Contracts

A contract is a meeting of the minds and, therefore,

there must be mutual consent. (Art. 1305)

Contracts is one of the sources of obligations.

(Art. 1157)

Obligation is the legal tie or relation itself that

exists after a contract has been entered into.

Contracts are agreements enforceable through

legal proceedings. Those agreements which
cannot be enforced by action in the courts of
justice (like an agreement to go to a dance party)
are not contracts but merely moral or social
agreements. So, all contracts are agreements but
not all agreements are contracts.

The contracting parties may establish such

stipulations, clauses, terms and conditions as
they may deem convenient, provided they are
not contrary to law, morals, good customs, public
order, or public policy.
Example

A contract whereby X promised to live as the

common law wife of Y without the benefit of
marriage in consideration of P100,000.00
o Contract is immoral and, therefore, void.
An arrangement whereby X is to render service
as a servant to Y without compensation as long
as X has not paid his debt.
o Agreement
is
reprehensible
and
censurable, also contrary to law
A stipulation in a contract of lease whereby the
landlord can use force to eject the tenant in case
of failure of the latter to pay the rent agreed
upon.
o Contract is void as being against public
order.

A third person is one who has not taken part in a

contract and is, therefore, a stranger to the contract.
As a general rule, a third person has no rights and
obligations under a contract to which he is a stranger.
(Art. 1311) He has no standing in law to demand the
enforcement of a contract or question its validity.
Cases when third party may be affected by a contract:

In contracts containing a stipulation in favor of a

third person. (Art. 1311)

In contracts creating real rights. (Art. 1312)

In contracts entered into defraud creditors. (Art.

1313)

In contracts which have been violated at the

inducement of a third person. (Art. 1314)
Example

Person X contracts with Y for the erection of a

building which will enhance the value of Zs
adjoining property. In the event that the contract
between X and Y is breached, does Z has the
right to sue both X and Y for breach of contract?
o The fact that Z may incidentally derive
some benefit from the contract gives him
no right to sue X for breach of contract.
Classification of contracts according to its name:
1. Nominate contract

That which has

designation inlaw
sale, etc).
Innominate contract
o That which has
designationin law.
may give).
o

2.

a specific name or
(e.g., lease, agency,

no specific name or
(e.g., I give that you

Classification of contracts according to its perfection:

1. Consensual contract
o That which is perfected by mere consent
(e.g.sale, lease, agency)
2. Real contract
o That which is perfected by the delivery of
thething subject matter of the contract
(e.g.pledge)
3. Solemn contract
o That which requires compliance with
certainformalities prescribed by law (e.g.
donation ofreal property which must be
in a publicinstrument)
Stages In the life of a contract:
1. Preparation or negotiation
o This includes all the steps taken by the
parties leading to the perfection of the
contract.
o At this stage the parties have not yet
arrived at any definite agreement.
2. Perfection or birth
o This is when the parties have come to a
definite agreement or meeting of the
minds regarding the subject matter and
cause of contract.
3. Consummation or Termination
o This is when the parties have performed
their respective obligations and the
contract may be said to have been fully
accomplished or executed, resulting in
the
extinguishment
or
termination
thereof.
Example

Which of the following is NOT an essential

requisite of a contract:
o Consent
o
Delivery
o Object
o Cause
Art. 1318. There is no contract unless the following
requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of
the contract;
3. Cause of the obligation which is established.
Real

contracts
DELIVERY

Identification:

Consent

require

fourth

requisite:

Manifested by the meeting of the offer

and the acceptance upon the thing and
the cause which are to constitute the
contract.

Offer
o

Is a proposal made by one party to

another to enter into a contract. It is
more than the desire or hope

Acceptance
o Is the manifestation of the offeree of his
assent to the terms of the offer.
Example

David offered to sell a ring either for cash, or on

an installment basis, the balance to be paid in
three years. The total price was P1,000,000. Rey,
to whom the ring was offered, wrote to David
stating among other things that he was giving
P100,000 as down payment, the balance to be
paid in some other way. Is there a formation of a
contract?
o There was already meeting of the mind.
o Art. 1319. , The offer must be certain
and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.

On Aug.1, 2006, Rene wrote to Ben a letter,

offering to sell a ring. On Aug.18, Ben wrote a
letter of complete acceptance, which was
received by Rene Aug.20. However, on Aug.19,
Rene had already written to Ben a letter
withdrawing the offer, received by the latter on
Aug.21.
o There was already a perfected contract.
o Art. 1319, , Acceptance made by letter
or telegram does not bind the offer
except from the time it came to his
knowledge
o What is important is that the letter if
withdrawal was MADE prior to the
knowledge of acceptance.

An offer made through an agent is accepted from

the time acceptance is communicated to the
principal.
o False
Art. 1322. An offer made through an
agent is accepted from the time
acceptance is communicated to him. (n)
o an agent is an extension of the
personality of the principal
On Aug.1, 2006, Pedro wrote Meno a letter,
offering to sell a ring. On Aug.18, Meno wrote a
letter of complete acceptance, which was
received at the house of Pedro on Aug.20.
However, on Ag.19, Pedro had died.
o Statement: There was NO meeting of the
minds
o Art. 1323. An offer becomes ineffective
upon the death, civil interdiction,
insanity, or insolvency of either party
before acceptance is conveyed. (n)
o

Facts: B, interested in a particular car, asked S

for the price. S said: P1M. B however could not
make up his mind whether to buy or not. So S
told B, Ill give you a week to make up your
mind. In the meantime, I will reserve this car for
you.
o Statement: Before the week is over, S
can withdraw the offer to sell the car.
o Art. 1324. When the offerer has allowed
the offeree a certain period to accept,
the offer may be withdrawn at any time
before acceptance by communicating
such withdrawal

Facts: B, interested in a particular car, asked S

for the price. S said: P1M. B however could not
make up his mind whether to buy or not. So B
told S, Ill give you P500 to give me a week to
make up my mind. In the meantime, reserve this
car for me. S agreed.
o Art. 1324. When the offerer 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.
Identification

Contract of Option
o is a separate (have its own cause and
consideration) and distinct contract from
the contract which the parties may enter
into upon the consummation of the
Option contract
o a contract granting a person/offerree a
certain period to accept, and during
which period the offer cannot be
withdrawn by the offerror.

Business advertisements of things for sale are

not definite offers, but mere invitations to make
an offer
Example

For Sale: 500 sq. meter lots at P10M to P15M a

lot at SitioCalong-Calong Tel 2-20-82.
o This is a definite offer from which the
advertisers cannot back out, once it is
accepted by another.
o DOES NOT CONTAIN all the specific
particulars needed in the contract.

The advertiser is NOT bound to accept the

highest or lowest bidder.
o Art. 1326. 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.

Which of the following CAN give consent to a

contract:
o Minors
o Demented persons

o
o

Deaf-mutes who do not know how to

write
Insane persons during lucid interval

Incapacitated to give consent:

minors;

insane or demented persons;

dear-mutes who do not know how to write;

married women of age in cases specified by law;

persons suffering from civil interdiction;

incompetents under guardianship.

Persons prohibited from entering into a contract:

Insolvents
o Before they are discharged by the
insolvency court

Husband and wife

o Prohibited from donating or selling
property to each other during the
marriage. (Art. 1490)

Persons who are prohibited from giving each

other any donation or advantage
o Prohibited from entering into a contract if
universal partnership

Persons holding a fiduciary relation with respect

to certain properties.
o Fiduciary - relating to a holding of
something in trust for another
o Art. 1491. :
o (3) Executors and administrators, the
property
of
the
estate
under
administration;
o (4) Public officers and employees, the
property of the State or of any
subdivision
thereof,
or
of
any
government-owned
or
controlled
corporation,
or
institution,
the
administration of which has been
intrusted to them; this provision shall
apply to judges and government experts
who, in any manner whatsoever, take
part in the sale;
o (5)
Justices,
judges,
prosecuting
attorneys, clerks of superior and inferior
courts, and other officers and employees
connected with the administration of
justice, the property and rights in
litigation or levied upon an execution
before the court within whose jurisdiction
or territory they exercise their respective
functions; this prohibition includes the
act of acquiring by assignment and shall
apply to lawyers, with respect to the
property and rights which may be the
object of any litigation in which they may
take part by virtue of their profession.

(6) Any others specially disqualified by

law. (1459a)

Example

A contract entered by one who is prohibited from

entering into a contract is void.
o Void,
voidable,
rescissible
and
unenforceable contracts are defective
contracts

Which of the following will NOT render the

contract voidable:
a. Consent given by mistake
b. Consent given through undue influence
c. Consent given through intimidation
d. Consent given in a state of drunkenness
e.
None of the above
o

Vices

Art. 1328. Contracts agreed to in a state

of drunkenness or during a hypnotic spell
are voidable. (n)

of consent:
Mistake
Violence
Intimidation
Undue influence
Fraud (Art 1330)

Art. 1330. A contract where consent is given through

mistake, violence, intimidation, undue influence, or
fraud is voidable.
Example

Mistake of law renders the contract voidable.

o ignorance of the law excuses no one
from compliance therewith.\
o if a contract is voidable, it can be
annulled, thus would excuse a party from
complying with his obligations
Mistake of fact renders the contract voidable.

(1)as to the object of the contract

A. identity of the thing
B. substance of the thing
C. condition of the thing
D. quantity of the thing
o provided that the extent or dimension of
the thing was one of the principal reasons
of one or both of the parties for entering
into the contract

(2) as to person
o mistake with regard to the identity or
with regard to the qualification of one of
the parties. (Art 1331)
o provided
that
such
identity
or
qualifications have been the principal
cause of the contract
When a person takes improper advantage of his power
over the will of another,
The following circumstances shall be considered:
1. confidential, family, spiritual and other
relations between the parties

2.
3.
4.

mental weakness
ignorance
financial distress

Example

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 the descendants or
ascendants, to give a consent, there is:
o Fraud
o
Intimidation
o
o

Undue influence
Violence

Art. 1335. A threat to enforce one's claim through

competent authority, if the claim is just or legal, does
not vitiate consent.
Art. 1336. Violence or intimidation shall annul the
obligation, although it may have been employed by a
third person who did not take part in the contract.
Example

When, through insidious words or machination of

one of the contracting parties, the other induced
to enter into a contract which, without them, he
would not have agreed to, there is:
o
Fraud
o
o
o

Intimidation
Undue influence
Violence

Insidious- awaiting a chance to entrap; treacherous

Art. 1341. A mere expression of an opinion DOES NOT
signify fraud, unless made by an expert and the other
party has relied on the former's special knowledge. (n)
Example

Facts: An agent persuaded his principal to sell

certain properties to himself at a low price. The
agent did not reveal that somebody else was
interested in acquiring said properties at much
higher prices.
o Statement: The sale to the agent is
voidable because of fraud
Art. 1339. Failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (n)
Simulation of Contract
--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)

Absolutely simulated contracttakes place when

the parties do not intend to be bound at all.
Relatively simulated contracttakes place when
the parties conceal their true agreement.
Object - The thing, right, or service which is the
subject matter of the obligation which is created or
established in the contract.

Art. 1347. All things which are not outside the

commerce of men, including future things, may be the
object of a contract. All rights which are not
intransmissible may also be the object of contracts. No
contract may be entered into upon future inheritance
except in cases expressly authorized by law.
All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be
the object of a contract. (1271a)

Requisites of a valid object:

the object should be within the commerce of

mansusceptible
of
appropriation
and
transmissible from one person to another.

the object should be real or possibleshould

exist at the moment of the celebration of the
contract, or at least, it can exist subsequently or
in the future.

the object should be licitshould not be contrary

to law, morals, good customs, public order, or
public policy

the object should be determinate as to its kind.

Cause - The essential reason which moves
contracting parties to enter into the contract.

the

Classification of Contracts as to Cause:Classification of

Contracts as to Cause:

Onerousthe cause is for each contracting

party, the prestation or promise of a thing or
service by the other.

Remuneratorythe past service or benefit

which by itself is a recoverable debt.

Gratuitousthe cause is the mere liberality of

the benefactor (Art 1274)
Art. 1351. The particular motives of the parties in
entering into a contract are different from the cause
thereof.
Requisites of a valid cause:

the cause should be in existence;

the cause should be licit;

the cause should be true.

Art. 1354. Although the cause is not stated in the
contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary.

It is inadequacy of cause.
Art. 1355. Except in cases specified by law, LESION or
inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue
influence.
(n)

means
prior to
o
o
o
o

of the restoration of to their condition

the celebration of the contract:
Annulment
Ratification
Reformation
Rescission

Art. 1356. Contracts shall be obligatory, in whatever

form they may have been entered into, provided all the
essential requisites for their validity are present.
However, when the law requires that a contract be in
some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that
requirement is absolute and indispensable.

Lesion

Is any damage caused by the fact that the price

is unjust or inadequate

It is the injury suffered in consequence of

inequality of situation, by one party who does not
receive the full equivalent for what he gives in a
commutative contract, like a sale

Art. 1359. When, there having been a meeting of the

minds of the parties to a contract, their true intention
is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may
ask for the reformation of the instrument to the end
that such true intention may be expressed.

Example

S sold B his land worth P100,000.00 for only

P80,000.00.
o This contract of sale is valid
o This contract of sale is valid although the
price is inadequate

Art. 1359. ... If mistake, fraud, inequitable conduct, or

accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the
instrument but annulment of the contract.
Art. 1367. When one of the parties has brought an
action to enforce the instrument, he cannot
subsequently ask for its reformation.
Example

Shall apply if the terms of the contract are

UNCLEAR and AMBIGUOUS:
o Annulment
o
Interpretation of contract
o
o

Ratification
Reformation of the instrument

Defective Contracts

Rescissible contracts

Voidable contracts

Unenforceable contracts

Void and inexistent contracts

Example

Contract which is valid because it contains all of

these essential requisites prescribed by law, but
which is defective because of injury or damage to
either of the contract parties or to third persons:
o
Rescissible contract

o Unenforceable contract
o Void contract
o Voidable contract
Remedy granted by law to the contracting
parties, and even to third persons, to secure the
reparation of damages caused to them by a
contract, even if the same should be valid by

Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of
the things which are the object thereof;
(2) Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in
the preceding number;
(3) Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the
claims due them;
(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 or of competent judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission. (1291a)
Example

To fraud his creditor, B sold his house to X. when

however the creditor wanted his credit,
somebody lent B enough money. The sale of the
house should no longer be rescinded.
o True
o Art.
1381.
Rescissible:(3)Those
undertaken in fraud of creditors when the
latter cannot in any other manner collect
the claims due them;
o Art. 1383. The action for rescission is
subsidiary; it cannot be instituted except
when the party suffering damage has no
other legal means to obtain reparation
for the same. (1294)

B sues C for recovery of a diamond ring. Pending

the resolution of the case, B sells the ring to D
with the approval of C but without the approval
of the court. The sale to D is rescissible.
o False

Art. 1381. Rescissible:(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 or of competent judicial
authority;
An obligation that results when a contract is
rescinded:
o Ratification
o Reparation
o Resolution
o
Restitution
o

Art. 1385. Rescission creates the obligation to return

the things which were the object of the contract,
together with their fruits, and the price with its
interest; consequently, it can be carried out only when
he who demands rescission can return whatever he
may be obliged to
Example

The following must be returned if a contract is

rescinded, EXCEPT:
o The object of the contract and their fruits
o The price with its interest
o
The object of the contract in the legal
possession of third persons in good faith
Art. 1385. . Neither shall rescission take place when
the things which are the object of the contract are
legally in the possession of third persons who did not
act in bad faith. In this case, indemnity for damages
may be demanded from the person causing the loss.
Example

To fraud his creditors, B sold to C a piece of land.

C is an innocent purchaser in good faith, who
takes legal possession of the land. What is the
remedy of the creditors?
o Demand indemnity for damages
o
Ratification

o Rescission
o Restitution
Facts: the person who asked for the rescission
was 14 years old and was under a guardian at
the time of the transaction of the rescindable
contract.
Statement: action brought for the rescission of a
rescindable contract, five years after it was made
should not be allowed.
o False
o Art.
1389.
For
persons
under
guardianship and for absentees, the
period of four years shall not begin until
the
termination
of
the
former's
incapacity, or until the domicile of the
latter is known. (1299)

Which of the following statement refers to

voidable contract:
A. Compatible with the perfect validity of
the contract
B. The basis is lesion
C.
The basis is vitiated consent or
incapacity to consent
D. The action is subsidiary

Art. 1390. The following contracts are voidable or

annullable, even though there may have been no
damage to the contracting parties:
(1) Those where one of the parties is incapable of
giving consent to a contract;
(2) Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or
fraud.

The action for annulment must be brought within

how many years?
A. 1 year
B. 2 years
C.
4 years
D. No limit. Action DOES NOT PRESCRIBE

Art. 1391. The action for annulment shall be brought

within four years.
This period shall begin:

In cases of intimidation, violence or undue

influence, from the time the defect of the
consent ceases

In case of mistake or fraud, from the time of the

discovery of the same.

And when the action refers to contracts entered

into by minors or other incapacitated persons,
from the time the guardianship ceases.

Ratification
o Cures the defect in a voidable contract.
o Art. 1392. Ratification extinguishes the action
to annul a voidable contract.
o Art. 1396. Ratification cleanses the contract
from all its defects from the moment it was
constituted

Art. 1393. Ratification may be effected expressly or

tacitly. It is understood that there is a tacit ratification
if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an
act which necessarily implies an intention to waive his
right.
Example

X contracted with a minor. X CAN NOT sue for

annulment on the ground that the other party
was a minor
A. True

B. Art. 1397. The action for the annulment

of contracts may be instituted by all who
are thereby obliged principally or
subsidiarily. However, persons who are
capable cannot allege the incapacity of
those with whom they contracted; nor
can those who exerted intimidation,
violence, or undue influence, or
employed fraud, or caused mistake base
their action upon these flaws of the
contract.
The following must be returned if a contract is
annulled, EXCEPT:
A. The object of the contract and their fruits
B. The price with its interest
C. The object of the contract if one of the
parties is incapable
D. The object of the contract if one of the
parties is incapacitated and benefited
therefrom
Which of the following would NOT make a
voidable contract VALID?
A.
Annulment
B. Loss of the thing which is the object of
the contract through the fraud or fault of
the person who is entitled to institute the
action for the annulment
C. Prescription of the action for annulment
D. Ratification or confirmation

Art. 1399. When the defect of the contract consists in

the incapacity of one of the parties, the incapacitated
person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price
received by him.
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(1) Those entered into in the name of another
person by one who has been given no authority
or legal representation, or who has acted
beyond his powers;
(2) Those that do not comply with the Statute of
Frauds
(3) Those where both parties are incapable of
giving consent to a contract.
Art. 1405. Contracts infringing the Statute of Frauds,
are ratified by the failure to object to the presentation
of oral evidence to prove the same, or by the
acceptance of benefit under them.
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2) Those that do not comply with the Statute
of Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and

subscribed by the party charged, or by his agent;

evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence
of its contents:
Documents required to be in writing:
Art. 1403.
(a) An agreement that by its terms is not to
be performed within a year from the
making thereof;
(b) A special promise to answer for the debt,
default, or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to
marry;
Art. 1403.
(d) An agreement for the sale of goods,
chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive
part of such goods and chattels, or the evidences, or
some of them, of such things in action or pay at the
time some part of the purchase money;
Art. 1403.
(e) An agreement of the leasing for a longer
period than one year, or for the sale of real property or
of an interest therein;
(f) A representation as to the credit of a third
person.
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2) Those that do not comply with the Statute of
Fraudsevidence, therefore, of the agreement cannot
be received without the writing, or a secondary
evidence of its contents:
(e) An agreement of the leasing for a longer period
than one year, or for the sale of real property or of an
interest therein;
Art. 1405. Contracts infringing the Statute of Frauds,
are ratified by the failure to object to the presentation
of oral evidence to prove the same, or by the
acceptance of benefit under them.
Art. 1405. Contracts infringing the Statute of Frauds,
are ratified by the acceptance of benefit under them.
**The Statute of Frauds applies only to executory
contracts and not to contracts that have been partially
or fully performed.
Voidable contract - lack absolutely either in fact or in
law one or some or all of those elements which are
essential for its validity:
Art. 1409. The following contracts are inexistent and
void from the beginning:
(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 of the contract
cannot be ascertained;
(7) Those expressly prohibited or declared void by law.