LAW 1: MODULE 3

Republic of the Philippines

University of Rizal System
Province of Rizal
[Link]..ph
Email Address: ursmain@[Link]

Business and Industry

Law 1: Business Law
First Semester, Schoolyear 2020-2021

 MODULE 7: Concepts, classification, Elements and stages of a Contract

Introduction

Contracts as a source of obligations has its own specific legal provisions which
are supplemental to the laws on obligations. In studying contracts, it is important to
relate it to obligations in general in order to build a solid foundation on the subject. Much
like obligations, contracts has its own elements, characteristics and classifications.

Module Objectives

A. To define and understand the meaning of contract as provided by law.

B. To identify the elements and characteristics of a contract.
C. To identify parties that may be involved in a contract.
D. To classify contracts based from what the Civil Code of the Philippines provides.
E. To discuss and understand the provisions of the law on “contracts”.
F. To discuss and analyze the application of the law regarding contracts.
Discussion

Contracts Defined

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, R.A. No. 386, Civil Code of the Philippines)
A juridical convention manifested in legal form , by virtue of which one or
more persons bind themselves in favor of one another or others, or reciprocally, to the
fulfillment of a prestation to give, to do or not to do. (Sanchez Roman).
Binding effect of contract that based on the following principles:
1. Obligations arising from the contract have the force of law between the
contracting parties.
2. There must be mutually between the parties based on their essential
equality , to which is repugnant to have one party bound by the contract
leaving the other free therefrom.

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Elements of a Contract

1. Essential Elements (Chapter II, infra) – without which there can be no contract
a. Consent
b. Object
c. Cause
2. Natural Elements – exist as part of the contract even if the parties do not provide
for them, because the law, as suppletory to the contract, creates them. E.g.
warranty against hidden defects or eviction in the contract of purchase and sale.
3. Accidental Elements – agreed upon by the parties and which cannot exist
without being stipulated. e.g. mortage, guaranty, bond

Characteristics of a Contract (MARCO)

1. MUTUALITY - contracts must bind both contracting parties; its validity or

compliance cannot be left to the will of one of them. (Article 1308)
Article 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 contracting parties.
Article 1310. 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 1473. The fixing of the price can never be left to the discretion of one
of the contracting parties. However, if the price fixed by one of the parties is
accepted by the other, the sale is perfected.
CONTRACT OF ADHESION: A contract in which one party has already
prepared a form of a contract containing stipulations desired by him and he
simply asks the other party to agree to them if he wants to enter into the contract.
2. AUTONOMY
Autonomy of contracts –principle that the contracting parties are free to enter
into a contract and to establish such stipulations, clauses, terms and
conditions as they may be deemed convenient as long as they are not
contrary to law, good morals, customs, public order and public policy.
(Article 1306)

a. Contrary to law
Laws a contract must not intervene:
1. Expressly declare their obligatory character
2. Prohibitive
3. Express fundamental principles of justice which cannot be overlooked by
the contracting parties
4. Impose essential requisites without which the contract cannot exist

Illustration: 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.
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i. Pactum commissorium –automatic foreclosure

Article 2088 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.

ii. Pactum leonina- one party bears the lion ‘s share of the risk
Article 1799 A stipulation including one or more parties from any share in
the profits or losses is void.

iii. Pactum de non alienado – not to alienate

Article 2130 A stipulation forbidding the owner from alienating the
immotivable mortgaged shall be void.

b. Contrary to morals
Man’s innate sense or notion of what is right and wrong. More or less
universal.

Illustration: A contract, whereby X promised to live as a common

law-wife of Y without the benefit of marriage in consideration of
Php 100,000.00, is immoral ans therefore, void.
c. Contrary to good customs
Custom pertains to certain precepts that cannot be universally recognized
as moral, sometimes they only apply to certain communities or localities.

Illustration: X entered into a contract whereby X binds himself to slap his

father. This contract is void because it is against the good customs of showing
respect to our parents.

d. Contrary to public order

Consideration of the public good, will or weal (welfare), peace and safety of
the public and health of the community.

Illustration: A stipulation in a contract of lease whereby the land lord can

use force to eject the tenant in case of failure of the latter to pay the rent
agreed upon is void as being against public order.

e. Contrary to public policy

Court must find that the contract contravenes some established interest of
the society.

Illustration: X stole the car of Y. Later, they entered into a contract whereby
Y would not prosecute X in consideration of Php 50,000.00

Special disqualifications:

Article 87, FC inter vivos donation between spouses

Article 1490 husband and wife generally cannot sell property to each other,
subject to exceptions.
Article 1491 special prohibition as to who cannot acquire by purchase

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Article 1782 persons prohibited from giving each other any donation or
advantage, cannot enter into universal partnership

3. RELATIVITY- binding only upon the parties and their successors

a. Contracts take effect only between the parties, their assigns, and heirs.
Article 1311 Par 1 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 property he
received from the decedent.

TRANSMISSIBLE CONTRACTS:
a. Purely personal e.g. partnership and agency.
b. Vey nature of obligation that requires special personal
qualifications of the obligor..
c. Payment of money debts not transmitted to the heirs but to the
estate.

b. No one may contract in the name of another.

Article 1317. No one may contract in the name of another without being
authorized by the latter or unless he has by law a right to represent him.
* Unenforceable unless ratified expressly or impliedly (Unenforceable
Contracts, Art 1302 Par 1)

4. CONSENSUALITY – 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 consequences which according to their nature, may be in
keeping with good faith, usage and law (Article 1315) except contracts such as
deposit, pledge and commodatum, are not perfected until the delivery of the object
of the obligation..

5. OBLIGATORY FORCE – constitutes the law as between the parties.

Article 1159 Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
Article 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
be in keeping with good faith, usage and law.
Article 1356 Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.

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Classification of Contracts

1. According to subject matter

a. Things
b. Services

2. Accroding to the name

a. NOMINATE – have their own individuality (names) and are regulated by
special provisions of law.
b. INNOMINATE – without particular names
Article 1307 Innominate contracts shall be regulated by the stipulations of
the parties, by the provisions of Titles I and II of this Book, by the rules
governing the most analogous nominate contracts, and by the
customs of the place.

i. Do ut des – I give, you give

ii. Do ut facias – I give, you do
iii. Facio ut facias – I do, you do
iv. Facio ut des – I do, you give

3. According to perfection

a. By MERE CONSENT (consensual) – e.g. purchase and sale

Article 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 be in keeping with good faith, usage and law.

b. By DELIVERY OF THE OBJECT (real)- commodatum

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

4. According to its relations to other contracts , degree of dependence

a. Preparatory – e.g. agency
b. Principal – e.g. lease or sale
c. Accessory – e.g. pledge, mortgage or suretyship

5. According to form
a. Common or informal – e.g. loan
b. Special or formal – e.g. donations and mortgages of immovable property

6. According to purpose
a. Transfer of ownership- e.g. sale or barter
b. Conveyance of use – e.g. commodatum
c. Rendition of services – e.g. agency

7. According to the nature of the vinculum produced , nature of obligation

produced
a. Unilateral – e.g. commodatum or gratuitous deposit
b. Bilateral or sinalagmatico – e.g. purchase and sale
c. Reciprocal
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8. According to the cause

a. Onerous
b. Gratuitous or lucrative

9. According to risk
a. Commutative
b. Aleatory

Stages of Contract

a. Preparation – period of negotiation and bargaining, ending at the

moment of agreement of the parties
b. Perfection – moment when the parties come to agree on the terms and
conditions of the contract
c. Consummation or termination – fulfillment or the performance of the
terms agreed upon in the contract

As distinguished from a Perfected Promise and an Imperfect Promise

CONTRACT PERFECTED PROMISE IMPERFECT PROMISE

Establishes and Tends only to assure Mere unaccepted offer
determines the and pave the way for the
obligation arising celebration of a contract
therefrom in the future; until the
contract is actually
made, the rights and
obligations are not yet
determined

With Respect to Third Persons

1. Stipulations in favor of third persons (stipulation pour autrui) may demand its
fulfillment provided the acceptance is made prior to revocation.
Article 1311 Par 2 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.
 Test of beneficial stipulation – A mere incidental interest of a 3rd person is
not within the doctrine; it must be the purpose and intent of the stipulating
parties to benefit the third person.
 Requisites of stipulation our autrui:
a. Stipulation in favor of third person is a part, not whole of the contract

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b. Favorable stipulation not conditioned or compensated by any kind of
obligation whatever
c. Neither of the contracting parties bear the legal representation or
authorization of the third party
d. Benefit to the 3rd party was clearly and deliberately conferred to by
parties.
e. Third person communicated his acceptance to the obligor before the
latter revokes the same

2. Possession of the object of contract by third persons only for real rights
Article 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.
3. Creditors of the contracting parties
Article 1313. Creditors are protected in cases of contracts intended to defraud
them.
Article 1387. – in rescissible contracts, presumption of fraudulent alienation
when the debtor does leave sufficient property to cover his obligations.
Creditor may ask for rescission – Article 1177 (accion subrogatoria) and Article
1381 (accion pauliana)
4. Interference by third persons
Article 1314. Any third person who induces another to violate his contract shall
be liable for damages to the other contracting party.
 Liability for damages: third person ‘s liability cannot be more than the party
he induced
 Requisites of Interference with Contractual Relation by Third Person
a. Existence of a valid contract
b. Knowledge by a third person of the existence of a contract
c. Interference by the third person in the contractual relation without legal
justification

Activity

For supplemental discussion of the topic, please check the links below:

[Link]

[Link]

Exercise

Imagine that you are an entrepreneur and you would want to hire some employees. Draft
a sample employment contract with all the necessary elements of a contract.

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Rubrics for Grading the Simulated agreement
5 3 1
Content All of the necessary Some of the Most of the
provisions are necessary necessary
present. provisions are provisions are
missing. missing.
Organization The provisions of Some of the Most of the
the agreement are provisions are not provisions are not
clear organized properly. organized properly.
Legal Basis All the provisions Some of the Most of the
are in accordance provisions are not in provisions are not in
with law. accordance with accordance with
law. law.

Assessment

Choose the letter that corresponds to the correct answer.

_______1. The following are void contracts, except:
a) Pactum commissorium
b) Pactum de non alienando
c) Pactum leonina
d) Pacto de retro

_______2. Which of the following statements is correct?

a) All contracts are perfected by mere consent.
b) All contracts are perfected by delivery of the object.
c) All contracts are required to be in writing.
d) All contracts are required to have a valid consideration.

_______3. It constitutes the law as between the parties.

a) Obligatory force of contracts
b) Mutuality of contracts
c) Autonomy of contracts
d) Relativity of contracts
e) Consensuality of contracts

_______4. It is a principle which holds that contracts must be binding to both parties and
its validity and effectivity can never be left to the will of one of the parties.
a) Obligatory force of contracts
b) Mutuality of contracts
c) Autonomy of contracts
d) Relativity of contracts
e) Consensuality of contracts

_______5. It refers to the rule that a contract is binding not only between
parties but extends to the heirs, successors in interest, and assignees of the
parties, provided that the contract involved transmissible rights by their nature, or by
stipulation or by law.
a) Obligatory force of contracts
b) Mutuality of contracts
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c) Autonomy of contracts
d) Relativity of contracts
e) Consensuality of contracts

_______6. The following are the ways by which innominate contracts are
regulated, except:
a) By the stipulation of the parties.
b) By the general principles of quasi-contracts and delicts
c) By the rules governing the most analogous nominate contracts.
d) By the customs of the place.

________7. The following are essential requisites of a contract, except:

a) Consent
b) Object
c) Cause
d) Motive

________8. The following are stages of contract, except:

a) Preparation
b) Perfection
c) Consummation or Death
d) Renewal

________ 9. A contract is classified according to purpose hereunder, except:

a) Transfer of ownership
b) Conveyance of use
c) Onerous
d) Rendition of services

________10. A contract is classified according to nature of obligation produced

hereunder, except:
a) Unilateral
b) Bilateral
c) Reciprocal
d) Principal

Reflection

Can a contract be valid in one country and invalid in another? Explain.

Resources and Additional Resources

1. Aldeguer, Christine Carpio (2014). Law on Obligations and Contracts in the

Philippines: An Overview. Retrieved from [Link] or
[Link]

2. Ateneo Central Bar Operations (2007) Civil Law Reviewer. Retrieved from
[Link]
Law-Summer-Reviewer

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3. De Leon, Hector S. The Law on Obligations and Contracts. 1995 Revised Edition.
Rex Book Store, Manila, Philippines. Pages 276 – 347.

4. Labitag, Eduardo A. (2012). Obligations and Contracts. Retrieved from January 15,
2017 from [Link]
[Link]

5. Lumba, Solomon. UP 2010 OBLICON Reviewer. Civil Law Reviewer. Retrieved July
18, 2020 from [Link]
6. Real Estate Lawyer Philippines. (March 4, 2016). Essential Requisites of a Contract.
Retrieved July 17, 2020 from [Link]
a-contract/
7. The Lawphil Project: Arellano Law Foundation. Philippine Laws and Jurisprudence
Databank. 2012 Bar Examinations Civil Law. Retrieved July 18, 2020 from
[Link]

8. The Lawphil Project: Arellano Law Foundation. Philippine Laws and Jurisprudence
Databank. RA 386: An Act to Ordain and Institute the Civil Code of the Philippines.
Retrieved July 18, 2020 from
[Link]

Answer Key to the Assessment Activity

1. D 6. B
2. A 7. D
3. A 8. D
4. B 9. C
5. D 10. D

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