Leet CONTRACTS 4, Contracts defined: sanchez Roman's definition = ifested in legal form, idical convention mani oe another or others, oF FeCiprocal to the fu iment prestation to give, 10.40, oF notto do, Civil Code definition — ‘Ameeting of minds between {WO PerSONS Whereby ong binds himself wth respect tothe other, to give Something orto render some service. (Art. 1308). 2. Elements of Contract A. Essential Elements - without them a contract cannot exist because these are indispensable requirements, 1 Consent 2--Subject 3,_Cause or consideration 8. Natural elements these are found in certain contracts and are presumed to exist, unless excluded by stipulation of the parties. Example: Warranty against eviction and against hidd fen defects in contract of sale. oe Accidental elements — not conside jered the Parties unless stipulated, “sreod by Example: Payment of interest in a contract of loan. iness Law (For CPA Review ae ee OT 4, The stages in the life of a contract. 4, Preparation or conception — this is the taken by the parties leading to the porocten Seine contract, otherwise known as the bargaining pomnt 2, Perfection or birth - the meeting of the subject matter and the causesofthe cess nd 3, Consummation or death or termination — the point of time when the parties have performed their respective obligations and the contract is put to an end. Example: Today, S offered for sale a specific car to B for £x4500,000. Tomorrow, B countered the offer by tol ngs that he will buy the car if S will give it for P800,000. S consented to the proposal (counter) of B. Two days thereafter, S delivered the car and B paid the price of 800,000. Today is the preparation of the contract because this is the bargaining point, that is, when negotiation is in progress. Tomorrow is the perfection, that is, when their minds metas to the offer and the cause of the contract. Two days afters the consummation, that is, when S delivered the object and B paid the price The stages of a cpmtract pf sa‘e are: (1) negotiation, covering the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the consurrence of the essential elements of the sale, which is the meeting of the minds of the parties as to the object of the contract and upon the price, and (3) consummation, which begins when the parties perform their respective undertakings under the contract of sale, culminating in the extinguishment thereof (Spouses Serrano vs. Caquiat, GR. No. 139173, February 28, 2007)203 4, Disting! gC uish an ordinary contract from: 4. Contract of marriage 2. Obligation 3. Pact 4, Stipulation 1. Inan ordinary contract, the parties May be two or mor, persons of the same or diferent Sexes, while jn'® marriage contract itisnecessary that the parties mut be one man and one woman. Ordinary contract mayest terminated by mere agreement of the parties, while in 2 marriage contract, termination is with the Consent gp the state 2. The contracts the cause, while the obligation is the effect. There can be an obligation without a contract but there can be no contract without an obligation.” 3. Apactis an incidental part of a contract which can be separated from the agreement itself. 4. Stipuletion is the dispositive part of a coritract which cannot be separated from the principal agreement. 5. What are the basic principles or characteristics of a contract? 1. /Freedom (or liberty) to stipulate. (Art. 1306) 2 Obligatory force and compliance in good faith. (Arts. / 1159, 1315) 3. Perfection by mere consent. (Art, 1315) 4 Both parties are mutually bound. (Art. 1308) 5. Relativity: binging between th assigns and heirs (ant 1341) Paes only thelr in Business Law (For CPA Reviewee aaate = 209 erent kinds of contracts, "a. According to perfection Consensual — perfe ® Sale and barter °°'°4 bY mere consent, such as b. Real perfected by the del Gontract, such as Pledge, ina aeetpesbiect ofthe g. According to degree of importance a. Principal - can stan alo a eed an Ne, such as sale, barter, b. Accessory— its existence and validity is dependent upon another contract, such as. and guaranty. Pledge, mortgage c. Preparatory — contract is not an end means thru which other contracts maybe tet Example: Contract of Partnership and Contract of Agency, C. According to subject matter a. Contracts involving things, such as sale, barter b. Contracts involving rights or credits, such as usufruct or assignment of credit. c. Contracts involving services, such as agency, lease of services and contract of ¢arriage D. According to name a. Nominate.—with a special name, such as pledge, arter and lease. b._Innominate —without any name. E. According to cause a. Onerous - there is an exchange of consideration such as sale, barter and lease. b. Gratuitous — there is no consideration received in exchange for what has been given, such as donation, remission and commodatum.ysiness Law (For CPA Reviewe on Business feviewees) a Sanita pel _y_samettngis 920 8 benoit example of the prohibition: ©. Remuneratory SP without any legal obligation” ‘Against the law—D agreed to kill x for service performes a a considerati do so. poniprad ‘of P10,000. Should D kill x, D cannot collect pe F. According to nature of obligation Produced o, 10,000 because the agreement is contrary to law. ; igated. number of parties © Immoral agreement ~ promise of m een emecencesiteptton eg | ruttnomdgea imma” arae xeon ive or todo A m, tare eather ao mis acontract ofloan whereby ong ‘candidate fora consideration. 4, Commodat ? Nites delivers to another, eit : of the a not consumable sothat the laiter i , Against public policy — restraint of trade. use the same for 3 a rattous U ata e. Against public order—agreementin a contract oflease This contra’ ) that a lessee can be ejected by the use of fc isa contract of loan whereby one of the lation of the contract of lease. oe ten 2 Mee geivers money of other Consumable Parte Jon tne condition that Some amount of ote: To simplify the meaning of Artie 1206, he the Same Kn ae a eae ans contracting parties can enter into any stipulation provided tne a may be gratuitous OF with a stipulation ae rey Genorore fopay interest. (Art 1933) . Bilateral or ‘sinalagmatico”~ where both parties | — g. lustrative cases on Liberty to Contract: Je obliged to give or to do something, such as sale, parterand lease. G According to risk Commutative - where equivalent values are given No.1. Is the agreement between two candidates in an election that whoever loses in the convention should not run against the winner valid? Why? byboth parties, such as sale, barter and lease. A. No, because political rights are outside the b. Aleatory - where fulfillment of the contract is commerce of man. / ependent upon chance, such as insurance. No. 2. Inthe contract of employment between A and B, the [1 The conceptof “liberty to contract” latter agreed that for a period of five years after the - halll neither Tunnncguais icaeianen aan termination of his employment, he sl n Ya or ami a ee a convenient, provided they are not contrary (o law, mor similar to or in competition with those operated by grod customs, public order, or public policy. This is ‘A, nor enter into the employment of any enterprise rerwise known as the ‘principle of autonomy’. (Art. 1306) in the Philippines, except after obtaining the written permission of A. Is the agreement valid? Reasons. 1 ANo.3. No. 4, ——————Cont —_——— “entaey Jement is void because it is contra, Court repeateg ublic policy. The Supreme ie a cuch prohiston isan undue or unreasongelt restraint of trade because itis permanent in nara, a sok up law at Arellano University. He lef, Universi and enrolled for the last semester of pe fourth year in Abad Santos Law Schor® Subsecuently, he passed the bar examination, During his stay at Arellano University, he wags constant recipient of scholarship grants. Howeye™ he was made to sign a waiver of his right o tranfa: to another schoolunless he refunds tothe University the equivalent of his scholarship grants. Since. taking the bar examinations, he had to secure his transcrig of records from the University. He was required ig make a refund, which he did, but under protest Subsequently, he brought an action to recover the ‘amount which he had paid, Will the action prosper? Yes, because the waiver signed by A is contrary to public policy, therefore void. Scholarship grants are awarded in recognition of ment and not io attract briliant students in school for their propaganda value. (Cui vs. Arellano University, 112 Phil. 135) Inthe contract of sale of a drugstore, it was stipulated that the seller shall not open or have any interest directly or indirectly in any drugstore either in his own name or in the name of another or have Connection with or be employed in any drugstore within four kilometers from the Municipality of San Femando, Pampanga while the said purchaser or his heirs may own or have aright to open a drugstore gr have an interest in any other within the limits of San Femando, Pampanga. Are the limitations or restrictions placed upon the seller valid? Reasons. The agre to in Business Law (For CPA Reviewees) —__213 Yes, because the restriction j A. ited scale. The answer wouboe aieey on seller is forbidden to engage in business within the Philippines, or during his lifetime he cannot engage in a drugstore business, or fo engaye in this kind of business he must obtain the written consent of the buyer, for this is contrary fo public policy considered by the court as restraint of trace, 10.5. The Constitution enjoins the State to “protect the No.9 Fights of workers and promote ther welfare.” “to afford labor full protection.” The State, therefore, has the right and duty to regulate the relations between capital and labor. These relations are not merely contractual but are so impressed with public interest that labor contracts, collective bargaining agreements included, must yield to the common good. Should such contracts contain stipulations that are contrary to public policy, courts would not hesitate to strike down these stipulations (Metrobank vs. Court of Appeals, et. al., GR. No 122899, June 8, 2000) 9, Contract of Adhesion. contract duly executed is the law between the parties, and they are obliged to comply fully and not selectively with its terms. Acontact of adhesion is no exception. A contract of adhesion is just as binding as ordinary contracts. itis true that the Court has, on occasion, struck down such contracts as being assailable when the weaker party is left with no choice by the dominant bargaining party and is thus completely derived of an opportunity to bargain effectively. Nevertheless, contracts of adhesion are not prohibited even as the courts remain carefulin scrutinizing the factual circumstances underlying each case to determine the respective claims of contending parties on their efficacy.10. rat, should there be ambiguities In a cop The rue is that smauities are fo be construed age act agai gene it prepared it If, however, the stipulations inst ot obscure, but are cleat and leave No doubt on gh iteral meaning of its stipula intention ot the parties, the 4 tions Irsct be held controling. (PILTEL vs. Tecson, GR Ne 156966, May 7, 2004) Determination of a contract by third person. Although the performance in a contract cannot be left to the will of one of the parties, the determination of the performance may be leftto a third person. The decision of the third person is not binding untilit has been made known to both contracting parties. Exception to the determination of performance by third person The determination of performance by a third person may be cancelled if itis inequitable. In such a case, the court shall decide what is equitable under the circumstances. Illustrative Case: A leased a certain building to Band C. In the contract of lease, there is a stipulation that B and C can ccontinue occupying the building indefinitely so long as they should faithfully fulfill their obligation of paying the rentals. Inn action or ejectment, can B and C successfully set up the defense that under the contract, they can continue ‘occupying the building so long as they faithful obligation of paying the rentals? Reasons.” No, because the continuance of the contract would epend upon the sole will of B and C, completely depriving the owner of all say on the matter. The law states that ‘the validity and compliance of the contract cannot be left (0 the will of one of them’. (Art. 1308) siness Low (For CPA Reviewseg eee fees) 5 ro 12. 3. the parties bound by the contra as the "principle of relativity”, Contracts take effect only between the assigns and heitS, except in cases where the, “ghts ned bigations arising from the contract are not tancnles Oe pytheirnature, orby stipulation or by provision of law 7a heir is not lable beyond the value of the property ho received from the decedent ict, otherwise known Ifthe contract should contain some stipulation in favor ofa 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 isnotsulficient. The contracting parties musthave clearly and deliberately conferred a favor upon athird person. (Art. 1311) Note: The second paragraph is called stipulation “Pour Autrul What are some of the exceptions to the “Rule of relativity”? a. Obligations arising from contract which are not transmissible by their nature, stipulation or provision of law’. (Art. 1311). b. Stipulation Pour Autrui. (Art. 1311) c. When a third person induces another to violate contract. (Art: 1314) d. The right of a creditor to sue on a contract entered into by his debtor. (Art. 1313) Illustrative Case: L leased his property to X. X subleased part of the premises to SL in violation of the condition of the contract of lease between L and X.L therefore goes to court to rescind the contract.14. 220g .ct to the rescission on the Question: Can SL obje’ that fthe contractis rescinded, the sub-lease contract woul be affected? , id by the sub Answer: No, because L is not boun Jeas, contract between X and SL inasmuch as he did no, roung participate therein. ined. Stipulation “Pour Autrui” ext is stipulation in favor of a third person made by the contracting parties with the clear and deliberate intention ‘of conferring a favor upon such third person and whose. fulfillment the latter may demand by communicating his acceptance tothe obligor before its revocation. (Art. 1311) Requisites: 1. Stipulation isin favor of a third person. 2. The parties clearly and deliberately conferred the favor tothe third person 3. The stipulation must be a part of the contract 4. The acceptance of the third person must be communicated to the partigs of the contract. Example No. 1: D owes C P10,000 with 14% interest payable on June 15. The 14% interest must be given toa third person, X. Take note that the parties in the contract is D and C but it carries a stipulation in tavor of “X". In this case, X must communicate his acceptance to D and C, otherwise, he (X) will not be entitled to the benefit of the ‘contract. This is a stipulation “Pour Autrui’ Example No. 2: Insurance of motor vehicles as publ ies, taken by their owners or operators in favor of the Passengers. The contract here is between the owner- operator and the insurers but the f ascengers at ues but the favored person are the 17 J Low (For GPA Reviewen gn pysness Low (For CPA Revewes) 27 w contracts are perfected, irconsensual by mere consent Example: contract of sale treal-by delivery Example: contract of pledge and mortgage 3. If oe or solemn ~ special form is required for its perfec! Example: Donation of a real property, it must be in a public instrument to be valid. Ho’ 1 perfection of Real contracts ifthe contract is real, the perfection is the same as if, the contract is consensual, In addition, there must be delivery of the object. If the object of the contract is not delivered, the contract is not perfected. The contracts referred to in this article are deposit, pledge, and ‘commodatum. ‘Take note that if the agreement is a contract “ts make deposit, or to make a pledge” the contrc7*is consensual The perfection is upon the meeting of minds. After delivery, the contract becomes a real contract Example: Today, June 1, D borrowed money from © P10,000 with a promise that D will give his diamond ring toC as a security on June 15. Before June 15 even if C gave D the P10,000, the contract is not yet perfectec because in a contract of pledge, the perfection is only upon the delivery of the object pledged Concept of Consent Consent is the manifestation of the meeting of the offer and the acceptance upon the thing and the cause of the contract. \218 18. 138. 20. Contac ! Requisites of Consent ven by two or more parties. 2. Pattee aie capactated to contract 3. Consent must be intelligently or freely given, 4 Express manifestation of the will of the contract, parties. 0 Nature of acceptance Acceptance ofthe offer must be absolute. If qualifieg ; consttves only @ counteroffer and the contract ig ect perfected uniess the counteroffer s counter accepteg, ®t short, a counter-offer extinguishes the original offer. Q - What are the different kinds of innomi contracts and how are they regulated? Do ut des - | give that you give Do ut facias ~ | give give that you do. Facio ut des —| do that you give. Facio ut Facias -| do that you do. These contracts shall be regulated by the stipulation ofthe parties, by the general provisions or principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the custom ofthe place lustrative Cases: 1. § offered 1,000 ballpens to B for P5.00 each. B answered by letter that he is willing to buy if S could deliver 1,500. Is the contract perfected? No, because the acceptance is qualif acounterofer (an 1319) aioe. It constitutes 2. On January 5, 2018, S wrote a letter to B offeri 2018, offering te tim the sale of a spectic building, On January 6, 2018, at 7-O0AM. B sent aletter of acceptance which was Sheed by Sat 11:00AM. thatday Butat 10:00AM. had already sent B a letter of wi \drawal of the offer inate RONe ysiness Law (For CPA Reviewees Tees tg hich was received by B at 5: perfected? "YB at 5:00 PM. Was the contract No, because there was mn acceptance. }0 more offer at the time of 3, Swites B offering to sell a and at the same time recei to buy the said land for P41 contract? None, because neither party knew the offer of at he time the letter was vaiten. For the continete oe perfected itis necessary that one party should acceot the offer made by the other. This is otherwise knero, as “crossing of letters” piece of land for P10,000 'ves from Ba letter offerin, 10,000. Is there a perfected 21. Perfection of contract: If sent by letter or telegram Acceptance made by letter or telegram does not bind the offeror except from the time it com: 1€S to his knowledge. An offer becomes ineffective upon the death, civ interdiction, insanity, or insolvency of either party before acceptance is conveyed Example 1: S offered 100 bal Ipens to B for P10.00 each. B answered through a letter that he is wi ling to buy if Scan deliver 150. Is the contract perfected? No, because B’s acceptance is qualified, therefore itconstitutes a counter-offer. Example 2: On December 1, S offered for sale a specific car to B for P100,000 by letter. B received the letter and consented to buy on December 5. He wrote the letter of acceptance and dropped it at the mailbox on December 10. While the letter is in the course of mail, B died, but the letter was received by X on December 15, is the contract perfected? No. The death of either party before the acceptance is conveyed shall render the offer and acceptance ineffective,eer cee : aes bonnets ‘every at ee Pre in Teaetety 4, rcceptance of offer made thru an agent sion ther cognition eon. and Manifestatg, 9: |f the offer is made thru an ay jent, the cor aa theory as app 2g to perfection of contracts, perfected or othe sates ote ‘hoe : theory te contractis perfected from thy rneipal under the prinepns ts conveyed to ee ances declared or made eye ; the principal under the principle in agency that the reread known tothe offeror. In short, ifthe offer if personality of 133 yent's an extension ofthat of tho rosea ettero telegram, fom the moment the offeres steerer he notification of acceptance to the offergt* ve Case: anes no letter i placed in the mailbox, the contrac} a acrher nein pres erage Ona P appointed A as his agent to sell a specific car for was fener an OS. Pec) ceceted on he same See ene men he theory the contract is perfected fr. fatter (B) fe date. B Sends his letter of B.inGogten nan recone sPaete min ‘goceptance to Aon June 15 and was received by Aon the {ho otfero In short there no perfected contract untic, SthopalonJune20. nN soepianoe of Bios Pec Tome to the knowledge of the person making the ne aa oer ‘offer. This is the theory adopted in the Philippines. Question: When is the contract perfected? C. In Manifestation theory, the contract is perfected from. the moment the acceptance is declared or made. Th is the theory followed by the Code of Commerce. (Art 54, Code of Commerce) Answer: June _15, because this is the date when the ‘acceptance of B came to the knowledge of A. The principle in agency is that the personality of the agent is an extension of that of the principal. 23. Revocation of Acceptance 26, Effectof death, civil interdiction, insolvency or insanity The asceptanos by te offeree may be revoked before of either party before acceptance is conveyed. reaching the knowledge of the offeror. Ifitis revoked. the contracts not perfected if the notice of revocation reaches, ‘The offer and the acceptance becomes ineffective. the offeror before the letter of acceptance is received. (4 llustrative Case: X applied for a life annuity of One Tolentino Civil Code 418) pesos payable annually. He paid One million and was issued a provisional receipt. The application was forwarded 24. Inunilateral promise, specific acceptance is not required. to the office of the company in New York. However, the According to authorities in Civil Law, if an obligor notice of acceptance was received at the residence of X Bromises @ reward for the realization of an act or one day after his death. achieverrent of @ particular result, said obligor is obliged - ¢ One million Goalie uaanectopetctcourmges | © ~ Gani legal hrs stilrecoverth = ‘specific acceptance is re uired because tl veers the public Thisisan exception tthe rue A ~ Yes, because there was no perfected contract of at if the offer is it wing reasons: Binding Tonite 'S Ret accepted the same is nat ife annuity for the following Code 7) 1. Death will render the offer ineffective.Sentra, 222 nes effective only: + by communication Beco” ° pewne orig come to the knowledge of the person, the te ne offer (Ennquez vs. Sun Life Assurancg Co., 41 Phil. 269) ife insurance for O, tion: Supposing this #S 2 7 eae vesos and X paid P50.000 as premium for ong year. Can X's heirs recover the 50,000 premium pai Srwill they collect the One million Po! icy? Answer: X's heirs can recover on P50,000 because there was no insurance ly the premium paid of perfected contract of 27. Rule in case of an offer to sel 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. (Art, 1324) Option Contract - one giving a person a certain period within which to acoept the offer of the offerer. Option Money ~ money paid or promised to be paid in consideration for the option, Question No. 1: S offered to sell his house and lot for 10,000 to B, who was interested in buying the same. In his letter to B, S stated that he was giving a period of 10 Gays beginning January 2 within which to accept the offer n January §, S went to B withdra : Can $ validly do so? wing the offer to sel Yes, because this isa mere offer withdrawable at any time. Question No. 2:1n the gave S P1,000 as option 10-day periog? Preceding question, suppose B money, can S withdraw within the _ i} 2B. psusiess Low (For CPA Reviewses 223 wo, because the offer is founded on a consideration Msiict from the price ofthe sale, the seller cannot withdraw aati after the lapse of the 10-day period question No. 3:In the preceding illustration, suppose B Snsented tothe offer, how much will he pay S. P'10,000 or 9,000? p10,000 because the P1,000 is not apart ofthe purchase rice. The amount is a consideration of the 10-day option jyriod independent from the purchase price pl pe strative Case: X, the owner of a house and lot in Quezon City, gave an option to A to purchase said property for P100,000 within ninety days from May 1, 5018. A gave X one (P1.00) peso as option money. Before the expiration of the ninety-day period, Awent to X to exercise his option and to pay the purchase price but X refused because somebody wanted to buy his property for P150,000 and because there was no sufficient consideration for the option. A sued X to compel him to accept payment and execute a deed of sale in his favor. Decide the case. X can be compelled to accept the purchase price of 100,000 and to execute the Deed of Sale. Its true that this is only an offer to sell, but when A gave X a consideration of P1.00 as option money, the latter could no longer withdraw the offer until after the 90-day period. When therefore A tendered the purchase price to X, in effect he is exercising his option, the contract is perfected. Many authors in Civil Law maintained that the insufficiency of the consideration paid by virtue of the option is imelevant, because this is not the price of the sale.[ lV Contracts Jurisprudence {As used in the law of sales x, an option, according to Limson "is a continuing Sra Contract by so crown stipulates with another that the latter sha a the nght to buy the propoerty at ts price within a certain, or under, orin compliance with, certain terms and conditions, or which ves othe owner of the property eo ngntto sell or demand a sale” By juridical nature, any Spton contract creates 2 mere entitlement, right, Or privilege or tne part of the offeree who retains the discretionary prerogative whether to exercise itor not, Considering that von is unilateral in essence, the offeror in an otpion topurchase creates a burden upon himself not to dispose of he subject matter ofthe option within the specified time Set forth in the contract for the purpose of obtaining ‘exclusivity of partes in a future contract conditioned upon, the acceptance ofthe off: Itis plain, then, that a valid option, contract is not a mere expression of a willingness to enter into a future contract, rather, itis already a committed offer, definte in its terms, that effectivity induces the offeree- optionee to reasonably believe that the chance or preference to generale such forthcoming covenant stems from him. (Capala et.al. vs. Comelec, G.R. No. 201/12, June 13, 2012) The consideration isthe why of the contracts, the essential reason which moves the contracting parties to enter into the contract" This definition ilustrates that the consideration Contemplated to support an optioon contract need not be ‘ponetary Actual cash need not be exchanged for the option rac bye very nature ofan option contract, as defined ina the same is an onerous contract for which sideration must be something of value, although its kind may vary. (Euk 167864 Yanvary 20% Biogy” Pouses Apeles, GR, No. v. Court of Appeasis. 23, aw (For CPA Reviewees) ness Law (For CPAReviewees) 225, js no question that under Article 1479 of the new ‘Code “an option to sell,” or “a promise to buy or to as used in said article, to be valid must be "supported consideration district from the price.” This is clearly red from the ontext of said article that a unilateral ise to buy or to sell, even if accepted, is only binding ported by consideration. In other words, “an accepted feral promise can only have a binding effect if ted by a consideration, which means that the option canstill be withdrawn, even if accepted, ifthe same is not Supported by any consideration. Hance, itis not disputed that the option is without consideration. itcan therefore be withdrawn notwithstanding the acceptance made oft by appellee. itis true that under Article 1324 of the new Civil Code, the general rule regarding offer and acceptance is that, when the offerer gives to the offeree a certain period to accept, “the offer may be withdrawn at any time before acceptance” excep when the option is founded upon consideration, but this general rule must be interpreted as modified by the provision of Article 1479 above referred to, which applies to"a promise to buy and sell’ specifically. As already stated, this rule requires that a promise to sell to be valid must be supported by a consideration district from the price. (Tuazon Jr. Rosario-Suarez, et. al., GR. No. 168325, December 8, 2010) sel bya infer promi ifsuPI unilat suppo Are business advertisements of things for sale definite offers? If the offer is definite or certain, that is, all specific particulars needed in the contract are present in the advertisement, the offer is definite. Ifimportant details are not stated, it is only considered as a mere invitation to make an offer.