Law on Contracts

CHAPTER 2: CONTRACTS

CONTRACTS, IN GENERAL

  • DEFINITION: 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. (Art. 1305)
Criticisms of the Definition in Art. 1305:

  1. Obligation Not To Do: The phrase "to give something or to render some service" suggests that obligations not to do something are excluded, which is inaccurate. Examples include:

    • A contract not to install a fence.
    • A contract not to sell competing products.

  2. One-Sided Obligation: The phrase "whereby one binds himself" implies that only one party is obligated, which is also misleading, as most contracts are reciprocal or bilateral in nature.

  3. Two Persons Requirement: The requirement of "two persons" implies that a contract cannot be perfected with only one party, which is inaccurate as auto-contracts may involve one person acting on behalf of different interests.

AUTO-CONTRACTS
  • Definition: An auto-contract occurs when one person is responsible for the perfection of a contract while acting in two capacities (e.g., as themselves and as a representative).
  • Valid Auto-Contract Example: An agent empowered to borrow money may lend it himself at the prevailing interest rate (Art. 1890).
  • Void Auto-Contract Examples:
    • Sale of property by a guardian to themselves (Art. 1491).
    • Lease contracts involving property belonging to an estate where the lessee is an executor (Art. 1492).

STAGES OF A CONTRACT

  1. Negotiation (Preparation or Conception): Initial discussions and bargaining occur here without a definite agreement.
  2. Perfection (Birth): The parties reach a definitive agreement concerning a specific subject matter and valid cause, having all essential elements present.
  3. Consummation (Death or Termination): The contract terms have been fulfilled, leading to the contract's completion.

FUNDAMENTAL CHARACTERISTICS/PRINCIPLES OF CONTRACTS

  1. Consensuality of Contracts: Generally, a contract is perfected by mutual consent unless specific requirements for form or delivery must be met.

    • Contract with an unauthorized person is unenforceable. If acted beyond authority, ratification may allow enforceability.

  2. Autonomy of Contracts: Parties may set terms provided they comply with law, morality, good customs, public order, or public policy.

    • Prohibited waivers include:
      • Waiver for future fraud.
      • Certain partnership or mortgage clauses (e.g., Pactum Commissorium).

  3. Mutuality: Contracts must bind both parties, with valid performance not left to just one party's will. Adjustments may be made based on 3rd party evaluations—as long as decisions are equitable.

    • Validity of Escalation Clauses: Valid increases are based on reasonable standards. Invalid increases depend solely on one party's decision (e.g., unilateral increases in interest rates).

  4. Obligatory Force of Contracts: Obligations arise with the force of the law and should be fulfilled in good faith. (Art. 1159)

  5. Relativity of Contracts (Privity): Contracts bind only the parties and their privies.

    • Heirs are liable for debts only to the extent of inherited property value.
    • General rules on transmissibility—certain exceptions for purely personal rights and stipulated exceptions.
Third-Party Rights
  • Stipulation Pour Autrui: Third persons may benefit from a contract under certain conditions. The contracting parties must intend to confer a favor upon a 3rd party, and the 3rd party must accept it before revocation.
  • Liabilities of Third Parties:
    • Third parties cannot enforce contracts but may have claims under certain conditions, such as collateral contracts or contracts creating real rights.
    • Malicious interference by third parties that causes contract breach can lead to liability.

CLASSIFICATION OF CONTRACTS

  1. According to Perfection:

    • Consensual: Perfected by mere consent (sale, lease).
    • Real: Perfected upon delivery.
    • Formal: Require a certain form for validity.

  2. According to Degree of Dependence:

    • Principal: Stand alone (sale, lease).
    • Accessory: Dependent on other contracts (guaranty).
    • Preparatory: Means to achieve an end (option contracts).

  3. According to Parties Obliged:

    • Bilateral: Reciprocally obligated (sale).
    • Unilateral: Only one party is obligated (guaranty).

  4. According to Equivalence of Prestation:

    • Commutative: Prestation value of one presumed equivalent to the other (sale).
    • Aleatory: Based on chance (insurance).

  5. According to Cause:

    • Onerous: Reciprocal exchange of value (sale).
    • Gratuitous: A donation.
    • Remuneratory: Payment for earlier rendered services.

  6. According to Risk:

    • Commutative: Parties expect fulfillment (sale).
    • Aleatory: Fulfillment depends on chance (insurance).

  7. According to Degree of Execution:

    • Executory: Not yet performed.
    • Executed: Already performed.

  8. According to Name:

    • Nominative: Named contracts (sale).
    • Innominate: Without specific names (various forms).

ELEMENTS OF CONTRACTS

  1. Essential: Necessary for validity; absence renders contract void. Consensual contracts require consent, object, and cause. Formal contracts require additional formality.
  2. Natural: Embedded by law, such as warranties.
  3. Accidental: Not standard; exist only if stipulated.
ESSENTIAL ELEMENTS OF A CONTRACT
  • Consent: Meeting of the offer and acceptance concerning the subject matter.
Requisites of Valid Consent:
  1. Intelligent: Free from mistake or fraud.
  2. Free/Voluntary: Not obtained through coercion.
  3. Spontaneous: Should not be vitiated.

Offer and Acceptance:

  • Offer must be clear, while acceptance can be express or implied. Qualified acceptance creates a counter offer.
Acceptance Through Letter/Telgram: Cognition Theory vs. Manifestation Theory
  1. Cognition Theory: Acceptance takes effect when the offeror is aware.
  2. Manifestation Theory: Acceptance takes effect upon manifestation by the offeree. The Philippines follows the Cognition Theory.
Situations Affecting Consent:
  1. Simulation: Total (void) vs. Relative (partially binding).
  2. Incapacity: Juridical (inherent) vs. Legal capacity (may be lost).
    • Absolute incapacity includes unemancipated minors, insane, and other categories defined by law.
  3. Vitiated Consent: Evidences through mistake, fraud, violence, etc.
    • Fraud includes causal and incidental fraud; the former may void a contract while the latter may only lead to damages.
Object (The Subject Matter)
  • Requirements: Must be within commerce, transmissible, lawful, possible, and determinate. Future inheritances and impossible objects cannot be contractually valid.
Cause or Consideration
  • Definition: Essential reason for assuming an obligation.
  • Types: Onerous, Gratuitous, Remuneratory.
  • Rules Regarding Cause: Unlawful causes nullify contracts. Inadequacy of price generally doesn't affect validity unless specific circumstances apply.
Forms of Contract
  • General Rule: No form is required for validity but some contracts must comply with formalities.
  • Validity: Requires writing for donations over P5,000, sale of real property, among others.
  • Statute of Frauds: Certain contracts must be in writing to be enforceable, including contracts not performed within a year, promises to answer for the debts of another, etc.
Reformation of Instruments
  • Definition: Correcting a written instrument to reflect true intentions; requires existence of a written contract showing a mutual mistake.
Interpretation of Contracts
  • Rules: Terms must reflect the intentions of the parties, and ambiguities should be resolved in favor of equity rather than favoring the causing party.
Defective Contracts
  1. Rescissible Contracts: Remain valid until rescinded; subject to annulment and restoration.
  2. Voidable Contracts: Valid until annulled by the injured party upon discovery of vitiation.
  3. Unenforceable Contracts: Valid but not binding until ratified.
  4. Void Contracts: Inexistent or illegal from inception, cannot be ratified or created valid subsequent contracts.