PART TWO: CONTRACTS

I. Introduction

A. Concept and Definition (Art. 1305)

B. Classification of Contracts

1. According to subject matter: things or services

2. According to name: nominate and innominate contracts (Art. 1307)
3. According to perfection: by mere consent (Art. 1315) or by delivery of object
(Art. 1316)
4. According to its relation to other contracts: preparatory; principal; or accessory
5. According to form: informal or formal
6. According to purpose
7. According to nature of legal tie created: unilateral, bilateral or reciprocal
8. According to cause: onerous or gratuitous
9. According to risk: commutative or aleatory

C. Characteristics

1. Obligatory Force between the Parties (Art. 1308)

a. General Rule: Freedom to Contract (Art. 1306)

Gabriel v. Monte de Piedad, 71 Phil. 497 (1941)

b. Exceptions:
i. When it is inequitable (Art. 1310)
ii. Special disqualifications:
 Art. 87, Family Code
 Articles 1490 and 1491
 Article 1782
iii. What may not be stipulated
 Contrary to Law
(a) pactum commisorium (Art. 2088)
(b) pactum leonina (Art. 1799)
(c) pactum de non alienado (Art. 2130)
(d) other limitations: Labor Code, Corporation Code
 Contrary to morals
 Contrary to good customs
 Contrary to public order
 Contrary to public policy
c. Effect of contract as to third parties

i. Performance may be determined by third parties (Art. 1309)

ii. When possession of the object of the contract is with a third person (Art. 1312)
iii. Creditors of contracting parties (Art 1313, 1177, 1381)
iv. Interference by third parties (Art. 1314)

2. Mutuality (Art. 1308 to 1310; 1473)

3. Relativity or Privity of Contracts (Art. 1311)

a. Contracts take effect only between the parties, their assigns and heirs

b. No one may contract in the name of another (Art. 1317)

c. Stipulations in favor of third persons (Art. 1311, par. 2)

II. Essential Requisites of Contracts

A. Consent: Requisites (Art. 1319)

1. Perfection of Contract: Offer and Acceptance

a. Offer
 must be certain (Art. 1319)
 what may be fixed by the offeror (At. 1321)
 when made through an agent (Art. 1322)
 when offer becomes ineffective (Art. 1323)
 business advertisements of things for sale (Art. 1325)
 advertisements for bidders (Art. 1326)

b. Acceptance
 must be absolute (Art. 1319)
 kinds:
o express (Art. 1320)
o implied (Art. 1320)
o qualified (Art. 1319)

 period of acceptance (Art. 1324)

 option contract (Art. 1324)

c. Termination of Offer

d. Perfection of Contract
 Four theories when contract is perfected:
o Manifestation theory
o Expedition theory
o Reception theory
o Cognition theory (Art. 1319 [2])

2. Legal Capacity of the Parties

a. Minors, insane or demented persons, and deaf‐mutes who do not

know how to write (Art. 1327)
b. When offer or acceptance is made during a lucid interval, intoxication,
during hypnotic spell (Art. 1328)
c. Corporations (Sections 23 and 36, Corporation Code)
3. Vices of Consent: Consent must be Intelligent, Free, Spontaneous and
Real (Art. 1330 to 1346)
a. Mistake or Error
i. Mistake of Fact
 As to substance of the object
 As to principal conditions
 As to identity or qualifications of the parties
 As to quantity, as distinguished from simple mistake of account

ii. Mistake or Error of Law

 General Rule: Ignorance of the law excuses no one (Art. 3)
 Exception: Mutual Error of Law (Art. 1334)

iii. Mistake when one party is unable to read (Art. 1332)

Dumasug v. Modelo, 34 Phil 252 (1916)

Hemedes v. Court of Appeals, 316 SCRA 347(1990)

iv. Inexcusable mistake (Art. 1333)

b. Violence or Intimidation (Art. 1335)

Martinez v. HSBC, 15 Phil. 252 (1910)

Lee v. Court of Appeals, 201 SCRA 405 (1991)

c. Undue Influence (Art. 1337)

d. Fraud or Dolo (Art. 1338)

 Kinds:
i. Dolo causante (Art. 1338)
ii. Dolo incidente (Art. 1344 [2])

Hill v. Veloso, 31 Phil. 161 (1915)

Woodhouse v. Halili, supra.
 Failure to Disclose Facts when there is a duty to reveal them (Art. 1339)

 Usual exaggerations in trade: opportunity to know the facts (Art. 1340)

Trinidad v. Intermediate Appellate Court, 204 SCRA 524 (1991)

 Mere expression of opinion (Art. 1341); Effects (Art. 1344)

Songco v. Sellner, 37 Phil. 254 (1917)

e. Misrepresentation
i. by a third person (Art. 1342)
ii. made in good faith (Art. 1343)
iii. active or passive

Braganza v. Villa Abrille, 105 Phil. 456 (1959)

4. Simulation of Contracts

Suntay v. Court of Appeals, 251 SCRA 430 (1995)

Pangadil et al. v. Court of First Instance, G.R. No. L32437, August 31, 1982
Umali v. Court of Appeals, G.R. No. 89561, September 13, 1990

a. Kinds: Absolute and Relative (Art. 1345)

b. Effects (Art. 1346)

B. Object
 Must be determinate as to its kind (Art. 1379)
 What may NOT be objects of contracts (Art. 1347)

a. All things outside the commerce of man

b. All intransmissible rights
c. Those services which are contrary to law, morals, good customs, public
order, or public policy
d. Future inheritance, except when authorized by law
e. Impossible things or services (Art. 1348)
C. Cause
1. Meaning of Cause (Art. 1350)
a. in onerous contracts
b. in remuneratory contracts
c. in contracts of pure beneficence

2. Distinguished from Motive (Art. 1351)

3. Presumption: Existence and Lawfulness of Cause (Art. 1354)

4. Defective Causes and Effects:

a. Absence of Cause or Unlawful Cause (Art. 1352)
b. Statement of False Cause (Art. 1355)
c. Inadequacy of Cause or Lesion (Art. 1355)

III. Form of Contracts

A. General Rule: Contracts are obligatory in whatever form, provided all essential
requisites are present (Art. 1356)

B. Exception: When the law requires the contract to be in a specific form in order for
it to be valid or enforceable (Art. 1356)

 Kind of formalities required by law:

1. For validity (Articles 748, 749, 1874, 2134, 1771, 1773)
2. To make it effective as to third parties (Articles 1357 and 1358)
3. For purposes of proving existence of contract (Statute of Frauds in Art. 1403)

IV. Interpretation of Contracts

A. Compare with Rules of Statutory Construction

B. Primacy of Intention (Articles 1370, 1372)

C. Determining Intention (Art. 1371)

D. Rules of Contract Interpretation

1. Under the Civil Code

a. When it contains stipulations which admit of several meanings (Art. 1373)

b. When it contains various stipulations, some of which are doubtful (Art. 1374)

c. When it contains words with different meanings (Art. 1375)

d. When it contains ambiguities and omission of stipulations (Art. 1376)

e. With respect to the party who caused the obscurity (Art. 1377)

f. When it is impossible to settle doubts using the above‐cited rules (Art. 1378)
 In gratuitous contracts
 In onerous contracts

g. When doubts are cast upon the principal object so that the true
intention cannot be known (Art. 1378)

2. Under the Rules of Court (Rule 130, Sections 10 to 19)

V. Reformation of Instruments

A. Requisites (Art. 1359)

1. Meeting of the minds

2. True intention of the parties are not expressed in the instrument
3. Failure to express true intention due to mistake, fraud, inequitable conduct, or
accident
B. When Reformation is not allowed (Art. 1366)

C. Implied Ratification (Art. 1367)

D. Who may ask for reformation (Art. 1368)

E. Procedure for reformation (Art. 1369)

VI. Defective Contracts

A. Rescissible Contracts

1. Kinds (Art. 1381)

2. Characteristics
a. The defect consists in injury or damage either to one of the
contracting parties of to a third person
b. Contract is valid before rescission
c. Attack may only be direct on, not collaterally
d. Attack maybe done by contracting party or by a third person who is injured
or defrauded
e. Validated only by prescription and not by ratification

3. Definition (Art. 1380): Distinguished from Rescission in Art. 1191 (Resolution)

Spouses Cannu v. Spouses Galang, G.R. No. 139523, May 26, 2005
Iringan v. Court of Appeals, G.R. No. 129107, September 26, 2001
Rivera v. del Rosario, G.R. No. 144934, January 15, 2004
Equatorial Realty v. Mayfair Theatre, G.R. No. 133879, November 21, 2001

4. Requisites

a. Contract is rescissible

b. Party asking for rescission has no other legal means to obtain

reparation (Art. 1383)

Union Insurance Society of Canton v. Court of Appeals, G.R. No. 100319,

August 8, 1996
c. He is able to return what he may be obliged to restore if rescission is
granted (Art. 1385)

Rivera v. del Rosario, G.R. No. 144934, January 15, 2004

5. Effect of Rescission (Art. 1385)

a. As to third persons who acquired thing in good faith (Art. 1385 [2] and [3]
b. As to third persons who acquired things in bad faith, when alienation was in
fraud of creditors (Art. 1388)

6. Extent of Rescission (Art. 1387)

Siguan v. Lim, 318 SCRA 725 (1999)

7. Badges of Fraud (Art. 1387)

Oria v. McMicking, 21 Phil, 243 (1912)

Siguan v. Lim, 318 SCRA 725 (1999)
Suntay v. Court of Appeals, 251 SCRA 430 (1995)
China Banking Corporation v. Court of Appeals, G.R. No. 129644, March 7, 2000
MR Holdings Limited v. Carlos, G.R. No. 138104, April 11, 2002

B. Voidable or Annullable Contracts

1. Kinds (Art 1390)

2. Characteristics
a. There is a defect in consent of one of the contracting parties
b. Binding until annulled by a competent court
c. May be validated by ratification or prescription

Felipe v. Heirs of Aldon, 120 SCRA 628 (1983)

3. Annulment

a. Distinguished from Rescission

b. Grounds (Art. 1390)
c. Who May or May Not Institute Action for Annulment (Art. 1397)

Singsong v. Isabela Sawmill, 88 SCRA 623 (1979)

Samahan ng Magsasaka sa San Josep v. Valisno, 430 SCRA 629 (2004)
Malabanan v. Gaw Ching, 181 SCRA 84 (1990)
Armentia v. Patriarca, 18 SCRA 1253 (1966)
d. Prescription (Art. 1391)

Carantes v. Court of Appeals, 76 SCRA 514 (514)

e. Effect: Mutual Restitution (Art. 1398 and 1402)

Cadwallader & Co. v. Smith, Bell & Co., 7 Phil. 461

(1907) Velarde et al. v. Court of Appeals, 361 SCRA 56
(2001) Ines v. Court of Appeals, 247 SCRA 312 (1995)
Arra Realty Corporation v. Guarantee Development Corporation, 438
SCRA 441 (2004)

i. When on the parties is incapacitated (Art 1399)

Katipunan v. Katipunan, 375 SCRA 199 (2002)

ii. When the thing is lost through the fault of the party obliged to return
the sam (Art. 1400)

f. Extinguishment of Action for Annulment

i. by ratification (Art. 1392)
ii. When the thing is lost through the fault of the person who has the right
to file the action (Art. 1401)

4. Ratification
a. Requisites

i. Contract is voidable
ii. Ratification is made with knowledge that contract is voidable
iii. At the time of ratification, the cause for nullity has already ceased to exist

b. Forms
i. Express or tacit (Art. 1393)
ii. By the parties themselves or by the guardian in behalf of an incapacitated
party (Art. 1394)

c. Effects

i. action to annul is extinguished (Art. 1392)

Uy Soo Lim v. Tan Unchuan, 38 Phil. 552 (1918)

ii. contract is cleansed retroactively from all its defects (Art. 1396)
C. Unenforceable Contracts

1. Characteristics
a. Valid but cannot be enforces by a proper action in court
b. Can be ratified
c. Cannot be assailed by third persons

2. Kinds (Art. 1403)

a. Unauthorized contracts (Art. 1404)

b. Contracts covered by Statute of Frauds

i. Purpose of Statute of Frauds

Asia Production Co. Inc. v. Judge Pano, 205 SCRA 458 (1992)
Western Mindanao Co. v. Medalle, 79 SCRA 703 (1977)
Limketkai & Sons v. Court of Appeals, 250 SCRA 523 (1995)
Babao v. Perez, 102 Phil. 756 (1957)
Reiss v. Memije, 15 Phil. 350 (1910)
Villanueva v. Court of Appeals, 267 SCRA 89 (1997)

ii. How Ratified (Art. 1405)

Philippine National Bank v. Philippine Vegetable Oil Co. 49 Phil. 857 (1927)
Carbonnell v. Poncio et al, 103 Phil. 655 (1958)
First Philippine International Bank v. Court of Appeals, 252 SCRA 259
(196)

iii. Right of the Parties when a Contract is enforceable but a public

document is necessary for its registration (Art. 1406)

c. Contracts executed by parties who are both incapable of giving consent

i. Effect of ratification by the parents or guardian of one of the parties

(Art. 1407)
ii. Effect of ratification by the parents or guardian of both parties (Art. 1407)

D. Void or Inexistent Contracts

1. Characteristics

 Void from the beginning

 Produces no effect whatsoever
 Cannot be ratified (Art. 1409)
Tongoy v. Court of Appeals, 123 SCRA 99 (1983)
Cui v. Arellano, 2 SCRA 205 (1961)
Chavez v. Presidential Commission on Good Government, 307 SCRA 372 (1999)
Guiang v. Court of Appeals, 291 SCRA 372 (1998)
Castillo v. Galvan, 85 SCRA 526 (1978)

2. Kinds

a. Void Contracts

i. Those whose cause, object or purpose is contrary to law, morals,

good customs, public order or public policy

 When the act constitutes a criminal offense (Art. 1411)

 When the act is unlawful but does not constitute a criminal
offense (Art. 1412)
o In pari delicto rule

Menchavez v. Teves, 449 SCRA 380 (2005)

Angel v. Aledo and Modales, 420 SCRA 645 (2004)

 When the purpose is illegal and money is paid or

property delivered therefore (Art. 1414)
 When the contract is illegal and one of the parties is incapable
of giving consent (Art. 1415)

Liguez v. Court of Appeals, 102 Phil. 577 (1957)

Rellosa v. Gaw Cheen Hum, 93 Phil 827 (1953)

 When the agreement is not per se illegal but prohibited

(Art. 1416)

Philippine Banking Corporation v. Lui She, 21 SCRA 52 (1967)

Frenzel v. Catito, 406 SCRA 55 (2003)
Acabal and Nicolas v. Acabal, 454 SCRA 555 (2005)

 When the amount paid exceed the maximum fixed by law

9Art. 1417)
 When by virtue of a contract a labourer undertakes to work
longer than the maximum number of hours of work fixed by law
(Art. 1418)
 When the contract is divisible (Art. 1420)
 When the contract is the direct result of a previousl illegal
contract (Art. 1422)
ii. Those whose object is outside the commerce of man

iii. Those which contemplate an impossible service

iv. Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained

v. Those expressly prohibited by law

b. Inexistent Contracts

i. those which are absolutely simulated or fictitious (Articles 1345 to

1346)
ii. those whose cause or object did not exist at the time of the transaction

3. No Waiver of Defense of Illegality (Art. 1409)

4. Action or Defense for the Declaration of the Inexistence of a Contract

 No prescription period (Art. 1410)
 Not available to third persons not directly affected (At. 1421)
PART THREE: SPECIFIC EXAMPLES OF OBLIGATIONS

Obligations Created by Law

A. Estoppel

1. Definition (Art. 1431)

Kalalo v. Luz, 34 SCRA 337 (1970)

2. Kinds

a. Technical estoppel
i. by record
ii. by deed (Art. 1433)

b. Equitable estoppel or estoppel in pais (Art. 1433)

3. Persons Bound (Art. 1439)

Manila Lodge No. 761 Benevolent and Protective Order of the Elks v. Court
of Appeals, 73 SCRA 168 (1976)

4. Application (Art. 1434 to 1438)

Miguel v. Catalino, 26 SCRA 234 (1969)
Read: Annotation 32 SCRA 542
Mendoza v. Reyes and Court of Appeals, G.R. No. L31618, August 17, 1983

B. Trusts

1. Definition (Art. 1442)

2. Parties (Art. 1440)

a. Trustor
b. Trustee
c. Beneficiary or cestui que trust

Salao v. Salao, 70 SCRA 168 (1976)

3. Kinds (Art. 1441)

a. Express trusts

i. Proof required (Art. 1443)

ii. Form (Art. 1444)
iii. Want of trustee (Art. 1445)
iv. Acceptance by the beneficiary (Art. 1441)
b. Implied Trusts

i. How established (Art 1441)

ii. How proved (Art. 1457)
iii. Specific cases (Art. 1448 to 1456)

Fabian v. Fabian, 22 SCRA 231 (1968)

Bueno v. Reyes, 27 SCRA 1179 (1969)
Tamayo v. Callejo, 46 SCRA 27 (1972)
Heirs of Sanjorjo v. Quijano, G.R. No. 140457, January 19, 2005)
Aznar Brothers Realty Company v. Aying, G.R. No. 144773, May 16, 2005.

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