Extent of autonomy
While the freedom to contract is guaranteed, it is thus important to know the extent and limitations of the terms and conditions we put in when entering into a contract
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While the freedom to contract is guaranteed, it is thus important to know the extent and limitations of the terms and conditions we put in when entering into a contract
We live in a world where contracts and agreements are part of our daily lives. In this day and age, we lean towards putting everything in writing to avoid the possibility of becoming victims of fraudulent schemes. However, we tend to go overboard sometimes as we put in such terms and conditions that may be greatly prejudicial to the other party.
As provided in Article 1306 of the Civil Code, the contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. This principle is also known as the Autonomy of Contracts or the freedom of the parties to establish their respective obligations and all other matters related to its performance.
In transacting with other people, we all want what's best for us, and there is nothing wrong with that. However, it should never come at the expense of other people's rights.
The Supreme Court, in Light Rail Transit Authority v. Joy Mart Consolidated Inc. (G.R. 211281, 15 February 2022), reminds us that the Autonomy of Contracts comes with certain limitations. Autonomy is not a blanket license for the parties to stipulate anything they desire into the contract at the expense of limiting positive laws.
Because of this, it is worth noting the following limitations:
Must not be contrary to the law
Any terms and conditions established in a contract must be within the bounds of law. No person shall compel another in the performance of something illegal, notwithstanding the existence of a contract between them.
Must not be contrary to morals
Morals deal with good and right conduct within a community. The Supreme Court, in Bank of the Philippine Islands v. Pilar (G.R. No. 227569, 5 September 2022), stated that stipulated interest rates of 3 percent per month and higher are excessive, iniquitous, unconscionable, and exorbitant. Such stipulations are void for being contrary to morals, if not against the law.
Must not be contrary to good customs
Customs are habits and practices that are being followed and enforced by society and have been practiced for a long period of time. The spheres of morals and good customs may frequently overlap each other, but sometimes they do not (Report of the Code Commission).
In Selanova v. Mendoza (A.M. No. 804-CJ, 19 May 1975), the Supreme Court held that an act of a lawyer notarizing an agreement where the spouses stipulated that they "separated mutually and voluntarily, that they renounced their rights and obligations, and that they authorized each other to remarry, renouncing any action to which they might be entitled, and each promising not to be a witness against the other" is contrary to good customs.
Must not be contrary to public order and public policy
Public order refers to public safety, while public policy covers a much broader scope as it pertains to considerations that are moved by the common good.
In Ferrazini v. Gsell (G.R. No. L-10712, 10 August 1916), a contract of employment where the employee agreed for a period of five years after the termination of his employment to neither engage nor interest himself in any business enterprise similar to or in competition with that operated by the employer nor enter into the employment of any enterprise in the Philippines is void for being contrary to public policy for being one under undue or unreasonable restraint.
While the freedom to contract is guaranteed, it is thus important to know the extent and limitations of the terms and conditions we put in when entering into a contract. Only then can we ensure that the same will not be struck down as void later.
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