Notes on Law on Contracts

NOTES ON LAW ON CONTRACTS

Definition of Contracts

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 as defined in Article 1305 of the Civil Code.

Requisites of a Contractual Obligation

  1. Essential Requisites of a Contract:

    • Must contain all the essential requisites as stated in Article 1318.

  2. Legality Requirement:

    • Contracts must not be contrary to law, morals, good customs, public order, and public policy according to Article 1306.

Stages in the Life of a Contract

  1. Preparation/Conception/Generation:

    • This is the negotiation and bargaining phase that ends when the parties reach an agreement.

  2. Perfection or Birth of the Contract:

    • This occurs when the parties agree on the terms of the contract. The effect of perfection is that the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences in line with good faith, usage, and law as stated in Article 1315.

  3. Consummation or Death:

    • This is the phase where the terms agreed upon in the contract are fulfilled or performed; referenced in Toyota Shaw Inc. vs. Court of Appeals, G.R. No. 116650, May 23, 1995.

Characteristics of Contracts

Relativity of Contracts

  • General Rule: Contracts take effect only between the parties or their assigns and heirs, as indicated in Article 1311.

  • Exceptions:

    1. Rights and obligations that are not transferable by nature, stipulation, or law.

    2. Stipulation pour atrui: Benefits conferred to third persons which can be claimed if accepted by them before being revoked (Art. 1311).

    • Requisites for stipulation pour atrui:

      • Must be a stipulation in favor of a third person.

      • Must be part of the contract obligations.

      • Favor must be clearly and deliberately conferred.

      • Third person must communicate acceptance.

      • Neither contracting party must represent the third person legally (refer to Young v. Court of Appeals, G.R. No. 79518, January 13, 1989).

    1. Third persons acquiring real rights subject to Mortgage Law and Land Registration Law (Art. 1312).

    2. Contracts made in fraud of creditors (Art. 1313).

    3. Interference by a third party causing violation of contract (Art. 1314):

    • Requisites:

      • Existence of a valid contract.

      • Knowledge of the contract by the third party.

      • Interference without justification (De Leon, 2010).

Liability of Heirs

  • Heirs are only liable for obligations that are transmissible by nature, stipulation, or law (Art. 1311).

Obligatory Force of Contracts

  • Contracts have obligatory force when all essential requisites for validity are present, as stated in Article 1356.

  • This contractual force aligns with Article 1159, indicating obligations arising from contracts have the force of law and must be complied with in good faith.

Exceptions to Obligatory Force of Contracts

  1. Impossibility of Performance:

    • A debtor may be released from obligations to do when performance becomes legally or physically impossible without fault (Art. 1266).

  2. Doctrine of Difficulty of Performance:

    • Release of obligations is possible when the service exceeds reasonable difficulty beyond the parties' contemplation (Art. 1267).

Mutuality of Contracts

  • Contracts must bind both parties, and validity cannot be contingent on one party's will (Art. 1308). A contract wherein the fulfillment is solely dependent on one party's will is void (refer to Garcia v. Rita, G.R. No. L-20175, October 30, 1967).

Contract of Adhesion

  • A contract of adhesion is characterized by one party drafting the stipulations with no negotiation from the other party. The adhering party has the option to accept or reject but not modify. While not prohibited, it remains valid unless exploited to deprive equitable bargaining (refer to various case laws, including Premiere Development Bank v. Central Surety & Insurance Company, Inc., G.R. No. 176246, February 13, 2009). In doubtful cases causing imbalance, interpretation favors the party who drafted the contract (refer to Magis Young Achiever’s Learning Center v. Manalo, G.R. No. 178835, February 13, 2009).

Autonomy of Contracts/Liberty of Contracts

  • Parties enjoy the freedom to contract provided stipulations do not contradict law, morals, customs, order, or policy (Art. 1306). The law is assumed to be inherently part of every contract, regulating bilateral relationships without any conflict with established laws (refer to Heirs of San Miguel v. Court of Appeals, G.R. No. 136054, September 5, 2001).

  • Agreements contrary to morals, such as consensual living without marriage, are deemed void.

Elements of Contracts

  1. Natural Elements:

    • Derived from the nature of the contract.

  2. Essential Elements:

    • If absent, the contract is void.

  3. Accidental Elements:

    • Stipulated distinctly by the contracting parties.

Consent

  • Defined as the agreement of wills on the object and cause, forming the contract.

  • Requisites for Valid Consent:

    1. Intelligent understanding of the matters involved.

    2. Must be free.

    3. Must be spontaneous.

Offer and Acceptance

Elements of Offer:

  • Must be definite and can be made verbally or in writing unless specified otherwise (Art. 1345).
    Elements of Acceptance:

  • Must be absolute; qualification makes it a counter-offer (Art. 1319).

  • Must comply with specified forms if indicated; may be express or implied (Art. 1320).

  • The offeror can set terms for acceptance regarding time, place, and manner (Art. 1321).

  • The Cognitive Theory indicates acceptance becomes effective once it reaches offeror’s knowledge; acceptance via letter or telegram binds when reached.

  • Advertisements are generally invitations to offer unless specified; bids are similar (Art. 1325 & Art. 1326).

Grounds for Ineffectiveness of Offer

  1. Death, civil interdiction, insanity, or insolvency before acceptance.

  2. Revocation, whether express or implied by the offeree.

  3. Conditional acceptance constitutes a counter-offer.

  4. Illegality or impossibility of subject matter before acceptance.

  5. Expiration of the stipulated acceptance period.

Period for Acceptance

  1. If stipulated, acceptance must occur within the given timeframe.

  2. If not stated, it must occur…

  • General Rule: Immediate acceptance is required if the offer is made in person; otherwise, it must occur within reasonable time based on circumstances.

Incapacity to Give Consent

  1. Deaf-mutes without literacy.

  2. Insane individuals, unless under lucid intervals.

  3. Minors, except under certain conditions, both legal and necessaries (Art. 1327).

Vices of Consent
Mistake

  • Pertains mainly to factual errors, not legal errors, except in mutual factual errors concerning a contract's legal implications (Art. 1334). Kinds of Mistakes that Vitiate Contract:

    1. Mistake regarding the object.

    2. Mistake concerning identity.

    3. Mistakes regarding substance or quantity.

    4. Mistakes regarding significant conditions influencing contract formation.

    5. Mistakes concerning a party's identity substantially affecting consent.

Intimidation

  • Occurs through fear of imminent evil, either personal or upon property, compelling consent (Art. 1335). Requisites of Intimidation:

    1. Compulsion induced by reasonable fear.

    2. The evil must be imminent and grave.

    3. It must be unjust.

    4. The evil must compel consent.

Violence

  • Defined as the use of serious or irresistible force to extract consent (Art. 1335).

  • Either violence or intimidation invalidates an obligation irrespective of participant involvement (Art. 1336).

Undue Influence

  • Arises when one party improperly leverages power to undermine another’s autonomy or decision-making freedom (Art. 1337). Certain underlying circumstances like familial bonds, mental frailty, lack of knowledge, or financial distress may indicate undue influence (Art. 1337).

Fraud

  • Involves deceptive discourse inducing the other party into an agreement that they wouldn't otherwise have accepted (Art. 1338).

  • Duty to disclose information can be integral to fraud, especially in confidential relations (Art. 1339).

  • Key Requisites of Fraud:

    1. Deceptive articulation must come from one contracting party.

    2. It must be material and invoked serious consequences.

    3. Those who commit fraud must not be both parties or third parties.

    4. Victim must suffer a detriment or loss.

Kinds of Fraud

  1. Causal Fraud:

    • Impacts contract formation.

    • Makes it voidable.

  2. Incidental Fraud:

    • Related to contract performance.

    • Does not affect contract validity and merely calls for damages.

Invalid/Fictitious Contracts

  • Simulation of Contract:

    • Declaration of a non-existent will designed for deception either as totally fictitious (absolute simulation) or one that conceals the true agreement (relative simulation).

  • Relative Simulation:

    • Bind the parties to their true intent when it does not oppose third parties (Art. 1346).

  • Absolute Simulation:

    • Results in a void contract since no intention to bind exists.

Object of the Contract

  • It serves as the subject matter, be it a thing, right, or service.

  • Requisites of an Object:

    1. Determinate nature.

    2. Lawsfulness.

    3. Existential status.

    4. Commerical viability.

    5. Transferability.

Cause

  • Represents the foundational reasoning for an obligation.

  • Requisites of Cause:

    1. Actual existence.

    2. Truthfulness.

    3. Lawfulness.

Contracts: Types Based on Perfection or Formation

  1. Consensual Contracts:

    • Perfected through mutual agreement, e.g., Sale, Lease, and Agency (Art. 1305).

  2. Real Contracts:

    • Requires both consent and delivery for perfection, e.g., mortgage, pledge.

  3. Solemn Contracts:

    • Mandate written form per law.

Contracts Based on Purpose

  1. Transfer ownership (Sale).

  2. Utilize rights (Usufruct).

  3. Render services (Agency).

Formalities Under the Law

  • Generally, contracts don't necessitate formal conditions unless specific circumstances dictate (for validity or enforceability).

  • Contracts needing written form include:

  1. Donations of personal property exceeding 5,000 pesos (Art. 748).

  2. Real property contributions in partnership necessitating a public document.

  3. Contracts foreshadowing future litigation.

Reformation of Contracts

  • Reformation: A corrective remedy to align with the parties’ genuine intention post-error, fraud, or inequitable conduct (Art. 1359).

  • Distinction from annulment is that reformation aims for rectification of an embodied valid agreement.

Types of Defective Contracts

Rescissible Contracts

  • Valid yet may be annulled due to economic damage caused; eg. contracts formed with fiduciaries create automatic rescission when the ward suffers significant loss (Art. 1381).

Voidable Contracts

  • Contracts appearing valid but having vitiated consent are effective until annulled (Art. 1390).

Unenforceable Contracts

  • Cannot sought to enforce legally without previous ratification (Art. 1403). Types include unauthorized contracts and those violating statutes of fraud.

Void and Inexistent Contracts

  • Contracts failing vital elements are void from inception and cannot be ratified or validated. Types of void contracts may be illegal by nature or lack requisite cause.

Principle of In Pari Delicto

  • When both parties share fault relating to illegality, remedy refusal is common unless public interest is served by allowing recovery.

Conclusion

Understanding the various elements, requirements, and classifications of contracts is essential for navigating both the creation and potential disputes that may arise in the realm of contractual obligations. This comprehensive exploration of contract law elucidates vital principles fundamental to successful legal transactions and relationships.