CONTRACTS According to manner of perfection:

1. Consensual - that which is perfected by mere

DEFINITION, CLASSIFICATION, AND consent (e.g., sale)
DISTINCTIONS 2. Real - that which is perfected not by mere
consent but by the delivery of the object of the
DEFINITION:
contract (e.g., deposit, pledge)
A contract is a meeting of minds between two persons
According to name:
whereby one binds himself, with respect to the other, to
give something or to render some service. 1. Nominate - that which is distinguished by a
particular or special name in the Civil Code.
• The definition lays emphasis on the meeting of
2. Innominate Contracts - that which is recognized
minds between two contracting parties which
in the Civil Code, but they are not so named in
takes place when an offer by one party is
the said Code.
accepted by the other
Rules in Innominate Contracts:
Take note: A single person may create a contract by
Shall be regulated by:
himself where he represents distinct interests.
1. The stipulation of the parties
Examples:
2. Provisions of the Obligations and
• An agent who was authorized to borrow Contracts
money, may himself be the lender at the current 3. By the rules governing the most
rate of Interest. (Art. 1890.) analogous nominate contracts
• Guardians, executors, or administrators cannot 4. Customs of the place
acquire by purchase property of persons under According to obligations created:
their guardianship, or property of the estate
under their administration (Article 1491) 1. Bilateral - that which creates obligations on both
sides or on both parties.
2. Unilateral - that which creates obligations only
Contracts vs. Agreements on one side or only on one of the contracting
• Contracts are agreements enforceable through parties. (e.g., contract of commudatum)
legal proceedings/actions. Those agreements According to form/solemnity required:
which cannot be enforced by action in the
courts of justice or law are merely agreements. 1. Common - that which does not require any form.
(De Leon, 2010) 2. Special or solemn - that which requires certain
• An agreement to be a "contract" must be a formalities for its validity or enforceability
source of obligations (Article 1157).

Classifications of Contracts Characteristics of Contracts (MORA)

According to degree of dependence: 1. Obligatory force of Contracts

2. Autonomy of Contracts
1. Principal - that which can exist independently of 3. Mutuality of Contracts
other contracts 4. Relativity of Contracts
2. Accessory - that which cannot without a valid
principal contract (e.g., contract of guaranty) 1. Obligatory force of Contracts - Obligations
3. Preparatory - these are contracts which are a arising from contracts have the force of law
means for the execution of another contract between the contracting parties and should be
(e.g., contract of agency) complied with in good faith
Requisites: incur to prosecute a claim in the City of Cebu, he
would most probably decide not to file the
A. Contract must be perfected
action at all. The condition will thus defeat.
B. Contract must be valid
instead of enhance, the ends of justice.
C. Contract must be enforceable
• A student who had finished 3 ½ semesters in the
2. Autonomy of Contracts - The parties may
College of Law of the Arellano University
establish such stipulations, clauses, terms, and
transferred to another law school for his last
conditions as they may deem convenient,
semester. For the 3 ½ semesters he stayed at the
provided, they are not contrary to law, morals,
Arellano University, he enjoyed a scholarship:
good customs, public order, and public policy
hence, was not required to pay fees. When he
(Art. 1306.);
sought transfer and his transcript of grades, he
Examples of Void Stipulations was asked to reimburse all the scholarship
funds since, the agreement precisely provided
• The reason alleged by the plaintiff as a basis for for a refund in case of transfer.
the loan is untenable, to wit, that the defendant
was obliged to render service in his house as a The proviso is void, and contravenes both
servant without remuneration whatever and to morals and public policy. Scholarships should
remain therein so long as she had not paid he not be propaganda matter they are awards for
debt, inasmuch as this condition is contrary to merit. Hence, the student need not reimburse.
law and morality. Domestic services are always (Cui vs. Arellano University, 2 SCRA 205)
to be remunerated, and no agreement may
subsist in law in which it is stipulated that any 3. Mutuality of Contracts - The principle of
domestic service shall be absolutely gratuitous, mutuality of contracts is found in Article 1308 of
unless it be admitted that slavery may be the New Civil Code, which states that contracts
established in this country through a covenant must bind both contracting parties, and its
entered into between the interested parties. (De validity or compliance cannot be left to the will
los Reyes v. Alojado 16 Phil. 499) of one of them. The binding effect of any
agreement between parties to a contract is
• Sweet Lines, Inc. vs. Bernardo Teves (G.R. No. L- premised on two settled principles: (1) that any
37750. May 19, 1978) obligation arising from contract has the force of
CONDITION NO. 14: "It is hereby agreed and law between the parties; and (2) that there must
understood that any and all actions arising out of be mutuality between the parties based on their
the conditions and provisions of this ticket, essential equality. As such, any contract which
irrespective of where it is issued, shall be filed in appears to be heavily weighted in favor of one
the competent courts in the City of Cebu." of the parties so as to lead to an unconscionable
result is void.
RULING: Condition No. 14 is subversive of public “…any stipulation regarding the validity or
policy on transfers of venue of actions. For, compliance of the contract that is potestative or
although venue may be changed or transferred is left solely to the will of one of the parties is
from one province to another by agreement of invalid. This holds true not only as to the original
the parties in writing, such an agreement will not terms of the contract but also to its
be held valid where it practically negates the modifications. Consequently, any change in a
action of the claimants, such as the private contract must be made with the consent of the
respondents herein. The philosophy underlying contracting parties, and must be mutually
the provision on transfer of venue of actions is agreed upon. Otherwise, it has no binding
the convenience of the plaintiffs as well as his effect." (Security Bank vs. Spouses Mercardo;
witnesses and to promote the ends of justice. G.R. No. 192934, June 27, 2018)
Considering the expense and trouble a
passenger residing outside of Cebu City would
Security Bank vs. Spouses Mercardo; G.R. No. 192934, adheres to the contract is, in reality, free to
June 27, 2018 reject it entirely; if he adheres, he gives his
consent. (Norton Resources and Development
FACTS: Security Bank granted spouses Mercado a
Corporation vs. All Asia Bank; G.R. No. 162523;
revolving credit line in the amount of PI.000,000.00. The
November 25, 2009)
terms and conditions of the revolving credit line
• Ambiguities in contracts of adhesion must be
agreement included the following stipulations:
interpreted against the party that prepared
• "I hereby agree to pay Security Bank Corporation these contracts. (Geraldez vs. Court of Appeals
(SBC) interest on outstanding availments based 230 SCRA 320; 1994)
on annual rate computed and billed monthly by
DETERMINATION OF A THIRD PARTY
SBC on the basis of its prevailing monthly rate."
• "I hereby give my continuing consent without • The determination of the performance may be
need of additional confirmation to the interests left to a third person, whose decision shall not be
stipulated as computed by SBC." binding until it has been made known to both
1. First, the authority to change the interest rate contracting parties.
was given to Security Bank alone as the lender. • The decision, however, of the third person shall
without need of the written assent of the bind the parties only after it has been made
spouses Mercado. This unbridled discretion known to both of them.
given to Security Bank is evidenced by the clause • The determination shall not be obligatory if it is
"I hereby give my continuing consent without evidently inequitable. In such case, the courts
need of additional confirmation to the interests shall decide what is equitable under the
stipulated as computed by Security Bank." circumstances.
2. Second, the interest rate to be imposed is
determined solely by Security Bank for lack of a Example:
stated, valid reference rate. The reference rate • Dabby sold his parcel of land to Bounce. It was
of "Security Bank's prevailing lending rate" is not agreed that Geline, a real estate appraiser,
pegged on a market-based reference rate as would be the one to determine the reasonable
required by the BSP price of the land. Geline, then, fixed the price
after considering all the circumstances and
factors affecting the value of the land.
Contract of Adhesion • In this case, Geline must make known his
decision to Dabby and Bounce who will be bound
• DA contract of adhesion is defined as one in
by the same.
which one of the parties imposes a ready-made
form of contract, which the other party may
accept or reject, but which the latter cannot 4. Relativity of Contracts
modify.
Contracts take effect only between the parties, their
• One party prepares the stipulation in the
assigns and heirs. This means that only the parties, their
contract, while the other party merely affixes
assigns and heirs can have rights and obligations under
his signature or his "adhesion" thereto, giving
a contract.
no room for negotiation and depriving the latter
of the opportunity to bargain on equal footing. res inter alios acta aliis neque nocet prodes
(Norton Resources and Development
Corporation vs. All Asia Bank; G.R. No. 162523: "a thing done between others does not harm or
November 25, 2009) benefit others"

Reminders in Contract of Adhesion: "a matter between others is not our business"

• Contracts of adhesion are not invalid per se.

They are not entirely prohibited. The one who
EXAMPLE: contract. (Northern Motors, Inc. v. Prince Line, et
al., L-13884, Feb. 29, 1960).]
Dabby is indebted to Bounce in the amount of PI
Million. Dabby and Bounce are the parties to the Examples:
contract.
• An agreement was entered into by Banco de Oro
If Bounce dies, Dabby must pay the heirs of (bank) and Isetann Mall whereby Isetann Mall
Bounce. If Bounce assigns his credit to Camille, then shall honor validly issued the BDO's credit cards
Dabby is liable to pay Camille. presented by their corresponding holders (third
persons) in the purchase of goods and/ or
If Dabby dies and Ron is the heir, then Ron
services supplied by Isetann Mall.
assumes the obligation of Dabby to Bounce. (see Arts.
• The Manila Yellow Taxicab Co. obtained a
776, 781.) Ron is bound by the contract entered into by
common carrier accident insurance policy from
Dabby, his predecessor-in-interest, in view of the privity
the Fieldmen's Insurance Co. Under the terms of
of interest between him and Dabby
the policy, the Insurance agreed to indemnify
BUT Ron is not liable beyond the value of the property any fare-paying passenger (third person),
he inherits from Dabby, the decedent. (Art. 1311. par. including the authorized driver, driving the taxi
1.) at the time of the accident. In the event of death,
the personal representatives would be given the
indemnity. (Melecio Coquia, et al. v. Fieldmen's
EXCEPTIONS TO TRANSMISSIBILITY OF Ins. Co., Inc. L-23276, Nov. 29, 1968)
RIGHTS/OBLIGATIONS:

(a) by their nature (like a contract requiring or 2. Contracts creating real right
involving personal qualifications, as painting,
*Real right or right in rem (jus in re) is a right in
singing, etc.)
property, and is enforceable against the whole word.
(b) by stipulation in accordance with the principle of
freedom to contract): or EFFECT: Third persons who come into possession of
(c) by provision of law (as in agency, partnership, the object of a contract over which there is a real right,
and commodatum, when death extinguishes the such as a real estate mortgage, are bound thereby even
legal relationships) if they were not parties to the contract. A real right is
binding against the whole world and attaches to the
EXCEPTIONS TO THE PRINCIPLE OF RELATIVITY OF
property over which it is exercised wherever it goes.
CONTRACTS
3. Creditors are protected in cases of contracts
1. Stipulation pour autrui
intended to defraud them.
2. Contracts creating real right
• If Dabby gratuitously gives Ron a parcel
3. Creditors are protected in cases of contracts
of land, and Dabby has no other
intended to defraud them
property or cash left to satisfy his
4. Any third person who induces another to violate
creditors, said creditors may ask for the
his contract
rescission of the contract, to the extent
5. Accion Directa
that they have been prejudiced.
1. Stipulation pour autrui
Remedies of Creditors
• It is a stipulation in favor of a third person
1. exact payment or ask for specific performance
conferring a clear and deliberate favor upon him,
2. exhaust debtor's properties, generally by
and which stipulation is merely part of a contract
attachment (except properties exempted by the
entered into by the parties, neither of whom
law). (See Art. 2236, Civil Code)
acted as agent of the third person.
3. accion subrogatoria (subrogatory action) - i.e.,
• Such a stipulation is binding on said third person, exercise all rights and actions except those
although he may not be a signatory to the
inherent in the person (like parental authority,
 right to revoke donations on ground of
ingratitude, hold office, carry out an agency).
4. accion pauliana (impugn or rescind acts or
contracts done by the debtor to defraud the
creditors)

4. TORT INTERFERENCE

• Any third person who induces another

to violate his contract shall be liable for
damages to the other contracting party.

Example:

Super Tekla, a movie actress, has a one-year exclusive

contract with GMA-7. If an official of TV-5 a induces her,
without any justifiable cause, to break the contract, then
GMA-7 can sue the official for damages.

Elements of Tort Interference

(1) existence of a valid contract

(2) knowledge on the part of the third person of the
existence of contract
(3) interference of the third person is without legal
justification or excuse.

5. Accion Directa

If the sub-lessee misuses the property, the lessor

may directly bring an action against him
notwithstanding the fact that the sub-lessee is not a
party to the lease contract. BUT the sub-lessee cannot
sue the lessor directly, the suing of the lessor must be
done by the lessee.
Stages of Contracts EFFECTS OF A PERFECTED CONTRACT

A contract undergoes three distinct stages: The parties are bound to the contract and;

1. Negotiation/Preparation - Involves all the steps (1) to the fulfillment of what has been expressly
taken by the prospective parties from the time stipulated but also,
they manifest interest in entering into a contract, (2) to all the consequences which according to their
leading to the perfection of the contract. At this nature, may be in keeping with good faith, usage,
stage, the parties have not yet arrived at any and law.
definite agreement.
2. Perfection - the parties have come to a definite
agreement or meeting of the minds regarding REQUISITES/ELEMENTS OF CONTRACTS
the terms and cause of the (consensual)
contract. 1. Essential Elements - refers to the elements
3. Consummation - the parties have fulfilled or necessary for the very existence of contracts
performed their respective obligations or 2. Natural Elements - these elements are not
undertakings under the contract and the essential for the existence of a contract but they
contract may be said to have been fully are presumed to exist in certain contracts unless
accomplished or executed, resulting in the there is a stipulation to the contrary (e.g.,
extinguishment thereof. warranty in case of eviction in contract of sale)
3. Accidental Elements - these elements exist only
because the parties provide for them. (1306)
Perfection of Contracts:
ESSENTIAL ELEMENTS
1. Consensual Contracts - As a general rule,
contracts are perfected by mere consent of the There is no contract unless the following requisites
parties regarding the subject matter and the concur:
cause of the contract. They are obligatory in (1) Consent of the contracting parties;
whatever form they may have been entered into (2) Object certain which is the subject matter of the
provided, all the essential requisites for their contract;
validity are present. (3) Cause of the obligation which is established.
2. Real Contracts - Real contracts which are
perfected not merely by consent but by the
delivery, actual or constructive, of the object of FIRST ELEMENT: CONSENT
the obligation like in a pledge, mutuum (simple
loan) or commodatum. Consent is the conformity of wills and with respect to
3. Formal or Solemn Contracts - a special form is contracts, it is the agreement of the will of one
required or perfection (Example: A simple contracting party with that of another or others, upon
donation inter vivos of real property, to be valid the object and terms of the contract.
and perfected, must be in a public instrument.)
* It is the meeting of minds, i.e., the concurrence of offer
* A perfected loan contract is binding upon the parties and acceptance between the parties which expresses
and can give rise to an action for damages, but said their intent in entering into the contract respecting the
contract does not constitute the real contract of loan subject matter and the cause or consideration thereof.
which requires the delivery of the object of the contract
HOW IS CONSENT MANIFESTED?
for its perfection (see Art. 1934.) and which gives rise to
obligations only on the part of the borrower. (BPI Consent is manifested by the meeting of the
Investment Corp. vs. Court of Appeals, 377 SCRA I17 offer and the acceptance upon the thing and the cause
[2002]. which are to constitute the contract.
 REQUISITES OF CONSENT 3. By operation of law
• Lapse of time (when a time is stated and
1. There must be two or more parties
no acceptance was made)
2. The parties must be capable or capacitated
• Death, civil interdiction, insolvency of
(hence, if one party be insane, the contract is
either party
merely voidable).
• Supervening illegality of the contract
3. There must be no vitiation of consent.
• Destruction of the subject matter

COUNTER-OFFER:
What is an offer?
• Where the changes or qualifications in the offer
Offer is a proposal made by one party (offerer) to are not material or are mere clarifications of
another to enter into a contract. It is more than an what the parties had previously agreed upon
expression of desire or hope. It is really a promise to act (e.g., insertion of "per annum" after the word
or to refrain from acting on condition that the terms "interest") cannot be categorized as major
thereof are accepted by the person (offeree) to whom it alterations of the offer that will prevent a
is made. (De Leon,) meeting of the minds between the parties. (see
Villonco Realty Co. vs. Bormacheco, Inc., 65 SCRA
Requisites of a valid/effective offer:
350 [1975].)
1. The offeror must have serious intention to be
Acceptance of the offer:
bound by his offer;
2. The terms of the offer must be certain, definite "Acceptance" is the manifestation by the offeree of his
and complete; assent to the terms of the offer.
Meaning of "certain, definite, and complete"
A contract can come into existence by the mere • The acceptance of an offer must be absolute,
acceptance of the offer without any further act unconditional or unqualified that is, it must be
on the part of the offeror. identical in all respects with that of the offer so
3. The offer must be communicated to the offeree. as to produce the consent or meeting of the
minds necessary to perfect a contract.
Examples of a valid/effective offer:
EXAMPLE: Tekla offered to sell his Jaguar car to Willy for
• Will you buy this TV set for P25,000? "Php 10Million in cash" should Willy indicate his
• I am willing to sell my house for P20,000,000.00 acceptance on or before Christmas Day of 2020,
cash or for 12 monthly installments. otherwise Tekla would sell the same to others.
Examples of cases which are not considered offers under Willy sent a reply stating that: "Dear Tekla, I am very
the law: much Interested to buy and acquire your car in the same
price, manner, conditions and considerations other
1. Advertisement of things for sale - these are
buyers will offer."
merely invitations to make an offer (unless
expressly and clearly stated that it is an offer) THERE IS NO ACCEPTANCE OF THE OFFER.
2. Advertisement for bidders
3. Auction sales
How to Accept the Offer?
Termination of offer:
1. Form of Acceptance: either express or implied,
1. By the offeror - the offeror may revoke or
may be my words, acts, or conducts of a party
withdraw the offer prior to acceptance by the
recognizing the existence of a contract
offeree
2. Acceptance through an agent: If offer was made
2. By the offeree - by rejection of the offeree. One
through an agent, communication of acceptance
form of rejection is by making a counter-offer,
through the agent is valid. This means that when
which means simultaneously rejecting the
the offer was made through a channel or agency,
original offer and making of a new offer
 it is implied that acceptance through the channel EXAMPLE:
or agency is valid, unless otherwise stated.
Dabby offers to construct the building of Carlo
When Acceptance Binds the Offeror: for P5,000,000.00 giving Carlo one (1) month within
which to make up his mind. Under Article 1324, Dabby
• Contract is perfected only from the time an
may withdraw the offer even before the lapse of one-
acceptance is made known to the offeror.
month unless Carlo has already accepted the offer. After
(COGNITION THEORY)
acceptance, withdrawal is not possible as there is no
• If acceptance is transmitted by letter or more offer to withdraw. Even before acceptance, Dabby
telegram, the contract is perfected not from the may not withdraw the offer if the option is covered by
time the letter or telegram is sent but from the a consideration as when Carlo paid or promised to pay
time of the offeror's knowledge, actual or P500,000 to Dabby for giving him the 1-month period.
constructive, of the acceptance. There is here an option contract. After the 1 month-day
• CONSTRUCTIVE KNOWLEDGE: as when the period, in the absence of acceptance, the offer becomes
letter of acceptance has been received in the ineffective.
house of the offeror by a person possessed of
reasonable discernment Rule in Option Contract:

• An option contract needs to be supported by a

DECIDED CASE: (Laudico v.Arias 43 Phil. 270) separate consideration. The consideration need
not be monetary but could consist of other
FACTS: On Feb. 5, 1919, Arias wrote Laudico a letter, things or undertakings. However, if the
offering a lease contract. On Mar. 6, 1919. Laudico wrote consideration is not monetary, these must be
a letter of complete acceptance, which was received by things or undertakings of value, in view of the
Arias that same afternoon. But that same morning Arias onerous nature of the contract of option.
had already written Laudico a letter withdrawing the Furthermore, when a consideration for an option
offer. contract is not monetary, said consideration
There is no perfected contract, because prior to receipt must be clearly specified as such in the option
of the letter of acceptance, the offer had already been contract or clause. (Bible Baptist Church vs.
withdrawn. It does not matter that the letter of Court of Appeals, 2004)
withdrawal may have been received later by the offeree EARNEST MONEY vs. OPTION MONEY
than receipt of the letter of acceptance by the offerer.
What is important is that the letter of withdrawal was EARNEST MONEY OPTION MONEY
MADE prior to the knowledge of acceptance. 1. Part of the 1. Consideration for
purchase price the option
contract
"OPTION" CONTRACT 2. Earnest money is 2. Option money
given when there applies to a sale that
An option is a preparatory contract in which one
is already a sale is not yet perfected.
party grants to the other, for a fixed period and under
specified conditions, the power to decide whether or 3. When earnest 3. When option
not to enter into a principal contract. It binds the party money is given, money is given, the
who has given the option, not to enter into the principal the buyer is would-be buyer
contract with any other person during the period bound to pay the
designated, and, within that period, to enter into such balance.
contract with the one to whom the option was granted,
if the latter should decide to use the option. It is a
Essential Element of Consent: "Capacity to Give
separate agreement distinct from the contract which
Consent"
the parties may enter into upon the consummation of
the option. Rule: The parties to a contract must have the legal
capacity to give consent because the legal capacity of the
parties is an essential element for the existence of the *Lucid interval: period in which the insane person is
contract. restored to the use of his reason

Effect of "incapacity" *Monomania (excessive obsession on one thing) is not

considered insanity that will annul the contract
• If only one party has incapacity: voidable
(Standard Oil Company vs. Arenas, 19 Phil. 363)
• If both parties are incapacitated: unenforceable

Persons who are incapable of giving consent: (MISPC)

Civil Interdiction, Old Age and Illiteracy:
1. Minors
2. Insane or Demented Persons Civil Interdiction is an accessory penalty imposed upon
3. State of being deaf-mute (who does not know an accused who is imposed with a principal penalty not
how to write) lower than reclusion temporal (12 years and I day to 20
4. Persons suffering from civil interdiction years).
5. Incompetents under guardianship
Effects of Civil Interdiction:
Effect of Minority:
1. Parental Authority
Minority - state of a person who is under the age of legal 2. Marital Authority
majority (below 18) 3. Management of Property
4. Disposition of Property by any act inter vivos
CONTRACT: voidable

• Minor can annul the contract within four (4)

years from his attainment of the age of majority.
If not, barred already.
SECOND ELEMENT: “Object" of Contracts
• He may ratify the contract - upon reaching the
age of majority The object of every contract is the obligation
created. It may be said that the object of a contract is a
MISREPRESENTATION BY THE MINOR
thing or a service.
Active Misrepresentation: where the minor who
• The object may be things (as in sale of property),
entered into the contract have already passed the age of
rights (as in assignment of credit), or services (as
puberty and adolescence in such a way that they could
in agency).
misrepresent and actually did misrepresent themselves
as having reached the age of majority, they cannot annul Requisites of a Valid Object
the contract on the ground of minority inasmuch as they
(a) the thing or service must be within the
are already in estoppel. (Mercado vs. Espiritu 37 Phil.
commerce of man;
215)
(b) must be transmissible;
Insanity: (c) must not be contrary to law, morals, good
customs, public order, or public policy;
Insanity is a manifestation, in language or conduct, of
(d) must not be impossible (Art 1348, Civil Code);
disease or defect of the brain, or a more or less
(e) must be determinate as to its kind or
permanently diseased or disordered condition of the
determinable without the need of a new
mentality, functional or organic, and characterized by
contract or agreement.
perversion, inhibition, or disordered function of the
sensory or of the intellective faculties, or by impaired or "within the commerce of man"
disordered volition. (Engle vs. Doe, 47 Phil. 760)
• Things of public ownership such as sidewalks,
Effects of Insanity: public places, bridges, streets, etc., things that
are common to everybody such as air sunlight,
Contract is voidable except contracts entered into during
rain, etc. cannot be the object of contracts.
lucid interval.
"must be transmissible" Effect of a contract upon future inheritance

• All rights which are not intransmissible may be • A contract concerning future inheritance is void
the object of contracts. But strictly political rights and consequently, cannot be the source of any
(like the right to vote) or strictly personal rights right nor the creator of any obligation between
(like parental authority) cannot be the subject of the parties.
a contract.
THIRD ELEMENT: “Cause” of Contracts
"must be possible"
• Cause (or Consideration) is the “why f the
• Prohibited drugs and all illicit objects; to kill a contract, the essential reason which moves the
person, etc. (illicit things or services are also contracting parties to enter into the contract.
outside the commerce of men.); to get soil from • Cause is the essential reason which moves the
planet Mars; to construct a building in one day; contracting parties to enter into it. In other
etc. (De Leon) words, the cause is the immediate, direct and
proximate reason which justifies the creation of
“must be determinate or determinable"
an obligation through the will of the contracting
• The object must be determinate or determinable parties. (Uy vs. Court of Appeals, G.R. No. 120465
(without need of a new agreement). September 9, 1999)
• If the object is not determinate or determinable,
EXAMPLE: I bought a gun from a store for P50,000. The
the contract is void for want of an essential
cause of the contract is the gun (for the buyer) and the
requisite - the object of the contract.
money (for the seller).
Examples:
Cause vs. Motive
• Dabby sold to Albert the future (2021) harvest in
• The party's motives for entering into the contract
Dabby's field for a definite price, the contract is
do not affect the contract. However, when the
valid for there is no need of a new agreement.
motive predetermines the cause, the motive
• Dabby agreed to deliver one of his dogs to Jan. may be regarded as the cause.
Here, the object is determinable without the
• So, when the motive was not realized, it may
need of a new contract between the parties. It
negate the existence of a cause which will make
becomes determinate the moment it is
the contract "inexistent" (Uy vs. Court of
delivered.
Appeals, G.R. No 120465 September 9, 1999)

Example:
Contract upon future inheritance
• In a contract of sale of a piece of land, the cause
• Future inheritance is any property or right, not in of the vendor in entering into the contract is to
existence or capable of determination at the obtain the price. For the vendee, NHA, it is the
time of the contract, that a person may inherit in acquisition of the land. The motive of the NHA,
the future. (Blas vs Santos, I SCRA 899 [1961].) on the other hand, is to use said lands for
housing.
Requisites But the DENR declared the lands not
• The succession has not yet been opened at the suitable for housing projects.
time of the contract; • So, the motive of NHA was not realized. Hence,
• The object of the contract forms part of the it negates the existence of a cause which will
inheritance; and make the contract "inexistent" (Uy vs. Court of
• The promissor has, with respect to the object, an Appeals. G.R. No. 120465 September 9, 1999)
expectancy of a right which is purely hereditary
in nature.

XPN: Partition
Requisites of cause: EXCEPTIONS: The form, however, is required in the
following cases:
(1) It must exist at the time the contract is entered
into • FOR VALIDITY - when the law requires that a
(2) It must be lawful contract be in some form to be valid
(3) It must be true or real. • TO BE ENFORCEABLE - when the law requires
that a contract be in some form to be
Rules as to cause:
enforceable or proved in a certain way
• If there is no cause whatsoever, the contract is • FOR CONVENIENCE - when the law requires that
VOID. Thus, a fictitious sale is VOID. a contract be in some form for the convenience
Example: A contract of sale is null and void for of the parties or for the purpose of affecting third
being without cause where the purchase price, persons.
(which appears thereon as paid) has in fact never
FOR VALIDITY
been paid by the buyer to the seller
Examples:
• If the cause is unlawful, the transaction is null
1. Donation of real property. - It must be in a public
and void.
instrument (both donation and acceptance)
Example: A promise of marriage based on sexual
2. Donation of personal property the value of which
intercourse is based on an illegal cause. (Batarra
exceeds P5,000.00. - The donation and
v. Marcos, 7 Phil. 156).
acceptance must be in writing
3. Contract of partnership. - If immovables are
• Lesion or inadequacy of cause shall not
contributed, it must be in a public instrument to
invalidate a contract, unless there has been
which shall be attached a signed inventory of the
fraud, mistake or undue influence.
immovable property contributed
Example: Dabby sold to Robert for P700.00 a
4. Sale of land through an agent - The authority of
parcel of land with an area of over 18 hectares
the agent must be in writing: otherwise, the sale
and an assessed value of over P4,310.00. At the
is void.
time of the execution of the deed of sale, Dabby
was already 100 years old and very weak. As a FOR ENFORCEABILITY: certain agreements are required
matter of fact, he could not talk when his to be in writing so that they be enforced (Statute of
thumbmark was affixed to the said deed. Frauds)

Reason for the Statute of Frauds:

FORMS OF CONTRACTS "Since memory is many times unreliable, oral

agreements may sometimes result in injustice. To aid
General Rule: Contracts shall be obligatory, in whatever human memory, to prevent the commission of
form they may have been entered into, provided all the injustices due to faulty memory, to discourage
essential requisites for their validity are present. It is intentional misrepresentations, are the principal aims of
enough that there be consent subject matter, and cause. the Statute of Frauds."
This rule applies, however, to CONSENSUAL CONTRACTS
Cases Covered by Statute of Frauds:
• FORMAL CONTRACTS (SOLEMN CONTRACTS)
1. "An Agreement that by its terms is not to be
require a certain specified form, in addition to
performed within a year from the making
consent, subject matter and cause. (Example: A
thereof."
donation of real property must be in a public
Example: Dabby and Robert, neighbors, orally
instrument in order to be valid. even as between
agreed that Dabby would sell and Robert would
the parties.)
buy Dobby's car for P2Million three years from
• REAL CONTRACTS require DELIVERY to be valid
the date of the agreement. At the end of three
as a real contract even as between the parties, in
years. Dabby refused to hand over the car
addition to consent subject matter, and cause.
 although Robert was willing to pay. Is the FOR CONVENIENCE:
agreement enforceable under the Statute of
Formal requirements are, therefore, for the benefit of
Frauds? NO.
third parties for the purpose of informing as well as
binding them. Non-compliance therewith does not
2. "A special promise to answer for the debt,
adversely affect the validity of the contract nor the
default, or miscarriage of another"
contractual rights and obligations of the parties
Example: Dabby borrowed money from Robert,
thereunder.
with Cynthia as guarantor. The contract of
guaranty between Robert, the creditor, and
Cynthia, the guarantor, must be in writing to be
enforceable. REFORMATION OF INSTRUMENTS
Reformation Defined.
3. An agreement made in consideration of
marriage other than a mutual promise to marry." • Reformation is that remedy by means of which a
Example: Dabby agrees to build a house worth written instrument is amended or rectified so as
P500,000.00 for Shiela if Shiela will marry Dabby. to express or conform to the real agreement or
This must appear in writing to be enforceable intention of the parties when by reason of
unless Dabby ratifies the agreement. The Statute mistake, fraud, inequitable conduct, or
applies even when the promise to build the accident, the instrument fails to express such
house is made by a third person to Sheila. agreement or intention. (Rosello-Bentir v.
Leanda, G.R. No. 128991. April 12. 2000)
4. "An agreement for the sale of goods, chattels, or
things in action, at a price not less than five
hundred pesos unless there is partial Requisites of Reformation (National Irrigation
performance delivery or payment" Administration vs. Gamit: G.R. No. 85869; November 6,
Example: Dabby and Robert mutually promised 1992)
to buy and sell a cellphone at a price of (1) There is a meeting of the minds of the parties to
P4,000.00. This contract must be in writing to be the contract;
enforceable against either party unless there is (2) The written instrument does not express the
delivery or partial or full payment, in which case, true agreement or intention of the parties;
it is taken out of the operation of the Statute of (3) The failure to express the true intention is due to
Frauds and the contract may be enforced even if mistake, fraud, inequitable conduct, or
it was made orally. accident;

5. "Agreement for leasing for a longer period than

one year" “…Reformation of an instrument may be allowed if
Example: Robert agreed to lease his house to subsequent and contemporaneous acts of the parties
Edna for two (2) years. Again, this agreement show that their true intention was not accurately
must appear in writing to be enforceable unless reflected in the written instrument.” (Justice Leonen;
it is partially executed. Makati Tuscany vs. Multi-Reality Development
Corporation, Inc.: G.R. No. 185530: 18 April 2018)

• Article 1956, Civil Code. No interest shall be due

unless it has been expressly stipulated in writing. Example of Reformation

Dabby sold to Robert orally a house at "16 San Isidro,

• NOTE: These statutes are applicable only to Malate." In the written public document, both forgot the
executory contracts, not to partially or totally true number of the house and instead wrote on the
executed or performed contracts. contract "No. 18 San Isidro, Malate".
Reformation is not allowed in: holding, as the court hereby holds, that said contract
was a sale on installments, for such was the evident
• Simple donations inter vivos wherein no
intention of the parties in entering into said contract.
condition is imposed;
(Abella v. Gonzaga 56 Phil. 132)
• Wills;
• When the real agreement is void;
• When one of the parties has brought an action
Complementary-Contracts-Construed-Together Doctrine:
to enforce the instrument, he cannot
subsequently ask for its reformation. The provisions of an accessory contract must be
• In donation, the act is essentially gratuitous and read in its entirety and together with the principal
the done has, therefore, no just cause for contract between the parties. The provisions must be
complaint. construed together to arrive at their true meaning.
• If the real agreement is void, there is nothing to Certain stipulations cannot be segregated and then made
reform. Reformation would be useless because to control. The various stipulations of a contract shall be
the real agreement being void, it is interpreted together, attributing to the doubtful ones
unenforceable. that sense which may result from all of them taken
• When a party brings an action to enforce the jointly.
contract, he admits its validity and that it "...finds support in the principle that the surety
expresses the true intention of the parties. contract is merely an accessory contract and must be
interpreted with its principal contract, which ... was the
loan agreement."
INTERPRETATION OF CONTRACTS
• Interpretation of a contract is the determination
of the meaning of the terms or words used by the Other Rules in Contract Interpretation:
parties in their contract. It is a method by which
Rule 1: If there is an ambiguity in contracts of adhesion,
the meaning of language is ascertained.
the ambiguity should be interpreted against the party
who prepared it.
• Rule 1. If the terms of a contract are clear and
leave no doubt upon the intention of the Rule 2. If there are obscure words or stipulations in a
contracting parties, the literal meaning of its contract, interpret the obscure words against the party
stipulations shall control. who prepared the contract.

• Rule 2: If the words appear to be contrary to the Rule 3: The usage and custom of the place shall be borne
evident intention of the parties, the intention in mind in the interpretation of contracts.
shall prevail over the words of the contract.

• In order to judge the intention of the contracting DEFECTIVE CONTRACTS

parties, their contemporaneous and
1. Rescissible contracts - they are valid because all
subsequent acts shall be principally considered.
the essential requisites of a contract exist but by
reason of injury or damage to one of the parties
Example: or to third persons, such as creditors, the
contract may be rescinded.
Carlo and Harold entered into a so-called
2. Voidable contracts - In a voidable contract, the
contract of lease, whereby Carlo would pay certain
defect is caused by vice of consent
regular amounts as "rentals" and at the end of the
3. Unenforceable contracts - cannot be sued upon
"lease," Carlo would become the absolute owner of the
or enforced, unless it is ratified.
property, Is this really a lease or a sale in installments?
4. Void Contracts - is one that has no effect at all: it
Although in the contract, the usual words 'lease, lessee,
cannot be ratified or validated.
and 'lessor' were employed, that is not obstacle to
 1) There must be a creditor who became such
PRIOR to the contract sought to be rescinded
Rescissible contracts are those validly agreed upon
2) There must be an alienation made subsequent to
because all the essential elements exist and, therefore,
such credit.
legally effective, but in the cases established by law, the
3) The party alienating must be in BAD FAITH
remedy of rescission is granted in the interest of equity
4) There must be no other remedy for the
• Rescission is a remedy granted by law both to prejudiced creditor – “inability to collect the
contracting parties and to third persons in order claims due them.”
to secure reparation of damages caused them
by a contract, even if the contract be valid, by
PRESCRIPTIVE PERIOD: must be commenced within 4
means of the restoration of things to their
years
condition prior to the celebration of said
contract. • Ward: from the termination of the ward's
incapacity
RESCISSIBLE CONTRACTS UNDER 1381:
• Absentee: from the time his domicile is known
1. Those which are entered into by the guardians • Creditor: discovery that he has no other legal
whenever the wards whom they represent suffer remedy to pursue his claims against the debtor
lesion by more than one-fourth of the value of
the things which are the object thereof.
Other Rescissible Contract
• Example: Dabby is the guardian of Robert (ward).
Dabby sells the property of Robert worth • When the right of first refusal is violated
P20,000.00 for only P2,000.00. • Right of first refusal:

*If with court approval, the contract is valid regardless "...It is a settled principle in civil law that when a lease
of lesion. contract contains a right of first refusal, the lessor is
under a legal duty to the lessee not to sell to anybody at
any price until after he has made an offer to sell to the
latter at a certain price and the lessee has failed to accept
2. Those agreed upon in representation of
it. The lessee has a right that the lessor's first offer shall
absentees whenever the they whom they
be in his favor."
represent suffer lesion by more than one-fourth
of the value of the things which are the object
thereof.
Rescission (Resolution) under 1191:
XPN: *If with court approval, the contract is valid
regardless of lesion. • The right of rescission or more accurately,
resolution, of a party to an obligation under
• An absentee is a person who disappears from his Article 1191 is predicated on a breach of faith by
domicile, his whereabouts being unknown, and the other party that violates the reciprocity
without leaving an agent to administer his between them. (Uy vs. Court of Appeals. GR. No.
property. A court may appoint a person to 120465 September 9, 1999)
represent him specifying his powers and • This Article in speaking of "reciprocal ones"
obligations in accordance with the rules refers only to reciprocal obligations, that is, to
concerning guardians. obligations where two parties are reciprocally
obliged to do or give something. It is not enough
that both parties are indebted to each other. The
3. Those undertaken in fraud of creditors, when cause must be IDENTICAL and the obligations
the latter cannot in any other manner collect should arise simultaneously. (Paras, 2008)
claims due them ("Accion Pauliana")
FOR EXAMPLE: In a contract of sale of car, the delivery of Limitations on the right to ask for rescission:
the car sold by the seller is conditioned upon the
1. Rescission cannot be permitted for slight or
simultaneous payment of the purchase price by the
casual breach
buyer, and vice versa.
2. Rescission cannot be demanded by an injured
• The seller is the creditor as to the price and party who is not in a position to return what he
debtor as to the car, while the buyer is the had received
creditor as to the car and debtor as to the price. 3. Rescission cannot be granted when the object of
the contract is in the possession of a third person
EXAMPLE: Dabby borrowed P10,000.00 from Neptali
who has not acted in bad faith
under a contract of loan. Dabby, on the other hand, is
the owner of a place where Neptali deposits (for
safekeeping) his car. Neptali owes Dabby P5,000.00 for EFFECTS OF RECISSION IN 1191:
deposit fees.
"...When a decree for rescission is handed down, it is the
• There is no reciprocal obligation. Although they duty of the court to require both parties to surrender
are mutually bound, the cause does not arise that which they have respectively received and to place
from the same contract. One is the contract of each other as far as practicable in his original situation.
loan; the other is the contract of deposit. The The rescission has the effect of abrogating the contract
payment of P10, 000. 00 as a loan does not in all parts. Rescission has the effect of "unmaking a
depend on the payment of P5,000.00 as deposit contract, or its undoing from the beginning, and not
fees. merely its termination. Hence, rescission creates the
obligation to return the object of the contract. To
Alternative Remedies under Article 1191: rescind is to declare a contract void at its inception and
• the "injured party” has the right to choose to put an end to it as though it never was..." (Unlad
between rescission or fulfillment of the Resources vs Dragon G.R. NO. 149338: July 28, 2008)
obligation, with the right to claim damages in
either case.
• But if the injured party has chosen specific
performance, he may ask for rescission if
specific performance becomes impossible.
• If the injured party asked for rescission, he
cannot thereafter ask for specific performance.

RULE: "...this power must be invoked judicially; it

cannot be exercised solely on a party's own judgment
that the other has co mitted a breach of the obligation.
Where there is nothing in the contract empowering [a
party] to rescind it without resort to the courts, (such
party's] action in unilaterally terminating the contract x x VOIDABLE CONTRACTS:
x is unjustified..." (Ong vs. Bognalbal, G.R No. 149140,
September 12, 2006) • Voidable or annullable contracts are those which
possess all the essential requisites of a valid
XPN: "...Where there is a provision in the contract contract but one of the parties is legally
empowering a party to rescind it without resort to the incapable of giving consent, or consent is
courts, judicial permission to cancel is no longer vitiated by mistake, violence, intimidation,
necessary." (Subic Bay Metropolitan Authority v. undue influence, or fraud. (De Leon)
Universal International Group of Taiwan: GR No. 131680. • They are existent, valid and obligatory unless
September 14. 2000). annulled or set aside by a proper action in court,
i.e., an action instituted for that purpose.
GROUNDS: B. Violence
• Violence requires the employment of physical
1. Party is legally incapable of giving consent
force. It must be serious or irresistible. In either
(MISPC)
case, consent is not free. It is essential that the
2. Consent of one party is vitiated by mistake,
force employed must be the determining cause
violence, intimidation, undue influence, or fraud.
or reason for giving consent.

A. Mistake or error - Mistake or error is the false

C. Intimidation
notion of a thing or a fact material to the
(1) It must produce a reasonable and well-grounded
contract or, it is the false belief about
fear of an evil;
something. What is being referred to as mistake
(2) The evil must be imminent and grave;
is substantial mistake of fact, that is, the party
(3) The evil must be upon his person or property, or
would not have given his consent had he known
that of his spouse, descendants, or ascendants,
of the mistake. Hence, not every mistake will
(4) It is the reason why he enters into the
vitiate consent and make a contract voidable.
contract.
MISTAKE AS TO THE:
• Violence or intimidation shall annul the
• the object of the contract. (A person signed a
obligation, although it may have been employed
contract of sale thinking it was only a contract of by a third person who did not take part in the
loan).
contract.
• the conditions which principally moved or • The threat of a court action as a means to
induced one of the parties (A person desiring to
enforce a just or legal claim is justified and does
buy land consisting of 100 hectares discovers
not vitiate consent. It is a practice followed by
that the land has only 60 hectares). (Asian v.
creditors to demand payment of their accounts
Jalandani, 45 Phil. 296)
with the threat that upon failure to do so an
• identity or qualifications (error in personae), but action would be instituted in court. Such a threat
only if such was the principal cause of the is proper within the realm of the law as a means
contract. to enforce collection.
(Hiring of a pre-bar reviewer, a particular singer
for a concert, contracts involving partnership,
agency, deposit, since these require trust and
D. Undue Influence
confidence.)
• There is undue influence when a person takes
MISTAKE OF LAW improper advantage of his power over the will of
another, depriving the latter of a reasonable
General Rule: not a ground
freedom of choice.
XPN: Mutual error as to the legal effect of an agreement • The influence must be undue or improper (Art.
when the real purpose of the parties Is frustrated, may 1337.) to avoid a contract. Mere general or
vitiate consent reasonable influence is not sufficient. If gained
by kindness and affection or argument and
• Example: Dabby borrows P10,000.00 from Albie. persuasion, the influence will not vitiate consent.
As security for the debt, it was agreed that Dabby (De Leon)
should mortgage his parcel of land in favor of Dabby, an uneducated man, is in need of
Albie. They signed a contract of antichresis, the P500,000.00 to pay the hospital bill of his son,
parties erroneously believing that it has the who is the intensive care unit (ICU). Dabby tried
same effect as a mortgage. to borrow from Edna but instead of letting Dabby
• The contract of antichresis is voidable borrow money, Edna tells Dabby to sell his land
to her for only a small amount. Dabby has
nobody to turn to for assistance. If Dabby does
 not want to sell the land but he is compelled to representation of Dabby, the sale may be
sell it because of his financial condition, the sale annulled on the ground of fraud.
may be avoided on the ground of undue • Dabby sold to Robert a parcel of land
influence. representing that the same was “absolutely free
of all liens and encumbrances.” Robert gave his
consent on the faith of Dabby's representation.
E. Fraud (DOLO CAUSANTE) When the sale was registered. It was found that
• There is fraud when, through insidious words or a lis pendens notice was annotated on the title to
machinations of one of the contracting parties, the land.
the other is induced to enter into a contract
Rules in Fraud:
which without them, he would not have agreed
to. • The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are
**Causal fraud or dolo causante is the fraud employed
not in themselves fraudulent.
by one party prior to or simultaneous with the creation
• A mere expression of an opinion does not signify
of the contract to secure the consent of the other. It is
fraud, unless made by an expert and the other
the fraud used by a party to induce the other to enter
party has relied on the former's special
into a contract without which the latter would not have
knowledge.
agreed to, taking into account the circumstances of the
case. Example: Dabby, on buying a ring, was assured by the
seller that it was a good ring, in the opinion of the seller.
• "insidious words or machinations” include false
This is a mere expression of opinion that is not
promises, exaggerated expectations or benefits,
fraudulent. But if the seller was an expert, and the only
abuse of confidence, fictitious names, qualities,
reason why Dabby bought the ring was this opinion of
or power
the seller, the contract is voidable on the ground of
• Causal fraud may also be committed by means of
fraud.
concealing or omitting to state material facts.
when there is a special duty to disclose the same, REASON: The opinion of the expert is considered a FACT
with intent to deceive, by reason of which
WHEN TO FILE ACTION FOR ANNULMENT OF VOIDABLE
concealment or omission, the other party was
CONTRACTS
induced to give a consent which he would not
otherwise have given. 4 (FOUR) YEARS FROM
Examples: • In cases of intimidation, violence or undue
influence, from the time the defect of the
• Dabby wanted to have himself insured, but
consent ceases.
because he was afraid, he could not pass the
• In case of mistake or fraud, from the time of the
medical examination, he had Robert (another
discovery of the same.
person) examined in his place. Here the contract
of insurance is voidable. (Eguaras v. Great • In the case of contracts entered into by minors
Eastern Life Assurance Co., 33 Phil. 263). or other incapacitated persons from the time
the guardianship ceases.
• Misrepresentation by the vendor of the
boundaries of his land by showing valuable
properties not really included in his title. (Gomez WHO MAY FILE ACTION FOR ANNULMENT OF VOIDABLE
Marino v. Linton, 45 Phil 652). CONTRACTS
Examples: • The victim (principal or subsidiary party) may ask
for annulment, not the guilty person or his
• Dabby offered to sell to Robert a ring claiming
successor,
that the stone on the ring is diamond, and Dabby
knows that it is not diamond but ordinary glass.
If Robert buys the ring, relying on the truth of the
Example: A minor contracted with Dobby. Dobby's heir • Minor A and Minor B entered into a contract of
sues for annulment on the ground that the other party sale.
was a minor.
Rules in enforceable contracts:
**Annulment cannot prosper because Dabby and his heir
are capacitated parties. • Where both parties to a contract are incapable
of giving consent, the contract is unenforceable.
However, if the parent or guardian, as the case
may be, of either party, or if one of the parties
RATIFICATION OF A VOIDABLE CONTRACT
after attaining or regaining capacity, ratifies the
• Ratification means that one under no disability contract, it becomes voidable. (see Arts. 1390,
voluntarily adopts and gives sanction to some 1394.)
defective or unauthorized contract, act, or • If the ratification is made by the parents or
proceeding which, without his subsequent guardians, as the case may be, of both
sanction or consent, would not be binding or contracting parties, or by both contracting
him. parties after attaining or regaining capacity, the
contract is validated and its validity retroacts to
EFFECTS OF RATIFICATION: The action to annul is
the time it was entered into (see Art 1396.)
extinguished (Art. 1392, Civil Code); thus, the contract
• Strangers to a voidable contract cannot bring an
becomes a completely valid one. The contract is
action to annul the same (see Art. 1397.); neither
cleansed of its defect from the beginning.
can they assail a contract because of its
Rule in Ratification: unenforceability. The benefit of the Statute can
only be claimed or waived by one who is a party
• There must be knowledge of the reason which or privy to the oral contract, not by a stranger.
renders the contract voidable.
• The cause must not exist or continue to exist
anymore at the time of ratification
VOID CONTRACTS:

• Void contracts are those which, are perfected

UNENFORCEABLE CONTRACTS: contracts (all elements are present) but because
of certain defects, generally produce no effect at
• Unenforceable contracts are those that cannot all. They are considered as inexistent from its
be enforced in court or sued upon by reason of inception or from the very beginning,
defects provided by law until and unless they are • Inexistent contracts refer to agreements which
ratified according to law. lack one or some or all of the elements (ie,
Kinds of unenforceable contracts. consent, object, and cause) or do not comply
with the formalities which are essential for the
(1) Those entered into in the name of another by existence of a contract.
one without or acting in excess of authority;
(2) Those that do not comply with the Statute of Instances of void contracts:
Frauds; (1) Those whose cause, object or purpose is
(3) Those where both parties are incapable of giving contrary to law, morals, good customs, public
consent. order or public policy;
Examples of unenforceable contracts: (2) Those which are absolutely simulated or
fictitious;
• In Dabby's name, but without Dabby's (3) Those whose cause or object did not exist at the
authorization, Maria sold Dabby's car to Robert. time of the transaction;
The sale of the car is unauthorized. (4) Those whose object is outside the commerce of
• Those that violate the statute of frauds. men;
(5) Those which contemplate an impossible service;
 (6) Those where the intention of the parties law, morals, good customs, public order, or
relative to the principal object of the contract public policy. (Art. 1346.)
cannot be ascertained; • EXAMPLE: Dabby and Robert entered into a
(7) Those expressly prohibited or declared void by contract of donation. But wanting to hide the
law. donation, it was made to appear in the form of a
deed of sale. Here, there are two acts involved:
Example of Void Contracts:
outward act (contract of sale) and the hidden act
• Sale of property between husband and wife (contract of donation).
except when there is a separation of property
(Art. 1490.)
• Contracts upon future inheritance except in • Effect as to the parties: they are bound by their
cases expressly authorized by law. (Art. 1347.) true agreement.
• Absolutely simulated contracts • Effect as to third persons: the parties are bound
by their outward contract unless it will
SIMULATION OF CONTRACTS
affect/prejudice third persons.
• It is the process of intentionally deceiving others
by producing the appearance of a contract that
really does not exist (absolute simulation) or
Rules in Void Contracts:
which is different from the true agreement
(relative simulation). 1. If a contract is void, a party thereto can always
bring a court action to declare it void or
Two Kinds:
inexistent Mere lapse of time cannot give
A. Absolute Simulation efficacy to a void contract neither can it be cured
B. Relative Simulation by ratification.
2. Parties to a void agreement cannot expect the
ABSOLUTE SIMULATION OF CONTRACTS aid of the law, the courts leave them as they are,
• Absolute simulation or when the contract does because they are deemed in pari delicto, or "in
not really exist and the parties do not intend to equal fault." However, this applies only to illegal
be bound at all. (Art. 1345.) Absolutely contracts that are also criminal acts.
simulated or fictitious contracts are inexistent Example of In Pari Delicto:
and void and are not susceptible of ratification.
• Example: Dabby is indebted to Albert Upon Dabby and Albert entered into a contract for smuggling
learning that Albert is going to enforce his credit. or importation of prohibited drugs.
Dabby pretended to sell his land to his neighbor Effects:
but Dabby did not receive a single centavo for
the deed of sale he executed and he continued 1. they shall have no action against each other
in possession of the land as the contract was 2. Both shall be prosecuted.
merely simulated or fictitious. 3. The effects or the instruments of the crime
things or price of the contract) shall be
RELATIVE SIMULATION confiscated in favor of government.
• Relative simulation or when the contract entered Rules in void contracts:
into by the parties is different from their true
agreement or the parties state a false cause in XPN: If only one party is guilty or both parties are not
the contract to conceal their real agreement. equally guilty (in delicto, but not in pari delicto), the rule
The parties are bound by their real agreement, applies only to the guilty party or the more guilty party.
provided, it does not prejudice a third person The innocent one or the less guilty may claim what he
and is not intended for a purpose contrary to has given and shall not be bound to comply with his
promise.
What if the contract is illegal but not “criminal”? the sale for the reason that his right or interest
is directly affected.
EXAMPLE: A Filipino sold land to a Chinese after the
effective date of the Constitution.
• A contract which is the direct result of a
Effect: Neither may recover what he has given by virtue previous illegal contract, is also void and
of the contract or demand the performance of the inexistent.
other's undertaking. Example: Dabby promised to give Carlo a car as
a reward after Carlo has killed Dabby's wife.
Later, after the killing the contract was changed
XPNS to In Pari delicto: to a lease of a big house for a certain period.

1. Interest paid in excess of the interest allowed by • In case of a divisible contract, if the illegal terms
the usury laws may be recovered by the debtor, can be separated from the legal ones, the legal
with interest thereon from the date of the ones may be enforced.
payment. Example: Dabby sold to Carlo his car for
2. When money is paid or property delivered for an P150,000 and shabu, a prohibited drug, for
illegal purpose, the contract may be repudiated P200,000.00. The sale of the car is valid.
by one of the parties before the purpose has
been accomplished, or before any damage has
been caused to a third person.
Example: For a reward, Dabby promised to kill
Albert for Cynthia. Cynthia gave the reward.
Before Dabby could kill Albert, Cynthia
repudiated the contract.

Is Cynthia allowed to do so? Yes, because here,

the purpose has not yet been accomplished and
no damage has as yet been caused to a third
person.
3. Where one of the parties to an illegal contract
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.
Example: An insane man gave money to another
to kill Dabby. Recovery by the insane man is
allowed.

Some rules in Void Contracts:

• The defense of illegality of contracts is not

available to third persons whose interests are
not directly affected
Example: Husband, sold his parcel of land to W,
his wife. Under the law, husband and wife
cannot sell property to each other (Art. 1490.)
and such sale is, therefore, illegal and void.
***BUT a creditor, who became a creditor of
Husband before the transaction, can question