CONTRACTS

Atty. A. Agrupis
Article 1305. 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
Elements of Contracts
1. Essential
a. Common
- consent, cause, object
b. Special (e.g. delivery, form)
c. Extraordinary (e.g. consideration/price)
2. Natural (e.g. warranty, fortuitous event)
3. Accidental (e.g. conditions, limitations)
Parties to a Contract
Article 1305. 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
Exception: Auto Contracts
- apparently, there is only one party involved, but in reality, said party merely
acts in the name and for the account of two distinct contracting parties.

1) When a person, in his capacity as representative of the other contracts with

himself, or
2) when as a representative of two different persons, he brings about a
contract between his principals by contracting with himself, unless there is
a conflict of interests or when the law expressly prohibits it in specific
cases.
Characteristics of Contracts
Characteristics of Contract
1. Obligatory force or character of contracts (obligatoriedad del
contrato);
2. Autonomy of contracts;
3. Mutuality of contracts; and
4. Relativity of contracts (relatividad del contrato).
Obligatory Force of Contract
Article 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
Article 1305. 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.
Obligatory force of Contract
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.

Article 1356. 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.
Obligatory force of Contract
It refers to the rule so fundamental in all contracts, that once the
contract is perfected, it shall be of obligatory force upon both of the
contracting parties. Consequently, such contracting parties are
bound, not only to the fulfillment of what has been expressly
stipulated, but also to all of the consequences thereof.
Mutuality of Contract
Article 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.
Autonomy of Contract
Article 1306. 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.
Relativity of Contract
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. xxx
Relativity of Contract
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. xxx
Breach of Contract
Breach of contract is defined as the failure ,without legal reason, to
comply with the terms of the contract. It is also defined as the
failure, without legal excuse, to perform any promise which forms
the whole or part of the contract.
(Sps. Edgar and Dinah Omengan vs. Philippine National Bank. et. al., G.R. No.
161319, January 23, 2007).
Stages of A Contract
Stages of a Contract
1. Generation
- preliminary or preparation, conception or
generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of
the parties .
Stages of a Contract
1. Generation
- preliminary or preparation, conception or
generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of
the parties .
Stages of a Contract
2. Perfection
- the moment when the parties come to agree on
the terms of the contract.
Stages of a Contract
3. Consummation
- fulfillment or performance of the terms agreed
upon in the contract.
Classification of Contracts
According to their relation to other Contracts
1. Preparatory - those which have for their object the
establishment of a condition in law which is necessary
as a preliminary step towards the celebration of
another subsequent contract.
According to their relation to other Contracts
2. Principal - those which can subsist independently
from other contracts and whose purpose can be
fulfilled by themselves.
According to their relation to other Contracts
3. Accessory - those which can exist only as a
consequence of, or in relation with, another prior
contract.
Examples — pledge, mortgage.
According to their Perfection
1. Consensual - those which are perfected by the
mere agreement of the parties. (Art. 1315)
Examples — sale, lease.

2. Real - those which require not only the consent of

the parties for their perfection, but also the delivery of
the object by one party to the other. (Art. 1316)
Examples — commodatum, deposit, pledge.
According to their Form
1. Common or informal — or those which require no
particular form.
Example — loan.

2. Special or formal — or those which require some

particular form.
Examples — donations, chattel mortgage.
According to their Purpose
1. Transfer of ownership. Example — sale.
2. Conveyance of use. Example — commodatum.
3. Rendition of services. Example — agency.
According to their Purpose
1. Transfer of ownership. Example — sale.
2. Conveyance of use. Example — commodatum.
3. Rendition of services. Example — agency.
According to Subject Matter
1. Things. Examples — sale, deposit, pledge.
2. Services. Examples — agency, lease of services.
According to the Nature of the Vinculum which
they Produce
1. Unilateral — or those which give rise to an
obligation for only one of the parties.
Examples — commodatum, gratuitous deposit.

2. Bilateral — or those which give rise to reciprocal

obligations for both parties.
Examples — sale, lease.
According to their Cause
1. Onerous — or those in which each of the parties
aspires to procure for himself a benefit through
the giving of an equivalent or compensation.
Example — sale.
2. Gratuitous — or those in which one of the parties
proposes to give to the other a benefit without any
equivalent or compensation.
Example — commodatum.
According to the Risk Involved
1. Commutative — or those where each of the
parties acquires an equivalent of his prestation
and such equivalent is pecuniarily appreciable and
already determined from the moment of the
celebration of the contract.
Example — lease.
According to the Risk Involved
2. Aleatory — or those where each of the parties has
to his account the acquisition of an equivalent of his
prestation, but such equivalent, although pecuniarily
appreciable, is not yet determined at the moment of
the celebration of the contract, since it depends upon
the happening of an uncertain event, thus charging
the parties with the risk of loss or gain.
Example — insurance.
According to their Names or Norms Regulating Them
1. Nominate — or those which have their own
individuality and are regulated by special
provisions of law.
Examples — sale, lease.

2. Innominate — or those which lack individuality and

are not regulated by special provisions of law.
Right to Contract
Article 1306. 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.
Mutuality of Contract
The validity or fulfillment of a contract cannot be left
to the will of one of the contracting parties.

Article 1308. The contract must bind both contracting

parties; its validity or compliance cannot be left to the
will of one of them.
The validity or fulfillment may be left to the will of a
third person.

Article 1309. 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.

ü Determination made by the third person should not be evidently

inequitable. If it is evidently inequitable, it shall not have any
obligatory effect upon the contracting parties.
Relativity of Contract
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.
xxx
General Rule
A contract can only bind the parties who had entered into it
or their successors who have assumed their personality or
their juridical position.
Exception
If the rights and obligations arising from the contract are not
transmissible:
(1) By their nature, as when the special or personal qualification of
the obligor constitutes one of the principal motives for the
establishment of the contract; or
(2) By stipulation of the parties, as when the contract expressly
provides that the obligor shall perform an act by himself and not
through another; or
(3) By provision of law, as in the case of those arising from a
contract of partnership or of agency.
Article 1311. xxx 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.
Effect of Contract on Third Persons; General Rule
Since a contract can take effect only between the contracting
parties, as well as their assigns and heirs, it follows, as a general
rule, that it cannot produce any effect whatsoever as far as third
persons are concerned.
Consequently, he who is not a party to a contract, or an
assignee thereunder, has no legal capacity to challenge its validity,
hence, even if it is admitted that a contract is voidable,
nevertheless, its voidable character cannot be asserted by one who
is not a party to the transaction or his representative.
Effect of Contract on Third Persons; Exceptions
(1) Where the contract contains a stipulation in favor of a
third person;
(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
(4) Where the third person induces a contracting party to
violate his contract.
Stipulation in Favor of A Third Person
- Stipulation “pour autrui”
- 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.
Stipulation in Favor of A Third Person; Requisites
(1) that there must be a stipulation in favor of a third person;
(2) the stipulation must be a part, not the whole of the contract;
(3) the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental
benefit or interest;
(4) the third person must have communicated his acceptance to the
obligor before its revocation; and
(5) neither of the contracting parties bears the legal representative
or authorization of the third party.
Contract Creating Real Rights
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.
Real Right
A real right is a right belonging to a person over a specific
thing, without a passive subject individually determined,
against whom such right may be person- ally enforced. Such
a right, therefore, is enforceable against the whole world.
Contracts in Fraud of Creditors
Article 1313. Creditors are protected in cases
of contracts intended to defraud them.

vAlthough 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 intention of
defrauding him, he may ask for its rescission.
 Interferences with
Contractual Relation
Article 1314. Any third person who induces another
to violate his contract shall be liable for damages to
the other contracting party.
Requisites
(1)the 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.
Example
“O,” a very popular movie star, was under contract with “P’’ Movie
Productions to star exclusively in the latter’s films for two years. “O’’ was
prohibited by the contract to star in any film produced by another producer.
“X’’ Film Co. induced “O’’ to break her contract with “P’’ Movie Productions
by giving her twice her salary. “P’’ Movie Productions sued “X’’ Film Co. for
damages. “X’’ Film Co. contended that it had a right to compete for the
services of “O” and that her contract with “P” Movie Productions was in
restraint of trade and a restriction on her freedom of contract.

Whose contention would you sustain?

Answer
The contention of “P’’ Movie Productions should be sustained. According to
the Civil Code, any third person who induces another to violate his contract
shall be liable for damages to the other contracting party. In the law of torts,
we call this “interference with contractual relation.’’ However, in order that it
will be actionable, it is necessary that the following requisites must concur:
(a) the existence of a valid contract; (b) knowledge on the part of the third
person of the existence of such contract; and (c) interference by the third
person without legal justification or excuse. All of these requisites are present
in the case at bar.
Answer
The contention of “X’’ Film Co. that “O’s’’ contract with “P’’ Movie
Productions was in restraint of trade and a restriction of her freedom to
contract, on the other hand, cannot be sustained. Well-established is the rule
that in order to determine whether or not an agreement of this nature
constitutes an undue restraint of trade, and therefore, is contrary to public
policy, two tests are always applied. They are first, is there a limitation as to
time or place? And second, is the prohibition or restraint reasonably
necessary for the protection of the contracting parties? If the answer to both
of these questions is in the affirmative, then the prohibition or restraint is not
contrary to public policy. It is crystal clear that the agreement between “O’’
and “P” Movie Productions passes both tests.