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Obligations & Contracts UL CPA REVIEW CENTER

UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY
CPA REVIEW CENTER

OBLIGATIONS & CONTRACTS

(Regulatory Framework for Business Transactions)
I. OBLIGATIONS
A. General Provisions
An obligation is defined as a juridical necessity to give, to do or not to do.
Real Obligation (Obligation to give)
a. Determinate or Specific thing – particularly designated from the same class
b. Indeterminate or Generic thing
Personal Obligation
a. Positive Personal Obligation (Obligation to do)
b. Negative Personal Obligation (Obligation not to do)
The obligation referred to herein pertains only to civil obligations and does not cover
natural obligations because these are obligations that cannot be enforced in court being based
merely on equity and natural law.
Essential requisites of an Obligation
1) Passive subject (Obligor or Debtor) – Siya yung gumagawa ng obligations(Deliverer)
- The one bound to perform the prestation to give, to do, or not to do.
2) Active subject (Obligee or Creditor) – Siya yung nag dedemand ng obligations(Receiver)
- The person demanding the performance of the obligation. It is he in whose favor the
obligation is constituted, established or created.
3) Object
- The subject matter of the obligation which has a corresponding economic value or
susceptible of pecuniary substitution in case of noncompliance. It is a conduct that
may consist of giving, doing, or not doing something.
4) Juridical Tie (Vinculum Juris or Efficient Cause)
- The efficient cause by virtue of which the debtor becomes bound to perform
the PRESTATION - a performance of something due upon an obligation.
NOTE: In order to be valid, the object/prestation must be:
1. Licit or lawful;
2. Possible, physically & judicially;
3. Determinate or determinable; and
4. Pecuniary value or possible equivalent in money. PECUNIARY - relating to or consisting
of money.
Absence of any of the first three (licit, possible and/or determinate) makes the object void.
B. Sources of Obligation
Sources of Obligation
1) Law
-Obligations arising from law must be expressed and not presumed. Presumed obligations
are not demandable. Ex. The obligation of the parents of their child.
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2) Contracts
- Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
3) Quasi-contracts - LUV
- Obligations arising from lawful, unilateral and voluntary acts. A juridical relation
based
on the principle that “no on shall be unjustly enriched at the expense of another.”
a. Solutio Indebiti - – Takes place when a person received something from
another without any right to demand for it, and the thing was unduly delivered to
him through mistake. Ex. Nakareceive ka ng delivery na hindi sayo, UNJUST
ENRICHMENT
b. Negotiorium Gestio - – Arises when a person voluntarily takes charge of
the management of the business or property of another without any power
from the latter. Ex.
4) Acts or omissions punished by law (delict)
- Obligation which is based on the premise that every person criminally liable for a
felony is also civilly liable.
- A violation of the law; a wrongful act or omission giving rise to a claim for a
compensation.
It may require a restitution, a reparation of damages caused or an indemnification for
consequential damages.
5) Quasi-delicts (culpa)
- Obligations arising from an act or omission arising from fault or negligence which
causes damage to another, there being no pre-existing contractual relations between the
parties.
Kinds of Negligence
a) Culpa Aquiliana (quasi-delict)
- This refers to a negligence resulting from the failure to observe the required
diligence which causes damage to another person.
b) Culpa Contractual – Contractual Negligence
- This refers to a negligence in the performance of a pre-existing contract.
c) Culpa Criminal
- This refers to the negligence which refers to a crime.
Delict and Quasi-delict
 Delict is a wrong committed against the State while quasi-delict is a wrong committed
against a person.
 In delict, criminal intent is necessary for the existence of liability while in quasi-delict
intent is not necessary.
 Delict is applicable only when there is law penalizing it while quasi-delict is actionable in
any act or omission wherein negligence intervenes.
 Delict requires proof beyond reasonable doubt while in quasi-delict only requires
preponderance of evidence.

C. Kinds of Obligation
1) Pure Obligation and Conditional Obligation

Pure Obligation
- An obligation whose performance does not depend upon a future or uncertain event, or
upon a past event or upon a past event unknown to the parties, demandable at once.

Conditional Obligation
- An obligation subject to a condition and the effectivity of which is subordinated to the
fulfillment or non-fulfillment of a future and uncertain event, or upon a past
event unknown to the parties.
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Two (2) Kinds of Conditions:

1. Suspensive condition – fulfillment of condition gives rise to an obligation

Effect of Fulfillment of Suspensive Condition
General rule: The condition once fulfilled shall retroact to the day of constitution
of obligation.
Exceptions:
 In case of unilateral obligation, fruits and interests derived during
pendency of the condition shall remain to the debtor unless parties
stipulated otherwise.
 In case of reciprocal obligation, fruits and interests derived during
pendency of the condition are deemed mutually compensated.

2. Resolutory condition - fulfillment of condition extinguishes obligation

Effects of Fulfillment of Resolutory Condition
 It will extinguish the obligation.
 Both parties shall return to each other what they have received including
fruits and interests.
 The rule on loss, deterioration, or improvement will apply to person who
has to return the thing.
Rules in case of Loss, Deterioration or Improvement of thing during the pendency of
condition
1) Loss
 If loss is due to debtor’s fault – damages to creditor
 If loss is not due to debtor’s fault – extinguishes obligation
2) Deterioration
 If loss is due to debtor’s fault - (1) cancel obligation and damages; or (2)
fulfill obligation with damages
 If loss is not due to debtor’s fault – creditor suffer impairment
3) Improvement
 By nature/time – benefit to creditor
 At the expense of debtor – debtor has no right other than that granted to a
usufructuary

2) Obligation with a Period

- Obligations for whose fulfillment a day certain has been fixed, shall be demandable only
when that day comes.
Period and Condition Distinguished
PERIOD or TERM CONDITION
Future and certain Future and uncertain
Future only Future/past but unknown
Impacts on demandability of Impacts on the very existence of obligation itself
obligation
No retroactive effect Has retroactive effect
Can be left to the will of debtor Cannot be left to the will of debtor
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Classifications of Period or Term

As to effect
a. Suspensive period (Ex die)
- obligation becomes demandable only upon arrival of a day certain.
b. Resolutory period (In Diem)
- arrival of day certain terminates the obligation
As to source
a. Legal—granted by law.
b. Conventional—stipulated by parties.
c. Judicial—fixed by courts.

As to definiteness
a. Definite—date/time is known beforehand.
b. Indefinite—the date/time of day certain is unknown.

Benefit of a Period
General Rule: When a period is designated, it is presumed to have been established
for the benefit of both the debtor and creditor.
Exception: If the term of obligation has to favor one of them.
Effect of the Period or Term
 When it is for the benefit of the creditor
– Creditor may demand the performance of the obligation at any time but the
debtor cannot compel him to accept payment before the expiration of the period.

 When it is for the benefit of the debtor

– Debtor may oppose any premature demand on the part of the creditor for performance
of the obligation, or if he so desires, he may renounce the benefit of the period
by performing his obligation in advance.
Instances when Debtor loses right to use “Period” (IGIVA)
1. Debtor is Insolvent.
2. Debtor attempts to Abscond. ABSCOND - leave hurriedly and secretly, typically to avoid
detection of or arrest for an unlawful action such as theft.
3. Impairment of guarantees/securities.
4. Failure to furnish Guarantees/securities promised.
5. Violation of undertaking.

3) Alternative and Facultative Obligation

Alternative Obligation
- It is one where the debtor is alternatively bound by different prestations but the
complete performance of one of them is sufficient to extinguish the obligation.

Facultative obligation – Non obligatory

- It is one where the debtor, who has a reserved right to choose another prestation or
thing, is bound to perform one of the several prestations due or to deliver a thing
as substitute for the principal.
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Right to choose prestation in an alternative obligation

General rule: The right of choice belongs to the debtor
Exception: Unless it has been expressly given to the creditor
Limitations on debtor’s right to choose
1. The debtor must absolutely perform the prestation chosen. He cannot compel the
creditor to receive part of one and part of the other undertaking.
2. The debtor shall have no right to choose those prestation which are impossible, unlawful
or which could not have been the object of the obligation.
3. The debtor shall lose the right to choice when among the prestation whereby he
is alternatively bound, only one is practicable.
Effects of loss of objects in alternative obligations

Due to Fortuitous Event Due to Debtor’s Fault

Choice belongs to Debtor
All lost Debtor released from the Creditor shall have a right to be
obligation indemnified for damages based on
the value of the last thing which
disappeared/ last service which
became impossible
Some but not all Debtor shall deliver that which he Debtor shall deliver that which
are lost shall choose from among he shall choose from among
the remainder the remainder without damages
Only one remains Deliver that which remains
Choice belongs to Creditor
All lost Debtor released from the Creditor may claim the price/value
obligation of any of them with indemnity
for damages
Some but not all Creditor may choose from among Creditor may claim any of those
are lost the remainder or that which subsisting OR he may choose any of
remains if only one subsists those were lost, but it is the
price/value of with right to
damages that can be claimed
Only one remains Deliver that which remains. In case of fault of debtor, creditor has a
right to indemnity for damages

4) Joint and Solidary Obligation

Joint obligations
- Each debtor is liable only for a proportionate part of the debt and each creditor to his
proportionate share to the credit.

Solidary obligations
- It is where each of the debtors obliges to pay the entire obligation while each one of the
creditors has the right to demand from any of the debtors, the payment or fulfillment.
Presumption on the Character of an obligation
General rule: When two or more creditors or two or more debtors concur in one and
the same obligation, the presumption is that the obligation is joint.
Exception: When the law, stipulation or nature of the obligation requires solidarity.
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5) Divisible and Indivisible Obligation

Divisible obligations
- Those which have as their object a prestation which is susceptible of partial
performance with the essence of the obligation being changed.

Indivisible obligations
- Those which have as their object a prestation which is not susceptible of partial
performance, because otherwise the essence of the obligation will be changed.

6) Obligation with a Penal Clause

- An obligation with a penal clause is one with an accessory undertaking by virtue of
which the obligor assumes a greater liability in case of breach of the obligations.
General rule: Penalty takes the place of damages and interest in case of non-compliance.
Exceptions:
i. Stipulation states.
ii. Debtor refuse to pay penalty.
iii. Debtor guilty of fraud in performance of obligation

D. Nature and Effects of Obligation

Obligations of the Obligor or Debtor in an obligation to give (Real Obligation)
Specific or Real Determinate Obligation Generic or Real Indeterminate Obligation
 Deliver the thing which he has  Deliver the thing which is neither of
obligated himself to give; superior nor inferior quality;
 Take care of the thing with proper  Pay damages in case of breach of the
diligence of a good father of a family; obligation by reason of delay, fraud,
 Deliver all accessions and accessories negligence or contravention of the tenor
of the thing even though they may not thereof;
have been mentioned;
 Pay damages in case of breach of the
obligation by reason of delay, fraud,
negligence or contravention of the
tenor thereof;

Rights of the creditor in an obligation to do something (Personal Obligation)

Specific Personal Obligation Generic Personal Obligation
 Compel Specific Performance  Ask for the performance of the obligation
 Recover damages in case of breach of  Ask that the obligation be complied with
the obligation, exclusive or in addition at the expense of the debtor
to specific performance
 Entitlement to the fruits  Recover damages in case of breach of the
(natural/civil/industrial) from the obligation
time the obligation to deliver arises.*
*This refers to the personal right of oblige/creditor which is enforceable against the obligor.
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Breach of Obligations
1) Voluntary breach
- Debtor, in the performance of the obligation, is guilty of:
a) default (mora)
b) fraud (dolo)
c) negligence (culpa)
d) contravention of the tenor of the obligation
- Obligor or debtor liable for damages.

2) Involuntary breach
- Debtor is unable to comply with his obligation because of fortuitous event.
Fortuitous event is an occurrence or happening which could not be foreseen, or even if
foreseen, is inevitable.
- Debtor is not liable for damages.
Effects of fortuitous events
 On determinate obligation – The obligation is extinguished
 On generic obligation – The obligation is not extinguished.
This is based on the principle of “genus nun quam peruit” which means genus never
perishes.
Modes of Breach of Obligation
a) Default (mora)
- The failure to perform the obligation in due time because of dolo (malice) or culpa
(negligence).

- In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligations, delay by the other begins.

Kinds of Mora
i Mora Solvendi – delay on the part of the debtor or obligor to give (ex re) or to do (ex
persona)
ii Mora Accipiendi - delay on the part of the creditor or obligee to accept
iii Compensatio Morae – delay of both parties in a reciprocal obligations
General Rule: THERE IS NO DELAY, WHEN THERE IS NO DEMAND (Judicial or Extra-
Judicial) Exceptions: Demand is NOT necessary when:
i. Stipulated by the parties;
ii. Provided by law;
iii. Time is of the essence of the contract; and
iv. Demand will be useless.

b) Fraud (dolo)
- Fraud or dolo consists in the conscious and intentional proposition to evade
normal fulfilment of an obligation.
Classes of fraud in the perfection
i Dolo causante (casual fraud) - fraud in obtaining consent
ii Dolo incidente (incidental fraud) - fraud in performing a contract
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Dolo incidente Dolo causante

 Present during the performance of a
pre-existing obligation.
 Purpose is to evade the normal
fulfilment of the obligation.
 Result in the non-fulfilment or breach
of the obligation.
 Gives rise to a right of the creditor to
recover damages from the debtor.
 Present during the time of birth or
perfection of the obligation.
 Purpose is to secure the consent of the
other to enter into a contract.
 Results in the vitiation of consent.
 Gives rise to a right of an innocent party to
annul the contract.

c) Negligence (culpa)
- Omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the place.
Diligence required:
i That agreed upon by the parties
ii In the absence of stipulation, that required by law in the particular case
iii If both the contract and law are silent, diligence of a good father of a family

Concept of Ordinary Diligence (Diligence of a Good Father of a Family)

- That reasonable diligence which an ordinary prudent person would have done under the
same circumstances.

d) Contravention of the tenor of the obligation

- The act of contravening the tenor or terms or conditions of the contract. It is also known as
“violation”.
- The phrase “in any manner contravene the tenor” of the obligation includes any illicit act
which impairs the strict and faithful fulfillment of the obligation, or every kind of defective
performance. Such violation of the terms of contract is excused in proper cases by
fortuitous events.

E. Extinguishment of Obligation
Modes of Extinguishing an Obligation (PaLoCo3N)
1) Payment or Performance
2) Loss
3) Condonation or remission of debt
4) Confusion or merger of the rights of creditor and debtor
5) Compensation
6) Novation
Other modes (PARF)
1) Annulment
2) Rescission
3) Fulfillment of a resolutory condition
4) Prescription
5) Others: Death of a party in case of a personal obligation, mutual withdrawal of parties,
arrival of a resolutory period, compromise agreements, impossibility of fulfillment and
happening of a fortuitous event.
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Payment or Performance
Characteristics of payment
a) Payment or Performance must be complete. (Integrity of fulfillment)
b) Thing paid must be the very thing due and cannot be another thing even if of the same or
more quality and value. (Identity of prestation)
Exceptions:
i Dation in payment
ii Novation of the obligation
iii Obligation is facultative
c) The payment of the obligation must be in its entirety. Debtor cannot be compelled by the
creditor to perform obligation in parts and neither can the debtor compel the creditor to
accept obligation in parts. (Indivisibility)
Requisites of a valid payment (P3AD)
1) Person who pays*
2) Person to whom payment is made**
3) Propriety of the time, place, and manner of payment
4) Acceptance by the creditor
5) Delivery of the full amount or the full performance of the prestation
Persons qualified to make payments*
The following persons may effect payment and compel the creditor to accept the payment:
1) Debtor himself
2) His heirs and assigns
3) His agents and representatives
4) Third persons who have a material interest in the fulfilment of the obligation.
Rule when a third person made the payment:
 If payment by third person is with knowledge and consent of creditor, he is
entitled to full reimbursement or can be subrogated to all rights of creditor.
 If payment by third person is without knowledge and consent of creditor, he is
entitled to conditional reimbursement only. He can recover only insofar
as payment has been beneficial to the debtor.
Person to whom payment is made**
The following persons are entitled to receive the payment:
1) The person in whose favor the obligation has been constituted
2) His successor in interest, or
3) Any person authorized to receive it.
Place of Payment
i At the place agreed upon
ii If no agreement
a. Object is indeterminate – paid at domicile of DEBTOR
b. Object is determinate – location of the thing at the time of constitution of obligation
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Special Forms of Payment

Dation in Payment
Alienation by the debtor of a particular property in favor of his creditor, with
the latter’s consent, for the satisfaction of the former’s money obligation to the latter, with
the effect of extinguishing the said money obligation.

Application of Payment
Designation of the particular debt being paid by the debtor who has two or
more debts or obligations of the same kind in favor of the same creditor to whom the
payment is made.
Requisites:
 There is only one debtor and one creditor
 There are two or more debts owed to a single creditor
 All debts are due and demandable
 Insufficient payment to extinguish all debts

Payment by Cession
Debtor cedes his property to his creditors so the latter may sell the same and the
proceeds realized applied to the debts of the debtor.
Requisites:
 There is only one debtor and two or more creditor
 Debtor is in partial or total insolvency
 Debtor to deliver all his property to creditors
 All debts are due and demandable
 Creditors must sell the properties & apply the proceeds to their respective credits
proportionately.

Tender of Payment
Voluntary act of the debtor whereby he offers to the creditor for acceptance
the immediate performance of the former’s obligation to the latter.

Consignation
Act of depositing the object of the obligation with the court or competent authority
after the creditor has unjustifiably refused to accept the same or is not in a position to
accept it due to certain reasons or circumstances.
Effectivity of consignation as payment
General rule: Consignation shall produce effects of payment only if there is a valid tender of
payment.
Exceptions:
i. Creditor is Absent or unknown, or doesn’t appear at place of payment
ii. Creditor Refuses to issue a receipt without just cause
iii. Title of the obligation has been lost
iv. Creditor is Incapacitated to receive payment at the time it is due
v. Two or more persons claim the right to collect
Loss
A thing is considered lost when (DOPE):
a. It Disappears in such a way that its existence is unknown;
b. It goes Out of commerce;
c. It Perishes; or
d. Its Existence is unknown or if known, it cannot be recovered.
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Requisites for the extinguishment of obligation due to loss

 Thing lost is a determinate thing;
 The loss is without debtor’s fault; and
 No delay on the part of the debtor.

Condonation or remission of debt

- gratuitous abandonment of right by the creditor

Requisites of condonation:
 Must be gratuitous;
 Acceptance by the debtor;
 Must not be inofficious;
 Formalities provided by law on donations must be complied with if condonation is express;
and
 An existing demandable debt.

Confusion or merger of the rights of creditor and debtor

- meeting in one person of qualities of debtor & creditor w/ same obligation

Requisites of valid confusion/merger

 The merger of characters of debtor and creditor must be in same person;
 It takes place between principal debtor and creditor; and
 Confusion or merger is clear and definite.

Compensation
- two persons are debtors and creditors of each other

Requisites of Compensation
 Parties both principal debtors and creditors of each other.
 Compensation is not prohibited by law.
 No retention or controversy by third person.
 Both debts are due and demandable.
 Both debts are liquidated.
 Both debts are in money or consumable things.

Classes of Compensation
As to effect
a. Total – obligations completely extinguished.
b. Partial – a balance remains
As to origin or cause
a. Legal – by law
b. Voluntary or conventional – agreement of parties
c. Judicial – order from the court
d. Facultative – one of parties can choose/oppose claiming compensation

Novation
- It is the substitution or change of an obligation by another, resulting in its extinguishment or
modification.

Two-fold functions of Novation

1. It extinguishes the old obligation; and
2. Creates a new obligation in lieu of the old one.
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Two (2) types of Novation

1) Real Novation - by changing the object or principal conditions
2) Personal Novation - changing the person of debtor or creditor
Two (2) sub-types of Personal Novation
a. substituting another in the place of the debtor
b. subrogating a third person to the rights of the creditor

Forms of Novation by Substitution of Debtor

i Expromision – with consent of creditor and without consent of old debtor
Requisites:
 Takes place with the initiative of third person and
 With the consent of creditor.

ii Delegacion– all must agree (creditor, old debtor and new debtor)
Requisites:
 Takes place with the initiative old debtor;
 With the consent of debtor; and
 Acceptance by creditor.

Forms of Novation by Subrogation of Creditor

i Conventional – takes place by agreement of parties
ii Legal – by operation of law
Instances of Legal Subrogation
a. When a creditor pays another preferred creditor even without the knowledge
of the debtor
b. When a third person pays the debt of another with express approval of debtor
c. When a third person pays even without the knowledge of debtor

II. CONTRACTS

A. General Provisions
A contract is the meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.

Contracts may either be nominate or innominate

Nominate – are those regulated and which the law designates by name
Innominate – are those contractual relations recognized by law with no special designation
Kinds of innominate contracts:
Do ut des—I give that you give;
Do ut facias—I give that you do;
Facio ut des—I do that you give;
Facio ut facias—I do that you do.

Perfection of contract
General rule: Contracts are perfected by mere consent. *

Exception: Real contracts (such as deposit, pledge and commodatum)

*In consensual contracts, cognition theory is to be applied wherein the contract is

deemed perfected from the moment the acceptance comes to the knowledge of the offeror.
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Stages in the life of a contract

1. Preparation
2. Perfection or Birth
3. Consummation or Death

Characteristics of a contract (ROMA):

1. Relativity
- Contracts take effect only between the parties or their assigns and heirs, except where
the rights and obligations arising from the contract are not transmissible by their
nature, by stipulation, or by provision of law.

Exception to Principle of Relativity

1. Stipulations pour atrui—stipulations in favor of a third person;
2. When a third person induces a party to violate contract;
3. Third persons who come in possession of the object of the contract creating real
rights; and
4. Contracts entered into in fraud of creditors.

2. Obligatoriness and consensuality

- Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for validity are present.
3. Mutuality
- The contract must bind both contracting parties and its validity or compliance cannot be
left to the will of one of them.
4. Autonomy
- It is the freedom of the parties to contract and to stipulate provided the stipulations are
not contrary to law, morals, good customs, public order or public policy.

B. Elements of Contracts

1) Essential Requisites of a Contract (COC): Consent, Object and Cause

- are those without which there can be no contract.

Consent
It is the manifestation of the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract.

Valid offer and acceptance

 Offer must be certain, complete and intentional; may be made orally or in writing
 Acceptance must be absolute; a qualified acceptance constitutes a counter-offer

Persons incapacitated to give consent

1. Deaf-mutes who do not know how to read and write
2. Insane or demented persons, unless the contract was entered into during a lucid interval
3. Minors
Except:
a. Contracts for necessaries
b. Contracts by guardians or legal representatives
c. Contracts when there is a misrepresentation on the part of the minor
d. Contracts of deposit, life, health or accident insurance
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Vices of consent (VIMFU)

1. Mistake
2. Intimidation
3. Violence
4. Undue influence
5. Fraud

Object or subject matter

It is the subject matter of the contract. It can be a thing, right or service arising from a
contract.

Requisites of an object (DELiCT)

 Determinate as to kind (even if not determinate, provided it is possible to determine the
same without the need of a new contract);
 Existing or the potentiality to exist subsequent to the contract;
 Must be Licit;
 Within the Commerce of man; and
 Transmissible.

General rule: All things or services may be the object of contracts.

Exceptions:
i Things outside the commerce of men;
ii Intransmissible rights;
iii Future inheritance, except in cases expressly authorized by law;
iv Services which are contrary to law, morals, good customs, public order or
public policy;
v Impossible things or services; and
vi Objects which are not possible of determination as to their kind.

Cause or consideration
It is the essential and impelling reason why a party assumes an obligation. Every
contract is presumed to have lawful cause.

Kinds of Cause
a. Cause in Onerous contracts – the prestation or promise of a thing or service by the other.
b. Cause in Remuneratory contracts - the service or benefit remunerated.
c. Cause in Gratuitous contract - the mere liberality of the donor or benefactor.

2) Natural Elements
- are those derived from the nature of the contract and ordinarily accompany the same.
3) Accidental Elements
- are those which exist only when the parties expressly provide for them for the purpose
of limiting or modifying the normal effects of the contract.

C. Form of Contracts

General Rule: Form is not required in consensual contracts.

Exceptions: When the law requires a contract be in writing for its:
1. Validity (formal contracts); or
2. Enforceability (under Statute of Frauds).
3. For the convenience of the parties
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When the solemnity requirement is for validity, its non-observance renders the contract
void and no effect.

Oral In writing Public instrument

Loan Loan with interest Contributed immovable
property in a partnership
Donation and acceptance Donation and acceptance of Donation and cceptance of
of movable less than or movable more than 5,000 immovable regardless of
equal to 5,000 amount
Agency Antichresis Chattel mortgage
Agency to sell land

The non-compliance of a form prescribed for enforceability will not permit the
contract, upon the objection of a party and although otherwise valid, to be proved or enforced by
action.

In writing (SALSAR)
1. Guaranty contracts (Special promise to answer)
2. Agreements not be performed within 1 year
3. Lease of immovable property for more than a year
4. Sale of Real Property
5. Sale of Personal property of more than or equal to 500
6. Prenuptial Agreeement
7. Representation

D. Reformation of Instruments
Reformation is a remedy to conform to the real intention of the parties due to mistake,
fraud, inequitable conduct, accident.

Requisites in reformation of instruments

 Meeting of the minds to the contract
 True intention is not expressed in the instrument
 By reason of: (MARFI)
- Mistake,
- Accident,
- Relative simulation,*
- Fraud, or
- Inequitable conduct.

Absolute and Relative Simulation Distinguished

 Absolute—when the contracting parties do not intend to be bound by the contract at
all.
Thus, an absolutely simulated contract is VOID.

 Relative*—when the contracting parties conceal their true agreement. A relatively simulated
contract binds the parties to their real agreement. The remedy to conform to the real
intention of the parties due to MARFI is reformation.

Reformation of instruments; when not allowed

1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void; and
4. When an action to enforce the instrument is filed (estoppel).
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E. Defective Contracts

1) Rescissible Contracts
Contracts validly agreed upon by reason of lesion or economic prejudice may be
rescinded in cases established by law.

Rescissible Contracts
1. Those entered into by guardians where the ward suffers lesion of more than ¼ of the
value of the things which are objects thereof;
2. Those agreed upon in representation of absentees, if the latter suffer lesion by more than
¼ of the value of the things which are subject thereof;
3. Those undertaken in fraud of creditors when the latter cannot in any manner claim what
are due them (accion pauliana);
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 and the court;
5. All other contracts especially declared by law to be subject to rescission; and
6. Payments made in a state of insolvency on account of obligations not yet enforceable.

Prescriptive period of action for rescission

 In case of no. 1, within 4 years from the time the termination of the incapacity of the ward;
 In case of no. 2, within 4 years from the time the domicile of the absentee is known; or
 In case of no. 3, within 4 years from the time of the discovery of fraud.

2) Voidable Contracts
Those in which all of the essential elements for validity are present, although the
element of consent is vitiated either by lack of capacity of one of the contracting parties.

Voidable Contracts
1. Those where one of the parties is incapable of giving consent to a contract;
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence,
or fraud.

Effects of annulment of contract

 If contract not yet consummated – parties shall be released from the obligations arising
therefrom.
 If contract has already been consummated
- Restitution shall take place
- Whenever restitution is not possible, he shall return the fruits received and the value
of the thing at the time of the loss, with interest from the same date.

Causes of extinction of action to annul

1. Prescription (4 years)
2. Ratification – cleanses the contract of its defects from the moment it was constituted
3. By loss of the thing which is the object of the contract through fraud or fault of the
person who is entitled to annul the contract

Prescriptive period of action for annulment of voidable contract

The action for annulment shall be brought within 4 years, reckoned 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.
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 And when the action refers to contracts entered into by minors or other incapacitated
persons, from the time the guardianship ceases.

3) Unenforceable Contracts
Those which cannot be enforced by proper action in court unless ratified.

Unenforceable Contracts
1. Those entered into in the name of another by one without authority or acting in excess
of authority;
2. Those where both parties are incapable of giving consent; and
3. Those which do not comply with the Statute of Frauds.

Characteristics of unenforceable contract

1. It cannot be enforced by a proper action in court;
2. It may be ratified;
3. It cannot be assailed by third person

4) Void/Inexistent Contracts
Those where all of the requisites of a contract are present but the cause, object or
purpose is contrary to law, morals, good customs, public order or public policy, or contract
itself is prohibited or declared void by law.

Void Contracts
1. Those lacking in essential elements:
a. Those whose cause, object or purpose is contrary to law, morals, good customs,
public law or public policy;
b. Those which are absolutely simulated or fictitious;
c. Those whose cause or object did not exist at the time of the transaction;
d. Those whose object is outside the commerce of men;
e. Those which contemplate an impossible service; and
f. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained.
2. Contracts prohibited by law
3. Illegal or illicit contracts

Characteristics of void/inexistent contracts

a. It cannot be ratified.
b. The right to set up the defense of illegality cannot be waived.
c. The action or defense for the declaration of the inexistence of a contract does not
prescribe.
d. The defense of illegality of contracts is not available to third persons whose
interests are not directly affected
e. A contract which is the direct result of a previous illegal contract is also void and
inexistent.

Doctrine of In Pari Delicto

When the defect of a void contract consists in the illegality of the cause or object of
the contract, and both of the parties are at fault or in pari delicto, the law refuses them every
remedy and leaves them where they are.
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DEFECTIVE
Void Voidable Rescissible Unenforceable
1. Defect is Defect is caused by Defect is caused by Defect is caused by
caused by lack vice of consent injury/damage lack of form,
of essential either to one of the authority, or capacity
elements or parties or to a 3 rd of both parties not
illegality person cured by
prescription
2. Do not, as a Valid and Valid and Cannot be enforced
general rule, enforceable until enforceable until by proper action in
produce legal they are annulled by they are rescinded by court
effects a competent court a competent court

3. Action for the Action for annulment Action for rescission Corresponding
declaration of or defense of may prescribe action for recovery, if
nullity or annulability may there was total or
inexistence prescribe partial performance
does not of the unenforceable
prescribe contract may
prescribe
4. Not cured by Cured by Cured by Not cured by
prescription prescription prescription prescription

5. Cannot be Can be ratified Need not be ratified Can be ratified

ratified

6. Assailed not Assailed only by a Assailed not only by Assailed only by a

only by contracting party a contracting party contracting party
contracting but even by third
party but person who is
even by a prejudiced or
third person damaged by the
whose contract
interest is
directly
affected

7. Assailed Assailed directly or Assailed directly only Assailed directly or

directly or collaterally collateraly
collaterally

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God bless future CPAs!

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