Pointers in Oblicon for Finals

1. General Provision

a. Meaning of contracts –

 (Article 1305) A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service. (1254a)
 It lays emphasis on the meeting of minds between two (2) contracting parties which takes place
when an offer by one party is accepted by the other (Art. 1319)

b. Distinction between contract and obligation

 Contract - one of the sources obligations (Art. 1157)

 Obligation - legal tie or relation itself that exists after a contract has been entered into
Take Note: There can be no contract of there is no obligation accepted in return for some
benefit to be enjoyed. But an obligation may exist without a contract such as the obligation
imposed by law to pay taxes.

c. Distinction between contract and agreement

 Contract binding agreements enforceable through legal proceedings in case the other party
does not comply with his obligation under the agreement.
Take Note: To be valid and enforceable, a contract must be lawful (See Art. 1306) and all the
requisites for its validity mus be present. (See Art. 1318)
 Agreement broader than a contract because the former may not have all the elements of a
contract (Art. 1318) that create legally enforceable obligations.
Take Note: Those agreement which cannot be enforced by action in the courts of justice are not
contracts but merely moral or social agreements.

d. Limitations on contractual stipulations

(Article 1306) This article provides the limitations to which contracting parties may establish in the
stipulations of the contract. These limitations are:

 Limitations by Law- fundamental requirement that the contract entered into must be in
accondance with, and not repugnant to, an applicable statute.
 Limitations by Morals- deal with norms of good and right conduct evolved in a community.
 Limitations by Good Customs- consist of habits and practices which through long usage have
been followed and enforced by society or some part of it as binding rules of conduct.
 Limitations by Public Order- refers principally to public safety although it has been considered to
mean also the public weal.
 Limitations by Public Policy- broader than public order, as the former may refer not only to
public safety but also to considerations which are moved by the common good.
e. Classification of contracts according to its name or designation

According to name or designation:

a) Nominate contract or that which has specific name or designation in law (e.g., coomodatum,
lease, agency, sale, etc.); and
b) Innominate contract or that which has no specific name or designation of law

f. Kinds of innominate contract

They are:

a) do ut des (I give that you may give);

b) do ut facias (I give that you may do);
c) facto ut des (I do that you may give);
d) facto ut facias (I do that you may do).

Do ut des is, however, no longer an innominate contract. It has already been given name of its own, i.e.,
barter or exchange. (Art. 1638)

g. Effect where determination inequitable (Art. 1310)

 A contracting party is not bound by the determination if it is evidently inequitable or unjust as

when the third person acted in bad faith or by mistake. In such case, the courts shall decide
what is equitable under the circumstances.

h. Persons affected by a contract & exceptions

 General rule- a party's rights and obligations derived from a contract are transmissible to the
successors. (See Art. 1178) Under Article 1311 (par. 1.), contracts take effect only between the
parties, their assigns and heirs.
 Exceptions- The cases when a contract are effective only between the parties are when the
rights and obligations arising from the contract are not transmissible:
a. by their nature,
b. by stipulation,
c. by provision of law.

h. Cases where strangers or third persons affected by a contract

 In contracts containing a stipulation in favor of a third person (stipulation pour autrui) (Art.
1311, par. 2.)
 In contracts creating real rights (Art. 1312)
 In contracts entered into to defraud creditors (Art 1313)
 In contracts which have been violated at the inducement of a third person. (Art 1314)

i. Stipulation pour autrui

 A stipulation in a contract clearly and deliberately conferring a favor upon a third person who
has a right to demand its fulfillment provided he communicates his acceptance to the obligor
before its revocation by the obligee or the original parties.
j. Classification of contracts according to perfection

 Consensual contract or which is perfected by mere consent (Art. 1315)

 Real contract or that which is perfected by the delivery of the thing subject matter of the
contract (Art. 1316; see Arts. 1934, 1963, 2093)
 Solemn contract which requires compliance with certain formalities prescribed by law, such
prescribed form being thereby an essential element thereof (see Art. 1356)

k. Stages in the life of a contract

 Preparation or negotiation includes all the steps taken by the parties leading to the perfection
of the contract. At this stage, the parties have not yet arrived at any definite agreement;
 Perfection or birth when the parties have come to a definite agreement or meeting of the minds
regarding the subject matter and cause of the contract (Art. 1319)
 Consummation or termination when the parties have performed their respective obligations
and the contract may be paid to have been fully accomplished oe executed, resulting in the
extinguishment or termination thereof. A contract may also be terminated after its perfection,
not by performance, but by mutual agreement of the parties.

l. How contracts are perfected and its effect of perfection

 Consensual contracts As a general rule, contracts are perfected by mere consent of the parties
regarding the subject matter and the cause of the contract. (Arts. 1315, 1319) They are
obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present.
 Real contracts which are perfected not merely by consent but by delivery, actual or constructive
of the object of the obligation (Art. 1316) These contracts have for their purpose restitution
because they contemplate the return by a party of what has been received from another.
 Solemn contracts when the law requires that a contract be in some form to be valid (Art 1356)
this special form is necessary for its perfection. Thus, a donation of real property cannot be
perfected until it is embodied in a public instrument.

m. How to cure unauthorized contracts.

UNAUTHORIZE CONTRACTS CAN BE CURED ONLY RATIFICATION

 The mere lapse of time cannot give efficacy to such a contract. the defect is such that it canoot
be cured except by the subsequent ratification (Art. 1405) of the person in whose name the
contract was entered into or by his duly authorized agent and not by any other person not so
empowered.
 The ratification must be clear and express so as not to admit any doubt or vagueness.
2. Essential Requisites of Contracts

a. Classes of elements of a contract

They are:

(1) Essential Elements or those without which no contract can validly exist regardless of the
intentions of the parties. They are also known as requisites of a contract. They may be
subdivided into:
a) Common or those present in all contracts, namely, consent, object, and cause
b) Special or those not common to all contracts or those which must be present only in, or
pellicular to, certain specified contracts, and such peculiarity may be as regards to form,
as regards the subject matter or as regards the consideration or cause.
(2) Natural Elements or those that are presumed to exist in certain contracts unless the contrary is
expressly stipulated by the parties, like warranty against eviction (Art. 1548), or warranty against
hidden defects in sale (Art. 1561)
(3) Accidental Element or the particular stipulations, clauses, terms, or conditions established by
the parties in their contract (Art. 1306), like conditions, period, interest, penalty, etc., and
therefore, they exist only when they are expressly provided by the parties.

b. Meaning of consent, offer, acceptance

 Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.
 Offer is a proposal made by one party (offerer) to another (offeree), indicating a willingness to
enter into a contract. It is more than an expression of desire or hope. It is really a promise to act
to refrain from acting on condition that the terms thereof are accepted by the person to whom
it is made.
 Acceptance is the manifestation by the offeree of his assent to all the terms of the offer,
Without acceptance, there can be no meeting of the minds between the parties.

c. When offer becomes ineffective and other grounds

 An offer may be revoked or withdrawn at any time before it is accepted merely by

communicating such intentions to the other party.

d. Meaning of contract of option; option period; option money

 Option Contract is one giving a person a consideration a certain period within which to accept
the offer of the offeree.
 Option Period is a period given within which the offeree must accept the offer.
 Option Money is the money paid or promised to be paid in consideration for the option. It is not
to be a confused with earnest money which is actually a partial payment of the purchase price
and is consideration as proof of the perfection of the contract.
e. Persons who cannot give consent

 A contract entered into where one of the parties is incapable of giving a consent to a contract is
voidable. A voidable contract is valid and binding until it is annulled by a proper action in court.
It is susceptible of ratification.

Those who are incapacitated to give consent under Article 1327 are the following:

a. Unemancipated minors – they refer to those persons who have not yet reached the age of
majority (18 years) and are still subject to parental authority.
b. Insane or demented persons – the insanity must exist at the time of contracting.
c. Deaf-mutes – they are persons who are deaf and dumb.

f. Effects when there is a lucid interval, drunkenness and hypnotic spell

 Lucid interval is a temporary period of sanity. A contract-entered into by insane or demented

person during lucid interval is valid. It must be shown, however, that there is full return of the
mind to sanity as to enable him to understand the contract he is entering into.
 Drunkenness and Hypnotic Spell impair the capacity of a person to give intelligent consent. A
contract entered into in a state of drunkenness, or during a hypnotic spell voidable and it is not
required that such state was procured by the circumvention of the other party.

g. Effects when there is incapacity

In general, the contracts entered into by the persons enumerated in Article 1327 are voidable. (Art.
1390.) However, in certain cases, their incapacity may be modified by that is, they can also give valid
consent. Thus:

a. When necessaries such as food, are sold and delivered to a minor or other person without
capacity to act, he must pay a reasonable price therefor. (Arts. 1489, 290.)
b. A minor 18 years old or above may contract for life, health and accident insurance, provided the
insurance is taken on his life and the beneficiary appointed is the minor's estate or the minor's
father, mother, husband, wife, child, brother, or sister. (Insurance Code of 1978 [Pres. Decree
No. 1460], Sec. 3, par. 3.)
c. A contract is valid if entered into through a guardian or legal representative. (see Art. 1381[1,
2].)
d. A contract is valid where the minor misrepresented his age and convincingly led the other party
to believe in his legal capacity. (Mercado vs. Espiritu, 37 Phil. 215.)
e. A contract is valid where a minor between 18 and years of age voluntarily pays a sum of money
or delivers 21 a fungible thing in fulfillment of his obligation thereunder and the obligee has
spent or consumed it in good faith. (Art. 1427.)

h. Other special disqualifications provided by law

Under the Rules of Court, the following are considered incompetents and may be placed under
guardianship:

 Persons suffering the accessory penalty civil interdiction

 Hospitalized lepers
  Prodigals (spendthrifts)
 Deaf and dumb who are unable to read and write
 Those who are of unsound mind even though they have lucid intervals
 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 thereby an easy prey
for deceit and exploitation.

i. Characteristics of consent

In order that consent may be valid for purposes of contract, it is required, not only that it exists, but that
it must be given with exact understanding over the thing consented to. In other words, the contract
must be based on the genuine assent of both parties to the contract and the terms thereof There is no
valid consent unless:

 It is intelligent. there is capacity to act (see Arts 1327-1329.);

 It is free and voluntary. there is no vitiation of consent by reason of violence or intimidation
(see Art 1330.); and
 It is conscious or spontaneous. - there is no vitiation of consent by reason of mistake, undue
influence, or fraud

Thus, Article 1330 enumerates in a negative manner the different requisites of consent. The contracting
parties must possess the necessary legal capacity to give consent to a contract. (Arts. 1327-1329.)

j. Vices of consent

Aside from incapacity and simulation of contract, the following are the causes that vitiate consent or
render it defective so as to make the contract voidable:

 error or mistake (Art. 1331.);

 violence or force (Art. 1335.);
 intimidation or threat or duress (Ibid.);
 undue influence (Art. 1337.); and
 fraud or deceit. (Art. 1338.)

k. Mistake or error

 Mistake or Error is the false notion of a thing or a fact material to the contract.

l. Mistake of fact vs. mistake of law

 the substance of the thing which is the object of the contract; or

 those conditions which have principally moved one or both parties to enter into the contract;
or
 the identity or qualifications of one of the parties provided the same was the principal cause
of the contract.

No. 1 above includes mistake regarding the nature of the contract, as when the contracting parties
believe that the other is selling, when in truth and in fact, both are buying.

m. Mistake of fact which does not vitiate consent

  Error as regards the incidents of a thing or accidental qualities thereof (e.g., accessibility of a
residential house to means of transportation; maximum speed of a car) not taken as the
principal consideration of the contract, does not vitiate consent (Art. 1331, par. 1.) unless the
error is caused by fraud of the other party. (See Art. 1338.)
 Mistake as to quantity or amount does not also vitiate consent but only gives rise to its
correction (Ibid., par. 3.) unless it goes to the essence of the contract.
 Error as regards the motives of the contract (see Art. 1351.) does not also vitiate consent unless
the motives constitute a condition or cause of the contract.
 Mistake as regards the identity or qualifications of a party does not vitiate consent for the
reason that contracts are entered into more in consideration of the things or services which
form their subject matter rather than of persons. The exception is when such identity or
qualifications have been the principal cause of the contract (Art. 1331, par. 2.), as in contracts,
which have for their object obligations to do, requiring personal qualifications, of the debtor, or
involving trust and confidence, such as contracts of partnership, agency, commodatum,
guaranty, deposit, etc.
 Error which could have been avoided by the party alleging it, or which refers to a fact known to
him, or which he should have known by the exercise of ordinary diligence, or which is so patent
and obvious that nobody could have made it, will not invalidate consent.

n. Burden of proof in case of mistake or fraud

 When a person signs a document, the presumption is that he does so with full knowledge and
understanding of the contents of the same. He is, therefore, bound by all its terms. Should he
later on allege fraud or mistake, it is incum bent upon him to prove his allegation. A
presumption is a fact that is accepted as true until proved otherwise.
 Article 1332 is an exception to the above rule. When one of the parties is unable to read or if the
contract is in a language not understood by him, it is the party enforcing the contract who is
duty-bound to show that there has been no fraud or mistake and that the terms of the contract
have been fully explained to the former. "This rule is especially necessary in the Philippines
where unfortunately there is still a fairly large number of illiterates, and where documents are
usually drawn up in English or Spanish."

o. Effect of knowledge of risk

 If a party knew beforehand the doubt, contingency, or risk affecting the object of the contract, it
is to be assumed that he was willing to take chances and cannot, therefore, claim mistake. This
is especially true where the contract is aleatory in nature.

p. When mistake of law vitiates consent

 "Mistake of law does not generally vitiate consent. But when there is a mistake on a doubtful
question of law, or on the construction or application of law, this is analogous to a mistake of
fact, and the maxim of ignorantia legis neminem excusat (ignorance of the law excuses no one)
should have no proper application.
 When even the highest courts are sometimes divided upon difficult legal questions and when
one-half (1/2) of the lawyers in all controversies on a legal question are wrong, why should a
 layman be held accountable for his honest mistake on a doubtful legal issue?" (Report of the
Code Commission, p. 130; see Art. 1331.)

q. Nature of violence or force

 Violence requires the employment of physical force. Under Article 1335, to make consent
defective, the force em ployed must be either serious or irresistible. In either case, consent is
not free. (Report of the Code Commission, p. 136.)

r. Nature of intimidation or threat

Under the above article, for intimidation to vitiate the consent of a party to a contract, the following
requisites must be present:

 It must produce a reasonable and well-grounded fear of an evil;

 The evil must be imminent and grave;
 The evil must be upon his person or property, or that of his spouse, descendants, or ascendants;
and
 It is the reason why he enters into the contract.

Intimidation need not resort to physical force. Intimidation is internal while violence is external.

s. Factors to determine degree of intimidation

 Whether or not the fear is reasonable and well-ground ed or the evil imminent and grave
depends upon the cir cumstances, including the age, sex, and condition of the person.
 If a contract is signed merely out of reverential fear or the fear of displeasing a person to whom
respect and obedience are due, the contract is valid because reverential fear by itself does not
annul consent in the absence of actual threat (Sabalvaro vs. Erlanger and Galinger, 64 Phil. 588.),
unless the fear so deprives one of reasonable inference that undue influence has been
exercised. (see Art. 1337.)

t. Violence or intimidation by a third person

Violence or intimidation may be employed by a third person who did not take part in the contract.
However, to make the contract voidable or annullable, it is necessary that the violence or intimidation
must be of the character required in Article 1335.

u. Meaning of undue influence

 Undue influence is influence of a kind that so overpowers the mind of a party as to prevent him
from acting understandingly and voluntarily to do what he would have done if he had been left
to exercise freely his own judgment and discretion.

v. Causal fraud, Fraud by concealment, Fraud by a third person

 Causal fraud is the fraud committed by one (1) party before or at the time of the celebration of
the contract to secure the consent of the other. It is the fraud used by a party to induce the
other to enter into a contract without which the latter would not have agreed to. The fraud
 contemplated in this article is causal fraud and must be distinguished from the fraud dealt with
in Article 1170.
 A neglect or failure to communicate or disclose that which a party to a contract knows and
ought to communicate constitutes concealment. In this case, concealment is equivalent to
misrepresentation or false representation. The injured party is entitled to rescind or annul the
contract whether the failure to disclose the material facts is intentional or unintentional as long
as there is a duty to reveal them and the party is misled or deceived in entering into the
contract. If the failure is unintentional, the basis of the action for annulment is not fraud but
mistake or error (Art. 1343.); even if intentional but there is no duty to make the disclosure, the
parties are bound by their contract.
 A third person has no connection with a contract. Consequently, a misrepresentation by him
does not vitiate consent. A party should not be made to suffer for the imprudence of another in
believing the fraud of a third person. The presumption is that both contracting parties are acting
in good faith. However, if the misrepresentation has created substantial mistake and the same is
mutual, that is, it affects both parties, the contract may be annulled but principally on the
ground of mistake. If the misrepresentation has been employed by a third person in connivance
with, or at least with knowledge of, the party benefited by the fraud, it is deemed to have been
exercised by such party upon the other contracting party.

w. Effect of misrepresentation made in good faith.

 If the misrepresentation is not intentional but made in good faith (the person making the false
statement believed it to be true), it is considered a mere mistake or error. Fraud is definitely
more serious than mistake; hence, the party guilty of fraud is subject to greater liability.

x. Causal fraud vs incidental fraud

 the causal fraud, which is a ground for the annul ment of a contract (par. 1.), although it may
also give rise to an action for damages; and
 the incidental fraud, which only renders the party who employs it liable for damages because
the fraud was not the principal inducement that led the other to give his consent. (par. 2.) This
kind of fraud must not be confused with the fraud in Articles 1170 and 1171 which refers to that
occurring in the performance of a contract, without affecting its validity. Both kinds of incidental
fraud do not vitiate consent.

y. Kinds of simulation of contracts

 Absolute simulation. - when the contract does not really exist and the parties do not intend to
be bound at all.
 Relative simulation. when the contract entered into by the parties is different from their true
agreement. (Art. 1345.) The parties are bound by their real agreement provided it does not
prejudice a third person and is not intended for a purpose contrary to law, morals, good
customs, public order, or public policy. (Art. 1346.)
3. Objects of a contract

a. Kinds of object of contract

 Object certain is the second essential element of a valid contract. (Ibid.) The object may be
things (as in sale), rights (as in assignment of credit), or services (as in agency).

b. Rights as object of contract

 As a general rule, all rights may be the object of a contract. The exceptions are when they are
intransmissible by their nature, or by stipulation, or by provision of law. (Art. 1311, par. 1.)

c. Validity of contracts for future inheritance

Except in cases expressly authorized by law, a contract concerning future inheritance is void. (Art.
1409[7].)

The law permits contracts on future inheritance –

 in the case of donations by reason of marriage between future spouses with respect to their
future property to take effect, only in the event of death, to the extent laid down by law in
testamentary succession (see Art. 84, Family Code ); and
 in the case of partition of property by act inter vivos by a person (i.e., owner or source of the
property) to take effect upon his death. (Art. 1080; see Arroyo vs. Gerona, 58 Phil. 226)

d. Kinds of impossibility

Impossibility may be:

(1) Physical. when the thing or service in the very nature of things cannot exist (e.g., a monkey that
talks) or be performed. With particular reference to services (see Arts. 1206, 1207.), the impossibility
may be:

a. Absolute. when the act cannot be done in - any case so that nobody can perform it (e.g., to fly
like a bird, etc.); or
b. Relative when it arises from the special circumstances of the case (e.g., to make payment to a
dead person, to drive a car on a flooded highway, etc.) or the special conditions or qualifications
of the obligor (to paint a portrait by a blind person, etc.); or

(2) Legal. when the thing or service is contrary to law, morals, good customs, public order, or public
policy. An act is contrary to law, either because it is forbidden by penal law (e.g., to sell shabu, etc.) or a
rule of law makes it impossible to be done (e.g., to make a valid donation of real property without a
public instrument [Art. 749.], to make a valid will, where the testator is under 18 years of age [Art. 797.],
etc.).

4. Cause of contracts

a. Meaning of cause
  Cause is the essential reason or purpose which the contracting parties have in view at the time
of entering into the contract. It is something bargained for or given by a party in exchange for a
legally enforceable promise of another.
 It is the Civil Code term for consideration in Anglo- American or common law.

b. Cause distinguished from object

 In bilateral or reciprocal contract like purchase and sale, the cause for one is the subject matter
or object for the other, and vice versa. Hence, the distinctions is only a matter of view point.

c. Classification according to cause

 Onerous or one the cause of which, for each contracting party is the prestation or promise of a
thing or service by other. In other words, in this contract, the parties are reciprocally obligated
to each other.
 Remuneratory or remunerative or one the cause of which is the service or benefit which is
renumerated. The purpose of the contract is to reward the service that had been previously
rendered by the party remunerated.
 Gratuitous or one the cause of which is the liberality of the benefactor or giver.

d. Motive

 Motive is the purely personal or private reason which a party has in entering into a contract. It is
different from the cause of contract.

e. Cause distinguished from motive

The differences are as follows:

 Cause is the immediate or direct reason, while is the remote or indirect reason;
 Cause is always known to the other contracting party, while motive may be unknown;
 Cause is essential element of a contract, while motive is not: and
 The illegality of the cause affects the validity of a contract, while the illegality of one`s motive
does not render the contract void.

f. Absence or want of cause

Contracts without cause confer no right and produce no legal effect whatever. Thus;

 A contract which is absolutely simulated or fictitious is inexistent and void.

 Where there is, in fact, no consideration the statement of one in the contract will not suffice to
bring it under the rule of Article 1353 as stating a false consideration. Promises to make a gift, or
to render some gratuitous service in the future are not enforceable as contracts because they
contain no consideration. Similarly, promises made in gratitude for good deeds of others cannot
be enforced for they constitute only moral, not legal, consideration.

g. Effect of failure of cause

 Absence of cause should be distinguished from inadequacy of cause, which, as a general rule, is
not a ground for relief and from failure of cause which does not render a contract void.
  Thus, the failure to pay the stipulated price after the execution of a contract of sale does not
convert the contract into one without cause or consideration, it not being essential to the
existence of cause that payment or full payment be made at the time of the contract. But a
contract of sale is void for being without cause where the purchase price, which appears
thereon as paid, has in fact never been paid by the buyer to the seller.

h. Illegality of cause

Illegality of cause implies that there is a cause but the same is unlawful or illegal.

Contracts with unlawful cause are also null and void.

 A promise of marriage based upon carnal connection is founded on an unlawful cause and,
therefore, void and no action can be maintained by the woman against the man thereof.
 2. Also, a contract whereby a person accused of a crime obliges himself to give a sum of money
in consideration of the promise on the part of the obligee to refrain from testifying against him
is void because the purpose is to stifle criminal prosecution and this is against public policy.

i. Effect of falsity of cause

 By falsity of cause is meant that the contract states a valid consideration but such statement is
not true.
 A false cause may be erroneous or simulated. The first always renders a contract void . If the
cause is false, the contract is rendered void because the same actually does not exist. The
second does not always produce this effect, because it may happen that the hidden but true
cause is sufficient to support the contract. If the parties can show that there is another cause
and that said cause is true and lawful, then the parties shall be bound by their true agreement.

j. Lesion and Effect of lesion or inadequacy of cause

 Lesion is any damage caused by the fact that the price is unjust or inadequate. It is the injury
suffered in consequence of inequality of situations by one party who does not receive the full
equivalent for what he gives in a communicative contract, like a sale.
 Effect of lesion or inadequacy of cause
1. GENERAL RULE- Lesion or inadequacy of cause does not of itself invalidate a contract.
A person who is willingly enters into a contract will be held bound by its terms through
the exchange of benefits may seem to be inequitable or unfair to him. The law assumes that the
parties themselves remain the best judges of how much their bargain is worth.

2. EXPECTIONS- lesion will invalidate a contract

a. when there has been fraud, mistake, or undue influence
b. in case specified by law

5. Form of contracts

a. Classification according to form

 Informal or common or simple contract- which may be entered into in whatever form provided
all the essential requisites for their validity are present. This refers to consensual contracts.
  Formal or solemn contract- which is required by law for its efficacy to be in a certain specified
form.

b. Rules regarding form of contracts

 General rule - Contracts are binding and, therefore, enforceable reciprocally by the contracting
parties, whatever may be the form in which the contract has been entered into.

c. Form for validity of contract (Page 390)

 Donation of real property

 Donation of personal property the value of which exceeds P5,000
 Sale of land through an agent
 Stipulation to pay interest
 Contract of partnership

d. Form of enforceability of contract

 In the cases of contracts covered by the Statute of Frauds, the law requires that they be in
writing subscribed by the party charged or by his agent. (Art. 1403[2].) If the contract is not in
writing, the contract is valid (assuming all the essential elements are present) but it cannot be
proved and, therefore, it cannot be enforced by either party if the other refused to perform the
contract unless it is ratified by the latter. (Art. 1405.)

e. Contracts which must appear in public document

 Creation, etc., of real rights over immovable property.

 Cession or renunciation of hereditary rights or those of conjugal partnership of gains.
 Power to administer property.
 Cession of actions or rights.

6. Reformation of instrument

a. Meaning and reason of reformation

 "Equity orders the reformation of an instrument in order that the intention of the contracting
parties may be expressed.
 The courts do not attempt to make another contract for the parties. The rationale of the
doctrine is that it would be unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting of the minds of the parties. The
rigor of the legalistic rule that the written instrument should be the final and inflexible criterion
and measure of the rights and obligations of the contracting parties is thus tempered, to
forestall the effects of mistake, fraud, inequitable conduct or accident."

b. Reformation vs annulment
  In reformation, there has been a meeting of the minds of the parties (Art. 1359, par. 1.); hence,
a contract exists but the written instrument purporting to embody the contract does not express
the true intention of the parties by reason of mistake, fraud, inequitable conduct, or accident.
 In annulment, there has been no meeting of the minds, the consent of one of the parties being
vitiated by mistake, etc. (Ibid., par. 2.)

c. Mutual mistake as basis for reformation

 Mutual mistake- is mistake of fact that is common to both parties of the instrument which
causes the failure of the instrument to express their true intention.

d. Remedy of concealment of mistake by the other party

 The remedy of reformation may be availed of the party who acted in good faith. The
concealment mistake by the other party constitutes fraud.

e. Cases where reformation is not allowed

 Simple donations inter vivos where no condition is imposed. - Donation is an act of liberality
whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it.
(Art. 725.) When the donor intends that the donation shall take effect during his lifetime, it is a
donation inter vivos. It is distinguished from donation mortis causa in that this kind of donation
takes effect after the donor's death.
a. In donation, the act is essentially gratuitous and the done has, therefore, no just cause
for complaint. The donor is not bound to correct a mistake or defects in the deed of
donation which in the first place he was not bound to make. Of course, the donor may
ask for the reformation of a deed of donation.
b. If the donation is conditional or is onerous in character, the deed may be reformed so
that the true conditions imposed by the donor or the real intention of the parties might
be expressed. (see Phil. National Railways vs. CFI of Albay, 83 SCRA 569, supra.)
 Wills. - A will is an act whereby a person is per mitted with the formalities prescribed by law to
control to, a certain degree the disposition of his estate, to take effect after his death. (Art. 783.)
Like a donation, the making of a will is a strictly personal and a free act (Arts. 784, 839.); hence,
upon the death of the testator, the right to reformation is lost. Furthermore, a will may be
revoked by the testator any time before his death. (Art. 820.)
 When the real agreement is void. If the real agreement is void. there is nothing to reform.
Reformation would be useless because the real agreement being void, it is unenforceable.
 When one party has brought an action to enforce the instrument. - Article 1367 is based on
estoppel (Art. 1431.) or ratification. (see Arts. 1392, 1396.) When a party brings an action to
enforce the contract, he admits its validity and that it expresses the true intention of the parties.
The bringing of the action is thus inconsistent with reformation.

f. Party entitled to reformation

 The burden of proof is upon the party who insists that the contract should be reformed.

7. Interpretation of contracts
a. Meaning of interpretation of contract

 Interpretation of a contract is the determination of the meaning of the terms or words used by
the parties in their written contract. It is the process of ascertaining the intention of the parties
from the written words contained in the contract.

b. Literal meaning controls when language is clear

 Contracts, which are the private laws of the contracting parties, should be fulfilled according to
the literal sense of their stipulations, if the terms of a contract are clear and unequivocal. The
parties are bound by such terms. (Phil. Am. Gen. Ins. Co., Inc. vs. Mutuc, 61 SCRA 22.) In this
case, the question is not what existed in the minds of the parties but what intention is expressed
in the language used. (17 C.J.S. 700.)

c. Evident intention of parties prevails over terms of contract

 Where the words and clauses of a written contract are in conflict with the manifest intention of
the parties, the latter shall prevail over the former. It is a cardinal rule in the interpretation of
contracts that the intention of the contracting parties should always prevail because their will
has the force of law between them. (Art. 1159; see Borromeo vs. Court of Appeals, 47 SCRA 65.)

d. Contemporaneous and subsequent acts relevant in the determination of intention

 Where the parties to a contract have placed an interpretation to the terms thereof by their
contemporaneous and/or subsequent conduct, as by acts in partial performance, such
interpretation may be considered by the court in determining its meaning and ascertaining the
intention of the parties (17 C.J.S. 755.) when such intention cannot clearly be ascertained from
the words used in their contract. (Art. 1370, par. 2.)
Although Article 1371 speaks of acts contemporaneous and subsequent to the celebration of the
contract, antecedent circumstances under which it was made may also be considered. (Sec. 11,
Rule 130, Rules of Court.)

e. Special intent prevails over a general intent

 As a rule, where in a contract there are general and special provisions covering the same subject
matter, the latter control over the former when the two (2) cannot stand together.
The reason for this rule is that when the parties express themselves in reference to a particular
matter, the attention is directed to that, and it must be assumed that it expresses their intent;
whereas, a reference to some general matter, within which the particular matter may be
included, does not necessarily indicate that the parties had that particular matter in mind. (12
Am. Jur. 779.)

f. Interpretation of stipulation with several meanings

 When an agreement is susceptible of several meanings, one of which would render it effectual,
it should be given that interpretation. Thus, if one interpretation makes a contract valid and the
 other makes it illegal, the former interpretation is one which is warranted by the rule stated in
Article 1373.

g. Interpretation of various stipulations of a contract

 A contract must be interpreted as a whole and the intention of the parties is to be gathered
from the entire instrument and not from particular words, phrases, or clauses. All provisions
should, if possible, be so interpreted as to harmonize with each other.

h. Interpretation of words with different significations

 If a word is susceptible of two or more meanings, it is to be understood in that sense which is

most in keeping with the nature and object of the contract in line with the cardinal rule that the
intention of the parties must prevail. (Art. 1370.)

i. Interpretation of obscure words

 A written agreement should, in case of doubt, be in terpreted against the party who has drawn
it, or be given an interpretation which will be favorable to the other who, upon the faith of
which, has incurred an obligation. (12 Am Jur. 795-796.)
The reason for the rule in Article 1377 is that the party who drafts the contract (e.g., insurance
contract the terms of which are prescribed by the insurance company in printed form), more
easily than the other, could have prevented mistakes or ambiguity in meaning by careful choice
of woras, and generally, the party, who causes the obscurity acts with ulterior motives.
The rule is generally applied to what are called contracts of adhesion that is to say, contracts
most of the terms of which do not result from mutual negotiation between the parties as they
are usually prescribed in printed forms prepared by one party to which the other may "adhere"
if he chooses but which he cannot change. Aside from insurance contracts, the rule also applies
to bill of ladings for goods, plane tickets, and contracts between lawyer and client, and to all
other contracts where their provisions have been drafted only by one party.

j. Rule in case of doubts impossible to settle

When, despite the application of the preceding rules (Arts. 1370-1377.), certain doubts still exist, such
doubts shall be resolved in accordance with the supplementary rules stated in the present article.

 Gratuitous contract. If the doubts refer to inci dental circumstances of a gratuitous contract
(see Art. 1350.), such interpretation should be made which would result in the least
transmission of rights and interests.
 Onerous contract. If the contract in question is - onerous (see Art. 1350.), the doubts should be
settled in favor of the greatest reciprocity of interests.
A contract of sale is essentially onerous. Thus, whether the parties intended a suspensive
condition (see Art. 1179.) or a suspensive period (see Art. 1193.) for the payment of the agreed
price, the doubt shall be resolved in favor of the latter, that is, the buyer's obligation is deemed
to be actually subsisting, with only its maturi postponed or deferred (Gaite vs. Fonacier, 2 SCRA
830.)
  Principal object of the contract. - If the doubt refers to the principal object of the contract and
such doubt cannot be resolved thereby leaving the intention of the parties unknown, the
contract shall be null and void

8. Kinds of defective contracts

There are four (4) kinds of defective contracts. They are, in the order of their defectiveness:

 The first class, rescissible contracts, are valid because all the essential requisites of a contract
exist but by reason of economic injury or damage to one of the parties or to third persons, such
as creditors, the contract may be rescinded.
 The second class, voidable contracts, are also valid until annulled unless there has been a
ratification. In a voidable contract, the defect is caused by vice of consent.
 The third class, unenforceable contracts, cannot be sued upon or enforced unless they are
ratified. As regards the degree of defectiveness, voidable contracts are farther away from
absolute nullity than unenforceable contracts. In other words, an unenforceable contract
occupies an intermediate ground between a voidable and a void contract.
 Lastly, there are the void or inexistent contracts. They are absolutely null and void. Void
contracts have no effect at all and cannot be ratified. (see Report of the Code Commission, pp.
138-140.)

9. Meaning of rescissible contracts

a. Meaning of rescission and rescissible contracts

 Rescission is a remedy granted by law to the contracting parties and sometimes even to third
persons in order to secure reparation of damages caused them by a valid contract, by means of
the restoration of things to their condition in which they were prior to the celebration of said
contract.
 Rescissible contracts are those validly agreed upon because all the essential elements exist and,
therefore, legally effective, but in the cases established by law, the remedy of rescission is
granted in the interest of equity.

b. Requisites of rescission

 There must be validly agreed upon. (Art. 1380)

 There must be lesion or pecuniary prejudice to one of the parties or to a third person. (Art.
1381)
 The rescission must be based upon a case especially provided by law. (Arts. 1380, 1381, 1382)
 There must be no other legal remedy to obtain reparation for the damage. (Art. 1383)
 The party asking for rescission must be able to return what he is obliged to restore by reason of
the contract. (Art. 1385, par. 1)
 The object of the contract must not legally be in the possession of third person who did not act
in bad faith. (Ibid., par. 2)
 The period for filling the action for rescission must not have prescribed. (Art. 1389)

c. Cases of rescissible contracts

  Contracts entered into in behalf of wards - A ward is a person under guardianship by reason of
some incapacity. (see Art. 1329)
 Contracts agreed upon in representation of absentees - An absentee is a person who
disapprears from his domicile his whereabouts being unkown and without leaving an agent
administer his property.
 Contracts undertaken in fraud of creditors - In order that fraud of creditors may be valid ground
for rescission the following requisites must also be present:
a. There must be an existing credit prior to the contract to be rescinded, although it is not
yet due or demandable;
b. There must be a fraud on the part of the debtor which maybe presumed or proved. (see
Art. 1387.)
c. The creditor cannot recover his credit in any other manner, it not being required that
the debtor be insolvent.
 Contracts which refer to things under litigation –
 Other instances – Some of the specific contracts subject o recission are as follows:
"A partition, judicial or extrajudicial, may also be rescinded on account of lesion, when any one
of the col-lheirs received things whose value is less by at least one-fourth than the share to
which he is entitled, considering the value of the thing at the time they were adjudicated." (Art.
1098.)
"If the lessor or the lessee should not comply with the obligations set forth in Article 1654
(referring to obligations of the lessor) and Article 1657 (referring to obligations of the lessee),
the aggrieved party may ask for the rescission of the contract and indemnification for damages,
or only the latter, allowing the contract to remain in force." (Art. 1659.)
Under Article 1539, the vendee may exercise the remedy of rescission when the lack in the area
of the real estate sold be not less than one-tenth of that stated, or when the inferior value of
the thing sold exceeds one-tenth of the price agreed upon.

d. Nature of action for rescission

 Rescission is not a principal remedy. It is only subsidiary, meaning that it can be availed of only if
the injured party proves that he has no other legal means aside from rescinding the contract to
obtain redress for the damage caused even if the contract is covered by Article 1381.
If the damage is repaired, as in the case of lesion suffered by the ward or absentee, rescission
cannot take place. (see Arts. 1355, 1381)

e. Extent of rescission

 The entire contract need not to be set aside by rescission if the damage can be repaired or
covered by partial rescission. The rescission shall only be to the extent of the creditor’s
unsatisfied credit. The policy of the law is to preserve or respect the contract, not to extinguish
it.

f. When rescission is not allowed

 The remedy of rescission cannot be availed of if the party who demands rescission cannot return
what he is obliged to restore under the contract. (par. 1)
  Neither shall rescission take place if the property is legally in the possession of a third person
who acted in good faith (par 2), that is to say, he acquired the property and registered it under
the Torrens System in the Registry of Property unaware of the flaw in his title or mode of
acquisition. In such case, the remedy would be to demand indemnity for damages from the
person who caused the loss. (par. 3.)

g. When alienation presumed in fraud of creditors

"This provision establishes prima facie presumptions of fraud in the case of alienation by the debtor of
his property. (pars. 1 and 2.) However, the instances mentioned are not exclusive of others that may be
proved in any other manner recognized by the law of evidence. (par. 3; see Art 1177.)"

 Alienation by GRATUITOUS title.

 Alienation by ONEROUS title.

10. Voidable contracts

a. Meaning of voidable or annullable contracts

 Voidable or annullable contracts are those which possess all the essential requisites of a valid
contract but one of the parties is incapable of giving consent, or consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud.

b. Kinds of voidable contracts

A contract otherwise legal in object and operation is voidable because of a defect caused by either:

 Legal incapacity to give consent, where one of the parties is incapable of giving consent to the
contract; or
 Violation of consent, where the vitiation is done by mistake, violence, intimidation, undue
influence, or fraud.

c. Meaning of annulment

 Annulment is a remedy provided by law, for reason of public interest, for the declaration of the
inefficacy of a contract based on a defect or vice in the consent of one of the contracting parties
in order to restore them to their original position in which they were before the contract was
executed.

d. Meaning and effect of ratification

 Ratification means that one voluntarily adopts or approves some defective or unauthorized act
or contract which, without his subsequent approval or consent, would not be binding on him. It
indicates an intention on the part of the ratifier to be bound to the provisions of the contract.
 Ratification cleanses the contract from all its defects from the moment it was constituted. The
contract thus becomes valid. Hence the action to annul is extinguished.

e. Kinds of ratification

 Express ratification - words or in writing; or when the ratification is manifested in writing; or

  Implied or tacit ratification - it may take diverse forms, such as by silence or acquiescence; by
acts showing adoption or approval of the contract; or by acceptance and retention of benefits
flowing therefrom.

f. Requisites of ratification

 The requisites for implied ratification are the following:

a) There must be knowledge of the reason which renders the contract voidable;
b) Such reason must have ceased; and
c) The injured party must have executed an act which necessarily implies an intention to
waive his right.
 The requisites for express ratification are the same as those for implied ratification except that
the former is effected expressly.

g. Who may ratify

 A contract entered into by an incapacitated person may be ratified by:

a) the guardian; or
b) the injured party himself provided he is already capacitated.

As legal representative of their wards, guardians have the power to contract on their behalf. Hence, they
may also ratify contracts entered into by their wards. (see Art. 1407.)

 In case the contract is voidable on the ground of mistake, etc., ratification can be made by the
party whose consent is vitiated.

h. Effect of ratification retroactive

 Ratification cleanses the contract of all its defects from the moment it was executed. It
extinguishes the right of action to annul.
 The effect of ratification is to make the contract valid from its inception subject to the prior
rights of third persons.

i. Party entitled to bring an action to annul

 The plaintiff must have an interest in the contract; and

 The victim and not the party responsible for the defect is the person who must assert the same.

j. Rights of strangers to bring action

 One who is not a party to the contract has no legal capacity to challenge the validity of such
contract.
 Strangers are without right to bring the action for they are not obliged by the contract,
principally or subsdiarily, unless they can show detriment which would positively result to
them from the contract in which they had no intervention or participation.

k. Guilty party without right to bring action

  Including his successor in interest cannot ask for annulment. This rule is sustained by the
principle that he who comes to court must come with clean hands.

l. Extinguishment of action for annulment

 If the person who has a right to institute an action for annulment (Art. 1397), will not be able to
restore the thing which he may be obliged to return in case the contract is annulled.
 Under the second paragraph, the right of action is based upon the incapacity of any one of the
contracting parties.

m. Effect where a party cannot restore what he is bound to return

 When a contract is annulled, a reciprocal obligation of restitution created.

 There will be no annulment if the party cannot restore what he is bound to return. This is true
even if the loss is due to a fortuitous event.

11. Unenforceable contract

a. Meaning of unenforceable contract

 Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of
defects provided by law until and unless they are ratified according to law.

b. Kinds of unenforceable contract

 Those entered into in the name of another by one without or acting in excess of authority;
 Those that do not comply with the Statute of Frauds; and
 Those where both parties are incapable of giving consent.
A party to an unenforceable contract may bring an action to enforce it subject to the defense of
the lack of the required form (Statute of Frauds) or absence of authority or in excess thereof.
The law expressly provides that such a contract cannot be assailed by a third person.

c. Statute of Frauds

 History. In 1677, the English Parliament enact ed a statute to counter the evil practice of giving
false tes timony in actions founded on certain kinds of contracts. It attempted to deal with the
prevalence of successful perjury by making specified contracts unenforceable unless evi denced
in a prescribed manner in general, by a written - memorandum signed by the party against
whom liability under the contract was sought to be enforced. Since then, the statute has been
called Statute of Frauds. It has been adopted, in more or less modified form, in the Philippines
as set forth in Article 1403(2).
 Purpose. - The Statute of Frauds has been enacted not only to prevent fraud but also to guard
against the mistakes of honest men by requiring that certain agreements specified (Art. 1403,
No. 21a-fl.) that are susceptible to fraud must be in writing; otherwise, they are unenforceable
by action in court. (see Shoemaker vs. La Tondeña, Inc., 68 Phil. 24.) Unless they be in writing,
there may be no palpable evidence of the intention of the contracting parties and the court
 must perforce rely upon no other evidence than the mere recollection or memory of witnesses,
which is many times faulty and unreliable. (see Factoran vs. Sabanal, 81 Phil. 513.)
 "Writing under the Statute The Statute does not require that the contract be contained in a
formal written document. The writing may be embodied in a slip of paper, a letter, a note or
memorandum by means of a pen, a pencil, or any mechanical device as long as it is intelligible
and records the intent of the parties.
 Application. Some fundamental principles relative to the Statute of Frauds are given hereunder.
a. The Statute of Frauds is not applicable inactions which are neither for damages because
of a violation of a contract, nor for the specific performance thereof. (Factoran vs.
Sabanal, 81 Phil. 513; Lim vs. Lim, 10 Phil. 635.) Thus, the purchaser of a parcel of land
may prove the oral contract of sale in a subsequent action for ejectment against a third
person who is in possession of the property.
b. It is applicable only to completely executory contracts (where no performance has as
yet been made by both parties) and not to contracts which are totally executed
(consummated) or partly executory (where the contract is partially performed). The
reason is that partial performance, like the writing, furnishes reliable evidence of the
intention of the parties or the existence of the contract.
A contrary rule would result in injustice or un fairness to the party who has performed
his obligation (see Art. 1405; see Espiritu vs. CFI of Cavite, 47 SCRA 354.), for it would
enable the other to keep the benefits already derived by him from the transaction, and
at the same time evade the obligations assumed or con tracted by him thereby.
Furthermore, these contracts cannot be categorized as unenforceable where the par
ties themselves have enforced them with partial execu tion or by accepting benefits
thereunder.
c. It is not applicable where the contract is admitted expressly, or impliedly by the failure
to deny specifically its existence, no further evidence thereof being required in such
case.
d. It is applicable only to the agreements enumerated therein. Thus, an agreement
creating an easement of right of way is not covered by the Statute since it is not a sale
of real property or of an interest therein.
e. It is not applicable where a writing does not express the true agreement of the parties.
This is so because the Statute cannot be used as a shield for fraud or as a means for the
perpetration of it.
f. It does not declare that contracts infringing it are void but merely unenforceable. (Art.
1403, No. 2, opening clause.)
g. The defense of the Statute of Frauds may waived. (Art. 1405.) be
h. The defense of the Statute

d. Agreements within the scope of the Statute of Frauds

To be enforceable, a contract does not have to be in writing. In fact, most contracts made orally are
legally enforceable. However, there are agreements which fall within the scope of the Statute of Frauds
enumerated below, which are not legally enforceable in court although valid, unless the same be in
writing. In other words, if either party refused to comply with their agreement, the same could not be
enforced.
  Agreement not to be performed within one (1) year from the making thereof.
 Promise to answer for the debt, default, or miscarriage of another.
 Agreement in consideration of marriage other than mutual promise to marry.
 Agreement for sale of goods, etc. at price not less than P500.00.
 Agreement for leasing for a longer period than one (1) year.
 Agreement for the sale of real property or of an interest therein.
 Representation as to the credit of a third person.

e. Modes of ratification under the Statute

The ratification of contracts infringing the Statute of Frauds may be effected in two (2) ways:

 by failure to object to the presentation of oral evidence to prove the contract. The failure to so
object amounts to a waiver and makes the contract as binding as if it has been reduced to
writing. The requirement of a written form is for evidential purpose only; and
 by acceptance of benefits under the contract. In this case, the contract is no longer executory
and, therefore, the Statute does not apply. This rule is based upon the familiar principle that one
who has enjoyed the benefits of a transaction should not be allowed to repudiate its burdens.

f. When unenforceable contracts becomes a voidable contract

 Where both parties to a contract are incapable of giving consent, the contract is unenforceable.
(Art. 1403[3].) However, if the parent or guardian, as the case may be, of either party, or if one
of the parties after attaining or regaining capacity, ratifies the contract, it becomes voidable.
(par. 1; see Arts. 1390, par. 1; 1394.)

g. When unenforceable contract becomes a valid contract

 If the ratification is made by the parents or guardians, as the case may be, of both contracting
parties, or by both contracting parties after attaining or regaining capacity, the contract is
validated and its validity retroacts to the time it was entered into. (see Art. 1396.)

12. Void or inexistent Contracts

a. Meaning of void contracts and inexistent contracts

 Void contracts are those which, because of certain defects, generally produce no effect at all.
They are considered as inexistent from its inception or from the very beginning. The expression
"void contract" is. therefore, a contradiction in terms. However, the expression is often loosely
used to refer to an agreement tainted with illegality.
 Inexistent contracts refer to agreements which lack one or some or all of the elements (ie,
consent, object, and cause) or do not comply with formalities which are essential for the
existence of a contract. An illegal contract may produce effects under certain circumstances
where the parties are not of equal guilt. (see Arts. 1411-1412.)

b. Characteristics of a void or inexistent contract

They are as follows:

 Generally, it produces no force and effect whatsoever,

  It cannot be ratified;
 The right to set up the defense of illegality cannot be waived;
 The action or defense for the declaration of its inexistence, does not prescribe; (Art.1410.)
 The defense of illegality is not available to third persons whose interests are not directly
affected (Art.1421); and
 It cannot give rise to a valid contract. (Art.1422.)

c. Instances of void or inexistent contracts

Void and inexistent contracts are not enforceable from the very beginning, regardless of the intentions
of the parties.

 Contracts whose cause, object or purpose is contrary to law, etc.

 Contracts which are absolutely simulated or fictitious.
 Contracts without cause or object.
 Contracts whose object is outside the commerce of men.
 Contracts which contemplate an impossible service.
 Contracts where the intention of the parties relative to the object cannot be ascertained
 Contracts expressly prohibited or declared void by law

d. Action or defense is imprescriptible

 If a contract is void, a party thereto can always bring a court action to declare it void or
inexistent; and a party against whom a void contract is sought to be enforced, can always raise
the defense of nullity, despite the passage of time. Since a void contract has no effect at all, it is,
therefore, unnecessary to bring an action to declare it void. However, it is better that a judicial
declaration of nullity be secured not only to give peace of mind to the parties but also to avoid
the taking of the law into their own hands.

e. Rules where contract is illegal and the act constitutes a criminal offense

 Where both parties are in pari delicto.

a. The parties shall have no action against each other;
b. Both shall be prosecuted; and
c. The things or the price of the contract, as the effects or instruments of the crime, shall
be confiscated in favor of the government.
 Where only one party is guilty.

f. Rules where contract is illegal but the act does not constitute a criminal offense

 Where both parties are in pari delicto. – If the cause of the contract is unlawful or forbidden
but there is no criminal offense, the rules are as follows:
a. Neither party may recover what he has given by virtue of the contract; and
b. Neither party may demand the performance of the other’s undertaking.
 Where only one party is guilty. – If only one party is guilty or both parties are not equally
guilty, the following are the rules:
a. The guilty party loses what he has given by reason of the contract;
b. The guilty party cannot ask for the fulfillment of the other’s undertaking;
 c. The innocent party may demand the return of what he has given; and
d. The innocent party cannot be compelled to comply with his promise.

g. Recovery where contract entered into for illegal purpose

The following are the requisites for the application of this article:

 The contract is for an illegal purpose;

 The contract is repudiated before the purpose has been accomplished or before any damage
has been caused to a third person; and
 The court considers that public interest will be subserved by allowing recovery.

h. Recovery by an incapacitated person

 This article is another exception to the in pari delicto rule in Articles 1411-1412. Recovery can be
allowed if one of the parties is incapacitated and the interest of justice so demands.
It is not necessary that the illegal purpose has not been accomplished or that no damage has
been caused to a third person.

i. Persons entitled to raise defense of illegality or nullity

 Third persons are NOT allowed to bring an action to annul OR assail, as the case may be said
contracts. HOWEVER, if the contract is illegal OR void, even a third person may avail of the
defense of illegality or set up its illegality as long as his interest is directly affected by the
contract.

j. Void contract cannot be novated

 This provision is based on the requisites of a valid novation. An illegal contract is void and
inexistent and cannot, therefore give rise to a valid contract.