Chapter 1. General Provisions

Article 1305. 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.

CONTRACT

Definition: 

The above article gives the definition of a contract. It lays emphasis on the meeting of minds between two contracting parties which takes place when an offer by one party is accepted by the other.1 (Art. 1319.)

In a contract, one or more persons bind himself or themselves with respect to another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.

Elements of a Contract

a. Essential elements – consent, subject matter, cause or consideration (without them a contract cannot exist)

[Note: In some contracts, form is also essential; still in others, delivery is likewise essential.]

b. Natural elements – those found in certain contracts, and presumed to exist, unless the contrary has been stipulated)

Examples: warranty against eviction and against hidden defects in the contract of sale

c. Accidental elements – these are the various specific stipulations that may be agreed upon by the contracting parties in a contract. They are accidental elements for they may be present or absent, it depends whether or not the parties have agreed upon them. 

Examples: the stipulation to pay credit; the stipulation to pay the interest

Parties to a Contract

1. The law speaks of a meeting of minds between two “persons.” The meeting of the minds really refers to two “parties.” If at the time of supposed perfection, one of the parties had already previously died, there can be no meeting of the minds; hence, no contract. (Coronel v. Ona, 33 Phil. 456)

2. While a promissory note is unilateral (in that only one party has signed it and is bound thereby), still such a contract includes two parties (the debtor and the creditor). Thus, the signer is not the only party, nor the only one who can sue on such a contract. There can be no obligor without an oblige. (Dilag v. Heirs of Fortunato Resurreccion, 76 Phil. 650)

3. The meeting of the minds may arise because of an express or implied accord (such as when services as an interpreter and guide, whether solicited or not, were accepted and duly rendered; here, an obligation to pay for such services exists). (See Perez v. Pomar, 2 Phil. 682)

Classification of Contracts

The following may be mentioned:

1. According to name or designation:

a. Nominate – contract is given a particular or special name

b. Innominate – those not given any special name (see Art. 1307.)

2. According to perfection:

a. Consensual – perfected by mere consent

b. Real – perfected by delivery (see Arts. 1315, 1316.)

3. According to cause or equivalent of the value of prestations:

a. Onerous - where there is an interchange of equivalent valuable consideration

b. Remuneratory or remunerative – one where one prestation is given for a benefit or service that had been rendered previously

c. Gratuitous or lucrative – this is free, this one party receives no equivalent prestation except a feeling that one has been generous or liberal (see Art. 1350.)

4. According to form:

a. Informal or common; and

b. Formal or solemn. (see Art. 1356.)

5. According to obligatory force:

a. Valid (see Art. 1306.);

b. Rescissible (Chapter 6.);

c. Voidable (Chapter 7.);

d. Unenforceable (Chapter 8.); and

e. Void or inexistent. (Chapter 9.)

6. According to person obliged:

a. Unilateral – only one of the parties has an obligation

b. Bilateral – both parties are required to render reciprocal prestations (see Art. 1191.)

7. According to dependence to another contract:

a. Preparatory (e.g., agency, partnership), when it is entered into as a means to an end;

b. Accessory (e.g., mortgage, guaranty), when it is dependent upon another contract it secures or guarantees for its existence and validity; and

c. Principal (e.g., sale, lease), when it does not depend for its existence a validity upon another contract but is an indispensable condition for the existence of an accessory contract.

8. According to risks:

a. Commutative (e.g., sale, lease), when the undertaking of one party is considered the equivalent of that of the other; and

b. Aleatory (e.g., insurance, sale of a hope6), when it depends upon an uncertain event or contingency both as to benefit or loss.

9. According to liability:

a. Unilateral (e.g., commodatum, gratuitous deposit), when it creates an obligation on the part of only one of the parties; and

b. Bilateral (e.g., sale, lease), when it gives rise to reciprocal obligations for both parties.

The kind of contract entered into is not determined, however, by the name or title given to it by the parties but by its nature or character as determined by principles of law. (see Art. 1371.)

Characteristics of contracts

They are:

1. Freedom or autonomy of contracts. — The 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, and public policy (Art. 1306.);

2. Obligatoriness of contracts. — Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith (Arts. 1159, 1315.);

3. Mutuality of contracts. — Contracts must bind both and not one of the contracting parties; their validity or compliance cannot be left to the will of one of them (Art. 1308.);

4. Consensuality of contracts. — Contracts are perfected, as a general rule, by mere consent,4 and from that moment the parties are bound not only by 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. 1315.); and

5. Relativity of contracts. — Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation, or by provision of law. (Art. 1311.)

Termination or cancellation of pre-existing contract

Article 1305 fully covers the case where two persons agree to terminate or cancel a pre-existing contract.

To terminate a contract, there must be some consideration, either in the delivery of money or something else, or in rendering some act or forbearance (Memorandum of the Code Commission, March 8, 1951, pp. 15-16.), subject to stipulation of the parties.

1. Termination by stipulation of the parties. — As a rule, the method of terminating a contract is primarily determined by the stipulation of the parties. The unilateral termination of a contract by a party is violative of the principle of mutuality of contracts ordained in Article 1308. (Home Development Mutual Fund vs. Court of Appeals, 288 SCRA 617 [1998].)

A contract may be superseded by a compromise agreement (see Art. 2028.) provided it is not contrary to law, morals, good customs, public order or public policy (Art. 1306.) To be valid, a compromise agreement is merely required by law to be based on real claims and to be actually agreed upon in good faith. (Manila International Airport Authority vs. ALA Industries Corp., 422 SCRA 603 [2004].)

2. Termination, by stipulation, at option of one party. — A contract may provide, however, that it shall come to an end at the option of one, or either of the parties and such stipulation, when fairly entered into, will be enforced if not contrary to equity and good conscience. (13 C.J. 606; see Art. 1308.) Where the contract is for an indefinite term subject to the right of either party to terminate it any time after a written notice of 30 days, it is immaterial that the termination is for cause or without cause, as long as a 30-day written notice is given. It is the unilateral act, without any legal basis or justification, of one party in terminating a contract which will make him liable for damages. (Riser Airconditioning Services Corp. vs. Confield Construction Dev. Corp., 438 SCRA 471 [2004].) But if a party terminating the contract acted in bad faith purposely to injure or prejudice the other, the former may be held liable for damages for abuse of a right under Article 19 of the Civil Code. (See Petrophil Corporation vs. Court of Appeals, 371 SCRA 702 [2001].)

3. Termination by one party with conformity of the other. — Where one party opts to cancel an existing agreement and the other party expresses its conformity thereto, in legal effect, the parties enter into another contract for the dissolution of the previous one, and they are bound by their contract. The dissolution or cancellation of the original agreement necessarily involves restoration of the parties to the status quo ante prevailing immediately prior to the execution of the agreement. (Floro Enterprises, Inc. vs. Court of Appeals, 249 SCRA 354 [1995].)

Distinctions between termination and rescission of a contract

To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore the parties to their relative positions which they would have occupied had no contract ever been made.

Termination of a contract is congruent with an action for unlawful detainer. The termination or cancellation of a contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of a contract need not undergo judicial intervention. The parties themselves may exercise such option. Only upon disagreement between the parties as to how it should be undertaken may the parties resort to courts. (Huibonhoa vs. Court of Appeals, 320 SCRA 625 [1999].)

Contract and obligation distinguished

Contract is one of the sources of obligations. (Art. 1157.) Whereas obligation is the legal tie or relation itself that exists after a contract has been entered into. Therefore, there can be no contract without an obligation. But an obligation may exist without a contract.

Contract and agreement distinguished

There can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. (Phil. National Bank vs. Court of Appeals, 238 SCRA 20 [1994].)

Contracts are agreements enforceable through legal proceedings. Those agreements which cannot be enforced by action in the courts of justice (like an agreement to go to a dance party) are not contracts but merely moral or social agreements. An agreement is broader than contract because the former may not have all the elements of a contract. (See Art. 1318.)

This article states that the parties that entered into a contract are given the freedom to agree on any terms or stipulations in their contract because it is both constitutional and statutory right. The only limitation is that the contractual stipulations should not be contrary to law, morals, good customs, public order or public policy. 

Contract must not be contrary to law. 

Stipulations in a contract must not be in violation of mandatory and prohibitory laws, unless the law itself authorizes the validity of such acts. When the contractual stipulations violate the law, the contract is considered void. 

Example of a contract contrary to law. 

A contract was made between Marina and Cora. It was decided that Marina would pay B P200,000 if Cora took Joan's pet dog.

Additionally, it was agreed that Marina would pay P150,000 in advance and the other P500,000 would be paid to Cora when Marina received the dog. Cora did as she was told and took the dog from Joan's house. Before he could give Marina the dog, though, Cora was taken into custody by the police. 

Question: Can Marina bring a legal action against Cora to reclaim the P150,000 that was given to Cora because Cora failed to deliver the dog to Marina as agreed? 

Answer: NO. In the agreement between the parties, Cora is required to steal Joan's dog. Stealing is forbidden. As a result, the contract is void and cannot be implemented. Both of them will be put on trial for the crime of robbery or theft if Marina files an action to recover the P150,000 from Cora based on their contract. 

Contract must not be contrary to morals. 

A contract that violates good morals is considered void. Morals refer to norms  of conduct universally accepted as rules not based on law but on principles of morality. Morality in turn is based on man’s faculty of knowing how to distinguish between what is right from what is wrong. 

Example of a contract contrary to law. 

Rana is a 20-year old college student who dropped out of school because her guardians could no longer pay for her tuition. Her 35-year old guy professor Ronald found out about it when she no longer attends the classes. On March 3, 2009, Ronald promised to pay for Rana’s tuition until she graduated college in exchange for living with him for a year without being married. Rana agreed on the offer. However, on March 7, 2009, Rana backed out of their agreement because her guardians found out their plan and prohibited Rana to go with their agreement as it is against their morals because they are not married. Ronald was upset and filed an action against Rana for violating their contract and he also asked for damages. 

Question: Is the agreement lawful? Can Rana be made to keep her pledge under the contract? 

Answer: It is stated that due to the autonomy of contracts, the parties are able to include any clause in their agreement that they see useful. But in this situation, it is morally wrong to force a woman to live with a man without providing her with the benefits of marriage.  As a result, Rana and Ronald’s agreement is void for immorality and cannot be carried out.

Contract must not be contrary to good customs. 

The term "good customs" refers to recognized moral standards that have long been acknowledged by the community on a social and practical level. Contracts with immoral goals are thus against good customs. 

Example of a contract contrary to good customs. 

Omar promised to give Loki P500,000 if Galang would slap his father once on both cheeks. This contract is void because it is against the good custom of showing respect to our parents.

Contract must not be contrary to public order.

Public order refers to public safety of the people which includes the maintenance of peace and order both in the entire country and in a particular community.

Example of a contract contrary to public order.

Fan owns an apartment and Han is interested in renting the apartment. After some talks and negotiations the parties entered into a contract with the stipulations that Fan is obliged to rent her apartment for 1 year, and Han promised to pay her P20,000 per month. Additionally when Han fails to pay her monthly rent, she must leave the apartment of Fan and when she refuses to leave she will be carried out and dragged out by Fan’s big brothers out of the apartment. 

Question: Assuming that Han later on fails to pay her monthly rentals, can Fan enforce the last stipulation  in their agreement considering that Han had agreed to the stipulation?

 Answer: NO. The last clause in the parties' contract cannot be enforced by Fan because it violates public order, even though the other clauses are legal and valid. Fan shouldn't physically compel Han to leave the apartment; that would be the wrong course of action. The best thing for Fan to do is to sue Han in court for ejectment. Fan must first obtain a final court order compelling Han to leave the property. The court's sheriff will next execute the final ejectment order, which requires the tenant to vacate the leased property.

Contract must not be contrary to public policy. 

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. An agreement that opposes public policy or law will be void.

Example of a contract contrary to public policy.

Rika is a public official who is convicted for graft and corruption. Her family entered into contract with the criminal investigator who is assigned to investigate the case of Rika to mislead the authorities and eventually nullify the verdict. 

The contract is void because agreement between the family of Rika and the investigator is contrary to public order because it seeks to nullify the lawsuit that has been sentenced on her. 

Example Case. 

Facts: In the Villa Homes community, Yolanda purchased two lots that were covered by certificates of title that had restrictions on their use, one of which said that the lots may only be used for homes. Villa, the owner of the subdivision, brought legal action to halt Yolanda's construction of a commercial structure on the grounds that it broke the title's restrictions. Two years after the area had been designated as a commercial and industrial zone by a local council vote, Yolanda purchased the property. Villa addressed the restrictions included in the deeds of sale and later in the corresponding Transfer Certificates of Title issued to him in her argument that the resolution cannot invalidate the contractual obligations taken on by Yolanda by invoking the principle of non-impairment of contracts.

Issue: Is the contention of Villa tenable?

Held: No. The right to refrain from interfering with contracts is guaranteed by the constitution, but this rule is not absolute because it must be balanced against the right to exercise police power, which is defined as "the power to prescribe regulations to promote the health, morals, peace, education, good order or safety and general welfare of the people." The resolution in question was undoubtedly passed by the Municipal Council in the course of exercising this power. 

Classification of contracts according to its name or designation.

1. Nominate Contract 

A type of contract that is recognized and enforceable by law. It is an agreement between two or more parties that creates obligations that can be legally enforced. It has a specific name or designation in law. (e.g commadatum, lease, agency, sale etc.)

EXAMPLE:

A lease agreement between a landlord and a tenant.

2. Innominate Contract 

A contract which lacks individuality and is not regulated by special revisions of law or has no specific name or designation in law. 

Specific Rules that may govern innominate contracts.

1. Agreement of the parties;

2. Titles I and II of Book IV — Obligations and Contracts;

3. Rules governing the most analogous nominate contracts;

4. Custom of the place.

Reasons for Innominate Contracts

This provision is backed up by the fact that it is impossible to anticipate every type of agreement, as well as the development of human sociological and economic connections. As long as a contract meets all of the requirements for a valid contract, it will not be deemed void for failing to exactly follow the standard contracts stipulated in the Civil Code. 

Innominate contracts are based on the well-known principle that “no one shall unjustly enrich himself at the expense of another.”

4 kinds of Innominate Contracts

•  do ut des (I give that you may give)

 is an agreement   in which A will give one thing to B, so that   B will give another thing to A.

• do ut facias (I give that you may do) 

is a contract under which A will give something to B, in order that B may do something for A.

• facio ut des (I do that you may give) 

is an agreement in which A binds himself to do something for  B, so that B will give something to A.

•  facio ut facias (I do that you may do) 

is a convention whereby A is to do something for B, so that B will render some other  service to A.

By this article, no party to a contract can renounce or violate the law of the contract without the consent of the other. 

Example Case. 

Macky promised to sell his electric scooter to Vicky, an interested buyer. It was agreed that Macky will determine the price of the electric scooter and inform Vicky about it on the same day that Macky will deliver the electric scooter. The following day, Macky went to the house of Vicky and delivered the electric scooter. Macky was also collecting from Vicky the purchase price of P20,000 which is what Makcy had decided.

 Question: Can Macky compel Vicky to accept delivery of the electric scooter and to pay the purchase price of P20,000? 

Answer: NO. There is no valid contract here. A contract is a meeting of the minds and, therefore, there must be mutual consent. The contract does not bind both contracting parties because the determination of the purchase price of the electric scooter was left to the sole determination of Macky. Of course, if Vikcy decides to accept delivery and agrees to the purchase price of P20,000 upon delivery, the contract of sale is perfected. 

Under the Article 1308 of this Code, compliance with a contract cannot be left to the will of only one of the contracting parties. However, in this provision, the determination of its performance may be left to a third person. The determination, however, will bind the contracting parties only after it has been made known to both of them.

Example Case.

Kianna sold his parcel of land to Dwight. It was agreed that Kianna, a real estate appraiser, would be the one to determine the reasonable price of the land. Kianna then appraises the land, fixes the price at P10M, and informs Mark about it. 

Question: Can Mark compel Dwight to pay the P10M purchase price? 

Answer: NO. The determination by Kianna of the price of the land, even if agreed to by Mark and Dwight will bind both contracting parties only after Kianna informs both Mark and Dwight of his determination. Since it was only Mark who was informed, and Dwight had no idea of the price fixed by Kianna, Dwight cannot be bound by the determination.

Whatever be the determination made by the third person shall bind both parties, except when it is evidently iniquitous, in which case the court shall decide whatever is fair.

Example Case. 

Garry, a tenant of an apartment owned by Maika was not able to give the lease for six (6) months due to the renovations made for the past six (6) months. It caused him disturbance that’s why he decided to leave the apartment for a while until the renovations had been completed. Now, he is being forced by Maika to pay for his rent for the past six (6) months. 

The question is, who will decide on the case? How do you think it will be decided? Justice or Equity?

Based on Article 1310, the Court will only be the one to decide on the basis of justice and equity. Justice means giving each what is due but equity is a process by which courts relax the sanctions of the law for humanitarian consideration.

In this article, the decedent's rights and responsibilities are typically transferable to his or her heirs and assigns ,thus, they are accountable for the contract. A person's inheritance and consequently his or her rights as an heir cannot be less than his or her legal rights, nor can he or she be required to pay more toward an inherited debt than the estate that was left to them.

Persons affected by a contract.

The general rule is that, a party’s rights and obligations derived from a contract are transmissible to the successors.

Example Case.

Maya and Fred entered into a contract. Fred is indebted to Maya in the amount of P78,000 for the laptop unit that he previously got from Maya. 

In this case, if Maya dies, Fred must pay the heirs of Maya. In other instances when Maya assigns her credit to the other person, like Kia. Then, Fred is liable to pay Kia the P78,000. 

Conversely, when Fred dies, and Lyka is the heir, then Lyka assumes the obligation of Fred to Maya. Lyka is bound by the contract entered into by Fred, his predecessor in interest in view of the privity of interest between him and Fred. However, Lyka is not liable beyond the value of the property he inherits from Fred, the decedent. 

However, there are exceptions to this general rule, there are cases when a contract is effective only between the parties when the rights and obligations arising from the contract are not transmissible. 

1. The rights and obligations arising from the contract may not be transmissible by their very nature. 

EXAMPLE:

Omar is a hairdresser who agreed to render his service in the salon of Karla for a year from January 13, 2010 to December 20, 2010. The customers specially requested for Omar because Omar is the only hairdresser that satisfies their needs for a hairdresser. Omar, however, died on February 10, 2010 in a car accident. 

Question: Can Nina, the only daughter of Omar, replace her father? 

Answer : No. In this case, the personal qualification of Omar was the reason why Karla hired his services. Nina cannot do what his father does and she doesn’t even have the skills and qualifications for the work. Therefore, because of the death of Omar, Nina will no longer be bound under the contract. The obligation of Omar will simply be extinguished. 

2. The rights and obligations arising from the contract may not be transmissible by stipulation of the parties. 

EXAMPLE:

Examine the above example. Assume Omar and Karla stipulated in their contract that the parties' rights and responsibilities would be nullified if one of them passed away before the obligation's maturity date. If this is the arrangement between the parties in their contract, Karla will no longer be able to collect from Nina after the passing of Omar, even if Nina received the P200,000 inheritance from his father Omar.

The rights and obligations arising from the contract may not be transmissible by provision of law.

In a partnership agreement, the deceased partner cannot be replaced in the partnership by his or her heirs. The legal relationship between partners in a partnership ends upon the death of a partner, according to the law. In other words, the deceased partner no longer qualifies as a partner and is unable to transfer or assign his or her rights and duties to heirs.

Cases when strangers or third persons are affected by a contract. 

On the other hand, as a general rule a third person has no rights and obligations under a contract to which he is a stranger. However, there are cases when third persons may be affected by a contract. 

1. In contracts containing a “stipulation pour autrui”

EXAMPLE:

Tina gave Roanne a loan of P50,000 that was due on March 20, 2018, plus 5% interest. The parties also agreed that Roanne would pay Tina the principal on the maturity date, but would give Denisse the P2,500 interest instead. This is so because Tina owes Denisse P2,500 as well. The parties informed Denisse of the arrangement. On January 30, 2018, Tina had a change of heart and urged Roanne to provide Denisse the full P52,500 upon the maturity of the obligation. On March 20, Denisse went to Tina and demanded the P2,500 that had been previously agreed upon. 

Question: Can Denisse collect from Roanne?

 Answer: No. In this instance, it is obvious that Roanne and Tina issued a stipulation pour autrui in favor of a third party named Denisse. However, communicating Denisse's acceptance of the benefits to Roanne (the obligor) prior to the benefit's revocation (withdrawal or cancellation) is a crucial need for Denisse's assumption of the advantages under the contract. In this instance, after the loan agreement between Roanne and Tina was finalized, Denisse was told of the clause in her favor. However, as of January 30, 2018, Tina had already canceled the benefit before Denisse could indicate her approval to Roanne. Therefore, Denisse loses her right to claim under the contract, and she can no longer collect the benefit on the maturity date of the obligation. 

2. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby.

EXAMPLE:

From Cat, Ded borrowed P4M that was due on June 20, 2015. Ded (the mortgagee) and Cat (the mortgagee) agreed to mortgage Ded's Vargas City land lot as collateral for the loan. The mortgage agreement was properly recorded in Vargas City's Registry of Property. If Ded is unable to pay on the due date, Cat will have the power to foreclose on the mortgage and sell the property at public auction to satisfy the debt. Ded traded B P5M for the same piece of land on May 12, 2015. Beb became the new owner of the land once the title was changed to his name.  On June 20, 2015, D failed to pay his P4M obligation to Cat.

 Question: Can Cat still foreclose on the mortgage considering that the owner of the land now is already Beb?

Answer : In this instance, Beb purchased the property from Ded while the mortgage in Cat's favor on the property was still in effect. Because the mortgage was recorded in the Registry of Property and is consequently annotated (recorded) in the title to the land that is currently in Beb's name, Beb cannot claim that he was unaware of the mortgage. As a result, even if Beb is not a party to the mortgage agreement between Ded and Cat, Beb is still subject to its terms. Even if Ded no longer owns the property that is the subject of the mortgage on the maturity date, Cat will still be able to sell the land at public auction. The appropriate line of action for Beb will be to bring a claim for damages against Ded. This is due to the fact that Beb's sole motivation for purchasing the land from Ded, even though it was financed, was a promise made by Ded to pay the debt to C when it came due. The mortgage contract will simply terminate upon repayment of the loan's principal obligation. However, it found out that Ded had broken his word to Beb. In order to pay off Ded's obligation, Cat can foreclose on the mortgage and sell the property at a public auction.  Beb now can go after Ded for the loss that he has suffered by reason of the foreclosure, and for consequential damages arising from the foreclosure.

3 . In contracts entered into by the debtor to defraud his creditor(s).

EXAMPLE:

Daniel loaned Effraim P8M, which was due on February 1st, 2019. A house and land owned by Effraim in Manila are worth P10 million. In order to avoid his duty to Daniel, Effraim sold his Manila home and lot to his friend Candy on January 6 for P12 million. Candy was aware of this sale. Following two weeks of non stop gambling at the Casino Filipino, Effraim lost the full P12M. As a result, on February 1, 2019, when Daniel sought payment of the P8M loan, Effraim was already bankrupt and had no further assets. Daniel then brought a claim to rescind or terminate the sale agreement between Candy and Effraim.  If the sale is canceled, and the ownership of the house and lot is reverted back to Candy, Daniel can then ask the court to attach the property and sell it at public auction for the payment of D’s obligation.

 Question: Given that he is not a party to the aforementioned contract of sale between Effraim and Candy, can Daniel bring a lawsuit to revoke or cancel it?

 Answer : Yes. In this instance, Effraim sold his land to Candy in order to cheat Daniel, i.e., avoid paying his debt to Daniel when it was due. According to Article 1313, Daniel, the victimized creditor, has the right to contest the legality of the sale contract (to which he is a stranger) by bringing a lawsuit to have it annulled. This will allow him to collect on his claims against the deceiving debtor. 

4. In contracts that have been breached as a result of a third party's incentive. In this instance, a third party successfully persuades a contracting party to violate his agreement with another by acting in bad faith. The other contracting party who suffered damage by the breach due to the inducement may sue the third party for damages.

EXAMPLE:

Tyra agreed to sell Coll his land for P10 million. The parties also agreed that Tyra would be responsible for paying Coll P800,000 in penalties and damages if Tyra failed to deliver the lot. Later, Tyra's close friend Gall visited him and persuaded him to sell the land to Nonoy instead, who is prepared to pay P12 million for it. After then, Tyra sold Nonoy the property. Tyra failed to deliver the land to Coll, resulting in P1.5M in losses for the company. Then, Coll brought a lawsuit for damages against Gall, the person who persuaded Tyra to break his contract. 

Question: Can a contract that Gall is not a party to hold him responsible for damages? If so, how much will Coll be entitled to get compensation from Gall?

 Answer : Yes, even though Gall is not a party to the sale agreement between Tyra and Coll, Coll may still file a lawsuit against Gall for damages. The theory of quasi-delict (Article 1162) serves as the foundation for Gall's duties in this situation. Gall's liability for damages, however, is limited to the amount Tyra should have been held liable for in breach of his contract. Coll can only sue Gall for P800,000 in damages because that is the agreed-upon fine for breaking the terms of the contract between Tyra and Coll. 

Third persons bound by contracts creating real rights

• The basic rule that a contract only binds the parties is not applicable to this item. Even if they were not parties to the contract, third parties who obtain the subject of a contract over which there is a genuine right, such as a real estate mortgage, are nonetheless obligated by it. A genuine right binds all parties and follows the property it is used to exercise wherever it goes. As a result, a contract that ties certain real estate to the repayment of certain debts and is recorded in accordance with the Property Registration Decree creates a real right that is caused less by the contract itself than by the Registry's publicity of the contract, which harms third parties' rights.

• Third parties that acted in good faith are protected by the terms of the Property Registration Decree if the genuine right is not registered. In our jurisdiction, it is common knowledge that individuals working with registered land have the legal authority to rely on the face of the Torrens Certificate of Title (TCT) and forego further investigation, unless the party in question actually knows the facts and circumstances that would compel a reasonably cautious man to do so.

Example

As security for his obligation, A grants C a mortgage on a portion of his land. The mortgage has been properly registered with the land registry. A later sold the property to B. In this instance, C purchased the property subject to the mortgage thereon.

Right of creditor to impugn contracts intended to defraud them.

• Another exception to the rule that contracts only have legal force between the parties is provided by Article 1313. Although he is not a party to the contract, the creditor has the right to contest any agreements made by his debtor with the intent to cheat him (Article 1177), such as agreements made with the knowledge of the creditor but not of the debtor. He may file a lawsuit to revoke the contract in order to stop fraud against him (see Art. 1381).

Right of creditor to enforce contracts of debtor with a third person.

• The law occasionally grants a creditor the right to take legal action to enforce a contract that his debtor has made with a third party. Thus:

(1) Those who provide supplies or labor for a task carried out by the contractor may sue the owner for the amount still owed by the latter to the contractor at the time the claim is filed. (Art. 1729.) 

(2) Since the sublessee is subsidiarily accountable to the lessor for any rent due from the lessee, the lessor may collect unpaid rent from the sublessee. (Art. 1652.)

Liability of third person responsible for breach of contract.

This is an American legal principle. Additionally, because a contractual interest is considered property under basic Philippine law standards, it is appropriate. 

According to Article 1314, a third party who is not a party to a contract may be held liable for damages for unjustified interference with the contract. Interference with contractual relations is a tort or unlawful act that presumes the contract being interfered with is legal and that the third party is aware of the existence of the contract or must have known about it after making a reasonable inquiry.

The word "induce" in this clause refers to circumstances in which someone coerces or threatens another into taking a particular action. Because the interference or inducement breaches a party's property rights to get the advantages that should follow from the contract, it is punishable by damages. Injunctions are the appropriate remedy to stop wrongful interference with contracts by strangers to such contracts when the legal remedy is insufficient and the harm caused is irreparable (Lagon v. Court of Appeals, 453 SCRA 616 [2005]). (Court of Appeals v. Yu, 217 SCRA 328 [1993]).

Example 

S sells his land to C instead after deciding to sell it to B, thanks to D's encouragement. In this situation, B has the right to sue D for damages. However, D cannot be held responsible for more damages than S for S's breach of their agreement. According to Daywalt v. Corporacion de LP. Agustinos Recoletos, 39 Phil. 587 (1919), holding D accountable for damages above those that can be recovered against S "would lead to a result at once grotesque and unjust." At worst, D would be jointly liable with S. 

Where would the obligation of D come from? The quasi-delict theory will be used to determine his responsibility. (also Art. 1157; also People's Bank & Trust Co. vs. Dahican Lumber Co., 20 SCRA 84 [1967]) Two or more people who are liable for a quasi-delict are jointly and severally liable for the consequences of their actions. (Art.2194.)

Classification of contracts according to perfection.

As follows: 

(1) Consensual contract or agreement that is completed by assent alone (such as a sale, lease, or agency) (Art. 1315. ); 

(2)A real contract, or one that is completed in addition to the foregoing by the delivery of the item covered by the contract (such as a deposit, pledge, or commodatum) (Article 1316; see also Articles 1934, 1963, and 2093); and 

(3)Solemn contracts or agreements that must follow specific legal requirements, with the legal requirements' defined form serving as a necessary component of the agreement (such as a real estate donation).

Stages in the life of a contract.

A contract goes through three (3) different steps. As follows: 

(1) Preparation or negotiation. — This covers all the actions that prospective parties perform from the moment they express interest in making a contract until the contract is complete. The parties have not yet reached a firm agreement at this time. They are still going through the first stages of creating a legal contract. Both parties have the right to end a negotiation or withdraw an offer;

(2) Perfection or birth.  —  This occurs when the parties have reached a clear understanding or agreement on the conditions, i.e., the object and reason for the (consensual) contract (Art. 1319), i.e., when the basic components of the contract are in accord; and 

(3) Consummation or termination.  —  When all of the parties have completed or carried out their individual tasks or commitments under the contract, the agreement is said to have been fully completed or executed and is hence extinguished.

A contract's existence and binding force cannot be contested after it is established that the parties thereto have completed or fully performed the deal. (Court of Appeals v. Weldon Construction Corp., 154 SCRA 618 [1987])

How to make contracts better.

(1) Consensual contracts.— In general, a contract's subject matter and reason for being are determined by the parties' simple agreement. They are binding in whatever format they may have been signed in as long as all conditions necessary for their validity are met (Articles 1315, 1319). (Art. 1356.)

As to perfection, almost all contracts are mutually agreed upon. With the exception of laws or agreements to the contrary, they come into existence upon their perfection by mutual consent even if the parties have not put their signatures on the written form or given the subject matter or the consideration. In the absence of delivery, perfection does not transfer title or create a real right, but it does result in an obligation that is binding on both parties (see Vargas Plow Factory, Inc. vs. Central Bank, 27 SCRA 84 [1969]). (Arts. 1305, 1308.)

Example 

Today, Y and Z sign a contract committing Y to selling his car to Z for P500,000.

Even though the car has not yet been delivered and the price has not been paid, the contract is considered to be complete. With the delivery of the car on the part of Y and the payment of P500,000 on the part of Z, each party gains the right to demand from the other that he fulfill his commitments.

(2) Real contracts. — The so-called genuine contracts, such as a pledge, mutuum (simple loan), or commodatum, are the exceptions, which are perfected not just by assent but also by the delivery, actual or constructive, of the object of the obligation (Art. 1316). Because they envision a party returning anything they have acquired from another party or something equal, these contracts have restitution as their intended outcome.

Example

X borrowed P5,000 from Y. X pledged to Y that he would give Y his diamond ring as security for the loan. 

The contract of commitment is not yet complete until the ring is delivered to Y. If X later decides not to pledge the ring, Y may demand payment of the debt, even if it has a grace period. However, as there isn't a formal contract of pledge yet, Y cannot demand that X surrender the ring as security (Art. 1198[2]). A pledge is only considered to exist when there is a voluntary agreement. What exists is a personal right, the ability for Y to take legal action to require that the promise be composed. (See Article 2022).

Similar to the previous point, a perfected loan contract binds the parties and may give rise to a claim for damages, but it is not the real loan contract, which (per Art. 1934) calls for the delivery of the contract's object to be completed and creates obligations only on the borrower's part. Court of Appeals v. BPI Investment Corp377 SCRA 117 (2002).

(3) Solemn contracts. — When the law stipulates that a contract must take a specific form in order to be legal (Art. 1356), this unique form is required for the deal's perfection, making the specified form a necessary condition of the contract.

Effect of perfection of the contracts.

In accordance with Batchelder v. Central Bank of the Philippines, 44 SCRA 45 (1972); Villongco Realty Co. v. Bormacheco, Inc., 65 SCRA 352 (1975), after the parties have agreed on a specific subject and legal consideration, they are obligated to: 

(1) to the fulfillment of the expressly stated requirements, but also, 

(2) to all repercussions that might, given their nature, be consistent with good faith, custom, and the law. (Art. 1315.)

Generally speaking, there is no need to sign a contract where there is a meeting of the minds. Consent may be either expressed or inferred (Art. 1319, paragraph 1), unless the law specifically specifies a certain way or form of conveying such consent. A party to such a contract may be anyone who approved or authorized it, and they will both be equally accountable.

Unauthorized contracts are unenforceable.

• Unauthorized contracts are not enforceable In general, a person is not bound by a contract made by another party that he is unaware of or has not authorized. Only the party who enters into the contract can be bound by it because a contract involves the free will of the parties. In accordance with Article 1317, a contract made in the name of another by a person without power is void (see Art. 1311, par.) Unless confirmed by him prior to being canceled by the other contracting party, it cannot be used against the former (see Art. 1403[1]).

• Contrary to popular belief, a contract for a third party's benefit is not the same thing as an unlawful contract. (2) of Article 1311

Unauthorized contracts can be cured only by ratification.

• Such a contract cannot be made effective by the passage of time alone. The flaw is such that it cannot be fixed unless the person in whose name the contract was made into or his lawfully authorized agent, and not by any other person not so empowered, ratifies the contract later (Article 1405). (Tipton v. Velasco, 6 Phil. 67 [1906]) According to Art. 1392, the ratification must be explicit and unequivocal in order to prevent any ambiguity or uncertainty. Its effects go back to the time the contract was signed (Asia Integrated Corp. vs. Alikpala, 72SCRA 285 [1976]).

• Insofar as the kids are concerned, it has been decided that a deed of conveyance signed by the mother, who does not appear to have been designated a judicial guardian of her minor children with the authority to sell their property, is unenforceable. Esquivel v. Frias, 67 SCRA 487 (1975).

When a person bound by the contract of another.

There are two conditions that must be met for one to be bound by another person's contract:

(1) The person entering into the contract must have the express or implied consent of the person in whose name he contracts or possess legal authority to act on that person's behalf (such as that of a guardian or administrator); and

(2) He must act within his power. In cases where the party with whom the agent contracted was not adequately informed of the scope of the powers conferred by the principal, the agent is personally liable to the party with whom he contracted; nonetheless, a contract entered into by an agent in excess of his authority is not enforceable against the principal (see Art. 1897).

Example

D (principal) gave A (agent) the go-ahead to sell his vehicle for P200,000 in cash. For P200,000 payable in ten monthly installments, A sold the vehicle to C.

Because A acted outside of his authority in this situation, C cannot compel D to accept the monthly payments and deliver the car without D's consent. A is directly responsible for C's losses.