REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Contracts

1. 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. It is one of the five sources of civil obligations.

a. Obligations arising from contracts have the force of law between contracting parties.
b. Obligations arising from contracts should be complied with in good faith.

2. Stages of a contract

a. Conception or preparation stage is the first stage of contract that involves preliminary
negotiations and bargaining, discussion of terms and conditions, with no arrival yet of a definite
agreement.
b. Perfection or birth stage is the second stage of contract when there is meeting of minds between
the parties on a definite subject matter and valid cause.
c. Termination or consummation stage is the last stage of contract when the contract has been
fulfilled resulting in its accomplishment.

3. Characteristics of contracts

a. Obligatory force of contract means that the contractual agreement constitutes the law as between
the parties.

i. Obligations arising from contracts have the force of law between contracting parties.
ii. Obligations arising from contracts should be complied with in good faith.

b. Mutuality of contract means that the validity and performance cannot be left to the will of only one
of the parties.

i. Determination of the performance of contract

1. The determination or validity or compliance of a contract cannot be left to the

judgment of one the parties only because it violates mutuality of contract.
2. The determination of the performance of contract may be left to a third person,
whose decision shall not be binding until it has been made known to both contracting
parties.
3. If the determination of the performance of the contract of a third person is evidently
inequitable, the court shall decide what is equitable under the circumstances.

c. Relativity of contract means that contract is binding only upon the parties and their successors
such as heirs and assignees.

a. The heirs are liable to the debts of decedent but only up to the extent of
the property they inherited. It is only the natural obligation of the heirs to
pay the unpaid debts of their predecessors beyond the value of the
properties they inherited.

i. Rights and obligations arising from contracts which are

intransmissible

1. Those which are purely personal.

2. Those which are provided by law to be intransmissible.
3. Those which are stipulated by the party to be intransmissible.

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 1. Exceptions to Relativity of Contract – Instances wherein third parties may be
bound or may be affected by contracts

a. Stipulation in favor of third person or stipulation pour autrui

ii. Requisites of stipulation pour autrui or stipulation in favor of

third person

a. There must be stipulation in favor of a third person.

b. The stipulation should be a part, not the whole, of the contract.
c. The contracting parties must have clearly and deliberately
conferred a favor upon a third person and not a mere incidental
benefit or interest.
d. The favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever.
e. The third person must have communicated his acceptance to the
obligor before its revocation.
f. One of the contracting parties does not bear the legal
representation or authorization of the third party.

Concepts of Stipulation Pour Autrui

a. A stipulation in favor of third person has no binding effect in itself

before its acceptance by the party favored.
b. Before acceptance by the third person, the contracting parties; by
mutual agreement, may modify the contract or revoke it.
c. A mere incidental interest or benefit is not within the doctrine of
stipulation pour autrui.
d. The stipulation pour autrui does not exist if the contract is considered
null and void.

b. Contracts creating real rights which are registered such as registered

real estate mortgage or registered pacto de retro sale/ sale with a right
to repurchase – The registration to Registry of Property/Deeds is
constructive notice to the whole world. Any person who will acquire such
property will be bound by the annotated lien.

c. Contracts intended to defraud creditor – The defrauded creditor may file

an action for cancellation of contract entered by the debtor to defraud the
creditor.

d. When third person induces a party to the contract to violate the

contract – A contracting party may file an action for damages to a third
person who induced a contracting party to violate a contract.

e. Void contract that directly affects a third person – A third person affected
by a void contract may file an action for declaration of nullity of a contract.

Contracts that may be not assailed by a third person

a. Perfectly valid contract
b. Voidable contract
c. Unenforceable contract

Exceptional contracts that may be assailed by a third person

a. Rescissible contract intended to defraud creditor
b. Void contract that directly affects a third person

d. Autonomy of Contract means that the parties may establish such stipulations, clauses, terms, and
conditions as they may deem convenient provided they are not contrary to any of the following:
i. Law
ii. Morals
iii. Good customs
iv. Public order
v. Public policy

e. Consensuality of contract means that contracts are perfected by mere consent except in real
contracts and formal or solemn contracts which require additional requirements.

f. Legality of contract means that contracts should not be contrary to law.

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4. Types of elements of a contract

a. Essential elements refer to those which are required in order for a contract to exist. They are
necessary for validity of contract and may not be waived by the parties. Absence of any of the
essential elements will make the contract void the remedy of which of injured party is declaration of
nullity.

i. Consensual Contract
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

ii. Real Contract

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
4. Delivery of the subject matter

iii. Solemn or Formal Contract

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
4. Formality required by law

b. Natural elements refer to those which already exist in certain contract unless set aside or
suppressed by the parties. They may be waived by the parties as long as the waiver is made in good
faith.
i. Warranty against eviction in a contract of sale.
ii. Warranty against hidden defects in a contract of sale.
iii. Warranty for merchantability in a contract of sale.
iv. Warranty against hidden and unregistered encumbrance in a contract of sale.

c. Accidental elements refer to those that do not normally exist in a contract unless stipulated or
provided by the parties.
i. Terms of payment in a contract of sale.
ii. Conventional interest in a contract of loan.

5. Types of Contracts

a. As to Perfection of Contract

i. Consensual contract is a contract perfected by mere consent.

1. Contract of lease.
2. Contract of sale
3. Contract of partnership
4. Contract of agency
5. Contract of real estate mortgage
6. Contract of common carrier

ii. Real contract is a contract perfected by the delivery of the object of the contract.
1. Contract of deposit
2. Contract of pledge
3. Contract of loan or mutuum
4. Contract of commodatum

iii. Solemn or Formal contract is a contract perfected by the execution of the formality
required by law.

1. Negotiable instruments must be made strictly in the form provided by the

Negotiable Instruments Law in ordered to be considered negotiable.
2. Contract of marriage must have all the solemnities required by Family Code of the
Philippines for it to be valid such as marriage license, capacity of contracting parties,
authority of solemnizing officer and personal appearance of contracting parties.
3. Contract of donation of personal property in excess of P5,000 must be made
and accepted in writing to be valid.
4. Contract of donation of real property must be made and accepted in public
instruments to be valid.
5. Contract of antichresis requires that the agreement of antichresis including the
principal and interest of secured contract of loan a must be specified in writing to be
valid.

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 6. Agreement or stipulation to pay interest in contract of loan must be in writing in
order for such agreement to be valid.
7. Contract of chattel mortgage requires it to be registered with Chattel Mortgage
Registry to be valid.
8. Contract of partnership to which real properties or real rights are contributed must
be in a public instrument, with an inventory of real property attached thereto, for the
contract of partnership to be valid.
9. Sale of a piece of land by the agent in the name of the principal, the authority of
the agent to sell the land must be in writing for the contract sale of such land to be
valid.
10. Sale of community or conjugal property by one of the spouses, there must be
authority given by the other spouse to the selling spouse.
a. Remedy to compel the other party to observe the formality for mere
convenience
b. Contracts required to be in Public Document for mere convenience but
not for validity
i. Acts or contracts which have for their object the creation,
transmission, modification or extinguishment or real rights over
immovable property.
ii. The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains.
iii. 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
iv. The cession of actions or rights proceeding from an act appearing in
a public document
c. Contracts required to be in written instrument, whether public
instrument or private instrument, for mere convenience but not for
validity
i. Contracts where the amount involved exceeds five hundred pesos

b. As to Cause of the Contract

i. Onerous contract is a contract whereby there is an exchange of valuable consideration. For

each contracting party, the cause is the prestation or the promise of a thing or service by the
other.
1. Contract of sale
2. Contract of lease
3. Contract of barter

ii. Gratuitous contract is a contract whereby one party receives no equivalent consideration.
These contracts are referred to as contracts of pure beneficence, the cause of which is the
liberality or generosity of the benefactor.
1. Contract of donation
2. Contract of commodatum

iii. Remuneratory contract is a contract whereby the cause here is the service or benefit
remunerated.
1. Contract of service or employment

c. Other Contracts

i. Principal contract is a contract that can stand by itself.

1. Contract of sale
2. Contract of loan.

ii. Accessory contract is a contract whose existence depends upon another contract known
as principal contract.
1. Contract of pledge,
2. Contract of chattel mortgage
3. Contract of antichresis
4. Contract of real estate mortgage
5. Contract of guarantee

iii. Preparatory contract is a contract which serves as a means by which other contracts may
be entered into.
1. Contract of agency
2. Contract of partnership.

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 iv. Nominate contract is a contract which has a name under the Civil Code or special law.
1. Contract of sale
2. Contract of agency
3. Contract of partnership
4. Contract of insurance
5. Contract of marriage

v. Innominate contract is a contract without any name under the Civil Code or special law.
1. Do ut des (I give that you may give.)
2. Do ut facias (I give that you may do.)
3. Facio ut des (I do that you may give.)
4. Facio ut facias (I do that you may do.)

a. Order of Priority on Rules that shall govern innominate contract

i. The stipulation of the parties
ii. The provisions of Obligations and Contracts
iii. The rules governing the most analogous contracts
iv. The customs of the place

vi. Commutative contract is a contract whereby the parties give almost equivalent values;
hence, there is real fulfillment.
1. Contract of sale
2. Contract of lease
3. Contract of barter

vii. Aleatory contract is a contract whose fulfillment depends upon chance.

1. Contract of insurance

viii. Unilateral contract is a contract whereby only one of the parties is obligated to give or to do
something.
1. Contract of commodatum (bailee)
2. Contract of gratuitous deposit (depositary)

ix. Bilateral contract is a contract whereby both parties are required to give or to do something.
1. Contract of sale
2. Contract of lease

x. Reciprocal contract is a contract whereby the cause on the other party is the object on the
other party.
1. Contract of sale
2. Contract of barter

xi. Auto-contract is a contract wherein one person contracts with himself.

xii. Contract of adhesion is a contract wherein one party has already prepared the form of the
contract, containing the stipulations he desires, and he simply asks the other party to agree
to them if he wants to enter into the contract. In case of ambiguity or doubt, it shall be
construed strictly against the preparer of the document of the contract.
1. Contract of insurance
2. Contract of enrollment

xiii. Executory contract is a contract that has not yet been performed. Certain executory
contracts are covered by Statute of Fraud and required to be in writing in order for them to
be enforceable.

xiv. Executed contract is a contract which has been performed. It is a contract not covered by
Statute of Fraud.

6. Moment of Perfection of contract

a. Upon consent of contracting parties in case of consensual contract
b. Upon delivery of the subject matter in case of real contract
c. Upon execution of formalities required by law in case of formal or solemn contract

7. Extent of binding effect of contract

a. The parties are bound not only to the fulfillment of what has been expressly stipulated in the contract
but also to all the consequences which, according to their nature, may be in keeping with good faith,
usage and law.

8. Nature of contract
a. Contract is determined by the principles of law.

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9. Consent is one of the essential elements of contract. It refers to the meeting of minds between the contracting
parties as regards to the object and cause of contract.

10. Principles of Consent

a. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract.
b. The offer must be certain and the acceptance absolute.
c. A qualified acceptance constitutes a counter-offer.
d. Consent may be expressed or implied.

11. Binding effect of acceptance through telegram

a. The contract entered into through telegram is perfected from the time the acceptance came to the
knowledge of the offerer also known as Cognitive Theory.

12. Place of perfection of contract entered through telegram, letter or telephone

a. In the place where the offer was made.

13. Requisites of an offer

a. It must be definite.
b. It must be certain.
c. It must be complete.
d. It must be intentional.

14. Concepts concerning Acceptance

a. An acceptance may be expressed or implied.
b. The person making the offer may fix the time, place and manner of acceptance, all of which must be
complied with.
c. An offer made through an agent is accepted from the time acceptance is communicated to the agent
not necessarily to the principal.
d. 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, something paid or promised.

15. Instances which if happened to either party before acceptance make the offer ineffective
a. Civil interdiction
b. Insanity
c. Death
d. Insolvency

16. Principles of Acceptance

a. An option contract supported by consideration or option premium is valid and binding and may not
be withdrawn.
b. Business advertisements are mere invitations to make an offer.
c. Advertisements for bidders are simply invitations to make proposals.

17. Incapacitated persons to give consent to a contract

a. Unemancipated minors
b. Insane except during lucid interval
c. Demented persons
d. Deaf-mutes who do not know how to write
e. Drunken person
f. Hypnotized person

18. Status of Contract entered into by incapacitated persons to given consent to a contract
a. Only one party is incapable (Voidable on the part of incapacitated person)
b. Both parties are incapable (Unenforceable)

19. Difference between contract wherein consent is wanting and contract wherein consent is vitiated
a. The contract is void if the consent is wanting requiring declaration of nullity of contract.
b. The contract is voidable if the consent is vitiated requiring annulment of contract.

20. Requisites of consent

a. It should be intelligent.
b. It should be free.
c. It should be spontaneous.
d. It should not be vitiated.

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21. Vices of Consent (FUMIV) which make the contract voidable

I. There is violence when in order to wrest consent, serious or irresistible force is employed.
a. Requisites of violence to vitiate consent
i. There must be physical force.
ii. The physical force must be irresistible.
iii. The force must be the determining cause in giving the consent to the contract.

II. There is intimidation 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, descendants or ascendants, to give his consent.
a. Requisites of intimidation to vitiate consent
i. The intimidation must be the determining cause of the consent.
ii. The threatened act must be unjust or unlawful.
iii. The threat must be real and serious.
iv. It must produce a reasonable and well-grounded fear.

III. 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.

IV. There is causal fraud when, through insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to.
a. Requisites of fraud to vitiate consent
i. It must have been employed by one of the contracting parties only.
ii. It must have induced the other party to enter into the contract.
iii. It must have been serious.
iv. It may or may not result to damage or injury to the contracting parties. Presence of injury on
the complainant is not necessary for the action for annulment of voidable contract to prosper.

V. Mistake which should be substantial.

1. Mistakes that may vitiate consent resulting to voidability of a contract

a. Mistake which should refer to the substance of the thing which is the object of the
contract.
b. Mistake which should refer to those conditions which have principally moved one or both
parties to enter into the contract.
c. Mistake as to identity or qualifications of one of the parties wherein such identity or
qualifications have been the principal cause of the contract.
d. Mutual error as to the legal effect of an agreement when the real purpose of the parties
is frustrated.

2. Errors that do not vitiate consent maintaining the perfect validity of a contract
a. Error as to the solvency of the other party.
b. Error as to the motive of the party.
c. Error as to estimates.

22. Difference between causal fraud (Dolo causante) and incidental fraud (Dolo incidente)
a. In causal fraud, the contract is voidable requiring annulment of contract.
b. In incidental fraud, the contract is perfectly valid but action for damages is the proper remedy.

23. Principles governing Vices of Consent

a. 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.
b. Failure to disclose facts, when there is duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
c. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not
in themselves fraudulent.
d. 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.

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24. Principles governing causal fraud

a. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.
b. Misrepresentation made in good faith is not fraudulent but may constitute error.
c. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.
d. Causal fraud may entitle the injured party for annulment of contract while incidental fraud may entitle
the injured party to action for damages.
e. In case both parties use fraud reciprocally, the fraud of one compensates that of the other, and
neither party can ask for annulment of the contract because they are in pari delicto.

25. Absolutely simulated contract vs. Relatively simulated contract

I. In absolute simulation, there is color of a contract, without any substance thereof, the parties not
having any intention to be bound. The proper legal remedy is action for declaration of nullity.

II. In relative simulation, the parties have an agreement which they conceal under the guise of another
contract. The proper legal remedy is action for reformation of instrument.

26. Object or Prestation is one of the essential elements of contract. It refers to the promise or conduct to be
performed in the fulfillment or rendition of the obligations of contract and it may consist of giving, doing or not doing
a thing.

27. Requisites of an object of a contract (Prestation)

a. The object must be within the commerce of men.

b. It must be licit, or not contrary to law, morals, good customs, public order or public policy.
c. It must be possible.
d. It must be determinate as to its kind.

28. Allowed object or prestation of a contract

a. Future things
b. All rights which are not intransmissible
c. All services not contrary to law, morals, good customs, public order or public policy
d. Hereditary rights

Prohibited objector prestation of a contract

a. Immoral object or prestation

b. Illegal object or prestation
c. Impossible object or prestation
d. Object or prestation outside the commerce of men
e. Object or prestation that did not exist at the time of the transaction
f. Future inheritance
g. Vaid hope

29. Cause of contract is one of the essential elements of contract. It refers to the immediate and proximate
purpose of the contract or the essential reason which impels the contracting parties to enter into it and which
explains and justifies the creation of the obligation through such contract.

30. Causes of different types of contract

a. In onerous contract the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other. There is valuable consideration in an onerous contract.
b. In remuneratory contract, the cause is the service or benefit which is remunerated.
c. In contract of pure beneficence or gratuitous contract, the cause is the mere liberality or
generosity of the benefactor.
d. The cause of accessory contract is the very cause or consideration of the principal contract.

31. Difference between cause and motive

I. Contracts without cause or with unlawful cause produce no effect whatever and are considered null and
void.
II. Contracts without motive or with unlawful motive remain to be valid.

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32. Principles concerning cause
a. The statement of a false cause in contracts shall render them void, if it should not be proved that
they were founded upon another cause which is true and lawful.
b. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the
debtor proves the contrary.
c. As a general rule, lesion or inadequacy of cause does not invalidate a contract.
d. The particular motives of the parties in entering into a contract are different from the cause thereof.

33. Reformation of instrument is the legal remedy available to the injured party in a contract when the instrument
or document that serves as tangible evidence of the contract does not express the true intention of the contracting
parties. However, 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.

34. Instances wherein reformation of the instrument is the proper remedy

a. When a mutual mistake of the parties results to the failure of the instrument to disclose their real
agreement.
b. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention.
c. When one party was mistaken and the other knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former.
d. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does not express the true intention of the
parties.
e. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right of repurchase.

35. Documents or Instrument which cannot be reformed or reformation of instrument is not allowed
a. Simple donation inter vivos wherein no condition is imposed or unconditional donation inter vivos
b. Last will and testament whether holographic will or notarial will
c. When the real agreement is void

36. Parties who may ask for the reformation of an instrument

a. Either party if the mistake is mutual.
b. Injured party
c. Successors in interest, heirs and assigns of injured party

37. Action for reformation of instrument and Action for exact fulfillment or specific performance are
inconsistent remedies and the complainant cannot have both.

38. Rules on Interpretation of Contract

a. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning shall be applied by the court.
b. If there is conflict between evident intention and words of contract, the intention of the parties shall prevail.
c. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.
d. Incidental circumstances of a gratuitous contract shall be interpreted with the least transmission of rights and
interest.
e. Incidental circumstances of an onerous contract shall be interpreted with greatest reciprocity of interest.
f. In case of doubt whether the contract is one of loan with mortgage or one of pacto de retro sale, it shall be
interpreted as loan with equitable mortgage in favor of social justice.
g. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract is void.
h. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered.
i. However general the terms of a contract may be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon which the parties intended to agree.
j. If some stipulation of any contract should admit several meanings, it shall be understood as bearing that
import which is most adequate to render in effectual.
k. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.
l. Words which may have different significations shall be understood in that which is most in keeping with the
nature and object of the contract.
m. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract,
and shall fill the omissions of stipulations which are ordinarily established.

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39. Types of Defective Contracts from Least Defective to Most Defective
I. Rescissible contract is a contract that has caused a particular damage to one of the parties or to a
third person, and which for equitable reasons may be set aside even if it is valid. The proper legal
remedy is action for rescission of rescissible contract.
II. Voidable or annullable contract is a contract in which the consent of one party is defective, either
because of want of capacity or because it is vitiated, but which contract is valid until set aside by a
competent court. The proper legal remedy is action for annulment of voidable contract.
III. Unenforceable contract is a contract that for some reason cannot be enforced, unless it is ratified in
the manner provided by law. There is no legal remedy required but to leave the contract as it is.
IV. Void or inexistent contract is an absolute nullity and produces no effect, as if had never been
executed or entered into and cannot be ratified. The proper legal remedy is action for declaration of
nullity of void contract.

40. Rescissible contract is a contract that has caused a particular damage to one of the parties or to a third
person, and which for equitable reasons may be set aside even if it is valid. The proper legal remedy is action for
rescission of rescissible contract.

41. Characteristics of Rescissible Contracts

a. They are valid and binding until rescinded.
b. They are not susceptible of ratification but convalidated by prescription.
c. After the rescission, they are no longer effective and will result to mutual restitution.
d. The prescriptive period of an action for rescssion is 4 years.
e. The proper legal remedy is action for rescission of contract.
f. They may be assailed by a third person affected by it.

42. Examples of Rescissible Contracts

A. Those contracts wherein the ward or absentee suffered by more than ¼ the value of the things on
the contracts entered into by their guardian or representative.
a. Those which are entered into by guardians whenever the wards they represent suffer lesion by more
than ¼ the value of the things which are the object thereof.
b. Those agreed upon in representation of absentees, if the latter suffer more than ¼ the value of the
things which are the object thereof.

B. Those contracts entered into to defraud creditors.

a. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them.
b. 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.
c. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected.
d. All contracts by virtue of which the debtor alienates property by gratuitous title when the donor did
not reserve sufficient property to pay all debts contracted before the donation.
e. Alienations by onerous title when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been issued.
f. Contracts entered into by an insolvent person to defraud creditors.

43. Rescission of contract is a 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 this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract. This action may be filed
by a third person directly affected by such rescissible contract.

44. Requisites of an action for rescission of contract

a. The contract must be rescissible.
b. The party asking for rescission must have no other legal means to obtain reparation for damages
suffered by him.
c. The person demanding rescission must be able to return whatever he may be obliged to restore if
rescission is granted.
d. The things which are the object of the contract must not have passed legally to the possession of a
third person acting in good faith.
e. The action for rescission must be brought within the prescriptive period of four years.

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45. Principles on rescission of contracts
a. The action for rescission is a remedy of last resort. It can be instituted only when the party suffering
damage has no other legal means to obtain reparation for the same.
b. Rescission shall be only to the extent necessary to cover the damages caused.
c. 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 may be obliged to restore.
d. Rescission will not prosper 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.
e. In case rescission is not possible, the indemnity for damages may be demanded from the person
causing the loss.

46. Rules to be observed in counting the 4-year period for prescription of an action for rescission
a. For incapacitated persons or under guardianship, 4 years shall be counted from the termination of
the ward’s incapacity.
b. For absentee, 4 years shall be counted from the date the domicile of absentee is known.
c. For contracts intended to defraud creditor, 4 years shall be counted from the knowledge of the
contract.
d. For contracts intended to defraud creditor but involving immovable, 4 years shall be counted from
the registration of the sale.

47. Voidable or annullable contract is a contract in which the consent of one party is defective, either because of
want of capacity or because it is vitiated, but which contract is valid until set aside by a competent court. The proper
legal remedy is action for annulment of voidable contract.

48. Characteristics of Voidable Contracts

a. They are valid and binding until annulled.
b. They are susceptible of ratification which extinguishes the action for annulment
c. After the annulment, they are no longer effective and will result to mutual restitution.
d. The prescriptive period of an action for annulment is 4 years.
e. The proper legal remedy is action for annulment of contract.
f. They cannot be assailed by a third person.

49. Examples of Voidable Contracts

a. Those where one of the parties is incapable of giving consent to a contract.
b. Those where the consent is vitiated by fraud, undue influence, mistake, intimidation or violence.

50. Rules to be observed in counting the 4-year period for prescription of an action for annulment.
a. In cases of intimidation, violence or undue influence, 4 years shall begin from the time the defect of
the consent ceases.
b. In cases of fraud or mistake, 4 years shall begin from the time of the discovery of the fraud or
mistake.
c. In cases of contracts entered into by wards or incapacitated persons, 4 years shall begin from the
time the guardianship or incapacity ceases.

51. Principles of Ratification of Voidable Contract

a. Ratification may be effected expressly or tacitly.
b. Ratification may be effected by the guardian of the incapacitated person.
c. Ratification does not require conformity of the contracting party who has no right to bring the action
for annulment.
d. Ratification cleanses the contract from all its defects from the moment it was constituted.

52. Parties who may ask for annulment of voidable contracts

a. Guardian of a minor
b. Guardian of an insane or demented person
c. Party whose consent is vitiated

53. Annulment of contract is a legal remedy granted by law to the injured party to a voidable contract to ask for its
annulment because of defect in the consent of the injured party either due to incapacity or vitiation of consent. This
action does not require presence of injury or damage to the complainant for it to prosper. This action may be filed by
the injured contracting party or guardian of incapacitated party in a voidable contract but neither by the guilty
party/capacitated party nor a third person.

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54. Effects of annulment of contract
a. 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 interests.
b. In obligations to render service, the value thereof shall be the basis for damages.
c. 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.
d. Whenever the person obliged by the decree of annulment to return the thing cannot do so because it
has been lost through his fault, he shall return the fruits received and the value of the thing at the
time of the loss, with interest from the same date.
e. One of the contracting parties may not be compelled to restore what in virtue of the decree of
annulment he is bound to return if the other does not restore what is incumbent upon him.
f. The action for annulment of contracts shall be extinguished when the thing which is the object
thereof is lost thorough the fraud or fault of the person who has a right to institute the proceedings.
g. If the loss of action is based upon the incapacity of any one of the contracting parties, the loss of the
thing shall not be an obstacle to the success of the action, unless said loss took place through the
fraud or fault of the plaintiff.

55. Unenforceable contract is a contract that for some reason cannot be enforced, unless it is ratified in the
manner provided by law. There is no legal remedy required but to leave the contract as it is.

56. Characteristics of Unenforceable Contracts

a. They are valid but not enforceable by court action.
b. They are susceptible of ratification which makes the contract enforceable.
c. There is no proper legal remedy but to leave the contract as it is.
d. They cannot be assailed by a third person.

57. Examples of Unenforceable contracts until ratified

a. Those contracts entered into in the name of another person by one who has been given no authority
or legal representative or who has acted beyond his powers.
b. Those where both parties are incapable of giving consent to a contract.
c. Those oral executory contracts for failure to comply with Statute of Fraud

58. Executory Contracts which shall be in writing to be enforceable under Statute of Fraud
a. An agreement that by its terms is not to be performed within one year from the making thereof.
b. A special promise to answer for the debt, default or miscarriage of another. (Contract of guaranty)
c. An agreement made in consideration of marriage, other than a mutual promise to marry.
d. An agreement for the sale of goods, chattels or things in action (movable property or personal
property) at a price not less than P500 pesos.
e. An agreement for the leasing of real property or immovable property for a longer period than one
year regardless of rent.
f. An agreement for the sale of real property or immovable property or of an interest therein regardless
of price.
g. A representation to the credit of a third person.

59. Motion to dismiss is a legal remedy granted by law to the defendant in an action for exact fulfillment or specific
performance filed by one of the parties in an unenforceable contract to ask for the dismissal of the contract although
valid because it is unenforceable or not binding unless ratified by the party or parties to the contract.

60. Principles on Ratification of Unenforceable Contract

a. The sale of property made by a person without authority of the owner is unenforceable in the
beginning but afterwards it becomes perfectly valid by the ratification of the owner.
b. Contracts infringing 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 benefits under them.
c. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for
the registration in the Registry of Deeds, the parties may compel each other to execute the required
form.
d. In a contract where both parties are incapable of giving consent, express or implied ratification by
the parent, or guardian, as the case maybe, of one of the contracting parties shall give the contract
the same effect as if only one of them were incapacitated.
e. In a contract where both parties are incapable of giving consent and if ratification is made by the
parents or guardians, as the case may be, of both contracting parties, the contract shall be validated
from the inception.
f. Unenforceable contracts cannot be assailed by third persons.

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61. Void or inexistent contract is an absolute nullity and produces no effect, as if had never been executed or
entered into and cannot be ratified. The proper legal remedy is action for declaration of nullity of void contract.

62. Characteristics of void contracts

a. The contracts produce no effect whatsoever either against in or in favor of anyone.
b. The proper legal remedy is action for declaration of nullity of void contract.
c. As a general rule they cannot be confirmed or ratified except that declaration of nullity of some void
contracts may be barred by reason of estoppel or laches in exceptional cases.
d. If they have been performed, the restoration of what has been given is in order.
e. They may be assailed by a third person directly affected by it.

63. Examples of Void Contracts

a. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy.
b. Those which are absolutely simulated.
c. Those whose cause or object did not exist at the time of the transaction.
d. Those whose object is outside the commerce of men.
e. Those which contemplate impossible services.
f. Those where the intention of the parties relative to the principal object cannot be ascertained.
g. Those expressly prohibited by law.
h. Those expressly declared void by law.

64. Declaration of nullity is a legal remedy granted by law to the injured party or to a third person to ask for the
nullification of a void contract because of the absence of any of the essential elements of contract necessary for its
validity. This action may be filed by the injured contracting party in a void contract or by a third person directly
affected by such void contract.

65. Principles of Void Contracts

a. The defense of illegality of contracts is available to third persons whose interests are directly affected.
b. A contract which is the direct result of a previous illegal contract is also void and inexistent.
c. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced.
d. When the law sets or authorizes the setting of a minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.
e. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for services rendered beyond the time limit.
f. When the price of any article or commodity is determined by statute or by authority of law, any person
paying any amount in excess of the maximum price allowed may recover such excess.
g. When the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed
for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or
delivered.
h. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the
interest of justice so demands, allow recovery of money or property delivered by the incapacitated person.
i. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one
the parties before the purpose has been accomplished or before any damage has been caused to third
person. In such a case, the courts may if the public interest will thus be sub served, allow the party
repudiating the contract to recover the money or property.
j. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with
interest thereon from the date of payment. Although Usury Law has been suspended by the BSP
Monetary Board Circular allowing the contracting parties to stipulate a conventional interest rate higher
than the legal interest rate, such contractually agreed rate should neither be unconscionable nor
excessive, otherwise it will be declared void for being contra bonus mores or being immoral.

66. Effects of nullity of contract for being illegal or criminal contract (Illegal Per Se Void Contract)
a. When both parties are in pari delicto, they shall have no action against each other.
b. Both criminals shall be prosecuted.
c. They cannot recover the proceeds of the crime.
d. The instruments of the crime shall be forfeited in favor of the government.
e. If only one of the parties is guilty, the innocent one may claim what he has given and shall not be bound
to comply with his promise.

67. Effects of nullity of contract for being illegal but not criminal contract (Unlawful but not illegal per se
Contract)
a. When the fault is on the part of both contracting parties, neither may recover what he has given by virtue
of the contract or demand the performance of the other’s undertaking.
b. When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the
contract or ask for the annulment of what has been promised to him.
c. The other, who is not at fault, may demand the return of what he has given without any obligation to
comply with his promise.

Distinctions of Defective Contracts

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 Rescissible Contract Voidable Unenforceable Void Contract
Contract Contract
As to Valid and binding until Valid and Valid but unenforceable Invalid
Validity rescinded binding until by court action
annulled
As to Legal Action for Rescission Action for None Action for Declaration of Nullity
Remedy to Annulment
injured party
Prescriptive 4 years 4 years N/A No Prescriptive Period
period of
Action
Capability Not subject to ratification but May be ratified. May be ratified. 1) Those illegal per se can never
for may be convalidated by be ratified.
Ratification prescription. 2) The declaration of nullity of
which will those which are not illegal per se
clean the may be barred by estoppel or
defects of laches in exceptional cases.
the contract.
As to May be assailed by a third May not be May not be assailed by a May be assailed by a third person
assailment person affected by it assailed by a third person directly affected by it
by third third person
person
As to Required Not required Not required Not required unless the
presence of complainant is a third person
injury to
complainant
Examples a. Those which are a.Those a. Those a. Those whose
entered into by guardians where one of entered into in the name cause, object or purpose is
whenever the wards they the parties is of another person by contrary to law, morals, good
represent suffer lesion by incapable of one who has been given customs, public order or public
more than ¼ the value of the giving no authority or legal policy.
things which are the object consent to a representative or who b. Those which are
thereof; contract. has acted beyond his absolutely simulated.
b. Those agreed upon b. Those powers. c. Those whose
in representation of where the b. Those cause or object did not exist at
absentees, if the latter suffer consent is that do not comply with the time of the transaction.
more than ¼ the value of the vitiated by the statute of frauds. d. Those whose
things which are the object fraud, undue c. Those object is outside the commerce
thereof; influence, where both parties are of men.
c. Those undertaken in mistake, incapable of giving e. Those which
fraud of creditors when the intimidation consent to a contract. contemplate an impossible
latter cannot in any other or violence. services.
manner collect the claims due f. Those where the
them; intention of the parties relative
d. Those which refer to to the principal object cannot
things under litigation if they be ascertained.
have been entered into by the g. Those expressly
defendant without the prohibited or declared void by
knowledge and approval of the law.
litigants or of competent
judicial authority;
e. Payments made in a
state of insolvency for
obligations to whose fulfillment
the debtor could not be
compelled at the time they
were effected.
f.All contracts by virtue of
which the debtor alienates
property by gratuitous title
when the donor did not
reserve sufficient property to
pay all debts contracted
before the donation.
g. Alienations by
onerous title when made by
persons against whom some
judgment has been rendered
in any instance or some writ of
attachment has been issued.
h. Contracts entered
into by an insolvent person if
he does not retain sufficient
property to pay his obligations.

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