Reo Law On Contracts

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LAW ON CONTRACTS LAW ON CONTRACTS

ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA
REO.CPA.ACADEMICS.F2.01.00
REO.CPA.ACADEMICS.F2.01.00 Example of a valid auto-contract: If the agent has been empowered to borrow money, he may himself be the lender at the
current rate of interest. (Art. 1890)
LAW ON CONTRACTS Examples of an auto-contract which is considered void:

1. Sale of property of a person under guardianship where the buyer is the guardian
2. Lease contract concerning the property belonging to an estate, where the lessee is the executor thereof.
ATTY. NICKO SORIANO, CPA/ATTY. DIANE AZORES, CPA
ELEMENTS OF CONTRACTS
TOPIC OUTLINE: a. ESSENTIAL - those without which the contract cannot exist, i.e., Consent, object, consideration. In some contracts,
1. General Provisions form and delivery is essential too.
a. Definition
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b. NATURAL - those which exist as part of the contract even if the parties do not stipulate it because the law is deemed
b. Classification written therein. Example: Warranty against eviction in a contract of sale or the warranty against hidden defects.
c. Stages of contract c. ACCIDENTAL - those which are agreed upon by the parties and which cannot exist without being stipulated. Example:
d. Freedom to contract (establish stipulations) and limitation
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stipulation for interest.
e. Persons bound
2. Essential requisites STAGES OF A CONTRACT
a. Consent a. NEGOTIATION (PREPARATION OR CONCEPTION OR GENERACION) – here the arties are progressing with their
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i. Requisites negotiations; prior to the arrival on a definite agreement. Here is where the parties provide for their offers and bargain
ii. Capacitated Persons with each other.
iii. Vices of consent b. PERFECTION (OR BIRTH) – when the parties have already came to a definite agreement and all the essential elements
b. Objects of contract are present (which includes form or delivey in some).
c. Cause of considerations of contracts c. CONSUMMATION (OR DEATH OR TERMINATION) – the terms of the contract have already been performed.
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3. Forms of Contracts
4. Reformation of instruments/contracts FUNDAMENTAL CHARACTERISTICS/PRINCIPLES OF CONTRACTS
5. Interpretation of contracts
6. Defective contracts 1. CONSENSUALITY OF CONTRACTS
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a. Rescissible
b. Voidable Perfection of a contract: is generally by the meeting of the minds or consensual, save for some cases where delivery or
c. Unenforceable form is required for its perfection.
d. Void and inexistent
Contract entered into by an unauthorized person: is unenforceable since the rule is that no one may contract in the
CONTRACTS IN GENERAL name of another without being authorized by the latter, such as an agent, or unless he has by law a right to represent him,
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such as a guardian.
DEFINITION – A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other,
to give something or to render some service. (Art. 1305) The same is true if the person, while authorized or has legal representation, acted beyond his powers.
Criticisms in the definition provided under Art. 1305:
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Unless, in both cases, the contract is ratified, expressly or impliedly, by the person on whose behalf it has been executed,
1. “to give something or to render some service” – connotes that obligation not to do is not covered, which is wrong. E.g., before it is revoked by the other contracting party.
contract not to put up a fence or not to sell products of a competitor company, or in the case of Honda cars prohibiting
conversion of the cars to taxicabs.
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CONTRACT OF ADHESION - one where there is already a prepared form containing the stipulations desired by one party
2. “whereby one binds himself” – connotes that only one is obligated, which is wrong as well. Most of the contracts are whereby the latter only asks the other party to agree to them if he wants to enter into a contract.
actually reciprocal or bilateral.
3. “Two persons” – connotes that a contract cannot be perfected if there is only one person, which is wrong. Auto-contracts Generally valid: because a party who does not consent to the terms and conditions in the contract can opt not to.
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involve only one person, although such person represent different interests.
2. AUTONOMY OF CONTRACTS (FREEDOM OR LIBERTY TO CONTRACT)
AUTO-CONTRACTS: one person is responsible for the perfection of the contract but this person is acting in two capacities,
one in behalf of himself, one in behalf of another. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.
Generally valid: the number of parties is not determinative of the existence of a contract; what is important is that there be
at least 2 declaration of wills. Contrary to Law: note that the law is deemed part of every contract and must thus be not contrary to the same.
a. Waiver for future fraud.
b. Partnership: Pactum Leonina – a stipulation which excludes one or more partners from any share in the profits or losses
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c. Mortgage/Pledge: Pactum Commissorium – a stipulation where the creditor appropriates the things given by way of Contract for a piece of work: where the compensation of the contractor may be increased on the basis of minimum wage
pledge or mortgage, or dispose of them. or as to materials, based on the consumer price index.
d. Real Estate Mortgage: Pactum de non aliendo – a stipulation forbidding the owner from alienating the immovable
mortgaged. Contract of Lease: where the rental would be increased or decreased based on the movement (increase or devaluation)
of foreign exchange – valid. (Del Rosario vs. Shell)
Contrary to Customs:
a. A notarized document entitled “legal separation” executed by husband and wife, wherein they agreed that they 4. OBLIGATORY FORCE OF CONTRACTS
separated mutually and voluntarily, that they renounced their rights and obligations, and that they authorized each other
to remarry, renouncing any action to which they might be entitled and each promising not to be a witness against each Obligations arising from contracts have the force of law between the contracting parties and should be complied with in
good faith. (Art. 1159)
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5. RELATIVITY OF CONTRACTS
Contrary to Public Policy:
a. Refund of tuition fees during the time a student is covered by a scholarship if such student transfers schools.
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RELATIVITY (OR PRIVITY) OF CONTRACTS: means that the contract takes effect only between the parties, their assigns
Scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward
and heirs which are referred to as privies.
merit or help gifted students in whom society has an established interest or a first lien. (Cui vs. Arellano)
b. Prohibiting a losing candidate in a convention to run as an independent candidate is contrary to constitutionality
Third Parties: as a general rule do not have a cause of action to enforce or annul a contract nor are they bound by the
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protected right to be elected in public office and the right of the electorate to choose. (Saura vs. Sindico)
terms thereof.
Contrary to Morals:
Exceptions:
a. in a contract of loan, where the interest rate is 50%, maybe declared void or reduced for being contrary to
a. Third person may be bound by the contract:
morals, the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is
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usurious. i. In contracts creating real rights, third persons who come into possession of the object of the contract are bound
b. Promise to live as a common-law wife without the consideration of marriage in consideration of money thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws
c. Work without pay ii. Collective contracts – such as a Collective Bargaining Agreement
d. Penalty of Php5/day for an obligation amounting to Php465 iii. Contracts that create a status – such as a marriage contract.
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b. A creditor may initiate an action against the contracting parties
3. MUTUALITY
Creditors are protected in cases of contracts intended to defraud them. The following actions are allowed for creditors,
The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. This effectively interfering in contracts to which they are not parties to:
principle stresses that both parties are bound. The principle is based on the essential equality of the parties since it would
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be unfair if it is binding on one party and yet leave the other free. Accion Pauliana: is the action of the creditor to rescind the contract entered into by the debtor to defraud him.
Consequences of Mutuality: Accion Directa: is the action of a creditor to sue on a contract entered into by his debtor, whenever authorized by law,
1. One party cannot revoke or renounce a contract without the consent of the other, nor have it said aside on the ground such as:
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that he had made a bad bargain. (1) Those who put labor upon or furnish materials for a piece of work undertaken by the contractor have an action
2. The determination of the performance may be left to a third person: against the owner up to the amount owing from the latter to the contractor at the time the claim is made.
a. Whose decision shall not be binding until it has been made known both contracting parties (2) The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not
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b. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is be responsible beyond the amount of rent due him, in accordance with the terms of the sublease, at the time of the
equitable under the circumstances. extrajudicial demand by the lessor.
c. Third persons may be liable under a contract

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ESCALATION CLAUSE: where one increases/decreases compensation of one of the parties.
When Void: when the increase is dependent solely upon the will of one of the parties. Malicious interference by third persons: A third person who induces another to violate his contract shall be liable for
damages to the other contracting party. As the name implies, there should be malice or a malicious inducement by the
The unilateral determination and imposition of increased interest rates by the bank is obviously violative of the principle of third person as a result of which, the debtor does not comply with his obligation under the contract, which necessarily
mutuality of contracts ordained in Article 1308 of the Civil Code. (Sps. Florendo vs. CA) implies that such third person has knowledge of the existence of the contract. (Art. 1314)
When Valid: when the increase/decrease is dependent on valid and reasonable standards. d. Third persons may be benefited by a contract – 2nd paragraph of Art. 1311, otherwise known as a stipulation
pour atrui.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he a. ONEROUS – such as a contract of sale, barter, lease and simple loans or mutuum with stipulation for interest.
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is b. GRATUITOUS OR LUCRATIVE – such as a donation and commodatum.
not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. c. REMUNERATORY – where one prestation is given for a benefit or service that had been rendered previously.
Stipulation pour atrui: is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and Importance of Classification: would be on the application of presumptions that the transfer of ownership is in fraud of
which stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the third creditors and as to interpretation of contracts:
person.
5. ACCORDING TO RISK
Communication of acceptance to the obligor is required. No form is required. It can even be implied from the acts of the a. COMMUTATIVE – where the parties contemplate real fulfillment, therefore, equivalent values (presumably) are
third person. given, such as sales (where the price is presumably the equivalent of the thing to be delivered) or lease (where the
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rental payments is presumably the value of the use of the thing)
Revocation: cannot be done by one party alone. The Supreme Court has held that if this revocation is a unilateral act b. ALEATORY – where the fulfillment of the cause as to one party is dependent upon chance, such as an insurance
of one of the parties, it is void for violation of the principle of mutuality of contracts. For a revocation to take effect, it contract (where the payment will depend on the happening of the event insured against)
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must be with consent of both parties (obligor and oblige) and should be done before the communication of acceptance
to the obligor. 6. ACCORDING TO NAME
a. NOMINATE – those contracts for which a particular name has been designated and rules particular to them are
CLASSIFICATION OF CONTRACTS applicable such as sales, commodatum, partnership, agency, deposit, etc.
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b. INNOMINATE – those which do not have particular designation, such as do ut des, do ut facias, facio ut des and
1. ACCORDING TO DEGREE OF DEPENDENCE facio ut facias.
a. PRINCIPAL – a contract which can stand on its own, such as a contract of sale, barter, lease, loan.
b. ACCESSORY – those which cannot stand on its own and are dependent upon other contracts for its validity. E.g., ESSENTIAL ELEMENTS OF A CONTRACT(COC)
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guaranty, suretyship, mortgage and antichresis.
c. PREPARATORY – a contract is a means to achieving an end, such as an option contract, a contract of partnership CONSENT OF CONTRACTING PARTIES
and that of agency.
Consent: the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.
2. ACCORDING TO PERFECTION
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a. CONSENSUAL – are those perfected by mere consent. Offer and Acceptance:
b. REAL – those which are perfected only upon delivery of the thing subject of the contract. E.g., deposit, pledge, 1. The offer must be certain
commodatum and mutuum. 2. The acceptance must be absolute.
c. FORMAL – those which require a certain form for its validity. E.g., antichresis 3. A qualified acceptance constitutes a counter-offer.
4. An acceptance may be express or implied.
3. ACCORDING TO PARTIES OBLIGED 5. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.
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a. BILATERAL – where both parties are reciprocally obligated, e.g., lease (where the lessor is obliged to allow the use
of the thing and the lessee is obliged to pay rent) and sale (where the buyer is obliged to pay the price and the seller COGNITION THEORY vs. MANIFESTATION THEORY:
obliged to deliver the thing) (ARTS. 1642, 1458) 1. Cognition Theory – follows that the acceptance takes effect from the time the offeror knew (or has knowledge) of the
b. UNILATERAL – only one party is obliged. E.g., guaranty and pledge. (ARTS. 2047, 2093) acceptance of the offeree.
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2. Manifestation Theory – on the other hand, follows that the acceptance will take effect once it is manifested by the
Importance of Classification: offeree.
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As to FRUITS: in conditional obligations, who would be entitled to the fruits before the happening of the suspensive In the Philippines, we abide by the Cognition Theory, considering that Art. 1319 provides that: “Acceptance made by letter
condition? or telegram does not bind the offeror except from the time it came to his knowledge. The contract, in such a case, is
a. Bilateral: the fruits are deemed mutually compensated under Art. 1187. presumed to have been entered into in the place where the offer was made.”
b. Unilateral: the fruits shall pertain to the debtor unless a contrary intention is clear. Offer made through an agent
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Rescission: under Art. 1191, is implied in reciprocal obligations, or in this case, bilateral contracts where both are An offer made through an agent is accepted from the time acceptance is communicated to him because the agent is an
reciprocally obligated. But if the contract is unilateral, logically, the creditor would not rescind, he would either demand extension of the personality of the principal.
performance or seek damages.
Question: Can silence be construed as an acceptance?
Delay: in reciprocal obligations (bilateral contracts), from the moment one of the parties had already complied and the
other did not, the latter shall be considered in delay even if there is no demand. Answer: As a rule, silence cannot be construed as acceptance. The acceptance must be affirmatively and clearly made
and evidenced by words or some acts or conduct communicated to the offeror. The exceptions are:
4. ACCORDING TO CAUSE

a. The parties agreed expressly or impliedly, that it shall amount to acceptance e. Those of unsound mind even though they have lucid intervals
b. Where specific provisions of law so declare f. Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aid, take
c. Where under the circumstances such silence constitutes estoppel. care of themselves and manage their property, becoming thereby an ease prey for deceit and exploitation.
Intervening events: An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party Note that these people (save for those suffering the penalty of civil interdiction) can still enter into contracts if not
before acceptance is conveyed. placed under guardianship. However, it can still be proven that intelligent consent was not given and thus, may still
render the contract voidable.
Option Agreement: When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as ii. Relative Incapacity – a person may be prohibited from entering specific contracts or that in a contract, he may
something paid or promised. be prohibited in a certain capacity, i.e., prohibited to be the buyer, or to specific things, or to specific persons.
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Advertisements: Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere Examples:
invitations to make an offer. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not • An alien is prohibited under the Constitution from acquiring private lands. EXCEPT: when acquired through
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bound to accept the highest or lowest bidder, unless the contrary appears. (1) succession; or (2) sale of residential land to a former natural born Filipino citizen.
• Husbands and wives cannot enter into a contract of sale, unless they agreed to a Separation of Property
SITUATIONS CONCERNING CONSENT OF THE PARTIES: marital property regime or they have been legally separated.
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a. Both parties gave consent their consent as to the essential elements of the contract – the contract is valid. d. Both are incapacitated: the contract is unenforceable.
b. Simulation: which can either be: e. Both parties gave their consent, but such consent was vitiated:
Absolute simulation – when one or both the parties did not intend to be bound by the contract – the same is void.
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i. Vices of consent (VIMFU): would render the contract voidable. Like:
ii. Relative simulation – if the parties merely conceal their true agreement relative simulation, they shall be bound by
their real agreement.
a. Violence - when in order to wrest consent, serious or irresistible force is employed.
c. Incapacity of one of the parties:
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b. Intimidation - when one of the contracting parties is compelled by a reasonable and well-grounded fear of an
Kinds of Capacity: imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or
(1) Juridical capacity – is the fitness to be the subject of legal relations which is inherent in every natural person and is ascendants, to give his consent.
lost only through death.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
If incapacity pertains to juridical capacity the contract is void.
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A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.
(2) Capacity to act (or legal capacity) – is the power to do acts with legal effect which is acquired and may be lost.
c. Mistake
If incapacity pertains to capacity to act or legal capacity, it can be:
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i. Absolute Incapacity – the party cannot give consent in any contract, with anyone, in whatever capacity, over Mistake will make the contract voidable if:
anything. i. It pertains to the object – e.g., gold-plated watch
ii. It pertains to the principal conditions – e.g., area of the land, when there is already a plan for the intended area
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The following cannot give consent to a contract: iii. Identity or qualifications of the parties – when they are principal causes – e.g., reviewers in a review school.
a. Unemancipated minors; iv. Legal effect that frustrates the agreement of the parties and the same is mutual – e.g., S delivered his car to B,
b. Insane or demented persons (except if consent is given during lucid interval); B gave money to S:
c. Deaf-mutes who do not know how to write; and
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a. S thinks it is a contract of loan secured by a pledge;
d. Drunks or hypnotized. b. B thinks it is a pacto de retro sale
Here the contract would be voidable as to the party who is incapacitated. Mistake does not vitiate consent in the following instances:
a. Mistake or error as to motive
Those who are “incompetent” under the Rules of Court who may be placed under guardianship: b. A simple mistake of account – which shall give rise to its correction only
a. Those suffering civil interdiction
c. If the party alleging it knew the doubt, contingency or risk affecting the object of the contract
b. Hospitalized lepers
c. Prodigals
d. Fraud - when, through insidious words or machinations of one of the contracting parties, the other is induced to
d. Deaf and dumb who are unable to read and write
enter into a contract which, without them, he would not have agreed to:

b. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded
There is NO FRAUD in the following cases: upon another cause which is true and lawful.
1. Failure to disclose facts, when there is NO duty to reveal them. c. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
2. The usual exaggerations in trade, when the other party had an opportunity to know the facts. contrary.
3. A mere expression of an opinion does not signify fraud, UNLESS made by an expert and the other party has d. As a rule, inadequacy of the price will not affect the contract. Except:
relied on the former's special knowledge (1) When expressly provided by law, e.g., rescissible contracts;
4. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created (2) When there has been fraud, mistake or undue influence.
substantial mistake and the same is mutual. e. The particular motives of the parties in entering into a contract are different from the cause thereof.
5. Misrepresentation made in good faith is not fraudulent but may constitute error
OTHER ESSENTIAL ELEMENTS: in some cases, delivery is required for the perfection of the contract; in others, there are
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formal requirements.
OTHER RULES:
1. In order that fraud may make a contract voidable, it should be serious and should not have been employed by Real Contracts: are those which are perfected by delivery, thus, delivery is an essential element to its perfection. Real
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both contracting parties. contracts include:
2. Incidental fraud only obliges the person employing it to pay damages. 1. Deposit
2. Pledge
3. Commodatum
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e. Undue Influence - when a person takes improper advantage of his power over the will of another, depriving the 4. Loan or Mutuum
latter of a reasonable freedom of choice.
The following circumstances shall be considered: the confidential, family, spiritual and other relations between the
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parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or FORMS OF CONTRACT
was ignorant or in financial distress.
GENERAL RULE: no form is required for the validity or perfection of a contract.
OBJECT CERTAIN WHICH IS THE SUBJECT MATTER Formalities required for VALIDITY:
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1. Donations of real property which requires a public instrument.
Object (Subject Matter) of the Contract: is really to create or to end obligations, which, in turn, may involve things, rights 2. Donations of personal property which exceeds P5,000 which requires that the donation and acceptance be written.
or services. 3. Stipulation to pay interests on loans or for the use of money, which must be in writing.
4. Sale or transfer of large cattle which requires that it be in a public instrument, registered and that there should be a
Requisites: certificate of transfer.
1. The thing, right or service must be within the commerce of man; 5. Contribution of real property in a partnership, which requires that there be an inventory attached to a public instrument.
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2. It must be transmissible;
3. It must not be contrary to law, morals, good customs, public order or public policy; Formalities required for ENFORCEABILITY (STATUTE OF FRAUDS): The following are unenforceable, unless they are
4. It must not be impossible; in writing, or some note or memorandum and subscribed by the party charged, or by his agent:
5. It must be determinate as to its kind or determinable without the need of a new contract or agreement. 1. An agreement that by its terms is not to be performed within a year from the making thereof;
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2. A special promise to answer for the debt, default, or miscarriage of another;
Future Inheritance: cannot be the subject matter of a valid contract. This is because the seller owns no inheritance while 3. An agreement made in consideration of marriage, other than a mutual promise to marry;
his predecessor lives. Public policy demands that if you’re going to sell, you have the right to do so, but not necessarily 4. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the
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requiring that the seller is the owner. buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the
CAUSE OR CONSIDERATION auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names
of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;
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Cause is the essential or impelling reason why a party assumes an obligation. 5. An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein;
a. Onerous – for each contracting party, the prestation or promise of a thing or service by the other; 6. A representation as to the credit of a third person.
b. Gratuitous – mere liberality of the benefactor
c. Remuneratory – service or benefit already rendered. Formalities required for CONVENIENCE: to bind third persons, the following are required to appear in a public instrument:
1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights
Rules on Cause: over immovable property; sales of real property or of an interest therein a governed by the Statute of Frauds.
a. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to 2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
law, morals, good customs, public order or public policy 3. The power to administer property, or any other power which has for its object an act appearing or which should appear
in a public document, or should prejudice a third person;

4. The cession of actions or rights proceeding from an act appearing in a public document. INTERPRETATION OF CONTRACTS
Remedy to require a specific form: if the law requires a document or other special form if the contract is VALID and Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
ENFORCEABLE, as in the acts and contracts required to appear in a public instrument for convenience (where the meaning of its stipulations shall control.
requirement that they must be in writing for validity, if applicable, is met), the contracting parties may compel each other to
observe that form, once the contract has been perfected. E.g., a contract of sale of land in a private instrument is valid and If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)
enforceable, and the parties may compel that it appear in a public instrument.
Primary Consideration: is the intention of the parties. Such that even if the terms of the contract are clear, but does not
REFORMATION OF INSTRUMENTS reflect the intention of the parties, it is the intention which would prevail.
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Reformation: is the remedy by means of which a written instrument is made or construed so as to express or conform to Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be
the true intention of the parties when some error or mistake has been committed. principally considered. (1282)
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Requisites: Contemporaneous and Subsequent Acts: may be considered to determine if the parties’ intention are different from the
a. There is a meeting of the minds; clear words of the agreement.
b. There is a written instrument; and
c. The written instrument does not reflect the true intention of the parties. In a case where a Deed of Assignment was issued as payment for the obligation of the debtor in an indemnity agreement
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by way of dacion en pago, the debtor thereafter made subsequent installment payments and executed a mortgage, the SC
When may reformation be had: held that clearly the subsequent acts of the debtor does not reflect his claim that the deed of assignment was by dacion en
1. Mutual mistake of the parties. If one party was mistaken and the other acted fraudulently or inequitably in such a way pago. The deed of assignment was a form of security for the indemnity agreement.
that the instrument does not show their true intention, the former may ask for the reformation of the instrument
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2. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, Specific rules in interpretation of contracts:
but concealed that fact from the former. 1. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct
3. Ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist. and cases that are different from those upon which the parties intended to agree.
4. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property 2. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which
is sold absolutely or with a right of repurchase. is most adequate to render it effectual.
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3. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may
Who can ask for reformation: result from all of them taken jointly.
1. If the mistake was mutual, reformation may be ordered at the instance of either party or his successor in interest; 4. Words which may have different significations shall be understood in that which is most in keeping with the nature and
2. Otherwise, the injured party, or his heirs and assigns. object of the contract.
5. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall
No reformation is allowed: fill the omission of stipulations which are ordinarily established.
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a. Simple donations inter vivos wherein no condition is imposed; 6. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity
b. Wills;
c. When the real agreement is void. When none of the above rules will apply:
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Likewise, when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to
reformation. incidental circumstances of:
1. a gratuitous contract - the least transmission of rights and interests shall prevail.
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2. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
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
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the intention or will of the parties, the contract shall be null and void. (Art. 1378)

DEFECTIVE CONTRACTS
Rescission as a remedy:
1. RESCISSIBLE CONTRACTS a. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal
means to obtain reparation for the same
Art. 1381. The following contracts are rescissible: b. Rescission shall be only to the extent necessary to cover the damages caused
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one- c. Restitution - rescission creates the obligation to return the things which were the object of the contract, together with
fourth of the value of the things which are the object thereof; their fruits, and the price with its interest.
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; d. It can be carried out only when he who demands rescission can return whatever he may be obliged to restore
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; e. Rescission shall not take place when the things which are the object of the contract are legally in the possession of third
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge persons who did not act in bad faith. In which case, indemnity for damages may be demanded from the person causing
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and approval of the litigants or of competent judicial authority; the loss.
(5) All other contracts specially declared by law to be subject to rescission. (1291a) f. If the sale of the property of the guardian or the absentee is approved by courts, rescission is not an available remedy.
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Lesion – is the damage or injury to the party asking for rescission, which represents the difference between the price and Prescriptive Period: the action to claim rescission must be commenced within 4 years. For persons under guardianship
the actual value of the property. Lesion, as a ground for rescission must be MORE THAN ONE-FOURHT of the value. and for absentees, such four year period shall begin upon termination of the ward’s incapacity or when the absentee’s
domicile is known.
In fraud of creditors: where the remedy of the creditor is properly called “accion pauliana,” through which the creditor can
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interfere and have the contract entered into by the debtor rescinded. Sale of land, 4 years is counted from the time of registration: When a transaction involves registered land, the four-year
period fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration
This presupposes that the creditor cannot in any other manner collect the claims due. Thus, if the debtor entered into a of the conveyance.
contract of sale with a third person in order to have enough money to pay the creditor, the latter cannot rescind such contract
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of sale since the sale was precisely entered into to pay him his due. The registration of the document is constructive notice of the conveyance to the whole world. (HSBC vs. Pauli)
Presumption of Fraud: 2. VOIDABLE CONTRACTS

a. Alienations by gratuitous title: 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. Voidable Contracts: are those which are valid until they have been annulled by proper action in court. However, they are
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b. Alienations by onerous title: presumed fraudulent when made by persons against whom some judgment has been likewise subject to ratification to cure the defect.
issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the
party seeking the rescission. The following are voidable contracts:
a. Those where one of the parties is incapable of giving consent;
Things under litigation: a contract having a thing under litigation as its subject matter is rescissible whenever entered into b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud;
without the knowledge and approval of: c. Those entered into by those hypnotized or under a state of drunk
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a. The litigants; or
b. Competent judicial authority (such as the court under which the thing is subject to litigation). Ratification: extinguishes the action to annul a voidable contract.
a. Ratification may be effected by the guardian of the incapacitated person
Other contract subject to rescission under the law: b. It does not require the conformity of the contract party who has no right to bring the action for annulment.
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a. Rights of an unpaid seller; c. It cleanses the contract from all the defects from the moment it was constituted.
b. In obligations to deliver a specific thing, where the same deteriorates with the fault of the debtor before the suspensive d. It may be done:
condition is fulfilled (or suspensive term arrives); i. Expressly – either oral or written; or
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c. Lesion of at least one-fourth in partition. ii. Tacitly (impliedly) – when the reason which renders the contract voidable has ceased, the person who has a right
d. In sale of real estate for a certain price per unit of measure and the real estate delivered is deficient by more than 1/10 to invoke annulment should execute an act which necessarily implies an intention to waive such right.
or when the buyer would not have entered into the contract knowing the actual area of the real estate.
Annulment: renders the contract non-existing, as if it was never entered into.
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e. Payments made in a state of insolvency for obligations whose fulfillment the debtor could not be compelled at the time
they were effected. a. Only the injured party (the victim, whether principal or subsidiary party) may ask for annulment.
b. Creditors of the injured party cannot ask for the annulment of the contract for they are not parties thereto.
Rescission: is a process designated to render inefficacious a contract validly entered into and normally binding, by reason c. In case of minority, and the minor misrepresents his age and the other party was led to believe the same, there can be
of external conditions, causing an economic prejudice to a party or his creditors. no annulment, for here, the minor would be estopped.
d. Those who are capacitated cannot allege the incapacity of those with whom they contracted with nor those who exerted
Resolution: is the proper term for “rescission” which is a remedy under Art. 1911 in reciprocal obligations. Unlike the proper intimidation, violence or undue influence, or employed fraud, or caused mistake.
rescission for rescissible contracts, resolution is a primary remedy which can be availed of by the parties and does not e. Effects of loss of the thing:
require lesion as a ground therefor but will require non-performance or non-fulfillment of the obligation or when there is i. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through
substantial breach. the fraud or fault of the person who has a right to institute the proceedings.

ii. If the right of action is based upon incapacity, the loss of the thing shall not be an obstacle to the success of the
action, unless said loss took place through the fraud or fault of the incapacitated person. vi. A representation as to the credit of a third person.
f. Effects of annulment: Rules Applicable to Statute of Frauds:

i. Generally, the parties are obliged to restore to each other the things which have been the subject matter of the i. It applies only to executory contracts, and not those which have been partially or completely executed.
contract, with their fruits and the price with its interest. ii. The list is exclusive, that is, it applies only to the agreements or contracts enumerated above.
ii. In obligations to render service, the value thereof shall be the basis for damages. iii. The defense of Statute of Frauds may be waived.
iii. In case of incapacity, the person incapacitated is not obligated to make any restitution except insofar as he has iv. The Statute of Frauds is a personal defense, that is, an agreement infringing it cannot be assailed by third persons.
been benefited by the thing or price received by him. v. If oral evidence is presented to prove the agreement, and the other does not object thereto, there is deemed a
iv. Whenever the person who is obliged to return the thing cannot do so because it has been lost through his fault, he waiver of the defense of Statute of Frauds. The same is true if the other party has already accepted the benefits of
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shall return: the contract.
1) the fruits received and
2) the value of the thing at the time of loss c. Those where both parties are incapable of giving consent.
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3) with interest from the same date.
v. When one party does not return what is due him by virtue of the annulment, he cannot compel the other to comply 4. VOID OR INEXISTENT
what is incumbent upon him.
Void Contracts are those which are either inexistent (as when the required formalities are not complied with for its
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Prescriptive Period: to annul a voidable contract shall be four years. perfection, which produces no legal effects), or illegal or illicit.
Ground Counted from: Art. 1409. The following contracts are inexistent and void from the beginning:
Intimidation, violence or undue influence The defect of the consent ceases (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
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Mistake or fraud Discovery (2) Those which are absolutely simulated or fictitious;
Minority or incapacity Guardianship ceases (3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
3. UNENFORCEABLE CONTRACTS (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
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(7) Those expressly prohibited or declared void by law.
Unenforceable contracts – are those which have no effect until they are ratified.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Kinds of Unenforceable Contracts:
a. Unauthorized contracts – those entered into in the name of a person by one who has been given no authority or legal Rules Applicable:
representation, or who has acted beyond his powers. a. The action or defense for the declaration of the contract as inexistent does not prescribe.
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b. Those that do not comply with the Statute of Frauds – these are agreements that are required to be in writing in b. The contract cannot be ratified.
order to avoid fraud. c. It cannot give rise to valid subsequent contracts if the same are based on it.
d. Generally, produces no effect and no action to declare them void is needed.
Statute of Frauds: in order to be enforceable, the following must be in writing, or in some note or memorandum: e. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties
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i. An agreement that by its terms is not to be performed within a year from the making thereof. before the purpose has been accomplished, or before any damage has been caused to a third person. In such case,
ii. A special promise to answer for the debt, default, or miscarriage of another; the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money
iii. An agreement made in consideration of marriage, other than a mutual promise to marry; or property.
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iv. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless f. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so
the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in demands allow recovery of money or property delivered by the incapacitated person.
action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made g. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the
by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale,
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protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; h. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.
i. The defense of illegality of contract is not available to third persons whose interests are not directly affected
* This refers only to a contract of sale where the price of the thing is P500 or more.
Illegal Contracts: can either be that which involves a criminal offense or where there is no criminal offense.
v. An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest
therein. a. When there is a criminal offense, it may be of two kinds:
i. Those where both parties are guilty (in pari delicto) – they shall have no action against each other; they shall both
*The requirement here is that the contract must be in writing. However, in case of sale of LAND made through an be prosecuted; the effects of the crime shall be confiscated in favor of the government. Example is when both
AGENT, the authority of the agent must be writing, otherwise, the sale is void. parties entered into a contract to smuggle contraband.
Page 17 of 17 | RFBT Pre-recorded Handout 02
LAW ON CONTRACTS
ATTY. N. SORIANO, CPA/ATTY. D. AZORES, CPA
REO.CPA.ACADEMICS.F2.01.00
ii.Those where only one is guilty and the other is innocent:
1) The guilty party will be prosecuted;
2) The instrument of the crime (or object of the contract) will be confiscated;
3) The innocent one may claim what he has given.
b. When there is no criminal offense, which may be:
i. Where both are guilty – where neither can recover what he has given by virtue of the contract or demand the
performance of the other’s undertaking.
ii. Where only one is guilty or at fault – where the guilty party cannot recover what he has given by reason of the
contract or ask for the fulfillment of what had been promised him and the party not at fault may demand the return
of what he has given, without any obligation to comply with his promise.
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----- END OF HANDOUTS -----
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REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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Page 1 of 17 | RFBT Pre-recorded Handout 02 Page 2 of 17 | RFBT Pre-recorded Handout 02

LAW ON CONTRACTS LAW ON CONTRACTS

LAW ON CONTRACTS Examples of an auto-contract which is considered void:

LAW ON CONTRACTS LAW ON CONTRACTS

c. Third persons may be liable under a contract

LAW ON CONTRACTS LAW ON CONTRACTS

LAW ON CONTRACTS LAW ON CONTRACTS

LAW ON CONTRACTS LAW ON CONTRACTS

LAW ON CONTRACTS LAW ON CONTRACTS

LAW ON CONTRACTS LAW ON CONTRACTS

Presumption of Fraud: 2. VOIDABLE CONTRACTS

LAW ON CONTRACTS LAW ON CONTRACTS

f. Effects of annulment: Rules Applicable to Statute of Frauds:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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