"Ob-la-di ob-la-da" is a phrase from a tribe (the Yoruba
tribe if you must know!) and it means: life goes on. When singing
the song, Paul acidentally mixed up the the names of the characters
in the last verse but the band liked it so it stayed.
Jimmy Scott had formed a band named the "Ob-la-di ob-la-da Band"
which is where Paul found the phrase. When he wrote the song, Jimmy
was annoyed because he felt that he deserved a percentage of the earnings
of the song. Paul naturally refused but when Jimmy ended up in jail
for unpaid bills, Paul covered his debts and in return, the whole
problem was forgotten.