5 - Contracts - General Provisions To Interpretation (1305 - 1379)

OBLIGATIONS AND CONTRACTS
UNIVERSITY OF SAN AGUSTIN
Title II. - CONTRACTS

CHAPTER 1
GENERAL PROVISIONS
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.
CONTRACT
It is a juridical convention manifested in legal form, by virtue of which, one or more persons bind
themselves in favor of another or others, or reciprocally, to the fulfilment of a prestation to give, to do, or
not to do. (Sanchez Roman)
It is an agreement between two or more competent parties, based on mutual promises, to do or to refrain
from doing some particular thing which is neither illegal nor impossible. The agreement results in an
obligation or duty that can be enforced in a court of law.
ELEMENTS OF A CONTRACT
1. Essential Elements: a legally complete contract will arises between two parties when all the
essential elements of a contract are present: (ATM: C-O-C)
a. Consent
b. Subject Matter / Object
c. Cause or consideration
Note: in some contracts, (d) form, and (e) delivery are essential
2. Natural Elements – those found in certain contracts and presumed to exist, unless the contrary
has been stipulated by the parties. (Ex. Warranty against eviction; warranty against hidden defects
(contract of sale))
3. Accidental Elements – these are stipulations agreed upon by parties (Ex. stipulation to pay
interest)
STAGES IN THE LIFE OF A CONTRACT

1. Preparation or Conception – This is the bargaining point of the contract. The parties are still
negotiating and have not arrived at a definite agreement.
2. Perfection or Birth – At this stage, the parties have come to a definite agreement. There is
meeting of the minds as to the subject matter (object) and the cause of the contract.
3. Consummation or Death or Termination – The parties have performed their respective
obligations under the contract at the stage. The contract may be said to have been fully executed.
Example: On June 13, Ana offered for sale to Francis a specific motorbike for P50,000. Francis,
told Ana that he is buying the motorbike for P40,000. On May 23, Ana accepted Francis’ proposal
to buy the motorbike for P40,000. Finally, on May 25, Ana delivered the motorbike to Francis, and
Francis paid Ana the price of P40,000.
Questions:
a. When is the preparation?
b. When is the perfection?
c. When is the consummation?
BASIC PRINCIPLES OR CHARACTERISTICS OF A CONTRACTS

(1) Freedom or autonomy of contracts. — The parties may establish such stipulations, clauses, terms,
and conditions as they may deem convenient, provided, they are not contrary to law, morals, good
customs, public order, and public policy (Art. 1306.);
(2) Obligatoriness of contracts. — Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith (Arts. 1159, 1315.);
(3) Mutuality of contracts. — Contracts must bind both and not one of the contracting parties; their
validity or compliance cannot be left to the will of one of them (Art. 1308.);
(4) Consensuality of contracts. — Contracts are perfected, as general rule, by mere consent, and from
that moment the parties are bound not only by the fulfillment of what has been expressly stipulated but
Sources:
Simplified Law on Obligations and Contracts, Ballada S. and Mendoza DJ
The Law on Obligations and Contracts, De Leon, H.S. and De Leon H. M. Page | 1
also to all the consequences which, according to their nature, may be in keeping with good faith, usage
and law (Art. 1315.); and
(5) Relativity of contracts. — Contracts take effect only between the parties, their assigns and heirs,
except in cases where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation, or by provision of law.
Art. 1306. 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. (1255a)
CONCEPT OF FREEDOM OR AUTONOMY OF CONTRACT

The freedom to contract is both a constitutional and statutory right. The right to enter contracts is one of
the liberties guaranteed to the individual by the Constitution. Hence, the contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient, but the same should not
be contrary to law, morals, good customs, public order, or public policy.
LIMITATIONS ON CONTRACTUAL STIPULATIONS.

1. Law – Contract must respect the law, for the law forms part of the contract. The provisions of all
laws are understood to be incorporated in the contract.
Example: Hyeri mortgaged her house and lot to Jacob as a security for her debt. The mortgaged
contract provided that in case of non-payment at maturity, Jacob (mortgagee) shall automatically
own the house and lot.
The clause providing that the mortgagee will automatically own the property mortgaged if the debt
is not paid at maturity is null and void. Such agreement of forfeiture is known as pactum
commisorium. Note, however, that the mortgage itself is valid.
2. Morals – It deals with right and wrong and with human conscience.
Example: Jack is indebted to Jill for P5,000. Jack agreed to work as Jill’s servant without wages
until Jack could find money with which to pay his debt to Jill. After six months of working with Jill,
Jack left without paying Jill the debt.
The agreement to work without pay is void and immoral for it amounts to involuntary servitude.
Jack is entitled to wages for the service he has rendered; Jill is allowed to deduct from said wages
the amount of Jack’s debt.
3. Good customs – those that have received for a period of time practical and social confirmation.
Good customs and morals overlap each other, but sometimes they do not.
4. Public Order – It represents in the law of persons the public, social and legal interest, that which
is permanent and essential to the institutions that which, even in favoring an individual in whom
the right lies, cannot be left to his own will.
5. Public Policy – this varies according to the culture of a particular country, is the public, social, and
legal interest in private law.
A contract is contrary to public policy if it has a tendency to injure the public, is against the public
good, or contravenes some established interests of society, or is inconsistent with sound policy and
good morals, or tends clearly to undermine the security of individual rights.
Example: Kia entered a contract with Lily. A stipulation in the contract states that should Kia leave
the service of his employer, Kia is prohibited from engaging in any enterprise with a period of five
(5) years from said separation.
Here, not to engage in “any” enterprise within a period of five years after leaving the service of
one’s employer constitutes an undue or unreasonable restraint of trade. The employment contract
is against public policy.
Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the
provisions of Titles I and II of this Book, by the rules governing the most analogous nominate
contracts, and by the customs of the place.
Sources:
KINDS OF CONTRACTS ACCORDING TO NAME

1. Nominate – the contract has a particular or special name. (Example: commodatum, contract of
partnership, contract of sale)
2. Innominate – the contract is not given any special name.
KINDS OF 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.
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
CONCEPT OF MUTUALITY OF CONTRACTS

Mutuality of contracts means that both parties must be bound. The principle is based on the equality of
the parties.
Art. 1309. 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.
Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case,
the courts shall decide what is equitable under the circumstances.
DETERMINATION OF A CONTRACT BY A THIRD PERSON

The determination of the performance of a contract may be left to a third person. But the decision of said
person shall not bind the contracting parties until it has been made known to them.
Except if the determination is evidently inequitable, it shall not bind the contracting parties. In such case,
the courts shall decide what is equitable under the circumstances.
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person.
PARTIES BOUND BY A CONTRACT

Under the principle of relativity contract are generally effective only between the parties, their assigns and
their heirs. However, the heir is not liable beyond the value of the property he received from the
decedent.
Example: Bob leased his property to Louis. Louis subleased part of the premises to Kris in violation of a
condition of the lease between Bob and Louis.
Bob can rescind the lease contract with Louis without being liable to Kris. His action would appropriately
be against Louis. Bob is a stranger to and is not bound by the sublease between Louis and Kris because he
did not participate therein.
EXCEPTIONS:
1. Obligations arising from the contract are not transmissible by their nature, by stipulation or
provision of law. (Article 1311)
2. Stipulation pour autrui (Article 1311)
3. When a third person induces another to violate his contract (Article 1314)
4. When the law authorizes the creditor to sue on a contract entered into by his debtor. (Article 1313)
STIPULATION POUR AUTRUI

It is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which
stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the
third person.
Sources:
REQUISITES:
1. There is a stipulation in favor of a third person.
2. The contracting parties must have clearly and deliberately conferred the favor upon the third
person.
3. The stipulation must be part of the contract.
4. The third person communicated his acceptance to the obligor before its revocation.
5. Neither of the contracting parties representing the third party.
Example: Jon sold a parcel of land to Joy for P2 million. They agreed that Jon will give Joy, P1.8 million
and to Rys P200,000 because Jon is indebted to Rys for P200,000.
Rys must communicate his acceptance of the stipulation to Jon after which Rys can already demand its
fulfillment.
Art. 1312. In contracts creating real rights, third persons who come into possession of the
object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the
Land Registration Laws.
Example: Lian sold to Karen his apartment house. At the time of sale, a lease contract is existing
between Lian and Nikko. Karen must respect the existing lease contract between Lian and Nikko.
Art. 1313. Creditors are protected in cases of contracts intended to defraud them.
Art. 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party.
Articles 1313 and 1314 are the exceptions to the general rule that contract binds only parties related
thereto.
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and
law.
MANNER OF PERFECTING A CONTRACT

1. Consensual – Contract is perfected by mere consent. (Ex. Sale)
2. Real – Contract is perfected by the delivery of the thing. (Ex. Deposit, Pledge, Commodatum)
3. Formal or Solemn – A special form of contract is required for the perfection of the contract. (Ex.
Donation inter vivos of real property – the contract must be in a public instrument)
4.
EFFECTS OF PERFECTING A CONTRACT
1. Parties are bound to the fulfillment of what has been expressly stipulated and such compliance
must be in good faith.
2. Parties are bound to all consequences which according to their nature, may be in keeping with
good faith, usage, and law.
Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the
delivery of the object of the obligation.
DEPOSIT
It is constituted from the moment a person receive a thing belonging to another, with the obligation of
safely keeping it and of returning the same. (Art. 1962)
PLEDGE
It is a bailment or delivery of goods or property by way of security for a debt or engagement, or as
security for the performance of an act.
COMMODATUM
It is a contract whereby one of the parties delivers to another something not consumable so that the latter
may use the same for a certain time and return it. If what is delivered is money or other consumable
thing, it is a contract of mutuum.
Illustration: Ayz borrowed from Basti P10,000. Ayz promised to pledge her Rolex watch as a security for
his debt on May 13. Question: Is there perfection of the contract?
Sources:
Art. 1317. No one may contract in the name of another without being authorized by the latter,
or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is
revoked by the other contracting party.
CONTRACTS ENTERED INTO IN THE NAME OF ANOTHER

General Rule: A person may not contract in the name of another.
Except:
1. when authorized by the person being represented
2. when the law gives him the right to represent the other
UNENFORCEABLE CONTRACTS (Article 1403 – 1408)

Contracts entered into in the name of another without any authority or legal representation (i.e. guardian
in behalf of his ward or who has an authority but acted beyond his powers) shall be unenforceable.
Question: Can it be cured? Yes, through RATIFICATION.
RATIFICATION
The defect of unenforceability may be cured if the contract is ratified by the person on whose behalf it has
been executed. Ratification cleanses the contract from all of its defects from the moment the contract was
entered into. The ratification must be made before the contract is revoked by the other contracting party.
Example: On June 28, 2020, John entered into a contract with Nina selling to the latter a car owned by
Keith. John received P250,000 from Nina as purchase price. Keith did not authorize John to sell the car.
The contract of sale is unenforceable. John has no authority from Keith to sell the car. However, Keith may
ratify the said contract should he collect the purchasing price of P250,000 form John.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS
GENERAL PROVISIONS
Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
SECTION 1. - Consent
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a counter-offer.
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 in the
place where the offer was made.
CONSENT
It is manifested by the meeting of the offer and acceptance upon the thing and the cause which are to
constitute the contract.
REQUISITES OF CONSENT
1. There must be two or more parties.
2. The parties must be capacitated to contract.
3. Consent must not be vitiated (i.e. intelligently or freely given)
4. The intention of the parties must be expressly declared.
OFFER
It is a proposal made by one party to another indicating a willingness to enter into a contract.
NATURE OF OFFER
It must be certain. It must not be vague, misleading or made as a joke.
Sources:
ACCEPTANCE
It means that the offeree agrees to be bound by the terms set by the offeror in the offer.
NATURE OF ACCEPTANCE
Acceptance of the offer must be unqualified and absolute. If acceptance is qualified by a condition, it
merely constitutes as a counter-offer.
PERFECTION OF CONTRACT IF SENT BY LETTER OR TELEGRAM

Acceptance made by letter or telegram does not bind the offeror except from the time it came to his
knowledge. This the concept of “cognition theory” which bases the perfection of the contract from the time
the acceptance of the offer comes to the knowledge of the offeror.
Example: Diane offered to sell her car to KC for P800,000. On the third day, Diane changed her mind that
she sent a withdrawal letter to KC at 11:00 in the morning which KC received at 5:00 p.m. Unknown to
Diane, KC sent her letter of acceptance to Diane that same day which Diane received by 2:00pm.
Question: Is there perfection of the contract? No, since prior to receipt of the letter of acceptance, the
offer had already been withdrawn. It does not matter that the letter of withdrawal was received later by
KC (offeree) than the receipt of the letter of acceptance by Diane (offeror). What is relevant is that the
letter of withdrawal was made prior to the knowledge of acceptance.
Art. 1320. An acceptance may be express or implied.
Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all
of which must be complied with.
Art. 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him.
AGENT
He is an extension of the personality of either the offeror or offeree. Hence, if acceptance is communicated
to the agent, it is considered as a perfection of the contract.
Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.
INEFFECTIVITY OF OFFER
Before acceptance is conveyed to offeror, an offer may be rendered ineffective by the following:
1. Death
2. Civil Interdiction
3. Insanity
4. Insolvency
OTHER INSTANCES WHEN OFFER BECOMES INEFFECTIVE

1. Rejection of the offer by the offeree
2. Counter-offer by the offeree
3. Object becomes illegal or unlawful prior to acceptance
4. Period within which to accept the offer had lapsed
Art. 1324. When the offerer 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.
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 CONTRACT
It is an agreement that binds an offeror to a promise to hold open an offer for a predetermined or
reasonable length of time. The offeror may not receive any consideration for holding open an offer. But
sometimes, in return of the agreement to hold the offer open, the offeror receives money or something
else of value from the offeree.
OPTION MONEY
Sources:
It is the money paid or promised to be paid in consideration for the option.
Example: Rita, interested to buy the car at a showroom, asked Oli the price. Oli offered the price of the
car at P800,000. Since Rita could not make up her mind, Oli told her that he will be giving her a week to
decide and that he will reserve the car for her.
Before the week is over, Oli can withdraw his offer to sell the car to Rita provided that there is no
acceptance. Oli must communicate to Rita the withdrawal of the offer.
Example: Jake offered to sell his house and lot to Elle for P5 million. In Jake’s letter to Elle, Jake gave Elle
a month to raise the amount, in return Elle is to give Jake P50,000. Jake further wrote that as soon as Elle
is ready, they will sign a deed of sale. Interested with the offer, Elle gave Jake P50,000. After a week,
Jake went to Elle telling her that he is no longer willing to sell the property unless the price is raised to P7
million.
Elle may compel Jake to accept the P5 million which is the price first offered and executed the deed of sale
because the option is founded upon a consideration – P50,000 option money.
Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not
definite offers, but mere invitations to make an offer.
Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears.
Business advertisements of things for sale are not definite offers but mere invitations to make an offer.
However, if such advertisements contain very particular promises, the same may be held to be definite
offers.
Art. 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state
of drunkenness or during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by
law, and is understood to be without prejudice to special disqualifications established in the
laws.
CAPACITY
It is the legal ability to enter into a contractual relationship.
PERSONS INCAPACITATED TO CONSENT

1. Unemancipated minors – those who are below eighteen (18) years old or those whose parents
still exercises parental authority over the person and property of the child.
2. Insane or demented persons – Except if said person is experiencing lucid interval. (Lucid
Interval – temporary restoration to sanity.)
3. Drunk, drug-induced, hypnotized persons and those in a state of somnambulism
(sleepwalking) – Contracts entered into during such state may be annulled or ratified by said
person.
4. Deaf-mutes who do not know how to write. – If the said deaf-mute could read and not write,
he could still validly enter into a contract since he is able to understand the contents of the
contract.
Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable. (1265a)
CAUSES OF VITIATED CONSENT (ATM:VIFUM)

1. Mistake or Error (Articles 1331 to 1334)
2. Fraud or Deceit (Articles 1338 to 1344)
3. Violence (Articles 1335 to 1336)
4. Intimidation (Articles 1335 to 1336)
5. Undue Influence (Article 1337)
Sources:
Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the
thing which is the object of the contract, or to those conditions which have principally moved
one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
MISTAKE
It is the false belief about something. Mistake means some unintentional act, omission, or error arising
from ignorance, surprise, imposition, or misplaced confidence; a state of mind not in accord with reality.
REQUISITES FOR MISTAKE TO VITIATE CONSENT:

1. It must be substantial regarding:
a. the object of the contract
Ex. Gian signs a contract of sale thinking it is a contract of loan.
b. conditions which have principally moved one or both parties to enter into the
contract
Ex. Phoebe offer to Rachel a parcel of land for the latter to buy. Phoebe knew that the area
of the land is 500 sqm. However, after the signing of the contract, Rachel verified that the
parcel of land sold to her was actually 350 sqm. and not 500 sqm. By reason of this
circumstance, the contract may be annulled since the mistake in the measurement of the
land is substantial.
c. the identity or qualifications of one of the parties when the same have been the
principal cause of the contract
Ex. Dara enchanted by the beautiful voice of Xian which she overheard over the radio
decided to produce a concert for her. Dara phoned Xian and told him about her offer. “Sean”
accepted the offer and signed the contract which was sent by Dara to him. During the
rehearsals of Sean, Dara dropped by and was surprised to see Sean instead of Xian. The
contract may be annulled by Dara because of the error as to the identity and qualifications
of Sean.
2. Error must be excusable, not caused by negligence

3. Error must be mistake of fact, and not of law.
MISTAKE OF FACT
It is a mistake not caused by the neglect of a legal duty on the part of the person making the mistake,
and consisting in:
1. an unconscious ignorance or forgetfulness of a fact, past or present, material to the contract; or
2. belief in the present existence of a thing material to the contract which does not exist, or in the
past existence of such a thing which had not existed.
MISTAKE OF LAW
It happens when a party, having full knowledge of the facts, comes to an erroneous conclusion as to their
legal effect.
Art. 1332. When one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the contract must
show that the terms thereof have been fully explained to the former. (n)
Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract. (n)
Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated, may vitiate consent. (n)
Sources:
REQUISITES OF MUTUAL ERROR

1. There must be a mutual error
2. Error must refer to the legal effect of the agreement
3. Real purpose of the parties is frustrated
Example: Fred and Ana entered into a contract of sale of a parcel of land. As written, the contract the
signed was one of sale. It turned out however that both parties erroneously thought that it had the same
effect as mortgage. Contract here is voidable since there is no meeting of the minds.
Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is
employed.
There is intimidation when one of the contracting parties is compelled by a reasonable and
well-grounded fear of an imminent and grave evil upon his person or property, or upon the
person or property of his spouse, descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be
borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does
not vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall annul the obligation, although it may have been
employed by a third person who did not take part in the contract. (1268)
VIOLENCE INTIMIDATION
In order to wrest consent, serious or irresistible There is intimidation when one of the contracting
force is employed. parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon
is person or property, or upon the person or
property of his spouse, descendants or
ascendants, to give his consent.
Physical coercion Moral coercion.
Ex. Jonas, while being tortured, is forced into Ex. Afraid that he will be killed, Jonas at gunpoint
signing a contract. signs the contract.
Art. 1337. There is undue influence when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties, or the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress.
REQUISITES OF UNDUE INFLUENCE

1. Taking improper advantage of one’s power
2. Over the will of another
3. Depriving the latter of a reasonable freedom of choice.
Art. 1338. There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them, he would
not have agreed to.
KINDS OF FRAUD
1. Causal Fraud (dolo causante) – this is the vice of consent that makes the contract voidable.
2. Incidental Fraud (dolo incidente) – even without the fraud, the parties would still have agreed,
hence, fraud here is only incidental in the giving of the consent. The contract is still valid, but there
can be action for damages (Arti. 1344, 2nd par.)
REQUISITES OF DOLO CAUSANTE

1. fraud must be serious
2. fraud must be employed by only one of the contracting parties
3. there must be a deliberate intent to deceive or to induce
4. the other party must have relied on the untrue statement.
Sources:
Note: if both parties employed serious fraud, the contract remains to be valid.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud.
Example: Gian, agent, persuaded Dex, his principal, to sell a vast size of land to him at a price lower than
the market value. Gian did not disclose to Dex that the government was actually interested in acquiring
the sand land at a much higher price.
Here, the contract of sale between Gian and Dex is voidable. Gian, being in confidential relation with Dex,
there is a duty on the part of Gian to reveal to Dex the interest of the government in t he land. There is a
fraudulent concealment on the part of Gian as the agent.
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know
the facts, are not in themselves fraudulent.
CAVEAT EMPTOR (BUYER BEWARE)

In a contract of sale, the buyer must check the title of the seller so that he is ensured that the thing has a
clean title. A buyer must be on his own guard for he is buying at his own risk.
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert
and the other party has relied on the former's special knowledge.
Example: Bea bought a bottle of perfume because Alice, the sales lady of the department store assured
her that the fragrance lasts 48 hours.
Here, the statement of the sales lady, who is not an expert, is a mere expression of an opinion, such
statement does not signify fraud.
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.
Art. 1344. In order that fraud may make a contract voidable, it should be serious and should
not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when
the parties do not intend to be bound at all; the latter, when the parties conceal their true
agreement.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to law, morals,
good customs, public order or public policy binds the parties to their real agreement. (n)
SIMULATION
It is the process of intentionally deceiving others by producing the appearance of a contract that really
does not exist (absolute simulation) or which is different from the true agreement (relative simulation).
KINDS AND EFFECTS OF SIMULATION

1. Absolute simulation – The contract is fictitious and void. The parties do not intend to be bound.
Example: Wendy and Glenda, without reason and without any intention to be bound, executed a
deed of sale.
2. Relative simulation – The contract is disguised. The parties conceal their true agreement. The
parties are bound to their real agreement when it does not prejudice a third person and when its
purpose is not contrary to law, morals, good customs, public order, and public policy.
Sources:
Example: Howard and Bernadette executed a deed of sale although their real intention was a
donation. Here, parties are bound to their real agreement which is a donation and not sale.
SECTION 2. - Object of Contracts
Art. 1347. All things which are not outside the commerce of men, including future things, may
be the object of a contract. All rights which are not intransmissible may also be the object of
contracts.
No contract may be entered into upon future inheritance except in cases expressly authorized
by law.
All services which are not contrary to law, morals, good customs, public order or public policy
may likewise be the object of a contract.
Art. 1348. Impossible things or services cannot be the object of contracts.
Art. 1349. The object of every contract must be determinate as to its kind. The fact that the
quantity is not determinate shall not be an obstacle to the existence of the contract, provided it
is possible to determine the same, without the need of a new contract between the parties.
OBJECT
It is the end aimed at; the thing sought to be accomplished; the aim or purpose; the thing sought to be
attained.
REQUISITES OF VALID OBJECT

1. within the commerce of men
2. transmissible
3. not contrary to law, morals, good customs, public order or public policy
4. possible
5. determinate
Note: Future things may be the object of a contract. (Ex. Future harvest of a palay)
FUTURE INHERITANCE AS AN OBJECT

A future inheritance is any property or right not in existence or not capable of determination at the time of
the contract but which a person may in the future acquire by succession. Here, the source of property is
still alive.
General Rule: Future inheritance cannot be the object of contract.

Except:
1. in case of marriage settlements
2. in case of partition of property inter vivos by the deceased
Example: Bob’s father recently died. Being one of the heirs, he sold his share on the property even before
the said property was delivered to the heirs. Question: Is the sale made by Bob, valid?
Example: While Manuel’s father is still alive, Manuel sold the property which he expects to inherit from
his father. Question: Is the sale made by Manuel, valid?
SECTION 3. - Cause of Contracts
Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the
benefactor.
CAUSE OR CONSIDERATION
Sources:
It is the mutual exchange of benefits and sacrifices. It is the thing of value promised to the other party in
exchange for something else of value promised by the other party. It is this exchange of valued items or
services that binds the parties together.
CLASSIFICATION OF CONTRACTS AS TO CAUSE

1. Onerous – the cause for each contracting party is the prestation or promise of a thing or service
by the other.
2. Remuneratory – The cause is the past service or benefit which is remunerated.
3. Gratuitous – The cause is the mere liberality of benefactors.
Art. 1351. The particular motives of the parties in entering into a contract are different from
the cause thereof.
MOTIVE
It is the reason that moves the will and induces action. This however is not an essential element of the
contract, therefore, it does not affect in any manner the validity or invalidity of a particular contract.
Example: Derek buys a knife for P800.00 from the department store.
Here, for Derek the object is the price which is P800.00 and the cause is the knife. With a lawful object
and cause plus a valid contract, the contract of sale is valid. As to the motive why Derek bought the knife,
it is unknown. Hence, if Derek bought the knife to kill a certain person, this will not affect the validity of
the contract of sale.
Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.
Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be
proved that they were founded upon another cause which is true and lawful.
REQUISITES OF CAUSE:
1. it must exist
2. it must be lawful
3. it must be true
WANT OF CAUSE, UNLAWFUL CAUSE AND FALSE CAUSE – VOID CONTRACT

1. Want of cause – it means no cause exists. There is total lack or absence of cause or
consideration. (Ex. fictitious sale)
2. Unlawful cause – Cause is contrary to law, morals, good customs, public order or public policy.
(Ex. promise of a marriage based on sexual intercourse)
3. False cause – the cause is not true or not real. It invalidates a contract unless other cause which
is lawful really exists. (Ex. a sale which is actually a donation)
Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is
lawful, unless the debtor proves the contrary.
Example: Laine made a promissory note in favor of Bert which reads: “I promise to pay Bert or order
P100,000 on or before May 13, 2019.” (Sgd. Laine)
The promissory note does not show whether Bert received anything worth P100,000 from Laine so that
Laine is justified in making the promissory note in favor of Bert.
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.
LESION
It is the inadequacy or insufficiency of cause of a contract.
RULES ON LESION
Lesion or inadequacy of price does not invalidate a contract. Exceptions:
1. where there has been fraud, mistake or undue influence
Sources:
2. when expressly provided by law. (Article 1381 and 1382 – Rescissible contract)
Example: Heather sold her house and lot to Janice for P1.5 million. The property is actually worth P3
million.
Here, although there is lesion or inadequacy of the price, the contract is still valid except when there was
fraud, mistake, or undie influence.
CHAPTER 3
FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and indispensable. In such
cases, the right of the parties stated in the following article cannot be exercised.
General Rule: Under Article 1356, all contracts are valid regardless of form.
Exceptions:
1. when the contractual form is needed for validity (i.e. donation of real property)
2. when form is needed for enforceability under the Statute of Frauds
FORM
For formal contracts, in contrast with consensual contracts, it is required that the contract be in some
form so that it may be valid or enforceable. Form is, therefore, considered as the fourth requisite of formal
contracts in addition to consent, object, and cause.
IMPORTANCE OF FORM:
1. Validity – proper form must be observed in order for the contract to be valid.
Ex. Donation of real property in a private document (not notarized) – donation is not valid.
2. Enforceability – For agreements under the Statute of Frauds, the requirement of writing must be
satisfied, otherwise the same are unenforceable.
Ex. A parcel of land was sold by Fred to Vince for P1 million. The sale was orally made. Is the sale
valid? Yes. But is it enforceable? No. The statue of fraud requires that the sale must be in writing in
order for it to be enforceable.
3. Convenience – For contracts enumerated under Article 1358, form is necessary for convenience.
Art. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right may be exercised simultaneously
with the action upon the contract. (1279a)
The right to compel each party to observe the form can only be exercised if the contract is already
perfected (Art. 1357) and enforceable under the Statute of Frauds (Art. 1356).
Example: Jill donated a real property to Kris in a private instrument. Kris accepted the donation in the
same instrument. Later, Kris wanted to register the donation but registration requires a public instrument.
Can Kris compel Jill to put the donation in a public instrument? No, because the donation at the onset is
not valid. Donation of a real property requires a public instrument to be valid. For Article 1357 to apply,
the donation must be valid and enforceable.
Example: A parcel of land was sold by Fred to Vince for P1 million. They executed a private instrument.
Vince wanted to register the sale but registration requires a public instrument.
Can Vince compel Fred to execute a public instrument? Yes, since the contract is valid and enforceable.
Art. 1358. The following must appear in a public document:
Sources:
(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods, chattels or things in action are governed by
Articles, 1403, No. 2 and 1405.
Article 1358, which requires the embodiment of certain contracts in a public instrument, is only for
convenience, and registration of the instrument only adversely affects third parties. Formal requirements
under this article are for the benefit of third parties. Non-compliance with the formal requirements does
not adversely affect the validity of the contract nor the contractual rights and obligations of the parties
under said contract.
CHAPTER 4
REFORMATION OF INSTRUMENTS
Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the agreement, by
reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.
REFORMATION
It is 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 when some error or mistake has been committed.
REFORMATION ANNULMENT
It does not invalidate a contract. It invalidates the contract.
It is the remedy when there has been meeting of It is the remedy when there has been no meeting
the minds, but there is mistake, fraud, inequitable of the minds because consent was vitiated.
conduct or accident (ATM: FIMA) in the contract as
written.
Example: Jeremy sold to Mimi a dining set worth P25,000. Mimi knew that the price is P25,000. But the
contract stated the price to be P50,000. Here, there was meeting of the minds and so the proper remedy
is reformation.
REQUISITES FOR REFORMATION

1. There must be a meeting of the minds.
2. The true intention is not expressed in the instrument.
3. Failure to express true intention is due to mistake, fraud, inequitable conduct, or accident. (ATM:
FIMA)
4. There must be clear and convincing proof.
Art. 1360. The principles of the general law on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the provisions of this Code.
Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to
disclose their real agreement, said instrument may be reformed.
Sources:
Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a
way that the instrument does not show their true intention, the former may ask for the
reformation of the instrument.
Art. 1363. When one party was mistaken and the other knew or believed that the instrument
did not state their real agreement, but concealed that fact from the former, the instrument may
be reformed.
Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not express the
true intention of the parties, the courts may order that the instrument be reformed.
Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
Art. 1366. There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition is imposed;

(2) Wills;
(3) When the real agreement is void.
Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot
subsequently ask for its reformation.
Art. 1368. Reformation may be ordered at the instance of either party or his successors in
interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs
and assigns.
Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court
to be promulgated by the Supreme Court.
CHAPTER 5
INTERPRETATION OF CONTRACTS
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.
INTERPRETATION
It is the art or process of discovering and ascertaining the meaning of the contract.
When the intention of the parties is clearly manifested in the wordings of the contract, the rules of
interpretation need not apply.
In case of conflict between the words of the contract and the intention of the parties, the intention must
prevail.
Example: Ivana and Mona entered into a “contract of lease”. It was stated in the contract that Mona will
pay a certain amount as monthly “rentals”. At the end of the “lease term”, Mona will become the absolute
owner of the property.
Is the contract really a lease or a sale of installments? The contract is a sale in installments; such is the
evident intention of the parties.
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.
Sources:
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.
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.
Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.
Art. 1375. Words which may have different significations shall be understood in that which is
most in keeping with the nature and object of the contract.
Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established.
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract,
the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt
shall be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and
void.
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise
be observed in the construction of contracts.
Sources:

5 - Contracts - General Provisions To Interpretation (1305 - 1379)

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5 - Contracts - General Provisions To Interpretation (1305 - 1379)

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OBLIGATIONS AND CONTRACTS

UNIVERSITY OF SAN AGUSTIN

Title II. - CONTRACTS

STAGES IN THE LIFE OF A CONTRACT

BASIC PRINCIPLES OR CHARACTERISTICS OF A CONTRACTS

CONCEPT OF FREEDOM OR AUTONOMY OF CONTRACT

LIMITATIONS ON CONTRACTUAL STIPULATIONS.

KINDS OF CONTRACTS ACCORDING TO NAME

KINDS OF INNOMINATE CONTRACTS

CONCEPT OF MUTUALITY OF CONTRACTS

DETERMINATION OF A CONTRACT BY A THIRD PERSON

PARTIES BOUND BY A CONTRACT

STIPULATION POUR AUTRUI

MANNER OF PERFECTING A CONTRACT

CONTRACTS ENTERED INTO IN THE NAME OF ANOTHER

UNENFORCEABLE CONTRACTS (Article 1403 – 1408)

Question: Can it be cured? Yes, through RATIFICATION.

Art. 1318. There is no contract unless the following requisites concur:

PERFECTION OF CONTRACT IF SENT BY LETTER OR TELEGRAM

Art. 1320. An acceptance may be express or implied.

OTHER INSTANCES WHEN OFFER BECOMES INEFFECTIVE

It is the money paid or promised to be paid in consideration for the option.

Art. 1327. The following cannot give consent to a contract:

PERSONS INCAPACITATED TO CONSENT

CAUSES OF VITIATED CONSENT (ATM:VIFUM)

A simple mistake of account shall give rise to its correction.

REQUISITES FOR MISTAKE TO VITIATE CONSENT:

a. the object of the contract

Ex. Gian signs a contract of sale thinking it is a contract of loan.

2. Error must be excusable, not caused by negligence

REQUISITES OF MUTUAL ERROR

REQUISITES OF UNDUE INFLUENCE

REQUISITES OF DOLO CAUSANTE

CAVEAT EMPTOR (BUYER BEWARE)

Incidental fraud only obliges the person employing it to pay damages.

KINDS AND EFFECTS OF SIMULATION

SECTION 2. - Object of Contracts

Art. 1348. Impossible things or services cannot be the object of contracts.

REQUISITES OF VALID OBJECT

FUTURE INHERITANCE AS AN OBJECT

General Rule: Future inheritance cannot be the object of contract.

SECTION 3. - Cause of Contracts

CLASSIFICATION OF CONTRACTS AS TO CAUSE

WANT OF CAUSE, UNLAWFUL CAUSE AND FALSE CAUSE – VOID CONTRACT

Art. 1358. The following must appear in a public document:

REQUISITES FOR REFORMATION

Art. 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;

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