Contracts

[Definition – Stages1A(10.17.2020)]
[Follow the Outline]

Part One
Modified True or False. Consider the statement true only when it is absolutely true.
Explain ALL your answers.

1. A contract is a meeting of minds between two persons.

FALSE. There may be a “meeting of the minds (agreement)” that may not necessarily give rise to
a contract.

Uribe: Dation in payment is not a contract because contract is a source of obligation and dation
in payment does not create an obligation.

There may be a meeting of the minds (agreement) but that does not necessarily give rise to a
contract; but a contract necessarily implies that there was an agreement.

The definition of a contract under the Code is defective because it does not include bilateral
contracts where both parties are obliged and does not include obligations not to do.

Also, there are auto-contracts. Auto-contracts are contracts where one person contracts with
himself. They are, under the law, generally accepted because the number of parties is not
determinative of the existence of a contract; what is important is that there be at least two
declarations of wills (not two wills).

2. Contracts take effect between the parties, their assigns and heirs.

FALSE. 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.

 Privity of contracts

There are rights that are intransmissible by law:

1. Usufructuary
2. Partnership: 
3. Contracts are perfected by mere consent.

FALSE. NOT ALL CONTRACTS are perfected by mere consent: Only consensual contracts are
those which are perfected by mere consent (Art. 1315).

Real contracts are those which are perfected upon the delivery of the object of the obligation.
(Art. 1316) Examples of real contracts are deposit, pledge, commodatum and simple loan
(mutuum).

A DONATION IS NOT A CONTRACT. IT IS AN ACT.

How to determine if a contract is a formal contract? If the law requires particular form and
noncompliance will render the contract void.

Statute of frauds/Art. 1356. - Enforceability

Art. 1358. - To bind 3rd persons. Greater efficacy of the contract.

3. An offer becomes ineffective upon the insolvency of either party before acceptance is conveyed.

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

Cognition theory!

5. The contracting parties MAY establish such stipulations, clauses, terms and conditions as they
may deem convenient.

TRUE. 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.

KAPAG “MAY” ang nakalagay at pwedeng mangyari, TRUE ANG SAGOT HUHU

5. Real contracts are not perfected until the delivery of the object of the obligation. (WHEN
PERFECTED)

TRUE. Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected
until the delivery of the object of the obligation.

5. The contracts must bind both contracting parties; its validity or termination cannot be left to the
will of one of them.

FALSE. Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.

This refers to the MUTUALITY PRINCIPLE.

Lease, retainership agreements. MAY KASO DITO: Philippine Banking Corporation v. Lui She, 21
 SCRA 52

However, in an escalation clause, if the increase of compensation is dependent on the sole will of
one of the parties, that is a void stipulation because it violates the mutuality of contracts
principle.

5. Real contracts, such as deposit, pledge and guaranty, are not perfected until the delivery of the
object of the obligation.

FALSE. Art.1316. Real contracts, such as deposit, pledge and commodatum, are not perfected
until the delivery of the object of the obligation.

Guaranty is not a REAL CONTRACT.

5. In onerous contracts the object is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other.

FALSE. Art. 1350. In onerous contracts the cause is understood to be, for each contracting party,
the prestation or promise of a thing or service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the
benefactor.

What may be the object of contracts? Things, rights, services.

In a contract of sale, what is the cause? Seller: Promise to deliver the thing; Buyer: Promise to
pay the price

5. A contract of loan is a real contract.

TRUE. A contract of loan is a real contract because the delivery of the thing is necessary for the
perfection of the contract.

There are 2 kinds of loan: (1) commodatum and (2) mutuum. Both commodatum and mutuum
are real contracts.

5. A contract of adhesion is a principal contract.

FALSE. A contract of adhesion is not necessarily a principal contract.

An example of contract of adhesion which is not a principal contract: Guaranty

12. A contract of sale is an essentially onerous contract.

TRUE. It is essentially onerous, because a sale cannot be gratuitous. Otherwise, it may be

another contract or any other act like it may be a donation if there is no compensation for the
transfer of ownership to the other party. (Art. 1350)
 Example of essentially gratuitous contract: commodatum

13. A contract of lease is a bilateral contract.

TRUE. Art. 1642. The contract of lease may be of things, or of work and service.

Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid. 

Art. 1644. In the lease of work or service, one of the parties binds himself to execute a piece of
work or to render to the other some service for a price certain, but the relation of principal and
agent does not exist between them. 

A bilateral contract is one which gives rise to reciprocal obligations for both parties (i.e. sale,
lease).

14. An option agreement is a contract.

FALSE DAW. NOT NECESSARILY. Art. 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time before acceptance by communicating
such withdrawal, except when the option is founded upon a consideration, as something paid or
promised.

An option contract is one granting a privilege to buy or sell within an agreed time and
at a determined price. It must be supported by a consideration distinct from the
price. (Art. 1479 and 1482, NCC)

Withdrawal in an option contract would be in breach of a contract.

15. A contract of sale is a formal contract.

FALSE. Not all sales are required to be in a particular form for their validity. A contract of sale is
essentially a consensual contract which is perfected upon the meeting of the object and price of
the thing.

Part Two
Multiple Choice. Choose the best answer.

1. P1,500,000.00.  Perfecto told Reynaldo that he was giving Reynaldo up to February 28, 2020 to
decide whether to buy or not the house and lot.  Reynaldo accepted the option but did not give
anything to Perfecto to support the option given to him.   On February 20, 2020, Perfecto found
another buyer who was ready to buy the house and lot for P2,000,000.00.  Perfecto wants to ask
you whether he can still withdraw the offer he made to Reynaldo.  Decide.
1. Yes, Perfecto may withdraw the offer because he stands to gain an added profit of
P500,000.00 and this will be more than enough to pay any damages to Reynaldo.
 2. Yes, Perfecto may withdraw the offer by just informing Reynaldo of such fact.

When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration.

In this case, the option was not founded upon any consideration.

c. No, Perfecto may not withdraw the offer because the option was accepted by  Reynaldo
although Reynaldo did not given anything in support thereof.
c. No, Perfecto may not withdraw his offer until the lapse of the period given to Reynaldo to
exercise his option.

2. A contract whose cause is the promise of a thing or service by the other is:
1. a remuneratory contract.
2. a gratuitous contract.
3. a lucrative contract.
4. an onerous contract.

Art. 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other ;
in remuneratory ones, the service or benefit which is remunerated; and in contracts of
pure beneficience the mere liberality of the benefactor.

b. 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.  This is known as:
1. Liberty of contract

This also refers to autonomy of contracts.

2. Mutuality of contract
3. Relativity of contract
4. Obligatory force of contract

b. One of the following is not a real contract:

1. Pledge
2. Commodatum
3. Deposit
4. Sale

Real contracts are perfected only upon delivery.

b. It is the manifestation of the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.
1. Consideration
2. Contract
 3. 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)

d. Cause

6. On  May 1, 2019, S offered to sell a specific car to B for P500,000.00.  B sent his letter of
acceptance to S on May 8, 2019.   On May 10, 2019, however, S died in a vehicular accident and
his secretary received the letter of acceptance on May 12, 2019 unaware that S had already died.
d. The contract was perfected on May 8, 2019 when B sent his letter of acceptance.
d. The contract was perfected on May 12, 2019 when the secretary of S received the letter
of acceptance.
d. The contract was not perfected because the offer of S became ineffective
when he died.

Under the theory of manifestation, offer and acceptance takes effect only from the time
knowledge is acquired by the person to whom it is directed. If during the intervening
time, the offer or acceptance is extinguished by death/insanity, such offer or acceptance
has no more effect. (In civil code, we use the theory of cognition (Art. 1319, second
pag.). In commercial law, we use the theory of manifestation- refer to Balane)

d. The contract was perfected on May 1, 2019 because the acceptance made by B on May
8, 2002 retroacts to the date of the offer.

b. It is a principle which holds that parties are bound not only by what has been expressly provided
for in the contract but also to the natural consequences that flow out of such agreement.
1. Obligatory force of contracts

Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.

Uribe: I would say, ang pinaka-fundamental basis of this principle is Art. 1159--that
obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
 The premise, however, of that rule is that the contract is a valid contract in order for
such to have the force of law between the contracting parties.

b. Mutuality of contracts
b. Autonomy of contracts
b. Relativity of contracts

8. Contracts take effect only between the parties or their assigns and heirs, except where the rights
and obligations arising from the contract are not transmissible by their nature, by stipulation, or
by provision of law. In the latter case, the assigns or the heirs are not bound by the contracts.
This is known as the principle of
1. Relativity of contracts.
2. Freedom to stipulate.
3. Mutuality of contracts.
4. Obligatory force of contracts.

b. Which phrase most accurately completes the statement – Any third person who induces another
to violate his contract:
1. shall be liable for damages only if he is a party to the same contract.
2. shall be liable for damages to the other contracting party.

Art. 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party.

Uribe: Ang liability nila according to SC decisions is solidary because ang treatment sa
Art. 1314 is an extension of the concept known as quasi-delict. Kaya applicable ang rule
sa Art. 2194--they will be treated as joint tortfeasors. But in one case decided by the SC,
ang liability ng third person cannot be greater than the liability who he himself violated
the contract.

3. shall not be liable for damages to the other contracting party.

4. shall not be liable for damages if the parties are in pari delicto.

b. The following are solemn contracts (Contracts which must appear in writing), except: 
1. Donations of real estate or of movables if the value exceeds P 5,000.00.
2. Stipulation to pay interest in loans.
3. Sale of land through an agent (authority must be in writing).
4. Construction contract of a building.

b. Which of the following statements is correct? 

1. All contracts are perfected by mere consent.
2. All contracts are perfected by delivery of the object.
3. All contracts are required to be in writing.
4. All contracts are required to have a valid consideration.
Part Three
Give direct and concise but complete answers.
Cite authorities, if any.

Batchelder v. CB

Batchelder is an American permanently residing in the Philippines. In compliance with Monetary Board
Resolutions, he surrendered his dollar earnings to the Centra Bank’s authorized agents and applied for a
license to utilize 90% of the surrendered earnings. However, the Central Bank never heeded Batchelder’s
application arguing that the Monetary Board Resolutions relied upon simply laid down policy without in
any way giving rise to a valid and binding agreement to which the law should give effect. The trial court
found for Batchelder. On appeal, Central Bank interposed an issue that there was no such contractual
obligation between the parties which will hold Central Bank liable therefor.

Was there a contract between Batchelder and the Central Bank?

NO, there was no contract. The birth or perfection of a consensual contract commences from the
moment the parties come to an agreement on a definite subject matter and valid consideration.

The Monetary Board Resolutions merely laid down a general policy on the utilization of the dollar
earnings of Filipino and resident American contractors undertaking projects in U.S. military bases

1. Newlyweds Sam and Sienna had contracted with Sangria Hotel for their wedding
reception. The couple was so unhappy with the service, claiming, among other things,
that there was an unreasonable delay in the service of dinner and that certain items
promised were unavailable. The hotel claims that, while there was a delay in the service
of the meals, the same was occasioned by the sudden increase of guests to 450 from the
guaranteed expected number of 350, as stated in the Banquet and Meeting Services
Contract. In the action for damages for breach of contract instituted by the couple, they
claimed that the Banquet and Meeting Services Contract was a contract of adhesion since
they only provided the number of guests and chose the menu. On the other hand, the
hotel’s defense was that the proximate cause of the complainant’s injury was the
unexpected increase in their guests, and this was what set the chain of events that resulted
in the alleged inconveniences.

(b) Was the Banquet and Meeting Services Contract a contract of adhesion? If yes,
is the contract void?

Yes, it is a contract of adhesion, but the same is not void.

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of
contract, which the other party may accept or reject, but which the latter cannot modify. Here, the
contract is ready-made by Sangria, as the spouses only chose the menu and provided the number of
guests but they cannot modify the terms thereof; hence, a contract of adhesion.

Although a contract of adhesion, it is not entirely against the law and is as binding as ordinary contracts,
the reason being that the party who adheres to the contract is free to reject it entirely, but the effect, as
ruled in Orient Air v. CA (G.R. No. 76931, May 29, 1991), is that in case of ambiguity it is construed
against the party who caused it to be drafted and could have avoided it by the exercise of a little more
care.

1. On July 1, 1998, Brian leased an office space in a building for a period of five years at a rental
rate of P1,000.00 a month.  The contract of lease contained the proviso that “in case of inflation
or devaluation of the Philippine peso, the monthly rental will automatically be increased or
decreased depending on the devaluation or inflation of the peso to the dollar.”   Starting March 1,
2001, the lessor increased the rental to P2,000.00 a month, on the ground of inflation proven by
the fact that the exchange rate of the Philippine peso to the dollar had increased from
P25.00=$1.00 to P50.00=$1.00.  Brian refused to pay the increased rate and an action for
unlawful detainer was filed against him.  Will the action prosper?  Why?

BAR 2001: SUGGESTED ANSWER:

The unlawful detainer action will not prosper. Extraordinary inflation or deflation is defined as the
sharp decrease in the purchasing power of the peso. It does not necessarily refer to the
exchange rate of the peso to the dollar. Whether or not there exists an extraordinary Inflation or
deflation is for the courts to decide. There being no showing that the purchasing power of the
peso had been reduced tremendously, there could be no inflation that would justify the increase
in the amount of rental to be paid. Hence, Brian could refuse to pay the increased rate.

ALTERNATIVE ANSWER:

The action will not prosper. The existence of inflation or deflation requires an official declaration
by the Bangko Sentral ng Pilipinas.

ALTERNATIVE ANSWER:*
The unlawful detainer action will prosper. It is a given fact in the problem, that there
was inflation, which caused the exchange rate to double. Since the contract itself
authorizes the increase in rental in the event of an inflation or devaluation of the
Philippine peso, the doubling of the monthly rent is reasonable and is therefore a
valid act under the very terms of the contract. Brian's refusal to pay is thus a ground
for ejectment.

Uribe:* Ang tamang sagot diyan ay yung isang alternative answer.* This is a valid adjustment of
the rental because it was expressly agreed upon by the parties--it was stipulated. That would fall
under the last phrase of Art. 1250: “unless there is an agreement to the contrary.” It does not
require extraordinary inflation.
 This scenario, I am 99.9% sure, was taken from Del Rosario v. Shell (164 SCRA 556). Doon,
ganun din ang condition: Basta may inflation or deflation, ia-adjust ang renta. Was it sustained
by the SC as a valid escalation clause? YES! Because that is a reasonable escalation clause.
Siempre, kapag bumaba ang value ng peso, dapat itaas ang renta. Wala nang silbi ang renta
kung bumababa ang value ng peso. The SC sustained the validity of the increase because it was
expressly stipulated by the parties--hindi kailangan ng extraordinary inflation in order for the
adjustment in the compensation to be sustained. 

Daisy Tiu v. Platinum Plans

Daisy Tiu signed a contract with this stipulation:

NON-INVOLVEMENT PROVISION -- The EMPLOYEE further undertakes that during his/her engagement
with EMPLOYER and in case of separation from the Company, whether voluntary or for cause, he/she
shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation,
association or entity, whether directly or indirectly, engaged in the same business or belonging to the
same pre-need industry as the EMPLOYER. Any breach of the foregoing provision shall render the
EMPLOYEE liable to the EMPLOYER in the amount of One Hundred Thousand Pesos (P100,000.00) for
and as liquidated damages.

Despite this provision, Tiu resigned from Platinum Plans and illegally transferred to Professional Pension
Plans. Nag-demand ang Platinum na magbayad si Tiu ng P100,000. Because Tiu refused to pay,
kinasuhan siya. 

Ang defense ni Tiu--as would usually be the defense in similar cases--is that the non-involvement
provision is void. Anong ground? Nasa Constitution--it amounts to an unreasonable restraint of trade. 

ISSUE: In this case, does the provision amount to unreasonable restraint of trade? 

RULING: The SC ruled NO. In those cases wherein the SC ruled that such stipulation is void--the
prohibition is perpetual or 20 years. Mukha nga namang unreasonable restraint of trade. 

But here, two (2) years lang. The SC ruled that under the circumstances, especially as to Tiu, this is a
reasonable restriction on the rights of the employee and also a reasonable protection to the rights of the
employer. This is because Tiu is the Assistant Vice President of Platinum Plans--hindi siya ordinary
personnel, hindi siya utility personnel. Head siya ng Asia-Pacific operations ng company--Hong Kong,
Singapore, etc. Nasa mataas siya na position--privy siya sa mga strategy ng company. Aside from two (2)
years lang, limited lang sa pre-need industry. Kaya ang conclusion is that it is a reasonable limitation on
the rights of the employee. Hindi ito void na provision. 

Article 1306 of the Civil Code provides that parties to a contract 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. Article 1159 of the same Code also provides that obligations
arising from contracts have the force of law between the contracting parties and should be complied with
in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does
not contravene law, morals, good customs, public order or public policy, for to do so would be to alter
the real intent of the parties, and would run contrary to the function of the courts to give force and effect
thereto. Not being contrary to public policy, the non-involvement clause, which petitioner and respondent
freely agreed upon, has the force of law between them, and thus, should be complied with in good faith.

A non-involvement clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place. In this case, the non-involvement clause has a time
limit: two years from the time petitioner’s employment with respondent ends. It is also limited as to
trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondent’s.
More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations
Head in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and
highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business
soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive
marketing environment. In sum, we find the non-involvement clause not contrary to public welfare and
not greater than is necessary to afford a fair and reasonable protection to respondent.

What is a scenario wherein even 1 year non-involvement clause would be void? When the ee was
prohibited from engaging in any business. In this case, it is limited only to pre-need business.

Cui v. Arellano University, 2 SCRA 205

Emetrio Cui took his preparatory law course at Arellano University.  He then enrolled in its College of Law
from first year (SY1948-1949) until first semester of his 4th year.  During these years, he was awarded
scholarship grants of the said university amounting to a total of P1,033.87.  He then transferred and took
his last semester as a law student at Abad Santos University.   To secure permission to take the bar, he
needed his transcript of records from Arellano University.  The defendant refused to issue the TOR until
he had paid back the P1,033.87 scholarship grant which Emetrio refunded as he could not take the bar
without Arellano’s issuance of his TOR.

On August 16, 1949, the Director of Private Schools issued Memorandum No. 38 addressing all heads of
private schools, colleges and universities.  Part of the memorandum states that “the amount in tuition
and other fees corresponding to these scholarships should not be subsequently charged to the recipient
students when they decide to quit school or to transfer to another institution.  Scholarships should not be
offered merely to attract and keep students in a school.”

Is Cui entitled to refund the P1,033.97 payment for the scholarship grant provided by Arellano?
NO. The memorandum of the Director of Private Schools is not a law where the provision set therein was
advisory and not mandatory in nature.  Moreover, the stipulation in question, asking previous students to
pay back the scholarship grant if they transfer before graduation, is contrary to public policy, sound policy
and good morals or tends clearly to undermine the security of individual rights and hence, null and void.     

The stipulation in a contract, between a student and the school, that the student’s scholarship is good
only if he continues in the same school, and that he waives his right to transfer to another school without
refunding the equivalent of his scholarship in cash is contrary to public policy and, hence, null and void
because scholarships are awarded in recognition of merit and to help gifted students in whom society has
an established interest or a first lien, and not to keep outstanding students in school to bolster its
prestige and increase its business potential.
Saura v. Sindico, 107 Phil 336

Saura and Sindico were contenders to be the official nominee of the Nacionalista Party in the 4th district
of Pangasinan in the 1957 elections. They entered into an agreement, stipulating:

“Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a
rebel or independent candidate after losing in said convention.”

Saura won the nomination. Nonetheless, Sindico still filed for candidacy. Saura sued Sindico. Trial court
dismissed the complaint, ruling that the agreement sued upon was null and void.

Was the agreement between Saura and Sindico valid?

NO. Political rights cannot be the subject matter of a contract!

Among those that may not be the subject matter (object) of contracts are certain rights of individuals,
which the law and public policy have deemed wise to exclude from the commerce of man. Among these
are the political rights conferred upon citizens, including, but not limited to one's right to vote, the right
to present one's candidacy to the people and to be voted to public office, provided, however, that all the
qualifications prescribed by law obtain. Such rights may not, therefore, be bargained away or
surrendered for consideration by the citizen or unduly curtailed with impunity, for they are conferred not
for individual or private benefit or advantage but for the public good and interest.

Sanico and Castro v. Colipano

This case involved a contract of carriage. Colipano is a passenger in one of the jeepneys owned by
Sanico. Castro is the driver. Na-injure si Colipano at in-amputate ang kanyang isang paa. Kinasuhan niya
si Sanico at Castro. Ang cause of action niya: Breach of contract.

I agree with this decision. I do not agree with the decision in Gutierrez v. Gutierrez (56 Phil 177) (THIS
CASE WAS DISCUSSED IN OBLIGATIONS--THE DRIVER IN THAT CASE WAS HELD LIABLE
TOGETHER WITH THE OWNER OF THE VEHICLE) and a few other cases. Ang sinasabi kasi ng mga
kasong ito: Ang driver daw can also be held liable for breach of contract of carriage. Pero paano siya
magiging liable eh hindi naman siya party to the contract? He is not even privy to the contract. Party lang
siya sa employment contract with the operator but not in the contract of carriage. Ang party sa contract
of carriage is the operator and the passenger.

Dito, kinasuhan niya ang driver ng breach of contract. Did the action prosper?

ISSUE: Whether Colipano has cause of action against Castro.

RULING: NO, because only Sanico breached the contract of carriage. Only Sanico was the party to the
contract of carriage with Colipano. Since the cause of action is based on a breach of contract of carriage,
the liability of Sanico is direct as the contract is between him and Colipano. Castro, being merely the
driver of Sanico's jeepney, cannot be made liable as he is not a party to the contract of carriage .
3. Francis Albert, a citizen and resident of New Jersey U.S.A., under whose law he was still
a minor, being only 20 years of age, was hired by ABC Corporation of Manila to serve
for two years as its chief computer programmer. But after serving for only four months,
he resigned to join XYZ Corporation, which enticed him by offering more advantageous
terms. His first employer sues him in Manila for damages arising from the breach of his
contract of employment. He sets up his minority as a defense and asks for annulment of
the contract on that ground. The plaintiff disputes this by alleging that since the contract
was executed in the Philippines under whose law the age of majority is 18 years, he was
no longer a minor at the time of perfection of the contract.
Suppose XYZ Corporation is impleaded as co-defendant, what would be the basis of its
liability, if any?

3. SUGGESTED ANSWER:*
XYZ Corporation, having enticed Francis Albert to break his contract with the plaintiff, may be
held liable for damages under Art. 1314, Civil Code.

ALTERNATIVE ANSWER:
The basis of liability of XYZ Corporation would be Article 28 of the Civil Code which states that:
“Unfair competition in agricultural, commercial, or industrial enterprises or in labor through the
use of force, intimidation, deceit, machination or any other unjust, oppressive or highhanded
method shall give rise to a right of action by the person who thereby suffers damage.”

ANOTHER ANSWER:

No liability arises. The statement of the problem does not in any way suggest intent, malice, or
even knowledge, on the part of XYZ Corporation as to the contractual relations between Albert
and ABC Corporation.

Uribe:* This question pertains to Art. 1314--if a third person maliciously induced a party to
violate a contract. There has to be malice.

Itong XYZ Corporation, in a way, induced Francis Albert to violate his contract with the other
corporation. Ang sabi ng examiner, this corporation (XYZ) enticed Francis Albert by offering more
advantageous terms. From the words used by the examiner, mukhang may malicious
inducement. Again, pag sinabi mong “more advantageous,” alam mo may existing contract and
you offering more advantageous terms. “Entice” also has the connotation na may malice. In
Tagalog, “to entice” is “inakit” mo. Malicious ang dating. Kaya pwede mong i-claim na under Art.
1314 that XYZ can be held liable as it induced a party to violate the contract.

In fact, sino ang magiging liable? Silang dalawa: XYZ (the inducer) and Francis Albert (the party
who himself violated the terms of the contract). Ang liability nila according to SC decisions is
solidary because ang treatment sa Art. 1314 is an extension of the concept known as quasi-
delict. Kaya applicable ang rule sa Art. 2194--they will be treated as joint tortfeasors. But in one
case decided by the SC, ang liability ng third person cannot be greater than the liability who he
himself violated the contract. 

Metropolitan Bank and Trust Company vs. Reynado and Adrandea,

Ang contract, for example, is between A and B. Itong si Reynado and Andrandea (X), they claimed that
their criminal liability was extinguished when Metrobank (A) and B entered into an agreement. Sa point of
view ng civil law--kasi sa criminal law, novation does not extinguish the criminal responsibility--X cannot
invoke any right under the contract between A and B because X was not privy to the contract. 

In other words, under the privity of contracts principle, contracts take effect only between the contracting
parties, their assigns, and their heirs. The assigns and heirs are called “privies” to the contract. 

Kaya lang, kung ang general rule is the privity of contract, there are certain contracts that would only
bind the parties--they will not take effect as to the assigns and heirs such that if there is an assignment,
that cannot be a valid assignment. Kung namatay ang isang party, the heirs would not acquire the right
of such party. The reason: The rights and obligations arising from such contract are intransmissible. 

Bakit intransmissible? There are three reasons:

1. By nature of the right and obligation;

2. By stipulation; or
3. By provision of law.

Pero nandito talaga ang tanong:

If X is a third person--hindi siya party, assign or heir--may he be bound by the contract between A and
B? May X have a cause of action? May X be held liable? May X be benefitted? The answer is YES. Nasa
Art. 1311 and 1314. 

Who may be bound by a contract even though he is not a party to such a contract? Anyone in possession
of the object of a contract creating real rights will be bound by such contract. An example of a contract
creating real rights is a real estate mortgage. Kung ang object ng contract ay ibinenta kay X, who is not a
party or privy thereto, X will be bound by such mortgage under Art. 1312. Real rights attach to the party.
Whoever will be in possession of the property will be bound by such contract. Note, however, that In
order to bind X, the real estate mortgage must be registered--although a third person who has actual
knowledge of the contract will also be bound thereby even if the contract is not registered.

Kauffman v. PNB, 42 Phil 182

Kauffman was the president of the Philippine Fiber and Produce Company. He was entitled to the sum of
P98,000 from the surplus earnings of the company which was placed to his credit in the company’s
books. The company treasurer requested from PNB Manila that a telegraphic transfer of $45,000 be
made to Kauffman in New York upon the account of the company. Upon receiving the telegraphic
message, PNB’s representative in NY replied, suggesting the advisability of withholding the money from
Kauffman in view of his reluctance to accept certain bills from the company. PNB heeded the advise and
sent another message to its NY rep withhold the payment to Kauffman as requested.

Does Kauffman have a right of action against PNB?

YES. The fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third
person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the
intention of the parties as disclosed by their contract.

If a third person claims an enforcible interest in the contract, the question must be settled by determining
whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms
in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving
this question, of course, the ordinary rules of construction and interpretation of writings must be
observed.

In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of
a gift or whether there is an obligation owing from the promise to the third person. That no such
obligation exists may in some degree assist in determining whether the parties intended to benefit a third
person, whether they stipulated for him.

It is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in
New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the
circumstances under which that promise was given disclose an evident intention on the part of the
contracting parties that the plaintiff should have the money upon demand in New York City. The
recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in
him to maintain an action to recover it; and indeed if the provision in question were not applicable to the
facts now before us, it would be difficult to conceive of a case arising under it. 

It will be noted that under the paragraph cited a third person seeking to enforce compliance with a
stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff
clearly signified his acceptance to the bank by demanding payment; and although the Philippine National
Bank had already directed its New York agency to withhold payment when this demand was made, the
rights of the plaintiff cannot be considered to as there used, must be understood to imply revocation by
the mutual consent of the contracting parties, or at least by direction of the party purchasing he
exchange.

---

A stipulation in favor of a third person cannot be revoked by the obligated party alone, without the
conformity of the other contracting party.

Bonifacio Bros. v. Mora,

Mora owned a car which he mortgaged to HS Reyes, Inc., with the condition that the former would insure
the automobile with the latter as beneficiary. The car was then insured with State Bonding & Insurance
Co., Inc. During the effectivity of the insurance, the car met an accident.

Without the knowledge of HS Reyes, Mora authorized Bonifacio Bros., Inc to furnish materials and labor
for the repair of the car. After the car was repaired, the same was delivered to Mora, without HS Reyes’
consent and without payment to Bonifacio Bros. and the firm which repaired the car. Bonifacio Bros. filed
for an action for collection of sum of money against Mora and State Bonding.

Was there privity of contract between Bonifacio Bros. and State Bonding?

NO. The fairest test to determine whether the interest of a third person in a contract is a stipulation pour
autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their
contract.

In the instant case, the insurance contract does not contain any words or clauses to disclose an intent to
give any benefit to any repairmen or materialmen in case of repair of the car in question.

---
Contracts take effect only between the parties thereto, except in some specific instances provided by law
where the contract contains some stipulation in favor of a third person which is known as a stipulation
pour autrui or a provision in favor of a third person not a party to the contract. Under this doctrine, a
third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided
that the contracting parties have clearly and deliberately conferred a favor upon such person.
Consequently, a third person, not a party to the contract, has no action against the parties thereto, and
cannot generally demand the enforcement of the same.

The question of whether a third person has an enforceable interest in a contract must be settled by
determining whether the contracting parties intended to tender him such an interest by deliberately
inserting terms in their agreement with the avowed purpose of conferring a favor upon such third person.
The fairest test to determine whether the interest of a third person in a contract is a stipulation pour
autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their
contract.

A policy of insurance is a distinct and independent contract between the insured and insurer. A third
person has no right in law or equity to the proceeds of an insurance unless there is a contract or trust,
expressed or implied, between the insured and third person.

5. Merle offered to sell her automobile to Violy for P60,000.00. After inspecting the
automobile, Violy offered to buy it for P50,000.00. This offer was accepted by Merle.
The next day, Merle offered to deliver the automobile, but Violy being short of funds,
secured postponement of the delivery, promising to pay the price “upon arrival of the
steamer, Helena”. The steamer however never arrived because it was wrecked by a
typhoon and sank somewhere off the Coast of Samar.
Is there a perfected contract in this case? Why?

Yes, there is a perfected contract because there is already a concurrence between the offer and the
acceptance with respect to the object and the cause which shall constitute the contract. Such
concurrence is manifested by the acceptance made by Merle of the offer made by Violy.

Uribe: This is a contract of sale. And knowing that a contract of sale is a consensual contract, consider in
the facts if there was a meeting of the minds as to the thing and the price. The answer is YES.
Nagkasundo na sila. Automobile ang thing, ang price ay P50,000.00. This contract had already been
perfected.
Pero may panggulo dito. Pagdating sa payment of the price, nag-agree sila na gagawin ito upon the
arrival--so may condition. Eh the steamer never arrived. Therefore, did it affect the perfection of the
contract? HINDI. It only affected the performance of the obligation in that contract--the obligation to pay
the price.

Iba yun kung ang sinabi ay “I will sell to you upon the arrival of the steamer.” Yung fulfillment of the
condition diyan is necessary for the perfection of the contract.

But not here. It is only the payment which is subject to that condition.

7. Bert offers to buy Simeon’s property under the following terms and conditions: P1
million purchase price, 10% option money, the balance payable in cash upon the
clearance of the property of all illegal occupants. The option money is promptly paid and
Simeon clears the property of all illegal occupants in no time at all. However, when Bert
tenders payment of the balance and asks Simeon for the deed of absolute sale, Simeon
suddenly has a change of heart, claiming that the deal is disadvantageous to him as he has
found out the property can fetch three times the agreed purchase price. Bert seeks
specific performance but Simeon contends that he has merely given Bert an option to buy
and nothing more, and offers to return the option money which Bert refuses to accept.
A. Explain the nature of an option contract.

An option contract is one granting a privilege to buy or sell within an agreed time and at a determined
price. It must be supported by a consideration distinct from the price. (Art. 1479 and 1482, NCC)

B. Will Bert’s action for specific performance prosper? Explain.

Sanchez v. Rigos

In an instrument entitled "Option to Purchase," executed on April 3, 1961, Rigos "agreed, promised and
committed ... to sell" to Sanchez for the sum of P1,510.00 within two (2) years from said date, a parcel
of land situated in Nueva Ecija. It was agreed that said option shall be deemed "terminated and elapsed,"
if “Sanchez shall fail to exercise his right to buy the property" within the stipulated period. On March 12,
1963, Sanchez deposited the sum of Pl,510.00 with the CFI of Nueva Ecija and filed an action for specific
performance and damages against Rigos for the latter’s refusal to accept several tenders of payment that
Sanchez made to purchase the subject land.

Defendant Rigos contended that the contract between them was only “a unilateral promise to sell, and
the same being unsupported by any valuable consideration, by force of the New Civil Code, is null and
void." Plaintiff Sanchez, on the other hand, alleged in his compliant that, by virtue of the option under
consideration, "defendant agreed and committed to sell" and "the plaintiff agreed and committed to buy"
the land described in the option. The lower court rendered judgment in favor of Sanchez and ordered
Rigos to accept the sum Sanchez judicially consigned, and to execute in his favor the requisite deed of
conveyance. The Court of Appeals certified the case at bar to the Supreme Court for it involves a
question purely of law.

Was there a contract to buy and sell between the parties or only a unilateral promise to sell?

The Supreme Court affirmed the lower court’s decision. The instrument executed in 1961 is not a
"contract to buy and sell," but merely granted plaintiff an "option" to buy, as indicated by its own title
"Option to Purchase." The option did not impose upon plaintiff Sanchez the obligation to purchase
defendant Rigos' property. Rigos "agreed, promised and committed" herself to sell the land to Sanchez
for P1,510.00, but there is nothing in the contract to indicate that her aforementioned agreement,
promise and undertaking is supported by a consideration "distinct from the price" stipulated for the sale
of the land. The lower court relied upon Article 1354 of the Civil Code when it presumed the existence of
said consideration, but the said Article only applies to contracts in general.

However, it is not Article 1354 but the Article 1479 of the same Code which is controlling in the case at
bar because the latter’s 2nd paragraph refers to "sales" in particular, and, more specifically, to "an
accepted unilateral promise to buy or to sell." Since there may be no valid contract without a cause or
consideration, the promisor is not bound by his promise and may, accordingly, withdraw it. Pending
notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which,
if accepted, results in a perfected contract of sale. Upon mature deliberation, the Court reiterates the
doctrine laid down in the Atkins case and deemed abandoned or modified the view adhered to in the
Southwestern Company case.

---

Article 1354 of the Civil Code which presumes the existence of a consideration in every contract applies
to contracts in general, whereas the second paragraph of Article 1479 thereof refers to “sales” in
particular, and, more specifically, to “an accepted unilateral promise to buy or to sell.” It is Article 1479
that controls defendant’s unilateral promise to sell her property to the plaintiff.

In order that said unilateral promise may be “binding” upon the promisor, Article 1479 requires the
concurrence of a condition, namely, that the promise be “supported by a consideration distinct from the
price.” Accordingly, the promisee can not compel the promisor to comply with the promise, unless the
former establishes the existence of said distinct consideration. In other words, the promisee has the
burden of proving such consideration.
In accepted unilateral promise to sell, since there may be no valid contract without a cause or
consideration, the promisor is not bound by his promise and may, accordingly, withdraw it. Pending
notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which,
if accepted, results in a perfected contract of sale.

The decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf and Pacific Co., holding that Art. 1324
is modified by Art. 1479 of the Civil Code, in effect, considers the latter as an exception to the former,
and exceptions are not favored, unless the intention to the contrary is clear, and it is not so, insofar as
said two articles are concerned.

Other Problems discussed by Uribe:

8. Marvin offered to construct the house of Carlos for a very reasonable price of P900,000.00, giving
the latter 10 days within which to accept or reject the offer.  On the fifth day, before Carlos could
make up his mind, Marvin withdrew his offer.
A. What is the effect of the withdrawal of Marvin’s offer? 

BAR 2005:

The withdrawal of Marvin’s offer is valid because there was no consideration paid for the option.
An option is a separate contract from which is the subject of the offer, and if not supported by
any consideration, the option contract is not deemed perfected. Thus, Marvin may withdraw the
offer at any time before the acceptance of the offer.

B. Will your answer be the same if Carlos paid Marvin P10,000.00 as consideration for that option? 
Explain.

BAR 2005:

If Carlos paid P10,000.00 as consideration for that option, Marvin cannot withdraw the offer prior
to expiration of the option period. The option is a separate contract and if founded on
consideration is a perfected option contract and must be respected by Marvin.

C. Supposing that Carlos accepted the offer before  Marvin could communicate his withdrawal
thereof?  Discuss the legal consequences.

BAR 2005:

If Carlos has already accepted the offer and such acceptance has been communicated to Marvin
before Marvin communicates the withdrawal, the acceptance creates a perfected construction
contract, even if no consideration was as yet paid for the option. If Marvin does not perform his
obligations under the perfected contract of construction, he shall be liable for all consequences
arising from breach thereof based on any of the available remedies which may be instituted by
Carlos, such as specific performance, or rescission with damages in both cases.

Mr. and Mrs. X migrated to the US with all their children. As they had no intention of coming back, they
offered their house and lot for sale to their neighbors, Mr. and Mrs. A (the buyers) who agreed to buy the
property for ₱8 Million. Because Mr. and Mrs. A needed to obtain a loan from a bank first, and since the
sellers were in a hurry to migrate, the latter told the buyers that they could already occupy the house,
renovate it as it was already in a state of disrepair, and pay only when their loan is approved and
released. While waiting for the loan approval, the buyers spent ₱1 Million in repairing the house. A month
later, a person carrying an authenticated special power of attorney from the sellers demanding that the
buyers either immediately pay for the property in full now or vacate it and pay damages for having made
improvements on the property without a sale having been perfected.

Can the buyers be made to immediately vacate on the ground that the sale was not perfected? Explain
briefly.

BAR 2015:

No, the buyers may not be made to vacate the properties. A contract of sale is a consensual contract
which is perfected at the moment there is a meeting of the minds upon the thing which is the object of
the contract and upon the price (Art. 1475).

In this case, the sale was already perfected since there was already a meeting of the minds as to the
object of the sale, which is the house and lot, and as to the price, which is P8 Million. The fact that there
was not payment yet is immaterial since it is not a requisite for the perfection of the contract.

Even assuming that the sale was rescinded, the buyers may still not be made to vacate the properties.
Since the buyers made necessary and useful improvements upon the properties, they have the right to
retain the properties in question until the full reimbursement of such expenses (Arts. 448 and 546).

Uribe: In the first place, kung nabasa niyo ang facts, the sale was perfected. There was already a
meeting of the minds as to the object (house and lot) and the price (P8 Million). Thus, there was a
perfected contract. But do not forget that perfection is subject to the Statute of Frauds and other laws. In
other words, sale nga ito, may perfection na kasi nag-meeting of the minds na, pero this is a sale of an
immovable which is not in writing. Thus, it will be unenforceable under the Statute of Frauds.