Stages of a contract

1. Preparation or conception - this involves preliminary negotiations

and bargaining, discussion of terms and conditions, with no arrival
yet of a definite agreement. Negotiation begins from the time the
prospective contracting parties manifest their interest in the
contract and end at the moment of their agreement

2. Perfection or birth - This is the point when there is a meeting of

minds between the parties on a definite subject matter and valid
cause.

3 Consummation or death or termination -This occurs when the

parties fulfill or perform the terms agreed upon in the contract
culminating in the extinguishment thereof (See Navarra vs.
Planters Development Bank, G.R. No. 172674, July 12, 2007; XYST
Corporation vs. DMC Urban Properties Development, Inc., G.R. No.
171968, July 31, 2009.)

Basic principles of contract

1 Liberty of contract or freedom to stipulate
The contracting parties may establish such stipulation,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law morals, good customs,
public order or public policy. (Art 1306)
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)

2 Mutuality of contract
The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them. (Art 1308)
After a party has entered into a contract he will not be
permitted to renounce it unilaterally. If the fulfillment of the
suspensive condition of an obligation depends upon the sole will of
the debtor, the obligation and the condition are avoid (See Art
1182) since compliance id dependent upon him, alone.
 a. Any contract which appears to be heavily weighted in favor of
one of the parties so as to lead to an unconscionable result is
void. Thus, the provision in a promissory note authorizing the
creditor to increase, decrease, or otherwise change from time
to time the rate of interest and /or bank charges " without
advance notice" to the borrower "in the event of change of
interest rate prescribed by law or the monetary Board of the
Central Bank of the Philippines, " does not give the creditor
bank unrestrained freedom to charge any rate other than that
which was agreed upon. Such stipulation granting the creditor
bank to make monthly upward/downward adjustment of
interest rate violates the essence of mutuality of contract.
(Floirendo, Jr. vs. Metro bank, G.R NO. 148325 September 3,
2007)

b. Determination of performance by a third person

The determination of the performance may be left to a third
person, whose decision shall not be being until it has been
made know to both contracting parties. (Art 1309) However,
such determination shall not be obligatory if it is evidently
inequitable. In such a case, the court shall decide what is
equitable under the circumstances. (Art 1310)

3. Relativity of contracts
Contracts take effect only between the parties, their assigns and
heirs, except where the rights and obligation are not transmissible:
a. by law
b. by stipulation, or
c. by nature (Art 1311)
Note: With respect to the heir, he shall not be liable beyond the
value of the property he receives from the decedent. (Art. 1311)
When a contract may be enforced by or against a third person
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
 b. Where a third person induces another to violate contract, in
which case, such third person may be held liable for damages
by the other contracting party. (Art 1314)

c In contract creating real rights, third person who come into

possession of the object of the contract are bound thereby,
subject to the provisions of the Mortgage law and the Land
Registrations law (Art 1312)

d In contract 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)

4 Consensuality of contract
Contracts are perfected by mere consent (Art 1315) except in
the following contract which needs to comply with additional
requirements:
a. In real contract such as deposit, pledge and commodatum,
which are perfected, upon the delivery of the object of the
obligation? (Art 1316)
b. In formal solemn contract, which are required to be in the
form provided by law, to be perfected, such as the donation of
an immovable which must be in a public instrument together
with the acceptance thereof (Art 749); otherwise, the contract
is void.

5 Obligatory force of contract and compliance in good faith

Obligations arising from contract 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)
 Consent of the Contracting Parties
Consent, meaning
Consent is the manifestation of the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract (Art 1319)

Rules on offer
1. The offer must be certain (Art 1319) because there could be no
meeting of minds if it is vague or not definite.
Thus, if S, who has several lots, offer to sell his lot to B
without designation which of the lots he is selling, the offer is not
certain.

Nature of advertisements
a. Business advertisements of things for sale are not definite
offers, but mere invitations to make an offer unless it
appears otherwise. (Art 1325)

b. Advertisements for bidders are merely invitations to make

proposals and the advertiser is not

2. An offer becomes ineffective upon the death, civil interdiction,

insanity or insolvency of either party before acceptance is
conveyed. (Art 1323)
3. When the offerer has allowed the offer may be withdrawn at any
time when the option is founded upon a consideration as
something paid or promised. (Art 1324)
Option, concept
Option is a contract whereby the offeror gives the offeree a
certain period within which to buy or not to buy certain object for
a fixed price it may or may not be for a valuable consideration
Right of the offeror to withdraw the offer
a. If there is no consideration for the option, the offerer may
withdraw the offer at any time within the option period
provided there has not yet been any acceptance
 b. If there is a consideration, the offerer may not withdraw the
offer within the option period; otherwise, he will be liable for
damages to the offeree for breach of contract.
Note: In both cases the option is extinguished upon the lapse of the
period unless in the meantime, the offeree has accepted the offer

Rules on acceptance
1. The acceptance must be absolute. (Art 1319). If the acceptance
varies the offer, there is no contract since there is no meeting of
minds.
a. If the acceptance is qualified, it constitutes a counter offer;
(Art 1319) and has the effect of rejecting the offer (XYST
Corporation vs. DMC Urban Properties Development, Inc.,
supra)
b. If the offer fixes the time, place and manner of acceptance, all
must be complied with. (Art 1321) Otherwise, there will no
meeting of minds

2. Acceptance made by letter or telegram does not bind the offerer

expect from the time it came to his knowledge. The contract in
such a case is presumed to have been entered into the place
where the offer was made. (Art 1319)
The second sentence is important to determine which law
will apply regarding the contract.

3. Acceptance may be express or implied. (Art 1320)

The acceptance is express if made orally or in writing. It is
implied if it can be inferred from the conduct of the parties.
Thus, if S offers to sell a kilo of his mangoes to B for P20.00,
and B, without saying anything to S, take