CHAPTER 1

GENERAL PROVISIONS
CONTRACTS
CONTRACT (Article 1305)
– A meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.
KINDS OF INNOMINATE CONTRACTS
A. DO UT DES
– I give that you may give.
B. DO UT FACIAS
– I give that you may do.
C. FACIO UT DES
– I do that you may give.
D. FACIO UT FACIAS
– I do that you may do.
BASIC PRINCIPLES OF CONTRACTS
BASIC PRINCIPLES OR CHARACTERISTICS OF CONTRACTS (MARCO)
A. AUTONOMY or LIBERTY or FREEDOM TO STIPULATE (Article 1306)
B. MUTUALITY (Articles 1308 to 1310)
C. RELATIVITY (Articles 1311 to 1314)
D. CONSENSUALITY (Articles 1315 to 1316)
E. OBLIGATORINESS or OBLIGATORY FORCE (Articles 1159 and 1315)
AUTONOMY or LIBERTY or FREEDOM TO STIPULATE (Article 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.
MUTUALITY (Article 1308)
– A contract must bind both contracting parties in order that it can be enforced
against either party. Without this equality between the parties, the contract has
no force of law between them.
– It also includes the fundamental rule that no party can renounce or violate the
law of the contract without the consent of the other. Hence, its validity or
compliance cannot be left to the will of one of them.
DETERMINATION OF PERFORMANCE BY A THIRD PERSON (Article 1309)
– The compliance with a contract cannot be left to the will of one of the parties.
However, under this provision, the determination of its performance may be left to
a third person. In such a case, the obligation does not depend upon any
potestative condition. The decision of the third person shall bind the parties only
after it has been made known to both of them.
EFFECT WHERE DETERMINATION IS INEQUITABLE (Article 1310)
– A contracting party is not bound by the determination if it is evidently
inequitable
or unjust as when the third person acted in bad faith or by mistake. In such case,
the courts shall decide what is equitable under the circumstances.
RELATIVITY (Article 1311)
– Contracts are generally effective only between the PARTIES, their ASSIGNS and
their HEIRS.
PERSONS AFFECTED BY A CONTRACT
A. GENERAL RULE
– A party’s rights and obligations derived from a contract are transmissible to the
successors. Contracts take effect only between the parties, their assigns, and heirs.
This means that only the parties, their assigns, and heirs can have rights and
obligations under the contract.
BASIC PRINCIPLES OF CONTRACTS
B. EXCEPTIONS TO RELATIVITY
1. THE CONTRACT IS EFFECTIVE ONLY BETWEEN THE PARTIES or INTRANSMISSIBLE
– The rights and obligations arising from the contract are not transmissible.
SCOPE OF INTRANSMISSIBILITY
a. BY NATURE
– Contracts involving personal qualifications.
b. BY STIPULATION
– In accordance with the principle of autonomy.
c. BY PROVISION OF LAW
– When death extinguishes the legal relationship.
2. THE CONTRACT AFFECTS STRANGERS OR THIRD PERSONS
a. Article 1311 – Contracts containing stipulations pour autrui.
b. Article 1312 – Contracts creating real rights.
c. Article 1313 – Contracts intended to defraud creditors.
d. Article 1314 – Contracts violated at the inducement of a third person.
STIPULATION POUR AUTRUI (Article 1311)
– 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 obligee or the original
parties. The stipulation is merely part of the contract entered into by the parties,
neither of whom acted as agent of the third person.
– The acceptance of the stipulation by the third party may be made expressly or
implicitly, formally or informally.
THIRD PERSONS ARE BOUND BY CONTRACTS CREATING REAL RIGHTS
(Article 1312)
– Third persons who come into possession of the object of a contract over which
there is a real right, are bound thereby even if they were not parties to the
contract. A real right is binding against the whole world and attaches to the
property over which it is exercised wherever it goes.
RIGHT OF CREDITOR TO IMPUGN CONTRACTS INTENDED TO DEFRAUD THEM
(Article 1313)
– The creditor is given the right to impugn the contracts of his debtor to defraud
him.
LIABILITY OF THIRD PERSON RESPONSIBLE FOR BREACH OF CONTRACT
(Article 1314)
– Since contractual right is a property, the law recognizes an instance when a
stranger to a contract can be sued for damages for his unwarranted interference
with the contract. It presupposes that the contract interfered with is valid and the
third person has knowledge of the existence of the contract.
– The liability of the third person cannot be more than that of the party who
violated the contract. The liability will be based on the theory of quasi-delict.
STAGES IN THE LIFE OF A CONTRACT
A. PREPARATION or NEGOTIATION or CONCEPTION or GENERACION
– The parties are progressing with their negotiations and this stage includes all the
steps taken by the parties leading to the perfection of the contract; they have not
yet arrived at any definite agreement, although there may have been a preliminary
offer and bargaining.
B. PERFECTION or BIRTH
– This is when the parties have come to a definite agreement or meeting of the
minds regarding the subject matter and cause of the contract, i.e. upon
concurrence of the essential elements thereof.
C. CONSUMMATION or TERMINATION or DEATH
– This is when the parties have performed their respective obligations and the
contract may be said to have been fully accomplished or executed, resulting in the
extinguishment or termination thereof.
KINDS OF CONTRACTS
KINDS OF CONTRACTS ACCORDING TO PERFECTION
A. CONSENSUAL CONTRACT (Article 1315)
– As a general rule, contracts are perfected by mere consent of the parties
regarding the subject matter and the cause of the contract. They are obligatory in
whatever form they may have been entered into, provided all the essential
requisites for their validity are present.
B. REAL CONTRACTS (Article 1316)
– They are perfected by the delivery, actual or constructive, of the object of the
obligation. These contracts have for their purpose restitution because they
contemplate the return by a party of what has been received from another.
C. FORMAL or SOLEMN CONTRACTS (Article 1356)
– When the law requires that a contract be in some form to be valid, this special
form is necessary for its perfection.
UNAUTHORIZED CONTRACTS
UNAUTHORIZED CONTRACTS (Article 1317)
– 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.
UNAUTHORIZED CONTRACTS ARE UNENFORCEABLE (Article 1317)
– A person is not bound by the contract of another of which he has no knowledge
or to which he has not given his consent. A contract entered into in the name of
another by one who has no authority is unenforceable against the former unless it
is ratified by him before it is revoked by the other contracting party.
UNAUTHORIZED CONTRACTS CAN BE CURED ONLY BY RATIFICATION
– The mere lapse of time cannot give efficacy to such a contract. The defect is such
that it cannot be cured except by the subsequent ratification of the person whose
name the contract was entered into or by his duly authorized agent and not by any
other person not so empowered.
– The ratification must be clear and express so as not to admit of any doubt of
vagueness.

Chapter 2
ESSENTIAL REQUISITES OF CONTRACTS
ELEMENTS OF CONTRACTS
A. Essential
1. Common
2. Special
B. Natural
C. Accidental
COMMON ESSENTIAL ELEMENTS
A. Consent
B. Object
C. Cause
CONSENT
CONSENT (Article 1319)
– The conformity or concurrence of wills (offer and acceptance) and with respect
to contracts, it is the agreement of the will of one contracting party with that of
another or others, upon the object and terms of the contract.
GENERAL RULE
– Capacity to give consent is presumed.
OFFER
• Article 1319 – Offer must be certain.
• Article 1321 – Offer may fix time, place, and manner of acceptance.
• Article 1322 – Offer may be made through an agent.
• Article 1323 – Offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency.
• Article 1324 – Offer may be withdrawn at any time before acceptance.
• Article 1325 – Business advertisements of things for sale are not definite offers.
• Article 1326 – Advertisements for bidders are not definite offers.
ACCEPTANCE
• Article 1319 – Acceptance must be absolute.
• Article 1320 – Acceptance may be express or implied.
• Article 1321 – Acceptance must comply with the terms of the offer.
• Article 1322 – Acceptance must be communicated to the agent who made the
offer.
PERSONS WHO CANNOT GIVE CONSENT (Article 1327)
A. Minors.
B. Insane or demented.
C. Deaf-mutes who do not know how to write.
MODIFICATIONS ON INCAPACITY DISCUSSED UNDER ARTICLE 1327 (Article 1329)
A. When necessaries such as food, are sold and delivered to a minor or other
person without capacity to act, he must pay a reasonable price therefor (Articles
1489 and 290).
B. A contract is valid if entered into through a guardian or legal representative
(Article 1381 (1) and (2)).
C. A contract is valid where the minor misrepresented his age and convincingly led
the other party to believe his age his legal capacity.
LUCID INTERVAL
– A temporary period of sanity.
EFFECT OF LUCID INTERVAL (Article 1328)
– A contract entered into by an insane or demented person during a lucid interval
is valid. It must be shown however, that there is a full return of the mind to sanity
as
to enable him to understand the contract he is entering into.
EFFECT OF DRUNKENNESS AND HYPNOTIC SPELL (Article 1328)
– Drunkenness and hypnotic spell impair the capacity of a person to give intelligent
consent.
– These conditions are equivalent to temporary insanity. Hence the contract
entered into during such state is voidable and it is not required that such state was
procured by the circumvention of the other party.
VICES OF CONSENT (VIMFU)
A. Error or mistake. (Articles 1331 to 1334)
B. Violence or force. (Articles 1335 to 1336)
C. Intimidation or threat or duress. (Articles 1335 to 1336)
D. Undue influence. (Article 1337)
E. Fraud or deceit. (Articles 1338 to 1344)
MISTAKE (Article 1331)
– The false notion or belief about a thing or a fact material to the contract.
– The mistake contemplated by law is substantial mistake of fact, that is, the party
would not have given his consent had he known of the mistake. Hence not every
mistake will vitiate consent and make a contract voidable.
VIOLENCE (Article 1335)
– Requires the employment of physical force which must be either serious or
irresistible.
INTIMIDATION or THREAT (Article 1335)
– The action of intimidating someone, or the state of being intimidated. There is no
physical force but moral coercion.
– Whether or not the fear is reasonable and well-grounded or the evil imminent
and grave depends upon the circumstances, including the age, sex, and condition
of the person.
UNDUE INFLUENCE (Article 1337)
– Influence of a kind that so overpowers the mind of a party as to destroy his free
will and make him express the will of another, rather than his own.
TWO KINDS OF FRAUD or DOLO (Articles 1338 and 1344)
A. CAUSAL FRAUD or DOLO CAUSANTE
– This is the kind of fraud which vitiates consent and the law refers to this when it
speaks of vices of consent.
– It is the fraud used by a party to induce the other to enter into a contract without
which the latter would not have agreed to.
– It may be committed through insidious words or machinations or by
concealment.
B. INCIDENTAL FRAUD or DOLO INCIDENTE
– Renders the party who employs it liable for damages because the fraud was not
the principal inducement that led the other to give his consent.
SIMULATION OF A CONTRACT (Article 1345 to 1346)
– It is the process of intentionally deceiving others by producing the appearance of
a contract that really does not exist or which is different from the true agreement.
KINDS OF SIMULATION
A. ABSOLUTE SIMULATION (FICTITIOUS CONTRACTS)
– Takes place when the contract does not really exist and the parties do not intend
to be bound at all. The contract is inexistent or void.
B. RELATIVE SIMULATION (DISGUISED CONTRACTS)
– When the parties conceal their true agreement and the contract entered into by
the parties is different from their true agreement.
– GENERALRULE: The parties are bound to the real or true agreement.
– EXCEPTIONS: 1) If the contract should prejudice a third person; and 2) If the
purpose is contrary to law, morals, good customs, public order or public policy.
OBJECT
OBJECT (Articles 1347 to 1349)
– It is the subject matter. In reality the object of every contract is the obligation
created but since a contract cannot exist without an obligation, the thing, service,
or right which is the object of the obligation is also the object of the contract.
REQUISITES OF THINGS AS OBJECT OF CONTRACT
A. The thing must be within the commerce of men, that is, it can legally be the
subject of commercial transaction.
B. It must not be impossible, legally or physically.
C. It must be in existence or capable of coming into existence (future things)
including future rights.
D. It must be determinate or determinable without the need of a new contract
between the parties.

REQUISITES OF SERVICESAS OBJECT OF CONTRACT

A. The service must be within the commerce of men.
B. It must not be impossible, legally or physically.
C. It must be determinate or capable of being made
determinate.
RIGHTS AS OBJECT OF CONTRACT
– GENERAL RULE: All rights may be object of a contract.
– EXCEPTION: When the rights are intransmissible by their nature, or by
stipulation, or by provision of law.
CAUSE
CAUSE or CAUSA or CONSIDERATION
– The essential reason or purpose which the contracting parties have in view at the
time of entering into the contract.
KINDS OF CONTRACTSACCORDING TO CAUSE (Article 1350)
A. Onerous.
B. Remuneratory or remunerative.
C. Gratuitous or contracts of pure beneficence.
MOTIVE (Article 1351)
– The purely personal or private reason which a party has in entering into a
contract. The motive may be regarded as the cause in a contract if it is founded
upon a fraudulent purpose to prejudice a third person.
CAUSE
• Immediate or direct reason.
• Always known.
• Essential element of a contract.
• Illegality affects the validity of a contract.
• Must be present for a contract to be valid.
MOTIVE
• Remote or indirect reason.
• May be unknown to the other party.
• Not an element of a contract.
• Illegality does not render the contract void.
• The presence of motive cannot cure the absence of cause.
LESION (Article 1355)
– Any damage or injury caused by the fact that the price is unjust or cause is
inadequate. One party does not receive the full equivalent for what he gives in a
commutative contract.
EFFECT OF LESION
A. GENERAL RULE
– Lesion or inadequacy of price does not invalidate a contract.
B. EXCEPTIONS
1. When, together with lesion, there has been fraud, mistake or undue influence.
2. In cases expressly provided by law.
CHAPTER 3
FORM OF CONTRACTS
FORM OF CONTRACTS
– Refers to the manner in which a contract is executed or manifested.
– A contract may be oral, or in writing, or partly oral and partly in writing. If in
writing, it may be public or a private instrument.
– To be recognized as a written contract, all its terms must be in writing. A contract
partly in writing and partly oral is, in legal effect, an oral contract.
CLASSIFICATION OF CONTRACTS ACCORDING TO FORM
A. INFORMAL or COMMON
– That which may be entered into in whatever form provided all the essential
requisites for their validity are present. This refers only to consensual contracts. An
informal contract may be oral or written.
B. FORMAL or SOLEMN
– That which requires compliance with certain formalities prescribed by law for its
efficacy, such prescribed form being thereby an essential element thereof.
RULES REGARDING FORM
RULES REGARDING FORM OF CONTRACTS (Article 1356)
A. GENERAL RULE
– Form does not matter for the validity of a contract. It is enough that there be
consent, subject matter and cause. This rule applies, however, to consensual
contracts.
B. EXCEPTIONS
1. FORM FOR VALIDITY
– When the law requires that a contract be in some form to be valid.
2. FORM FOR ENFORCEABILITY
– When the law requires that a contract be in some form to be enforceable or
proved in a certain way.
3. FORM FOR CONVENIENCE OR GREATER EFFICACY
– When the law requires that a contract be in some form for the convenience of
the parties or for the purpose of affecting third persons.
FORM FOR VALIDITY
A. REQUIRED TO BE IN WRITING
1. DONATION OF PERSONAL PROPERTY (Article 748)
– Donations of personal property the value of which exceeds ₱5,000 require that
the donation and acceptance be made in writing otherwise the donation is void.
2. STIPULATIONS REDUCING THE COMMON CARRIER’S EXTRAORDINARY
DILIGENCE
AND LIMITING ITS LIABILITY (Articles 1744-1750)
3. SALE OF LAND THROUGH AN AGENT (Article 1874)
– Sale of land thru an agent whose authority must be in writing, otherwise, the sale
is null and void.
4. STIPULATION TO PAY INTEREST (Article 1956)
– Stipulation to pay interest on loans, interest for the use of the money must be in
writing.
5. ANTICHRESIS (Article 2134)
– In contracts of antichresis, the amount of the principal and of the interest shall
be specified in writing; otherwise, the contract shall be void.
B. REQUIRED TO BE IN A PUBLIC INSTRUMENT
1. DONATION OF REAL PROPERTY (Article 749)
– Donation of an immovable must be made in a public document. The acceptance
may be made in the same deed of donation or in a separate public document, but
it shall not take effect unless it is done during the lifetime of the donor. If in a
separate instrument, the donor shall be notified thereof in an authentic form, and
this step shall be noted in both instruments.
2. CONTRACT OF PARTNERSHIP (Articles 1771 and 1773)
– In partnerships where real property is contributed the contract of partnership
should be in writing.
FORM FOR ENFORCEABILITY (Article 1403)
– In the cases of contracts covered by the Statute of Frauds and Perjuries, the law
requires that they be in writing, subscribed by the party charged or by his agent. If
the contract is not in writing, the contract is valid (assuming all the essential
elements are present) but it cannot be proved in court and is unenforceable
(neither party may be compelled by court action to perform) unless it is ratified.
FORM FOR CONVENIENCE OR GREATER EFFICACY
– In certain cases, a certain form is required for the convenience of the parties in
order that the contract may be registered in the proper registry to make effective
the right acquired under such contract as against third persons. Non-compliance
with the required form would not adversely affect the validity nor the
enforceability of the contract between the parties themselves.
– As between parties, the form is not indispensable since they are allowed by law
to compel the other to observe the proper form and this right may be exercised
simultaneously with the action to enforce the contract. It is essential however that
the contract be both valid and enforceable (Article 1357).
CONTRACTS WHICH MUST APPEAR IN A PUBLIC DOCUMENT (Article 1358)
A. Acts and contracts which have for 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 the
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 document, or should prejudice
a third person.
D. The cession of actions or rights proceeding from an act appearing in a public
document.

CHAPTER 4
REFORMATION OF INSTRUMENTS (n)
REFORMATION (Article 1359)
– 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 by
reason of mistake, fraud, inequitable conduct, or accident, the instrument fails to
express such agreement or intention.
REQUISITES FOR THE ACTION FOR REFORMATION
A. There must be meeting of the minds of the parties to the contract.
B. The true intention or agreement of the parties is not expressed in the written
instrument.
C. The failure to express the true intention is due to mistake, fraud, inequitable
conduct, or accident.
D. The facts upon which relief by way of reformation of the instrument is sought
are put in issue by the pleadings.
E. There must be clear and convincing proof of the mistake, fraud, inequitable
conduct, or accident.
F. It must be brought within the proper prescriptive period of 10 years.
G. The document must not refer to a simple unconditional donation inter vivos,
wills or to a contract where the real agreement is void.
WHEN REFORMATION IS PROPER
A. Article 1361 – Mutual mistake.
B. Article 1362 – Mistake on one side and fraud or inequitable conduct on the
other side.
C. Article 1363 – Concealment of mistake by the other party.
D. Article 1364 – Ignorance, lack of skill, negligence, or bad faith on the part of a
third person.
E. Article 1365 – Mortgage or pledge stated as sale.
F. Article 1346 – Relative simulation that does not prejudice a third person and is
not unlawful.
PRINCIPLES OF THE GENERAL LAW ON REFORMATION (Article 1360)
– In case of conflict between the provisions of the New Civil Code and the
principles of general law on reformation, the former prevails. The latter will have
only suppletory effect.
MUTUAL MISTAKE (Article 1361)
– A mistake of fact that is common to both parties of the instrument which causes
the failure of the instrument to express their true intention.
REQUISITES
A. The mistake must be of fact (Article 1331).
B. Such mistake must be proved by clear and convincing evidence.
C. The mistake must be mutual, that is, common to both parties to the instrument.
D. The mistake must cause the failure of the instrument to express the true
intention of the parties.
MISTAKE ON ONE SIDE, FRAUD OR INEQUITABLE CONDUCT ON THE OTHER
(Article 1362)
– The mistake is unilateral but the other party acted fraudulently or inequitably.
The right to ask for reformation is granted only to the party who was mistaken
since the mistake is not mutual.
CONCEALMENT OF MISTAKE BY THE OTHER PARTY (Article 1363)
– The mistake is unilateral but the other party is guilty of concealment. The
remedy
of reformation may be availed of the party who acted in good faith. The
concealment of the mistake by the other party constitutes fraud.
IGNORANCE, LACK OF SKILL, NEGLIGENCE, OR BAD FAITH ON THE PART OF THIRD
PERSON (Article 1364)
– Neither party is responsible for the mistake. Either party may ask for
reformation.
– The court may order the reformation of the instrument if the instrument does
not
convey the true intention of the parties because of the ignorance, lack of skill, or
bad faith of the drafter of the instrument, or the clerk, or the typist.
MORTGAGE OR PLEDGE STATED AS A SALE (Article 1365)
– The reformation of the instrument is proper; otherwise the true intention of the
parties would be frustrated. Such true intention must prevail for the contract must
be complied with in good faith.
– The intent of the parties can be adjudged from their contemporaneous and
subsequent acts.
CASES WHEN REFORMATION IS NOT ALLOWED
A. SIMPLE DONATIONS INTER VIVOS WHERE NO CONDITION IS IMPOSED (Article
1366)
– The act is essentially gratuitous and the donee has no just cause for complaint.
The donor is not bound to correct mistakes or defects in the deed of donation
which in the first place he was not bound to make. Of course, the donor may ask
for the reformation of a deed of donation.
B. WILLS (Article 1366)
– The making of a will is a strictly personal and free act, hence upon the death of
the testator, the right to reformation is lost. Furthermore, a will may be revoked by
the testator any time before his death. However, after the death of the testator,
errors or imperfections in descriptions may be corrected under Article 789, but not
the manner of property disposal.
C. WHEN THE REAL AGREEMENT IS VOID (Article 1366)
– If the real agreement is void, there is nothing to reform.
D. WHEN ONE PARTY HAS BROUGHT AN ACTION TO ENFORCE THE INSTRUMENT
(Article 1367)
– Based on estoppel or ratification. When a party brings an action to enforce the
contract, he admits its validity and that it expresses the true intention of the
parties. The bringing of the action is thus inconsistent with reformation.
PARTY ENTITLED TO REFORMATION (Article 1368)
A. Either of the parties, if the mistake is mutual under Articles 1361, 1364, and
1365.
B. In all other cases, the injured party, under Articles 1362, 1363, 1364, and 1365.
C. The heirs or successors-in-interest, in lieu of the party entitled.
PROCEDURE FOR REFORMATION (Article 1369)
– The Rules of Court governs procedure. However, no rules have yet been
promulgated.

CHAPTER 5
INTERPRETATION OF CONTRACTS
INTERPRETATION OF CONTRACT
– The determination of the meaning of the terms or words used by the parties in
their written contract.
RULES IN INTERPRETATION OF CONTRACTS
A. LITERAL MEANING CONTROLS WHEN LANGUAGE IS CLEAR (Article 1370)
– If the terms of a contract are clear and unequivocal, the parties are bound by
such
terms. The concern here is not what existed in the minds of the parties but what
intention is expressed in the language used.
B. EVIDENT INTENTION OF PARTIES PREVAILS OVER TERMS OF CONTRACT (Article
1370)
– Where the words and clauses of a written contract are in conflict with the
manifest
intention of the parties, the latter shall prevail over the former. It is a cardinal rule
in the interpretation of contracts that the intention of the parties should always
prevail because their will has the force of law between them.
C. CONTEMPORANEOUS AND SUBSEQUENT ACTS RELEVANT IN THE
DETERMINATION OF INTENTION (Article 1371)
– Where the parties to a contract have placed an interpretation to the terms of the
contract by their contemporaneous and/or subsequent acts, as by acts in partial
performance, such interpretation may be considered by the court in determining
its meaning and ascertaining the intention of the parties when such intention
cannot clearly be ascertained from the words used in their contract.
– Antecedent circumstances may also be considered.
D. SPECIAL INTENT PREVAILS OVER A GENERAL INTENT (Article 1372)
– The special provisions control over the general provisions when the two cannot
stand together. A reference to a special matter means that attention was given to
that particular matter and it must be assumed that it expresses their intent. A
reference to a general matter within which a particular matter may be included,
does not mean that the parties had that particular matter in mind.
E. PRINCIPLE OF EFFECTIVENESS (Article 1373)
– When an agreement is susceptible of several meanings, one of which would
render it effectual, it should be given that interpretation. If one interpretation
makes a contract valid and the other makes it illegal, the former interpretation will
prevail.
F. INTERPRETATION OF VARIOUS STIPULATIONS OF A CONTRACT (Article 1374)
– A contract must be interpreted as a whole and the intention of the parties is to
be gathered from the entire instrument and not from particular words, phrases, or
clauses. All provisions should, if possible, be so interpreted as to harmonize with
each other.
G. INTERPRETATION OF WORDS WITH DIFFERENT SIGNIFICATIONS (Article 1375)
– If a word is susceptible of two or more meanings, it is to be understood in that
sense which is most in keeping with the nature and object of the contract in line
with the cardinal rule that the intention of the parties must prevail.
H. RESORT TO USAGE OR CUSTOM AS AID IN INTERPRETATION (Article 1376)
– The usage or custom or the place where the contract was entered into may be
received to explain what is doubtful or ambiguous in a contract on the theory that
the parties entered into their contract with reference to such usage or custom.
– It is necessary to prove the existence of usage or custom, the burden of proof
being upon the party alleging it. Usage or custom is not admissible to supersede or
vary the plain terms of a contract.
I. INTERPRETATION OF OBSCURE WORDS (Article 1377)
– In case of doubt, a written agreement should be interpreted against the part who
has drawn it, or be given an interpretation which will be favorable to the other
who, upon the faith of which, has incurred an obligation. Since he caused the
obscurity, the party who drew up the contract with ambiguous terms should be
responsible therefore; so the obscurity must be construed against him.
– The party who drafts the contract, more easily than the other, could have
prevented mistakes or ambiguity in meaning by careful choice of words and
general, the party who causes the obscurity acts with ulterior motives.
CONTRACTS OF ADHESION
– Contracts most of the term of which do not result from mutual negotiation
between the parties as they are usually prescribed in printed forms prepared by
one party to which the other party merely “adheres” if he chooses but which he
cannot change.
RULES IN CASE OF DOUBTS AS TO INCIDENTAL CIRCUMSTANCES (Article 1378)
A. LEAST TRANSMISSION OF RIGHTS AND INTERESTS
– Applies when the doubts refer to incidental circumstances of gratuitous
contracts.
B. GREATEST RECIPROCITY OF INTERESTS
– Applies when the doubts refer to incidental circumstances of onerous contracts.
C. PRINCIPAL OBJECT IS DOUBTFUL
– If the doubt refers to the principal object of the contract and such doubt cannot
be resolved thereby leaving the intention of the parties unknown, the contract is
null and void.

CHAPTER 6
RESCISSIBLE CONTRACTS
RESCISSIBLE CONTRACTS (Article 1380)
– Those that are validly agreed upon and enforceable because all the essential
elements exist and, therefore, legally effective, but in the cases established by law,
the remedy of rescission is granted by the court in the interest of equity when
there is economic damage or prejudice or lesion to one of the parties or to a third
person. There is actually no defect at all but by reason of some extrinsic defect, its
enforcement would cause injustice.
KINDS OF RESCISSIBLE CONTRACTS (Article 1381)
A. Contracts entered into in behalf of wards.
B. Contracts agreed upon in representation of absentees.
C. Contracts undertaken in fraud of creditors.
D. Contracts which refer to things under litigation.
E. Other instances. (Articles 1098, 1189, 1191, 1382, 1526 and 1534, 1539, 1542,
1556, 1560, 1567, 1599, and 1659.
CONTRACTS APPROVED BY THE COURTS (Article 1386)
– If a contract entered into in behalf of a ward or absentee has been approved by
the court, rescission cannot take place because it is valid whether or not there is
lesion. The law presumes that the court is acting in the interests of the ward or
absentee when it approves the contract despite of the lesion.
PAYMENTS MADE IN A STATE OF INSOLVENCY (1382)
– Payments made for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected. Includes obligations which are not yet
due and demandable but also those which cannot be legally demanded such as
natural obligations and those that have prescribed.
RESCISSION
NATURE OF ACTION FOR RESCISSION (Articles 1383 and 1384)
– Rescission is not a principal remedy. It is merely a subsidiary remedy. It can be
availed of only if the injured party proves that he has no other legal means aside
from rescinding the contract to obtain redress for the damage caused. If the
damage is repaired, rescission cannot take place.
RESCISSION CREATES OBLIGATION OF MUTUAL RESTITUTION (Article 1385)
– The purpose of rescission is to restore the parties to their original situation. The
law presumes that the party who received the object of the contract has enjoyed
the fruits thereof while the other has used the money which is the price of the
object.
PERIOD FOR FILING ACTION FOR RESCISSION (Article 1389)
A. GENERAL RULE
– The action to claim rescission must be commenced within four years from the
date the contract was entered into.
B. EXCEPTIONS
1. For persons under guardianship, the period shall begin from the termination of
incapacity.
2. For absentees, from the time the domicile is known.
PERSONS ENTITLED TO BRING ACTION FOR RESCISSION
A. The injured party or the defrauded creditor.
B. The heirs, assigns, or successors-in-interest.
C. The creditors of the above entitled to subrogation.

BADGES OF FRAUD
WHEN ALIENATION PRESUMED IN FRAUD OF CREDITORS (Article 1387)
– Prima facie presumption of fraud in case of alienation by the debtor of his
property. The enumeration is not exclusive.
A. GRATUITOUS ALIENATION
– Presumed fraudulent when the debtor did not reserve sufficient property to pay
all debts contracted before the donation.
B. ONEROUS ALIENATION
1. Presumed to be fraudulent when made by persons against whom some
judgment has been rendered in any instance even if not yet a final judgment.
2. When made by persons against whom some writ of attachment has been issued.
BADGES OF FRAUD
– Circumstances indicating that certain alienation have been made in fraud of
creditors.
CIRCUMSTANCES DENOMINATED AS BADGES OF FRAUD
A. The fact that the consideration of the conveyance is fictitious or inadequate.
B. A transfer made by a debtor after suit has been begun and while it is pending
against him.
C. A sale upon credit by an insolvent debtor.
D. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
E. The fact that the transfer is made between father and son, when the fact is
considered together with preceding circumstances.
F. The failure of the vendee to take exclusive possession of all the property.
G. It was known to the vendee that the vendor had no properties other than that
sold to him.
PURCHASER IN BAD FAITH
LIABILITY OF PURCHASER IN BAD FAITH (Article 1388)
– The purchaser in bad faith, who acquired the object of the contract alienated in
fraud of creditors, must return the same if the sale is rescinded and should it be
impossible for him to return it, due to any cause, he must indemnify the creditor.
EFFECT OF BAD FAITH
A. The acquirer must return or indemnify.
B. “Due to any cause” includes a fortuitous event.
SUBSEQUENT TRANSFERS
A. If the first transferee is in good faith, the good or bad faith of the next
transferee is not important.
B. If the first transferee is in bad faith, the next transferee is liable only if he is also
in bad faith.

CHAPTER 7
VOIDABLE CONTRACTS
VOIDABLE or ANNULLABLE CONTRACTS
- 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.
- These contracts are valid and binding between the parties unless annulled by a
proper court action. Once ratified, they become absolutely valid and can no longer
be annulled.
KINDS OF VOIDABLE CONTRACTS (Article 1390)
A. Legal incapacity to give consent, where one of the parties is incapable of giving
consent to the contract.
B. Violation of consent, where the vitiation is done by mistake, violence,
intimidation, undue influence, or fraud.
RATIFICATION
– One voluntarily adopts some defective or unauthorized contract which, without
his subsequent approval or consent, would not be binding on him.
– It cleanses the contract from all its defects from the moment it was constituted.
(Article 1396)
– Extinguishes an action to annul a voidable contract. (Article 1392)
– Ratification may be effected expressly or tacitly. (Article 1393)
– Ratification does not require the conformity of the contracting party who has no
right to bring the action for annulment. (Article 1395)
PERSONS WHO MAY RATIFY (Article 1394)
A. IN CASE OF INCAPACITY
1. Guardian.
2. Injured party himself provided he is already capacitated.
B. IN CASE OF VITIATED CONSENT
- Party whose consent is vitiated.
ANNULMENT
- A remedy provided by law, for reason of public interest, for the declaration of the
inefficacy of a contract based on a defect or vice in the consent of one of the
contracting parties in order to restore them to their original position in which they
were before the contract was executed.
PARTY ENTITLED TO BRING ACTION TO ANNUL (Article 1397)
A. The plaintiff who must have an interest in the contract.
B. The victim and not the party responsible for the defect is the person who must
assert the same.
PERIOD FOR FILING ACTION FOR ANNULMENT (Article 1391)
A. In cases of intimidation, violence, or undue influence, four years from the time
the intimidation, etc. ceases.
B. In case of mistake or fraud, four years from the time it is discovered.
C. In case of contracts entered into by minors or other incapacitated persons, four
years from the time the guardianship ceases.
DUTY OF MUTUAL RESTITUTION (Article 1398)
A. If the contract is annulled, the parties, as a general rule, must restore to each
other the subject matter of the contract and the price thereof with legal interest.
B. In personal obligations where the service has already been rendered, the value
thereof with the corresponding interest, is the basis for damages recoverable from
the party benefited by the service.
RESTITUTION BY AN INCAPACITATED PERSON (Article 1399)
- This is an exception to the general rule of mutual restitution laid down in Article
1398. The incapacitated person is obliged to make restitution only to the extent
that he was benefited by the thing or price received by him.
EFFECT OF LOSS OF THING TO BE RETURNED BY THE GUILTY PARTY (DEFENDANT)
(Article 1400)
A. If the thing to be returned is lost without the fault of the person obliged to make
restitution (defendant), there is no more obligation to return such thing but the
other cannot be compelled to restore what in virtue of the decree of annulment he
is bound to return.
B. If it is lost through the fault of the person obliged to make restitution
(defendant),
his obligation is not extinguished but is converted into an indemnity for damages
consisting of the value of the thing at the time of the loss with interest from the
same date and the fruits received from the time the thing was given to him to the
time of its loss.
EFFECT OF LOSS OF THE THING TO BE RETURNED BY THE INNOCENT PARTY
(PLAINTIFF)
– If the person who has a right to institute an action for annulment, will not be
able
to restore the thing which he may be obliged to return in case the contract is
annulled because such thing is lost through his fraud or fault, his right to have the
contract annulled is extinguished. (Article 1401)
– If the loss is not due to his fault or fraud, there is no annulment if the party
cannot restore what he is bound to return. This is true even if the loss is due to a
fortuitous event. (Article 1402) If an innocent party asks for annulment but the
thing he is supposed to return is lost by a fortuitous event, there may still be
restitution provided he offers to give the value of the thing lost but he does not
have to give interest in view of the fortuitous event.

CHAPTER 8
UNENFORCEABLE CONTRACTS
UNENFORCEABLE CONTRACTS
– Although valid, they are unenforceable in court unless they are cured or ratified.
Thus, it is as if they have no effect yet. Once ratified, these contracts may then be
enforceable and they can have in such a case the effect of valid contracts. In one
sense, therefore, they may be called validable.
RIGHT OF THIRD PERSONS TO ASSAIL AN UNENFORCEABLE CONTRACT
(Article 1408)
- Strangers to an unenforceable contract cannot bring an action to assail or
question an unenforceable contract.
KINDS OF UNENFORCEABLE CONTRACTS (Article 1403)
A. Those unauthorized contracts i.e. those entered into in the name of another by
one without, or acting in excess of, authority.
B. Those that do not comply with the Statute of Frauds and Perjuries.
C. Those where both parties are incapable of giving consent to the contract.
UNAUTHORIZED CONTRACTS
UNAUTHORIZED CONTRACTS (Articles 1317, 1403, and 1404)
– Those entered into in the name of another person by one who has been given no
authority or legal representation or who has acted beyond his powers.
– Such contract must be ratified to become effective against the person allegedly
represented. Without ratification, the “agent” assumes personal liability. The
ratification must be clear and express so as not to admit of any doubt of
vagueness.
STATUTE OF FRAUDS AND PERJURIES
– It has been enacted not only to prevent fraud but also to guard against the
mistakes of honest men by requiring that certain agreements specified that are
susceptible to fraud must be in writing; otherwise they are unenforceable by
action in court.
– They are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by acceptance of benefits under them. (Article 1405)
– It is a Rule of Exclusion, that is, oral evidence might be relevant to the
agreements enumerated therein and might therefore be admissible were it not for
the fact that the law or the statute excludes said oral evidence.
STATUTE OF FRAUDS AND PERJURIES
RULES OF APPLICATION OF THE STATUTE OF FRAUDS
A. The Statute of Frauds is not applicable in actions which are neither for damages
because of a violation of a contract, nor for the specific performance thereof.
B. It is applicable only to executory contracts and not to contracts which are totally
or partially performed.
C. It is not applicable where the contract is admitted expressly, or impliedly by the
failure to deny specifically its existence, no further evidence thereof being required
in such case.
D. It is applicable only to agreements enumerated therein.
E. It is not applicable where a writing does not express the true agreement of the
parties.
F. It does not declare that contracts infringing it are void but merely
unenforceable.
G. The defense of the Statute of Frauds is personal to the parties and cannot be
interposed by strangers to the contract.
AGREEMENTS WITHIN THE SCOPE OF THE STATUTE OF FRAUDS (Article 1403)
A. An agreement that by its terms is not to be performed within a year from the
making thereof.
B. A special promise to answer for the debt, default, or miscarriage of another.
C. An agreement made in consideration of marriage, other than a mutual promise
to marry.
D. An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action or
pay at the time some part of the purchase money; but when a sale is made by
auction and entry is made by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient
memorandum.
E. An agreement of the leasing for a longer period than one year, or for the sale of
real property or of an interest therein.
F. A representation as to the credit of a third person.
MODES OF RATIFICATION OF A CONTRACT COVERED BY THE STATUTE OF
FRAUDS AND PERJURIES (Article 1405)
A. By failure to object to the presentation of oral evidence to prove the contract.
The failure to so object amounts to a waiver and makes the contract as binding as
if it has been reduced to writing.
B. By acceptance of benefits under the contract. In this case, the contact is no
longer
executory and therefore, the Statute does not apply.
INCAPACITY OF CONTRACTING PARTIES
RATIFICATION OF AN UNENFORCEABLE CONTRACT DUE TO THE INCAPACITY OF
THE CONTRACTING PARTIES (Article 1407)
A. WHEN AN UNENFORCEABLE CONTRACT BECOMES A VOIDABLE CONTRACT
- If the parent or guardian, as the case may be, of either party, or if one of the
parties after attaining or regaining capacity, ratifies the contract, it becomes
voidable.
B. WHEN AN UNENFORCEABLE CONTRACT BECOMES A VALID CONTRACT
- If the ratification is made by the parents or guardians, as the case may be, of both
contracting parties, or by both contracting parties after attaining or regaining
capacity, the contract is validated and its validity retroacts to the time it was
entered into.

CHAPTER 9
VOID CONTRACTS
VOID CONTRACTS
– Those which, because of certain defects, generally produces no effect at all. They
are considered as inexistent from its inception or from the very beginning.
SPECIAL CLASSIFICATIONS OF VOID CONTRACTS
– In the case of Liguez v. Lopez, 102 Phil. 577, the Supreme Court, stated that there
are two kinds of VOID contracts:
A. INEXISTENT CONTRACT
- Agreements which lack one or some or all of the elements or do not comply with
formalities which are essential for the existence of a contract.
B. ILLEGAL OR ILLICIT CONTRACT
- May produce effects under certain circumstances where the parties are not of
equal guilt.

CHARACTERISTICS OF A VOID OR INEXISTENT CONTRACT

A. Generally, it produces no force and effect whatsoever.
B. It cannot be ratified. (Article 1409)
C. The right to set up the defense of illegality cannot be waived.
D. The action or defense for the declaration of its inexistence does not prescribe.
(Article 1410)
E. The defense of illegality is not available to third persons whose interests are not
directly affected. (Article 1421)
F. It cannot give rise to a valid contract. (Article 1422)
INSTANCES OF VOID CONTRACTS
A. Contracts whose cause, object, or purpose is contrary to law, etc. (Articles 1306
and 1416)
B. Contracts which are absolutely simulated or fictitious. (Articles 1345 and 1346)
C. Contracts without cause or object. (Articles 1347, 1352, and 1353)
D. Contracts whose object is outside the commerce of men. (Articles 1347 and
1348)
E. Contracts which contemplate an impossible service. (Articles 1347 and 1348)
F. Contracts where the intention of the parties relative to the object cannot be
ascertained. (Article 1378)
G. Contracts expressly prohibited or declared void by law.
CONTRACTS EXPRESSLY PROHIBITED OR DECLARED VOID BY LAW
A. Contracts upon future inheritance except in cases expressly authorized by law.
(Article 1347)
B. Sale of property between husband and wife except when there is a separation
of
property. (Article 1490)
C. Purchase of property by persons who are specially disqualified by law because
of
their position or relation with the person or property under their care. (Article
1491)
D. Donation between the spouses during their marriage except moderate gifts on
the occasion of any family rejoicing. (Article 87, Family Code of the Philippines,
Executive Order No. 209 as amended, December 13, 1989)
E. A testamentary provision in favor of a disqualified person even though made
under the guise of an onerous contracts, or made through an intermediary shall be
void. (Article 1031)
F. Any stipulation that household service shall be without compensation is void.
(Article 1689)
G. Members of congress are prohibited from being financially interested, directly
or
indirectly, in any contract with the government or any subdivision or
instrumentality
thereof. (Articles 1782, 1874, 2035, 2088, and 2130 and Section 14, Article VI, The
Constitution of the Republic of the Philippines, February 2, 1987)
ILLEGAL AND CRIMINAL CONTRACTS
RULES WHERE CONTRACT IS ILLEGAL AND THE ACT CONSTITUTES A CRIMINAL
OFFENSE (Article 1411)
A. WHERE BOTH PARTIES ARE IN PARI DELICTO
1. The parties shall have no action against each other.
2. Both shall be prosecuted.
3. The things or the price of the contract, as the effects or instruments of the
crime, shall be confiscated in favor of the government.
B. WHERE ONLY ONE PARTY IS GUILTY
1. The guilty party will be prosecuted.
2. The instrument of the crime or object of the contract will be confiscated.
3. The innocent one may claim what he has given; or if he has not yet given
anything, he shall not be bound to comply with his promise.
ILLEGAL BUT NOT CRIMINAL CONTRACTS
RULES WHERE CONTRACT IS ILLEGAL BUT THE ACT DOES NOT CONSTITUTE A
CRIMINAL OFFENSE (Article 1412)
A. WHERE BOTH PARTIES ARE IN PARI DELICTO
1. Neither party may recover what he has given by virtue of the contract.
2. Neither party may demand the performance of the other’s undertaking.
B. WHERE ONLY ONE PARTY IS GUILTY
1. The guilty party loses what he has given by reason of the contract.
2. The guilty party cannot ask for the fulfillment of the other’s undertaking.
3. The innocent party may demand the return of what he has given.
4. The innocent party cannot be compelled to comply with his promise.
RECOVERY
RULES FOR RECOVERY
A. RECOVERY OF EXCESSIVE INTEREST (Article 1413)
– The entire interest agreed upon may be recovered, not merely that in excess of
those allowed by law.
B. RECOVERY WHERE CONTRACT ENTERED INTO FOR ILLEGAL PURPOSE (Article
1414)
- Provided the contract is repudiated before the purpose has been accomplished or
before any damage has been caused to a third person. The court considers that
public interest will be subserved by allowing recovery.
C. RECOVERY BY INCAPACITATED PERSON (Article 1415)
- Recovery can be allowed if one of the parties is incapacitated and the interest of
justice so demands.
D. RECOVERY WHERE CONTRACT IS NOT ILLEGAL PER SE (Article 1416)
- Prohibition is designed for the protection of the plaintiff. Public policy would be
enhanced by allowing the plaintiff to recover what he has paid or delivered.
E. RECOVERY OF AMOUNT PAID IN EXCESS OF CEILING PRICE (Article 1417)
- Recovery of any amount paid in excess of the ceiling price is allowed to curb the
evils of profiteering or black-marketing.
F. RECOVERY OF ADDITIONAL COMPENSATION FOR SERVICES RENDERED BEYOND
TIME LIMIT (Article 1418)
- The normal hours of work of any employee shall not exceed eight hours a day.
The law allows recovery of overtime pay in case work exceeds eight hours.

G. RECOVERY OF AMOUNT OF WAGE LESS THAN MINIMUM FIXED (Article 1419)

- If an employee receives less than minimum wage rate, he can still recover the
deficiency with legal interest and the employer shall be criminally liable.
EFFECT OF ILLEGALITY
EFFECT OF ILLEGALITY WHERE CONTRACT INDIVISIBLE OR DIVISIBLE (Article 1420)
A. When the consideration is entire and single, the contract is indivisible so that if
part of such consideration is illegal, the whole contract is void.
B. Where the contract is divisible as when the consideration is made up of several
parts, and the illegal ones can be separated from the legal portions, the latter may
be enforced. The rule is subject to the contrary intention of the parties