Individual activity:

OL & NOL Students:

A. Explain or state briefly the rule or reason for your answer.

1. When is a contract voidable or annullable? Explain each by giving examples or
cases that you know
2. How are contracts perfected? Explain by giving examples or cases that you
know
3. Give the effect of the perfection of a contract? Explain by giving examples or
cases that you know

Individual: Submit your answer via google classroom

Group collaboration: In addition to the individual answer
➢ Submit the consolidated group answer in your team collaboration learning
portfolio google docs

ASSESSMENT / EVALUATION

1. Synchronous Test with a time limit

A long test link will be provided through our group chat. This is synchronous test with a time
limit.

2. Asynchronous Learning

Points to Ponder

Using your learning portfolio, Answer the following question;

1. What part of the module captured your attention?
2. Why do you like the topic?
3. How will you apply the topic to your daily life?

ASSIGNMENT

1. Collaborative Work: Progressive Final Project Use the Group Collaboration Learning
Portfolio

Progressive Requirements:

Collaborative activity:
OL & NOL Students:

Explain or state briefly the rule or reason for your answer.

a. Give the requisites of things as object of the contract? Explain each by giving
examples or cases that you know

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 b. Give the requisites of service as object of a contract? Explain each by giving
examples or cases that you know

CCLOC MODULE 6
 CONTRACTS

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).
Duty of courts in interpreting contracts

It is not the province of the court to alter a contract by construction or to make a new contract for the
parties. Its duty is confined to the interpretation of the one which they have made for themselves without
regard to its wisdom or folly as the court cannot supply material stipulations or red into the contract
words which it does not contain.

STAGES IN THE MAKING OF A CONTRACT

Three stages in the making of a contract

1. Conception or Generation – the first stage where the 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. Consumation 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.

CHARACTERISTICS OF A CONTRACT

The following are the characteristics of a contract

1. Autonomy (NCC, Art. 1306);

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2. Mutuality (NCC, Art. 1308);
3. Obligatoriness and consensuality (NCC, Art. 1315);
4. Relativity (NCC, Art. 1311)
5. Consensuality (NCC, Art. 1315)

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.
Res inter alios acta aliis neque nocit prodest (a thing done between others does not harm or benefit
others) – a contract can only obligate the parties who entered into it, or their successors who assumed
their personalities, and that, concomitantly, a contract can neither favor nor prejudice third persons
(Vitug, 2006).

NOTE: With respect to the heir, he shall not be liable beyond the value of the property he received from
the decedent (NCC, Art. 1311).

XPNs:
1. Rights and obligations that are not transmissible by their nature, or by the stipulation or by provisions
of law (NCC, Art. 1311);

NOTE : Determine whether a contract terminates upon the death of one of the parties

2. Stipulation pour autrui (stipulation in favor of a third person) – benefits clearly and deliberately
conferred by parties to a contract upon third persons (NCC, Art. 1311) and which stipulation is merely
part of a contract entered into by the parties, neither of whom acted as agents of the third person and
which favor can be demanded by the third person if duly accepted by him before it could be revoked;

Requisites of stipulation pour atrui:

a. Stipulation in favor of a third person;

b. Stipulation is just part and not the whole obligations of the contract;
c. Contracting parties must have clearly and deliberately conferred a favor upon third person;
d. Favor or benefit conferred is not just an incidental benefit or interest;
e. Third person must have communicated his acceptance; and
f. Neither of the contracting parties bears the legal representation of the third person (Young v. Court
of Appeals, G.R. No. 79518, January 13, 1989).

NOTE: The fairest test to determine whether the interest of third person in a contract is a stipulation
pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by
their contract. In applying this test, it matters not whether the stipulation is in the nature of a gift or
whether there is an obligation owing from the promise to the third person (Rabuya, 2017).

3. Third persons coming into possession of the object of the contract creating real rights subject to the
provisions of Mortgage Law and the Land Registration Law (NCC, Art. 1312);

4. Contracts entered into in fraud of creditors; (NCC, Art. 1313);

5. When a third person induces a party to violate the contract (NCC, Art. 1314).

CCLOC MODULE 6
NOTE: This tort or wrongful conduct is known as “interference with contractual relations.”

Requisites:

a. Existence of a valid contract;

b. Third person has knowledge of such contract;
c. Third person interferes without legal justification or excuse (De Leon, 2010).
Thus, third person and the breaching party is liable for damages. It is based on quasi-delict and their
liability is solidary.

NOTE: A third person can be held liable for tort intereference even if he does not know the identity of
one of the contracting parties. The interference with lawful contracts by strangers thereto gives rise to
an action for damage in favor of the injured person. The law does not require that the responsible
person shall have known the identity of the injured person (Rabuya, 2017).

OBLIGATORY FORCE OF CONTRACTS

Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for validity are present (NCC, Art. 1356).

Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. (NCC, Art. 1159)

This provision must fall within the other characteristic of a contract

NOTE: Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith (NCC, Art. 1159).

Requisites for the application of the principle

Before a contract may be considered obligatory, it is necessary that:

1. It is perfected;
2. It is valid; and
3. It is enforceable (Rabuya, 2017).

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 (NCC, Art. 1308).
If a party alleges defects in the contract so that it could be set aside, he must prove conclusively the
existence of the defects because the validity and fulfillment of the contract cannot be left to the will of
one of the contracting parties. (Pineda, 2009)

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; and (2) that there
must be mutuality between the parties based on their essential equality. 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. 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. (Sps. Juico vs. China Banking Corp., G.R. 187678, April 10, 2013)

CCLOC MODULE 6
NOTE: A contract containing a condition whose efficacy or fulfillment is dependent solely on the
uncontrolled will of one of the parties is void (Garcia v. Rita, G.R. No. L-20175, October 30, 1967; PNB
v. CA, G.R. No. 88880, April 30, 1991).

However, the termination of the contract does not necessarily require mutuality, and it can even be
validly left to one party by agreement or under a resolutory facultative condition (Vitug, 2006; see also
PNB v. CA, 1994).

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 (Norton Resources and Development Corporation v. All Asia Bank Corporation, G.R. No.
162523, November 25, 2009).

Validity of contract of adhesion

It is not entirely prohibited since the one who adheres to the contract is, in reality, free to reject it entirely,
and if he adheres, he gives his consent (Premiere Development Bank v. Central Surety & Insurance
Company, Inc., G.R. No. 176246, February 13, 2009). However, it is void when the weaker party is
imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative
of “taking or leaving it,” completely depriving such party of the opportunity to bargain on equal footing
(Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporation, G.R. Nos. 180880-81,
September 25, 2009).

Note: Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties
who enter into such contracts are free to reject the stipulations entirely. (Ermitao vs. CA, G.R. No.
127246, April 21, 1999)

Interpretation of contract of adhesion

In interpreting such contracts, however, courts are expected to observe greater vigilance in order to
shield the unwary or weaker party from deceptive schemes contained in ready-made covenants
(Premiere Development Bank v. Central Surety Insurance Company, Inc., G.R. No. 176246, February
13, 2009). In case of doubt, which will cause a great imbalance of rights against one of the parties, the
contract shall be construed against the party who drafted the same (Magis Young Achiever’s Learning
Center v. Manalo, G.R. No. 178835, February 13, 2009).

Third person may determine the performance of a contract

The determination of the performance may be left to a third person. However, his decision shall not be
binding until it has been known to both the contracting parties (NCC, Art. 1309). Moreover, the
determination made shall not be obligatory if it is evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances (NCC, Art. 1310).
Unilateral increase of interest rate

Even assuming that the loan agreement between the creditor and the debtor gave the former a license
to increase the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts (Rabuya, 2017).

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AUTONOMY OF CONTRACTS / LIBERTY OF CONTRACTS

It is the freedom of the parties to contract and to stipulate provided the stipulations are not contrary to
law, morals, good customs, public order or public policy (NCC, Art. 1306).

NOTE: Courts cannot make for the parties better or more equitable agreements than they themselves
have been satisfied to make, or rewrite contracts because they operate harshly or inequitably as to one
of the parties, or alter them for the benefit of one party and to the detriment of the other, or by
construction, relieve one of the parties from terms which he voluntarily consented to, or impose on him
those which he did not (Angel Bautista v. Court of Appeals, G.R. No. 123655, January 19, 2000).

An agreement to pay unconscionable interests on a loan is against morals. (Medel, et al. vs. Ca, 299
SCRA 481)

PERFECTION BY MERE CONSENT

Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law. (NCC, Art. 1315)

Note: This refers to consensual contracts. However, real contracts are perfected by delivery and formal
contracts are perfected upon compliance.

EFFECT OF CONTRACTS

Contracts take effect only between the parties, and their assigns and heirs, the latter being liable only
to the extent of the property received from the decedent (NCC, Art. 1311).

Persons affected by a contract

GR:
4. Parties to the contract; and their
5. Corresponding successors.

XPNs:
1. Contracts containing a stipulation in favor of a third person (pour autrui) [NCC, Art. 1311 (2)];
2. Contracts containing real rights (NCC, Art. 1312);
3. Contracts entered into to defraud creditors (NCC, Art. 1313);
4. Contracts which have been violated at the inducement of 3rd persons (NCC, Art. 1314);
5. Quasi-contract of negotiorum gestio (NCC, Art. 2150).

Liability of heirs for the obligation contracted by the decedent

The heirs are liable for the obligation contracted by the decedent when the rights and
obligations arising from the contract are transmissible:

1. By their nature;
2. By stipulation; or
3. By provision of law (NCC, Art. 1311).

Requisites in order that a third person may demand the fulfillment of the contract
CCLOC MODULE 6
1. The contracting parties must have clearly and deliberately conferred a favor upon the third person;
2. The third person’s interest or benefit in such fulfillment must not be merely incidental; and
3. Such third person communicated his acceptance to the obligor before the stipulations in his favor
are revoked.

ESSENTIAL REQUISITES OF A CONTRACT

ELEMENTS OF A CONTRACT

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).

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.

CONSENT

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constiturtes a counter-offer. (NCC, Art. 1319)
It is the concurrence of the wills of the contracting parties with respect to the object and cause, which
shall constitute the contract (De Leon, 2010).

NOTE: Consent is essential to the existence of a contract; and where it is wanting, the contract is non-
existent.

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).

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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.

2. The conformity must be Real.

Offer

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).

Rules on complex offer

1. Offers are interrelated – contract is perfected if all the offers are accepted
2. Offers are not interrelated – single acceptance of each offer results in a perfected contract unless
the offeror has made it clear that one is dependent upon the other and acceptance of both is necessary.

Rules on advertisements as offers

1. Business advertisements – not a definite offer, but mere invitation to make an offer, unless it appears
otherwise (NCC, Art. 1325).
Note: If the advertisement contains all the necessary date need in a contract, its a definite offer for the
sale of the thing advertised. Otherwise, it is not a definite offer, it is a mere invitation to make offer.
2. Advertisement for bidders – simply invitation to make proposals and advertiser is not bound to accept
the highest or lowest bidder, unless the contrary appears (NCC, Art. 1326).
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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.

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.

NOTE: 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 (NCC, Art. 1320).

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).

Period for acceptance

Stated fixed period in the offer

a. Must be made within the period given by the offeror.

b. As to withdrawal of the offer:

GR: It can be made by communicating such withdrawal at any time before the acceptance is
made

XPN: When the option is founded upon a consideration (something paid or promised since
partial payment of the purchase price is considered as proof of the perfection of the contract).
(NCC, Art 1324)

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.

Note: If there was an acceptance already, the offeror cannot just withdraw his offer unilaterally.
He will be liable for damages. (Pineda, 2009)

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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. (Pineda,2009 citing
Sanchez vs. Rigos, 45 scra 368)

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;

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 of majority – they ratify the same.

NOTE: Because the law incapacitates them to give their consent to a contract, the only way by which
any one of those enumerated above can enter into a contract is to act through a parent or guardian. If
this requirement is not complied with, the result is a defective contract. If only one of the contracting
parties is incapacitated to give his consent, the contract is voidable. If both of them are incapacitated
to give their consent, the contract is unenforceable [NCC, Art. 1390(1), NCC, Art. 1403(3)].

Vices of consent (MI-VUF)

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

NOTE: A threat to enforce a just or legal claim through a competent authority does not amount
to intimidation nor vitiate consent (NCC, Art. 1335).

Mistake

GR: Mistake as a vice of consent refers to mistake of facts and not of law, thus rendering the
contract voidable (Jurado, 2010).

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 (NCC, Art. 1334).

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Mistake Distinguished from Ignorance

Mistake is a false impression on something, while Ignorance is absence of any notion or

impression about a particular thing.

Requisites:

1. Mistake must be with respect to the legal effect of the agreement;

2. It must be mutual; and
3. Real purpose of the parties must have been frustrated.

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 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.

For mistake (as to the qualification of one of the parties) to vitiate consent, two requisites must concur:

a. The mistake must be either with regard to the identity or with regard to the qualification of one of the
contracting parties; and
b. The identity or qualification must have been the principal consideration for the celebration of the
contract.

Mutual Error

Mutual Error as to the legal effect of an agreement when the real purpose of the parties is frustrated,
may vititate consent. (NCC, Art. 1334)
Legal effect refers to the rights of the parties as stated in legal provisions.

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).

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NOTE: To determine the degree of the intimidation, the age, sex and condition of the person shall be
borne in mind (NCC, Art. 1335).
Validity of a contract if consent is reluctant

A contract is valid even though one of the parties entered into it against his wishes and desires or even
against his better judgment. Contracts are also valid even though they are entered into by one of the
parties without hope of advantage or profit (Martinez v. Hongkong and Shanghai Banking Corp., G.R.
No. L-5496, February 19, 1910).

Violence

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

Requisites of violence

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.
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vititate
consent. [NCC, Art. 1335(4)]

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 (NCC, 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 (NCC, Art. 1337).

It must in some measure destroy the free agency if a party and interfere with the exercise of that
independent discretion. (4 Tolentino 501)

Circumstances to be considered for the existence of undue influence

1. Confidential, family, spiritual and other relations between the parties;

2. Mental weakness;
3. Ignorance;
4. Financial distress (NCC, Art. 1337).
NOTE: The enumeration is NOT exclusive. Moral dependence, indigence, mental weakness, tender
age or other handicap are some of the circumstances to consider undue influence.

Determination of undue influence

The test to determine whether or not there is undue influence which will invalidate a contract is to
determine whether or not the influence exerted has so overpowered and subjugated the mind of the
contracting party as to destroy his free agency, making him express the will of another rather than his
own (Jurado, 2011).

Due influence does not vitiate consent

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When influence consists in persuasive arguments or in appeals to the affections which are nort
prohibited by law or morals, the consent is not vitiated at all. (Pineda, 2009)

Reverential Fear

The fear of displeasing persons to whom respect and obedience are due does not vitiate consent.

Fraud

There is fraud when through the insidious words or machinations of one of the contracting parties the
other is induce to enter into a contract which, without them, he would not have agreed to (NCC, Art.
1338).

NOTE: Insidious words refers to a deceitful scheme or plot with an evil design, or a fraudulent
purpose (Pineda, 2000).

Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud (NCC, Art. 1339).

Requisites of Fraud to vitiate consent

Dolo

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.

Kinds of Fraud

1. Fraud in the perfection of the contract

a. Causal fraud (dolo causante)

b. Incidental fraud (dolo incidente)

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

Requisites:

Simulation of contract

It is the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce,
for the purposes of deception, the appearance of a juridical act which does not exist or is different from
that which was executed (Tolentino, 2002).

Kinds of simulation of contract

1. Absolute (simulados) – The contracting parties do not intend to be bound by the contract at all,
thus the contract is void (NCC, Arts. 1345-1346). In absolute simulation, there is a colorable contract
but it has no substance as the parties have no intention to be bound by it. The main characteristic of
an absolute simulation is that the apparent contract is not really desired or intended to produce legal
CCLOC MODULE 6
effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or
fictitious contract is void, and the parties may recover from each other what they may have given under
the contract (Heirs of Dr. Mario S. Intac and Angelina Mendoza-Intac v. CA, G.R. No. 173211, October
11, 2012).

They lack the element of true consent.

2. Relative (disimulados) – The contracting parties conceal their true agreement (NCC, Art. 1345);
binds the parties to their real agreement when it does not prejudice third persons or is not intended for
any purpose contrary to law, morals, good customs, public order or public policy (NCC, Art. 1346). If
the concealed contract is lawful, it is absolutely enforceable, provided it has all the essential requisites:
consent, object, and cause (NCC, Arts. 1345-1346).

OBJECTS, CAUSE AND FORM OF CONTRACTS

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.

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 (De Leon, 2010).

Object of contracts

GR: All things or services may be the object of contracts.

XPNs:
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

Under Art. 130 of the Family Code, which allows the future spouses to give or donate to each other in
their marriage settlement their future property to take effect upon the death of the donor and to the
extent laid down by the provisions of the NCC relating to testamentary succession; and

CCLOC MODULE 6
2. Under Art. 1080 of the Code, which allows a person to make a partition of his estate among his heirs
by an act inter vivos, provided that the legitime of the compulsory heirs is not prejudiced (Jurado,2009;
De Leon 2010).

NOTE: Except in cases authorized by law, future inheritance cannot be an object of contract because
its extent, amount or quantity is not determinable (Sta. Maria, 2003).

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.

NOTE: Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless
the debtor proves the contrary. (NCC, art. 1354)

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.
(This must be included in Interpretation of Contracts)

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.

FORMALITY
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Rules on the form of contracts

GR: Form is not required in consensual contracts. (Provided, all the essential requisites for their validity
are present.)
XPNs: When the law requires a contract be in writing for its:

1. Validity (formal contracts);

2. Enforceability (under Statute of Frauds); or
3. For the convenience of the parties

NOTE: The parties may compel each other to reduce the verbal agreement into writing
The parties may require to observe the form required for their convenience

The contracting parties may compel each other to observe the required form once the contract has
been perfected and is enforceable under the statute of frauds.

This one of the rights of the creditor.

The right to demand the execute of the document required under Art.1358 is not imprescriptible. It is
subject to prescription. It must be pursued within the period prescribed by law which is five (5) years.
(Pineda, 2009)

NOTE: the right must be exercised once the contract has been perfected, otherwise, the exercise will
be considered as premature.

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;
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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

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). (2005 BAR)
e.g. Sale, Lease.

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:

a. Donations of real estate or of movables if the value exceeds P5,000;

b. Partnership to which immovables are contributed;
c. Contract of antichresis – requires the amount of principal and interest be specified;
d. Sale of piece of land or interest therein is through an agent;
e. Stipulation to charge interest;
f. Stipulation limiting common carrier's duty of extraordinary diligence to ordinary diligence;
g. Chattel mortgage; or
h. Transfer of large cattle (Sec. 22, Act No. 1147; NCC, Art. 1581).

According to the degree of dependence:

1. Principal – that which can exist independently of ther contracts;

e. g. contract of loan.

2. Accessory – that which cannot exist without a valid principal contract;

e. g. guaranty, surety, pledge, mortgage.

3. Preparatory – that which is not an end by itself but only a means for the execution of another contract.
e. g. contract of agency as agency does not stop with the agency because the purpose is to enter into
other contracts (Rabuya, 2017).

According to their relation to other contracts:

1. Preparatory Contracts – are those which have for their object the establishment of a condition in law
which is necessary as a preliminary step towards the celebration of another subsequent contract.
e.g. Partnership, Agency.
2. Principal Contracts – are those which can subsist independently from other contracts.
e.g. Sale, Lease.
3. Accessory Contracts – those which can exist only as a consequence of, or in relation with, another
prior contract.
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e.g. Pledge, Mortgage.
According to their form:
1. Common or Informal Contracts – are those which require no particular form.
e.g. Loan.
2. Special or Formal Contracts – are those which require a particular form.
e.g. Donations, Chattel Mortgage.

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
According to the nature of the vinculum which they produce:

1. Unilateral Contracts – are those which give rise to an obligation only to one of the parties.
e.g. Commodatum.
2. Bilateral Contracts – are those which give rise to reciprocal obligations for both parties.
e.g. Sale.

According to their cause:

1. Onerous
e. g. Sale.
2. Gratuitous
e. g. commodatum
3. Remuneratory

According to the risks involved:

Commutative Contracts – are those where each of the parties acquire an equivalent of his prestation
and such equivalent is pecuniarily appreciable and already determined from the moment of the
perfection of the contract.
e.g. Lease.
2. Aleatory Contracts – are those which are dependent upon the happening of an uncertain event, thus,
charging the parties with the risk of loss or gain.
e.g. Insurance.

According to their names or norms regulating them:

1. Nominate Contracts – are those which have their own name and individuality, and are regulated by
provisions of law.
e.g. Sale
2. Innominate Contracts – are those which lack name or individuality, and are not regulated by special
provisions of law.

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).

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Reformation is a remedy in equity by means of which a written instrument is made or construed so as
to express or confirm the real intention of the parties when some error or mistake is 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

Distinction Annulment
between
Reformation and
Annulment
Reformation
There is meeting There is no
of the minds meeting of the
between the minds. Consent is
parties as to the vitiated.
object, cause of
the contract
The instrument The meeting of
failed to express the minds was
the true intention prevented by
of the parties due reason of
to mistake, fraud, mistake, fraud,
inequitable inequitable
conduct or conduct or
accident. accident
perpetrated by
one party against
the other
The purpose of The purpose of
reformation is to annulment is to
establish the true render
agreement of the inefficacious the
parties and not to contract in
create a new one question.

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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).

Principle of effectiveness in contract interpretation

Pursuant to this principle, where two interpretations of the same contract language are possible, one
interpretation having the effect of rendering the contract meaningless while the other would give effect
to the contract as a whole, the latter interpretation must be adopted (PNB v. Utility Assurance & Surety,
Co., Inc., 177 SCRA 393, 1989).

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 (NCC, Art. 1374).

DEFECTIVE CONTRACTS
BASIS RESCISSIBLE VOIDABLE UNENFORCE VOID
ABLE /INEXISTENT
Origin of the Economic Incapacity of Entered without Illegality (void)
defect damage or one of parties authority or in or absence of
lesion to either to give consent excess thereof; any of essential
one of the or vitiated non- requisites of a
parties or to 3rd consent. compliance
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 persons; with Statute of contract
declaration by Frauds; (inexistent).
law. incapacity of
both parties to
give consent.
Necessity of Suffered by – As to the other Not necessary Not necessary
Damage/ either one of contracting
prejudice parties or 3rd party - not
person. necessary.
Curable by Curable Curable Not curable Not Curable
Prescripiton
Legal effect Valid & legally Valid & legally Inoperative None
enforceable enforceable until ratified;
until judicially until judicially not enforceable
rescinded. annulled. in court without
proper
ratification.
Remedy Rescission or Annulment of Only personal Declaration of
rescissory contract. defense nullity of
action. contract.
Nature of Must be a Direct action Indirect attack Can be
action direct action. needed. allowed attacked
directly or
indirectly.
Who can file GR: Contracting Contracting 3rd persons
the action Contracting party party cannot file
party; unless their
XPN: interest are
Defrauded directly
Creditors affected.
Susceptibility Susceptible but Susceptible Susceptible Not
of ratification not of Susceptible
ratification
proper.
Susceptibility Action for Action for Action for Action for
prescription rescission annulment recovery; declaration of
prescribes after prescribes after specific nullity or putting
4 years. 4 years. performance or of defense of
damages nullity does not
prescribes prescribe.
(10 years if
based on a
written
contract; 6
years if
unwritten).

RESCISSIBLE CONTRACTS

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These are contracts validly constituted but nevertheless maybe set aside due to a particular economic
damage or lesion caused to either to one of the parties or to a third person. It may be set aside in whole
or in part, or up to the extent of the damage caused (NCC, Art. 1381).

Contracts that may be rescinded

1. Under Art. 1381, those
2.
a. Entered into by guardians whenever the wards whom they represent suffer lesion by more than ¼ of
value of the property [NCC, Art. 1381(1)];

If a guardian alienates properties of the ward without judicial approval, the contract is ”unenforceable”
for lack of authority. (NCC, Art. 1403,par. 1)
b. Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of value of
property [NCC, Art. 1381(2)];
c. Contracts where rescission is based on fraud committed on creditor and cannot collect the claim due
(accion pauliana) [NCC, Art. 1381(3)];

NOTE: Contracts which are rescissible under the third paragraph of Art. 1381 are valid contracts,
although undertaken in fraud of creditors. If the contract is ‘‘absolutely simulated’’, the contract is not
merely rescissible but inexistent, although undertaken as well in fraud of creditors (MBC v. Silverio, 466
SCRA 438, August 11, 2005). In the former, the remedy is rescission; in the latter, the remedy is an
action to declare the contract inexistent which action is imprescriptible (Rabuya, 2017).
d. Contracts where the object involved is the subject of litigation; contract entered into by defendant
without knowledge or approval of litigants or judicial authority [NCC, Art. 1381(4)];
e. Payment by an insolvent – on debts which are not yet due; prejudices the claim of others (NCC, Art.
1382);
f. Provided for by law (NCC, Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 & 1659).

Characteristics of rescissible contract

1. It has all the elements of a valid contract.

2. It has a defect consisting of an injury (generally in the form of economic damage or lesion, fraud, and
alienation of the property) to one of the contracting parties or to a third person.
3. It is valid and effective until rescinded.
4. It can be attacked only directly.
5. It is susceptible of convalidation only by prescription (De Leon, 2010).

VOIDABLE CONTRACTS

Voidable contracts are those where consent is vitiated either by the incapacity of one of the contracting
parties or by mistake, violence, intimidation, undue influence or fraud. These contracts are binding,
unless they are annulled by a proper action in court. It is susceptible of ratification (NCC, Art. 1390).

NOTE: Annulment may be had even if there be no damage to the contracting parties.

Characteristics of a voidable contract

1. Effective until set aside;

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2. Can be; and
(the word should be”ratified ”)
3. Can be assailed only by the party whose consent was defective or his heirs or assigns.

NOTE: Third persons may assail if they are prejudiced. (Development Bank vs. CA, 96 SCRA 342)

4. A voidable contract, unlike an unenforceable and void contracts may be attacked indirectly or
collaterally, by way of defense to an action under the contract by way of a counterclaim (De Leon,
2016).

Classes of voidable contracts

1. Those where one of the parties is incapable of giving consent; and

NOTE: If both parties are incapacitated to give consent, the contract is unenforceable and not merely
voidable.

2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud
(NCC, Art. 1390).

UNENFORCEABLE CONTRACTS

Those contracts which cannot be enforced by action or complaint, unless they have been ratified by
the party or parties who did not give consent thereto (Jurado, 2009).

Characteristics of unenforceable contract

a. It cannot be enforced by a proper action in court;

b. It may be ratified;
c. It cannot be assailed by third person; and
d. May only be assailed as a way of defense, not by direct action.
e. The defect of an unenforceable contract is of a permanent nature and it will exist as long as the
contract is not duly ratified. The mere lapse of time cannot give efficacy to the contract (Rabuya, 2017).

NOTE: An unenforceable contract is valid although it produces no legal effect (Tolentino, 2002).

Kinds of unenforceable contracts

The following contracts are unenforceable unless they are ratified:

1. Those entered into the name of another person by one who has been given no authority/legal
representation or acted beyond his powers; “Unauthorized contracts”;

NOTE: A contract of sale over a piece of land entered by an agent whose authority is not in writing,
even if he acted beyond the scope of his authority is void, not merely unenforceable (NCC, Art. 1874).
2. Those that do not comply with the Statute of Frauds; and
3. Those where both parties are incapable of giving consent to a contract (NCC, Art. 1403).

Statute of Frauds

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The term "Statute of Frauds" [Article 1403, (2)] is descriptive of statutes which require certain classes
of contracts to be in writing. It requires certain contracts enumerated therein to be evidenced by some
note or memorandum subscribed by the party charged or by his agent in order to be enforceable. The
Statute does not deprive the parties of the right to contract with respect to the matters therein involved,
but merely regulates the formalities of the contract necessary to render it enforceable. Evidence of the
agreement cannot be received without the writing or a secondary evidence of its contents.

VOID AND INEXISTENT CONTRACTS

In general, void and inexistent contracts may be defined as those which lack absolutely either in fact
and or in law one or some or all of those elements which are essential for its validity.
Void contracts are those which have no force and effect from the beginning and which cannot be ratified
or validated by lapse of time (Pineda, 2000).

NOTE: The principle of in pari delicto is applicable in cases of void contracts but not in inexistent
contracts. Consequently, void contracts may produce effects (NCC, Arts. 1411-1412), but inexistent
contracts do not produce any effect whatsoever (Jurado, 2009).

Characteristics of void/inexistent contracts

1. It produces no legal force and effect;

2. It cannot be cured or validated by prescription or ratification (NCC, Art. 1409);
3. The right to set up the defense of illegality cannot be waived (NCC, Art. 1409).
4. The defense of illegality of contracts is not available to third persons whose interests are not directly
affected (NCC, Art. 1421).
5. Cannot give rise to a valid contract (NCC, Art. 1422).
6. Can be assailed either directly or collaterally.
7. Parties to a void agreement cannot expect the aid of the law. (in pari delicto)

NOTE: In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter
may be enforced. (Art. 1420)

Reiteration

GR: They produce no legal effect whatsoever in accordance with the principle quod nullum est nullum
producit effectum (Jurado, 2011).

XPN: In case of pari delicto since it will refuse legal remedy to either party to an illegal agreement and
leaves them to where they were. Hence, if a void contract is already executed, neither of the parties
can recover from each other.

NOTE: A party has a right to unilaterally cancel and treat as avoided a void contract. However,
an action to declare its inexistence is necessary to allow restitution of what has been given
under it (Fuentes v. Roca, 618 SCRA 702, [2010]).

Effect of Laches.

GR: The action or defense for the declaration of the inexistence of a contract does not prescribe. (Art.
1410)

XPN : When there is laches on the part of the party assailing this contract.
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Laches is neglignece or ommission to assert a right within the reasonable time, warranting a
presmption that the party entitled to assert it either has abandoned it or declined to assert it. (Lim Tay
vs. Court of Appeals, 293 SCRA 634)

The prevailing doctrine is that the right to have a contract declared void ab initio may be barred by
laches although not barred by prescription. (Jurado, 2009)

Kinds of void contracts

Those lacking in essential elements:

a. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy: illicit cause, or object;
b. Those which are absolutely simulated or fictitious: no cause;
c. Those whose cause or object did not exist at the time of the transaction: no cause or object;
d. Those whose object is outside the commerce of man: no object;
e. Those which contemplate an impossible service: no object;
f. Those where the intention of parties relative to principal object of the contract cannot be ascertained.
Contracts prohibited by law

a. Pactum commisorium – the creditor appropriates to himself the things given by way of pledge
or mortgage to fulfill the debt.
b. Pactum de non alienando – an agreement prohibiting the owner from alienating the
mortgaged immovable.
c. Pactum leonina – a stipulation in a partnership agreement which excludes one or more
partners from any share in the profits or losses.
d. Illegal or illicit contracts (e.g. contract to sell marijuana)

NATURAL OBLIGATIONS

Natural obligations, not being based on positive law but on equity and natural law, do not grant a right
of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason thereof (NCC, Art. 1423).

NOTE: They are real obligations to which the law denies an action, but which the debtor may
perform voluntarily.

Requisites for natural obligations to arise

1. The obligation is not prohibited by law or contrary to morals and good customs.
2. There must be a previous juridical relationship between two persons but due to certain intervening
circumstances, it lost its legal enforceability leaving its fulfillment entirely to the free will or discretion of
the supposed debtor (Pineda, 2000).

Examples of natural obligations

1. Performance even after the civil obligation has prescribed (NCC, Art. 1424);
2. Reimbursement of a third person for a debt that has prescribed (NCC, Art. 1425);
3. Restitution by minor of the thing or price after annulment of contract (NCC, Art. 1426);
4. Delivery by minor of money or fungible thing in fulfillment of obligation (NCC, Art. 1427);
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5. Performance after action to enforce civil obligation has failed (NCC, Art. 1428);
6. Payment by the heir of a debt exceeding the value of property he inherited (NCC, Art. 1429); and
7. Payment of legacy after will has been declared void (NCC, Art. 1430).

NOTE: The enumeration is not exclusive.

Voluntary payment of debt which has already prescribed

The obligor who voluntarily performs the contract cannot recover what he has delivered or the value of
the service he has rendered. Because of extinctive prescription, the obligation of the debtor to pay his
debt became a natural obligation. While it is true that a natural obligation cannot be enforced by court
action, nevertheless, after voluntary fulfillment by the debtor, under the law, the creditor is authorized
to retain what has been paid by reason thereof (Jurado, 2009). Fulfillment puts the debtor into estoppel
from recovering what had been paid or delivered (Pineda, 2009).

Conversion of natural obligation to civil obligation

Natural obligations may be converted into civil obligations by acts of novation. Thus, a prescribed
debt is turned into civil obligation when the debtor renounces the defense of prescription or by signing
a document recognizing such with a promise to pay the debt at some future time. The natural obligation
becomes a valid cause for a civil obligation after it has been affirmed or ratified anew by the debtor
(Pineda, 2009).

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