LAW

Contracts.1

Contracts

A juridical convention manifested in legal form, by

virtue of which, one or more persons bind
themselves in favor of another or others, or
reciprocally, to the fulfillment of a prestation to
give, to do or not to do.
A meeting of minds between two persons whereby
one binds himself, with respect to the other, to give
something or render some service. (Art.1305)

Essential Elements

Without them a contract cannot exist

because there are indispensable
requirements.
CONSENT
SUBJECT
CAUSE OR CONSIDERATION

Natural Elements

These are found in certain contracts and

presumed to exist, unless excluded by
stipulation of the parties.
Example : warranty against eviction and
against hidden defect in contract of sale.

Accidental Elements

Not considered agreed by parties unless

stipulated.
Example: payment of interest in a
contract of loan.

Stages in the life of a

contract

Preparation or conception this is the preparatory step

taken by the parties leading to the perfection of the
contract , otherwise known as the bargaining point.
Perfection or birth the meeting of minds regarding the
subject matter and cause of the contract.
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 a sale of a specific car to B for P10,000.

Tomorrow, B countered the offer by telling S that he will buy the car
if D will give it for P8,000. S consented to the proposal of B. Two
days thereafter, S delivered the car and B paid the price of P8,000.
-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 met as to the
offer and the cause of the contract.
-Two days after is the consummation, that is, when S delivered the
object and B paid the price.

Ordinary contract distinguished from

marriage contract

- Ordinary contract may be two or more

persons of the same or different sexes,
whereby in a marriage contract the
parties must be one man and one
woman. Ordinary contract may be
terminated by mere agreement of the
parties, in marriage contract,
termination is with the consent of the

Ordinary contract distinguished from

obligation

- The contract is 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

Ordinary contract distinguished from pact

- A pact is an incidental part of a contract

which can be separated from the
agreement itself.

Ordinary contract distinguished from

stipulation

- Stipulation is the dispositive part of a

contract which cannot be separated from
the principal agreement.

Basic principle or characteristics of a

contract

Freedom (or Liberty) to stipulate. (Art.1306)

Obligatory force and compliance in good faith
(Art.1159,1315)
Perfection by mere consent
Both parties are mutually bound. (Art1308)
Relativity; binding between the parties only,
their assigns and heirs. (Art. 1311)

Different kinds of Contracts

According to Perfection

Consensual perfected by mere

consent, such as sale and barter
Real perfected by the delivery of the
object of the contract, such as pledge,
loan and deposit.

Different kinds of Contracts

According to degree of importance

Principal can stand alone, such as sale , barter,

deposit and loan.
Accessory its existence and validity is dependent
upon another contract, such as pledge, mortgage
and guaranty
Preparatory contract is not an end by itself, but a
means thru which other contracts may be made.

Example: Contact of Partnership and Contract of Agency.

Different kinds of Contracts

According to subject matter

Contracts involving things such as sale

and barter
Contacts involving rights or credits, such
as usufruct or assignment of credit.
Contracts involving services, such as
agency, lease of services and contract of
carriage.

Different kinds of Contracts

According to name

Nominate with a special name, such as

pledge, barter and lease.
Innominate without any name.

Different kinds of Contracts

According to cause

Onerous there is an exchange of

consideration such as sale barter and lease.
Gratuitous there is no consideration received
in exchange for what has been given
Remuneratory something is given for a
benefit or service performed without any legal
obligation to do so

Different kinds of Contracts

According to nature of obligation produced or number or
parties obligated

Unilateral- where only one of the parties is obliged to give or to do

something, such as commodatum, gratuitous mutuum.

Commodatum is a contract of loan whereby one of the parties delivers to

another, either something not consumable so that the latter may use the
same for a certain time and return it. This contract is essentially gratuitous.
Mutuum is a contract of loan whereby one of the parties delivers money or
another consumable things, upon the condition that some amount of the
same kind and quality shall be paid. This may be gratuitous or with a
stipulation to pay interest

Bilateral or sinalagmatico- where both parties are oblige to give or to

do something , such as sale or barter and lease.

Different kinds of Contracts

According to Risk

Commulative where equivalent values

are given by both parties such as sale,
barter and lease.
Aleatory where fulfillment of the
contract is dependent upon chance such
as insurance.

Liberty 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. This
otherwise known as the principle of
autonomy.

Example of Prohibition:

Against the law D agreed to kill X for a consideration of

P10,000. Should D kill X, D cannot collect the P10,000
bec. The agreement is contrary to law.

Immoral agreement promise of marriage based on

carnal knowledge is immoral.

Against custom an agreement to vote a certain

candidate for a consideration

Against Public policy restraint of trade

Against public order- agreement of contract of lease that

the lessee can be ejected by the use of force upon
violation of the contract of lease.

Note: The contracting parties can enter into any stipulation

provided not contrary to law or morals.

Illustrative Cases on liberty to Contract

Is the agreement between two

candidates in an election race that
whoever loses in the convention should
not run against the winner valid? Why?

No, because political rights are

outside the commerce of man.

Illustrative Cases on liberty to Contract

In the contract of employment between A and B, The latter agreed

that for a period of five years after the termination of his employment,
he shall neither engage or interest himself in any business enterprise
similar to or in competition with those operated by A, nor enter into
the employment of any enterprise in the Philippines, except after
obtaining the written permission of A. Is the agreement valid?
Reasons.

The agreement is void because it is contrary to

public policy. Our courts repeatedly held that such
prohibition is an undue or unreasonable restraint
of trade because it is permanent in nature.

Illustrative Cases on liberty to Contract

A took up law at Arellano University. He left the university and enrolled for the last
semester of his fourth year in the Abad Santos Law School. Subsequently, he
passed the bar examinations. During his stay at the Arellano University, he was
constant recipient of scholarship grants. However, he was made to sign a waiver
of his right to transfer to another school unless he refunds to the University the
equivalent of his scholarship grants. Since taking the bar examinations, he had to
secure his transcript of records from the University. He was required to make a
refund, which he did, but under protest. Subsequently he brought an action to
recover 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 merit and not to attract brilliant students in
school for their propaganda value.

Illustrative Cases on liberty to Contract

In the contact 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 any connection with or be employed in any drugstore or have
connection with or be employed in any drugstore within four kilometers from the
municipality of San Fernando, Pampanga while the said purchaser or his heirs may own or
have right to open a drugstore or have an interest in any other within limits of San
Fernando, Pampanga. Are the limitations or restriction placed upon seller valid? Reasons.

YES. Because the restriction imposed is only on a limited scale. The

answer would be different if the seller is forbidden to engage in
business within the Philippines, or during his lifetime he cannot
engage in drugstore business, or to engage in this kind of business
he must obtain the written consent of the buyer , for this is contrary
to public policy considered by the court as restraint of trade.

Illustrative Cases on liberty to Contract

The constitution enjoins the State to protect the rights

of workers and promote their 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.

Contract of Adhesion

A contract duly executed is the law between the parties, and they are
obliged to comply fully and not selectively with its terms. A contract of
adhesion is just binding as ordinary contracts.

It is true that the court has, on occasion, struck down such contracts as
being assailable when the weaker the party is left with no choice by the
dominant bargaining party and is thus completely deprived of an opportunity
to bargain effectively. Nevertheless, contracts of adhesion are not prohibited
even as the courts remain careful in scrutinizing the factual circumstances
underlying each case to determine the respective claims of contending
parties on their efficacy.
The rule is that, should there be ambiguities in a contract of adhesion , such
ambiguities are to be construed against the party the prepared it. If,
however, the stipulation are not obscures, but clear and leave no doubt on
the intention of the parties, the literal meaning of its stipulations must be
held controlling.

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 left to a third
person. The decision of the third person
is not being binding until it has been
made known to both contracting parties.

Exception to the determination of a

performance by third person

The determination of performance by the

third person may be cancelled if it is
inequitable. In such a case, the court
shall decide what is equitable under the
circumstances.

Illustrative Case:
A leased a certain building to B and C. In the contract of
lease there is a stipulation that B and C can continue
occupying the building indefinitely so long as they should
faithfully fulfill their obligation of paying the rentals. In an
action for ejectment, can B and C successfully set up the
defense that under the contract, they can continue
occupying the building so long as they faithfully fulfill their
obligation of paying the rentals? Reason.
No, because the continuance of the contract would
depend upon the sole will of B and C, completely depriving
the owner of all say on the matter. The law states the
validity and compliance of the contract cannot be left to the
will of one of them. (Art.1308)

otherwise known as principle of

relativity

Contracts take effect only between the parties, their assigns and
heirs, except in cases where the rights and obligations arising
from the contract are not transmissible by their nature, or by the
stipulation or by provision of law. The heir is not liable beyond the
value of property he received from the decedent.
Pour Auturi - If the 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. The contracting parties must have clearly and
deliberately conferred a favor upon a third person (Art.1311)

Exceptions to the rule of

relativity

Obligations arising from contract which are not

transmissible by their nature, stipulation or
provision of law (Art.1311)
Stipulation Pour Autrui (Art.1311)
When a third person induces another to violate
his contract. (Art.1314)
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
court to rescind the contract. Can SL object to the
rescission on the ground that if the contract is
rescinded, the sub-lease contract would be affected?

No, because L is not bound by the sub lease contract

between X and SL inasmuch as he did not participate
therein.

Stipulation Pour Autrui

Stipulation in favor of a third person

made by the contracting parties with
clear and deliberate intention of
conferring a favor upon such third
person and whose fulfillment the latter
may demand by communication his
acceptance to the obligor before its
revocation. (Art.1311)

Requisites of Pour Autrui

Stipulation is in favor of a third person

The parties clearly and deliberately
conferred the favor to the third person.
The stipulation must be a part of the
contract.
The acceptance of the third person must
be communicated to the parties of the
contract.

Examples

D owes C P10,000 with 14% interest payable on June 15. The

14% interest must be given to a third person, X. Take note
that the parties in the contract is D and C but it carries a
stipulation in favor of X, In this case, X must communicate
his acceptance to D and C otherwise he will not be entitled
to the benefit of the contract. This is stipulation Pour Autrui
Insurance of motor vehicles as public utilities, taken by their
owners or operators in favor of the passengers. The contract
here is between the owner operator and the insurers but
the favored persons are the passengers, a third person.

How contracts are perfected?

If consensual by mere consent

If real by delivery
If formal or solemn special form is
required for its perfection.

Perfection of Real Contracts

If the 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 articles are deposit, pledge, and
commodatum.

Perfection of Real Contracts

Take note that if the agreement is a contract to make

deposit, or make a pledge the contract is consensual,
the perfection is a upon the meeting of minds. After
delivery, the contract becomes a real contract

Example: Today, June 1, D borrowed from C P10,000 with a

promise that D will give his diamond ring to C as a security
on June 15. before June 15 even if C gave D the P10,000 the
contract is not yet perfected because in 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.

Requisites of Consent

Must be given by two or more parties

Parties are capacitated to contract
Consent must be intelligently or freely
given
Express manifestation of the will of the
contracting parties.

Nature Acceptance

Acceptance of the offer must be

absolute. If qualified, it constitute only a
counter offer and the contract is not
perfected unless the counter offer is
counter accepted. In short, a counter
offer extinguishes the original offer.

Innominate contracts and how regulated

Do ut des I give that you give

Do ut facias I give that you do
Facio ut des I do that give
Facio ut Facias I do that you do

Illustrative Cases:

S offered 1,000 ballpen to B for P5.00

each. B answered by lettered that he is
willing to buy if S could deliver 1,500. Is
the contract perfected?

No, because the acceptance is qualified. It

constitute a counter offer. (Art.1319)

Illustrative Cases:

On January 5, 2006, S wrote a letter to B offering to

him the sale of a specific building. On January 6,
2006 at 7 am, B sent a letter of acceptance which
was received by S at 11 am that day. But at 10:00
am S had already sent B a letter of withdrawal of
the offer which was received by B at 5pm. Was the
contract perfected.

No, because there was no more offer at the time of

acceptance.

Illustrative Cases:

S writes D offering to sell a piece of land for

P10,000 and at the same time receives a letter of
offering to buy the said land for P10,000. Is there
a perfected contract.

None, because neither party knew the offer of the

other at that time the letter was written. For the
contract to be perfected it is necessary that one party
should accept the offer made by the other. This
otherwise known as crossing of letters

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 comes to his knowledge. An offer
becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of
either party before acceptance is
conveyed.

Example

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 Dec. 5. He wrote the letter of acceptance and
drop it at the mailbox on Dec.10 while the letter is in
the course of travel, B dies, but the letter was received
by S on Dec. 15, is the contract perfected?

No. the death of either party before the acceptance is

conveyed shall render the offer and the acceptance
ineffective.