NOTES ON LAW ON CONTRACTS

Atty. Harjade Segura Dammang

CONTRACTS – 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 (Art. 1305).

• Requisites of a contractual obligation: (1) It must contain all the essential requisites of a contract (Art,
1318); and (2) It must not be contrary to law, morals, good customs, public order, and public policy (Art.
1306).

CHARACTERISTICS OF CONTRACTS

RELATIVITY OF CONTRACTS General Rule: Contracts take effect only between the parties or their
assigns and heirs, except where the rights and obligations arising from the
contract are not transmissible by their nature, by stipulation, or by provision
of law (Art. 1311).

Exceptions:

1. Rights and obligations that are not transmissible by their nature, or

by the stipulation or by provisions of law (Art. 1311).
2. Stipulation pour atrui (stipulation in favor of a third person) –

Stipulation pour atrui – refers to benefits clearly and deliberately

conferred by parties to a contract upon third persons (Art. 1311) and
which stipulation is merely part of a contract entered into by the
parties, neither of whom acted as agents of the third person and
which favor can be demanded by the third person if duly accepted
by him before it could be revoked.

Requisites of stipulation pour atrui:

a. Stipulation in favor of a third person;
b. Stipulation is just part and not the whole obligations of
the contract;
c. Contracting parties must have clearly and deliberately
conferred a favor upon third person;
d. Third person must have communicated his acceptance;
and
e. Neither of the contracting parties bears the legal
representation of the third person (Young v. Court of
Appeals, G.R. No. 79518, January 13, 1989).

3. Third persons coming into possession of the object of the contract

creating real rights subject to the provisions of Mortgage Law and
the Land Registration Law (Art. 1312);
4. Contracts entered into in fraud of creditors (Art. 1313).
5. When a third person induces a party to violate the contract (Art.
1314).
▪ Requisites:
a. Existence of a valid contract;
b. Third person has knowledge of such contract;
c. Third person interferes without justification. (De Leon,
2010)

Liability of heirs for the obligation contracted by the decedent –

Contracts take effect only between the parties, ant their assigns and heirs,
the latter being liable only to the extent of the property received from
the decedent.
 - The heirs are liable for the obligation contracted by the decedent
when the rights and obligations arising from the contract are
transmissible: (1) By their nature; (2) By stipulation; or (3) By
provision of law (Art. 1311).

OBLIGATORY FORCE OF Contracts shall be obligatory, in whenever form they may have been
CONTRACTS entered into, provided all the essential requisites for validity are present (Art.
1356).

- The obligatory force of contract is consonance with Article 1159

which provides that: Obligations arising from contracts have the
force of law between the contracting parties and should be complied
with in good faith.

- The parties are bound from the moment the contracts are perfected
by mere consent not only from 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 (Art. 1315).

Exceptions to Obligatory Force of Contracts:

1. Impossibility of Performance in Obligation to do – The debtor in

obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the
obligor (Art. 1266).

2. Doctrine of Difficulty of Performance – When the service has

become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or
in part (Art. 1267).

MUTUALITY OF CONTRACTS The contract must bind both contracting parties and its validity or
compliance cannot be left to the will of one of them (Art. 1308).

- A contract containing a condition whose efficacy or fulfillment is

dependent solely on the uncontrolled will of one of the parties is void
(Garcia v Rita, G.R. No. L-20175, October 30, 1967).
- Third person may determine the performance of a contract –
The determination of the performance may be left to a third person.
However, his decision shall not be binding until it has been
known to both the contracting parties (Art. 1309). Moreover, the
determination made shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is equitable
under the circumstances (Art. 1310).

Contract of Adhesion – It is a contract in which one of the parties

prepares the stipulations in the form of a ready-made contract, which
the other party must accept or reject, but not modify, by affixing his
signature or his “adhesion” thereto; leaving no room for negotiation and
depriving the latter of the opportunity to bargain on equal footing.

Validity of contract of adhesion – It is not entirely prohibited the one

who adheres to the contract is, in reality, free to reject it entirely, and if
he adheres, he gives his consent (Premiere Development Bank v.
Central Surety & Insurance Company, Inc., G.R. No. 176246, February
13, 2009).
 Interpretation of contract of adhesion – In case of doubt which will
cause a great imbalance of rights against one of the parties, the contract
shall be construed against the party who drafted the same (Magis Young
Achiever’s Learning Center v. Manalo, G.R. No. 178835, February 13,
2009).

AUTONOMY OF It is the freedom of the parties to contract and to stipulate provided the
CONTRACTS/LIBERTY OF stipulations are not contrary to law, morals, good customs, public order or
CONTRACTS public policy (Art. 1306).

Note: An agreement between a man and woman to live together as

husband and wife without the benefit of marriage being contrary to morals
is void.

ELEMENTS OF CONTRACTS
1. Natural Elements – Those which are derived from the very nature of the contract, and as a consequence,
ordinarily accompany the same.
2. Essential Elements – Those without which there can be no contract. Absence of any of the essential
elements will render the contract void or inexistent/non-existent.
3. Accidental Elements – those which exist only when the contracting parties expressly provide for them.

ESSENTIAL ELEMENTS

CONSENT It is the concurrence of the wills of the contracting parties with respect to the
object and cause, which shall constitute the contract.

- Requisites of a valid consent: It must be – (1) Intelligent or with an exact

notion of the matter to which it refers; (2) Free; and (3) Spontaneous.

I. OFFER AND ACCEPTANCE

- Elements of Offer and Acceptance

Offer Acceptance
1. Must be certain (Art. 1345); 1. Must be absolute. A qualified
2. May be made or orally or in acceptance constitutes a
writing, unless the law counter-offer (Art. 1319);
prescribes a particular form. 2. No specified form but when
the offeror specifies a
particular form, such must be
complied with.
3. An acceptance may be
express or implied (Art. 1320).
The person making the offer may fix the time, place and manner of
acceptance, all of which must be complied with. (Art. 1321).

- We follow the Cognitive Theory – The offer and acceptance concur only
when the acceptance has reached the knowledge of the offeror (actual
knowledge), and not at the same time of sending the acceptance.
- Acceptance by letter or telegram binds the offeror from the time it comes
to his knowledge.

- Rules on advertisements as offers:

▪ Business advertisements – not a definite offer, but mere invitation

to make and offer, unless it appears otherwise (Art. 1325).
 ▪ Advertisement for bidders – simply invitation to make proposals and
advertiser is not bound to accept the highest or lowest bidder, unless
the contrary appears (Art. 1326).

- Grounds that would render the offer ineffective:

1. Death, civil interdiction, insanity or insolvency of either party before

acceptance is conveyed;
2. Express or implied revocation of the offer by the offeree;
3. Qualified or conditional acceptance of the offer, which becomes
counter-offer;
4. Subject matter becomes illegal or impossible before acceptance is
communicated;
5. Period given to the offeree to signify his acceptance has already
lapsed.

- Period for acceptance

1. Period in the offer is stipulated

a. Must be made within the period given by the offeror.
b. As to withdrawal of the offer:
General Rule: It can be made by communicating such withdrawal
at any time before the acceptance is made.
Exception: When the option is founded upon a consideration,
which is something paid or promised (Option Contract).

2. No stated period

a. Offer is made to a person present – acceptance must be made

immediately.
b. Offer is made to a person absent – acceptance may be made
within such time that, under normal circumstances, an answer
can be expected from him.

- Persons incapacitated to give consent:

1. Deaf-mutes who do not know how to read and write.

2. Insane or demented persons, unless the contract was entered into
during a lucid interval.
3. Minors (Art. 1327) except:
a. Contracts for necessaries (Art. 1489);
b. Contracts by guardians or legal representatives and the court
having jurisdiction had approved the same.
4. When there is active misrepresentation on the part of the minor (minor
is estopped).

II. VICES OF CONSENT

MISTAKE General Rule: Mistake refers to mistake of facts and

not of law.

Exception: When mistake of law involves mutual

error as to the legal effect of an agreement when the
real purpose of the parties is frustrated (Art. 1334).

Requisites:
1. Mistake must be with respect to the legal
effect of the agreement;
2. It must be mutual; and
 3. Real purpose of the parties must have been
frustrated.

Kinds of mistakes of fact which vitiate consent:

1. Mistake as to object
2. Mistake as to the identity of the thing
3. Mistake as to the substance of the thing)
4. Mistake as to the quantity of the thing)
5. Mistake as to the conditions of the thing,
provided such conditions have principally
moved one or both parties to enter into the
contract
6. Mistake as to person – 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. Requisites:

a. The mistake must be either with

regard to the identity or with
regard to the qualification of
one of the contracting parties; and
b. The identity or qualification must
have been the principal
consideration for the celebration
of the contract.

Note: A threat to enforce a just or legal claim

through a competent authority does not amount to
intimidation nor vitiate consent (Art. 1335).

INTIMIDATION 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 (Art. 1335).

Requisites of Intimidation:
1. One of the 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. It must be Unjust; and
4. The evil must be the determining Cause for
the party upon whom it is employed in
entering into the contract (Art. 1335).

Validity of a contract if consent is reluctant – A

contract is valid even though one of the parties
entered into it against his wishes and desires or even
against his better judgment.

VIOLENCE There is violence when in order to wrest consent,

serious or irresistible force is employed (Art. 1335).

- 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 (Art. 1336).

Requisites of Violence:
1. Physical force employed must be serious or
irresistible; and
2. The determining cause for the party upon
whom it is employed in entering into the
contract.

UNDUE There is undue influence when a person takes

INFLUENCE improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom
or choice (Art. 1337).

Circumstances to be considered for the

existence of undue influence:

1. Confidential, family, spiritual and other

relations between the parties;
2. Mental weakness;
3. Ignorance;
4. Financial distress (Art. 1337).

FRAUD There is fraud when through the insidious words or

machinations of one of the contracting parties the
other is induce to enter into a contract which, without
them, he would not have agreed to (Art. 1338).

- Failure to disclose facts, when there is a

duty to reveal them, as when the parties are
bound by confidential relations, constitutes
fraud (Art, 1339).

Requisites of Fraud:
1. Fraud, insidious words or machinations must
have been employed by one of the
contracting parties;
2. It must have been material and serious;
3. It induced the other party to enter into a
contract;
4. It must be a deliberate intent to deceive
or/and induce;
5. Should not have been employed by both
contracting parties or by third persons; and
6. The victim suffered damage or injury.

Kinds of Fraud:

1. Fraud in the perfection of the contract

(Causal fraud/dolo causante)
2. Fraud in the performance of an obligation
(Incidental fraud/dolo incidente)

Causal Fraud Incidental Fraud

Serious in character Not serious
Efficient cause which Not the efficient cause
induces the party to
enter into a contract.
 Renders the contract Does not affect the
voidable. validity of the contract.
Annulment with Contract remains valid.
damages. Remedy is claim for
damages.

Acts considered not fraudulent:

1. The usual exaggerations in trade and the

other party had an opportunity to know the
facts are not themselves fraudulent (Art.
1340);
2. A mere expression of an opinion does not
signify fraud, unless made by an expert and
the other party had relied on the former’s
special knowledge (Art. 1341);
3. Misrepresentation by a third person does
not vitiate unless such misrepresentation has
created substantial mistake and the same is
mutual (Art. 1342);
4. Misrepresentation made in good faith is
not fraudulent but may constitute error (Art.
1337).

III. SIMULATION OF CONTRACT

- Simulation of contract – It is the declaration of a fictitious will,

deliberately made by agreement of the parties, in order to produce, for the
purposes of deception, the appearance of a juridical act which does not
exist or is different from that which was executed.

- Kinds of simulation of contract:

1. Absolute – The contracting parties do not intend to be bound by the

contract at all, thus the contract is void (Arts. 1345-1346).
2. Relative – The contracting parties conceal their true agreement (Art.
1345); binds the parties to their real agreement when (1) it does not
prejudice third persons or (2) is not intended for any purpose contrary
to law, morals, good customs, public order or public policy (Art. 1346).

- As to third persons without notice, the apparent contract is valid

for purposes beneficial to them. As to third persons with notice of
the simulation, they acquire no better right to the simulated
contract than the original parties to the same. If the concealed
contract is lawful, it is absolutely enforceable, provided it has all
the essential requisites: consent, object, and cause (Arts. 1345-
1346).

OBJECT It is the subject matter of the contract. It can be a thing, right or service arising
from a contract.

Requisites of an Object:
1. Determinate as to kind (even if not determinate, provided it is possible to
determine the same without the need of a new contract);
2. Existing or the potentiality to exist subsequent to the contract;
3. Must be Licit;
4. Within the Commerce of man; and
5. Transmissible.
 -
The fundamental requisite in order that a thing, right or service may be
the object of a contract, is that it should be in existence at the moment
of the celebration of the contract, or at least, it can exist subsequently
or in the future.
Can be the object of contracts:

General Rule: All things or services may be the object of contracts.

Exceptions:
1. Things outside the commerce of men (Art. 1347);
2. Intransmissible rights;
3. Future inheritance, except in cases expressly authorized by law;
4. Services which are contrary to law, morals, good customs, public order
or public policy;
5. Impossible things or services; and
6. Objects which are not possible of determination as to their kind.

CAUSE It is the essential and impelling reason why a party assumes an obligation.

- Every contract is presumed to have a cause and such cause is lawful.

Requisites of a Cause: It must – (1) Exist; (2) Be true; and (3) Be licit.

Kinds of Cause

1. Onerous contracts – the prestation or promise of a thing or service by

the other.
2. Remuneratory contracts – the service or benefit renumerated.
3. Gratuitous contracts – the mere liberality of the donor or benefactor.
4. Accessory – identical whit cause of principal contract, the loan which it
derived its life and existence (e.g.: mortgage or pledge).
- Complementary Contracts Construed Together Doctrine – An
accessory contract must be interpreted with its principal contract.

CAUSE MOTIVE
Direct and most proximate reason of a Indirect or remote reasons.
contract.
Legality or illegality of cause affects Legality or illegality of motive does not
the existence or validity of the contract affect the existence or validity of
contract.
Cause is always the same for each Motive differs for each contracting
contracting party. party.

Rules relating to cause on contracts

1. Absence of cause – confers no right and produces no legal effect.

2. Failure of cause – does not render the contract void.
3. Illegality of cause – contract is null and void.
4. Falsity of cause – contract is void; unless the parties show that there is
another cause which is true and lawful.
5. Lesion or inadequacy of cause – does not invalidate the contract,
unless:
a. There is fraud, mistake, or undue influence;
b. When the parties intended a donation or some other contract; or
c. In cases specified by law (e.g. contracts entered by guardian
when ward suffers lesion of more than 25% and with court
approval, otherwise, if there is no approval, the contract is void
regardless of the amount of lesion).
KINDS OF CONTRACTS

I. According to perfection or formation:

1. Consensual contracts – perfected by the mere meeting of the minds of the parties (e.g. Sale, Lease)
(Art. 1305).
2. Real contracts – those which require for their perfection both the consent of the parties and the
delivery of the object by one party to the other (e.g. creation of real rights over immovable property
must be written, deposit and pledge).
3. Solemn contracts – contracts which must appear in writing such as:
a. Donations of real estate or of movables if the value exceeds P5,000;
b. Partnership to which immovables are contributed;
c. Contract of antichresis – requires the amount of principal and interest and specified;
d. Sale of piece of land or interest therein is through an agent;
e. Stipulation to charge interest;
f. Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence; or
g. Chattel mortgage

II. According to their relations to other contracts:

1. Preparatory Contracts – 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 (e.g.
Partnership, Agency).
2. Principal Contracts – are those which can subsist independently from other contracts (e.g. Sale,
Lease).
3. Accessory Contracts – those which can exist only as a consequence of, or in relation with, another
prior contract (e.g. Pledge, Mortgage).

III. According to their form:

1. Common or Informal Contracts – are those which require no particular form (e.g. Loan).
2. Special or Formal Contracts – are those which requires a particular form. (e.g. Donations, Chattel
Mortgage).

IV. According to their purpose:

1. Transfer of Ownership (e.g. Sale)

2. Conveyance of Use (e.g. Usufruct, Commodatum)
3. Rendition of Services (e.g. Agency)

V. According to the nature of the vinculum which they produce:

1. Unilateral Contracts – are those which give rise to an obligation only to one of the parties (e.g.
Commodatum).
2. Bilateral Contracts – are those which give rise to reciprocal obligations for both parties (e.g. Sale).

VI. According to their cause:

1. Onerous (e.g. Sale)

2. Gratuitous (e.g. Commodatum)

VII. According to the risks involved:

1. Commutative Contracts – are those where each of the parties acquire an equivalent of his prestation
and such equivalent is pecuniarily appreciable and already determined from the moment of the
perfection of the contract (e.g. Lease).
2. Aleatory Contracts – are those which are dependent upon the happening of an uncertain event,
thus, charging the parties with the risk of loss or gain (e.g. Insurance).
 VIII. According to their names or norms regulating them:

1. Nominate Contracts – are those which have their own name and individuality, and are regulated by
provisions of law (e.g. Sale).
2. Innominate Contracts – are those which lack name of individuality, and are not regulated by special
provisions of law.

Kinds of Innominate Contracts:

a. Do ut des (I give that you may give) – no longer an innominate contract since it has already
been given a name of its own, i.e., barter or exchange.
b. Do ut facias (I give that you may do)
c. Facio ut des (I do that you may give)
d. Facio ut facias (I do that you may do)

FORMALITIES UNDER THE LAW

Rules on the forms of contracts – Generally, form is not required in consensual contracts, except: (1) Validity
(Formal Contracts); (2) Enforceability (under Statute of Frauds); or (3) For the convenience of the parties.

- The parties may compel each other to reduce the verbal agreement into writing.

Formalities required in special contracts

1. Donations
a. Personal property – if value exceeds 5,000 the donation and acceptance must both be written
(Art. 748)
b. Real Property:
i. Donation must be in a public instrument specifying therein the property donated and value
of charges which done must satisfy.
ii. Acceptance must be written, either in the same deed of donation or in separate instrument.
iii. If acceptance is in a separate instrument, the donor shall be notified thereof in authentic
form, and this step shall be noticed in both instruments (Art. 749).

2. Partnership
a. Partnership where real property contributed –
i. There must be a public instrument regarding the partnership;
ii. The inventory of the realty must be made, signed by the parties and attached to the public
instrument (Art. 1773).

3. Antichresis – the amount of the principal and interest must be in writing (Art. 2134).
4. Agency of sell real property or an interest therein – authority of the agent must be in writing (Art.
1874).
5. Stipulation to charge interest – interest must be stipulated in writing (Art. 1956).
6. Chattel mortgage – personal property must be recorded in the Chattel Mortgage Register (Art. 2140).
7. Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence –
a. Must be in writing signed by shipper or owner;
b. Supported by valuable consideration other than the service rendered by the common carrier;
c. Reasonable, just and not contrary to the policy (Art. 1744).

Contracts which must be in writing to be valid:

1. Donation of personal property whose value exceeds five thousand pesos (Art. 748) – the donation
and acceptance must be in writing.
2. Sale of a piece of land or any interest therein through an agent (Art. 1874) – the authority of the
agent shall appear in writing.
3. Agreements regarding payment of interest in contracts of loan (Art. 1956).
4. Antichresis – the amount of the principal and the interest shall be specified in writing (Art. 2134).
Contracts which must appear in a public document:

1. Donation of real properties;

2. Partnership where immovable property or real rights are contributed to the common fund;
3. Acts and contracts which have for their object the creating, transmission, modification or extinguishment
of real rights over immovable property; sale of real property or of an interest therein is governed by Arts.
1403, No. 2, and 1405;
4. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains;
5. 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;
6. The cession of actions or rights proceeding from an act appearing in a public document.

Contracts that must be registered:

1. Chattel Mortgages
- In accordance with Article 2125 of the Civil Code, an unregistered chattel mortgage is binding
between the parties because registration is necessary only for the purpose of binding third
persons (Filipinos Marble Corporation v. Intermediate Appellate Court, G.R. No. L-68010, May 30,
1986).

REFORMATION

Reformation – It is a remedy to conform to the real intention of the parties due to mistake, fraud, inequitable
conduct, accident (Art. 1359). In reformation of contracts, what is reformed is not the contract itself, but the
instrument embodying the contract.

Requisites of Reformation of Instruments:

1. Meeting of the minds to the contract;
2. True intention is not expressed in the instrument;
3. By reason of: (1) Mistake; (2) Accident; (3) Relative simulation; (4) Fraud; or (5) Inequitable conduct
4. Clear and convincing proof of any of the preceding reasons.

- Reformation vs. Annulment – When there is no meeting of the minds, the proper remedy is
annulment and not reformation. The fundamental distinction between reformation of an instrument
and annulment of a contract is that the first presupposes a perfectly valid contract in which there
has been a valid meeting of the minds of the contracting parties while the second is based on a
defective contract in which there has been no meeting of the minds because the consent is vitiated.

Cases when Reformation of Instrument is Cases when Reformation of Instrument is NOT

ALLOWED ALLOWED
1. When the mutual mistake of the parties 1. Simple, unconditional donations inter vivos;
causes the failure of the instrument to disclose 2. Wills;
their agreement (Art. 1361). 3. When the agreement is void (Art. 1366); and
2. When one party was mistaken and the other 4. When an action to enforce the instrument is
acted fraudulently or inequitably in such a way filed (estoppel).
that the instrument does not show their true
intention, the former may ask for the
reformation of the instrument (Art. 1362).
3. 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 (Art. 1363).
4. 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 (Art. 1364).
 5. If the 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 (Art.
1365).
Prescriptive Period – 10 years from the date of the
execution of the instrument
Persons who can ask for the reformation of the
instrument – It may be ordered at the instance of:
1. If the mistake is mutual – either party or his
successors in interest otherwise;
2. Upon petition of the injured party; or
3. His heirs and assigns.

DEFECTIVE CONTRACTS

RESCISSIBLE CONTRACTS These are contracts validly constituted but nevertheless maybe set aside
due to a particular economic damage or lesion caused to either to one of the
parties or to a third person. It may be set aside in whole or in part, or up to
the extent of the damage caused (Art. 1381).

The following are rescissible contracts:

1. Entered into by persons exercising fiduciary capacity (Art. 1381):

a. Entered into by guardians whenever the wards whom they

represent suffer lesion by more than ¼ of value of the property.
However, contracts entered by a guardian over the property of his
ward, without court approval is void, not merely rescissible
regardless of the existence of lesion.
b. Agreed upon in representation of absentees, if absentee suffers
lesion by more than ¼ of value of property.
c. Contracts where rescission is based on fraud committed on
creditor and cannot collect the claim due (Accion Pauliana).
d. Contracts where the object involved is the subject of litigation or
contract entered into by defendant without knowledge or approval
of litigants or judicial authority.
e. Other causes provided for by law.

2. Payment by an insolvent – on debts which are not yet due; prejudices

the claim of others (Art. 1382):

Characteristics of rescissible contract:

1. It has all the elements of a valid contract.
2. It has a defect consisting of an injury (generally in the form of
economic damage or lesion, fraud, and alienation of the property) to
one of the contracting parties or to a third person.
3. It is valid and effective until rescinded.
4. It can be attacked only directly.
5. It is susceptible of convalidation only by prescription.

Persons who may institute an action for the rescission of a rescissible

contract –

The action for rescission may be instituted by the following:

1. The person who is prejudiced, such as the person suffering the
lesion in rescissory actions based on lesion, the creditor who is
defrauded in rescissory actions based on fraud, and other
 persons authorized to exercise the same in other rescissory
actions.
2. Their representatives.
3. Their heirs.
4. Their creditors by virtue of subrogatory action define in Art.
1177 of the NCC.

- Nature of an action for rescission – 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 (Art. 1383).

- The object of the contract must not legally in the possession

of a third person who did not act in bad faith. If the object of
the contract is legally in the possession of a third person who did
not act in bad faith, the remedy available to the creditor is to
proceed against the person causing the loss for damages.

Prescriptive period of Action for Rescission

For persons under Within 4 years from the time the

guardianship termination of the incapacity of the
ward;

For absentees Within 4 years from the time the

domicile of the absentee is known;
Other cases under Arts. Within 4 years from the time of the
1381 and 1382 discovery of fraud.

VOIDABLE CONTRACTS Those where consent is vitiated either by the incapacity of one of the
contracting parties or by mistake, violence, intimidation, undue influence or
fraud. These contracts are binding, unless they are annulled by a proper
action in court. It is susceptible of ratification (Art. 1390).

Characteristics of a voidable contract:

1. Effective until set aside;
2. May be assailed only in an action for such purpose
3. Can be confirmed; and
4. Can be assailed only by the party whose consent was defective or
his heirs or assigns.

Classes of Voidable contracts:

1. Those where one of the parties is incapable of giving consent;

and

Note: If both parties are incapacitated to give consent, the contract

is unenforceable and not merely voidable.

2. Those where the consent is vitiated by mistake, violence,

intimidation, undue influence or fraud (Art. 1390).

Remedy in Voidable Contracts – Annulment. The annulment may be had

even if there be no damage to the contracting parties.
Who may institute an An action for annulment may be instituted by
action for annulment all who are thereby obliged principally or
subsidiarily.

- He who has capacity to contract may

not invoke the incapacity of the party
with whom he has contracted nor can
those who exerted intimidation,
violence or undue influence or
employed fraud or caused mistake
base their action upon these flaws of
the contract.
Effects of annulment of 1. If contract not yet consummated –
a contract parties shall be released from the obligations
arising therefrom.
2. If contract has already been
consummated – rules provided in Arts. 1398
– 1402 shall govern.

a. Restitution

General Rule: Mutual restitution – the

contracting parties shall restore to each other
things which have been the subject matter of
the contract, with their fruits and the price
with its interest except in case provided by
law. In an obligation to render services, the
value thereof shall be the basis for damages
(Art. 1398).

Exception: No restitution – The party

incapacitated is not obliged to make any
restitution except insofar as he has been
benefited by the thing or the price received by
him (Art. 1399).

b. Whenever the person obliged by the

decree of annulment to return the thing
cannot do so because it has been lost
through his fault, he shall return the fruits
received and the value of the thing at the
time of the loss, with interest from the
same date (Art. 1400).

Causes of extinction of 1. Prescription – the action for annulment

action to annul must be commenced within 4 years
depending on the ground stated.

2. Ratification – cleanses the contract of its

defects from the moment it was
constituted (Art. 1396).

Ratification extinguishes the action to

annul a voidable contract (Art. 1392).

Kinds of Ratification:
a. Express – when ratification is
manifested in words or in writing.
 b. Implied (tacit) – it is the knowledge of
the reason which renders the contract
voidable and such reason having
ceased, the person who has a right to
invoke it should execute an act which
necessarily implies an intention to
waive his right (Art. 1393).

Retroactivity in ratification of
contracts – ratification has retroactive
effects unless when the rights of innocent
third persons will be prejudiced,
ratification will not take effect.

Ratification does not require the

conformity of the contracting party who
has no right to bring the action for
annulment.

3. By loss of the thing which is the object

of the contract through fraud or fault of
the person who is entitled to annul the
contract (Art. 1401).

Note: If the right of action is based upon

the incapacity of any one of the
contracting parties, the loss of the thing
shall not be an obstacle to the success of
the action, unless it took place through
the fraud or fault of the plaintiff (Art.
1401).

Prescriptive period for The action for annulment shall be brought

an annulment of a within 4 years, reckoned from:
voidable contract
▪ In cases of intimidation, violence
or undue influence – from the time
the defect of the consent ceases;
▪ In case of mistake or fraud – from
the time of the discovery of the same;
▪ The action refers to contracts
entered into by minors or other
incapacitated persons – from the
time the guardianship ceases (Art.
1391).

UNENFORCEABLE Those contracts which cannot be enforced by action or complaint, unless

CONTRACTS they have been ratified by the party or parties who did not give consent (Art.
1403).

Characteristics of Unenforceable Contract:

1. It cannot be enforced by a proper action in court;
2. It may be ratified; and
3. It cannot be assailed by third person.

Kinds of Unenforceable Contracts:

The following contracts are unenforceable unless they are ratified:

1. Those entered into the name of another person by one who has been
given no authority/legal representation or acted beyond his power
(Unauthorized Contracts).

Note: A contract of sale over a piece of land entered by an agent whose

authority is not in writing, even of he acted beyond the scope of his
authority is void, not merely unenforceable (Art. 1874).

2. Those that do not comply with the Statute of Frauds.

The following are the contracts or agreements covered by the Statute of

Frauds:

a. An agreement that by its terms is not to be performed within a year

from the making thereof.
b. A special promise to answer for the debt, default or miscarriage of
another.
c. An agreement made in consideration of marriage, other than a
mutual promise to marry.
d. An agreement for the sale of goods chattels or things in action, at a
price not less than 500 pesos, unless the buyer accepts and receives
parts of such goods and chattels, or the evidences, or some of them
of such things in action, or pay at the time some part of the purchase
money.
However, when a sale is made by an auction and entry is made by
the auctioneer in his sales book, at the time of the sale, price, names
of the purchasers and person on whose account the sale is made, it
is a sufficient memorandum.
e. An agreement for the leasing for a longer period than one year, or for
the sale of real property or of an interest therein.
f. A representation as to the credit of a third person (Art. 1403).

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

(Art. 1403).

Unenforceable contract is ratifiable

1. A contract entered into in the name of another by one who has no authority,
legal representation or who 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 (Art.
1317).

2. Contracts infringing the statute of Frauds are ratified:

a. By failure to object to the representation of oral evidence to prove the
same; or
b. By the acceptance of benefits under them (Art. 1317).

3. In a contract where both parties are incapable of giving consent – express

or implied ratification by the parents or guardian, as the case may be, of one
of the contracting parties, or one of the contracting parties upon attaining
capacity, shall give the contract the same effect as if only one of them is
incapacitated. Hence, the contract becomes voidable and the rules on
voidable contracts should govern.
 If the ratification is made by the parents or guardians as the case may be, of
both contracting parties, or both of the contracting parties upon attaining
capacity, the contract shall be validated from the inception.

VOID AND INEXISTENT In general, void and inexistent contracts may be defined as those which lack
CONTRACTS absolutely either in fact and or in law one or some or all of those elements
which are essential for its validity. Void contracts are those which have no
force and effect from the beginning and which cannot be ratified or validated
by lapse of time.

Void vs. Inexistent Contracts

Void Contracts Inexistent Contracts

Those where all the requisites of Those where one or some of
a contract are present, but the the requisites which are
cause, object or purpose is essential for validity are
contrary to law, morals, good absolutely lacking.
customs, public order or
public policy or the contract
itself is prohibited or declared
prohibited.
Principle of in pari delicto is Principle of in pari delicto is not
applicable. applicable.

Characteristics of void/inexistent contracts:

1. It cannot be ratified (Art. 1409).
2. The right to set up the defense of illegality cannot be waived (Art.
1409).
3. The action or defense for the declaration of the inexistence of a
contract does not prescribe (Art. 1410).
4. The defense of illegality of contracts is not available to third persons
whose interests are not directly affected (Art. 1421).
5. A contract which is the direct result of a previous illegal contract is
also void and inexistent (Art. 1422).
6. They produce no legal effect whatsoever.

Kinds of Void Contracts:

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

good customs, public order or public policy (Illicit cause or object).
2. Those which are absolutely stimulated or fictitious (No cause).
3. Those whose cause or object did not exist at the time of the
transaction (No cause or object).
4. Those whose object is outside the commerce of man (No object).
5. Those which contemplate an impossible service (No object).
6. Those where the intention of parties relative to principal object of the
contract cannot be ascertained.
7. Contracts prohibited by law.
a. Pactum commisorium – the creditor appropriates to himself the
things given by way of pledge or mortgage to fulfill the debt.
b. Pactum de non alienado – an agreement prohibiting the owner
from alienating the mortgaged immovable.
c. Pactumleonina – a stipulation in a partnership agreement which
excludes one or more partners from any share in the profits or
loses.

Principle of in Pari Delicto – When the defect of a void contract consists in

the illegality of the cause or object of the contract, and both of the parties are
at fault or in pari delicto, the law refuses them every remedy and leaves them
where they are.

The exceptions to the principles of pari delicto are the following:

a. Payment of money or delivery of property for an illegal purpose,

where the party who paid or delivered repudiates the contract before
the purpose has been accomplished, or before any damage has
been caused to a third person. In such case, the courts may allow
such party to recover what he has paid or delivered, if the public
interest will thus be subserved.
b. Payment of money or delivery of property by an incapacitated
person. In such case, the courts may allow such person to recover
what he has paid or delivered, if the interest of justice so demands.
c. Agreement or contract which is not illegal per se but is merely
prohibited by law, and the prohibition is designed for the protection of
the plaintiff. In such case, such plaintiff, if public policy is thereby
enhanced, may recover what he has paid or delivered.
d. Payment of any amount in excess of the maximum price of any article
or commodity fixed by law. In such case, the buyer may recover the
excess.
e. Whereby a laborer undertakes to work longer than the maximum
number of hours fixed law. In such case, the laborer may demand for
overtime pay.
f. Contract whereby a laborer accepts a wage lower than the minimum
wage fixed by law. In such case the laborer may demand for the
deficiency.