REGULATORY FRAMEWORK IN BUSINESS TRANSACTIONS

TOPIC 2: LAW ON CONTRACTS

CONTRACTS (ARTICLE 1305 – 1422, Civil Code)

✓ Meeting of minds
✓ Bind themselves
✓ To give something or to render some services

AUTO CONTRACTS
 One person represents the two opposites parties

GENERALLY VALID: the number of parties is not determinative of the existence of the contract; there will be at least 2
declaration of wills.

ELEMENTS OF A CONTRACT (ENA)

1. Essential elements - without it, contract cannot exist (Consent, Object, Consideration)
2. Natural elements - already exist in a contract even do not stipulate it (warranty against eviction)
3. Accidental elements – agreed upon the parties (terms of payment, interest rate, place of payment)

STAGES OF CONTRACT
1. Negotiation (Preparation / Conception / Generacion) - prior negotiations with no arrival yet of a definite agreement
2. Perfection (Birth) - already came to a definite agreement
3. Consummation (Death / Termination) - the terms have been performed already

CLASSIFICATIONS OF CONTRACTS
a. Principal – can stand by itself
According to importance /
b. Accessory – existences depends upon another contract
dependence upon another
c. Preparatory – serves as a means by other contract

a. Consensual – perfected by mere consent

According to perfection or formation b. Real – perfected by delivery of the object
c. Formal/Solemn – form provided by law

a. Transfer of Ownership – Donation, Sale and Barter

According to purpose b. Conveyance of Use – Usufruct, Lease, and Loan
c. Rendition of Service – Lease and Agency

a. Unilateral – only one party is obligated

According to parties obligated
b. Bilateral – both parties to give or to do

a. Onerous – exchange of valuable consideration

According to cause b. Gratuitous / Lucrative – one party receives consideration
c. Remuneratory – cause is the service or benefit remunerated

a. Commutative – parties give equivalent values

According to risk/fulfillment
b. Aleatory – fulfillment depends upon chance

a. Nominate – have a name under law

According to name/description
b. Innominate – without any name under law

a. Contracts involving things

According to subject matter b. Contracts involving rights or credits
c. Contracts involving services

a. Executed – has been performed

According to time of fulfillment
b. Executory – has not yet been performed

BASIC PRINCIPLES OF CONTRACT (MARCO)

Meeting of minds or consensual

Contract entered into by an unauthorized person: UNENFORCEABLE since the

rule is no one may contract in the name of another without being authorized by the
latter. While authorized or has a legal representation, acted beyond his powers.
1. CONSENSUALITY OF
Unless, the contract is RATIFIED, expressly or impliedly executed before it is revoked.
CONTRACTS
CONTRACT OF ADHESION
 Only one party drafted the contract, only asks the other party to agree (insurance)
 General Valid: because a party who does not consent to the terms and conditions
in the contract can opt to do.

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 The contracting parties establish such stipulations provided they are NOT contrary to
law, morals, good customs, public order, or public policy.

Contrary to Law
 Waiver for future fraud (VOID)
 Partnership: Pactum Leonina – stipulations which excludes one or more parties
from any share of profits and losses.
 Mortgage/Pledge: Pactum Commissorium – stipulation where the creditor
appropriates the things given by the way of pledge/ mortgage or dispose of them.
 Real Estate Mortgage: Pactum de non aliendo – stipulation forbidding the owner
2. AUTONOMY OF from alienating the immovable mortgaged.
CONTRACTS
(Liberty of a contract Contrary to Customs
or freedom to stipulate)  A notarized document “legal separation” executed by husband and wife.

Contrary to Public Policy

 Refund of tuition fees
 Prohibiting a losing candidate to run as an independent

Contrary to Morals
 Contract of loan
 Promise to live as a common-law wife without the consideration of marriage
 Work without pay
 Penalty
Must bind both contracting parties, validity cannot be left to the will of one of them.

Consequences of Mutuality
3. MUTUALITY a. One party cannot revoke or renounce a contract without the consent of the other
b. Performance may be left to a third person
 Decision shall not be binding until it has been made
 Determination shall not be obligatory if it is evidently inequitable
4. OBLIGATORY FORCE OF
CONTRACT AND Contract that has force of law between the contracting parties and must be
COMPLIANCE IN GOOD complied with in good faith.
FAITH
Contracts take effect only between the contracting parties, their assigns and heirs

Third Parties: As a general rule DO NOT have a cause of action to enforce or annul
a contract.

Exceptions:
a. Third Parties are bound by the contract
 Contracts creating real rights – third persons who come into possession of the
object of the contract are bound thereby, subject of the Mortgage Law and Land
5. RELATIVITY OF Registration Laws
CONTRACTS b. A creditor may initiate an action against the contract of his debtor
 Accion Pauliana – action of the creditor to rescind the contract
 Accion Directa – action of the creditor to sue on a contract
c. Third persons may be liable under the contract
 Malicious interference of the third persons – induces another to violate his
contract
d. Third persons may benefit under the contract (stipulation pour atrui)
 Stipulation Pour Atrui – stipulation in favor of a third persons
 Communication of Acceptance – no form is required
 Revocation – cannot be done by one party alone

ESSENTIAL ELEMENTS OF A CONTRACT

CONSENT – Meeting of the offer and the acceptance upon thing and the cause to constitute the contract

Cognition Theory – follows that the acceptance takes effect from the time the offeror knew of the acceptance of the offeree.
Manifestation Theory – follows the acceptance will take effect once it is manifested by the offeree.

Offer and Acceptance:

1. Offer must be certain and clear.
2. Acceptance must be absolute.
3. Qualified acceptance constitutes counter-offer.
4. Acceptance may be express or implied.
5. An offer made through an agent is accepted from the time it is communicated to him.
6. The person making the offer may fix the time, place, and manner of acceptance
7. Allowed certain period to accept and may be withdrawn before the acceptance.

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Intervening events: Ineffective upon death, civil interdiction, insanity or insolvency either party before acceptance is
conveyed.
Option – the offeror gives the offeree certain period within to buy or not certain things, the offer may withdrawn at any time
before the acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as
something paid or promised.
Advertisements – are not definite offers but merely invitations to make an offer

SITUATIONS CONCERNING CONSENT OF THE PARTIES

1. Must have the capacity to enter into a contract.

2. Simulation
a. Absolute Simulation – one or both parties did not intend to be bound by the contract
b. Relative Simulation – party merely conceals their real agreement
3. Incapacity of one of the parties
a. Juridical Capacity – fitness to be subject of legal relations
b. Capacity to act (or legal capacity) – power to do acts with legal effects, is acquired and may be lost.
i. Absolute Incapacity – the party cannot give consent in any contract

WHO CANNOT GIVE CONSENT WHO ARE “INCOMPETENT” UNDER THE RULES OF COURT
a. Unemanicpated minor a. Suffering civil interdiction
b. Insane or Demented persons b. Hospital lepers
(except given during lucid c. Prodigals
interval) d. Deaf and dumb who are unable to read and write
c. Deaf-mutes who do not know e. Those of unsound mind even though they have lucid intervals
how to write f. Those who by reason of age, disease, weak mind, and other
d. Drunks or Hypnotized similar causes, cannot without outside aid, take care of
themselves and manage their property, becoming thereby an
easy prey for deceit and exploitation

ii. Relative Incapacity – person may be prohibited from entering specific contracts

4. Both are incapacitated: the contracts is UNENFORCEABLE

5. VOIDABLE (contracts in a state of drunkenness or during a hypnotic spell)
6. Consent was vitiated by Vices of Consent (VOIDABLE) - VIMFU
a. Violence – to wrest consent, serious or irresistible force is employed
b. Intimidation – compelled by a reasonable and well-grounded of fear of an imminent and grave evil upon his
person, or property (determining degree of intimidation: age, sex, & condition of the person)
c. Mistake/ Error

Mistake will make the contract VOIDABLE

i. Pertains to the object or to principal conditions
ii. Pertains to the condition which have been principally moved one or both parties to enter into the contract.
iii. Mistake as to the identity or qualifications of one of the parties when such identity or qualifications have been
the principal cause of the contract.
iv. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate
consent.

Mistake does NOT vitiate consent:

i. Mistake or error as to motive

ii. A simple mistake of account
iii. If the party alleging it knew the doubt, contingency or risk affecting the object of the contract.

d. Fraud – insidious words or machinations of the contracting parties, the other is induced to enter into a contact.
Fraud may make a contract VOIDABLE, it should be serious and should not have been employed by both
contracting parties.

OTHER RULES:
1. In order that fraud may make a contract voidable, it should be serious and should NOT have been employed
by both contracting parties.
2. Incidental fraud only obliges the person employing it to pay damages.

e. Undue Influence – takes improper advantage of his power over the will of another; depriving the reasonable
freedom of choice.

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OBJECTS (SUBJECT MATTER) OF THE CONTRACT – create or to end the obligations, may involve things, rights or services.

REQUISITIES OF OBJECT OF CONTRACT

1. Must be within the commerce of men. (future inheritance = VOID)
2. Must be transmissible
3. Must NOT contrary to law, morals, good customs, public order, or public policy.
4. Must NOT be impossible.
5. Must be determinate as to its kinds or determinable, must be possible to determine without the need of a new contract.

CAUSE – essential or impelling reason why a party assumes an obligation

Essential reason why a party enters into a contract.

1. Onerous – cause is the prestation or promise of a thing
2. Gratuitous – liberality of the benefactor
3. Remuneratory – service or benefit remunerated

REQUISITIES OF CAUSE OF A CONTRACTS (LET)

Must be lawful, exist, true

CAUSE MOTIVE
Essential reason of a contract Private or secret reason or intention
VOID if the cause is ILLEGAL Validity is NOT AFFECTED by the illegality
Known by the contracting parties One party may not be known to other

RULES ON CAUSE
a. Contracts without cause, or with unlawful cause, produce no effect whatever.
b. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded
upon another cause which is true and lawful.
c. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
contrary.
d. As a rule, inadequacy of the price will not affect the contract. Except:
1. When expressly provided by law, e.g., rescissible contracts;
2. When there has been fraud, mistake or undue influence.
e. The particular motives of the parties in entering into a contract are different from the cause thereof.

Real Contracts: are those which are perfected by delivery, thus, delivery is an essential element to its perfection. Real
contracts include:
1. Deposit 3. Commadatum
2. Pledge 4. Loan or Mutuum

Formal Contracts: where the execution of the required formality is also an essential element for perfection

ANNULMENT RESCISSION
Remedy allowed by law to the contracting parties and even to
Action brought to set aside a voidable contract
third party
Availed to produce the inefficacy which did not exist in the
Brought to declare the inefficacy inherent in the contract
contract
Based on vitiated consent Based on lesion or damage
Action is principal Action is subsidiary
Sanction where the law predominates Remedy where equity predominates
Available only to parties whether bound to principally or Available to contracting parties and third person whose interest
subsidiarily are affected
Ratification is required Ratification is not required

FORMS OF CONTRACT

GENERAL RULE: No form is required for the validity or perfection of a contract.

Formalities required for VALIDITY:

1. Donations
a. Real Property – PUBLIC INSTRUMENT
b. Personal Property exceed P5,000 – IN WRITING
2. Pay interest – IN WRITING (Art. 1956)
3. Sale or transfer of large cattle – PUBLIC INSTRUMENT and a CERTIFICATE OF TRANSFER
4. Contribution of Real Property in the partnership – PUBLIC INSTRUMENT

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Formalities required for ENFORCEABILITY: Statute of Frauds (Art. 1403) Unenforceable unless they are in WRITING:

WHOLLY EXECUTORY
o Agreement not to be performed within a year
1 year
o Leasing for more than 1 year
o Personal property exceeds 500
Sale
o Real property or an interest therein
o As to the credit of a third person
Representation / Promise o Answer the debt default or miscarriage of another (guarantee)
o Agreement in consideration of marriage other than mutual promise to marriage

Formalities required for CONVENIENCE:

 Bind THIRD PERSON and does NOT AFFECT VALIDITY OR ENFORCEABILITY of contracts

The following are required to appear in a public instrument:

1. Extinguishment of real rights
2. Cession, repudiation or renunciation of hereditary rights
3. The power to administer property, for its object an act appearing or which should appear in a public document
4. Rights proceeding from an act appearing in a public document

Right to compel observance of the form required by law (Art. 1357)

If the contracts is VALID AND ENFORCEABLE but NOT IN THE FORM PROVIDED BY LAW, the contracting parties may
compel each other to observe the form.

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

Public Document
Any writing public or private
a. Acts and contracts for their object of creation
b. Cession, repudiation or renunciation of hereditary rights
c. Power to administer property
d. Cession of actions or rights
Exceeds P5,000 must be in WRITING

REFORMATION

REMEDY in equity by means which a written instrument is made or constructed

REQUISITIES
1. Meeting of minds
2. Written instrument, true intention of the parties is NOT EXPRESSED
3. Reason is due to mistake, fraud, inequitable conduct or accident.

WHO CAN ASK FOR WHEN MAY REFORMATION BE NO REFORMATION IS

REFORMATIION
1. Mistake was mutual (either the
party or his successor)
2. The injured party, or his heirs or
assigns
HAD?
1. Mutual mistake of the parties.
2. One party was mistaken and the
other knew that the instrument did
not state their real agreement
3. Ignorance
4. Two parties agree upon the
mortgage or pledge of real or
personal property
ALLOWED:
Article 1366 of the Civil Code of the
Philippines provides that there shall
be NO REFORMATION in the
following cases:
1. Simple donations inter vivos
where in no condition is imposed
2. Wills
3. When the real agreement is
VOID

INTERPRETATION OF CONTRACTS

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

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1283).

Contemporaneous and Subsequent Acts: may be considered to determine if the parties intention are different from the clear
words of the agreement.

When none of the above rules will apply:

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

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have be the
intention or will of the parties, the contract shall be null and void. (Art. 1378)

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 DEFECTIVE CONTRACTS

AS TO RESCISSIBLE VOIDABLE UNENFORCEABLE VOID

DEGREE OF
DEFECTIVENESS
Least defective Most defective
Those which possess
Those validly agreed all the essential
upon because all the requisites of a valid
essential elements exist contract but one of the Those that cannot be
and, therefore legally parties is legally enforced in court or sued upon Those which, because of
DEFINITIONS effective, but in the incapable of giving by reason of defects provided certain defects, generally
cases established by consent, or consent is by law until and unless they produce no effect at all
law, the remedy of vitiated by mistake, are ratified according to law
rescission is granted in violence, intimidation,
the interest of equity undue influence, or
fraud
- Damage/ Injury to - Vitiation of consent - Unauthorized contracts - Absolute lack in fact/ law of
one of the parties or one of the partner - Does not comply with some/all essential
- Based on EQUITY is incapacitated Statute of frauds requisites of contract
DEFECTS - Based on LAW - Both parties are - Contrary to law, morals,
incapacitated good customs, public order,
- Based on LAW public policy
- Based on LAW
ENFORCEABLE YES YES NO NO
CANNOT BE
VALID UNTIL VALID UNTIL DOES NOT PRODUCE
EFFECT ENFORCED BY COURT
RESCINDED ANNULED EFFECT
OF ACTION
RESCISSION DECLARATION OF
REMEDY ANNULMENT N/A
(CANCEL) ABSOLUTE NULLITY
Focus on consent  Unauthorized Contracts ARTICLE 1409
FLAGS  Does not comply with statute  COC is contrary to law,
 One of the parties is of frauds: morals, good customs,
 Contracts entered incapable of giving a. Agreement not to be public order/policy
into in behalf of consent performed within 1 year  Absolutely simulated
Guardians represent  Mistake, from the making contracts
suffer lesion by Intimidation, b. Promise to wear for debt,  Cause/Object did not
more than ¼ of the Violence, Undue default, miscarriage, of exist at time of transaction
value of the things influence, Fraud, another  Object is outside the
 Contracts agreed (VIMFU) c. Agreement in commerce of men
upon in  Entered into by consideration of marriage  Impossible service
GROUNDS representation of those hypnotized other than mutual promise  Contracts where intention
Absentees or under a state of to marry of parties relative to object
 Contracts undertaken drunkenness d. Agreement for sale of cannot be ascertained
in Fraud of creditors goods (price not less  Contracts expressly
 Contracts which refer than P500) prohibited/declared by
to things under e. Agreement for leasing a law
Litigation longer period than 1 year
 All other contracts f. Agreement for sale of real
Specially declared properties
by law g. Representation as to
credit to third party
RATIFICATION NO YES YES NO
PRESCRIPTIBLE PRESCRIPTIBLE
PRESCRIPTION 4 YEARS 4 YEARS
N/A IMPRESCRIPTIBLE
IS DAMAGE
YES NO NO NO
NECESSARY
BY PARTY OR THIRD
WHO MAY BY PARTY OR BY PARTY OR
BY PARTY ONLY PARTY DIRECTLY
ASSAIL? THIRD PARTY THIRD PARTY
AFFECTED
HOW DIRECTLY AND DIRECTLY AND
DIRECTLY COLLATERALLY
ASSAILED? COLLATERALLY COLLATERALLY
CAN BE
ASSAILED BY YES YES NO YES
3RD PERSONS?

Lesion – inadequacy of cause.

General Rule: Lesion shall NOT invalidate a contract except:

1. When there was fraud, mistake, and undue influence.
2. In case provided by law, such as when the ward or absentee suffer from lesion by more than 1/4 of the value of the
object of the contract.

Rescission – a process designated to render inefficacious a contract validly

Ratification – extinguishes the action to annul a voidable contract
Pari delicto – universal doctrine which holds that no action arises, in equity or law, from illegal contract.