IRS CPA REVIEW

Iloilo City and Leganes, Iloilo

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

LAW ON CONTRACTS
FORMS, REFORMATION AND INTERPRETATION

1. Form of contracts

A contract shall be obligatory or binding in whatever form it may have

been entered into provided all the essential requisites (consent, object
and cause; and in certain specified contracts, delivery or form) for its
validity are present.

In the following cases, the form of the contract is essential:

a) When the law requires that the contract be in some form to be

valid (for validity);
b) When the law requires that a contract be in some form to be
enforceable or proved in a certain way (for enforceability);
c) When the law requires that a contract be in certain form for the
convenience of the parties (for convenience ).

2. Contracts that must appear in public instrument

a) Acts and contracts which have for their object the creation,
transmission, modification or extinguishments of real rights over
immovable property;
b) Assignment, repudiation or renunciation of hereditary rights or
rights in the conjugal partnership of gains or in the community of
property between husband and wife;
c) Powers of attorney to administer property or to perform an act
requiring a public instrument, or to perform an act which is to affect
third persons.

The requirement above is only directory. If the acts or contracts do not

appear in a public instrument, they are still valid, and the parties may
compel each other by filing an action in court to observe the necessary
form.

3. Reformation

Reformation is that remedy in equity by means of which a written

instrument is made or construed so as to express or conform to the
real intention of the parties when some error or mistake has been
committed.

Requisites of reformation

a) Meeting of the minds between the parties;

b) Instrument does not express the true intention of the parties;
c) The failure of intention is due to mistake, fraud, inequitable
conduct or accident;
d) There must be clear and convincing proof.

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 The following instruments are not subject to reformation:

a) Simple donations inter vivos wherein no condition is imposed;

b) Wills;
c) The real agreement is void.

4. Interpretation of contracts

Interpretation of contracts is the determination of the meaning of the

terms or words used by the parties in the contract.

Basic rules in the interpretation of contracts:

a) If the terms of the contract are clear, the literal meaning of its
stipulations shall control.
b) The evident intention of the parties shall prevail over the words of
the contract.
c) The contemporaneous and subsequent acts of the parties shall be
principally considered in order to ascertain their intention.
d) Obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
e) Doubts in gratuitous contracts shall be settled in such a way that
the least transmission of rights and interests shall prevail.
f) Doubts in onerous contracts shall be settled in favor of the
greatest reciprocity of interests.

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