AEO1 MODULE SIX : CONTRACTS

A. GENERAL PROVISIONS
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 (NCC, Art. 1305).

A contract is a meeting of the minds between two or more parties, whereby one party binds himself
with respect to the other, or where both parties bind themselves reciprocally, in favor of one
another, to fulfill a prestation to give, to do or not to do. (Pineda, 2009)

• Meeting of minds
Speaks of the intention of the parties in entering into the contract respecting the subject matter and
the 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 althought
they have not affixed their signature to its written form (Rabuya, 2017).

• 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 been entered into.
Hence, there can be no contract if there is no obligation. But an obligation may exist without a
contract (De Leon, 2010).

B. Stages of Contracts
1. Preparation (conception or “generation” or negotiation) – begins from time the parties manifest
their interest and ends prior to the moment of agreement

2. Perfection (or birth) – when the parties agreed upon essential elements of contract

3. Consummation (or death) - when parties fulfill or perform the agreement

Preparation Perfection Consummation Preparation

Perfection Exchanges of offers and Parties come Parties perform
Counter offers. to an agreement. Their obligations
under the contract
No contract yet, thus All the essential
no Requisites concur
Binding effect
The stage to The stage to
look at to look at to
determine the determine
status of the whether
contract (i.e., there has
valid, voidable, been a
void, breach of
unenforceable) the contract
Consummation
C. CLASSIFICATION
1. To their subject matter
• Things, e.g. sale, deposit, pledge
• Services, e.g. agency, lease of services
2. To formation or perfection
• Consensual – consent is sufficient to perfect the contract [Art. 1315, CC]
• Real – delivery, actual or constructive, is required in addition to consent
[Art. 1316, CC]
• Solemn or formal – where special formalities are required for perfection
[Art. 1356, CC]
3. To relation to other contracts
• Principal – may exist alone; e.g. lease
• Accessory – depends on another contract for its existence, e.g. guaranty
• Preparatory – a preliminary step towards the celebration of a
subsequent contract; e.g. agency
4. To form
• Common or informal – may be entered into in whatever form as long as there is consent,
object and cause
• Special or formal – required by law to be in a certain specified form

5. To cause/by equivalence of prestations

• Onerous – there is an exchange of correlative values, e. g. sale
• Remuneratory – where the outstanding prestation is premised upon services or benefits
already received
• Gratuitous – where no correlative prestation is received by one party, e.g.
donation, commodatum
6. To purpose
• Transfer of ownership, e.g. sale
• Conveyance of Use, e.g. commodatum
• Rendition of Service, e.g. agency
7. To time of fulfillment
• Executed – where the obligations are fulfilled at the time the contract is
entered into
• Executory – where fulfillment of obligations does not take place at the
time the contract is made
8. To risk
• Commutative – fulfillment is predetermined in advance
• Aleatory – fulfillment is dependent upon chance
9. To the nature of the vinculum produced
• Unilateral – only one party is bound by the prestation, e.g. commodatum
• Bilateral – both parties are bound by reciprocal prestations, e.g. sale
o All contracts are bilateral in the consent, but not all are bilateral
in effects
10. To their designation/name
• Nominate – where the law gives the contract a special designation or
particular name; e.g. deposit
• Innominate – where the contract has no special name
o Do ut des (I give so that you may give)
o Do ut facias (I give so that you may do)
o Facio ut facias (I do so that you may do)
o Facio ut des (I do so that you may give)
D. ELEMENTS OF A CONTRACT

Art 1318, CC. There is no contract unless the following requisites concur:
a. Consent of the contracting parties;
b. Object certain which is the subject matter of the contract
c. Cause of the obligation which is established

1. Natural Elements – Those which are derived from the very nature of the contract, and as a
consequence, ordinarily accompany the same.
2. Essential Elements – Those without which there can be no contract.
3. Accidental Elements – those which exist only when the contracting parties expressly provide for
them (De Leon, 2010).

E. ESSENTIAL REQUISITES OF A CONTRACT

The following are the essential requisites of contracts (COC):
1. Consent;
2. Object or subject matter; and
3. Cause or consideration (NCC, Art 1318). (See Cathay Pacific v. Vasquez, 2003)

NOTE: These three requisites are, therefore, the essential elements of a consensual contract. In real
contracts, however, in addition to the above, the delivery of the object of the contract is required as a
further requisite.

1. Consent
The meeting of the minds of the parties on the subject matter and cause of the contract.
The facts that the signatures of the witnesses and the notary public were forged does not
negate the existence of the contract for as long as the parties consented to it. The signatures
of the witnesses and the notary public are necessary simply to make the contract binding on the
third person. [Soriano v. Soriano, G.R. No. 130348 (2007)]

Requisites of consent (LM-CR)

1. Legal capacity of the contracting parties;

NOTE: The parties must have full civil capacity. Hence, if any one party to a supposed
contract was already dead at the time of its execution, such contract is undoubtedly
simulated and false and, therefore, null and void by reason of its having been made after the
death of the party who appears as one of the contracting parties therein. The death of a
person terminates contractual capacity (Milagros De Belen Vda. De Cabalu, et. al. v. Sps.
Renato Dolores Tabu and Laxamana, G.R. No. 188417, September 24, 2012).

2. Manifestation of the conformity of the contracting parties;

Note: 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; and

NOTE: Intelligence in consent is vitiated by error; freedom by violence, intimidation or

undue influence; and spontaneity by fraud.
4. The conformity must be Real.

OFFER
A unilateral proposition which one party makes to the other for the celebration of the contract.
[Tolentino]

An offer is defined as an expression of willingness to contract on certain terms, made with the
intention that it shall become binding as soon as it is accepted by the person to whom it is
addressed (Rabuya, 2017 citing G. H. Treitel, The Law of Contract, 10th Ed., p.8).

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
offeror (actual knowledge), and not at the time of sending the acceptance.

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 (Rabuya, 2017).

Invitation to make offers (Advertisements)

a. Business Advertisements of things for sale are NOT definite offers, just invitations to make
an offer, UNLESS the contrary appears [Art. 1325, CC].
b. Advertisement for bidders are invitations to make proposals, the advertiser is NOT bound
to accept the lowest or highest bid; UNLESS the contrary appears. The bidder is the offeror
[Art. 1326, CC].

The Terms and Conditions of the bidding disseminated… constitutes the

"advertisement" to bid on the project. The bid proposals or quotations submitted by the
prospective suppliers… are the offers. The reply… constitutes the acceptance or rejection of
the respective offers. [Jardine Davies v. CA, G.R. No. 128066 (2000)]

c. Statements of intention: no contract

1. results even if accepted.

In a letter informing another that the sender was “in a position and is willing to entertain”
the purchase of a yacht under some terms, the word “entertain” applied to an act does
not mean the resolution to perform said act, but simply a position to deliberate for
deciding to perform or not to perform said act. It was merely a position to deliberate
whether or not he would purchase the yacht and invitation to a proposal being made to
him, which might be accepted by him or not. [Rosenstock v. Burke, G.R. No. 20732 (1924)]
BRAIN EXERCISE

Q: The husband assumed sole administration of the family’s mango plantation since his wife
worked abroad. Subsequently, without his wife’s knowledge, the husband entered into an
antichretic transaction with a company, giving it possession and management of the
plantation with power to harvest and sell the fruits and to apply the proceeds to the payment
of a loan he got. What is the standing of the contract?

Grounds that would render the offer ineffective

1. Death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed;
2. Express or implied revocation of the offer by the offeree;
3. Qualified or conditional acceptance of the offer, which becomes counter-offer;
4. Subject matter becomes illegal or impossible before acceptance is communicated;
5. Period given to the offeree to signify his acceptance has already lapsed.

ACCEPTANCE

To produce a contract, the acceptance must not qualify the terms of the offer. It is necessary
that the acceptance be unequivocal and unconditional, and the acceptance and the
proposition shall be without any variation whatsoever; and any modification or variation
from the terms of the offer annuls the latter and frees the offeror. [Tolentino]

Acceptance must be absolute, unconditional, and without variance of any sort from the
offer. It must also be made known to the offeror. An acceptance not made in the manner
prescribed is not effective but constitutes a counter-offer. [Malbarosa v. CA, G.R.
No.125761 (2003)]

Requisites of a valid acceptance

1. Must be absolute; a qualified acceptance constitutes a counter-offer (NCC, Art. 1319).
2. No specified form but when the offeror specifies a particular form, such must be complied
with.

Art. 1324, CC provides the General Rule regarding offer and acceptance: when the offerer
gives to the offeree a certain period to accept, "the offer may be withdrawn at any time
before acceptance" except when the option is founded upon consideration.

However, Art. 1479, CC modifies the General Rule, which applies to "a promise to buy and
sell" specifically. This rule requires that a promise to sell to be valid and binding must be
supported by a consideration distinct from the price. Otherwise, the option can still be
withdrawn, even if accepted. [Tuazon v. Del Rosario-Suarez, G.R. No. 168325 (2010)]

Mirror Image Rule in law on contracts

 This is a common law concept which states that in order for there to be an acceptance, the
offeree must accept the terms as stated in the offer. Our courts also adhere to the “mirror-
image rule.” Thus, it has been ruled that acceptance must be identical in all respects with
that of the offer so as to produce consent of meeting of the minds (Rabuya, 2017 citing ABS-
CBN v. CA. 301 SCRA 592-593, 1999).

Persons incapacitated to give consent (DIM)

1. Deaf-mutes who do not know how to read and write (illiterates);
2. Insane or demented persons, unless the contract was entered into during a lucid interval;
3. Minors (NCC, Art. 1327) except:

a. Contracts for necessaries (NCC, Art. 1489);

b. Contracts by guardians or legal representatives and the court having jurisdiction had
approved the same;
c. When there is active misrepresentation on the part of the minor (minor is estopped);
d. Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years
of age;
e. Contract of an insurance for life, health and the accident on the minor’s life.
f. Upon reaching age

Vices of consent (MI-VUF)

1. Mistake
2. Intimidation
3. Violence
4. Undue influence
5. Fraud

1. MISTAKE
“A misunderstanding of the meaning or implication of something” or a “wrong action or
statement proceeding from a faulty judgment”.[Domingo Realty v. CA]

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. [Art.1331, CC]

Requisites
a. The error must be substantial regarding:
1. The object of the contract (error in re) which may be:
• Mistake as to the identity of the thing (error in corpore)
• Mistake as to the substance of the thing (error in substantia)
• Mistake as to the conditions of the thing provided, or
• Mistake as to the quantity of the thing (error in quantitate)

2. The condition which primarily moved or induced one or both parties to enter the
contract.
3. Identity or qualifications of one of the parties (error in persona), but only if such
was the principal cause of the contract.

b. The error must be excusable

c. The error must be a mistake of fact and not of law.
 Kinds of mistakes of fact which vitiate consent
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 identy 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.

3.Intimidation
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 [NCC, Art.
1335(2)].

Requisites of intimidation (CICU)

1. One of the parties is compelled to give his Consent by a reasonable and well-grounded
fear of an evil;
2. The evil must be Imminent and grave;
3. It must be Unjust; and
4. The evil must be the determining Cause for the party upon whom it is employed in entering
into the contract (NCC, Art. 1335).

4. Violence
There is violence when in order to wrest consent, serious or irresistible force is employed.
(Art. 1335)

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.
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 (NCC, Art. 1336).

5. 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, CC]

Requisites
a. Improper advantage
b. Power over the will of another
c. Deprivation of the latter’s will of a reasonable freedom of choice

Test of Undue Influence: Whether or not the influence exerted has so overpowered or
subjugates the mind of a contracting party as to destroy his free agency, making him express
the will of another rather than his own. [Coso-Fernandez v. Deza, G.R. No. L-16763 (1921)]

6. 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. [Art.
1338, CC]

In order that fraud may make a contract voidable, it should be serious and should not have
been employed by both contracting parties. [Art. 1344, CC]

Requisites:
a. It must be made in bad faith
b. One party must have employed fraud or insidious words or machinations
c. Damage or injury resulted to the other party
d. It must have been serious
e. It induced the other party to enter into a contract
f. It must have been employed by one contracting party upon the other and not
employed by both contracting parties nor by third persons.

Kinds of Fraud
1. Fraud in the perfection of the contract
a. Causal fraud (dolo causante)
b. Incidental fraud (dolo incidente)

3. Fraud in the performance of an obligation (NCC, Art. 1170)

Dolo Causante v. Dolo DOLO CAUSANTE DOLO INCIDENTE

Incidente BASIS (Art. 1338) (Art 1344)
Gravity of Fraud Serious in character Not serious

Efficient Cause Efficient cause which Not the efficient cause

induces the party to
enter into a contract
Effect on the Status of Renders the contract Does not affect the
the Voidable validity of the contract
Contract
Annulment with Contract remains valid.
Remedies damages Remedy is claim for
damages.

BRAIN EXERCISE

Q: Santos’ lease contract was about to expire but it was extended and he continued to
occupy the leased premises beyond the extended term. Samson offered to buy Santos’
store and his right to the lease. Santos stated that the lease contract between him and the
lessor was impliedly renewed and that formal renewal thereof would be made upon the
arrival of a certain Tanya Madrigal, based on the letter to him given by the lessor. When
Samson occupied the premises, he was forced to vacate for Santos’ failure to renew his
lease. He filed an action for damages against Santos for fraud and bad faith claiming that
the misrepresentation induced him to purchase the store and the leasehold right. Decide.
SIMULATION OF CONTRACTS
Simulation is the declaration of a fictitious will, deliberately made by agreement of the
parties, in order to produce, for the purposes of deception, the appearances of a judicial act
which does not exist or is different with that which was really executed [Nautica Canning
Corporation v. Yumul, G.R. No. 164588 (2005)]. There exists an instrument, but there is no
contract.

Requisites of Simulation
a. An outward declaration of will different from the will of the parties
b. The false appearance must have been intended by mutual agreement
c. The purpose is to deceive third persons [Penalosa v. Santos, G.R. No. 133749
(2001)]

Absolute vs. Relative Simulation [Art. 1345,CC]

Absolute Relative Simulation

Simulation (Disimulados)
(Simulados)
The parties have The parties conceal
no intention to their true agreement.
be bound at all
Fictitious Disguised Contract
contract
Void. (Because there is Bound to their real
an absolute lack of agreement, so long as it
cause) [Art. 1346, CC] does not prejudice a
third person and is not
contrary to law, morals,
good customs, public
order or public policy.
[Art. 1346, CC]

2. OBJECT
It is the subject matter of the contract. It can be a thing, right or service arising from a contract.

Note: rights which are not intransmissible can only be the object of the contract. (NCC, Art.
1347)

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.

General Rule: All things or services may be the object of contracts, which includes future things
[Art. 1347, CC]
.
Exception:
1. Things outside the commerce of men (NCC, Art. 1347);
2. Intransmissible 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; and
6. Objects which are not possible of determination as to their kind.

Exceptions to the rule that no person can enter into a contract with regard to
future inheritance:
1. In case of marriage settlements under Art. 130, CC
2. In case of partition of properties inter vivos by the deceased under Art.
1080, NCC

3. CAUSE
Cause is 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
It must:
1. Exist;
2. Be true; and
3. Be 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.
 CAUSE VS MOTIVE

BASIS CAUSE MOTIVE

As to proximate reason in Direct and most proximate Indirect or remote
a contract reason of a contract. reasons.

As to the kind of reason in Objective and juridical Psychological or purely

the contract reason of contract.
(As to the legal effect to Legality or illegality of
the contract cause affects the existence
or validity of the contract.
personal reason.
Legality or illegality of
motive does not affect the
existence or validity of
contract.

As to the parties Cause is always the same Motive differs for each
for each contracting party. contracting party.

As to its knowability Always known May be known to the

other

Cause in contracts [Art. 1350]

Onerous
Onerous Renumeratory Contracts Pure
Contracts Beneficence
The undertaking The service or Mere liberality of
or the promise of benefit which is The benefactor
the thing or service by remunerated
the other party
Beneficence
Rules relating to cause on contracts
1. Absence of cause – confers no right and produces no legal effect.
2. Failure of cause – does not render the contract void.
3. Illegality of cause – contract is null and void.
4. Falsity of cause – contract is void; unless the parties show that there is
another cause which is true and lawful.
5. Lesion or inadequacy of cause – does not invalidate the contract, unless:
a. there is fraud, mistake, or undue influence;
b. when the parties intended a donation or some other contract; or
c. in cases specified by law
e.g. contracts entered by guardian when ward suffers lesion of more than
25% and with court approval, otherwise, if there is no approval, the
contract is void regardless of the amount of lesion.
F. FORMALITY OF CONTRACTS
General rule: No form necessary for contracts provided that all the essential requisites
for their validity are present [Par. 1, Art. 1356, CC]

Exception:
1. When the law requires that a contract be in some form in order that it may be valid
[par. 2, Art. 1356, CC]
2. When the law requires that a contract be proved in a certain way to be enforceable
(Statute of Frauds) [par. 2, Art. 1356, CC]
3. When the law requires a contract to be in some form for convenience, or to be
effective against third parties [Arts. 1357 and 1358, CC]

Kind of Formalities required in specific contracts:

1. Donations
a. Personal property – if value exceeds 5,000, the donation and acceptance must
both be written (NCC, Art. 748).
b. Real property:

i. Donation must be in a public instrument, specifying therein the property

donated and value of charges which donee must satisfy.
ii. Acceptance must be written, either in the same deed of donation or in a
separate instrument.
iii. If acceptance is in a separate instrument, the donor shall be notified thereof
in authentic form, and this step shall be noted in both instruments (NCC, Art.
749).

2. Partnership where real property contributed

a. There must be a public instrument regarding the partnership;
b. The inventory of the realty must be made, signed by the parties and attached
to the public instrument (NCC, Art. 1773).

Antichresis - the amount of the principal and interest must be in writing (NCC,
Art. 2134).

3. Agency to sell real property or an interest therein - authority of the agent must be in
writing (NCC, Art. 1874).
4. Stipulation to charge interest - interest must be stipulated in writing (NCC, Art. 1956).
5. Stipulation limiting common carrier's duty of extraordinary diligence to ordinary
diligence:
a. Must be in writing, signed by shipper or owner;
b. Supported by valuable consideration other than the service rendered by the
common carrier;
c. Reasonable, just and not contrary to public policy (NCC, Art. 1744).
6. Chattel mortgage - personal property must be recorded in the Chattel Mortgage
Register. (NCC, Art. 2140).

Contracts which must be in writing to be valid:

1. Donation of personal property whose value exceeds five thousand pesos (NCC,
Art. 748). – the donation and acceptance must be in writing.
2. Sale of a piece of land or any interest therein through an agent (NCC, Art.
1874). – the authority of the agent shall appear in writing.
3. Agreements regarding payment of interest in contracts of loan (NCC, Art.
1956).
4. Antichresis – the amount of the principal and the interest shall be specified in
writing (NCC, Art. 2134; Jurado, 2011).

Contracts which must appear in a public document:

1. Donation of real properties (NCC, Art. 719);
2. Partnership where immovable property or real rights are contributed to the
common fund (NCC, Arts. 1171 & 1773);
3. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sale of
real property or of an interest therein is governed by Arts. 1403, No. 2, and 1405
[NCC, Art. 1358(1)];
4. The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains [NCC, Art. 1358(2)];
5. 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; [NCC, Art. 1358(3)];
6. The cession of actions or rights proceeding from an act appearing in a public
document [NCC, Art. 1358(4)].

Art. 1358, CC which requires the embodiment of certain contacts in a public

instrument, is only for convenience, and registration of the instrument only
adversely affects third parties. Formal requirements are, therefore, for the
benefit of third parties. Non-compliance therewith does not adversely affect the
validity of the contract nor the contractual rights and obligations of the parties
thereunder. [Fule v. CA, G.R. No. 112212 (1998)

Art. 1358, CC. The following must appear in a public document:

1. Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest therein as
governed by Articles 1403, No. 2, and 1405;
 2. The cession, repudiation or renunciation of hereditary rights or of those
of the conjugal partnership of gains;
3. 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;
4. The cession of actions or rights proceeding from an act appearing in a
public document. All other contracts where the amount involved exceeds
five hundred pesos must appear in writing, even a private one. But sales of
goods, chattels or things in action are governed by Articles, 1403, No. 2
and
1405.

Contracts that must be registered

1. Chattel mortgages (NCC, Art. 2140).

NOTE: In accordance with Article 2125 of the Civil Code, an unregistered chattel
mortgage is binding between the parties because registration is necessary only
for the purpose of binding third persons (Filipinas Marble Corporation v.
Intermediate Appellate Court, G.R. No. L-68010, May 30, 1986).

2.Sale or transfer of large cattle (Cattle Registration Act).

Statute of Frauds
An agreement as to the following shall be unenforceable UNLESS:
1. The agreement, or some note or memorandum, thereof, be in writing, and
2. 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. [Art. 1403, CC]

Agreements under the Statute of Frauds [Art. 1403, CC]:

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 of 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

G. KINDS OF CONTRACTS
Reformation – remedy in equity by means of which a written instrument is made or
construed so as to express or conform to the real intention of the parties when some
error or
mistake has been committed [Reyes and Puno]

Requisites [Art. 1359, CC]:

1. There must be a meeting of the minds of the contracting parties
2. Their true intention is not expressed in the instrument;
3. Such failure to express their true intention is due to mistake, fraud,
inequitable
conduct, or accident; and
4. There is clear and convincing proof of mistake, fraud, inequitable conduct, or
accident.

It is a remedy to conform to the real intention of the parties due to mistake, fraud,
inequitable conduct, accident (NCC, Art. 1359).

Distinction between Reformation and

Annulment

Reformation Annulment

There is meeting of the minds between There is no meeting of the minds.

the parties as to the object, cause of the
contract
The instrument failed to express the true
intention of the parties due to mistake,
fraud, inequitable conduct or accident.
Thepurpose of reformation is to establish
the true agreement of the parties and not
to create a new one
Consent is vitiated.
The meeting of the mids was prevented
by reason of mistake, fraud, inequitable
conduct or accident perpetrated by one
party against the other
The purpose of annulment is to render
inefficacious the contract in question
NOTE: When there is no meeting of the minds, the proper remedy is annulment and not
reformation (Pineda, 2000).

The fundamental distinction between reformation of an instrument and annulment of a

contract is that the first presupposes a perfectly valid contract in which there has been a
valid meeting of the minds of the contracting parties while the second is based on a
defective contract in which there has been no meeting of the minds because the
consent is vitiated (Jurado, 2010).

Burden of Proof
The presumption is that an instrument sets out the true agreement of the parties
and that it was executed for valuable consideration. Thus, when there is some
error or mistake in the contract, the onus probandi is upon the party who insists
that the contract should be reformed.

While intentions involve a state of mind, subsequent and contemporaneous acts

of the parties as well as the evidentiary facts as proved and admitted can be
reflective of one’s intention. [Multi-Ventures Capital Management Corporation v
Stalwart, G.R. No. 157439 (2007)]

Effect of Reformation
In granting reformation, the remedy in equity is not making a new contract for
the parties, but Establishing and perpetuating the real contract between the
parties which, under the technical rules of law, could not be enforced but for
such reformation. [Quiros vs Arjona, G.R. No. 158901 (2004)]

Reformation of instruments; when allowed

1. Mutual mistake. – When the mutual mistake of the parties causes the failure of the
instrument to disclose their agreement (NCC, Art. 1361);

Requisites:
a. The mistake should be of fact;
b. The same should be proved by clear and convincing evidence; and
c. the mistake should be common to both parties to the instrument (BPI v.
Fidelity Surety, Co. 51 Phil 57).
2. Mistake on one party and fraud on the other. – In such a way that the instrument
does not show their true intention, the party mistaken or defrauded may ask for the
reformation of the instrument (NCC, Art. 1362);
3. Mistake on one party and concealment on the other. – When one party was mistaken
and the other knew or believed that the instrument did not state their real agreement,
but concealed that fact from the former (NCC, Art. 1363);
4. Ignorance, lack of skill, negligence or bad faith. – When through the ignorance, lack of
skill, negligence or bad faith on the part of the person drafting the instrument or of the
clerk or typist, the instrument does not express the true intention of the parties (NCC,
Art. 1364);
5. Right of repurchase. – If the parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property is sold absolutely or with
a right of repurchase (NCC, Art. 1365).

Art. 1365, CC. 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 a
right of repurchase, reformation of the instrument is proper.

Who May Ask for Reformation

a. When through mistake of the parties
b. Either party or his successors in interest, if the mistake was mutual;
otherwise.
c. Upon petition of the injured party, or his heirs and assigns [Art. 1368, CC]
d. When through the ignorance, lack of skill, negligence or bad faith on the part
of the person drafting the instrument or of the clerk or typist, Courts may order
that the instrument be reformed [Art. 1364, CC]

Reformation of instruments; when not allowed

1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void (NCC, Art. 1366);
4. When an action to enforce the instrument is filed (estoppel);
5. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the
minds of the parties;
6. When the contract is unenforceable because of failure to comply with the statute of
frauds.
H. INTERPRETATION OF CONTRACTS
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.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former (NCC, Art. 1370).

In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered (NCC, Art. 1371).

However the 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 (NCC, Art. 1372).
If some 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 (NCC, Art. 1373).

Primacy of Language or Intention

a. Cardinal/First Rule of Interpretation – Literal Meaning Governs

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. [Art. 1370, par.
1, CC]

b. Rule if Language Contrary to Intent – Intent over Literal Interpretation

If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former. [Art. 1370, par. 2, CC]

The cardinal test is the intention of the parties, to be derived from the terms/language
of the contract.

c. Exclusion to Rules – Distinct and Different Cases

However general the terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon
which the parties intended to agree. [Art. 1372, CC]

d. Stipulation Rendered to be Effectual

If some 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. [Art.
1373, CC]

e. Stipulations Interpreted Together

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. [Art. 1374, CC]

f. Interpretation according to Nature and Object of Contract

 Words which may have different significations shall be understood in that which is
most in keeping with the nature and object of the contract. [Art. 1375, CC]

g. Interpretation against Party Causing Obscurity

The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity. [Art. 1377, CC]

Interpretation of Contracts of Adhesion

A contract of adhesion is just as binding as ordinary contracts. Contracts of
adhesion are not invalid per se; they are not entirely prohibited. The one who
adheres to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent.

h. Nomenclature not Decisive of the Character

A contract is what the law defines it to be, and not what it is called by the contracting
parties.
The Title of the contract does not necessarily determine its nature. [Tolentino]

i. Separability Clause
Another fundamental rule in the interpretation of contracts is that the terms, clauses
and
conditions contrary to law, morals and public order should be separated from the
valid and legal contract and when such separation can be made because they are
independent of the valid contract. [Kasilag v. Rodriguez, G.R. No. 46623 (1939)]