LAW ON CONTRACTS

• Article 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.

• Under the civil code, a contract is an agreement where

one of the parties binds himself or agrees to give
something or to render some service to the other party in
exchange of another thing.
Contracts vs. Obligations

Contracts vs Agreements
STAGES OF A CONTRACT
B.STAGES OF A CONTRACT

a. Preparation (conception or “generation” or negotiation) – begins

from time the parties manifest their interest and ends prior to the
moment of agreement. In this stage there is yet no binding
agreement between them. As such, there is yet no obligation in this
stage.

b. Perfection (or birth) – when the parties agreed upon essential

elements of contract.

c. Consummation (or death) - when parties fulfill or perform the

agreement.
Freedom to Contract
“Principle of Autonomy”

Article 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.

In a contract, there exists a freedom between the parties to establish whatever

they may want to agree on with regards to the terms, conditions, clauses, and
stipulations. However this freedom is limited to those which are not illegal,
against public order, or public policy. This freedom is regarded as the Freedom
to Contract.
Limitations to the Freedom of Contract

The contract entered into by the parties must not be

contrary to:
a. Law - A contract must adhere in accordance with established
laws.

b. Morals - Contracts must also not contravene with the virtues what
is morally right or wrong. Morals deal with the norms of what is good
and right conduct that a person must observe.
Example:
A contract where the subject of which is to kill another person is against morals
since killing a person is morally wrong.
c. Good Customs - These refers to habits or practices in society that have
been observed for a long period of time.

Example:
Respecting our elders. Taking care of the older people.

d. Public Order - This refers to public safety or safety of the general public.

Example:
Getting drunk and unruly in public can disturb public order.
e.Public Policy - Public policy is broader than public order
since it talks about not only public safety but also those
which affect the common good.

A Contract must not be against the mentioned limitations,

otherwise it is VOID or NULL. A void or null contract does
not produce any effect. It is as if there was no contract to
begin with.
Art. 1307. Innominate Contracts shall be regulated by the
stipulations of the parties, the provisions of Obligations and
Contracts, the rules regarding the most analogous
contracts, and by the customs of the place.

Nominate Contract: Contracts that have particular names /

designation under the law.
Innominate: the opposite.
Kinds of Innominate Contracts

1. Do ut des (I give so that you give)

2. Do ut facias (I give that you may do)
3. Facto ut des (I do that you may give)
4. Facto ut facias ( I do that you may do)

(Note: Do ut des: Barter or exchange, no longer an

innominate contract)
PERSONS BOUND IN A
CONTRACT
Persons bound

Principle of Mutuality

• The contract must bind both contracting parties; its

validity or compliance cannot be left to the will of one of
them. (Article 1308)

• Under the Principle of mutuality, both parties who enter

into a contract must be bound to it. The fulfillment or its
termination must not depend on the will of just one of
them.
Example:
• Jose and Brian entered into a contract where Jose
promised to fix Brian’s house for a fee. In their contract it
was stated that Jose may choose to comply or not with
their agreement. This is provision in the contract is not
valid since the compliance in a contract cannot be left to
the will of one of the parties, in this case, Jose.
Ex. “the coach, in the sole opinion of the corporation, fails to
exhibit sufficient skill or competitive ability to coach the
team, the corporation may terminate his contract”
• Article 1309. The determination of the performance may
be left to a third person, whose decision shall not be
binding until it has been made known to both contracting
parties. (n)
Ex:

S sold his car to B. They agreed that M, an automotive

expert will determine the price of the car. M then determined
the price of the car. M must make his decision known to S
and B who will be bound to the said price.
Article 1310. The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances. (n)

In relation to 1309, if the determination of the 3rd person is

inequitable or unjust, then the court shall decide.
Relativity of Contracts

Article 1311. Contracts take effect only between the parties,

their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law. The
heir is not liable beyond the value of the property he
received from the decedent.
GENERAL RULE:

Contracts take effect between the following:

1.The parties
2.Their assigns and heirs

XPN:
In case the contract cannot be transmitted because of the
nature of the contract, or by agreement, or by law.
A third person who has no part in a contract has no rights
and obligations under a contract because he is a stranger
thereof.
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.
Example:

Jose and Milton entered into a contract where Milton

borrowed 1,000,000 php from Jose. The contract takes
effect between Jose and Milton.

If Milton dies then the heirs or assigns of Milton will have to

pay Jose.
Example

Jose and Milton entered into a contract where Milton is to

perform a song and dance number to the tune of “My way”
in Jose’s Birthday party. This obligation cannot be
transmitted because of the nature of the contract.

Jose and Milton entered into a contract of partnership for

their law office. If Milton dies, the partnership is dissolved by
operation of law. The contract of partnership cannot be
transferred to another person.
Stipulation Pour Autrui

A stipulation in favor of a third person giving him the right to

demand its fulfillment. The third person must first
communicate his acceptance and the contracting parties
must also have clearly and deliberately conferred in favor of
the third person.
Example: Stipulation pour autrui

Jose borrowed 1,000,000 Php from Brian. It was agreed

upon that Jose will be liable to pay the amount plus interest.
The interest however will be given by Jose to Maria, Brian’s
daughter.

Maria needs to communicate her acceptance Jose. If she

communicates her acceptance before the revocation of
such stipulation, she will have the right to demand the
performance of the contract.
Art 1314. Any third persn who induces another to violate his
contract shall be liable for damages to the other contracting
party.
ELEMENTS OF A
CONTRACT
ELEMENTS OF A CONTRACT

Article 1318. There is no contract unless the following

requisites concur: C-O-C
(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. (1261)
CONSENT
I.Consent
Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which constitute the
contract. It is when the will of one person meets with the will of
another.

An offer is a unilateral proposal of one person to another.

Acceptance is the showing of assent to the offer of another. If an
offer is accepted then there exists a meeting of the minds between
two parties.
Requisites of an effective offer:

a.Serious intention of he offeror to be bound by his offer.

b.Offer must be certain.
c.The offer must be communicated to the the offeree and
the offeree must have knowledge of the offer.
Instances not considered as offers:

a.business advertisements
b.Advertisements for bidders
c.Display of goods with price tags / tickets
d.Terminated offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge.
Cognition Theory
• The acceptance of the offeree only becomes effective
once the acceptance comes into the knowledge of the
offeror.
• The offer must be certain and the acceptance by the other must
be absolute or unconditional.
• If the acceptance is a counter offer, the original offerer must
likewise accept for there to be a meeting of the minds.
A contract is perfected by mere consent of the parties. From
the time the offer and the acceptance of the object and the
consideration then there is consent. The offer must be
certain and the acceptance by the other must be absolute
or unconditional. If the acceptance is a counter offer, the
original offerer must likewise accept for there to be a
meeting of the minds.
Example:
• Jose and Brian are neighbors. Jose offered to sell his dog
to brian for 100,000 pesos. If Brian accepts this offer then
there is already a perfected contract since the parties
have a meeting of the minds. There is a meeting of the
minds between them since there was an offer by Jose of
selling the object of the contract which is the dog and the
acceptance of Brian to give the consideration which is the
100,000 pesos.
• Here the offer of Jose is certain since it was clear as to
what he was selling and how much. The acceptance of
Brian was also absolute since he did not propose another
price and just accepted the offer as is. As such, this
acceptance is absolute.
• If Brian proposes another price, for example 90,000 pesos, this
acceptance is not absolute but rather a counter offer. If the
acceptance constitutes a counter offer then Jose must accept the
counter offer for there to be meeting of the minds.

• In all these scenarios, without a meeting of the minds there would

be no consent. If there is no consent then there is no valid
contract. If there is no valid contract then there is no obligation to
speak of.
• In a contract, the person making the offer may fix the
time, place, and the manner of the acceptance, all of
which must be complied with. (Art. 1321, NCC)

• An offer made through an agent is accepted from the

time acceptance is communicated to him. (Art. 1322,
NCC)
Acceptance
Acceptance may be express or implied. (Art. 1320, NCC).

The person making the acceptance may do so either impliedly or

expressly. If implied, he must do an act which may be deemed as an
acceptance. An express acceptance may be done oral or written.

The acceptance must likewise be communicated to the offerer in

order to be effective. Without the offerer knowing the acceptance,
then there is no meeting of the minds between them.
If the offer has not been accepted before the death, civil
interdiction, insanity, or insolvency of either party, then the
offer becomes ineffective. (Art. 1323, NCC)

An offer may be revoked at anytime before it is accepted.

Example:
• Joseph offered to sell his house to Brian. However before
Brian could communicate his acceptance of the offer to
Joseph, Joseph became insane. Here, there is no
contract or meeting of the minds between them since
Joseph became insane before the acceptance was
communicated to him.
Article 1324.
• When the offerer has allowed the offeree a certain period
to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as
something paid or promised.
• General Rule:

• When the offeror has provided for a period for which the
offeree should accept, the offer may be withdrawn at any
time before acceptance but should communicate the
withdrawal to the offeree.

• XPN: If there is an option contract.

• Option Contract “Option” - is a contract where a person
is given the freedom to accept the offer within a period of
time. It is a contract separate the original contract. May
also refer to the privilege given

• Option period - it is the time given to the offeree to

accept the offer

• Option Money - Money paid for the option and is not

considered part of the purchase price.
Example
• Brian offers to sell his new motorcycle to Jose for Php
450,000 and gave him 5 days to decide.

• In this example, Brian may withdraw his offer to Jose

before Jose accepts his offer.

• However, if Jose paid option money to Brian for the 5 day

period to decide, Brian cannot withdraw his offer.
Who cannot give consent in a contract?
The following cannot give consent to a contract because of
incapacity:

• a.A minor (below 18 years of age)

• b.Insane or demented person
• c.Deaf-mutes who do not know how to write.
• If any of these persons enter into a contract, that contract
will become voidable. A contract which is voidable is valid
it can be questioned or annulled in court. A valid contract
on the otherhand cannot be questioned in court.
VITIATION OF CONSENT
Factors that affect Consent - vitiation of consent

In addition to the incapacity mention in the previous

paragraph, the following factors will also affect consent as
to make a contract voidable.

a.Error or mistake (Art. 1331, NCC)

b.Violence or Force (Art. 1335, NCC)
c.Intimidation or Threat
d.Undue Influence (Art. 1337, NCC)
e.Fraud or Deceit (Art. 1338, NCC)
Error or Mistake
• Error or mistake is “A misunderstanding of the meaning or
implication of something” or a “wrong action or statement
proceeding from a faulty judgment”. (Domingo Realty v
CA).
• In order that mistake may affect consent and make the
contract voidable, it must refer to the following:
• a.The substance of the thing which is the object of the
contract;
• b.The conditions of the contract that have principally
moved one or both parties to enter into the contract;
• c.The identity or qualifications of one of the parties
provided the same was the principal cause of the
contract.
EXAMPLE:

a.Jose wants to buy Brian’s dog to be used dog racing.

However what they did not know is that the dog cannot run
that fast. Here there is a mistake in the fact that would affect
Jose’s decision in buying the dog.

b.Jose wants to buy a piece of land in Baguio city thinking

that he could do so in installments. It turns out that he
cannot buy the land in installments. Here there is a mistake
as to the condition of the contract.
c.Jose wants to sell to Brian his dog thinking that he was
his cousin. If Jose entered into the contract to sell the dog
on the reason that he will only do so if he was to sell to a
relative then there will be a mistake in identity or
qualification if later on he finds out that Brian was not his
cousin anyway.
Article 1333. There is no mistake if the party alleging it
knew the doubt, contingency or risk affecting the object of
the contract.

Ex. The buyer bought a parcel of land despite knowing that

it was subject to different claims.
B.Violence or Force

This refers to the use of physical force in order to get the

consent of one of the parties. The force must be serious
and irresistable

EXAMPLE:
Jose wanted to sell his car to Brian for 100,000 pesos.
Brian however does not want to buy Jose’s car. Jose then
grabs Brian by the neck and forces him to buy the car.
Here, the consent was affected by Violence or Force. The
contract between them is voidable.
C.Intimidation or Threat

• This refers to a person being compelled by a reasonable

and well grounded fear of evil to his person, his property,
upon his spouse, descendants or ascendants in order get
his consent.
Requisites in order for Intimidation or threat to vitiate
consent:
1.It must produce resonable and well grounded fear of an
evil
2.The evil is imminent and grave
3.the evil will be inflicted upon his person or property, or
upon the person or property of his spouse, descendants,
ascendants
4.The fear caused by the evil is the reason why the contract
was entered into.
EXAMPLE
• Jose wanted to sell his car to Brian for 100,000 pesos.
Brian however does not want to buy Jose’s car. Jose then
got a knife and told him that if he will not buy the car he
will stab Brian’s daughter. Here, the consent was affected
by Threat and intimidation. The contract between them is
voidable.
Threatening to take legal actions to enforce a contract or a
legal claim does not vitiate consent.

Example.
Brian owes Jose 10,000 Php. Brian failed to pay despite
demand. Jose threatened him of court action.
Art. 1336. Violence or intimidation shall annul the obligation
although it may have been employed by a third person who
did not take part in the contract.

Violence or Intimidation may also be caused by a third

person.
D.Undue Influence

This refers to the use of influence to overpower another

person from acting voluntarily. In looking whether there is
undue influence the following factors are to be considered:

a.Confidential, family, spiritual and other relations between

the parties,
b.Mental weakness,
c.Ignorance
d.Financial distress
EXAMPLE:
• Jose is Brian’s boss in the company. Brian always wanted
Jose’s dog but Jose never wanted to sell his dog. If Jose
does not want to sell the dog but was pressured to do so
because of financial distress, then the sale may be voided
on the reason of financial distress.
E.Fraud or Deceit

There is Fraud or deceit when one of the parties uses

insidious words or machinations to induce another party in
entering into the contract and without such insidious words
or machinations, he would not have entered into such
contract. (CAUSAL FRAUD)

In using Fraud or deceit, one of the parties deceive the

other into entering into the contract by using schemes and
other acts.
Causal Fraud - Fraud used by one party to induce the
other to enter into the contract.
Incidental Fraud - Fraud in the performance of the
obligation. The party causing the fraud will be liable for
damages.

Failure to disclose facts, when there is a duty to reveal

them, as when parties are bound by confidential relations
also constitutes fraud. (Art 1339)
Art 1344. In order that Fraud may make a contract voidable,
it should be serious and should not have been employed by
both contracting parties.
EXAMPLE:

Jose wanted to sell his watch to Brian however he can’t

since Brian does not like cheap watches. Jose then tells
Brian that his watch is a very expensive watch despite
knowing that it is in fact not.

Here there is the use of insidious words or machinations to

induce Brian to buy the watch. Without these , Brian would
not have bought the watch.
Failure to disclose facts, when there is a duty to reveal them, as
when parties are bound by confidential relations also constitutes
fraud. (Art 1339)

Usual exaggerations in trade when the other party had an

opportunity to know the facts, are not in themselves fraudulent. (Art
1340)

Example:

“This candy is one of the best candies in town”

“This car will surely give you the best riding experience”
Art 1341. A mere expression of an opinion does not signify
fraud, unless made by an expert and the other party has
relied on the former’s special knowledge.

Art 1342. Misrepresentation by a third person does not

vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.
Art 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error.
Art 1345. Simulation of a contract may be absolute or relative. The
former takes place when the parties do not intended to be bound at
all, the latter, then the parties conceal their true agreement.

Art 1346. An absolutely simulated or fictitious contract is void.

A relative simulation, if it does not prejudice a third person and is not
intended for any purpose contrary to law, morals good customs,
public order, or public policy, binds the parties to their real
agreement.
In simulation of contracts, the parties try to deceive or make
it appear that they have entered into a contract where in
fact there is none.
Absolute simulation of contract: VOID
Relative Simulation: Valid if it does not prejudice third
persons and is not contrart to L M GC PO PP.
Example:
1. Jose is indebted to Brian for 1,000,000 Php. Jose knowing that
Brian will want to take his land in exchange of his credit, Jose and
his mother pretended to enter into a contract where they make it
seem that Jose sold his land to his mother.

2. Jose and Brian entered into a contract of mortgage. However they

wanted to make it appear that what they entered into is a contract of
sale. In this case, Jose and Brian will be bound to their original
agreement.
OBJECT AND
CONSIDERATION OF
CONTRACTS
What is the Object of a Contract?
• The object is the subject matter in a contract. In relation to
obligations, an object may be a thing to be given, an act
to be done or not to be done.
Requisites of a VALID object:
1.The thing must be within the commerce of man - It must be capable of legally being the
subject of commercial transactions.

2.Must not be legally or physically impossible - A thing is legally impossible if it cannot be done
or given because the object itself is against the law. It is physically impossible if it cannot be
done in the ordinary course of human physical capabilities.

3.In existence or capable of coming into existence - A thing is in existence if it is already

available in the present time. It is capable of coming into existence if it is certain that it will come
in some other time in the future.

4.Determinable or determinate without the need of entering into another contract. - An

object is determinate if the parties are already certain as to what will be the object of the
contract.
General Rule:

As a rule all things or services may be the object of

contracts , which includes future things.
Exception (Art. 1347-1349, NCC)
The following objects cannot be the subject of a contract.
a.Things which are outside the commerce of men - These are things that cannot be
subject of commercial transactions.

Example:
Public places such as parks, forests, streets, etc. cannot be the subject of a contract since
these cannot be subject of commercial contracts.

b.Intransmissible rights - These pertains to rights which are personal to the person who
posses it.

Example:
Political rights, right to vote, parental right, right to public office, marital rights cannot be subject
to contracts since these rights are personal to the person who posses it.
c.Future inheritance except in cases authorized by law - Inheritance refers to the property
which will be transmitted to the heirs of a person upon his death.

Example:
Michael is Joe’s father. Michael and Joe cannot enter into a contract regarding the things that
Joe will inherit when Michael dies.

d. Impossible objects - Same as previously discussed.

III.Cause or Consideration

The cause or consideration in a contract is the reason or

purpose which the contracting parties entered into the
contract. It is what is given for in exchange for the promise
of another. It also refers to the proximate or immediate
reason for entering into a contract.

In contracts the consideration refers to what is given by one

party in exchange for the other’s promise (which is the
object of the obligation).
EXAMPLE:
• Jose offered to sell his car for 1,000 pesos to Brian. Here
the object of the contract as in the perspective of Jose is
the car and the consideration is the 1,000 pesos since it is
the reason for which he entered into a contract with Brian.
Absence and Illegality of Cause
• “ Article 1352. Contracts without cause, or with unlawful
cause, produce no effect whatever. The cause is unlawful
if it is contrary to law, morals, good customs, public order
or public policy. (1275a)”
ABSENCE OF CAUSE
• A contract with a total lack of cause or consideration is
VOID.
• Total lack of cause - this situation happens if the parties
did not stipulate any cause or consideration at all. The
contract in this case is VOID since there is an absence of
a cause.
• 2.Absolutely Simulated or Fictitious Cause (Fake) - If
the parties did not really intend to have a cause in a
contract then that contract is VOID for having an absence
of a cause or consideration.
EXAMPLE:
• Brian and Jose are friends. Brian told Jose that he will
give his car to Brian. However Brian told him that in order
for his wife not to get angry they will just pretend that
Brian will sell to him the car. Here, the contract is void
because there was a fictitious or fake cause since they
only pretended that Jose will pay Brian for the car.
ILLEGALITY OF CAUSE
• A contract with an illegal cause is likewise VOID.
Art 1355. Lesion or Inadequacy of Cause shall not
invalidate a contract, unless there has been fraud mistake
or undue influence.
Formalities of contracts
General rule:
• No form necessary for contracts provided that all the
essential requisites for their validity are present [Par. 1,
Art. 1356, CC] Contracts shall be obligatory, in whatever
form they may have been entered into.

• As a general rule, a contract may be executed in any

form. Thus, it may be made in writing, verbally, or partly in
writing or verbally. If the contract complies with all the
essential requisites then it is considered as a valid
contract whatever form it may be executed.
Exception:
• 1. When the law requires that a contract be in some form
in order that it may be valid [par. 2, Art. 1356, CC]
• 2. When the law requires that a contract be proved in a
certain way to be enforceable (Statute of Frauds) (par. 2,
Art. 1356, CC)
• 3. When the law requires a contract to be in some form
for convenience, or to be effective against third parties
(Arts. 1357 and 1358, CC)
EXAMPLE:

1.Sale or transfer of Immovable Property - Must be in a

public instrument.

2.Donation of Immovable Property - Must be in a public

instrument indicating the property to be donated.

3.Agreement to pay Interest - Must be in writing.

Interpretation and reformation
of contract
REFORMATION OF CONTRACTS
• Reformation is the remedy of the parties in a contract in
case there has already been a meeting of the minds or an
agreement but the true intention of the parties was not
expressed in the contract by reason of mistake, fraud,
inequitable conduct (act which is unjust or unfair), or
accident. In this case, one of the parties to the contract
that does not express their true intentions may ask the
court for the reformation of the contract so that it may be
revised to express their true intention.
• If there was no meeting of the minds at all then the
remedy of reformation is not available. In this case the
remedy is ANNULMENT of CONTRACT because there
was no meeting of the minds.
Reformation in the following instances:

1. Mutual mistake - both parties committed mistake.

2. When one party is Mistaken, and the other is fraudulent.
3. When on of the parties was mistake and the other knew
but concelead the knowledge thereof.
4. Mistake by a third person.
5. Mortgage but was stated as a sale.
No Reformation in the following instances:

1. Donation inter vivos wherein no condition is imposed

2. Wills
3. When the real agreement is void
4. When one of the parties has brought an action to enforce
the instrument.
EXAMPLE:

• Jose and Brian entered into a contract where Jose sold

his dog name DingDong to Brian. However, in the
contract they signed, Dingdong the dog’s name was
mistakenly written as Digong, which Jose also owns.
Here, the parties may ask the court for the reformation of
the contract because of the mistake.
• If Jose was selling cats and Brian was buying dogs, here
the remedy of reformation is not available since there is
no meeting of the minds between the parties. The remedy
in case they made a contract is ANNULMENT of
CONTRACT and NOT REFORMATION. Remember, No
meeting of the minds, No Reformation.
Note:
• If the real intention of the parties is a VOID contract then
reformation cannot be made since a VOID contract
cannot be given effect anyway. (Read together with VOID
CONTRACTS).
INTERPRETATION OF CONTRACTS

How do we interpret contracts?

General Rule:
If the terms of the contract leave no doubt about the intention of the
parties then the literal interpretation of the contract shall apply.

Exception:
If the words of the contract are contrary to the intention of the
parties, then the intention of the parties will prevail.
EXAMPLE:
• Jose and Brian entered into a contract of sale where Jose sold his
Car to Brian for 100,000 pesos. The contract also states that the
100,000 will be distributed over a ten month period. Here, if the
contract is clear and unambiguous , then the contract will be
interpreted literally or as it is written without going into the
intentions of the parties.

• If Jose and Brian originally intended that the payment shall be

distributed over a tenth month period BUT the contract states that
it will be paid in a five month period, the intention of the parties
shall prevail over the words of the contract.
KINDS OF DEFECTIVE
CONTRACTS
KINDS OF DEFECTIVE CONTRACTS - R-U VV?

1.Rescissible Contracts
2.Unenforceable Contracts
3.Voidable Contracts
4.Void Contracts
I.Rescissible Contracts
Rescissible contracts are contracts which were validly agreed upon
by the parties but the remedy of RESCISSION is granted to by law.
Here, the contracts are VALID contracts, however due to economic
injury or damage to one of the parties, the party may avail of
rescission.

Rescission
Is the remedy granted by law to parties in a contract where the
things in the contract shall be restored/ returned to their condition
prior to the contract.
The following contracts shall be rescissible:

1.Those contracts entered into by the guardian of a ward

where the ward suffers a lesion of more than one fourth of
the value of the thing or object.

A guardian is a person who takes care of another (ward)

who does not have the capacity to act for himself (minor,
insanity, deaf-mute). If the guardian sells the property of the
ward and the ward suffers a loss of more than one fourth of
the value of his property, then the contract is rescissible.
EXAMPLE:

Jose is the guardian of Brian, a minor. Since Brian cannot

sell his property because he is a minor, Jose sold it for him.
Jose sold Brian’s land worth 100,000 for only 74,000 pesos.
Here, Brian suffered a loss of more than one fourth of the
value of the property. As such, Brian may later on avail the
remedy of Rescission. If he avails the remedy of rescission,
the things shall be restored to their previous condition,
meaning, the land will be returned to Brian and the 74,000
will be returned to the buyer.
2.Those contracts entered into by agents of ABSENTEES where the
absentee suffered a lession of more than one fourth of the value of
the object or property.

Under Philippine laws, an absentee is a person who has

disappeared and his whereabouts are unknown. The courts shall
appoint an agent to manage his property. If the agent sells the
property of the absentee with a loss or lesion of more than one
fourth of its value, then the contract is rescissible.
EXAMPLE:

Jose is the agent of Brian, a person missing for already 10

years and has been declared an absentee. Since Brian
cannot sell his property because he is an absentee, Jose
sold it for him. Jose sold Brian’s land worth 100,000 for only
74,000 pesos. Here, Brian suffered a loss of more than one
fourth of the value of the property. As such, Brian may later
on avail the remedy of Rescission. If he avails the remedy
of rescission, the things shall be restored to their previous
condition, meaning, the land will be returned to Brian and
the 74,000 will be returned to the buyer.
3.Contracts undertaken in Fraud of Creditors

Example:
D is indebted to C for 1,000,000 php. He promised C that
he will give his house as payment. Unknown to C, D
secretly sold the house that would have been used to pay
his debt. In this case, the contract is rescissible.
• 4.Contracts concerning things under litigation if the
defendant without the knowledge and approval of the
other parties and the court.
Example:
Jose sued Brian in court regarding a parcel of land. During
the pendency of the case, Brian sold the land. In case Jose
wins the case, he may file for rescission on sale of the
parcel of land.
EFFECT OF RESCISSION

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. (Art 1385)
Period to file action for Rescission

GENERAL RULE:
4 years from the date when the contract was entered into.

EXCEPTION:
1.In case of guardianship - Within 4 years from termination
of guardianship.
2. In case of absentees - from the time the domicile of the
absentee is known
Unenforceable Contracts
II.Unenforceable Contracts
• Unenforceable contracts are contracts which cannot be
brought in court because of certain defects unless they
are ratified.
• If the unenforceable contract is ratified, then it becomes
enforceable.
• In case of unenforceable contracts, the parties cannot go
to court and ask the court to enforce the contract against
the other person. The court cannot force or compel the
parties to comply with the obligation.
Ratification
• In ratification, the parties agrees or approves to the
defective or unauthorized act or contract.
The following are Unenforceable contracts:

1.Contracts which were entered into in the name of a

person not given authority.

Art. 1317. No one may contract in the name of another

without being authorized by the latter, or unless he has by
law, a right to represent him.
A contract entered into the name of another person who has
no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable.
• Here, If a person enters into a contract for another
person, without the authority to do so, the contract is
unenforceable.
Example:

Brian entered into a contract with Jose, Brian represented

himself to be the agent of Marc. Brian signed for marc. It
was later on found out that Brian was not authorized by
Marc. Here, the contract is unenforceable. Brian cannot go
to court and ask the court to enforce the contract against
Jose because he was unauthorized to do so.
2.Those which does not comply with the Statute of
Frauds.
• The statute of frauds requires that certain contracts or
agreements to be in writing in order for the parties to
avoid being defrauded.
The following agreements needs to be IN WRITING under the
statute of frauds otherwise they are unenforceable.

a. Agreements not to be performed within one (1) year from the

making thereof.

Example:
Jose and Brian entered into a contract on December 1, 2020 where Brian will fix
Jose’s house on December 2, 2021. Here the obligation will be performed after
1 year from the agreement. Hence, it must be in writing so that later on, the
parties may go to court and enforce it against the other person.
b. A promise to pay the debt of another person.

EXAMPLE:
Jose and Brian entered into a contract where Brian will lend
Jose money. Marc, another friend promised Brian that if
Jose will not pay, he (Marc) will pay Jose’s debt. Here , the
promise to pay another person’s debt should be in writing
under the statute of frauds.
c. Agreements in consideration or in exchange of marriage.

EXAMPLE:
Joe promised Roxy that he will give her a car if she Marries
him. Here, the agreement between them is an agreement in
consideration of marriage. This agreement must be in
writing.
d.Agreements for the sale of goods worth 500 pesos and
above.

e.Agreement for leasing for a period of more than one year.

EXAMPLE:
Jose and Brian entered into an agreement where Jose
agreed to lease his house to Brian for 5 years. Here the
agreement must be in writing.
f.Agreement for the sale of Real property.

EXAMPLE:
Jose and Brian entered into a contract where Jose will sell
his land to Brian. This agreement must be in writing
otherwise it is unenforceable.
The Statute of Frauds only applies to completely Executory
contracts, where the parties have not yet performed their
respective obligations.

If the contract is partially executed already like in case of an

oral sale of real property, when the seller and buyer have
already exchanged the property and the payment, then the
contract is already valid and enforceable.
3.Agreements between parties who are BOTH
incapable of giving consent are Unenforceable.

• Here, if both of the aprties cannot give consent either

because they are minors, insane, or deaf - mute who
cannot write, the contract is unenforceable.
III.Voidable Contracts
• Voidable or annullable contracts are existent, valid and
binding, although they can be annulled because of want
of capacity or vitiated consent of one of the parties.

• Voidable contracts are valid however it may be

questioned in court because the consent of one of the
parties was obtained with certain defects in it.
• 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.
3. Contracts agreed to in a state of drunkenness or during a
hypnotic spell are voidable. Contracts entered into during a lucid
interval are valid.
• In voidable contracts , the parties may either annul the
contract or ratify it.

• Annulment is the action in court to invalidate the contract

or to consider it as a nullity or without effect.

• The action for ratification is an action to verify the validity

of a contract. Once it is ratified, the contract becomes
absolutely valid.
The action for annulment of contract shall be brought within
4 Years. The period of 4 years shall be counted from:

1.If the defect in the consent was due to intimidation,

violence, or undue influence, the period of 4 years shall be
counted from the intimidation, violence, or undue influence
ceases or stops.
Example:

Jose forced Brian through intimidation to buy his car. If for

example Jose has stopped intimidating Brian on December
1, 2020 then the 4 year period to annul the contract will be
counted from that day.
2.If the defect in the consent was due to Mistake or Fraud,
the 4 year period shall be counted from the day the mistake
or fraud was discovered.

Example:
Jose and Brian entered into a contract where Jose bought Brian’s
car thinking it was a Porsche as it was represented by Brian. On
December, 1, 2020, a few weeks after buying it, Jose discovered
that the car was not a Porsche. Here, the 4 year period shall be
counted from the time Jose discovered the Fraud.
3. If the defect in the contract is brought about by the
incapacity of a person (minority, insanity, deaf-mute),
then the 4 year period shall be counted from the time the
guardianship ceases or in other words from the time
incapacity ceases. If a minor, then from the time that he
ceases to be a minor, If insane or deaf mute, from the time
they are already capable of giving consent.
Example:
• Jose and Brian are neighbors. Jose , a minor, sold a
house and lot to Brian. The contract of sale of the land
may be annulled from the time Jose ceases to be a minor.

• The action for annulment may only be brought by the

VICTIM and not the person responsible for the defect.
• Aside from annulment of a voidable contract, a party may
also choose the ratification of the contract. In ratification,
the parties agrees or approves to the defective or
unauthorized act or contract. This is the opposite of
Annulment. Here the contract becomes valid and is
cleared of all its defects.

• Ratification may be done Expressly or impliedly.

• Ratification will cleanse the contract from all its defects
from the moment it was entered into as if there was no
defect at all.

• If voidable contract has been annulled each of the parties

must restore to one another what may have been the
object and cause of the contracts including the fruits or
interest thereof.
IV.Void Contracts
• A void contract is a contract which is an ABSOLUTE
NULLITY and produces NO EFFECT, as if it had never
been executed or entered into. A void contract is treated
as if there was no contract at all. As such, it does not give
rise to an obligation on the part of the debtor nor does it
give right to a creditor.
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.
• A void contract can always be brought in court for it to be
declared void or inexistent. The action to declare a void
contract void or inexistent does not prescribe, meaning it
may be raised anytime in court.
• If the contract is void due to the illegality of the object or
the cause, and the act constitutes a criminal offense, both
of the parties shall be considered at fault and both of them
shall be prosecuted. They shall likewise have no action
against each other, being both at fault.
EXAMPLE:
• Jose and Brian are classmates in BACC 104. One day Brian
offered to sell Jose pure grade Marijuana (a prohibited drug) from
Sagada. They agreed that delivery shall be on December 1, 2020.
On the said date, Brian failed to appear on the scheduled meeting
place. Jose sent a demand letter telling Brian to deliver the
Marijuana on December 3, 2020. Brian again failed to appear. In
this example, Jose and Brian shall have no right of action against
each other. Both shall be prosecuted for the criminal offense of
illegal possession and sale of drugs.
Article 1420. In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may
be enforced.