LAW ON CONTRACTS

Contract- the meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service.

Characteristics of contracts:
1. Consensuality
2. Autonomy (liberty or freedom to stipulate)
3. Mutuality
4. Obligatoriness
5. Relativity
General rule: a contract is bind only between the contracting parities, their assigns and heirs
Exceptions:
a. Obligations arising from contracts are not transmissible by nature, stipulation or by provision of law
b. Stipulation pour autrui
c. Third person induces another to violate his contract, the third person will be liable for damages
(tortious interference)
d. In some other cases, third persons may be adversely affected by a contract where they did not
participate.
e. Where the contract is entered into in order to defraud a creditor.

Classification of contracts
1. According to perfection or formation
a. Consensual
b. Real
c. Formal or solemn
2. According to degree of dependence
a. Preparatory
b. Principal
c. Accessory
3. According to the parties obligated
a. Unilateral
b. Bilateral
4. According to cause or equivalent of value of prestation
a. Onerous
b. Gratuitous
c. Remunerative or remuneratory
5. According to risk involved
a. Commutative
b. Aleatory
6. According to name or designation
a. Nominate
b. Innominate
7. According to time of performance
a. Executory
b. Executed
c. Partially executed

Stages in the life of a contract:

1. Preparation/ generation
2. Perfection/ birth
3. Performance/ death

Kinds of elements of a contract:

1. Essential
2. Natural
3. Accidental

Essential Elements:
1. Consent
2. Object
3. Cause or Consideration
4. Delivery (in real contracts)
5. Formalities required by law (in solemn contracts)

Consent- manifested by the meeting of the offer and acceptance upon the thing and the cause which are to
constitute a contract.

Rules on offer:
1. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
2. The person making the offer may fix the time, place, and manner of acceptance, all of which must be
complied with.

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 3. An offer made through an agent is accepted from the time acceptance is communicated to him.
4. An offer becomes ineffective by operation of the law upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.
5. Offer may be withdrawn so long as the offeror has no knowledge of acceptance by the offeree. Pending
the acceptance of an offer, the offeror can perfect a contract over the same thing with another person.
6. 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.
7. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere
invitations to make an offer.
8. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary appears.

Rules on acceptance:
1. The acceptance must be definite and absolute. A qualified acceptance constitutes a counter-offer.
2. An acceptance may be express or implied. Implied acceptance may arise from acts or facts which reveal
the intent to accept, such as the consumption of the things sent to the offeree, or the fact of
immediately carrying out the contract offered.
3. Acceptance made by letter or telegram does not bind the offeror except from the time it came to his
knowledge (cognition theory).
4. Acceptance may be revoked before it comes to the knowledge of the offeror because in such case there
is still no meeting of the minds.

Theories that determine the exact moment of perfection when acceptance is made by letter or
telegram:
1. Manifestation theory
2. Expedition theory/mailbox theory
3. Reception theory
4. Cognition theory

Persons incapacitated to give consent

1. Unemancipated minors
2. Insane or demented persons unless the contract was entered into during lucid interval
3. Deaf-mutes who do not know how to write
4. Persons suffering from civil interdiction
5. Incompetent under guardianship
6. Persons under state of drunkenness or during hypnotic spell

Vices of consent
1. Mistake or error- is the false notion of a thing or a fact material to the contract.
2. Violence or force- there is violence when in order to wrest consent, serious or irresistible force is
employed.
3. Intimidation or threat or duress- 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.
4. Undue influence- 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.
5. Fraud or deceit- there is fraud when, through 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.

Simulation of contracts
1. Absolute- no real transaction is intended.
Effect- simulated contract is inexistent/void.
2. Relative- the real transaction is hidden.
Effect- the apparent contract is void but the hidden contract is valid.

Objects of contracts
Requisites:
1. Within the commerce of men
2. Transmissible
3. Not contrary to law, morals, good customs, public order or public policy
4. Not impossible thing or service
5. Determinate as to its kind or determinate without the need of a new contract

Cause of contracts
-must be present at the time the contract was entered into, otherwise the contract is void
-must be true and lawful

Lack/absence of cause The contract confers no right and produces no legal

effect
Failure of cause Does not render the contract void
Illegality/unlawfull of cause The contract is null and void
Falsity of cause The contract is void unless the parties can show that
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 there is another cause which is true and lawful
Lesion/inadequacy of cause Does not invalidate the contract unless:
-there is fraud, mistake or undue influence
-when the parties intended a donation or some other
contract, it is valid with respect to such contract of
donation or some other contract.

Form of contracts
1. When the law requires that a contract be in some form to be valid.
*The following contracts shall be void if orally constituted:
a. Donations of real estate (public instrument) or of movables if exceeding P5,000.00
b. Transfer of large cattle
c. Stipulation to pay interest in loans
d. Sale of land through an agent (authority must be in writing)
e. Partnership to which immovable are contributed (public instrument)
f. Stipulation limiting carrier’s liability to less than extra-ordinary diligence
g. Contracts of antichresis
h. Sale of vessels
i. Chattel mortgage
2. When the law requires that a contract be in some form to be enforceable.
*In contracts under the statute of frauds where the party sued makes a timely objection to the absence
of a written memorandum.
3. Real contracts that require delivery for perfection

Reformation of instruments
-the remedy though 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:
1. Meeting of minds to the contract
2. The true intention is not expressed in the instrument by reason of mistake, accident, relative simulation,
fraud and inequitable conduct
3. Clear and convincing proof of mistake, accident, relative simulation, fraud and inequitable conduct

Cases when there can be no reformation:

1. Simple, unconditional donation inter vivos
2. Wills
3. When the agreement is void

Interpretation of contracts
1. Terms/wordings of the contract must be followed.
2. In case of conflict between the wordings and the intent of a contract, the latter shall prevail.
3. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered.
4. 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.
5. If some 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.
6. Stipulations shall be read together.
7. Interpretation must be in keeping with the object and nature of the contract.
8. Usage or custom shall be borne in mind.
9. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.

Classes of defective contracts

1. Rescissible
2. Voidable
3. Unenforceable
4. Void

Rescissible Contracts

Contracts that are rescissible:

1. Those entered into by guardians where the ward suffers lesion of more than ¼ of the value of the things
which are objects thereof;
2. Those agreed upon in representation of absentees, if the latter suffer lesion by more than ¼ of the value
of the things which are subject thereof;
3. Those undertaken un fraud of creditors when the latter cannot in any manner claim what are due them
(accion pauliana);
4. Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants and the court; and
5. All other contracts especially declared by law to be subject to rescission.

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Prescriptive period for action for rescission:
1. For no. 1, within 4 years from the time of the termination of the incapacity of the ward.
2. For no. 2, within 4 years from the time the domicile of the absentee is known.
3. For nos. 3 and 4, within 4 years from the time of the discovery of fraud.

Voidable Contracts

Contracts that are voidable:

1. Those where one of the contracting parties is incapable of giving consent; and
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
Note: contracts entered into during state of drunkenness or hypnotic spell are voidable

Causes of extinction of action to annul:

1. Prescription
-the action must be commenced within four years from:
a. the time the incapacity ends
b. the time the violence, intimidation or undue influence ends
c. the time the mistake or fraud was discovered
2. By loss of the thing which is the object of the contract through fraud or fault of the person who is
entitled to annul the contract
3. Ratification- the act or means by virtue of which efficacy is given to a contract which suffers from a vice
of curable nullity.

Unenforceable contracts

Contracts that are unenforceable:

1. Those entered into in the name of another by one without or acting in excess of authority
2. Those which do not comply with the statute of frauds
3. Those where both parties are incapable of giving consent

Agreements within the scope of the statute of frauds

1. Agreements not to be performed within one year from the making thereof
2. Promise to answer for the debt, default or miscarriage of another
3. Agreement in consideration of marriage other than a mutual promise to marry
4. Contracts of lease for a period longer than one year
5. Agreement for the sale of real property or interest therein
6. Representation as to the credit of a third person

Modes of ratification
1. A contract entered into in the name of another by one who has no authority, legal representation or who
acted beyond his powers, it is ratified expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party.
2. For contracts infringing the statute of fraud
a. Expressly
b. Impliedly- by failure to object to the representation of oral evidence to prove the contract, or by
the acceptance of benefits under the contract.
3. If both parties are incapacitated, ratification by their parents or guardian shall validate the contract
retroactively.

Void or Inexistent Contract

Contracts which are void ab initio:

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public policy or public
order
2. Those whose object is outside the commerce of men
3. Those which contemplate an impossible service
4. Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained
5. Those expressly prohibited or declared void by law

Contracts which are inexistent:

1. Those which are absolutely simulated or fictitious
2. Those whose cause or object did not exist at the time of the transaction

The following stipulations are void:

1. Pactum comissorium
2. Pactum de non aliendo
3. Pactum leonina

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 BASIS RESCISSIBLE VOIDABLE UNENFORCEABLE VOID
Origin of the defect 1. Economic 1. Incapacity of 1. It was entered Absence of any of
damage or one of the into in behalf of the essential
lesion to one of contracting another person: requisites of a
the parties or to parties to give a. Without contract
a third person consent authority
2. A special 2. Vitiated consent b. In excess of
declaration by due to the vices authority
law that the of consent 2. Non-compliance
contract is with the statute
subject to of frauds
rescission 3. Incapacity of
both contracting
parties to give
consent
Damage or -there must be -damage or -damage or -damage or
prejudice damage/lesion or prejudice to the prejudice is not prejudice is not
prejudice to one of other party is not necessary necessary
the contracting necessary
parties or third
person
Legal effect -they are considered -they are considered -they are -generally, they do
valid and legally valid, binding and inoperative until not produce legal
enforceable until enforceable until ratified. They are effects
judicially rescinded judicially annulled not enforceable in
court without proper
ratification.
Remedy/action -rescission or -annulment of -this is just a -declaration of
rescissory action contract personal defense nullity of the
when the plaintiff contract
pursues a specific
performance case or
complaint for
damages based on
breach of contract
Persons who can file -contracting party -general rule- -contracting party -third persons
the action -exception- contracting party -third person cannot cannot assail the
creditors who are principally or assail it contract unless his
defrauded subsidiary obliged interests are directly
under the contract affected
-exception: a third
person who is
prejudiced
Susceptibility of -need not be ratified -susceptible of -susceptible of -not susceptible of
ratification ratification ratification ratification
Susceptibility of -action for -action for -action for recovery -action for
prescription rescission prescribes annulment also or action for specific declaration of nullity
after four years prescribes after four performance or for or the putting of the
years damages for breach defense of nullity of
of contract also the contract does
prescribes. There not prescribe.
being no specified
period, it could be
10 years if the basis
of the action is a
written contract or 6
years if unwritten.

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