ART. 1305.

A contract is a meeting of minds between two persons whereby one binds

himself, with respect to the other, to give something or to render some service. (1254a)

Meaning of contract. The above article gives the definition of a contract. It lays emphasis on
the meeting of minds between two contracting parties which takes place when an offer by one
party is accepted by the other.1 (Art. 1319.) In a contract, one or more persons bind himself or
themselves with respect to another or others, or reciprocally, to the fulfillment of a prestation to
give, to do, or not to do.2

Number of parties to a contract.

In a contract, there must be at least two persons or parties, because it is impossible for one to
contract with himself. A single person may create a contract by himself where he represents
distinct interests (e.g., his own and that of another for whom he acts as agent, or of two
principals for both of whom he acts in a representative capacity) subject to specifi c prohibitions
of law against the presence of adverse or confl icting interests. For example, guardians,
executors, or administrators cannot acquire by purchase property of persons under their
guardianship, or property of the estate under their administration. Neither can agents purchase
property whose administration or sale has been entrusted to them unless the consent of the
principal has been given. (Art. 1491.) Similarly, if an agent has been authorized to lend money
at interest, he cannot borrow it without the consent of the principal. But if he has been
authorized to borrow money, he may himself be the lender at the current rate of interest. (Art.
1890.)

Characteristics of contracts.

They are:

(1) Freedom or autonomy of contracts. — The parties may establish such stipulations, clauses,
terms, and conditions as they may deem convenient, provided, they are not contrary to law,
morals, good customs, public order, and public policy (Art. 1306.);

(2) Obligatoriness of contracts. — Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith (Arts. 1159, 1315.);

(3) Mutuality of contracts. — Contracts must bind both and not one of the contracting parties;
their validity or compliance cannot be left to the will of one of them (Art. 1308.);

(4) Consensuality of contracts. — Contracts are perfected, as a general rule, by mere

consent,4 and from that moment the parties are bound not only by the fulfi llment 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

(5) Relativity of contracts. — Contracts take effect only between the parties, 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. (Art. 1311.)
ART. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. (1255a)

Limitations on contractual stipulations.

There are limitations to the freedom to contract.

(1) Law. — It is a fundamental requirement that the contract entered into must be in accordance
with, and not repugnant to, an applicable statute. Its terms are embodied in every contract. The
parties to a contract are charged with knowledge of the existing law at the time they enter into
the contract and at the time it is to become operative, and a person is presumed to be more
knowledgeable about the law of his country than an alien. Where a contract is entered into by
the parties on the basis of the law then obtaining, the repeal or amendment of said law will not
affect the terms of the contract, nor impair the rights of the parties hereunder. This rule applies
even if one of the contracting parties is the government. Laws in force at the time the contract
was made generally govern its interpretation and application.

(2) Police power. — Public welfare is superior to private rights. When there is no law in
existence or when the law is silent, the will of the parties prevails unless their contract
contravenes the limitation of morals, good customs, public order, or public policy. The policy of
protecting contracts against impairment presupposes the maintenance of a government by
virtue of which contractual relations are worthwhile — a government which retains adequate
authority to secure the peace and good order of society. In short, all contractual obligations are
subject — as an implied reservation therein — to the possible exercise of the police power of
the state. Otherwise, important and valuable reforms may be precluded by the simple device of
entering into contracts for the purpose of doing that which otherwise may be prohibited. Far
from being an impairment of contractual obligations, the exercise of such power constitutes,
therefore, a mere enforcement of one of the conditions deemed imposed in all contracts.

Contract must not be contrary to law.

In its specific sense, law has been defined as “a rule of conduct, just, obligatory, promulgated
by legitimate authority, and of common observance and benefit.” (1 Sanchez Roman 3.) A
contract cannot be given effect if it is contrary to law because law is superior to a contract. (Art.
1409[1].) Acts executed against the Art. 1306 451 provisions of mandatory or prohibitory laws
are void, except when the law itself authorizes their validity. (Art. 5.) Although a contract is the
law between the parties (Art. 1159.), the contracting parties must respect the law which is
deemed to be an integral part of every contract. (see Art. 1315.) The provisions of positive law
which regulate contracts are deemed incorporated or written therein and shall limit and govern
the relations between the parties.

Contract must not be contrary to morals.

Morals deal with norms of good and right conduct evolved in a community. These norms may
differ at different times and places and with each group of people. Art. 1306 GENERAL
PROVISIONS 452 CONTRACTS Morals or good customs are often embodied in the law (see
Arts. 873, 1183.), but the morals or good customs referred to in Article 1306 must refer to those
not expressed in legal provisions.

Contract must not be contrary to good customs.

Customs consist of habits and practices which through long usage have been followed and
enforced by society or some part of it as binding rules of conduct. It has the force of law when
recognized and enforced by law. A custom must be proved as a fact, according to the rules of
evidence. (Art. 12; see Art. 1376.)

Contract must not be contrary to public order.

Public order refers principally to public safety although it has been considered to mean also the
public weal.

Contract must not be contrary to public policy.

Public policy is broader than public order, as the former may refer not only to public safety but
also to considerations which are moved by Art. 1306 455 the common good. By public policy is
intended that principle of law which holds that no subject or citizen can lawfully do that which
has a tendency to be injurious to the public or against the public good which may be termed the
“policy of the law,’’ or “public policy in relation to the administration of the law.’’

“In the absence of express legislation or constitutional prohibition, a court, in order to declare a
contract void as against public policy, must find that the contract as to the consideration or thing
to be done, has a tendency to injure the public, is against the public good, or contravenes some
interests of society, or is inconsistent with sound policy and good morals, or tends clearly to
undermine the security of individual rights, whether of personal liability or of private property.”

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. (n)

Classifi cation of contracts according to its name or designation.

They are:

(1) Nominate contract or that which has a specific name or designation in law (e.g.,
commodatum, lease, agency, sale, etc.); and

(2) Innominate contract or that which has no specifi c name or designation in law.

Kinds of innominate contract.

They are:

(1) do ut des (I give that you may give);

(2) do ut facias (I give that you may do);

(3) facio ut des (I do that you may give); and

(4) facio ut facias (I do that you may do).

Do ut des is, however, no longer an innominate contract. It has already been given a name of
its own, i.e., barter or exchange. (Art.1638.)

ART. 1308. The contracts must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them. (1256a)

Contract binds both contracting parties.

(1) Principle of mutuality of contract. — Article 1308 expresses this principle. The ultimate
purpose of the principle is to nullify a contract containing a condition which makes its fulfillment
or pre-termination dependent exclusively upon the uncontrolled will of one of the contracting
parties.

A contract is an agreement which gives rise to obligations. It must bind both parties in order
that it can be enforced against either. Needless to say, a contract can be renewed, revived,
extended, abandoned, renounced, or terminated only by mutual consent of the parties. Without
this mutuality and equality between the parties, it cannot be said that the contract has the force
of law between them. (Art. 1159.) It is considered repugnant to have one party bound by a
contract while leaving the other free from complying therewith.

A party to a contract is liable for damages for breach or violation thereof. (see Art. 1170.)
Breach of contract is defi ned as the “failure without legal reason to comply with the terms of the
contract’’ or the “failure without legal excuse to perform any promise which forms the whole or
part of the contract.

Meaning of stipulation pour autrui.

Stipulation pour autrui is a stipulation in a contract clearly and deliberately conferring a favor
upon a third person who has a right to demand its fulfi llment, provided, he communicates his
acceptance to the obligor before its revocation by the obligee or the original parties.

ART. 1315. Contracts are perfected by mere consent, and from that moment the parties
are bound not only to the fulfi llment 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. (1258)

Art. 1315 493 ART. 1316. Real contracts, such as deposit, pledge and commodatum, are
not perfected until the delivery of the object of the obligation. (n)

Classifi cation of contracts according to perfection.

They are:

(1) Consensual contract or that which is perfected by mere consent (e.g., sale, lease, agency)
(Art. 1315.);

(2) Real contract or that which is perfected, in addition to the above, by the delivery of the thing
subject matter of the contract (e.g., depositum, pledge, commodatum) (Art. 1316; see Arts.
1934, 1963, 2093.); and

(3) Solemn contract or that which requires compliance with certain formalities prescribed by law
such prescribed form being thereby an essential element thereof (e.g., donation of real
property).

Stages in the life of a contract.

A contract undergoes three (3) distinct stages. They are:

(1) Preparation or negotiation. — This includes all the steps taken by the prospective parties
from the time they manifest interest in entering into a contract, leading to the perfection of the
contract. At this stage, the parties have not yet arrived at any defi nite agreement. They are yet
undergoing the preliminary steps towards the formation of a valid contract. Either party may stop
the negotiation or withdraw an offer made;

(2) Perfection or birth. — This takes place when the parties have come to a defi nite agreement
or meeting of the minds regarding the terms, that is, the subject matter and cause of the
(consensual) contract (Art. 1319.), i.e., upon concurrence of the essential elements of the
contract; and

(3) Consummation or termination. — This takes place when the parties have fulfi lled or
performed their respective obligations or undertakings under the contract and the contract may
be said to have been fully accomplished or executed, resulting in the extinguishment thereof.

Once a contract is shown to have been consummated or fully performed by the parties thereto,
its existence and binding effect can no longer be disputed

How contracts are perfected.

(1) Consensual contracts. — As a general rule, contracts are perfected by mere consent of the
parties regarding the subject matter and the cause of the contract.20 (Arts. 1315, 1319.) They
are obligatory in whatever form they may have been entered into, provided, all the essential
requisites for their validity are present. (Art. 1356.) Almost all contracts are consensual as to
perfection. They come into existence upon their perfection by mutual consent even if the parties
have not affixed their signatures to its written form, and even if the subject matter or the
consideration has not been delivered, barring law or stipulation to the contrary.

In the absence of delivery, perfection does not transfer title or create real right, yet, it gives rise
to obligation binding upon both parties. (Arts. 1305, 1308.)
(2) Real contracts. — The exceptions are the so-called real contracts which are perfected not
merely by consent but by the delivery, actual or constructive, of the object of the obligation (Art.
1316.), as in a pledge, mutuum (simple loan) or commodatum. These contracts have for their
purpose restitution, because they contemplate the return by a party of what has been received
from another or its equivalent.

(3) Solemn contracts. — When the law requires that a contract be in some form to be valid (Art.
1356.), this special form is necessary for its perfection, the prescribed form being thereby an
essential requisite of the contract. Thus, a donation of real property cannot be perfected until it
is embodied in a public instrument. (Art. 749.) But, except in the case of statutory forms or
solemn agreements, it is the assent and concurrence (“the meeting of the minds”) of the parties,
and not the setting down of its terms, that constitutes a binding 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. (1261)

Classes of elements of a contract.

They are:

(1) Essential elements or those without which no contract can validly exist. They are also
known as requisites of a contract. They may be subdivided into:

(a) common or those present in all contracts, namely, consent, object, and cause (Art. 1318.);
and

(b) special or those not common to all contracts or those which must be present only in or
peculiar to certain specifi ed contracts, and such peculiarity may be:

1) as regards to form, as for example, public instrument in donation of immovable property (Art.
749.), delivery in real contracts (Art. 1316.), registration in real estate mortgage1 (Art. 2125.)
and chattel mortgage (Art. 2140.), etc.; or

2) as regards the subject-matter, as for example, real property in antichresis (Art. 2132.),
personal property in pledge (Art. 2094.), etc.; or 3) as regards the consideration or cause, as for
example, price in sale (Art. 1458.) and in lease (Arts. 1643, 1644.), liberality in commodatum

SECTION 1. — Consent

ART. 1319. Consent 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. A qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge. The contract, in such a case, is presumed to have been entered
into in the place where the offer was made. (1262a)

Meaning of consent. Consent is the conformity of wills and with respect to contracts, it is the
agreement of the will of one contracting party with that of another or others, upon the object and
terms of the contract.

Meaning of offer. Offer is a proposal made by one party (offerer) to another to enter into a
contract. It is more than an expression of desire or hope. It is really a promise to act or to refrain
from acting on condition that the terms thereof are accepted by the person (offeree) to whom it
is made. Offer must be certain. The offer must be certain or defi nite and clear, and not vague or
speculative so that the liability (or the rights) of the parties may be exactly fi xed because it is
necessary that the acceptance be identical with the offer to create a contract without any further
act on the part of the offeror.

Meaning of acceptance. Acceptance is the manifestation by the offeree of his assent to the
terms of the offer. Without acceptance, there can be no meeting of the minds between the
parties. (Art. 1305.) A mere offer produces no obligation.

Acceptance of offer must be absolute. The acceptance of an offer must be absolute,

unconditional or unqualifi ed, that is, it must be identical in all respects with that of the offer so
as to produce the consent or meeting of the minds necessary to perfect a contract.

When acceptance with request for changes in offer not a counter-offer. An acceptance of
an offer may request certain changes in the terms of the offer and yet may be a binding
acceptance. So long as it is clear that the meaning of the acceptance is positively and
equivocally to accept the offer, whether such request is granted or not, a contract is formed.

However, when any of the elements of the contract is modified upon acceptance, such
alteration amounts to a counter-offer.

ART. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.

When offer becomes ineffective.

An offer may be withdrawn before it is accepted. After acceptance, the contract is already
perfected. (Art. 1319.) Under Article 1323, even if the offer is not withdrawn, its acceptance will
not produce a meeting of the minds in case the offer has already become ineffective because of
the death, civil interdiction, insanity, or insolvency of either party before the conveyance of the
acceptance to the offeror. It must be observed that the law refers to “either party.” This means
that at the time the acceptance is communicated, both parties, offerer and offeree, must be
living and capacitated. (see Art. 1327.) The death of either party or his loss of capacity before
perfection precludes the formation of a contract. The above grounds are not exclusive. Thus,
failure to comply with the condition of the offer as to the time, place, and the manner of payment
(Art. 1321.), the expiration of the period fi xed in the offer for acceptance (Art. 1324.), the
destruction of the thing due before acceptance (Art. 1262.), rejection of the offer, etc. will also
render the offer ineffective and prevent the juridical tie from being formed.

ART. 1327. The following cannot give consent to a contract: (1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

Persons who cannot give consent.

There is no effective consent in law without the capacity to give such capacity.

A contract entered into where one of the parties is incapable of giving consent to a contract is
voidable. A voidable contract is valid and binding until it is annulled by a proper action in court. It
is susceptible of ratification. (Art. 1390.) If both parties are incapable of giving consent, the
contract is unenforceable unless they are ratified. (Art. 1403[3].)

Those who are incapacitated to give consent under Article 1327 are the following:

(1) Unemancipated minors. — They refer to those persons who have not yet reached the age of
majority (18 years) and are still subject to parental authority. A minor can be emancipated by
attainment of the age of majority, by marriage, or by the recording in the Civil Register of an
agreement in a public document executed by the parent exercising parental authority and the
minor at least 18 years of age. (Art. 234, Family Code.)

(2) Insane or demented persons. — The insanity must exist at the time of contracting. Unless
proved otherwise, a person is presumed to be of sound mind at any particular time and the
condition is presumed to continue to exist. Thus, the mere fact that the vendor was judicially
declared mentally incapacitated nine (9) days after the execution of the deed of sale does not
prove conclusively that he was incapacitated when the contract was executed, and in the
absence of suffi cient proof that he was suffering from mental alienation at the specifi ed time,
the declaration does not warrant the annulment of said contract

(3) Deaf-mutes. — They are persons who are deaf and dumb. However, if the deaf-mute knows
how to write, the contract is valid for then he is capable of giving intelligent consent. A person
who does not know how to write, does not know how to read: and one who knows how to read
necessarily knows how to write. A contract entered into by a deaf-mute who knows how to read
is, therefore, valid, although he cannot write because of some physical reasons.

ART. 1330. A contract where consent is given through mistake, violence, intimidation,
undue infl uence, or fraud is voidable.(1265a)

Characteristics of consent.

In order that consent may be suffi cient for purposes of contract, it is required, not only that it
exists. Aside from the requirement that consent must be manifested by the meeting of the offer
and the acceptance (Art. 1319.), there is no valid consent unless:

(1) It is intelligent. — There is legal capacity to act. (see Arts. 1327- 1329.) The consent must
be given with an exact notion over the thing consented to or the matter to which it refers. In the
case of a juridical persons such as a corporation, consent may only be given through officers
duly authorized by its board of directors;

(2) It is free and voluntary. — There is no vitiation of consent by reason of violence or

intimidation (see Art. 1330.); and

(3) It is conscious or spontaneous. — There is no vitiation of consent by reason of mistake,

undue infl uence, or fraud.

Thus, Article 1330 enumerates in a negative manner the different requisites of consent. In
addition, under Articles 1327, 1328, and 1329, the contracting parties must possess the
necessary legal capacity. (Arts. 1327-1329.) Simulation of contract renders the apparent
contract void.(see Arts. 1345-1346.)

ART. 1331. In order that mistake may invalidate consent, it should refer to the substance
of the thing which is the object of the contract, or to those conditions which have
principally moved one or both parties to enter into the contract. Mistake as to the identity
or qualifi cations of one of the parties will vitiate consent only when such identity or
qualifi cations have been the principal cause of the contract. A simple mistake of account
shall give rise to its correction. (1266a)

Meaning of mistake or error. Mistake or error is the false notion of a thing or a fact material to
the contract.

SECTION 2. — Object of Contracts

ART. 1347. All things which are not outside the commerceof men, including future
things, may be the object of a contract.All rights which are not intransmissible may also
be the objectof contracts.No contract may be entered into upon future inheritance except
in cases expressly authorized by law. All services which are not contrary to law, morals,
good customs, public order or public policy may likewise be the object of a contract.
(1271a)

ART. 1348. Impossible things or services cannot be the object of contracts. (1272)

Concept of object of a contract.

The object of a contract is its subject matter. (Art. 1318[2].) In reality, the object of every
contract is the obligation created. But since a contract cannot exist without an obligation, it may
be said that the thing, service, or right which is the object of the obligation is also the object of
the contract. (2 Castan 9.)

Kinds of object of contract.

Object certain is the second essential element of a valid contract. The object may be things (as
in sale of property), rights (as in assignment of credit), or services (as in agency).
Requisites of things as object of contract.

In order that things may be the object of a contract, the following requisites must be present:

(1) The thing must be within the commerce of men, that is, it can legally be the subject of
commercial transaction (Art. 1347.);

(2) It must not be impossible, legally or physically (Art. 1348.);

(3) It must be in existence or capable of coming into existence (see

Arts. 1461, 1493, 1494.); and

(4) It must be determinate or determinable without the need of a

new contract between the parties. (Arts. 1349, 1460, par. 2.)

Requisites of services as object of contract.

In order that service may be the object of a contract, the following requisites must concur:

(1) The service must be within the commerce of men;

(2) It must not be impossible, physically or legally (Art. 1348.);

and

(3) It must be determinate or capable of being made determinate. (Arts. 1318[2], 1349.)

Rights as object of contract.

As a general rule, all rights may be the object of a contract. The exceptions are when they are
intransmissible by their nature, or by stipulation, or by provision of law. (Art. 1311, par. 1.)

FORM OF CONTRACTS

ART. 1356. Contracts shall be obligatory, in whatever form they may have been entered
into, provided all the essential requisites for their validity are present. However, when the
law requires that a contract be in some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties stated in the following article cannot
be exercised. (1278a)

Meaning of form of contracts.

The form of a contract refers to the manner in which a contract is executed or manifested.

Forms of contract.

(1) The contract may be (a) parol or oral, or (b) in writing, or (c) partly oral and partly in writing.
If in writing, it may be in a public or a private instrument.

(2) A contract need not be contained in a single writing. It may be collected from different
writings which do not conflict with each other and which when connected, show the parties,
subject matter, terms and consideration, as in contracts entered into by correspondence.

(3) A contract may be encompassed in several instruments even though every instrument is not
signed by the parties since it is sufficient if the unsigned instruments are clearly identified or
referred to and made part of the signed instrument or instruments.

(4) Similarly, a written agreement of which there are two copies, one signed by each of the
parties is binding on both to the same extent as though there had been only one copy of the
agreement and both had signed.

When contract considered in written form.

It is generally recognized that to be a written contract, all its terms must be in writing. So, a
contract partly in writing and partly oral is,in legal effect, an oral contract.

Two aspects of contracts.

(1) Intent or will. — This is internal and as long as a contract exists merely as a psychological
fact, it produces no legal effect, because the law cannot take cognizance of its existence; and
(2) Expression of such intent or will. — It is necessary, in order that the will may produce legal
effect, that it be expressed. This expression or declaration of the will is its form. On this basis,
contracts are divided into formal and informal

Form for validity of contract.

There are rare cases when the law requires that a contract be in a certain form for the validity
of the contract such as those mentioned below.

(1) Donation of real property. — It must be in a public instrument. (Art. 749.)

(2) Donation of personal property the value of which exceeds P5,000.00.— The donation and
acceptance must be in writing. (Art. 748.)

(3) Sale of land through an agent. — The authority of the agent must be in writing; otherwise,
the sale is void. (Art. 1874.)

(4) Contract of antichresis. — The amount of the principal and of the interest must be specifi ed
in writing. (Art. 2134.)

(5) Stipulation to pay interest. — It must be in writing; otherwise, no interest is due. (Art. 1956.)
 (6) Contract of partnership. — If immovables are contributed, it must be in a public instrument
to which shall be attached a signed inventory of the immovable property contributed. (Arts.
1771, 1773.)

(7) Transfer or sale of large cattle. — It must be registered (so it must be in a public instrument)
and a certifi cate of transfer secured. (Act No. 1147, Sec. 22.)

(8) Negotiable instruments. — They must be in writing. (Act No.2031, Sec. 1.)

Form for enforceability of contract.

In the cases of contracts covered by the Statute of Frauds, the law requires that they be in
writing subscribed by the party charged or by his agent. (Art. 1403[2].) If the contract is not in
writing, the contract is valid (assuming all the essential elements are present) but, upon the
objection of a party, it cannot be proved and, therefore, it cannot be enforced unless it is ratifi
ed. (Art. 1405.)