CONTRACTS

GENERAL PROVISIONS ON CONTRACTS

Learning Objectives:

After studying this lesson, you should:

1. know the definition of contract
2. learn the different classifications of contracts;
3. know the elements of contracts; and
4. that contracts take effect only between parties and its exceptions.
The classifications of contracts summarizes those types of contracts that may be freely
agreed upon as long as they are not contrary to law, morals, good customs, public order or
public policy.

ART. 1305. A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render service. (1254a)
CONTRACTS, DEFINED

The above article defines the term Contract. In a contract, one or

more persons bind themselves with respect to another or
reciprocally, to the fulfillment of a presentation to give, to do or
not to do.
ELEMENTS OF CONTRACT:

1. Essential elements those elements without which there

can be no valid contract. This element are consent, object
or subject matter and cause or consideration

2. Natural elements those elements which are found in a

contract by its nature and presumed by law to exist, such as
Warranty of hidden defects or eviction in contract of sale.

3. Accidental elements - those which exist by virtue of an

agreement for the purpose of expanding, limiting, or
modifying a contract. Such accidental elements are
condition, clauses, terms, modes of payment, or penalties.
STAGES OF A CONTRACT:

1. Preparatory or conception process of formation

such as bargaining, negotiation to arrive at a define
contract.

2. Perfection or birth there is now a meeting of

minds to arrive at a definite agreement as to the
subject matter, cause or consideration, terms and
conditions of contract.

3. Consumption or death which is the fulfillment or

performance of the terms and conditions agreed upon
in the contract may be said to have been fully
accomplished or executed.
CHARACTERISTICS OF CONTRACTS:

1. Freedom to contract they may establish terms

and conditions as they may deem convenient.

2. Relativity it is binding only upon the parties

and their successors.

3. Obligatory force it constitutes the law as

between the parties.

4. Mutuality its validity and performance cannot

be left to the wil of only one of the parties.
CLASSIFICATION OF A CONTRACT: (FROM)
1. As to perfection
a. Consensual one which is perfected by mere consent (Art. 1315
b. Real Contract perfected by mere consent and by the delivery of the object or
subject matter. Ex. Deposit, pledge, or commodatum.

2. As to dependence to other contract.

a. Principal one which can stand alone. Ex. A contract of sale, lease.
b. Accessory those which are dependent upon another contract. Ex. Contract of
mortgage, pledge of guaranty.
c. Preparatory those which is created in order that a future transaction or
contract may be entered into by te parties. Ex. Contract of partnership or agency.
 3. According to name or designation
a. Nominate one which has particular name or designation such
as sale, agency, etc.
b. Innominate those without particular name.

4. According to the nature of obligation

a. Unilateral where only one ha an obligation to perform. Ex.
Contract of donation, commodation.
b. Bilateral where both parties have reciprocal obligation to
perform. Ex. Sale.

5. According to risk involved

a. Commutative - where there is an exchange of values, such as
lease.
b. Aleatory - one which the fulfillment of the obligation depends
upon chance. Ex. Contract of insurance.

6. According to cause
a. Onerous one which imposes valuable consideration such as
sale, mortgage.
b. Gratuitous one which one of the parties does not receive any
valuable consideration, such as commodatum.
 7. According to form
a. Oral by word of mouth of the parties
b. Written the agreement which is reduced in
writing which may be public or private or private
document

ART. 1306. The contracting parties may

establish such stipulations, clauses, terms and
conditions as they may deem convenient,
provided they are not contrary to law, morals,
good customs, public order, or public policy.
(1255a)
CONTRACT BINDS BY BOTH PARTIES

ART. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. (1256a)
 Contracts entered by and between the parties
mush bind both parties in order that it can be enforced
against each other. This is also known as mutuality of
contract. Hence, its validity or compliance cannot be
left to the will of one of them. This principle is based on
the essential equality of the parties. It is elementary
rule that no party can renounce or violate the law of the
contract without the consent of the other. (11 Manresa
380)

Example, Sara and Laura entered into a contract

to sell whereby Sara binds herself to sell her only parcel
of land to Laura if Sara decides to leave for States. The
contract is void because the fulfillment of the condition
depends on the will of Sara.
 ART. 1309. The determination of the performance may be
left to a third person, whose decision shall not be binding until it
has been made known to both contracting parties.

ART. 1310. The determination shall not be obligatory if it is

evidently inequitable. In such case, the courts shall decide what is
equitable under the circumstances.
DETERMINATION OF PERFORMANCE BY THIRD PERSON

As a rule, compliance with a contract cannot be left to the

will of one of the contracting parties. However, the determination
of its performance may be left to a third person after it has been
made known to both contracting parties. Provided, further, the
parties are not bound by the determination if it is evidently
inequitable or unjust when the third person acted in bad faith or
by mistake, the courts shall decide what is equitable under the
circumstances.

Example, Sara sold her parcel of land to Laura. It was

agreed that Maya, a real estate appraiser would be the one to
determine the reasonable price of the land. Maya, then, fixed the
price after considering the factors affecting the value of the land,
and informing both contracting party that the decision is just and
suitable. If the decision made by Maya is manifestly inequitable,
the court may be called upon to decide what is equitable.
 ART. 1311. Contracts take effect only between
the parties, their assigns and heirs, except in case
where the rights and obligations arising from the
contract are not transmissible by their nature, or
by stipulation, or by provision of law. The heir is
not liable beyond the value of the property he
perceived from the decedent.

If a contact should contain some stipulation in

favor of third person, he may demand its
fulfillment provided he communicated his
acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a
third person. (1257a)
CASES WHERE THIRD PERSON MAY BE AFFECTED BY A
CONTRACT
1. In determining the performance of both parties (Art. 1309).

2. In contracts containing a stipulation in favor of a third

person (Art. 1311).

3. In contracts creating real rights (Art. 1312).

4. In contracts entered into to defraud creditor (Art. 1313).

5. In contracts which have been violated at the inducement

of the third person (Art. 314).

Example, Sara mortgaged her parcel of land in favor of Laura

as collateral for her debt. The mortgage is duly registered. Later
on, Sara sold the same land to Mark. In this case, Mark bought the
land subject to the mortgage constituted thereon. Mark, although
a stranger in the mortgage, being a real right follows the property
on the right of Laura to the mortgage.
FORMS OF CONTRACTS

Art. 1356. Contracts shall be obligatory, in whatever form they may

have been entered into, provided all the essential requisites for their validity are
present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases, the
right of the parties stated in the following article cannot be exercised. (1278a)
MEANING OF FORM OF CONTRACTS

Forms of a contract refer to the

manner in which a contract is
executed or manifested
RULES REGARDING FORM OF CONTRACTS

General Rule Contracts are binding and therefore,

enforceable reciprocally by the contracting parties, whatever may be
the form in which the contact has been entered into to provided all
the three essential requisites (consent, object, cause) for their
validity are present.
 Art. 1359. When, there having been a
REFORMATION OF INSTRUMENTS
meeting of the minds of the parties to a contract,
their true intention is not expressed in the
instrument purporting to embody the agreement,
by reason of mistake, fraud, inequitable conduct
or accident, one of the parties may ask for the
reformation of the instrument to the end that
such true intention may be expressed.

If mistake, fraud, inequitable conduct, or

accident has prevented a meeting of the minds of
the parties, the proper remedy is not reformation
of the instrument but annulment of the contract.
MEANING OF REFORMATION

Reformation is that remedy by means of which a

written instrument is amended or rectified so as to express
or conform to the real agreement or intention of the parties
when by reason of mistake, fraud, inequitable conduct, or
accident the instrument fails to express such an agreement
or intention.
REQUISITES OF REFORMATION

1. There is a meeting of the minds of the parties to the contract;

2. The written instrument does not express the true agreement or

intention of the parties;

3. The failure to express the true intention is due to mistake,

fraud, inequitable conduct or accident;
 4. The facts upon which relief by way of
reformation of the instrument is sought are put in
issue by the pleadings; and

5. There is clear and convincing evidence of the

mistake, fraud, inequitable conduct or accident.

Example, Arvin sold his land to Ryan. It was

greed that the sale will include all the
improvements. However, the contract was signed
by the parties, states that the land is being sold
excluding the improvements thereon. In this
case, the remedy is reformation, because there
has been a meeting of minds.
CASES WHEN REFORMATION NOT ALLOWED
1. Simple donation inter vivos where no condition
is imposed Donation is an act of liberality
whereby a person disposes gratuitously of a thing
or right in favor of another, who accepts it. (Art.
725). Donation is strictly personal andfree act so
that if the intend of the donor that the donation
will take effect during his lifetime, it is a donation
inter vivos, while the opposite of inter vivos is
donation mortis causa which takes effect after the
donors death.

2. Wills A will is an act whereby a person is

permitted with a formalities prescribed by law to
control to a certain degree the disposition of his
estate, to take effect after his death.
 3. When the real agreement is void If the real agreement is
void, thre is nothing to reform.

4. When one party ahs brought an action to enforce the

instrument (Art. 1367) When a party brings an action to enforce
the contract, he admits its validity and that it expresses the true
intention of the parties. The bringing of the action is thus
inconsistent with reformation
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms
of a contract
are clear and leave no doubt upon the
intention of the contracting parties, the
literal meaning of its stipulations shall
control.

If the words appear to be contrary to

the evident intention of the parties, the
latter shall prevail over the former. (1281)
MEANING OF INTERPRETATION OF A CONTRACT

Interpretation of a contract is the determination of the

meaning of the terms of word used by the parties in their contact.
If the terms of a contract are clear and unequivocal, the
parties are bound thereby according to the literal sense of their
stipulations.
Example, a contract was executed by A and B, the contract
recites that is a sale of land belongs to A for P500. The terms of
the contract are clear and it does not appear that the intention of
the parties is contrary to the literal meaning of said terms
CAUSE OF CONTRACTS

Art. 1350. In onerous contracts the cause is

understood to be, 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 beneficence, the mere liberality of the
benefactor. (1274)
MEANING OF CAUSE

Cause is the essential or more proximate purpose which the

contracting parties have in view at the time of entering into a
contract. (8Manresa697)

It is the Civil Code term for consideration in Anglo

American or Common Law.
CLASSIFICATION OF CONTRACTS ACCORDING TO CAUSE

1. ONEROUS the cause of which for each contracting parties is

the pre-station or promise of a thing or service of the other. Ex.
Sale, lease of things.
2. REMUNERATORY - the cause is the service or benefit which is
remunerated. Ex. A rendered service as the lawyer-counsel of B
who agreed to pay P10, 000 for said services.
3. GRATUTIOUS the cause which is the mere liberality of the
benefactor or giver. Ex. X donated a parcel of land to Y. The cause
is the liberality of X, the done or benefactor.
 Art. 1352. Contracts without cause, or with unlawful
cause, produce no effect whatever. The cause is unlawful if it
is contrary to law, morals, good customs, public order or
public policy. (1275a)

Art. 1353. The statement of a false cause in contracts

shall render them void, if it should not be proved that they
were founded upon another cause which is true and lawful.
(1276)
REQUISITES OF CAUSE

1. it must exist at the time the contract is entered into. (Art. 1352)

2. it must be lawful; (Ibid) and

3. it must be true or real. (Art 1353)

EFFECT OF ABSENCE OF CAUSE

A contract without cause or with an

unlawful cause, according to this article,
produces no effect whatever. Like, for
example, an absolutely simulated contract
produces no effect because there is no
cause at all.
EFFECT OF INADEQUACY OF CAUSE

Inadequacy of cause does not

invalidate a contact. (Art. 1355).
Illegality of cause implies that there is
a cause but the same is unlawful or
illegal. By falsity of Cause is meant
that the contract states a valid
consideration but such statement is
not true
 PART IV

DEFECTIVE CONTRACTS

There are four kinds of defective contracts:

1. Rescissible contracts (Chapter 6);

2. Voidable contracts (Chapter 7);

3. Unenforceable Contracts (Chapter 8); and

4. Void or inexistent contracts (Chapter 9)

RESCISSIBLE CONTRACTS

Contracts are valid because all the essential

requisites of a contract exist but by reason of injury or
damage to one of the parties or to third persons, such as
creditors, the contract may be rescinded.

Art. 1380. Contracts validly agreed upon may be

rescinded in the cases established by law. (1290)
MEANING OF RESCISSION
Rescission is a remedy granted
by law to the contracting parties and
sometimes even to third person in
order to secure reparation of damages
caused them by a valid contract, by
means of the restoration of things to
their condition in which they were
prior to the celebration of said
contract. (8Manresa 748)
 REQUISITES OF RESCISSION

1. The contract must be validly agreed upon;

2. There must be lesion on pecuniary prejudice to one of the parties or to a third

person;

3. The rescission must be based upon a case especially provided by law;

4. There must be no other legal remedy to obtain reparation for the damage;
 5. The party asking for rescission must be able to return
what he is obliged to restore by reason of the contract.

6. The object of the contract must not legally be in the

possession of third person who did not act in bad faith;

7. The period for filing the action for rescission must not
have prescribed
 Art. 1381. The following contracts are rescissible:
`
(1) Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object
thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be
subject to rescission. (1291a)
 VOIDABLE CONTRACTS

Art. 1390. The following contracts are voidable or annullable, even though
there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a
contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud. These contracts are binding, unless they are annulled by
a proper action in court. They are susceptible of ratification.
MEANING OF VOIDABLE CONTRACTS

Voidable or annullable contracts are those which

possess all the essential requisites of valid contract but one
of the parties is incapable of giving consent, or consent is
vitiate by mistake, violence, intimidation, undue influence of
fraud.
MEANING OF ANNULMENT

Annulment is a remedy granted by

law, for reason of public interest, for
the declaration of the inefficacy of a
contract based on defect or vice in
the consent of one of the contracting
parties in order to restore them to
their original position in which there
were before contract was executed.
 1. CHARACTERISTICS
The defect OFconsists
in the contract VOIDABLE CONTRACTS
in the vitiation of consent of one of
the contracting parties;

2. The contract is binding until annulled by a competent court;

3. The contract is susceptible of convalidation by ratification or prescription;

4. The defect or voidable character of the contract cannot be invoked by third

persons.
 Art. 1391. The action for annulment shall be brought within four
years. This period shall begin:

In cases of intimidation, violence or undue influence, from the

time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the

same.

And when the action refers to contracts entered into by minors or

other incapacitated persons, from the time the guardianship ceases.
(1301a)
PERIOD FOR FILING ACTION FOR ANNULMENT

The period within which the action for annulment shall be

brought within four(4) years from:

1. The time the intimidation, violence or undue influence

ceases;
2. The time of the discovery of mistake or fraud; and
3. The time guardianship ceases, in cases of contracts
entered into by incapacipated persons.
UNENFORCEABLE
Art. CONTRACTS
1403. The following contracts are
unenforceable, unless they are ratified:

(1) Those entered into in the name of another

person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of

Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note
or memorandum, thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
 (a) An agreement that by its terms is not to be performed
within a year from the making thereof;

(b) A special promise to answer for the debt, default, or

miscarriage of another;

(c) An agreement made in consideration of marriage, other

than a mutual promise to marry;
 (d) An agreement for the sale of goods,
chattels or things in action, at a price not less than
five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, of such things in action
or pay at the time some part of the purchase money;
but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers
and person on whose account the sale is made, it is
a sufficient memorandum;
(e) An agreement of the leasing for a longer
period than one year, or for the sale of real property
or of an interest therein;
(f) A representation as to the credit of a
third person.

(3) Those where both parties are incapable of

giving consent to a contract.
MEANING OF UNENFORCEABLE CONTRACTS

Unenforceable contracts are those that cannot be enforced

in court or sued upon by reason of defects provide by law until unless
they are ratified according to law.

They are contracts either entered into without or in excess

of authority or do not comply with the statue of frauds or both of the
contracting parties do not possess the required legal capacity.
CLASSES OF UNENFORCEABLE CONTRACTS

1. Those entered into the same of another person by

one without authority or in excess of his authority;

2. Those which do not comply with the Statue of

Frauds; and

3. Those where both parties are incapable of giving

consent
 Art. 1404. Unauthorized contracts are
governed by Article 1317 and the
principles of agency in Title X of this
Book.

Art. 1405. Contracts infringing the Statute of Frauds,

referred to in No. 2 of Article 1403, are ratified by the
failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefit under
them.
VOID Art.
OR INEXISTENT CONTRACTS
1409. The following contracts are inexistent and
void from the beginning:

1) Those whose cause, object or purpose is

contrary to law, morals, good customs, public order or
public policy;

2) Those which are absolutely simulated or

fictitious;

3) Those whose cause or object did not exist at

the time of the transaction;

4) Those whose object is outside the commerce

of men;

5) Those which contemplate an impossible

service;
 6) Those where the intention of the parties
relative to the principal object of the contract
cannot be ascertained;

7) Those expressly prohibited or declared

void by law.

These contracts cannot be ratified. Neither

can the right to set up the defense of illegality be
waived.

Art. 1410. The action or defense for the

declaration of the inexistence of a contract does
not prescribe.
MEANING OF VOID OR INEXISTENT CONTRACTS

1. it cannot be ratified. (Art 1409)

2. the right to set up the defense of illegality
cannot be waived.
3. the action or defense for the declaration of its
inexistence does not prescribed. (art. 1410)
4. the defense of illegality is not available to third
persons whose interests are not directly affected; and
5. it cannot give rise to a valid contract. (Art.
1422)
INSTANCES OF VOID OR INEXISTENCE CONTRACT

There is no need for a detail discussion of these

different kinds of void inexistent contracts considering that
they have been discussed in previous chapters of this book.

Void of inexistent contracts does not prescribe.

Mere lapse of time cannot give effect to contracts which are
null and void.
 Art. 1411. When the nullity proceeds from the illegality
of the cause or object of the contract, and the act constitutes a
criminal offense, both parties being in pari delicto, they shall
have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative
to the disposal of effects or instruments of a crime shall be
applicable to the things or the price of the contract.

This rule shall be applicable when only one of the

parties is guilty; but the innocent one may claim what he has
given, and shall not be bound to comply with his promise.
(1305)
MEANING OF PARI DELICTO

Pari Delicto means both parties are equally at fault or

are equally guilty. The principle of pari delicto, means that
when the defect of avoid contracts consists in the illegality of
the cause or object f the contract and both parties are at
fault or in a pari delicto, the law refuse them every remedy,
or the parties have no action against each other.
ILLEGAL CONTRACT WITH CRIMINAL OFFENSE

1. When both parties are in pari delicto Rules

a. the parties shall have no action against each
other;
b. both shall be prosecuted; and
c. the things of the price of the contract, shall be
confiscated in favor of the government.

2. Where only one party is guilty.

The innocent one or less guilty may claim what he has
given and shall not be bound to comply with his
promise
 Art. 1412. If the act in which the
unlawful or forbidden cause consists does not
constitute a criminal offense, the following
rules shall be observed:

(1) When the fault is on the part of

both contracting parties, neither may recover
what he has given by virtue of the contract,
or demand the performance of the others
undertaking;

(2) When only one of the contracting

parties is at fault, he cannot recover what he
has given by reason of the contract, or ask
for the fulfillment of what has been promised
him. The other, who is not at fault, may
demand the return of what he has given
EFFECT OF ILLEGAL TERMS IN A CONTRACT

Art. 1420. In case of a divisible contract, if the illegal terms

can be separated from the legal ones, the latter may be enforced.

In case a contract containing an illegal orlegal terms, the

law allows the legal terms to be enforced if it can be enforced if it can
be separated from the illegal ones.
PERSONS ENTITLED TO RAISE DEFENSE OF ILLEGALITY
OR NULLITY

As general rule, contracts bind

only the contracting parties, their heirs
or assigns. Corollary to this rule, the
illegality of a contract maybe set up as
a defense only by contracting parties
or by parties whose interest are affect
by the contracts as a defense