Contracts Classifications and Rules

CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 ARTICLE 1305 CONTRACTS (Arts. 1305-1422, Civil Code.) 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. (1254a) A contract is a meeting of the minds between two people. In this agreement,one person binds themselves to another to: Give something (delivery of a thing). Do something (render a service). Not do something (abstain from an act). Number of parties to a contract Auto-Contract 1. In a contract, there must be at least two (2) persons or parties, because it is impossible for one to contract with himself. 2. A single person may create a contract by himself where he represents distinct interests. (e.g., his own and that of another for whom he acts as agent. For example: If A (agent) has been authorized by P (principal) to borrow (not lend). A may himself be the lender at the current rate of interest. Meeting of Minds: Offer by one + Acceptance by other (Art. 1319) Two or More Parties: Impossible for one to contract with himself Exception: Single person representing semt distinct interests (e.g., Agent A authorized by Principal P to borrow; A lends his own money) CONTRACTS Source of obligation Requires mutual obligation EX: Sale agreement LAW 192 OBLIGATION Legal tie/relation May exist w/o contract (taxes) EX: Duty to pay taxes by its nature is ginagawa na natin Rule: No contract without obligation accepted for benefit. Key Points: Contract→ gives rise to obligation (Art. 1157) Obligation- legal relationship created Important: XNo contract without obligation ✔Obligation can exist without contract Example: taxes imposed by law X not enforceable by a legal proceedings CONTRACTS AGREEMENT A binding agreement that is enforceable through legal proceedings. A broader term than contract. It includes moral or social agreements (e.g., an agreement to go to a dance party) that cannot be enforced in a court of justice. Key Distinction: "All contracts are agreements, but not allagreements are contracts". Key Rule: Example: ☑ All contracts are agreements XNot all agreements are contracts Agreement to attend a party →→ not enforceable CLASSIFICATIONS OF CONTRACTS ELEMENTS OF CONTRACTS without which there can be NO CONTRACT C CONSENT 0 → The voluntary agreement and "meeting of the minds" between C OBJECТ parties. The specific thing, right, or service being exchanged (e.g., a car, а house, or a cleaning service). CAUSE Reason The "why" of the contract. For you, it's what you get; for the other person, it's what they get Elements by Law and Stipulation Payment Interest Place of payment PPc Terminat PREPA by a by a MUTUAL AGREEMEVT releasing them + buyer warranty agan warranty against eviction/defecls in a ontract of sal Natural Elements: These are "built-in" by law unless you cross them out. Example: When you buy a car, the law presumes the seller guarantees they actually own it (Warranty against eviction). Accidental Elements: These only exist if you specifically type them into the contract Example: A clause saying the full payment n made in Bitcoin, or a penalty fee for every day a contractor is late. STAGES OF CONTRACTS offer to sellthe car Parties are negotiating, making offers bound y Sagrees to sell the сar one is legally The exact moment ther meeting of the minds." You both agree on the object and the price act is now legally alive consummated s delivers The parties perform their duties (e.g., I pay the money, you deliver the goods). Once everyone has done their part, the contract is "finished" or auished. CONTRACTS OBLIATION Perfection Consensual- perfected by consent mere agreement only Consent + cost Real- perfected by delivery (e.g.,a deposit or a loan) consent + Cost + (Delivery, Formal/Solemn -perfected by special form Consent +ost +Special Form Requires specific legalI formalities formalities or paperwork to be valid (e.g., a donation of real estate). Cause/ Equivalence of prestatio Onerous exchange) →Both parties give something of value (a "win-win" Bartending Sales contract: You buy a house for $500,000. You pay the price (value given), the seller transfers ownership (value received). Employment contract: Company hires you as a software engineer with a $100,000 salary. You provide work services, the company pays salary and benefits. ays salaly aup gaub Lease agreement: You rent an apartment for $2,000/month. You pay rent, and the landlord provides a habitable living space. Gratuitous → One party gets something for free (e.g.,a pure gift). Examples: Pure gift deed: Parent transfers property ownership to adult child via a gift deed-no payment required from the deed-no payment required fron child (may need notarization but lacks mutual exchange). Promise to donate: Charity pledges $10,000 to a school h no service expected in return (unenforceable if revoked, as it's gratuitous). Forgiven debt: Lender writes off a $5,000 loan balance as a glft after the borrower's hardship-no repayment needed. Remunerative→ Given in exchange for a service previously rendered. Express Form Quantum merit claim: Freelancer fixes your website emergency without a prior contract; court awards payment for services rendered (e.g., $3,000 fee). Finder's fee agreement: You locate a rare collectible for a collector; they pay 10% commission ($1,000) after you deliver it. Bonus afterter project completion: Employee finishes a company merger ahead of time; employer pays a $20,000 retrospective performance bonus. Informal no special form No special form required-can be oral,written casually, LAW 192 1 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 Importance/ Dependence one upon Name Risks or even implied by conduct. Enforceable based on evidence of agreement, offer, acceptance, and consideration. Formed quickly without paperwork (e.g.,handshake deals). Verbal agreement at checkout: "I'll pay $50 for these items." Friend agrees orally to mow your lawn for $20; they do it, you pay. Taxi picks you up and drives; payment implied by the ride. Solemn Formal /Implied special form Formal→ Requires a specific form (e.g.,written, signed, notarized, deed, or seal) for validity/enforceability, often for high-value or leg Strict formalities ensure clarity and prevent fraud. Document serves as strong proof. E.g., deeds, wills, or contracts under seal. signed, notarized transfer of property own Principal (e.g., sale, lease), when it does not depend for its existence and validity upon another contract but is an indispensable condition for the existence of an accessory contract. Contract stands alone Accessory (e.g., mortgage, guaranty), when it is dependent upon another contract it secures or guarantees for its existence and validity; and Exists only to support another contract (e.g.,a Mortgage only exists because there is a Loan). Preparatory (e.g., agency, partnership), when it is entered into as a means to an end; A "step"toward future contracts (e.g.,an Agency agreement). Nominate- specific name in law Innominate- no specific name KINDS OF INNOMINATE CONTRACT They are: (1) do ut des (2) do ut facias (3) facto ut des (4) facto ut facias I give that you may give I give that you may do I do that you may give Ido I do that you may do Do ut des is, however, no longer an innominate contract. It has already been given a name of its own, i.e.,barter or exchange. (Art. 1638.) *This may actually be barter or exchange which is defined as a contract whereby one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (See Art. 1638.) Thus, a nominate contract. The classification may have been made prior to the enactment of a law on barter or exchange. Innominate contracts shall be governed by the following rules: The stipulations of the parties; The provisions of Obligations and Contracts; Contlacis, The rules governing the most analogous nominate contracts; and The customs of the place. (Art. 1307) Commutative - (e.g., sale, lease), when the undertaking of one party is considered the equivalent of that of the other equal exchange Aleatory - (e.g., insurance, sale of hope), when it depends upon an uncertain event or contingency both as to benefit or loss Obligatory force According to subject matter dependence of part of contract to other parts Other classifications Valid complete requisites Rescissible → valid but can be rescinded Voidable → defective consent Unenforceable→cannot be enforced in court Void/Inexistent → no legal effect > Contracts involving things (such as sale or barter). Contracts involving rights or credits (such as usufruct or assignment of credits). Contracts involving services (such as agency or lease of service). Indivisible (or entire) (e.g.,sale of aadining room table and 8 matching chairs), when each part of the contract is dependent upon the other parts for satisfactory performance; and Divisible (e.g.,sale of rocking chair and a pair of shoes),when one part of the contract may be satisfactorily performed independently of the other parts. (see Arts. 1223-1225.) Auto-contract - Where only one person person represents the two opposite parties to the contract (such as when an agent lends money to his principal whom he represents as borrower) Contract of adhesion - Where only one party drafted the contract (such as insurance). It is so-called because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. (Uy vs. People, G.R. No. 174899, September 11, 2008) A contract of adhesion gives no room for negotiation and deprives the latter the opportunity to bargain on equal footing. It presupposes that the party adhering to the contract is a weaker. wedkel party. (Saludo, Jr., vs. Security Bank Corporation, G.R. No. 184041, October 13, 2010) The weaker party's participation is reduced to the alternative to take it or to leave it. Thus, contracts of adhesion are viewed as traps for the weaker party whom the courts of justice must protect. (ACI Philippines, Inc. vs. Coquia, G.R. No. 174466, July 14, 2008) The kind of contract entered into is not determined, however, by the name rtitle given to it by the parties but, by its nature or character as determined by principles of law, principally the intention of the contracting parties. (see Art. 1371.) Important Principle Contract type depends on: Nature Intention of parties NOT by its name/title CHARACTERISTICS/PRINCIPLES OF CONTRACTS ARTICLE 1306 LIBERTY OF CONTRACT Freedom to stipulate (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. (1255a) VALID CONTRACTS Meet all requisites (Art. 1318) Comply with limitations (Art. 1306) legally binding and enforceable Note: May be unenforceable if violates Statute of Frauds (Art. 1403) depends on chance Person obliged Unilateral→ one party obligated Bilateral both parties obligated Liability Unilateral - (e.g.,commodatum, gratuitous deposit), when it creates an obligation on the part of only one of the parties Bilateral (e.g.,sale, lease), when it gives rise to reciprocal obligations for both parties. NOTE: Status/time Executory - when it has not yet been completely performed by both It is possible to have an agreement that meets all the criteria of a valid contract but is unenforceable in a court of law for failuree to comply with the Statutes ofFrauds. (see Art. 1403.) of parties; and performance Executed- when it has been fully and satisfactorily carried out by both parties. (see Art. 1403.) LAW 192 2 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 FREEDOM TO СONTRACT GUARANTEED but not absolute The right to enter into a contract is one of the liberties guaranteed to the individual by the Constitution. (Article III, Sec. 10 thereof.) However, the constitutional prohibition against the impairment of contractual obligations refers only to legally valid contracts. (San Diego vs. Mun. of Naujan, 107 Phil. 118.) In appropriate cases, it cannot be invoked as against the right of the state to exercise its police power. (infra.) In other words, an individual does not have an absolute right to enter into any kind of contract. However, because the freedom of contract is both a constitutional and statutory right, to uphold the right courts are enjoined to move with the necessary caution and prudence in holding contracts void. (Gabriel vs. Mateo, 71 Phil. 497.) LIMITATIONS ON CONTRACTUAL STIPULATIONS There are limitations to the freedom to contract. 1. 2 Law. - It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied in every contract. The law thus sets limits. (Maritime Co. of the Phil. vs. Reparations Commission, 40 SCRA 70.) Police power. - When there is no law in existence or when the law is silent, the will of the parties prevails unless their contract contravenes the limitation of morals, good customs, public order, or public policy. In short, all contractual obligations are subject - as an implied reservation therein - to the possible exercise of the police power of the state. Far from being an impairment of contractual obligations, the exercise of such power constitutes,a mere enforcement of one of the conditions deemed imposed in all contracts. (Central Bank of the Phil. vs. Cloribel,44 SCRA 307.) Contract must not be contrary to law In its specific sense, law has been defined as "a rule of conduct,just, obligatory, promulgated by legitimate authority, and of common observance and benefit."(1 Sanchez Roman 3.) A contract cannot be given effect if it is contrary to law because law is superior to a contract. (Art. 1409[1].) Acts executed against the provisions of mandatory or prohibitory laws are void, except when the law itself authorizes their validity. (Art. 5.) The contracting parties must respect the law which is deemed to be an integral part of every contract. (see Article 1315.) → You are free to contract, but only within legal limits. → A contract contrary to law is "void from the beginning." Laws exist to protect the common good, which is more important than a private deal. Practical Examples Example A: The Illegal Employment Contract Imagine vou hire someone to be a deliverv driver. but the states: "The driver agrees to work 20 hours a day without any overtime pay." The Conflict: Labor laws usually limit work hours and require overtime pay. The Result: Because this provision is contrary to law, that specific part of the contract is void. The employer ye cannot point to the driver's signature and say, "But they agreed to it!"The law is superior to their private agreement. Example B: The "Stolen Goods" Sale Suppose Person A agrees to sell a car to Person B for $10,000. However, both parties know the car was stolen. The Conflict: The law prohibits the sale of stolen property (theft/fencing). The Result: This contract is void from the beginning. If Person B pays the money but Person A doesn't deliver the car, Person B cannot go to court to sue for "breach of contract." The court will refuse to help because the contract itself was illegal. Contract must not be contrary to morals. Morals deal with norms of good and right conduct evolved in a community. These norms may differ at different times and places and with each group of people. Contract conduct a legal proceedings EXAMPLES: (1) A contract whereby X promised to live as the common-law wife of Y without the benefit of marriage in consideration of P100,000 is immoral and, therefore, Void. (2) An agreement whereby X is to render service as a servant to Y without compensation as long as X has not paid his debt is reprehensible and censurable. It is also contrary to law. (Art. 1689.) Social norms and conscience Doing something "wrong" or "indecent." Agreeing to abandon one's children for money. Contract must not be contrary to good customs. Customs consist of habits and practices which through 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 by law. "Good customs are expressly mentioned, although morals are already specified. The spheres of morals and good customs may frequentlyoverlapeach other but sometimes they do not." (Report of the Code Commission, p. 134.) EXAMPLE: X entered into a contract whereby X binds himself to slap his father in consideration of P5,000 to be given by Y. This contract is void because it is against the good custom of showing respect to our parents. In any contract, there must be an Object (the thing or service being traded). If the object is an immoral or "bad" act, the contract has no legal "legs" to stand on. Since hurting a parent for money is considered "base" and "vile," the court treats the contract as if it never existed. What happens if the slap occurs? If X actually slaps his father and Y refuses to pay the $P5,000$: X cannot sue Y: X cannot go to a judge and say, "Islapped my father as agreed, please make Y pay me." The judge will dismiss the case immediately because the contract is void Criminal Liability: Not only is the contract void, but X could also be charged with Physical Injuries or Maltreatment under Criminal Law. Key Takeaway: The law doesn't just look at whether two people agreed to something; it looks at what they agreed to. If the agreement involves "trampling" on a sacred social custom-like honoring your parents-the law simply refuses to recognize it. Contract must not be contrary to public order. Public order refers principally to public safety although it has been considered to mean also the public weal. EXAMPLE: A stipulation in a contract of lease whereby the landlord can use force to eject the tenant in case of failure of the latter to pay the rent agreed upon is void as being against public order. Contract must not be contrary to public policy. Public policy is broader than public order, as the former may refer not only to public safety but also to considerations which are moved by the common good. (Ibid.; see Art. 1416.) A contract which has a tendency to be injurious to the public or is against the public good is contrary to public policy. Actual injury need not be shown. (Sy Suan vs. Regala, 105 Phil. 1024.) EXAMPLE: X stole the car of Y. Later. they entered into a contract whereby Y would not prosecute X in consideration of P50,000. It is to the interest of society that crimes be punished. The agreement between X and Y is, therefore, contrary to public policy because it seeks to prevent or stifle the prosecution of X for theft. To permit X to escape the penalties prescribed by law by the purchase of immunity from Y, a private individual, would result in a EJECT or kick out LAW 192 3 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 4if I dori't Pay bby Dec yourgsis manifest perversion of justice. (Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787.) The freedom to enter into a contract is one of the liberties guaranteed by the State subject only to the five limitations. (People vs. Pomar, 46 Phil 440) The following are some stipulations that have been held to be void: a. The stipulation that the creditor automatically becomes the owner of the property pledged or mortgaged if the debtor defaults, in his payment. (Declaro vs. Alpha Insurance, 58564-R, June 16, 1978) Such stipulation, known as pactum Voin commissorium, is void for being contrary to law. (Art. 2088) -they don't b. A stipulation in a mortgage contract providing for a specified get it they must go price (known as "tipo" or upset price) below which the throuq leg Proces g mortgaged property is not supposed to be sold at the foreclosure sale is void for being contrary to law. (Warner, Barnes and Co. vs. Jaucian, 13 Phil 4) it isso high MUST The contract must bind both contracting parties, its validity or compliance cannot be left to the will of one of them (1256a) Note: Binds both equally Enforceable by either → XOne-sided cancellation/price determination = VOID Perfected by mutual consent (Arts. 1305, 1319, 1473) CONTRACTS BINDS BOTH CONTRACTING PARTIES A contract is an agreement which gives rise to obligations. It must bind both parties in order that it can be enforced against either. Without this equality between the parties, it cannot be said that the contract has the force of law between them. (Art. 1159.) It is a fundamental rule that no party can renounce or violate the law of the contract without the consent of the other. Hence, "its validity or compliance cannot be left to the will of one of them." (Art. 1308; see Art. 1182.) EXAMPLE: S agreed to sell his car to B for P100,000. The contract is binding upon both contracting parties and either of them can enforce the contract against the 10% interest per day other c. An agreement to pay an unconscionable rate of interest is void for being contrary to morals. (Spouses Albor vs. Spouses Embisan, G.R. No. 210831, November 26, 2014, and various cases.) d. An agreement by the debtor to work without pay until he could find money to pay the debt is void for being contrary to morals as this amounts to involuntary servitude (Delos Reyes vs. Alojado, 16 Phil. 499) e. An agreement to hide a crime, to suppress evidence and to stifle the prosecution of the offender is void for being contrary to public policy. (Hibberd vs. Rhode, 33 Phil 476; Arroyo vs. Berwin, 36 Phil 386) TERM Pactum Commissorium Tipo/ Upset Price Unconscionable Interest Involuntary Servitude 2. MUTUALITY WHY IT IS VOID? Creditor cannot just "take" the property; there must be a proper legal process/foreclosure. It limits the bidding process in a way that is contrary to law Rates that are excessively high are considered "shocking to the conscience" and immoral. Forcing someone to work off a debt without pay violates basic human rights and morals. MUTUALITY OF CONTRACTS 1308 validity and performance cannot be left the will of only one f the parties ARTICLE 1308 A stipulation in the contract to the effect that the contract shall be considered invalid if so declared by S or that S can comply with his obligation if he wants (Art. 1182.) without the same privilege being given to B is void because the contract does not bind both of them. Nor can S alone determine the price of the car which price is binding upon B whether he accepts it or not. contract is a meeting of the minds and, therefore, there must be mutual consent. (Arts. 1305, 1319.) But if the price fixed by S is accepted by B, the sale is perfected (see Art. 1473.) If S or B alleges fraud, he must adduce satisfactory evidence. The binding effect of a contract on both parties is based on the principle that obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. ➤ Why it matters: Contracts are like a two-way street. Both parties must be equally bound (or free). You can't have one side locked in while the other can escape or change terms at will. ➤ Key rule: If fulfillment depends solely on one party's whim (e.g., debtor's choice), it's VOID. ➤ Protects against unfair deals where one party controls everything. ☆ No unilateral escape: Once signed, neither can back out alone. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties. (Manila International Airport Authority vs. Ding Velayo Sports Center, Inc., G.R. No. 161718, December 14, 2011) That is why the obligation and the condition are void if the fulfillment of the suspensive condition of an obligation depends upon the sole will of the debtor. (See Art. 1182.)since compliance is dependent upon him alone, Also, after a party has entered into a contract, he will not be permitted to renounce it unilaterally. Case Floirendo, Jr. vs. Metrobank G. R. No. 148325, September 3, 2007) Facts: D obtained from C Bank a loan which was secured by real estate mortgage of D's four lots The promissory note executed by D provided that C Bank may increase, decrease, oror otherwise otherwise change change from time to time the rate of interest and LAW 192 4 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 bank charges without advance notice to D, in the event of changes in the interest rates prescribed by law. Over time, C Bank increased the interest rates without advance notice to D. When D could no longer make any payment because of the increased interest rates, C Bank foreclosed the mortgage constituted on the lots of D. D, alleged among other things, that the interest rates unilaterally imposed by C Bank were unconscionable. Issue: Whether stipulation granting C Bank the right to modify the interest rate without notice to D is valid. Held: No. Such stipulation is void. It is a well-settled principle that there must be mutuality between the contracting parties based on their essential equality to which it is repugnant to have one party bound by the contract leaving the other free therefrom. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Thus, the upward/downward adjustment of interest rate to be made by C Bank without advance notice to D violates the essence of mutuality of contract. (Floirendo, Jr. vs. Metrobank, G. R. No. 148325, September 3, 2007) EFFECT WHERE DETERMINATION INEQUITABLE This article is a qualification to Article 1309. 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. In such case, the courts shall decide what is equitable under the circumstances RELATIVITY RELATIVITY OF CONTRACTS 1311 binding only upon the parties and successor ARTICLE 1311 *ensures that you cannot be liable for a deal you never made* NOTE: In the latter case of Philippine Savings Bank vs. Sps. Castillo, G.R. No. 193178, May 30, 2011, the Supreme Court held that in loan contracts, the interest is undeniably always a vital component, so that any change thereof must be mutually agreed upon; otherwise, it produces no binding effect. x x x A contracting party's assent to the modifications in interest rates cannot be implied from his/her lack of response to the means sent by the other party. Determination of performance by a third person 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. 1309) However, such determination shall not be obligatory if it is evidently inequitable. In such a case, the courts shall decide what is equitable under the circumstances. (Art. 1310) cou COURT would ARTICLE 1309 decide Article 1310 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 sufneient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) Note PARTIES These are the original signatories or the persons who entered into the contract. Role: They are the ones who gave their consent (e.g., the Buyer and the Seller). Liability: They are directly responsible for the fulfillment of the obligations and are the primary holders of the rights created by the contract. ASSIGNS The determination of the performance may be leftto a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n) DETERMINATION OF PERFORMANCE BY A THIRD PERSON Under the preceding article, compliance with a contract cannot be left to the will of one of the contracting parties. However, under the above provision, the determination of its performance may be left to a third person. (see Arts. 2042-2046.) In such case, the obligation does not depend upon a potestative condition. (see Art. 1182.) agreement that is enforceable The decision, however, shall bind the parties only after it has been made known to both of them. EXAMPLE: S sold his parcel of land to B. It was agreed that C, a real estate appraiser, would be the one to determine the reasonable price of the land. (see Art. 1469.) C then. fixed the price after affecting the value of the land. considering all the circumstances and factors In this case, C must make known his decision to S and B who will be bound by the same. HEIRS These are people to whom the original party transfers or "assigns their rights or obligations under the contract while they are still alive. Role: An "assign" steps into the shoes of the original party. For example, if you have a right to collect a debt and you sell that right to a collection agency, the agency becomes your "assign." Condition: The contract remains binding on them unless the law or a specific stipulation in the contract forbids the transfer inthecantrad of rights. death These are the people who succeed the original party upon the latter's death nu ana la nabati na idi natay isu lang ti mabalin mo nga ibayad Comparison Table Role: When a party dies, their rights and obligations are generally passed down to their heirs (like children or a spouse) as part of the inheritance. Key Limitation: As noted in Article 1311, "The heir is not liable beyond the value of the property he received from the decedent." * Example: If a father dies leaving a debt of P1M but only leaves P500k in assets, the child (heir) is only liable up to P500k. They do not have to pay the remaining balance from their own pocket. ARTICLE 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. (n) LAW 192 Category Basis of Connection When does it apply? Parties Direct Consent At the moment the contract signed. Assigns Transfer of Rights During the I etime of the original part Heirs Succession/Inheritance Upon t edeath the original party. 5 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 WHEN DO THEY NOT APPLY OR TRANSMISSABLE? By Provision of Law ➤ If the law says the right ends with the person (e.g., agency or partnership, which usually dissolve upon death). By Stipulation By Nature If the contract specifically states it is "non-transferable." ➤ If the obligation is purely personal (e.g., a contract for a specific artist to paint a portrait; the artist's heir cannot be forced to finish it). [Note: With respect to the heir, he shall not be liable beyond the value ofthe property he received from the decedent. (Art. 1311)] Sucæssors debtor Case Llenado vs. Llenado G.R. No. 145736, March 4, 2009 creditor Facts: O the owner of a aperiod of 6 years and 9 months. The lease contract provides that T. the ti I have the option to renew the lease o the piration of the I Issue: Whether the rights to enjoy the lease and to renew it are transmitted t Held: Yes. A contract of lease is generally transmissible to the heirs ofthe lessor or the lessee. It involves a property right and, as such, the death of a party does not excuse non-performance of the contract. The rights and obligations pass to the heirs of the deceased and heirs of the deceased lessor are bound to respect the period ofthe lease. The same principle applies to the option to renew the lease. As a general rule, covenants to renew a lease are not personal but will run with the land. Consequently, the successor-in-interest of the lessee are entitled to the benefits, while that of the lessor are burdened with the duties and obligations, which said covenants conferred and imposed on the original parties. WHEN A CONTRACT MAY BE ENFORCED BY OR AGAINST A THIRD PERSON Examples: A. Where there is a stipulation in the contract that clearly and deliberately confers a favor upon a third person (stipulation pour autrui). Such third person may demand its fulfillment provided he has communicated his acceptance to the obligor before its revocation. (Art. 1311) A mere incidental benefit or interest of a person is not sufficient. D obtained a loan from C amounting to P100,000.00. The parties agreedthat the loan shall bear an interest of 1% per month to be paid by D to X until the principal is paid in full. The stipulation for the payment of interest to X who is not a party to the contract is a stipulation pour autrui nthe contract although he is not party if he does not receive the interest. Dowes several creditors, one of whom is C. X promises to supply D with money which the latter needs to pay his debts. When C could not collect from D, he sued X claiming that there was a stipulation in the promise of X granting him (C) the right to proceed against X for the payment of his claim against D. Does C have the right to proceed against X? Answer: No. C does not have such right because he was a mere incidental beneficiary of the promise made by X to D. There was no stipulation in the promise made by X clearly and deliberately conferring a favor upon him. B. Where a third person induces another to violate his contract, in which case, such third person may be held liable for damages by the other contracting party. (Art. 1314) ARTICLE 1314 act of one person successfully influencing another person to break an contract Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) Liability of third person responsible for breach of contract This is a rule of American law. It is also proper under the general principles of the Philippine law, because a contractual right is property. (Report of the Code Commission, p. 135.) NOTE Article 1314 recognizes an instance when a stranger to a contract can be sued for damages for his unwarranted interference with the contract. It presupposes that the contract interfered with is valid and the third person has knowledge of the existence of the contract. It is not required in the third person to be liable that he acted with malice or in personal gain as long as there is no sufficient justification in the interference or inducement. Example: D has a contract for 5 years with XYZ Broadcasting Company. During the second year of the contract, RST Radio Company, with knowledge of the existing contract between D and XYZ, induced D to sign a contract as radio talent of RST. XYZ may sue RST (and also D) for damages under the contract between D and XYZ although RST is not a party thereto. C. EXAMPLES: 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) D obtained a loan of P200,000.00 from C. The loan is secured by a mortgage ofD's lot which C recorded with the Register of Deeds. Later, D sold the lot to X who was not aware of the mortgage. When D could not pay the loan on due date, C foreclosed the mortgage on the lot. Here, X would be bound by the mortgage although he was nota party thereto ecause the mortgage created a realI ric right in favor of C. This is true even if X was not aware of it since the registration of the mortgage operates as a notice to the whole world of the existence thereof. D. EXAMPLES: In contracts intended to defraud creditors, the law gives them protection. (Art. 1313) This is true if the third person acted in bad faith. (See Art. 1388.) D owed C P100,000.00. To defraud C, D sold his only lot to X who knew of D's fraudulent intent, i.e., in bad faith. Here Cnay sue for the rescission of the sale between D and X although he was not a party to it. CONSENSUALITY OF CONTRACTS ARTICLE 1315 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 keeping with good faith, usage and law. (1258) Contracts are perfected by mere consent (Art. 1315) except in the following contracts which need to comply with additional requirements: a. In real contracts such as deposit, pledge and commodatum, which are perfected upon the deliver of the object of the obligation. (Art. 1316) LAW 192 6 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 b. In formal or solemn contracts, which are required to be in the form provided by law to be perfected such as the donation of an immoyable which must be in a public instrument together with the acceptance thereof (Art. 749); otherwise, the contract is void. ARTICLE 1316 Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. CLASSIFICATIONS OF CONTRACTS ACCORDING TO PERFECTION 1. Consensual contract or that which is perfected by mere consent e.g., 2 3 sale, lease, agency) (Art. 1315.); Real contract or that which is perfected by the delivery of the thing subject matter of the contract (e.g., depositum, pledge, commodatum) (Art. 1316; see Arts. 1934, 1963, 2093.); and Solemn contract or that which requires compliance with certain formalities prescribed by law, such prescribed form being thereby an essential element thereof (e.g., donation of real property which must be ina public instrument). (see Art. 1356.) STAGES IN THE LIFE OF A CONTRACT (1) Preparation or negotiation. - This includes all the steps taken by the parties leading to the perfection of the contract. At this stage, the parties have not yet arrived at any definite agreement; (2) Perfection or birth. - This is when the parties have come to a definite agreementor meeting of the minds regarding the subject matter and cause of the contract (Art. 1319.),i.e., upon concurrence of the essential elements thereof; and (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. A contract may also be terminated after its perfection, not by performance, but by mutual agreement of the parties. EXAMPLE: Preparation S offers to sell his car to B for P500.000. B asks S to show him the car. Later. S brings the car and shows it to B. B offers to pay P400,000 for the Here, the parties are taking all the steps that may lead perfection of the contract. Now, if S agrees to sell the car for P400,000, the contract is Perfection perfected because there is a meeting of the minds upon the subject matter and the cause of the contract. The contract will be consummated after S delivers the car to B and B pays P400,000. В becomes the owner of the car and S. the owner of the money paid by B. The contract is completely executed. It ceases to be an active or existing agreement and it is valuable only in case later dispute should arise between S and B about the agreement. S and B may terminate their contract by mutual agreement HOW CONTRACTS ARE PERFCTED Cost + Consent Consensual contracts. - As a general rule, contracts are perfected by mere consent of the parties regarding the subject matter and the cause of the contract. (Arts. 1315, 1319.) They are obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. (Art. 1356.) Almost all contracts are consensual as to its perfection. They come into existence upon their perfection by mutual consent, even if the subject matter or the consideration has not been delivered. EXAMPLE: In the absence of delivery, perfection does not transfer title or create real right, yet, it gives rise to obligations binding upon both parties. (Arts. 1305, 1308.) Today S and B enter contract whereby S binds himself to sell his car to В for P500.000. The contract is deemed perfected although there is as yet no delivery of the car and payment of the price. Both parties acquire the right to demand from the other the fulfillment of his obligation: to deliver the car on the part of S. and to pav the amount of P500.000 on the part of B. LAW 192 Cost + Consent + Delivery Real contracts. - The exceptions are the so-called real contracts which are perfected not merely by consent but by the delivery, actual or constructive, of the object of the obligation. (Art. 1316.) These contracts have for their purpose restitution because they contemplate the return by a party of what has been received from another. EXAMPLE B Under the contract signed by A and B. B agreed to loan P100,000 to A. No contract of loan exists before B's delivery of P100,000 to A. Under the Civil Code, a contract of loan is a real contract, the delivery of the loan amount by B to A perfects the contract. (Art. 1934.) Before the delivery of the loan amount, the contract between A and B is a mere contract to loan (which is a consensual contract). Under the Civil Code, an accepted promise to deliver something by way of simple loan is binding upon the parties. (Art. 1934.) Hence, A can demand the delivery of the loan amount. The contract of loan is perfected upon delivery by B of the loan amount. SpecialCost + Consent + belivery + form Solemn contracts. - When the law requires that a contract be in some form to be valid (Art. 1356.), this special form is necessary for its perfection. Thus, under the law, a donation of real property cannot be perfected until it is embodied in a public instrument. (Art. 749.) it is a fixed rule that both parties have formally accepted Effect of perfection of the contract From the moment the parties an agreement on adefinite subject matte and valid consideration, they are bound not onlyto the fulfillment of what has been expressly stipulated but also. 2. EXAMPLE to all the consequences which according to their nature, may be in keeping with good faith, usage, and law. (Art. 1315.) (1) S sold a 5.000. The details of th ct as regards the plaс of delivery of the horse and payment of the price. the time of deliverv and payment etc., are not included. These details are furnished by law and taken u provisions of the Civil Code. (2) S agreed to sell his horse to B. It was stipulated that S should deliver the horse to B the next dav. In this case, S has the obligation to deliver the horse the next day as expressly stipulated in the contract. S has also the obligation to take car of the horse pending delivery and to warrant that he has the right to sell the horse although nothing is said about the obligation in the contract as this is in keeping with good faith, usage, and law OBLIGATORY FORCE OF CONTRACTS AND COMPLIANCE IN GOD FAITH 1159 follow what is OBLIGATORY FORCE agreed upon constitutes the law as between the parties Once you set those tenms and agnee, you ane stuch with them as if they wene a law. Obligations arising from contracts shall have the force of law between the contracting parties and should be complied with in good faith. (Art. 1159) Upon the perfection of the contract, the parties are bound to the following: A. The fulfillment of what has been expressly stipulated. B. All the consequences which, according to their nature, may be in keeping with good faith, usage and law. (Art. 1315) LAW 192 7 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 EXAMPLE: On June 1, S and B entered into a contract of sale involving the horse of S for P10.000.00. The terms of the contract provide that S must deliver the horse on June 30. while B must pay the price on June 25. In the place of S and B. it is the usaqe that when one sells a horse, he must place a horseshoe on its hooves. However, this is not stated in the contract. To what consegu are the parties bound? Answer:S must deliver the horse on June 30 as stipulated. Before delivery, he must take care of the horse with the diligence of a good father of a family although it was not stipulated because this is provided by law and in keeping with goodd faith. faith He must place a horseshoe on the hooves of the horse although this was not also stipulated because the same is required by the usage of the place where they reside. On the other hand. B must pay the price on June 25 also as stipulated. Не must pay the whole amount because of the requirement of the law that payment must be complete. must pay the whole amount on June 25 obligations under a contract to which he is a stranger. (par. 1,Art. 1311.) He has no standing in law to demand the enforcement of a contract or question its validity. There are cases, however, when third persons may be affected by a contract. Among such cases are the following: 1. In contracts containing a stipulation in favor of a third person (stipulation pour autrui) (par.2, Art. 1311.); 2. In contracts creating real rights (Art. 1312.); 3. 4. In contracts entered into to defraud creditors (Art. 1313.); and In contracts which have been violated at the inducement of a third person. (Art. 1314.) STIPULATION POUR AUTRUI a stipulation in a contract clearly and deliberately conferring a favor upon a third person who has a right to demand its fulfillment provided he communicates his acceptance to the obligor before its revocation by the obligee or the original parties. CLASSES OF STIPULATION POUT AUTRUI Stipulation pour autrui (3rd party favor) Requisites: Clearly/deliberately conferred 3rd person accepts before revocation Part (not whole) of contract No offsetting obligation No legal representation Types: PERSON'S AFFECTED BY A CONTRACT GENERAL RULE Binds only parties, assigns, heirs As a general rule, a party's rights and obligations derived from a contract are transmissible to the successors. (see Art. 1178.) Under Article 1311 (par. 1.), contracts take effect only between the parties, their assigns (i.e., transferees), and heirs. This means that only the parties, their assigns and heirs can have rights and obligations under the contract. Note As a rule, the act, declaration, or omission of a person cannot affect or prejudice another (see Sec. 28, Rule 130, Rules of Court.) without the latter's authorization or ratification. EXAMPLE: D is indebted to C in the amount of P10,000. D and C are the parties to the contract. If C dies, D must pay the heirs of C. If C assigns his credit to X, then D is liable to pay X. If D dies and H is the heir, then H assumes the obligation of D to C. (see Arts. 776, 781.) Н is bound by the contract entered into by D, his predecessor in interest, in view of the privity of interest between him and D. However, H is not liable beyond the value of the property he inherits from D, the decedent. (par. 1, Art. 1311.) EXCEPTIONS → Binds only parties, assigns, heirs The cases when a contract are effective only between the parties are when the rights and obligations arising from the contract are not transmissible: a. by their nature (like a contract involving personal qualifications, as painting, singing, etc.); or by stipulation (in accordance with the principle of freedom to contract); or by provision of law (as in agency, partnership, and commodatum, when death extinguishes the legal relationships). (Art. 1178.) CASES WHEN STRANGERS OR THIRD PERSON AFFECTED BY A CONTRACT A third person is one who has not taken part in a contract and is, therefore,a stranger to the contract. As a general rule, a third person has no rights and Example: Note: Donee-beneficiary (pure gift) Creditor-beneficiary (discharge debt) Interest payment to 3rd party creditor. (1) Those where the stipulation is intended for the sole benefit of such third person. This stipulation, in effect, confers a gift, it being necessary in such case to apply the rules relating to donations insofar as the form of acceptance is concerned; and (2) Those where an obligation is due from the promisee to the third. person which the former seeks to discharge by means of such stipulation, as, for instance,where a sale of property is coupled with the promise of the purchaser (promisor) to pay a debt owing from the seller (promisee / debtor) to a third person (creditor). In the first case, the third party is said to be a donee-beneficiary while in the second, he is called creditor-beneficiary. REQUISITES OF STIPULATION POUT AUTRUI They are the following EXAMPLES: (1) The contracting parties by their stipulation must have clearly and deliberately conferred a favor upon a third person; (2) The third person must have communicated his acceptance to the obligor before its revocation by the obligee or the original parties; (3) The stipulation in favor of the third person should be a part, not the whole, of the contract; (4) The favorable stipulation should not be conditioned or compensated by any kind of obligation whatever, and (5) Neither of the contracting parties bears the legal representation or authorization of the third party for otherwise, the rules on agency will apply. (see Florentino vs. Encarnacion, 79 SCRA 193.) (1) D owes C P10,000 payable after one year at 12% interest. It was agreed that the interest of P1.200 would be given to T to whom C is indebted sam amount. In this case T must communicate his acceptance to D before the revocation of the stipulation by the parties in order that the same will be effective. From the moment communication of acceptance is duly made, T becomes a party to the contract. The promisee (C) in a contract containing a stipulation pour autrui is entitled to bring an action for its enforcement or to prevent its breach in the same manner as the beneficiary (T) thereof. (Ibid.) (2) X contracts with Y for the erection of a building which will enhance the value of Z's adioining propertv. The fact that Z mav incidentally derive some benefit from the contract gives him no right to sue X for breach of his contract with Y LAW 192 8 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 LAW 192 ADDITIONAL INFO INNOMINATE CONTRACTS ARTICLE 1307 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. (n) CLASSIFICATIONS OF CONTRACTS Name and designation certain debts, registered in accordance with the Property Registration Decree, constitutes a real right, which is produced not by the contract but by the publicity given by the Registry, such publicity prejudicing the right of third persons. However, if the real right is not registered, third persons who acted in good faith are protected under the provisions of the Property Registration Decree. EXAMPLE D mortgaged his parcel of land in favor of C as a security for his debt. The mortgage is duly registered in the Registry of Property. Later on. D sold the same land to T. In this case, T bought the land subject to the mortgage constituted thereon. In other words Ts bound by the contract between D and C although he is a stranger to said contract because the right of C to the mortgage, being a real right, follows the property wherever it goes. (see Art. 1164.) CREDITOR PROTECTION NOMINATE which has a specific name or designation in law (e.g., commodatum, lease, agency, sale, etc.); ARTICLE 1313 INNOMINATE which has no specific name or designation in law KINDS OF INNOMINATE CONTRAСТ They are: (1) do ut des (2) do ut facias (3) facto ut des (4) facto ut facias I give that you may give I give that you may do I do that you may give I do that you may do Do ut des is, however, no longer an innominate contract. It has already been given a name of its own, i.e.,barter or exchange. (Art. 1638.) REASONS FOR INNOMINATE CONTRACTS The impossibility of anticipating all forms of agreement on one hand, and the progress of man's sociological and economic relationships on the other, justify this provision. (8 Manresa 623-625.) A contract will not, therefore, be considered invalid for failure to conform strictly to the standard contracts outlined in the Civil Code. It is sufficient that it has all the elements of a valid contract. (Arts. 1318, 1356.) RULES GOVERNING INNOMINATE CONTRACTS Innominate contracts shall be governed by: 2 the agreement of the parties; the provisions of the Civil Code on obligations and contracts; 3 the rules governing the most analogous contracts; 4 the customs of the place. Creditors are protected in cases of contracts intended to defraud them. (n) Right of creditors to impugn contracts intended to defraud them Article 1313 is another qualification to the rule that contracts take effect only between the parties. The creditor is given the right to impugn the contracts of debtor intended to defraud him. (Art. 1177.) Although he is not a party to the contract, he can sue to prevent the debtor from committing fraud against him. EXAMPLE: D is indebted to C in the amount of P100,000. D sells a parcel of land to T with the knowledae of C in order that C mav not attach the land in pavment of his debt and D has no other property. C, who is a stranger to the contract between D and T, is given by law the right to ask for the rescission or cancellation of the sale in order that he may be paid his claim. (see Arts. 1381[3], 1387.) THIRD PERSON LIABILITY ARTICLE 1317 CONTRACTS CREATING REAL RIGHTS ARTICLE 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.¹ (n) THIRD PERSON ARE BOUND BY CONTRACTS: CREATING REAL RIGHTS This article is an exception to the general rule that a contract binds only the parties. Third persons who come into possession of the object of a contract over which there is a real right, are bound thereby even if they were not parties to the contract. A real right is a right binding against the whole world (everybody) and attaches to the property over which it is exercised wherever it goes. (see Art. 1164.) Thus, a contract subjecting certain real properties to the payment of LAW 192 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 po authority or legal representation, or whoo hhas 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. (1259a) Unauthorized contracts are unenforceable As a general rule,a person is not bound by the contract of another of which he has no knowledge or to which he has not given his consent. 1. A contract involves the free willof the parties and onlyhe who enters into the contract can be bound thereby. (see par. 1, Art. 1311.) Thus, under Article 1317, a contract entered into in the name of another by one who has no authority is unenforceable against the former unless it is ratified by him before it is revoked by the other contracting party. (see Art. 1403[1].) 9 CONTRACTS 2ND SEMESTER | A.Y. 2025-2026 2. An unauthorized contract is not to be confused with a contract for the benefit of a third person who may demand its fulfillment provided the requisites mentioned (supra.) are present. (see par. 2, Art. 1311.) Unauthorized contracts can be cured only by ratification The mere lapse of time cannot give efficacy to such a contract. 1. The defect is such that it cannot be cured except by the ratification (subsequent approval or conformity) of the person in whose name the contract was entered into or by his duly authorized agent and not by any other person not so empowered. (see Art. 1405.) 2. The ratification may be express or implied, but it must be clear so as 3. EXAMPLE not to admit of any doubt or vaqueness The effects of ratification retroact to the moment of the celebration of the contract. D borrowed P10.000 from C in whose favor he executeda promissory note. In the note it is stated that D is acting as the agent of P and that the money is intended for P. P never authorized D to borrow money from C. In this case, the contract of D is not enforceable against P. However, P can subsequently approve or sanction the contract unless it has already been revoked by C, the other contracting party. Ratification cleanses the contract from all its defects from the moment the contract was entered into. (Art. 1396.) If the contract has already been ratified by P. it can no longer be revoked by C. (see Art. 1901.) When a person is bound by the contract of another In order that a person may be bound by the contract of another, there are two (2) requisites: 1. The person entering into the contract must be duly authorized, expressly or impliedly, by the person in whose name he contracts or he must have, by law, a right to represent him (like a guardian or an administrator); and 2 He must act within his power. A contract entered into by an agent in excess of his authority is unenforceable against the principal, but the agent is personally liable to the party with whom he contracted where such party was not given sufficient notice of the limits of the powers granted by the principal. (see Art. 1897.) EXAMPLE: P (principal) authorized A (agent) to sell his car for P200,000 cash. A sold the car to C for P200,000 payable in 10 monthly installments. In this case, P cannot be compelled by C to accept the monthly installments and to deliver the car because A acted beyond his powers unless there has been ratification by P. A is personally liable to C for damages