SP: Review:

What a contract needs: Object, Cause, Contract

For you to have a contract the parties should agree on the object and
the cause.
Few meetings back I told you that if you have a contract the minimum
agreement for the parties should be on the object and the cause. The
moment the parties agree on the object and the cause, you will have a
valid contract, as a rule. Cos a contract has to be CONSENSUAL. Of
course the parties can agree on other terms, which we learned on the
AUTONOMY of contracts. The parties can stipulate anything in a
contract. The only limitation is the general limitation imposed by law. It
must not be contrary to law, morals, and public policy (e.g. waiver of
an action based on future fraud, sale of a property to a foreigner) If the
parties do not agree on other terms, then the law will provide for the
default rules. Even if they agree only on the object and the cause, the
terms will be fine. Say, payment, when should it be made?
Simultaneously. Should it be full payment? Yes. As a rule, payment is
full, indivisible, it should be complete.
Now, the rule in the principle of the obligatory force of a contract:
Obligations arising from contracts have the force of law between the
contracting parties. Why is it obligatory? Because they agreed. So the
moment the parties agree on the terms, they had to abide by the
terms.
Principle of mutuality of contracts: It means that one party cannot
dictate an essential term of the contract. We learned that in the case of
GF Equity. In GF Equity, the team owner was given the right to
terminate the contract if the team owner, based on its discretion,
assessed the performance of the coach as below par. The court said
that violated the mutuality of contracts because one party will
determine when there would be a contract. Of course I explained last
time, its more a fault of contract drafting because if it were crafted as
the team owner shall have the right to terminate the contract, with or
w/o cause, by mere written notice to the coach that would have been
valid even in the perspective of a purely potestative condition because
in that case, that would be a resolutory condition. And as weve
learned a potestative resolutory condition dependent on the sole will of
the debtor is valid. Reason: in that case theres an obligation, it does
not negate the juridical tie. What is determined only is when will the
obligation cease. Clear?
The rule of mutuality, we also learned in the two cases, the bad cases.
One is the case of PNB. In PNY, you see there the court saying that one
party cannot decide an essential term of a loan contract. What is that
essential term: fixing the interest rate of the contract. Its an important

term of a loan contract. One party should not be left with unbridled
discretion to determine the interest rate. So, in this case, what was the
problem with the clause? There is a wide discretion on the part of the
bank. There is no control. How could you have controlled it? The parties
could have had a formula for interest adjustment. In which case, the
adjustment of the rates would not be discretionary on the part of the
bank only. Another is when the borrower has the option to prepay
should he reject the adjustment rate. Its an illusory opt-out because
generally, borrowers are not in the position to pre-pay especially in the
early part of your loan contract.
We also discussed the autonomy of contracts. When the parties agree
to enter any stipulation. We saw that in the case of Tiu v. Platinum
plans. In Tiu there is a non-compete clause. A non-compete clause will
be valid when there is a limit with respect to time, place, and
trade/industry. So, it depends on the reasonableness of the noncompete clause. Also an example is when there is a limitation on the
use or ownership of property. In certain cases it may be valid, in some
not. Say for example, in one case, a perpetual restriction on the
disposition of the property, is VOID. Because there is undue burden on
ownership. How to validate it? Put a time-frame.
In mutuality of contracts, always look at the context. It may be valid in
certain context, and some are not.
Next principle is: Principle of Relativity. (This is nothing Einstein) This
means the contracts binds only the parties and their assigns.
Say you have a contract of sale; seller sells property( subdivision lot) to
buyer in exchange for the price. And you have the terms such as
Restrictions of use: you can only use it as residence, there is a building
height limitation, you cannot subdivide it, you cannot have multiple
buildings in one lot etc. which are all valid restrictions. There are also
certain mandates like you have to build within a certain period, if you
dont, you shall be penalized. So lets assume you have those terms
here. What does Relativity mean? It means that this contract will bind
both or operate against both parties. So lets say payment of the price,
the seller could enforce the contract with respect to the payment of the
price against the buyer. Thats the general rule. So lets say, the buyer
has a son. Buyer defaulted. Can seller go after the son? Aanswer: No!
Because only the contracting parties, the buyer and the seller, are
bound by the contract. But lets say, buyer died. Lets assume theres
still balance yet to be paid. And theres an inheritance. Should the son
be liable? Answer: Yes! But only to the extent of the amount inherited.
Because the estate, the properties of the deceased, should be used

first to pay the seller. General Rule: Only the contracting parties are
bound by the contract.
Now, we have that case of Napocor v. Province of Quezon
NPC had a contract, ECA-Energy Conversion Agreement. It is a powergeneration contract. What is this contract all about?_____ would build
and operate a power plant under the Build, Operate, Transfer
C
C NPC entered into an with Mirant on November 9, 1991. The ECA
provided for a build-operate-transfer agreement between Mirant and
the NPC.
C

Mirant will build and finance a coal-fired thermal power plant on

the lots owned by the NPC in Pagbilao, Quezon for the purpose of
converting fuel into electricity, and thereafter, operate and maintain
the power plant for a period of 25 years.

The NPC, in turn, will supply the necessary fuel to be converted

by Mirant into electric power, take the power generated, and use it to
supply the electric power needs of the country.

At the end of the 25-year term, Mirant will transfer the power
plant to the NPC without compensation. Under the contract there is a
provision that NPC will pay all the taxes, specifically property taxes. So
there was an issue with the local government as it collected real
property tax. So theres an assessment by the LGU. The NPC being the
one obliged to pay contested such assessment. So the issue in this
case was that: Was the NPC the correct party to do this action? For that
purpose NPC showed the ECA, specifically the provision obliging NPC to
pay the taxes. The Supreme Court said that this contract binds only the
parties, NPC and Mirant. As far as the LGU is concerned, Mirant is the
owner of the power plant in the meantime, hence, the tax payer and
proper party to file the action. The said provision could not bind the
LGU because this provision only binds NPC and Mirant. The
undertaking by NPC to pay the property taxes stipulated in the contract
between NPC and Mirant could not force the LGU to recognize NPC as
the tax payer. As far as the LGU is concerned the LGU can go after
Mirant.

C Now, there are certain exceptions to the principle of relativity of

contracts.
C 1. Contracts creating real rights that bind third persons.

C There are certain contracts that create real rights that bind third
persons if that contract complies with specific legal requirements. Lets
say you have a Lender and a Borrower. L extended a loan to B. B has
the obligation to pay the principal plus interest. To Ensure payment of
the loan, there was a real estate mortgage (REM). B mortgaged
property as security for payment of the loan obligation. So now theres
a loan contract and a mortgage contract. Now following the rule on
relativity of contrcts, only the lender and borrower would be bound by
this contract. This contract would not work in favor of or against a third
party. However under the law, if this REM is registered with the
relevant registration deeds, the mortgage will bind even third parties.
C So lets say B sold the property to X. Will the sale be valid? Yes! But the
property in the hands of X will still be subject to the mortgage because
the mortgage is registered. The mortgage, if registered, will follow the
property and will bind anyone who will possess the property.
C Other example: Pledge. Same principle. If the pledge is in a private
document(not notarized), it will only bind the parties. However, the
moment you have a notarized pledge agreement, that will bind third
parties dealing with the pledged property. Clear? So thats the first
exception, contracts binding third parties after following certain
formalities of law.
C By the way, there are two kinds of notarization: Acknowledgement and
Jurat. If you have a contract you use acknowledgement. If you have an
affidavit you use jurat.
C Now, Second Exception: Protection to creditors from contracts intended
to defraud them. A creditor may have a right in relation to the contract
defrauding him. Remember when we discussed resolution as against
recission, I will remind you.---For example on Day 1, creditor extended
a 10M loan to debtor. The loan will be payable with interest on Day 3.
But on Day 2, debtor has already conveyed his only asset to X in
exchange for a small or nominal sum which is not commensurate to
the value of the property. Lets assume that this is a fraudulent scheme
for the debtor to have 0 assets on Day 3. What will be the creditors
recourse? Creditor has no other recourse but to rescind the contract.
Remember that recission under Art. 1383 is a subsidiary remedy as
opposed to resolution under Art. 1191, which is a retaliatory remedy.
Under the law, by virtue of accion pauliana, the creditor in this
example can assail the said transaction, despite being a stranger to
the contract, up to the extent necessary to obtain payment of the
obligation.

C So why is this an exception? The creditor here is a third party but has
the right to rescind the contract to the extent necessary to obtain
payment.
C Next exception: Tortious interference. A third party inducing a
contracting party to violate his undertaking in the contract, the
inducing party may be held liable. We call that inducing party a
tortious interferer.
C We saw this, first, in Gilchrist v. Cuddy. In this cae, Cuddy, owner of the
film Zigomar or whatever that is (he chose to call it Batman vs
Superman), had a contract with Gilchrist wherein the latter would rent
the film for 6 weeks for a price of 150pesos/week. So here comes
another party, X, who induced Cuddy by offering a higher price, say
450pesos/week. In this case, X blew the contract. X knew that there
was an existing contract between Cuddy and Gilchrist and yet X made
an offer and he induced cuddy to breach such contract. Obviously,
Cuddy will be liable based on breach of contract. But how about X? X is
a stranger to the contract. Will he be liable? Yes! As a Tortious
interferer(basis is a tort liability). In this case, whats the decision of
the Supreme Court? Was malice part of the equation? There are 2
schools of thought: (1) Malice is required for tortious interference. (2)
Malice is not required for tortious interference. The SC said, NO, malice
is NOT required! SC adopted the 2nd school of thought. So it does not
matter if X here is malicious. Then the only issue here is, if there is no
malice, then there may possible limitations as to the entitlement to
damages. But clearly, there was tortious interference here because tort
does not require malice. (Most people misinterpret the decision of this
case that there was no tortious interference. THERE WAS.)
C Next case, So Ping Bun v. CA
Tek Hua Trading Co. entered into a lease contract with DCCSI in which
the former will use the warehouse of the latter to store textiles for a
period of 4 years. Under the contract, if at the end of the term the
lessee (Tek Hua) stays in the leased warehouse, the lease will be on a
monthly basis. Tek Hua Trading Co. was dissolved and one of its
founding members, So Pek Giok died. However, the other founding
members, headed by Manuel Tiong, formed Tek Hua Enterprises Co.
After So Pek Gioks death, his grandson, So Ping Bun occupied the
warehouse for the textiles manufactured by his company Trendsetter
Marketing. Aggrieved, Manuel Tiong and the rest of Tek Hua
Enterprises, wrote a letter to So Ping Bun, demanding the latter to
vacate the warehouse for 14 days since there is a subsisting contract

of lease between Tek Hua and DCCSI. However, So Ping Bun asked
DCCSI to execute a lease agreement between his company
(Trendsetter) and DCCSI. The latter acceded to the request of So Ping
Bun, thus the complaint of Tek Hua Enterprises. In this case, the SC laid
down the requirements for tortious interference. Remember them: (1)
Existence of a valid contract; (2) The third party has knowledge of the
existing contract and; (3) Unjustified interference by the third party.
But wait, going back to the case of Gilchrist. If you interfere in a
contract, with a purpose to advance your economic/financial interest,
that would not make you liable for damages. Which is totally wrong!
Because that, for me, is always the reason why you enter in to any
contract. Thats why if you look at the development of the cases, in
Gilchrist, it is clearly stated that malice is not an element of tortious
interference. As long as you are aware of an existing contract and you
induced another party to violate his contract, you will be liable, unless
you find a valid justification. In Gilchrist, advancement of ones
financial interest is not a justification. But you see that in the case of
So Ping Bun, the supreme court focused on the absence of malice by
considering financial gain as a justification/excuse and did not award
damages.
In LAGON v. CA
Lagon, through an intestate court, bought two parcels of land from the
estate of Bain Tonina Sepi. A few months after the sale, Lapuz filed a
complaint for damages against Lagon because Lapuz allegedly had 4
lease contracts with Bai Tonina Sepi over the lands bought by Lagon.
Under the lease contracts between Sepi and Lapuz, the latter may put
up commercial buildings to be leased to new tenants, however when
the contract ended, the buildings had yet to be completed. Hence, as
Lapuz claimed, the lease contracts were renewed. According to Lapuz,
the administrator of the property advised him to stop collecting rentals
from the tenants of the building because Lagon already owned the
property. Lapuz accused Lagon of inducing the heirs of Sepi to sell the
property to the latter, thus violating the renewed contracts of lease
between Sepi and Lapuz. On the other hand, Lagon argued that he
verified the existence of the lease contracts to Atty. Fajardo who
showed him 4 copies unsigned lease renewal contracts. Lagons
personal investigation and inquiry also did not reveal any claim or
encumbrance on the subject lands, and so he purchased them.
The SC held that: Only the first element of tortious interference was
present. Lagon was not aware of the existence of the lease contract
between Lapuz and Sepi despite his exercise of due diligence (verifying
the existence of a lease contract).

The exercise of due diligence is the proof/justification of the third

partys lack of knowledge of an existing contract. The third party
cannot just say that he has no knowledge of the contract; he has to
prove that he exercised the necessary diligence which led him to
believe that there are no contracts concerning the prestation.
There should be knowledge of the existence of a valid contract. In this
case there was no tortious interference because there was lack of
knowledge. This is important, how do you prove lack of knowledge?
The third party must show that he exercised due diligence. If one party
is not aware of the existence of the contract after exercising due
diligence, that party will not be a tortious interferer. Thats the ruling
here. However, the court went beyond whats needed to make that
decision. It could just have said that there was no awareness of the
contract that could have been interfered with. But the SC proceeded to
the next element and said: in fact there was a justification because it
was in furtherance of an economic interest, therefore there is a legal
justification. Like I said before, for me, that shouldnt be the
justification because if thats the case then we will never have a
tortious interferer because somebody get some money out of
something always so you will not have a tortious interference at all.
So what will be a legal justification? You will find that in the next case,
TAYAG v. LACSON
In Tayag, there was a beneficiary of a land reform program. There was
a landowner (Lacsons) and they have tenants (Tiamson et. al). Under
the Comprehensive Agrarian Reform Law, the tenants will be getting
the lands. However, the tenants should keep the land within a certain
period. Then here comes Tayag, he promised to pay P50 per square
meter in exchange for a conveyance of the land. Tayag wanted to get
the rights of the tenants even before the tenants could get the land.
There was a directive by the landowner (Lacsons), that they will cause
the disqualification of the tenants to benefit under the CARP if the
tenants will proceed with the contract with Tayag. It was like a threat
from a third party. Is this tortious interference?
What was the ruling of the SC? There is no tortious interference on
the part of the Lacsons( 3rd party) because it merely follows the CARP
since the contract between the tenants and Tayag violates the said law.
The landowner was saying, if you proceed with this, it will be illegal.
In effect, the third party merely prevents another from consummating
an unlawful contract. So thats a justification that is not an
advancement of financial interest.
Another example would be when X a film owner threatens Y the
theater owner: proceed with the showing of that film and I will sue

you! Can X be held liable for tortious interference? Answer is NO!

Because thats an exercise of a right by X. This will be a justification.
By the way the spelling of tortious is T-O-R-T-I-O-U-S. Its misspelled by
the supreme court.
Question: If X induces Y, is it necessary for Y to accept to make X liable
for tortious interference?
Answer: Whats important is that Y negates his obligations to the
contract. If its just inducement, it would be fine.
Fourth Exception would be a stipulation in favor of a third
party.
What are the requisites of a stipulation in favor of a third party?
C

1.The stipulation in favor of third person should only be a part, not the
whole, of the contract;

2. The contracting parties must have clearly and deliberately conferred

a favor in upon a third person, not a mere incidental benefit or interest;

3. The favorable stipulations should not be conditioned or

compensated by any kind of obligation whatsoever;

4. The third person must have communicated his acceptance to the

obligor before its revocation;

5. Neither of the contracting parties bear the legal representation or

authorization of the third party.
Limitless v. Quilala:

C
C There was a contract of lease between lessor (Church) and lessee
(Limitless) for advertising purposes in the lessors property in
Guadalupe (San Carlos Seminary and Our Lady of Guadalupe Church)
in exchange of rentals. Astro, another advertising company, applied to
the lessor (Church) to lease a part of its property. The lessor referred
the application to lessee (Limitless) and the lessee executed a
Sublease Agreement with Astro (sublessee), which contains a
stipulation that the payments of Astro will go directly to the lessor
(Church) to augment the rentals received by the Church. Lessor
(Church) signed the Sublease Agreement as a witness. Lessee
(Limitless) defaulted rental payments due to the lessor (Church).

Question was how should you characterize this transaction whereby

the church will get all the payment due for the lease? This is an
example of a stipulation in favor of a third party.
The catholic church got a benefit which was only an incident(just part
of the contract), deliberately conferred to them. Of course the parties
are not representatives of the catholic church, otherwise the church
would not be a third party in this contract. The catholic church also
willingly accepted the benefits by getting the money. The catholic
church did not refuse. SO all the requirements were present.
The issue was, this may be a donation. And in donation, there must be
a certain form. It must be in writing. The acceptance must also be in
writing. However, there was no such thing here. There was no
compliance with the formalities of a donation. The supreme court said
no. Theres no need for compliance to this formality. There must only
be compliance to the requisites of stipulation in favor of a third party.
Limitless claims that the rentals paid by Astro to the Church should be
credited to the obligation of Limitless by virtue of the Sublease
Agreement. Lessor (Church) argued that the stipulation directing the
payments of Astro to the Church is a stipulation pour autrui in its favor.
The counterargument of lessee (Limitless) was, if the said provision is
in the nature of a stipulation pour autrui, then the Church should have
accepted it in writing because the benefit is actually a donation and by
law the acceptance of a donation must be in writing.
Remember our discussion on the payment by a third party without
any intention of being reimbursed? Its the same thing. Its a
donation but the payment would still be valid notwithstanding the
non-compliance to the requirements of the formalities of donation.
As long as you comply with the requisites of a stipulation in favor
of third parties, theres no need to comply with the formalities
required in donation for it to be valid.