LAW ON OBLIGATIONS AND CONTRACTS

Midterm Notes

Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the
right granted him by article 1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the
expense of the debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons
who do not have the same interest, he shall be responsible for any fortuitous event until he has
effected the delivery. (1096)

Article 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned. (1097a)

Article 1167. If a person obliged to do something fails to do it, the same shall be executed at his
cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone. (1098)

Obligations To Do; Effects of Breach. — In obligation to do (positive personal obligations), if

the obligor fails to do that which he has obligated himself to do, the obligee can have the
obligation performed or executed at the expense of the former, and, at the same time, demand
for damages by reason of the breach.

It must be observed, however, that the right of the obligee to have the prestation executed at the
expense of the obligor cannot be availed of when such prestation consists of an act where the
personal and special qualification of the obligor is the principal motive for the establishment of
the obligation, as for instance, the talent and prestige of an artist. In such case, there is no other
remedy of the obligee except to proceed against the obligor for damages under Art. 1170 of the
Code. This is because the law recognizes the individual’s freedom or liberty to choose between
doing that which he has promised to do and not doing it.

On the other hand, if there has been a performance of the obligation, but in contravention of the
tenor thereof, the following rights are available to the obligee:

(1) To have the obligation performed or executed at the expense of the obligor;

(2) to ask that what has been poorly done be undone; and

(3) to recover damages because of breach of the obligation.

Ex. collapse of a building

Article 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense. (1099a)
Obligations Not To Do; Effects of Breach. — In obligations not to do (negative personal
obligations), the object of the obligation is fulfilled or realized so long as that which is forbidden
is not done by the obligor.

Remedies: to have it undone at the expense of the obligor in accordance with Art. 1168 and to
ask for damages in accordance with Art. 1170.

It must be noted that in obligations of this type (not to do), delay or mora is not possible
unlike positive obligations. This is so because in negative obligations, the obligation is either
fulfilled or not fulfilled.

There are, however, certain cases where the remedy provided for in Art. 1168 is not available:

1. Effects of the act which is forbidden are definite in character, in which case, even if
it is possible for the obligee to ask that the act be undone at the expense of the obligor,
consequences contrary to the object of the obligation will have been produced which are
permanent in character.
2. Cases where it would be physically or legally impossible to undo what has been done
because of the very nature of the act itself, or because of a provision of the law, or
because of the conflicting rights of third persons.

Note: remedy is damages.

Types of breach:

1. Voluntary
2. Involuntary

When is there Voluntary Breach? When a person is guilty of the following:

1. Delay
2. Fraud
3. Negligence
4. Contravenes the tenor of the contract

When is there an Involuntary breach? It’s when there is a fortuitous event or any act of God.

Breach through Default or Delay (Mora)

Article 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
(4) In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other begins. (1100a)

Article 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins. (1100a)

What is delay? Delay exists when:

Requisites:

1. Obligation is demandable
2. Obligor delays performance
3. Creditor requires the performance judicially or extrajudicially

Note:

In obligations to give and to do, default is incurred at the time the creditor demands from the
debtor the fulfillment of the obligation; demand can be judicial or extrajudicial.

Judicial demand: creditor files a complaint in court

Extrajudicial demand: creditor demands fulfillment of the obligation orally or in writing.

Usually, before a court is filed, an extrajudicially demand by means of a demand letter is first
sent to the debtor.

General Rule: Before delay sets in, there must be demand first. Demand may be judicial
or extrajudicial.

Exception: Demand is not necessary when:

(1) When the obligation or the law expressly so declare; or

Note:There must be an equivocal statement that demand is not necessary. In the contract,
there must be “demand is not necessary in order that the debtor shall incur in delay”. If only a
date is stated, demand is still required.
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract;

Note: Time is of the essence. It must be established that time, when obligation shall be fulfilled,
was a controlling motive. Ex. when there is an exhibition and the objects of the contract need to
be delivered on a specific date in line with the date of the exhibition.

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.

(4) In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other begins. (1100a)

Effect of Default: Where there is default, the party who is in default will be liable for damages.
The liability for damages will subsist even if the object has been lost or destroyed.

If there is delay in the payment of a sum of money damages will be in the form of interest that
may be agreed upon by the parties. In the absence of stipulation, the legal interest. As it stands,
the legal interest is 6%. This is according to the Bangko Sentral ng Pilipinas circular published in
2013.

Breach by Fraud

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
(1101)

Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an
action for future fraud is void. (1102a)

Fraud (Dolo) is the conscious and intentional proposition to evade the normal fulfillment of an
obligation.

There are two kinds of fraud:

1. Civil
2. Criminal

Since Obligations and contracts is part of civil law, we are going to focus on Civil fraud.

There are two kinds of civil fraud: Fraud in the performance of the obligation and fraud in the
constitution or establishment of an obligation.

Fraud in the Performance of the Fraud in the constitution of an obligation

Obligation
 Present only during the performance of a pre- Present only at the time of the birth of the
existing obligation obligation

Employed for the purpose of evading the Employed for the purpose of securing the
normal fulfillment of an obligation consent of the other party to enter into the
contract

Results in the nonfulfillment or breach of the Reason for the other party upon whom it is
obligation employed for entering into the contract results
in the vitiation of consent.

Note: When there is fraud malice is presumed.

Liability for future fraud cannot be waived or renounced. Past frauds however can be
renounced or waived.

If there is bad faith or malice, the amount of damages shall comprehend all damages
which may be reasonably attributed to the breach or nonfulfillment of the obligation, regardless
of whether such consequences are natural or unnatural, probable or improbable, foreseeable or
unforeseeable. It may include Exemplary damages or moral damages.

Article 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according to the
circumstances. (1103)

Note: Liability may arise from negligence but the liability may be tempered or regulated by the
courts depending on the circumstances.

Article 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows bad faith, the provisions of
articles 1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required. (1104a)

Voluntary Breach Through Negligence or Culpa

- Consists in the omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons of the time and place.
- There is a question of fact to determine whether the proper degree of care has been
exercised taking into consideration what a reasonable and prudent man would have
done under the circumstance.

Kinds of Negligence:

1. Civil
2. Criminal

There are two kinds of Civil Negligence:

 1. Culpa contractual
2. Culpa aquiliana (quasi-delict)

Culpa contractual - the fault or negligence of the obligor by virtue of which he is unable to
perform is obligation arising from pre-existing contract because of the omission of the diligence
which is required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time, and of the place.

Culpa aquiliana - fault or negligence of a person who, because of the diligence which is required
by the nature of the obligation and which must correspond with the circumstances of the
persons, of the time, and of the place, causes damages to another.

Culpa Contractual Culpa Aquiliana

Negligence of the defendant is merely an Negligence is substantive and independent

incident in the performance of the obligation

There is a pre-existing contractual relation There is no pre-existing contractual relation

Source of obligation breach or nonfulfillment Defendant’s neglect is the act or omission

of the contract itself

The proof required for recovery is the Negligence must be proved

existence of the contract and of its breach.
Once such proof exists, negligence is
presumed.

The defence of due diligence in the selection Defence of due diligence is available.
of the employees is not applicable

Test of Negligence - Did the defendant in doing the alleged negligence act use the reasonable
care and caution which an ordinarily prudent person would have used in the same situation? If
not then he is guilty of negligence.

Contributory Negligence: Reduce or mitigate the damages which can be recovered as a result
of the breach of the obligation.

Other Circumstances where the courts may also equitably mitigate the damages:

1. Where the plaintiff has contravened the terms of the contract

2. Where plaintiff has derived some benefit
3. Exemplary damages where defendant acted upon the advice of counsel
4. Loss would have resulted in any event
5. Where upon the filing of the action the defendant has done his best to lessen the
plaintiff’s loss or injury.

Voluntary Breach through contravention of Tenor of Obligation

-includes not only any illicit act which impairs the strict and faithful fulfillment of the obligation,
but also every kind of defective performance.

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which, could not be foreseen, or which, though foreseen, were
inevitable.93

Concept of Fortuitous Event. — Fortuitous events may be defined as an event which could
not be foreseen, or which, though foreseen, was inevitable. It is clear from this definition that the
presence of either the element of unforeseeability or inevitability would be sufficient to
classify the event as fortuitous in character.

It includes:

1. “Acts of God” or those which are absolutely independent of human intervention, such as
rains, typhoons, floods, cyclones, earthquakes or any other similar calamity brought about by
natural forces. force majeure or events which arise from legitimate or illegitimate acts of persons
other than the obligor, such as commotions, riots, wars, robbery, and similar acts.

2. Fortuitous events

i. ordinary fortuitous event - refers to an event which usually happens or which

could have been reasonably foreseen

ii. extraordinary fortuitous event - refers to an event which does not usually
happen and which could not have been reasonably foreseen, such as fire, war,
pestilence, unusual flood, locust, earthquake, and others of a similar nature.

Effect upon Obligation. — If the obligor is unable to comply with his obligation by reason of a
fortuitous event, the general rule is that he is exempted from any liability whatsoever. In other
words, his obligation is extinguished.

Note: In the case of Southeastern College, Inc. vs. Court of Appeals (July 10, 1998, 292 SCRA
422), the Supreme Court ruled that in order that a fortuitous event may exempt a person from
liability, it is necessary that he be free from any previous negligence or misconduct by reason of
which the loss may have been occasioned. An act of God cannot be invoked for the protection
of a person who has been guilty of gross negligence in not trying to forestall its possible adverse
consequences. When a person’s negligence concurs with an act of God in producing damage or
injury to another, such person is not exempt from liability by showing that the immediate or
proximate cause of the damage or injury was a fortuitous event. When the effect is found to be
partly the result of the participation of man — whether it be from active intervention, or neglect,
or failure to act — the whole occurrence is hereby humanized, and removed from the rules
applicable to acts of God.

The Supreme Court also ruled that there is no question that a typhoon or storm is a fortuitous
event, a natural occurrence which may be foreseen but is unavoidable despite any amount of
foresight, diligence or care. In order to be exempt from liability arising from any adverse
consequence engendered thereby, there should have been no human participation amounting
to a negligent act.

Essential conditions for there be a fortuitous event:

 1. That the event must be independent of the will of the obligor;
2. that the event must be either unforeseeable or inevitable;
3. that the event must be of such a character as to render it impossible for the obligor to
fulfill his obligation in a normal manner;
4. that the obligor must be free from any participation in the aggravation of the injury
resulting to the obligee or creditor.
a. In the Virginia Real vs. Sisenando case, the Court held that it is established by
evidence that the fire originated from leaking fumes from the LPG stove and tank
installed at petitioner’s fastfood stall and her employees failed to prevent the fire
from spreading and destroying the other fastfood stalls. Such circumstances do
not support the petitioner’s theory of fortuitous event.

Note: The act of God or fortuitous event must not only be the proximate cause of the loss or
destruction, but the better opinion is that it must be the sole cause.

CONTRACTS

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 some service. 1

Concept of Contracts. — A contract may be defined as a juridical convention manifested in

legal form, by virtue of which one or more persons bind themselves in favor of another or others,
or reciprocally, to the fulfillment of a prestation to give, to do or not to do.

The Basic Duties of Persons when entering into Contracts.

From Valles vs. Villa, 35 Phil. 769; Sps. Pascual vs. Ramos, G.R. No. 144712, July 4, 2002:

All men are presumed to be sane and normal and subject to be moved by substantially
the same motives.

The law furnished no protection to the inferior simply because he is inferior, any more
than it protects the strong because he is strong. The law furnishes protection to both alike –– to
one no more or less than the other. It makes no distinction between the wise and the foolish, the
great and the small, the strong and the weak. The foolish may lose all they have to the wise but
that does not mean that the law will give it back to them again. Courts cannot follow one every
step of his life and extricate him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot
constitute themselves guardians of persons who are not legally competent. Courts operate not
because one person has been defeated or overcome by another, but because he has been
defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use
miserable judgment, and lose money by then –– indeed, all they have in the world; but not for
that alone can the law intervene and restore. There must be, in addition, a violation of law, the
commission of what the law knows as an actionable wrong, before the courts are authorized to
lay hold of the situation and remedy it.

Characteristics of Contracts

The four most fundamental characteristics of contracts are:

1. The obligatory force or character of contracts (obligatoriedad del contrato);

2. The autonomy of contracts;
3. The mutuality of contracts, or what amounts to the same thing, the essential equality of the
contracting parties;
4. The relativity of contracts (relatividad del contrato).

The Obligatory Force of Contracts

A fundamental rule in all contracts. Once the contract is perfected, it shall be of
obligatory force upon both of the contracting parties. Consequently, such contracting parties are
bound, not only to the fulfillment of what has been expressly stipulated, but also to all of the
consequences thereof.

The principle of the mutuality of contracts

This principle refers to the position of essential equality that is occupied by both
contracting parties in relation to the contract. The contract must be binding upon both of the
parties. Consequently, its validity or compliance cannot be left to the will of one of them.

The right, however, is not absolute in character. It is subject to several limitations. According to
Art. 1306, the stipulation, clause, term or condition established by the contracting parties must
not be contrary to (1) law, (2) morals, (3) good customs, (4) public order, or (5) public policy.

From this principle, the law expressly or impliedly recognizes the following consequences:

(1) The validity or fulfillment of a contract cannot be left to the will of one of the contracting
parties.
This rule is expressly declared by Art. 1308. It must be observed, however, that what is
prohibited by the law from being delegated to one of the contracting parties are: first, the power
to determine whether or not the contract shall be valid; and second, the power to determine
whether or not the contract shall be fulfilled.

(2) The validity or fulfillment may be left to the will of a third person.
This rule is now expressly recognized in Art. 1309 which states that the determination of
the performance of a contract may be left to the will of a third person whose decision shall not
be binding until it has been made known to each of the contracting parties. It is, however, an
indispensable requisite that the determination made by the third person should not be evidently
inequitable. If it is evidently inequitable, it shall not have any obligatory effect upon the
contracting parties.

(3) The validity or fulfillment can be left to chance.

The principle of the autonomy of contracts

Expressly declared in Art. 1306.

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.

The contracting parties may establish such agreements as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy. As a
matter of fact, this principle is guaranteed by Sec. 1, Art. 3 of the Philippine Constitution itself:

Section 1. No person shall be deprived of life, liberty, or property without due process of
law, nor shall any person be denied the equal protection of the laws.

The principle of relativity of contracts

Expressly declared in the first paragraph of Art. 1311.

Article 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 received from the decedent.

If a contract should contain some stipulation in favor of a 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.

General Rule: Contracts take effect only between the parties, their assigns and heirs.
Consequently, they cannot, as a general rule, produce any effect upon third persons.

Exceptions: According to the first paragraph of Art. 1311, the rule is not applicable if the rights
and obligations arising from the contract are not transmissible:

(1) By their nature, as when the special or personal qualification of the obligor constitutes one of
the principal motives for the establishment of the contract; 62 or

(2) By stipulation of the parties, as when the contract expressly provides that the obligor shall
perform an act by himself and not through another; or

(3) By provision of law, as in the case of those arising from a contract of partnership or of
agency.
Effect of contract on third persons.

He who is not a party to a contract, or an assignee thereunder, has no legal capacity to

challenge its validity, hence, even if it is admitted that a contract is voidable, nevertheless, its
voidable character cannot be asserted by one who is not a party to the transaction or his
representative.

There are, however, four exceptional instances under the Civil Code where a contract may
produce effect either directly or indirectly on third persons. They are:

(1) Where the contract contains a stipulation in favor of a third person;

(2) Where the third person comes into possession of the object of a contract creating a real
right;

(3) Where the contract is entered into in order to defraud a third person;

(4) Where the third person induces a contracting party to violate his contract.

Where the contract contains a stipulation in favor of a third person

Stipulations in favor of third persons, or stipulation pour autrui

If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation.

A beneficial stipulation, or what is generally known as a stipulation pour autrui, may, therefore,
be defined as a stipulation in a contract, clearly and deliberately conferred by the contracting
parties as a favor upon a third person, who must have accepted it before it could be revoked.

Requisites for there to be a stipulation pour autrui

(1) that there must be a stipulation in favor of a third person;

(2) the stipulation must be a part, not the whole of the contract;
(3) the contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest;
(4) the third person must have communicated his acceptance to the obligor before its
revocation;
(5) neither of the contracting parties bears the legal representative or authorization of the third
party.

Test of beneficial stipulation — The fairest test whereby we can determine whether the
interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest,
is if a third person claims an enforceable interest in the contract, that question must be settled
by determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon
such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed.

Breach of Contract defined. — Breach of contract is defined as the failure ,without legal
reason, to comply with the terms of the contract. It is also defined as the failure, without legal
excuse, to perform any promise which forms the whole or part of the contract (Sps. Edgar and
Dinah Omengan vs. Philippine National Bank. et. al., G.R. No. 161319, January 23, 2007).

Note:

The life of a contract has three phases or stages — generation, perfection and consummation.

Generation - comprehends the preliminary or preparation, conception or generation, which is

the period of negotiation and bargaining, ending at the moment of agreement of the parties.

Perfection - comprehends the perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract;

When is a contract perfected? The perfection of a contract refers to that moment in the life of
a contract when there is finally a concurrence of the wills of the contracting parties with respect
to the object and the cause of the contract.

As a general rule, the perfection of a contract is produced by mere consent. There are,
however, certain contracts, such as deposit, pledge and commodatum, which cannot be
perfected until after the delivery of the object by one contracting party to the other.

Consummation - comprehends the consummation or death, which is the fulfillment or

performance of the terms agreed upon in the contract. (ABS-CBN Broadcasting Corporation vs.
Court of Appeals, G.R. No. 128690, January 21, 1999.)

Contracts may be classified as follows:

(1) According to their relation to other contracts:

(a) Preparatory — or those which have for their object the establishment of a condition in law
which is necessary as a preliminary step towards the celebration of another subsequent
contract. Examples — partnership, agency.

(b) Principal — or those which can subsist independently from other contracts and whose
purpose can be fulfilled by themselves. Examples — sale, lease.
(c) Accessory — or those which can exist only as a consequence of, or in relation with, another
prior contract. Examples — pledge, mortgage.
According to their perfection:

(d) Consensual — or those which are perfected by the mere agreement of the parties.
Examples — sale, lease.

(e) Real — or those which require not only the consent of the parties for their perfection, but
also the delivery of the object by one party to the other. Examples — commodatum, deposit,
pledge.

(2) According to their form:

(a) Common or informal — or those which require no particular form. Example — loan.

(b) Special or formal — or those which require some particular form. Examples — donations,
chattel mortgage.

(3) According to their purpose:

(a) Transfer of ownership. Example — sale.

(b) Conveyance of use. Example — commodatum.

(c) Rendition of services. Example — agency.

(4) According to their subject matter:

(a) Things. Examples — sale, deposit, pledge.

(b) Services. Examples — agency, lease of services.

(5) According to the nature of the vinculum which they produce:

(a) Unilateral — or those which give rise to an obligation for only one of the parties. Examples
— commodatum, gratuitous deposit.

(b) Bilateral — or those which give rise to reciprocal obligations for both parties. Examples —
sale, lease.

(6) According to their cause:

(a) Onerous — or those in which each of the parties aspires to procure for himself a benefit
through the giving of an equivalent or compensation. Example — sale.

(b) Gratuitous — or those in which one of the parties proposes to give to the other a benefit
without any equivalent or compensation. Example — commodatum.

(7) According to the risks involved:

(a) Commutative — or those where each of the parties acquires an equivalent of his prestation
and such equivalent is pecuniarily appreciable and already determined from the moment of the
celebration of the contract. Example — lease.

(b) Aleatory — or those where each of the parties has to his account the acquisition of an
equivalent of his prestation, but such equivalent, although pecuniarily appreciable, is not yet
determined at the moment of the celebration of the contract, since it depends upon the
happening of an uncertain event, thus charging the parties with the risk of loss or gain. Example
— insurance.

(8) According to their names or norms regulating them:

(a) Nominate — or those which have their own individuality and are regulated by special
provisions of law. Examples — sale, lease.

(b) Innominate — or those which lack individuality and are not regulated by special provisions of
law.

Note:

Art. 1306 of the Civil Code enunciates one of the most fundamental principles of the law on
contracts — the right of the contracting parties to establish any stipulation, clause, term or
condition as they may deem convenient. The freedom to contract is both a constitutional and a
statutory right; therefore, to uphold this right, courts should move with all the necessary caution
and prudence in holding contracts void.

Art. 1313. Creditors are protected in cases of contracts intended to defraud them.

Contracts In Fraud of Creditors. — Although a third person cannot ask for the annulment of a
contract, nevertheless, if he is a creditor of one of the contracting parties, and it can be
established that the contract was entered into with the intention of defrauding him, he may ask
for its rescission. This is what is meant by the Code when it says that creditors are protected in
cases of contracts intended to defraud him. 83 This rule must, therefore, be read always in
relation to the provisions of Arts. 1380, et seq., of the Civil Code, as well as Art. 1177.
Note:

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

Article 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.

Art. 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party.

Note: This provision talks about interferences with Contractual Relations. Any third person who
induces another to violate his contract shall be liable for damages to the other contracting party.

Requisites

Before the third person who induces another to violate his contract can be held liable for
damages, it is essential, however, that the following requisites must concur:

(1) the existence of a valid contract;

(2) knowledge on the part of the third person of the existence of the contract;
(3) interference by the third person without legal justification or excuse.
“malice, in some form, is generally implied from the act of interference with contractual
relations, and is declared to be an essential ingredient in such cases.

Art. 1317. 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 in whose behalf it has been executed, before it is
revoked by the other contracting party.

ESSENTIAL REQUISITES OF CONTRACTS

Article 1318. 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.

Concept of Consent. — The most important element, which constitutes the very heart and soul
of contracts, is, unquestionably, the consent of the contracting parties.

As applied to contracts, it may be defined as the concurrence of the wills of the

contracting parties with respect to the object and the cause which shall constitute the contract.

Requisites of Consent.

1. The consent must be manifested by the concurrence of the offer and the acceptance
(Arts. 1319-1326);
2. The contracting parties must possess the necessary legal capacity (Arts. 1327-1327);
3. The consent must be intelligent, free, spontaneous, and real (Arts. 1330-1346).

When Contracts are Perfected

Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the contract. The offer must be certain
and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer 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. (1262a)

In general, contracts are perfected from the moment that there is a manifestation of the
concurrence between the offer and the acceptance with respect to the object and the cause
which shall constitute the contract. (Art. 1319, par. 1, New Civil Code.)

However, if the acceptance is made by letter or telegram, we must distinguish.

According to Art. 1319, par. 2, of the New Civil Code, the contract is perfected from the moment
that the offeror has knowledge of such acceptance. However in purely commercial contracts,
such as joint accounts, maritime contracts, (Art. 54 of the Code of Commerce), the contract is
perfected from the moment an answer is made accepting the offer.

Manifestation of Consent. — Before there is consent, it is essential that it must be manifested

by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. Once there is such a manifestation of the concurrence of the wills of the
contracting parties, the period or stage of negotiation is terminated. The contract, if consensual,
is finally perfected.

Character of offer and acceptance. — An offer may be defined as a proposal to make a

contract. In order to constitute a binding proposal, the first paragraph of Art. 1319 declares that
the offer must be certain or definite.
As far as the acceptance it must also be certain or definite.

Art. 1320. An acceptance may be express or implied. Form of Acceptance. — According

to the above article, the acceptance may be express or implied.

Art. 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with.

Art. 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him.

Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.

Effect of Death, Civil Interdiction, Insanity, or Insolvency.

Article 1323 above states that an offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. The word “conveyed”
refers to that moment when the offeror has knowledge of the acceptance by the offeree.
Hence, the article merely means that an offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before the offeror has knowledge of the
acceptance by the offeree.

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer
may be withdrawn at any time before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as something paid or promised.
34

Period for Acceptance: Options. — It is clear from the above article that there is a very great
difference between the effect of an option which is without a consideration and the effect of one
which is founded upon a consideration as far as the right of the offeror to withdraw his offer or
proposal is concerned. If the option is without any consideration, the offeror may withdraw his
offer by communicating such withdrawal to the offeree at anytime before acceptance; if it is
founded upon a consideration, the offeror cannot withdraw his offer.

Art. 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to write.

Note:

According to Art. 1327, the following cannot give their consent to a contract:

(1) Unemancipated minors;

(2) insane or demented persons; and

Cover all cases where one or both of the contracting parties are unable to understand the
nature and consequences of the contract at the time of its execution, such as those in a state of
drunkenness or under a hypnotic spell or who are suffering from any kind of mental incapacity
whatsoever.

Include any person, who, at the time of the celebration of the contract, cannot understand the
nature and consequences of the act or transaction by reason of any cause affecting his
intellectual or sensitive faculties, whether permanent or temporary.

(3) Deaf-mutes who do not know how to write.

We must distinguish between the effect of a contract entered into by a deaf-mute who knows
how to write and that of a contract entered into by a deaf-mute who does not know how to write.
The first is perfectly valid, while the second is either voidable or unenforceable, depending upon
whether one or both of the parties are incapacitated.

Other incapacitated persons. — Besides the persons enumerated in Art. 1327, there are others
who are also incapacitated to give their consent to a contract, such as married women of age in
cases specified by law, persons suffering from civil interdiction, and incompetents who are
under guardianship.

Because the law incapacitates them to give their consent to a contract, the only way by which
any one of those enumerated above can enter into a contract is to act through a parent or
guardian. If this requirement is not complied with, the result is a defective contract.

Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell are voidable.

Art. 1329. The incapacity declared in Article 1327 is subject to the modification
determined by law, and is understood to be without prejudice to special disqualifications
established in the laws.

Disqualifications to Contract. — Persons specially disqualified mentioned in Art. 1329 refer to

those who are prohibited from entering into a contract with certain persons with regard to certain
property under certain circumstances and not to those who are incapacitated to give their
consent to a contract.

Distinguished from incapacity to contract. Disqualification to contract or prohibition to contract,

referred to in the previous section, must not be confused with incapacity to give consent to a
contract. The two may be distinguished from each other as follows:

Disqualifications to Contract Incapacity to Contract

One who is prohibited from entering into a Incapacity restrains the exercise of the right
particular contract is absolutely disqualified to contract, while prohibition to contract
from entering into that contract; restrains the very right itself; in other words, a
person who is incapacitated can still enter
into a contract, but he must do so through his
parent or guardian.

Improperly called special incapacity by certain based upon subjective circumstances of

 authors, is based upon public policy and certain persons which compel the law to
morality suspend for a definite or indefinite period their
right to contract

Contract entered into by one against whom a A contract entered into by an incapacitated
prohibition is directed is void in accordance person is merely voidable in accordance with
with Arts. 5 and 1409, No. 7, of the Civil Art. 1390 of the Civil Code.
Code.

Art 1330. A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.

Art. 1331. 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.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only
when such identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

What is a Mistake?

As it is understood in the Civil Code, mistake may be defined not only as the wrong conception
of a thing, but also as the lack of knowledge with respect to a thing.

What are mistakes which vitiate consent.

There are two general kinds of mistakes:

1. Mistake of fact
- a mistake of fact when one or both of the contracting parties believe that a fact
exists when in reality it does not, or that such fact does not exist when in reality it
does.

Classes:

(1) Mistake as to object (error in re) - This is the mistake which is referred to in the first
paragraph of Art. 1331 of the Code. It may be subdivided into the following:

(a) Mistake as to the identity of the thing (error in corpore), as when the thing which constitutes
the object of the contract is confused with another thing;

(b) mistake as to the substance of the thing (error in substantia);

(c) mistake as to the conditions of the thing, provided such conditions have principally moved
one or both parties to enter into the contract; and

(d) mistake as to the quantity of the thing (error in quantitate), provided that the extent or
dimension of the thing was one of the principal reasons of one or both of the parties for entering
into the contract.

Note: In order that a contract is rendered voidable because of mistake regarding the quantity of
the thing which constitutes the object thereof, it is necessary that such mistake should refer not
only to the material out of which the thing is made, but also to the nature which distinguishes it,
generically or specifically, from all others, such as when a person purchases a thing made of
silver believing that it is made of gold. Consequently, if the mistake refers only to accidental or
secondary qualities (error in qualitate), the contract is not rendered voidable.

In case of mistake regarding the quantity of the thing (error in quantitate), it is important that this
class of mistake should be distinguished from a mistake of account or calculation. In the first,
there is a real mistake as to the extent of the object of the contract; in the second, there is only
an apparent mistake, a mere mistake in mathematical computation. As a consequence, in the
first, the contract is voidable; in the second, it is not. Thus, if the parties enter into a contract
with respect to a parcel of land which they believe has an area of 100 hectares, when in reality it
has an area of only 50 hectares, there is mistake as to the quantity of the thing; the contract in
this case is voidable. If, on the other hand, they enter into a contract in which it is agreed that a
parcel of land consisting of 10 hectares shall be sold for P1,000 per hectare, and they thought
that the total price is only P5,000, there is a mistake of account; the mistake in this case can
only be corrected.

(2) Mistake as to person (error in persona): This kind of mistake or error may refer either to
the name or to the identity or to the qualification of a person. The second paragraph of Art. 1331
that the only mistake with regard to persons which will vitiate consent are mistakes with regard
to the identity or the qualifications of one of the contracting parties. Hence, mistake with regard
to the name of one or both of the contracting parties will not invalidate the contract.

In order that mistake as to persons shall vitiate consent, the following requisites must,
however,

1. The mistake must be either with regard to the identity or with regard to the qualification
of one of the contracting parties;
2. Such identity or qualification must have been the principal consideration for the
celebration of the contract. Generally, this kind of mistake occurs in obligations to do
which require special qualifications of the parties or which are based on confidence.
Examples of these obligations are those arising from remuneratory contracts,
partnership, agency, deposit, commodatum, and lease of services.

2. Mistake of law
- when one or both of the contracting parties arrive at an erroneous conclusion
regarding the interpretation of a question of law or the legal effects of a certain
act or transaction.

As a general rule, it is only a mistake of fact which will vitiate consent thus rendering the
contract voidable; a mistake of law, on the other-hand, does not render the contract voidable
because of the wellknown principle that ignorance of the law does not excuse anyone from
compliance therewith.

Mistake of law as a rule will not vitiate consent. There is, however, an exception to this rule.
According to Art. 1334 mutual error as to the effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent.

Three requisites are, therefore, necessary in order that such mistake will vitiate consent:

1. the mistake must be with respect to the legal effect of an agreement;

2. the mistake must be mutual;
3. the real purpose of the parties must have been frustrated.

Art. 1332. When one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the former.

Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk
affecting the object of the contract.

Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated, may vitiate consent.

Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is
employed.

There is intimidation when 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 the intimidation, the age, sex and condition of the person shall be
borne in mind.

A threat to enforce one’s claim through competent authority, if the claim is just or legal,
does not vitiate consent.

Art. 1336. Violence or intimidation shall annul the obligation, although it may have been
employed by a third person who did not take part in the contract.

Violence and intimidation sometimes known as duress. But the two must be distinguished from
the other.

Violence Intimidation

External Internal

prevents the expression of the will influences the operation of the will, inhibiting it
substituting it with a material act dictated by in such a way that the expression thereof is
another apparently that of a person who has freely
given his consent.
 physical compulsion moral compulsion.

Requisites of violence. — In order that consent is vitiated through violence, it is essential that
the following requisites must concur:

1. the force employed to wrest consent must be serious or irresistible;

2. it must be the determining cause for the party upon whom it is employed in entering into
the contract.

Requisites of intimidation.

1. One of the contracting parties is compelled to give his consent by a reasonable and well-
grounded fear of an evil;
2. The evil must be imminent and grave;
3. The evil must be unjust;
4. The evil must be the determining cause for the party upon whom it is employed in
entering into the contract.

Note: In order that intimidation may be sufficient to render a contract voidable, one of the
contracting parties should be 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.

This presupposes that the threat or intimidation must be actual, serious and possible of
realization, and that the actor can and still will carry out his threat. Example are those contracts
entered into during the Japanese occupation involving payments in Japanese military notes,
where it is established that one of the contracting parties was compelled to give his consent to
the payment by reason of a threat to report his non-acceptance of the military notes to the
Japanese authorities. Thus, it has been held that the threat to deliver anyone to the Kempetai or
to the now infamous Fort Santiago, for refusal to accept Japanese military notes, or for any
cause, even to intelligent persons of ordinary firmness would surely infuse just fear of great
bodily harm, should there be a refusal considering the inquisitorial methods employed by the
invaders and what they had done.