UNIVERSITY OF NUEVA CACERES

COLLEGE OF BUSINESS AND ACCOUNTANCY

MADBOLIVAR

Contracts

Concepts and classification

Contract - A contract is a meeting of the minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.
CLASSIFICATION OF CONTRACTS
(1) To their subject matter
a. Things, e.g. sale, deposit
b. Services, e.g. agency
(2) To formation
a. Consensual – consent is sufficient to perfect the contract [Art. 1315]
b. Real – delivery, actual or constructive, is required in addition to consent [Art.1316]
c. Solemn or formal – where special formalities are required for perfection
(3) To relation to other contracts
a. Principal – may exist alone; e.g. lease
b. Accessory – depends on another contract for its existence, e.g. guaranty
c. Preparatory – a preliminary step towards the celebration of a subsequent contract; e.g. agency
(4) To form
a. Common or informal – may be entered into in whatever form as long as there is consent, object
and cause
b. Special or formal – required by law to be in certain specified form
(5) To cause/by equivalence of prestations
a. Onerous – there is an exchange of correlative values
b. Remuneratory – where the outstanding prestation is premised upon services or benefits already
received
c. Gratuitous – where no correlative prestation is received by one party
(6) To purpose
a. Transfer of ownership, e.g. sale
b. Conveyance of Use, e.g. commodatum
c. Rendition of Service, e.g. agency
(7) To time of fulfillment
a. Executed – where the obligations are fulfilled at the time the contract is entered into
b. Executory – where fulfillment of obligations does not take place at the time the contract is made
(8) To risk
a. Commutative – fulfillment is predetermined in advance
b. Aleatory – fulfillment is dependent upon chance
(9) To the nature of the vinculum produced
a. Unilateral – only one party is bound
by the prestation, e.g. commodatum

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b. Bilateral (synallagmatic)- both parties are bound by reciprocal prestations, e.g. sale
All contracts are bilateral in the consent, but not all are bilateral in effects.
(10) To their designation/name
a. Nominate – where the law gives the contract a special designation or particular name; e.g.
deposit
b. Innominate – where the contract has no special name
(i) Do ut des (I give so that you may give)
(ii) Do ut facias (I give so that you may do)
(iii) Facio ut facias (I do so that you may do)
(iv) Facio ut des (I do so that you may give)

PRINCIPAL CHARACTERISTICS OF CONTRACTS (MARCO)

1. MUTUALITY Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
2. AUTONOMY (ALSO FREEDOM TO CONTRACT) 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.
3. RELATIVITY Art. 1311, para. 1. Contracts take effect only between parties, their assigns and
heirs, EXCEPT in case where the rights and obligations arising from the contract are not
transmissible by their (1) nature, (2) by stipulation, or (3) by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.
4. CONSENSUAL 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
consequences which according to their nature may be keeping in good faith, usage, and law.
Exceptions: Real contracts, such as deposit, pledge and commodatum, are not perfected until the
delivery of the object of the obligation [Article 1316].
5. OBLIGATORY FORCE Art. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.

Elements and stages

1) Essential – those without which there is no contract
Consensual Real Solemn
(ordinary) (formal)
Essential Elements Consent, Object, Cause
Additional Delivery of the object Formality prescribed
Elements of the obligation by law
Essential Requisites
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

2) Natural – those which are derived from the nature of the contract and ordinarily accompany the
same; they are presumed to exist unless the contrary is stipulated.

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3) Accidental – those which exist only if stipulated

STAGES OF A CONTRACT
(1) Preparation (conception or “generation”)– when negotiations are in progress
(2) Perfection (or birth) – when the parties come to an agreement
(3) Consummation (or death) - when the contract is fully executed

Freedom to contract and limitation

Contracting parties may establish any agreement, term, and condition they may deem advisable,
provided they are not contrary to law, morals or public policy. The right to enter into lawful
contracts constitutes one of the liberties guaranteed by the Constitution. It cannot be struck down or
arbitrarily interfered with without violating the freedom to enter into lawful contracts.
Special disqualifications in freedom to contract
1. Art. 87, FC: Every donation or grant of gratuitous advantage, direct or indirect, between the
spouses during the marriage shall be void, except moderate gifts which the spouses may give each
other on the occasion of any family rejoicing. The prohibition shall also apply to persons living
together as husband and wife without a valid marriage.
2. Art. 1490, CC: The husband and the wife cannot sell property to each other, except: (1) When a
separation of property was agreed upon in the marriage settlements; or (2) When there has been a
judicial separation of property under Article 191.
3. Art. 1491, CC The following persons cannot acquire by purchase, even at a public or judicial
auction, either in person or through the mediation of another:
(1) The guardian, the property of the person or persons who may be under his guardianship;
(2) Agents, the property whose administration or sale may have been entrusted to them, unless the
consent of the principal has been given;
(3) Executors and administrators, the property of the estate under administration;
(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any
government-owned or controlled corporation, or institution, the administration of which has been
entrusted to them; this provision shall apply to judges and government experts who, in any manner
whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers
and employees connected with the administration of justice, the property and rights in litigation or
levied upon an execution before the court within whose jurisdiction or territory they exercise their
respective functions; this prohibition includes the act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights which may be the object of any litigation in which
they may take part by virtue of their profession.

Limitations to stipulations/what not to stipulate:

1. Contrary to Law
a. Pactum commisorium – automatic foreclosure. The creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
b. A stipulation which excludes one or more partners from any share in the profits or losses is void.
c. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
2. Contrary to morals
3. Contrary to good customs
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4. Contrary to public order
5. Contrary to public policy

Persons bound
RELATIVITY Art. 1311, para. 1. Contracts take effect only between parties, their assigns and
heirs, EXCEPT in case where the rights and obligations arising from the contract are not
transmissible by their (1) nature, (2) by stipulation, or (3) by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.

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 in 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.

Exceptions to Relativity (Contracts may bind and affect strangers in the ff. cases):
1. Stipulations Pour Autrui - If a contract should contain some stipulation in favor of a third person,
he may demand its fulfillment, provided:
i. He communicated his acceptance to the obligor before its revocation (by the original parties).
ii. The contracting parties must have clearly and deliberately conferred a favor upon the third
person (A mere incidental benefit or interest of a person is not sufficient).
iii. The stipulation favoring the third person is only a part of the contract.
iv. No relation of agency exists between any of the parties and the third person favored.

Consent
CONSENT- The meeting of the minds of the parties on the subject matter and cause of the
contract.

Capacitated persons
Persons incapacitated to give consent
(1) Minors, EXCEPT—
a. For necessaries
b. Where the minor actively misrepresents his age (estoppel)
(2) Insane or demented persons, UNLESS they contract during a lucid interval.
(3) Deaf-mutes who do not know how to read AND write.

Persons disqualified to contract

(1) Those under civil interdiction for transactions inter vivos.
(2) Undischarged insolvents
(3) Husband and wife cannot donate to each other [Art. 123, FC], nor sell to each other if the
marriage is under the regime of Absolute Community of Property
(4) The ff. cannot purchase, whether in public or private sale:
Prohibited Party Subject
Guardian Property of the ward

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Agent Property of the Principal
Executors and Administrators Property under administration
Public Officers Property under their administration
Justices, judges, prosecutors, clerks of court, Property attached in litigation
lawyers

Requisites
Consent
Requisites:
(1) It must be manifested by the concurrence of the offer and acceptance.
(2) The contracting parties must possess the necessary legal capacity.
(3) It must be intelligent, free, spontaneous, and real (not vitiated)

A contract is perfected by mere consent. From the moment of a meeting of the offer and the
acceptance upon the object and the cause that would constitute the contract, consent arises.
However, “the offer must be certain” and “the acceptance seasonable and absolute; if qualified, the
acceptance would merely constitute a counteroffer.

Offer
A unilateral proposition which one party makes to the other for the celebration of the contract.
Requisites of an Offer:
(1) Definite
(2) Intentional
(3) Complete

Invitation to make offers (advertisements)

(1) Business advertisements of things for sale are NOT definite offers, just invitations to make an
offer, UNLESS the contrary appears.
(2) Advertisements for bidders are invitations to make proposals, the advertiser is NOT bound to
accept the lowest or highest bid; UNLESS the contrary appears. The bidder is the offeror.
(3) Statements of intention: no contract results even if accepted.

Acceptance- To produce a contract, the acceptance must not qualify the terms of the offer. It is
necessary that the acceptance be unequivocal and unconditional, and the acceptance and the
proposition shall be without any variation whatsoever; and any modification or variation from the
terms of the offer annuls the latter and frees the offeror.
Requisites of acceptance:
(1) Unqualified and unconditional, i.e. it must conform with all the terms of the offer, otherwise it
is a counter-offer
(2) Communicated to the offeror and learned by him. If made through an agent, the offer is
accepted from the time the acceptance is communicated to such agent.
(3) May be express/implied, but is not presumed

Cognition Theory

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Acceptance made by a letter or telegram does not bind the offeror 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.

Option Contract
A preparatory contract in which one party grants to the other, for a fixed period, the option to
decide whether or not to enter into a principal contract.

With consideration Without consideration

Offeror cannot unilaterally withdraw Offeror may withdraw by communicating
his offer. withdrawal to the offeree before acceptance.

Vices of consent
A contract where consent is given through
a. Mistake
b. Violence
c. Intimidation
d. Undue influence
e. Fraud
is voidable. [Art. 1330]
Mistake
Inadvertent and excusable disregard of a circumstance material to the contract. In order that
mistake may invalidate consent, it 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.
There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object
of the contract.

Violence
• Serious or irresistible force used to extort consent.
Requisites:
(1) One party is compelled to give his consent by a reasonable and wellgrounded fear of an evil;
(2) The evil must be imminent and grave;
(3) The evil must be upon his person or property, spouse, descendants or ascendants;
(4) The evil must be unjust.
If a contract is signed merely because of “fear of displeasing persons to whom obedience and
respect are due”, the contract is still valid, for by itself, reverential fear is not wrong.

Intimidation
One of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent
and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in
mind.

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 Violence Intimidation
Physical compulsion Moral compulsion
External or prevents the will to manifest itself Internal or induces the performance of an act

Undue Influence
When a person takes improper advantage of his power over the will of another, depriving the latter
of a reasonable freedom of choice.
Requisites:
(1) Improper advantage
(2) Power over the will of another
(3) Deprivation of the latter’s will of a reasonable freedom of choice

Test of Undue Influence: Whether or not the influence exerted has so overpowered or subjugates
the mind of a contracting party as to destroy his free agency, making him express the will of
another rather than his own.

Fraud
When, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.
In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Dolo incidente (Incidental fraud,Article 1344)

Those which are not serious in character and without which the other party would still have entered
into the contract.
Dolo causante (Causal fraud)
Determines or is the essential cause of the consent, while dolo incidente refers only to some
particular or accident of the obligation. The effects of dolo causante are nullity of the contract and
indemnification of damages, while dolo incidente obliges the person employing it to pay damages.

Fraud to vitiate consent must fulfill two conditions

(1) The fraud must be dolo causante or it must be fraud in obtaining the consent of the party. The
deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily
prudent person into error; that which cannot deceive a prudent person cannot be a ground for
nullity. The circumstances of each case should be considered, taking into account the personal
conditions of the victim.
(2) The fraud must be proven by clear and convincing evidence and not merely by a preponderance
thereof.

Objects of contracts The subject matter; the thing, right or service which is the subject matter
of the obligation arising from the contract.
Requisites
(1) Within the commerce of men

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(2) Not legally or physically impossible
(3) In existence or capable of coming into existence
(4) Determinate or determinable, without the need of a new contract between the parties

All things or services may be the object of contracts, EXCEPT:

(1) Things which are outside the commerce of men
(2) Intransmissible rights
(3) Future inheritance except in cases authorized by law
(4) Impossible things or services
(5) Objects which are indeterminable as to their kind, the genus should be expressed

A FUTURE THING may be the object of a contract. Such contract may be interpreted as a:
a) Conditional contract, where its efficacy should depend upon the future existence of the thing.
b) Aleatory contract, where one of the contracting parties assumes the risk that the thing will never
come into existence, e.g. insurance.

Considerations of contracts
Also called Cause- The essential and impelling reason why a party assumes an obligation. Motive,
on the other hand, is the particular reason for a contracting party which does not affect the other.
Requisites:
(1) Exists at the time of the contract is entered into.
(2) Lawful.
(3) True or real

Formalities of contracts
General Rule: Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present.
Exceptions:
(1) When the law requires that a contract be in some form in order that it may be valid or
enforceable [Art. 1356, par. 2]
(2) When the law requires that a contract be proved in a certain way to be enforceable (Statute of
Frauds) [Art. 1356, par. 2]
(3) When the law requires a contract to be in some form for convenience [Art. 1357 and 1358]

KINDS OF FORMALITIES REQUIRED BY LAW

FOR THE VALIDITY OF CONTRACTS (SOLEMN CONTRACTS)
Formal or Solemn Contract Special Form Required by Law
Donations of Immovables Must be in a public instrument [Art. 749]
Donations of Movables Must be in a written contract if the donation
exceeds P500 [Art. 748]
Partnerships where real property is Must be in public instrument; otherwise the
contributed contract of partnership is void [Art. 1771, 1773]
Contracts of antichresis The principal loan and the interest, if any, must be
specified in writing; otherwise, the contract of

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 antichresis is void [Art. 2134]
Agency to sell real property or any Authority of the agent must be in writing;
interest therein otherwise, the sale is null and void [Art. 1874]
Stipulation to pay interest on loans, Must be expressly made in writing [Art. 1956]
interest for the use of money
Stipulation limiting common carrier’s Must be (1) in writing, signed by the shipper or
duty of extraordinary diligence to owner; (2) supported by a valuable consideration;
ordinary diligence and (3) reasonable, just, and not contrary to public
policy [Art. 1744]
Chattel mortgage Must be recorded in Chattel Mortgage Register
[Art. 2140]
Transfer of large cattle Requires transfer of the certificate of registration
[Rev. Adm. Code, Sec. 523]

FOR THE PURPOSE OF PROVING THE EXISTENCE OF THE CONTRACT

(AD PROBATIONEM/ STATUTE OF FRAUDS)
This article speaks of contracts that cannot be proved except by written note or memorandum,
unless the party charged waives the objection.

This article applies to executory contracts only.

Art. 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.

FOR THE EFFECTIVITY OF THE CONTRACT AGAINST THIRD PERSONS

Art. 1358, Civil Code. The following must appear in a public document:

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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 a governed by Articles 1403, No. 2, and 1405;
The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership
of gains;
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;
The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403,
No. 2 and 1405.

Article 1358 is only needed for convenience, not validity or enforceability. Registration of the
instrument only adversely affects third parties

Interpretation and reformation of contracts

Reformation – remedy in equity by means of which a written instrument is made or construed so as

to express or conform to the real intention of the parties when some error or mistake has been
committed.
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.

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.

1.2.10 Defective Contracts

1.2.10.1 Recissible

1.2.10.2 Voidable
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1.2.10.3 Unenforceable

1.2.10.4 Void
Distinctions among Defective Contracts
Rescissible Voidable Unenforceable Void Contract
Contract Contract Contract
As to Validity Valid and Valid and Valid but Invalid
binding until binding until unenforceable by
rescinded annulled court action
As to Legal Action for Action for None Action for
Remedy to Rescission Annulment Declaration of
injured party Nullity
Prescriptive 4 years 4 years N/A No Prescriptive
period of Action Period
Capability for Not subject to May be May be ratified 1. Those illegal
Ratification ratification but ratified per se can never
which will clean may be be ratified
the defects of the convalidated by 2. The
contract prescription declaration of
nullity of those
which are not
illegal per se
may be barred
by estoppel or
laches in
exceptional
cases.
Examples (1) Those which (1) Those (1) Unauthorized (1) Those
are entered into where one of contracts – those whose cause,
by guardians the parties is entered into by one object or
whenever the incapable of who has no purpose is
wards whom giving consent authority or legal contrary to law,
they represent to a contract; representation, or morals, good
suffer lesion by who has acted customs, public
more than one- (2) Those beyond his powers order or public
fourth of the where the policy;
value of the consent is (2) Those which did
things which are vitiated by not comply with the (2) Those which
the object mistake, Statute of Frauds are absolutely
thereof; violence, simulated or
intimidation, (3) Those where fictitious;
(2) Those agreed undue both parties are
upon in influence or incapable of giving (3) Those

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representation of fraud. consent to a whose cause or
absentees, if the contract. object did not
latter suffer more exist at the time
than one-fourth of the
of the value of transaction;
the things which
are the object (4) Those
thereof; whose object is
outside the
(3) Those commerce of
undertaken in men;
fraud of creditors
when the latter (5) Those which
cannot in any impossible
other manner service;
collect the claims
due them; contemplate

(4) Those which an

refer to things
under litigation if (6) Those where
they have been the intention of
entered into by the parties
the defendant relative to the
without the principal object
knowledge and of the contract
approval of the cannot be
litigants or of ascertained;
competent
judicial (7) Those
authority; expressly
prohibited or
(5) Payments declared void
made in a state of by law
insolvency of
obligations to
whose fulfillment
the debtor could
not be compelled
at the time they
were effected.

(6) All contracts

by virtue of which

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the debtor
alienates property
by gratuitous title
when the donor
did not reserve
sufficient
property to pay all
debts contracted
before the
donation.

(7) Alienations by
onerous title
when made by
persons against
whom some
judgment has
been rendered in
any instance or
some writ of
attachment has
been issued.

(8) Contacts
entered into by an
insolvent person,
if he does not
retain sufficient
property to pay
his obligations.

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