ANDRES BONIFACIO COLLEGE

SCHOOL OF ENGINEERING
College Park, Dipolog City

CONTRACTS

I. DEFINITION OF 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.

 Another definition of contract ascribed to Sanchez Roman is as follows: It is a

juridical convention manifested in legal from, by virtue of which two or more
persons bind themselves in favor of another or others or reciprocally, to the
fulfilment of the prestation to give, to do or not to do.

II. STAGES OF CONTRACTS

The Supreme Court observed that contracts undergo three stages:

(1) Negotiation. – This covers the period from the time the prospective
contracting parties indicate interest in the contract to the time the contract is
concluded or perfected.

(2) Perfection. – This takes place upon the concurrence of the essential
elements of the contract.

(3) Consummation. – This begins when the parties perform their respective
undertakings under the contract culminating in the extinguishment of the same
contract.

III. KINDS OF CONTRACTS.

A) As to how it is perfected:

(a) Consensual
(b) Formal, and
(c) Real.

B) As to whether or not there is defect:

(a) Valid
(b) Voidable
(c) Unenforceable
(d) Rescissible, and
(e) Void.

C) As to the degree of independence or dependence:

(a) Principal
(b) Accessory, and
(c) Preparatory

D) As to whether or not obligations are fulfilled:

(a) Executor, and

(b) Executed.

E) As to whether or not a name is given by law:

(a) Nominate, and
(b) Innominate.
F) As to the nature of consideration:

(a) Gratuitous
(b) Onerous, and
(c) Remuneratory.

IV. Definitions:
a) Principal. – This contract may exist alone even without the presence of any other
contract.

Example: Contract of Sale.

b) Accessory. – This contract cannot exist without the presence or existence of another
contract.

Example: Mortgage which cannot exist alone. There must be another contract like a
loan to be secured by the mortgage.

c) Preparatory. – This contract is entered into so that other contracts can be entered
into or in anticipation of another contract.

Example: Agency to sell. This is in anticipation of the contract of sale that may be
entered into.

d) Executed. – The obligations are fulfilled upon entering into the contract.

e) Executory. – The obligation will be performed after the contract is entered into.

f) Nominate. – A name is given under the law.

Example: Loan, Sale, Agency.

g) Innominate. – No name is given by law.

Innominate Contracts
(Art. 1307). The different kinds of Innominate Contracts are as follows:

(1) Do ut des (I give so that you may give). Example: Goods will be given in exchange
for goods.

(2) Do ut facias (I give so that you may do). Example: Goods will be delivered in
exchange for services that will be performed by the other party.

(3) Facio ut facias (I will do so that you may do). Example: Services will be performed in
exchange for the performance of another service by the other.

(4) Facio ut des (I will do so that you may give). Example: Services will be performed so
that the other may give certain goods.

Rules that Apply to Innominate Contracts:

(1) First: The agreement or stipulation between the parties.

(2) Second: The provisions of the New Civil Code on Obligations and Contracts

(3) Third: Provisions on nominate contracts that may be applied by analogy.

(4) Fourth: Customs of the place.

V. BASIC CHARACTERISTICS OF CONTRACTS.

(1) Autonomy, (2) Mutuality, (3) Relativity, and (4) Obligatoriness.

Obligatoriness:

The contract is (1) the law between the parties, and (2) must be complied with in good
faith. The contract itself governs the relationship of the parties and they are required to
perform the acts required in the contract and to follow the terms and conditions stated
therein. The following rules logically flow from such rule:

(1) One party cannot unilaterally change the provisions of the contract without the
consent of the other.

(2) The parties cannot refuse to comply with the obligations stated in the contract.

(3) Any party can file a case in court if the other party will fail to perform his obligation.

(4) The court where the case was filed by a party to the contract cannot change the
provisions of the contract it can interpret the contract but it cannot replace what was
agreed upon by the parties.

Autonomy of Contracts

(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.

a) Even the courts cannot make a contract for the parties. Neither abstract justice
nor rule of liberal constructions justifies the creation of contract for the parties which
they did not make themselves or the imposition upon one party to a contract of an
obligation not assumed.

b) Limitations. The parties must not agree on stipulations that are contrary to:

(1) Law,

(2) Morals,

(3) Good Customs,

(4) Public Order, or

(5) Public Policy.

c) The contract should not be contrary to law. However, the law referred to here are
mandatory and prohibitory laws. Autonomy does not mean that the law will be
disregarded. The provisions of positive law which regulate contracts are deemed written
therein and shall limit and govern the relationship between the parties. The Constitution
is the paramount, fundamental and supreme law and is therefore written in every statue
and contract.

d) Moral and Good Customs. – This refers t standards of right and wrong and decency
acknowledged by the society. According to the Code Commission, morals and good
customs overlap each other but sometimes they do not.

e) Public Order. – What is being considered is the public weal, peace, safety and
health of the community.

f) Public Policy. – a contract is against public policy if it has tendency to injure the
public, is against public good, or contravenes some established interests of society, or
is inconsistent with sound policy and good morals or tends clearly to undermine the
security of individual rights. Examples: (1) Contracts that exempt those guilty of malice
from liability, (2) An agreement not to report the commission of crimes.
Mutuality and Obligatoriness of Contracts

(Arts. 1308 to 1310). Consistent with obligatory nature and the principle of mutuality of
contracts: (1) Contracts binds all parties; and (2) The validity and compliance of
contracts cannot be left to the will of one of the parties. Thus, one of the parties cannot
claim that the contract is binding on him and not to the other. One party cannot change
his mind and withdraw from the contract without the consent of the other.

a) Manresa believes that Art. 1308 is based firstly on the principle that obligations
arising from contracts have the force of law between the parties and secondly, that
there must be mutuality between the parties based on their essential equality. Because
of their essential equality, it is repugnant to have one party be bound by the contract
leaving the other party to be free therefrom.

b) Will of Party or Third Person. The basic rules are as follows:

(1) If compliance of the contract is left to the will of only one of the parties, the contract
is void. Example: An agreement that Mr. A will deliver a sack of rice to Mr. B if Mr. A
wants to deliver is void.

(2) If compliance of the contract is left to the will of third person, the contract is valid.

c) If the compliance is left to the will of a third party, it is necessary that: (1) the decision
of the third party must be made known to both parties, and (2) the decision of the third
person must not be inequitable.

Relativity of Contracts.

Relativity of contracts means that contracts take effect only between (1) the parties, (2)
assigns (the persons to whom the contract or rights and obligations are transferred),
and (3) heirs (persons who will inherit in case of death of the parties). Contracts will not
generally take effect as to third persons who are not members of any of the three
groups.

a) The contract will not take effect between the assigns and heirs if the contract is
not transmissible because of: (1) nature of the contract, (2) stipulation, or (3) by
provision of law. This includes cases when the acts stipulated to be performed require
the exercise of special knowledge, genius, skills, taste, ability, experience, judgment,
discretion, integrity, or other personal qualifications and therefore the obligation is
personal in nature and is terminated upon the death of the obligor. For example: The
contract whereby a famous painter will make a painting cannot be transferred if the
intention is that only the famous painter will perform the act to be done.

b) Exceptions to Relativity. It is a fundamental axiom in the law of contracts that a

person who is not a party to the agreement should not be affected thereby. Third
persons will be affected by the contract in the following cases:

(1) If there is a stipulation in favor of third persons (pour autrui);

(2) If there is a law that extends benefits under the contract to third person.

(3) If the contract is intended to defraud the creditor (In this case rescission under Arts.
1177 and 1381 are available to third persons who are defrauded);

(4) If the third person files subrogatory action or recissory action;

(5) Where real rights are created in the contract (Example: A real estate mortgage that
is registered with the Register of Deeds is binding even on third person.); and

(6) Negotiorum gestio.

c) Stipulation in Favor of Third Persons: Requisites. The second paragraph of Art.
1311 restates the rule on contracts pour autrui – stipulation in favor of third person. The
following requisites must concur before these rules can be made to apply and before
the stipulation can be considered binding:

(1) The contract contains a stipulation in favor of a third person;

(2) The stipulation in favor of third person must be part not the whole of the contract;

(3) The contracting parties clearly and deliberately conferred a favor upon a third person
and not merely incidental benefit or interest;

(4) The favourable stipulation must not be compensated by any obligation;

(5) The third person must communicate his acceptance to the obligor before its
revocation;

(6) The contracting parties are not legal representatives or duly authorized by the third
person to enter into the contract that gives the latter benefit.

EXAMPLES:

1) Mr. X, the owner of a passenger jeepney entered into a contract with Y Insurance
Corporation whereby the insurer agreed to pay all damages that may result to the
vehicle of Mr. X in any accident. The insurance contract also provides that the insurer
will pay any damage resulting to any passenger in an accident the vehicle of Mr. X.

2) XYC Credit Card Corporation entered into an agreement with X Department Store
whereby the store agreed to honor the credit card of XYC that may be presented by a
customer in case the customer wants to purchase goods on credit.

VI. INTERFERENCE WITH CONTRACTS.

Article 1314 embodies a tort called interference with contracts under which a party to
the contract may sue a third person for damages if the said third person causes the
other party to violate the provisions of the contract.

17.04.01. Requisites. The requisites of the liability for the tort of interference with
contracts are as follows:

(1) The existence of a valid contract;

(2) The third person must be aware of the existence of the contract; and

(3) The interference of the third person must be without legal justification or excuse.

a) Example: Mr. A own a bar and restaurant and he hired Mr. X as a singer for a period
of one year. When Mr. B, the owner of another bar, learned that Mr. X is very good, he
induced Mr. X to terminate the contract without any reason and to enter a contract with
him (Mr. B.).

VII. PERFECTION OF CONTRACTS

(Arts. 1315 and 1316). Perfection signifies the birth of a contract, that is, when all
essential elements of a contract concur. As to how contracts are perfected, they may be
classified into: (1) consensual contracts, (2) real contracts, or (3) formal contracts.

(1) Consensual contracts – perfected by mere concept or upon the meeting of minds
upon the object and consideration of the contract. Example: Contract of Sale.
(2) Real contracts – perfected only upon delivery. Example: Loan, deposit, pledge or
commodatum.

(3) Formal (or solemn) contracts – perfected only upon execution or preparation of
certain documents or other formalities. Examples: (1) Donation of real property which
must be in public instrument, (2) Agency to sell real property which must be in writing.

a) The parties to the contract may personally enter into the contract or may ask
somebody else to represent them. In addition, the court may also, in certain cases,
appoint a person who may represent a party to the contract as in the case of
appointment of guardians. The contract is unenforceable if a person enters a contract
without authority of the supposed principal. The contract is not unenforceable if the
supposed principal ratified it. Examples: (1) Mr. X sold the watch of Mr. B to Mr. Y
without the authority of Mr. Y Later, Mr. Y signed a special power of attorney authoring
Mr. X to sell his watch; (2) In the first example, there is implied ratification if, after
learning about the unauthorized sale, Mr. Y accepted from Mr. X, the proceeds of the
sale paid by Mr. B.

VIII. ESSENTIAL REQUISITES OF CONTRACTS.

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

a) Additional Elements. For Real contracts, delivery is also an essential element. On

the other hand, formal contracts additionally require certain formalities to be valid and
binding.

b) There are at least two parties to a contract because there can be no meeting of
minds if only one person is involved. However, two parties may be presented by one
agent.

IX. KINDS OF REQUISITES.

There are three kinds of requisites: (1) essential elements, (2) natural elements, and (3)
accidental elements.

a) Essential elements are those enumerated under Art. 1318. There is no contract
unless the essential elements concur.

b) Natural elements are those that accompany the contract based on their nature.
Natural elements are presumed by law to exist. Example: Implied warranty in a contract
of sale.

c) Accidental elements are those that exist only because of the agreement of the
parties.

Prepared by:
HENRY MARK T. CASOCOT
Instructor