Saint Louis University

SCHOOL OF ACCOUNTANCY, MANAGEMENT, COMPUTING AND INFORMATION STUDIES

Department of Accountancy, Business Laws and Taxation

OBLIGATIONS AND CONTRACTS

COURSE LEARNING OUTCOMES:

At the end of the term, the students are expected to:
1. Identity the rights and obligations of any individual or entity in a contract or agreement.
2. Define and understand and apply basic principles of the law on obligations and contracts
3. Integrate concepts/techniques in evaluating the contents and implications of contracts and
agreements.
4. Promote the Louisian core values when entering into contracts and agreements.

COURSE INTRODUCTION:
This course gives the student a proper introduction to the Law in order for him to have a good
foundation before taking other law subjects. OBLICON covers civil obligation, its nature and effect,
the different kinds of obligations and the modes by which an obligation may be extinguished. The
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highlight of OBLICON is the study of contracts, the essential elements, and the different kinds of
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defective contracts. OBLICON culminates with the study of Natural Obligations.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or
posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.
 MODULE 8:
FORMS OF CONTRACTS
I. IN GENERAL
A. General Rule: Form is Not Necessary. Contracts are obligatory in whatever form such
contracts may have been entered into, provided all essential requisites for their validity are
present. (Art. 1356)
➢ The form (oral or written) is irrelevant to the binding effect between the parties of
a contract that possesses the three validating elements (consent, object, and cause).
➢ Example: The following contracts are consensual and are thus valid even if they are
merely agreed upon orally: (i) sale; (ii) lease; (iii) contract for services; (iv) partition.

B. Exception: Article 1356 establishes only two (2) exceptions when form is necessary. They
are:
1. When required by law for validity or enforceability. Form is necessary for contracts
for which the law itself requires that they be in some particular form (writing) in
order to make them valid and enforceable. These are called Solemn or Formal
Contracts. Examples are:
a. Donation of immovable property (Art. 749) which the law requires to be
embodied in a public instrument in order that donation may be valid;
b. Donation of movables worth more than P5,000.00 which must be in
writing, otherwise the donation shall be void. (Art. 748);
c. Contracts to pay interest on loans which must be expressly stipulated in
writing. (Art. 1956);
d. Stipulation limiting the liability of carrier to a degree less than
extraordinary diligence, which must be in writing and signed by the
shipper/owner of the goods. (Art. 1744);
e. Contract of partnership when an immovable is contributed – there must
be an inventory of the property, signed by the parties, and attached to the
public instrument. (Art. 1773);
f. Real Estate Mortgage (Art. 1874); and
g. Contract of Antichresis, wherein the amount of the principal and interest
must be specified in writing. (Art. 2134)
Note: The requirement of form is absolute and indispensable. If the formal
requirement has not been complied with, a party cannot seek its enforcement
or compel compliance with the formal requirements, because the law does not
recognize any existing or enforceable contract to begin with.

2. When required by law to prove the contract. Form is necessary for contracts that
the law requires to be proved by some writing (memorandum) of its terms, as in
those covered by the Statute of Frauds (Art. 1403).
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a. Their existence is not provable by mere oral testimony or parol evidence.

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 b. The form required is for evidentiary purposes only. Thus, the Statute of
Frauds would not apply if:
i. The contract is wholly or partly executed; or
ii. The parties permit a contract to be proved, without any objection.

II. FORMAL REQUIREMENT AS A MATTER OF CONVENIENCE

A. If the law requires a document or other special form, such as in the acts and contracts
enumerated in Art. 1358, the contracting parties may compel each other to observe that
form, once the contract has been perfected. (Art. 1357)
1. This right may be exercised simultaneously with the action upon the contract. (Art.
1357)

2. This right presupposes the existence of a valid contract. It is not available or cannot
be exercised for contract where form is necessary for validity/enforceability or for
proving the contracts (contracts covered by the Statute of Frauds). Examples:
a. Deed of Donation entered into orally – not valid and not enforceable;
therefore, Art. 1357 will not apply.

b. Deed of Sale of an immovable property entered orally – contract is valid

(sale is consensual); however, it is unenforceable (Statute of Frauds);
therefore, Art. 1357 does not apply.

c. Sale of a property in a private instrument – sale is valid and binding. It is

executory but only between the parties (inter parties) but not against third
persons. The contracting parties may compel each other to observe form,
once the contract has been perfected. Art. 1357 applies.

B. There are contracts that must be in a Public document.

1. Under Art. 1358, the following must appear in a public document:
a. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property;
• Sales of real property or of an interest therein are governed by Arts.
1403 (2) and 1405 to be enforceable.

b. The cession, repudiation or renunciation of hereditary rights or those of

the conjugal partnership of gains;

c. The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or
should prejudice a third person;

d. The cession of actions or rights proceeding from an act appearing in a

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public document.
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 2. The foregoing requirement of Art. 1358 is only for convenience, not for validity
or enforceability. Thus, failure to follow the proper form does not invalidate the
contract. The parties can simply compel each other to observe that form, once the
contract has been perfected.

C. Art. 1358 provides that “all other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one. But sales of goods, chattels
or things in action are governed by Arts. 1403 (2) and 1405. This does not mean that
contracts involving more than P500 are void or unenforceable if not in writing. It is not
enough that the law should require that the contract be in writing, as it does in Art. 1358.
The law must further prescribe that without the writing the contract is not valid or not
enforceable by action.

REFORMATION OF INSTRUMENTS
I. IN GENERAL
A. Nature. Reformation is a Remedy in equity or allowed by law by means of which a written
instrument is amended or rectified so as to express or conform to the real agreement or
intention of the parties when by reason of mistake, fraud, inequitable conduct, or accident,
the instrument fails to express such agreement or intention)
1. In an action for reformation of instrument, the court does not attempt to make
another contract for the parties, but simply confirms and perpetuates the real
contract between the parties.

2. Reformation involves a determination of the true intent of the parties. It involves a

question of fact and not a mere question of law, and is different from mere
interpretation of the contract.

B. Purpose. Equity orders the reformation of an instrument in order that the true intention
of the contracting parties may be expressed. It would be unjust and inequitable to allow the
enforcement of a written instrument which does not reflect or disclose the real meeting of
the minds of the parties.

C. Reformation versus Annulment

REFORMATION ANNULMENT
There is meeting of the minds but There is no meeting of the
because of mistake, fraud, inequitable minds because consent is
conduct, or accident in the contract, vitiated.
the instrument fails to express the
intention of the parties.
Does not invalidate the contract. Invalidates the contract.
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Examples:
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 1. A and B entered into a contract of sale of a vehicle. The parties agreed that the
purchase price is P70,000.00. However, the contract states that the purchase price
is P150,000.00. Remedy here is Reformation.

2. A and B entered into a contract of sale of a vehicle. A is selling the car for
P150,000.00 but B thinks that the purchase price is only P70,000.00. Remedy here
is Annulment of the contract because there is no meeting of the minds.

D. Requisites of Reformation
1. There must have been a meeting of the minds of the parties to the contract;
2. The instrument does not express the true intention of the parties;
3. The failure of the instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident;
4. There must be clear and convincing proof;
5. It must be brought within the proper prescriptive period; and,
6. It must be put in issue in the pleading/s.

II. SPECIFIC INSTANCES OF REFORMATION

A. Mutual Mistake. When a mutual mistake of the parties causes the failure of the instrument
to disclose their real agreement, said instrument may be reformed. (Art. 1361)

Example: A sold to B orally a house and lot located at No. 15 Brookspoint, Aurora Hill,
Baguio City. In the written public document, both forgot the true number of the house and
instead wrote No. 17 Brookspoint, Aurora Hill, Baguio City. Reformation is proper.

B. Mistake by one party

1. Mistake by One Party; Fraud or Inequitable Conduct by the Other. If one party
was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the
reformation of the instrument. (Art. 1362)

Examples:
a. When the parties agreed on a contract of lease, but one of the parties
surreptitiously inserted certain stipulations which were not agreed upon.
b. When the parties agreed to a sale subject to repurchase, but the defendant
did not include the condition of repurchase unbeknownst to the plaintiff
(who did not understand the language in which the contract is written).

2. Mistake by One Party; Concealment by the Other. When one party was mistaken
and the other knew or believed that the instrument did not state their real
agreement, but concealed that fact from the former, the instrument may be
reformed. (Art. 1363)
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 Example: A and B entered into a contract of loan but what was signed is a contract
of sale. B knew of the mistake but concealed such mistake from A. Reformation
is proper.

C. Ignorance, Lack of Skill, Negligence or Bad Faith. 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 true intention of the parties, the courts
may order that the instrument be reformed. (Art. 1364)

Example: Mistake in the currency exchange in the drafting of instrument. Instead of

Philippine currency, what was type written is US dollars. Reformation is proper.

D. Sale which is really a Mortgage or Pledge. 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 a right of repurchase, reformation of the instrument is proper. (Art. 1365)

E. Relative Simulation that will not prejudice third persons. See discussions in Module 7.

III. WHEN REFORMATION IS NOT PROPER

A. Gratuitous Acts. There shall be no reformation in the following cases: (Art. 1366)
1. Simple donations inter vivos wherein no condition is imposed; and

2. Last Will and Testament (Wills).

The reason is that Donations and Wills are purely gratuitous dispositions of property, so
the law will not normally interfere with how the donor or testator wanted to dispose of his
property

B. Void Agreements. Reformation is useless if the actual agreement is void and cannot be
enforced.

C. Estoppel. When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation. (Art. 1367). One party admits the validity of
the contract and that it expresses the intention of the parties. It is inconsistent with
reformation. However, A party who is sued on a contract may file a counterclaim for its
reformation.

Example: A and B entered into a contract of sale but they signed a contract of mortgage.
Instead of Reformation, B initiated the foreclosure procedure. Here, reformation is useless.

D. No Meeting of the Minds. If mistake, fraud, inequitable conduct, or accident has

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prevented a meeting of the minds of the parties, the proper remedy is not reformation of
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the instrument but annulment of the contract.

IV. PROCEDURE
A. Real Party in Interest. Reformation may be ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, upon petition of the injured
party, or his heirs and assigns. (Art. 1368)

B. Prescription. The prescriptive period for reformation is 10 years (Art. 1144) counted from
the time the right of action accrues.

INTERPRETATION OF CONTRACTS
I. IN GENERAL

Interpretation is the act of making intelligible what was before not understood, ambiguous, or
not obvious. It is a method by which the meaning of language is ascertained. The “interpretation”
of a contract is the determination of the meaning attached to the words written or spoken which
make the contract.

II. PRINCIPLES OF INTERPRETATION

A. Primacy of Intention.
1. Plain Meaning Rule. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulation shall
control. (Art. 1370)

When the words are clear and unambiguous, the intent is to be discovered from the
express language of the agreement.

2. Intention Prevails. In case of conflict between the words of the contract and the
evident intention of the parties, the intention prevails.

Example: A and B entered into a contract of lease. The provisions of the contract
states: (i) B, the lessee shall give the amount of P250,000 to the A, the lessor upon
signing the contract; (ii) P50,000.00 monthly rental; (iii) rent is for 12 years; and, (iv)
by the end of 12 years, B will become the owner of the property. The real intention
of the parties is not a contract of lease but a contract of sale by installments

B. Determining the Intention.

1. Contemporaneous and Subsequent Acts. In order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally
considered. (Art. 1371).
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That by this principle, the court can look into extrinsic evidence, outside the four
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corners of the written contract.

2. Scope of the Terms. Where in a contract there are general and special provisions
covering the same subject matter, the latter controls the formers when the two
cannot stand together. (Art. 1372)

A special intent prevails over a general intent.

Example: “All the furniture therein” – will not include electronic appliances or
furniture that does not belong or owned by the seller or borrowed from another
person.

3. Most Effectual Interpretation. (Art. 1373). If one interpretation makes a contract

valid and the other makes it illegal, the former interpretation is one which is
warranted by the rule.

Example: A sold her parcel of land to B. A has two lots, A’s paraphernal property
and A’s conjugal share with her husband. Husband did not give his consent. Sale
should refer to the paraphernal property to render the contract effective.

4. Holistic Interpretation. (Art. 1374). A contract must be interpreted as a whole, and

the intention of the parties is to be gathered from the entire instrument and not
from particular words, phrases or clauses.

Example: A and B entered into a contract of sale in installments. The contract

provides the following provisions: (i) In case of failure to pay any installment; A will
forfeit the payment and rescind the contract; and (ii) In case of violation of any of
the terms, a penalty of P2,500.00 will be added in case of late payments. In case B
fails to pay one-month installment is rescission the proper remedy? Answer: No.
the contract must be interpreted as a whole. In light of the penalty clause, rescission
is not the proper remedy.

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

Example: A and B entered into a contract where B was allowed to occupy a portion
of A’s land to live by tolerance. It was agreed that B should surrender possession
of the land once A will “use” the same. A rented out the property to C, his brother.
A asked B to surrender possession of the land because his brother C will use it. The
term “use” should include the right of A to rent out the property to another as an
attribute of ownership.
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6. Usage or Custom. (Art. 1376) The usage or custom of the place where the contract
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was entered into may be received to explain what is doubtful or ambiguous in a

 contract on the theory that the parties entered into their contract with reference to
such usage or customs

Example: In agricultural areas – use of per diem; In urban areas – contract of

services

C. Contra Proferentum.
1. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity. (Art. 1377)

2. Any ambiguity is to be taken contra proferentum, i.e., construed against the party who
drafted the contract and caused the ambiguity which could have been avoided by
the exercise of a little more care. See discussion on Contract of Adhesion.

D. Impossibility of Settling Doubts.

1. When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests shall prevail. If the contract
is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
(Art. 1378)

2. If the doubts refer to Incidental Circumstances:

a. Where the contract is gratuitous, the least transmission of rights and
interest shall prevail.

Example: A gave B a parcel of land without consideration. Is it a donation

or a usufruct? It is prudent to interpret it as usufruct rather than a donation
because the former connotes the least transmission of rights and interest.

b. Where contract is onerous, the doubt shall be settled in favor of the

greatest reciprocity of interest.

Example: A and B entered into a contract of loan of P150,000.00 with

10% annual interest. It cannot be determined whether the loan is payable
in six months or one year. Answer: One (1) year because A can use the
money for one year and B can earn interest for one year.

3. 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.
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 DEFECTIVE CONTRACTS
I. IN GENERAL
Defective Contracts are classified into four (4), they are:

A. Rescissible Contracts: They are the least infirm contracts. Though valid and possessing
all essential requisites of contracts, they may be set aside for having caused economic
damage (LESION) to one of the contracting parties or to a third party.

B. Voidable Contracts: They are contracts where the consent of one party is defective,
either because of want of capacity to give consent, or because consent is vitiated by
mistake, violence, intimidation, undue influence, or fraud. They are considered valid until
annulled.

C. Unenforceable Contracts: They are contracts which cannot be enforced (unless ratified)
because of lack of authority, or of the required writing, or because of incapacity of both
parties.

D. Void Contracts: They are the most infirm contracts. One or more of the essential
requisites are absent, making them absolute nullity and without any effect.

II. RESCISSIBLE CONTRACTS

A. In General.
1. A rescissible contract contains all the requisites of a valid contract and is considered
legally binding, but by reason of injury or damage to either of the contracting parties
or to third persons, such as creditors, it is susceptible to rescission at the instance
of the party who may be prejudiced thereby.

2. The rescission of rescissible contracts (Art. 1381) should be distinguished from

“rescission” or “resolution” under Art. 1191.
a. Rescission in general (Art. 1380)
i. is based on lesion or fraud upon creditors;
ii. here, the action is instituted by either of the contracting parties or
by third persons;
iii. here, the courts cannot grant a period or term within which to
comply;
iv. here, non-performance by the other party is immaterial.

b. Rescission under Art. 1191 (resolution)

i. is based on non-performance or non-fulfillment of the obligation;
ii. here, the action may be instituted only by the injured party to the
contract;
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iii. here, in some cases, the courts may grant a term;

iv. here, non-performance by the other party is important.
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B. Causes. Contracts validly agreed upon may be rescinded in the cases established by law.
(Art. 1380). Under Art. 1381, the following contracts are rescissible:
1. Lesion to Wards. Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof.
a. Effect of Contracts Entered into on behalf of Ward:
i. If it is an act of ownership, court approval is required; otherwise,
contract is unenforceable whether there is lesion or not;
ii. If merely an act of administration:
✓ If it is with court approval – valid, regardless of lesion. (Art.
1386)
✓ If without court approval – rescissible if lesion is more than
one-fourth. (Art. 1381)

2. Lesion to Absentees. Those agreed upon in representation of absentees, if the

latter suffer lesion by more than one-fourth of the value of the things which are
the object thereof.
a. Absentee – a person who disappears from his domicile, his whereabouts
being unknown, and without leaving an agent to administer his property.

b. Lesion – means the damage cause to the ward or absentee due to the
discrepancy between the consideration received and the value of the things
alienated.

3. Fraud of Creditors. Those undertaken in fraud of creditors when the latter cannot
in any other manner collect the claims due them.
a. All contracts by virtue of which the debtor alienates property by gratuitous
title are presumed to have been entered into in fraud of creditors, when
the donor did not reserve sufficient property to pay all debts contracted
before the donation. (Art. 1387)

Example: A donated his house and lot to a third person to defraud his
creditors.

b. Alienations by onerous title are also presumed fraudulent when made by

persons against whom some judgment or writ of attachment has been
issued. (Art. 1387)

Example: A writ of attachment was issued by the court on the property of

the debtor but before the sheriff can executed the same, the debtor sold
his property to third persons to defraud his creditors (plaintiff)
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 c. In addition to these presumptions, the design to defraud creditors may be
proved in any other manner recognized by the law of evidence. The
following circumstances are considered Badges of Fraud in a sale:
i. The fact that the consideration of the conveyance is fictitious or is
inadequate.
ii. A transfer made by a debtor after suit has been begun and while it
is pending against him.
iii. A sale upon credit by an insolvent debtor.
iv. Evidence of a large indebtedness or complete insolvency.
v. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially.
vi. The fact that the transfer is made between father and son, when
there are present other of the above circumstances.
vii. vii. The failure of the vendee to take exclusive possession of all the
property.

4. Things under Litigation. Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority.
a. Example: A sued B for the recovery of a diamond ring. Pending litigation,
B sells the ring to C without the approval of A or of the court. The sale to
C is rescissible at A’s instance in case A wins in the original case, unless C
is in good faith.

b. To protect himself/herself, the plaintiff must Register his claim in the

registry of property pending litigation, if the suit is about Real Property.
This is the Notice of Lis Pendens. The purpose is to give notice to the whole
world. If Personal Property is involved, the property may be levied upon
by a writ of preliminary attachment

5. By Provision of Law. All other contracts specially declared by law to be subject to

rescission.
a. Payments made in a state of insolvency for obligations to whose fulfilment
the debtor could not be compelled at the time they were effected, are also
rescissible. (Art. 1382). For Art. 1382 to apply, it is required that:
i. the payment is made in a state of insolvency; and
ii. the obligation paid was not yet due at the time of the payment.
Example: A Corporation owed B P700,000.00. The Corporation was insolvent
and although the debt was not yet enforceable, the Corporation gave B a Deed
of Sale to one of its properties. The Deed of Sale is rescissible because it was
made in a state of insolvency for an obligation to whose fulfillment the debtor
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could not be compelled at the time it was effective.

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C. Who May File? The action for rescission may be filed by the following persons:
 1. The injured person (the ward or absentee suffering lesion; the creditor defrauded;
or the plaintiff in a case where the thing in litigation was alienated);

2. The heirs of such person;

3. The creditors of such person (Accion subrogatoria, by virtue of Art. 1177).

D. Requisites:
1. General Requisites:
a. Rescission must be for a cause provided by law;

b. Since rescission is a Subsidiary Action, it can be instituted only when the

party suffering damages and has No Other Legal Means to obtain
reparation for the same;

c. Rescission shall only be to the extent necessary to cover the damages

caused.

Example: Guardian was ordered to sell the two parcels of land owned by
the ward for P400,000.00 each. The guardian sold the two parcels of land
for P400,000.00. Here, only one of the sales may be rescinded.

d. Rescission can be carried out only when he who demands rescission CAN
RETURN whatever he may be obliged to RESTORE. (this applies to
contracts which are rescissible due to lesion suffered by the ward or
absentee)

e. Rescission shall not take place when the things which are the object of the
contract are legally in the POSSESSION OF THIRD PERSONS who did
not act in bad faith. In case of a fraudulent transfer by the debtor of his
property:
i. If the transferee acquired the property Gratuitously, he is obliged
to surrender it regardless of his good faith or bad faith
ii. If the transferee acquired the property Onerously (with
consideration), he is obliged to surrender it only if he acted in bad
faith. (Art. 1385)

f. The action to claim rescission must be commenced within four (4) years.
(Art. 1389)

For persons under guardianship and for absentees, the period of 4 years
shall not begin until the termination of the former’s incapacity, or until the
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domicile of the latter is known.

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 2. Requisites for Rescission of Contracts in Fraud of Creditors (Accion Pauliana) –
a. That the plaintiff asking for rescission, has a credit prior to the alienation,
although demandable later;

b. That the debtor has made a subsequent contract conveying a patrimonial

benefit to a third person;

c. That the creditor has no other legal remedy to satisfy his claim, but would
benefit by rescission of the conveyance to the third person;
d. That the act being impugned is fraudulent; and,

e. That the third person who received the property conveyed, if by onerous
title, has been an accomplice in the fraud.

E. Effects: 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. (Art. 1385) Mutual
Restitution.
1. Rescission is not Allowed:
a. The party who demands rescission cannot return what he is obliged to
restore under the contract.

b. If the property/object of the contract is legally in the possession of a third

person who acted in good faith. The remedy would be to demand
indemnity for damages from the person who caused the loss.

Example: To defraud his creditors, A sold his property to B (who is in

good faith). Later, B sold the same property to C (who is in bad faith). May
the creditor/s rescind, although the property is now in the possession of
C? The answer would be No because it does not matter whether C is in
good faith or bad faith, since he obtained the same from B who is in good
faith. It is B’s good faith that is important.

III. VOIDABLE CONTRACTS

A. In General.
1. Voidable or annullable contracts are those which possess all the essential requisites
of a valid contract but one of the parties is incapable of giving consent, or consent
is vitiated by mistake, fraud, intimidation, or undue influence.

2. Voidable contracts are valid and binding until set aside in an action for that
purpose (Art. 1390). Before annulment, they are effective and obligatory between
the parties.
3. They can be confirmed or ratified. (Art. 1390)
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 4. A contract may be voidable even though there may have been no damage to the
contracting parties.

B. Causes.
1. Lack of Capacity. Those where one of the parties is incapable of giving consent to
a contract.
a. Thus, a contract executed by a senile or demented person (who cannot
enter into contracts under Art. 1327) is voidable.

b. If both parties lack capacity, the contract is Unenforceable. (Art. 1403 [3])

c. Lack of capacity is different from lack of authority. If the contract is

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, the
contract is unenforceable. (Art. 1403 [1]; Art. 1317)

2. Vitiated Consent. Those where the consent is vitiated by mistake, violence,

intimidation, undue influence or fraud. (Art. 1391). – Relate to the discussion on
Vices of Consent.

C. Action for Annulment

1. Direct Action. The validity of a voidable contracts may be assailed only by a
“proper action in court “(Art. 1390). The validity of voidable contracts cannot be
attacked collaterally.

2. Who may file?

a. An action for annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
i. Strangers to a contract cannot sue to annul and set aside the same.
ii. Exception: There have been cases holding that a stranger may sue
for annulment when he is prejudiced in his right with respect to
one of the contracting parties and can show detriment which
would positively result to him from the contract in which he has
no intervention.

b. The plaintiff must be the injured party or victim, and not the party
responsible for the defect.
i. Persons who are capable cannot allege the incapacity of those with
whom they contracted. (Art. 1397)
ii. Persons who exerted intimidation, violence, or undue influence, or
employed fraud, or caused mistake cannot base their action upon
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these flaws of the contract.

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 3. Prescription. The action for annulment shall be brought within four (4) years. (Art.
1391) This period shall begin:
a. In cases of intimidation, violence or undue influence – from the time the
defect of the consent ceases.

b. In case of mistake or fraud – from the time of the discovery of the same.

c. In case of contracts entered into by minors or other incapacitated persons

- from the time the guardianship ceases.

D. Ratification
1. Concept. One party voluntarily adopts or approves some defective or
unauthorized act or contract, which, without his subsequent approval or consent,
would not be binding on him.
a. Ratification requires that:
i. The ratifying party knows of the reason which renders the contract
voidable; and,
ii. Such reason has ceased;
iii. The ratification must have been made expressly or by an act
implying a waiver of the action to annul; and,
iv. The person ratifying must be the injured person. (Art. 1393)

2. Manner. Ratification may be effected expressly or tacitly. (Art. 1393)

a. There is a express ratification if the same is manifested in words or in
writing.

b. There is tacit (or implied) 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 should execute an act which necessarily
implies an intention to waive his right. (Art. 1393) Implied ratification may
take in various forms – like silence or acquiescence, acts showing approval
or adoption of the act, or acceptance and retention of benefits flowing
therefrom.

Example: A (minor) sold his land to B. This is a voidable contract.

However, A, upon reaching the age of majority, bought another parcel of
land using the proceeds of the first sale for his benefit. (There is
tacit/implied ratification)

c. Example of ratification:
i. Acceptance and retention of benefits under the voidable contract;
ii. Use of the proceeds of the voidable contract; or,
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iii. Introduction by the seller of the buyer as the new owner of the
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property.
 3. Who may Ratify?
a. For voidable contracts due to Lack of Capacity, ratification may be
effected by the incapacitated person (upon gaining capacity) or by his
guardian (during the ward’s incapacity). (Art. 1394)

b. For voidable contracts due to Vice of Consent, ratification may be

effected by the person whose consent was vitiated.

c. Ratification does not require conformity of the contracting party who has
No right to bring the action for annulment. (Art. 1395)

4. Effect of Ratification. Ratification cleanses the contract from all its defects from
the moment it was constituted. Contracts become valid. Hence, the action to annul
is extinguished.

E. Effect of Annulment
1. In General. The effect of annulment of the contract is to wipe it out of existence,
and to retore the parties, insofar as legally and equitably possible, to their original
situation before the contract was entered into. If a voidable contract is annulled,
the restoration of what has been given is proper.

2. General Rule: Restoration. An obligation having been annulled, the contracting

parties shall restore to each other the things which have been the subject matter
of the contract, with their fruits, and the price with its interest, except in cases
provided by law. (Art. 1398)

a. In obligations to render service, the value thereof shall be the basis for
damages.

b. As long as one of the contracting parties does not restore what in virtue of
the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him. (Art. 1402)

Example: A, through fraud, sold his car to B for P150,000.00. B asked for
annulment. The court gave the decree of annulment ordering each to
return what has been received. B refused to give back the car. May A be
compelled to give back the price? Answer: No. Legal basis is Art. 1402.

c. The principle of unjust enrichment applies here. Thus, if a lease is annulled,

the lessee cannot demand the return of the past rentals which corresponds
to the period that he was in possession of the property.
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 3. Exception: Incapacity. When the defect of the contract consists in the incapacity
of one of the parties, 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.

4. Inability to Make Restitution.

a. Due to loss of the thing caused by plaintiff. The action for annulment of
contracts shall be extinguished when the thing which is the object thereof
is lost through the fraud or fault of the person who has a right to institute
the proceedings.

Example: (minor) sold his house to B. A squandered all the proceeds of

the sale. May A still bring an action for annulment? Answer: No. The act
of squandering the proceeds extinguishes his right to bring an action for
annulment.

b. Due to loss of the thing caused by the defendant - Whenever the person
obliged by the decree of annulment to return the thing cannot do so
because it has been lost through his fault, he shall return the fruits received
and the value of the thing at the time of the loss, with interest from the
same date. (Art. 1401)

c. Restatement of the rule. In case the thing which is the object of the
contract has been lost (regardless of the cause of voidability of the contract
– whether due to incapacity or vice of consent), the following rules apply.
i. If loss is through fraud or fault of the plaintiff (the party who has
the right to institute the action) – the action for annulment is
barred.
ii. ii. If loss through fraud or fault of the defendant – the action is not
barred; the defendant must pay the value of the thing at the time
of the loss (with interest from the same date) as well as the fruits
received.
iii. iii. If loss is not due to fraud or fault of any party (such as by
fortuitous event) – the action is not barred; restitution may still be
effected by paying the value of the thing at the time of loss, but
without interest (since the payor was not at fault).

IV. UNENFORCEABLE CONTRACTS

A. In General.
1. Concept. Unenforceable contracts are those which cannot be enforced in court
(unless they are ratified) because they are entered into without or in excess of
authority, or they do not comply with the statute of frauds, or both of the
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contracting parties do not possess the required legal capacity.

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a. Kinds of Unenforceable Contracts:

 i. Unauthorized Contracts;
ii. Those that fail to comply with the Statute of Frauds; and
iii. Those where both parties are incapable of giving consent to a
contract.

2. Ratification. Unenforceable contracts may be ratified.

3. Who may assail. Unenforceable contracts cannot be assailed by third persons. (Art.
1408)

B. Lack of Authority.
1. Unauthorized Contracts. Contracts entered into in the name of another person by
one who has been given no authority or legal representation, or who acted
beyond his powers.

Examples: (i) If A sold the car of his friend B, without the latter’s authorization,
the sale is unauthorized and thus unenforceable. (ii) If A was authorized by the
owner of a house to lease it out to a third person, but A sold it instead, the sale is
beyond A’s power and thus unenforceable.

C. Statute of Frauds.
1. Non-compliance with the statute of frauds.

2. Contracts covered by the statute of frauds. In the following cases an agreement

shall be unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent: (Art.
1402 [2])

a. An agreement that by its terms is not to be performed within a year

from the making thereof.

Example: On April 10, 2019, A entered into a contract to construct the

swimming pool of B to begin on April 20, 2020. The contract must be in
writing to be enforceable.

b. A special promise to answer for the debt, default, or miscarriage of

another.

Example: A is indebted to B in the amount of P250,000.00 guaranteed by

C with a special promise on the part of C to answer for the debt in case of
default by A. The special promise must be in writing signed by C to make
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it enforceable.
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c. An agreement made in consideration of marriage.

 Example: A agrees to spend for the wedding and build a house for B if B
will marry A. This must appear in writing to be enforceable. Do not
confuse this with A and B’s mutual promise to marry each other. The
mutual promise to marry each other need not be in writing.

d. An agreement for the sale of goods, chattels or things in action, at a price

not less than five hundred pesos.

Example: A and B entered into a contract of sale of a fountain pen worth

P1,500.00. It must be in writing to be enforceable. However, if there is
already delivery or partial delivery, oral evidence may be admitted.

e. An agreement of the leasing for a longer period than one year, or for the
sale of real property or of an interest therein.

Example: A agreed to lease the house of B for a period of three (3) years.
It must be in writing. Unless, it is partially executed.

f. Agreement for the sale of real property or of an interest therein.

Example: A orally sold his land to B. The agreement is unenforceable,

unless there is partial performance.

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

Example: A is seeking to borrow money from B. C, a common friend of

A and B, represented A to be solvent. With this inducement, B extended
loan to A, who turn out to be insolvent. The representation of C which
was made to induce B must be in writing to be enforceable.

h. Express trusts concerning an immovable or any interest therein. (Art.

1443)

3. Ratification. Contract infringing the Statute of Frauds are ratified by:

a. The failure to object to the presentation of oral evidence to prove the
same. (Art. 1405); or,

b. The acceptance of benefit under them.

D. Incapacity of Both Parties

1. Incapacity of both parties. The third type of unenforceable contracts are those
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where both parties are incapable of giving consent to a contract. If one of the
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contracting parties is incapacitated, the contract is voidable.

 2. Ratification. Ratification may be made by the parent or guardian, as the case may
be, of the incapacitated parties. (Art. 1407)
a. If the contract is ratified by the parent/guardian of one of the contracting
parties, the effect is to make the contract voidable.

b. If the contract is ratified by the parent/guardian of both contracting

parties, the effect is to make the contract valid.

c. Examples:
i. A (15) entered into a contract with B (16) - Contract is
Unenforceable
ii. If A’s parent/guardian ratifies the contract - Contract is Voidable
iii. If the parent/guardian of both parties ratify the contract - Contract
is Valid.

V. VOID OR INEXISTENT CONTRACTS

A. In General.
1. Concept. A void or inexistent contract is one which has no force and effect from
the very beginning. Hence, it is as if it has never been entered into.
a. It produces no civil effect and does not create, modify or extinguish a
juridical relation.

b. Technically, “inexistent” contracts are those in which an essential element

is lacking (as opposed to contracts where the elements are present, but
illegal)

2. Ratification. A void contract cannot be ratified.

3. Waiver. The right to set up the defense of illegality of a contract cannot be waived.

4. Imprescriptibility. The action or defense for the declaration of the inexistence of

a contract does not prescribe.

5. Who can invoke? The right to set up the nullity of a void or non-existent contract
is not limited to the parties, it is extended to third persons who are directly affected
by the contract, whenever juridical effects founded thereon are asserted against
him. However, the defense of illegality of contract is not available to third persons
whose interests are not directly affected.
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B. Types of void or inexistent contracts. Art. 1409 provides that the following contracts
are inexistent and void from the beginning –
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 1. Those whose cause, object, or purpose is contrary to law, morals, good customs,
public order or public policy.

Example: The termination of marital relations is an unlawful consideration which

renders the contract void.

2. Those which are absolutely simulated or fictitious. (consent is totally absent).

3. Those whose cause or object did not exist at the time of the transaction.

Example: A person who has leased his property to another person cannot lease it
again to a third party while the original lease is still valid and subsisting.

4. Those whose object is outside the commerce of men.

Example: Public office and political rights, purely personal rights, properties of
public dominion, etc.

5. Those which contemplate an impossible service.

Example: It is impossible for a lessor to undertake the maintenance of the public

drainage system; he can only maintain the private pipes or drainage of the leased
premises.

6. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained.

7. Those expressly prohibited or declared void by law.

Example: Contracts upon future inheritance.

C. Rules on Recovery.
1. General Rule. Parties to a void agreement cannot expect the aid of the law; the
courts leave them as they are, because they are deemed in pari delicto or “in equal
fault”. Each must bear the consequences of his own acts.

2. Exceptions:
a. The pari delicto rule does not apply to inexistent contracts.

Example: The pari delicto rule does not apply to absolutely simulated
contracts or to contracts without consideration.
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 b. The pari delicto rule does not apply if it would violate public policy.

Example: A squatter who had been ousted by a fellow squatter is not

barred from filing an ejectment suit on the ground that they are both
squatters in pari delicto.

3. Illegal Cause or Object. When the nullity proceeds from the illegality of the cause
or object of the contract, the following rules apply:
a. If the act constitutes a criminal offense:
i. When both parties are in pari delicto – they shall have no action
against each other, and both shall be prosecuted.

Example: A and B entered into a contract of sale of prohibited

drugs in the amount of P40,000.00. Both parties must be
prosecuted.

ii. When only one of the parties is guilty – they shall have no action
against each other, and the guilty party shall be prosecuted.
However, the innocent party may claim what he has given, and
shall not be bound to comply with his promise.

b. If the act does not constitute a criminal offense:

i. When both parties are at fault – neither may recover what he has
given by virtue of the contract or demand the performance of the
other’s undertaking.

Example: A agreed to be the mistress of B in consideration of a

house and lot.

ii. When only one of the parties is at fault –

✓ the guilty party loses what he has given by reason of the
contract;
✓ the guilty party cannot ask for the fulfillment of the other’s
undertaking;
✓ the innocent party may demand the return of what he has
given; and,
✓ the innocent party cannot be compelled to comply with his
promise.

Example: In the above example, suppose that A is a minor and B

is of age. A agreed to be the mistress of B in consideration of a
house and lot.
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 4. Illegal Purpose. When money is paid or property is delivered for an illegal purpose,
the contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person
a. In such case, the courts may, if public interest will thus be subserved, allow
the party repudiating the contract to recover the money or property.

Example: A hired B to kill C for P100,000.00. However, A changed his

mind. In this case, A may be allowed to recover the P100,000.00 from B.

5. Illegal Contract by an Incapacitated Person. Where one of the parties to an illegal

contract is incapable of giving consent, the courts may, if the interest of justice so
demands allow recovery of money or property delivered by the incapacitated
person.

Example: A (minor) hired B to kill C for P100,000.00. Here, it is not necessary that
the illegal purpose has not been accomplished or that no damage has been caused
to a third person. A is incapable of giving consent; hence, he may recover the
P100,000.00.

6. Prohibited Contracts. When the agreement is not illegal per se but is merely
prohibited, and the prohibition by the law is designed for the protection of the
plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or
delivered.

7. Excess Interest or Price.

a. A stipulation for the payment of usurious interest is VOID. The person
paying the usurious interest can recover the whole interest paid.
b. Ceiling Law – a statute fixing the maximum price of any article or
commodity. The purpose is to curb the evils of profiteering.

8. Overwork or Underpayment.
a. PD 442 (Labor Code of the Philippines) – maximum working hours is
eight (8) hours in a workday (continuous or broken). Beyond eight hours,
the worker is entitled to overtime pay.

b. Minimum wage – If the laborer accepts a lower wage, he shall be entitled

to recover the deficiency.

D. Separability of Illegal Terms. In case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced.
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Examples:
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✓ A is obliged to deliver to B prohibited drugs and jewelry (contract is void)

 ✓ A is obliged to deliver to B prohibited drugs or jewelry (contract is divisible,
separate the legal from the illegal term)

E. Void Contracts Cannot be Novated. An illegal contract cannot give rise to a valid
contract.

Example: A hired B to kill C with a promise of a house and lot. Later, the house and lot
were changed into a brand-new sports car. The contract remains void.

- End of Module 8 -
References:
a. Laws:

• Civil Code of the Philippines

• Relevant Supreme Court decision
b. Books:

• De Leon, H. and De Leon, Jr., H. (5th Edition). Obligations and Contracts.

• Paras, E. (16th Edition), Civil Code of the Philippines Annotated.

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