OBLIGATIONS & CONTRACT

REVIEWER
CONTRACTS

Art. 1305 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.

“Contract”
- means an agreement or convention.
- As the juridical convention manifested in legal form, by virtue of which one or more
persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of
a prestation to give, to do, or not to do.

Contract Convention
Limited exclusively Broad enough to
to those include any kind of
agreements which agreement
produce patrimonial
obligations.
specie genus
Contract Juridical
Convention
The principal The principal
source o rights and source of rights and
obligations of the obligations of the
parties is their parties is the law
agreements itself
Rights and Rights and
obligations are obligations are
concrete, limited more or less
and transitory elastic, absolute
and permanent.
Contract Marriage Contract
Parties may be two It is necessary that
or more persons of the partis must be
the same or of one man and one
different sexes woman.
Consequences and Consequences and
ioncidents of the incidents of the
contract are marriage are
governed primarily governed by law
by the agreement
of the parties
The contract is Once the marriage
executed, the result is celebrated, the
is a contract result is a status.
Usual remedy is for Usual remedy is for

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 the injured party to the injured party to
institute an action institute a civil
against the other action against the
party for damages other party for legal
separation or a
criminal action for
adultery or
concubinage.
Perfected promise Imperfected
Promise
To insure and pave Is a mere
way for the unaccepted offer.
celebration of a
future contract
Pact Stipulation
Is an incidental part Is an essential and
of a contract which dispositive part
can be separated chich cannot be
from the principal separated from
agreement such principal
agreement.

Elements of a Contract
1. Essential – those without which there can be no contract. The following are essential
elements:
a. Common (communes) – those which are present in all contracts, such as the
consent, object and cause.
b. Special (especiales) – present onle in certain contracts, such as delivery in real
contracts.
c. Extraordinary or peculiar (especialisimos) – which are peculiar to a specific
contract, such as the price in a contract of sale.
2. Natural – those which are derived from the nature of the contract and ordinarily
accompany the same, they are presumed by the law, they can be excluded by the
contract parties if they so desire.
3. Accidental – those which exist only when the p[arties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract.

Parties to a Contract
It is evident that the existence of two parties is also another essential element which is common
to all contracts and must, theref9re, be added to the requirement of consent, object certain and
cause.

A person cannot enter into a contract with himself. However, there are certain cases where a
juridical relation, known as an “Auto- contract”, may be created, there is only one party
involved but in reality, said party merely acts in the name and for the account of two distinct
contracting parties.

An Auto Contract may take place only in two (2) cases:

1. When a person, in his capacity as representative of another, contracts with himself, or

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 2. When as a representative of two different persons, he brings about a contract between
his principals by contracting with himself.

Characteristics of Contracts
The fundamental characteristics of contracts:
1. The obligatory force or character of contracts.
- Once a contract is perfected, it shall be of obligatory force upon both of the contracting
parties, not only to the fulfillment of what has been expressly stipulated., but also to all of
the consequences thereof.

2. The autonomy of contracts

- The contracting parties may establish such agreements as they may deem convenient,
provided that they are not contrary to law, morals, good customs, public order, or public
policy.

3. Mutuality of contracts or what amounts to the same thing.

- Refers to the position of essential equality that is occupied by both contracting parties in
relation to the contract, it must be binding upon both of the parties.
- The validity or compliance cannot be left to the will of one of them.

4. Relativity of contracts
- Contracts take effect only between the parties, their assigns and heirs.
- General rule, contracts cannot produce any effect upon third persons, in conformity with
the principle of res inter alios acta aliis negue nocet prodest. (a thing done between
others does not harm or benefit others).

“Breach of Contracts”
- As the failure, without legal reason, to comply with the terms of the contract.
- As the failure, without legal excuse, to perform any promise which forms the whole or
part of the contract.

Life of Contracts
First Stage: Generation
- As the preliminary or preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement of the parties.

Second Stage: Perfection

- The perfection or birth of the contract, when the parties come to agree on the terms of
the contract.

Third Stage: Consummation

- The death, which is the fulfillment or performance of the terms agreed upon in the
contract.

Classification of Contracts
According to their relation to other
contracts.
Preparatory
- which have for their object the
establishment of a condition in law

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 which is necessary as a
preliminary step towards the
celebration of another subsequent
contract
Principal
- which can subsist independently
from other contracts and whose
purpose can be fulfilled by
themselves.
Accessory
- which can exist only as
consequence of, or in relation
with, another prior contract.
According to their perfection
Consensual
- which are perfected by the mere
agreement of the parties
Real
- which require not only the consent
of the parties for their perfection
but also the delivery of the object
According to their form
Common or Informal
- which require no particular form
Special or Formal
- which require some particular form
According to their purpose
Transfer of Ownership
Conveyance of Use
Rendition of Service
According to their subject matter
Things
Services
According to the nature of the
vinculum which they produce
Unilateral
- which give rise to an obligation for
only one of the parties
Bilateral
- which give rise to reciprocal
obligations for both parties
According to their cause
Onerous
- which each of the parties aspires
to procure for himself a benefit
through the giving of an equivalent
or compensation
Gratuitous

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 - which one of the parties proposes
to give to the other a benefit
without any equivalent or
compensation
According to the risks involved
Commutative
- each of the parties acquires an
equivalent of his prestation and
such equivalent is pecuniarily
appreciable and already
determined from the moment
Aleatory
- where each of the parties has to
his account the acquisition of an
equivalent of his prestation, but
such equivalent, although
pecuniarily appreciable, is not yet
determined at the moment of the
celebration of the contract, since it
depends upon the happening of
an uncertain
According to their names or norms
regulating them
Nominate
- those which have their own
individuality and are regulated by
special provisions of law
Innominate
- which lack individuality and are
not regulated by special provisions
of law.
Art. 1306 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

This is this is the right of the contracting parties to establish any stipulation, clause, term or
condition as they deem convenient.

Limitations
The stipulations, clause,. Term, or condition established by the contracting parties must not be
contrary to:
1. Law
- The laws referred to are:
a. Those which are mandatory or prohibitive in character
b. Those which are expressive of fundamental principles of justice
c. Which impose essential requisites without which the contract cannot exist.

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 2. Morals
- The morals referred to are those principles which are incontrovertible and are universally
admitted and which have received social and practical recognition.
3. Good customs
- If a moral precept or custom is not recognized universally, but is sanctioned by the
practice of a certain community, then it shall be included within the scope or sphere of
good customs.
4. Public order
- Can only refer to the safety, as well as to the peace and order, of the country or of any
particular community.
5. Public policy
- A principle of law which holds that no person can lawfully do that which has a tendency
to be injurious to the public or against the public good.
- According to Justice Laurel: in order to declare a contract void as against public policy,
it. Must find that the contract as to the consideration or thing to be done, has a tendency
to injure the public, is against public good, or contravenes some established interests of
society or is inconsistent with sound policy and god morals, or tends clearly to
undermine the security of individual rights.

Restrain in Business Trade

With regard to contracts which tend top restrain business trade, the rule is now well established
that a contract in restraint of trade is valid provided that there is a limitation upon either time or
place.

A contract, however, which restrains a man from entering into a business or trade without either.
A limitation as to time or place is invalid.

In addition to the requirement that there must be a limitation as to time or place, it is also
required that the restraint must be reasonable necessary for the protection of the contracting
parties.

Compromise Agreement
“Compromise”
- Is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced.
- It is an agreement between 2 or more persons, for preventing or putting an end to a law
suit, adjust their difficulties by mutual consent in the manner which they agree on, which
every one of them prefers in the hope of gaining, balanced by the danger of losing.

Compromise Agreement is binding on the contracting parties and is expressly acknowledged as

a juridical agreement

The general rule is that a compromise has upon the parties the effect and authority of res
judicata. Even if the agreement has not been judicially approved.

The compromise agreement as a consensual contract became binding between the parties
upon its execution and not upon its court approval. It becomes the source of the rights and
obligations.

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In the case of National Commerical bank of Saudi Arabia v. Court of Appeals, the Court held
that to have the force of res judicate, the Compromise Agreement must be approved by final
order of the court, and must be based on real claims and actually agreed upon in good faith.

Nominate/ Innominate Contracts

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the
provisions of Titles I and II of this Book, by the rules governing the most analogous nominate
contracts, and by the customs of the place.

“Nominate Contracts”
- Those which have their own distinctive individuality and regulated by special provisions
of law. Such as:
a. Sales
b. Barter or Exchange
c. Lease
d. Partnership
e. Agency
f. Loan
g. Deposits
h. Aleatory Contracts
i. Compromise and Arbitration
j. Pledge, Mortgage, and Antichresis

“Innominate Contracts”
- Those which lack individuality and are not regulated by special provisions of law.
- There are four kinds:
a. Do ut des: I give that you give
b. Do ut facias: I give that you do
c. Facio ut des: I do that you give
d. Facio ut facis: I do that you do

Innominate Contracts shall be regulated by the stipulations of the parties, by the general
provisions or principles of obligations and contracts, by the rules governing the most analogous
nominate contracts and by the customs of the place. (Art. 1307)

Mutuality of Contracts

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.

Article 1309. 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.

Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case,
the courts shall decide what is equitable under the circumstances.

The law expressly or impliedly recognizes the following:

1. The validity or fulfillment of a contract cannot be left to the will of one of the contracting
parties.

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 What is prohibited by the law from being delegated to one of the contracting parties:
a. The power to determine whether or not the contract shall be valid
b. The power to determine whether or not the contract shall be fulfilled.
2. The validity or fulfillment may be left to the will of a third person. Whose decision shall
not be binding until it has been made known to each of the contracting parties.
3. The validity or fulfillment can be left to chance.

There are certain agreement which will in effect render the mutuality of contracts illusory
because one of the contracting parties is placed in a position of superiority with regard to the
determination of the validity or fulfillment of the contract, but it does not fall within the purview of
the prohibition. Such as:
1. Where the obligor promises to pay a certain amount which is not determined, but the
contract itself specifies the manner by which the amount may be determined by the
exercise of judgment and discretion of the obligor.
2. Where the fulfillment of the contract is left to the will of one of the contracting parties in
the negative form of rescission.

Relativity of Contracts

Article 1311. 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. The heir is not liable beyond the value of the
property he received from the decedent. If a 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.

A contract can only bind the parties who had entered into it or their successors who have
assumed their personality or their juridical position, and that, such contract can neither favor nor
prejudice a third person.

An assignment or transfer by a contracting party has the effect of subrogating the assignee to all
of the rights and obligations of the assignor.

It must be noted, that the monetary obligations that the decedent might have incur during his
lifetime cannot be transmitted to his heirs through successions. The heirs cannot be charged
directly with the payment of such obligations.

It is the estate or the mass of property left by the decedent, instead of the heirs directly, that
becomes vested and charged with his rights and obligations which survive after his death.

The general rule that an assignee or heir shall be bound by the terms of the contract is not
applicable if the rights and obligations arising from the contract are not transmissible, such as:
1. By their nature
- When the special or personal qualification of the obligor constitutes one of the principal
motives for the establishment of the contract.
2. By the stipulation of the parties

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 - When the contract expressly provides that the obligor shall perform an act by himself
and not through another.
3. By the provisions of law
- Those arising from a contract of partnership or of agency.

Effects of Contract on Third Persons

Four exceptional instances where a contract may produce effect either directly or indirectly on
third persons:

1. Where the contract contains a stipulation in favor of a third person

2. Where the third person comes into possession of the object of a contract creating a real
right
3. Where the contract is entered into in order to defraud a third persons
4. Where the third person induces a contracting party violate his contract.

Beneficial Stipulation
- A stipulation in a contract, clearly and deliberately conferred by the contracting parties as
a favor upon a third person, who must have accepted it before it could be revoked.
- he may demand its fulfillment provided that he communicated his acceptance to the
obligor before its revocation.

Kinds of beneficial stipulations:

a. Where the stipulation is intended for the sole benefit of the third person
b. Where an obligation is due from the promise to the third person which the former
seeks to discharge by means of such stipulation.

Requisites:
1. There must be a stipulation in favor if a third person
2. The stipulation musty 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
4. The third person must have communicated his acceptance to the obligor before its
revocation
5. Neither of the contracting parties bears the legal representative or authorization of the
third party.

Contracts Creating Real Rights

Article 1312. In contracts creating real rights, third persons who come into possession of the
object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the
Land Registration Laws.

“Real Right”
- Right belonging to a person over a specific thing, against whom such right may be
personally enforced.
- Enforceable against the whole world
- A third person who might come into the possession of the object of a contract creating a
real right will be bound by such right

Contracts in Fraud of Creditors

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Article 1313. Creditors are protected in cases of contracts intended to defraud them.

Although a third person cannot ask for the annulment of a contract, but if he is a creditor of one
of the contracting parties, and the contract was entered into with the intention of defrauding him,
he may ask for its rescission.

Interferences with Contractual Relations

Article 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party.
Any third person who induces another to violate his contract shall be liable for damages.

Requisites:
1. The existence of a valid contract
2. Knowledge on the part of the third person of the existence of the contract
3. Interference by the third person without legal justification or excuse

The malice which makes one liable for procuring a breach of contract is malice in its legal
sense, and whether a wrongdoer’s motive in interfering is to benefit himself or to gratify his spite
by working mischief to another is immaterial.

Perfection of Contracts

Article 1315. 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

“Perfecting of Contract”
- The moment in the life of a contract when there is finally a concurrence of the wills of the
contracting parties with respect to the object and the cause of the contract.
- Signifies the birth or appearance of the contract as an obligatory tie

General rule is that the perfection of a contract is produced by mere consent. There are certain
contracts, such as deposit, pledge and commodatum, which cannot be perfected until the
delivery of the object.

Contracts in Name of Another

Article 1317. No one may contract in the name of another without being authorized by the latter,
or unless he has by law a right to represent him. A contract entered into in the name of another
by one who has no authority or legal representation, or who has acted beyond his powers, shall
be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it
has been executed, before it is revoked by the other contracting party.

No person may enter into a contract in the name of another unless he has been duly authorized
by the latter, or unless he has by law a right to represent him.

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If he enters into a contract, although he has no authority or legal representation, or even if he
has such authority, if he has acted beyond the scope of his powers, the contract is
unenforceable.
Unenforceable Voidable
It cannot be sued it is binding, unless
upon or en forced, annulled by proper
unless they are action in court.
ratified by the
person in whose
behalf it has been
executed.
In the degree of In the degree of
defectiveness, defectiveness,
unenforceable voidable contracts
contract occupies are farther away
an intermediate from absolute
ground between a nullity than
voidable and void unenforceable
contract contracts.

ESSENTIAL REQUISITES OF
CONTRACTS

Article 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

The elements of a contract may either be:

1. Essential
- Those without which there can be no contract.
- It may either be:
a. Common Elements: those which are present in all contracts
b. Special Elements: those which are present only in certain contracts
c. Extraordinary Elements: those which are peculiar to a specific contract.
2. Natural
- Those which are derived from the very nature of the contract, and as a consequence,
ordinarily accompany the same, although they can be excluded by the contracting
parties if they so desire.
3. Accidental
- Those which exist only when the contracting parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract.

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The law imposes the essential elements, presumes the natural and authorizes the accidental.
Conversely, the will of the contracting parties conforms to the first, accepts or repudiates the
second and establishes the third.

Consent

Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause w Article 148. Article 148. w hich are to constitute the contract. The offer
must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.

Acceptance made by letter or telegram does not bind the offeror except from the time it came to
his knowledge. The contract, in such a case, is presumed to have been entered into in the place
where the offer was made.

“Consent”
- Merely means the agreement of wills.
- The concurrence of the wills of the contracting parties with respect to the object and the
cause which shall constitute the contract.

Requisites:
1. Consent must be manifested by the concurrence of the offer and the acceptance
2. The contracting parties must possess the necessary legal capacity
3. The consent must be intelligent, free, spontaneous, and real

Contracts are Perfected

It is perfected from the moment that there is a manifestation of the concurrence between the
offer and the acceptance with respect to the object and the cause which shall constitute the
contract.

If the acceptance is made by letter or telegram:

Art. 1319, par. 2 of Art. 54 of the

the Civil Code Code of
Commerce
General Rule: The Exception: The
contract is contract is
perfected from the perfected from the
moment that the moment an answer
offeror has is made accepting
knowledge of such the offer.
acceptance
Only applies to
purely commercial
contracts

Manifestation of Consent
Before there is consent, it is essential that it must be manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to constitute the contract.

SHELLA HANNAH J. SALIH 12

Once there manifestation, the stage of negotiation is terminated. The contract is finally
perfected.

Character of Offer and Acceptance

“Offer”
- May be defined as a proposal to make a contract.
- The offer must be certain or definite
- “willing to entertain” does not perfect a contract, since it is simply a position to deliberate
whether to perform or not to perform said act.

“Acceptance”
- the acceptance must also be certain or definite
- It has been held that stating “we are willing to accept” does not mean acceptance, but
simple a disposition to accept the offer in principle.
- To convert the offer into a contract, the acceptance must be absolute and must not
qualify the terms of the offer.
- It must be plain, unequivocal, unconditional and without variance of any sort from the
proposal.

“Qualified Acceptance”
- One that involves a new proposal, constitutes a counter-offer and is a rejection of the
original offer.
- According to ABS CBN Broadcasting Corp. v. Court of Appeals, When something is
desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of
the offer annuls the offer.

Complex Offers
If the offeror proposes to lease one part and to sell another part, acceptance of one by the
offeree would ordinarily result in a perfected contract. Unless, the offeror should have made one
offer dependent upon the other.

Acceptance by Letter or Telegram

When or at what precise moment would there be a meeting of the offer and the acceptance.

There are four theories to pin-point the exact moment of perfection:

1. Manifestation Theory
- The contract is perfected from the moment the acceptance is declared or made
2. Expedition Theory
- The contract is perfected from the moment the offeree transmits the notification of
acceptance to the offeror, as when the letter is placed in the mailbox
3. Reception Theory
- The contract is perfected from the moment that the notification of acceptance is in the
hand of the offeror in such a manner that he can, procure the knowledge or its contents
- Even if he is not able actually to acquire such knowledge by reason of absence,
sickness or some other cause.
4. Cognition Theory
- The contract is perfected from the moment the acceptance comes to the knowledge of
the offeror.

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According Art. 1319 of the Civil Code, acceptance made by letter or diagram does not bind the
offeror except from the time it came to his knowledge. It is presumed to have entered into in the
place where the offer was made. Therefore, we follow the Cognition Theory.

Constructive Knowledge
There must be a clear implication that such offeror must have read the contents of the letter or
telegram accepting his offer. Mere receipt of the letter or telegram is not sufficient.

Once it is established that the offeror has received the letter or telegram, there arises a
presumption that he has read the contents thereof.

But if he might not have been able to do so, such as when he was absent or incapacitated at the
time of the receipt of the letter or telegram, it is quite clear that he cannot be bound by the
acceptance.

It is however, different if, being able to do so, he refused to open the letter or telegram because
for some reason or other he has already changed his mind or he has already decided to revoke
his offer or proposal.

Withdrawal of Offer
The rule in this jurisdiction is that he may still withdraw his offer or proposal as long as he still
has no knowledge of the acceptance by the offeree. This is implied that he is not bound by the
acceptance except from the time it comes to his knowledge.

In the case of Laudico v Arias: “Mr. Arias wrote Mr. Laudio, withdrawing the offer, he had the
right to do so, inasmuch as he had not yet received notice of acceptance, and when the notice
of acceptance was received by Mr. Arias, it no longer had any effect, as the offer was not then
in existence, the same having already been withdrawn. Though both the offer and the
acceptance existed, they did not meet to give birth to a contract.”

Withdrawal of Acceptance
As far as the law is concerned, there is only one decisive moment to consider and that is the
moment when the offeror has knowledge of the acceptance made by the offeree.

At any time before that moment, the offeror is not bound by his offer, neither should the offeree
be bound by his acceptance.

Form of Acceptance

Article 1320. An acceptance may be express or implied.

The acceptance may be:

1. Express or,
2. Implied

The Court held that: not only is there an express and tacit consent which produces true
contracts, but there is also a presumptive consent which is the basis of quasi- contracts.

SHELLA HANNAH J. SALIH 14

Effect of Death, Civil Interdiction, Insanity or Insolvency

Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all
of which must be complied with.
Article 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him.
Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed

An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either
party before the offeror has knowledge of the acceptance by the offeree.

“Conveyed”
- The moment when the offeror has knowledge of the acceptance by the offeree

Period of Acceptance

Article 1324. When the offerer 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 something paid or promised.

As far as the right of the offeror to withdraw his offer or proposal is concerned:
The effect of an The effect of one
option which is which is founded
without upon a
consideration consideration
The offeror may The offeror cannot
withdraw his offer withdraw his offer.
by communicating
such withdrawal to
the offeree at
anytime before
acceptance

“Option”
- Bouvier defined an option as a contract in the following language: ‘A contract by virtue of
which A, in consideration of the payment of a certain sum to B, acquires the privilege of
buying from, or selling to B, certain securities or properties within a limited time at a
specified price.

Article 1325. Unless it appears otherwise, business advertisements of things for sale are not
definite offers, but mere invitations to make an offer.

Article 1326. Advertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears.

Legal Capacity of Contracting Parties

Article 1327. The following cannot give consent to a contract:

SHELLA HANNAH J. SALIH 15

(1) Unemancipated minors;
(2) Insane or demented persons, and
(3) deaf-mutes who do not know how to write.

the capacity of the contracting parties, is an indispensable requisite of consent.

Because the law incapacitates them to give their consent to a contract, the only way by which
any of those enumerated above can enter into a contract is to act through a parent or guardian.
If this requirement is not complied with, the result is a defective contract.

If only one of the contracting parties is incapacitated to give his consent, the contract is
voidable.

If both are incapacitated to give their consent, the contract is unenforceable.

Unemancipated Minors
They cannot give their consent to a contract.
However, if a minor is emancipated by marriage or by voluntary concession he shall have the
power to administer his property.

There are five exceptional cases where a contract entered into by unemancipated minor may
have all of the effects of a valid contract:

1. When it is entered into by a minor who misrepresent his age

2. When it involves the sale and delivery of necessaries to the minor
3. When it involves a natural obligation and such obligation is fulfilled voluntarily by the
minor
4. When it is a marriage settlement or donation propter nuptias
5. When it is a life, health or accident insurance taken on the life of the minor and the
beneficiary appointed is the minor’s estate, or the minor’s father, mother, husband wife,
child, brother, or sister.

Insane or Demented Persons

“Insane or Demented Persons”
- Any person, at the time of celebration of the contract, cannot understand the nature and
consequences of the act or transaction by reason of any cause affecting his intellectual
or sensitive faculties, whether permanent or temporary
- A contract entered into during a lucid interval is valid.
- The presumption of insanity, is only prima facie and may be rebutted by evidence.
- It was established that one of the contracting parties was suffering from monomania or
delusion of wealth believing himself to be very wealthy when as a matter of fact is nit, it
was held that such fact alone will not be sufficient to invalidate the contract.

Deaf-Mutes
- Deaf mute who knows how to write: perfectly valid
- Deaf mute who does not know how to write: either voidable or unenforceable, depending
upon whether one or both of the parties are incapacitated.

Other incapacitated persons

There are another who are also incapacitated to give their consent to a contract, such as:

SHELLA HANNAH J. SALIH 16

 1. married women of age specified by law
2. persons suffering from civil interdiction
3. incompetents who are under guardianship. Incompetent includes:
a. persons suffering from civil interdiction
b. hospitalized lepers
c. prodigals
d. deaf and dumb who are unable to read and write
e. those who are of unsound mind, even though they have lucid intervals
f. those by reason of age, weak mind, and other similar causes

A person is not incapacitated to enter into a contract merely because of advanced years or by
reason of physical infirmities, unless such age and infirmities impair his mental faculties to the
extent that he is unable to properly understand the provisions of said contract.

Disqualifications to Contract

Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell are voidable.

Article 1329. The incapacity declared in article 1327 is subject to the modifications determined
by law, and is understood to be without prejudice to special disqualifications established in the
laws

Art. 1329 refer to those who are prohibited from entering into a contract with certain persons
with regard to certain property under certain circumstances and not to those who are
incapacitated to give their consent to a contract.

Prohibition distinguished from Incapacity to contract

Incapacity Art. 1329

Prohibition
Restrains the Restrains the very
exercise of the right right itself
to contract
can still enter into a Absolutely
contract, but he disqualified from
must do so through entering into that
his parent or contract
guardian
Based upon Based upon public
subjective policy and mortality
circumstances of
certain persons
which compel the
law to suspend for
a definite or
indefinite period
their right to

SHELLA HANNAH J. SALIH 17

 contract.
Merely voidable void

Vices of Consent
Article 1330. A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable.

Vices of consent may be divided into two distinct groups:

1. Vices of the Will
a. Mistake
b. Violence
c. Intimidation
d. Undue Influence
e. Fraud
2. Vices of Declaration
- Comprehends all forms of simulated contracts

Requisites of Consent:
1. Intelligent
- Vitiated by mistake or error
2. Free
- Consent by violence, intimidation and undue influence
3. Spontaneous
- Consent by fraud
4. Real
- Vitiated by Simulation of contracts
In the absence of any of the first three requisites, the contract is voidable. In the absence of
the fourth requisite it may be either void ab initio or valid, whether the simulation is absolute
or relative.

Mistake

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the
thing which is the object of the contract, or to those conditions which have principally moved one
or both parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

“Mistake”
- Not only as the wrong conception of a thing, but also as the lack of knowledge with
respect to a thing.

Two kinds of mistakes:

Mistake of Fact Mistake of Law

SHELLA HANNAH J. SALIH 18

 When one or both When one or both
of the contracting of the contracting
parties believe that parties arrive at an
a fact exists when erroneous
in reality it does conclusion
not, or that such regarding the
fact does not exist interpretation of a
when in reality it question of law.
does.
It is only a mistake Mistake of law does
of fact which will not render the
vitiate consent thus contract voidable.
rendering the
contract voidable

Mistake of Fact
Different mistake of fact which vitiate consent:
1. Mistake as to object
a. Mistake as to the identity of the thing
b. Mistake as to the substance of the thing
c. Mistake as to the conditions of the thing
d. Mistake as to the quantity of the thing
2. Mistake as to person
- May refer either to the name or to the identity or to the qualification of a person.
- Mistake with regard to the name of one or both of the contracting parties will not
invalidate the contract.
- Requisites:
1. The mistake must be either with regard to the identity or with regard to the
qualification of one of the contracting parties
2. Such identity or qualification must have been the principal consideration for the
celebration of the contracts.
- This kind of mistakes occurs in obligations to do which require special qualifications of
the parties or which are based on confidence.2

Where a Party is Illiterate

Article 1332. When one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the contract must
show that the terms thereof have been fully explained to the former.

This provision is intended for the protection of a party to a contract who is at disadvantage due
to his illiteracy, ignorance, mental weakness or other handicap.

“Mistake”
- Should refer to the substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties enter into the contract.

“Fraud”

SHELLA HANNAH J. SALIH 19

 - Is present when through 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.

Mistake of Law

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract. (n)

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

General Rule: Mistake of law will not vitiate consent.

Exception: According Art. 1334, mutual error as to the effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.

Requisites:
1. Mistake must be with respect to the legal effect of an agreement
2. Mistake must be mutual
3. The real purpose of the parties must have been frustrated

Violence and Intimidation

Article 1335. There is violence when in order to wrest consent, serious or irresistible force is
employed. There is 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 his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne
in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal,
does not vitiate consent.

Article 1336. Violence or intimidation shall annul the obligation, although it may have been
employed by a third person who did not take part in the contract

Violence Intimidation
Prevents the Influences the
expression of the operation of the
will substituting It will, inhibiting it in
with a material act such a way that the
dictated by another expression thereof
is apparently that of
a person who has
freely given his
consent.
Physical Moral Compulsion
Compulsion
Requisites: Requisites:

SHELLA HANNAH J. SALIH 20

 1. Force 1. One of the
employed to contracting
wrest parties is
consent compelled
must be to give his
serious or consent by
irresistible a
2. It must be reasonable
the and well-
determining grounded
cause for fear of an
the party evil.
upon whom 2. The evil
it is must be
employed in imminent
entering into and grave
the contract 3. Evil must be
unjust
4. Evil must be
the
determining
cause for
the party
upon whom
it is
employed in
entering into
the contract.

Character of Intimidation
One of the contracting parties should be 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.

The threat or intimidation must be actual, serious and possible realization, and that the actor
can and still will carry out his threat.

Without any proof of direct acts showing the imminence and gravity of any injury, does not in
itself establish intimidation.

Degree of Intimidation
To determine the degree of the intimidation, the age, sex, and condition of the person shall be
borne in mind.

Just or Legal Threat

A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not
vitiate consent.

SHELLA HANNAH J. SALIH 21

Even if it can be established that the reason or motive of a party in entering into a contract was
the threat of the other to proceed against him through the courts, the contract would still be
perfectly valid and not voidable.

Even if the claim proves to be unfounded so long as the creditor who made the threat believed
that his right to do so.

Undue Influence

Article 1337. There is 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. The following
circumstances shall be considered: the confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial distress.

“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.
- Which substitutes the wishes of another for those of a part to the contract or that which
deprives he latter of his free agency.
- Influence obtained by persuasion or argument or by appeals to the affections is not
prohibited either in law or morals and is not obnoxious even in courts of equity.

Circumstances considered:
1. The confidential
2. Family
3. Spiritual
4. Other relations between the parties
5. The person unduly influenced is suffering from mental weakness or ignorant or in
financial distress.

Fraud

Article 1338. There is fraud when, 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.

“Fraud”
- Insidious words or machinations employed by one of the contracting parties in order to
induce the other to enter into a contract, without them, he would not have agreed to.

Fraud or dolo which is present or employed at the time of the birth or perfection of a contract,
may be subdivided into:
Dolo Causante Dolo Incidente
Deceptions or Deceptions or
misrepresentations misrepresentations
of a serious which are not
character employed serious in character

SHELLA HANNAH J. SALIH 22

 by one party and and without which
without which the the other party
other party would would still have
not have entered entred into the
into the contract. contract.

Serious in Not serious

character
It is the cause It is not the cause
which nduces the
party upon whom it
is employed in
entering into the
contract
Render the contract Render the party
voidable who employed it
liable for damages

Requisites:
1. Words or machinations must have been employed by one of the contracting parties
2. Words or machinations must have been serious
3. Words or machinations must have induced the other party to enter into the contract
4. Shoud not have been employed by both of the contracting parties or by third persons.

It is essential that such insidious words or machinations must be prior to or contemporaneous

with the birth or perfection of the contract

Failure to Disclose Facts

Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties
are bound by confidential relations, constitutes fraud.

When there is a duty to reveal them, as when the parties are bound by confidential relations,
constitutes fraud.

However, the innocent nondisclosure of a fact, when there is no duty to reveal it, does not
constitute fraud, such nondisclosure does not affect the formation of the contract or operate to
discharge the parties from their agreement.

Exaggerations in Trade

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know
the facts, are not in themselves fraudulent.

Expression of Opinion

Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert
and the other party has relied on the former's special knowledge.

SHELLA HANNAH J. SALIH 23

Misrepresentation by Third Persons

Article 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual

The fraud must be employed only by one of the contracting parties. It would be clearly unjust to
visit upon a contracting party the disastrous effects of nullity simply because the other
contracting party has indiscreetly reposed his confidence upon a third party.

The precept would not be applicable if the third person makes the misrepresentation with the
complicity or at least, with the knowledge, but without any objection, of the contracting party who
is favored.

Magnitude of Fraud

Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.

Article 1344. In order that fraud may make a contract voidable, it should be serious and should
not have been employed by both contracting parties. Incidental fraud only obliges the person
employing it to pay damages.

“Serious Character”
- Refers not to its influence, but to its importance or magnitude,
- The annulment of a contract cannot be invoked just because of the presence of minor or
common acts of fraud whose veracity could easily have been investigated.

If fraud is merely incidental in the sense that the party who is deceived would have agreed to
the contract even without it, his consent is not at affected.

Simulation of Contracts
Article 1345. Simulation of a contract may be absolute or relative. The former takes place when
the parties do not intend to be bound at all; the latter, when the parties conceal their true
agreement.

Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to law, morals,
good customs, public order or public policy binds the parties to their real agreement.

“Simulation of Contract”
- Vices of declaration

May be either:
a. Absolute
- There is colorable contract but it has no substance as the contracting parties do not
intend to be bound by the contract at all.
- The apparent contract is not really desired or intended to produce legal effects or in any
way alter te juridical situation of the parties.

b. Relative

SHELLA HANNAH J. SALIH 24

 - When the contracting parties state a false cause in the contract to conceal their true
agreement

An absolutely simulated contract is void, while a relatively simulated contract binds the parties
and the parties may recover from each other what they may have given under the contract.

The legal presumption is in favor of the validity of contracts.

Contracts of Adhesion
Its terms are prepared by only one party while the other party merely affixes his signature
signifying his adhesion thereto.

A contract of adhesion is just as binding as ordinary contracts. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres. He gives his consent.

Neither the law nor the courts will extricate a party from an unwise or undesirable contract
entered into ith all the required formalities and with full awareness of its consequences.

On numerous occasions, the Supreme Court has upheld the binding effects of such contracts.

Object of Contract
Object is the most indispensable in order to have at least the shadow of a contract. Without an
object there is nothing.

“Object of a Contract”
- May be defined as the thing, right, or service which si the subject matter of the obligation
which is created or established.

Article 1347. All things which are not outside the commerce of men, including future things, may
be the object of a contract. All rights which are not intransmissible may also be the object of
contracts. No contract may be entered into upon future inheritance except in cases expressly
authorized by law. All services which are not contrary to law, morals, good customs, public order
or public policy may likewise be the object of a contract.

Article 1348. Impossible things or services cannot be the object of contracts.

Article 1349. The object of every contract must be determinate as to its kind. 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.

General rule, all things or services may be the object of contracts.

Requisites:
1. The object should be within the commerce of men
- It should be susceptible of appropriation and transmissible from one person to another.
2. The object should be real or possible
- It should exist at the moment of the celebration of the contract, or it can exist
subsequently or in the future.
3. The object should be licit
- It should not be contrary to law, morals, good customs, public order or public policy.

SHELLA HANNAH J. SALIH 25

 4. The object should be determinate
- Possible of determination

The following cannot be the object of contracts:

1. Things which are outside the commerce of men
2. Intransmissible rights
3. Future inheritance
4. Services which are contrary to law, morals, good customs, public order or public policy
5. Impossible things or services
6. Objects which are not possible of determination as to their kind

It has been held that communal things, such as public plazas, sidewalks, streets, rivers,
fountains and other things for public use cannot be sold or leased.

If at the time the contract of sale is perfected, the thing which is the object of the contract has
been entirely lost, the contract shall be without any affect.

Future Things
it is a conditional contract if its efficacy should depend upon the future existence of the thing
it is an aleatory contract if one of the contracting parties should bear the risk that the thing will
never come into existence.

In case of doubt, it must be deemed to be conditional.

The prohibition enunciated in the second paragraph of art. 1347, is not absolute in character.
There are two exceptions:
1. Under art. 130 allows the future spouses to give or donate to each toehr in their
marriage settlement their future property to take effect upon the death of the donor
2. Under art. 1080 allows a person to make a partition oh his estate by an act inter vivos,
provided that the legitimate of compulsory heirs is not prejudiced.

Impossible Things or Services

Impossible things or services cannot be the object of contracts, otherwise the contract is void or
inexistent.

Absolute Relative
Impossibility Impossibility
Which arises from Which arises from
the very nature or the circumstances
essence of the act or qualifications of
or service itself, the obligor
renders the rendering him
contract void. incapable of
executing the act or
service, allows the
perfection of the
contract, although
the fulfillment
thereof is hardly
probable.

SHELLA HANNAH J. SALIH 26

Cause of Contracts.

Article 1350. 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; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the
benefactor.

Article 1351. The particular motives of the parties in entering into a contract are different from
the cause thereof.

“Cause”
- Is the why of the contract or the essential reason which moves the contracting parties to
enter into the contract.
- It is the immediate direct or most proximate reason which explains and justifies the
creation of an obligation through the will of the contracting parties.

Cause Object
The service or The thing which is
benefit which is given in
remunerated remuneration
The liberality of the The object is the
donor or benefactor thing which is given
or donated
Is the prestation or Is the thing or
promise of a thing service itself
or service by the
other
Cause Motives
Direct or most Indirect or remote
proximate reason reasons
of a contract
The objective or Psychological or
juridical reason of a purely personal
contract reasons
Cause is always Differ for each
the same contracting party
The legality or Legality or illegality
illegality will affect will not affect the
the existence or existence of the
validity of the contract.
contract
Motive becomes cause when it
predetermines the purpose of the
contract.

Moral Obligations

SHELLA HANNAH J. SALIH 27

Where the moral obligation arises wholly from ethical considerations, unconnected with any civil
obligation, it not demandable in aw, it cannot constitute a sufficient cause or consideration to
support an onerous contract

But where such moral os based upon a previous civil obligation which has already been barred
by the statute of limitations,it constitutes a sufficient cause or consideration to support the said
contract.

Remuneratory Contracts
Cause in remuneratory contracts is the service or benefit which is remunerated, is also one in
which one of the contracting parties remunerates or compensates the service or benefit
rendered or given by the other party.

Cause

Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.

Article 1353. The statement of a false cause in contracts shall render them void, if it should not
be proved that they were founded upon another cause which is true and lawful.

Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is
lawful, unless the debtor proves the contrary.

Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate
a contract, unless there has been fraud, mistake or undue influence.

Requisites of Cause:
1. the cause should be in existence at the time of the celebration of the contract
2. The cause should be licit or lawful
3. The cause should be true

If the contract has no cause, or even if it has, if the cause should be illicit or unlawful, it shall not
produce any effect whatsoever, or what amounts to the same thing, it is inexistent or void from
the beginning.
The same is true if the cause stated in the contract is false.

Effects of Lack of Cause

If the contract is not founded upon any cause, then it shall not produce any effect whatsoever.

According to Art. 1409, those contracts which are absolutely simulated or fictitious as well as
those whose cause did not exist at the time of the transaction shall be inexistent.

Even where the contract itself expressly states that the consideration fro the sale of a piece of
land is only one peso, it does not follow that the contract or sale is void or inexistent, the
contract may be voidable because of the inadequacy of the cause or consideration, but
certainly, it is not void.

According to Art. 1354, even if the cause is not stated in the contract, it is presumed that it
exists and is lawful, unless the debtor proves the contrary.

SHELLA HANNAH J. SALIH 28

Effect of Unlawful Cause
If a contract has an unlawful cause, it shall not produce any effect whatsoever, in other words it
is void from the very beginning.

Effect of False Cause

Statement of a false cause in contracts shall render them void.

If a contract is simulated, it does not necessarily follow that it is inexistent or void, provided, of
course that it can be established that it is, in reality, founded upon another cause which is true
and lawful.

FORMS OF CONTRACTS

Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and indispensable. In such
cases, the right of the parties stated in the following article cannot be exercised.

Whatever may be the form in which a contract may have entered into, the general rule is that it
shall be obligatory, provided all of the essential requisites for its validity are present.

It has been held that contracts of partnership, of agency, and of lease of services, although
executed verbally are obligatory as far as the contracting parties are concerned.

Verbal extrajudicial partition of property is valid and binding among the parties thereto. The
right of a partitioner or his successor in interest is merely a jus ad rem (personal), not a jus in re
(real).

Exceptions
Contracts as being obligatory regardless of the form in which they may have been entered into,
it does not include those contracts for which the law prescribed a certain from either for validity
or for enforceability.

Two exceptions:
1. When the law requires that the contract must be in a certain from in order to be valid
2. When the law requires that the contract must be in a certain form in order to be
enforceable.

Formalities for Validity

Certain contracts for which the law prescribes certain forms for their validity.

Classification of said contracts:

1. Those which must appear in writing
2. Those which must appear in apublic document
3. Those which must be registered

SHELLA HANNAH J. SALIH 29

Contracts which must appear in writing:
1. Donations of personal property whose value exceeds five thousand pesos.
- The donation and acceptance shall be made in writing
2. Sale of a piece of land or any interest therein through an agent
- The authority of the latter shall be in writing
3. Agreements regarding payment of interest in contracts of loan.
- No interest shall be due unless it has been expressly stipulated in writing
4. Anichresis
- The amount of the principal and of the interest shall be specified in writing.

Contracts which must appear in a public documents

1. Donations of Immovable Property
2. Partnerships where immovable property or real rights are contributed to the common
fund
- There must be an inventory of the immovable property or real rights, signed by the
partners, and attached to the public instrument.

Contracts which must be registered are as follows:

1. Chattel Mortgages
- Personal Property is recorded in the Chattel Mortgage Register
2. Sales or transfers of large cattle
- No sale or transfer of large cattle shall be valid unless it is duly registered and a
certificate of transfer is secured.

Forms of Contracts Required by Law

The forms required by law for the execution of certain contracts may be divided into:
1. Those which are necessary for the convenience of the contracting parties or for the
efficacy of the contract
2. Those which are necessary for the validity of the contract
3. Those which are necessary for the enforceability of the contracts.

Formalities of Efficacy

Article 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right may be exercised simultaneously
with the action upon the contract.

Article 1358. The following must appear in a public document:

(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 are 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;

SHELLA HANNAH J. SALIH 30

(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

There are certain contracts falling within the purview or scope of this rule, by reason of their
importance, should be executed in accordance with certain formalities, in order to insure their
efficacy and to protect the interests of the contracting parties as well as that of third persons.

The following principles:

1. Art. 1357 and 1358 do not require the execution of the contract in order to validate or
enforce it but only to insure its efficacy. After its existence has been admitted, the party
bound may be compelled to execute the necessary document.
2. Even where the contract has not been reduced to the required form, it is still valid and
binding. Both articles presuppose the existence of a contract.
3. From the moment one of the contracting parties invokes the provisions by means of
proper action, the effect is to place the existence of the contract in issue
4. Art. 1357 does not require that the action to compel the execution of the necessary
document must precede the action upon the contract.
5. Art. 1357 do not operate against the validity of the contract nor the validity of the acts
voluntarily performed by the parties for the fulfillment, yet the moment when any of the
contracting parties invokes said provision, it is evident that under them the execution of
the required document must precede the determination of the other obligations

REFORMATION OF INSTRUMENTS

Article 1359. When, there having been a meeting of the minds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the agreement, by reason
of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation
of the instrument to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.

When the true intention of the parties are not expressed in the instrument purporting to embody their
agreement by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask
for the reformation of the instrument so that such true intention may be expressed.

Requisites:
1. There must be a meeting of the minds of the contracting parties
2. Their true intention is not expressed in the instrument.
3. Such failure to express their true intention is due to mistake,fraud, inequitable conduct or
accident.

Where the complaint fails to allege that the instrument to be reformed does not express the real
agreement or intention of the parties, it is clear that no cause of action is stated theirein.

Action for the Action for the

SHELLA HANNAH J. SALIH 31

 reformation of an annulment of a
instrument contract
Presupposes a Based on a
perfectly valid defective contract in
contract in which which there has
there has already been no meeting of
been a meeting of the minds because
the minfs of the the consent has
contracting parties been vitiated.

Contracts of Adhesions

Article 1360. The principles of the general law on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the provisions of this Code.

Article 1361. When a mutual mistake of the parties causes the failure of the instrument to
disclose their real agreement, said instrument may be reformed.

Article 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a
way that the instrument does not show their true intention, the former may ask for the
reformation of the instrument.

Article 1363. When one party was mistaken and the other knew or believed that the instrument
did not state their real agreement, but concealed that fact from the former, the instrument may
be reformed.

Article 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the instrument be reformed.

Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.

Article 1366. There shall be no reformation in the following cases: (1) Simple donations inter
vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void.

Article 1367. When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.

Article 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.

Article 1369. The procedure for the reformation of instrument shall be governed by rules of court
to be promulgated by the Supreme Court.

“Contract of Adhesion”
- Which one of the parties imposes a readymade form of contract, which the other party
may accept or reject, but which the latter cannot modify.

SHELLA HANNAH J. SALIH 32

 - Is itself not an invalid agreement
- Binding as a mutually executed transaction.
- The one who adheres to the contract is in reality free to reject it entirely, if he adheres he
gives his consent.
- Not even an allegation of ignorance of a party excuses non-compliance.
- When one of the parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, metal weakness, tender age or other handicap, courts must be
vigilitant for his protection.

Contracts of Credit Cards

For the cardholder to be absolved from liability for unauthorized purchases made through his
lost or stolen card, two steps must be followed:
1. The cardholder must give written notice to the credit card company.
2. The crecit card company must notify its member establishment of such loss or theft, it
may only do upon receipt of a notice from the cardholder.

Prompt notice by the cardholder to the credit card company of the loss or theft of her card
should be enough to relive the former of any liability.

INTERPRETATION OF CONTRACTS

Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. If the words appear to be
contrary to the evident intention of the parties, the latter shall prevail over the former.

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered

The intention of the contracting parties should always prevail because their will has the force of
law between them.

If the terms of contracts are clear and leave no doubt as to the intention of the contracting
parties, the literal sense of its stipulations shall be followed, and if the words appear to be
contrary to the evident intention of the contracting parties, the intention shall prevail.

In the case of Philippine National Construction Corporation v. The Hon. CA et al. the Court held
that the contract between parties is the formal expression of the parties’ rights, duties and
obligations.

When the terms of an agreement have been reduced to writing, it is considered as containing all
the terms agreed upon and there can be, no evidence of such terms other than the contents of
the written agreement.

Judge Intention

Their contemporaneous and subsequent acts shall be principally considered. Without prejudice
to the consideration of other factors as fixed or determined by the other rules of interpretation.

SHELLA HANNAH J. SALIH 33

One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties
in relation to the transaction under consideration.

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.

Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of contracts

RESCISSIBLE CONTRACTS

Classes of Defective Contracts

There are four classes of defective contracts under present Civil Code. They are:
1. Rescissible Contracts
2. Voidable Contracts
3. Unenforceable Contracts
4. Void or Inexistent Contracts

As to Defect
Recissible Contracts
- There is damage or injury to either
to one of the contracting parties

Voidable Contracts

SHELLA HANNAH J. SALIH 34

 - There is vitiation of consent or legal
capacity of one of the contracting
parties.

Unenforceable Contracts
- The contract is entered into in
excess or without any authority or
does not comply with the Statute of
Frauds, or both contracting parties
are legally incapacitated

Void Contracts
- One or some of the essential
requisites of a valid contract are
lacking either in fact or in law

As to Effect
Recissible Contracts
- Considered vaid and enforceable
until they are rescinded by a
competent court

Voidable Contracts
- Considered valid and enforceable
until they are annulled by a
competent court

Unenforceable Contracts
- Cannot be enforced by a proper
action in court

Void Contracts
- Do not produce any legal effect

As to prescriptibility of action or defense

Recissible Contracts
- An action for recission may
prescribe

Voidable Contracts
- The action for annulment or the
defense of annullability may
prescribe

Unenforceable Contracts
- The corresponding action for
recovery, if there was total or partial
performance of the unenforceable
contract under Art. 1403 may

SHELLA HANNAH J. SALIH 35

 prescribe

Void Contracts
- The action for declaration of nullity
or inexistence or the defense of
nullity or inexistence does not
prescribed.

As to Susceptibility of Ratification
Recissible Contracts
- Not susceptible of ratification

Voidable Contracts
- Susceptible of ratification

Unenforceable Contracts
- Susceptible of ratification

Void Contracts
- Not susceptible of ratification

As to Who may Assail Contracts

Recissible Contracts
- May assailed not only by a
contracting party but even by a third
person who is prejudiced or
damaged by the contract

Voidable Contracts
- May be assailed only by a
contracting party

Unenforceable Contracts
- May be assailed only by a
contracting party

Void Contracts
- May be assailed not only by a
contracting party but even by a third
person whose interest is directly
affected.

As to How Contracts may be Assailed

Rescissible Contracts
- May be assailed directly only, and
not collaterally

Voidable Contracts

SHELLA HANNAH J. SALIH 36

 - May be assailed directly or
collaterally

Unenforceable Contracts
- May be assailed directly or
collaterally

Void Contracts
- May be assailed directly or
collaterally

Rescissible Contracts
Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

All of the essential requisites of a contract exist and the contract is valid, but by reason of injury
or damage to either of the contracting parties or to third persons, such as creditors, it may be
rescinded.

Before it is rescinded, a Rescissible contract is valid and legally effective. The only way by chich
it can be attacked is by means of a direct action for rescission based on any of the causes
expressly specified by law, hence it cannot be attacked collaterally.

Characteristics
1. Their defect consists in injury or damage eother to one of the contracting parties or to
third persons
2. Before rescission, they are calid and legally effective
3. They can be attacked directly only, and not collaterally
4. They can be attacked only either by a contracting party or by a third person who is
injured or defrauded
5. They are susceptible of convalidation only by prescription, not by ratification

“Rescission”
- Is a remedy granted by law to the contracting parties, and even to third person, to secure
the reparation of damages caused to them by a contract, even if the same should be
valid, by means of the restoration of things to their condition prior to the celebration of
the contract.

Rescission v. Resolution

Rescission Resolution
As to party who may institute action
May be instituted not only May be instituted
by the a party to the only by a party to
contract but even by a the contract.
third person
As to the causes
There are several causes the only ground
or grounds such as is failure of one of

SHELLA HANNAH J. SALIH 37

 lesion,fraud and other the parties to
expressly specified by comply with what
law is incumbent
upon him
As to powers of the courts
There is no power of the law expressly
courts to grant an declares that
extension of time for courts shall have
performance of the a discretionary
obligation so long as power to grant an
there is a ground for extension for
rescission performance
provided that
there is a just
cause
As to the contracts which may be
rescinded or resolved
Any contract, whether Only reciprocal
unliateral or reciprocal, contracts may be
may be rescinded resolved.

Article 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.

Article 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

Contracts in Behalf of Ward

Those which are entered into by guardians whenever the wards whom they represent suffer
lesion or damage by more than ¼ for the value of the things which are object thereof.

A judicial guardian entering into a contract with respect to the property of his ward must
ordinarility secure the approval of a competent court.

If the contract involves the sale or encumbrance of real property, judicial approval is
indispensable. If a guardian sells,mortgages or otherwise encumbers real property belonging to
his ward without judicial approval, the contract is unenforceable.

However, if he enters into a contract falling within the scope of his powers as guardians of the
person and property, or only of the property, of his ward, such as when the contract involves
acts of administration, express judicial approval is not necessary.

Contracts in Behalf of Absentees

SHELLA HANNAH J. SALIH 38

Such contracts are not Rescissible if they have been approved by the courts.

Since the powers and duties if a legal representative of an absentee are exactly the same as
those of a guardian.

Before it can be rescinded on the grounf of lesion, it is indispensable that the following
requisites must concur:
1. The contract must have been entered into by a guardian in behalf of an absentee
2. The ward or absentee must have suffered lesion of more than one fourth of the value of
the property which is the object of the contract
3. The contract must have been entered into without judicial approval
4. There must be no other legal means for obtaining reparatiing for the lesion
5. The person bringing be no other legal means for obtaining reparation for the lesion
6. The object of the contract must not be legally in the possession of a third person who did
not act in bad faith.

If the object is legally in the possession of a third person who did not act in bad faith, the remedy
available to the perso suffering the lesion is indemnification for damages.

Contracts In Fraud of Creditors

When the creditors cannot in any other manner collect the claims due them.

According to Art. 1177, one of the remedies available to the creditor after he has exhausted all
of the property in possession of the debtor is to impugn the acts which the latter may have done
to defraud him.

Requisites:
1. There must be a credit existing prior to the celebration of the contract.
2. There must be a fraud, or at least, the intent to commit fraud, or at least, the intent to
commit fraud to the prejudice of the creditor seeking the rescission
3. The creditor cannot in any other legal manner collect his credit
4. The object ofte contract must not be legally in the possession of a third person who did
not act in bad faith.

If the object is legally in the possession of a third person who did not act in bad faith, the remedy
available to proceed against the person causing the loss for damages.
Contracts Referring to Things under Litigation
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 authority.

The purpose is to secure the possible effectivity of a claim.

Contracts by Insolvent
In order that the payment can be rescinded, it is indispensable:
1. That is must have been made in a state of insolvency
2. That the obligation must have been one which the debtor could not be compelled to pay
at the time such payment was effected

“insolvency”

SHELLA HANNAH J. SALIH 39

 - It refers to the financial situation of the debtor by virtue of which it is impossible for him to
fulfill his obligations.
- Juridical declaration of insovelncy is not necessary.

According to Manresa, the obligations contemplated by this article comprehend not only those
with a term or which are subject to a suspensive condition, but even void and natural obligations
as well as those which are condoned or which have prescribed.

If the obligation with a period became due before the obligation to the creditor seeking the
rescission became due, then the latter cannot rescind the payment even if such payment was
effected before the expiration of the period

If the obligation with a period became due after the obligation to the creditor seeking the
rescission became due, then the latter can rescind the payment

Subsidiary Character of Action

Article 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.

It cannot be instituted except when the party suffering damage has no other legal means to obtain
reparation for the same.

Even where the fraud charged which is the ground for an action for rescission actually did exist,
where there is not legal allegation or evidence that the creditor has already exhausted all of legal
remedies to obtain reparation from the debtor, the action to rescind the sale made by said debtor is
not maintainable.

Parties Who May Institute Action

The action for rescission may be instituted by the following:
1. The person who is prejudiced
2. Their representatives
3. Their heirs
4. Their creditors by virtue of the subrogatory action

If it can be established that the decedent, during his lifetime, entered into a contract with another in
order to defraud him of his legitimate, in this case the compulsory heir does not have any right to
institute the action as a representative of the decendent, since the decedent himself does not have
the right.

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

In order the purpose of rescission may be realized the rescission does not necessarily have to
be total in character, it may also be partial. Rescission shall apply only to the extent necessary
to cover the damages caused.

Effect of Rescission in Case of Lesion

Article 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.

SHELLA HANNAH J. SALIH 40

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.

Applicable only to rescissoy actions on the grounf of lesion and not to rescissory actionson the
ground of fraud. Because in the latter there can be no obgliation on the part of the plaintiff
creditor to restore anything since he has not received anything.

Rescission is not possible, unless he who demands it can return whatever he may obliged to
restore.

Ex. Where a guardian alienates certain properties of a minor for P85,000 to a certain person,
and subsequently, the minor upon reaching the age of majority, brings an action for the
rescission of the contract on the ground of lesion,the effect if rescission is granted would be the
restoration of things to their condition prior to the celebration of the contract.

“fruits of the thing”

- Refer not only to natura, industrial, and civil frits but also to other accessions obtained by
the thing.
- As the obligation to restore the fruits is concerned , the rules on possession shall be
applied.

It has been held that as a condtion to the rescission of a contract of sale of a parcel of land, the
vendor must refund to the vendees an amount equal to the purchase price, plus the sum
expended by them in improving the land.

Rescission Upon Third Person

Two indispensable requisites which must concur in order that the acquisition of the thing which
constitutes the object of the contract by a third person shall defeat an action for rescission

Requisites:
1. The thing must be legally in the possession of the third person
2. That such third person must not have acted in bad faith.

When the object of the of the contract happens to be a movable property, the concurrence of
these requisites offers no difficulty bevause of the ptinciple that possession of movable property
acquired in good faith is equivalent to a title.

When it it s n immovable property, it is indispensable that the right of the third person must be
registered or recorded in the proper registry before we can say that the thing is legally in his
possession. Othewise, he ccanor be protected against the effecs of a judgment rendered in the
action for rescission.

Fraud
Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with
respect to contracts approved by the courts.

Article 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

SHELLA HANNAH J. SALIH 41

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. 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.
Article 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

Presumptions of Fraud
The law presumes that there is fraud of creditors in the following cases:
1. Alienations of property by gratuitous title if the debtor has not reserved sufficient property
to pay all of his debts contracted before such alienations.
2. Alienations of property by onerous title if made by a debtor against whom some
judgment had been rendered in any instance or some writ of attachment has been
issued.

Ex. Where the debtor alienated a certain property, which was his only attachable property, to his
son after judgment had been rendered against him and a writ of execution had been issues,
there is a presumption that such alienation is fraudulent .

Badges of Fraud
It is not indispensable that the creditor shall have to depend upon the two presumptions
established in Art. 1387 in order to prove the existence of fraud or the intention to defraud.

In determinin whether or not a certain conveyance is fraudulent the question in every case is
whether or not it is prejudicial to the right of the creditors.

The following circumstance are badges of fraud:

1. The fact that the cause or consideration of the conveyance is inadequate
2. A transfer made a by a debtor after suit has been begun and while it is pending against
him
3. A sale on credit by an insolvent debtor
4. Evidence of large indebtedness or complee insolvency
5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially
6. The transfer is made between father and son, when there are present others of the
above cirsumtances
7. The failure of the vendee to take exclusive possession of all the property.

But where the sale is founded on. Fictitious cause or consideratoion it would be futile for the
creditor to invoke its rescission since such action presupposes the existence of valid,not
inexistent, contract.

Acquisition by third person in good faith

If the property is acquired by a purchaser in good faith and for value, the acquisition as far as
the law is concerned is not fraudulent.

SHELLA HANNAH J. SALIH 42

The right of the purchaser over the property is legally superior to that of any other person eben
against as the creditor who is prejudiced by the conveyance,

The contract is not Rescissible.

Acquisition by third person in bad faith

If the property is acquired by one who is not a purchaser in good faith and for value, it is clear
that the contract or conveyance is Rescissible.
The creditor who is prejudiced can still proceed after the property.

If it should be impossible for the acquirer in back faith to return the property, he shall indemnify
the creditor seeking he rescission for damages suffered in account of the alienation.

If the reason for the impossibility of returning the property acquired in bad faith is a fortuitous
event, then there can be no liability of the acquirer.

Prescriptive Period
Article 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.

The action for rescission of a contract must be commenced within four years.

1. Under No. 1 of Art. 1391, the period must be counted from the time of the termination of
the incapacity of the ward
2. Under No.2, it must be counted from the time the domicile of the absentee is known
3. Under Nos. 3 &4 of Art. 1382, it must be counted from the time of the discover fo the
fraud.
In certain cases of contracts of sale, the prescriptive period is six months or even forty days,
counted from the day of delivery.

VOIDABLE CONTRACTS

“Voidable Contracts”
- Those in which all of the essential elemts for validity are present, although the elemtns of
cosent is vitiated either by lack of legal capacity of one of the contracting parties, or by
mistake, violence, intimidation,undue influence or fraud.
Once is it executed there are only two possible alternatives left tot the party who may invoke its
voidable character
1. Attack its validity
- Validity may be attacked either by:
a. directly by means of a proper action in court. (The action is called annulment)
b. indirectly by way of defense. (the defense is called annullability or relative nullity)
2. To convalidate it either by ratification or by prescription

Characteristics
Voidable C. possess the following charactersitics:

SHELLA HANNAH J. SALIH 43

 1. Their defect consists in the vitiation of consent
2. They are binding until they are annulled by a competent court
3. They are susceptible of convalidation by ratification or by prescription

Their defect or voidable character cannot be invoked by third persons.

Voidable Rescissible
The defect is The defect is
intrinsic. It consists external. It consists
of a vice which of damage or
vitiates consent prejudice
Voidable even if Not Rescissible if
there is not there no damage or
damage or prejudice
prejudice
Annullability is Rescissibility is
based on the law based on equity
Annulment is a Rescission is just a
sanction remedy
Susceptible of Not susceptible of
retification ratification
Annulment may be May be invoked by
invoked only by a a third person
contracting party

Contracts Which are Voidable

Article 1390. 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;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.

Whether a contract which the law considers as voidable has already been consummated or is
merely executory is immaterial; it can always be annulled by a proper action court.

Prescriptive Period
Article 1391. The action for annulment shall be brought within four years. This period shall
begin: In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And
when the action refers to contracts entered into by minors or other incapacitated persons, from
the time the guardianship ceases.

The action must be commend within a period of four years.

SHELLA HANNAH J. SALIH 44

 Incapacitated From the time the
persosn guardianship
ceases
Consent is vitiated The time such VIU
by ceases or
violence,intimidation, disappers
undue influence
(VIU)
Consent is vitiated The time of the
by misrake or fraud discovery of such
mistake or fraud.

Ratification

Article 1392. Ratification extinguishes the action to annul a voidable contract.

Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with 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.

Article 1394. Ratification may be effected by the guardian of the incapacitated person.

Article 1395. Ratification does not require the conformity of the contracting party who has no
right to bring the action for annulment.

Article 1396. Ratification cleanses the contract from all its defects from the moment it was
constituted.

“Ratification”
- As the act or means by virtue of which efficacy is given to a contract which suffers from a
vice of curable nullity.

Requisites:
1. Contract should be tainted with a vice which is susceptible of being cured
2. The confirmation should be effected by the person who is entitled to do so under the law
3. It should be effected with knowledge of the vice or defect of the contract
4. The cause of the nullity or defect should have already disappeared

Forms of Ratification
- It may be effected:
a. Expressly
 There is an express confirmation if,with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person
who has a right to invoke it should expressly declare his desire to
convalidate it, to renounce his right to annul the contract.
b. Tacitly
 The person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.

SHELLA HANNAH J. SALIH 45

Effects of Ratification
1. It extinguishes the action to annul the contract
2. It cleanses the contract of its defects from the moment it was constituted.

Who May Institute Action

Article 1397. The action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However, persons who are capable cannot allege the
incapacity of those with whom they contracted; nor can those who exerted intimidation,
violence, or undue influence, or employed fraud, or caused mistake base their action upon
these flaws of the contract.

Requisites:
1. The plaintiff must have an interest in the contract
- General rule: a third person cannot institute an action for its annulment
- Exception: he may exercise an action for annulment if he is prejudiced in his right with
respect to one of the contracting parties, and can show detriment which would positively
result to him from the contract in which he has no intervention.
-
2. The victim and not the party responsible for the vice must be the person who assert the
same

Annulment
Article 1398. An obligation having been annulled, the contracting parties shall restore to each
other the things which have been the subject matter of the contract, with their fruits, and the
price with its interest, except in cases provided by law. In obligations to render service, the value
thereof shall be the basis for damages.

Article 1399. 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
benefited by the thing or price received by him

If the contract has not yet been consummated, it is evident, although the Code does not
expreslly say so, that the contracying parties shall be releasd from the obligations arising
therefrom.

Obligation of Mutual Restitution

Obligation to give The parties shall

restore to each
other the things
which have been
the subject matter
of the contract, with
their fruits, and the
price with its
interest.
Oblogation to do There will have to
and not to do be an
apportionment of

SHELLA HANNAH J. SALIH 46

 damages based on
the value of such
prestation with
corresponding
interests.

If the defect of th contract consusts in the incapacity of one of the contracting parties, the
incapacitated person is not obliged to make any restitution except insofar as he has been
benefited by the thing or price received by him.

Art.1399 cannot be applied to thosecases where the incapacitated person can still retirn the
thing which he has received

Fi after attaining capacitu, it is established that he not only failed to ask for the annulment of the
contract but he also squandered that part of the consideration which remained, it is clear that
there is already an implied ratification or confirmation.

Lost of the thing due

Article 1400. Whenever the person obliged by the decree of annulment to return the thing can
not do so because it has been lost through his fault, he shall return the fruits received and the
value of the thing at the time of the loss, with interest from the same date.

Article 1401. 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. If the right of action is based upon the incapacity of any one of the contracting
parties, 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 plaintiff.

Article 1402. 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.

Due to the Fault of Defendant

When the person obliged by the decree of annulment to return the thing cannot do so because
eit has been lost through his fault, he shall retrun the fruits received and the value of the thing at
the time of the loss, with interest from the same date.

If the loss of the thing whcich constitutes the object of the contract through the fault of the party
against whom the action for annulment may be instituted shall not extinguish the action for
annulment, he can only be complled to pay the value instead of restoring the thing.

Due to the Fault of Plaintiff

The action for annulment shall be extinguished.
Three modes of extinguishing the action:
1. Prescription
2. Ratification
3. Loss of the thing through the faulr of the person who is entitled to institute the action.

SHELLA HANNAH J. SALIH 47

Whether the loss occurred during the plaintiff’s incapacity or after he had acquired capacity, the
action for annulment would still be extinguished in accordance with rule stated in first paragraph.

Due to Fortuitous Event

If the person obliged by the decree of annulment to return the thing cannot do so because it has
been lost through a fortuitous event, the contract can still be annulled. The defendant can be
held liable only for the value of thing at the time of the loss but without interest thereon.

If it is the plaintiff who cannot return the thing because it has been lost through a FE, the
contract may still be annulled, he must pay the defendant the valude of the thing, but without
interest.

If the plaintiff offers to pay the value of the thing at the time of its loss as a substitute for the
thing itself the annulment if the contract woud be still possible.

UNENFORCEABLE CONTRACTS

“Unenforceable Contracts”
- Those which cannot be enforced by a proper action in court, unless they are ratified,
they are enterd into without or in excess of authority or they do not comply with the
stature of frauds or both contracting parties do not possess the required legal capacity.

Classes of Unenforceable Contracts

1. Contracts entered into in the name of another person by one without any authority or in
excess of his authority
2. Those which do not comply with the Statute of Fraud
3. Those where both contracting parties are legally incapacitated

They are noe placed in the same category as contracts which do not comply with the Statute of
Frauds.

Characteristics:
1. They cannot be enforeced by a proper action in court
2. Suspceptible of retification
3. Cannot be assailed by third person

Unenforceable Rescissible
Contracts Contracts
Cannot be Can be enforced
enforeced by a unless it is
proer action court rescinded
Susceptible of Is not susceptible
ratification of ratification
Cannot be assailed May be assailed by
by third person third person
Unenforceable Voidable
Contracts Contracts

SHELLA HANNAH J. SALIH 48

 Cannot be enforced Can be enforced,
by a proper action unless it is annulled
in court

Article 1403. The following contracts are unenforceable, unless they are ratified:

(1) 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;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:

(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 debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) 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
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 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;
(e) An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
( f ) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Contracts Without or in Excess of Authority

1. No one may contract in the name of another without being authorized by the latter or
unless he has a right to represent him. If he is duly authorized, he must acr within the
scope of his powers.
2. A contract entered into the name of another by one who has no authority or legal
representation is unenforceable
3. Suc contract may be ratified, expressly or impliedly by the person in whose behalf it has
been executed, before it is revoked by other contracting party

Confirmation v. Recognition
Confirmation tends to cure a vice of nullity and ratification is for the purpose of giving authority
to a person who previously acted in the name of another without authority.

Recognition is merely to cure a defect of proof. The person acting on behalf of another os duly
authorized to do so.

Statute of Frauds

SHELLA HANNAH J. SALIH 49

The statute of frauds was enacted for the purpose of preventing frauds. The only formality
requires is that the contract or agreement must be in writing and subscribed by the party
charged or by his agent.

In case of noncompliance, the contract is unenforceable by action. It is therefore clear that the
form required is for evidential prupose only. Hence, if the parties permit a contract to be proved,
without any objection, it is then just as binding as if the statute has been complied with.

Classes of contracts which are covered by the Statute of Frauds:

1. An agreement that by its terms is not to be performed within a year from the making
thereof. This refers only to agreements whuch by their terms are not to be performed on
either side within a year from the execution thereof.
When in an oral contract, which by its terms is not to be performed within one tear from
the execution thereof, one of the contracting parties has already complied within the year
with the obligations imposed upon him, the other party cannot avoid the fulfillment of
those incumbent upon him.

2. A special promise to answer for th debt, default or miscarriage of another. It is well-

settles that a promise in order to fall under the statute must be collateral not independent
or original.

Perfomance of Contracts
The statute of frauds is only applicable only to those contracts which are executory anf not to
those which have been consummated either totally or partiall. In such case there is already a
ratification. There is acceptance of benefits

Ratification
Contracts infringing the statute of frauds are susceptible of ratification

Such constracts may be ratified either:

1. By the failure to object to the presentation of oral evidence to prove the same
2. By the acceptance of benefits under them

Both Parties are Incapacitated

If both parties are legally incapacitated the contract is unenforceable
If only one is incapacitated, the contract is voidable.
In the case of those entered into the name of another by one without or in excess of authority,
contracts where both parties are legally incapacitated may be ratified either expreslly or
impliedly. Such ratification may be effected by the parents or guardians.

The ratification by The ratification by

the parent or the parents or
guardian of one of guardians of both
the contracting parties or by both
parties or by of such
himself upon themselves upon
attaining capacity attaining capacity.

SHELLA HANNAH J. SALIH 50

 VOIDABLE VALID UPON ITS
INCEPTION

Article 1404. Unauthorized contracts are governed by article 1317 and the principles of agency
in Title X of this Book.

Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefit under them.

Article 1406. When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.

Article 1407. In a contract where both parties are incapable of giving consent, express or
implied ratification by the parent, or guardian, as the case may be, of one of the contracting
parties shall give the contract the same effect as if only one of them were incapacitated. If
ratification is made by the parents or guardians, as the case may be, of both contracting parties,
the contract shall be validated from the inception.

Article 1408. Unenforceable contracts cannot be assailed by third persons.

VOID OR UNEXISTENT
CONTRARCS CONTRACTS

“Void or Inexistent”
- As one which lacks absolutely either in fact or in law one or some of the elments which
are essential for its validity.
- The contract is void when:
a. If there is absolutely no consent,object or cause, or
b. if the formalities which are essential for validity are not complied with or
c. even if there is a cause and an object, if such cause or object is contrary to
law,morals, good customs,public order or public policy
d. the contract is expreslly prohibited or declared by law to be void.

VOID INEXISTENT
those where all of those where one or
the requisites of a some or all of those
contract are requisires which
present but the are essential for the
cause,object or validity of a
purpose is contrary contract are
to law,morals,good absolutelty lacking.
customs ,public
order or public Such as those
policy which are
absolutely

SHELLA HANNAH J. SALIH 51

 simulated or
fictitious or the
cause or object did
not exist at the time
of transaction.
Neither party may It is open to attack
be heard to invoke even by the parties
its unlawful
character as a
ground for relief.
May produce legal Cannot produce
effects any effect
whatsoever

VOID RESCISSIBLE
CONTRACTS CONTRACTS
Produces no effect Valid unless it is
even if it not set rescinded
aside by a direct
action
The defect consists The defect consists
in absolute lack in in lesion or damage
fact or in law of one to one of the
or some of the contracting parties
essential elemts of or to third persons
a contract
Nullity or The Rescissible
inexistence of the character is based
contract is based on equity
on the law
The action for the The action for
declaration of the rescission of a
nullity or contract is
inexistence of a prescriptible.
contract is
imprescriptible
The nullity cannot The Rescissible
be assailed by third
character may be
persons assailed by third
persons
VOID VOIDABLE
Produces as rule Binding, unless it is
no effect annulled
Not Susceptible of Susceptible of
ratification ratification
The defense of Defense of

SHELLA HANNAH J. SALIH 52

 inexistence or annulablity is not
absolute nullity is available to third
available to third persons
person whose
interests are
directly affected
VOID UNENFORCEABLE
There is in reality Thee is actually a
no contract at all contract which
cannot be enforced
by a court action,
unless it is ratified
Not susceptible of Susceptible of
ratification ratification
Can be assailed by Cannot be assailed
third persons by third persons
whose interests are
directly affected

CONTRACTS WHICH ARE VOID OR INEXISTENT

Article 1409. 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;
(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;
(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.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.

it must be observed, that Nos 1,4,5,6 and 7 refer to the contracts which are void, while the Nos
2 and 3 refer to contracts which are inexistent.

Charactersistics

(1) As a general rule, they produce no legal effects whatsoever in accordance with the
principle “quod nullum est nullum producit effectum.’’22

(2) They are not susceptible of ratification.23

(3) The right to set up the defense of inexistence or absolute nullity cannot be waived or
renounced.24

(4) The action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible.25

SHELLA HANNAH J. SALIH 53

(5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose
interests are not directly affected

Effects
As far as inexistent contracts are concerned, such contracts can produce no legal effect
whatsoever in accordance with the principle “quod nullum est nullum producit effectum.’

in the case of void contracts where the nullity proceeds from the illegality of the cause or
object, a certain qualification must be made. nullity of contracts due to illegal cause or
object, when executed (and not merely executory), will produce the effect of barring any
action by a guilty to recover what he has already given under the contract.

Art. 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.

Imprescriptibility of Action or Defense

Because of the fact that the defect of void or inexistent contracts is of a more or less
permanent character, mere lapse of time cannot give efficacy to such contracts.

This principle of impres- criptibility is applicable not only to the action for the declaration of
the inexistence or absolute nullity of the contract but also to the defense.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the price of
the contract.

This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply with
his promise.34

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other’s

undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the con- tract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.35

Principle of In Pari Delicto

SHELLA HANNAH J. SALIH 54

When the defect of a void contract consists in the illegality of the cause or object of the
contract, and both of the parties are at fault or in pari delicto, the law refuses them every
remedy and leaves them where they are

The rule is expressed in the maxims: “Ex dolo malo non oritur actio’’ and “In pari delicto
potior est conditio defendantis.’’ The law will not aid either party to an illegal agreement it
leaves them where they are. Of course, this presupposes that the fault of one party is more
or less equal or equivalent to the fault of the other party. 38

It must be observed, however, that the principle of in pari delicto applies only to cases of
existing contracts with an illegal cause or object and not to simulated or fictitious contracts
nor to those which are inexistent for lack of an essential requisite such as cause or
consideration

In other words, the principle can have no application to inexistent contracts, since such
contracts are always open to attack even by the parties thereto. But where the contract is
void because of the illegality of the cause or the object, the principle is applicable since the
Code in Arts. 1411 and 1412 commands that neither party thereto may be heard to invoke
its unlawful character as a ground for relief.4

Ex. Thus, if the plaintiff transfers to the defendant a parcel of land by means of a fictitious
deed of sale for the purpose of averting its attachment by his creditors, it is clear that the
principle, enunciated in Art. 1412 of the Civil Code is not applicable, since what is illegal is
the motive of the transferor and not the object or the cause of the contract. 43

Effect if only one party is at fault

When only one of the contracting parties is at fault, we must have to distinguish between a
case where the contract has already been executed and one where it is merely executory.

If the contract has already been executed, the guilty party is barred from recovering what
he has given to the other party by reason of the contract. The innocent party, however, may
demand for the return of what he has given

if the contract is merely executory, it is clear that it cannot produce any legal effect
whatsoever. Neither of the contracting parties can demand for the fulfillment of any
obligation arising from the contract nor be compelled to comply with such obligation

Exceptions:

(1) Payment of usurious interest. In such case, the law allows the debtor to recover the
interest paid in excess of that allowed by the usury laws, with interest thereon from the date
of payment.47

(2) Payment of money or delivery of property for an illegal purpose, where the party who
paid or delivered repudiates the contract before the purpose has been accomplished, or
before any damage has been caused to a third person. In such case, the courts may allow
such party to recover what he has paid or delivered, if the public interest will thus be
subserved.48

SHELLA HANNAH J. SALIH 55

(3) Payment of money or delivery of property by an incapacitated person. In such case, the
courts may allow such person to recover what he has paid or delivered, if the interest of
justice so demands.49

(4) Agreement or contract which is not illegal per se but is merely prohibited by law, and the
prohibition is designed for the protection of the plaintiff. In such case, such plaintiff, if public
policy is thereby enhanced, may recover what he has paid or delivered. 50

(5) Payment of any amount in excess of the maximum price of any article or commodity
fixed by law. In such case, the buyer may recover the excess. 51

(6) Contract whereby a laborer undertakes to work longer than the maximum number of
hours fixed by law. In such case, the laborer may demand for overtime pay. 52

(7) Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law.
In such case, the laborer may demand for the deficiency

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment. 54

Art. 1414. When money is paid or property 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. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.63

Art. 1415. When one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands, allow recovery of
money or property delivered by the incapacitated person.64

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and
the prohibition by the law is designed for the protection of the plaintiff, he may, if
public policy is

thereby enhanced, recover what he has paid or delivered

Art. 1417. When the price of any article or commodity is determined by statute, or
by authority of law, any person paying any amount in excess of the maximum
price allowed may recover such excess.79

Art. 1418. 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 time limit.80

Art. 1419. 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.81

SHELLA HANNAH J. SALIH 56

Art. 1420. In case of a divisible contract, if the illegal terms can be separated
from the legal ones, the latter may be enforced.82

Art. 1421. The defense of illegality of contracts is not available to third persons
whose interests are not directly affected.83

Art. 1422. A contract which is the direct result of a previous illegal contract, is
also void and inexistent.84

SHELLA HANNAH J. SALIH 57