Contracts

Art. 1305
“A contract is a meeting of the minds between two persons whereby one binds himself, with respect
to the other, to give something, or to render some service.”

When do meeting of minds occur?

It takes place when an offer by one party is accepted by the other.

Is it necessary that contract must be in writing?

No, it does not need to be in writing except for those contracts that are needed to be written.

Contracts vs. Obligations

● Contract is one of the sources of obligations.
● Obligation is the legal tie or relation itself that exists after a contract has been entered into
● Hence, there can be no contract if there is no obligation. But an obligation may exist without a
contract.

Contract vs. Agreement

● All contracts are agreements
● NOT all agreements are contracts

Stages in the life of a contract

1. Preparation or conception
– Preparatory step
– Bargaining point
2. Perfection - meeting of minds regarding the subject matter and the cause of the contract.
3. Consummation - parties performed their respective obligations, and so the contract is put to
an end.

Example:
On December 1, X offered to sell his car for 1M to Y (Preparation). On December 2, Y offer to buy
the car for 800k (Perfection). On December 3, X delivered the car to Y and Y pays 800k
(Consummation).

According to Perfection or Formation:

1. Consensual
 – Perfected by mere agreement of the parties (i.e. sales, lease).
2. Real
– Requires not only the consent of the parties for their perfection, but also the delivery of the
object by 1 party to the other (i.e. commodatum, deposit, pledge).
3. Formal
– Requires some particular form (i.e. donation, chattel mortgage).

According to Cause or equivalent vale of Prestation:

(1) Onerous
– each of the parties aspires to procure for himself a benefit through the giving of an equivalent
or compensation (i.e. sale).
(2) Gratuitous
– Done of the parties proposes to give to the other a benefit without any equivalent or
compensation (i.e. commodatum).
(3) Remunerative
– For service previously rendered

According to Degree of dependence:

1. Principal
– A principal contract is one which can subsist independently from other contracts and whose
purpose can be fulfilled by themselves (i.e. sales, lease).
2. Accessory
– An accessory contract is one which can exist only as a consequence of, or in relation with,
another prior contract (i.e. pledge, mortgage).
3. Preparatory
– A preparatory contract is one which has for its object the establishment of a condition in law
which is necessary as a preliminary step towards the celebration of another subsequent
contract (i.e. partnership, agency).

According to Parties Obligated:

1. Unilateral
– A unilateral contract is one which gives rise to an obligation for only 1 of the parties (i.e.
commodatum, gratuitous deposit).
– Both must give consent
2. Bilateral
– A bilateral contract is one which gives rise to reciprocal obligations for both parties (i.e. sale,
lease).
According to Name or Designation:
1. Nominate
– A nominate contract is one which has a name and is regulated by special provisions of law
(i.e. sale, deposit, agency, lease)
2. Innominate
– No specific name or designation in law

According to Subject Matter:

(1) Involving Things (i.e. sale, deposit, pledge)
(2) Involving Rights or Credits (i.e. usufruct, assignment of credits)
(3) Involving Services (i.e. agency, lease of services)

According to Number of Person who participated in the drafting of contracts:

(1) Ordinary (i.e. sale,)
(2) Contract of adhesion (i.e. insurance contract)
– Provisions are drafted by only one party and the only participation of the other party is to sign
his name, his signature or his adhesion to the contract.

Art. 1306 Autonomy of Contracts

"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.”

Art. 1307 Innominate Contracts

"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 (similar) nominate contracts,
and by the customs of the place."

4 kinds of Innominate contracts

1. Do ut des (I give that you may give)
2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
4. Facio ut facias (I do that you may do)

Art. 1308 Mutuality of Contracts

"The contracts must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them."
Example:
In a loan contract, pag yung isang party has the SOLE DISCRETION/UNILATERAL RIGHT, TO
ADJUST INTEREST, ANYTIME, AS HE WANT. This is not valid.

Example: (Binding)
X agrees to sell his car to Y. Y agrees to pay 1M

Note:
● Stipulations stating that X ALONE will determine/adjust the price of the car, and Y has no
right to negate X’s decision, violates Mutuality of contracts.
● bad bargain in itself does not necessarily violates Mutuality of contracts.

Art. 1309 Exception to the MoC

"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."

Example:
X sells his land to Y. They agreed that Z will determine the price of the land because Z is a real
estate appraiser.

Note:
● The third person should notify both parties.

Art. 1310
“The determination shall not be obligatory if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the circumstances."

Art. 1311 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.
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"
Note:
● Sila lang ang may rights and obligations under their contract. Sa kanila lang effective yung
contracts. Yan yung ibig sabihin ng Principle of Relativity. Yung parties lang, hindi kasama ang
hindi PRIVY (stranger/third person) to the contract.

Example:
Y sold her car to X with an agreement not to sell it to others until it is fully paid. Later on, X, which
is not still fully paid, sold the car to Z, in violation to the agreement? Can Y cancel the contract
entered into by X and Z? No, because Z is not a party to the agreement between X and Y. In the
same way, Y is not a party to the agreement of X and Z. However, Y can claim damages against
X for breach of contract.

Example:
X leased his property to Y and prohibited sub-lease. Y subleased the property to Z. X goes to court
to rescind the leased contract. Can Z oppose? No, because X is not bound by the sublease
between Y and Z. Z’s remedy is to proceed against Y.

STIPULATION POUR AUTRUI REQUISITES:

1. There must be a stipulation in favor of a third person;
2. The contracting parties must have clearly and deliberately conferred a favor to the third
person;
3. The stipulation should be a part and not the whole of the contract or the contract itself;
4. The third person must have communicated his acceptance to the obligor before its revocation
by the obligee or the original parties;
5. Neither of the contracting parties bears the legal representation or authorization of the third
party for otherwise the rules on agency will apply.

Example:
X borrowed 10k with 12% interest from Y, payable on Dec. 25, 2020. There is a stipulation that the
12% interest will be given to Z. In this situation, Z must communicate her acceptance to X and Y.
Otherwise, she will not become entitled to the benefit of the contract. From the moment Z
communicated her acceptance, she becomes party to the contract.

Exception to the Principle of Relativity of Contracts

● STIPULATION POUR AUTRUI (Article 1311, 2nd par)
● Third persons is bound by contracts creating real rights (Article 1312)
● Right of defrauded creditors under (Article 1313)
● Contract is violated trough inducement by third person (Article 1314)
Art. 1312 Exception to the RoC
"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"

Example:
X mortgage his land to Y. Since X is still the owner of the land, he sold the same land to Z. Because
there is a contract of mortgage, Y will be bound to the contract of X and Z. But Z must respect the
right of Y to the land.

Art. 1313
"Creditors are protected in cases of contracts intended to defraud them"

Art. 1314
"Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party."

Example:
Suppose, Y is a movie actress and has a 1 year contract with 123 studio. Z, a friend of Y, induces Y
to break her contract without any justifiable cause. 123 studio can sue Z for damages.

Note:
● A third person is not liable for damages if there is a justifiable cause.

Art. 1315 Consensuality of Contracts

"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."

How contracts are perfected?

General Rule: Principle Consensuality of contracts
Exceptions:
● Real contracts
● Formal contracts

Art. 1316
"Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of
the object of the obligation"

Example:
On June 1, X borrowed money from Y worth 10k with a promise that X will give his diamond ring as a
security for the loan on June 15. Before June 15, even if Y has already given the 10k to Y, the
contract of pledge is not yet perfected. The perfection is upon the delivery of the pledge.

Art. 1317 Unenforceable Contracts

"No one may contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
contracting party."

Requisites for a person to contract in the name of another

1. He must be authorized (expressly or impliedly).
2. He must have by law, a right to represent him
3. The contract must be subsequently RATIFIED. (express or implied)
4. He must act within his power