LAW ON CONTRACTS

DEFINITION AND ELEMENTs I

DEFINITION - 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. (Art. 1305)
ELEMENTS OF CONTRACTS
1.ESSENTIAA those without which the contract cannot exist, i.e., Consent, object, consideration. in some contracts, form
and delivery is e ssential too.
2 NATURAL those which exist as partof the contract even if the parties do not stipulate it because the law is deemed
written therein. -
3. ACCIDENTAL - those which are agreed upon by the parties and which cannot exist without being stipulated.
STAGES IN THE LIFE OF A CONTRACT

-NEGOTIATION (PREPARATION-OR CONCEPTION OR GENERACION) --here the parties are progressing with their
negotiation, prior to the arrival on-a definite agreement. Here iswhere the parties-provide for-their offers-and-bargain-with
each other.
2.PERFECTION (OR BIRTH) -when the parties have already come to a definite agreement and att the essential elements
are present (which-includes form or delivery in some).
3. CONSUMMATION (OR DEATH OR TERMINATION) - the terms of the contract have already been performed.

SSENTHAL ELEMENTS OF CONTRACTS

1. CONSENT OF CONTRACTING PARTIES

Consent: the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract..

Offer and Acceptance:

The offer must be certain
The acceptance must be absolute.
A-qualified acceptance constitutesa counter-offer:
d -An-acceptance may be express or-implied.
The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.

Cognition Theory vs. Manifestation Theory:

a Cognition Theory- fotlows that the acceptance takes effect from the time the offeror knew (or has knowledge) of the
racceptance of the offeree.T
b Manifestation Theory -on the other hand, follows that the acceptance will take effect once it is manifested by the
offeree.

In the Philippines, We dbide by the Theory, since Art. 1319 provides that: "Acceptance made by letter or telegram
does not bind the offeror except from t e to his knowledae. The contract, in such a case, is presumed to nave
been entered into in the place where the offer was made."

ntervening events: An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before
acceptance is conveyed.

Option Agreement: 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.
Advertisements: Unless it appears otherwise, business advertisements of things for sate are not definite offers, but mere
invitations te-make-an effer. Advertisements for bidders are simply-invitations to-make propOsa ls, and the advertiser-is not
bound to accept the highest or lowest bidder, unless the contrary appears.
ST ONSENT OF THE PARTIES:
STAATNbtr
a. Both parties gave
g neent as to the essential elements of the contract - the contract IS Valld.
b Simulation: when one or both the parties did not intend to be bound by the contract (absolute simutation), the same is
-void- Otherwise, if the parties merely conceal their-true agreement (relative simulation), they-shall- be bound by their real
agreement.

Incapadty of one of the parties:

Kinds of Capacity:
iF uridical-capacity- is the fitnessto be the subject of legal relations, is inherent in every natural person and is lost only
through death.

If incapacity pertains to juridical capacity the contract is void.

Capacity to act (or legal capacity) - is the power to do acts with legal effect, is acquired and may be lost.

If incapacity pertains to capacity to act or legal capacity, it can be:

 Absolute Incapacity - the party cannot give consent in any contract, with anyone, in whatever capacity, over
anything.

The following cannot give consent to a contract:

FaTUnemancipated- minors
b. tinsane or demented persons (except ifconsent is given during lucid interval); |
C -Deaf-mutes who do not know how to write; and
d Drunks or hypnotized.
Here the contract would be voidable as to the party who is incapacitated.
Those who are "incompetent" under the Rules of Court who may be placed under guardianship:
Those sufferingcivit interdiction
b Hospitaized lepers
Prodigals
Deaf and dumb who are unable to read and write T
e Those of unsound mindeven thoughthey havetuctd intervals
f Those whe by-reason-of age, disease, weak mind, and othersimilar causes, cannot without outside aid, take
care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.

Note that these people (save for those suffering the penalty of civil interdiction) can still enter into contracts if not
placed under guardianship. However, it can still be proven that iintelligent consent was not given and thus, may
still render the contract voidable.

Relative Incapacity - a person may be prohibited from entering specific contracts or that in a contract, he may be
prohibited in a certain capaity, e.g., prohibited to be the buyer, or to specific things, or to specific persons.

ExampBes: t
-oAalien is prohibited under the Constitution from acquiring private lands. EXCEPT: when acquired through
(1) succession; or (2) sale of residential land to a former natural born Filipino citizen.
Husbands and wives cannot enter into a contract of sale, unless they agreed to a Separation of Property
marital property regime or they have been legally separated.
d Both are incapacitated: the contract is unenforceable.

e Both parties gave their consent, but such consent was vitiated:
Vices of consent: would render the contract voidable. I
Mistake

The following mistakes will make the contract voidable:

-#the mistake pertains te the object-of the contract;
If the mistake pertains to the conditions which have principatly moved one or both parties to enter into the contract.
FiiMistake-as to the identity or-qualificationsof-one- of-theparties when suchidentity orqualifications-have- been the
principal cause of the contract.
V. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate
consent.

Mistake does NOT vitiate consent:

iMista stake of to -or-as
ii,
-iii
AsimpBe mis of
mowhich
aCcOUnt :shall give rise toits correction onty
the party alleging it knew the doubt, contingency-or risk affecting the object of the contract.
b Violence- when in order to wrest consent, serious or irresistible force is employed.

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.

To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
Athreat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent
d. Undue Influence
nce - when a person takes improper advantage of his power over the will of another, depriving the latter
Of a reasonable
choice.

The following circumstances shall be considered: the confidential, family, spiritual and other relations between the
parties, or the fact that the person alleged to have been unduly influenced was suffering from mnental weakness, or
was ignorant or in financial distress.
e Fraud - when, through insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to.
In order that fraud may make a contract voidable, it should be serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
There is NO vitiation of consent on the ground of fraud in the following instances:
 Failure to disclose facts, when there is NO duty to reveal them. But if there is a duty to reveal them, failure to
disclose the facts constitutes fraud as when the parties are bound by confidential relations.
The usuat exaggerations in trade, when the other party had- an opportunity to know the facts.
üi. Amere expression of an opinion does not signify fraud; UNLESS made by an expert and the other party has retied
on-the former's special knowiedge
Îv. Misrepreserntation by a third person does not vitiate consent; UNLESS such misrepresentation has created
substantial mistake and the same is mutuat.
Misrepresentation made in good faith is not fraudulent but may constitute error.

2. OBJECT CERTAIN WHICH IS THE SUBJECT MATTER

Object (Subject Matter) of the Contract: is really to create or to end obligations, which, in turn, may involve things, rights
or services.

| Requisites:
The thing, right or service must be within the commerce of man;
b. Tit must be transmissibte;
tt.tmust not be contrary to taw, morals, good customs, public order or public policy:
d, t rmust not be impossibte:
te.It must be determinate as to its kind or determinable without the need of a new contract or agreement.
Future Inheritance: cannot be the subject matter of a valid contract. This is because the seller owns no inheritance while his
predecessor lives. Public policy demands that if you're going to sell, you have the right to do so, but not necessarily requiring |
that the seller is the owner.

3. CAUSE
Cause is the essential or impelling reason why a party assumes an obligation. t
a.b Onerous -for each contracting party, the prestation r promise of athing or service by the other;
Gratuitous mere liberality of the benefactor
Remuneratory - service or benefit already rendered.
Rutes on Cause:
Contracts without cause, or with
morals, good CUstoms, pub
unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law,
order or pubtic policy
b
The statement
tanother of afalse
cause which cause
is true andinlawful.
contracts
+ shall render them void, if it should not be proved that they were founded upon
C
Athough
contrary.
the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
Asarute, inadequacy of the price will mot affect the contract. Except:
(1) When expressly provided-byBaw, e.g-, rescissible-contracts;
(2) When there has been fraud, mistake or undue infuence.
e
The particular motives of the parties in entering into a contract are different from the cause thereof.
Exception: if it predominates the purpose of the party to enter into a contract.. E.g., sale to defraud creditors.
4 OTHER ESSENTIAL ELEMENTS:
Real Contracts: are those which are perfected by delivey, thus, delivery ls an essential element to its
Contracts incude:
perfection. Real
1.+Deposit
Pledge
3 Commodatum
4 Simple Loan or Mutuum
Formal Contracts: where the execution of the required formality is also an essential elemnent for perfection.

FORMS OF CONTRACT
GENERAL RULE: no form is required for the validity or perfection of a contract.

Exceptions: Formalities required for VALIDTY

1 Donationsof real property which requires apubli instrument.
Donations of personal property which exceeds P5,000 which requires that the donation
3.ipulation-topay interests onHoans or for-the use-of money,-which must be in writing. bewritte.
4 Sate or transfer of larqe cattle which requires that it be in a public
instrument, registered and that there should be a
-certificate of transfer. -
5 Contribution of real property in a partnership, which requires that there be an inventory
attached to a public instrument.
Formalities required for ENFORCEABILITY (STATUTE OF FRAUDS): The following are
writing, or some note or memorandum and subscribed by the party unenforceable, unless they are in
charged, or by his agent:
An agreement that by its terms is not to be performed within a year from the making thereof;
special promise to nswer for the debt, default, or miscarriage of another;
A special
3 An agreement made in consideration of marriage, other than a mnutual promise
to
r4. An agreement for the sale of yoods, chattels or things in action, at a price not marry;
buyer accept and receive part of such goods and chattels, or the ess than five hundred pesos, untess the
evidences, or some of them, of such things in action or
pay at the time some part of the purchase money; but when a sale is made by auction
in his sales book, at the time of the sale, of the amount and kind of property and entry is made by the auctioneneer |
sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient memorandum;
5 agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein;
6 A representation as to the credit of a third person.
 Formalities required for CONVENIENCE: to bind third persons, the following are required to appear in a public instrument:
1 Acts and contracts which havefor their object the creation, transmission, modification or extinguishment of reat rights over
-immovable property; sales of real property or of an interest therein a governed by-the Statute of Frauds.
2 The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
3.The power toadminister property,or any other power which has for its object an act appearing or which should appear in
-a eubliE decument, or snotio a thirdperson
pigo a at appearing in a
4. The cession of actions or rights proceeding from public document.
Remedy to reguire a specific form: if the law requires a document or other special form if the contract is VALID and
ENFORCEABLE, as in the acts and contracts required to appear in a public instrument for convenience (where the requirement
that they must be in writing for validity, if applicable, is met), the contracting parties may compel each other to observe that
form, once the contract has been perfected.
REFORMATION OF INSTRUMENTS
Reformation: is the remedy by means of whicha written instrument is made or construed so as to express or conform to the
true intention of the parties when some error or mistake has been committed.

Requisites:
1. There is a meeting of the minds;
There is a written instrument; and
3. The written instrument does not reflect the true intention of the parties.

When may reformation be had:

1 MutuaB mistake of the parties. Hf one party was mistaken and the other acted fraudulently orinequitably in such a way that
the instrument does not show their true intention, the former may ask for the reformation of the instrument
When one party was mistaken andthe other knew or believed that the instrument did not state their reat agreerment, but
concealed that fact from the former.
3 Ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist.
4 If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property
is-sold absolutelyor with aright of repurchase. -
Who can ask for reformation:
1 If the mistake was mutual, reformation may be ordered at the instance of either party or his successor in interest;
2. Otherwise, the injured party, or his heirs and assigns.
Noreformation is allowed:
a Simplerdonations inter vivos wherein no condition is imposed;t
rb. tWills;
When the real agreement is void.
Likewise, when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its
reformation.
FUNDAMENTAL CHARACTERISICS/ PRINCIPLES OF CONTRACTS
1. CONSENSUALITY OF CONTRACTS

Perfection of a contract: is generally by the meeting of the minds or consensual, save for some cases where delivery or form
is required for its perfection.

Contract entered into by an unauthorized person: is unenforceable since the rule is that no one may contract in the name
of another without being authorized by the latter, such as an agent, or unless he has by law a right to represent him, such as
a guardian.

The same is true if the person, while authorized or has legal representation, acted beyond his powers.
Unless, in both cases, the contract is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.
CONTRACT OF ADHESION one where there is already a prepared form containing the stipulations desired by one party
-ee to them if he wants to enter into a contract,
whereby the latter only asks the other party tto agree

Consent is necessary for there to be a contract: as such, in the case of PLDT, the SC held that the government cannot
compel PLDT to enter into an interconnection agreement with it without the latter's consent and there is no claim under a
contract without such consent.

However, the government may exercise its sovereign power of eminent domain and compel PLDT to allow the use of its facilities
subject to just compensation. In this case, the Court treated the action as one of expropriation. (Republic vs. PLDT)
2. AUTONOMY OF CONTRACTs (FREEDOM OR LIBERTY TO CONTRACT)
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.
Contrary to Law: note that the law is deemed part of every contract and must thus be not contrary to the same.
TWaiverfor future fraud.
b Partnership: Pactum Leonina -a stipulation which -excudes one or more partners from-any share in the profits-or losses
C Mortgage/Pledge: Pactum Commissorium - a stipulation where the creditor appropriates the things given by way of pledge
or mortgage, or dispose of them.
d Mortgage/Pledge: Pactum de non aliendo - a stipulation forbidding the owner from alienating the immovable mortgaged.
 Contrary
RefundtoofPublic
tuition Ponc
fe during the time a student is covered by a scholarship if such student transfers schools. Scholarships
are granted not to attract and to keep briliant students in school for their propaganda mine but to reward merit or help
gifted students in whom society has an established interest or a first llen, (Cui vs. Arellano)
b Prohibiting a losing candidate in a convention to un as an independent candidate is contrary to constitutionality protected |
right to be elected in public office and the right of the electorate to choose. (Saura vs. Sindico)
Contrary to Morals: in a contract of loan, where the interest rate is 50%, is void (and reduced) for being contrary to morals,
the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is usurious.
3 MUTUALITY

The contract must bind both contracting parties;

b its validity or compliance cannot be left to the will of one of them.
Consequences of Mutuality: t
-a One party cannot-revoke or renounce a contract without the consent of the other, nor have it said aside on the ground that
he had made a bad bargain.
Potestative suspensive conditions dependent upon the sole will of the debtor voids the obligation. If the potestative condition
isparties.
resolutory, it woud not affect the validity of the contract, as such, extinguishment can be let to the will of one of the
The determination of the performance may be left to a third person:
(1) Whose decision shall not be binding until it has been made known both contracting parties
(2) The determination shalt not be obligatory if it is evidently inequitable. In such case, the cOurts shall decide what is
equitable under the circumstances.
ESCALATION CLAUSE: where one increases/decrea ses compensation of one of the parties.
When Void: when the increase is dependent solely upon the will of one of the parties.

The unilateral determination and imposition of increased interest rates by the bank is obviously violative of
mutuality of contracts ordained in Article 1308 of the Civil Code. (Sps. Florendo vs. CA) principle of

When Valid: when the increase/decrease is dependent on valid and

reasonable standards, independent of the parties' will. |
Contract for a piece of work: where the compensation of the
as to materials, based on the consumer price index. contractor may be increased on the basis of minimum wage or

Contract off Lease: where the rental would be increased or decreased based on the
foreign exchange - valid. (Del ROsario vs. Shell) movement (increase devaluation) of

|4. OBLIGATORY FORCE OF CONTRACTS

Obligations arising from contracts have the force of law between the contracting parties and should be
faith. (Art. 1159) cornplied with in good

5. RELATIVITY OF CONTRACTS

RELATIVITY (OR PRIVITY) OF CONTRACTS: means that the

and heirs which are referred to as privies. contract takes effect only between the parties, their assigns
Third Parties: as a general rule do not have a cause of
action to enforce or annul a contract nor are they bound by
thereof. the terms
Exceptions:
a. Third person may be bound by the
contract: In contracts creatingreal rights, third persons who come into POSSession
of the object of the contract are bound thereby,
Laws subject to the provisions of the Mortgage Law and the Land Registration
b A creditor may initiate an action against the contracting parties
Creditors are protected in cases of contracts intended to defraud
effectively interfering in contracts to which they are not parties to: them. The following actions are allowed for creditors,
Accion Pauliana: is the action of the creditor to rescind the contract entered into by the debtor to defraud him.
Accion Directa: is the action of a creditor to sue on a
suçh as: contract entered into by his debtor, whenever
4. Those who put laboF upon or furnish
authorized by laW,
materials for a piece of work undertaken by the
latter to the contractor at the time the contractor-have an action against
the owner up to the amount owing from the
ii. The sublessee is subsidiarily Hableto the claim is made.
- |responsible lessor for any rent due from the lessee.However, the sublessee shalt not be
-beyond-the-ameunt of-rent
extrajudicial demand by the lessor.
due him, in accordanee with theterms of-the- sublease, at the time of the
-

C. Third persons may be liable under a contract

Malicious interference by third persons: A
damages to the other contracting party. As third person who induces another to violate
the name implies, there should his contract shall be liable for
third person as a result of which, the ld be malice or a malicious inducement by the
debtor does not comply with his obligation
implies that such third person has knowledge ot
of the under the contract, which
necessarily
existence of the contract.. (Art. 1314)
 Third persons may be benefited by a contract 2nd paragraph of Art. 1311, otherwise known as a stipulation
pour a trui.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.
Stipulation pour atrui: is a stipulation in favor of a third person conferring a dear and deliberate favor upon him, and which
stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the third person.
Communication of acceptance to the obligor is required. No formn is required. It can even be implied from the acts of the
third person.
Revocation: cannot be done by one party alone. The Supreme Court has held that if this revocation is a unilateral act of
one of the parties, it is void for violation of the principle of mutuality of contracts. For a revocation to take effect, it must
be with consent of both parties (obligor and oblige) and should be done before the communication of acceptance to the
obligor.
CLASSEICATION OF CONTRATTS
1. ACCORDING TO DEGREE OF DEPENDENCE
ta.PRINGIPAA-acontract which
canrstand or its own, Such as a contract of sale, barter,lease, toan.
b ACEESSORY-those which cannot stand on its own and-are dependent-upon other contracts for its validity. E.g.,
tguaranty, suretyship, mortgage and antichresis.==
PREPARATORY- a contract is a meansto achieving an end, such as an option contract, a contract of partnership and
that of agency.
2, ACCORDING TO PERFECTION
CONSENSUAL- are those perfected by mere consent.
h REAL - those which are perfected only upon delivery of the thing subject of the contract E.g., deposit, pledge,
commodatum and mutuum.
FORMAL - those which require a certain form for its validity. E.g., antichresis
3 ACCORDING TO PURPOSE
a
-TRANSFER OF OWNERSH0P - Donation, Sale and Barter
b CONVEYANCE OF USE Usufruct, tease and Loan
RENDITION OF SERVICE - Lease and Agency
4 ACCORDING To NATUREOF OBLIGATION PRODUCED
e. BILATERAL- where both parties are reciprocalty obligated, e.g., lease (where the lessor is obliged to allow the use of
thing and the lessee is obliged pay rent) and sale (where the buyer is obliged to pay the price and the seller
obliged to deliver the thing) (ARTS. 1 642, 1458)
b UNILATERAL only one party is obliged. E.g., guaranty and pledge. (ARTS. 2047, 2093)
5 ACCORDING TO CAUSE T
a.ONEROUSSuch asa contract of sale, barter, tease and simpte loans or mutuum with stipulation for interest.
b. t GRATUITOUS OR EUCRATIVE such asa donatioand commodatum:
-REMUNERATORY -where one prestation is given for a benefit or service that had been rendered previously.
6. ACcORDING TO RISK
a.cOMMUTATEVE- where the parties contemplate real fulfillment, therefore, equivalent values (presumably) are given,
such as sales (where the price is presumably the equivalent of the thing to be delivered) or lease (where the rental
payments is presurnabty the value of the use of the thing)
b ALEATORYwere thefulfittment of the cause as to one party is dependent uponchance, such asan insurance contract
where the payment willdepend on the happening the event insured against)

7, -ACcORDING TO NAME
t a . NOMINATE those contracts for which a particular name has been designated and rules particular to them are
appticable such as sales, commodatum, partnership, agency, deposit, etc.
b INNOMINATEthose which do not have particular designatior, such as do ut des ( will give that yo¯ may give), do
ut facias (I will give that may do), facio ut des (I will do that you may give) and facio ut facias (I witl do that you may
do).
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)

Primordial Consideration: is the intention of the parties. Such that even if the terms of the contract are clear, but does not
reflect the intention of the parties, it is the intention which would prevail.
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (1282)
Contemporaneous and Subsequent Acts: may be considered to determine if the parties' intentions are different from the
clear words of the agreement.
 In a case where a Deed of Assignment was issued as payment for the obligation of the debtor in an indemnity agreement by
way of dacion en pago, the debtor thereafter made subsequent installment payments and executed a mortgage, the SC held |
that clearly the subsequent acts of the debtor do not reflect his claim that the deed of assignment was by dacion en pago. The
deed of assignment was a form of security for the indemnity agreement.
Specific rutestn interpretation of contracts:
1. 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.
2. If some stipulatton of any contract should
admit of severa meanings, it shall be understood as bearing that Import which
is most adequate to render it effectual.
3 The various stipulations of acontract shalt be interpreted together, attributing to the doubtfut ones that sense which may
result from all of them taken jointly:
4.
Words which
objec th
may have different signiflcatlons shall be understood in that which is most in keeping with the nature and
ntract
The usage or custom of the place shalt be borne in mind in the interpretation of the ambiguities of acontract, and shall fill
6
the omission of stipulations which are ordinarily established.
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity
When none of the above rules will apply:

When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to
FIncidental circumstances of:
a gratuitous contract-the least transmission of rights and interests shati prevait.
If the contract is onerous, the doubt shall be settled in favor of the greatest recproclhY Of interests

If the doubts are cast upon the principal obiect of the contract in such a way that it cannot be known what may have been
| the intention or will of the parties, the contract shall be null and void. (Art. 1378)
DEFECTITVE CONTRACTS
1 RESCISSIBLE CONTRACTS

Rescission: is a process designated to render inefficacious a contract validly entered into and normally binding, by reason of
external conditions, causing an economic prejudice to a party or his creditors.
Resolution: is the proper term for "rescission" which is a remedy under Art. 1911 in reciprocal obligations. Unlike the proper
rescission for rescissible contracts, resolution is a primary remedy which can be availed of by the parties and does not require
lesion as a ground therefor but will require non-performance or non-fulfillment of the obligation or when there is substantial
breach.

Rescissible Contracts:
Art. 1381. The following contracts are rescissible:
(1) Those whicn entered into by
b quardians whenever the wards whom they represent suffer lesion by more than
one-fourth of the dreehings
value which are the object
(2) Those agreed upon in representation of absentees, if thethereor
latter suffer the lesion stated in the preceding number;
(3 ose undertaken in fraud of creditors when the latter cannot in any other manner collect
the caims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
(5) Allother contracts specially decdared by law to be subject to rescission. (1291a)
Lesion - is the damage or injury to the party asking for rescission, which represents the difference
actual value of the property. Lesion, as a ground for rescission mnust be MORE THAN ONE-FOURHT ofbetween the price and the
the value.

In fraud of creditors: which is properly termed "accion pauliana," through which the creditor can interfere and have the
contract entered into by the debtor rescinded. This presupposes that the creditor cannot in any other manner collect the claims
due. Thus, if the debtor entered into a contract of sale with a third person
in order to have enough money to pay the creditor,
the latter cannot rescind such contract of sale since the sale was precisely entered into to pay him his due.
Things under litigation: is rescissible whenever entered into without
the knowledge and approval of:
TThelitigants; or
T Competent judicial authority (suchas the court under which the thingis subject to litigation).
Other contract subject to rescission under the law:
a. Rights of an unpald seller;
In obligations to deliver a specific thing, where the samne
condition is fulfitled (or suspensive term arrives); deteriorates with the fault of the debtor before the suspensive
C. Lesion of at least one-fourth in partition.
d. In sale vf real estate for a certain price per unit of
Tneasure and the real estate detivered is deficient by more than 1/10 or
when the buyer would not have entered into the contract
e.r Payments made in a state of insolvency for obligations whoseknowingthe actual area of the real estate.
were effected fulfillment the debtor could not be compelled at the time they

Rescission as a remedy:
a. The action for rescission is subsidiary; it cannot be
means to oobtain reparation for the same
instituted ex cept when the party suffering damage has no other legal
b. TRescission shalt be only to the extent necessary to cover
the damages caused
He.Restitution rescission creates the obligation to return
the things which were the object of the contract,
"fruits, and the price with its interest. together with their
d. It can be carried-out onlywhen he who demands
rescission canreturn whatever he may be-obliged to restore
 Rescissionwhoshall not take
did not place when
act in-bad thewhich-
faith. In thingscase,
which are theforobject
indemnity of themay
damages contract are tegally
be demanded inthe
from the possession
person of third
loss.
f -If the sale of the property of the ward or the absentee is approved by courts, rescission is not an available remedy:

Presumption of Fraud:
a Allenatons by gratuitous title: presumed to have been entered into in fraudof creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.
b Allenations by onerous title: presumed fraudutent when made by persons against whom some judgment has been
issued. The decision or attachment need not-refer to the property alienated, and need not have been obtained by the party
seeking the rescission.
Whoever acquires in bad faith the things alienated in fraud of creditors shall indemnify the latter for damages suffered on
account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

Prescriptive Period: the action to claim rescission must be commenced within 4 years. For persons under guardianship and
absentees, such four year period shall begin upon termination ward's incapacity or en entee's domicile ie
known.

Sale of land, 4 years is counted from the time of registration: When a transaction involves registered land, the four-year period
fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration of the
conveyance.

The registration of the document is constructive notice of the conveyance to the whole world. (HSBC vs. Pauli)
. VOIDABLE CONTRACTS

Voidable Contracts: are those which are valid until they have been annulled by proper action in court. However, they are
likewise subject to ratification to cure the defect.

The following are voidable contracts:

a. Those where one of the parties is incapable of giving consent;
h. Those where the consent is vitiated by mistake, viotence, intimidation,undue influence or fraud.
C. Those-entered into by those-hypnotized er undera state-of drunkenness

Prescriptive Period: shall be four years.

Ground Counted from:

Intimidation, violence or undue influence The defect of the consent ceases
Mistakeor fraud DVery
Minority or incapacity Guardianship ceases

| Ratifica tion: extinguishes the action to annul a voidable contract.

a. Ratification may be effected by the guardian of the incapacitated person
b It does not require the conformity of the contract party who has no right to bring the action for annulment.
C. It cleanses the contract from all the defects from the moment it was constituted.
d. It may be done:
Expressly - either oral or written; or
i. Tacitty (impliedty) when the reason which renders the contract voidable has ceased, the person who has a right to
invoke annulment should-execute anact which necessarily implies an intention to waive such-right.
Annulment: renders the contract non-existing, as if it was never entered into.
a. Only the
injured party (e vitwhether principal or subsidiary party) may ask for annuiment.
2ck for the
b. Creditors of the injured
In case oarty annulment
of the contract t for they
inority, and the minor misrepresents his age, and other party was
ey are not parties thereto.
believe the same, there can be
no annulment, for here, the minor would be estopped.
d. Those who are capacitated cannot allege the incapacity of those with whom they contracted with nor those who exerted
intimidation, violence or undue influence, or empBoyed fraud, or caused mistake.
e. Effects of loss of the thing:
ifThe action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through
the
fraud or faut of theperson who has a right to institute the proceedings.
i, If the right of action isbased upon incapacity, the toss of the thing shalt not be an obstacle to the sUccess of the action,
unless said toss took place through the fraud or fault of the incapacitated person.
f. Effects of annutment:
H. Generally, the parties are obliged to restore to each other thethings which have been the subject matter of the contract,
with their fruits and the price with its interest,
i. In obligations to render service, the v
value thereof shall be the basis for damages.
ii. In ca se of incapacity, the person incapacitatedis not obligated to make any restitution except insofar as he has been
benefited by the thing or price received by him.
ivWhenever the person who is obliged to return the thing cannot do so because it has been lost through his fault, he
shall return:
1) the fruits received and
2) the value of the thing at the time of loss
|3) withinterest from the same date.
v. When one party does not return what is due him by virtue of the annulment, he cannot compel the other to comply
what is incumbent upon-him.
 3. UNENFORCEABLE CONTRACTS

Unenforceable contracts - are those which have no effect until they are ratified.

Kinds of Unenforceable Contracts:

ra. Unauthorized contracts those entered into in the ame of a person by one who has been
given no authority or legat
representation, or-who has acted beyond his powers.ilt
b.Those that do-not comply with the Statute of Frauds these are agreements that are required to be in writing in
L
order to avoid fraud.

Statute of Frauds: in order to be enforceable, the following must be in writing, or in some note or memorandum:
i An agreement thot terms is not to be pertormed Wntha year rom om the making thereof.
H A special promise to foe the debt, default, iage of another;
-ii. An agreement made in consideration f marriage, other than a mutual promise to marry:
iv, An agreement for the sale of goods, chattels or things in action, at a price not tess than five hundred pesos, untess the
-buyer accept and recelve part of such goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the 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;
An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein.
vi. A representation as to the credit of a third person.

Rules Applicable to Statute of Frauds:

a.Itapplies-onty to- exeEutery contracts,and not those which have been partiallyor cormpletely executed.
b. The tist is-exclusive, that is, it applies only
to the agreements-or centracts enumerated above.
The defense of Statute
of Frauds may be waived.
The Statute of Frauds iS aapersonat
prove t h h a t is, ana
t defense, an agreement infringing it cannot be assaited by third persons.
1E eral
evidence
defense of
contract.
is sented to
9ther
agr ment, and the does po
jectt thereto, there is deemed a waiver
tatute of Frauds. The same is true if the other party has already accepted the benefits of the

C Those where both parties are incapable of giving consent.

4 VOID OR INEXISTENT

Void Contracts are those which are either inexistent (as when the required formalities are not complied with for its perfection,
which produces no legal effects), or illegal or illicit.

Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
(2) Those which are absolutely simnulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Rules Applicable:
a. The action or defense for the dedaration of the contract as inexistent does not prescribe.
b. The contract cannot be ratified.
C. The defense of illegality of contract is not available to third persons whose interests are not directly affected

Legal Effects of a Void Contract:

GENERAL RULE: It cannot give rise to valid subsequent contracts if the same are based on it. Generally, produces no effect
and no action to declare them void is needed.

EXCEPTIONS:
a. When money is paid or property delivered for an itlegal purpose, the contract may be repudiated by one of the parties
before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the
courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or
property
Hb. Where one of the parties to an illegal contract-is incapable of giving consent, thecourts may, if the interest of justice so
-demands allow recovery of-money or property delivered by the incapacitated person. -
c. When the agreement is not-illegal per se but is merely prohibited, and the prohibition by the law isdesignated for the
-protection of the plaintiff, he may, if publiepoliey is thereby enhanced, recover- what he has paid or delivered.
d. In case of divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

THegal Contracts: can either be that which involves a criminal offense or where there is no criminal offense. |

ra. When there is a criminal offense and both parties are at fautt/guilty (in pari delicto) they shall have no shatt have no action
against each-other; they shal! both be prosecuted; the effects of the crime shall-be confiscated in favor of the government. 4
b.When there is no criminal offense, same rights as to recovery, except no prosecution will be involved. As such, if both are
-at fauit, no-recovery can be made by either. But ifonly one party is at fault, the innocent party may demand the return of
what he has given, without any obligation to comply with his promise. |