CONTRACTS

Contract, defined
A contract is e meeting of minds between
two persons whereby one binds himself, with
respect to the other, to give something or to
render some service. (Art. 1305)

Elements of a contract
1. Essential elements – Those without
which there will be no contract
a. Consent of the contracting parties.
 b. Object certain which is the subject
matter of the contract.
c. Cause of the obligation which must
be established. (Art. 1318)
2. Natural elements – Those found in
certain contracts unless set aside or
suppressed by the parties (such as warranty
against eviction and warranty against hidden
defects in a contract of sale). (Art. 1547)
3. Accidental elements – Those that refer to
particular stipulations of the parties (such
as terms of payment, interest rate, place of
payment).
Classification of contracts
1. According to perfection or formation
a. Consensual – Those that are
perfected by mere consent (such as
sale and lease).
b. Real – Those that are perfected by
the delivery of the object of the
contract (such as depositum,
pledge, and commodatum). (Art.
1316).
c. Formal or solemn – Those which
must be in the form provided by law
for their perfection (such as the
 donation of an immovable which,
together with the acceptance by
the donee, must be in a public
instrument to be valid).
2. According to cause
a. Onerous – Those where there is an
exchange of valuable
considerations (such as sale and
barter). For each contracting party,
the cause is the prestation or the
promise of a thing or service by the
other. (Art. 1350)
 b. Gratutitous or lucrative – Those
where one party receives no
equivalent consideration (such as
donation and commodatum). These
contracts are referred to as
contracts of pure beneficense, the
cause of which is the liberality of the
benefactor. (Art. 1350)
c. Remuneratory –Those where the
cause is the service or benefit
remunerated. (Art. 1350)
3. According to importance or dependence of
one upon another
a. Principal-One that can stand by itself
(such as sale,loan).
b. Accessory- One whose existnce
depends upon another contract (such
as pledge or morgage which is
dependent upon a principal contract
such as loan).
c. Preparatory- One which serves as a
means by which other contacts may
be entered into (such as agency and
partnership).
4. According to name or designation
a. Nominate- Those which have a name
under the law (such as sale,loan and
barter).
b. Innominate-Those without any name
under the law.Authorities in
civilLaw,list the following as
innominate contracts:
1) Do ut des (I give that you may
give)*
2) Do ut facias (I give that you may
do)
3) Facio ut des (I do that you may
give)
4) Facio ut facias (I do that you may
do)
*This may actually be barter, hence, a
nominate contract. (See Art.1636.)
Rules that govern innominate
contracts
1) The stipulation of the parties;
2) The provisions of Obligations
and Contracts;
 3) The rules govering the most
analogous nominate
contracts;and
4) The customs of the place.
(Art.1307)
5. According to risk or fulfillment
a. Commutative – Those where the
parties give equivalent values (such as
sale and barter); hence, there is real
fulfillment.
b. Aleatory – Those whose fulfillment
depends upon chance (such as an
insurance contract).
6. According to the parties obligated
a. Unilateral – Those where only one of
the parties is obligated to give or do
something (such as commodatum and
gratuitous deposit).
b. Bilateral (or synalagmatic) – Those
where both parties are required to give
or do something (such as sale and
barter). They may be reciprocal or non-
reciprocal.
7. According to subject matter
a. Contracts involving things (such as
sale or barter).
 b. Contracts involving rights or credits
such as usufruct or assignment of
credits).
c. Contracts involving services (such as
agency or lease of service).
8. According to the time of fulfillment
a. Executed – One which has been
performed.
b. Executory – One that has not yet been
performed.
9. According to the number of persons
physically entering into the contract
 a. Ordinary – Where two parties are
represented by different persons (such
as sale and barter).
b. Auto-contract – Where only one person
represents the two opposite parties to
the contract (such as when an agent
lends money to his principal whom he
represents as borrower).
10. According to the number of persons who
participated in the drafting and preparation
of the contract
a. Ordinary – Where both parties
participated in the drafting of the
contract (such as sale).
 b. Contract of adhesion – Where only one
party drafted the contract (such as
insurance).
It is so-called because its terms
are prepared by only one party, while
the other party merely affixes his
signature signifying his adhesion
thereto. (Uy vs. People, G.R. No.
174899, September 11, 2008)

Stages of a contract
1. Preparation or conception – This
involves premilinary negotiations and
bargaining, discussion of terms and
 conditions, with no arrival yet of a
definite agreement. Negotiation begins
from the time the prospective
contracting parties manifest their
interest in the contract and ends at the
moment of their agreement.
2. Perfection or birth – This is the point
when there is a meeting of minds
between the parties on a definite
subject matter and valid cause.
3. Consummation or death or termination
– This occurs when the parties fulfill or
perform the terms agreed upon in the
 contract, culminating in the
extinguishment thereof. (See Navarra
vs. Planters Development Bank, G.R.
No. 172674, July 12, 2007; XYST
Corporation vs. DMC Urban Properties
Development, Inc., G.R. No. 171968,
July 31, 2009)
Basic principles of contract
1. Liberality of contract or freedom to
stipulate
The contracting parties may
establish such stipulations, clauses,
terms and conditions as they may
 deem convenient, provided they are
not contrary to law, morals, good
customs, public order or public policy.
(Art. 1306)
The freedom to enter into a
contract is one of the liberties
guaranteed by the State subject only to
the five limitations. (People vs. Pomar,
46 Phil 440)
2. Mutuality of contracts
The contract must bind both
contracting parties; its validity
compliance cannot be left to the will of
one of them. (Art. 1308)
After a party has entered into a
contract, he will not be permitted to
renounce it unilaterally. If the
fulfillment of the suspensive condition
of an obligation depends upon the sole
will of the debtor, the obligation and
the condition are void (See Art. 1182)
since compliance is dependent upon
him alone.
a. Any contract which appears to
be heavily weighed in favor of
one of the parties so as to lead to
an unconscionable result is void.
Thus, the provision in a
promissory note authorizing the
creditor to increase, decrease, or
otherwise change from time to
time the rate of interest and/or
bank charges “without advance
notice” to the borrower, “in the
event of change of interest rate
prescribed by law or the
Monetary Board of the Central
Bank of the Philippines,” does
not give the creditor bank
unrestrained freedom to charge
 any rate other than that which
was agreed upon. Such
stipulation granting the creditor
bank to make monthly
upward/downward adjustment
of interest rate violates the
essence of mutuality of contract.
(Floirendo, Jr. vs. Metrobank,
G.R. No. 148325, September 3,
2007)
b. Determination of performance by
a third person
The determination of the
 performance may be left to a
third person, whose decision
shall not be binding until it has
been made known to both
contracting parties. (Art. 1309)
However, such determination
shall not be obligatory if it is
evidently inequitable. In such a
case, the courts shall decide what
is equitable under the
circumstances.(Art. 1310)
3. Relativity of contracts
Contracts take effect only
between the parties, their assigns and
heirs, except where the rights and
obligations are not transmissible:
a. by law,
b. by stipulation, or
c. by nature. (Art. 1311)
Note: With respect to the heir, he shall
not be liable beyond the value of the
property he received from the
decedent. (Art 1311)
When a contract may be enforced by or
against a third person
a. Where there is a stipulation in
the contract that clearly and
deliberately confers a favor upon
a third person (stipulation pour
autrui). Such third person may
demand its fulfillment provided
he has communicated his
acceptance to the obligor before
its revocation. (Art. 1311) A mere
incidental benefit or interest of a
person is not sufficient.
Example: D obtained a loan
from C amounting to P100,
000.00. The parties agreed that
the loan shall bear an interest of
 1% per month to be paid by D to
X until the principal is paid in
full. The stipulation for the
payment of interest to X who is
not a party to the contract is a
stipulation pour autrui. X can sue
on the contract although he is not
party if he does not receive the
interest.
b. Where a third person induces
another to violate his contract, in
which case, such third person
may be held liable for damages
by the other contracting party.
(Art. 1314)
Example: D has a contract
for 5 years with XYZ
Broadcasting Company. During
the second year of the contract,
RST Radio Company, with
knowledge of the existing
contract between D and XYZ,
induced D to sign a contract as
radio talent of RST. XYZ may sue
RST (and also D) for damages
under the contract between D
and XYZ although RST is not a
party thereto.
c. In contract creating real rights,
third persons who come into
possession of the object of the
contract are bound thereby,
subject to the provisions of the
Mortgage Law and the Land
Registration laws. (Art. 1312)
Example: D obtained a loan
of P200,000.00 from C. The loan is
secured by a mortgage of D’s lot,
which C recorded with the
Register of Deeds. Later, D sold
the lot to X who was not aware
 of the mortgage. When D could
not pay the loan on due date, C
foreclosed the mortgage on the
lot. Here, X would be bound by
the mortgage although he was
not a party thereto because the
mortgage created a real right in
favor of C. This is true even if X
was not aware of it since the
registration of the mortgage
operates as a notice to the whole
world of the existence thereof.
d. In contracts intended to defraud
creditors, the law gives them
protection. (Art, 1313) This is true
 if the third person acted in bad
faith. (See Art. 1388)
Example: D owed C P100,
000.00. To defraud C, D sold his
only lot to X who knew of D’s
fraudulent intent, i.e., in bad
faith. Here, C may sue for the
rescission of the sale between D
and X although he was not a
party to it.
4. Consensuality of contract
Contracts are perfected by mere
consent (Art. 1315) except in the
following contracts which need to
comply with additional requirements:
a. In real contracts such as deposit,
pledge and commodatum, which
are perfected upon the delivery
of the object of the obligation.
(Art. 1316)
b. In formal or solemn contracts,
which are required to be in the
form provided by law, to be
perfected, such as the donation of
an immovable which must be in
a public instrument together with
the acceptance thereof (Art. 749);
otherwise, the contract is void.
5. Obligatory force of contract and
compliance in good faith
Obligations arising from
contracts shall have the force of law
between the contracting parties and
should be complied with in good faith.
(Art. 1159) Upon the perfection of the
contract, the parties are bound to the
following:
a. The fulfillment of what has been
expressly stipulated.
b. All the consequences which,
according to their nature, may be
 in keeping with good faith, usage
and law. (Art. 1315)
Example:
On June 1, S and B entered into a
contract of sale involving the horse of S
for P10, 000.00. The terms of the
contract provide that D must deliver
the horse on June 30, while C must pay
the price on June 25. In the place of S
and B, it is the usage that when one
sells a horse, he must place a horseshoe
on its hooves. However, this is not
stated in the contract. To what
consequences are the parties bound?
 Answer: S must deliver the horse on
June 30 as stipulated. Before delivery, he
must take care of the horse with the
diligence of a good father of a family
although it was not stipulated because this
is provided by law and in keeping with
good faith. He must place a horseshoe on
the hooves of the horse although this was
not also stipulated because the same is
required by the usage of the place where
they reside.
On the other hand, D must pay the
price on June 25 also as stipulated. He
must pay the whole amount because of the
requirement of the law that payment must
be complete.
ESSENTIAL REQUISITES OF CONTRACTS

Consent of the Contracting Parties

Consent, meaning
Consent is the manifestation of the
meeting of the offer and the acceptance upon
the thing and the cause which are to constitute
the contract. (Art. 1319)

Rules on offer
1. The offer must be certain (Art. 1319)
because there could be no meeting of
minds if it is vague or not definite.
 Thus, if S, who has several lots,
offers to sell his lot to B without
designating which of the lots he is
selling, the offer is not certain.
Nature of advertisements
a. Business advertisements of
things for sale are not definite
offers, but mere invitations to
make an offer unless it appears
otherwise. (Art.1325)
Examples: (1) An
advertisement reads: “For sale:
residential house on a 200 square
 meter lot at Green Valley Village
for P3M. Call 723-4567” This is
not an offer but a mere invitation
to make an offer. (2) “For sale: 3
bedroom bungalow on a 200
square meter lot located at No.
123 Molave Street, Bgy.
Mayamot, Antipolo City, for
P2M cash.” This is a definite offer
because it contains all the matters
required of a contract.
b. Advertisements for bidders are
merely invitations to make
proposals and the advertiser is
not bound to accept the highest
 or lowest bidder, unless the as
contrary appears. (Art. 1326)
2. An offer becomes ineffective upon the
death, civil interdiction, insanity or
insolvency of either party before
acceptance is coverted. (Art. 1323)
3. When the offeror has allowed the
offeree a certain period to accept, the
offer may be withdrawn at any time
before acceptance by communicating
such withdrawal, except when the
option is founded upon a consideration
as something paid or promised. (Art.
1324)
Option, concept
Option is a contract whereby the
offeror gives the offeree a certain
period within which to buy or not to
buy a certain object for a fixed price. It
may or may not be for a valuable
consideration.
Right of the offeror to withdraw the offer
a. If there is no consideration for
the option, the offerer may
withdraw the offer at anytime
within the option period
provided there has not yet been
any acceptance.
b. If there is a consideration, the
offeror may not withdraw the
offer with the option period.
Otherwise, he will be liable for
damages to the offeree for breach
of contract.
Note: In both cases, the option is
extinguished upon the lapse of the
period, unless in the meantime, the
offeree has accepted the offer.
Example: S promised to sell his
car to B for P100, 000.00 giving B 30
days to decide. B accepts the promise.
 S may withdraw his promise even
before the lapse of the 30-day period
by informing B of the withdrawal.
However, if B had given to S option
money of say, P1,000.00, S cannot
withdraw the offer before the lapse of
the option period because the option
given to B was founded upon a
consideration.
Rules on acceptance
1. The acceptance must be absolute. (Art.
1319). If the acceptance varies the offer,
there is no contract since there is no
meeting of minds.
a. If the acceptance is qualified, it
constitutes a counter-offer; (Art.
1319) and has the effect of
rejecting the offer. (XYST
Corporation vs. DMC Urban
Properties Development, Inc.,
supra)
Example: S offers to sell his
car for P100,000.00 to B. B accepts
the offer but is willing to pay the
price of P95, 000.00. The
acceptance made by B is a
qualified acceptance which
 constitute a counter-offer.
Accordingly, no contract is
perfected. However, if S accepts
the counter-offer, then there will
be a perfected contract at the
price of P95, 000.00.
b. If the offer fixes the time, place
and manner of acceptance, all
must be complied with. (Art.
1321) Otherwise, there will no
meeting of minds.
2. Acceptance made by letter or telegram
does not bind the offeror except from
the time it came to his knowledge. The
 contract in such a case is presumed to
have been entered into the place where
the offer was made. (Art. 1319)
The second sentence is important
to determine which law will apply
regarding the contract.
3. Acceptance may be express or
implied. (Art. 1320)
The acceptance is express if made
orally or in writing. It is implied if it
can be inferred from the conduct of the
parties.
Thus, if S offers to sell a kilo of
his mangoes to B for P20.00, and B,
 without saying anything to S, takes the
mangoes and begins to eat one and
offers the rest to others, then B is
deemed to have impliedly accepted the
offer of S.
4. An offer made through an agent is
accepted from the time it is
communicated to him. (Art. 1322)
This is so because the agent is
merely an extension of the personality
of the principal.
Rules on consent
1. The parties must have the capacity to
enter into a contract. The following
cannot give consent to a contract:
a. Unemancipated minors
Emancipation takes place
by the attainment of the age of
majority which is eighteen years.
(Art. 234, Family Code, as
amended)
b. Insane or demented persons
However, contracts entered
into during lucid intervals are
valid. (Art. 1328) Lucid interval
refers to the period of temporary
sanity of an insane person.
c. Deaf – mutes who do not know
how to write.
A contract entered into by the
above-named incapacitated persons is
voidable. (Art. 1390) However, when
both parties are incapable of giving
consent to a contract, the contract is
unenforceable. (Art. 1403)
The incapacity aforementioned is
subject to the modifications
by law, and is understood to be
without prejudice to special
disqualifications established in the
laws. (See Art. 1329.)
 Thus, an incapacitated person
must pay a reasonable price for food
and other necessaries sold to him. The
sale here is valid. (See Art. 1409.) On
the other hand, a person may be
capacitated but is disqualified to enter
into some contracts, such as in the case
of the husband and the wife who, as a
general rule, are prohibited to sell to
each other (Art. 1490) or donate to each
other. (Art. 87, Family Code)
2. Contracts agreed to in a state of
drunkenness or during a hypnotic spell
 are voidable. (Art. 1328) This is so
because consent given in such states is
not freely and intelligently given.
3. A contract where consent is given
through mistake, violence,
intimidation, undue influence, or fraud
is voidable. (Art. 1330) These five are
referred to as the causes that vitiate
consent or the vices of consent.
a. Mistake
1) When mistake will
invalidate consent
a) If the mistake refers
to the substance of
the thing which is the
object of the contract.
(Art. 1331)
Example: If B
bought a lot on which
he wanted to
construct a factory
believing that it was
situated in an
industrial area, he can
have the contract
annulled if the lot
was actually situated
in a residential area.
b) If the mistake refers
to those conditions
which have
principally moved
one or both parties to
enter into the
contract. (Art. 1331)
Example: S sold
his car to B for
P100,000.00 cash
because he needed
the money to settle a
debt. The deed of sale
signed by him
 showed, however,
that the price would
be paid in 4 equal
installments. S can
have the sale
annulled because of a
mistake as to the
condition of the
contract.
c) If the mistake refers
to the identify or
qualifications of one
of the parties if such
identity or
qualifications have
been the principal
cause of the
contract.(Art. 1331)
Example: D
donated a lot to C
believing that C was
his illegitimate son.
D found out later,
however, that C was
not his son. The
identify of C was
material to the
 contract; D can have
the contract annulled
on the ground of
mistake as to the
identity of the donee.
d) If the mistake refers
to the legal effect of
an agreement when
the real purpose of
the parties is
frustrated and the
same is mutual. (Art.
1334)
 This refers to
mistake of law which
does not generally
vitiate consent
because of the rule
that ignorance of the
law excuses no one
from compliance
therewith. However,
the contract shall be
voidable if the
mistake as to the legal
effect of the
agreement is mutual
and frustrates the real
purpose of the
parties.
Example: S and
B entered into a
contract of sale with a
right to repurchase
believing that the
contract had the same
effect as a contract of
loan and mortgage.
The mistake here
refers to the legal
effect of their
 agreement. Either
party may annul the
contract on such
ground.
2) When mistake does not
vitiate consent
a) If the mistake refers
to a simple mistake of
account which shall
only be corrected.
(Art. 1331)
Thus, if 10
books were sold at
 P567.80 each but the
total price was shown
at P5, 678.00 instead
of P5, 678.00, the
mistake in
computation will not
render the contract
voidable but will only
be corrected.
b) If the party alleging it
knew the doubt,
contingency or risk
affecting the object of
the contract. (Art
1333)
 Thus, if B buys
a brand new car
stereo for P500.00
when he knows that
the price of one is P5,
000.00, he cannot
allege mistake if the
car stereo later turns
out to have been
stolen. The fact that
the car stereo was
offered to him at a
very low price should
have put him on
 guard that it might
have come from an
illegal source.
3) Rule when one party is
unable to read or does not
understand the language of
the contract
If mistake or fraud is
alleged, the person
enforcing the contract must
show that the terms thereof
have been fully explained
to the former. (Art. 1332)
 This is an exception
to the rule that he who
alleges fraud or mistake
must prove the same.
b. Violence or physical coercion
1) When violence vitiates
consent
There is violence
when in order to wrest
consent, serious or
irresistible force is
employed. (Art. 1335) This
is true although it may
have been employed by a
 third person who did not
take part in the contract.
(Art. 1336)
Example: S signed a
deed of sale of his land to B
because B twisted and
threatened to break his arm
if he refused to sign.
Consent here is given
because of violence.
c. Intimidation or moral coercion
1) When intimidation vitiates
consent
 There is intimidation
when one of the contracting
parties is compelled by a
reasonable and well-
grounded fear of an
imminent and grave evil
upon his person or
property, or upon the
person or property of his
spouse, descendants or
ascendants to give his
consent. (Art. 1335) This
intimidation exists
although it may have been
employed by a third person
who did not take part in
the contract. (Art. 1336)
Example: In the
example above, if S signed
the deed of sale because B
pointed a gun on his head
and threatened to shoot
him if he did not sign the
deed of sale, consent here is
given by reason of
intimidation. There is
likewise intimidation if B
 threatened to burn the
house of S if S did not sign
the deed of sale.
2) Factors to be considered in
determining the degree of
intimidation
a) age,
b) sex, and
c) condition of the
person. (Art. 1335)
3) When no intimidation
exists
 No intimidation
exists in case of a threat to
enforce one’s claim through
competent authority, if the
claim is just or legal. (Art.
1335)
Example: C
threatened to sue D if he
did not pay his debt to him.
D, afraid of a court action,
thus made a dacion en pago
by transferring his lot to C
to settle his debt. Here, the
contract (dacion en pago) is
 not voidable as there is no
intimidation when one
seeks the aid of the courts
to enforce his rights.
d. Undue influence
1) When undue influence
vitiates consent
There is undue
influence when a person
takes improper advantage
of his power over the will
of another, depriving the
latter of a reasonable
freedom of choice. (Art.
1337) For it to be present,
the influence exerted must
have so overpowered or
subjugated the mind of a
contracting party as to
destroy his free agency,
making him express the
will of another rather than
his own. (Naranja vs. Court
of Appeals, G.R. No.
160132, April 17, 2009)
Example: If a church
minister improperly takes
 advantage of his power
over a member of his
congregation who regularly
confides in him by
persistently telling the
member to sell his property
to him, the contract if
entered into will be
voidable at the instance of
the member on the ground
of undue influence.
2) Factors to be considered in
determining the existence
of undue influence:
a) Confidential, family,
spiritual and other
relations of the
parties,
b) Mental weakness,
c) Ignorance, or
d) Financial distress of
the person alleged to
have been unduly
influenced. (Art.
1337)
e. Fraud
1) When fraud exists (dolo
causante)
a) When, through the
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)
The fraud here is
active fraud.
 Examples: (1) S
induced B to buy a
ring which S claimed
was made of pure
gold. However, S
knew all along that
the ring was only
gold-plated. B can
have the contract
annulled on the
ground of fraud.
b) When there is a
failure to disclose
facts, when there is a
duty to reveal them,
as when the parties
are bound by
confidential relations.
(Art. 1339) The fraud
here is passive fraud.
Example: A and
B were partners in a
real estate business.
During the existence
of the partnership, A
met X who told A
that he was interested
in buying a large tract
of land. A did not
inform B about X’s
proposal. Instead, he
persuaded B to self
his share in the
partnership to him.
After A became the
sole owner of the
business, he sold real
property to X
realizing a huge
profit. The contract
between A and B for
the sale of B’s interest
 is voidable on the
ground of fraud. A
was duty bound to
disclose the proposal
of X to B since as
partners, they are
bound by trust and
confidence.
2) Requisites to make a
contract voidable by reason
of fraud
a) The fraud should be
serious.
 Incidental fraud
only obliges the
person employing it
to pay damages.
b) The fraud should not
have been employed
by both contracting
parties. (1344)
If both parties
employed fraud, the
bad faith of one will
negate the bad faith
of the other. The law
 will consider both of
them in good faith;
hence, the contract
will be valid.
3) When no fraud exists
a) In case of the usual
exaggerations in
trade, when the other
party had an
opportunity to know
the facts. (Art. 1340)
This is to give
allowance to dealer’s
 talk or sales talk such
as “The liquid soap that
can wash a thousand
plates” or “The shirt
that is wrinkle-free.”
b) In case of a mere
expression of an
opinion, unless made
by an expert and the
other party has relied
on the former’s
special knowledge.
(Art. 1341)
 Example: S, a
farmer, who knows
nothing about germs,
tells B that in his (S’s)
opinion, his ring is
embellished with
diamond and that he
is selling it. B buys
the ring believing
that ring is adorned
with diamond. Later
he discovers that the
gemstone is really
emerald. There is no
 mispresentation here
because S is not an
expert in gems.
However, B can have
the contract annulled
on the ground of
mistake.But if S is a
gemologist (an expert
in gems) B can annul
the contract on the
ground of fraud.
c) In case of
mispresentation by a
third person, unless
such mispresentation
has created
substantial mistake
and the same is
mutual. (Art.1342)
Consent will
likewise be vitiated if
the third person
connived with a party
to the contract in
making the
misrepresentation.
 Example: B
wants to buy the land
of S because he is
interested in putting
up a factory.
However, S and B do
not know the
classification of the
area where the land is
located. So they
consult T, a third
person, who tells
them that the land is
situated in an
 industrial area. S and
B thus proceed with
the sale. Later,
however, B finds out
that he could not put
up a factory because
the land is situated in
a residential area. Is
the contract between
S and B voidable?
Answer:
Although generally,
misrepresentation by a
 third person does not
affect the validity of the
contract, the contract in
this case is voidable
because the
misrepresentation by T,
a third person, has
created a substantial
mistake that is mutual.
d) If the
misrepresentation
was made in good
faith. However, the
same may constitute
error. (Art. 1343)
 Example: S has
a ring which he
honestly believes is
adorned with
diamond. He offers to
sell the ring to B
telling B that the
gemstone is diamond.
B buys the believing
it to be so. Later, he
discovers that the
gemstone is emerald.
No fraud exists here
because S was in
 good faith. However,
B may annul the
contract on the
ground of mistake.
4) Kinds of dolo or fraud
a) Fraud in obtaining
consent
1) Causal fraud or
dolo causante –
Fraud without
which consent
would not have
been given. It
 renders the
contract
voidable.

2) Incidental fraud
or dolo incidental
– Fraud without
which consent
would have still
been given but
the person
giving it would
have agreed on
different terms.
The contract is
valid but the
party
employing it
shall be liable
for damages.
Example:
S sold his lot for
P100,000.00 to B
who stated in
the deed of sale
that he was
married. The
price was fixed
by S at the said
amount in a
consideration of
B’s having a
family to
support. In
reality,
however, B was
single. If S
would have
sold the lot to B
whether B was
 married or
single but that
he would have
given a higher
price, say P105,
000.00, had he
known that B
was single, the
fraud here is
only incidental.
That contract is
not vitiated by
fraud but S can
 recover
damages in the
amount of
atleast P5,
000.00.
b) Fraud in the
performance of the
obligation
This is the
deliberate act of
evading fulfillment of
an obligation in a
normal manner. This
 presupposes an
existing obligation;
hence, the fraud has
no effect on the
validity of the
contract since it was
employed after
perfection. However,
the party employing
it shall be liable for
damages. (Art. 1170)
Simulated contract, concept and kinds
A contract that does not intend to have
any legal effect on or a change in the judical
situation of the parties. (Amistad vs. Baltazar,
59635-R, Oct. 24, 1979). They are of two kinds:
1. Absolutely simulated contract- One
where the parties do not intend to be
bound at all. (Art. 1345). Being fictitous
it is void. (Art. 1346) The simulation,
must be on the part of both parties.
Where only one simulates, there is
deceit or fraud, and the contract is
regarded as voidable, not void. (Bacani
vs. Salvador, 60900-R, April 28, 1982)
Example: B is interested in
buying the lot of S. S tells B to show his
 capacity to buy the lot by asking B to
present his bank records. B, however,
does not have any bank account. So he
asks XYZ Bank through the manager
who is his friend to certify that B is a
depositor of the bank. XYZ Bank issues
the certification when the truth is that
D has never opened an account and
made a deposit in the bank. The
contract of bank deposit is absolutely
simulated.
2. Relatively simulated contract – One
where the parties conceal their true
agreement. (Art. 1345) The parties here
are bound by their real agreement
provided it does not prejudice a third
person and is not intended for any
purpose contrary to law, morals, good
customs, public order or public policy.
(Art. 1346)
Example: S and B made it appear
that S sold his car to B for P100,000.00.
In reality, however, S donated the car
to B. The sale is relatively simulated. S
and B will be bound by the contract of
donation. However, they will be bound
by the sale if B is a public official since
 donation to a public official is void for
being contrary to public policy (See
Art. 789.); or if as a result of the
donation, the compulsory heirs of S
could not receive their legitime, in
which case, the heirs can demand the
price from B.

Object of Contracts
What may be the object of contracts
1. All things which are not outside the
commerce of men, including future
things. (Art. 1347)
 Thus, public plazas, streets,
sidewalks may not be the object of
contracts. Future things such as the
crops that may thereafter be harvested,
or eggs that may be produced by a
poultry farm, may be the object of
contracts, but not future inheritance
except in cases provided by law (Art.
1347) such as in the marriage
settlements or in partition of the estate
by the testator.
Contract is generally void when object is
future inheritance
 The contract involving future
inheritance is void when the following
requisites concur:
a. The succession has not been
opened.
b. The object of the contract forms
part of the inheritance; and
c. The promissor has, with respect
to the object, an expectancy or
right which is purely hereditary
in nature. (Arrogante vs. Deliarte,
G.R . No. 152132, July 24, 2007)
2. All rights which are not
intransmissible. (Art. 1347)
Thus, a credit right may be the
object of deed of assignment; so also
are leasehold rights to a certain
building. However, strictly personal
rights, such as parental authority, or
political rights such as the right to vote
or to run for public office, may not be
the object of contracts, as they are
intransmissible.
3. All services which are not contrary to
 law, morals, good customs, public
order or public policy. (Art. 1347)
Thus, contracting the service of
person for the slaughter of a carabao is
void, being contrary to law.
Requisites of object of a contract
1. It must be within the commerce of
men. (Art. 1347)
2. It must be transmissible. (Art. 1347)
3. It must not be contrary to law, morals,
good customs, public order or public
policy. (Art. 1347)
4. It must not be impossible. (Art. 1348)
5. It must be determinate as to its kind or
if its quantity is not determinate, it
must be possible to determine the same
without the need of a new contract
between the parties. (Art. 1349)
Thus, if S sells to B a “car stereo”,
the object is determinate as to its kind
although it has not been particularized.
If the object stated in the contract is “all
the pigs in the piggery”, the fact that
the quantity is not determinate shall
not be an obstacle to the existence
 of the contract because such quantity
can be determined by the parties
without the need of entering into
another contract.

Human internal organs as objects of a

contract
R. A. No. 9208 penalizes human
trafficking for the purpose of the removal or
sale of internal organs. The law provides that
the human body and its parts cannot be the subject
of commercial transactions. Giving or receiving
payment including any other compensation or
reward for organs is prohibited along with
advertising the need for or availability of
organs, with a view to offering or seeking
payment.

Under the law, however, a living and

related voluntary donor or a living and non-
related voluntary donor may be allowed to
donate organs, but no living minor is allowed
to donate any organ for the purpose of
transplant. Organ donations under the said law
are subject to the World Health Organization’s
Guiding Principles on Human Organ
Transplantation which was forged by member
countries in 1981. Under the international
agreement, organs for transplant should be
removed preferably from the bodies of
deceased persons, and that adult living persons
may also donate organs but such donors
should be genetically related to the recipients.

Cause of Contracts
Cause, concept
It is the essential reason why a party
enters into a contract.
Cause of contracts
1. Onerous contract – Here, the cause for
 each contracting party is the prestation
or promise of a thing or service by the
other. (Art. 1350)
Example: (1) S sold his car to B
for P100,000.00. The cause for S is the
payment of, or the promise to pay,
P100,000.00 by B, while the cause for B
is the delivery of, or the promise to
deliver, the car by S. (2) C, a CPA,
entered into a contract with B, a
businessman, to audit the books of the
latter, for a professional fee of
P10,000.00. The cause for C is the
 payment of the professional fee of
P10,000.00, while the cause for B, is the
audit of his books by C.
2. Remuneratory contract – Here, the
cause is the service or benefit which is
remunerated. (Art. 1350)
Example: C saves D from
drowning, and as a reward, D gives C
P5, 000.00. The saving of D from
drowning is the service remunerated.
The service here is not a recoverable
dept to distinguish it from an onerous
contract where there is a promise of
service by a party.
3. Gratuitous, lucrative or contract of
pure beneficense – The cause is the
liberality of the benefactor. (Art. 1350)
An example is donation whose cause is
the liberality of the donor; or
commodatum whose cause is the
liberality of the lender.
Requisites of cause
1. It must exist
a. It is presumed that the cause
exists and it is lawful, even if not
stated in the contract, unless the
debtor proves the contrary. (Art.
1354)
 b. Contracts without cause produce
no effect whatsoever. (Art. 1352)
2. It must be lawful.
Contracts with unlawful cause
produce no effect whatsoever. The
cause is unlawful if it is contrary to
law, morals, good customs, public
order or public policy. (Art. 1352)
3. It must be true.
The statement of a false cause
in a contract shall render them void, if
it should not be proved that they were
founded upon another cause which is
true and lawful. (Art. 1353)
 Example: A contract stated that S
sold his car to B for P100,000.00. The
fact, however, is that B did not give S
P100,000.00 but a diamond ring. The
cause of the contract is false. However,
the contract is not rendered void
because the false cause, the giving of
P100,000.00, is founded upon another
cause, the giving of a diamond ring,
that is true and lawful.
However, if what B gave to S was
several grams of “shabu”, the contract
will be rendered void.
Cause and motive distinguished
1. Cause is the essential reason of the
contract; while motive is the private or
secret reason or intention of the
contracting party. (Lui vs. De Ocampo,
55 O.G. 1778)
2. The contract is void if the cause is
illegal; the validity of the contract is
not affected by the illegality of the
motive.
Example: S sold his car to B for
P100,000.00 because he wanted to have
funds for the purchase of a dangerous
 drug. The motive of S is illegal.
However, its illegality does not affect
the validity of the contract which has a
lawful cause, i.e., the payment of
P100,000.00.
3. The cause of a contract is always
known to the contracting parties, while
the motive of one party may not b
known to the other.
Lesion, concept and effect on contract.
Lesion is the inadequacy of cause. As a
general rule, lesion shall not invalidate a
contract except in the following:
1. When there was fraud, mistake and
undue influence. (Art. 1355)
2. In cases provided by law, such as when
the ward or absentee suffer lesion by
more than one-fourth of the value of the
object of the contract. (Art. 1381)

DEFECTIVE CONTRACTS
Rescissible Contracts
Rescissible contract, concept
A rescissible contract is one which has all
the essential requisites of a contract but which may
be set aside by reason of equity on account of
damage to one of the parties or upon a third
person.
on account of damage to one of the parties or
upon a third person.
The following are rescissible contracts (Art.
1381)
1. Those entered into by guardians
whenever the ward whom they
represent suffer lesion by more than
one-fourth of the value of the things
which are the object thereof.
Example: G, the guardian, of M,
sold the corn harvested from M’s farm
for P40,000.00. The value of the corn is
P26,000.00. The sale is rescissible
because the lesion of P20,000.00 is more
 than ¼ of P60,000.00, or P15,000.00.
2. Those agreed to in representation of
absentees, if the latter suffer lesion by
more than one-fourth of the value of
the things which are the object thereof.
An absentee is a person who
disappears from his domicile, his
whereabouts being unknown, and
without leaving an agent to administer
his property. (Art. 381). Thus, if it was
the representative of an absentee who
sold the corn in the preceding number,
the sale is rescissible.
3. Those undertaken in fraud of creditors
when the latter cannot in any manner
collect the claims due them.
Example: D owes C. To defraud
C, D sells his only lot to T who knows
of the fraudulent intention of D. The
sale is rescissible.
4. Those which refer to things under
litigation it they have been entered into
by the defendant without the
knowledge and approval of the
litigants or of competent judicial
authority.
 Example: C sued D to recover
some pieces of jewelry. While the case
was pending, D, without authority
from the court or from C, sold jewelry
to T who was aware that the jewelry
was the subject of litigation. The sale is
rescissible.
5. All other contracts specially declared
by law to be subject to rescission. (Art.
1381)
Note: Rescission with respect to lesion in
items 1 and 2 shall not take place if the contract
is approved by the court which is presumed to
have taken appropriate steps to safeguard the
interest of the ward or the absentee.
Rescissible payment, requisites
1. The debtor is insolvent.
2. The obligation is not yet due.
3. The debtor makes the payment. (Art.
1382)

Rescission, concept
Rescission is the remedy allowed by
law to the contracting parties and to third
persons to repair the damages cause them by a
contract.
Requisites for rescission
1. The party suffering damage must have
no other legal means to obtain
reparation for the same. (Art. 1383)
The action for rescission is
subsidiary. Hence, if the debtor has
property other than that for which
rescission is being brought, rescission
will not prosper.
2. The party demanding rescission must
be able to return whatever he may be
obliged to restore. (Art. 1385)
 Rescission creates the obligation
to return the things which were the
object of the contract, together with
their fruits, and the price with its
interest. Hence, rescission is not
available if the party seeking it cannot
comply with such obligation. (Art.
1385). However, the obligation to
return does not apply to prejudiced
creditors as there is nothing to be
returned by them.
3. The thing object of the contract must
not be legally in the possession of a
third person who acted in good faith.
(Art. 1385)
 In this case, indemnity for
damages may be demanded from the
person causing the loss. (Art. 1385)
4. The action for rescission must be
brought within the period allowed by
law. (Art. 1389)
The prescriptive period is 4 years
from the date of the contract, except in
the following:
a. For persons under guardianship
– 4 years from termination of
incapacity.
b. For absentees – 4 years from the
time the absentee’s domicile is
known.
Extent of rescission
Rescission shall only be to the extent
necessary to cover the damages caused. (Art.
1384)
Example: G, guardian, sold 100 sacks
of rice harvested from the farm of M, his ward,
for P700.00 per sack, or a total price of
P70,000.00 to B. However, the value of each
sack is P1, 000.00, or total value of P100,000.00.
The rescission of the sale of 30 sacks of rice is
sufficient to cover the damage of P30,000.00
(which is more than one-fourth of the total
value of P100,000.00). Thus, B must return 30
sacks of rice to M.
Alienations in fraud of creditors
1. Alienations by gratuitous title
Gratuitous alienations are
presumed to have been entered into in
fraud of creditors if the debtor did not
reserve sufficient property to pay all
debts contracted before the donation.
(Art. 1387)
Example: D owes his creditors
P500,000.00. He has assets of
P700,000.00. If D donates assets
amounting to P300,000.00, such
donation is presumed fraudulent
 because it leaves D with assets of only
P400,000.00, which amount is not
enough to pay his debts of P500,000.00.
2. Alienations by onerous title (such as
sale or exchange)
Onerous alienations are
presupartyzmed fraudulent when
made by persons against who some
judgment has been rendered in any
instance or some writ of attachment
has been issued. The decision or
attachment need not refer to the
property alienated, and need not have
been obtained by the party seeking
rescission.(Art. 1387)
Examples:
a. D owes C P100,000.00. When D
defaults, C sues him and obtains
a favorable judgment against
him. If D sells properties, say to
T, the sale is presumed
fraudulent because it was made
by D who has a decision
rendered against him. C or any
other creditor may ask for the
rescission of the sale.
b. C files a complaint against D to
collect P100,000.00 He asks the
the court to attach a lot of D (Lot
1). The court issues a writ of
attachment. Later, D sells another
lot of his (Lot 2) to T. The sale of
Lot 2 is presumed fraudulent
because it was made by D against
whom a writ of attachment has
been issued. X, another creditor
of D, may sue for the rescission
of the sale of Lot 2. This is
 possible because the law says
that “(T)he decision or attachment
need not refer to the property
alienated, and need not have been
obtained by the party seeking
rescission”. (Art. 1387)
Liability for damages of persons acquiring
things in alienations in fraud of creditors
1. If the purchase was made in bad faith
The purchaser in bad faith shall
indemnify the creditors for damages
suffered by them on account of the
alienation whenever due to any cause,
 it would be impossible for him to
return them. (Art. 1388) This rule
applies even if the cause of the loss is a
fortuitous event.
If there are two or more
alienations, the first acquirer shall be
liable first, and so on successively (Art.
1388) provided they are also in bad
faith.
2. If the purchases was made in good
faith
The purchaser in good faith shall
not be liable notwithstanding the
 fraudulent intention of the debtor in
disposing the property. Hence,
rescission will not be available. If there
are subsequent transfers, the
transferees shall not be liable even if
they were in bad faith.

Voidable Contracts
Voidable contract, concept
A voidable contract is one that is
defective by reason of the incapacity or vitiated
consent of one to the parties. It is binding
unless annulled by a proper action in court. It
is susceptible of ratification. (Art. 1390)
The following are voidable or annullable
contracts
1. Those where one of the parties is
incapable of giving consent to a
contract.
The following are incapable of
giving consent to a contract:
a. Unemancipated minors
b. Insane or demented persons.
c. Deaf-mutes who do not know
how to write. (Art. 1327)
2. Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence or fraud. (Art. 1390)
3. Those where consent in a state of
drunkenness. (Art. 1328)
4. Those where consent is given during a
hypnotic spell. (Art. 1328)

Annulment, concept
Annulment is the action brought to set
aside a voidable contract.
Annulment and rescission, distinguished
1. Annulment is brought to declare the
inefficacy inherent in the contract.
Rescission is availed of to produce the
inefficacy which did not exist in the
contract.
2. Annulment is based on vitiated consent;
hence, damage is immaterial. Rescission
is based on lesion or damage.
3. In annulment, the action is principal. In
rescission, the action is subsidiary.
4. Annulment is a sanction where the law
predominates. Rescission is a remedy
where equity predominates.
5. Annulment is available only to the
parties, whether bound principally or
subsidiarily. Rescission is available not
only to the contracting parties but also
to third persons whose interests are
affected.
6. Ratification is required to prevent
annulment, while ratification is not
required to prevent rescission.
Rules on annulment of voidable contracts
1. When action must be brought
(prescriptive period); otherwise the
contract can no longer be set aside
 The action for annulment must
be brought within four (4) years which
period shall begin:
a. In cases of intimidation, violence
or undue influence, from the time
the defect in the consent ceases.
b. In case of mistake or fraud, from
the time of discovery of the same.
c. In cases of minority or other
incapacity of a party, from the
time guardianship ceases. (Art.
1391)
2. Who may bring action for annulment
The action for annulment may be
instituted by all who are thereby
obliged principally or subsidiarily.
(Art. 1397) Hence, it cannot be brought
by third persons. It may be brought by
the following:
a. The guardian of the incapacitated
person during the latter’s
incapacity.
b. The incapacitated person after he
has attained capacity.
c. The party whose consent is
vitiated by mistake, violence,
intimidation, undue influence or
fraud. (Thus, persons who
employed such vices of consent
cannot base their actions on such
flaws of the contract. This is
based on the principle that “(H)e
who comes to court must come with
clean hands.” This principle
applies also to capacitated
persons who cannot seek the
annulment of the contract on the
ground of the incapacity of the
other party.
3. Effects of annulment
a. Obligations created by
annulment
1) In obligations to give, the
contracting parties shall
restore to each other, except
in cases provided by law,
the following:
a) The things which
have been the subject
matter of the contract,
with their fruits.
b) The price with its
interest. (Art. 1398)
2) In obligations to render
service, the value thereof
shall be the basis of
damages. (Art. 1398)
3) Restitution when one of the
parties is incapacitated
The incapacitated
person is not obliged to
make any restitution except
insofar as he has been
benefited by the thing or
price received by him. (Art.
1399)
4) When the thing is lost
through the fault of the
party obliged by the decree
of annulment to return it
The said party shall
return the following:
a) Fruits received
b) Value of the thing at
the time of the loss.
c) Interest from the time
of the loss. (Art. 1400)
 5) Mutual restitution
If one party
cannot restore what
he is bound to return
in the decree of
annulment, the other
cannot be compelled
to comply with what
is incumbent upon
him. (Art. 1402)
4. Effect of loss of thing while in the
possession of the party who has right
to bring the action for annulment
a. If lost through his fault, the
action for annulment is
extinguished, whether such party
is incapacitated or his consent is
vitiated.
b. If lost without his fault and such
party is incapacitated, he can still
bring an action for annulment.
However, he will be required to
return the value of the thing and
its fruits (Art. 1398) and only up
to the extent that he has been
benefited. (Art. 1399)
Ratification, concept
Ratification is the adoption or
affirmation of a contract which is defective
because of a party’s vitiated consent or
incapacity.
Rules on ratification
1. How ratification is made
a. Express – When made orally or in
writing.
b. Implied or tacit – There is tacit
ratification if with knowledge of the
reason which renders the contract
voidable and such reason having
ceased, the person who has a right to
invoke it executes an act which
necessarily implies an action to waive
his right. (Art. 1393)
Example: S, 17 years old, sold his
computer to B, 25, for P50,000.00
payable in 10 equal monthly
installments. When S turned 18 years
old, 6 installments were still due. If S
continues to collect the remaining
installments instead of suing for
annulment, he is deemed to have
ratified the contract.
2. Who may ratify (the same persons who
may annul the contract)
a. The guardian of the incapacitated
person during the latter’s
incapacity.
b. The incapacitated person after he
has attained capacity.
c. The party whose consent is
vitiated by mistake, violence,
intimidation, undue influence or
fraud (hence, the person who
employed such vices of consent
cannot ratify).
 Note: Ratification does not require the
conformity of the person who has no
right to bring the action for annulment.
(Art. 1395)
3. Effects of ratification
a. It extinguishes the action to
annul a voidable contract. (Art.
1392)
Once the party who has the
right to seek annulment of the
contract ratifies it, he can no
longer subsequently bring the
action for annulment.
 b. It cleanses the contract from all
its defects from the moment it
was constituted. In other words,
the contract is validated from
inception.

Unenforceable Contracts
Unenforceable contract, concept
An unenforceable contract is one that
cannot be enforced unless ratified.
Right to defense of unenforceability
This right is available only to the
contracting parties. Unenforceable contracts
cannot be assailed by third persons. (Art. 1408)
The following are unenforceable contracts:
1. Those entered into in the name of
another person by one who has been
given no authority or legal
representation, or who has acted
beyond his powers. (Art. 1403)
Under 1317, no one may contract
in the name of another without being
authorized by the latter, or unless he
has by law a right to represent him.
Such, contract, if entered into, shall be
unenforceable, unless it is ratified,
expressly or impliedly, by the person
 in whose behalf it has been executed,
before it is revoked by the other
contracting party.
Examples:
a. A sells P’s car to B in the name of
P without P’s authority. B cannot
enforce the contract against P
unless P ratifies it.
b. P authorizes A to sell P’s car for
P100,000.00 cash. A sells the same
to B for P100,000.00 in
installments. B cannot enforce the
contract against P unless P
 ratifies it because although A had
the authority to sell the car, he
acted in excess of authority.
2. Those that do not comply with the
Statute of Frauds. (Art. 1403)
The Statute of Frauds is a statute
designed to prevent the commission of
fraud by requiring certain contracts to
be in writing and be subscribed by the
party charged. It applies only to wholly
executory contracts, i.e., contracts
where no performance has yet been
made by both contracting parties.
Contracts infringing the Statute of
Frauds cannot be sued upon either for
damages or specific performance.
The following contracts must be
in writing; otherwise they are
unenforceable:
a. An agreement that by its terms is
not to be performed within a year
from the making thereof.
Example: On January 1,
2010, C and D orally entered into
a contract for the contruction of
C’s building which shall begin on
February 1, 2011. Niether one
 may enforce the contract against
the other on February 1, 2011 as it
was not in writing and
subscribed by either or both
parties.
b. A special promise to answer for
the debt, default, or miscarriage
of another. This is known as
guaranty.
Example: D borrowed from
C P10,000.00 with G as
guarantor. The guaranty was
made orally. If D cannot pay, C
cannot enforce the guaranty
against G.
c. An agreement in consideration of
marriage, other than mutual
promise to marry.
Examples: (1) F, the father
of G, orally agreed to give a
house and lot to G, the groom,
and B, his bride, in consideration
of their marriage. The agreement
is unenforceable against F since it
is not in writing. (2) M and W
mutually agreed to marry each
other within 6 months. The
agreement was oral. At the end
 of 6 months, M refused to marry
W. If preparations have been
made for the wedding, M can
enforce the contract for the
purpose of claiming damages
although the mutual promise
was not in writing, but not for
the specific promise to marry.
d. Sale of goods, chattels or things
in action at a price not less than
P500.00.
Things in action include
credit, shares of stock and other
incorporeal properties.
 Example: S orally sold his
radio for P1,000.00 to B. The
parties agreed that the radio
would be delivered and the price
paid the following day. Here,
neither party may enforce the
contract since it was not in
writing. However, if the price of
the radio is P500.00 or less, the
sale is enforceable although it is
wholly executory.
Rule in sale by auction
 If the auctioneer makes an
entry in his sales book, at the
time of sale, of the amount and
kind of property sold, terms of
sale, price, names of the
purchasers and person on whose
account the sale is made, it is a
sufficient memorandum, (Art.
1403),i.e., the requisite that the
contract must be in writing is
complied with; hence, the sale is
enforceable although not
subscribed by the party sought to
be held liable.
e. An agreement for the leasing of a
real property or of an interest
therein for more than one year.
If the object of the lease is
personal property, the contract is
enforceable regardless of the
length of the lease period.
f. Sale of real property of an
interest therein (regardless of
price).
g. A representation as to the credit
of a third person.
 The representation must
have the effect of inducing the
party to whom the representation
is made to grant credit to
another.
Example: D wants to buy
construction materials on credit
from C. T orally tells C that D
has a good credit standing and
pays his loans promptly. C thus
sells on credit to D. If the
representation is false, C cannot
prove such misrepresentation
against T to recover damages
 because it is unenforceable not
being in writing.
Applicability of Statute of Frauds and
ratification
The Statute of Frauds applies
only to executory, not to completed,
executed or partially consummated,
contracts. (Arrogante vs Deliarte, G.R.
No. 152132, July 14,2007) They are
susceptible of ratification through any
of the following means which will
render them enforceable:
a. By the failure to object to the
 presentation of oral evidence to
prove them.
b. By the acceptance of benefits
under them. (Art. 1405). This will
make the contract executed in
part.
Example: S orally sold to B
a radio for P800.00. The parties
agreed that S would deliver the
radio the following day. B,
however, gave a down payment
of P200.00. The sale is enforceable
because S had accepted a benefit
under the contract.
Problem:
S and B entered into a contract
whereby S sold his computer to B for
P20,000.00. The parties agreed that S
would deliver the computer, and that B
would pay the price the following day.
B signed the written agreement, but S
refused to sign it saying that he would
sign when B makes the payment. The
following day, B went to the place of S
to get the computer and offered the
payment. S refuses to deliver the
computer. May B enforce the contract
against S?
 Answer: No. It is not enough that
there is a writing of the agreement for it to
be enforceable. It must likewise be
subscribed by the party charged. So since S
did not subscribe to the agreement, the
same cannot be enforced against him.
3. Those where both parties are incapable
of giving consent to a contract. (Art.
1403)
Thus, the contract is
unenforceable if one party is a minor,
while the other party is insane.
Effect of ratification by parent or guardian
a. When only the parent or
guardian of one party ratifies, the
contract is voidable at the
instance of the parent or
guardian of the party who did
not ratify the contract.
b. When the parents or guardians of
both parties ratify, the contract
shall be considered validated
from inception. (Art. 1407)
 Void or Inexistent Contracts
Void contract, concept
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 validate either by time or ratification.
(Moreno, Philippine Law Dictionary). The
following are some characteristics of a void
contract:
1. A void contract cannot be ratified.
(Art.1409)
Thus, unlike in an unenforceable
contract, a void contract remains void
 even if a down payment has been
made or a benefit has been accepted by
a party.
2. The right to to set up the defense of
illegality cannot be waived. (Art. 1409)
Hence, the illegality of the
contract can be raised even on appeal.
3. The action or defense for the
declaration of the inexistence of a
contract does not prescribe. (Art. 1410)
4. The defense of illegality of contracts is
not available to third persons whose
interests are not directly affected.
(Art.1421)
 Example: H sells his land to W,
his wife. The sale is void, unless it falls
under the exceptions. T, a third person,
cannot assail the nullity of the sale
unless his interests are directly affected
such as if he is a creditor of H and he
cannot collect from the latter because
he has no more property.
5. A contract is void and inexistent if it is
the direct result of a previous illegal
contract. (Art. 1422)
The following contracts are void from the
very beginning (Art. 1409)
1. Those whose cause, object or purpose
is contrary to law, morals, good
customs, public order or public policy.
(Art. 1347,1352)
2. Those which are absolutely simulated
or frictions. (Art. 1356)
3. Those whose object or cause did not
exist at the time of the transaction.
These should refer to things that
are not capable of coming into
existence, and not to future goods or
things having a potential existence
 which may validly be the object of a
contract. (Art. 1347, 1461 and 1462)
4. Those whose object is outside the
commerce of men. (Art. 1347)
5. Those which contemplate an
impossible service. (Art. 1347, 1348)
6. Those where the intention of the
parties relative to the principal object
of the contract cannot be ascertained.
(Art. 1378, par. 2)
7. Those expressly prohibited or declared
void by law. (Art. 1409)
 The following are some contracts
declared void by law:
a. A contract of donation between
spouses during the marriage
(except moderate ones made on
the occasion of a family
rejoicing.) (Art. 87, Family Code.)
b. A contract of sale between
spouses (except when there is
separation of property) (Art.
1490)
c. A contract which stipulates that
household service shall be
without any compensation (Art.
1689)
 d. A contract upon future
inheritance (except in cases
provided by law such as in the
marriage settlements).
Kinds of illegal contracts
1. Where the contract is a criminal offense
(Art. 1411)
a. If both parties are guilty (in pari
delicto)
1) They shall have no right of
action against each other.
2) Both shall be criminally
prosecuted.
3) The effects and instruments
of the crime (the things and
price of the contract) shall
be confiscated in favor of
the government.
Example: S sold to B 10
sticks of marijuana at P50.00 per
stick. S initially delivered 3 sticks
to B who paid P150.00. B cannot
compel S to deliver the
remaining 7 sticks and S cannot
compel B to pay the balance of
P350.00. S and B will be
criminally prosecuted, and the
 3 sticks and P150.00 will be
confiscated in favor of the
government.
b. If only one party is guilty
1) The guilty party will be
criminally prosecuted.
2) Neither one may compel
the other to comply with
his undertaking.
3) The instrument will be
confiscated in favor of the
government.
4) The innocent party shall
not be bound to comply
with his promise if he has
not yet given anything, and
if he had given, he may
claim for its return.
Example: B is buying a bale
of tobacco leaves from S.
However, S delivers to B a bale of
marijuana leaves which B
believes to be tobacco. S will be
prosecuted and he cannot compel
B to pay the price. If B has paid
the price, he may recover it. The
 marijuana leaves will be
confiscated in favor of the
government.
2. Where the contract is not a criminal
offense (Art. 1412)
a. If both parties are guilty
Neither party may recover
what he has given or demand the
performance of the other’s
undertaking.
Example: W, a woman,
agreed to live with M, a man, as
M’s wife without the benefit of
 marriage in consideration of M´s
giving a monthly support to W.
The contract is illegal for being
immoral but the illegality does
not constitute a crime. Neither
party may ask for the fulfillment
of the other’s promise nor
recover what he has given. If M
has already given support to W,
M cannot recover it.
b. If only one party is guilty
1) The guilty party cannot
recover what he has given
 nor can he ask for the
fulfillment of what has
been promised him.
2) The innocent party may
demand the return of what
he has given without any
obligation to comply with
his promise.
Example: S sold and
delivered to B for P3,000.00 a cow
which S knew was suffering
from contagious disease. The sale
is void under Art. 1575 of the
Civil Code. However, the
illegality does not constitute a
crime. If B, the innocent party,
had paid the price, he can recover
it. And if he had not paid it yet,
he cannot be compelled to make
the payment. S, the guilty party,
cannot recover the cow. Since the
animal is suffering from a
contagious disease, it shall be
condemned by the authorities.
Causes when recovery may be made despite
the parties being in pari delicto in illegal
contracts
1. The payor may recover interest he paid
in excess of the interest allowed by
usury laws together with interest from
the date of payment. (Art. 1413)
a. Law governing usurious
transactions
The law governing
usurious transactions is the
Usury Law. The following are the
maximum lawful rates of interest
under the Usury Law which may
be charged for loan or
forbearance of money:
1) Twelve percent (12%) per
annum – If the security
given is a real estate the
title to which is duly
recorded or government
securities.
2) Fourteen percent (14%) per
annum – If the security
given is unregistered real
estate or personal property,
or where there is no
security given.
3) For pawnbrokers
a) Two-and-a-half
percent (2 ½ %) a
month – If the loan is
less than P500.00..
b) Two percent (2%) a
month – If the loan is
P500.00 to P2,000.00.
c) Fourteen percent
(14%) per annum –If
the loan is more than
P2,000.00. (Secs. 2, 3
and 4, Usury Law;
P.D. 116; CB Circular
416 and 419)
b. Usury legally inexistent
With the promulgation of
Central Bank Circular No. 905,
usury has become legally
inexistent. The lender and the
borrower may thus freely agree
on the interest to be charged on
the loan (Verdejo vs. CA, 157
SCRA 743) However, nothing in
the said circular grants lenders
carte blanche to raise interest rates
to levels which will either
enslave their borrowers or lead
to a hemorrhaging of their
assets. Stipulations authorizing
such interest are contra bonos
mores, i.e., contrary to good
customs, if not against the law.
They are inexistent and void
from the beginning. Thus, the
interest rate of 10% per month
agreed upon by the parties is
clearly excessive, iniquitous and
unconscionable and cannot be
sustained. (Svendsen vs. Peopls,
G.R. No. 175381, February
26,2008.)
 However, the Supreme
Court in certain cases (Macalalag
vs. People, 511 SCRA 400 (2006));
(Dino vs. Jardines 481 SCRA 226
(2006)); and (Cuaton vs. Salud, 41
SCRA 278 (2004)), found the 10%
interest per month clearly
excessive and reduced it to 12%
per annum. In effect, the
difference may be recovered by
the debtor if he had paid such
excessive interest.
2. A party may recover if public interest
will be subserved, money or property
delivered for illegal purpose provided
he repudiates the contract before the
purpose has been accomplished or
before any damage has been caused to
a third person. (Art. 1414)
Example: A hired B to kill X by
giving P20,000.00 to B. Later, A
changed his mind and told B not to kill
X anymore. A may be allowed by the
court to recover the amount he gave to
B.
3. An incapacitated person who is a party
to an illegal contract may recover, if the
interest of justice so demands, money
or property delivered by him. (Art.
1415)
Example: A, a minor of 17 years,
gave P10,000.00 to B for a dangerous
drug. The court may allow A to
recover the amount he gave if the
interest of justice so demands.
4. A person may recover, if public policy
is thereby enhanced, what he has paid
or delivered, if the agreement is not
 illegal per se but is merely prohibited,
and the prohibition by law is designed
for his protection. (Art. 1416)
Thus, F, a Filipino, is allowed to
recover a piece of land (located in the
Philippines) he sold to A, an alien,
because the restoration of the land to
him would enhance the public policy
to conserve lands for Filipinos.
5. Any person may recover any amount
he has paid in excess of the price fixed
by law for any article or commodity.
(Art. 1417)
6. A laborer may demand additional
compensation for service rendered
beyond the maximum number of hours
of labor in a contract where he
undertakes to work longer than the
maximum hours fixed. (Art. 1418)
7. A laborer may recover the deficiency in
a contract in a contract where he
accepts a wage lower than the
minimum wage set by law. (Art. 1419)
Rule when contract is divisible and there are
illegal terms
1. If divisible – The legal terms may be
enforced; the illegal terms are void,
hence, they may not be enforced. (Art.
1420)
2. If indivisible – The whole contract is
void; hence, no part thereof may be
enforced. (Art. 1420)
Example:
S sells to B one carton of “Fortune”
cigarettes and 20 sticks of marijuana for a
consideration of P500.00. The sale is indivisible
because there is only one consideration for the
“Fortune” cigarettes and the 20 sticks of
marijuana. Accordingly, the whole contract is
void because that which is legal cannot be
separated from that which is illegal. However,
if B paid P200.00 for the “Fortune” cigarettes
and P300.00 for the marijuana, then only the
sale of the “Fortune” cigarettes may be
enforced. Here, the sale is divisible with the
part that is legal being capable of separation
from that which is illegal.
 FORM OF CONTRACTS
Obligatory force of contracts in whatever
form, exceptions
Contracts shall be obligatory in
whatever form thay may have been entered
into, provided all the essential requisites for
their validity are present. (Art. 1356) This rule,
however, does not apply when a certain form is
required by law for the following reasons:
1. For validity
If the contract is not in the form
provided by law for its validity, the
contract is void.
 The following are certain
contracts that must be in a certain
form to be valid:
a. Contract of donation of an
immovable which must be in a
public document together with
the acceptance of the donee. (Art.
749)
b. Contract of donation of personal
property whose value exceeds
P5,000.00 must be in writing
together with the acceptance of
the donee. (Art. 748)
c. The authority of the agent to sell
a piece of land must be in
writing; otherwise, the sale is
void. (Art. 1874)
d. Contract of partnership where
immovable property is
contributed must be in a public
instrument to which shall be
attached a signed inventory of
the immovable property. (Art.
1771)
2. For enforceability
If the contract is not in the form
provided by law for its enforceability,
the contract, though it has all the
essential requisites for validity, cannot
be enforced against the party sought to
be charged. (See discussions on the
Statute of Frauds under Unenforceable
Contracts.)

3. For convenience
(Please see succeeding topics.)
Right to compel observance of the form
required by law
If the contract is valid and enforceable
but the same is not in the form required by law,
the contracting parties may compel each other
to observe that form. This right may be
exercised simultaneously with the action upon
the contract. (Art. 1357)
Example: S sells his land to B. The sale
is in a private instrument. The contract is valid
and enforceable because it was in writing.
However, if B wants to register the sale with
the Register of Deeds, he may compel S to
execute tha sale in a public instrument.
Contracts for the convenience of the parties
(Art. 1358)
1. Public document
The following contracts are
required to appear in a public
document for the convenience of the
parties and so that they may be
registered in the proper recording
office to be binding against third
persons:
a. Acts and contracts which have
for their object the creation,
transmission, modification or
 extinguishment of real rights
over immovable property.
Example: A deed of real
estate mortgage and its eventual
cancellation must be in a public
instrument.
b. The cession, repudiation or
renunciation of hereditary rights
or of those of conjugal
partnership of gains.
c. The power to administer
property, or any other power
which has for its object an act
 appearing or whch should
appear in a public document, or
should prejudice a third person.
Example: The power given
to another to mortgage a real
property must be in a public
instrument since the mortgage
itself is an act that must also
appear in a public instrument for
the convenience of the parties.
d. The cession of actions or rights
proceeding from an act
appearing in a public document.
 Example: D mortgaged his
lot in favor of C to secure a debt.
If C assigns the debt and the
mortgage, the deed of
assignment must also be in a
public instrument since the
mortgage itself is required to be
in a public instrument.
2. Any writing, public or private
All other contracts where the
amount involved exceeds P500.00 must
be in writing for the convenience of the
parties. However, the sale of goods,
 chattels or things in action whose price
is P500.00 or more must be in writing
to be enforceable.
Thus, the lease of personal
property for a period of two years at a
monthly rental of P1,000.00 must be in
writing for the convenience of the
parties.

REFORMATION OF INSTRUMENTS
Reformation, concept
Reformation is a remedy in equity by
means of which a written instrument is made
or construed so as to express or conform to the
real intention of the parties when some error or
mistake has been committed. (Zaragosa vs.
Certified Clubs, 52718-R, Nov. 24, 1975)
Requisites of reformation
1. There must be a meeting of minds of
the parties to the contract.
2. The true intention of the parties is not
expressed in the instrument.
3. The reason thereof is due to mistake,
fraud, inequitable conduct or accident.
(Art. 1359)
Example: S sold to B his lot consisting
of P1,000 square meters for P100,000.00 cash.
However, the contract they signed showed an
area of 1,200 square meters because of the
clerk’s error. The parties had a meeting of
minds but the contract did not show their true
intention as to the area of the lot. Either party
may ask for the reformation of the contract.
Who may ask for reformation
1. If the mistake was mutual, by either
party, or his successors in interest, such
as his heirs or assigns
2. In other cases, by the injured party, or
his heirs or assigns
When an instrument may be reformed
1. When a mutual mistake of the parties
causes the failure of the instrument to
disclose their agreement. (Art.1361)
2. When one party was mistaken and the
other acted fraudulently or inequitably
in such a way that the instrument does
not show their true intention. (Art.
1362)
3. When a party was mistaken and the
other knew or believed that the
instrument did not state their real
agreement. (Art. 1363)
4. When through the ignorance, lack of
skill, negligence or bad faith on the
part of the person drafting the
instrument or of the clerk or typist, the
instrument does not express the
intention of the parties. (Art. 1364)

5. If two parties agree upon the mortgage

or pledge of real or personal property,
but the instrument states that the
property is sold absolutely or with
right of repurchase. (Art. 13365)
When reformation is not available
1. In the case of the following:
a. Simple donations inter vivos
wherein no condition is imposed.
This is so because a
donation is essentially an act of
liberity on the part of the donor.
However, if the donation is
conditional, reformation is
allowed so as show the true
intent of the donor as regards the
conditions.
b. Wills.
The reason i sthat the
making of a will is strictly a
personal act which is free and the
will may also be revoked at any
time by the testator. (See Arts.
784, 828 and 839.) Upon the death
of the testator, the will shall also
be scrutnized in the probate
proceedings where errors in
descriptions may be rectified.
 c. When the real agreement is void.
(Art. 1366)
Here there is nothing to
reform as the contract is
inexistent.
2. When one of the parties has brought an
action to enforce the contract, he
cannot subsequently ask for its
reformation. (Art. 1367)

This is equivalent to ratification,

waiver or estoppel.
 INTERPRETATION OF CONTRACTS
Rules on interpretation of contracts
1. If the terms of a contract are clear and leave
no doubt upon the intention of the
contracting parties, the literal meaning of the
stipulations shall control. (Art. 1370)
2. If the words appear to be contrary to the
evident intention of the parties, the latter
shall prevail over the former. (Art. 1370)
In order to judge the intention of the
contracting parties, their contemporaneous
and subsequent acts shall be principally
considered. (Art. 1371)
3. However, general the terms of a contract
may be, they shall not be understood to
comprehend things that are distinct and
cases that are different from those upon
which the parties intended to agree. (Art.
1372)
Thus, if S sells “all the grains” in his
warehouse to B; such term does not include
the grains which, though stored in S’s
warehouse, do not belong to S.
4. If the stipulation of any contract should
admit of several meanings, it shall be
understood as bearing that import which is
most adequate to render it
effectual.(Art.1373)
 Example: S has two cars. He sold one
of the cars to B but without indicating which.
His ownership of one car is absolute, while
his ownership of the car is disputed. The car
that is deemed to have been sold is the first
car since such is the import that will render
the contract effectual.
5. The various stipulations of a contract shall be
interpreted together, attributing to the
doubtful ones that sense which may result
from all of them taken jointly. (Art. 1374)
6. Words which may have different
significations shall be understood in that
which is most in keeping with the nature and
object of the contract. (Art. 1375)
 Example: P gave A, his agent, the
authority “to exact payment by legal means”all
the receivables of P. With the authority, A,
among other things, wrote demand letters
and called on P’s debtors including B. When
A could not collect from B, he filed a court
action against him. B, however, questioned
the authority of A to sue claiming that the
authority given to him by P “to exact payment
by legal means” does not include such power.
Here, the power to sue is deemed included
because it is in keeping within the nature
and object of the contract, which is for A to
 be able to collect all of P’s receivables. (See
German and Co. vs. Donaldson, Sim and Co.,
1 Phil 63)
7. The usage or custom of the place shall be
borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the
omission of stipulations which are ordinarily
established. (Art. 1376)
Thus, if A hired the services of B but
the contract did not indicate the
compensation to be paid, the amount thereof
shall be the rate that is customarily paid in
the place where the services were rendered.
(Arroyo vs. Azur, 76 Phil. 498)
8. The interpretation of obscure words or
stipulations in a contract shall not favor a
party who caused the obscurity. (Art. 1377)
Thus, in a contract of insurance which
is a contract of adhesion, any ambiguity shall
be interpreted against the insurer since the
terms of the policy do not result from mutual
negotiation between the parties as they are
prescribed by the insurer in printed form to
which the isured may “adhere” if he chooses
but which he cannot change. (Del Rosario vs.
Equitable Insurance and Casualty Co., G.R.
No. 16215, June 29, 1963)
Rules when it is absolutely impossible to
settle doubts under the preceding rules (Art.
1378)
1. When the doubts refer to the incidental
circumstances of a gratuitous contract,
the least transmission of rights and
interests shall prevail.
Example: If C gave his bicycle to
D, but it cannot be determined
whether C donated it (donation) or
merely lent it (commodatum), the
contract should be interpreted as
commodatum rather than donation
because commodatum transmits lesser
 rights the ownership of the bicycle
being retained by C.
2. If the contract is onerous, the doubt
shall be settled in favor of the greatest
reciprocity of interests.
Example: D obtained from C a
loan of P500,000.00. which bears
interest at 1% per month. It cannot be
determined, however, whether the loan
is payable in 2 years or 3 years. The
payment period should be
interpreted at 3 years because D will
have more time to use the money,
while C will earn more interest.
3. If the doubts are cast upon the
principal object of the contract in such
a way that if cannot be known what
may have been the intention or will of
the parties, the contract shall be null
and void.
Example: S has several cars. He
sold one car to B but it cannot be
determined which of the cars was
being sold. The contract of sale is void.