INTERPRETATION OF CONTRACTS
Intent of the law – it is a cardinal rule
- the determination of the meaning of
the terms or words used by the parties in their
contracts
NOTE: Interpretation of a contract is a
question of law since a contract is in the
nature of law
Interpretation vs. Reformation
o Interpretation – the act of making
intelligible that was not before
understood, ambiguous, or not
obvious; it is a method by which a
meaning of a language is ascertained
o Reformation – that remedy in equity
by means of which a written
instrument is made or construed so as
to express or conform to the real
intention of the parties
Laws, in general, as aid to interpretation
of contracts
1. Modification by parties of rules of
interpretation – The parties are free
to accept these rules as a whole, or to
modify in cases not essential or
obligatory, or to complete to the
extent which is legal or in conformity
with their nature
2. Acceptance by parties of the rules –
These supplementary norms, these
legal models must be deemed
presumed accepted if nothing is said
to the contrary
3. Natural and accidental elements of
contracts – The acceptance of the
natural elements of contract is
implied, when nothing is said by the
parties to the contrary, and the
exclusion of the accidental elements,
if none has been stipulated by them
4.
that in seeking the meaning of a law,
the first concern of the court should
be to discover in its provisions the
intent of the lawmaker
5. Retroactivity of the law – well-settled
is the rule that statutes have no
retroactive effects unless otherwise
provided therein.
6. Law of place where contract entered
into – according to the doctrine of lex
loci contractus, as a general rule, the
law of the place where a contract is
made or entered into governs with
respect to its nature, validity,
obligation, and interpretation.
ART. 1370. 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.
If the words appear to be contrary to
the evident intention of the parties, the latter
shall prevail over the former.
Weight of Evidence to Justify Disregard of
Contracts
1. Terms presumed to embody will of
the parties – it is presumed that every
contracting party knows the contents
of the contract before he signed and
delivers it and that the words used
embody the will of the parties
2. Clear and convincing evidence
required to impugn a contract –
where the terms of the contract are
simple and clear and it appears to
have been executed with all the
solemnities of the law, more than a
 mere preponderance of evidence is
required to successfully impugn it
Application and Interpretation of terms of
contracts by courts
1. First duty of court – the first and
fundamental duty of the court is the
application of the contract according
to its express terms, interpretation
being called only when such literal
application is impossible.
2. Limits to interpretation – courts are
not permitted to make a new contract
for the parties in ascertaining their
intention or ignore those already
made by them simply to avoid
seeming hardships
3. Equity as ground for relief – equity
is not an antidote against the
disadvantages of a bad transaction,
and it may not be invoked to allow a
contract to be interpreted in a manner
different from that impelled by its
terms
4. Submission of disputes to arbitration
– Being an inexpensive, speedy and
amicable method of settling disputes,
arbitration – along with mediation,
conciliation and negotiation – is
encouraged by the Supreme Court.
Evident Intention of Parties Prevails over
Terms of Contract
1. When terms in conflict with manifest
intention – when the words of a
contract are clear and readily
understandable, there is no room for
construction. However, where the
words and clauses of a written
contract appear to conflict or
contravene with the manifest
intention of the parties, the latter shall
prevail over the former
2. Determination by court of true
intention – the words used by the
parties to project that intention, all the
words not just a particular word or
two, and words in context not just
words standing alone, must be looked
into.
ART. 1371. In order to judge the intention of
the contracting parties, their
contemporaneous and subsequent acts shall
be principally considered.
Courts not bound by name given to
contract by the parties
- to determine the true nature of a
contract, courts do not have or are not bound
to rely upon the name or title given it by the
contracting parties should there be
controversy as to what they really intended to
enter into.
ART. 1372. However general the terms of a
contract may be, they shall not be understood
to comprehend things that are distinct and
cases that are different from those upon
which the parties intended to agree.
Special intent prevails over a general
intent
- as a rule, where in a contract there
are general and special provisions covering
the same subject matter are inconsistent, the
latter shall be paramount to and control over
the former when the two cannot stand
together
ART. 1373. If some stipulation of any
contract should admit of several meanings, it
shall be understood as bearing that import
which is most adequate to render it effectual.
Meaning
If there are several interpretations and one ART. 1375. Words which may have different
interpretation makes a contract valid or significations shall be understood in that
effective while the other makes it illegal or which is most in keeping with the nature and
meaningless, the former interpretation is one object of the contract.
which is warranted by the rule stated in
ART. 1376. The usage or custom of the place
Article 1373.
shall be borne in mind in the interpretation of
the ambiguities of a contract, and shall fill the
omissions of stipulations which are ordinarily
ART. 1374. The various stipulations of a
established.
contract shall be interpreted together,
attributing to the doubtful ones that sense Allegations and Proof of Customs and
which may result from all of them taken Usages
jointly
1. Where custom or usage general in
Interpretation of Various character – if a custom or usage be
Stipulations/Separate Writings of a general in character, and therefore,
Contract presumed to be known by the parties,
the rule is that such custom or usage
1. Conflicting provisions of contract –
may be proved without being
as in statutes, the provisions of a
specifically pleaded.
contract should not be read in
2. Where custom or usage local in
isolation from the rest of the
character – if the custom or usage be
instrument but, on the contrary,
local in character, the party who
interpreted in the light of other related
proposes to rely upon it should aver in
provisions.
its pleadings, and a local custom or
2. Contract contained in several
usage applying to a special or
documents – where the contract is
particular kind of business may not be
contained in several document or in
proved to explain even the ambiguous
two or more separate writings all of
terms of a contract, unless the
them must be taken together to
existence of such custom or usage is
determine the intention of the parties
pleaded.
3. Business forms – business forms,
e.g., order slip, delivery charge
invoice and the like, are not always
ART. 1377. The interpretation of obscure
fully accomplished to contain all the
words or stipulations in a contract shall not
necessary information describing in
favor the party who caused the obscurity.
detail the whole business transaction
4. Titles/separability clause in Meaning
contracts – titles given to sections of
a contract may be restored to for the A written agreement should, in case
purpose of determining the scope of of doubt or ambiguity, be taken contra
the provisions and their relation to proferentum, i.e., be given an interpretation
other portions thereof. which will be favorable to the other who,
upon the faith of which, has incurred an the intention or will of the parties, the
obligation contract shall be null and void.
Contracts of Adhesion
- contracts whose provisions have Rules in case doubts are impossible to
mostly been drafted by one party, and the settle
only participation of the other party is signing
1. Gratuitous contracts – if the doubt
of his signature or his “adhesion” thereto on
refers to incidental circumstances of a
the “take it or leave it” basis, without the right
gratuitous contract, such
to modify it.
interpretation should be made which
1. Contracts of insurance – the rule in would result in the least transmission
Art. 1377 is generally applied to of rights and interests
contracts of insurance which are
EXAMPLE: R gave his car to E. It is not
liberally construed in favor of the
clear, whether the contract is a donation or a
insured and strictly and most strongly
commodatum.
against the insurer, resolving all
ambiguities against the latter The contract should be presumed as a
mere commodatum because it would transmit
The rule also applies to:
the lesser rights than donation since R retains
2. Contracts in bills of lading his ownership of the car.
3. Contracts between a lawyer and his
client
2. Onerous contracts – if the contract is
Validity of Contract of Adhesion
onerous, the doubts should be
- contracts of adhesion are not resolved in favor of the greatest
entirely prohibited and are as binding as reciprocity of interests.
ordinary contracts, the reason being the one
EXAMPLE: D borrowed from C 15,000 at
who adheres to the contract is in reality free
18% interest. It cannot be determined from
to reject it entirely; if he adheres, he gives his
the terms of the contract whether the loan is
consent but cannot modify.
payable in 6 months or in 1 year.
ART. 1378. When it is absolutely impossible
It must be assumed that the period
to settle doubts by the rules established in the
agreed upon is 1 year which results in a
preceding articles, and the doubts refer to
greater reciprocity of interest since D can use
incidental circumstances of a gratuitous
the money for 1 year, and C, on the other
contract, the least transmission of rights and
hand, can earn interest due for 1 year instead
interest shall prevail. If the contract is
of only 6 months.
onerous, the doubt shall be settled in favor of
the greatest reciprocity of interests. 3. Principal object of contract – if the
doubt refers to the principal object of
If the doubts are cast upon the
the contract and such doubt cannot be
principal object of the contract in such a way
resolved, thereby leaving the
that it cannot be know what may have been
 intention of the parties unknown, the
contract shall be null and void.
EXAMPLE: S sold his land to B. S has many
lands. It cannot be determined which land
was intended by the parties to be the subject
of the sale.
Therefore, the contract shall be null
and void and it is as if the parties have not
entered into any contract at all.
ART. 1379. The principles of interpretation
stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of
contracts.
Principles of Interpretation in the Rules of
Court
1. The language of a writing shall have
the legal meaning it bears in the place
of execution, unless the parties
intended otherwise
2. An instrument with several
provisions or particulars shall be
construed so as to give effect at all.
3. In case of conflict between a general
and a particular provision, the latter
shall prevail; so a particular intent
will control the general one
4. The circumstances under which the
instrument was made, including the
situation of the subject thereof and of
the parties to it, may be considered in
its interpretation.
5. Terms are presumed to have been
used in their ordinary and generally
accepted meaning unless intended to
have been used in a different sense
6. In case of conflict, the written words
prevail over the printed form
7. Experts and interpreters may be asked
to declare the characters or the
meaning of the language when such
characters are difficult to decipher or
the language is not understood by the
court
8. Of two constructions, that sense is to
prevail against the party in which he
understood it or which is most
favorable to the party in whose favor
the provision was made
9. Of two constructions, one in favor
and the other against natural right, the
former is to be adopted.
10. Usage may be the basis to determine
the true character of an instrument.
***
INTRODUCTION to the FOLOWING
CHAPTERS
Rescissible contract – they are the
least infirm or defective. 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. Thus, the defect is
external. Until such contracts are
rescinded in an appropriate
proceeding, they remain valid and
binding upon the parties.
Voidable contracts – they are also
valid until annulled unless there has
been a ratification. In a voidable
contract, the defect is caused by vice
of consent.
Unenforceable contracts – they
cannot be sued upon or enforced
unless they are ratified. As regards the
degree of defectiveness, voidable
contracts are further away from
absolute nullity than unenforceable
 contracts. In other words, an
unenforceable contract occupies an
intermediate ground between a
voidable and a void contract.
Void or inexistent contracts – they
are absolutely null and void. They
have no legal effect at all and cannot
be ratified
***
RESCISSIBLE CONTRACTS
ART. 1380. Contracts validly agreed upon
may be rescinded in the cases established by
law.
Rescissible contract – are those validly
agreed upon because all essential elements
exist and, therefore, legally effective, but in
cases established by law, the remedy of
rescission is granted in the interest of equity.
Meaning of Rescission
- an equitable remedy granted by law
to the contracting parties and sometimes even
to third persons in order to secure reparation
of damages caused them by a valid contract,
by means of the restoration of things to their
condition prior to the celebrations of said
contracts.
Requisites of Rescission
1. The court must be validly agreed
upon
2. There must be lesion or pecuniary
prejudice or damage to one of the
parties or to a third person
3. The rescission must be based upon a
case especially provided by law
4. There must be no other legal remedy
to obtain reparation for the damage
5. The party asking for rescission must
be able to return what he is obliged to
restore by reason of the contract
6. The object of the contract must not
legally be in the possession of third
persons who did not act in bad faith
7. The period for filing the action for
rescission must not have prescribed
ART. 1381. The following contracts are
rescissible:
1. Those which are entered into by
guardians whenever the wards whom
they represent suffer from lesion by
more than one-fourth of the value of
the things which are the object thereof
2. Those agreed upon in representation
of absentees, if the latter suffer the
lesion stated in the preceding number
3. Those undertaken in fraud of
creditors when the latter cannot in any
other manner collect the claims due
them
4. Those which refer to things under
litigation if they have been entered
into by the defendant without the
knowledge and approval of the
litigants or of competent judicial
authority
5. All other contracts specially declared
by law to be subject to rescission
Terms:
o Ward – a person under guardianship
by reason of some incapacity
o Absentee – a person who disappears
from his domicile, his whereabouts
being unknown, and without leaving
an agent to administer his property.
o Accion pauliana – the action to
rescind in fraud of creditors
Rescission for Breach of Contract and
Rescission by Reason of Lesion
1. Rescission for breach of contract –
is not predicated on injury to
economic interests of the party
plaintiff but on the breach of faith by
the defendant, that violates the
reciprocity of between the parties.
2. Rescission by reason of lesion or
economic prejudice or economic
prejudice – the cause of action is
subordinated to the existence of that
prejudice, because it is raison d’etre
as well as the measure of the right to
rescind.
ART. 1382. Payments made in a state of
insolvency for obligations to whose
fulfillment the debtor could not be compelled
at the time they were effected, are also
rescissible.
ART. 1383. The action for rescission is
subsidiary; it cannot be instituted except
when the party suffering damage has no other
legal means to obtain reparation for the same
ART. 1384. Rescission shall be only to the
extent necessary to cover the damages
caused.
The entire contract need not be set aside by
rescission if the damage can be repaired or
covered by partial rescission.
ART. 1385. Rescission creates the obligation
to return the thing which were the object of
the contract, together with their fruits, and the
price with its interest; consequently, it can be
carried out only when he who demands
rescission can return whatever he may be
obliged to restore.
Neither shall rescission take place
when the things which are the object of the
contract are legally in possession of third
persons who did not act in bad faith.
In this case, indemnity for damages
may be demanded from the person causing
the loss.
Effect of Rescission
1. Obligation of mutual restitution –
rescission creates the obligation of
mutual restitution. There is no
obligation to restore if nothing has
been received. When the court
declares a contract rescinded, the
parties must return to each other (a)
the object of the contract with its
fruits and (b) the price thereof with
legal interest
2. Abrogation of contract – when a
rescission is granted, it has the effect
of abrogating the contract in all
respects. The party seeking rescission
cannot ask performance as to part and
rescission as to remainder.
3. Obligation of third person to restore
– the clause “he who demands
rescission” applied also to third
persons. Of course, if the third person
has nothing to restore, the article does
not apply.
When Rescission Not Allowed
1. If the party who demands rescission
cannot return what he is obliged to
restore under the contract
2. Neither shall rescission take place, if
the property is legally in the
possession of a third person who
acted in good faith.
Mutual Dissent – where the parties agree to
cancel their contract and mutually return the
object and cause thereof. This is to be
distinguished from rescission
ART. 1386. Rescission referred to in Nos. 1
and 2 of Article 1381 shall not take place with
respect to contracts approved by the courts.
ART. 1387. All contracts by virtue of which
the debtor alienates property by gratuitous
title are presumed to have been entered into
in fraud of creditors, when the donor did not
reserve sufficient property to pay all debts
contracted before the donation.
Alienations by onerous title are also
presumed fraudulent when made by persons
against whom some judgment has been
rendered in any instance or some writ of
attachment has been issued. The decision or
attachment need not refer to the property
alienated, and need not have been obtained by
the party seeking the rescission.
In addition to these presumptions, the
design to defraud creditors may have proved
in any other manner recognized by the law of
evidence.
EXAMPLES:
(1) Alienation by gratuitous title. — R
made a donation of a parcel of land to E.
Before the date of the donation, R had
contracted several debts.
With the donation to E, the remaining
property of R is not sufficient to pay all his
debts.
Under the first paragraph, the donation is
presumed fraudulent unless proved
otherwise.
(2) Alienation by onerous title. —
a) Suppose in the preceding example,
the contract is a sale.
Under the second paragraph, the sale
to E is not presumed fraudulent. The
creditors of R must show that the
conveyance will prejudice their
rights. However, the presumption of
fraud will arise in case the sale was
made by R after some judgment has
been rendered against him or some
writ of attachment has been issued
against him.
b) Suppose again that C, a creditor of R,
has obtained a judgment or writ of
attachment in his favor. Then R sold
to D another parcel of land which has
not been levied upon or attached.
The sale to D is also presumed
fraudulent because the law says “the
decision or attachment need not refer
to the property alienated.”
c) E is another creditor of R. Does he
have the right to rescind the sale to D?
Yes, because the law says that “the
decision or attachment . . .need not
have been obtained by the party
seeking the rescission.”
ART. 1388. Whoever acquires in bad faith
the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by
them on account of the alienation, whenever,
due to any cause, it should be impossible for
him to return them. \
If there are two or more alienations,
the first acquirer shall be liable first, and so
on successively.
Summary: If it is impossible for a purchaser
in bad faith to return the thing alienated in
fraud of creditors, he shall pay for damages
to the creditors.
EXAMPLES: other person has a right to, or interest in, such
property and pays a full and fair price for the
(1) S sold his car to B in order to avoid the
same, at the time of such purchase, or before
payment of his debt to C, his creditor. B knew
he has notice of the claim or interest of some
of S’s purpose.
other person in the property.
If the sale is rescinded, B must return the car.
ART. 1389. The action to claim rescission
Should the car be destroyed with or without
must be commenced within four (4) years.
his fault, then C is entitled to be indemnified
for damages by B. For persons under guardianship and
for absentees, the period of four (4) years
(2) Suppose, B transferred the car to D who
shall not begin until the termination of the
also acted in bad faith. Then D sold it to E
former’s incapacity, or until the domicile of
who did not know of the purpose behind the
the latter is known.
previous conveyance.
Persons entitled to bring the action for
As the first acquirer. B is liable first. If he
rescission
cannot pay, then D will be liable.
1. The injured party or the defrauded
If B acted in good faith, the good or bad faith
creditor;
of D is not important, except where D
2. His heirs, assigns, or successors in
connived with S to make B a mere innocent
interest; or
intermediary in which case D can be held
3. The creditors of the above entitled to
liable.
subrogation
(3) Without making any inquiry, B bought a
Right of Ordinary Creditors to Sue for
parcel of land from S, who is not the
Rescission
registered owner, although the land object of
the transaction is registered. May B be An ordinary creditor (e.g., lender) does not
considered a purchaser in good faith? have such material interest as to allow him to
sue for rescission of a contract of sale of real
No. “One who buys from one who is not the
property by his debtor.
registered owner is expected to examine not
only the certificate of title but all factual
circumstances necessary for him to determine
***
if there are any flaws in the title of the
transferor or in his capacity to transfer the RESCISSIBLE CONTRACTS
land.”
ART. 1390. The following contracts are
*** voidable or annullable, even though there
may have been no damage to the contracting
Bad faith – does not simply connote bad
parties:
judgments or negligence. It imports a
dishonest purpose or some moral obliquity 1. Those where one of the parties is
and conscious doing of wrong. incapable of giving consent to a
contract
Purchaser in good faith – one who buys the
property of another without notice that some
 2. Those where the consent is vitiated by
mistake, violence, intimidation,
undue influence or fraud.
These contracts are binding unless they are
annulled by a proper action in court. They are
susceptible of ratification.
Meaning of annulment
Annulment is a remedy as well as a
sanction provided by law, for reason of
public interest, for the declaration of the
inefficacy of a contract based on a defect or
vice in the consent of one of the contracting
parties in order to restore them to their
original position in which they were before
the contract was executed.
Difference between action for annulment
and action for rescission
1. Annulment: based on vitiation of
consent
Rescission: based on lesion to one of
the parties or to a third person
2. Annulment: may be brought only by
a party to the contract
Rescission: also, by a third person
who suffered damage by reason of the
contract
3. Annulment: a principal action
Rescission: subsidiary
4. Annulment: presupposes that the
contract is legally defective
Rescission: the contract was validly
entered into
5. Annulment: seeks the imposition of
sanction by law on the guilty party for
reason of public interest
Rescission: a remedy allowed by law
on ground of equity
6. Annulment: Allowed even if the
plaintiff has been indemnified
Rescission: barred from such
indemnification
ART. 1391. The action for annulment shall
be brought within four (4) years. This period
shall begin:
In case 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.
And when the action refers to
contracts entered into by minors or other
incapacitated persons, from the time the
guardianship ceases.
NOTE: Direct court action is necessary to
annul a voidable contract.
ART. 1392. Ratification extinguishes the
action to annul a voidable contract.
Ratification – 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.
Effects of Ratification
- it cleanses the contract from all of its
defects from the moment it was constituted.
The contract thus becomes valid.
ART. 1393. Ratification may be effected
expressly or tacitly. It is understood that there
is a tacit ratification if, with knowledge of the
reason which renders the contract voidable
and such reason having ceased, the person
who has a right to invoke it should execute an
act which necessarily implies an intention to
waive his rights.
Kinds of Ratification
1. Express
 2. Implied or tacit
REQUISITES OF RATIFICATION
For implied ratification:
o There must be knowledge of the
reason which renders the contract
voidable
o Such reason must have ceased
o The injured party must have executed
an act which necessarily implies an
intention to waive his right
For express ratification:
o The same as those for implied
ratification except that the express
ratification is effected expressly
Confirmation, ratification, or recognition
o Confirmation – tends to cure the vice
of nullity
o Ratification – is for the purpose of
giving authority to a person who
previously acted in the name of
another without authority
o Recognition – merely to cure a defect
of proof
ART. 1394. Ratification entered into by an
incapacitated person may be ratified by:
a. A guardian
b. The injured party himself, provided,
he is already capacitated
ART. 1395. Ratification does not require the
conformity of the contracting party who has
no right to bring the action for annulment
(guilty party).
ART. 1396. Ratification cleanses the
contract from all its defects from the moment
it was constituted.
ART. 1397. The action for the annulment of
contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
However, persons who are capable cannot
allege the incapacity of those with whom they
contracted; nor can those who exerted
intimidation, violence, undue influence, or
employed fraud, or caused a mistake base
their action upon these flaws of the contract.
Party entitled to bring an action to annul
1. The plaintiff must have an interest in
the contract
2. The victim and not the guilty party or
the party responsible for the defect is
the person who must assert the same
Right of strangers to bring action
1. Person without material interest in
contract – has no legal capacity to
challenge the validity of such contract
2. Creditors of victim or aggrieved
party – strangers, therefore, even the
creditors of the victim or aggrieved
party, are without right or personality
to bring the action for they are not
obliged by the contract, principally or
subsidiarily, unless they are
prejudiced in their rights with respect
to one of the contracting parties, and
can show detriment which would
positively result to them from the
contract in which they had no
intervention.
3. Plaintiffs in a representative suit –
allowed to take action for annulment
ART. 1398. An obligation having been
annulled, the contracting parties shall restore
to each other the things which have been the
subject matter of the contract, with their
fruits, and the price with its interest, except in
cases provided by law.
In obligations to render service, the value
thereof shall be the basis for damages.
ART. 1399. When the defect of the contract
consists in the incapacity of one of the
parties, the incapacitated person is not
obliged to make any restitution except insofar
as he has been benefited by the thing or price
received by him.
ART. 1400. Whenever the person obliged by
the decree of annulment to return the thing
can not do so because it has been lost through
his fault, he shall return the fruits received
and the value of the thing at the time of the
loss, with interest from the same date.
If the thing is lost without his fault, there is
no more obligation to return such thing. But
in such a case, the other cannot be compelled
to restore what in virtue of the decree of
annulment he is bound to return.
ART. 1401. The action for annulment of
contracts shall be extinguished when the
thing which is the object thereof is lost
through the fraud or fault of the person who
has a right to institute the proceedings.
If the right of action is based upon the
incapacity of any one of the contracting
parties, the loss of thing shall not be an
obstacle to the success of the action, unless
said loss took place through the fraud or fault
of the plaintiff.
ART. 1402. As long as one of the contracting
parties does not restore what in virtue of the
decree of annulment he is bound to return, the
other cannot be compelled to comply with
what is incumbent upon him (unless the party
offers to pay for the thing lost under his care).
***
UNENFORCEABLE CONTRACTS
ART. 1403. The following contracts are
unenforceable, unless they are ratified:
1. Those entered into the name of
another person by one who has given
no authority or legal representation,
or who has acted beyond his powers
2. Those that do not comply with the
Statute of Frauds as set forth in this
number. In the following cases an
agreement hereafter made shall be
unenforceable by action, unless the
same, or some note or memorandum
thereof, be in writing, and subscribed
by the party charged, or by his agent;
evidence, therefore, of the agreement
cannot be received without the
writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is
not to be performed within a year
from the making thereof
b) A special promise (by guarantor)
to answer for the debt, default, or
miscarriage of another (principal)
c) An agreement made in
consideration of marriage, other
than a mutual promise to marry
d) An agreement for the sale of
goods, chattels, or things in
action, at a price not less than Five
hundred pesos, unless the buyer
accept and receive part of such
goods and chattels, or the
evidences, or some of them, of
such things in action, or pay at the
time some part of the purchase
money; but when a sale is made
by auction and entry is made by
the auctioneer in his sales book, at
the time of the sale, of the amount
and kind of property sold, terms
 of sale, price, names of the
purchasers and person on whose
account the sale is made, it is a
sufficient memorandum.
e) An agreement for the leasing for a
longer period than one year, or for
the sale of real property of an
interest therein.
f) A representation as to the credit of
a third person
3. Those where both parties are
incapable of giving consent to a
contract.
Unenforceable contracts – 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.
Binding force of unenforceable contracts
- valid but unenforceable unless they
are ratified
Kinds of unenforceable contracts
1. Those entered into in the name by one
without or acting in excess of
authority (in which case, this is
known as unauthorized contract)
2. Those that do not comply with the
Statute of Frauds
3. Those where both parties are
incapable of giving consent
Statute of Frauds – is descriptive of statutes
which require certain classes of contracts to
be in writing
Marriage settlements (ante-nuptial
contracts) – are agreements entered into the
future spouses before the celebration of
marriage and in consideration thereof, for the
purpose of fixing the conditions of their
property relations both with respect to their
present and future property.
Donations by reason of marriage
(donations propter nuptias) – are those
which are made before its celebration, in
consideration of the same and in favor of one
or both of the future spouses
Modes of satisfaction of the statute
1. The giving of a note or memorandum
2. Acceptance and receipt of part of the
goods (or things in action) sold
3. Payment at the time some part of the
purchase price
Enforceability of electronic transactions
- electronic data message, electronic
documents, and electronic signatures have
the same legal effect validity and
enforceability as any other document or legal
writing.
ART. 1404. Unauthorized contracts are
governed by Article 1317 and the principles
of agency in Title X of this Book.
ART. 1405. Contracts infringing the Statute
of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure of the object
of prestation of oral evidence to prove the
same, or by the acceptance of benefits under
them.
Modes of ratification under the Statute
1. Failure to object – the failure to so
object amounts to a waiver and makes
the contract as binding as if it had
been reduced to writing
2. By acceptance of benefits – one who
has enjoyed the benefits of a
transaction should not be allowed to
repudiate its burden.
ART. 1406. When the contract is enforceable
under the Statute of Frauds, and a public
document is necessary for its registration in
the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
Right of a party where contract is
enforceable
For the application of this provision, there
must be a valid agreement and the agreement
must not infringe the Statute of Frauds.
1. Accordingly, a party to an oral sale of
real property cannot compel the other
to put the contract in a public
document for purposes of registration
because it is unenforceable unless, of
course, it has been ratified.
2. Similarly, the right of one party to
have the other execute a public
document is not available in a
donation of realty when it is in a
private instrument because the
donation is void.
ART. 1407. In a contract where both parties
are incapable of giving consent, express or
implied ratification by the parent, or
guardian, as the case may be, of one of the
contracting parties shall give the contract the
same effect as if only one of them were
incapacitated.
If ratification is made by the parents
or guardians, as the case may be, of both
contracting parties, the contract shall be
validated from the inception.
When unenforceable contract becomes a
voidable contract
o If both parties are incapacitated, it is
unenforceable
o If the parent or guardian of one of the
parties, or one of the parties himself
after regaining capacity, ratifies the
contract, it becomes voidable.
ART. 1408. Unenforceable contracts cannot
be assailed by third persons.
***
VOID OR INEXISTENT CONTRACTS
ART. 1409. The following contracts are
inexistent and void from the beginning:
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
These contracts cannot be ratified. Neither
can the right to set up the defense of illegality
be waived.
Void contracts – those which, because of
certain defects, generally produce no effect at
all. They are considered as inexistent from its
inception or from the very beginning.
(Usually if illegal)
Inexistent contracts – refer to agreements
which lack one or some or all of the elements
or do not comply with the formalities which
are essential for the existence of a contract
Characteristics of Void or Inexistent
Contracts
1. Produces no effect whatsoever, being
void or inexistent from the beginning
2. It cannot be cured or validated either
by time or ratification
3. The right to set up the defense for the
declaration of illegality, inexistence,
or absolute nullity cannot be waived
4. The action or defense for the
declaration of its illegality,
inexistence, or nullity does not
prescribe
5. The defense of illegality, inexistence,
or absolute nullity is not available to
third persons whose interests are not
directly affected
6. It cannot give rise to a valid contract
7. Its invalidity can be questions by
anyone affected by it
ART. 1410. The action or defense for the
declaration of the inexistence of a contract
does not prescribe.
ART. 1411. When the nullity proceeds from
the illegality of the cause or object of the
contract, and the act constitutes a criminal
offense, both parties being in pari delicto,
they shall have no action against each other,
and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the
disposal of effects or instruments of a crime
shall be applicable to the things or the price
of the contract.
This rule shall be applicable when
only one of the parties is guilty; but the
innocent one may claim what he has given,
and shall not be bound to comply with his
promise.
NOTE: “in pari delicto” means “in equal
fault”
In pari delicto – a universal doctrine which
holds that no action arises, in equity or at law,
from an illegal contract; no suit can be
maintained for its specific performance, or to
recover the property agreed to be sold or
delivered, or money agreed to be paid, or
damages for its violation; and where the
parties are in pari delicto, no alternative relief
of any kind will be given to one against the
other.
ART. 1412. If the act in which the unlawful
or forbidden cause consists does not
constitute a criminal offense, the following
rules shall be observed:
1. When the fault is on the part of both
parties, neither may recover what he
has given by virtue of the contract, or
demand the performance of the
other’s undertaking
2. When only one of the contracting
parties is at fault, he cannot recover
what he has given by reason of the
contract or ask for the fulfillment of
what has been promised him. The
other, who is not at fault, may demand
the return of what he has given
without any obligation to comply
with his promise
ART. 1314. Interest paid in excess of the
interest allowed by the usury laws may be
recovered by the debtor, with interest thereon
from the date of the payment
ART. 1414. When money is paid or property
delivered for an illegal purpose, the contract
may be repudiated by one of the parties
before the purpose has been accomplished, or
before any damage has been caused to a third
person. In such case, the courts may, if the
public interest will thus be subserved, allow
the party repudiating the contract to recover
the money or property.
Recovery where contract for an illegal
purpose
1. The contract is for an illegal purpose
2. The contract is repudiated before the
purpose has been accomplished or
before any damage has been caused to
a third person
3. The court considers that public
interest will be subserved by allowing
recovery
“Article 1414 is one instance (the other is Art.
1416.) when the law allows recovery by one
of the parties even though both of them have
acted contrary to law.” (Report of the Code
Commission, p. 27.)
ART. 1415. Where one of the parties to an
illegal contract is 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.
ART. 1416. When the agreement is not
illegal per se but is merely prohibited, and the
prohibition by the law is designed for the
protection of the plaintiff, hey may, if public
policy is thereby enhanced, recover what he
has paid or delivered.
NOTE: The rule on pari delicto has been
interpreted as applicable only where the fault
on both sides is, more or less, equivalent. It
does not apply where one party is literate or
intelligent and the other one is not.
ART. 1417. When the price of any article or
commodity is determined by statute, or by
authority of law, any person paying any
amount in excess of the maximum price
allowed may recover such excess.
ART. 1418. When the law fixes, or
authorizes the fixing of the maximum
number of hours of labor, and a contract is
entered into whereby a laborer undertakes to
work longer than the maximum thus fixed, he
may demand additional compensation for
service rendered beyond the time limit.
ART. 1419. When the law sets, or authorizes
the setting of a minimum wage for laborers,
and a contract is agreed upon by which
laborer accepts a lower wage, he shall be
entitled to recover the deficiency.
ART. 1420. In case of a divisible contract, if
the illegal terms can be separated from the
legal ones, the latter may be enforced.
Where the consideration is entire and single,
the contract is indivisible (or entire) so that if
part of such consideration is illegal, the
whole contract is void and unenforceable.
Divisible contract Vs. Divisible obligation
Divisible contract: the test is divisibility of
its cause; refers to the cause
Divisible obligation: the test is susceptibility
of partial performance; refers to the
prestation or object
ART. 1421. The defense of illegality of
contracts is not available to third persons
whose interests are not directly affected.
Meaning, if the interest of the third person is
prejudiced, he may use the defense of
illegality of contract.
ART. 1422. A contract which is the direct
result of a previous illegal, is also void and
inexistent.
NATURAL OBLIGATIONS right to recover the same from the obligee
who has spent or consumed it in good faith.
ART. 1423. Obligations are civil or natural.
Civil obligations give a right of action to ART. 1428. When, after an action to enforce
compel their performance. Natural a civil obligation has failed, the defendant
obligations, not being based on positive law voluntarily performs the obligation, he
but on equity and natural law, do not grant a cannot demand the return of what he has
right of action to enforce their performance, delivered or the payment of the value of the
but after voluntary fulfillment by the obligor, service he has rendered.
they authorize the retention of what has been
ART. 1429. When a testate or intestate heir
delivered or rendered by reason thereof.
voluntarily pays a debt of the decedent
Some natural obligations are set forth in the
exceeding the value of property which he
following articles.
received by will or by the law of intestacy
ART. 1424. When a right to sue upon a civil from the estate of the deceased, the payment
obligation has lapsed by extinctive is valid and cannot be rescinded by the payer.
prescription, the obligor who voluntarily
NOTE: The heir is not personally liable
performs the contract cannot recover what he
beyond the value of the property he received
has delivered or the value of the service he
from the decedent.
has rendered.
ART. 1430. When a will is declared void
ART. 1425. When without the knowledge or
because it has not been executed in
against the will of the debtor, a third person
accordance with the formalities required by
pays a debt which the obligor is not legally
law, but one of the intestate heirs, after the
bound to pay because the action thereon
settlement of the debts of the deceased, pays
prescribed, but the debtor later reimburses the
a legacy in compliance with a clause in a
third person, the obligor cannot recover what
defective will, the payment is effective and
he has paid.
irrevocable.
ART. 1426. When a minor between eighteen
Legacy – is the act of disposition by the
and twenty-one years of age who has entered
testator in separating from the inheritance for
into a contract without the consent of the
definite purposes, things, rights, or a definite
parent or guardian, after the annulment of the
portion of his property.
contract voluntarily returns the whole thing
or price received, notwithstanding the fact the
he has not been benefited thereby, there is no
right to demand the thing or price thus
returned.
ART. 1427. When a minor between eighteen
and twenty-one years of age, who has entered
into a contract without the consent of the
parent or guardian, voluntarily pays the sum
of money or delivers a fungible thing in
fulfillment of the obligation, there shall be no