CONTRACTS

❖ A meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service,

ELEMENTS OF A CONTRACT

1. Essential elements - Those without which there will be no contract

a. Consent of the contracting parties
b. Object certain which is the subject matter of the contract

c. Cause of the obligation which must be established

2. Natural elements - Those found in certain contracts unless set aside or suppressed by the
parties (such as warranty against eviction and warranty against hidden defects in a
contract of sale)
3. Accidental elements - those that refer to particular stipulation of the partners (such as
terms of payment, interest rate, place of payment)

CLASSIFICATION OF CONTRACTS
1. According to perfection or formation
a. Consensual - Those that are perfected by mere consent (such as sale and lease)
b. Real - Those that are perfected by the delivery of the object of the contract (such
as depositum, pledge, and commodatum)
c. Formal or solemn - Those which must be in the form provided by law for their
perfection (such as the donation of an immovable which, together with the
acceptance by the donee, must be in a public instruments to be valid)

2. According to cause
a. Onerous - Those were there is an exchange of valuable considerations (such as
sale and barter)
b. Gratuitous or lucrative - Those where one party receives no equivalent
consideration (such as donation and commodatum).
❖ These contracts are referred to as contracts of pure beneficence, the cause
of which is the liberality of the benefactor
c. Remuneratory - Those were the cause is the service or benefit remunerated

3. According to importance or dependence of one upon another

a. Principal - one that can stand by itself (such as sale, loan)
b. Accessory - one whose existence depends upon another contract (such as pledge
or mortgage which is dependent upon a principal contract such as loan
 c. Preparatory - one which serves as a means by which other contracts may be
entered into (such as agency and partnership)

4. According to name or designation

a. Nominate - Those which have a name under the law (such as sale, loan and barter)
b. Innominate - Those without any name under the law. Authorities in Civil Law, list
the following as innominate contracts
1. Do ut des - i give that you may give
2. Do ut facias - i give that you may do
3. Facio ut des - i do that you may give
4. Facio ut facias - i do that you may do
❖ This may actually be barter, hence, a nominate contract
1. The stipulations of the parties
2. The provisions of Obligations and Contracts
3. The rules governing the most analogous nominate contracts
4. The customs of the place

5. According to risk or fulfillment

a. Commutative - Those were the parties give equivalent values (such as sale and
barter) hence, there is real fulfillment
b. Aleatory - Those whose fulfillment depends upon chance (such as an insurance
contract

6. According to the parties obligated

a. Unilateral - Those were only one of the parties is obligated to give or do
something (such as commodatum and gratuitous deposit)
b. Bilateral or synallagmatic - Those where both parties are required to give or do
something (such as sale and barter). They may be reciprocal or non-reciprocal

7. According to subject matter

a. Contracts involving things (such as sale or barter)
b. Contracts involving rights or credits (such as usufruct or assignment of credits)
c. Contracts involving services (such as agency or lease of service)

8. According to the time of fulfillment

a. Executed - One which has been performed
b. Executory - One that has not yet been performed

9. Other classifications
a. Auto-contract - where only one person represents the two opposite parties to the
contract (such as when an agent lends money to his principal whom he represents
as borrower)
b. Contract of adhesion - where only one party drafted the contract (such as
insurance)
❖ Gives no room for negotiation and deprives the latter the opportunity to
bargain on equal footing.
STAGES OF A CONTRACT
1. Preparation or conception - this involves preliminary negotiations and bargaining,
discussion of terms and conditions, with no arrival yet of a definite agreement.
❖ Negotiation begins from the time the prospective contracting parties manifest
their interest in the contract and ends at the moment of their agreement
2. Perfection or birth - this is the point when there is a meeting of minds between the parties
on a definite subject matter and valid a cause
3. Consummation or Death or Termination - this occurs when the parties fulfill or perform
the terms agreed upon in the contract, culminating in the extinguishment thereof

BASIC PRINCIPLES OF CONTRACT

1. Liberty of contract or freedom to stipulate
❖ The contracting 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 or public policy.

The following are some stipulations that have been held to be void:
a. The stipulation that the creditor automatically becomes the owner of the property
pledged or mortgaged if the debtor defaults in his payment.
b. A stipulation in a mortgage contract providing for a specified price (known as ‘tipo” or
upset price) below which the mortgaged property is not supposed to be sold at the
foreclosure sale is void for being contrary to law.
c. An agreement to pay an unconscionable rate of interest is void for being contrary to
morals.
d. An agreement by the debtor to work without pay until he could find money to pay the
debt is void for being contrary to morals as this amounts to involuntary servitude.
e. An agreement to hide a crime, to suppress evidence and to stifle the prosecution of the
offender is void for being contrary to public policy.

2. Mutuality of contracts
❖ The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them,
a. 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
b. Determination of performance by a third person
❖ 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. However, such determination shall not
be obligatory if it is evidently equitable

3. Relativity of contracts
❖ Contracts take effect only between the parties, their assigns and heirs, except
where the rights and obligations are not transmissible:
a. By law
b. By stipulation
c. By nature
 4. Consensuality of contract
❖ Contracts are perfected by mere consent except in the following contracts which
need to comply with additional requirements:
a. In real contracts such as deposit, pledge and commodatum, which are
perfected upon the delivery of the object of the obligation
b. In formal or solemn contracts, which are required to be in the form
provided by law, to be perfected, such as the donation of an immovable
which must be in a public instrument together with the acceptance thereof
otherwise, the contract is void

5. Obligatory force of contract and compliance in good faith

❖ Obligations arising from contracts shall have the force of law between the
contracting parties and should be complied with in good faith. Upon the
perfection of the contract, the parties are bound to the following:
a. The fulfillment of what has been expressly stipulated
b. All the consequences which, according to their nature, may be in keeping
with good faith, usage and law.

CONSENT
❖ Is the manifestation of the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.

Rules on Offer
1. The offer must be certain because there could be no meeting of minds if it is vague or not
definite. Must be “definite, complete and intentional”
❖ Nature of advertisements
a. Business advertisements of things for sale are not definite offers, but mere
invitations to make an offer unless it appears otherwise.
b. Advertisements for bidders are merely invitations to make proposals and
the advertiser is not bound to accept the highest or lowest bidder, unless
the contrary appears.

2. An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of
either party before acceptance is conveyed.

3. When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, EXCEPT
when the option is founded upon a consideration as something paid or promised.
❖ Option, concept
➔ Option is a contract whereby the offeror gives the offeree a certain period
within which to buy or not to buy a certain object for a fixed price. It may
or may not be for a valuable consideration.
➔ Right of the offeror to withdraw the offer
 a. If there is no consideration for the option, the offeror may
withdraw the offer at any time within the option period provided
there has not yet been any acceptance.
b. If there is a consideration, the offeror may not withdraw the offer
before the lapse of the period agreed upon. Otherwise he will be
liable for damages to the offeree for breach of contract.

Rules on acceptance
1. The acceptance must be absolute
❖ If the acceptance varies the offer, there is no contract since there is no meeting of
minds
a. If the acceptance is qualified, it constitutes a counter-offer; and has the
effect of rejecting the offer.
b. If the offer fixes the time, place and manner of acceptance, all must be
complied with. Otherwise, there will be no meeting of minds.

2. Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge.
❖ The contract in such a case is presumed to have been entered into the place where
the offer was made.

3. Acceptance may express or implied

❖ The acceptance is expressed if made orally or in writing. It is implied if it can be
inferred from the conduct of the parties.

4. An offer made through an agent is accepted from the time it is communicated to him.
❖ A contract is binding upon the principal although the agent has not communicated
the acceptance to him. This is so because the agent is merely an extension of the
personality of the principal. Therefore, an acceptance by the agent is deemed an
acceptance by the principal.

Rules on consent
1. The parties must have the capacity to enter into a contract. The following cannot give
consent to a contract:
a. Unemancipated minors
➔ Emancipation takes place by the attainment of the age of majority which is
eighteen years. (Art.234, Family Code, as amended)
b. Insane or demented persons
➔ Contracts entered into during lucid intervals are valid
➔ Lucid interval refer to the period of temporary sanity of an insane person
c. Deaf-mutes who do not know how to write
➔ A contract entered into by the above-named incapacitated persons is
voidable. However, when both parties are incapable of giving consent to a
contract, the contract is unenforceable.
 ➔ The incapacity aforementioned is subject to the modifications determined
by law, and is understood to be without prejudice to special
disqualifications established in the laws.

2. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.

This is so because consent given in such states is not freely and intelligently given.

3. A contract where consent is given through mistake, violence, intimidation, undue

influence, or fraud is voidable.
a. MISTAKE
1. When mistake will invalidate consent
a. If the mistake refers to the substance of the thing which is the
object of the contract.
b. If the mistake refers to those conditions which have principally
moved one or both parties to enter into the contract.
c. If the mistake refers to the identity or qualifications of one of the
parties if such identity or qualifications have been the principal
cause of the contract.
d. If the mistake refers to the legal effect of an agreement when the
real purpose of the parties is frustrated and the same is mutual.
❖ This refers to a mistake of law which does not generally
vitiate consent because of the rule that ignorance of the law
excuses no one from compliance therewith. However, the
contract shall be voidable if the mistake as to the legal
effect of the agreement is mutual and frustrates the real
purpose of the parties.

2. When mistake does not vitiate consent

a. If the mistake refers to a simple mistake of account which shall
only be corrected
b. If the party alleging it knew the doubt, contingency or risk
affecting the object of the contract.

3. Rule when one party is unable to read or does not understand the language
of the contract
❖ If the mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the
former
❖ This is an exception to the rule that he who alleges fraud or
mistake must prove the same.

b. VIOLENCE or PHYSICAL COERCION

1. When violence vitiates consent
➔ There is violence when in order to wrest consent, serious or
irresistible force is employed. This is true although it may have
 been employed by a third person who did not take part in the
contract.

c. INTIMIDATION or MORAL COERCION

1. When intimidation vitiates consent

2. Factors to be considered in determining the degree of intimidation

a. Age
b. Sex
c. Condition of the person

3. When no intimidation exists

d. UNDUE INFLUENCE
1. When undue influence vitiates concept

2. Factors to be considered in determining the existence of undue influence

a. Confidential, family, spiritual and other relations of the parties
b. Mental weakness
c. Ignorance
d. Financial distress of the person alleged to have been unduly
influenced

e. FRAUD
1. When fraud exists (dolo causante)
a. When, through the 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.
b. When there is a failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by confidential
relations.

2. Requisites to make a contract voidable by reason of fraud

a. The fraud dhoud be serious
b. The fraud should not have been employed by both contracting
parties

3. When no fraud exists

a. In case of usual exaggerations in trade, when the other party had an
opportunity to know the facts
b. In case of a mere expression of an opinion, unless made by an
expert and the other party has relied on the former’s special
knowledge.
c. In case of misrepresentation by a third person, unless such
misrepresentation has created substantial mistakes and the same is
mutual.
 d. If the misrepresentation was made in good faith. However the
same may constitute error.

SIMULATED CONTRACT
❖ One that does not intend to have any legal effect on or a change in the juridical situation
of the parties.
1. Absolutely simulated contract
❖ One where the parties do not intend to be bound at all
2. Relatively simulated contract
❖ One where the parties conceal their true agreement

OBJECTS OF CONTRACTS

What may be the object of contracts

1. All things which are not outside the commerce of men, including future things
❖ Contract is generally void when objects are future inheritance.
❖ The contract involving future inheritance is void when the following requisites
concur:
a. The succession has not been opened
b. The object of the contract forms part of the inheritance; and
c. The promissor has, with respect to the object, an expectancy or right
which is purely hereditary in nature.

2. All rights which are not intransmissible

3. All services which are not contrary to law, morals, good customs, public order or public
policy

Requisites of object of a contract

1. It must be within the commerce of men
2. It must be transmissible
3. It must not be contrary to law, morals, good customs, public order or public policy .
4. It must not be impossible
5. It must be determinate as to kinds or if its quantity is not determinate, it must be possible
to determine the same without the need of a new contract between the parties.

CAUSE OF CONTRACTS
❖ It is the essential reason why a party enters into a contract.

1. Onerous contract
2. Remuneratory contract
3. Gratuitous, lucrative or contract of pure beneficence

Requisites of cause
1. It must exist
2. It must be lawful
3. It must be true