10. GENERAL PROVISIONS OF CONTRACTS

ART. 1305: 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."

The two factors vital for contracts are:

1. There should be two contracting parties.
2. A party is bound to the fulfillment to give, to do, or not to do.

A contract is one source of obligation. Hence, if an obligation is not accepted, there could be no contract.

A contract is a binding agreement. A contract should be lawful to be valid and enforceable. Those agreements that are not enforced in courts of justice are not contracts; they are moral or social agreements. Contracts create legally enforceable obligations but agreements are a general entity.

10.1. CLASSIFICATIONS OF CONTRACTS

ACCORDING TO RISKS:

1. Commutative - the undertaking of one party is equal to that of the other (Examples: sale, lease)
2. Aleatory - a contract which depends upon an uncertain event or contingency for benefit or loss (Example: insurance, sale of hope)

ACCORDING TO LIABILITY

1. Unilateral - a contract where only one of the parties has an obligation (Examples: Commodatum, gratuitous deposit)
2. Bilateral - a contract giving rise to reciprocal obligations (Examples: lease, sale)

ACCORDING TO STATUS

1. Executory - it has not yet been completely performed by both parties
2. Executed - it has been fully and satisfactorily completed by both parties.

ACCORDING TO DEPENDENCE TO ANOTHER CONTRACT

1. Preparatory - it is entered into as a means to an end (Examples: agency, partnership)
2. Accessory - it is dependent upon another contract (Examples: mortgage, guaranty)
3. Principal - it does not depend on another contract for its existence or validity (Examples: sale, lease)

ACCORDING TO DEPENDENCE OF PART OF CONTRACT TO OTHER PARTS

1. Indivisible or entire - each part is dependent upon the other parts (Example: sale of a dining set - table and chairs)
2. Divisible - one part of the contract may be satisfactorily performed independently.

10.2. VALIDITY OF CONTRACTS

ART. 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."

A contract is considered valid when it meets all the legal requirements and limitations for the type of agreement involved. The Constitution guarantees individuals with the right to enter into contract (Freedom of Contract).

10.2.1. LIMITATIONS ON CONTRACTUAL STIPULATIONS

Limitations to the freedom of contract are as follows:

1. Law - A fundamental requirement to all contracts is they must be in accordance to an applicable statute. The law sets limits.
2. Police power - All contractual obligations are subject to the possible exercise of the police power as mere enforcement of one of the conditions deemed imposed in all contracts.

A. CONTRACTS MUST NOT BE CONTRARY TO THE LAW

A contract cannot be given effect if it is contrary to law because law is superior to a contract. Any contract executed against the law is void, except the law authorizes its validity.

B. CONTRACTS MUST NOT BE CONTRARY TO MORALS

Morals deal with norms of good and right conduct evolved in a community.

C. CONTRACTS MUST NOT BE CONTRARY TO GOOD CUSTOMS

Customs consist of habits and practices which through long usage have been followed and enforced by society. It has the force of law when recognized and enforced by law.

D. CONTRACTS MUST NOT BE CONTRARY TO PUBLIC ORDER

Public order refers principally to public safety.

E. CONTRACTS 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.

A contract which has a tendency to be injurious to the public or is against the public good is contrary to public policy.

10.3. CONTRACTS ACCORDING TO ITS NAME OR DESIGNATION

ART. 1307: Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Law and Obligations, by the rules governing the most analogous nominate contracts and by the customs of the place.

A. NOMINATE CONTRACT

A contract which has a specific name or designation in law (Examples: commodatum, lease, agency, sale)

B. INNOMINATE CONTRACT

One without any specific name or designation in law.

10.3.1. KINDS OF INNOMINATE CONTRACT

The different kinds are the following:

1. do ut des        ( I give that you may give)
2. do ut facias     (I give that you may do)
3. facto ut des    (I do that you may give)
4. facto ut facias (I do that you may do)

10.3.2. REASONS FOR INNOMINATE CONTRACTS

1. Impossibility of anticipating all forms of agreement
2. Progress of man's sociological and economic relationships

10.3.3. RULES GOVERNING INNOMINATE CONTRACTS

1. Agreement of the parties
2. Provisions of the Civil Code on obligations and contracts
3. Rules governing the most analogous contracts
4. Customs of a place

10.4. BINDING POWER OF CONTRACTS

ART. 1308: The contract must bind both contracting parties, its validity or compliance cannot be left to the will of one of them.

The obligation resulting from a contract binds both parties in order to be enforced.

It is a fundamental rule that no party can renounce or violate the law of the contract without the consent of the other.

10.5. DETERMINATION OF PERFORMANCE BY A THIRD PERSON

ART. 1309: 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 cotnracting parties.

Although the compliance of a contract cannot be left to the will on one of the contracting parties, the determination of its performance may be left to a third person. The decision shall bind the parties only after it has been made known to both parties.

10.5.1 EFFECT WHEN DETERMINATION IS UNJUST

ART. 1311: Contracts take effect only between the parties, their assigns and hers, 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 sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. 

As a general rule, only the parties, their assigns, and heirs can have rights and obligations under the contract. The act, decaration, or ommission of a person cannot affect another without the latter's authorization or ratification.

There are also cases where the obligations arising from the contract are not transmissible:

1. By their nature (like a contract involving personal skills: painting, singing)
2. By stipulation (in accordance with the principle of freedom to contract)
3. By provision of law (as in agency, partnership, and commodatum)

10.5.2. THIRD PERSONS AFFECTED BY A CONTRACT

A stranger or third person has no standing in law to demand the enforcement of a contract or question its validity except in the following cases:

1. In contracts containing a stipulation in favor of a third person (stipulation pour autrui)
2. In contracts creating real rights
3. In contracts entered into to defraud creditors
4. In contracts which have been violated at the inducement of a third person

10.5.3. 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.

10.5.4. CLASSES OF STIPULATIONS POUR AUTRUI

Stipulations in favor of a third person may be divided into two classes:

1. The stipulation confers a gift.
2. Those where an obligation is due from the promise to the third person. (Example: a transfer of property is coupled wit the purchaser's promise to pay a debt owing from the seller to a third person.)

10.5.5. REQUISITES OF STIPULATION POUR AUTRUI

1. The contracting parties 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
5. Neither of the contracting parties bears the legal representation or authorization of the third party for the rules on agency they will apply.

10.5.6. REAL RIGHTS OF THIRD PERSONS

ART. 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.

Third persons who come into possession of the object of a contract over which there is a real right are bound. A real right is binding against the whole world and attaches to the property over which it is exercised.

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.

10.5.7. CONTRACTS DEFRAUDING CREDITORS

ART. 1313: Creditors are protected in cases of contracts intended to defraud them.

The creditor has the right to impugn contracts intended to defraud them.

10.5.8. CONTRACTS VIOLATED INDUCED BY A THIRD PERSON

ART. 1314: Any third person who induces another to violate his contract shall be liable for damages to teh other contracting party. 

 This is a rule of American Law. 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 interferred with is valid and the third person has knowledge of the existence of the contract.

10.6. CLASSIFICATION OF CONTRACTS ACCORDING TO PERFECTION

ART. 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 ne keeping with good faith, usage and law.

ART. 1316: Real contracts, such as deposit, pledge, and commodatum, are not perfected until the delivery of the object of the obligation. 

According to perfection, contracts are divided as follows:

1. Consensual contract - perfected by mere consent
2. Real contract - perfected by the delivery of the thing subject matter of the contract
3. Solemn contract - requires compliance with certain formalities prescribed by law (Example: donation of real property which must be in a public instrument). 

10.7. STAGES IN THE LIFE OF A CONTRACT

1. Preparation or negotiation. Preliminary steps taken by the parties leading to the perfection of a contract. The parties have yet to arrive at a definite agreement.
2. Perfection or birth. The parties have come to a definite agreement or meeting of the minds.
3. Consummation or termination. When the parties have performed their respective obligations.

10.8. HOW CONTRACTS ARE PERFECTED

1. For consensual contracts, by mere consent of the parties regarding the subject matter. In the absence of delivery, perfection does not transfer title or create real right but it gives rise to obligations.
2. For real contracts, perfection is by delivery, actual or constructive, of the object of the obligation.
3. For solemn contracts, a necessity for perfection is the law required that a contract be in some form to be valid.

10.9. EFFECT OF PERFECTION OF CONTRACT

From the moment of agreement of both parties, they are bound to:

1. the fulfillment of what has been expressly stipulated
2. all consequences which may be in keeping with good faith, usage, and law.