CONTRACTS Chapter 1

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with In case of breach, the usual remedy is for the In case of breach, the usual remedy is for the
respect to the other, to give something or to render some service. injured party to institute an action against the injured party to institute a civil action against
other party for damages. the other party for legal separation or a
Incomplete definition includes only: criminal action for adultery or concubinage.
• Unilateral contracts
• Contracts that creates an obligation Contracts vs Perfected and Imperfect Promise
• Consensual contracts. • A perfected promise merely tends to insure and pave the way for the celebration of a future
contract.
Defective definition • An imperfect promise (policitación), on the other hand, is a mere unaccepted offer.
• Requires two persons
- Auto-contracts. Contract vs Pacts or Stipulations
• A pact is an incidental part of a contract which can be separated from the principal agreement.
Stages in life of contract: • A stipulation is an essential and dispositive part which cannot be separated from such principal
1. Preparation (conception) agreement.
2. Perfection/Executory; and
3. Consummation/Executed. The duty of the Courts in interpreting Contracts.
Its duty is confined to the interpretation of the one which they have made for themselves without regard
Contract is a juridical convention manifested in legal form, by virtue of which one or more persons bind to its wisdom or folly as the court cannot supply material stipulations or read into the contract words
themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to which it does not contain. (Cuizon vs. CA, 260 SCRA 645.)
do or not to do.
Elements of Contracts
Contract distinguished from other terms (Marriage, Adoption or Succession) 1. Essential
• The principal source of the rights and obligations of the parties in contracts is their agreement, o The essential elements are those without which there can be no contract.
while in the other juridical conventions, it is the law itself. ▪ Common (Comunes)
• Rights and obligations arising from contracts are concrete, limited and transitory, while those -Common to all contracts:
arising from the other juridical conventions are more or less elastic, absolute and permanent. o Consent
o Object
Ordinary Contract vs Contract of Marriage o Cause.
Ordinary Contract Contract of Marriage ▪ Special (Especiales)
Parties may be two or more persons of the same It is necessary that the parties must be one -Present only in certain contracts (Delivery in real contracts.)
or of different sexes. man and one woman. ▪ Extraordinary (Especialisimos)
Nature, consequences and incidents of the Nature, consequences and incidents of the -Peculiar to a specific contract. (Price in contract of sale)
contract are governed primarily by the marriage are governed by law. 2. Natural
agreement of the parties. o Those which are derived from the nature of the contract and ordinarily accompany the
Once the contract is executed, the result is a Once the marriage is celebrated, the result is same. They are presumed by the law, although they can be excluded by the
contract. a status. contracting parties if they so desire.
Can be terminated or dissolved by the mere Cannot be terminated or dissolved by the ▪ Thus, warranty against eviction is implied in a contract of sale, although the
agreement of the parties. mere agreement of the parties.
contracting parties may increase, diminish or even suppress it.

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3. Accidental. 4. Relativity (relatividad del contrato); (Art. 1311)

o Those which exist only when the parties expressly provide for them for the purpose a. General Rule: Contracts take effect only between parties, their assigns and heirs.
of limiting or modifying the normal effects of the contract. b. A general rule produce any effect upon third persons, in conformity with the principle
▪ Conditions, terms and modes. of res inter alios acta aliis negue nocet prodest. (contract cannot adversely affect the
rights of one who is not a party to the contract.)
Note: Two or more parties except in cases of “Auto-Contract”. This may take place: i. Limitations: HOWEVER, with respect to assignees or heirs, the general rule
• When a person, in his capacity as representative of another, contracts with himself; or under Art. 1311 is not applicable if the rights and obligations arising from
• When as a representative of two different persons, he brings about a contract between his the contract are not transmissible or purely personal.
principals by contracting with himself, unless there is a conflict of interests or when the law
expressly prohibits it in specific cases. ii. Exceptions
1. Beneficial stipulation/ stipulation pour autrui – A stipulation in favour
Characteristics of Contracts of a third person;
1. Obligatory (obligatoriedad del contrato) 2. When the third person comes into possession of the object of a
a. This principle is explicitly recognized in Arts. 1159, 1308, 1315 and 1356. contract creating real rights; (Art. 1312)
b. It is a rule that once the contract is perfected, it shall be of obligatory force upon 3. Where the contract is entered into in order to defraud a creditor;
both of the contracting parties. (Art. 1313)
c. Consequently, such contracting parties are bound, not only to the fulfillment of what 4. Here, the creditor may ask for its rescission.
has been expressly stipulated, but also to all of the consequences thereof. 5. Where the third person induces a contracting party to violate his
contract (Art. 1314). Such third person can be held liable for
Requisites of obligatory damages.
a) The contracts should be perfected 6. Contracts creating “status” (marriage contract)
b) Contract must be valid; and 7. In suspension of payments and compositions under the Insolvency Law
c) Contract must be enforceable. 8. Collective Bargaining Agreement
9. Negotiorum gestio (Art. 2150-2151)
2. Mutuality (Art 1308) 10. Violence & intimidation employed by 3P (Art. 1336).
a. The contract must be binding upon both of the parties. 5. Consensuality
b. Consequently, its validity or compliance cannot be left to the will of one of them.
i. Exception: Validity or fulfillment may be left to: Note: Breach of contract is the failure, without legal reason, to comply with the terms of the
(1) the will of a third person, whose decision shall not be binding contract. (Sps. Edgar and Dinah Omengan vs. Philippine National Bank. et. al., G.R. No. 161319,
until made known to both the contracting parties (Art. 1309) or January 23, 2007).
(2) chance.
Classification of Contracts
3. Autonomy (Art 1306) & (Sec. 1 Art 3 Phil Consti) • According to their relationship to other contracts
a. The contracting parties may establish such stipulations, clauses, terms and conditions o Preparatory
as they deem convenient. ▪ Partnership & Agency.
i. Limitation to the principle of autonomy: o Principal
1. Stipulations should not be contrary to law, morals, good customs, ▪ Sales & Lease.
public order, or public policy; and o Accessory
2. Exercise of Parens Patriae – weakening the consensual nature of ▪ Pledge & Mortgage.
contracts giving undue advantage to one of the contracting parties. • According to their perfection
o Consensual

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▪ Perfected by mere agreement. o Aleatory

o Real ▪ Those where each of the parties has to his account the acquisition of an
▪ Requires consent and delivery for perfection, equivalent of his prestation, but such equivalent, although pecuniarily
• According to their form appreciable, is not yet determined at the moment of the celebration of the
o Common or informal contract, since it depends upon the happening of an uncertain event, thus
▪ Require no particular form charging the parties with the risk of loss or gain.
• Loan • According to their names or norms regulating them
o Specific or formal o Nominate
▪ Require particular form ▪ Those which have their own individuality and are regulated by special
• Donations provisions of law.
o Innominate
• According to their purpose
o Transfer of ownership ▪ Those which lack individuality and are not regulated by special provisions
of law.
▪ Sale
Art. 1306.
o Conveyance of use
The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
▪ Commodatum
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
o Rendition of service
▪ Agency • Law refers to Mandatory, Prohibitive, Expressive of fundamental principles of justice and those
which impose essential requisites without which the contract cannot exist.
• According to their subject matter
o Things
Type of laws that must not be disregarded by contracting parties:
▪ Sale, deposit, pledge.
(1) When the law requires their obligatory character;
o Services
(2) Laws that are prohibitive;
▪ Agency, lease of service. (3) The express fundamental principle of justice that the parties cannot overlook; and
• According to the nature of the vinculum which they produce (4) Those laws that impose essential requirements or requisites that without it the contracts are
o Unilateral invalid.
▪ Give rise to an obligation to one party only.
o Bilateral • Morals referred to are those principles which are incontrovertible and are universally admitted
▪ Give rise to obligations to both parties. and which have received social and practical recognition.
• According to their cause • Good Customs moral precept or custom is not recognized universally, but is sanctioned by the
o Onerous practice of a certain community, then it shall be included within the scope or sphere of good
▪ Which each of the parties aspires to procure for himself a benefit through customs.
the giving of an equivalent or compensation. • Public order can only refer to the safety, as well as to the peace and order, of the country or
o Gratuitous. of any particular community.
▪ Those in which one of the parties proposes to give to the other a benefit o Signifies public weal, sound healthy prosperous state.
without any equivalent or compensation.
• Public Policy principle of law which holds that no person can lawfully do that which has a
• According to the risk involved tendency to be injurious to the public or against the public good.
o Commutative o Contravene some established interest of society;
▪ Those where each of the parties acquires an equivalent of his prestation and o Violates some public statutes;
such equivalent is pecuniarily appreciable and already determined from the o Against morals;
moment of the celebration of the contract. o Trends to interfere public welfare or safety;
o If it is at war with the interest of the society.
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 CONTRACTS Chapter 1

Compromise Agreements
Jurisprudence (Santos Ventura Hocorma Foundation, Inc. vs. Santos)
Ysmael & Co vs Barreto Compromise it is an agreement between 2 or more persons, who, for preventing or putting an end to a
“By the weight of modern authority, a carrier cannot limit its liability, for injury or loss of goods shipped, law suit, adjust their difficulties by mutual consent in the manner which they agree on, and which every
where such injury or loss was caused by its own negligence. The rule rests on consideration of public policy, one of them prefers in the hope of gaining, balanced by the danger of losing.
as the contract of the carrier is to carry and deliver the goods, and a contract that undertakes to relieve
the carrier from any liability for loss or damage accruing or arising from its own negligence would in legal Note: Thus, a compromise agreement whereby the parties make reciprocal concesions to resolve their
effect nullify the contract.’’ differences to thereby put an end to litigation is binding on the contracting parties and is expressly
acknowledged as a juridical agreement between them. (National Commercial Bank of Saudi Arabia vs.
Ferrazzini Vs Gsell Court of Appeals)
“The contract under consideration is clearly one in undue or unreasonable restraint of trade and therefore
against public policy. It is limited as to time and space but not as to trade. It is not necessary for the General rule: A compromise has upon the parties the effect and authority of res judicata, with respect
protection of the defendant, as this is provided for in another part of the clause. It would force the plaintiff to the matter definitely stated therein, or which by implication from its terms should be deemed to have
to leave the Philippine Islands in order to obtain a livelihood in case the defendant declined to give him the been included therein. This holds true even if the agreement has not been judicially approved.
written permission to work elsewhere in this country.”
Compromise agreement as a consensual contract became binding between the parties upon its
Del Castillo Vs Richmond execution and not upon its court approval. From the time a compromise is validly entered into, it
“The law concerning contracts which tend to restrain business trade has gone through a long series of becomes the source of the rights and obligations of the parties thereto. The purpose of the compromise
changes xxx the rule is now well established, have held that a contract in restraint of trade is valid provided is precisely to replace and terminate controverted claims.
there is a limitation upon either time or place. A contract, however, which restrains a man from entering
into a business or trade without either a limitation as to time or place, will be held invalid xxx National Commercial Bank of Saudi Arabia vs. Court of Appeals the Court held that to have the
“xxx If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. xxx. Of force of res judicata, however, the compromise agreement must be approved by final order of the
course, in establishing whether the contract is reasonable or unreasonable, the nature of the business must court. To be valid, the compromise agreement must be based on real claims and actually agreed upon
also be considered xxx in good faith. In the case at bar, each of the parties have manifested their desire, by forging the
Compromise Agreement, to abbreviate the legal battle and settle the case amicably to both their
Sy Suan Vs Regala satisfaction.
xxx all agreements the purpose of which is to create a situation which tends to operate to the detriment of
the public interest are against public policy and, therefore, void, whether the purpose of the agreement is Art. 1307
or is not effectuated xxx 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
Cui vs Arellano University of the place.
“The waiver signed by plaintiff is contrary to public policy and, therefore, null and void. Scholarship grants
as pointed out by the Director of the Bureau of Private Schools in Memorandum No. 38, are awarded in Nominate contracts are those which have their own distinctive individuality and are regulated by
recognition of merit and not to attract and keep brilliant students in school for their propaganda value. To special provisions of law.
look at such grants as a business scheme designed to increase the business potential of an educational
institution is not only inconsistent with sound public policy but also good morals.” The nominate contracts which are defined and regulated by the Civil Code are:
• Sales (Arts. 1458-1637);
• Barter or exchange (Arts. 1638-1641);
• Lease (Arts. 1642-1766);
• Partnership (Arts. 1767-1867);
• Agency (Arts. 1868-1932);

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• Loan (Arts. 1933-1961); Art. 1310.

• Deposit (Arts. 1962-2009); The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall
• Aleatory contracts, such as: decide what is equitable under the circumstances.
o Insurance, gambling and life annuity (Arts. 2010-2027),
o Compromise and arbitration (Arts. 2028-2046); Mutuality of Contracts
o Guaranty (Arts. 2047-2084): and • Art 1308 - validity or compliance cannot be left to the will of one of them.
o Pledge, mortgage and antichresis (Arts. 2085-2141). o It must be observed, however, that what is prohibited by the law from being
delegated to one of the contracting parties are:
Innominate contracts are those which lack individuality and are not regulated by special provisions of ▪ The power to determine whether or not the contract shall be valid; and
law. Following the Roman law classification, there are four kinds of innominate contracts. They are: ▪ The power to determine whether or not the contract shall be fulfilled.
(a) Do ut des — I give that you give. • Art 1309 – Third person
(b) Do ut facias — I give that you do. o Indispensable requisite that the determination made by the third person should not
(c) Facio ut des — I do that you give. be evidently inequitable.
(d) Facio ut facias — I do that you do. ▪ If it is evidently inequitable, it shall not have any obligatory effect upon
the contracting parties.
Shall be regulated by • Art 1308 -validity or fulfillment can be left to chance.
• Stipulations of the parties; o Deduced a sensu contrario from the text of Art. 1308.
• General provisions or principles of obligations; and contracts;
• Rules governing the most analogous nominate contracts, and According to Manresa, considering the text of Art. 1308, it is perfectly licit to leave the fulfillment of
• Customs of the place. a contract to the will of one of the contracting parties in the negative form of rescission, a case which
Jurisprudence is frequent in certain contracts (especially in contracts involving lease of service), because in such, case
Perez vs. Pomar, 682 neither is the prohibition in the article violated nor is there inequality between the parties since they
“Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services remain with the same faculties with respect to fulfillment.
as interpreter. As it does not appear that he did this gratuitously the duty is imposed upon the defendant,
he having accepted the benefit of the services, to pay a just compensation, by virtue of the innominate Jurisprudence
contract of facio ut des implicitly established. Liebenow vs Phil Vegetable Oil Co.

“The obligations arising from this contract are reciprocal, and, apart from the general provisions with Taylor vs Uy Teng Piao
respect to contracts and obligations, the special provisions concerning contracts for lease of service “Art. 1308 of the Civil Code in our opinion creates no impediment to the insertion in a contract for
are applicable by analogy. personal service of a resolutory condition permitting the cancellation of the contract by one of the
parties. xxx xxx for where the contracting parties have agreed that such option shall exist, the exercise
Arroyo vs. Azur, 76 Phil. 493 of the option is as much in fulfillment of the contract as any other act which may have been the subject
Intestate Estate of Reguera vs. Tandra, 46 Off. Gaz. 186. of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon
beforehand is fulfillment.”
Art. 1308.
The contract must bind both contracting parties; its validity or compliance cannot be left to the will of Art. 1311.
one of them. 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
Art. 1309. provision of law. The heir is not liable beyond the value of the property he received from the decedent.
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.
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If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment (4) Where the third person induces a contracting party to violate his contract.
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 Where the contract contains a stipulation in favor of a third person;
conferred a favor upon a third person. • According to this exception, 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
Relativity of Contracts obligor before its revocation;
It is a general principle of the civil law that a contract can only bind the parties who had entered into • A beneficial stipulation, or what is generally known as a stipulation pour autrui, may,
it or their successors who have assumed their personality or their juridical position, and that, as a therefore, be defined as a stipulation in a contract, clearly and deliberately conferred by the
consequence, such contract can neither favor nor prejudice a third person (in conformity with the axiom contracting parties as a favor upon a third person, who must have accepted it before it could
res inter alios acta aliis neque nocet prodest). be revoked.

Persons bound by contract. Kinds

Beneficial stipulations in favor of a third person may be divided into the following:
General rule: Contracts can take effect only between the parties, their assigns and heirs. • Those where the stipulation is intended for the sole benefit of the third person; and
Exceptions: The rule is not applicable if the rights and obligations arising from the contract are not
• Those where an obligation is due from the promisee to the third person which the former seeks
transmissible:
to discharge by means of such stipulation.
(1) By their nature, as when the special or personal qualification of the obligor constitutes one of
Requisites:
the principal motives for the establishment of the contract; or
(1) There must be a stipulation in favor of a third person;
(2) By stipulation of the parties, as when the contract expressly provides that the obligor shall
(2) Stipulation must be a part, not the whole of the contract;
perform an act by himself and not through another; or
(3) Contracting parties must have clearly and deliberately conferred a favor upon a third person,
(3) By provision of law, as in the case of those arising from a contract of partnership or of
not a mere incidental benefit or interest;
agency.
(4) Third person must have communicated his acceptance to the obligor before its revocation;
and
Jurisprudence
a. It may be done expressly or impliedly.
Mojica vs Fernandez
“The principle on which these decisions rest is not affected by the provisions of the new Code of Civil
(5) Neither of the contracting parties bears the legal representative or authorization of the third
Procedure (now Rules of Court), and, in accordance with that principle, the heirs of a deceased person
party.
cannot be held to be ‘third persons’ in relation to any contract touching the real estate of their
decedent which comes into their hands by right of inheritance; they take the property subject to all
Note: Test of beneficial stipulation is the intention of the parties.
the obligations resting thereon in the hand of him from whom they derive their rights.’’
Jurisprudence
Effect of contract to third persons
Florentino Vs encarnacion
General rule: that it cannot produce any effect whatsoever as far as third persons are concerned.
Kauffman vs Phil. National Bank
“Consequently, he who is not a party to a contract, or an assignee thereunder, has no legal
Coquia vs. Fieldmen’s Insurance Co.
capacity to challenge its validity”
Constantino vs Espiritu
Exception: Four exceptional instances under the Civil Code where a contract may produce effect either
Art. 1312.
directly or indirectly on third persons. They are:
In contracts creating real rights, third persons who come into possession of the object of the contract are
(1) Where the contract contains a stipulation in favor of a third person;
bound thereby, subject to the provisions of the Mortgage Law and the Land Registration laws.
(2) Where the third person comes into possession of the object of a contract creating a real right
(3) Where the contract is entered into in order to defraud a third person; and

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A real right is a right belonging to a person over a specific thing, without a passive subject individually Art. 1317.
determined, against whom such right may be personally enforced. Right, therefore, is enforceable No one may contract in the name of another without being authorized by the latter, or unless he has by
against the whole world. law a right to represent him.

Art. 1313 A contract entered into in the name of another by one who has no authority or legal representation, or
Creditors are protected in cases of contracts intended to defraud them. who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly,
by the person in whose behalf it has been executed, before it is revoked by the other contracting party.
Although a third person cannot ask for the annulment of a contract, nevertheless, if he is a creditor of
one of the contracting parties, and it can be established that the contract was entered into with the Note: Unenforceable contracts cannot be sued upon or enforced, unless they are ratified. As regards
intention of defrauding him, he may ask for its rescission. the degree of defectiveness, voidable contracts are farther away from absolute nullity than
unenforceable contracts.
Art. 1314.
Any third person who induces another to violate his contract shall be liable for damages to the other Jurisprudence
contracting party. Badillo vs Ferrer

Requisites:
(1) Existence of a valid contract;
(2) Knowledge on the part of the third person of the existence of the contract; and
(3) Interference by the third person without legal justification or excuse.
a. Malice, in some form, is generally implied from the act of interference with contractual
relations, and is declared to be an essential ingredient in such cases.

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.
Perfection of Contracts.
“It signifi es the birth or appearance of the contract as an obligatory tie, resulting from the concurrence
of the wills of the contracting parties.’’

General rule: The perfection of a contract is produced by mere consent.

Exception: Certain contracts, such as deposit, pledge and commodatum, which cannot be perfected until
after the delivery of the object by one contracting party to the other.

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