PART 2: CONTRACTS

(ARTS. 1305-1422, CIVIL CODE)

Chapter 1
General Provisions

Contract

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. (Art. 1305)

The above article gives the definition of a contract. It lays emphasis on the meeting of minds
between two (2) contracting parties which takes place when an offer by one (1) party is accepted by
the other.

In a contract, one (1) or more persons bind himself or themselves with respect to another or others,
or reciprocally, to the fulfillment to give, to do, or render service or to refrain from doing some
particular thing.

In a contract, there must be at least two (2) persons or parties, because it is impossible for one to
contract with himself.

Contract Obligation
Contract is one of the sources of obligations. Obligation is the legal tie or relation itself that
exist after a contract has been entered into.

There can be no contract if there is no obligation. Obligation may exist without a contract.

Elements of Contract
1. Essential – those without which there can be no contract.
a. Consent
b. Object or Subject Matter
c. Cause or Consideration
2. Natural – those derived from the nature of the contract and ordinarily accompany the same.
3. Accidental – those which exist only when the parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract.

Classifications of contract

1. According to name or designation

a. Nominate – the contract is given a particular or special name.

Example
Sale, Partnership, Agency, and Deposit
 b. Innominate – also called contratos innominados, those contract not given any special
name.

Innominate contracts shall be regulated by the stipulations of the parties, by the

provisions of Titles I and II of this Book, by the rules governing the most analogous
nominate contracts, and by the customs of the place. (Art. 1307)

The impossibility of anticipating all forms of agreement on one hand, and the
progress of man's sociological and economic relationships on the other, justify this
provision.

A contract will not, therefore, be considered invalid for failure to conform strictly to
the standard contracts outlined in the Civil Code. It is sufficient that it has all the
elements of a valid contract.

Kinds of innominate contract

1) do ut des (I give that you may give);

2) do ut facias ( I give that you may do;
3) facto ut des (I do that you may give);
4) facto ut facias (I do that you may do).

Do ut des is, however, no longer an innominate contract It has already been given a
name of its own, i.e., barter or exchange.

Rules governing innominate contracts

1) The agreement of the parties;

2) The provisions of the Civil Code on obligations and contracts;
3) The rules governing the most analogous contracts
4) The customs of the place.

2. According to perfection

a. Consensual – Perfect by mere consent.

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)

As a general rule, contracts are perfected by mere consent of the parties regarding tn
subject matter and the cause of the contract. They are obligatory in whatever form
they may have been entered into, provided all the essential requisites for their sheir
validity are present. Almost all contracts are Consensual as to its perfection.

Example: Sale
 b. Real – Perfected by delivery

Real contracts, such as deposit, pledge and Commodatum, are not perfected until the
delivery of the object of the obligation. ( Art. 1316.)

The exceptions are the so-called real contracts which are perfected not merely by
consent but by the delivery, actual or constructive, of the object of the obligation.
These contracts have for their purpose restitution because they contemplate the
return by a party of what has been received from another.

3. According to cause
a. Onerous – where there is an interchange of equivalent valuable considerations.

b. Remuneratory or remunerative – one where one prestation is given for a benefit or

service that had been rendered.

c. Gratuitous – this is Free, thus one party receives no equivalent prestation except a
feeling that one has been generous or liberal.

4. According to person obliged

a. Unilateral – where only one of the parties has an obligations.
b. Bilateral – both parties are required to render reciprocal prestation.

Characteristics of Contracts

1. Relativity (ART 1311)

Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent. (Art. 1311)

Contracts take effect only between the parties, their assigns (i.e., transferees), and heirs. This
means that only the parties, their assigns and heirs can have rights and obligations under the
contract.

Exceptions:
a. Stipulation pour atrui - stipulation in favor of a third person.

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (Art. 1311)

Requisites:
i. the stipulation must be a part, not the whole of the contract;
ii. the contracting parties must have clearly and deliberately conferred a favor
upon a third person, not a mere incidental benefit or interest;
 iii. the third person must have communicated his acceptance to the obligor
before its revocation;
iv. the favorable stipulation should not be conditioned or compensated by any
kind of obligation whatever; and
v. neither of the contracting parties bears the legal representative or authorization of
the third person.

b. When a third person induces a party to violate contract

Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. (Art. 1314.)

Requisites:
i. Existence of a valid contract;
ii. knowledge of contract by third person; and
iii. interference by third person without legal justification or excuse.

c. Third persons who come into possession of the object of the contract creating real
rights

d. Contracts entered into in fraud of creditors

2. Obligatory Force and Consensuality (ART 1315)

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)

3. Mutuality (ART 1308)

The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. (Art. 1308)

The contract must bind both parties; its validity or compliance must not be left to the will of
one of them.

The contract cannot have any stipulation authorizing one of the contracting parties: (a) to
determine whether or not the contract shall be valid, or (b) to determine whether or not the
contract shall be fulfilled.

Determination of performance by a third person

The determination of the performance may be left to a third person, whose decision shall
not be binding until it has been made known to both contracting parties. (Art. 1309)

The determination of its performance may be left to a third person. In such case, the
obligation does not depend upon a potestative condition. The decision, however, shall
bind the parties only after it has been made known to both of them.

4. Autonomy (ART 1306)

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. (Art. 1306)

The parties are free to stipulate anything they deem convenient provided that they are not
contrary to law, morals, good customs, public order and public policy.

Limitations on contractual stipulations

a) Contract must not be contrary to law

In its specific sense, law has been defined as "a rule of conduct, just, obligatory,
promulgated by legitimate authority, and of common observance and benefit."

A contract cannot be given effect if it is contrary to law because law is superior

to a contract. Acts executed against the provisions of mandatory or prohibitory
laws are void, except when the law itself authorizes their validity. The
contracting parties must respect the law which is deemed to be an integral part
of every contract.

b) Contract must not be contrary to morals.

Morals deal with norms of good and right conduct evolved in a community. These
norms may differ at different times and places and with each group of people.

Example
A contract whereby X promised to live as the common-law wife of Y without
the benefit of marriage in consideration of P100,000 is immoral and, therefore,
void.

c) Contract must not be contrary to good customs.

Customs consist of habits and practices which through long usage have been
followed and enforced by society or some part of it as binding rules of conduct. It
has the force of law when recognized and enforced by law.

Example
X entered into a contract whereby X binds himself to slap his father. This
contract is void because it is against the good custom of showing respect to our
parents.

d) Contract must not be contrary to public order.

Public order refers principally to public safety although it has been considered to
mean also the public weal.

Example
 A stipulation in a contract of lease whereby the landlord can use force to eject
the tenant in case of failure of the latter to pay the rent agreed upon is void as
being against public order.

e) Contract must not be contrary to public policy.

Public policy is broader than public order, as the former may refer not only to
public safety but also to considerations which are moved by the common good.

Example
X stole the car of Y. Later, they entered into a contract whereby Y would not
prosecute X in consideration of P50,000.

It is to the interest of society that crimes be punished. The agreement between

X and Y is, therefore, contrary to public policy because it seeks to prevent or
stifle the prosecution of X for theft.
Stages in the life of a contract

1. Preparation or negotiation - This includes all the steps taken by the parties leading to the
perfection of the Contract. At this stage, the parties have not yet arrived at any definite
agreement;

2. Perfection or birth - This is when the parties have come to a definite agreement or meeting
of the minds regarding the subject matter and cause of the contract.

3. Consummation or termination - This is when the parties have performed their respective
obligations and the contract may be said to have been fully accomplished or executed,
resulting in the extinguishment or termination thereof. A contract may also be terminated
after its perfection, not by performance, but by mutual agreement of the parties.