puntaney: 5°FloorCMFFIBuiding 813 Cor R Papa and S. Loyola Sis ‘Sampaloc, Mania {735.9807 / 734-3989 / (0910) 439-1320 resareview@hotmail com Regulatory Framework for Business Transactions (RFBT)_ ‘Atty. R. Rosales « Atty. J. Domingo Atty. N. Valderrama RFBT - 02: CONTRACTS Definition ~ A Contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (Art. 1305) Elements of a Contract: a. Consent of the contracting parties b. Object certain which 1s the subject ‘matter of the contract ¢. Cause of the obligation that must be established Stages of a Contract: * Negotiation ~ this covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected + Perfection ~ takes place upon the concurrence of the essential elements of the contract * Consummation ~ this begins when the parties perform their respective undertakings under the contract resulting to the eventual extinguishment of the contract Kinds of Contracts a. As to how it is perfected: + Consensual - perfected by mere consent of the contracting parties + Formal - contracts which must be in a form provided by law for its perfection + Real - perfected by the delivery of the object of the contract b. As to the degree of dependence or independen ‘s Principal - a contract that may exist alone even without the presence of any other contract «Accessory - this contract cannot exist without the presence or existence of another contract «Preparatory ~ a contract entered into so that other contracts can be entered into or in anticipation of another contract c. As to whether or not a name is given: + Nominate ‘* Innominate - Do ut des, (I will give so that you may give), Do ut facias, Facio ut facias, Facio ut des d. As to the nature of consideration: * Gratuitous - When one party does not receive an equivalent consideration © Onerous - When there is an exchange of valuable considerations. | Remuneratory ~ Those where the cause is the service or benefit remunerated. e. According to parties: + Unilateral - only one party is obligated to give or to do something + Bilateral - both parties are obligated to give or to do something. Basic Characteristics of Contracts: 2. Obligatoriness (Art. 1308) b. Autonomy of Contracts/Freedom to Scipulate (Art. 1306) <. Mutuality of Contracts (Arts. 1308 ~ 1310) . Relativity of Contracts (Art. 1311) . Consensuality Essential Requisites of Contracts: Consent Definition - Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause, which are to constitute the contract. Flements of Consent: 1. Piuratity of Parties; 41, Capacity of the Parties; wii, Will or the capacity to give consent which must be intelligent or conscious, spontaneous and free; 'v. Declaration or manifestation which may be either express or implied; v. Meeting of the offer and acceptance Offer and Acceptance Cognition Theory - Acceptance is effective from the time that such acceptance of the offer has come to the knowledge of the offeror. Acceptance takes effect from the time the offeror learns about the acceptance. Counter-offer - There is no perfected contract if there 1s a counter-offer such as when the other party suggests other termsto the offeror or when the acceptance is qualified, Parties who cannot give consent: @. _Unemancipated Minors - should only be “munors” or those persons who have not Feached the age of majority. Note: Before, there were “emancipated minors” when the age of majority 15s 21 and the marrying age is 14 for girls and 16 for boys. They can be emancipated by attaining the age of majority. b. Insane or demented persons except when entered into during a lucid interval; ¢. Deaf-mutes who do not know how to write; d. Persons in a state of drunkenness or hypnotic spell. * The contract entered into by such Persons is voidable. If both parties are incapable of giving consent. the contract 1s unenforceable. Vices of Consent - a centract where consent is given through mistake, violence, intimidation, undue influence or fraud 1s voidable. Mistake ‘+ General rule: One who alleges mistake or even fraud must prove the same. + Exception: When one party ss unable to read or does not understand the language of the contract, the person enforcing the contract must show that the terms thereof have been fully ‘explained to the former When mistake will vitiate consent: + Mistake will vitiate consent when it refers to the substance of the thing thai is the object of the contract + If mistake refers to those conditions which have principally moved one or both parties to enter into the contract + If the mistake refers to the identity or qualifications of one of the parties if such identity or qualifications have been the principal cause of the contract + If mistake refers to the legal effect of an agreement when the real purpose of the parties is frustrated and the same is mutual When mistake does not vitiate consent: * If the mistake refers to @ simpie mistake of account which shall only be corrected; RFBT - 02 + If the party allleging it knew the doubt, contingency or risk affecting the object of the contract. Force or violence: There is violence when in order to wrest consent, serious irresistible force is employed. This is true although it may have been employed by a third person who did not take part in the contract. Intimidation or moral coercion: 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 the person or property of his spouse, descendants or ascendants to give his consent. This intimidation exists although it may have been employed by @ third person who did not take part in the contract. 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 influence must have ‘overpowered or subjugated the mind of the contracting party, reducing him into a mere puppet and making him express the will of another. Fraud The kind of fraud that could vitiate consent 18 causal fraud or dolo causante: + The fraud should be serious; and * Should not have been employed by both contracting parties. No fraud exists in the following cases: + Usual exaggerations in trade, when the other party had an opportunity to know the facts + In case of a mere expression of an opinion, unless made by an expert and the other party has relied on the former's special knowledge. ‘+ Incase of misrepresentations by a third Person, unless such misrepresentation has created substantial mistake and the same 1s mutual. + If the misrepresentation was made in good faith. However, the same may Constitute error or mistake Simulated Contracts: a. Absolutely Simulated Contract: ‘+ One where the parties do not intend to be bound at all. It is void for being fictitious. The parties may thus recover from each other what Page 2 of 6they may have given under the contract. + Itis.a contract not really desired or intended to produce legal effects by the parties The simulation must be on the part of both parties. b. Relatively Simulated Contract + One where parties conceal their true agreement. The parties liere are bound to their real agreement Provided it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order and public policy. Object of Contracts What may be the object of contracts? 1. All things which are not outside the commerce of men including future things (except future inheritance); 2. All rights which are transmissible; 3. All services which are not contrary to law, morals, good customs, public order or public policy. Requisites of Object of a Contract: 1. It must be within the commerce of men; 2. It must be transmissible; 3. It must not be contrary to law, morals, good customs, public order or public policy; 4, It must not be impossible; 5. It must be determinate as to its kiti! 9 if its quantity is not determinate, it must be possible to determine the same without the need of a new contract between the parties. Cause of Contracts: It is the consideration ‘on why a party enters into a contract. Onerous Contracts - the cause is the prestation or promise of a thing or service by the other. In a contract of sale, the cause for the seller is the price to be paid and for the buyer, the cause is the thing which is the subject of the sale. Remuneratory Contract - the cause is the service or benefit which is remunerated. In remuneratory contracts, the service being remunerated or compensated does not arise from any source of obligation but from another person's purely voluntary act. RFBT - 02 Gratuitous Contract - The cause 1s the liberality, kindness and generosity of the benefactor. Requisites of Cause: a. Itmust exist. ‘+ Ttis presumed that the cause exists and it is lawful, even if not stated in the contract, unless the debtor proves the contrary; + Contracts without cause produce no effect whatsoever. b. It must be lawful - Contracts with unlawful cause produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. c. It must be true ~ The statement of a false cause in a contract shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. Cause and motive distinguished 1. Cause is the essential reason of the contract; while motive is the private or secret reason or intention of a contracting party. 2. The contract is void if the cause is illegal; The validity of the contract is not affected by the illegality of the motive. 3. The cause of a contract is always known, to the contracting parties, while the motive of one party may not be known to the other. Lesion ~ Lesion is the inadequacy of cause. As a rule, lesion shall not invalidate a contract except a. When there was fraud, mistake and undue influence; b. In cases provided by law, such as when the ward or absentee suffer lesion by more than % of the value of the object of the contract; the contract becomes a Rescissible contract. Defective Contracts Rescissible Contracts; Voidable Contracts; Unenforceable Contracts; Void Contracts. Rescissible Contracts ~ are those which has all the essential elements of a contract but which may be set aside by reason of equity on account of damage to one of the parties or to a third person. Page 3 of 6The following are rescissible contracts 1, Those entered into by guardians whenever the ward whom they represent suffer lesion by more than '% of the value of the things which are the object thereof; 2, Those agreed to in representation of absentees, if the latter suffer iesion by more than % of the value of the things which are the object thereof; 3. Those undertaken in fraud of crevitors when the latter cannot in any manner collect the claims 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 ‘or of competent judicial authority; 5. All other contracts specially declared by law to be subject to rescission; 6. Payments made in a state of insolvency for obligations to whcse fulfillment the debtor could not be compelled at the time they were affected. ‘+ Rescission in nos. 1 and 2 shail not take place with respect to contracts approved by the court. Alienations of properties presumed to be in fraud of creditors: Alienations by gratuitous title ~ Gratuitous alienations are presumed to have been entered into in fraud of creditors if the debtor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title - Onerous alienations are presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking rescission. Liability of third persons acquiring in bad faith the things alienated in fraud o! creditors - Such third persons shall indemnify the latter for damages suffered by them on account of the alienation, whenever due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shail be liable first and so on successively. RFBT - 02 Prescription of the right to rescind ~ The action to claim rescission must be ‘commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. Voidable Contract - one that is defective by reason of the incapacity or vitiated consent of one of the parties. It is binding unless annulled by a proper action in court. It is also susceptible to ratification. Voldable contracts: 1. Those where one of the parties is incapable of giving consent to a contract. Either of the parties is: (a) Unemancipated Minor; (b) Insane or demented perons; (c) Deaf-mutes who do not know how to write, 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 3. Those where consent is given ina state of drunkenness. 4, Those where consent is given during a hypnotic spell. Annulment - the action brought to set aside a voidable contract. Rules on Annulment of Contracts: 1. The action for annulment must be brought within four years which period shall begin: 2. In cases of intimidation, violence or undue influence, from the time the defect in the consent ceases; b. In case of mistake or fraud, from the time of discovery of the same; c. in cases of minority or other incapacity of a party, from the time guardianship ceases. 2. The action for annulment may be instituted by all who are thereby obliged principally or —subsidiarily. hence it cannot be brought by third persons. It may be brought by the following: a. The guardian of the incapacitated person during the __atter’s incapacity; b. The incapacitated person after he hhas attained capacity; c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 3. Effects of Annulment: a. Obligations created by annulment Page 4 of 6‘In obligations to gwe, the contracting parties shall restore to each other, except in cases Provided by law, the following: 1. The things which have been the subject matter of the contract, with their fruits. 2. The price with its interest. ‘In obligations to render service, the value thereof shall be the basis of the damage. b. Restitution when one of the parties is incapacitated - the incapacitated Persons is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. . When the thing is lost through th> fault of the party obliged by the decree of annulment to return it. The said party shall return the following: + Fruits received, + Value of the thing at the time of the loss, + Interest from the time of the loss. d. If one cannot restore what he i bound to return in the decree of annulment, the other cannot be compelled to comply with what 1s incumbent upon him. fe. Effect of loss of the thing while in the possession of the party who has right to bring action for annulment: right to file the action for annuiment is extinguished Ratification ~ the adoption or affirmation cf a contract that is defective because of a party's vitiated consent or incapacity. Rules on Ratification: 1, How ratification is made: a. Express - when made orally or in writing; b. Implied or tacit - There is tacit ratification if with the knowledge of the reason which renders the contract voidable and such reasov having ceased, the person who has a right to invoke it executes an act which necessarily implies an action to waive his right. 2. Who may ratify (the same persons who may annul the contract) a. The guardian of the incapacitated person during the _latie incapacity; b. The incapacitated person after he has attained capacity; g c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence or fraud. RFBT - 02 Consent of the other party who has no right to bring the action for annulment is not required in ratification Effects of Ratification a. It extinguishes the action to annul a voidable contract; b. It cleanses the contract from all its defects from the moment it was constituted; the contract is validated from inception. Unenforceable Contracts: one that cannot be enforced by the courts unless ratified. This right is available only to the contracting parties. It cannot be assailed by third persons. The following are unvenforceable contracts: 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. Those that do not comply with the Statute of Frauds; The , following contracts must be in writing: + An agreement that by its terms is not to be performed within a year from the making thereof. + Aspecial promise to answer for the debt, default or miscarriage of another. > An agreement in consideration of marriage, other than a mutual promise to marry. + Sale of goods, chattels or things in action at a price not less than 5,000 ~ Sale of personal property with 2 value of less than P5,000. It includes credits, shares and other incorporeal rights. + An agreement for the leasing of a real property or of an interest therein for more than one year. + Sale of real property or an interest therein. (regardless of the price) ‘= A representation as to the credit of 2 third person. Those where both parties are incapable of giving consent Void Contracts: one which has no force and effect from the very beginning, as if it had never been entered into and which cannot be validated either by time or ratification. Page 5 of 6Characteristics of a void contract: 1. Avoid contract cannot be ratified, 2. The right to set up defense of illegality cannot be waived; 3. The action or defense for the declaration of the inexistence of a contract does not prescribe; 4. The defense of illegality of contracts is not available to third persons wnose interests are not directly affected. Void Contracts as enumerated in Art, 1409 1, Those whose cause, object or purpose is contrary to law morals, gooo customs, public order or public policy; 2. Those which are absolutely simulaceu oF fictitious; 3. Those whose object or cause did not exist at the time of the transaction, 4. Those whose object is outside the commerce of men; 5. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; 6. Those expressly prohibited or declared void by law. Reformation of Instruments: a remedy in equity by means of which a writen instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. Requisites of reformatior 1, There must be meeting of the minds of the contracting parties; 2. The true intention of the parties 15 not expressed in the instrument; 3. The reason is due to mistake, fraud, inequitable conduct, or accident. Who may ask for reformation: 1. If the mistake was mutual by either party or his successors in interest, such as heirs or assigns; 2. In other cases, by the injured party or his heirs or assigns. When an instrument may be reformed: 1, When a mutual mistake of the parties causes the failure of the instrument to disclose their agreement. 2. When one party was mistaken and the other acted fraudulently or inequitably RFBT - 02 in such a way that the instrument does not show their true intention. 3. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement; 4, When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the intention of the parties; 5. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the Property is sold absolutely or with right of repurchase. When reformation is not available: 1. Simple donations inter vivos wherein no condition is imposed - this is so because a donation is essentially an act Of liberality on the part of the donor. However, if the donation is conditional, reformation is allowed so as to show the true intent of the donor as regards the conditions. 2. In case of wills because the making of a will is a strictly personal act which is free and the will may also be revoked at any time by the testator. 3. When the real agreement is void. ‘4, When one of the parties has brought an action to enforce the contract, he cannot subsequently ask for its reformation. Interpretation of contracts - how are doubts in the interpretation of contracts settled? 1. When doubt refers to the incidental circumstances of a gratuitous contract, the least transmission of rights and interest shall prevail; 2. If the contract is onerous, the doubt shail be settled in favor of the greatest reciprocity of interest. 3. If the doubts are cast upon the principal ‘object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. Page 6 of 6