OUTLINE NOTES

LAW 121/OBLIGATIONS & CONTRACTS

SECTIONS JD1A & JD1B
By: Atty. JEN N. ASUNCION

CONTRACTS

INTRODUCTION TO CONTRACTS:

I. IN GENERAL:

1. DEFINITION. The NCC defines a contract as “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, NCC)

An agreement of two or more persons for the purpose of creating, modifying, or extinguishing
a juridical relation between them.

a. “MEETING OF THE MINDS” – once the minds of the contracting parties meet, a valid
contract exists, whether it is reduced to writing or not.

b. “TWO PERSONS” – there must be at least two parties to a contract. However, a contract
may also be multilateral, or involving more than 2 parties.

c. “ONE BINDS HIMSELF, WITH RESPECT TO THE OTHER” – the contract may also be
reciprocal, wherein both parties are obliged to perform the prestation.

2. CONTRACT v. OBLIGATION

CONTRACT OBLIGATION
One of the sources of obligation Refers to the legal tie or relation
There is no contract if there is no obligation Obligation may exists without a contract
because there are other sources of obligation

3. KINDS/CLASSIFICATIONS OF CONTRACTS:

a. ACCORDING TO PERFECTION OR FORMATION:

i. CONSENSUAL – perfected by mere consent. (e.g. sale)

ii. REAL – perfected upon delivery, in addition to consent. (e.g. depositum,

commodatum or pledge)

iii. FORMAL/SOLEMN – perfected upon execution of required formalities. (e.g. donation

or mortgage of real properties)

b. ACCORDING TO CAUSE OR EQUIVALENCE OF THE VALUE OF PRESTATIONS:

i. ONEROUS – parties exchange equivalent values (e.g. sale)

ii. GRATUITOUS/LUCRATIVE – one party does not receive an equivalent value 9e.g.
commodatum)

iii. REMUNERATIVE – where one prestation is given for a benefit or service that had
been rendered previously.

c. ACCORDING TO IMPORTANCE OR DEPENDENCE OF ONE UPON THE OTHER:

i. PRINCIPAL – may exist alone (e.g. lease, sale, loan)

ii. ACCESSORY – existence depends on another contract (e.g. pledge, mortgage,

suretyship)

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 iii. PREPARATORY – the parties do not consider the contract as an end by itself, but as
a means thru which future transaction or contracts may be made. (e.g. agency,
partnership)

d. ACCORDING TO PARTIES OBLIGATED:

i. UNILATERAL – only one party is required to perform a prestation (e.g. commodatum

or gratuitous deposit)

ii. BILATERAL/SYNALAGMATIC – both parties are required to perform reciprocal

prestations. (e.g. sale)

e. ACCORDING TO THEIR NAME OR DESIGNATION:

i. NOMINATE – those which have their own individuality and are regulated by special
provisions of law. (e.g. sale, lease, agency, deposit, mortgage, etc.)

ii. INNOMINATE – those without particular names

(1) Innominate Contracts are traditionally divided into four (4) types:

(a) DO UT DES (I give and you give);

(b) DO UT FACIAS (I give and you do);
(c) FACIO UT DES (I do and you give); and,
(d) FACIO UT FACIAS (I do and you do)

(2) Innominate contracts are regulated by the following: (Art. 1307, NCC)

(a) Stipulation of the parties;

(b) Provisions of Titles I (Obligations) and II (Contracts) of Book IV, NCC;
(c) Rules governing the most analogous nominate contact; or,
(d) Custom of the place.

(3) Contracts which do not strictly conform to the standard contracts are allowed
and may be considered innominate contracts.

f. ACCORDING TO THE RISK OF FULFILLMENT:

i. COMMUTATIVE – parties contemplate a real fulfillment, therefore equivalent values

are given (e.g. sale, lease, etc.)

ii. ALEATORY – fulfillment is dependent upon chance; thus, the values vary because of
the risk or chance. (e.g. insurance contract)

g. ACCORDING TO TIME OF PERFORMANCE OR FULFILLMENT:

i. EXECUTED – one completed at the time the contract is entered into, that is the
obligation is complied with at this time. (e.g. sale of property already delivered.

ii. EXECUTORY – one where the prestations are to be complied with at some future
time. (e.g. perfected sale where the property has not been delivered or price has
not yet been given.)

h. ACCORDING TO SUBJECT MATTER:

i. THINGS – e.g. sale, deposit, pledge;

ii. RIGHTS OR CREDIT – e.g. usufruct, assignment of rights/credits

iii. SERVICES – e.g. agency, lease of service, contract of common carriage

i. ACCORDING TO OBLIGATIONS IMPOSED AND REGARDED BY THE LAW:

i. ORDINARY – involves at least two contracting parties and binds them. (e.g. sale,
lease)
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 ii. INSTITUTIONAL – impressed with public interest (e.g. marriage, employment
contract, CBA)

j. ACCORDING TO THE EVIDENCE REQUIRED FOR ITS PROOF

i. THOSE REQUIRING MERE ORAL OR PAROLE EVIDENCE – oral contracts are binding
unless form is essential for its validity or enforcement

ii. THOSE REQUIRING WRITTEN PROOF – refers to contracts enumerated under the
Statute of Frauds.

k. ACCORDING TO THE NUMBER OF PERSONS ACTUALLY AND PHYSICALLY ENTERING INTO

THE CONTRACTS:

i. ORDINARY – when two parties are represented by different persons (e.g. sale)

ii. AUTOCONTRACTS – contracts made by a single person representing two parties (one
is a party he represents, while the other is either another party he represents or he
himself, in his personal capacity). Generally autocontracts are permissible if not
expressly prohibited. (e.g. Special Power of Attorney – Agency)

l. ACCORDING TO THE NUMBER OF PERSONS WHO PARTICIPATED IN THE DRAFTING OF THE

CONTRACT:

i. ORDINARY – e.g. sale

ii. CONTRACT OF ADHESION – almost all provisions are drafted by one party. The
participation of the other party is limited to affixing his signature. (e.g. insurance)

4. STAGES OF CONTRACT:

a. PREPARATION (Conception or “Generacion”) – covers the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is
concluded. The parties are progressing with their negotiations; they have not yet arrived at
any definite agreement, although, there may have been a preliminary offer and bargaining.

NB: Starts with an OFFER and COUNTER-OFFER of the other party.

b. PERFECTION (Birth of the Contract) – takes place upon the concurrence of the essential
elements thereof. Until the contract is perfected, it cannot, as an independent source of
obligation, serve as binding juridical relation.

Parties have at long last came to a definite agreement, the elements of a definite subject
matter, and valid cause have been accepted by mutual consent.

i. In general, contracts are CONSENSUAL, i.e., perfected by mere consent (Art. 1315,
NCC), or upon a mere meeting of the minds, i.e., the concurrence of offer and
acceptance on the object and cause thereof;

ii. However, some contracts are REAL CONTRACTS, i.e., they are not perfected until
the delivery of the object of the obligation; and,

iii. In SOLEMN/FORMAL CONTRACTS, compliance with certain formalities prescribed by

law is essential in order to make the act valid, the prescribed form being an essential
element thereof.

c. CONSUMMATION (Death or extinguishment) – begins when the parties perform their

respective undertakings under the contract culminating in the extinguishment thereof.

The terms of the contract are performed, and the contract may be said to have been fully
executed.

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5. CHARACTERISTICS/PRINCIPLES OF A CONTRACT

A. CONSENSUALITY: Contracts are generally deemed perfected by mere consent (Art. 1315,
NCC). No special form is necessary. (Art. 1356, NCC)

Except: REAL CONTRACTS (delivery of the object is required; and, FORMAL/SOLEMN

CONTRACTS (compliance with special formalities under the law is required).

EFFECT OF PERFECTION OF CONTRACT: Parties are bound:

i. To the fulfillment of what has been expressly stipulated; and,

ii. All the consequences which according to their nature, may be in keeping with good
faith, usage, and law.

Example: If a contract of sale is perfected, the parties are bound to the purchase
price, delivery, time of delivery, place of delivery, conditions agreed, warranties,
etc.

B. FREEDOM/AUTONOMY TO STIPULATE: 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, NCC)

NB: Art. 3, Sec. 10 of the 1987 PC refers to the freedom of the parties to stipulate the terms
of their contract as part of the liberty of an individual under the Constitution. However,
this only covers VALID CONTRACTS or those that meet all legal requirements and
limitations.

LIMITATIONS ON CONTRACTUAL STIPULATION/FREEDOM TO STIPULATE: It must be in

accordance with:

1. LAW

i. Law is superior to a contract. Acts executed against the provisions of mandatory

or prohibitory laws are void, except, when the law itself authorizes their validity.

ii. Applicable laws form part of and are read into the contract without need for any
express reference.

iii. Examples of contract or stipulation prohibited by law:

a. Pactum commissorium – 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. 2028, NCC);

b. Stipulation in contract of employment discriminating against women or

prohibiting them from getting married (Labor Code); or,

c. An agreement to deprive a court of jurisdiction conferred on it by law is void.

Jurisdiction over an action is conferred by law, and may not be changed by
mere agreement of the parties.

2. MORALS AND GOOD CUSTOMS

i. Refer to general principles of morality which have received a good measure of

social acceptance.

ii. Morals refer to norms of good and right conduct and human conscience.

iii. Good customs, on the other hand, refer to habits and practices which through a
long usage have been followed and enforced by society or some part of it as
binding rules of conduct. It has the force of law when recognized and enforced;

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 iv. Examples of stipulations or contract against morals and good customs:

a. Iniquitous, exorbitant and unconscionable stipulation on interest rates,

penalties, or attorney’s fees;
b. Contracts for domestic services without payment of wages are void;
c. Contract of separation between husband and wife with a waiver to their right
to prosecute each other for future acts of infidelity;
d. Any contract showing disrespect to elders, parents, women or religion.

3. PUBLIC POLICY AND PUBLIC ORDER

i. Refers to the public good or the interest of the society. No person can lawfully
do that which has a tendency to be injurious to the public or against the public
good.

ii. Examples of stipulation or contract against public policy and/or order:

a. Stipulation that a credit card holder who reported loss/theft of his credit
card continues to be liable for unauthorized charges until the credit card
company notifies its member establishment. Such clause leaves the holder at
the mercy of the credit card company.

b. Stipulation which repudiates the existence of employer-employee

relationship to circumvent the compulsory coverage of the employee under
the SSS Law;

c. Agreement to stifle prosecution of a crime;

d. A stipulation by a common carrier exempting itself from liability or limiting

its liability for injury or loss caused by its own negligence; or,

e. Stipulation surrendering rights like the right to vote or to run for public
office.

f. “NON-INVOLVEMENT CLAUSES” – Refers to those which prevent an employee

from working for another employer. In general, they are VALID if there are
reasonable limitations as to time, trade and place, and if they are not greater
than is necessary to afford a fair and reasonable protection to the employer.
Example –

o Clause prohibiting employee from opening, owning or having any

connection with any other drugstore within a radius of 4 miles from
the employer’s place of business during the time the employer was
operating his drugstore – Valid.

o Clause prohibiting an independent agent for 1 year from engaging

directly or indirectly in activities of other companies that compete
with the business of her principal – Valid.

o Clause prohibiting an employee from working in any company or

business in the Philippines for 5 years – Void, because there is no
limitation as to trade.

C. OBLIGATORINESS/OBLIGATORY FORCE & COMPLIANCE IN GOOD FAITH: Obligations arising

from contracts have the FORCE OF LAW between the contracting parties and should be
complied with in good faith. (Art. 1159, NCC)

i. From the perfection of contract, 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, NCC)

ii. Compliance in good faith means sincerity and honesty must be observed to prevent
one party from taking advantage over the other.

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 iii. The mere fact that one has made a poor bargain may not be a ground for setting
aside the agreement. The law does not relieve a party from the effects of an unwise,
foolish or disastrous contract, entered into with full awareness of what he was doing
and entered into and carried out in good faith. Courts have no jurisdiction to look
into the wisdom of the contract entered into by the parties or to render a decision
different therefrom.

D. MUTUALITY: The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them. (Art. 1308, NCC)

i. Principle of mutuality of contracts is based on the essential equality of the parties.

ii. CONSEQUENCES OF MUTUALITY:

a. A party cannot revoke or renounce a contract without the consent of the other,
nor can it have it set aside on the ground that he made a bad bargain.

EXCEPT: Unless, the parties stipulated that either one of them may unilaterally
terminate the contract.

b. Validity or compliance cannot be left to the will of one of them.

EXCEPT: Determination of its performance may be left to a third person, which

shall bind the parties only after it has been made known to both of them. (Art.
1309, NCC) E.g. Stipulation of Arbitration or Appraiser to fix the price.

EXCEPTION TO THE EXCEPTION: A contracting party is not bound by the

determination if it is evidently inequitable or unjust as when the third person
acted in bad faith or by mistake – the courts shall decide what is equitable. (Art.
1310, NCC)

iii. ESCALATION CLAUSES which grant the creditor an absolute right to adjust the
interest independently and upwardly, without the consent of the debtor, is VOID.

E. RELATIVITY/PRIVITY: Contracts take effect only between the parties, their assigns and
heirs. (Art. 1311, NCC)

i. NOT BINDING ON THIRD PARTIES: Contracts can only bind the parties who entered
into it, and it generally cannot favor or prejudice a third person, even if he is aware
of such contract and has acted with knowledge thereof. Since a contract may be
violated only by the parties thereto as against each other, a party who has not taken
part in it cannot sue performance, unless he shows that he has a real interest
affected thereby.

ii. GENERAL RULE: A third person is one who has not taken part in a contract and is,
therefore a stranger to the contract. He has no standing in law to demand
enforcement of a contract or question its validity.

EXCEPTIONS. A contract may be said to affect even non-parties or third persons in

the following instances:

a. CONTRACT CONTAINING A STIPULATION IN FAVOR OF A THIRD PERSON OR A

STIPULATION POUR AUTRUI (Art. 1311, par. 2, NCC)

STIPULATION POUR AUTRUI – A stipulation in a contract clearly and deliberately

conferring a favor upon a third person who has the right to demand its fulfillment
provided he communicated his acceptance to the obligor before the revocation
by the obligee or the original parties.

REQUISITES OF A STIPULATION POUR AUTRUI:

a) There must be a stipulation in favor of a third person;

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 b) The stipulation in favor of a third person should be a part, not the who,
of the contract;

c) The contacting parties must have clearly and deliberately conferred a

favor upon a third person, not a mere incidental benefit or interest.

- The contracting parties must have intended to create a cause of

action in favor of the beneficiary/third person.

- An agent who stands to receive a commission under a contract to sell

property is not a beneficiary of a stipulation pour autrui and thus
cannot enforce the contract. His interest is merely incidental.

d) The third person must have communicated his acceptance to the obligor
before its revocation;

- Acceptance may be in any form. Even if the benefit amounts to a

donation, the acceptance need not follow the formalities required for
the acceptance of a donation.
- Acceptance may be implied from the third party’s employment of
benefits under the stipulation or from his performance of his
obligations under the stipulation.
- Before acceptance by the third person, the original contracting
parties may revoke the stipulation pour autrui.

e) Neither of the contracting parties bears the legal representation or

authorization of the third party.

Examples of Stipulation Pour Autrui:

- A stipulation in a sublease contract that the sublessee should directly

pay rent to the principal lessor;

- A stipulation in a deed of donation requiring the done to transfer title

over a portion of the subject property to the present occupants of the
said portion;

- A stipulation in a deed of partition that the fruit of a particular parcel

of land be given to Church to defray certain religious expenses; or,

- A stipulation in a contract between BANKARD, a credit company, and

its affiliated establishment that the latter will honor the BANKARD
credit card offered by a cardholder.

b. CONTRACTS CREATING REAL RIGHTS. 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 (Art. 1312, NCC)

Example: A registered mortgage over a property is binding even on third persons

who subsequently acquires it, even if he was not a party to the mortgage.

c. CONTRACTS TO DEFRAUD CREDITORS. Creditors are protected in cases of

contracts intended to defraud them. (Art. 1313, NCC)

- Example: Contracts of the debtor disposing his property/ies

gratuitously, without reserving sufficient property to pay off his
previous debts. (Art. 1387, NCC)

- The defrauded creditor may sue for the rescission (accion pauliana)
of the contract intended to defraud him. (Art. 1381, par. 3; Art. 1177,
NCC)

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 d. UNLAWFUL INTERFERENCE WITH CONTRACTS/TORTIOUS INTERFERENCE. Any
third person who induces another to violate his contract shall be liable for
damages to the other contracting party. (Art. 1314, NCC)

ELEMENTS OF UNLAWFUL OR TORTIOUS INTERFERENCE:

a) Existence of a valid contract;

b) Knowledge on the part of the third person of the existence of the contract;
and,

c) Interference of the third person is without legal justification or excuse.

EXAMPLE. A induced the owner to lease a building to him, knowing that said
building had already been leased to another person, B.

REMEDIES:

i. The wronged party is entitled to damages, but the liability for damages
of the meddler cannot be worse than the liability of the contracting party
who breached the contract.

ii. Injunction is also a proper remedy to restrain such unlawful interference.

e. ACCION DIRECTA. Those who put their labor upon or furnish materials for a piece
of work undertaken by the contractor have an action against the owner up to the
amount owing from the latter to the contractor at the time the claim is made.
(Art. 1729, NCC)

F. TRANSMISSIBILITY: Under Art. 1311, NCC, contracts are generally transmissible to the
assigns and heirs of the original contracting parties, except in the following cases –

a) Where the rights and obligations are not transmissible by their nature (this refers to
rights and obligations which are strictly personal)

Examples:

o Those relating to family relations (such as parental authority, action for nullity
or annulment of marriage or for legal separation, cohabitation)
o Those arising from public aw (suffrage or public office)
o Those which involve or require the personal skills, characteristics, qualifications
or circumstances of a particular individual (a contract for a concert by a famous
singer, or a portrait commissioned from a distinguished painter)
o Criminal responsibility

b) Where the rights and obligations are not transmissible by stipulation; and,

c) Where the rights and obligations are not transmissible by provision of law.

6. UNAUTHORIZED CONTRACTS.

a. 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. (Art. 1317, NCC)

b. 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.

NB: RATIFICATION is generally RETROACTIVE. It is as though

authority to do the act had been previously given, except where the

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rights of third parties have intervened between the act and the
ratification.