P3 MODULES SUMMARY + SOME NOTES

MODULE 18

Contract is one of the sources of obligation. Contract embodied the understanding between parties as
to the scope of the work or business relationship so that no one can claim any misunderstandings later.
If executed correctly, they are binding between the contracting parties and legally enforceable in the
court of law.

CONTRACT: Article 1305. A 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.
Article 1305 provides the definition of a contract. Note the phrase in the meaning “contract is meeting
of the minds of two persons”.

This imply that a contract is born whenever there is meeting of minds between two persons which takes
place when an offer by one party is accepted by the other.

Classifications of Contract:
Contract can be classified in different ways. It can be classified

According to Name or Designation – a contract can be classified into nominate or innominate contract.
A nominate contract has a specific name or designation by law while innominate contract has no specific
name or designation.
Example of a nominate contract is contract of sale, contract of lease and contract of agency.

According to Perfection – basically, contract is considered perfected whenever an offer is accepted.

If a contract is perfected by mere consent, the contract is said to be consensual contract like contract of
sale.
If the contract is perfected by delivery, then the contract is a real contract like contract of deposit.

According to Cause – a contract can be onerous or gratuitous.

A contract is onerous whenever the parties are both under obligation to each other. Like in a contract of
sale, the seller is obligated to deliver the goods while the buyer is obligated to pay the price of the
goods.
A contract is gratuitous whenever the contract is just based on the act of liberality on the side of one of
the contracting parties.

According to Form – a contract can be informal or formal.

The form of the contract is the manner in which a contract is executed. It can be in oral or in writing. If in
writing, it can be in public instrument (notarized) or in private instrument. There are contracts that must
strictly follow a certain form otherwise the contract will be considered as an unenforceable contract.

According to Obligatory Force – a contract can be a valid contract, rescissible contract, voidable
contract, unenforceable contract or void or inexistent contract.
A valid contract is one which meet all the necessary requisites to be valid.

According to Dependence – a contract can be a preparatory contract, an accessory contract and a

principal contract. The book provided you with the definition. What I can tell you is that
a preparatory contract is entered into by the parties in preparation to entering again to another kind of
contract.
Example will be a contract of agency between the principal and the agent, so that the agent may enter
into a let say, a contract of sale in behalf of the principal. Without the contract of agency, the agent
cannot sell in behalf of the principal.

An accessory contract on the other hand is a contract that depends on another contract to be valid.
Example will be the contract of mortgage.
Example: A party mortgage his property as a security in case of failure to pay for a contract of loan which
he entered into with the creditor.

A principal contract is a contract that is valid all by itself. Like a contract of sale or a contract of lease. It
can stand on its own and does not depend on any other contract for validity.

According to Risks – a contract can be a commutative contract or an aleatory contract.

A commutative contract is where the amount to be given is an equivalent of the thing to be received.
On the other hand, an aleatory contract is a contract which is based on hope and expectancy. Like
buying on a lotto ticket, the buyer does not know for sure if he will win or not.

According to Liability – a contract can be unilateral or bilateral.

A unilateral contract is when only one of the parties has an obligation towards another party such as
when a person promises to deliver his sign pen to another without asking for anything in return or
without any conditions.
A bilateral contract is when both of the parties has reciprocal obligation towards each other.

FREEDOM TO CONTRACT:
The right to enter into a contract is guaranteed by our Constitution. Parties can enter into a contract for
as long as it is not contrary to:

 Law – contracts must not be against the law. Selling and buying illegal drugs is prohibited by law.
Illegal drugs cannot be a valid object of a contract. The contract is void.
 Morals – it deals with norms of good and right conduct evolved in a community. It differs from
place to place and with each group of people.
 Good customs – it consists of habits and practices which through long usage have been followed
and enforced by society. Sometimes the spheres of morals and good customs may overlap. In
the Philippines, it is customary for us to show respect to elders, that is why a contract whereby
A binds himself to kick his father is against good custom.
 Public order – it refers principally to public safety although it has been considered to mean also
the public weal.
 Public policy – it is broader than public order because any policy for common good is considered
as public policy. So, a contract that may be proved dangerous to public is void even though the
actual injury has not happened yet.

Stages in the Life of the Contract:

Preparation or Negotiation
o At this stage, the parties have not yet arrived at any definite agreement.
o There is an offer but not yet accepted by the other party.
Perfection or Birth
o This is the stage where the parties have come to a definite agreement or meeting of the minds
regarding the subject matter and the cause of the contract.
o It is the stage where all the elements of a valid contract concur.

Consummation or Termination
o This is the stage where the parties have performed their respective obligations.
o Likewise, this is the stage where we can say that the obligations of each of the parties have been fully
accomplished or executed.

How Contracts Are Perfected:

The perfection of the contract depends on the classification of the contract.
Consensual Contract – it is perfected by mere consent. Meaning, the contract come to existence just by
the mutual consent of the parties. The general rule is that, contracts need not be written to be valid,
with some exceptions because some contracts need to be in writing to be enforceable and some
specifically stated by law to be in writing to be valid. In the later part of the semester, we will tackle
about the contracts that needs to be in writing.

Enforceability and validity of contracts are two different things. A contract may be valid but
unenforceable just because it did not follow that the contract must be in writing. Likewise, there are
contracts that are considered void if not in writing. Like the contract of agency for the sale of land. It
must be in writing, otherwise, the sale of the land by the agent is void.

Real Contract – This is actually the exception to the general rule that the contract is perfected by mere
consent. There are contracts which nature dictates that the thing must be delivered first to have the
contract perfected. Like in the contract of deposit. Even if the parties already agreed to the contract of
deposit, there will be no contract of deposit perfected until the thing is deposited.

Stipulation pour atrui is a stipulation in a contract clearly and deliberately conferring a favor upon a third
person who has a right to demand its fulfillment provided he communicates his acceptance to the
obligor before its revocation by the oblige or the original parties.

NOTES:

CHARACTERISTICS OR BASIC PRINCIPLES OF CONTRACT (AMOR)

1. AUTONOMY (Liberty of contract or freedom to stipulate)

The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good gustoms, public
order or public policy (Art. 1306)

2. MUTUALITY
The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them. (Art. 1308)

3. OBLIGATORINESS (Obligatory force of contract and compliance in good faith)

 Obligations arising from contracts shall have the force of law between the contracting parties
and should be complied with good faith. (Art. 1159)

4. RELATIVITY
Contracts take effect only between the parties, their assigns and heirs, except where the rights
and obligations are not transmissible:
a. By law,
b. By stipulation
c. By nature (Art. 1311)

MODULE #19

According to Article 1318, there is no contract unless the following requisites concur: (COC)
Consent of the contracting parties;
Object certain which is the subject matter of the contract;
Cause of the obligation which is established.

These essential elements must exist to have a valid contract. In this module, prepare to learn about the
first in the list of the essential elements, consent.

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.
o An offer is a proposal made by one party to another to enter into a contract.
o The offer must be a definite offer. When a person says, “Will you buy this watch for P5,000?” this is an
offer.
o “I am willing to buy your ring.” This is just a showing an interest to buy the ring but this is not an offer
because there is no mentioning about the price.

Acceptance is the manifestation by the offeree of his assent to the terms of the offer. It must be
absolute. It can be express or implied, meaning, the acceptance of the offer can be made orally or in
writing or even if no words were said, but it is obvious in the action and demeanor of the other party
that acceptance has been made

A qualified acceptance constitutes a counteroffer. This is a scenario when after offering something and
its amount, the other party, instead of absolutely accepting the offer said yes but with a condition like
lowering of price for instance.

Acceptance made by letter or telegram does not bind the offeror except from the time it came to his
knowledge.

PERSONS WHO CANNOT GIVE CONSENT:

The law provides for the list of persons who are incapable of giving consent. If persons incapable to give
consent enter into a contract, the contract is considered as voidable. A voidable contract is valid until
annulled by the proper action of court.
According to Article 1327, the following cannot give consent:
Unemancipated minors or those persons who have not yet reached the age of majority or 18 years old
and are still under parental authority.
Insane or demented persons are those persons whose insanity must exist at the time of the perfection
of the contract. The presumption is that a person is considered sane.
Deaf-mutes who do not know how to write. There are educated deaf-mutes nowadays, if they know
how to write, then the contract is valid because of the obviousness that they are capable of giving
intelligent consent.

Effect of Contract Entered into Under the State of Drunkenness and Hypnotic Spell:
The contract entered into under the above-mentioned state shall be considered as voidable. A voidable
contract is considered as valid until annulled before a competent court of justice.

Drunkenness and hypnotic spell impair the capacity of a person to give intelligent consent.

Lucid Interval:
It is a temporary period of sanity. Contract entered into during lucid interval is valid.
So, if a person entered into a contract during the period that he can give intelligent consent, then the
contract is considered as valid even if right after that period, he reverted back to insanity once again.

VICES OF CONSENT:
When we say vices of consent, it means the grounds or instances wherein a contract will be considered
as voidable because the consent was not given freely.

The following are the vices of consent or the causes that vitiate consent: VIMFU

Error or Mistake
o Take note that not all error or mistake vitiates consent.
o To vitiate consent, the error or mistake must be in relation to the false notion or idea or understanding
of a thing or a fact which is substantial to the contract.

Violence or Force
o Violence requires the employment of physical force which is either serious or irresistible to the point
that the party has no choice but to give the consent because of so much fear.
o Violence is present in a scenario where a person signed the contract because every time he refuses, he
was being hit on his head.

Intimidation or Threat or Duress

o Intimidation or threat differs from violence in a sense that in intimidation or threat, no physical harm
has happened yet.
o It vitiates consent because the party agreed only because of the presence of fear of evil and therefore
the consent is not freely given.

Undue Influence
o This is when a person takes improper advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice.
o So that undue influence may vitiate consent, it must be undue or improper.
o When a person takes advantage of his power over the will of another, considering the circumstances
such as confidential, family, spiritual and other relations between the parties, or the fact that the person
is suffering from mental weakness or was ignorant or in financial distress, then we can say that there is
an undue influence.

Fraud or Deceit
o When do we say that fraud or deceit is present? 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.
o Fraud is present when a party induces another to enter into a contract using fraudulent claims and
misrepresentation.

Option Contract
It is a contract wherein a person, for a consideration, is given a certain period of time within which to
accept the offer of the offeror.

He pays for the time given to him to think whether or not he will accept the offer of the offeror and
during this time, the other party cannot sell the thing to another person while waiting for the period to
lapse.

The price paid for the option contract is not part of the purchase price. It is the major difference
between option money and earnest money. Earnest money is considered as down payment for the
thing.

MODULE #20

OBJECT OF CONTRACTS:

These are the things you need to put in mind about the object of contracts:
The object of the contract is the subject matter of the contract.
An object maybe things, rights or services.
Future things may be the object of a contract.
o Example for this would be the crops next season by a farmer.
o But future inheritance may not be an object of a contract of sale except in cases provided by law.

All services which are not contrary to law morals, good customs, public order or public policy may
likewise by the object of a contract.

Requisites of Object of Contract:

 The object must be within the commerce of men.
 The object must not be impossible, whether legally or physically.
o It means that the object can be legally be subject of transactions.
o The sale of the sky, stars, moon, illegal drugs are not valid object of a contract.
 It must be in existence or capable of coming into existence.
 It must be determinate or determinable without the need of a new contract between the
parties.
TRIVIA:
Human internal organs as objects of a contract
R.A. No. 9208 penalizes human trafficking for the purpose of the remobval or sale of internal organs. The
law provides that the human body and its parts cannot be the subject of commercial transactions.

Giving or receiving payment including any other compensation or reward for organs is prohibited along
with advertising the need for or availability of organs, with a view to offering or seeking payment.

Under the law, however, a living and related voluntary donor or a living and non-related voluntary donor
may be allowed to donate organs, but no living minor is allowed to donate any organ for the purpose of
transplant.

CAUSE OF CONTRACTS:

The cause is the essential or more proximate purpose which the contracting parties have in view at the
time of entering into the contract.
In short, this is the reason why the parties entered into the contract with each other.
Remember that contracts without cause, or with unlawful cause, produce not effect.
The statement of a false cause in contracts shall render the contract void.

Requisites of Cause:
The following are the requisites of cause:
 It must exist at the time the contract is entered into
 It must be lawful
 It must be true or real

Let us now study the effect in the contract of the following scenario regarding cause.

Absence of Cause – absence of cause means there is total lack of any valid consideration for the
contract. If this is the case, then there is no valid contract. The contract is inexistent or void.

Failure of Cause – Failure of cause is a scenario wherein there is a failure to pay the agreed price after
the execution of the contract. It does not mean that the contract is without cause or consideration but
rather, the buyer just failed to pay the price agreed upon. This instance does not render the contract
void.

Illegality of Cause – This is a scenario wherein there is a cause but the same is unlawful or illegal.
Remember that the contract with unlawful cause are also inexistent or void.

Falsity of Cause – This is where the contract states a valid consideration but the same is not true. A false
cause is a simulated cause. Just like when a contract states that the consideration is P500,000 but in fact
the actual consideration is another amount. Remember, if the cause is false, the contract is void.

Lesion or Inadequacy of Price – Lesion is any damage cause by the fact that the price is unjust or
inadequate. The truth is, just because there is lesion does not mean that the contract is not valid. There
is nothing wrong if a seller would want to sell an object for a bargain. However, if the lesion is
accompanied by fraud, mistake, or undue influence or any other cases specified by law, then the lesion
or inadequacy in price will invalidate the contract.
Future Inheritance – is any property or right, not in existence or capable f determination at the time of
the contract, hat a person may inherit in the future.

Kinds of Impossibility
o Physical – when the thing or service in the very nature of thing cannot exist. (duck that can lay golden
eggs)
o Legal – when the thing or serviced is contrary to law, morals, good customs, public order or public
policy.

MODULE #21

The general rule is that, a contract is perfected by mere consent. However, this general rule accepts
some exceptions. The manner in which a contract is executed or manifested is crucial for validity of
some contracts. The law required some contracts to observe some level of formality or solemnity for its
efficacy.

Though form is not really a requisite of a valid contract, when the law requires that a contract be in
some form in order that it may be valid or it may be enforceable, that requirement is indispensable for
its validity. Meaning, we must follow the law or else, the contract may be rendered as invalid or
unenforceable, as the case may be.

In a scenario wherein the agreement of the party was not properly reflected on the document which
they are about to sign. What do you think is the proper remedy? Correct! The answer is reformation.
Take note also that there are rules on interpreting the provisions in the contract. In this module, prepare
to learn all of this and more.

The form of a contract refers to the manner in which a contract is executed or manifested.
As to form, contracts may be classified as informal and formal.
Informal or common contract may be entered into by the parties in whatever form as long as all the
essential requisites of a valid contract is present.
However, there are contracts which are required by law to follow a certain specified form for its
effectiveness. These contracts are called formal or solemn contract.
Reason:
1. For validity
2. For enforceability
3. For convenience

A contract may be oral or in writing. If the contract is in writing, it can be in public instrument
(notarized) or private instrument (not notarized).

Form for Validity of Contract:

As I have said a while back, there are contracts that were needed to be executed in a certain form to be
valid. Some of these contracts are as follows:
A donation of real property must be in a public instrument
A donation of personal property which value exceeds P5,000
The sale of land through an agent, the authority of the agent must be in writing otherwise the sale is
void Stipulation to pay interest must be in writing

CONTRACTS WHICH MUST APPEAR IN A PUBLIC INSTRUMENT:

Article 1358 enumerates the contracts that must appear in a public instrument. The contracts covered
by this article are valid and enforceable though not contained in a public document or instrument or in
writing.

The public document is only required for the convenience and greater protection of the parties and to
make the contract binding as against third person.

NOTES:

The following contracts are required to appear in a public document for the convenience of the parties
and so that they may registered in the proper recording office to adversely affect third persons.

a. Acts and contracts which have their object the creation, transmission, modification or
extinguishment of real rights over immovable property
b. The cession, repudiation or renunciation of hereditary rights or of those of conjugal partnership
of gains
c. The power to administer property, or any other power which has for its object an act appearing
or which should appear in a public instrument, or should prejudice a third person
d. The cession of actions or rights proceeding from an act appearing in a public document
e. Any writing, public or private
All other contracts where the amount involved exceeds P500.00 must be in writing for the
convenience of the parties. However, the sale of goods, chattels or things in action whose price is
P500 or more must be in writing to be enforeceable.

Contract are valid regardless of form. There are only 2 exceptions:

o First, when the contractual form is needed for validity such as in donation of real property.
o Second, when form is needed for enforceability under the Statute of Frauds.

MODULE #22
Reformation is the remedy allowed by law wherein a written instrument is amended to conform to the
real agreement of the parties whenever the instrument fails to express or reflect such agreement or
intention because of mistake, fraud, inequitable conduct or accident.

Reformation of contract may be availed as a remedy when the following requisites are present:
1. There is a meeting of the minds of the parties to the contract.
2. The written instrument does not express the true agreement or intention of the parties.
3. The failure to express the true intention is due to mistake, fraud, inequitable conduct or accident.

PARTY ENTITLED TO REFORMATION:

If mistake is mutual – either of the parties
In all other cases – the injured parties
Note that the only time that reformation is allowed is when the written contract does not reflect the
real agreement of the parties due to mistake, fraud, inequitable conduct or accident.

NOTES:
When reformation is not available
1. In the case of the following:
a. Simple donations inter vivos wherein no condition is imposed.
i. This is so because a donation is essentially an act of liberality on the part of the
donor.
b. Wills
i. The reason is that the making of a will is strictly a personal act which is free and
the will may also be revoked at any time by the testator.
c. When the real agreement is void.
i. Here there is nothing to reform as the contract is inexistent
2. When one of the parties has brought an action to enforce the contract, he cannot subsequently
ask for its reformation. (Art. 1367)

INTERPRETATION OF CONTRACT:
Interpretation of contract is the determination of the meaning of the terms used by the parties in their
written contract. If the contract can easily be comprehended because the terms used are
understandable, then there is no need for interpretation. The only time that interpretation of contract is
necessary is whenever the terms or words used accepts several meanings.

Rules on Interpretation of Contract:

Literal meaning controls when language is clear.
Intention of the parties prevails over terms of contract.
o If the written contract does not reflect the intention of the parties, reformation is proper. This is also
because the intention of the parties prevails over terms of contract.
o In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered.
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.
o This is what is provided for in Article 1373. Remember, the interpretation that render the contract
effectual or effective and which upholds the existence of the contract shall be given the weight.

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.
o Note that the contract must be interpreted as a whole.
The usage or custom of the place shall be use to aid in interpretation.
o If a person rendered services to another but the contract did not provide for the amount of
compensation to be paid, the amount must be determined by the rate customarily pain in the place
where the services were rendered. (Arroyo vs. Azur, 76 Phil. 493)

There shall be no reformation in the following cases:

1. Simple donations inter vivos (while the donor is alive) wherein no condition is imposed.
2. Wills
3. When the real agreement is void
4. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask
for its reformation.

In case of impossibility to settle doubts

• Gratuitous Contract (lesser rights)
• Onerous Contract (most beneficial to the contracting parties)
• Principal Object of a Contract (void)

Module #23
So that contracts be considered as valid, the three essential elements must be present.
If the contract does not possess all the essential requisites or there are other issues like the contract will
cause an economic injury or damage to one of the parties or even to a third person, the contract is
considered as defective.

The Law on Obligation and Contracts provided for the four kinds of defective contract, which are as
follows:
1. Rescissible contract
2. Voidable contract
3. Unenforceable contract
4. Void or inexistent contract
In this module, prepare to learn about rescissible and voidable contract.

RESCISSIBLE CONTRACT:
Actually, a rescissible contract is a valid contract. It possesses all the essential requisites of a contract.
The problem really lies on the fact that there is a possibility that because of this contract, one of the
parties or even a third person might suffer an economic injury.

An economic injury is a scenario where one of the parties or a third person is put into a disadvantage
because of the said contract.

So again, rescissible contracts are valid and enforceable although may be subjected to rescission by the
court when there is economic damage or prejudice to one of the parties or to a third person.

According to Article 1380, contracts validly agreed upon may be rescinded in the cases established by
law.
By definition, rescission is a remedy granted by law to the contracting parties and sometimes even to
third persons in order to secure reparation of damages caused them by a valid contract, by means of the
restoration of things to their condition in which they were prior to the celebration of said contract.

Requisites of Rescission:
The remedy of rescission may be availed of when the following requisites are present:
 There is a contract which is validly agreed upon.
 There must be a lesion or pecuniary prejudice to one of the parties or to a third person
 There must be no other legal remedy to obtain reparation for damages.
The party asking for rescission must be able to return what he is obliged to restore and the object of the
contract must not legally be in the possession of third persons who did not act in bad faith.
The period of filing of the action must not have prescribed.
Rescissible Contract:
Article 1381 and 1382 enumerates the six types of rescissible contracts.

Contracts entered into in behalf of wards – a ward is a person under guardianship by reason of some
incapacity. If the guardian entered into a contract wherein the ward suffer lesion of more than ¼ of the
value of the thing, then the same is a rescissible contract.

The ward suffered lesion when the guardian sells the property of the ward worth P20,000 for only
P10,000. The property is sold where the ward suffer lesion of more than ¼ of the value of the thing.
Therefore, the sale can be rescinded.

This rule is also applicable to a contract agreed upon in representation of absentee.

Absentee is a person who disappears from his domicile his whereabouts being unknown and without
leaving an agent to administer his properties.

Contracts undertaken in fraud of creditors – The contract entered into is rescissible whenever a person
sell his property to another just to avoid paying his creditors. However, it is not as plain as that. There
are also requisites to be observed to rescind these kinds of contracts, namely:
o There must be an existing credit prior to the contract to be rescinded.
o There must be fraud on the part of the debtor which may be presumed or proved.
o The creditor has no other way to recover his credit.

Contracts which refer to things under litigation – Example is when A sues B for the recovery of a
property. During the pendency of the case before the court and without the approval of the court, B
sells the property to C. In this scenario, the sale is rescissible.

Extent of Rescission:
Take note that the action for rescission is subsidiary. When we say subsidiary, it cannot be instituted
except when the party suffering from damage has no other legal means to obtain reparation for the
same.

Rescission shall be only to the extent necessary to cover the damages caused. It means that the entire
contract need not be set aside in whole if damage can be repaired by partial rescission.

Rescission creates an obligation of mutual restitution. By restitution, it means that the parties must
return to each other the object together with the fruits and the price thereof with legal interest.

Liability of Purchaser in Bad Faith:

A purchaser in bad faith is someone who is aware that the thing was sold to him by the seller so that the
seller may defraud its creditor.
A purchaser in bad faith must return the object of the contract if the sale is rescinded. If in instances
that it is impossible for the purchaser in bad faith to return it, due to any cause, he must indemnify the
creditor of his seller for damages.
Example is when S sold his house to B in order to avoid payment of his debt to C, his creditor. B knew of
S’s purpose but still bought the same. If the sale is rescinded, B must return the house. If the house was
destroyed due to typhoon, then he should indemnify C for damages.
Period for Filing of Action for Rescission:
According to Article 1389, the action to claim rescission must be commenced within four years.
Persons Entitled to Bring Action:
The action for rescission may be brought by:
1. the injured party or the defrauded creditor
2. his heirs, assigns, or successors-in-interest
3. the creditors of the above entitled to subrogation

NOTES:

1.Contracts entered into in behalf of wards

Example:
a. G is the guardian of M (a minor). G sells the property of M worth P200,000 for only P140,000
to B.
b. G, the guardian of M, a minor, was authorized by the court to sell two parcels of land valued
at P200,000 each. G sold the two parcels of B for only P200,000.

2. Contracts agreed upon in representation of absentees

3. Contracts undertaken in fraud of creditors.
4. Contracts which refer to things under litigation
5. Payment made in a state of insolvency
6. Some specific contracts subject to rescission.

*Rescission is not Principal remedy

*Rescssion shall be only to the extent necessary to recover damages caused.
*Rescission creates an obligation of mutual restitution.

ALIENATIONS IN FRAUD OF CREDITORS

1. Alienation by gratuitous title
Gratuitous alienations are presumed to have been entered into in fraud of creditors if the
debtor did not reserve sufficient property to pay all debts contracted before the donation. (Art
1387)
Example: D owes his creditors P500,000. He has assets of P700,000. If D donates assets
amounting to P300,00, such donation is presumed fraudulent because it leaves D with assets of
only P400,000 which amount is not enough to pay his debts of P500,000.

2. Alienation by onerous title (such as sale or exchange)

Onerous alienations are presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued.

VOIDABLE CONTRACTS:
Voidable contracts are also known as annullable contracts. They are valid until annulled. They are valid
because the 3 essential elements for a contract to be considered valid are present. The only problem
really is that, the consent was vitiated or the party is not capable of giving consent.
Again, voidable contract is valid and is binding, unless they are annulled by a proper action in court.
are those which possess 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

NOTES:
The following are voidable or annullable contracts
1. Those where one of the parties is incapable of giving consent to a contract.
The following are incapable of giving consent to a contract:
a. Unemancipated minors
b. Insane or demented person
c. Deaf-mutes who do not know how to write
2. Those where the consent is vitiated by VIMFU
3. Those where consent is given in a state of drunkenness (Art. 1328)
4. Those where consent is given during hypnotic spell (Art. 1328)

Annulment:
Annulment is a remedy provided by law. Annulment has the effect of declaring that the contract entered
into by the party has no efficacy or not effective because of: 1. one of the contracting parties is
incapable of giving consent to the contract. 2. violation of consent, where there is vitiated consent
because of mistake, violence, intimidation, undue influence or fraud.

Party Entitled to Bring Action to Annul the Contract:

It can be instituted by all who are thereby obliged principally or subsidiarily.
o The complainant must have an interest in the contract
o The complainant must be the victim and not the party responsible for the defect.

Effects of Annulment of Contract:

The parties shall have the obligation to restore to each other the things which have been the subject
matter of the contract with their fruits and the price with its interest.

But if the person obliged to return cannot return the thing

o Without his fault – there is no more obligation to return the thing. If that is the case, the other cannot
be compelled to restore what in virtue of the decree of annulment he is bound to return.
o With his fault – he shall return the fruits received and the value of the thing at the time of the loss,
with interest.

The action for annulment must be brought within four (4) years.

Ratification:
As we all know, a voidable contract is a valid contract unless it is annulled before the proper court. The
contracting party injured has the right to seek for its annulment. But as much as he has the right to
annul, he may also choose ratification.

What is ratification? It means that the party voluntarily adopts some defective or unauthorized contract
either expressly or impliedly. Example is when a guardian sold the property of the ward and the ward
suffered lesion of more than ¼ of the property. Upon reaching legal age, instead of asking for the
annulment of the contract before the court, he just let it be and does not mind at all. In this example,
there is an implied ratification.
Effects of Ratification:
Ratification cleanses the contract from all its defects from the moment it was constituted

Who May Ratify:

In case of vitiated consent, the contract may be ratified by the party whose consent is vitiated.
In case a contract is entered into by an incapacitated person
o By the guardian
o By the injured party himself provided he is already capacitated.

Ratification is a unilateral act. It does not require the conformity of the contracting party who has no
right to bring the action for annulment. If the injured party chose to ratify the contract, he does not
need to ask for the consent of the other party.

Module #24

By now you know that the Law on Obligations and Contracts specifically provided for 4 kinds of defective
contracts. To recall, we have:
1. Rescissible Contract
2. Voidable Contract
3. Unenforceable Contract
4. Void or inexistent Contract

In the last module, you learned that rescissible contract and voidable contracts are both valid contracts.
This is because the essential elements for a valid contract are present.

What makes rescissible contract defective? Correct! Rescissible contract is defective because of the fact
that they are entered into to defraud the creditors, it causes injury to a third party or they are rescissible
because certain laws are violated, just like when the guardian sold the property of his ward and the
ward suffered lesion of more than ¼ of the value of the property!

What about voidable contracts? What makes them defective? Correct! Voidable contracts are defective
because the one of the contracting parties is not capable of giving consent or the consent was vitiated,
meaning, the consent was not freely given because of mistake, fraud, undue influence, intimidation or
force.

In this module, prepare to learn more about defective contract, specifically, the unenforceable contract
and the void or inexistent contract.

UNENFORCEABLE CONTRACT:
Unenforceable contracts are those that cannot be enforced in court because of defects provided by law.
Actually, like rescissible and voidable contracts, unenforceable contracts are also valid.
The only problem with unenforceable contract is that it is unenforceable in court unless they are cured
or ratified.

Article 1403 enumerates the contract that are unenforceable unless they are ratified.
Those entered into in the name of another by one without or acting in excess of authority.
o Unauthorized contracts are those entered into in the name of another person by one who has been
given no authority or legal representation.
o Unauthorized contracts are also those entered into in the name of another but the person authorized
acted beyond its powers. If a person was authorized to sell a particular property for a specific amount
but sold the same in a lower amount, then the authorized person has acted beyond his powers.

Those that do not comply with the Statute of Frauds.

o Statute of Frauds require certain agreement that susceptible to fraud to be in writing.
o If those contracts enumerated in the Statute of Frauds failed to be in writing, the contract will be
considered unenforceable.

STATUTE OF FRAUDS is statute designed to prevent the commission of fraud by requiring certain
contracts to be in writing and be subscribed by the party charges.

The following contracts must be in writing otherwise they are unenforceable:

1. Agreement not to be performed within one year from the making thereof
2. Promise to answer for the debt, default or miscarriage of others.
Illustration
-D owes C P50,000 with G as guarantor.
-G promise to pay C what D owes him (C).
3. Agreement in consideration of marriage other than mutual promise to marry
4. Agreement for sale of goods, chattels or things in action at a price not less than P500.00
Illustration:
S and B mutually promise to sell and buy a piano at a price of P12,000.00
5. Agreement for leasing for a longer period than one year
6. Agreement for the sale of real property or an interest
S agreed in a private document to sell his land to B. The document was given to B who lost it. May B
prove his agreement by oral evidence?
7. A representation as to the credit of a third person

Those where both parties are incapable of giving consent.

o In a contract where both parties are incapable of giving consent, express or implied ratification by the
parent or guardian, as the case may be, of one of the contracting parties shall give the contract the same
effect as if only one of them were incapacitated.
o However, if the parent or guardian of either party or if one of the parties after attaining or regaining
capacity, ratifies the contract, it becomes voidable.

VOID OR INEXISTENT CONTRACTS:

A void contract is a contract that produces no effect at all. It cannot be ratified because there is no
contract to talk about in the first place. Article 1409 enumerates the contracts which are considered
inexistent or void from the very beginning.

1. Those whose cause, object or purpose in contrary to law, morals, good customs, public order or
public policy.
2. Those which are absolutely simulated or fictitious
3. Those whose cause or object did not exist at the time of the transaction
4. Those whose object is outside the commerce of men
5. Those which contemplate an impossible service
 6. Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained
7. Those expressly prohibited or declared void by law
A. Contract of donation between spouses during the marriage (Art. 87, Family Code)
B. A contract of sale between spouses (except when there is separation of property.
(Art. 1490)
C. A contract which stipulates that household service shall be without any
compensation. (Art. 1689)
D. A contract upon future inheritance (except in cases provided by law such as in the
marriage settlement)

What is the rule where the contract is illegal and the act constitutes a criminal offense?
o When the parties are in pari delicto, meaning both parties have done wrong, the parties shall have no
action against each other, both of them shall be prosecuted and the things or the price of the contract
shall be confiscated in favor of the government.
o A sold B illegal drugs. The act of selling illegal drugs constitutes a criminal offense and both of them
have done wrong by entering such contract with each other. In this case, both of them shall be
prosecuted and the object and price of the contract shall be confiscated in favor of the government.
Contracts which are expressly prohibited by law.