LAWContracts.1

Contracts A juridical convention manifested in legal form, by

virtue of which, one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do.

A meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or render some service. (Art.1305)

Essential Elements Without them a contract cannot exist

because there are indispensable requirements.

- CONSENT- SUBJECT- CAUSE OR CONSIDERATION

Natural Elements These are found in certain contracts and

presumed to exist, unless excluded by stipulation of the parties.

Example : warranty against eviction and against hidden defect in contract of sale.

Accidental Elements Not considered agreed by parties unless

stipulated. Example: payment of interest in a

contract of loan.

Stages in the life of a contract Preparation or conception – this is the preparatory step

taken by the parties leading to the perfection of the contract , otherwise known as the bargaining point.

Perfection or birth – the meeting of minds regarding the subject matter and cause of the contract.

Consummation or death or termination – the point of time when the parties have performed their respective obligations and the contract is put to an end.

Example Today S offered for a sale of a specific car to B for P10,000.

Tomorrow, B countered the offer by telling S that he will buy the car if D will give it for P8,000. S consented to the proposal of B. Two days thereafter, S delivered the car and B paid the price of P8,000.

-Today is the preparation of the contract because this is the bargaining point, that is, when negotiation is in progress.

-Tomorrow is the perfection, that is when their minds met as to the offer and the cause of the contract.

-Two days after is the consummation, that is, when S delivered the object and B paid the price.

Ordinary contract distinguished from marriage contract

- Ordinary contract may be two or more persons of the same or different sexes, whereby in a marriage contract the parties must be one man and one woman. Ordinary contract may be terminated by mere agreement of the parties, in marriage contract, termination is with the consent of the state.

Ordinary contract distinguished from obligation

- The contract is the cause, while the obligation is the effect. There can be an obligation without a contract, but there can be no contract without an obligation

Ordinary contract distinguished from pact

- A pact is an incidental part of a contract which can be separated from the agreement itself.

Ordinary contract distinguished from stipulation

- Stipulation is the dispositive part of a contract which cannot be separated from the principal agreement.

Basic principle or characteristics of a contract

Freedom (or Liberty) to stipulate. (Art.1306) Obligatory force and compliance in good

faith (Art.1159,1315) Perfection by mere consent Both parties are mutually bound. (Art1308) Relativity; binding between the parties only,

their assigns and heirs. (Art. 1311)

Different kinds of Contracts According to Perfection

Consensual – perfected by mere consent, such as sale and barter

Real – perfected by the delivery of the object of the contract, such as pledge, loan and deposit.

Different kinds of Contracts According to degree of importance

Principal – can stand alone, such as sale , barter, deposit and loan.

Accessory – its existence and validity is dependent upon another contract, such as pledge, mortgage and guaranty

Preparatory – contract is not an end by itself, but a means thru which other contracts may be made. Example: Contact of Partnership and Contract of

Agency.

Different kinds of Contracts According to subject matter

Contracts involving things such as sale and barter

Contacts involving rights or credits, such as usufruct or assignment of credit.

Contracts involving services, such as agency, lease of services and contract of carriage.

Different kinds of Contracts According to name

Nominate – with a special name, such as pledge, barter and lease.

Innominate – without any name.

Different kinds of Contracts According to cause

Onerous – there is an exchange of consideration such as sale barter and lease.

Gratuitous – there is no consideration received in exchange for what has been given

Remuneratory – something is given for a benefit or service performed without any legal obligation to do so

Different kinds of Contracts According to nature of obligation produced or number or parties obligated

Unilateral- where only one of the parties is obliged to give or to do something, such as commodatum, gratuitous mutuum. Commodatum – is a contract of loan whereby one of the parties delivers to

another, either something not consumable so that the latter may use the same for a certain time and return it. This contract is essentially gratuitous.

Mutuum – is a contract of loan whereby one of the parties delivers money or another consumable things, upon the condition that some amount of the same kind and quality shall be paid. This may be gratuitous or with a stipulation to pay interest

Bilateral or sinalagmatico- where both parties are oblige to give or to do something , such as sale or barter and lease.

Different kinds of Contracts According to Risk

Commulative – where equivalent values are given by both parties such as sale, barter and lease.

Aleatory – where fulfillment of the contract is dependent upon chance such as insurance.

Liberty to Contract 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. This otherwise known as the principle of autonomy.

Example of Prohibition: Against the law – D agreed to kill X for a consideration of

P10,000. Should D kill X, D cannot collect the P10,000 bec. The agreement is contrary to law.

Immoral agreement – promise of marriage based on carnal knowledge is immoral.

Against custom – an agreement to vote a certain candidate for a consideration

Against Public policy – restraint of trade Against public order- agreement of contract of lease that

the lessee can be ejected by the use of force upon violation of the contract of lease.

Note: The contracting parties can enter into any stipulation provided not contrary to law or morals.

Illustrative Cases on liberty to Contract

Is the agreement between two candidates in an election race that whoever loses in the convention should not run against the winner valid? Why? No, because political rights are outside the commerce of man.

Illustrative Cases on liberty to Contract In the contract of employment between A and B, The latter agreed that

for a period of five years after the termination of his employment, he shall neither engage or interest himself in any business enterprise similar to or in competition with those operated by A, nor enter into the employment of any enterprise in the Philippines, except after obtaining the written permission of A. Is the agreement valid? Reasons. The agreement is void because it is contrary to

public policy. Our courts repeatedly held that such prohibition is an undue or unreasonable restraint of trade because it is permanent in nature.

Illustrative Cases on liberty to Contract A took up law at Arellano University. He left the university and enrolled for the

last semester of his fourth year in the Abad Santos Law School. Subsequently, he passed the bar examinations. During his stay at the Arellano University, he was constant recipient of scholarship grants. However, he was made to sign a waiver of his right to transfer to another school unless he refunds to the University the equivalent of his scholarship grants. Since taking the bar examinations, he had to secure his transcript of records from the University. He was required to make a refund, which he did, but under protest. Subsequently he brought an action to recover amount which he had paid. Will the Action prosper. YES. Because the waiver signed by A is contrary to public

policy therefore void. Scholarship grants are awarded in recognition of merit and not to attract brilliant students in school for their propaganda value.

Illustrative Cases on liberty to Contract In the contact of sale of a drugstore it was stipulated that the seller shall not open or

have any interest directly or indirectly in any drugstore either in his own name or in the name of another or have any connection with or be employed in any drugstore or have connection with or be employed in any drugstore within four kilometers from the municipality of San Fernando, Pampanga while the said purchaser or his heirs may own or have right to open a drugstore or have an interest in any other within limits of San Fernando, Pampanga. Are the limitations or restriction placed upon seller valid? Reasons. YES. Because the restriction imposed is only on a limited scale.

The answer would be different if the seller is forbidden to engage in business within the Philippines, or during his lifetime he cannot engage in drugstore business, or to engage in this kind of business he must obtain the written consent of the buyer , for this is contrary to public policy considered by the court as restraint of trade.

Illustrative Cases on liberty to Contract

The constitution enjoins the State to “protect the rights of workers and promote their welfare,’’ “to afford labor full protection .”The State, therefore ,has the right and duty to regulate the relations between capital and labor. These relations are not merely contractual but are so impressed with public interest that labor contracts, collective bargaining agreements included, must yield to the common good. Should such contracts contain stipulations that are contrary to public policy, courts would not hesitate to strike down these stipulations.

Contract of Adhesion A contract duly executed is the law between the parties, and they

are obliged to comply fully and not selectively with its terms. A contract of adhesion is just binding as ordinary contracts. It is true that the court has, on occasion, struck down such contracts as

being assailable when the weaker the party is left with no choice by the dominant bargaining party and is thus completely deprived of an opportunity to bargain effectively. Nevertheless, contracts of adhesion are not prohibited even as the courts remain careful in scrutinizing the factual circumstances underlying each case to determine the respective claims of contending parties on their efficacy.

The rule is that, should there be ambiguities in a contract of adhesion , such ambiguities are to be construed against the party the prepared it. If, however, the stipulation are not obscures, but clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling.

Determination of a contract by third person

Although the performance in a contract cannot be left to the will of one of the parties, the determination of the performance may be left to a third person. The decision of the third person is not being binding until it has been made known to both contracting parties.

Exception to the determination of a performance by third person

The determination of performance by the third person may be cancelled if it is inequitable. In such a case, the court shall decide what is equitable under the circumstances.

Illustrative Case:

A leased a certain building to B and C. In the contract of lease there is a stipulation that B and C can continue occupying the building indefinitely so long as they should faithfully fulfill their obligation of paying the rentals. In an action for ejectment, can B and C successfully set up the defense that under the contract, they can continue occupying the building so long as they faithfully fulfill their obligation of paying the rentals? Reason.

No, because the continuance of the contract would depend upon the sole will of B and C, completely depriving the owner of all say on the matter. The law states the “validity and compliance of the contract cannot be left to the will of one of them. (Art.1308)

The parties bound by the contract otherwise known as “principle of relativity” Contracts take effect only between the parties, their assigns

and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by the stipulation or by provision of law. The heir is not liable beyond the value of property he received from the decedent.

“Pour Auturi” - If the 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 (Art.1311)

Exceptions to the rule of relativity Obligations arising from contract which are not

transmissible by their nature, stipulation or provision of law (Art.1311)

Stipulation Pour Autrui (Art.1311) When a third person induces another to violate

his contract. (Art.1314) The right of a creditor to sue on a contract

entered into by his debtor. (Art.1313)

Illustrative Case L leased his property to X. X subleased part of the

premises to SL in violation of the condition of the contract of lease between L and X. L therefore goes court to rescind the contract. Can SL object to the rescission on the ground that if the contract is rescinded, the sub-lease contract would be affected? No, because L is not bound by the sub lease contract

between X and SL inasmuch as he did not participate therein.

Stipulation Pour Autrui Stipulation in favor of a third person

made by the contracting parties with clear and deliberate intention of conferring a favor upon such third person and whose fulfillment the latter may demand by communication his acceptance to the obligor before its revocation. (Art.1311)

Requisites of Pour Autrui Stipulation is in favor of a third person The parties clearly and deliberately

conferred the favor to the third person. The stipulation must be a part of the

contract. The acceptance of the third person must

be communicated to the parties of the contract.

Examples D owes C P10,000 with 14% interest payable on June 15. The

14% interest must be given to a third person, X. Take note that the parties in the contract is D and C but it carries a stipulation in favor of X, In this case, X must communicate his acceptance to D and C otherwise he will not be entitled to the benefit of the contract. This is stipulation “Pour Autrui”

Insurance of motor vehicles as public utilities, taken by their owners or operators in favor of the passengers. The contract here is between the owner –operator and the insurers but the favored persons are the passengers, a third person.

How contracts are perfected? If consensual – by mere consent If real – by delivery If formal or solemn – special form is

required for its perfection.

Perfection of Real Contracts If the contract is real, the perfection is

the same as if the contract is consensual, in addition there must be delivery of the object. If the object of the contract is not delivered the contract is not perfected. The contracts referred to in this articles are deposit, pledge, and commodatum.

Perfection of Real Contracts Take note that if the agreement is a contract “ to make

deposit, or make a pledge” the contract is consensual, the perfection is a upon the meeting of minds. After delivery, the contract becomes a real contract Example: Today, June 1, D borrowed from C P10,000 with a

promise that D will give his diamond ring to C as a security on June 15. before June 15 even if C gave D the P10,000 the contract is not yet perfected because in contract of pledge the perfection is only upon the delivery of the object pledged.

Concept of Consent Consent is the manifestation of the

meeting of the offer and the acceptance upon the thing and the cause of the contract.

Requisites of Consent Must be given by two or more parties Parties are capacitated to contract Consent must be intelligently or freely

given Express manifestation of the will of the

contracting parties.

Nature Acceptance Acceptance of the offer must be

absolute. If qualified, it constitute only a counter offer and the contract is not perfected unless the counter offer is counter accepted. In short, a counter offer extinguishes the original offer.

Innominate contracts and how regulated

Do ut des – I give that you give Do ut facias – I give that you do Facio ut des – I do that give Facio ut Facias – I do that you do

Illustrative Cases: S offered 1,000 ballpen to B for P5.00

each. B answered by lettered that he is willing to buy if S could deliver 1,500. Is the contract perfected? No, because the acceptance is qualified. It

constitute a counter offer. (Art.1319)

Illustrative Cases: On January 5, 2006, S wrote a letter to B offering

to him the sale of a specific building. On January 6, 2006 at 7 am, B sent a letter of acceptance which was received by S at 11 am that day. But at 10:00 am S had already sent B a letter of withdrawal of the offer which was received by B at 5pm. Was the contract perfected. No, because there was no more offer at the time of

acceptance.

Illustrative Cases: S writes D offering to sell a piece of land for

P10,000 and at the same time receives a letter of offering to buy the said land for P10,000. Is there a perfected contract. None, because neither party knew the offer of the

other at that time the letter was written. For the contract to be perfected it is necessary that one party should accept the offer made by the other. This otherwise known as “crossing of letters”

Perfection of contract : If sent by letter or telegram

Acceptance made by letter or telegram does not bind the offeror except from the time it comes to his knowledge. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

Example On december 1, S offered for sale a specific car to B

for P100,000 by letter. B received the letter and consented to buy on Dec. 5. He wrote the letter of acceptance and drop it at the mailbox on Dec.10 while the letter is in the course of travel, B dies, but the letter was received by S on Dec. 15, is the contract perfected? No. the death of either party before the acceptance is

conveyed shall render the offer and the acceptance ineffective.