Business Law

General Previsions of Contract Classification of Contracts

Meaning of Contract a) According to formation or

perfection
- A contract is meeting of minds
between two persons whereby one 1. Consensual contract
binds himself, with respect to the
other, to give something or to render - those perfected by mere consent such
as sale.
some service.

3 Stages in the making of a Contract 2. Real Contract

- those which cannot be perfected

1. Conception or Generation (preparation
or negotiation) without delivery such as commodatum,
depositum.
- This is the first stage where the parties
begin their initial negotiation and 3. Formal
bargaining for the formation of the
contract ending at the moment of - those which cannot be perfected
agreement of the parties. without compliance with the formalities
- It is also called the Preparatory Stage. required by law such as donation of real
property. They are also called solemn
2. Perfection or Birth contracts because they have to comply
- This the second stage where the with the formalities or solemnities
contract is said to have been born. required by law, otherwise, they are
Here, the parties had a meeting of the void.
minds as to the object, cause or
consideration and other terms and
conditions of the contract. It has b) According to cause
passed the preparatory stage.
- This is the birth of contract. 1. Onerous
- Those contracts providing for
3. Consummation or Fulfillment exchange of valuable considerations
- This is the last stage which consists in such as sale where the seller delivers
the performance or fulfillment by the the object of the contract and the
parties of their obligations under the buyer pays the purchase price
terms of the perfected contract. thereafter.
- Consummation is accomplishment,
death or termination of the contract.
The parties ceased to be contractually
related to one another.
2. Gratuitous
2. Innominate
- those contracts where one of the -lack individuality; note regulated
parties gives something or renders by special provisions of law.
service to the other without receiving
any equivalent or compensation such as e) According to obligatory force
pure donation and commodatum. This 1. Valid
is also called lucrative contract because 2. Rescissible
it provides gain to the other party for 3. Voidable
free. 4. Unenforceable
3. Remunerative 5. Void or inexistent

- those contracts where one party gives

something or renders service to
another in consideration of a previous Basic Legal Principles Governing Contracts
or past deeds of the other. (Characteristics of Contracts)
c) According to the party or parties 1. Freedom to stipulate ( Liberty of
obligated/liability. Contract):
-The parties are free to create or
1. Unilateral establish stipulations, clauses, terms
-those where only one of the and conditions as they may deem
parties is bound to fulfill an convenient provided these are not
obligation such as: (a) contrary to law, morals, good customs,
commodatum ; and (b) a public order, or public policy.
promissory note.
2. Obligatory force of contracts;
2. Bilateral -obligations arising from contracts have
- those where both parties have the force of law between the
reciprocally bound themselves to contracting parties and should be
fulfill their obligations in favor of complied with in good faith.
the other such as sale. These are
also known as synalagmatic. 3. Mutuality of contracts; (this is based on
essential equality of the parties)
-A contract binds both contracting
d) According to their names or norms parties and its validity or the
regulating them. compliance there with cannot be left to
the will of only one party. (Art.1308)
1. Nominate
-have their own individuality;
regulated by special provisions of
law.
4. Relativity of Contracts: Mutuality of Contracts (1308)
-Contracts take effect only between the
parties, their assigns and heirs except  The contract must bind both the
where the rights and obligations arising contracting parties, its validity or
from the contracts are not transmissible compliance cannot be left to the will of one
by their nature, by stipulation or by of the contracting parties (1308).
provision of law (Art.1311) in which
case the assigns or heir are not affected  It is a fundamental rule that no
anymore. party can renounce or violate the
law of the contract without the
5. Perfection by mere consent of consent of the other.
consensual contracts:
-Consensual contracts are perfected by Purpose
mere consent. (Art.1315)  The Ultimate Purpose is to render void
a contract containing condition which
Classes of Elements of Contracts makes its fulfillment dependent solely
1. Essential Elements or those without upon the uncontrolled will of one of the
which no contract can validly exist contracting parties.
regardless of the intentions of the
parties. They are also know as  Thus if the fulfillment of the suspensive
requisites of a contract (they may be condition of an obligation depends
Common & Special). upon the sole of the debtor, the
2. Natural Elements or those that are obligations and the conditions are void.
presumed to exist in in certain
contracts unless the contrary is  Also, after a party has entered into a
expressly stipulated by the parties, like contract, he will not be permitted to
warranty against eviction, or warranty renounce it unilaterally.
against hidden defects in sale.
3. Accidental Elements or those that refer  Note: with respect to the heir, he shall
to the particular stipulations, clauses, not be liable beyond the value of the
terms, or conditions established by the property he received from decedent
parties in the contract like conditions, (Art.1311).
period, interest, penalty, etc., and
therefore, they exist only when they are Exception to the Principle of Relativity:
expressly provided by the parties.
1. When the obligation arising from
contract are not transmissible:
Note: According to some authorities, do
a. By their nature (like a contract
ut des is no longer an innominate
involving personal
contract. It has already been given a
qualifications, as painting,
name of its own, i.e., Barter or
singing);
Exchange.
 b. By stipulation (in accordance  Third person who come into
with the principle of freedom to possession of the object of the
contract); or contract over which there is a real
c. By provision of law (as in right, are bound thereby even if
agency, partnership, and they were not parties to the
commodatum, when death contract.
extinguishes the legal
relationship (Art.1178).  A real right is binding against the
whole world and attaches to the
Cases when 3rd Person / Stranger may be
property over which it is exercised
affected by a Contract
wherever it goes.
1. In contracts containing a stipulation in
favor of a third person (Stipulation Pour
Article 1313 (Right of Defrauded Creditors)
Autrui) (Art.1311);
2. Where a third person induces another  This article represent another instance
to violate his contract (Art.1314) when an outsider can in a sense interfere
3. In contract creating real rights with another’s contract.
(Art.1312)  The creditor has to the right to impugn
4. In contract entered into to defraud contracts intended to defraud them.
creditors (Art.1313).
Article 1314 (Effect of Unwarranted
Requisites of Stipulation Pour Atrui Interference with Contractual Relations)

1. There must be stipulation in favor of a  Any third person who induces another to
third person. violate his contract without valid excuse is
2. The Stipulation must be a part, not the liable for damages to the other contracting
whole of a contract. party.
3. The contracting parties must have  It presupposes that the contract
clearly and deliberately conferred a interfered with is valid and the third
favor upon a 3rd person, not a mere person has knowledge of the existence
incidental benefit or interest, of the contract.
4. The 3rd person must have  The one who induces is “Solidarily
communicated his acceptance to the liable” because of Quasi Delict.
obligor before its revocation.
5. Neither the contracting parties bears
the legal representation or
Who is Tort Interference?
authorization of the third party.
 Art. 1314 expresses the Principle of Tort
Article 1312 (Contracts Creating Real
Interference. This is an exception to the
Rights)
principle of relativity of contracts.
 This is an exception to the rule that a
contract binds only the parties.
o The tort recognized in that provision is 4. The said conformity must be real
known as interference with contractual and not simulated or fictitious.
relations.
o The interference is penalized because it  Requisites of Consent;
violates the property rights of a party in 1. Must be manifested by
contract to reap the benefits that concurrence of the offer and
should results therefrom. acceptance (Arts. 1319-1326)
2. Parties must possess the necessary
Elements of Tort Interference capacity (Arts. 1327-1329)
3. Must be intelligent, free,
1. Existence of valid contract spontaneous and real (Arts.1330-
- The existence of valid contract must be 1346)
established.
Rules on Offer

2. Knowledge on the part of the 3rd 1. The offer must be certain (Art.1319)
person of the existence of contract because there could be no meeting of
- The 2nd element requires that there be the minds if it is vague or not definite. It
knowledge on the part of the must be “definite, complete and
interferer that the contract exist; and intentional”.
2. An offer becomes ineffective upon the
3. Interference of the 3rd person is death, civil interdiction, insanity or
without legal justification. insolvency of either party before
acceptance is conveyed. (Art.1323)
Elements of Consent
3. When the offerer has allowed the
1. Legal capacity of the contracting offeree a certain period to accept, the
parties. offer may be withdrawn at anytime
2. Manifestation of the conformity of before acceptance by communicating
the contracting parties. There such withdrawal, except when the
must be overt acts showing the option is founded upon a consideration
concurrence of the offer and the as something paid or promised.
acceptance with respect to the (Art.1324)
object and cause of the contract.
This is known as the meeting of
Nature of Advertisements
the minds of the contracting
parties. a.) Business advertisements of things for
3. The parties conformity to the sale are not definite offers, but mere
object, cause, the terms and invitations to make an offer unless it
conditions of the contract must be appears otherwise. (Art.1325)
intelligent, spontaneous and free
from all vices of contracts.
 b.) Advertisements for bidders are merely itself given to the offeree to accept an
invitations to make proposal and the offer within a certain period.
advertiser is not bound to accept the
highest bidder, unless the contrary 2. Option Period is the period given
appears. (Art.1326) within which the offeree must accept
the offer.
Art. 1323- When Offer Becomes Ineffective

 Under this article, even if the offer is 3. Option Money is the money paid or
not withdrawn, its acceptance will promised to be paid in consideration
not produce a meeting of the minds for the option. It is not to be confused
in case offers is ineffective because with earnest money which is actually a
of Death, Civil interdiction, Insanity, partial payment of the purchase price
Insolvency of “either party” before and is considered as proof of the
conveyance of the acceptance of the perfection of the contract.
offer.
 Both parties, the offeree and offeror Option Money and Earnest Money; Defined:
must be living and capacitated.
 Option Money is the consideration paid in
Withdrawal of Offer Where Period an option contract. If the principal contract
Stipulated For Acceptance (Art.1324) is not consummated, the option money is
 General Rule: not refunded.
- When the offerer gives the offeree a  Earnest money is the payment made to the
certain period within which to accept seller by the buyer to show his good faith. It
the offer, the General Rule is that the will constitute as part of the purchase price,
offer may be withdrawn as a matter of if the sale is finally consummated. It is also a
right at any time before acceptance. proof of the perfection of the contract
(Art.1482). If the sale is not concluded, the
Exception: When the option is founded earnest money shall be returned to the
upon consideration, as something paid or would-be-buyer unless there is a contrary
promised. agreement.

Option Contract; Option Period; Option

Money

1. Option contract is one giving a person

for consideration a certain period
within which to accept the offer of the
offeror. It is separate and distinct from
the contract which will be perfected
upon the acceptance of the offer.
Option may also refer to the privilege