THE LAW ON

OBLIGATIONS AND
CONTRACTS
FINAL PERIOD
MODULE 9 TO MODULE 12
 MODULE 9

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

1. Distinguish contract from agreement.

2. Determine the limitations on the freedom to enter into a contract.
3. Determine the scope of binding effect of a valid contract

Distinction between contract and

agreement
---------------------------------------

The law defined contract as the “meeting of minds between two

persons whereby one binds himself, with respect to the other, to give
something or to render some service”1.

Notice that the above definition is directly related to the definition of

obligation stated in Art. 1156 of the Civil Code. A contract is the best
evidence that will prove the juridical tie (vinculum juris) between the two
parties. This tie will be the basis in asking the court to award damages in
case of breach of contract.

It will now very easy for us to distinguish contract from mere

agreement. In contract, the court may be asked to enforce the obligation if
the debtor does not comply with what is incumbent upon him; while in
agreement, the non-compliant party cannot be compelled by the court to
give or perform his obligation.

Three (3) stages of contract’s life

1. Negotiation stage (preparation) – the offer and counter-offer will be

done in this stage.

2. Perfection stage (birth of a contract)–there will be meeting of the

minds in this stage. It will be clear what is the subject matter and
how much is the consideration.
1
See Art. 1305 of the Civil Code
 3. Termination stage (consummation)– both parties already complied
their respective obligation in this stage.

Limitations on freedom to contract

The 1987 Constitution expressly protects the right of a person to enter

into a contract, it provides: “No law impairing the obligation of contracts
shall passed”2.While it is true that freedom to contract is guaranteed by the
Constitution, it is subject to various limitations 3, such as:

1. It must not be contrary law4

All contract that runs counter with law are considered

void ab initio5.

2. It must not be contrary morals

Morals directly relates to person inherent sense of

knowing what is right and what is wrong. This concept is mostly
influenced by the culture in a particular area.

It is considered to be against morals for two persons to

enter into a contract to live together as husband and wife
without the benefit of marriage.

3. It must not be contrary to good customs

Custom refers to an accepted and usual way of doing

something. Most of the time, this concept overlaps with concept
of morals.

In one case, the Supreme Court ruled that, though a

mere breach of promise to marry is not an actionable wrong,
one can still be held liable for damages if he walks out of it,
after all the necessary preparations were done and when the
2
Art. III, Sec. 10 , 1987 Philippine Constitution
3
Art 1306 of the Civil Code
4
Art. 1409[1]
5
Void from the very beginning
 matrimony is about to be solemnized. This act is considered
contrary to good customs.6

4. It must not be contrary to public order

The Philippine Revised Penal Code enumerated the crimes

against public order, such as, among others: rebellion, Coup
d’etat, sedition.

To maintain peace and order in a civilized society, all are

expected to be vigilant and not to enter into a contract with a
prestation that violates any of the provisions of Revised Penal
Code.

5. It must not be contrary to public policy

“An agreement is against public policy if it is injurious to

the interests of the public, contravenes some established
interest of society, violates some public statute, is against good
morals, ends to interfere with the public welfare or society, or
as it is sometimes put, if it is at war with the interests of
society and is in conflict with the morals of the time.”7
 

The scope of contract’s binding

effect
---------------------------------------

Once the contract is perfected it will bind both parties and “its validity
or compliance cannot be left to the will of one of them” 8. It will be
considered as the law between them. And any amendment in the
stipulations must be done with consent of all the parties.

If the contract contains rights and obligation which are transmissible,

its binding effect may be passed to the parties’ assigns and heirs. But with
limitation with respect to obligation9.

Example:

6
Wassmer v. Velez, G.R. No. L-20089, 26 December 1964
7
Sy Suan v. Regala, G.R. No. L-9506, 30 June 1956
8
Art. 1308 of the Civil Code
9
Art. 1311 of the Civil Code
 1. Transmissible rights

Assume that Mr. C is the creditor of Mr. D. The

obligation of the latter is to pay Php5,000,000.

Mr. C may assign his right to collect to somebody

else.

If Mr. C died without assigning it, his right to collect

from Mr. D will be transmitted to his heirs.

2. Transmissible obligation

Assuming that Mr. X died, leaving behind an asset worth

Php8,000,000 and liabilities amounting to Php10,000,000.

The asset will be transmitted to the heirs. As to liabilities,

the heirs will only be liable up to the extent of the amount
of asset received. Hence, the heirs can only be compelled to
pay up to maximum amount of Php8,000,000.

Another situation where the contract’s binding effect extends to third

person is when there is stipulation pour autrui in a contract. Stipulation
pour autrui refers to a stipulation conferring favor to a third person. Such
third person may demand its fulfillment provided he communicated his
acceptance to the debtor before its revocation.

Cases for class discussion:

1. Wassmer v. Velez, G.R. No. L-20089, 26 December 1964 [promise to

marry]
2. Suan v. Regala, G.R. No. L-9506, 30 June 1956 [Limitations on
freedom to contract]
3. Morla v. Belmonte, G.R. No. 171146, 7 December 2011 [Freedom to
contract]
END OF MODULE 9

MODULE 10

LEARNING OBJECTIVES:
 After studying this module, the learners should be able to:

1. Distinguish the legal effect of giving option money from that of

giving earnest money;

2. Determine whether the parties have capacity to enter into a

contract;

3. Assess whether the contract is voidable due to vitiated consent.

Essential requisites of contracts

A valid contract must have the following elements:
1. Consent
2. Object
3. Cause of the obligation

Consent (meeting of the minds) refers to the voluntary concurrence of

two wills, one pertains to an offer and the other pertains to acceptance. It is
“essential to the existence of a contract; and where it is wanting, the
contract is non-existent”10. Such will become clear during the perfection
stage of the contract, when the parties sign the documents containing all the
stipulations they mutually and freely made.

Option money and earnest money

During the negotiation stage, one of the parties (potential buyer) may
have some details to confirm, or shall we say, he is still not convinced with
the authenticity of the object being offered to him by the seller. Almost
always,there can be no acceptance. If the potential wants to reserve the
property for himself, he might enter into an option contract.
Option contract is simply a contract which gives the potential buyer a
time for him to decide whether to accept or reject the offer. This kind of
contract will of course a consideration separate from the price of the object.
This consideration is what we call option money.
10
First Philippine Holdings Corporation v. Trans Middle East Equities Inc., G.R. No. 179505, 04 December 2009
 Option money is actually the payment of option period within which
the seller is bound not to offer the same object to another potential buyer.
Again, this amount is not part of the selling price. There is no perfected
contract yet during the option period.
The option money is different from earnest money.
Earnest money is considered a partial payment of the purchase price;
while option money is not part of the purchase price.
The giving of earnest money indicates a perfectedcontract; while the
giving of earnest money does not indicate a perfected contract.

Presumption on capacity
Contracting parties must have a capacity to give consent. “Every
person is presumed to be capacitated to enter into a contract until
satisfactory proof to the contrary is presented. The burden of proof is on the
individual asserting a lack of capacity to contract, and this burden has been
characterized as requiring for its satisfaction clear and convincing
evidence.11”

But such presumption does apply on persons who are prone to be a

victim of fraudulent transaction. They are considered to be incapable of
giving consent:
1. Minors (persons below 18 years of age)
2. Insane
3. Deaf-mutes who do not know how to read and write.

Lucid interval
The presumption is that a person is sane. If a particular person has
been proven or diagnosed to be insane by competent person, such person is
incapable of giving consent. Thus, as a general rule he is not allowed to
enter into a contract.

11
supra
 But there might be a time that such insane person is in lucid interval –
which means he is in temporary period of sanity. During this time, that
person can validly enter into a contract12.

While the law considers this contract as valid, some legal luminaries
stated that there is a need to prove that such person was really in lucid
interval when he entered into a contract.

Factors that will vitiate consent

As one of essential requisites of contract, consent must have the
following requisites: “(1) it should be intelligent or with an exact notion of
the matter to which it refers; (2) it should be free; and (3) it should be
spontaneous”13.
There can be no intelligent consent when it is vitiated by any of the
following:
1. Violence
2. Intimidation
3. Mistake
4. Fraud
5. Undue influence14

Violence
Violence happens when a person uses irresistible force to compel a
person to do an act against his will15.

Example:
Mr. D was forced to signed a document against his will
because when he refused to sign it Mr. C, a professional
boxer, punched him so hard.

12
Art. 1328 of the Civil Code
13
Lim v. San, G.R. No. 159723, 9 September 2004
14
Art. 1330 of the Civil Code
15
Art. 1335 of the Civil Code
Intimidation
Intimidation is done by instilling fear of an imminent and grave danger
upon a person.

Example:
Mr. S signed a deed of sale of his lot, against his will,
because Mr. B, a notorious cold-blooded serial killer,
pointed a loaded gun on his head and threatened to shoot
him dead.

Mistake
Mistake “is a wrong conception about said thing, or a belief in the
existence of some circumstance, fact, or event, which in reality does not
exist”16. “In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into the
contract”17.

Example:
Mr. S (owner of land) and Mr. B (businessman)entered
into a contract of sale involving a parcel of land owned by
the former. Both of them believed that the said land is
suitable for planting dragon fruits, the very reason why
such contract was made. If it turns out that the land is
not suitable for such kind of fruit, then there is mistake
which refer to the object of the contract.

Fraud
Fraud pertains to any kind of dishonesty intentionally done by one
party in order to convince and secure the consent of the other party. It must
be serious enough to render the contract voidable. In other words, the

16
Spouses Theis v. Court of Appeals, G.R. No. 126013, 12 February 1997
17
Art. 1331[1] of the Civil Code
“fraud or deception must be so material that had it not been present, the
defrauded party would not have entered into the contract” 18.

There are two (2) kinds of fraud, namely:

1. Dolocausante(causal fraud) – done to secure the consent of one
party.It is serious in characterand may be used as ground for
annulling a contract.

2. Doloincidente (incidental fraud) – fraud which is not serious in

characterand may be used as ground for asking damages.

Undue influence
When one party takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice,there is
undue influence that vitiates consent and makes the contract voidable.
In one case, the Supreme Court briefly discussed undue influence,
thus:
“For undue influence to be established to justify the
cancellation of an instrument, three elements must be
present: (a) a person who can be influenced; (b) the fact
that improper influence was exerted; (c) submission to the
overwhelming effect of such unlawful conduct. In the
absence of a confidential or fiduciary relationship between
the parties, the law does not presume that one person
exercised undue influence upon the other. A confidential or
fiduciary relationship may include any relation between
persons, which allows one to dominate the other, with the
opportunity to use that superiority to the other's
disadvantage. Included are those of attorney and client,
physician and patient, nurse and invalid,parent and
child,guardian and ward,member of a church or sect and
spiritual adviser,a person and his confidential adviser,or
whenever a confidential relationship exists as a fact.”19

18
Tankeh v. DBP, G.R. No. 171428, 11 November 2013
19
Loyola v. Court of Appeals, G.R. No. 115734, 23 February 2000
Prescriptive period to file a suit

In voidable contract, the injured party have four (4) years to file a
case for its annulment.

Grounds Prescriptive period

Intimidation Four (4) years from the time the

Violence defect of the consent ceases
Undue influence

Mistake Four (4) years from the time of the

Fraud discovery of mistake or fraud

Cases for class discussion:

1. First Philippine Holdings Corporation v. Trans Middle East Equities Inc.,
G.R. No. 179505, 04 December 2009 [prescriptive period]

2. Loyola v. Court of Appeals, G.R. No. 115734, 23 February 2000

[undue influence]

3. Lim v. San, G.R. No. 159723, 9 September 2004 [vitiated consent]

END OF MODULE 10

MODULE 11

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

 1. What are the legally possible object of a contract;
2. What are the legally possible causes of a contract;
3. Determine what is the legal effect of lesion.
4. Determine what is the required form to be used in entering into a
contract.

Object of contracts

The object of a contract (subject matter) is the thing or service that

the debtor must deliver or perform. It may involve:

1. Things which are not outside the commerce of men, including future
things;
2. Services; or
3. Transmissible rights.

In reading Article 1347 of the Civil Code, one will immediately notice
that while future things may be an object of contract, there is a reservation
when it comes to future inheritance.
When we say future things, we are referring to the things to be
acquired, produced, or manufactured after the parties perfected their
contract.
And when we say future inheritance, we are referring to the things
which a person may inherit in the future. It is a mere expectancy of
hereditary rights. “For the inheritance to be considered "future", the
succession must not have been opened at the time of the contract” 20.

Cause of contracts

Cause (also known as consideration) is the very reason which moves

the parties to enter into a contract. “In other words, the cause is the
immediate, direct and proximate reason which justifies the creation of an
obligation through the will of the contracting parties” 21.

20
J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, 11 March 2005
21
Uy v. Court of Appeals, G.R. No. 120465, 9 September 1999
 Example:

In a contract of sale of house and lot, the cause of the

seller in entering into the contract is to get the proceeds;
and for the buyer is to acquire the house and lot.

Gratuitous contract and onerous

contract, distinction

In gratuitous contract, only one of the parties is obliged to give

without expecting something in return; while in onerous contract, both
parties are obliged to give a thing/perform a service.

Example of gratuitous contract: Deed of Donation

Example of onerous contract: Deed of Sale

Lesion

Lesion pertains to injury suffered by one party who does not receive a
full equivalent for what he gives. It is not a proper ground to invalidate a
contract, unless fraud, mistake or undue influence is proven. In one case,
the Supreme Court elaborated poetically the reason behind the rule on
lesion, in this wise:

“All men are presumed to be sane and normal and

subject to be moved by substantially the same motives. When
of age and sane, they must take care of themselves. In their
relation with others in the business of life, wits, sense,
intelligence, training, ability and judgment meet and clash and
contest, sometimes with gain and advantage to all, sometimes
to a few only, with loss and injury to others. In these contests
men must depend upon themselves — upon their own
abilities, talents, training, sense, acumen, judgment. The fact
that one may be worsted by another, of itself, furnishes no
cause of complaint. One man cannot complain because
another is more able, or better trained, or has better sense of
judgment than he has; and when the two meet on a fair field
the inferior cannot murmur if the battle goes against him. The
 law furnishes no protection to the inferior simply because
he is inferior, any more than it protects the strong because
he is strong. The law furnishes protection to both alike — to
one or more or less than to the other. It makes no distinction
between the wise and the foolish, the great and the small, the
strong and the weak. The foolish may lose all they have to the
wise; but that does not mean that the law will give it back to
them again. Courts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or annul
the effects of foolish acts. Courts cannot constitute themselves
guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or
overcome by another, but because he has been defeated or
overcome illegally. Men may do foolish things, make ridiculous
contracts, use miserable judgment, and lose money by them
— indeed, all they have in the world; but not for that alone
can the law intervene and restore. There must be, in addition,
a violation of law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it.”22

Form of contracts

As a general rule, contract may be entered into orally or in writing. It

will be obligatory in whatever form it may have been entered into as long as
all the essential requisites for its validity are present.23

There are, however, contracts that are required to be in particular

form for it to be considered valid or enforceable.

Examples:

1. “If the value of the personal property donated exceeds

five thousand pesos, the donation and the acceptance
shall be made in writing, otherwise, the donation shall be
void.”24

22
Vales v. Villa, G.R. No. 10028, 16 December 1916
23
Art. 1356 of the Civil Code
24
Art. 748 [3] of the Civil Code
 2. “In order that the donation of an immovable may be
valid, it must be made in a public document, xxx”25

3. “No interest shall be due unless it has been expressly

stipulated in writing.”26

4. Sales of real property must be in public document.27

Cases for class discussion:

1. J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, 11 March 2005 [future
inheritance]

2. Uy v. Court of Appeals, G.R. No. 120465, 9 September 1999 [Cause]

3. Vales v. Villa, G.R. No. 10028, 16 December 1916 [Lesion]

END OF MODULE 11

25
Art. 749 [1] of the Civil Code
26
Art. 1956 of the Civil Code
27
Art. 1358 [1] of the Civil Code
 MODULE 12

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

1. Know the various grounds for contract reformation.

2. Resolve a conflict between intention of the parties and terms of
contract.
3. Determine whether the contract is defective.

Reformation of instruments

Reformation refers to a remedy allowing the parties to amend the

existing contract for them to express their true intention. “It is predicated on
the equitable maxim that equity treats as done that which ought to be
done. The rationale of the doctrine is that it would be unjust and unequitable
to allow the enforcement of a written instrument which does not reflect or
disclose the real meeting of the minds of the parties.” 28This may happen
when their true agreement is not embodied in the contractthey signed due
to:

1. Mistake
2. Fraud
3. Inequitable conduct, or
4. accident

However, reformation is not allowed on the following:

1. Simple donations inter-vivos29 wherein no condition is imposed

2. Last will and testament
3. Void contracts
4. When a party already filed a case to enforce the contract, he is not
anymore allowed to ask for reformation.30

28
Rosello-Bentir v. Leanda, G.R. No. 128991, 12 April 2000
29
Inter vivos means between living people. This kind of donation will take effect during the lifetime of the donor
30
Arts. 1366 -1367 of the Civil Code
Interpretation of contract

Interpretation of contract is the process of determining the intention of

the parties using as guide the written stipulations on the signed instrument.
The basic rule is that “the intention of the parties is to be ascertained from
the contract and effect should be given to that intention. Likewise, it must
be construed so as to give effect to all the provisions of the contract. In
essence, the contract must be read as a whole.”31

In this process, the first consideration is the language of contract

itself. “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."32

“If the wordings, however, are ambiguous and may lead to different
interpretations, the court should determine the actual intention of the
contracting parties.”33

Defective contracts

The four (4) kinds of defective contracts are as follows:

1. Rescissible contracts
2. Voidable contracts
3. Unenforceable contracts
4. Void contracts

Rescission

Rescission is the cancellation (partial or total) of a valid contract in

order to address the lesion suffered by one of the parties, or by third
person.“Rescission has likewise been defined as the "unmaking of a contract,
or its undoing from the beginning, and not merely its termination.” 34

It is a subsidiary remedy which can only be availed of if the injured

party has no other means to obtain reparation for damages 35. And once it is

31
Adriatico Consortium, Inc., et al. v. Land Bank of the Philippines, G.R. No. 187838, 23 December 2009
32
Art. 1370 (1) of the Civil Code
33
Dupasquier v. Ascend (Philippines) Corporation, G.R. No. 211044, 24 July 2019
34
Pryce Corporation v. PAGCOR, G.R. No. 157480, 6 May 2005
35
Art. 1383 of the Civil Code.
granted by the court, it will create an obligation to return the things which
were the object of the contract,as well as their fruits36.

The following are considered rescissible contracts:

1. Contracts entered into by guardians, on behalf of their wards, when

the latter suffer lesion by more than ¼ of the value of the object such
contracts;

2. Contracts entered into on behalf of the absentees, when the absentees

suffer lesion by more than ¼ of the value of the object such contracts;

3. Contracts undertaken in fraud of creditors which prevent them from

collecting the amount due to them;

4. Those that involve things under litigation, when those were entered
into by the defendants sans knowledge and approval of litigants or of
the court;

5. Payments made in a state of insolvency for obligations to whose

fulfillment the debtor could not be compelled at the time they were
effected;

6. Those declared by law to be rescissible37;

Voidable contracts

Voidable contracts are those which are valid but may be annulled on
the ground of vitiated, or lack of, consent.

“Thus, contracts where consent is given through fraud, are voidable or

annullable. These are not void ab initio since voidable or annullable contracts
are existent, valid, and binding, although they can be annulled because of
want of capacity or the vitiated consent of one of the parties. However,
before such annulment, they are considered effective and obligatory
between parties.”38

In case there is a voidable contract, the injured party have to options,

to wit:
36
Art. 1385 of the Civil Code
37
Arts. 1381 - 1382 of the Civil Code
38
First Philippine Holdings Corporation v. Trans Middle East (Phils.) Equities Inc, G.R. No. 179505, 4 December
2009
 1. File an action for annulment within four years 39.

 In case of intimidation, violence, or undue influence,

the 4-year period will commence from the time the
defect of the consent ceases;

 In case of mistake or fraud, the 4-year period will

commence from the time of discovery of such defect;

 In cases involving minors or incapacitated person, the

4-year period will commence from the time the
guardianship ceases.

2. Ratify the contract.

Ratification means the giving (expressly or

impliedly) of formal consent signifying affirmation or
approval of an action previously done. Such act will
effectively prevent the annulment of voidable
contract40.

Unenforceable contracts

Unenforceable contracts are those that cannot be enforced by the

parties, nor given effect through court action.These kinds of contracts need
ratification to be binding and demandable. The following are considered
unenforceable:

1. Those entered into in the name of another person sans authority, or in

excess of authority given;
2. Those that are not compliant with the Statute of Frauds;
3. Those where both contracting parties are incapable of giving consent.

Statute of Frauds

Contract may be entered into orally or in writing, and it is obligatory in

whatever form it may have been entered into as long as all the essential
elements for its validity are present. “However,when the law requires that a
39
Art. 1391 of the Civil Code
40
Art. 1392 of the Civil Code
contract be in some form in order that it may be valid or enforceable, or that
a contract be proved in a certain way, that requirement is absolute and
indispensable. The Statute of Frauds falls within this exception.”41

Under the Statute of Frauds, some contracts must be in writing to

prevent fraud in the enforcement of obligations, and guard against the
mistakes which might be committed while performing the obligation in good
faith. It “does not deprive the parties of the right to contract with respect to
the matters therein involved, but merely regulates the formalitiesof the
contract necessary to render it enforceable.”42

The following contracts, to be enforceable, must be in writing and

subscribed by the party charged or by his agent:

“a) An agreement that by its terms is not to be performed

within a year from the making thereof;

b) A special promise to answer for the debt, default, or

miscarriage of another;

c) An agreement made in consideration of marriage, other

than a mutual promise to marry;

d) An agreement for the sale of goods, chattels or things in

action, at a price not less than five hundred pesos, unless
the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things
in action, or pay at the time some part of the purchase
money; 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 purchasers and person on whose account
the sale is made, it is a sufficient memorandum;

e) An agreement for the leasing for a longer period than one

year, or for the sale of real property or of an interest
therein;

f) A representation as to the credit of a third person.”43

41
Swedish Match, et al. v. Court of Appeals, G.R. No. 128120, 20 October 2004
42
Supra
43
Art. 1403 of the Civil Code
Void contracts

Void contracts are those that produce no legal effect and are
considered inexistent from the very beginning.

Since technically there is no contract if it is void, any action for the

declaration of its inexistence may be filed anytime, without any danger of
extinctive prescription44. It can never even be ratified.

The law enumerated the void contracts as follows:

“(1) Those whose cause, object or purpose is contrary to law,

morals, good customs, public order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the
transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the

principal object of the contract cannot be ascertained;

(7) Those expressly prohibited or declared void by law.”45

Cases for class discussion:

1. Rosello-Bentir v. Leanda, G.R. No. 128991, 12 April 2000

[Reformation]

2. Adriatico Consortium, Inc., et al. v. Land Bank of the Philippines, G.R.

No. 187838, 23 December 2009 [Interpretation of contract]
3. Swedish Match, et al. v. Court of Appeals, G.R. No. 128120, 20
October 2004 [Statute of frauds]

END OF MODULE 12

44
Art. 1410 of the Civil Code
45
Art. 1409 of the Civil Code
XXX