MODULE 2: Law on Contracts and Obligations PDF - KLD

KOLEHIYO NG LUNGSOD NG DASMARIÑAS BRGY. BUROL MAIN, CITY OF DASMARIÑAS, CAVITE, PHILIPPINES 4114 Law on Contracts and Obligations Elements of Valid Contract Module 2 Course Overview This course focuses on the fundamental principles of contracts and their legal requirements....

KOLEHIYO NG LUNGSOD NG DASMARIÑAS BRGY. BUROL MAIN, CITY OF DASMARIÑAS, CAVITE, PHILIPPINES 4114 Law on Contracts and Obligations Elements of Valid Contract Module 2 Course Overview This course focuses on the fundamental principles of contracts and their legal requirements. It is designed to help students understand the essential elements of a valid contract in business law, particularly in the context of Information Technology (IT) contracts and agreements. Students will learn about the requirements for contract formation, the legal processes involved in contract interpretation, and the consequences of defective contracts. The course will also explore the ethical dimensions of contracts and how these elements align with broader goals like Sustainable Development Goal 8 (SDG 8), which emphasizes decent work and economic growth. Learning Objectives LO1: Discuss the essential and formal requisites of a valid contract. LO2: Identify defects in consent, cause, or object. LO3: Explain the legal consequences of void, voidable, and unenforceable contracts. LO4: Explore ethical dimensions of contract formation. LO5: Relate contractual validity to SDG 8 (Decent Work and Economic Growth) and KLD Tenet: Transparency. Topic Outline I. Essentials Requisites of Contracts a. Elements of Contracts II. Consent, Cause, Object III. Defective Contracts I. Types of Defective Contract II. Effects of Defective Contract Elements of a Valid Contracts In the field of Information Systems, contracts play a significant role, especially when dealing with software licensing, hardware procurement, IT service agreements, and other technological transactions. Understanding the elements of a valid contract is essential for students to ensure that business transactions, data exchanges, and technology deployments are legally sound. Elements of a Valid Contracts I. Essential Requisites of Contracts Elements of a Valid Contracts I. Essential Requisites of Contracts Article 1318, Civil Code of the Philippines There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. Elements of a Valid Contracts I. Essential Requisites of Contracts Elements of Contracts In addition to understanding the elements of obligation, it’s important to grasp the elements of a contract, as they are foundational for Information Systems students who may work with legal agreements in e- commerce, software development, or other technology-related areas. 1. Consent Consent refers to the agreement of the parties involved, which must be freely given without force, intimidation, or undue influence. In the context of Information Systems, this would apply to situations like a company agreeing to a service-level agreement (SLA) or a user consenting to terms of service or privacy policies when using a digital platform or product. Elements of a Valid Contracts I. Essential Requisites of Contracts Elements of Contracts - Consent Example: A company contracts an IT service provider to manage its network. The terms (e.g., payment, uptime, support) should be mutually agreed upon by both parties. Example : When a user agrees to the Terms of Service of an online platform, they are providing consent to the contract. Legal Reference: "The consent of the parties must be freely given and not obtained through force, intimidation, or undue influence.". Elements of a Valid Contracts I. Essential Requisites of Obligation and Contracts Elements of Contracts 2. Object (Subject Matter) As with obligations, the object of the contract refers to the service, product, or benefit being provided or exchanged. It must be lawful and possible to perform. Example: A software development contract may have as its object the design, development, and delivery of a mobile application. Elements of a Valid Contracts I. Essential Requisites of Obligation and Contracts Elements of Contracts - Object Example: A contract for the purchase of computer hardware or software. The object could be the actual physical devices (e.g., servers) or software applications being licensed. Example: A software development contract may have as its object the design, development, and delivery of a mobile application. Legal Reference: "The object of a contract must be lawful, possible, and determinate, or at least determinable." Elements of a Valid Contracts I. Essential Requisites of Obligation and Contracts Elements of Contracts 3. Cause (Reason or Purpose) The cause of the contract is the reason why the contract is entered into. It must be lawful and not contrary to public policy or morality. Example: The cause in a contract between a client and a web development company could be the creation of a website for the client’s business in exchange for a fee. Elements of a Valid Contracts I. Essential Requisites of Obligation and Contracts Elements of Contracts - Cause Example: A company hires an IT contractor to design a website. The consideration (cause) is the payment the contractor will receive for creating the site. Legal Reference: "The cause of an obligation is the reason for its existence, which must be lawful and not contrary to public policy." Elements of a Valid Contracts I. Essential Requisites of Contracts Elements of a Valid Contracts II. Consent, Cause, Object 1. Consent (Agreement) The mutual agreement of the parties to the terms of the contract, made freely without any form of coercion, misrepresentation, or fraud. Importance: Both parties must fully understand the terms, such as timelines, payment schedules, and intellectual property rights. Defects in Consent: Mistake: A misunderstanding of facts or terms. Duress: Force or threats influencing agreement. Undue Influence: Taking unfair advantage of a weaker party. Fraud: Misrepresentation of facts. Elements of a Valid Contracts II. Consent, Cause, Object 1. Consent (Agreement) Key Points : Consent in Information Systems could refer to a company or individual agreeing to the terms and conditions of a software license agreement or an IT services contract. In an online setting, consent is often given through the "click-wrap" agreement (where the user clicks "I Agree" to the terms of service before using a digital platform or software). Consent must be freely given and not influenced by force, intimidation, or undue influence. Elements of a Valid Contracts II. Consent, Cause, Object 1. Consent (Agreement) Relevant Philippine Law: Article 1318, Civil Code of the Philippines: "There is no contract unless there is consent, object, and cause." This article establishes that consent is an essential element of a contract. Article 1330, Civil Code of the Philippines: "Consent is vitiated when obtained through force, intimidation, or undue influence." This emphasizes that valid consent requires that it is given voluntarily and without any external pressure. Elements of a Valid Contracts II. Consent, Cause, Object 2. Cause (Reason) The reason why the contract is being entered into; it must be lawful and not contrary to public policy. Examples: The cause might be to provide a software solution that helps a business improve its operational efficiency. Potential Issues with Cause: An unlawful cause renders the contract void, such as contracts for illegal services (e.g., hacking services). Elements of a Valid Contracts II. Consent, Cause, Object 2. Cause (Reason) Key Points: In an IT contract, the cause could be the provision of IT services in exchange for payment. For example, a business hires an IT consulting firm to provide network security services in return for agreed payment. The cause can also refer to the intellectual property being licensed (e.g., a software company provides a software product, and the customer pays for the license). The cause must always be lawful and not in violation of any legal or ethical standards. A contract formed for illegal purposes is void. Elements of a Valid Contracts II. Consent, Cause, Object 2. Cause (Reason) Relevant Philippine Law: Article 1325, Civil Code of the Philippines: "The cause of an obligation is the reason for its existence, which must be lawful and not contrary to public policy." This article ensures that the cause must be legal and not go against societal norms or laws. Article 1352, Civil Code of the Philippines: "The cause of a contract must be lawful. If the cause is unlawful, the contract is void." This article underscores that the cause (reason for the contract) must be lawful for the contract to remain valid. Elements of a Valid Contracts II. Consent, Cause, Object 3. Object (Subject Matter) The subject matter of the contract must be clear, definite, possible, and lawful. Examples: The object could be software development, maintenance services, or hardware procurement Importance in IT contracts: Contracts must specify the scope of work, the deliverables, and any performance standards. Elements of a Valid Contracts II. Consent, Cause, Object 3. Object (Subject Matter) Key Points : In the context of Information Systems, the object of a contract could be anything from a software product to IT services, consultation, or even a license to use a platform. The object of the contract must be possible (i.e., it can be delivered or performed), lawful, and determined or determinable (clearly described or can be identified). Elements of a Valid Contracts II. Consent, Cause, Object 3. Object (Subject Matter) Relevant Philippine Law: Article 1319, Civil Code of the Philippines: "The object of a contract must be lawful, possible, and determined, or at least determinable." This article clarifies that the object must be something that can be legally delivered or performed under the terms of the contract. Elements of a Valid Contracts II. Consent, Cause, Object 3. Object (Subject Matter) Relevant Philippine Law: Article 1347, Civil Code of the Philippines: "The object of the contract must be certain or capable of being made certain. It cannot be a thing that is impossible or illegal." This reinforces the idea that the object must not be illegal and must be something that can be clearly defined or at least determined. Elements of a Valid Contracts II. Consent, Cause, Object Application in Information Systems Context Let’s look at an example involving a contract for software development: Consent: The IT company (developer) and the client agree to the terms of the software development project. Both parties willingly enter into the agreement without force or coercion. Cause: The IT company agrees to develop a custom software system for the client in exchange for agreed compensation (money). The purpose or consideration (cause) is clear and lawful—payment in exchange for service. Elements of a Valid Contracts II. Consent, Cause, Object Application in Information Systems Context Let’s look at an example involving a contract for software development: Object: The object of the contract is the software to be developed, which must be clearly defined (e.g., the number of features, the specific functionalities, and the timeline for delivery). If any of these elements are missing or unlawful (for instance, if the software development project involved illegal activities), the contract would be considered invalid. Elements of a Valid Contracts III. Defective Contracts In the context of Philippine law, Hector de Leon (a renowned legal scholar) defines a defective contract as one that lacks one or more essential requisites required for it to be valid and binding. A contract may be defective for a number of reasons, rendering it either void (null from the beginning) or voidable (valid until one party rescinds it). The defects can arise due to issues with consent, cause, object, or the capacity of the parties involved. Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 1. Void Contracts: Contracts that are invalid from the start and cannot be enforced due to defects in consent, object, or cause. Example: A contract for the development of malware is void because the object (illegal activity) is unlawful. Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 1. Void Contracts: Examples of Void Contracts: A contract that involves an illegal subject matter (e.g., selling illegal software or pirated content). A contract with an object that is impossible (e.g., a contract to develop a non-existent software or provide impossible IT services). Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 1. Void Contracts: Civil Code Reference: Article 1409 - "The following contracts are void and produce no effect whatsoever: (1) Those whose object is illegal; (2) Those whose cause or object is contrary to law, morals, good customs, public order, or public policy." Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 2. Voidable Contracts: Contracts that can be rescinded by one party due to defects such as lack of consent or undue influence. Example: A software development contract entered under duress is voidable at the option of the coerced party. Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 2. Voidable Contracts: Examples of Voidable Contracts: A contract signed by a minor (below the legal age of majority) without the consent of a guardian. A contract entered into under duress (e.g., an employee is forced to sign an IT service agreement under threat of job loss). Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 2. Voidable Contracts: Civil Code Reference: Article 1390 - "The following contracts are voidable: (1) Those where one of the parties is incapable of giving consent; (2) Those executed by mistake, violence, intimidation, undue influence, or fraud.” Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 2. Voidable Contracts: Civil Code Reference: Article 1391 - "A contract is voidable if it is entered into by a person who, at the time of the contract, is unable to act in a free and conscious manner due to reasons such as mental incapacity or coercion." Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 3. Unenforceable Contracts: Contracts that cannot be enforced due to non-compliance with legal formalities but may still be valid in some respects. Example: A software agreement made orally but required to be in writing under the Statute of Frauds is unenforceable but not void. Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 3. Unenforceable Contracts: Examples of Unenforceable Contracts: A contract for IT services that is not in writing but is worth more than ₱500 (required by law to be in writing for enforceability). A contract that lacks notarization when required by law. Elements of a Valid Contracts III. Defective Contracts Identifying Defective Contracts 3. Unenforceable Contracts: Civil Code Reference: Article 1403 - "The following contracts are unenforceable unless they are ratified: (1) Those that are not in writing, when the law requires a written form; (2) Those that do not comply with the formalities required by law for their validity." Elements of a Valid Contracts III. Defective Contracts Effects of Defective Contracts a. Void Contracts No legal effect: A void contract produces no legal consequences whatsoever. Cannot be ratified: Since a void contract is inherently flawed, it cannot be ratified or validated by any action of the parties involved. Elements of a Valid Contracts III. Defective Contracts Effects of Defective Contracts b. Voidable Contracts Valid until rescinded: A voidable contract remains valid and produces legal effects unless one of the parties chooses to void the contract. The party who was affected by the defect (e.g., duress, fraud) has the right to rescind the contract. Ratification: A voidable contract can be ratified by the party who is capable of doing so. Once ratified, the contract is deemed valid. Elements of a Valid Contracts III. Defective Contracts Effects of Defective Contracts c. Unenforceable Contracts Not enforceable in court: Although unenforceable contracts are not void, they cannot be legally enforced in court until they comply with necessary formalities. Possible ratification: If the required formalities (e.g., written form) are met, the unenforceable contract may be ratified and become enforceable. References https://www.scribd.com/document/558985701/Obligations-and- Contracts-Hector-de-Leon https://www.studocu.com/ph/document/laguna-university/bachelor- of-science-in-accounting-information-system/business-law-the-law-on- obligation-and-contracts/24543624