CONTRACTS

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.

Essential requisites (Article 1261)

There is no contract unless the following requisites concur:

a) Consent of the contracting parties;

b) Object certain which is the subject matter of the contract;
c) Cause of the obligation which is established. (Article 1318)

Requisites of Consent

a) Must be manifested by the concurrence of the offer and acceptance;

b) Parties must possess the necessary legal capacity; and
c) Must be intelligent, free, spontaneous, and real.

Consent is manifested by the meeting of the offer and 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 is such a case is presumed to have
been entered into in the place where the offer was made.

Requisites of a valid object of a contract

a) Must be within the commerce of man;

b) Should be real or possible;
c) Should be lawful; and
d) Should be determinate, or at least possible of determination as to its kind.

Requisites of cause

a) Existing at the celebration of the contract;

b) Lawful; and
c) True.

Kinds of Contracts

A. Consensual Contracts

Perfected by mere consent, and from that moment the parties are bound not
only in 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.

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B. Real Contracts

Real contracts, such as deposit, pledge, and commodatum, are not perfected
until the delivery of the object of the obligation.

C. Formal Contracts

Those which require some particular form.

1. Donations (Articles 748 - 749)

If the value of the personal property donated exceeds five thousand pesos,
the donation and the acceptance shall be made in writing, otherwise, the
donation shall be void.

In order that the donation of an immovable may be valid, it must be made in

a public document, specifying therein the property donated and the value of the
charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in separate

public document, but it shall not take effect unless it is done during the lifetime
of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified

thereof in an authentic form, and this step shall be noted in both instruments.

2. Partnership where real property contributed (Articles 1771 - 1777)

A partnership may be constituted in any form, except where immovable

property or real rights are contributed thereto, in which case a public instrument
shall be necessary.

A contract of partnership is void, whenever immovable property is

contributed thereto, if an inventory of said property is NOT made, signed by the
parties, and attached to the public instrument.

3. Antichresis (Article 2134)

The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void. Even if the antichresis is void,
the principal obligation may be valid.

4. Agency to sell real property or an interest therein (Article 1874)

When a sale of a piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall be void.

5. Stipulation to charge interest (Article 1956)

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 No interest shall be due unless it has been expressly stipulated in writing.

6. Stipulation limiting common carrier’s duty of extraordinary diligence to

ordinary diligence (Article 1744)

A stipulation between the common carrier and the shipper or owner limiting
the liability of the former for the loss, destruction, or deterioration of the goods to
a degree less than extraordinary diligence shall be valid, provided it be: 1) in
writing, signed by the shipper or owner, 2) supported by a valuable
consideration other than the service rendered by the common carrier; and 3)
reasonable, just and not contrary to public policy.

However, a stipulation that the common carrier shall exercise a degree of

diligence less than that of a good father of a family, or of a man of ordinary
prudence in the vigilance over the movables transported shall be considered
unreasonable, unjust, and contrary to public policy. (Article 1745)

7. Chattel Mortgage

By a chattel mortgage, personal property is recorded in the chattel mortgage

register as a security for the performance of an obligation. If the movable, instead
of being recorded, is delivered to the creditor or a third person, the contract is a
pledge and not a chattel mortgage. (Article 2140)

8. Sale/Transfer of large cattle

All large cattle which have attained the age of two years must be branded
and registered, and original certificate of ownership issued to the owner. All
subsequent transfers must be registered, with reference to the number of the
original certificate of ownership with the name of the municipality which issued
it. No transfer of large cattle shall be valid unless the same is registered and a
certificate of transfer obtained as above stated.

Formality (Articles 1356, 1357, 1358)

General rule: Contracts are obligatory, in whatever form they may have been
entered into, provided ALL the essential requisites for their validity are present.

Exceptions: When the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be proved in a certain way,
that requirement is absolute and indispensable. In such cases, the parties
CANNOT exercise the right to compel each other to observe a particular form.

When the law requires a document or other special form, once the contract is
perfected, the contracting parties may compel each other to observe that form.
The right may be exercised simultaneously with the action upon the contract.

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 For the purpose of convenience or to made them effective against third
parties, the following contracts must appear in a public document:

1. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein as governed by Articles 1403, no. 2, and
1405;

2. The cession, repudiation, or renunciation of hereditary rights or of those of

the conjugal partnership of gains;

3. The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or should
prejudice a third person;

4. The cession of actions or rights proceeding from an act appearing in a

public document.

All other contracts where the amount involved exceeds five hundred pesos
must appear in writing even a private one. But sales of goods, chattels, or things
in action are governed by the statute of frauds. (Article 1358)

DEFECTIVE CONTRACTS

A. Rescissible Contracts

Contracts that are rescissible (Articles 1381 - 1382)

1. Those entered into by guardians where the ward suffers lesion of more
than 1/4 of the value of the things which are objects thereof;
2. Those agreed upon in representation of absentees, if the latter suffer lesion
by more than 1/4 of the value of the things which are objects thereof;
3. Those undertaken in fraud of creditors when the latter cannot in any
manner claim what are due them;
4. Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants and the
court;
5. All other contracts especially declared by law to be subject to rescission;
and
6. Payments made in a state of insolvency for obligations whose fulfillment
the debtor could not be compelled at the time they were effected.

Requisites of Rescission

1. Contract must be rescissible under Articles 1381 and 1382;

2. Party asking for rescission must have no other legal means to obtain
reparation for the damages suffered by him (Article 1383);
3. Person demanding rescission must be able to return whatever he may be

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obliged to restore if rescission is granted (Article 1385);
4. Things which are the object of the contract must not have passed legally to
the possession of a third person acting in good faith (Article 1385); and
5. Action must be brought within four years (Article 1389).

Difference with rescission (resolution under Article 1191

Resolution (Article 1191) Rescission (Article 1380)
May be denied by the court when there Reason to justify extension of time does
is sufficient reason to justify extension not affect the right to ask for rescission
of time to the defendant in which to
perform
Non-performance is the only ground There are various reasons of equity
provided as grounds
Applies only to reciprocal obligations Applies also to unilateral obligations
May be demanded ONLY by a party to May be demanded by a THIRD PARTY
the contract prejudiced by the contract

B. Voidable Contracts

The following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties:

1. Those where one of the parties is incapable of giving consent to a

contract;
2. Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.

i. Binding effect

Voidable contracts are binding, unless they are annulled by a proper court
action. They are susceptible of ratification.

Persons who are incapacitated to give consent to contract

1. Minors;
2. Insane or demented persons, and deaf-mutes who do not know how to
write (and read)

This incapacity is subject to the modifications determined by law, and is

understood to be without prejudice to special disqualifications established by
law (Article 1329).

Contracts entered into during a lucid interval are valid. (Article 1328)

Contracts agreed to in a state of drunkenness or during a hypnotic spell are

voidable. (Article 1328)

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 When consent is given through mistake, violence, intimidation, undue
influence, or fraud, the contract is voidable (Article 1330).

Mistake; how it invalidates consent

It should refer to the substance of 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.

When the error refers to the rights of the parties of the contract, the contract
is NOT invalidated. Further, in contract to the essential or principal conditions,
accidental conditions, which do not invalidate a contract, may exist without the
thing, which is the object of the contract, ceasing to be what it is.

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 bear the burden of showing that the terms thereof have been fully
explained to the former.

If the party alleging the mistake knew the doubt, contingency or risk
affecting the object of the contract, there is no mistake.

Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent.

Violence

There is violence when in order to wrest consent, serious or irresistible force

is employed.

Intimidation

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 intimation, the age, sex, and condition of the
person shall be borne in mind.

A threat to enforce one’s claim through competent authority, if the claim is

legal, does not vitiate consent.

Note: 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.

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Undue Influence

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.

Fraud

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. (Article 1338)

Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud. (Article 1339)

Principle of tolerated fraud or dolus bonus - the USUAL exaggerations in

trade, when the other party has an opportunity to know the facts, are not in
themselves fraudulent.

Mere expression of opinion does not signify fraud unless made by an expert
and the other party has relied o the former’s special knowledge. Take note,
however, that in order to fall within the exception, the expert must not be
employed by the party alleging fraud.

Misrepresentation by a third person does not vitiate consent, unless such

misrepresentation has created substantial mistake and the same is mutual.

Misrepresentation made in good faith is not fraudulent but may constitute

error.

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.

An action for annulment should be brought within four years. This period
shall begin:

a) In cases of intimidation, violence or undue influence, from the time the

defect of the consent ceases.
b) In case of mistake or fraud, from the time of the discovery of the same.
c) When the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.

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Ratification

Ratification is that act or means by which efficacy is given to a contract or an

obligation which suffers from a vice or curable nullity. It extinguishes the action
to annul a voidable contract. Ratification cleanses the contract from all its defects
from the moment it was constituted.

Requisites of Ratification

1. Contract is tainted with a vice susceptible of being cured;

2. Confirmation is effected by the person who is entitled to do so under the
law;
3. It is effected with knowledge of the vice or defect of the contract; and
4. Cause of the nullity or defect have already disappeared.

Ratification may be effected expressly or tacitly. It is understood that there is

a TACIT ratification if, with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right.
Further, ratification does not require the conformity of the contracting party who
has no right to bring the action for annulment.

Ratification may be effected by the guardian of the incapacitated person.

The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable
cannot allege the incapacity of those with whom they contracted; nor can those
who exerted intimidation, violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of the contract.

Mutual Restitution when contract is annulled

An obligation having been annulled, the contracting parties shall restore to

each other the things which have been the subject matter of the contract, with
their fruits, and the price with its interest, except in cases provided by law. In
obligations to render service, the value thereof shall be the basis for damages.

However, when the defect of the contract consists in the incapacity of one of
the parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.

Further, whenever the person obliged by the decree of annulment to return

the thing can not do so because it has been lost through his fault, he shall return
the FRUITS RECEIVED and the value of the thing at the of the loss, with interest
from the same date.

Reason: to restore the parties, in so far as legally and equitably possible, to their
original situation before the contract was entered into. But mutual restitution

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should NOT violate the principle of unjust enrichment.

Take note that as long as one of the parties does not restore what in virtue of
the decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him.

Effect when the thing which is the object of the voidable contract is lost
through the fault or fraud of the plaintiff

The action for annulment of contracts shall be extinguished when the thing
which is the object thereof is lost through the fraud or fault of the person who
has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the success of
the action, unless said loss took place through the fraud or fault of the plaintiff.

C. Unenforceable Contracts

The following are unenforceable contracts, unless they are ratified:

1. Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his powers;
2. Those that do not comply with the Statute of Frauds as set forth in this
number.

In the following cases an agreement hereafter made shall be unenforceable

by action, unless the same, or some note or memorandum, thereof, be in
writing,and subscribed by the party charged, by his agent; evidence, therefore, of
the agreement cannot be received without the writing, or a secondary evidence of
its contents:
a) An agreement that by its terms is not to be performed within a year from
the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of
another;
c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price
not less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action or
pay at the time some part of the purchase money; but when a sale is made by
auction and entry is made by the auctioneer in his sales book, at the time of the
same, of the amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
e) An agreement of the leasing for a longer period than one year, or for the
sale of real property or of an interest therein;
f) A representation as to the credit of a third person.

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 3. Those where both parties are incapable of giving consent to a contract.

Unauthorized contracts are governed by Article 1317 and the principles of

agency

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.

Contracts infringing the Statute of Frauds; how ratified

They are ratified by the failure to object to the presentation of oral evidence
to prove the same, or by the acceptance of benefit under them.

When a contract is enforceable under the Statute of Frauds, and a public

document is necessary for its registration in the Registry of Deeds, the parties
may avail of the right under Article 1357. (Article 1406)

When both parties in a contract are incapable of giving consent, the express
or implied ratification by the parent, or guardian, as the case may be, of one of he
contracting parties shall give the contract the same effect as if only one of them
were incapacitated. Consequently, the contract becomes voidable. If ratification is
made by the parents or guardians, as the case may be, of both contracting parties,
the contract shall be validated from the inception.

Unenforceable contracts cannot be assailed by third persons.

D. Void Contracts

The following contracts are inexistent and void from the beginning:

1. Those whose cause, object or purpose is contrary to law, morals, good

customs, public order or public policy; (void)
2. Those which are absolutely simulated or fictitious; (inexistent)
3. Those whose cause or object did not exist at the time of the transaction;
(inexistent)
4. Those whose object is outside the commerce of men; (void)
5. Those which contemplate an impossible service; (void)
6. Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained; (void)
7. Those expressly prohibited or declared void by law. (void)

Those contracts cannot be ratified. Neither can the right to set up the defense
if illegality be waived.

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 Simulated contracts

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.

Void stipulations

1. Pactum Commissorium
The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and
void.

2. Pactum de non Alienando

A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.

3. Pactum Leonina
A stipulation which excludes one or more partners from any share in the
profits or losses is void.

Comparative Table of Defective Contracts

Void Voidable Rescissible Unenforceable
Defect is caused Defect is caused Defect is caused Defect is caused
by lack of essential by vice of consent by injury/damage by lack of form,
elements or either to one of the authority, or
rd
illegality parties or to a 3 capacity of both
person parties not cured
by prescription
Do not, as a Valid and Valid and Cannot be
general rule, enforceable until enforceable until enforced by a
produce any legal annulled by a rescinded by a proper action in
effect competent court competent court court
Action for the Action for Action for Corresponding
declaration or annulment or rescission may action for
nullity or defense of prescribe recovery, if there
inexistence or annulability may was total or partial
defese of nullity or prescribe performance of
inexistence does the unenforceable
not prescribe contract under No.
1 or 3 of Article
1403 may
prescribe
Not cured by Cured by Cured by Not cured by
prescription prescription prescription prescription
Cannot be ratified Can be ratified Need not be Can be ratified

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 ratified
Assailed by a Assailed only be a Assailed by a Assailed only by a
contracting party contracting party contracting party contracting party
and a third person and a third person
whose interest is who is prejudiced
directly affected or damaged by the
contract
Assailed directly Assailed directly Assailed directly Assailed directly
or collaterally or collaterally only or collaterally

EFFECT OF CONTRACTS

Principle of relativity of contract; exceptions thereto

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.

The following are the exceptions thereto:

1. 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. (Article 1311)

2. 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. (Article 1312)

3. Creditors are protected in cases of contracts intended to defraud them.

(article 1313) Take note of Article 1381 (3).

4. Any third person who induces another to violate his contract shall be liable
for damages to the other contracting party. (Article 1314)

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