Ch6. Obligations Law — The Structure of Debt and Contract Performance

What Is an Obligation?

An obligation is a right held by a specific person (the obligee/creditor) to demand a certain act (performance) from another specific person (the obligor/debtor).

Basic Structure of an Obligation:

Creditor ──────────────► Debtor
(right to demand)        (duty to perform)

Types of Performance:
- Delivery of a thing (sale, lease)
- Payment of money (loan, damages)
- Performing an act (services, construction)
- Refraining from an act (non-compete, noise prohibition)

Sources of Obligations

1. Contract

The most important source of obligations. Formed by offer + acceptance.

Types of Contracts:

Type	Description	Examples
Bilateral (Synallagmatic)	Mutual obligations as consideration	Sale, lease, employment
Unilateral	Only one party bears an obligation	Gift, gratuitous loan
Onerous	Exchange involves consideration	Sale, lease
Gratuitous	No consideration	Gift, gratuitous deposit

2. Tort

When a person intentionally or negligently causes harm to another, a duty to compensate arises.

Elements of a Tort (Civil Code, general provision):
1. Intent or negligence
2. Unlawfulness of the conduct
3. Damage occurred
4. Causal connection

Scope of Damages:
- Property damage: direct losses (expenditures) + consequential losses (lost income)
- Non-property damage: pain and suffering (solatium)

Special Torts:

Employer liability: An employer is liable for torts committed by its employees in the course of employment
Liability of possessor of a structure: Owner/possessor of a land structure bears liability for damage it causes
Liability of animal keeper: A person keeping an animal is liable for damage it causes to others

3. Unjust Enrichment

Where a person is enriched without legal cause at the expense of another, an obligation to return the enrichment arises.

Elements of Unjust Enrichment:
1. Enrichment
2. Loss to another
3. Causal connection between the enrichment and the loss
4. Absence of legal cause

Extent of return: limited to the extent the enrichment still exists
Bad-faith recipient: must return with interest + compensate for any remaining loss

Breach of Contract

Types

Delay in performance: performance is possible but not made on time without justification
Impossibility of performance: performance has become impossible
Defective performance: performance was made but is defective (imperfect tender)

Consequences of Breach of Contract

1. Claim for Damages

General principle: ordinary damages (foreseeable losses)
Special damages: only when the debtor knew or could have known of them

2. Termination of Contract

Delay in performance: give reasonable notice to perform, then terminate if not performed
Impossibility: can terminate immediately without notice
Effect of termination: obligation to restore to original position (return what has already been performed)

3. Specific Performance

Compelling performance through the court (direct compulsion, substituted performance, indirect compulsion by penalty).

Contract Termination vs. Contract Cancellation

Termination (rescission): retroactive effect — as if the contract never existed
→ Applies to: one-off contracts (sale, contract for work)
→ Effect: restoration to original position + damages

Cancellation (for the future): no retroactive effect — contract ends only going forward
→ Applies to: continuing contracts (lease, employment, mandate)
→ Effect: future obligations extinguished + damages where applicable

Extinction of Obligations

Performance

The debtor performs in accordance with the obligation, extinguishing it. The most normal method of extinction.

Order of Application of Partial Payment:
1. Agreement of the parties
2. Designation by the performing party
3. Costs first → interest → principal

Set-Off

Where both parties hold mutual obligations of the same kind, a declaration extinguishing them to the extent of the lesser amount.

Requirements for Set-Off:
1. Same type of obligations (usually monetary)
2. Both obligations must be due
3. Set-off must not be prohibited

Prohibited Set-Off: intentional tort claim, contractual prohibition, acquired after garnishment

Extinction by Statute of Limitations

An obligation not exercised will be extinguished by the statute of limitations.

Limitation Periods:
General obligations: 10 years
Commercial obligations: 5 years
Short-period limitations (3 years): doctors'/pharmacists' fees, lodging and restaurant debts
Short-period limitations (1 year): accommodation charges, food and drink bills

Suretyship (Guarantee)

The obligation of a guarantor to perform the debt of another (the principal debtor).

Characteristics of Suretyship:
Accessory nature: principal debt extinguished → guarantee extinguished
Benefit of excussion: guarantor has the right to insist creditor first pursues principal debtor

Joint and Several Guarantee: no benefit of excussion; creditor may directly claim from guarantor
→ Most commercial bank loan guarantees are joint and several

Practical Application: Responding to a Contract Breach

Scenario: You purchased a used car for $2,500, but after taking delivery you discover the mileage was falsely listed.

Legal Options:

Step 1: Confirm the defect (defective performance)
   → Breach of contract through defective performance

Step 2: Choose a remedy:
   ① Demand proper performance (replacement vehicle)
   ② Claim damages (difference in value)
   ③ Rescind the contract + restoration (return of purchase price)

Step 3: Seller's Warranty Liability
   → Rescission or damages must be claimed within 6 months of discovering the defect
   → False disclosure may constitute fraud (both civil and criminal liability)

Three sources of obligations: contract, tort, unjust enrichment Three types of breach: delay, impossibility, defective performance Rescission (retroactive) vs. cancellation (prospective) — one-off vs. continuing contracts Limitation periods: general 10 years, commercial 5 years, short 1–3 years