In Philippine civil law, the principles governing contracts are detailed in the Civil Code, particularly under Book IV, Title II, which addresses "Obligations and Contracts." Here, we will meticulously outline the fundamental principles governing contracts under Philippine law, covering essential aspects such as the nature, formation, validity, and effects of contracts.

1. Definition and Nature of Contracts

A contract, as defined in Article 1305 of the Civil Code, 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." This emphasizes that a contract is a mutual agreement that creates enforceable obligations and rights for the parties involved. Contracts are a fundamental tool in civil law, essential for the conduct of business and social relations.

Contracts can be:

Nominate or innominate, depending on whether they have a specific name and classification under the Civil Code.
Onerous (involving the exchange of value), gratuitous (benefit without consideration), or remunerative (compensating for past services or benefits).
Unilateral (where only one party has an obligation) or bilateral (where both parties have reciprocal obligations).

2. Essential Elements of Contracts

For a contract to be valid under Philippine law, it must contain the following essential requisites outlined in Article 1318 of the Civil Code:

a. Consent of the Contracting Parties

Mutual Agreement: Both parties must willingly and knowingly agree to the terms.
Capacity to Consent: Individuals must possess the legal capacity to contract. Generally, those below 18, insane persons, and others deemed incompetent by law cannot validly give consent.
Vices of Consent: Consent must be free from vices (e.g., error, violence, intimidation, undue influence, or fraud). If consent is defective, the contract may be voidable.

b. Object Certain which is the Subject Matter of the Contract

Specific and Determinable: The object of the contract must be certain or, at least, determinable.
Lawfulness of Object: The object cannot be contrary to law, morals, good customs, public order, or public policy.
Possibility of Performance: The object or obligation must be physically and legally possible.

c. Cause of the Obligation which is Established

Cause in Onerous Contracts: In contracts involving mutual benefits, the cause is the promise of reciprocal obligations.
Cause in Gratuitous Contracts: In these contracts, the cause is the liberality or intent to benefit the other party.
Lawfulness of Cause: The cause must not be illicit or against public order or morality; otherwise, the contract will be void.

3. Stages of a Contract

Contracts generally pass through the following stages:

a. Preparation or Negotiation

This is the preliminary stage where parties discuss and negotiate terms without yet forming a binding contract.

b. Perfection or Birth of the Contract

A contract is perfected when all essential requisites (consent, object, and cause) are present. From this point, the parties are bound by their agreement.

c. Consummation or Termination

This is the stage where the parties fulfill their respective obligations, and the contract’s purpose is achieved.

4. Principles Governing Contracts

Several principles form the backbone of contract law under Philippine jurisprudence:

a. Autonomy of Contracts (Article 1306)

Parties are generally free to stipulate their terms and conditions within the bounds of law, morals, good customs, public order, and public policy.

b. Mutuality of Contracts (Article 1308)

The binding force of a contract requires that its performance must depend on the mutual consent of both parties. Neither party can unilaterally modify the terms once the contract is perfected.

c. Relativity of Contracts (Article 1311)

Contracts are binding only on the parties who entered into them, and generally cannot impose obligations or confer rights on third parties, with some exceptions in the Civil Code (e.g., stipulations pour autrui).

d. Obligatory Force of Contracts (Article 1159)

Valid contracts have the force of law between the contracting parties, meaning they are bound to fulfill their obligations as stipulated, except where circumstances justify termination or modification.

e. Consensuality of Contracts

Most contracts are consensual in nature, meaning they are perfected by mere consent, except for those requiring specific formalities or formal execution under the law (e.g., contracts for the sale of real property).

5. Forms of Contracts

According to Article 1356, the Civil Code prescribes that contracts may be formal or informal. The form is generally not an essential requisite for the validity of a contract unless a specific form is required by law (e.g., written form for certain sales, donations of real property).

6. Interpretation of Contracts

When disputes arise, the interpretation of contracts follows specific principles to ascertain the true intent of the parties:

Literal Interpretation (Article 1370): If the terms are clear, they shall control.
Intent of the Parties (Article 1371): The actual intent prevails over the literal terms if they appear inconsistent.
Interpretation in Case of Doubt (Articles 1372-1379): Various rules apply when terms are ambiguous, favoring the contract's validity and, in case of onerous contracts, interpreting against the party who caused ambiguity.

7. Defective Contracts

The Civil Code categorizes defective contracts as follows:

Rescissible Contracts (Articles 1380-1389): Validly formed but rescindable due to harm to one party or third parties.
Voidable Contracts (Articles 1390-1402): Valid until annulled; typically due to vitiated consent (e.g., contracts with minors or induced by fraud).
Unenforceable Contracts (Articles 1403-1408): Cannot be enforced unless ratified (e.g., contracts lacking authority).
Void or Inexistent Contracts (Articles 1409-1422): Contracts with illicit objects, unlawful causes, or lacking essential elements.

8. Effects of Contracts

a. Performance and Breach

Contracts obligate parties to perform as agreed, and failure to do so constitutes a breach. Remedies for breach include specific performance, rescission, and damages.

b. Novation (Article 1291)

Parties may agree to substitute obligations or modify contractual terms, extinguishing the original contract.

Conclusion

The Philippine law on contracts provides a comprehensive framework emphasizing the binding nature of contracts and protecting the autonomy, mutuality, and interests of contracting parties.