CONTRACTS

Sources: The New Civil Code of the Philippines; commentaries by Paras, Suarez, and
Tolentino; reviewer published by Soriano; reviewers prepared by UP Law Bar-Ops Commis-
sion and Karichi Santos of UP Law B2012; and some personal inferences.

Definition according to the Civil Code of the Philippines: 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.

We can infer from the very definition of Contract that obligations would always naturally
exist upon the perfection of a contract. In short, when there is a contract, there will always
be an obligation but when there is obligation, there isn’t always a contract.

Elements of a Contract

1. Essential Elements – without these elements, there is no contract. A defect in any of

these elements causes a defect in the contract.
a. Consent of the parties – most important of all elements. This is the
meeting of minds between parties on the object and cause of the contract
b. Object – the subject matter of the contract
c. Cause – the essential and impelling reason why a party assumes an
obligation.
2. Accidental Elements – those that which exist only upon stipulations in the contract
(such as terms of payment, place of payment, conditions, etc.)
3. Natural Elements – those that even without stipulations, they exist (such as warranty
against hidden defects and warranty against eviction). However, parties can stipulate
waiver of such elements.

Classifications of Contracts

1. According to perfection or formation

a. Consensual – those perfected upon mere consent (such as sales)
b. Real – those perfected upon delivery of the object (such as depositum,
pledge, and commodatum)
c. Formal or Solemn – those that can only be valid through compliance with
the formalities of law (such as donation of a real property)
2. According to cause
a. Onerous – where there is exchange of valuable considerations
b. Gratuitous – where one party receives no equivalent consideration
c. Remuneratory – the cause is the service remunerated
3. According to dependence upon another contract
a. Principal – one that stand by itself
b. Accessory – one whose existence depends another contract known as the
principal contract (such as mortgage and pledge)
c. Preparatory – one which serves as a means in which other contracts may be
entered (such as agency and partnership)
4. According to parties obligated
a. Unilateral – those where only one of the parties are required to accomplish
the determinative conduct
b. Bilateral or synalagmatic – those where both parties are required to
accomplish their own determinative conducts
5. According to time or fulfillment
a. Executed – one which has already been performed
b. Executory – one that has not yet been performed
 6. According to the number of persons physically entering into the contract
a. Ordinary – where the two parties are represented by two different persons
b. Auto-contract – where the two parties are represented by only one person
(such as in agency where the agent lends money to his principal who he
represents as the borrower)

Stages of a Contract

1. Preparation or Conception – involves preliminary negotiations, discussion of terms

and conditions wherein agreement has not yet occurred.
2. Perfection or Birth – the point at which there is finally a meeting of minds between
parties as to the object and the valid cause.
3. Consummation or Death or Termination – the point at which the terms of the contract
have been fulfilled resulting in its accomplishment

Basic Principles of a Contract

1. Liberty of contract or freedom to stipulate – the parties have the liberty to contract
and stipulate. This is one of the liberties guaranteed by the laws of the land to the
people. However, this is subject to limitations as follows: law, public policy, good
customs, public order and morals.
2. Mutuality of contracts – the parties are both bound to one another. The validity or
compliance of the contract cannot be left to the will of one of them.
3. Relativity of contracts – contracts take effect only within the contracting parties, their
assigns and heirs, except where the rights and obligations are not transmissible.
4. Consensuality of contracts – contracts are usually perfected by mere consent of the
parties except if the contracts are real and formal/solemn.
5. Obligatory force of contract and compliance in good faith – all contracts have the
force of law between the contracting parties and should be complied with in good
faith.

ESSENTIAL REQUISITES OF CONTRACTS (expounded)

CONSENT

Consent is manifested by the meeting of the offer and the acceptance upon the object and
the cause which are to constitute the contract. In plain language, it is the meeting of
minds of both parties.

Consent has two parts: Offer and Acceptance. Upon communication of acceptance of one
of the parties towards the other, the contract is usually perfected.

What happens if… Answer

…the offer is vague? Will there still be a There wouldn’t be meeting of minds,
contract? therefore contract will not exist.

…a seller advertised his products to the
public? Is there already an offer?
At this point, offer does not exist yet.
Advertisements are mere invitations to
make an offer. However, if all details
needed are conveyed to the public,
advertisement becomes an offer.

…one of the parties dies, is civilly The offer becomes ineffective. Thus,
interdicted, insane or incapacitated
before acceptance is conveyed? What
happens to the offer?
…an offerer gives the offeree a certain
period of time to accept, can the offerer
withdraw the offer?
there is no contract.
Yes, as long as he communicates such
withdrawal before the acceptance has
been communicated.

…after the offerer has given the offeree a
certain period of time to accept, the
latter gives the former an option money,
can the offerer withdraw the offer?
No. Because, in effect, the offeree has
bought the time period given by the
offerer. The former is entitled to compel
the latter not to withdraw the offer until
the prescription of the period of time.
However, if the offeree failed to give the
option money, the offeror has the liberty
to withdraw the offer. It is as if there is no
such option contract. (Q: Using
inference, what kind of contract as
to perfection is an option contract?)

Major Rule on Consent

There is no consent until there has been agreement between two parties. Contract is
perfected upon the point at which acceptance is communicated to the offerer.

Example

May 31, 10:45 pm

Kent texts Karen: “Hoy Bakla, bilhin mo naman make-up ko from Avon, maganda na mura
pa. 15,000 pesos lang. Bukas, dalhin ko na.”

May 31, 10:46 pm

Karen receives Kent’s text message. She replies: “Sige, go! Pero, pwede 10,000 pesos na
lang?”

May 31, 10:48 pm

Kent receives text message. He takes his calculator and tried to compute his profit. He
shakes his head then sends back a message: “Hay naku gurl, mahal yan. Di basta-basta yan.
Gaganda ka lalo…”

May 31, 11:37 pm

Due to problems in signal, Karen receives text message at this late. She makes a reply:
“Pano ba ako nakakasigurong totoo yang sinasabi mo eh lalake ka?”

May 31, 11:50 pm

Kent thought for awhile. He remembers something, then makes a reply: “Alala mo ba
kahapon kung ano itsura ko?”

May 31, 11:51 pm

Karen: “Absent ka kahapon so pano ko malalaman?”

May 31, 11:53 pm

Kent: “Akala mo lang yun! Present ako no… ako yung naka-blue with stripes of white
kahapon…”

May 31, 11:55 pm

Karen: “Huh? Di mo naman kamukha si Piolo Pascual at di mo rin kamukha si Diether

Ocampo!”

May 31, 11:56 pm

Kent: “That’s the point! Linagay ko make-up from avon kaya on my left side, kamuka ko si
Diether at pagtingin mo sa kabila, kamuka ko na rin si Piolo!”

May 31, 11:57 pm

Karen: “May magic ang make-up mo???!!!”

May 31, 11:58 pm

Kent: “Ano pa ba sa tingin mo?”

May 31, 11:59 pm

Karen: “Sige, go! Bilhin ko na. Willing ako!”

June 1, 12:01 am

Kent receives Karen’s last text message and replies: “Okay.”

June 1, 12:03 am

Karen receives Kent’s last text message and finally rests her head on the bed and starts
sleeping.

Question: At what time was there a meeting of minds? At what time was there
perfection of the contract?

Answer

June 1, 12:01 am. Meeting of minds occurs at the moment the offeror receives the offeree’s
acceptance.

Capacity

Parties entering into a contract must have the legal capacity to do so. Reason: To protect
incapacitated persons from damages that may be caused by the other party.

Contracts entered into by incapacitated persons are VOIDABLE if only one of the contracting
persons is incapacitated and UNENFORCEABLE if both parties are incapacitated.
Who are the incapacitated persons?

1. Minors – those aged below 18 (RA 6805). Exceptions: (1) if the contract is entered into for
the purpose of acquiring necessaries; or (2) when the minor misrepresents his age (the
reason for this is to protect the other party from harm that may be caused by such
misrepresentation. However, if the other party knows such misrepresentation, contract
remains voidable).

2. Insane or demented persons, unless they contract during lucid interval.

3. Deaf-mutes who do not know how to read and write, unless guided by another person.

Vices of Consent

1. Mistake – inadvertent and inexcusable disregard of a circumstance material to the

contract (JBL Reyes). 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.

2. Intimidation – happens 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 (Art. 1335).

3. Violence – irresistible force used to extort consent (JBL Reyes)

4. Undue Influence – happens when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice (Art. 1337).

5. Fraud – happens 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 (Art. 1338).

Query: Is there Fraud in the following circumstances?

1. Offeror failed to disclose certain important facts to the offeree and the former has the
duty to reveal them.

2. Usual exaggerations in trade made by the seller and the other party had an opportunity to
know the facts.

3. Seller expresses an opinion and the buyer believes such opinion.

4. Expert expresses an opinion. A) the expert was hired by the seller; B) the expert was
hired by the buyer.

Simulation of Contracts: Declaration of a non-existent will producing the appearance of a

transaction that does not exist, or which is different from the one that actually arose.
(Reyes)

Kinds of Simulated Contracts

1. Absolutely Simulated Contract – contract which provides for a transaction that

does not exist. This contract is void.
 2. Relatively Simulated Contract – contract which provides for a transaction that
differs from the one that actually arose. True agreement is concealed for some
reasons. The validity and effects of this contract will be governed by the rules
applicable to the “intended” contract, and not by those applicable to the
“appearing” contract. However, if a 3rd person is benefited by the “appearing”
contract, it will be binding. This is, however, dependent on w/n the 3rd person is in
good faith.

Absolute Relative

No real transaction intended Real transaction is hidden

Fictitious contract Disguised contract

Void Bound as to hidden agreement, so long

as it does not prejudice a 3rd person and
is not contrary to law, morals, public
policy, customs or public order

OBJECT
Object is the thing, right or service which is the subject matter of the obligation arising
from the contract.

Requisites:

1. Lawful: Not contrary to law, morals, good customs, public order or public policy.
2. Actual or possible
3. Transmissible: within the commerce of man. Things that are outside the commerce
of man are those things that are not susceptible of appropriation or of private
ownership, and which are not transmissible. Examples: property that pertain to
public dominion such as roads and plazas; common things like the air and the sea.
4. At least determinate as to its kind. If the object is merely “something” or “an
animal,” the species is not determined, the contract would be void.

In order that a thing, right or service may be the object of a contract, it should be in
existence at the moment of the celebration of the contract, or at least, it can exist
subsequently or in the future.

A future thing may be the object of a contract, such contract may be interpreted as a:

• Conditional Contract: where its efficacy should depend upon the future existence of the
thing.
• Aleatory Contract: where one of the parties assumes the risk that the thing will never
come into existence, e.g. insurance.

Q: Can future inheritance be the object of a contract? It depends. If the object is a

specific property you are expecting to inherit from an ascendant, the sale is void. But if the
object is merely the future hereditary rights without specification of the properties, the sale
is valid because this is permitted by law (Art. 1630).

CAUSE

Cause is the impelling reason for which a party assumes an obligation

Requisites: (1) Existing; (2) Licit/Lawful; (3) True*.

Query: What is the cause and what is the object in a sale of land? Answer: It
depends on which perspective.

Party Cause Object

vendOR Cash (wants to profit) Land

vendEE Land (wants to acquire land) Land

According to Tolentino, the object in onerous contracts is the thing, service or act which
forms the basis of the entire contract, the starting point of the agreement, without which
the negotiations or bargaining between the parties would never even have begun.

Cause and Object in Other Types of Contract

Remuneratory Gratuitous

Definition It is a contract where a party gives Agreements to give something or to

something to another because of lend something.
some service or benefit given or
rendered by the latter to the
former, where such service or
benefit was not due as a legal
obligation. (Tolentino)*
Cause The service or benefit which is Mere liberality of the benefactor or
remunerated giver

Object Thing given in exchange for the Thing given (for donation) or thing
service or benefit lent (commodatum)

What is Motive? It is the psychological, individual and personal reason which induces a
party to enter into a contract.

Example: Jerelyn bought a piece of land from Daila because she wants that piece of land
used for constructing a vacation house (the land is located in Caramoan). The cause is the
piece of land she wants to own while the motive is Jerelyn’s desire to have a place for
relaxation.

Circumstance Defined Effect

Lack of Absence or total lack of cause Contract is null and void

Cause
Illegality of Contrary to law, morals, good Null and void
Cause customs, public policy and public
order
Falsity of Cause is stated but is untrue Void if it should NOT be proved that it
Cause was founded upon another cause
which was true and lawful.

Lesion or Cause is not proportionate to • Shall not invalidate the contract

Inadequacy object. except when there is fraud,
 of Cause mistake, or undue influence
May rescind the contract under some
instances(see rescissible contracts)

FORMS OF CONTRACTS

GENERAL RULE: Contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.

EXCEPTIONS

1. When the law requires that a contract be in some form to be valid. Such contract is
a formal contract.

a. Must be in public instrument to be valid:

i.donation of real property
ii.Contribution of immovable property by a partner in a partnership

b. Must be in writing:
i.Donation of personal property exceeding P5,000
ii.Authority of an agent in sale of land

2. When the law requires that contract be in some form to be enforceable. (Statute of
Frauds) Failure to abide by this provision does not render the contract void, it
merely renders the contract unenforceable.

a. Must be in writing to be enforceable:

ii.Agreement that by its terms is not to be performed within a year from
the making thereof
iii.Special promise to answer for the debt, default, or miscarriage of
another
iv.Agreement made in consideration of marriage, other than mutual
promise to marry
v.Sale of goods, chattels, or things in action, at a price not less than
P500.
vi.Leasing for a period more than one year.
vii.Sale of real property or of an interest therein
viii.Representation to the credit of a 3rd person

DEFECTIVE CONTRACTS

The following are defective contracts:

1. Rescissible Contracts – valid until rescinded. They are valid because there is no
defect in any of the essential requisites BUT the law allows a party to rescind (or
cancel) the contract because of the damage received by such party. This is based
on the EQUITABLE REASONS.
2. Voidable Contracts – valid until annulled. They are valid because the party
injured can ratify the contract but the law gives such party the right to annul the
same. These contracts are voidable because of a defect in the consent.
3. Unenforceable Contracts – valid but cannot be enforced unless ratified.
4. Void Contracts – void from the beginning.
RESCISSIBLE CONTRACTS

Rescissible contracts are entirely valid as to essential elements (consent, object and cause).
However, harm or damage is caused or being caused against a party (be it one of the
contracting parties or any 3rd party). For equitable reasons, the law gives the injured party
the right to rescind (cancel) the contract. In effect, the validity of this contract is set aside
for justifiable reasons of equity.

Kinds of Rescissible Contracts

1. Entered into by guardians whenever the wards suffer lesion by more than ¼ of
value of things

· Guardian: authorized only to “manage” ward’s property, no power to dispose

without prior approval of court. Only includes those which are “ordinary course” of
management of estate of the ward, because if sale, mortgage and other
encumbrance AND not approved by court, it becomes unenforceable.

2. Agreed upon in representation of absentee, suffer lesion by more than ¼ of the

value of things

· Absentee is a person who was lost for an indefinite period of time due to some
freak accident, natural calamities, wars, or any other reason that have caused him
to be absent for a period of time.
· This type of contract is usually entered into by a person other than the absentee
who has the right of representation but entered into such contract that caused
damage of more than ¼ of the value of the things. Example: Jerelyn was abducted
by aliens. She was absent for several years. Her wife (assume that gay marriage is
already legal) later gained the right of representation and then sold Jerelyn’s beach
resort for 75% below its appraised value. The sale of beach resort can be rescinded
by Jerelyn.

3. In fraud of creditors who cannot collect claims due them (Accion Pauliana)

· Requisites of Accion Pauliana

1. Plaintiff asking for rescission (subsidiary action) has a credit prior to the
alienation
2. Debtor has made subsequent contract, giving advantage to a 3rd person
3. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd
person (last resort)
4. Act being impugned is fraudulent
5. 3rd person who received the property is an accomplice in the fraud

Contracts entered by Contracts in Contracts entered

GUARDIANS representation of into to DEFRAUD
ABSENTEES existing creditors

Who can In general, by the injured By absentee By creditor(s)

rescind? party. But can be done
also by guardian ad tem
(new guardian) of ward
during incapacity of ward
in an action against the
original guardian.
 When? W/in 4 years from W/in 4 years from W/in 4 years from
(re)gaining capacity knowledge of knowledge of
domicile* of fraudulent contract
absentee
How to cure Ratification by injured Ratification by Ratification by
defect? party w/in 4 years from absentee w/in 4 defrauded creditor w/in
gaining capacity years from 4 years from knowledge
knowledge of
of fraudulent contract
domicile* of
absentee or
knowledge of
fraudulent contract

VOIDABLE CONTRACTS

Voidable contracts are existent, valid, and binding, although they can be annulled because
of want of capacity or vitiated consent of one of the parties; but before the annulment, they
are effective and obligatory between the parties. Hence, it is valid until it is set aside and its
validity may be assailed only in an action for that purpose (Llacer v Munoz, 12 Phil. 328).

Kinds of Voidable/Annullable Contracts (Although no damage to contracting parties):

1. Want of capacity
2. Vitiated consent (Violence, Intimidation, Fraud, Mistake or Undue

Characteristics of Voidable/Annullable Contracts:

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

NULLITY (Voidable) RESCISSION (Rescissible)

Declares inefficiency which contract already
carries
in itself (intrinsic defect)
Merely produces inefficiency, which did not
exist
essentially in the contract (external defect
i.e.
pecuniary damages or prejudice to one of
the
contracting parties or 3rd persons)

Requires act of ratification to be cured Needs no ratification to be effective

Based on a vice of the contract which Compatible with the perfect validity of the
invalidates it contract

Annulment is a sanction based on law Rescission is a remedy based on equity

Demanded only by the parties to the Demanded even by third parties affected by
contract it

Prescription of Action for Annulment – after prescription, contract can no longer be

annulled
Art 1391 - Within 4 years
Period shall begin:

1. Intimidation, violence or undue influence: from the time consensual defect ceases
2. Mistake or fraud: from the time of discovery of the same
3. Incapacity: from the time guardianship ceases

* Applies to the parties of to the contract, but NOT to third persons

Effects of Annulment:

1. Mutual restitution of the things delivered, along with fruits and price paid with
interest.
2. Damages to be paid by the party who caused defect of the contract.

UNENFORCEABLE CONTRACTS

Unenforceable contract is one which cannot be enforced unless it is first ratified in the
manner provided by law. It is distinguished from the rescissible and the annullable contracts
in that the latter two contracts produce legal effects unless they are set aside by a
competent court, while the unenforceable contract does not produce any effect unless it is
ratified.

Kinds of Unenforceable Contracts

1. Entered into in the name of another person by one who has no authority or no legal
representation OR acted beyond his powers

2. Do not comply with Statute of Frauds, which are agreements unenforceable unless in
written
memorandum and subscribed by the party charged:

i.Agreement that by its terms is not to be performed within a year from the making
thereof
ii.Special promise to answer for the debt, default, or miscarriage of another
iii.Agreement made in consideration of marriage, other than mutual promise to marry
iv.Sale of goods, chattels, or things in action, at a price not less than P500.
v.Leasing for a period more than one year.
vi.Sale of real property or of an interest therein
vii.Representation to the credit of a 3rd person

• If the contract has been executed, even partly, the contract’s status as unenforceable
ceases as execution is considered by law as a form of ratification.

3. Both parties are incapable of giving consent to contract

• Ratification can be done by either parties or their guardians.

• Ratification by one party (or its guardian) makes the contract voidable.
• Ratification made by both parties (or their guardians) makes the contract perfectly valid.

VOID CONTRACTS
A void contract is one which has no force and effect from the very beginning, as if it had
never been entered into, and which cannot be validated either by time or by ratification. The
maxim is “no contract at all.”
Characteristics of Void/Inexistent Contracts

1. Void from the beginning

2. Produces no effect whatsoever nullity exist ipso jure, judgment of nullity is merely
declaratory
3. Cannot be confirmed or validated (by prescription OR ratification), neither can the right to
set up
the defense of illegality be waived Art 1409

Action to Declare Nullity

– necessary because nobody can take the law into his own hands

DISTINCTIONS

VOID RESCISSIBLE

Defect is inherent in the contract itself Defect is in their effects, either to one of the
parties or to a 3rd party

Matter of law and public interest Based on equity and more a matter of
private interest

No legal effects even if no action is taken to No action, remains valid and produces all its
set it aside effects

Action to declare nullity of void contracts Action to rescind prescribes in 4 years

never
prescribes

VOID VOIDABLE

One of those essential requisites is wanting,
either in fact or in law or is declared void by
statute
Not susceptible of ratification
Essential requisites for validity is present,
BUT consent is vitiated
May be rendered perfectly valid by
ratification

Action to declare nullity of void contracts May be rendered perfectly valid by

never ratification
prescribes

VOID UNENFORCEABLE

Both are ineffective at its birth

Can never be ratified and become Can be ratified and thereafter enforced
enforceable
There is no contract at all There is a contract which, however, cannot
be enforced unless properly ratified

Examples of Void Contracts

• One whose cause, object or purpose is against law, morals, public policy, public order or
good customs.
• One whose cause is totally absent.
• One whose object is impossible or cannot be done.
• Absolutely-simulated contracts