CIVIL LAW REVIEW 2: Obligations
Atty Tizon
Lecture 5: 14 February 2015
CONTRACTS
OVERVIEW
1. There are different sources of obligations. One of those is contracts.
2. Obligations are broader of contracts. Contracts is just one source of
obligaitons. There can be obligation but not necessarily a contract.
But a contract necessarily gives birth to obligation.
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. (1254a)
3. The essential elements of a contact:
a. Consent
i. Consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are
to constitute the contract.
b. Object
i. General rule: anything can be an object of a
contract. however, there are exeptions
c. Cause or consideration
i. Reason for the constitution of the contract. it
determines the type of contract: can be onerous,
remuneratory, gratuitous (like donation).
4. General rule: contracts are perfected by mere meeting of the minds
of the parties.
a. Exception: where law requires specific form for its validity
or certain manner of proving it in court.
b. In some cases, perfection happens not upon meeting of the
minds of the parties but upon delivery. This is in cases of
pledge, commodatum, deposit and mutuum.
A. Definition
5. Heirs of Intac v CA (2012)
a. The court ruled that the deed of sale executed by Irineo and
Salvancion in favor of Sps Intac is void. It was an absolute
simulation. The court made a distinction between absolute
simulation and relative simulation
i. Absolute: total lack of consideration. the parties
did not really intend to bind themselves of change
their juridical relationship.
ii. Relative: there is a false consideration and
something else was actually intended.
b. SC: There was a total lack of consideration making it an
absolute simulation. Even though the deed indicated P60K
as consideration, the Sps Intac failed to prove that they
actually paid for it or lend such amount, even on the
argument that it was an equitable mortgage, to Irineo and
Salvacion.
i. The court also noted the different circumstnaces
surrounding the case. Sps Irineo and Salvacion
continued to be in possession of the property.
ii. Even the contemporaneous acts of the parties show
that they had no intneiton to sell the property to
Sps Intac. Sps Intac only paid the real estate tax
belatedly in 1999.
c. In this case there is a missing element of a contract, thus
void. Parties have no intention to be bound. Furthermore,
there was total lack of consideration.
6. MIAA v Avaia (2012)
a. Parties entered into a one year lease agreement. MIAA
leased to Avaia portion of NAIA airport for purposes of its
chartering operations and aircraft repair.
i. During the effectivity of the lease, MIAA adopted
an admin order increasing the rental rates. Despite
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CIVIL LAW REVIEW 2: Obligations
Atty Tizon
Lecture 5: 14 February 2015

such, Avaia continued paying the lease based on
the old rates.
ii. MIAA sent a billing statement to Avaia assessing
the balance of Avaia based on the new rental rates
and a lump sum based on the different between the
old and the new rates pertaining to previous years.
Avaia paid the new rental rate but refused to pay
the lump sum. Avaia was denied entry to the
property.
iii. MIAA filed a collection case against Avaia.
c. With respect to the 2nd contract. The problem of the heirs
was the gross inadequacy of the price. The contract only
stipulates the P180K. Respondents were claiming that it
should be around P9 to 15 million. Nonetheless, the court
ruled that gross inadequacy of the price does not
affect the validity of the contract, unless there was a
showing that there was vitiated consent.
d. Testimony of one of Respondents was they were forced to
sign the agreement. What they actually meant was that they
were felt compelled to do so, although it is not sufficient to
find vitiation of consent. They could have opted not to sign.

b. RTC and CA favored Avaia. MIAA is not entitled to the

rental difference. MIAA appealed to SC. MIAA was
invoking that it is an administrative agency with quasi-
legislative powers. In their agreement it was stated that any
AO to issued which increases or decreases the lease rental
will be deemed incorporated in the contract.

c. SC: MIAA cannot automatically amend the contract. SC

pointed to a part of a contract which states that any
amendment or alteration of the contract should be
consented to by both parties. In interpreting a contract, all
provisions must be taken into consideration, such that all
must be rendered effective. The increase of rental rates only
took effect after the billing statement was issued and when
Avaia impliedly agreed to it when it paid the new rental
rates.

7. Heirs of Uy v Castillo (2013)

a. SC made a finding that there were two separate contracts,

with different parties and different objects. In one contract,
parties were respondents, Manuel Uy and Atty Zepeda. It
involves the 60% of the property. In the other contract, it
was just respondents and Manuel Uy ek liong it involves the
40% of the property.

b. They have to be treated separately. The first contract was

not covered by the prohibition under art 1491 (5). The
transfer was made to take effect after the final judgment.

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Lecture 5: 14 February 2015
B. Different characteristics of a contract
8. Obligatory force – It is law between parties. It has the binding
effect of law between parties. Once perfected, parties are bound not
only to fulfill what has been expressly agreed upon but also those
consequences that are by nature part of the agreement.
Article 1314. Any third person who induces another to violate his contract
shall be liable for damages to the other contracting party. (n)
Article 1315. Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law.
a. A third person who induces another to violate a contract
can be held liable for damages to the injured party
10. Mutuality – the contract must bind both contracting parties. Its
b. In a number of cases, the court says that it is not a protector
of parties for bad deals. Not just because you entered into a
bad investment due to bad judgment, the court will not
intervene. There has to be some other grounds sanctioned
by law. For example, there was vitiation of consent –
supervening fraud and the consent of the other party is
vitiated.
9. RS Tomas v Rizal (2012)
a. FACTS: RS Tomas bid to perform certain job orders in
favor of Rizal Cement. They agreed on a total contract
price. RS Tomas won the bid but was not able to finish all
the job orders. RS asked to extension and at the same time
price adjustments. Thus, Rizal cement was compelled to
have the work done by another contractor and terminate
the contract with RS Tomas.
i. Rizal Cement filed a collection case against RS
Tomas for the reimbursement of the advances it
made and for the additional expenses it had
incurred for having another contractor to finish the
obligations of RS Tomas.
ii. Defense of RS Tomas was there was
misrepresentation on the part of Rizal with respect
to the extent of damage that it had to repair.
b. SC: RS should have knowledge of the extent of the damage.
Even assuming that the transformer was sealed, RS should
have conducted due diligence to verify the degree of
damage. RS is liable to Rizal Cement.
i. The court refused to reduce the penalty and
observed the general rule. The parties had the
power or the autonomy of will to stipulate penalty
– liquidated damages. It will nto apply the
exception of reducing the penalty because RS
Tomas was not able to complete any of the job
orders that it committed to perform.
validity cannot be left to the will of a third party.
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a)
Article 1309. The determination of the performance may be left to a third
person, whose decision shall not be binding until it has been made known
to both contracting parties. (n)
Article 1310. The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is equitable under
the circumstances. (n)
a. In relation to 1182, suspensive potestative condition,
if it is left to the will of the debtor, it is void. If it is left to
the will of the creditor, it is valid. however, you have to look
at it if it would violate this provision of mutuality of
contracts.
b. Based on 1309, the determination of performance may be
left to the will of a third person. The decision will not be
binding unless known to both contracting parties. If the
decision is unjust, it will be the court that shall be the one
to determine which is equitable under the circumstances
(1310).
c. Example of stipulations violating mutuality:
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Lecture 5: 14 February 2015
i. Stipulations of banks with respect to interest. PNB
v Manalo and PNB v Silos. Interest in a loan is
a very important condition in a contract. It cannot
be left to the sole will of one of the parties.
Although the ceiling under the usury law has been
lifted, it does not give the parties unbridled
discretion to make unilateral imposition of interest.
11. Relativity – The contract only binds and affects only the parties
to the contracts, their assigns and heirs, except in cases of personal
obligations and intransmissible.
Article 1311. Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (1257a)
12. We saw the principle of mutuality applied in the case of PNB v
Dee (2014)
a. Dee previously purchased a house and lot from PEPI on
installment. PEPI was later on rehabilitated. It made a
dacion en pago with PNB certain real properties, including
one purchased by Dee. After full payment, Dee sought from
PNB the delivery of the title, to no avail. On the other hand,
in their MOA, Dee promised to deliver the title of the
property upon proof of full payment by the purchaser.
b. SC: PNB was not privy to the agreement between Dee and
PEPI. However, whatever claim PNB may have against
PEPI because of their dacion agreement it should not
prejudice the rights of Dee.
i. Despite the apparent validity of the mortgage
between the petitioner and PEPI, the former is still
bound to respect the transactions between
respondents PEPI and Dee. The petitioner was well
aware that the properties mortgaged by PEPI were
also the subject of existing contracts to sell with
other buyers.
13. Exception to the principle of relativity
a. Accion Pauliana – the creditor may ask for the
rescission of the agreement entered into in fraud of
creditors
b. Accion Directa – rights granted to a person to directly
file or collect against a person. Example, a provider of
materials can go straight to the owner of the building.
c. Art 1312 – deals with real right over objects. The real right
is entwined with the object. Who ever gets possession of the
object, subject to the requirements under land registration
laws and mortgage law.
Article 1312. In contracts creating real rights, third persons who
come into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and the
Land Registration Laws. (n)
d. Stipulation pour Autrui
Article 1311 (2) If a contract should contain some stipulation in
favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation.
A mere incidental benefit or interest of a person is not sufficient.
The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)
i. If the parties to a contract stipulates in favor of
third person, that third person may enforce the
stipulation provided that he communicated his
acceptance before revocation of the stipulation in
his favor.
ii. Stipulation has to be clearly provided and
deliberately conferred upon that person.
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14. Autonomy of Will bidding, there is a restriction with respect to amendment of

the contract. The parties cannot substantially or
Article 1306. The contracting parties may establish such stipulations, material alter the agreement. Effectively there is a
clauses, terms and conditions as they may deem convenient, provided they restriction to the autonomy of will of the parties.
are not contrary to law, morals, good customs, public order, or public Furthermore, it is a public policy of fairness to other
policy. (1255a)
bidders.
a. General rule is parties can stipulate any terms and
conditions, subject to the condition that it will not be
contrary to law, public morals, good customs, public order
and policy.

15. Malbarosa v CA (2003)

a. In relation of the parties’ power to stipulate on terms and

conditions. SC applied 1321, although not expressly said in
the case. The offeror making the offer may fix the time,
place and manner of acceptance. All of which must be
complied with for there to be a valid acceptance. In this
case, the court said, since there was a required manner of
acceptance, which is to affix the signature, and no time was
provided, in case the offer was made when both parties are
present, it is presumed that the offer should immediately be
accepted.

i. In this case he did not immediately accept the offer.

Rather, he affixed the signature and set it back on a
later time. When the time it reached the offeror, the
offer had already been revoked by the offeror.

ii. Thus, there was no valid acceptance.

16. Capalla v Comelec (2012)

a. The parties can extend a resolutory period. they can waive a

resolutory period and agree on an extension of the period
within which the option can be exercised.

b. In the main portion of the decision, the court mentioned

the rules on public bidding. General rule is that the parties
may stipulate as to terms and conditions, including the
amendment of the contract they entered into. However, in
cases of government project, wherein there is a special
law governing such transactions – requiring public
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Lecture 5: 14 February 2015

C. Elements of a contract
17. Essential 20. Acceptance must be absolute. If you make a qualification, it a
counter-offer, which has to be accepted by the other party. Until
a. consent you meet, there is only negotiation and no perfected contract.

b. object 21. Acceptance made by letter or telegram does not bind the offerer
except from the time it came to his knowledge. The contract, in
c. cause such a case, is presumed to have been entered into in the place
where the offer was made (1319(2)).
18. Consent is manifested by:

Article 1319 (1). 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.

19. The person making the offer can fix the time, manner and place of
acceptance. All of which must be complied with. In Malbarosa
case, since there was a manner of acceptance required, acceptance
not in accordance to such is not a valid acceptance. Even if he
complied in accordance with the manner prescribed but the offer
has already been withdrawn by the offeror, it is no longer an
acceptance. Acceptance is ineffective.

Article 1321. The person making the offer may fix the time, place, and
manner of acceptance, all of which must be complied with. (n) 


Article 1323. An offer becomes ineffective upon the death, civil

interdiction, insanity, or insolvency of either party before acceptance is
conveyed. (n)

Article 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. (n) (option contract)

Article 1325. Unless it appears otherwise, business advertisements of

things for sale are not definite offers, but mere invitations to make an offer.
(n)

Article 1326. Advertisements for bidders are simply invitations to make

proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears. (n)