Nature and Governing Principles
A contract is a juridical convention by which one or more persons bind themselves, with respect to another or others, to give something or to render some service. Its immediate source is the concurrence of wills, but its legal effect comes from the law which recognizes that concurrence as obligatory.
The law on contracts gives private persons a broad power to regulate their patrimonial relations. This power is not absolute. Stipulations may be freely established only when they are not contrary to law, morals, good customs, public order, or public policy. A contract may therefore be valid as an expression of consent, yet void or ineffective as to a stipulation that transgresses a mandatory limitation.
Contracts operate within the wider law of obligations. A contract is a source of obligation; the obligation is the juridical necessity to give, to do, or not to do; the prestation is the conduct or thing due. The contract explains why the obligation exists, while the rules on obligations govern performance, breach, damages, extinguishment, and related consequences.
Basic Characteristics of Contracts
| Characteristic | Meaning | Legal Consequence |
|---|---|---|
| Autonomy | Parties may establish stipulations according to their will. | The agreed terms generally govern, subject to mandatory limits imposed by law and public norms. |
| Obligatory force | A valid contract has the force of law between the parties. | Parties must comply in good faith and cannot disregard the contract because performance has become inconvenient or less profitable. |
| Mutuality | The validity or fulfillment of the contract cannot be left solely to the will of one party. | A stipulation allowing one party alone to determine whether the contract exists, continues, or binds is generally void. |
| Relativity | Contracts generally bind only the parties, their assigns, and heirs. | Third persons are neither bound nor benefited, except in recognized cases such as stipulations in favor of a third person, real rights, creditor protection, or interference with contractual relations. |
| Consensuality | Contracts are generally perfected by mere consent. | Once consent is perfected on the object and cause, obligations arise even before delivery or execution of a formal instrument, unless the contract is real, solemn, or subject to a required form for enforceability. |
Freedom to Contract and Its Limits
The principle of autonomy means that parties may shape their own bargains. They may choose the object, price, risk allocation, remedies, conditions, periods, warranties, confidentiality terms, exclusivity clauses, liquidated damages, arbitration clauses, and other terms consistent with law.
Autonomy yields to mandatory law. A contract cannot validate what the law prohibits, waive rights declared by law to be inalienable, defeat labor or consumer protection, evade constitutional or statutory restrictions on property, authorize fraud, or impose terms so offensive to morals, good customs, public order, or public policy that the law refuses enforcement.
Morals and good customs refer to accepted standards of right conduct in the community. Public order refers to rules essential to social organization and legal order. Public policy refers to considerations which the law treats as more important than private convenience, including the integrity of commerce, family relations, land registration, credit protection, and the administration of justice.
When only a particular stipulation is illegal and the lawful parts can stand independently, the invalid stipulation may be severed. When the unlawful stipulation is inseparable from the essential bargain, the entire contract may fail.
Obligatory Force and Good Faith
A valid contract is binding not only as to what is expressly stated, but also as to all consequences that, according to their nature, are in keeping with good faith, usage, and law. The parties are therefore bound by duties that naturally flow from the agreement even if not written in full detail.
Good faith in contracts requires honesty in the formation, interpretation, performance, and enforcement of obligations. It prohibits a party from using literal terms to defeat the evident purpose of the agreement, from deliberately preventing the fulfillment of a condition, and from exercising contractual rights in a manner that unjustly injures the other party.
The binding effect of a contract does not depend on continuing satisfaction with the bargain. A party who freely entered into a valid contract may not withdraw merely because the terms later appear burdensome. Equity may temper consequences in proper cases, but it does not create a general license to escape contractual commitments.
Mutuality of Contracts
Mutuality requires that a contract bind both parties and that its validity or fulfillment not depend exclusively on the uncontrolled will of only one of them. A contract that is binding on one party but optional solely to the other in respect of its very existence lacks the reciprocity expected of contractual relations.
A stipulation is not invalid merely because one party is given an option, a right of first refusal, a right to terminate for cause, or discretion to choose among agreed modes of performance. These arrangements are valid when the contract itself supplies standards, conditions, periods, consideration, or objective facts that control the exercise of the power.
The Civil Code allows performance or determination to be entrusted to a third person. The third person's decision generally binds the parties, because neither party alone controls the result. If the decision is evidently inequitable, courts may intervene. If the third person refuses or cannot act, the effect depends on whether that determination was essential to the parties' consent.
Relativity and Effects on Third Persons
The general rule is that contracts take effect only between the parties, their assigns, and heirs. This reflects the consensual basis of contractual liability: a person is not ordinarily bound by an agreement to which he did not consent.
Heirs are generally bound because they succeed to the transmissible rights and obligations of the decedent. They are not bound when the rights and obligations are intransmissible by nature, by stipulation, or by law. Personal obligations based on special skill, trust, confidence, or personal qualifications usually do not pass as enforceable duties against heirs in the same manner.
Assignments transfer contractual rights to an assignee, subject to the nature of the right, stipulations against assignment, and legal restrictions. The assignment of a right does not automatically transfer personal duties unless the creditor consents to substitution where required by the nature of the obligation.
Recognized Effects Involving Third Persons
- Stipulation in favor of a third person. A contract may contain a deliberate and clear benefit in favor of a third person who may demand its fulfillment after communicating acceptance to the obligor before revocation. The benefit must not be merely incidental to the contract.
- Contracts creating real rights. When a contract creates a real right, third persons who come into possession of the object may be bound by that right, subject to the rules on registration, notice, and priority.
- Protection of creditors. Creditors may assail contracts intended to defraud them when the requisites for rescission or other protective remedies are present.
- Inducement of breach. A third person who knowingly and unjustifiably induces a contracting party to violate the contract may be liable for damages.
A stipulation in favor of a third person differs from representation. In representation, a person acts in the name and for the account of another, so the principal becomes the party to the contract if authority exists. In a stipulation pour autrui, the contracting parties act in their own names but intentionally confer an enforceable benefit on a third person.
Perfection of Contracts
Contracts are generally perfected by mere consent. Consent is perfected when an offer and an acceptance meet upon the object and cause of the contract. From that moment, the parties are bound not only to perform the expressly promised prestations but also to comply with the consequences that flow from the contract's nature.
Perfection must be distinguished from consummation. Perfection creates the binding juridical relation. Consummation occurs when the parties have fully performed their respective prestations. A sale, for example, may be perfected before delivery and payment, while ownership and risk consequences may depend on delivery, stipulation, and applicable law.
Some contracts are real contracts and are not perfected until delivery of the object. Deposit, pledge, and commodatum are classic examples because delivery is not merely performance but an element of perfection. Without delivery, there may be a promise to enter into the real contract, but the real contract itself has not yet arisen.
Some contracts are formal or solemn because the law requires a particular form for validity. In those cases, consent alone does not produce a valid contract unless the required form is observed. Other contracts may be valid orally but must appear in a certain form for enforceability, proof, registration, or convenience.
Stages in Contractual Relations
| Stage | Focus | Typical Legal Significance |
|---|---|---|
| Preparation or negotiation | Parties explore terms, exchange proposals, or conduct due diligence. | Generally no perfected contract exists yet, but bad faith, fraud, confidentiality undertakings, or culpa in contrahendo may create liability. |
| Perfection | Consent meets on object and cause, or the additional requirement for perfection occurs. | The contract becomes binding and obligations arise according to its nature. |
| Consummation | Parties perform the prestations promised. | Rights are satisfied, breached, extinguished, transferred, or enforced according to the contract and law. |
The law treats negotiation with practical flexibility. Mere advertisements, price lists, invitations to bid, and preliminary drafts are usually invitations to make offers rather than offers themselves, unless the terms show a definite intent to be bound upon acceptance. A perfected contract requires finality on essential terms, not merely continuing discussion.
Classification of Contracts Under General Provisions
Contracts may be classified in several ways because different classifications identify different legal consequences. A single contract may fall under multiple classifications at the same time.
| Classification | Meaning | Importance |
|---|---|---|
| Consensual | Perfected by mere consent. | Most contracts become binding once parties agree on essential terms. |
| Real | Perfected only upon delivery of the object. | Delivery is required for the juridical relation itself to arise. |
| Solemn or formal | Requires a form prescribed by law for validity. | Noncompliance with the required form prevents the contract from being validly constituted. |
| Nominate | Has a special name and regulation in law. | Specific statutory rules supplement the parties' stipulations. |
| Innominate | Has no special statutory name or complete regulation. | Governed by stipulations, general contract principles, analogous rules, customs, and the nature of the transaction. |
| Unilateral | Gives rise to an obligation for only one party. | Only one party is principally bound to perform. |
| Bilateral or reciprocal | Creates obligations for both parties that are correlative. | Breach, rescission, delay, and risk may be affected by reciprocity. |
| Onerous | Each party gives or promises something in exchange. | Cause consists in the prestation or promise of the other party. |
| Gratuitous | One party confers a benefit without equivalent return. | Liberality is the cause and stricter rules may govern capacity, form, and revocation. |
| Commutative or aleatory | In commutative contracts, prestations are viewed as equivalent; in aleatory contracts, gain or loss depends on an uncertain event. | The allocation of risk determines whether later inequality affects the bargain. |
Innominate Contracts
The Civil Code recognizes innominate contracts because commerce and private ordering produce arrangements beyond traditional nominate forms. These include agreements where one gives so that another may give, gives so that another may do, does so that another may give, or does so that another may do.
Innominate contracts are not legally inferior to nominate contracts. They are enforceable when the essential requisites of contracts are present and the stipulations do not violate law, morals, good customs, public order, or public policy.
The governing rules for an innominate contract are determined in an ordered manner: first, the parties' lawful stipulations; second, the general provisions on obligations and contracts; third, rules governing the most analogous nominate contracts; fourth, customs of the place; and finally, general principles consistent with the transaction's nature.
Form and Documentation
As a general rule, contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for validity are present. Oral contracts may therefore be valid and binding when the law does not require a particular form.
Form becomes decisive when the law requires it for validity, enforceability, proof, effectiveness against third persons, or registration. A public instrument may be necessary to bind third persons, register a real right, or comply with conveyancing requirements, even if the underlying agreement between the parties is otherwise valid.
The distinction between validity and enforceability is important. A contract may be valid because consent, object, and cause exist, but unenforceable in court until ratified or until the required evidentiary form is supplied. A contract may also be valid between the parties yet ineffective against third persons because the required public instrument, registration, or notice is absent.
Representation and Contracting for Another
No one may contract in the name of another without authority, legal representation, or a right conferred by law. A person who acts for another must stay within the authority given; otherwise, the supposed principal is not bound unless ratification occurs in the manner and time recognized by law.
A contract entered into in another's name without authority, or beyond the scope of authority, is generally unenforceable against the person represented unless that person ratifies it before revocation by the other contracting party. Ratification cleanses the defect of authority and makes the contract binding as though authority had existed from the start, subject to rights already vested in third persons.
Authority may be express or implied from acts, conduct, business practice, or the nature of the position held, but apparent authority cannot be lightly inferred from the declarations of the supposed agent alone. The focus is on the principal's manifestations and the reasonable reliance they induce.
General Provisions in Relation to Validity and Inefficacy
The general provisions on contracts supply the foundation for later rules on essential requisites, form, reformation, interpretation, rescission, voidable contracts, unenforceable contracts, and void or inexistent contracts. They explain when a contractual relation arises, whom it binds, how far private autonomy extends, and when third persons may be affected.
A contract may be valid, voidable, rescissible, unenforceable, void, or inexistent depending on the defect involved. Defects in consent commonly produce voidability. Economic prejudice or fraud against creditors may produce rescission. Lack of authority, certain Statute of Frauds concerns, or incapacity in particular combinations may produce unenforceability. Illegality, impossibility, or absence of essential requisites may produce voidness or inexistence.
These categories matter because they carry different effects. A valid contract is enforceable according to its terms. A voidable contract binds until annulled. A rescissible contract remains valid until rescinded. An unenforceable contract cannot be sued upon unless ratified or otherwise saved. A void or inexistent contract produces no legal effect as a contract and generally cannot be ratified.
Interpretive Role of General Contract Principles
When the text of a contract is clear and lawful, it governs. When ambiguity exists, the contract is read as a whole, giving effect to all provisions if possible and interpreting terms according to the parties' evident intent, the nature of the transaction, contemporaneous and subsequent acts, usage, and good faith.
General provisions prevent both excessive literalism and judicial rewriting. Courts enforce the bargain the parties made, not a better bargain one party later wishes it had made. At the same time, courts will not allow contractual language to become an instrument for fraud, oppression, illegality, or evasion of mandatory law.
The practical function of the general provisions is to preserve the balance between private ordering and legal control. Private persons may create binding legal relations through consent, but the law determines the requisites, limits, effects, transmissibility, third-party consequences, and remedies attached to those relations.