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(Obligations – General Provisions [Art. 1156-1162] and Nature and Effect of Obligations [Art.
January 24, 2018

Sometime in 1989, the general membership of Makati Stock Exchange, Inc. (MKSE) passed a
resolution amending its Articles of Incorporation which among others granted Miguel Campos
(Campos) the position of Chairman Emeritus for life to which he was allowed to participate in
the Initial Public Offerings (IPOs) of corporations registered with MKSE for being also an active
member thereof. Such right enjoyed by Campos to participate in IPOs is also a right given to all
the other members. IPOs are shares of corporations offered for sale to the public prior to the
listing in the trading floor. However, on June 3, 1993, during a meeting of the Board of Directors
of MKSE, they passed a resolution to stop giving Campos the IPOs he is entitled to. Campos
filed a petition with the SEC against MKSE and its board of directors to nullify the said
resolution. However, MKSE and its board of directors filed a motion to dismiss on the ground
that the petition failed to state a cause of action. Did the petition failed to state a cause of action?

Answer: Makati Stock Exchange, Inc. vs. Campos, G.R. No. 138814, April 16, 2009

Yes. A cause of action is the act or omission by which a party violates a right of another. A
complaint states a cause of action where it contains three essential elements of a cause of action,
namely: (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. If these elements are absent,
the complaint becomes vulnerable to dismissal on the ground of failure to state a cause of action.

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondents alleged right to subscribe to the IPOs of corporations listed
in the stock market at their offering prices; and stipulates the correlative obligation of petitioners
to respect respondents right, specifically, by continuing to allow respondent to subscribe to the
IPOs of corporations listed in the stock market at their offering prices.

Right and obligation are legal terms with specific legal meaning. A right is a claim or title to an
interest in anything whatsoever th at is enforceable by law. An obligation is defined in the Civil
Code as a juridical necessity to give, to do or not to do. For every right enjoyed by any person,
there is a corresponding obligation on the part of another person to respect such right. Thus,
Justice J.B.L. Reyes offers the definition given by Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor)

may demand from another (called the debtor) the observance of a determinative
conduct (the giving, doing or not doing), and in case of breach, may demand
satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to
another, must be rooted in at least one of these five sources. The mere assertion of a right and
claim of an obligation in an initiatory pleading, whether a Complaint or Petition, without
identifying the basis or source thereof, is merely a conclusion of fact and law. A pleading should
state the ultimate facts essential to the rights of action or defense asserted, as distinguished from
mere conclusions of fact or conclusions of law. Thus, a Complaint or Petition filed by a person
claiming a right to the Office of the President of this Republic, but without stating the source of
his purported right, cannot be said to have sufficiently stated a cause of action. Also, a person
claiming to be the owner of a parcel of land cannot merely state that he has a right to the
ownership thereof, but must likewise assert in the Complaint either a mode of acquisition of
ownership or at least a certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondents
right to subscribe to the IPOs of corporations listed in the stock market at their offering prices,
and petitioners obligation to continue respecting and observing such right, the Petition utterly
failed to lay down the source or basis of respondents right and/or petitioners obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in
1989, granting him the position of Chairman Emeritus of MKSE for life. However, there is
nothing in the said Petition from which the Court can deduce that respondent, by virtue of his
position as Chairman Emeritus of MKSE, was granted by law, contract, or any other legal
source, the right to subscribe to the IPOs of corporations listed in the stock market at their
offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged
to have been done in accord with a practice normally observed by the members of the stock
exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing
in the trading floor of the countrys two stock exchanges. Normally, Twenty-Five
Percent (25%) of these shares are divided equally between the two stock
exchanges which in turn divide these equally among their members, who pay
therefor at the offering price.

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right. Indeed, in labor cases, benefits which were voluntarily given by the employer, and which
have ripened into company practice, are considered as rights that cannot be diminished by the
employer. Nevertheless, even in such cases, the source of the employees right is not custom, but
ultimately, the law, since Article 100 of the Labor Code explicitly prohibits elimination or
diminution of benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE
members, for subscription at their offering prices, into an enforceable or demandable right. Thus,
even if it is hypothetically admitted that normally, twenty five percent (25%) of the IPOs are
divided equally between the two stock exchanges -- which, in turn, divide their respective
allocation equally among their members, including the Chairman Emeritus, who pay for IPO
shares at the offering price -- the Court cannot grant respondents prayer for damages which
allegedly resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said
practice by no longer allocating any shares to respondent.

Kristina brought her diamond ring to a jewelry shop for cleaning. The jewelry shop undertook to
return the ring by February 1, 2013. When the said date arrived, the jewelry shop informed

Kristina that the job was not yet finished. They asked her to return five days after. On February
6, 2013, Kristina went to the shop to claim the ring, but she was informed that the same was
stolen by a thief who entered the shop the night before. Kristina filed an action for damages
against the jewelry shop which put up the defense of force majeure. Will the action prosper or
not? (5%)

Answer: Aquino, p. 355

Yes. The action will prosper. Art. 1165 of the New Civil Code provides that if the obligor delays,
he shall be responsible for any fortuitous event until he has effected delivery. Thus, even
assuming for the sake of argument that the theft of the ring can be considered fortuitous event,
the jewelry shop is still liable because there was already delay when the theft occurred.

What are obligations without an agreement? Give five examples of situations giving rise to this
type of obligation. (5%)

Answer: Ulep, p. 18; Bar Problem (2007)

“Obligations without an agreement” are obligations that do not arise from contract such as those
arising from:

1. Delicts;
2. Quasi-delicts;
3. Solutio indebiti;
4. Negotiorum gestio and
5. All other obligations arising from law. (Answer by UP Law Center)

A delivered to B, a typewriter repairer, a portable typewriter for routine cleaning and servicing.
B was not able to finish the job after some tine despite repeated reminders made by A. Finally, B
returned the typewriter unrepaired, some parts missing. A had the typewriter repaired by F
Business Machines, and the repair job cost him P58.75 for labor or service and P31.10 for the
missing parts or a total of P89.85. The lower cost rendered judgment ordering B to pay only
P31.10. Is B liable also for P58.75, the cost of the service expended in the repair? (5%)

Answer: De Leon, pp. 43-44; Chaves vs. Gonzales, 32 SCRA 547 [1970]; see Tanguilig vs. CA,
266 SCRA 78 [1997]

Yes. B contravened the tenor of his obligation (see Art. 1170) because he not only did not repair
the typewriter but returned it “in shambles”. For such contravention, he is liable under Article
1167 for the cost of executing the obligation in a proper manner, which in the case should be the
cost of the labor or service expended in its repair, because the obligation or contract was to repair

In addition, he is liable under Art. 1170 for the cost of the missing parts for in his obligation to
repair the typewriter he was bound, but failed or neglected to return it in the same condition it
was when he received it.

B obliged himself to pay to S the balance of the purchase price of a subdivision lot within two
years from completion by S of the roads in said subdivision. S brought an action to foreclose the

real estate mortgage executed by B to secure the payment of the unpaid price. B contends lack of
previous notice of the completion of the roads and the absence of a demand for payment. Is this
contention of B tenable? (5%)

Answer: De Leon, p. 48; Enriquez vs. Ramos, 73 SCRA 116 [1976]

The filing of the foreclosure suit by S is sufficient notice to S of the completion of the roads and
of S’s desire to be paid the purchase price.

To secure a loan, R mortgaged a parcel of land to Development Bank of the Philippines
(formerly RFC). The plantation for which the loan was obtained was attacked by mosaic diseases
by reason of which R was unable to pay a yearly amortization. The mortgage was foreclosed.
The court rendered a deficiency judgment against R. Is R entitled to a reduction, if not
exemption, from the loan because of his inability to realize any income from the abaca he
planted? (5%)

Answer: De Leon, p. 82; Development Bank of the Phil. vs. Mirang, 66 SCRA 141 [1975]; see
also Repide vs. Alzeiluz, 39 Phil. 194 [1918]

No. His predicament may evoke sympathy, but it does not justify a disregard of the terms of the
contract he entered into. His obligation thereunder is neither conditional nor aleatory; its terms
are clear and subject to no exception.

B borrowed the car of L. While about to reach his destination, the car driven by L’s driver and
with B as the sole passenger, was accidentally stoned by some “mischievous boys” playing along
the road and its windshield was broken. Did B assume the risk of the car being stoned? (5%)

Answer: De Leon, p. 87; Dioquino vs. Laureano, 33 SCRA 65 [1970]

What happened was clearly unforeseen. It was a fortuitous event which must be borne by the
owner (L) of the car. The very wording of Art. 1174 dispels any doubt that what is therein
contemplated is the resulting liability even if caused by a fortuitous event where the party
charged may be considered as having assumed the risk incident in the nature of the obligation to
be performed.

It would be an affront, not only to logic but to the realities of the situation, if B could be held as
bound to assume the risk of this nature. In the case of Republic vs. Luzon Stevedoring
Corporation, 21 SCRA 279 [1967], the risk was quite evident and the nature of the obligation
such that a party could rightfully be deemed as having assumed it. It is not so in the case at bar.

In a contract, it was agreed that for 30 years, the planters would deliver their sugar to a milling
company. However, during the war (four years) and during the period of reconstitution (two
years), the milling company could not operate its mill. Should the period of six years be made
up? In other words, should the planters be required to deliver for six more years their sugar to the
same mill to make up for what had been lost? (5%)

Answer: Paras, p. 167-168; Victorias Planters Association, et. al. vs. Victorias Milling Co., Inc.,
97 Phil. 318

No more, because war is a fortuitous event that would relieve the planters from this obligation
since fulfillment then had been rendered impossible.

The share of W in the estate of her deceased husband, including a real property, was sold by the
deputy sheriff under an execution issued on a judgment against W in favor of X. The sheriff’s
certificate of sale purported to convey not only the real estate but all the shares, actions, or
interest of any kind which W might have in the estate of her deceased husband, including
usufructuary and conjugal rights.

X contends that by virtue of the sale, he is entitled not only to appear as the owner of the
property in the proceedings for the settlement of her deceased husband’s estate but also to
exclude W from further participation therein. Did the sale subrogate X to all the rights of W in
the estate? (5%)

Answer: De Leon, pp. 100-101; In re Estate of Ceballos, 12 Phil. 271 [1908]

No. In the real estate at least, W retained the right of redemption from the execution sale (see
Sec. 29, Rule 39, Rules of Court) which gave her a standing in the estate proceedings. Moreover,
the creditor is not clothed with such rights as inherent in the person of his debtor and in this case,
W’s strictly personal rights would have alone entitled her to a representation in the estate
proceedings. The existence of the right of redemption would suffice to prevent an entire

R (owner) leased his factory to E (lessee) for two (2) years, giving the latter an option to buy said
factory within the same period.

E assigned his right to X who communicated in writing his desire to exercise the option to R
who, however, refused to execute the corresponding deed of sale alleging as his reason the fact
that the option was given to E and not to any other person and E could not make the assignment
without his (R’s) consent and when E did it, he (R) withheld his approval. Under the contract and
the law, is there any impediment on the part of E to transfer his right under the option? (5%)

Answer: De Leon, p. 102; Bastida and Ysmael & Co., Inc. vs. Dy Buncio & Co., Inc., 93 Phil.
195 [1953]

No. The contract does not contain any stipulation forbidding E from assigning the option or
requiring R’s consent for the assignment nor was the option given to E in consideration of his
personal qualifications. Article 1178 is applicable.