CONTRACTS Stages in the life of a contract



any other person specially disqualified by law.

Simulation of a contract Kinds of simulation:

1. 2. 3.
1. 2. 3. 4.

Preparation/Generation Perfection/Birth Consummation/Death

1. 2.

Absolute - no real transaction is intended; Effect: simulated contract is inexistent. Relative - the real transaction is hidden; Effect: the apparent contract is void, but the hidden contract is valid if it is lawful and has the necessary requisites. : as to third persons without notice - the apparent contract is valid on the principle of estoppel. the contract confers no right and produces no legal effect does not render the contract void the contract is null and void the contract is void unless the parties can show that there is another cause which is true and lawful does not invalidate the contract unless: • there is fraud, mistake or undue influence • when the parties intended a donation or some other contract.

Characteristics of Contracts: (ROMA) Relativity (Art. 1311) Obligatoriness & Consensuality (Art. 1315) Mutuality (Art. 1308) Autonomy (Art. 1306)

Effect of: Absence of cause Failure of cause

Stipulation pour Autrui - stipulation in favor of a 3rd party. Requisites: 1. The stipulation must be part, not whole of the contract; 2. the contracting parties must have clearly and deliberately conferred a favor upon a 3rd person; 3. the 3rd person must have communicate his acceptance; 4. neither of the contracting parties bears the legal representation of the 3rd party. General Rule: Contracts (except real contracts) are perfected from the moment there is a manifestation of concurrence between the offer and the acceptance regarding the object and the cause. Except: Acceptance by letter or telegram which does not bind the offerror except from the time it came to his knowledge. Theories applied to perfection of contracts: Form of Contracts Rules: Illegality of cause Falsity of cause


1. 2. 3. 4.

Manifestation theory - the contract is perfected from the moment the acceptance is declared or made; Expedition theory - the contract is perfected from the moment the offeree transmits the notification of acceptance to the offerror; Reception theory - the contract is perfected from the moment that the notification of acceptance is in the hands of the offerror; Cognition theory - the contract is perfected from the moment the acceptance comes to the knowledge of the offerror. This is the theory adopted in the Philippines.

1. 2.

Persons incapacitated to give consent:



Unemancipated minors; Except: • Contracts for necessaries; • Contracts by guardians or legal representatives; • Contracts where the minor is estopped to urge minority through his own misrepresentation; • Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years of age.

2. 3.

Insane or demented persons unless the contract was entered into during a lucid interval; Deaf-mutes who do not know how to write.

The following may not acquire by purchase, even by public or judicial auction, in person of though the mediation of another:

Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. Contracts must be in a certain form when the law requires that a contract be in some form to be: • valid; • enforceable; • for the convenience of the parties. The parties may compel each other to reduce the verbal agreements to writing except: • Solemn contracts such as the following: a. Donations of real estate or of movables if exceeding Ps 5,000; 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 immovables are contributed f. Stipulation limiting carrier’s liability to less than extraordinary diligence g. Contracts of antichresis h. Sale of vessels Note: in such case, if the contract is not in writing it is VOID • Real contracts that require delivery for perfection. • In contracts under the Statute of Frauds where the party sued makes a timely objection to the absence of a written memorandum.

1. 2. 3. 4. 5.

the guardian, with respect to the property of his ward; agents, with respect to the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; executor or administrator, the property of the estate under administration; public officers and employees, with respect to the properties of the government, its political subdivisions, GOCCs, that are entrusted to them; judges, justices, prosecuting atty.’s, clerks of courts, etc., the property in custogia legis; and

Reformation of instruments: Requisites:


Meeting of the minds to the contract;

2. 1. 2. 3. 1. 2. 3. 4.

The true intention is not expressed in the instrument by reason of mistake, accident, relative simulation, fraud, inequitable conduct (MARFI). Cases when there can be no reformation: Simple, unconditional donations inter vivos; Wills; When the agreement is void.


Clear and convincing proof of MARFI.

Classes of Defective Contracts: (RUVI) Rescissible Unenforceable Voidable Void or Inexistent COMPARATIVE TABLE OF DEFECTIVE CONTRACTS: 1. 2. 3. 4. VOID defect is caused by lack of essential elements or illegality not cured by prescription cannot be ratified not binding 1. VOIDABLE defect is caused by vice of consent


2. 3. 4.

cured by prescription can be ratified binding until annulled

2. 3. 4.

RESCISSIBLE defect is caused by injury/ damage either to one of the parties of to a 3rd person cured by prescription need not be ratified binding unless rescinded

UNENFORCE-ABLE defect is caused by lack of form, authority, or capacity of both parties 2. not cured by prescription 3. can be ratified 1. 4. binding unless the defect is raised against enforcement.

RESCISSIBLE CONTRACTS Contracts which may be rescinded:

(Art. 1191)

1. 2. 3.

1. 2. 3. 4. 5. 6.

those entered into by guardians where the ward suffers lesion of more than ¼ of the value of the things which are objects thereof; 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; those undertaken in fraud of creditors when the latter cannot in any manner claim what are due them; 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; all other contracts especially declared by law to be subject to rescission; payments made in a state of insolvency on account of obligations not yet enforceable;

Action by the contracting parties even by a 3rd party; based on lesion/fraud of creditors; courts cannot grant periods for compliance

1. 2. 3.

Action only by the injured party; based on nonfulfillment of the obligation; courts may grant periods

VOIDABLE CONTRACTS Causes of extinction of action to annul:


Prescription • from:

the action must be commenced within 4 years • the time the incapacity ends; • the time the violence, intimidation or undue influence ends; • the time the mistake or fraud is discovered.

Circumstances denominated as badges of fraud:

2. Ratification

1. 2. 3. 4.
5. 6.

consideration of the conveyance is inadequate or fictitious; transfer was made by a debtor after a suit has been begun and while it is pending against him; sale upon credit by an insolvent debtor; transfer of all his property by a debtor when he is financially embarrassed or insolvent; transfer is made between father and son, where there are present some or any of the above circumstances; failure of the vendee to take exclusive possession of the property; Distinctions: RESCISSION RESOLUTION


a. b. c.

there must be knowledge of the reason which renders the contract voidable; such reason must have ceased;

the injured party must have executed an act which expressly or impliedly conveys an intention to waive his right. 3. 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. UNENFORCEABLE CONTRACTS Kinds of unenforceable contracts: 1. those entered into in the name of another by one without or acting in excess of authority; 2. those where both

3. 4.

parties are incapable of giving consent; those which do not comply with the Statute of Frauds.

4. 5. 1. 2.

Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; Those expressly prohibited or declared void by law;

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. Agreement for the sale of goods, etc. at a price not less than Ps500.00 5. Contracts of lease for a period longer than one year; 6. Agreements for the sale of real property or interest therein; 7. Representation as to the credit of a 3rd person. Modes of Ratification: 1. For contracts infringing the Statute of Frauds: • expressly • impliedly - by failure to object to the presentation of oral evidence to prove the contract, or by the acceptance of benefits under the contract. 2. If both parties are incapacitated, ratification by their parents or guardians shall validate the contract retroactively. VOID OR INEXISTENT CONTRACTS

The following contracts are inexistent: Those which are absolutely simulated or fictitious; Those whose cause or object did not exist at the time of the transaction. CONTRACTS Art 1305 ELEMENTS OF A CONTRACT a. Essential Elements 1.Consent 2.Subject Matter 3.Cause or Consideration b. Natural Elements- presumed to exist, unless the contrary is stipulated Ex. Warrants against eviction and against hidden defects c.

The following contracts are void:

Accidental Elements – existence of such is dependent on the agreement of the parties.

1. 2. 3.

Those whose cause, object or purpose is contrary to law, morals good customs, public order or public policy; Those whose object is outside the commerce of men; Those which contemplate an impossible service;

Classification of Contracts a. According to perfection or formation 1. Consensual 2. Real-perfected by delivery 3. Formal or Solemn


According to cause of equivalence of the value of prestations: 1. Onerous 2. Gratuitous or Lucrative 3. Remunerative According to Importance or dependence of one upon another 1. Principal – can stand alone 2. Accessory – depends upon the existence of another contract 3. Preparatory – here, the parties do not consider the contract as an end by itself, but as a means thru which future transaction or contracts may be made Ex. Agency, partnership According to the parties obligated 1. Unilateral 2. Bilateral According to their Name or Designation 1. Nominate 2. Innominate According to the risk of fulfillment 1. Commutative 2. Alienatory According to the time of performance or fulfillment 1. Executed- one completed at the time the contract is entered into 2. Executory – one where the prestations are to be complied with at some future time According to subject matter 1. Contracts involving things 2. Contracts involving rights or credit 3. Contracts involving services According to obligations imposed and required by law 1. Ordinary 2. Institutional-like contract of marriage According to the evidence required for its proof 1. Those requiring merely oral or parol evidence 2. Those requiring written proof According to the number of persons actually and physically entering into the contracts 1. Ordinary – two parties are represented by different persons 2. Auto Contracts –where only one person represents two opposite parties, but in different capacities According to the number of persons who participated in the drafting of the contract 1. Ordinary 2. Contract of Adherence According to the nature of the contract 1. Personal 2. Impersonal

Art 1307 Four Kinds of Innominate Contracts a. Du ut des (I give that you may give) b. Do ut facias (I give that you may do) c. Facio ut des (I do that you may give) d. Facio ut facias (I do that you may do)


Art 1308-1310 MUTUALITY OF CONTRACTS • The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. • The validity or fulfillment may be left to the will of a third person. • The validity or fulfillment may be left to chance.



Art 1311 This principle stresses the Principle of Relativity. Contracts are generally effective only between the parties, their assigns and their heirs. Exceptions: a. Where the obligation arising from the contract are not transmissible by their nature, by stipulation, or by provision of law. b. Where there is stipulation pour atrui (a stipulation in favor of a third party) c. Where a third person induces another to violate his contract d. Where, in some cases, third persons may be adversely affected by a contract where they did not participate. e. Where the law authorizes the creditor to sue on a contract entered into by his debtor.






Art 1312 A real right binds the property over which it is exercised. Exception to the general rule that a contract binds only the parties.


Art 1313 Right of defrauded creditor.


Art 1314 Requisites before a third person in this article can be held for damages a. Existence of a valid contract b. Knowledge on the part of the third person of the existence of the contract c. Interference by the third person without legal justification or excuse


STAGES OF A CONTRACT a. Preparation b. Perfection c. Consummation (or death or termination) Basic Principles or Characteristics of a Contract a. Freedom to stipulate b. Obligatory force and compliance in good faith c. Perfection by mere consent d. Both parties are mutually bound e. Relativity Art 1306 – Freedom or autonomy of contract

Art 1315-1316 Perfection of contracts

Art 1317 Requisites for a Person to Contract in the Name of Another a. He must be duly authorized (expressly or impliedly) b. Or he must have by law a right to represent him c. Or the contract must be subsequently ratified

Art 1318 Requisites of Contracts a. Consent (Art 1319-46) b. Object (Art 1347-1349) c. Cause (Art 1350-55)

d. e. Art 1319 Definition of Consent -Art 1319,first paragraph Requisite of Consent a. There must be two or more parties b. The parties must be capable or incapacitated c. There must be no vitiation of consent d. There must be no conflict between what was expressly declared and what was really intended e. The intent must be declared properly Requisites for the meeting of minds a. An offer that must be certain b. And an acceptance must be unqualified and absolute • • • Concurrence of offer and acceptance (Art 1319-26) Legal capacity of contracting parties (Art 1327-29) Characteristics of Consent (Art 1330-46) Art 1332

The error must be excusable The error must be a mistake of fact

Kinds of Mistake a. Mistake as to the object 1. Mistake as the identity of the thing 2. Mistake as to the substance of the thing 3. Mistake as to the conditions of the thing 4. Mistake as to the quantity of the thing b. Mistake as to person 1. Mistake must be either with regards to the identify or with regard to the qualification of one of the contracting parties 2. Such identity or qualification must have been the principal consideration for the celebration of the contract

Burden of proof in case of mistake Art 1333 Effect of knowledge of risk

Art 1320 Forms of Acceptance

Art 1334 Mistake of Law Is that which arises from an ignorance of some provision of law, or from an erroneous interpretation of its meaning, or from an erroneous conclusion as to the legal effect of the agreement, on the part of one of the parties. Requisites: a. There must be mutual error b. The error must refer to the legal effect of the agreement c. The real purpose of the parties is frustrated Art 1335-1336 Violation refer to physical coercion Intimidation refers to moral coercion Requisites for violence to vitiate consent a. Employment of serious or irresistible force b. It must have been the reason why the contract was entered into Requisites for intimidation to vitiate consent a. Reasonable and well-grounded fear b. Of an imminent and grave evil c. Upon his person, property, or upon the person of property of his spouse, descendents or ascendants d. It must have been the reason why the contract was entered into e. The threat must be an unjust act, an actionable wrong Art 1337 Requisites for undue influence to vitiate consent a. Improper advantage b. Power over the will of another c. Deprivation of the latter’s will of a reasonable freedom of choice Art 1338-1341 Kinds of Fraud a. Fraud in the celebration of the contract 1. Dolo Causante or causal fraud (Art 1338) 2. Dolo Incidente of incidental fraud b. Fraud in the performance of the obligations stipulated in the contract

Art 1322 Acceptance of an Offer made thru an agent

Art 1323 Other instances when the offer becomes ineffective a. When the offeree expressly or impliedly rejects the offer b. When the offer is accepted with qualification or condition c. When before acceptance is communicated, the subject matter becomes illegal or impossible d. When the period of time given to the offeree within which he must signify his acceptance has already lapsed e. When the offer is rejected in due tome

Art 1324 Option Contract Option- it is a contract granting a person the privilege to buy or not to buy certain objects at anytime within the agreed period at a fixed price Perfection of Option When there is a meeting of minds on the option Art 1325-1326 If the advertisement contains all the specific particular needed in a contract, it is a definite offer. If important details are left out, the advertisement is not a definite offer, but a mere invitation to make an offer. Art 1327 in relation to Art 1329 Who cannot give consent. Art 1328 Voidable contracts by reason of incapacity Art 1330 This article enumerates causes or vices of consent. Art 1331 in relation to Art 1333 Mistake It is a false belief about something. Requisites for mistake to vitiate consent a. Object of the contract b. The condition which principally proved or induced one of the parties c. Identify or qualifications, but only if such was the principal cause of the contract.

Requisites of Dolo Causante a. The fraud must be material and serious b. The fraud must have been employed by one of the contracting parties, because if both committed fraud, the contract would remain valid

c. d.

There must be a deliberate intent to deceive to induce The other party must have relied on the untrue statement, and must himself not be guilty of negligence in ascertaining the truth

Art 1356 Meaning of form of contracts -Refers to the manner in which a contract is executed or manifested Rules regarding from of contracts (Art 1356) Art 1357-1358 Principles regarding formalities for the efficacy of a contract a. Art 1357 and Art 1358 do not require the execution of a contract either in a public or private instrument in order to validate enforce it but only to ensure its efficacy, so after its existence has been admitted, the party bound may be compelled to execute the necessary document b. Even where the contract has not been reduced to the required form, it is still valid and binding as far as the parties are concerned c. From the moment one of the contracting parties invokes the provisions of Art 1357 and 1358by means of a proper action, the effect is to place the existence of the contract in issue, which must be resolved by the ordinary rules of evidence d. Art 1357 does not require that the action to compel the execution of the necessary document must precede the action upon the contract e. However, although the provisions of Art 1357 in connection with those of Art 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfillment thereof, yet from the moments when any of the contracting parties invokes said provisions, it is evident that under them the execution of the required document must precede the determination of the other obligations derived from the contract

Art 1342-1344 Speaks about misrepresentation Art 1345-1346 Simulation Simulation of a Contract defined It is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) Or which is different from the true agreement relative simulation. Kinds a. b. Absolute; Effect; the contract is void Relative; Effect; the parties are bound to the real or true agreement excepta. If the contract should prejudice third persons b. Or if the purpose is contrary to law, morals, public order, policy or good customs

Requisites a. An outward declaration of will difference from the will of the parties b. The false appearance must have been intended by mutual agreement c. The purpose is to deceive third persons Art 1347-1349 Objects (Subject Matter) of a contract A thing or a service Requisites a. The thing or service must be within the commerce of man b. Must be transmissible c. Must not be contrary to law, morals, good customs, public order, or public policy d. Must not be impossible e. Must be determinate as to its kind or determinate without the need of a new contract or agreement CAUSE OF CONTRACTS Art 1350 “Cause” defined -It is the essential and impelling reason why a party assumes an obligation Art 1351 Motive – is the purely personal or private reason which a party has in entering into a contract Motive vs. Cause Motive a. May vary although he enters into the same kind of contract b. May be unknown to the other c. The presence of motive Cause a. b. c. Always the same Always known Cannot cure the absence of cause

CHAPTER 4 REFORMATION OF INSTRUMENT Reformation – is that remedy 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, or inequitable contract, or accident the instrument fails to express such agreement or intention. Requisites for reformation a. There is a meeting of minds of the parties to the contract b. The written instrument does not express the true agreement or intention of the parties c. The failure to express the true intentions is due to mistake, fraud, inequitable conduct or accident d. The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings e. There is clear and convincing evidence of the mistake, fraud, inequitable conduct, or accident Reformation vs. Annulment In reformation, there has been a meeting of the minds of the parties, hence, a contract exists while in annulment, there has been none, the consent of one of the parties being vitiated by mistake, etc.

Art 1360-69 Art 1360 Rule in case of conflict Art 1366 Instances when reformation is not allowed

Art 1352-1355 Requisites for cause a. It must be present b. It must be true c. It must be lawful



Definition of interpretation of contract -Is the determination of the meaning of the terms or words used by the parties in their contract Art 1371-79 (provisions) Kinds of defective contracts a. Rescissible (Art 1380-89) b. Voidable (Art 1390-1402) c. Unenforceable (Art 1403-1408) d. Void or Inexistent (Art 1409-1422) Art 1381 in relation to Art 1382 Meaning of rescissible contracts -Those validly agreed upon because all the essential elements exists but in some cases established by law, the remedy of rescission is granted in the interest of equity Requisites of rescission a. The contracts must be validly agreed upon b. There must be lesion or pecuniary prejudice to one of the parties or to a third person c. The rescission must be based upon a case especially provided by law d. There must be no other legal remedy to obtain reparation of the damages e. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract f. The object of the contract must not legally g. The object of the contract must not legally be in the possession of third persons who did not act in bad faith h. The period for filing the action of rescission must have not prescribed Meaning of Rescission -Remedy granted by law to the contracting parties and sometimes even to third persons in order to secure reparation of damages caused by them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of the said contract. Art 1385 Effects of rescission

c. d. e.

Rescissibility of the contract is based on equity Not susceptible of ratification Are different form

Art 1390 Voidable contracts Art 1391 Prescription Art 1392-96 Concept of Ratification -By virtue of which efficacy is given to a contract which suffers from a vice of curable nullity Requisites for ratification a. The contract should be tainted with a vice which is susceptible of being cured b. The confirmation should be effected by the person who is entitled to do so under the law c. It should be effected with knowledge of the vice or defect of the contract d. The cause of the nullity or defect should have already disappeared Art 1397 in relation to Art 1391 -Who and when may an action for annulment of contract be instituted Art 1398-99 Effects of annulment Art 1400-02 - Effect pf failure to make restitution -Where loss is due to fault of plaintiff -Where loss is due to fault of defendant -Where loss is due to fortuitous event CHAPTER 8

Art 1324 Prescription

UNENFORCEABLE CONTRACTS Meaning of unenforceable contracts -Those that san not be enforced in court or sued upon by reason of defects provided by law until and unless they are ratified according to law. Kinds: a. b. c. Those entered into in the name of another by one without or acting in excess of authority Those that do not comply with the statute of fraud Those where both parties are incapacitated of giving consent

VOIDABLE CONTRACTS Definition -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, violence, intimidation, undue influence, or fraud Characteristics a. Their defect consist in the vitiation of consent of one of the contracting parties b. They are binding until they are annulled by competent court c. They are susceptible of convalidation by ratification or by prescription Voidable vs. Rescissible Contracts Voidable a. b. c. d. e. Defect is intrinsic Contract is voidable even if there is no damage or prejudice Annulability of the contract is based on law Susceptible of ratification The causes of annulment The causes of rescission

Unauthorized contracts -Those entered into in the name of another person by one who has been given no authority or legal representation on who has acted beyond his powers. Characteristics of Unenforceable Contracts a. They can not be enforced by a proper action in court b. They are susceptible of ratification c. They can not be assailed by third persons Unenforceable vs. Rescissible a. An unenforceable contract cannot be enforced by a proper action in court, while a rescissible contract can be enforced, unless it is rescinded b. The causes for the unenforceable character of the former are different from the causes fro the rescissible character of the latter c. The former is susceptible of ratification, while the latter is not

Rescissible a. Defect is extrinsic b. Contract is not rescissible id there is no damage or prejudice


The former cannot be assailed by third persons, while the latter may be assailed by third persons who are prejudiced


The things or the price of the contract, as the effects of the crime shall be confiscated in favor of the government

Unenforceable vs. Voidable a. An unenforceable contract cannot be enforced by a proper action in court, while a voidable contract can be enforced, unless it is annulled b. The causes for the unenforceable character of the former are different from the causes for the voidable character of the latter STATUTE OF FRAUDS Purpose -Not only to prevent fraud but also to guard against the mistakes of honest men by requiring that certain agreement specified must be in writing. Application a. Not applicable in actions which are neither for damages because of a violation of a contract, nor for the specific performance thereof b. Applicable only to executory contracts and not to contracts which are totally or partially performed c. Not applicable where the contract is admittedly expressly, or impliedly by the failure to deny specifically its existence, no further evidence thereof being required in such case. d. Applicable only to the agreements enumerated therein e. Not applicable where a writing does not express the true agreement of the parties f. It does not declare the contracts infringing it are void but merely unenforceable g. The defense of the statute of frauds may be waived h. The defense of the statute of frauds is personal to the parties and cannot be enforced by strangers to the contract Effect of Non-Compliance -The contract or agreement is unenforceable by action Ratification of Unenforceable Contracts Either by: a. the failure of object to the presentation of oral existence to prove the same c. The acceptance of benefits under them Art 1404-1408 (provisions)

Where only one party is guilty -The rule in paragraph 1 of Art 1411 applies only to the guilty party or the more guilty party Exceptions to the principle of pari delicto Art 1413-1419

CHAPTER 9 VOID OR INEXISTENT CONTRACTS Void Contracts -Those, which of certain defects generally produce no effect at all Inexistent Contracts -Refer to agreements which lack one or some or all the elements or do not comply with the formalities which are essential for the existence of a contract Characteristics of a Void or Inexistent Contracts a. Generally, it produces no effect b. It cannot be ratified c. The right to set up the defense of legality cannot be waived d. The action or defense for the declaration of its inexistence does not prescribe e. The defense of illegality is not available to third persons whose interests are not directly affected f. It cannot give rise to a valid contract Art 1410 -Imprescriptibility of void or inexistent contract Art 1411-1412 Where both parties are in pari delicto a. The parties shall have no action against each other b. Both shall be prosecuted

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