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CONTRACTS

CONTRACTS- meeting of minds between two persons whereby one person binds himself to give
something or render some service.

PHASES OF CONTRACT

1.) Generation- negotiating with each other. There is offer and acceptance of the offer.

2.) Perfection of the contract- birth of the contract. It will bind contracting parties to the contract

3.) Consummation- fulfils or complies with whatever is expected from you. Fulfilment of the
purpose for which it was constituted.

BASIC PRINCIPLES:

1.) Freedom or liberty or autonomy of contracts, Art.1306 “the contracting parties may stipulate on
whatever terms and conditions convenient to them provided the terms and conditions are not
contrary to law, morals good customs, public order or public policy”.
-all terms and conditions agreed upon by the parties will be put in writing and will be the law
that will govern the contracting parties.

2.) Mutuality of contracts

Art 1308: Contract must bind all contracting parties. Its compliance or validity cannot be left to
the will of one party.

EXCEPTIONS:
a.) 1309- Performance of an obligation may be left to third person whose decision shall not be
binding until it is made known to both contracting parties and the parties must agree
to the same before it can be binding to both parties. But if it is so inequitable then it may be
considered as null and void.
- The court shall determine what is inequitable.
b.) 1310

3.) Effectivity or relativity of contracts

Who will be bound by the contract itself? Only the contracting parties, their assigns, privies,
successors-in-interest.

GR: contracts take effect only bet parties. They are the ones who agreed on the terms and
conditions of the contract, their assigns and heirs, but as to the heirs, there is already the
exception with respect to hers that EXCEPT
(1) Where the rights and obligations arising from the contract are not transmissible by their
nature or by provision of law or stipulation. {i.e., personal obli}
(2) Heir is not liable beyond the value of the prop he received from the decedent.
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1311 admits of some exceptions that even if you are not party to the contract, you are not an
assign or heir of contracting party, you may be bound by the contract itself.

Exception
I.-Stipulation por au trui-when there is favor given to a third person, this person may demand its
fulfilment provided he communicated its acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
deliberately and willingly conferred a favor upon the third person.

REQS OF STIP POR AUTRUI

1.) should not be the whole or entire contract,

2.) Favor conferred to a third person who must accept the same before revocation and must
accept it to the obligor prior to revocation

3.) The contracting parties must not have any legal rep or representation or authorization from
the third person. They must not be related to each other.

If all reqs are present, there is stip por au trui.

II- Art.1312. In contracts creating real rights, third persons who come into possession of the
object contract are bound thereby, subject to the provs of the mortgage law and land
registration laws.
EXAMPLE:
If Mr.X is indebted to Y the amt of 1M and later on Y reqd Mr. X to constitute a REM over his
property. Mr. X constituted and executed the REM in favor of Y. the further ensure security, the
REM was recorded in the RD. Annotated behind the title which is a collateral to the loan of 1M.
Later on, Mr. X sold the real property to Z. Is the sale valid? YES. The sale is valid. Later on when
we go to mortgage and pledge, we will recall that the owner cannot be prohibited from selling
or alienating the prop sub of mortgage or pledge bec. The pledge or mortgage is only a lien or
encumbrance. He is still the owner. He has the attributes of ownership to sell or dispose of his
own property. However, what is the right of the mortgagee? We have to respect the mortgage.
We think ahead of the sale. What is now the obli of the buyer who have taken possession of the
real property subj to REM? He will respect the REM. The person who took into the possession of
that real property, Z, also has a right to property; he can take possession and be the owner of
the pro subj to respecting the encumbrance or lien. He should pay or the mortgagor must pay
the mortgage to release him otherwise the annotation will always be there. They have the obli
to pay the loan so that the prop will be released the particular prop from mortgage.

On the other hand, if the mortgage is not recorded in the RD, what is the right of the third
person who took possession of the real prop and brought the prop from the owner? He now has
a better right bec the prop was not recorded, the mortgage was not recorded then the person
has no constructive notice of the encumbrance. Remember that registration is the one which
gives you constructive notice of whatever encumbrance or lien is on the real prop. So you have a
better right now to the possession of the property.
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Who is now the one obliged? Only the mortgagor. The mortgage contract is still valid. However,
it is only effective and valid and binding bet the contracting parties, the mortgagor and the
mortgagee. The buyer is not bound by the contract bec of the non registration of the property
to the RD. that’s why all particular transactions regarding real prop should be registered.
That person who bought the property shall be bound even if he is not party to the mortgage
contract because of the registration of the mortgage.

III- Art.1313 creditors are protected in cases of contracts intended to defraud them. In the
previous example, Y is the creditor, X is the debtor. The only prop that X have is a real property.
What he did with his only prop after the loan of 1M was given to him was he sold it to Z to
defraud Y. Later on, if X cannot pay Y, Y cannot go to court Y for writ of execution because X no
longer in possession of the property. The remedy of Y is to have the sale rescinded.

IV 1314- tortuous interference by a third person. Any third person who induces another to
violate his contract shall be liable for damages to the other contracting parties.

HOW ARE CONTRACTS PERFECTED:

1.) By mere consent: consensual contract. Contracts are perfected by mere consent, from that
moment the parties are bound from the fulfilment and consequences of the contract.

- no need for delivery.

- As long as there in consent bet the parties.

2.) Real contracts -not perfected until delivery of obj of obli.

3.) formal contracts- contracts that are not considered as valid until they comply with the formalities
reqd by law.

Example:

-donation inter vivos or donation mortis causa.

-anti chresis - it must be a doc in writing, including the interest and the principal.

-interest on loan must be contained in writing.(art 1315)

May a person enter into a contract for another?

GR: No. one cannot enter into a contract in favor of another. It is unenforeceable if one is not
authorized.

EXCEPTIONS:

1.) If there is authority from the person

2.) Right by law to represent the other. (successor-in-interest)

EXCEPTION TO THE EXCEPTION:

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Unless there is ratification, expressed or implied by the person on whose behalf it was executed before
it was revoked by the other contracting party.

We will got to contract of agency (correlation purposes)

When there is a contract of agency, the principal authorizes the agent to transact with other persons,
then that particular contract is no longer unenforceable. It now becomes enforceable.

Unenforceable contract- cannot enforce it by court action. Cannot go to court and file any action either
for or against any of the contracting parties because you are not authorized by the other parties. But if
you are an agent, fully clothed with authority anything you do within the instruction and in accordance
of the authority given to you will be enforceable and all your acts will bind the principal.

ESSENTIAL REQS OF A CONTRACT

1.) Consent of the contracting parties

- Must be voluntarily given by the contracting parties.
- Parties must be capacitated
- If given by minor, it is voidable because it can be ratified. Unlike if really no consent was
given, therefore it is not a valid contract.
- Minor, insane persons, they can give consent but the contract is voidable. But if you can
prove that the insane person gave his consent during lucid interval, then the contract
remains valid.
- If it is drunkard or consent given during hypnotic spell, who gave consent, it Is voidable.

2.) Object certain

- Must be within commerce of man
- Lawful or licit
- Determinate or can be determined
- Possible
- Even future obj can be obj of constitution.
- No obj, no valid contract

3.) Cause
- Amt that you pay or service that you rendered
- Consideration
- Remuneratory; money must be paid
- Pure liberality; gratuitous.

How is consent manifested?

-by meeting of the offer and acceptance upon the thing and the cause.

Qualified acceptance constitutes as counter offer and counter offer must be accepted.
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*in one case decided by the SC, even if you agree on the obj of the sale, even if you agree on the price
but if you do not agree yet on the manner of payment or payment of the balance, there is no perfected
contract.

-acceptance by way of letter or telegram, when do we perfect that? It is only perfected from the time
that it came to the knowledge of the offeror.

-if it is a transaction thru an agent, it is accepted from the time it is communicated to the agent.

Effect of death, insolvency, civil interdiction or any incapacity of either party before there is acceptance:
the offer becomes ineffective. However, if there is already acceptance, it is effective but the other party
can rescind.

Art. 1324. Option contract

Cruztina offered to Emerita her 2nd hand car. The price is 500k. Emerita told Cruztina to give him one
month to think about whether to buy the car or not. Cruztina told Emerita that she will give him one
month. Two weeks later, Cruztina went to Laurita. She told Laurita that she is selling her car and then
told Emerita that she is withdrawing the offer and is now offering the same car to Laurita who is inclined
to buying it at once. Emerita told Cruztina that she cannot withdraw and Emerita will sue Cruztina for
damages due to not respecting the one month agreed upon. Still Cruztina offered the car to Laurita who
bought the car for the same price. Emerita went to court and sue Cruztina for damages for not
complying with the option contract to respect the one month period. Is Emerita entitled to damages?
No. Emerita is not entitled for damages because he did not give Cruztina any consideration distinct from
the price. It would have been different if after the discussion, Emerita would ask Cruztina to give him
one month and afterwards gave Cruztina a sum of money, which is considered as consideration distinct
from the price, thus requiring Cruztina to respect the one month period within which to hold the
property until such period lapses. Option is on the offeree whether to buy or not to buy. The privilege is
on him. He cannot be compelled to buy and Cruztina should not offer the same to other persons.

After the one month period and Emerita did not buy, what can Cruztina do to the sum of money given
by Emerita? Cruztina can forfeit it in her favor. the option money that was given may be forfeited in
favor of the seller if the prospective buyer did not buy.

Can Cruztina consider the money as part of the purchase price should Emerita decide to buy the car
within the period agreed upon? Take note that it is option money for the option contract. Yes. It can be
considered as part of the purchase price provided it was agreed upon but as a general rule, the option
money is distinct and diff from the purchase price. The option money is given only for the period to be
respected. It is given only for the option contract. However it may be agreed upon that the option
money will form part of the purchase price. Can option money be refunded even if there is no sale? GR
no, unless there is an agreement bet the parties. No refund bec there is already prejudice. The holding
of the prop for a month. If the prospective buyer buys the object of the option contract, a new contract
arises, which is a contract of sale later on. There will be deed of absolute sale.

“An option contract is when an offeror has allowed the offeree a certain period to accept. The offer may
be withdrawn anytime before acceptance by communicating such withdrawal.”
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OPTION MONEY VS. EARNEST MONEY

1.) OPTION MONEY- money given for an option contract, it can be forfeited unless there is an
agreement. In Option Contract there is no perfected contract yet. The option money shows
there is no perfected contract of sale. But if there is EARNEST MONEY< it is proof that there is
already perfected contract of sale. The Earnest money is part of the purchase price.

2.) Option contract granting the person a privilege that the reason why you cannot compel a person
to buy. There is already a fixed price. Determined period given to decide whether to buy or not
to buy.

Right of first refusal- no fixed price but given first option to buy bec prop will be offered to you
first before it is offered to other person at the same terms and conditions.

Who may not give consent to the contract:

1.) Insane UNLESS they enter during lucid interval which now makes the contract valid OR
demented persons UNLESS they enter during lucid interval which now makes the contract
voidable because the guardian or the parents or the person himself can ratify the contract
entered into.
2.) Minority
3.) Deaf-mute who does not know how to read or write,
4.) Drunkenness,voidable

VOIDABLE CONTRACTS

Vices or defects of consent:

a. Mistake – mistake as to the substance of the thing which is the obj. of the contract EXAMPLE:
agreement is to purchase the brand new car but 2nd hand car was delivered.
Mistake must be (SIS) Serious, Substantial and Important. Not voidable if merely an error. If it is
negligible, it can still be corrected.
b. Fraud- person enforcing the contract must show that the term thereof have been fully explained
to the former. One must be wary and cautious if one of the parties is unable to read or if the
contract is in a language not understood by him.
- incurred by one of contracting party

REQS OF FRAUD:

1.) Insidious words or machinations

c. Violence- physical force
d. Intimidation –irresistible fear; reasonable and well-grounded fear
e. Undue influence- deprived of right of will; improper advantage of some other persons over a
person; depriving one of freedom of choice.
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FACTORS CONSIDERED UNDER UNDUE INFLUENCE:
a.) Spiritual
b.) Family
c.) Mental weakness
d.) Financial distress (kapit sa patalim)

Art.1339-usually applies when there is duty to reveal the facts. Usually happens in insurance policy. It
will make the contract voidable if there is concealment. The policy is contestable for a period of two
years, after which it now becomes incontestable.

Art.1345- Simulation of contract.

A.) Absolute- parties did not intend to be bound at all. Null and void. Fictitious.

B.) Relative- when a party concealed their true agreement, it is valid, however, it will only be
considered valid if it does not prejudice a third person and is not intended for any purposes
contrary to law, public morals, good custom, public order or public policy.

FORM OF CONTRACT

GR: - obligatory in whatever form. It may be oral or written. Provided all reqs are present. EXCEPTION is
when the law requires that the contract be in some form in order to be valid or enforceable, then such
requirement shall be complied with.

Examples of contracts that requires certain form to be valid:

IN WRITING:

1.) Donation must be in writing if exceeding 5k

2.) Sale of real prop by an agent
3.) Antichresis
4.) Interest of loan of money

IN A PUBLIC INSTRUMENT (if not it is void) art.1358

1.) Donation and acceptance of real prop

2.) Partnership where there are immovable prop contributed
3.) Transmission of right over immovable prop

REFORMATION OF INSTRUMENT

Reform the instrument, not the contract.

Reqs:

1.) There is meeting of the minds

2.) Instrument does not contain true intention of the party due to mistake, fraud, inevitable
conduct or accident.
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Ways of reforming the instrument:

1.) Judicially- one does not want to reform the contract, they will go to RTC to reform.
2.) Extra judicially- you already have an existing instrument. Later on, both of the parties discovered
there was a mistake. The instrument does not reflect the true agreement of the parties. Both
parties now agreed to reform the instrument among themselves.

When is reformation proper

1.) 1361 mutual mistake of the parties

2.) 1362 one acted with mistake, the other acted fraudulently

3.) 1363 mistake by one, concealment by another of the mistake

4.) 1364 ignorance, lack of skill, negligence or bad faith on the part of the person drafting the
instrument

5.) 1365

Reformation is not proper when

1.) Simple donation intervivos without any condition-bec. it is out of liberality and generosity

2.) Will- bec testator is already dead and it is based on intention of testator.

3.) Contract is null and void

Interpretation of contracts

1.) If the terms are clear and leaves no doubt upon the intention of the parties, the literal meaning
of the stipulations shall control.

2.) If the words appear contrary to the true intention of the parties, the intention shall prevail.

3.) Look at the contemporaneous acts of the parties to determine their true intention. Acts before,
during and after the transaction.

4.) Art.1377 the interpretation of obscure words or stipulations do not favor the party who caused
such obscurity

Contract of adhesion is not void. It is prepared by one party alone. Although prepared by one
party alone, it is still bilateral contract because one may or may not adhere to the agreement by
not signing or purchasing the airline ticket.
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Valid and Defective Contracts:

Valid - comply with all the legal reqs as to Consent, object and cause. It may be enforced.
Entered into during lucid interval. Relatively simulated which do not intend to prejudice third persons
and not contrary to law morals, good customs and public order.

Divisible contracts- contracts that some parts are legal or valid and some parts are illegal or not
valid. In such case, if the provisions can be separated from each other such that the provisions that are
lawful can stand alone and it wants to be enforced,it is considered valid provisions of the contract.

Defective Contracts:

1.) Rescissible- least defective. Valid until rescinded. Contains financial or economic injury or damage to
contracting parties or the other party.
a.) Lesion of more than ¼ of the property of the value of the prop of the ward by the guardian.
b.) Fraud of creditors
c.) Payment when already insolvent. Payment made on state of insolvency
d.) Payment under litigation.
e.) Recission of reciprocal obligation.

Effect of Rescission:

a.) mutual restoration not susceptible of ratification to the extent to cover damages caused. NOT
APPLICABLE if the property is legally in possession of third party who did not act in bad faith.
The remedy is now payment of damages against the person who caused the loss.
b.) retroacts from the day the action for rescission was instituted. Including interst and fruits.
c.) filed within 4 years reckoned from date of termination of guardianship for as long as the ward
became free from impediment. Or when domicile of absentee was known

2.) Voidable-next defective. Valid until annulled. One party able to give consent and the other is not.
Defect may be minority or insane or demented. Vitiated consent (mistake, violence, intimidation,
fraud) entered into during state of drunkenness or hypnotic spell. The contract may be ratified to
enforce validity. Susceptible of ratification.

Effects of ratification:

a.) Cleanses the contract of its defects.

b.) Retroacts from constitution of the contract
c.) May be done tacitly or expressly
d.) Done by guardian
e.) Extinguishes action to annul contract
f.) Needs no conformity of other party who has no right to bring the action for annulment.

If the defect is minority as to one party, as soon as there is ratification of parent or minor, it cleanses the
defect of the contract. Ratification retroacts from the date of constitution of the contract.
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Effect of annulment:
-mutual restoration

Exception:
a.) Incapacitated minor is no compelled to restitute except in so far as he has been benefitted.
b.) Loss of the thing could not fall on the person who is obliged to return said thing.just return the
fruits. Actio of annulment n is extinguished.
c.) 4 years fron time of legal oage of minor
d.) 4 years from time of discovery of fraud or mistake
e.) 4 years from ceasing of vitiation of consent.

3.) Unenforceable- most defective. cannot be enforced by court action unless ratified. Entered into
without legal authority or exceeds the authority given. Cannot go to court to enforce action..
contracts which does not comply with the statute of frauds.

Statute of fraud is applicable only to executor contracts. It is no longer applicable if the contract is
partly executed or fully executed. Ratification of contract infringing on the statute of frauds can be
ratified later on.

-both contracting parties incapable of giving consent.

-failure to object on oral presentation of evidence, can be ratified
-ratified if there is already acceptance of benefits.

4.) Void- no legal effect at all. Art. 1409

-Contrary to law public order public policy, good morals.
-not susceptible of ratification.
-rt of action or defense cannot be waived
-even rt to file action does not prescribe UNLESS cases where laches

Laches- stale demand. When you slept on your right. May be assailed by 3rd person who have an
interest that will be directly affected.
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