Contracts A contract is a meeting of the minds and, therefore, there must be mutual consent. (Art. 1305)

Contracts is one of the sources of obligations. (Art. 1157) Obligation is the legal tie or relation itself that exists after a

contract has been entered into. Contracts are agreements enforceable through legal

proceedings. Those agreements which cannot be enforced by action in the courts of justice (like an agreement to go to a dance party) are not contracts but merely moral or social agreements. So, all contracts are agreements but not all agreements are contracts.

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.

Example

A contract whereby X promised to live as the common – law wife of Y without the benefit of marriage in consideration of P100,000.00

o Contract is immoral and, therefore, void. An arrangement whereby X is to render service as a servant

to Y without compensation as long as X has not paid his debt.o Agreement is reprehensible and censurable, also

contrary to law A stipulation in a contract of lease whereby the landlord can

use force to eject the tenant in case of failure of the latter to pay the rent agreed upon.

o Contract is void as being against public order.

A third person is one who has not taken part in a contract and is, therefore, a stranger to the contract. As a general rule, a third person has no rights and obligations under a contract to which he is a stranger. (Art. 1311) He has no standing in law to demand the enforcement of a contract or question its validity.

Cases when third party may be affected by a contract: In contracts containing a stipulation in favor of a third

person. (Art. 1311) In contracts creating real rights. (Art. 1312) In contracts entered into defraud creditors. (Art. 1313) In contracts which have been violated at the inducement of a

third person. (Art. 1314)

Example Person X contracts with Y for the erection of a building which

will enhance the value of Z’s adjoining property. In the event that the contract between X and Y is breached, does Z has the right to sue both X and Y for breach of contract?

o The fact that Z may incidentally derive some benefit from the contract gives him no right to sue X for breach of contract.

Classification of contracts according to its name:1. Nominate contract

o That which has a specific name or designation inlaw (e.g., lease, agency, sale, etc).

2. Innominate contracto That which has no specific name or designationin

law. (e.g., “I give that you may give”).

Classification of contracts according to its perfection:1. Consensual contract

o That which is perfected by mere consent (e.g.sale, lease, agency)

2. Real contracto That which is perfected by the delivery of thething

subject matter of the contract (e.g.pledge)3. Solemn contract

o That which requires compliance with certainformalities prescribed by law (e.g. donation ofreal property which must be in a publicinstrument)

Stages In the life of a contract:1. Preparation or negotiation

o This includes all the steps taken by the parties leading to the perfection of the contract.

o At this stage the parties have not yet arrived at any definite agreement.

2. Perfection or birtho This is when the parties have come to a definite

agreement or meeting of the minds regarding the subject matter and cause of contract.

3. Consummation or Terminationo This is when the parties have performed their

respective obligations and the contract may be said to have been fully accomplished or executed, resulting in the extinguishment or termination thereof.

Example Which of the following is NOT an essential requisite of a

contract:o Consent

o Deliveryo Objecto Cause

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.

Real contracts require a fourth requisite: DELIVERY

Identification: Consent

o Manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.

Offero Is a proposal made by one party to another to

enter into a contract. It is more than the desire or hope

Acceptanceo Is the manifestation of the offeree of his assent to

the terms of the offer.

Example David offered to sell a ring either for cash, or on an

installment basis, the balance to be paid in three years. The total price was P1,000,000. Rey, to whom the ring was offered, wrote to David stating among other things that he was giving P100,000 as down payment, the balance to be paid in some other way. Is there a formation of a contract?

o There was already meeting of the mind.o Art. 1319. …, The offer must be certain and the

acceptance absolute. A qualified acceptance constitutes a counter-offer.

On Aug.1, 2006, Rene wrote to Ben a letter, offering to sell a ring. On Aug.18, Ben wrote a letter of complete acceptance, which was received by Rene Aug.20. However, on Aug.19, Rene had already written to Ben a letter withdrawing the offer, received by the latter on Aug.21.

o There was already a perfected contract.o Art. 1319, …, Acceptance made by letter or

telegram does not bind the offer except from the time it came to his knowledge…

o What is important is that the letter if withdrawal was MADE prior to the knowledge of acceptance.

An offer made through an agent is accepted from the time acceptance is communicated to the principal.

o False

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

o an agent is an extension of the personality of the principal

On Aug.1, 2006, Pedro wrote Meno a letter, offering to sell a ring. On Aug.18, Meno wrote a letter of complete acceptance, which was received at the house of Pedro on Aug.20. However, on Ag.19, Pedro had died.

o Statement: There was NO meeting of the mindso Art. 1323. An offer becomes ineffective upon the

death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n)

Facts: B, interested in a particular car, asked S for the price. S said: “P1M.” B however could not make up his mind whether to buy or not. So S told B, “I’ll give you a week to make up your mind. In the meantime, I will reserve this car for you.”

o Statement: Before the week is over, S can withdraw the offer to sell the car.

o 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…

Facts: B, interested in a particular car, asked S for the price. S said: “P1M.” B however could not make up his mind whether to buy or not. So B told S, “I’ll give you P500 to give me a week to make up my mind. In the meantime, reserve this car for me.” S agreed.

o 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.

Identification Contract of Option

o is a separate (have its own cause and consideration) and distinct contract from the contract which the parties may enter into upon the consummation of the Option contract

o a contract granting a person/offerree a certain period to accept, and during which period the offer cannot be withdrawn by the offerror.

Business advertisements of things for sale are not definite offers, but mere invitations to make an offer

Example “For Sale: 500 sq. meter lots at P10M to P15M a lot at

SitioCalong-Calong Tel 2-20-82.”o This is a definite offer from which the advertisers

cannot back out, once it is accepted by another.o DOES NOT CONTAIN all the specific particulars

needed in the contract. The advertiser is NOT bound to accept the highest or lowest

bidder.o 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.

Which of the following CAN give consent to a contract:o Minorso Demented personso Deaf-mutes who do not know how to write

o Insane persons during lucid interval

Incapacitated to give consent: minors; insane or demented persons; dear-mutes who do not know how to write; married women of age in cases specified by law; persons suffering from civil interdiction; incompetents under guardianship.

Persons prohibited from entering into a contract: Insolvents

o Before they are discharged by the insolvency court Husband and wife

o Prohibited from donating or selling property to each other during the marriage. (Art. 1490)

Persons who are prohibited from giving each other any donation or advantage

o Prohibited from entering into a contract if universal partnership

Persons holding a fiduciary relation with respect to certain properties.

o Fiduciary - relating to a holding of something in trust for another

o Art. 1491. …: o (3) Executors and administrators, the property of

the estate under administration; o (4) Public officers and employees, the property of

the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;

o (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession.

o (6) Any others specially disqualified by law. (1459a)Example

A contract entered by one who is prohibited from entering into a contract is void.

o Void, voidable, rescissible and unenforceable contracts are defective contracts…

Which of the following will NOT render the contract voidable:

a. Consent given by mistakeb. Consent given through undue influencec. Consent given through intimidationd. Consent given in a state of drunkennesse. None of the above

o Art. 1328. …Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n)

Vices of consent: Mistake Violence Intimidation Undue influence Fraud (Art 1330)

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

Example Mistake of law renders the contract voidable.

o …ignorance of the law excuses no one from compliance therewith”.\

o …if a contract is voidable, it can be annulled, thus would excuse a party from complying with his obligations

Mistake of fact renders the contract voidable. (1)as to the object of the contract

A. identity of the thingB. substance of the thingC. condition of the thingD. quantity of the thing

o provided that the extent or dimension of the thing was one of the principal reasons of one or both of the parties for entering into the contract

(2) as to persono mistake with regard to the identity or with regard

to the qualification of one of the parties. (Art 1331)o provided that such identity or qualifications have

been the principal cause of the contract

When a person takes improper advantage of his power over the will of another,The following circumstances shall be considered:

1. confidential, family, spiritual and other relations between the parties

2. mental weakness3. ignorance4. financial distress

Example When one of the contracting parties is compelled by a

reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse the descendants or ascendants, to give a consent, there is:o Fraud

o Intimidationo Undue influenceo Violence

Art. 1335. …A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.

Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract.

Example When, through insidious words or machination of one of the

contracting parties, the other induced to enter into a contract which, without them, he would not have agreed to, there is:

o Fraudo Intimidationo Undue influenceo Violence

Insidious- awaiting a chance to entrap; treacherous

Art. 1341. A mere expression of an opinion DOES NOT signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. (n)

Example Facts: An agent persuaded his principal to sell certain

properties to himself at a low price. The agent did not reveal that somebody else was interested in acquiring said properties at much higher prices.

o Statement: The sale to the agent is voidable because of fraud

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n)

Simulation of Contract--It is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) or which is different from the true agreement (relative simulation)

Absolutely simulated contract—takes place when the parties do not intend to be bound at all.

Relatively simulated contract—takes place when the parties conceal their true agreement.

Object - The thing, right, or service which is the subject matter of the obligation which is created or established in the contract.

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271a)

Requisites of a valid object: the object should be within the commerce of man—

susceptible of appropriation and transmissible from one person to another.

the object should be real or possible—should exist at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future.

the object should be licit—should not be contrary to law, morals, good customs, public order, or public policy

the object should be determinate as to its kind.

Cause - The essential reason which moves the contracting parties to enter into the contract.

Classification of Contracts as to Cause:Classification of Contracts as to Cause:

Onerous—the cause is for each contracting party, the prestation or promise of a thing or service by the other.

Remuneratory—the past service or benefit which by itself is a recoverable debt.

Gratuitous—the cause is the mere liberality of the benefactor (Art 1274)

Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof.

Requisites of a valid cause: the cause should be in existence; the cause should be licit; the cause should be true.

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.

It is inadequacy of cause.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. (n) Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable , or that a contract be proved in a certain way, that requirement is absolute and indispensable.

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.

Art. 1359. ... 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.

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.

Example Shall apply if the terms of the contract are UNCLEAR and

AMBIGUOUS:o Annulment

o Interpretation of contracto Ratificationo Reformation of the instrument

Defective Contracts

Rescissible contracts Voidable contracts Unenforceable contracts Void and inexistent contracts

Example Contract which is valid because it contains all of these

essential requisites prescribed by law, but which is defective because of injury or damage to either of the contract parties or to third persons:

o Rescissible contracto Unenforceable contracto Void contracto Voidable contract

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 restoration of to their condition prior to the celebration of the contract:

o Annulmento Ratificationo Reformation

o Rescission

Lesion Is any damage caused by the fact that the price is unjust or

inadequate It is the injury suffered in consequence of inequality of

situation, by one party who does not receive the full equivalent for what he gives in a commutative contract, like a sale

Example S sold B his land worth P100,000.00 for only P80,000.00.

o This contract of sale is valido This contract of sale is valid although the price is

inadequate

Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the

wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

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

(5) All other contracts specially declared by law to be subject to rescission. (1291a)

Example

To fraud his creditor, B sold his house to X. when however the creditor wanted his credit, somebody lent B enough money. The sale of the house should no longer be rescinded.

o Trueo Art. 1381. …Rescissible:…(3)Those undertaken in

fraud of creditors when the latter cannot in any other manner collect the claims due them;

o 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. (1294)

B sues C for recovery of a diamond ring. Pending the resolution of the case, B sells the ring to D with the approval of C but without the approval of the court. The sale to D is rescissible.

o Falseo Art. 1381. …Rescissible:…(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;

An obligation that results when a contract is rescinded:o Ratificationo Reparationo Resolution

o Restitution

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

Example The following must be returned if a contract is rescinded,

EXCEPT:o The object of the contract and their fruitso The price with its interest

o The object of the contract in the legal possession of third persons in good faith

Art. 1385. …. 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.

Example To fraud his creditors, B sold to C a piece of land. C is an

innocent purchaser in good faith, who takes legal possession of the land. What is the remedy of the creditors?

o Demand indemnity for damages

o Ratificationo Rescissiono Restitution

Facts: the person who asked for the rescission was 14 years old and was under a guardian at the time of the transaction of the rescindable contract.

Statement: action brought for the rescission of a rescindable contract, five years after it was made should not be allowed.

o Falseo Art. 1389. …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. (1299)

Which of the following statement refers to voidable contract:A. Compatible with the perfect validity of the contractB. The basis is lesionC. The basis is vitiated consent or incapacity to

consentD. The action is subsidiary

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.

The action for annulment must be brought within how many years?

A. 1 yearB. 2 yearsC. 4 yearsD. No limit. Action DOES NOT PRESCRIBE

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.

Ratificationo Cures the defect in a voidable contract.o Art. 1392. Ratification extinguishes the action to annul a

voidable contract. o Art. 1396. Ratification cleanses the contract from all its

defects from the moment it was constituted

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.

Example X contracted with a minor. X CAN NOT sue for annulment on

the ground that the other party was a minorA. TrueB. 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.

The following must be returned if a contract is annulled, EXCEPT:

A. The object of the contract and their fruitsB. The price with its interestC. The object of the contract if one of the parties is

incapableD. The object of the contract if one of the parties is

incapacitated and benefited therefrom Which of the following would NOT make a voidable contract

VALID?A. AnnulmentB. Loss of the thing which is the object of the contract

through the fraud or fault of the person who is entitled to institute the action for the annulment

C. Prescription of the action for annulmentD. Ratification or confirmation

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.

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 … (3) Those where both parties are incapable of giving consent

to a contract.

Art. 1405. Contracts infringing the Statute of Frauds, …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. 1403. The following contracts are unenforceable, unless they are ratified:

…(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:

Documents required to be in writing:Art. 1403. …

(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;

Art. 1403. … (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; …Art. 1403. …

(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.

Art. 1403. The following contracts are unenforceable, unless they are ratified: …(2) Those that do not comply with the Statute of Frauds…evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: …(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;… Art. 1405. Contracts infringing the Statute of Frauds, … 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. 1405. Contracts infringing the Statute of Frauds, …are ratified… by the acceptance of benefit under them.**The Statute of Frauds applies only to executory contracts and not to contracts that have been partially or fully performed.

Voidable contract - lack absolutely either in fact or in law one or some or all of those elements which are essential for its validity:

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.