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CIVIL LAW REVIEWERCONTRACTSGeneral Provisions-------------------------------------------------------------------------------Art. 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. ---------...

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OBLIGATIONS AND CONTRACTS CIVIL LAW REVIEWER

CONTRACTS General Provisions ------------------------------------------------------------------------------Art. 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. ------------------------------------------------------------------------------Contract – meeting of the minds between two persons whereby one binds himself with respect to the other to give something or to render some service (Art. 1305, NCC) – 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 fulfilment of a prestation to give, to do or not to do (Sanchez Roman) Distinguished from the Special Contract of Marriage Ordinary Contract Marriage As to Parties Parties are two or more The parties must be one persons whether of the man and one woman, both same or different sexes of legal age As to what Governs The nature, consequences The nature, consequences, and incidents of the contract and incidents of the are governed primarily by marriage are governed by the agreement of the parties law As to Result Once executed, the result is Once executed, the result is a contract a status As to Termination Can be dissolved or Cannot be dissolved or terminated by mere terminated by mere agreement of the parties agreement of the parties As to Remedy in Case of Breach The injured party may The injured party may institute an action against institute a civil action the other party for damages against the other party for legal separation or a criminal action for adultery or concubinage  Contracts must also not be confused with perfected promises, or to policitacion (imperfect promise) which is a mere unaccepted offer. 73

 Contracts must not also be confused with pacts or stipulations.  Pact – an incidental part of the contract which can be separated from the principal agreement  Stipulation – an essential and dispositive part of the contract (hence, not the contract itself) which cannot be separated from such principal agreement. Elements of Contracts 1. Essential – those without which there can be no contract. Essential elements, in turn are subdivided into: a. Common (communes) – those which are present in all contracts, such as consent of the contracting parties, object certain which is the subject matter of the contract, and cause of the obligation which is established b. Special (especiales) – those which are present only in certain contracts, such as delivery in real contracts or form in solemn ones; and c. Extraordinary or peculiar (especialisimos) – those which are peculiar to a specific contract, such as the price in a contract of sale or insurable interest in a contract of insurance 2. Natural – those which are derived from the nature of the contract and ordinarily accompany the same. They are presumed by law although they can be excluded by the contracting parties if they so desire. Example is warranty against eviction in a contract of sale which is implied although the contracting parties may increase, diminish or even suppress it. 3. Accidental – those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract.  Parties to a contract – from the definition under Article 1305, it would seem that it is necessary that there must be two persons in order that a contract may exist. This is however not accurate for what is really required is that there must be two different parties. What is therefore necessary is the existence of two distinct and autonomous wills. The existence of a contract is not determined by the number of persons who intervene in it, but by the number of parties thereto. Hence, there are certain cases where a juridical relation, known as an autocontract, may be created wherein, apparently, there

MAGHIRANG, Ariel | REFERENCES: Jurado, Tolentino | 2011 Civil Law Reviewer: Obligations and Contracts.

OBLIGATIONS AND CONTRACTS CIVIL LAW REVIEWER

is only one party involved, but in reality, said party merely acts in the name and for the account of two distinct contracting parties.  Auto-contract may take place (1) when a person, in his capacity as 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, unless there is conflict of interests or when the law expressly prohibits it in specific cases. Illustration: R is an agent of P for the sale of a parcel of land owned by the latter. P however authorized R to buy for himself the parcel of land if he so desires. In this case, R may enter into a contract of sale wherein R, in a representative capacity, sells to R, in a principal capacity, the parcel of land. This R can do without violating the element of contract which states that there must be two different parties into a contract. The law speaks of two different parties not two persons. Characteristics of Contracts (OMAR) 1. Obligatory force or character of contracts (Articles 1159, 1308, 1315, and 1356) – it refers to the principle that once the contract is perfected, it shall be of obligatory force upon both of the contracting parties. The contracting parties are bound, not only to the fulfilment of what has been expressly stipulated, but also to all the consequences thereof. 2. Mutuality of contracts (Article 1308) – refers to the position of essential equality that is occupied by both contracting parties in relation to the contract. The contract must be binding upon both of the parties. Consequently, its validity or compliance cannot be left to the will of one of them 3. Autonomy of contracts (Article 1306) – under this principle, the contracting parties may establish such agreements as they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy. 4. Relativity of contracts (Article 1311) – this principle states that contracts take effect only between the parties, their assigns and heirs. Consequently, they cannot, as a general rule, produce any effect upon third persons. Life of Contracts

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1. Generation – comprehends the preliminary or preparation, conception, or generation, which is the period of negotiation and bargaining and ending at the moment of the agreement of the parties. 2. Perfection – the birth of the contract. It is the moment when the parties come to agree on the terms of the contract. 3. Consummation – comprehends the consummation or the death of the contract, which is the fulfilment or performance of the terms agreed upon in the contract. Classification of Contracts 1. According to their relation to other contracts a. Preparatory – those which have for their object the establishment of a condition in law which is necessary as a preliminary step towards the celebration of another subsequent contract (examples: partnership, agency) b. Principal – those which can subsist independently from other contracts and whose purpose can be fulfilled by themselves (examples: sale, lease) c. Accessory – those which can exist only as a consequence of, or in relation with, another prior contract. (examples: guaranty, pledge, mortgage) 2. According to their perfection a. Consensual – those which are perfected by the mere agreement of the parties (examples: sale, lease) b. Real – those which are perfected by the delivery of the object of the obligation (examples: commodatum, deposit, pledge) 3. According to their form a. Common or informal – those which require no particular form (example: loan) b. Special or formal – those which require some particular form (examples: donations, chattel mortgage) 4. According to their purpose a. Transfer of ownership (example: sale) b. Conveyance of use (example: commodatum) c. Rendition of services (example: agency) 5. According to their subject matter a. Things (examples: sale, deposit, pledge) b. Services (examples: agency, lease of services) 6. According to the nature of the vinculum which they produce

MAGHIRANG, Ariel | REFERENCES: Jurado, Tolentino | 2011 Civil Law Reviewer: Obligations and Contracts.

OBLIGATIONS AND CONTRACTS CIVIL LAW REVIEWER

a. Unilateral – those which give rise to an obligation for only one of the parties (examples: commodatum, gratuitous deposit) b. Bilateral – those which give rise to reciprocal obligations for both parties (examples: sale, lease) 7. According to their cause a. Onerous – those in which each of the parties aspires to procure for himself a benefit through the giving of an equivalent or compensation (example: sale, lease) b. Gratuitous – those in which one of the parties proposes to give to the other a benefit without any equivalent or compensation (example: commodatum) c. Remuneratory – 8. According to the risks involved a. Commutative – those where each of the parties acquires an equivalent of his prestation and such equivalent is pecuniarily appreciable and already determined from the moment of the celebration of the contract (examples: sale, lease) b. Aleatory – those where each of the parties has to his account the acquisition of an equivalent of his prestation but such equivalent, although pecuniarily appreciable is not yet determined at the moment of the celebration of the contract, since it depends upon the happening of an uncertain event, thus charging the parties with the risk of loss or gain (example: insurance) 9. According to their names or norms regulating them a. Nominate – those which have their own individuality and are regulated by special provisions of law (examples: sale, lease) b. Innominate – those which lack individuality and are not regulated by special provisions of law. Breach of Contract Breach of contract – the failure, without legal reason, to comply with the terms of the contract; the failure, without legal excuse, to perform any promise which forms the whole or part of the contract. ------------------------------------------------------------------------------Art. 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. ------------------------------------------------------------------------------Autonomy of Contracts 75

The freedom to contract provided it is not contrary to law, morals, good customs, public order or public policy, is both a constitutional and a statutory right. Limitations 1. Law – the laws referred to in the article are (1) those which are mandatory or prohibitive in character; (2) those which, without being mandatory or prohibitive, nevertheless, are expressive of fundamental principles of justice, and, therefore cannot be overlooked by the contracting parties; and (3) those which impose essential requisites without which the contract cannot exist. Illustration: S sold to B 20 kilograms of marijuana. In this case the object of the contract or the sale itself is prohibited by law. Since the sale is prohibited by law, the contract of sale here between S and B is invalid. Illustration: D acquired a loan of P 50,000.00 from C. The loan is secured by a property owned by D. However, under the stipulations of the contract, C will acquire the property constituted as security if D failed to pay the loan. The contract in this case is invalid as it is against the law. The stipulation of the parties partake the nature of a pactum commissorium which is prohibited by law. 2. Morals – those principles which are incontrovertible and are universally admitted and which have received social and practical recognition. Illustration: D acquired a loan of P 1,000.00 from C payable within two months. The parties stipulated that D will pay P 20.00 a day in case of non-payment of the debt at maturity. The stipulation in this case is void for being contrary to morals as the penalty is clearly excessive, unconscionable, and shocking to the senses. However, in this case, what is void is the stipulation to pay the penalty and not the principal contract. The stipulation to pay the penalty in this case shall be deemed not have been agreed upon. 3. Good customs – the spheres of morals and good customs frequently overlap each other but sometimes they do not. It must be admitted however that if a moral precept pr custom is not recognized universally, but is sanctioned by the practice of a certain community, then it shall be included within the scope or sphere of good customs. 4. Public order – public order can only refer to the safety, as well as to the peace and order, of the

MAGHIRANG, Ariel | REFERENCES: Jurado, Tolentino | 2011 Civil Law Reviewer: Obligations and Contracts.

OBLIGATIONS AND CONTRACTS CIVIL LAW REVIEWER

country or of any particular community. Public order is not as broad as public policy. The latter may refer not only to public safety but also to considerations which are moved by the common good. 5. Public policy – a principle of law which holds that no person can lawfully do that which has a tendency to be injurious to the public or against the public good. Illustration: T stole goods belonging to O. T was however caught. T and O agreed that O will stifle (suppress) the prosecution of T if T will give him P 10,000.00. The agreement in this case is against public policy and therefore void. Illustration: Bus Co., a bus company, posted notices that the bus will not be liable for any loss or damage to passengers or their properties occasioned by their own negligence, and that the passengers will be deemed to have accepted the condition upon buying a bus ticket and boarding their bus. The agreement in this case is invalid for being contrary to public policy. Common carriers cannot escape liability by posting notices that they will not be liable for any loss to their passengers by reason of their (Bus Co.) own negligence. Compromise Agreements; effects Compromise – a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. It is an agreement between two or more persons, who, for preventing or putting an end to a lawsuit, adjusts their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing. General rule: a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been judicially approved. ------------------------------------------------------------------------------Art. 1307. 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 nominate contracts, and by the customs of the place. ------------------------------------------------------------------------------Nominate and Innominate Contracts 76

Nominate Contracts – those which have their own distinctive individuality and are regulated by special provisions of law. (ex. Sale, Barter of Exchange, Lease, Partnership, Agency, Loan, Deposit, Aleatory contracts, Compromise and Arbitration, Guaranty, Pledge, Mortgage, and Antichresis Innominate Contracts – those which lack individuality and are not regulated by special provisions of law. Kinds of Innominate Contracts a. Do ut des – I give and you give b. Do ut facias – I give and you do c. Facio ut des – I do and you give d. Facio ut facias – I do and you do ------------------------------------------------------------------------------Art. 1308. The contracts must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Art. 1309. 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. 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. ------------------------------------------------------------------------------Mutuality of Contracts The validity or fulfilment of a contract cannot be left to the will of one of the contracting parties. It must be observed however that what is prohibited by law from being delegated to one of the contracting parties are: 1. The power to determine whether the contract shall be valid; and 2. The power to determine whether the contract shall be fulfilled. Illustration: L and O entered into a contract of lease whereby O leased to L the former’s house. It was stipulated in the contract that L can continue occupying the house indefinitely as long as they should faithfully fulfil their obligation to pay rentals. In this case, the characteristic of mutuality is violated. The continuance and fulfilment of the contract would depend solely and exclusively upon L’s uncontrolled choice between continuing paying the rentals or not, completely depriving O of all say on the matter.  However, there are certain agreements which will in effect render the mutuality of contracts illusory

MAGHIRANG, Ariel | REFERENCES: Jurado, Tolentino | 2011 Civil Law Reviewer: Obligations and Contracts.

OBLIGATIONS AND CONTRACTS CIVIL LAW REVIEWER

because one of the contracting parties is placed in a position of superiority with regard to the determination of the validity or fulfilment of the contract over that occupied by the other party, but which do not fall within the purview of the prohibition under Article 1308. Determination by Third Person or by Chance – The validity or fulfilment may be left to the will of a third person. However, it is necessary that the determination made by the third person should not be evidently inequitable. If it is evidently inequitable, it shall not have any obligatory effect upon the contracting parties.  The validity or fulfilment can also be left to chance When Stipulated – it is important to note however that an agreement of the parties that either one of them may terminate the contract upon reasonable period of notice is valid. Judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for the violation of any of its terms and conditions. This right of rescission, however, may be waived. ------------------------------------------------------------------------------Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from 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 fulfilment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest or a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. ------------------------------------------------------------------------------Relativity of Contracts A contract can only bind the parties who had entered into it or their successors who have assumed their personality or their juridical position, and that, as a consequence, such contract can neither favor nor prejudice a third person (in conformity with the axiom res inter alios acta aliis neque nocet prodest)

General rule: contracts can take effect only between the parties, their assigns and heirs.

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Exceptions: An assignee or heir shall not be bound by the terms of the contract if the rights and obligations arising from the contract are not transmissible: 1. By their nature, as when the special or personal qualification of the obligor constitutes one of the principal motives for the establishment of the contract; or 2. By stipulation of the parties, as when the contract expressly p...