A contract is fundamentally a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. A more complete definition describes it as a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves, with respect to another, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.
The law on obligations arising from contracts is governed by the stipulations of the contracting parties, which should be complied with in good faith. The Philippine contract law adheres to the "spiritual system," meaning that a contract is obligatory provided the essential requisites are present, regardless of its form, unless the law requires a specific form for validity or enforceability.
For a contract to exist, it must possess the following essential requisites:
- Consent of the contracting parties. Consent is the very essence of a contract. It is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain, and the acceptance must be unqualified and absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offeror except from the time it came to his knowledge. The Philippine Civil Code adopts the theory of cognition, which means acceptance is effective when it comes to the knowledge of the offeror. There must be no vitiation of consent, meaning it must be free, voluntary, willful, and with reasonable understanding. Vitiated consent may occur due to mistake, violence, intimidation, undue influence, or fraud.
- Object certain which is the subject matter of the contract. The object of a contract can be things, rights, or services. It must be within the commerce of men, licit (lawful), possible, and determinate or capable of being made determinate. Impossible things or services cannot be the object of a contract. Future things can be the object of a contract.
- Cause of the obligation which is established. In onerous contracts, the cause is the prestation or promise of a thing or service by the other party. In remuneratory contracts, it is the service or benefit which is remunerated. In gratuitous contracts, the cause is the mere liberality of the benefactor. The cause is the essential reason or purpose of the contract, distinct from the particular motives of the parties for entering into it. Generally, the motive does not affect the validity or existence of the contract. An unlawful or false cause renders the contract void.
Contracts have several key characteristics:
- Obligatory force: Contracts have the force of law between the contracting parties.
- Autonomy: Contracting parties are free to 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.
- Mutuality: The contract must bind both contracting parties, and its validity or compliance cannot be left to the will of one of them.
- Relativity: Contracts take effect only between the parties, their assigns, and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, by stipulation, or by provision of law. A notable exception is a stipulation pour autrui (stipulation in favor of a third person), which binds the promisor if the third person accepts it before it is revoked.
Contracts can also be classified based on their perfection:
- Consensual contracts: Perfected by mere consent.
- Real contracts: Perfected by the delivery of the object of the obligation. Examples include deposit, pledge, and commodatum.
- Formal or Solemn contracts: Those for which the law requires a specific form for perfection or validity. Examples include donations of real property which require a public instrument.
Contracts which lack one or some of the essential requisites are void or inexistent from the beginning. They produce no legal effects and cannot be ratified. Contracts where consent is vitiated or where one of the parties is incapacitated are voidable. Voidable contracts are valid until annulled and are susceptible of ratification. Certain contracts are unenforceable by court action unless ratified, such as those not complying with the Statute of Frauds.