Lecture No 4

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Lecture no 4

(Business Law)
By: Atty. Aive Marelia P. Vargas
Contract
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.

In a contract, one or more persons bind himself or themselves with respect to another or
others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.
Question: Distinguish Contract from Obligation.
Contract and agreement
distinguished.
Contracts are agreements enforceable through legal proceedings. Those agreements
which cannot be enforced by action in the courts of justice (like an agreement to go to a
dance party) are not contracts but merely moral or social agreements. An agreement is
broader than contract because the former may not have all the elements of a contract.
(see Art. 1318.)
So, all contracts are agreements but not all agreements are contracts.
Number of parties to a
contract.
In a contract, there must be at least two persons or parties, because it is impossible for
one to contract with himself.
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, or of two principals for
both of whom he acts in a representative capacity) subject to specific prohibitions of law
against the presence of adverse or conflicting interests.
Importance, basis, and purpose of contract.

(1) “The movement of the progressive societies has hitherto been a movement from
Status to Contract. . .
(2) Its rational and juridical basis is the limitation of man and his insufficiency to obtain
by himself the means necessary for the fulfillment of his purposes.
(3). Contract serves as the juridical means of effecting in a practical manner the
effectiveness and development of the economic principle of the division of labor.
Characteristics of contracts.
Characteristics of contracts.
They are:
(1) Freedom or autonomy of contracts. — The 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, and public policy (Art. 1306.);
(2) Obligatoriness of contracts. — Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith (Arts. 1159, 1315.);
(3) Mutuality of contracts. — Contracts must bind both and not one of the contracting parties; their validity
or compliance cannot be left to the will of one of them (Art. 1308.);
(4) Consensuality of contracts. — Contracts are perfected, as a general rule, by mere consent,4 and from that
moment the parties are bound not only by 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.); and
5) Relativity of contracts. — Contracts take effect only between the parties, their assigns and heirs, except in
cases where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation, or by provision of law. (Art. 1311.)
Freedom to contract guaranteed.
The freedom to contract is both a constitutional and statutory right.
The right to enter into contracts is one of the liberties guaranteed to the individual by the
Constitution. It also signifies or implies the right to choose with whom one desires to contract. The
Constitution prohibits the passage of any law impairing the obligation contracts. (Art. III, Sec. 10
thereof.) However, the constitutional prohibition against the impairment of contractual obligations
refers only to legally valid contracts. In appropriate cases, it cannot be invoked as against the right
of the state to exercise its police power.
In other words, an individual does not have an absolute right to enter into any kind of contract.
However, because the autonomy or 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.
The binding force of a contract must be recognized as far as it is legally possible to do so. The legal
presumption is always on the validity of contracts.
Limitations on contractual stipulations.
(1) Law. — It is a fundamental requirement that the contract entered into must be in accordance with,
and not repugnant to, an applicable statute.
(2) Police power. — Public welfare is superior to private rights. 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.

Question:
Facts: B bought two lots in a subdivision covered by certificates of title on which are annotated certain
restrictions on the use of the property, one of which was the lots are exclusively for residential purposes.
S, the subdivision owner, filed a suit to stop the construction of a commercial building by B on the
ground that it violated the restrictions on the title. B bought the property two years after the area had
been declared by a municipal council resolution as a commercial and industrial zone.
S invoked the principle of non-impairment of contracts, contending that the resolution cannot nullify the
contractual obligations assumed by B referring to the restrictions incorporated in the deeds of sale and
later in the corresponding Transfer Certificates of Title issued to him.
Issue: Is the contention of S tenable?
Contract must not be contrary
to law.
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 provisions of positive law which regulate contracts are
deemed incorporated or written therein and shall limit and govern the relations between the parties.
Thus:
(1) A contract intended to circumvent and violate the law is void ab initio.
(2) The lessor cannot be validly a beneficiary of a fire insurance policy taken by a lessee over his
merchandise and the provision in the lease contract providing for such automatic assignment of the
policy obtained without the prior consent of the lessor is void for being contrary to law and/or public
policy under Sections 17, 18, and 25 of the Insurance Code. The insurer cannot be compelled to pay the
proceeds of a fire insurance to a person who has no insurable interest in the property insured. (Chua vs.
Court of Appeals, 277 SCRA 690 [1997].)
(3) A waiver by a party of his right to bring an action for future fraud or gross negligence is void as being
against the law (Arts. 1171, 1172.) and also public policy. (Art. 1409[1].) A stipulation which excludes one
or more partners from any share in the profits or losses is void. (Art. 1799.) Every stipulation exempting
the agent from the obligation to render an account to the principal shall be void. (Art. 1891.) 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. 2088.) A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void. (Art. 2130.)
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.
Morals or good customs are often embodied in the law (see Arts. 873, 1183.), but the morals or good customs referred
to in Article 1306 must refer to those not expressed in legal provisions. (G. Florendo, op. cit., p. 493.)
EXAMPLES:
(1) A contract, whereby X promised to live as the common-law wife of B without the benefit of marriage in
consideration of P50,000.00, is immoral and, therefore, void. (see Batarra vs. Marcos, 7 Phil. 156 [1906].)
(2) An agreement to pay usurious interest is contrary to the usury law (Act No. 2655.) and morality. (Ibarra vs.
Aveyro, 37 Phil. 273 [1917].)
(3) 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. (see De los Reyes vs. Alojado, 16 Phil. 499 [1910].) It is also contrary to law. (Art.
1689.)
Question:
Facts: Judge A was charged with gross ignorance of the law for having prepared and ratified
a document extrajudicially liquidating the conjugal partnership of complainant and his wife.
One condition of the liquidation was that either spouse (as the case may be) would withdraw
the complaint for adultery or concubinage which each had filed against each other and that
they waived their “right to prosecute each other for whatever acts of infidelity” either would
commit against the other.
Issue: Is the agreement valid?
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.
By public policy is intended that principle of law which holds that no subject or citizen can lawfully do
that which has a tendency to be injurious to the public or against the public good which may be termed
the “policy of the law,’’ or “public policy in relation to the administration of the law.

“In the absence of express legislation or constitutional prohibition, a court, in order to declare a
contract void as against public pol- icy, must find that the contract as to the consideration or thing to be
done, has a tendency to injure the public, is against the public good, or contravenes some interests of
society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the
security of individual rights, whether of personal liability or of private property.
Examples:
(1) X stole the car of Y. Later, they entered into a contract whereby Y would not prosecute X in
consideration of P1,000.00.
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 manifest perversion of justice.
(2) A condition in a contract of sale states: “In case of sale, the buyer shall not sell to others the land
sold but only to the seller, or to his heirs or successors for the same price of P5,600.00 when the latter
shall be able to pay it.’’
The condition is contrary to public policy, because it virtually amounts to a perpetual restriction on
the right of ownership, specifically the owner’s right to freely dispose of his property. Such a
prohibition indefinite and unlimited as to time, so much so that it shall continue to be applicable
even beyond the lifetime of the original parties to the contract is a nullity.
Question:
Facts: X is prohibited from engaging in any business or occupation whatever in the
Philippines for a period of five (5) years after the termination of his contract of
employment without special written permission from Y.
Issue: Is this stipulation against public policy?
Question:
Facts: The promissory note signed by D in favor of C stipulates that “I (D) do hereby
authorize any attorney in the Philippines, in case this note be not paid at maturity, to appear
in my name and confess judgment” for the amount of the note. In an action by C on the note,
an attorney associated with C appeared for D and filed a motion confessing judgment.
Issue: Is the stipulation in question valid?
Question:
Facts: X, a law student and a consistent recipient of scholarship grants at Y University, was
made to sign a waiver of his right to transfer to another school unless he refunds to the
university the equivalent of his scholarship grants in cash. Hence, he was not required to pay
fees. For the last semester of his fourth year, X enrolled at another university.
X brought action to recover the amount of the refund which he paid, under protest, to Y
University in order to secure his transcript of records for the purpose of the bar examinations.
Issue: Is the waiver not to transfer to another school contrary to public policy?
Question:
Parties operated an arrangement, commonly known as the “kabit
system.’’
Facts: For a consideration, X attached his motorcycle with complete accessories and sidecar to
the transportation line of Y who had the fran- chise so much so that in the registration
certificate, Y appeared to be the owner.
X failed to claim any insurance indemnity for damages arising from accidents in which the
motorcycle figured because of the failure of Y to comply with his obligation to register the
motorcycle.
Issue: Is X entitled to relief from the court?
Classification of contracts according to its name or
designation.
They are:
(1) Nominate contract or that which has a specific name
or
designation in law (e.g., commodatum, lease, agency,
sale, etc.); and
(2) Innominate contract or that which has no specific
name or
designation in law.
Kinds of innominate contract.
They are:
1.(1) do ut des (I give that you may give);
2.(2) do ut facias (I give that you may do);
3.(3) facio ut des (I do that you may give); and
4.(4) facio ut facias (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 and basis 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.) A contract
will not, therefore, be considered invalid for failure to conform strictly to the standard
contracts outlined in the Civil Code provided it has all the elements of a valid contract.
Innominate contracts are based on the well-known principle that “no one shall unjustly
enrich himself at the expense of another.”
Rules governing
innominate contracts.
Innominate contracts shall be governed by:
1. the agreement of the parties;
2. the provisions of the Civil Code on obligations and contracts;
3. the rules governing the most analogous contracts; and
4. the customs of the place.
Contract binds both contracting parties.
(1) Principle of mutuality of contract. — Article 1308 expresses this principle. The ultimate purpose of
the principle is to nullify a contract containing a condition which makes its fulfillment or pre-
termination dependent exclusively upon the uncontrolled will of one of the 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. NeedLess to say, a contract can be renewed, revived, extended,
abandoned, renounced, or terminated only by mutual consent of the parties. Without this mutuality
and equality between the parties, it cannot be said that the contract has the force of law between
them. (Art. 1159.) It is considered repugnant to have one party bound by a contract while leaving
the other free from complying therewith.
(2) Fulfillment or extinguishment of contract. — A contract containing a condition which makes
its fulfillment or extinguishment dependent exclusively upon the uncontrolled will of one of
the contracting parties is void.
(3) Renunciation or violation of contract. — It is an elementary rule that no party can renounce
or violate the law of the contract unilaterally or without the consent of the other. (Fernandez
vs. MRR, 14 Phil. 274 [1909]; 11 Manresa 380-382.) Hence, “its validity or compliance cannot
be left to the will of one of them.” (Art. 1308; see Art. 1182.) Just as nobody can be forced to
enter into a contract, no one may be permitted to change his mind or disavow and go back
upon his own acts, or to proceed contrary thereto, to the prejudice of the other party.
(4) Proof of alleged defect in contract. — If after a perfect and binding contract has been executed
between the parties it occurs to one of them to allege defect as a reason for annulling it, the
alleged defect must be conclusively proved since the validity and fulfillment of contracts
cannot be left to the will of one of the contracting parties. (Joaquin vs. Mitsumine, 34 Phil. 858
[1916]; Hemedes vs. Court of Appeals, 316 SCRA 347 [1999].) It is the duty of every
contracting party to learn and know the contents of a document before he signs and delivers
it.
(5) Release of obligor from compliance. — The mere fact that a party to a contract has made a bad
bargain, may not be a ground for setting aside the agreement. (see Art. 1355.) Where,
however, the performance of the contract has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may be released therefrom, in whole or in part. (Art.
1267.) The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor. (Art. 1266.)

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