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TITLE II. CONTRACTS stipulations, clauses, terms

and conditions as they may
deem convenient, provided
Chapter 1 they are not contrary to law,
morals, good customs, public
GENERAL PROVISIONS order, or public policy.
3. Mutuality of contracts
 That is, the contract must
Art. 1305. A contract is a meeting of bind both the contracting
minds between two persons, whereby parties and the validity or
one binds himself, with respect to the compliance cannot be left to
other, to give something or to render the will of one of them.
some service. 4. Relativity of contracts
 That is, contracts take effect
only between parties, their
Elements of Contract assigns and heirs, except in
case where the rights and
1. Contract is a meeting of minds obligations arising from the
between two persons; contract are not transmissible
2. Whereby one binds himself, with by their nature, or by
respect to the other; stipulation, or by provision of
3. To give something or to render law.
service

Classifications of Contracts
“Meeting of Minds”
1. According to the degree of
 speaks of intent of the parties in dependence
entering into the contract respecting 1.1. Preparatory – That which is not an
the subject matter and the end by itself but only a means for
consideration thereof. the execution of another contract.
Examples: agency or option
1.2. Principal – That which can exist
Consent independently of other contracts
because it has its own purpose
 is the essence of a contract; there which does not depend upon any
can be no contract in the absence of other contract. Examples: loans,
the element of agreement, or of sales or leases
mutual assent of the parties. 1.3. Accessory – That which cannot
 This element is what makes contract exist as an independent contract
different from the other sources of since its consideration is the same
obligations. as that of the principal contract. A
principal obligation is an
indispensable condition for the
Meeting of Minds Between Two Persons existence of an accessory contract.
Examples: pledges, mortgages or
 What is actually meant by the suretyships
provision is two parties and not two
persons.
2. According to perfection
2.1. Consensual – That which is
Four (4) Characteristics of Contract perfected by mere consent or upon
mere meeting of the minds. Once
1. Obligatory force of contracts
there is concurrence between the
 That is, obligations arising
offer and the acceptance upon the
from contracts have the force
subject matter and the
of law between the parties
consideration, a contract is
and should be complied with
produced. Example: sale
in good faith.
2.2. Real – That which is perfected only
2. Autonomy of contracts
upon the delivery of the object of
 That is, the contracting
the contract. Example:
parties may establish such
commadatum

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3. According to nature of obligation something in consideration of what

produced the other shall give or do upon the
3.1. Unilateral – That which creates happening of an event which is
obligations only on one side or on uncertain, or which is to occur at an
the part of only one of the indeterminate time. Here, the
contracting parties. Examples: element of risk dependent on
loans, sales or leases chance is predominant. Example:
3.2. Bilateral – That which creates contract of insurance
obligations on both sides or on both
parties. In bilateral contracts the
contracting parties are mutually 7. According to requirement of form or
creditors and debtors. Examples: solemnity
contract of sales 7.1. Common – That which does not
require any form. As a rule,
contracts are obligatory in whatever
4. According to name form they may have been entered
4.1. Nominate (contrato nominado) – into, provided all the essential
That which has an individuality of its requisites of a contract is present.
own and is distinguished by a 7.2. Special or solemn – That which
particular or special name in the requires certain formalities either for
Civil Code. It is governed by the its validity or enforceability.
special rules of law applicable to it. Examples: the donation of real
Examples: sale, lease, deposit, property and its acceptance are
barter, or pledge required to be embodied in a public
4.2. Innominate (contrato instrument or the sale over a real
innominado) – That which is property or any interest therein, if
without individuality of its own and still purely executory
not specifically named or classified
in the Civil Code although
recognized by it. 8. According to purpose
8.1. To transfer ownership –
Examples: sale or barter
5. According to cause 8.2. To convey the use – Examples:
5.1. Onerous – That where the cause is commodatum or lease
understood to be, for each 8.3. To give security – Examples:
contracting party, the prestation or pledge or mortgage
promise of a thing or service by the 8.4. To render some service –
other. Examples: contract of sale or Example: agency
option contract
5.2. Remuneratory – That where the
cause is the service or benefit for 9. According to their subject matter
which the renumeration is given. 9.1. Things – Examples: sales, pledge
Example: a donation given in or mortgage
consideration of a past service 9.2. Services – Examples: leases of
which does not amount to a services or agency
demandable debt 9.3. Rights – provided that the same
5.3. Gratuitous – That were the cause are not personal or intransmissible.
is the mere liberality of the
benefactor. Example: contract of
commadatum
10. According to their defects
1.1. Perfectly valid – That which is not
suffering from any defect.
6. According to risk involved 1.2. Rescissible – (Art. 1380, NCC)
6.1. Commutative – That in which each 1.3. Voidable – (Art. 1390, NCC)
of the contracting parties gives and 1.4. Unenforceable – (Art. 1403, NCC)
receives an equivalent or there is a 1.5. Void or Inexistent – (Art. 1409,
mutual exchange of relative values. NCC)
Example: contract of sale
6.2. Aleatory – That in which each of
the parties or both reciprocally bind
themselves to give or to do

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Art. 1306. The contracting parties may prohibition on the on the

establish stipulations, clauses, terms impairment of the obligation
and conditions as they may deem of contract does not prohibit
convenient, provided they are not every change in existing
contrary to law, morals, good customs, laws, and to fall within the
public order, or public policy. prohibition, the must not only
impair the obligation of the
existing contract, but the
Autonomy of Contracts impairment must be
substantial.
 or sometimes referred to as  Examples: a law which
“principle of party of autonomy of changes the terms of a legal
contracts” or “freedom of contract” contract between parties,
 The autonomous nature of contracts either in the time or mode of
is enunciated in Article 1306. Under performance, or imposes
this article, the contracting parties new conditions, or dispenses
are accorded the liberty and freedom with those expressed, or
to establish such stipulations, authorizes for its satisfaction
clauses, terms and conditions as something different from that
they may deem convenient, provided provided in its terms.
the same are not contrary to laws,  While non-impairment of
morals, good custom, public order or contracts is constitutionally
public policy. guaranteed, the rule is not
absolute, since it has be
reconciled with the legitimate
Function of the Article 1306
exercise of police power.
 aside from recognizing the right to
enter into lawful contracts, is simply
to provide for limitations on the Limitations on Freedom of Contract
exercise of the freedom of contract.
 Although a contract is the law
between the parties, the provisions
of positive law which regulate
Constitutionality Protected Right
contracts are deemed written therein
1. Due Process Clause and shall limit and govern the
 “Article III. Section 1. No relations between the parties.
person shall be deprived of  Freedom of contract is also subject
life, liberty and property to the limitation that the agreement
without due process of law.” must not be against public policy
 The Constitution guarantees and any agreement or contract
the free exercise of the right made in violation of this rule is not
to of property, and the binding and will not be enforced.
freedom to contract is such  Courts of justice will not recognize or
right, of which the possessor uphold a transaction when its object,
cannot be deprived without operation or tendency is calculated
due process of law. to be prejudicial to the public
2. Non-Impairment Clause welfare, to sound morality or to civic
 “Article III. Section 10. No honesty.
law shall be passed  In that every contract which has an
impairing obligations of immoral purpose is contrary to good
contracts.” The purpose of customs.
non-impairment clause is to
safeguard the integrity of
contracts against
unwarranted interference by
the State.
 As a rule, contracts should
not be tampered with by
subsequent laws that would
change or modify the rights
and obligations of the parties.
However, the constitutional

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condition which make its fulfillment

dependent solely upon the
Art. 1307. Innominate contracts shall be uncontrolled will of one of the
regulated by the stipulations of the contracting parties.
parties, by the provisions of Title I and II
of the Civil Code, by the rules governing
the most analogous nominate contracts,
and by the customs of the place. Contract of Adhesion
 is defined as one in which one of the
parties imposes a ready-made form
Innominate Contracts or Contrato of contract, which the other party
Innominado may accept or reject, but which the
latter cannot modify.
 That which is without individuality of  Contracts of adhesion are not void
its own and not specifically named or per se. These types of contracts
classified in the Civil Code although have been declared as binding as
recognized by it. ordinary contracts, the reason being
that the party who adheres to the
contract is free to reject it entirely. If
Innominate Contracts Shall Be Regulated the terms thereof are accepted
By without objection, then the contract
serves as the law between them.
1. The stipulations of the parties;
 While a contract of adhesion is not
2. The provisions of Title I and II of the
necessarily void and unenforceable
Civil Code;
(it is valid), it must nevertheless be
3. The rules governing the most
construed strictly against the one
analogous nominate contracts; and
who drafted the same.
4. The customs of the place.
 Because of the peculiar nature of
contracts of adhesion, the validity
thereof must be determined in light
Four (4) Kinds of Innominate Contracts of the circumstances under which
1. do ut des (I give that you give) the stipulation is intended to apply.
2. do ut facias (I give that you do)
3. facio ut des (I do that give)
4. facio ut facias (I do that you do) Art. 1309. The determination of
performance may be left to a third
person, whose decision shall not be
Art. 1308. The contracts must bind both binding until it has been known to both
contracting parties; its validity or contracting parties.
compliance cannot be left to the will of Art. 1310. The determination shall not be
one of them. obligatory if it is evidently inequitable. In
such case, the courts shall decide what
is equitable under the circumstances.
Mutuality of Contracts
 That is, the contract must bind both
the contracting parties and the Determination of Performance By Third
validity or compliance cannot be left Person
to the will of one of them.  While the validity of a contract or
 This binding effect of contract on compliance thereto cannot be left to
both parties is based on the principle the will of one of the contracting
that the obligations arising from parties, the determination of the
contracts have the force of law performance may, however, be left
between the contracting parties, and to a third person.
there must be mutuality between  Such determination of the
then based essentially on their performance by a third person shall
equality under which it is repugnant be binding upon the contracting
to have one party bound by the parties from the moment it is made
contract while leaving the other free known to them, provided that the
therefrom. same is not evidently inequitable.
 The ultimate purpose is to render
void a contract containing a

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 In such case, the courts shall decide the peculiar individual

what is equitable under the qualities are contemplated as
circumstance. a principal inducement of the
contract. Example: contract
Art. 1311. Contracts take effect only the intuitu personae, or in
between parties, their assigns and heirs, consideration of the
except in case where the rights and performance by a specific
obligations arising from the contract are person and by no other.
not transmissible by their nature, or by 2. Intransmissibility by
stipulation, or by provision of law. The stipulation of the parties –
heir is not liable beyond the value of the being exceptional and
property he received from the decedent. contrary to the general rule,
If a contract should contain some should not be easily implied,
stipulation in favor of a third person, he but must be expressly
may demand its fulfillment provided he established, or at the very
communicated his acceptance to the least, clearly inferable from
obligor before its revocation. A mere the provisions of the contract
incidental benefit or interest of a person itself.
is not sufficient. The contracting parties 3. Intransmissibility by
must have clearly and deliberately operation of law – The
conferred a favor upon a third person. provision makes reference to
those cases where the law
expresses that the rights or
obligations are extinguished
Relativity of Contracts
by death as in the cases in
 A contract can only obligate the legal support parental
parties who had entered into it, or authority, usufruct, contracts
their successor who assumed their for a piece of work,
personalities or judicial positions, partnership, and agency.
and that, concomitantly, a contract
can neither favor nor prejudice third
persons. Rule on Monetary Debts
 As a consequence of the foregoing
rule, where there is no privity of  While the heirs are bound by the
contract, there is likewise no contracts entered into by their
obligation or liability to speak about. predecessors-in-interest, the first
The parties to a contract are the real paragraph of Article 1311 declares,
parties in interest ana action upon it. however, that “the heir is not liable
Only the contracting parties are the beyond the value of the property he
ones who would benefit from and received from the decedent.”
could violate it. Thus, one who is not  Thus, when the deceased had left
a party to a contract, and for whose debts, the heirs are nor personally
benefit it was not expressly made, liable for such debts of the
cannot maintain an action on it. One deceased; such debts must be
cannot do so, even if the contract collected only from the property left
performed by the contracting parties upon his death, and if it should not
would incidentally inure to one’s be sufficient to cover all of them, the
benefit. heirs cannot be made to pay the
uncollectible balance.

Heirs Are Also Bound By Contracts

Exceptions to Relativity of Contracts
 Heirs are bound by the contracts
entered into by their predecessors- 1. Exceptionally, contracts may confer
in-interest except when the rights benefits to a third person or what are
and obligations therein are not otherwise also known as pour autrui.
transmissible by their nature, by 2. In contracts creating real rights, third
stipulation or by provision of law. persons who come into possession
 Exceptions: of the object of the contract may be
1. Intransmissibility by nature bound thereby under the provisions
of the right and obligation of the Mortgage Law and the Land
– refers to a situation where Registration laws.

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3. Creditors are protected in cases of 1. A donee beneficiary – if the

contracts intended to defraud them, stipulation is in the nature of
such they can ask for their a gift and for the sole benefit
rescission. of the third person;
4. Any third person who induces
another to violate his contract can be
liable for damages to the other 2. A creditor beneficiary –
contracting party. where an obligation is due
5. Accion directa is allowed by law in from the promise to the third
certain cases. person which the former
seeks to discharge by means
of such stipulation, such as
Stipulation Pour Autrui when a transfer of property is
coupled with the purchaser’s
 It is fundamental that contracts take promise to pay debt owing
effect only between the parties from the seller to a third
thereto, except in some specific person; or
instances provided by law where the 3. An incidental beneficiary –
contract contains some stipulation in such party is one who
favor of a third person. benefits from the contract of
 In order to constitute a valid another but whose benefit
stipulation pour autrui it must be the was not the intent of the
purpose and the intent of the contracting parties. Said
stipulating parties to benefit the third party has no right or
person, and it is not sufficient that obligation under the contract.
the third person may be incidentally  In view of the foregoing, a stipulation
benefited by the stipulation. pour autrui may be divided into two
 Under this doctrine, a third person is (2) classes:
allowed to avail himself of a benefit 1. Those where the
granted to him by the terms of the stipulation is intended for
contract, provided that the the sole benefit of such
contracting parties have clearly and person – the third part is a
deliberately conferred a favor upon donee beneficiary.
such person. 2. Those where an obligation
is due from the promise to
the third person which the
Parties former seeks to discharge
by means of such
 There are three (3) parties to a
stipulation – the third party
stipulation pour autrui:
is a creditor-beneficiary.
1. The promisor – the party
obliged to perform the
prestation in favor of the third
person; Requisites of Stipulation Pour Autrui
2. The promisee – the party 1. There is a stipulation in favor of a
who obtains and accepts the third person;
promise; and 2. The stipulation is part, not the whole,
3. The third person or of the contract;
beneficiary who may be 3. The contracting parties clearly and
determinate (e.g. a deliberately conferred a favor to the
particular person), or third person – the favor is not an
indeterminate (e.g. the incidental benefit;
prospective beneficiary in life 4. The favor is unconditional and
insurance) – the party who uncompensated;
acquires the right to demand 5. The third person communicated his
the prestation from the or her acceptance of the favor
promisor. before its revocation; and
 In so far as the third party 6. The contracting parties do not
beneficiary is concerned, there are represent, or are not authorized, by
three (3) possibilities. The third party the third party.
may either be:

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provisions of the Mortgage Law and the

Land Registration laws.

Requirement of Acceptance
Contracts Creating Real Rights
 While a stipulation in favor of a third
person has no binding effect in itself  In contracts creating real rights, third
before its acceptance by the party persons who come into possession
favored, the law does not provide of the object of the contract are
when the third person must make his bound thereby, subject to the
acceptance. provisions of the Mortgage Law and
 As a rule, there is no time limit; such the Land Registration laws.
third person has all the time until the  Example: a registered real estate
stipulation is revoked. mortgage contract
 It does not require that the
acceptance by the third-party
beneficiary of the benefit be in Art. 1313. Creditors are protected in
writing. cases of contracts intended to defraud
them.

Revocation of Stipulation Pour Autrui

 Revoked must be understood to Contracts in Fraud of Creditors
imply revocation by mutual consent  Creditors, in order to satisfy their
of the contracting parties, or at least claims, may:
by direction of the party to whom the 1. Pursue properties in the
promise is made. possession of the debtor;
 Stipulation pour autrui can be 2. Exercise all the right and
revoked prior to its acceptance by bring all the actions of the
the third person beneficiary. debtor, except those purely
 After acceptance, however, the personal to such debtor; and
stipulation may no longer be revoked 3. Impugn the acts which the
because the third party is now debtor may have done to
entitled to demand for its fulfillment. defraud them.
 The power to revoke the stipulation
belongs to both the contracting
parties and not to one of them.
Art. 1314. Any third person who induces
another to violate his contract shall be
liable for damages to the other
Rights of the Parties contracting party.
 Third party beneficiary may demand
for the fulfilment of the stipulation in
his favor provided that he Principle of Tort Interference
communicated his acceptance to the
 Under Article 1314 of the Civil Code,
obligor before its revocation.
however, “any third person who
 On the part of the contracting
induces another to violate his
parties, the right of one of the parties
contract shall be liable for damages
to a contract pour autrui to bring an
to the other contracting party”.
action for its enforcement or to
 The tort recognized in this provision
prevent its breach is too clear to
is known as interference with
need any extensive discussion.
contractual relations. The
interference is penalized because it
violates the property right of a party
Art. 1312. In contracts creating real in a contract to reap the benefits that
rights, third persons who come into should result therefrom.
possession of the object of the contract  In order that an action against a third
are bound thereby, subject to the person for contractual interference

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can be maintained, the following mere meeting of minds, i.e., the

elements must be present: concurrence of offer and
1. Existence of a valid contract; acceptance, on the object and on
2. Knowledge on the part of the the cause thereof, or stated
third person of the existence otherwise, is perfected by mere
of the contract; and consent.
3. Interference of the third  A contract which requires, in addition
person without legal to the above, the delivery of the
justification or excuse. object of the agreement, as in a
pledge or commodatum, is
commonly referred to as a real
Art. 1315. Contracts are perfected by contract. Examples: (1) deposit, (2)
mere consent, and from the moment the pledge, (3) commodatum, and (4)
parties are bound not only to the mutuum.
fulfillment of what has been expressly
stipulated but also to all the
consequences which, according to their Obligatory Force of Contracts
nature, may be in keeping with good
faith, usage and law.  Under this principle, obligations
arising from contracts have the force
Art. 1316. Real contracts, such as of law between the parties and
deposit, pledge and commodatum, are should be complied with in good
not perfected until the delivery of the faith.
object of the obligation.  In characterizing the contract as
having the force of law between the
parties, the law stresses the
Stages of Contract obligatory nature of a binding and
valid agreement.
 Generally, a contract undergoes  Nobody can be forced to enter into a
three (3) distinct stages: contract, in the same manner, once
1. Negotiation or Preparation a contract is entered into, no party
– begins when the can renounce it unilaterally or
prospective contracting without the consent of the other. It is
parties manifest their interest general principle of law that no one
in the contract and ends at may be permitted to change his
the moment of their mind or disavow and go back upon
agreement. It is formally his own acts, or to proceed contrary
initiated by an offer, which thereto, to the prejudice of the other
should be certain with party.
respect to both the object  Contracts should be applied
and the cause or according to their literal tenor and
consideration of the that courts cannot supply material
envisioned contract; stipulations, read into the contract
2. Perfection or Birth of words it does not contain or, for that
contract – occurs when they matter, read into it any other
agree upon the essential intention that would contradict its
elements thereof; and plain import.
3. Consummation – occurs  Neither can they rewrite contracts
when the parties fulfill or because they operate harshly or
perform the terms agreed inequitably as to one of the parties,
upon in the contract, or alter them for the benefit of one
culminating in the party and to the detriment of the
extinguishment thereof. other, or by construction, relive one
of the parties from the terms which
he voluntarily consented to, or
Perfection of Contracts impose on him those which he did
not.
 The perfection of contract takes
place upon the concurrence of the
essential elements thereof.
Art. 1317. No one may contract in the
 A contract which is consensual as to
name of another without being
perfection is so established upon a

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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.

Unauthorized Contracts
 The first paragraph of Article 1317
prohibits a person to enter into a “
contract in the name of another
without being authorized by the
latter, or unless he has by law a
right to represent him.”
 However, the second paragraph
clarifies that a contract entered into
in the name of another by one who
has no authority or legal
representation is not void by merely
unenforceable.
 In declaring the contract to be
merely unenforceable, the law
allows the defect of the contract to
be cured by ratification. Hence, the
second paragraph provides that the
contract is 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.”

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