Law on Obligations and Contracts (Part 3)

C O N T R A C T S

The Law
“Article 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. (1254a)”
Discussion of the Law

Characteristics of a Contract

(1) Mutuality of Contracts. Its validity and performance cannot be left to the will of only one of the parties.

(2) Autonomy of Contracts. Parties are free to stipulate terms and provisions in a contract, as long as these terms and provisions are not contrary to law, morals, good customs, public order and public policy.

The following are valid stipulations in an employment contract:

a) Non-competition agreements – those that impose restrictions on an employer’s ability to compete with a former employer are valid as long as:
 It is supported by adequate consideration;
 The restraint is confined within the limits that are reasonably necessary for the protection of the employer’s business
 Restraint does not impose undue hardship on the employee.

b) Non-solicitation agreements – requirement to newly-hired employees to sign a non-solicitation agreement to obligate the employee not to solicit contacts and fellow employees of the employer. Non-solicitation agreements run for an indefinite period.

c) Confidentiality – imposes upon an employee a duty to keep confidential trade secrets and other confidential company information during employment and after employment. This may also run for an indefinite period.

A Yellow Dog Contract is a promise exacted from workers as a condition of employment that they are not to belong to, or attempts to foster, a union during their period of employment. This constitutes Unfair Labor Practice and considered an illegal stipulation.

(3) Relativity of Contracts. Contracts are binding only upon the parties and their successors-in-interest.

Exceptions:
 Stipulation in favor of a third person (stipulation pour autrui) as in a beneficiary of an insurance policy.
 Contracts creating real rights
 Third person liable to pay damages in case he induces a party to violate his contract.

A Stipulation pour autrui (stipulation in favor of a third person) will prosper as long as the following requisites are present:
 It must be for the benefit or interest of the third person;
 Such benefit must not be merely incidental;
 Contracting parties must clearly and deliberately conferred such benefit or interest upon the third person
 That the third person must have communicated his acceptance to the obligor before his revocation.

(4) Consensuality of Contracts. Contracts are perfected by mere consent. and no form is prescribed by law for their validity. Exception: (a) real contracts (such as pledge, chattel mortgage); (b) contracts covered under the Statute of Frauds.

(5) Obligatory Force of Contracts. By the obligatory force of contracts, it constitutes the law as between the parties who are compelled to perform under the threat of being sued in the courts of law.