UNIVERSITY OF THE CORDILLERAS

COLLEGE OF LAW

Obligations and Contracts

READING GUIDE
SPECIAL FORMS OF PAYMENT

A. DATION IN PAYMENT (DACION EN PAGO)

 Alienation of property to the creditor in satisfaction of a debt in money

 Indispensable requirement: delivery and transmission of ownership of a thing owned
by debtor
 Thing delivered is equivalent to performance of the obligation if accepted by the
creditor; total or partial performance depending agreement of parties
 Special form of payment because the identity of prestation is not preserved

B. CESSION

 Abandonment of the totality of the property of the debtor in favor of the creditors
 Only the possession and administration of the properties are transferred to the
creditors; they do not become owners of the property
 Requires plurality of creditors and insolvency of the debtor
 Debtor is released only to the extent of net proceeds of the properties sold by the
creditors

C. TENDER OF PAYMENT AND CONSIGNATION

 Tender of payment must be accompanied by consignation to produce the effect of

payment
 Tender = offer; consignation = deposit in court
 Tender may be extrajudicially undertaken, consignation is necessarily judicial
 GR: tender + consignation = obligation is extinguished;
EXC: when creditor is absent, unknown, does not appear at the place of payment,
incapacitated to receive payment at the time obligation is due, refuses to give receipt;
also, when two or more persons claim the same right to collect and when the title of
the obligation has been lost (in these instances, tender is excused; consignation only)

 Requirements of consignation must be strictly followed for consignation to be

effectual; substantial performance is not sufficient:

1) Valid debt – no circumstances rendering it void and it is already due

2) Valid prior tender unless tender is excused or exempt (see Art. 1256) – very
object agreed upon/legal tender, complete, and unconditional
3) Notice prior to consignation given to persons interested in the obligation (first
notice)
4) Actual consignation with proper judicial authority
5) Subsequent notice of consignation (second notice) – for creditor to withdraw
the money or goods deposited in court

 Debt is considered extinguished when the creditor accepts the consignation or when
the court declares that consignation has been properly made.

APPLICATION OF PAYMENT

A. CONCEPT – a special rule on payment. It is the process of designating to which the

payment made is applied, when the debtor has different obligations in favor of the same
creditor.

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 B. REQUISITES

1) One debtor and one creditor

2) Various debts
3) Debts are of the same kind
4) All debts are due (EXC: contrary stipulation or made by the party for whose benefit
the term has been constituted)
5) Payment is insufficient to cover all the obligations

C. WHO HAS THE RIGHT TO MAKE APPLICATION OF PAYMENT

1) Primarily belongs to the debtor, to be exercised at the time of payment

2) Creditor – if the debtor did not choose which obligation to extinguish and the debtor
accepts from the creditor a receipt indicating that an application of payment was made
3) Operation of law – when the debtor and creditor did not exercise right to choose;
rules: (a) most onerous, (b) if the debts are of the same nature and burden, payment
shall be proportionately applied to all of the debts

LOSS OF THE THING DUE

A. WHEN IS A THING CONSIDERED LOST – when the thing perishes, goes out of commerce,
or disappears in such a way that its existence is unknown or it cannot be recovered; also,
in case of partial loss where the portion lost is of such importance in relation to the whole
obligation

B. REQUISITES OF LOSS TO EXTINGUISH REAL OBLIGATIONS (TO GIVE)

1) Determinate object (loss of a generic object will not extinguish an obligation)

2) Loss occurs after the obligation is constituted
3) Debtor is without fault
4) Debtor is not in default
5) Debtor did not promise to deliver the same thing to 2 or more persons who do not
have the same interest

C. LOSS IN OBLGATIONS TO DELIVER A DETERMINATE THING ARISING FROM A CRIME –

obligation is not extinguished; debtor-criminal is still liable for the loss of the thing due
regardless of the reason for the loss, even a fortuitous event (the obligation is converted
to a monetary obligation corresponding to the value of the thing); EXC: if the creditor is
in mora accipiendi (i.e. debtor is no longer liable)

D. LOSS IN PERSONAL OBLIGATIONS (TO DO) – obligation is extinguished:

1) When the prestation becomes physically or legally impossible without the fault of the
debtor
2) When the service has become so difficult as to be manifestly beyond the contemplation
of the parties – this is also called the “Doctrine of the Frustration of the Commercial
Object, or Unforeseen Events” (see Art. 1267), performance is extremely difficult, but
not impossible

E. LOSS CAUSED BY A THIRD PERSON – obligation is extinguished; creditor can recover from
the third person

CONDONATION OR REMISSION OF THE DEBT

A. CONCEPT - gratuitous abandonment by the creditor of his right; an act of liberality on the
part of the obligee who renounces enforcement of the obligation without receiving any
price or equivalent from the obligor

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 B. REQUISITES

1) Gratuitous – creditor does not receive any price or equivalent

2) Demandable obligation at the time of the remission – already due
3) Acceptance by the obligor – unilateral renunciation is ineffective
4) Not an inofficious donation – does not impair legitime of compulsory heirs
5) Comply with the forms of donation if expressly made – if obligation remitted involves
personal property exceeding P5,000.00 = both remission and acceptance must be in
writing; if real property (regardless of value) = both remission and acceptance must
be in a public instrument

CONFUSION OR MERGER OF RIGHTS

A. CONCEPT – meeting of the characters of creditor and debtor in the same person
B. REQUISITES – (1) takes place in the person of the principal creditor and principal debtor;
(2) complete and definite; and (3) only one/same obligation.

COMPENSATION

A. CONCEPT – simplified mode of payment/abbreviated payment; extinguishes obligations

to the concurrent amounts when two persons are creditors and debtors of each other

B. KINDS

1) Legal compensation – takes place ipso jure when all the 5 requisites under Art. 1279
are present
2) Conventional or voluntary compensation – occurs when the parties agree to the mutual
extinguishment of their respective obligations; 2 requisites only (a) capacity to dispose
the credit sought to be compensated, and (b) consent of the parties
3) Facultative compensation – only one of the parties to the obligation has the right to
claim compensation
4) Judicial compensation – when the court allows the set-off or counterclaim of the
defendant as against the claim of the plaintiff

C. PROHIBITED COMPENSATION – see Arts. 1287 and 1288

D. EFFECT OF ASSIGNMENT ON COMPENSATION – see Art. 1285

1) If assignment is made after legal compensation had taken place – assignment will not
affect the debtor because the obligation was already extinguished before the
assignment

2) If assignment is made prior to legal compensation taking place and assignment was
made:
 With debtor’s consent – debtor cannot set up compensation against the
assignee, EXC: debtor reserved his right
 With debtor’s knowledge but without his consent – debtor may set up the
compensation of debts existing previous to the assignment but not of
subsequent ones
 Without debtor’s knowledge – debtor may set up the compensation of all
credits existing prior to, or even after the assignment, until he had knowledge
of the assignment

NOVATION

A. CONCEPT – extinguishing an existing obligation and creating a new one. It is the

substitution or change of an obligation by another, which extinguishes or modifies the

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 first, either by changing its object or principal condition, or substituting another in place
of the debtor, or subrogating a third person in the right of the creditor.

B. REQUISITES

1) Valid old obligation; EXC: Art. 1298

2) Parties must agree to a new obligation
3) Old contract must be extinguished
4) Valid new obligation; EXC: Art. 1297

C. KINDS

1) Extinctive or total when the old obligation is completely extinguished;

Relative or partial when the old obligation is merely modified.
2) Express when the new obligation declares in unequivocal terms that the old obligation
is extinguished;
Implied when the new obligation is on every point incompatible with the old one.
3) Objective when there is a change in the object or principal condition of an obligation;
Subjective when there is change in the person of either the debtor or creditor;
Mixed = objective + subjective change

D. NOVATION BY SUBSTITUTION OF DEBTOR

 Old debtor must be released and the new debtor assumes his place
 Indispensable requirement = creditor’s consent which may be express or implied
 Insolvency or non-fulfillment by the new debtor will not revive the liability of the old
debtor; EXC: Art. 1295

 2 forms of substitution:
1) Expromision – initiative comes from a third person; consent required = 2 parties
only, i.e. third person/new debtor and creditor; third person entitled only to
beneficial reimbursement when he pays without the knowledge or against the will
of the old debtor
2) Delegacion – initiative comes from the debtor; consent required = all 3 parties,
i.e. old debtor, creditor, and new debtor

E. NOVATION BY SUBROGRATION OF CREDITOR

 Transfer of all the rights of the creditor to a third person

 2 kinds of subrogation:
1) Legal – takes place by operation law because of certain acts; not presumed EXC:
Art. 1302; legal subrogation transfers to the new creditor the credit, together with
all the rights thereto appertaining (e.g. mortgage, pledge, guaranty), whether
those rights be against the debtor or third persons.
2) Conventional – takes place by agreement of all the 3 parties, i.e. debtor, old
creditor, and new creditor; effects thereof subject also to their agreement

CONTRACTS

 Meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.
 Distinguished from obligation: contract is one of the sources of obligation; contract is the
cause while obligation is the effect

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 Distinguished from quasi-contract (QC): contract requires consent of the parties while QC
does not require mutual consent it being a unilateral act; basis of a contract is the will of
the parties while for QC is the law that no one should be unjustly enriched at the expense
of another.

A. ELEMENTS

1) Essential elements – necessary for the existence of the contract (consent, object, and
cause/consideration, plus delivery of the object in real contracts)
2) Natural elements – presumed to exist in certain contracts unless there is an express
stipulation to the contrary (e.g. warranties in a contract of sale)
3) Accidental elements – exist only when the parties expressly provide them (e.g.
interest, place of payment, conditions, period)

B. CLASSIFICATION

1) According to manner of perfection

 Consensual – perfected by mere consent (e.g. sale)
 Real – perfected by delivery (e.g. pledge)
 Formal/solemn – special formalities are required to perfect the contract (e.g.
donation)

2) According to cause
 Onerous – valuable consideration
 Gratuitous – generosity/liberality of the benefactor
 Remunerative – benefit or service previously rendered

3) According to degree of dependence

 Principal – independent contract (e.g. loan)
 Accessory – existence depends on a valid principal contract (e.g. interest)
 Preparatory – means for the execution of another contract (e.g. agency)

4) According to nature of obligation produced

 Bilateral – both parties are required to render reciprocal obligations
 Unilateral – only one of the parties has an obligation

5) According to name
 Nominate – contract has particular or special name in the Civil Code
 Innominate – recognized in the Civil Code but without a special name (see Art.
1307)

6) According to risk of fulfillment

 Commutative – equivalent values are given and the parties contemplate a real
fulfillment of the contract
 Aleatory – values vary because of risk or chance; fulfillment depends upon
chance

7) According to time of performance

 Executed- completed at the time contract is entered into
 Executory – when the prestation is to be complied at some future time

8) According to subject matter

 Things
 Services
 Rights

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 C. STAGES

1) Preparation – negotiations, preliminary offer, and bargaining

2) Perfection – birth of the contract; the parties agree on the definite subject matter and
valid cause
3) Consummation – contract is performed and fully executed

D. BASIC PRINCIPLES OR CHARACTERISTICS OF A CONTRACT

1) Autonomy (Art. 1306)

 Contracting parties may establish such stipulations, clauses, terms, and conditions
as they may deem convenient, provided these are not contrary to law, morals,
good customs, public order, or public policy
 Freedom to stipulate is not absolute; stipulations are subject to compliance to law

2) Mutuality (Art. 1308)

 Contract must bind both parties; its validity or compliance cannot be left to the will
of one of them
 Unilateral acts are not binding, EXC: if accepted by the other party
 Contact of adhesion does not violate the principle of mutuality because the party
who adheres to a ready-made form contract is free to reject that contract
 Third person is allowed to determine performance and such determination
becomes obligatory from the time it is made known to the parties; EXC: evidently
inequitable (Art. 1310)

3) Relativity (Art. 1311)

 GR: contracts are effective only between the parties, their assigns, and their heirs
 EXC: nature of obligation; stipulation; provision of law such as stipulation pour
autrui/stipulation in favor of a third person (Art. 1311, 2nd par), contracts creating
real rights (Art. 1312), contracts intended to defraud creditors (Art. 1313), tort
interference (Art. 1314), accion directa (Art. 1729)

4) Consensuality (Art. 1315)

 Contract is perfected by mere consent, i.e. when the parties agree on the subject
matter and cause
 EXC: real contract – mere consent will not perfect the contract, delivery is
indispensable (Art. 1316)

5) Obligatory Force of Contract (Arts. 1159, 1315)

 Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
 Courts have no alternative but to enforce the contract as agreed and written
provided the contract is perfected, valid, and enforceable. They cannot relieve
parties from obligations voluntary assumed.

CONSENT

 Conformity of wills
 Meeting of the offer and acceptance upon the thing and cause which are to constitute the
contract

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A. OFFER

 Expression of willingness to contract

 Offer of the offerer must be serious, certain, unqualified, absolute, and communicated
to the offeree
 Not considered as offer: advertisement of things for sale (Art. 1325), advertisement
for bidders (Art. 1326), auction sale (Art. 1476) = these are invitations to make an
offer or proposal

B. ACCEPTANCE

 May be express or implied; must be unqualified and absolute

 Must comply to the time, place, and manner of acceptance fixed by the offerer
 Contract is perfected from the time acceptance by the offeree is known by the offerer
(cognition theory). Acceptance can be withdrawn or revoked before it is made known
to the offerer.

C. OPTION CONTRACT

 A preparatory contract to a main contract

 Contract granting a privilege to buy or sell at a determined price within an agreed time
 To be binding, it must be supported by a consideration distinct from the price of the
main contract (i.e. option money)
 If the option contract is perfected but the offer is still withdrawn during the agreed
period – breach of option contract which results to liability for damages
 Option money distinguished from earnest money (EM) – EM is proof of perfection of
the main contract, EM considered as downpayment; hence, in case of breach – specific
performance is an available remedy

D. INCAPACITATED TO GIVE CONSENT (Art. 1327)

 Contracts entered into by the following results to a voidable contract

1) Minors
2) Insane or demented persons (EXC during lucid intervals)
3) Deaf-mutes who do not know how to write and read
4) Persons suffering from civil interdiction
5) Incompetents under guardianship

E. VICES OF CONSENT (Art. 1330)

 Consent given through the following results to a voidable contract

1) Mistake (Art. 1331)

 Wrong action/statement proceeding from a faulty judgment

 Requisites: (a) substantial (error on the object, conditions which principally moved
the party to enter the contract, quality, quantity, identity, qualifications); (b)
excusable; and (c) mistake of fact, not law (EXC: mutual mistake of law–Art. 1334)
 Not considered as mistake (thus contract is not voidable): (a) simple mistake of
account (Art. 1331, 3rd par); (b) if party alleging it knew the doubt, contingency,
or risk affecting the object of the contract (Art. 1332)

2) Violence (Art. 1335)

 Serious or irresistible force employed to wrest consent

 It must be the reason for entering the contract
 Contract is still voidable if employed by a third person who is not a party to the
contract

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 3) Intimidation (Art. 1335)

 Reasonable and well-grounded fear of an imminent and grave peril upon one’s
person or property, or upon the person or property of one’s spouse, descendants,
or ascendants
 It must be the reason for entering the contract
 The threatened act must be unjust or unlawful
 Contract is still voidable if employed by a third person who is not a party to the
contract
 Not considered as intimidation (thus contract is not voidable): threat to enforce
one’s legal or just claim through competent authority (Art. 1335, last par.)

4) Undue influence (Art. 1337)

 Taking improper advantage of one’s power over another’s will resulting to the
deprivation of freedom of choice by the other party
 Circumstances to consider: confidential, family, spiritual, and other relations
between the parties; mental weakness; ignorance; financial distress

5) Fraud (Art. 1338)

 Insidious words or machinations of one of the parties to induce the other party to
enter into the contract
 2 kinds: (a) dolo causante (causal fraud) – fraud as defined under Art. 1338 which
results to a voidable contract; (b) dolo incidente (incidental fraud) – deceptions or
misrepresentations which are not serious in character and without which the other
party would still have entered the contract; may result to liability for damages
 Not considered as fraud (thus contract is not voidable): dealer’s talk (Art. 1340);
expert’s opinion (Art. 1341); misrepresentation by a third person EXC: if it caused
substantial mistake on both parties (Art. 1342); misrepresentation in good faith
(Art. 1343); employed by both parties/in pari delicto (Art. 1344)

F. SIMULATED CONTRACTS

1) Absolutely simulated – fictitious contract; parties do not intend to be bound; effect =

void contract
2) Relatively simulated – disguised contract; parties conceal their real agreement; effect=
parties are bound to their real agreement EXC if a third person will be prejudiced or if
the purpose is contrary to law, morals, good customs, public order, or public policy

OBJECT OF CONTRACTS

 Things, right, services

 Requisites: within the commerce of men; transmissible; licit or not contrary to law, morals,
good customs, public order, public policy; possible or real; determinate or determinable
as to its kind
 Future things (e.g. fruits) can be the object of a contract (EXC donation).
 Future inheritance cannot be the object of a contract EXC in cases expressly authorized
by law (e.g. partition of the estate inter vivos)
 An object is determinable at the time of perfection of contract when it is possible to fix
the object without the need of a new contract between the parties

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CAUSE OF CONTRACTS

 Essential reason which moves the contracting parties to enter into the contract
 Kinds: onerous, gratuitous, remuneratory
 Requisites: existing, true, and lawful
 Different from motive - particular purpose for entering the contract; no effect on contract
 Lesion or gross inadequacy of cause – contract is still valid; EXC: if there is fraud, mistake,
or undue influence in agreeing to an inadequate cause = contract becomes voidable

FORM OF CONTRACTS

A. GR: Contracts are obligatory in whatever form they may have been entered into, provided
all the essential requisites for validity are present.

B. EXC - Requirement of form is absolute and indispensable in the following instances:

1) Contracts which require form for validity [non-compliance = void contract]

 Donation of personal property with value exceeding P5,000.00

 Donation of real property
 Donation propter nuptias
 Contract of partnership if real property is contributed as capital
 Sale of parcel of land or any interest therein by an agent
 Stipulation limiting common carrier’s liability
 Contract of antichresis
 Sale or transfer of large cattle
 Chattel mortgage

2) Contracts which require form for enforceability - see Art. 1403(2) [non-compliance =
unenforceable contract]

3) Contracts which require form for convenience – see Art. 1358 [non-compliance = still
a valid contract between the parties, but cannot bind third persons]

C. RIGHT TO COMPEL EXECUTION OF NECESSSARY FORM (Art. 1357)

 Contract should have been perfected, valid as to form, and enforceable

 Right may be exercised simultaneously with the action upon the contract.

REFORMATION OF INSTRUMENTS

 A remedy in equity
 A written instrument is made or construed so as to express or conform to the real intention
of the parties

 Requisites:
1) Meeting of minds of the parties to the contract
2) Instrument does not express the true intention of the parties
3) Due to mistake, fraud, inequitable conduct, or accident
4) Clear and convincing proof
5) Proper prescriptive period (10 years from execution of instrument)

 If mistake, fraud, inequitable conduct, or accident prevented a meeting of the minds of

the parties, the proper remedy is annulment of the contract, not reformation
 Instances when a contract may be reformed – see Arts. 1361 to 1365
 Instances when a contract cannot be reformed – see Arts. 1366 and 1367
 Who can ask for reformation – see Art. 1368

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INTERPRETATION OF CONTRACTS

1) Intention of the parties is paramount.

2) Literal meaning of the stipulations control
3) Intention prevails over words. Intention is determined through looking at the
contemporaneous and subsequent acts of the parties.
4) Written words prevail over printed words in case of conflict.
5) Interpretation which would make the contract effective shall be adopted.
6) Various stipulations provided in a contract shall be construed together.
7) Words having different significations shall be understood in the sense which is most in
keeping with the nature and object of the contract.
8) Ambiguities in a contract are interpreted against the party who caused the ambiguity.
9) Usage and custom may be used in interpreting ambiguous contracts.
10) General terms exclude those that are distinct.
11) In case doubt is not resolved by the other rules in contract interpretation:
 If a gratuitous contract – interpretation which results to the less transmission of
rights and interests shall be adopted
 If an onerous contract – doubt shall be settled in favor of the greatest reciprocity
of interests.

DEFECTIVE CONTRACTS

I. RESCISSIBLE CONTRACTS

 Contracts which have caused economic damage either to one of the parties to the contract
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.

A. DISTINGUISHED FROM ART. 1191

1) Art. 1191 – resolution; Art. 1381 – rescission

2) As to nature of remedy: Art. 1191 – principal remedy; Art. 1381 – subsidiary remedy
3) As to basis or ground: Art. 1191 – breach of faithful performance; Art. 1381 – lesion
or economic prejudice
4) As to kind of obligation: Art. 1191 – reciprocal obligations only; Art. 1381 – all kinds
of obligations arising from contracts
5) As to who can avail action: Art. 1191 – injured party of a contract; Art. 1381 – injured
party of a contract as well as a prejudiced third person
6) As to prescriptive period: Art. 1191 – 10 years from accrual of right of action for
written contracts or 6 years for oral contracts; Art. 1381 – 4 years.

B. CHARACTERISTICS

1) Valid and enforceable until rescinded by a competent court

2) Cause pecuniary lesion or prejudice to one of the contracting parties or to a third
person
3) Defect cannot be cured by ratification
4) Right of action may be lost by prescription – see Art. 1389
5) Defect cannot be attacked collaterally

C. REQUISITES

1) Must originate from any of the causes under Arts. 1381 and 1382
2) No other means to obtain reparation for the damage caused (i.e. subsidiary)
3) Object of the contract must not be in the possession of a third person who did not act
in bad faith
4) Filed within 4 years from accrual of the right of action

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 D. KINDS

1) Contracts entered by guardians on behalf of wards and the wards suffer lesion by
more than one-fourth of the value of the object

 Not rescissible if the contract was approved by the court

 Involves acts of administration only
 If act of ownership – court approval is mandatory; in its absence – void
contract

2) Contracts entered by representatives on behalf of absentees and the absentees suffer

lesion by more than one-fourth of the value of the object

 Not rescissible if the contract was approved by the court

 Involves acts of administration only
 If act of ownership – court approval is mandatory; in its absence – void
contract

3) Contracts undertaken in fraud of creditors

 Rescissory action is called accion pauliana

 Requisites: there must be a creditor who became such prior to the contract
being rescinded; an alienation was made subsequent to such credit; party
alienating must be in bad faith; there must be no other remedy
 Badges of fraud – see Oria v. McMicking
 Presumption of fraud – see Art. 1387

4) Contracts relating to things under litigation

 Entered into by the defendant without approval of the litigants or court

5) Other contracts specially declared by law to be subject to rescission (e.g. Art. 1189(4),
1203)

E. PAYMENTS MADE IN A STATE OF INSOLVENCY

 Premature payments
 The debtor is insolvent and the debt is not yet due
 Payment made can be rescinded

II. VOIDABLE CONTRACTS

 Contracts that have all the essential requisites for the perfection of contract but the
element of consent is defective either because of want of capacity of one of the parties
or because of vitiated consent

A. CHARACTERISTICS

1) Valid and binding, and produces all its civil effects until it is set aside by a final
judgment of a competent court in an action for annulment
2) Defective by reason of want of capacity or by vitiated consent
3) Defect can be cured through ratification
4) Right of action may be lost by prescription – see Art. 1391
5) Defect cannot be attacked collaterally

B. KINDS – see discussion under consent

1) Voidable contracts because of incapacity to give consent

2) Voidable contracts because of vitiated consent

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 C. WHO CAN ASK FOR ANNULMENT – see Arts. 1397, 1401

D. EFFECTS OF ANNULMENT – see Arts. 1398 to 1400, 1402

III. UNENFORCEABLE CONTRACTS

 Contracts which cannot be sued upon or enforced by court action unless ratified

A. CHARACTERISTICS

1) Valid contract but cannot be enforced by court action

2) Susceptible of ratification – see Art. 1405
3) Defect is of a permanent nature, unless ratified
4) Cannot be assailed by third persons

B. KINDS

1) Unauthorized contracts

 Contracts entered in the name of another by one who has no authority or who
has acted in excess of authority
 May be ratified by the person on whose behalf the contract was entered into
before the contract is revoked by the other contracting party
 Rule does not apply to sale of parcel of land or an interest therein by an agent
who has no written authority from the principal = void contract, not merely
unenforceable

2) Contracts which do not comply with the Statute of Frauds

 Statute of Frauds (SF)

 Requires certain classes of contracts to be in writing to be enforceable;

non-compliance makes the contract unenforceable
 Purpose: to prevent fraud
 Formality required: the agreement itself must be in writing, or there
must be some note or memorandum in writing containing the essential
elements of the agreement and it must be subscribed (signed) by the
party charged or his agent
 Applicable to purely executory contracts only (no performance yet)
 Applies if the action is for damages or specific performance
 List under Art. 1403(2) is exclusive
 Defense of SF is a personal defense and can be waived

a. Agreements not to be performed within a year

b. Special promise to answer for the debt of another
c. Agreements in consideration of marriage
d. Sale of goods, chattels, or things in action at a price not less than P500.00
e. Lease of real property for more than a year, or sale or real property or an
interest therein
f. Representation as to the credit of a third person

3) Contracts where both parties are incapacitated

 If the parent or guardian of one of the incapacitated ratifies the contract –

voidable contract, no longer unenforceable; if both – valid contract

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IV. VOID OR INEXISTENT CONTRACTS

 Contracts which are contrary to law and those which do not comply with the essential
elements of a contract

A. CHARACTERISTICS

1) Defense of illegality of contract cannot be waived or renounced

2) Imprescriptible
3) Defense of illegality is not available to third persons whose interests are not directly
affected
4) Cannot give rise to another contract
5) Generally produces no effect
6) Not susceptible of ratification
7) Generally, no need for an action to declare them void because they are inexistent from
the very beginning (EXC: an action to declare the non-existence of the contract to
recover what may have been given by virtue of that contract)

B. KINDS

1) Inexistent contracts – those that do not comply with the essential elements of a
contract

 Those which are absolutely simulated or fictitious

 Those whose cause did not exist at the time of the transaction
 Those whose object is outside the commerce of men
 Those which contemplate an impossible service
 Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained

2) Illegal contracts – those which are contrary to law

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

customs, public order, or public policy
 Those expressly prohibited or declared void by law

C. ILLEGAL AND CRIMINAL CONTRACTS

1) If both are guilty, they shall have no action against each other. Both shall be
prosecuted and the effects or instruments of the crime shall be confiscated in favor of
the government.
2) If only one is guilty or they are not of equal guilt, the guilty party shall be prosecuted.
The effects or instruments of the crime shall be confiscated in favor of the government.
The innocent party may claim what he has given, or if he has not given anything yet,
he shall not be bound to comply with his promise.

D. ILLEGAL BUT NOT CRIMINAL ACTS

 Same rules as C.1 and C.2 above, except that there shall be no confiscation of effects/
instruments

E. THE PARI DELICTO RULE – In void contracts where the nullity proceeds from the illegality
of the cause or the purpose of the contract, whether the attendant facts constitute an
offense or misdemeanor or whether the consideration involved is merely rendered illegal,
and the two parties are equally at fault, the law leaves them as they are and denies
recovery by either one of them.

 EXC: Arts. 1413 to 1419 (law gives affirmative relief and allows recovery)

Atty. Noemi P. Humilde

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