II.

CONTRACTS
A. In General

1. Definition
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.
Tolentino Notes:
Error in our definition of contracts
Imperfect phraseology. It seems to limit
the definition to cases where one party
binds himself to perform a prestation in
favor of another, excluding cases of
reciprocal obligations.
Tolentino prefers the Sanchez-Roman
definition:
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.
express convention ? = NO. Because a
contract can exist by expression of law.
A contract is limited to agreements
which produce patrimonial liabilities.
o patrimonial (from dictionary)
an estate inherited from ones
father or ancestors.
Contracts 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. 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 of the contracts, while
the meeting of the minds is
merely secondary in other
acts.)
3. In contracts, the law has only
a
suppletory
effect,
meanwhile in other acts, the
law is the principal source of
rights and obligations.
Perfect promise 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.

Imperfect
promise
(policitacion)

Constitutes a mere unaccepted offer.

Pact A special part of the contract,
sometimes
merely
incidental
and
separable from the principal agreement
Stipulation Similar to a pact.
o When the contract is in an
instrument, stipulation refers to
the essential and dispositive part,
as
distinguished
from
the
exposition of the facts and
antecedents upon which it is
based.
No of Parties: The code requires two
parties.

Auto-Contracts
Art. 1491. The following persons cannot
acquire by purchase, even at a public or judicial
auction, either in person or through the
mediation of another:
(1) The guardian, the property of the person or
persons who may be under his guardianship;
(2) Agents, the property whose administration
or sale may have been intrusted to them,
unless the consent of the principal has been
given;
(3) Executors and administrators, the property
of the estate under administration;
(4) Public officers and employees, the property
of the State or of any subdivision thereof, or of
any
government-owned
or
controlled
corporation, or institution, the administration of
which has been intrusted to them; this provision
shall apply to judges and government experts
who, in any manner whatsoever, take part in
the sale;
(5) Justices, judges, prosecuting attorneys,
clerks of superior and inferior courts, and other
officers and employees connected with the
administration of justice, the property and
rights in litigation or levied upon an execution
before the court within whose jurisdiction or
territory
they
exercise
their
respective
functions; this prohibition includes the act of
acquiring by assignment and shall apply to
lawyers, with respect to the property and rights
which may be the object of any litigation in
which they may take part by virtue of their
profession;
(6) Any others specially disqualified by law.

Art. 1646. The persons disqualified to buy

referred to in articles 1490 and 1491, are also
disqualified to become lessees of the things
mentioned therein.
Art. 1890. If the agent has been empowered to
borrow money, he may himself be the lender at
the current rate of interest. If he has been
authorized to lend money at interest, he cannot
borrow it without the consent of the principal.
Tolentino Notes:
Q: 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?
(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?
Tolentino: He believes that 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.
o In auto-contracts, there are two
declarations, although made by
the same person.
The dangers that may arise due to
conflict of interest in such cases are
often avoided by express prohibitions
such as in the law on sales (1941) and in
agency (1890).
The very existence of these specific
prohibitions gives rise to the implication
that, as a general rule, auto-contracts
are permissible.
o That which is not expressly
prohibited is deemed to be
allowed.
Characteristics of Contracts:
1. Obligatory force
2. Mutuality; and
3. Relativity of contracts
By the obligatory force of contracts, it
constitutes the law as between the
parties. By its mutuality, its validity and
performance cannot be left to the will of
only one of the parties. And by its
relativity, it is binding only upon the
parties and their successors.
Elements of Contracts:
1. The essential elements, or
those without which there can
be no contract; these are
consent, subject matter, and
cause
2. The natural elements, or
those which exist as part of

the contract even if the

parties do not provide for
them, because the law, as
suppletory to the contract,
creates them (ex. warranty
against
eviction
in
the
contract of purchase and sale)
3. The accidental elements, or
those which are agreed upon
by the parties and which
cannot exist without being
stipulated.
Stages of Contracts:
1. Preparation, conception, or
generation, which is the
period of negotiation and
bargaining, ending at the
moment of agreement of the
parties
2. Perfection or birth of the
contract, which is the moment
when the parties come to
agree on the terms of the
contract
3. Consummation
or
death,
which is the fulfillment or
performance of the terms
agreed upon in the contract.

B. Fundamental Characteristics / Principles

of Contracts
1. Consensuality of Contracts
Art. 1317. No one may contract in the name of
another without being authorized by the latter,
or unless he has by law a right to represent him.
A contract entered into in the name of another
by one who has no authority or legal
representation, or who has acted beyond his
powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is
revoked by the other contracting party.
Tolentino Notes:
Ratification Necessary. Where a
contract is entered into in behalf of
another who has not authorized it, such
contract is not valid and binding as
against him, unless he ratifies the
transaction, and is estopped to question
its legality.
o The nullity of such contract is of a
permanent nature and it will exist
as long as it is not duly ratified.
o The mere lapse of time cannot
give efficacy to such contract.
o The defect is such that it cannot
be
cured
except
by
the
subsequent ratification of the
2

person in whose name the

contract was executed.
Express or Implied. The ratification of
an unauthorized contract may be either
express or implied.
Effect retroactive. The ratification of a
contract by the person in whose name it
has been entered into without authority,
validates the act from the moment of its
celebration, and not merely from the
time of its ratification, for the ratification
operates upon or applies to the act
already performed.
Status
before
ratification.
The
unauthorized contract produces a state
of suspense; its effectivity depends upon
its ratification.
o Before such ratification, the other
party may not do anything which
would frustrate the rights of the
former which may arise in the
event of ratification.
o However, he may resolve the
contract before the ratification,
by
means
of
revocation
communicated to the principal or
to the agent.
Liability of Representative. If the
contract is not ratified by the person
represented,
the
representative
becomes liable in damages to the other
party, if he did not give notice of the
absence or deficiency of his power.
o The liability is based on the fact
that having represented himself
as having authority to act for
another, he is responsible for the
truth of such affirmation.
o The 3rd party, however, is not
entitled to damages, if he knew
or should have known that the
authority does not exist.
Under Art. 1897, an agent who exceeds
the limits of his authority without giving
the other party sufficient notice of his
powers, becomes personally liable to the
latter.
o This is applicable also to cases of
total want of authority, because
the ratio decidendi is the same.
Contracts of Adhesion

Contracts of Adhesion. Although some

writers consider that there is no true
contract in such cases, because the will
of one of the parties is suppressed, this
is not always juridically true. Normally,
the party who adheres to the contract is
in reality free to reject it entirely; if he
adheres, he gives his consent.

2. Autonomy of Contracts
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.
Art. 1799. A stipulation which excludes one or
more partners from any share in the profits or
losses is void.
Art. 2088. The creditor cannot appropriate the
things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary
is null and void.
Art. 2130. A stipulation forbidding the owner
from alienating the immovable mortgaged shall
be void.
Tolentino Notes:
Freedom to Contract. The right to
enter into lawful contracts constitutes
one of the liberties of the people of the
state.
o If that right be struck down or
arbitrarily interfered with, there is
a substantial impairment of the
liberty of the people under the
Constituion. The legislature 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.
Validity of Stipulations. The contract
is the law between the contracting
parties. And where there is nothing in
the contract which is contrary to law,
morals, god customs, public policy, or
public order, the validity of the contract
must be sustained.
Trust receipts. Trust receipts, as
contracts, in a certain manner partake of
the nature of a conditional sale as
provided by the Chattel Mortgage Law,
that is, the importer becomes absolute
owner of the imported merchandise as
soon as he had paid its price.
Qualification of Contracts. The law,
not the parties, determines the juridical
situation created by the parties through
their contract and the rights and
obligations arising therefrom.
o A contract is to be judged by its
character, and courts will look to
the substance and not to the
mere form of the transaction.
3. Mutuality of Contracts
3

Art. 1308. The contract 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.
Art. 1182. When the fulfillment of the condition
depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends
upon chance or upon the will of a third person,
the obligation shall take effect in conformity
with the provisions of this Code.
Tolentino Notes:
Mutuality of Contract. The binding
effect of the contract on both parties is
based on the principles: (1) that
obligations arising from contracts have
the force of law between the contracting
parties; and (2) that there must be
mutuality between the parties based on
their essential quality, to which is
repugnant to have one party bound by
the contract leaving the other free
therefrom.
o The ultimate purpose is to render
void a contract containing a
condition
which
makes
its
fulfillment dependent exclusively
upon the uncontrolled will of one
of the contracting parties.
Unilateral
Cancellation.
Just
as
nobody can be forced to enter into a
contract, in the same manner, once a
contract is entered into, no party can
renounce it unilaterally or without the
consent of the other.
o No one may be permitted to
change his mind or disavow and
go back upon his own acts, or to
proceed contrary thereto, to the
prejudice of the other party.
When Stipulated. An agreement of the
parties that either one of them may
terminate
the
contract
upon
a
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.
o The right of rescisision, owever,
may be waived.

Acceleration Clause
Escalation Clause
4. Obligatory Force of Contracts
Art. 1159. Obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good
faith.
Art. 1315. Contracts are perfected by mere
consent, and from that moment the parties are
bound not only to the fulfillment of what has
been expressly stipulated but also to all the
consequences which, according to their nature,
may be in keeping with good faith, usage and
law.
Art. 1316. Real contracts, such as deposit,
pledge and commodatum, are not perfected
until the delivery of the object of the obligation.
Art. 749. In order that the donation of an
immovable may be valid, it must be made in a
public document, specifying therein the
property donated and the value of the charges
which the donee must satisfy.
The acceptance may be made in the same deed
of donation or in a separate public document,
but it shall not take effect unless it is done
during the lifetime of the donor.
If the acceptance is made in a separate
instrument, the donor shall be notified thereof
in an authentic form, and this step shall be
noted in both instruments.
Tolentino Notes:
Perfection of Consensual Contracts.
The perfection of a contract is the
moment from which it exists; the
juridical tie between the parties arises
from that time.
Consensual Contracts (referred to in
1315) They are perfected by mere
consent which is the meeting of the
minds of the parties upon the terms of
the contract.
o The consent need not be made
expressly.
o However, there is no perfected
contract
where
the
alleged
contract was signed by only one
party and the record shows that
the other party did not execute or
sign the said contract form.
Formal
Contracts

Traditionally
understood to meant hose in which
4

compliance
with
special
external
formalities is necessary for the validity of
the contract are NO longer recognized
under our law, as distinct from
consensual contracts.
Binding Effect of Contracts. The
binding force of a contract is not limited
to what is expressly stipulated, but
extends to all consequences which are
the natural effect of the contract,
considering its true purpose, the
stipulations it contains, and the object
involved.
Contracts are not what the parties
choose to call them, but what they really
are as determined by the principles of
laws.

5. Relativity of Contracts
Art. 1311. Contracts take effect only between
the parties, their assigns and heirs, except in
case where the rights and obligations arising
from the 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
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.1312. In contracts creating real rights, third
persons who come into possession of the object
of the contract are bound thereby, subject to
the provisions of the Mortgage Law and the
Land Registration Laws. (n)
Art. 1313. Creditors are protected in cases of
contracts intended to defraud them. (n)
Art. 1314. Any third person who induces
another to violate his contract shall be liable for
damages to the other contracting party.
Art. 1177. The creditors, after having pursued
the property in possession of the debtor to
satisfy their claims, may exercise all the rights
and bring all the actions of the latter for the
same purpose, save those which are inherent in
his person; they may also impugn the acts
which the debtor may have done to defraud
them. (1111)
Art. 1178. Subject to the laws, all rights
acquired in virtue of an obligation are

transmissible, if there has been no stipulation to

the contrary.
Art. 138. The following contracts are
rescissble:
(3) Those undertaken in fraud of creditors when
the latter cannot in any other manner collect
the claims due them;
Tolentino Notes:
Parties
Bound
by
Contracts.
Contracts produce effect as between the
parties who execute them.
o Even when the contract is
ostensibly in the name of one
person, if the other party knew
that the person named did not
have any legal existence or any
real interest in the contract, but
that another person had the
interest in and was the real party
to the contract, such contract will
produce effect with respect to the
latter.
o The original parties to contracts
may
stipulate
as
to
the
transmission of their rights and
obligations therein.
3P Not Bound. The rights of a party
cannot be prejudiced by the act,
declaration, or omission of another, and
proceedings against one cannot affect
another, except as expressly provided by
law or the ROC.
o A contract cannot be binding
upon and cannot be enforced
against one who is not a party to
it, even if he is aware of such
contract and has acted with
knowledge thereof.
3P Affected. Although contracts do not
bind 3P, juridical situations may be
created affecting them. Ex:
o A contract creating a real right
affects 3P who may have some
right over the thing (1312)
o A contract may reduce the
properties of a debtor and thus
diminish the available security for
the claims of the creditors (1313)
o In some cases, as in composition
in insolvency and in suspension of
payments, certain agreements
are binding by law on creditors
who may not have agreed
thereto.
Thus, one who is not a
party to a contract cannot
sue or be sued for the
performance
or
cancellation
thereof,
5

unless he has a real

interest affected thereby.
Enforcement of Contract. Only a party
to the contract can maintain na action to
enforce the obligations arising under
said contract.
Annulment of Contract. Since a
contract is binding only upon the parties
thereto, a 3P cannot ask for its
annulment, although, of course, he may
ask for its rescission if it is in fraud of his
rights.
o One who is not a party to a
contract has no rights under such
contract, and even if the contract
may be voidable, its nullity can
be asserted only by one who is a
party thereto; a 3P would have
absolutely no personality to ask
for the annulment.
o However, it was held that a
person who is not a party obliged
principally or subsidiarily in a
contract may exercise an action
for nullity of the contract if he is
prejudiced in his rights with
respect to one of the contracting
parties, and can show the
detriment which would positively
result to him from the contract in
which he had no intervention.
Contracts Bind Heirs. GR: Rights and
obligation sunder a contract are
transmitted to the heirs of the parties.
o The heirs cannot be considered
as 3P, because there is privity of
interest between them and their
predecessors.
Intransmissible Contracts. Among
contracts which are intransmissible are
those which are purely personal, either
by provision of law (partnership and
agency) or by the very nature of the
obligations arising therefrom.
Stipulations for 3P. (1311) The 2nd
paragraph of this article creates an
apparent exception to the first.
o Under the 1st paragraph, the
cardinal rule of contract is laid
down that only parties thereto
and their privies acquire rights
and
assume
obligations
thereunder;
while
the
2nd
paragraph permits a 3P to avail
himself of a benefit extended to
him by its terms.
o Manresa: The 2nd paragraph of
1311 corresponds almost always
to the juridical conception of
donation, it being necessary in
such case to apply the rules
relating to donations in so far as

the form of acceptance is

concerned.
Tolentino: This is true
where the stipulation is for
the sole benefit of the 3P.
o But where a transfer of property
is coupled with the purchasers
promise to pay a debt owing from
the seller to a 3P, it can scarcely
be said that the stipulation is in
the nature of a gift, and yet such
a stipulation is in favor of a 3P.
Stipulations in favor of 3P may be
divided into two classes:
1. Those where the stipulation is
intended for the sole benefit
of such 3P
2. Those where the an obligation
is due from the promise to the
3P and for the former seeks to
discharge it by means of such
stipulation

Principle of Relativity:
Contracts are generally effective only between
the parties, their assigns and their heirs.
Exceptions:
1. Where obligations arising from the
contract are not transmissible by their
nature, by stipulation in favor of a 3rd
party.
2. Where there is stipulation Pour Autri (a
stipulation in favor of 3rd person)
3. Where a third person induces another to
violate his contract
4. Where in some cases, 3rd persons may
be adversely affected by a contract
where they did not participate.
5. Where law authorizes the creditor to sue
on a contract entered into by his debtor.
Requisites of Stipulation Pour Autri
a) There must be a stipulation in favor of a
3rd person;
b) Contracting parties must have clearly
and deliberately conferred a favor upon
a 3rd person;
c) A mere incidental benefit or interest of a
person is not sufficient
d) The stipulation must be part of contract
and not the whole of the contract;
e) 3rd
person
communicated
his
acceptance
to
obligor
before
its
revocation;
f) There must be no relation of agency
between either of the parties and 3rd
person. (Neither the contracting parties
bears the representation or authorization
of the 3rd party.)
g) That the favorable condition should not
be conditioned or compensated by any
kind of obligation or whatsoever;
6

Beneficiaries. A stipulation may validly

be made in favor of indeterminate
persons, provided that they can be

determined in some manner at the time

when the prestation from the stipulation
has to be performed.
Test of Beneficial Stipulation. A mere
incidental interest