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V. GENERAL PROVISIONS ON CONTRACTSCLARENCE TIUATENEO LAW 4B, BATCH 2017OBLIGATIONS AND CONTRACTSCIVIL LAW REVIEWER1I. GENERAL PROVISIONS ON CONTRACTSNATURE, DEFINITION AND ELEMENTS OF A CONTRACTNATURE OF CONTRACTS‣ TOLENTINO —‣ A contract, broadly speaking, is an agreement on the declaration of a co...

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V. GENERAL PROVISIONS ON CONTRACTS

I. GENERAL PROVISIONS ON CONTRACTS NATURE, DEFINITION AND ELEMENTS OF 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. (1254a)

NATURE OF CONTRACTS ‣

TOLENTINO — ‣

A contract, broadly speaking, is an agreement on the declaration of a common will. It has been defined in other codes as “a bilateral legal transaction to create, modify, or terminate a legal tie between the parties.” Our code however, follows a more restrictive definition, giving emphasis to the obligatory concept of contracts. The error in our definition, however, lies in imperfect phraseology. It seems to limit the definition to cases, where one party binds himself to perform a presentation in favour of another, excluding cases or reciprocal prestations.

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A better definition is given by Sanchez-Roman, who defines it as a “juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favour of another or others, or reciprocally, to the fulfilment of a prestation to give, to do, or not to do.”

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Some authors define contract as “an express convention”, but this is not accurate, because a contract can exist by implication, as an attorney-client relationship when an attorney actually rendered legal services for another who is a close friend.

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As a consensual relation, a contract must be shown to exist, as a fact, clearly and convincingly.

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Contract distinguished from other conventions — ‣

Although a contract is a convention, or agreement of wills, not every convention is a contract. A contract is limited to agreements which product patrimonial liabilities. Contracts, therefore, are distinguished from other acts based on the consent of two or more persons such as marriage, donation, adoption, and succession, in the following ways — 1. A contract creates obligations which are more particular, concrete, and transitory, because it establishes a relation which is more limited by reason of persons, effects, and importance. 2. In contract, the freedom to stipulate predominates over the necessity of the act, in other words, the intention of the parties is the determining factor in contracts, while the meeting of the minds is merely secondary in the other acts. 3. The law is the principal source of rights and obligations in the other acts mentioned, but in contracts, the law has only a suppletory effect.

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Contract distinguished from other terms — 1.

Perfect promise — is distinguished from a contract, in that the latter establishes and determines the obligations arising therefrom,. while the former tends only to assure and pave the way for the celebration of a contract in the future; until the contract is actually made, the rights and obligations are not yet determined.

2.

Imperfect promise — designated also as policitacion, constitutes a mere unaccepted offer.

3.

Pact — is a special part of the contract, sometimes merely incidental and separable from the principal agreement.

4.

Stipulation — is similar to a pact. When a contract is in an instrument, a stipulation refers to the essential and dispositive part, as distinguished from the exposition of the facts and antecedents from which it is based.

PARTIES TO A CONTRACT ‣

TOLENTINO — ‣

Number of Parties — the Code requires “two persons” for the existence of a contract, obviously, what is meant by the law is “two parties”. For a contract to exist, therefore, there must be two parties to it. Hence, if one of the supposed parties to the contract, was, at the time of its execution, already dead, the contract does not exist. Neither can there be a contract when one of the parties to it is a supposed corporation that has no legal existence.

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Husband and Wife as Parties — Under Art. 1490, the husband and wife cannot sell property to each other, unless there is a separation of property between them. Although that article applies expressly only to sales, it has not been construed restrictively. Sale being the prototype or model of bilateral contracts, and the intent of the legislator being to

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V. GENERAL PROVISIONS ON CONTRACTS

extend it to contracts with the same purpose, jurisprudence has applied it to other contracts. The purpose behind the prohibition is to protect the conjugal partnership. However, the husband and wife can enter into a contract of agency. ‣

One person as two parties (Auto-contracts) — Is it necessary for the existence of a contract that two distinct persons enter into it, or is an auto-contract, where one person contracts with himself, valid? In other words, can the same person make a contract, acting in the name of another in one capacity, and in his own name or that of a different person in another capacity? Under our law, there is no general prohibition, but only special prohibitions, such as those found in Art. 1491 and 1890 (for guardians, agents, executors, administrators, public officers and employees, etc.) Thus, the validity of auto-contracts in our law is generally accepted. The existence of a contract is not determined by the number of persons who intervene in it, but by the number of parties thereto, not by the number of individual wills, but by the number of declarations of will. A contract, requires, not two persons, but two parties, not two wills, but two declarations of will. The effective element is not in the formation of the will but in its declaration. In the auto-contract, there are two declarations although made by the same person. So long as there are two distinct patrimonies, even if they are represented by the same person, a juridical relation can be created between them. The declaration of will may be made only by one person, but so long as he represents two different personalities, a contract can arise, because the declaration manifests two distinct wills. This may take place (1) when a person, in his capacity as a representative of another, 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. In the absence of a general prohibition on such auto-contracts, they must be held to be valid, except when there is a conflict of interest or a possibility of injury, and except when the law expressly prohibits it in specific cases.

CHARACTERISTICS OF A CONTRACT 1.

Obligatory force and compliance in good faith — a contract constitutes the law as between the parties (Arts. 1159 and 1315)

2.

Autonomy — the parties have the freedom to decide and stipulate the terms and conditions of their contract, provided not contrary to law, morals, good customs, public order, or public policy. (Art. 1306)

3.

Mutuality — a contract’s validity and performance cannot be left to the will of only one of the parties. (Art. 1308)

4.

Relativity — a contract is generally binding only upon the parties and their successors. (Art. 1311)

5.

Consensuality (as a general rule) (Art. 1315)

ELEMENTS OF A CONTRACT 1. Essential elements — those without which there can be no contract a. Consent b. Subject matter c.

Cause or consideration

2. Natural elements — those found in certain contracts, and presumed to exist, unless the contrary has been stipulated. It exists as part of the contract even if the parties do not provide for them, because the law, as suppletory to the contract, creates them.

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Such as — warranty against eviction and against hidden defects in the contract of sale

3. Accidental elements — These are the various particular stipulations that may be agreed upon by the contracting parties in a contract. They are called accidental, because they may be present or absent, depending upon whether or not the parties have agreed upon them. They cannot exist without being stipulated.

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Such as — the stipulation to pay credit; the stipulation to pay interest; the designation of the particular place for delivery or payment.

STAGES OF THE LIFE OF A CONTRACT 1. Preparation (or Conception or “Generacion”) — Here the parties are progressing with their negotiations; they have not yet arrived at any definite agreement, although there may have been a preliminary offer and bargaining. 2. Perfection (or birth) — Here the parties have at long last came to a definite agreement, the elements of definite suject matter and valid cause have been accepted by mutual consent. 3. Consummation (or death or termination) — Here the terms of the contract are performed, and the contract may be said to have been fully executed.

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CLASSIFICATION OF CONTRACTS 1. AS TO PERFECTION OR

FORMATION

a. Consensual — perfected by mere consent

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Such as — sale

b. Real — perfected by delivery

‣ c.

Such as — depositum, pledge, commodatum Formal or solemn — those where special formalities are essential before the contract may be perfected

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Such as — donation inter vivos of real property requires for its validity a public instrument

2. AS TO

CAUSE OR EQUIVALENCE OF THE VALUE OF PRESENTATIONS

a. Onerous — where there is an interchange of equivalent valuable consideration

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Such as — sale b. Gratuitous or lucrative — this is free, thus one party receives no equivalent prestation except a feeling that one has been generous or liberal

‣ c.

Such as — donation, commodatum Remunerative — one where one prestation is given for a benefit or service that had been rendered previously

3. AS TO

IMPORTAN CE OR DEPEN DEN CE OF ON E UP ON ANO THER

a. Principal — where the contract may stand alone by itself

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Such as — sale, lease, loan

b. Accessory — this depends for its existence upon another contract

‣ c.

Such as — a real estate mortgage as an accessory contract to a loan Preparatory — where the parties do not consider the contract as an end by itself, but as a means through which future transaction or contracts may be made

‣ Such as — agency, partnership 4. AS TO THE PARTIES OBLIGATED a. Unilateral — where only one of the parties has an obligation

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Such as — commodatum (like the borrowing of a bicycle)

b. Bilateral (or synalagmatic) — where both parties are required to render reciprocal prestations

‣ 5. AS TO

Such as — sale THE GOVERNING AUTHORITIES (AS TO THEIR NAME OR DESIGNATION)

a. Nominate (Special Contracts)— where the contract is given a particular or special name which is governed by a particular set of provisions of law

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Such as — commodatum, partnership, sale, agency, deposit

b. Innominate (Contratos Innominados) — those not given any special name and is governed by the general laws on contracts Such as —“do ut des,” meaning “I give that you may give” ‣ 6. AS TO THE RISK OF FU LFILMENT a. Commutative — where the parties contemplate a real fulfillment; therefore, equivalent values are given

‣ Such as — sale, lease b. Aleatory — where the fulfillment is dependent upon chance; thus the values vary because of the risk or chance ‣

Such as — insurance contract

7. AS TO THE TIME OF PERFORMANCE OR FULFILMENT a. Executed — one completed at the time the contract is entered into, that is, the obligations are complied with at this time

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Such as — a sale of property which has already been delivered, and which has already been paid for. (In the case of personal property, this results in tangible property itself, a “chose in possession.”)

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NOTE — If the whole or a part of the property or the price has been delivered, the contract may be said to be “partially executed.”

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b. Executory — one where the prestations are to be complied with at some future time

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Such as — a perfected sale, where the property has not yet been delivered, and where the price has not yet been given) (In the meantime, there is only a “chose in action.”)

8. AS TO SUBJECT

MATTER

a. Contracts involving things b. Contracts involving rights or credits (provided these are transmissible) Such as — contract of usufruct, or assignment of credits ‣ c. Contracts involving services

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Such as — agency, lease of services, a contract of common carriage, a contract of carriage (simple carriage)

9. AS TO

OBLIGATIONS IMPOSED AND REGARDED BY THE LAW

a. Ordinary — like sale; the law considers this as an ordinary contract b. Institutional — like the contract of marriage; the law considers marriage also as an “inviolable social institution.” ‣

NOTE — Under Art. 1700 of the Civil Code, the law says that “the relations between capital and labor are not merely contractual. They are so impressed with public interest that labor contracts must yield to the common good.

10. AS TO THE EVIDENCE REQUIRED FOR ITS PROOF a. Those requiring merely oral or parol evidence b. Those requiring written proof (such as contracts enumerated under the Statute of Frauds) 11. AS TO

THE NUMBER OF PERSONS ACTUALLY AND PHYSICALLY ENTERING INTO THE CONTRACTS

a. Ordinary — where two parties are represented by different persons, such as a sale. b. Auto-contracts — where only one person represents two opposite parties, but in different capacities

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Such as — an agent representing his principal sells a specific car to himself, as a buyer

12. AS TO

THE NUMBER OF PERSONS WHO PARTICIPATED IN THE DRAFTING OF THE CONTRACT

a. Ordinary — where both parties participate in the draft and deciding the terms and conditions of the contract, like an ordinary sale b. Contract of adhesion — where only one party decides and drafts the terms and conditions of the contract, and the other simply “adheres” to it.

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Such as — one prepared by a real estate company for the sale of real estate; or one prepared by an insurance company. Here, the buyer, or the person interested in being insured, signifies his consent by signing the contract. If he does not desire to enter into the contract, it is his privilege to refuse.

CONTRACTS OF ADHESION

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What are “contracts of adhesion”? ‣

It is one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. (Premiere Development Bank v. Central Surety & Insurance Company 2009)

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Such as — in the case of employment, banking or transportation contracts

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Are contracts of adhesion valid? ‣

YES. “Contracts of Adhesion” and have been generally recognized by the Supreme Court as valid and legally binding in a long line of cases. “They are not invalid per se and are not entirely prohibited, the rationale being, the one who adheres to the contract is, in reality, free to reject it entirely, if he adheres, he gives his consent.

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The rule is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling. A contract of adhesion is just as binding as ordinary contracts. It is true that this Court has, on occasion, struck down such contracts as being assailable when the weaker 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. (Pilipino Telephone Corporation vs Tecson 2004)

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AUTONOMY OF CONTRACTS 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. (1255a) Article 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. (4a) 1987 CONSTITUTION ARTICLE 3 — BILL OF RIGHTS Section 10. No law impairing the obligation of contracts shall be passed.

FREEDOM

TO

ENTER INTO LAWFUL C ONTRACTS

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Art. 1306 stresses the principle of freedom. The free entrance into contracts generally without restraint is one of the liberties guaranteed to the people. (People v. Pomar) The contract is the law between the contacting parties. And where there is nothing in the contract which is contrary to law, morals, good customs, public order, or public policy, the validity of the contract must be sustained.

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TOLENTINO — ‣

The right to enter into lawful contracts constitutes one of the liberties of the people of the state. If that right be struck down or arbitrarily interfered with, there is a substantial impairment of the liberty of the people under the Constitution. The legislature, under the Constitution, is not permitted to prescribe the terms of a legal contract and thereby deprive the citizens of the state from entering freely into such contracts according to their own convenience and advantage, so long as the contracts entered into are not prohibited by law, public policy or morals. To enter into contracts freely and without restrains, is one of the liberties guaranteed to the people of the state.

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The policy of the law is that the freedom of persons to enter into contract should not be lightly interfered with, and courts should move with all the necessary caution and prudence in holding contracts void.

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Save in limited and exceptional situations provided by the law itself, courts have no authority to prescribe the terms and conditions of a contract for the parties.

PRINCIPLE OF AUTONOMY OF CONTRACTS ‣

RULE — THE CONTRACTING PARTIES MAY ESTABLISH SUCH STIPULATIONS, DEEM CONVENIENT, PROVIDED THEY ARE NOT CONTRARY TO EITHER — 1.

CLAUSES , TERMS AND CONDITIONS AS THEY MAY

L AW ‣

‣ 2.