II.

CONTRATCS: GENERALPROVISIONS

A. ARTICLE 1305: 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.

B. Elements of a Contract:

essential elements Without them a contract cannot exist. NOTE: In some contracts, form is also essential; still in
others, delivery is likewise essential.

Examples: consent, subject matter, cause or consideration

(b) natural elements those found in certain contracts, and presumed to exist, unless the contrary has been
stipulated. They can be excluded by the contracting parties if they so desire.

Example: warranty against eviction and against hidden defects in the contract of sale

(c) accidental elements They are called accidental, because they may be present or absent, depending upon
whether or not the parties have agreed upon them.

Examples: the stipulation to pay credit; the stipulation to pay interest; the designation of the particular place for
delivery or payment.

C. Characteristics of a contract:

1. Freedom of autonomy of contracts- parties may establish such stipulations, terms, conditions, clauses
provided thy are not contrary to law, morals, good customs, public order, and public policy.
2. Obligatoriness of contracts- Obligations arising from contracts have the force of law between the contracting
parties and should be complied in good faith.
3. Mutuality of contracts- Contracts must bind both contracting parties. Validity or compliance cannot be left to
the will of one of them.
4. Consensuality of contracts- Contracts are perfected by mere consent as a general rule and from that moment
the parties are bound by the fulfillment as well as all the consequences
5. Relativity of contratcs- contracts take effect only between the parties, their assign and heirs except for not
transmissible rights.

a) Obligatory force

ARTICLE 1308: The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them (Principle of mutuality of contracts). REASON: It is considered repugnant to have one party
bound by a contract while leaving the other free from complying therewith.

A contract containing a condition which makes its fulfillment or extinguishment dependent exclusively
upon the uncontrolled will of one of the contracting parties is void.

Consequences of MUTUALITY:

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.
When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation is void if the condition is SUSPENSIVE. If RESOLUTORY, the obligation is valid. Hence, it is all
right for the contract to expressly give to one party the right to CANCEL the same. This is because, when
the contract is thus cancelled, the agreement is really being FULFILLED.

b) Mutuality

ARTICLE 1309: 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.

ARTICLE 1310: The determination shall not be obligatory if it is evidently inequitable. In such case, the
courts shall decide what is equitable under the circumstances.
 Example: In a contract of sale, the fixing of the price and the delivery date can be left to a third person. But
the decision binds the parties only after it is made known to both.
Evidently Inequitable Determination Is Not Binding:

(a) What is equitable is a question of fact, to be ascertained from the attendant circumstances.
(b) The court is called upon to decide what is equitable.

ARTICLE 1473. The fixing of the price can never be left to the discretion of one of the contracting
parties. However, if the price fixed by one of the parties is accepted by the other, the sale is perfected.

e) Relativity

ARTICLE 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.

Principle of RELATIVITY that is, contracts are generally effective only between the PARTIES, their ASSIGNS,
and their HEIRS. REASON: Res inter alios acta aliis neque nocet prodest. (The act, declaration, or omission
of another, cannot affect another, except as otherwise provided by law or agreement.)

Example: If I promised to buy Mr. Xs land, and Mr. X promised to sell to me the same, my friend Y
cannot insist that the contract be performed.

Question: May compulsory heirs question the deceaseds transactions?

1) if they were voidable YES.

2) if they were illicit or illegal NO, because even the deceased had no right to question them herself,
and had no right to recover the properties illicitly conveyed. HOWEVER, an action to RESCIND the
contract can prosper, insofar as the legitimes of the compulsory heirs are prejudiced.

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. Cases when a contract are effective only between the parties

(b) Where there is a STIPULATION POUR AUTRUI (a stipulation in favor of a third party). Stipulation pour
autrui is a stipulation in a contract clearly and deliberately conferring a favor upon a third person who
has a right to demand its fulfillment, provided, he communicates his acceptance to the obligor before its
revocation by the obligee or the original parties.

(c) Where a third person induces another to violate his contract.

-As a general rule, a third person has no rights and obligations under a contract to which he is a
stranger.

(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

Example: D is indebted to C in the amount of P10,000.00. D and C are the parties to the contract. If
C dies, D must pay the heirs of C. If C assigns his credit to X, then D is liable to pay X.

If D dies and Y is the heir, then Y assumes the obligation of D to C. Y is bound by the contract
entered into by D, his predecessor-in-interest, in view of the privity of interest between him and D.
The death of a party does not excuse non-performance of a contract which involves a property right
or interest in the subject matter of the contract. The right and the obligation thereunder pass to the
personal representative(s) of the deceased. However, Y is not liable beyond the value of the
property he inherits from D, the decedent.

ARTICLE 1317: No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him. A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is
 ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by
the other contracting party.

General rule: A person is not bound by the contract of another of which he has no knowledge or to which he
has not given his consent.

Requisite for a Person to Contract in the Name of Another:

(a) he must be duly authorized (expressly or impliedly)

(b) OR he must have by law a right to represent him (like the guardian, or the administrator)
(c) OR the contract must be subsequently RATIFIED. Unauthorized contracts can be cured only by
ratification. The ratification must be clear and express so as not to admit of any doubt or vagueness. Its
effects retroact to the moment of the celebration of the contract. NOTE: There can be no more
ratification if the contract has previously been REVOKED by the other contracting party.

In order that a person may be bound by the contract of another, there are two requisites:

(1) The person entering into the contract must be duly authorized, expressly or impliedly, by the person
in whose name he contracts or he must have, by law, a right to represent him (like a guardian or an
administrator); and
(2) He must act within his power.

D. Parties Q: May a person enter enter into a contract with himself? Yes in certain cases known as auto--contract.

1. Auto-contracts

There is only one party involved but in reality said party merely acts in the name and for the account of 2 distinct
contracting parties. This may take place:
a) When a person in his capacity as representative of another contracts with himself; OR
b) When as a representative of 2 different persons, he brings about a contract between his principals by
contracting with himself, unless there is a conflict of interest or when the law expressly prohibits it.

2. Freedom to contract

ARTICLE 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.

The Constitution prohibits the passage of any law impairing the obligation contracts. (Art. III, Sec. 10 thereof.)
However, the constitutional prohibition against the impairment of contractual obligations refers only to legally
valid contracts, not to void or inexistent ones. In other words, an individual does not have an absolute right to
enter into any kind of contract. But the binding force of a contract must be recognized as far as it is legally possible
to do so.

Limitations on contractual stipulations:

a) Law- contract entered into must be in accordance with, and not repugnant to, an applicable statute. A
contract cannot be given effect if it is contrary to law because law is superior to a contract. A contract
intended to circumvent and violate the law is void ab initio.

Note: Where a contract is entered into by the parties on the basis of the law then obtaining,
the repeal or amendment of said law will not affect the terms of the contract, nor impair the rights
of the parties hereunder.But all contractual obligations are subject to the possible exercise of the
police power of the state.

b) Morals- morals or good customs must refer to those not expressed in legal provisions. Morals deal with
right and wrong and with human conscience.
c) 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.
d) Public order refers principally to public safety although it has been considered to mean also the public
weal.
e) By public policy is intended that principle of law which holds that no subject or citizen can lawfully do
that which has a tendency to be injurious to the public or against the public good.
 Special Disqualification:

i. Article 87 (family code)

Every donation or grant of gratuitous advantage, direct or indirect, between spouses during marriage
shall be void except moderate gifts on the occasion of any family rejoicing. Prohibition shall also apply
to persons living together as husband and wife w/o a valid marriage.

ii. Article 1490 and 1491, CC

1. Article 1490. The husband and wife cannot sell property to each other, except:
a) When a separation of property was agreed upon in the marriage settlements; OR
b) When there has been a judicial separation or property under Article 191

2. Article 1491. The following persons cannot acquire by purchase, even at a public or judicial auction,
either in person or through the mediation of another:
a) The guardian, the property of the person or persons who may under his guardianship
b) Agents, property whose administration or sale may have been entrusted to them, unless the
consent of the principal has been given
c) Executors and administrators, the property of the estate under administration
d) Public officers and employees, the property of the state or any of subdivision thereof, GOCC,
or institution, the administration of which has been entrusted to them. (Also apply to judges and
government experts who in any manner take part in the sale)
e) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts and other
officers connected with the administration of justice , the property and rights in litigation or levied
upon execution before the court. (Also apply to lawyers which they may take part in any litigation
of property and rights)
f) Any others specifically disqualified by law

3. Article 1492. Prohibitions are applicable to sales in legal redemption, compromise and renunciation.

iii. Article 1782, CC

Persons who are prohibited from giving each other any donation or advantage cannot enter into
universal partnership.

E. Classification of contracts:

(a) According to subject matter

i. contracts involving things (like SALE)

ii. contracts involving rights or credits (provided these are transmissible)
iii. contracts involving services [like agency, lease of services, a contract of common carriage]

(b) According to their name or designation

i. nominate (here the contract is given a particular or special name; examples: commodatum,
partnership, sale, agency, deposit)
ii. innominate (also called contratos innominados) those not given any special name

ARTICLE 1307: 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.

Classification of contracts according to its name or designation:

(1) Nominate contract or that which has a specific name or designation in law (e.g., commodatum,
lease, sale)
(2) Innominate contract or that which has no specific name or designation in law. REASON: Based
on the well-known principle that no one shall unjustly enrich himself at the expense of another.
A contract will not, therefore, be considered invalid for failure to conform strictly to the standard
contracts outlined in the Civil Code provided it has all the elements of a valid contract.
 Kinds of innominate contract:

(1) do ut des (I give that you may give); -no longer an innominate contract. Its name now is barter
or exchange
(2) do ut facias (I give that you may do);
(3) facio ut des (I do that you may give);
(4) facio ut facias (I do that you may do).

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; and
(4) the customs of the place.

(c) According to perfection or formation

i. Consensual
ii. Real
iii. Solemn or formal

ARTICLE 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.
(CONSENSUALITY OF CONTRACTS)

Classification of contracts according to perfection:

(1) Consensual contract or that which is perfected by mere consent (e.g., sale, lease);
(2) Real contract or that which is perfected, in addition to the above, by the delivery of the thing
subject matter of the contract (e.g., depositum, pledge, commodatum)
(3) Solemn contract or that which requires compliance with certain formalities prescribed by law
such prescribed form being thereby an essential element thereof

Perfection of Consensual Contracts: Consensual contracts are perfected from the moment there is
agreement (consent) on the subject matter, and the cause or consideration.

ARTICLE 1316: Real contracts, such as deposit, pledge and commodatum, are not perfected until the
delivery of the object of the obligation.

Perfection of Real Contracts: Real contracts require consent, subject matter, cause or consideration, and
DELIVERY.

A contract to make a deposit, to make a pledge, or to make a commodatum is a consensual contract.

After delivery, the contract becomes a real contract.

Example: A agreed to lend B his (As) car on Sept. 8. If on Sept. 8 A refuses to deliver the car, may B sue
him for damages?

ANS.: Yes, because of the consensual contract of to make a commodatum. If A had delivered the car
and B thru negligence damages the car, A can sue him because of the real contract of commodatum.

Note: Commodatum is a loan where the identical object must be returned (Example: Loan of a car)

(d) According to its relation to other contracts

i. Preparatory - those which have for their object the establishment of a condition in law which is
necessary as a preliminary step towards the celebration of another subsequent contract. Examples:
Agency, partnership.
ii. Principal - which can subsist independently from other contracts. Example: sale
iii. Accessory - which can exists only as a consequence or in relation with another prior contract.
Example: pledge, mortgage
 (e) According to form

i. Common or informal - require no particular form. Example: loan

ii. Special or formal - require some particular form. Example: donations

(f) According to purpose

i. Transfer or ownership. Example: sale

ii. Conveyance of use. Example: commodatum
iii. Rendition of services. Example: agency

(g) According to the nature of of the vinculum which they produce

i. Unilateral - only one of the parties

Ii. Bilateral - reciprocal obligations

(h) According to cause or equivalence of the value of prestations

i. onerous where there is an interchange of equivalent valuable consideration

Ii. gratuitous or lucrative this is FREE, thus one party receives no equivalent prestation
iii. remunerative (one where one prestation is given for a benefit or service that had been rendered
PREVIOUSLY)

(i) According to the risk of fulfillment

i. commutative (here the parties contemplate a real fulfillment; therefore, equivalent values are
given; examples: sale, lease)
ii. aleatory (here the fulfillment is dependent upon chance; thus the values vary because of the risk
or chance; example: an insurance contract)
F. Stages

3 Stages in the life of a contract:

(1) Preparation or negotiation. The parties have not yet arrived at any definite agreement. They are yet
undergoing the preliminary steps towards the formation of a
valid contract. Either party may stop the negotiation or withdraw an offer made;
(2) Perfection or birth. This takes place when the parties have come to a definite agreement or meeting of the
minds regarding the terms, that is, the subject matter and cause of the (consensual) contract, i.e., upon
concurrence of the essential elements of the
contract; and
(4) Consummation or termination. This takes place when the parties have fulfilled or performed the
irrespective obligations or undertakings under the contract and the contract may be said to have been fully
accomplished or executed, resulting in the extinguishment thereof.

From the moment the parties come to an agreement on a definite subject matter and valid consideration,
they are bound not only: (1) to the fulfillment of what has been expressly stipulated but also, (2) to all the
consequences which according to their nature, may be in keeping with good faith, usage, and law.

G. As distinguished from a perfected promise and an imperfect promise (policitacion)

1. Perfected promise merely tends to insure and pave the way for the celebration of a future contract.
2. Imperfect promise (policitacin) is a mere unaccepted offer.

H. With respect to third persons

1. Stipulation in favor of third persons

Article 1311. (2nd para) 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.
 Stipulation pour autrui is a stipulation in a contract clearly and deliberately conferring a favor upon a third
person who has a right to demand its fulfillment, provided, he communicates his acceptance to the obligor before
its revocation by the obligee or the original parties.

-Those where the stipulation is intended for the sole benefit of such person.
-Those where an obligation is due from the promisee to the third person which the former seeks to
discharge by means of such stipulation.

Requisites of stipulation pour autrui:

(1) The contracting parties by their stipulation must have clearly and deliberately conferred a favor
upon a third person;
(2) The third person must have communicated his acceptance to the obligor before its revocation
by the obligee or the original parties;
(3) The stipulation in favor of the third person should be a part and not the whole of the contract
or the contract itself;
(4) The favorable stipulation should not be conditioned or compensated by any kind of obligation
whatever; and
(5) Neither of the contracting parties bears the legal representation or authorization of the third
party for otherwise the rules on agency will apply.

2. Possession of the object of contract by third persons

ARTICLE 1312: In contracts creating real rights, third persons who come into possession of the object
of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land
Registration Laws. An exception to the general rule that a contract binds only the parties.

A real right is binding against the whole world and attaches to the property over which it is exercised
wherever it goes.

Example: If A should purchase an apartment house from the owner but there is a lease thereon, A must
respect the lease, if the same is registered in the Registry of Property, or if A has actual knowledge of the
existence and duration of the lease.

3. Creditors of the contracting parties

ARTICLE 1313: Creditors are protected in cases of contracts intended to defraud them. Another
qualification to the rule that contracts take effect only between the parties.

Example: If A gratuitously gives B a parcel of land, and A has no other property or cash left to satisfy his
creditors, said creditors may ask for the rescission of the contract, to the extent that they have been
prejudiced.

4. Interference by third persons

ARTICLE 1314: Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. The tort or wrongful conduct is known as interference with
contractual relations. It presupposes that the contract interfered with is valid and the third person has
knowledge of the existence of the contract or must have known of it after a reasonable inquiry.

Example: S, a movie actress, has a one-year contract with XYZ Studio. If F, a friend of S induces her, without
any justifiable cause, to break the contract, then XYZ Studio can sue F for damages.

Except:

(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.