Essential Characteristics of Contracts (Philippine Law)

This article surveys the foundational characteristics of contracts in the Philippines under the Civil Code, explains how they interact with the essential requisites (consent, object, and cause), and illustrates each principle with practical examples.

1) Autonomy of Contracts (Freedom to Stipulate)

Rule. Parties may establish such stipulations, clauses, terms, and conditions as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy (Civil Code, Art. 1306).

Implications

Parties can tailor obligations, price mechanisms, dispute resolution, risk allocation, and even create innominate contracts (Art. 1307), so long as mandatory norms are respected.
Autonomy is not absolute. Clauses may be struck down if unconscionable, illegal, or oppressive (e.g., interests that are shocking to conscience; penalties that are punitive rather than compensatory).

Examples

Price escalation with cap. A construction contract pegs price adjustments to an index with a ceiling to avoid unconscionability.
Employee bonds. Valid if reasonable in amount and duration; void if they effectively restrain lawful trade beyond what protection of the employer’s legitimate interests requires.
Non-compete clauses. Enforceable when reasonable as to time and territory and necessary to protect legitimate business interests.

2) Consensuality (Perfection by Mere Consent)

Rule. In general, contracts are perfected by mere consent (Art. 1315). Consent requires: capacity, intelligent and free will, and agreement on the object and cause.

When form or delivery matters

Real contracts (e.g., deposit, commodatum, pledge) are perfected upon delivery of the thing.
Formal/Solemn contracts require compliance with a specific form for validity (e.g., donation of real property in a public instrument and acceptance in a public instrument—Arts. 748–749).

Examples

Sale of a laptop. Binding once parties agree on the model and price, even before payment or delivery; remedies differ if non-delivery occurs.
Pledge of jewelry. Not perfected until the jewelry is actually delivered to the pledgee.
Donation of land. Void if not in a notarized deed with proper acceptance.

3) Mutuality (Binds Both; No One-Sided Will)

Rule. A contract must bind both parties; its validity or compliance cannot be left to the will of one of them (Art. 1308).

What’s allowed / not allowed

Allowed: Conditional obligations dependent on objective facts or a third person’s determination (e.g., price set by an appraiser or index).
Not allowed: Clauses letting one party unilaterally decide whether to be bound or how much to pay without standards (pure potestative conditions on the debtor’s part).

Examples

“Rent is whatever the lessor later decides.” Void for lack of mutuality.
“Price to be the average of three independent valuations.” Valid—performance depends on determinable external standards.

4) Relativity (Privity of Contracts)

Rule. Contracts take effect only between the parties, their assigns and heirs, except in cases where rights and obligations are not transmissible by nature, stipulation, or provision of law (Art. 1311).

Key exceptions

Stipulation pour autrui (stipulation in favor of a third person) who accepts the benefit before revocation.
Real rights attach to the thing and bind subsequent possessors who take with notice (e.g., a registered mortgage).
Acción directa granted by law (e.g., subcontractor’s direct action in specific statutes; insurer’s direct liability to third parties in certain settings).
Tortious interference and other statutory causes where third parties become liable despite privity.

Examples

Life insurance with a named beneficiary. Beneficiary can demand proceeds upon the insured event.
Mortgage annotated on title. Buyer takes subject to the lien.

5) Obligatory Force and Good Faith

Rule. Contracts have the force of law between the parties and must be complied with in good faith (Arts. 1159, 1315, 1306).

Operational standards

Good faith requires honesty and fairness in performance (e.g., cooperation required to fulfill conditions precedent).
The duty not to impair the contract’s efficacy: no deliberate acts that defeat the agreed purpose.
Penalty clauses are generally enforceable but courts may reduce them if iniquitous or unconscionable.

Examples

Supply contract with forecast mechanism. Buyer must provide reasonable forecasts and not weaponize uncertainty to starve seller of commitments.
Late completion penalties. Enforceable but may be equitably reduced if the penalty is grossly disproportionate to the actual delay harm.

6) Form: Validity vs. Enforceability vs. Proof

A. Form for validity (solemnity)

Donations. Movables above a modest value and all immovables require specific formalities (Arts. 748–749).
Antichresis, chattel mortgage, real estate mortgage. Must be in certain forms and often registered to bind third persons.

B. Form for enforceability (Statute of Frauds, Art. 1403[2])

Certain agreements must be in writing to be enforceable (e.g., sale of real property; sale of goods ≥ a statutory threshold; leases beyond one year; agreements not to be performed within a year; special promise to answer for the debt of another).
Note: The Statute of Frauds applies only to executory contracts; partial or full performance generally takes the agreement out of the statute.

C. Form for greater efficacy or proof

Even if valid and enforceable without formality, putting it in a public instrument aids in proof and registration to affect third persons (Art. 1358).

Examples

Oral lease for three years. Unenforceable under the Statute of Frauds unless there’s a sufficient written note or partial performance (e.g., tenant’s possession and payment accepted).
Unregistered real estate mortgage. Valid between parties but does not bind third persons who rely on the title.

7) Essential Requisites vs. Characteristics

While the characteristics above describe how contracts operate, every contract must still have the essential requisites (Art. 1318):

Consent (free, intelligent, and real; vitiated by mistake, violence, intimidation, undue influence, or fraud—Arts. 1330–1346).
Object certain (lawful, determinate as to kind; at least determinable as to quantity—Arts. 1347–1349).
Cause (the immediate and essential reason for the obligation—Arts. 1350–1355).

Examples of vices

Mistake on the substance of the thing sold (voidable).
Fraud inducing consent (voidable; plus damages).
Illicit cause or object (void and inexistent).

8) Classification of Contracts and Why It Matters

Consensual / Real / Formal (Solemn) — determines when the contract is perfected.
Onerous / Gratuitous — affects cause and rules on rescission and donations.
Commutative / Aleatory — risk allocation (e.g., insurance).
Nominate / Innominate — nominate contracts follow their specific titles; innominate contracts are governed by (i) party stipulations; (ii) provisions of the Civil Code on obligations and contracts; (iii) rules of the most analogous nominate contracts; and (iv) customs (Art. 1307).

9) Defective Contracts: Void, Voidable, Unenforceable, Rescissible

Understanding defects helps enforce the characteristics above.

Void (inexistent) (Art. 1409): illegal object or cause; absolutely simulated; impossible services; no consent; violates statutes declaring absolute nullity. Cannot be ratified; imprescriptible action to declare nullity (subject to laches/equitable defenses in practice).
Voidable (Arts. 1390–1391): consent vitiated or parties incapacitated. Ratifiable and subject to prescription.
Unenforceable (Art. 1403): e.g., Statute of Frauds; unauthorized contracts; both parties incapable. Susceptible of ratification.
Rescissible (Arts. 1381–1389): valid but rescinded due to lesion or fraud on creditors/minors; subsidiary remedy when no other legal means to obtain reparation.

Example

Sale in fraud of creditors. Rescissible at the instance of prejudiced creditors after exhausting other remedies.

10) Interpretation, Reformation, and Simulation

Interpretation (Arts. 1370–1379): ascertain intention; literal meaning controls if clear; otherwise, consider contemporaneous and subsequent acts, and interpret in a way that renders the contract effective rather than void.
Reformation (Arts. 1359–1369): available when a valid agreement exists but the instrument does not reflect the true intention due to mistake, fraud, inequitable conduct, or accident.
Simulation (Arts. 1345–1346): Absolute simulation → no contract (void). Relative simulation → instrument hides a different real agreement; the real agreement governs if lawful.

11) Typical Clauses That Engage the Core Characteristics

Hardship/renegotiation clause (supports good faith and equity without destroying mutuality).
Third-party beneficiary clause (express pour autrui exception to relativity).
Appraisal/independent determiner (preserves mutuality by avoiding unilateral determination).
Entire agreement & non-waiver (manages autonomy while respecting good faith).
Governing law and venue (valid under autonomy; subject to rules on jurisdiction/arbitration).
Arbitration clause (favored; separable from the main contract; respects mutuality/unconscionability limits).

12) Illustrative Philippine Scenarios

Retail installment sale (consumer finance). An interest clause may be valid despite the lifting of usury ceilings, but courts can reduce unconscionable rates under equity and good faith. Mutuality is preserved if the computation follows an objective formula disclosed to the buyer.
Software-as-a-Service (SaaS) agreement. A clause allowing the provider to “modify fees at any time at its sole discretion” may violate mutuality unless tethered to clear standards (e.g., published schedule, CPI, cost pass-throughs) and accompanied by termination rights.
Real estate preselling. The developer’s unilateral power to change unit area “as measured by developer” is suspect; mooring to independent survey and price adjustment rules preserves mutuality and good faith.
Insurance. Policies are often contracts of adhesion; ambiguous terms are construed against the drafter but still enforced if clear and not illegal. Third-party beneficiaries may sue if the policy or law so allows.

13) Practical Checklist for Enforceable, Fair Philippine Contracts

Autonomy within limits: Are any terms contrary to law or public policy (e.g., oppressive penalties, perpetual restraints, waiver of labor standards or future negligence)?
Consensuality + perfection: Do we know when the contract is perfected (consent vs. delivery vs. form)?
Mutuality preserved: Do obligations depend on objective standards or third-party determinations rather than one party’s whim?
Relativity recognized: Are there intended beneficiaries or real rights to bind third parties? Have we registered where required?
Good faith: Is performance structured to require cooperation and avoid opportunism (notice periods, cure rights, proportional remedies)?
Form & evidence: Does the deal fall under Statute of Frauds or formal validity rules? Are notarization and registration needed?
Defect control: If risk of vices of consent exists, do we have representations, due diligence records, and fair remedies?

14) Quick Reference to Common Civil Code Provisions

Art. 1306 — Autonomy of contracts and public policy limits
Art. 1307 — Innominate contracts
Art. 1308 — Mutuality
Art. 1311 — Relativity and heirs/assigns; exceptions
Art. 1315 — Perfection by consent (consensuality)
Art. 1318 — Essential requisites (consent, object, cause)
Arts. 1330–1346 — Vices of consent; simulation
Arts. 1347–1349 — Lawful, determinate object
Arts. 1350–1355 — Cause and its effects
Arts. 1356–1358 — Form for validity, enforceability, and proof
Arts. 1359–1369 — Reformation
Arts. 1370–1379 — Interpretation
Art. 1381 ff. — Rescissible contracts
Arts. 1390–1399 — Voidable contracts and ratification
Art. 1403 — Unenforceable contracts; Statute of Frauds
Art. 1409 — Void and inexistent contracts

Conclusion

In Philippine law, the essential characteristics of contracts—autonomy, consensuality, mutuality, relativity, and obligatory force in good faith—operate alongside the requisites of consent, object, and cause and the rules on form. Sound drafting aligns each clause with these pillars: it preserves mutuality with objective standards, channels autonomy within public policy limits, respects privity while planning for beneficiaries and real rights, and records the transaction in the appropriate form. Done right, a contract becomes not only enforceable but also fair and durable in Philippine courts.