CONTRACTS THEORY.

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Law on Contracts

Contract
A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.
Elements of a contract
1. Essential elements
a. Consent
b. Object
c. Cause of the obligation
2. Natural Elements
3. Accidental elements
Classification of Contracts
1. According to perfection
a. Consensual
b. Real
c. Formal or Solemn
2. According to Cause
a. Onerous
→such as sale and barter
b. Gratuitous
Where one party receives no equivalent consideration
c. Remuneratory
The cause is the service
3. According to importance or dependence of one upon another
a. Principal
b. Accessory
c. Preparatory
One which serves as a means by which other contracts may be entered into
4. According to name
a. Nominate
b. Innominate
Those without any name under the law.
5. According to risk or fulfillment
a. Commutative
Those where the parties give equivalent values
b. Aleatory
Those whose fulfillment depends upon chance
6. According to the parties Obligated
a. Unilateral
Those where only one of the parties is obligated to give or to do something
b. Bilateral
Those where both parties are required to give or do something
 Those where both parties are required to give or do something
7. According to subject matter
a. Contracts involving things
b. Contracts involving rights or credits
c. Contracts involving services

8. According to the time of fulfillment

a. Executed
b. Executory
One that has not yet been performed.
9. According to the number of persons physically entering into the contract.
a. Ordinary
Where two parties are represented by different persons
b. Auto-contract
Where only one person represents the two opposite parties to the contract
10. According to the number of persons who participated in the drafting of the contract
a. Ordinary
→both parties participated in the drafting of the contract
b. Contract of adhesion
→only one party drafted the contract
Stages of a Contract
1. Preparation or conception
2. Perfection or birth
3. Consummation or death or termination

Characteristics of contract.
1. Liberty of contract or freedom to stipulate
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
2. Mutuality of Contracts
The contract must bind both contracting parties
3. Relativity of Contracts
Contracts take effect only between the parties, their assigns and heirs, except where the rights
and obligations are not transmissible:
a. By law
b. By stipulation; or
c. By nature

•What is stipulation “pour autrui”?

It is a stipulation in a contract clearly and deliberately conferring a favor upon a third person
who has a right to demand its fulfillment provided he communicates his acceptance to the obligor
before its revocation.

4. Consensuality of Contract
Contracts are perfected by mere consent
5. Obligatory force of contract and compliance in good faith
Obligations arising from contracts shall have the force of law between the contracting
 Obligations arising from contracts shall have the force of law between the contracting
parties and should be complied with in good faith.

ESSENTIAL REQUISITES OF CONTRACTS

I. CONSENT OF THE CONTRACTING PARTIES
→ is the manifestation of the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract
Nature of advertisements
•Business advertisements of things for sale are not definite offers, but mere invitations to make an
offer
•Advertisements for bidders are merely invitations to make proposals and the advertiser is not bound
to accept the highest or lowest bidder
•Option
→ is a contract whereby the offeror gives the offeree a certain period within which to buy or not to
buy a certain object for a fixed price.
Rules on Acceptance
1. The acceptance must be absolute and unqualified.
2. Acceptance made by letter or telegram does not bind the offerer except from the time
it came to his knowledge. The contract in such a case is presumed to have been entered
into the place where the offer was made.
3. Acceptance may be express or implied
4. An offer made through an agent is accepted from the time it is communicated to him.

What causes will render an offer ineffective?

•Death, civil interdiction, insolvency of either party before acceptance is conveyed ;
•Revocation, rejection of withdrawal of the offer before acceptance is communicated;
•Qualified acceptance of the offer as the acceptance is really a counter-offer; and
•Expiration of the period of time given to the offeree within which he must signify his
acceptance.

What are the characteristics of consent?

It is intelligent – there is capacity to act;
It is free and voluntary – There is no vitiation of consent by reason of violence or intimidation;
and
It is conscious and spontaneous – there is no vitiation of consent by reason of mistake, undue
influence, or fraud .
Rules on consent
1. The parties must have the capacity to enter into a contract.
The following cannot give consent to a contract:
a. Unemancipated minors
b. Insane or demented persons
c. Deaf mutes who do not know how to write
2. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.
3. A contract where consent is given through mistake, violence, intimidation, undue influence,
or fraud is voidable.

Simulated contract
→A contract that does not intend to have any legal effect on or a change, in the juridical
 →A contract that does not intend to have any legal effect on or a change, in the juridical
situation of the parties.
What are the kinds of simulation
a. Absolute – when the contract does not really exist and the parties do not intend to be bound
at all. Absolutely simulated or fictitious contracts are void;
b. Relative – when the (apparent) contract entered into by the parties is different from their
true (hidden or disguised) agreement. The parties are bound by their real agreement provided
it does not prejudice a third person and is lawful;

•What services may be the object of a contract

All services which are not contrary to law, morals, good customs, public order, or public
policy.
•What rights may be the object of a contract?
All rights may be the object of a contract except those which are intransmissible by their
nature, or by stipulation, or by provision of law.
Cause of Contracts
It is the essential reason why a party enters into a contract.
Cause of Contracts
1. Onerous contracts – the cause for each contracting party is the prestation or promise of a
thing or service by the other.
2. Remuneratory contract – the cause is the service or benefit which is remunerated.
3. Gratuitous, lucrative, or contract of pure beneficence- the cause is the liberality of the
benefactor.
•What is motive in a contract?
Motive is purely personal reason which a party has in entering into a contract.

Lesion
→ is inadequacy of the cause.
As a general rule, lesion shall not invalidate a contract except in the following:
1. When there was fraud, mistake and undue influence.
2. In cases provided by law, such as when the ward or absentee suffer lesion by more than
one-fourth of the value of the object of the contract.

DEFECTIVE CONTRACTS
a. Rescissible contracts – They are valid because all the essential requisites of a
contract are present but by reason of injury or damage to one of the parties or to third
persons, such as creditors, the contract may be rescinded;
b. Voidable contracts – They are also valid until annulled unless there has been
ratification.
c. Unenforceable contracts – They cannot be sued upon or enforced in court by
reason of statutory defects unless they are ratified; and
d. Void or inexistent contracts – They have no effect at all and cannot be ratified.

Rescissible Contracts
→ is one which has the essential requisites of a contract but which may set aside by reason of
injury or damage to third persons.
The following are rescissible contracts
1. Those entered into by guardians whenever the ward whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof.
 more than one-fourth of the value of the things which are the object thereof.
2. Those agreed to in representation of absentees, if the latter suffer lesion by more than one-
fourth of the value of the things which are the object thereof.
3. Those undertaken in fraud of creditors when the latter cannot in any 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.

NOTA BENE:
The action for rescission must be brought within the period allowed by law.
The prescriptive period is 4 years from the date of the contract except in the following:
a. For persons under guardianship – 4 years from termination of incapacity.
b. For absentees – 4 years from the time the absentee’s domicile is known

Nota Bene:
Alienation indicating bad faith – When it is attended by circumstances that have been denominated
by our courts as “badges of fraud.”

Voidable Contracts
A voidable contract is one that is defective by reason of the incapacity or vitiated consent of
one to the parties.
The following are voidable or annullable contracts
1. Those where one of the parties is incapable giving consent to a contract.
The following are incapable of giving consent to a contract.
a. Unemancipated minors
b. Insane or demented persons
c. Deaf-mutes who do not know how to write.
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

•Annulment
Annulment is the action brought to set aside a voidable contract.
NOTA BENE:
1. When action must be brought (prescriptive period);
The action for annulment must be brought within four (4) years which period shall
begin:
a. In cases of intimidation, violence, or undue influence, from the time the defect in the
consent ceases.
b. In case of mistake or fraud, from the time of discovery of the same
c. In cases of minority or other incapacity of a party, from the guardianship ceases.
2. Who may bring action for annulment
The action for annulment may be instituted by all who are thereby obliged principally or
subsidiarily. It may be brought by the following:
d. The guardian of the incapacitated person during the latter’s incapacity.
e. The incapacitated person after he has attained capacity.
f. The party whose consent is vitiated by mistake, violence, intimidation, undue influence or
fraud
3. Effect of loss of thing while in the possession of the party who has right to bring the
 fraud
3. Effect of loss of thing while in the possession of the party who has right to bring the
action for annulment
a. If lost through his fault, the action for annulment is extinguished, whether such party is
incapacitated or his consent is vitiated.
b. If lost without his fault and such party is incapacitated, he can still bring an action for
annulment. However, he will be required to return the value of the thing and its fruits and
only up to the extent that he has been benefited.
•Ratification
is the adoption or affirmation a contract which is defective

Unenforceable Contracts
→ is one that cannot be enforced unless ratified.

•The following are unenforceable contracts

1. Those entered into the name of another by one without authority or legal representation, or
who acted beyond his powers;
2. Those that do not comply with the Statute of Frauds.

•Statute of Frauds is a statute designed to prevent the commission of fraud by requiring

certain contracts to be in writing and to be subscribed by the party charged.
The following contracts must be in writing, otherwise, they are unenforceable.
a. An agreement that by its term 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 in consideration of marriage, other than mutual promise to marry.
d. Sale of goods, chattels or things in action at a price not less than P500.00
e. An agreement for the leasing of a real property or of an interest for more than one year.
f. Sale of real property or an interest therein
g. A representation as to the credit of a third person.

How may an unenforceable contract under the Statute of Frauds be ratified?

a. By failure to object to the presentation of oral evidence to prove the contract; and
b. By acceptance of benefits under the contract.

Void or Inexistent Contracts

→ is one which has no force and effect from the very beginning, as if it had never been entered into
and which cannot be validated either by time or ratification.

What are the classes of void contracts?

They are:
a. Inexistent contracts or those where a requisite or some of the essential requisites of a
contract are lacking or where the formalities prescribed by law for validity are not complied
with; and
b. Illegal or Illicit contracts or those where the essential requisites of a contract are present but
the cause, object, or purpose is contrary to law, morals, etc.

The following contracts are void from the very beginning:

a. Those whose cause, object or purpose is contrary to law, morals, good customs, public
 a. Those whose cause, object or purpose is contrary to law, morals, good customs, public
order, or public policy.
b. Those which are absolutely simulated or fictitious.
c. Those whose object or cause did not exist at the time of the transaction.
d. Those whose object is outside the commerce of men.
e. Those which contemplate an impossible service.
f. Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained.
g. Those expressly prohibited or declared void by law.

Cases when recovery may be made despite the parties being in pari delicto in illegal contracts
1. The payor may recover interest he paid in excess of the interest allowed by usury laws together
with interest from the date of payment.
2. A party may recover, if public interest will be subserved, money or property delivered for
illegal purpose provided he repudiates the contract before the purpose has been accomplished or
before any damage has been caused to a third person.
An incapacitated person who is a party to an illegal contract may recover, if the interest of justice
so demands, money or property delivered by him.
3. A person may recover, if public policy is thereby enhanced, what he has paid or delivered. If
the agreement is not illegal per se but is merely prohibited and the prohibition by law is designed
for his protection.
4. Any person may recover any amount he has paid in excess of the price fixed by law for any
article or commodity.
5. A laborer may demand additional compensation for service rendered beyond the maximum
number of hours of labor in a contract where he undertakes to work longer than the maximum
hour fixed.
6. A laborer may recover the deficiency in a contract where he accepts a wage lower than the
minimum wage set by law.

Rule when contract is divisible or indivisible and there are illegal terms
1. If divisible – the legal terms may be enforced; the illegal terms are void, hence, they may not
be enforced.
2. If indivisible – the whole is void; hence no part thereof may be enforced.

FORM OF CONTRACTS
Obligatory force of contracts in whatever form, exceptions
State the rules governing the form of contracts
(1) General Rule – A contract shall be obligatory or binding in whatever form it may have
been entered into provided all the essential requisites (consent, object and cause and in certain
specified contracts, delivery or form) for its validity are present
(2) Exceptions – In the following cases, the form of the contract is essential:
(a)when the law requires that the contract be in some form to be valid
(b)when the law requires that a contract be in some form to be enforceable or proved in a
certain way; and
(c)when the law requires that a contract be in a certain form for the convenience of the
parties.
•A public instrument
is one which is sworn to before a notary public or other officer authorized to
administer oaths.
 administer oaths.
REFORMATION OF INSTRUMENTS
→is a remedy in equity by means of which a written instrument is made or construed so as to express
or conform to the real intention of the parties when some error or mistake has been committed.
Who may ask for reformation
1. If the mistake was mutual – by either party, or his successors in interest, such as his heirs or
assigns.
2. In other cases – the injured party, or his heirs or assigns.

When reformation is not available

1. In case of the following:
a. Simple donations inter vivos wherein no condition is imposed.
b. Wills
c. When the real agreement is void.
2. When one of the parties has brought an action to enforce the contract, he canot subsequently
ask for its reformation.
INTERPRETATION OF CONTRACTS
→is the determination of the meaning of the terms or words used by the parties in the contract.
Rules on interpretation of contracts
1. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of the stipulations shall control.
2. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former
3. However, general the terms of a contract may be, they shall not be understood to comprehend
things that are distinct and cases that are different from those upon which the parties intended to
agree
4. If the stipuation of any contract should admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual.
5. The various stipulations of a contract shall be interpreted together, although attributing to the
doubtful ones that sense which may result from all of them taken jointly.
6. Words which may have different significations shall be understood in that which is most keeping
with the nature and object of the contract.
7. The usage or custom of the place shall be borne in minds in the interpretation of the ambiguities of
a contract, and shall fill the omission of stipulations which are ordinarily established.
8. The interpretation of obscure words or stipulations in a contract shall not favor a party who caused
the obscurity
Rules when it is absolutely impossible to settle doubts under the preceding rules
1. When the doubts refer to the incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail.
2. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests
3. If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.