Exceptions to the Rule on Privity of Contracts | Relativity | Basic Principles of Contracts | Contracts | OBLIGATIONS AND CONTRACTS

The principle of relativity of contracts, under civil law in the Philippines, states that contracts bind only the parties who entered into them and have no effect upon third parties. This is rooted in Article 1311 of the Civil Code of the Philippines, which provides that "Contracts take effect only between the parties, their assigns, and heirs," except in certain cases provided by law.

However, there are exceptions to this rule on privity of contracts, where a third party may be bound or may acquire rights under a contract. Here’s a comprehensive examination of these exceptions:

1. Stipulation Pour Autrui (Stipulation for the Benefit of a Third Party)

• A contract may contain a stipulation for the benefit of a third party, known as a stipulation pour autrui. This exception allows a third party who is not a party to the contract to benefit from it, but only if certain conditions are met:
  • The stipulation must be clearly intended to favor the third party.
  • The third party must have accepted the benefit stipulated for them.
  • The stipulation must not be incidental, meaning it must be directly intended by the contracting parties for the third party’s benefit.
• For example, in a life insurance policy, the insured may name a third party as the beneficiary, who may then claim benefits from the insurer upon the insured's death.

2. Contracts Intended to Affect Third Parties by Operation of Law

• There are instances where laws allow certain contractual obligations to affect third parties. For example:
  • Labor contracts may affect subcontractors when there is a principal-employer relationship that extends liability to a principal company.
  • In cases involving joint tortfeasors, a person who did not directly enter a contract may be held jointly liable if their actions are directly tied to a contractual relationship.

3. Tortious Interference

• A third party who unjustifiably interferes with an existing contract may be held liable under tort law. This is based on the principle that while third parties generally have no direct obligations or rights under a contract, they must not interfere with the contractual relationship of others.
• The elements required to establish tortious interference include:
  • A valid and existing contract.
  • The third party’s knowledge of this contract.
  • Intentional interference by the third party, resulting in damage to one or both contracting parties.

4. Transmissible Contracts (Contracts Transferring Rights or Obligations to Successors)

• Certain contractual rights and obligations are transmissible by their nature, law, or stipulation, thereby binding successors-in-interest (e.g., heirs and assigns). This is, however, limited by specific provisions in the contract or by law:
  • For example, lease agreements may bind a new property owner, who is considered a successor-in-interest, to honor the existing lease.

5. Involuntary Assignment of Rights

• By law, some rights can be involuntarily assigned to a third party. This usually occurs through legal processes such as attachment, execution, or similar court-ordered mechanisms that transfer a contractual right or obligation to a third party.
  • For instance, a creditor may pursue a garnishment order, allowing them to receive payments from a debtor’s contract with a third party.

6. Contracts for the Protection of Creditors (Acción Pauliana)

• Acción Pauliana allows creditors to impugn fraudulent transactions entered by their debtor with third parties that harm their rights.
• This action enables creditors to nullify transactions intended to prejudice their rights, even though they were not parties to the transaction.

7. Contracts Affecting Property or Rights that “Run with the Land”

• Certain contractual obligations may attach to property and bind subsequent owners (who are not original parties to the contract) if the contract is registered or otherwise publicly known. Examples include easements or covenants that “run with the land,” which are enforceable against anyone acquiring the property.
• This principle is often applied in real estate transactions, where covenants bind not only the original contracting parties but also future property owners.

8. Agency

• The law on agency provides that acts performed by the agent within the scope of their authority bind the principal, even though the principal did not directly perform the act. In this context, the principal is bound by the contract entered into by the agent with a third party.
• Under Article 1317 of the Civil Code, however, an agent who acts outside the scope of their authority does not bind the principal unless the principal ratifies the unauthorized act.

9. Trust Relationships

• In trust arrangements, where a trustee holds property for the benefit of a beneficiary, the beneficiary may acquire rights in the contract or transactions entered into by the trustee in relation to the trust.
• Trust relationships may also allow a beneficiary to assert claims against third parties in connection with trust property, even though they were not direct parties to the transaction.

10. Third Party’s Involvement in Performance of a Contractual Obligation

• In certain cases, a third party may perform obligations under a contract if such performance is allowed by the contracting parties. Under the Civil Code, if a third party voluntarily performs the obligation of another, this may be acknowledged if it benefits the creditor.
• This is particularly relevant in situations where third-party performance prevents unjust enrichment or fulfills a legally recognized interest of the creditor.

11. Negotiorum Gestio (Intervention Without Authority)

• In situations where a third party intervenes in the affairs of another without authorization, the law allows them to be indemnified or to be reimbursed if they act for the benefit of the other party and without undue risk.
• This doctrine provides relief to a third party who, acting as a gestor, incurs obligations or expenses to prevent loss or damage to the contracting party's interests.

12. Class Suits or Group Claims (Class Actions)

• Certain rights and obligations may be asserted in a class suit where one or more parties represent a group with similar interests. While not common in Philippine jurisdiction, class suits are recognized in specific instances where a large number of people have the same legal interest affected by a particular contract.
• For example, environmental damage claims may allow communities to bring a class suit against a corporation or entity based on a contractual obligation (such as a mining or forestry agreement) where the effects are widespread.

Summary

The exceptions to the principle of relativity of contracts are deeply rooted in both statutory and case law in the Philippines. While the general rule holds that only the parties to a contract are bound by its terms, these exceptions create situations where third parties may acquire enforceable rights or obligations, either through direct benefit, legal intervention, or specific legal doctrines. The interpretation and application of these exceptions require careful consideration of contractual language, legal precedent, and statutory provisions to ensure the protection of rights and interests under Philippine law.

Concept | Relativity | Basic Principles of Contracts | Contracts | OBLIGATIONS AND CONTRACTS

Concept of Relativity of Contracts in Civil Law

The principle of relativity of contracts is a fundamental doctrine in civil law, encapsulated in Article 1311 of the Civil Code of the Philippines. This principle states that contracts are generally binding only between the parties who enter into them, their assigns, and heirs, except when the rights and obligations arising from the contract are not transmissible by their nature, by stipulation, or by provision of law. This principle is anchored on the idea that a contract is essentially a private agreement that cannot bind third parties who are strangers to its terms and obligations.

Key Points on Relativity of Contracts

1. Binding Effect on the Parties:

   • The parties who enter into a contract are bound to its terms and are legally required to fulfill their obligations as stipulated. Contracts create a "law" between the parties, which must be adhered to as long as the contract is valid.
   • The binding effect is limited to the contracting parties and does not, as a general rule, extend to third persons who are not parties to the agreement.

2. Binding Effect on Assigns and Heirs:

   • Assigns (those to whom rights under the contract have been transferred) and heirs (the legal successors of the contracting parties) are bound by the contract, provided the rights and obligations are transmissible.
   • However, the transmissibility of contractual obligations is subject to limitations:
     • By Nature: Some contracts, such as those based on personal qualities or skills, are inherently non-transferable (e.g., contracts for personal services).
     • By Stipulation: Parties can explicitly agree that certain obligations are not transmissible to assigns or heirs.
     • By Law: Legal provisions may restrict the transferability of certain contractual rights and obligations.

3. Principle of Privity of Contract:

   • This principle means that only those who are parties to a contract have the right to enforce or be bound by it. Third parties cannot claim rights or be imposed obligations arising from a contract to which they are not privy.
   • An exception exists when a third party, although not a party to the contract, has an interest that the law or contract intends to protect or benefit. This exception is recognized under the concept of stipulation pour autrui.

4. Stipulation Pour Autrui (Stipulation for the Benefit of a Third Person):

   • Stipulation pour autrui refers to a stipulation within a contract made for the benefit of a third person who is not a party to the contract. For a stipulation pour autrui to be valid, the following requisites must be present:
     1. The stipulation must be part of a contract between two contracting parties.
     2. The third person must be clearly and deliberately intended to benefit from the stipulation.
     3. The benefit must be a positive and direct obligation that the parties intend to give to the third party.
     4. The third party must have accepted the benefit.
   • Once the third party accepts the stipulation, they acquire the right to enforce it directly against the obligor in the contract. However, the original parties can still modify or revoke the stipulation unless the third party has already signified acceptance.

5. Effects of Relativity on Third Parties in Specific Situations:

   • Third-Party Contracts: If a third party interferes with or benefits from a contract without explicit inclusion in the agreement, they have no claim over the contract’s provisions unless they qualify under the stipulation pour autrui exception.
   • Contracts that Result in Injury to Third Parties: While third parties cannot interfere with or enforce a contract directly, they may still seek remedy if the contract causes them harm, typically through the tort of quasi-delict.
   • Contracts Interfered with by Third Parties: In cases where a third party interferes with the performance of contractual obligations, the injured contracting party may seek damages against the interfering party.

6. Third Parties and Incidental Effects:

   • Although third parties generally have no right or obligation under the contract, they may be incidentally affected by it. These incidental effects do not confer any right of action on third parties but may have indirect consequences on them.
   • For instance, in creditor-debtor relationships, creditors may be indirectly affected by contracts entered into by their debtor with third parties. However, such effects do not grant creditors any right to interfere with the contract unless expressly permitted by law.

Case Law Illustrations

1. Case Law Supporting the Principle of Relativity:

   • The Supreme Court of the Philippines has consistently upheld the principle of relativity in multiple rulings, reiterating that contracts are binding only between parties and cannot impose obligations on or grant rights to third parties who are not privy to the agreement.

2. Cases of Recognized Exceptions:

   • Case law also illustrates situations where the principle of stipulation pour autrui applies. For example, where a life insurance policy provides benefits to a designated beneficiary, such a third party (the beneficiary) can directly enforce the contract despite not being a party to it.

Conclusion

The principle of relativity of contracts ensures that contracts are binding only between the parties who enter into them, safeguarding their privacy and limiting obligations to those who have expressly consented to them. However, the law allows exceptions to ensure fairness, protect certain third-party interests, and recognize situations where third-party benefits are intentional and integral to the contractual arrangement. Through stipulation pour autrui and other narrowly defined exceptions, the law balances the need for private enforcement with protections for designated beneficiaries.

Relativity | Basic Principles of Contracts | Contracts | OBLIGATIONS AND CONTRACTS

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

1. 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.

2. 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.

3. 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.

4. 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).

5. 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.

6. 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.

7. 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.

8. 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

1. 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.

2. 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.

3. 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.

4. 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.