(The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.)
Q: What is a contract?
It is the meeting of the minds between two or more parties, whereby one party binds himself with respect to the other, or where both parties bind themselves reciprocally, in favor of one another, to fulfill an obligation to give, to do or not to do [See Pineda, Obligations and Contracts, 2000 ed., p. 328].
Q: In entering into contracts, are the parties free to stipulate whatever terms and conditions they want?
The parties are free to create or establish stipulations, clauses, terms and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order or public policy.
Q: When I enter into a contract, who shall be bound by it?
Contracts take effect only between the parties, their assigns and heirs. Thus, if a person indebted to another has died, his heirs may be held liable to pay such indebtedness. However, the heir’s liability shall be limited only to the value of whatever he may have inherited from the deceased.
In case where the rights and obligations arising from the contract are not transmissible by their nature, only the contracting parties shall be bound. So if a person entered into a contract where he binds himself to paint a portrait of the other contracting party, the obligation created is non-transferrable to his heirs in case he dies, because his skills as an artist was taken into consideration in entering into such contract. Since the obligation is personal to the party concerned, his heirs or assigns shall not be bound by the contract.
Also, the contracting parties may stipulate that the rights and obligations created through the contract shall not be transferrable.
Q: May I enter into a contract on behalf of another person?
Yes, but only when you are duly authorized to do so. If you will enter into contracts in the name of another but without authority, or with authority but you acted beyond your authority, the contract shall be unenforceable. However, in such cases, nothing prevents the person you are representing from approving the contract that you have entered on his behalf. Such approval will cure the defect, and will render the contract fully enforceable against him.
But if the one you are representing does not approve the contract, you may be liable for damages, when the other contracting party has relied in good faith on your supposed authority to deal with him.
Q: Once a contract is entered into, does it create an obligation on the part of the parties to comply with what was agreed upon?
Yes. In fact, obligations arising from contracts have the force of law between the contracting parties, and should be complied with in good faith. Since a contract has the force of law between the parties, each is bound to fulfill what has been stipulated.
Also, contracts must bind the parties, and its validity or compliance cannot be left to the will of just one of them. It is but natural and logical that the contract shall bind both contracting parties. It is based on the essential equality of the parties, which makes it incongruous to bind one party and let free the other party from responsibility [See Garcia vs. Rita Legarda, Inc., G.R. No. L-20175, October 30, 1967].
Q: What are the remedies the aggrieved party may take in case of breach of contract?
Those who, in the performance of their obligations, are guilty of fraud, negligence or delay, and those who, in any manner contravene the tenor of the contract, shall be liable for damages.
The aggrieved party may also enforce the fulfillment of the obligation through an action for specific performance.
Q: In what forms can a contract be entered into?
Contracts shall be obligatory in whatever form they may have been entered into. Thus, a contract may be entered into by mere consent of the parties, and the document where the contract is reduced is considered as mere evidence of the agreement that the parties came up with.
However, when the law requires that a contract be in some form or 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.
Q: What is a contract of adhesion?
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. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his “adhesion” thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent [Norton Resources and Development Corporation vs. All Asia Bank Corporation, G.R. No. 162523, November 25, 2009].
The rule is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling [Pilipino Telephone Corporation vs. Delfino Tecson, G.R. No. 156996, May 7, 2004].
Q: Are minors allowed to enter into contracts?
Generally, children below 18 years old do not possess yet the capacity to enter into contracts. A minor may enter into a contract, but he may later on question his lack of capacity once he reaches the age of majority. However, in case the contract is invalidated due to his lack of capacity, the minor shall be bound to recompense the other contracting party up to the extent that he had benefitted from the contract [Braganza vs. De Villa Abrille, G.R. No. L-12471, April 13, 1959].
Nonetheless, there are times when the minor shall be fully bound by the contract he enters into. Such instances are:
1. When the minor, in entering into a contract, actively misrepresented on the contract that he is of age, and the other party was misled;
2. When the contract involves the sale and delivery of necessaries to the minor;
3. When the minor, upon reaching the age of majority, approves the contract;
Q: I signed a contract at gunpoint. What can I do to prevent the other contracting party from enforcing it against me?
You may have the contract annulled. Under the law, a contract where consent is given through mistake, violence, intimidation, undue influence, or fraud may be annulled. It is because consent to the contract must be given intelligently, freely, and spontaneously.
The contract may be annulled even when the violence or intimidation was employed by a third person who did not have any participation in the contract.
Q: What if I entered into a contract by mistake, will that be taken against me?
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 qualifications of one of the parties will impair consent only when such identity or qualifications have been the principal reason why the contract has been entered into.
If you have sustained damages by your reliance on the erroneous declaration of the other party, you may be entitled to recovery of damages from him if he had been negligent, that is, if he could have discovered the error by observance of simple diligence, and by such omission he had misled you to enter into the contract where you sustained damages. You shall also be entitled to damages if the other contracting party was guilty of fraud, deliberately misleading you to enter into a contract with him.
However, if you knew that there should be doubt as to the correctness of the circumstances surrounding the object of the contract, or if you are aware of the risk affecting such object, then you cannot be considered to have entered into the contract by mistake. The same is true if you had been aware of the facts that caused the supposed mistake.
However, if both you and the other contracting party committed an error, and because of such error the real purpose of entering into a contract was frustrated, then consent is considered to have been impaired by mistake.
Q: I was defrauded. Can my consent be considered as impaired when I entered into the contract?
There are two kinds of fraud: fraud in the perfection of the contract, and fraud in the performance of the contract. It is the fraud in the perfection of the contract that impairs consent, and may be the basis for the annulment of the contract.
There is fraud in the perfection of the contract when the fraud occurs before or simultaneous with the creation of the obligation, and the fraud was resorted in order to induce a contracting party to enter into the contract. It is such kind of fraud, without which, the party upon whom it was employed would not have entered into the contract.
On the other hand, with respect to fraud in performance, this kind of fraud is employed after the contract has already been entered into, and the fraud was resorted only to avoid proper compliance with the obligations under the contract. Since there is already an existing contract (in fraud in performance), the consent given by the aggrieved party when he enters into the contract cannot be considered to have been vitiated by fraud. However, the aggrieved party is not entirely without relief, as he shall be entitled to recover damages from the other contracting party who defrauded him.
Q: How are contracts interpreted?
The following are the guidelines that may be used in interpreting contracts:
1. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.
2. If the words appear contrary to the evident intention of the parties, such intention shall prevail over the words used. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.
3. No matter how general the terms of a contract may be, they shall be understood not to comprehend things that are distinct and different from those agreed upon by the parties.
4. If some stipulations in the contract should admit of several meanings, it shall be understood and interpreted in such way most adequate to render it valid and legal.
5. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones the sense that may be gathered from all other provisions taken jointly.
6. Words that may have different significations shall be understood in a way most in keeping with the nature and object of the contract.
7. The usage or customs of the place shall be taken into consideration in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations that are ordinarily established.
8. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
9. When it is absolutely impossible to settle doubts by the above rules, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
10. If there are doubts upon the principal object of the contract in such a way that it cannot be known what may have been the intention of the parties, the contract shall be null and void.
Q: How are defective contracts classified?
(1) Rescissible contracts;
(2) Voidable or annullable contracts;
(3) Unenforceable contracts;
(4) Void or inexistent contracts.
Q: What are rescissible contracts?
These are the contracts validly entered into by the contracting parties, but for having caused economic damage or lesion to one of the parties or to a third person, or for having been entered into in fraud of creditors, or without approval of the judicial authority when the property is under the custody of the court, or for being declared by law as rescissible, may be rescinded.
Q: What are voidable or annullable contracts?
There are the contracts where the consent of one party is defective either because of incapacity to give consent to a contract, or where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. For the said causes, the contract may be annulled. However, before such annulment, the contract shall be considered valid, and its effects before such annulment are legally recognized.
Q: What are unenforceable contracts?
There are the contracts that cannot be enforced in court because of the existence of any of the following reasons:
(1) They were entered into on behalf of another without authority or in excess of authority;
(2) There is non-compliance with the Statute of Frauds;
(3) Both contracting parties are incapacitated.
These unenforceable contracts may, however, be ratified.
As to the Statute of Frauds, it requires that the following agreements must be reduced in writing to make it enforceable:
a. An agreement that by its terms is not to be performed within a year from the time such agreement was made;
b. A special promise to answer for the debt, default, or miscarriage of another;
c. An agreement in consideration of marriage, other than the mutual promise to marry;
d. An agreement of sale of goods at a price not less than P500, unless the buyer accept and receive part of such goods, or has paid a part of the purchase price;
e. An agreement for the leasing of a property for a period longer than 1 year; or
f. An agreement for the sale of real property or of any interest over real property.
Q: What are void or inexistent contracts?
These are the contracts that produce no legal effect and cannot be ratified, as they do not exist in the eyes of the law. These contracts may be questioned before the courts, and have them declared void from the beginning. The following are the contracts considered as void and inexistent:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of man;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding contracts and enforcement of contractual rights, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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