Week 13

Contracts
CHAPTER 1
GENERAL PROVISIONS

Atty. Johnson A.H. Ong, CPA, MBA

 Definition: Contract
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)
Limitation:
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. 1306)

Atty. J_Ong_Oct 2020

 RCPI vs. CA., G.R. No. L-44748. August 29,
A 1986
Petition for Review by certiorari of the decision of the Court of Appeals, modifying the
decision of the trial court in a civil case for recovery of damages against petitioner
corporation by reducing the award to private respondent Loreto Dionela of moral
damages from P40,000 to P15,000, and attorney's fees from P3,000 to P2,000.
The basis of the complaint against the defendant corporation is a telegram sent through
its Manila Office to the offended party, Loreto Dionela, reading as follows:
"176 AS JR 1215 PM 9 PAID
MANDALUYONG JUL 22-66
LORETO DIONELA
CABANGAN LEGASPI CITY.
WIRE ARRIVAL OF CHECK
FER.
LORETO DIONELA — CABANGAN — WIRE ARRIVAL OF CHECK-PER.
115 PM.
• SA IYO WALANG PAKINABANG DUMATING — KA DIYAN — WALA KANG PADALA
DITO — KAHIT BULBULMO" (p. 19, Annex "A")

• Defendant defense: Defendant-corporation as a defense, alleges that the additional

words in Tagalog was a private joke between the sending and receiving operators and
that they were not addressed to or intended for plaintiff and therefore did not form
part of the telegram and that the Tagalog words are not defamatory. Atty. J_Ong_Oct 2020
 RCPI vs. CA., G.R. No. L-44748. August 29,
1986
Ruling:
• Petitioner is a domestic corporation engaged in the
business of receiving and transmitting messages. Every
time a person transmits a message through the facilities
of the petitioner, a contract is entered into. Upon receipt
of the rate or fee fixed, the petitioner undertakes to
transmit the message accurately.
• There is no question that in the case at bar, libelous
matters were included in the message transmitted,
without the consent or knowledge of the sender. There is
a clear case of breach of contract by the petitioner in
adding extraneous and libelous matters in the message
sent to the private respondent.

Atty. J_Ong_Oct 2020

 Example: Contrary to moral
1. A promise of marriage based on a carnal
consideration is immoral (Batarra vs. Marcos, 7 Phil
156)
2. Interest stipulation of 5.5% per month or 66% per
annum. (Medel et al vs. Court of Appeal, et al, G.R.
No. 131622. November 27, 1998)

Atty. J_Ong_Oct 2020

 Example: Contrary to public policy
1. Stipulation exempting a carrier from liability for
gross negligence (Heacock vs. Macondray, 32 Phil
205)
2. Encourage fraud (Bough vs. Cantiveros, 40 Phil 209)
3. Denying access to court (Manila electric Co., vs.
Pasay Transportation, 57 Phil 603)
4. Stipulation to refund all the benefits received by
student under scholarship if he transfer to another
school. (Emeterio Cui vs. Arellano University, 2SCRA
205)

Atty. J_Ong_Oct 2020

 Kinds of contract
• Formation or perfection
• Consensual – perfected by mere consent (1315)
• Real – perfected by delivery (i.e. depositum, pledge,
commodatum) (1316)
• Formal or solemn Contract – Perfected upon execution of
certain formalities.
• Interest must be in writing (1956);
• Contribution of immovable property must be in a public
instrument (Art. 1771 and 1773)
• Donation of personal property where the value exceed P5,000
must be in writing (Art. 748)
• Donation of immovable property must be in a public instrument
(Art. 749)
• Sale of land or interest therein, the authority of the agent must be
in writing (Art. 1874)

Atty. J_Ong_Oct 2020

Kinds of contract
• Cause or equivalence of value of prestation
• Onerous – equivalent value of prestation
• Gratuitous or lucrative – no equivalent prestation
• Remunerative - the prestation is the benefit or service that
had been rendered previously.
• Importance or dependence of one upon another
• Principal – can stand alone
• Accessory – depend upon the existence of another contract
• Preparatory – not considered the contract as an end by
itself but as a mean for entering in future transaction or
contract.

Atty. J_Ong_Oct 2020

Kinds of contract
• Parties obligated
• Unilateral – only one party has obligation
• Bilateral – both party has obligation
• Name or designation
• Nominate – has a name given by law
• Innominate – no name given by law
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. (Art. 1307)
a. Do ut des (I give that you may give) no longer innominate. Barter
b. Do ut facias (I give that you may do)
c. Facio ut des (I do that you may give)
d. Facio ut facias (I do that you may do)
Atty. J_Ong_Oct 2020
Kinds of contract
• Risk of fulfillment
• Commutative – real fulfillment, equivalent value are given
• Aleatory – the fulfillment depend upon chance.
• Time of performance or fulfillment
• Executed – prestation are already complied with
• Executory – prestations are to be complied with in the
future
• According to number of person who participated in
the drafting of the contract
• Ordinary -
• Contract of adhesion – Where the terms and condition of
the contract is already drafted by one party. The other
party only signifies his consent by signing the contract.
Atty. J_Ong_Oct 2020
Stages of contract
1. Preparation (Negotiation, conception or
Generacion) – steps taken by the parties leading to
the perfection of the contract.
2. Perfection (or birth) – Come to a definite agreement
or meeting of the mind upon the object and the
cause.
3. Consummation (death or termination) – parties
have performed their respective obligation

Atty. J_Ong_Oct 2020

 Characteristics of contract
1. Freedom of contract - contracting parties may
establish such stipulations, clauses, terms and
conditions as they may deem convenient (1306)
• Limitation:
• Law
• Moral
• Good custom
• Public order
• Public policy

Atty. J_Ong_Oct 2020

 Characteristics of contract
2. Mutuality of contract - contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them (1308). The
principle is based on the essential equality of the
parties.
• 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. (1309)
• The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is
equitable under the circumstances (1310)

Atty. J_Ong_Oct 2020

Mutuality of contract – Contract of sales

Art. 1473. The fixing of the price can never be left to the
discretion of one of the contracting parties. However, if the
price fixed by one of the parties is accepted by the other, the
sale is perfected

Determinate
Seller Object Buyer

Atty. J_Ong_Oct 2020

Mutuality of contract – Partnership
Illustration
Art. 1798. If the partners have agreed to intrust to a third person the designation of
the share of each one in the profits and losses, such designation may be impugned
only when it is manifestly inequitable. In no case may a partner who has begun to
execute the decision of the third person, or who has not impugned the same within a
period of three months from the time he had knowledge thereof, complain of such
decision.
The designation of losses and profits cannot be intrusted to one of the partners.
(1690)

ABC Partnership

A B C
Partner Partner Partner

Atty. J_Ong_Oct 2020

 Characteristics of contract
3. Relativity of contract - Contracts take effect only between
the parties, their assigns and heirs (1311)
Exception:
a. Where the obligations arising from contract are not transmissible
by nature (personal qualification is involved), by stipulation or by
provision of law (Agency, partnership, commodatum).
b. Stipulation in favor of third person (stipulation pour autrui)
• 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. 1311 par 2)
c. 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. (1312)
d. Creditors are protected in cases of contracts intended to defraud
them. (1313)
e. Any third person who induces another to violate his contract shall
be liable for damages to the other contracting party. (1314)

Atty. J_Ong_Oct 2020

Manila Railroad Co. vs. Compania
Trasatlantica, 38 Phil 875
Contract to unload the
Contract of carriage cargo from the ship
A B C
Cargo was damaged

Atty. J_Ong_Oct 2020

Mandarin Villa, Inc. vs. CA, G.R. No. 119850. June 20, 1996
Facts:
In the evening of October 19, 1989, private respondent.
Clodualdo de Jesus, a practicing lawyer and
businessman, hosted a dinner for his friends at the
petitioner's restaurant, the Mandarin Villa Seafoods
Village. Greenhills, Mandaluyong City. After dinner the
waiter handed to him the bill in the amount of
P2,658.50. Private respondent offered to pay the bill
through his credit card issued by Philippine Commercial
Credit Card Inc. (BANKARD). This card was accepted by
the waiter who immediately proceeded to the
restaurant's cashier for card verification. Ten minutes
later, however, the waiter returned and audibly
informed private respondent that his credit card had
expired.
Atty. J_Ong_Oct 2020
Mandarin Villa, Inc. vs. CA, G.R. No. 119850. June 20, 1996
• Private respondent remonstrated that said credit card had
yet to expire on September 1990, as embossed on its
face. The waiter was unmoved, thus, private respondent
and two of his guests approached the restaurant's cashier
who again passed the credit card over the verification
computer. The same information was produced, i.e., CARD
EXPIRED.
• Private respondent and his guests returned to their table
and at this juncture, Professor Lirag, another guest,
uttered the following remarks: "Clody [referring to
Clodualdo de Jesus], may problema ba? Baka kailangang
maghugas na kami ng pinggan?“ Thereupon, private
respondent left the restaurant and got his BPI Express
Credit Card from his car and offered it to pay their bill.
This was accepted and honored by the cashier after
verification. Petitioner and his companions left
afterwards.
Atty. J_Ong_Oct 2020
Mandarin Villa, Inc. vs. CA, G.R. No. 119850. June 20, 1996
• The Point of Sale (POS) Guidelines which outlined the
steps that petitioner must follow under the
circumstances provides.
• "xxx xxx xxx
• "CARD EXPIRED
• a. Check expiry date on card.
• b. If unexpired, refer to CB.
• b 1. If valid, honor up to maximum of SPL only.
• b.2. If in CB as Lost, do procedures 2a to 2e.,
• b.3. If in CB as Suspended/Cancelled, do not honor
card
• c. If expired, do not honor card." 12
Atty. J_Ong_Oct 2020
 Mandarin Villa, Inc. vs. CA, G.R.
No. 119850. June 20, 1996
Ruling:
A cursory reading of said rule reveals that whenever the
words CARD EXPIRED flashes on the screen of the
verification machine, petitioner should check the credit
card's expiry date embossed on the card itself. If unexpired,
petitioner should honor the card provided it is not invalid,
cancelled or otherwise suspended. But if expired, petitioner
should not honor the card. In this case, private
respondent's BANKARD credit card has an embossed expiry
date of September 1990. 13 Clearly, it has not yet expired on
October 19, 1989, when the same was wrongfully
dishonored by the petitioner. Hence, petitioner did not use
the reasonable care and caution which an ordinary
prudent person would have used in the same situation
and as such petitioner is guilty of negligence.

Atty. J_Ong_Oct 2020

 Characteristics of contract
4. Consensuality of contracts
• 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. 1315)
• Exception:
• Formal Contract
• Real Contract

Atty. J_Ong_Oct 2020

Unauthrorized 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.

Principal Agent 3rd person

1. No authority
2. Acted beyond his power
Atty. J_Ong_Oct 2020
End – Week 13