THE LAW ON OBLIGATION AND CONTRACTS

PART II

CONTRACTS -meeting of minds bet 2 parties whereby one binds

himself with respect to other to give something or render some
service

PRINCIPAL CHARACTERISTICS:
1. Autonomy of wills – parties may stipulate anything as long as not
illegal, immoral, etc.
2. Mutuality – performance or validity binds both parties; not left to will
of one of parties
3. Obligatory Force – parties are bound from perfection of contract:
a. fulfill what has been expressly stipulated
b. all consequences w/c may be in keeping with good faith, usage & law
4. Relativity – binding only between the parties, their assigns, heirs;
strangers cannot demand enforcement

EXCEPTION TO RELATIVITY:
a. Accion pauliana
b. Accion directa
c. Stipulation pour autrui
REQUISITES OF STIPULATION POUR AUTRUI
(1) Parties must have clearly and deliberately conferred a favor
upon a 3rd person
(2) The stipulation in favor of a 3rd person should be a part of, not
the whole contract
(3) That the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatsoever
(4) Neither of the contracting parties bears the legal representation
or authorization of 3rd party
(5) The third person communicates his acceptance before
revocation by the original parties
d. Art 1312
e. Art 1314
 REQUISITES OF ART 1312:
(1) Existence of a valid contract
(2) Knowledge of the contract by a 3rd person
(3) Interference by the 3rd person

KINDS OF CONTRACTS

As to perfection or formation:
1. consensual – perfected by agreement of parties
2. real – perfected by delivery ( commodatum, pledge, deposit )
3. formal/solemn – perfected by conformity to essential formalities
(donation )
As to cause
1. Onerous – with valuable consideration
2. Gratuitous – founded on liberality
3. Remunerative – prestation is given for service previously rendered not
as obligation

As to importance or dependence of one upon another

1. principal – contract may stand alone
2. accessory – depends on another contract for its existence; may not exist
on its own
3. Preparatory – not an end by itself; a means through which future
contracts may be made

As to parties obliged:
1. Unilateral – only one of the parties has an obligation
2. Bilateral – both parties are required to render reciprocal prestations

As to name or designation:
1. Nominate
2. Innominate
a) Do ut des – I give that you may give
b) Do ut facias – I give that you may do
c) Facio ut des – I do that you may give
d) Facio ut facias – I do that you may do
STAGES IN A CONTRACT:
1. Preparation - negotiation
2. perfection
3. consummation – performance

ESSENTIAL ELEMENTS:
1. Consent – meeting of minds between parties on subject matter &
cause of contract; concurrence of offer & acceptance
Requirements:
a. Plurality of subject
b. Capacity
c. Intelligence and free will
d. Manifestation of intent of parties
e. Cognition by the other party
f. Conformity of manifestation and cognition

Note: We follow the theory of cognition and not the theory of

manifestation. Under our civil law, the offer and acceptance
concur only when the offeror comes to know, and not when the
offeree merely manifests his acceptance

ELEMENTS OF VALID OFFER ELEMENTS OF VALID

ACCEPTANCE
a. definite a. unequivocal
b. complete b. unconditional
c. intentional

WHEN OFFER BECOMES INEFFECTIVE:

1. death, civil interdiction, insanity or insolvency of either party before
acceptance is conveyed
2. express or implied revocation of the offer by the offeree
3. qualified or conditional acceptance of the offer
4. subject matter becomes illegal or impossible before acceptance is
communicated

PERIOD FOR ACCEPTANCE

1. stated fixed period in the offer
2. no stated fixed period
 a) offer is made to a person present – acceptance must be made
immediately
b) offer is made to a person absent – acceptance may be made
within such time that, under normal circumstances, an answer
can be received from him
OPTION - option may be withdrawn anytime before acceptance is
communicated but not when supported by a consideration other than
purchase price: option money

PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT:

1. Minors
2. Insane or demented persons
3. Illiterates/ deaf-mutes who do not know how to write
4. Intoxicated and under hypnotic spell
5. Art 1331 - person under mistake; mistake may deprive intelligence
6. Art 1338 - person induced by fraud (dolo causante)

Note: Dolus bonus (usual exaggerations in trade) are not in

themselves fraudulent

RULE ON CONTRACTS ENTERED INTO BY MINORS

General Rule: VOIDABLE
EXCEPTIONS:
1. Upon reaching age of majority – they ratify the same
2. They were entered unto by a guardian and the court having
jurisdiction had approved the same
3. They were contracts for necessities such as food, but here the
persons who are bound to give them support should pay therefor
4. Minor is estopped for having misrepresented his age and misled
the other party (when age is close to age of majority as in the
Mercado v Espiritu & Sia Suan v Alcantara cases)

DISQUALIFIED TO ENTER INTO CONTRACTS: ( contracts

entered into are void )
1. those under civil interdiction
2. hospitalized lepers
3. prodigals
4. deaf and dumb who are unable to read and write
 5. those who by reason of age, disease, weak mind and other similar
causes, cannot without outside aid, take care of themselves and
manage their property, becoming an easy prey for deceit and
exploitation

CAUSES WHICH VITIATE FREEDOM

1. violence
REQUISITE:
a. Irresistable physical force
b. Such force is the determining cause for giving consent

2. Intimidation
REQUISITE:
a. Determining cause for the contract
b. Threatened act is unjust and unlawful
c. Real and serious
d. Produces a well grounded fear that the person making it will
carry it over
3. undue influence

SIMULATED CONTRACTS
a. absolute – no intention to be bound at all, fictitious only – void
from beginning
b. relative – there is intention to be bound but concealed; concealed
contract binds:
1. no prejudice to 3rd persons
2. not contrary to law, morals, etc.
2. OBJECT – The prestation

REQUISITES:
a) Within the commerce of man - either existing or in potency
b) Licit or not contrary to law, good customs
c) Possible
d) Determinate as to its kind or determinable w/o need to enter into a
new contract
e) Transmissible

3. CAUSA – reason why parties enter into contract

 REQUISITES:
a) It must exist
b) It must be true
c) It must be licit

MOTIVE - purely private reason; illegality does not invalidate contract

except when it predetermines purpose of contract; when merged into
one

4. FORM – in some kind of contracts only as contracts are generally

consensual; form is a manner in which a contract is executed or
manifested
a. Informal – may be entered into whatever form as long as there is
consent, object & cause
b. Formal – required by law to be in certain specified form such as:
donation of real property, stipulation to pay interest, transfer of
large cattle, sale of land thru agent, contract of antichresis,
contract of partnership, registration of chattel mortgage, donation
of personal prop in excess of 5,000
c. Real – creation of real rights over immovable prop – must be
written

WHEN FORM IS IMPORTANT:

1) for validity (formal/solemn contracts)
2) for enforceability (statute of frauds)
3) for convenience
General Rule: contract is valid & binding in whatever form provided
that 3 essential requisites concur
Exception:
a. Law requires contract to be in some form for validity - donation &
acceptance of real property

b. Law requires contract to be in some form to be enforceable - Statute

of Frauds; contract is valid but right to enforce cannot be exercised;
need ratification to be enforceable
c. Law requires contract to be in some form for convenience - contract
is valid & enforceable, needed only to bind 3rd parties
 - ex: public documents needed for the ff:
1. contracts w/c object is creation, transmission or reformation of
real rights over immovables
2. cession, repudiation, renunciation of hereditary rights/CPG
3. power to administer property for another
4. cession of action of rights proceeding from an act appearing in
a public inst.
5. all other docs where amount involved is in excess of 500 ( must
be written even private docs )

REFORMATION OF CONTRACTS – remedy to conform to real intention

of parties due to mistake, fraud, inequitable conduct, accident

CAUSES/GROUNDS:
a. mutual: instrument includes something w/c should not be there or
omit what should be there
 mutual
 mistake of fact
 clear & convincing proof
 causes failure of instrument to express true intention
b. unilateral
 one party was mistaken
 other either acted fraudulently or inequitably or knew but
concealed
 party in good faith may ask for reformation
c. mistake by 3rd persons – due to ignorance, lack of skill, negligence ,
bad faith of drafter, clerk, typist
d. others specified by law – to avoid frustration of true intent

REQUISITES:
1. there is a written instrument
2. there is meeting of minds
3. true intention not expressed in instrument
4. clear & convincing proof
5. facts put in issue in pleadings

Note: prescribes in 10 years from date of execution of

instrument
 WHEN NOT AVAILABLE:
a. simple donation inter vivos
b. wills
c. when real agreement is void
d. estoppel; when party has brought suit to enforce it

KINDS OF DEFECTIVE CONTRACTS:

1. RESCISSIBLE CONTRACTS – Those which have caused a particular

economic damage either to one of the parties or to a 3rd person and
which may be set aside even if valid. It may be set aside in whole or in
part, to the extent of the damage caused'

REQUISITES:
a. Contract must be rescissible
(1) Under art 1381:
i. Contracts entered into by persons exercising fiduciary capacity
(a) Entered into by guardian whenever ward suffers damage
by more than 1/4 of value of object
(b) Agreed upon in representation of absentees, if absentee
suffers lesion by more than ¼ of value of property
(c)Contracts where rescission is based on fraud committed on
creditor (accion pauliana)
(d) Objects of litigation; contract entered into by defendant
w/o knowledge or approval of litigants or judicial authority
(e) Payment by an insolvent – on debts w/c are not yet due;
prejudices claim of others
(f) Provided for by law - art 1526, 1534, 1538, 1539, 1542,
1556, 1560, 1567 and 1659
ii.Under art 1382 - Payments made in a state of insolvency
b. Plaintiff has no other means to obtain reparation
b. Plaintiff must be able to return whatever he may be obliged to return
due to rescission
c. The things must not have been passed to 3rd parties who did not act
in bad faith
d. It must be made within the prescribed period
 OBLIGATION CREATED BY THE RESCISSION OF THE
CONTRACT: Mutual Restitution
1. Things w/c are the objects of the contract & their fruits
2. Price with interest

Note: Mutual restitution N.A. when:

1. creditor did not receive anything from contract
2. thing already in possession of party in good faith; subject
to indemnity only; if there are 2 or more alienations –
liability of 1st infractor

2. VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect

is due to vice of consent or legal incapacity

CHARACTERISTICS:
a. Effective until set aside
b. May be assailed or attacked only in an action for that purpose
c. Can be confirmed ( Note: CONFIRMATION IS THE PROPER
TERM FOR CURING THE DEFECT OF A VOIDABLE CONTRACT)
d. Can be assailed only by the party whose consent was defective or his
heirs or assigns

WHAT CONTRACTS ARE VOIDABLE:

a. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF
GIVING CONSENT TO A CONTRACT (legal incapacity)
(1) minors ( below 18 )
(2) insane unless acted in lucid interval
(3) deaf mute who can’t read or write
(4) persons specially disqualified: civil interdiction
(5) in state of drunkenness
(6) in state of hypnotic spell

b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE,

VIOLENCE, INTIMIDATION, UNDUE INFLUENCE OR FRAUD
(vice of consent)

(1) mistake – false belief into something

 REQUISITES:
1. Refers to the subject of the thing which is the object of the
contract
2. Refers to the nature of the contract
3. Refers to the principal conditions in an agreement
4. Error as to person - when it is the principal consideration of the
contract
5. Error as to legal effect - when mistake is mutual and frustrates
the real purpose of parties

(2) violence – serious or irresistible force is employed to wrest

consent

(3) intimidation – one party is compelled by a reasonable & well-

grounded fear of an imminent & grave danger upon person &
property of himself, spouse, ascendants or descendants (moral
coercion)

(4) undue influence – person takes improper advantage of his

power over will of another depriving latter of reasonable freedom
of choice

(5) fraud – thru insidious words or machinations of contracting

parties, other is induced to enter into contract w/o w/c he will not
enter (dolo causante)

PERIOD TO BRING ACTION FOR ANNULMENT

EFFECTS OF ANNULMENT:
1. Obligation to give – mutual restitution
2. Obligation to do – value of service

PRESCRIPTION IN ACTION FOR ANNULMENT OF VOIDABLE

CONTRACTS:
3. UNENFORCEABLE CONTRACT – valid but cannot compel its
execution unless ratified; extrinsic defect; produce legal efefcts only
after ratified
 KINDS/VARIETIES:
1. Unauthorized/No sufficient authority – entered into in the name of
another when:
a. no authority conferred
b. in excess of authority conferred ( ultra vires )

Note: Curable by RATIFICATION

2. Both parties incapable of giving consent -2 minor or 2 insane persons

Note: Curable by ACKNOWLEDGEMENT

3. Failure to comply with Statute of Frauds

a. Agreement to be performed within a year after making contract
b. Special promise to answer for debt, default or miscarriage of
another
c. Agreement made in consideration of promise to marry
d. Agreement for sale of goods, chattels or things in action at price
not less than 500; exception: auction when recorded sale in sales
book
e. Agreement for lease of property for more than 1 year & sale of
real property regardless of price
f. Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS:

1. Failure of defendant to object in time, to the presentation of parole
evidence in court, the defect of unenforceability is cured
2. Acceptance of benefits under the contract. If there is performance in
either part and there is acceptance of performance, it takes it out of
unenforceable contracts; also estoppel sets in by accepting
performance, the defect is waived

4. VOID OR INEXISTENT – of no legal effect

CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone
b. There is no action for annulment necessary as such is ipso jure. A
judicial declaration to that effect is merely a declaration
c. It cannot be confirmed, ratified or cured
d. If performed, restoration is in order, except if pari delicto will apply
e. The right to set up the defense of nullity cannot be waived
f. Imprescriptible
g. Anyone may invoke the nullity of the contract whenever its juridical
effects are asserted against him

KINDS OF VOID CONTRACT:

1) Those lacking in essential elements: no consent, no object, no

cause (inexistent ones) – essential formalities are not complied with (
ex: donation propter nuptias – should conform to formalities of a
donation to be valid )
(a) Those w/c are absolutely simulated or fictitious – no cause
(b) Those which cause or object did not exist at the time of the
transaction – no cause/object
(c)Those whose object is outside the commerce of man – no object
(d) Those w/c contemplate an impossible service – no object
(e) Those w/c intention of parties relative to principal object of the
contract cannot be ascertained

2) Prohibited by law
(f) Those expressly prohibited or declared void by law - Contracts w/c
violate any legal provision, whether it amounts to a crime or not

3) Illegal/Illicit ones – Those whose cause, object or purpose is

contrary to law, morals, good customs, public order or public policy ;
Ex: Contract to sell marijuana

MUTUAL RESTITUTION IN VOID CONTRACTS

General Rule: parties should return to each other what they have
given by virtue of the void contract in case where nullity arose from
defect in essential elements
1. return object of contract & fruits
2. return price plus interest
 Exception: No recovery can be had in cases where nullity of contract
arose from illegality of contract where parties are in pari delicto; except:
a. incapacitated – not obliged to return what he gave but may
recover what he has given
b. other party is less guilty or not guilty

END#