1. Concepts
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. (Article 1305, Civil Code)
2. Principles of contracts
a. Principle of autonomy
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. (Article 1306, Ibid.)
b. Principle of mutuality
The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (Article 1308, Ibid.)
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 contracting parties.(Article 1309, Ibid.)
The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (Article 1310, Ibid.)
c. Principle of relativity
Contracts take effect only between the parties, their assigns and heirs, 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. (Article 1311, Ibid.)
1) Stipulation in favor of third persons (pour autrui)
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. (Ibid.)
3. Stages of a contract
Stages:
1) Preparation / Negotiation
2) Perfection
3) Consummation
A contract has three distinct stages: preparation, perfection, and consummation. Preparation or negotiation begins when the prospective contracting parties manifest their interest in the contract and ends at the moment of their agreement. Perfection or birth of the contract occurs when they agree upon the essential elements thereof. Consummation, the last stage, occurs when the parties “fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof. (Rockland Construction Company, Inc. v. Mid-Pasig Land Development Corporation, G.R. No. 164587, 04 February 2008)
a. Preparation or negotiation
Preparation or negotiation begins when the prospective contracting parties manifest their interest in the contract and ends at the moment of their agreement. (Ibid.)
Negotiation is formally initiated by an offer. Accordingly, an offer that is not accepted, either expressly or impliedly, precludes the existence of consent, which is one of the essential elements of a contract. (Ibid.)
b. Perfection
Perfection or birth of the contract occurs when they agree upon the essential elements thereof. (Ibid.)
c. Consummation
Consummation, the last stage, occurs when the parties “fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof.” (Ibid.)
4. Essential requisites
The following are the essential requisites of a contract:
1) Consent;
2) Object; and
3) Causa.
There is no contract unless the following requisites concur:
1) Consent of the contracting parties;
2) Object certain which is the subject matter of the contract;
3) Cause of the obligation which is established. (Article 1318, Ibid.)
a. Consent
Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. (Ibid.)
Consent, under Article 1319 of the Civil Code, is manifested by the meeting of the offer and acceptance upon the thing which are to constitute a contract. To produce a contract, the offer must be certain and the acceptance absolute. (Rockland Construction Company, Inc. v. Mid-Pasig Land Development Corporation, supra.)
1) Acceptance
An acceptance may be express or implied. (Article 1320, Civil Code)
a) Acceptance by letter or telegram
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (Paragraph 2, Article 1319, Ibid.)
2) Offer
a) Time, place, manner of acceptance
The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (Article 1321, Ibid.)
b) When offer made through an agent
An offer made through an agent is accepted from the time acceptance is communicated to him. (Article 1322, Ibid.)
c) Death, civil interdiction, insanity, insolvency
An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (Article 1323, Ibid.)
d) Waiting period to accept
GENERAL RULE:When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal. (Article 1324, Ibid.)
EXCEPTION:… except when the option is founded upon a consideration, as something paid or promised. (Ibid.)
e) Business advertisements
Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (Article 1325, Ibid.)
f) Advertisements for bidders
Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (Article 1326, Ibid.)
3) Incapacity of a party
The following cannot give consent to a contract:
1) Insane or demented persons; and
2) Deaf-mutes who do not know how to write. (Article 1327, Ibid.)
Contracts entered into during a lucid interval are valid.(Article 1328, Ibid.)
Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (Ibid.)
4) Defective consent: voidable contract
A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (Article 1330, Ibid.)
a) Mistake
In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. (Article 1331, Ibid.)
(1) Identity or qualifications
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. (Paragraph 2, Article 1331, Ibid.)
A simple mistake of account shall give rise to its correction. (Paragraph 3, Article 1331, Ibid.)
(2) Illiterate or in a language not understood by a party
When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (Article 1332, Ibid.)
(3) Knowledge of the doubt, contingency, or risk
There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract.(Article 1333, Ibid.)
(4) Mutual error
Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.(Article 1334, Ibid.)
b) Violence
There is violence when in order to wrest consent, serious or irresistible force is employed. (Article 1335, Ibid.)
Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (Article 1336, Ibid.)
(1) Annuls the obligation
Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (Article 1336, Ibid.)
c) Intimidation
(1) Concept
There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. (Paragraph 2, Article 1335, Ibid.)
(2) Degree of intimidation; circumstances to be considered
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. (Paragraph 3, Article 1335, Ibid.)
(3) Threat to enforce claim via competent authority
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. (Paragraph 3, Article 1335, Ibid.)
(4) Annuls the obligation
Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (Article 1336, Ibid.)
d) Undue influence
(1) Concept
1) Improper advantage of his power over the will of another; and
2) Depriving the latte of a reasonable freedom of choice.
There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. (Article 1337, Ibid.)
(2) Circumstances to be considered
The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (Ibid.)
e) Fraud
There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (Article 1338, Ibid.)
(1) When a ground for annulment
1) Serious fraud; and
2) Parties not in pari delicto.
In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. (Article 1344, Ibid.)
Incidental fraud only obliges the person employing it to pay damages. (Paragraph 2, Article 1344, Ibid.)
(2) Failure to disclose facts – when there is a duty
Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (Article 1339, Ibid.)
(3) Tolerated fraud
The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (Article 1340, Ibid.)
(4) Mere expression of an opinion – with exception
A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge. (Article 1341, Ibid.)
(5) Misrepresentation
By a third person – with exception. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (Article 1342, Ibid.)
In good faith. Misrepresentation made in good faith is not fraudulent but may constitute error.(Article 1343, Ibid.)
(6) Simulation of a contract
(a) Absolute simulation of contract
(b) Relative simulation of contract
Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (Article 1345, Ibid.)
An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (Article 1346, Ibid.)
b. Object of contracts
1) Scope and extent
1) All thing not outside the commerce of men
2) All rights which are not intransmissible
3) All services which are not contrary to law, morals, good customs, public order or public policy
All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts.(Article 1347, Ibid.)
No contract may be entered into upon future inheritance except in cases expressly authorized by law. (Paragraph 2, Article 1347, Ibid.)
All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (Paragraph 3, Article 1347, Ibid.)
2) Impossible things or services
Impossible things or services cannot be the object of contracts. (Article 1348, Ibid.)
3) Determinate as to its kind
The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (Article 1349, Ibid.)
c. Cause of contracts
“Cause” is “the essential reason which moves the contracting parties to enter into it.” … In other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. (Basic Books [Phils.], Inc. v. Lopez, En Banc, G.R. No. L-20753, 28 February 1966)
1) Different causes
a) Onerous contracts
In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. (Article 1350, Ibid.)
b) Remunerative contracts
In remuneratory contracts, the service or benefit which is remunerated.(Ibid.)
c) Gratuitous contracts
In contracts of pure beneficence, the mere liberality of the benefactor. (Ibid.)
2) Motive v. Cause
The particular motives of the parties in entering into a contract are different from the cause thereof.(Article 1351, Ibid.)
a) Distinguished
Cause is the essential reason which moves the contracting parties to enter into it. In other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. Cause, which is the essential reason for the contract, should be distinguished from motive, which is the particular reason of a contracting party which does not affect the other party. (Uy v. CA, G.R. No. 120465, 09 September 1999)
b) When motive can become the cause
Ordinarily, a party’s motives for entering into the contract do not affect the contract. However, when the motive predetermines the cause, the motive may be regarded as the cause. (Ibid.)
3) No cause, unlawful cause
Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (Article 1352, Ibid.)
4) False cause
The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful.(Article 1353, Ibid.)
5) Presumption of existence and lawfulness
Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (Article 1354, Ibid.)
6) Lesion or inadequacy of cause
Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (Article 1355, Ibid.)
References
⦁ Book IV, Republic Act No. 386, Civil Code
