Law on Obligations and Contracts

• Contracts fall under the Law on Obligations and Contracts

Learning Objectives

• Identify contract definitions, elements, classifications, and characteristics.
• Describe each contract characteristic.
• Understand basic contract concepts.

Definition of Contracts

• A contract requires a meeting of minds between two people.
• One party must bind themselves to give something or provide a service to the other based on Article 1305.

Importance, Basis and Purpose of Contracts

• Contracts help individuals get what they need from others for satisfaction.
• Contracts offer legal means to facilitate effectiveness and the economic division of labor.
• Contracts are essential to complete limitations and a key tool to realize individual and social goals, enabling cooperation.

Number of Parties in a Contract

• A contract requires at least two parties.
• A single person can form a contract if they represent different interests (e.g., as an agent).
• An agent authorized by a principal to borrow can be the lender at the going interest rate.

Contract vs. Obligation

• A contract creates obligations.
• A contract requires an accepted obligation for a benefit to exist.
• An obligation is the legal tie after a contract is made.
• Obligations like paying taxes can exist without a contract.

Contract vs. Agreement

• Contracts are legally binding and enforceable.
• Valid and enforceable contracts must be lawful and have all necessary rights for validity.
• Agreements not enforceable in court are considered moral or social, not contracts.
• Agreements are broader, lacking the requirements of legally enforceable contracts.

Essential Characteristics of Contracts

• Mutuality requires contracts to bind both parties, not subject to one's will.
• Autonomy lets parties set terms/conditions if not against the law, morals, good customs, public order, or policy.
• Relativity dictates contracts affect only parties, assigns, and heirs. Exceptions may exist only when rights and obligations of a contract are not transmitted according nature, or by stipulation, or provision of law.
• Consensuality means contracts are perfected by consent.
• Obligations from contracts carry legal force and must be fulfilled in good faith.

Kinds of Contracts

• By name: Nominate (specific name in law) and Innominate (no specific name).
• By perfection: Consensual (perfected by consent) and Real (perfected by delivery).
• By cause: Onerous, Remunatory/Remunerative, and Gratuitous.
• By form: Informal/Simple and Formal/Solemn.
• By obligatory force: Valid, Rescissible, Voidable, Unenforceable, and Void/Inexistent.
• By person obliged: Unilateral and Bilateral.
• By risks: Commutative and Aleatory.
• Commutative contract: The undertaking of one party is considered equivalent to that of the other.
• Aleatory contract: It depends upon an uncertain event or contingency both as to benefit or loss.
• By liability: Unilateral and Bilateral.
• Unilateral contract: It creates an obligation on the part of only one of the parties.
• Bilateral contract: It gives rise to reciprocal obligations for both parties.
• By status: Executory and Executed.
• Executory contract: It has not yet been completely performed by both parties.
• Executed contract: It has been fully and satisfactorily carried out by both parties.
• By dependence to another contract: Preparatory, Accessory, and Principal.
• Preparatory contract: It is entered into as a means to an end, like agency or partnership.
• Accessory contract: It is dependent upon another contract it secures or guarantees for its existence and validity.
• Principal contract: It does not depend for its existence and validity upon another contract but is an indispensable condition for the existence of an accessory contract.
• By dependence of part of contract to other parts: Indivisible and Divisible
• Indivisible contract: Each part of the contract is dependent upon the other parts for satisfactory performance.
• Divisible contract: One part of the contract may be satisfactorily performed independently of the other parts

Contract Validity

• Parties can set convenient terms if they are legal, moral and in line with good customs, public order, and policy (Art. 1306).

Valid Contracts

• Valid contracts meet legal requirements and contractual stipulation limits, making them legally binding and enforceable.
• An agreement meeting valid contract criteria may be unenforceable if it violates the Statute of Frauds (Art. 1403).

Freedom to Contract

• Article 3, Section 10 of the Philippine Constitution states that no law impairing the obligation of contracts shall be passed.

Limitations to Freedom to Contract

• Freedom to contract applies to valid contracts only.
• It cannot override the state’s police power.
• There is not an absolute right to enter into any contract.
• Courts show caution before voiding contracts, as freedom of contract is a constitutional and statutory right.

Contracts Must Not Be Contrary to the Following:

• Law: Contracts cannot violate the law.
• Morals: Contracts cannot violate moral conduct.
• Good customs: Contracts cannot violate customs and enforced practices.
• Public order: Contracts cannot violate public safety etc.
• Public policy: Contracts cannot violate what is for the common good.

Classified According to Name

• Nominate Contract: a specific name or designation exists
• Innominate Contract: no specific name or designation exists

Kinds of Innominate Contracts

• do ut des (I give that you may give)
• do ut facias (I give that you may do)
• facto ut des (I do that you may give)
• facto ut facias (I do that you may do)
• Note: "do ut des” is no longer innominate for it has been given a name, and is known as barter or exchange

Rules Governing Innominate Contracts:

• Agreement of all parties
• Provisions of the Civil Code on obligations and contracts
• Rules governing the most analogous contract
• Customs of the place

Contract Binds Both Parties

• Agreements create obligations and must bind all parties for enforcement.

Determination of Performance of Contractual Obligation

• Performance determination can be by a third party; decisions bind when known by all parties (Art. 1309).
• Third-party determination is not obligatory if inequitable; courts then decide what is equitable (Art. 1310).

Persons Affected by a Contract

• Generally, contract rights/obligations pass to successors (Art. 1311); contracts bind parties, assigns, and heirs only.
• An heir's liability is capped at the inherited property's value.
• Exceptions to this include when contract obligations are not transmissible due to:
• Their nature (personal qualifications being critical).
• Stipulation.
• Provision of law.
• Third parties are not generally entitled to any rights or obligations from contracts to which they are strangers, thus lack standing in court enforce or question its validity. The exception is in the instance:
• Contracts containing a stipulation in favor of a third person
• In contracts creating a real right
• In contracts entered into to defraud creditiors
• In contracts violated at the inducement of a third person

Stipulation Pour Autrui

• Stipulation Pour Autrui: a contract stipulation that deliberately gives a benefit upon a the third person who has right to demand.
• Benefit acceptance must be communicated to the responsible party, prior to the revocation by the of the original parties

Classes of Stipulations Pour Autrui

• Those where the sole benefit of the third person is bestowed.
• Those where an obligation is due from the promisee to the third person which with property sale and a promise to pay seller debt to third person

Requisites of Stipulation Pour Autrui

• Parties clearly and intentionally confer favor on a third party.
• The third party communicates acceptance to the obligor before revocation by parties involved.
• The third party benefit is part, not the whole, of the contract.
• The benefit is free of conditions or compensation.
• No party legally represents the third party; otherwise, agency rules apply.

Nature and Form of Acceptance of Stipulation

• Acceptance must be unconditional and occur before revocation.
• Acceptance does not have to be a specific formality; demand for performance may imply in.

Acceptance of Stipulation Includes its Concurrent Obligations

• When a third person accepts the benefits of a contract to which he is not a party, thus he is also bound to accept the concomitant obligations corresponding thereto.
• A third party cannot selectively accept contract benefits while rejecting unfavorable terms.

Third Persons Are Bound by Contracts Creating Real Rights

• Third parties possessing an object under contract with a real right are bound, even if not parties to the contract (Art. 1312).
• Rights not registered are governed by the Property Registration Decree and are protected acting in good faith.

Creditors Have the Right to Impugn Contracts Intended to Defraud Them

• Creditors can contest contracts designed to defraud them (Art. 1313).
• Although not being party to the contract, creditors can prevent debtor engaging in fraud.

Liability of Third Person Responsible for Breach of Contract

• Third parties inducing contract violation are liable for damages to contract parties (Art. 1314).
• This assumes the contract is valid and the third party knew of it.

Where Legal Justification Exists

• A third person is not liable where sufficient justification for interference
• Thus, it was said that if a party enters into a contract to go with another upon a journey to a remote and unhealthful climate, and a third person with a bona fide purpose of benefiting the one who is under a contract to go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuation is used for the indirect purpose of benefiting himself at the expense of the other contracting party, the intermeddler is liable if his advice is taken and the contract broken.

Classification of Contracts According to Perfection

• Consensual Contract perfected by consent [Art. 1315]
• Real Contract perfected by delivery [Art. 1316]
• Solem Contract requires compliance with certain formalities [Art. 1356]

Stages in the Life of a Contract

• Preparation: Steps taken by parties to reach contract perfection, but without definite agreement.
• Perfection: Parties reach a clear agreement on the contract's subject and cause.
• Consummation: Parties fulfill obligations, fully accomplish the contract, leading to its end.

How Contracts are Perfected

• Consensual Contracts. Generally perfected by parties consenting to the subject and cause.

Consensual Contracts

• General rule is upon parties consenting to the subject/cause.
• Obligatory in any form if essential validity needs are me

Real Contracts

• These are exceptions that require delivery (actual or constructive) of the obligation’s object for perfection.
• Aim for restitution, planning return of what was received.

Solemn Contracts

• Contract needs a special legal form for validity.
• Donation of real property is perfected through public instrument

Effect of Perfection of Contract

• Parties must fulfill stipulations.
• Bound by any impact in line with good faith/law.

Pertinent Provisions of Law are Deemed Incorporated in Contracts

• The rights and obligations of the parties to an agreement are not determined solely by the terms thereof. Any agreement or contract to be enforceable in this jurisdiction is understood to incorporate therin the pertinent provision/s of law specifying the rights and obligations of the parties under such contract.

Unauthorized Contracts

• Individuals are not bound to contracts by others without their knowledge/consent.
• Unless ratified, unenforceable until other party revokes

Ratification of Unauthorized Contracts

• Defects can be cured by the ratification that can be from the person whose mandate it was, as well as by an authorized agent
• Ratification must be clear and made expressed, and cannot contain vagueness
• Ratification has a retroactive effect and so the terms may be enforced

When a Person is Bound by the Contract of Another

• The person entering into the contract must be duly authorized, expressly or impliedly, by the person in whose name he contracts or he must have, by law, a right to represent him; and
• He must act within his power.

Essential Requisites of Contracts

• The requisites/elements that must concur:
• Consent of the contracting parties;
• Object certain which is the subject matter of the contract;
• Cause of the obligation which is established.

Classes of Elements of Contracts

• Essential without such, contract does not exist
• Natural presumed to exist, unless stipulated against, for example, warrantees.
• Accidental exist only when parties expressly make them part of an agreement

Subdivisions of Essential Elements of Contracts

• Common the three elements present in contracts
• Special are unique to contracts, public document for donation, delivery for contract