PART II CONTRACTS

Definition of a Contract

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

Different phases or stages in the life of a contract

1 1.
Preparation Preliminary to formation
2 2.
Perfection birth of the contract
3 3.
Consummation - fulfillment
Essential characteristics of Contracts
1 1.
Obligatory force must be complied with in good faith
2 2.
Autonomy parties are free to enter such stipulations, clauses,
terms and conditions
Clauses and condtions must not be contrary to:

3 3.

4 4.

LAW
Morals
Good Customs
Public Order
Public Policy
Mutuality contract must bind both parties

Determination can be left to third party, whose decision shall

be binding only when communicated to both parties

Unless such determination be evidently inequitable

Relativity takes effect only bet parties, their assigns and heirs

Stipulation pour autrui accepted by third party

Where third persons comes into possesion of the object of

contract creating real rights

Where contract is to defraud a third person

Where third person induces a contracting party to violate his contract
a a.

Different Classes of Contracts

According to perfection
Consensual Perfected by mere agreement of the parties
Real Requires not only consent, but also the delivery of the
object

According to form

 Common Do not require particular form

Formal Those which require particular form, like donation,
mortgage
According to nature of vinculum
Unilateral Obligation of one party only
Bilateral Reciprocal obligations for both parties
According to cause
Onerous Giving of an equivalent or compensation
Gratuitous Given without compensation, just pure liberality
According to risks involved
Commutative Prestation is pecuniarily appreciable and
determined at the moment of celebration of contract
Aleatory Pecuniarily appreciable but not yet determined at
the moment of celebration, since it depends upon the happening
of an uncertain event. Ex. Insurance
According to name
Nominate with specific names or designation in law
Innominate no specific name
Essential Requisites of Contracts

Consent of the contracting parties

Object certain subject matter of the contract

Cause of the obligation which is established

Elements of Consent

Concurrence of the offer and the acceptance

o Definite Offer that may be exactly fixed
o Assent to the terms without qualifications or conditions
o Conveyed before the death, civil interdiction, insanity, or insolvency
o Qualified acceptance is a counter offer
o Perfected when acceptance comes to knowledge of offeror
o Offer can be withdrawn anytime before acceptance, unless option
is founded on consideration
o If offer made thru agent, accepted when communicated to the
agent

By parties with legal capacity to contract

o Not minors, insane or demented, deaf-mutes who do not know how

to write, incompetents under guardianship, civil interdiction
o Minor can be liable if he misrepresents his age
o Prohibited by law from entering into contracts

o
o
o
o
o
o
o
o
o
o
o

Husband and Wife to each other

o
Insolvents
o
Persons prohibited from giving donations
o
Adultery, concubinage
o
In consideration of criminal offense
o
Made to public officer, spouse, by reason of office
o
Persons with fiduciary relations
o
Guardian, for property under his guardianship
o
Agents, for property entrusted to them
o
Executor/administrator
Public officers, judges, for property under their jurisdiction
o

Intelligently, freely given, consciously

- Vices of the will

Mistake - False notion of a thing or a fact materrial to

the contract
Simple mistake gives rise to correction

Render voidable in following cases:

Mistake as to object of the contract

o Identity of thing, Substance, Condition
Quantity only if principal reason
o o
Mistake of Law

o Will not make it voidable except:

Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated

Mistake as to person
o If such identity or qualification is principal
cause of contract

Violence Employment of external physical force,

irresistible and serious to wrest consent

Intimidation Moral compulsion to influence another

to give his consent thru fear of imminent or grave evil
o o
Force employed must be serious or
irresistible

o o
Determining cause for the party in entering
into the contract

Undue Influence Improper advantage of his power

over the will of another depriving the latter of reasonable
freedom of choice

Confidential, Family, Spiritual and other

relations or

Person influenced suffering from mental

weakness, ignorant, financial distress

Fraud Insidious words or machinations of one of the

contracting parties induced the other to enter into a
contract, which without them he would not have agreed;
Failure of one party to disclose facts to other party when
there is a duty to reveal them
Dolo incidente (Incidental Fraud) - committed in the
performance of pre-existing obligation, remedy is
damages
Dolo causante (Causal Fraud) Fraud employed at the time
of the execution of a contract in order to secure consent,
remedy is annulment bec of vitiation of consent
o o
Must be employed by one of the contracting
parties,
o o
but not by both or by third parties
o o
Must be Serious
o Must have induced the other party to enter into
the contract

Vices of Declaration
Simulated Contracts
1. Absolute
Contracting parties do not intend to be bound by the
contract at all

Void
2. Relative
Contracting parties conceal their true intentions
Real agreement binding on the parties if it does not
prejudice third person

Objects

Thing, right or service which is the subject matter of the obligation

created or established

o
o
o
o
o

Thing or service must be within the commerce of man

o
The law prohibits future inheritance as object of contract
o
Transmissible and can be appropriated
o
Not contrary to Law Moral Good Conduct Public Order
Public Policy
o
Real or possible
o
Determinate or determinable
Cause

Essential reason why the parties enter into the contract

o Cause should be in existence

o Licit or lawful
o True
Interchangeable with consideration, but not same as motive
o General rule: Particular motive of the party in entering into a
contract are not material. Except: When it predetermines the
purpose of the contract

Form

Whatever may be the form, Contract shall be obligatory on all

provided all the essential requisites are present

Two exceptions:

When Law requires a certain form for validity

When Law requires form for enforcement

Must appear in Writing to be valid:

o o
o o

Donation exceeding P 5,000

Sale of piece of land or interest therein by an agent

o o
Antichresis - Creditor acquires rights to fruits of
immovable but applying to payment of interest
o o
Agreement regarding payment of interest

Must appear in Public Instrument to be valid:

Donations of immovable property

Partnership where immovable or real rights are contributed

Must appear in Public Instrument for Enforcement

Creation, transmission, modification, sales or

extinguishments of real rights over immovable properties

Cession, repudiation, or renunciation of hereditary

rights, or those of conjugal partnership of gains

Power to administer property

Cession of actions or rights proceeding from an act appearing in
a public document

Reformation

When the true intention of the parties are not expressed in the
instrument, one of the party may ask for the instrument to be
changed so that true intention may be expressed.

Requisities

Must be a meeting of the minds of the parties

True intention is not expressed in the instrument

Failure due to mistake, fraud, inequitable conduct or accident

What may be reformed

Mutual mistake of parties cause failure to disclose real
agreements

One party mistaken and the other acted fraudulently or
inequitably

One party was mistaken and the other knew that
instrument did not state real agreement, yet concealed it

Ignorance, lack of skill,, negligence or bad faith on the part
of person drafting it
Where parties agree on mortgage, but instrument states property
is sold absolutely or with right to repurchase

o o

What
o o
o o
o o

may not be reformed

Simple Donations with no condition
Wills
Those where real agreement is void

Defective Contracts

As to defect
o

Rescissible - Injury or damage

Voidable - Vitiation of consent or legal capacity

Unenforceable - In excess of authority or do not comply with Statute of fraud

Void - Lack of an element of a valid contract

As to effect
o

Rescissible and Voidable - Valid until annulled

Unenforceable - Cannot be enforced by action in court

Void - No legal effects at all

As to parties who can file action

o

Rescissible and Void May be attack directly By contracting parties or by third

parties

Voidable and Unenforceable - Cannot be attacked by third persons

Resolution (Rescission of reciprocal obligation

)
o
o
o
o

Party who may institute action

For resolution, only party to the contract
Causes
Failure of one party to comply w/ obligation
Kind of contract
Reciprocal obligation only
Power of the courts
Can grant extension for performance

KINDS OF DEFECTIVE CONTRACTS:

1.

RESCISSIBLE CONTRACTS Those which have caused a particular economic damage either to one of the
parties or to a 3rd person and which may be set aside even if valid. It may be set aside in whole or in part, to the
extent of the damage caused'
REQUISITES:
a. Contract must be rescissible
(1) Under art 1381:
i. Contracts entered into by persons exercising fiduciary capacity
(a) Entered into by guardian whenever ward suffers damage by more than 1/4 of value of object
(b) Agreed upon in representation of absentees, if absentee suffers lesion by more than of value
of property
(c) Contracts where rescission is based on fraud committed on creditor (accion pauliana)

Badges of Fraud
o Cause or consideration is inadequate
o Transfer made after suit has begun or pending
o Sale on credit by an insolvent debtor
o Evidence of large indebtedness or complete insolvency
o Transfer of all or nearly all of debtor properties
o Between father and son, with any of above circumstances
o
Failure of vendee to take exclusive possession

(d) Objects of litigation; contract entered into by defendant w/o knowledge or approval of
litigants or judicial authority
(e) Payment by an insolvent on debts w/c are not yet due; prejudices claim of others
(f) Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and 1659
o Those which may be declared by law

Partition (1098)
Result of deterioration (1189)
Unpaid seller (1526 and 1534)

ii.Under art 1382 - Payments made in a state of insolvency

b. Plaintiff has no other means to obtain reparation
b.

Plaintiff must be able to return whatever he may be obliged to return due to rescission

c.

The things must not have been passed to 3rd parties who did not act in bad faith

d.

It must be made within the prescribed period

OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT:

Mutual Restitution
1. Things w/c are the objects of the contract & their fruits
2.

Price with interest

Note: Mutual restitution N.A. when:

2.

1.

creditor did not receive anything from contract

2.

thing already in possession of party in good faith; subject to indemnity only; if there are 2 or more
alienations liability of 1st infractor

VOIDABLE CONTRACTS intrinsic defect; valid until annulled; defect is due to vice of consent or legal
incapacity
CHARACTERISTICS:
a.

Effective until set aside

b.

May be assailed or attacked only in an action for that purpose

c.

Can be confirmed ( Note: CONFIRMATION IS THE PROPER TERM FOR CURING THE DEFECT
OF A VOIDABLE CONTRACT)

d.

Can be assailed only by the party whose consent was defective or his heirs or assigns

WHAT CONTRACTS ARE VOIDABLE:

a.

THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING CONSENT TO A

CONTRACT (legal incapacity)
(1) minors ( below 18 )
(2) insane unless acted in lucid interval
(3) deaf mute who cant read or write
(4) persons specially disqualified: civil interdiction

(5) in state of drunkenness

(6) in state of hypnotic spell
b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE, INTIMIDATION,
UNDUE INFLUENCE OR FRAUD (vice of consent)
(1) mistake false belief into something
REQUISITES:
1. Refers to the subject of the thing which is the object of the contract
2.

Refers to the nature of the contract

3.

Refers to the principal conditions in an agreement

4.

Error as to person - when it is the principal consideration of the contract

5.

Error as to legal effect - when mistake is mutual and frustrates the real purpose of parties

(2) violence serious or irresistible force is employed to wrest consent

(3) intimidation one party is compelled by a reasonable & well-grounded fear of an imminent & grave
danger upon person & property of himself, spouse, ascendants or descendants (moral coercion)
(4) undue influence person takes improper advantage of his power over will of another depriving latter
of reasonable freedom of choice
(5) fraud thru insidious words or machinations of contracting parties, other is induced to enter into
contract w/o w/c he will not enter (dolo causante)

Convalidation
o

o
o

Prescription (Four years)

From time incapacity ceases
From discovery of such fraud or mistake
Ratification or confirmation
Loss of the thing by thru the fault of the person who has right to annul

PERIOD TO BRING ACTION FOR ANNULMENT /PRESCRIPTION IN ACTION FOR

ANNULMENT OF VOIDABLE CONTRACTS:
Intimidation, violence, undue influence
Mistake, fraud
Incapacity/Contracts entered into by minors/incapacitated
persons

4 years from time defect of consent

ceases
4 years from time of discovery
4 years from time guardianship ceases

EFFECTS OF ANNULMENT:
1.

Obligation to give mutual restitution

2.

Obligation to do value of service

If not consummated, then parties are released from obligation

If consummated, parties are to restore to each other what they have given, with fruits and interests, plus
damages
If to do or not to do, there will be apportionment of damages
Incapacitated party not obliged to make restitution except for what he was benefited
3.

UNENFORCEABLE CONTRACT valid but cannot compel its execution unless ratified; extrinsic defect;
produce legal effects only after ratified.
KINDS/VARIETIES:
1.

Unauthorized/No sufficient authority entered into in the name of another when:

a.

no authority conferred

b.

in excess of authority conferred ( ultra vires )

Note: Curable by RATIFICATION

2.

Both parties incapable of giving consent -2 minor or 2 insane persons

Note: Curable by ACKNOWLEDGEMENT

3.

Failure to comply with Statute of Frauds [Purpose is to prevent fraud, not to aid the commission of fraud]
a.

Agreement to be performed within a year after making contract

b.

Special promise to answer for debt, default or miscarriage of another

c.

Agreement made in consideration of promise to marry

d.

Agreement for sale of goods, chattels or things in action at price not less than 500; exception: auction
when recorded sale in sales book

e.

Agreement for lease of property for more than 1 year & sale of real property regardless of price

f.

Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS:

4.

1.

Failure of defendant to object in time, to the presentation of parole evidence in court, the defect of
unenforceability is cured

2.

Acceptance of benefits under the contract. If there is performance in either part and there is acceptance of
performance, it takes it out of unenforceable contracts; also estoppel sets in by accepting performance, the
defect is waived

VOID OR INEXISTENT of no legal effect

CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone
b.

There is no action for annulment necessary as such is ipso jure. A judicial declaration to that effect is
merely a declaration

c.

It cannot be confirmed, ratified or cured

d.

If performed, restoration is in order, except if pari delicto will apply

e.

The right to set up the defense of nullity cannot be waived

f.

Imprescriptible

g.

Anyone may invoke the nullity of the contract whenever its juridical effects are asserted against him

KINDS OF VOID CONTRACT:

1) Those lacking in essential elements: no consent, no object, no cause (inexistent ones) essential
formalities are not complied with ( ex: donation propter nuptias should conform to formalities of a
donation to be valid )
(a) Those w/c are absolutely simulated or fictitious no cause
(b) Those which cause or object did not exist at the time of the transaction no cause/object
(c) Those whose object is outside the commerce of man no object
(d) Those w/c contemplate an impossible service no object
(e) Those w/c intention of parties relative to principal object of the contract cannot be ascertained
2) Prohibited by law
(f) Those expressly prohibited or declared void by law - Contracts w/c violate any legal provision, whether
it amounts to a crime or not
3) Illegal/Illicit ones Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy ; Ex: Contract to sell marijuana
KINDS OF ILLEGAL CONTRACTS

CONTRACT
CRIMINAL OFFENSE
Parties are in pari
delicto

Only one party is

guilty

CONSTITUTE

No action for specific performance

No action for restitution on either
side. The law will leave you where
you are
Both shall be prosecuted
Thing/price to be confiscated in favor
of government
No action for specific performance
Innocent party is entitled to
restitution
Guilty party is not entitled to
restitution
Guilty party will be prosecuted
Instrument of crime will be
confiscated in favor of govt

CONTRACT DOES NOT CONSTITUTE

CRIMINAL OFFENSE BUT IS ILLEGAL
OR UNLAWFUL PER SE
No action for specific performance
No action for restitution on either side.
The law will leave you where you are
No confiscation

No action for specific performance

Innocent party is entitled to restitution
Guilty party is not entitled to
restitution

PARI DELICTO DOCTRINE -both parties are guilty, no action against each other; those who come in equity
must come with clean hands; applies only to illegal contracts & not to inexistent contracts; does not apply when
a superior public policy intervenes
EXCEPTION TO PARI DELICTO RULE
1.

If purpose has not yet been accomplished & If damage has not been caused to any 3rd person
Requisites:
a) contract is for an illegal purpose
b) contract must be repudiated by any of the parties before purpose is accomplished or damage is caused
to 3rd parties
c)

2.

court believes that public interest will be served by allowing recovery (discretionary upon the court )
based on remorse; illegality is accomplished when parties entered into contract; before it takes effect
party w/c is remorseful prevents it

Where laws are issued to protect certain sectors: consumer protection, labor, usury law
a)

Consumer protection if price of commodity is determined by statute, any person paying an amount in
excess of the maximum price allowed may recover such excess

b) Labor if law sets the minimum wage for laborers, any laborer who agreed to receive less may still be
entitled to recover the deficiency; if law set max working hours & laborer who undertakes to work
longer may demand additional compensation
c)

Interest paid in excess of the interest allowed by the usury law may be recovered by debtor with
interest from date of payment

3.

If one party is incapacitated, courts may allow recovery of money, property delivered by incapacitated
person in the interest of justice; pari delicto cannot apply because an incapacitated person does not know
what he is entering into; unable to understand the consequences of his own action

4.

If agreement is not illegal per se but merely prohibited & prohibition is designated for the protection of the
plaintiff may recover what he has paid or delivered by virtue of public policy

MUTUAL RESTITUTION IN VOID CONTRACTS

General Rule: parties should return to each other what they have given by virtue of the void contract in case
where nullity arose from defect in essential elements
1.

return object of contract & fruits

2.

return price plus interest

Exception: No recovery can be had in cases where nullity of contract arose from illegality of contract where
parties are in pari delicto;
except:
a. incapacitated not obliged to return what he received but may recover what he has given

b. other party is less guilty or not guilty

Estoppel
Estoppel in pais - by ones conduct or acts, representatioons, admissions or silence, culpable
negligience induces another to believe certain facts to exist and such other rightfully relies and
acts on such belief.
Estoppel by Deed - A party to a deed, are precluded from aasserting against the other party to the
deed any right or title in derogation of the deed, or from denying any material fact asserted therein.
Estoppel by Record - A party precluded from denying the truth of matters set forth in a record,
whether judicial or legislative.
Estoppel by Laches
o Failure or neglect to enforce a right for an
o Unreasonable and unexplained length of time
o Despite knowledge or notice