CONTRACTS

(Articles 1305 – 1422)

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CONTRACTS

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.
WHAT IS A CONTRACT
It is a meeting of the minds between two or more
persons whereby one binds himself, with respect to the
other, or where both parties bind themselves reciprocally
in favor of one another, to fulfill a prestation to give, to
do, or not to do.
OBLIGATION VS. CONTRACT
While a contract is one of the sources of
obligations, an obligation is the legal tie or
relations itself that exists after a contract
has been entered into.
Hence, there can be no contract if there is
no obligation. But an obligation may exist
without a contract. (De Leon, Obligations
and
Contracts, 2003 ed, p. 283‐284)
STAGES OF A CONTRACT
1. Preparation, conception, or generation – period of
negotiation and bargaining, ending at the moment of
agreement of the parties
2. Perfection or birth of the contract – the moment when the
parties come to agree on the terms of the contract
3. Consummation or death – the fulfillment or performance of
the terms agreed upon in any contract
ESSENTIAL ELEMENTS OF A CONTACT (COC)
1.Consent of the contracting parties (Arts. 1319-1346)
2.Object Certain which is the subject matter of the contract
(Arts. 1347-1349
3.Cause of the obligation which is established. Arts. 1350-
1355)
ILLUSTRATIVE CASE: Essential Elements.
FACTS:
X offered to purchase from the spouses H and W their
364square meter parcel of land, situated in Davao City,
for 3,0000,000. Finding the offer acceptable, the spouses
executed with X a Memorandum of Agreement dated May
8, 1992.
 On December 2, 1992, X’s lawyer prepared a Deed of
Absolute Sale indicating the consideration as only
400,000. When H ‘’noticed that the consideration was
very low, she complained and called the attention of X but
the latter told her not to worry as he would be the one to
pay for the taxes and she would receive the net amount of
3,0000,0000.
Upon signing the Deed of Absolute Sale, X paid
200,000 in cash to the spouses and issued a
postdated check in the amount of 2,800,000,
representing the remaining balance of the purchase
price of the subject property. Thereafter, a new
Transfer Certificate of Title (TCT) was issued in the
name of X.
When presented for payment the check was
dishonored for the reason “Drawn Against
Insufficient Funds.” Left with no other recourse, the
Spouses filed a Complaint.
ISSUE:
Whether there is a meeting of minds.

HELD:
In the present case, there is no question that the subject
matter of the sale is the 364-square meter Davao lot
owned by Spouses H and W and the selling price agreed
upon by the parties is 300,000,000. Thus, there is no
dispute as regards the presence of the two requisites for a
valid sales contact, namely: 1) A determinate subject
matter and 2) A price certain in money.
CLASSIFICATION OF CONTRACTS
1. According to their relation to other contacts:
a. Preparatory - Those which have for their object the
establishment of a condition in law which is necessary
as preliminary step towards the celebration of another
subsequent contract.
Examples: Partnership, Agency
b. Principal - Those which can subsist independently from
other contracts and whose purpose ca be fulfilled by
themselves.
Examples: Sale, Lease
 c. Accessory - Those which can exist only as a
consequence of, or in relation with, another prior
contract. Examples: Pledge, Mortgage
2. According to their perfection:
a. Consensual - Those which are perfected by the mere
agreement of the parties.
Examples: Sale, Lease
b. Real - Those which require not only the consent of the
parties for their perfection, but also the delivery of the
object by any one party to the other.
Examples: Commodatum, Deposit, Pledge
3. According to their form:
a. Common or Informal - Those which do not require
some particular form.
Example: Loan, Lease
 b. Special or formal - Those which require some
particular form.
Example: Donation, Chattel Mortgage
4. According to their purpose:
a. Transfer of ownership
Example: Sale
b. Conveyance of use
Example: Commodatum
c. Rendition of services Examples: Agency
5. According to their subject matter:
a. Things
Examples: Sales, Deposit, Pledge
b. Services
Examples: Agency, Lease of services.
6. According to their vinculum which they produce:
a. Unilateral - Those which give rise to an obligation
for only one of the parties.
Examples: Commodatum, Gratuitous deposit
b. Bilateral - Those which give rise to reciprocal
obligations for both parties.
Examples: Sale, Lease
7. According to their cause:
a. Onerous - Those in which each of the parties aspires
to procure for himself a benefit through the giving of
an equivalent or compensation.
Example: Sale
b. Gratuitous - Those in which one of the parties
proposes to give the other a benefit without any
equivalent or compensation.
8. According to risk involved:
a. Commutative - Those where each of the parties
acquires an equivalent of his prestation and such
equivalent is pecuniary appreciable and already
determined from the moment of the celebration of the
contract.
Example: Lease
b. Aleatory - Those were each of the parties has to account
the acquisition of an equivalent oh his prestation, but
such equivalent, although pecuniarily appreciable, is not
yet determined, at the moment of the celebration of the
contact, since it depends upon the happening of an
uncertain event, thus charging the parties with the risk of
loss or gain.
Example: Insurance
9. According to their name or norms regulating them:
a. Nominate - Those which have their own individuality and
are regulated by special provisions of law.
Examples: Sale, Lease
b. Nominate - Those which lack individuality and are not
regulated by special provisions of law.
CONTRACT OF ADHESION
A contact of adhesion is a contact whereby almost
all of its provisions are drafted by one party. The
participation of the other party is limited to affixing his
signature or his “adhesion” to the contract. For this reason,
contracts of adhesion are strictly construed against the
party who drafted it.
It is erroneous, however, to conclude that contracts of
adhesion are invalid per se. They are, on the contrary, as
binding as ordinary contracts. A party is in reality to free
to accept or reject it. A contract of adhesion becomes void
only when the dominant party takes advantage of the
weakness of the other party, completelydepriving the
latter of the opportunity to bargain on equal footing.
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. (1255A)

• This article embodies the principle of autonomy of contracts

or freedom of contract

Freedom to contract:
• Any person has the liberty to enter into a contract so long as
they are not contrary to law, morals, good customs, public order
or public policy.
• The legislature, under the constitution, is prohibited from
enacting laws to prescribe the terms of a legal contract.
* CONTRARY TO LAW:
 • Freedom of contract is restricted by law for the good of the
public.
• It is fundamental postulate that however broad the freedom of
the contracting parties may be, it does not go so far as to
countenance disrespect for or failure to observe a legal
prescription. The Statute takes precedence.
Examples:
1. A promissory note which represents a gambling debt is
unenforceable in the hands of the assignee.
2. Stipulations to pay usurious interests are void.
3. A contract between the public service companies to divide the
territory is void because it impairs the control of the Public
Service Commission.
4. Agreement to declare valid a law or ordinance is void.
* CONTRARY TO MORALS:
Morals mean good customs or those generally accepted principles of
morality which have received some kind of social and practical
confirmation.
Examples:
1. A promise to marry or not to marry; to secure legal separation
2. A promise to change citizenship, profession, religion or domicile
3. A promise not to hold public office or which limits the
performance of official duties
4. A promise to enter a particular political party or separate from it
5. Contracts which limit in an excessive manner the personal or
economic freedom of a person
6. To make an act dependent on money or some pecuniary value,
when it is of such a nature that it should not depend thereon;
payment to kill another.
CONTRARY TO PUBLIC ORDER:
1. Public order means the public weal or public policy. It represents
the public, social, and legal interest in private law that which is
permanent and essential in institutions, which, even if favoring
some individual to whom the right pertains, cannot be left to his
own will.
2. A contract is said to be against public order if the court finds that
the contract as to the consideration or the thing to be done,
contravenes some established interest of society, or is
inconsistent with sound policy and good morals, or tends clearly
to undermine the security of individual rights.
Examples:
a. Common carrier cannot stipulate for exemption for liability unless
such exemption is justifiable and reasonable and the contract is
freely and fairly made.
b. Payment to intermediaries in securing import licenses or quota
allocations.
c. Contract of scholarship stipulating that the student must remain
in the same school and that he waives his right to transfer to
another school without refunding the school
ART. 1307. INNOMINATE CONTRACTS SHALL BE REGULATED
BY THE STIPULATIONS OF THE PARTIES, BY THE PROVISIONS
OF TTILES I AND II OF THIS BOOK, BY THE RULES
GOVERNING THE MOST ANALOGOUS NOMINATE CONTRACTS,
AND BY THE CUSTOMS OF THE PLACE. (N)

What is NOMINATE contract?

Those which have their own individually and are regulated by
special provisions of law.
Examples – sale, lease

What is INNOMINATE contract?

 Those which lack individually and are not regulated by special
provisions of law.
KINDS OF INNOMINATE CONTRACT
1. do ut des (I give that you may give) – An agreement in which A will
give one thing to B, so that B will give another thing to A.
2. do ut facias (I give that you may do) – An agreement under which
A will give something to B, so that B may do something for A.
3. facio ut facias (I do that you may do) – An agreement under which
A does something for B, so that B may render some other service for
A.
4. facio ut des (I do that you may give) – An agreement under which
A does something for B, so that B may give something to A.

Rules on innominate contracts

1.Stipulations of the parties;
2.The provisions of the Civil Code on obligations and
contracts 3. The rules governing the most analogous
nominate contracts;
4. The customs of the place.
KINDS OF INNOMINATE CONTRACT
1.do ut des - I give that you give.
2.do ut facias - I give that you do.
3.facio ut des - I do that you give.
4.facio ut facias - I do that you do.

Rules on innominate contracts

1.Stipulations of the parties;
2.The provisions of the Civil Code on obligations and
contracts 3. The rules governing the most analogous
nominate contracts;
4. The customs of the place.
ILLUSETRATIVE CASE: The rule governing the most analogous
nominate contract.
FACTS:
A, B and C, and Z, forged an agreement entitled “Renunciation and
Transfer of Claims, Rights, and Interests” covering a parcel of land,
Lot 2.
As reflected in the agreement of the parties, A B and C,
abandoned and transferred, whatever rights “they may have” over
Lot 2 in favor of Z, as second party, and on account of renunciation
and transfer, A B and C, transferred “whatever rights they may have
in the prosecution of the land registration proceeding,” LRC No. N-
411.
About 14 years after the execution of the parties’ agreement, Z
filed a motion to intervene and be substituted as applicant in LRC
Case No. N411. The motion was opposed by A, B and C, who denied
the authenticity and due execution of the agreement. The land
registration court, finding for A, B and C, denied Z’s motion by order
of March 2, 1999.
Z thus filed a Complaint for Specific Performance and Damages against
A, B and C, for the enforcement of A, B and C’,’s obligation under the
agreement.

ISSUE:
Whether the innominate agreement of the parties is analogous to
a contract of sale?
HELD:
By the agreement, A B, and C., abandoned and
transferred whatever rights, interests, or claims they had
over Lot 2 in favor of Z for and in consideration of her
payment of the loan in the principal amount of P19,000
which was outstanding.
Articles 1458, 1498 and 1307 of the Civil Code which are
pertinent to the resolution of the petition provide:
Art. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
Art. 1498. When the sale is made through a public
instrument, the execution thereof shall be equivalent to
 the delivery of the thing which is the object of the
contract, if from the deed the contrary
does not appear or cannot clearly be inferred.
Art. 1307. Innominate contracts shall be regulated by
the stipulations of the parties, by the provisions of Title I
and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of
the place.
The agreement of the parties is analogous to a
deed of sale in favor of Z, it is having transferred
ownership for and in consideration of her payment of the
loan in the principal amount of P19,000. The agreement
having been made through a public instrument, the
execution was equivalent to the delivery of the property to
C.
ART. 1308. THE CONTRACT MUST BIND BOTH
CONTRACTING PARTIES; ITS VALIDITY OR COMPLIANCE
CANNOT BE LEFT TO THE WILL OF ONE OF THEM.
(1256A)

* Principle of Mutuality of Contract:

The binding effect of contract on both parties is based on the
principles:
o That obligations arising from contracts have the force of law
between the contracting parties
o That there must be mutuality between the parties based on
their essential equality, to which is repugnant to have one
party bound by the contract leaving the other free
therefrom.
A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
contracting parties is void.
* Unilateral Cancellation:
Just as nobody can be forced to enter into a contract, in the same
manner once a contract is entered into, no party can renounce it
unilaterally or without the consent of the other.
Nobody is allowed to enter into a contract, and while the contract is
in effect, leaves, denounces or disavows the contract to the
prejudice of the other.

* When Stipulated:
a. However, when the contract so stipulates that one may
terminate the contract upon a reasonable period is valid.
b. Judicial action for the rescission of the contract is no longer
necessary when the contract so stipulates that it may be
 revoked and cancelled for the violation of any of its terms and
conditions. This right of rescission may be waived.
ART. 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.

Exception to Art. 1308 (Mutuality of Contract)

A third person may be called upon to decide whether or

not performance has been done for the fulfillment of the
contract. Such decision becomes binding when the
contracting parties have been informed of it.
ART. 1310. THEDETERMINATION SHALL BE
OBLIGATORY IF IT IS EVIDENTLY INEQUITABLE. IN
SUCH CASE, THE COURTS SHALL DECIDE WHAT IS
EQUITABLE UNDER THE CIRCUMSTANCES.

• Exception to Art. 1308 (Mutuality of Contract)

• However, when the decision cannot be arrived due to
inequity, the courts shall decide what is equitable for the
parties involved.
ILLUSTRATIVE CASE: Courts are granted authority to
reduced/increase interest rates equitablity.
FACTS:
On March 20, 1996, X obtained a loan of P1,000,000 from Z Bank. As
security for the loan, X executed a real estate mortgage in favor of Z
Bank over his 4 parcels of land.
The loan was renewed for another year secured by the same real estate
mortgage X signed a promissory note fixing the rate of interest at
“15.446% per annum for the first 30 days, subject upward/ downward
adjustment every 30 days thereafter.”
On July 11, 1997, Z Bank started imposing higher interest rates on X’s
loan which varied through the months, in fact, as high as 30.244% in
October 1997. As a result, X could no longer pay the high interest rates
changed by Z bank. Thus, he negotiated for the renewal of his loan. Z
bank agreed provided X would pay the arrears in interest amounting to
the total sum of P163,138. Despite payment by X, Z bank, instead of
renewing the loan, filed a petition for foreclosure of mortgage.
ISSUE:
Whether the interest rates are excessive and arbitrary.
HELD:
Under Article 1310 of the Civil Code, courts are granted authority
to reduce/increase interest rates equitably.
In the other Philippine National Bank v. Court of Appeals case, we
disauthorized petitioner bank from unilaterally raising the interest
 rate on the loan of private respondent from 18% to 32%, 41% and
48%. In Almeda v. Court of Appeals, where the interest rate was
increased from 21% to as high 68% per annum, we declared
arbitrary “the galloping increase in interest rate imposed by
respondent bank on petitioners’ loan, over the latter’s vehement
protests.” In Medel v. Court of Appeals, the stipulated interest of
5.5% per month or 66% per annum on a loan amounting to
P500,000 was equitably reduced for being iniquitious,
unconscionable and exorbitant. In Solangon v. Salazar, the
stipulated interest rate of 6% per month or 72% per annum was
found to be “definitely outrageous and inordinate” and was
reduced to 12% per annum which we deemed fair and reasonable.
In Imperial v. Jaucian, we ruled that the trial court was justified in
reducing the stipulated interest rate from 16% to 1.167% or 14%
per annum and the stipulated penalty charge from 5% to 1.167%
per month or 14% per annum.
 In this case, respondent bank started to increase the agreed
interest rate of 15.446% per annum to 24.5% on July 11, 1997 and
every month thereafter; 27% on August 11, 1997; 26% on
September 10, 1997; 33% on October 15, 1997; 26.5% on
November 27, 1997; 27% on December 1997; 29% on January 13
1998; 30.244% on February 7, 1998; 24.49% on march 9, 1998;
22.9% on April 18, 1998; and 18% on May 21, 1998. Obviously, the
rate increases are excessive and arbitrary. It bears reiterating that
Z bank unilaterally increased the interest rate without X’s
knowledge and consent.
ART 1311. CONTRACTS TAKE EFFECT ONLY BETWEEN THE
PARTIES, THEIR ASSIGNS AND HEIRS, EXCEPT IN CASE WHERE
THE RIGHTS AND OBLIGATIONS ARISING FROM THE
CONTRACTS 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.
 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.
• 1st paragraph of this article embodies the principle of relativity of
contract
• Four exceptional instances where a contract may produce effect on
third persons: Arts. 1311-1314
• 1st paragraph of this Article 1311 embodies the principle of
relativity of contract.
• There are four exceptional instances where a contract may
produce effect on third persons: Arts. 1311-1314
1. The rights and obligations arising from the contracts are
not transmissible by their nature, or by stipulation or by
provision of law. (Art. 1311)
2. In contracts creating real rights, third persons who come
into possession of the object of the contract are bound
thereby, subject to the provisions of the mortgage law
and the land registration laws. (n) (Art. 1312)
3. Creditors are protected in cases of contracts intended to
defraud them. (Art 1313)
4. Any third person who induces another to violate his
contract shall be liable for damages to the other
contracting party. (n) (Art. 1314)
RELATIVITY OF CONTRACTS
 This article refers to the principle of Relativity of
Contracts.

General Rule:
Contracts take effect only between the parties, their
assigns and heirs.

Exceptions:
1.Contract are not transmissible by their nature; or
2.Contract are not transmissible by stipulation; or
3.Contract are not transmissible by provision of law.
• It is basic principle in civil law that, with certain
exceptions, a contract can only bind the parties who had
entered into it or their successors who assumed their
 personalities or their juridical positions, and that, as a
consequence, such contract can neither favor nor
prejudice a third person.

• The obligation of contracts is limited to the parties

making them and, ordinarily, only those who are parties
to contracts are liable for their breach. Parties to a
contract cannot thereby impose any liability on one who,
under its terms, is a stranger to the contract, and, in any
event, in order to bind a third person contractually, an
expression of assent by such person is necessary.
Example:
Under Article 1311 of the Civil Code, the heirs are bound by the
contracts entered
Into by their predecessors-in-interest except when the rights of
obligations therein are not transmissible by their nature, by
stipulation or by provision of law. A contract of lease is, therefore,
generally transmissible to the heirs of the lessor or lessee. It
involves a property right and, as such, the death of a party does not
excuse non-performance of the contract. The rights and obligations
pass to the heirs of the decreased and the heir of the decreased
lessor is bound to respect the period of the lease. The same
principles applies to the option to renew the lease. As a general
rule, covenants to renew a lease or not personal but will run with
the land. Consequently, successors-in-interest of the lessee are
untitled to the benefits, while that of the lessor are burdened with
the duties and obligations, which said covenants conferred and
imposed on the original parties.
FOUR (4) EXCEPTIONAL CASES TO THE PRINCIPLE OF
RELATIVITY OF CONTACTS
1. If a person 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.
2. In contracts creating real rights, third persons who come into
possession of the object of the contract are bound thereby.
3. Creditors are protected in cases of contracts intended to
defraud them.
4. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting
party.
ILLUSTRATIVE CASE: “He who contracts does so for himself and
his heirs.”
FACTS:
The subject of the controversy is parcel of land which was originally
owned by S’s deceased mother, M. This lot was in front of one of the
textile plants of Z Corporation and, such as, was seen by the latter as
potential warehouse site.
Z Corp. entered into a Contract of Lease with Option to Buy with M,
whereby Z Corp. was given the option to lease or lease with purchase
the subject land, which option must be exercised within a period of two
years counted from the signing of the Contract, In turn, Z Corp.
undertook to pay P3,000 a month as consideration for the reservation of
its option. Within the two-year period, Z Corp. shall serve formal written
notice upon the lessor of its desire to exercise its option. The contract
also provided that in case Z Corp. chooses to lease the property, it may
take actual possession of the premises. In such an event, the lease shall
be for a period of six years, renewable for another six years, and the
monthly rental fee shall be P15,000 for the first six years and P18,000
for the next six years, in case of renewal.
Z. Corp. regularly paid the monthly P3,000 provided for by the
Contract to M until her death in January 1990. Thereafter, Z. Corp.
coursed its payment to S, being the sole heir of M. S, however,
refused to accept these payments.
On March 14, 1990, Z. Corp. served upon S, notice that it was
exercising its option to lease the property, tendering the amount of
P15,000 as rent for the month of March. Again, S refused to accept
the tendered rental fee and to surrender possession of the property
to Z corp.
Thus, on April 23, 1990, Z Corp. filed a complaint for specific
performance against S.

ISSUE:
Whether or not the contract of Lease with Option to Buy entered
into by the late M with Z Corp. was terminated upon her death or
whether it binds her sole heir, S, even after her demise.
HELD:
ART. 1311 of the Civil Code provides, as follows –
Art. 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 property he received from the
decedent.
In the case at the bar, there is neither contractual stipulation nor
legal provision making the rights and obligations under the contract
intransmissible. More importantly, the nature of the rights and
obligations therein are, by their nature transmissible.
In this case, there is no personal act required from the late M.
Rather, the obligation of M in the contract to deliver possession of
the subject property Z. Corp. upon the exercise by the latter of its
opinion to lease the same may very well be performed by her heir
S.
As early as 1903, it was held that “He who contracts does so far himself
and his heirs.” In 1952, it was ruled that if the predecessor was duty-bound
to reconvey land to another, and at his death the reconveyance had not been
made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape
the legal consequence of a transaction entered into by their predecessor-in-
interest because they may have inherited the property subject to the liability
affecting their common ancestor.
It is futile for S to insist that he is not a party to the contract because of the
clear provision of Article 1311 of the Civil Code. Indeed, being an heir of M,
there is privity of interest between him and his decreased mother. He only
succeeds to what rights his mother had and what is valid and binding against
her is also valid and binding as against him.
In the case at bar, which is a property right. The death of a party does not
excuse nonperformance of a contract which involves a property right, and the
rights and obligations thereunder pass to the personal representatives of the
decreased. Similarly, nonperformance is not excused by the death of the party
when the other party has a property interest in the subject matter of the
contract. S is bound by the subject Contract of Lease with Option to Buy.
REQUISITES OF STIPULATION POUR AUTRUI
1. There must be a stipulation in favor of a third person
2. The stipulation must be a part, not the whole, of the contract,
3. The contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental
benefit or interest,
4. The third person must have communicated his acceptance to
the obligor before its revocation, and
5. Neither of the contracting parties bears the legal representation
or authorization of the third party.

To be considered a pour autrui provision, an incidental benefit or

interest, which another person gains, is not sufficient. The
contracting parties must have clearly and deliberately
conferred a favor upon a third person.
* PARTIES BOUND BY CONTRACT:
Generally, only the parties that agreed on the contracts are bound
by the contract.
Transmission is possible to the heirs or assignees if so stipulated
and in certain contracts.

* THIRD PERSONS NOT BOUND:

It is a general rule that third parties are not bound by the acts of
another.
A contract cannot be binding upon and cannot be enforced against
one who is not a party to it, even if he has knowledge of such
contract and has acted with knowledge thereof.
Important Latin maxim: Res inter alio acta aliis necque nocet
prodest.
* THIRD PERSONS AFFECTED:
There are exceptions to the rule. They are:
1. A contract creating a real right affects third persons who
may have some right over the thing. (article 1312)
2. A contract may reduce the properties of a debtor and
thus diminish the available security for the claims of
creditors. (article 1313)
3. In some cases as in composition in insolvency and in
suspension of payments, certain agreements are made
binding by law on creditors who may not have agreed
thereto.
* Test of Beneficial Stipulation:
To constitute a valid stipulation pour autrui, it must be the
purpose and intent of the stipulating parties to benefit the third
person, and it is not sufficient that the third person may be
incidentally benefited by the stipulation.

* Acceptance of Third Party:

1. Stipulation pour autrui has no binding effect unless it is accepted
by the third party.
2. Acceptance is optional to the third person: he is not obliged to
accept it.
3. It may be in any form, express or implied, written or oral
4. There is no time limit to acceptance until the stipulation is
revoked before the third person’s acceptance.
ART. 1312. IN CONTRACTS CREATING REAL RIGHTS,
THIRD PERSONS WHO COME INTO POSSESSION OF
THE OBJECT OF THE CONTRACT ARE BOUND
THEREBY, SUBJECT TO THE PROVISIONS OF THE
MORTGAGE LAW AND THE LAND REGISTRATION
LAWS. (N)
• This is an exception to the principle of relativity of
contracts.

* REAL RIGHTS IN PROPERTY

Areal right directly affects property subject to it; hence,
whoever is in possession of such property must respect
that real right.
.
ILLUSTRATIVE CASE: Real right or lien.
FACTS:

B Corp., thru its president, Z, obtained 6 loans from X Bank,

amounting to P50,000,000 as evidenced by promissory notes. To secure
the payment of an P1,000,000 loan, C Corp., thru its president, also Z,
executed in favor of X bank, a real estate mortgage over three parcels
of land, with all the buildings and improvements thereon.
When the debtor-mortgagor failed to pay, X bank extra-judicially
foreclosed the real estate mortgage. Thereafter, in public auction, X
bank was the highest bidder. When C Corp. refused to turn over the real
properties, on March 17, 2001, X bank filed, an ex parte petition for the
issuance of a writ of possession.

Meanwhile, on April 3, 2002, Y filed a complaint against X bank for

Nullification of Real Estate Mortgage Contracts and Extrajudicial
Foreclosure Sale.
On May 14, 2004, Y filed with the Court of Appeals a Petition for
Annulment of Judgment. Y alleged that his predecessor, C Corp.,
was not notified of the proceedings.

ISSUE:
Whether a real right or lien in favor of X bank had already been
established.
HELD:
Initially, we recognized herein Y as the co-assignee of the subject
real properties as shown in the March 25, 2002 deed of assignment.
However, while Y would be injured by the judgment in this suit, we
find that Y has no present substantial interest to institute the
annulment of judgment proceedings and nullify the order granting
the writ of possession.
In the deed of assignment, Y also acknowledged that the subject
real priorities were already sold at various extrajudicial foreclosure
sales and bought by X bank. Clearly, Y recognized the prior existing
right of X bank as the mortgagee-purchaser over the subject real
properties. Actual knowledge of a prior mortgage with X bank is
equivalent to notice of registration in accordance with Article 2125
of the Civil Code. Conformably with Articles 1312 and 2126 of the
Civil Code, a real right or lien in favor of X bank had already been
established, subsisting over the properties until the discharge of
the principal obligation, whoever the possessor(s) of the land might
be. Y is not a party whose interest is adverse to that of C Corp,
there was no bar to the issuance of a writ of possession to X bank.
It does not matter that Y was not specifically named in the writ of
possession nor notified of such proceedings.
ART1313. CREDITORSARE PROTECTED INCASES OF
CONTRACTS INTENDED TO DEFRAUD THEM.

• This is also and exception to the principle of relativity of

contacts.
• Article 1313 of the Civil Code provides that “creditors are
protected in cases of contacts intended to defraud them.”
Further, Article 1381 of the Civil Code provides that contacts
entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due them.
• Article 1381 applies to contracts where the creditors are not
parties for such contracts are usually made without their
 knowledge. Thus, a creditor who is not a party to a contract can
sue to rescind the contract to prevent fraud upon him.
• Or, the same creditor can instead choose to enforce the contact
if a specific provision in the contract allows him to collect his
claim, and thus protect him from fraud.
ART. 1314. ANY THIRD PERSON WHO INDUCES ANOTHER TO
VIOLATE HIS CONTRACT SHALL BE LIABLE FOR DAMAGES TO
THE OTHER CONTRACTING PARTY. (n)

WHAT IS TORT INTERFERENCE (Interference of Third

Persons)
The above article expresses the principle of tort
interference. This is an exception to the principle of relativity of
contracts.
This provision is known as interference with contractual
relations. The interference is penalized because it violates the
property rights of a party in a contract to reap the benefits that
should result therefrom.
While it is true that a third person cannot possibly be sued for
breach of contract because only parties can breach contractual
provisions, a contracting party may sue a third person not for breach
but for inducing another to commit such breach.
ELEMENTS OF TORT INTERFERENCE
1. Existence of a valid contract;
(As regards the first element, the existence of a valid
contract must be duly established.)
2. Knowledge on the part of the third person of the
existence of a contract; and
(And the second element, on the other hand, requires
that there be knowledge on the part of the interferer that
the contract exists.)
3. Interference of the third person is without legal
justification.
ART. 1315. CONTRACTS ARE PERFECTED BY MERE CONSENT,
AND FROM THAT MOMENT THE PARTIES ARE BOUND NOT
ONLY TO THE FULFILLMENT OF WHAT HAS BEEN EXPRESSLY
STIPULATED BUT ALSO TO ALL THE CONSEQUENCES WHICH,
ACCORDING TO THEIR NATURE, MAY BE IN KEEPING WITH
GOOD FAITH, USAGE AND LAW. (1258)

Contracts are perfected by mere consent, and from that moment

the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage
and law
ARTICLE 1316. REAL CONTRACTS, SUCH AS DEPOSIT, PLEDGE
AND COMMODATUM, ARE NOT PERFECTED UNTIL THE
DELIVERY OF THE OBJECT OF THE OBLIGATION. (N)
REAL CONTRACT is not perfect by mere consent. The delivery of
the thing is required. Delivery is demanded, neither arbitrary nor
formalistic.
What is Commodatum, Deposit, and Pledge?
Commodatum - One of the parties delivers to another, either
something not consumable so that the latter may use the same for
a certain time and return it, in which case the contract is called a
Commodatum.
Deposit - A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same.
Pledge - In a contract of pledge, the creditor is given the right to
retain his debtor’s movable property in his possession, or in that of
a third person to whom it has been delivered, until the debt is paid.
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

BY ONE WHO HAS NO AUTHORITY OR LEGAL
REPRESENTATION, OR WHO HAS ACTED BEYOND HIS
POWERS, SHALL BE UNENFORCEABLE, UNLESS IT IS
RATIFIED, EXPRESSLY OR IMPLIEDLY, BY THE PERSON
ON WHOSE BEHALF IT HAS BEEN EXECUTED, BEFORE
IT IS REVOKED BY THE OTHER CONTRACTING PARTY.
(1259A)
General Rule:
No one may contract in the name of another.

Exceptions:
1. This person entering into a contract in the name
of another has been authorized by the latter.
2. The person entering into a contract in the name of
another has by a law right to represent him.
EFFECT OF AN UNAUTHORIZED CONTRACT
General Rule:
 A contract entered into in the name of another
by one who has no authority or legal representation,
or whohas acted beyond his powers,shall be
unenforceable

Exception:
If it is ratified, expressly or impliedly, by the person
on whose behalf it has been executed, before it is
revoked by the other contracting party.
CHAPTER 2
 Essential Requisites of Contracts
ESSENTIAL REQUISITES OF CONTRACTS

ARTICLE 1318. THERE IS NO CONTRACT UNLESS THE

FOLLOWING REQUISITES CONCUR:
1.CONSENT OF THE CONTRACTING PARTIES (ARTS.
1319-1346)
2.OBJECT CERTAIN WHICH IS THE SUBJECT OF THE
CONTRACT (ARTS. 1347-1349)
3.CAUSE OF THEOBLIGATION WHICH IS
ESTABLISHED. (ARTS. 1350-1355)
 CONSENT
(Arts. 1319-1346)
ARTICLE 1319. CONSENT IS MANIFESTED BY THE
MEETING OF THE OFFER AND THE ACCEPTANCE UPON
THE THING AND THE CAUSE WHICH ARE TO
CONSTITUTE THE CONTRACT. THE OFFER MUST BE
CERTAIN AND THE ACCEPTANCE ABSOLUTE. A
QUALIFIED ACCEPTANCE CONSTITUTES A COUNTER-
OFFER.
ACCEPTANCE MADE BY LETTER OR TELEGRAM DOES
NOT BIND THE OFFERER EXCEPT FROM THE TIME IT
CAME TO HIS KNOWLEDGE. THE CONTRACT, IN SUCH A
CASE, IS PRESUMED TO HAVE BEEN ENTERED INTO IN
THE PLACE WHERE THE OFFER WAS MADE. (1262A)
ELEMENTS OF CONSENT (LM‐CR)
1.Legal capacity of the contracting parties;
2.Manifestation of the conformity of the
contracting parties;
3.Conformity of the parties to the object,
cause, terms and condition of the contract
must be intelligent, spontaneous and free
from all vices of consent; and
4.The conformity must be Real.
REQUISITES OF A VALID CONSENT
It should be:
1. Intelligent, or with an exact notion of the
matter to which it refers;
Note: Intelligence in consent is vitiated by
error; freedom by violence, intimidation or
undue influence; and spontaneity by fraud.
2. Free; and
3. Spontaneous
Q: WHAT IS THE EFFECT ON THE
VALIDITY OF A CONTRACT IF CONSENT
IS RELUCTANT?
A contract is valid even though one of the
parties entered into it against his wishes
and desires or even against his better
judgment. Contracts are also valid even
though they are entered into by one of the
parties without hope of advantage or
profit.
Q: WHAT ARE THE KINDS OF SIMULATION OF
CONTRACT?
1. Absolute – the contracting parties do not intend to be
bound by the contract at all, thus the contract is void.
2. Relative – the real transaction is hidden; the contracting
parties conceal their true agreement; binds the parties to
their real agreement when it does not prejudice third
persons or is not intended for any purpose contrary to
law, morals, etc. If the concealed contract is lawful, it is
absolutely enforceable, provided it has all the essential
requisites: consent, object, and cause.
As to third persons without notice, the apparent contract is
valid for purposes beneficial to them. As to third persons
with notice of the simulation, they acquire no better right
to the simulated contract than the original parties to the
same.
Q: Tiro is a holder of an ordinary timber license
issued by the Bureau of Forestry. He executed a
deed of assignment in favor of the Javiers. At the
time the said deed of assignment was executed,
Tiro had a pending application for an additional
forest concession. Hence, they entered into another
agreement.
Afterwards, the Javiers, now acting as timber
license holders by virtue of the deed of assignment
entered into a forest consolidation agreement with
other ordinary timber license holders. For failure of
the Javiers to pay the balance due under the two
deeds of assignment, Tiro filed an action against
them. Are the deeds of assignment null and void for
total absence of consideration and non‐fulfillment of
the conditions?
A: The contemporaneous and subsequent acts of Tiro and the
Javiers reveal that the cause stated in the first deed of
assignment is false. It is settled that the previous and
simultaneous and subsequent acts of the parties are properly
cognizable indicia of their true intention. Where the parties to a
contract have given it a practical construction by their conduct
as by acts in partial performance, such construction may be
considered by the court in construing the contract, determining
its meaning and ascertaining the mutual intention of the
parties at the time of contracting. The first deed of assignment
is a relatively simulated contract which states a false cause or
consideration, or one where the parties conceal their true
agreement. A contract with a false consideration is not null and
void per se. Under Article 1346 of the Civil Code, a relatively
simulated contract, when 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.
ARTICLE 1320. AN ACCEPTANCE MAY BE
EXPRESS OR IMPLIED. (n)

ARTICLE 1321. THE PERSON MAKING THE

OFFER MAY FIX THE TIME, PLACE, AND
MANNER OF ACCEPTANCE, ALL OF WHICH
MUST BE
COMPLIED WITH. (n)

ARTICLE 1322. AN OFFER MADE THROUGH AN

AGENT IS ACCEPTED FROM THE TIME
ACCEPTANCE IS COMMUNICATED TO HIM. (n)
Q: Whatare the elements of a valid offer and
acceptance?
1. Definite – unequivocal
2. Intentional
3. Complete – unconditional

Q: What are the requisites of a valid offer?

1. Must be certain.
2. May be made orally or in writing, unless the law
prescribes a particular form
ARTICLE 1323. AN OFFER BECOMES INEFFECTIVE
UPON THE DEATH, CIVIL INTERDICTION,
INSANITY, OR INSOLVENCY OF EITHER PARTY
BEFORE ACCEPTANCE IS CONVEYED. (n)

Q: When does offer become ineffective?

1. Death, civil interdiction, insanity or insolvency of
either party before acceptance is conveyed
2. Express or implied revocation of the offer by the
offeree
3. Qualified or conditional acceptance of the offer,
which becomes counter‐offer
4. Subject matter becomes illegal or impossible before
acceptance is communicated.
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. (n)

What are the effects of an option?

Option may be withdrawn anytime before acceptance
is communicated but not when supported by a
consideration other than purchase price – option
money.
Q: What are the requisites of a valid
acceptance?
1.Must be absolute; a qualified acceptance
constitutes a counter‐offer
2.No specified form but when the offeror
specifies a particular form, such must be
complied with

Note: Offer or acceptance, or both, expressed

in electronic form, is valid, unless otherwise
agreed by the parties (electronic contracts).
ARTICLE 1325. UNLESS IT APPEARS
OTHERWISE, BUSINESS ADVERTISEMENTS OF
THINGS FOR SALE ARE NOT DEFINITE OFFERS,
BUT MERE INVITATIONS TO MAKE AN OFFER.
(N)

ARTICLE 1326. ADVERTISEMENTS FOR

BIDDERS
ARE SIMPLY INVITATIONS TO MAKE
PROPOSALS, AND THE ADVERTISER IS NOT
BOUND TO ACCEPT THE HIGHEST OR LOWEST
BIDDER, UNLESS THE CONTRARY APPEARS. (N)
Q: What is the rule on advertisements as
offers?
1. Business advertisements –not a definite
offer, but mere invitation to make an offer,
unless it appears otherwise
2. Advertisement for bidders – only invitation
to make proposals and advertiser is not
bound to accept the highest or lowest
bidder, unless it appears otherwise.
Q: What is the period for acceptance?
1.Stated fixed period in the offer
 a. Must be made within the period given by the
offeror
i. As to withdrawal of the offer:
GR: It can be made at any time before
acceptance is made, by communicating such
withdrawal
XPN: When the option is founded upon a
consideration, as something paid or
promised since partial payment of the
purchase price is considered as proof of the
perfection of the contract
2.No stated fixed period
 a. Offer is made to a person present – acceptance
must be made immediately
b. Offer is made to a person absent – acceptance
may be made within such time that, under
normal circumstances, an answer can be
received from him

Note: Acceptance may be revoked before it comes

to the knowledge of the offeror (withdrawal of offer)
OBJECT
 (Arts. 1347-1349)
ARTICLE 1347. ALL THINGS WHICH ARE NOT OUTSIDE
THE COMMERCE OF MEN, INCLUDING FUTURE THINGS,
MAY BE THE OBJECT OF A CONTRACT. ALL RIGHTS
WHICH ARE NOT INTRANSMISSIBLE MAY ALSO BE THE
OBJECT OF CONTRACTS.
NO CONTRACT MAY BE ENTERED INTO UPON FUTURE
INHERITANCE EXCEPT IN CASES EXPRESSLY AUTHORIZED
BY LAW.
ALL SERVICES WHICH ARE NOT CONTRARY TO LAW,
MORALS, GOOD CUSTOMS, PUBLIC ORDER OR PUBLIC
POLICY MAY LIKEWISE BE THE OBJECT OF A CONTRACT.
(1271A)
Q: What are the requisites of an object?
1. Determinate as to kind (even if not determinate, provided it
is possible to determine the same without the need of a new
contract);
2. Existing or the potentiality to exist subsequent to the
contract;
3. Must be licit;
4. Within the commerce of man; and
5. Transmissible.

Note: The most evident and fundamental requisite in order

that a thing, right or service may be the object of a contract, it
should be in existence at the moment of the celebration of the
contract, or at least, it can exist subsequently or in the future.
Q: What are the things which can be the object of
contracts?
GR: All things or services may be the object of contracts.
XPNs:
1. Things outside the commerce of men;
2. Intransmissible rights;
3. Future inheritance, except in cases expressly authorized
by law;.
4. Services which are contrary to law, morals, good
customs, public order or public policy;
5. Impossible things or services; and
6. Objects which are not possible of determination as to
their kind.
Q: A contract of sale of a lot stipulates that the
"payment of the full consideration based on a
survey shall be due and payable in 5 years from the
execution of a formal deed of sale". Is this a
conditional contract of sale?
No, it is not. The stipulation is not a condition which affects
the efficacy of the contract of sale. It merely provides the
manner by which the full consideration is to be computed
and the time within which the same is to be paid. But it
does not affect in any manner the effectivity of the
contract. (Heirs of San Andres v. Rodriguez, G.R. No.
135634, May 31, 2000)
CAUSE
(Arts. 1350-1355)
Q: What are the requisites of a cause?
It must:
1. Exist
2. Be true
3. Be licit

Q: What are the two presumptions in contracts as

to cause? 1. Every contract is presumed to have a
cause; and
2. The cause is valid.
Q: What are the kinds of causes?
1. Cause of onerous contracts – the prestation or
promise of a thing or service by the other
2. Cause of remuneratory contracts– the service or
benefit remunerated
3. Cause of gratuitous contracts – the mere liberality
of the donor or benefactor
4. Accessory – identical with cause of principal
contract, the loan which it derived its life and
existence (e.g.:
mortgage or pledge)
Q: Distinguish cause from motive
CAUSE MOTIVE
Direct and most proximate
reason of a contract Indirect or remote reasons
Objective and juridical Psychological or purely
reason of contract personal reason
Legality or illegality of Legality or illegality of
cause affects the motive does not affect the
existence or validity of the existence or validity of
contract contract
Cause is always the same Motive differs for each
for each contracting party contracting party
Q: What is the effect of the error of cause on contracts?
1. Absence of cause (want of cause; there is total lack or
absence of cause) – Confers no right and produces no legal
effect
2. Failure of cause ‐ Does not render the contract void
3. Illegality of cause (the cause is contrary to law, morals, good
customs, public order and public policy) – Contract is null
and void
4. Falsity of cause (the cause is stated but the cause is not
true) – Contract is void, unless the parties show that there is
another cause which is true and lawful
5. Lesion or inadequacy of cause – Does not invalidate the
contract, unless:
a. There is fraud, mistake, or undue influence;
b. When the parties intended a donation or some contract;or
c. In cases specified by law (e.g
d. .Contracts entered when ward suffers lesion of more than
25%)
II. KINDS OF CONTRACT
Q: What are the kinds of contracts?
1. Consensual contracts which are perfected by the mere
meeting of the minds of the parties
2. Real contracts that require delivery for perfection – creation of
real rights over immovable property must be written
3. Solemn contracts – contracts which must appear in writing,
such as:
a. Donations of real estate or of movables if the value exceeding
P5,000;
b. Transfer of large cattle;
c. Stipulation to pay interest in loans;
d. Sale of land through an agent;
e. Partnership to which immovables are contributed;
f. Stipulation limiting carrier’s liability to less than extra‐ordinary
diligence; or
g. Contracts of antichresis and sale of vessels.
Q: What is the principle of relativity of contracts?
GR: A contract is binding not only between parties but extends to
the heirs, successors in interest, and assignees of the parties,
provided that the contract involves transmissible rights by their
nature, or by stipulation or by provision of law.
XPNs:
1. Stipulation pour autrui (stipulation in favor of a third person) –
benefits deliberately conferred by parties to a contract upon third
persons. Requisites:
a. The stipulation must be part, not whole of the contract;
b. Contracting parties must have clearly and deliberately
conferred a favor upon third person;
c. Third person must have communicated his acceptance; and
d. Neither of the contracting parties bears the legal
representation of the third person.
2. When a third person induces a party to violate the contract
Requisites:
 a. Existence of a valid contract
b. Third person has knowledge of such contract
c. Third person interferes without justification
3. Third persons coming into possession of the object of the
contract creating real rights
4. Contracts entered into in fraud of creditors
Q: Fieldmen's Insurance issued, in favor of MYT, a
common carrier, accident insurance policy. 50% of the
premium was paid by the driver. The policy indicated
that the Company will indemnify the driver of the
vehicle or his representatives upon his death. While the
policy was in force, the taxicab driven by Carlito, met
with an accident. Carlito died. MYT and Carlito's parents
filed a complaint against the company to collect the
proceeds of the policy. Fieldmen’s admitted the
existence thereof, but pleaded lack of cause of action
on the part of the parents.
Decide.
Yes. Carlito’s parents‐ who, admittedly, are his sole heirs have
a direct cause of action against the Company. This is so
because pursuant to the stipulations, the Company will also
indemnify third parties. The policy under consideration is
typical of contracts pour autrui, this character being made
more manifest by the fact that the deceased driver paid 50%
of the premiums. (Coquia v. Fieldmen’s
Insurance Co., Inc.,G.R. No. L‐23276, Nov. 29, 1968)
Q: WHAT IS THE OBLIGATORY FORCE OF
CONTRACTS?
The parties are bound not only by what has been
expressly provided for in the contract but also to
the natural consequences that flow out of such
agreement. (Art. 1315, NCC)

• “Article 1315. Contracts are perfected by mere

consent, and from that moment the parties are
bound not only to the fulfillment of what has
been expressly stipulated but also to all the
consequences which, according to their nature,
may be in keeping with good faith, usage and
law.
(1258)”
Q: Villamor borrowed a large amount from Borromeo, for
which he mortgaged his property but defaulted.Borromeo
pressed him for settlement. The latter instead offered to
execute a promissory note containing a promise to pay his
debt as soon as he is able, even after 10 years and that he
waives his right to prescription. What are the effects of said
stipulation to the action for collection filed by Borromeo?
None. The rule is that a lawful promise made for a lawful
consideration is not invalid merely because an unlawful promise
was made at the same time and for the same consideration. This
rule applies although the invalidity is due to violation of a statutory
provision, unless the statute expressly or by necessary implication
declares the entire contract void. Thus, even with such waiver of
prescription, considering that it was the intent of the parties to
effectuate the terms of the promissory note, there is no legal
obstacle to the action for collection filed by Borromeo. (Borromeo v.
CA,G.R. No. L‐22962, Sept. 28, 1972)
Note: Where an agreement founded on a legal consideration
contains several promises, or a promise to do several things, and a
part only of the things to be done are illegal, the promises which
can be separated, or the promise, so far as it can be separated,
from the illegality, may be valid.(Borromeo v. CA,G.R. No. L‐22962,
Sept. 28, 1972)

Q: What is the principle of mutuality of contracts?

Contract must be binding to both parties and its validity and
effectivity can never be left to the will of one of the parties. (Art.
1308, NCC)

Q: What is the principle of autonomy of contracts?

It is the freedom of the parties to contract and includes the freedom
to stipulate provided the stipulations are not contrary to law,
morals, good customs, public order or public policy. (Art. 1306,
NCC)
A. CONSENSUAL CONTRACTS
Q: What are consensual contracts?
They are contracts perfected by mere consent.
Note: This is only the general rule.

B.REAL CONTRACTS
Q: What are real contracts?
They are contracts perfected by delivery

C.FORMAL CONTRACTS Q: What

are formal contracts?
A: Contracts which require a special form for perfection.

Q: What are the formalities required in the

following contracts?
1. Donations:
a. Personal property ‐ if value exceeds 5000, the
donation and acceptance must both be written.
b.Real property:
i. Donation must be in a public instrument,
specifying therein the property donated and
value of charges which donee must satisfy.
ii. Acceptance must be written, either in the same
deed of donation or in a separate instrument.
 iii.If acceptance is in a separate instrument, the
donor shall be notified thereof in authentic
form, and this step must be noted in both
instruments.
2. Partnership where real property
contributed:
i. There must be a public instrument regarding the
partnership.
ii. The inventory of the realty must be made,
signed by the parties and attached to the public
instrument.
3. Antichresis ‐ the amount of the principal and
interest must be in writing.
 4. Agency to sell real property or an interest
thereinauthority of the agent must be in writing.
5. Stipulation to charge interest‐ interest must
be stipulated in writing.
6.Stipulation limiting common carrier's duty of
extraordinary diligence to ordinary diligence:
a. Must be in writing, signed by shipper or owner
b. Supported by valuable consideration other than
the service rendered by the common carrier
c. Reasonable, just and not contrary to public policy.
7. Chattel mortgage ‐ personal property must be
recorded in the Chattel Mortgage Register
III. FORM OF CONTRACTS
Q: What are rules on the form of contracts?
1. Contracts shall be obligatory, in whatever form
they may have been entered into, provided all
essential requisites for their validity are present.
2. Contracts must be in a certain form – when the
law requires that a contract be in some form to
be: a. Valid;
b. Enforceable; or
c. For the convenience of the parties.
3. The parties may compel each other to reduce the
verbal agreement into writing.
Note:
GR: Form is not required in consensual contracts.
XPNs: When the law requires a contract be in
certain for its:
1. Validity (formal contracts); or
2. Enforceability (under Statute of Frauds).
Q: What are the acts which must appear in a public
document?
1. Donation of real properties (Art. 719);
2. Partnership where immoveable property or real rights are
contributed to the common fund (Arts. 1171 & 1773);
3. Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest therein
is governed by Arts. 1403, No. 2, and 1405 [Art. 1358 (1)];
4. The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains [Art. 1358 (2)]
5. 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 [Art. 1358 (3)];
6. The cession of actions or rights proceeding from an act appearing
in a public document [Art. 1358 (4)].
Q: What are contracts that must be registered?
1.Chattel mortgages (Art. 2140)
2.Sale or transfer of large cattle (Cattle Registration
Act)

REFORMATION
Q: What is reformation of instruments?
It is a remedy to conform to the real intention of the
parties due to mistake, fraud, inequitable conduct,
accident. (Art. 1359)
Note: Reformation is based on justice and equity.
Q: What are the requisites in reformation of instruments?
1. Meeting of the minds to the contract
2. True intention is not expressed in the instrument
3. By reason of MARFI:
a. Mistake,
b. Accident,
c. Relative simulation,
d. Fraud, or
e. Inequitable conduct
4. Clear and convincing proof of MARFI

Note: When there is no meeting of the minds, the proper remedy is

annulment and not reformation.
Q: In what cases is reformation of instruments
not allowed?
1. Simple, unconditional donations inter vivos
2. Wills
3. When the agreement is void
4. When an action to enforce the instrument is filed
(estoppel)
 Q: What is the prescriptive period in
reformation of instruments?
10 years from the date of the execution of the
instrument.
Q: Who may ask for the reformation of an
instrument?
It may be ordered at the instance of:
1. If the mistake is mutual – either party or his
successors in interest; otherwise; 2. Upon petition
of the injured party; or
3. His heirs and assigns.
Note: When one of the parties has brought an action
to enforce the instrument, no subsequent
reformation can be asked
(estoppel).
Q: In case of reformation of contracts, is the
prescription period in bringing an action for
reformation run from the time the contract
became disadvantageous to one party?
In reformation of contracts, what is reformed is not
the contract itself, but the instrument embodying
the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation
and therefore, cannot be an element in the
determination of the period for prescription of the
action to reform.
IV. DEFECTIVE CONTRACTS
Q: What may be the status of contracts?
1. Valid
2. Void
3. Voidable
4. Rescissible
5. Unenforceable
6. Inexistent
WHAT ARE THE DEFECTIVE CONTRACTS UNDER THE
NCC?
1. A rescissible contract is one, which, though possessing all
the essential requisites of contracts, has caused a
particular economic damage either to one of the
contracting parties or to a third person.
2. A voidable contract is one in which the consent of one
party is defective, either because of want of capacity, or
because consent is vitiated.
3. An unenforceable contract is one that, for lack of
authority or of the required writing, or for incompetence of
both parties, cannot be given effect unless properly
ratified.
4. A void contract is one which suffers from absence of
object or cause and is therefore an absolute nullity and
produces no effect.
Lesion has been defined as the “injury which one of the parties
suffers by virtue of a contract which is disadvantageous to him”
(IV Arturo M. Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Philippines 574 (1987), citing 3 Camus 205-06).
For the contract to be rescissible, the lesion must exceed 25% of
the value of the thing owned by the ward or absentee.
 A. RESCISSIBLE CONTRACTS
Q: What are rescissible contracts?
A: Those which have caused a particular economic damage either
to one of the parties or to a third person and which may be set
aside even if valid. It may be set aside in whole or in part, to the
extent of the damage caused. (Art. 1381, NCC)
Q: Which contracts are rescissible?
1. Entered into by persons exercising fiduciary capacity:
a. Entered into by guardian whenever ward suffers damage
more than 1⁄4 of value of property.
b. Agreed upon in representation of absentees, if absentee
suffers lesion by more than 1⁄4 of value of property.
c. Contracts where rescission is based on fraud committed on
creditor (accionpauliana)
d. Objects of litigation; contract entered into by defendant
without knowledge or approval of litigants or judicial authority
e. Payment by an insolvent – on debts which are not yet due;
prejudices claim of others
f. Provided for by law (Arts. 1526, 1534, 1538, 1539, 1542,
1556, 1560, 1567 & 1659, NCC)
2. Payments made in state of
insolvency:
a. Plaintiff has no other means to
maintain reparation
b.Plaintiff must be able to return
whatever he may be obliged to return
due to rescission
c. The things must not have been passed
to third persons in good faith
d.It must be made within 4 yrs.
Q: What are the requisites before a contract
entered into in fraud of creditors may be
rescinded?
1.There must be credit existing prior to the
celebration of the contract;
2.There must be fraud, or at least, the intent to
commit fraud to the prejudice of the creditor
seeking rescission;
3.The creditor cannot in any legal manner collect his
credit (subsidiary character of rescission); and
4.The object of the contract must not be legally in
possession of a third person in good faith.
 RESOLUTION (ART. 1191) RESCISSION (ARTICLE 1381) Q:
Both presuppose contracts validly entered into and subsisting and
both require mutual restitution when proper
Nature
Principal action. retaliatory in
character Subsidiary remedy
Grounds for Rescission
5 grounds under Art. 1381.
(lesions or fraud of creditors)
Only ground is non‐ Non‐performance is not
performance of obligation important
Applicability
Applies only to reciprocal Applies to both unilateral and
obligations reciprocal obligation
Distinguish rescission from resolution
 RESOLUTION (ART. 1191) RESCISSION (ARTICLE 1381)
Applicability
Applies only to reciprocal Applies to both unilateral and
obligations reciprocal obligations
Person who can Initiate the Action
Even third persons prejudiced by
Only the injured party who is a the contract may bring the
party to the contract action
Fixing of Period by the Court
Court may fix a period or grant extension of
time for the fulfillment of the obligation when Court cannot
there is sufficient reason to justify such grant extension
extension of time
Purpose
Cancellation of the Reparation for damage or injury, allowing
contract partial rescission of contract
Q: What is the obligation created by the rescission of the
contract?
Mutual restitution of things which are the objects of the
contract and their fruits and of the price with interest.

Q: When is mutual restitution not applicable?

1. Creditor did not receive anything from contract; or
2. Thing already in possession of third persons in good faith;
subject to indemnity only, if there are two or more
alienations – liability of first infractor.

Note: Rescission is possible only when the person demanding

rescission can return whatever he may be obliged to restore. A
court of equity will not rescind a contract unless there is
restitution, that is, the parties are restored to the status quo
ante.(Article 1385)
Q: Reyes (seller) and Lim (buyer) entered into
a contract to sell of a parcel of land. Harrison
Lumber occupied the property as lessee.
Reyes offered to return the P10 million down
payment to Lim because Reyes was having
problems in removing the lessee from the
property. Lim rejected Reyes’ offer. Lim
learned that Reyes had already sold the
property to another.
Trial court, in this case, directed Reyes to
deposit the P10 million down payment with
the clerk of court but Reyes refused. Does
Reyes have the obligation to deposit the P10
million down payment in the court?
A: Yes. There is also no plausible or justifiable
reason for Reyes to object to the deposit of the P10
million down payment in court. The contract to sell
can no longer be enforced because Reyes himself
subsequently sold the property. Both Lim and Reyes
are seeking for rescission of the contract.
By seeking rescission, a seller necessarily offers to
return what he has received from the buyer. Such a
seller may not take back his offer if the court deems
it equitable, to prevent unjust enrichment and
ensure restitution, to put the money in judicial
deposit.
Q: What are the badges of fraud attending sales, as
determined by the courts?
1. Consideration of the conveyance is inadequate or fictitious;
2. Transfer was made by a DR after a suit has been begun and
while it is pending against him
3. Sale upon credit by an insolvent DR;
4. The presence of evidence of large indebtedness or complete
insolvency of the debtor;
5. Transfer of all his property by a DR when he is financially
embarrassed or insolvent;
6. Transfer is made between father and son, where there are
present some or any of the above circumstances; and
7. Failure of the vendee to take exclusive possession of the
property.
Q: What are the characteristics of the right to
rescind?
1. Can be demanded only if plaintiff is ready, willing
and able to comply with his own obligation and
defendant is not;
2. Not absolute;
3. Needs judicial approval in the absence of a
stipulation allowing for extra‐ judicial rescission, in
cases of nonreciprocal obligations;
4. Subject to judicial review if availed of extra‐
judicially;
5. May be waived expressly or impliedly; and
6. Implied to exist in reciprocal obligations therefore
need not be expressly stipulated upon.
Q: May an injured party avail of both fulfillment
and rescission as remedy?
GR: The injured party can only choose between
fulfillment and rescission of the obligation, and
cannot have both.
Note: This applies only when the obligation is
possible of fulfillment.
XPN: If fulfillment has become impossible, Article
1191, NCC allows the injured party to seek
rescission even after he has chosen fulfillment.
 (Ayson‐ Simon v. Adamos,G.R. No. L‐39378, Aug.
28 1984)
Q: Vermen and Seneca entered into an "offsetting
agreement", where Seneca is obliged to deliver
construction materials to Vermen, who is obliged to pay
Seneca and to deliver possession of 2 condominium
units to Seneca upon its completion. Seneca filed a
complaint for rescission of the offsetting against
Vermen alleging that the latter had stopped issuing
purchase orders of construction materials without valid
reason, thus resulting in the stoppage of deliveries of
construction materials on its part, in violation of the
Offsetting Agreement. Can the agreement be
rescinded?
Yes, because the provisions of the offsettingagreement are
reciprocal in nature. Article 1191 of the Civil Code provides the
remedy of rescission (more appropriately, the term is
"resolution") in case of reciprocal obligations, where one of the
obligors fails to comply with that is incumbent upon him.
The question of whether a breach of contract is substantial
depends upon the attendant circumstances. Seneca did not fail
to fulfill its obligation in the offsetting agreement. The
discontinuance of delivery of construction materials to Vermen
stemmed from the failure of Vermen to send purchase orders
to Seneca. Vermen would never have been able to fulfill its
obligation in allowing Seneca to exercise the option to transfer
from Phase I to Phase II, as the construction of Phase II has
ceased and the subject condominium units will never be
available. The impossibility of fulfillment of the obligation on
the part of Vermen necessitates resolution of the contract, for
indeed, the non‐ fulfillment of the obligation aforementioned
constitutes substantial breach of the agreement. (Vermen
Realty Development Corp. v. CA and Seneca Hardware Co.,
Inc., G.R. No. 101762, July 6, 1993)
Q: Ong and spouses Robles executed an "agreement of
purchase and sale" of 2 parcels of land. Pursuant to the
contract they executed, Ong partially paid the spouses
the by depositing it with the bank. Subsequently, Ong
deposited sums of money with the BPI in accordance
with their stipulation that Ong pay the loan of the
spouse with BPI. To answer for Ong’s balance, he issued
4 post‐dated checks which were dishonored. Ong failed
to replace the checks and to pay the loan in full. Can
the contract entered into by Ong and the spouses be
rescinded?
No. The agreement of the parties in this case may be set aside,
but not because of a breach on the part of Ong for failure to
complete payment of the purchase price. Rather, his failure to
do so brought about a situation which prevented the obligation
of the spouses to convey title from acquiring an obligatory
force.
The agreement of purchase and sale shows that it is in the nature
of a contract to sell. Ong’s failure to complete payment of the
purchase price is a non‐fulfillment of the condition of full payment
which rendered the contract to sell ineffective and without force
and effect. The breach contemplated in Article 1191, NCC is the
obligor’s failure to comply with an obligation. In this case, Ong’s
failure to pay is not even a breach but merely an event which
prevents the vendor’s obligation to convey title from acquiring
binding force.
Note: The contract entered into by the parties in the case at bar
does not fall under any of those mentioned by Article 1381.
Consequently, Article 1383 is inapplicable.
In a contract to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a breach, casual or
serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force. (Ongv.CA, G.R. No.
97347, July 6, 1999)
Q: A contract of sale of a lot stipulates that the "payment of
the full consideration based on a survey shall be due and
payable in 5 years from the execution of a formal deed of
sale". Is this a conditional contract of sale?
No, it is not. The stipulation is not a condition which affects the
efficacy of the contract of sale. It merely provides the manner by
which the full consideration is to be computed and the time within
which the same is to be paid. But it does not affect in any manner
the effectivity of the contract. (Heirs of San Andres v. Rodriguez,
G.R. No. 135634, May 31, 2000) No. Goldenrod and Barretto Realty
did not intend that the earnest money or advance payment would
be forfeited when the buyer should fail to pay the balance of the
price, especially in the absence of a clear and express agreement
thereon.
Moreover, Goldenrod resorted to extrajudicial rescission of its
agreement with Barretto Realty. Under Article 1385, NCC, rescission
creates the obligation to return the things which were the object of
the contract together with their fruits and interest. Therefore, by
virtue of the extrajudicial rescission of the contract to sell by
Goldenrod without opposition from Barretto Realty, which in turn,
sold the property to other persons, Barretto Realty, had the
obligation to return the earnest money which formed part of the
purchase price plus legal interest from the date it received notice of
rescission. It would be most inequitable if Barretto Realty would be
allowed to retain the money at the same time appropriate the
proceeds of the second sale made to another. (Goldenrod, Inc. v.
CA, G.R. No. 126812, Nov. 24, 1998)
Q: Whatisthe prescriptive period of action for
rescission?
1.Under Art. 1381, no.1 – within 4 years from the
time the termination of the incapacity of the ward;
2.Under Art. 1381, no. 2‐ within 4 years from the
time the domicile of the absentee is known; or
3.Under Art. 1381, nos. 3 & 4 & Art. 1382 – within 4
years from the time of the discovery of fraud.
B. VOIDABLE CONTRACTS
Q: What are the characteristics of a voidable contract?
1. Effective until set aside;
2. May be assailed or attacked only in an action for that purpose;
3. Can be confirmed; and
4. Can be assailed only by the party whose consent was defective
or his heirs or assigns.
Q: When is there a voidable contract?
When:
1. One of the parties is incapacitated to give consent; or
2. Consent was vitiated.
Q: Who are the persons incapacitated to give
consent?
DIM
1.Deaf‐mutes who do not know how to read and write
(illiterates)
2.Insane or demented persons, unless the contract was
entered into during a lucid interval
3.Minors except:
a. Contracts for necessaries
 b. Contracts by guardians or legal representatives & the
court having jurisdiction had approved the same
c. When there is active misrepresentation on the part of the
minor (minor is estopped)
d. Contracts of deposit with the Postal Savings Bank provided
that the minor is over 7 years of age
e. Upon reaching age of majority – they ratify the same
Q: What are the vices of consent?
MIVUF
1. Mistake – substantial mistake and not merely an
accidental mistake; must refer to the:
a. Substance of the thing which is the subject of the
contract; or
b. To those conditions which have principally moved one
or both parties to enter the contract.
 Note: Mistake as to identity or qualifications of one of
the parties will vitiate consent only when such identity
or qualifications have been the principal cause of the
contract.
2. Intimidation – An internal moral force operating in the
will and inducing performance of an act.
3. Violence – An external, serious or irresistible physical
force exerted upon a person to prevent him from doing
something or to compel him to do an act.
4. Undue influence – Any means employed upon a party
which, under the circumstances could not be resisted and
has the effect of controlling his volition and inducing him to
give his consent to the contract, which otherwise, he would
not have entered into.
5. Fraud – Use of insidious words or machinations in
inducing another party to enter into the contract, which
without them, he would not have agreed.
Q: What are the kinds of mistake?
1. Mistake of fact– When one or both of the contracting parties
believe that a fact exists when in reality it does not, or that such
fact does not exist when in reality it does.
2. Mistake of law– When 1 or both parties arrive at erroneous
conclusion or interpretation of a question of law or legal effects
of a certain act or transaction.
Note:
GR: Mistake as a vice of consent refers to mistake of facts and not
of law.
XPN: When mistake of law involves error as to the effect of an
agreement when the real purpose of the parties is frustrated (Art.
1334, NCC).
To determine the effect of an alleged error, both the objective and
subjective aspects of the case which is the intellectual capacity of
the person who committed the mistake.
Q: When will mistake invalidate consent?
A: Mistake, in order to invalidate consent, should refer to the
substance of the thing which is the object of the contract, or to
those conditions which have principally moved one or both parties
to enter into the contract.(Leonardo v. CA, G.R. No. 125485, Sept.
13, 2004)

Q: Leonardo is the only legitimate child of the late spouses

Tomasina and Balbino. She only finished Grade three and
did not understand English. The Sebastians, on the other
hand, are illegitimate children. She filed an action to
declare the nullity of the extrajudicial settlement of the
estate of her parents, which she was made to sign without
the contents thereof, which were in English, explained to
her. She claims that her consent was vitiated because she
was deceived into signing the extrajudicial settlement. Is
the extra‐judicial settlement of estate of Tomasina valid?
A: No. When one of the parties is unable to read, or if the contract
is in a language not understood by him, and mistake or fraud is
alleged, the person enforcing the contract must show that the
terms thereof have been fully explained to the former. (Art. 1332,
NCC) Leonardo was not in a position to give her free, voluntary and
spontaneous consent without having the document, which was in
English, explained to her. Therefore, the consent of Leonardo was
invalidated by a substantial mistake or error, rendering the
agreement voidable. The extrajudicial partition between the
Sebastians and Leonardo should be annulled and set aside on the
ground of mistake. (Leonardo v. CA, G.R. No. 125485, Sept. 13,
2004) Note: Contracts where consent is given by mistake or
because of violence, intimidation, undue influence or fraud are
voidable. These circumstances are defects of the will, the existence
of which impairs the freedom, intelligence, spontaneity and
voluntariness of the party in giving consent to the agreement.
Art. 1332 was intended to protect a party to a contract
disadvantaged by illiteracy, ignorance, mental weakness or
some other handicap. It contemplates a situation wherein a
contract is entered into but the consent of one of the
contracting parties is vitiated by mistake or fraud
committed by the other.(Leonardo v. CA, G.R. No. 125485,
Sept. 13, 2004)

Q: What are the requisites that ignorance of or

erroneous interpretation of law (mistake of law) may
vitiate consent?
1. Mistake must be with respect to the legal effect of the
agreement;
2. It must be mutual; and
3. Real purpose of the parties must have been frustrated.
Q: What are the requisites of intimidation?
1. One of the parties is compelled to give his consent by a
reasonable and well‐ grounded fear of an evil;
2. The evil must be imminent and grave;
3. It must be unjust; and
4. The evil must be the determining cause for the party upon whom
it is employed in entering into the contract.

Q: What are the requisites of violence?

It must be:
1. Serious or irresistible; and
2. The determining cause for the party upon whom it is employed
in entering into the contract.
Q: What are the kinds of fraud?
1.Fraud in the perfection of the contract
a. Causal fraud (dolo causante)
b. Incidental fraud (dolo incidente)
2.Fraud in the performance of an obligation (Art. 1170, NCC)

Requisites:
a. Fraud, insidious words or machinations must have been
employed by one of the contracting parties;
b. It must have been serious;
c. It induced the other party to enter into a contract; and
d. Should not have been employed by both contracting parties or
by third persons.
Q: Distinguish dolo causante from dolo incidente.
DOLO CAUSANTE (ART. DOLO INCIDENTE (ART.
1338) 1344)
Refers to fraud which is Refers to fraud which is
serious in character not serious in character
It is the cause which It is not the cause which
induces the party to enter induces the party to enter
into a contract into a contract
Renders the contract Renders the party liable
voidable for damages
Q: Santos’ lease contract was about to expire
but it was extended and he continued to
occupy the leased premises beyond the
extended term. Samson offered to buy Santos’
store and his right to the lease. Santos stated
that the lease contract between him and the
lessor was impliedly renewed and that formal
renewal thereof would be made upon the
arrival of a certain Tanya Madrigal, based on
the letter to him given by the lessor. When
Samson occupied the premises, he was forced
to vacate for Santos’ failure to renew his
lease. He filed an action for damages against
Santos for fraud and bad faith claiming that
the misrepresentation induced him to
purchase the store and the leasehold right.
Decide.
A: No, Santos was not guilty of fraud nor bad faith in
claiming that there was implied renewal of his contract of
lease with his lessor. The letter given by the lessor led
Santos to believe and conclude that his lease contract was
impliedly renewed and that formal renewal thereof would
be made upon the arrival of Tanya Madrigal. Thus, from the
start, it was known to both parties that, insofar as the
agreement regarding the transfer of Santos’ leasehold
right to Samson was concerned, the object thereof relates
to a future right. It is a conditional contract, the efficacy of
which depends upon an expectancy the formal renewal of
the lease contract between Santos and lessor. The efficacy
of the contract between the parties was thus made
dependent upon the happening of this suspensive
condition. (Samson v. CA, G.R. No. 108245, Nov. 25, 1994)
Q: What are the causes of extinction of action to annul?

1. Prescription – the action must be commenced within 4 years from the

time the:
a. incapacity ends; guardianship ceases;
b. violence, intimidation or undue influence ends; or
c. mistake or fraud is discovered

2. Ratification–cleanses the contract of its defects from the moment it

was
constituted
Requisites:
 a. There must be knowledge of the reason which renders the contract
voidable;
b. Such reason must have ceased; and
c. The injured party must have executed an act which expressly or
impliedly conveys an intention to waive his right
3. By loss of the thing which is the object of the contract
through fraud or fault of the person who is entitled to
annul the contract

Q: Who may institute action for annulment?

By all who are thereby obliged principally or subsidiarily.

Note: He who has capacity to contract may not invoke the

incapacity of the party with whom he has contracted.
A third person who is a stranger to the contract cannot
institute an action for annulment.
Q: What are the effects of annulment?
1. If contract not yet consummated – parties shall be released
from the obligations arising therefrom.
2. If contract has already been consummated – rules provided
in Arts.
1398‐1402, NCC, shall govern.

Q: What is confirmation?
It is an act by which a voidable contract is cured of its vice or
defect.

Q: What is recognition?
It is an act whereby a defect of proof is cured such as when an
oral contract is put into writing or when a private instrument is
converted into a public instrument.
Q: What is ratification?
It is an act by which a contract entered into in behalf of another
without or in excess of authority is cured of its defect.

Q: What are the modes of ratification?

1. For contracts infringing the Statute of Frauds:
a. expressly
b. impliedly– by failure to object to the presentation of oral
evidence to prove the contract, or by the acceptance of
benefits under the contract.
2. If both parties are incapacitated, ratification by their parents or
guardian shall validate the contract retroactively
C. UNENFORCEABLE CONTRACTS
Q: What are unenforceable contracts?
The following contracts are unenforceable unless
they are ratified:
1. Those entered into without or in excess of
authority;
2. Those that do not comply with the Statute of
Frauds i.e., are not in writing nor subscribed by
the party charged or by his agent; or
3. Those where both contracting parties are
incapable of giving consent.
Q: What is Statute of Frauds?
The Statute of Frauds [Article 1403, (2)] requires certain
contracts enumerated therein to be evidenced by some
note or memorandum in order to be enforceable. The term
"Statute of Frauds" is descriptive of statutes which require
certain classes of contracts to be in writing. The Statute
does not deprive the parties of the right to contract with
respect to the matters therein involved, but merely
regulates the formalities of the contract necessary to
render it enforceable. Evidence of the agreement cannot
be received without the writing or a secondary evidence of
its contents. (Swedish Match, AB v. CA, G.R. No. 128120,
Oct. 20, 2004)
Note: The Statute of Frauds applies only to executory contracts,
not to those that are partially or completely fulfilled. Where a
contract of sale is alleged to be consummated, it matters not that
neither the receipt for the consideration nor the sale itself was in
writing. Oral evidence of the alleged consummated sale is not
forbidden by the Statute of Frauds and may not be excluded in
court. (Victoriano v. CA, G.R. No. 87550, Feb. 11, 1991)
Q: What is the purpose of the Statute of Frauds?
It is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of
witnesses, by requiring certain enumerated contracts and
transactions to be evidenced by a writing signed by the party to be
charged. (Swedish Match, AB v. CA, G.R. No. 128120, Oct. 20,
2004)
Q: What are the contracts or agreements covered by the Statute
of Frauds?
1. An agreement that by its terms is not to be performed within a year
from the making thereof;
2. A special promise to answer for the debt, default or miscarriage of
another
3. An agreement made in consideration of marriage, other than a mutual
promise to marry;
4. An agreement for the sale of goods, chattels or things in action, at a
price not lower that 500 pesos, unless the buyer accepts and receives
 part of such goods and chattels, or the evidences, or some of them, of
such things in action, or pay at the time some part of the entry is made
by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a
sufficient memorandum
5. An agreement for the leasing for a longer period than one year, or for
the sale of real property or of an interest therein;
6. A representation to the credit of a third person
Q: Cenido, as an heir of Aparato and claiming to be the
owner of a house and lot, filed a complaint for ejectment
against spouses Apacionado. On the other hand, spouses
Apacionado allege that they are the owners which are
unregistered purchased by them from its previous owner,
Aparato. Their claim is anchored on a 1‐page typewritten
document entitled "Pagpapatunay," executed by Aparato. Is
the “Pagpapatunay” entered into by Bonifacio and spouse
Apacionado valid and enforceable?
A: It is valid but unenforceable. Generally, contracts are obligatory,
in whatever form such contracts may have been entered into,
provided all the essential requisites for their validity are present.
When, however, the law requires that a contract be in some form
for it to be valid or enforceable, that requirement must be complied
with.
The sale of real property should be in writing and
subscribed by the party charged for it to be enforceable.
The "Pagpapatunay" is in writing and subscribed by
Aparato, hence, it is enforceable under the Statute of
Frauds. Not having been subscribed and sworn to before a
notary public, however, the "Pagpapatunay" is not a public
document, and therefore does not comply with par. 1, Art.
1358, NCC.
Moreover, the requirement of a public document in Article
1358 is not for the validity of the instrument but for its
efficacy. Although a conveyance of land is not made in a
public document, it does not affect the validity of such
conveyance. The private conveyance of the house and lot
is therefore valid between Aparato and the spouses.
(Cenidov.Spouses Apacionado, G.R. No. 132474, Nov. 19,
1999)
Q: What are the two ways of ratifying contracts which
infringe the Statute of Frauds?
1. Failure to object during the trial to the admissibility of parol
evidence to support a contract covered by the Statute of Frauds.
2. Acceptance of benefits – when the contract has been partly
executed because estoppel sets in by accepting performance.
 D. VOID CONTRACTS
Q: What are the kinds of void contracts?
1. Those lacking in essential elements:
No consent, no object, no cause – some or all elements
of a valid contract are absent
a. Those which are absolutely simulated or fictitious: no
cause
b. Those whose cause or object did not exist at the time
of the transaction: no cause or object
c. Those whose object is outside the commerce of man:
no object
d. Those which contemplate an impossible service: no
object
 e. Those where the intention of parties relative to
principal object of the contract cannot be
ascertained
2. Contracts prohibited by law
a. Pactum commisorium – the creditor appropriates to
himself the things given by way of pledge or
mortgage to fulfill the debt
b. Pactum de non alienando – an agreement prohibiting
the owner from alienating the mortgaged immovable
c. Pactum leonina – a stipulation in a partnership
agreement which excludes one or more partners
from any share in the profits or losses
3. Illegal or illicit contracts (e.g. contract to sell
marijuana)
Q: On July 6, 1976, Honorio and Vicente executed a
deed of exchange. Under this instrument, Vicente
agreed to convey his 64.22‐ square‐meter lot to
Honorio, in exchange for a
500‐square‐meter property. The contract was entered
into without the consent of Honorio’s wife. Is the deed
of exchange null and void?
The deed is valid until and unless annulled. The deed was
entered into on July 6, 1976, while the Family Code took effect
only on August 3, 1998. Laws should be applied prospectively
only, unless a legislative intent to give them retroactive effect
is expressly declared or is necessarily implied from the
language used. Hence, the provisions of the Civil Code, not the
Family Code are applicable. According to Article 166 of the
Civil Code, the husband cannot alienate or encumber any real
property of the conjugal partnership without the wife’s
consent. (Villarandav. Villaranda, G.R. No.
153447, Feb. 23, 2004)
Q: Judie sold one‐half of their lot to Guiang under a
deed of transfer of rights without the consent and over
the objection of his wife, Gilda and just after the latter
left for abroad. When Gilda returned home and found
that only her son, Junie, was staying in their house. She
then gathered her other children, Joji and Harriet and
went to stay in their house. For staying in their alleged
property, the spouses Guiang complained before the
barangay authorities for trespassing.
Is the deed of transfer of rights executed by Judie
Corpuz and the spouses Guiang void or voidable?
It is void. Gilda’s consent to the contract of sale of their
conjugal property was totally inexistent or absent. Thus, said
contract properly falls within the ambit of Article 124 of the FC.
Q: Distinguish
Void from Voidable Contract
VOID VOIDABLE
Absence of essential Consent is vitiated or there is
element/s of a contract incapacity to give consent
No effect even if not set aside Valid contract until set aside
Cannot be ratified Can be ratified
Nullity can be set up against Nullity can be set up only
any person asserting right against a party thereto
arising from it, and his
successors in interest not
protected by law
Q: Distinguish
Action to declare nullity does Action to annul contract
not prescribe prescribes in 4 years
void contract from rescissible contract.

VOID RESCISSIBLE
Defect is in its effects, either
Defect is inherent in the against one of the parties or a
contract itself third person
Nullity is a matter of law and Based on equity and matter of
public interest private interest
No legal effects even if no Produces legal effects and
action is filed to set it aside remains valid if no action is
Q: Distinguish
filed
Action to declare its nullity
does not prescribe (Art. 1410, Action to rescind prescribes
NCC) within 4 years (Art. 1389, NCC;
void contract from inexistent contract.

VOID CONTRACT INEXISTENT CONTRACT

Those where all the Those where one or some of

requisites of a contract are the requisites which are
present, but the cause, essential for validity are
object or purpose is absolutely lacking
Q: Distinguish
contrary to law, morals,
good customs, public order
or public policy or the
contract itself is prohibited
or declared prohibited.
Principle of in pari
Principle of in pari delicto is delicto is not
applicable. applicable
 V. EFFECT OF CONTRACTS
Q: Between whom do contracts take effect?
Contracts take effect only between the parties, and their assigns
and heirs, the latter being liable only to the extent of the
property received from the decedent.

Q: What are the instances when the heirs may be liable

for the obligation contracted by the decedent?
When the rights and obligations arising from the contract
are transmissible:
1. By their nature; or
2. By stipulation; or
3. By provision of law.
Q: What are the requisites in order that a third person
may demand the fulfillment of the contract?
1. The contracting parties must have clearly and deliberately
conferred a favor upon the third person;
2. The third person’s interest or benefit in such fulfillment must
not be merely incidental; and
3. Such third person communicated his acceptance to the
obligor before the stipulations in his favor are revoke.
-End-