CONTRACTS

Contract
A contract is a meeting of mind between two persons whereby one binds himself, with respect to the
other, to give something or to render some service (CIVIL CODE, Art. 1305).

Contract and Obligation Distinguished

While a contract is one of the sources of obligations, an obligation is the legal tie or relation itself that
exists after a contract has been entered into. Hence, there can be no contract if there is no obligation.
But an obligation may exist without a contract (DE LEON, Obligations and Contracts, supra at 444).

Elements of Contracts:
1. Essential – those without which there can be no contract
a. Common elements – present in all contracts
I. Consent
II. Object or Subject Matter
III. Cause or Consideration
b. Special elements – present only in certain contracts (e.g., delivery in real contracts or form
in solemn ones).
c. Extraordinary elements – peculiar to specific contracts (e.g., price in a contract of sale)
2. Natural – those which are derived from the nature of the contract and ordinarily accompany
the same; they are presumed by law, although they can be excluded by the contracting parties
if they so desire (e.g., warranty against eviction in a contract of sale).
3. Accidental – those which exist only when the parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract (e.g. conditions, terms or
modes) (JURADO, Obligations and Contracts, supra at 357).
Note: Contracts must not be confused with other judicial conventions such as marriage, adoption
and succession. The principal source of the rights and obligations of the parties in contracts is their
agreement, while in the other juridical conventions, it is the law itself (ld.at 354).

Essential Elements of a Valid Contract

There is no contract unless the following requisites concur: (COC)
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established (CIVIL CODE, Art. 1318).

Stages of Contracts: (GPC)

1. Generation – comprehends the preparation or conception. It is the period of negotiation and
bargaining, ending at the moment of agreement of the parties.
2. Perfection – the moment when the parties come to agree on the terms of the contract
3. Consummation – it is the fulfillment or performance of the terms agreed upon in the contract
(ABS-CBN Broadcasting Corporation v. CA, G.R. No. 128690, January 21, 1999).

Classification of Contracts
1. According to their relation to other contracts
a. Preparatory – preliminary step towards the celebration of another subsequent contract.
b. Principal – can subsist independently from other contracts.
c. Accessory – can exist only as a consequence of, or in relation with another prior contract
(JURADO, Obligations and Contracts, supra at 359).
2. According to the risk involved
a. Commutative – each of the party acquires an equivalent of his prestation.
b. Aleatory – each of the parties has to his account the acquisition of an equivalent of his
prestation.
3. According to their perfection
a. Consensual – perfected by mere consent of the parties
b. Real – requires not only consent of the parties but also delivery of the object for their
perfection.
4. According to their purpose
a. Transfer of ownership – e.g., sale
b. Conveyance of use – e.g., commodatum
1 |CONTRACTS
 c. Rendition of service – e.g., agency
5. According to the nature of the vinculum which they produce
a. Unilateral – give rise to an obligation for only one of the parties
b. Bilateral – give rise to reciprocal obligations for both parties
6. According to their form
a. Common or informal – requires no particular form
b. Special or formal – requires some particular form
7. According to their cause
a. Onerous – in which each of the parties aspires to procure for himself a benefit through the
giving of an equivalent or compensation.
b. Gratuitous – in which one of the parties proposes to give to the other a benefit without
any equivalent or compensation.
8. According to their subject matter
a. Things – e.g., sale, deposit, pledge
b. Services – e.g., agency, lease of services
9. According to their name
a. Nominate – have their own individuality; regulated by special provisions of law
b. Innominate – contracts which do not have a specific name; not regulated by special
provisions of law (ld.at 350-361).

Kinds of Innominate Contracts:

1. Do ut des – I give that you give
2. Do ut facias – I give that you do
3. Facio ut des – I do that you give
4. Facio ut facias – I do that you do (DE LEON, Obligations and Contracts, supra at 463).
Notes: According to some authorities, do ut des is no longer an innominate contract. It has already
been given a name of its own, i.e., barter or exchange (CIVIL CODE, Art. 1638).

How innominate Contract Regulated

Innominate contracts shall be regulated, successively, by:
1. The stipulations of the parties,
2. The general provisions of the Civil Code on obligations and contracts,
3. The rules governing the most analogous nominate contracts and
4. The customs of the place (CIVIL CODE, Art. 1307).

Characteristic of Contracts: (MARCo)

1. Mutuality (CIVIL CODE, Art. 1308);
2. Autonomy (CIVIL CODE, Art. 1306);
3. Relativity (CIVIL CODE, Art. 1311); and
4. Consensuality (CIVIL CODE, Art. 1305)

Mutuality or Obligatory Force

The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them (CIVIL CODE, Art. 1308).

Exception: Validity or fulfillment may be left to:

1. The will of a third person, whose decision shall not be binding until made known to both the
contracting parties (CIVIL CODE, Art. 1309); or
2. Chance (As sensucontrario from CIVIL CODE, Art. 1308)

The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances (CIVIL CODE, Art. 1310).
Contract changes must be made with the consent of the contracting parties. The minds of all parties
must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. Thus, any change must be mutually agreed upon; otherwise, it produces no binding effect
(Philippine Savings Bank v. Sps. Castillo, G.R. No. 193178, May 30, 2011).

Contract of Adhesions
One wherein one party imposes a ready-made form of contract on the other. It is a contract whereby
almost all of its provisions are drafted by one party, with the participation of the other party being
limited to affixing his or her signature or “adhesion” to the contract. However, contracts of adhesion

2 |CONTRACTS
are not invalid per se as they are binding as ordinary contracts (Encarnacion Construction vs. Phoenix
Ready Mix Concrete Development and Construction G.R. No. 225402, September 4, 2017).

Note: Contracts of adhesion do not violate mutuality of contracts because the adhering party has the
freedom to reject in its entirety. However, in case of controversy, the contract is interpreted liberally in
favor of the adhering party (JURADO, Obligations and Contracts, supra at 455).

Contracts Cannot Be Unilaterally Cancelled

General Rule: No party can renounce the contract unilaterally or without the consent of the other
(Landoil Resources vs. Tensuan, G.R. No. 77733, December 20, 1988) just as nobody can be forced to
enter into a contract.
Exception: An agreement that a party may terminate the contract upon reasonable period of notice or
when cancellation is by reason of breach (CIVIL CODE, Art. 1191; Palay, Inc. vs. Clave, G.R. No. L-56076,
September 21, 1983).

Autonomy (Freedom to Contract)

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient (CIVIL CODE, Art. 1306).

Freedom to contract is both a CONSTITUTIONAL and STATUTORY right (CONST., Art. III, Sec. 10; CIVIL
CODE, Art. 1306).

In contractual relations, the law allows the parties leeway and considers their agreement as the law
between them. Contractual stipulations that are not contrary to law, moral, good customs, public order
or public policy shall be binding and should be complied with in good faith (Spouses Chung v. Ulanday
Construction, Inc., G.R. No. 156038, October 11, 2010).

Limitation to the Principle of Autonomy

Stipulations should not be contrary to law, morals, good customs, public order, or public policy (CIVIL
CODE, Art. 1306).
1. Contrary to Law
Acts executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity (CIVIL CODE, Art. 5).
2. Contrary to Morals
The morals referred to are those principles which are incontrovertible and are universally
admitted and which have received social and practical recognition (JURADO, Obligations and
Contracts, supra at 363).
Example: Interest rate so high that it is so unconscionable and shocking to the senses (Andals
vs. PNB, G.R. No. 194201, November 27, 2013) and an agreement on a trial marriage is void for
being contrary to morals.
3. Contrary to Good Customs
Customs consist of habits and practices which through long usage have been followed and
enforced by society or some part of it as binding rules of conduct. It has the force of law when
recognized and enforced by law. A custom must be proved as a fact, according to the rules of
evidence (CIVIL CODE, Art. 12 & 1376).
Example: A contract providing for a penalty if one of the parties would back out from his/her
promises to marry is against good customs (PINEDA, Obligations and Contracts, supra at 339).
4. Contrary to Public Order
Refers to the safety, as well as to the peace and order, of the country or of any particular
community (JURADO, Obligations and Contracts, supra at 364).
Example: A contract to commit rebellion.
5. Contrary to Public Policy
Public policy is intended that principle of law which holds that no subject or citizen can lawfully
do that which has a tendency to be injurious to the public or against the public good which may
be termed the “policy of the law” or “public policy” in relation to the administration of the
law” (Rivera v. Solidbank Corp., G.R. No. 163269, April 19, 2006).
Example: A quitclaim where a dismissed employee waives action against his former employer
for any cause.

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Autonomy of Contracts Submits to Fundamental Human Rights and General Welfare
Non-impairment clause is inferior to:
1. The Police Power of the State (BF United Homeowner’s Association, Inc. v. The City Mayor of
Paranaque, G.R. No. 141010, February 7, 2007)
2. Freedom of Religion (Victoriano vs. Elizalde Rope Workers’ Union, G.R. No. L-25246, September
12, 1974).

Consensuality or Obligatory Force

Contracts are perfected by mere consent, and from that moment the parties are bound to the
fulfillment of what has been expressly stipulated and to all consequences which according to their
nature, maybe in keeping with good faith, usage and law (CIVIL CODE, Art. 1315).

A party cannot be allowed to renege on his obligation under a contract simply because he changed his
mind (Morla vs. Belmonte, G.R. No. 171146, December 7, 2011).

Note: The binding force of contracts comes from the consent of a free and unimpaired mind. Pacta sunt
servanda, “agreements must be kept”

All Contracts Are Essentially Consensual

While most contracts are perfected by mere consent, others require acts in addition to consent in order
to obtain obligatory force. These are:
1. Real contracts are not perfected until the delivery of the object of the obligation (CIVIL CODE,
Art. 1316).
Examples: Deposit, pledge and commodatum
2. Solemn contracts or Formal contracts require compliance with certain formalities prescribed
by law such prescribed form being thereby an essential element thereof (DE LEON, Obligations
and Contracts, supra at 542).
Example: Donation of real property; Notarial Will
Note: In both real and solemn contracts, contractual consent is impliedly included.

Effect of perfection of the Contract

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding
juridical relation (Asuncion v. CA, G.R. No. 109125, December 2, 1994; Amado v. Salvador, G.R. No.
171401, December 13, 2007).
Unaccepted offers and proposals remain as such and cannot be considered as binding commitments;
hence, not demandable (Luxuria Homes, Inc. v. CA, G.R. No. 125986, January 28, 1999).
From the moment the parties come to an agreement on a definite subject matter and valid
consideration, they are bound not only:
1. To the fulfillment of what has been expressly stipulated; but also,
2. To all the consequences which according to their nature, may be in keeping with good faith,
usage and law (CIVIL CODE, Art. 1315).

Relativity
General Rule: Contracts take effect only between the parties, their assigns and heirs (CIVIL CODE, Art.
1311).
When a person assigns his credit to another person, the latter is deemed subrogated to the rights as
well as to the obligations of the former (Fort Bonifacio Development Corp. v. Fong, G.R. No. 209370,
March 25, 2015).
When there is no privity of contract, there is likewise no obligation or liability to speak about (Asian
Terminal, Inc. v. Padodan Stainless Steel Corporation G.R. No. 211876, June 25, 2018).

Stipulations Pour Autrui

If a contract should contain some stipulation in favor of a third person, 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 (CIVIL CODE, Art. 1311, par.2)
A beneficial stipulation or stipulation pour autrui (‘for another”) is a stipulation in a contract, clearly and
deliberately conferred by the contracting parties as a favor upon a third person, who must have
accepted it before it could be revoked (JURADO, Obligations and Contracts, supra at 382).

Example: A stipulation in a contract of sublease that the sublessee’s rent shall be paid directly to the
principal lessor is a stipulation pour autrui (Limitless Potentials, Inc. Vs. Quilala, G.R. No. 157391, July 15,
2005).
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Acceptance of Benefit by Third Party Required
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 (CIVIL CODE, Art. 1311,
par.2).
Reason: Relativity of Contracts

Form of Acceptance of Beneficiary

The acceptance may be made at any time before the favorable stipulation is revoked and the
acceptance may be in any form it does not have to be formal or express but may be implied (Sps.
Narvaez v. Sps. Alciso, G.R. No. 165907, July 27, 2009).

Exceptions to Relativity of Contracts:

1. Intransmissible Contractual Rights by nature, stipulation or law.
2. Real Rights As to Those Charge with Notice
3. Transferees of Property alienated in fraud of creditors
4. Tortious Interference

Intransmissible Contractual Rights do Not Bind Heirs, Assigns and Successors-in-interest

Contractual Rights which are by law, nature or stipulation instransmissible cannot bind persons other
than the parties thereto.
Examples:
1. Membership in a non-stock corporation is intransmissible by law.
2. Personal obligations are intransmissible by nature.

Real Rights as to Those Charged with Notice

A real right is a right belonging to a person over a specific thing, without a passive subject individually
determined, against whom such right may be personally enforced. Such a right, therefore, is enforceable
against the whole world (JURADO, Obligations and Contracts, supra at 388).
A real right is binding upon third persons who are chargeable with notice of the same.
A recorded real estate mortgage is a right in rem (Paderes vs. CA, G.R. No. 147074, July 15, 2005).

Transferees of Property Alienated In Fraud

Contracts entered into in order to defraud a creditor are rescissible (CIVIL CODE, Art. 1381 (3)).
The transferees are effectively bound to the contract between the transferor and the charging creditor
such that any transfer of title to them are rescissible.

Tortious Interference
There is tortious interference where the third person induces a contracting party to violate his contract.
Such third person can be held liable for damages (CIVIL CODE, Art. 1314).
Note: The rule on tortious interference implies that any person aware that a binding contract exists
between parties is bound to respect such juridical tie.

Contracts by an Agent Without Authority are Unenforceable

As a general rule, a person is not bound by the contract of another to which he has no knowledge or to
which he has not given his consent (CIVIL CODE, Art. 1311, par. 1).
A contract entered into in the name of another by one who has no authority is unenforceable against
the former unless it is ratified by him before it is revoked by the other contracting party (CIVIL CODE,
Art. 1317 & 1403 (1)).
A contract entered into by an agent in excess of his authority is unenforceable against the principal, but
the agent is personally liable to the party with whom he contracted where such party was not given
sufficient notice of the limits of the powers granted by the principal (CIVIL CODE, Art. 1897).

When a Person Bound by the Contract of Another

In order that a person may be bound by the contract of another, there are two requisites:
1. The person entering into the contract must be duly authorized, expressly or impliedly, by the
person in whose name he contracts or he must have, by law, a right to represent him (like a
guardian or an administrator); and
2. He must act within his power.

5 |CONTRACTS
 CONSENT
Consent
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 counter-offer (CIVIL CODE, Art. 1319).
Requisites of Valid Consent: (CCI)
1. Must be manifested by the Concurrence of the offer and acceptance (CIVIL CODE, Art. 1319-
1326);
2. Parties must possess the necessary legal Capacity (CIVIL CODE, Art. 1327-1329); and
3. Must be Intelligent, free, spontaneous and real (CIVIL CODE, Art. 1330-1346).

LEGAL CAPACITY TO CONSENT

Legal Capacity
It refers not only to natural persons but also to artificial as well. The absence of legal capacity results in
legal incapacity, the causes of which are based on positive provisions of law, and exist in opposition to
or as limitations of natural capacity as in the case of persons under civil interdiction (DE LEON,
Obligations and Contracts, supra at 417).
Persons Incapacitated to Give Consent According to the Civil Code: (MID)
1. Minors
2. Insane or Demented
3. Deafmutes who cannot read nor write
Consent of Minors
Under the Civil Code, minors have a limited capacity to consent. Consent by a minor is not an absence of
consent as to render the resulting contract void. A minor’s consent only results in a voidable contract.
Minors May Contract Through Their Guardians
Minors may validly contract without any impairing the validity of said contract when they contract
through their natural guardians (parents) or legal guardians (ld.at 418).
Instances When Minor’s Consent is Not Deemed Vitiated
1. When the contract is entered into by a minor who actively misrepresents his age (not merely
constructive representation) (Mercado v. Espiritu, G.R. No. L-11872, December 1, 1917);
This exceptions is based on estoppel. Estoppel presupposes capacity to misrepresent. The
circumstances of the minor (i.e. he appears to be a legal age) must be of such nature that it
could have been relied upon by the other party. Otherwise, the contract remains voidable
(Mercado v. Espiritu, G.R. No. L-11872, December 1, 1917).
2. When it involves the sale and delivery of necessaries to minors (CIVIL CODE, Art. 1489, par. 2);
3. When it involves a natural obligation and such obligation is fulfilled voluntarily by the minor
(CIVIL CODE, Arts. 1425-1427);
Contracts Enter Into by Minor may be Ratified
When upon reaching the age of majority, they ratify the same (Badilo v. Ferrer, G.R. No. L-51369, July
29, 1987).

Insane or Demented Persons

An insane or demented person includes any person, who, at the time of the celebration of the contract,
cannot understand the nature and consequences of the act or transaction by reason of any cause
affecting his intellectual or sensitive faculties whether permanent or temporary (JURADO, obligations
and Contracts, supra at 421).
It is not necessary that there be a previous declaration of mental incapacity in order that a contract
entered into by a mentally defective person may be annulled; it is enough that the insanity existed at
the time the contract was made (4 TOLENTINO, supra at 471).
Note: Mere forgetfulness without evidence that the same has removed from a person the ability to
intelligently and firmly protect his property rights, will not by itself incapacitate a person from entering
into contracts (Almeda v. Heirs of Ponciano Almeda , G.R. No. 194189, September 14, 2017).

State of Drunkenness or Hypnotic Spell

Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable (CIVIL CODE, Art.
1328).
But the same must be of a degree that obscures completely the faculties and almost extinguishes the
consciousness of acts (JURADO, Obligations and Contracts, supra at 422).
It is the result of the use of alcohol or drugs upon the condition of the mind which determines whether
the user has the capacity to contract at any given moment; the mere use in itself does not incapacitate
him (4 TOLENTINO, supra at 472).

6 |CONTRACTS
Lucid Interval
Contracts entered into during a lucid interval are valid (CIVIL CODE, Art. 1328).
A person under guardianship for insanity may still enter into a valid contract and even convey property,
provided it is proven that at the time of entering into said contract, he was not insane or that his mental
defect, if mentally deranged, did not interfere with or affect his capacity to appreciate the meaning and
significance of the transaction entered into by him (JURADO, Obligations and Contracts, supra at 422).
Presumption of Capacity
There is a prima facie presumption that every person of legal age possesses the necessary capacity to
execute a contract (ld.at 423).

Deaf-Mutes who do not Know How to Write

Being a deaf-mute is not by itself a disqualification for giving consent. The law refers to the deaf-mute
who does not know how to write (4 TOLENTINO, supra at 471).

Incompetents
Under the Rules of Court, the following are considered incompetents and may be placed under
guardianship:
1. Civil Interdiction
2. Hospitalized lepers
3. Prodigals (spendthrift)
4. Deaf and dumb who are unable to read and write
5. Those of unsound mind even though they have lucid intervals
6. Those who by reason of age, disease, weak mind and other similar causes, cannot without
outside aid, take care of themselves and manage their property becoming thereby an easy prey
for deceit and exploitation (RULES OF COURT, SECTION 2, Rule 92).
Note: Incompetents are also incapacitated from giving unimpaired consent.
Effect Where BOTH Contracting Parties are Incapable of Giving Unimpaired Consent
If both of the parties are incapable of giving consent, the contract is unenforceable (CIVIL CODE, Art.
1403).
Disqualification to Contract
Refers to those who are prohibited from entering into a contract with certain persons with regard to
certain property under certain circumstances and not to those who are incapacitated to give their
consent to a contract (CIVIL CODE, Arts. 1490 & 1491).

Incapacity v. Disqualification
Incapacity to Give Consent (CIVIL CODE, Art. Disqualification to Contract (CIVIL CODE, Art.
1327) 1329)
As to restrictions
Restrains the exercise of the right to contract. Restrains the very right itself.
As to basis
Based upon subjective circumstances of certain Based upon public policy and morality.
persons.
As to validity
Voidable. Void.
(JURADO, Obligations and Contracts, supra at 428).
Persons Disqualified to Contract
1. Those under Civil interdiction for transactions inter vivos (REVISED PENAL CODE, Art. 34)
2. Undischarged insolvents (INSOLVENCY LAW, Sec. 24)
3. Husband and wife cannot donate to each other (FAMIL CODE, Art. 87)
4. Husband and wife cannot sell property to each other except when they are by consent or by
judicial order under a regime of separation of property (CIVIL CODE, Art. 1490)
5. Either spouse may not alienate or encumber community or conjugal property without the
consent of the other spouse (FAMILY CODE Arts. 96 and 124)
6. The following cannot purchase (CIVIL CODE, art. 1491):
a. The guardian: his ward’s property
b. The agent: the principal’s property
c. Executors and administrator: property under administration;
d. Public officers: state property under their administration;
e. Justice, judges, prosecutors, clerks of court, lawyers: property attached in litigation.

7 |CONTRACTS
CONSENT MUST BE FREE, INTELLIGENT, SPONTANEOUS, REAL
Vices of Consent
1. Vices of the will (vicious de la formacion de la voluntad): (VIMFU)
a. Violence;
b. Intimidation;
c. Mistake;
d. Fraud; and
e. Undue influence (CIVIL CODE, Art. 1330).
2. Vices of declaration (vicios de la declaracion);
3. Simulation of contracts (CIVIL CODE, Arts. 1345-1346).

Mistake
Mistake or error is the false notion of a thing or a fact material to the contract (DE LEON, Obligations
and Contracts, supra at 556).

Two General Kinds of Mistake

Mistake of Fact Mistake of Law
As to existence
One or both contracting parties believe that a One or both parties arrive at an erroneous
fact exists when in reality it does not or vice conclusion regarding the interpretation of a
versa. question of law or the legal effects of a certain
act or transaction.
As to the vitiation of consent
Vitiates consent. Does not vitiate consent except when it involves
mutual error as to the effect of an agreement
when the real purpose is frustrated.
(JURADO, Obligations and Contracts, supra at 429).

Requisites of Mistake of FACT Which Vitiates Consent: (SEM)

1. The error must be Substantial regarding:
a. The object of the contract (error in re) which may be:
I. Mistake as to the identity of the thing (error in corpore);
II. Mistake as to the substance of the thing (error in substantia);
III. Mistake as to the condition or state of the thing; or
IV. Mistake as to the quantity of the thing (error in quantitate) (ld.at 433);
b. The condition which primarily moved or induced one or both of the parties to enter into
the contract (CIVIL CODE, Art. 1331);
c. Identify or qualifications of one of the parties (error in persona), but only if such was the
principal cause of the contract (CIVIL CODE, Art. 1331, par. 2).
2. The error must be Excusable; and
3. The error must be a Mistake of fact and not of law (JURADO, Obligations and Contracts, supra
at 430-432).

Error in Re
In order that mistake may invalidate consent, it 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 (CIVIL CODE, Art. 1331, par. 1).
1. Mistake as to the identity of the thing as when the thing which constitutes the object of the
contract is confused with another thing;
2. Mistake as to the substance of the thing (error in substantia);
3. Mistake as to the conditions of the thing, provided such conditions have principally moved one
or both parties to enter into the contract; and
4. Mistake as to the quantity of the thing (error in quantitate), provided that the extent or
dimensions of the thing was one of the principal reasons of one or both of the parties for
entering into the contract.
Mistakes which do NOT in Any Manner Affect the Validity of the Contract
1. Error with respect to accidental qualities of the object of the contract (e.g. the quality of the
paper of a book, the adjoining owners of a piece of land);
2. Error in the value of the thing (e.g. when a person, having forgotten the cost price of
merchandise, erroneously sells it for less); and

8 |CONTRACTS
 3. Error which refers, not to the conditions of the thing, but to accessory matters in the contract
foreign to the determination of the object (4 TOLENTION, supra at 480).

Error in Quantitate
It is important that this class of mistake should be distinguished from a mistake of account or
calculation. In the first, there is a real mistake as to the extent of the object of the contract; in the
second, there is only an apparent mistake, a mere mistake in mathematical computation. As a
consequence, in the first, the contract is voidable; in the second, it is not (JURADO, Obligations and
Contracts, supra at 430).

Error in Persona
This kind of mistake or error may refer either to the name or to the identity or to the qualification of a
person.
The only mistake with regard to persons which will vitiate consent are mistakes with regard to the
identity or the qualifications of one of the contracting parties. (CIVIL CODE, Art. 1331, par.2).

Mistake of Law
Mistake of law as a rule will not vitiate consent, except when mutual error as to the legal effect of an
agreement when the real purpose of the parties is frustrated, may vitiate consent (CIVIL CODE, Art.
1334).

Illiterate Who Signs a Contract is Presumed to Know its Contents

The rule that one who signs a contract is presumed to know its contents has been applied even to
contracts of illiterate persons on the ground that if such persons are unable to read, they are negligent if
they fail to have the contract read to them (Diampoc vs. Buenventura, G.R. No. 200383; March 19,
2018).
It is a well-settled principle that the law will not relieve parties from the effects of an unwise, foolish or
disastrous agreement they entered into with all the required formalities and with full awareness of what
they were doing (Diampoc vs. Buenventura, G.R. No. 200383; March 19, 2018).

Violence
When in order to wrest consent, serious or irresistible force is employed (CIVIL CODE, Art. 1335).

Requisites for Existence of Violence Sufficient to Vitiate Consent: (SD)

1. The force employed to wrest consent must be Serious or irresistible; and
2. Must be the Determining cause for the party upon whom it is employed in entering into the
contract (JURADO, Obligations and Contracts, supra at 436).

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 (CIVIL CODE, Art. 1335).

Requisites for Existence of Intimidation Sufficient to Vitiate Consent: (CIRUP)

1. One party is Compelled to give his consent by a reasonable and well-grounded fear or an evil;
2. The evil must be Imminent and grave;
3. It is the Reason why he enters the contract;
4. The evil must be Unjust (JURADO, Obligations and Contracts, supra at 436); and
5. The evil must be upon his Person or property or that of his spouse, descendants or ascendants
(DE LEON, Obligations and Contracts, supra at 566).

Notice or Warning of Just Action Not Intimidation

A threat to enforce one’s claim through competent authority, if the claim is just or legal does not vitiate
consent, (CIVIL CODE, Art. 1335, par. 4).
Even if it can be established that the reason or motive of a party in entering into a contract was the
threat of the other to proceed against him through the courts, the contract would still be perfectly valid
and not voidable (JURADO, Obligations and Contracts, supra at 441).
The intimidation that will annul a contract has to do with the evil or harm arising from an unlawful act.
The fear in itself does not justify the annulment of the contract, unless such fear was induced by a
threatened wrong (4 TOLENTINO, supra at 491-492).

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Reverential Fear
If a contract is signed merely because of “fear of displeasing persons to whom obedience and respect
are due,” the contract is still valid, for by itself, reverential fear is not wrong (4 PARAS, supra at 639).
Exception: If in addition to such fear of causing displeasure, there is an imposition upon the will, then
the consent will be vitiated (4 TOLENTION, supra at 498).
Note: Consent given through intimidation must not be confused with consent given reluctantly and even
against good sense and judgment. It is clear that one acts as voluntarily and independently in the eyes of
the law when he acts spontaneously and joyously (JURADO, Obligations and Contracts, supra at 437
citing Vales v. Villa, G.R. No. 10028, December 16, 1916).

Violence v. Intimidation
Violence Intimidation
Refers to physical compulsion Refers to moral compulsion
External or prevents the will to manifest itself Internal or induces the performance of an act.
(JURADO, Obligations and Contracts, supra at 435).

Violence Need Not Come From Parties

Violence or intimidation shall annul the obligation, although it may have been employed by a third
person who did not take part in the contract (CIVIL CODE, 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 (CIVIL CODE, Art. 1337).
Requisites for Existence of Undue Influence Sufficient to Vitiate Consent: (IPD)
1. Improper advantage;
2. Power over the will of another; and
3. Deprivation of the latter’s will of a reasonable freedom of choice (JURADO, Obligations and
Contracts, supra at 443).
Note: Undue influence must be distinguished from intimidation, in that in intimidation there must
be an unlawful or unjust act which threatens and which causes consent to be given, while in undue
influence, there need not be an unjust or unlawful act (4 TOLENTION, supra at 501).
Test of Undue Influence: Whether or not the influence exerted has no overpowered or subjugated the
mind of a contracting party as to destroy his free agency, making him express the will of another rather
than his own (JURADO, Obligations and Contracts, supra at 444 citing Coso v. Fernandez Deza, G.R. No.
L-16763, December 22, 1921).
Note: By analogy, undue influence employed by a third person may annul the contract (4 TOLENTION,
supra at 503 citing Commission Memorandum to Joint Congressional Committee on Codification, March
8, 1951).

Fraud in Contracts
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 (CIVIL CODE, Art. 1338).
Fraud is deemed to comprise anything calculated to deceive, including all acts, omissions and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in
damage to another, or by which an undue and unconscientious advantage is taken of another
(Information Technology Foundation of the Philippines v. Commission on Elections, G.R. No. 159139,
June 6, 2017).
Malicious Intent is Basis of Liability for Fraud
As a ground for damages, malice or dishonesty is implied. It is the element of intent and not the harm
dome (JURADO, Obligations and Contracts, supra at 64).
Fraud Synonymous with Bad Faith
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or
interest or ill-will that partakes of the nature of fraud (Cathay Pacific, Ltd. V. Vasquez, G.R. No. 150843,
March 14, 2003).
Insidious Words and Machinations
Constitutes deceit, including false promises, exaggeration of hopes or benefits, abuse of confidence,
fictitious names, qualifications or authority (4 TOLENTION, supra at 505).
Requisites of Fraud Under Article 1338: (BE-SIN)
1. It must be made in Bad faith, i.e., with knowledge of its falsity (4 TOLENTION, supra at 445-
446);
2. One party must have Employed fraud or insidious words or machinations;
10 |CONTRACTS
 3. It must have been Serious;
4. It Induced the other party to enter into a contract; and
5. It must have been employed by one contracting party upon the other and Not employed by
both contracting parties or by third persons.
Fraud Not Presumed
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked and that is why they are never presumed
(Cathay Pacific, Ltd. V. Sps. Vasquez, G.R. No. 150843, March 14, 2003; DPWH v. Quica, G.R. No.
183444, February 8, 2012).
Legal examples and illustration of fraud
1. Fraud by concealment
Failure to disclose facts, when there is a duty to reveal them, constitutes fraud (CIVIL CODE Art.
1339).
A neglect or failure to communicate that which a party to a contract knows and ought to
communicate constitutes concealment. In this case, concealment is equivalent to
misrepresentation (INSURANCE CODE, Sec. 26).

Note: Silence or concealment by itself does not constitute fraud. The concealment
contemplated in Article 1339 presupposes a purpose or design to hide facts which the other
party ought to know (DE LEON, Obligations and Contracts, supra at 641).

2. Principle of Tolerated Fraud (Dolus Bonus)

The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent (CIVIL CODE, Art. 1340).
This is known as “tolerated fraud” which includes minimizing the defects of the thing,
exaggerating its good qualities and giving it qualities that it does not have. They do not affect
the validity of the contract, so long as they do not go to the extent of malice of bad faith (4
TOLENTINO, supra at 510).

Dealer’s talk or trader’s talk are representations which do not appear on the face of the
contract and these do not bind either party (DE LEON, Obligations and Contracts, supra at 582;
Puyat v. Arce Amusement Co., G.R. No. L-47538, June 20, 1941; Philippine Steel Coating Corp. v.
Quinones, G.R. No. 194533, April 19, 2017).
3. Expression of an Opinion
A mere expression of an opinion does not signify fraud unless made by an expert and the other
party relied on the former’s special knowledge (CIVIL CODE, Art. 1341).

An opinion of an expert is like a statement of a fact, and if false, may be considered a fraud
giving rise to annulment (4 TOLENTINO, supra at 511).
4. Fraud by Third Person
Fraud by a third person does not vitiate consent and merely gives rise to an action for damages
by the party injured against such third person unless:
1. It has created a substantial mistake and the same is mutual (CIVIL CODE, Art. 1342).
2. A third person makes the misrepresentation with the complicity or at least with the
knowledge but without the objection of the contracting party who is favored (JURADO,
Obligations and Contracts, supra at 449).
When Misrepresentation Not Fraud
Misrepresentation made in good faith is not fraudulent but may constitute error (CIVIL CODE, Art. 1343).

Mutual Fraud
When both parties use fraud reciprocally, neither one has an action against the other and neither party
can ask for the annulment of the contract (DE LEON, Obligations and Contracts, supra at 651 citing
Valdez v. Sibal, G.R. No. L-26278, August 4, 1927).
Distinction of Fraud in Contracts
There are two types of fraud contemplated in the performance of contracts: dolo incidente or
incidental fraud and dolo causante or fraud serious enough to render a contract voidable (Tankeh v.
Development Bank of the Philippines, G.R. No. 171428, November 11, 2013).

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Dolo Incidente v. Dolo Causante
Dolo Incidente Dolo Causante
As to Source
Referred to in Article 1338. Referred to in Article 1344.
As to character
Deceptions or misrepresentations of a serious Not serious in character and without which the
character employed by one party and without other party would still have entered into the
which the other party would not have entered contract.
into the contract.
As to cause
Only to some particular or accident of the The essential cause of the consent.
obligation.
As to effect
Person employing must pay damages. Nullity of the contract and indemnification of
damages.
(Geraldez v. Court of Appeals, G.R. No. 108253, February 23, 1994).

Some Examples of What Constitute Dolo Causante or Causal Fraud:

1. When the seller, who had no intention to part with her property, was “tricked into believing”
that what she signed were papers pertinent to her application for the reconstitution of her
burned certificate of title, not a deed of sale;
2. When the signature of the authorized corporate officer was forged; or
3. When the seller was seriously ill, and died a week after signing the deed of sale raising doubts
on whether the seller could have read, or fully understood, the contents of the documents he
signed or of the consequences of his act (Spouses Carmen S. Tongson and Jose C. Tongson, et
al., v. Emergency Pawnshop Bula, Inc., G.R. No. 167874, January 15, 2010).

Simulation of Contracts
It is the declaration of a fictitious will, deliberately made by agreement of the parties, in order to
produce, for purposes of deception, the appearance of a juridical act which does not exist or is different
from that which was really executed (4 TOLENTINO, supra at 516).
Third Person Acting In Good Faith
With respect to a third person acting in good faith, the apparent contract must be considered as the
true contract. The declaration that the contract is simulated does not prejudice him (4 TOLENTINO,
supra at 519).

OBJECT OF CONTRACT

Object
The thing, right or service which is the subject matter of the obligation arising from the contract
(JURADO, Obligations and Contracts, supra at 456).
Requisites of Valid Contractual Object: (CLRT-D)
1. Must be within the Commerce of man (CIVIL CODE, Art. 1347);
2. Should be Licit (CIVIL CODE, Art. 1347);
3. Should be Real or possible (CIVIL CODE, Art. 1348);
4. Should be Transmissible (CIVIL CODE, Art. 1347);
5. Should be Determinate, or at least possible of determination as to its kind (CIVIL CODE, Art.
1349).
All Things May Generally be Subject of Contracts
All things or services may be the object of contracts. This includes future things or rights which do not
belong to the obligor when the contract was made (CIVIL CODE, Art. 1347).
As a general rule, all rights may be the object of a contract. The exceptions are when they are
intransmissible by their nature, or by stipulation or by provision of law (CIVIL CODE, Art. 1311, par. 1).
Invalid Objects of Contracts: (OIF-SIN)
1. Things Outside the commerce of men (CIVIL CODE, Art. 1347);
2. Intransmissible rights (CIVIL CODE, Art. 1347);
3. Future inheritance;
4. Services contrary to law, morals, good customs, public order or public policy (CIVIL CODE, Art.
1306);
5. Impossible things or services; and
12 |CONTRACTS
 6. Objects Not possible of determination as to their kind.
Note: In order that a thing, right or service may be the object of a contract, it should be in existence
at the moment of the celebration of the contract, or at least, it can exist subsequently or in the
future (4 TOLENTINO, supra at 521).
Examples:
Outside the Things of public ownership such as sidewalks, public places, bridges, streets,
Commerce of etc.; things that are common to everybody such as air, sunlight, rain
Men
Impossible, Prohibited drugs and all illicit objects; to kill a person, etc. (illicit things or
Physically or services are also outside the commerce of men.); to get soil from planet
Legally Jupiter; to construct a building in one day
Determinable All the cavans of rice in a warehouse; all the eggs in a basket; my land with
Things the smallest areas; the land of the corner of a particular street
Future Things Things to be manufactured, raised or acquired after the perfection of the
or Rights contract such as wine that a vineyard is expected to produce; wool that shall
thereafter grow upon sheep; rice to be harvested next harvesting season;
milk that a cow may yield; eggs that hens may lay; young animals not yet in
existence, etc.
Intransmissible Political rights such as the right to vote; family, marital and parental rights;
Rights right to public office or to run for public office etc.
(DE LEON, Obligations and Contracts, supra at 599).

Future Things
A future thing may be the object of a contract. Such contract may be either be:
1. Conditional – if its efficacy should depend upon the future existence of the thing (4
TOLENTINO, supra at 521).
2. Aleatory – if one of the contracting parties should bear the risk that the thing will never come
into existence (4 TOLENTINO, supra at 522).
Exception: No contract may be entered into with respect to future inheritance except in cases expressly
authorized by law (CIVIL CODE, Art. 1347, par. 2).
Exceptions to the Exception
1. Future spouses may give or donate to each other in their marriage settlement their future
property to take effect upon the death of the donor and to the extent laid down by the
provisions of the Civil Code relating to testamentary succession (FAMILY CODE, Art. 130); and
2. A person may make a partition of his estate by an act inter vivos, provided that the legitime of
compulsory heirs is not prejudiced (CIVIL CODE, Art. 1080).

Impossible Things or Services

Impossibility things or services cannot be the object of contracts (CIVIL CODE, Art. 1348).

Kinds of Impossibility
1. Absolute or objective – when nobody can perform the service. It nullifies the contract; or
2. Relative or subjective – when due to the special conditions or qualifications of the debtor, it
cannot be performed. If temporary, it does not nullify the contract (4 TOLENTINO, supra at
526).

Partial Impossibility
If the thing is partly possible and partly impossible, the effect will depend upon the divisibility of the
thing. If it is indivisible, by its nature or by the intention of the parties, there is no contract; the consent
would be wanting. But if the things is divisible, then the contract is valid to the extent possible (4
TOLENTINO, supra at 527).

Difficulty of Performance
A showing of mere inconvenience, unexpected impediments, or increased expenses is not enough to
relieve a party of the obligation (JURADO, Obligations and Contracts, supra at 294; De Castro v. Longa,
G.R. No. L-2152-53, July 31, 1951).
The difficulty of performance should be such that the party seeking to be released from a contractual
obligation would be placed at a disadvantage by the unforeseen event. Mere convenience, unexpected
impediments, increased expenses or even pecuniary inability to fulfill an engagement, will not relieve
the obligor from an undertaking that it has knowingly and freely contracted (Sps. Poon v. Prime Savings
Bank, G.R. No. 183794, June 13, 2016).

13 |CONTRACTS
Quantity should be Determinate as to its Kind or Species
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
(CIVIL CODE, Art. 1349).
The object of a contract, in order to be considered as “certain”, need not specify such object with
absolute certainty as long as it is determinable (Domingo Realty c. CA, G.R. No. 126326, January 26,
2007).

CAUSE OF CONTRACTS
Cause
It is the immediate, direct or most proximate reason which explains and justifies the creation of an
obligation through the will of the contracting parties (JURADO, Obligations and Contracts, supra at 464).
Essential Requisites of Cause: (ELT)
1. Existing at the time of the celebration of the contract
2. Licit or lawful; and
3. True (JURADO, Obligations and Contracts, supra at 472).
Note: A promise made by one party, if made in accordance with the forms required by law, may be
a good cause or consideration for a promise made by the other party (4 TOLENTINO, supra at 532).

Cause v. Object
Cause Object
As to Remuneratory Contracts
The service or benefit which is remunerated. The thing which is given in remuneration.
As to Gratuitous Contracts
The liberality of the donor or benefactor. The thing which is given or donated.
As to the Thing
Prestation or promise of a thing or service by the The thing or service itself.
other.
As to Contracting Parties
Different with respect of each party. May be the same for both the parties.
(4 TOLENTINO, supra at 464-465).

Cause v. Motive
Cause Motive
As to proximity
Direct and most proximate / essential reason of a Indirect / particular or remote reason.
contract.
As to characteristics of reason
Objective or juridical reason for the existence of Psychological, individual or purely personal
a contract. reason.
As to contracting parties
Always the same for each contracting party. Differs for each contracting party.
As to effect in the validity of contract
Its legally affects the existence or validity of the Its legality does not affect the existence or
contract. validity of contract.
(4 TOLENTINO, supra at 466).
Note: Motive becomes causa when it predetermines the purpose of the contract (4 TOLENTINO, supra
at 466).

Cause in Different Contracts

Cause
Onerous For each contracting party, the prestation or promise of a thing or service by the
Contracts other;

Note: A promise made by one party may be a sufficient cause for a promise made
by another party. It is not, therefore, necessary that the cause or consideration
should pass from one party to the other at the time of the execution of the
contract (JURADO, Obligations and Contracts, supra at 468).

14 |CONTRACTS
 Remuneratory The service or benefit which is remunerated.
Contracts
Note: Remuneratory contract is one in which one of the contracting parties
remunerates or compensates the service or benefit rendered of given by the other
party, although such service or benefit does not constitute a demandable debt
(ld.at 471).
Gratuitous Mere liberality of the benefactor (ld.at 471).
Contracts
Accessory Same as that of the principal contract (ld.at 469).
Contracts
(CIVIL CODE, Arts. 1350 & 2052).

Moral Obligation as Cause

Where the moral obligation arises wholly from ethical considerations, unconnected with any civil
obligations, it cannot constitute a sufficient cause or consideration to support an onerous contract
(JURADO, Obligations and Contracts, supra at 469; see Fisher v. Robb, G.R. No. 46274, November 2,
1939).
Where such moral obligation is based upon a previous civil obligation which has already been barred by
the statute of limitations at the time when the contract is entered into, it constitutes a sufficient cause
or consideration to support a contract, it is then already a natural obligation (ld.at 469-470).

Effects of Lack, Illegality, Falsity or Inadequacy of Cause

1. Total lack of absence of cause – the contract confers no right and produces no legal effect
(CIVIL CODE, Art. 1352).
Note: Even if the cause is not stated in the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary (CIVIL CODE, Art. 1354)
2. Illegal/Unlawful cause – the contract is null and void (CIVIL CODE, Art. 1409 (1)).
3. False cause – the contract is void unless it should be proved that it be founded upon another
cause which is true and lawful (CIVIL CODE, Art. 1353).
4. Inadequacy of cause/lesion – the contract is CIVIL CODE, Art. 1409 valid. However, under
certain conditions, it is rescisscible under Article 1381 (1).

Even if the consideration for the contract is only P1.00, it will not render the contract void,
because it is the absence of consideration, not mere inadequacy which will result in a void
contract (Carantes v. CA, G.R. No. L-33360, April 25, 1977).

Presumption of Lawful Cause

When the cause is not stated, it shall be presumed to be in existence and lawful unless proof to the
contrary is shown (CIVIL CODE, Art. 1354).

Note: The presumption that a contract has sufficient consideration cannot be overthrown by a mere
assertion that it has no consideration. To overcome the presumption, the alleged lack of consideration
must be shown by preponderance of evidence. The burden to prove lack of consideration rests upon
whoever alleges it (Mendoza v. Sps. Palugod, G.R. No. 220517, June 20, 2018).

15 |CONTRACTS