Relativity of Contracts

In the context of Philippine civil law, the principle of relativity of contracts is governed by the fundamental rule that contracts are binding only upon the parties who have entered into them, their assigns, and heirs, except when the rights and obligations in the contract are not transmissible by their nature, by stipulation, or by legal provision. This principle, articulated in Article 1311 of the Civil Code of the Philippines, is based on the understanding that a contract is essentially a private agreement between two or more parties, who are the only ones entitled to benefit from or be bound by its provisions.

Key Elements of the Principle of Relativity

Contractual Privity (Privity of Contract)
Contracts are binding only upon the parties who execute them. This concept is known as privity of contract, meaning that only those who are parties to the contract have rights and obligations under it. Third parties cannot be compelled to fulfill or benefit from the contract unless they fall under specific exceptions outlined in the law.
Personal Scope of Obligations and Rights
The principle of relativity ensures that only the parties to a contract bear the consequences of the agreement, whether beneficial or detrimental. For example, if A contracts with B, only A and B (or their legal substitutes, like heirs or assigns) have enforceable rights and obligations arising from that contract. No third party can demand performance from A or B, nor can A or B demand anything from a non-party.
Transmission to Heirs and Assigns
Contracts may affect heirs and assigns only if the obligations and rights are transmissible either by law or by stipulation. If a contract contains a personal obligation or involves a non-transferable right (e.g., a contract based on personal skills or qualities), it will not be passed down to heirs or assigns.
Legal Exceptions
While the general rule is that contracts have effects only between the contracting parties, exceptions arise under certain legal doctrines:
- Stipulation Pour Autrui (Stipulation in Favor of a Third Party): A contract can create enforceable rights for a third person if there is a stipulation in favor of that third person, known as a "stipulation pour autrui." For this to apply:
  - The stipulation must be clear and deliberate.
  - The third party must have accepted the benefit stipulated in their favor before it is revoked.
  - The benefit must not merely be incidental but must be a genuine third-party benefit that the promisor intended.
- Quasi-contracts and the Principle of Solidarity: Although quasi-contracts are not contracts in the strict sense, their existence may create obligations enforceable against third parties. Furthermore, where there is a solidary obligation, one party may demand compliance from the co-obligors.
- In Rem Obligations: Some contractual rights and obligations may extend to third parties if the contract involves real property rights. This includes specific property rights that are enforceable against the world (e.g., servitudes or real covenants).
Interference by Third Parties
Third parties cannot unjustly interfere with contractual relations. Under Article 1314 of the Civil Code, if a third party maliciously interferes in the performance of a contract, that third party can be held liable for damages. Malicious interference generally requires:
- Intent to cause harm to one of the contracting parties.
- Malicious intent, or acting in bad faith.
- Actual damage resulting from the interference.
Contracts Transmitting Obligations Involving Real Rights
If a contract involves a real right (such as ownership or lease of land), certain obligations may extend beyond the parties to third parties who acquire the property. For example:
- Lease Agreements: Article 1676 of the Civil Code states that if a leased property is sold, the lease agreement remains binding upon the buyer if it was registered. The buyer, as a successor-in-interest, inherits the obligations related to the real right (i.e., the lease).
- Real Servitudes and Easements: These are property rights that may impose obligations on subsequent owners of the property.
Principle of No Injury to Third Parties
Contracts should not harm third parties, and the parties to a contract cannot use the agreement to evade public policy or mandatory legal provisions that protect third parties. For example:
- Fraudulent Conveyance: If a debtor contracts to transfer assets to evade creditors, the law allows creditors to seek annulment of the contract (accion pauliana).
- Prejudicial Contracts: Article 1313 provides that a contract cannot prejudice third persons who are not parties to it, essentially meaning that parties cannot impose obligations on or extract rights from third parties through a private agreement.
Implications in Agency and Trusts
In cases involving agents, trust arrangements, or fiduciary relationships, the principle of relativity is nuanced:
- Agency Contracts: Although the principal and agent are the parties to the agency contract, the actions of the agent bind the principal with respect to third parties if the agent acts within the scope of authority.
- Trusts: A trust arrangement is governed by the terms between the trustor, trustee, and beneficiary. While third parties are generally not affected by the trust’s provisions, they may be impacted in cases where the trust has a legal effect on property rights.

Applications of Relativity in Contractual Law

Contractual Autonomy
Contracting parties have the freedom to define the terms and scope of their contract, but this autonomy is confined to the relationship between the parties. They cannot create obligations or rights for people not involved in the contract without clear stipulations in favor of third parties.
Nullity of Contracts to Protect Third Parties
Contracts that contravene law, morals, good customs, public order, or public policy may be declared void. For instance, a contract involving illicit activities is void not only to protect the contracting parties but also to protect public interests, which encompasses third-party and societal rights.
Distinction Between Contractual and Delictual Obligations
Although contract law and tort law (delict) are distinct areas of obligation, the relativity of contracts means that damages arising from tortious acts by a third party are addressed separately from breaches of contract. Therefore, if a third party causes damage to one of the contracting parties, that party may seek remedies based on tort law rather than contract law.
Binding Effect of Contractual Stipulations for Specific Beneficiaries
Where a contract explicitly benefits a third party (e.g., an insurance contract with a third-party beneficiary clause), the beneficiary may enforce that part of the contract even if they did not personally execute it. This third-party beneficiary principle allows for certain contractual terms to extend benefits or obligations to third parties, albeit in a limited and controlled manner.

Jurisprudential Interpretations

Philippine jurisprudence has upheld the principle of relativity in various cases. The Supreme Court has ruled consistently that contracts are binding only between the parties, emphasizing the limited scope of enforceability to uphold the integrity of private agreements. Additionally, in cases involving stipulations pour autrui, the Court has delineated the criteria for determining when a third party may enforce contractual rights, demanding clear intent by the contracting parties to benefit the third party directly.

Conclusion

The principle of relativity of contracts is a fundamental aspect of Philippine civil law that establishes a boundary around the rights and obligations created by private agreements. By restricting the effects of a contract to the parties involved, this principle reinforces the notion that contracts are a private law between the parties and ensures that third-party rights and obligations are only implicated in strictly defined circumstances, such as in stipulations pour autrui, malicious interference, and transmission of real rights.