OBLIGATIONS AND CONTRACTS

An obligation is a juridical necessity to give to do or not to do.

Juridical = Legal
Juridical Necessity = means that an obligation is a legal duty wherein resort to the
legal system or the courts may be had by a person seeking
redress from the failure of another to perform his obligation.

Requisites (Elements) of an Obligation

1) Active Subject is the person who has the right to demand the performance of
the obligation and is referred to as the obligee or the creditor.
2) Passive Subject is the person bound to perform the obligation and is referred
to as the obligor or the debtor.
3) Prestation is the conduct required to be observed by the debtor or obligor,
which may be an obligation to give, to do, or not to do.
4) Juridical or legal tie (vinculum juris) – the efficient cause or that which binds
the parties to the obligation (sources).

Classification of Obligation according to Subject Matter

1) Real Obligation – the obligation to give or deliver something.
2) Personal Obligation – the obligation to render some service, which is
further classified into:
a) Positive Personal Obligation – consist of the obligation to do;
b) Negative Personal Obligation – consist of the obligation not to do;

Sources of Obligations
1) LAW – The Philippine Constitution
Republic Acts enacted by Congress;
Presidential Decrees signed by President Ferdinand Marcos;
Executive Orders signed by President Corazon Aquino
Administrative Orders of Cabinet Secretaries have the force of Law

never presumed; obligation must be expressly declared by the Law

regulated by the precepts of the law which establishes them

2) CONTRACT – is a meeting of minds between two persons whereby one

binds himself with respect to the other, to give something or to
render some service.

force of Law between the parties

complied with in good faith
must not be contrary to law; public policy, customs and morals.
3) QUASI-CONTRACT - prevent unjust enrichment
a) Negotiorum Gestio - Whoever voluntarily takes charge of the agency or
management of the business or property of another, without any power
from the latter, is obliged to continue the same until the termination of the
affair and its incidents, or to require the person concerned to substitute
him, if the owner is in a position to do so. This juridical relation does not
arise in either of these instances
(1) When the property or business is not neglected or abandoned
(2) If in fact the manager has been tacitly authorized by the owner
b) Solutio Indebiti - If something is received when there is no right to demand
it, and it was unduly delivered through mistake, the obligation to return it
arises

4) CIVIL LIABILITIES FROM CRIMES – every person criminally liable = civilly liable

5) QUASI-DELICT - damage is caused through fault or negligence and there is no

pre-existing contractual relation between the parties

OBLIGATION TO GIVE

1) Take care of the thing with the proper diligence of a good father of a family,

means ordinary care, just like a father of a family, it is a care

that an average person would do in taking care of his property

unless law or stipulation = requires another standard of care

= as in the case of Public Utility Vehicle Drivers/Common Carriers,
a higher degree of care = Extraordinary Diligence

That extreme care and caution which very prudent and thoughtful
persons exercise under the same or similar circumstances
.

2) Deliver Fruits + Accessions + Accessories included with the principal

for better use; (keys to a
Natural fruits - products of the soil; products house; dishes in restaurant)
or young of animals
Industrial fruits - produced by lands through
in addition or improvement
cultivation or labor
(house on land; windows on
Civil fruits - rents of buildings, interests from
buildings; car air-conditioner)
loans, dividends from shares
Deliver, even though not mentioned.
Only acquire real right (binding against everyone) over fruits upon delivery.
3) Deliver Determinate (SPECIFIC) thing = compelled + damages
Indeterminate (GENERIC) thing = complied with at obligor’s
expense (can source generic thing elsewhere)
Quality of generic thing not stated = not superior/inferior quality

4) Deliver on Time = otherwise DELAY occurs after obligee makes

extrajudicial /judicial demand on debtor to perform
EXCEPT, no demand necessary:
a) when by stipulation filed in court
b) when by Law
c) when time is of the essence
d) when demand is useless as when the obligor cannot comply
(the thing is lost through act or fault of debtor)

Reciprocal Obligations = when one party fulfills obligation

delay by the other begins
Effects of Delay:
a) Obligor is liable for damages
b) Obligor is liable in event the thing is lost through a fortuitous event

OBLIGATION TO DO / NOT TO DO

1) Obligor does not do the obligation shall be executed at obligor’s cost

Cost = includes all expenses connected with performance of obligation
by the obligee/third person, not limited to agreed price with obligor

2) Obligation is not done on time = same rules on DELAY

3) Obligation is done = BUT in contravention of agreed terms /poorly done

undone at obligor’s expense + done at obligor’s cost

4) Obligor does what is forbidden (NOT TO DO) = undone at obligor’s expense

Liability for DAMAGES

in the performance of Obligation = GUILTY of Fraud, Negligence,
Delay and in any manner contravene the tenor (F i N D)

Damages awarded only after Court judgment

1) FRAUD – Bad faith

Responsibility from fraud is demandable
Waiver of future fraud is void
2) NEGLIGENCE - omission of diligence required by the nature of obligation
also demandable
may be regulated (reduced) by courts
if attended by bad faith = treated as fraud

Fraud vs. Negligence (W I M P)

a) Waiver = future fraud is not allowed, no such prohibition for negligence
b) Intentional = for fraud, negligence is not intentional
c) Damages is Mitigated (reduced) by courts in negligence, but not in fraud
d) Negligence is Presumed, Fraud must be Proved

If obligee or offended party is also negligent = court determines if such

negligence may have been the proximate cause or just contributory
Contributory negligence by the obligee or offended party = reduce damages
against obligor at fault
law/stipulation not state required diligence = observe proper diligence
(good father of a family)
Fortuitous Events
General rule = no person shall remain liable or responsible for the
fulfillment of the obligation in case it is prevented by a fortuitous event
events which could not be foreseen, or though foreseen was inevitable
includes both Acts of God (flood, earthquake, tsunami, thunderstorm
and lightning) and Acts of Man (force majeure) (war, strike, riot, fire [except
if caused by lightning])

Exceptions to Excuse from Liability (L S A)

a) When specified by Law example = obligor in (1) Delay or (2) promised
to deliver same thing to two or more persons not having the same interest

means the two persons are not subjects of the

same transaction or contract with the obligor

b) When declared by Stipulation

c) Obligor Assumes the risk Requisites of Assumption of Risk
(1) actual knowledge of the danger
Usurious Transactions (2) understood the risk from the danger
governed by special laws (3) voluntarily exposed himself to risk
Usury Law = suspended
usury = unreasonably high interest rates for loans
lifting of the ceilings for interest rates does not authorize stipulations charging
excessive, unconscionable, and iniquitous interests
the nullity of the stipulation of usurious interest does not affect the lender’s right
to recover the principal of a loan, nor affect the other terms
 Receipt of Payment for Principal without Reservation to Interest
Presumption = Interest is Paid
Receipt of Later Installment without Reservation to Past Unpaid Installment
Presumption = Such installment/s paid

Mere presumptions = Rebuttable

Waiver of interest/installment = must be express
(issuance of receipt of payment received not sufficient to serve as waiver)
Hierarchy of Payment of Debt with Interest payment received without
indication if for principal/interest = payment of the principal shall not
be deemed to have been made until the interests have been covered

Right of Obligee to Collect Claims

1) Exact payment
2) Exhaust Properties of Obligor
3) Impugn acts to defraud Obligee
these actions may be taken simultaneously
when filing collection suit, ask for attachment of properties
remedial measure, court prohibits defendant from disposing properties
the family home; salaries = exempt from execution (as a general rule)
properties of obligor = applied to full satisfaction of claims (return difference)
properties inherent in person of Obligor = NOT included in action for claims
acts to defraud = simulated sales/falsified public documents

Transmissibility of Rights
= Rights are transmissible EXCEPT:
a) Law provides otherwise
b) Contrary stipulation
c) Obligation is purely personal
Transmissible = inherited by heirs or assigned by Obligee
Real right acquired by Obligee binding against everyone
Rights purely personal in character = NOT transmissible
Rights in partnership, agency contracts

KINDS OF OBLIGATIONS

PURE and CONDITIONAL OBLIGATIONS

PURE Obligation NOT depend on future/uncertain event or

past event unknown to parties = Demandable at Once
Obligations subject to a Resolutory Condition = also
NATURAL OBLIGATIONS
based on equity, natural law, no right of action to compel
vs. Civil Obligations = based on positive law, with right of action to compel

debtor cannot recover under the following Natural Obligations:

1) voluntarily performs obligation despite lapse of right to sue by prescription
2) voluntarily reimburses 3rd person who paid prescribed debt
3) voluntarily performs obligation despite favorable judgment against the creditor
4) heir pays debt of decedent exceeding value of what he received
5) heir paid legacy in compliance with voided defective will, after debt settlement

QUASI-CONTRACTS
lawful, voluntary and unilateral acts = give rise to juridical relation
= no one shall be unjustly enriched
Negotiorum Gestio
voluntarily takes charge of management of business or property of another
• must be abandoned or neglected
• not authorized by the owner
owner = reimburse manager for necessary and useful expenses (even if the
owner did not derive benefit)
extinguished when: (a) owner repudiates or ends it;
(b) manager withdraws;
(c) death/civil interdiction/insolvency or owner/manager
Solutio Indebiti
something received/paid without right to demand it/mistake obligation to
return it arises
pay interest (if sum of money) or fruits (if thing)
debtor is reimbursed for improvements/expenses
recipient of thing may prove that delivery was a pure act of liberality

Other Quasi-Contracts:
reimburse stranger who gives support (without knowledge of the person
obliged to give support) = except no intention to be reimbursed
funeral expenses (under same above circumstances)
pay physician or person who rendered aid, after being injured/ill from
an accident/other cause
same as above with calamities
reimburse person who made the necessary work on property of another in
order to comply with health and safety protocols
pay share for community measures for protection against lawlessness/calamities
reimburse 3rd person paying debt/taxes of another
QUASI-DELICT
act/omission + fault/negligence = cause damage pay damages
separate from fault/negligence covered by Revised Penal Code (crimes)
rules for exemption of liability due to a fortuitous event apply
negligence by claimant is proximate cause = cannot recover
but if contributory courts = mitigate claim for damages
includes liability for acts of those for whom one is responsible such as:
1) Father, or Mother for acts of minor children living in their company
2) Guardians minor/incapacitated person under their authority living w/them
3) Owners/managers employees, on occasion of their functions
4) State acts of agent, in discharge of functions
except if caused by an official to whom the task done properly pertains
5) Teachers students, in their custody
6) Owner of Motor Vehicle (MV) (not in the MV at time of mishap) driver
• Liability is subsidiary
• Prove observed diligence of a good father of a family to prevent damage
• Subsidiarily liable person = recover from dependents
• Minor/incapacitated no parent/guardian = own property liable
other presumed liabilities:
Possessor of animal responsible for acts of lost/escaped animal
unless caused by force majeure or fault of complainant
Owner of MV (inside MV at time of mishap) = solidarily liable w/ driver
Driver = presumed negligent:
(a) if guilty of reckless driving
(b) violated traffic regulations at least twice within the preceding two months
(c) violating any traffic regulation at time of mishap
Manufacturer of food stuff/drinks/toilet articles and similar goods = liable for
death/injury caused by noxious and harmful substances
Possessor of dangerous weapons except when possession is indispensible
in his occupation or business
Provinces/Cities/Municipalities = defective conditions of the road, bridges,
buildings and other public works
Proprietors = liable for explosion of machinery; excessive smoke; falling of trees;
emanations from tubes/canals/sewers
Head of the Family living in building = liable for thrown/falling things
Liability of 2/more persons in quasi-delict = solidary liability.
CIVIL LIABILITY ARISING FROM CRIME
every person criminally liable = civilly liable
exempt from criminal liability = not exempt from civil liability
subsidiary liability:
(a) in default of persons responsible for the crime Inn/tavern keepers/
proprietors = responsible for crimes committed in their establishments
(b) employers/teachers/corporations acts of employees/pupils,
in discharge of their duties
restitution, reparation and indemnification of damages
2/more persons liable = court determines amount for each
any person who participates in the proceeds = restitution
extinguished = same manner as obligations in civil law (except for Compensation)
served sentence/pardon/amnesty = must still satisfy civil liability
 NOTES ON OBLIGATIONS AND CONTRACTS

CONTRACTS
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.
- 2 persons
- binding effect
- perform an obligation
Stipulations/clauses/terms and conditions must not be contrary to laws,
morals, customs, public order and public policy
Requisites of a Contract
1) Consent
2) Subject Matter
3) Cause or Consideration
Certain contracts require a particular/definite form
Stages of a Contract
1) Preparation/Conception – negotiation stage/meeting of minds
2) Perfection – parties come to a definite agreement/signing of document
3) Consummation – performance of the terms
Mutuality of contracts = must bind both parties;
validity/compliance = cannot be left to the will of one of the parties
(same with conditional obligations)
Suspensive conditional obligation dependent on the sole will of the debtor is void
(ex: A will give B P10,000 if A goes to the zoo)
Determination of performance can be left to third persons and is binding on the
parties after it is made known to them (ex: fixing of price; delivery date)
Principle of Relativity = contracts are binding between the parties; heir/assigns
except: 1) Not transmissible by their nature (ex. Employment/partnership)
2) Stipulation
3) Law (ex. debt from loan contracts do not pass on to heirs)
4) Pour Autrui – clear provision in contract that favors a 3rd person
(Ex. a. Passenger insurance taken by Public Utility Vehicles; b. A buys
land of B for 10M, pay 8M to B and 3M to C, creditor of B. C accepts)
Contracts creating real rights (rights over immovable property) = bind 3rd persons
who come into possession of object (ex. A buys land of B which is leased by C,
A must respect the existing contract of lease despite his purchase of the property)
Creditors = protected vs. contracts intended to defraud them
(ex: A debtor of B, cannot pay B, but supposedly sold his property to his brother
C. The contract of sale can be rescinded being an act to avoid its seizure)
3rd Person who induces another to violate his contract = liable for damages to the
other contracting party (ex. A, with an existing employment contract is recruited
by B and offered a more lucrative contract causing A to renege on his contract)
Consensuality of Contracts = contracts are perfected by mere CONSENT
Real Contracts (deposit, pledge and commodatum) = perfected by delivery
The thing subject of the contract must be duly delivered
Cannot enter into contract in the name of another except:
1) duly authorized by such person (express authority/SPA)
2) authorized by law (court appointed guardian)
3) when ratified by such person (either expressly [in writing]
or impliedly [enjoy/avail of benefits])
Otherwise = such contract is unenforceable

CONSENT
manifested by meeting of mind and acceptance of consideration
The acceptance must be duly communicated to the other party
It must be unqualified and absolute; otherwise = it is a counter-offer
Acceptance = express or implied
Offeror = fix time, place and manner of acceptance; it must be complied with
Offer through Agent = accepted upon communication of acceptance to him
Offer = becomes ineffective upon death; civil interdiction; insanity or insolvency of
either party before acceptance is communicated
Period to Accept is Given = may withdraw offer; except if Option = founded upon
consideration (reservation fee/earnest money)
Advertisements = not definite offer but mere invitation to make an offer
(except, if definite and contains specific particulars)
Same with bidder advertisement
(except for requests for bids on execution sale)
Persons who cannot give Consent:
1) Minors
2) Insane or Demented persons
3) Deaf-Mutes who can’t write
(but if can read, understand = then capacitated to consent)
Contract by these persons = voidable, except:
1) Ratified, upon reaching age of majority
2) Executed in their favor
3) For their necessities, such as food and shelter
4) Estoppel (minor involved misrepresented age)
If both parties are minors contract is unenforceable
Persons Specially Disqualified:
1) Husband and Wife cannot enter into contract of sale/donation with each other
2) Fiduciary Relationship(Guardian cannot enter into contract with Ward)
3) Insolvents
Contract entered into during Lucid Interval = Valid
State of Drunkenness or During a Hypnotic Spell = Voidable
Dumaguin v. Reynolds = insanity in some things but sanity in other things
Under the Rules of Court (Sec. 2 Rule 92), the following are disqualified
to enter into Contracts:
1) Under Civil Interdiction
2) Hospitalized Leper
3) Prodigals
4) Deaf and Dumb who are unable to read and write
5) Unsound Mind
6) Those by reason of age/disease/similar causes cannot be without aid
Vitiated Consent
Consent given through Mistake; Violence; Intimidation; Undue influence or Fraud
= contract is voidable (binding until annulled)
There must be clear and convincing evidence of presence of Vitiated Consent.
Mere preponderance of evidence is not sufficient (Centenera v. Palico 29 Phil 470)
Mistake/Fraud = defects of the intellect
Violence/Intimidation = defects of the will
MISTAKE must refer to the substance of the thing/object of the contract
or conditions that principally moved parties to enter contract
as to identity or qualifications of one of the parties = vitiate consent
only if such was principal cause of the contract
simple mistake of account = correction
must be a false belief about something
Unable to read or in a language unknown to him = the party enforcing the contract
must show that the terms were fully explained to him (ex: through Notarization)
No Mistake = if party knew doubt, contingency or risk affecting the object
Mistake caused by inexcusable negligence = not vitiate consent
Mutual Error as to the legal effect of the Contract and the Real Purpose is frustrated
= voidable (ex: intention was co-ownership, but turned out as mortgage)
VIOLENCE serious/irresistible force is employed
INTIMIDATION reasonable, well-grounded fear of imminent, grave evil upon
person or property or relatives (not exclusive, include stranger)
age, sex, condition of person = take into account in determining
the degree of intimidation
Threat to enforce claim through competent authority = NOT
Vitiate Consent (ex: reporting crime to police)
Violence = physical coercion
Intimidation = moral coercion
Threat against honor, chastity, dignity = threat to person
Legal right to do what is being threatened = NOT intimidation (Ruiz v. Atienza)
Threat to prosecute unless debtor signs contract = NOT intimidation (Sotto v. Mariano)
Preventing deployment of sea vessel unless taxes paid (Tabacalera v. Collector)
Entering compromise agreement with bank to prevent court action vs. his brother is
a proper threat = NOT intimidation (Berg vs. National Board)
Includes reverential fear = fear of displeasing persons to whom obedience
and respect is due (Sabalvaro v. Erlanger – displeasing employer/
Turner v. Casabar – displeasing client)
Violence/Intimidation = annul contract even if it was employed by 3rd person
who did not take part in the contract
UNDUE INFLUENCE = person takes advantage of his power over the will
of another, depriving freedom of choice
Following circumstances considered:
1) relations between parties
2) mental weakness
3) ignorant
4) or in financial distress
Influence exerted must overpower the mind (Coso v. Fernandez Deza)

FRAUD = insidious words or machinations of one party = induces other party

to enter into contract, without which not have agreed to the contract
Vendor indicated as married in a deed of sale, when he is not
= insufficient evidence of fraud (Porciuncula v. Adamos)
Other party must have relied on misrepresentation and he must not be
himself guilty of negligence (Songco v. Sellner)
Can determine by exercise of due diligence = not fraud (Tuason v. Marquez)
Asked another person to take a medical examination for him for insurance
purposes = Fraud, voidable (Eguaras v. Great Eastern Life)
Inspected boundaries, cannot allege false representation (Azarraga v. Gay)
The Seller was well educated, handled own business affairs, assisted by counsel,
and son was a leading business man = not deceived (Araneta v. Tuazon de Paterno)
Able to read and understand, affix signature without reading = negligence prevent
annulment (Ayola v. Valderrama)
Both parties had the opportunity to know the exact nature of the subject matter
of the contract = no annulment
Men may do foolish things, make ridiculous contracts, use miserable judgment
and lose money on them = but not for that alone can the law intervene and restore.
There must be an actionable wrong (Vales v. Villa) = The law furnishes no
protection to the inferior simply because he is inferior, anymore than it protects
the strong because he is strong, the law furnishes protection to both alike.
Failure to disclose facts, when there is a duty to reveal them as when the parties are
bound by confidential relations = fraud
Agent persuade his principal to sell properties to him at a low price, not revealing
interest of government in purchasing them, then selling it at a much higher price =
fraud, sale is voidable (Cadwallader and Co. v. Smith, Bell and Co.)
No duty to disclose facts as between opponents in litigation (Escudero v. Flores)
Usual exaggeration in trade = other party had an opportunity to know the
facts is NOT fraudulent
This stresses the rule of Caveat Emptor (let the buyer beware)
Allow dealer’s talk = rely at own risk (Songco v. Sellner)
No truth in advertising
Mere expression of an opinion = not fraud unless made by an expert and the
other party relied on such special knowledge
The reason is that the opinion of an expert is in the category of a fact
Opportunity to examine land = not fraudulent (Puato v. Mendoza)
Own expert wrong = not fraud
Mere misrepresentation by a 3rd person = not vitiate consent unless substantial
mistake and it is mutual
Contract is voidable but Not on fraud but mistake
Misrepresentation in good faith = not fraud but error contract is voidable
Fraud = must be serious, not employed by both parties contract is voidable
Incidental fraud = pay damages
Simulation of Contract
= may be absolute or relative
Absolute = not to be bound at all
Relative = conceal their true agreement
Absolute, fictitious contract = void
Relative simulation = if it does not prejudice a 3rd person and is not contrary
to law, morals, customs, public order and public policy = binding
Different from illegal contracts = not really desired to produce an illegal
effect, whereas illegal contract intended to be real and effective, intended
to circumvent a law (Rodriguez v. Rodriguez)

Object of Contracts
All things not outside the commerce of men;
May include future things;
Transmissible rights;
Not include future inheritance;
All services not contrary to law, morals, customs, public order and public policy
Impossible things/services = cannot be the object of contracts
Not to be confused with mere difficulty (Castro v. Longa)
Impossibility may be physical (nature of things) or legal (contrary to law)
Object = must be determinate as to its kind; but if Quantity not determinate
= allowed if can be determined without new contract (ex: future harvest)

CAUSE OF CONTRACTS
Cause of Onerous Contract = The prestation/promise
Cause of Remuneratory Contract = Services/benefit remunerated
Cause of Gratuitous Contract = Liberality of benefactor (pure beneficience)
The reason why a party assumes an obligation and enters into a contract
The sale of 18 hectare property by dying man to his for P700 is shocking
to the conscience = void (Javier v. Vda. De Cruz)
Bad faith and inadequacy of consideration do not render a conveyance inexistence
(P1.00), the liberality of the assignor could be a sufficient cause (Ong v. Ong)
Motive vs. Cause = the law is concerned with cause (De Jesus v. G. Urrutia and Co.)
Illegal cause = void; illegal motive = not necessarily void
Contract with No cause or Unlawful cause = no effect, void
The land of a married man, donated to 15 year old, for sexual relation. Upon his
death, the heirs refused to give the land as the contract was conditioned on an
illegal motive, hence void. Unlawful cohabitation was the condition = donation
unlawful, but since donor was at fault, they cannot invoke illegality of donation,
so she still got the land (Liguez v. CA)
Wife embezzled pawnshop, to prevent prosecution, her husband and father issued
a promissory note (PN), they did not pay, pawnshop cannot recover against the PN
as it was based on an illegal cause, to prevent prosecution (Velez v. Ramas)
False cause = contract is void;
Unless founded on another cause which is true and lawful
Cause not stated = presumed to exist and lawful
A claims loan from illegal gambling, A must prove illegality, otherwise the
presumption is that it is lawful (Rodriguez v. Martinez)
Lesion or Inadequacy of Cause = not invalidate contract
unless specified by law or fraud, mistake or undue influence
(ex: insufficiency of price)
Forms of Contract
All contracts are obligatory;
BUT if form is required = absolute and indispensible requirement
to be valid and enforceable
Example of Formal Contracts
1) Donation of Real Property = must be in a public instrument
2) Donation of Personal Property > P5,000 = must be in a public instrument
Both the giving and accepting must be in a public instrument (Abella v. Balanaz)
3) Stipulation on the payment of interest on loan (must be in writing)
4) Sale of property through an agent (authorization in writing is required)
Public Documents
1) Real rights over immovable property
2) Renunciation of hereditary rights or conjugal partnership of gains
3) Power to administer property
4) Cessation of rights proceeding from a public instrument
Statute of Frauds = Contracts with an amount involved > P500 must appear
in writing (even private)
Land was partitioned orally, it must be in a public instrument to
affect 3rd persons, but valid between the parties (Duque v. Domingo)
When a party admits the genuineness of a document, such is a waiver
of all lacking formal requisites in the instrument, such as oath,
acknowledgment, stamps (Heirs of Del Rosario v. Santos)
Oral sale of land is valid when already executed or partially executed (Paras)
Oral contract for services as actress valid even if Article 1358 requires
amounts over P500 to be written, uphold the spirit and intent of the
parties over formalities (Dauden-Hernaez v. Delos Angeles)
Formal requirements are only for convenience, not for validity
or enforceability (Guerrero v. Miguel)
If a Form is required and the contract is perfected = the parties may compel each
other to observe the form
A donated land to B in a private instrument (not notarized), B accepted through
a private instrument, B may not compel A because donation is not valid (Paras)
Unnotarized deed of sale of land, cannot be registered with the Register of Deeds,
buyer can compel seller to have document notarized (Gallardo v. IAC)
The contract of sale of real property even if not complete in form, so long as the
essential requisites of consent, object and cause were clearly established [although
in this case, the document was not signed by all the heirs, it was unnotarized,
but they received partial payment or P49l,000 out of P300,000 (Jomoc v. CA)
Formal requirements are for the benefit of 3rd parties, non-compliance
does not affect validity of the contract (Fule v. CA)
P800 loan, contracted orally, the creditor may still recover payment as
the requirement of > P500 be in writing is only for convenience and not
for validity (Que Yong Keng v. Tan Quico)
Reformation of Contracts
Express real intention of the parties
If the true intention of the parties is not expressed due to mistake, fraud,
inequitable conduct of one of the parties the other party may ask
for reformation = for the true intention of the parties to be expressed
BUT if mistake, fraud and inequitable conduct actually prevented
a meeting of minds = remedy is annulment (by court action) not reformation
intention was for mortgage, but contract was sale, supposed buyer mortgaged to
innocent 3rd person, the original owner may still move for reformation despite
mortgage of the property to 3rd person (Jayme v. Alapay)
If there is Mutual Mistake = reformation
If one party = mistake; the other = fraud/inequitable conduct;
the mistaken party = may ask reformation of the contract
Teck sold his land to Ong with right to repurchase, Ong sold the land to C with
Teck’s right to repurchase, C made the deed of sale and did not include the right
to repurchase of Teck, Ong did not know English. When Teck wanted to repurchase
the land, C said no, as he was the absolute owner already and there was no right to
repurchase. Ong may ask the deed to be reformed as he mistakenly thought the
right to repurchase was there and C is guilty of fraud (Ong Chua v. Carr)
One party = mistake; other party = knows mistake = reform (by party in good faith)
Person drafting/typist/clerk = negligence/bad faith = reformation
The contract was a sale but the intention was only a mortgage, it may be reformed
as the intention of the parties can be judged from their contemporaneous and
subsequent acts (Velasquez v. Teodoro)
No Reformation:
1) Simple donation inter vivos (during the lifetime) with no condition
2) Will
3) When the Real agreement is void (contrary to law, morals, etc.)
Mutual mistake = either party or successor may ask for reformation;
otherwise = it is the injured party or his heirs/assigns that may ask for reformation
One party = brought action to enforce the contract he cannot subsequently
ask for reformation
Procedure for reformation = governed by Rules of Court
Prescriptive period for Reformation = 10 years from the execution of the contract

Interpretation of Contracts
Terms of the contract are clear and leave no doubt upon intention of parties
= literal meaning shall control BUT words contrary to intention = intention prevail
Spirit over Letter
Contract denominated as a Lease, but it was really a sale since the lessee becomes
the owner of the property after the expiration of the lease (Abella v. Gonzaga)
To determine intention = contemporaneous and subsequent acts are considered
Even if the contract uses general terms = it may comprehend distinct things
The contract in this case used the phrase “all furniture included” in the sale of the
house. However, some furniture in the house belonged to the relatives of the seller.
Although the word “all” was used, here, “all” is still not to be understood to
comprehend things that are distinct and cases that are different from those upon
which the parties intended to agree. The special intent prevails over the general
intent (Hibberd v. Estate of McElroy)
Some stipulation = admit of several meanings use the most adequate
to render it effectual
The interpretation that makes a contract valid must prevail (Luna v. Linato)
Various stipulations = must be interpreted together
The contract showed a sale with right to repurchase but the redemption price
was escalating every month, hence such is really a mortgage (Bundalion v. CA)
Words with different significations = understood as that which is most in keeping
with the nature and object of contract
Usage and custom of the place = considered in interpretation of ambiguities
Since compensation had not been previously arranged, is the contract in question
not perfected because there was no certain price? There is a certain price not only
when its certainty is fixedly determined, but also when it can be known with
reference to another certain thing, or its determination is left to the discretion
of a certain person. There is also a certain price when it can be indicated and
determined under the uses and customs of the place. (Arroyo v. Azul)
If custom is local in character, applying to a particular kind of business, such
as discounting notes, its existence must be alleged and proved (Andreas v. BPI)
Interpretation of obscure words or stipulations = interpreted against the party
who caused the ambiguity
Construed (interpreted) against the party who made the contract
Contracts of adhesion = one party imposes a ready-made form on the other, who
is free to reject it, if he/she adheres, gives consent (Philamgen v. Sweet Lines, Inc.)
Cannot settle doubts by the foregoing Rules;
then if it is a gratuitous contract = least transmission of rights prevail;
If it is an onerous contract = greatest reciprocity of interests;
If there are doubts on the object of the contract and the intention of the parties
cannot be known = contract if null and void
Doubt on whether the contract is a mortgage or sale = assume debtor assumed
lesser obligation
A owed B P175, A cannot pay, C paid B. A being grateful, transferred his land to C,
was such a loan with security or sale = it is a loan, as this is a lesser transmission of
rights as well as greater reciprocity of interests (Olino v. Medina)
Rule 123 (now Rule 130) of the Rules of Court = be observed in construction
of contracts
Some of these Rules are:
1) Language of a writing to be interpreted according to the legal meaning
it bears in the place of its execution where unless parties intended otherwise
2) Terms of a writing are presumed to have been used in their primary and general
acceptance, unless there is evidence that it has a local, technical or otherwise
peculiar signification and it was used in that particular instance
3) Partly written, partly printed and the two are inconsistent = written prevails
4) Characters in the contract are difficult to be deciphered or in a language not
understood by the court = may use experts

Rescissible Contracts
Valid until annulled
Valid contract = may be rescinded in cases established by law
Economic damage/prejudice against one party
The following are rescissible:
1) Those entered into by guardians whereby the ward suffers lesion
by >1/4 of the value of the object of the contract
2) Those entered into in representation of absentees, suffer same manner above
3) Those entered into in fraud of creditors
4) Things under litigation entered into by defendant without knowledge and
approval of the litigants or of the competent judicial authority
5) Other contracts declared by law
No rescission for numbers 1 and 2 if such are with approval by the court
Payments made by insolvent for debts not yet due and demandable = rescissible
Rescission is subsidiary, not a principal remedy = allowed only if there are no other
legal means to obtain reparation
A creditor who seeks to set aside a contract as fraudulent must first prove that he is
a creditor and that he cannot collect the debt in any other way (Kuenzle v. Watson)
Rescission shall be only to the extent necessary to cover the damages caused
Only the creditor who asked for rescission = benefits from the rescission
Mutual Restitution
Rescission includes the return of the object of the contract, with fruits and
interests = carried out only when he who demands rescission can return
whatever he should restore
= no rescission if object is in possession of 3rd person in good faith
If object cannot be returned = indemnity for damages
Fraudulent transactions:
1) Properties donated, without reserving sufficient property to pay off debts
2) Transfer of property when judgment or attachment was already issued against
him, it need not refer to the property subject of litigation
Badges of Fraud = circumstances indicating that a certain
alienation has been made in fraud of creditors
Examples of Transactions with Badges of Fraud:
1) Inadequate consideration or price
2) Transfer of property made after already being sued
3) Sale on credit by insolvent debtor
4) Transfer of all properties by insolvent debtor
5) Transfer between a father and his son
6) Failure of buyer to take possession of acquired property
NOT prejudice innocent purchaser for value, who is a complete stranger and
the judgment against the debtor was not annotated on the titles (Abaya v. Enriquez)
Acquired in bad faith, BUT impossible to return = damages
If two or more alienations = first acquirer is liable, and so on successively
Action for Rescission = must be commenced within 4 years of effectivity of Contract
For wards/absentees = 4 years counted from the termination of their incapacity
Who can bring an action for rescission:
1) Injured party
2) Heirs/successors-in-interest
3) Creditors (by subrogation)
No Rescission:
1) Party demanding rescission cannot return what he is obliged to restore
2) There are other remedies for collection or to obtain reparation
3) The property is in the hands of a 3rd person in good faith
4) Period to file action for rescission has already prescribed
 VOIDABLE CONTRACTS
One party is incapable of giving consent
Consent is vitiated by mistake, violence, intimidation, undue influence, fraud
Binding unless annulled by court
Susceptible of Ratification
Action for annulment = brought within 4 years:
a) From time the intimidation, violence or undue influence ceases:
b) From discovery of mistake or fraud;
c) From time the guardianship ceases
Thought they were signing a mere authority to sell (Carantes v. Court of Appeals [CA])
If MWSS’ consent was vitiated, discovery commenced from the date of the execution
of the sale documents as it was a party thereto, or at least is deemed to have taken
place on the date of registration with the Register of Deeds (MWSS v. CA)
Ratification = extinguishes the action to annul a voidable contract
May be express or implied
Implied = with knowledge of the reason of defect which renders the contract
voidable and such reason ceased = executed an act which implies
as intention to waive his right
Minor bought property, but sold it after reaching the age of 21 (Rosales v. Reyes)
Minor sold land, upon reaching age of majority, collected the
unpaid balance (Uy Soo Lim v. Tan Unchiong)
Person previously intimidated, used proceeds of the sale (Madlambayan v. Aquino)
Voluntary performance of the obligation after the cause of nullity
was known to him (Tan Ah Chan v. Gonzales)
Mere lapse of time does not legalize a voidable contract (Tipton v. Velasco)
Remaining silent for a certain period of time ratifies such a contract
Guardian of incapacitated person = may effect ratification
The guardian acts in his behalf (Escoto v. Arcilla)
Ratification = does not require conformity of the other party
Ratification cleanses the contract from all defects = has retroactive effect
But rights of innocent 3rd persons must not be prejudiced
Annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily (parent/employer) but capacitated party or those
who exerted intimidation, fraud, violence, intimidation, undue influence or
caused the mistake = cannot allege the incapacity of the other party
Even if not obliged principally or subsidiarily, may ask for annulment if his rights are
prejudiced regarding one of the parties (Development Bank of the Philippines vs. Court of
Appeals)
If minor misrepresents his age and the other party is misled, the minor may not ask
for annulment because of estoppel (Mercado v. Espiritu)
When contract is annulled = the parties must restore to each other the things/subject
matter of the contract, with the fruits and interests;
If service = the value for such service is the basis for the payment of damages
Even if land has already been registered in the name of the other party (buyer),
provided there is no estoppel, can still be recovered (Tinsay v.Yusay)
The incapacitated party = need not make any restitution;
except to the extent he/she benefitted (Article 1427, Natural Obligations)
Minor = no right to recover from other party if thing/money is consumed
or spent in good faith (Article 1427, Natural Obligations)
Minor cannot return object of contract = amount to ratification (Uy Soo Lim v. Tan)
Other party cannot return thing, lost through his fault = return fruits/interests and
value of the thing and interest until full payment
If thing is lost through fraud or fault of the party who has the right to
ask for annulment = extinguishes the action for annulment
Conflict with incapacitated, who is not required to restitution
If the other party cannot restore = the other party cannot be compelled to comply

UNENFORCEABLE CONTRACTS
1) Unauthorized contracts or those entered without authority or beyond his power
2) Fail to comply with Statute of Frauds, following must be in writing:
a) Not to be performed within a year
b) Special promise to answer for debt of another
c) Made in consideration of Marriage
d) Sale of Goods > 500
e) Lease > a year
f) Representation as to the Credit of a 3rd person
3) Both parties incapable of giving consent to the contract
Unauthorized contracts = governed by principles of agency
Contracts infringing the Statute of Frauds = ratified by:
1) failure to object to presentation of oral evidence; or
2) by acceptance of benefits under them
Cross-examination of witness testifying orally on contracts
amounts to a waiver or failure to object (Abrenica v. Gonda)
Contract is enforceable, but under the Statute of Frauds must be in a public document
for registration with Register of Deeds = compel other party (Article 1357)
BUT Article 1357 allows other party to be compelled if the contract is valid,
if infringing Statute of Frauds = other party can only be compelled
if the contract has been ratified
Unenforceable contracts = cannot be assailed by 3rd parties
Ratification cures an unauthorized contract (Tagaytay Development Co. v. Osorio)

VOID CONTRACTS
1) Cause/Object is contrary to law/morals/good customs/public order or policy
2) Absolutely Simulated or Fictitious
3) Cause/Object did not exist at time of transaction (not same with Article 1357)
4) Object is outside the commerce of men
 5) Impossible Service
6) Intention of parties relative to the principal object = cannot be ascertained
(ex: A delivered his car to B. Is it sale, donation, lease, payment?)
7) Expressly prohibited by law
(ex: donation between spouses; waiver of minimum wage)
Cannot be ratified
Defense of illegality cannot be waived
Sale by mother of land she bought three months before, to daughter
at a much lower price is fictitious (Castillo v. Castillo)
Action for declaration of inexistent contract does not prescribe
Illegality of cause/object and act constitutes a criminal offense, parties in pari delicto
(both at fault) = no action against each other and both will be prosecuted
One party guilty and one innocent = the innocent party may claim what he has given
and not bound to comply with his promise
If the act does not constitute a criminal offense, but both parties at fault
= neither may recover what was given or demand performance
Guilty party cannot recover what was given and cannot demand what was promised
Payment of interest over the interest rate allowed = may be recovered, with interest
Money/property given for illegal purpose BUT contract repudiated before
purpose is accomplished or damage caused to 3rd persons;
the party repudiating = allow to recover money/property
One instance where one party is allowed to recover even if both parties at fault
Repudiation must be through court action
One party to illegal contract incapable of giving consent
= court allow incapacitated person to recover money/property
Not illegal but prohibited by law, for the protection of the plaintiff
= he may recover what was paid or delivered
(ex: agrarian reform land, can only be sold after 10 years from award)
Law sets price for commodity = any person paying more may recover excess
Law sets maximum number of hours of labor = laborer who works
longer than the maximum fixed = may demand additional compensation
for services rendered beyond the time limit (overtime pay)
LTFRB limits working hours of Public Utility Bus drivers to 6 hours and cannot be
extended due to health and safety reasons (Memorandum Circular No. 2017-012)
Laborer who agrees to lower wage = entitled to recover deficiency
Not allowed under the minimum wage law (Republic Act No. 602)
Law applies even if the employer is engaged in
illegal trade (Bacata v. Workmen’s Compensation Commission)
Contract is directly the result of a previous illegal contract = also void
Divisible contracts = if illegal terms can be separated from legal enforce legal
Burden is on person claiming legality to show what part is legal (Lichauco v. Martinez)
Defense of illegality of contracts = not available to 3rd persons where
their interests are not directly affected
 COMPARISON OF CONTRACTS ACCORDING TO OBLIGATORY FORCE

RESCISSIBLE VOIDABLE UNENFORCEABLE VOID

Status Valid Valid until Annulled No effect unless Ratified Inexistent
Grounds One party suffered 1) No consent (either 1) Unauthorized or 1) Cause/Object contrary
economic damage and Minor or Insane); or entered without to law, morals, etc.
loss caused by the 2) Consent was authority; or 2) Simulated/Fictitious;
other party; or the vitiated due to mistake, 2) Fail to comply with 3) Cause/Object is
contract’s purpose is fraud, intimidation, Statute of Frauds; or inexistent
to defraud creditor; undue influence, 3) Both parties are 4) Object if outside the
and there is no other violence or fraud incapable of giving commerce of men
remedy available consent. 5) Impossible Service
6) Intention of parties
relative to object cannot
be ascertained;
7) Prohibited by law.
Action Rescission action by: Ratification by Ratification by: No ratification or any
Taken 1) Injured party; incapacitated person 1) Provide authority other available remedy,
2) Heirs/successor; when capacitated or by 2) Failure to object to action to declare void
3) Creditor (defrauded) parent/guardian oral evidence or
(express or implied) acceptance of the
benefits;
3) Parent/Guardian of
incapacitated
Period to 4 years from execution 4 years from: 4 years: from Action for declaration
file action of the contract intimidation, undue execution of the of inexistence of a
for Annul- influence, violence contract for (1) and (2); contract does not
ment: ceased; the discovery when they became prescribe
of fraud/ mistake; or incapacitated.
when they became
capacitated.
Restitution Parties return things Restore to each other When ratified, the Both parties guilty = no
which were the object of the things w/c have contract becomes valid restitution; 1 guilty, 1 is
the contract, with the been the object of the from time of inception innocent, innocent =
fruits/interests. contract with fruits/ and contract becomes recovers thing given
interests. If service = effective. and need not perform
value of service his obligation
Object is Return fruits/ interests Return fruits/ interests N/A Pay value of the thing
Lost + Pay value of thing + Pay value of thing plus damages
+ damages + damages
Object No restitution if the No restitution if the N/A No restitution if the
with 3rd property is in the hands property is in the property is in the hands
person in of 3rd person in good hands of 3rd person in of 3rd person in good
good faith, guilty party good faith, guilty party faith, guilty party
faith instead pays damages instead pays damages instead pays damages
Effect on Prejudiced 3rd person N/A Cannot be assailed by Affected 3rd persons
3rd persons (creditor) may file the 3rd persons may allege defense of
action for rescission illegality of the contract
 SAMPLE CONTRACT

CONTRACT OF LEASE Title of the Contract

Know all men by these presents:

This lets everyone know what
This Contract entered into by and between: this document is about. Appears
in business contracts.
Juan dela Cruz, Filpino with residence at________
____________________________________________
- and –
Parties to the Contract
ABC Corporation, a Corporation duly registered
with the Securities and Exchange Commission and
hereby represented by its President, Mr. XYZ_____

Whereas, ___________________________________
Whereas, ___________________________________ Whereas Clauses (preliminary
Now therefore, for and in consideration of the statements/ intentions of parties)
foregoing premises, the parties hereunto agree that:

Section 1 Subject Premises

Section 2 Payment
Section 3 Term of Lease Terms and Conditions of the Contract

Section 7 Renewal

In witness whereof, the parties hereunto affix their

signatures this 31st day of January 2022 in the City of Signatories
Manila.

JuanDC Xyz Acknowledgment is used

Juan dela Cruz XYZ for commercial contracts
Lessor For: ABC Corporation Notarization while a Jurat (Subscribed
Lessee and Sworn to.. are used for
affidavits and certifications
ACKNOWELDGMENT

Republic of the Philippines) SS

City of Manila ) SS is short for Scilicet, which
means “more particular”
Before me, a Notary Public for the City of Manila,
personally appeared the following...

Known to me and to me known to be the same persons who

executed the foregoing Contract of Lease consisting of three
(3) pages, including the page where this acknowledgment is
written and they acknowledged to me that the same are their
free and voluntary act and deed and the corporation herein
represented.

Witness my hand and seat this 31st January 2022 at the

place and date above written.
Notary Pub
NOTARY PUBLIC
Doc. No. :_______
Page No.: _______
Book No.: _______
Series of 2022