Law on Contracts

(Arts. 1305- 1422, Civil Code)

Outline
General Provisions (Arts. 1305 1317)
Essential Requisites of Contracts (Art. 1318- 1355)
Forms of Contracts (Arts. 1356- 1358)
Reformation of Instruments ( Arts. 1359- 1369)
Interpretation of Contracts (Arts. 1370- 1379)
Defective Contracts (Arts. 1380- 1422)
- Rescissible/ Voidable/ Unenforceable/ Void

Contracts (definition)
A meeting of the minds (acceptance
of offer)
Between two or more persons
Whereby one binds himself, with
respect to the other
To give something or to render some
service

Contract vs. obligation

Can there be a contract without an obligation?
Can there be an obligation without a contract?
Source of obligation
Legal tie or relation

Phases/Stages in the Life of Contracts

Preparation Preliminary to formation
Perfection birth of the contract
Consummation/termination- fulfillment

Essential Characteristics of Contracts

1. Obligatory must be complied with in good faith
2. Autonomy/Freedom parties are free to enter
such stipulations, clauses, terms and conditions
(Art. 1306)
3. Mutuality contract must bind both parties (Art.
1308)
4. Relativity takes effect only between parties,
their assigns and heirs (Art. 1311)

Freedom: Clauses and Conditions of

Contracts (Art. 1306)

Law (rule of conduct)

Morals (good and right conduct)
Good customs (habits and practices)
Public order (public safety)
Public policy (broader in scope: safety
and common good; police power)

Classes of Contracts
According
to:

Kinds

perfection

Consensual Perfected by mere agreement of the parties

Real - Requires not only consent, but also the delivery of the object
Solemn- compliance with certain formalities prescribed by law

form

Common Do not require particular form

Formal Those which require particular form, like donation, mortgage

nature of
vinculum

Unilateral Obligation of one party only

Bilateral Reciprocal obligations for both parties

cause

Onerous Giving of an equivalent or compensation

Gratuitous Given without compensation, just pure liberality

risks
involved

Commutative Prestation is pecuniarily appreciable and determined at

the moment of celebration of contract
Aleatory Pecuniarily appreciable but not yet determined at the moment
of celebration, since it depends upon the happening of an uncertain event.
Ex. Insurance

name

Nominate with specific names or designation in law

Innominate no specific name

Nominate contracts

Deed of Absolute Sale (Real Estate Property)

Contract to Sell (Real Estate Property)
Chattel Mortgage (Motor Vehicle)
Contract of Lease / Rent
Deed of Sale (Motor Vehicle)
Earnest Money Receipt Agreement
General Power of Attorney
Special Power of Attorney
Deed of Assignment & Transfer of Rights (Real Estate)
Deed of Donation
Authority to Sell / Lease (Real Estate Property)
Offer to Purchase (Real Estate Property)
Last Will and Testament

Innominate Contracts (Art. 1307)

Regulated by (1) stipulation of the parties (2) Civil
Code provisions on Obligations and Contracts (3)
analogous nominate contracts (4) customs of the
place
Kinds:
1. do ut des (barter)
2. do ut facias
3. facto ut des
4. facto ut facias

Samples of innominate contracts

Memorandum of Agreement
Rent-to-Own Contract (Real Estate
Property)
Contract of Renovation/Construction of
a House or Building

Mutuality (Arts. 1308-1310)

General rule: cannot be left to the will of
one of the contracting parties
Exception: Determination can be left to
third party, whose decision shall be
binding only when communicated to
both parties, unless such determination
be evidently inequitable

Relativity (Art.1311)
Rule: parties, assigns, heirs
Exceptions:
Stipulation pour autrui accepted by third party
Where third persons comes into possession of the
object of contract creating real rights (Art. 1312)
Where contract is to defraud a third person (Art.
1313)
Where third person induces a contracting party to
violate his contracts (Art. 1314)

Stipulation pour autrui

Parties clearly and deliberately agreed
The 3rd person must have communicated his
acceptance
Stipulation in favor of the 3rd person part not whole
of the contract
Favorable stipulation not conditioned nor
compensated by any other kind of obligation
No authorization or legal representation of the 3rd
party

Unauthorized Contracts (Art. 1317)

not enforceable
Cured only by ratification
A person is bound by the contract of
another:
1. duly authorized (express or implied)
2. act within his/her power

Essential requisites of contracts (Art. 1318)

Common:
Consent of the contracting parties
Object certain subject matter of the contract
Cause of the obligation which is established
Special:
- form
- Subject matter
- Consideration or cause

Other elements
Natural elements presumed to exist
(like warranty against eviction or hidden
defects)
Accidental elements conditions,
clauses, terms, penalty etc.

Elements of
Consent
1. Concurrence of the offer and the acceptance
Definite offer that may be exactly fixed
Assent to the terms without qualifications or conditions
Conveyed before the death, civil interdiction, insanity, or
insolvency
Qualified acceptance is a counter offer
Perfected when acceptance comes to knowledge of offeror
Offer can be withdrawn anytime before acceptance, unless
option is founded on consideration
If offer made thru agent, accepted when communicated to the
agent

Elements of
Consent

2. By parties with legal capacity to

contract
Not minors, insane or demented, deaf-mutes who
do not know how to write, incompetents under
guardianship, civil interdiction
Minor can be liable if he misrepresents his age
Prohibited by law from entering into contracts

Offer
Offer certain -fixed time, place, manner
of acceptance (Art. 1321)
Offer made by agents (1323)
Effect of death, civil interdiction, insanity,
insolvency, other grounds

Business advertisements
Sale: mere invitations (Art. 1325)
Bidders: mere proposals (Art. 1326)

Acceptance
Acceptance absolute (express or
implied)

Option Contract (Art. 1324)

Giving a person for a consideration a
period within which to accept the offer
Option period
Option money vs. earnest money
promise to buy or sell

Incapacity to give consent

Minors
Insane or demented persons
- lucid interval
- state of drunkenness and hypnotic spells

Deaf mutes

Restrictions in giving consent:

Husband and wife to each other
Insolvents
Persons prohibited from giving donations

(Adultery, concubinage; In consideration of criminal

offense;Made to public officer, spouse, by reason of
office)

Persons with fiduciary relations

( Guardian, for property under his guardianship; Agents, for

property entrusted to them Executor/administrator; Public
officers, judges, for property under their jurisdiction)

Modifications of incapacity
Civil Code provisions
- guardianship
- minor misrepresented age
Rules of Court
- civil interdiction;lepers;prodigals etc

Elements of
Consent

3 . I n t e l l i g e n t l y, f r e e l y g i v e n ,
consciously
vices of consent:
mistake, violence, intimidation,
undue influence, or fraud
Causes of vitiating consent vs. causes
of incapacity

Mistake (Art. 1331-1334)

False notion of a thing or fact material to the contract
Mistake of fact which law refers:
1. substance of the thing which is the object of the
contract/nature of the contract ;
2. conditions which have principally moved one or
both parties to enter into the contract ;
3. identity or qualifications of one of the parties will
vitiate consent only when such identity or qualifications
have been the principal cause of the contract

Mistake which does NOT vitiate consent

Error as to incidents/ accidental qualities

Mistake as to quantity or amount
Error as to motives of the contract
Identity or qualifications of a party
(except when the same are the principal
cause of the contract)

simple mistake
On account/calculation shall give rise to
its correction

Burden of proof
Rule: the one alleges fraud/mistake must
prove it
Exceptions:
1. One party is unable to read
2. contract is in a language not understood by
him
- Party enforcing the contract must show that the terms
thereof have been fully explained to the other

Knowledge of risk
No mistake doubt, contingency, risk

Mistake of law
Rule: ignorantia legis non excusat
Exception:
-Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated

Violence or force (Art. 1335- 1336)

violence -order to wrest consent, serious
or irresistible force is employed
intimidation - one of the contracting
parties is compelled by a reasonable and
well-grounded fear of an imminent and
grave evil
May be committed by a 3rd person(Art.
1336)

Violence?
Factors to determine degree of
intimidation vs. reverential fear
Threat to enforce just/legal claim

Undue influence (Art. 1337

improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom
of choice
Circumstances:
1. confidential, family, spiritual and other relations
between the parties
2. mental weakness
3. ignorance
4. financial distress

Fraud (Arts. 1338-1344)

Causal fraud: induced to enter into a
contract which, without them, he would
not have agreed to
By insidious words or machinations of
one of the contracting parties or by
concealment

Elements of Causal Fraud annulling consent

1. There must be misrepresentation or concealment;
2. It must be serious;
3. It must have been employed by only 1 of the
contracting parties;
4. It must be made in bad faith or with intent to deceive
5. It must have induced the consent of the other party;
6. It must be alleged and proved by clear and
convincing evidence.

Fraud by concealment (Art. 1339)

Neglect or failure to communicate that
which a party to contract knows and
ought to communicate

Related articles on fraud

Art. 1340 usual exaggerations in trade
Art. 1341- expression of opinion unless relying
on an experts special knowledge
Art. 1342- fraud by a 3rd person unless it
created substantial mistake and the same is
mutual
Art. 1343- misrepresentation in good faith
(constitute an error)

Causal Fraud vs. Incidental Fraud

CAUSAL FRAUD

INCIDENTAL FRAUD

- Ground for annulment of contract

- Only renders the party who

employs it liable for damages

It should be serious;
It should not have been employed
by both the contracting parties (pari
delicto); and
It should not have been known by
the other contracting party

Simulation of Contract (Art. 1345-1346)

Deliberately deceiving others, by
feigning/pretending by agreement, the
appearance of a contract
Absolute simulation vs. relative
simulation

Absolute simulation vs. relative simulation

ABSOLUTE SIMULATION

RELATIVE SIMULATION

-When the contract does not really

exist and the parties do not intend to
be bound at all
- inexistent or void

-parties conceal their true agreement

- parties are bound in their real
agreement provided it does not
prejudice a 3rd person/not contrary to
law, moral, good customs, public
order or public policy

Objects of Contracts (Arts. 1347-1349)

The subject matter
(a)Things
(b)Rights
(c)Services

Requisites of things
Within the commerce of men
Not impossible (legal or physical)
In existence or capable of coming into
existence
Determinate or determinable without the
need of a new contract

Requirements of services
Within the commerce of men
Not impossible (legal or physical)
Determinate or capable of being made

Cannot be an Object
Intransmissible by their nature
Stipulation
Provision of law

Cause of Contracts (Arts. 1350-1355)

Cause is the essential or more
proximate purpose which the contracting
parties have in view of the time

Classification of contracts according to cause

Onerous cause is the promise of a thing/
service parties are reciprocally obligated to
each other
Remuneratory/remunerative cause is the
service or benefit to be rewarded
Gratuitous cause is the liberality of the
giver/benefactor

Motive vs. Cause (Art. 1351)

Motive (purely

personal/private reason which a

party has in entering into a contract): remote/

indirect reason; may be unknown; not

essential element of contract; illegality does
not render the contract void
Cause: immediate/direct reason, always
known; essential element of contract; illegality
affects the validity of contract.

Requisites of cause (Art. 1352)

Must exist at the time the contract is entered
into
- Absence/want of cause- there is total lack of valid
consideration

Must be lawful
- Illegality of cause implies that there is a cause but the
same is unlawful or illegal

Must be true or real

- Falsity of cause means the contract states a valid
contract but the statement is not true
- False cause erroneous vs. simulated

Presumption of cause (Art. 1354)

Prima facie cause exist and lawful
Contrary evidence may be presented by
the debtor

Lesion (Art. 1355)

Damage caused when the price is unjust or
inadequate
Rule: does not invalidate the contract
Exceptions to the rule:
(a)when there is fraud, mistake, or undue
influence
(b)When specified by law