ASIA PACIFIC COLLEGE OF ADVANCED STUDIES, INC.

A.H. Banzon St., Ibayo, City of Balanga, Bataan

2nd Semester, S.Y. 2023-2024

CBA 1- Law on Obligation and Contracts

ART. 1305. A contract is a meeting of minds between two persons whereby

one binds himself, with reports to the others, to give something or to
render some services.

In a contract, there must be at least two persons or parties, because it is

impossible for one to contract with himself.
through legal proceedings.
CONTRACT vs OBLIGATION
• Agreements are broader than
• Contract is one of the sources of
contract
obligation.
because the former may not have all
• Obligation is the legal tie or relation the
itself
elements of a contract.
that exists after a contract has
• All contracts are agreements but
been
not all agreements are contracts
entered into. Hence, there is no
contract if
there is no obligation. But an
obligation
may exist without a contract.
CONTRACT vs AGREEMENT
• Contracts are agreements
enforceable
CLASSIFICATION OF CONTRACT

Acc. to form
Acc. to name or designation
• Informal or common
• Nominate
Formal or solemn
Innominate

Acc. to obligatory force

Acc. to perfection
• Valid
• Consensual
• Rescissible
Real
• Voidable
• Unenforceable
Acc. to cause
Void or inexistent
• Onerous
• Remuneratory or remunerative
Acc. to person obliged
Gratuitous
• Unilateral
• Bilateral
Acc. to dependence to another contract
• Preparatory - entered into as a means to an end (e.g., agency, partnership)
• Accessory - dependent upon another contract it secures or guarantees for its
existence and validity (e.g., mortgage, guaranty),
Principal - does not depend for its existence and validity upon another contract
but is an indispensable condition for the existence of an accessory contract.
(e.g., sale, lease),

Acc. to risks
• Commutative - the undertaking of one party is considered the equivalent of that
of the other (e.g., sale, lease)
• Aleatory- depends upon an uncertain event or contingency both as to benefit or
loss. (e.g., insurance, sale of a hope)

Acc. to liability
Unilateral (e.g., commodatum, gratuitous deposit), when it creates an obligation
on the part of only one of the parties
Bilateral (e.g., sales, lease), when it gives rise to reciprocal obligations for both
parties

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.
• The right to enter into contracts is one of the liberties guaranteed to the
individual by the Constitution. However, the constitutional prohibition against the
impairment of contractual obligations refers only to legally valid contracts.
• In appropriate cases, it cannot be invoked as against the right of the state to
exercise its police power.

Limitations on contractual stipulations

1. Law -It is a fundamental requirement that the contract entered into must be in
accordance with, and not repugnant to, an applicable statute. Its terms are
embodied in every contract. Law sets limit.
2. Police Power- When there is no law in existence or when the law is silent, the
will of the parties prevails unless their contract contravenes the limitation of
morals, good customs, public order, or public policy.

CONTRACTS MUST NOT BE CONTRARY TO:

• LAW- “a rule of conduct, just, obligatory, promulgated by legitimate
authority, and of common observance and benefit.” A contract cannot be given
effect if it is contrary to law because law is superior to a contract. Acts executed
against the provisions of mandatory or prohibitory laws are void, except when the
law itself authorizes their validity.
• MORALS- deal with norms of good and right conduct evolved in a community.
• GOOD CUSTOMS- consist of habits and practices which through long usage
have been followed and enforced by society
• PUBLIC ORDER- public safety or the public weal.
• 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.
ART. 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.

Classification of contracts according to its name or designation.

1. Nominate contract - has a specific name or designation in law (e.g.,
commodatum, lease, agency, sale)
2. Innominate contract - no specific name or designation in law

Kinds of innominate contract.

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

• Do ut des is, however, no longer an innominate contract. It has already been

given a name of its own, i.e., barter or exchange.
• Innominate contracts are based on the well-known principle that “no one shall
unjustly enrich himself at the expense of another.”

Rules governing innominate contracts.

1. the agreement of the parties
2. the provisions of the Civil Code on obligations and contracts
3. the rules governing the most analogous contracts
4. the customs of the place.

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

• A contract is an agreement which gives rise to obligations. It must bind both

parties in order that it can be enforced against either. Without this mutuality and
equality between the parties, it cannot be said that the contract has the force of
law between them.
• It is a fundamental rule that no party can renounce or violate the law of the
contract without the consent of the other. Hence, “its validity or compliance
cannot be left to the will of one of them.”

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 contracting parties.

• the determination of the performance may be left to a third person. In such

case, the obligation does not depend upon a potestative condition.
• The decision, however, of the third person shall bind the parties only after it has
been made known to both of them.

ART. 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.
• A contracting party is not bound by the determination if it is evidently inequitable
or unjust as when the third person acted in bad faith or by mistake. In such case,
the courts shall decide what is equitable under the circumstances.

ART. 1311. 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.

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.

General rule. — a party’s rights and obligations derived from a contract

are transmissible to the successors. This means that only the parties, their
assigns and heirs can have rights and obligations under a contract
As a rule, the act, declaration, or omission of a person cannot affect
another without the latter’s authorization or ratification.

• Exception:
a) by their nature (like a contract requiring or involving personal qualifications, as
painting, singing)
b) by stipulation (in accordance with the principle of freedom to contract)
c) by provision of law (as in agency, partnership, and commodatum, when death
extinguishes the legal relationships).
• A third person is one who has not taken part in a contract and is, therefore, a
stranger to the contract.
• general rule, a third person has no rights and obligations under a contract to
which he is a stranger. He has no standing in law to demand the enforcement of
a contract or question its validity.

When a third person may be affected by a contract

Containing a stipulation in favor of a third person (stipulation pour autrui)
Creating real rights
Entered into a defraud creditors
Which have been violated at the inducement of the third person

Stipulation pour autrui

Stipulation in a contract clearly and deliberately conferring a favor upon a third
person. Who has a right to demand its fulfillment
He communicates his acceptance to the obligor before its revocation by the
obligee or the original parties.

Classes of stipulation pour autrui

DONEE - BENEFICIARY - intended for the sole benefit of such person.
CREDITOR - BENEFICIARY - those where an obligation is due from the
promisee to the third person which the former seeks to discharge by means of
such stipulations.

Requisites of stipulation pour autrui.

1. The contracting parties by their stipulation 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 and not the whole
of the contract or the contract itself
4. The favorable stipulation should not be conditioned or compensated by any
kind of obligation whatever
5. Neither of the contracting parties bears the legal representation or
authorization of the third party for otherwise the rules on agency will apply.

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.

This article is an exception to the general rule that a contract binds only the
parties.
Third persons who come into possession of the object of a contract over which
there is a real right, such as a real estate mortgage, are bound thereby even if
they were not parties to the contract.
A real right is binding against the whole world and attaches to the property over
which it is exercised wherever it goes.
If the real right is not registered, third persons who acted in good faith
are protected under the provisions of the Property Registration Decree.
ART. 1313. Creditors are protected in cases of contracts intended to
defraud them.

• Article 1313 is another qualification to the rule that contracts take effect only
between the parties. The creditor is given the right to impugn the contracts of his
debtor to defraud him.

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

• Article 1314 recognizes 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 interfered with is valid and the third person
has knowledge of the
existence of the contract or must have known of it after a reasonable inquiry.

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 be in 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.

Classification of contracts according to perfection.

1. Consensual contract - which is perfected by mere consent (e.g., sale, lease,
agency)
2. Real contract - which is perfected, in addition to the above, by the delivery of
the thing subject matter of the contract (e.g., depositum, pledge, commodatum)
3. Solemn contract - which requires compliance with certain formalities
prescribed by law such prescribed form being thereby an essential element
thereof (e.g., donation of real property).

Stages in the life of a contract.

1. Preparation or negotiation. —includes all the steps taken by the parties leading
to the perfection of the contract. At this stage, the parties have not yet arrived at
any definite agreement.
2. Perfection or birth. —when the parties have come to a definite agreement
regarding the subject matter and cause of the (consensual) contract, i.e., upon
concurrence of the essential elements of the contract
3. Consummation or termination. —when the parties have fulfilled their
respective obligations under the contract and the contract may be said to have
been fully accomplished, resulting in the extinguishment thereof.

How contracts are perfected

1. Consensual contracts. — As a general rule, contracts are perfected by
mere consent of the parties regarding the subject matter and the cause of the
contract. They are obligatory in whatever form they may have been entered into,
provided, all the essential requisites for their validity are present.
2. Real contracts –which are perfected not merely by consent but by the delivery,
actual or constructive, of the object of the obligation. These contracts have for
their purpose restitution because they contemplate the return by a party of what
has been received from another.
3. Solemn contracts- when the law requires that a contract be in some form to be
valid, this special form is necessary for its perfection. Thus, a donation of real
property cannot be perfected until it is embodied in a public instrument.
Effect of perfection of the contract.
1. to the fulfillment of what has been expressly stipulated but also,
2. to all the consequences which according to their nature, may be in keeping
with good faith, usage, and law.

ART. 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.

A contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other contracting
party.

Unauthorized contracts are unenforceable.

• general rule, a person is not bound by the contract of another of which he has
no knowledge or to which he has not given his consent.
• A contract involves the free will of the parties and only he who enters into the
contract can be bound thereby.
• Thus, under Article 1317, a contract entered into in the name of another by one
who has no authority is unenforceable against the former unless it is ratified by
him before it is revoked by the other contracting party

Unauthorized contracts can be cured only by ratification.

• The defect is such that it cannot be cured except by the subsequent ratification
of the person in whose name the contract was entered into or by his duly
authorized agent and not by any other person not so empowered.
• The ratification must be clear and express so as not to admit of any doubt or
vagueness.

When a person bound by the contract of another.

1. The person entering into the contract must be duly authorized, expressly or
impliedly, by the person in whose name he contracts or he must have, by
law, a right to represent him (like a guardian or an administrator)
2. He must act within his power

• A contract entered into by an agent in excess of his authority is unenforceable

against the principal, but the agent is personally liable to the party with
whom he contracted where such party was not given sufficient notice of the
limits of the powers granted by the principal.