CONTRACTS

BASIC CONCEPTS
1. Definition – a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something, or to render something.
2. Elements
a. Essential elements (COC – discussed in detail below)
i. Consent of the contracting parties
ii. Object certain which is the subject matter of the contract
iii. Cause of the obligation which must be established
b. Natural elements – found in certain contracts unless set aside or suppressed by the
parties
c. Accidental elements – refer to particular stipulations of the parties (terms of payment,
interest rate, place of payment)
3. Classification
a. According to perfection or formation
i. Consensual – perfected by mere consent
ii. Real – perfected by the delivery of the object of the contract (depositum, pledge,
and commodatum)
iii. Formal or solemn – which must be in form provided by law for their perfection
b. According to cause
i. Onerous – there is an exchange of valuable considerations (sale)
ii. Gratuitous or lucrative – one party receives no equivalent consideration (the cause
of these contracts is the liberality of the benefactor)
iii. Remuneratory – the cause is the service or benefit remunerated
c. According to importance or dependence of one upon another
i. Principal – independent contract (such as sale)
ii. Accessory – its existence depends upon another contract (dependent contract
such as a mortgage)
iii. Preparatory – serves as a means by which other contracts may be entered into
(such as contract between partners in a partnership which then lead to the
formation of subsequent contracts)
d. According to name or designation
i. Nominate – contracts which have a name under the law (sale)
ii. Innominate – those without name under the law. List of innominate contracts under
the Authorities in Civil Law:
1. Do ut des (I give that you may give)
2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
4. Facio ut facias (I do that you may do)
a. Rules that govern innominate contracts (order of priority)
i. The stipulation of the parties
ii. The provisions of Obligations and Contracts
iii. The rules governing the most analogous (identical) nominate
contracts
iv. The customs of the place
e. According to risk or fulfillment
i. Commutative – parties give equivalent values, hence, real fulfillment is present
ii. Aleatory – fulfillment depends upon chance (insurance contracts)
f. According to parties obligated
i. Unilateral – only one of the parties is obligation to give or to do something
ii. Bilateral (synalagmatic) – both parties are required to give or do something (may
be reciprocal or non-reciprocal)
g. According to subject matter
i. Contracts involving things (sale)
ii. Contracts involving rights or credits (usufructuary rights or assignment of credits)
iii. Contracts involving services (agency or lease of service)
h. According to time of fulfillment
 i. Executed – one which has been performed
ii. Executory – one that has not yet been performed
i. Other classifications
i. Auto-contract – only one person represents two opposite parties of the contract
ii. Contract of adhesion – only one party drafted the contract (insurance)
4. Stages of Contracts
a. Preparation or inception or generation or negotiation – involves primary negotiations and
bargaining, discussion of terms, and conditions, with no arrival yet of a definite
agreement. Negotiation begins from the time the prospective contracting parties manifest
their interest in the contract and ends at the moment of their agreement.
b. Perfection or birth – point when there is a meeting of minds between the parties on a
definite subject matter and a valid cause.
c. Consummation or death or termination – occurs when the parties fulfill or perform the
terms agreed upon in the contract, culminating in the extinguishment thereof.
5. Basic Principles (MARCO)
a. Mutuality of contracts – contracts must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. The ultimate purpose is to render
void a contract containing a condition which makes its fulfillment dependent solely upon
the uncontrolled will of one of the contracting parties. Thus, if the fulfillment of the
suspensive condition of an obligation depends upon the will of the debtor, the obligation
and the condition are void.
i. After a party has entered into a contract, he will not be permitted to renounce it
unilaterally.
ii. Any contract which appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is void. (Such as when, in a promissory note
where the creditor can increase, decrease, or otherwise change the interest rates
without advance notice to the borrower)
iii. The determination of the performance may be left to a third person, whose decision
shall not be binding until it has been made known to both contracting parties.
However, such determination shall not be obligatory if it is evidently inequitable. In
such a case, the courts shall decide what is equitable under the circumstances.
b. Autonomy of contracts (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, or good customs, public order
or public policy. The following stipulations are held to be void:
i. Pactum commissorium – stipulation that creditor automatically becomes the owner
of the property pledged or mortgaged if the debtor defaults in his payments
(contrary to law)
ii. Tipo – stipulation in a mortgage contract providing for a specified price below which
the mortgaged property is not suppose to be sold at the foreclosure (contrary to
law)
iii. An agreement to pay an unconscionable rate of interest (contrary to morals)
iv. Involuntary servitude – an agreement by the debtor to work without pay until he
could find money to pay the debt (contrary to morals)
v. An agreement to hide a crime, to suppress the evidence and to stifle the
prosecution of the offender (contrary to public policy)
c. Relativity of contracts – contracts take effect only between the parties, their assigns and
heirs (an heir shall not be liable beyond the value of the property he received from the
decedent) except where the rights and obligations are not transmissible by law,
stipulation, or nature.
i. Where a contract may be enforced by or against a third person
1. Pour autrut – stipulation in the contract that clearly and deliberately confers
a favor upon a third person. Such third person may demand its fulfillment
provided he has communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is not sufficient.
2. Where a third person induces another to violate his contract, in which case,
such third person may be liable for damages by the other contracting party
(two-timer on contracts)
 3. In contracts creating real rights, third person who come into possession of
the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws.
4. In contracts intended to defraud creditors, the law gives them protection.
This is true if the third person acted in bad faith.
d. Consensuality of contract – contracts are perfected by mere consent except in the
following contracts which need to comply with additional requirements (if the parties did
not follow the requirements, contract is void):
i. In real contracts such as deposit, pledge, and commodatum, which are perfected
upon the delivery of the object of the obligation.
ii. In formal or solemn contracts, which are required to be in the form provided by law,
to be perfected. (e.g. donation of an immovable property which must be in a public
instrument)
e. Obligatory force of contract and compliance in good faith – obligations arising from
contracts shall have the force of law between the contracting parties and should be
complied with in good faith. Upon the perfection of the contract, the parties are bound to
the following:
i. The fulfillment of what has been expressly stipulated
ii. All the consequences which, according to their nature, may be in keeping with
good faith, usage (customs of the place) and law.

ESSENTIAL REQUISITES OF CONTRACTS (COC)

Consent Definition: Manifestation of the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the contract.

Rules on offer
1. The offer must be certain because there could be no meeting of minds
if it is vague or not definite. It must be definite, complete, and
intentional.
a. Nature of advertisements
i. Business advertisements of things for sale are not
definite offers, but mere invitations to make an offer
unless it appears otherwise.
ii. Advertisements for bidders are merely invitations to
make proposals and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary
appears.
2. An offer becomes ineffective upon the death, civil interdiction, insanity,
or insolvency of either party before acceptance is conveyed.
3. 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 is paid or promise (put option).
a. Option – 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. It may or may not be for a valuable
consideration.
i. Option without consideration – offerer may withdraw the
offer anytime
ii. Option with consideration (put option) – the offerer may
not withdraw the offer before the lapse of the period
agreed upon

Rules on acceptance
1. The acceptance must be absolute. If the acceptance varies the offer,
there is no contract since there is no meeting of minds.
a. If the acceptance is qualified, it constitutes a counter-offer; and
has the effect of rejecting the offer (counter-offer means
 offering less than the initial offer [tawad]). If the offerer accepted
the counter-offer, then there will be a perfected contract.
b. If the offer fixes the time, place, and manner of acceptance, all
must be complied with. Otherwise, there will be no meeting of
minds.
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 (this is important because a contract is governed by the law
of the place where it was entered into).
3. Acceptance may be express or implied
a. Express – made orally or in writing
b. Implied – it can be inferred from the conduct of the parties
4. An offer made through an agent is accepted from the time it is
communicated to him (a contract is binding upon the principal
although the agent has not communicated the acceptance to him
because the agent is merely an extension of the principal).
Acceptance of the agent is deemed an acceptance by the principal.

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 (17 years or below)
b. Insane or demented persons (if the contract is entered into
during lucid intervals of such persons, the contract is valid)
c. Deaf-mutes who do not know how to write (contract is voidable)
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. These are referred
to as the causes that vitiate the consent or the vices of the consent.
a. Mistake
i. When mistake will invalidate consent
1. If the mistake refers to the substance of the thing
which is the object of the contract
2. If the mistake refers to those conditions which
have principally moved one or both parties to
enter into contract
3. If the mistake refers to the identity or
qualifications of one of the parties if such identity
or qualifications have been the principal cause of
the contract.
4. If the mistake refers to the legal effect of an
agreement when the real purpose of the parties
is frustrated and the same is mutual (either party
may annul the contract).
ii. When mistake does not vitiate consent
1. If the mistake refers to a simple mistake of
account which shall only be corrected
2. If the party alleging it knew the doubt,
contingency, or risk affecting the object of the
contract
iii. Rule when one party is unable to read or does not
understand the language of the contract – if mistake or
fraud is alleged, the person enforcing it must show that
the terms thereof have been fully explained to the
former. This is an exception to the rule that he who
alleges fraud or mistake must prove the same.
b. Violence or physical coercion
i. When violence vitiates consent
1. There is violence when in order to wrest consent,
serious or irresistible force is employed. This is
 true although it may have been employed by a
third person who did not take part in the contract.
c. Intimidation or moral coercion
i. When intimidation vitiates consent
1. There is intimidation 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, descendants, or
ascendants, to give his consent. This intimidation
exists although it may have been employed by a
third person who did not take part in the contract.
2. Factors to consider in determining the degree of
intimidation
a. Age
b. Sex
c. Condition of the person
ii. When no intimidation exists
1. In case of a threat to enforce one’s claim through
competent authority, if the claim is just or legal.
d. Undue influence
i. When undue influence vitiates consent
1. There is undue influence when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable
freedom of choice. For it to be present, the
influence exerted must have so overpowered or
subjugated the mind of a contracting party as to
destroy his free agency, making him express the
will of another rather than his own.
2. Factors to consider in determining the existence
of undue influence
a. Confidential, family, or spiritual, and other
relations of undue influence
b. Mental weakness
c. Ignorance
d. Financial distress of the person alleged to
have been unduly influenced.
e. Fraud
i. Kinds of dolo or fraud
1. Causal fraud (dolo causante) – fraud without
which consent would not have been given. It
renders the contract voidable
2. Incidental fraud (dolo incidente) – fraud without
which consent would have still been given but the
person giving it would have agreed on different
terms. Contract is valid but the party employing it
shall be liable for damages.
3. Fraud in the performance of the obligation –
deliberate act of evading fulfillment of an
obligation in a normal manner.
ii. When fraud exists (dolo causante)
1. Active fraud – when through insidious words or
machinations of one of the contracting parties,
the other is induced to enter into a contract which,
without them, he would not have agreed to
(unrelated parties).
2. Passive fraud – when there is a failure to disclose
facts, when there is a duty to reveal them, as
when the parties are bound by confidential
relations (related parties).
 iii. Requisites to make a contract voidable by reason of
fraud
1. The fraud should be serious (incidental fraud only
obliges the person employing it to pay damages)
2. The fraud should not have been employed by
both contracting parties (if both parties are in
fraud, the contract is valid)
iv. When no fraud exists
1. In case of usual exaggerations in trade, when the
other party had an opportunity to know the facts
2. In case of a mere expression of an opinion,
unless made by an expert and the other party has
relied on the former’s special knowledge.
3. In case of misinterpretation by a third person,
unless such misinterpretation has created
substantial mistake and the same is mutual
(contract is then voidable). Consent is likewise
vitiated if the third person connived with a party to
the contract in making the interpretation.
4. If the misinterpretation was made in good faith.
However, the same may constitute error.

Simulated contracts
1. Absolutely simulated contracts – one where parties do not intend to
be bound at all. Being fictitious, it is void. The parties may thus recover
from each other what they may have given under the contract.
a. Main characteristic: The apparent contract is not really desired
or intended to produce legal effect or in any way alter the
juridical situation of the parties.
b. The simulation must be on the part of both the parties. Where
only one simulates, there is deceit or fraud, and the contract is
regarded as voidable, not void.
2. Relatively simulated contracts – one where the parties conceal their
true agreement. The parties here are bound by their real agreement
provided it does not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs, public order, or
public policy.
a. If the parties state a false cause in the contract to conceal their
real agreement, the contract is only relatively simulated and the
parties are still bound by their real agreement.
b. Where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract,
the agreement is absolutely binding and enforceable between
the parties and their successors in interest.
Object What may be the object of contracts
1. All things which are not outside the commerce of men including future
rights except future inheritance (except in cases provided by law –
such as in the marriage settlements or in partition of the estate by the
testator).
a. Contract is generally void when object is future inheritance.
Requisites are as follows:
i. The succession has not been opened
ii. The object of the contract forms parts of the inheritance
and
iii. The promissor has, with respect to the object, an
expectancy or right which is purely hereditary in nature.
2. All rights which are transmissible
3. All services which are not contrary to law, morals, good customs,
public order, or public policy.

Requisites of the object of a contract

1. It must be within the commerce of men
 2. It must be transmissible
3. It must not be contrary to law, morals, good customs, public order, or
public policy
4. It must not be impossible
5. It must be determinate as to its kind or if its quantity is not determinate,
it must be possible to determine the same without the need of a new
contract between the parties
6. Human body and parts cannot be the subject of commercial
transactions
a. Except a living and related voluntary donor or a living and non-
related voluntary donor may be allowed to donate organs, but
no living minor is allowed to donate any organ for the purpose
of transplant.
b. Under the international agreement, organs for transplant
should be removed preferably from the bodies of deceased
persons, and that adult living persons may also donate organs
but such should be genetically related to the recipients.
Cause Definition: It is the essential reason why a party enters into a contract

Cause of contracts
1. Onerous contract – the case here is the prestation or promise of a
thing or service by the other
2. Remuneratory contract – the cause is ther service or the benefit which
is remunerated
3. Gratuitous, lucrative, or contract of pure beneficence – the cause is
the liberality of the benefactor

Requisites
1. It must exist
a. It is presumed that the cause exists and it is lawful, even if not
stated in the contract, unless the debtor proves the contrary
b. Contracts without cause produce no effect whatsoever
2. It must be lawful
3. It must be true – the statement of a false cause in a contract shall
render them void, if it should not be proved that they were founded
upon another cause which is true and lawful

Cause vs motive
1. Cause is the essential reason of the contract; while motive is the
private or secret reason or intention of a contracting party
2. The contract is void if the cause is illegal; the validity of the contract is
not affected by the illegality of the motive
3. The cause of a contract is always known to the contracting parties,
while the motive of one party may not be knowen to the other

Lesion
1. Definition: Lesion is the inadequacy of cause. As a general rule,
lesion shall not invalidate the contract except in the following:
a. When there was fraud, mistake, and undue influence.
b. 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
(arranged according to the gravity of their defect)
Rescissible contract Definition: One which has all the essential requisites of a contract but
which may be set aside by reason of equity on account of damage to one of
the parties or upon a third person.

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
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 (the sale is not rescissble if the
third party acted in good faith)
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
Note: Rescission in 1 and 2 shall not take place if the contract is approved
by the court which is presumed to have taken appropriate steps to
safeguard the interest of the ward or the absentee.

Rescissible payment, requisites

1. The debtor is insolvent
2. The obligation is not yet due
3. The debtor makes the payment

Rescission
1. Definition: Remedy allowed by law to the contracting parties and
even to third person, to secure the reparation of damages caused by
a contract, even if it should be valid, by means of the restoration of
things to their condition at the moment prior to the celebration of the
contract.
2. Requisites
a. The party suffering damage must have no other legal means
to obtain reparation for the same
b. The party demanding rescission must be able to return
whatever he may be obliged to restore – rescission creates
the obligation to return the things which were the object of the
contract, together with the fruits, and the price with its interest.
Hence, rescission is not available if the party seeking it cannot
comply with such obligation. However, the obligation to return
does not apply to prejudiced creditors as there is nothing to be
returned by them.
c. The thing object of the contract must not be legally in the
possession of the third person who acted in good faith – in
this case, indemnity for damages may be demanded from the
person causing the loss
d. The action for rescission must be brought within the period
allowed by law
i. Generally, the prescriptive period is 4 years. Except in
the following cases:
1. For persons under guardianship – 4 years from
termination of incapacity
2. For absentees – 4 years from the time the
absentee’s domicile is known
3. Extent of rescission
a. Rescission shall only be to the extent necessary to cover the
damages caused
4. Alienations in fraud of creditors
a. Alienations by gratuitous title – gratuitous alienations are
presumed to have been entered into fraud of creditors if the
debtor did not reserve sufficient property to pay all debts
contracted before the donation
b. Alienations by onerous title – presume fraudulent when made
by persons against whom some judgment has been rendered
 in any instance or some write of attachment has been issue.
The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party
seeking rescission.
5. Liability for damages of persons acquiring things in alienations in
fraud or creditors
a. If the purchase was made in bad faith
i. The purchaser in bad faith shall indemnify the creditors
for damages suffered by them on account of the
alienation whenever due to any cause, it would be
impossible for him to return them. This rule applies
even if the cause of the loss is a fortuitous event. If
there are two or more alienators, the first acquirer shall
be liable first, and so on successively provided they
were also in bad faith.
b. If the purchase was made in good faith
i. The purchaser in good faith shall not be liable
notwithstanding the fraudulent intention of the debtor in
disposing the property. Hence, rescission will not be
available. If there are subsequent transfers, the
transferees shall not be liable even if they were in bad
faith.
Voidable contract Definition: One that is defective by reason of the incapacity or vitiated
consent of one of the parties. It is binding unless annulled by a proper
action in court. It is susceptive of ratification.

The following are voidable or annullable contracts

1. Those where one of the parties is incapable of giving consent to a
contract such as unemancipated minors, insane or demented
persons, deaf-mutes who do not know how to write.
2. Those where the consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud.
3. Those where consent is given in a state of drunkenness
4. Those where consent is given during a hypnotic spell

Annulment
1. Definition: Action brought to set aside a voidable contract
2. Annulment vs. rescission
a. Annulment is brought to declare the inefficacy inherent in the
contract. Rescission is availed to produce the inefficacy which
did not exist in the contract.
b. Annulment is based on vitiated consent; hence, damage is
immaterial. Rescission is based on lesion or damage.
c. In annulment, the action is principal. In rescission, the action
is subsidiary.
d. Annulment is a sanction where the law predominates.
Rescission is a remedy where equity predominates.
e. Annulment is available only to the parties, whether bound
principally or subsidiarily. Rescission is available not only to
the contracting parties but also to third person whose interests
are affected.
f. Ratification is required to prevent annulment, while ratification
is not required to prevent rescission.
3. Rules on annulment of voidable contracts
a. When action must be brought (prescriptive period), otherwise
the contract can no longer be set aside.
i. Generally, the prescriptive period is 4 years except on
the following instances:
1. In cases of intimidation, violence, or undue
influence, from the time the defect in the consent
ceases
 2. In case of mistake or fraud, from the time of
discovery of the same
3. In cases of minority or other incapacity of a
party, from the time guardianship ceases
b. Who may bring action for annulment
i. The action for annulment may be instituted by all who
are hereby obliged principally or subsidiary. It cannot
be brought by third persons. It may be brought by the
following:
1. The guardian of the incapacitated person during
the latter’s incapacity
2. The incapacitated person after he has attained
capacity
3. The party whose consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud.
c. Effects of annulment
i. Obligations created by annulment
1. In obligations to give, the contracting parties
shall restore to each other, except in cases
provided by law, the following:
a. The things which have been the subject
matter of the contract, with their fruits
b. The price with its interest
2. In obligations to render service, the value
thereof shall be the basis for damages
3. Restitution when one of the parties is
incapacitated – 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
4. When the thing is lost through the fault of the
party obliged by the decree of annulment to
return it – the said party must return the fruits
received, value of the thing at the time of the
loss, and interest from the time of the loss.
5. Mutual restitution – if one party cannot restore
what he is bound to return in the decree of
annulment, the other cannot be compelled to
comply with what is incumbent upon him.
d. Effect of loss of thing while in the possession of the part who
has right to bring the action for annulment
i. If lost through his fault, the action for annulment is
extinguished, whether such par is incapacitated or his
consent is vitiated
ii. If lose 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 extend that he has been
benefitted.

Ratification
1. Definition – adoption or affirmation of a contract which is defective
because of a party’s vitiated consent or incapacity.
2. Rules
a. How ratification is made
i. Express – made orally or in writing
ii. Implied or tacit – ‘implies an action to waive his right’
b. Who may ratify (the same persons who may annul the
contract)
3. Effects
a. It extinguished the action to annul a voidable contract

Unenforceable
contracts
Statutes of frauds – statute
which is designed to prevent
the commission of fraud by
requiring certain contracts to
be in writing and be
subscribed by the party
charged. It applies only to
wholly executory contracts.
Contracts infringing the
Statute of Frauds cannot be
sued upon either for
damages or specific
performance.
Applicability of Statute of
Frauds
The statute of frauds applies
only to executory, not to
completed, executed, or
partially consummated,
contracts. They are
susceptible of ratification
through any of the following
means which will render
them enforceable:
1. By the failure to object
the presentation of oral
evidence to prove them
2. By the acceptance of
benefits under them.
This will make the
contract executed in
part.
Void or Inexistent
Contracts
Pari delicto – universal
doctrine which holds that no
action arises, in equity or
law, from an illegal contract;
no suit can be maintained
for its specific performance,
or to recover the property
agreed to be sold or
delivered, or the money
agreed to be paid, or
damages for its violation;
and where the parties are in
pari delicto, no affirmative
relief of any kind will be
given to one against the
other. This only applies
where there is equal guilt,
and not when one party is
more guilty than the other.
b. It cleanses the contract from all its defects from the moment it
was constituted. In other words, the contract is validated from
inception.
Definition: Is one that cannot be enforced unless ratified.
Right to defense unenforceability – available to the contracting parties
The following are unenforceable contracts
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. Such contract, if entered into, shall be
unenforceable, unless it is ratified expressly or impliedly, by the
person in whose behalf it has been executed, before it is revoked by
the other contracting party.
2. Those do not comply with the Statutes of Frauds. The following
contracts must be in writing otherwise they are unenforceable:
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. This is known as guaranty.
c. An agreement in consideration of marriage, other than mutual
promise to marry.
d. Sale of goods, chattels, or thins in action at price not less than
P500.00.
i. Rule in sale of auction – if the auctioneer makes an
entry in his sales book, at the time of sale, of the
amount and kind of property sold, terms of sale, price,
names of purchasers and person on whose account
the sale is made, it is a sufficient memorandum (it is
enforceable).
e. An agreement for the leasing of a real property or of an
interest therein for more than one year.
f. Sale of real property or an interest therein (regardless of the
price)
g. A representation as to the credit of a third person – the
representation must have the effect of inducing party to whom
the representation is made to grant credit to another
3. Those where both parties are incapable of giving consent to a
contract
a. If ratified by the guardian:
i. When only the parent or guardian of one party ratifies,
the contract is voidable at the instance of the parent or
guardian of the party who did not ratify the contract
ii. When the parents or guardian of both parties ratify, the
contract shall be considered validated from inception
1. Definition: One which has no force and effect from the very
beginning, as it if had never been entered into, and which cannot be
validated either by time or ratification. It is equivalent to nothing; it
produces no civil effect. It does not create, modify, or extinguish a
juridical relation.
2. Characteristics
a. A void contract cannot be ratified
b. The right to set up the defense of illegality cannot be waived
c. The action or defense for the declaration of the inexistence of
a contract does not prescribe
d. The defense of illegality of contracts is not available to third
persons whose interests are not directly affected
e. A contract is void and inexistent if it is direct result of a
previous illegal contract
3. The following contracts are void from the very beginning
a. Those whose cause, object or purpose is contrary to law,
morals, good customs, public order, or public policy

Exceptions to the Pari
Delicto
As a rule, when the contract
is unlawful, whether or not it
constitutes criminal offense,
recovery by either party is
not allowed if both parties
are in pari delicto. The
following are the cases
where recovery may be
made despite the parties
being in pari delicto.
1. The payor may recover
interest he has paid in
excess of the interest
allowed by usury laws
together with interest
from the date of
payment. Usury has
become legally
inexistent. However,
nothing in the circular
grants lenders carte
blanche to raise interest
rates to levels which will
enslave their borrowers.
(Under Circular No. 799,
the rate of interest for
loan or forbearance of
money, goods or credits
and the rate allowed in
judgments, in the
absence of an express
contract as to such rate
of interest, shall be 6%
per annum.
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.
3. 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.
4. 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.
5. Any person may recover
any amount he has paid
in excess of the price
fixed by law for any
article or commodity.
6. 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 hours fixed.
7. A laborer may recover
the deficiency in a
contract where he
b. Those which are absolutely simulated or fictitious
c. Those whose object or cause did not exist at the time of the
transaction – these refers to things that are not capable of
coming into existence, and not to future goods or things
having a potential existence which may validly be the object of
a contract.
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 such as:
i. A contract of donation between spouses during the
marriage (except moderate ones on family rejoicing)
ii. A contract of sale between spouses (except when there
is a separation of properties)
iii. A contract which stipulates that household service shall
be without any compensation
iv. A contract upon future inheritance (except in cases
provided by law such as in the marriage settlements)
4. Kinds of illegal contracts; effect of illegality
a. Where the contract is a criminal offense
i. If both parties are guilty (in pari delicto)
1. They shall have no right of action against each
other
2. Both shall be criminally prosecuted
3. The effects and instruments of the crime shall be
confiscated in favor of the government
ii. If only one party is guilty
1. The guilty party will be criminally prosecuted
2. Neither one may compel the other to comply
with his undertaking
3. The instruments will be confiscated by the
government
4. The innocent party shall not be bound to comply
with his promise if he has not yet given anything,
and if he had given, he may claim for its return
b. Where the contract is not a criminal offense
i. If both parties are guilty
1. Neither party may recover what he has given or
demand the performance of the other’s
undertaking
ii. If only one part is guilty
1. The guilty party cannot recover what he has
given nor can he ask for the fulfillment of what
has been promised him
2. The innocent party may demand the return of
what he has given without any obligation to
comply with his promise
5. Rights when contract is divisible or indivisible ad there are illegal
terms
a. If divisible – the legal terms may be enforced; the illegal terms
are void, hence, they may not be enforced
b. If indivisible – the whole contract is void; hence, no part
thereof may be enforced.
 accepts a wage lower
than the minimum wage
set by law.

FORM OF CONTRACTS
1. Obligatory force of contracts in whatever form, exceptions – contracts shall be obligatory in
whatever form they may have been entered into, provided all the essential requisites for their
validity are present. This rule, however, does not apply when a certain form by law for the
following reasons:
a. For validity – if the contract is not in the form provided by law for its validity, the contract
is void. The following are certain contracts that must be in a certain form to be valid:
i. Contract of donation of an immovable property which must be in public instrument
together with the acceptance thereof by the done
ii. Contract of donation of personal property whose value exceeds P5,000.00 must
be in writing together with the acceptance of the done
iii. The authority of the agent to sell a piece of land must be in writing, otherwise, the
sale is void
iv. Contract of partnership where immovable property is contributed must be in a
public instrument to which shall be attached a signed inventory of the immovable
property
b. For enforceability
c. For convenience
2. Right to compel observance of the form required by law – if the contract does not follow the
required form of law, the contracting parties may compel each other to observe that form.
3. Contracts for the convenience of the parties
a. Public document – the following contracts are required to appear in a public document for
the convenience of the parties and so that they may be registered in the proper recording
office to adversely affect third persons.
i. Acts and contracts which have for their object the creation, transmission,
modification, or extinguishment of real rights over immovable property.
ii. The cession, repudiation or renunciation of hereditary rights or of those of conjugal
partnership of gains
iii. The power to administer property, or any other power which has for its object an
act appearing or which should appear in a public document, or should prejudice a
third person.
iv. The cession of actions or rights proceeding from an act appearing in a public
document.
b. Any writing, public or private – all other contracts where the amount involved exceeds
P500.00 must be in writing for the convenience of the parties. However, the sale of goods,
chattels, or things in action whose price P500.00 or more must be in writing to be
enforceable.

REFORMATION OF INSTRUMENTS
1. Definition – remedy in equity by means of which a written instrument is made or construed as to
express or to conform to the real intention of the parties when some error has been committed
2. Requisites
a. There must be a meeting of minds of the parties to the contract
b. The true intention of the parties is not expressed in the instrument
c. The reason therefore is due to mistake, fraud, inequitable conduct, or accident.
3. Who may ask reformation
a. If the mistake was mutual, by either party, or his successors in interest, such as his heirs
or assigns
b. In other cases, by the injured part, or his heirs or assigns
4. When an instrument may be reformed
a. When a mutual mistake of the parties causes the failure of the instrument to disclose their
agreement
b. When one party was mistaken and the other acted fraudulently or inequitably in such as
way that the instrument does not show their true intention
 c. When a party was mistaken and the other knew or believed that the instrument did not
state their real agreement
d. When through ignorance, lack of skill, or negligence or bad faith on the part of the person
drafting the instrument or of the clerk of typist, the instrument does not express the
intention of the parties
e. If two parties agree upon the mortgage or pledge of real or personal property, but the
instrument states that the property is sold absolutely or with right or repurchase.
5. When reformation is not available
a. In case of the following
i. Simple donations inter vivos wherein no condition is imposed – this is so because
a donation is essentially an act of liberality on the part of the donor. However, if the
donation is conditional, reformation is allowed so as to show the true intent of the
donor as regards the conditions.
ii. Wills – the reason is that the making of a will is strictly a personal act which is free
and the will may also be revoked at any time by the testator.
iii. When the real agreement is void – nothing to reform since the contract is inexistent
b. When one of the parties has brought an action to enforce the contract, he cannot
subsequently ask for its reformation – this is equivalent to ratification

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. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.
3. However, general 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 stipulation 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, 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 in
keeping with the nature and object of a contract.
7. The usage or custom of the place shall be borne in mind 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 cause
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 interest 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 as way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.