CONTRACTS

Q: What is a contract?
A: It is a meeting of the minds between two or more persons whereby one binds himself, with respect t
o the other, or where both parties bind themselves reciprocally in favor of one another, to fulfill a
prestation to give, to do, or not to do. (Pineda, Obligations and Contracts, 2000 ed, p. 328)

Q: What is the difference between an obligation and a contract?

A: While a contract is one of the sources of obligations, an obligation is the legal tie or relation
s itself that exists after a contract has been entered into.
Hence, there can be no contract if there is no obligation. But an obligation may exist without a contract.
(De Leon, Obligations and Contracts, 2003 ed, p. 283284)

I. ESSENTIAL REQUISITES OF A CONTRACT

Q: State the essential elements of contracts.

A: COC
1. Consent;
2. Object or subject matter; and
3. Cause or consideration.
Q: State the characteristics of a contract.
A: ROMA
1. Relativity (Art. 1311, NCC)
2. Obligatoriness and consensuality (Art. 1315, NCC)
3. Mutuality (Art. 1308, NCC)
4. Autonomy (Art. 1306, NCC)

CONSENT
Q: What are the elements of consent?
A: LM‐CR
1. Legal capacity of the contracting parties;
2. Manifestation of the conformity of the contracting parties;
3.Parties’ Conformity to the object, cause, terms and condition of the contract must be intelligent,
spontaneous and free from all vices of consent; and
4. The conformity must be Real.

Note: We follow the theory of cognition and not the theory of manifestation. Under our Civil Law,
the offer & acceptance concur only when the offeror comes to know, and not when the offeree
merely manifests his acceptance.

Q: What are the requisites of a valid consent?

A: It should be:
1.Intelligent, or with an exact notion of the matter to which it refers;
Note: Intelligence in consent is vitiated by error; freedom by violence, intimidation or undue influence; and spontaneity
by fraud.
2. Free; and
3.Spontaneous.

Q: What is the effect on the validity of a contract if consent is reluctant?

A: A contract is valid even though one of the parties entered into it against his wishes and
desires or even against his better judgment. Contracts are also valid even though they are
entered into by one of the parties without hope of advantage or profit (Martinez v. Hongkong and Shan
ghai Banking Corp., GR No. L5496, Feb. 19, 1910).

Q: What are the kinds of simulation of contract?

A: 1.Absolute the contracting parties do not intend to be bound by the contract at all, thus the contr
act is void.
2.Relative the real transaction is hidden; the contracting parties conceal their true agreement; binds
the parties to their real agreement when it does not prejudice third persons or is not intended for
any purpose contrary to law, morals, etc. If the concealed contract is lawful, it is absolutely
enforceable, provided it has all the essential requisites: consent, object, and cause.
As to third persons without notice, the apparent contract is valid for purposes beneficial to them. As to
third persons with notice of the simulation, they acquire no better right to the simulated contract
than the original parties to the same.
Q: Tiro is a holder of an ordinary timber license issued by the Bureau of Forestry. He executed a deed
of assignment in favor of the Javiers. At the time the said deed of assignment was executed, Tiro had a
pending application for an additional forest concession. Hence, they entered into another agreement.

Afterwards, the Javiers, now acting as timber license holders by virtue of the deed of assignment
entered into a forest consolidation agreement with other ordinary timber license holders. For
failure of the Javiers to pay the balance due under the two deeds of assignment, Tiro filed an action
against them. Are the deeds of assignment null and void for total absence of consideration and non‐
fulfillment of the conditions?

A: The contemporaneous and subsequent acts of Tiro and the Javiers reveal that the cause stated
in the first deed of assignment is false. It is settled that the previous and
simultaneous and subsequent acts of the parties are properly cognizable indicia of their true
intention. Where the parties to a contract have given it a practical construction by their conduct as by
acts in partial performance, such construction may be considered by the court in construing the
contract, determining its meaning and ascertaining the mutual intention of the parties at the time of
contracting. The first deed of assignment is a relatively simulated contract which states a false
cause or consideration, or one where the parties conceal their true agreement. A contract with a
false consideration is not null and void per se. Under Article 1346 of the Civil Code, a relatively
simulated contract, 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. (Javier v. CA, G.R. No. L‐48194, Mar. 15, 1990)

Q: What are contracts of adhesion?

A: One party has already a prepared form of a contract, containing the stipulations he desires, and he
simply asks the other party to agree to them if he wants to enter into the contract.

Q: What are the elements of a valid offer and acceptance?

A: 213
1. Definite – unequivocal
2. Intentional
3. Complete – unconditional

Q: What are the requisites of a valid offer?

A: 1. Must be certain
2.May be made orally or in writing, unless the law prescribes a particular form

Q: When does offer become ineffective?

A:
1.Death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed
2. Express or implied revocation of the offer by the offeree
3. Qualified or conditional acceptance of the offer, which becomes counter‐offer
4.Subject matter becomes illegal or impossible before acceptance is communicated

Q: What is the rule on complex offer?

A:
1. Offers are interrelated – contract is perfected if all the offers are accepted
2.Offers are not interrelated single acceptance of each offer results in a perfected contract unless
the offeror has made it clear that one is dependent upon the other and acceptance of both is
necessary.

Q: What is the rule on advertisements as offers?

A:
1.Business advertisementsis not a definite offer, but mere invitation to make an offer, unless it appears
otherwise
2.Advertisement for bidders online
invitation to make proposals and advertiser is not bound to accept the highest or lowest bidder,
unless it appears otherwise.

Q: What are the effects of an option?

A: Option may be withdrawn anytime before acceptance is communicated but not when
supported by a consideration other than purchase price option money.
Q: What are the requisites of a valid acceptance?
A:
1. Must be absolute; a qualified acceptance constitutes a counter‐offer
2.No specified form but when the offeror specifies a particular form, such must be complied with N
ote: Offer or acceptance, or both, expressed in electronic form, is valid, unless otherwise agreed by the parties (electronic
contracts).
Q: What is the period for acceptance?
A:
1. Stated fixed period in the offer
a. Must be made within the period given by the offeror
i.As to withdrawal of the offer:
GR: It can be made at any time before acceptance is made, by communicating such withdr
awal
XPN: When the option is founded upon a consideration, as something paid or promised sin
ce partial payment of the purchase price is considered as proof of the perfection of the con
tract
2. No stated fixed period
a. Offer is made to a person present – acceptance must be made immediately
b. Offer is made to a person absent –
acceptance may be made within such time that, under normal circumstances, an answer can be
received from him
Note: Acceptance may be revoked before it comes to the knowledge of the offeror (withdrawal
of offer)
OBJECT
Q: What are the requisites of an object?
A:
1.Determinate as to kind (even if not determinate, provided it is possible to determine the same wit
hout the need of a new contract);
2. Existing or the potentiality to exist subsequent to the contract;
3. Must be licit; 214
4. Within the commerce of man; and
5. Transmissible.
Note: The most evident and fundamental requisite in order that a thing, right or service may be the obj
ect of a contract, it should be in existence at the moment of the celebration of the contract, or at l
east, it can exist subsequently or in the future.

Q: What are the things which can be the object of contracts? A: GR: All things or services may be the
object of contracts.
XPNs:
1. Things outside the commerce of men;
2. Intransmissible rights;
3. Future inheritance, except in cases expressly authorized by law;
4. Services which are contrary to law, morals, good customs, public order or public policy;
5. Impossible things or services; and
6.Objects which are not possible of determination as to their kind.

Q: A contract of sale of a lot stipulates that the "payment of the full consideration based on a survey
shall be due and payable in 5 years from the execution of a formal deed of sale". Is this a conditional
contract of sale?
A: No, it is not. The stipulation is not a condition which affects the efficacy of the contract of sale. It
merely provides the manner by which the full consideration is to be computed and the time within
which the same is to be paid. But it does not affect in any manner the effectivity of the contract. (Heirs
of San Andresv.Rodriguez, G.R. No. 135634, May 31, 2000)

CAUSE
Q: What are the requisites of a cause?
A: It must:
1. exist
2. be true
3. be licit

Q: What are the two presumptions in contracts as to cause?

A: 1. Every contract is presumed to have a cause; and
2. The cause is valid.
Q: What are the kinds of causes?
A:
1. Cause of onerous contracts – the prestation or promise of a thing or service by the other
2. Cause of remuneratory contracts– the service or benefit remunerated
3. Cause of gratuitous contracts – the mere liberality of the donor or benefactor
4. Accessory –
identical with cause of principal contract, the loan which it derived its life and existence (e.g.:
mortgage or pledge)

Q: Distinguish cause from motive.

CAUSE
Direct and most proximate reason of a contract
Objective and juridical reason of contract
Legality or illegality of cause affects the existence
or validity of the contract
Cause is always the same for each contracting
party
MOTIVE
Indirect or remote reasons
Psychological or purely personal reason
Legality or illegality of motive does not affect the
existence or validity of contract
Motive differs for each contracting party

Q: What is the effect of the error of cause on contracts?

A:
1. Absence of cause (want of cause; there is total lack or absence of cause) –
Confers no right and produces no legal effect
2. Failure of cause ‐ Does not render the contract void
3.Illegality of cause (the cause is contrary to law, morals, good customs, public order and public
policy)–Contract is null and void
4. Falsity of cause (the cause is stated but the cause is not true)–
Contract is void, unless the parties show that there is another cause which is true and lawful
5. Lesion or inadequacy of cause –Does not invalidate the contract, unless:
a.there is fraud, mistake, or undue influence;
b. when the parties intended a donation or some other contract;or
c.in cases specified by law (e.g.contracts entered when ward suffers lesion of more than 25%)

II. KINDS OF CONTRACT

Q: What are the kinds of contracts?
A:
1. Consensual contracts which are perfected by the mere meeting of the minds of the parties
2. Real contracts that require delivery for perfection –
creation of real rights over immovable property must be written
3. Solemn contracts– contracts which must appear in writing, such as:
a. Donations of real estate or of movables if the value exceeding P5,000;
b. Transfer of large cattle;
c. Stipulation to pay interest in loans;
d. Sale of land through an agent;
e. Partnership to which immovables are contributed;
f. Stipulation limiting carrier’s liability to less than extra‐ordinary diligence; or
g.Contracts of antichresis and sale of vessels.

Q: What is the principle of relativity of contracts?

A: GR: A contract is binding not only between parties but extends to the heirs, successors in interest,
and assignees of the parties, provided that the contract involves transmissible rights by their
nature, or by stipulation or by provision of law.
XPNs:
1. Stipulation pour autrui (stipulation in favor of a third person) –
benefits deliberately conferred by parties to a contract upon third persons.
Requisites:
a. The stipulation must be part, not whole of the contract;
b.Contracting parties must have clearly and deliberately conferred a favor upon third
person;
c. Third person must have communicated his acceptance; and
d.Neither of the contracting parties bears the legal representation of the third person
2. When a third person induces a party to violate the contract
Requisites:
a. Existence of a valid contract
b. Third person has knowledge of such contract
 c. Third person interferes without justification

3. Third persons coming into possession of the object of the contract creating real rights
4. Contracts entered into in fraud of creditors

Q: Fieldmen's Insurance issued, in favor of MYT, a common carrier, accident insurance policy. 50% of
the premium was paid by the driver. The policy indicated that the Company will indemnify the driver
of the vehicle or his representatives upon his death. While the policy was in force, the taxicab driven
by Carlito, met with an accident. Carlito died. MYT and Carlito's parents filed a complaint against the
company to collect the proceeds of the policy. Fieldmen’s admitted the existence thereof, but pleaded
lack of cause of action on the part of the parents.
Decide.
A: Yes. Carlito’s parents‐ who, admittedly, are his sole heirs have a direct cause of action against the
Company. This is so because pursuant to the stipulations, the Company will also indemnify third
parties. The policy under consideration is typical of contracts pour autrui, this character being ma
de more manifest by the fact that the deceased driver paid 50% of the premiums. (Coquia v. Fieldm
en’s Insurance Co., Inc.,G.R. No. L‐23276, Nov. 29, 1968)

Q: What is the obligatory force of contracts?

A: The parties are bound not only by what has been expressly provided for in the contract but also to
the natural consequences that flow out of such agreement. (Art. 1315, NCC)

Q: Villamor borrowed a large amount from Borromeo, for which he mortgaged his property but def
aulted.Borromeo pressed him for settlement. The latter instead offered to execute a promissory note
containing a promise to pay his debt as soon as he is able, even after 10 years and that he waives his
right to prescription. What are the effects of said stipulation to the action for collection filed by Borro
meo?
A: None. The rule is that a lawful promise made for a lawful consideration is not invalid merely because
an unlawful promise was made at the same time and for the same consideration. This rule applies alt
hough the invalidity is due to violation of a statutory provision, unless the statute expressly or b
y necessary implication declares the entire contract void. Thus, even with such waiver of prescriptio
n, considering that it was the intent of the parties to effectuate the terms of the promissory note, the
re is no legal obstacle to the action for collection filed by Borromeo. (Borromeo v. CA,G.R. No. L‐
22962, Sept. 28, 1972)
Note: Where an agreement founded on a legal consideration contains several promises, or a promise to do several thin
gs, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be
separated, from the illegality, may be valid.(Borromeo v. CA,G.R. No. L22962, Sept. 28, 1972)

Q: What is the principle of mutuality of contracts?

A: Contract must be binding to both parties and its validity and effectivity can never be left to the will o
f one of the parties. (Art. 1308, NCC)
Q: What is the principle of autonomy of contracts?
A: It is the freedom of the parties to contract and includes the freedom to stipulate provided the sti
pulations are not contrary to law, morals, good customs, public order or public policy. (Art. 1306, NCC)

A. CONSENSUAL CONTRACTS
Q: What are consensual contracts?
A: They are contracts perfected by mere consent.
Note: This is only the general rule.
B. REAL CONTRACTS
Q: What are real contracts? A: They are contracts perfected by delivery
C. FORMAL CONTRACTS
Q: What are formal contracts?
A: Contracts which require a special form for perfection.

Q: What are the formalities required in the following contracts?

A:
1. Donations:
a. personal property‐ if value exceeds 5000, the donation and acceptance must both be written. b.
b. real property:
i.donation must be in a public instrument, specifying therein the property donated and v
alue of charges which donee must satisfy.
ii.acceptance must be written, either in the same deed of donation or in a separate instrument.
iii.If acceptance is in a separate instrument, the donor shall be notified thereof in authentic
 form, and this step must be noted in both instruments. Note: The acceptance in a separate
document must be a public instrument.
2.Partnership where real property contributed: i. there must be a public instrument regarding the
partnership. ii. the inventory of the realty must be made, signed by the parties and attached to the
public instrument.
3. Antichresis‐ the amount of the principal and interest must be in writing.
4. Agency to sell real property or an interest therein‐ authority of the agent must be in writing.
5. Stipulation to charge interest‐ interest must be stipulated in writing.
6. Stipulation limiting common carrier's duty of extraordinary diligence to ordinary diligence:
i. must be in writing, signed by shipper or owner
ii.supported by valuable consideration other than the service rendered by the comon carrier
iii. reasonable, just and not contrary to public policy.
7. Chattel mortgage‐ personal property must be recorded in the Chattel Mortgage Register

III. FORM OF CONTRACTS

Q: What are rules on the form of contracts?

A:
1.Contracts shall be obligatory, in whatever form they may have been entered into, provided all
essential requisites for their validity are present.
2. Contracts must be in a certain form –
when the law requires that a contract be in some form to be: a. valid; b. enforceable; or c.
for the convenience of the parties.
3.The parties may compel each other to reduce the verbal agreement into writing.
Note: GR: Form is not required in consensual contracts.
XPNs: When the law requires a contract be in certain for its:
1. validity (formal contracts); or
2.enforceability (under Statute of Frauds).

Q: What are the acts which must appear in a public document?

A:
1. Donation of real properties (Art. 719);
2.Partnership where immoveable property or real rights are contributed to the common fund (Arts.
1171 & 1773);
3.Acts and contracts which have for their object the creation, transmission, modification or extinguish
ment of real rights over immovable property; sales of real property or of an interest therein is gover
ned by Arts. 1403, No. 2, and 1405 [Art. 1358 (1)];
4.The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnersh
ip of gains [Art. 1358 (2)]
5.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 [Art. 1358 (3)];
6.The cession of actions or rights proceeding from an act appearing in a public document [Art. 1358
(4)].

Q: What are contracts that must be registered?

A:
1. Chattel mortgages (Art. 2140)
2.Sale or transfer of large cattle (Cattle Registration Act)

REFORMATION
Q: What is reformation of instruments?
A: It is a remedy to conform to the real intention of the parties due to mistake, fraud, inequitable cond
uct, accident. (Art. 1359) Note: Reformation is based on justice and equity.
Q: What are the requisites in reformation of instruments?
A:
1. Meeting of the minds to the contract
2. True intention is not expressed in the instrument
3. By reason of MARFI:
a. Mistake,
b. Accident,
c. Relative simulation,
d. Fraud, or e. Inequitable conduct
4. Clear and convincing proof of MARFI
Note: When there is no meeting of the minds, the proper remedy is annulment and not reformation.
Q: In what cases is reformation of instruments not allowed?
A:
1. Simple, unconditional donations inter vivos
2. Wills
3. When the agreement is void
4.When an action to enforce the instrument is filed (estoppel)

Q: What is the prescriptive period in reformation of instruments?

A: 10 years from the date of the execution of the instrument.

Q: Who may ask for the reformation of an instrument?

A: It may be ordered at the instance of:
1. if the mistake is mutual – either party or his successors in interest; otherwise;
2. upon petition of the injured party; or
3.his heirs and assigns.
Note: When one of the parties has brought an action to enforce the instrument, no subsequent reformation can b
e asked (estoppel).
Q: In case of reformation of contracts, is the prescription period in bringing an action for reform
ation run from the time the contract became disadvantageous to one party?
A: In reformation of contracts, what is reformed is not the contract itself, but the instrument embo
dying the contract. It follows that whether the contract is disadvantageous or not is irrelevant to ref
ormation and therefore, cannot be an element in the determination of the period for prescription of th
e action to reform.

IV. DEFECTIVE CONTRACTS

Q: What may be the status of contracts?
A:
1. Valid
2. Void
3. Voidable
4. Rescissible
5. Unenforceable
6.Inexistent

A. RESCISSIBLE CONTRACTS
Q: What are rescissible contracts?
A: Those which have caused a particular economic damage either to one of the parties or to a third
person and which may be set aside even if valid. It may be set aside in whole or in part, to the
extent of the damage caused. (Art. 1381, NCC)

Q: Which contracts are rescissible?

A:
1. Entered into by persons exercising fiduciary capacity:
a.Entered into by guardian whenever ward suffers damage more than ¼ of value of property.
b.Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of
value of property.
c. Contracts where rescission is based on fraud committed on creditor (accionpauliana)
d.Objects of litigation; contract entered into by defendant without knowledge or approval of
litigants or judicial authority
e. Payment by an insolvent – on debts which are not yet due; prejudices claim of others
f. Provided for by law (Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 & 1659, NCC)
2. Payments made in state of insolvency:
a. Plaintiff has no other means to maintain reparation
b. Plaintiff must be able to return whatever he may be obliged to return due to rescission
c. The things must not have been passed to third persons in good faith
d. It must be made within 4 yrs.

Q: What are the requisites before a contract entered into in fraud of creditors may be
rescinded?
A:
1. There must be credit existing prior to the celebration of the contract;
2.There must be fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeki
ng rescission;
3.The creditor cannot in any legal manner collect his credit (subsidiary character of rescission); and
4.The object of the contract must not be legally in possession of a third person in good faith.

Q: Distinguish rescission from resolution.

RESOLUTION (ART. 1191) RESOLUTION (ART. 1191)
Both presuppose contracts validly entered into Both presuppose contracts validly entered into
and subsisting and both require mutual restitution and subsisting and both require mutual restitution
when proper. when proper.
NATURE
Principal action retaliatory in character Subsidiary remedy
GROUNDS FOR RESCISSION
Only ground is non-performance of obligation 5 Grounds under Art. 1381. (lesions or fraud of
creditors. Non-performance is not important
APPLICABILITY
Applies only to reciprocal obligations Applies to both unilateral and reciprocal
obligations
Person who can initiate the action
Only the injured party who is a party to the Even third persons prejudiced by the contract may
contract bring the action.
Fixing of period by the court
Court may fix a period or grant extension of time Court cannot grant extension of time.
for the fulfillment of the obligation when there is
sufficient reason to justify such extension.
Purpose
Cancellation of the contract Reparation for damage or injury, allowing partial
rescission of contracts.
Note: While Article 1191 uses the term “rescission,” the original term which was used in the old Civil Co
de, from which the article was based, was “resolution.” (Ongv.CA,G.R. No. 97347, July 6, 1999)

Q: What is the obligation created by the rescission of the contract?

A: Mutual restitution of things which are the objects of the contract and their fruits and of the price
with interest.

Q: When is mutual restitution not applicable?

A:
1. Creditor did not receive anything from contract; or
2.Thing already in possession of third persons in good faith; subject to indemnity only, if there are
two or more alienations liability of first infractor.
Note: Rescission is possible only when the person demanding rescission can return whatever he may be obliged to restore. A
court of equity will not rescind a contract unless there is restitution, that is, the parties are restored to the status quo
ante.(Article 1385)

Q: Reyes (seller) and Lim (buyer) entered into a contract to sell of a parcel of land. Harrison Lumbe
r occupied the property as lessee. Reyes offered to return the P10 million down payment to Lim becaus
e Reyes was having problems in removing the lessee from the property. Lim rejected Reyes’ offer. Li
m learned that Reyes had already sold the property to another.

Trial court, in this case, directed Reyes to deposit the P10 million downpayment with the clerk of court
but Reyes refused. Does Reyes have the obligation to deposit the P10 million downpayment in the c
ourt?
A: Yes. There is also no plausible or justifiable reason for Reyes to object to the deposit of the P10
million down payment in court. The contract to sell can no longer be enforced because Reyes himself s
ubsequently sold the property. Both Lim and Reyes are seeking for rescission of the contract.

By seeking rescission, a seller necessarily offers to return what he has received from the buyer. Such a s
eller may not take back his offer if the court deems it equitable, to prevent unjust enrichment and ens
ure restitution, to put the money in judicial deposit.

Note: In this case, it was just, equitable and proper for the trial court to order the deposit of the down payment to prevent unj
ust enrichment by Reyes at the expense of Lim. Depositing the down payment in court ensure its restitution to its rightful own
er. Lim, on the other hand, has nothing to refund, as he has not received anything under the contract to sell. (Reyes v. Lim,
Keng and Harrison Lumber, Inc., G.R. No. 134241, Aug. 11, 2003)
Q: What are the badges of fraud attending sales, as determined by the courts?
A:
1. Consideration of the conveyance is inadequate or fictitious;
2. . Transfer was made by a DR after a suit has been begun and while it is pending against him
3. 3. Sale upon credit by an insolvent DR;
4. 4. The presence of evidence of large indebtedness or complete insolvency of the debtor;
5. 5. Transfer of all his property by a DR when he is financially embarrassed or insolvent;
6.Transfer is made between father and son, where there are present some or any of the above ci
rcumstances; and
7. Failure of the vendee to take exclusive possession of the property. 220

Q: What are the characteristics of the right to rescind?

A:
1.Can be demanded only if plaintiff is ready, willing and able to comply with his own obligation and
defendant is not;
2. Not absolute;
3.Needs judicial approval in the absence of a stipulation allowing for extrajudicial rescission, in case
s of nonreciprocal obligations;
4. Subject to judicial review if availed of extra‐judicially;
5. May be waived expressly or impliedly; and
6.Implied to exist in reciprocal obligations therefore need not be expressly stipulated upon.

Q: May an injured party avail of both fulfillment and rescission as remedy?

A:
GR:The injured party can only choose between fulfillment and rescission of the obligation,
and cannot have both. Note: This applies only when the obligation is possible of fulfillment.

XPN: If fulfillment has become impossible, Article 1191, NCC allows the injured party to
seek rescission even after he has chosen fulfillment. (AysonSimon v. Adamos,G.R. No. L‐
39378, Aug. 28 1984)

Q: Vermen and Seneca entered into an "offsetting agreement", where Seneca is obliged to deliver
construction materials to Vermen, who is obliged to pay Seneca and to deliver possession of 2
condominium units to Seneca upon its completion. Seneca filed a complaint for rescission of the
offsetting against Vermen alleging that the latter had stopped issuing purchase orders of
construction materials without valid reason, thus resulting in the stoppage of deliveries of
construction materials on its part, in violation of the Offsetting Agreement. Can the agreement be
rescinded?
A: Yes, because the provisions of the offsetting agreement are reciprocal in nature. Article 1191 of the
Civil Code provides the remedy of rescission (more appropriately, the term is "resolution") in
case of reciprocal obligations, where one of the obligors fails to comply with that is incumbent upon
him.

The question of whether a breach of contract is substantial depends upon the attendant circumstanc
es. Seneca did not fail to fulfill its obligation in the offsetting agreement. The discontinuance of
delivery of construction materials to Vermen stemmed from the failure of Vermen to send purchase
orders to Seneca. Vermen would never have been able to fulfill its obligation in allowing Seneca to
exercise the option to transfer from Phase I to Phase II, as the construction of Phase II has ceased a
nd the subject condominium units will never be available. The impossibility of fulfillment of the obli
gation on the part of Vermen necessitates resolution of the contract, for indeed, the nonfulfillment
of the obligation aforementioned constitutes substantial breach of the agreement. (Vermen Realty D
evelopment Corp. v. CA and Seneca Hardware Co., Inc., G.R. No. 101762, July 6, 1993)

Q: Ong and spouses Robles executed an "agreement of purchase and sale" of 2 parcels of land.
Pursuant to the contract they executed, Ong partially paid the spouses the by depositing it with the
bank. Subsequently, Ong deposited sums of money with the BPI in accordance with their stipulation
that Ong pay the loan of the spouse with BPI. To answer for Ong’s balance, he issued 4 post‐
dated checks which were dishonored. Ong failed to replace the checks and to pay the loan in full. Can
the contract entered into by Ong and the spouses be rescinded?

A: No. The agreement of the parties in this case may be set aside, but not because of a breach on the p
art of Ong for failure to complete payment of the purchase price. Rather, his failure to do so brought ab
out a situation which prevented the obligation of the spouses to convey title from acquiring an obli
gatory force. The agreement of purchase and sale shows that it is in the nature of a contract to sell.
Ong’s failure to complete payment of the purchase price is a nonfulfillment of the condition of full
payment which rendered the contract to sell ineffective and without force and effect. The
breach contemplated in Article 1191, NCC is the obligor’s failure to comply with an obligation. In this
case, Ong’s failure to pay is not even a breach but merely an event which prevents the vendor’s
obligation to convey title from acquiring binding force.

Note: The contract entered into by the parties in the case at bar does not fall under any of those mentioned by Article 1
381. Consequently, Article 1383 is inapplicable. In a contract to sell, the payment of the purchase price is a positive suspensiv
e condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vend
or to convey title from acquiring an obligatory force. (Ongv.CA, G.R. No. 97347, July 6, 1999)

Q: Goldenrod offered to buy a mortgaged property owned by Barreto Realty to which it paid an
earnest money amounting to P1 million. It was agreed upon that Goldenrod would pay the
outstanding obligations of Barreto Realty with UCPB. However, Goldenrod did not pay UCPB
because of the banks denial of its request for the extension to pay the obligation. Thereafter,
Goldenrod, through its brocker, informed Barreto Realty that it could not go through with the
purchase of the property and also demanded the refund of the earnest money it paid. In the absence
of a specific stipulation, may the seller of real estate unilaterally rescind the contract and as a
consequence keep the earnest money to answer for damages in the event the sale fails due to
the fault of the prospective buyer?
A: No. Goldenrod and Barretto Realty did not intend that the earnest money or advance
payment would be forfeited when the buyer should fail to pay the balance of the price,
especially in the absence of a clear and express agreement thereon. Moreover, Goldenrod resorted
to extrajudicial rescission of its agreement with Barretto Realty. Under Article 1385, NCC, rescission
creates the obligation to return the things which were the object of the contract together with their
fruits and interest. Therefore, by virtue of the extrajudicial rescission of the contract to sell by
Goldenrod without opposition from Barretto Realty, which in turn, sold the property to other persons,
Barretto Realty, had the obligation to return the earnest money which formed part of the purchase
price plus legal interest from the date it received notice of rescission. It would be most inequitable if
Barretto Realty would be allowed to retain the money at the same time appropriate the proceeds of
the second sale made to another. (Goldenrod, Inc. v. CA, G.R. No. 126812, Nov. 24, 1998)

Q: What is the prescriptive period of action for rescission?

A:
1. Under Art. 1381, no.1 –
within 4 years from the time the termination of the incapacity of the ward;
2. Under Art. 1381, no. 2‐ within 4 years from the time the domicile of the absentee is known; or
3. Under Art. 1381, nos. 3 & 4 & Art. 1382 – within 4 years from the time of the discovery of fraud.

B. VOIDABLE CONTRACTS
Q: What are the characteristics of a voidable contract?
A:
1. Effective until set aside;
2. May be assailed or attacked only in an action for that purpose;
3. Can be confirmed; and
4.Can be assailed only by the party whose consent was defective or his heirs or assigns.

Q: When is there a voidable contract?

A: When:
1. one of the parties is incapacitated to give consent; or
2. consent was vitiated.

Q: Who are the persons incapacitated to give consent?

A: DIM
1. Deaf‐mutes who do not know how to read and write (illiterates)
2. Insane or demented persons, unless the contract was entered into during a lucid interval
3. Minors except:
a. Contracts for necessaries
b.Contracts by guardians or legal representatives & the court having jurisdiction had
approved the same
c. When there is active misrepresentation on the part of the minor (minor is estopped)
d.Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years of
age
e. Upon reaching age of majority – they ratify the same
Q: What are the vices of consent?
A: MIVUF
1. Mistake substantial mistake and not merely an accidental mistake; must refer to the:
a. substance of the thing which is the subject of the contract; or
b.to those conditions which have principally moved one or both parties to enter the
contract.
Note: Mistake as to 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.
2. Intimidation – An internal moral force operating in the will and inducing performance of an act.
3.Violence An external, serious or irresistible physical force exerted upon a person to prevent him
from doing something or to compel him to do an act.
4.Undue influence
Any means employed upon a party which, under the circumstances could not be resisted and has
the effect of controlling his volition and inducing him to give his consent to the contract, which
otherwise, he would not have entered into.
5.Fraud Use of insidious words or machinations in inducing another party to enter into the
contract, which without them, he would not have agreed.

Q: What are the kinds of mistake?

A: 1. Mistake of fact–
When one or both of the contracting parties believe that a fact exists when in reality it does not, or
that such fact does not exist when in reality it does.
2. Mistake of law–
When 1 or both parties arrive at erroneous conclusion or interpretation of a question of law or legal
effects of a certain act or transaction.
Note: GR: Mistake as a vice of consent refers to mistake of facts and not of law.

XPN: When mistake of law involves error as to the effect of an agreement when the real purpose of the parties is
frustrated (Art. 1334, NCC).
To determine the effect of an alleged error, both the objective and subjective aspects of the case whic
h is the intellectual capacity of the person who committed the mistake.
Q: When will mistake invalidate consent?
A: Mistake, in order to invalidate consent, 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 in
to the contract.(Leonardo v. CA, G.R. No. 125485, Sept. 13, 2004)

Q: Leonardo is the only legitimate child of the late spouses Tomasina and Balbino. She only finished
Grade three and did not understand English. The Sebastians, on the other hand, are illegitimate
children. She filed an action to declare the nullity of the extrajudicial settlement of the estate of
her parents, which she was made to sign without the contents thereof, which were in English,
explained to her. She claims that her consent was vitiated because she was deceived into signing
the extrajudicial settlement. Is the extrajudicial settlement of estate of Tomasina valid?

A: No. 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. 1332, NCC) Leonardo was not in a position to
give her free, voluntary and spontaneous consent without having the document, which was in
English, explained to her. Therefore, the consent of Leonardo was invalidated by a substantial
mistake or error, rendering the agreement voidable. The extrajudicial partition between the
Sebastians and Leonardo should be annulled and set aside on the ground of mistake. (Leonardo v. CA,
G.R. No. 125485, Sept. 13, 2004)
Note: Contracts where consent is given by mistake or because of violence, intimidation, undue influence or fraud are
voidable. These circumstances are defects of the will, the existence of which impairs the freedom, intelligence,
spontaneity and voluntariness of the party in giving consent to the agreement. 223 Art. 1332 was intended to protect a
party to a contract disadvantaged by illiteracy, ignorance, mental weakness or some other handicap. It contemplates a
situation wherein a contract is entered into but the consent of one of the contracting parties is vitiated by mistake or
fraud committed by the other.(Leonardo v. CA, G.R. No. 125485, Sept. 13, 2004)

Q: What are the requisites that ignorance of or erroneous interpretation of law (mistake of law) may
vitiate consent?
A:
1. Mistake must be with respect to the legal effect of the agreement;
2. It must be mutual; and
3.Real purpose of the parties must have been frustrated.
Q: What are the requisites of intimidation?
A: 1. One of the parties is compelled to give his consent by a reasonable and well
grounded fear of an evil;
2. The evil must be imminent and grave;
3. It must be unjust; and
4. The evil must be the determining cause for the party upon whom it is employed in entering into the
contract.

Q: What are the requisites of violence?

A: It must be:
1. serious or irresistible; and
2.the determining cause for the party upon whom it is employed in entering into the contract.

Q: What are the kinds of fraud?

A: 1. Fraud in the perfection of the contract
a. Causal fraud (dolo causante)
b. Incidental fraud (dolo incidente)
2. Fraud in the performance of an obligation (Art. 1170, NCC)
Requisites:
a.Fraud, insidious words or machinations must have been employed by one of the contra
cting parties;
b. It must have been serious;
c. It induced the other party to enter into a contract; and
d. Should not have been employed by both contracting parties or by third persons.

Q: Distinguish dolo causante from dolo incidente.

A:
Dolo Causante. Art. 1338 Dolo Incidente Art. 1344
Refers to fraud which is serious in character Refers to fraud which is not serious in character
It is the cause which induces the party to enter It is not the cause which induces the party to enter
into a contract. into a contract
Renders the contract voidable Renders the party liable for damages

Note: In contracts, the kind of fraud that will vitiate consent is one where, 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. T
his is known as dolo causante or causal fraud which is basically a deception employed by one party prior to or simultaneo
us to the contract in order to secure the consent of the other. (Samson v. CA, G.R. No. 108245, Nov. 25, 1994)

Q: Santos’ lease contract was about to expire but it was extended and he continued to occupy the lease
d premises beyond the extended term. Samson offered to buy Santos’ store and his right to the
lease. Santos stated that the lease contract between him and the lessor was impliedly renewed
and that formal renewal thereof would be made upon the arrival of a certain Tanya Madrigal,
based on the letter to him given by the lessor. When Samson occupied the premises, he was forced
to vacate for Santos’ failure to renew his lease. He filed an action for damages against Santos for fraud
and bad faith claiming that the misrepresentation induced him to purchase the store and the
leasehold right.
Decide.
A: No, Santos was not guilty of fraud nor bad faith in claiming that there was implied renewal of his
contract of lease with his lessor. The letter given by the lessor led Santos to believe and conclude that
his lease contract was impliedly renewed and that formal renewal thereof would be made upon the
arrival of Tanya Madrigal. Thus, from the start, it was known to both parties that, insofar as the
agreement regarding the transfer of Santos’ leasehold right to Samson was concerned, the object
thereof relates to a future right. It is a conditional contract, the efficacy of which depends upon
an expectancy the formal renewal of the lease contract between Santos and lessor. The efficacy of the
contract between the parties was thus made dependent upon the happening of this suspensive
condition. (Samson v. CA, G.R. No. 108245, Nov. 25, 1994)

Q: What are the causes of extinction of action to annul?

A: 1. Prescription – the action must be commenced within 4 years from the time the:
a. incapacity ends; guardianship ceases;
b. violence, intimidation or undue influence ends; or
c. mistake or fraud is discovered
2.Ratificationcleanses the contract of its defects from the moment it was constituted
Requisites:
a. there must be knowledge of the reason which renders the contract voidable;
b. such reason must have ceased; and
c.the injured party must have executed an act which expressly or impliedly conveys an
intention to waive his right
3.By loss of the thing which is the object of the contract through fraud or fault of the person who is enti
tled to annul the contract

Q: Who may institute action for annulment? A: By all who are thereby obliged principally or
subsidiarily.
Note: He who has capacity to contract may not invoke the incapacity of the party with whom he has contract
ed. A third person who is a stranger to the contract cannot institute an action for annulment.

Q: What are the effects of annulment?

A:
1. If contract not yet consummated –
parties shall be released from the obligations arising therefrom.
2. If contract has already been consummated – rules provided in Arts. 1398‐
1402, NCC, shall govern.

Q: What is confirmation?
A: It is an act by which a voidable contract is cured of its vice or defect.

Q: What is recognition?
A: It is an act whereby a defect of proof is cured such as when an oral contract is put into writing or wh
en a private instrument is converted into a public instrument.

Q: What is ratification?
A:It is an act by which a contract entered into in behalf of another without or in excess of authority
is cured of its defect.

Q: What are the modes of ratification?

A:
1. For contracts infringing the Statute of Frauds: a. expressly b. impliedly–
by failure to object to the presentation of oral evidence to prove the contract, or by the accepta
nce of benefits under the contract.
2.If both parties are incapacitated, ratification by their parents or guardian shall validate the contract
retroactively

Q: What are unenforceable contracts?

A: The following contracts are unenforceable unless they are ratified:
1. Those entered into without or in excess of authority; 2
2. Those that do not comply with the Statute of Frauds i.e., are not in writing nor subscribed b
y the party charged or by his agent; or
3.Those where both contracting parties are incapable of giving consent.

Q: What is Statute of Frauds?

A: The Statute of Frauds [Article 1403, (2)] requires certain contracts enumerated therein to be
evidenced by some note or memorandum in order to be enforceable. The term "Statute of
Frauds" is descriptive of statutes which require certain classes of contracts to be in writing. The
Statute does not deprive the parties of the right to contract with respect to the matters therein
involved, but merely regulates the formalities of the contract necessary to render it enforceable.
Evidence of the agreement cannot be received without the writing or a secondary evidence of it
s contents. (Swedish Match, AB v. CA, G.R. No. 128120, Oct. 20, 2004)
Note: The Statute of Frauds applies only to executory contracts, not to those that are partially or completely fulfilled.
Where a contract of sale is alleged to be consummated, it matters not that neither the receipt for the consideratio
n nor the sale itself was in writing. Oral evidence of the alleged consummated sale is not forbidden by the Statute of Frau
ds and may not be excluded in court. (Victoriano v. CA, G.R. No. 87550, Feb. 11, 1991)

Q: What is the purpose of the Statute of Frauds? A: It is to prevent fraud and perjury in the enfor
cement of obligations depending for their evidence on the unassisted memory of witnesses, by
requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the
party to be charged. (Swedish Match, AB v. CA, G.R. No. 128120, Oct. 20, 2004) Q: What are the
contracts or agreements covered by the Statute of Frauds?
A:
1. An agreement that by its terms is not to be performed within a year from the making thereof;
2. A special promise to answer for the debt, default or miscarriage of another
3. An agreement made in consideration of marriage, other than a mutual promise to marry;
4.An agreement for the sale of goods, chattels or things in action, at a price not lower that 500 pe
sos, unless the buyer accepts and receives 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 entry is made by the auctione
er in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, pri
ce, names of the purchasers and person on whose account the sale is made, it is a sufficient m
emorandum
5.An agreement for the leasing for a longer period than one year, or for the sale of real property or
of an interest therein;
6.A representation to the credit of a third person

Q: Cenido, as an heir of Aparato and claiming to be the owner of a house and lot, filed a complaint
for ejectment against spouses Apacionado. On the other hand, spouses Apacionado allege that
they are the owners which are unregistered purchased by them from its previous owner, Aparato.
Their claim is anchored on a 1page typewritten document entitled "Pagpapatunay," executed by
Aparato. Is the “Pagpapatunay” entered into by Bonifacio and spouse Apacionado valid and
enforceable?

A: It is valid but unenforceable. Generally, contracts are obligatory, in whatever form such contracts
may have been entered into, provided all the essential requisites for their validity are present. When,
however, the law requires that a contract be in some form for it to be valid or enforceable, that require
ment must be complied with. The sale of real property should be in writing and subscribed by the p
arty charged for it to be enforceable. The "Pagpapatunay" is in writing and subscribed by Aparato, h
ence, it is enforceable under the Statute of Frauds. Not having been subscribed and sworn to befor
e a notary public, however, the "Pagpapatunay" is not a public document, and therefore does not c
omply with par. 1, Art. 1358, NCC. Moreover, the requirement of a public document in Article 1358 is
not for the validity of the instrument but for its efficacy. Although a conveyance of land is not
made in a public document, it does not affect the validity of such conveyance. The private conveyanc
e of the house and lot is therefore valid between Aparato and the spouses. (Cenidov.Spouses Apacion
ado, G.R. No. 132474, Nov. 19, 1999)

Q: What are the two ways of ratifying contracts which infringe the Statute of Frauds?
A:
1.Failure to object during the trial to the admissibility of parol evidence to support a contract cover
ed by the Statute of Frauds.
2.Acceptance of benefits when the contract has been partly executed because estoppel sets in by a
ccepting performance. 226

D. VOID CONTRACTS
Q: What are the kinds of void contracts?
A: 1. Those lacking in essential elements: No consent, no object, no cause –
some or all elements of a valid contract are absent
a. Those which are absolutely simulated or fictitious: no cause
b. Those whose cause or object did not exist at the time of the transaction: no cause or object
c. Those whose object is outside the commerce of man: no object
d. Those which contemplate an impossible service: no object
e.Those where the intention of parties relative to principal object of the contract cannot be
ascertained
2. Contracts prohibited by law
a. Pactum commisorium –
the creditor appropriates to himself the things given by way of pledge or mortgage to fulfill the debt
b. Pactum de non alienando –
an agreement prohibiting the owner from alienating the mortgaged immovable
c. Pactum leonina –
a stipulation in a partnership agreement which excludes one or more partners from any share in the
profits or losses
3. Illegal or illicit contracts(e.g. contract to sell marijuana) Q: On July 6, 1976, Honorio and Vicente
executed a deed of exchange. Under this instrument, Vicente agreed to convey his 64.22square‐
meter lot to Honorio, in exchange for a 500‐square
meter property. The contract was entered into without the consent of Honorio’s wife. Is the deed of
exchange null and void?
A: The deed is valid until and unless annulled. The deed was entered into on July 6, 1976, while the Fam
ily Code took effect only on August 3, 1998. Laws should be applied prospectively only, unless a legislati
ve intent to give them retroactive effect is expressly declared or is necessarily implied from the lang
uage used. Hence, the provisions of the Civil Code, not the Family Code are applicable. According to Ar
ticle 166 of the Civil Code, the husband cannot alienate or encumber any real property of the co
njugal partnership without the wife’s consent. This provision, however, must be read in conjunction wit
h Article 173 of the same Code. The latter states that an action to annul an
alienation or encumbrance may be instituted by the wife during the marriage and within ten years
from the transaction questioned. Hence, the lack of consent on her part will not make the
husband’s alienation or encumbrance of real property of the conjugal partnership void, but
merely voidable. (Villarandav. Villaranda, G.R. No. 153447, Feb. 23, 2004)

Q: Judie sold onehalf of their lot to Guiang under a deed of transfer of rights without the consent a
nd over the objection of his wife, Gilda and just after the latter left for abroad. When Gilda returned ho
me and found that only her son, Junie, was staying in their house. She then gathered her other
children, Joji and Harriet and went to stay in their house. For staying in their alleged property, the
spouses Guiang complained before the barangay authorities for trespassing. Is the deed of transfer
of rights executed by Judie Corpuz and the spouses Guiang void or voidable?

A: It is void. Gilda’s consent to the contract of sale of their conjugal property was totally inexistent or a
bsent. Thus, said contract properly falls within the ambit of Article 124 of the FC. The particular
provision in the old Civil Code which provides a remedy for the wife within 10 years during the
marriage to annul the encumbrance made by the husband was not carried over to the Family
Code. It is thus clear that any alienation or encumbrance made after the Family Code took effect by
the husband of the conjugal partnership property without the consent of the wife is null and void.
(Spouses Guiangv.CA, G.R. No. 125172, June 26, 1998)

Q: Distinguish void contract from voidable contract.

A:
V O I D
Absence of essential element/s of a contract
No effect even if not set aside
Cannot be ratified
Nullity can be set up against any person asserting
right arising from it, and his successors in interest
not protected by law
Action to declare nullity does not prescribe.
VOIDABLE
Consent is vitiated or there is incapacity to give
consent
Valid contract until set aside
Can be ratified
Nullity can be set up only against a party thereto
Action to annual contract prescribes in 4 years
(pineda, Obligations and contracts, 2000 ed.p 606

Q: Distinguish void contract from rescissible contract.

A:
VOID CONTRACT RESCISSIBLE CONTRACT
Defect is inherent in the contract itself Defects is in its effects, either against one of the
parties or a third person
Nullity is a matter of law and public interest Based on equity and matter of private interest
No legal effects even if no action is filled to set it Produces legal effects and remains valid if no
aside. action is filed
Action to declare its nullity does not prescribe (Art. Action to rescind prescribes within 4 years (Art.
1411, NCC) 1389, pineda, Obligations and contracts, 2000 ed,p
605

Q: Distinguish void contract from inexistent contract.

VOID CONTRACT INEXISTENT CONTRACT
Those where all the requisites of a contract are Those where one or some of the requisites which
present, but the cause, object or purpose is are essential for validity are absolutely lacking.
contrary to law, morals, good customs, public
order or public policy or the contract itself is
prohibited or declared prohibited.
Principle of in pari delicto is applicable Principles of in pari delicto is not applicable.
V. EFFECT OF CONTRACTS

Q: Between whom do contracts take effect?

A: Contracts take effect only between the parties, and their assigns and heirs, the latter being liable
only to the extent of the property received from the decedent.

Q: What are the instances when the heirs may be liable for the obligation contracted by the
decedent?

A: When the rights and obligations arising from the contract are transmissible:
1. By their nature; or
2. By stipulation; or
3.By provision of law.

Q: What are the requisites in order that a third person may demand the fulfillment of the contract?
A:
1.The contracting parties must have clearly and deliberately conferred a favor upon the third
person;
2. The third person’s interest or benefit in such fulfillment must not be merely incidental; and
3.Such third person communicated his acceptance to the obligor before the stipulations in his
favor