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Law On Contracts-Comprehensive
Law On Contracts-Comprehensive
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LAW ON CONTRACTS
General Principles
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. (Art. 1305).
Meeting of the minds – intention of the parties in entering into the contract respecting the
subject matter and consideration thereof. As a rule, therefore, a contract is perfected by mere
consent. It does not require any special form, as a rule, and is binding from the moment that the
essential requisites are present. Thus, the meeting of the minds between the parties rise to the
binding contract although they have not affixed their signature to its written form.
Obligation v. Contract
While a contract is one of the sources of obligations, an obligation is the legal tie or relations
itself that exists after a contract has entered into.
Here, there can be no contract if there is no obligation. But an obligation may exist without a
contract.
Stage, Characteristics
Stages in the making of a contract (CPC)
1. Conception or Generation – where parties begin their initial negotiation and bargaining
for the formation of the contract ending at the moment of agreement of the parties
2. Perfection or Birth – here, the parties had a meeting of minds as to the object, cause or
consideration and other terms and conditions of the contract
3. Consummation or Fulfillment – the last stage which consists in their performance or
fulfillment by the parties of their obligations under the term of the perfected contract
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Relativity of Contracts
Principle of relativity or Principle of limited effectivity of contracts GR: Contracts take effect
only between the parties or their assigns and heirs.
XPNs:
1. Rights or obligations that are not transmissible by their nature, or by the stipulation or by
provisions of law
2. Contracts containing a stipulation in favor of a third person (Stipulation pour autrui)
3. Contracts containing real rights
4. Contracts entered into in fraud of creditors
5. Contracts which have been violated at the inducement of third persons
6. Quasi-contract of negotiorum gestio
Mutuality of contracts
The contract must bind both contracting parties and its validity or compliance cannot be left to
the will of one of them (Art. 1308)
The binding effect of any agreement between parties to a contract is premised on two settled
principles:
1. That any obligation arising from contract has the force of law between the parties 2.
That there must be mutuality between parties based on their essential equality.
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Any favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
Contract of Adhesion
It is a contract in which one of the parties prepares the stipulations in the form of a ready-made
contract, which the other party must accept or reject, but not modify, by affixing his signature or
his “adhesion” thereto; leaving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing.
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Consent
Consent – manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Note: Consent is essential to the existence of a contract; where it is wanting, the contract is non-
existent.
Requisites of consent
1. Legal capacity of the contracting parties (parties must have full civil capacity);
2. Manifestation of the conformity of the contracting parties (manifestation may be in
writing bearing the signature or marks of the parties, or it may be implied from the conduct of
the parties like the acceptance of payment);
3. Parties’ conformity to the object, cause, terms, and condition of the contract must be
intelligent, spontaneous and free from all vices of consent (intelligence in consent is vitiated by
error; freedom by violence, intimidation or undue influence; and spontaneity by fraud; and
4. The conformity must be real.
Offer
Offer – an expression of willingness to contract on certain terms, made with the intention that it
shall become binding as soon as it is acepted by the to whom it is addressed.
Elements of a valid offer and acceptance
1. Definite - unequivocal
2. Intentional
3. Complete – unconditional
Note: We follow the cognitive theory and NOT the mailbox theory. Under our Civil Law, the
offer and acceptance concur only when the acceptance has reached the knowledge of the offer
(actual knowledge), and not at the time of sending the acceptance.
Offer
Requisites of an effective offer
1. The one offering must have a serious intention to become bound by his offer;
2. The terms of the offer must be reasonably certain, definite and complete, so that the
parties and the court can ascertain the terms of the offer; and
3. The offer must be communicated by the offeror to the offeree, resulting in the offeree’s
knowledge of the offer.
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Acceptance
Period for acceptance
1. Stated fixed period in the offer
a. Must be made within the period given by the offeror
b. As to withdrawal of the offer:
i. GR: it can be made by communicating such withdrawal at any time before the
acceptance is made
ii. XPN: when the option is founded upon consideration (something paid or
promised since partial payment of the purchase price is considered as proof of the
perfection of the contract)
2. No stated period
a. Offer is made to a person present – acceptance must be made immediately
b. Offer is made to a person absent – acceptance may be made within such time that,
under normal circumstances, an answer can be expected from him
Notes: if there was an acceptance already, the offeror cannot just withraw his offer
unilaterally, he will be liable for damages
Acceptance
Requisites of a valid acceptance
1. Must be absolute
2. No specified form but when the offeror specifies a particular form, such must be
complied with.
Notes: Offer or acceptance, or both, expressed in electronic form, is valid, unless
otherwise agreed by the parties (electronic contracts).
A conditional acceptance is a counter-offer which extinguishes the offer. If not accepted
by the offeror, there is no contract..
An acceptance may be express or implied.
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Option Contract
It is a contract between the offeror and the offeree whereby the former grants the latter, for a
valuable consideration, the privilege to buy or not to buy certain objects at anytime within a
specified period and for a fixed price.
Note: The privilege granted to the offeree must be supported by a consideration, the option is just
considered an “offer to sell” to the offeree which is not binding until accepted.
Vices of consent
1. Mistake
2. Intimidation
3. Violence
4. Undue influence
5. Fraud
MISTAKE
GR: Mistake as a vice of consent refers to mistake of facts and not of law, thus rendering the
contract voidable.
XPN: When mistake of law involves mutual error as to the legal effect of an agreement when the
real purpose of the parties is frustrated (Art. 1334)
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Kinds of mistake
1. Mistake as to the nature of the contract;
2. Mistake as to object of the contract;
3. Mistake as to the quality or principal conditions of the thing;
4. Mistake or error in quantity;
5. Mistake as to identity of the person;
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.
VIOLENCE – there is violence when in order to wrest consent, serious or irresistible force is
employed.
Requisites of violence
1. Physical force employed must be serious or irresistible; and
2. The determining cause for the party upon whom it is employed in entering into the
contract.
Note: 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. (Art. 1336)
UNDUE INFLUENCE – 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 (Art.
1337)
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FRAUD – there is fraud when through the 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 (Art. 1338)
Requisites of fraud to vitiate consent
1. It was applied or utilized by one contracting party upon the other;
2. It must be serious deception;
3. It must have induced the victim to enter the contract without which he would not have
agreed to;
4. It must have resulted in damage or injury.
Basis Dolo Causante (Art. 1338) Dolo Incidente (Art. 1344)
Efficient cause Efficient cause which induces Not the efficient cause
the party to enter into a
contract
Effect on the status of Renders the contract voidable Does not affect the validity of the
the contract contract
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Prepared by: Dominador B. Billones III, BS Accountancy
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Object – it is the subject matter of the contract. It can be a thing, right or service arising from a
contract.
Requisites of an object (DELiCT)
1. Determinate as to kind (even if not determinate, provided it is possible to determine the
same without the need of a new contract);
2. Existing or the potentiality to exist subsequent to the contract;
3. Must be licit;
4. Within the commerce of man; and
5. Transmissible
Note: The most evident and fundamental requisite in order that a thing, right or service may be
the object of a contract, is that it should be in existence at the moment of the celebration of the
contract, or at least, it can exist subsequently or in the future.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
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Object of contracts
GR: All things or services may be the object of contracts
XPNs:
1. Things outside the commerce of men
2. Untransmissible rights
3. Future inheritance, except in cases expressly authorized by law
4. Services which are contrary to law, morals, good customs, public order or public policy
5. Impossible things or services
6. Objects which are not possible of determination as their kind
Cause – the essential reason which moves the parties to enter into the contract. It is the
immediate, direct and proximate reason which justifies the creation of an obligation through the
will of the contracting parties.
Requisites of a cause
1. Exist
2. True
3. Licit
Kinds of cause
1. Cause of onerous contracts – the prestation or promise of a thing or service by the other
(e.g. contract of sale)
2. Cause of remuneratory contracts – the service or benefit remunerated (e.g. donation in
consideration of a past service which does not constitute a demandable debt)
3. Cause of gratuitous contracts – the mere liberality of the donor or benefactor
4. Accessory – identical with cause of principal contract, the loan which it derived its life
and existence (e.g. mortgage or pledge)
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Kinds of Contracts
According to perfection or formation:
1. Consensual contracts – which are perfected by the mere meeting of the minds of the
parties (NCC, Art 1305). eg. Sale, Lease.
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2. Real contracts are those which require for their perfection both the consent of the parties
and the delivery of the object by one party to the other. (e.g., creation of real rights over
immovable property must be written, deposit and pledge.)
3. Solemn contracts - contracts which must appear in writing, such as donation of real estate
or of movables if the value exceeds P5,000.00
Kinds of Contracts
According to their purpose:
1. Transfer of Ownership; e.g., Sale.
2. Conveyance of Use; e.g., Usufruct, Commodatum.
3. Rendition of Services; e.g., Agency
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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Rescissible Contracts
A rescissible contract is 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 (Art. 1381):
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; (e.g., G, the guardian of M, sold the corn harvested fro M’s farm for P40,000.00.
The value of the corn is P60,000.00. The sale is rescissible because the lesion of
P20,000.00 is more than ¼ of P60,000.00.)
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)
Rescissible Contracts
Rescission, concept – the remedy allowed 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 it should be
valid, by means of the restoration of things to their condition at the moment prior to the
celebration of said contract.
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4. The action for rescission must be brought within the period allowed by law. (For persons
under guardianship – 4 years from termination of incapacity; For absentees – 4 years
from the time the absentee’s domicile is known)
Extent of rescission
Rescission shall only be to the extent necessary to cover the damages caused.
Voidable contract, concept – one which 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
susceptible of ratification.
The following are voidable or annullable contracts:
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.
3. Those where consent is given in a state of drunkenness (Art. 1328)
4. Those where consent is given during a hypnotic spell (Art. 1328)
Annulment, concept – the action brought to set aside a voidable contract
Annulment Rescission
Brought to declare the inefficiency inherent in Availed of to produce the inefficiency which
the contract did not exist in the contract
Available only to the parties, whether bound Available not only to the contracting parties
principally or subsidiarily. but also to third persons whose interests are
affected.
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Notes in Regulatory Framework for Business Transactions (RFBT)
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3. Effects of ratification
a. It extinguishes the action to annul a voidable contract
b. It cleanses the contract from all its defects from the moment it was
constituted. In other words, the contract is validated from inception.
Unenforceable Contracts
Unenforceable contract, concept – one that cannot be enforced unless ratified.
Right to defense of unenforceability – this right is available only to the contracting parties.
Unenforceable contracts cannot be assailed by third persons (Art. 1408)
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;
2. Those that do not comply with the Statute of Frauds;
3. Those where both parties are incapable of giving consent to a contract.
Statute of Frauds
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:
1. An agreement that by its terms is not to be performed within a year from the making
thereof;
2. A special promise to answer for the debt, default, or miscarriage of another;
3. An agreement made in consideration of marriage, other than a mutual promise to marry;
4. 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; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers and person on whose account the sale
is made, it is a sufficient memorandum;
5. An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
6. A representation as to the credit of a third person.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
DEFECTIVE CONTRACTS
Origin of the defect Economic Incapacity of Entered without Illegality (void) or absence of
damage or one of parties authority or in excess any of essential requisites of a
lesion to either to give thereof; non- contract (inexistent).
one of the consent or compliance with Statue
parties or to 3rd vitiated of Frauds; incapacity
persons; consent. of both parties to give
declaration by consent.
law.
Necessity of Suffered by As to the Not necessary Not necessary
Damage/Prescription either on the other
parties or 3rd contracting
person. party – not
necessary
Curable by Curable Curable Not curable Not curable
Prescription
Legal effect Valid & legally Valid & Inoperative until None
enforceable until legally ratified; not
judicially enforceable enforceable in court
rescinded. until without proper
judicially ratification.
annulled.
Remedy Rescission or Annulment of Only personal defense Declaration of nullity of
rescissory action contract. contract.
Nature of action Must be a direct Direct action Indirect attack allowed Can be attacked directly or
action needed. indirectly.
Who can file the GR: Contracting Contracting Contracting party 3rd persons cannot file unless
action party; party their interest are directly
XPN: Defrauded affected.
Susceptibility of Susceptible but Susceptible Susceptible Not Susceptible
ratification not of
ratification
proper.
Susceptibility Action for Action for Action for recovery; Action for declaration of
prescription recission annulment specific performance nullity or putting of defense of
prescribes after prescribes or damages prescribes nullity does not prescribe.
4 years. after 4 years. (10 years if based on a
written contract; 6
years if unwritten).
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Reformation of Instruments: it is a remedy to conform to the real intention of the parties due to
mistake, fraud, inequitable conduct, accident (NCC, Art 1359).
Reformation is a remedy in equity by means of which a written instrument is made or construed
S0 as to express or confirm the real intention of the parties when some error or mistake
committed. (Pineda, 2009)
Rationale: It would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting of the minds of the parties.
Requisites in reformation of instruments:
1. Meeting of the minds to the contract;
2. True intention is not expressed in the instrument;
3. By reason of: (MARFI)
a. Mistake;
b. Accident;
c. Relative simulation;
d. Fraud; or
e. Inequitable conduct
4. Strong, clear and convincing proof of MARFI.
Prescriptive period in reformation of instruments - 10 years from the date of the execution of
the instrument.
Persons who can ask for the reformation of the instrument:
It may be ordered at the instance of:
1. Either party or his successors in interest (if the mistake is mutual);
2. Upon petition of the injured party; or
3. His heirs and assigns.
Operation and effect of reformation
It relates back to, and takes effect from the time of its original execution, especially as between
the parties. Reformation of instruments may be availed of judicially or extra judicially.
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 its 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 (NCC, Art 1370).
3. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered (NCC, Art 1371).
4. If some stipulation of any contract should admit of several meanings, it shall be
understood as hearing that import which is most adequate to render it effectual (NCC, Art
1373).
Non scholae sed vitae discimus.
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