OBLICON

CONTRACTS
GENERAL PROVISIONS
CIVIL CODE Art. 1305-1317

Meaning of Contracts
1305. A contract is a meeting of the minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.

Meeting of the minds

- Speaks of the intention of the parties in entering into the contract respecting the subject matter
and the consideration thereof. As a rule, therefore, a contract is perfected by mere consent. It
does not require any special form, as a rule, and is binding from the moment that the essential
requisites are present. Thus, the meeting of the minds between the parties rise to the binding
contract although they have not affixed their signatures to its written form.

Obligation Contract
is the legal tie/relations itself that exists after a one of the sources of obligation
contract has been entered into
an obligation may exist without a contract there can be no contract if there is no obligation

Elements of a Contract
1. Essential Elements (1318-1355) - Those without which there can be no contract.
a. Consent
b. Object
c. Cause
d. In some contracts, form is essential
e. In some contracts, delivery is essential
2. Natural Elements - those found in certain contracts and presumed to exist, unless the contrary
has been stipulated by the parties (e.g. warranty against eviction, warranty against hidden
defects in a contract of sale)
3. Accidental Elements – those which exist only when the contracting parties expressly provide for
them (e.g. stipulation to pay interest)

Classifications of Contracts
1. According to perfection
a. Consensual – perfected by consent, object, cause (COC)
b. Real – perfected by COC + delivery (e.g. pledge, loan, deposit)
c. Formal or Solemn – perfected by COC + formalities required by law (e.g. donation of real
property, chattel mortgage, antichresis)
2. According to relation to other contracts
a. Principal – can exist on its own (e.g. sales, loan)
 b. Accessory – existence depends upon a principal contract (e.g. pledge, mortgage,
guaranty)
c. Preparatory – needed for the formation of subsequent contracts (e.g. partnership,
agency)
3. According to parties obliged
a. Unilateral – only one party is obliged (e.g. commodatum, donation)
b. Bilateral – both parties are obliged (e.g. sales, barter)
4. According to name
a. Nominate – the law gives it a special name or designation (e.g. sales, loan, partnership,
donation)
b. Innominate – the law does not give it a special name or designation (1307)
i. Do ut des: I give that you may give
ii. Do ut facias: I give that you may do
iii. Facio ut facias: I do that you may do
iv. Facio ut des: I do that you may give
5. According to risks
a. Commutative – when the undertaking of one party is considered the equivalent of that
of the other (e.g. sales, lease)
b. Aleatory – when it depends upon an uncertain event or contingency both as to benefit
or loss (e.g. contract of insurance, sale of hope)
6. According to cause
a. Onerous – cause has valuable consideration (e.g. sales, lease)
b. Gratuitous – cause is purely generosity (e.g. commodatum, donation)
c. Remuneratory – cause is based on services or benefits already received (e.g.
employment contract)
7. According to binding force
a. Valid
b. Rescissible
c. Voidable
d. Unenforceable
e. Void

When dealing with Innominate Contracts (1307)

1. Stipulation of the parties
2. Rules governing law on obligations and contracts
3. Rules governing the most analogous contract
4. Customs of the place

Stages of a Contract
1. Preparation/Conception/Generation/Negotiation - the first stage where the parties begin their
initial negotiation and bargaining for the formation of the contract ending at the moment of
agreement of the parties.
2. Perfection/Birth/Formation - Here, the parties had a meeting of minds as to the object, cause or
consideration and other terms and conditions of the contract.
 3. Consummation/Death/Extinguishment - This the last stage which consists in their performance
or fulfillment by the parties of their obligations under the term of the perfected contract.

Characteristics of a Contract (MARCO)

1. Mutuality of contracts (1308)
2. Autonomy/Liberty of contracts (1306)
3. Relativity of contracts (1311)
4. Consensuality of contracts (1315)
5. Obligatory force of contracts (1315)

Mutuality of Contracts
- Contract must bind both contracting parties
- Its validity or compliance cannot be left to the will of one of them (1308)
- The determination of the performance may be left to a third person, whose decision shall not be
binding until it has been made known to both contracting parties (1309)
- The determination shall not be obligatory if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the circumstances (1310)

Autonomy of Contracts
- Also called liberty of contracts or freedom to stipulate in contracts
- 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. (1306)

Relativity of Contracts
- Contracts take effect only between the parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. (1311, par. 1)
- The heir is not liable beyond the value of the property he received from the decedent.
- Contracts take effect between the parties in the contract (with exceptions)
- Contracts are generally transmissible except:
o Law
o Stipulation
o Nature
- Exceptions:
1. Rights and obligations that are not transmissible by their nature, stipulation, or provisions of
law (1311)
2. Stipulation Pour Autrui (1311, par. 2)
3. Third persons in possession creating real rights (1312)
4. Contracts entered to defraud creditor (1313)
5. Third person induced a party to a contract to violate the contract (1314)

Requisites of Stipulation Pour Autrui (in favor of a third person)

a. there must be a stipulation in favor of a third person
 b. the stipulation must be a part, not the whole, of the contract
c. the contracting parties must have clearly and deliberately conferred a favor upon a third person,
not a mere incidental benefit or interest
d. the third person must have communicated his acceptance to the obligor before its revocation
e. neither of the contracting parties bears the legal representation or authorization of the third
party

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

Requisites: Third person induced a party to a contract to violate the contract (1314)
a. Existence of a valid contract;
b. Third person has knowledge of such contract;
c. Third person interferes without legal justification or excuse (De Leon, 2010).
- Thus, third person and the breaching party is liable for damages. It is based on quasi-delict and
their liability is solidary
- This tort or wrongful conduct is known as “interference with contractual relations”.

Consensuality of Contracts
- Contracts are perfected by mere consent, and from that moment the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage, and law. (1315)
- Exceptions: Real (1316) and Formal Contracts

Obligatory Force of a Contract

- Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. (1159)
-
Requisites for the obligatory force of a contract
Before a contract may be considered obligatory, it is necessary that:
a. It is perfected;
b. It is valid; and
c. It is enforceable

Persons affected by a contract

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

ESSENTIAL REQUISITES
CIVIL CODE Art. 1318-1355

Essential Elements (1318)

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

Requisites of Consent
1. It must be manifested by the concurrence of the offer and acceptance (1319-1326)
2. The contracting parties must possess the necessary legal capacity (1327-1329)
3. It must be intelligent, free, spontaneous, and real (not vitiated) (1330-1346)

It must be manifested by the concurrence of the offer and acceptance (1319-1326)

- Offer: a specific proposal to enter into an agreement with another
- Acceptance: agreeing verbally or in writing to the terms of a contract, which is one of the
requirements to show there was a contract
- Note: an offer must be intentional and certain (1319, par. 1)
- Counteroffer: not absolute acceptance
- Policitacion: unilateral promise not accepted by the promisee

Special cases of offers:

1. The person making the offer may fix the time, place, and manner of acceptance, all of which
must be complied with (1321)
2. An offer made through an agent is accepted from the time acceptance is communicated to him
(1322)
3. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed (1323)
4. Advertisement for bidders are simply invitations to make offers (1326)

Acceptance
1. An acceptance must be absolute (1319)
2. Communicated to the offeror (1319, par. 2 & 1322)
3. May be express/implied

Promises in offer and acceptance

Promise Binding Perfected contract
Unilateral promise unaccepted No None
Unilateral promise accepted Binding if promise is supported Option contract only
by consideration
 Bilateral promise Yes Binding contract of promise to
enter into a contract

The contracting parties must possess the necessary legal capacity (1327-1329)

Kinds of incapacity
1. Absolute incapacity (contracts are voidable)
a. Unemancipated minors
i. Except for contracts involving necessity
ii. Where minor misrepresented his age
b. Insane or demented person
i. Lucid interval
c. Deaf-mutes who do not know how to write
2. Relatively incapacitated (contracts are void)
a. Those under Civil interdiction for transactions inter vivos (RPC 34)
b. Undischarged insolvents (Insolvency Law, Sec. 24)
c. Husband and wife: cannot donate (123 FC) to each other, nor to sell if the marriage is
under ACP (1490)

It must be intelligent, free, spontaneous, and real (not vitiated) (1330-1346)

- Vices of consent
o Violence
o Intimidation
o Mistake
o Fraud
o Undue influence

Requisites of Object
1. Lawful
2. Actual or possible
3. Transmissible: within the commerce of man
4. Determinate or determinable

Future inheritance cannot be an object of the contract. (void contract)

Cause
Onerous Gratuitous Remuneratory
As to each of the contracting Mere liberality of the The service or benefit is
parties is understood to be the benefactor renumerated
undertaking or the promise of
the thing or service by the other
party

Requisites of Cause
1. Existing
 2. Lawful
3. True

Cause vs Motive

FORMS OF CONTRACTS
CIVIL CODE 1356-1358
Why contracts need to be in certain forms?
Needed for:
1. Validity of the contract
2. Enforceability of the contract
3. Convenience of the parties

Contracts that need to be in certain forms for their validity

Contract Formality
Donation of personal property whose value Must be in writing
exceeds P5,000 (748)
Donation of real property (749) Must be in public instrument
Partnership where immovables are contributed Must be in public instrument with inventory of
immovables contributed
Sale of a piece of land or any interest therein Contract of agency must be in writing
through an agent (1874)
Antichresis (2134) Must be in writing
Chattel mortgage (2140) Must be registered
Agreements regarding payment of interests in Payment of interest must be in writing
contracts of loans (2314)

Contracts that need to be in certain forms for their enforceability (1403, par. 2)
1. An agreement that by its terms is not to be performed within a year from the making thereof;
2. A special promise to answer for the debt, default, or miscarriage of another;
3. An agreement made in consideration of marriage, other than mutual promise to marry;
4. An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidence, or some of them of such things in action, or pay at the time some part of the purchase
money; but when the sale is made by auction and entry is made by the auctioneer in his sales
book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
5. An agreement for the leasing for a longer period than one year, or for the sale of real property or
of an interest therein;
6. A presentation as to the credit of a third person.
7. Those where both parties are incapable of giving consent to a contract.

Contracts that need to be in certain forms for the convenience of the parties (1358)
 1. Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and 1405;
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
3. The power to administer property, or any other power which has for its object an act appearing
or which should appear in a public document, or should prejudice a third person;
4. The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even
a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and
1405. (1280a)

REFORMATION OF CONTRACTS
CIVIL CODE 1359-1369

Reformation
- A remedy whereby a written instrument to the contract is amended to conform to the true
intentions of the parties

Requisites of Reformation (1359, par. 1)

1. There is a valid contract
2. The written instrument does not conform to the true intention of the parties
3. The non-conformity is due to mistake, fraud, inequitable conduct, or accident

Mistake, fraud, inequitable conduct, or accident in reformation vs voidable contracts

Consent of parties (has consent) > perfected contract > instrument (wrong intention) = remedy is
reformation
Consent of parties (vitiated consent) > perfected contract > instrument = remedy is annulment

Contracts that cannot be reformed

1. Simple donations inter vivos wherein no condition is imposed
2. Wills
3. When the real agreement is void

When a person cannot seek reformation

- A party who enforces the instrument representing the contract cannot subsequently ask for its
reformation

Who may seek reformation (1368)

- Reformation may be ordered at the instance of either party or his successors in interest, if the
mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns
INTERPRETATION OF CONTRACT
CIVIL CODE 1370-1379

Interpretation
- The act of making intelligible that was not before understood, ambiguous, or not obvious

The intention will always prevail

- The intention of the parties will always prevail over the words that appear in the instrument of a
contract (1370)
- In judging the intention, subsequent acts of parties are considered (1371)

Article 1372
- 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.

Article 1373
- If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

Article 1374
- The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.

Article 1375
- Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.

Article 1376
- The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities
of a contract, and shall fill the omission of stipulations which are ordinarily established.

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

Article 1378
- When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. 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 the intention or will of the parties, the contract shall be null and
void.
DEFECTIVE CONTRACTS
CIVIL CODE 1380-1422

Types of Defective Contracts (order is based on their binding force)

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

Valid Binding Enforceable

Rescissible / / /
Voidable / / /
Unenforceable / X X
Void X X X

Rescissible Voidable Unenforceable Void

Why defective? Causes damage to Consent is Lack of authority Missing essential
3rd persons defective or form element/s
Can be ratified? Yes Yes Yes No
Applicable 1381 1390 1403 1409
provisions
Remedy to avoid Rescission Annulment N/A N/A

RESCISSIBLE CONTRACTS
CIVIL CODE 1380-1389

Art. 1381. The following contracts are rescissible:

(1) Those 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;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those 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;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)

Rescissible Contract vs Rescissible Payment (1382)

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.

Subsidiary Action for Rescission (1383)

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.
Extent of Rescission (1384)
Rescission shall be only to the extent necessary to cover the damages caused.

For rescission to be possible (1385)

- 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; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
- 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.
- In this case, indemnity for damages may be demanded from the person causing the loss. (1295)

Rescission not possible for contracts approved by court

- Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to
contracts approved by the courts.

Contracts presumed to be rescissible (1387)

- 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.
- Alienations by onerous title are also presumed fraudulent when made by persons against whom
some judgment has been issued. The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking the rescission.
- In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

Acquisition of third person in bad faith (1388)

- 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.
- If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Prescription of rescission (1389)

- The action to claim rescission must be commenced within four years.
- For persons under guardianship and for absentees, the period of four years shall not begin until
the termination of the former's incapacity, or until the domicile of the latter is known.

VOIDABLE CONTRACTS
CIVIL CODE 1390-1402

What contracts are voidable?

- The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:
 1. Those where one of the parties is incapable of giving consent to a contract (absolute incapacity;
exception: when contract involves necessaries);
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

Vices of consent
1. Violence – when in order to wrest consent, serious or irresistible force is employed
2. Intimidation – when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the person or
property of his spouse, descendants or ascendants, to give consent
3. Mistakes – that refer to the substance of the object, identity/qualification of a person, or
conditions that have principally moved one or both parties to enter into the contract
4. 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
5. Undue Influence – when a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice

Mistake of Law
- Ignorance of the law excuses no one from compliance therewith (article 3)

Mutual Mistake of Law

- Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent (1334)

Types of Fraud
1. Dolo incidente (incidental fraud)
2. Dolo causante (causal fraud)

When annulment cannot proceed

1. When the object of the contract is lost through the fault of the person who may annul the
contract
2. When the contract is ratified

Who can annul voidable contracts?

1. Incapacitated persons (upon ceasing of incapacity)
2. Persons whose consent were vitiated

When can it be annulled?

1. Within four (4) years after guardianship of minors or incapacitated persons ceases
2. Within four (4) years after intimidation, violence, or undue influence ceases
3. Within four (4) years from the time of discovery of mistake or fraud

Annulment Rescission
Used to invalidate a voidable contract Used to invalidate a rescissible contract
Principal remedy Subsidiary remedy
 Annulment is availed by parties to a contract Rescission is availed by injured person even if not
a party to contract

Who may ratify?

- The party who can annul a voidable contract

How it can be ratified?

- Ratification can be done orally, in writing, or may be implied

UNENFORCEABLE CONTRACTS
CIVIL CODE 1403-1408

What makes a contract unenforceable?

1. Unauthorized contracts
2. Both parties are incapacitated
3. Transactions under statute of frauds

Statute of Frauds
1. Contracts not to be performed within a year
2. A special promise to answer for the debt, default, or miscarriage of another
3. Agreement in consideration of marriage
4. Sale of personal property for 500 pesos or more
5. Lease of real property for more than 1 year
6. A representation as to the credit of a third person
7. Sale of real property (1358)
Exception: Partially Executed Contracts