PALABAY, MICHAEL RENZ A.

CONTRACTS
ARTICLES 1305-1317

ART. 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.

Number of parties to a contract- at least two persons or parties, because it is impossible for one to
contract with himself.

 A single person may create a contract by himself where he represents distinct interests subject
to specific prohibitions of law against the presence of adverse or conflicting interests.

TERMINATION OR CANCELLATION OF PRE-EXISTING CONTRACT

(1) Termination by stipulation of the parties.

 The method of terminating a contract is primarily determined by the stipulation of
the parties.
(2) Termination, by stipulation, at option of one party.
 Such stipulation, when fairly entered into, will be enforced if not contrary to equity
and good conscience.
(3) Termination by one party with conformity of the other.
 One party opts to cancel an existing agreement and the other party expresses its
conformity thereto, in legal effect, the parties enter into another contract for the
dissolution of the previous one, and they are bound by their contract.

TERMINATION AND RESCISSION OF A CONTRACT

TERMINATION
Congruent with an action for unlawful detainer. It
entails enforcement of its terms prior to the
declaration of its cancellation.
RESCISSION
To declare a contract void in its inception and to
put an end to it as though it never were or to
abrogate it from the beginning and restore the
parties to their relative positions which they would
have occupied had no contract ever been made

CONTRACT AND OBLIGATION

CONTRACT OBLIGATION
One of the sources of obligations The legal tie or relations itself that exists after a
contract has been entered into.

 There can be no contract if there is no obligation. But an obligation may exist without a contract.

CONTRACT AND AGREEMENT

CONTRACT AGRREMENT
Agreements enforceable through legal Agreements which cannot be enforced by action in
proceedings the courts of justice

CHARACTERISTICS OF CONTRACTS

(1) Freedom or autonomy

The 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, and
public policy (Art. 1306.);
(2) Obligatoriness of contracts

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith (Arts. 1159, 1315.);

(3) Mutuality of contracts

Contracts must bind both and not one of the contracting parties; their validity or compliance
cannot be left to the will of one of them (Art. 1308.);

(4) Consensuality of contracts

Contracts are perfected, as a general rule, by mere consent and from that moment the parties
are bound not only by the fulfilment 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.)

(5) Relativity of contract

Contracts take effect only between the parties, their assigns and heirs, except in cases where
the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation, or by provision of law. (Art. 1311.)

CLASSIFICATIONS OF CONTRACT

According to:

(1)Name or designation

(a) Nominate - the law gives the contract a special designation or particular name.

(b) Innominate - the contract has no special name.

(2) Perfection

(a) Consensual - perfected by mere consent

(b) Real - consent and delivery is required

(3) Cause

(a) Onerous - there is an exchange of correlative prestations

(b) Remuneratory or remunerative - the prestation is based on services or benefits already received
(c) Gratuitous - no correlative prestation isreceived by a party

(4) Form

(a) Informal or common - in any form as long as all the requisites or essential elements for its validity are
present
(b) Formal or solemn - in a form required by the law

(5) Obligatory Force

(a)Valid - stipulations, clauses, terms and conditions that are not contrary to law, morals, good customs,
public order, or public policy
(b)Rescissible - with legal validity, but may be rescinded or revoked in the cases established by law
(c)Voidable - with legal validity but may be invalidated by a court action on the grounds of mistake,
violence, intimidation, undue influence, fraud, or incapacity of one of the parties to give consent
(d)Unenforceable - with legal validity but cannot be enforce through court action by reason of defects,
unless it is ratified according to law
(e)Void or inexistent - with no validity at all because of certain defects, such as illegality; considered
inexistent from the very beginning and cannot be ratified according to law

(6 ) Person Obliged

(a) Unilateral - only one party is bound bythe prestation

(b) Bilateral - where bothparties are bound by reciprocalprestations

(7) Dependence to another contract

(a) Preparatory - when it is entered into as a means to an end;

(b) Accessory - when it is dependent upon another contract it secures or guarantees for its existence and
validity; and
(c) Principal - when it does not depend for its existence and validity upon another contract but is an
indispensable condition for the existence of an accessory contract.

(8) Risks

(a) Commutative - when the undertaking of one party is considered the equivalent of that of the other.
(b) Aleatory - when it depends upon an uncertain event or contingency both as to benefit t or loss.

(9) Liability

(a)Unilateral - when it creates an obligation on the part of only one of the parties;
(b)Bilateral - when it gives rise to reciprocal obligations for both parties.
 The kind of contract entered into is not determined, however, by the name or title
given to it by the parties but by its nature or character as determined by principles
of law

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.

Freedom to contract

The right to enter into contracts is one of the liberties guaranteed to the individual by the
Constitution. It also signifies or implies the right to choose with whom one desires to contract.

Limitations:

1. Law - the contract entered into must be in accordance with, and not repugnant to, an applicable
statute.
2. Police Power - Public welfare is superior to private rights. When there is no law in existence or
when the law is silent, the will of the parties prevails unless their contract contravenes the
limitation of morals, good customs, public order, or public policy.

Contract must not be contrary to the following:

LAW
 A contract cannot be given effect if it is contrary to law because law is superior to a contract.

MORALS
 Morals deal with norms of good and right conduct evolved in a community. Morals or good
customs referred to in Article 1306 must refer to those not expressed in legal provisions.
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.
 It must be proved as a fact, according to the rules of evidence.

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

PUBLIC POLICY
 Public policy refers not only to public safety but also to considerations which are moved by the
common good.

ART. 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.

(1) Nominate contract - has a specific name or designation in law

(2) Innominate contract - has no specific name or designation in law

KINDS OF INNOMINATE CONTRACT

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

(2) facio ut des (I do that you may give); and

(3) facio ut facias (I do that you may do).

 Innominate contracts are based on the well-known principle that “no one shall unjustly enrich
himself at the expense of another”.

RULES GOVERNING INNOMINATE CONTRACTS

(1) Agreement of the parties

(2) Provisions of the Civil Code on obligations and contracts

(3) Rules governing the most analogous contracts

(4) Customs of the place

ART. 1308. THE CONTRACTS MUST BIND BOTH CONTRACTING PARTIES; ITS VALIDITY OR
COMPLIANCE CANNOT BE LEFT TO THE WILL OF ONE OF THEM.

Principle of mutuality of contract

Its purpose is to nullify a contract containing a condition which makes its fulfilment or pre-
termination dependent exclusively upon the uncontrolled will of one of the contracting parties.

Breach of contract - “failure without legal reason to comply with the terms of the contract’’ or the
“failure without legal excuse to perform any promise which forms the whole or part of the contract.”

Fulfilment or extinguishment of contract

A contract containing a condition which makes its fulfilment or extinguishment dependent

exclusively upon the uncontrolled will of one of the contracting parties is void.

Renunciation or violation of contract

No party can renounce or violate the law of the contract unilaterally or without the consent of
the other. Hence, “its validity or compliance cannot be left to the will of one of them.”
Proof of alleged defect in contract

If after a perfect and binding contract has been executed between the parties it occurs to one of
them to allege defect as a reason for annulling it, the alleged defect must be conclusively proved since
the validity and fulfilment of contracts cannot be left to the will of one of the contracting parties.

It is the duty of every contracting party to learn and know the contents of a document before he
signs and delivers it.

Release of obligor from compliance

When the performance of the contract has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may be released therefrom, in whole or in part.

The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.

ART. 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.

ART. 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.

 This article is a qualification to Article 1309.

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 FULFILMENT 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.

Principle of relativity of contracts

A contract can bind only the parties (their heirs or assigns) who had entered into it and cannot
favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge
thereof.

Real parties in interest

Since a contract may be violated only by the parties thereto as against each other, in an action
upon the contract, the real parties in interest, either as plaintiff or as defendant, must be parties to said
contract.

A party who has not taken part in it and for whose benefit it was not expressly made, cannot sue
or be sued for performance or for cancellation thereof unless he can show that he has a real interest
affected thereby

Real Interest - a present substantial interest, as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest.

Exceptions:

Contracts are effective only between the parties when the rights and obligations arising from the
contract are not transmissible:

a) by their nature (like a contract requiring or involving personal qualifications, as painting,

singing, etc.); or
 b) by stipulation (in accordance with the principle of freedom to contract; or
c) by provision of law (as in agency, partnership, and commodatum, when death
extinguishes the legal relationships).
 Paragraphs (a) and (c) are purely personal, which are not transmissible by their nature and by
provision of law.
 The death of a party does not excuse non-performance of a contract which involves a property
right and the rights and obligations thereunder pass to the personal representatives of the
deceased. Similarly, non-performance is not excused by the death of the party when the other
party has a property interest in the subject matter of the contract.

CASES WHEN STRANGERS OR THIRD PERSONS AFFECTED BY A CONTRACT

General Rule: A third person has no rights and obligations under a contract to which he is a stranger.

Exceptions:

(1) Contracts containing a stipulation in favor of a third person (stipulation pour autrui). (Art. 1311, par.
2.).

(2) Contracts creating real rights. (Art. 1312)

(3) Contracts entered into to defraud creditors. (Art. 1313)

(4) Contracts which have been violated at the inducement of the third person. (Art. 1314)

(5) Contracts creating “status”.

(6) Quasi-contract of negotiorum gestio, the owner is bound in a proper case, by contracts entered into
by the “gestor’’ (unauthorized manager). (Art. 2150.)

(7) “Collective contracts” where the majority rules over the minority.

(8) Where the situation contemplated in Article 1729 obtains.

Pour Autrui - stipulation in a contract clearly and deliberately conferring a favor upon a third person
who has a right to demand its fulfi llment, provided, he communicates his acceptance to the obligor
before its revocation by the obligee or the original parties.

2 CLASSES OF STIPULATIONS POUR AUTRUI

1. Donee-beneficiary - stipulation is intended for the sole benefit of such person.

2. Creditor-beneficiary - obligation is due from the promise 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.

(5) Neither of the contracting parties bears the legal representation or authorization of the third party
for otherwise the rules on agency will apply.
Test as to nature of interest of third person in stipulation pour autrui

To constitute a valid stipulation pour autrui, it must be the purpose and intent of the stipulating
parties to benefit the third person, and it is not sufficient that the third person may be incidentally
benefited by the stipulation.

NATURE AND FORM OF ACCEPTANCE OF STIPULATION

1. Must be unconditional
2. May be implied from the demand for the performance of the stipulation.
 A stipulation pour autrui may be accepted any time before it is revoked, unless a definite
period for acceptance has been fixed.

Acceptance of stipulation includes its concurrent obligations

When a third person accepts the benefits of a contract to which he is not a party, he is also
bound to accept the concomitant obligations corresponding thereto.

ART. 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

General Rule: Contract binds only the parties.

Exception: Third persons who come into possession of the object of a contract over which there is a real
right.

Real right - binding against the whole world and attaches to the property over which it is exercised
wherever it goes

ART. 1313. CREDITORS ARE PROTECTED IN CASES OF CONTRACTS INTENDED TO DEFRAUD

THEM

General Rule: Contract binds only the parties.

Exception: The creditor, although he is not a party to the contract, is given the right to impugn the
contracts of his debtor intended to defraud him.

ART. 1314. ANY THIRD PERSON WHO INDUCES ANOTHER TO VIOLATE HIS CONTRACT SHALL BE
LIABLE FOR DAMAGES TO THE OTHER CONTRACTING PARTY

This provision recognizes an instance when a stranger to a contract can be sued for damages for
his unwarranted interference with the contract (tort or wrongful conduct).

ELEMENTS OF TORT INTERFERENCE:

(1) Existence of a valid contract

(2) Knowledge on the part of the third person of the existence of contract

(3) Interference of the third person is without legal justification or excuse

Induce - situations where a person causes another to choose one course of conduct by persuasion or
intimidation

 The interference or inducement gives rise to liabilities for damages because it violates the
property rights of a party in a contract to reap the benefits that should result therefrom.

Injunction - the appropriate remedy to prevent a wrongful interference with contracts by strangers to
such contracts where the legal remedy is insufficient and the resulting injury is irreparable.

 A third person is not liable where sufficient justification for interference or inducement can
be shown.
Malice not necessary

Upon the authorities, it is enough if the wrongdoer, having knowledge of the existence of the
contract relation, in bad faith sets about to break it up. Whether his motive is to benefit himself or
gratify his spite by working mischief to a contracting party is immaterial.

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. 1316. REAL CONTRACTS, SUCH AS DEPOSIT, PLEDGE AND COMMODATUM, ARE NOT
PERFECTED UNTIL THE DELIVERY OF THE OBJECT OF THE OBLIGATION.

CLASSIFICATION OF CONTRACTS ACCORDING TO PERFECTION

(1) Consensual contract - perfected by mere consent (e.g., sale, lease, agency) (Art. 1315.)

(2) Real contract - perfected, in addition to the above, by the delivery of the thing subject matter of the
contract (e.g., depositum, pledge, commodatum) (Art. 1316)

(3) Solemn contract - requires compliance with certain formalities prescribed by law such prescribed
form being thereby an essential element thereof (e.g., donation of real property)

STAGES IN THE LIFE OF A CONTRACT

(1) Preparation or negotiation - includes all the steps taken by the prospective parties from the time
they manifest interest in entering into a contract, leading to the perfection of the contract.

(2) Perfection or birth - 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 (Art. 1319.)

(3) Consummation or termination – the parties have fulfilled or performed their respective obligations
or undertakings under the contract and the contract may be said to have been fully accomplished or
executed, resulting in the extinguishment thereof.

HOW CONTRACTS ARE PERFECTED

(1) Consensual contract

General Rule: contracts are perfected by mere consent of the parties regarding the subject matter and
the cause of the contract. (Arts. 1315, 1319.) They are obligatory in whatever form they may have been
entered into, provided, all the essential requisites for their validity are present.

ESSENTIAL REQUISITES OF CONTRACTS:

1. Consent

2. Object or subject matter

3. Cause or consideration (NCC, Art 1318)

Exceptions:

(2) Real contracts.

Perfected not merely by consent but by the delivery, actual or constructive, of the object of the
obligation (Art. 1316.), as in a pledge, mutuum (simple loan) or commodatum. These contracts have for
their purpose restitution, because they contemplate the return by a party of what has been received
from another or its equivalent

(3) Solemn contracts.

When the law requires that a contract be in some form to be valid (Art. 1356.), this special form
is necessary for its perfection, the prescribed form being thereby an essential requisite of the contract.
EFFECT OF PERFECTION OF THE CONTRACT

It is only after perfection of the contract that the following arise:

1. The obligation of the debtor to perform the prestation and/or to pay for damages.
2. The right of the creditor to compel performance of the obligation and/or claim for damages.

Guide for performance of contract

Execution of a contract is not limited to the signing or concluding of the contract but includes as
well the performance or implementation or accomplishment of all terms and conditions of such
contract.

Article 1315 covers the following:

(1) Scope and limit of contractual obligation. Takes up the question of the scope and limit of the
contractual obligation in regard to its prestation.

(2) Observance of terms and conditions thereof. A judicial or quasi-judicial body cannot impose upon
the parties a judgment different from their real agreement or against the terms and conditions thereof
without running the risk of contravening the principle established in Article 1159 that a contract is the
law between the parties.

(3) Condition imposed on perfection of contract and performance of obligation. Failure to comply with
the former, results in the failure of a contract. Failure to comply with the latter, merely gives the other
party options and/or remedies to protect his interests.

(4) Adjustment of rights of parties by court. In the exercise of its equity jurisdiction, the court may
adjust the rights of parties in accordance with the circumstances obtaining at the time of rendition of
judgment, when these are significantly different from those existing at the time of generation of those
rights.

Pertinent provisions of law deemed incorporated in contracts.

The rights and obligations of the parties to an agreement are not determined solely by the terms
thereof. Any agreement or contract to be enforceable in this jurisdiction is understood to incorporate
therein the pertinent provision or provisions of law specifying the rights and obligations of the parties
under such contract.

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 RATIFI ED, EXPRESSLY OR IMPLIEDLY, BY THE PERSON ON WHOSE BEHALF IT HAS BEEN
EXECUTED, BEFORE IT IS REVOKED BY THE OTHER CONTRACTING PARTY. (1259A)

Unauthorized contracts are unenforceable

As a 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. Hence, a contract entered into in the name of
another by one who has no authority is unenforceable against the former unless it is ratified by him
before it is revoked by the other contracting party.

TWO REQUISITES IN ORDER THAT A PERSON MAY BE BOUND BY THE CONTRACT OF ANOTHER

(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)

(2) He must act within his power. A contract entered into by an agent in excess of his authority is
unenforceable against the principal, but the agent is personally liable to the party with whom he
contracted where such party was not given sufficient notice of the limits of the powers granted by the
principal.