CONTRACTS FINALS ACJUCO 1
PART 3-4: CONTRACTS
RELATIVITY/PRIVITY
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.
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.
Relativity of Contracts. — It is a general
principle of the civil law that a contract can only
bind the parties who had entered into it or their
successors who have assumed their
personality or their juridical position, and that,
as a consequence, such contract can neither
favor nor prejudice a third person (in
conformity with the axiom res inter alios acta
aliis neque nocet prodest).
Persons bound by contract. —General rule:
contracts can take effect only between the
parties, their assigns and heirs. Thus, it has
been held that even though the contract may
have been executed ostensibly in the name of
another person or entity, it shall produce effect
only insofar as the real contracting party is
concerned, provided, of course, that such fact
was known to the other party.
Exceptions. — According to the first
paragraph of Art. 1311 the rule is not
applicable if the rights and obligations arising
from the contract are not transmissible:
1) By their nature, as when the special or
personal qualification of the obligor
constitutes one of the principal motives
for the establishment of the contract; or
2) By stipulation of the parties, as when
the contract expressly provides that the
obligor shall perform an act by himself
and not through another; or
3) By provision of law, as in the case of
those arising from a contract of
partnership or of agency
Effect of contract on third persons. — Since
a contract can take effect only between the
contracting parties, as well as their assigns
and heirs, it follows, as a general rule, that it
cannot produce any effect whatsoever as far
as third persons are concerned.
Consequently, he who is not a party to a
contract, or an assignee thereunder, has no
legal capacity to challenge its validity, hence,
even if it is admitted that a contract is voidable,
nevertheless, its voidable character cannot be
asserted by one who is not a party to the
transaction or his representative.
EXCEPTION: ART 1311 par 2
Stipulations in favor of third persons. —
According to this exception, 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.
Manresa says that this exception corresponds
almost always to the juridical conception of a
gift or donation, it being necessary in such
case to apply the rules relating to donations in
so far as the form of acceptance is concerned.
This is true where the stipulation is for the
sole benefit of the third person. But where,
for instance, a transfer of property is coupled
with the purchaser’s promise to pay a debt
owing from the seller to a third person, it can
scarcely be said that the stipulation is in favor
of a third person.
Stipulation pour autrui – stipulation in a
contract, clearly and deliberately conferred by
the contracting parties as a favor upon a third
person, who must have accepted it before it
could be revoked.

Florentino vs. Encarnacion: It was defined
as a stipulation in favor of a third person
conferring a clear and deliberate favor upon
him, and which stipulation is merely a part of a
contract entered into by the parties, neither of
whom acted as agent of the third person, and
such third person may demand its fulfillment
provided that he communicates his
acceptance to the obligor before it could be
revoked.
Requisites:
1) That there must be a stipulation in favor
of a third person;
2) The stipulation must be a part, not the
whole of the contract;
3) The contracting parties must have
clearly and deliberately conferred a
favor upon a third person, not a mere
incidental benefit or interest;
4) The third person must have
communicated his acceptance to the
obligor before its revocation; and
5) Neither of the contracting parties bears
the legal representative or authorization
of the third party.
Test of beneficial stipulation – is to rely upon
the intention of the parties as disclosed by their
contract. If a third person claims an
enforceable interest in the contract, that
question must be settled by determining
whether the contracting parties desired to
tender him such an interest.
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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.
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Art. 1316. Real contracts, such as deposit,
pledge and commodatum, are not perfected
until the delivery of the object of the
obligation.
Perfection of Contracts. — The perfection of
a contract refers to that moment in the life of a
contract when there is finally a concurrence of
the wills of the contracting parties with respect
to the object and the cause of the contract.
In the words of Manresa, “it signifies the birth
or appearance of the contract as an obligatory
tie, resulting from the concurrence of the wills
of the contracting parties.’’
General rule: The perfection of a contract is
produced by mere consent.
Exception: There are, however, certain
contracts, such as deposit, pledge and
commodatum, which cannot be perfected until
after the delivery of the object by one
contracting party to the other.
The contracts referred to in the
aforementioned articles are actually
consensual contracts.
Art. 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
in whose behalf it has been executed, before
it is revoked by the other contracting party.
General Rule: no person may enter into a
contract in the name another
Exception: Unless he has been duly
authorized by the contracting part or unless he
has by law a right to represent him.
If a person, therefore, enters into a contract
with another in the name of another person,
although he has no authority or legal
representation, or even if he has such
authority or representation, if he has acted

beyond the scope of his powers, the contract
is unenforceable.
The term ‘unenforceable’ cannot be sued upon
or enforced, unless they are ratified. As
regards the degree of defectiveness, an
unenforceable contract occupies an
intermediate ground between a voidable and
void contract.
Although the contract is unenforceable, it is,
however, susceptible of either express or
implied ratification by the person in whose
behalf it has been executed before it is
revoked by the other contracting party.
Art. 1318. There is no contract unless the
following requisites concur:
1) Consent of the contracting parties;
2) Object certain which is the subject
matter of the contract;
3) Cause of the obligation which is
established
Section 1. — Consent
Art. 1319. Consent is manifested by the
meeting of the offer and the acceptance upon
the thing and the cause which are to
constitute the contract. The offer must be
certain and the acceptance absolute. A
qualified acceptance constitutes a counter-
offer.
Acceptance made by letter or telegram does
not bind the offerer except from the time it
came to his knowledge. The contract, in such
a case, is presumed to have been entered
into in the place where the offer was made.
Concept of Consent - In its derivative sense,
the word “consent” (cum sentire) merely
means the agreement of wills.
Consequently, as applied to contracts, it may
be defined as the concurrence of the wills of
the contracting parties with respect to the
object and the cause which shall constitute the
contract.
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Requisites of Consent.
(1) Consent must be manifested by the
concurrence of the offer and the
acceptance (Arts. 1319-1326);
(2) The contracting parties must possess
the necessary legal capacity (Arts.
1327-1327); and,
(3) The consent must be intelligent, free,
spontaneous, and real (Arts. 1330-
1346). The first is expressly stated in
the Code, the second and the third are
implied.
When Contracts are Perfected.
General Rule: perfected from the moment
that there is a manifestation of the
concurrence between the offer and the
acceptance with respect to the object and
the cause which shall constitute the
contract. (Art. 1319, par. 1, New Civil
Code.)
If the acceptance is made by letter or
telegram
General Rule: Art. 1319, par. 2, of the New
Civil Code, the contract is perfected from
the moment that the offeror has knowledge
of such acceptance.
Exception: Art. 54 of the Code of
Commerce, the contract is perfected from
the moment an answer is made accepting
the offer. As it is modified (Art 2270 of
NCC), it can now be applied only to purely
commercial contracts, such as joint
accounts, maritime contracts, etc.
Manifestation of Consent. — Before
there is consent, it is essential that it must
be manifested by the meeting of the offer
and the acceptance upon the thing and the
cause which are to constitute the contract.
Once there is such a manifestation of the
concurrence of the wills of the contracting
parties, the period or stage of
negotiation is terminated. The contract, if
consensual, is finally perfected.

According to Castan, consent presupposes
the following elements or conditions:
(1) Plurality of subjects; (2) legal capacity; (3)
intelligent and voluntary; (4) express or implied
manifestation; and (5) concurrence of the
internal and the declared will.
Four different theories which have been
advanced in order to pin-point the exact
moment of perfection.
They are:
(1) The manifestation theory (manifestación)
— According to this theory, the contract is
perfected from the moment the acceptance is
declared or made. This is the theory which is
followed by the Code of Commerce.
(2) The expedition theory (expedición) —
According to this theory, the contract is
perfected from the moment the offeree
transmits the notification of acceptance to the
offeror, as when the letter is placed in the
mailbox. This is the theory which is followed by
the majority of American courts.
(3) The reception theory (recepción) —
According to this theory, the contract is
perfected from the moment that the notification
of acceptance is in the hand of the offeror in
such a manner that he can, under ordinary
conditions, procure the knowledge of its
contents, even if he is not able actually to
acquire such knowledge by reason of
absence, sickness or some other cause. This
is the theory which is followed by the German
Civil Code.
(4) The cognition theory (cognición) —
According to this theory, the contract is
perfected from the moment the acceptance
comes to the knowledge of the offeror. This is
the theory which is followed by the Spanish
Civil Code.
OFFER
Offer is a proposal made by one party (offerer)
to another to enter into a contract. It is more
than an expression of desire or hope. It is
really a promise to act or to refrain from acting
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on condition that the terms thereof are
accepted by the person (offeree) to whom it is
made.
MUST BE CERTAIN OR DEFINITE.
The offer must be certain or definite and clear,
and not vague or speculative so that the
liability (or the rights) of the parties may be
exactly fixed because it is necessary that the
acceptance be identical with the offer to create
a contract without any further act on the part of
the offeror.
Example: “I am willing to sell my car for
P210,000.00 cash or for 12 monthly
installments of P20,000.00.’’ The offer is
certain; here, the determination of the manner
of payment is left to the offeree.
ROSENSTOCK VS BURKE: Where the
defendant wrote a letter to the plaintiff stating
that he is “in a position” and is “willing to
entertain” the purchase of a yacht belonging to
the plaintiff under certain terms, and the
plaintiff accepted all of such terms, it was held
that there was no perfected contract, since
the word “entertain” applied to an act does not
mean the resolution to perform said act, but
simply a position to deliberate whether to
perform or not to perform said act;
consequently, the letter of the defendant
cannot be interpreted as a definite offer to
purchase the yacht but simply to deliberate
whether or not he would purchase the yacht.
Art. 1321. The person making the offer may
fix the time, place, and manner of
acceptance, all of which must be complied
with.
MATTERS THAT MAY BE FIXED BY THE
OFFERER.
The person making the offer may prescribe the
time, the place, and the manner of
acceptance, all of which must be complied with
otherwise the offer shall be deemed
terminated.
An offer is terminated when it is rejected by the
offeree.

An acceptance departing from the terms of the
offer constitutes a counter-offer. Take note
that a counteroffer has the effect of
extinguishing the offer. It, in effect, constitutes
a new offer which the original offerer may
accept or reject.
MALBAROSA VS CA: It has been held that
when the offeror has not fixed a period for the
offeree to accept the offer, and the offer is
made to a person present, the acceptance
must be made immediately; hence, the offeree
cannot complain that he was not given a
reasonable period within which to accept or
reject the offer of the offeror.
Art. 1322. An offer made through an agent is
accepted from the time acceptance is
communicated to him.
COMMUNICATION OF ACCEPTANCE TO
AGENT.
For a contract to arise, the acceptance must
be made known to the offeror.
General Rule: By legal fiction, an agent is
considered an extension of the personality of
his principal. (Art. 1910, par. 1.)
If duly authorized, the act of the agent is, in
law, the act of the principal.
Article 1322 applies only if the offer is made
through the agent and the acceptance is
communicated through him. Hence, there
would be no meeting of the minds if the
principal himself made the offer and the
acceptance is communicated to the agent
unless, of course, the latter is authorized to
receive the acceptance.
Art. 1323. An offer becomes ineffective upon
the death, civil interdiction, insanity, or
insolvency of either party before acceptance
is conveyed.
Effect of Death, Civil Interdiction, Insanity,
or Insolvency. - INEFFECTIVE
Under Article 1323, even if the offer is not
withdrawn, its acceptance will not produce a
meeting of the minds in case the offer has
already become ineffective because of the
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death, civil interdiction, insanity, or insolvency
of either party before the conveyance of the
acceptance to the offeror.
The word “conveyed” refers to that moment
when the offeror has knowledge of the
acceptance by the offeree.
ART. 1325. Unless it appears otherwise,
business advertisements of things for sale
are not definite offers, but mere invitations to
make an offer.
General Rule: Business advertisements of
things for sale are not definite offers,
acceptance of which will perfect a contract but
are merely invitations to the reader to make
an offer or only as proposals.
Exception: However, if the advertisement is
complete in all the particulars necessary in a
contract, it may amount to a definite offer
which, if accepted, will produce a perfected
contract.
EXAMPLE: “For sale: 1,000 square meters lot
at Green Plains Village, Quezon City located
at the corner of Geronimo and Magallanes
Streets for P5,000,000.00 cash. — Tel. No.
817-12-84.” This is a definite offer.
ART. 1326. Advertisements for bidders are
simply invitations to make proposals, and the
advertiser is not bound to accept the highest
or lowest bidder, unless the contrary appears.
1) Acceptance of bid. — In an
advertisement for bidders, the
advertiser is not the one making the
offer. In reality, the bidder is the one
making the offer which the advertiser is
free to accept or reject.
2) Compliance with terms of bid. — (a)
One who submits a bid not only
signifies assent to the terms and
conditions of a proposal, but impliedly
binds himself to them, if and when the
bid is considered.

ACCEPTANCE
Art. 1320. An acceptance may be express or
implied.
Acceptance is the manifestation by the
offeree of his assent to the terms of the offer.
Without acceptance, there can be no meeting
of the minds between the parties. (Art. 1305.)
A mere offer produces no obligation.
1) MUST BE ABSOLUTE, unconditional
or unqualified, that is, it must be
identical in all respects with that of the
offer so as to produce the consent or
meeting of the minds necessary to
perfect a contract.
Forms/Kinds:
1) Express acceptance may be oral or
written.
2) Implied acceptance – one that is
inferred from act or conduct.
3) Qualified acceptance – as when it is
subject to a condition (e.g., sale price
shall be made by installment), or
modifies or varies the terms of the offer,
it merely constitutes a counter-offer or
a new proposal which, in law, is
considered a rejection of the original
offer and an attempt by the parties to
enter into a contract on a different
basis. A qualified acceptance must, in
turn, be accepted absolutely in order
that there will be a contract.
Implied Acceptance:
(1) Acceptance by promise. — An offer of a
promise or an act may be accepted by giving
a promise, as where a person offers to deliver
to another a certain thing if the latter will pay a
certain amount, and the other accepts by
promising to so pay according to the
conditions of the offer. The promise need not
be by words but may be inferred from the acts
of the parties, as by one or both acting on it as
though it were a completed agreement.
(2) Acceptance by act. — An acceptance of
an offer may be by act, as where an offer is
made that the offerer will do something else, if
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the offeree shall do a particular thing. In such
a case, performance is the only thing needful
to complete the agreement and to create a
binding promise.
ART. 1324. When the offerer has allowed the
offeree a certain period to accept, the offer
may be withdrawn at any time before
acceptance by communicating such
withdrawal, except when the option is
founded upon a consideration, as something
paid or promised.
Period for Acceptance: Options. — It is
clear from the above article that there is a very
great difference between the effect of an
option which is without a consideration and the
effect of one which is founded upon a
consideration as far as the right of the offeror
to withdraw his offer or proposal is concerned.
If the option is without any consideration, the
offeror may withdraw his offer by
communicating such withdrawal to the
offeree at anytime before acceptance; if it is
founded upon a consideration, the offeror
cannot withdraw his offer.
(1) Option contract is a preparatory contract
giving a person for a consideration a certain
period and under specified conditions within
which to accept the offer of the offerer. It is
separate and distinct from the projected main
agreement or principal contract itself (subject
matter of the option) which the parties may
enter into upon the consummation of the
option or which will be perfected upon the
acceptance of the offer.
Option may also refer to the privilege itself
given to the offeree to accept an offer within a
certain period.
It includes digitally signed documents and any
print-out or output, readable by sight or other
means, which accurately reflects the
electronic data message or electronic
document.
(2) Option period is the period given within
which the offeree must decide whether or not
to enter into the principal contract.

(3) Option money is the money paid or
promised to be paid as a distinct consideration
for an option contract. It is not to be confused
with earnest money which is actually a partial
payment of the purchase price and is
considered as proof of the perfection of the
contract.
Thus, earnest money presupposes that there
is already a sale (or some other contract) with
the buyer bound to pay the balance.
The would-be buyer who gives option money
is not required to buy. The consideration need
not be monetary; it may consist of other things
or undertaking but they must be of value, in
view of the onerous nature of the contract of
option.
Termination/Withdrawal of offer where
period for acceptance stipulated.
When the offerer gives to the offeree a certain
period within which to accept the offer, the
general rule is that the offer may be
withdrawn as a matter of right at any time
before acceptance. The exception is when
the option is founded upon a separate
consideration, as something paid or promised
in which case, a contract of option is deemed
perfected, and the offer may not be withdrawn
before the lapse of the option period;
otherwise, it would be a breach of the contract
of option and render the optioner-offerer liable
for damages.
In other words, the option binds the offerer not
to enter into the principal contract with any
other person during the period fixed, and,
within the period, to enter into such contract
with the offeree, if the latter should decide to
use the option. However, the optionee-offeree
may not sue for specific performance on the
proposed contract before it has reached its
own stage of perfection.
The right to withdraw, however, must not be
exercised whimsically or arbitrarily; otherwise,
it could give rise to a damage claim under
Article 19 of the Civil Code. Only when the
option is exercised, may the contract be
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perfected. In any case, the offerer may not
withdraw his offer after it has been accepted.
Articles 1324 and 1479 compared.
Article 1324 lays down the general rule
regarding offer and acceptance. It has been
interpreted as modified by the provision of
Article 14795 of the Civil Code which applies
specifically to “a promise to buy or sell.”
(1) An unconditional mutual promise to buy
and sell as long as the object is made
determinate and the price is fixed can be
obligatory on the parties, and compliance
therewith may accordingly be exacted.
A unilateral promise to buy or sell a
determinate thing not supported by any
consideration distinct from the price for which
that thing was intended to be sold by or to the
promisee (offeree) does not bind the
promissor (offerer), even if accepted, and may
be withdrawn at any time.
A promise to buy and sell a determinate thing
for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell
a determinate thing for a price certain is
binding upon the promissor if the promise is
supported by a consideration distinct from the
price.
In other words, in order that the promissor will
be bound, his offer (unilateral promise which
specifies the thing to be sold and the price to
be paid) must be accepted and it must be
founded upon a consideration distinct and
separate from the price. This is what may
properly be termed a perfected contract of
option which is an independent contract by
itself. The optionee (holder of option) has the
right, but not the obligation, to buy or sell.
Once the option is exercised timely,
i.e., the offer is accepted before a breach of
the option, a bilateral promise to buy and sell
ensues and both parties are then reciprocally
bound to comply with their respective
undertakings.

In other words, a perfected contract of option
does not result in the perfection or
consummation of the sale. Only when the
option is exercised may a sale be perfected.
LEGAL CAPACITY OF THE PARTIES
Art. 1327. The following cannot give consent
to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-
mutes who do not know how to write.
Legal Capacity of Contracting Parties. —
The capacity of the contracting parties is, in
effect, an essential element of a contract, or to
be more exact, it is an indispensable requisite
of consent.
Incapacitated persons – Because the law
incapacitates them to give their consent to a
contract, the only way by which any one of
those enumerated above can enter into a
contract is to act through a parent or guardian.
Defective contract – If this requirement is not
complied with.
Voidable – If only one of the contracting
parties is incapacitated to give his consent.
Unenforceable – If both of them are
incapacitated to give their consent.
1) Unemancipated minors. — Under No.
1 of Art. 1327, unemancipated minors
cannot give their consent to a contract.
However, if a minor is emancipated by
marriage or by voluntary concession,
according to Art. 399 of the Civil Code, he shall
have the power to administer his property, but
he cannot borrow money or alienate or
encumber real property without the consent of
his father or mother, or guardian.
Five exceptional cases where a contract
entered into by an unemancipated minor may
have all of the effects of a valid contract.
1) when it is entered into by a minor who
misrepresents his age;
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2) when it involves the sale and delivery
of necessaries to the minor;
3) when it involves a natural obligation
and such obligation is fulfilled
voluntarily by the minor, provided that
such minor is between eighteen and
twenty-one years of age;
4) when it is a marriage settlement or
donation propter nuptias, provided that
the minor is between twenty and
twenty-one years of age, if male, or
between eighteen and twenty-one
years of age, if female;
5) when it is a life, health or accident
insurance taken on the life of the minor,
provided that the minor is eighteen
years old or more and the beneficiary
appointed is the minor’s estate, or the
minor’s father, mother, husband wife,
child, brother, or sister.
2) Insane or demented persons. — Under
No. 2 of Art. 1327, insane or demented
persons cannot give their consent to a
contract. It is, of course, well established
that “insane or demented persons” include
any person, who, at the time of the
celebration of the contract, cannot
understand the nature and consequences
of the act or transaction by reason of any
cause affecting his intellectual or sensitive
faculties, whether permanent or temporary.
3) Deaf-mutes. — With regard to deaf-mutes
who does not know how to write is either
voidable or unenforceable, depending
upon whether one or both of the parties are
incapacitated.
This can be inferred from No. 2 of Art. 1327
which states that deaf mutes who do not know
how to write cannot give their consent to a
contract.
Other incapacitated persons. — Besides the
persons enumerated in Art. 1327, there are
others who are also incapacitated to give their
consent to a contract, such as married women
of age in cases specifi ed by law, persons

suffering from civil interdiction, and
incompetents who are under guardianship.
Reason for disqualification.
The reason behind Article 1327 is that those
persons mentioned can easily be the victims
of fraud as they are not capable of
understanding or knowing the nature or import
of their actions. They can enter into a contract
only through a parent or guardian.
Art. 1328. Contracts entered into during a
lucid interval are valid. Contracts agreed to in
a state of drunkenness or during a hypnotic
spell are voidable.
1) Contracts entered into during a lucid
interval.
Lucid interval is a temporary period of sanity.
A contract entered into by an insane or
demented person during a lucid interval is
valid.
It must be shown, however, that there is a full
return of the mind to sanity as to enable him
to understand the contract he is entering into.
A contract entered into by a person under
guardianship for insanity will be upheld,
provided, it is shown that at the time of
entering into said contract, he was not
insane, or that his mental defect, if mentally
deranged, did not interfere with or affect his
capacity to appreciate the meaning and
significance of the transaction entered into by
him.
As to such person, his insanity must be
presumed to continue at the moment of
contracting, but such presumption is prima
facie and may be rebutted.
2) Effect of drunkenness and hypnotic
spell.
Drunkenness and hypnotic spell impair the
capacity of a person to give intelligent consent.
These conditions are equivalent to temporary
insanity. Hence, the law considers a contract
entered into in a state of drunkenness or
during a hypnotic spell voidable, and it is not
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required that such state was procured by the
circumvention of the other party.
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