Title II.

CONTRACTS

Chapter I. General Provisions

A. Definition
Art 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
B. Elements of Contract
1. Essential elements without which there can be no contract
a. Consent
b. Object
c. Cause
2. Natural Elements exist as part of the contract even if the parties do not
provide for them, because the law creates them. E.g. Warranty against
hidden defects or eviction in the contract of purchase and sale
3. Accidental elements- agreed upon by the parties and which cannot exist
without being stipulated e.g. mortgage, guaranty, bond
C. Characteristics of a contract
1. Obligatory force- constitutes the law as between the parties
Art 1308 The contracts must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them
2. Mutuality- validity and performance cannot be left to the will of only one of
the parties
3. Relativity Binding only upon the parties and their successors
4. Consensuality
5. Freedom entering into contracts is a guaranteed right of the citizens.
They are free to do so as long as it's not contrary to law, good morals,
customs, public order and public policy.
D. Parties in a contract
1. Auto -contracts
- Necessary for the existence of a contract that two distinct persons enter into it
- Existence of a contract is not determined by the number of persons who
intervene in it, but by the number of parties. Not by the number of individual
wills but by the number of declarations of will
- As long as there are two distinct patrimonies, even if they are represented by
the same person
2. Freedom to contract
Art 1306 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 and public policy
3. What they may not stipulate
- A contract is to be judged by its character, courts will look into the substance
and not to the mere form of the transaction
E. Classification of Contracts
1. According to subject matter
a. Things
b. Services
2. According to name or designation
a. Nominate have their own individuality (names) and are regulated by
special provisions of law e.g. sale, agency, etc.
b. Innominate without particular names
3. According to perfection
a. Consensual- by mere consent e.g. purchase and sale
Art 1315 Contracts are perfected by mere consent and from that
moment, the parties are bound not only to fulfillment of what has been
expressly stipulated but also to all the consequences which, according
to their nature, may be in keeping good faith, usage and law
b. Real- by delivery of the object
Art 1316 Real contracts such as deposit, pledge and commodalum are
not perfected until the delivery of the object of obligation
4. According to its relation to other contracts, degree of dependence
a. Preparatory- e.g. agency
b. Principal- e.g. lease or sale

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 c. Accessory- e.g. pledge, mortgage or suretyship
5. According to form
a. Common or informal- e.g. loan
b. Special of formal- e.g. donations and mortgages of immovable property
6. According to purpose
a. Transfer of ownership- e.g. sale or barter
b. Conveyance of use- e.g. commodalum
c. Rendition of services- e.g. agency
7. According to the nature of the vinculum produced, nature of obligation
produced
a. Unilateral- where only one has an obligation to perform e.g.
commodalum or gratuitous deposit
b. Bilateral- where both parties have obligation to perform e.g. purchase
and sale
c. Reciprocal
8. According to cause
a. Onerous- one which imposes valuable consideration such as sale,
mortgage
b. Gratuitous or lucrative- one which one of the parties does not receive
any valuable, consideration such as commodalum
c. Remuneratory- the cause is the service or benefit which is
remunerated. E.g. a rendered service as the lawyer- counsel of B who
agreed to pay P10,000 for said services
9. According to risk
a. Commutative- where there is an exchange of values, such as lease
b. Aleatory- one which the fulfillment of the obligation depends upon
chance e.g. contract of insurance
F. Stages of Contracts
a. Preparation- period of negotiation and bargaining, ending at the moment
of agreement of the parties
b. Perfection- moment when the parties come to agree on the terms of the
contract
c. Consummation or death- fulfillment or the performance of the terms
agreed upon in the contract
G. As distinguished from a perfected promise and an imperfect promise

CONTRACT PERFECTED PROMISE IMPERFECT PROMISE

Tends only to assure and

pave the way for the
Establishes and celebration of a contract
determines the obligation in the future; until the Mere unaccepted offer
arising therefrom contract is actually made,
the rights and obligations
are not yet determined

Contract Binds by Both Parties

Art 1308 The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them
Contracts entered by and between the parties must bind both parties in order
that it can be enforced against each other. This is also known as "mutuality of
contract". Hence, its validity or compliance cannot be left to the will of one of
them. This principle is based on the essential equality of the parties. It is
elementary rule that no party can renounce or violate the law of the contract
without the consent of the other.
Example. Gail and Laura entered into a contract to sell whereby Gail binds herself to
sell her only parcel of land to Laura if Gail decides to leave for States. The contract
is void because the fulfillment of the condition depends on the will of Gail.

Determination of Performance by Third Person

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Art 1309 The determination of the performance may be left to a third person, whose
decision shall not be binding until it has been known to both contracting parties.
Art 1310 The determination shall not be obligatory if it is evidently inequitable. In
such case, the courts shall decide what is equitable under the circumstances.
As a rule, compliance with a contract cannot be left to the will of one of the
contracting parties. However, the determination of its performance may be left to a
third person after it has been made known to both contracting parties. Provided
further, the parties are not bound by the determination if it is evidently inequitable
or unjust when the third person acted in bad faith or by mistake, the courts shall
decide what is equitable under the circumstances.
Example. Gail sold her parcel of land to Laura. It was agreed that Maya, a real
estate appraiser would be the one to determine the reasonable price of the land.
Maya then fixed the price after considering the factors affecting the value of the
land, and informing both contracting party that the decision is just and suitable. If
the decision made by Maya is manifestly inequitable, the court may be called upon
to decide what is equitable

Cases Where Third Person May Be Affected by a Contract

Art 1311 Contracts can take effect only between the parties, their assigns and heirs
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation, or by provision of law. The heir is not
liable beyond the value of the property he perceived from the decedent.

If a contact 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.
1. In determining the performance of both parties. (Art 1309)
2. In contracts containing a stipulation in favor of a third person. (Art 1311)
3. In contracts creating real rights (Art 1312)
4. In contracts entered into to defraud creditor (Art 1313)
5. In contracts which have been violated at the inducement of the third person
(Art 1314)

Example. Gail mortgaged her parcel of land in favor of Laura as collateral for her
debt. The mortgage is duly registered. Later on, Gail sold the same land to Tara. In
this case, Tara bought the land subject to the mortgage constituted thereon. Tara,
although a stranger in the mortgage, being a real right follows the property on the
right of Laura to the mortgage.

Forms of Contracts

Art 1356 Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it may
be valid or enforceable, or that a contract be in some form in order that it may be
valid or enforceable, or that a contract be proved in a certain way, that requirement
is absolute and indispensable. In such cases, the right of the parties stated in the
following article cannot be exercised.

Meaning of forms of contracts

Forms of a contract refer to the manner in which a contract is executed or

manifested.

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 provided all the three essential requisites (consent, object, cause) for
their validity are present.

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 Reformation of Instruments

Art 1359 When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to the
end such that true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the

minds of the parties, the proper remedy is not reformation of the instrument but
annulment of the contract.

Meaning of Reformation

Reformation is that remedy by means of which a written instrument is amended or

rectified so as to express or conform to the real agreement or intention of the
parties when by reason of mistake, fraud, inequitable conduct, or accident the
instrument fails to express such an agreement or intention.

Requisites of Reformation

1. There is a meeting of the minds of the parties to the contract.

2. The written instrument does not express the true agreement or intention of
the parties.
3. The failure to express the true intention is due to mistake, fraud, inequitable
conduct or accident.
4. The facts upon which relief by way of reformation of the instrument is sought
are put in issue by the pleadings
5. There is clear and convincing evidence of the mistake, fraud, inequitable
conduct, or accident.

Example. Anne sold her land to Ryan. It was agreed that the sale will include all
the improvements. However, the contract was signed by the parties, stated that
the land is being cold excluding the improvements thereon. In this case, the
remedy is reformation, because there has been meeting of minds.

Cases when Reformation is Not Allowed

1. Simple donation 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. Donation is strictly personal and free act so that if
the intent of the donor is that the donation will take effect during his lifetime,
it is a donation inter vivos, while the opposite of inter vivos is donation mortis
causa which takes effect after the donor's death.
2. Wills- A will is an act whereby a person is permitted with the formalities
prescribed by law to control a certain degree the disposition of his estate, to
take effect after his death.
3. When the real agreement is void- If the real agreement is void, there is
nothing to reform.
4. When one party has brought action to enforce the instrument- When a party
brings an action to enforce the contract, he admits its validity that it
expresses the true intention of the parties. The bringing of the action is thus
inconsistent with reformation.

Causes of Contracts

Art 1350 In onerous contracts the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other; in renumenatory
ones, the service or benefit which is renumenerated; and in contracts of pure
beneficence, the mere liberality of the benefactor.

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Meaning of Cause

- Cause is the essential or more proximate purpose which the contracting parties
have in view at the time of entering into a contract.
- It is the Civil Code term for consideration in Anglo American or Common Law

Art 1352 Contracts without cause, or with unlawful cause, produce no effect
whatever. The cause is unlawful if it is contrary to law, morals, good customs, public
order or public policy.

Art 1353 The statement of a false cause in contracts shall render them void, if it
should not be proved that they were founded upon another cause which is true and
lawful.

Requisites of Cause

1. It must exist at the time the contract is entered into.

2. It must be lawful
3. It must be true and real

Effect of Absence of Cause

- A contract without cause or with unlawful cause, produces no effect whatever.

Like, for example, an absolutely simulated contract produces no effect because
there is no cause at all.

Effect of Inadequacy of Cause

- Inadequacy of cause does not invalidate a contract. Illegality of cause implies

that there is a cause but the same is unlawful or illegal. Falsity of cause means
that the contract states a valid consideration but such statement is not true.

Defective Contracts

There are four kinds of defective contracts

1. Rescissible Contracts
2. Voidable Contracts
3. Unenforceable Contracts
4. Void or Inexistent Contracts

1. Rescissible Contracts

- Contracts are valid because all the essential requisites of a contract exist but by
reason of injury or damage to one of the parties or to third persons, such as
creditors, the contract may be rescinded.

Art 1380 Contracts validly agreed upon may be rescinded in the cases established
by law.

Meaning of Rescission

- Rescission is a remedy granted by law to the contracting parties and sometimes

even to third person in order to secure reparation of damages caused to them
by a valid contract, by means of the restoration of the things to their condition
in which they were prior to the celebration of said contract.

Requisites of Rescisison

1. The contract must be validly agreed upon

2. There must be lesion on pecuniary prejudice to one of the parties or to a third
person.
3. The rescission must be based upon a case especially provided by law.
4. There must be no other legal remedy to obtain reparation for the damage.

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 5. The party asking for rescission must be able to return what he is obliged to
restore by reason of the contract.
6. The object of the contract must not legally be in the possession of third
person who did not act in bad faith
7. The period for filing the action for rescission must not have prescribed

Art 1381 The following contracts are rescissible:

1. Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things
which are the object thereof.
2. Those agreed upon in the representation of the absentees, if the latter suffer
the lesion stated in the preceding number.
3. Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due to 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. All other contracts specially declared by law to be subject to rescission.

2. Voidable Contracts

Art 1390 The following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties:

- Those where one of the parties is incapable of giving consent to a contract

- Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud. These contracts are binding, unless they are annulled by a
proper action in court. They are susceptible of ratification.

Meaning of Voidable Contracts

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

Characteristics of Voidable Contracts

1. The defect in the contract consists in the vitiation of consent of one of the
contracting parties
2. The contract is binding until annulled by a competent court
3. The contract is susceptible of covalidation by ratification or prescription
4. The defect or voidable character of the contract cannot be invoked by third
persons

3. Unenforceable Contracts

Meaning of Unenforceable Contracts

- Unenforceable contracts are those that cannot be enforced in court or sued

upon by reason of defects provided by law until unless they are ratified
according to law.
- They are contracts either entered into without or in excess of authority or do not
comply with the statue of frauds or both of the contracting parties do not
possess the required legal capacity.

Classes of Unenforceable Contracts

1. Those entered into the same of another person by one without authority or in
excess of his authority
2. Those which do not comply with the Statue of Frauds
3. Those where both parties are incapable of giving consent

Art 1403 The following contracts are unenforceable, unless they are ratified:

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 1. Those entered into in the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers.
2. Those that do not comply with the Statue of frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the writing,
or a secondary evidence of its contents:
a. An agreement that by its terms is not to be performed within a year from
the making thereof
b. A special promise to answer for the debt, default, or miscarriage of
another.
c. An agreement made in the consideration of marriage, other than a mutual
promise to marry
d. An agreement for the sale of goods, chattels or things in action, at a price
not less than five hundred pesos, unless the buyer accept and receive 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.
e. An agreement of the leasing for a longer period than one year, or for the
sale of real property or of an investment therein
f. A representation as to the credit of a third person
3. Those where both parties are incapable of giving consent to a contract

4. Void or Inexistent Contracts

Art 1409 The following contract 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 simulated 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.

Art 1410 The action or defense for the declaration of the inexistence of a contract
does not prescribe.

Instances of Void or Inexistent contract

- Void or inexistent contracts does not prescribe. Mere lapse of time cannot give
effect to contracts which are null and void.

Meaning of Pari Delicto

- Pari Delicto means both parties are equally at fault or equally guilty.

Rules when both parties are in pari delicto

a. The parties shall have no action against each other

b. Both shall be prosecuted
c. The things of the price of the contract, shall be confiscated in favor of the
government

Where only one party is guilty

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- The innocent one or less guilty may claim what he has given and shall not be
bound to comply with his promise