ARTICLE 1311.

Contracts take effect only between the parties,

their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.

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.
Persons affected by a contract.
(1) General rule — Contracts take effect only between the parties, their assigns and heirs.
This means that only the parties, their assigns and heirs can have rights and obligations
under a contract.
(2) Exceptions — The cases when a contract is effective only between the parties are 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).
Cases when strangers or third persons affected by a contract.
A third person is one who has not taken part in a contract and is, therefore, a stranger to the
contract. As a general rule, a third person has no rights and obligations under a contract to
which he is a stranger. (Art. 1311, par. 1.) He has no legal standing or capacity to demand the
enforcement of a contract or assail its validity even if it is admitted that it is defective.

There are cases, however, when third persons may be affected by a contract. They are the
following:
(1) In contracts containing a stipulation in favor of a third person (stipulation pour autrui)
(2) In contracts creating real rights
(3) In contracts entered into to defraud creditors
(4) In contracts which have been violated at the inducement of the third person.
(5) In contracts creating “status” (e.g., the resulting status of marriage must be respected,
even by strangers, while the contract is in force);
Meaning of stipulation pour autrui.
Stipulation pour autrui is a stipulation in a contract clearly and deliberately conferring a
favor upon a third person who has a right to demand its fulfillment, provided, he
communicates his acceptance to the obligor before its revocation by the obligee or the
original parties.
Classes of stipulations pour autrui.
Stipulations in favor of a third person may be divided into two classes, namely:
(1) Those where the stipulation is intended for the sole benefit of such person. This
corresponds almost always to the juridical conception of a gift, it being necessary in such
case to apply the rules relating to donations in so far as the form of acceptance is
concerned; and
(2) Those where an obligation is due from the promise to the third person which the former
seeks to discharge by means of such stipulation, as, for instance, where a transfer of
property is coupled with the purchaser’s promise to pay a debt owing from the seller to a
third person
In the first case, the third party is said to be a done-beneficiary, while in the second, he is
called creditor-beneficiary
Requisites of stipulation pour autrui.
They are the following:
(1) The contracting parties by their stipulation must have clearly and
deliberately conferred a favor upon a third person;
(2) The third person must have communicated his acceptance to the obligor
before its revocation by the obligee or the original parties;
(3) The stipulation in favor of the third person should be a part and not the
whole of the contract or the contract itself;
(4) The favorable stipulation should not be conditioned or compensated by
any kind of obligation whatever; and
(5) Neither of the contracting parties bears the legal representation or
authorization of the third party for otherwise the rules on agency will apply.
ARTICLE 1312. In contracts creating real rights, third persons who come into possession of
the object of the contract are bound thereby, subject to the provisions of the Mortgage Law
and the Land Registration Laws. (n)

Third persons bound by contracts creating real rights.

This article is an exception to the general rule that a contract binds only the parties.

Third persons who come into possession of the object of a contract over which there is a real right,
such as a real estate mortgage, are bound thereby even if they were not parties to the contract.

A real right is binding against the whole world and attaches to the property over which it is
exercised wherever it goes. Thus, a contract subjecting certain real properties to the payment of
certain debts, registered in accordance with the Property Registration Decree, constitutes a real
right, which is produced not by the contract but by the publicity given by the Registry, such publicity
prejudicing the right of third persons.

If the real right is not registered, third persons who acted in good faith are protected under the
provisions of the Property Registration Decree.
ARTICLE1313. Creditors are protected in cases of contracts
intended to defraud them. (n)

Right of creditor to impugn contracts intended to defraud them .

Article 1313 is another qualification to the rule that contracts take effect only
between the parties. 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,
such as contracts undertaken by a debtor in fraud of his creditor without the
knowledge of the latter. He can sue to rescind the contract to prevent fraud
upon him.
ARTICLE 1314. Any third person who induces another to violate
his contract shall be liable for damages to the other contracting party.
Liability of third person responsible for breach of contract.
• This is a rule of American law. It is also proper under the general principles of the
Philippine law, because a contractual right is property.
• Article 1314 recognizes an instance when a stranger to a contract can be sued for damages
for his unwarranted interference with the contract.
• The tort or wrongful conduct is known as “interference with contractual relations.’’ It
presupposes that the contract interfered with is valid and the third person has knowledge
of the existence of the contract or must have known of it after a reasonable inquiry.
• The word “induce’’ in the provision refers to situations where a person causes another to
choose one course of conduct by persuasion or intimidation.
ARTICLE 1315. Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. (1258)

ARTICLE 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation. (n)
Classification of contracts according to perfection.
They are:
(1) Consensual contract or that which is perfected by mere consent (e.g., sale, lease,
agency)
(2) Real contract or that which is perfected, in addition to the above, by the delivery of the
thing subject matter of the contract.
(3) Solemn contract or that which requires compliance with certain formalities prescribed
by law such prescribed form being thereby an essential element thereof.
A contract undergoes three (3) distinct stages. They are:
(1) Preparation or negotiation. — This 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. At this stage, the
parties have not yet arrived at any definite agreement. They are yet undergoing the preliminary steps towards
the formation of a valid contract. Either party may stop the negotiation or withdraw an offer made;
(2) Perfection or birth. — This takes place when the parties have come to a definite agreement or meeting of
the minds regarding the terms, that is, the subject matter and cause of the (consensual) contract i.e., upon
concurrence of the essential elements of the contract; and
(3) Consummation or termination. — This takes place when 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. Once a contract is shown to have been
consummated or fully performed by the parties thereto, its existence and binding effect can no longer be
disputed.
How contracts are perfected.
(1) Consensual contracts. — As a general rule, contracts are perfected by mere consent of the parties
regarding the subject matter and the cause of the contract. They are obligatory in whatever form they may have
been entered into, provided, all the essential requisites for their validity are present. In the absence of delivery,
perfection does not transfer title or create real right, yet, it gives rise to obligation binding upon both parties .
(2) Real Contracts – The exceptions are so-called real contracts which are
perfected not merely by consent but the delivery, actual or constructive, of the
object of the obligation.
(3) Solemn Contracts- When the law requires that a contract be in some form
to be valid, this special form is necessary for its perfection. Thus, a donation of
real property cannot be perfected until it is embodied in public instrument.
 
Effect of perfection of the contract.
From the moment the parties come to an agreement on a definite subject matter
and valid consideration they are bound not only:
(1) to the fulfillment of what has been expressly stipulated but also,
(2) to all the consequences which according to their nature, may be in keeping
with good faith, usage, and law.