COLLEGE OF SCIENCE AND TECHNOLOGY

Cagamutan Norte, Leganes, Iloilo – 5003

Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

COO – FORM 12

SUBJECT TITLE: LAW ON OBLIGATIONS AND CONTRACTS

INSTRUCTOR: MARY PRINCESS JERMAINE N. CABARON, CPA
SUBJECT CODE: RFBT1/BL1

FINALS MODULE

LAW ON CONTRACTS

Topic 1 : CONTRACTS – GENERAL PRINCIPLES

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of Contracts.

2. Identify and explain Stages in the life of a Contract.
3. Identify and explain the Characteristics of a Contract.
4. Differentiate Real Contracts from Formal Contracts.

NOTES:

The Law on Contracts consists of four parts:

1) General principles;
2) Essential elements of contracts;
3) Form and interpretation of contracts
4) Defective contracts.

PART 1: GENERAL PRINCIPLES

A. Definition of Contracts

Definition of contract

Contract is a meeting of the minds between two persons whereby one binds himself
with respect to the other, to give something or to render some service. There is
meeting of the minds as to object and cause.

B. Stages in the life of contract

1) Preparation;
2) Perfection;
3) Consummation.

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 In preparation, the parties are negotiating as to the possible object and cause; in
perfection, the minds of the parties meet as to object and cause; and in
consummation, the parties had performed their respective obligations.

C. Characteristics of contracts

1) Autonomy or liberty of contracts;

2) Obligatory force of contracts;
3) Mutuality of contracts;
4) Consensuality of contracts;
5) Relativity of contracts.

Autonomy or liberty of contracts

Autonomy or liberty of contracts means the parties are free to stipulate whatever they
want to, as long as the stipulation is not contrary to law, morals, good customs, public
order or public policy.

Obligatory force of contracts

Contracts have the force of law between the contracting parties. They are bound to
comply with their respective obligations in good faith.

Mutuality of contracts

A contract must bind both contracting parties. Its validity cannot be left to the will of
one of them.

Consensuality of contracts

Contracts are perfected by mere consent. Upon meeting of the minds of the parties as
to object and cause, a contract is perfected. The concurrence of the three essential
elements of contract, consent, object and cause, generally gives rise to a contract. The
following are the exceptions:

1) Real contracts;
2) Formal contracts.

Real contracts are perfected by delivery. Formal contracts require certain form for their
perfection.

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.

The principle of relativity simply provides that contracts are binding only to those who
have signed the agreement. They are called parties to a contract. Those who are not
signatories of an agreement are not bound or cannot enforce the same. However, the
law extends a bit to assignees and heirs of the parties. The exceptions stated above
means that there are certain contracts which do not extend to the assignees and heirs
of the parties because they are not transmissible by their nature, by stipulation or by
provision of law.

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D. Stipulation pour autrui

Stipulation pour autrui is a stipulation in favor of a third person conferring a clear and
deliberate favor upon him. The stipulation is merely part of a contract entered into by
the parties, neither of whom acted as an agent of the third person. In this case, the
person, although not a signatory of the contract, may demand the enforcement thereof
in his favor.

E. Perfection of contract

Consensual contracts

Contracts are perfected by mere consent. Upon meeting of the minds of the parties as
to object and cause, a contract is perfected.

Consent is manifested by the meeting of the offer and acceptance upon the thing and
the cause which are to constitute a contract.

An offer, in order to be valid, must be certain or definite and made with intent to be
bound if the same is accepted. An acceptance, in order to be valid, must be absolute
and unqualified and must be known to the offeror.

F. Acceptance through correspondence

In cognition theory, contract is perfected from the moment the acceptance comes to
the knowledge of the offeror.

In expedition theory, contract is perfected from the moment the acceptance is

declared or made even if not made known to the offeror.

The Civil Code follows the cognition theory. Acceptance binds the offeror from the
time it came to his knowledge.

G. Acceptance through an agent

The principal is bound from the time the acceptance is communicated to the agent. When
an agent makes an offer to a third person in behalf of the principal, and the third person
accepts the same, by communicating the acceptance to the agent, the contract between
the principal and the third person is deemed perfected. A communication to the agent
is a communication to the principal. In Law on Agency, an agent is an alter ego of the
principal.

Business advertisements

Business advertisements are not definite offers. They are invitations to make an offer,
unless the contrary appears.

Advertisements for bidders

Advertisements for bidders are merely invitations to make an offer. The advertiser is
not bound to accept the highest bidder, unless the contrary appears.

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 Causes that render the offer ineffective
The following instances render the offer ineffective:

1) Death, civil interdiction, insanity, or insolvency of either party before acceptance

is conveyed;
2) Revocation, rejection or withdrawal of the offer before acceptance is communicated
3) Qualified acceptance of the offer as the acceptance is really a counter-offer;
4) Expiration of the period of time given to the offerree within which he must signify
his acceptance.

H. Real contracts

Real contracts are perfected by delivery.

Meeting of the minds of the parties as to object and cause is not enough to perfect a
contract. An additional element is required, that is delivery. In contract of pledge, for
example, delivery of the object pledged is required for the perfection of contract of
pledge.

I. Formal contracts

Formal contracts are perfected upon execution of formal instrument required by law for
validity.

Meeting of the minds of the parties as to object and cause is not enough to perfect a
contract. An additional element is required, that is execution of a formal instrument
required by law for validity. In donation of real property, for example, the law requires
that it must be in public instrument, otherwise the donation is void.

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Exercises:

I. Application.

1. Liz, lessor, entered into a contract of lease of land with Tris. The contract stipulates
that at anytime before Tris could construct a building thereon, Liz could cancel the
lease. Is the stipulation valid?

2. Tisoy shipped his cargo in a trucking company owned by Rabby, who entered into
a contract also with Pika to unload the cargos from the truck. In the process of
unloading, Tisoy’s cargo was damaged. May Tisoy successfully sue Pika for
damages?

3. A sold to B his computer set on February 1 of the current year. It was agreed upon
that it will be delivered on February 5 and B will pay the price upon delivery. When
was the contract perfected?

4. Flor sold to Rob a parcel of land for P1,000,000. The contract also stipulates that
Rob will pay P800,000 to Flor while the remaining P200,000 will be given to Clara,
a creditor of Flor. Can Clara demand fulfillment of the stipulation?

5. Debie entered into a contract with Cray to teach her Japanese language. Cray died
before he begins teaching Debie. Is his son, Nakie obliged to teach Debie the
Japanese language?

-END OF TOPIC 1 OF MODULE 3-

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Topic 2 – ESSENTIAL ELEMENTS AND FORMS AND INTERPRETATIONS
OF CONTRACTS

LEARNING OBJECTIVES:

At the end of chapter, the students are expected to:

1. Elaborate the Essential elements of a contract.
2. Identify the persons who are incapable of giving consent.
3. Identify and explain the vices of consent.
4. Explain simulation contract.
5. Elaborate the Forms and Interpretation of Contracts.

NOTES:

A. Essential elements of Contracts

The following are the essential elements of a contract:

1) Consent;
2) Object;
3) Cause.

The concurrence of the three essential elements leads to the perfection of a contract.
There is meeting of the minds as to object and cause.

The absence of one element renders the contract void. It is inexistent from the
beginning.

B. Consent
Consent is manifested by the meeting of the offer and acceptance upon the thing and
the cause which are to constitute a contract.

Persons incapable of giving consent

The following are persons incapable of giving consent:

1) Minors;
2) Insane or demented persons;
3) Deaf mutes who do not know how to write.

Under the Family Code, majority age is eighteen years old.

A contract entered into by a minor is voidable, except: when the minor misrepresents
his age or when the contract involves sale and delivery of necessities to a minor.

Contracts entered into by an insane person during lucid interval is valid.

If a deaf mute does not know how to write, it is presumed that he does not know how
to read. However, if the situation says that he knows how to read, but does not know
how to write, the author believes that he is capable of giving consent.

C. Vices of consent
The following are causes of vitiating consent:

1) Error or mistake;
2) Violence or force;
3) Intimidation or threat;

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 4) Undue influence;
5) Fraud or deceit.

Mistake is not only a misconception of a thing, but also lack of knowledge with respect
to a thing.

There is violence when in order to obtain 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.

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.

Fraud refers to insidious words or machinations of one of the contracting parties, and
the other is induced to enter into a contract which, without them, he would not have
agreed to.

Kinds of fraud:

1) Fraud in obtaining consent (dolo causanti);

2) Fraud in the performance of an obligation (dolo incidenti).

In fraud in obtaining consent, the status of the contract is voidable because there is
vitiated consent. The remedy of the aggrieved party is annulment of contract plus
damages.

In fraud in the performance of an obligation, the status of the contract is valid. The
contract itself is not effective because fraud was committed after the perfection of the
contract. The aggrieved party may demand for damages only.

D. Simulation of contract
Simulation of contract is the act of deliberately deceiving others, by pretending by
agreement the appearance of a contract which is either non-existent or concealed.

Kinds of simulation:

1) Absolute;
2) Relative.

In absolute simulation, the parties do not intend to be bound. The contract is void from
the beginning.

In relative simulation, the parties conceal their true agreement. They are bound by their
true agreement.

E. Object
All things which are not outside the commerce of men, including future things may be
the object of a contract. All rights which are transmissible may also be the object of
contracts. All services which are not contrary to law, morals, good customs, public order
or public policy may likewise be the object of contract.

No contract may be entered into upon a future inheritance. A future thing may be made
an object of a contract, but not future inheritance.

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 Sale of future things

There may be a sale of expected things, but subject to the condition that it will come to
existence. This is called emptio rei speratae. If the object will not come into existence,
the sale is inexistent.

There may be sale of hope, the hope or expectancy already exists. This is called emptio
spei. This is not subject to the condition that it will come into existence.

Object must be determinate

The object of a contract must be determinate, or determinable without need a new

agreement. When the object is indeterminate or undeterminable, the contract is void
because of absence of an essential element.

F. Cause

Cause is the impelling reason why a party enters into a contract. In reciprocal obligation,
the subject matter for one is the cause for the other.

Contracts without cause or with unlawful cause are void. The cause is unlawful if it is
contrary to law, morals, good customs, public order or policy. Although the cause is not
stated in the contract, it is presumed that it exists and lawful.

Lesion or inadequacy of cause does not invalidate a contract, unless there has been
fraud, mistake or undue influence.

G. FORM AND INTERPRETATION OF CONTRACTS

Form of contracts

A contract is obligatory or binding in whatever form it may have been entered into
provided all the essential requisites (consent, object and cause; and in certain specified
contracts, delivery or form) for its validity are present.

In the following cases, the form of the contract is essential:

1) When the law requires that the contract be in some form to be valid;
2) When the law requires that a contract be in some form to be enforceable or proved
in a certain way;
3) When the law requires that a contract be in certain form for the convenience of the
parties.

The forms required by law may be for any of the three: for validity; for enforceability;
or for the convenience of the parties. If it is for validity, non-compliance of the required
form renders the contract void. If it is for enforceability, non-compliance thereof renders
the contract unenforceable. If it is for the convenience of the parties, non-compliance
thereof does not affect the validity of the contract.

Examples of forms required by law for validity:

1) A contract of partnership must be in public instrument if a partner contributes

immovable property;
2) Donation of real property must be in public instrument.

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 Examples of forms required by law for enforceability:

1) Sale of real property must be in writing;

2) Sale of personal property having a value of P500 or more must be in writing.

If the prescribed form above is not complied with, the contract may not be enforced by
and between the parties. Unenforceable contracts however, may be ratified. The above
examples may be ratified by at least a partial execution of the agreement, as when the
seller delivers the thing sold or the buyer pays at least a downpayment.

Examples of forms required by law for the convenience of the parties:

1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishments of real rights over immovable property;
2) Assignment, repudiation or renunciation of hereditary rights or rights in the conjugal
partnership of gains or in the community of property between husband and wife;
3) Powers of attorney to administer property or to perform an act requiring a public
instrument, or to perform an act which is to affect third persons.

The requirement above is only directory. If the acts or contracts do not appear in a
public instrument, they are still valid, and the parties may compel each other by filing
an action in court to observe the necessary form.

H. Reformation of instruments
Reformation 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.

Requisites of reformation:

1) Meeting of the minds between the parties;

2) Instrument does not express the true intention of the parties;
3) The failure of intention is due to mistake, fraud, inequitable conduct or accident;
4) There must be clear and convincing proof.

The status of a contract that may be reformed must be valid. The mistake or fraud
stated above must not be employed to obtain consent, otherwise the contract is
voidable. A voidable contract cannot be reformed, the proper remedy of the aggrieved
party is annulment of contract, not reformation.

No reformation of instruments in the following:

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

2) Wills;
3) The real agreement is void.

I. Interpretation of contracts
Interpretation of contracts is the determination of the meaning of the terms or words
used by the parties in the contract.

Rules on interpretation of contracts:

1) If the terms of the contract are clear, the literal meaning of its stipulations shall
control.
2) The evident intention of the parties shall prevail over the words of the contract.

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 3) The contemporaneous and subsequent acts of the parties shall be principally
considered in order to ascertain their intention.
4) Obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.
5) Doubts in gratuitous contracts shall be settled in such a way that the least
transmission of rights and interests shall prevail.
6) Doubts in onerous contracts shall be settled in favor of the greatest reciprocity of
interests.

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Exercises:

I. Application.

1. Cali, a resident of South Korea, offered to sell to Han his house and lot in Iloilo City.
On March 20, Han writes a letter to Cali accepting the offer. The letter reached Cali
on March 30 but on March 28 Cali had died. Is the offer effective?

2. Anton published in a newspaper an “Invitation to Bid” inviting suppliers of hardware

materials for the construction of an infrastructure project. Berie submitted the lowest
bid. Is Anton compelled to award the contract to Berie?

3. Elsa entered into a contract of a sale of land with Ana despite her knowledge that the
latter is a minor. May Elsa successfully demand for annulment of the contract?

4. Seve agreed to deliver his 50 bags of cassava flour to Bene at P2,000 per cavan. Seve
delivered flour on the agreed date but the 20 bags were not actually cassava flour but
rice flour. Can the contract be annulled on the ground of fraud?

5. Sally and Brian entered into a contract of sale of a parcel of land. Assuming that the
contract was entered into as a joke, is the contract valid?

-END OF TOPIC 2 OF MODULE 3-

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Topic 3 – DIFFERENT KINDS OF OBLIGATIONS

LEARNING OBJECTIVES:

At the end of chapter, the students are expected to:

1. Identify the different defective contracts.
2. Explain the different defective contracts.
3. Give examples of different defective contracts.

NOTES:

A. Defective contracts

There are four types of defective contracts:

1) Rescissible contracts;
2) Voidable contracts;
3) Unenforceable contracts;
4) Void contracts.

RESCISSIBLE CONTRACTS

Rescissible contracts are valid contracts. The essential requisites of a contract are
complied with. However, the law itself provides that these types of contracts, although
valid, may be rescinded.

The status of a rescissible contract is valid until rescinded. The remedy of the supposed
aggrieved party is rescission of contract.

Rescission is the remedy granted by law to the contracting parties and sometimes even
to third persons in order to recover indemnity for damages caused them by a contract,
even if such contract be valid, by means of restoration of things to their condition prior
to the celebration of contract.

Requisites for a valid rescission of contract:

1) The party seeking rescission can return what he received by virtue of the
contract;
2) The object of the contract is not in the legal possession of a third person who
acted in good faith;
3) There must be no other legal remedy;
4) The action must be brought within the proper prescriptive period.

Prescriptive period for rescission

The action for rescission must be commenced within four years from the date the
contract was entered into.

For persons under guardianship, the four-year period begins from the termination of
incapacity. For absentees, the four-year period begins from the time the domicile is
known.

Examples of rescissible contracts:

1) Those made by guardians when their wards suffer lesion by more than ¼ of the
value of the things which are the object thereof;
2) Those agreed upon in behalf of absentees if the latter suffer the lesion stated
above;
3) Those made in fraud of creditors;

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 4) Those which refer to things under litigation made by defendants without the
knowledge and approval of the litigants or of competent judicial authority.

VOIDABLE CONTRACTS

A voidable contract is a contract which possesses all the essential requisites of a valid
contract but one of the parties is incapable of giving consent, or consent is vitiated by
mistake, violence, intimidation, undue influence or fraud.

The status of a voidable contract is valid until annulled. The remedy of the aggrieved
party is annulment of contract.

Prescriptive period for annulment

The action for annulment must be brought within four years from the time the defect of
the consent ceases in cases of intimidation, violence or undue influence. In cases of
mistake or fraud, the four-year period begins from the time of discovery of the same.

A voidable contract may be ratified. The following are the requisites of a valid
ratification:

1) Contract must be voidable;

2) Person ratifying knew the reason why the contract is voidable;
3) Ratification must have been made expressly or impliedly;
4) Ratification is made by injured party.

UNENFORCEABLE CONTRACTS

An unenforceable contract is a contract that cannot be enforced in court or sued upon

by reason of defects provided by law until they are ratified according to law.

Kinds of unenforceable contracts:

1) Those executed by one in the name of another without any authority or in excess
of such authority;
2) Those that do not comply with the Statute of Frauds;
3) Those where both parties are incapable of giving consent.

Statute of Frauds

The Statute of Frauds, found in Art. 1403, No. 2, Civil Code, is the rule which requires
that certain agreements or some note or memo thereof, shall be in writing and
subscribed by the party charged or by his agent; otherwise, such agreement shall be
unenforceable by action because evidence of the same cannot be received without the
writing or a secondary evidence of its contents.

Agreements that must appear in writing to be enforceable under the statute of frauds:

1) Agreement that by its terms is not to be performed within a year from making
thereof;
2) Special promise to answer for the debt, default or miscarriage of another;
3) Agreement made in consideration of marriage other mutual promise to marry;
4) Agreement for sale of goods, chattels or things in action at a price not less than
500, unless there has been partial delivery or payment
5) Agreement for the leasing for more than 1 year, or for the sale of real property
or of an interest therein, unless it has been partially executed;
6) Representation as to the credit of a third person.

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 VOID CONTRACT

It is a contract which has absolutely no force and effect and is inexistent from the
beginning.

Classes of void contracts

1) Inexistent contracts or those where a requisite or some of the essential requisites

of a contract are lacking or where the formalities prescribed by law for validity
are not complied with.
2) Illegal or unlawful contracts or those where the essential requisites of a contract
are present but the cause, object or purpose is contrary to law, morals, good
customs, public order or public policy.

Examples of void contracts

1) Those whose cause, object, or purpose is contrary to law, morals, good customs,
public order or public policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of the transaction (but
future things may legally be the object of a contract).
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service.;
6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
7) Those expressly prohibited by law.

Characteristics of void contract

1) It produces no effect.
2) It cannot be ratified.
3) It cannot give rise to valid contract.
4) The right to set up the defense of illegality cannot be waived.
5) The defense of illegality is available to the third persons only when their interests
are directly affected.
6) The action does not prescribe.

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Exercises:

I. Application.

1. Mina, 12 years old, was represented by her guardian, Gio in a contract of sale of land
valued at P500,000. The land was sold for P300,000 only. What kind of defective
contract was entered into by Gio?

2. Bob promised to give Pam a house and lot if she will marry Bob’s friend, Jam. The
agreement was done orally. After a month, the marriage between Pam and Jam took
place. Can Pam now demand delivery of the house and lot?

3. Susan sold to Barn a parcel of land for P500,000. The agreement was oral. Susan has
not yet delivered the land and Barn has not yet paid the price. Barn offered to pay
now but Susan refused. Can Barn sue Susan for specific performance?

4. Andi orally agreed to sell to Bona his cellular phone for P400 two years from the date
of agreement. After two years, Andi refused to deliver the phone to Bona. Is the
contract enforceable?

5. What is the unique characteristic of a void contract compared to other defective

contracts?

-END OF MODULE 3-

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 REFERENCE

Rosada, F. (2011). Law On Obligations and Contracts. Yuency Books.

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