CONTRACTS

A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service. (Art. 1305)

Elements of a contract
1. Essential elements - Those without which there will be no contract

a. Consent of the contracting parties.

b. Object certain which is the subject matter of the contract.
c. Cause of the obligation which must be established (Art. 1318)

2. Natural elements- Those found in certain contracts unless set aside or suppressed by the
parties (such as warranty against eviction and warranty against hidden defects in a contract of
sale). (Art. 1547)

3. Accidental elements - Those that refer to particular stipulations of the parties (such as terms
of payment, interest rate, place of payment).

Classification of contracts

1. According to perfection or formation

a. Consensual - Those that are perfected by mere consent (such as sale and lease).
b. Real- Those that are perfected by the delivery of the object of the contract (such as
depositum, pledge, and commodatum).. (Art. 1316).
c. Formal or solemn - Those which must be in the form provided by law for their
perfection (such as the donation of an immovable which, together with the
acceptance by the donee, must be in a public instrument to be valid).

2. According to cause
a. Onerous - Those where there is an exchange of valuable considerations (such as
sale and barter) For each contracting party, the cause is the prestation or the
promise of a thing or service by the other. (Art. 1350)

b. Gratuitous or lucrative - Those where one party receives no equivalent consideration

(such as donation and commodatum). These contracts are referred to as contracts
of pure beneficence, the cause of which is the liberality of the benefactor. (Art.
1350)

c. Remuneratory - Those where the cause is the service or benefit remunerated. (Art.
1350)

3. According to importance or dependence of one upon another

a. Principal-One that can stand by itself (such as sale, loan)

b. Accessory One whose existence depends upon another contract (such as pledge or
mortgage which is dependent upon a principal contract such as loan).
 c. Preparatory- One which serves as a means by which other contracts may be entered
into (such as agency and partnership)

4. According to name or designation

a. Nominate - Those which have a name under the law (such as sale, loan and barter).
b. Innominate -Those without any name under the law. Authorities in Civil Law, list the
following as innominate contracts:
[1] Do ut des (I give that you may give)
[2] Do ut facias (I give that you may do)
[3] Facio ut des (I do that you may give)
[4] Racio ut facias (I do that you may do)

Rules that govern innominate contracts

1) The stipulations of the parties
2) The provisions of Obligations Contracts;
3) The rules governing the most analogous nominate contracts; and
4) The customs of the place. (Art. 1307)

5. According to risk or fulfillment

a. Commutative -Those where the parties give equivalent values (such as sale and barter);
hence, there is real fulfillment.
b. Aleatory- Those whose fulfillment depends upon chance (such as an insurance contract).

6. According to the parties obligated

a. Unilateral Those where only one of the parties is obligated to give or do something
(such as commodatum and gratuitous deposit).
b. Bilateral (or synalagmatic) -Those where both parties are required to give or do
something (such as sale and barter). They may be reciprocal or non-reciprocal.

7. According to subject matter

a. Contracts involving things (such as sale or barter).
b. Contracts involving rights or credits (such as usufruct or assignment of credits).
c. Contracts involving services (such as agency or lease of service).

8. According to the time of fulfillment

a. Executed- One which has been performed.
b. Executory-One that has not yet been performed.

9. Other classifications

a. Auto-contract -Where only one person represents the two opposite parties to the
contract (such as when an agent lends money to his principal whom he represents as
borrower)

b. Contract of adhesion Where only one party drafted the contract (such as insurance).
 It is so-called because its terms are prepared by only one party, while the other party
merely affixes his signature signifying his adhesion thereto. (Uy vs. People, G.R. No. 174899,
September 11, 2008) A contract of adhesion gives no room for negotiation and deprives the
latter the opportunity to bargains on equal footing. It presupposes that the party adhering to
the contract is a weaker party. Security Bank Corporation, G.R. October 13, 2010) The weaker
party's participation is reduced to the alternative to take it or to leave it. (Saludo, Jr., vs. No.
184041, Thus, contracts of adhesion are viewed as traps for the weaker party whom the courts
of justice must protect. (ACI Philippines, Inc. vs. Coquia, G.R. No. 174466, July 14, 2008)

Stages of a contract

1) Preparation or conception- This involves preliminary negotiations and bargaining,

discussion of terms and conditions, with no arrival yet of a definite agreement.
Negotiation begins from the contracting parties manifest their interest in the contract
and ends at the moment of their agreement.

2) Perfection or birth -This is the point when there is a meeting of minds between the
parties on a definite subject matter and valid a cause.

3) Consummation or death or termination- This occurs when the parties fulfill or perform
the terms agreed upon in the contract, culminating in the extinguishment thereof.

Basic principles of contract

1. Liberty of contract or freedom to stipulate

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

The freedom to enter into a contract is one of the liberties guaranteed by the State subject only
to the five limitations.
The following are some stipulations that have been held to be void:

a. The stipulation that the creditor automatically becomes the owner of the property
pledged or mortgaged if the debtor defaults in his payment. Such stipulation, known as
pactum commissorium, is void for being contrary to law. (Art. 2088)

b. A stipulation in a mortgage contract providing for a specified price (known as "tipo" or

upset price) below which the mortgaged property is not supposed to be sold at the
foreclosure sale is void for being contrary to law.

c. An agreement to. pay an unconscionable rate of interest is void for being contrary to
morals.

d. An agreement by the debtor to work without pay until he could find money to pay the
debt is void for being contrary to morals as this amounts to involuntary servitude.
 e. An agreement to hide a crime, to suppress evidence and to stifle the prosecution of the
offender is void for being contrary to public policy.

2. Mutuality of contracts
The contract must bind both contracting parties its validity or compliance cannot be left
to the will of one of them. (Art. 1308)
The binding effect of a contract on both parties is based on the principle that obligations
arising from contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have
one party bound by the contract while leaving the other free therefrom. The ultimate purpose is
to render void a contract containing a condition which makes its fulfillment dependent solely
upon the uncontrolled will of one of the contracting parties. Thus, if the fulfillment of the
suspensive condition of an obligation depends upon the sole will of the debtor, the obligation
and the condition are void (See Art. 1182.) since compliance is dependent upon him alone.
Also, after a party has entered into a contract, he will not be permitted to renounce it
unilaterally.

A. Any contract which appears to be heavily weighted in favor of one of the parties so as to
lead to an unconscionable result is void. Thus, the provision in a promissory note
authorizing the creditor to increase, decrease, or otherwise change from time to time
the rate of interest end/or bank charges without advance notice" to the borrower, "in
the event of change of interest rate prescribed by law or the Monetary Board of the
Central Bank of the Philippines," does not give the creditor bank unrestrained freedom
to charge any rate other than that which was agreed upon. Such stipulation granting the
creditor bank to make monthly upward/downward adjustment of interest rate violates
the essence of mutuality of contract

B. Determination of performance by a third person .The determination of the performance

may be left to a third person, whose decision shall not be binding until it has been made
known to both contracting parties. (Art. 1309) However, such determination shall not be
obligatory if it is evidently inequitable. In such a case, the courts shall decide what is
equitable under the circumstances. (Art. 1310)

3. Relativity of contracts
Contracts take effect only between the parties, their assigns and heirs, except where the rights
and obligations are not transmissible:
a. by law,
b. by stipulation, or
c. by nature. (Art. 1311)

Note: With respect to the heir, he shall not be liable beyond the value of the property he
received from the decedent. (Art. 1311)

When a contract may be enforced by or against a third person

a. Where there is a stipulation in the contract that clear and deliberately confers a favor
upon a third person (stipulation pour autri). Such third person may demand its
 fulfillment provided he has communicated his acceptance to the obligor before its
revocation (art 1311) a mere incidental benefit or interest of a person is not sufficient.

b. Where a third person induces another to violate his contract, in which case, such third
person may be held liable for damages by the other contracting party. (art. 1314)

c. In contracts creating real rights, third persons who come into possession of the object of
the contract are bound thereby, subject to the provisions of the Mortgage Law and the
Land Registration laws. (art. 1312)

d. In contracts intended to defraud creditors, the law gives them protection. (Art. 1313).
This is true if the third person acted in bad faith. (Art. 1388)

4. Consensuality of Contract
Contracts are perfected by mere consent (art 1315) except in the following contracts
which need to comply with additional requirements.

a. In real contracts such as deposit, pledge and commodatum, which are perfected upon
the delivery of the object of the obligation. (Art. 1316)

b. In formal or solemn contracts, which are required to be in the form provided by law, to
be perfected, such as the donation of an immovable which must be in a public
instrument together with the acceptance thereof (Art. 749); otherwise, the contract is
void.

5. Obligatory forte of contract and compliance in good faith

Obligations arising from contracts shall have the force of law between the contracting parties
and should be complied with in good faith. (Art. 1159) Upon the perfection of the contract, the
parties are bound to the following

a. The fulfillment of what has been expressly stipulated.

b. All the consequences which, according to their nature, may be in keeping with good
faith, usage and law. (Art. 1315)

ESSENTIAL REQUISITES OF CONTRACTS

Consent of the Contracting Parties

Consent is the manifestation of the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. (Art. 1319)

Rules on offer

1) The offer must be certain (Art. 1319) because there could be no meeting of minds if it is
vague or not definite. It must be "definite, complete and intentional."
 Thus, if S, who has several lots, offers to sell his lot to B without designating
which of the lots his selling, the offer is not certain.

Nature of advertisements
a. Business advertisements of things for sale are not definite offers, but mere invitations to
make an offer unless it appears otherwise. (Art. 1325) Examples: (1) An advertisement
reads: For sale: residential house on a 200 square meter lot at Green Valley Village for
P3M. Cal1 723-4567 This is not an offer but a mere invitation to make an offer. (2) For
sale: 3 bedrooms bungalow on a 200 square meter lot located at No. 123 Molave Street,
Bgy Mayamot, Antipolo City, for P2M cash. "This is a definite offer because it contains all
the matters required of a contract.

b. Advertisements for bidders are merely invitations to make proposals and the advertiser
is not bound to accept the highest or lowest bidder, unless the contrary appears. (Art.
1326)

2) An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of
either party before acceptance is conveyed. (Art. 1323)

3) When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when
the option is founded upon a consideration as something paid or promised. (Art. 1324)

Concept of an Option
Option is a contract whereby the offeror gives the offeree a certain period within which to buy
or not to buy a certain object for a fixed price. It may or may not be for a valuable
consideration.

Right of the offeror to withdraw the offer

a. If there is no consideration for the option, the offerer may withdraw the offer at any
time within the option period provided there has not yet been any acceptance.

b. If there is a consideration, the offerer may not withdraw the offer before the lapse of
the period agreed upon.) Otherwise, he will be liable for damages to the offeree for
breach of contract.

Note: In both cases, the option is extinguished upon the lapse of the period, unless in the
meantime, the offeree has accepted the offer.

Rules on acceptance
1. The acceptance must be absolute. (Art. 1319) If the acceptance varies the offer, there is no
contract since there is no meeting of minds.

a. If the acceptance is. qualified, it constitutes a counter-offer; (Art. 1319) and has the
effect of rejecting the offer.
 b. If the offer fixes the time, place and manner of acceptance, all must be complied with.
(Art. 1321) Otherwise, there will no meeting of minds.

2. Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge. The contract in such a case is presumed to have been entered into
the place where the offer was made. (Art. 1319)
The second sentence is important because a contract is governed by the law of the
place where it was entered into.

3. Acceptance may be express or implied. (Art. 1320)

The acceptance is express if made orally or in writing. It is implied if it can be inferred
from the conduct of the parties.
Thus, if S offers to sell a kilo of his mangoes to B for P20.00, and B, without saying
anything to S, takes the mangoes and begins to eat one and offers the rest to others, then B is
deemed to have impliedly accepted the offer of S.

4. An offer made through an agent is accepted from the time it is communicated to him. (Art.
1322)

Thus, a contract is binding upon the principal although the agent has not communicated the
acceptance to him. This is so because the agent is merely an extension of the personality of the
principal. Therefore, acceptance by the agent is deemed an acceptance by the principal.

Rules on consent

1. The parties must have the capacity to enter into a contract. The following cannot give
consent to a contract:

a. Unemancipated minors- Emancipation takes place by the attainment of the age of

majority which is eighteen years. (Art. 234, Family Code, as amended)

b. Insane or demented persons However, contracts entered into during lucid intervals are
valid. (Art. 1328) Lucid interval refers to the period of temporary sanity of an insane
person.

c. Deaf-mutes who do not know how to write.

A contract entered into by the above-named incapacitated persons is voidable. (Art. 1390)
However, when both parties are incapable of giving consent to a contract, the contract is
unenforceable. (Art. 1403)

The incapacity aforementioned is subject to the modifications determined by law, and is

understood to be without prejudice to special disqualifications established in the laws. (See Art.
1329.)

Thus, an incapacitated person must pay reasonable price for food and other necessaries sold
him. The sale here is valid. (See Art. 1409.) On the other hand, a person may be capacitated
but is disqualified to enter into some contracts, such as in the case of the husband and the wife
who, as a general rule, are prohibited to sell to each other (Art. 1490) or donate to each other.
(Art. 87, Family Code)

2. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (Art.
1328) This is so because consent given in such states is not freely and intelligently given.

3. A contract where consent is given through mistake, violence, intimidation, undue influence,
or fraud is voidable. (Art. 1330) These five are referred to as the causes that vitiate consent or
the vices of consent.

A. Mistake
1) When mistake will invalidate consent

a. If the mistake refers to the substance of the thing which is the object of the contract.
(Art. 1331)

Example: If B bought a lot on which he wanted to construct a factory believing that it was
situated in an industrial area, he can have the contract annulled if the lot was actually situated
in a residential area.

b. If the mistake refers to those conditions which have principally moved one or both
parties to enter into the contract. (Art. 1331)

Example: S sold his car to B for P100,000.00 cash because he needed the money to settle a
debt. The deed of sale signed by him showed, however, that the price would be paid in 4 equal
installments. S can have the sale annulled because of a mistake as to the condition of the
contract.

c. If the mistake refers to the identity or qualifications of one of the parties if such identity
or qualifications have been the principal cause of the contract. (Art. 1331)

Example: D donated a lot to that C was his C believing illegitimate son. D found out later,
however, that C was not his son. The identity of C was material to the contract; hence, D can
have the contract annulled on the ground of mistake as to the identity of the donee.

d. If the mistake refers to the legal effect of an agreement when the real purpose of the
parties is frustrated and the same is mutual. (Art. 1334)

This refers to mistake of law which does not generally vitiate consent because of the
rule that ignorance of the law excuses no one from compliance therewith. However, the
contract shall be voidable if the mistake as to the legal effect of the agreement is mutual and
frustrates the real purpose of the parties

Example: S and B entered into a contract of sale with a right to believing contract had the same
effect as a repurchase that the contract of loan and mortgage. The mistake here refers to the
legal effect of their agreement. Either party may annul the contract on such ground.
2). When mistake does not vitiate consent
a. If the mistake refers to a simple mistake of account which shall only be corrected. (Art.
1331)

b. If the party alleging it knew the doubt, contingency or risk affecting the object of the
contract. (Art. 1333)

3) Rule when one party is unable to read or does not understand the language of the contract
If mistake or fraud is alleged, the person enforcing the contract must show that the
terms thereof have been fully explained to the former. (Art. 1332)
This is an exception to the rule that he who alleges fraud or mistake must prove the
same.

B. Violence or physical coercion

1) When violence vitiates consent

There is violence when in order to wrest consent, serious or irresistible force is employed. (Art.
1335) This is true although it may have been employed by a third person who did not take part
in the contract. (Art. 1336)

C. Intimidation or moral coercion

1) When intimidation vitiates consent

There is intimidation when one of the contracting parties is compelled by a reasonable and
well-grounded fear of an imminent and grave evil upon his person or property, or upon the
person or property of his spouse, descendants or ascendants to give his consent. (Art. 1335)
This intimidation exists although it may have been employed by a third person who did not take
part in the contract. (Art. 1336)

2) Factors to be considered in determining the degree of intimidation

a) age,
b) sex, and
c) condition of the person. (Art. 1335)

3) When no intimidation exists

No intimidation exists in case of a threat to enforce one's claim through competent
authority, if the claim is just or legal. (Art. 1335)

D. Undue influence

1) When undue influence vitiates consent.

There is undue influence when a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice. (Art. 1337) For it to be present,
the influence exerted must have so overpowered or subjugated the mind of a contracting party
as to destroy his free agency, making him express the will of another rather than his own.
17, 2009)

2) Factors to be considered in determining the existence of undue influence:

a) Confidential, family, spiritual and other relations of the parties,

b) Mental weakness,
c) Ignorance, or
d) Financial distress of the person alleged to have been unduly influenced. (Art. 1337)

E. Fraud

1). When fraud exists (dolo causante)

a) When, through the insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have
agreed to. (Art. 1338) The fraud here is active fraud.

b) When there is a failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations. (Art. 1339) The fraud here is passive
fraud

2) Requisites to make a contract voidable by reason of fraud

a) The fraud should be serious. Incidental fraud only obliges the person employing it to pay
damages.

b) The fraud should not have been employed by both parties. (1344) contracting If both
parties employed fraud, the bad faith of one will negate the bad faith of the other. The
law will consider both of them in good faith; hence, the contract will be valid.

3) When no fraud exists

a) In case of the usual exaggerations in trade, when the other party had an opportunity to
know the facts. (Art. 1340)

b) In case of a mere expression of an opinion, unless made by an expert and the other
party has relied on the former's special knowledge. (Art. 1341)

c) In case of misrepresentation by a third person, unless such misrepresentation has

created substantial mistake and the same is mutual. (Art. 1342)
Consent will likewise be vitiated if the third person connived with a party to the
contract making the misrepresentation.
 d) If the misrepresentation was made in good faith. However, the same may constitute
error. (Art. 1343)

4) Kinds of dolo or fraud

a) Fraud in obtaining consent

[1] Causal fraud or doto causante- Fraud without which consent would not have been
given. It renders the contract voidable.

[2] Incidental fraud or dolo incidente - Fraud without which consent would have still been
given but the person giving it would have agreed on different terms. The contract is
valid but the party employing it shall be liable for damages.

b) Fraud in the performance of the obligation-This is the deliberate act of evading fulfillment of
an obligation in a normal manner. supposes an existing obligation;
hence, the fraud has no effect on the validity of the contract since it was employed after
perfection. However, the party employing it shall be liable for damages. (Art. 1170)

Simulated contract, concept and kinds

A simulated contract is one that does not intend to have any legal effect on or a change
in the juridical situation of the parties. They are of two kinds:

1) Absolutely simulated contract One where the parties do not intend to be bound at all.
(Art. 1345). Being fictitious it is void. (Art. 1346) The parties may thus recover from
each other what they may have given under the contract. The main characteristic of an
absolute simulation is that the apparent contract is not really desired or intended to
produce legal effect or in any way alter the juridical situation of the parties. The
simulation must be on the part of both parties. only one simulates, there is deceit or
fraud, and the contract is regarded as voidable, not void.

2) Relatively simulated contract One where the parties conceal their true agreement. (Art.
1345) The parties here are bound by their real agreement provided it does not prejudice
a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy. (Art. 1346) If the parties state a false cause in the
contract to conceal their real agreement, the contract is only relatively simulated and
the parties are still bound by their real agreement. Hence, where the essential requisites
of a contract are present and the simulation refers only to the content or terms of the
contract, the agreement is absolutely binding and enforceable between the parties and
their successors in interest

Object of Contracts

What may be the object of contracts?

1) All things which are not outside the commerce of men, including future things. (Art.
1347) Thus, public plazas, streets, sidewalks may not be the object of contracts. Future
things such as the crops that may thereafter be harvested, or eggs that may be
 produced by a poultry farm, may be the object of contracts, but not future inheritance
except in cases provided by law (Art. 1347) such as in the marriage settlements or in
partition of the estate by the testator.

Contract is generally void when object is future inheritance

The contract involving future inheritance is void when the following requisites concur
a) The succession has not been opened.
b) The object of the contract forms part of the inheritance; and
c) The promissor has, with respect to the object, an expectancy or right which is purely
hereditary in nature

2) All rights which are not intransmissible. (Art. 1347)

Thus, a credit right may be the object of deed of assignment; so also are leasehold rights to a
certain building. However, strictly personal rights, such as parental authority, or political rights
such as the right to vote or to run for public office, may not be the object of contracts, as they
are intransmissible

3) All services which are not contrary to law, morals, good customs, public order or public
policy. (Art. 1347) Thus, contracting the service of person for the slaughter of a dog
contrary to Animal Welfare Act of 1998, is void.

Requisites of object of a contract

1. It must be within the commerce of men. (Art. 1347)

2. It must be transmissible. (Art. 1347)
3. It must not be contrary to law, morals, good customs, public order or public policy. (Art.
1347)
4. It must not be impossible. (Art. 1348)
5. It must be determinate as to its kind or if its quantity is not determinate, it must be
possible to determine the same without the need of a new contract between the parties.
(Art, 1349)

Human internal organs as objects of a contract

R. A. No. 9208 penalizes, human trafficking for the purpose of the removal or sale of
internal organs. The law provides that the human body and its parts cannot be the subject of
commercial transactions. Giving or receiving payment including any other compensation or
reward for organs is prohibited along with advertising the need for or availability of organs, with
a view to offering or seeking payment.
Under the law, however, a living and related voluntary donor or a living and non-related
voluntary donor may be allowed to donate organs, but no living minor is allowed to donate any
organ for the purpose of transplant. Organ donations under the said law are subject to the
World Health Organization's Guiding Principles on Human Organ Transplantation which was
forged by member countries in 1981. Under the international agreement, organs for transplant
should be removed preferably from the bodies of deceased persons, and that adult living
persons may also donate organs but such donors should be genetically related to the recipients.
Cause of Contracts

Cause, concept
It is the essential reason why a party enters into a contract.

Cause of contracts
1. Onerous contract Here, the cause for each contracting party is the prestation or promise
of a thing or service by the other. (Art. 1350)

2. Remuneratory contract -Here, the cause is the service or benefit which is remunerated.
(Art: 1350)

3. Gratuitous, lucrative or contract of pure beneficence- The cause is the liberality of the
benefactor. (Art. 1350) An example is donation whose cause is the liberality of the
donor, or commodatum whose cause is the liberality of the lender.

Requisites of cause

1. It must exist.

a. It is presumed that the cause exists and it is lawful, even if not stated in the contract,
unless the debtor proves the contrary. (Art. 1354)

b. Contracts without cause produce no effect whatsoever. (Art. 1352)

2. It must be lawful.

Contracts with unlawful cause produce no effect whatsoever. The cause is unlawful if it
is contrary to law, morals, good customs, public order or public policy. (Art. 1352)

3. It must be true.

The statement of a false cause in a contract shall render them void, if it should not be
proved that they were founded upon another causes which is true and lawful (Art. 1353)

Cause and motive distinguished

1. Cause is the essential reason of the contract; while motive is the private or secret
reason or intention of a contracting party.

2. The contract is void if the cause is illegal; the validity of the contract is not affected by
the illegality of the motive.

3. The cause of a contract is always known to the contracting parties, while the motive of
one party may not be known to the other
Lesion, concept and effect on contract.
Lesion is the inadequacy of cause. As a general rule, lesion shall not invalidate a contract
except in the following
1. When there was fraud, mistake and undue influence. (Art. 1355)
2. In cases provided by law, such as when the ward or absentee suffer lesion by more than
one-fourth of the value of the object of the contract. (Art. 1381)

DEFECTIVE CONTRACTS

Classification of defective contracts

The following are the defective contracts, arranged according to the gravity of their defect. i.e.,
from the least defective to the most defective.

[1] Rescissible contract

[2] Voidable contract
[3] Unenforceable contract
[4] Void contract

RESCISSIBLE CONTRACTS

A rescissible contract is one which has all the essential requisites of a contract but which may
be set aside by reason of equity on account damage to one of the parties or upon a third
person.

The following are rescissible contract (Art. 1381)

1. Those entered into by guardians whenever the ward whom they represent suffer lesion
by more than one-fourth of the value of the things which are the object thereof.

2. Those agreed to in representation of absentees, if the latter suffer lesion by more than
one-fourth of the value of the things are the object thereof. An absentee is a person
who disappears from his domicile, his whereabouts being unknown, and without leaving
an agent to administer his property. (Art. 381) Thus, if it was the representative of an
absentee who sold the corn in the preceding number, the sale is rescissible.

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them.

4. Those which refer to things under litigation it they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority.

5. All other contracts specially declared by law to be subject to rescission. (Art. 1381)
Note: Rescission with respect to lesion in items 1 and 2 shall not take place if the contract is
approved by the court which is presumed to have taken appropriate steps to safeguard the
interest of the ward or the absentee.

Rescissible payment, requisites

1. The debtor is insolvent.
2. The obligation is not yet due.
3. The debtor makes the payment. (Art. 1382)

Rescission, concept
Rescission is the remedy allowed by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if it should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of
said contract. It is a remedy to make ineffective a contract, validly entered into and therefore
obligatory under normal conditions, by reason of external causes resulting in a pecuniary
prejudice to one of the contracting parties or their creditors.

Requisites for rescission

[1] The party suffering damage must have means to obtain reparation for the same. (Art.
1383)
The action for rescission is subsidiary. Hence, if the debtor has property. other
than that, for which rescission is being brought, rescission will not prosper.

[2] The party demanding rescission must be able to return whatever he may be obliged to
restore. (Art. 1385)
Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest. Hence, rescission
is not available if the party seeking it cannot comply with such obligation. (Art. 1385).
However, the obligation to return does not apply to prejudiced creditors as there is
nothing to be returned by them.

[3] The thing object of the contract must not be legally in the possession of a third person
who acted in god faith. (Art. 1385)
In this case, indemnity for damages may be demanded from the person causing
the loss. (Art. 1385)

[4] The action for rescission must be brought within the period allowed by law. (Art. 1389)
The prescriptive period is 4 years from the date of the contract, except in the
following:

a. For persons under guardianship-4 years from termination of incapacity

b. For absentees 4 years from the time the absentee's domicile is known.

Extent of rescission

Rescission shall only be to the extent necessary to cover the damages caused. (Art. 1384)
Allenations in fraud of creditors

[1] Alienations by gratuitous title

Gratuitous alienations are presumed to have been entered into in fraud of
creditors if the debtor did not reserve sufficient property to pay all debts contracted
before the donation. (Art. 1387)

[2] Alienations by onerous title (such as sale or exchange) Onerous alienations are
presumed fraudulent when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been obtained
by the party seeking rescission. (Art. 1387)

Liability for damages of persons acquiring things in alienations in fraud of creditors

1) If the purchase was made in bad faith

The purchaser in bad faith shall indemnify the creditors for damages suffered by
them on account of the alienation whenever due to any cause, it would be impossible
for him to return them. (Art, 1388) This rule applies even if the cause of the loss is a
fortuitous event.
If there are two or more alienations, the first acquirer shall be liable first, and so
on successively (Art. 1388) provided they are also in bad faith.

2) If the purchase was made in good faith

The purchaser in good faith shall not be liable notwithstanding the fraudulent
intention of the debtor in disposing the property. Hence, rescission will not be available.
If there are subsequent transfers, the transferees shall not be liable even if they were in
bad faith.

Voidable Contracts

A voidable contract is one that is defective by reason of the incapacity or vitiated consent of
one to the parties. It is binding unless annulled by a proper action in court. It is susceptible of
ratification. (Art. 1390)

The following are voidable or annullable contracts

1. Those where one of the parties is incapable of giving consent to a contract.

The following are incapable of giving consent to a contract:

a. Unemancipated minors.
b. Insane or demented persons.
c. Deaf-mutes who do not know how to write. (Art. 1327)
 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence
or fraud. (Art. 1390)

3. Those where consent is given in a state of drunkenness. (Art. 1328)

4. Those where consent is given during a hypnotic spell. (Art. 1328.)

ANNULMENT
Annulment is the action brought to set aside a voidable contract.

Annulment and rescission, distinguished

1. Annulment is brought to declare the inefficacy inherent in the contract. Rescission is

availed of to produce the inefficacy which did not exist in the contract.

2. Annulment is based on vitiated consent; hence, damage is immaterial Rescission is

based on lesion or damage.

3. In annulment, the action is principal in rescission, the action is subsidiary

4. Annulment is a sanction where the law predominates. Rescission is a remedy where

equity predominates.

5. Annulment is available only to the parties, whether bound principally or subsidiarily.

Rescission is available not only to the contracting parties but also to third persons whose
interests are affected.

6. Ratification is required to prevent annulment, while ratification is not required to prevent

rescission.

Rules on annulment of voidable contracts

1. When action must be brought (prescriptive period); otherwise the contract can no
longer be set aside
The action for annulment must be brought within four (4) years which period
shall begin:

a. In cases of intimidation, violence or undue influence, from the time the defect in
the consent ceases.
b. In case of mistake or fraud, from the time of discovery of the same.
c. In cases of minority or other incapacity of a party, from the time guardianship
ceases. (Art. 1391)
 2. Who may bring action for annulment?
The action for annulment may be instituted by all who are thereby obliged
principally or subsidiarily. (Art. 1397) Hence, it cannot be brought by third persons. It
may be brought by the following:

a. The guardian of the incapacitated person during the latter's incapacity.

b. The incapacitated person after he has attained capacity.
c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence
or fraud. (Thus, persons who employed such vices of consent cannot base their actions
on such flaws of the contract. This is based on the principle that "He who comes to
court must come with clean hands." This principle applies also to capacitated persons
who cannot seek the annulment of the contract on the ground of the incapacity of the
other party.
3. Effects of annulment

a) Obligations created by annulment

1. In obligations to give, the contracting parties shall restore to each

other, except in cases provided by law, the following:

a. The things which have been the subject matter of the contract, with
their fruits.
b. The price with its interest. (Art. 1398)

2. In obligations to render service, the value thereof shall be the

basis of damages. (Art.1398)

3. Restitution when one of the parties is incapacitated.

The incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.
(Art. 1399)

4. When the thing is lost through the fault of the party obliged by
the decree of annulment to return it. The said party shall return the
following

a. Fruits received.
b. Value of the thing at the time of the loss.
c. Interest from the time of the loss. (Art. 1400)

5. Mutual restitution. If one party cannot restore what he is bound to

return in the decree of annulment, the other cannot be compelled to
comply with what is incumbent upon him. (Art. 1402)

4. Effect of loss of thing while in the possession of the party who has right to bring the action
for annulment
 a. If lost through his fault, the action for annulment is extinguished, whether such party is
incapacitated or his consent is vitiated.

b. If lost without his fault and such party is incapacitated, he can still bring an action for
annulment. However, he will be required to return the value of the thing and its fruits
(Art. 1398) and only up to the extent that he has been benefited. (Art. 1399)

Ratification, concept
Ratification is the adoption or affirmation of a contract which is defective because of a party's
vitiated consent or incapacity.

Rules on ratification

1. How ratification is made

a. Express-When made orally or in writing.
b. Implied or tacit -There is tacit ratification if with knowledge of the reason which renders
the contract voidable and such reason having ceased, the person who has a right to
invoke it executes an act which necessarily implies an action to waive his right. (Art.
1393)

2. Who may ratify (the same persons who may annul the contract)
a. The guardian of the incapacitated person during the latter's incapacity.
b. The incapacitated person after he has attained capacity.
c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence
or fraud (hence, the person who employed such vices of consent cannot ratify).

Note: Ratification does not require the conformity of the person who has no right to bring the
action for annulment. (Art. 1395)

Effects of ratification
a. It extinguishes the action to annul a voidable contract. (Art. 1392) Once the party who
has the right to seek annulment of the contract ratifies it, he can no longer subsequently
bring the action for annulment.

b. It cleanses the contract from all its defects from the moment it was constituted. In other
words, the contract is validated from inception.

Unenforceable Contracts

An unenforceable contract is one that cannot be enforced unless ratified.

Right to defense of unenforceability

This right is available only to the contracting parties. Unenforceable contracts cannot be
assailed by third persons. (Art. 1408)

The following are unenforceable contracts:

1) 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. (Art. 1403)
 Under 1317, no one may contract in the name of another without being authorized by
the latter, or unless he has by law a right to represent him. Such contract, if entered into, shall
be unenforceable, unless it is ratified expressly or impliedly, by the person in whose behalf it
has been executed, before it is revoked by the other contracting party.

2) Those that do not comply with the Statute of Frauds. (Art 1403)

The Statute of Frauds is a statute designed to prevent the commission of fraud by requiring
certain contracts to be in writing and be subscribed by the party charged. It applies only to
wholly executory contracts, i.e., contracts where no performance has yet been made by both
contracting parties. Contracts infringing the Statute of Frauds cannot be sued upon either for
damages or specific performance.

The following contracts must be inwriting otherwise they are unenforceable:

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. This is
known as guaranty.
c. An agreement in consideration of marriage, other than mutual promise to marry.
d. Sale of goods, chattels or things in action at a price not less than P500.00.
Things in action include credit, shares of stock and other incorporeal properties.

Rule in sale by auction. If the auctioneer makes an entry in his sales book, at the time
of 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, (Art 403), 1.e.,
the requisite that the contract must be in writing is complied with; hence, the sale is
enforceable although not subscribed by the party sought to be held liable.

e. An agreement for the leasing of a real property or of an interest therein for more than
one year.
The object of the lease must be real property and the term of lease must be 1for
more than one year. However, although the lease is not in writing, it shall be
enforceable if the lease period is one year or less, or even if the lease period is more
than one year but the object is personal property.

f. Sale of real property or an interest therein (regardless of price).

g. A representation as to the credit of a third person.

The representation must have the effect of inducing the party to whom the
representation is made to grant credit to another.

Applicability of Statute of Frauds and ratification

The Statute of Frauds applies only to executory not to completed, executed or partially
consummated, contracts. They are susceptible of ratification through any of the following
means which will render them enforceable:
 a. By the failure to object to the presentation of oral evidence to prove them.
When the purpose of the testimony of the person enforcing the contract or of his
witness is being offered which is to prove the contract by oral evidence, the party
against whom the contract is being enforced should immediately object to such purpose,
or as soon as the question is asked the witness which would allow him to present oral
evidence to prove the contract, the other party should object to the witness answering
the question. Otherwise, such other party will be deemed to have waived his right to
raise the unenforceability of the contract.

b. By the acceptance of benefits under them. (Art. 1405). This will make the contract
executed in part.

Effect of ratification by parent or guardian

a. When only the parent or guardian of one party ratifies, the contract is voidable at the
instance of the parent or guardian of the party who did not ratify the contract
b. When the parents or guardians of both parties ratify, the contract shall be considered
validated from inception. (Art. 1407)

Void or Inexistent Contracts

A void contract is one which has no force and effect from the very beginning, as if it had never
been entered into, and which cannot be validated either by time or ratification. It is equivalent
to nothing; it produces no civil effect. It does not create, modify or extinguish a juridical
relation.

Characteristics of a void contract

1. A void contract cannot be ratified. (Art. 1409) Thus, unlike in an unenforceable contract,
a void contract remains void even if a down payment has been made or a benefit has
been accepted by a party.
2. The right to set up the defense of illegality cannot be waived. (Art. 1409) Hence, the
illegality of the contract can be raised even on appeal.
3. The action or defense for the declaration of the inexistence of a contract does not
prescribe (Art. 1410)
4. The defense of illegality of contracts is not available to third persons whose interests are
not directly affected. (Art. 1421)
5. A contract is void and inexistent if it is the direct result of a previous illegal contract.
(Art. 1422)

The following contracts are void from the very beginning (Art. 1409)

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy. (Art.1347, 1352)
2. Those which are absolutely simulated or fictitious. (Art.1356)
3. Those whose object or cause did not exist at the time of the transaction. These should
refer to things that are not capable of coming into existence, and not to future goods or
things having a potential existence which may validly be the object of a contract. (Art.
1347, 1461 and 1462)
 4. Those whose object is outside the commerce of men. (Art.1347)
5. Those which contemplate an impossible service. (Art.1347, 1348)
6. Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained. (Art. 1378, par. 2)
7. Those expressly prohibited or declared void by law. (Art1409)

The following are some contracts declared void bylaw:

a. A contract of donation between spouses during the marriage (except moderate ones
made on the occasion of a family rejoicing.) (Art. 87, Family Code.)
b. A contract of sale between spouses (except when there is separation of property).
(Art. 1490)
c. A contract which stipulates that household service shall be without any
compensation. (Art. 1689)
d. A contract upon future inheritance (except in cases provided by law such as in the
marriage settlements).

Kinds of illegal contracts; effect of illegality

1. Where the contract is a criminal offense (Art. 1411)

a. If both parties are guilty (in pari delicto)

1. They shall have no right of action against each other.
2. Both shall be criminally prosecuted.
3. The effects and instruments of the crime (the things and price of the contract)
shall be confiscated in favor of the government.

b. If only one party is guilty

The guilty party will be criminally prosecuted.
Neither one may compel the other to comply with his undertaking
The instruments will be confiscated in favor of the government
The innocent party shall not be bound to comply with his promise if he has not yet given
anything, and if he had given, he may claim for its return.

2. Where the contract is not a criminal offense (Art. 1412)

a. If both parties are guilty Neither party may recover what he has given or demand the
performance of the other's undertaking

b. If only one party is guilty

1. The guilty party cannot recover what he has given nor can he ask for the fulfillment
of what has been promised him.
2. The innocent party may demand the return of what he has given without any
obligation to comply with his promise.

Pari delicto, concept

Pari delicto is a universal doctrine which holds that no action arises, in equity or law, from an
illegal contract; no suit can be maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money agreed to be paid, or damages for its
violation; and where the parties are in pari delicto, no affirmative relief of any kind will be given
to one against the other. Pari delicto applies only when there is equal guilt, and not when one
party is more guilty than the other.

Exceptions to the rule of pari delicto

As a rule, when the contract is unlawful, whether or not it constitutes a criminal offense,
recovery by either party is not allowed if both parties are in pari delicto. The following are the
cases when recovery may be made despite the parties being in pari delicto:

1. The payor may recover interest he paid in excess of the interest allowed by usury laws
together with interest from the date of payment. (Art. 1413)

a. Law governing usurious transactions. The law governing usurious transactions is the
Usury Law. The following are the maximum lawful rates of interest under the Usury Law
which may be charged for loan or forbearance of money:

1. Twelve percent (12%) per annum If the security given is a real estate the title to
which is duly recorded or government securities
2. Fourteen percent (14%) per annum-If the security given is unregistered real estate
or personal property, or where there is no security given.
3. For pawnbrokers
a) Two-and-a-half percent (2 %) a month- If the loan is less than P500.00..
b) Two percent (2%) a month If the loan is P500.00 to P2,000.00.
c) Fourteen percent (14%) per annum- If the loan is more than P2,000.00.
(Secs. 2, 3 and 4, Usury Law; P.D 116; CB Circular 416 and 419)

b. Usury legally inexistent.

With the promulgation of Central Bank Circular No. 905, usury has become
legally inexistent. The lender and the borrower may thus freely agree on the interest to
be charged on the loan. However, nothing in the said circular grants lenders carte
blanche to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets. Stipulations authorizing such interest are contra
bonos mores i.e., contrary to good customs, if not against the law. They are inexistent
and void from the beginning. Thus, the interest rate of 10% per month agreed upon by
the parties is clearly excessive, iniquitous and unconscionable and cannot be sustained.

2. A party may recover, if public interest will be subserved, money or property delivered for
illegal purpose provided he repudiates the contract before the purpose has been accomplished
or before any damage has been caused to a third person.(Art. 1414)

3. An incapacitated person who is a party to an illegal contract may recover, if the interest of
justice so demands, money or property delivered by him. (Art. 1415)

4. A person may recover, if public policy is thereby enhanced, what he has paid or delivered, if
the agreement is not illegal per se but is merely prohibited, and the prohibition by law 1s
designed for his protection. (Art.1416) Thus, F, a Filipino, 1s allowed to recover a piece of land
(located in the Philippines) he sold to A, an alien, because the restoration of the land to him
would enhance the public policy to conserve lands for Filipinos.

5. Any person may recover any amount he has paid in excess of the price fixed by law for any
article or commodity. (Art. 1417)

6. A laborer may demand additional compensation for service rendered beyond the maximum
number of hours of labor in a contract where he undertakes to work longer than the maximum
hours fixed. (Art. 1418)

7. A laborer may recover the-deficiency in a contract where he accepts a wage lower than the
minimum wage set by law. (Art. 1419)

Rule when contract is divisible or indivisible and there are illegal terms

1. If divisible -The legal terms may be enforced; the illegal terms are void, hence, they
may not be enforced. (Art.1420)

2. If indivisible The whole contract is void; hence, no part thereof may be enforced. (Art.
1420)

FORM OF CONTRACTS

Obligatory force of contracts in whatever form, exceptions

Contracts shall be obligatory in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. (Art. 1356) This rule, however, does not
apply when a certain form is required by law for the following reasons:

1. For validity

If the contract is not in the form provided by law for its validity, the contract is void.

The following are certain contracts that must be in a certain form to be valid:

a. Contract of donation of an immovable which must be in a public document together

with, the acceptance thereof by the donee. (Art. 749)
b. Contract of donation of personal property whose value exceeds P5,000.00 must be in
writing together with the acceptance of the donee. (Art 748)
c. The authority of the agent to sell a piece of land must be in writing; otherwise, the sale
is void. (Art. 1874)
d. Contract of partnership where immovable property is contributed must be in a public
instrument to which shall be attached a signed inventory of the immovable property:
(Art. 1771)

2. For enforceability
If the contract is not in the form provided by law for its enforceability, the contract, though it
has all the essential requisites for validity, cannot be enforced against the party sought to be
charged.

3. For convenience

Right to compel observance of the form required by law

If the contract is valid and enforceable but the same is not in the form required by law, the
contracting parties may compel This right may be exercised simultaneously with the action
upon the contract. (Art. 1357)

Contracts for the convenience of the parties (Art. 1358)

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

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 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.

2. Any writing, public or private

All other contracts where the amount involved exceeds P500.00 must be in writing for
the convenience of the parties. However, the sale of goods, chattels or things in action whose
price is P500.00 or more must be in writing to be enforceable.
Thus, the lease of personal property for a period of two years at a monthly rental of
P1,000.00 must be in writing for the convenience of the parties.

REFORMATION OF INSTRUMENTS

Reformation is a remedy in equity by means of which a written instrument is made or construed

so as to express or conform to the real intention of the parties when some error or mistake has
been committed
Requisites of reformation

1. There must be a meeting of minds of the parties to the contract.

2. The true intention of the parties is not expressed in the instrument.
3. The reason therefor is due to mistake, fraud, inequitable conduct or accident. (Art.
1359)

Who may ask for reformation?

1. If the mistake was mutual, by either party, or his successors in interest, such as his
heirs or assigns
2. In other cases, by the injured party, or his heirs or assigns

When an instrument may be reformed

1. When a mutual mistake of the parties causes the failure of the instrument to disclose
their agreement. (Art. 1361)
2. When one party was mistaken and the other acted fraudulently or inequitably in such a
way that the instrument does not show their true intention. (Art. 1362)
3. When a party was mistaken and the other knew or believed that the instrument did not
state their real agreement. (Art. 1363)
4. When through the ignorance, lack of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not express
the intention of the parties. (Art, 1364)
5. If two parties agree upon the mortgage or pledge of real or personal property, but the
instrument states that the property is sold absolutely or with right of repurchase. (Art.
1365)

When reformation is not available

1. In the case of the following

a. Simple donations inter vivos wherein no condition is imposed.

This is so because a donation 1s essentially an act of liberality on the part of the
donor. However, if the donation is conditional, reformation is allowed so as show the
true intent of the donor as regards the conditions.

b. Wills.-
The reason, is that the making of a will is strictly a personal act which is free and
the will may also be revoked at any time by the testator. (See Arts. 784, 828 and 839.)
Upon the death of the testator, the will shall also be scrutinized in the probate
proceedings where errors in descriptions may be rectified.

c. When the real agreement is void. (Art. 1366)

Here there is nothing to reform as the contract is inexistent.
2. When one of the parties has brought an action to enforce the contract, he cannot
subsequently ask for its reformation. (Art. 1367)
This is equivalent to ratification, waiver or estoppel.

INTERPRETATION OF CONTRACTS

Rules on interpretation of contracts

a. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of the stipulations shall control. (Art. 1370)

b. If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former. (Art. 1370)
In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered. (Art. 1371)

c. However, general the terms of a contract may be, they shall, not be understood to
comprehend things that are distinct and cases that are different from those upon which
the parties intended to agree. (Art. 1372)
Thus, if S sells "all the grains in his warehouse to B, such term does not include
the grains which, though stored in S's warehouse, do not belong to S.

d. If the stipulation of any contract should admit of several meanings, it shall be

understood as bearing that import which is most adequate to render it effectual. (Art.
1373)

e. The various stipulations of a contract shall be interpreted together, attributing to the

doubtful ones that sense which may result from all of them taken jointly. (Art. 1374)

f. Words which may have different significations shall be understood in that which is most
in keeping with the nature and object of the contract. (Art. 1375)

g. The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established. (Art. 1376)
Thus, if A hired the services of B but the contract did not indicate the
compensation to be paid, the amount thereof shall be the rate that is customarily paid.
in the place where the services were rendered.

h. The interpretation of obscure words or stipulations in a contract shall not favor a party
who caused the obscurity. (Art. 1377)
Thus, in a contract of. insurance which is a contract of adhesion, any ambiguity
shall be interpreted against the insurer since the terms of the policy do not result from
mutual negotiation between the parties as they are prescribed by the insurer in printed
form to which the insured may "adhere if he chooses but which he cannot change

Rules when it is absolutely impossible to settle doubts under the preceding rules (Art. 1378)
 a. When the doubts refer to the incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail.

b. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.

c. If the doubts are cast upon the principal object of the contract in such a way that it
cannot be known what may have been the intention or will of the parties, the contract
shall be null and void.

Reference:
NOTES TO BUSINESS LAW
FEDELITO R. SORIANO
2016 EDITION

EXERCISES

1. 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 is known as:
a. Obligation
b. Consent
c. contract
d. stipulation

2. The stages of a contract according to the order of their occurrence are:

a. Birth, conception, and consummation
b. conception, consummation and Birth
c. conception, Birth and consummation
d. consummation conception, and Birth

3. the elements of a contract without which a contract would not exist are known as:
a. accidental elements
b. natural elements
c. especial elements
d. essential elements

4. a real contract has the following elements

a. consent of the contracting parties, object certain and cause or consideration
b. consent of the contracting parties, object certain and cause or consideration and
delivery of the object.
c. consent of the contracting parties, object certain and cause or consideration and
formalities required by law
 d. consent of the contracting parties, object certain, delivery of the object and
formalities required by law

5. elements that accompany certain contracts unless set aside or suppressed by the parties are
known as:
a. natural elements
b. accidental elements
c. essential elements
d. original elements

6. the warranty against hidden defects in contract of sale is an example of:

a. natural elements
b. accidental elements
c. original elements
d. stipulated elements

7. a contract that can be stand by itself is known as:

a. accessory contract
b. principal contract
c. commutative contract
d. gratuitous contract

8. a contract where both parties are required to do or to give something is known as a:

a. bilateral contract
b. unilateral contract
c. gratuitous contract
d. commutative contact

9. 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. This is known as the principle of:
a. liberty of contract
b. mutuality of contract
c. relativity of contract
d. obligatory force of contract

10. the contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. This is known as the principle of:
a. mutuality of contract
b. relativity of contract
c. consensuality of contract
d. freedom of contract
11. contract take effect only between the contracting parties, their assigns and heirs, except in
cases where the obligations and rights arising from the contract are not transmissible by
their nature, or by stipulation or provision of law. This principle of contract is known as:
a. relativity of contract
b. mutuality of contract
c. obligatory force of contract
d. liberty of contract

12. a contract may be enforced by or against a third person, except:

a. in case of the stipulation pour autri
b. when a third person induces another to violate his contract
c. in case of contracts intended to defraud creditors
d. when the benefit to the third person is merely incidental

13. the principle that contracts are perfected by mere consent is known as:
a. consistency of contract
b. consensuality of contract
c. consummation of contract
d. mutuality of contract

14. one of the following is not a real contract

a. pledge
b. commodatum
c. deposit
d. sale

15. it is the manifestation of the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract
a. consideration
b. contract
c. consent
d. cause

16. Three of the following instances will render an offer ineffective before acceptance is
conveyed. Which one will not?
a. Civil interdiction of either party
b. Insolvency of either party
c. Insanity of either party
d. Intoxication of either party

17. Mistake in three of the following will make a contract voidable. Which one will not?
a. Mistake as to the substance of the thing which is the object of the contract
b. Mistake as the principal conditions which principally moved one or both parties to
enter into the contract
c. Mistake as the identity or qualification of one of the parties, which identity or
qualification have been the principal cause of the contract.
d. Simple mistake of account
18. It involves the employment of serious or irresistible force to obtain consent
a. Intimidation
b. Threat
c. Violence
d. Moral coercion

19. It is present when one of he contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person, or property, or upon the
person or property of his spouse, descendants and ascendants, to give his consent.
a. Violence
b. Physical coercion
c. Intimidation
d. Mistake

20. It exists when a person takes improper advantage of his power over the will of another
depriving the latter of a reasonable freedom of choice.
a. Intimidation
b. Duress
c. Threat
d. Undue influence

21. An absolute simulated contract is:

a. Void
b. Voidable
c. Valid
d. Unenforceable

22. A contract whose cause is the promise of a thing or service by the other party is:
a. An onerous contract
b. A gratuitous contract
c. A lucrative contract
d. A remuneratory contract

23. A contract whose cause is the liberality of the benefactor is:

a. A gratuitous contract or contract of pure beneficence
b. A remuneratory contract
c. An aleatory contract
d. An onerous contract

24. One of the following is not a requisite of cause in a contract. Which is it?
a. It must exist
b. It must be lawful
c. It must not be false
d. It must clearly stated in the contract

25. The defective contracts arranged according to the degree of their defectiveness from the
least defective to the most defective are:
a. Voidable, rescissible, unenforceable, and void contracts
 b. rescissible, unenforceable, Voidable, and void contracts
c. rescissible, Voidable, unenforceable, and void contracts
d. unenforceable, rescissible, Voidable, and void contracts

26. the following are characteristics of rescissible contracts, except:

a. they may be set aside for equitable reasons
b. they are valid until rescinded
c. the action to rescind them prescribes
d. the action to rescind them are not available to third persons even if their interests
are directly affected.

27. The following contracts are voidable, except

a. Contracts entered into during a state of drunkenness or hypnotic spell
b. Contracts where one of the parties is incapable of giving consent
c. Contracts where the consent of one party is vitiated by violence, intimidation,
mistake, fraud or undue influence

28. One of the following may not annul a voidable contract

a. The party whose consent is vitiated by violence, intimidation, mistake, fraud or
undue influence
b. The incapacitated person when he attains capacity
c. The guardian, during the ward’s incapacity
d. The party who is capable of entering into a contract

29. The following contracts are unenforceable, except:

a. Those entered into by one who has no authority or legal representation.
b. Those that do not comply with the statute of Frauds
c. Those where both parties are incapable of giving consent to a contract
d. Those where the consent of a party is vitiated by violence, intimidation, mistake,
fraud or undue influence.

30. The Statute of Frauds applies only to:

a. Wholly executed contracts
b. Contracts wholly or partially executed on the part of the debtor
c. Contracts wholly partially executed on the part of the creditor
d. Wholly executory contracts

31. Reformation of instruments has the following requisites, except:

a. There must be meeting of the minds of the parties to the contract
b. The true intention of the parties is not expressed in the instrument
c. The failure of the instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident
d. The contract must be in a public instrument

32. As a rule, a contract of sale is perfected:

a. Upon compliance with the requirements of the law as to form
b. Upon delivery of the object of the contract
 c. Upon the meeting of the minds o the thing which is the object of the contract and
upon the price.
d. Upon demand

33. A contract of sale is not a:

a. Principal contract
b. Nominate contract
c. Consensual contract
d. Real contract

34. S convinced B to buy a gold-plated bar which S told B was made of pure gold. B bought the
thing believing that it was really made of pure gold. The contract between S and B is:
a. Valid
b. Voidable
c. Rescissible
d. Void

35. D, out of his and affection for C, donated a parcel of land to the latter who accepted it. The
formalities required by law were complied with. The contract between and C is:
a. An onerous contract
b. A gratuitous contract
c. A remuneratory contract
d. An accessory contract

36. In January 2008, S, 17 years old, sold his only car to B, 21 years old. The sale was without
the knowledge of G, the guardian of S. Assuming than an annulment case is filed today:
a. S may bring the action for annulment
b. G may bring the action for annulment
c. B may bring the action for annulment
d. Annulment will not prosper whoever will file it.

37. Which of the following contracts is valid and enforceable?

a. An oral promise to answer for the default of another
b. A donation and its acceptance in a private instrument of a parcel of land
c. An oral lease of mining equipment for more than two years.
d. An oral contract of sale of a ring worth P450 between an insane and a minor.

38. A entered into a contract with B whereby B agreed not to testify in a criminal case filed
against A in exchange for P5,000 to be given by A. the contract between A and B is:
a. Void for being contrary to law
b. Void for being contrary to good customs
c. Void for being contrary to public policy
d. Valid because there is nothing wrong when one does not want to testify against
another in a crime.

39. Which of the following contracts is involving real property is valid and enforceable although
not in writing?
a. Sale of a piece of land for P50,000
 b. Lease of agricultural lot for a period of 2 years at a monthly rental of P3,000.
c. Mortgage of a commercial lot to secure a loan o P50,000
d. Donation and acceptance of a residential lot

40. An insurance policy which, in practice, is prepared by an insurance company and all the
insured has to do is to sign thereon if he agrees with its terms, is an example of:
a. An auto-contract
b. A contract of adhesion
c. A commutative contract
d. A gratuitous contract