Law On Contracts

CONTRACTS
General provisions
CONTRACTS, concept:
A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.
Persons- “parties”
• Natural person
• Juridical person- such as Corporation and Partnerships
Elements:
1. Essential Elements – those without which there will be no contract
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which must be established.
2. Natural Elements – those found in certain contracts and are presumed to exist, unless set aside or supressed by
the parties
1. Warranty against eviction
2. Warranty against hidden defects
3. Accidental Elements – those that refer to particular stipulations that maybe agreed upon by the parties.
1. Terms of payment
2. Place of payment
3. interest rate
etc…..
Classification of contracts
1. Classification of Contracts according to perfection or form:
1. CONSENSUAL (perfected by mere consent); Ex. Contract of Sale
2. REAL (perfected by delivery); Ex. Deposit and pledge.
3. FORMAL OR SOLEMN (those where special formalities are essential before the contract may be
perfected).
Ex. A simple donation inter vivos of real property, to be valid and perfected, must be in a public
instrument.
2. According to cause
1. Onerous – Those where there is an exchange of valuable considerations (ex. Sale, Lease or Barter)
2. Gratuitous or lucrative – Those where one party receives no equivalent consideration. (ex. Donation or
commodatum). These contracts are referred to as a contract of pure beneficence, the cause of which is the
liberality of the benefactor.
3. Remunerative or remuneratory- Those where one prestation is given for a benefit or service previously
rendered. The cause of these contracts is the service or benefit remunerated.
3. According to importance or dependence of one upon another
1. Principal – One that can stand independently by itself (such as sale, barter, lease and
load)
2. Accessory – One whose existence depends upon another contract (such as pledge,
and mortage which are dependent upon a principal contract such as loan)
3. Preparatory – One which serves as a means by which other contracts maybe entered
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CONTRACTS
into (such as agency and partnership)
4. According to name or designation

a. Nominate – Those that have a name under the law (such as sale, lease, barter and
partnership.)
b. Innominate – Those that do not have a special name under the law.
The 4 KINDS OF INNOMINATE CONTRACTS:
(a) Do ut Des – I give what you may give;
(b) Do ut Facias – I give what you may do;
(c) Facio ut Des – I do what you may give;
(d) Facio ut Facias – I do what you may do.
5. According to risk or fulfilment

a. Commutative – Those where the parties give equal or almost equal values ( such as sale and barter;
hence, there is real fulfilment
b. Aleatory – Those whose fulfilment depends upon chance; thus, the values given by the
parties vary because of the risks involved. (ex. Insurance contract
6. According to the parties obligated

a. Unilateral – Those where only one of the parties is obligated to give or to do something
( ex. Commodatum)
b. Bilateral or synalagmatic – those where both parties are required to give or to do
something (sale or barter). They may be reciprocal or non-reciprocal.
7. According to subject matter

a. Contracts involving things (such as sale and barter)
b. Contracts involving rights (such as usufruct and assignment of credits)
c. Contracts involving service (such agency and lease of service)
8. According to the time of fulfilment

a. Executed – One that has been performed.
b. Executory – One that has not been performed.
9. According to the number of persons physically entering into the contract

a. Ordinary- those where the parties are represented by different persons (sale and
barter)
b. Auto-contracts - Those where only one person represents the two opposite parties to
the contract (such as when the agent lends his money to the principal whom he
represents as borrower).
10. According to number of persons who participated in the drafting and preparation of the contract
a. Ordinary – one where both parties participated in the preparation of the contract
(deed of sale prepared by both parties)
b. Contract of adhesion – One where only one party prepared the contract ( ex.
Insurance contract)
STAGES OF A CONTRACT

CONTRACTS
a. Preparation or Negotiation – here the parties are progressing with their negotiations; they have
not yet arrived at any definite agreement, although there may have been a preliminary offer, and
bargaining;
b. Perfection – Here the parties have at long last came to a definite agreement, the elements of definite
subject matter and valid cause have been accepted by mutual consent;
c. Consummation – here the terms of the contract are performed, and the contract may be said to have
been fully executed.
CHARACTERISTICS OF A CONTRACT
• 1. Contract has the obligatory force or character, or the principle that once a contract is perfected, it shall
be of obligatory force upon both of the contracting parties;
• 2. The autonomy of contracts, or the principle that the contracting parties are free to enter into a
contract and to establish stipulations, clauses, terms and conditions as they may deem convenient;
• 3. The mutuality of contracts, of the essential equality of the contracting parties whereby the contract
must bind both of them;
• 4. The relativity of contracts, or the principle that the contract takes effect only between the parties,
their assigns and heirs.
PRINCIPLES OF CONTRACTS
• PRINCIPLE OF LIBERALITY – or “freedom of contracts” or “autonomy of contracts”

Means the right of the parties to enter into such stipulations or terms and conditions in their contracts.
However, it is subject to certain limitations imposed by law and that the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy.
Limitations on the Nature of Stipulations under a contract;
a. Law;
b. Morals;
c. Good Customs;
d. Public Order; or
e. Public Policy.
• PRINCIPLE OF RELATIVITY
A contract can only be binding to parties who had entered into it or their successors who assumed their
personalities or their juridical positions, and that, as a consequence, such contract can neither favor nor prejudice a
third person. (Quano vs. CA et. al., G.R. No. 95900, July 23, 1992)
Exceptions to the Principle of Relativity:

a. Where the obligations arising from the contract are not transmissible by their
nature, by stipulation or by provision of law;
b. Where there is a stipulation pour autrui (a stipulation in favor of a third party);
c. Where the third person induces another to violate his contract;
d. Where in some cases, third persons may be adversely affected by a contract
where they did not participate;
e. Where the law authorizes the creditor to sue on a contract entered into by his
debtor.
Requisites of a stipulation pour autrui :

CONTRACTS
• a. There must be a stipulation in favor of a third person;
• b. The stipulation must be a part, not the whole of the contract;
• c. The contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest;
• d. The third person must have communicated his acceptance to the obligor before its
revocation;
• e. Neither of the contracting parties bears the legal representation or authorization of the third party.
• CONSENSUALITY OF CONTRACTS
Contracts are perfected by mere
consent and from that moment the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature may be in keeping with good faith,
usage and law. (Art. 1315)
• The following, among other contracts must, however, comply with additional requirements before they can be
perfected:
• 1. Real Contracts- These are contracts that require the delivery of the object for their perfection, such as
deposit, pledge and commodatum;
• 2. Formal or solemn contracts – These are contracts that must be in the form provided by law for their
perfection (donation of movable property whose value exceeds Php5,000.00)
• PRINCIPLE OF MUTUALITY OF CONTRACTS

• It means that the contracts are binding between parties; its validity or compliance cannot be left to the will
of one of them. For a contract is a contract. Once agreed upon and the essential elements are present, it is
valid and binding between parties.
• A party cannot revoke or renounce a contract without the consent of the other, nor can it have it set aside
on the ground that he had made a bad bargain. (Fernandez vs. MRR, 14 Phil. 274)
• Principle of obligatory force of contracts and compliance in good faith

- obligations arising from contracts shall have force of law between the contracting parties and should be
complied with in good faith. (Art. 1159) Upon the perfection of the contract, the parties are bound by the
following:
1. The fulfilment of what has been expressly stipulated;

2. All the consequences which, according to their nature, may be in keeping with good
faith, usage and law. (Art. 1315)

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CONTRACTS

BUSINESS LAW 1 PAGE 1

4. According to name or designation

5. According to risk or fulfilment

6. According to the parties obligated

7. According to subject matter

8. According to the time of fulfilment

9. According to the number of persons physically entering into the contract

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• PRINCIPLE OF LIBERALITY – or “freedom of contracts” or “autonomy of contracts”

Exceptions to the Principle of Relativity:

Requisites of a stipulation pour autrui :

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• PRINCIPLE OF MUTUALITY OF CONTRACTS

• Principle of obligatory force of contracts and compliance in good faith

1. The fulfilment of what has been expressly stipulated;

BUSINESS LAW 1 PAGE 4

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