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.

Stages in a contract – Negotiation, Perfection, Consummation

Kinds of Contracts

As to how it is perfected
1. Consensual – perfected by mere consent of both parties.
2. Formal/Solemn – perfected only upon the execution or preparation of certain documents or
formalities.
3. Real – perfected only upon delivery.

As to whether or not a defect exists

1. Valid – all effects of the contract are deemed to be effective.
2. Voidable – valid until declared void.
3. Unenforceable – valid but cannot be enforced.
4. Rescissible – may be rescinded due to circumstances surrounding the obligation.
5. Void – as if it never existed.

As to the degree of independence or dependence

1. Principal – may exist on its own.
2. Accessory – can only exist if attached to another contract.
3. Preparatory – contracts entered in preparation for another contracts or in anticipation of
another contract.

As to whether or not the obligations are fulfilled

1. Executed – obligations are fulfilled upon entering the contract.
2. Executory – obligations are fulfilled only after the contract has been entered into.

As to whether or not it is named

1. Nominate – the contract is given a name by law.
2. Innominate – the law does not give any name.

As to the nature of the consideration

1. Gratuitous – cause is mere liberality.
2. Onerous – the cause is understood to be for both parties.
3. Renumenatory – the cause is a service or benefit which is renumerated.

Types of innominate contracts

1. Do ut des (I give so that you may give)
2. Do ut facias (I give so that you may do)
3. Facio ut facias (I will do so that you may do)
4. Facio ut des (I will do so that you may give)

Rules on innominate contracts

1. The agreement or stipulation between the parties.
2. The provisions of the New Civil Code on Obligations and Contracts.
3. Provisions on nominate contracts that may be applied through analogy, or that which is most
similar to the innominate contract.
4. Customs of the place.

Basic Characteristics of Contracts

1. Autonomy – the parties may agree to establish any stipulation, clause, terms and conditions as
they seem fit with the only limitation that it should not be contrary to laws, morals, good
customs, public order, or public policy.
 2. Mutuality – a contract binds all parties and the determination of the validity and compliance
of the contract cannot be left to the will of one of the parties. Parties in a contract are deemed
to be on equal standing.
a. If compliance with the contract is left to the will of a third party, the contract is valid
as long as the decision of the third party is made known to all parties and that it is a
fair decision/equitable.
b. If compliance is left to the will of one party, then the contract is void.

3. Relativity – contracts take effect only between:

a. The parties
b. Their assigns (successors in interest)
c. Heirs.
The contract will not be transferred or will not have any effect against the assigns and heirs if
the contract is non-transferrable or transmissible due to the law, their agreement, or by the
nature of the contract.

Exceptions to Relativity
1. Stipulation Pour Atrui(stipulation in favour of a third person), Requisites:
a. The contracts contains a stipulation in favour of a third person
b. The stipulation in favour of the third person is only a part of the contract
c. There is a clear deliberate intent between the parties to benefit the third person
d. The stipulation affecting the third party is not based on any compensation
e. It can only be revoked with the consent of the third person
f. The parties are not the representatives or agent of the third person.

4. Obligatoriness – a contract is the law between the parties and a violation of the stipulations
thereof is a violation of the right of the injured party arising from such contract.

Tortious Interference – any party not part of the contract who interferes with a contract can be sued
in court and will be liable for damages if the other party causes one party in the contract to violate the
stipulations of the contract. Requisites:
1. A valid contract exists
2. Third person is aware of the contract
3. The interference of the third person is without any legal or just excuse.

Perfection of Contracts

Contracts are perfected depending on the type of contract.

1. For consensual contracts – mere consent or meeting of the minds of the object of the
contract leads to perfection.
2. Real contracts – perfected only upon delivery. E.g. depositum, commodatum, loan, pledge.
3. Formal or solemn contracts – perfected upon execution or preparation of certain
documents or other formalities. E.g. donation of more personal property worth more than
P5000, donation of real property, agency to sell real property.

Object
The object of a contract refers to the thing or right which is the subject matter of the contract. The
object may be tangible or intangible.

Requisites of the object

1. Must be within the commerce of man
a. Things outside the commerce of man
i. Slavery
ii. Personal rights
iii. Honorary rights
iv. Political rights
v. Public office
vi. Things withdraw from the commerce by law.
vii. Thing not susceptible of exclusive ownership.

2. Must not be contrary to law, morals, good customs, public policy, or public order
3. Must be possible
a. Physical impossibility – no amount of effort could lead to its happening or contrary to
nature. Can be absolute or relative.
b. Practical impossibility – possible but only with an excessive or unreasonable cost.
c. Legal or judicial impossibility – when the law makes it impossible.
d. Logical impossibility – contrary to the nature of the obligation.
e. Original impossibility – impossible from the very beginning.
4. Must be determinate or determinable.
a. Determinate – it must be determinate as to its kind and quantity.
b. Determinable – a thing is determinable if it can be determined without any further
agreement.

An object can refer to future things that will come into the possession of one or both parties. However,
future inheritance cannot be the object of a contract.

Future Inheritance (requisites)

1. Succession has not yet been opened
2. The object of the contract forms part of the inheritance
3. The promissor has, with respect to the object, an expectancy of a right which is purely
hereditary in nature.

Cause or Consideration

It is the essential or more proximate purpose which the contracting party have in view at the time of
the contract. It is the reason that impels a party to assume an obligation under a contract. Cause or
consideration can be pure liberality.

A contract is void if there is no cause, the cause is unlawful, or when there is a false cause.

Cause versus Motive

CAUSE
Legal reason that impels one to enter in to the
obligation.
The cause is the same for certain types of
contract.
Both parties are aware of the cause.
Cause is an essential element of the contract.
MOTIVE
Personal reason or inducement of the party.
May be different for both parties
Motive need not be known by the parties.
Not an essential element of a contract.

Form of Contracts
General rule – there is no prescribed or required form or solemnity for contracts to be valid.

The law gives us three types of formalities needed depending on the contract.
1. Formalities necessary for the validity of the contract. If the requisites are not complied
with the law gives the parties the remedy to compel each other to observe the form
required by law.
Required by law to be valid E.g.:
a. Donation of real property must be in a public instrument
b. Donation of personal property more than P5,000
c. Stipulation that interest should be paid on loans
d. Agency to sell land

2. Formalities to make the contract binding on third persons. Without such form, the
contracts are applicable only to the parties and does not affect third persons. E.g.:
a. Acts and contracts pertaining to rights over real property.
b. Cession, repudiation, or renunciation of hereditary rights or those from conjugal
partnership of gains
c. The power to administer property, or to represent thereof, or if its purpose is to bind
third persons.
d. Cession of actions of rights coming from a public document.
3. Formalities to allow proof of the existence or enforceability of the contract.
This is what is referred to as the Statute of Frauds, these contracts must be contained in
any written instrument. Contracts that do not follow these prescribed rule are
unenforceable.
a. Agreement that is not to be performed within a year from the making thereof.
b. Special promise to answer for the debt, default, or miscarriage of another.
c. Agreement in consideration of marriage.
d. Sale of Goods
i. If the price is not less than 500, except:
1. When the buyer accepts and receives part of the goods or chattels or
some of them
2. When the buyer accepts and receives evidences or some of them
3. When he paid part of the price .
e. Lease for more than one year
f. Sale of real property or an interest therein, except:
i. An agreement to give another person a right of way in land
ii. An agreement allowing the right of repurchase of a parcel of land if there is a
written deed of sale, the oral agreement is deemed part of the written deed of
sale.
iii. Partition of real estate since this is not a sale or lease of property, merely a
division of property.
g. Representation as to the credit of third persons. A person who assures the solvency of
another should make it in writing.

Reformation of Instruments

This involves filing a case in court to have the document which constitutes the evidence if the
agreement to reflect the real intent of the parties. Either party may seek for reformation, even
simultaneously, or the injured party if due to unilateral mistake.

Requisites in reformation of instruments.

1. There must have been a meeting of minds of the parties to the contract
2. The instrument does not express the true intention of the parties
3. The failure of the instrument to express the true intent of the parties is due to mistake,
fraud, inequitable conduct, or accident.
The general rule is that the mistake must be mutual in order to seek relief of reformation of
instruments. When the mistake is unilateral, or the mistake is on one party only reformation of
instruments can still be sought in the following cases:
 1. If one party is mistaken and the other acted fraudulently or inadequately;
2. When one party was mistaken and the other knew or believed that the instrument did not
state their real agreement, but concealed that fact from the former.

Reformation of Instruments can also be sought if the document does not express the true agreement
of the parties due to a third person who drafted the instrument due to his 1) ignorance, 2) lack of skill,
3) negligence, and 4) bad faith.

Reformation of instruments cannot be sought in the following instances:

1. In simple donations inter vivos or donations done during the lifetime of the donor, and
the donation is not based on any condition
2. Wills, wills are governed by the Civil Code provisions on succession
3. Void agreements.

Interpretation of Contracts

Primary Rules in Interpreting Contracts

1. The intention of the parties should prevail..
2. The stipulations in the agreement are not modified nor increased nor decreased but merely
interpreted according to their intention.
3. Interpretation of the agreement entails that act of making intelligible/clear what was before
ambiguous or not obvious.
4. A contract should always be interpreted in the way that an average person would understand
it.
5. Laws at the time the contract was made is deemed to be part of the contract.
6. Contracts are defined by the law and not the intention of the parties.

Other Rules on Interpreting Contracts

1. If the terms are unclear or ambiguous then the literal meaning should be used.

2. If the wrong/contrary words were used:

a. The intent prevails
b. Previous and subsequent acts should be considered
c. If they have given their own construction of the words or meaning to the words then
that should prevail.
d. Error or mistake in grammar and syntax should not affect the agreement if the
intention is clear.

3. When provisions in the contract are conflicting

a. The specific statement or provision should prevail over the general statement or
provision.
b. The accessory should be interpreted with the principal to bring harmony unto both.

4. When words are omitted, tradition and customs shall be used to compensate for the omission.

5. When there is doubt as to the meaning of the terms:

a. All the provisions shall be examined to give an interpretation which is consistent with
the whole agreement
b. If there are several meaning, the meaning that would make the agreement most
effectual shall be used
c. If there are several meanings, the meaning that is most consistent with the whole
agreement should be used.
d. Tradition and customs of the place.

6. When there is an obscurity/vagueness caused by one party

a. the interpretation should be in favour of the innocent party and against he one who
caused the obscurity
 b. For contracts of adhesion, or one which on party has prepared the whole contract and
the other merely signs the same, the obscurity should be interpreted against the one
who drafted the contract.

7. If the doubt cannot be settled

a. Interpretation should lead to the least prejudicial to both parties
b. Interpretation should be for the preservation and conservation of rights
c. If the doubt that can’t be settled involves the object of the contract, then the contract
is null and void.

Defective Contracts

1. Rescissible Contracts – these contracts are those that can be rescinded due to the damage and
injury that it would cause third persons. This type of rescission differs from rescission for
breach of contract as the causes are the different and that the latter does not affect third
persons.
a. Grounds for Rescission
i. Lesion – injury suffered by one who does not receive a full equivalent for what
he gives in a commutative contract. It is when the value that is supposed to be
received by one party is greatly decreased. Lesion means to hurt.
Requisites for Lesion
1. The lesion that was suffered is more than ¼ of the value of the thing;
2. The contract was entered into by a guardian or representative of an
absentee
3. The contract was entered into in behalf of the ward or the absentee
involving the ward or absentee’s property
4. The contract does not need approval of the court

ii. The contract is in Fraud of Creditors. This is called as accion pauliana. The
contract is rescinded because the debtor is will defraud his creditors by
transferring his property to avoid payment or performance of his obligation.
The debtor as the transferor and the third party transferee must be proven to
have acted in bad faith and fraudulently.
Additional Requirements
1. The creditor must have in his favour a credit that existed prior to the
contract that is sought to be rescinded;
2. Fraud must be established.

The general rule is that fraud is not presumed and must be clearly established
by evidence.

Badges of Fraud – in the following circumstances fraud maybe established

purely based on their presence or existence, thus the burden to disprove the
fraud now falls on the transferor.
1. Property was donated and the donor did not leave sufficient property
to cover his debts
2. Property was donated after a judgment was rendered ordering him to
pay
3. The consideration of the contract is fictitious or inadequate
4. Transfer made by a debtor after a suit has been filed against him or
when a suit is pending
5. Sale upon credit by insolvent debtor
6. Evidence of large indebtedness or complete insolvency
7. The transfer of all or nearly all properties by an insolvent debtor or
one who is greatly financially embarrassed
8. Transfer between father and son along with other circumstances
9. Failure of vendee/buyer to take possession of all the property.
 The person who acquired the thing in bad faith must return what he received,
and if he is unable to do so he must pay damages

iii. Transfer of property in litigation – a contract where the debtor transfers his
property which is the subject of an action in court is rescissible.

iv. Transfer by an insolvent - A contract where payment was made by an insolvent

debtor where the obligation is not yet due is also rescissible.

Requisites of Rescission
1. Any of the grounds for rescission is present
2. There is no other legal remedy available
3. Mutual restitution can still be made
4. The action must be filed in four years

Rescission is a subsidiary remedy and must always be resorted to if there is no

other remedy available to the injured party. It can be partial or total.

Mutual Restitution – the person who rescinded that contract must be able to
return what he received and the losing party must restore what he received.
Rescission is not possible in the following instances as there can be no mutual
restitution:
1. The person who demands rescission cannot return what he is obligated
to restore;
2. The thing involved in the restitution is in the possession of an innocent
third person.

2. Voidable Contracts – these are contracts that are valid and effective until declared void or
annulled.

Contracts are voidable when:

a. One of the parties is incapacitated – only one party is incapacitated due to minority,
insanity, imbecility, or deaf-mutes who can’t write.
b. When consent was vitiated – when the vices of consent are present, or when vitiated
by mistake, violence, intimidation, undue influence, and fraud.

A voidable contract is susceptible to ratification.

Requisites of Ratification:
a. The person who ratifies is the one who was incapacitated or the one whose consent
was vitiated
b. The act which constitutes the ratification is done with the knowledge of the vice
c. The incapacity or vice has ceased.

Ratification can either be:

a. Express – verbal or written statement ratifying the contract
b. Implied – acts done implies intention to waive the right to annul the contract.

Mutual Restitution when annulled – when the voidable contract is annulled the parties in the
contract are obliged to return to each other what they have received from the contract.
a. If the object is service the value of the service shall be returned.
b. If the thing cannot be returned in full then the loss will be converted to damages.
c. The incapacitated person is not obliged to make any restitution except insofar as he
has benefitted. Mere acceptance of money is not the benefit the law speaks of.
d. Loss of thing due to the plaintiff
i. If with the fault of the plaintiff then the action to annul the contract is
extinguished.
 ii. If due to a fortuitous event the value of the thing lost would be given.
e. Loss of the thing due to the defendant
i. If with fault he must return the fruits, value of the thing at the time of loss,
and interest from the time of loss.
ii. If due ti a fortuitous event he must return the value.

3. Unenforceable Contracts – those that are existing but cannot be enforced unless they are
ratified. Contracts become unenforceable due to:
a. Absence of authority – an agent who is not authorized by the principal cannot bind
the latter. Thus, any contract entered into by the former is unenforceable.
This can be ratified by the principal and thus it becomes a contract that is deemed
valid from the beginning.

b. Violation of Statute of Frauds – non-compliance with the statute of frauds will result
to the unenforceability of the contract. This can be ratified by conforming to the
required from as provided by law or by waiving such right and acknowledging the
existing agreement.

c. Incapacity of both parties – when both parties are incapacitated due to minority,
insanity, imbecility, or deaf-mutes who can’t write the contract or agreement between
them is unenforceable.
This can be ratified by the guardians of the incapacitated, if only one party ratified then
it is voidable, if both parties ratify then the contract is valid from the beginning.

4. Void and Inexistent Contracts – a contract is deemed void in the following instances
a. The absence of any of the essential elements of a contract
i. When the contract is absolutely simulated
ii. Any of the essential elements were simulated
b. The cause or object is illegal or illicit
i. Those with cause or object contrary to law, morals, public policy, public order,
and good customs
ii. The object is outside the commerce of man
iii. The cause or object did not exist at the time the contract was made
iv. Those which contemplate an impossible service
v. The intention of the parties relative to the principal object cannot be
ascertained
c. The law expressly prohibits the contract
i. Sale between spouses
ii. Any alienation or encumbrance made by the husband of the conjugal property
without the consent of the wife
iii. Contracts involving future inheritance
iv. Sale of real property through an agent where the authority is not written

Characteristics of a void contract

a. Has no effect from the very beginning
b. Cannot be ratified
c. Can be used as a defense in cases filed in court
d. The right to set up the illegality of the contract can’t be waived
e. Action to declare it void does not prescribe.
f. In divisible contracts the void terms can be separated from legal and valid terms
g. The defense of illegality of contracts are available only to those directly affected by the
contract.

In Pari Delicto Rule

The parties to an illegal contract have no right to enforce the contract. (ex pacto illicito non oritur
action – no action arises out of an illicit bargain.
 1. If the contract constitutes a crime and both parties are at fault
a. Both parties have no action against each other
b. They can be made criminally liable
2. The effects of the crime would be disposed of as provided by the criminal laws applicable
3. If the act is unlawful but does not constitute a crime and both parties are at fault
a. Both parties cannot demand performance
b. Both parties cannot recover what was given
4. If the contract constitutes a crime and only one party is at fault
a. Both parties cannot enforce the contract through any action
b. The innocent party has a right to recover what was given
c. The guilty party may be made criminally liable

If both parties entered into a contract contrary to law but does not constitute a crime and both are
aware of such fact, the law will leave them as is.

Whatever is given in a void contract shall be returned, except when the party has repudiated the
illegality before any illegal act has been done or when one of the parties is incapacitated.