Contracts

Civil Code of the Philippines

Articles 1305-1422
 A contract is 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
(Article 1305)
❖ PRINCIPLE OF AUTONOMY OF CONTRACTS: The contracting
parties may establish such stipulations, clauses, terms &
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public
policy (Article 1306)

❖ PRINCIPLE OF MUTUALITY OF CONTRACT: The contract must

bind both contracting parties; its validity or compliance cannot
be left to the will of one of them (Article 1308)
EXCEPTION: A third person may be called upon to decide
whether or not performance has been done for the fulfillment of
the contract. Such decision becomes binding when the
contracting parties have been informed of it (Article 1309)
 QUALIFICATION TO EXCEPTION: A contracting party is not
bound by the determination if it is evidently inequitable or
unjust. In such case, the courts shall decide what is equitable
under the circumstances (Article 1310)

❖ PRINCIPLE OF RELATIVITY OF CONTRACT: Contracts take

effect only between the parties, their assigns and heirs, except
in case where the rights and obligations arising from the
contracts are not transmissible by their nature, or by stipulation
or by provision of law. The heir is not liable beyond the value of
the property he received from the decedent (Article 1311, first
paragraph)
 EXCEPTION: Stipulation pour autrui - stipulation clearly
and deliberately conferring a favor upon a third person who has
a right to demand its fulfillment provided he communicates his
acceptance to the obligor before its revocation (Article 1311,
second paragraph)

❖ PRINCIPLE OF CONSENSUALITY: Contracts are perfected by

mere consent, and from that moment the parties are bound not
only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law
(Article 1315)
 EXCEPTION: Real contracts (deposit, pledge,
commodatum) are not perfected by mere consent; delivery of
the thing is required (Article 1316)

❖ A contract entered into in behalf of another who has not

authorized it is not valid or binding on him/her unless he/she
ratifies the transaction. When ratified, he/she is estopped to
question the legality of the transaction (Article 1317)

❖ INNOMINATE CONTRACTS are contracts with no specific name

of designation in law. Such contracts are governed by the
agreement of the parties, provisions of the Civil Code on
obligations and contracts, rules governing the most analogous
contracts and the customs of the place (Article 1307)
❖ Any third person who induces another to violated his/her
contract shall be liable for damages to the other contracting
party (Article 1314)
Essential Requisites
(Article 1318)

(1) CONSENT of the contracting parties

(1) OBJECT certain which is the subject

matter of the contract

(1) CAUSE of the obligation which is

established
CONSENT
❖ CONSENT is concurrence of the wills of the contracting
parties with respect to the object and the cause which
shall constitute the contract
REQUISITES:
❖ consent must be manifested by the concurrence
of the offer and the acceptance (Articles
1319-1326);
❖ contracting parties must possess the necessary
legal capacity (Articles 1327-1329); and
❖ consent must be intelligent, free, spontaneous
and real (Articles 1330-1346)
❖ Offer must be certain or definite
❖ Acceptance must be clear and absolute
❖ Acceptance math be express or implied
❖ Person making the offer may fix the time, place and manner
of acceptance
❖ Offer made through an agent is accepted from the time
acceptance is communicated to him/her
❖ Offer becomes ineffective upon the death, civil interdiction,
insanity or insolvency of either party before acceptance is
conveyed
❖ When offerer gives offeree a certain period within which to
accept the offer, the offer may be withdrawn any time before
acceptance
❖ Business advertisement of things for sale are not definite
offers
❖ Advertisement for bidders are not definite offers
❖ The following cannot give consent:
(1) unemancipated minors
(2) insane or demented persons
(3) deaf-mutes who do not know how to write
❖ Contracts entered into during a lucid interval are valid
❖ Contracts entered into in state of drunkenness or during a
hypnotic spell are voidable
❖ Contracts where consent is given through mistake, violence,
intimidation, undue influence or fraud are voidable
OBJECT
❖ OBJECT is the subject matter
REQUISITES:
❖ it must be within the commerce of man;
❖ It must be licit, or not contrary to law, morals, good
customs, public policy, or public order;
❖ it must be possible ; and
❖ It must be determinate as to its kind

❖ Contracts on future inheritance are not allowed except in

cases expressly authorized by law
CAUSE
❖ CAUSE is the “why of the contract,” the immediate and most
proximate purpose of the contract, the essential reason which
impels the contracting parties to enter into it and which
explains and justifies the creation of the obligation through
such contract
REQUISITES:
❖ it must exist;
❖ it must be true; and
❖ it must be licit
❖ Onerous contracts - cause is the prestation or promise of a
thing or service by the other
❖ Remuneratory contracts - cause is the service or benefit
which is remunerated
❖ Gratuitous contracts - cause is the liberality of the benefactor
❖ Motive is different from cause
❖ Contracts without cause confer no right and produce no legal
effect
❖ Cause presumed to exist and lawful unless debtor proves the
contrary
❖ Lesion or inadequacy of cause does not invalidate a contract
unless there has been fraud, mistake or undue influence
 Defective Contracts

Rescissible Voidable
01 Valid but by reason of Valid until annulled 02
economic injury or damage, unless there has been
may be rescinded ratification

Unenforceable Void
03 Cannot be sued upon or Absolutely null and void, 04
enforced unless ratified no effect at all and cannot
be ratified
 RESCISSIBLE CONTRACTS
❖ REQUISITES:
(1) Contract must be validly agreed upon (Article 1380)
(2) There must be lesion or pecuniary prejudice to one of the
parties or to a third person (Article 1381)
(3) Rescission must be based on cases established by law
(Articles 1380, 1381, 1382)
(4) Party asking for rescission must be able to return what he/she
is obliged to restore by reason of the contract (Article 1385, par 1)
(5) Object of the contract must not be legally be in the possession
of third persons who did not act in bad faith (Article 1385, par 2)
(6) Period for filing the action must not have prescribed (Article
1389)
❖ The following are rescissible contracts (Articles 1381 and 1382):
(1) contracts entered into in behalf of wards
(2) contracts agreed upon in representation of absentees
(3) contracts undertaken in fraud of creditors
(4) contracts which refer to things under litigation
(5) other instances
(6) payments made in a state of insolvency

❖ Action for rescission is subsidiary (Article 1383)

❖ Rescission shall only be to the extent necessary to cover the

damages caused (Article 1384)
❖ Rescission creates obligation of mutual restitution (Article 1385)

❖ The purchaser in bad faith, who acquired the object of the contract
alienated in fraud of creditors, must return the same of the sale is
rescinded and should it be impossible to return it, due to any cause,
he/she must indemnify the creditor (Article 1388)

❖ Action to claim rescission must be commenced within 4 years from

the date the contract was entered into (Article 1389)
EXCEPTIONS:
(1) for persons under guardianship, the period shall begin
from the termination of incapacity
(2) for absentees, from the time the domicile is known
 VOIDABLE CONTRACTS
❖ Contracts that are voidable or annullable (Article 1390):
(1) when either party is incapable of giving consent to a contract
(2) when consent is vitiated by mistake, violence, intimidation,
undue influence, fraud

❖ Voidable contracts are binding, unless annulled by a proper court

action and ratifiable (Art. 1390)

❖ Prescription for action of annulment: 4 years to begin: (Article 1391):

> in case of intimidation, violence or undue influence, from the
time defect of consent ceases
> in case of mistake or fraud, from the time of discovery
 > entered into by minors or those incapable of giving consent,
from the moment guardianship ceases

❖ Ratification extinguishes action for annulment (Article 1392)

❖ Ratification may be express or tacit (Art. 1393)

➢ tacit ratification – the execution of an act which necessarily implies
an intention to waive his/her right by the party, who, knowing of
the reason which renders the contract voidable, has a right to
invoke annulment

❖ Ratification may be effected by the guardian of the incapacitated

person (Article 1394)
❖ Ratification does not require the conformity of the person who does
not have a right to bring an action for annulment (Article 1395)

❖ Ratification cleanses the contract from all its defects from the moment
it was constituted (Article 1396)

❖ Who may institute an action for annulment (Article 1397):

➢ by all who are obliged principally or subsidiarily
EXCEPT:
(1) persons capable cannot allege the incapacity of those with
whom they contracted
(2) persons who exerted violence, undue influence, who
employed fraud or caused mistake cannot base an action for
annulment on these flaws
❖ Annulment gives rise to the responsibility of restoring to each other
things subject matter of the contract, with fruits, price with its interest,
except in cases provided by law (Article 1398)

❖ When defect consists in incapacity of a party, incapacitated persons

not obliged to make restitutions except insofar as he/she has been
benefited by the thing or price received by him/her (Article 1399)

❖ If objects cannot be returned because these were lost through fault of

person obliged to return, he/she shall return the fruits received and the
value of the thing at the time of the loss, with interests from the same
date (Article 1400)
❖ As long as one of the contracting parties does not restore what in
virtue of the annulment decree he/she is bound to return, the other
cannot be compelled to comply with what is incumbent upon him/her
(Article 1402)

❖ Extinguishment of action (Article 1401):

➢ if object is lost through the fault or fraud of person who has the
right to institute the proceedings, the action is extinguished
➢ if action is based on incapacity of any one of contracting parties,
loss of thing shall not be an obstacle to the success of the
action,unless loss or fraud took place through the plaintiff’s fault
 UNENFORCEABLE CONTRACTS
❖ Unenforceable contracts cannot be enforced unless it is first ratified in
the manner provided by law

❖ An unenforceable contract does not produce any effect unless it is

ratified

❖ Unenforceable contracts cannot be sued upon unless ratified

❖ As to defectiveness, an unenforceable contract is nearer to absolute

nullity than voidable or rescissible contracts.
❖ There are 3 kinds of unenforceable contracts (Article 1403):
(1) unauthorized contracts
(2) those that fail to comply with the Statute of Frauds
(3) those where both parties are incapable of giving consent to a
contract

❖ UNAUTHORIZED CONTRACTS
When a person enters into a contract for and in the name of another,
without authority to do so, the contract does not bind the latter, unless
he/she ratifies the same. The agent, who has entered into the contract
in the name of the purported principal, but without authority from
him/her, is liable to third persons upon the contract
❖ STATUTE OF FRAUDS
➢ Meaning: descriptive of statutes which require certain classes of
contracts to be in writing
➢ Purpose: to prevent fraud and perjury in the enforcement of
obligations depending for their evidence upon the unassisted
memory of witnesses by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party
to be charged
➢ The statute does not deprive the parties the right to contract with
respect to matters therein involved, but merely regulates the
formalities of the contract necessary to render it unenforceable.
The statute of frauds, however, simply provides for the manner in
which contracts under it shall be proved. It does not attempt to
make such contracts invalid if not executed in writing but only
makes ineffective the action for specific performance.
 ➢ The statute of frauds is not applicable to contracts which are
either totally or partially performed

❖ SPECIFIC AGREEMENTS UNDER THE STATUTE OF FRAUDS

(1) Performance within a year
(2) Guaranty of another's debt
(3) Consideration of marriage
(4) Sale of personal property at a price not less than Php500
(5) Lease or sale of real property for a longer period than 1 year
(6) Representation as to credit
❖ INCAPACITATED PARTIES
Ratification by one party converts the contract into a voidable contract
- voidable at the option of the party who has not ratified

❖ Requisites for a person to contract in the name of another:

(a) he/she must be duly authorized (expressly or impliedly) or
(b) he/she must have by law a right to represent him (like the
guardian, or the administrator) or
(c) the contract must be subsequently ratified (expressly or
impliedly, by word or by deed)

❖ Two ways of ratification of contracts infringing the Statute are:

(1) failure to object to the presentation of oral evidence;
(2) acceptance of benefits under them
❖ If the law requires a document or other special form, as in the acts and
contracts enumerated in the following article, the contracting parties
may compel each other to observe that form, once the contract has
been perfected. This right may be exercised simultaneously with the
action upon the contract. (Article 1357)

❖ The defense of the Statute is personal to the party to the agreement.

Thus, it cannot be set up by strangers to the agreement (Article 1408)
 VOID CONTRACTS
❖ The following contracts are void or inexistent from the beginning
(Article 1409):
(1) Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy
(2) Those which are absolutely simulated or fictitious
(3) Those whose cause or object did not exist at the time of the
transaction
(4) Those whose object is outside the commerce of men
(5) Those which contemplate an impossible service
(6) Those where the intention of the parties relative to the
principal object cannot be ascertained
(7) Those expressly prohibited or declared void by law
 (8) Those which are the direct results of previous illegal contracts
(Article 1422)

❖ The action or defense for declaration of the inexistence of a contract does

not prescribe (Article 1410)

❖ Where contract is illegal and act constitutes a criminal offense (Article

1411):
➢ Where both parties are in pari delicto - the parties shall have no
action against each other; both shall be prosecuted; the thing or
price of the contract shall be confiscated in favor of the government
➢ Where only one party is guilty - the guilty has no action against the
other party and shall be prosecuted but the innocent may claim
what he/she has given and shall not be bound to comply with his/her
promise
❖ Where contract is illegal but act does not constitute a criminal offense
(Article 1412):
➢ Where both parties are in pari delicto - neither party may recover
what he/she has given; neither party may demand the performance
of the other’s undertaking
➢ Where only one party is guilty - the guilty loses what he/she has
given; guilty cannot ask for fulfillment of the other’s undertaking but
the innocent may demand the return of what he/she has given;
innocent cannot be compelled to comply with his/her promise

❖ Where contract entered into is for illegal purpose but is repudiated by

one of the parties before the purpose has been accomplished or before
any damage has been caused to a third person, the court may allow the
repudiating party to recover if the public interest will be subserved by
allowing recovery (Article 1414)
❖ Where one of the parties is incapacitated, the court may allow recovery or
money or property delivered by the incapacitated person if the interest of
justice so demands (Article 1415)

❖ Where contract is not illegal per se but merely prohibited and prohibition is
designed for the protection of the plaintiff, the plaintiff may recover what
he/she has paid or delivered if public policy is enhanced (Article 1416)

❖ Amount paid in excess of ceiling price may be recovered (Article 1417)

❖ In the case of divisible contracts, if the illegal terms can be separated from
the legal ones, the latter may be enforced (Article 1420)

❖ The defense of illegality of contracts is not available to third persons

whose interests are not directly affected (Article 1421)