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CHAPTER 1 General Provisions On Contracts Arts 1305 1317
CHAPTER 1 General Provisions On Contracts Arts 1305 1317
TITLE II
CHAPTER I - GENERAL PROVISIONS
(Articles 1305-1317)
1. What is a contract?
To better understand the definition, let us recall the definition of an obligation under
Article 1156 that, “(A)n obligation is a juridical necessity to give, to do, or not to do. We
said that the definition of an obligation under Article 1156 refers specifically to civil
obligations, and not to moral, divine or natural obligations which cannot be legally
enforced in court by the creditor or active subject.
(a) There are at least two parties involved in a contract – an active subject (creditor) and
a passive subject (debtor).
(b) An obligation is created because the passive subject promises to the active subject
the performance of a prestation, either to give something ( “to give”), or to render
some service (“to do” or “not to do”).
(c) By agreement between the parties, a civil obligation is created. At this point, we
make a distinction between an agreement and a contract. If two parties agree on the
performance of a moral or social obligation, there is an agreement but there is no
contract. However, if the parties agree on the performance of a civil obligation (Art.
1156), the result is a contract which is legally enforceable in court.
AGREEMENT: D and C agreed that they will go to mass every Sunday at the St. Therese
Chapel in Villamor, Pasay for 10 consecutive Sundays.
CONTRACT : D and C agreed that if D will hear mass for 10 consecutive Sundays at the
St. Therese Chapel, C will give D P100,000. Here, we have a contract which gives rise to
a suspensive conditional obligation. If D performs his obligation, C will be obliged to give
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D P100,000. If C does not comply with his obligation as agreed upon, D’s obligation will
then be extinguished.
(d) A contract gives rise to an obligation between the parties to the contract. Hence,
there can be no contract if there is no obligation. However, can a party have an
obligation even without a contract? YES. As we have previously studied in Article
1157, contract is only one of the sources of an obligation. Thus, we are reminded
that even without the debtor’s knowledge or consent ( i.e., even without a previous
contract entered into with the active subject), he will be liable for reimbursement
arising from quasi-contract [Art. 1160] if he has been benefited at the expense of
another.
“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.”
By this principle, the parties to a contract are given the freedom to agree on any terms
or stipulations in their contract. The only limitation is that the agreement should not be
illegal (i.e., contrary to LaMoG-PuPu). The contracting parties must respect the law which
is considered as an essential part of every contract.
A and B entered into a contract. It was agreed that A will give B P500,000 if B will steal
the pet lion of C. It was also agreed that A will give an advance payment of P250,000, and
the balance will be given to B when B delivers the lion to A. As agreed upon, B stole the lion
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from the residence of C. However, B was apprehended by the police authorities before he
could deliver the lion to A.
Question: Since B failed to deliver the lion to A as agreed upon, can A file an action in
court against B for the recovery of the P250,000 advanced to B?
Answer: NO. The prestation of B in the parties’ contract is to steal the lion of C.
Stealing is unlawful. Hence, the contract is illegal and cannot be given effect. If A files an
action for recovery of the P250,000 from B on the basis of their contract, both of them will be
put on trial for the crime of robbery or theft.
D borrowed P100,000 from C. On maturity date, D could not pay his obligation to C. D
and C then agreed that for the meantime that D is not able to pay his debt, D will work as the
secretary of C without pay. After 3 months of working without pay, D suddenly left the office of
C. C filed an action in court against D stating that D had not yet paid his debt. Hence, D
should continue working without pay in the office of C because it was what they agreed upon.
Question: Is D bound by the agreement? Can D demand payment equivalent to 3
months salary for his services from C?
Answer: The parties’ agreement for D to render service without pay is contrary to law
and cannot be given effect; hence, C cannot compel D to work without pay. A lawful
arrangement would be to require D to work as the secretary in the office of C with a salary of,
let us say, P10,000. The parties can then agree that D will not receive salary for 10 months to
compensate for the P100,000 debt that he owes C.
In this case, the court has to deny C’s prayer to compel D to comply with his obligation to
work without pay because the agreement is illegal. However, D has the right to be paid for his
services rendered to C. Therefore, the court can determine how much D should receive from
C by way of compensation for work rendered for 3 months, and subtract it from D’s P100,000
loan to C.
Study No. 1 of your application or problems in the study guide.
Joe is a 40-year old bachelor. Jane is a 17-year old student who has been compelled to
obtain a leave of absence from school this semester because her parents could no longer
afford to pay her tuition.
On January 2, 2012, Joe promised to give Jane P1M if Jane will live with him as his wife
for 6 months without the benefit of marriage. Jane agreed. On January 6, however, Jane
informed Joe that she was backing out from their agreement because she had already found
an employer who was willing to help her with her studies. Joe was upset. He filed an action
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against Jane for specific performance (to compel her to comply with her obligation) and for
damages.
Question: Is the contract valid? Can Jane be compelled to comply with her promise
under the agreement?
Answer: It is stated that by the autonomy of contracts, the parties are free to establish
any stipulation in their contract as they may consider convenient to them. In this case,
however, to compel a woman to cohabit with a man (even if not married) without the benefit of
marriage is contrary to morals. The contract of Joe and Jane is, therefore, void for being
immoral and cannot be enforced.
Kulit promised to give Galang P100,000 if Galang will slap his father once on both
cheeks. This contract is void because it is against the good custom of showing respect to our
parents.
“The contract must bind both contracting parties, its validity or compliance cannot be left to the
will of one of them.”
By this principle, no party to a contract can renounce or violate the law of the contract
without the consent of the other.
While the compliance with a contract cannot be left to the will of only one of the
contracting parties, under Article 1309, the determination of its performance may be left
to a third person. The determination, however, will bind the contracting parties only after it
has been made known to both of them.
In the above example, let us assume that A conspired with S for the fixing of the
price at P5M even if the appraised value of the land was only P3M. Then A informs
both S and B of the price. Question: Will B be bound by the determination of A?
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Answer: Still NO. Article 1310 states that a contracting party is not bound by the
determination of a third person if it is evidently inequitable or unjust as when the third
person acted in bad faith or by mistake.
5. Consensuality of Contracts –
Before we start discussing this principle, let us take a quick look at the essential
requisites of a contract discussed in the next chapter.
Effect of lack of any one of the requisites: The contract will be void and cannot be enforced.
We also need to take a look into the three stages in the life of a contract.
(3) Consummation or termination – This is when the parties have performed their respective
obligations, and the contract may be said to have been fully accomplished or executed, resulting in
the extinguishment or termination thereof.
Example: S advertised his BMW car for sale at P6M.
(1) Stage of Conception - B goes to S and offers to buy the BMW car for P5M. S is willing to sell at
P5.8M. B again makes another offer to buy at P5.5M. Here, the parties are still negotiating.
(2) Stage of Perfection – S agrees to B’s offer of P5.5M. Here, the contract is perfected. There is
already a mutual agreement as to the object and the cause of the sale.
(3) Stage of Consummation – S delivers the BMW car to B. B then pays S the P5.5M purchase
price. Here, the parties comply with their respective prestations under the contract. It is in this
stage that the obligations of the parties are completely extinguished.
Effect of perfection of a contract: It is only after perfection of a contract that the following will
arise:
(a) the obligation of the debtor to perform the prestation and/or to pay for damages.
(b) the right of the creditor to compel performance of the obligation and/or claim for damages.
A contract is thus only perfected after compliance with all the three essential requisites
of consent, object and cause, or C-O-C .
Answer : YES. As of January 25, 2012, there was already a perfected contract of sale
because as of that date there was already consent on the part of both contracting parties,
there was an object (the delivery of the car), and there was a cause (the payment of the P3M
purchase price). Since there was already a perfected contract, both S and B are bound to the
fulfilment of their respective obligations under the contract. Therefore, S can no longer back
out from his obligation of delivering the car to B unless he is willing to be liable for damages to
B for breach of contract.
(2) Real contract – This kind of contract is perfected by the delivery of the thing subject matter of
the contract. In other words, mere consent is not enough. There is an additional requisite
for the perfection of the contract – that is, delivery of the object of the contract. C-O-C-D
(3) Solemn contract – This kind of contract is perfected after compliance with certain formalities
prescribed by law. Just like in real contracts, mere consent is not enough. There is an additional
requisite for the perfection of this kind of contract – that is, compliance by the parties with the
formalities required by law for its validity or effectiveness. C-O-C-F
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6. Relativity of Contracts –
Under the principle of relativity of contracts, it is stated that contracts take effect only
between the parties, their assigns and heirs. (Article 1310). This means that only the
parties, their assigns and heirs can have rights and obligations under the contract.
Strangers to a contract cannot be made liable for damages under the contract. Neither
can strangers claim benefits under the contract.
Example No. 1: Contracts take effect only between the parties. On January 5,
2012, S promised to sell his BMW car to B for P2M. The delivery of the car and payment of
the purchase price was set on January 15, 2012. On January 15, 2012, S delivered the car
but B paid only P1.5M of the purchase price. B promised to deliver the balance of the
purchase price to S the following day. B, however, failed to pay despite repeated demands
from S. When M, the mother of S, heard about what happened, M filed a case against B in
court for collection of the balance of P500,000.
Question: Will the action for collection filed by M against B prosper?
Answer : NO. M has no legal standing to file the action for collection against B. Under the
principle of relativity of contracts, the contract takes effect only between the parties. Even if M
is the mother of S, M is a stranger to the contract of sale between S and B. Hence, M cannot
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claim any rights under the contract by collecting the balance of the purchase price which B
failed to pay. Only S is the proper party to file the collection case against B.
Example No. 2: Contracts can also bind the assigns of the parties. In the example
above, let us assume that S specifically authorized his mother M to collect the purchase price
of the car, and to file an action for collection in case of non-payment.
Question: This time, will an action for collection filed by M against B prosper?
Answer : YES. This time, since M has been specifically authorized and allowed by her son
to collect the purchase price and file an appropriate action against B, the action for collection
will prosper. This is because M is now an assignee or authorized representative of S who can
legally act in behalf of S.
Example No. 3: Contracts have also binding effect on the heirs of the parties .
This is only possible if one of the parties to a contract dies before the maturity
date of the obligation. D borrowed P2M from C due on December 30, 2011. On
November 30, 2011, D died of a heart attack leaving his only son S an inheritance amounting
to P1.5M. S is a multimillionaire with a total asset valued at P890M.
Question: Can C collect the obligation from S? If so, how much?
Answer : YES. By the principle of relativity, since D is already dead, the contract can be
made to bind the son S. When we say, however, that the contract will bind even the heirs,
what the law actually means is not the heir personally, but the estate of the deceased (the
contracting party who died). Hence, if D died without leaving any inheritance to S, S cannot
be personally liable for the obligation of D even if D was his father. In this case, C may
recover from S, but only to the extent of whatever S inherited from D – that is, P1.5M.
Under the last sentence of the first paragraph of Article 1311, “(T)he heir is not liable
beyond the value of the property he received from the decedent.” Of course, since S
is a multimillionaire, if he considers it his moral obligation to pay the entire debt of his father,
he is not legally prohibited from doing so.
There are, however, also instances when the contract takes effect ONLY between the
parties, and cannot bind even assigns and/or heirs. This happens when the rights and
obligations arising from the contract are not transmissible ( i.e., cannot be transferred or
passed on to another person).
(a) The rights and obligations arising from the contract may not be transmissible by
their very nature.
Example : D agreed to sing in the nightclub of C for 3 consecutive nights on February 12,
13 and 14, 2012. The customers specially requested for D because D is the only singer in the
country who can sing while walking on a rope in the air. D, however, died on February 10,
2012 in a car accident.
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(b) The rights and obligations arising from the contract may not be transmissible by
stipulation of the parties.
Example : Look at Example No. 3 above. Assume that D and C specifically agreed in their
contract that should one of them die before the maturity date of the obligation, the rights and
obligations of the parties under the contract will be extinguished. If this is the parties’
agreement in their contract, even if S inherited P1.5M from his father D, C can no longer
collect from S after the death of D.
(c) The rights and obligations arising from the contract may not be transmissible by
provision of law.
Example : In a contract of partnership, if one of the partners die, the partner who died
cannot be replaced by his heirs in the partnership. The law (Article 1830[5]) specifically
provides that the death of one of the partners in a partnership will extinguish the legal
relationship. In other words, the dead partner ceases to be a partner and cannot transmit or
pass on to his heirs the rights and obligations of a partner.
The general rule is that: strangers cannot be bound by a contract to which they are not
parties. There are, however, exceptions to this rule. In other words, there are cases
when even third persons (not parties to the contract) may assume benefits, or may be held
liable for damages, under the contract.
Example : D borrowed P100,000 from C payable after one year, or on June 30, 2012, plus
10% interest. It was also agreed by the parties that on maturity date D will pay to C the
principal, but the interest of P10,000 will be given to T. This is because C also owes T the
amount of P10,000. T was informed by the parties of the agreement. However, on May 30,
2012, C changed his mind and asked D to deliver the entire amount of P110,000 to C on
maturity date of the obligation. On June 30, T went to C demanding for the payment of
P10,000 to him as earlier agreed upon.
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(b) In contracts creating real rights, third persons who come into possession of the
object of the contract are bound thereby. (Article 1312)
indebtedness. B now can go after D for the loss that he has suffered by reason of the
foreclosure, and for consequential damages arising from the foreclosure.
(c) In contracts entered into by the debtor to defraud his creditor(s). (Article 1313)
Example : D borrowed P6M from C payable on February 15, 2011. D has a house and lot in
Manila valued at P8M. On January 28, 2011, D sold his Manila house and lot for P10M to his
friend B, who was aware of D’s intention to evade his obligation to C. Thereafter, D
squandered the entire P10M after gambling everyday at the Casino Filipino for two entire
weeks. Hence, when C demanded for payment of the P6M debt on February 15, 2011, D was
already insolvent without any other property. C then filed an action for the rescission or
cancellation of the contract of sale between D and B. If the sale is cancelled, and the
ownership of the house and lot is reverted back to B, C can then ask the court to attach the
property and sell it at public action for the payment of D’s obligation.
Question: Can C file an action to rescind or cancel the contract of sale between D and B
considering that he is a stranger to the said contract of sale?
Answer : YES. In this case, D sold his property to B for purposes of defrauding C – that is,
to evade the payment of his obligation to C on maturity date. Under Article 1313, C, the
defrauded creditor, is given the right to attack the validity of the contract of sale (to which he is
a stranger) by filing an action for its cancellation so that he may be paid his claims against the
defrauding debtor.
NOTE: Under Article 1381(3), One of the rescissible contracts are “(T)hose undertaken in
fraud of creditors when the latter cannot in any other manner collect the claims due them.”
When we discuss the chapter on rescissible contracts, you will have a more detailed study of
the requirements for rescission. Why don’t you go and have a peep at the author’s
commentaries under Article 1381(3)...I know you feel tempted...just give in.
(d) In contracts which have been violated by reason of the inducement of a third
person. (Article 1314) In this case, a third person convinces in bad faith a
contracting party to violate his contract with another. In case of breach because of
the inducement, the third person may be sued for damages by the other
contracting party who suffered the damage.
Example : S agreed to sell his land to B for P5M. It was also agreed by the parties that
should S fail to deliver the lot, S will be liable to pay B damages amounting to P500,000 as
penalty. Later, F, a close friend, visited S and convinced him to sell the land instead to M who
is willing to pay P12M for the lot. S then sold the land to M. Since S did not deliver the land
to B, B suffered business loses amounting to P1.5M. B then filed an action for damages
against F who was the one who convinced S to violate his contract.
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Question: Can F be made liable for damages under a contract to which he is a stranger? If
so, how much will F be liable in damages to B?
Answer : YES. B can sue F for damages even if F is a stranger to the contract of sale
between S and B. The source of F’s obligation here is based on the theory of quasi-delict
(Art. 1162). However, the liability of F for damages cannot be more than what S should have
been liable for violation of his contract. Hence, B can recover from F only the amount of
P500,000 as damages, which is the penalty that has been agreed upon for breach in the
contract between S and B.
Under the principle of the obligatory force of contracts, it is stated that “Obligations
arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.” (Art. 1159) From the moment a contract is perfected, “the
parties are bound not only to the fulfilment 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. 1315)
Example : S agreed to sell his horse to B. It was stipulated that S should deliver the horse
after two days. In this case, S has the obligation to deliver the horse after two days as agreed
upon in the contract. While waiting, since it was not part of the agreement, S did not feed the
horse anymore. Also, since it was not part of the agreement, S did not let the horse stay in the
stable anymore. After two days, the horse fell ill and died. The veterinarian said that the
horse catched a deadly virus while soaked in heavy rains two nights before the delivery date.
Question: Was S obliged to feed the horse and provide adequate shelter for it considering
that it was never stipulated in the parties’ contract?
Answer : YES. Pending delivery of the object of a contract, the debtor is obliged to take
care of the thing to be delivered with the proper diligence of a good father of a family (Art.
1163). Hence, S had the obligation to feed the horse, and provide it adequate shelter before
the appointed delivery date even if nothing is said about the obligation in his contract with B as
this is in keeping with good faith, usage, and law.
unauthorized contract). Since the agent entered into the contract without the consent
of the principal, it is the agent who will be personally liable to the creditor under the
contract.
Example: A went to C to borrow P50,000. A tells C that P sent him to borrow the P50,000 from
C. in truth and in fact, however, P never sent A to C to borrow the money. In any event, before C
gave the money to A, he made A sign a promissory note with the following tenor:
We will study this provision again when we study Article 1403 (1) of the chapter on
“Unenforceable Contracts”. You can take an advance look at the commentaries under
Article 1403 (1) for a more detailed understanding of this provision.
Atty. Harriet Reyes Linsangan
August 19, 2012