CONTRACTS

Formality of Contracts to Voidable Contracts

FORMALITY OF CONTRACTS

Rules on the form of contracts

• General Rule: Form is not required in consensual contracts. (Provided, all the essential
requisites for their validity are present.)
• Exceptions: When the law requires a contract be in writing for its:
• Validity (formal contracts);
• Enforceability (under Statute of Frauds); or
• For the convenience of the parties
• NOTE: The right to demand the execution of the document required under Art.1358 is
not imprescriptible. It is subject to prescription. It must be pursued within the period
prescribed by law which is five (5) years. (Pineda, 2009)
FORMALITIES REQUIRED IN SPECIFIC
CONTRACTS
Donations
• Personal property – if value exceeds 5,000, the donation and acceptance must both be written (NCC, Art. 748).
• Real property:
• Donation must be in a public instrument, specifying therein the property donated and value of charges which donee
must satisfy.
• Acceptance must be written, either in the same deed of donation or in a separate instrument.
• If acceptance is in a separate instrument, the donor shall be notified thereof in authentic form, and this step shall be
noted in both instruments (NCC, Art. 749).

Partnership where real property contributed

• There must be a public instrument regarding the partnership;
• The inventory of the realty must be made, signed by the parties and attached to the public instrument (NCC,
Art. 1773).
• Antichresis - the amount of the principal and interest must be in writing (NCC, Art. 2134).
FORMALITIES REQUIRED IN SPECIFIC
CONTRACTS
Agency to sell real property or an interest therein - authority of the agent must be in
writing (NCC, Art. 1874).
Stipulation to charge interest - interest must be stipulated in writing (NCC, Art. 1956).
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 (NCC, Art. 1744).
• Chattel mortgage - personal property must be recorded in the Chattel Mortgage
Register. (NCC, Art. 2140).
CONTRACTS WHICH MUST BE IN
WRITING TO BE VALID
• Donation of personal property whose value exceeds five thousand pesos (NCC,
Art. 748). – the donation and acceptance must be in writing.
• Sale of a piece of land or any interest therein through an agent (NCC, Art. 1874). –
the authority of the agent shall appear in writing.
• Agreements regarding payment of interest in contracts of loan (NCC, Art. 1956).
• Antichresis – the amount of the principal and the interest shall be specified in
writing (NCC, Art. 2134; Jurado, 2011).
CONTRACTS WHICH MUST APPEAR IN A PUBLIC
DOCUMENT [NOTARIZED]

• Donation of real properties (NCC, Art. 719);

• Partnership where immovable property or real rights are contributed to the common fund (NCC,
Arts. 1171 & 1773);
• Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sale of real property or of an interest
therein is governed by Arts. 1403, No. 2, and 1405 [NCC, Art. 1358(1)];
• The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains [NCC, Art. 1358(2)];
• 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; [NCC, Art. 1358(3)];
• The cession of actions or rights proceeding from an act appearing in a public document [NCC,
Art. 1358(4)].
CONTRACTS THAT MUST BE
REGISTERED
• Chattel mortgages (NCC, Art. 2140).
• NOTE: In accordance with Article 2125 of the Civil Code, an unregistered chattel
mortgage is binding between the parties because registration is necessary only for the
purpose of binding third persons (Filipinas Marble Corporation v. Intermediate Appellate
Court, G.R. No. L-68010, May 30, 1986).
• Sale or transfer of large cattle (Cattle Registration Act).
REFORMATION OF INSTRUMENTS
• It is a remedy to conform to the real intention of the parties due to mistake, fraud,
inequitable conduct, accident (NCC, Art. 1359).
• Reformation is a remedy in quity by means of which a written instrument is made
or construed so as to express or confirm the real intention of the parties when
some error or mistake is committed. (Pineda, 2009)
• Rationale : It would be unjust and inequitable to allow the enforcement of a
written instrument which does not reflect or disclose the real meeting of the
minds of the parties.
REQUISITES IN REFORMATION OF
INSTRUMENTS
• Meeting of the minds to the contract;
• True intention is not expressed in the instrument;
• By reason of: (MARFI)
• Mistake;
• Accident;
• Relative simulation;
• Fraud; or
• Inequitable conduct
• Strong, clear and convincing proof of MARFI
REFORMATION VS. ANNULMENT

Reformation Annulment
There is meeting of the minds between the There is no meeting of the minds. Consent is
parties as to the object, cause of the contract vitiated.
The instrument failed to express the true The meeting of the minds was prevented by
intention of the parties due to mistake, reason of mistake, fraud, inequitable conduct
fraud, inequitable conduct or accident. or accident perpetrated by one party against
the other

The purpose of reformation is to establish The purpose of annulment is to render

the true agreement of the parties and not to inefficacious the contract in question.
create a new one
WHEN IS REFORMATION OF
INSTRUMENTS ALLOWABLE
• Mutual mistake. – When the mutual mistake of the parties causes the failure of the instrument to
disclose their agreement (NCC, Art. 1361);
• The mistake should be of fact;
• The same should be proved by clear and convincing evidence; and
• the mistake should be common to both parties to the instrument (BPI v. Fidelity Surety, Co. 51 Phil 57).
• Mistake on one party and fraud on the other. – In such a way that the instrument does not show their
true intention, the party mistaken or defrauded may ask for the reformation of the instrument (NCC, Art.
1362);
• Mistake on one party and concealment on the other. – When one party was mistaken and the other
knew or believed that the instrument did not state their real agreement, but concealed that fact from the
former (NCC, Art. 1363);
• Ignorance, lack of skill, negligence or bad faith. – When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument
does not express the true intention of the parties (NCC, Art. 1364);
• Right of repurchase. – If the parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase (NCC, Art. 1365).
WHEN IS REFORMATION OF
INSTRUMENTS NOT ALLOWABLE
• Simple, unconditional donations inter vivos
• Wills
• When the agreement is void (NCC, Art. 1366);
• When an action to enforce the instrument is filed (estoppel)
• If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the
minds of the parties

NOTE: The remedy here is annulment of contract.

INTERPRETATION OF CONTRACTS
• If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
• If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former (NCC, Art. 1370).
• In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered (NCC, Art. 1371).
• However the general terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon which
the parties intended to agree (NCC, Art. 1372).
• If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual (NCC, Art.
1373).
PRINCIPLE OF EFFECTIVENESS IN
CONTRACT INTERPRETATION
• Pursuant to this principle, where two interpretations of the same contract
language are possible, one interpretation having the effect of rendering the
contract meaningless while the other would give effect to the contract as a whole,
the latter interpretation must be adopted (PNB v. Utility Assurance & Surety, Co.,
Inc., 177 SCRA 393, 1989).
• The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly (NCC,
Art. 1374).
COMPLEMENTARY-CONTRACTS-
CONSTRUED-TOGETHER DOCTRINE
• The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly.
(NCC, Art. 1374)
• A contract must be read in its entirety. Piecemeal interpretation must be avoided.
RULES IN INTERPRETATION OF
CONTRACTS
• Words which may have different significations shall be understood in that which is most in keeping with the
nature and object of the contract (NCC, Art. 1375).
• The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which are ordinarily established (NCC, Art. 1376).
• The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity (NCC, Art. 1377).
• When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the
doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and
interest shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.
• If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract shall be null and void (NCC, Art. 1378).
• The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the
construction of contracts (NCC, Art. 1378).
RESCISSIBLE CONTRACTS

These are contracts validly constituted but nevertheless maybe set aside due to a
particular economic damage or lesion caused to either to one of the parties or to a
third person. It may be set aside in whole or in part, or up to the extent of the
damage caused (NCC, Art. 1381).
CONTRACTS THAT MAY BE RESCINDED
Entered into by persons exercising fiduciary capacity:
• Entered into by guardian whenever ward suffers damage more than ¼ of value of property.
• Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of value of property.
• Contracts where rescission is based on fraud committed on creditor (accion pauliana)
• Objects of litigation; contract entered into by defendant without knowledge or approval of litigants or judicial authority
• Payment by an insolvent – on debts which are not yet due; prejudices claim of others
• Provided for by law (Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 & 1659, NCC)
Payments made in state of insolvency:
• Plaintiff has no other means to maintain reparation
• Plaintiff must be able to return whatever he may be obliged to return due to rescission
• The things must not have been passed to third persons in good faith
• It must be made within 4 yrs.
CHARACTERISTICS OF RESCISSIBLE
CONTRACT
• It has all the elements of a valid contract.
• It has a defect consisting of an injury (generally in the form of economic damage
or lesion, fraud, and alienation of the property) to one of the contracting parties or
to a third person.
• It is valid and effective until rescinded.
• It can be attacked only directly.
• It is susceptible of convalidation only by prescription (De Leon, 2010).
NATURE OF AN ACTION FOR
RESCISSION
The action for rescission is subsidiary. It cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same (NCC,
Art. 1383). Hence, it must be availed of as the last resort, availed only after all legal
remedies have been exhausted and proven futile (Khe Hong Cheng v. CA, G.R. No.
144169, March 28, 2001).
PERSONS WHO MAY INSTITUTE AN ACTION FOR
THE RESCISSION OF A RESCISSIBLE CONTRACT
• Injured party;
• Contracts entered into by guardians – by ward, or by guardian ad litem of ward
during the latter’s incapacity in an action against the original guardian;
• Contracts in representation of absentees – by the absentee;
• Contracts defrauding creditors – by the creditors;
• Contracts referring to things in litigation – by the party litigant;
• Their representatives;
• Their heirs;
• Their creditors by virtue of subrogatory action defined in Art. 1177, NCC
PRESCRIPTIVE PERIOD OF ACTION FOR
RESCISSION
• Under Art. 1381, no.1 – within 4 years from the time the termination of the
incapacity of the ward;
• Under Art. 1381, no. 2- within 4 years from the time the domicile of the absentee is
known; or
• Under Art. 1381, nos. 3 & 4 & Art. 1382 – within 4 years from the time of the
discovery of fraud.
REQUISITES THAT MUST CONCUR BEFORE A CONTRACT
MAY BE RESCINDED ON THE GROUND OF LESION
• The contract must be entered into by the guardian in behalf of his ward or by the
legal representative in behalf of an absentee.
• The ward or absentee suffered lesion of more than 1/4 of the value of the property
which is object of the contract.
• The contract must be entered into without judicial approval.
• There must be no other legal means for obtaining reparation for the lesion.
• The person bringing the action must be able to return whatever he may be obliged
to restore.
• The object of the contract must not be legally in the possession of a third person
who did not act in bad faith.
Statutory presumptions of Fraud in Article
1387
• Alienation by gratuitous title. When a debtor donates his property without
reserving sufficient property to pay all his pre-existing debts, the law presumes
that the gratuitous dispositions are made in fraud of creditors.
• Alienation by onerous title. The contract is presumed fraudulent if at the time of
alienation, some judgement has been rendered against him, whether it is on
appeal or has already become final and executory; or some writ of attachment has
been issued against him in any case.
• NOTE: The decision or writ of attachment need not refer to the very property subject of
alienation. The person who obtained the judgement or writ of attachment need not be
the same person seeking the rescission. These presumptions are rebuttable, which
means, they may be overcome by clear, strong and convincing evidence
REQUISITES BEFORE A CONTRACT ENTERED INTO IN FRAUD
OF THE CREDITORS MAY BE RESCINDED

• There must be a credit existing prior to the constitution of the said fraudulent contract;
• There must be fraud, or at least, the intent to commit fraud to the prejudice of the creditor
seeking rescission;
• The creditor cannot in any legal manner collect his credit (subsidiary character of
rescission);
• The object of the contract must not be legally in possession of a third person in good faith.
NOTE: If the object of the contract is legally in the possession of a third person who did not
act in bad faith, the remedy available to the creditor is to proceed against the person
causing the loss for damages. Such person is solidarily liable with that of transferring
creditor as both of them are guilty of fraud. The action to rescind contracts in fraud of
creditors is known as accion pauliana.
BADGES OF FRAUD
• Consideration for the conveyance of the property is inadequate or fictitious;
• Transfer was made by the debtor after a suit has commenced and during its pending
against him;
• Sale upon credit by an insolvent debtor;
• The presence of evidence of large indebtedness or complete insolvency of the debtor;
• Transfer of all his property by a debtor when he is financially embarrassed or insolvent;
• Transfer is made between father and son, where there are present some or any of the
above circumstances; and
• Failure of the vendee to take exclusive possession of the property (Oria v. McMicking,
21 Phil. 243, G. R. No. 7003, January 18, 1912)
NOTE: While Article 1191 uses the term “rescission,” the original term which
was used in the old Civil Code, from which the article was based, was
“resolution”
  RESOLUTION (NCC, ART. 1191) RESCISSION (NCC, ART. 1381)
  Both presuppose contracts validly entered into and subsisting and both require mutual restitution when proper
Nature Principal action; Retaliatory in character
    Subsidiary remedy
Grounds Non-performance of obligation (only ground) 5 grounds under Art. 1381. (lesions or fraud of creditors); Non-
performance is not important
Applicability Only to reciprocal Applies to both
  obligations unilateral and
  reciprocal obligations
Prescriptive Period 10 years from accrual of right of action for written 4 years (NCC, Art. 1389)
contracts;
 
6 years for verbal contracts [NCC, Arts. 1144 (2) and
1145 (1)]
Person who can Initiate the Action Only the injured party Even third persons
  to the contract prejudiced by the
  contract
Fixing of Period by the Court Court may fix a period or grant extension of time for Court cannot grant extension of time
  the fulfillment of the obligation when there is
sufficient reason to justify such extension
Purpose Cancellation of the contract Reparation for damage or injury, allowing partial rescission of
contract (Pineda, 2000)
EFFECT OF RESCISSION
• Obligation of mutual restitution (but not absolute);
• Abrogation of contract (Absolute);
• Obligation of third person to restore (if third person has nothing to restore, Article
does not apply) (De Leon, 2016). Mutual Restitution Rescission of contract creates
an obligation of mutual restitution of the objects of the contract, their fruits, and
the price with interest.
• 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 (NCC, Art. 1385).
VOIDABLE CONTRACTS
• Voidable contracts are those where consent is vitiated either by the incapacity of
one of the contracting parties or by mistake, violence, intimidation, undue
influence or fraud. These contracts are binding, unless they are annulled by a
proper action in court. It is susceptible of ratification (NCC, Art. 1390).
• NOTE: Annulment may be had even if there be no damage to the contracting
parties.
CLASSES OF VOIDABLE CONTRACTS
• Those where one of the parties is incapable of giving consent; and NOTE: If both
parties are incapacitated to give consent, the contract is unenforceable and not
merely voidable.
• Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud (NCC, Art. 1390).
WHO MAY INSTITUTE AN ACTION FOR
ANNULMENT
• Real party in interest. – All who are principally or subsidiarily liable ; and
• One not responsible for the defect of the contract
• NOTE: An action for annulment may be instituted by all who are thereby obliged
principally or subsidiarily. He who has capacity to contract may not invoke the
incapacity of the party with whom he has contracted nor can those who exerted
intimidation, violence or undue influence or employed fraud or caused mistake
base their action upon these flaws of the contract.
EFFECTS OF ANNULMENT OF A
CONTRACT
• If contract not yet consummated – parties shall be released from the obligations arising
therefrom.
• If contract has already been consummated – rules provided in Arts. 1398-1402 shall govern.
• Restitution
• Mutual restitution. – the contracting parties shall restore to each other things which have been the
subject matter of the contract, with their fruits and the price with its interest except in case provided
by law. In an obligation to render services, the value thereof shall be the basis for damages (NCC, Art.
1398).
• Note: No restitution. – The party incapacitated is not obliged to make any restitution except insofar as
he has been benefited by the thing or the price received by him (NCC, Art. 1399).
• Whenever the person obliged by the decree of annulment to return the thing cannot do so
because it has been lost through his fault, he shall return the fruits received and the value of the
thing at the time of the loss, with interest from the same date (NCC, Art. 1400).
CAUSES OF EXTINCTION OF ACTION TO
ANNUL
• Prescription – the action for annulment must be commenced within 4 years
depending on the ground stated.
• Ratification – cleanses the contract of its defects from the moment it was
constituted. (NCC, Art. 1396).
• 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 (NCC, Art. 1401).
• If the minor is guilty of active misrepresentation of his age (Braganza v. De Villa
Abrille, 1959).
PRESCRIPTIVE PERIOD FOR AN
ANNULMENT OF A VOIDABLE CONTRACT
The action for annulment shall be brought within 4 years, reckoned from:
• In cases of intimidation, violence or undue influence, from the time the defect of
the consent ceases;
• In case of mistake or fraud, from the time of the discovery of the same;
• And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases (NCC, Art. 1391).
Ratification It is the act or means by virtue of which, efficacy is given to a contract
which suffers from a vice of curable nullity (Manresa).
• NOTE: Ratification extinguishes the action to annul a voidable contract (NCC, Art.
1392).
KINDS OF RATIFICATION
• Express –the desire of the innocent party to convalidate the contract, or his
waiver or renunciation of his right to annul the contract is clearly manifested
verbally or formally in writing (Pineda, 2000).
• Implied (tacit) – it is the knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right
(NCC, Art. 1393).
EFFECTS OF RATIFICATION
• Ratification cleanses the contract from all its defects from the moment it was
constituted, thereby extinguishing the action to annul a voidable contract. It
results therefore that after a contract is validly ratified, no action to annul the
same can be maintained based upon defects relating to its original validity
(Rabuya, 2017).
VOIDABLE VS. RESCISSIBLE
CONTRACTS
BASIS VOIDABLE RESCISSIBLE
As to the susceptibility of ratification Susceptible of ratification Not susceptible of ratification

As to whether a sanction or a remedy It is a sanction It is a remedy

As to who can avail the remedies Only parties to the contract can assail it Third persons who are affected may file the action

As to the kind of action It is a principal action It is a subsidiary action

As to the kind of defect present Defect is intrinsic Defect is external
As to the source of defect Vitiated consent makes the contract voidable The damage or prejudice suffered by one of the
contracting parties or a third person makes the
contract rescissible

As to the necessity of damage Damage is immaterial Damage / prejudice is material

As to the source of remedy Annulability of the contract is based on law Rescissibility of the contract is based on equity

As to the kind of interest the predominates Public interest predominates Private interest predominates

As to the susceptibility of ratification Susceptible of ratification Not susceptible of ratification

As to whether a sanction or a remedy It is a sanction It is a remedy