d. Judicial – decreed by the court in a case where there is a counterclaim.

Requisites:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
(3) That the two debts be due;

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(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.

Requisites:
1. Parties must be mutual principal debtors and creditors in their own right:

They must be creditors in their own right – If one of the creditors is not a creditor in his own right, that is, his right to
collect is because of a contract of agency, compensation cannot take place between the debt of such agent to a party who
is indebted to the principal.

The two obligations can be simplified as follows:

a. A (agent of P) is indebted to X
b. X is indebted to P

2. Both debts must be due– does not necessitate that both debts are due AT THE SAME TIME; one debt may have been
due earlier. The requirement is that at the time of the compensation, both debts are already due.

3. Both debts must be liquidated and demandable - Liquidated debts are those whose exact amount has already been
determined.

4. Debts must pertain to sums of money or if consumables, they must be of the same kind and quality

5. The claim must be clearly demandable, i.e., no controversy as to the claim.

Guarantors: may set up compensation as regards what the creditor may owe the principal debtor.

Rescissible or Voidable Debts: may be the subject of compensation before they are rescinded or avoided/annulled.

Assignment of credit: Even if the creditor already assigned his credit, the debtor may still invoke compensation as against
the debts due to him if:
1. He had no knowledge of or did not consent to the assignment; or
2. If with knowledge or consent, but reserved his right to the compensation.

When compensation may not be proper:

1. Depositum – as to the depositary;
2. Bail – as to the bailee;
3. Support – as to the one giving support, EXCEPT: support in arrears and those contractual in nature;
4. Civil liability arising from a penal offense.
Several debts susceptible of compensation: the rules on the application of payments shall apply to the order of
compensation.

Legal compensation: takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.

NOVATION

Requisites:
1. Previous valid obligation – if the original obligation is void, the novation is likewise void. But if it is voidable, novation is
valid except when annulment has been claimed.
2. Agreement of all parties to a new contract
3. Extinguishment of old obligation
4. Validity of the new obligation - If the new obligation is void, the original one shall subsist, unless the parties intended that
the former relation should be extinguished in any event.

Kinds of Novation:
1. As to nature: 2. As to form: 3. As to extent:
a. Subjective/Personal a. Express a. Total
b. Objective/Real b. Implied b. Partial
c. Mixed

Subjective Novation: changing the subject:

1. Active (SUBROGATION) – if a third person is subrogated to the rights of the creditor;
a. By agreement or express – which requires the consent of the original parties and the third person to be subrogated.
b. By law or implied – Art. 1302: It is presumed that there is legal subrogation:
i. When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
ii. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
iii. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter's share

Effects of subrogation: Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining,
either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in
a conventional subrogation.

Preference of original creditor: A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment
of the same credit.

2. Passive (SUBSTITUTION) – if a third person is substituted to the person of the debtor. In this case, it should be clear to
both parties that the new debtor is in lieu of the old debtor.

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KINDS OF PASSIVE NOVATION Extent of Liability of Old Debtor in case of
reimbursement INSOLVENCY of new debtor
Expromision - without knowledge or consent of Beneficial Old debtor is no longer liable
the original debtor Reimbursement
Delegacion – with consent of the original Full Old debtor may still be liable if the
debtor. insolvency was already existing and of
public knowledge, or known to the debtor.
Parties:
Delegante – the old debtor;
Delegado – the new debtor
Delegatorio – the creditor.

Creditor’s consent – in any case, the creditor’s consent is necessary for there to be a novation in the person of the debtor
as provided under Art. 1293.

Objective or Real Novation

1. Change in the object
2. Change in the principal conditions of the obligation, which may either be:
a. Express – when so expressed in unequivocal terms;
b. Implied - the old and the new obligations be on every point incompatible with each other.

Implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The
law requires no specific form for an effective novation by implication.

The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation
novates the first. If they can stand together, no incompatibility results and novation does not take place. (Millar vs. CA)

Accessory obligations: General Rule: extinguished as a consequence of novation.

Exception: insofar as pour atrui is concerned and the third person for whose benefit the obligation was constituted did not give
his consent.

Conditional Obligations: If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall
be under the same condition, unless it is otherwise stipulated.

1. An obligation is a juridical necessity to give, to do or not to do. This definition primarily describes:
A. Civil Obligation
B. Moral Obligation
C. Natural Obligation
D. All of the choices

2. D is indebted to C for P100,000. The action to enforce the obligation has already prescribed. However, X, a suitor of D paid
the same and D voluntarily reimbursed X. In this case, D can recover payment from:
A. C
B. X
C. Both C and X
D. Neither C nor X

3. This essential element of an obligation is the reason for the obligation’s existence. The tie that binds the parties to the
obligation:
A. Active subject
B. Passive subject
C. Prestation
D. Efficient Cause

4. X died, leaving the legal title to his land to his son A, while the usufruct was given to B. When B dies,
A. His rights will be transmitted to his heirs by operation of law
B. His rights will be inherited by the heirs because obligations are transmissible in general
C. His rights will be merged with the legal title of A
D. His rights will be inherited by the other heirs of X

5. The obligation to give support arises from:

A. Law
B. Contract
C. Quasi-contract
D. Moral conscience

6. D bought a pack of gum from a convenience store which costs P18. He paid P20 to the cashier, but the cashier gave him
P5 as change. What juridical relation is created between D and the cashier?
A. Contract
B. Quasi-Contract
C. Delict
D. Quasi-Delict

7. What is the required quantum of evidence or proof necessary for criminal liability to attach?
A. Preponderance of evidence
B. Substantial evidence
C. Prima facie evidence
D. Proof beyond reasonable doubt

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
LAW on OBLIGATIONS RFBT-01
8. X, a minor, through negligence, inflicted damage upon another child. X’s father was made liable by court to pay civil
damages to the other child. The liability of X’s father arises from:
A. Contract
B. Quasi-contract
C. Delict
D. Quasi-delict

9. The defense of due diligence in the selection and supervision of employees may used against:
I. Vicarious liability of an employer arising from quasi-delict
II. Subsidiary liability of an employer arising from delict
A. I and II
B. I only
C. II only
D. Neither I nor II

10. In this type of obligation, 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.
A. Pure obligation
B. Alternative obligation
C. Conditional obligation
D. Obligation with a term

11. A potestative suspensive condition solely dependent upon the will of __________ will make the obligation void.
A. The debtor
B. The creditor
C. Both the debtor and creditor
D. Either the debtor or the creditor

12. “I will give to you my car if you will not draw a circle that is at the same time a square” is a
A. Valid obligation
B. Void obligation
C. Alternative obligation
D. Facultative obligation

13. On May 31, 2021, D promised to give C P10,000 after the latter passes the LECPA. C passed the LECPA and took oath as
a CPA on October 31, 2021. In this case, the prescriptive period to enforce the obligation will:
A. Be reckoned from May 31, 2021
B. Be reckoned from October 31, 2021
C. Be reckoned from when C makes a demand
D. Not begin to run since the condition was fulfilled

14. On June 30, 2021, D promised to give C a car on December 31, 2021. However, before the arrival of the period, the car
deteriorated without D’s fault. In this case,
A. C will suffer the impairment on the car
B. C will suffer the impairment of the car but may demand from D reimbursement for necessary repairs
C. D will be obliged to bring the car back to the intended condition
D. D will no longer be obliged to deliver the car

15. This kind of term is one that is agreed upon by the parties:
A. Legal term
B. Voluntary term
C. Term ex die
D. Term in diem

16. D is indebted to C for P100,000 payable on December 31, 2021. On September 30, 2021, C went to D’s house and found
that he is packing all his clothes and the house was already empty. It would show that D was already preparing to migrate
to another country, never to return. Can C make a valid demand for payment on September 30, 2021?
A. No, because an attempt on itself to abscond does not remove the debtor’s right to make use of the period
B. No, because the debt is not yet due
C. Yes, because D is about to abscond
D. Yes, because there’re no longer properties which C can attach should he sue

17. In a facultative obligation, the loss of the _________ object _______ substitution extinguishes the obligation:
A. Principal; after
B. Principal; before
C. Substitute; before
D. None of the choices is correct

18. A, B and C are indebted to X and Y for P120,000. How much can X collect from A?
A. P120,000
B. P60,000
C. P40,000
D. P20,000

19. X went to Y to have his car repaired. Y failed to perform the obligation agreed upon. What is/are the remedy/ies of X?
A. Specific Performance
B. Substitute Performance
C. Both A and B
D. Neither A nor B

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
LAW on OBLIGATIONS RFBT-01
20. This is awarded by courts to vindicate a right that has been violated when no other kinds of damages may be recovered.
A. Actual damages
B. Temperate damages
C. Nominal damages
D. Liquidated damages

21. This is civil negligence or one arising from quasi-delict.

A. Culpa criminal
B. Culpa contractual
C. Culpa aquiliana
D. None of the choices

22. Payment made by a third party who has an interest in the fulfillment of an obligation, will:
A. Entitle him to full reimbursement of whatever amount he has paid
B. Entitle him to reimbursement to the extent the debtor was benefited
C. Entitle him to no reimbursement
D. Make the payment as a donation

23. The place of payment/performance, in an obligation to deliver a specific thing, where none is designated by the parties,
will be
A. The domicile of the debtor
B. The domicile of the creditor
C. The place where the thing might be at the moment the obligation was constituted
D. The place where the thing might be at the time of performance

24. The following limits the debtor’s choice in application of payments, except:
A. Creditor cannot be compelled to accept partial payment
B. Debtor cannot apply payment to principal if interest has not been paid
C. The debt must be liquidated
D. When the period is constituted in favor of the debtor and the same has not yet arrived

25. This kind of cession of payment extinguishes all the obligations of the debtor:
A. Conventional
B. Voluntary
C. Judicial
D. All of the choices

26. Compensation is not proper in all of the following cases, except:

A. Deposit on the part of the depositor
B. Bail as to the bailee
C. Support as to the one obliged to give support
D. Civil liability arising from a penal offense

27. A partial loss of the specific thing which is the object of the obligation,
A. Will not affect the obligation
B. Will extinguish the obligation once filed in court
C. Will extinguish the obligation if the court finds the loss so important as to extinguish the obligation
D. Will release the debtor from his obligation

28. The following are implied condonations, except:

A. Delivery of the promissory note to the debtor for the voluntary destruction
B. Cancellation of the evidence of credit by the creditor with intent to renounce the right
C. If the thing pledged, after delivery to the creditor-pledgee, is found in the possession of the debtor, or a third person
who owns the thing
D. None of the choices is an exception

29. A mode of extinguishing an obligation to the concurrent amount by which the parties are reciprocally the debtors and
creditors of each other.
A. Novation
B. Confusion/Merger
C. Compensation
D. Condonation

30. D is indebted to C for P1,000,000. X, a third party to the obligation, paid P500,000, or half of the obligation of D. Later on,
D became insolvent and only had P500,000 in remaining assets. Who shall be entitled to the remaining P500,000?
A. C
B. X
C. Both, equally
D. Either at the choice of D

1. A 7. D 13. B 19. B 25. C

2. D 8. D 14. A 20. C 26. A
3. D 9. B 15. B 21. C 27. C
4. C 10. C 16. C 22. A 28. D
5. A 11. A 17. B 23. C 29. C
6. B 12. A 18. D 24. D 30. A

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