Contract – is the agreement of two or more persons (or parties) for the purpose of creating, modifying,

extinguishing a juridical relation between them.

Stages of a Contract

a) Preparation or conception-preliminary stage of negotiation and bargaining until an agreement is reached.

b) Perfection or birth– the moment when minds of the parties meet or agree on all the terms of the contract.
c) Consummation or death-when the contract is performed and its terms fulfilled.

The essential elements of a contract (without them a contract cannot exist):

a) Consent, which is manifested by the meeting of the minds 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;
b) Object certain, which is the subject matter of the contract; and
c) Cause of the obligation which is established.

A contract of adhesion is defined as one in which almost all the provisions have been drafted only by one party,
usually a corporation or insurance company. The only participation of the other party is the signing of his signature
or his adhesion.50 Some writers believe that such contract suppresses the will of one of the contracting parties, hence
not a true contract. However, this is not always juridically true. Normally, the party who adheres to it is in reality
free to reject entirely; if he adheres, then he gives his consent.

Consent

It is manifested by the meeting of the offer (which must be definite) and acceptance (which must be
absolute) upon the thing and the cause which constitute the contract.
Acceptance through telegram (or e-mail) shall bind the offeror from the time it came to his knowledge.
An Option to Purchase may be withdrawn anytime if the option is without any consideration (Reservation
Fees) separate from the purchase price.
Invitations to Bid. Advertisements for bidders are simply invitations to make proposals and the advertiser is
not bound to accept the highest or lowest bidder unless the contrary appears.
The following are the parties who are incapable of giving consent:

1) Minors
2) Insane or demented persons;
3) Deaf-mutes who do not know how to read and write
4) Persons under the influence of drugs or alcohol

The following are the instances which vitiate consent:

1) Mistake -- unconscious ignorance or forgetfulness of the existence or non- existence of a fact, past or
present, material to the contract. Example: Mistake of object, mistake of identity.
2) Violence -- There is violence when, in order to wrest consent, serious and irresistible force is employed.
3) Intimidation -- There is intimidation when one of the contracting parties is compelled by a reasonable and
well-grounded fear of an imminent or grave evil upon his person or property or upon the person or property
upon his spouse, descendants, or descendants, to give his consent.
4) Undue Influence -- There is 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.
5) Fraud (Causal fraud) -- Insidious words or machinations are employed to induce the party to enter into a
contract, without which, he would not have entered into. Usual exaggerations of trade when the other party
had the opportunity to know the facts are not fraudulent (LET THE BUYER BEWARE). Mere expression
of opinion does not signify fraud unless made by an expert and the other party relied on the former‘s
special knowledge.
Object

It is the subject matter of the contract.

The requisites of a valid object are as follows:

1) Lawful
2) Within the commerce of man
3) Possible
4) Determinate as to its kind
5) Must not be contrary to law, morals, good customs, public order, public policy.

Cause

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

The following requisites of a valid cause:

1) It must be true
2) It must exist
3) It must be lawful

Case: Mr. Danilo Santos bought 10 boxes of Fundador Brandy at a price of P10,000 pesos per box from his
supplier, Mr. John Smith, proprietor of Exquisite Wines & Brandy, Inc. Determine the requisites of such contract of
sale.

Legal Opinion: The consent refers to the meeting of minds as when Mr. John Smith (the seller) offered Mr. Danilo
Santos to sell the 10 boxes of Fundador Brandy at a price of P10,000 pesos per box and when Mr. Danilo Santos
agreed to buy the said 10 boxes of Fundador Brandy at the price of P10,000 pesos per box. The object or subject
matter refers to the 10 boxes of Fundador Brandy at the price of P10,000 pesos per box. As to the seller, the cause is
the price of P10,000 pesos per box. As to the buyer, the cause is the 10 boxes of Fundador Brandy.

Classification of Contracts

a) According to perfection
1) Consensual (perfected by mere consent; example – sale)
2) Real (perfected by delivery; example – depositum, pledge commodatum)
Depositum -- a moveable thing is given by one man to another to keep until it is
demanded back, and without any reward for the trouble of keeping it. The party who
makes the depositum is called deponens or depositor, and he who receives the thing is
called depositarius.
Commodatum -- a moveable thing is given by one man to another to keep until it is
demanded back, and without any reward for the trouble of keeping it. The party who
makes the depositum is called deponens or depositor, and he who receives the thing is
called depositarius.
3) Formal or solemn (those where special formalities are essential before the contract may be
perfected)
b) According to cause or equivalence of the value of prestations:
1) Onerous – where there is an interchange of equivalent valuable considerations
2) Gratuitous or lucrative – this is FREE, thus one party receives no equivalent prestation except
a feeling that one has been generous or liberal
3) Remunerative – (one where one prestation is given for a benefit or service that had been
rendered previously)
 c) According to importance or dependence of one upon another:
1) Principal (here the contract may stand alone by itself: examples; sale, lease)
2) Accessory (this depends for its existence upon another contract; example; mortgage)
3) Preparatory (here, parties do not consider the contract as an end by itself, but as a means
thru which future transactions or contracts may be made; examples: agency, partnership)
d) According to time of performance or fulfillment:
1) Executed – (one completed at the time the contract is entered into, that is, the obligations are
complied with at this time; example: a sale of property which has already been delivered, and
which has already been delivered, and which has already been paid for)
2) Executory – (one where the prestations are to be complied with at some future time; example:
a perfected sale, where the property has not yet been delivered, and where the price has not
yet been given)
e)

Form of Contracts
Contracts may be in any form because they are consensual in nature. The following are the exceptions:
1) Real Contracts are perfected not by mere consent but by delivery. Example: pledge,
antichresis
2) Donation of personal property exceeds P5,000 – it must be in writing, otherwise, it is void.
3) Donation of real property – it must appear in a public instrument.
4) Chattel mortgage where registration in the chattel mortgage registry is required.
5) Contracts which are required to be in writing or in a memorandum to be enforceable.
6) In case of sale of piece of land is made through an agent, the agent‘s authority must be in writing,
otherwise the sale is void.
Case: Marlen Dauden, a movie star filed a complaint against X Co. to recover P14,700 representing the balance of
her compensation as leading actress in two motion pictures produced by the company. Upon motion of defendant,
the lower court dismissed the complaint because ―the claim of plaintiff was not evidenced by any written
document, either public or private‖ in violation of Article 1358 of the Civil Code of the Philippines. Is this order of
dismissal in accordance with the law?

Legal Opinion: The lower Court‘s dismissal is not in accordance with the law. In the matter of formalities,
contracts are valid and binding from their perfection regardless of form whether they be oral or written. This is plain
from Articles 1315 and 135 of the Civil Code of the Philippines. Consequently, as long as the three elements of a
contract exist (consent, object, cause), the contract is generally valid and binding.

Reformation of Instruments:
This remedy is applicable when there is meeting of minds as to the object and cause, but the true
intention is not expressed in the instrument.
The requisites are as follows:
1) There is meeting of minds of parties in the contract.
2) The true intention of the parties is not expressed in the instrument
3) The true intention is not expressed by reason of mistake, fraud or

inequitable conduct.

Interpretation of contracts
The courts of justice are empowered to interpret contracts in case of litigation.

The following are the rules to be observed in the interpretation of contracts.

The literal meaning shall prevail in the absence of any obscurity therein
In case of doubt, the intention of the parties shall prevail.
In case of doubt, a contract of adhesion shall be construed most strongly against the person who caused the
 ambiguity (as in the one who made it).
In case of doubt, contracts of labor shall be construed liberally in favor of the laborer.

Kinds of Defective Contracts

a) Rescissible

Rescissible Contracts are defective by reason of damage or lesion. In

this kind of defective contract, mutual return is incumbent upon actual
participants. Rescision is instituted only when the party suffering
damage has no other legal means to obtain reparation for the same. The
action must be commenced within 4 years.

Example:

1) Those entered into by guardians whenever their wards represent lesion by more than ¼ of the
value of the thing.
2) Those agreed upon in representation of absentees, if the latter suffer lesion stated in the
preceding number.
3) Those undertaken in fraud of creditors.

b) Voidable Contracts

These contracts are v alid but subject to annulment by reason of vitiated consent or incapacity of
one of the contracting parties. The action to file annulment shall commence within 4 years. The
action for annulment shall involve restitution with their fruits, and the price with its interest.

c) Unenforceable Contracts

These contracts are valid but defective because it cannot be enforced in courts.
Examples of unenforceable contracts are as follows:.
1) Those entered into in the name of another who has been given no authority or legal
representation or who has acted beyond his powers.
2) Those where both parties are incapable of giving consent to a contract.
3) Those that do not comply under the Statute of Frauds (The items covered must appear in
writing otherwise it cannot be enforced in courts.)
An agreement that by its terms is not to be performed within one (1) year;
A special promise to answer for the debt, default or miscarriage of another
An agreement for the sale of goods/chattels at a price not less than P500
Sale of real property
An agreement for the leasing for a longer period than one year.
Those covered under the Statute of Frauds refer only to executory contracts, and does not refer to
executed contracts already.

d) Void Contracts

These are contracts are considered void because the object and cause are illegal, contrary to law,
inexistent or considered simulated. These are contracts which are not subject to ratification. The
right to bring an action to declare a contract void does not prescribe, the right to raise the defense of
illegality cannot be waived and a void contract has no force or effect whatsoever.
 Case: On January 4, 1979, Ronald Coloma sold his hotel in favor of Spouses Leo and Vanessa Uy.
A deed of sale was executed but Spouses Uy named Johnny Uy (their unborn son) as the buyer in
the contract of sale. Accordingly, Johnny Uy was named as the buyer in the deed of sale by virtue
of a Chinese custom naming children as the heir of their parents‘ properties. It was only on March
1, 1980 that Johnny Uy was born. Is the contract of sale valid?

Legal Opinion: It was held that the contract of sale is void for being simulated and fictitious.
Johnny Uy was not even conceived yet at the time of the alleged sale, hence had no legal
personality to be named as a buyer in the said deed of sale. Neither could he have given his consent
thereto. The contract of sale is perfected at the moment there is a meeting of the minds upon the
thing which is the object of the contract and upon the price. Consent is manifested by the meeting
of the offer and the acceptance upon the thing and the cause which are to constitute the contract.
Unemancipated minors, insane or demented persons, and deaf-mutes who do not know how to read
and write cannot validly give consent to contracts. In the instant case, Johnny Uy could not have
validly given his consent to the contract of sale, as he was not even conceived yet at the time of its
alleged perfection. Therefore, for lack of consent of one of the contracting parties, the deed of sale
is null and void.

In pari delicto rule

This signifies that both parties are at fault. If both parties are at fault, they cannot sue
each other nor demand performance from each other. The courts will leave them as they are and no
award shall be granted.

Examples
1. A contract between A and B was annulled by the court. But the object of the contract, a carabao, had died
while in B’s possession. What should B return? Why? None, because it is annulled
2. While his father was still alive A sold to B the property he (A) expected to receive from his father. Is the
contract valid? Why? No, because his father is still alive and he doesn’t own the property yet.
3. D lost in gambling, and as payment, executed a promissory note in favor of the winner C. C then assigned
the note to A. May A successfully recovered from D? No, because the promissory note is void. Just as the
winner cannot recover, so also cannot the assignee. (NOTE: If the loser had borrowed money from a
friend thru a promissory note, said money is to be used to pay the winner, the promissory note is valid for
it was not the result of gambling between the loser and the friend. Thus, while a winner in gambling
cannot recover, a friend who lend the money can recover.)
4. A agreed to lend B his (A’s) car on Sept. 8. If on Sept. 8, A refuses to deliver the car, may B sue him for
damages? Yes, because of consensual contract of “to make a commodatum.” If A had delivered the car,
and B thru negligence damages the car, A can sue him because the real contract of “commodatum.”
5. A offered to sell B a particular car for P350,000. Before B could consent, A withdrew the offer. Was A
allowed to do so? Yes, because there was no meeting of the minds yet, hence no contract had been
perfected.
6. A went to a store and offered to buy a certain watch for P5000. The seller said he was willing to give it for
P5500. Whereupon, A turned to go away because he did not want to pay that price. The seller called him
back and said he was willing to sell the watch for P5000. Is A allowed not to buy said watch? Yes, A’s offer
was P5000. This was not accepted. Or granting that the proposal of P5500 was a sort of acceptance, the
statement that the buyer could have it for P5500 was not absolute. It was a qualified acceptance and
hence under the law, constitutes a counter-offer. Hence when the seller said P5500, he was not really
accepting the offer to buy. Now, when he was going to give it for P5000, he was not really accepting the
 offer of A, but was making another offer, a counter offer since the offer made by A previously had been
rejected by him (the seller).
7. While still in the process of negotiation, the offeree, legally suspended the payment of the check it had
issued for failure of the offerer to sign certain documents. Was there a contract here. No, because the
legal suspension of the check payment clearly indicates that the transaction was merely in the stage of
negotiation, otherwise the offeree would not have allowed to legally withdraw from the payment.
8. An agent persuaded his principal to sell certain properties to himself at a low price. The agent did not
reveal that the government was interested in acquiring said properties at much higher prices. Is the said
sale to the agent voidable? Yes, because of fraudulent concealment.
9. X desiring to buy certain property, hired an expert to ascertain its true value. But the expert’s opinion
turned out to be wrong and X was therefore misled. May X ask for the annulment of the contract? No,
because his own expert (and therefore his employee) committed the error.
10. A and B entered into a contract with X. A’s consent was obtained only because B had deceived or
defrauded him. May A ask for annulment of the contract with X? No, because X was not a party to the
fraud.
11. A bought a certain article from B. The article was needed for A’s radio. B honestly but mistakenly assured
A that the article was the proper object. May the contract be annulled? Yes, not on the ground of fraud,
for the misrepresentation was honest, but on the ground of substantial error.