CoE 413 – Contracts, Laws and Ethics Law on Contracts

Module 3:
Law on Contracts

Article 1156 to 1430 of the New Civil Code – law of obligations and contracts

Obligation – Latin word “obligare” meaning to bind.

- a juridical necessity to give, to do or not to do.

Obligation to give:
“A” entered into contract with “B” whereby the former bound himself to
deliver to “B” a specific car on June 5, 2005.

Obligation to do:
“A” and “B” entered into an agreement whereby the former obliged
himself to fix the car of “B”.

Obligation not to do:

“A” and “B” signed a contract whereby the former bound himself with
“B” not to construct a fence on a land belonging to the latter for the
period of (5) years.

4 (four) Essential Requisites of Obligation:

1. A passive subject –the person who is bound or has the duty to fulfill the obligation,
called the debtor or obligor.

2. An active subject – the person who can demand the fulfillment of the object or
presentation, called the creditor or obligee.

3. An object or presentation – this is the subject matter of the obligation. It is either the
giving of a thing, or the doing, or not the doing of something.

4. A juridical tie, legal tie or the vinculum – it is that which binds the parties to the
obligation. It is otherwise known as the efficient cause.

Example:
“X” promised to design and create a computerized appliance
controller system for “Y” for one million pesos by virtue of
contract signed by them.

Passive subject : “X”

Active subject : “Y”
Object or presentation : Creation of Computerized appliance controller system
Juridical or legal tie : Contract

If it was agreed that after the creation:

Passive subject : “Y”
Active subject : “X”

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Sources of Obligations:
a. Derived from Law – determined in the Civil Code or in special laws are demandable and
shall be regulated by the precepts of the law.
Example:
Obligation of the spouses to mutually support each other
Obligation to pay taxes pursuant to the National Internal Revenue Code

b. Derived from Contracts – the force of law between the contracting parties and should be
complied with in good faith. The contract must be valid and enforceable and must not be
contrary to law, morals, good customs, public order or public policy.
Example:
1. “X” agrees to sell his car to “Y” and the latter agrees to buy the
car of “X” voluntarily.
- The agreement has the force of law. Thus, neither may not violate the
terms and conditions of the contract for it is required by the law that the
same must be complied with in good faith.

2. “A” agrees with “B” to steal the car of “C” for in consideration of
P2,000.00.

- This contract is “void ab initio” for it is contrary to law.

c. Derived from quasi-contracts – lacks the element of consent, and no formal contract
between the parties. However, the law considers them to have entered into an
agreement purposely to prevent injustice.

2 (two) kinds of quasi-contracts

(a) negotiorum gestio – it is the voluntary management of the property or
affairs of another without the knowledge or consent of the latter.
Example:
“A” went abroad with his family without leaving
anybody to look after his house. While abroad, a strong
earthquake occurred resulting in the destruction of “A’s”
house. Because of the magnanimity of “B”, “A’s” neighbor,
the house was repaired with some expenses. In this case,
“A” is obliged to reimburse the expenses of “B”.

(b) solution indebiti - it is a juridical relation which takes place when

something is received when there is no right to demand it, and it was
unduly delivered through mistake, giving rise to the obligation to
return it.
Example:
“A” owes “B” the sum of P2,000.00. “A” paid “B” the
sum of P3,000.00 not knowing that the former incurred only
a debt amounting to P2,000.00. In this example, “B” is
duty-bound to return the excess of P1,000.00.

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d. Derived from delicts or crimes – person committing a criminal offense is obliged to pay
for the injury thus inflicted.
Crimes or delicts – acts or omissions punished by law (felony).

Example:
“A” boloed “B” resulting in the latter’s death. If “A’ is found
guilty thereof, he is liable to indemnify the heirs of the
deceased.

e. Derived from Quasi-delicts – an act or omission by one person which causes damage to
another giving rise to the obligation to pay for the damage done, there being fault or
negligence, and there is no pre-existing contractual relation between the parties.
Example:
In a pedestrian, one who was hit by a speeding jeepney due to
negligence

Persons liable for damages arising from quasi-delicts:

a. Father or mother
b. Guardians
c. Owners and managers of an establishment or enterprise
d. Employers
e. The state
f. Teachers or heads of establishments of arts and trades

Nature and Effect of Obligation:

• Obligation to be diligent – “Every person obliged to give something is also obliged to

take care of it with the proper diligence of a good father of the family, unless the law
or the stipulation of the parties requires another standard of care.”
Example:
“A” binds himself to deliver to “B” a specific race horse on
certain day. Before the arrival of the agreed upon, “A” has the
accessory obligation to take care of the horse such as feeding it
regularly until he actually delivers the horse on the specified
date. If the horse dies as a result of “A’s” failure to exercise
proper diligence he shall be liable for damages.

• Obligation to give a determinate thing – delivering all its accessions ad accessories

even though they may not have been mentioned.
Accession – pertains to the fruits of a thing or additions to or improvements
upon a thing such as trees planted on a land, and rents on buildings.
Accessories – pertains to things joined to or included with the principal thing
for the latter’s embellishment such as frame of the picture, keys of the
car, etc.

• Obligation to do – if a person obliged to do something fails to do it, the same shall be

executed at his cost.
Example:

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“A” binds himself to construct a building for “B”. However, it

was constructed in accordance with the agreed plans an
specification. In this case, it may be ordered undone.
• Obligation not to do – when the obligation consists in not doing, and the obligor does
what has been forbidden him, it shall be undone at his expense.
Example:
“A” and “B” agreed that the latter will not construct an
adjoining fence between their lands for a certain period. IF “B”
violates the agreement, the same shall be demolished at his
expense.

• Obligation to deliver – the obligor may bind himself to deliver either a specific
(determinate) or generic (indeterminate) thing.

Rights to the fruits:

• Natural fruits
• Industrial fruits
• Civil Fruits
Example:

“A” binds himself to deliver the land to “B” on February 5,

2006”. Before this date, “B” has no rights over the fruits of the
land. After Feb. 5, 2006 he has perfect rights over the same.
However, if “A” actually delivered the land on Feb 25, 2006, “B”
could only acquire real right (ownership) over the land on such
date.

Primary classifications of Obligations:

a. Pure and conditional obligations
Pure obligation – an obligation which is not subject to any condition or burden.
Example:
“A” promised to give “B” the sum of P1,000.00
Meaning:
The obligation to pay is demandable at once because there is no
specific date mentioned for its performance. Neither is it subject to any
condition imposed for its fulfillment.

Conditional obligation – an obligation whose performance is subject to any condition.

Example #1:
“A” binds himself to give “B” a car as soon as “A’s” mother
arrives from Canada.
Meaning:
The obligation is demandable only upon the fulfillment of the
conditions the arrival of the mother.
Example #2:
I will allow you to use my car until you pass the Bar
Examinations.
Meaning:
The obligation is immediately demandable but it will be extinguished
upon the happening of the condition, that is, the passing of the Bar
examinations.
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b. Obligations with a period – an obligation whose performance is subject to the expiration

of said period or term.
Example:
1. I will give you a gift on your birthday.
2. I will give you a 200 peso allowance until you finish your course.
3. Payment of taxes.

c. Alternative and facultative obligations

Alternative obligation – various presentations are due, but the performance of one of
them is sufficient determined by the choice which rightfully belongs to the
debtor (obligor) unless it has been granted expressly to the creditor (oblige)

Example:
“A” binds himself to deliver to “B” either a gold ring or a gold
watch.
Meaning:
“A” should deliver one of them and it is required that the performance must
be complete, that is, he cannot deliver the stone of the ring or bracelet of the
watch.

Facultative obligation – an obligation where one presentation is due but the obligor
(debtor) may substitute another.

d. Joint and solidary obligations

e. Divisible and indivisible obligations
f. Obligations with a penal clause

Secondary classification of obligations:

a. Unilateral and bilateral obligations
b. Real and personal obligations
c. Determinate and generic obligations
d. Civil and natural obligations
e. Legal, conventional and penal obligations

MEANING OF CONTRACT:
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.

- it is a 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 presentation to give, to do or not to do.

Difference between contract and obligation:

- Contract is one of the sources of obligation, while the latter is the legal relation itself.
- Contract is the very agreement of the parties; while the obligation is the remedy which the
law affords for its enforcement.

Example of Contract to give something:

“A” offers to sell to “B” his 1995 Toyota Corolla car for P50,000.00.
“B” accepts the offer for such amount.
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Since there is a contract, “A” must deliver the car to “B”, but the latter is obliged to
pay the amount agreed upon”.

Example of Contract to render some service:

“A” binds himself to construct the house of “B” for P100,000.00.

Elements of a Contract:
a. Essential elements – are requisites of a contract.
1. Consent of the contracting parties – consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute
the contract.

Incapacitated to give consent:

a. Unemancipated minors – who have not reached the age of majority (21
years)
b. Insane or demented person – denotes the degree of mental illness.
c. Deaf, dumb and cannot write – but a deaf, mute who knows how to
write could intelligently give consent.
Vises of Consent:
a. Error or mistake
b. Violence or force
c. Intimidation threat or duress (pressure)
d. Undue influence
e. Fraud or deceit

Essential Characteristics of Consent:

a. It is intelligent
b. It is free and voluntary
c. It is conscious or spontaneous
2. Certain object which is the subject matter of the contract.
Requisites of Things as objects of contract:
1. It must not be outside the commerce of men – like plazas, streets,
rivers.
2. It must not be contrary to law, morals, good customs, public order
or public policy – like opium or marijuana.
3. It must no be impossible either physically or legally.
4. It must be determinate as its kind
3. Cause or consideration of the obligation which is established

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b. Natural elements – are those that are presumed to exist in certain contracts unless the
contrary is expressly stipulated by the parties like warranty against hidden defects in a
contract of sale.
c. Accidental elements – are the particular clauses, terms or conditions established by the
parties in their contract like interests and penalties.

Stages of a Contract:
a. Preparation, conception, or generation– the parties are still in the negotiation
preliminaries.
Example:
“A” offers to sell his house at Forbes Park to “B” for P500,000.00.
Before accepting the offer, “B” requested “A” to accompany him to
the location. Thereafter “B” agreed to pay such amount.

b. Perfection or birth – the parties have already come to a definite agreement for the
meeting of the minds between them exists as to the subject matter and the cause of the
contract.
Example:
If “A” finally agreed to sell such house for P500,000.00, the
contract is therefore perfected for they finally meet on the subject
matter and a definite consideration.

c. Consummation or termination – the parties have already performed their respective

obligations which led to termination of contract.
Example:
If “A” delivers to “B” the necessary documents or transfer such as the
title following the signing of the agreement and “B” pays the amount.

Instances of Unlawful Contracts:

1. Contract whereby it provides payment of usurious interest is void.
2. Parties cannot enter into contract that will deprive a court of the jurisdiction conferred it
by law, for jurisdiction cannot be the subject-matter of the contract.
3. A waiver signed by a student-scholar whereby he relinquishes his right to transfer to
another school unless the refunds to the University the equivalent of his scholarship
grants, is void.
4. A contract whereby services will be rendered without remuneration is contrary to law
and morality.
5. A promise of marriage based on illicit relation such as an agreement to become a
common-law wife, is void.

Essential Characteristics of Contracts:

1. Obligatory force of contracts – once the contract is perfected it shall have obligatory
force upon contracting parties.

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2. Autonomy of contracts – contracting parties are free to enter into a contract and
establish such terms and conditions provided they are not contrary to law, morals, good
customs, public order, or public policy.
3. Mutuality of contracts – the contract must bind both contracting parties and necessarily
there must be mutual consent.
4. Relativity of contracts – the contract takes effect only between the parties, their assigns
and heirs.

Classification of Contracts:
1. According to their designation
a. Nominate – those that can be identified by their individuality and are regulated
by special provisions of law, such as a contract of agency, lease, sale.
b. Innominate – those which lack individuality are regulated by the stipulation of
parties. They are not regulated by special provision of law.
2. According to their profession
a. Consensual – perfected by mere consent of the parties without need of other
formalities, such as contracts of sale and partnership.
b. Real – those which require not only the consent of the parties, but also the
delivery of the object of the contract which is necessary such as deposit,
commodatum, or pledge.

3. According to their form

a. Common or informal – does not require any formality such as loan or lease.
b. Special or formal – prescribes some formalities such as donation or chattel
mortgage. They should be made in a public document.

4. According to the nature of the obligation they produce

a. Unilateral – an obligation for only one of the parties such as in the case of
gratuitous deposit.
b. Bilateral – reciprocal obligations such as in the case of a contract of sale.

5. According to their cause or consideration

a. Onerous – benefit is derived through something which is given or promised, such
as in a contract of sale.
b. Gratuitous – derives benefit without giving any equivalent or compensation, such
as simple donation.
6. According to risk involved
a. Commutative – what is given by one party is considered an equivalent given by
the other, such as in a contract of lease.
b. Aleatory – the cause or consideration is unequal and depend upon the happening
of an uncertain event such as in an insurance contract where the business is
either risk of loss or risk of gain.

7. According to relations with other contracts

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a. Principal – those that exist independently from other contracts such as contracts
of lease and sale.
b. Accessory – those which cannot exist without another prior contract, such as
mortgage and pledge.

Characteristics of Contract-Writing:
1. It must be worded in plain language – too technical words must be avoided
2. It must be concise – it must be brief but comprehensive to pave the way for certainty
and clarity.
3. It must include all the legal requirements – inclusion of all the requirements required by
law.

Components of a Contract Construction:

A. The proper agreement

1. The prologue or opening clause.
Eg. “This Agreement Witnesseth” or “This Contract”

2. The contracting parties

Eg. “This CONTRACT made in Manila, Philippines, this 5th day of June, 2006,
by and between BETA PUBLICATIONS, a corporation duly organized under the
laws of the Philippines and with business address at #2 Magallanes St,
Intramuros, Manila, herein after referred to as OWNER and ASAP Semicon,
also a corporation organized under the laws of the Philippines and with
business address at 414 Ayala Ave., Makati, Metro Manila, hereinafter
referred to as CONTRACTOR.”

3. The subject matter – description, scope and location of the work to be performed.
Eg. “That the CONTRACTOR shall construct in a work-manlike manner in
accordance with the agreed plans and specifications a condominium building
upon a lot located at Block 24, Ayala Ave., Makati, Metro Manila,
Philippines, which specifications are hereto attached forming part of this
contract; and shall provide all labor, materials, and necessary tools and
equipment to complete the same.”

4. The term of the contract

Eg. “That the CONTRACTOR shall start the construction on December 30, 2006,
finish the same on or before December 30, 2006.

5. The contract price.

Eg. “That the OWNER binds himself to pay the CONTRACTOR the total sum of
ONE MILLION PESOS (P1,000,000.00), Philippine currency.”

6. The attestation clause – a clause mandating the parties and their witnesses to sign the
agreement under seal before a notary public or any person authorized by law to
authenticate documents.

B. General Conditions

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1. Scope of Contract – the nature and scope of the work must be defined.
2. Terms of the Contract – consists of the tie of commencement and completion of work.
3. Plans and specifications
4. Workmanship
5. Materials
6. Conduct of work
7. Contractual changes
8. Payments
9. Extra-work
10. Contractor’s risks and obligations
11. Contract security
12. Contractor’s liability for injuries.
13. Disputes and arbitration
14. Definition of terms
15. Rights of way
16. Inspection of the work
17. Engineer’s authority

ACTIVITY: CONSTRUCT A CONTRACT

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