Art. 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 service.

CONTRACT is a juridical convention manifested in legal form, by virtue of w/c, one or more persons bind
themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do.

ELEMENTS (Essential)
Consent
Subject matter
Cause/consideration

NATURAL Elements those found in certain contracts and presumed to exist, unless the contrary has been
stipulated.
ACCIDENTAL Elements various particular stipulations that may be agreed upon by the contracting parties in a
contract.

CLASSIFICATION OF CONTRACTS

A. According to Formation
a. Consensual perfected by consent
b. Real - perfected by delivery
c. Formal/solemn those where special formalities are essential before contract may be perfected.

B. According to Cause/Equivalence of Value of Prestations

a. Onerous interchange of equivalent valuable considerations
b. Gratuitous/ lucrative free, one party receives no equivalent prestation
c. Remunerative one where one prestation is given for a benefit or service that had been rendered
previously.

C. According to Importance/ Dependence of One upon Another

a. Principal contract stands alone by itself
b. Accessory depends for its existence upon another contract. (eg. Mortgage; principal is Loan)
c. Preparatory contract is not the end itself but as means through w/c future transactions or contracts may be
made.

D. Parties Delegated
a. Unilateral one party has obligation
b. Bilateral both parties are obliged to give or render reciprocal prestations

E. Name/Designation
a. Nominate contract has a name
b. Innominate contract has no name

F. Risk of Fulfillment
a. Commutative parties contemplated a real fulfillment; equivalent value are given (lease)
b. Aleatory fulfillment is dependent upon chance; values vary.

G. Time of Performance
a. Executed one contemplated at time the contract is entered into, that is, obligations are complied with at
this time (eg. Contract of sale)
b. Executory prestations are to be complied with at some future time (eg. Property not yet delivered and price
not yet given)

H. Subject Matter
a. Contract involving things (eg. Sale)
b. Contract involving Rights/credits (usufruct, assignment of credits)
c. Contract involving services (carriage)

I. Obligation Imposed and regarded by Law

a. Ordinary
b. Institutional
J. Evidence Required for its Proof
a. Parol/oral
b. Required written proof

K. No. of Persons actually and physically entering into Contracts

a. Ordinary (2)
b. Auto-contracts one represents 2 opposite parties but in different capacities

L. #of Persons participating in Drafting a Contract

a. Ordinary e.g sale
b. Contract of Adhesion buyer or person interested is insured, signifies his consent by signing the contract.

M. Nature
a. Personal
b. Impersonal

STAGES OF CONTRACT

1. Preparation (conception) negotiations between parties

2. Perfection (birth) agreement; elements of subject matter and valid cause accepted by mutual consent.
3. Consummation (termination) terms of contract are perfected.

Basic Principles/Characteristics of Contract

1. Freedom to stipulate
2. Obligatory force and compliance in good faith
3. Perfection by mere consent
4. Both parties are mutually bound
5. Relativity

Contract: juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in
favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.

1305 says that a contract is the meeting of minds between two persons whereby one binds himself with respect to the
other to give some thing or to render some service. It does not mean that the parties are only limited to only two
persons. The appropriate term is to parties because there can be as many persons in a contract as they are
interested in the contract. May a person enter into a contract with himself? Yes, but in different capacities. (contracts
of adhesion) He can be a vendor and a vendee at the same time only that in one contract he might merely be an
agent and the other the buyer. So different capacities in one person. Now, may any person just enter into a contract?
Is that right absolute? No, because there are certain limitations. Such as: husbands and wives cannot enter into
contracts involving properties, except if there is complete separation of property. Other limitations: in agency, if the
agent is authorized to borrow money, can the agent also be the lender? Or if he is authorized to lend, may he borrow
money? But if he is authorized to lend, can he use his own money?

o The existence of a contract is not determined by the number of persons who intervene in it, but by the
number of declarations of will. (Contracts of adhesion)

What are contracts of adhesion? Example of which would be an insurance contract. Now, we learned before
that in cases of contracts of adhesion, in case of doubt, the construction is construed strictly against that person who
prepared that contract, and liberally in favor of the person who does nothing but merely affixes his signature to the
already prepared contract. Because in that case, the parties do not stand on equal footing. The debtor, especially if
he borrows money from the bank, cannot stipulate his term. He cannot say that this is onerous on my part. He cannot
do that. The only option is to either to sign or not to sign. So in those cases in case of doubt, the interpretation would
always be in favor of the person who merely affixed his signature thereto and who did not participate in the
preparation of the contract.
 Now, what are the characteristics of a contract? Contracts have three characteristics: we have the obligatory
force of contracts. Now, what is meant by obligatory force of contracts? Just like autonomy of will, what has been
stipulated in the contract is the law between the parties to the contract. And one cannot be heard later on to say that
the agreement is disadvantageous on his part. The presumption is that at the time of the negotiation, prior to the
perfection of the contract, the parties freely stipulates the conditions, terms and stipulations that may have agreed
which arrived at and belong to the perfection of the contract.

The second is mutuality of contract. The validity and performance cannot be left to the performance of one
of the contracting parties and leaving the other free from complying with what is stipulated in the contract.

The third is the principle of relativity of contracts. That it only binds the parties to the contract and their
successors in interest. One of the exceptions there is: if there is a stipulation in favor of a third person.

Now, contracts have 3 elements. We have the essential elements. Consent, subject matter, and the cause.
The cause is the why of the contract, the reason why parties entered into the contract. Then we have the natural
elements, which are those elements that even if not agreed upon by the parties form part of the contract. An example
of which would be the warranty against hidden defects. The third element would be the accidental elements. The
accidental elements are the ones that must be agreed upon by the parties. That if it is not stipulated there, the
presumption is that it is not part of the agreement. An example would be that if the parties agree that in case of
breach, their liability would be solidary. Because, under the law, solidary liability is not presumed.

To arrive at a consummated or perfected contract, there are three stages: when the parties bargain or
negotiate, you call that preparation or generation. Ano ang kasama sa negotiation? The price. Then you have
perfection, the birth and the perfection of the contract. And when you pay the price and he delivers what you have
bought, then that is consummation or death of the contract. Because there is now fulfillment or performance of the
terms agreed upon in the contract.

Now, how are contracts classified? First is according to the degree of dependence, a contract may be
preparatory in nature such as a contract of agency because this would lead to future transactions. Why is it called
preparatory? It is called such in as much as it looks forward to future transactions. Now what are those future
transactions that will arise from a contract of agency? It would depend to the powers granted. If Y is authorized to
lend money, what would be the future transaction that would arise? A contract of loan. This is what you call as future
transactions. So, the contract of loan is the principal contract.

A contract might also be considered accessory because its existence will depend on the principal contract.
So if the loan is guaranteed by a mortgage, then this is the accessory contract. So the contract of loan is the principal
contract, the contract of agency the prepratory contract and the contract of mortgage the accessory contract.

So, how are contracts perfected? It might be perfected by mere consent and they are called as consensual,
such as sale. Now, if a contract of sale does not have any document is that a valid contract? Yes, because it is
perfected by mere consent. Is marriage a consensual contract? Yes. You don't have to have the contract or certificate
of marriage. Hindi man yan kailangan. But there are certain contracts that will require delivery aside from consent, an
example of which would be antichresis. Remember antichresis? You have to deliver the property in order that
antichresis shall be perfected. Because there can be no antichresis if the debtor does not deliver the property.

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

1306: Autonomy of contract = to autonomy of will; it is the obligatory force between the parties.

1306 Autonomy of Contracts:

But there are certain limitations. As I said, it must not be contrary to law, likewise even if the parties would
say "this is valid between us ha, the promissory note of a gambling debt". So, if X and A played Tong-its and then
their bet is 50K, natalo si A at umabot ang utang nya ng 300,000. So, sabi ni A, i don't have the money now, but i will
furnish you a promissory note, this PN if suppose A would not pay what is stated on it, X will not have a cause of
action against A. X cannot sue A by reason of the PN, because this is not a contractual debt. The cause of the
issuance is an illegal cause, it is from gambling. (except those allowed). So in this case, A in fact can recover what he
had lost from X kung nagbigay sya ng pera, of course he cannot recover under the circumstances of the promissory
note, because as I've said, the PN cannot be the basis for X to file a case against A because the source is from a
polluted source from one not allowed by law. (illegal gambling)

But suppose X would negotiate the PN to Y, who received the PN in good faith and paid value for it. (like,
sige discounted ko yan, 20K). Now, Y would demand from A the value of the PN. A cannot invoke as a defense that
the PN is a void PN as against a 3rd person who acted in good faith and paid the PN with consideration. Between Y
and A, Y can still collect the amount stated in the PN. he is not affected by the agreement between X and A. (because
3rd persons are always protected.)

Now, parties are free to stipulate. Yes, but the juridical relations as well as the rights and obligations that
would arise by reason of that contract that you have entered into is not governed by the stipulation of the parties, but
rather by law. Such as what? Suppose A executed a deed of Sale with right to repurchase in favor of C. The deed of
Sale with right to repurchase contains that A, for and in consideration of the sum of 20K hereby transfers, sells,
conveys, disposes, alienates his parcel of land covered by TCT 123 located in Ecoland D.C. consisting of 500 sq. m.
And if A will be unable to repurchase the property within the period of 1 year, then B's right over the property shall be
absolute and unconditional.

Now, looking at it, would you believe that that is a valid deed of sale taking into account that the land is
located in Ecoland, and only for 20K for 500sq. m.? Would the parties now be bound by that agreement in case there
is a doubt? No, because while it might be true that the stipulation is the law between the parties, however, the rights
and obligations which arise by reason of this contract is not governed by the stipulations. In fact, by looking at it, it
would seem that the contract entered into is one of mortgage, only couched differently by the parties. For one, the
consideration is very very low. Second, there is a period to repurchase within one year. So those are the
considerations that must be taken together when the parties entered into the agreement. There would be no question
if the consideration was 20million, that would really be a deed of sale with right to repurchase because the
consideration given is really equivalent to the value of the property based on its location. So in that case, the SC said,
in case of doubt, it is one of equitable mortgage, not of sale with right to repurchase.

So, that is an example of the principle that while it may be true that parties are bound by
their stipulations and it shall constitute the law between them, however, the juridical relations as
well as the rights and obligations that will arise by reason of the contract is not governed by the
stipulation but rather by law.

- not absolute because there are limitations, such as husband and wives cannot enter into a contract subject
to certain exceptions, an agent authorized to lend cannot borrow.

Galongco Vs PCIB

Facts: William Golangco Construction Corporation (WGCC) and the Philippine Commercial International Bank
(PCIB) entered into a contract for the construction of the extension of PCIB Tower II (denominated as PCIB Tower
II, Extension Project [project]) on October 20, 1989. The project included, among others, the application of a
granitite wash-out finish on the exterior walls of the building.
PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of the completed work
by WGCC in a letter dated June 1, 1992. To answer for any defect arising within a period of one year, WGCC
submitted a guarantee bond dated July 1, 1992 issued by Malayan Insurance Company, Inc. in compliance with the
construction contract.
The controversy arose when portions of the granitite wash-out finish of the exterior of the building began peeling
off and falling from the walls in 1993. WGCC made minor repairs after PCIB requested it to rectify the construction
defects. In 1994, PCIB entered into another contract with Brains and Brawn Construction and Development
Corporation to re-do the entire granitite wash-out finish after WGCC manifested that it was "not in a position to do
the new finishing work," though it was willing to share part of the cost. PCIB incurred expenses amounting
to P11,665,000 for the repair work.
PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for the
reimbursement of its expenses for the repairs made by another contractor. It complained of WGCCs alleged non-
compliance with their contractual terms on materials and workmanship. WGCC interposed a counterclaim
for P5,777,157.84 for material cost adjustment.
The CIAC declared WGCC liable for the construction defects in the project. WGCC filed a petition for review with
the Court of Appeals (CA) which dismissed it for lack of merit. Its motion for reconsideration was similarly denied.
In this petition for review on certiorari, WGCC raises this main question of law: whether or not petitioner WGCC is
liable for defects in the granitite wash-out finish that occurred after the lapse of the one-year defects liability period
provided in Art. XI of the construction contract.

Held: The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Obligations arising from contracts have the force of law between the parties and should be complied with in good
faith. In characterizing the contract as having the force of law between the parties, the law stresses the obligatory
nature of a binding and valid agreement.
The provision in the construction contract providing for a defects liability period was not shown as contrary to law,
morals, good customs, pubic order or public policy. By the nature of the obligation in such contract, the provision
limiting liability for defects and fixing specific guaranty periods was not only fair and equitable; it was also
necessary. Without such limitation, the contractor would be expected to make a perpetual guarantee on all
materials and workmanship.
The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the Philippines for
private and government construction contracts. The contract did not specify a different period for defects in the
granitite wash-out finish; hence, any defect therein should have been brought to WGCCs attention within the one-
year defects liability period in the contract.
We cannot countenance an interpretation that undermines a contractual stipulation freely and validly agreed upon.
The courts will not relieve a party from the effects of an unwise or unfavorable contract freely entered into.
[T]he inclusion in a written contract for a piece of work [,] such as the one in question, of a provision defining a
warranty period against defects, is not uncommon. This kind of a stipulation is of particular importance to the
contractor, for as a general rule, after the lapse of the period agreed upon therein, he may no longer be held
accountable for whatever defects, deficiencies or imperfections that may be discovered in the work executed by
him.

Interpretation of contracts
To challenge the guarantee period provided in Article XI of the contract, PCIB calls our attention to Article 62.2
which provides:
62.2 Unfulfilled Obligations
Notwithstanding the issue of the Defects Liability Certificate[,] the Contractor and the Owner shall remain liable for
the fulfillment of any obligation[,] incurred under the provisions of the Contract prior to the issue of the Defects
Liability Certificate[,] which remains unperformed at the time such Defects Liability Certificate is issued[. And] for
the purpose of determining the nature and extent of any such obligation, the Contract shall be deemed to remain in
force between the parties of the Contract. (emphasis ours)
The defects in the granitite wash-out finish were not the "obligation" contemplated in Article 62.2. It was not an
obligation that remained unperformed or unfulfilled at the time the defects liability certificate was issued. The
alleged defects occurred more than a year from the final acceptance by PCIB.
An examination of Article 1719 of the Civil Code is enlightening:
Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work,
unless:
(1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or
(2) The employer expressly reserves his rights against the contractor by reason of the defect.
The lower courts conjectured that the peeling off of the granitite wash-out finish was probably due to "defective
materials and workmanship." This they characterized as hidden or latent defects. We, however, do not agree with
the conclusion that the alleged defects were hidden.

First, PCIBs team of experts (who were specifically employed to detect such defects early on) supervised WGCCs
workmanship.
Second, WGCC regularly submitted progress reports and photographs.
Third, WGCC worked under fair and transparent circumstances. PCIB had access to the site and it exercised
reasonable supervision over WGCCs work.
Fourth, PCIB issued several "punch lists" for WGCCs compliance before the issuance of PCIBs final certificate of
acceptance.
Fifth, PCIB supplied the materials for the granitite wash-out finish. And
finally, PCIBs team of experts gave their concurrence to the turnover of the project.

The purpose of the defects liability period was precisely to give PCIB additional, albeit limited, opportunity to oblige
WGCC to make good any defect, hidden or otherwise, discovered within one year.
Contrary to the CAs conclusion, the first sentence of the third paragraph of Article XI on guarantee previously
quoted did not operate as a blanket exception to the one-year guarantee period under the first paragraph. Neither
did it modify, extend, nullify or supersede the categorical terms of the defects liability period.
Under the circumstances, there were no hidden defects for which WGCC could be held liable. Neither was there any
other defect for which PCIB made any express reservation of its rights against WGCC. Indeed, the contract should
not be interpreted to favor the one who caused the confusion, if any. The contract was prepared by TCGI for PCIB.
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 41152
is ANNULED and SET ASIDE.