UST – AMV COLLEGE OF ACCOUNTANCY

LAW ON OBLIGATIONS AND CONTRACTS – CA51011

MODULE 4
(Art. 1305 to 1379)

1. 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.

2. Stages of a contract

a. Conception or preparation stage - involves preliminary negotiations and

bargaining, discussion of terms and conditions, with no arrival yet of a definite
agreement.
b. Perfection or birth stage - is the point when there is meeting of minds
between the parties on a definite subject matter and valid cause.
c. Termination or consummation stage - is the point when the contract has
been fulfilled resulting inits accomplishment.

3. Characteristics of contracts

a. Autonomy of contract/liberality to contract/freedom to contract

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.

b. Mutuality of contract

The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.

The determination or validity or compliance of a contract cannot be left to the

judgment of one the parties only because it violates mutuality of contract.

The determination of the performance of contract may be left to a third person,

whose decision shall not be binding until it has been made known to both
contracting parties.

If the determination of the performance of the contract of a third person is

evidently inequitable, the court shall decide what is equitable under the
circumstances.

c. Relativity of contract

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.

Rights and obligations arising from contracts which are intransmissible:

(1) Those which are purely personal.
(2) Those which are provided by law to be intransmissible.
(3) Those which are stipulated by the party to be intransmissible.

Exceptions to relativity of contract:

(1) Stipulation in favor of third person or stipulation pour autrui
 Requisites:
(a) There must be stipulation in favor of a third person.
(b) The stipulation should be a part, not the whole, of the contract.
(c) The contracting parties must have clearly and deliberately conferred a
favor upon a third person and not a mere incidental benefit or interest.
(d) The favorable stipulation should not be conditioned or compensated by
any kind of obligation whatever.
(e) The third person must have communicated his acceptance to the obligor
before its revocation.
(f) One of the contracting parties does not bear the legal representation or
authorization of the third party.

(2) 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.

Ex. Contract of Real Estate Mortgage

(3) Creditors are protected in cases of contracts intended to defraud them.

The defrauded creditor may file an action for rescission.

(4) Any third person who induces another to violate his contract shall be liable
for damages to the other contracting party.

The aggrieved contracting party may file an action for damages against the
third person.

d. Consensuality of contract

Contracts are perfected by mere consent. However, Real contracts, such as

deposit, pledge and commodatum, are not perfected until the delivery of the
object of the obligation.

e. Obligatory force of contract

(1) Obligations arising from contracts have the force of law between contracting
parties.
(2) Obligations arising from contracts must be complied with in good faith.

4. Nominate contract is a contract which has a name under the Civil Code or
special law. Ex. Contract of sale and contract of partnership.

Innominate contract is a contract without any name under the Civil Code or
special law.
a. Do ut facias (I give that you may do.)
b. Facio ut des (I do that you may give.)
c. Facio ut facias (I do that you may do.)

5. Essential elements of contracts

a. Consent of the contracting parties

(1) 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.
 (2) Acceptance made by letter or telegram does not bind the offerer except from
the time it came to his knowledge. (Cognitive theory)

(3) An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.

(4) 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.

(5) The following cannot give consent to a contract:

1. Unemancipated minors;
2. Insane or demented persons
3. Deaf-mutes who do not know how to write.

(6) Status of contract

1. One of the parties is incapable of giving consent – voidable
2. Both parties are incapable of giving – unenforceable

(7) Vitiation of consent (Status of contract is voidable)

1. Mistake
2. Violence
3. Intimidation
4. undue influence
5. Causal fraud

(8) Contracts entered into during a lucid interval are valid. Contracts agreed to
in a state of drunkenness or during a hypnotic spell are voidable.

(9) An absolutely simulated or fictitious contract is void. A relative simulation,

when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their real agreement.

b. Object certain which is the subject matter of the contract

(1) Requisites of an object of a contract (Prestation)

(a) The object must be within the commerce of men.
(b) must be licit, or not contrary to law, morals, good customs, public order
or public policy.
(c) It must be possible.
(d) It must be determinate as to its kind.

(2) No contract may be entered into upon future inheritance except in cases
expressly authorized by law.

All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract.

c. Cause of the obligation which is established

The essential reason which impels the contracting parties to enter into it and
which explains and justifies the creation of the obligation through such
contract.

(1) In onerous contract the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other.
 (2) In remuneratory contract, the cause is the service or benefit which is
remunerated.
(3) In contract of pure beneficence or gratuitous contract, the cause is the
mere liberality of thebenefactor.

(4) Contracts without cause, or with unlawful cause, produce no effect

whatever.

(5) The statement of a false cause in contracts shall render them void, if it
should not be proved that they were founded upon another cause which is
true and lawful.

(6) Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue
influence

6. Form of contracts

Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when
the law requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that requirement is
absolute and indispensable. In such cases, the right of the parties stated in the
following article cannot be exercised.

7. Reformation of instrument

When, there having been a meeting of the minds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the instrument to the end that such
true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the

minds of the parties, the proper remedy is not reformation of the instrument but
annulment of the contract.

There shall be no reformation in the following cases:

a. Simple donations inter vivos wherein no condition is imposed;
b. Wills;
c. When the real agreement is void.

8. Rules on Interpretation of Contract

a. If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning shall be applied by the court.
b. If there is conflict between evident intention and words of contract, the
intention of the parties shall prevail.
c. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.
d. Incidental circumstances of a gratuitous contract shall be interpreted with
the least transmission of rights and interest.
e. Incidental circumstances of an onerous contract shall be interpreted with
greatest reciprocity of interest.
f. In case of doubt whether the contract is one of loan with mortgage or one of
pacto de retro sale, it shall be interpreted as loan with equitable mortgage in
favor of social justice.
g. If the doubts are cast upon the principal object of the contract in such a way
that it cannot be known what may have been the intention or will of the
parties, the contract is void.
h. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
i. However general the terms of a contract may be, they shall not be understood
to comprehend things that are distinct and cases that are different from
those upon which the parties intended to agree.
j. If some stipulation of any contract should admit several meanings, it shall be
understood as bearing that import which is most adequate to render in
effectual.
k. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
taken jointly.
l. Words which may have different significations shall be understood in that
which is most in keeping with the nature and object of the contract.
m. The usage or custom of the place shall be borne in mind in the interpretation
of the ambiguities of a contract and shall fill the omissions of stipulations
which are ordinarily established.