Regulatory Framework for Business Transactions

Law on Contracts A. Sanchez

General principles b. Mutuality of contract ‐ Contract must bind both contracting parties;
1. Concept ‐ meeting of the minds between two persons whereby one binds its validity or compliance cannot be left to the will of one of them.
himself, with respect to the other, to give something or to render some c. Autonomy of contract ‐ Contracting parties may establish such
service. stipulations, clauses, terms and conditions as they may deem
2. Elements of a contract convenient, provided they are not contrary to law, morals, good
a. Essential elements ‐ those without which there will be no contract customs, public order, or public policy.
1) Consent d. Relativity of contract ‐ Contracts take effect only between the
2) Object parties, their assigns and heirs, except in case where the rights and
3) Consideration/Cause obligations are not transmissible.
b. Natural elements ‐ Those found in certain contracts unless set aside Exceptions:
or suppressed by the parties (i.e, warranty against defects and a. Stipulation pour autrui ‐ stipulation in favor of a third person.
encumbrance, and warranty against eviction) Mere incidental benefit or interest of a person is not sufficient.
c. Accidental elements ‐ those that refer to particular stipulations of The contracting parties must have clearly and deliberately
the parties (i.e, time and place of payment) conferred a favor upon a third person.
3. Classification of contracts b. Contracts creating real rights ‐ third persons who come into
a. As to perfection possession of the object of the contract are bound thereby (i.e,
1) Consensual ‐ perfected by mere consent (i.e, sale, lease, real real mortgage and pacto de retro sale of immovable recorded
mortgage) in the Register of Deeds).
2) Real ‐ perfected by delivery (i.e, deposit, mutuum, c. Contracts intended to defraud of creditors (i.e, accion pauliana)
commodatum) d. 3rd person induces another to violate his contract ‐ shall be
3) Formal or solemn ‐ perfected upon observation of formalities liable for damages.
required by law (i.e, donation of immovable property needs to e. Obligatory force of contract ‐ Contracts shall be obligatory, in
be in public instrument; authority of an agent to sell land of the whatever form they may have been entered into, provided all the
principal must be in writing) essential requisites for their validity are present.
b. As to cause 5. Stages of a contract:
1) Onerous ‐ exchange of valuable consideration. The cause is the a. Preparation/Negotiation
prestation or promise of a thing or service by the other. b. Perfection ‐ concurrence of the essential elements (i.e, consent,
2) Gratuitous ‐ no equivalent consideration. Cause is the mere object and consideration; plus delivery for real contract, or forms
liberality/generosity of the benefactor. required for solemn contracts)
3) Remuneratory ‐ cause is the service or benefit which is c. Termination/Consummation
remunerated (i.e, saving the life of the debtor).
c. As to dependence upon another Essential elements of contracts
1) Principal ‐ can stand by itself (i.e, sale, donation) 6. Consent ‐ manifested by the meeting of the offer and the acceptance
2) Accessory ‐ dependent on another contract (i.e, guaranty, upon the thing and the cause which are to constitute the contract.
mortgage) 7. Provisions related to offer
3) Preparatory ‐ means of entering another contract (i.e, a. Must be certain. Unless it appears otherwise, business
partnership, agency) advertisements of things for sale are not definite offers, but mere
d. As to name or designation invitations to make an offer. Advertisements for bidders are simply
1) Nominate contracts ‐ contracts with specific name under the invitations to make proposals, and the advertiser is not bound to
civil code (i.e, mutuum, sale, partnership) accept the highest or lowest bidder, unless the contrary appears.
2) Innominate contracts ‐ contracts with no specific name b. Theory of Cognition. An offer made through an agent is accepted
a) Examples of innominate contract: from the time acceptance is communicated to him. An offer
1. Do ut des ‐ I give that you may give becomes ineffective upon the death, civil interdiction, insanity, or
2. Do ut facias ‐ I give that you may do insolvency of either party before acceptance is conveyed.
3. Facio ut des ‐ I do that you may give c. Option Period. When the offerer has allowed the offeree a certain
4. Facio ut facias ‐ I do that you may do period to accept, the offer may be withdrawn at any time before
b) Regulation of innominate contracts acceptance by communicating such withdrawal, except when the
1. Stipulations of the parties option is founded upon a consideration, as something paid or
2. By the provisions of Civil Code Book IV ‐ Obligations promised (option contract).
and Contracts (Titles I and II) d. Article 1324 vs Article 1479
3. By the rules governing the most analogous Under Article 1324, the offerer cannot withdraw the offer once
nominate contracts accepted by the offeree but under Article 1479, 2nd paragraph, the
4. Customs of the place promissor can still withdraw his promise despite the acceptance of
e. As to the risk involved the promisee if the promise is not supported by a consideration
1) Commutative ‐ parties give equivalent considerations; there is distinct from the price (option money).
real fulfillment (i.e, sale) 8. Provisions related to acceptance
2) Aleatory ‐ fulfillment based on chance (i.e, insurance; emptio a. Acceptance must be absolute. A qualified acceptance constitutes a
spei) counter‐offer.
f. Others b. Theory of Cognition. Acceptance made by letter or telegram does
1) Auto‐contract ‐ only one person represents two opposite not bind the offerer except from the time it came to his knowledge.
parties (i.e, agent representing on behalf of his principal and at NOTE: This is the theory of cognition. In contrast, theory of
the same time on his personal capacity) manifestation will bind the parties by mere sending of acceptance
2) Contract of adhesion (fine print rule) ‐ only one party drafted even without knowledge of acceptance. In the Philippines, we follow
the contract (i.e, insurance, bank deposit) the theory of cognition.
4. Characteristics of contracts c. Place of execution. The contract, in such a case, is presumed to have
a. Consensuality of contract ‐ Generally, contract is perfected by mere been entered into in the place where the offer was made (to
consent. determine which law will apply).
Exception: Formal or solemn contracts. d. Kinds of acceptance. An acceptance may be express or implied.

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9. Who are incapacitated to give consent d. The following contracts must be in PUBLIC DOCUMENT to affect 3rd
a. Absolute incapacity (will render the contract voidable or persons and for the convenience of the parties. The contracting
unenforceable depending on the number of incapacitated parties; parties may compel each other to observe that form, once the
apply to all contracts) contract has been perfected. This right may be exercised
1) Unemancipated minor ‐ emancipation take place at the age of simultaneously with the action upon the contract. (CHAR)
majority. NOTE: A party may only be compelled under this rule if the contract
NOTE: RA 6809 lowered the age of majority from 21 to 18. is both valid and enforceable.
2) Insane or demented person ‐ But contracts entered into during 1. The Cession of actions or rights proceeding from an act
lucid interval of the insane person are valid. appearing in a public document.
3) Deaf‐mutes who do not know how to write 2. The cession, repudiation or renunciation of Hereditary rights or
of those of the conjugal partnership of gains.
b. Relative incapacity (will render the contract void; apply to specific
3. The power to Administer property, or any other power which
contracts) has for its object an act appearing or which should appear in a
1) Those expressly provided by law (i.e, husband and wife cannot public document or should prejudice a third person.
sell/donate properties to each other) 4. Acts and contracts which have for their object the creation,
10. Simulation of contract transmission, modification or extinguishment of Real rights
a. Absolute simulation (fictitious contract) ‐ the parties do not intend over immovable property; sales of real property or of an
to be bound at all; the contract is void. interest therein a governed by statute of frauds.
19. Reformation of Contracts
b. Relative simulation ‐ the parties conceal their true agreement; when
a. Concept ‐ When, there having been a meeting of the minds of the
it does not prejudice a third person and is not intended for any
parties to a contract, their true intention is not expressed in the
purpose contrary to law, morals, good customs, public order or
instrument purporting to embody the agreement, by reason of
public policy binds the parties to their real agreement
mistake, fraud, inequitable conduct or accident, one of the parties
11. Object ‐ subject matter of the obligation arising from the contract.
may ask for the reformation of the instrument to the end that such
12. Requisites of object:
true intention may be expressed.
a. Licit
NOTE: If there is no proper meeting of the minds because of vitiated
b. Possible (physically and juridically)
consent, the proper remedy is annulment and not reformation.
c. Determinate or determinable ‐ determinable means it is possible to
b. Cases where reformation is not necessary
determine without the need of a new contract. A contract to give a
1) Simple donations inter vivos wherein no condition is imposed
certain gadget or to deliver certain number of coconuts is void for
2) Wills
not having determinate object.
3) When the real agreement is void
d. Possible equivalent in money (pecuniary value)
4) When one of the parties has brought an action to enforce the
13. Future things may be the object of a contract except future inheritance as
instrument (ratification/waiver)
it is against public policy.
5) Oral contract
14. Cause/Consideration ‐ is the essential reason which moves the parties to
c. Who can ask for reformation
enter into a contract.
1) Either party or his successors in interest, if the mistake was
15. Motive vs Cause
mutual;
Motive Cause
2) Otherwise, upon petition of the injured party, or his heirs and
Not essential requisite Essential requisite
Private/secret reason for entering Essential/ known reason for assigns
into a contract entering into a contract 20. Interpretation of Contracts
Illegal motive will not render the Illegal cause will render the a. If the terms of a contract are clear and leave no doubt upon the
contract void contract void intention of the contracting parties, the literal meaning of its
16. Rules in Consideration stipulations shall control. If the words appear to be contrary to the
a. Contracts without cause, or with unlawful cause, produce no effect evident intention of the parties, the latter (intention) shall prevail
whatever. The cause is unlawful if it is contrary to law, morals, good over the former (words).
customs, public order or public policy. A contract of sale where the b. In order to judge the intention of the contracting parties, their
buyer paid using fake money bills is valid. There is consideration, contemporaneous and subsequent acts shall be principally
which is the fake bills. considered.
b. The statement of a false cause in contracts shall render them void, if c. However general the terms of a contract may be, they shall not be
it should not be proved that they were founded upon another cause understood to comprehend things that are distinct and cases that
which is true and lawful. are different from those upon which the parties intended to agree.
c. Although the cause is not stated in the contract, it is presumed that d. If some stipulation of any contract should admit of several meanings,
it exists and is lawful, unless the debtor proves the contrary. it shall be understood as bearing that import which is most adequate
d. Except in cases specified by law, lesion or inadequacy of cause shall to render it effectual.
not invalidate a contract, unless there has been fraud, mistake or e. The various stipulations of a contract shall be interpreted together,
undue influence. attributing to the doubtful ones that sense which may result from all
17. Form of Contracts of them taken jointly.
a. GR: Contracts shall be valid in whatever form provided all the f. Words which may have different significations shall be understood in
essential requisites for their validity are present. that which is most in keeping with the nature and object of the
b. Exception: when the law requires some other form (i.e, written in contract.
private or public instrument) g. The usage or custom of the place shall be borne in mind in the
18. Formal or Solemn Contracts interpretation of the ambiguities of a contract and shall fill the
a. The following contracts must be in PUBIC INSTRUMENT to be VALID: omission of stipulations which are ordinarily established.
1) Donation of immovable property regardless of amount. h. The interpretation of obscure words or stipulations in a contract
2) Partnership with immovable property regardless of amount. shall not favor the party who caused the obscurity.
b. The following contracts must be in WRITING (whether private or i. When it is absolutely impossible to settle doubts by the rules, and
public) to be VALID: the doubts refer to incidental circumstances of a gratuitous
1) Donation of personal property with value exceeding P5,000. contract, the least transmission of rights and interests shall prevail.
2) Authority of agent to sell a piece of LAND. If the contract is onerous, the doubt shall be settled in favor of the
3) Contract of antichresis. greatest reciprocity of interests.
4) Interest on loan. j. If the doubts are cast upon the principal object of the contract in
5) Reduction of common carrier’s liability for the loss, destruction, such a way that it cannot be known what may have been the
or deterioration of the goods. intention or will of the parties, the contract shall be null and void.
c. The following contracts must be in WRITING to be ENFORCEABLE:
1) Please see statute of frauds on unenforceable contracts.

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21. Kinds of contract b. Instances of voidable/ annullable contracts
a. Purely valid ‐ contracts will all the essential requisites, and not 1) One of the contracting parties is incapacitated
against law, moral, good custom, public order, and public policy. 2) Vitiated consent/vice of consent due to VIMFU
b. Valid but defective 3) Those entered into state of drunkenness and hypnotic spells
1) Rescissible contract are also voidable.
2) Voidable or Annullable contract c. Vitiated consent/vice of consent due to VIMFU
3) Unenforceable contract 1) Violence or duress ‐ when in order to wrest consent, serious or
22. Rescissible contract irresistible external force is employed.
a. Concept ‐ Contract with all valid essential requisites but due to 2) Intimidation ‐ when one of the contracting parties is compelled
lesion/damage or economic prejudice or equity, the contract may be by a reasonable and well‐grounded fear of an imminent and
rescinded or cancelled in cases established by law. grave evil upon his person or property, or upon the person or
b. Instances of rescissible contracts: (GAFLIO) property of his spouse, descendants or ascendants, to give his
1) Those which are entered into by Guardians whenever the consent.
wards whom they represent suffer lesion by more than one‐ NOTE: There is no intimidation in case of threat to enforce
fourth of the value of the thing one's claim through competent authority, if the claim is just or
2) Those agreed upon in representation of Absentees, if the latter legal.
suffer the same lesion as above NOTE: Violence or intimidation shall annul the obligation,
3) Those undertaken in Fraud of creditors when the latter cannot although it may have been employed by a third person who did
in any other manner collect the claims due them; not take part in the contract.
4) Those which refer to things under Litigation if they have been 3) Mistake
entered into by the defendant without the knowledge and a) When mistake vitiates consent
approval of the litigants or of competent judicial authority; 1. Mistake that refers to the substance of the thing
5) Payments made in a state of Insolvency for obligations to which is the object of the contract (mistake of fact).
whose fulfillment the debtor could not be compelled at the 2. It also refers to conditions which have principally
time they were effected, are also rescissible. moved one or both parties to enter into the
6) All Other contracts specially declared by law to be subject to contract.
rescission. 3. Mistake as to the identity or qualifications of one of
a) Remedy of injured party in reciprocal obligation the parties will vitiate consent only when such
b) Remedy of CR when the thing deteriorates due to DR’s identity or qualifications have been the principal
fault in obligation with a condition or period. cause of the contract.
c) Rights of unpaid seller. 4. Mutual error as to the legal effect of an agreement
NOTE: Rescission referred to in Nos. 1 and 2 shall not take place with when the real purpose of both parties is frustrated
respect to contracts approved by the courts. (mistake of law).
c. Nature of Rescission: The action for rescission is subsidiary (except b) When mistake does not vitiate consent
in case of other rescissible contracts, number 6); it cannot be 1. If the party alleging it knew the doubt, contingency
instituted except when the party suffering damage has no other legal or risk affecting the object of the contract.
means to obtain reparation for the same. 2. Simple mistake of account ‐ shall give rise to its
d. Extent of Rescission ‐ shall be only to the extent necessary to cover correction/reformation only.
the damages caused. 4) Fraud ‐ When, through insidious words or machinations of one
e. Effect of Rescission ‐ Rescission creates the obligation to return the of the contracting parties, the other is induced to enter into a
things which were the object of the contract, together with their contract which, without them, he would not have agreed to
fruits, and the price with its interest. (dolo causante).
f. Presumption to defraud of creditors Rules in determining fraud:
1) Gratuitous contracts ‐ when the donor did not reserve a) Failure to disclose facts, when there is a duty to reveal
sufficient property to pay all debts contracted before the them, as when the parties are bound by confidential
donation. relations.
2) Onerous contracts ‐ When made by persons against whom b) A mere expression of an opinion does not signify fraud,
some judgment has been issued. The decision or attachment unless made by an expert and the other party has relied
need not refer to the property alienated, and need not have on the former's special knowledge.
been obtained by the party seeking the rescission. c) Misrepresentation has created substantial mistake and
3) Limitation of Rescission: Shall not take place the same is mutual.
a) When he who demands rescission cannot return d) Misrepresentation made in good faith is not fraudulent
whatever he may be obliged to restore. This rule does not but may constitute error.
apply to cases where nothing to be returned (i.e, defraud e) In order that fraud may make a contract voidable, it
of creditors). should be serious and should not have been employed by
b) When the things which are the object of the contract are both contracting parties. Incidental fraud only obliges the
legally in the possession of third persons who did not act person employing it to pay damages.
in bad faith. In this case, indemnity for damages may be NOTE: When one of the parties is unable to read, or if the
demanded from the person causing the loss. contract is in a language not understood by him, and mistake
g. Liability of 3rd person in bad faith ‐ Whoever acquires in bad faith or fraud is alleged, the person enforcing the contract must
the things alienated in fraud of creditors, shall indemnify the latter show that the terms have been fully explained to the innocent
for damages suffered by them on account of the alienation, party.
whenever, due to any cause, it should be impossible for him to 5) Undue influence ‐ When a person takes improper advantage of
return them. If there are two or more alienations, the first acquirer his power over the will of another, depriving the latter of a
shall be liable first, and so on successively. reasonable freedom of choice. The following circumstances
h. Prescription of Rescission: must commence within 4 years. For shall be considered: the confidential, family, spiritual and other
persons under guardianship and for absentees, the period of four relations between the parties, or the fact that the person
years shall not begin until the termination of the former's incapacity, alleged to have been unduly influenced was suffering from
or until the domicile of the latter is known. mental weakness or was ignorant or in financial distress.
23. Voidable contract d. Annulment ‐ action brought to set aside a voidable contract.
a. Concept ‐ Defective due to incapacity of one of the contracting e. Rules of annulment
parties or due to vitiation/vice of consent. These contracts are 1) An obligation having been annulled, the contracting parties
binding, unless they are annulled by a proper action in court. They shall restore to each other the things which have been the
are susceptible of ratification. subject matter of the contract, with their fruits, and the price

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 with its interest, except in cases provided by law. In obligations c. Ratification of unenforceable contracts
to render service, the value thereof shall be the basis for 1) No authority or exceeded authority ‐ ratification by the
damages. principal (law on agency will apply)
2) Whenever the person obliged by the decree of annulment to 2) Incapacity of contracting parties ‐ express or implied
return the thing cannot do so because it has been lost through ratification by the parent, or guardian, as the case may be, of
his fault, he shall return the fruits received and the value of the one of the contracting parties shall give the contract the same
thing at the time of the loss, with interest from the same date. effect as if only one of them were incapacitated.
3) As long as one of the contracting parties does not restore what 3) Statute of frauds:
in virtue of the decree of annulment he is bound to return, the a) Failure to object to the presentation of oral evidence to
other cannot be compelled to comply with what is incumbent prove the same.
upon him. b) Acceptance of benefits under them.
f. Causes of extinction of action to annulment 25. Void/inexistent contract
1) Prescription. The action must be commenced within 4 years a. Instances of void/inexistent contract:
from: 1) Inexistent Contract ‐ lacks essential requisites.
a) The time the incapacity ends. a) Those which are absolutely simulated or fictitious;
b) The time the violence, intimidation or undue influence b) Those whose cause or object did not exist at the time of
ends. the transaction.
2) Void contract
c) The time the mistake or fraud is discovered.
a. Those whose cause, object or purpose is contrary to law,
2) Ratification ‐ may be effected expressly or tacitly. It is
morals, good customs, public order or public policy
understood that there is a tacit ratification if, with knowledge of b. Those whose object is outside the commerce of men
the reason which renders the contract voidable and such reason c. Those which contemplate an impossible service
having ceased, the person who has a right to invoke it should d. Those where the intention of the parties relative to the
execute an act which necessarily implies an intention to waive principal object of the contract cannot be ascertained
his right. Ratification does not require the conformity of the e. Those expressly prohibited or declared void by law.
contracting party who has no right to bring the action for b. Characteristics:
annulment. 1) Cannot be ratified
3) By loss of the thing which is the object of the contract through 2) The right to set up the defense of illegality cannot be waived
fraud or fault of the person who is entitled to annul the contract. 3) Does not prescribe
BUT an incapacitated person is not obliged to make any 4) The defense of illegality is not available to third persons whose
restitution except insofar as he has been benefited by the thing interests are not directly affected
or price received by him. In such a case, annulment will still 5) In case of a divisible contract, if the illegal terms can be
prosper. separated from the legal ones, the latter may be enforced.
g. Who may bring action for annulment/ratification 6) A contract which is the direct result of a previous illegal
1) The guardian of the incapacitated person. contract, is also void and inexistent. (i.e, cannot be novated)
2) The incapacitated person upon reaching the age of majority. c. Rules of “in pari delicto” ‐ When the defect of a void contract came
3) The party whose consent is vitiated. from illegality of the cause or object, both parties being at fault or in
NOTE: Ratification does not require the conformity of the pari delicto, they shall have no action against each other. The court
contracting party who has no right to bring the action for annulment. will leave them where they are.
24. Unenforceable contract NOTE: If the act constitutes a criminal offense, both shall be
a. Concept ‐ Cannot be enforced in court unless ratified or reduced in prosecuted and the provisions of the Penal Code relative to the
some writing or memoranda evidencing the agreement. disposal of effects or instruments of a crime shall be applicable to
NOTE: Unenforceable contract can’t be assailed by 3rd persons. the things or the price of the contract.
b. Instances of unenforceable contracts NOTE: In pari delicto is applicable only to void contracts and not to
1) Those entered into in the name of another person by one who inexistent contracts.
has been given no authority or legal representation, or who has d. Exceptions to “in pari delicto”: (cases where recovery is allowed)
acted beyond his powers a) Interest paid in excess of the interest allowed by the usury laws
NOTE: A sold B’s cellphone under the former’s (A’s) name. The may be recovered by the debtor, with interest thereon from
contract is valid. But if A sold B’s cellphone under B’s name, the date of the payment.
the contract is unenforceable. b) When money is paid or property delivered for an illegal
2) Both parties are incapacitated. purpose, the contract may be repudiated by one of the parties
NOTE: If one party ratifies the contract, it will become voidable before the purpose has been accomplished, or before any
contract. And if the other one also ratifies; the contract will be damage has been caused to a third person. In such case, the
valid. courts may, if the public interest will thus be subserved, allow
3) Those that do not comply with Statute of Frauds. The the party repudiating the contract to recover the money or
contracts/agreements under the Statute of Frauds require that property.
the same be evidence by some note, memorandum or writing, c) Where one of the parties to an illegal contract is incapable of
subscribed by the party charged or by his agent, otherwise, the giving consent, the courts may, if the interest of justice so
contract is unenforceable. demands allow recovery of money or property delivered by the
a) Agreements not to be performed within one year from incapacitated person.
the making thereof; d) When the agreement is not illegal per se but is merely
b) Special promise to answer for the debt, default or prohibited, and the prohibition by the law is designated for the
miscarriage of another; protection of the plaintiff, he may, if public policy is thereby
c) Agreement in consideration of marriage other than a enhanced, recover what he has paid or delivered.
mutual promise to marry; e) When the price of an article/commodity is determined by law,
d) Agreement for the sale of goods, etc. at the price not less any person paying any amount in excess of the maximum price
than P500.00; allowed may recover such excess.
e) Contracts of lease for a period longer than one year f) When the law fixes or authorizes the fixing of the maximum
f) Agreements for the sale of real property or interest number of hours of labor, and a contract is entered into
therein; whereby a laborer undertakes to work longer than the
g) Representation as to the credit of a third person. maximum thus fixed, he may demand additional compensation
NOTE: The Statute of Frauds applies only to executory for service rendered beyond the time limit.
contracts, not to those that are partially or completely fulfilled. g) When the law sets, or authorizes the setting of a minimum
wage for laborers, and a contract is agreed upon by which a
laborer accepts a lower wage, he shall be entitled to recover
the deficiency.
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 e. Rules when only one of the parties is at fault: b) Innocent party may demand for the return of what he has
1) Executed Contracts given.
a) Guilty party cannot recover what he has given to the 2) Executory Contracts ‐ Neither of the contracting parties may
other party by reason of the contract. ask for the fulfillment of what has been promised or compelled
to comply with such obligation.

Comparison of Defective Contracts:

Rescissible Contract Voidable Contract Unenforceable Contract Void/Inexistent Contract
Defect Lesion or economic damage Incapacity and vitiation of Incapacity, lack or excess of Lack of essential elements;
consent authority and not compliance Contrary to law, moral, good
with statute of frauds custom, public order and
public policy
Status and effect Valid until rescinded Valid until annulled Valid but cannot be enforced Void and has no effect
until ratified
Ratification Need not be ratified Susceptible of ratification Susceptible of ratification Not susceptible of
ratification
Prescription 4 years from the termination 4 years from the time the 6 years for oral; Does not prescribe
of the incapacity, or until the incapacity, violence, 10 years for written
domicile of the absentee is intimidation or undue
known. influence ends; or from the
time the mistake or fraud is
discovered.
Part who can assail Contracting parties and their Contracting parties and their Cannot be assailed by third Persons DIRECTLY affected
guardian guardian persons.

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