IRS CPA REVIEW

Iloilo City and Leganes, Iloilo

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

LAW ON CONTRACTS

GENERAL PRINCIPLES
ESSENTIAL ELEMENTS OF A CONTRACT

1. Contract

Contract is the meeting of the minds between two persons whereby one
binds himself with respect to the other, to give something or to render
some service.

2. Stages in the life of contract

a) Preparation or conception – “bargaining point”

b) Perfection or birth – meeting of the minds regarding the subject
matter and the cause of the contract
c) Consummation or termination – when the parties have performed
their respective obligations

3. Characteristics of contracts

a) Autonomy or liberty of contracts;

b) Obligatory force of contracts;
c) Mutuality of contracts;
d) Consensuality of contracts;
e) Relativity of contracts.

Parties bound by the contract (Principle of relativity)

Contracts take effect only between the parties, their assigns and heirs,
except in cases where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of
law.

If the contract should contain some stipulation in favor of a third person,

he may demand its fulfillment provided he communicated his acceptance
to the obligor before its revocation. A mere incidental benefit or interest of
a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (Stipulation pour
autrui)

Exceptions to the rule of relativity

a) Obligations arising from contract which are not transmissible by their

nature stipulation or provision of law;
b) Stipulation pour autrui;
c) When a third person induces another to violate his contract;
d) Right of a creditor to sue on a contract entered into by his debtor.

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4. How contracts are perfected

a) If consensual – by mere consent (contract of sale)

b) If real – by delivery (contract of pledge)
c) If formal – special form is required for its perfection (donation of real
property)

Consent is manifested by the meeting of the offer and acceptance upon

the thing and the cause which are to constitute a contract.

Requisites of a valid offer:

a) Certain or definite;
b) Made with intent to be bound if the same is accepted.

Requisites of valid acceptance:

a) Must be absolute and unqualified;

b) Must be known to the offeror.

Acceptance thru correspondence – acceptance binds the offeror from the

time it came to his knowledge.

Offer and acceptance thru agent – the principal is bound from the time the
acceptance is communicated to the agent.

Causes that render the offer ineffective

a) Death, civil interdiction, insanity, or insolvency of either party before

acceptance is conveyed;
b) Revocation, rejection or withdrawal of the offer before acceptance is
communicated;
c) Qualified acceptance of the offer as the acceptance is really a
counter-offer;
d) Expiration of the period of time given to the offerree within which he
must signify his acceptance.

Cognition theory. Contract is perfected from the moment the acceptance

comes to the knowledge of the offeror.

Expedition theory. Contract is perfected from the moment the acceptance

is declared or made even if not made known to the offeror.

5. Essential elements of contracts

a) Consent
b) Object
c) Cause

6. Persons incapable of giving consent

a) Unemancipated minors
b) Insane or demented persons, and deaf mutes who do not know how
to write

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7. Five causes of vitiating consent

a) Error or mistake
b) Violence or force
c) Intimidation or threat
d) Undue influence
e) Fraud or deceit

Simulation of contract is the act of deliberately deceiving others, by

pretending by agreement the appearance of a contract which is either
non-existent or concealed.

Kinds of simulation:

a) Absolute – when the parties do not intend to be bound, void from the
beginning
b) Relative – parties conceal their true agreement

8. Object of a contract (things, rights or services)

a) Must be within the commerce of men

b) Transmissible
c) Licit
d) Possible
e) Determinate

9. Rules in contract of sale as to future things

a) Under the contract of sale, things having potential existence may be

the object of the contract of sale.

b) There may be a sale of expected things, but subject to the condition

that it will come to existence. (emptio rei speratae)

c) There may be sale of hope, the hope or expectancy already exists.

(emptio spei)

10. Cause is the essential or principal purpose or reason which the

contracting parties have in view at the time of entering into the contract.
(why of the contract)

11. Lesion is the insufficiency or inadequacy of the cause of a contract.

The contract (with lesion) is valid except when there is fraud, mistake or
undue influence.

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