Relativity

Governing Principle

The principle of relativity means that a contract generally produces legal effects only between the parties who gave their consent, their assigns, and their heirs. It is a consequence of consent: a person who did not agree to the contract is ordinarily neither entitled to enforce it nor liable for its breach.

Article 1311 of the Civil Code expresses the main rule and its immediate limits. Contracts bind the parties, their assigns, and heirs, except when the rights and obligations are not transmissible by their nature, by stipulation, or by law. The same provision recognizes a stipulation in favor of a third person, provided the parties clearly and deliberately intended to confer a favor upon that person and the beneficiary communicates acceptance before revocation.

Relativity is sometimes described through the maxim res inter alios acta aliis neque nocere neque prodesse potest: a transaction between others should neither prejudice nor benefit a stranger. In contract law, the maxim does not mean that contracts are invisible to the world. It means that the obligatory force of a contract, as a source of rights and duties, is normally confined to those who are parties or successors in interest.

The doctrine protects both autonomy and security of transactions. Autonomy is protected because no one is bound by a private agreement without consent or a legal substitute for consent. Security is protected because parties may rely on their contract being enforceable against successors who take their place, subject to rules on transmissibility and notice.

Who Are Bound

The parties are those who entered into the contract personally or through a duly authorized representative. A person who acts through an agent is bound as principal when the agent acts within authority, because the juridical act is legally attributed to the principal. Conversely, an unauthorized act does not bind the alleged principal unless there is ratification or another legal basis for liability.

Heirs are generally bound because succession transmits not only rights but also obligations that survive death. The heir does not become a new contracting party in the historical sense; the heir succeeds to the patrimonial position of the decedent. The estate answers for transmissible obligations, and heirs who receive property may be affected within the limits recognized by succession law.

Assigns are persons to whom rights or interests are transferred. An assignee generally steps into the position of the assignor and acquires no better right than the assignor had. The debtor may ordinarily set up against the assignee defenses that were available against the assignor before notice or perfection of the assignment, because assignment transfers the credit subject to its legal incidents.

Relativity does not make every successor liable for every undertaking of the original party. The successor is bound only to the extent that the right or obligation is transmissible, has been validly transferred, or is attached by law to the thing or juridical position acquired.

Limits on Transmission

Rights and obligations may fail to pass to heirs or assigns when non-transmissibility arises from the nature of the obligation, the stipulation of the parties, or law.

• By nature: obligations that are purely personal, confidential, or dependent on special skill, trust, or personal qualifications are not freely transmissible. A contract to paint a portrait, perform a personal service, or rely on a specific professional's judgment cannot be treated as an ordinary transferable undertaking when the identity of the obligor was a determining cause.
• By stipulation: parties may validly agree that a right is non-assignable, that performance must be made only by a particular person, or that the contract terminates upon death, provided the stipulation is lawful and consistent with the nature of the contract.
• By law: certain juridical relations are extinguished, limited, or regulated by statute because of their personal character or public policy. Agency, partnership relations, family rights, and certain statutory privileges may not be transmitted in the same way as ordinary patrimonial credits.

The test is not whether a contract has economic value, but whether the specific right or duty is legally capable of passing to another without destroying the identity of the prestation, defeating the parties' intention, or violating a rule of law.

Effect on Third Persons

A third person, or stranger to the contract, is one who is neither a party nor a successor bound by law, stipulation, or transmission. The third person generally cannot demand performance, rescission, annulment, reformation, or damages for breach of the contract, because those remedies belong to the parties or to persons legally placed in their position.

The same rule protects strangers from liability. A contracting party cannot impose duties on a non-party by merely declaring them in the contract. A promise that another person will act, pay, deliver, or refrain from doing something does not bind that other person unless there is agency, representation, ratification, assumption of obligation, law, or another juridical source of liability.

A contract may nevertheless be relevant evidence against a third person when offered to prove an independent fact, such as possession, notice, fraud, relationship, or the character of a transaction. This evidentiary use does not convert the third person into a contracting party and does not impose contractual liability by itself.

Relativity also means that a contract cannot convey what a party does not own or control. If a person purports to sell, lease, mortgage, or waive the property or right of a stranger, the contract may bind the promisor personally if valid between the parties, but it cannot prejudice the true owner without consent or legal authority. The rule reflects the principle that one cannot transfer a better title or right than one has.

Stipulation in Favor of a Third Person

A stipulation in favor of a third person, or stipulation pour autrui, is the principal contractual exception stated in Article 1311. It exists when the contracting parties deliberately confer a direct and favorable right upon a third person, who may demand fulfillment after accepting the benefit before revocation.

The beneficiary is not a party to the contract, but the law allows the beneficiary to enforce the particular stipulation made in his favor. The right arises from the contract between the promisor and promisee, yet enforceability in favor of the beneficiary depends on the parties' clear intention and the beneficiary's timely acceptance.

The requisites are commonly stated as follows:

1. There is a valid contract between the contracting parties.
2. The contract contains a stipulation in favor of a third person.
3. The stipulation is not merely incidental, but clearly and deliberately intended to benefit the third person.
4. The third person communicates acceptance to the obligor or to the parties before the stipulation is revoked.
5. The contracting parties did not intend to exclude the third person's right to demand fulfillment.

The benefit must be direct. A person who merely profits from the performance of a contract as a factual consequence is not a beneficiary under stipulation pour autrui. For example, a nearby business that gains customers because another party constructed a facility is only incidentally benefited unless the contract shows an intent to create a right in that business.

Acceptance need not follow a rigid form unless the contract or law requires one. It must, however, be communicated before revocation because the contracting parties remain free to withdraw or modify the benefit before the beneficiary's acceptance completes the beneficiary's enforceable right.

Once the beneficiary accepts in time, the promisor becomes bound to perform the stipulation in the beneficiary's favor. The promisee may also have an interest in demanding performance, especially where the stipulation was part of the cause or consideration of the contract. The beneficiary's right is limited to the favorable stipulation and does not automatically include control over the entire contract.

The beneficiary takes the stipulation subject to its terms and conditions. If the benefit is conditional, onerous, revocable until acceptance, or limited by the contract, the beneficiary cannot demand more than what was conferred. The promisor may invoke defenses arising from the contract and from the beneficiary's failure to comply with conditions attached to the benefit.

Distinctions from Similar Arrangements

Contracts Creating Real Rights

Article 1312 qualifies relativity by providing that, in contracts creating real rights, third persons who come into possession of the object are bound, subject to the rules on mortgages and land registration. The reason is that a real right directly affects the thing and may follow it into the hands of later possessors or transferees.

A real right is enforceable against the world with respect to the thing, while a personal right is enforceable against a particular obligor. When a contract creates or recognizes a real right, later possessors cannot ignore the right merely because they did not sign the original contract, especially when the right is registered, annotated, or otherwise legally effective against them.

Examples include a mortgage affecting the property, a registered encumbrance, or an easement that burdens an immovable. A purchaser who acquires the property subject to such a real right must respect the encumbrance, although personal covenants not attached to the thing remain governed by ordinary rules of privity.

Land registration rules are crucial because registered land operates under a system of notice and priority. Registration does not validate a void contract by itself, but it may make a valid real right binding upon subsequent purchasers or possessors according to the governing property and registration rules.

The distinction between real and personal effects prevents overextension of the exception. A later possessor may be bound to respect a mortgage or easement attached to the property, but that does not automatically make the possessor liable for all personal promises made by the original owner unless there is assumption, novation, law, or another binding source.

Protection of Creditors

Article 1313 recognizes that creditors are protected in cases of contracts intended to defraud them. A debtor's freedom to contract cannot be used to place property beyond the reach of legitimate creditors through simulated, fraudulent, or prejudicial dispositions.

A creditor is not ordinarily a party to the debtor's contracts with third persons. Still, the law allows the creditor to attack or neutralize transactions that impair the creditor's legally protected right to collect. This is not because the creditor becomes a contracting party, but because the law prevents the contract from being used as an instrument of fraud.

The usual remedy is rescission for fraud of creditors, often associated with accion pauliana. It is subsidiary in character: the creditor must generally show that ordinary remedies are insufficient, that the debtor disposed of property in a manner prejudicial to collection, and that the legal requirements for impugning the transfer are present.

The effect of rescission for fraud of creditors is limited to what is necessary to satisfy the creditor's claim. The remedy does not exist to punish every disadvantageous contract made by the debtor, nor to give the creditor ownership of the transferred property as a windfall. It restores the property or value to the extent needed to make the creditor's remedy effective.

Creditors may also, in proper cases, exercise the debtor's rights through accion subrogatoria when the debtor refuses or neglects to enforce patrimonial rights needed for collection. This likewise qualifies strict relativity because the creditor acts through a legal remedy that preserves the debtor's patrimony for satisfaction of obligations.

Third Person Who Induces Breach

Article 1314 imposes liability for damages on a third person who induces another to violate a contract. The third person is still not bound by the contract as a party; the liability arises from an independent wrongful act that intentionally interferes with an existing contractual relation.

The essential elements are the existence of a valid contract, knowledge of that contract by the third person, intentional inducement or interference, breach or violation by a contracting party, and damage to the injured party. The interference must be more than ordinary competition or lawful pursuit of one's own rights.

Inducement may consist of persuasion, pressure, collusion, or conduct designed to cause one party not to perform. Liability is clearer when the third person knowingly procures the breach for an improper purpose or without legal justification. A person who merely enters into a transaction without knowledge of the prior contract, or who acts under a legitimate legal right, is not liable under this doctrine solely because the prior contract was later breached.

The remedy is damages against the interfering third person, while contractual remedies against the breaching party remain available under the contract. The injured party may pursue the proper remedies against each wrongdoer according to the source of liability: contractual liability against the party in breach and extra-contractual or statutory liability against the inducer.

Practical Consequences of Relativity

Relativity determines who may sue, who may be sued, and what remedies are available. A plaintiff asserting contractual rights must show either that he is a party, a successor, a duly represented principal, an accepted third-party beneficiary, a creditor invoking a protective remedy, or a person otherwise given a right by law.

A defendant sued for breach may invoke relativity by showing that he did not consent, was not represented, did not assume the obligation, was not a successor bound by the undertaking, and is not made liable by law. The defense is especially important when a contract attempts to impose duties on affiliates, family members, corporate officers, property buyers, or related entities that did not bind themselves.

Relativity also separates contract enforcement from property consequences. A contract of sale may bind seller and buyer before delivery, but it cannot defeat the rights of a true owner who was not a party. A lease may bind the lessor and lessee, but its effect on a later purchaser depends on property, registration, and special statutory rules. A mortgage may bind later holders of the property when it is legally effective as a real right, but personal undertakings in the loan remain enforceable against the personal obligors.

Corporate personality and relativity operate together. A corporation's contract is generally not the contract of its stockholders, directors, officers, or affiliated corporations. Personal liability requires a separate basis, such as personal undertaking, agency beyond authority, tort, law, or circumstances justifying disregard of separate juridical personality.

Family relationship alone does not make one person bound by another's contract. Marriage, filiation, or kinship may matter under family property regimes, support, succession, or agency rules, but a relative is not contractually liable merely because of relationship to a contracting party.

Relativity further affects rescission, annulment, reformation, and interpretation. These remedies generally belong to the parties and their proper successors, except when the law grants standing to a third person whose legally protected interest is directly affected, such as a creditor in fraudulent conveyance or a beneficiary under a stipulation in his favor.

Summary of Effects

Doctrinal Synthesis

Relativity is the rule of contractual privity in Philippine civil law. It confines contractual rights and liabilities to the parties and their legally recognized successors, while preserving specific legal protections for third persons when the contract deliberately benefits them, creates real rights, defrauds creditors, or is violated through intentional interference.

The doctrine should be applied by identifying the juridical source of the alleged right or liability. If the source is the contract itself, the claimant must be a party, heir, assign, represented principal, or accepted beneficiary. If the source is property law, creditor protection, tortious interference, agency, succession, or another legal rule, the effect on a non-party depends on that independent source rather than on contractual privity alone.