BM2304

ESSENTIAL REQUISITES OF CONTRACTS

Definition of Contract
➢ It is a meeting of the minds between two (2) persons whereby one binds himself to the other to
give something or render some service (Article 1305).
➢ Two (2) persons must be involved; otherwise, allowing one to contract with himself would only
result in confusion that extinguishes an obligation.
➢ It is one of the sources of obligation.
➢ It adheres to technical rules and must be lawful.
➢ It is enforceable through legal proceedings.

Requisites that must concur for a contract to exist

1. Consent of the contracting parties
2. Object certain, which is the subject of the contract
3. Cause of the obligation that is established

What is a Valid Contract?

These contracts meet all the legal requirements and limitations for the type of agreement involved.

Classification of Contracts
As to perfection
a. Consensual contracts – Contracts that are perfected by mere consent of the parties.
b. Real contracts – Contracts that are perfected upon the delivery of the object of the contract.
Example: Contract of pledge, depositum and commodatum

As to form
a. Formal contracts – Contracts that must be in the form provided by the law for the contract to be
valid. Example: Contract of Partnership
b. Informal contracts – Contracts that do not require the forms for their validity.

As to name
a. Nominate contracts – Contacts that have a title or name under the law.
Example: Contract of Sale, Contract of Partnership, Contract of loan and Contract of Lease
b. Innominate contracts – Contracts without any name or title under the law.
There are several kinds of innominate contracts, namely:
• do ut des (“I give that you may give.”) - it comprises an obligation to give from both parties.
• do ut facias (“I give what you may do.”) - it comprises an obligation to give on the part of
the first party and an obligation to do on the part of the second party.
• facto ut des (“I do what you may give.”) - it comprises an obligation to do on the part of
the first party and an obligation to give on the part of the second party.
• facto ut facias (“I do what you may do.”) - it comprises an obligation to do on both parties.

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Innominate contracts are governed by the following:

1. The agreement of the parties
2. The provisions of the Civil Code on obligations and contracts
3. The rules governing the most analogous contracts
4. The customs of the place

As to cause
a. Onerous – Contracts where there is an exchange of consideration. The consideration as to each of
the parties is the delivery or performance or the promise of delivery or performance of a thing or
service by the other party.
b. Remuneratory – The consideration is the service or benefit for which the remuneration is given.
c. Gratuitous – Contracts where one party receives no equivalent consideration. These are contracts
of pure beneficence; the consideration is the liberality of benefactors.
Example: Donation

As to dependence on another contract

a. Preparatory – those contracts which serve as the first step before another contract is to be
entered.
Example: Contract of Agency and Contract of Partnership
b. Principal – those contracts that can survive on their own. Its validity does not depend upon
another contract.
Example: Contract of Sale and Contract of Lease
c. Accessory – those contracts that are dependent upon another contract.
Example: Mortgage and pledge

As to parties obligated
a. Unilateral – those contracts in which only one party is obligated to perform an obligation.
Example: Commodatum
b. Bilateral – those contracts where both parties are required to perform an obligation.
Example: Contract of Sale

As to risk involve
a. Commutative – Contracts where each party obtains an equivalent presentation value.
Example: Contract of lease
b. Aleatory contracts – Contracts whose fulfillment depends upon chance.
Example: Insurance

Characteristics or Principles of Contracts

Freedom to Contract
The contracting parties may establish stipulations, clauses, terms and conditions as they deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy (Article 1306).

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Limitations on the Freedom to Contract

The freedom to contract is not absolute. In fact, the law provides for the limitations that the parties cannot
stipulate on something contrary to law, morals, good customs, public order, or public policy.

The presence of any of the limitations mentioned will render the contract void.
1. Contract must not be contrary to law.
Laws are superior to contracts. Any contract that opposes the law is void and without legal effect.
2. Contract must not be contrary to morals.
Morals relate to fundamental values of society that are universally admitted and already gained
recognition.
3. Contract must not be contrary to good customs.
Custom is a habitual course of conduct observed uniformly and voluntarily by the people. It is a
kind of special rule which is followed from time immemorial.
4. Contract must not be contrary to public order.
Public order refers to the safety as well as the peace and order of a particular community or
country.
5. Contract must not be contrary to public policy.
Public policy is a principle of law that holds that no person can lawfully do that which has a
tendency to be injurious to the public or against the public good.

Principle of Mutuality of Contract

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

Exception to the Principle of Mutuality of Contracts: Determination by Third Person

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 (Article 1309).

The determination, however, is not obligatory.

The determination of the third person will not bind the parties into a contract if the determination or
assessment of the third person is not just or inequitable. In this case, the court shall decide what is equitable
under the circumstances (Article 1310).

Relativity of Contracts
Contracts take effect only between the parties, their assigns and heirs, except where the rights and obligations
arising from the contract are not transmissible by their nature, 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. The contracting parties must have clearly and deliberately conferred a favor upon a
third person (Article 1311).

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Instances where the rights and obligations in the contracts are not transmissible to the assigns or heirs:
1. When the rights and obligations arising from the contract are not transmissible by nature.
2. By agreement of the parties.
3. When the contract so provides. Example: Contract of Partnership

Exception to the Relativity principle

The general rule is that contracts can only bind the parties who entered them. Thus, all others or third persons
who are not privy to the contracts have no business at all in the contracts. They have no rights and obligations
whatsoever simply because they are strangers.

However, the rule admits an exception wherein third persons may be affected by a contract. To wit:
1. When a contract contains a stipulation in favor of a third person, otherwise known as the
Contract Pour Autrui.

What is Contract Pour Autrui?

It is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, which
stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent
of the third person. Such a third person may demand its fulfillment, provided he communicates
his acceptance to the obligor before revoking it.

Requisites of Contract Pour Autrui

➢ There is a stipulation in favor of a third person;
➢ The stipulation is a part, not the whole, of the contract;
➢ The contracting parties clearly and deliberately conferred a favor to the third person
– the favor is not an incidental benefit;
➢ The favor is unconditional and uncompensated;
➢ The third person communicated their acceptance of the favor before its revocation
and
➢ The contracting parties do not represent, or are not authorized by, the third person.

2. In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby. (Article 1312)
3. The right of the creditor to sue on a contract entered into by his debtor. (Article 1313)
4. When a third person induces another to violate his contract. (Article 1314)

Obligatory Force of the Contract

The obligations arising from contracts shall have the force of law between the contracting parties and should
be complied with in good faith. (Article 1159)

Once the contract is perfected, the parties must faithfully observe the terms and conditions established.
Otherwise, a cause of action for breach of contract will arise.

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Consensuality of Contract
A contract is 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. (Article 1315)

Consensual contracts are perfected by mere consent, while real contracts are perfected not by mere consent
but by delivery of the object of the obligation. (Article 1316)

Contracts take effect ONLY between the parties, their assigns, and heirs, which means only these people can
have the rights and obligations under the contract. EXCEPT:
1. When a contract is effective only between the parties and the obligation arising from the contract
is not transmissible by its nature (i.e., a contract involving personal qualifications, by stipulation,
or by the provision of law, i.e., agency, partnership, and commodatum); and
2. When strangers or third persons are affected by the contract (i.e., contracts containing stipulation
pour autrui, contracts creating real rights, contracts entered into to defraud creditors, and
contracts which have been violated at the inducement of a third person.

References
Civil Code of the Philippines
De Leon, H. S. & De Leon Jr., H. M. (2014). The law on obligations and contracts. Rex Book Store.
Paras, E. (2016). Civil code of the Philippines annotated prescription; obligations and contracts article 1106-
1457. Rex Book Store.
Cagurangan, T. (2022). Essentials in Law on Obligations and Contracts

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