PART II - CONTRACTS

Meeting of minds between 2 parties whereby one binds himself with respect to other to give
something or render some service
PRINCIPAL CHARACTERISTICS:
1. Autonomy of wills – parties may stipulate anything as long as not illegal, immoral, etc.
Application of the Law Case:

In a contract of employment between A and B, the latter agreed that for a period of five
years after the termination of his employment, he shall neither engage or interest himself
in any business enterprise similar to or in competition with those operated by A, nor enter
into the employment of any enterprise in the Philippines, except after obtaining the
written permission of A. Is the agreement valid?

Legal Opinion:

The agreement is void because it is contrary to public policy. The agreement is clearly
one in undue or unreasonable restraint of trade. It is not necessary for the protection of A.
Besides, it would practically force B to get out of the country in order to obtain a
livelihood in case should decline to give him a written permission to work elsewhere in
the country.

2. Mutuality – performance or validity binds both parties; not left to will of one of parties
3. Obligatory Force – parties are bound from perfection of contract: a. fulfill what has been
expressly stipulated b. all consequences w/c may be in keeping with good faith, usage & law
4. Relativity – binding only between the parties, their assigns, heirs; strangers cannot demand
enforcement.
EXCEPTION TO RELATIVITY:
a. Accion pauliana
b. Accion directa
c. Stipulation pour autrui
REQUISITES OF STIPULATION POUR AUTRUI
(1) Parties must have clearly and deliberately conferred a favor upon a 3rd person
(2) The stipulation in favor of a 3rd person should be a part of, not the whole
contract
(3) That the favorable stipulation should not be conditioned or compensated by
any kind of obligation whatsoever
(4) Neither of the contracting parties bears the legal representation or
authorization of 3rd party
(5) The third person communicates his acceptance before revocation by the
original parties
d. Art 1312
e. Art 1314
REQUISITES OF ART 1312:
(1) Existence of a valid contract
 (2) Knowledge of the contract by a 3rd person
(3) Interference by the 3rd person
KINDS OF CONTRACTS
As to perfection or formation:
1. consensual – perfected by agreement of parties
2. real – perfected by delivery (commodatum, pledge, deposit)
3. formal/solemn – perfected by conformity to essential formalities (donation)
As to cause
1. Onerous – with valuable consideration
2. Gratuitous – founded on liberality
3. Remunerative – prestation is given for service previously rendered not as
obligation
As to importance or dependence of one upon another
1. principal – contract may stand alone
2. accessory – depends on another contract for its existence; may not exist on its
own
3. Preparatory – not an end by itself; a means through which future contracts may
be made
As to parties obliged:
1. Unilateral – only one of the parties has an obligation
2. Bilateral – both parties are required to render reciprocal prestations
As to name or designation:
1. Nominate
2. Innominate
a) Do ut des – I give that you may give
b) Do ut facias – I give that you may do
c) Facio ut des – I do that you may give
d) Facio ut facias – I do that you may do

STAGES IN A CONTRACT:
1. Preparation - negotiation
2. perfection/birth
3. consummation – performance
ESSENTIAL ELEMENTS:
1. CONSENT– meeting of minds between parties on subject matter & cause of contract;
concurrence of offer & acceptance Requirements:
 a. Plurality of subject
b. Capacity
c. Intelligence and free will
d. Manifestation of intent of parties
e. Cognition by the other party
f. Conformity of manifestation and cognition
Note: We follow the theory of cognition and not the theory of manifestation. Under our civil law,
the offer and acceptance concur only when the offeror comes to know, and not when the offeree
merely manifests his acceptance
ELEMENTS OF VALID OFFER ELEMENTS OF VALID ACCEPTANCE
a. definite
b. unequivocal
c. complete
d. unconditional
e. intentional
WHEN OFFER BECOMES INEFFECTIVE:
1. death, civil interdiction, insanity or insolvency of either party before acceptance
is conveyed
2. express or implied revocation of the offer by the offeree
3. qualified or conditional acceptance of the offer
4. subject matter becomes illegal or impossible before acceptance is
communicated
PERIOD FOR ACCEPTANCE
1. stated fixed period in the offer
2. no stated fixed period
a) offer is made to a person present – acceptance must be made immediately
b) offer is made to a person absent – acceptance may be made within such time that,
under normal circumstances, an answer can be received from him
OPTION - option may be withdrawn anytime before acceptance is communicated but
not when supported by a consideration other than purchase price:
Option Money Note: Ang Yu v. CA (1994) states that a unilateral promise to buy or sell,
if not supported by a distinct consideration, may be withdrawn but may not be done
whimsically or arbitrarily; the right of the grantee here is damages and not specific
performance; Equatorial v. Mayfair(264 SCRA 483) held that an option clause in order to
be valid and enforceable must indicate the definite price at which the person granting the
option is willing to sell, contract can be enforced and not only damages; Paranaque Kings
V CA (1997) states that right of first refusal may be enforced by specific performance.
PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT:
1. Minors
 2. Insane or demented persons
3. Illiterates/ deaf-mutes who do not know how to write
4. Intoxicated and under hypnotic spell
5. Art 1331 - person under mistake; mistake may deprive intelligence
6. Art 1338 - person induced by fraud (dolo causante)
Note: Dolus bonus (usual exaggerations in trade) are not in themselves fraudulent
RULE ON CONTRACTS ENTERED INTO BY MINORS
General Rule: VOIDABLE EXCEPTIONS:
1. Upon reaching age of majority – they ratify the same
2. They were entered unto by a guardian and the court having jurisdiction had approved
the same
3. They were contracts for necessities such as food, but here the persons who are bound
to give them support should pay therefor
4. Minor is estopped for having misrepresented his age and misled the other party (when
age is close to age of majority as in the Mercado v Espiritu & Sia Suan v Alcantara cases)
Note: In the Sia Suan v Alcantara case, there is a strong dissent by Justice Padilla to the effect
that the minor cannot be estopped if he is too young to give consent; one that is too young to give
consent is too young to be estopped. Subsequently, in Braganza v Villa-Abrille, the dissent
became the ruling. Minors could not be estopped
DISQUALIFIED TO ENTER INTO CONTRACTS: (contracts entered into are void)
1. those under civil interdiction
2. hospitalized lepers
3. prodigals
4. deaf and dumb who are unable to read and write
5. those who by reason of age, disease, weak mind and other similar causes, cannot
without outside aid, take care of themselves and manage their property, becoming an easy
prey for deceit and exploitation
CAUSES WHICH VITIATE FREEDOM
1. violence
REQUISITE:
a. Irresistable physical force
b. Such force is the determining cause for giving consent
2. Intimidation
REQUISITE:
a. Determining cause for the contract
b. Threatened act is unjust and unlawful
c. Real and serious
d. Produces a well-grounded fear that the person making it will carry it over
 3. Undue influence
SIMULATED CONTRACTS
a. absolute – no intention to be bound at all, fictitious only – void from beginning
b. relative – there is intention to be bound but concealed; concealed contract binds:
1. no prejudice to 3rd persons
2. not contrary to law, morals, etc.
2. OBJECT – The prestation
REQUISITES:
a) Within the commerce of man - either existing or in potency
b) Licit or not contrary to law, good customs
c) Possible
d) Determinate as to its kind or determinable w/o need to enter into a new contract e)
Transmissible
3. CAUSE – reason why parties enter into contract
REQUISITES:
a) It must exist
b) It must be true
c) It must be licit
Application of the Law:

Case: Mr. Jeffrey Sorrera bought 10 boxes of Ursus Brandy at a price of P10,000
pesos per box from his supplier, Mr. John Michael Suarez, proprietor of Exquisite
Wines & Brandy, Inc. Determine the requisites of such contract of sale.

Legal Opinion: The consent refers to the meeting of minds as when Mr. John
Micahel Suarez (the seller) offered Mr. Jeffrey Sorrera to sell the 10 boxes of
Ursus Brandy at a price of P10,000 pesos per box and when Mr. Jeffrey Sorrera
agreed to buy the said 10 boxes of Ursus Brandy at the price of P10,000 pesos per
box. The object or subject matter refers to the 10 boxes of Ursus Brandy at the
price of P10,000 pesos per box. As to the seller, the cause is the price of P10,000
pesos per box. As to the buyer, the cause is the 10 boxes of Ursus Brandy.

MOTIVE - purely private reason;

Illegality does not invalidate contract except when it predetermines purpose of contract;
when merged into one
ABSENCE OF CAUSA VOID - produce no legal effect
ILLEGALITY OF CAUSA VOID - produce no legal effect
FALSITY OF CAUSA VOIDABLE – party must prove that cause is untruthful;
presumption of validity but rebuttable
 CAUSA NOT STATED IN CONTRACT PRESUMED TO EXIST - burden of proof is
on the person assailing its existence
INADEQUACY OF CAUSA DOES NOT INVALIDATE CONTRACT PER SE
Exceptions:
1. fraud
2. mistake
3. undue influence
4. cases specified by law - contracts entered when ward suffers lesion of more
than 25%
FORM – in some kind of contracts only as contracts are generally consensual; form is a manner
in which a contract is executed or manifested
a. Informal – may be entered into whatever form as long as there is consent, object & cause
b. Formal – required by law to be in certain specified form such as: donation of real property,
stipulation to pay interest, transfer of large cattle, sale of land thru agent, contract of antichresis,
contract of partnership, registration of chattel mortgage, donation of personal prop in excess of
5,000
c. Real – creation of real rights over immovable property – must be written
WHEN FORM IS IMPORTANT:
1) for validity (formal/solemn contracts)
2) for enforceability (statute of frauds)
3) for convenience
General Rule: contract is valid & binding in whatever form provided that 3 essential
requisites concur
Exception:
a. Law requires contract to be in some form for validity - donation & acceptance
of real property
b. Law requires contract to be in some form to be enforceable - Statute of Frauds;
contract is valid but right to enforce cannot be exercised; need ratification to be
enforceable
c. Law requires contract to be in some form for convenience - contract is valid &
enforceable, needed only to bind 3rd parties - ex: public documents needed for the
ff:
1. contracts w/c object is creation, transmission or reformation of real
rights over immovables
2. cession, repudiation, renunciation of hereditary rights/CPG
3. power to administer property for another
4. cession of action of rights proceeding from an act appearing in a public
inst.
5. all other docs where amount involved is in excess of 500 (must be
written even private documents)
 Application of the Law Case:

Barbie Lim, a movie star filed a complaint against Xian Imperial & Co. to recover
P14,700 representing the balance of her compensation as leading actress in two motion
pictures produced by the company. Upon motion of defendant, the lower court dismissed
the complaint because ―the claim of plaintiff was not evidenced by any written
document, either public or private in violation of Article 1358 of the Civil Code of the
Philippines. Is this order of dismissal in accordance with the law?

Legal Opinion:

The lower Court‘s dismissal is not in accordance with the law. In the matter of
formalities, contracts are valid and binding from their perfection regardless of form
whether they be oral or written. This is plain from Articles 1315 and 135 of the Civil
Code of the Philippines. Consequently, as long as the three elements of a contract exist
(consent, object, cause), the contract is generally valid and binding.

REFORMATION OF CONTRACTS – remedy to conform to real intention of parties due to

mistake, fraud, inequitable conduct, accident
CAUSES/GROUNDS:
a. mutual: instrument includes something w/c should not be there or omit what should be
there:
 mutual
 mistake of fact
 clear & convincing proof
 causes failure of instrument to express true intention
b. unilateral
 one party was mistaken
 other either acted fraudulently or inequitably or knew but concealed
 party in good faith may ask for reformation
c. mistake by 3rd persons – due to ignorance, lack of skill, negligence, bad faith of
drafter, clerk, typist
d. others specified by law – to avoid frustration of true intent
REQUISITES:
1. there is a written instrument
2. there is meeting of minds
3. true intention not expressed in instrument
4. clear & convincing proof
5. facts put in issue in pleadings
Note: prescribes in 10 years from date of execution of instrument
WHEN NOT AVAILABLE:
a. simple donation inter vivos
b. wills
 c. when real agreement is void
d. estoppel; when party has brought suit to enforce it
KINDS OF DEFECTIVE CONTRACTS:
1. RESCISSIBLE CONTRACTS – Those which have caused a particular economic damage
either to one of the parties or to a 3rd person and which may be set aside even if valid. It may be
set aside in whole or in part, to the extent of the damage caused'
REQUISITES:
a. Contract must be rescissible
(1) Under art 1381:
i. Contracts entered into by persons exercising fiduciary capacity.
(a) Entered into by guardian whenever ward suffers damage by more than 1/4 of
value of object
(b) Agreed upon in representation of absentees, if absentee suffers lesion by more
than ¼ of value of property
(c) Contracts where rescission is based on fraud committed on creditor (accion
pauliana)
(d) Objects of litigation; contract entered into by defendant w/o knowledge or
approval of litigants or judicial authority
(e) Payment by an insolvent – on debts w/c are not yet due; prejudices claim of
others
(f) Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and
1659
ii. Under art 1382 - Payments made in a state of insolvency
a. Plaintiff has no other means to obtain reparation
b. Plaintiff must be able to return whatever he may be obliged to return due to
rescission
c. The things must not have been passed to 3rd parties who did not act in bad faith
d. It must be made within the prescribed period
OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT:
Mutual Restitution
1. Things w/c are the objects of the contract & their fruits
2. Price with interest
Note: Mutual restitution Not Available when:
1. creditor did not receive anything from contract
2. thing already in possession of party in good faith; subject to indemnity only; if
there are 2 or more alienations – liability of 1st infractor
2. VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect is due to vice of
consent or legal incapacity
CHARACTERISTICS:
 a. Effective until set aside
b. May be assailed or attacked only in an action for that purpose
c. Can be confirmed (Note: CONFIRMATION IS THE PROPER TERM FOR
CURING THE DEFECT OF A VOIDABLE CONTRACT)
d. Can be assailed only by the party whose consent was defective or his heirs or
assigns
WHAT CONTRACTS ARE VOIDABLE:
a. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING CONSENT
TO A CONTRACT (legal incapacity)
(1) minors (below 18)
(2) insane unless acted in lucid interval
(3) deaf mute who can’t read or write
(4) persons specially disqualified: civil interdiction
(5) in state of drunkenness
(6) in state of hypnotic spell
b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE,
INTIMIDATION, UNDUE INFLUENCE OR FRAUD (vice of consent)
(1) mistake – false belief into something
REQUISITES:
1. Refers to the subject of the thing which is the object of the contract
2. Refers to the nature of the contract
3. Refers to the principal conditions in an agreement
4. Error as to person - when it is the principal consideration of the contract
5. Error as to legal effect - when mistake is mutual and frustrates the real purpose
of parties
(2) violence – serious or irresistible force is employed to wrest consent.
(3) intimidation – one party is compelled by a reasonable & well-grounded fear of
an imminent & grave danger upon person & property of himself, spouse,
ascendants or descendants (moral coercion)
(4) undue influence – person takes improper advantage of his power over will of
another depriving latter of reasonable freedom of choice
(5) fraud – thru insidious words or machinations of contracting parties, other is
induced to enter into contract w/o w/c he will not enter (dolo causante)
PERIOD TO BRING ACTION FOR ANNULMENT
Intimidation, violence, undue influence 4 years from time defect of consent ceases
Mistake, fraud 4 years from time of discovery Incapacity from time guardianship ceases
EFFECTS OF ANNULMENT:
1. Obligation to give – mutual restitution
 2. Obligation to do – value of service PRESCRIPTION IN ACTION FOR
ANNULMENT OF VOIDABLE CONTRACTS: Intimidation/Violence/undue Influence
4 years from time defect of consent ceases Mistake/Fraud 4 years from time of discovery
Contracts entered into by minors/incapacitated persons 4 years from time guardianship
ceases
3. UNENFORCEABLE CONTRACT – valid but cannot compel its execution unless ratified;
extrinsic defect; produce legal effects only after ratified
KINDS/VARIETIES:
1. Unauthorized/No sufficient authority – entered into in the name of another when: a. no
authority conferred b. in excess of authority conferred (ultra vires)
Note: Curable by RATIFICATION
2. Both parties incapable of giving consent -2 minor or 2 insane persons
Note: Curable by ACKNOWLEDGEMENT
3. Failure to comply with Statute of Frauds
a. Agreement to be performed within a year after making contract
b. Special promise to answer for debt, default or miscarriage of another
c. Agreement made in consideration of promise to marry
d. Agreement for sale of goods, chattels or things in action at price not less than 500;
exception: auction when recorded sale in sales book
e. Agreement for lease of property for more than 1 year & sale of real property regardless
of price
f. Representation as to credit of another
2 WAYS OF CURING UNENFORCEABLE CONTRACTS:
1. Failure of defendant to object in time, to the presentation of parole evidence in court,
the defect of unenforceability is cured
2. Acceptance of benefits under the contract. If there is performance in either part and
there is acceptance of performance, it takes it out of unenforceable contracts; also
estoppel sets in by accepting performance, the defect is waived
4. VOID OR INEXISTENT – of no legal effect
CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone
b. There is no action for annulment necessary as such is ipso jure. A judicial declaration
to that effect is merely a declaration
c. It cannot be confirmed, ratified or cured
d. If performed, restoration is in order, except if pari delicto will apply
e. The right to set up the defense of nullity cannot be waived
f. Imprescriptible g. Anyone may invoke the nullity of the contract whenever its juridical
effects are asserted against him

KINDS OF VOID CONTRACT:

1) Those lacking in essential elements: no consent, no object, no cause (inexistent ones) –
essential formalities are not complied with (ex: donation propter nuptias – should conform to
formalities of a donation to be valid)
(a) Those w/c are absolutely simulated or fictitious – no cause
(b) Those which cause or object did not exist at the time of the transaction – no
cause/object
(c) Those whose object is outside the commerce of man – no object
(d) Those w/c contemplate an impossible service – no object
(e) Those w/c intention of parties relative to principal object of the contract cannot be
ascertained
2) Prohibited by law (f) Those expressly prohibited or declared void by law - Contracts w/c
violate any legal provision, whether it amounts to a crime or not
3) Illegal/Illicit ones – Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy; Ex: Contract to sell marijuana
Application of the Law Case:

On January 24, 1989, Mark Jhun Cantos sold his hotel in favor of Spouses Steve and
Cocay Kho. A deed of sale was executed but Spouses Arcilla named Salome Kho (their
unborn daughter) as the buyer in the contract of sale. Accordingly, Salome Kho was
named as the buyer in the deed of sale by virtue of a Chinese custom naming children as
the heir of their parents‘ properties. It was only on March 1, 1990 that Salome Kho was
born. Is the contract of sale valid?

Legal Opinion:

It was held that the contract of sale is void for being simulated and fictitious. Salome Kho
was not even conceived yet at the time of the alleged sale, hence had no legal personality
to be named as a buyer in the said deed of sale. Neither could he have given his consent
thereto. The contract of sale is perfected at the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price. Consent is
manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. Unemancipated minors, insane or demented persons,
and deaf-mutes who do not know how to read and write cannot validly give consent to
contracts. In the instant case, Salome Kho could not have validly given her consent to the
contract of sale, as she was not even conceived yet at the time of its alleged perfection.
Therefore, for lack of consent of one of the contracting parties, the deed of sale is null
and void.

KINDS OF ILLEGAL CONTRACTS CONTRACT CONSTITUTE CRIMINAL

OFFENSE CONTRACT DOES NOT CONSTITUTE CRIMINAL OFFENSE BUT IS
ILLEGAL OR UNLAWFUL PER SE
Parties are in pari delicto
 No action for specific performance

 No action for restitution on either side. The law will leave you where you are

 Both shall be prosecuted

 Thing/price to be confiscated in favor of government

 No action for specific performance

  No action for restitution on either side. The law will leave you where you are

 No confiscation Only one party is guilty

 No action for specific performance

 Innocent party is entitled to restitution

 Guilty party is not entitled to restitution

 Guilty party will be prosecuted

 Instrument of crime will be

 No action for specific performance

 Innocent party is entitled to restitution

 Guilty party is not entitled to restitution confiscated in favor of government

PARI DELICTO DOCTRINE -both parties are guilty, no action against each other; those who
come in equity must come with clean hands; applies only to illegal contracts & not to inexistent
contracts; does not apply when a superior public policy intervenes
EXCEPTION TO PARI DELICTO RULE
1. If purpose has not yet been accomplished & If damage has not been caused to any 3rd
person Requisites:
a) contract is for an illegal purpose
b) contract must be repudiated by any of the parties before purpose is
accomplished or damage is caused to 3rd parties
c) court believes that public interest will be served by allowing recovery
(discretionary upon the court) – based on remorse; illegality is accomplished
when parties entered into contract; before it takes effect – party w/c is remorseful
prevents it
2. Where laws are issued to protect certain sectors: consumer protection, labor, usury law
a) Consumer protection – if price of commodity is determined by statute, any
person paying an amount in excess of the maximum price allowed may recover
such excess
b) Labor – if law sets the minimum wage for laborers, any laborer who agreed to
receive less may still be entitled to recover the deficiency; if law set max working
hours & laborer who undertakes to work longer may demand additional
compensation
c) Interest paid in excess of the interest allowed by the usury law may be
recovered by debtor with interest from date of payment
3. If one party is incapacitated, courts may allow recovery of money, property delivered
by incapacitated person in the interest of justice; pari delicto cannot apply because an
incapacitated person does not know what he is entering into; unable to understand the
consequences of his own action
4. If agreement is not illegal per se but merely prohibited & prohibition is designated for
the protection of the plaintiff – may recover what he has paid or delivered by virtue of
public policy
MUTUAL RESTITUTION IN VOID CONTRACTS
General Rule: parties should return to each other what they have given by virtue of the
void contract in case where nullity arose from defect in essential elements.
1. return object of contract & fruits
2. return price plus interest Exception: No recovery can be had in cases where nullity of
contract arose from illegality of contract where parties are in pari delicto; except:
a. incapacitated – not obliged to return what he gave but may recover what he has
given
b. other party is less guilty or not guilt.