A contract is a meeting of the minds between two or more parties, whereby one party binds himself with respect to the other, or where one party binds himself with respect to the other, or where both parties bind themselves reciprocally, in favor of one another, to fulfill a prestation to give, to do, or not to do. (Pineda, Obligations and Contracts 2009, p. 363)
The following are the five (5) basic legal principles governing contracts.
I. Principle of Free Stipulation
The first principle is embodied in Article 1306 of the Civil Code. The article provides that contracting parties are free to create or establish stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
By this principle, the parties have the right to negotiate and agree on any stipulations, clauses, terms and conditions as they may deem convenient. This right is even guaranteed under the constitution when it states that “No law impairing the obligation of contracts shall be passed” (Article III, Sec. 10, 1987 Constitution). Hence, the right of free stipulation is both a statutory and a constitutional right.
Illustrative cases
1. On Interest Rates
Vitug vs. Abuda
G.R. No. 201264, January 11, 2016
The freedom to stipulate interest rates is granted under the assumption that we have a perfectly competitive market for loans where a borrower has many options from whom to borrow. It assumes that parties are on equal footing during bargaining and that neither of the parties has a relatively greater bargaining power to command a higher or lower interest rate. It assumes that the parties are equally in control of the interest rate and equally have options to accept or deny the other party’s proposals. In other words, the freedom is granted based on the premise that parties arrive at interest rates that they are willing but are not compelled to take either by force or another person or by force of circumstances.
However, the premise is not always true. There are imperfections in the loan market. One party may have more bargaining power than the other. A borrower may be in need of funds more than a lender is in need of lending them. In that case, the lender has a more commanding power to set the price of borrowing than the borrower has the freedom to negotiate for a lower interest rate.
Hence, there are instances when the state must step in to correct market imperfections resulting from unequal bargaining positions of the parties.
In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore, void, for being against public morals. The lifting of the ceiling on interest rates may not be read as “grant[ting] lenders carte blanche [authority] to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
2. Employment Contract
Gopio vs. Bautista
G.R. No. 205953, June 06, 2018
While our Civil Code recognizes that parties may stipulate in their contracts such terms and conditions as they may deem convenient, these terms and conditions must not be contrary to law, morals, good customs, public order or policy; a contract of employment is imbued with public interest; the parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with each other.
II. Obligatory Force of contracts
The second principle states that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.
The obligatory force of contracts is expressly recognized in the following articles of the Civil Code:
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
Art. 1315. Contracts are perfected by mere consent, and from the 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.
Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form 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 xxx
III. Mutuality of contracts
The third principle states that a contract binds both contracting parties and its validity or the compliance therewith cannot be left to the will of only one party.
Illustrative Case:
Stipulations of Interest
Security Bank Corp. vs. Sps. Mercado
Gr. No. 192934, June 27, 2018
Found in Art. 1308 of the New Civil Code, which states that contracts must bind both contracting parties, and its validity or compliance cannot be left to the will of one of them; premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality; as such, any contract which appears to be heavily weighed in favor or one of the parties so as to lead to an unconscionable result is void; likewise, any stipulation regarding the validity or compliance of the contract that is potestative or is left solely to the will of one of the parties is invalid; stipulations of interest are subject to the principle of mutuality of contracts; interest rates, when allowed.
IV. Relativity of Contracts
The fourth principle states that contracts take effect only between the parties, their assigns and heirs except where the rights and obligations arising from the contract are not transmissible by their nature, by stipulation or by provision of law (Art. 1311) in which case the assigns or heirs are not affected anymore.
Illustrative Case:
A contract cannot favor or prejudice a third person
Asian Terminals, Inc. vs. Padoson Stainless Steel Corp.
GR. No. 211876, June 25, 2018
The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof; “Where there is no privity of contract, there is likewise no obligation or liability to speak about”; guided by this doctrine, respondent corporation cannot shift the burden of paying the storage fees to BOC since the latter has never been privy to the contract of service between respondent corporation and petitioner; to rule otherwise would create an absurd situation wherein a private party may free itself from liability arising from a contract of service, be merely invoking that the BOC has constructive possession over its shipment by the issuance of a Hold-Order.
V. Perfection by mere consent of consensual contracts
The fifth principle states that consensual contracts are perfected by mere consent.
The fifth principle is embodied in Article 1315 of the Civil Code.
Art. 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.
Illustrative Case:
Meeting of the offer and acceptance
Sps. Ong vs. BPI Family Savings Bank, Inc.,
G.R. No. 208638, January 24, 2018
As a rule, a contract is perfected upon the meeting of the minds of the two parties; it is perfected by mere consent, that is, from the moment that there is a meeting of the offer and acceptance upon the thing and the cause that constitute the contract.
