CONTRACTS

MP Casino

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 Definition
• Agreements and conventions
– Meeting of minds (Art. 1305)
• One of the sources of obligations (Art. 1157)
• Only those agreements that produce patrimonial rights and liabilities are
considered as contracts.
• Contracts of marriage and adoption are not contracts as defined by Art. 1305.
– Ordinary contracts create temporary obligations and relations whereas
contracts of marriage/adoption have more ore less permanent effects
– In an ordinary contract, the same is the source of obligations and rights the
parties and the law is only suppletory. In contracts of marriage/adoption, the
law is the primary source of rights and obligations, Family Code, Child and
Youth Welfare Code,
– An ordinary contract does not affect the civil status of the parties. The
consequence of contracts of marriage/adoption is change in civil status

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 Contracts
• Two parties/two declarations of will
– Auto contracts – only one person intervenes or signs the
contract
• Possible conflict of interests (Art. 1491, Sales; and Art. 1890,
Agency; Art. 267, Code of Commerce)
– Collective contracts – in a group or organization, the will of the
majority is binding upon the minority. Examples: collective
bargaining agreements, suspension of payments or
compositions in insolvency proceedings
– Contract of Adhesion – one party prepares the contract
containing the stipulations he desires and he simply asks the
other party to consent thereto. Examples: Contract for transport
of passengers.

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 Principles of Contracts

COMAR
• Consensuality
• Obligatory force
• Mutuality
• Autonomy
• Relativity

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 I. Consensuality
– There must be consent
– From the definition of contracts (Art 1305)
– Kinds of contracts as to perfection:
• Consensual Contracts (Art. 1315), e.g. sale, lease,
agency; and
• Real Contracts (Art. 1316), e.g. deposit, pledge, loan,
commodatum
– Manifestation of consent (Art. 1319)
• Meeting of the offer and the acceptance upon the thing
(object/service) and the cause/consideration

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 II. Obligatory Force
• Contracts have the FORCE OF LAW between the parties and
should be complied with in good faith (Art. 1159) and
OBLIGATORY subject to formal requirements (Art. 1356).
– It presupposes the validity and enforceability of the
contract.
• Or, at least Rescissible (Art. 1380) or Voidable (Art.
1390)
• A party cannot be allowed to renege on his obligation under
a contract simply because he changed his mind (RODOLFO
MORLA vs. NISPEROS BELMONTE, et al. G.R. No. 171146,
December 7, 2011)

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 III. Mutuality
• Contract must bind BOTH parties
– Validity OR compliance cannot be left to the will of one of them. (Art. 1308)
• The determination of performance may be left to a third person (Art.
1309) but shall not be obligatory if it is evidently inequitable (Art. 1310).
– Relate this to Arts. 1180 and 1197 (re period is dependent upon the will of the
debtor), and Art. 1182 (re suspensive condition the fulfillment of which is
dependent on the sole will of the debtor)
• Reiteration of the Obligatory nature of contracts (Art. 1159)
• It renders void a contract containing a provision which makes the
performance dependent upon the UNCONTROLLED will of one of
the contracting parties (Corpuz vs. CA, 98 SCRA 424)
• Contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important
aspect of the agreement. (See Arts. 1291 to 1304 on Novation of
Obligations)

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 Mutuality, cont’d.
• Illustrations:
• Lease –
– Lessee to continue possessing the property for as long as he pays the rent is violative of
the principle of mutuality because it would leave the lessee the sole power to determine
whether the lease should continue or not (Encarnacion vs Baldemar (77 Phil 4700)
– Lessee given the option to renew the lease for “like term” – valid as the lessor is free to
give or not to give the option to the lessee (Allied Banking Corporation vs. Court Of
Appeals (G.R. No. 124290 January 16, 1998)
• Cancellation of the contract
– General Rule: No party can renounce the contract unilaterally or without the consent of
the other (Landoil Resources vs. Tensuan (168 SCRA 659) just as nobody can be forced to
enter into a contract.
– Exception: An agreement that party may terminate the contract upon reasonable period
of notice or when cancellation is by reason of breach (Art. 1191; Palay, Inc. vs. Clave, 124
SCRA 638)
• Escalation Clauses
– No unbridled right to unilaterally upwardly adjust the interest on debtor’s ' loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
(Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536)
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 IV. Autonomy
• Freedom to contract is both a CONSTITUTIONAL and
STATUTORY right (Section 10 Art. III, Constitution and
Art. 1306, Civil Code)
– The contract is the LAW between the contracting parties.
• Unless the stipulations in a contract are contrary to law, morals,
good customs, public order or public policy, the same are binding
as between the parties (Art. 1305 in relation to Art. 5)
– Non-impairment clause is inferior to the Police Power of
the State (BF United Homeowner’s Association, Inc. Vs. The
City Mayor, 515 SCRA 1 [2007]; Beltran v. Secretary of
Health, 476 SCRA 168) and Freedom of Religion (Victoriano
vs. Elizalde Rope Workers’ Union G.R. No. L-25246,
September 12, 1974)

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 Autonomy, limitations
• Contrary to Law
– The stipulation/s must not be contrary to law
• Nature of law: Prohibitory and Mandatory laws (Art. 5, Civil
Code)
– Illustrations:
• Waiver of an action for future fraud (Art. 1171)
• Sale of Prohibited Drugs
• A stipulation whereby actions proceeding from the contract
can be filed only in a certain place and with a particular
court is void as the power to fix jurisdiction lies with the
legislature (Article VI, Constitution; BP No. 129).
• Pactum commissorium (Art. 2088)

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 Autonomy, cont’d.
• Against morals and good customs
– Rendition of domestic services without remuneration (De Los Reyes vs. Alojado, 16 Phil
499)
– Interest rate so high that it is so unconscionable and shocking to senses (Andal vs. PNB,
et al., G.R. No. 194201, Nov. 27, 2013)
– Penalty of PhP5.00 per day in a loan amounting to PhP500.00 (Ibarra vs Aveyro, 37 Phil.
273)
– Non-compete/involvement clauses are valid provided the same are limited as to time,
circumstance, space and trade.
• Necessary to protect trade secrets.
•Ferrazzinni vs. Gsell (34 Phil. 697)
•Tiu vs. Platinum Plans (517 SCRA 101)
•Duncan vs. Glaxo (438 SCRA 343)
•Star Paper v. Simbol, 487 SCRA 228 [2006]
- Stipulation in the contract for legal services whereby the fee is unconscionale and not
commensurate to the services rendered.
- Agreement on a trial marriage is void for being contrary to morals.

• NOTE: good customs are more “localized” than morals. The same must be proved. (Art. 12)

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 Autonomy, cont’d.
- Doctrine of Reasonable Necessity for the
stipulation (Star Paper v. Simbol (487 SCRA
228)
- The policy of Philippine Air Lines requiring
that prospective flight attendants must be
single and that they will be automatically
separated from the service once they marry
was declared void, it being violative of the
clear mandate in Article 136 of the Labor Code
with regard to discrimination against married
women (Zialcita, et al. vs. Philippine Air Lines
(Case No. RO4-3-3398-76; February 20, 1977).
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 Autonomy, cont’d
• Against public order
– relates to public weal, safety and health.
– Examples:
• A contract whereby one party binds himself to kill a particular person in
exchange for a sum of money.
• A contract whose object is the formation of a combination in the market
to stifle competition (R.A. 10667, Phil. Competition Law)
• A contract of lease of a building for the operation of a gambling,
prostitution or drug den.
• An agreement the purpose of which is to conceal a public offense.
• An agreement whereby a public official will intervene in a public bidding
for a government project for a commission
• A stipulation providing that in case of the lessee’s failure to pay the rent,
the lessor can use force to retake possession of the leased property.

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 Autonomy, Cont’d
• Against public policy
– Principle of law whereby no person is allowed to do that which is injurious
to the public or against public good.
• Examples:
– Stipulation whereby a common carrier is not responsible for any loss or injury
brought about by its own negligence or that of its employees (Heacock vs.
Macondray &Co., 42 Phil. 205; Art. 1745, et seq., Civil Code)
• A stipulation in the bill of lading limiting the common carrier's liability for
loss or destruction of a cargo to a certain sum, unless the shipper or
owner declares a greater value, is valid and sanctioned by law (Arts. 1749
and 1750)
– A promissory note representing a gambling debt (Art. 2014) is void and not
enforceable even in the hands of an assignee (Palma vs. Canizares, 1 Phjil 602)
– Contract of sale of a land by the grantee thereof under the Agrarian Reform
Law within the five-year prohibitive period (Dinayug Vs. Ugaddan, et al. G.R.
No. 181623, December 5, 2012)
– Contract for the sale and purchase of votes (Saura vs. Sindico, L-13403, March
23, 1960)
– Agreement to prevent or stifle prosecution of a crime.
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 Relativity
• Contracts take effect between the parties,
their assigns and heirs (Arts. 1311 and 1178).
– EXCEPT when the rights and obligations are not
transmissible by their nature, by law or by
stipulation.
– It can neither favor nor prejudice third persons
(Res inter alios acta aliis neque nocet prodest)
• Third persons cannot enforce the contract nor can they
impugn the validity thereof save in cases provided by
law (Art. 1380 et seq. and Art. 1177)

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 Relativity cont’d.
• Intransmissibility
– By nature:
• When the special or personal qualifications are the principal
motives for the establishment of the contract
– By law
• Those arising from agency (Art. 1830) and partnership (Art.
1919)
– By stipulation
• As when the obligor binds himself to perform the act and
not through another
• NOTE: if the instrument is non negotiable, it may still be
transferred

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 Relativity, Cont’d
• Exceptions to relativity:
– Stipulation pour autrui (Art. 1311, 2nd Par)
– When the third person comes into possession of
the object of the contract creating a real right (Art.
1312)
– When the contract is entered into to defraud
creditors (Art. 1313 in relation to Art. 1381 (3) and
Art. 1177)
– In case of contractual interference (Art. 1313)

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 Relativity, cont’d.
• Stipulation pour autrui
– Such a stipulation is binding upon the third person although he is not a
signatory to the contract.
– The third party may be a: 1) donee-beneficiary, 2) creditor-beneficiary, or 3)
incidental beneficiary
– Requisites:
a. Stipulation in favor of a third person.
b. The stipulation is a part, not the whole, of the contract (otherwise, it is a
donation).
c. The stipulation is not conditioned or compensated of any kind of
obligation. (otherwise, there is an onerous contract with the third
person being a party thereto)
d. Neither of the contracting parties bears the legal representation or
authorization of the third person. (otherwise, there is an agency)
e. Acceptance by the third person before revocation.
Note: The acceptance does not have to be in any particular form nor
does it have to be made expressly and formally.

- the stipulation must confer favor and NOT impose obligations to third persons.

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 Relativity, Cont’d
– The "intent of the contracting parties to benefit third party by means of such
stipulations pour autrui must be clearly expressed.

• A stipulation to pay for all labor and materials cannot be construed stipulation pour
autrui available to materialmen who supplied certain materials to the contractor for
use in the performance of the latter's contract with the city (Uy Tam vs. Leonard, 30
Phil. 471 (1915).

– A clause in a motor vehicle insurance policy authorizing the owner of damaged vehicle to
contract for its repair does not mean that the repairman may collect the cost of the
repair directly the insurer, there being no clause "from which we can infer that there is an
obligation on the part of the insurance company to pay the cost of repairs directly to
them,' and that the mortgagee of the car (expressly named in the insure policy as
beneficiary of any loss payable thereunder) had better right than the repairman to the
insurance proceeds (Bonifacio Bros, Inc. vs. Mora, 20 SCRA 261 )

– The insured who is not a party or privy to insurer's reinsurance contracts cannot directly
demand enforcement of such (re)insurance contract (Artex Development Co., Inc., vs.
Wellington Insurance Co., Inc., G.R. No. L-29508 June 27, 1973)

– A compromise agreement cannot bind persons who are not parties thereto (Rebecca C.
Young vs. CA, G.R. No. 79518 January 13, 1989)

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 Relativity, Cont’d
• Illustrations:
– A clause in the Extra-Judicial Partition between co-
heirs stating that the fruits of the land co-owned will
be used to defray expenses for religious festivities is a
contract with stipulation pour autrui (Florentino vs.
Encarnacion, 79 SCRA 195)
– Contract that contains an auto-debit clause.
– A stipulation in a contract of sublease that the
sublessee’s rent shall be paid directly to the principal
lessor is a stipulation pour autrui (Limitless
Potentials, Inc. Vs. Quilala, G.R. No. 157391. July 15,
2005)

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 Relativity, Cont’d
Contracts creating real rights
• A real right or lien established in favor subsists over the
properties until the discharge of the principal obligation,
whoever the possessor(s) of the land might be, subject to
Mortgage Law and Land Registration Laws (Arts. 1312,
2125 and 2126, Civil Code. See also PD 1529)
• Registration of the contract creating real right is notice to
the whole world.
– A recorded real estate mortgage is a right in rem (Paderes
vs. CA., G.R. No. 147074, July 15, 2005)
• Actual knowledge of a prior mortgage with is equivalent to
notice of registration (Rehabilitation Finance Corp. v.
Javillonar, et al., 107 Phil 664, 668 (1960) in accordance with
Article 2125 of the Civil Code.
• See also Article 1544 on Double Sales.
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 Relativity, Cont’d
Interference
• Requisites:
– Valid contract
– Knowledge by the third person of the
existence of such valid contract
– Interference by the third person without just
cause
• The aggrieved party can recover damages.

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 Elements of Contracts
I. Essential Elements –without which there is no contract
A. Consent
B. Object
C. Cause or Consideration
II. Natural Elements – those that exist even if the parties did
not provide for them. (implied)
A. warranty against eviction
B. Warranty against hidden defects
III. Accidental Elements – those which are agreed between
the parties and which cannot exist without being
stipulated.
A. Place of payment/delivery
B. Manner of payment/delivery

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 Classification of Contracts
• According to the degree of dependence: preparatory, such as agency; principal,
such as lease or sale; and accessory, such as pledge, mortgage or suretyship.
• According to perfection: consensual, such as purchase and sale; and real such as
commodatum.
• According to solemnity or form: common form, such as a loan; and special form,
such as donations and mortgages of immovable property.
• According to purpose: transfer of ownership, such as sale or barter; conveyance of
use, such as commodatum; and rendition of service, such as agency.
• According to subject matter: things (movable, immovable or incorporeal rights)
such as sale, pledge or mortgage, and services such as deposit, agency and lease of
services.
• According to nature of obligation produced: bilateral such as purchase and sale;
and unilateral such as commodatum or gratuitous deposit.
• According to cause: onerous, such as purchase and sale; and gratuitous or lucrative,
such as commodatum.
• According to risk: commutative such as lease; and aleatory, such as insurance.

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 Classification of Contracts, cont’d.
• According to name, into:
1. nominate such as sale, lease, agency, etc.;
and
2. innominate (those without any particular
name) such as:
– do ut des (I give and you give),
– do ut facias (I give and you do),
– facio ut facias (I do and you do), and
– facio ut des (I do and you give).
NOTE: Do ut Des is now a nominate contract and
governed by the Civil Code provisions on Barter (Arts.
1638-1641)
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 Regulation of Innominate Contracts
• Innominate contracts are regulated by:
– The stipulations of the parties
• Contract is the law between the parties (Art.
1159)
– Civil Code provisions on Obligations and
Contracts
– Rules governing the most analogous
contracts
– Customs of the place
IN THAT ORDER. (Art. 1307)

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 Stages of Contracts
• Negotiation – bargaining. Initiated by an offer.

• Perfection – Meeting of the offer and the

acceptance --- birth of the contract

• Consummation – fulfillment or performance

of the contract in accordance with the terms
and conditions thereof.
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 Essential Elements of Contracts

A. CONSENT of the contracting parties

B. OBJECT certain which the subject matter of

the contract

C. CAUSE of the obligation which is established

(Art. 1318)

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 CONSENT
• Concept –
– conformity on the terms of the contract.
– Acceptance of the offer made by the other
– Concurrence of the minds of the parties on the
object and the cause of the contract
• Manifestation of consent
– Meeting of the offer and acceptance upon the
thing which are to constitute the contract (Art.
1319).
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 Requisites of Consent
A. Plurality of subjects – at least two parties
B. Capacity of the parties (Art. 1323, 1327, 1390 and 1403 (3)
in relation to Arts. 37, 38 and 39)
A. In some cases, Qualification (Arts 1490 and 1491) or
Authority (Art. 1317 and 1403; Arts. 96 and 124, Family
Code)
C. Intelligent, free, spontaneous and real (Art. 1330 on vices
of consent)
D. Express or tacit manifestation and conformity of the
internal will and its manifestation (Arts. 1319 and 1323)

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 CONSENT
• Want of consent – there is no contract
• Effect of incapacity
– Incapacity of one of the parties - the contract is voidable (Art. 1327 and
1390 (1)
– Incapacity of both parties – the contract is UNENFORCEABLE (Art. 1403
(3)
– Exceptions:
• when necessaries are sold AND delivered to an incapacitated
person, he must pay a reasonable price therefor (Art. 1489); and
• ESTOPPEL. Minors who misrepresent as to their age cannot impugn
the validity of the contract they entered into on the ground of
incapacity (Mercado vs. Espiritu, 37 Phil. 37; Sia Suan vs.
Alcantara, G.R. No. L-1720, March 4, 1950).
– See Young vs. Tecson (39 O.G. 953), if the person making the
misrepresentation cannot bind himself by a contract, he
cannot also be bound by any misrepresentation in connection
therewith.
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 Incapacity and Disqualification
• Incapacity is the inability to do acts with legal effects
(Arts. 37, 38 and 39, and Section 2 Rule 92, Rules of
Court in relation to Art. 1329).
• Disqualification is special or relative incapacity of the
parties to enter into a particular contract by reason of
their relations to each other or of their relation to the
object of the contract (See Arts. 1490 and 1491).
• Distinctions:
– Incapacity is a restriction upon the exercise of a right while
disqualification is a restriction upon the very right itself.
– Incapacity renders the contract VOIDABLE (or
UNENFORCEABLE) while disqualification renders the
contract VOID.

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 Perfection
OFFER AND ACCEPTANCE
a. Offer – unilateral proposition made by one party to the other for the
celebration of the contract.
– Requisites:
• Definite (Art. 1319) – It must be certain that the offeror does not reserve the right to
deliberate whether to act on a proposition. (Art. 1325 on business advertisements; Art.
1326 on Advertisement for bidders)
• Complete (Art. 1319) – it must indicate with sufficient clarity the nature of the contract
intended and the essential conditions thereof. It must contain the cause and the object.
• Intentional – it must be serious.

NOTE: It is NOT necessary that the offer be addressed to a specific person.

NOTE: Art. 1326 is not applicable to judicial sales as the law mandates that the
sale be awarded to the highest bidder.

Link to pdf

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Is there a valid offer?

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Are there valid offers?

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 CONSENT
• ACCEPTANCE - agreeing either expressly or by conduct
to the act or offer of another so that a contract is
concluded and the parties become legally bound.
– Requisites
1. Absolute (not qualified or conditional)
2. Intentional
3. Duly conveyed to the offeror (2nd Par, Art. 1319 and Art. 1323) or
his agent (1322) within the proper time and in accordance with
the tenor of the offer (Arts. 1321 and 1324)
• If an offer is NOT accepted or rejected, there is NO
contract.

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 Theories on perfection

1. Manifestation Theory – the contract is perfected the

moment acceptance is declared (Art. 54, Code of
Commerce)
2. Expedition Theory – the contract is perfected from the
moment offeree transmits his acceptance to the offeror
3. Reception Theory – the contract is perfected when the
offeror receives notice of the acceptance (constructive
knowledge). It can be applied in this jurisdiction.
4. Cognition theory – the contract is perfected when the
offeror gains knowledge of the acceptance (Arts. 1319 and
1323).

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 Principles and Illustrations
• Period within which the offeree accept the offer:
– When the offeror has allowed the offeree a certain
period of time 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, something paid or promised (Arts.
1324) See also Art. 1479.
• the offer must be accepted in the following manner:
– If there is a fixed period given, any time before it expires.
– When there is a fixed period, and the offer is made to a person
present, the same must be accepted immediately.
– When the offer is made to a person absent, the acceptance may
be made within such time that, under normal circumstances, an
answer can be received

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 CONSENT
• The offer may be withdrawn BEFORE it is accepted.
• An offer be withdrawn even before the expiration of the period given
– EVEN if the period is founded upon a consideration. But the offeror shall be
liable for damages.
• The acceptance may be withdrawn BEFORE it is made known to the offeror.
• The offer becomes ineffective upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is conveyed (Art. 1323).
– Death - extinguishes personality (Art. 42)
– Civil interdiction – deprivation of the right to manage one’s property or to
dispose of the same by any act or conveyance inter vivos (Art. 34, Revised
Penal Code)
• Penalties that carry with them civil interdiction (unless remitted in the
pardon) :
– Death when not executed (Art. 40,Revised Penal Code), Reclusion
perpetua and reclusion temporal (Art. 41, Revised Penal Code)
– Insanity – state of having an unsound mind or complete deprivation of free
agency and intelligence
– Insolvency – inability to pay obligations as they fall due.
• Judicial declaration of state of insolvency is not necessary.

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 Consent, Cont’d
• A sale shall be considered perfected and binding as between vendor and vendee
when they have agreed as to the thing which is the object of the contract and as to
the price, even though neither has been actually delivered (Roman vs. Grimalt
(6Phil. 96)
• There is no perfected contract of sale if it is subject to the approval of higher
authorities (People’s Homesite vs. Court of Appeals, L-61623, December 26, 1984)
• Sale with assumption of mortgage not perfected without the mortgagee’s consent
(Chua vs Gutierrez, G.R. No. 172316, December 8, 2010) as the mortgagee’s
consent is necessary to perfect the sale with assumption of mortgage (Binan Steel
Corp. vs. CA, 439 Phil. 688)
• Seller wanted P980.00 per square meter, but the occupants were willing to pay
only P850.00. There was no meeting of the minds between the parties regarding
the offer by private respondent to sell his property to the occupants. (Virginia
Pagco vs. Court of Appeals (G.R. No. L-109236, March 18, 1994)
• A definite agreement on the manner of payment of the price is an essential
element in the formation of a binding and enforceable contract of sale. (67 Am Jur
2d Sales § 105 [1973]. (Velasco vs. Court of Appeals, 51 SCRA 439 [1973], citing
Navarro vs. Sugar Producers Cooperative Marketing Association, 1 SCRA 1180
[1961]; Raet vs. CA, G.R. No. 128016, Sept. 17, 1998)
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 Consent, Cont’d
• Option Contract
– A preparatory contract in which one party grants to another, for a period
fixed and under specified conditions, the power to decide whether or not
to enter into a principal contract. It is supported by a consideration
independent of the price of the contract. (Art. 1324. Relate this to Article
1479).
• If the offeree accepts the offer before the expiration of the period even
though the option is not supported by any consideration, there is a contract.
• The offeror is not bound if the offeree accepts the offer after the period given
has expired, even if the same is founded upon a consideration separate and
distinct from the price.
• Option money is NOT part of the price; separate consideration
• Payment of EARNEST MONEY is part of the price and proof of perfection of a
contract of sale (Art. 1482).

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 Consent, Cont’d

• The acceptance, without consideration, did not create an

enforceable obligation on the part of the defendant. The offer
as well as the acceptance, did not contemplate nor produce
an immediately binding and enforceable contract of sale
(Southwestern Sugar and Molasses Co. vs. Atlantic Gulf &
Pacific Co. (51 O.G. 3447)
• There is no valid contract without a cause or consideration,
the promisor is not bound by his promise and may,
accordingly, withdraw it. Pending notice of its withdrawal, his
accepted promise partakes, however, of the nature of an offer
to sell which, if accepted, results in a perfected contract of
sale (Sanchez vs. Rigos, 45 SCRA 368)

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 VICES OF CONSENT
• Vices of consent (Art. 1330):
1. Mistake
2. Violence
3. Intimidation
4. Undue influence
5. Fraud

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 Mistake
• Mistake and Ignorance
– Mistake is false notion of a particular matter while Ignorance is complete
absence of any notion about such matter.
• Juridically, they produce the same effect.
– "Mistake" has been defined as a "misunderstanding of the meaning or
implication of something" or "a wrong action or statement proceeding from a
faulty judgment.” (Domingo Realty vs. CA, 513 SCRA 40 [2007]
• Requisites
1. It must be substantial (it must refer to the object of the contract, the
conditions, the identity or qualifications which principally moved the parties
into entering into the contract) (Art. 1331)
2. It must be excusable (not by negligence)
3. It must be a mistake of fact, and not of law. (See Art. 3)
• To invalidate consent, the error must be real and not one that could have been
avoided by the party alleging it. The error must arise from facts unknown to him.
(ALCASID vs. vs. Court of Appeals, G.R. No. 104751 October 7, 1994)

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 Mistake, Cont’d.
• Mistakes of fact:
1. Error in re (Mistake as to object) – referred to by
the 1st Par. Of Art. 1331.
1. Error in corpore (Identity) – When the thing which is
the object of the contract is confused with another
thing
2. Error in substantia or qualitate (substance or quality)
– mistake as to the substance or circumstance of the
thing
3. Error in quantitate (quantity) - refers to extent, area
or dimension

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 Mistake, cont’d.
• 2. Error in personam (Mistake as to person) – referred to
by the 1st Par. Of Art. 1331.
• Only mistake with regard to the identity or
qualifications of one of the contracting parties will
vitiate consent.
• Requisites:
1. With regard to the identity or qualification of one of the
contracting parties; and
2. Such identity or qualification must have been the principal
consideration in the celebration of the contract.
*Mistake as to the name of one or both the contracting
parties will not vitiate consent.

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 Mistake, Cont’d
• Art. 1332 –
• Requisites in order for a party to enforce a contract
where the other is illiterate:
• There is a contract
• One of the parties is unable to read, or the contract is in a
language not understood by him
• Fraud or mistake is alleged
• The person enforcing the contract shows that the terms and
conditions thereof have been explained to the illiterate party.
• NOTE: The duty imposed by the provision does not
apply to the party who is NOT seeking to enforce the
contract (See Tang vs. CA (90 SCRA 236)
– NOT applicable also when there is absence of consent

47
 Mistake, Cont’d
• Cases:
– Proof that the disadvantaged party, due to mental weakness,
ignorance or any handicap could not read or that the contact
was made in a language not known to him is necessary (Bunyi vs
Reyes, 39 SCRA 504).
• Only after such proof is the burden shifted to the party enforcing the
contract that the contract’s content was explained to the other party.
– When the party who signed the document is blind and he
affixed his signature to the instrument believing that the same
was a mortgage but which turned out to be a sale, the contract
is voidable (Transporte vs. Beltran, 51 OG 1434).
– When the party signed the document without knowing or
understanding its contents, the contract is voidable (Ayola vs
Balderama Lumber, 49 OG 980).
• Note: In both cases, the party enforcing the contract was not able to
adduce evidence that the contents of the document was explained to
the other in the language understood by him.

48
 Violence
• when in order to wrest consent, serious or
irresistible force is employed (Art. 1335)
• Requisites:
1. Must be serious or irresistible or to such a
degree that the victim has no other recourse but
to submit; and
2. Must be the determining cause for the party
upon whom it is employed in entering into the
contract;

49
 Intimidation:
• (Art. 1335)
• Requisites:
1. The threatened act must be unjust or unlawful.
2. The threatened evil must be imminent and grave.
3. The threatened evil must be upon his person or property,
spouse, descendants or ascendants;
4. The threatened evil must be real and serious, there being
evident disproportion between the evil and the
resistance which one can offer, leading to the contract;
5. The threatened evil produces a reasonable and well-
grounded fear of a greater evil; and
6. The threatened evil is the determining cause of the
contract, or must have caused the consent to be given.
Note: Principle of choosing the lesser one between two
evils.
50
 Undue Influence

• There is undue influence when a person takes improper advantage of his power
over the will of another, depriving the latter of a reasonable freedom of choice.
(Art. 1337). It destroys the free agency of a party.

• Test of undue influence:

– Whether or not the influence exerted has so overpowered or subjugated the
mind of a contracting party as to destroy his free agency, making him express
the will of another rather than his own (Coso vs. Fernandez Deza, G.R. No.
16763, December 22, 1921).

• Circumstances considered to determine whether the influence exerted is

unreasonable:
• Confidential relations
• Family relations
• Spiritual relations
• Other relations between the parties

51
 Cases
• A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not vitiate
consent (Toledo vs. Hyden G.R. No. 172139, December 8,
2010; Lee vs. C, G.R. No. 90423 September 6, 1991).
• Threat to prosecute spouse.
– Jalbuena vs Ledesma (8 Phil. 601) a threat to “send back the
husband to jail” if the wife does sign a document guaranteeing
with her property the debt of her husband is voidable on
account of intimidation.
– Martinez vs HSBC, 15 Phil. 252) - the fact that the wife was
“forced” to convey her property to settle the criminal
complaint filed against her husband does not amount to
duress since she was the one who offered the settlement and
she was accompanied by counsel during negotiations.

52
 Fraud –
There is fraud when, through insidious words or machinations of one party,
the other is induced to enter a contract which, without them, he would not
have agreed to (Art. 1338)
Kinds of Fraud:
1. Fraud in the PERFECTION of the contract
• Causal Fraud (Dolo Causante) (Art. 1338 and Art. 1344, 1st Par.)
• Incidental Fraud (Dolo Incidente) (Art. 1344, 2nd Par.)
2. Fraud in the PERFORMANCE of an obligation (Art. 1170 and 1171)
Requisites of Fraud under Art. 1338:
1. It must have been employed by one contracting party upon the other
(Arts. 1338, 1342 and 1344)
2. It must have been serious (Art. 1344)
3. It induced the other party to enter into a contract (Art. 1338)
4. It must have been employed by one contracting party upon the other
and NOT employed by both contracting parties or by third persons;
5. Damage or injury resulted to the other party
53
 Fraud
Distinctions between Dolo Causante and Dolo Incidente

Dolo Causante Dolo Incidente

(Art. 1338) (Art. 1344)
Refers to those deceptions or Refers to those deceptions or
misrepresentations of a serious character misrepresentations which are not serious in
employed by one party and without which the character and without which the other party
other party would not have entered into the would have still entered the contract
contract

Fraud which is serious in character Fraud which is not serious in character

It is the cause which induces the party to It is not the cause that induced the party to
enter into a contract enter into a contract
Renders the contract voidable Renders the party liable for damages

54
 Fraud
• Distinctions between Fraud under Arts. 1170 (and 1171) and Fraud
under Art. 1338:
1. The first is present during the performance of the obligation; the
second is present only at the birth of the obligation;
2. The first is employed for the purpose of evading the normal
fulfillment of an obligation, while the second is employed for the
purpose of securing the consent of the other party to enter into the
contract;
3. The first result is the non fulfillment or breach of the obligation,
while the second, if it is the reason for the other party upon whom it
is employed for entering into the contract, results in the vitiation of
his consent;
4. The first gives rise to a right of the creditor or obligee to recover
damages from the debtor or obligor, while the second gives rise to a
right of the innocent party to ask for the fulfillment of the contract if
fraud is causal or to recover damages if it is incidental.

55
 Fraud
Cases:
• There must be concrete proof of facts constituting the fraud or
insidious words or machinations employed by one of the parties (or
a third person) BY REASON OF WHICH THE OTHER PARTY WAS
INDUCED TO ENTER INTO THE CONTRACT, WHICH, WITHOUT THEM,
HE WOULD NOT HAVE AGREED TO (Ramos vs. Valencia, 47 Off. Gaz.
1978)
• There is no fraud when the party claiming the same was fully aware
of the magnitude of his undertaking (Tankeh vs. Development Bank
Of The Philippines, G.R. No. 171428, November 11, 2013)
• When fraud is employed to obtain the consent of the other party to
enter into a contract, the resulting contract is NOT VOID but merely
a voidable contract, that is, a valid and subsisting contract until
annulled or set aside by a competent court (Abando vs. Lozada, G.R.
No. L-82564 October 13, 1989).

56
 Object
• Concept
– Subject matter
• The thing, right, service or abstention from doing an act
• The object of the contract and the object of the obligation are one and
the same EXCEPT in Barter (See Art. 1638)
• Requisites: It must be
– within the commerce of men (Art. 1347)
– licit, not contrary to law, morals, good customs, public policy or
public order (Art. 1347)
– in existence or possible of coming into existence (Arts. 1348,
1461 and 1462) but not future inheritance (Art.1347, 2nd Par)
• No contract if at the time of perfection the object is entirely lost. If
loss is partial, the buyer may withdraw from the contract or ask for a
proportionate reduction of the price (Art. 1493)
– determinate as to its kind (Arts. 1349 and 1460)
• See Also Arts. 1308 (re Mutuality of contracts)
 Object
• On future inheritance (Art. 1347, 2nd Par.)
• Requisites:
1. Succession has not yet been opened at the time of the
perfection of the contract
2. Object of the contract forms part if the inheritance
3. The promissor has, with respect to the object, an expectancy
of a right which is purely hereditary
(See Ferrer vs. Diaz, 619 SCRA 226; Tanedo vs CA, 322 SCRA 84)
• Exceptions
• Future spouses to donate to each other in their marriage settlement
(Art. 130, Family Code)
• Partition by a person of his estate during his lifetime (Art. 1080, Civil
Code)
• Inheritance ceases to be future upon the death of the
decedent.

58
 CAUSE
• Concept
– Reason for or the “why” of the contract
– Essential reason why the parties enter into a contract
• Requisites:
– It must exist at the time of the perfection of the
contract (Arts. 1352 and 1409 (2) and (3)
– It must be licit (Arts. 1352 and 1409 (1)
– It must be true (Arts. 1345 and 1353 )
NOTE: The cause is presumed to exist and is lawful even
if it is not stated in the contract (Art. 1354)
 Cause
• Art. 1350 – Cause of contracts
– Onerous contracts – for each contracting party,
the prestation or promise of a thing or service by
the other
– Remuneratory contracts – the service or benefit
remunerated
– Gratuitous contracts – liberality or generosity of
one of the contracting parties
NOTE: Natural obligations may constitute a
sufficient cause to support an onerous contract
(Villaroel vs. Estrada, 71 Phil. 14) but NOT moral
obligations cannot (Fisher vs. Robb, 69 Phil. 101)
 Cause
• Simulated contracts (Arts. 1345, 1346, 1352,
1353, 1409 Nos. (2) and (3) and 1471)
– Absolutely Simulated Contact
• Parties do not intend to be bound at all;
– Contract is not really desired or intended to produce any legal
effect
• Void
– Relatively Simulated Contract (See Art. 1471)
• Parties conceal their true agreement
• Produces legal effect
– If NO third person is prejudiced; or
– If NOT intended for any purpose contrary to law, morals, good
customs, public policy or public order

61
 Cause
• Cause is different from Motive.
– CAUSE is the direct or most proximate reason of a
contract while MOTIVE is the indirect reason.
– CAUSE is the objective or juridical reason of a contact
while MOTIVE is the psychological or purely personal
reason.
– CAUSE is always the same while MOTIVES differ for each
contracting party.
– The illegality of the CAUSE will affect the contract while
the illegality of the MOTIVE does not have any effect on
the contract
• EXCEPT when the MOTIVE predetermines the purpose of the
contract (Liguez vs. CA, 102 Phil 577; Rodriguez vs. Rodriguez,
20 SCRA 908; PBC vs. Lui She, 21 SCRA 52)
 Cause
• Inadequacy of the cause (lesion) CANNOT
invalidate a contract
– Unless there has been fraud, mistake or undue
influence (See Art. 1470); or
– Unless it falls under Art. 1381 (1) and (2)
See also Art. 1470 on Inadequacy of the price in
relation to Art. 1306 (on Autonomy of Contracts)

63
 Forms of Contracts
• A contract may be:
– Oral
– In writing
– Partly Oral and partly in writing
– Implied-in-Fact Contract – one implied from facts and circumstances
showing a mutual intention to contract. not expressed but manifested
by conduct and not by direct or explicit words between parties but is
to be deduced from conduct of the parties, language used, or things
done by them, or other pertinent circumstances attending the
transaction (UP vs Philab Industries, Inc. (G.R. No. 152411, September
29, 2004)
• Note: The totality of the acts/conducts of the parties must be
considered to determine their intention. An implied-in-fact
contract will not arise unless the meeting of minds is indicated by
some intelligent conduct, act or sign.

64
 Forms of Contracts
• Obligatoriness of contracts regardless of form as long
as the essential requisites are present, i.e. Consent,
Object and Cause (Arts. 1159 and 1356) UNLESS the
law requires that the contract be in some form for it
to be:
– VALID
– ENFORCEABLE BY ACTION or or TO BE PROVEN
(See also Art. 1430, 2 on Statute of Frauds)
– Convenience, efficacy and binding effect as to
third person (Art. 1358)

65
 Forms of Contracts
• Formalities for Validity:
1. Those which must appear in writing:
a. Donations of personal property whose value exceeds five
thousand pesos and acceptance thereof shall be made in
writing; otherwise, the donation be void (Art. 748, in relation to
Art. 1270, 2nd Par.)
b. Sale of a piece of land or any interest therein through an agent.
the authority of the latter shall be in writing. Otherwise, the sale
is void (Art. 1874)
c. Agreements regarding payment of interest in contracts of loan,
no interest shall be due unless it has been expressly stipulated in
writing (According to Art. 1956).
a. The validity of the contract of loan, however, is NOT affected
d. Antichresis contracts the amount of the principal and of the
interest shall be specified in writing. Otherwise, the contract is
void. (Art. 2134)

66
 Forms of Contracts
• Those which must appear in a public document:
a. Donations of immovable property must be made in a public document. The
acceptance may be made in the same deed of donation or in a separate
public document. Otherwise, the donation void. (Art. 749),
b. Partnerships where immovable property or real rights are contributed to
the common fund must appear in a public instrument and that there must
be an inventory of the immovable property or real rights, signed by the
partners, and attached to the public instrument. Otherwise, the contract is
void. (Arts. 1771 and 1773)
• Those which must be registered:
a. Chattel Mortgage. by a chattel mortgage, personal property is recorded in the
Chattel Mortgage Registers as a security for the performance of an obligation.
If the movable, instead of being recorded, is delivered to a creditor or a third
person, the contract is pledge and not chattel mortgage. According to Art.
2140 of the Code)
b. Sales or transfers of large cattle must be duly registered and a certificate of
transfer is secured. Otherwise, the same is not valid. (Act No. 1147 or the
Cattle Registration Act and Art. 1581)
67
 Forms of Contracts
• Contracts that must be in a public instrument:
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; (see also Art. 1625)
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. (Art. 1358)

68
 Forms of Contracts
• Failure to comply with Art. 1358 does not affect the validity,
binding effect or enforceability of the contract.
• The formality is intended for greater efficacy, convenience
or to bind third persons (Dauden-Hernaez vs. De Los
Angeles, 27 SCRA 1276)
• The parties have the right to compel each other to observe
the form
– The same may be exercised simultaneously with the action to
enforce the contract (Art. 1357)
• Note: Sec. 112 of PD 1529 provides that only public
instruments are registerable.
• See also Art. 1312, on contracts creating real right; one of
the exceptions to the principle of relativity of contracts.

69
 Reformation of Instruments
• Nature of the remedy
– To rectify the contract as to make it express the real intention of the
parties to prevent inequity and injustice
– The courts do not attempt to make another contract for the parties.
– Only the aggrieved party (or his heirs or assigns) may avail of the
remedy. If there is mistake and the same is mutual, either party or his
successors-in-interest may ask for reformation. (Art. 1368)
• Requisites:
a. There must be a meeting of the minds of the contracting parties;
b. Their true intention is not expressed in the instrument; and
c. Such failure to express their true intention is due to mistake, fraud,
inequitable conduct, accident, ignorance, negligence, etc. (Arts.
1361 to 1368)
• NOTE: The written contract must be valid or at least voidable or rescissible
• Rationale for the code provisions on the remedy of reformation :
– “Equity orders the reformation of an instrument in order that the true
intention of the contracting parties may be expressed. 70
 Reformation of Instruments
See also:
1. The Best Evidence Rule – when the subject of inquiry is the contents of a
document, the best evidence is the original document itself and no other
evidence (such as a reproduction, photocopy or oral evidence) is admissible
as a general rule (Section 3( d) of Rule 130 of the Rules of Court)
– The original is preferred because it reduces the chance of undetected
tampering with the document
2. The Parol Evidence Rule - when the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon
and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement
(Rules of Court, Rule 130, Section 9, 1st Par)
- The rule excludes extrinsic evidence by which a party seeks to contradict,
vary, add to or subtract from the terms of a valid agreement or
instrument EXCEPT:
- When there is an intrinsic ambiguity, mistake or imperfection in the
written agreement;
- When there is failure of the written agreement to express the true
intent and agreement of the parties thereto (agreement (Rules of
Court, Rule 130, Section 9, 2nd Par)
71
 Reformation of Instruments

• Distinction from the remedy of annulment of contracts:

– Reformation of an instrument presupposes a perfectly
valid contract (or at least voidable or rescissible) whereas
an action for annulment is based on a defective contract
because of want of a valid consent on the part of one of
the parties
– The grounds for reformation are mistake, fraud,
inequitable conduct, accident etc. (which must be present
or employed AFTER the perfection of the contract)
whereas the grounds for annulment are incapacity of one
of the parties, mistake, fraud, violence, intimidation,
undue influence (which must be present or employed at
the time of the celebration of the contract)

72
 Reformation of Instruments
• Instruments that cannot be reformed:
1. Simple donation inter vivos with no conditions
2. Wills; and
3. When the real agreement is void; and
4. When the instrument does not comply with the
formal requirements of the law for its validity.

73