Contracts Flashcards
What is a contract?
ART. 1305. 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.
What are the elements of a contract?
ART. 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)
What are the types of essential elements of contracts?
1.1. Common elements these are those which are present in all contracts. (Ex. Consent, Object, and Cause)
1.2. Special elements - required in certain contracts, but special in a sense that they are not observed by all contracts are present only n certain contracts (Ex. The requirement or the necessity of delivery in cases of real contracts; essential solemnities or forms)
1.3. Extraordinary elements pertain to particular types of contracts that they are extraordinary considering that it has a particular provision in law peculiar or specific to certain types of contracts. (Ex. Law on Sales purchasing price in contract of sale is an extraordinary element because ordinarily, that is what we call the consideration or cause in contracts. But it has a definite or a specific name in law of sales)
When does auto contracts take place?
This may take place when a person in his capacitywhich is a representative of another contract with himself or when he is a representative of two different persons bring about a contract between his two principals. This is usually brought about in a contract of agency. (Ex. Real estate brokers through SPA
How are innominate contracts regulated?
ART. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n)
What are the types of innominate contracts?
- Facio ut facias (I do in order that you may do)
- Facio ut des (I do that you may give)
- Do ut facias (I give that you may do)
- Do ut des (I give that you give)
What are innominate contracts?
those special types of contract that are not given any particular designation or name under the law.
What are the characteristics of a contract?
- Principle of Autonomy/Autonomy of Contracts freedom of the parties or the liberality of the parties to stipulate terms and conditions in each and every contract.
- Principle of Mutuality or Mutuality of Contracts 3. Relativity of Contracts
- Obligatory Force of Contracts
What is the principle of autonomy of contracts?
ART. 1306. The contracting parties may establish such 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.
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FACTS: William Golangco Construction Corporation (WGCC) and the Philippine Commercial International Bank (PCIB) entered into a contract for the construction of the extension of the PCIB Tower II on October 20, 1989. It included the application of a granitite wash-out finish on the exterior walls of the building.
In June 1, 1992, PCIB accepted turnover of completed work and to answer for any defect arising within a period of one year, WGCC submitted a guarantee bond issued by Malayan Insurance in compliance with the construction contract.
The issue arose when portions of the granitite wash-out finish of the exterior of the building began peeling off and falling from the walls in 1993. WGCC made minor repairs.
But in 1994, PCIB entered into another contract with Brains and Brawns Corporation to re-do the entire granitite wash-out finish after WGCC that it was not in a position to do the new finish work though it was willing to share a part of the cost. PCIB incurred P11.6M for the repair work.
Construction Industry Arbitration Commission PCIB filed a request for arbitration with the CIAC for the reimbursement of its expenses for the repairs made by another contractor it complaint WGCC alleged non-compliance with their contractual terms on materials and workmanship. WGCC interposed a P5.7M counter-claim for material cost.
CIAC declared WGCC liable for the construction defects in the project. WGCC filed for review with CA but was dismissed.
ISSUE: WON petitioner WGCC is liable for defects in the granitite wash-out finish that occurred after the lapse of the one-year defects liability period provided in Art. XI of the construction contract.
Obligations arising from contracts have the force of law between the parties and should be complied with in good faith. In characterizing the contract as having the force of law between the parties, the law stresses the obligatory nature of a binding and valid agreement.
The provision in the construction contract providing for a defects liability period was not shown as contrary to law, morals, good customs, pubic order or public policy. By the nature of the obligation in such contract, the provision limiting liability for defects and fixing specific guaranty periods was not only fair and equitable; it was also necessary. Without such limitation, the contractor would be expected to make a perpetual guarantee on all materials and workmanship.
The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the Philippines for private and government construction contracts. The contract did not specify a different period for defects in the granitite wash-out finish; hence, any defect therein should have been brought to WGCCs attention within the one-year defects liability period in the contract.
We cannot countenance an interpretation that undermines a contractual stipulation freely and validly agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract freely entered into
Respondent Angelina de Leon Tan, and her husband Ruben Tan were the former registered owners of a 240-square meter residential lot, situated at Barrio Canalate, Malolos, Bulacan and covered by Transfer Certificate of Title No. T-8540. On February 17, 1994, they entered into an agreement with petitioners spouses Isagani and Diosdada Castro denominated as Kasulatan ng Sanglaan ng Lupa at Bahay (Kasulatan) to secure a loan of P30,000.00 they obtained from the latter. Under the Kasulatan, the spouses Tan undertook to pay the mortgage debt within six months or until August 17, 1994, with an interest rate of 5% per month, compounded monthly.
When her husband died on September 2, 1994, respondent Tan was left with the responsibility of paying the loan. However, she failed to pay the same upon maturity. Thereafter, she offered to pay petitioners the principal amount of P30,000.00 plus a portion of the interest but petitioners refused and instead demanded payment of the total accumulated sum of P359,000.00.
On February 5, 1999, petitioners caused the extrajudicial foreclosure of the real estate mortgage and emerged as the only bidder in the auction sale that ensued. The period of redemption expired without respondent Tan having redeemed the property; thus title over the same was consolidated in favor of petitioners. After a writ of possession was issued, the Sheriff ejected respondents from the property and delivered the possession thereof to petitioners.
ISSUE: WON nullifying the interest rate voluntarily agreed upon by the petitioners and respondents and expressly stipulated in the contract of mortgage entered into between them was proper
The petition lacks merit. The Court of Appeals correctly found that the 5% monthly interest, compounded monthly, is unconscionable and should be equitably reduced to the legal rate of 12% per annum.
While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law.
Whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners 1.7M loan to which they agreed upon is excessive and unconscionable under the circumstances.
SC: We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.
Based on jurisprudence (Villanueva v. CA and Garcia v. CA), the Court finds that the 24% per annum interest rate, provided for in the subject mortgage contracts, may not be considered unconscionable. Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions contained therein.
Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners’ loan in this case can by no means be considered excessive or unconscionable.
SC: We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners’ failure to perform their obligation was due to force majeure or to respondent bank’s acts, petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.
What is the principle of mutuality of contracts?
Principle of Mutuality of Contracts - presumption that the parties are of equal footing when they enter in a contract, such that there is mutuality, they are mutually bound as against each other with respect to the terms and conditions that they place in that contract.
What is the binding effect if the contracts are mutual as to the contracting parties?
ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
Article 1309 - 1310
‘ART. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n)
ART. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (n)
In a contract, we have different stages.
- Conception/generation or negotiation This is the stage where the parties try to come into an agreement and negotiate what are the terms and conditions that they want to be bound towith respect to a particular contract. If they already agree, there is already consent between the parties, and it gives rise to birth or the perfection of the contract.
- Perfection In the perfection stage, this is where you can say that the contract actually exists under the law.
- Performance Finally, once the contract has been perfected, the parties must carry out the obligations corresponding their agreements. This stage is the performance stage.
What is a contract of adhesion?
it is a contract whereby the terms, stipulations, clauses, and conditions therein were only drafted on the part of one of the contracting parties. With respect to the other party, he will only accept (or not) the terms and stipulations drafted by one party.
Are contracts of adhesion void for being violative of the principle of mutuality of contracts? Is it void per se?
: The Supreme Court discussed that a contract of ‘ adhesion is just as binding as ordinary contracts. While it may be true that it was prepared by only one of the parties, it does not negate the fact that it is mutual, because the other party is free whether to accept it or not.
What is an escalation clause?
An escalation clause is usually a stipulation made part of a contract of loan where interest rates imposed upon a loan may be increased in subsequent years.
Escalation clauses, are they invalid per se because they violate the principle of mutuality of contracts?
The Supreme Court discussed that, although as a rule, escalation clauses are not void per se.
For an escalation clause to be valid, the rate of interest stipulated by the parties will only be increased if the applicable maximum rate of interest is increased by law or the monetary board of the Bangko Sentral ng Pilipinas.
An escalation clause is void where the creditor unilaterally determines the rate of increase without express conformity of the debtor. Such unbridled right given to the creditors to adjust independently and upwardly the interest negates the principle of mutuality.
On April 7, 1982, Fernandez as owners of a NACIDA registered enterprise, obtained a loan from CIGLF from the PNB in the amount of P50K as evidence by a Credit Agreement, under the PN the loan was to be amortized over a period of three years at 12% interest annually.
To secure the loan Fernandez executed a REM over a 1.5- hectare parcel of unregistered agricultural land at Toledo City which was appraised by PNB at P1,062 and given a loan value of P531. In addition, there was a Chattel Mortgage over a thermo plastic-forming machine which had an appraised value of P8,800 and a loan value of P4,400.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only within the limits allowed by law.
In 1983, they had additional loan of P50K which contained similar provisions and terms, but they executed a new credit agreement changing the amount of the loan from P50K to P100K but otherwise preserving the stipulation, they constituted another Real Estate Mortgage of 311 sq.m. which had a value of P40K with a loan value of P28K.
In a letter dated August 1, 1984, the PNB informed Fernandez that the interest rate of CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annum on past dues. The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges.
Thus, as of said date, the unpaid principal obligation of (private respondents) amounted to P62,830.32
ISSUE: WON, the escalation clause imposed by PNB is valid.
We cannot countenance petitioners claim that the escalation clause at bench gives it unbridled right to unilaterally and upwardly increase the interest. That would completely take away from private respondents the right to assent to an important modification in their agreement and would negate the element of mutuality in contracts. His silence per se cannot be construed as an acceptance; there is even no implicit agreement to the proposed increases in interest rate.
Spouses Tanqueco owned a 512 sq.m lot. On June 30, 1978, they leased the property to Allied Banking for a monthly rental of P1000 for the first three years, adjustable 25% every three years thereafter.
The lease con years any may be renewed for a like term at the option of the lessee
Pursuant to the lease agreement, Allied introduced an
improvement on the property consisting of a concrete building with a floor area of 340 sq.m. which it used as a branch office. As stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the original term of the lease.
When the lease contract expired in 1992 private respondents demanded that Allied vacate the premises.
However, the latter asserted its sole option to renew the lease and enclosed P68,400.00 representing the advance rental payments for six (6) months considering the escalation clause. Private respondents however returned the check to Allied, prompting the latter to consign the amount in court.
Allied insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid and binding on both parties, and the exercise by petitioner of its option to renew the contract was part of their agreement and in pursuance thereof.
WON in a stipulation in a contract of lease to the effect that the contract may be renewed for a like term at the option of the of the lessee is void for being violative of the principle of mutuality of contracts.
It is valid. Article 1308 of the Civil Code expresses what is known as the principle of mutuality of contracts. It provides that the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of the parties alone.
The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
In this case, an express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee.
It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend.
The right of renewal constitutes a part of the lessees’ interest in the land and forms a substantial and integral part of the agreement.
Even if such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee.
And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement.
On March 20, 1996 Floirendo, Jr. obtained a loan from Metrobank to infuse additional working capital for his company. As security he executed a REM over his four parcels of land in CDO. The loan was renewed for another year secured by the same REM. It fixed the interest at 15.4% per annum for the first 30 days and subject to upward/downward adjustment every 30 days thereafter based on any unpaid principal.
On 1997, Metrobank started imposing higher interest rates on loan as high as 30.244% on October 1997. As a result petitioner could no longer pay the high interest rate charged by Metrobank.
Metrobank agreed to the proposal of Floreindo to renew his loan provided that he would pay the arrears in interest amounting to the total sum of P163,138.33. Despite payment by petitioner, respondent bank, instead of renewing the loan, foreclosed the mortgaged property. On August 17, 1998, the auction sale was set. Prior on auction sale, Floirendo complaint for reformation of real estate mortgage contract and PN referring to them as Contracts of Adhesion alleging that metro banks increased interest rates imposed by the bank are scandalous, immoral, illegal and unconscionable. He also alleged that the terms and conditions of the real estate mortgage and the promissory note are such that they could be interpreted by respondent bank in whatever manner it wants, leaving petitioner at its mercy
ISSUE: WON the mortgage contract and the promissory note express the true agreement between the parties therein.
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and or bank charges without advance notice to petitioner in the event of change in the interest rate prescribed by law or the Monetary Board bestows to the creditor unrestrained freedom to charge any rate other than that which was agreed upon.
Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract.
The promissory note gives respondent bank authority to increase the interest rate at will during the term of the loan. This stipulation violates the principle of mutuality between the parties. It would be converting the loan agreement into a contract of adhesion where the parties do not bargain on equal footing.
WHEN ESCALATION CLAUSE BECOMES VOID:
They become void when it grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement. A stipulation of such nature violates the mutuality of contracts. The court nullifies the unilateral determination and imposition by creditor banks of increases in the interest rate provided in loan contracts.
