Chapter 1 - General Provisions On Contracts (arts. 1305-1317) w281x

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TITLE II CHAPTER I - GENERAL PROVISIONS (Articles 1305-1317) 1. What is a contract?  As defined under Article 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 some service.  To better understand the definition, let us recall the definition of an obligation under Article 1156 that, “(A)n obligation is a juridical necessity to give, to do, or not to do. We said that the definition of an obligation under Article 1156 refers specifically to civil obligations, and not to moral, divine or natural obligations which cannot be legally enforced in court by the creditor or active subject.  From the definition of a contract above, we can assume the following : (a) There are at least two parties involved in a contract – an

active subject (creditor) and a ive subject (debtor). (b) An obligation is created because the ive subject promises

to the active subject the performance of a prestation, either to give something (“to give”), or to render some service (“to do” or “not to do”). (c) By agreement between the parties, a civil obligation is

created. At this point, we make a distinction between an agreement and a contract. If two parties agree on the performance of a moral or social obligation, there is an agreement but there is no contract. However, if the parties

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2 agree on the performance of a civil obligation (Art. 1156), the result is a contract which is legally enforceable in court. AGREEMENT: D and C agreed that they will go to mass every Sunday at the St. Therese Chapel in Villamor, Pasay for 10 consecutive Sundays. CONTRACT : D and C agreed that if D will hear mass for 10 consecutive Sundays at the St. Therese Chapel, C will give D P100,000. Here, we have a contract which gives rise to a suspensive conditional obligation. If D performs his obligation, C will be obliged to give D P100,000. If C does not comply with his obligation as agreed upon, D’s obligation will then be extinguished.

(d) A contract gives rise to an obligation between the parties to

the contract. Hence, there can be no contract if there is no obligation. However, can a party have an obligation even without a contract? YES. As we have previously studied in Article 1157, contract is only one of the sources of an obligation. Thus, we are reminded that even without the debtor’s knowledge or consent (i.e., even without a previous contract entered into with the active subject), he will be liable for reimbursement arising from quasi-contract [Art. 1160] if he has been benefited at the expense of another. 2. What are the basic principles governing contracts? (a) (b) (c) (d) (e)

Autonomy or Liberty of Contracts (Art. 1306) Mutuality of Contracts (Art. 1308) Consensuality of Contracts (Art. 1315) Relativity of Contracts (Art. 1311) Obligatory Force of Contracts (Art. 1159)

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3 3. Autonomy or Liberty of Contracts - The principle of autonomy of contracts is stated in Article 1306. “The contracting parties may establish such stipulations, clauses, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”

 By this principle, the parties to a contract are given the freedom to agree on any or stipulations in their contract. The only limitation is that the agreement should not be illegal (i.e., contrary to LaMoG-PuPu). The contracting parties must respect the law which is considered as an essential part of every contract. Example of a contract which is contrary to law. A and B entered into a contract. It was agreed that A will give B P500,000 if B will steal the pet lion of C. It was also agreed that A will give an advance payment of P250,000, and the balance will be given to B when B delivers the lion to A. As agreed upon, B stole the lion from the residence of C. However, B was apprehended by the police authorities before he could deliver the lion to A. Question: Since B failed to deliver the lion to A as agreed upon, can A file an action in court against B for the recovery of the P250,000 advanced to B? Answer: NO. The prestation of B in the parties’ contract is to steal the lion of C. Stealing is unlawful. Hence, the contract is illegal and cannot be given effect. If A files an action for recovery of the P250,000 from B on the basis of their contract, both of them will be put on trial for the crime of robbery or theft. Example of a contract which is contrary to law. D borrowed P100,000 from C. On maturity date, D could not pay his obligation to C. D and C then agreed that for the meantime that D is not able to pay his debt, D will work as the secretary of C without pay. After 3 months of working without pay, D suddenly

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4 left the office of C. C filed an action in court against D stating that D had not yet paid his debt. Hence, D should continue working without pay in the office of C because it was what they agreed upon. Question: Is D bound by the agreement? Can D demand payment equivalent to 3 months salary for his services from C? Answer: The parties’ agreement for D to render service without pay is contrary to law and cannot be given effect; hence, C cannot compel D to work without pay. A lawful arrangement would be to require D to work as the secretary in the office of C with a salary of, let us say, P10,000. The parties can then agree that D will not receive salary for 10 months to compensate for the P100,000 debt that he owes C. In this case, the court has to deny C’s prayer to compel D to comply with his obligation to work without pay because the agreement is illegal. However, D has the right to be paid for his services rendered to C. Therefore, the court can determine how much D should receive from C by way of compensation for work rendered for 3 months, and subtract it from D’s P100,000 loan to C.  Study No. 1 of your application or problems in the study guide. Example of a contract which is contrary to morals. Joe is a 40-year old bachelor. Jane is a 17-year old student who has been compelled to obtain a leave of absence from school this semester because her parents could no longer afford to pay her tuition. On January 2, 2012, Joe promised to give Jane P1M if Jane will live with him as his wife for 6 months without the benefit of marriage. Jane agreed. On January 6, however, Jane informed Joe that she was backing out from their agreement because she had already found an employer who was willing to help her with her studies. Joe was upset. He filed an action against Jane for specific performance (to compel her to comply with her obligation) and for damages. Question: Is the contract valid? Can Jane be compelled to comply with her promise under the agreement?

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5 Answer: It is stated that by the autonomy of contracts, the parties are free to establish any stipulation in their contract as they may consider convenient to them. In this case, however, to compel a woman to cohabit with a man (even if not married) without the benefit of marriage is contrary to morals. The contract of Joe and Jane is, therefore, void for being immoral and cannot be enforced. Example of a contract which is contrary to good customs. Kulit promised to give Galang P100,000 if Galang will slap his father once on both cheeks. This contract is void because it is against the good custom of showing respect to our parents. Example of a contract which is contrary to public order. O is the owner of an apartment. T is interested in leasing or renting the apartment of O. The parties enter into a contract with the following stipulations, among others: 1. O obliged to rent his apartment to T for 2 years. 2. T promised to pay a monthly rental of P10,000. 3. Should T fail to pay his monthly rentals, T must leave the apartment. 4. If after failure to pay rentals T refuses to leave the apartment, O will ask his 2 wrestler brothers (each weighing 500 pounds) to drag T out of the apartment never to be seen again. Both O and T agreed to these provisions in their lease contract. Question: Assuming that T later on fails to pay his monthly rentals, can O enforce term No. 4 in their agreement considering that T had agreed to the stipulation? Answer: NO. While the other in the parties’ contract is lawful and valid, term No. 4 cannot be enforced by O for being against public order. The proper recourse of O is not to use physical force on T to leave the apartment. What O should do is to file an action for ejectment in court against T. O must first secure a final judgment from the court ordering T to vacate the premises. Then the sheriff of the court will carry out the final order of ejectment (an order to compel the tenant to leave the property being leased). Example of a contract which is contrary to public policy.

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6  Study No. 2 of your application or problems in the study guide.

4. Mutuality of Contracts - The principle of mutuality of contracts is stated in Article 1308. “The contract must bind both contracting parties, its validity or compliance cannot be left to the will of one of them.”

 By this principle, no party to a contract can renounce or violate the law of the contract without the consent of the other. Example of the principle of mutuality. S promised to sell his car to B, an interested buyer. It was agreed that S will determine the price of the car and inform B about it on the same day that S will deliver the car. The following day, S went to the house of B and delivered the car. S was also collecting from B the purchase price of P3.5M which is what S had decided. Question: Can S compel B to accept delivery of the car and to pay the purchase price of P3.5M? Answer: NO. There is here no valid contract. A contract is a meeting of the minds and, therefore, there must be mutual consent. The contract does not bind both contracting parties because the determination of the purchase price of the car was left to the sole determination of S. Of course, if B decides to accept delivery and agrees to the purchase price of P3.5M upon delivery, the contract of sale is perfected.

 While the compliance with a contract cannot be left to the will of only one of the contracting parties, under Article 1309, the determination of its performance may be left to a third person. The determination, however, will bind the contracting parties only after it has been made known to both of them. Determination of performance by a third person. S sold his parcel of land to B. It was agreed that A, a real estate appraiser, would be the one to determine the reasonable price of the land. A

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7 then appraises the land, fixes the price at P5M, and informs S about it. Question: Can S compel B to pay the P5M purchase price? Answer: NO. The determination by A of the price of the land, even if agreed to by S and B will bind both contracting parties only after A informs both S and B of his determination. Since it was only S who was informed, and B had no idea of the price fixed by A, B cannot be bound by the determination.

 In the above example, let us assume that A conspired with S for the fixing of the price at P5M even if the appraised value of the land was only P3M. Then A informs both S and B of the price. Question: Will B be bound by the determination of A? Answer: Still NO. Article 1310 states that a contracting party is not bound by the determination of a third person if it is evidently inequitable or unjust as when the third person acted in bad faith or by mistake. 5. Consensuality of Contracts –

 Under the principle of consensuality of contracts, it is stated that contracts are perfected by mere consent (Article 1315).  Before we start discussing this principle, let us take a quick look at the essential requisites of a contract discussed in the next chapter. 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. Example: S agreed to sell his BMW car to B for P6M.

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8 (1) The object is the delivery of the car. (2) The cause or consideration is the payment of the purchase price of P6M. (3) There is consent because both parties agree as to the object and the cause of the sale. Effect of lack of any one of the requisites: The contract will be void and cannot be enforced.

 We also need to take a look into the three stages in the life of a contract. Stages in the life of a contract. (1) Conception (Preparation or negotiation) - This includes all the negotiations or steps taken by the parties leading to the perfection of the contract. At this stage, the parties have not yet arrived at any definite agreement. (2) Perfection or birth – This is when the parties have come to a definite agreement or meeting of the minds regarding the subject matter and cause of the contract (Art. 1319). At this stage, there is already a concurrence of all the essential elements or requisites of a contract. (3) Consummation or termination – This is when the parties have performed their respective obligations, and the contract may be said to have been fully accomplished or executed, resulting in the extinguishment or termination thereof. Example: S d his BMW car for sale at P6M. (1) Stage of Conception - B goes to S and offers to buy the BMW car for P5M. S is willing to sell at P5.8M. B again makes another offer to buy at P5.5M. Here, the parties are still negotiating. (2) Stage of Perfection – S agrees to B’s offer of P5.5M. Here, the contract is perfected. There is already a mutual agreement as to the object and the cause of the sale.

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9 (3) Stage of Consummation – S delivers the BMW car to B. B then pays S the P5.5M purchase price. Here, the parties comply with their respective prestations under the contract. It is in this stage that the obligations of the parties are completely extinguished.

Effect of perfection of a contract: It is only after perfection of a contract that the following will arise: (a) the obligation of the debtor to perform the prestation and/or to pay for damages. (b) the right of the creditor to compel performance of the obligation and/or claim for damages.

 A contract is thus only perfected after compliance with all the three essential requisites of consent, object and cause, or C-O-C .  Now we go back to the principle of consensuality. Contracts are perfected by mere consent. In other words, if all the requisites of C-O-C are present, a contract is already perfected. This is, however, only the GENERAL RULE because some contracts need more than mere consent for their perfection. We can understand this better by examining the three (3) kinds of contracts according to perfection outlined below. Classification of contracts according to perfection : (1) Consensual contract – This kind of contract is perfected by mere consent. As long as there is C-O-C, the contract is perfected. Example : A contract of sale is an example of a consensual contract. On January 25, 2012, S promised to sell his car to B for P3M. It was agreed by the parties that delivery of the car and payment of the purchase price was to be made on January 31, 2012. On January 31, 2012, S refused to deliver the car stating that he had changed his mind about selling his car. Question: Was there here a perfected contract of sale between S and B?

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10 Answer : YES. As of January 25, 2012, there was already a perfected contract of sale because as of that date there was already consent on the part of both contracting parties, there was an object (the delivery of the car), and there was a cause (the payment of the P3M purchase price). Since there was already a perfected contract, both S and B are bound to the fulfilment of their respective obligations under the contract. Therefore, S can no longer back out from his obligation of delivering the car to B unless he is willing to be liable for damages to B for breach of contract.

(2) Real contract – This kind of contract is perfected by the delivery of the thing subject matter of the contract. In other words, mere consent is not enough. There is an additional requisite for the perfection of the contract – that is, delivery of the object of the contract. C-O-C-D Example : As stated in Article 1319, a contract of pledge is one example of a real contract. On January 5, 2012, D borrowed P200,000 from C due for payment on July 4, 2012. To secure the loan, D promised C that he will deliver his rolex watch valued at P250,000 to C the following day. D, however, failed to deliver the watch, and C eventually forgot about it. On maturity date, D could not pay his P200,000 debt to C. C then demanded that D deliver the watch so that C may sell the watch at public auction, and use the proceeds from the sale to cover the P200,000 loan of D. Question: Was there here a perfected contract of pledge between D and C? Can C compel D to deliver the rolex watch so that it may be sold at public auction to pay for the indebtedness? Answer : NO. The purpose of a contract of pledge (which is merely an accessory contract to the principal contract of loan) is to secure the payment of the loan by the debtor. Under the contract of pledge, the creditor is given the right to sell the thing pledged at public auction, if the debtor fails to pay the principal obligation on maturity date. In this case, D never delivered the rolex watch to C until the debt already matured. In other words, since pledge is a real contract, it will be perfected (the contract will be born) only if the thing object of the contract is delivered to the creditor. Since there was no delivery of the rolex watch, there was no perfected

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11 contract of pledge between D and C. ( that for the perfection of a real contract, in addition to the three essential requisites of consent, object and cause, there must be delivery of the object or subject matter of the contract.) Therefore, on maturity date, if D fails to pay his obligation, C will have no right to demand the delivery of the rolex watch for purposes of selling it at public auction. It is as if C agreed to the contract of loan without security. The proper recourse of C is to file an action in court for the collection of the P200,000 unpaid obligation of D.

(3) Solemn contract – This kind of contract is perfected after compliance with certain formalities prescribed by law. Just like in real contracts, mere consent is not enough. There is an additional requisite for the perfection of this kind of contract – that is, compliance by the parties with the formalities required by law for its validity or effectiveness. C-O-C-F Example : A contract of donation of real property is an example of a solemn contract. Article 749 requires that for a contract of donation of real property to be valid, it must be in a public instrument. On January 5, 2012, Don donated to Des a 1000 square-meter house and lot located in Manila. Don and Des then drafted and signed a “Deed of Donation”. After two years, Don died leaving as sole heir his only son, Andy. Andy now wants to recover the house and lot from Des. Question: Was there a perfected contract of donation between Don and Des? Can Andy recover the property from Des? Answer : The contract of donation is an example of a solemn contract which requires a specific form for the validity of the contract. In other words, without the specific form required by law for its perfection, the contract will be lacking one essential requisite which is form. Article 749 of the Civil Code requires that for the contract of donation to be valid, it must be executed by the parties in a public instrument. In other words, it is not enough that the parties draft and sign the document. (This is a private document only.) After g the written contract of donation, the parties must have the document notarized by a lawyer. (The private document of donation is now converted into a public document.) In this case, the contract of donation between Don and Des was made only in a private document. Therefore, there was no contract of

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12 donation perfected between Don and Des. The property may still be recovered from Des by Andy who is the rightful heir of the property left by his father Don.

6. Relativity of Contracts –

 Under the principle of relativity of contracts, it is stated that contracts take effect only between the parties, their assigns and heirs. (Article 1310). This means that only the parties, their assigns and heirs can have rights and obligations under the contract. Strangers to a contract cannot be made liable for damages under the contract. Neither can strangers claim benefits under the contract. Example No. 1: Contracts take effect only between the parties. On January 5, 2012, S promised to sell his BMW car to B for P2M. The delivery of the car and payment of the purchase price was set on January 15, 2012. On January 15, 2012, S delivered the car but B paid only P1.5M of the purchase price. B promised to deliver the balance of the purchase price to S the following day. B, however, failed to pay despite repeated demands from S. When M, the mother of S, heard about what happened, M filed a case against B in court for collection of the balance of P500,000. Question: Will the action for collection filed by M against B prosper? Answer : NO. M has no legal standing to file the action for collection against B. Under the principle of relativity of contracts, the contract takes effect only between the parties. Even if M is the mother of S, M is a stranger to the contract of sale between S and B. Hence, M cannot claim any rights under the contract by collecting the balance of the purchase price which B failed to pay. Only S is the proper party to file the collection case against B. Example No. 2: Contracts can also bind the assigns of the parties. In the example above, let us assume that S specifically authorized his mother M to collect the purchase price of the car, and to file an action for collection in case of non-payment.

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13 Question: This time, will an action for collection filed by M against B prosper? Answer : YES. This time, since M has been specifically authorized and allowed by her son to collect the purchase price and file an appropriate action against B, the action for collection will prosper. This is because M is now an assignee or authorized representative of S who can legally act in behalf of S.

Example No. 3: Contracts have also binding effect on the heirs of the parties. This is only possible if one of the parties to a contract dies before the maturity date of the obligation. D borrowed P2M from C due on December 30, 2011. On November 30, 2011, D died of a heart attack leaving his only son S an inheritance amounting to P1.5M. S is a multimillionaire with a total asset valued at P890M. Question: Can C collect the obligation from S? If so, how much? Answer : YES. By the principle of relativity, since D is already dead, the contract can be made to bind the son S. When we say, however, that the contract will bind even the heirs, what the law actually means is not the heir personally, but the estate of the deceased (the contracting party who died). Hence, if D died without leaving any inheritance to S, S cannot be personally liable for the obligation of D even if D was his father. In this case, C may recover from S, but only to the extent of whatever S inherited from D – that is, P1.5M. Under the last sentence of the first paragraph of Article 1311, “(T)he heir is not liable beyond the value of the property he received from the decedent.” Of course, since S is a multimillionaire, if he considers it his moral obligation to pay the entire debt of his father, he is not legally prohibited from doing so.

 There are, however, also instances when the contract takes effect ONLY between the parties, and cannot bind even assigns and/or heirs. This happens when the rights and obligations arising from the contract are not transmissible (i.e., cannot be transferred or ed on to another person). (a) The rights and obligations arising from the contract may not

be transmissible by their very nature.

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14 Example : D agreed to sing in the nightclub of C for 3 consecutive nights on February 12, 13 and 14, 2012. The customers specially requested for D because D is the only singer in the country who can sing while walking on a rope in the air. D, however, died on February 10, 2012 in a car accident. Question: Can S, the only son of D, perform for his father? Answer : NO. In this case, the personal qualification of D was the reason why C hired his services. S cannot do what his father does – walk on a rope in the air while singing. Therefore, because of the death of D, S will no longer be bound under the contract. The obligation of D will simply be extinguished.

(b) The rights and obligations arising from the contract may not be transmissible by stipulation of the parties. Example : Look at Example No. 3 above. Assume that D and C specifically agreed in their contract that should one of them die before the maturity date of the obligation, the rights and obligations of the parties under the contract will be extinguished. If this is the parties’ agreement in their contract, even if S inherited P1.5M from his father D, C can no longer collect from S after the death of D.

(c)The rights and obligations arising from the contract may not be transmissible by provision of law. Example : In a contract of partnership, if one of the partners die, the partner who died cannot be replaced by his heirs in the partnership. The law (Article 1830[5]) specifically provides that the death of one of the partners in a partnership will extinguish the legal relationship. In other words, the dead partner ceases to be a partner and cannot transmit or on to his heirs the rights and obligations of a partner.

 The general rule is that: strangers cannot be bound by a contract to which they are not parties. There are, however, exceptions to this rule. In other words, there are cases when even third persons (not parties to the contract) may assume benefits, or may be held liable for damages, under the contract.

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15 (a) In contracts containing a “stipulation pour autrui”. – A

stipulation pour autrui conferring a favour upon demand its fulfilment, acceptance to the obligor

is a stipulation in a contract a third person who has a right to provided he communicates his before its revocation.

Example : D borrowed P100,000 from C payable after one year, or on June 30, 2012, plus 10% interest. It was also agreed by the parties that on maturity date D will pay to C the principal, but the interest of P10,000 will be given to T. This is because C also owes T the amount of P10,000. T was informed by the parties of the agreement. However, on May 30, 2012, C changed his mind and asked D to deliver the entire amount of P110,000 to C on maturity date of the obligation. On June 30, T went to C demanding for the payment of P10,000 to him as earlier agreed upon. Question: Can T collect from D? Answer : NO. In this case, it is clear that there was a stipulation pour autrui granted by the parties D and C in favour of a third person T. An important requirement, however, for T’s assumption of benefits under the contract is that T communicate his acceptance of the benefits to D (the obligor) before the revocation (withdrawal or cancellation) of the benefit. In this case, T was informed of the stipulation in his favour after the contract of loan between D and C was perfected. However, before T could signify his acceptance of such benefit to D, C had already revoked the benefit as of May 30, 2012. Therefore, T loses his right to claim under the contract, and he can no longer collect the benefit on maturity date of the obligation. (b)In contracts creating real rights, third persons who come

into possession of the object of the contract are bound thereby. (Article 1312) Example : A contract of mortgage on land (“pagkasanlaan ng lupa”) is a real right which is binding not only between the mortgagor (“ang taong me pagkakautang na nagsasanla ng lupa”) and the mortgagee (“ang taong pinagkakautangan at pinagsasanlaan ng lupa”) but is also binding against the whole world. This presupposes, of course, that the

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16 contract of mortgage is ed in the Registry of Property of the place where the property is located. D borrowed P2M from C payable on June 30, 2012. As security for the loan, D (mortgagor) mortgaged his parcel of land in Quezon City in favour of C (mortgagee). The contract of mortgage was duly ed in the Registry of Property of Quezon City. Under the contract, C will have the right to foreclose on the mortgage, and sell the land at public auction to pay for the obligation, if D is not able to pay on maturity date. On May 1, 2012, D sold the same parcel of land to B for P3M. The title of the land was transferred to the name of B, and B started occupying the land. On June 30, 2012, D failed to pay his P2M obligation to C. Question: Can C still foreclose on the mortgage considering that the owner of the land now is already B? Answer : YES. In this case, B bought the land from D while the mortgage on the land in favour of C was still subsisting. B cannot say that he was not aware of the mortgage because the mortgage was ed in the Registry of Property, and is therefore annotated (recorded) in the title to the land now in the name of B. Hence, even if B is not a party to the contract of mortgage between D and C, B will be bound by the stipulations in the mortgage. On maturity date, even if D is no longer the owner of the property mortgaged, C will still have the right to sell the land at public auction. The proper recourse of B will be to file an action against D for damages. This is because the only probable reason of B in buying the land from D, even if it was subject to a mortgage, was because D promised B that he will pay the obligation to C on maturity date. Upon payment of the principal obligation of loan, the contract of mortgage will simply be extinguished. It turned out, however, that D did not make good his promise to B. Hence, C can foreclose on the mortgage and sell the land at public auction to pay for D’s indebtedness. B now can go after D for the loss that he has suffered by reason of the foreclosure, and for consequential damages arising from the foreclosure.

(c) In contracts entered into by the debtor to defraud his

creditor(s). (Article 1313)

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17 Example : D borrowed P6M from C payable on February 15, 2011. D has a house and lot in Manila valued at P8M. On January 28, 2011, D sold his Manila house and lot for P10M to his friend B, who was aware of D’s intention to evade his obligation to C. Thereafter, D squandered the entire P10M after gambling everyday at the Casino Filipino for two entire weeks. Hence, when C demanded for payment of the P6M debt on February 15, 2011, D was already insolvent without any other property. C then filed an action for the rescission or cancellation of the contract of sale between D and B. If the sale is cancelled, and the ownership of the house and lot is reverted back to B, C can then ask the court to attach the property and sell it at public action for the payment of D’s obligation. Question: Can C file an action to rescind or cancel the contract of sale between D and B considering that he is a stranger to the said contract of sale? Answer : YES. In this case, D sold his property to B for purposes of defrauding C – that is, to evade the payment of his obligation to C on maturity date. Under Article 1313, C, the defrauded creditor, is given the right to attack the validity of the contract of sale (to which he is a stranger) by filing an action for its cancellation so that he may be paid his claims against the defrauding debtor. NOTE: Under Article 1381(3), One of the rescissible contracts are “(T)hose undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.” When we discuss the chapter on rescissible contracts, you will have a more detailed study of the requirements for rescission. Why don’t you go and have a peep at the author’s commentaries under Article 1381(3)...I know you feel tempted...just give in. 

(d)In contracts which have been violated by reason of the

inducement of a third person. (Article 1314) In this case, a third person convinces in bad faith a contracting party to violate his contract with another. In case of breach because of the inducement, the third person may be sued for damages by the other contracting party who suffered the damage.

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18 Example : S agreed to sell his land to B for P5M. It was also agreed by the parties that should S fail to deliver the lot, S will be liable to pay B damages amounting to P500,000 as penalty. Later, F, a close friend, visited S and convinced him to sell the land instead to M who is willing to pay P12M for the lot. S then sold the land to M. Since S did not deliver the land to B, B suffered business loses amounting to P1.5M. B then filed an action for damages against F who was the one who convinced S to violate his contract. Question: Can F be made liable for damages under a contract to which he is a stranger? If so, how much will F be liable in damages to B? Answer : YES. B can sue F for damages even if F is a stranger to the contract of sale between S and B. The source of F’s obligation here is based on the theory of quasi-delict (Art. 1162). However, the liability of F for damages cannot be more than what S should have been liable for violation of his contract. Hence, B can recover from F only the amount of P500,000 as damages, which is the penalty that has been agreed upon for breach in the contract between S and B.

7. Obligatory Force of Contracts –

 Under the principle of the obligatory force of contracts, it is stated that “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” (Art. 1159) From the moment a contract is perfected, “the parties are bound not only to the fulfilment 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. (Art. 1315) Example : S agreed to sell his horse to B. It was stipulated that S should deliver the horse after two days. In this case, S has the obligation to deliver the horse after two days as agreed upon in the contract. While waiting, since it was not part of the agreement, S did not feed the horse anymore. Also, since it was not part of the

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19 agreement, S did not let the horse stay in the stable anymore. After two days, the horse fell ill and died. The veterinarian said that the horse catched a deadly virus while soaked in heavy rains two nights before the delivery date. Question: Was S obliged to feed the horse and provide adequate shelter for it considering that it was never stipulated in the parties’ contract? Answer : YES. Pending delivery of the object of a contract, the debtor is obliged to take care of the thing to be delivered with the proper diligence of a good father of a family (Art. 1163). Hence, S had the obligation to feed the horse, and provide it adequate shelter before the appointed delivery date even if nothing is said about the obligation in his contract with B as this is in keeping with good faith, usage, and law.

8. Article 1317. - This article discusses the effect of an

unauthorized contract. An unauthorized contract is one which is entered into by a person (the supposed agent), in the name of another person (the principal), without the consent of that other person (the principal). An unauthorized contract is unenforceable against the principal (the debtor in the unauthorized contract), unless he ratifies or confirms it before the contract is revoked or cancelled by the other contracting party (the creditor in the unauthorized contract). Since the agent entered into the contract without the consent of the principal, it is the agent who will be personally liable to the creditor under the contract. Example: A went to C to borrow P50,000. A tells C that P sent him to borrow the P50,000 from C. in truth and in fact, however, P never sent A to C to borrow the money. In any event, before C gave the money to A, he made A sign a promissory note with the following tenor: I promise to pay the sum of P50,000 to C on March 15, 2012.

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20 P (Sgd.) by A for P On March 15, 2012, C went to P to collect on the promissory note. Question: Can C compel P to pay the P50,000 loan? Answer: NO. This case is an example of an unauthorized contract. The debtor in this contract of loan appears to be P. But the contract of loan, instead of being contracted by P himself, is contracted by A (the supposed authorized agent of A) in favour of P, even if P did not authorize A, making P primarily liable on the note with the obligation to pay the P50,000 to C on maturity date. Under Article 1317, this contract of loan will be unenforceable against P (the supposed debtor in the contract of loan) because P did not authorize A to contract it for him (P). Under Article 1403, an unenforceable contract (even if valid) cannot be enforced by the creditor against the debtor. In the instant case, the proper remedy of C will be to proceed against A who himself signed the promissory note, and benefited from the P50,000 he received from C. Of course, P can always ratify or confirm the contract by paying C the P50,000 if he indeed authorized A to borrow the money from C.

We will study this provision again when we study Article 1403 (1) of the chapter on “Unenforceable Contracts”. You can take an advance look at the commentaries under Article 1403 (1) for a more detailed understanding of this provision. Atty. Harriet Linsangan August 19, 2012

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