obligations and contracts

1E 2009-2010 Obligations and Contracts Reviewer Contracts || General Provisions

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 some service. From the book of Jurado, contract was derived from the word “cum traho” which means an agreement or convention. However, do not be misled that contract is synonymous with convention because the latter is broad enough to include any kind of agreement which may create, extinguish or modify patrimonial and even family relations while contract is limited to only those which create patrimonial obligations. Class Notes: The definition of contract provided in the above article seems to be incomplete. This is so because:

1. It only covers consensual contracts 2. It does not deal with the concept of formal

contracts 3. It only refers to unilateral contracts 4. It refers to contracts that only create obligations

and not those that extinguish Sanchez Roman, on the other hand, defined contract as “a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, reciprocally, to the fulfilment of a prestation to give, to do, or not to do.” Note: Not all agreements constitute contracts. But all contracts constitute an agreement. In order to further understand the concept of contract, Jurado distinguished an ordinary contract from a marriage contract:

ORDINARY CONTRACT CONTRACT OF MARRIAGE

Parties may be two or more persons of the same or different sexes.

Necessary that the parties must be one man and one woman.

The nature, consequences and incidents of the contract are primarily governed by the agreement of the parties.

Nature, consequences and incidents are governed by law

Once executed, the result is a contract.

Once executed the result is a status.

It can be terminated or dissolved by mere agreement of the parties.

It cannot be terminated by mere agreement.

In case of breach, the The usual remedy is a civil

remedy available is to institute an action against the other party for damages.

action for legal separation or a criminal action for adultery or concubinage

Both Jurado and Tolentino explained the difference between a contract and a perfected and an imperfect promises. Perfected promise merely tends to insure and pave the way for the celebration of a future contract while an imperfect promise is a mere unaccepted offer. Auto-Contract

It is a kind of contract in which only one person acted in behalf of the other party and himself or another person in another capacity to establish a contract. Tolentino said that in order that a contract be existing, it requires two parties and not two persons, two declaration of wills and not two wills.

Ex. Art. 18901 in Agency Elements of contract:

a. Essential – are those without which there can be no contract

Common – the consent of the contracting parties, object or the subject of the contract and cause of the obligation

Special – this is only present in certain contracts such as delivery in real contracts or form in solemn ones.

Extraordinary – peculiar to a specific contract, such as the price in a contract of sale.

b. Natural – those which are derived from the

nature of the contract and ordinarily accompany the same. It is presumed by law, but it also be excluded by the contracting parties if they so desire.

c. Accidental – are those which only exist when the

parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract. (ex. Conditions, terms or modes)

1 Art. 1890: If the agent has been empowered to borrow

money, he may himself be the lender at the current rate of interest. If he has been authorized to lend money at interest, he cannot borrow it without the consent of the principal.


CHARACTERISTICS OF A CONTRACT 1. Obligatory force / character of contracts –

(Arts. 1159, 1308, 1315 and 1356) - It refers to the rule that once the contract is

perfected, it shall be of obligatory force upon both parties. They are bound not only to the fulfilment of obligations but also to all the consequences.

2. Mutuality of contracts – (Art. 1308 and the

nature of contract) - It refers to the position of essential equality that is

occupied by both contracting parties. The contract must be binding upon both parties and its validity or compliance cannot be left to the will of only one party.2

3. Autonomy of contracts – (Art. 1306) - The contracting parties may establish

agreements provided it is not contrary to law, public order, morals, good customs or public policy.3

4. Relativity of contracts – (First paragraph of Art.

1311) - Contracts take effect only between parties, their

assigns and heirs. - Exception:

a. 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.

STAGES OF CONTRACTS 1. Generation – it comprehends the preliminary or

preparation or conception. It is the period of negotiation and bargaining.

2. Perfection – it is the moment when parties come to agree on the terms of the contract

3. Consummation – it is the fulfilment or performance of the terms agreed upon in the contract.

CLASSIFICATION OF CONTRACTS

1. According to their relation to other contracts: a. Preparatory – those which have for their object

the establishment of a condition in law which is necessary as a preliminary step towards the

2 Art. 1308: The contracts must bind both contracting parties;

its validity or compliance cannot be left to the will of one of them. 3 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.

celebration of another subsequent contract b. Principal – those which can subsist

independently from the other contracts and whose purpose can be fulfilled by themselves.

c. Accessory – those which can exist only as a consequence of, o in relation with, another prior contract.

2. According to their perfection: a. Consensual – those which are perfected by the

mere agreement of the parties. b. Real – those which are require not only the

consent of the parties for their perfection, but also the delivery of the object by one party to the other.

3. According to their form: a. Common – those which require no particular

form b. Special – those which require some particular

form

4. According to their purpose: a. Transfer of ownership b. Conveyance of use c. Rendition of services

5. According to their subject matter: a. Things b. Services

6. According to the nature of the vinculum which

they produce: a. Unilateral – those which give rise to an

obligation for only one party b. Bilateral – those which give rise to reciprocal

obligations for both parties

7. According to their cause: a. Onerous – those in which each of the parties

aspires to procure for himself a benefit through the giving of an equivalent or compensation

b. Gratuitous – those in which one of the parties proposes to give to the other a benefit without any equivalent or compensation.

8. According to the risk involved:

a. Commutative – those where each of the parties acquires an equivalent of his prestation and such equivalent is pecuniarily appreciable and already determined from the moment of the celebration of contract.


b. Aleatory – those where each of the parties has to his account the acquisition of an equivalent of his prestation, but such equivalent is not yet determined at the moment of celebrationj of contract. It depends upon the happening of an uncertain event.

9. According to their names or norms regulating

them: a. Nominate – those which have their own

individuality and are regulated by special provisions of law.

b. Innominate – those which lack individuality and not regulated by special provisions of law.

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

Autonomy characteristic of contracts – the right of the contracting parties to establish any stipulation, clause, term or condition as they deem convenient. Limitations: 1. Stipulations must not be contrary to law, morals, good customs, public order, public policy

a. Law those which are mandatory or prohibitive in character those which impose essential requisites without which the contract cannot exist. those, without being mandatory, are expressive of fundamental principles of justice only serve as suppletory to the stipulations or the will of the parties.

b. Morals – Tolentino said that it means those generally accepted principles of morality which have received some kind of social and practical confirmation; synonymous to good customs. c. Good customs – Jurado acknowledged the possible overlapping of the concept of good customs and good morals. But he gave a distinction, he said that if a moral precept or custom is not recognized universally but is sanctioned by the practice of a certain community, then it shall be included within the scope of good customs. d. Public Order – public weal, peace, safety, and

health of the community. e. Public Policy – broader in scope than public order; it is defined as a principle of law which holds that no person can lawfully do that which has a tendency to be injurious to the public or against the public good; all those considerations which are moved by the common good.

2. In cases of social legislation in relation to pursuance of social justice

E.g. in labor contracts; that which is more favoured to those who are needy are more favoured in the pursuit of social justice

3. Contract of adhesion: where only one of the parties prepared the contract and would favour the other party who did not prepare

In case of doubts in the interpretation of the provisions, that which is more favourable to the party who may not have the position to impose agreement is more appreciated

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. Kinds of innominate contracts:

a. Do ut des – I give and you give. (Illustration – A will give one thing to B, so that B will give another thing to A)

b. Do ut facias – I give and you do (Illustration – A will give something to B, in order that B may do something for A)

c. Facio ut des – I do and you give (A binds himself to do something for B, so that B will give something to A)

d. Facio ut facias – I do and you do (A will do something for B, so that B will do something for A)

What rules govern innominate contracts? 1. stipulation of the parties 2. provisions of Title I (Obligations) and II (Contracts) of Obligations and Contracts 3. rules governing the most analogous nominate contracts 4. customs of the place Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the


will of one of them.

Mutuality characteristic of contracts The binding effect of the contract on both parties is

based on the principle that obligations arising from contracts have the force of law between the contracting parties and that there must be mutuality between the parties based on their essential equality. Rationale: to maintain the enforceability of contracts Purpose: To render void a contract containing a condition which makes its fulfilment dependent exclusively upon the uncontrolled will of one of the contracting parties. General Rule on Unilateral Cancellation: No one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other party. * The termination of the contract may be left to the will of one of the parties in the negative form of rescission is that is so expressly stated in the contract. Reason: Since the termination is in the contract, then it would not be a violation but it would be in the fulfilment of the agreement of the parties to the contract. 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. Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contracts are not transmissible by their nature, or by stipulation or by provision of law. Their heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfilment 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. General Rule: The contract is only binding between the contracting parties, their assigns and heirs. (relativity characteristic of contracts)

Exceptions: 1. According to the first paragraph, the rule is not applicable if the rights and obligations arising from the contract are not transmissible:

By their nature

By stipulation

By provision of the law Examples:

Agency, which is based on the confidence reposed by the principal on the agent, is not transmissible to the heirs of the agent.

When a person by agreement is required to do something personally

Cases when contract may affect third persons: a. when the parties transfer to third persons the rights

they acquired under the contracts b. when the contract contains a stipulation in favor of a

third person c. when third persons exercise the subrogatory action or

rescissory action d. in suspension of payments and compositions under the

Insolvency Law e. In labor contracts of collective bargaining under RA

No.875 f. In contracts creating real right Stipulation pour autrui – it is a stipulation in a contract clearly and deliberately conferring a favor upon a third person who has a right to demand its fulfilment provided he communicates his acceptance to the obligor prior to its revocation. Kinds:

1. Those where the stipulation is intended for the sole benefit of a third person

2. Those where an obligation is due from the promise to the third person which the former seeks to discharge by means of such stipulation.

Requisites:

There must be a stipulation in favor of third persons

That the stipulation in favor of a third person should be a part of the contract and not the entire contract

That the contracting parties must have clearly and deliberately conferred a favor upon a third person

The favourable stipulation should not be conditioned or compensated by any kind of obligation


That the person must have communicated his acceptance to the obligor prior its revocation.

Neither of the contracting parties bears a legal representation or authorization of the third party.

Test of Beneficial Stipulation To constitute a valid stipulation pour autrui, it must be the purpose and intent of the stipulating parties to benefit the third person, and it is not sufficient that the third person be incidentally benefited by the stipulation. So in order to determine whether or not such stipulation exists, one needs to rely upon the intention of the parties as disclosed by their contract. Rights of the parties *The third person after acceptance has the rights of a party to the contract, and therefore may sue either for specific performance or resolution, with indemnity for damages. Art. 1312. In contracts creating real rights, third person who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. Contracts creating real rights – the right created directly affects the object of the contract and it follows the same who ever comes into the possession of such property Example: a mortgage to the property follows the property wherever it goes, and whether the party is aware of the mortgage or not. *Although the contract may create a real right, it may not affect a third person who comes into possession of the property if the land and affected by such real right is registered under the Mortgage Law or the Land Registration Laws, and the real right in question is not recorded in the Registry of Property. Real contracts – those which are perfected by the delivery of the property in question. Real right – a right belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally enforced. Art. 1313. Creditors are protected in cases of contracts intended to defraud them. is considered an exception to the relativity of contracts creditors, who are not parties to the contract, may interfere in the same through a rescissory action when

such contract should prejudice their rights. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting parties. Interference in Contracts by third persons - an injured party may recover damages for unlawful interference with the contract by a third party who has induced one of the parties of the contract to violate the terms thereof. Requisites:

1. Existence of a valid contract 2. Knowledge on the part of the third person of the

existence of the contract 3. Interference by the third person without legal

justification or excuse Liability of the contracting party & third person joint and solidary Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfilment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.

Consensual contracts Consensual contracts – perfected by mere consent and that from that moment on the juridical ties between the parties arises. Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.

Real contracts Perfection of contract - refers to that moment in the life of a contract when there is finally a concurrence of the wills of the contracting parties with respect to the object and the cause of the contract.

1E Obligations and Contracts Reviewer Contracts || Form

Real contracts, when perfected – by the delivery of the thing or object of the obligation Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the persons in whose behalf has been executed, before it is revoked by the other contracting party. Rule: No person may enter into a contract in the name of another unless he has been duly authorized by the person represented or he has by law a right to represent him. Effect if the contract entered into in the name of another is without the authority of the latter either given by law or by the person involved = contract is NOT ENFORCEABLE = exception: unless it is ratified, expressly or impliedly, by the person in whose behalf it has been executed before it is revoked by the other contracting party Unenforceable contracts cannot be sued upon before ratification; the defects therein are permanent in nature and will exist as long as it has not been ratified. Effects of Ratification Once ratified, the contract can be sued upon. Effects retroact to the time of its celebration. Act is validated from the moment of the celebration of the contract and not merely from the time of its ratification. *The unauthorized contract produces a state of suspense; its effectivity depends upon its ratification. If the contract is not ratified by the person represented, the representative becomes liable in damages to the other party, if he did not give notice of the absence or deficiency of his power. This liability is based on the fact that having represented himself as having authority to act for another, he is responsible for

the truth of such affirmation.

CHAPTER 2 ESSENTIAL REQUISITES OF CONTRACTS

General Provisions

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties; (2) Object certain which is the subject matter of

the contract; (3) Cause of the obligation which is established.

Consent

Object essential common elements

Cause

essential common elements those elements which are found in all contracts, otherwise there can be NO contract. Essential elements of a contract: 1. Essential common – those which are found in all

contracts 2. Essential special or essential proper – those which

exist only in certain classes or groups of classes - E.g. delivery in real contracts; form in formal

contracts 3. Essential very special – those which are necessary for

a particular contract - E.g. price in contracts of sale

Section 1. – Consent

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. Consent from the Latin word cum sentire meaning to feel

together or the convergence of two wills over the same point


essence: conformity of the parties to the terms of the contract

definition: the concurrence of the offer and the acceptance over the thing and the cause which constitute the contract.

Requisites:4(Castan as cited by Caguioa) (1) Plurality of subjects (2) Capacity of the contracting parties (3) Intention of the parties (4) Manifestation of the intention of the parties (5) Concurrence between the intention of the parties

and its manifestation

Plurality of subjects - There must be at least two parties (not two

persons) and two declarations of will (not two wills)5

Capacity of the contracting parties - Refers to the legal capacity (i.e. age, mental

disposition) of the contracting parties to contract

- A valid consent presupposes legal capacity. Intention of the parties

- Must be formed and manifested in a manner that is rational and conscious and should not be vitiated by any vice which may destroy its character.

- 4 traditional vices of consent: o Error o Fraud o Violence o Intimidation

Manifestation of the intention of the parties - May be express, tacit, or may be presumed. Express consent – exists when the same is manifested by words or by writing; the normal way of manifesting consent. Implied consent – exists when certain acts are performed which do not directly manifest the consent but where the consent can be inferred from the conduct of the person. Presumed consent – is a fiction which produces

4 According to Clarin vs. Rulona, as cited in Tolentino, the

following are the requisites of consent: (1) plurality of subjects; (2) capacity; (3) intelligent and free will; (4) express or tacit manifestation of the will; (5) conformity of the internal will and its manifestation. Jurado, on the other hand, enumerates the following as requisites of consent: (1) consent must be manifested by the concurrence of the offer and the acceptance; (2) contracting parties must possess the necessary legal capacity; and (3) consent must be intelligent, free, spontaneous and real 5 This thus gives way to the validity of auto-contracts

determinate effects by virtue of a certain situation; basis of quasi-contracts; e.g. lapse of time given to repudiate an inheritance

Concurrence between the intention of the parties and its manifestation - an absolute concurrence between what is

intended and what is expressed. *Divergence of intention – when there is NO concurrence 2 types:

o conscious – when there is jovandi causa or mental reservation or when there is a simulation

o unconscious – when there is an error in the declaration or error substantibo

2 elements of consent:

(1) Offer (2) Acceptance

* Manifestation of consent the meeting of the offer and the acceptance General Rule: There must be a concurrence of the offer and acceptance with respect to the object and the cause of the contract. Exception: Not applicable to cases where other matters beside the thing and the cause are considered material by the parties, in which case, the area of agreement must include those other things which are considered material by the parties. (Magsaysay v. Cebu Portland Cement Co. as cited in Caguioa) Offer – a unilateral proposition which one party makes

to the other for the celebration of a contract; or simply put, a proposal to make a contract. - requisites: 1. definite 2. complete 3. made with the intention to be bound 4. directed to person or persons with whom the offeror intends to enter into a contract a. it must be definite offer is definite when an acceptance thereof will create a valid and subsisting contract. not affected where the determination thereof is left to the will of the other party. e.g. “I am in a position and willing to entertain the purchase of a yacht.” >>> not an offer but a mere


invitation to make an offer.6 Note: Definiteness is not affected where the determination thereof is left to the will of the other party. Example: An offer to sell as many sacks of rice as the buyer is willing to purchase but not exceeding 500 sacks at P50 per sack is a valid offer. b. it must be complete when it indicates with sufficient clearness the kind of contract intended and definitely stating the essential conditions of the proposed contract, as well as the non-essential ones desired by the offeror example: in a contract of sale, offer must specify the object, price and terms c. it must be made with the intention to be bound the offer must be made seriously examples of offers with NO intention to be bound:

Those made for fun or jest Those made jocandi causa or as an expression of courtesy

General Rule: Offers not seriously made and accepted by the other party, aware of the non-seriousness of the offer, is null and void and cannot give rise to a contract.

*If the offeree is induced to take it seriously or he was not aware that offer was not intentional, act is VOID; hence there is NO CONTRACT; but he may recover for damages which he has suffered by reason of his belief that the offer was seriously made.

Exception:

*In cases of mental reservations (when a party makes a declaration but secretly and without informing the other party does not intend to be bound by such declaration; exists when the manifestation of the will is made by one party for the purpose of inducing the other to believe that the former intends to be bound, when in fact he does not) act is VALID; and hence may give birth to a

contract. This is in line with the principle of estoppel (Caguioa and Tolentino). Exception to the exception: But when the other party is aware of such mental reservation, it will not bind the offeror.

d. it must be directed to the person or persons with whom the offeror intends to enter into a contract General rule: The offer must be directed to a particular

6 Rosentoch v. Burke as cited in Caguioa, Tolentino &

Jurado

person or persons with whom the offeror wishes to enter into a contract. Exception: definite offers which are not directed to a particular person but to the public in general (examples: promises of reward, public auction)

In order for unilateral promises publicly made be enforced, there must be an acceptance that shall convert it into a contract. The performance of the act for which a reward or prize is promised can be considered as an acceptance.7

Acceptance – the unconditional and unqualified

agreement to the offer. - requisites: (ADICT) 1. absolute 2. directed to the offeror 3. made with the intention to be bound 4. made within the proper time 5. communicated to the offeror and learned by him a. it must be absolute - there is no variation whatsoever between the terms of the offer and the acceptance.

It is necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition shall be without any variation whatsoever; and any modification or variation from the terms of the offer annuls the latter and frees the offeror. means that the offeree should NOT desire

anything exactly than the proposed offer; his acceptance must be for the totality of the offer, nothing more, nothing less. Should the acceptance be qualified (for example when a pure obligation is accepted with a condition, or when a term is established or changed, or when a simple obligation is converted into an alternative one), the acceptance constitutes a counter-offer and a counter-offer has the effect of extinguishing the offer.

b. it must be directed to the offeror c. it must be made with the intention to be bound d. it must be made within the proper time, i.e. within the period expressly or tacitly given e. it must be communicated to the offeror and learned by him Unless the offeror knows of the acceptance, there is no meeting of the minds of the parties, no real

7 Tolentino, 2002, p. 459.


concurrence of offer and acceptance.8

Withdrawal of offer Rule: Both the offer and the acceptance can be revoked before the contract is perfected. Offeror may withdraw his offer at any time before he learns of the acceptance, even if such acceptance has already been made, but not made known to him.9 Lapse of Time An offer without a period must be considered as becoming ineffective after the lapse of more than the time necessary for its acceptance, taking into account the circumstances and social conditions.

Media by which the acceptance has been made known to the offeror:

1. acceptance through intermediaries10

If the intermediary is a true agent who has the power of binding the offeror, Acceptance by the offeree made known to

the agent is binding on the offeror.

If the intermediary has no power to bind either the offeror or the offeree, Acceptance is not binding on the offeror until

the intermediary actually informs him of the same.

2. acceptance by correspondence 4 different theories in pinpointing the exact

moment of perfection: a. Manifestation theory – contract is perfected

from the moment the acceptance is declared or made. (theory followed by the Code of Commerce)11

b. Expedition theory – contract is perfected from the moment the offeree transmits the notification of acceptance to the offeror, as when the latter is placed in the mailbox

c. Reception theory – contract is perfected from the moment that the notification of acceptance is in the hand of the offeror in such a manner that he can, under ordinary conditions, procure the knowledge of its contents, even if he is not able actually to

8 Art. 1319, par.2: Acceptance made by letter or telegram

does not bind the offerer except from the time it came to his knowledge. (This rule should also apply in case of acceptance by cable or telephone according to Tolentino.) 9 Art. 1324

10 Art. 1322: An offer made through an agent is accepted

from the time acceptance is communicated to him. 11

Art. 54: Contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer or the condition by which the latter may be modified.

acquire such knowledge by reason of absence, sickness or some other cause.

d. Cognition theory – contract is perfected from the moment the acceptance comes to the knowledge of the offeror; theory followed by the Spanish Code and have been retained by our Civil Code

Presumption: Contract has been entered into the place where the offer was made.

If the offeror delays in bad faith (by not reading or opening the letter of acceptance although he can do so), contract must be deemed perfected. [ Reason: It cannot have been the intention of the law to leave the perfection of the contract to the caprice of the offeror.]

Exception: Art.54 of the Code of Commerce can be applied only to purely commercial contracts which are still governed by the Code of Commerce such as joint accounts and maritime contracts.12

3. acceptance by telephone or telegram is deemed to have been made by two

persons present and is considered to have been entered at the place where the offer was made.

4. acceptance by silence

Rule: Whether or not silence can be considered as an expression of the will depends upon the circumstances for silence is in itself ambiguous.

When circumstances imply a duty to speak on the part of the person for whom an obligation is proposed, his silence can be construed as consent. Requisites: a. that there is a duty on the part of the offeree

to express his refusal b. that the silence on the part of the offeree

cannot be interpreted in any other way c. that there is a concurrence between the

effect of silence and the undisclosed will of the offeree

Art. 1870-1873 – on agency; cases when acceptance of the agency may be implied from silence of the agent under certain circumstances

12

Jurado, 2002, p.399


Applicable Doctrines13 a. As between persons present - If the silence is entirely unconnected with

any fact, there can be no contract. b. As between persons absent - If there has been no antecedent relation

between the parties, silence will not give rise to a contract.

Revocation of Acceptance The acceptance may be revoked before it comes to the knowledge of the offeror. New Contract Before Acceptance Pending the acceptance of an offer, the offeror can perfect a contract over the same thing with another person. If the first offer is not revoked by him before it is accepted, he becomes liable for damages to the first offeree for culpable impossibility of performance. As between the two offerees, the one whose acceptance perfected a contract first is given priority; the other party has only an action for damages.

Art. 1320. An acceptance may be express or implied. Manner of acceptance Express consent – exists when the same is manifested by words or by writing; the normal way of manifesting consent. Implied consent – exists when certain acts are performed which do not directly manifest the consent but where the consent can be inferred from the conduct of the person. Presumed consent – is a fiction which produces determinate effects by virtue of a certain situation; basis of quasi-contracts; e.g. failure on the part of the heir to reject the inheritance within 30 days from notice of the order of the court distributing the estate

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. Contents of the offer offeror must make the offer complete and definite in order that acceptance of the same may constitute a binding agreement

13

Above principles have been developed in French jurisprudence and have been recognized as acceptable doctrines according to Tolentino (Tolentino, 2002, p.456)

If the offeror fixes a period within which the acceptance must be made in order to become effective, >>> acceptance must be made known to the offeror before the period lapses; one made after the lapse of the period is NOT considered an acceptance of the offer.

Any variation whatsoever between the manner of acceptance prescribed by the offeror and that offered by the offeree constitutes a counter-offer = invalidates the offer = NO CONTRACT

Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him.

- See acceptance through intermediaries

Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed. General Rule: Offer is extinguished upon the death, civil interdiction, insanity or insolvency (CIDI) of either party before acceptance is conveyed. Cases where offer is extinguished: 1. upon the death, civil interdiction, insanity or insolvency of either party (Art. 1323) 2. upon the rejection of the offeree (Batangan v. Cojuangco) 3. upon the lapse of the period stated in the offer without acceptance being conveyed 4. upon qualified or conditional acceptance, i.e. counter-offer (Logan v. Phil. Acetylene Co.) 5. upon revocation of the offer before knowledge of acceptance (Art. 1324) Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. Rule: The offeror may always withdraw the offer before acceptance

In cases of arbitrary revocation, i.e. revoking the offer without just cause, offeror may be held liable for damages.14 But still, there will be NO

14

Based on the principle of abuse of right; Art. 19, NCC: Every person must, in the exercise of his rights and in the


BINDING agreement between parties as there was NO LEGAL OFFER upon withdrawal.

Option Contracts

- an agreement whereby one party concedes to the other, for a determinate period, and under fixed conditions, the power, which is left to his sole will, to decide whether a principal contract will be celebrated. - Where the offeror grants to the other party a period within which to accept the offer or not - Requisites: a. concession by one party in favour of the other of the power to decide whether a contract will be celebrated or not, without any obligation on the part of the latter b. concession is exclusive c. concession is for a fixed period d. there is no other condition but the sole will of the other

General Rule: Offeror still have the right to withdraw offer before knowledge of acceptance. If acceptance has been communicated and learned by the offeror, then there is meeting of the minds and therefore offer CANNOT be withdrawn. Exception: In case of option contracts where the same are not supported by an independent consideration distinct from the price. Illustration: Art. 147915 (Even though the unilateral promise to buy or to sell has already been accepted, it can still be withdrawn by the offeror if the accepted unilateral promise (option contract) is not supported by any consideration distinct form the price.) Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. Art. 1326. 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. Art. 1327. The following cannot give consent to a contract:

performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. 15

Art. 1479: A promise to buy or to sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

(1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. Legal Effects of entering into contracts by parties without legal capacity:

If both parties cannot give consent = CONTRACT IS UNENFORCEABLE16

If only one of the parties is incapable of giving consent = CONTRACT IS VOIDABLE17

Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. Characteristics of consent:

Intelligent

Free and voluntary

Spontaneous

Real Vices of consent: Mistake - should refer to mistake of fact and not of law. - must refer to the very substance of the thing (if error refers to the nature of the contract, contract is VOID) - must refer to the essential or substantial conditions of the contract in order to vitiate consent - requisites: 1. it must be of a past or present fact 2. mistake must have induced the consent 3. mistake must not be imputable to the party mistaken, i.e. mistake is not inadvertent and excusable 4. mistake must be of fact and not of law Violence - refers to physical force or compulsion - there is violence when in order to wrest consent, serious or irresistible force is employed - requisites: 1. force employed is serious or irresistible 2. it is the determining cause of consent 3. it is not justified 4. it is sufficient Intimidation - when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and

16

Art. 1403: 17 Art. 1407


grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants to give his consent - requisites: 1. it must produce a reasonable and well-grounded fear when the person issuing the threat appears able to inflict the harm threatened in order to determine this, it is required that the age, sex and condition of the persons be borne in mind. 2. fear must produce the consent the fear produced by the same must be the direct and the determining cause which compelled the consent to be given. 3. fear is of imminent and grave evil upon person and property evil threatened must be serious or grave and imminent. 4. threat must be unjust if the means threatened to be used to inflict the evil or harm is unlawful or illegal or there is no right to inflict the injury feared Undue Influence - when a person takes advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice - to determine whether the influence exerted is unreasonable, the following circumstances shall be considered: 1. confidential relations 2. family relations 3. spiritual relations 4. other relations between the parties Fraud - when through insidious words or machinations of one of the contracting parties, the other is induced to enter in to a contract which, without them, he would not have agree to. - refers to deceit or fraud in the celebration of contract - any kind of deception and includes words, machinations, false promises, exaggerations of hope and benefits, abuse of confidence, fictitious names, qualifications or authority. - 2 kinds of deceit: a. dolo causante (substantial fraud) – that which affects the substance of the agreement so that without it the party would not have consented b. dolo incidente (incidental fraud) – that which affects, not the substance but the incidentals of the agreement, so that without it the party would have consented but under different terms. - requisites: 1. there must be a misrepresentation or concealment of a fact 2. it must be serious

3. it must be employed by one of the contracting parties and not by a third person 4. it must not be employed by both contracting parties 5. it must have induced the consent of the other party 6. it must be made in bad faith, i.e. with knowledge of its falsity Non-fraudulent cases:

Not every silence or concealment will constitute fraud. If the concealment does not refer to material facts, i.e. those that induce consent, it will not be fraudulent. (Art.1339)

The usual exaggerations in trade (are said to be lawful misrepresentations known as dolus bonus), when the other party had an opportunity to know the facts, are not in themselves fraudulent. (Art. 1340)

A mere expression of opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s knowledge. (Art. 1341)

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. SIMULATION is the declaration of a fictitious intent manifested deliberately and in accordance with the agreement of the parties in order to produce for the purpose of deceiving others the appearance of a transation which does not exist or which is different from their true agreement. requisites:

1. A deliberate declration contrary to the will of the parties

2. Agreement of the parties to the apparently valid act

3. The purpose is to deceive or to hide from third persons although it is not necessary that the purpose be illicit or for purposes of fraud

2 types: a. absolute – when the parties do not intend to be bound at all b. relative – when the parties conceal their true agreement Effects of Simulation If simulation is absolute = NO CONTRACT If simulation is relative = VALID CONTRACT unless it prejudices a third person or has an illicit purpose


Section 2 – Object of Contracts Object of a contract the subject matter; the prestation which is the subject matter of the obligation arising from the contract requisites: a. object must be real or possible (it exists at the moment of the celebration of the contract, or at least capable of existing thereafter) b. it is licit (it is not contrary to law, morals, good customs, public order, public policy) c. it must be determinate or susceptible of determination (the kind and quantity may be determined without the aid of a new contract between the parties)

Section 3 – Cause of Contracts Cause the essential or more proximate purpose which the contracting parties have in view at the time of entering into the contract (Manresa); the fact which explains and justifies the creation of an obligation by the will of the parties (Castan); the reason, end or purpose of the obligation requisites: 1. it must exist 2. it must be real 3. it must be lawful

Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. Presumption: Even if the contract does not state a cause, the law presumes that one exists and that the same is lawful and hence it is incumbent on the party impugning the contract to prove the contrary. Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.

Lesion any damage caused by the fact that the price is unjust or inadequate. General Rule: The mere fact the cause is unjust or inadequate does not invalidate the contract. Exception: Unless there is fraud, mistake or undue influence.

CHAPTER 3 Forms

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 indispensible. In such cases, the right of the parties stated in the following articles cannot be exercised. Gen. Rule: Whatever may be the form in which the contract may have been entered into, it shall be obligatory provided all the essential requisites for its validity are PRESENT.

Ex. Contract of partnership, although entered verbally, is obligatory.18

Exceptions: (Jurado)

1. When the law requires that the contract must be in a certain form in order to be valid.

2. When the law requires that the contract must be in a certain form in order to be enforceable.

(Caguioa)

1. Those where the form is required for the validity of the contract. a. Donations of real property require a public

document and donations of movables worth more than P5,000

b. Transfer of large cattle c. Sale of land through an agent d. Interests in loan e. Principal interest in antichresis f. Contract of partnership to which a real

property or real rights are contributed g. Negotiable instruments

2. Those where form is required for the purpose of

proving the existence of the contract.

3. Those where the form is required for the purpose of making the contract effective against third persons.

18 Fernandez v. De la Rosa, 1 Phil. 571


Formalities for validity These contracts may be classified as follows:

1. Contracts which must appear in writing a. Donations of personal property whose value

exceeds five thousand pesos19 b. Sale of a piece of land or any interest

therein through an agent20 c. Agreements regarding payment of interest in

contracts of loan21 d. Antichresis22

2. Contracts which must appear in a public

document a. Donations of immovable property23 b. Partnerships where immovable property or

real rights are contributed to the common fund24

3. Contracts which must be registered

a. Chattel Mortgages25 b. Sales or transfers of large cattle26

Formalities for enforceability According to Tolentino, the formalities may be classified into three groups:

1. Those which are required for the validity of the contract ad esentia, ad solemnitatem

2. Those required to make the contract effective as against third parties27

3. Those required for the purpose of proving the existence of the contract

Form of Contracts Required by Law

1. Those which are necessary for the convenience of the contracting parties or for the efficacy of the contract28

19 Art. 748 20 Art. 1874 21 Art. 1956 22 Art. 2134 23 Art. 749 24 Art. 1771 and 1773 25 Art. 2140 26 Cattle Registration Act 27 Those mentioned in Arts. 1357 and 1358 28 Art. 1356 - 1358

2. Those which are necessary for the validity of the contract

3. Those which are necessary for the enforceability of the contract29’

ART. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe the form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. ART. 1358. The following must appear in a public document:

1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405;

2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;

3. The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person;

4. The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405.

29 Statute of frauds


CHAPTER 4 REFORMATION OF INSTRUMENTS

Art. 1359. When, there having been a 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. Reformation30 – the remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. Requisites:

1. There must be a meeting of the minds of the contracting parties

2. Their true intention is not expressed in the instrument

3. Such failure to express their true intention is due to mistake, fraud, inequitable or accident

Rationale:

The doctrine of reformation of instrument is based on justice and equity. It would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties.

Distinction from annulment of contracts: Reformation of instruments presupposes a perfectly valid contract in which there has already been a meeting of the minds of the contracting parties, while annulment of contracts are based on a defective contract in which there has been no meeting of the minds because the consent of one or both of the contracting parties has been vitiated.

30 Caguioa, pp. 579

Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. Requisites of mistake31:

1. The mistake is one of fact 2. It is common to both parties 3. The proof of mutual mistake must be clear and

convincing Mistake of fact – the written evidence of agreement includes something which should not be there, or omits from such instrument something that should be there; it simply sets forth something different from what is intended. Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument. Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. Art. 1366. There shall be no reformation in the following cases:

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

31 Tolentino, pp. 550


Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Rationale: It is because there has been an election as between inconsistent remedies, one in affirmance of the written contract and the other in disaffirmance. The party suing under the written contract may be said to have ratified the same. Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.

CHAPTER 5 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. Rule in interpretation of contracts:

The intention of the contracting parties should always prevail because their will has the force of law between them.

Jurado stressed that the cardinal rule in statutory construction should be followed in interpreting contracts. If the terms of contracts are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed.

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. General rule:

Documents are interpreted in the precise terms in

which they are expressed, but the courts, in the exercise of their sound discretion, are called upon to admit and simultaneous circumstantial evidence necessary for their interpretation with the purpose of making the true intention of the parties prevail. Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. In the construction of an instrument, when a general and a particular provision are inconsistent32, the latter is paramount to the former. A particular intent will control a general one that is inconsistent with it. Rules in interpreting contracts when the terms are improper:33

1. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

2. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

3. A particular intent will control a general one that is inconsistent with it.

Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. A contract cannot be interpreted by parts, but should be construed as a whole34 in relation to one another.

32 Statutory Construction 33 Caguioa 34 Id.


Art. 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. When there is doubt as to the meaning, it should be determined by a consideration of the general scope and the purpose of the instrument in which it occurs.35 Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Rules in interpreting contracts where there are omissions:36

1. The usage or customs of the place shall be borne in mind in order to fill in such omissions37

Rules to follow where terms are doubtful:38

1. The various stipulations shall be interpreted together

2. If some stipulations of any contract should admit of several meanings, it shall be understood as having that import which is most adequate to render it effectual.

3. The usage or customs of the place shall be borne in mind in order to fill in such omissions.

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in

35 Id. 36 Caguioa 37 Art. 1376 38 Supra. 19

the construction of contracts.

CHAPTER 6 RESCISSIBLE CONTRACTS

Classes of Defective contracts:

1. Rescissible contracts there is damage or injury to one of the

contracting parties or to third persons considered valid and enforceable until

they are rescinded by a competent court

The action for rescission may prescribe Not susceptible of ratification Maybe assailed only by a contracting

party Assailed directly but not collaterally

2. Voidable contracts

There is vitiation of consent or legal incapacity of one of the contracting parties

Considered valid and enforceable until they are annulled by a competent court

The action for annulment may prescribe

May be assailed only by a contracting party

May be assailed directly or collaterally

3. Unenforceable contracts The contract is entered into in excess

or without any authority, or does not comply with the Statute of Frauds, or both contracting parties are legally incapacitated

Cannot be enforced by a proper action in court

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contract under no. 1 or 3 of Art. 1403, may prescribe

Susceptible of ratification May be assailed only by a contracting

party May be assailed directly or collaterally


4. Void or inexistent contracts One or some of the essential requisites

of a valid contract are lacking either in fact or in law

Do not produce any legal effect The action for declaration of nullity or

inexistence or the defense of nullity or inexistence does not prescribe

Not susceptible for ratification May be assailed not only by a

contracting party but even by a third person whose interest is directly affected

May be assailed directly or collaterally Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. Rescissible contracts – a contract which is valid because it contains all the essential requisites prescribed by law, but which is defective because of injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by a means of a proper action for rescission.

- A remedy to make ineffective a contract validly entered into and which is therefore obligatory under the normal conditions by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors.39

Characteristics:

1. Their defect consists in injury or damage either to one of the contracting parties or to third persons.

2. Before rescission, they are valid and, therefore, legally effective.

3. They can be attacked directly only, and not collaterally.

4. They can be attacked only by either by a contracting party or by a third person who is injured or defrauded.

5. They are susceptible of convalidation only by prescription, and not by ratification.

Concept of rescission: Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation of damages caused to them by a contract, even if the same should be valid, by means of the

39 Mucius Scaevola (Cagiuoa)

restoration of things to their condition prior to the celebration of the contract. Rescission distinguished from resolution:

Rescission Resolution

The action may be instituted not only by a party to the contract, but by even a third party.

Instituted by a party to the contract.

There are several causes or grounds such as lesion, fraud and others expressly specified by law.

The only ground is failure of one of the parties to comply with what is incumbent upon him

There is no power of the courts to grant an extension of time for performance of the obligation so long as there is ground for rescission

The law expressly declares that courts shall have a discretionary power to grant an extension for performance provided that there is just cause

Any contract, whether unilateral or reciprocal, may be rescinded

Only reciprocal contracts may be resolved

Tolentino discussed rescission in reciprocal obligations and gave the following similarities and differences:

Similarities

Both presupposes contracts validly entered into and existing

Both require mutual restitution when declared proper

Article 1911 Chapter 6

May be demanded only by a party to the contract.

May be demanded by a third person prejudiced by the contract

May be denied by the court when there is sufficient reason to justify extension of time

Not applicable in this chapter

The only ground for rescission is non- performance

There are various reasons

Applies only to reciprocal obligations

Applicable to both unilateral and reciprocal obligations.


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.

Grounds for rescission40:

1. Lesion or prejudice 2. Fraud or bad faith 3. Special cases governed by special provisions

(Arts. 1189, 1191, 1526, 1538, 1542, 1556, 1567 and 16590

Requisites:

1. The contract must have been entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee

2. The ward or absentee must have suffered lesion of more than one- fourth of the value of the property which is the object of the contract

3. The contract must have been entered into without judicial approval

4. There must be no other legal means for obtaining reparation for the lesion

5. The person bringing the action must be able to return whatever he may be obliged to restore

6. The object of the contract must not be legally in the possession of a third person who did not act in bad faith

Lesion - The injury suffered, in consequence of inequality of situation, by one who does not receive the full equivalent of what he gives in a commutative contract.

40 Caguioa

Kinds of rescissible contracts by reason of lesion: 1. Those entered into by guardians whenever the

wards whom they represent suffer lesion by more than one-fourth of the value of the thing

2. Those agreed upon in representation of absentees

3. Partition of inheritance where an heir suffers lesion of at least one-fourth of the share to which he is entitled.

Contracts in Fraud of Creditors 1. There must be a credit existing prior to the

celebration of the contract 2. There must be a fraud, or at least, the intent to

commit fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking the rescission

3. The creditor cannot in any other legal manner collects his credit

4. The object of the contract must not be legally in the possession of a third person who did not act in bad faith

Purpose: To guarantee an existing credit Jurado relates this with accion pauliana41, and in order that such contract be rescinded, the following requisites must first concur:

1. The plaintiff asking for rescission has a credit prior to alienation

2. The debtor has made a subsequent contract conveying a patrimonial benefit to a third person

3. The creditor has no legal remedy to satisfy his claim

4. The act being impugned is fraudulent 5. The third person who received the property

conveyed has been an accomplice in the fraud General rule: The rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. Fraud as a ground for rescission:42

1. Those undertaken in fraud of creditors a. There must be an existing credit b. That said credit existed prior to the contract to

be rescinded c. There is existence of fraud or that the debtor

has the intention to injure by acting knowingly and in bad faith

41 Art. 1381 42 Caguioa


d. That the creditor cannot in any other way recover the credit

2. Those which refer to things under litigation if they have been entered into by defendant without the knowledge and approval of the litigants or of competent judicial authority.

3. Payments made in a state of insolvency Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. Requisites:

1. That it must have been made in a state of insolvency

2. That the obligation must have been one which the debtor could not be compelled to pay at the time such payment was effected.

Insolvency – a financial situation of the debtor by virtue of which it is impossible for him to fulfill his obligations. Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. Rescission is not a principal remedy. It is only subsidiary, meaning that it can be availed of only if the injured party proves that he has no other legal means aside from rescinding the contract to obtain redress for the damage caused. Effects of the subsidiary nature of rescission:

1. The juridical concept of rescission in relation to nullity is a subsidiary one

2. In its economic aspect, rescission is likewise subsidiary since the creditor cannot avail of the remedy unless he can show that he cannot collect his credit in any other way

3. In its remedial aspect, it is likewise subsidiary since the creditor must exhaust all other remedies.

1384. Rescission shall be only to the extent necessary to cover the damages caused. The rescission shall only be to the extent of the creditor’s unsatisfied credit. The policy of the law is to preserve or respect the contract, not to extinguish it.

Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. The following should be returned to each other when the court declares a contract rescinded:

1. The object of the contract with its fruit 2. The price thereof with legal interest

Rescission is not allowed on the following:

1. The remedy of rescission cannot be availed of if the party who demands rescission cannot return what he is obliged to restore under the contract.

2. If the property is legally in the possession of a third person who acted in good faith.

Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. Presumption of fraud: Caguioa enumerated the possible existence of fraud may be determined through the following:

1. Competent evidence of actual fraud 2. Presumptions


Circumstances denominated by courts as badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or inadequate

2. A transfer made by a debtor after suit has begun and while it is pending against him

3. A sale upon credit by an insolvent debtor 4. The transfer of all his property by a debtor

(especially when insolvent) 5. The fact that the transfer is made between father

and son, when there are present some or any of the above circumstances

6. The failure of the vendee to take exclusive possession of all the property

7. It was known to the vendee that the vendor had no properties other than that sold to him

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. Liability of acquirers in bad faith:

1. If the first transferee acted in good faith, then the action for rescission is barred.

2. The first transferee be in bad faith, then rescission is allowable and he shall return the property or be liable for damages if ever he cannot return the property

3. If the first transferee acted in bad faith but the subsequent transferee acted in good faith, the rescission is barred and the creditor is only entitled for indemnity for damages.

4. If both acted in bad faith, then rescission will prosper.

Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. Period for filing action for rescission: General Rule: The action to claim rescission must be commenced within four years from the date the contract was entered into.

Exceptions: 1. Under guardianship – the period shall begin from

the termination of incapacity 2. Absentees – from the time the domicile is known

Persons entitled to bring action:

1. The injured party 2. His heirs, assigns or successors in interest 3. The creditors of the above entitled to subrogation

CHAPTER 7

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. Nullity43 - imperfection of a contract derived from determinate vices of capacity or of consent of the parties which gives rise to an action of annulment which if exercised successfully produces the destruction of the act with retroactive effect. Voidable contracts – those which possess all the essential requisites of a valid contract but one of the parties is incapable of giving consent, or consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

- They are considered valid and binding unless annulled by a proper action in court.

- Once ratified, it becomes binding and can no longer be annulled.

Kinds of voidable contracts: Any contract is voidable if the defect is caused by either:

1. Legal incapacity to give consent 2. Violation of consent, where the vitiation is done

by mistake, violence, intimidation, undue influence or fraud

43 Caguioa


Note: It is essential that ONLY ONE of the parties be incapacitated, because if both of them are incapacitated, the contract is not voidable but unenforceable. Annulment – a remedy provided by law, for reason of public interest, for the declaration of the inefficacy of a contract based on a defect or vice Distinguished from rescissible contract:

Voidable Contract Rescissible Contract

The defect is intrinsic The defect is external

The contract is voidable even without damage or prejudice.

The contract is rescissible due to damage or prejudice to either one of the parties or a third person.

It is based on the law. Based on equity.

Susceptible to ratification Not susceptible to ratification

Can only be invoked by a contracting party

Can be invoked by either party or a third person who is prejudiced.

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. Art. 1392. Ratification extinguishes the action to annul a voidable contract. Ratification – the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. Requisites:

1. The contract should be tainted with a vice which is susceptible of being cured.

2. The confirmation should be effected by the person who is entitled to do so under the law44

44 Arts. 1394 and 1395

3. It should be effected with knowledge of the vice or defect of the contract.45

4. The cause of the nullity or defect should have already disappeared.

On the other hand, Caguioa enumerated the

following instances when ratification is not applicable: 1. When there is ratification, express or implied 2. When the action to annul has prescribed 3. When the thing which is the object of the contract

is lost through fraud or fault of the person entitled to the proceeding

4. The minor is barred by estoppels because of misrepresentation of his age

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Art. 1394. Ratification may be effected by the guardian of the incapacitated person. Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. Effects of ratification:

1. Ratification extinguishes the action to annul a voidable contract.46

2. Ratification cleanses the contract from all its defects from the moment it was constituted.

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

45 Art. 1393 46 Art. 1392


Persons who can institute an action: 1. Those who have an interest in the contract 2. The victim and not the party responsible for the

vice must be the person who must assert the same.47

Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. Rule in Annulment of contract: Upon annulment, the contracting parties should be restored to their original position by mutual restitution. Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. General Rule in case of incapacity: When the defect of the contract consists in the incapacity of one of the contracting parties, the incapacitated is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. Art. 1400. Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. Rule when loss is due to fault of defendant: He shall return the fruits received and the value of the thing at the time of the loss with interest from the same date. Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing

47 This is based on the principle that “whoever goes to court must do so with clean hands.”

shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. Rule where loss is due to fault of plaintiff: If the loss is due to fraud of the party who is entitled to institute the proceedings, the action for annulment shall be extinguished through either of the following modes:

1. Prescription 2. Ratification 3. Loss of the thing which is the object of the

contract through the fraud or fault of the person entitled to institute the action.

Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

CHAPTER 8 UNENFORCEABLE CONTRACTS (n)

Unenforceable contract – are those which cannot be enforced by a proper action in court, unless they are ratified, because, either they are entered into without or in excess of authority or they do not comply with the statute of frauds or both contracting parties do not possess the required legal capacity. Classes of unenforceable contract:

1. Those contracts entered into in the name of another person by one without any authority or in excess of his authority.

2. Those which do not comply with the Statute of frauds

3. Those where both contracting parties are legally incapacitated.

Characteristics:

1. They cannot be enforced by a proper action in court48

2. They are susceptible of ratifications49 3. They cannot be assailed by third persons50

48 Art. 1403 49 Id., 1405, 1407, 1371 50 Art. 1408


Unenforceable Contract Rescissible Contract

Cannot be enforced by a proper action in court.

Can be enforced, unless rescinded

Susceptible of ratification Not susceptible of ratification

Cannot be assailed by a third person

Can be assailed by a third person who are prejudiced

Art. 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.

Contracts without or in excess of authority: Jurado discussed that this kind of contract was already provided by the old law to be a kind of void contract, although susceptible of ratification. And the following principles are applicable:

1. No one may contract in the name of another without being authorized by the latter or unless he has a right to represent him. If he is duly authorized, he must act within the scope of his powers.

2. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, is unenforceable. This principle is reiterated in the law on agency.

3. However, such contract may be ratified, expressly or impliedly, by the person in whose behalf it has been executed, before it is revoked by the other contracting party.

Statute of fraud

- It was enacted for the purpose of preventing fraud

- It is required that the contract be in writing and subscribed by the party charged or by his agent.

- In case of non-compliance, the contract is unenforceable by action.

- Classes covered: 1. An agreement that by its terms is not to be

performed within a year from the making thereof.

2. A special promise to answer for the debt, default or miscarriage of another.

3. An agreement made in consideration of marriage, other than a mutual promise to marry.

4. An agreement for the sale of goods, chattels, or things in action, at a price not less than five hundred pesos.

5. An agreement for the leasing of real property for a longer period than one year, or for the sale of real property or an interest therein.


Mode of ratification: 1. Failure to object to the presentation of oral

evidence to prove the same 2. Acceptance of benefits under them

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. Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357. Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. Art. 1408. Unenforceable contracts cannot be assailed by third persons.

CHAPTER 9 VOID AND INEXISTENT CONTRACTS

Void or inexistent contracts – one which lacks absolutely either in fact or in law one or some of the elements which are essential for its validity

- Void contracts refer to those where all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order and public policy. The concept of pari delicto is applicable. Jurado said that there can still be legal effect on this kind of contract.

- Inexistent contract, on the other hand, refers to those where one or some or all of the essential requisites for the validity of a contract are lacking. The concept of pari delicto is not applicable and no legal effect may be produced.

Void or inexistent contract

Rescissible contract

Produces no effect It is valid unless rescinded

Defect consists in absolute lack in fact or in law of one or some essential elements of a contract

Defect consists in lesion or damage to one of the contracting parties or a third person

The nullity or inexistence of the contract is based on the law. it is a sanction.

Based on equity. It is only a remedy.

It is imprescriptible. Prescriptible

Cannot be assailed by a third person (nullity or inexistence)

May be assailed by a third person affected or damaged


Voidable Contract

Produces no effect Binding unless annulled

Not susceptible to ratification

Susceptible to ratification

It is imprescriptible. Prescriptible

Defense is available to third person whose interests are directly affected

Defense not applicable to third persons.



Unenforceable contract

In reality, there is really no contract

There is a contract but is unenforceable by a court action unless ratified.

Not susceptible to ratification.

Susceptible to ratification

Can be assailed by a third person whose interests are directly affected

Cannot be assailed by a third person

Art. 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. Characteristics:

1. They produce no legal effect 2. Not susceptible to ratification 3. The right to set up the defense of inexistence

cannot be waived or renounced 4. The action is imprescriptible 5. The absolute nullity of a contract cannot be

invoked be a person whose interests are not directly affected.

Kinds of void contracts:

1. Those which lack an essential element or requisite for a valid contract a. Those defective for want of consent as

those which are absolutely simulated or fictitious

b. Those defective for want of object such as those where object did not exist at the time of the transaction

c. Those defective for want of cause 2. Those contracts which are illegal 3. Those contracts which are expressly prohibited

by law 4. Those declared void by law

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. 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. Exceptions to the concept of pari delicto:

1. Payment of usurious interest. In such case, the law allows the debtor to recover the interest paid in excess of that allowed by the Usury Laws, with interest thereon from the date of payment.

2. Payment of money for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been done to a third person.

3. Payment of money or delivery of property by an incapacitated person.

4. Agreement which is illegal but is merely prohibited by law.

5. Payment of any amount in excess of the maximum price of any article or commodity fixed by law.

6. Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law.

7. Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law.

http://www.chanrobles.com/revisedpenalcodeofthephilippines.htm


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 other's 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 without any obligation to comply his promise.

Rules in case of illegal contracts:

1. Where both parties are in pari delicto, neither party may recover what he has given by virtue of the contract nor enforce performance from the other.

2. Where both parties are in delicto but not in pari delicto, the guilty party cannot recover what he has given by virtue of the contract nor enforce the performance of the contract.

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be sub served, allow the party repudiating the contract to recover the money or property. Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person. Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any

person paying any amount in excess of the maximum price allowed may recover such excess. Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. Exceptions to the rule of in Pari Delicto:

1. Where the contract is absolutely simulated 2. Where both parties are not guilty to the same

degree, recovery is allowed to the party with lesser guilt, provided no third person is prejudiced

3. Where plaintiff can establish his case without revealing the illegal nature of the transaction

4. In null and void sale of homestead 5. Where one of the parties to an illegal contract is

incapable of giving consent 6. Where an agreement is not illegal per se but

merely prohibited of law is designed for the protection of the plaintiff

7. Where contract s for an illegal purpose but one party has repudiated the contract before accomplishment of purpose or damage is caused to third persons

8. For protection of weaker party, such as those in violation of the maximum price law

9. In contracts covered by the Usury Law 10. Disbarment proceedings

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.