CONTRACTS

Law on Obligation &

Contracts
September 6, 2016

Contract
Art. 1305. 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.
Contracts vs Agreements
Contracts are agreement enforceable by court action while
agreements are not always enforceable by court action.

Elements of Contracts
A. Essential Elements without them a contract cannot exist
because these are indispensable requirements.
B. Natural Elements these are found in certain contracts and
presumed to exist, unless excluded by stipulation of the
parties.
C. Accidental Elements not considered agreed by the parties
unless stipulated.

Stages in the life of a contract

1. Preparation or conception This is the preparatory step taken by
the parties leading to the perfection of the contract, otherwise
known as the bargaining point.
2. Perfection or birth the meeting of minds regarding the subject
matter and the cause of the contract.
3. Consummation or death or termination the point when parties
have performed their respective obligations and the contract is put
to an end.
Illustration:
Today, S offered for sale a specific car to B for P1 million. Tomorrow, B
countered the offer by telling S that he will buy the car if S will give it for
P800k. S consented to the proposal (counter) of B. Two days thereafter,
S delivered the car and B paid the price of P800k.

Characteristics of a contract
a. Freedom (or liberty) to stipulate.
b. Obligatory force and compliance in good faith.
c. Perfection by mere consent.
d. Both parties are mutually bound.
e. Relatively binding between the parties only, their assigns and
heirs.

Kinds of contracts
1. Consensual perfected by mere consent (Sale and Barter)
2. Real perfected by the delivery of the object of the contract (Pledge, Loan, Deposit)
3. Principal can stand alone (Sale, Barter, Deposit and Loan)
4. Accessory its existence and validity is dependent upon another contract (Pledge, Mortgage and
Guaranty)
5. Preparatory contract is not an end by itself but a means thru which other contracts may be made.
(Contract of Partnership and Contract of Agency)
6. Nominate with a special name, such as Pledge, Barter and Lease.
7. Innominate without a name
8. Onerous there is an exchange of considerations
9. Gratuitous or lucrative there is no consideration received in exchange for what has been given.
10.Remuneratory something is given for a benefit or service performed without any legal obligation
to do so.
11.Unilateral where only one of the parties is obliged to give or to do something
12.Bilateral where both parties are obliged to give or to do something
13.Commutative where equivalent values are given by both parties
14.Aleatory where fulfillment of the contract is dependent upon chance, such as insurance.

Innominate Contracts
Kinds of Innominate Contracts:
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

Liberty to contract
Art. 1306. 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.

Mutuality of contracts
Art. 1308. The contracts must bind both contracting
parties; its validity or compliance cannot be left to the
will of one of them.
Examples:
a. A party in a contract cannot just cancel or revoke the contract
without the consent of the other.
b. When the fulfillment of a suspensive condition depends upon
the will of one of the contracting parties, the obligation is void.

Relativity of contracts
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, or by stipulation or by
provision of law.
Example:
1. The heir is not liable beyond the value of the property he received
from the decedent.
2. Stipulation Pour Autrui
3. When a third person induces another to violate his contract.
4. The right of a creditor to sue on a contract entered into by his debtor.

Stipulation Pour Autrui

A stipulation in favor of a third person made by the contracting
parties with the clear and deliberate intention of conferring a
favor upon such third person and whose fulfillment the latter
may demand by communicating his acceptance to the obligor
before its revocation.
Example : TPL

Real Contracts
Contract of Deposit
- A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning
the same.
Contract of Pledge
- Pledge is the delivery of a personal property by a debtor to a creditor as
security for a debt.
Commodatum
- A contract whereby one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and with
the obligation to return it. If the contract is consumable, it is a contract of
Mutuum.

Essential Elements of a Contract

1. Consent is the manifestation of the meeting of offer and the
acceptance upon the thing and the cause of the contract.
Requisites:
a. Must be given by two or more parties.
b. Parties are capacitated to contract.
c. Consent must be intelligently or freely given.
d. Express manifestation of the will of the contracting parties.

Offer
Offer is the proposition or proposal made by one party to another
to enter into a contract. It is an expression or willingness to
bargain for something you desire.
The offer must be certain, definite or specific so that the
liability or right of the parties can be determined.
Examples:
I am willing to sell this car to you for P100,000. This is a definite
offer.
I will consider selling my car to you for P100,000. This is not a
definite offer.
Acceptance of the offer must be absolute. If qualified, it
constitutes only a counter-offer and the contract is not

Acceptance
How acceptance is made?
1. Expressly written or oral words are used in accepting the offer.
2. Impliedly when from the acts of the offeree, it can be inferred that he
is accepting the offer, such as accepting the payment of the price of the
sale.
Time, place and manner of acceptance
If the offeror fixes the time, place and manner of acceptance, all must be
complied with before the contract is made effective.
Illustration:
S offered for sale to B a specific car for P400,000. S made clear to B that the
offer is good only on or before June 30, and that the acceptance of the
offer must be in writing. On June 25, B calls S by telephone and accepted
the offer. Is the contract perfected?

Acceptance
Acceptance of offer made thru an agent.
The contract is perfected from the time the acceptance of the
offeree is communicated to the agent even before it is conveyed
to the principal under the principle in agency that the personality
of the agent is an extension of that of the principal.
Illustration:
P appointed A as his agent to sell a specific car for P500,000. A
offered it to B on June 10 by letter, which the latter (B) received on
the same date. B sends his letter of acceptance to A on June 15
and was received by A on the same date. A communicated the
acceptance of B to his principal on June 20. When is the contract
perfected?

Ineffectivity of an offer
An offer becomes ineffective upon:
1. Death;
2. Civil Interdiction;
3. Insanity; or
4. Insolvency of either party before acceptance is conveyed
Illustration:
X applied for a life annuity of P1 million payable annually. He paid
P1 million and was issued a provisional receipt. The application was
forwarded to the office of the company in New York. However, the
notice of acceptance was received at the residence of X one day
after his death. Can his legal heirs still recover the P1 million paid?

Ineffectivity of an offer
Other instances when offer becomes ineffective:
a. Rejection of the offer by the offeree.
b. Counter offer offeree accepted with qualification
c. Before acceptance, the object becomes illegal or unlawful
d. When the period to accept the offer had lapsed.

Consent
Persons incapable of giving consent
a. Unemancipated minors
b. Insane or demented persons
c. Deaf-mutes who do not know how to write

Causes that vitiate consent

1. Error or mistake
2. Violence or force
3. Intimidation or threat
4. Undue influence
5. Fraud or deceit

Causes that vitiate consent

1. Error or Mistake
Requisites:
a. It must be substantial regarding:
1. Object of contract
2. Conditions which principally moved one or both parties to enter into a
contract.
3. Identity or qualification of persons
b. Error must be excusable, not caused by negligence.
c. The error must be a mistake of fact, and not of law.
Note: Simple error or mistake as to account will give rise to correction, not
annulment of the contract.

Causes that vitiate consent

2. Violence when in order to obtain consent, serious or irresistible
force is used.
3. Intimidation mental coercion
Requisites:
a. Reasonable and well-grounded fear
b. Of an imminent and grave evil
c. Upon his person, property or upon person or property of his spouse
descendants or ascendants
d. The very reason why the contract is entered into
e. The threat must be of an unjust act or actionable wrong

Causes that vitiate consent

4. Undue influence
Requisites:
a. Taking improper advantage
b. Over the will of another person
c. Depriving the person of a reasonable freedom of choice
5. Fraud when through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract, without
which, he would have not agreed.
Kinds of Fraud:
Incidental committed after perfection of contract; right of party is to ask
DAMAGES
Causal committed before or at the time of perfection; ANNULMENT OF
CONTRACT

Object
Object of Contracts
a. The thing must be within the commerce of men.
b. Transmissible
c. Licit
d. Possible
e. Determinate

Cause
The cause of a contract is the essential reason which impels the
contracting parties to enter into the contract.
Requisites:
a. It must exist.
b. It must be real.
c. It must be lawful.
Lesion insufficiency or inadequacy of the cause of a contract
Rule: Contract is valid except when their is Fraud, Mistake or
Undue Influence

Seatwork:

Forms of Contracts

VALIDITY the form required or specified by law is essential, otherwise the contract is without
effect.

Example: Donations of real property must be in a public instrument in order to be valid, even
between the donor and donee.

ENFORCEABILITY requires the contract to be in writing, subscribed by the parties to be

charged for its enforcement as against such party, as in the case of contracts covered by the
Statute of Frauds.

Example: In a sale of immovable property or interest therein, the contract must be in writing
otherwise unenforceable.
CONVENIENCE requires a certain form in order to make effective the rights against third persons.
But as between the parties, it is no longer necessary because the law allows them to compel each
other to put it in the proper form.
Example: In contracts creating real right, such as mortgage, the contract must appear in a public
instrument for convenience or effectiveness as to third persons.

Formal Contracts
a. Donations of real property must be in a public instrument,
otherwise void. (Art. 749)
b. Donations of personal property exceeding P5,000 must be in
writing, otherwise void. (Art. 748)
c. Contributions of a partner in a partnership, if an immovable
property, must be in writing, otherwise void. (Art. 1773)
d. Sale of land thru an agent, the authority of the agent to sell
must be in writing, otherwise void. (Art. 1874)

Oral or verbal contracts

Unless otherwise provided by law, a contract is obligatory in
whatever form it is entered into, provided all the essential
requisites are present.
Note: If the law requires a document of other special form, the
contracting parties may compel each other to observe that
form, once the contract has been perfected.
Example: S sold orally to B a parcel of land for P10,000. B needed
a public instrument to register the sale at the Register of Deeds.
Can B compel S to execute the public instrument of sale?

What must appear in a public

instrument?
a. Acts and contracts which have for their object the creation,
transmission, modification, or extinguishment of real rights
over immovable property.
b. The cession, repudiation or renunciation of hereditary rights or
of those of the conjugal partnership of gains.
c. 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.
d. The cession of actions or rights proceeding from an act
appearing in a public document.

Reformation of Instruments
REFORMATION is a remedy in equity by means of which written
instrument is made or construed so as to express or conform to the real
intention of the parties when some error or mistake has been committed.
- It is predicated on the equitable maxim that equity treats as done which
ought to be done. The rationale of the doctrine is that it would be unjust
and unequitable to allow the enforcement of a written instrument which
does not reflect or disclose the real meeting of the minds of the parties.
REQUISITES:
a. Meeting of minds between the parties
b. Instrument does not express the true intention of the parties.
c. The failure of intention is due to mistake, fraud, inequitable conduct or
accident.
d. There must be clear and convincing proof.

Illustrations:
1. S owns two (2) apartments, Apt. #8 and Apt. #9. Today, he
offfered for sale to B Apt. #8 for P100,000. B accepted the
offer of S because he (B) thought all the while S is offering Apt.
#9, and not Apt.#8. Can the parties ask for reformation?
2.

S owns two (2) apartments, Apt.#8 and Apt.#9. Today, he sold

to B Apt. #8 for P100,000. Both parties executed the Contract
of Sale and signed their names not knowing that the apartment
stated in the Contract is Apt.#9 instead of Apt.#8. Can the
parties ask for reformation?

Prescriptive period for reformation 10 years

When Contracts may be

reformed?
1. Mutual mistake of the parties
2. One party was mistaken and the other acted fraudulently or
inequitably
3. One party was mistaken and the other knew or believed that
the instrument did not state their real agreement but
concealed it from the former
4. Through ignorance, lack of skill, negligence or bad faith on the
part of the person drafting the contract/instrument
5. Parties agree upon mortgage or pledge of real or personal
property, but the instrument states absolute sale or with right
of repurchase

No Reformation in the following

cases
1. Simple donations inter vivos wherein no condition is imposed.
2. Wills
3. When the real agreement is void.
4. One party has bought an action to enforce instrument

Interpretation of Contracts
Interpretation determination of the meaning of the terms or words
used by the parties in the contract.
General rules:
1. Conflict between words used and intention of the parties
intention must prevail
2. Terms of contract are clear and unambiguous literal meaning
3. Stipulation admitting several meanings which is most adequate
to render it effectual
4. Various stipulations shall be interpreted together
5. Doubts are cast upon the principal object null and void