ART. 1159.

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. (1091a) Contractual obligations. The above article speaks of
contractual obligations or obligations arising from contracts or voluntary agreements. 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. (Art. 1305.) It is the formal expression by the parties of their rights
and obligations they have agreed upon with respect to each other. (1) Binding force. — Obligations arising
from contracts are governed primarily by the agreement of the contracting parties. Once perfected, valid
contracts have the force of law between the parties who are bound to comply therewith in good faith,
and neither one may without the consent of the other, renege therefrom. (Tiu Peck vs. Court of Appeals,
221 SCRA 618 [1993].) In characterizing contracts as having the force of law between the parties, the law
stresses the obligatory nature of a binding and valid agreement (William Golangco Construction
Corporation vs. Phil. Commercial International Bank, 485 SCRA 293 [2006].), absent any allegation that it
is contrary to law, morals, good customs, public order, or public policy. (Art. 1306.)

5This provision is not contained in the Family Code. 6Art. 1448. There is an implied trust when property is
sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having
the benefi cial interest of the property. The former is the trustee, while the latter is the benefi ciary.
However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying
the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of
the child.

Art. 1159 GENERAL PROVISIONS

OBLIGATIONS14

(a) The law,7 recognizing the obligatory force of contracts (Arts. 1139, 1308, 1315, 1356.), will not permit
a party to be set free from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. (Art. 1170.) The mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief.8 (FGU Insurance Corp. vs. G.P.
Sarmiento Trucking Corp., G.R. No. 141910, Aug. 6, 2002.) (b) In law, whatever fairly puts a person on
inquiry is suffi cient notice, where the means of knowledge are at hand, which if pursued by proper inquiry,
the full truth might have been ascertained. Thus, where a purchaser of a memorial lot, on installment
basis, had full knowledge of the terms and conditions of the sale, including the rules and regulations issued
by the seller governing the memorial park, to which she obliged herself to abide, cannot later feign
ignorance of said rules. (Dio vs. St. Ferdinand Memorial Park, Inc., 509 SCRA 453 [2006].) (c) If it occurs to
one of the contracting parties to allege some defect in a contract as a reason for invalidating it, such
alleged defect must be proved by him by convincing evidence since its validity or compliance cannot be
left to will of one of them. (see Art. 1308.) “An experienced businessman who signs important legal papers
cannot disclaim the consequent liabilities therefor after being a signatory thereon.’’ (Blade International
Marketing Corp. vs. Court of Appeals, 372 SCRA 333 [2001].) It behooves every contracting party to learn
and to know the contents of an instrument before signing and agreeing to it. (Dio vs. St. Ferdinand
Memorial Park, Inc., supra.) (d) Courts have no alternative but to enforce contracts as they were agreed
upon and written when the terms thereof are clear

7The rule of lex loci contractus (the law of the place where the contract is made) governs in cases of
Filipino workers whose employment contracts were approved by the Philippine Overseas Employment
Administration (POEA) and were entered into and perfected in the Philippines. (Philippine Employment
Services and Resources, Inc. vs. Paramo, 427 SCRA 732 [2004].) 8It has been consistently ruled that a
bonus is not a demandable and enforceable obligation, unless the giving of such bonus has been the
company’s long and regular practice, i.e., the giving of the bonus should have been done over a long
period of time, and must be shown to have been consistent and deliberate. (Phil. Appliance Corp. vs. Court
of Appeals, 430 SCRA 525 [2004].)

Art. 1159

15

and leave no room for interpretation. (Art. 1370.). This does not mean, however, that contract is superior
to the law. Although a contract is the law between the contracting parties, the provisions of positive law
which regulate such contracts are deemed included and shall limit and govern the relations between the
parties. (Asia World Recruitment, Inc. vs. National Labor Relations Commission, 313 SCRA 1 [1999].) (e) A
compromise agreement is immediately executory and not appealable, except for vices of consent (Art.
1330.) or forgery. Upon the parties, it has the effect and the authority of res judicata, once entired into.
To have the force of law between the parties, it must comply with the requisites of contracts. (Art. 1318.)
It may be either extrajudicial (to prevent litigation) or judicial (to end a litigation). (Magbanua vs. Uy, 458
SCRA 184 [2005].) (2) Requirements of a valid contract. — As a source of obligation, a contract must be
valid and enforceable. (see Art. 1403.) A contract is valid (assuming all the essential elements are present,
Art. 1318.) if it is not contrary to law, morals, good customs, public order, and public policy. It is invalid or
void if it is contrary to law, morals, good customs, public order, or public policy. (Art. 1306; see Phoenix
Assurance Co., Ltd. vs. U.S. Lines, 22 SCRA 675 [1968].) In the eyes of the law, a void contract does not
exist. (Art. 1409.) Consequently, no obligations will arise. (3) Where contract requires approval by the
government. — Where a contract is required to be verifi ed and approved by the government before it
can take effect (e.g., contract for overseas employment must be approved by the Philippine Overseas
Employment Administration [POEA] under Art. 21[c] of the Labor Code), such contract becomes the law
between the contracting parties only when approved, and where there is nothing in it which is contrary
to law, etc., its validity must be sustained. (Intetrod Maritime, Inc. vs. National Labor Relations
Commission, 198 SCRA 318 [1991].) (4) Compliance in good faith. — It means compliance or performance
in accordance with the stipulations or terms of the contract or agreement.9 Good faith and fair dealing
must be observed to prevent

9Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Art. 1159 GENERAL PROVISIONS

OBLIGATIONS16

one party from taking unfair advantage over the other. Evasion by a party of legitimate obligations after
receiving the benefi ts under the contract would constitute unjust enrichment on his part. (see Royal Lines,
Inc. vs. Court of Appeals, 143 SCRA 608 [1986].) (5) Liability for breach of contract. — Although the
contract imposes no penalty for its violation, a party cannot breach it with impunity. Our law on contracts
recognizes the principle that actionable injury inheres in every contractual breach. (Boysaw vs. Interphil
Promotions, Inc., 148 SCRA 635 [1987]; see Arts. 1170, 1191.) Interest may, in the discretion of the court,
on equitable grounds, be allowed upon damages awarded for breach of contract. (see Art. 2210.) The
failure of either party to a contract to demand performance of the obligation of the other for an
unreasonable length of time may render the contract ineffective where the contract does not provide for
the period within which the parties may demand the performance of their respective undertakings but
the parties did not contemplate that the same could be made indefi nitely. (Villamor vs. Court of Appeals,
202 SCRA 607 [1991].) The mere failure of a party to respond to a demand letter in the absence of other
circumstances making an answer requisite or natural does not constitute an implied admission of liability.
(Phil. First Insurance Co., Inc. vs. Wallen Phils. Shipping, Inc., 582 SCRA 457 [2009].) (6) Preservation of
interest of promisee. — A breach upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to preserve the interest of the
promisee of having the benefi t of his bargain, or in being reimbursed for loss caused by reliance on the
contract, or in having restored to him any benefi t that he has conferred on the other party. The effect of
every infraction is to create a new duty, that is, to make recompense to the one who has been injured by
the failure of another to observe his contractual obligation unless he can show extenuating circumstances.
(FGU Insurance Corporation vs. G.P. Sarmiento Trucking Corporation, 386 SCRA 312 [2002]; see Art. 1170.)

ILLUSTRATIVE CASES: 1. Binding force of an oral agreement inconsistent with a prior written one. Facts: X
verbally agrees to pay Y the balance of an account in advance, notwithstanding the different stipulation
of a prior written agreement.

Art. 1159

17

Issue: Is X bound to perform said obligation? Held: Yes. Since he agreed to pay Y the balance of the
account independently of the terms of the written contract, he must perform his obligation to pay
according to the tenor of his verbal agreement which has the force of law between them. (Hijos de I. de
la Rama vs. Inventor, 12 Phil. 45 [1908].) —-— —-— —-— 2. Validity of contract stipulating that in case of
failure of debtor to pay amount of loan, his property shall be considered sold to creditor. Facts: D
borrowed from C money to be paid within a certain period, under the agreement that, if D fails to pay at
the expiration of said period, the house and lot described in the contract would be considered sold for the
amount of the loan. D failed to pay as promised. C brought action for the delivery of the house and lot.
Issue: Are both contracts valid and, therefore, should be given effect? Held: Yes. The fact that the parties
have agreed at the same time, in such a manner that the fulfi llment of the promise of sale would depend
upon the non-payment or return of the amount loaned has not produced any change in the nature and
legal conditions of either contract, or any essential defect which would nullify them. As the amount loaned
has not been paid and continues in possession of the debtor, it is only just that the promise of sale be
carried into effect, and the necessary instruments be executed. That which is agreed to in a contract is
law between the parties, and must be enforced. (Alcantara vs. Alinea, 8 Phil. 111 [1907].) Note: In the
above case, the court found that no contract of mortgage, pledge, or antichresis was entered into. (see
Arts. 2088, 2137.) —-— —-— —-— 3. Validity of contract for attorney’s fees where amount stipulated is
unreasonable. Facts: D executed a promissory note in favor of C for the purchase price of a truck sold by
the latter. In the note, D bound himself to pay an additional 25% as attorney’s fees in the event of
becoming it necessary for C to employ counsel to enforce its collection. Issue: Has the court the power to
ignore the contract as to attorney’s fees, considering that a contract has the force of law between the
contracting parties?

Art. 1159 GENERAL PROVISIONS

OBLIGATIONS18

Held: Yes. Where no special agreement is made by the parties with reference thereto, the courts are
authorized to determine the amount to be paid to an attorney as reasonable compensation for his
professional services; and even where parties have made a written agreement as to the fee, the courts
have the power to ignore their contract, if the amount fi xed is unconscionable or unreasonable, and to
limit the fee to a reasonable amount.10 (Bachrach vs. Golingco, 35 Phil. 138 [1916].) —-— —-— —-— 4.
A big corporation, to avoid cancellation of contract it has breached, pleaded considerations of equity.
Facts: The contract between the parties (two big real estate corporations) was a contract to sell or
conditional with title expressly reserved in S (seller) until the suspensive condition of full and punctual
payment of the full price by B (buyer) shall have been met on pain of automatic cancellation of the
contract upon failure to pay any of the monthly installments. B failed to pay the P5,000.00 monthly
installments notwithstanding that it was punctually collecting P10,000.00 monthly rentals from the lessee
of the property. Issue: The main issue posed by B is that there has been no breach of contract by it; and
assuming there was, S was not entitled to rescind or resolve the contract without recoursing to judicial
process. Held: B only pleads that it be given special treatment and that the cancellation of its contract be
somehow rejected notwithstanding S’s clear right under the contract and the law to do so. The contract
between S and B, entered into with the assistance of counsel and with full awareness of the import of its
terms and conditions, is the binding law between them and equity cannot be pleaded by one who has not
come with clean hands nor complied therewith in good faith but instead willfully breached the contract.
“Its time to put an end to the fi ction that corporations are people. The business of big corporations such
as the protagonists at bar is business. They are bound by the lawful contracts that they enter into and
they do not ask for nor are they entitled to considerations of equity.” (Luzon Brokerage Co., Inc. vs.
Maritime Bldg. Co., Inc., 86 SCRA 305 [1978].)

10The validity of contingent fee agreement in large measure depends on the reasonableness of the
stipulated fees under the circumstances of each case. The reduction of unreasonable attorney’s fees is
within the regulatory powers of the courts to protect clients from unjust charges. (Taganas vs. National
Labor Relations Commission, 248 SCRA 133 [1995]; see Sec. 13, Canons of Professional Ethics; Sec. 24,
Rule 138, Rules of Court.)

Art. 1159

19

—-— —-— —-— 5. Corporation unconditionally undertook to redeem preferred shares at specifi ed dates.
Facts: The terms and conditions of the Purchase Agreement shows that the parties intended the
repurchase of the preferred shares in question on the respective dates to be an absolute obligation made
manifest by the fact that a surety was required to see to it that the obligation is fulfi lled in the event of
the corporation’s inability to do so. Defendant corporation contends that it is beyond its power and
competence to redeem the preferred shares due to fi nancial reverses. Issue: Can this contention serve
as a legal justifi cation for its failure to perform its obligation under the agreement? Held: No. The
unconditional undertaking of the corporation does not depend upon its fi nancial ability: it constitutes a
debt which is defi ned “as an obligation to pay money at some fi xed future time, or at a time which
becomes defi nite and fi xed by acts of either party and which they expressly or impliedly agree to perform
in the contract.” The Purchase Agreement constitutes the law between the parties. (Lirag Textiles Mill,
Inc. vs. Social Security System, 153 SCRA 338 [1987].)