CONTRACTS

General Provisions
ART. 1305 - A contract is a
meeting of the minds between
two persons whereby one
binds himself, with respect to
the other, to give something or
render some service.
 Note:
This legal definition of a contract
clearly emphasizes the fact that to
establish a contract, two parties must
have a meeting of the minds as to the
object, consideration and the terms
and conditions which must not be
contrary to law, public morals, public
order, public policy and good customs.
 DEFINITION OF CONTRACT
A contract involves a meeting of minds
between two persons whereby one binds
himself, with respect to the other, to give
something or to render some service.
Contracts, in general, are perfected by mere
consent, which is manifested by the meeting
of the offer and the acceptance upon the
thing and the cause which are to constitute
the contract. The offer must be certain and
the acceptance absolute. (Adelfa Properties,
Inc. v. Court of Appeals, G.R. No. 111238,
January 25, 1995)
 Distinguish an ordinary contract:

• From a contract of marriage

• From an obligation (contract is the cause,
obligation is the effect)
• From an imperfect promise (this is only the start
of the formation of a contract)
• From a pact (a pact is an incidental part of a
contract which can be separated from the
principal agreement)
• From a stipulation (a stipulation is an essential
and dispositive part of a contract which cannot
be separated from the principal agreement)
 CONTRACTS

A contract, once perfected,

has the force of law between
the parties with which they
are bound to comply in good
faith and from which neither
one may renege without the
consent of the other.
 Autonomy of contracts
The autonomy of contracts allows the parties to
establish such stipulations, clauses, terms and
conditions as they may deem appropriate
provided only that they are not contrary to law,
morals, good customs, public order or public
policy. The standard norm in the performance of
their respective covenants in the contract, as
well as in the exercise of their rights thereunder,
is expressed in the cardinal principle that the
parties in that juridical relation must act with
justice, honesty and good faith. (Bricktown
Development Corp. v. Amor Tierra Development
Corporation, G. R. No. 112182, December 12,
1994)
 Note:
Under Art. 1157, Contract is one of the
sources of an obligation contract
being the agreement between the
parties and the obligation, the legal
relation.
Three essential requisites of a valid contract:
(Art. 1318*)

1) Consent -
a) must be free & voluntary consent
b) must be intelligent consent
c) must be given by a capacitated person
d) the parties intend to be bound by the
contract.

(*Art. 1318. There is no contract unless the following requisites

concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.)
2) Object or Subject Matter - to be
valid, the object must be:
a) specific and certain;
b) within the commerce of man;
c) must not be legally or physically
impossible;
d) must not be contrary to law, public
policy, public order, public morals and
good customs.
3) Cause or Consideration -
a) must be just and equitable;
b) must not be legally or physically
impossible;
c) must not be contrary to law, public
policy, public order, public morals and
good customs.
 Elements of a Contract:

1. Natural Elements - those elements

inherent or derived from the nature of
the contract and presumed by law,
which the contracting parties may or
may not choose to adopt in the
contract. An example is the warranty
against eviction in a contract of sale.
2. Essential Elements – the essential elements
are those without which there can be no
contract. These elements are, in turn,
subdivided into common, special and
extraordinary or peculiar. E.g. of common:
consent, object certain and cause; special
elements are those present only in certain
contracts such as the delivery in real
contracts or form in solemn ones; the
extraordinary elements are those which are
peculiar to specific contracts, such as price
in a contract of sale
3. Accidental Elements - Accidental
elements are those expressly
provided for in the contract by the
parties, such as the terms,
conditions and modes imposed by
the parties to protect their
respective interests.
 Stages of Contract:
There are three basic stages
through which every contract must
pass and these are:
1. Generation or Conception - This
stage involves all the preliminary
steps necessary to make the
contracting parties receptive to a
meeting of the minds;
2. Perfection or Birth - this
signifies the birth of the contract
once the contracting parties
have a meeting of the minds as
to the object, consideration and
the terms and conditions of the
contract. There is now a
perfected contract.
3. Consummation - this is the
final stage when upon the
fulfillment or performance of
the contract to the satisfaction
of the parties, the contract is
terminated.
 Note:
STAGES/PHASES AND KINDS OF
CONTRACTS - Among the sources of an
obligation is a contract which is a meeting of
minds between 2 persons whereby one binds
himself, with respect to the other, to have
something or to render some service. A
contract undergoes various stages that
include its negotiation or preparation, its
perfection and, finally its consummation.
Preparation and Negotiation cover
the period from the time the
prospective contracting parties
indicate interest in the contract to
the time the contract is concluded
(perfected).
The perfection of the contract
takes place upon the concurrence
of the essential elements thereof. A
contract which is consensual as to
perfection is so established upon a
mere meeting of minds, i.e., the
concurrence of offer and
acceptance, on the object and on
the cause thereof.
 Note:
A contract which requires, in addition to the
above, the delivery of the object of the agreement,
as in a pledge of commodatum, is commonly
referred to as a real contract. In a solemn contract,
compliance with certain formalities prescribed by
law, such as in a donation of real property, is
essential in order to make the act valid, the
prescribed form being thereby an essential
element thereof. The stage of consummation
begins when the parties perform their respective
undertaking under the contract culminating in the
extinguishment thereof. (Ang v. Court of Appeals,
G.R. No. 109125, December 2, 1994)
 STAGES/PHASES OF A
CONTRACT -
The phases that a contract goes through may
be summarized as follows: (a) preparation,
conception or generation, which is the period
of negotiation and bargaining, ending at the
moment of agreement of the parties; (b)
perfection or birth of the contract, which is
the moment when the parties come to agree
on the terms of the contract; and (c)
consummation or death, which is the
fulfillment or performance of the terms
agreed upon in the contract.
In Ang Yu Asuncion (238 SCRA 602, 611
[1994], per Justice Vitug:
“Xxx A contract undergoes various stages
that include its negotiation or preparation, its
perfection and, finally, its consummation.
Negotiation covers the period from the time
the prospective contracting parties indicate
interest in the contract to the time the
contract takes place upon the concurrence of
the essential elements thereof. A contract
which is consensual as to perfection is so
established upon a mere meeting of minds,
i.e., the concurrence of offer and acceptance,
on the object and on the cause thereof. X x
x”
 Con’t. …

X x x Until the contract is perfected, it cannot,

as an independent source of obligation,
serve as a binding juridical relation. In sales,
particularly, the contract is perfected when a
person, called the seller, obligates himself,
for a price certain, to deliver and to transfer
ownership of a thing or right to another
called the buyer, over which the latter agrees.
(Limketkai Sons Milling, Inc. v. Court of
Appeals, G.R. No. 118509, December 1, 1995)
 Classification or Classes of
Contracts:
A. As To Dependence With Other Contracts:
1. Preparatory - that which must necessarily
be created first as a preliminary requisite
towards the establishment of other
subsequent contracts, such as a contract of
Partnership or Agency. This means that
before a Partnership can enter into a contract
in its own name with third parties, the
contract of Partnership must first be legally
established to give it the legal personality to
enter into contracts with third parties.
2. Principal - that which can stand
on its own completely
independent from other contracts.
An example of a principal contract
is a contract of Sale or Lease.
3. Accessory - that which is
only auxiliary to or in support
of an existing principal
contract. Examples: pledge,
mortgage
 Some Accessory Contracts:

1) Pledge - when personal property is

given by the debtor to the creditor as
security for a loan. The creditor has the
right to keep the thing until the debt is
paid, after which the thing pledged is
returned to the debtor or pledgor.
2) Real Estate Mortgage - when real property
is offered by the debtor or mortgagor to the
creditor or mortgagee as a security for the
loan. The creditor/mortgagee may have the
real estate mortgage registered with the
Register of Deeds to create a lien or
encumbrance on the real property. If debtor
pays his obligation, the creditor may execute
a Discharge of Mortgage. If debtor fails to
pay, the creditor may foreclose the mortgage.
3) Chattel Mortgage - when personal
property is offered as collateral or
security. It must also be registered to
be valid against 3rd parties. May be
foreclosed if the principal obligation
is unpaid, or discharged if debt is
paid.
4) Accessory Contract of Guaranty
- when a 3rd party binds himself
secondarily liable to answer for or
guarantee the debt of the debtor.
5) Accessory Contract of
Suretyship - when a 3rd party
solidarily binds himself to pay the
obligation of the debtor to the
creditor.
B. As to Perfection:
1. Consensual - that which is perfected by
the mere agreement or consent of the
parties, such as a Contract of Sale or Lease.
(Art. 1315)
2. Real - that which is perfected by the
actual delivery of the object or prestation by
one to the other party. Thus in a contract of
deposit, it is not perfected until the object of
the contract is actually delivered for deposit
by the depositor. Others are Commodatum
and Pledge. (Art. 1316)
C. As to Form
1. Common - that which does not require
any particular or special form to be valid, as
long as it contains all the essential elements
of a contract, and the terms and conditions
are riot contrary to law, public policy, public
order, public morals or good customs.
Examples are contracts of Loan and Lease
2. Special - that which must be in a special
form as required y by law, such as Donation,
Sale of Real Property, and Mortgage. They
must be in a public instrument.
D. As to Nature of Vinculum Which They
Produce:
l. Unilateral - where only one contracting
party has an obligation to perform, as in
Commodatum or gratuitous deposit.
2. Bilateral - where both parties have their
respective reciprocal obligations to perform.
Example is a Contract of Sale wherein the
seller must deliver and the buyer to pay for
the object agreed upon.
 Commadatum
This is a gratuitous loan made
by one party to another, with the
latter having the obligation to return
the object borrowed on agreed date
or upon completion of the purpose
for which the loan is made.
E. As to Name or Designation:
I . Nominate - that which has a
special designation or name in law
and governed by specific provisions
of law.
2. Innominate - that which does not
have a special name and not
governed by special provisions of
law. (Art. 1307)
F. As to Risk Involved
1. Commutative - that which provides a
mutual exchange of relative values to
the contracting parties, as in a contract
of Lease.
2. Aleatory - that where the elements of
risk dependent on chance is
predominant, as in a contract of
Insurance.
G. As to Declaration of Intent:
1. Express - that where the intent of
the contracting parties and terms and
condition are expressly declared. May
be in writing or oral.
2. Implied - that where the intent of the
parties is not specifically declared in
the contract but may be inferred or
implied from the acts of the parties, or
from facts or circumstances which tend
to define the intent of the parties.
H. As To Their Purpose:
1. Transfer of ownership – e.g. sale
2. Conveyance of use – e.g.
commodatum
3. Rendition of services – e.g. agency
I. As To Their Cause:
1. Onerous – those in which each of
the parties aspire to procure for himself
a benefit through the giving of an
equivalent or compensation – e.g., sale
2. Gratuitous – those in which one of
the parties proposes to give the other a
benefit without any equivalent or
compensation – e.g; commodatum
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
policy, public order.
 Note:
It is a general principle of law that any person shall
be free to enter into a contract, subject, of course, to
certain constitutional and statutory limitations. And
once the contract is legally constituted, it shall have
the force and effect of law on both the contracting
parties. The contracting parties are also free to
incorporate in their contract, all terms and
conditions which they believe will express their true
intent and protect their respective rights and
interests. As provided for in the Article, the only
limitation is that such terms and conditions must not
be contrary to law, public order, public policy, public
morals, and good customs.
 Problem:
In a contract of employment between A and B,
the latter agreed that for a period of 5 years after
the termination of his employment, he shall
neither engage nor interest himself in any
business enterprise similar to or in competition
with those operated by A, nor enter into the
employment of any enterprise in the Philippines,
except after obtaining the written permission of
A. Is the agreement valid? Reason.
IMPAIRMENT OF CONTRACT –

Impairment is anything that diminishes

the efficacy of the contract. There is an
impairment if the subsequent law
changes the terms of a contract
between the parties, imposes new
conditions, dispenses with those
agreed upon or withdraws remedies for
the enforcement of the rights of the
parties.
 In one case…
The requirement of notice of the rescission
under the Maceda Law does not change the
time or mode of performance or impose new
conditions or dispense with the stipulations
regarding the binding effect of the contract.
Neither does it withdraw the remedy for its
enforcement. At most, it merely provides for
a procedure in aid of the remedy of
rescission. (Siska Development Corporation
vs. Office of the President of the Philippines,
G.R. No. 93176, April 22, 1994)
Art. 1307. Innominate contracts shall
be regulated by the stipulations of
the parties, by the provisions of
Titles I and II of this Book, by the
rules governing the most analogous
nominate contracts, and by the
customs of the place.
Innominate contracts, as the name implies,
have no specific or special designation or
nomenclature in the Civil Code, but are
recognized as valid contracts governed by:
I ) the agreement of the contracting parties;
2) the law on Obligations and Contracts;
3) the rules governing the most analogous
nominate contracts; and
4) the customs of the place where the
contract is constituted.
 The Four Types of Innominate
Contracts:

• Do ut des – “I give that you give”

• Do ut facias – “I give that you do”
• Facio ut des – “I do that you give”
• Facio ut facias – “I do that you do”
Art. 1308. The contract must
bind both contracting
parties; its validity or
compliance cannot be left
to the will of one of them.
 Mutuality of Contracts

The mutuality of contracts refers to the

position of essential equality which
must be occupied by both of the
contracting parties in relation to the
contract. This principle is confirmed by
Art. 1308 of the Civil Code, which
declares that the contract must bind
both contracting parties; its validity or
compliance cannot be left to the will of
one of them.
 Note:
Once a contract is validly constituted, it
shall bind both contracting parties,
their assigns and successors in
interest. However, if the validity or
compliance of the contract is left to the
exclusive will of one party, the contract
becomes potestative in nature and,
therefore, null and void.
 Example:
A binds himself to sell to B his city
house if A decides to retire to his home
province. Here the compliance of the
contract to sell A's city house to B
depends exclusively on A's decision as
to when he may want to retire to his
home province, the contract to sell
cannot be executed. The contract is
potestative and, therefore, deemed null
and void.
Art. 1309. The determination of the
performance may be left to a third
person, whose decision shall not be
binding until it has been made known
to both contracting parties.

Art. 1310. The determination shall not

be obligatory if it is evidently
inequitable. In such case, the courts
shall decide what is equitable under the
circumstances.
 Note:
The contracting parties may mutually agree
that the determination of the performance of
their contract may be left to a third person
whose decision shall be binding on the
contracting parties after it is made known to
them.
However, if the third person's determination
appears unfair and inequitable, the parties
may not comply with it. Any of them may go
to court and seek its intervention in fixing
what is just and reasonable.
 Example:
A enters into a contract to sell his one
hectare of land in Tarlac to B, and
agreed to have the price determined by
X, a real estate appraiser. Suppose X,
based on the fair market value of the
property, determined that the correct
price shall be Php 3,000.00 per square
meter, then such price will be binding
on both A and B immediately it is made
known to them.
 However,
… the price fixed by X may not be obligatory
if it is manifestly inequitable. Suppose the
prevailing price of the land in the area of A in
Tarlac is already P5,000.00 per sq. meter, will
A be obliged to sell his land to B for Php
3,000.00 per sq. meter as determined by X?
While X's recommended price may be
favorable to B. A cannot be compelled to
accept it. A shall have the recourse to go to
Court and have the Court fix the fair and
reasonable price for the land.
Art. 1311. Contracts take effect only between
the parties, their assigns and heirs, except in
case where the rights and obligations arising
from the contract are not transmissible by their
nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some
stipulation in favor of a third person, he may
demand its fulfillment provided he
communicated his acceptance to the obligor
before its revocation. A mere incidental benefit
or interest of a person is not sufficient. The
contracting parties must have clearly and
deliberately conferred a favor upon a third
person.
 Relativity of Contracts

Relativity of contracts refers to the

principle that a contract can only bind the
parties who had entered into it or their
successors who have assumed their
personality or their juridical position, and
that, as a consequence, such contracts
can neither favor not prejudice a third
person. “Res inter alios acta aliis neque
nocet prodest.”
 Note:
The first paragraph of this Article must be
taken up with Art. 1178 which provides
transmissibility of rights. As a rule, rights
and obligations arising from a contract are
binding not only between the contracting
parties, but also on their assigns and heirs
because such rights and obligations are
transmissible. The heir of a deceased
contracting party shall, however, be liable
only to the extent of what he will inherit from
the decedent.
 Example:
Arsenio owes Benito Php 100,000.00 payable
December 21, 2013. Before maturity, Arsenio
dies, leaving property worth Php 500,000.00
to his only son, Candido. In this case the
debt of Arsenio of Php 100,000.00 is
transmitted to his heir, Candido and the latter
must pay Benito the Php 100,000.00 because
the inheritance of Php 500,000.00 is capable
of paying his father's debt.
However, suppose Arsenio leaves
property worth only Php 50,000.00. Can
Benito compel Candido to pay his
father's debt of Php 100,000.00? No,
Candido cannot be compelled to pay
the Php 100,000.00 because the rule
states that the heirs will be liable only
to the extent of what he stands to
inherit. In this case, Candido must pay
Benito Php 50,000.00, the amount
which he will inherit from Arsenio.
 Still…
Again, let us suppose that Arsenio dies
before maturity date, leaving no property or
asset whatsoever. But Candido is very rich in
his own right. Can Benito compel Candido to
pay Arsenio's debt of Php I00.000.00? No,
because Candido did not inherit anything
from his father. As the rule says, the heir will
only be liable to the extent of what he will
inherit. Candido did not inherit anything so
he cannot be compelled to pay Benito even
though he is rich.
CONTRACT EFFECTIVE BETWEEN PARTIES:
In Marimperio Compania Naviera S.A. v. Court
of Appeals (156 SCRA 368 [l9$7], the Court
held "According to Article 1311 of the Civil
Code, a contract takes effect between the
parties who made it, and also 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. Since a
contract may be violated only by the parties
thereto, as against each other, in an action
upon that contract, the real parties in interest,
either as plaintiff or as defendant, must be
parties to said contract.
Therefore, a party who has not taken part in
it cannot sue or be sued for performance or
for cancellation thereof, unless he shows
that he has a real interest affected thereby.
A “real interest” has been defined as “a
present substantial interest, as distinguished
from a mere expectancy or a future,
contingent, subordinate or consequential
interest.” (Moreno, F.B., Phil. Law Dictionary,
3rd ed.) (Barfel Development Corporation v.
Court of Appeals, G.R. No. 98177, June 8,
1993)
Exceptions to the rule about the transmissibility of
rights and obligations arising from contracts
according to Art. 1311.

These are:
(1) From the Nature of the Contract - If the
contract is personal in nature, rights and
obligations are not transmissible.

Example - Adolfo entered into a contract with

De Leon to paint the portrait of Adolfo's wife.
If De Leon dies before he begins or finishes
painting the portrait of Adolfo's wife, the
obligation to paint the portrait is not
transmissible to the heir of De Leon.
(2) By Stipulation - where the parties
mutually stipulate that the rights or
obligations arising from their contract are
not transmissible.

Example - A entered into a contract to sell his

House/Lot to B for Php 2,000,000.00 on
December 31, 2013. They stipulate that if any
of them dies before due date, the right or
obligation of the decedent will not be
transmitted to his heirs. If A dies before
December 31, 2013, B cannot compel the
heirs of A to sell said House/Lot.
(3) By Provision of Law - In certain contracts,
the law prohibits the transmission of rights in
a contract.

Example - A expressly nominates B his

exclusive agent to sell A's land. If B dies
before he finds a buyer for A's land, the
contract of agency between them is
extinguished and heirs of B cannot perform
the agency, unless there is expressed
stipulation to that effect.
The second paragraph refers to a stipulation
pour autrui in the contract which: (refer to
Art. 1296*).
1. expressly confers a definite and direct
benefit or interest to a third person by the
contracting parties; and
2. which benefit or interest the third party
has expressly accepted and his acceptance
communicated to the obligor before its
revocation.
*Art. 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may subsist
only insofar as they may benefit third persons who did not give
their consent.
 Example:

A borrowed Php 10,000.00 from B

payable in three years at 12% interest
per annum. They expressly stipulate
that A will pay the 1 % monthly interest,
equivalent to P100.00 per month,
directly to C, nephew of B, at the end of
each month for C's schooling. C
notified A of his acceptance before it
could be revoked.
 Requisites for a stipulation
pour autrui
1. the stipulation in favor or the third person
should be a part, not the whole, of the
contract;
2. that the favorable stipulation should not
be conditioned or compensated by any kind
of obligation whatever;
3. neither of the contracting parties bears the
legal representation or authorization of the
third person; and
4. acceptance of the benefit by the third
person communicated to the obligor before it
could be revoked.
Art. 1312. In contracts creating
real rights, third persons who
come into possession of the
object of the contract are bound
thereby, subject to the provisions
of the Mortgage Law and the
Land Registration Laws.
 In contracts involving real properties or real
rights, a third person who acquires such real
property is bound by prior contracts affecting
said real property, even if he is not a party to
such prior contracts.
• Example - A borrowed Php 500,000.00 from B
and mortgaged his 5 hectares of land in
Bulacan as a collateral. Later, before maturity
of the loan, A sold the same 5 hectares to C, a
3rd person. C acquired ownership of the land,
but subject to the provisions of the Real Estate
Mortgage executed by A in favor of B, provided
the same was registered with the Register of
Deeds where the land is located.
 Art. 1313. Creditors are protected in cases of
contracts intended to defraud them.

• This article refers to absolute simulated

contracts executed by the debtors to defraud
their creditors and to prevent attachment of
their real or personal properties. Remedy of
creditors is to ask for rescission of such
simulated contracts. This Article must be
correlated with Art. 1177 relating to remedies
available to a creditor against his debtor.
 Art. 1177

Art. 1177. The creditors, after having

pursued the property in possession of
the debtor to satisfy their claims, may
exercise all the rights and bring all the
actions of the latter for the same
purpose, save those which are inherent
in his person; they may also impugn
the acts which the debtor may have
done to defraud them.
Art. 1314. Any third person who
induces another to violate his
contract shall be liable for
damages to the other
contracting party.
 Note:
Any third person who, although not a
party to the contract, induces one of
the contracting parties to break his
contract, shall also be liable for
damages to the injured contracting
party. Liability of such third person who
induces another to violate the contract
shall be distinct and separate from the
liability of the defaulting party, and
much lesser.
 Example:

A executes a contract of sale with B for

certain goods. C, a third party induces
A not to comply with the contract, and
B suffers damages. In this case B, has
the right to demand damages from both
A and C separately. C's liability will be
much less than A's liability.
Art. 1315. Contracts are perfected by
mere consent, and from that moment
the parties are bound not only to 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.
 Note:
This article refers to consensual
contracts which are perfected by the
mere consent of the parties, and
immediately become binding between
the parties although no delivery of the
object has yet been made.

Note too that a contract of sale is an

example of a consensual contract.
 Example:
Today A and B entered into a contract of sale of a
Weinstein Piano. It is mutually agreed that A will
deliver the Weinstein Piano tomorrow and B to pay
the price of Php 100.000.00 upon delivery. As of
today, the contract is perfected and both A and B
are already bound even if actual delivery and
payment will be made tomorrow. So that if A fails
to deliver the piano, he becomes liable; or if B fails
to pay the Php 100,000.00 on delivery of the piano,
he becomes liable to A. In other words, the
perfection of a contract gives rise to a personal
right on the part of the party to demand
compliance thereof.
Art. 1316. Real contracts, such
as deposit, pledge and
commodatum, are not
perfected until the delivery of
the object of the obligation.
 Note:

Perfection of a real contract is

characterized by the actual delivery of
the object of the contract. While there
may be already a meeting of the minds
as to the object and consideration, the
contract is not deemed perfected until
such time as the object is actually
delivered.
This article gives three kinds of real contract, to
wit:
1. Deposit - it takes place when a person
receives an object from another, expressly for
safekeeping, gratuitously or for consideration,
and to return such object on demand or on
agreed date.

Example - A and B agreed that before A leaves

for abroad, he will leave with B his Mercedes
Benz for safekeeping for two months. Suppose
A suddenly left without leaving his car with B.
Is there a contract of deposit? None, the
contract was not perfected because A failed to
deliver to B his Mercedes Benz.
2. Pledge - this is an accessory contract whereby a
person leaves or delivers to another person a
movable or incorporeal property (stock certificates,
patent rights, etc.) as a collateral or security for a
principal obligation. Once the principal obligation is
paid and extinguished, the accessory contract of
pledge is likewise extinguished.

Example - A borrowed Php 100,000.00 from B

payable on June 30, 2013, and as a security or
collateral, A promised to deliver to B his diamond
ring as a pledge. Suppose A failed to deliver to B the
diamond ring, is the contract of pledge perfected`?
No, there is no contract of pledge because there is
no actual delivery of the diamond ring. There will
exist a principal contract of loan, but without the
accessory contract of pledge.
3. Commadatum - this is a gratuitous loan
made by one party to another, with the latter
having the obligation to return the object
borrowed on agreed date or upon completion
of the purpose for which the loan is made.

Example - A and B agree that A will lend B his

whole set of SCRA which B will use to review
for the Bar for three months without pay. The
contract of commodatum will not be
perfected if A fails to deliver to B his books.
Art. 1317. No one may contract in the name
of another without being authorized by the
latter, or unless he has by law a right to
represent him.
A contract entered into in the name of
another by one who has no authority or legal
representation, or who has acted beyond his
powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person
on whose behalf it has been executed, before
it is revoked by the other contracting party.
This article refers to the general principles of a
Contract of Agency whereby no person can enter
into and bind another in a contract unless:
1. he is duly authorized by the person in whose
behalf he is acting, or
2. he has the legal right to represent the person
for whom he is acting.

A contract made by a person who has no

authority from the person on whose behalf he is
acting or who has no legal representation shall
be unenforceable, unless duly ratified by the-
party he is representing. However, the
ratification must be made before the other
contracting party revokes the contract.
 Example:
A owns a Ford and wants to sell it for Php
500,000.00 cash. Then A authorized B to sell
the Ford for him.
A becomes the principal and B the agent.
Suppose B enters into a contract of sale with
X for the Ford for Php 500,000.00 cash in the
name of A. Will the contract between B and X
bind A? Yes, the contract will bind A because
B acted with authority, and he disclosed his
principal.
Suppose in this example B sells the Ford to X
for Php 400,000.00 only, will B's contract of
sale with X bind A? No, it will not bind A
because although B has the authority from A,
B acted beyond the scope of his authority by
selling the car below the authorized Php
500,000.00, and therefore his contract with X
will not bind A - it becomes unenforceable.
What is required to make the contract
binding on A? Ratification of A is needed. If A
ratifies or approves the sale of his car by B
to X for only Php 400,000.00, then the
contract becomes binding on him.
Again, let us suppose that A becomes
incapacitated and B is appointed his
legal guardian. Then needing money
for A's subsistence and medical
attention, B sold A's Ford to X for Php
500,000.00, without A's authority. Is B's
contract of sale with X binding on A?
Yes, the contract is binding on A
because B, by virtue of his
appointment as the legal guardian of A,
acquires the legal right to represent A.
 CONTRACTS OF ADHESION -

The courts cannot ignore that nowadays,

monopolies, cartels and concentrations
of capital, endowed with overwhelming
economic power, manage to impose
upon parties dealing with them
cunningly prepared “agreements” that
the weaker party may not change one
whit, his participation in the “agreement”
being reduced to the alternative to take it
or leave it labeled since x x x
Raymond Baloilles “contracts by adherence”
(contracts d'adhesion), in contrast to those
entered into by parties bargaining on an equal
footing, such contracts (of which policies of
insurance and international bills of lading are
prime examples) obviously call for greater
strictness and vigilance on the part of the courts
of justice with a view to protecting the weaker
party from abuses and imposition, and prevent
their becoming traps for the unwary." (Quoting
Justice J.B.L. Reyes in Qua Chee Gail v. Las
(Union and Rock Insurance Co. Ltd. 98 Phi 85
[1955]) (Gerales v. Hon. Court of Appeals, G.R.
No. 85909, February 9, 1993)
 Quiz:

1. How are contracts perfected?

2. A and B entered into a contract of compromise.
In the contract, there is a stipulation wherein
the parties ceded a house and lot to X. Upon
signing of the contract, X entered into the
possession of the property. Ten years later,
after the death of both A and B, their heirs
revoked the beneficial stipulation.
Subsequently, they brought an action against
X for the recovery of the property. Will the
action prosper? Reason.