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STUDENT HANDOUTS
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS ATTY. J. ONG
RFBT. 202 —CONTRACTS OCT 2021 CPALE REVIEW

CONTRACTS other party only signifies his consent by signing the

contract.
Definition
Contract is a meeting of minds between two persons whereby Stages of contract
one binds himself, with respect to the other, to give something 1. Preparation (Negotiation, conception or Generacion) –
or to render some service. (1305) steps taken by the parties leading to the perfection of the
Obligations arising from contracts have the force of law contract.
between the contracting parties and should be complied with in 2. Perfection (or birth) – Come to a definite agreement or
good faith. (1159) Hence, whatever be the agreement between meeting of the mind upon the object and the cause.
the parties are the law between the parties provided they are 3. Consummation (death or termination) – parties have
not contrary to law, morals, good customs, public order, or performed their respective obligation
public policy. (1306)
Characteristics of contract
Kinds of contract 1. Freedom of contract - contracting parties may establish
1. Formation or perfection such stipulations, clauses, terms and conditions as they may
a. Consensual – perfected by mere consent (1315) deem convenient (1306)
b. Real – perfected by delivery (i.e. depositum, pledge, Limitation:
commodatum) (1316) a. Law
c. Formal or solemn (i.e. Interest must be in writing b. Moral
(1956); Contribution of immovable property must be in c. Good custom
a public instrument, donation of personal property d. Public order
where the value exceeds P5,000 must be in writing; e. Public policy
Donation of immovable property must be in a public 2. Mutuality of contract - contract must bind both
instrument, Sale of land or interest therein, the contracting parties; its validity or compliance cannot be left
authority of the agent must be in writing) to the will of one of them (1308). The principle is based on
2. Cause or equivalence of value of prestation the essential equality of the parties.
a. Onerous – equivalent value of prestation ➢ The determination of the performance may be left to a
b. Gratuitous or lucrative – no equivalent prestation third person, whose decision shall not be binding until
c. Remunerative - the prestation is the benefit or service it has been made known to both contracting parties.
that had been rendered previously. (1309)
3. Importance or dependence of one upon another: ➢ The determination shall not be obligatory if it is
a. Principal – can stand alone evidently inequitable. In such case, the courts shall
b. Accessory – depend upon the existence of another decide what is equitable under the circumstances
contract (1310)
c. Preparatory – not considered the contract as an end by 3. Relativity of contract - Contracts take effect only between
itself but as a mean for entering in future transaction or the parties, their assigns and heirs (1311)
contract. Exception:
4. Parties obligated a. Where the obligations arising from contract are not
a. Unilateral – only one party has obligation transmissible by nature (personal qualification is
b. Bilateral – both party has obligation involved), by stipulation or by provision of law (Agency,
5. Name or designation partnership, commodatum).
a. Nominate – has a name given by law b. Stipulation in favor of third person (stipulation pour
b. Innominate – no name given by law autrui) (1311 par 2)
1. Do ut des (I give that you may give) no longer If a contract should contain some stipulation in favor of
innominate. This is now called Barter a third person, he may demand its fulfillment provided
2. Do ut facias (I give that you may do) he communicated his acceptance to the obligor before
3. Facio ut des (I do that you may give) its revocation. A mere incidental benefit or interest of a
4. Facio ut facias (I do that you may do) person is not sufficient. The contracting parties must
6. Risk of fulfillment have clearly and deliberately conferred a favor upon a
a. Commutative – real fulfillment, equivalent value are third person
given c. Contract creating real right (1312)
b. Aleatory – fulfillment depend upon chance. d. Contact entered into to defraud the creditors. (1313)
7. Time of performance or fulfillment e. Contract which have been violated thru the inducement
a. Executed – prestation are already complied with of 3rd person (1314)
b. Executory – prestations are to be complied with in the 4. Consensuality of contract - Contracts are perfected by
future mere consent, and from that moment the parties are bound
8. According to number of person who participated in the not only to the fulfillment of what has been expressly
drafting of the contract stipulated but also to all the consequences which, according
a. Ordinary - to their nature, may be in keeping with good faith, usage
b. Contract of adhesion – Where the terms and condition and law.
of the contract is already drafted by one party. The

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Elements of a Contract time acceptance is communicated to him. (n)

1. Essential elements Art. 1323. An offer becomes ineffective upon the death, civil
a. Common (Consent, Object, Cause) interdiction, insanity, or insolvency of either party before
b. Special acceptance is conveyed.
1.) Form – formalities in solemn contract, deliver in Art. 1325. Unless it appears otherwise, business advertisements
real contract, registration to bind third person of things for sale are not definite offers, but mere invitations to
(Real estate mortgage, chattel mortgage) make an offer.
Art. 1326. Advertisements for bidders are simply invitations to
Solemn contract make proposals, and the advertiser is not bound to accept the
(Consent, Object, Cause + Execution of formalities) highest or lowest bidder, unless the contrary appears.
a. Stipulation of interest = writing. Art. 1327. The following cannot give consent to a contract:
b. Contribution of immovable property in (1) Unemancipated minors;
partnership = inventory of such property + (2) Insane or demented persons, and deaf-mutes who do not
public instrument know how to write. (1263a)
c. Donation of personal property where the value Art. 1328. Contracts entered into during a lucid interval are
exceed P5,000 = in writing valid. Contracts agreed to in a state of drunkenness or during a
d. Donation as well as acceptance of real property hypnotic spell are voidable. (n)
= Public instrument.
e. Will = writing + formalities prescribed by law.
f. Agent authority in case of sale of immovable
property in behalf of the principal = writing

Real Contract
(Consent, Object, Cause + Delivery)
a. Deposit
b. Pledge
c. Commodatum
2.) Subject matter
Real estate mortgage Real property No delivery
Chattel mortgage Personal No delivery
property
Pledge Personal Delivery
property
Antichresis Real property Delivery
3.) Consideration or cause – Sale (price);
Commodatum (liberality)
2. Natural elements – presumed to exist in certain contracts
a. Warranty against eviction
b. Warranty against hidden defect
3. Accidental elements (by stipulation) – Exist only when they
are expressly provided by the parties. (i.e. Conditions,
period, interest, penalty, place of payment)

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 (1319)
Art. 1319. Consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a OPTION PERIOD (1324)
counter-offer. Art. 1324. When the offerer has allowed the offeree a certain
Acceptance made by letter or telegram does not bind the offerer period to accept, the offer may be withdrawn at any time before
except from the time it came to his knowledge. The contract, in acceptance by communicating such withdrawal, except when
such a case, is presumed to have been entered into in the place the option is founded upon a consideration, as something paid
where the offer was made. or promised. (n)
1. Theory of cognition – The acceptance is considered to
effectively bind the offeror only from the time it came to his
knowledge. (Civil code)
2. Theory of manifestation – The contract is perfected at the
moment when the acceptance is declared or made by the
offeree. (Code of commerce)

Art. 1320. An acceptance may be express or implied.

Art. 1321. The person making the offer may fix the time, place,
and manner of acceptance, all of which must be complied with.
Art. 1322. An offer made through an agent is accepted from the

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5. 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.
➢ Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential
relations, constitutes fraud. (1339)
➢ The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in
themselves fraudulent. (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. (1341)
➢ Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (1342)
➢ Misrepresentation made in good faith is not fraudulent
but may constitute error. (1343)
➢ In order that fraud may make a contract voidable, it
should be serious and should not have been employed
by both contracting parties. (1344)
Incidental fraud only obliges the person employing it to pay
damages.

Employed by Employed by 3rd

Vices of Consent one of the person
1. Error or mistake contracting
➢ In order that mistake may invalidate consent, it should parties
refer to the substance of the thing which is the object of Violence Voidable Voidable
the contract, or to those conditions which have Intimidation Voidable Voidable
principally moved one or both parties to enter into the Fraud without Voidable Valid, unless it
contract. connivance/ results to a
Mistake as to the identity or qualifications of one of the knowledge by the substantial mistake
parties will vitiate consent only when such identity or party benefited by and the same is
qualifications have been the principal cause of the the fraud mutual. It can be
contract. annulled on the
A simple mistake of account shall give rise to its ground of mistake
correction. (1331) Fraud with Voidable Voidable. As if
➢ When one of the parties is unable to read, or if the connivance/ exercised by the
contract is in a language not understood by him, and knowledge by the party benefited by
mistake or fraud is alleged, the person enforcing the party benefited by the fraud.
contract must show that the terms thereof have been the fraud
fully explained to the former. (1332) Undue influence Voidable Voidable
➢ There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the Absolute simulated Relative simulated
contract. (1333) or fictitious contract
➢ Mutual error as to the legal effect of an agreement The parties do not The parties conceal their true
when the real purpose of the parties is frustrated, may intend to be bound at agreement. (1345)
vitiate consent. (1334) all. (1345)
VOID When it does not prejudice a third
2. Violence - when in order to wrest consent, serious or (1346) person and is not intended for any
irresistible force is employed. (1335)
purpose contrary to law, morals, good
3. Intimidation - when one of the contracting parties is
customs, public order or public policy
compelled by a reasonable and well-grounded fear of an
binds the parties to their real
imminent and grave evil upon his person or property, or
agreement. (1346)
upon the person or property of his spouse, descendants or
ascendants, to give his consent. (1335)
To determine the degree of intimidation, the age, sex and
OBJECT OF CONTRACTS
condition of the person shall be borne in mind.
➢ All things which are not outside the commerce of men,
A threat to enforce one's claim through competent
including future things, may be the object of a contract. All
authority, if the claim is just or legal, does not vitiate
rights which are not intransmissible may also be the object
consent.
of contracts.
4. Undue influence - when a person takes improper
➢ No contract may be entered into upon future inheritance
advantage of his power over the will of another, depriving
except in cases expressly authorized by law.
the latter of a reasonable freedom of choice. The following
➢ All services which are not contrary to law, morals, good
circumstances shall be considered: the confidential, family,
customs, public order or public policy may likewise be the
spiritual and other relations between the parties, or the fact
object of a contract. (1347)
that the person alleged to have been unduly influenced was
➢ Impossible things or services cannot be the object of
suffering from mental weakness, or was ignorant or in
contracts. (1348)
financial distress. (1337)

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➢ The object of every contract must be determinate as to its prejudice a third person;
kind. The fact that the quantity is not determinate shall not (4) The cession of actions or rights proceeding from an act
be an obstacle to the existence of the contract, provided it is appearing in a public document.
possible to determine the same, without the need of a new All other contracts where the amount involved exceeds
contract between the parties. (1349) five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action
CAUSE OF CONTRACTS are governed by articles, 1403, No. 2 and 1405. (1280a)
Cause of contract
1. Onerous contracts - the cause is understood to be, for each REFORMATION OF INSTRUMENTS
contracting party, the prestation or promise of a thing or Art. 1359. When, there having been a meeting of the
service by the other; minds of the parties to a contract, their true intention is not
2. Remuneratory contracts - the service or benefit which is expressed in the instrument purporting to embody the
remunerated; agreement, by reason of mistake, fraud, inequitable conduct or
3. Contracts of pure beneficence - the mere liberality of the accident, one of the parties may ask for the reformation of the
benefactor. (1350) instrument to the end that such true intention may be
expressed.
Distinction between cause and motive If mistake, fraud, inequitable conduct, or accident has prevented
Cause Motive a meeting of the minds of the parties, the proper remedy is not
Cause are essential element of Not essential element reformation of the instrument but annulment of the contract.
contracts
Illegality of cause would Illegality of motive will not When reformation is not allowed?
render the contract void affect the contract There shall be no reformation in the following cases:
Cause are the primary reason This is just incidental (1) Simple donations inter vivos wherein no condition is
in entering into a contract imposed;
Determined at the tie the Unknown to the parties (2) Wills;
contract is entered into (3) When the real agreement is void. (Art. 1366)

The particular motives of the parties in entering into a contract ➢ Reformation can be avail only of the innocent party.
are different from the cause thereof. (1351) ➢ Reformation may be ordered at the instance of either party
or his successors in interest, if the mistake was mutual;
➢ Contracts without cause, or with unlawful cause, produce otherwise, upon petition of the injured party, or his heirs
no effect whatever. The cause is unlawful if it is contrary to and assigns. (1368)
law, morals, good customs, public order or public policy. ➢ When reformation proper
(1352) a. Mutual mistake of the parties causes the failure of the
➢ The statement of a false cause in contracts shall render instrument to disclose their real agreement (1361)
them void, if it should not be proved that they were founded b. One party was mistaken and the other acted
upon another cause which is true and lawful. (1353) fraudulently or inequitably in such a way that the
➢ Although the cause is not stated in the contract, it is instrument does not show their true intention. (1362)
presumed that it exists and is lawful, unless the debtor c. When one party was mistaken and the other knew or
proves the contrary. (1354) believed that the instrument did not state their real
➢ Except in cases specified by law, lesion or inadequacy of agreement, but concealed that fact from the former.
cause shall not invalidate a contract, unless there has been (1363)
fraud, mistake or undue influence. (1355) d. When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the
FORM OF CONTRACTS instrument or of the clerk or typist, the instrument
➢ Contracts shall be obligatory, in whatever form they may does not express the true intention of the parties.
have been entered into, provided all the essential requisites (1364)
for their validity are present. However, when the law e. If two parties agree upon the mortgage or pledge of real
requires that a contract be in some form in order that it may or personal property, but the instrument states that the
be valid or enforceable, or that a contract be proved in a property is sold absolutely or with a right of
certain way, that requirement is absolute and repurchase. (1365)
indispensable. In such cases, the right of the parties stated ➢ When one of the parties has brought an action to
in the following article cannot be exercised. (1356) enforce the instrument, he cannot subsequently ask for
➢ If the law requires a document or other special form, as in its reformation. (1367)
the acts and contracts enumerated in the following article, ➢ The procedure for the reformation of instrument shall
the contracting parties may compel each other to observe be governed by rules of court. (1369)
that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the INTERPRETATION OF CONTRACTS
contract. (1357) ➢ If the terms of a contract are clear and leave no doubt upon
➢ The following must appear in a public document: (1358) the intention of the contracting parties, the literal meaning
(1) Acts and contracts which have for their object the of its stipulations shall control. (1370)
creation, transmission, modification or extinguishment If the words appear to be contrary to the evident intention
of real rights over immovable property; sales of real of the parties, the latter shall prevail over the former.
property or of an interest therein a governed by articles ➢ In order to judge the intention of the contracting parties,
1403, No. 2, and 1405; their contemporaneous and subsequent acts shall be
(2) The cession, repudiation or renunciation of hereditary principally considered. (1371)
rights or of those of the conjugal partnership of gains; ➢ However general the terms of a contract may be, they shall
(3) The power to administer property, or any other power not be understood to comprehend things that are distinct
which has for its object an act appearing or which and cases that are different from those upon which the
should appear in a public document, or should parties intended to agree. (1372)

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➢ If some stipulation of any contract should admit of several 6. The following are the requisites for mistake to vitiate
meanings, it shall be understood as bearing that import consent except?
which is most adequate to render it effectual. (1373) a. The error must be substantial regarding the object of
➢ The various stipulations of a contract shall be interpreted the contract or the condition which principally moved
together, attributing to the doubtful ones that sense which one or both parties to enter into the contract.
may result from all of them taken jointly. (1374) b. The error must be excusable and not cause by
➢ Words which may have different significations shall be negligence
understood in that which is most in keeping with the nature c. The error must be of fact
and object of the contract. (1375) d. There must be an error to personal motive
➢ The usage or custom of the place shall be borne in mind in 7. The following are all factors vitiating consent, except
the interpretation of the ambiguities of a contract, and shall a. Mistake c. Intimidation
fill the omission of stipulations which are ordinarily b. Dolo incidente d. Undue influence
established. (1376) 8. Which of these is a formal contract?
➢ The interpretation of obscure words or stipulations in a a. Donation of real property
contract shall not favor the party who caused the b. A partnership where there is contributed real property
obscurity. (1377) c. Both of (a) and (b)
➢ When it is absolutely impossible to settle doubts by the d. None of (a) and (b)
rules established in the preceding articles, and the doubts 9. Which of these is proof of the perfection of a contract of
refer to incidental circumstances of a gratuitous contract, sale?
the least transmission of rights and interests shall prevail. If a. Option c. Earnest money
the contract is onerous, the doubt shall be settled in favor b. Option money d. All of them
of the greatest reciprocity of interests. 10. An incidental element of a contract
If the doubts are cast upon the principal object of the a. Implied warranty against eviction
contract in such a way that it cannot be known what b. Payment of interest in a loan
may have been the intention or will of the parties, the c. Delivery of the object in contract of pledge
contract shall be null and void. (1378) d. All of the above
➢ The principles of interpretation stated in Rule 123 of 11. Which of the following is principal contract?
the Rules of Court shall likewise be observed in the a. Guaranty c. Antichresis
construction of contracts. (1379) b. Chattel Mortgage d. Deposit
12. The following are the ways by which innominate contracts
DISCUSSION QUESTIONS are regulated, except:
a. By the stipulation of the parties.
1. Arnold worked for Bambi as Chinese interpreter. Even b. By the general principles of delicts amd quasi delict
without an express agreement as to compensation, Arnold c. By the rules governing the most analogous nominate
is entitled to compensation because of: contracts.
a. Do ut facias c. Facio ut facias d. By the customs of the place.
b. Do ut des d. Facio ut des 13. It is a contract by virtue of the terms of which the parties
2. Ernesto donated a mobile phone worth P32,000 to Hubert thereto promise and obligate themselves to enter into
orally and delivered the unit to Hubert who accepted. another contract at a future time, upon the happening of
Which statement is most accurate? certain events, or the fulfillment of certain conditions.
a. The donation is void and Ernesto may get the mobile a. Contract of option c. Contract of sale
phone back. b. Contract of adhesion d. Contract to sell
b. The donation is void but Ernesto cannot get the mobile 14. Contracting parties are free to enter into all kinds of pacts,
phone back. terms or stipulations provided they are not contrary to law,
c. The donation is voidable and may be annulled. morals, good customs, public policy or public order. The
d. The donation is valid. above is a description of the characteristic of a contract
3. Which of the following statements is wrong? known as:
a. Creditors are protected in cases of contracts intended a. Consensuality of contracts
to defraud them. b. Binding effects of contracts
b. Contracts take effect only between the parties, their c. Autonomy of contracts
assign and heirs, except in case where the rights and d. Obligatory force of contracts
obligations arising from the contract are not 15. Which of the following statements is not correct?
transmissible by their nature, or by stipulation or by a. A threat to enforce one's claim through competent
provision of law. authority, if the claim is just or legal, does not vitiate
c. If a contract should contain some stipulation in favor of consent
a third person, he may demand its fulfillment provided b. Violence or intimidation shall annul the obligation,
he communicated his acceptance to the obligor before although it may have been employed by a third person
its revocation. who did not take part in the contract
d. In contracts creating real rights, third persons who c. Failure to disclose facts, when there is a duty to reveal
come into possession of the object of the contract are them, as when the parties are bound by confidential
not bound thereby. relations, constitutes fraud
4. The following contract must be in a public instrument for d. The usual exaggerations in trade even when the other
purpose of convenient. Which is the exception: party had an opportunity to know the facts are
a. Donation of real property fraudulent.
b. Repudiation of hereditary right 16. The following are the requisites for mistake to vitiate
c. Power to administer property consent except?
d. Cession of conjugal partnership of gain. a. The error must be substantial regarding the object of
5. Which of the following that result in defects of the intellect? the contract or the condition which principally moved
a. Mistake c. Intimidation one or both parties to enter into the contract.
b. Violence d. Undue influence

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b. The error must be excusable and not cause by 5. It is a contract by virtue of the terms of which the parties
negligence thereto promise and obligate themselves to enter into
c. The error must be of fact another contract at a future time, upon the happening of
d. There must be an error to personal motive certain events, or the fulfillment of certain conditions.
17. Which of the following cannot be a valid object of a c. Contract of option c. Contract of sale
contract? d. Contract of adhesion d. Contract to sell
a. transmissible rights c. possible services 6. Which of the following contracts is not void ab initio?
b. future inheritance d. potential or future things a. The contract where the object is beyond the commerce
18. Which of the following statement about cause is not of man.
correct? b. The contract whose cause, object or consideration is
a. Contract without cause is void against the law, morals, good customs or public order.
b. Statement of a false cause in contract shall render them c. The contract which is relatively simulated or fictitious.
void. d. The contract where the intention of the relative to the
c. Although the cause is not stated in the contract, it is object thereof cannot be ascertained.
presumed that it exists and is lawful 7. The following contract must be in a public instrument for
d. When the motive of one contracting party is contrary to purpose of convenient. Which is the exception:
law, the contract is void. a. Repudiation of hereditary right
19. Reformation of the instrument and not annulment of b. Power to administer property
contract is the proper remedy if the ground is? c. Cession of conjugal partnership of gain.
a. Accident c. Violence d. Donation of real property
b. Undue influence d. Intimidation 8. The freedom of contract is
20. In a written contract of sale between S and B the true a. A constitutional right
intention of the parties was not incorporated due to the b. Statutory right
mistake of S. However, B has knowledge that the instrument c. Both constitutional and statutory right
does not reflect the true intention of the parties but d. Neither constitutional or statutory right.
concealed such information to S. Assume that there was a 9. Which of the following is not an accidental element?
meeting of the minds between S and B. Who can bring the a. Place of payment
action for reformation? b. Penalty in case of breach
a. B only c. Both S and B c. Stipulated interest
b. S only d. Neither S nor B d. Implied warranty against eviction
10. The borrower in a contract of loan or mutuum must pay
PRACTICE EXAM – PART 1 interest to the lender.
a. If there is an agreement in writing to that effect.
1. The mere liberality of the benefactor is the cause in: b. As a matter of course.
a. Onerous contract c. If the amount borrowed is very large.
b. Contract of pure beneficence d. If the lender so demands at the maturity date.
c. Remunetory contract 11. The parties may ask for reformation of the instruments,
d. Consensual contract when there having been a meeting of the minds of the
2. The following are act of liberality, except: parties to a contract, their true intention is not expressed in
a. Condonation of debt out of pure generosity the instrument purporting to embody the agreement by
b. Donation inter vivos reason of the following, except?
c. Donation mortis causa a. Fraud
d. Condonation of debt by reason of past services b. Accident
rendered. c. Mistake
3. The following contract must be in a public instrument for d. Intimidation
purpose of convenient. Which is the exception: 12. S orally sold to B his house and lot for P5,000,000 where B
a. Repudiation of hereditary right initially paid P50,000. After paying the balance B now seeks
b. Power to administer property to register the lot in his name, but the Register of Deeds
c. Donation of real property refuses to do so. In this case:
d. Cession of conjugal partnership of gain. a. The transaction involving the oral sale of a house and
4. Luis donated a parcel of land to Veronica worth P500,000 in lot is null and void.
a public instrument on February 8, 2020. Veronica accepted b. The contract between S and B is unenforceable under
the same on the same day in a separate private instrument. the Statute of Fraud.
When Veronica now seeks to registered the land in the c. The oral sale of the house and lot although
Registry of Property, the latter refused the registration unenforceable under the Statute of Fraud has been
because the acceptance of the donated property was not in ratified by the receipt of the consideration and,
a public instrument. In this case: therefore, B can compel S to execute the deed of sale in
a. Veronica can compel the Registry of Property to a public document.
register the land under his name because the donation d. If S does not want to execute the public document, he
is valid. can rescind or cancel his agreement with B.
b. The Registry of property committed a grave abuse of 13. Which phrase most accurately completes the statement -
discretion in refusing the registration of the donated Any third person who induces another to violate his
property in question. contract:
c. The donation is valid but the registration may be a. shall be liable for damages only if he is a party to the
refused on the ground that the acceptance was not in a same contract.
public instrument. b. shall be liable for damages to the other contracting
d. Veronica cannot compel the Registry of Property to party.
register the land under his name because the donation c. shall not be liable for damages to the other contracting
is void. party.

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Accountancy Review Center (ARC) of the Philippines Inc. (ATTY. ONG – OCT 2021)

d. shall not be liable for damages if the parties are in pari to be subject to by law.
delicto. rescission.
14. Which of the following statements is not correct?
a. Consent is manifested by the meeting of the offer and 1. Rescissible contract – Rescissible contract is valid until
the acceptance upon the thing and the cause which are rescinded. It is allowed by reason of injury or damage to
to constitute the contract. one parties or to a third person.
b. The person making the offer may fix the time, place, The following contracts are rescissible: (1381)
and manner of acceptance, all of which must be a. Those which are entered into by guardians whenever
complied with the wards whom they represent suffer lesion by more
c. Acceptance made by letter or telegram does not bind than one-fourth of the value of the things which are the
the offerer except from the time it came to his object thereof;
knowledge ➢ Not applicable when approved by court (1386)
d. Contracts entered into during a lucid interval are ➢ Prescriptive period: Four years from the
voidable. termination of incapacity
15. When in order to wrest consent, serious or irresistible force b. Those agreed upon in representation of absentees, if
is employed. the latter suffer the lesion stated in the preceding
a. Intimidation c. Undue influence number;
b. Violence d. Fraud ➢ Not applicable when approved by court (1386)
➢ Prescriptive period: Four years from the date the
domicile of the absentee is known.
DEFECTIVE CONTRACTS c. Those undertaken in fraud of creditors when the latter
Rescissible Voidable Unenforce Void cannot in any other manner collect the claims due
able them;
1) Those which 1. Those 1. Those 1. Those ➢ The action to claim rescission must be commenced
are entered into where one entered into whose cause, within four years (1389)
by guardians of the in the name object or ➢ Alienation which are presumed to have been
whenever the parties is of another purpose is entered into in fraud of creditors
wards whom incapable of person by contrary to a. Gratuitous title - donor did not reserve
they represent giving one who law, morals, sufficient property to pay all debts contracted
suffer lesion by consent to a has been good before the donation.
more than one- contract; given no customs, b. Onerous title - when made by persons against
fourth of the 2. Those authority or public order whom some judgment has been issued. The
value of the where the legal or public decision or attachment need not refer to the
things which are consent is representati policy; property alienated, and need not have been
the object vitiated by on, or who 2. Those obtained by the party seeking the rescission.
thereof; mistake, has acted which are Note: The design to defraud creditors may be
(2) Those violence, beyond his absolutely proved in any other manner recognized by the law
agreed upon in intimidatio powers; simulated or of evidence. (1387)
representation n, undue 2. Those fictitious; ➢ Whoever acquires in bad faith the things alienated
of absentees, if influence or covered by 3. Those in fraud of creditors, shall indemnify the latter for
the latter suffer fraud. statute of whose cause damages suffered by them on account of the
the lesion stated fraud or object did alienation, whenever, due to any cause, it should be
in the preceding 3. Those not exist at impossible for him to return them.
number; where both the time of If there are two or more alienations, the first
(3) Those parties are the acquirer shall be liable first, and so on successively.
undertaken in incapable of transaction; (1388)
fraud of giving 4. Those d. Those which refer to things under litigation if they have
creditors when consent to a whose object been entered into by the defendant without the
the latter cannot contract. is outside the knowledge and approval of the litigants or of
in any other commerce of competent judicial authority;
manner collect men; ➢ The action to claim rescission must be commenced
the claims due 5. Those within four years (1389)
them; which e. All other contracts specially declared by law to be
(4) Those which contemplate subject to rescission.
refer to things an impossible
under litigation service; Prescriptive period
if they have been 6. Those The action to claim rescission must be commenced within four
entered into by where the years (1389)
the defendant intention of
without the the parties Limitation on the exercise of rescission
knowledge and relative to the 1. Contracts can be rescinded only in cases provided by law
approval of the principal 2. Being a subsidiary action, it can be exercised only when
litigants or of object of the there is no other legal means to obtain reparation for the
competent contract same. (1383)
judicial cannot be 3. Can be exercised only to the extent necessary to cover the
authority; ascertained; damages caused. (1384)
(5) All other 7. Those 4. Rescission creates the obligation to return the things which
contracts expressly were the object of the contract, together with their fruits,
specially prohibited or and the price with its interest (mutual restitution). Hence, it
declared by law declared void can be demanded only if the one claiming rescission can

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Accountancy Review Center (ARC) of the Philippines Inc. (ATTY. ONG – OCT 2021)

return whatever he may be obliged to restore. the same date. (1400)

5. It cannot be availed when the things which are the object of ➢ The action for annulment of contracts shall be extinguished
the contract are legally in the possession of third persons when the thing which is the object thereof is lost through
who did not act in bad faith. In this case, indemnity for the fraud or fault of the person who has a right to institute
damages may be demanded from the person causing the the proceedings.
loss (1385) If the right of action is based upon the incapacity of any one
6. The action for rescission has not been prescribed. of the contracting parties, the loss of the thing shall not be
an obstacle to the success of the action, unless said loss took
2. Voidable Contract – The consent is defective by reason of place through the fraud or fault of the plaintiff (1401)
incapacity of one party or vices of consent. It is valid until ➢ As long as one of the contracting parties does not restore
annulled. what in virtue of the decree of annulment he is bound to
The following contracts are voidable or annullable, even return, the other cannot be compelled to comply with what
though there may have been no damage to the is incumbent upon him. (1402)
contracting parties: (1390)
a. Those where one of the parties is incapable of giving 3. Unenforceable contract – Contract that cannot be enforce
consent to a contract; unless ratified.
b. Those where the consent is vitiated by mistake, The following contracts are unenforceable, unless they are
violence, intimidation, undue influence or fraud. ratified: (1403)
(1) Those entered into in the name of another person by
These contracts are binding, unless they are annulled by a one who has been given no authority or legal
proper action in court. They are susceptible of ratification. representation, or who has acted beyond his
powers;
Prescriptive period (2) Those that do not comply with the Statute of Frauds
Grounds Prescriptive period as set forth in this number. In the following cases an
Intimidation, violence or 4 years from the time the agreement hereafter made shall be unenforceable by
undue influence defect of the consent ceases action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party
Mistake or fraud 4 years from the time of the charged, or by his agent; evidence, therefore, of the
discovery* of the same agreement cannot be received without the writing, or a
minors or other 4 years from the time the secondary evidence of its contents:
incapacitated persons guardianship ceases (a) An agreement that by its terms is not to be
*Note: If there is registration of the property, count from the performed within a year from the making
date of registration. thereof;
(b) A special promise to answer for the debt,
➢ Ratification extinguishes the action to annul avoidable default, or miscarriage of another;
contract. (1392) (c) An agreement made in consideration of
➢ Express ratification – Done in writing or orally marriage, other than a mutual promise to marry;
➢ Tacit ratification - with knowledge of the reason which (d) An agreement for the sale of goods, chattels or
renders the contract voidable and such reason having things in action (personal property), at a price
ceased, the person who has a right to invoke it should not less than five hundred pesos, unless the
execute an act which necessarily implies an intention to buyer accept and receive part of such goods and
waive his right. (1393) chattels, or the evidences, or some of them, of such
➢ Ratification may be effected by the guardian of the things in action or pay at the time some part of the
incapacitated person. (1394) purchase money; but when a sale is made by
➢ Ratification does not require the conformity of the auction and entry is made by the auctioneer in his
contracting party who has no right to bring the action for sales book, at the time of the sale, of the amount
annulment. (1395) and kind of property sold, terms of sale, price,
➢ Ratification cleanses the contract from all its defects from names of the purchasers and person on whose
the moment it was constituted. (1396). account the sale is made, it is a sufficient
➢ The action for the annulment of contracts may be instituted memorandum;
by all who are thereby obliged principally or subsidiarily. (e) An agreement of the leasing for a longer period
However, persons who are capable cannot allege the than one year, or for the sale of (real property)
incapacity of those with whom they contracted; nor can or of an interest therein;
those who exerted intimidation, violence, or undue (f) A representation as to the credit of a third
influence, or employed fraud, or caused mistake base their person.
action upon these flaws of the contract. (1397) (3) Those where both parties are incapable of giving
➢ An obligation having been annulled, the contracting parties consent to a contract.
shall restore to each other the things which have been the
subject matter of the contract, with their fruits, and the ➢ Statutes of fraud is no longer applicable when:
price with its interest, except in cases provided by law. In a. There is total or partial performance (Partially or
obligations to render service, the value thereof shall be the totally executed)
basis for damages. (1398) b. Failure to object to the presentation of oral
➢ When the defect of the contract consists in the incapacity of evidence to prove the contract.
one of the parties, the incapacitated person is not obliged to ➢ Cannot be assailed by third person (1408)
make any restitution except insofar as he has been ➢ Effect of ratification by parents or guardian (1407)
benefited by the thing or price received by him. (1399) a. Only one party – Voidable contract
➢ Whenever the person obliged by the decree of annulment to b. Both parties - valid
return the thing can not do so because it has been lost
through his fault, he shall return the fruits received and the 4. Void contract – contract that never exist in the eyes of law.
value of the thing at the time of the loss, with interest from It has no effect at all and cannot be ratified.

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Accountancy Review Center (ARC) of the Philippines Inc. (ATTY. ONG – OCT 2021)

b. Voidable contract d. Void Contract

The following contracts are inexistent and void from the 2. Which of the following contracts is not void ab initio?
beginning: (1409) a. That whose object is outside the commerce of men.
(1) Those whose cause, object or purpose is contrary to b. That whose object did not exist at the time of
law, morals, good customs, public order or public transaction.
policy; c. That which contemplates an impossible service.
(2) Those which are absolutely simulated or fictitious; d. That which is undertaken is fraud of creditors.
(3) Those whose cause or object did not exist at the time of 3. Three of the following statements are true. Which one is
the transaction; false?
(4) Those whose object is outside the commerce of men; a. Not only the parties, but their heirs and assigns are
(5) Those which contemplate an impossible service; bound by their contract.
(6) Those where the intention of the parties relative to the b. Obligations arising from contracts have the force of law
principal object of the contract cannot be ascertained; between the contracting parties and must be complied
(7) Those expressly prohibited or declared void by law. with in good faith.
These contracts cannot be ratified. Neither can the right c. Fraud committed in the performance of an obligation
to set up the defense of illegality be waived. gives the injured party the right to annul the contract.
d. Generally, the debtor is not liable for the non-
Rules in determining contracts void performance of his obligation due to fortuitous event.
1. Absence of any of essential requites of contract 4. Duffny asked Christoff if the latter can grant him loan of
(Consent, Object or Cause) P50,000.00 payable in one year plus 12% interest and
2. Contract that are prohibited by law. (i.e Sale between Christoff nodded his head. The contract of loan is in the
husband and wife, donation between husband and stage of:
wife) a. Preparation c. Consummation
b. Perfection d. None of the above
➢ The action or defense for the declaration of the 5. Which of the following contract is essentially gratuitous?
inexistence of a contract does not prescribe. (1410) I. Commodatum
➢ Interest paid in excess of the interest allowed by the II. Precarium
usury laws may be recovered by the debtor, with III. Deposit
interest thereon from the date of the payment. (1413) IV. Mutuum
➢ Where one of the parties to an illegal contract is a. I and II c. I, II and III
incapable of giving consent, the courts may, if the b. I and III d. I, II, III and IV
interest of justice so demands allows recovery of 6. Paul entered into a written agreement to sell a parcel of
money or property delivered by the incapacitated land to Steve. At the time the agreement was executed, Paul
person. (1415) had consumed alcoholic beverages. Paul’s ability to
➢ When the agreement is not illegal per se but is merely understand the nature and terms of the contract was not
prohibited, and the prohibition by the law is designated impaired. Steve did not believe that Paul was intoxicated.
for the protection of the plaintiff, he may, if public The consent is:
policy is thereby enhanced, recover what he has paid or a. Void as a matter of law
delivered. (1416) b. Legally binding on both parties
➢ When the price of any article or commodity is c. Voidable at Paul’s option
determined by statute, or by authority of law, any d. Voidable at Steve option.
person paying any amount in excess of the maximum 7. M is minor who owns a house and lot valued at P1,000,000.
price allowed may recover such excess. (1417) G is the guardian who sold the house and lot to B for only
➢ When the law fixes, or authorizes the fixing of the P600,000 but with the approval of the court. The contract
maximum number of hours of labor, and a contract is between G and B is –
entered into whereby a laborer undertakes to work a. Valid; c. Unenforceable;
longer than the maximum thus fixed, he may demand b. Rescissible; d. Voidable;
additional compensation for service rendered beyond 8. Choose the contracts which are voidable.
the time limit. (1418) a. Those undertaken in fraud of creditors when the latter
➢ When the law sets, or authorizes the setting of a cannot in any other manner collect the claims due
minimum wage for laborers, and a contract is agreed them.
upon by which a laborer accepts a lower wage, he shall b. Those where the consent is vitiated by mistake,
be entitled to recover the deficiency. (1419) violence, intimidation, undue influence or fraud.
➢ In case of a divisible contract, if the illegal terms can be c. Those whose object is outside the commerce of man.
separated from the legal ones, the latter may be d. Those where both parties are incapable of giving
enforced. (1420) consent to a contract.
➢ The defense of illegality of contract is not available to 9. Which of these contracts is not subject to ratification?
third persons whose interests are not directly affected. a. Rescissible contract
(1421) b. Void contract
➢ A contract which is the direct result of a previous illegal c. Voidable contract
contract is also void and inexistent. (1422) d. Unenforceable contract
10. The following are the requisites before a contract entered
DISCUSSION QUESTIONS into in fraud of creditors may be rescinded, except:
a. There must be credit existing prior to the celebration of
1. Manny, sixteen years old student of University of the contract.
Sinampalukan sold the car of Tristan his guardian without b. There must be fraud, or at least, the intent to commit
the latter’s authority. The property at the time of sale has a fraud to the prejudice of the creditor seeking rescission.
fair market value of P500,000 but Manny sold it only for c. The creditor cannot in any legal manner collect his
P370,000. The contract in this case is: credit (subsidiary character of rescission)
a. Rescissible contract c. Unenforceable contract

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Accountancy Review Center (ARC) of the Philippines Inc. (ATTY. ONG – OCT 2021)

d. The object of the contract must be legally in the b. That whose object did not exist at the time of
possession of a 3rd person in good faith. transaction.
11. M, minor enters into a contract with I, insane, in connection c. That which contemplates an impossible service.
with the sale of a house and lot for P500,000. Said contract d. That which is undertaken is fraud of creditors.
is: 20. Which of the following statement is not correct about void
a. Unenforceable contract?
b. Rescissible a. In case of a divisible contract, if the illegal terms can be
c. Void separated from the legal ones, the latter may be
d. Voidable enforced.
12. M, minor enters into a contract with I, insane, in connection b. The defense of illegality of contract is not available to
with the sale of a house and lot for P500,000. However, the third persons whose interests are not directly affected.
guardian of M ratifies the contract. c. A contract which is the direct result of a previous illegal
a. Valid d. Unenforceable contract, is also void and inexistent.
b. Rescissible e. Void d. The action or defense for the declaration of the
c. Voidable inexistence of a contract prescribe in thirty (30) years.
13. The guardian of an insane person sells a house and lot
belonging to the latter valued at P1,000,000 to B, buyer for PRACTICE EXAM – PART 2
P600,000 with the approval of the court. the contract is:
a. Perfectly Valid 1. S sometime in 2016 sold to B a house and lot where the
b. Unenforceable former committed fraud. The deed of sale which was in a
c. Rescissible public document was registered with the Register of Deeds
d. Voidable in 2017. In 2019, the fraud was discovered by the heirs of B.
14. Which of these contracts is not subject to ratification? Under the Law, the action to annul a contract based on
a. Rescissible fraud must be filed within four (4) years from:
b. Void a. 2016 the date of the contract.
c. Voidable b. 2017 the date of registration with the Register of
d. Unenforceable Deeds.
15. D agreed to transfer to C, verbally, a house and lot in c. 2019 the date the fraud was discovered.
consideration of a service or benefit already rendered by d. The action to annul a contract based on fraud is not
the latter in favor of the former. Which of these is correct? subject to prescription.
a. The agreement being verbal involving real property is 2. S and B agreed on the sale of a certain amount of opium for
unenforceable and therefore cannot be sued upon in the total price of P1,000,000. Which of these statements is
court. correct?
b. The verbal agreement is enforceable because it is not a. If S had delivered the opium, and B does not pay him, he
covered by the Statute of Fraud. cannot ask for the return of the opium.
c. The law requires the agreement to be in writing at least b. If B had paid the P1,000,000 and S does not deliver the
since it involves real property. opium, he cannot recover the price paid.
d. The transaction is covered by the Statute of Fraud c. The opium and the consideration of P1,000,000 shall be
because it involves the sale of real property or any confiscated by the government.
interest therein. d. All of the above.
16. Statement 1: S orally sold to B a piece of land P1,000,000 3. A voidable contract:
where the latter made a down payment of P500,000 to the a. Contract agreed to in state of drunkenness
former, B can compel S to execute a public document b. Contract agreed to during hypnotic spell
containing the sale. c. Contract where consent is given through undue
Statement 2: In reformation of contracts, where the influence
mistake, fraud or accident prevented a meeting of the d. All of the above
minds, the remedy remains to be reformation and not 4. The least defective contract:
annulment. a. Voidable contract
a. Both statements are true. b. Rescissible contract
b. Both statements are false. c. Unenforceable contract
c. Statement 1 is true, but statement 2 is false. d. Void contract
d. Statement 1 is false, but statement 2 is true. 5. An oral sale of land for P500,000.
17. This results in the ratification of a contract violative of the a. Rescissible c. Unenforceable
Statute of Fraud: b. Voidable d. Void
a. Receipt of benefits under the agreement. 6. One of the parties to a contract is incapacitated:
b. Failure to object to the presentation of evidence a. Rescissble
proving the oral agreement. b. Voidable
c. Both (a) and (b) c. Unenforceable
d. None of (a) and (b) d. Void
18. Which of the following contracts is not void ab initio? 7. An agreement in restraint of trade:
a. The contract where the object is beyond the commerce a. Perfectly valid
of man. b. Voidable
b. The contract whose cause, object or consideration is c. Unenforceable
against the law, morals, good customs or public order. d. Void
c. The contract which is relatively simulated or fictitious. 8. When both parties to the contract are minors, the contract
d. The contract where the intention of the relative to the is:
object thereof cannot be ascertained. a. Voidable c. Void
e. None of the above. b. Rescissible d. Unenforceable
19. Which of the following contracts is not void ab initio? 9. S orally sold to B a specific parcel of land for P1,000,000
a. That whose object is outside the commerce of men. where the latter made a down payment of P500,000 to the

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Accountancy Review Center (ARC) of the Philippines Inc. (ATTY. ONG – OCT 2021)

former. Can B compel S to execute a deed of sale in a public

instrument?
a. No, because oral sale of land is unenforceable if the sale
is not in writing.
b. No, because the sale is void
c. Yes, because the sale is valid and enforceable
d. Yes, because the sale is valid although rescissible.
10. An oral contract of guaranty:
a. Perfectly valid c. Unenforceable
b. Voidable d. Void
11. The statute of frauds
a. Prevents the use of oral evidence to contradict the
terms of a written contract
b. Applies to all contracts having consideration valued at
P500 or more.
c. Requires the independent promise to pay the debt of
another to be in writing.
d. Applies to all real estate leases.
12. Which of these contracts is not subject to ratification?
a. Rescissible contract
b. Void contract
c. Voidable contract
d. Unenforceable contract
13. O is the owner of a car which was sold by S without
authorization in favor of B. The contract between S and B in
so far as O is concerned is:
a. Unenforceable
b. Rescissible
c. Void
d. Voidable
14. S offered to sell to B his house and lot for P10,000,000. In
order to pressure B into buying said house and lot, T, a very
good friend of S, threatened B with death as a result of
which B accepted the offer of S. It turns out now that the
market value of the house and lot is P15,000,000. Is the
contract of S and B valid?
a. The contract is valid since it is very clear that S did not
apply the intimidation.
b. The contract is voidable because the consent given by B
is anyway vitiated even if the intimidation was
employed by a third person.
c. The issue of the contract being voidable is not relevant
because B will not have the contract avoidable because
it is actually favorable to him.
d. It is not B but S or T who can file the action for
annulment.
15.The statute of frauds
a. Prevents the use of oral evidence to contradict the
terms of a written contract
b. Applies to all contracts having consideration valued at
P500 or more.
c. Requires the independent promise to pay the debt of
another to be in writing.
d. Applies to all real estate leases.

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