Contracts

Art. 1305
“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.”

When do meeting of minds occur?

It takes place when an offer by one party is accepted by the other.

Is it necessary that contract must be in writing?

No, it does not need to be in writing except for those contracts that are needed to be written.

Contracts vs. Obligations

● Contract is one of the sources of obligations.
● Obligation is the legal tie or relation itself that exists after a contract has been entered into
● Hence, there can be no contract if there is no obligation. But an obligation may exist without a
contract.

Contract vs. Agreement

● All contracts are agreements
● NOT all agreements are contracts

Stages in the life of a contract

1. Preparation or conception
– Preparatory step
– Bargaining point
2. Perfection - meeting of minds regarding the subject matter and the cause of the contract.
3. Consummation - parties performed their respective obligations, and so the contract is put to
an end.

Example:
On December 1, X offered to sell his car for 1M to Y (Preparation). On December 2, Y offer to buy
the car for 800k (Perfection). On December 3, X delivered the car to Y and Y pays 800k
(Consummation).

According to Perfection or Formation:

1. Consensual
 – Perfected by mere agreement of the parties (i.e. sales, lease).
2. Real
– Requires not only the consent of the parties for their perfection, but also the delivery of the
object by 1 party to the other (i.e. commodatum, deposit, pledge).
3. Formal
– Requires some particular form (i.e. donation, chattel mortgage).

According to Cause or equivalent vale of Prestation:

(1) Onerous
– each of the parties aspires to procure for himself a benefit through the giving of an equivalent
or compensation (i.e. sale).
(2) Gratuitous
– Done of the parties proposes to give to the other a benefit without any equivalent or
compensation (i.e. commodatum).
(3) Remunerative
– For service previously rendered

According to Degree of dependence:

1. Principal
– A principal contract is one which can subsist independently from other contracts and whose
purpose can be fulfilled by themselves (i.e. sales, lease).
2. Accessory
– An accessory contract is one which can exist only as a consequence of, or in relation with,
another prior contract (i.e. pledge, mortgage).
3. Preparatory
– A preparatory contract is one which has for its object the establishment of a condition in law
which is necessary as a preliminary step towards the celebration of another subsequent
contract (i.e. partnership, agency).

According to Parties Obligated:

1. Unilateral
– A unilateral contract is one which gives rise to an obligation for only 1 of the parties (i.e.
commodatum, gratuitous deposit).
– Both must give consent
2. Bilateral
– A bilateral contract is one which gives rise to reciprocal obligations for both parties (i.e. sale,
lease).
According to Name or Designation:
1. Nominate
– A nominate contract is one which has a name and is regulated by special provisions of law
(i.e. sale, deposit, agency, lease)
2. Innominate
– No specific name or designation in law

According to Subject Matter:

(1) Involving Things (i.e. sale, deposit, pledge)
(2) Involving Rights or Credits (i.e. usufruct, assignment of credits)
(3) Involving Services (i.e. agency, lease of services)

According to Number of Person who participated in the drafting of contracts:

(1) Ordinary (i.e. sale,)
(2) Contract of adhesion (i.e. insurance contract)
– Provisions are drafted by only one party and the only participation of the other party is to sign
his name, his signature or his adhesion to the contract.

Art. 1306 Autonomy of Contracts

"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.”

Art. 1307 Innominate Contracts

"Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules governing the most analogous (similar) nominate contracts,
and by the customs of the place."

4 kinds of Innominate contracts

1. Do ut des (I give that you may give)
2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
4. Facio ut facias (I do that you may do)

Art. 1308 Mutuality of Contracts

"The contracts must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them."
Example:
In a loan contract, pag yung isang party has the SOLE DISCRETION/UNILATERAL RIGHT, TO
ADJUST INTEREST, ANYTIME, AS HE WANT. This is not valid.

Example: (Binding)
X agrees to sell his car to Y. Y agrees to pay 1M

Note:
● Stipulations stating that X ALONE will determine/adjust the price of the car, and Y has no
right to negate X’s decision, violates Mutuality of contracts.
● bad bargain in itself does not necessarily violates Mutuality of contracts.

Art. 1309 Exception to the MoC

"The determination of the performance may be left to a third person, whose decision shall not be
binding until it has been made known to both contracting parties."

Example:
X sells his land to Y. They agreed that Z will determine the price of the land because Z is a real
estate appraiser.

Note:
● The third person should notify both parties.

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

Art. 1311 Relativity of Contract

“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"
Note:
● Sila lang ang may rights and obligations under their contract. Sa kanila lang effective yung
contracts. Yan yung ibig sabihin ng Principle of Relativity. Yung parties lang, hindi kasama ang
hindi PRIVY (stranger/third person) to the contract.

Example:
Y sold her car to X with an agreement not to sell it to others until it is fully paid. Later on, X, which
is not still fully paid, sold the car to Z, in violation to the agreement? Can Y cancel the contract
entered into by X and Z? No, because Z is not a party to the agreement between X and Y. In the
same way, Y is not a party to the agreement of X and Z. However, Y can claim damages against
X for breach of contract.

Example:
X leased his property to Y and prohibited sub-lease. Y subleased the property to Z. X goes to court
to rescind the leased contract. Can Z oppose? No, because X is not bound by the sublease
between Y and Z. Z’s remedy is to proceed against Y.

STIPULATION POUR AUTRUI REQUISITES:

1. There must be a stipulation in favor of a third person;
2. The contracting parties must have clearly and deliberately conferred a favor to the third
person;
3. The stipulation should be a part and not the whole of the contract or the contract itself;
4. The third person must have communicated his acceptance to the obligor before its revocation
by the obligee or the original parties;
5. Neither of the contracting parties bears the legal representation or authorization of the third
party for otherwise the rules on agency will apply.

Example:
X borrowed 10k with 12% interest from Y, payable on Dec. 25, 2020. There is a stipulation that the
12% interest will be given to Z. In this situation, Z must communicate her acceptance to X and Y.
Otherwise, she will not become entitled to the benefit of the contract. From the moment Z
communicated her acceptance, she becomes party to the contract.

Exception to the Principle of Relativity of Contracts

● STIPULATION POUR AUTRUI (Article 1311, 2nd par)
● Third persons is bound by contracts creating real rights (Article 1312)
● Right of defrauded creditors under (Article 1313)
● Contract is violated trough inducement by third person (Article 1314)
Art. 1312 Exception to the RoC
"In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of the Mortgage Law and the Land
Registration Laws"

Example:
X mortgage his land to Y. Since X is still the owner of the land, he sold the same land to Z. Because
there is a contract of mortgage, Y will be bound to the contract of X and Z. But Z must respect the
right of Y to the land.

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

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

Example:
Suppose, Y is a movie actress and has a 1 year contract with 123 studio. Z, a friend of Y, induces Y
to break her contract without any justifiable cause. 123 studio can sue Z for damages.

Note:
● A third person is not liable for damages if there is a justifiable cause.

Art. 1315 Consensuality of Contracts

"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 the consequences which,
according to their nature, may be in keeping with good faith, usage and law."

How contracts are perfected?

General Rule: Principle Consensuality of contracts
Exceptions:
● Real contracts
● Formal contracts

Art. 1316
"Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of
the object of the obligation"

Example:
On June 1, X borrowed money from Y worth 10k with a promise that X will give his diamond ring as a
security for the loan on June 15. Before June 15, even if Y has already given the 10k to Y, the
contract of pledge is not yet perfected. The perfection is upon the delivery of the pledge.

Art. 1317 Unenforceable Contracts

"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."

Requisites for a person to contract in the name of another

1. He must be authorized (expressly or impliedly).
2. He must have by law, a right to represent him
3. The contract must be subsequently RATIFIED. (express or implied)
4. He must act within his power
Law on Obligations and Contracts acceptance, all of which must be
Contracts - Essential Requisites complied with (Art. 1321)
Civil Code Art. 1318-1355 2. An offer made through an agent is
accepted from the time acceptance is
Essential Elements of Contract communicated to him [Art. 1322)
3. An offer becomes ineffective upon the
Essential Elements (Art. 1318) death, civil interdiction, insanity, or
There is no contract unless the following insolvency of either party before
requisites concur: acceptance is conveyed (Art. 1323).
1. Consent of the contracting parties; 4. Advertisements for bidders are simply
2. Object certain which is the subject invitations to make offers [Art. 1326)
matter of the contract;
3. Cause of the obligation which is Offer
established. Advertisement for bidders
S sells at a public auction a specific land.
The starting bid is P1,000,000. A placed
Consent a P1,100,000 bid; B placed P1,150,000;
Requisites: and C placed P1,300.000.
1. It must be manifested by the
concurrence of the offer and acceptance Acceptance
(Arts. 1319-1326) Note:
2. The contracting parties must possess 1. an acceptance must be absolute (Art.
the necessary legal capacity 1319)
(Arts. 1327-1329) 2. communicated to the offeror (Art.
3. It must be intelligent, free, 1319 par. 2 & 1322)
spontaneous, and real (not 3. may be express/implied.
vitiated] (Arts. 1330-1346)

Consent Acceptance
1. It must be manifested by the Example:
concurrence of the offer and acceptance S offers B to sell his specific house and
(Arts. 1319-1326) lot in Quezon City for P1,500,000. B
⚫ Offer - a specific proposal to enter accepted the offer but is only willing to
into an agreement with another. buy the land.
⚫ Acceptance - agreeing verbally or in
writing to the terms of a contract, COUNTER - OFFER
which is one of the requirements to
show there was a contract. How acceptance is communicated to
offeror:
Offer 1. S, during an "in-person" conversation
Note: an offer must be intentionally with B, offered B to sell his land for
certain [Art. 1319 par. 1) P1,000,000.
Example: 2. S, through a letter, offered B to sell
When offering to sell something, you his land for P1,000,000.
should specify the object being sold. ✓ S sends a letter of offer on Jan 1
✓ B receives the letter on Jan 15
Offer ✓ B sends a letter of acceptance on
Special cases of offers: Jan 16
1. The person making the offer may fix ✓ S receives the letter of acceptance
the time, place, and manner of on Jan 31
 Consent
2. The contracting parties must possess
the necessary legal capacity [Arts.
1327-1329)
2 kinds of incapacity:
1. Absolute incapacity
2. Relative incapacity

Consent
Promises in offer and acceptance Absolutely incapacitated:
⚫ S offers to sell his land to B for 1. Unemancipated minors
P1.000.000. B refused. However, S ⚫ Except for contracts involving
still insists that he is willing to give necessary
B 30 days to decide. However, B ⚫ Where minor misrepresented his age
still refuses. Again, S still stands 2. Insane or demented person
with his promise. ⚫ Lucid interval
3. Deaf-mutes who do not know how to
POLICITATION write.
⚫ S offers to sell his land to B for
P1,000,000. B refused. However, S
still insist that he is willing to give Relatively incapacitated:
B 30 days to decide. B accepted the 1. Those under Civil interdiction for
promise. transactions inter vivos.
[RPC Art. 34)
2. Undischarged insolvents
Unilateral Promise Accepted (Insolvency Law, Sec.24)
3. Husband and wife: cannot donate
[Art. 123 FC] to each other, nor sell
if the marriage is under ACP (Art.
⚫ S offers to sell his land to B for 1490)
P1,000,000. B refused. However, S
still insist that he is willing to give Consent
B 30 days to decide. B accepted the 3. It must be intelligent, free,
promise and gave S P1,000 as spontaneous, and real (not
option money. vitiated] (Arts. 1330-1346)

Unilateral Promise Accepted Vices of consent:

⚫ Violence
⚫ Intimidation
⚫ Mistake
⚫ S promised to sell his land to B for ⚫ Fraud
P1,000,000 after 1 month. Likewise, ⚫ Undue Influence
B promise to buy S's land for
P1,000,000 after 1 month.

Bilateral Promise
Object Vs. Cause
Contract of sale:
✓ S sells his land to B for P1,000,000.
Contract of lease:
✓ S leases his land to B for P10,000
per year.

Object
1. Lawful: Not contrary to law, morals,
good customs, public order or public
policy.
2. Actual or possible
3. Transmissible: Within the commerce
of man
4. Determinate or determinable

Object
Future Inheritance:
X is the son of Y. While Y is still alive,
X sold his inheritance to Z.

Cause
1. Existing
2. Lawful
3. True

Cause
Cause vs Motive:
✓ X buys a gun from an arms dealer
and procured the necessary permit.
Forms of Contracts

Art. 1356.
"Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. However, when the law requires that a contract be
in some form in order that it may be valid or enforceable, or that a contract be proved in a certain
way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in
the following article cannot be exercised."

Form is important for:

1. For Validity; or
2. For Enforceability; or
3. For Convenience

Example of Contracts where the law requires to be in certain form for validity:
1. Donation of real property (Public document)
2. Donation of personal property if the value exceeds Php 5,000.00 (In writing)
3. Sale of land through an agent (In writing)
4. Stipulation to pay interest (In writing)

Art. 1357. Right to compel the other party to execute the necessary form
"If the law requires a document or other special form, as in the acts and contracts enumerated in
the following article, the contracting parties may compel each other to observe that form, once the
contract has been perfected. This right may be exercised simultaneously with the action upon the
contract.”

– Presupposes that the contract is valid and enforceable.

Note: This is only applicable if form is needed only for convenience.

Example:
(1) If X donated his land to Y in a private instrument. Y accepted the donation in the same private
instrument. Later on, Y wants to register the donation. However, the registration requires that the
donation be in public document. Y requested X to put down the donation into a public instrument. X
REFUSES to execute the public instrument. Y filed a case against X to compel him to observe the
necessary form. Can X be compelled to execute the necessary document? No, because as a rule,
donation needs to be in a public document to be valid.
(2) X sold his land to Y in a private instrument. Later on, Y wants to register the sale. However, the
registration requires that the sale be in public instrument. Can X be compelled to execute the
necessary document? Yes, because the sale of land is valid and enforceable.

Art. 1358.
"The following must appear in a public document:
1. 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 are governed by Articles 1403, No. 2, and 1405;
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
3. The power to administer property, or any other power which has for its object an act
appearing or which should ap- pear in a public document, or should prejudice a third person;
4. 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."

(1) 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 are governed by Articles 1403, No. 2, and 1405
– The parties need to execute the necessary public document

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
Example:
X and Y are heirs of their father. When their father died, X renounce his shares of inheritance in
favor of Y. X’s renunciation of inheritance must be in public document.

(3) 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;
Example:
X appointed Y to administer his property while he is in vacation. The authority of Y to administer/
manage X’s property must be in public document.

(4) The cession of actions or rights proceeding from an act appearing in a public document.
Example:
If X mortgaged his land in favor of Y to secure his loan. The cession of Y’s right must also be in
public document if the mortgage appears in a public document.

Reformation of Instruments

Art. 1359.
"When, there having been a meeting of the minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract."

What is Reformation of Instrument?

– A remedy wherein a written instrument is made so as to express or conform to the real
intention of the parties if ever there is a mistake, fraud, inequitable conduct, or accident.
– A written instrument is required.

Reformation vs. Annulment

– In reformation, there is a meeting of minds. However, the written instrument provides what
they did not agree upon. Whereas, in annulment, there is no meeting of minds. The consent
of one party was vitiated.

Example:
(1) X sells his car to Y for 1,000,000. Y thought that she is buying the car for 800,000. The price
written in the contract is 1,000,000. There was really no meeting of minds. The remedy is
annulment, because there was no meeting of minds.

(2) X sells his car to Y for 1,000,000. But Y negotiated 800,000. They agreed for a selling price of
800,000. However, written instrument provides for 1,000,000. The remedy is reformation, because
there was a meeting of minds.

REQUISITES FOR THE ACTION FOR REFORMATION

1. There must be a meeting of the minds
2. The true intention is not expressed in the written instrument
3. The failure of intention is due to mistake, fraud, inequitable conduct or accident
4. There must be clear and convincing proof
Art. 1360.
"The principles of the general law on the reformation of instruments are hereby adopted insofar as
they are not in conflict with the provisions of this Code."

Art. 1361.
"When a mutual mistake of the parties causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed.”

Example:
X sold his car 1 to Y. Written instrument provides for the car 2, due to their mutual mistake. Either of
the parties may file for reformation.

Art. 1362.
"If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the reformation of the
instrument."

Example:
X borrowed money from Y worth 1M. Written instrument provides that X was selling his car for 1M,
due to the fraudulent act of Y. Who among the two can file reformation of the instrument? Only X
may ask for the reformation of the instrument because Y acted fraudulently.

Art. 1363.
"When one party was mistaken and the other knew or believed that the instrument did not state
their real agreement, but concealed that fact from the former, the instrument may be reformed."

Art. 1364.
"When through the ignorance, lack of skill, negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the instrument does not express the true intention
of the parties, the courts may order that the instrument be reformed.”

Art. 1365.
"If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right of repurchase, reformation of the
instrument is proper."
Example:
X mortgage his land in favor of Y to secure his loan. Both parties agreed. However, written
instrument provides for a contract of sale. The instrument may be reformed. Otherwise, the
intentions of the parties would be frustrated.

Art. 1366.
"There shall be no reformation in the following
cases:
(1) Simple donations inter vivos (donation during lifetime) wherein no condition is imposed; UNLESS
THERE IS A CONDITION
(2) Wills; (no meeting of minds)
(3) When the real agreement is void."

Art. 1367.
"When one of the parties has brought an action to enforce the instrument, he cannot subsequently
ask for its reformation."

Example:
X sold his land in favor of Y. Written instrument provides for a contract of mortgage, due to the
fraudulent act of X. Y, therefore, has a right to reform the instrument because she is innocent.
However, if Y filed a case to foreclose the mortgage, she cannot file a reformation.

Art. 1368.
"Reformation may be ordered at the instance of either party or his successors in interest, if the
mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns."

Example:
X sold his land in favor of Y. Written instrument provides for a contract of mortgage, due to the
fraudulent act of X. If Y dies, her child can file a reformation. X cannot file a reformation as well as
his children.

Art. 1369.
"The procedure for the reformation of instruments shall be governed by rules of court to be
promulgated by the Supreme Court."

Interpretation of Contracts
Interpretation
– Interpretation is the act of making intelligible that was not before understood, ambiguous, or
not obvious.

Intention always prevail

The intention of the parties always prevail over the words that appear in the instrument of a
contract. (Art. 1370)

In judging the intention, subsequent acts of parties are considered. [Art. 1371)

Art. 1372
However general the terms of a contract may be, they shall not be understood to comprehend
things that are distinct and cases that are different from those upon which the parties intended to
agree.
Example:
S sold to B his house including all furniture.

Art. 1373
If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.
Example:
S sold to B his race horse named "Tom". Incidentally, there are two horses with the name Tom.
However, one of them is amputated.

Art. 1374
The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.
Example:
X leased his house to Y. X forbid Y from subleasing the property without his consent. Further, it was
stipulated: "If Y sublease the property to a third person, there will be additional P1,000 per month
payment on top of his rent."

Art. 1375
Words which may have different significations shall be understood in that which is most in keeping
with the nature and object of the contract.
Example:
R leased to E a roof for the purpose of erecting an advertising sign. The contract provides for the
termination of the lease by E if a "building" should be constructed on an adjoining property of such
height as to obscure the view of E's sign. There was erected on the roof of an adjoining building a
sign which obstructed the view of E's sign.

Art. 1376
The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which are ordinarily established.
Example:
S sold to B a horse. It was the customs of the place to place horse shoe on sold horses.

Art. 1377
The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.

Art. 1378
When it is absolutely impossible to settle doubts by the rules established in the preceding articles,
and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of
rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
Example:
It was not clear whether A lent or donated to B a specific phone. Is the contract a commodatum or a
donation?

Art. 1378
If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.
Example:
It was not clear whether A sold or leased to B a building. Is the contract a sale or a lease?

Rescissible Contracts

Art. 1381
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;
Example:
G is the guardian of W, ward. G sold to X the property of W for P250,000. The value of the property
is P500,000.
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
Example:
R is the representative of A, absentee. R sold to X the property of A for P250,000. The value of the
property is P500,000.

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
Example:
D is a debtor of C, creditor. Fearing that he won't be able to pay his debt to C and his land levied, D
sold his land to X without the intention of using the proceeds to pay C.

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;
Example:
S sues B for the recovery of a parcel of land. In this case, the land is a "thing under litigation."
Supposed B sold to X the parcel of land.

Rescissible Contract Vs. Rescissible Payment

Art. 1382
Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible.
Example:
D, while insolvent, pays X his debt. Y and Z are also creditors of D but cannot, in any manner, collect
from D.

Rescission Art. 1383

The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.
Example:
G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G sold the two
properties to B for only P200,000.00.

Extent of Rescission Art. 1384

Rescission shall be only to the extent necessary to cover the damages caused.
Example:
G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G sold the two
properties to B for only P200,000.00.

For Rescission to be Possible Art. 1385

Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.

Example For Rescission to be Possible:

B asks for the rescission of a sale with S because of breach of warranty against hidden defects.

Rescission not possible for contracts approved by court Art. 1386

Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts
approved by the courts.

Contracts presumed to be rescissible Art. 1387 par. 1

All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, when the donor did not reserve sufficient property to
pay all debts contracted before the donation.

Contracts presumed to be rescissible Art. 1387 par. 2 & 3

Alienations by onerous title are also presumed fraudulent when made by persons against whom
some judgement has been rendered in any instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

Contracts presumed to be rescissible Example- Gratuitous:

D contracted several debts amounting to P200,000. Also, D has P300,000 total assets. One day, D
donated to X a property from his total assets worth P170.000.

Example - Onerous
D contracted several debts amounting to P200,000 with A and B. Also, D has P300,000 total assets
composed of a car, land, and building. For whatever reason, supposed A obtained a writ of
attachment on D's land. Meanwhile, D sold the car to X.

Acquisition of third person in bad faith Art. 1388

Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation, whenever, due to any cause, it should be
impossible for him to return them. If there are two or more alienations, the first acquirer shall be
liable first, and so on successively.
Example:
To defraud C, S sold to B his car. B knows S's purpose.
To defraud C, S sold to B his car. B knows S's purpose. B sold to D, bad faith, and D sold to E, good
faith.
To defraud C, S sold to B his car. B doesn't know S's purpose. B sold to D, bad faith, and D sold to
E, bad faith.

Prescription of Rescission Art. 1389

The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the
termination of the former's incapacity, or until the domicile of the latter is known.

Voidable Contracts

I. What Contracts are Voidable? (Art. 1390)

1. When one (1) of the parties is incapable of giving consent (absolute incapacity)
Exception: when contract involves necessaries.
2.When one (1) or more of the vices of consent is present.
A. Violence
B. Intimidation
C. Mistake
D. Fraud
E. Undue Influence

II.Incapacity
1. When one (1) of the parties is incapable of giving consent (absolute incapacity)
Exception: when contract involves necessaries
Example:
M, minor, bought food from X, 25 years old. This contract may have been voidable but it involves a
necessary (food). Therefore, this contract is PERFECTLY VALID.
III.Vices of Consent (Violence)
1. When one (1) or more of the vices of consent is present

A. Violence
Definition: When in order to wrest consent, serious or irresistible force is employed.
Example:
A asks B to buy his cellphone for P1,000. B refused. A then punches B in the face until he agreed to
buy it.

B. Intimidation
Definition: 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.
Example:
A asks B to lease B's land or else he will set B's house in fire.

Exception:
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not
vitiate consent.
Example:
A asks B to lease B's land or else he will sue B because he violated A's right of easement regarding
B's property.

C. Mistake
Definition: Mistakes that refer to the substance of the object, identity/qualification of a person, or
conditions that have principally moved one or both parties to enter into the contract.
Examples:
● S and B entered into a contract of sale for a piece of land worth P1,000,000. The clerk who
made the deed sale mistakenly typed P100,000.
● A believing that B is his long lost brother, agreed to donate him a house and lot.
● S sold to B a diamond ring. Later on, both of them found out it is fake.

Mistake of Fact
Examples:
S sold to B a diamond ring. Later on, both of them found out it is fake.

Mistake of Law
Mistake of Law
Examples:
In a pacto de retro sale between S (vendor a retro) and B, there was no redemption period stated. B
wants to annul the contract on grounds of mistake.
● Art. 3- Ignorance of the law excuses no one from compliance therewith.

Mutual Mistake of Law

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

D. Fraud
Definition: 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.
● Dolo incidente (Incidental Fraud)
● Dolo causante (Causal Fraud)
Examples:
● X applies for a job with a requirement of 3-5 years experience on a specific job. Though
having only 3 years of experience, X made it appear he has 5 years.
● X applies for a job with a requirement of 3-5 years experience on a specific job. Though
having no experience, X made it appear he has 5 years.
● S sold to B his specific car. Before S deliver the car to B, he changed the engine without
informing B.
● S offers B to a Rolex watch. S made B believe it is genuine though he know it is fake.
● S offers B to a Rolex watch. B asks S if it is genuine and S responded that he think it is. (S is
not an expert).
● S offers B to a Rolex watch. B asks S if it is genuine and S responded that he think it is. (S is
an expert).

E. Undue Influence
Definition: When a person takes improper advantage of his power over the will of another, depriving
the latter of a reasonable freedom of choice.
Example:
Your professor asks to marry you. You are of age but the biggest factor for you saying YES is
because he is your professor and if you say NO, you are afraid he might be disappointed and FAIL
you in class.

IV.Annulment of Voidable Contracts

Voidable Contracts are Valid until annulled
When annulment cannot proceed
1. When the object of the contract is lost through the fault of the person who may annul the
contract.
2. When the contract is ratified.

Who can annul voidable contracts?

1. Incapacitated persons (upon ceasing of incapacity).
2. Persons whose consent were vitiated.

When can it be annulled?

1. Within four (4) years after guardianship of minors or incapacitated persons ceases.
Example:
S sold to M (17 y/o) a land. Upon reaching 18 years old, M can avail annulment within 4 years until
his last day being 22 years old.

2.Within (4) years after intimidation, violence, or undue influence ceases.

3. Within four (4) years from the time of discovery of mistake or fraud.

VI.Ratification of Voidable Contracts

Who may ratify?

The party who can annul a voidable contract.

How?
Ratification can be done orally, in writing, or may be implied.
Example:
Supposed S sold his car to B (minor) in installment. Upon reaching 18 years old, B continued to pay
S.

Unenforceable Contracts

What makes a contract unenforceable?

1. Unauthorized contracts.
2. Both parties are incapacitated.
3. Transactions under statute of frauds.
Unauthorized contracts
● A, representing himself as agent of P, sold P's land to B. A sold P's land to B.
● A, agent of P, sold P's land to B in installment. A is only authorized to sell P's land in cash.
● A, representing himself as agent of P, sold P's land to B.
Exception: When P ratified the sale. Both Parties are Incapacitated

A, minor, sold his bicycle to B, minor.

Exception: If the guardians of both A and B ratified the contract.

Statute of Frauds
1. Contracts not to be performed within a year.
2. A special promise to answer for the debt, default, or miscarriage of another.
3. Agreement in consideration of marriage.
4. Sale of personal property for 500 pesos or more.
5. Lease of real property for more than 1 year.
6. A representation as to the credit of a third person.
7. Sale of real property (Art. 1358).
Exception: Partially Executed Contracts

Contracts not to be performed within a year

X and Y verbally agreed to formed a partnership after 13 months.

A special promise to answer for the debt, default, or miscarriage of another

D is indebted to C. G orally guaranteed D's debt.

Agreement in consideration of marriage

Z orally obliged himself to give Y a piece of land if Y marries his daughter, X.

Sale of personal property for 500 pesos or more

Lease of real property for more than 1 year

A representation as to the credit of a third person

A (insolvent) is in need of cash. A asked B for help. B represented A as having good credit to C who
extends a loan to A because of B's representation.

Sale of real property (Art. 1358)