CONTRACTS

What is a contract?

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service. (Art. 1305, NCC). It is a juridical convention in legal form,
by virtue of which one or more persons bind themselves in favor of another, or others, or reciprocally, to the
fulfillment of a presentation to do, to give, or not to do. (Sanchez vs. Mapalad Realty Corp. G.R. No. 148516,
December 27, 2007).

What is the so-called “liberty of contracts”:

The liberty of contracts simply means the right of the parties to enter into such stipulations or terms and
conditions in their contracts.

The liberty of contracts is not absolute. It is subject to certain limitations imposed by law and 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. (Art.
1306, NCC).

What is the principle of mutuality of contracts;

It means that the contracts are binding between the parties; their validity or compliance cannot be left to
the will of one of them. (Art. 1308, NCC). A contract is a contract. Once agreed upon and the essential
elements are present, it is valid and binding between the parties. (Mate vs. CA, et., G.R. No 120724-25, May
21, 1998, 94 SCAD 615; Blas vs. Linda Angeles-Hutalla, G.R. No. 155594, September 27, 2004; Sps.
Dumlao vs. Marion Realty Corp., G.R. No. 131491, August 17, 2007).

General Rule with respect to the effectivity of contracts and the exceptions:

Contracts take effect only between the parties, their assigns, and heirs, except in cases where the
rights and obligations arising from the contract are not transmissible by their nature, by stipulation, or by
provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.

Requisites of stipulation pour autrui:

The requisites for such stipulation are the following;

a. The stipulation in favor of a third person, the third-party beneficiary which should be a part, not the
whole, of the contract;
b. The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a
mere incidental benefit or interest;
c. The favorable stipulations should not be conditioned or compensated by any kind of obligation
whatsoever;
d. The third person must have communicated his acceptance to the obligor before its revocation;
e. Neither of the contracting parties bears the legal representation or authorization of the third party.

How are contracts perfected:

It depends. If the contracts are consensual, they are perfected by mere consent. If they are real they
are perfected by the delivery of the object. (Arts. 1315 and 1316, NCC).
Elements of a valid contract:

They are a) consent of the contracting parties; b) object certain which is the subject matter of the
contract; and c) the cause of the obligation that is established. (Art. 1318, NCC).

How is consent manifested:

Consent is manifested by the meeting of the offer and the acceptance of the thing and the cause which
are to constitute the contract. The offer must be certain and the acceptance, absolute. A qualified acceptance
constitutes a counteroffer. (Art. 1319, NCC).

If there is an offer and there is an acceptance with conditions, whether there is a perfected contract?

None, because an offer must be clear and definite while an acceptance must be unconditional and
unfounded, in order that their concurrence can give rise to a perfected contract. If there are conditions
imposed, there is no meeting of the minds, as the same is a mere counter-offer. (Maria Cristina Fertilizer
Corp., et al., vs. CA, et al., G. R. No. 123905, June 9, 1997, 83 SCAD 130).

Example:

X owns a house and lot. He sent a letter to Y and offered it for sale. Two days after receipt, Y sent X a
letter accepting the offer; but when the letter of acceptance reached X’s residence, he was already dead. Was
there a meeting of the minds?

None. Acceptance made by letter does not bind the offerer except from the time it came to his
knowledge. (Art. 1319, NCC). Since X was already dead when the letter of acceptance reached his
residence, he could not have known the said acceptance.

Effect if both parties to a contract employed fraud:

The contract is valid and they cannot invoke the fraud to avoid liability as their mutual fraud would
negate each other. Under the law, in order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties. (Art. 1344, NCC).

OBJECT OF CONTRACTS

What may be the object of a contract?

All things which are not outside the commerce of men, including future things, maybe 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. (Art. 1347, NCC)

Example:

X entered into a contract of sale with the right to repurchase with Y over a house and lot belonging to
him. Can he sell that right?

Yes, because that right, even if intangible, is determinate. The object of every contract must be
determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to determine the same, without the need of a new contract
between the parties. (Art. 1349, NCC).

CAUSE OF CONTRACTS
What are the causes of contracts?

In onerous contracts the cause is understood to be, for each contracting party the prestation or promise
of a thing or service by the other: in remuneratory ones, the service or benefit which is remunerated; and in
contracts of pure beneficence the mere liberality of the benefactor. (Art. 1350, NCC).

Example:

X and Y entered into a contract of sale over a parcel of land without any cause or consideration. Is the
contract valid?

No, because the law requires as one of the requirements for the validity of a contract that there be a
cause or consideration. (Art. 1318, NCC; Robleza vs. CA, G.R. No. 80364, June 28, 1989).

Suppose the cause or price was not paid, is the contract valid?

Yes. Non-payment of the price is not the controlling criterion to make a contract void. Non-payment is
merely a ground for specific performance or rescission of the contract. (Robleza vs CA, supra).

Is an oral contract of sale over a parcel of land valid and binding?

Yes, an oral contract of sale over a parcel of and is valid and binding between the parties, but with
respect to innocent third persons, it is not binding upon them.

FORM OF CONTRACTS

1. May a contract be entered into in any form?

Yes. 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 to be
in some form in order that it may be valid or enforceable, or that a contract is proven in a certain way, that
requirement is absolute and indispensable. One exception thereto is the Statute of Frauds which requires
a written instrument for the enforceability of a contract. (Arts. 1356 and 1402). Arrogante, et al. vs.
Deliarte, et al., G.R. No. 152132, July 24, 2007).

Example:

X and Y entered into an oral contract of sale of a parcel of land. X paid the consideration,. When
he demanded the delivery of the title, Y refused, contending that there was no written contract evidencing
the same. What right, if any, does X have as against Y to enforce his rights?

He can ask for a specific performance. Under the law, if the law requires a document or other
special form, the contracting parties may compel each other to observe that form once the contract has
been perfected. This right may be exercised simultaneously with the action upon the contract. (Art. 1357,
NCC; Limketkai vs. CA, et al., G. R. No. 118509, December 1, 1995. 66 SCAD 136).

2. Contracts or acts that must appear in a public instrument:

The following must appear 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 thereto
are governed by Articles 1403, No. 2, and 1405).
2. The cession, repudiation, or renunciation of hereditary rights or of those of the conjugal partnership of
gains;

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

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

All other contracts where the amount involved exceeds Five Hundred Pesos (P500.00) must appear
in writing, even a private one. But the sale of goods, chattels or things in action are governed by Articles
1403, No. 2, and 1405. Art 1358 NCC.

3. As a rule, the requirement that contracts be in a certain form does not necessarily mean that they be
so in order to be valid, but the requirement is designed merely for purposes of enforceability. Some
laws that require contracts to be in a certain form to be valid, are, namely:

1. In case of donation of personal properties the value of which exceeds P5,000.00, the law requires it
to be in writing. (Art. 748, NCC).

2. Donation of real property must be in a public instrument and accepted to be valid. (Art. 749).

3. In the sale of real property through an agent, the law requires the agency to be in writing (Art.
1874 NCC).

REFORMATION OF INSTRUMENTS

4. When is a reformation of the instrument proper?

When there has 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. (Article 1359, NCC).
Example:
X and Y entered into a contract of loan. X, the creditor, however, asked Y to sign a document that
purported to be a sale of a parcel of land with the assurance that the same would only be a security for the
payment of the obligation. What is the remedy of Y in case X demands the delivery of the supposed
security contending that X is now the owner of the property?

Y can ask for specific performance. Under the law, when, there have 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; par. 1,
NCC).

5. What is the concept of the principle that you do not reform the contract but you reform the instrument
evidencing it?
It simply means that the contract is binding as it is the law between the parties, but the instrument
that evidences the terms and conditions of the contract may not be reflective of the same, hence it must
be reformed in order to reflect the true intention of the parties.

Example:
X and Y entered into a contract. X sought to enforce it by way of a suit in court. Can he still ask
for the reformation of the instrument?
No, because when one of the parties has brought an action to enforce the instrument, he cannot
subsequently ask for the reformation. (art. 1367, NCC).

RESCISSIBLE CONTRACTS
6. What is rescission?
Rescission is a remedy granted by law to the contracting parties and to third persons in order to
secure reparation of damages caused them by a contract, even if the contract be valid, by means of the
restoration of things to their condition prior to the celebration of the said contract.

7. Enumeration of rescissible contracts.

(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 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;
(4)All other contracts specially declared by law to be subject to rescission (Art. 1381, NCC).

8. What is “accion pauliana?”

The action to rescind contracts made in fraud of creditors is called “ accion pauliana.”

VOIDABLE CONTRACTS

9. What are voidable contracts?

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. (Art. 1390, NCC).
 10. Basic characteristics of voidable contracts.
Voidable contracts are valid until annulled. They are susceptible of ratification. Once ratification
is made, the said contracts shall be cleansed of their defects and such ratification retroacts to the
constitution of the contracts. (Art. 1396, NCC).
Example:
A was forced by B to sign a contract. C, a creditor of A, wants to annul the contract. Is C
allowed to do so?
No, C is not allowed to do so. If the contract prejudices him, and A has no other property, then
C may ask for the rescission of the contract, not its annulment. C cannot ask for annulment because
he is not obliged by the terms of said contract, either principally or subsidiarily.

11. What is the obligation of each party in case of annulment of a contract?

The contracting parties shall restore to each other the things which have been the subject
matter of the contract, with their fruits, and the price with its interest, except in cases as provided by
law.
In obligations to render service, the value thereof shall be the basis for damages.

UNENFORCEABLE CONTRACTS
12. Why are they called unenforceable contracts?
They are called unenforceable contracts because they cannot be sued upon or enforced unless they
are ratified.

13. What are the unenforceable contracts?

Unenforceable contracts are those enumerated in Art. 1403 of the New Civil Code.

14. Example:
A and B entered into an oral contract of sale of a parcel of land agreeing on the price, date of
payment, and delivery of the title on August 30, 2003. Suppose on August 30, 2003, A would go to B’s
house and deliver the money, but B would refuse to convey the land.
1. Can A sue B to enforce the oral contract?
2. What is the defense of B, if any? Will it prosper?
3. Will your answer in Nos. 1 and 2 be the same if B accepted a down payment?
4. Suppose A has already delivered the consideration, but B refuses now to execute the deed
of conveyance, what would be the remedy of the aggrieved party?

1. No, because the oral contract of sale over real property is unenforceable if not in writing.
(Hernandez vs CA, 160 SCRA 821; Renato Cenido, et al., vs. Sps. Sta.Ana, G.R. No. 132474,
November 19, 1999).

2. The defense of B is that the oral contract is not enforceable, and it would prosper because the
requirement is that, to be enforceable, such contract must be in writing.
 3. No more the defense in nos. 1 and 2 would no longer prosper because if a down payment was
accepted it would mean that the contract is no longer executory but partly executed. A partly executed
contract does not fall under the Statute of Fraud.

4. The aggrieved party can file an action for specific performance or rescission, and in both cases, with
damages. (Art.1191, par.2, NCC).

15. If an unenforceable contract entered into between persons who are incapable of giving consent is ratified,
what is the reckoning period of its validity?
If there is ratification of the contract by the parents or guardians of the persons who entered into the
unenforceable contract the same shall be validated from its inception.

16. May a third person assail an unenforceable contract?

No, because under the law, unenforceable contracts cannot be assailed by third persons. (Art. 1408,
NCC).

VOID CONTRACTS
17. What are the void contracts?
The following contracts are inexistent and void from the beginning:
1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
7. Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
(Art.1409, NCC). A void contract is equivalent to nothing. It is absolutely wanting in civil effects; it cannot be
the basis of actions to enforce compliance. (Rep. vs. La’o, G.R. No. 141941, May 4, 2004, 489 SCRA, 424;
Barcero vs. Capitol Dev. Corp., G R. No 154765, March 29, 2007).

18. Can void or absolutely simulated contracts be ratified?

No, void and absolutely simulated contracts cannot be ratified. (Art. 1409, NCC). The characteristic of
simulation is the fact that the apparent contract is not really desired or intended to produce legal effects nor in
any way alter the juridical situation. (Carino vs. CA, L-47661, July 31, 1987).

19. Is thee a need for a void contract to be declared void?

Strictly speaking, there is no use. But for purposes of convenience, or to avoid taking the law into our
own hands, there is nothing wrong in having a void contract declared really void.

Example:
 A sells B the Jones Bridge and B gives A the price. Of course, this contract is null and void, but
suppose A refuses to return to B the price, stating that there is nothing wrong with the contract, what should B
do?

B should file an action in court to declare the inexistence of the contract. This right of B to bring the
action does not prescribe. Indeed the defect in this kind of contract cannot be cured by prescription or by
ratification. (Eugenio vs Perdido, 97 Phil. 41).

[ESTOPPEL, TRUSTS and NATURAL OBLIGATIONS]

ESTOPPEL
(Example – If several persons, each claiming ownership over certain property deposited in a
Estoppel – is a condition or state by virtue of which an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon.

Examples of Estoppel
A] A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal defect, is estopped
from asserting that there had been an illegal consideration for the note, and so, he has to pay its value.

B] A person who alleged at one time in court that he was the owner of a certain motor
vehicle cannot afterwards deny his ownership thereof.

Kinds of Estoppel
Estoppel in Pais (equitable estoppel). This may be estoppel (a) by conduct or by acceptance of
benefits; (b) by representation or concealment; (c) by silence; (d) by omission; (e) by laches
(unreasonable delay in suing).

(Example : if the real owner of a house pretends to be merely a broker in the sale thereof, he is
estopped from asserting ownership over the same).

(Example : if a vendee a retro agrees to accept a check in payment of the repurchase price, he
cannot afterwards allege that the check is not a legal tender. He is bound by his own act.

Estoppel by Deed – It is a bar which precludes a party to a deed and his privies from asserting it
against the other and his privies any right or title in derogation of the deed, or from denying the truth of
any material fact asserted.

warehouse, in a written document agree it should be sold, said persons cannot later on modify
the terms of the agreement.

(Example – Purchase in one’s own name with another’s money generally gives title to the
purchaser, that is in him who appears in the deed to have made the purchase in his own name.
 TRUSTS

Trust Defined. It is the right to the beneficial enjoyment of property, the legal title to which is
vested in another.

It is a fiduciary relationship concerning property which obliges the person holding it to

deal with the property for the benefit of another. The person holding, in view of his equitable title, is
allowed to exercise certain powers belonging to the owner of the legal title.

Parties to a Trust
Trustor – one who establishes the trust;
Trustee – one who holds the property in trust for the benefit of another;
Beneficiary or cestui que trust – the person for whose benefit the trust has been created
(NOTE: The trustor may at the same time be also the beneficiary.

Classification of Trusts

A] Express trust – created by the parties, or by the intention of the trustor;

(Example : A person to whom the land was conveyed holds it as a trustee for the person who
supplied the purchase money.

B] Implied trust – created by operation of law. There are two (2) kinds of implied trusts.

. Resulting trust – also called passive trust. Here, there is an intent to create a trust but
it is not effective as an express trust. (Example – where a person who inherits property registers the
same in another’s name, whom he does not intend to have any beneficial interest therein for he wants
this for himself.

. Constructive trust – there is no intention to create a trust, but a trust is nevertheless

created by law to prevent unjust enrichment. (Example - if a person acquires property by mistake, he is
considered by the law as a trustee while he holds the same.

NATURAL OBLIGATIONS

Natural and Civil Obligations – Civil obligations give a right of action to compel their
performance. Natural obligations, not being based on positive law but on equity and natural law, do not
grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason thereof.
 Distinctions between natural and civil obligations

[a] Natural obligations are based on equity and natural law; while civil obligations are based on
positive law;
[b] Natural obligations are not enforceable by court action; while civil obligations are enforceable
by court action.

(Examples – (a) obligation to pay interest for use of money, even if not agreed upon in writing;
(b) giving of material and financial assistance to children upon their marriage; (c) duty to support natural
or spurious children even if not recognized voluntarily or by judicial compulsion and even if there is a
judgment denying recognition.

PRINCIPLE OF IN PARI DELICTO

The law will not aid either party to an illegal agreement; it leaves them where they are.
No suit can be maintained for its specific performance, to recover the property agreed to be sold or
delivered, or the money agreed to be paid or damages for its isolation, and no affirmative relief of any
kind will be given to one against the other. Each must bear the consequences of his own acts. They
will be left where they have place themselves since they did not come to court with clean hands.

(Example – Both A and B entered into a contract for smuggling of prohibited drugs or
importation of contraband. Effects – (a) since they are in pari delicto they shall have no action
against each other. Both A and B shall be prosecuted. (b) the effects or the instruments of the crime
(things or price of the contracts) shall be confiscated in favor of the government.