II.

Contracts
Chapter I
Art. 1305. A contract 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.
Elements of a Contract: ENA
Essential - without them contract cannot exist
CSE: (1) Common COC [Consent of the contracting
parties, Object of the contract, Cause of the obligation] (2)
Special (3) Extraordinary
Natural - found in certain contracts and presumed to exist
Accidental - it may be present or absent, and expressly stated
by the parties.
Life of a Contract: GPC
Generation - negotiations
Perfection birth of the contract
Consummation fulfillment or performance
Characteristics of a Contract: OMAR
Obligatory Force 1159, 1308, 1315, 1356
Mutuality - 1308
Autonomy - 1306
Relativity - 1311
Classification of Contracts:
Consensual 1315
Nominate
Innominate
Aleatory fulfillment dependent upon chance (insurance)
Art. 1306. 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.
@Autonomy
SCTC-LM-GC-PO-PP
Law must respect the law and cannot be contrary to mandatory

laws and prohibitive laws

Morals right and wrong or human conscience
Good Customs - practical and social confirmation
Public Order public safety and peace
Public Policy has tendencies to be injurious to the public or against
the public good
Art. 1307. Innominate contracts shall be regulated by the
stipulations of the parties, by the provisions of Titles I and II
of this Book, by the rules governing the most analogous
nominate contracts, and by the customs of the place.
Innominate contracts lacks individuality
a. Do ut des I give that you give
b. Do ut facias I give that you do
c. Facio ut des I do that you give
d. Facio ut facias I do that you do
e.
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them.
Art. 1309. The determination of the performance may be
left to a third person, whose decision shall not be binding
until it has been made known to both contracting parties.
Art. 1310. The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances.
@Mutuality
Taylor v. Uy Teng Piao, 1922: [BUT] a contract may expressly confer
upon one party the right to cancel the contract because the exercise of
that right is a fulfillment of the provisions of the contract itself

The release must be binding on both parties. The determination of

rd.
the performance may be left to a 3 person, whose decision shall
NOT be binding if:

>
>

It is evidently inequitable (the courts will decide)

The decision had not been made known to both parties
(Art.1309)

>

Art. 1311. Contracts take effect only between the parties,

their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law. The
heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a
third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
@Relativity
Contracts take effect only between parties, their assigns and heirs
UNLESS, obligations arising from the contract are not transmissible
by their (1) nature, (2) by stipulation or (3) by provision of law. The
heir is not liable beyond the value of the property he received from
the decedent. (Art. 1311)
Exception: Strangers may enforce the contract in their favor in the
ff. cases:
1. Stipulations Pour Autrui
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfilment provided he communicated
his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a
favour upon a third person (Art.1311).
Requisites:
a. There must be a stipulation in favor of a third person
b. The stipulation must be part, not the whole of the contract
c. The contracting parties must have clearly and deliberately

conferred a favor upon a third person, NOT a mere incidental benefit

or interest.
d. The third person must have communicated his acceptance to the
obligor before its revocation
e. No relation of agency exists between any of the parties and the
third person favored
2. Third Person In Possession
When the third person comes into possession of the object of a
contract creating real rights (Art 1312)
3. Fraud
Where the contract is entered into in order to defraud a person (Art.
1313)
4. Tortuous Interference
Where the third person induces a contracting party to violate his
contract (Art.1314).
Art. 1312. In contracts creating real rights, third persons
who come into possession of the object of the contract are
bound thereby, subject to the provisions of the Mortgage
Law and the Land Registration Laws.
1 CreatingRealRights/Arealrightbindsthepropertyoverwhichitisexercised.
Art. 1313. Creditors are protected in cases of contracts
intended to defraud them.
Art. 1314. Any third person who induces another to violate
his contract shall be liable for damages to the other
contracting party.
Art. 1315. Contracts are perfected by mere consent, and
from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may
be in keeping with good faith, usage, and law.
@CONSENSUALITY / or perfection by mere consent
consensual by mere consent
real perfected by delivery

solemn special form for perfecton

Art. 1316. Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the
object of the obligation.
Real Contracts = contracts to carry/carriage
Art. 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has by
law a right to represent him.
A contract entered into in the name of another by one who
has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the
other contracting party
Requisites
If a person wants to contract in the name of another
(a) he must be duly authorized (expressly or impliedly)
(b) OR he must have by law a right to represent him (like the
guardian, or the administrator)
(c)
ORthecontractmustbesubsequentlyRATIFIED(expressly
or
impliedly, by word or by deed). (See Gutierrez Hermanos v. Orense,
28 Phil. 898).
Chapter II
Art. 1318 (1) Consent of the contracting parties (2) Object
certain which is the subject matter of the contract (3) Cause
of the obligation established
*In case of Real Contracts (perfected by delivery) (4) Delivery
*In case of Solemn/Formal (4) Compliance with the Formalities
Required by Law
Art. 1319 Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the

acceptance absolute. A qualified acceptance constitutes a

counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made.
Requisites:
(a) There must be two or more parties.
[NOTE: One person may represent two or more par- ties,
unless there are contradictory or prejudicial interests involved.
(See Art. 1490, Civil Code; Garchitorena v. Sotelo, 74 Phil. 25).]
(b) The parties must be capable or capacitated (hence, if one
party be insane, the contract is merely voidable).
(c) There must be no vitiation of consent.
(Example: There must be no fraud or intimidation,
otherwise the contract is voidable.)
(d) There must be no conflict between what was expressly
declared and what was really intended. Otherwise, the remedy
may be reformation, as when the parties really intended to be
bound, or else the contract is VOID, as when the contract is
fictitious or absolutely simulated.)
(e) The intent must be declared properly (that is, whatever
legal formalities are required must be complied with).
Meeting of Minds:
(1) An offer must be CERTAIN - it must not be vague, misleading, or
made as a joke
(2) acceptance that must be UNQUALIFIED and ABSOLUTE - If there
is completely no acceptance or if the offer is expressly rejected,
there is no meeting of the minds.
Acceptance made by letter or telegram does not bind the offerer
The knowledge may be actual or constructive (as when the
letter of acceptance has been received in the house of the
offerer by a person possessed of reasonable discernment). If
actual knowledge be required, proof of this would be almost
impossible, for even when the letter containing the answer has

been opened and read, the offerer can always claim, in some
cases truthfully, that while he was reading the same, his mind
was elsewhere, and he did not actually know the contents of
said answer.
* What is important is that the letter of withdrawal was MADE prior
to the knowledge of acceptance. Offerer withdrew
* Where the offeree has sent his acceptance, but then sends a
rejection or a revocation of the acceptance, which reaches the
offerer BEFORE the acceptance, there is NO meeting of the minds.
Art. 1320 An acceptance may be express or implied.
(a) express (Art. 1320);
(b) implied (Art. 1320) from conduct, or acceptance of unsolic- ited
services (Perez v. Pomar, 2 Phil. 682);
(c) presumed (by law) as when there is failure to repudiate
hereditary rights within the period fixed by law (See Art. 1057, Civil
Code); or when there is SILENCE in certain specific cases as would
tend to mislead the other party, and thus place the silent person in
estoppel. (See Arts. 1670, 1870, 1871, 1872 and 1873, Civil Code).
Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be complied with.
Art. 1322. An offer made through an agent is accepted from
the time acceptance is communicated to him.
* BOTH the offer and the accept- ance are made thru an
AGENT
**Allowed if the agent was expressly authorized to
receive acceptance
*a sort of messenger, who must communicate to the person
who sends him
Art. 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity,orinsolvencyofeitherpartybeforeacceptanceisconveyed.

There are other instances when the offer becomes ineffective,

namely:
(a) When the offeree expressly or impliedly rejects the offer.
(b) When the offer is accepted with a qualification or condition (for
here, there would merely arise a counter-offer).
(c) When before acceptance is communicated, the subject mat- ter
has become illegal or impossible.
(d) When the period of time given to the offeree within which he
must signify his acceptance has already lapsed.
(e) When the offer is revoked in due time (that is, before the offeror
has learned of its acceptance by the offeree).
Art. 1324. When the offerer has allowed the offeree certain
period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as
something paid or promised.
Option = It is a contract granting a person the privilege to buy
or not to buy certain objects at any time within the agreed
period at a fixed price.
Art.
1325.
Unless
it
appears
otherwise,
business
advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
*containing all the specific particulars needed in a contract, it
is a definite offer.
Art. 1326. Advertisements for bidders are simply invitations
to make proposals, and the advertiser is not bound to accept
the highest or lowest bidder, unless the contrary appears.
Art. 1327. The following cannot give consent to a con- tract:
> (1) Unemancipated minors;
> (2) Insane or demented persons, and deaf-mutes who
do not know how to write.

Two Classes of Voidable Contracts

(a) Those where one party is incapacitated to give
consent. (Art. 1327, Civil Code).
(b) Those where the consent of one party has been
vitiated (such as by error, fraud, violence, intimidation,
and undue influence). (Arts. 1330-1334, Civil Code).
[NOTE: These contracts in general are valid until
annulled; however, annulment cannot prosper when they
have been ratified. (See Art. 1390, Civil Code).]
Unemancipated Minors - have not been emancipated by
marriage, attainment of the age of majority, or by parental or
judicial authority
In general, the contracts, which they enter into, are VOIDABLE
unless:
1) Upon reaching the age of majority, they ratify the same.
2) They were entered into thru a guardian, and the court having
jurisdiction had approved the same.
3) They were contracts of life insurance in favor of their parents,
spouse, children, brothers, sisters, and provided, furthermore, that
the minor is 18 years old or above.
4) They were in the form of savings account in the Postal Savings
Bank, provided furthermore that the minor was at least seven years
old.
5) They were contracts for necessities such as food, but here the
people who are legally bound to give them support should pay
therefor.
6) They were contracts where the minor misrepresented his age,
and pretended to be one of major age and is, thus, in ESTOPPEL. It
is, however, essential here that the other party must have been
MISLED.
Married minors can validly alienate or encumber personal property
without parental consent, but in the case of real property or if they
want to borrow money, they need such parental consent, without

which the transaction is void- able.

If both parties to a contract are minors, the contract is
unenforceable. (Art. 1403, No. [3] states that contracts where both
parties are incapable of giving consent to a contract are
UNENFORCEABLE.)
Insane or Demented Persons (Unless They Acted During a
Lucid Interval)
deaf-mute does not know how to write but he knows how to
read, he should be considered capacitated.
Persons Specially Disqualified
Husband and wife cannot sell to each other (Art. 1490, Civil
Code), nor can they donate to each other. (Art. 134, Civil
Code). Violations are considered VOID contracts, but only
those prejudiced can assail the validity of the transaction
Insolvents before they are discharged cannot, for example,
make payments.
because of fiduciary relationship, such as the guardian, who
is not allowed to purchase the prop- erty of his ward; or
judges, with reference to the property under litigation. (Art.
1491, Civil Code).
Contracts entered into with non-Christians (except contracts of personal service and the barter or sale of personal
property) are VOID unless approved by the governor or his
representative.
Art. 1328. Contracts entered into during a lucid interval are
valid. Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Article 1327 is subject
to the modifications determined by law, and is understood
to be without prejudice to special disqualification
established in the laws.
1 Regarding contracts entered into by non-Christians,

approval by the officials concerned is required even if

BOTH parties are non-Christians, because both imposition
and fraud are still possible in this case.
considered incompetents, and may be placed under guardianship:
> (a) those under civil interdiction
> (b) hospitalized lepers
> (c) prodigals(spendthrifts)
> (d) deaf and dumb who are unable to read and write
> (e) those of unsound mind even though they have lucid intervals
> (f) those who by reason of age, disease, weak mind, and other
similar causes, cannot without outside aid, take care of
themselves and manage their property, becoming thereby an
easy prey for deceit and exploitation.
Art. 1330. A contract where consent is given through
mistake, violence, intimidation, undue influence, or fraud is
voidable. (MV IUF)
Causes of Vitiated Consent
Aside from incapacity to give consent, the following are causes of
vitiated consent: (They are also referred to as vices of consent.)
> (a) mistake (or error)
> (b) fraud (or deceit)
> (c) violence
> (d) intimidation
> (e) undueinfluence [NOTE: Mistake and fraud affect the
INTELLECT (which
is the faculty in the mind of man, the proper object of which is the
TRUTH. They thus affect COGNITION.) Cognition must be intelligent.]
[NOTE: Violence, intimidation, and undue influence affect the WILL
(which is the faculty in the mind of man, the proper object of which
is the GOOD. They thus affect VOLITION.) Volition must be free.]
[NOTE: Mistake and fraud result in defects of the intellect; the others
result in defects of the will.]

Art. 1331. In order that mistake may invalidate consent, it

should refer to the substance of the thing, which is the
object of the contract, or to those conditions which have
principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
Requisites for Mistake to Vitiate Consent
> (a) The error must be substantial regarding:
1 1) the object of the contract
2 2) the conditions which principally moved or induced one of
the parties (error in quality or in quantity error in
qualitate or in quantitate).
3 3) identity or qualifications (error in personae), but only if
such was the principal cause of the contract.
> (b) The error must be excusable (not caused by negligence).
> (c) The error must be a mistake of fact, and not of law.
Substantial Error - because of it, the party gave his consent.
[NOTE: A simple mistake as to account, caused for example by
wrong arithmetical computation, would ordinarily give rise merely to
correction, and not annulment of the contract]
Art. 1332. When one of the parties is unable to read, or if
the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully
explained to the former.
Art. 1333. There is no mistake if the party alleging it knew

the doubt, contingency or risk affecting the object of the

contract.
It is to be assumed here that the party was willing to take the
risk. This is particularly true in contracts which are evidently
aleatory (performance on the occurrence of a particular event) in
nature.
Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may
vitiate consent.
(a) There must be mutual error.
(b) The error must refer to the legal effect of the agreement.
(c) The real purpose of the parties is frustrated.
**distinguished from Art. 1361 where the remedy is
reformation, not annulment.
Art. 1335. There is violence when in order to wrest consent,
serious or irresistible force is employed.
There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of the intimidation, the age, sex
and condition of the person shall be borne in mind.
A threat to enforce ones claim through competent
authority, if the claim is just or legal, does not vitiate
consent.
Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person
who did not take part in the contract.
Art. 1337. There is undue influence when a person takes
improper advantage of his power over the will of another,

depriving the latter of a reasonable freedom of choice. The

following
circumstances
shall
be
considered:
the
confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or
was ignorant or in financial distress.
Requisites for Undue Influence to Vitiate Consent
> (a) improper advantage
> (b) power over the will of another (in a superior bargaining
power)
> (c) deprivation of the latters will of a reasonable freedom of
choice
Examples of Circumstances to be Considered
> (a) confidential, family, spiritual, and other relations between
the parties
> (b) mentalweakness
> (c) ignorance
> (d) financial distresss
Art. 1338. There is fraud when, through insidious words or
machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he
would not have agreed to.
Kinds of Fraud
> (a) Fraud in the CELEBRATION of the contract (this is fraud
proper):
1 1) Dolo causante (or causal fraud): Here, were it not for the
fraud, the other party would not have consented. (This is
the fraud referred to in Art. 1338, Civil Code.) Effect of this
kind of fraud: The contract is VOIDABLE.
2 2) Dolo incidente (or incidental fraud): Here, even without
the fraud the parties would have agreed just the same,
hence the fraud was only incidental in causing consent. Very
likely though, different terms would have been agreed upon.
Effect of this kind of fraud: The contract is valid, but there

can be an action for damages. (See Woodhouse v. Halili, 93

Phil. 526).
> (b) Fraud in the PERFORMANCE of the obligations stipulated in
the contract. (NOTE: This kind of fraud presupposes the
existence of an already perfected contract.) (Example:
Although real vinegar was sold, what was really delivered was
diluted vinegar.)
*1338 is Dolo causante.
> (a) The fraud must be material and serious, that is, it really
induced the consent. (Art. 1344, Civil Code).
> (b) The fraud must have been employed by only one of the
contracting parties, because if both committed fraud, the
contract would remain valid. (See Art. 1344, Civil Code).
> (c) There must be a deliberate intent to deceive or to induce;
therefore, misrepresentation in GOOD FAITH is not fraud. (See
Art. 1343, Civil Code).
> (d) The other party must have relied on the untrue statement,
and must himself not be guilty of negligence in ascertaining
the truth. (See Songco v. Sellner, 37 Phil. 254).
Art. 1339. Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by confidential
relations, constitutes fraud.
> - (CONCEALMENT) constitutes FRAUD, when there is a duty to
reveal them.
> - There is a duty to reveal in the following cases, for example:
when the parties are bound by confidential relations (Art.
1339) as in the case of partners.
Art. 1340. The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are not in
themselves fraudulent.
1 The maxim caveat emptor simply means that a buyer
must be on his guard. It is his duty to check the title of the
seller, otherwise the buyer gets the object at his own risk.

Art. 1341. A mere expression of an opinion does not signify

fraud, unless made by an expert and the other party has
relied on the formers special knowledge.
Art. 1342. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.
Fraud by a third person does not make the contract voidable
unless
> 1) the representation has created substantial mistake, and
> 2) the mistake is mutual.
Art. 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error.
Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay
damages.
**Two requisites for fraud as a ground for annulment are given in
this Article:
> (a) the fraud must be serious;
> (b) the parties must not be in pari delicto (mutual guilt), otherwise, neither party may ask for annulment. The contract
would, therefore, be considered valid.
Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal
their true agreement.
It is the process of intentionally deceiving others by producing the
appearance of a contract that really does not exist (absolute
simulation) or which is different from the true agreement (relative
simulation).

Art. 1346. An absolutely simulated or fictitious contract is

void. A relative simulation, when it does not prejudice a
third person and is not intended for any purpose contrary to
law, morals, good customs, public order, or public policy
binds the parties to their real agreement.