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PART III

General Provisions on Contracts

Learning Objectives:

After studying this lesson, you should:1. know the definition of contract2. learn the different classifications of contracts;3. know the elements of contracts; and4. that contracts take effect only between parties and its exceptions.

The classifications of contracts summarizes those types of contracts that may be freely agreed upon as long as they are not contrary to law, morals, good customs, public order or public policy.

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 service. (1254a)

Contracts, Defined

The above article defines the term Contract. In a contract, one or more persons bind themselves with respect to another or reciprocally, to the fulfillment of a presentation to give, to do or not to do.

Elements of Contract:1. Essential elements – those elements without which

there can be no valid contract. This element are consent, object or subject matter and cause or consideration

2. Natural elements – those elements which are found in a contract by its nature and presumed by law to exist, such

as Warranty of hidden defects or eviction in contract of sale.

3. Accidental elements - those which exist by virtue of an agreement for the purpose of expanding, limiting, or modifying a contract. Such accidental elements are condition, clauses, terms, modes of payment, or penalties.

Stages of A Contract:1. Preparatory or conception – process of

formation such as bargaining, negotiation to arrive at a define contract.

2. Perfection or birth – there is now a meeting of minds to arrive at a definite agreement as to the subject matter, cause or consideration, terms and conditions of contract.

3. Consumption or death – which is the fulfillment or performance of the terms and conditions agreed upon in the contract may be said to have been fully accomplished or executed.

Characteristics of Contracts:1. Freedom to contract – they may establish

terms and conditions as they may deem convenient.

2. Relativity – it is binding only upon the parties and their successors.

3. Obligatory force – it constitutes the law as between the parties.

4. Mutuality – its validity and performance cannot be left to the wil of only one of the parties.

Classification of A Contract: (FROM)1. As to perfection a. Consensual – one which is perfected by mere

consent (Art. 1315 b. Real Contract – perfected by mere consent and by the

delivery of the object or subject matter. Ex. Deposit, pledge, or commodatum.

2. As to dependence to other contract. a. Principal – one which can stand alone. Ex. A

contract of sale, lease. b. Accessory – those which are dependent upon another contract. Ex. Contract of mortgage, pledge of guaranty. c. Preparatory – those which is created in order that a future transaction or contract may be entered into by te parties. Ex. Contract of partnership or agency.

3. According to name or designation a. Nominate – one which has particular name or

designation such as sale, agency, etc. b. Innominate – those without particular name.

4. According to the nature of obligation a. Unilateral – where only one ha an obligation to

perform. Ex. Contract of donation, commodation. b. Bilateral – where both parties have reciprocal

obligation to perform. Ex. Sale.

5. According to risk involved a. Commutative - where there is an exchange of values,

such as lease. b. Aleatory - one which the fulfillment of the obligation

depends upon chance. Ex. Contract of insurance.

6. According to cause a. Onerous – one which imposes valuable consideration

such as sale, mortgage. b. Gratuitous – one which one of the parties does not

receive any valuable consideration, such as commodatum.

7. According to form a. Oral – by word of mouth of the parties b. Written – the agreement which is reduced

in writing which may be public or private or private document

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)

Contract Binds by Both Parties

ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a)

Contracts entered by and between the parties mush bind both parties in order that it can be enforced against each other. This is also known as “mutuality of contract”. Hence, its validity or compliance cannot be left to the will of one of them. This principle is based on the essential equality of the parties. It is elementary rule that no party can renounce or violate the law of the contract without the consent of the other. (11 Manresa 380)

Example, Gaya and Laura entered into a contract to sell whereby Gaya binds herself to sell her only parcel of land to Laura if Gaya decides to leave for States. The contract is void because the fulfillment of the condition depends on the will of Gaya.

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.

ART. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances.

Determination of Performance by Third Person

As a rule, compliance with a contract cannot be left to the will of one of the contracting parties. However, the determination of its performance may be left to a third person after it has been made known to both contracting parties. Provided, further, the parties are not bound by the determination if it is evidently inequitable or unjust when the third person acted in bad faith or by mistake, the courts shall decide what is equitable under the circumstances.

Example, Gaya sold her parcel of land to Laura. It was agreed that Maya, a real estate appraiser would be the one to determine the reasonable price of the land. Maya, then, fixed the price after considering the factors affecting the value of the land, and informing both contracting party that the decision is just and suitable. If the decision made by Maya is manifestly inequitable, the court may be called upon to decide what is equitable.

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 of the property he perceived from the decedent.

If a contact should contain some stipulation in favor of 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. (1257a)

Cases Where Third person May Be Affected By a Contract

1. In determining the performance of both parties (Art. 1309).

2. In contracts containing a stipulation in favor of a third person (Art. 1311).

3. In contracts creating real rights (Art. 1312).

4. In contracts entered into to defraud creditor (Art. 1313).

5. In contracts which have been violated at the inducement of the third person (Art. 314).

Example, Gaya mortgaged her parcel of land in favor of Laura as collateral for her debt. The mortgage is duly registered. Later on, Gaya sold the same land to Tito. In this case, Tito bought the land subject to the mortgage constituted thereon. Tito, although a stranger in the mortgage, being a real right follows the property on the right of Laura to the mortgage.

Forms of Contracts Art. 1356. Contracts shall be

obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

Meaning of Form of Contracts

Forms of a contract refer to the manner in which a contract is executed or manifested

Rules Regarding Form of Contracts

General Rule – Contracts are binding and therefore, enforceable reciprocally by the contracting parties, whatever may be the form in which the contact has been entered into to provided all the three essential requisites (consent, object, cause) for their validity are present.

Reformation of InstrumentsArt. 1359. When, there having been a

meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.

Meaning of Reformation

Reformation is that remedy by means of which a written instrument is amended or rectified so as to express or conform to the real agreement or intention of the parties when by reason of mistake, fraud, inequitable conduct, or accident the instrument fails to express such an agreement or intention.

Requisites of Reformation1. There is a meeting of the minds of the

parties to the contract;

2. The written instrument does not express the true agreement or intention of the parties;

3. The failure to express the true intention is due to mistake, fraud, inequitable conduct or accident;

4. The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings; and

5. There is clear and convincing evidence of the mistake, fraud, inequitable conduct or accident.

Example, Arvin sold his land to Ryan. It was greed that the sale will include all the improvements. However, the contract was signed by the parties, states that the land is being sold excluding the improvements thereon. In this case, the remedy is reformation, because there has been a meeting of minds.

Cases When Reformation Not Allowed1. Simple donation inter vivos where no

condition is imposed – Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (Art. 725). Donation is strictly personal andfree act so that if the intend of the donor that the donation will take effect during his lifetime, it is a donation inter vivos, while the opposite of inter vivos is donation mortis causa which takes effect after the donor’s death.

2. Wills – A will is an act whereby a person is permitted with a formalities prescribed by law to control to a certain degree the disposition of his estate, to take effect after his death.

3. When the real agreement is void – If the real agreement is void, thre is nothing to reform.

4. When one party ahs brought an action to enforce the instrument – (Art. 1367) When a party brings an action to enforce the contract, he admits its validity and that it expresses the true intention of the parties. The bringing of the action is thus inconsistent with reformation

Interpretation Of Contracts

Art. 1370. 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. (1281)

Meaning of Interpretation of a contract

Interpretation of a contract is the determination of the meaning of the terms of word used by the parties in their contact.

If the terms of a contract are clear and unequivocal, the parties are bound thereby according to the literal sense of their stipulations.

Example, a contract was executed by A and B, the contract recites that is a sale of land belongs to A for P500. The terms of the contract are clear and it does not appear that the intention of the parties is contrary to the literal meaning of said terms

Cause of Contracts

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

Meaning of Cause

Cause is the essential or more proximate purpose which the contracting parties have in view at the time of entering into a contract. (8Manresa697)

It is the Civil Code term for consideration in Anglo American or Common Law.

Classification of Contracts According to Cause1. ONEROUS – the cause of which for each

contracting parties is the pre-station or promise of a thing or service of the other. Ex. Sale, lease of things.

2. REMUNERATORY - the cause is the service or benefit which is remunerated. Ex. A rendered service as the lawyer-counsel of B who agreed to pay P10, 000 for said services.

3. GRATUTIOUS – the cause which is the mere liberality of the benefactor or giver. Ex. X donated a parcel of land to Y. The cause is the liberality of X, the done or benefactor.

Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)

Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)

Requisites of Cause1. it must exist at the time the contract is

entered into. (Art. 1352)

2. it must be lawful; (Ibid) and

3. it must be true or real. (Art 1353)

Effect of Absence of Cause A contract without cause or with an

unlawful cause, according to this article, produces no effect whatever. Like, for example, an absolutely simulated contract produces no effect because there is no cause at all.

Effect of Inadequacy of Cause

Inadequacy of cause does not invalidate a contact. (Art. 1355). Illegality of cause implies that there is a cause but the same is unlawful or illegal. By falsity of Cause is meant that the contract states a valid consideration but such statement is not true

PART IV

DEFECTIVE CONTRACTS

There are four kinds of defective contracts:1. Rescissible contracts (Chapter 6);

2. Voidable contracts (Chapter 7);

3. Unenforceable Contracts (Chapter 8); and

4. Void or inexistent contracts (Chapter 9)

Rescissible contracts

Contracts are valid because all the essential requisites of a contract exist but by reason of injury or damage to one of the parties or to third persons, such as creditors, the contract may be rescinded.

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Meaning of Rescission

Rescission is a remedy granted by law to the contracting parties and sometimes even to third person in order to secure reparation of damages caused them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of said contract. (8Manresa 748)

Requisites of Rescission1. The contract must be validly agreed

upon;

2. There must be lesion on pecuniary prejudice to one of the parties or to a third person;

3. The rescission must be based upon a case especially provided by law;

4. There must be no other legal remedy to obtain reparation for the damage;

5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract.

6. The object of the contract must not legally be in the possession of third person who did not act in bad faith;

7. The period for filing the action for rescission must not have prescribed

Art. 1381. The following contracts are rescissible:`(1) Those which are entered into by guardians whenever

the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission. (1291a)

Voidable Contracts Art. 1390. The following contracts are

voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.

Meaning of Voidable Contracts

Voidable or annullable contracts are those which possess all the essential requisites of valid contract but one of the parties is incapable of giving consent, or consent is vitiate by mistake, violence, intimidation, undue influence of fraud.

Meaning of Annulment

Annulment is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy of a contract based on defect or vice in the consent of one of the contracting parties in order to restore them to their original position in which there were before contract was executed.

Characteristics of Voidable Contracts1. The defect in the contract consists in the

vitiation of consent of one of the contracting parties;

2. The contract is binding until annulled by a competent court;

3. The contract is susceptible of convalidation by ratification or prescription;

4. The defect or voidable character of the contract cannot be invoked by third persons.

Art. 1391. The action for annulment shall be brought within four years. This period shall begin:

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. (1301a)

Period for Filing Action for Annulment

The period within which the action for annulment shall be brought within four(4)

years from:

1. The time the intimidation, violence or undue influence ceases;

2. The time of the discovery of mistake or fraud; and

3. The time guardianship ceases, in cases of contracts entered into by incapacipated persons.

Unenforceable ContractsArt. 1403. The following contracts are

unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive 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 purchase money; but when a sale is made by auction and 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;

(e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

(f) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Meaning of Unenforceable Contracts

Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provide by law until unless they are ratified according to law.

They are contracts either entered into without or in excess of authority or do not comply with the statue of frauds or both of the contracting parties do not possess the required legal capacity.

Classes of Unenforceable Contracts

1. Those entered into the same of another person by one without authority or in excess of his authority;

2. Those which do not comply with the Statue of Frauds; and

3. Those where both parties are incapable of giving consent

Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book.

Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

Void or Inexistent ContractsArt. 1409. The following contracts are inexistent

and void from the beginning:

1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

2) Those which are absolutely simulated or fictitious;

3) Those whose cause or object did not exist at the time of the transaction;

4) Those whose object is outside the commerce of men;

5) Those which contemplate an impossible service;

6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Meaning of Void or Inexistent Contracts

1. it cannot be ratified. (Art 1409)2. the right to set up the defense of

illegality cannot be waived.3. the action or defense for the

declaration of its inexistence does not prescribed. (art. 1410)

4. the defense of illegality is not available to third persons whose interests are not directly affected; and

5. it cannot give rise to a valid contract. (Art. 1422)

Instances of Void or Inexistence Contract

There is no need for a detail discussion of these different kinds of void inexistent contracts considering that they have been discussed in previous chapters of this book.

Void of inexistent contracts does not prescribe. Mere lapse of time cannot give effect to contracts which are null and void.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305)

Meaning of Pari Delicto

Pari Delicto means both parties are equally at fault or are equally guilty. The principle of pari delicto, means that when the defect of avoid contracts consists in the illegality of the cause or object f the contract and both parties are at fault or in a pari delicto, the law refuse them every remedy, or the parties have no action against each other.

Illegal contract with Criminal Offense1. When both parties are in pari delicto –

Rules a. the parties shall have no action

against each other; b. both shall be prosecuted; and c. the things of the price of the contract,

shall be confiscated in favor of the government.

2. Where only one party is guilty. The innocent one or less guilty may claim

what he has given and shall not be bound to comply with his promise

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306)

Effect of Illegal Terms in a Contract

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

In case a contract containing an illegal orlegal terms, the law allows the legal terms to be enforced if it can be enforced if it can be separated from the illegal ones.

Persons Entitled to Raise Defense of Illegality or Nullity

As general rule, contracts bind only the contracting parties, their heirs or assigns. Corollary to this rule, the illegality of a contract maybe set up as a defense only by contracting parties or by parties whose interest are affect by the contracts as a defense

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