ASSESSMENT TASK 5

Law on Obligations and Contracts (Contracts General Provisions) Civil Code Article 1305-
1317

Content
1. Meaning
2. Elements
3. Classifications
4. Stages
5. Characteristics

Meaning of Contracts
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
1. Essential Elements (Art. 1318-1355)
a. Consent
b. Object
c. Cause
2. Natural Elements- (e.g. warranty against eviction and hidden defects in case of sales)
3. Accidental Elements- (e.g. stipulation such as interest in loan)

Classifications
1. According to their perfection:
a. Consensual – perfected by consent, object cause (COC)
(e.g. sales, partnership, real mortgage)
b. Real- perfected by COC + delivery
(e.g. pledge, loan, deposit)
c. Formal or Solemn- perfected by COC + formalities required by law
(e.g. donation of real property, chattel mortgage, antichresis)

2. According to their relation to other contracts:

a. Principal- can exist on its own (e.g. sales, loan)
b. Accessory- existence depends upon a principal contract (e.g. pledge, mortgage,
guaranty)
c. Preparatory- needed for the formation of subsequent contracts (e.g. partnership,
agency)

3. According to parties obliged:

 a. Unilateral- only one party is obliged (e.g. commodatum, donation)
b. Bilateral- both parties are obliged (e.g. sales, barter)

4. According to name:
a. Nominate- the law gives it a special name or designation (e.g. sales, loan, partnership,
donation)
b. Innominate- the law does not give it a special name or designation
i. Do ut des – I give that you may give
ii. Do ut facias – I give that you may do
iii. Facio ut facias – I do that you may do
iv. Facio ut des – I do that you may give

When dealing with Innominate Contracts

1. Stipulations of the parties
2. Rules governing law on obligations and contracts
3. Rules governing the most analogous contract
4. Customs of the place
(Art. 1307)

5. According to the risk:

a. Commutative- when the undertaking of one party is considered the equivalent of that
of the other (e.g. sales, lease)
b. Aleatory- when it depends upon an uncertain event or contingency both as to benefit
or loss (e.g. contract of insurance, sale of hope)

6. According to their cause:

a. Onerous- cause has valuable consideration (e.g. sales, lease)
b. Gratuitous- cause is purely generosity (e.g. commodatum, donation)
c. Remuneratory- cause is based on services or benefits already received (e.g.
employment contract)

7. According to binding force:

a. Valid
b. Rescissible
c. Voidable
d. Unenforceable
e. Void

Stages
1. Preparation/Conception/Generation/Negotiation
2. Perfection/Birth/Formation
 3. Consummation/Death/Extinguishment

Characteristics (MARCO)
1. Mutuality of contracts
2. Autonomy/Liberty of contracts
3. Relativity of contracts
4. Consensuality of contracts
5. Obligatory force of contracts

Mutuality of Contracts

The contract must bind both parties. Its validity or compliance cannot be left to
the will of one of them. (Art. 1308)

The determination of the performance may be left to a third person, whose

decision shall not be binding until made known to both the contracting parties
(Art. 1309)

The determination shall not be obligatory if it is evidently inequitable. In such

case, the courts shall decide what is equitable under the circumstances (Art 1310).

S sold his parcel of land to B. It was agreed that X, a real estate appraiser, would be the
one to determine the reasonable price of the land. X, fixed the price after considering all
the circumstances and factors affecting the value of the land.

Autonomy of Contracts

Also called liberty of contracts or freedom to stipulate in contracts.

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

Relativity of Contracts

Contracts take effect only between 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. (Art. 1131 par. 1)

Relativity of Contracts
 Contracts take effect between the parties in the contract (with exceptions)
 Contracts are generally transmissible except:
  Law
 Stipulation
 Nature
 The heirs is not liable beyond the value of the property he received from the
decedent.

Stipulation Pour Autrui

Requisites
a. There must be a stipulation in favor of a third person
b. The stipulation must be a part, not the whole of the contract
c. The contracting parties must have clearly and deliberately conferred a favor upon a
third person, Not a mere incidental benefit or interest.
d. The third person must have communicated his acceptance to the obligor before its
revocation.
f. No relation of agency exists between any of the parties and the third person favoured

Relativity of Contracts

Exceptions:

1. Stipulation Pour Autrui (Art. 1311 par. 2)

2. Third persons in possession creating real rights (Art. 1312)
3. Contract is entered to defraud creditor. (Art. 1313)
4. Third person induced a party to a contract to violate the contract. (Art. 1314)

Stipulation Pour Autrui

D is indebted to C for 1,000,000 with 12% interest. It was stipulated the X will receive
the 12% interest. This stipulation is accepted by X and duly communicated the
acceptance to D and C.
After a year, D and C decided to change the contract into a specific house and lot. Under
relativity of contracts, third person cannot act upon the decisions of the parties in a
contract. However, X in this case is an exemption.

Third persons in possession of a property creating real rights

S sold to B a specific land for P1M. B occupied the said land but did not register it. One
day, S sold the same land to X.X registered the said property at the Registry of Deeds.
Contract is entered to defraud someone creditors

D is indebted to C for 1M. D fearing that he won’t be able to pay the debt and ultimately
his land being levied, sold the said land at a very low price to X with the condition that he
can purchase it back.
Third persons induced a party to a contract to violate the contract.

After agreeing to sell his parcel of land to B, S sells the land to C instead because of the
inducement of D. In this case, B can sue D for damages

Consensuality of Contracts

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 consequences
which, according to their nature may be in keeping with good faith, usage and law. (Art.
1315)

Exceptions: Real (Art. 1316) and Formal Contracts

Obligatory Force of a Contract

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

Law on Obligations and Contracts (Contracts General Provisions) Civil Code Article 1318-
1355

Essential Elements of Contracts

Essential Elements (Art. 1318)

There is no contract unless the following requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established

CONSENT
Requisites:
1. It must be manifested by the concurrence of the offer and acceptance (Arts. 1319-
1326)
2. The contracting parties must possess the necessary legal capacity (Art. 1327- 1329)
3. It must be intelligent, free, spontaneous, and real (not vitiated) (Art. 1330-1346)

CONSENT
1. It must be manifested by the concurrence of the offer and acceptance (Arts. 1319-
1326)
  Offer- a specific proposal to enter into an agreement with another.
 Acceptance- agreeing verbally or in writing to the terms of a contract, which is
one of the requirements to show there was a contract
(Source: dictionary.law.com)

Offer
Note: an offer must be international certain (Art. 1319 par. 1)
Example:
When offering to sell something, you should specify the object being sold.

Offer
Special cases of offers
1. The person making the offer may fix the time, place, and manner of acceptance, all of
which must be complied with (Art. 1321)
2. An offer made through an agent is accepted from the time acceptance is
communicated to him (Art. 1322)
3. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency
of either party before acceptance is conveyed (Art. 1323).
4. Advertisement for bidders are simply invitations to make offers (Art. 1326)

Offer
Advertisement for bidders

S sells at a public auction a specific land. The starting bid is P1,150,000; and C placed
P1,300,000.

Acceptance
Note:
1. an acceptance must be absolute (Art. 1319)
2. communicated to the offeror (Art. 1319 par. 2 & 1322)
3. may be express/implied

Example:
S offers B to sell his specific house and lot in Quezon City for P1,500,000. B
accepted the offer but is only willing to buy the land.
Counter-offer
Acceptance
How acceptance is communicated to offeror:
1. S, during an ‘’in-person’’ conversation with B, offered B to sell his land for
P1,000,000.
2. S, through letter, offered B to sell his land for P1,000,000.
 S sends a letter of offer on Jan 1
 B receives the letter on Jan 15
 B sends a letter of acceptance on Jan 16
 S receives the letter of acceptance on Jan 31
Promises in offer and acceptance
Promise Binding Perfected contract
Unilateral Promise unaccepted No. None
Unilateral Promise accepted Binding if promise is Option contract only
supported by consideration
Bilateral promise Yes Binding contract of promise to
enter into an contract

Promises in offer and acceptance

S offers to sell his land to B for P1,000,000. B refused. However, S still insist that he is
willing to give B 30 days to decide. However, B still refuse. Again, S still stand with his
promise. Policitacion

Promises in offer and acceptance

S offers to sell his land to B for P1,000,000. B refused. However, S still insist that he is
willing to give B 30 days to decide. B accepted the promise.
Unilateral Promise Accepted

Promises in offer and acceptance

S offers to sell his land to B for P1,000,000. B refused. However, S still insist that he is
willing to give B 30 days to decide. B accepted promise and gave S P1,000,000 as option
money.
Unilateral Promise Accepted

Promises in offer and acceptance

S promised to sell his land to B for P1,000,000 after 1 month. Likewise, B promise to buy
S’s land for P1,000,000 after 1 month.
Bilateral Promise

Consent
2. The contracting parties must possesses the necessary legal capacity (Arts. 1327-1329)
2 Kinds of incapacity:
1. Absolute incapacity
2. Relative incapacity

Consent
Absolute incapacitated (Voidable)
1. Unemancipated minors
 Except for contracts involving necessary
 Where minor misrepresented his age

2. Insane or demented person

 Lucid interval
 3. Deaf-mutes who do not know how to write

Consent
Relative incapacity (Void)
1. Those under Civil interdiction for transactions inter vivos (RPC Art. 304)
2. Undischarged insolvents (Insolvency Law, Sec. 24)
3. Husband and wife: cannot donate (Art. 123 FC) to each other, self if the
marriage is under ACP (Art. 1490)

Consent
3. It must be intelligent, free, spontaneous, and real (not vitiated) (Art. 1330-1346)

Vices of consent:
 Violence
 Intimidation
 Mistake
 Fraud
 Undue Influence

Object VS Cause

Contract of sale
S sells his land to B for P1,000,000.

Contract of lease:
S leases his land to B for P1,000,000 per year.

Object
1. Lawful: Not contrary law, morals, good customs, public order or public policy.
2. Actual or possible
3. Transmissible: Within the commerce of man
4. Determinate or determinable
Object
Future Inheritance
X is the son of Y. While Y is still alive, X sold his inheritance to Z.

Cause
Onerous Gratuitous Remuneratory
As to each of the contracting The service or benefit which is Mere liberality of the
parties is understood to be the remunerated benefactor
undertaking or the promise of
the thing or sevice by the other
party
Cause
1. Existing
2. Lawful
3. True

Cause VS Motive
X buys a gun from an arms dealer and procured the necessary permit.

ASSESSMENT TASK 6

FORMS OF CONTRACTS

Recap
Contracts classified according to perfection
1. Concensual Contracts
2. Real Contracts
3. Formal or Solemn Contracts

Why contracts need to be in certain forms?

Needed for:
1. Validity of the contracts
2. Enforceability of the contracts
3. Convenience of the parties

Contracts that needs to be in a certain forms for their validity

Contracts Formality
Donation of personal property whose value Must be in writing
exceeds P500 (Art. 748)
Donation of real property (Art. 749) Must be in public instrument
Partnership where immovables are contributed Must be in public instrument with inventory of
(Art. 1773) immovables contributed

Contracts Formality
Sale of a piece of land or any interest therein Contract of agency must be in writing
through an agent (Art. 1874)
Antichresis (Art. 2134) Must be in writing
Chattel Mortgage (Art. 2140) Must be registered
Agreements regarding payment of interests in Payment of interest must be in writing
contracts of loans (Art. 2314)
Contracts that needs to be in a certain forms for their enforceability
1. An agreement that by its terms is not to be performed within a year from the making thereof;
2. A special promise to answer for the debt, default or miscarriage of another
3. An agreement made in consideration of marriage, other than a mutual promise to marry;
4. 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
purchases and person on whose account the sale is made, it is a sufficient memorandum;
5. An agreement for 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.
Art. 1403 par. 2

Contracts that needs to be in certain forms for convenience of the parties

1. Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest
therein are 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 a goods, chattels or things in action are governed by
articles 1403, No. 2 and 1405. (1280a)
(Art. 1358)

REFORMATION OF CONTRACTS
Civil code Art. 1359-1369

Reformation
A remedy whereby a written instrument to the contract is a amended to conform
to the true intention of the parties.

Requisites
1. There is a valid contract
 2. The written instrument does not conform the true intention of the parties
3. The non-conformity is due to mistake, fraud, inequitable conduct or accident

Mistake, Fraud, & Inequitable conduct in Reformation VS Voidable Contracts

Consent of c Perfected Reformation

Instrument
Parties Contract

Consent of Perfected
Instrument Annulment
Parties Contract

Illustration

S sold to B a lot with 10ha. area. However, through mistake of the clerk, their deed of
sale should 1ha. area.
(Art. 1361
& 1364)
Illustration

S sold to B a lot with 10 ha. Area with a right of repurchase after 5 years. However,
through fraud, B made appear that the deed of sale is an absolute sale. Since the contract is in
English language, S was not aware that the deed is different from their real agreement.
(Art. 1362
& 1363)

Contracts that cannot be reformed

1. Simple donations inter vivos wherein no condition is imposed
2. Wills
3. When the real agreement is void

When a person cannot seek reformation

A party who enforces the instrument representing the contract cannot subsequently ask
for its reformation. (Art. 1367)

Illustration
S unconditionally sold to B a lot with 10 ha. area. However, through mistake, the dead
of sale appears to be a sale with a right of repurchase after 5 years. Both parties didn’t notice the
deed because they didn’t bother reading it at all.
Who may seek reformation?
Reformation may be ordered at the instance of either party or his successors in interest,
if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns
(Art. 1368)

INTERPRETATION OF CONTRACTS

Interpretation
Interpretation is the act of making intelligible that was not before understood,
ambiguous, or not obvious.

Intention always prevail

The intention of the parties always prevail over the words that appear in the instrument
of a contract. (Art.1370)

In judging the intention, subsequent acts of parties are considered (Art. 1371)

Art. 1372
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 form those upon which the parties
intended to agree.

Example
S sold to B his house including all furniture.

Art. 1373
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.

Example
S sold to B his race horse named ‘’Tom’’. Incidentally, there are two horses with the
name Tom. However, one of them is amputated.

Art. 1374
The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.
Example
X leased his house to Y. X forbid Y from subleasing the property without his consent.
Further, it was stipulated: ‘’If Y sublease the property to a third person, there will be additional
P1,000 per month payment on top of his rent.’’

Art. 1375
Words which may have different significations shall be understood in that which is most
in keeping with the nature and object of the contract.

Example
R leased to E a roof for the purpose of erecting an adverting sign. The contract provides
for the termination of the lease by E if a ‘’building’’ should be constructed on an adjoining
property of such height as to obscure the view of E’s sign. There was erected on the roof of an
adjoining building a sign which obstructed the view of E’s sign.

Art. 1376
The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established.

Example
S sold to B a horse. It was the customs of the place to place horse shoe on sold horses.

Art. 1377
The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.

Art. 1378
When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall
prevail. If the contract is onerous, the doubt shall be settled in favor or the greatest reciprocity of
interests.

Example
It was not clear whether A lent or donated to B a specific phone. Is the contract a
commodatum or a donation?

Example
It was not clear whether A sold or leased to B a building. Is the contract a sale or a lease?
Article 1378
If the doubts are cast upon the principal object 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.

ASSESSMENT TASK 7

DEFECTIVE CONTRACTS

Rescissible

Voidable

Unenforceable

Void

Valid Binding Enforceable

Rescissible check check check
Voidable check check check
Unenforceable check wrong wrong
Void wrong wrong wrong

Rescissible Voidable Unenforceable Void

Why Defective? Causes damage Consent is Lack of Missing
to 3rd persons defective authority or essential
form element/s
Can be ratified? Yes Yes Yes No
Applicable Art. 1381 Art. 1390 Art. 1403 Art.1409
Provisions
Remedy to Rescission Annulment N/A N/A
Avoid

RESCISSIBLE CONTRACTS

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 representation of 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 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.

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;
Example
G is the guardian of W, ward. G sold to X the property of W of P250,000. The value
of the property is P500,000.

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
Example
R is the representative of A, absentee. R sold to X the property of A of P250,000. The
value of the property is P500,000.

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
Example
D is a debtor of C, creditor. Fearing that he won’t be able to pay his debt to C and his
land levied, D sold his land to X without the intention of using the proceeds to pay C.

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;
Example
S sues B for the recovery of a parcel of land. In this case, the land is a thing under
litigation.’’ Supposed B sold to X the parcel of land.

5. All other contracts specially declared by law to be subject to rescission.

Rescissible Contract VS Rescissible Payment (Art. 1382)

Art. 1382
Payment made in a state of insolvency for obligations to whose fulfilment the debtor
could not be compelled at the time they were affected, are also rescissible.
Example
D, while insolvent, pays X his debt. Y and Z are also creditors of D but cannot, in any
manner, collect from D.
Rescission

Art. 1383
The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.
Example
G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G
sold the two properties to B for only P200,000.00
Extent of Rescission

Art. 1384
Rescission shall be only to the extent necessary to cover the damages caused.
Example
G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G
sold the two properties to B for only P200,000.00

For Rescission to be Possible

Art. 1385
Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally
in the possession of third persons who did act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss

For Rescission to be Possible

Art. 1385
B asks for the rescission of a sale with S because of breach of warranty against hidden
defects.

Rescission not possible for contracts approved by court

Art. 1386
Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to
contracts approved by the courts.

Contracts presumed be rescissible

Art. 1387 par.1
All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.

Art. 1387 par. 2&3

 Alienations by onerous title are also presumed fraudulent when made by persons against
whom some judgment has been rendered in any instance or some writ of attachment has been
issued. The decision or attachment need nor refer to the property alienated, and need not have
been obtained by the party seeking the rescission.
Example-Gratuitous
D contracted several debts amounting to P200,000. Also, D has P300,000 total assets.
One day, D donated to X a property from his total assets worth P170,000.

Example-Onerous
D contracted several debts amounting to P200,000 with A and B. Also, D has P300,000
total assets composed of a car, land, and building. For whatever reason, supposed A obtained a
writ of Attachment on D’s land. Meanwhile, D sold the car to X.

Acquisition of third person in bad faith

Art. 1388
Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify
the latter for damages suffered by them on account of the alienation, whenever, due to any cause,
it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on
successively.
Example
To defraud C, S sold to B his car. B knows S’s purpose.
To defraud C, S sold to B his car. B knows S’s purpose. B sold to D, bad faith, and D sold to
E, good faith.
To defraud C, S sold to B his car. B doesn’t know S’s purpose. B sold to D, bad faith, and D
sold to E, bad faith.

Prescription of Rescission
Art. 1389
The action to claim rescission must be commenced within four years. For persons under
guardianship and for absentees, the period of four years shall not begin until the domicile of the
latter is known.