Contract

IN GENERAL
DEFINITION. Art. 1305 - a meeting of the minds (there must be consensus) between
two persons (at least two parties, one cannot have contract with oneself) whereby one
binds himself with

An agreement of two or more persons for the purpose of creating (ex, sale), modifying
(novation), or extinguishing a juridical relation (mutual recision) between them.

Contract is a source of obligation, while obligation is the juridical necessity.

CONTRACT v. OBLIGATION
CONTRACT
OBLIGATION
One of the sources of an obligation. The legal tie or relation.

Obligation There is no contract if there is no may exist without a contract because

obligation there are other sources of obligations.

Classification of contracts
Accdg to perfection or formation
a. Consensual contract (meeting of the mind, so verbal can be considered such)
b. Real contract, contract of pledge is perfected upon delivery of thing
c. Formal or solemn contract – perfected thru legal form example, donation or real
estate mortgage – even if accessory must have written form

Accdg to cause or equivalence of the value of the prestation

a. Onerous Contract – when each one receives the equivalent value
b. Gratuitous or lucrative contract – donation or last will testament, only one party
receives the value
c. Remuneratory contract – the cause of service or loyalty and one receives

Accdg to importance or dependence of one upon the other

a. Principal contract – ex contract of sale, loan
b. Accessory Contract – ex Real Estate mortgage, the extinguishment of the
principal carries the accessory
c. Preparatory contract – a contract anticipating another contract, ex. deed of
conditional sale. Once the conditions are fulfilled then one creates the deed of
absolute sale to transfer ownerhip

Accdg to parties obligated

a. Unilateral Contract – only one party performs ex. deposit
b. Bilateral or synalagmatic Contract – two parties ex contract of sale
Accdg to their name or designation
a. Nominate contract – ex contract of sale, contract of deposit, contract of lease –
contracts are particularly named under the law
b. Innominate Contract – those without particular name

Accdg to risk of fulfillment

a. Commutative Contract – means both parties have the obligation to perform at the
same time, ex. contract of sale
b. Aleatory – only required to perform the obligation if specific event transpired, if it
does not happen, then one is not obliged to perform. Ex insurance, insured has
to pay premium, insurer company will not pay unless something wrong happened
to the insured, medical insurance

Accdg to the time of performance or fulfillment

a. Executed – when obligations are performed
b. Executory – still subject to execution, ex deed of conditional sale, until and
unless all the price has been paid then it can only be executed

Accdg to subject matter

a. Things –
b. Rights or credit – conveying a waiver
c. Services – construction agreement

Accdg to obligation imposed and regarded by the law

a. Ordinary contract – a contract entered into is the law between the parties,
regulated by the civil code, it binds only the parties involved.
b. Institutional Contract – imbued with public interest, the state has the interest. Ex
marriage contract – government has an interest, so the parties in annulment the
state will have a party – the office of the solicitor general; employment contract –
regulated by the labor code, bargaining agreement – imbued with

Accdg to the evidence required for its proof

a. Those requiring mere oral or parol evidence
b. Those requiring written proof – for purposes of enforceability

Accdg to number of persons actually and physically entering into the contracts
a. Ordinarily – two persons
b. Auto Contracts – contracts are made by a single person representing two parties.
Ex owner of property, subject of sale, which executed power of attorney as
vendor or seller, the agent is signing the spa, when the agent also signs the
deed of sale as seller.
There must be a law to effect such, such as law of agency and sale

Accdg to the number of persons who participated in the drafting of the contract
 a. Ordinary – the parties who prepared the contract
b. Contract of adhesion – only one party prepared, the other party is to signify or to
conform to the provisions. In case of dispute, such is tilted to the person who
merely sign the contract. It is always read against the one prepared it. Ex.
insurance contract, contract of loans – banks

Innominate contracts
Four Types
a. Do ut des (I give and you give)
b. Do ut facias (I give and you do)
c. Facio ut des (I do and you give)
d. Facio et facias (I do and you do)

Innominate contracts are regulated by

Article 1307
a. Stipulation for the parties
b. Provisions of obligations and contracts -book iv of the civil code
c. Rules governing the most analogous nominate contract
d. Customs of the place

Facts. Hilda’s car broke down and she went to look for a mechanic. She found ivan and
asked him to look at her car.

Answer: No Hilda is not correct. She should compensate Ivan as they entered

Stages of a Contract
a. Preparation/Negotiation (conception or generacion) covers the period from the
time of the prospective contracting parties indicate interest in the contract to the
time the contract is concluded (perfected) – offer and counter offer, till meeting of
the mind
b. Perfection (birth) – takes place upon the concurrence of the essential elements of
a contract.
Effects
a. Parties are bound to the fulfillment of what has been expressely stipulated
b. Parties are bound to all the consequences which according to their nature,
may be in keeping with good faith, usage and law
c. Consummation (death or extinguishement) – begins when the parties perform their
respective undertakings under the contract culminating in the extinguishment of the
contract

Characteristics of a contract
a. Consensuality (Art. 1315 -16) Contracts are generally perfected by mere consent
(art 1315. No special form is necessary (1316)
Exceptions
 1. Formal/solemn contracts – compliance with special formalities. If law requires
it to have such ex. verbal donation, last will and testament (notarial will – it
must follow a certain form, holographic will – entirely written by the testator)
2. Real Contracts – delivery is necessary
b. Autonomy or Freedom to Stipulate (Art 1306) – generally, contracting parties can
freely establish what clauses, conditions, stipulations and provisions deem
beneficial to the parties
Limitations on the contractual stipulations
1. Law – is superior to a contract. Contract must be in accordance with law. If
against then it is null and void
2. Morals – refers to the norms of good and right conduct and human
conscience. Example husband and wife write a contract of walang
pakialamanan
3. good customs – habits and practices which through long usage have been
followed and enforced by society or some part of it as binding rules of
conduct. It has the force of law when recognized and enforced by law. Ex.
disrespect against elders
4. Public order – deals with public weal and public safety. Ex. stipulation not to
lock gates
5. Public Policy – a stipulation which has a tendency to be injurious to the public
or against public good
c. Obligatoriness (art 1159) Obligations arising from contract have the force of law
between the contracting parties and should be complied with in good faith. Hence
one, signs thence one agrees to it.
d. Mutuality (Art 1308-1310) the contract must bind both contracting parties, its
validity or compliance cannot be left to the will of the one of them. Example if
there is stipulation, which may depend on one then, it is not valid.
Consequences of Mutuality
1. A party cannot revoke or renounce a contract without the consent of the other
nor can it habe it set aside on the ground that he made a bad bargain
2. Validity or compliance cannot be left to the one of them

General rule: compliance with the contract cannot be left to the will of the one of
the contracting party
Exception: Article 1309 - determination of its performance may be left to a third
person which shall bind the parties only after it has been made known to both of
them.
Example A and B invested into a business; they agreed that C will determine
whether the venture will continue after a year.

Qualification to Art 1309: Art 1310 – A contracting party is not bound by the
determination if it is evidently inequitable or unjust as when the third person
acted in bad faith or by mistakes
NB: the court will decide what is equitable
 e. Relativity (arts 1311, -1314 and 1317) – contracts take effect only between the
parties, their assigns and heirs. Aslo known as Principle of relativity of contracts
(1311)
The estate of the deceased will fulfill obligations
Exceptions:
1. Contracts are not transmissible by their nature
2. Contracts are not transmissible by stipulation
3. Contracts are not transmissible by provision of law

Four exceptional cases when strangers or 3rd persons are affected by the a contract
A. Contract containing a stipulation in favor of a third person (stipulation pour autrui)
Requisites
1. There must be a stipulation in favor of a third person
2. The stipulation must be a part, not the whole of the contract
3. The contracting parties must have clearly and deliberately conferred a favor
upon a third person, not a mere incidental benefit or interest
4. The third person must have communicated his acceptance to the obligor
before its revocation
5. Neither of the contracting parties bear the legal representation or
authorization of the third person.
B. In contracts creating real right (1312)
Third persons who come into possession of the object of a contract over which
there is a real right are bound thereby even if they were not parties to the
contract.
C. In contracts entered into to defraud creditors (1313)
The creditor is given the right to impugn the contracts of his debtors to defraud
him. Ex. The deed of donation made by A to B to save the object from C, creditor
of A, when used to defraud a creditor. The creditor can invalidate the deed
D. In contracts which have been violated at the inducement of a third person
(Tortious interference 1314)
Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. Example contract of conditional sale is
rescinded due to inducement of another to favor him.

Tortious interference
Requisites
a. Existence of a valid contract
b. Knowledge on the part of the third person of the contract
c. Interreference of the third person is without legal justification or excuse.
Remedies
1. The wronged party is entitled to damages but the liability for damages of
the meddler cannot be worse that the liability of the contracting party
2. In the screen shot
Unauthorized contract
Art 1317
General rule No one may contract in the name of another
Effect of unauthorized contract: unenforceable
Exception:
a. The person entering into a contract in the name of another has been authorized
by the latter.
b. He must have by law a right to represent him
c. The contract was subsequently ratified. When one enters without consent, but
later honors then it is ratified.

FACTS: Franco is selling the mobile phone of Jenny to Helga without Jenny's authority.
Helga agrees to buy the mobile phone, what is the status of the agreement?
ANSWER: It is unenforceable. (Art. 1317, NCC)
How can it be enforced?
ANSWER: If Jenny ratifies the agreement before it is revoked by Helga.

Facts: Imee authorized Justin to sell her mobile phone of 5000 to Karen for $ 4,000.mo.
What is the status of the agreement?
ANSWER: It is unenforceable. Justin is not authorized to sell it below P5,000.00.
What if Justin sells it for P6,000.00? What is the status of the agreement? It is
applicable since it is beneficial.

In general
There is no contract unless the following requisites concur:
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established Art 1318

Facts: Henry offered to sell his mobile phone to Imee for 15k. Imee accepted. Identify
the essential requisites of the contract
Consent – Henry and Imee agreed on the purchase oof the mobile phone
Object- Mobile Phone
Cause:
a. As for Henry – offer by Imee of 15k
b. As for Imee – delivery of the mobile phone

CONSENT
Concept: Consent is the conformity of the parties to the terms of the contract; the
acceptance by one of the offer made by the other; the concurrence of the minds of the
parties on the object and cause which shall constitute the contract

Manifestation: Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract Art 1319
Requisites:
a. An offer that must be certain
b. An acceptance that must be unqualified and absolute and
c. In addition to the subject matter and the consideration, the area of agreement
must extend to ALL points that the parties deem material

A. Offer
Definition: means a unilateral proposition which one party makes to the other
for the celebration of the contract
The offer must be certain
Effectivity: An offer is effective until either party becomes incapacitated or until the
offer is withdrawn by the offerer
a. Incapacity – an offer becomes ineffective upon the death, civil interdiction,
insanity or insolvency of either party before acceptance is conveyed (Art
1323). When acceptance is conveyed then there is valid contract
Conveyed – the time when the offerer learns of the acceptance of the
offeree
b. Withdrawal – as general rule, the offerer may withdraw the offer at any
time before he learns the acceptance by the offeree

When Period is Given

General Rule: The offer may still be withdrawn at anytime before
acceptance by communication such withdrawal (1324)

Exception: The offer may not be withdrawn when it is founded upon a

consideration as something paid or promised (1324)
NB: The consideration must be separate and distinct from the price in the
principal contract

Option Contract – grants a person the choice for a distinct and separate
consideration, to purchase a determinate thing at a predetermined fixed
price
Earnest Money – consideration for the main contract ex. down payment

The right of first refusal. Q: Is the right of the first refusal an option of
contract?
A. No. Because it depends on whether the offerer will decide to sell the
property and on terms that are not yet determinate.

ADVERTISEMENTS
Are they considered definite offers?
a. Unless it appears otherwise, business advertisement of things for sale
are not definite offers, but mere invitation to make an offer (1325)
b. Advertisements for bidders are simply invitation to make proposals
and the advertiser is not bound to accept the highest or lowest bidder,
unless the contrary appears (1326)
Except; Rule 39 of Rules of Court: By express provision of law in sale
of properties under execution, it must be sold to the highest bidder.
Ex. Contract of Mortgage – judicial foreclosure, the property is subject
to bid

c. Public advertisement offering rewards or prizes such as in contest or

competitions constitute unilateral promise. When a member of the
public performs an act pursuant to the offer, such action constitutes an
acceptance which converts the promise into a contract binding on the
advertiser.

B. ACCEPTANCE
Definition: Acceptance is the conformity by the offeree to the
proposition of the offerer

Acceptance must be absolute and unqualified

Knowledge of the Acceptance. The acceptance of an offer must be

made known to the offerer. The contract is perfected only from the
time the acceptance of the offer is made known to the offerer. Unless
and until the offerer knows the acceptance, there is meeting of minds
of the parties, no real concurrence of offer and acceptance.

Acceptance made by letter or telegram does not bind the offerer

except from the time it came to his knowledge (1319)

The contract, in such a case (acceptance by letter or telegram) is

presumed t have been entered into in the place where the offer is
made.

FACTS: Donna executed a Special Power of Attorney authorizing

Rylee to sell her (Donna's) house based on the terms indicated
therein. Rylee offered the house to Samuel who accepted the offer on
November 1. It turned out however that Donna also offered the house
to Hugo who accepted the offer on November 5. Who has a better
right as between Samuel and Hugo?

ANSWER: Samuel has a better right as he accepted the offer before

Hugo did. It does not matter that the acceptance was made to Rylee
as Rylee was authorized to act as Donna'a agent. An offer made
 through an agent is accepted from the time acceptance is
communicated to him.

KINDS OF ACCEPTANCE
a. Express (writing or verbal)
b. Implied
Silence. In general, the offeree is not bound to answer a proposal
and his silence per se cannot be construed as an acceptance.
Exception. Acceptance may be implied from silence if clearly
warranted by the circumstances (1870)
If the offeree requires express acceptance, it should be done
expressly (1321)

TIME, PLACE AND MANNER

RULE. The person making the offer may fix the TIME, PLACE, and MANNER of
acceptance, all of which must be complied with. (Art.
1321, NCC)
a. An acceptance which is not made in the manner, place, or period prescribed by
the offerer is not effective but constitutes a counter-offer, which the offerer may
accept or reject.
b. In general, when the offerer has not fixed a period for the offeree to accept the
offer, and the offer is made to a person present, the acceptance must be made
immediately.
Revocation of acceptance: acceptance may be revoked, but the revocation must be
made to the offerer before he learns of the acceptance
Illustration: sample in ss

Capacity to give consent

Capacity: As gen rule, any person of legal age can give consent to a contract unless
there is a ground for his incapacity provided by law

Incapacity: The following cannot give consent to a contract

a. Unemancipated Minors
b. Insane or demented persons
i. Contracts entered into during a lucid interval are valid 1328
ii. Contract agreed to in a state of drunkenness or a hypnotic spell are voidable
(1328) voidable by court
c. Deaf-mutes who do not know how to write (art 1327)

Special Disqualifications
Sec 2, Rule 92 of Rules of Court – Incompetents
a. Those under civil interdiction
b. Hospitalized lepers
c. Prodigals
 d. Deaf and dumb who are unable to read and write
e. Those of unsound mind even though they have lucid intervals
f. Persons not of unsound mind but by reason of age, disease, weak mind and other
similar causes cannot, without outside aid, take care of themselves and manage
their property, becoming thereby an easy prey for deceit and exploitation.
Effects of Incapacity
a. If one of the parties to a contract is incapacitated the contract is voidable 1390
b. If both parties to a contract are incapacitated the contract is unenforceable 1403
and 1407
c. If a party is disqualified by law, the contract is void.

VICES OF CONSENT
Consent is essential to the existence of a contract. If consent is absent, the contract is
non-existent
If consent is present, but it was given through mistake, violence, intimidation, undue
influence, or fraud, the contract is voidable
Requisites of consent :
1. It should be intelligent or with an exact notion of the matter to which it refers
(intelligence)
2. It should be free (freedom)
3. It should be spontaneous (spontaneity)

VICES OF CONSENT
MISTAKE OR ERROR:
1. In order to invalidate consent, error or mistake must be substantial regarding:
a. The object of the contract;
b. The condition which principally moved one or both parties to enter into the
contract (error in quality or quantity); or,
c. Identity or qualifications but only if such was the principal cause of the
contract.
MISTAKE OF ACCOUNT:
a. Simple - contract is valid; remedy is correction.
b. Gross - If it is not apparent - ground for rescission; if it is apparent – liability

2. Error must be the causal, not merely incidental factor that induced the
complaining party to enter into the contract.
3. Error must be a mistake of fact and not of law.

NOT ERROR OR MISTAKE

1. Mere error as to the designation will not vitiate consent, as long as the
intended object is clear.
2. There is no mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract. (Art. 1333, NCC)
RULE IN CASE OF INABILITY TO READ OR UNDERSTAND
-Art. 1332, NCC
PRESUMPTION: MISTAKE or FRAUD if (1) one of the parties is unable to read; or, (2)
the contract is in a language not understood by him.

RATIONALE: Art. 24, NCC - In all contractual, property or other relations, when one of
the parties is at a disadvantage on account of his moral dependence, ignorance,
indigence, mental weakness, tender age or other handicap, the courts must be vigilant
for his protection.

MUTUAL ERROR
Art. 1334, NCC REQUISITES ARE PRESENT:
a. There must be mutual error;
b. The error must refer to the legal effects of the agreement; and,
c. . The real purpose of the parties is frustrated.
Ex. A and B agreed to buy a land of C, but A and B did not know that they will
pay other fees.

DISTINGUISH FROM REFORMATION:

Real agreement is not disclosed.

VIOLENCE & INTIMIDATION or THREAT

VIOLENCE - refers to physical coercion
INTIMIDATION or THREAT - moral coercion

REQUISITES FOR VIOLENCE TO VITIATE CONSENT:

a. Employment of a serious or irresistible force; and,
b. It must have been the reason why the contract was entered into.
REQUISITES FOR INTIMIDATION OR THREAT TO VITIATE CONSENT:
a. Reasonable and well-grounded fear of an evil;
b. Evil must be imminent and grave;
c. . Evil must be upon his person or property, or that of his spouse, descendants or
ascendants;
d. It is the reason or the determining cause why he enters into the contract; and.
e. The threat must be an unjust act or an actionable wrong.

REVERENTIAL FEAR - fear of displeasing a person to whom respect and obedience

are due. (Art. 1336). It may be a third person exerting influence.

UNDUE INFLUENCE
There is undue influence When a person takes improper advantage of his choice.
The following circumstances shall be considered:
a. The confidential, family, spiritual and other relations between the parties;or,
 b. The fact that the person alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial distress.
NB: Undue influence shall annul the obligation, although it may have been employed by
a third person who did not take part in the contract. (Art.1336, NCC)

CONTRACTS OF ADHESION
DEFINITION. One wherein almost all of the provisions are drafted by one party. The
participation of the other party is limited to affixing his signature or his "adhesion" to the
contract. Ex. common in insurance contracts.

1. Any ambiguity, obscurity or doubt in a contract of adhesion is construed or

resolved strictly against the party who prepared it.
2. In some exceptional cases, the court may even set aside prejudicial stipulations
in an adhesion contract. Ex. Tickets of Bus, it cannot be used by bus companies

FRAUD OR DOLO

IN GENERAL. There is fraud, 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, NCC)
DOLO CAUSANTE - fraud employed prior or simultaneous to the creation of the
contract.
REQUISITES OF FRAUD TO VITIATE CONSENT:
a. It must have been employed by one of the contracting party upon the other;
b. It must have induced the other party to enter into a contract;
c. It must have been serious; and,
d. It must have resulted in damage and injury to the party seeking annulment.

DETERMINATION OF FRAUD
1. Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud. (Art. 1339, NCC).
2. The usual exaggerations in trade, when the other party had an opportunity to
know the facts are not in themselves fraudulent. (Art. 1340, NCC)
3. A mere expression of an opinion does not signify fraud. (Art. 1341, NCC)
EXCEPT: (1) made by an expert; and, (2) the other party has relied on the former's
special knowledge.
4. Misrepresentations by a third person does not vitiate consent. (Art. 1341. NCC)
EXCEPT: (1) such misrepresentation has created substantial mistake; and, (2) the
same is mutual. (Art. 1342, NCC)
5. Misrepresentation in good faith is not fraudulent but may constitute error.

EFFECTS OF FRAUD
A. DOLO CAUSANTE - makes the contract voidable, provided that it is (a) serious and
(b) has not been employed by both contracting parties (Art. 1344, NCC)
B. DOLO INCIDENTE -only obliges the person employing it to pay damages. (Art. 1344,
NCC)

SIMULATED CONTRACTS
DEFINITION. Simulation occurs when an apparent contract is a declaration of a
fictitious will, deliberately made by the agreement of the parties, in order to produce, for
the purpose of deception, the appearance of a juridical act which does not exist or is
different from that which was really executed.You don’t really intend to be bound to it.

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; and,
c. . The purpose is to deceive third persons.

TYPES OF SIMULATION
A. ABSOLUTE SIMULATION - when the parties do not intend to be bound at all. i.
i. An absolute simulated or fictitious contract is void (Art. 1346, NCC), because
consent is totally absent.
ii. Absolutely Simulated Contract v. Fraudulent Contract:

B. RELATIVE SIMULATION - when the parties conceal their true agreement.

The real and true agreement is binding on the parties, provided that:
a. It does not prejudice a third person; and,
b. It is not intended for any purpose contrary to law, morals, good customs, public
order or public policy.

OBJECTS OF CONTRACTS
DEFINITION. Object is the thing, right or service which is the subject matter of the
contract. (Arts. 1318 and 1347, NCC)
REQUISITES FOR A THING, RIGHT OR SERVICE TO BE AN OBJECT OF
CONTRACTS:
1. WITHIN THE COMMERCE OF MAN - All things which are not outside the
commerce of man, including future things, may be the object of contracts.

• No contract may be entered into upon future inheritance, except in cases

expressly authorized by law (Art. 1347, NCC) Partition inter vibos.
• All rights which are not intransmissible may also be the object of contracts.
(Art.
 • 1347, NCC)
• All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract
2. POSSIBLE - Impossible things or services cannot be the object of the contract.
(Art. 1348, NCC)
3. CERTAIN
i. AS TO KIND. The object of every contract must be determinate as to its
kind.
ii. AS TO QUANTITY. The fact that the quantity is not determinate shall not
be an obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between the
parties. (Art. 1349, NCC).
CAUSE OF CONTRACTS
IN GENERAL. The essential reason which moves the contracting parties to enter into it.
In other words, the cause is the immediate, direct and proximate reason which justifies
the creation of an obligation through the will of the contracting parties.

CAUSE OF CONTRACTS:
1. In ONEROUS CONTRACTS - the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other.
(Art. 1350, NCC)
2. In REMUNERATORY CONTRACTS - the cause is the service or benefit which is
remunerated. (Art. 1350, NCC)
3. In GRATUITOUS CONTRACTS - the cause is the mere liberality of the
benefactor (Art. 1350, NCC)

CAUSE v. MOTIVE
Cause is the essential reason for the contract, motive is the particular reason of a party
entering into a contract and which does not affect the other party. Ex contract of sale of
laptop, cause: buyer to pay the purchase price, seller to deliver the object; motive: what
he will do to the laptop

GENERAL RULE: A party's motives for entering into the contract do not affect the
contract. A party's motive does not even have to be known to the other party.

EXCEPTION: The motive may be regarded as the cause "when the motive
predetermines the cause" ex. social housing authority, purpose to buy land – should be
used for socialize housing. If the land is not suitable for socialized housing, the motive
becomes the cause. They can rescind the contract.

EXISTENCE OF A CAUSE
RULE: Contracts MUST have a cause, as it is an essential requisite. Contracts without
cause produce no effect whatever. (Art. 1352, NCC)
PRESUMPTION. Although the cause is not stated in the contract, it is presumed that it
exists (and is lawful), unless the debtor proves the contrary. (Art.
1354, NCC)

LEGALITY OF CAUSE
RULE. The cause MUST be legal. Contracts with unlawful cause produce no effect
whatever. (Art. 1352, NCC)

PRESUMPTION. The cause is presumed lawful. Although the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless the debtor proves otherwise.
UNLAWFUL CAUSE. The cause is unlawful if it is contrary to law, morals, good
customs, public order or public policy.

Ex enter a contract to build a drug den in a residential area. Ex. donation in favor of
mistress

FALSE CAUSE. The statement of a false cause in contracts shall render them void,
unless it should be proved that they were founded upon another cause which is true and
lawful.

Ex. A seller believed that a theme park will be built in your land, because of this the
buyer bought the land. However, the developer decided to build on other area.

ADEQUACY OF CAUSE
GENERAL RULE. Lesion (injury) or inadequacy of cause shall not invalidate a contract.
(Art. 1355, NCC) The court will not look into transaction whether things are sold in their
due price.

EXCEPTIONS:
1. In cases specified by law; and, ex 1602
2. If there has been fraud, mistake or undue influence. Go back to Art 24.

FORM OF CONTRACTS

GENERAL RULE: FORM NOT NECESSARY. Contracts shall be obligatory, in whatever

form they may have been entered into, provided all the essential requisites for their
validity are present. (Art. 1356, NCC)

EXCEPTIONS: WHEN FORM IS NECESSARY.

6. When required by law for Validity. (FORMAL CONTRACTS)
7. When required by law for Enforceability or to be Proven in a Certain way.
(STATUTE OF FRAUDS)
8. When required for convenience. (Arts. 1357 and 1358, NCC)
SOLEMN OR FORMAL CONTRACTS
a. Donation of Immovable Property (Art. 749), which the law requires to be
embodied in a public instrument in order "that the donation may be valid";
It has to follow formality to be valid, and requires an acceptance by a donee
b. Donation of Movables worth more than P5,000.00 which must be in writing,
"otherwise the donation shall be void" (Art. 748, NCC);
c. Contracts to pay interest on loans (mutuum) which must be "expressly stipulated in
writing" (Art. 1956, NCC); an interest must be expressly stipulated in the contract,
if verbal, it cannot be collected
d. Stipulation limiting the liability of carrier to a degree less than extraordinary
diligence which must be in writing and signed by the shipper/owner of the goods
(Art. 1744, NCC); only applicable to limit less diligence when carrying goods not
for persons
e. Contract of Partnership, when an immovable is contributed - there must be an
inventory of the property, signed by the parties, and attached to the public
instrument (Art. 1773, NCC);
f. Real Estate Mortgage (Art. 1874); and,
g. Contract of Antichresis, wherein the amount of the principal and interest must be
specified in writing. (Art. 2134)

STATUTE OF FRAUDS (Art. 1403 [2])

DEFINITION. Statute of Frauds refers to the law which requires certain contracts or
transactions to be put in writing and signed by the party charged thereby. Its purpose is
to prevent fraud and perjury in the enforcement of obligations depending for their
evidence on the "unassisted memory of witnesses"

Not for purposes of validity: but for enforceability and proof of fraud

NB: Contracts covered by the Statute of Frauds cannot be proven without the writing or
through oral evidence (Art. 1403, NCC), unless the party fails to object (Art. 1405, NCC)
CONTRACTS COVERED BY STATUTES OF FRAUDS
a. An agreement that by its terms is not to be performed within a year from the
making thereof;
b. A special promise to answer for the debts, default, or miscarriage of another;
A owes to B, C orally agreed to stand as A’s guarantor. Can B enforce C to
answer? No, it must be put in writing.
C orally promise to be a surety for A, it can be enforced since surety is not
covered herein
c. An agreement made in consideration of marriage, other than a mutual promise to
marry; Ex A promise B to build a house for B if latter marries him. Not
enforceable
 d. An agreement for the sale of goods, chattels or things in action, at a price not
less than P500.00; Ex. A orally agrees to buy phone of B in the amount of 2k, it
must be in writing
A orally agreed to buy B’s phone 2k and gives 450, then it is enforceable. The
rest of the provision must be read in full. If downpayment is made then it is not
covered by such unless the buyer agrees
e. An agreement of the leasing for a longer period than one year, or for the sale of
real property or of an interest therein; and,
f. A representation as to the credit of a third person. Ex A borrows B in the amount
of 500k, but B does not know A. C tells B that A is a good payor. B agrees to lend
to A. Can B go after C if A cannot pay? No, because representation is made
verbally. It should be in writing to be enforced.

If a contract is covered by statutes of frauds, then it must be written and requires

the elements of a valid contract. It must be complete not partly written and oral.
a. Memorandum is needed
b. It does not need that it be contained in a single document

EVIDENCE
RULE: Where the Statute of Frauds is applicable,
"evidence... of the agreement cannot be received without the writing, or a secondary
evidence of its contents". In other words, parol or oral evidence is barred.

NB: But the other party should promptly object to the presentation of oral evidence,
failure to do so would be a waiver of such objection and a ratification of the contract.

Ex. If an oral agreement is presented, then the defense must object and invoke the
statutes of frauds. If one does not object, then the evidence may be accepted.

Cross-examination regarding the contract may be deemed a waiver of the objection to

parol evidence.

RATIFICATION
-Contracts infringing the Statute of Frauds are ratified by:
a The failure to object to the presentation of oral evidence to prove the same
(Art.1405, NCC); or,
b The acceptance of benefit under them.(Art. 1405, NCC) ex. rent, but staying in the
place.

FORMAL REQUIREMENT AS A MATTER OF CONVENIENCE

IN GENERAL. If the law requires a document or other special form, such as in the acts
and contracts enumerated in Art. 1358, the contracting parties may compel each other
to observe that form, once the contract has been perfected. (Art. 1357, NCC)
 a This right may be exercised simultaneously with the action upon the contract. (Art.
1357)
b This right presupposes the existence of a valid contract. It is not available or
cannot be exercised for contracts where form is necessary for validity or
enforceability, or for proving the contracts.

If there is already a valid contract whether oral or not, if the law says that there should
be a form. Then are compelled to observe the form

ENUMERATION (Art. 1358, NCC)

A. Real rights over immovables, but sale of real property is under Arts. 1403 and
1405, NCC;
B. Cession, repudiation or renunciation of hereditary rights or conjugal partnership
of gains;
C. Power of administration and similar powers; and,
D. Cession of actions or rights
NB: Must be in writing - Contracts exceeding P500.00, but sale of personal property
is under Arts. 1403 and 1405, NCC.

ILLUSTRATE
Hansel has a right of first refusal with respect to the property of Gretel. Hansel executed
a waiver of his right in favor of Gertrude. If this is in a private document, may Gertrude
request that this be made in a public document?

ANS: Yes. Gertrude may request the execution of the public document. The right of first
refusal may be annotated on the title of the property. The Register of deeds will not
annotate it however it if not made in a public document. (1358)

What if Hansel merely agreed verbally with Gertrude with respect to the waiver of right
of first refusal, may Gertrude still compel Hansel to execute the necessary public
instrument?
ANS: Yes. The contract has already been perfected as between the parties. The form
here is merely for convenience. It is not necessary for this kind of contract to be in
writing for it to be valid.

Putting into a writing of a contract can only be compelled for purposes of convenience, if
there is an existence of a valid contract.

Carlito donated his land in Baguio City to Neo and his land in Urdaneta, Pangasinan to
Kitkat. The donation to Neo is in a private document while the donation made to Kitkat is
made verbally. May Neo and Kitkat compel Carlito to execute the necessary public
instrument?
ANS: No. In donation of immovable property, if the donation is not in a public
instrument, the donation is void. Both donations are void.
Tonka verbally agreed with Manja to the sale of the former's property in Bangui, locos
Norte. May Manja compel Tonka to execute the necessary public instruments?

ANS: This case is governed by the rules on Statute of Frauds Art. 1403 (2) and Article
1405. The sale is unenforceable as it involves the sale of real property. Manja cannot
compel Tonka to execute the public document. (the contract is invalid)

REFORMATION OF INSTRUMENTS
IN GENERAL. Reformation is a remedy (originally in equity) whereby a written
instrument is made or construed so as to express or conform to the real intention of the
parties, where some mistake, fraud, inequitable conduct or accident has occurred or
been committed.

NB: In granting reformation, the court is not making a new contract for the parties, but
establishing and perpetuating the real contract between the parties which, under
technical rules of law, could not be enforced but for such reformation.

PURPOSE: Equity orders the reformation of an instrument in order that the true
intention of the contracting parties may be expressed.

REQUISITES
a There must have been a meeting of the minds of the parties to the contract;
b The instrument does not express the true intention of the parties; and,
c The failure of the instrument to express the true intention of the parties due to
mistake, fraud, inequitable conduct or accident. (Multi-Ventures Capita Stalwart
Management, G.R No. 157439, July 4, 2007)

ILLUSTRATE
Imee and Barbie agreed on a Deed of Sale of property but the contract that was made
was a mortgage contract. What is the recourse of the parties?
ANS: Reformation of the contract. Go to court and ask for reformation

Through fraud, Kylie was able to induce Hailey to enter into a Deed of Sale and to
execute the corresponding agreement to that effect. What is the recourse of Hailey?

ANS: Annulment of the agreement. There is no consent for Hailey. Hence the Contract
was voidable.

Justine was selling her land to Zayn but Zayn thought they were entering into a
mortgage agreement. The contract executed was a Deed of Sale. What is the recourse
of Zavn?
ANS: To seek the nullification of the agreement. In here, there was no meeting of the
minds at all.

REFORMATION
There is a meeting of mind, consent but such is not reflected on the
instrument/form so the remedy is reformation. The rule is that an instrument must reflect
the real intention.

SPECIFIC INSTANCES OF REFORMATION

1. Mutual Mistake (Art. 1361, NCC)
2. Mistake by one party;
Ex. a unilateral deed of sale was signed by A instead of deed of mortgage, then it
can be reformed.
a. Mistake By One Party; Fraud or Inequitable Conduct By the Other. (Art. 1362,
NCC) ex A prepared a contract of lease with B, B changed to appear as
Contract of Mortgage. The innocent party can ask for reformation
b. Mistake by One Party; Concealment by the Other (Art.1363, NCC)
Ex A mistakenly signed a contract of mortgage with B, B knew that it should
be contract of lease. Who can ask for reformation. It should be the innocent
one.
3. Ignorance, Lack of Skill, Negligence or Bad Faith. (Art. 1364, NCC)
4. Sale which is really a Mortgage or Pledge. (Art. 1365, NCC). Mortgage does not
transfer ownership.

WHEN REFORMATION IS NOT PROPER

a. Gratuitous Acts. (Art. 1366, NCC)
i. Simple donations inter vivos (takes effect during the lifetime) wherein no
condition is imposed;
ii. Wills, takes effect mortis causa

b. Void Agreements. (Art. 1366, NCC)

c. Estoppel. (Art. 1367, NCC) A contact of mortgage with B, but A cannot pay so
there is the forclosure. It cannot be reform since, the mortgage has been
enforced.
d. No meeting of minds

GOVERNING LAWS AND RULES

GOVERNING LAW:
1. The provisions of the Civil Code primarily apply to the reformation of instruments.
(Art. 1360, NCC)
2. The Principles of the general law on reformation of instruments are adopted
insofar as they are not in conflict with the provisions of the Civil Code.

PROCEDURE:
 a Declaratory Relief.
b Real Party-in-Interest.
c Prescription. Ten (10) years counted from the time the right of action accrues.
When it lapsed one is barred from reformation

CAPACITY TO GIVE CONSENT

CAPACITY. As a general rule, any person of legal age can give consent to a
contract unless there is a ground for his incapacity provided by law.
INCAPACITY: The following cannot give consent to a contract:
a. Unemancipated Minors;
b. Insane or Demented Persons
i.Contracts entered into during a lucid interval are valid. (Art. 1328, NCC)
ii. Contracts agreed to in a state of drunkenness or during a hypnotic spell are
voidable. (Art. 1328, NCC)
c. Deaf-mutes who do not know how to write. (Art. 1327, NCC)
SPECIAL DISQUALIFICATIONS
• Sec. 2, Rule 92 of the ROC - INCOMPETENTS
a. Those under civil interdiction;
b. Hospitalized lepers;
c. Prodigals;
d. Deaf and dumb who are unable to read and write;
e. Those of unsound mind even though they have lucid intervals; and,
f. Persons not of unsound mind, but by reason of age, disease, weak mind and
other similar causes cannot, without outside aid, take care of themselves and
manage their property, becoming thereby an easy prey for deceit and
exploitation.

EFFECT OF INCAPACITY
a. If one of the parties to a contract is incapacitated, the contract is voidable. (Art.
1390, NCC)
b. If both parties to a contract are incapacitated, the contract is unenforceable. (Art.
1403 and 1407, NCC); and,
c. If a party is disqualified by law, the contract is void.

INTERPRETATION OF CONTRACTS
PRINCIPLES OF INTERPRETATION:
A. PRIMACY OF INTENTION (Art. 1370, NCC), one can read by going to the form.
ii. Plain Meaning Rule.
ii. Intention Prevails.
B. DETERMINING THE INTENTION.
a. Contemporaneous and Subsequent Acts. (Art. 1371)
RULE 130, Section 9 ROC
 RULE: When the terms of an agreement have been reduced to writing, it is
generally considered as containing all the terms agreed upon and there can
be, between the parties and their successors-in-interest, no evidence of such
terms other than the contents of the written agreement.

EXCEPTION: A party may present evidence to modify, explain or add to the

terms of the written agreement if he puts in issue in his pleading:
i.An intrinsic ambiguity, mistake or imperfection in the written agreement;
ii. The failure of the written agreement to express the true intent and
agreement of the parties thereto;
ili. The validity of the written agreement; or,
iv. The existence of other terms agreed to by the parties or their successors-
in-interest after the execution of the written agreement.
C. SCOPE OF TERMS. (Art. 1372, NCC)
FACTS: Kathleen recently purchased several hectares of farmland and she needed
a number of carabaos to pull the ploughs. She went to a nearby lot owned by Lloyd
and upon seeing several carabaos there, agreed with Lloyd in writing to purchase for
the amount of P1M "all animals in Lloyd's lot for the purpose of pulling plows in
Kathleen's farm". After payment, Lloyd delivered all carabaos on his lot to the
Kathleen but the latter said that the dog in the lot should also be delivered as the
agreement referred to "all animals in the lot" Is Kathleen correct?

ANS: No. The intent of the parties was for the sale of animal's for the purpose of farming
- of plowing. A dog is not a beast of burden. It cannot pull the plow. 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.
D. MOST EFECTUAL INTERPRETATION. Art. 1373, NCC – one that can give
effect to the contract
E. HOLISTIC INTERPRETATION. Art. 1374, NCC – look at the entire contract
F. CONSISTENCY OF THE NATURE AND OBJECT
G. USAGE AND CUSTOM

FACTS: Sidney agreed to construct a building for Tanya within the time stipulated in the
agreement. As there was delay, Tanya insisted on the contract provision that she has
the right to liquidated damages equivalent to 1/10 of 1% of the contract price for every
day of delay.
Hence, Tanya argues that the computation of the delay should be until the final
completion of the project. Sidney, however, countered that based on industry practice,
and rules promulgated by the Construction Industry Authority of the Philippines (CIAP),
it should only be until substantial completion 95% of the contract. Decide.
ANS: The SC has previously applied the CIAP Document No. 2 as evidence of the
construction industry practice that substantial compliance is equivalent to 95%
accomplishment rate. (West Corporation v. Highlands Prime, G.R No. 187543/187583,
February 8, 2017.

CONTRA PROFERENTUM
-Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.

CONTRACTS OF ADHESION
RULE: Any ambiguity, obscurity or doubt in a contract of adhesion is construed or
resolved strictly against the party who prepared it. But where no such ambiguity,
obscurity, or doubt exists, no such construction is warranted.

IMPOSSIBILITY OF SETTLING DOUBTS

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in
Arts. 1370-1377, the following rules apply:
1. If doubt refers to incidental circumstances –
a. Where the contract is gratuitous, the least transmission of rights and interest
shall prevail. Ex. comodatum (can be used) vs deposit, deposit shall prevail
b. Where the contract is onerous (burdensome), the doubt shall be settled in
favor of the greatest reciprocity of interest. Ex. if contract of loan bu no period
then ask the court to set the period that is of greatest favor for both.
2. If the doubts are cast upon the principal object of the contract in such a way that
it cannot be known what may have been the intention or will of the parties - the
contract shall be null and void.

Assignment RULES OF COURT

PROVISIONS "RULE 130, ROC (Law ON Evidence)
Interpretation of Documents
Sections 10-19

CLASSIFICATION
A. Rescissible Contracts;
B. Voidable Contracts;
C. Unenforceable Contracts; and,
D. Void Contracts.

RESCISSIBLE CONTRACTS
IN GENERAL. A rescissible contract contains all the requisites of a valid contract and is
considered legally binding, but by reason of injury or damage to either of the contracting
parties or to third persons, such as creditors, it is susceptible to rescission at the
instance of the party who may be prejudiced thereby (Equatorial Realty Development v.
Mayfair Theater, Inc., 370 SCRA 56)
Distinction: Art. 1381 v. Art. 1191

RESCISSION
• A remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if this should be
valid, by restoration of things to their condition at the moment prior to the celebration of
the contract. It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone. (The Wellex Group v. U-Land Airlines,
G.R No. 167519, January 14, 2015)

RESCISSION v. TERMINATION
To rescind is to declare a contract void in its inception and put an end to it as though it
never were.
The termination or cancellation of a contract would necessarily entail enforcement of its
terms prior to the declaration of its cancellation.

CAUSES
a LESION TO WARDS. Those contracts which are entered into by guardians
whenever the wards whom they represent suffer lesion by more than one-fourth
of the value of the things which are the object thereof; (Art. 1381, NCC)
b LESION TO ABSENTEES. Those contracts agreed upon in representation of
absentees, if the latter suffer lesion by more than one-fourth of the value of the
thing which are the object thereof;

LIMITATION
• Art. 1386, NCC - rescissions referred to in Nos. 1 and 2 of Art. 1381 shall not take
place with respect to contract approved by the courts.
FACTS: Edison, guardian of Froilan, rented out the latter's property worth P100,000.00
for P50,000.00 per month. The lease was however approved by the court. May the
lease still be rescinded as the ward suffered lesion by more than ¼ of the property's
value?
ANSWER: No. Art. 1386, NCC specifically states that rescission shall not take place
with respect to contracts approved by the court in reference to nos. 1 and 2 of Art. 1381.
The courts are presumed to have taken into consideration the interest of the
ward/absentee when it gave its approval
 c FRAUD OF CREDITORS. Those contracts undertaken in fraud of creditors when
the latter cannot in any other manner collect the claims due them;
i. All contracts by virtue of which the debtor alienates property. by gratuitous
title are presumed to have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all debts contracted before the
donation. (Art. 1387);
ii. Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment or writ of attachment has been
issued. (Art. 1387, NCC)
iii. Badges of Fraud in a Sale

PRESUMPTIONS
• Art. 1387, NCC - Presumption that certain transactions were undertaken in fraud of
creditors:
a . All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not
reserve sufficient property to pay all debts contracted before the donation.
b Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued.
NB: The decision or attachment need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.

REQUISITES FOR RESCISSION OF CONTRACTS IN FRAUD OF CREDITORS

(ACCION PAULIANA)
a. That the plaintiff asking for rescission, has credit prior to the alienation, although
demandable after;
b. That the debtor has made a subsequent contract conveying a patrimonial benefit
to a third person;
c. That the creditor has no other legal remedy to satisfy his claim, but would benefit
by rescission of the conveyance to the third person;
d. That the act being impugned is fraudulent; and,
e. That the third person who received the property conveyed, if by onerous title, has
been an accomplice in the fraud. (Anchor Savings Bank v. Furigay, GR No. 191
178, March 13, 2013)
BADGES OF FRAUD
a. The facts that the consideration of the conveyance is fictitious or is inadequate;
b. A transfer made by a debtor after a suit has been begun and while it is pending
against him;
c. A sale upon credit by an insolvent debtor;
d. Evidence of large indebtedness or complete insolvency;
 e. The transfer of all or nearly all his property by a debtor, especially when he is
insolvent or greatly embarrassed financially;
f. The fact that the transfer is made between father and son, when there are present
other of the above circumstances; or,
g. The failure of the vendee to take exclusive possession of all the property.
ILLUSTRATION
FACTS: Milany, an insolvent, owes Nida P100,000.00, but which debt has already
prescribed. Milany nevertheless still paid Nida the P100,000.00. May Onie, another
creditor of Milany, rescind the payment made by Milan to Nida?
ANSWER: Yes. Although the payment should have been valid under natural obligations
(Art. 1424), One may rescind the payment made by Milany in a state of insolvency. She
could not be compelled to pay Nida at the time it was effected as the debt has already
prescribed.

d.THINGS UNDER LITIGATION. Those contracts which refer to things under litigation if
they have been entered into by the defendant without the knowledge and approval of
the litigants or of competent judicial authority.

e.BY PROVISION OF LAW. All other contracts specially declared by law to be subiect
to rescission

Art. 1382, NCC - Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were effected, are also
rescissible.
REQUISITES: (a) The payment is made in a state of insolvency; and (b) the obligation
paid was not yet due at the time of payment or has already prescribed.

CONTRACTS UNDER THE CIVIL CODE SPECIFICALLY DECLARED BY LAW TO BE

SUBJECT TO RESCISSION
a. In case of partition, when a co-heir receives things the value of which is less, by at
least one-fourth, than the share to which he is entitled Art. 1098);
b.In the contract of sale of goods by description or by sample, if the bulk of the goods
delivered do not correspond with the description or the sample. (Art.
1481);
c. In case of an unpaid seller who has the right of lien or has stopped the goods in
transit (Art. 1534)

WHO MAY FILE?

• Action for rescission may be filed by the following persons:
a . The injured person (the ward or absentee suffering lesion); the creditor
defrauded; or the plaintiff in a case where the thing in litigation was alienated;
b The heirs of such person; or,
c The creditors of such person (accion subrogatoria, by virtue of Art. 1177, NCC)
PRESCRIPTION OF ACTION FOR RESCISSION
• Art. 1389, NCC
RULE: Action for Rescission must be commenced within four (4)
years.
Commences to run from the day it has become clear that there are no other legal
remedies by which the creditor can satisfy his claims.
RECKONING PERIOD:
a. Those under guardianship - from termination of incapacity; and,
b. Absentees - Until the domicile of the absentee is known.

REQUISITES
GENERAL REQUISITES:
1. Rescission must be for a cause provided by law. (Arts. 1380 and 1381);
2. Since rescission is subsidiary action, it can be instituted only when the party
suffering damage has no other legal means to obtain reparation for the same.
(Art. 1383, NCC);
3. Rescission shall be only to the extent necessary to cover the damages caused
(Art. 1384, NCC)
4. Rescission can be carried out only when he who demands rescission can return
whatever he may be obliged to restore. (Art. 1385, NCC)
5. Rescission shall not take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith. (Art. 1385, NCC)
ILLUSTRATION
FACTS: Brent owes Clarence P100,000.00. Brent sold his motorcycle to Drew in the
amount of P50,000.00 so Clarence could not attach it. The motorcycle was delivered to
Drew who already registered it in good faith in his name. May Clarence still file for
rescission?
ANSWER: No more. Since the thing in this case is already in the possession of a third
person who did not act in bad faith.
In this case, what then is the recourse or remedy of Clarence?
ANSWER: Clarence may file a claim for damages against Brent.

EFFECTS
• Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest. (Art.1385, NCC)
1. Consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
2. Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith; and,
3. Whoever acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by them on account of the alienation,
 whenever, due to any cause, it should be impossible for him to return them. (Art.
1388)
ILLUSTRATION
FACTS: Nebula owes Orion P100,000.00. To prevent Orion from attaching his car,
Nebula sold it to Prion for P100,000.00. If Prion is in bad faith, what is his obligation in
this case?
ANSWER: Prion should return the car he purchased. If it is impossible for him to return
it, he shall be liable for the corresponding damages.

Rescissible Contract

File a collection of sum of money with damages against the guardian

Or file rescission – you can only rescind according to your damage

There must an economic damage or injury

Rescission is a subsidiary action. Exhaust all means

VOIDABLE CONTRACT

DEFINITION. Voidable or annullable contracts are existent, valid, and binding, although
they can be annulled because of want of capacity or vitiated consent of one of the
parties.

QUESTION: Is damage an essential requisite in voidable contracts?

ANSWER: No. Art. 1390, NCC states that contracts are voidable even though there
may have been no damage to the contracting parties.

Voidable contracts can be confirmed or ratified.

CAUSES
• The following contracts are voidable or annullable:
1. LACK OF CAPACITY. Those where one of the parties is incapable of giving consent
to a contract; (Art. 1391, NCC)
Who are incapable of giving consent to a contract?
a. Minors;
b. Insane or demented persons, and deaf-mutes who do not know how to write.
(Please refer to our discussion in Art. 1327, NCC)

NB: If both parties lack capacity, the contract is UNENFORCEABLE (Art. 1403, par. 3)
When it falls into statutes of fraud
2. VITIATED CONSENT. Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud. (Art.1391, NCC)

ACTION FOR ANNULMENT

1. DIRECT ACTION. The validity of a voidable contract may be assailed only by a
"proper action in court" (Art. 1390, NCC)
2. WHO MAY FILE.
a. The action for annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. (Art.1397, NCC); and,
ILLUSTRATION
FACTS: Nico, through fraud, was able to convince Patty to buy his (Nico's)
car with Ruby as guarantor. Who may institute the annulment of the contract?

ANSWER: Either Patty or Ruby may institute the annulment. The law states
that the action for annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. Nico, on the other hand, being the
guilty party, may not seek its annulment.

b. The plaintiff must be the injured party or victim, and not the party responsible
for the defect.
3. PRESCRIPTION. The action for annulment shall be brought within four (4) years.
This period shall begin:
a. In cases of intimidation, violence, or undue influence - from the time the
defect of the consent ceases.
b. In case of mistake or fraud - from the time of the discovery of the same; and,
c. In case of contracts entered into by minors or other incapacitated persons -
from the time the guardianship ceases.
Illustration:

FACTS: Vincent sent a letter to Walter stating that if Walter will not sell his land,
something unfortunate will happen to him. As a result, Walter sold his land to
Vincent. Even after the sale, Vincent kept communicating with Walter, telling him
not to tell anyone about the letter or something unfortunate will happen. Some
time later, Vincent suffered a stroke and was bedridden. Until when can Walter
annul the agreement?

ANSWER: It should be four (4) years from the time the intimidation ceased or
when Vincent wasn't a threat anymore. The law provides that in cases of
intimidation, violence or undue influence, the period should be reckoned from the
time the defect of the consent ceased.

Intimidation, no overt acts but psychological, violence, there is presence of overt

acts
EFFECT OF ANNULMENT
IN GENERAL. The effect of annulment of the contract is to wipe it out of existence, and
to restore the parties, insofar as legally and equitably possible, For their original
situation before the contract was entered into. If a voidable contract is annulled, the
restoration of what has been given is proper.

RESTITUTION. (Art. 1398, NCC) the effect of annulment

a. In obligations to render service, the value thereof shall be the basis for damages
(Art. 1398, NCC)
b. As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to
comply with what is incumbent upon him. (Art. 1402, NCC).
c. The principle of unjust enrichment applies in annulment of voidable contracts.
ILLUSTRATION
FACTS: Samson wanted to buy Tony's racehorse but Tony wouldn't sell it.
Samson then inflicted physical injuries on Tony until the latter consented to sell
the horse for P25,000.00. While in Samson's possession, the horse gave birth to
a colt. If Tony successfully annuls the agreement, what will be its effect on the
horse and the P25,000.00?

ANSWER: Samson shall return the horse, together with the colt, while Tony will
return the P25,000.00 plus interest. Of course, in this case, Samson shall also be
liable for damages. The general rule in annulled obligations is that the parties
shall restore the subject of the contract, with their fruits, and the price with its
interest.

EXCEPTION: INCAPACITY. When the defect of the contract consists in the incapacity
of one of the parties, the incapacitated person is not obliged to make any restitution
except insofar as he has been benefitted by the thing or price received by him. (Art.
1399, NCC)

FACTS: Bianca and Winnie, both 16 years old, were both intimidated by Daniel into
buying the cellphones he was selling for P10,000.00 each. Bianca kept the cellphone in
her bag but Winnie's cellphone was snatched one hour after she bought it. If both
contracts would be annulled, what would be the extent of restitution?

ANSWER: Daniel would return P10,000 each to Bianca and Winnie with interest based
on the general principle of restitution under Art. 1398, NCC. Bianca would also return
the phone based on the same rule. Winnie, however is not obliged to return anything as
the rule is that the incapacitated person is not obliged to make any restitution except
insofar as he has been benefitted by the thing or price received by him. There was no
benefit to her in this case as the phone was immediately snatched from her.
RULES ON INABILITY TO MAKE RESTITUTION
• In case the thing which is the object of the contract has been lost (regardless
of the cause of voidability of the contract - whether due to incapacity or vice of consent),
the following rules apply:
a. If the loss is through fraud or fault of the plaintiff - the action for annulment is
barred. (Art. 1401, NCC)
b. If the loss is through the fraud or fault of the defendant - the action is not barred;
the defendant must pay the value of the thing at the time of the loss (with interest
from the same date) as well as the fruits received. (Art.1400, NCC).
c. If the loss is not due to any fault or fraud of any party - the action is not barred;
restitution may still be effected by paying the value of the thing at the time of loss,
but without interest (since the payor is not at fault)
ILLUSTRATION
FACTS: Cain, through fraud managed to take possession of the row of apartments of
Abel. The apartments however burned down due to the negligence of Cain leaving the
iron on while he was away. Cain was correspondingly ordered by the court pursuant to
a decree of annulment to return the apartment to Abel. What should Cain return/pay in
this case?
ANSWER: As the loss was due to the fault of Cain, he should return the rentals
received and the value of the apartments with interest from the time of the loss. (Art.
1400, NCC)

FACTS: Ryan was forced to buy the guitar of Eric through the latter's intimidation. After
the sale, while Ryan was walking home, a group of men forcibly took the guitar from
him. May Ryan still institute an action for annulment.
ANSWER: Yes. In this case, it was not because of the fraud or fault of Ryan that the
object of the contract was lost.
QUESTION: What if the guitar was lost due to Ryan's fault?
ANSWER: If it was lost due to his fault, he can no longer pursue the annulment. The
action for annulment of contracts shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the person who has a right to institute
the proceedings. (Art. 1401, NCC)

If one cannot return the object of contract especially when it was through one’s fault,
one cannot not file for annulment

RATIFICATION
CONCEPT. Voidable contracts are susceptible of ratification. Ratification extinguishes
the action to annul a voidable contract. (ART. 1392, NCC)
DEFINITION. Ratification means that a person knowingly and voluntarily adopts or
gives sanction to an unauthorized or defective act, which would otherwise not be
binding to him.

REQUISITES:
 a The ratifying party knows of the reason which renders the contract voidable; and,
b such reason has ceased. (Art. 1393, NCC)

MANNER OF RATIFICATION
RATIFICATION may be effected EXPRESSLY or TACITLY
a. EXPRESS - there is express ratification if the offended party states orally or in
writing that he is ratifying the voidable contract.
b. TACIT/IMPLIED - With the knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right.

"Implied ratification may take diverse forms, such as by silence or acquiescence; by

acts showing approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom" (Spouses Fernando v. Continental Airline, G.R No. 188288,
January 16, 2012)

EXAMPLE OF AN IMPLIED RATIFICATION

• Eric was able to sell to Franco his (Eric's) land in Mindoro through the use of force.
Eric was however subsequently jailed because of the incident. While Eric was in jail,
Franco cultivated the land and sold its produce in the market.
- Franco can no longer annul the agreement as he has already ratified the same.

WHO MAY RATIFY

a. For voidable contracts due to lack of capacity - ratification may be effected by the
incapacitated person (upon gaining capacity) or by his guardian (during ward's
incapacity) (Art. 1394, NCC); and,
b. For voidable contracts due to vice of consent - ratification may be effected by the
person whose consent was vitiated.
NB: Ratification does not require the conformity of the contracting party who has no
right to bring the action for annulment (Art. 1395, NCC) The offending party has not
right to bring action, so he has no right to confirm either.

EFFECT OF RATIFICATION. Ratification cleanses the contract from all defects from
the moment it was constituted.(Art. 1396, NCC)
Ratification retroacts to the time the contract was made.
UNENFORCEABLE CONTRACTS
CONCEPT. Unenforceable contracts are those which cannot be enforced in court
(unless they are ratified) because they are entered into without or in excess of
authority, or they do not comply with the statute of frauds, or both of the contracting
parties do not possess the required legal capacity.

RATIFICATION. Unenforceable contracts may be ratified.

RATIFICATION may be (a) Express; or, (b) Implied
RATIFICATION is generally retroactive.

TYPES
There are three (3) categories of Unenforceable contracts:
a. Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
b. Those that do not comply with the Statute of frauds; and,
c. Those where both parties are incapable of giving consent to a contract.

A. Lack of Authority
1. UNAUTHORIZED CONTRACTS.
Example. If A sold the car of his friend Y, without the latter's authorization, the
sale in unauthorized and thus unenforceable.

Example. If A was authorized by the owner of a house to lease it out to third

persons, but A sold it instead, the sale is beyond A's powers and thus
unenforceable.

GOVERNING LAW: Art. 1317, NCC and Principles of Agency under the Civil
Code

ILLUSTRATIONS
FACTS: Hannah authorized la to sell her cellphone for P5,000.00. Iza sells it to
Jackie for P4,000.00. What is the status of the agreement?

ANSWER: The contract is unenforceable as to Hannah. Iza acted in excess of the

authority given to her.

QUESTION: What is Iza sells the cellphone for P6,000.00? What is the status of the
agreement?

ANSWER: The contract is valid. Art. 1882 of the Civil Code provides that the limits of
the agent's authority shall not be considered exceeded should it have been performed in
a manner more advantageous to the principal than that specified by him.
If the contract is advantageous to the principal then it is valid.

QUESTION: What if Kelly, friend of Hannah, sells the cellphone to Jackie for P5,000.00
without the knowledge of Hannah? What is the status of the agreement?
ANSWER: The agreement in Unenforceable. Kelly acted without authority in selling the
phone.
B. Covered by Statutes of Fraud.
C. Incapacity of both parties
RATIFICATION. Ratification may be made by the parent or guardian, as the case
may be, of the capacitated parties.
a. If the contract is ratified by the parent or guardian of one of the contracting
parties, the effect is to make the contract voidable.
b. If the contract is ratified by the parent/guardian of both contracting parties, the
effect is to make the contract valid.

STATUTE OF FRAUDS
QUESTION: May third parties raise the defense of Statute of Frauds?
ANSWER: No. Only the contracting parties may raise that defense. (Art.
1408, NCC)
FACTS: Valerie and Wanda are both minors. Trendy, 20 years old, borrowed the mobile
phone of Valerie. Later, Valerie orally sold to Wanda the mobile phone for P10,000.00.
Wanda subsequently tells Trendy that she (Wanda) is now the owner of the mobile
phone. May Trendy raise the defense that the contract is unenforceable as both parties
are minors?
ANSWER: No. Trendy is a third person to the transaction. Unenforceable contracts
cannot be assailed by third persons.

VOID AND INEXISTENT CONTRACTS

CONCEPT. A void or inexistent contract is one which has no force and effect from the
very beginning. Hence, it is as if it has never been entered into.
EFFECTS:
1. It produces no civil effect and does not create, modify or extinguish a juridical
relation.
2. Technically, "inexistent" contracts are those in which an essential element is
lacking (as opposed to contracts where the elements are present, but illegal)
3. A void contract cannot be ratified. (Art. 1409. NCC)
4. The action or defense for the declaration of the existence of a contract does not
prescribe. (Art. 1410, NCC)
5. Who can invoke? The right to set up the nullity of a void or non-existent contract
is not limited to the parties; it is extended to third persons who are directly
affected by the contract, whenever juridical effects founded thereon are
asserted against him.
 NB: But the defense of illegality of contract is not available to third persons
whose interest are not directly affected. (Art. 1421)
ILLUSTRATION
FACTS: Nico donated his land to Noah in a private instrument. Later, Nico
sold the same land to Patrick for P1M. May Patrick raise the defense that the
donation by Nico to Noah of the property is void?
ANSWER: Yes. Patrick may raise the defense as he is a third person whose
interest are directly affected by the void contract.
FACTS: Bonix donated her land to Shellah in a private document. Shellah
immediately cordoned off the property and did not allow anyone to enter or pass
through it. Previous to the donation, Glenda usually strolled along the property to
get some fresh air. May Glenda raise the defense of the nullity of the donation?

ANSWER: No. Glenda may not raise the defense. The defense of illegality of
contract is not available to third persons whose interest are not directly affected.

TYPES OF VOID OR INEXISTENT

CONTRACTS
Art. 1409, NCC. The following contracts are inexistent and void from the beginning -
1. Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy.
2. Those which are absolutely simulated or fictitious. Ex. A and B entered into
contract of sale, but no actual sale but simply to defraud the creditor of B.
3. Those whose cause or object did not exist at the time of the transaction. Ex.
In a contract of sales, there was no object to be delivered.
In contract of sale, the object may be potentially be in existence.
4. Those whose object is outside the commerce of men; ex. contract of lease of
public property
5. Those which contemplate an impossible service. Ex. A enter into agreement
with B for B to teach his dog to talk.
6. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained.
7. Those expressly prohibited or declared void by law. Go to the forms.
8. A contract which is the direct result of a previous illegal contract, is also void
and inexistent. (Art. 1422, NCC)
ILLUSTRATION
FACTS: Mariel donated her land to Valerie in a private document. Later,
Valerie sold the land to Wendy in a public document. What is the status of the
later contract?
ANSWER: The later contract of sale between Valerie and Wendy is also void
as it is the direct result of a previous illegal contract.

RULES ON RECOVERY
 • GENERAL RULE: Parties to a void agreement cannot expect the aid of law;
the courts leave them as they are, because they are deemed in "pari delicto"
or "in equal fault". Each must bear the consequences of his own act.

Ex. A sold to B a sachet of Shabu for 10k, Can A asked B to return the
money? No. as general rule Since the contract is void.

EXCEPTIONS:
a. The pari delicto rule does not apply to inexistent contracts.
b. The par delicto rule does not apply if it would violate public policy.
c. The law permits the return of that which may have been given under a void
contract to:
a. The innocent party (Arts. 1411-1412);
b. The debtor who pays usurious interest (Art. 1413);
c. The party repudiating the void contract before the illegal purpose is
accomplished or before damage is caused to a third person and if
public interest is subserved by allowing recovery (Art. 1414);
d. The incapacitated party if the interest of justice so demands
(Art.1415);
e. The party for whose protection the prohibition by law is intended, if
the agreement is not illegal per se but merely prohibited and if
public policy would be enhanced by permitting recovery (Art.
1416);and,
f. If the party for whose benefit the law has been intended such as in
price celling laws. (Art. 1417)

ILLEGAL CAUSE OR OBJECT

• When the nullity proceeds from the illegality of the cause or object of the contract, the
following rules shall apply:
1. IF THE ACT CONSTITUTES A CRIMINAL OFFENSE:
i. When both parties are in pari delicto - they shall have no action against each
other, and both shall be prosecuted ("In pari delicto non oritur action"
ii. When only one of the parties is guilty - they shall have no action against each
other, and the guilty party shall be prosecuted. However, the innocent party may
claim what he has given, and shall not be bound to comply with his promise. (Art.
1411) Ex. A secured services of B to buy antibiotic capsule for 10k. Instead of
selling antibiotic, B gave shabu to A. B is guilty party. B will be prosecuted, while
A can claim his 10k being an innocent party.
2. IF THE ACT DOES NOT CONSTITUTE A CRIMINAL OFFENSE:
i. When both parties are at fault - neither may recover what he has given by virtue of
the contract, or demand the performance of the other's undertaking. (Art. 1412)
ii. When only one of the parties is at fault - (1) the party at fault cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has been
 promised him. 2) The party who is not at fault may demand the return of what he
has given without any obligation to comply with his promise.
ILLEGAL PURPOSE
•When money is paid or property is delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose has been accomplished, or before
any damage has been caused to a third person. (Art.1414)

ex. A is a race horse owner asked B to inject the horse with steroid. A paid 50k and later
changed his mind. May he recover the 50k? It is not automatic, the court may be asked
to recover. Change of mind is rewarded.

OVERPAYMENT OR UNDERPAYMENT
a. When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer
undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for service rendered beyond the lime limit (Art.
1418);
b. When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a
lower wage, he shall be entitled to recover the deficiency. (Art. 1419)
SEPARABILITY OF ILLEGAL TERMS
In case of a divisible contract. if the illegal terms can be separated from the legal
ones, the latter may be enforced. (Art. 1420, NCC)

Quiz
Extinguishment
General forms of contract, interpretation of contract

Contract of Sale
DEFINITION
•Art. 1458, NCC. By the contract of sale, one of the contracting parties obligates himself
to transfer the ownership and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE:

(a) CONSENT or MEETING OF THE MINDS - consent to transfer ownership in
exchange for the price;
(b) OBJECT - determinate subject matter; and,
(c) CAUSE or CONSIDERATION - Price certain in money or its equivalent.

CHARACTERISTICS
a Consensual Contract;
b Bilateral Contract;
c Onerous Contract;
d Commutative Contract; Things sold is equivalent to the price. Alienatory Contract –
not actually paying for the equivalent but buying hope or chance.
e Nominate Contract – designated a special name under CC
f Principal Contract – it can stand on its own

Not a Formal Contract

GENERAL RULE. A contract of sale may be made in writing, or by word of mouth, or

partly in writing, and partly by word of mouth, or may be inferred from the conduct of the
parties.

EXCEPTION: STATUTE FRAUDS

a. Public or private instrument - if the terms of the sale is not to be performed within a
year;
b. Public instrument - If the sale involves real properties; and,
c. Private or Public Instrument - In sale of goods exceeding P500.00
EXCEPTION: Sale of large cattle (bovine creature) must be in writing otherwise it is
VOID (Art. 1581, NCC)

Kinds of Sale
a. ABSOLUTE SALE - Where the sale is not subject to any conditions whatsoever,
and where title passes to the buyer upon delivery of the thing sold; or
b. CONDITIONAL SALE - Where the sale contemplates a contingency, and in
general, where the contract is subject to certain conditions, usually the full
payment of the purchase price.

CONDITIONAL SALE
a. Sale or Return - the buyer is given the option to return the goods instead of
paying the price, the ownership passes to the buyer upon delivery, but he may
revest the ownership in the seller by returning or tending the goods within the
time fixed in the contract, or, if no time has been fixed, within a reasonable time.
b. Sale on Approval - When goods are delivered to the buyer on approval or on trial
or on satisfaction, or other similar terms, the ownership therein passes to the
buyer:
a. When he signifies his approval or acceptance to the seller or does any
other act adopting the transaction;
b. If he does not signify his approval or acceptance to the seller, but retains
the goods without giving notice of rejection within the stipulated time, or if
no time has been fixed, on the expiration of a reasonable time.

DISTINGUISHED FROM OTHER CONTRACTS

CONTRACT TO SELL. The transfer of ownership in a contract to sell is subject to a
suspensive condition which is usually full payment of the purchase price (Art. 1478,
NCC)

NB: The happening or non-happening of the suspensive period prevents the contract
from obtaining obligatory force. There is no need to rescind a Contract to Sell if the
buyer fails to pay the price because ownership is NOT transferred even if there was
prior delivery.

It is in a Contract of Sale and not in a contract to sell that the seller needs to rescind in
case of non-payment.

ANSWER: No. Here, there is no obligation on the part of Samuel to supply the
appliances and on the part of Brandon to pay the price, on receiving them without any
other consideration than the discount of 25%, and regardless of whether Brandon sells
the appliances or not.

CONTRACT FOR A PIECE OF WORK.

Art. 1713, NCC. By the contract for a piece of work the contractor binds himself to
execute a piece of work for the employer, in consideration of a certain price or
compensation.
TEST: There is a contract of a piece of work if the thing transferred is not one in
existence and which never would have existed but for the order of the party desiring to
acquire it. On the other hand, there is sale if the thing transferred would have existed
and has been the subject of sale for some other person even if the order had not been
given.
Ex. When one asks a seller of shoes for one that is special for the customer which is not
offered in the general market.
Important: Contract for piece of work is not covered in the statutes of frauds

BARTER (Art. 1468, NCC)

By the contract of barter or exchange one of the parties binds himself to give one thing
in consideration of the other's promise to give another thing.
Contract of Sale, the vendor gives the thing in consideration for a price in money.
RULE: If the thing given in exchange consists partly in money and partly in another
thing.
a. Intention of the parties is paramount in determining whether one is a barter or of
sale - contemporaneous and subsequent acts of the parties.
b. If the intention cannot be ascertained then it shall be considered a barter if the
value of the thing given as part of the consideration exceeds the amount of
money or its equivalent; otherwise, it is a sale.

ILLUSTRATE
Q: Satur, a sugar miller, and Bert, a manufacturer and dealer in fine whisky, entered into
an agreement whereby Satur was to deliver sugar worth P100,000.00 to Bert who was
to give 200 bottles of whisky worth P100,000.00. What contract was created?
A: This is a contract of barter.
Q Suppose at the date of delivery, Bert had only 50 bottles of whisky. With the consent
of Satur, Bert paid the difference of P75,000.00 in cash. What contract was created?

Suppose, in the same problem, Bert had no whisky at the date of delivery and he paid
P100,000.00 instead of giving whisky. Did the contract become one of sale?
A: No, because the payment is in consideration of the value of the whisky, and not the
sugar. The manifest intention of the parties was to enter into a contract of barter.
O: Assume now that the contract between Satur and Bert was for Satur to deliver Sugar
to Bert who agreed to give 200 bottles of fine whisky or to pay
P100,000.00 cash. If Bert, instead of whisky paid P100,000.00 in cash, what contract
was entered into?
A: It is clear that the resulting contract is that of sale and not barter.
O: If the obligation of Bert is to deliver 100 bottles of whisky and pav
P50,000.00 cash, or 150 bottles of whisky and P25,000.00 cash, or 50 bottles of whisky
and P75,000.00 cash. What is the transaction between Satur and Bert?
A: The transaction shall be considered a barter or sale depending on the manifest
intention of the parties. If such intention does not clearly appear, the contract shall be
considered a barter, where the cash involved is P25,000.00, or a sale if the cash
involved is P75,000.00.

OPTION CONTRACT.
This is a contract whereby the prospective buyer for a consideration distinct from the
price is given the right to purchase the thing to be sold.
An option contract is a preparatory contract that is not binding unless it is supported by
a consideration that is separate from the price. The buyer is not duty bound to purchase
the thing sold.
EXCEPTION: Even if there is no separate consideration, there is a perfected contract of
sale if the offer is accepted before the offer is withdrawn.

ILLUSTRATE
FACTS: Amoroso, the owner of lot, gave Canuto the right to purchase the lot for
P2,500,000.00 for a period of one ear. Canuto paid Amoroso the amount of P50,000.00
such right to purchase within one year. What contract is created?
A: There is an option contract.
Q: Let us say, Canuto did not pay P50,000.00 for the option. Is Amoroso free to sell his
lot within one year to other persons?
A: Yes. He is not required to hold on to the property.
Q: However, without paying any option money, Canuto accepts and communicates it to
Amoro so that he agrees to purchase the lot for the stipulated price. Is there a perfected
contract of sale?
A. Yes

RIGHT OF FIRST REFUSAL

This agreement gives the first priority to the person to whom the right is given
(prospective buyer) to purchase the property should the owner decide to sell the same;
the offer shall offer the property to such person.
Right of First Refusal in a Contract of Lease.
RULE: The lessor has the legal duty to the lessee not to sell the leased property to
anyone at any price until after the lessor has made an offer to sell the property to the
lessee and the lessee has failed to accept it. Only after the lessee has failed to exercise
his right of first priority could the lessor sell the property to other buyers under the same
terms and conditions offered to the lessee or under the terms and conditions more
favorable to the lessor.
REMEDY: Specific Performance

OBJECT
REQUISITES CONCERNING OBJECT OF SALE:
DETERMINATE THING OR SOMETHING DETERMINABLE.
A thing is determinable if its capable of being made determinate without the necessity of
a new further agreement between the parties.
POTENTIAL EXISTENCE
Example:
1. Future Goods - Sale of goods to be manufactured, raised, or acquired by the
seller after the perfection of the contract of sale.
2. Things subject to resolutory condition (e.g. Sale with Right of Redemption)
3. Subject to contingency
 4. Voidable title ex. a minor sells to b, it is voidable. B sells to D in good faith, then it
is valid unless annulled.
LICIT
The thing must be licit and the vendor must have a right to transfer the ownership
thereof at the time it is delivered.
TYPES:
a Illicit per se (of its nature);
b Illicit per accidens (because of some provisions of law declaring it illegal)

NB: FUTURE INHERITANCE - this cannot be the object of sale.

MUST NOT BE IMPOSSIBLE

The things must be within the commerce of man

PRINCIPLES IN RELATION TO OBJECT

A. RIGHT OF THE VENDOR TO TRANSFER OWNERSHIP:

1. One can sell only what he owns - vendor must be able to transfer ownership and,
therefore, he must be the owner or at least must be authorized by the owner of
the thing sold.
EXCEPTIONS: Art. 1505, NCC. Sale by a person not the owner:
a. Where the owner of the goods is, by his conduct, precluded from denying the
seller's authority to sell. Ex. A sold B’s property without A’s consent, but later
A received the proceeds.
b. Where the law enables the apparent owner to dispose of the goods if he were
the true owner thereof;
c. Where the sale is sanctioned by statutory or juridical authority.
d. Where the sale is made at merchant's stores, fairs or markets - an imperfect
or void title ripening into a valid one as a result of some intervening causes.
(not applicable in anti-fencing law, the item bought is void and criminally
liable) It should not be illicit at the beginning.
e. Where the seller has a voidable title which has not been avoided at the time
of the sale (Art. 1506, NCC)
Requisites of Art. 1506, NCC
If the seller has a voidable title to the goods, the buyer acquires a good title to
the goods, provided, he buys them:
(i) Before the title of the seller has been avoided;
(ii) In good faith for value;
(iii) Without notice of the seller's defect of title.
ILLUSTRATE
FACTS: Seller, a minor, sold his car to the Buyer1, a person of majority age.
Q: What is the status of the contract of sale?
A: Contract of sale is voidable or annullable because a minor is incapable of giving
consent to a contract.
Q: Buyer1, in turn, sold the car to Buyer 2, in good faith. What is the
status of the contract of Sale?
A: In this case, Buyer 2 acquires a valid title to the car after its delivery if the contract
had not yet been annulled by a proper action in court.
NB: Art. 1506 is inapplicable where the seller had no title at all.
EXCEPT when the buyer acquired it in a public sale.

B. RIGHT MUST EXIST AT THE TIME OF DELIVERY - It is sufficient that the

vendor has the right to sell the thing at the time when ownership is to pass.

EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST

LOSS OF THE THING AT THE TIME OF PERFECTION RULES:

(a) Thing is entirely lost - The contract is inexistent and void, because there is no
object.
(b) Thing only partially lost - The vendee may elect between withdrawing from the
contract demanding the remaining part, paying and its proportionate price.

EFFECT OF LOSS IN CASE OF SPECIFIC

GOODS RULES:
The buyer may at his option treat the sale:
(a) As avoided; or,
(b)As valid in all of the existing goods or in so much thereof as may have not
deteriorated, and as binding the buyer to pay the agreed price of the goods in which the
ownership will pass, if the sale was divisible.

ILLUSTRATE
FACTS: The Seller sold to the Buver 100 cavans of rice in the warehouse of the Seller
at P1,000.00 per cavan or for a total price of
P100,000.00. If 60 cavans of rice were lost, What are the remedies of the Buyer?
A: Buyer may, at his option, withdraw from the contract without the obligation to pay for
the rice; or demand the delivery of the 40 cavans, but binding him to pay the agreed
price thereof which is P40,000.00
Q: Suppose the contract is indivisible, that is, the 100 cavans of rice were sold for
P100,000.00, fixed without consideration of the number of cavans. What is the remedy
of the Buyer?
A: Buyer should be made to pay only the proportionate price of 40 cavans which is also
P40,000.00

THE PARTIES (CAPACITY TO BUY AND SELL)

WHO MAY ENTER INTO A CONTRACT OF SALE?

GENERAL RULE: All persons, whether natural or juridical, who can bind themselves
have also legal capacity to buy and sell.
EXCEPTION: When the law determines that a party suffers from either absolute or
relative incapacity.

KINDS OF INCAPACITY:
a. ABSOLUTE - in the case of persons who cannot bind themselves;
b. RELATIVE - It exist only with reference to certain persons or certain class of
property (Arts. 1490-1491)

MINORS AND OTHER INCAPACITATED

- Generally, the contract entered into by a minor and other incapacitated persons (e.g.,
insane, demented persons, deaf-mutes who do not know how to write) are voidable.

"EXCEPTION: However, when necessaries are sold and delivered to him (without the
intervention of the parent or guardian), he must pay a reasonable price therefor. (Art.
1489, NCC). The minor must pay. But if overpriced then, the seller must return the
excess.

NECESSARIES - those things which are needed for sustenance, dwelling, clothing and
medical attendance, according to the social position of the family of the incapacitated
person.
EFFECT: The contract is VALID but the minor has the right to recover any excess
above a reasonable value paid by him.

SPOUSES
RULE: The husband and wife cannot sell property to each other. The sale is VOID.
-The incapacity or prohibition applies to common law spouses.
EXCEPTIONS: The sale from one spouse to another is allowed in the following cases:
(a) When a separation of property was agreed upon in the marriage settlements; or,
(b) When there has been a judicial separation of property. (if there is a decree, in
case of conjugal partnership of gains)
RELATIVE INCAPACITY TO BUY
The following cannot acquire by purchase, even at a public or judicial auction sales (or
in legal redemptions, compromises and renunciations), either in person or through the
mediation of another: (Art. 1491, NCC)
a. The guardian, the property of the person or persons who may be under his
guardianship;
b. Agents, the property hose administration or sale may have been entrusted to
them, unless the consent of the principal has been given;
c. Executors and administrators, the property of the estate under administration;
d. Public officers and employees, the property of the State or any subdivision
thereof, xxx;
e. Justices, judges, prosecuting attorneys, clerks of superior and inferior other
employees connected with the administration of justice, the property and rights in
litigation, xxx; and,
 f. Any others specially disqualified by law. Ex foreigners
"REASON FOR PROHIBITION: To prevent fraud on the part of the person enumerated
therein and to minimize temptation to the exertion of undue and improper influence.
"EFFECT:
(a) With respect to Nos. 1 to 3, the sale shall only be voidable because in such
cases only private interest are affected.

RULES ON PRICE
PRICE SHOULD BE CERTAIN. The price is considered certain if:
a . It is a fixed amount (Art. 1469, NCC);
b It is certain with reference to another thing certain (Art. 1472, NCC); or,
c That the determination thereof is left to the judgment of a special person or
persons.

EFFECT OF PRICE FIXED BY A THIRD PERSON

" GENERAL RULE: The price fixed by a third person specified by parties are binding
upon them.
" EXCEPTIONS:
a Should such person or persons be unable or unwilling to fix it, the contract shall be
inefficacious, unless the parties subsequently agree upon the price;
b If the third person or persons acted in bad faith or by mistake, the courts may fix
the price; or,
c Where such third person or persons are prevented from fixing the price or terms by
fault of the seller or the buyer, the party not in fault may have such remedies
against the party in fault as are allowed the seller or the buyer, as the case may
be.

MANNER OF PAYMENT
"RULE: A definite agreement on the manner of payment of the purchase price is an
essential element in the formation of a binding and enforceable contract of sale.
"The agreement as to the terms or manner of payment goes into the price so much so
that disagreement on the manner of payment is tantamount to FAILURE TO AGREE
ON THE PRICE.

GROSS INADEQUACY OF THE PRICE

ART. 1470, NCC: Gross inadequacy of price does not affect a contract of sale or affect
the validity of a contract of sale.
However, such gross inadequacy may indicate either (1) a defect in the consent; or, (2)
that the parties really intended a donation or some other contract.
SIMULATED CONTRACTS. If the price is not merely inadequate but is in fact
simulated, the sale is VOID, but the act may be shown to have been in reality a
donation, or some other contract.

SIMULATED CONTRACTS
. Simulation of a contract is the act of deliberately deceiving others, by feigning or
pretending by agreement, the appearance of a contract which is either non-existent or
concealed.
KINDS OF SIMULATION
Absolute simulation is one where the parties do not intend to be bound by the contract.
It is not really intended to produce any legal effect, nor does it alter the juridical situation
of the parties.

EXAMPLE:
Danny is indebted to Cathy. Upon learning that Cathy is going, to enforce his credit,
Danny pretended to sell his land to Fredo, his father-in-law. Danny did not receive a
single centavo for the deed of sale he executed and he continued in possession of the
land as the contract was merely simulated or fictitious. There is no contract of sale in
this case.

Relative simulation or when the contract entered into by the parties is different from their
true agreement or the parties state a false cause in the contract to conceal their real
agreement. The parties are bound by their real agreement, provided, it does not
prejudice a third person and is not intended for a purpose contrary to law, morals, good
customs, public order, or public policy.

EFFECTS OF SIMULATION TO THIRD PERSONS

◦ If he is prejudiced, he may invoked the nullity of the simulated contracts.
◦ If he acted in good faith, nullity cannot be invoked against them.
EXAMPLE:
A donor is donating a property to a donee. Instead of executing a deed of donation, the
donor instead executed a deed of sale to conceal the donation intended.