ERNESTO V. RONQUILLO, petitioner,
STIPULATION WHICH IS VOID FOR BEING CONTRARY TO MORALS: in a contract of loan, where the interest rate is 50%, is void for
being contrary to morals, the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is usurious.
3. MUTUALITY – ARTS. 1308-1310, 1182
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a)
Validity or compliance: not extinguishment. As such, in a contract of lease which may be terminated upon the will of the lessee by simply giving notice to the lessor, the same is valid and does not violate the mutuality of contracts principle. The principle pertains to validity or compliance and not termination of contracts.
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. (n)
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.
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115)
ACCELERATION CLAUSE and ESCALATION CLAUSE (see Autonomy of Contracts)
4. OBLIGATORY FORCE OF CONTRACTS – ARTS. 1159, 1315-1316, 749
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) 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. (1258) Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation.
Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (633)
5. RELATIVITY OF CONTRACTS – ARTS. 1311-1314, 1177-1178, 1381(3)
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. (1257a)
Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) PRIVITY OF CONTRACTS: means that the contract takes effect only between the parties, their assigns and heirs which are referred to as privies.
When not transmissible:
a. When the nature of the obligation is that it is not transmissible: when the rights are purely or strictly personal in nature, i.e., the qualifications and skills of the person have been considered in the constitution of the contract.
b. By stipulation: e.g. the right to sublease is granted by law, but may be prohibited by stipulation.
c. By provision of law: e.g. heirs as to the usufruct. The law provides that the rights of a usufructuary shall not be transmitted to the heirs, unless the parties stipulate otherwise.
Third Parties: as a general rule do not have a cause of action to enforce or annul a contract.
Exceptions:
a. Third person may be bound by the contract:
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.
(n)
Example: in a contract of mortgage where the mortgagor A sold his property to C. C shall be bound by the contract of mortgage on the premise that the mortgage in favor of B, the mortgagor, is registered.
This is because real rights attaches to the property. As such, under Art.
1312, any person who comes into the possession of said real property shall be bound by the encumbrance therein, i.e., the mortgage.
The exception to the above example, is when the mortgage is not registered. Accordingly, the buyer, C, will not be bound by it.
b. A creditor may initiate an action against the contracting parties
Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111)
Art. 1381. The following contracts are rescissible:
(3) Those undertaken in fraud of creditors when the latter cannot in any xxx other manner collect the claims due them;
xxx
Rescission by accion pauliana. As such, the creditor has a cause of action against the acts of the debtor and any person he contracts with, where the contract is to defraud the creditor, i.e., the creditor will have a right to rescind said contract.
c. Third persons may be liable under a contract
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.
Malicious interference by third persons: as the name implies, there should be malice or a malicious inducement by the third person as a result of which, the debtor does not comply with his obligation under the contract, which necessarily implies that such third person has knowledge of the existence of the contract.
How to know if there was malice: usually, the words use would indicate malice, e.g., “entice,” sometimes, it may be inferred from the circumstances, i.e., where a party entice an employee of another to leave by offering him a better compensation package.
BAR QUESTION: Francis Albert, a citizen and resident of New Jersey U.S.A., under whose law he was still a minor, being only 20 years of age, was hired by ABC Corporation of Manila to serve for two years as its chief computer programmer. But after serving for only four months, he resigned to join XYZ Corporation, which enticed him by offering more advantageous terms. His first employer sues him in Manila for damages arising from the breach of his contract of employment. He sets up his minority as a defense and asks for annulment of the
contract on that ground. The plaintiff disputes this by alleging that since the contract was executed in the Philippines under whose law the age of majority is 18 years, he was no longer a minor at the time of perfection of the contract.
Suppose XYZ Corporation is impleaded as co-defendant, what would be the basis of its liability, if any? (2%)
ANSWER: 1314. Interference by a third person. When a person maliciously induced another.
Who is liable? Both the debtor who failed to comply and the third party who maliciously induced such non-compliance. However, the liability of the third party cannot be greater than that of the debtor who is guilty of breach of contract.
BAR QUESTION: Roland, a basketball star, was under contract for one year to play-for-play exclusively for Lady Love, Inc. However, even before the basketball season could open, he was offered a more attractive pay plus fringe benefits by Sweet Taste, Inc. Roland accepted the offer and transferred to Sweet Taste. Lady Love sues Roland and Sweet Taste for breach of contract. Defendants claim that the restriction to play for Lady Love alone is void, hence, unenforceable, as it constitutes an undue interference with the right of Roland to enter into contracts and the impairment of his freedom to play and enjoy basketball.
Can Roland be bound by the contract he entered into with Lady Love or can he disregard the same? Is he liable at all? How about Sweet Taste? Is it liable to Lady Love?
ANSWER: Yes. Roland is bound under Art. 1159, obligations arising from contract have the force of law between the parties.
Yes, he is liable for breach of contract. He can be held liable with Sweet Taste under Art. 1314, this can be considered malicious interference to violate the contract.
d. Third persons may be benefited by a contract – 2nd paragraph of Art. 1311, otherwise known as a stipulation pour atrui.
Art. 1311. xxx
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.
Subject matter: must be secondary or incidental only, not the main object of the contract. E.g., in a contract of loan with a stipulation that the interests are payable to a third person.
Communication of acceptance to the obligor is required. No form is required. It can even be implied from the acts of the third person.
Revocation: cannot be done by one party alone. The Supreme Court has held that if this revocation is a unilateral act of one of the parties, it is void for violation of the principle of mutuality of contracts. For a revocation to take effect, it must be with consent of both parties (obligor and oblige) and should be done before the communication of acceptance to the obligor.
C. CLASSIFICATION OF CONTRACTS
1. ACCORDING TO DEGREE OF DEPENDENCE a. PREPARATORY – ARTS. 1479, 1767, 1868
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession. (1665a)
Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (1709a)
b. PRINCIPAL – ARTS. 1458, 1638, 1642, 1933, 1962 Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (1445a)
Art. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. (1538a)
Art. 1642. The contract of lease may be of things, or of work and service.
(1542)
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)
c. ACCESSORY – those which cannot stand on its own and are dependent upon other contracts for its validity. E.g., guaranty, suretyship, mortgage and antichresis.
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (1822a)
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)
2. ACCORDING TO PERFECTION
a. CONSENSUAL – are those perfected by mere consent.
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. (1258) Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.
(1450a)
b. REAL – those which are perfected only upon delivery of the thing subject of the contract. E.g., deposit, pledge, commodatum and mutuum.
Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)
Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)
c. FORMAL – those which require a certain form for its validity.
E.g., antichresis
Art. 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.
(1278a)
Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.
Art. 1357: does not apply where the formality is a requirement for validity.
As such, an action under Art. 1357 cannot prosper to compel the other party to execute a formality, when it has not been complied with, in cases where the formality is required for validity.
Art. 1357 presupposes the existence of a valid contract and cannot possibly refer to the form required to make it valid but rather to that required to simply to make it effective.
Form requirements as to the validity of the contract: or ad essential/ad solemnitatem:
Negotiable instruments – must be in writing;
Donations of personal property more than P5,000 – must be in writing;
Donations of real property – must be in a public instrument;
Interests on loan – must be stipulated in writing, otherwise they are not due;
Principal and interests in antichresis – must be specified in writing, otherwise the contract is void.
Sale and transfer of large cattle – under the Cattle Registration Act, the same must be registered and a certificate of transfer must be issued.
Chattel mortgage – requires registration.
Contract of partnership where real property or real rights are contributed – must be in a public instrument with an inventory attached.
Article 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable
property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405. (1280a) Formal requirements to prove existence: STATUTE OF FRAUDS:
Article 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient