CONTRACTS
1. Consensual - that which is perfected by mere
DEFINITION, CLASSIFICATION, AND
DISTINCTIONS
DEFINITION:
A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service.
• The definition lays emphasis on the meeting of
minds between two contracting parties which
takes place when an offer by one party is
accepted by the other
Take note: A single person may create a contract by
himself where he represents distinct interests.
Examples:
• An agent who was authorized to borrow
money, may himself be the lender at the current
rate of Interest. (Art. 1890.)
• Guardians, executors, or administrators cannot
acquire by purchase property of persons under
their guardianship, or property of the estate
under their administration (Article 1491)
Contracts vs. Agreements
• Contracts are agreements enforceable through
legal proceedings/actions. Those agreements
which cannot be enforced by action in the
courts of justice or law are merely agreements.
(De Leon, 2010)
• An agreement to be a "contract" must be a
source of obligations (Article 1157).
Classifications of Contracts
According to degree of dependence:
1. Principal - that which can exist independently of
other contracts
2. Accessory - that which cannot without a valid
principal contract (e.g., contract of guaranty)
3. Preparatory - these are contracts which are a
means for the execution of another contract
(e.g., contract of agency)
According to manner of perfection:
consent (e.g., sale)
2. Real - that which is perfected not by mere
consent but by the delivery of the object of the
contract (e.g., deposit, pledge)
According to name:
1. Nominate - that which is distinguished by a
particular or special name in the Civil Code.
2. Innominate Contracts - that which is recognized
in the Civil Code, but they are not so named in
the said Code.
Rules in Innominate Contracts:
Shall be regulated by:
1. The stipulation of the parties
2. Provisions of the Obligations and
Contracts
3. By the rules governing the most
analogous nominate contracts
4. Customs of the place
According to obligations created:
1. Bilateral - that which creates obligations on both
sides or on both parties.
2. Unilateral - that which creates obligations only
on one side or only on one of the contracting
parties. (e.g., contract of commudatum)
According to form/solemnity required:
1. Common - that which does not require any form.
2. Special or solemn - that which requires certain
formalities for its validity or enforceability
Characteristics of Contracts (MORA)
1. Obligatory force of Contracts
2. Autonomy of Contracts
3. Mutuality of Contracts
4. Relativity of Contracts
1. Obligatory force of Contracts - Obligations
arising from contracts have the force of law
between the contracting parties and should be
complied with in good faith
Requisites:
A. Contract must be perfected
B. Contract must be valid
C. Contract must be enforceable
2. Autonomy of Contracts - The parties may
establish such stipulations, clauses, terms, and
conditions as they may deem convenient,
provided, they are not contrary to law, morals,
good customs, public order, and public policy
(Art. 1306.);
Examples of Void Stipulations
• The reason alleged by the plaintiff as a basis for
the loan is untenable, to wit, that the defendant
was obliged to render service in his house as a
servant without remuneration whatever and to
remain therein so long as she had not paid he
debt, inasmuch as this condition is contrary to
law and morality. Domestic services are always
to be remunerated, and no agreement may
subsist in law in which it is stipulated that any
domestic service shall be absolutely gratuitous,
unless it be admitted that slavery may be
established in this country through a covenant
entered into between the interested parties. (De
los Reyes v. Alojado 16 Phil. 499)
• Sweet Lines, Inc. vs. Bernardo Teves (G.R. No. L-
37750. May 19, 1978)
CONDITION NO. 14: "It is hereby agreed and
understood that any and all actions arising out of
the conditions and provisions of this ticket,
irrespective of where it is issued, shall be filed in
the competent courts in the City of Cebu."
RULING: Condition No. 14 is subversive of public
policy on transfers of venue of actions. For,
although venue may be changed or transferred
from one province to another by agreement of
the parties in writing, such an agreement will not
be held valid where it practically negates the
action of the claimants, such as the private
respondents herein. The philosophy underlying
the provision on transfer of venue of actions is
the convenience of the plaintiffs as well as his
witnesses and to promote the ends of justice.
Considering the expense and trouble a
passenger residing outside of Cebu City would
incur to prosecute a claim in the City of Cebu, he
would most probably decide not to file the
action at all. The condition will thus defeat.
instead of enhance, the ends of justice.
• A student who had finished 3 ½ semesters in the
College of Law of the Arellano University
transferred to another law school for his last
semester. For the 3 ½ semesters he stayed at the
Arellano University, he enjoyed a scholarship:
hence, was not required to pay fees. When he
sought transfer and his transcript of grades, he
was asked to reimburse all the scholarship
funds since, the agreement precisely provided
for a refund in case of transfer.
The proviso is void, and contravenes both
morals and public policy. Scholarships should
not be propaganda matter they are awards for
merit. Hence, the student need not reimburse.
(Cui vs. Arellano University, 2 SCRA 205)
3. Mutuality of Contracts - The principle of
mutuality of contracts is found in Article 1308 of
the New Civil Code, which states that contracts
must bind both contracting parties, and its
validity or compliance cannot be left to the will
of one of them. The binding effect of any
agreement between parties to a contract is
premised on two settled principles: (1) that any
obligation arising from contract has the force of
law between the parties; and (2) that there must
be mutuality between the parties based on their
essential equality. As such, any contract which
appears to be heavily weighted in favor of one
of the parties so as to lead to an unconscionable
result is void.
“…any stipulation regarding the validity or
compliance of the contract that is potestative or
is left solely to the will of one of the parties is
invalid. This holds true not only as to the original
terms of the contract but also to its
modifications. Consequently, any change in a
contract must be made with the consent of the
contracting parties, and must be mutually
agreed upon. Otherwise, it has no binding
effect." (Security Bank vs. Spouses Mercardo;
G.R. No. 192934, June 27, 2018)
Security Bank vs. Spouses Mercardo; G.R. No. 192934,
June 27, 2018
FACTS: Security Bank granted spouses Mercado a
revolving credit line in the amount of PI.000,000.00. The
terms and conditions of the revolving credit line
agreement included the following stipulations:
• "I hereby agree to pay Security Bank Corporation
(SBC) interest on outstanding availments based
on annual rate computed and billed monthly by
SBC on the basis of its prevailing monthly rate."
• "I hereby give my continuing consent without
need of additional confirmation to the interests
stipulated as computed by SBC."
1. First, the authority to change the interest rate
was given to Security Bank alone as the lender.
without need of the written assent of the
spouses Mercado. This unbridled discretion
given to Security Bank is evidenced by the clause
"I hereby give my continuing consent without
need of additional confirmation to the interests
stipulated as computed by Security Bank."
2. Second, the interest rate to be imposed is
determined solely by Security Bank for lack of a
stated, valid reference rate. The reference rate
of "Security Bank's prevailing lending rate" is not
pegged on a market-based reference rate as
required by the BSP
Contract of Adhesion
• DA contract of adhesion is defined as one in
which one of the parties imposes a ready-made
form of contract, which the other party may
accept or reject, but which the latter cannot
modify.
• One party prepares the stipulation in the
contract, while the other party merely affixes
his signature or his "adhesion" thereto, giving
no room for negotiation and depriving the latter
of the opportunity to bargain on equal footing.
(Norton Resources and Development
Corporation vs. All Asia Bank; G.R. No. 162523:
November 25, 2009)
Reminders in Contract of Adhesion:
• Contracts of adhesion are not invalid per se.
They are not entirely prohibited. The one who
adheres to the contract is, in reality, free to
reject it entirely; if he adheres, he gives his
consent. (Norton Resources and Development
Corporation vs. All Asia Bank; G.R. No. 162523;
November 25, 2009)
• Ambiguities in contracts of adhesion must be
interpreted against the party that prepared
these contracts. (Geraldez vs. Court of Appeals
230 SCRA 320; 1994)
DETERMINATION OF A THIRD PARTY
• The determination of the performance may be
left to a third person, whose decision shall not be
binding until it has been made known to both
contracting parties.
• The decision, however, of the third person shall
bind the parties only after it has been made
known to both of them.
• The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts
shall decide what is equitable under the
circumstances.
Example:
• Dabby sold his parcel of land to Bounce. It was
agreed that Geline, a real estate appraiser,
would be the one to determine the reasonable
price of the land. Geline, then, fixed the price
after considering all the circumstances and
factors affecting the value of the land.
• In this case, Geline must make known his
decision to Dabby and Bounce who will be bound
by the same.
4. Relativity of Contracts
Contracts take effect only between the parties, their
assigns and heirs. This means that only the parties, their
assigns and heirs can have rights and obligations under
a contract.
res inter alios acta aliis neque nocet prodes
"a thing done between others does not harm or
benefit others"
"a matter between others is not our business"
EXAMPLE:
Dabby is indebted to Bounce in the amount of PI
Million. Dabby and Bounce are the parties to the
contract.
If Bounce dies, Dabby must pay the heirs of
Bounce. If Bounce assigns his credit to Camille, then
Dabby is liable to pay Camille.
If Dabby dies and Ron is the heir, then Ron
assumes the obligation of Dabby to Bounce. (see Arts.
776, 781.) Ron is bound by the contract entered into by
Dabby, his predecessor-in-interest, in view of the privity
of interest between him and Dabby
BUT Ron is not liable beyond the value of the property
he inherits from Dabby, the decedent. (Art. 1311. par.
1.)
EXCEPTIONS TO TRANSMISSIBILITY OF
RIGHTS/OBLIGATIONS:
(a) by their nature (like a contract requiring or
involving personal qualifications, as painting,
singing, etc.)
(b) by stipulation in accordance with the principle of
freedom to contract): or
(c) by provision of law (as in agency, partnership,
and commodatum, when death extinguishes the
legal relationships)
EXCEPTIONS TO THE PRINCIPLE OF RELATIVITY OF
CONTRACTS
1. Stipulation pour autrui
2. Contracts creating real right
3. Creditors are protected in cases of contracts
intended to defraud them
4. Any third person who induces another to violate
his contract
5. Accion Directa
1. Stipulation pour autrui
• It is a stipulation in favor of a third person
conferring a clear and deliberate favor upon him,
and which stipulation is merely part of a contract
entered into by the parties, neither of whom
acted as agent of the third person.
• Such a stipulation is binding on said third person,
although he may not be a signatory to the
contract. (Northern Motors, Inc. v. Prince Line, et
al., L-13884, Feb. 29, 1960).]
Examples:
• An agreement was entered into by Banco de Oro
(bank) and Isetann Mall whereby Isetann Mall
shall honor validly issued the BDO's credit cards
presented by their corresponding holders (third
persons) in the purchase of goods and/ or
services supplied by Isetann Mall.
• The Manila Yellow Taxicab Co. obtained a
common carrier accident insurance policy from
the Fieldmen's Insurance Co. Under the terms of
the policy, the Insurance agreed to indemnify
any fare-paying passenger (third person),
including the authorized driver, driving the taxi
at the time of the accident. In the event of death,
the personal representatives would be given the
indemnity. (Melecio Coquia, et al. v. Fieldmen's
Ins. Co., Inc. L-23276, Nov. 29, 1968)
2. Contracts creating real right
*Real right or right in rem (jus in re) is a right in
property, and is enforceable against the whole word.
EFFECT: Third persons who come into possession of
the object of a contract over which there is a real right,
such as a real estate mortgage, are bound thereby even
if they were not parties to the contract. A real right is
binding against the whole world and attaches to the
property over which it is exercised wherever it goes.
3. Creditors are protected in cases of contracts
intended to defraud them.
• If Dabby gratuitously gives Ron a parcel
of land, and Dabby has no other
property or cash left to satisfy his
creditors, said creditors may ask for the
rescission of the contract, to the extent
that they have been prejudiced.
Remedies of Creditors
1. exact payment or ask for specific performance
2. exhaust debtor's properties, generally by
attachment (except properties exempted by the
law). (See Art. 2236, Civil Code)
3. accion subrogatoria (subrogatory action) - i.e.,
exercise all rights and actions except those
inherent in the person (like parental authority,
 right to revoke donations on ground of
ingratitude, hold office, carry out an agency).
4. accion pauliana (impugn or rescind acts or
contracts done by the debtor to defraud the
creditors)

4. TORT INTERFERENCE

• Any third person who induces another

to violate his contract shall be liable for
damages to the other contracting party.

Example:

Super Tekla, a movie actress, has a one-year exclusive

contract with GMA-7. If an official of TV-5 a induces her,
without any justifiable cause, to break the contract, then
GMA-7 can sue the official for damages.

Elements of Tort Interference

(1) existence of a valid contract

(2) knowledge on the part of the third person of the
existence of contract
(3) interference of the third person is without legal
justification or excuse.

5. Accion Directa

If the sub-lessee misuses the property, the lessor

may directly bring an action against him
notwithstanding the fact that the sub-lessee is not a
party to the lease contract. BUT the sub-lessee cannot
sue the lessor directly, the suing of the lessor must be
done by the lessee.
Stages of Contracts
A contract undergoes three distinct stages:
1. Negotiation/Preparation - Involves all the steps
taken by the prospective parties from the time
they manifest interest in entering into a contract,
leading to the perfection of the contract. At this
stage, the parties have not yet arrived at any
definite agreement.
2. Perfection - the parties have come to a definite
agreement or meeting of the minds regarding
the terms and cause of the (consensual)
contract.
3. Consummation - the parties have fulfilled or
performed their respective obligations or
undertakings under the contract and the
contract may be said to have been fully
accomplished or executed, resulting in the
extinguishment thereof.
Perfection of Contracts:
1. Consensual Contracts - As a general rule,
contracts are perfected by mere consent of the
parties regarding the subject matter and the
cause of the contract. They are obligatory in
whatever form they may have been entered into
provided, all the essential requisites for their
validity are present.
2. Real Contracts - Real contracts which are
perfected not merely by consent but by the
delivery, actual or constructive, of the object of
the obligation like in a pledge, mutuum (simple
loan) or commodatum.
3. Formal or Solemn Contracts - a special form is
required or perfection (Example: A simple
donation inter vivos of real property, to be valid
and perfected, must be in a public instrument.)
* A perfected loan contract is binding upon the parties
and can give rise to an action for damages, but said
contract does not constitute the real contract of loan
which requires the delivery of the object of the contract
for its perfection (see Art. 1934.) and which gives rise to
obligations only on the part of the borrower. (BPI
Investment Corp. vs. Court of Appeals, 377 SCRA I17
[2002].
EFFECTS OF A PERFECTED CONTRACT
The parties are bound to the contract and;
(1) to the fulfillment of what has been expressly
stipulated but also,
(2) to all the consequences which according to their
nature, may be in keeping with good faith, usage,
and law.
REQUISITES/ELEMENTS OF CONTRACTS
1. Essential Elements - refers to the elements
necessary for the very existence of contracts
2. Natural Elements - these elements are not
essential for the existence of a contract but they
are presumed to exist in certain contracts unless
there is a stipulation to the contrary (e.g.,
warranty in case of eviction in contract of sale)
3. Accidental Elements - these elements exist only
because the parties provide for them. (1306)
ESSENTIAL ELEMENTS
There is no contract unless the following requisites
concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
FIRST ELEMENT: CONSENT
Consent is the conformity of wills and with respect to
contracts, it is the agreement of the will of one
contracting party with that of another or others, upon
the object and terms of the contract.
* It is the meeting of minds, i.e., the concurrence of offer
and acceptance between the parties which expresses
their intent in entering into the contract respecting the
subject matter and the cause or consideration thereof.
HOW IS CONSENT MANIFESTED?
Consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract.
 REQUISITES OF CONSENT
1. There must be two or more parties
2. The parties must be capable or capacitated
(hence, if one party be insane, the contract is
merely voidable).
3. There must be no vitiation of consent.
What is an offer?
Offer is a proposal made by one party (offerer) to
another to enter into a contract. It is more than an
expression of desire or hope. It is really a promise to act
or to refrain from acting on condition that the terms
thereof are accepted by the person (offeree) to whom it
is made. (De Leon,)
Requisites of a valid/effective offer:
1. The offeror must have serious intention to be
bound by his offer;
2. The terms of the offer must be certain, definite
and complete;
Meaning of "certain, definite, and complete"
A contract can come into existence by the mere
acceptance of the offer without any further act
on the part of the offeror.
3. The offer must be communicated to the offeree.
Examples of a valid/effective offer:
• Will you buy this TV set for P25,000?
• I am willing to sell my house for P20,000,000.00
cash or for 12 monthly installments.
Examples of cases which are not considered offers under
the law:
1. Advertisement of things for sale - these are
merely invitations to make an offer (unless
expressly and clearly stated that it is an offer)
2. Advertisement for bidders
3. Auction sales
Termination of offer:
1. By the offeror - the offeror may revoke or
withdraw the offer prior to acceptance by the
offeree
2. By the offeree - by rejection of the offeree. One
form of rejection is by making a counter-offer,
which means simultaneously rejecting the
original offer and making of a new offer
3. By operation of law
• Lapse of time (when a time is stated and
no acceptance was made)
• Death, civil interdiction, insolvency of
either party
• Supervening illegality of the contract
• Destruction of the subject matter
COUNTER-OFFER:
• Where the changes or qualifications in the offer
are not material or are mere clarifications of
what the parties had previously agreed upon
(e.g., insertion of "per annum" after the word
"interest") cannot be categorized as major
alterations of the offer that will prevent a
meeting of the minds between the parties. (see
Villonco Realty Co. vs. Bormacheco, Inc., 65 SCRA
350 [1975].)
Acceptance of the offer:
"Acceptance" is the manifestation by the offeree of his
assent to the terms of the offer.
• The acceptance of an offer must be absolute,
unconditional or unqualified that is, it must be
identical in all respects with that of the offer so
as to produce the consent or meeting of the
minds necessary to perfect a contract.
EXAMPLE: Tekla offered to sell his Jaguar car to Willy for
"Php 10Million in cash" should Willy indicate his
acceptance on or before Christmas Day of 2020,
otherwise Tekla would sell the same to others.
Willy sent a reply stating that: "Dear Tekla, I am very
much Interested to buy and acquire your car in the same
price, manner, conditions and considerations other
buyers will offer."
THERE IS NO ACCEPTANCE OF THE OFFER.
How to Accept the Offer?
1. Form of Acceptance: either express or implied,
may be my words, acts, or conducts of a party
recognizing the existence of a contract
2. Acceptance through an agent: If offer was made
through an agent, communication of acceptance
through the agent is valid. This means that when
the offer was made through a channel or agency,
 it is implied that acceptance through the channel
or agency is valid, unless otherwise stated.
When Acceptance Binds the Offeror:
• Contract is perfected only from the time an
acceptance is made known to the offeror.
(COGNITION THEORY)
• If acceptance is transmitted by letter or
telegram, the contract is perfected not from the
time the letter or telegram is sent but from the
time of the offeror's knowledge, actual or
constructive, of the acceptance.
• CONSTRUCTIVE KNOWLEDGE: as when the
letter of acceptance has been received in the
house of the offeror by a person possessed of
reasonable discernment
EXAMPLE:
Dabby offers to construct the building of Carlo
for P5,000,000.00 giving Carlo one (1) month within
which to make up his mind. Under Article 1324, Dabby
may withdraw the offer even before the lapse of one-
month unless Carlo has already accepted the offer. After
acceptance, withdrawal is not possible as there is no
more offer to withdraw. Even before acceptance, Dabby
may not withdraw the offer if the option is covered by
a consideration as when Carlo paid or promised to pay
P500,000 to Dabby for giving him the 1-month period.
There is here an option contract. After the 1 month-day
period, in the absence of acceptance, the offer becomes
ineffective.
Rule in Option Contract:

• An option contract needs to be supported by a

DECIDED CASE: (Laudico v.Arias 43 Phil. 270) separate consideration. The consideration need
not be monetary but could consist of other
FACTS: On Feb. 5, 1919, Arias wrote Laudico a letter, things or undertakings. However, if the
offering a lease contract. On Mar. 6, 1919. Laudico wrote consideration is not monetary, these must be
a letter of complete acceptance, which was received by things or undertakings of value, in view of the
Arias that same afternoon. But that same morning Arias onerous nature of the contract of option.
had already written Laudico a letter withdrawing the Furthermore, when a consideration for an option
offer. contract is not monetary, said consideration
There is no perfected contract, because prior to receipt must be clearly specified as such in the option
of the letter of acceptance, the offer had already been contract or clause. (Bible Baptist Church vs.
withdrawn. It does not matter that the letter of Court of Appeals, 2004)
withdrawal may have been received later by the offeree EARNEST MONEY vs. OPTION MONEY
than receipt of the letter of acceptance by the offerer.
What is important is that the letter of withdrawal was EARNEST MONEY OPTION MONEY
MADE prior to the knowledge of acceptance. 1. Part of the 1. Consideration for
purchase price the option
contract
"OPTION" CONTRACT 2. Earnest money is 2. Option money
given when there applies to a sale that
An option is a preparatory contract in which one
is already a sale is not yet perfected.
party grants to the other, for a fixed period and under
specified conditions, the power to decide whether or 3. When earnest 3. When option
not to enter into a principal contract. It binds the party money is given, money is given, the
who has given the option, not to enter into the principal the buyer is would-be buyer
contract with any other person during the period bound to pay the
designated, and, within that period, to enter into such balance.
contract with the one to whom the option was granted,
if the latter should decide to use the option. It is a
Essential Element of Consent: "Capacity to Give
separate agreement distinct from the contract which
Consent"
the parties may enter into upon the consummation of
the option. Rule: The parties to a contract must have the legal
capacity to give consent because the legal capacity of the
parties is an essential element for the existence of the *Lucid interval: period in which the insane person is
contract. restored to the use of his reason

Effect of "incapacity" *Monomania (excessive obsession on one thing) is not

considered insanity that will annul the contract
• If only one party has incapacity: voidable
(Standard Oil Company vs. Arenas, 19 Phil. 363)
• If both parties are incapacitated: unenforceable

Persons who are incapable of giving consent: (MISPC)

Civil Interdiction, Old Age and Illiteracy:
1. Minors
2. Insane or Demented Persons Civil Interdiction is an accessory penalty imposed upon
3. State of being deaf-mute (who does not know an accused who is imposed with a principal penalty not
how to write) lower than reclusion temporal (12 years and I day to 20
4. Persons suffering from civil interdiction years).
5. Incompetents under guardianship
Effects of Civil Interdiction:
Effect of Minority:
1. Parental Authority
Minority - state of a person who is under the age of legal 2. Marital Authority
majority (below 18) 3. Management of Property
4. Disposition of Property by any act inter vivos
CONTRACT: voidable

• Minor can annul the contract within four (4)

years from his attainment of the age of majority.
If not, barred already.
SECOND ELEMENT: “Object" of Contracts
• He may ratify the contract - upon reaching the
age of majority The object of every contract is the obligation
created. It may be said that the object of a contract is a
MISREPRESENTATION BY THE MINOR
thing or a service.
Active Misrepresentation: where the minor who
• The object may be things (as in sale of property),
entered into the contract have already passed the age of
rights (as in assignment of credit), or services (as
puberty and adolescence in such a way that they could
in agency).
misrepresent and actually did misrepresent themselves
as having reached the age of majority, they cannot annul Requisites of a Valid Object
the contract on the ground of minority inasmuch as they
(a) the thing or service must be within the
are already in estoppel. (Mercado vs. Espiritu 37 Phil.
commerce of man;
215)
(b) must be transmissible;
Insanity: (c) must not be contrary to law, morals, good
customs, public order, or public policy;
Insanity is a manifestation, in language or conduct, of
(d) must not be impossible (Art 1348, Civil Code);
disease or defect of the brain, or a more or less
(e) must be determinate as to its kind or
permanently diseased or disordered condition of the
determinable without the need of a new
mentality, functional or organic, and characterized by
contract or agreement.
perversion, inhibition, or disordered function of the
sensory or of the intellective faculties, or by impaired or "within the commerce of man"
disordered volition. (Engle vs. Doe, 47 Phil. 760)
• Things of public ownership such as sidewalks,
Effects of Insanity: public places, bridges, streets, etc., things that
are common to everybody such as air sunlight,
Contract is voidable except contracts entered into during
rain, etc. cannot be the object of contracts.
lucid interval.
"must be transmissible" Effect of a contract upon future inheritance

• All rights which are not intransmissible may be • A contract concerning future inheritance is void
the object of contracts. But strictly political rights and consequently, cannot be the source of any
(like the right to vote) or strictly personal rights right nor the creator of any obligation between
(like parental authority) cannot be the subject of the parties.
a contract.
THIRD ELEMENT: “Cause” of Contracts
"must be possible"
• Cause (or Consideration) is the “why f the
• Prohibited drugs and all illicit objects; to kill a contract, the essential reason which moves the
person, etc. (illicit things or services are also contracting parties to enter into the contract.
outside the commerce of men.); to get soil from • Cause is the essential reason which moves the
planet Mars; to construct a building in one day; contracting parties to enter into it. In other
etc. (De Leon) words, the cause is the immediate, direct and
proximate reason which justifies the creation of
“must be determinate or determinable"
an obligation through the will of the contracting
• The object must be determinate or determinable parties. (Uy vs. Court of Appeals, G.R. No. 120465
(without need of a new agreement). September 9, 1999)
• If the object is not determinate or determinable,
EXAMPLE: I bought a gun from a store for P50,000. The
the contract is void for want of an essential
cause of the contract is the gun (for the buyer) and the
requisite - the object of the contract.
money (for the seller).
Examples:
Cause vs. Motive
• Dabby sold to Albert the future (2021) harvest in
• The party's motives for entering into the contract
Dabby's field for a definite price, the contract is
do not affect the contract. However, when the
valid for there is no need of a new agreement.
motive predetermines the cause, the motive
• Dabby agreed to deliver one of his dogs to Jan. may be regarded as the cause.
Here, the object is determinable without the
• So, when the motive was not realized, it may
need of a new contract between the parties. It
negate the existence of a cause which will make
becomes determinate the moment it is
the contract "inexistent" (Uy vs. Court of
delivered.
Appeals, G.R. No 120465 September 9, 1999)

Example:
Contract upon future inheritance
• Future inheritance is any property or right, not in
existence or capable of determination at the
time of the contract, that a person may inherit in
the future. (Blas vs Santos, I SCRA 899 [1961].)
Requisites
• The succession has not yet been opened at the
time of the contract;
• The object of the contract forms part of the
inheritance; and
• The promissor has, with respect to the object, an
expectancy of a right which is purely hereditary
in nature.
• In a contract of sale of a piece of land, the cause
of the vendor in entering into the contract is to
obtain the price. For the vendee, NHA, it is the
acquisition of the land. The motive of the NHA,
on the other hand, is to use said lands for
housing.
But the DENR declared the lands not
suitable for housing projects.
• So, the motive of NHA was not realized. Hence,
it negates the existence of a cause which will
make the contract "inexistent" (Uy vs. Court of
Appeals. G.R. No. 120465 September 9, 1999)

XPN: Partition
Requisites of cause:
(1) It must exist at the time the contract is entered
into
(2) It must be lawful
(3) It must be true or real.
Rules as to cause:
• If there is no cause whatsoever, the contract is
VOID. Thus, a fictitious sale is VOID.
Example: A contract of sale is null and void for
being without cause where the purchase price,
(which appears thereon as paid) has in fact never
been paid by the buyer to the seller
• If the cause is unlawful, the transaction is null
and void.
Example: A promise of marriage based on sexual
intercourse is based on an illegal cause. (Batarra
v. Marcos, 7 Phil. 156).
• Lesion or inadequacy of cause shall not
invalidate a contract, unless there has been
fraud, mistake or undue influence.
Example: Dabby sold to Robert for P700.00 a
parcel of land with an area of over 18 hectares
and an assessed value of over P4,310.00. At the
time of the execution of the deed of sale, Dabby
was already 100 years old and very weak. As a
matter of fact, he could not talk when his
thumbmark was affixed to the said deed.
FORMS OF CONTRACTS
General Rule: Contracts shall be obligatory, in whatever
form they may have been entered into, provided all the
essential requisites for their validity are present. It is
enough that there be consent subject matter, and cause.
This rule applies, however, to CONSENSUAL CONTRACTS
• FORMAL CONTRACTS (SOLEMN CONTRACTS)
require a certain specified form, in addition to
consent, subject matter and cause. (Example: A
donation of real property must be in a public
instrument in order to be valid. even as between
the parties.)
• REAL CONTRACTS require DELIVERY to be valid
as a real contract even as between the parties, in
addition to consent subject matter, and cause.
EXCEPTIONS: The form, however, is required in the
following cases:
• FOR VALIDITY - when the law requires that a
contract be in some form to be valid
• TO BE ENFORCEABLE - when the law requires
that a contract be in some form to be
enforceable or proved in a certain way
• FOR CONVENIENCE - when the law requires that
a contract be in some form for the convenience
of the parties or for the purpose of affecting third
persons.
FOR VALIDITY
Examples:
1. Donation of real property. - It must be in a public
instrument (both donation and acceptance)
2. Donation of personal property the value of which
exceeds P5,000.00. - The donation and
acceptance must be in writing
3. Contract of partnership. - If immovables are
contributed, it must be in a public instrument to
which shall be attached a signed inventory of the
immovable property contributed
4. Sale of land through an agent - The authority of
the agent must be in writing: otherwise, the sale
is void.
FOR ENFORCEABILITY: certain agreements are required
to be in writing so that they be enforced (Statute of
Frauds)
Reason for the Statute of Frauds:
"Since memory is many times unreliable, oral
agreements may sometimes result in injustice. To aid
human memory, to prevent the commission of
injustices due to faulty memory, to discourage
intentional misrepresentations, are the principal aims of
the Statute of Frauds."
Cases Covered by Statute of Frauds:
1. "An Agreement that by its terms is not to be
performed within a year from the making
thereof."
Example: Dabby and Robert, neighbors, orally
agreed that Dabby would sell and Robert would
buy Dobby's car for P2Million three years from
the date of the agreement. At the end of three
years. Dabby refused to hand over the car
 although Robert was willing to pay. Is the
agreement enforceable under the Statute of
Frauds? NO.
2. "A special promise to answer for the debt,
default, or miscarriage of another"
Example: Dabby borrowed money from Robert,
with Cynthia as guarantor. The contract of
guaranty between Robert, the creditor, and
Cynthia, the guarantor, must be in writing to be
enforceable.
3. An agreement made in consideration of
marriage other than a mutual promise to marry."
Example: Dabby agrees to build a house worth
P500,000.00 for Shiela if Shiela will marry Dabby.
This must appear in writing to be enforceable
unless Dabby ratifies the agreement. The Statute
applies even when the promise to build the
house is made by a third person to Sheila.
4. "An agreement for the sale of goods, chattels, or
things in action, at a price not less than five
hundred pesos unless there is partial
performance delivery or payment"
Example: Dabby and Robert mutually promised
to buy and sell a cellphone at a price of
P4,000.00. This contract must be in writing to be
enforceable against either party unless there is
delivery or partial or full payment, in which case,
it is taken out of the operation of the Statute of
Frauds and the contract may be enforced even if
it was made orally.
5. "Agreement for leasing for a longer period than
one year"
Example: Robert agreed to lease his house to
Edna for two (2) years. Again, this agreement
must appear in writing to be enforceable unless
it is partially executed.
• Article 1956, Civil Code. No interest shall be due
unless it has been expressly stipulated in writing.
• NOTE: These statutes are applicable only to
executory contracts, not to partially or totally
executed or performed contracts.
FOR CONVENIENCE:
Formal requirements are, therefore, for the benefit of
third parties for the purpose of informing as well as
binding them. Non-compliance therewith does not
adversely affect the validity of the contract nor the
contractual rights and obligations of the parties
thereunder.
REFORMATION OF INSTRUMENTS
Reformation Defined.
• Reformation is that remedy by means of which a
written instrument is amended or rectified so as
to express or conform to the real agreement or
intention of the parties when by reason of
mistake, fraud, inequitable conduct, or
accident, the instrument fails to express such
agreement or intention. (Rosello-Bentir v.
Leanda, G.R. No. 128991. April 12. 2000)
Requisites of Reformation (National Irrigation
Administration vs. Gamit: G.R. No. 85869; November 6,
1992)
(1) There is a meeting of the minds of the parties to
the contract;
(2) The written instrument does not express the
true agreement or intention of the parties;
(3) The failure to express the true intention is due to
mistake, fraud, inequitable conduct, or
accident;
“…Reformation of an instrument may be allowed if
subsequent and contemporaneous acts of the parties
show that their true intention was not accurately
reflected in the written instrument.” (Justice Leonen;
Makati Tuscany vs. Multi-Reality Development
Corporation, Inc.: G.R. No. 185530: 18 April 2018)
Example of Reformation
Dabby sold to Robert orally a house at "16 San Isidro,
Malate." In the written public document, both forgot the
true number of the house and instead wrote on the
contract "No. 18 San Isidro, Malate".
Reformation is not allowed in:
• Simple donations inter vivos wherein no
condition is imposed;
• Wills;
• When the real agreement is void;
• When one of the parties has brought an action
to enforce the instrument, he cannot
subsequently ask for its reformation.
• In donation, the act is essentially gratuitous and
the done has, therefore, no just cause for
complaint.
• If the real agreement is void, there is nothing to
reform. Reformation would be useless because
the real agreement being void, it is
unenforceable.
• When a party brings an action to enforce the
contract, he admits its validity and that it
expresses the true intention of the parties.
INTERPRETATION OF CONTRACTS
• Interpretation of a contract is the determination
of the meaning of the terms or words used by the
parties in their contract. It is a method by which
the meaning of language is ascertained.
• Rule 1. If the terms of a contract are clear and
leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
• Rule 2: If the words appear to be contrary to the
evident intention of the parties, the intention
shall prevail over the words of the contract.
• In order to judge the intention of the contracting
parties, their contemporaneous and
subsequent acts shall be principally considered.
Example:
Carlo and Harold entered into a so-called
contract of lease, whereby Carlo would pay certain
regular amounts as "rentals" and at the end of the
"lease," Carlo would become the absolute owner of the
property, Is this really a lease or a sale in installments?
Although in the contract, the usual words 'lease, lessee,
and 'lessor' were employed, that is not obstacle to
holding, as the court hereby holds, that said contract
was a sale on installments, for such was the evident
intention of the parties in entering into said contract.
(Abella v. Gonzaga 56 Phil. 132)
Complementary-Contracts-Construed-Together Doctrine:
The provisions of an accessory contract must be
read in its entirety and together with the principal
contract between the parties. The provisions must be
construed together to arrive at their true meaning.
Certain stipulations cannot be segregated and then made
to control. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken
jointly.
"...finds support in the principle that the surety
contract is merely an accessory contract and must be
interpreted with its principal contract, which ... was the
loan agreement."
Other Rules in Contract Interpretation:
Rule 1: If there is an ambiguity in contracts of adhesion,
the ambiguity should be interpreted against the party
who prepared it.
Rule 2. If there are obscure words or stipulations in a
contract, interpret the obscure words against the party
who prepared the contract.
Rule 3: The usage and custom of the place shall be borne
in mind in the interpretation of contracts.
DEFECTIVE CONTRACTS
1. Rescissible contracts - they are valid because all
the essential requisites of a contract exist but by
reason of injury or damage to one of the parties
or to third persons, such as creditors, the
contract may be rescinded.
2. Voidable contracts - In a voidable contract, the
defect is caused by vice of consent
3. Unenforceable contracts - cannot be sued upon
or enforced, unless it is ratified.
4. Void Contracts - is one that has no effect at all: it
cannot be ratified or validated.

Rescissible contracts are those validly agreed upon
because all the essential elements exist and, therefore,
legally effective, but in the cases established by law, the
remedy of rescission is granted in the interest of equity
• Rescission is a remedy granted by law both to
contracting parties and to third persons in order
to secure reparation of damages caused them
by a contract, even if the contract be valid, by
means of the restoration of things to their
condition prior to the celebration of said
contract.
RESCISSIBLE CONTRACTS UNDER 1381:
1. Those which are entered into by the guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of
the things which are the object thereof.
• Example: Dabby is the guardian of Robert (ward).
Dabby sells the property of Robert worth
P20,000.00 for only P2,000.00.
*If with court approval, the contract is valid regardless
of lesion.
2. Those agreed upon in representation of
absentees whenever the they whom they
represent suffer lesion by more than one-fourth
of the value of the things which are the object
thereof.
XPN: *If with court approval, the contract is valid
regardless of lesion.
• An absentee is a person who disappears from his
domicile, his whereabouts being unknown, and
without leaving an agent to administer his
property. A court may appoint a person to
represent him specifying his powers and
obligations in accordance with the rules
concerning guardians.
3. Those undertaken in fraud of creditors, when
the latter cannot in any other manner collect
claims due them ("Accion Pauliana")
1) There must be a creditor who became such
PRIOR to the contract sought to be rescinded
2) There must be an alienation made subsequent to
such credit.
3) The party alienating must be in BAD FAITH
4) There must be no other remedy for the
prejudiced creditor – “inability to collect the
claims due them.”
PRESCRIPTIVE PERIOD: must be commenced within 4
years
• Ward: from the termination of the ward's
incapacity
• Absentee: from the time his domicile is known
• Creditor: discovery that he has no other legal
remedy to pursue his claims against the debtor
Other Rescissible Contract
• When the right of first refusal is violated
• Right of first refusal:
"...It is a settled principle in civil law that when a lease
contract contains a right of first refusal, the lessor is
under a legal duty to the lessee not to sell to anybody at
any price until after he has made an offer to sell to the
latter at a certain price and the lessee has failed to accept
it. The lessee has a right that the lessor's first offer shall
be in his favor."
Rescission (Resolution) under 1191:
• The right of rescission or more accurately,
resolution, of a party to an obligation under
Article 1191 is predicated on a breach of faith by
the other party that violates the reciprocity
between them. (Uy vs. Court of Appeals. GR. No.
120465 September 9, 1999)
• This Article in speaking of "reciprocal ones"
refers only to reciprocal obligations, that is, to
obligations where two parties are reciprocally
obliged to do or give something. It is not enough
that both parties are indebted to each other. The
cause must be IDENTICAL and the obligations
should arise simultaneously. (Paras, 2008)
FOR EXAMPLE: In a contract of sale of car, the delivery of
the car sold by the seller is conditioned upon the
simultaneous payment of the purchase price by the
buyer, and vice versa.
• The seller is the creditor as to the price and
debtor as to the car, while the buyer is the
creditor as to the car and debtor as to the price.
EXAMPLE: Dabby borrowed P10,000.00 from Neptali
under a contract of loan. Dabby, on the other hand, is
the owner of a place where Neptali deposits (for
safekeeping) his car. Neptali owes Dabby P5,000.00 for
deposit fees.
• There is no reciprocal obligation. Although they
are mutually bound, the cause does not arise
from the same contract. One is the contract of
loan; the other is the contract of deposit. The
payment of P10, 000. 00 as a loan does not
depend on the payment of P5,000.00 as deposit
fees.
Alternative Remedies under Article 1191:
• the "injured party” has the right to choose
between rescission or fulfillment of the
obligation, with the right to claim damages in
either case.
• But if the injured party has chosen specific
performance, he may ask for rescission if
specific performance becomes impossible.
• If the injured party asked for rescission, he
cannot thereafter ask for specific performance.
RULE: "...this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment
that the other has co mitted a breach of the obligation.
Where there is nothing in the contract empowering [a
party] to rescind it without resort to the courts, (such
party's] action in unilaterally terminating the contract x x
x is unjustified..." (Ong vs. Bognalbal, G.R No. 149140,
September 12, 2006)
XPN: "...Where there is a provision in the contract
empowering a party to rescind it without resort to the
courts, judicial permission to cancel is no longer
necessary." (Subic Bay Metropolitan Authority v.
Universal International Group of Taiwan: GR No. 131680.
September 14. 2000).
Limitations on the right to ask for rescission:
1. Rescission cannot be permitted for slight or
casual breach
2. Rescission cannot be demanded by an injured
party who is not in a position to return what he
had received
3. Rescission cannot be granted when the object of
the contract is in the possession of a third person
who has not acted in bad faith
EFFECTS OF RECISSION IN 1191:
"...When a decree for rescission is handed down, it is the
duty of the court to require both parties to surrender
that which they have respectively received and to place
each other as far as practicable in his original situation.
The rescission has the effect of abrogating the contract
in all parts. Rescission has the effect of "unmaking a
contract, or its undoing from the beginning, and not
merely its termination. Hence, rescission creates the
obligation to return the object of the contract. To
rescind is to declare a contract void at its inception and
to put an end to it as though it never was..." (Unlad
Resources vs Dragon G.R. NO. 149338: July 28, 2008)
VOIDABLE CONTRACTS:
• Voidable or annullable contracts are those which
possess all the essential requisites of a valid
contract but one of the parties is legally
incapable of giving consent, or consent is
vitiated by mistake, violence, intimidation,
undue influence, or fraud. (De Leon)
• They are existent, valid and obligatory unless
annulled or set aside by a proper action in court,
i.e., an action instituted for that purpose.
GROUNDS:
1. Party is legally incapable of giving consent
(MISPC)
2. Consent of one party is vitiated by mistake,
violence, intimidation, undue influence, or fraud.
A. Mistake or error - Mistake or error is the false
notion of a thing or a fact material to the
contract or, it is the false belief about
something. What is being referred to as mistake
is substantial mistake of fact, that is, the party
would not have given his consent had he known
of the mistake. Hence, not every mistake will
vitiate consent and make a contract voidable.
MISTAKE AS TO THE:
• the object of the contract. (A person signed a
contract of sale thinking it was only a contract of
loan).
• the conditions which principally moved or
induced one of the parties (A person desiring to
buy land consisting of 100 hectares discovers
that the land has only 60 hectares). (Asian v.
Jalandani, 45 Phil. 296)
• identity or qualifications (error in personae), but
only if such was the principal cause of the
contract.
(Hiring of a pre-bar reviewer, a particular singer
for a concert, contracts involving partnership,
agency, deposit, since these require trust and
confidence.)
MISTAKE OF LAW
General Rule: not a ground
XPN: Mutual error as to the legal effect of an agreement
when the real purpose of the parties Is frustrated, may
vitiate consent
• Example: Dabby borrows P10,000.00 from Albie.
As security for the debt, it was agreed that Dabby
should mortgage his parcel of land in favor of
Albie. They signed a contract of antichresis, the
parties erroneously believing that it has the
same effect as a mortgage.
• The contract of antichresis is voidable
B. Violence
• Violence requires the employment of physical
force. It must be serious or irresistible. In either
case, consent is not free. It is essential that the
force employed must be the determining cause
or reason for giving consent.
C. Intimidation
(1) It must produce a reasonable and well-grounded
fear of an evil;
(2) The evil must be imminent and grave;
(3) The evil must be upon his person or property, or
that of his spouse, descendants, or ascendants,
(4) It is the reason why he enters into the
contract.
• Violence or intimidation shall annul the
obligation, although it may have been employed
by a third person who did not take part in the
contract.
• The threat of a court action as a means to
enforce a just or legal claim is justified and does
not vitiate consent. It is a practice followed by
creditors to demand payment of their accounts
with the threat that upon failure to do so an
action would be instituted in court. Such a threat
is proper within the realm of the law as a means
to enforce collection.
D. 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 be undue or improper (Art.
1337.) to avoid a contract. Mere general or
reasonable influence is not sufficient. If gained
by kindness and affection or argument and
persuasion, the influence will not vitiate consent.
(De Leon)
Dabby, an uneducated man, is in need of
P500,000.00 to pay the hospital bill of his son,
who is the intensive care unit (ICU). Dabby tried
to borrow from Edna but instead of letting Dabby
borrow money, Edna tells Dabby to sell his land
to her for only a small amount. Dabby has
nobody to turn to for assistance. If Dabby does
 not want to sell the land but he is compelled to
sell it because of his financial condition, the sale
may be avoided on the ground of undue
influence.
E. Fraud (DOLO CAUSANTE)
• There is fraud when, through insidious words or
machinations of one of the contracting parties,
the other is induced to enter into a contract
which without them, he would not have agreed
to.
**Causal fraud or dolo causante is the fraud employed
by one party prior to or simultaneous with the creation
of the contract to secure the consent of the other. It is
the fraud used by a party to induce the other to enter
into a contract without which the latter would not have
agreed to, taking into account the circumstances of the
case.
• "insidious words or machinations” include false
promises, exaggerated expectations or benefits,
abuse of confidence, fictitious names, qualities,
or power
• Causal fraud may also be committed by means of
concealing or omitting to state material facts.
when there is a special duty to disclose the same,
with intent to deceive, by reason of which
concealment or omission, the other party was
induced to give a consent which he would not
otherwise have given.
Examples:
• Dabby wanted to have himself insured, but
because he was afraid, he could not pass the
medical examination, he had Robert (another
person) examined in his place. Here the contract
of insurance is voidable. (Eguaras v. Great
Eastern Life Assurance Co., 33 Phil. 263).
• Misrepresentation by the vendor of the
boundaries of his land by showing valuable
properties not really included in his title. (Gomez
Marino v. Linton, 45 Phil 652).
Examples:
• Dabby offered to sell to Robert a ring claiming
that the stone on the ring is diamond, and Dabby
knows that it is not diamond but ordinary glass.
If Robert buys the ring, relying on the truth of the
representation of Dabby, the sale may be
annulled on the ground of fraud.
• Dabby sold to Robert a parcel of land
representing that the same was “absolutely free
of all liens and encumbrances.” Robert gave his
consent on the faith of Dabby's representation.
When the sale was registered. It was found that
a lis pendens notice was annotated on the title to
the land.
Rules in Fraud:
• The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are
not in themselves fraudulent.
• A mere expression of an opinion does not signify
fraud, unless made by an expert and the other
party has relied on the former's special
knowledge.
Example: Dabby, on buying a ring, was assured by the
seller that it was a good ring, in the opinion of the seller.
This is a mere expression of opinion that is not
fraudulent. But if the seller was an expert, and the only
reason why Dabby bought the ring was this opinion of
the seller, the contract is voidable on the ground of
fraud.
REASON: The opinion of the expert is considered a FACT
WHEN TO FILE ACTION FOR ANNULMENT OF VOIDABLE
CONTRACTS
4 (FOUR) YEARS FROM
• In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases.
• In case of mistake or fraud, from the time of the
discovery of the same.
• In the case of contracts entered into by minors
or other incapacitated persons from the time
the guardianship ceases.
WHO MAY FILE ACTION FOR ANNULMENT OF VOIDABLE
CONTRACTS
• The victim (principal or subsidiary party) may ask
for annulment, not the guilty person or his
successor,
Example: A minor contracted with Dobby. Dobby's heir
sues for annulment on the ground that the other party
was a minor.
**Annulment cannot prosper because Dabby and his heir
are capacitated parties.
RATIFICATION OF A VOIDABLE CONTRACT
• Ratification means that one under no disability
voluntarily adopts and gives sanction to some
defective or unauthorized contract, act, or
proceeding which, without his subsequent
sanction or consent, would not be binding or
him.
EFFECTS OF RATIFICATION: The action to annul is
extinguished (Art. 1392, Civil Code); thus, the contract
becomes a completely valid one. The contract is
cleansed of its defect from the beginning.
Rule in Ratification:
• There must be knowledge of the reason which
renders the contract voidable.
• The cause must not exist or continue to exist
anymore at the time of ratification
UNENFORCEABLE CONTRACTS:
• Unenforceable contracts are those that cannot
be enforced in court or sued upon by reason of
defects provided by law until and unless they are
ratified according to law.
Kinds of unenforceable contracts.
(1) Those entered into in the name of another by
one without or acting in excess of authority;
(2) Those that do not comply with the Statute of
Frauds;
(3) Those where both parties are incapable of giving
consent.
Examples of unenforceable contracts:
• In Dabby's name, but without Dabby's
authorization, Maria sold Dabby's car to Robert.
The sale of the car is unauthorized.
• Those that violate the statute of frauds.
• Minor A and Minor B entered into a contract of
sale.
Rules in enforceable contracts:
• Where both parties to a contract are incapable
of giving consent, the contract is unenforceable.
However, if the parent or guardian, as the case
may be, of either party, or if one of the parties
after attaining or regaining capacity, ratifies the
contract, it becomes voidable. (see Arts. 1390,
1394.)
• If the ratification is made by the parents or
guardians, as the case may be, of both
contracting parties, or by both contracting
parties after attaining or regaining capacity, the
contract is validated and its validity retroacts to
the time it was entered into (see Art 1396.)
• Strangers to a voidable contract cannot bring an
action to annul the same (see Art. 1397.); neither
can they assail a contract because of its
unenforceability. The benefit of the Statute can
only be claimed or waived by one who is a party
or privy to the oral contract, not by a stranger.
VOID CONTRACTS:
• Void contracts are those which, are perfected
contracts (all elements are present) but because
of certain defects, generally produce no effect at
all. They are considered as inexistent from its
inception or from the very beginning,
• Inexistent contracts refer to agreements which
lack one or some or all of the elements (ie,
consent, object, and cause) or do not comply
with the formalities which are essential for the
existence of a contract.
Instances of void contracts:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy;
(2) Those which are absolutely simulated or
fictitious;
(3) Those whose cause or object did not exist at the
time of the transaction;
(4) Those whose object is outside the commerce of
men;
(5) Those which contemplate an impossible service;
 (6) Those where the intention of the parties
relative to the principal object of the contract
cannot be ascertained;
(7) Those expressly prohibited or declared void by
law.
Example of Void Contracts:
• Sale of property between husband and wife
except when there is a separation of property
(Art. 1490.)
• Contracts upon future inheritance except in
cases expressly authorized by law. (Art. 1347.)
• Absolutely simulated contracts
SIMULATION OF CONTRACTS
• It is the process of intentionally deceiving others
by producing the appearance of a contract that
really does not exist (absolute simulation) or
which is different from the true agreement
(relative simulation).
Two Kinds:
A. Absolute Simulation
B. Relative Simulation
ABSOLUTE SIMULATION OF CONTRACTS
• Absolute simulation or when the contract does
not really exist and the parties do not intend to
be bound at all. (Art. 1345.) Absolutely
simulated or fictitious contracts are inexistent
and void and are not susceptible of ratification.
• Example: Dabby is indebted to Albert Upon
learning that Albert is going to enforce his credit.
Dabby pretended to sell his land to his neighbor
but Dabby did not receive a single centavo for
the deed of sale he executed and he continued
in possession of the land as the contract was
merely simulated or fictitious.
RELATIVE SIMULATION
• Relative simulation or when the contract entered
into by the parties is different from their true
agreement or the parties state a false cause in
the contract to conceal their real agreement.
The parties are bound by their real agreement,
provided, it does not prejudice a third person
and is not intended for a purpose contrary to
law, morals, good customs, public order, or
public policy. (Art. 1346.)
• EXAMPLE: Dabby and Robert entered into a
contract of donation. But wanting to hide the
donation, it was made to appear in the form of a
deed of sale. Here, there are two acts involved:
outward act (contract of sale) and the hidden act
(contract of donation).
• Effect as to the parties: they are bound by their
true agreement.
• Effect as to third persons: the parties are bound
by their outward contract unless it will
affect/prejudice third persons.
Rules in Void Contracts:
1. If a contract is void, a party thereto can always
bring a court action to declare it void or
inexistent Mere lapse of time cannot give
efficacy to a void contract neither can it be cured
by ratification.
2. Parties to a void agreement cannot expect the
aid of the law, the courts leave them as they are,
because they are deemed in pari delicto, or "in
equal fault." However, this applies only to illegal
contracts that are also criminal acts.
Example of In Pari Delicto:
Dabby and Albert entered into a contract for smuggling
or importation of prohibited drugs.
Effects:
1. they shall have no action against each other
2. Both shall be prosecuted.
3. The effects or the instruments of the crime
things or price of the contract) shall be
confiscated in favor of government.
Rules in void contracts:
XPN: If only one party is guilty or both parties are not
equally guilty (in delicto, but not in pari delicto), the rule
applies only to the guilty party or the more guilty party.
The innocent one or the less guilty may claim what he
has given and shall not be bound to comply with his
promise.
What if the contract is illegal but not “criminal”?
EXAMPLE: A Filipino sold land to a Chinese after the
effective date of the Constitution.
• A contract which is the direct result of a
Effect: Neither may recover what he has given by virtue
of the contract or demand the performance of the
other's undertaking.
XPNS to In Pari delicto:
the sale for the reason that his right or interest
is directly affected.
previous illegal contract, is also void and
inexistent.
Example: Dabby promised to give Carlo a car as
a reward after Carlo has killed Dabby's wife.
Later, after the killing the contract was changed
to a lease of a big house for a certain period.

1. Interest paid in excess of the interest allowed by • In case of a divisible contract, if the illegal terms
the usury laws may be recovered by the debtor, can be separated from the legal ones, the legal
with interest thereon from the date of the ones may be enforced.
payment. Example: Dabby sold to Carlo his car for
2. When money is paid or property delivered for an P150,000 and shabu, a prohibited drug, for
illegal purpose, the contract may be repudiated P200,000.00. The sale of the car is valid.
by one of the parties before the purpose has
been accomplished, or before any damage has
been caused to a third person.
Example: For a reward, Dabby promised to kill
Albert for Cynthia. Cynthia gave the reward.
Before Dabby could kill Albert, Cynthia
repudiated the contract.

Is Cynthia allowed to do so? Yes, because here,

the purpose has not yet been accomplished and
no damage has as yet been caused to a third
person.
3. Where one of the parties to an illegal contract
incapable of giving consent, the courts may, if
the interest of justice so demands, allow
recovery of money or property delivered by the
incapacitated person.
Example: An insane man gave money to another
to kill Dabby. Recovery by the insane man is
allowed.

Some rules in Void Contracts:

• The defense of illegality of contracts is not

available to third persons whose interests are
not directly affected
Example: Husband, sold his parcel of land to W,
his wife. Under the law, husband and wife
cannot sell property to each other (Art. 1490.)
and such sale is, therefore, illegal and void.
***BUT a creditor, who became a creditor of
Husband before the transaction, can question