LAW ON CONTRACTS
Contract
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:
Consent meeting of the minds
Subject matter obligation
Consideration payment
Kinds:
According to Kinds
(a) Perfection (Kung 1. Consensual (perfected by mere
paano nagkaroon ng consent)
kontrata) 2. Real (perfected by delivery)
3. Formal (special formalities are
needed like execution of public
document)
(b) Cause or consideration 1. Onerous (interchange of
(kung me bayad) equivalent valuable consideration)
2. Gratuitous (free)
3. Remunerative (given for a benefit
previously given)
(c) Dependence on 1. Principal (stand alone)
another contract 2. Accessory (depends on a principal
contract)
3. Preparatory (not the end
contract)
(d) Parties obligated 1. Unilateral (only one party has an
obligation)
2. Bilateral (both parties have
obligation)
(e) Name (kung me 1. Nominate (the law gave it a
pangalan ba) name)
2. Innominate (no name) (1307)
(f) Risk of fulfillment 1. Commutative (parties expect
fulfillment)
2. Aleatory (fulfillment depends
upon chance)
(g) Time of performance 1.Executed (completed at the time
contract is entered into)
2. Executory (prestation is to be
complied with at a future time)
(h) Subject matter 1. Contracts involving things
2. Contracts involving rights
3. Contracts involving services
(i) How law regards the 1. Ordinary
contract 2. Institutional
(k) Evidence required to 1. Contracts requiring oral or parol
prove evidence
2. Contracts requiring written
evidence
(l) Number of persons 1. Ordinary (two parties are
entering in the contract represented by different persons)
2. auto-contracts (one person
represent two opposite parties in
different capacities)
(m) Number of person 1. Ordinary
who drafter the contract 2. Contract of adhesion (with pro-
forma deed take it or leave it)
Example
Sale
Commodatum (borrowing of something with
intent to return the same thing)
Donation of real property inter vivos (giving
of land while donor is still alive. Such
requires public instrument [notarized
document])
Sale
Donation during relief operations
Tip after you eat in a restaurant
Loan
Guarantee
Agency (one hires an agent to do things for
business of the principal)
Commodatum (yung nanghiram lang ang
may dapat gawin isoli ang hiniram)
Sale
Sale, commodatume, agency, deposit
4 types:
1. I do that you may do (Facio ut facias)
2. I do that you may give (Facio ut des)
3. I give that you may do (Do ut des)
4. I give that you may give (Do ut facias)
Sale
Insurance
Sale of personal property
Deed of conditional sale
Sale
Usufruct, assignment of credit
Agency
Sale
Marriage (inviolable social institution)
Commodatum
Sale of real property
Sale, where same person represents buyer
and seller
Contract of service for home repair
Insurance
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Stages of contract

1. Preparation negotiation phase

2. Perfection parties concluded the negotiation and came to an
agreement
3. Consummation terms performed and contract fully executed

General Rule on when contracts are perfected

Contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. (Art. 1315)

How contracts are perfected

o Consensual by mere consent (e.g. sale)
o Real by delivery (deposit)
o Formal special form (donation of real property)

Real Contracts

Real contracts, such as deposit, pledge and Commodatum, are not

perfected until the delivery of the object of the obligation. (Art.
1316)

o But future real contracts are Consensual Contracts

E.g.
A agreed to lend his car to B next school year. This is a
consensual contract.

Consequences of perfection of contract

o The parties are bound to fulfill in good faith the terms of the
contract
o The parties are bound to all the consequences of the contract

Basic Principles of Law on Contract

1. Freedom to Stipulate parties are fee to provide the terms as long as

they are not contrary to law, morals, good customs, public order or public
policy (1306)
2. Obligatory Force parties should comply in good faith (1159 and 1315)
3. Perfection by Mere Consent (as a general rule) (1315)
4. Mutuality - both Parties are Mutually Bound (Art. 1308)
5. Relativity generally it is binding only between the parties, their
assigns and heirs (1311)

Principle of Freedom to Stipulate

The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public policy. (Art. 1306)

Law passed by congress

Morals deals with right and wrong and human conscience. E.g. Work
without pay to pay debt.
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 Good customs Those that have received for a period of time practical
and social confirmation.
Public order includes public safety
Public policy Public, social and legal interest in private law

Persons Bound by Contract

Contracts 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 received from the decedent.

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. (Art. 1311)

Principle of Relativity (parties to the contract are the only persons

bound by the terms of the contract)
Parties include heirs and assigns unless the obligation (and rights) are
non-transferrable
Situations where non-parties are affected by the contract:
o STIPULATION POUR AUTRI (stipulation in favor of third party,
Art. 1311 2nd par.)
o Where third person induces another to violate contract (Art.
1314)
o Contracts creating real rights (e.g. Mortgage)

Stipulations Pour Autri, Elements:

o Stipulation in favor of a third person
o Clear and deliberate favor given
o Favor not mere incidental
o Stipulation is part of the contract
o Third person communicated his acceptance
o No relation of agency between either of the parties and the
third person

Creditors are protected in cases of contracts intended to defraud them.

(Art. 1313)

Authority to enter into Contract

No one may contract in the name of another without being authorized by

the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no

authority or legal representation, or who has acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly, by the
person on whose behalf it has been executed, before it is revoked by the
other contracting party. (Art. 1317)

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Consent (As Element of Contract)

Consent is manifested by the meeting of the offer and the acceptance

upon the thing and the cause which are to constitute the contract. (Art.
1319)

Offer - Must be certain

Acceptance Must be absolute

A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was
made.

Requisites of Consent
o 2 or more parties
o Parties capable of giving consent
o No vitiation of consent
o No conflict between what was declared and what was really
intended
o Intent declared properly (form)

Withdrawal of Offer
o May be made so long as there is no acceptance yet
o If offer was accepted, it may still be withdrawn if acceptance is
not yet known to the offeror

Acceptance

An acceptance may be express or implied.

Acceptance may also be presumed (by law)

o Example: Silence leading to estoppel
Qualified acceptance
o Counter-offer

Option Contract

When the offerer has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating
such withdrawal, except when the option is founded upon a consideration,
as something paid or promised. (Art. 1324)

Option Contract a contract granting a person the privilege to buy or

not to buy certain objects at anytime within the agreed period at a
fixed price. This is separate from the actual contract.

Advertisements

Unless it appears otherwise, business advertisements of things for sale are

not definite offers, but mere invitations to make an offer. (Art. 1325)

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 Advertisements for bidders are simply invitations to make proposals, and
the advertiser is not bound to accept the highest or lowest bidder, unless
the contrary appears. (Art. 1326)

Incapacitated Persons (to enter into a contract)

The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to
write. (Art. 1327)

Persons incapacitated to Consent

o Unemancipated minors
Exception
When he misrepresents his age. Must be active,
not merely constructive misrepresentation)
Sale and delivery of necessities
Contracts by guardians or legal representatives

o Insane or demented persons

Exception
During lucid interval (Art. 1328)

Note: Contracts in a state of drunkenness or during hypnotic

spell voidable (Art. 1328)

o Deaf-mutes who do not know how to write (and read)

Vices of Consent (Art. 1330)

Vices of Consent
o Mistake
o Violence
o Intimidation
o Undue Influence
o Fraud

Effect: Voidable contract

Mistake

Should refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one or
both parties to enter into the contract. (Art. 1331)
Mistake as to the identity or qualifications of one of the parties will
vitiate consent only when such identity or qualifications have been the
principal cause of the contract. (Art. 1331)
A simple mistake of account shall give rise to its correction. (Art. 1331)
There is no mistake if the party alleging it knew the doubt, contingency
or risk affecting the object of the contract. (Art. 1333)
Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent. (Art. 1334)

Illiterate Persons

When one of the parties is unable to read, or if the contract is in a

language not understood by him, and mistake or fraud is alleged, the
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 person enforcing the contract must show that the terms thereof have been
fully explained to the former. (Art. 1332)

Violence
There is violence when in order to wrest consent, serious or irresistible
force is employed. (Art. 1335)

Intimidation

There is intimidation when one of the contracting parties is compelled

by a reasonable and well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person or property of his
spouse, descendants or ascendants, to give his consent. (Art. 1335)
To determine the degree of intimidation, the age, sex and condition of
the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the
claim is just or legal, does not vitiate consent. (Art. 1335)

Third Person is the source of violence or intimidation

Effect: Shall annul the obligation. (Art. 1336)

Undue Influence

When a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice. (Art.
1337)
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 mental weakness, or was ignorant or in financial distress. (Art.
1337)
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. Known as Dolo Causante.
(Art. 1338)
Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud. (Art.
1339)
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.
(Art. 1344)

o Not Fraud
The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in
themselves fraudulent. (Art. 1340)
A mere expression of an opinion does not signify fraud,
unless made by an expert and the other party has relied
on the former's special knowledge. (Art. 1341)

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Misrepresentation

Misrepresentation by a third person does not vitiate consent, unless such

misrepresentation has created substantial mistake and the same is
mutual. (Art. 1342)

Misrepresentation made in good faith is not fraudulent but may constitute

error. (Art. 1342)

Simulation of Contract

Where parties do not intend to be bound.

May be absolute or relative. The former takes place when the parties do
not intend to be bound at all; the latter, when the parties conceal their
true agreement. (Art. 1345)

An absolutely simulated or fictitious contract is void. A relative simulation,

when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public
policy binds the parties to their real agreement. (Art. 1346)

OBJECT OF CONTRACT

What may be objects of contract:

o All things
Not outside the commerce of men
Future things
Rights which are not intransmissible
Services which are not contrary to law, morals, good
customs, public order or public policy
Cannot be objects of contract:
o Future inheritance except in cases expressly authorized by law
o Impossible things or services

Object must be determinate

The object of every contract must be determinate as to its kind. The

fact that the quantity is not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to determine the
same, without the need of a new contract between the parties. (Art.
1349)

CAUSE OR CONSIDERATION

Causes of contracts
o Onerous contracts - the prestation or promise of a thing or
service by the other
o Remuneratory ones, the service or benefit which is
remunerated
o Contracts of pure beneficence, the mere liberality of the
benefactor.

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 Contracts without or with unlawful causes
o Produces no effect (ineffectual)
It is presumed that there is always a cause in the contract even if it is
not stated in the contract (1353)
o Unless proven otherwise
Lesion (inadequacy of cause)
o Will not invalidate a contract unless caused by:
Fraud
Mistake
Undue influence (Art. 1355)

FORM OF CONTRACTS

When law requires a particular form of the contract in order for it to be

valid or enforceable.

General rule:

Contracts shall be obligatory, in whatever form they may have been

entered into, provided all the essential requisites for their validity are
present. (Consensual contract) (Art. 1356)

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 proved in a
certain way, that requirement is absolute and indispensable.

Remedy:

If the law requires a document or other special form, as in the acts and
contracts enumerated in the following article, the contracting parties may
compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action
upon the contract. (Art. 1357)

The following must appear in a PUBLIC DOCUMENT:

(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property;
Note: sales of real property or of an interest therein a governed by
Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or
should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a
public document.

All other contracts where the amount involved exceeds five hundred pesos
must appear in writing, even a PRIVATE one. But sales of goods, chattels
or things in action are governed by Articles, 1403, No. 2 and 1405.

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REFORMATION OF INSTRUMENTS

Purpose
o To make the contract express the true intention of the parties
It happens when (requisites)
o There have been a meeting of the minds
o True intention was not expressed in the instrument
o It was by reason of mistake, fraud, inequitable conduct or
accident
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. (Art. 1359)
Specific instances where reformation is allowed
o When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement, said instrument
may be reformed. (Art. 1361)
o If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show
their true intention, the former may ask for the reformation of
the instrument. (Art. 1362)
o When one party was mistaken and the other knew or believed
that the instrument did not state their real agreement, but
concealed that fact from the former, the instrument may be
reformed. (Art. 1363)
o When through the ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the instrument or of the
clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the
instrument be reformed. (Art. 1364)
o If two parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property
is sold absolutely or with a right of repurchase, reformation of
the instrument is proper. (Art. 1365)
Reformation not allowed (Art. 1366)
o Simple donations inter vivos wherein no condition is imposed
o Wills;
o When the real agreement is void.
o When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.

INTERPRETATION OF CONTRACTS
Rules on interpretation of contracts
o Literal meaning in case terms of the contract are clear and
leave no doubt (Art. 1370)
o Evident intention of parties prevail over the words (Art. 1370)
o Contemporaneous and subsequent acts to determine intention
of the parties (Art. 1371)
o If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is
most adequate to render it effectual. (Art. 1374)
o Words which may have different significations shall be
understood in that which is most in keeping with the nature and
object of the contract. (Art. 1375)
o The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity. (Art. 1377)
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DEFECTIVE CONTRACTS

Rescissible Voidable Unenforceable Void

Effect on Valid until Valid until Has no effect No effect at all
contract rescinded annulled unless ratified
Reason for the Due to extrinsic Due to intrinsic Non-compliance Violation of law,
defect defect causing defect as in with certain lack of
lesion cases of vitiated requirements requirements of
consent contract.
Note: This is
not a case of
mutual decision
of parties to
back out of the
contract. In
rescission, it is
the law that is
the basis of
rescission.
Contracts (1) Those (1) Those (1) Those (1) Those
involved entered into by where one of entered into in whose cause,
guardians for the parties is the name of object or
their ward, who incapable of another person purpose is
suffer lesion by giving consent by one who has contrary to law,
more than one- to a contract; been given no morals, good
fourth of the authority or customs, public
value of the (2) Those legal order or public
thing; where the representation, policy;
(2) Those consent is or who has
agreed for vitiated by acted beyond (2) Those which
absentees, if mistake, his powers; are absolutely
the latter suffer violence, simulated or
the lesion of intimidation, (2) Those that fictitious;
of the value of undue influence do not comply
thing; or fraud. with the Statute (3) Those
(3) Those of Frauds (there whose cause or
undertaken in These contracts must be object did not
fraud of may be evidence IN exist at the
creditors when annulled even WRITING) time of the
the latter when there is cannot be transaction;
cannot in any no damage to received
other manner the parties. (4) Those
without the
collect the whose object is
writing, or a
claims due Susceptible of outside the
them; ratification. secondary commerce of
(4) Those which evidence of its men;
refer to things contents:
under litigation (5) Those which
if they have (a) An contemplate an
been entered agreement that impossible
into by the by its terms is service;
defendant not to be
without the performed (6) Those
knowledge and within a year where the
approval of the from the intention of the
litigants or of making thereof; parties relative
competent to the principal
judicial (b) A special object of the
authority; promise to contract cannot
(5) All other answer for the be ascertained;
contracts debt, default, or
specially miscarriage of (7) Those
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declared by law another; expressly
to be subject to prohibited or
rescission. (c) An declared void
agreement by law.
made in
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

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 or of an interest
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.
Payments made
in a state of
insolvency for
obligations to
whose
fulfillment the
debtor could not
be compelled at
the time they
were effected,
are also
rescissible.
Duties of the Rescission The contracting When the nullity
parties to return creates the parties shall proceeds from
obligation to restore to each the illegality of
return the other the things the cause or
things which which have object of the
were the object been the contract, and
of the contract, subject matter the act
together with of the contract, constitutes a
their fruits, and with their fruits, criminal
the price with and the price offense, both
its interest; with its interest, parties being in
consequently, it except in cases pari delicto,
can be carried provided by they shall have
out only when law. no action
he who against each
demands In obligations to other, and both
rescission can render service, shall be
return whatever the value prosecuted.
he may be thereof shall be
obliged to the basis for
restore. damages. one may cla
Neither shall
rescission take Art. 1399.
place when the When the defect
things which of the contract
are the object consists in the
of the contract incapacity of
are legally in one of the
the possession parties, the
of third persons incapacitated
who did not act person is not
in bad faith. obliged to make
In this case, any restitution
indemnity for except insofar
damages may as he has been
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 be demanded benefited by the
from the person thing or price
causing the received by
loss. him.

Art. 1400.
Whenever the
person obliged
by the decree of
annulment to
return the thing
can not do so
because it has
been lost
through his
fault, he shall
return the fruits
received and
the value of the
thing at the
time of the loss,
with interest
from the same
date.
Time to The action to The action for
commence claim rescission annulment shall
action must be be brought
commenced within four
within four years.
years.
For persons This period shall
under begin:
guardianship In cases of
and for intimidation,
absentees, the violence or
period of four undue
years shall not influence, from
begin until the the time the
termination of defect of the
the former's consent ceases.
incapacity, or
until the In case of
domicile of the mistake or
latter is known. fraud, from the
time of the
discovery of the
same.
And when the
action refers to
contracts
entered into by
minors or other
incapacitated
persons, from
the time the
guardianship
ceases.
Ratification Ratification Contracts Cannot be
extinguishes the infringing the ratified
action to annul Statute of
a voidable Frauds are
contract. ratified by the

Page 13 of 15
 failure to object
Ratification may to the
be effected presentation of
expressly or oral evidence to
tacitly. It is prove the same,
understood that or by the
there is a tacit acceptance of
ratification if, benefit under
with knowledge them.
of the reason
which renders In a contract
the contract where both
voidable and parties are
such reason incapable of
having ceased, giving consent,
the person who express or
has a right to implied
invoke it should ratification by
execute an act the parent, or
which guardian, as the
necessarily case may be, of
implies an one of the
intention to contracting
waive his right. parties shall
give the
Art. 1394. contract the
Ratification may same effect as
be effected by if only one of
the guardian of them were
the incapacitated.
incapacitated
person. If ratification is
made by the
Art. 1395. parents or
Ratification guardians, as
does not require the case may
the conformity be, of both
of the contracting
contracting parties, the
party who has contract shall
no right to bring be validated
the action for from the
annulment. inception.

Art. 1396. Unenforceable

Ratification contracts
cleanses the cannot be
contract from assailed by
all its defects third persons.
from the
moment it was
constituted.

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Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute
a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he
has given without any obligation to comply his promise. (1306)

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.

Art. 1414. When money is paid or property delivered for an illegal 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.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent,
the courts may, if the interest of justice so demands allow recovery of money or property
delivered by the incapacitated person.

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designated for the protection of the plaintiff, he may, if public
policy is thereby enhanced, recover what he has paid or delivered.

Art. 1417. When the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price allowed
may recover such excess.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of
labor, and a contract is entered into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation for service rendered
beyond the time limit.

Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers,
and a contract is agreed upon by which a laborer accepts a lower wage, he shall be
entitled to recover the deficiency.

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced.

Art. 1421. The defense of illegality of contract is not available to third persons whose
interests are not directly affected.

Art. 1422. A contract which is the direct result of a previous illegal contract, is also void
and inexistent.

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