CHAPTER 2:

CONTRACTS
JENRI NIKO G. COMANDANTE
BSCE – V
42306
DEFINITION OF CONTRACT

■ The law defines a CONTRACT as a “meeting of the minds

between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.”
■ Much emphasis is made that for a contract to exist, there must
be a meeting of the minds of the parties who intend to be
bound by a legal relationship.
CONTRACT DIFFERENTIATED
FROM AGREEMENT
■ Contract is often times used interchangeably with the term agreement. A contract forms
a subdivision of a genus “agreement” from which follows that, while every contract is
based on agreement, not every agreement is a contract.
■ In order for an agreement to qualify as a contract, the parties much have clearly
intended to be bound by a legal tie, as distinguished from other relationship like social
and political. Moreover, a contract when breached can be enforced in court, not in the
case of an agreement.
 STAGES OF CONTRACT
(Under STAGES OF CONTRACTS)
■ Preparation or conception
■ Perfection or birth
■ Consumation or termination
CLASSIFICATION OF CONTRACTS

■ Express and implied contracts

■ Unilateral and bilateral contracts
■ Consensual and real contacts
■ Executed and executory contracts
■ Nominate and innominate contracts
FREEDOM IN CONTRACTS

■ The freedom to contract as guaranteed by the Constitution is articulated by Article

1306 of the Code which provides that “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, and public order, and public policy.”
■ This simply means that for a contract to be valid, the terms and conditions thereof must
not be against the law, good customs, morals, public order and public policy. Thus, once
the contract has been perfected neither of the parties may withdraw from it because the
contract is the law between them, and where there is nothing in it that is contrary to
law, morals, good customs, public policy and public order, the validity of the contract
must be sustained.
CONTRARY TO LAW

■ The parties cannot stipulate on matters against the law. If the

object and cause of the contract is prohibited or against the
law, the contract will be null and void. Typical examples of
these are contracts involving the killing or kidnapping an
individual for a monetary consideration or importation of
prohibited drugs for resale.
CONTRARY TO GOOD MORAL AND
GOOD CUSTOMS
■ Contract offending food morals and good customs are void and
without effect like for instance where Mr. X entered into an
employment contract with Miss Y whereby the former will
employ Miss Y as cashier in his firm if the latter will live with
him as wife without marriage, or walking out from marriage by
a woman to comply with her obligation with a woman whose
love affair with the supposed bridegroom did not culminate in
marriage.
CONTRACTS AGAINS PUBLIC
ORDER AND PUBLIC POLICY
■ Public policy is much broader that public order. It refers to higher goals
of the state for the good of all, like free enterprise to promote the national
economy or family planning policy to arrest population growth whereas,
public order refers not essentially to peace and order but also to existing
institutions of a people, like peaceful means of enforcing rights and
grievances. If a contract transgresses public policy or public order the
contract is void.
EQUALITY OF PARTIES UNDER THE
CONTRACT
■ The law gives us equal standing or treatment upon the parties
such that the validity or compliance with the contract cannot be
left to the sole will of one of them.
■ The determination or the performance of the contract however,
is allowed by law to be left to the judgment of a third person
whose decision shall bind the parties when it is communicated
to them, unless the same is manifestly inequitable in which
case the court shall decide the issue.
PARTIES BOUND UNDER THE
CONTRACT, EXCEPTION
■ The rule is that only the parties to the contract and their
assigns and heirs are bound thereto unless the rights and
obligations arising therefrom cannot be transferred to the heirs
and assigns of the parties because of their nature, or by
stipulation or, by specific provisions of law. In instances
allowed by law the heirs or assigns are not liable beyond the
value of the properties inherited or assigned.
EXAMPLE OF INTRANSMISSIBLE
RIGHTS AND OBLIGATIONS ARE:
■ By Law
■ By Nature
■ By Stipulation
STIPULATIONS IN FAVOR OF NON-
PARTIES TO THE CONTRACT
■ If a contract should contain stipulations granting a favor to a
person not a party to the contract, the latter may demand its
fulfillment provided he communicates his acceptance to the
obligor before revocation. This stipulation, better known: pour
autri, must be clearly and deliberately intended in order to
confer a right to the third party.
EXAMPLE:

■ If X who owns a warehouse, rents it to Y for Php. 500,000.00 a

month which is agreed to be paid to Z, a niece of X, then Z
who is a stranger to the contract, acquires the right to the
payment or rentals provided that he accepted the same when
communicated to him and before it is revoked by X, his uncle.
THIRD PARTIES INTERFERRING IN
THE CONTRACT
■ Further, any third person who induces another to the
violate his contract shall be liable for damages to the
other party, an instance, where a stranger to a contract
becomes liable for damages.
Illustration

■ X, a theatre operator, enters into a contract with Y, a celebrity

singer, where the latter will sing at X’s theatre for a period of
twenty days at an agreed compensation. After performing two
days in X’s theatre, Z, another theatre operator, entices Y to
sing in his theatre doubling the compensation which the latter
accepted – performing in Z’s theatre from the 3rd to the 20th
day. Z who is a third person is liable for the damages.
CONSENTUAL CONTRACTS

■ 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 for the consequences which, according to their nature,
may be in keeping with good faith, usage, and law.
■ Thus, a vendor of a Mercedez Benz car, even if already sold to be
delivered two weeks later, would be obliged to take good care of it as if
still the owner of the car, such that if the car fades or is dented by reason
if omission of that degree of care during the interim he would be liable
for damages.
CONTRACTS CREATING REAL
RIGHTS
■ Real rights are those rights relating to immovable properties
– Land
– Buildings
– Rights belonging to a mortgagee or lessee of a piece of lands.
■ The law provides that 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 Land Registration Law.
■ Thus, a vendee of a piece of land which is the subject of a mortgage or lease will be
bound to respect the real right if the mortgagee or lessee if the mortgage deed or lease
contract is registered to the Register of Deeds.
PROTECTION TO CREDITORS

■ Creditors are protected in case of contracts intended to defraud

them.
■ Thus, a fictitious contract alienating the debtor’s only property
in order to escape paying his creditor or creditors may be
rescinded at the instance of the latter for being fraudulent.
CONTRACTS ENTERED IN THE
NAME OF ANOTHER
■ A contract entered into the name of another without his
authority or without a legal right to represent him or in
excess of the authority given is unenforceable by
action unless the contract is ratified expressly or
impliedly by him before the other party revokes it.
EXAMPLE:

■ X, enters into a contract selling a sports car belonging to Z,

without the latter’s consent to Y for Php. 100,00.00. Three days
later, Y goes to Z offering to pay and demanding the delivery
of the car. Z can refuse because he has not given his authority
to X to sell the car. But if Z accepts the payment, in whole or
on part, the acceptance amounts to ratification, hence, he
should deliver the car.