CONTRACT rendition of service mortgage, the form of the contract will be disregarded and

the contract will be treated as a mortgage.

A. A contract is an agreement between two people  Subject-matter: things, services
where one promises to give something or do something for Limitations on stipulations
the other.  Nature of obligation produced: bilateral, unilateral
An act or contract that is illegal per se is one that by
 Unilateral contract: only one party is obligated to act  Cause: onerous, gratuitous universally recognized standards is inherently or by its very
nature, bad, improper, immoral or contrary to good
 Bilateral contract: both parties must fulfill their  Risk: commutative, aleatory
conscience.
obligations
 Name: nominate, innominate.
A. Obligatory Force
 Contracts create specific, temporary obligations
based on the parties involved. Art. 1159: Obligations arising from contracts have the force
CHARACTERISTICS OF CONTRACTS of law between the contracting parties and should be
 In contracts, the parties' intentions are more complied with in good faith.
important than the agreement itself. A. Autonomy (Autonomy of contracts)
Art. 1315: Contracts are perfected by mere consent, and
 Contracts rely on the parties' intentions, while other Art 1306: The contracting parties may establish such from that moment the parties are bound not only to the
acts are governed by the law. stipulations, clauses, terms and conditions as they may fulfillment of what has been expressly stipulated but also to
deem convenient, provided they are not contrary to law, all the consequences which, according to their nature, may
morals, good customs, public order, or public policy. be in keeping with good faith, usage and law. (Consensual
Contract of Adhesion: contracts)
Validity of Stipulations
 One party has a pre-prepared contract and asks • Consensual contracts - are perfected by mere consent
The contract is the law between the contracting
the other party to agree to it to enter into the which is the meeting of minds of the parties upon the terms
parties. And where there is nothing in the contract which is
contract. of contract. The consent need not be made expressly.
contrary to law, morals, good customs, public policy, or
public order, the validity of the contracts must be sustained. Binding effects of contracts
 The adhering party is free to reject the contract
entirely or consent by adhering. Qualification of Contract The binding force of a contract is not limited to what is
Contract Classification: expressly stipulated, but extends to all consequences
The law, not the parties, determines the JURIDICAL
which are the natural effect of the contract. Considering its
SITUATION created by the parties through their contract
 Degree of dependence: preparatory, principal, true purpose, the stipulations it contains, and the object
and the rights and obligations arising therefrom. A contract
accessory involved.
is to be judged by its character, and courts will look to the
 Perfection: consensual, real substance and not to the mere form of the transaction. Contracts are not what the parties choose to call them, but
what they really are as determined by principles of law.
 Solemnity or form: common form, special form Example:
Example: Where the vendor of real property parts with title
 Purpose: transfer of ownership, conveyance of use, A contract held in the form of a sale with pacto de retro,
thereto in favor of the vendee, upon a third person’s
but the real agreement of the parties is that of loan with a
assurance that he would himself pay to the vendor the or damage of cargo is allowed. by their nature, or by stipulation or by provision of law. The
balance of the purchase price still due from the vendee, heir is not liable beyond the value of the property he
such third person must make good his promise to pay. Contract of adhesion is not binding to third parties, received from the decedent.
except in cases under Arts. 1309 and 1310 of NCC.
Right of First Refusal No consent of third person
Art. 1309: The determination of the performance
A contractual right that gives its holder the option to may be left to a third person, whose decision shall not be Any contract entered into under the name of third person,
enter a business transaction with the owner of something, binding until it has been made known to both contracting without the latter’s consent, the same is unenforceable as
according to specified terms, before the owner is entitled parties. far as the third person is concern.
to enter into that transaction with a third party.
Art. 1310: The determination shall not be obligatory if When third persons may be bound
it is evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances. 1. Stipulations pour autrui
B. Mutuality (Mutuality of Contracts)
Arbitral Clause Art. 1311(2): If a contract should contain some
• There should be the presence of EQUAL BARGAINING stipulation in favor of a third person, he may demand its
POWER. It requires an arbitration of conflicts between parties (extra fulfillment provided he communicated his acceptance to
-judicial) before the same may be brought to court. the obligor before its revocation. A mere incidental benefit
• That obligations arising from contract have the force of or interest of a person is not sufficient. The contracting
law between the contracting parties. Absence of arbitration parties must have clearly and deliberately conferred a favor
There must be mutuality between the parties based on their If the law states the need of arbitration yet the parties upon a third person.
essential equality, to which is repugnant to have one party instantly file a case to court, the same will be dismissed Requisites of a stipulations pour autrui:
bound by the contract leaving the other free therefrom. because it is premature.
1. There must be a stipulation in favor of a third person.
Unilateral cancellation
2. That the stipulation in favor of a third person should
Once a contract is entered into, no party can renounce it C. Relativity (Relativity of Contracts) be a part, not the whole, of the contract.
unilaterally or without the consent of the other.
Art. 1311(1). Contracts take effect only between the parties, 3. That the contracting parties must have clearly and
When Stipulated their assigns and heirs, except in case where the rights and deliberately conferred a favor upon a third person, not a
obligations arising from the contract are not transmissible mere incidental benefit or interest.
An agreement of the parties that either one of them by their nature, or by stipulation or by provision of law. The
may terminate the contract upon a reasonable period of heir is not liable beyond the value of the property he 4. That the favorable stipulation should not be
notice is valid. received from the decedent. conditioned or compensated by any kind of obligation
Contract of adhesion whatsoever.
General rule
Example: In passenger buses, the contract releasing the 5. That the third person must have communicated his
Contracts take effect only between the parties, their acceptance to the obligor before its revocation.
bus company from any liability in case of death or assigns and heirs, except in case where the rights and
accidents, is void. But for waiver of liabilities in case of lost obligations arising from the contract are not transmissible 6. Neither of the contracting parties bears the legal
representation or authorization of the third party. Interference by third persons the performance of the prestation agreed upon.

Test of Beneficial Stipulations A third person may be held liable for damages IV. Consummation or death, which is the fulfillment or
because he has induced a party to the contract to violate performance of the terms agreed upon in the contract.
The third person acquires a right to the prestation only the terms thereof.
when this is in accordance with the intention of the ELEMENTS OF CONTRACTS
contracting parties, such as contract (Letter of credit Requisites of tortuous interference:
transaction) between a foreign bank and a local bank A. Essential Elements: elements without which, there
asking the latter to pay an amount to a beneficiary. 1. The existence of a valid contract can be no contract.

Contracts creating real rights 2. Knowledge by the third person of the existence of 1. Consent
the contract
Art. 1312: In contracts creating real rights, third 2. Object
persons who come into possession of the object of the 3. Interference by the third person in the contractual
relation without legal justification. 3. Cause
contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws. Consequences 4. Delivery (if real)

Enforceable to everyone and no one in particular 5. Form (if formal)

1. As to the contracting party who violated: specific
such as right of ownership performance or resolution with additional damages. B. Natural Elements: those which are derived from the
Example: When a Real estate mortgage is registered then it 2. As to the injured party: proceed against the third nature of the contract and ordinarily accompany the same.
is binding to all persons and anyone who deals with the person who induced the other party. They are presumed by law, although they can be excluded
property is deemed notified of the mortgage of the same. by the contracting parties if they so desire.
Collective Contracts
Contracts in Fraud of Creditors C. Accidental Elements: those which exist only when
These are the cases where the law authorizes the the parties expressly provide for them for the purpose of
Art. 1313: Creditors are protected in cases of will of the majority to bind a minority to an agreement limiting or modifying the normal effects of the contract (i.e.
contracts intended to defraud them. notwithstanding the opposition of the latter, when all have conditions, terms, modes)
Example: When a debtor enters into a contract in fraud of a common interest in the juridical act. E.g. Collective
Bargaining Agreement ALLOWED CLAUSES
his creditors, such as when he alienates property
gratuitously without leaving enough for his creditors (Art. STAGES IN EXECUTION OF CONTRACTS  Prohibition to marry: valid if not absolute
1187), the latter, although not parties to such contract of
alienation, may ask for its recission. I. Preparation, conception, or generation which is the  Exclusivity clause: distributor can't sell competitor
period of negotiation or bargaining. products
Tortuous Interference
II. Perfection or birth of the contract, which is the  Non-involvement clause: prohibits working for
Art. 1314: Any third person who induces another to moment when the parties come to agree on the terms of rivals for a definite period
violate his contract shall be liable for damages to the other the contract.
contracting party.  Dragnet clause: mortgage covers future obligations
III. After its perfection: OBLIGATION PHASE, includes
  Escalation/Adjustment clause: mutual consent for • How perfected - A real contract is not perfected by mere Must not be an offer without seriousness, or made
interest rate changes consent; delivery of the thing is also required. for fun or in jest, or pranks.

 Option to purchase: separate from contract ESSENTIAL REQUISITES OF CONTRACTS Provisions

• Right of first refusal: valid in writing and registered on 1. CONSENT OR MEETING OF MINDS Art. 1321: The person making the offer may fix the time,
Register of Deeds. place, and manner of acceptance, all of which must be
• Requisites of consent or meeting of minds: complied with.
• Automatic rental increase: valid within Rent
1. Plurality of subjects Art. 1322: An offer made through an agent is accepted
Control Law limits (20% for residential property).
Excess increase is void. 2. Capacity from the time acceptance is communicated to him.

3. Intelligent and free will Art. 1323: An offer becomes ineffective upon the death,
civil interdiction, insanity, or insolvency of either party
4. Express or tacit manifestation of the will before acceptance is conveyed.

CONSENSUAL CONTRACTS 5. Conformity of the internal will and its manifestation Art. 1325: Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
• Perfection - The perfection of a contract is the moment • Manifestation of consent - Consent is manifested by the mere invitations to make an offer.
from which it exists; the juridical tie between the parties concurrence of offer and acceptance with respect to the
arises from that time object and the cause of the contract. Acceptance letter in relation to Art. 1323: there is perfected
contract, as long as the letter is already sent before the
- How perfected - These contracts are perfected by mere • Offer - It is a unilateral proposition which one party occurrence of any event on Art. 1323.
consent which is the meeting of the minds of the parties makes to the other for the celebration of a contract.
upon the terms of the contract. The consent need not be • Sales advertisements - A business advertisement of
made expressly. Requisites of a valid offer: things for sale may or may not constitute a definite offer. It
is not a definite offer when the object is not determinate.
FORMAL CONTRACTS 1. It must be definite - The offer must be distinguished
from mere communications indicating that a party is Advertisements without specifications
• What are formal contracts? disposed to enter into a certain contract, or inviting the
other to make an offer. It is deemed as an offer to make an offer because there is
Those in which compliance with special external formalities
no definite offer.
is necessary for the validity of the contract. 2. It must be Complete
Option contracts
REAL CONTRACTS Indicating with sufficient clearness the kind of
contract intended and definitely stating the essential Art. 1324: When the offerer has allowed the offeree a
• What are real contracts?
condition of the proposed contract, as well as the non- certain period to accept, the offer may be withdrawn at any
Art. 1316: Real contracts, such as deposit, pledge and essential ones desired by the offeror. time before acceptance by communicating such
commodatum, are not perfected until the delivery of the withdrawal, except when the option is founded upon a
3. It must be Intentional consideration, as something paid or promised.
object of the obligation.
What is an option contracts? conditions. The contracts entered by minors can still become valid:

A preparatory contract that gives a party the Art. 1320: An acceptance may be express or implied. a. Upon reaching majority they ratify the same
exclusive right to decide on the offer within a definite time
and for consideration distinct from the price of the principal Implied acceptance: It may arise from acts or facts which b. The contract has been entered into through a
contract. reveal the intent to accept, such as the consumption of the guardian and approved by a guardianship court.
things sent to the offeree, or the fact of immediately
When perfected carrying out the contract offered. Valid contracts that a minor can enter:

It is perfected once option was given with a definite Withdrawal of Offer: The offeror may withdraw the offer at a. Contract of sale involving necessities
period and option fee was paid for privilege. any time before acceptance, even before the period for b. The minor giving consent to a contract and making
acceptance has expired. other party believe that he is capacitated (estoppel)
Violation of option contract
Revocation of Acceptance: The acceptance may be 2. Insanity/Imbecility/Dementia
When the item under an option contract is sold by the revoked before it comes to the knowledge of the offeror.
owner to a third person during the option period, then such It is enough that the insanity existed at the time the contract
sale is rescissible. New action before acceptance was made, not in a lucid interval. It is not necessary that
Period of Acceptance Pending the acceptance of an offer, the offeror can perfect there be a previous judicial declaration of mental incapacity.
a contract over the same thing with another person. If the Burden of proof: The same rests upon he who alleges it.
• With fixed period: the offeree may accept at any time until first offer is not revoked by him before it is accepted, then
such period expires. He must overcome the presumption of capacity to enter to
he becomes liable for damages to the first offeree for contract.
• No fixed period but person is present: the acceptance culpable impossibility of performance.
must be made immediately. 3. Deaf-mutism
Preferred offeree
• Person is absent: the acceptance may be made within The law refers to deaf-mute who does not know how to
As between the two offerees, however, the one whose write or is illiterate. Being deaf mute alone is not a valid
such time that, under normal circumstances, an answer acceptance perfected a contract first is given priority; the
can be received from him. ground for disqualification.
other party has only an action for damages.
• Effect of Delay: It is not the moment of sending but the 4. Drunkenness/Hypnotic Spell
Vices of Consent (Voidable)
time of receipt of the revocation or acceptance which is Applicable when a person through a superabundance of
controlling. 1. Vices of Capacity alcoholic drinks or the excessive use of drugs, may
2. Vices of Will become so mentally obscured that he is, for the time being,
comparable to an insane person in lack of understanding.
Acceptance
5. Hypnotism/Somnambullism
The acceptance must be for the same object and must be Vices of Capacity
unconditional. The utter want of understanding is a common element of
1. Minority (Unemancipated minors) both.
Counter-offer: If the acceptance changes the thing or
6. Special Incapacities 2. Violence/Intimidation upon the person or property of his spouse, descendants or
ascendants, to give his consent.
Examples: Being hospitalized, extremely sick, prodigal What is duress?
(spendthrift), absentee, insolvent Requisites of intimidation:
Duress is that degree of constraint or danger either actually
Vices of Will inflicted (violence) or threatened and impending 1. That the intimidation must be the determining cause
(intimidation), sufficient to overcome the mind and will of a of the contract, or must have caused the consent to be
Defect or lack of valid consent, in order to make the person of ordinary firmness. given.
contract voidable, must be established by full, clear, and
convincing evidence, and not merely by a preponderance When there is violence 2. That the threatened act be unjust or unlawful
thereof.
There is violence when in order to wrest consent, serious or 3. That the threat be real serious, there being an
1. Mistake/Error irresistible force is employed. evident disproportion between the evil and the resistance
which all men can offer, leading to the choice of the
In order that mistake may invalidate consent, it should refer Exception: Not every act of force or violence will cause contract as the lesser evil.
to the substance of the thing which is the object of the vitiated contracts.
contract, or to those conditions which have principally 4. That it produces a reasonable and well-grounded
moved one or both parties to enter into the contract. Requisite of violence/force: fear from the fact that the person from whom it comes has
1. That the physical force employed must be the necessary means or ability to inflict threatened injury.
Must be principal cause: Mistake as to the identity or
qualifications of one of the parties will vitiate consent only irresistible, or of such degree that the victim has no other Unjust act
when such identity or qualifications have been the principal course, under the circumstances, but to submit;
cause of the contract. The intimidation must be unjust, contrary to law or
2. That such force is the determining cause in giving morals, there being some evil intent.
Simple mistake: A simple mistake of account shall give rise the consent to the contract;
to its correction. Undue Influence
3. Evil upon any person of the contracting party or
False notion pertaining to the thing itself or any material even to the latter’s spouse, ascendants, descendants, or There is undue influence when a person takes
fact relevant to the contract; mistake must be substantial. property. improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
Kinds of mistake: Who may inflict force?
It is any means employed upon a party which, under
1. Mistake of Fact: as to the object, personal Force may be employed by one part or a third person in the circumstances, he could not well resist, and which
qualifications in a personal contract, and/or principal behalf of the former; the relative capacities of the party controlled his volition and induced him to give his consent
conditions on clauses. must be taken into account as to the force applied. to the contract, which otherwise he would not have entered
When there is intimidation? into.
2. Mistake of Law: generally, it does not vitiate
consent unless the parties are lead to believe of such error; There is intimidation when one of the contracting parties is Forms of undue influence:
the mistake should be on the application of law or legal compelled by a reasonable and well-grounded fear of an
consequences of their contract. The mistake should be 1. Moral coercion whereby a party abused his moral
imminent and grave evil upon his person or property, or ascendancy on the other to obtain the consent.
mutual and in good faith.
2. Moral ascendancy: confidential relations, constitutes fraud. the parties to conceal their true agreement which is
donation. Or when two deeds of sale are executed, one
3. Family relations Concealment or non-disclosure of material fact that having higher price and the other with lower one.
will affect subject matter or cause. In other words, there is
4. Confidential relations or any relations where trust fraud when there is a positive affirmative duty to reveal a Effects of simulation of contracts
and confidence are integral material fact, and that duty is not abided by.
Art. 1346. An absolutely simulated or fictitious
5. Feeble-mindedness or ignorance. 2. Active - It must be deliberate and willful. contract is void. A relative simulation, when it does not
6. Moral or financial dependence. prejudice a third person and is not intended for any
Determining cause: Besides being serious, the fraud must purpose contrary to law, morals, good customs, public
be the determining cause of the contract. It is this casual order or public policy binds the parties to their real
connection between the fraud and the contract which agreement.
Fraud - There is fraud when, through insidious words or vitiates the consent of the victim.
machinations of one of the contracting parties, the other is Absolute simulation contracts are void
induced to enter into a contract which, without them, he When fraud is not determining cause, it only gives
would not have agreed to. rise to an action for damages, but not for annulment of The nullity of the absolutely simulated contract is
contract. based on want of true consent; there is no intent to be
In relation to fraud in Art. 1171: The fraud occurs in bound. The contract does not legally exist; it is illusory, a
connection with the fulfillment of the obligation; while Simulation of Contract mere phantom. It is generally fraudulent and for the
under Art. 1338, the fraud is prior or simultaneous to the Art. 1345. Simulation of a contract may be absolute purpose of injuring third persons.
consent or the creation of the obligation. or relative. The former takes place when the parties do not Validity of relative simulation contracts
Requisites of fraud intend to be bound at all; the latter, when the parties
conceal their true agreement. The relatively simulated contract is valid and
1. It must have been employed by one contracting enforceable, except when it prejudices third persons or has
party upon the other Simulation is the declaration of fictitious will, an illicit purpose. However, such concealed contract must
deliberately made by agreement of the parties, in order to have all the essential requisites such as consent, object,
2. It must have induced the other party to enter into produce, for the purposes of deception, the appearance of and cause.
the contract a juridical act which does not exist or is different from that
which was really executed. 2. OBJECT / SUBJECT MATTER
3. It must have been serious
Absolute and Relative Simulations of Contract The object of a contract is its subject matter. It is the
4. It must have resulted in damage or injury to the thing, right, or service which is the subject matter of the
party seeking annulment Absolute Simulation: There is color of a contract, without obligation arising from the contract.
any substance thereof, the parties not having any intention
Kinds of fraud: to be bound. Requisites of Object:
1. Passive Relative Simulation: The parties have an agreement which 1. The object must be within the commerce of man.
they conceal under the guise of another contract.
Art. 1339: Failure to disclose facts, when there is a 2. It must be existing at the time of perfection of
duty to reveal them, as when the parties are bound by Example: A deed of sale of a piece of land is executed by contract.
3. It must be licit, or not contrary to law, morals, good morals, good customs, public order or public policy may Determinable when the object is valid for as long as
customs, public policy, or public order. likewise be the object of a contract. Otherwise, they are it is at least determinable as to quality or quantity.
void.
4. It must be possible. The object of a contract need not be individualized;
Time of determination of licitness is the time of the but it must be determinate as to its kind or species.
5. It must be determinate as to its kind. perfection of the contract.
The quantity of the object may be indeterminate, so
Within Commerce of Man Must be Possible long as the right of the creditor is not rendered illusory.
Art. 1347: All things which are not outside the Art. 1348: Impossible things or services cannot be 3. CAUSE OR CONSIDERATION
commerce of men, including future things, may be the the object of contracts.
object of a contract. All rights which are not intransmissible Cause or consideration is the essential reason
may also be the object of contracts. Things are impossible when they are not which moves the parties to enter into the contract. It is the
susceptible of existing, or they are outside the commerce immediate, direct and proximate reason which justifies the
(2) No contract may be entered into upon future of man. creation of an obligation through the will of the contracting
inheritance except in cases expressly authorized by law. parties.
Impossible personal services when they are beyond
Must Be Existing the ordinary strength or power of man. Requisites of cause or consideration:
It is essential that the object must be in existence at Difficulty of performance 1. It must exist
the time of the perfection of the contract, or that it has the
possibility or potentiality of coming into existence at some General rule: If a party charges himself with an 2. It must be true
future time. Thus, future things can be the object of obligation difficult of performance, he must abide by it. A
contracts. showing of mere inconvenience, unexpected impediments, 3. It must be licit
or increased expenses is not enough to relieve him of the Kinds:
Future Things as Object obligation.
Those which do not belong to the obligor at the time 1. Onerous
Exception: If the obstacles to the performance of
the contract is made; they may be made, raised, or the prestation are so great that they can only be overcome 2. Remuneratory
acquired by the obligor after the perfection of the contract. with sacrifices which are absolutely disproportionate, or
when accomplished, will prove to be dangerous to life and 3. Gratuitous
Includes not only material objects but also future
rights. Examples: a contractor can assign in advance the property.
Onerous Contracts
price which he expects to receive under a construction Must be Determinate
contract; an author can sell to a publisher a work he Art. 1350: In onerous contracts the cause is
intends to write; and a mortgage can be executed to Art. 1349: The object of every contract must be understood to be, for each contracting party, the prestation
secure a future debt. determinate as to its kind. The fact that the quantity is not or promise of a thing or service by the other; in
determinate shall not be an obstacle to the existence of the remuneratory ones, the service or benefit which is
Must be Licit contract, provided it is possible to determine the same, remunerated; and in contracts of pure beneficence, the
without the need of a new contract between the parties. mere liberality of the benefactor.
All services or things which are not contrary to law,
 The cause is the prestation that is reciprocally in fraud of existing creditors. Presumption of lawful cause
demandable between the parties.
Absence of Cause vs. Failure / Inadequacy of Cause Unless the contrary is proved, a contract is
The cause need not be adequate or an exact presumed to have a good and sufficient consideration. The
equivalent in point of actual value, especially in dealing with Art. 1352: Contracts without cause, or with unlawful presumption applies when no cause is stated in the
objects which have a rapidly fluctuating price. cause, produce no effect whatever. The cause is unlawful contract. But if a cause is stated in the contract, and it is
if it is contrary to law, morals, good customs, public order shown to be false, the burden of proving the legality of the
• Natural obligation: When the cause is a natural obligation, or public policy. cause is upon the party enforcing the contract.
or one of conscience, there is a sufficient cause to sustain
an onerous contract; and the cause will not be one of mere Art. 1353: The statement of a false cause in Cause vs. Motive
liberality. contracts shall render them void, if it should not be proved
that they were founded upon another cause which is true • Cause is the objective, intrinsic and juridical reason for
• Moral obligation: But a moral obligation arising wholly and lawful. the existence of the contract itself while motive is
from ethical considerations not constituting a natural psychological, individual or persona purpose of a party to
obligation, is not a sufficient cause for onerous contracts. Art. 1354: Although the cause is not stated in the the contract.
contract, it is presumed that it exists and is lawful, unless
Remuneratory Contracts the debtor proves the contrary. The cause is the objective of a party in entering into the
contract, while the motive is a person’s reason for wanting
One where a party gives something to another Art. 1355: Except in cases specified by law, lesion or to get such objective.
because of some service or benefit given or rendered by inadequacy of cause shall not invalidate a contract, unless
the latter to the former, where such service or benefit was there has been fraud, mistake or undue influence. The cause in each kind of contract is always the same; the
not due as a legal obligation. motive differs with each person
Want of cause
Example: Where Pedro agrees to give to Juan a Effect of Motive
piece of land in consideration of the service rendered by A simulated contract of sale is without any cause or
Juan in saving Pedro from drowning on some previous consideration, and is therefore null and void. General rule: The motive of a party does not affect the
occasion, the contract is remuneratory. The cause of the validity or existence of a contract.
No action necessary when want of cause: In such
contract is the service previously rendered as a voluntary case, no independent action to rescind or annul the The motive of a contracting party cannot be the basis for
act by Juan. contract is necessary, and it may be treated as non- the annulment of the contract, unless the realization of
Gratuitous Contracts existent for all purposes. such motives has been made a condition upon which the
contract is to depend.
These are essentially agreements to give donations. Illegality of cause
Motives cannot cure want of cause: The mere presence of
• Cause: The generosity or liberality of the benefactor is the Such agreement is void ab initio. motives cannot cure the absence of consideration.
cause in such contracts. Statement of false cause When motives may affect juridical act
• Voluntary conveyance valid: A voluntary conveyance, Where the cause stated in the contract is false, the latter
without any valuable consideration whatever, is good as When the motive of a debtor in alienating property is to
may nevertheless be sustained by proof of another licit defraud his creditors, the alienation is rescissible.
between the parties and cannot be set aside, unless made cause.
When the motive of a person in giving his consent is to prestation because nothing is written. REFORMATION OF INSTRUMENTS
avoid a threatened injury, as in case of intimidation, the
contract is voidable. Statute of Frauds (Art. 1403) Purpose of reformation of instruments:

When the motive of a person induced him to act on the  Certain agreements must be in writing to be  To accurately reflect the true intention of the parties
basis of fraud or misrepresentation by the other party, the enforceable involved.Basis:
contract is voidable.
 Includes agreements not to be performed within a  Reformation aims to correct mistakes, fraud, or
Motive regarded as cause year, promises to answer for another's debt, omissions in a written agreement to align it with the
marriage considerations, sale of goods over a actual contract.Who orders reformation:
When motive predetermines the purpose of the contract. certain amount, leases over one year, and credit
representations  Can be requested by either party or their
FORMS OF CONTRACTS successors in case of mutual mistake, or by the
 If not in writing, the agreement is not enforceable injured party or their heirs otherwise.Reformation vs.
1. Form for Validity, as an essential element of a
Annulment:
contract Effect on Statute of Frauds
 Reformation corrects errors in a valid existing
2. Form for Enforceability, statute of frauds The statute of frauds is no impediment to the reformation
contract, while annulment voids the entire
of an instrument, whether by way of correcting a
3. Form for Convenience agreement.Effects of reformation:
description which by mistake includes property other than
Form for Validity that intended, or omits the property from the description, or  Corrected instrument breathes life into the contract
conveys too much. with necessary adjustments.
Those which are required for the validity of the
contract Form for Convenience Effects of reformation

General rule: Contracts are binding parties regardless of To be effective against third parties, 1. The general rule is that it relates back to, and takes
form effect from the time of its original execution, especially as
 a contract must be notarized.
between the parties.
Exceptions: Some contracts forms are essential for it to be
 Real rights over immovable property require a Requisites of Reformation
valid example Donation of immovable or right of
public document.
immovable, written Donation of movable with value more
1. There must have been a meeting of the minds upon
than P5000, written, Sale of land through an agent, the  Acts involving real property, hereditary rights, the contract.
agency shall be in form of Special Power of Attorney. powers to administer property, and cession of
actions must be notarized. 2. The instrument or document evidencing the
Form for Enforceability
contract does not express the true agreement between the
 Contracts exceeding five hundred pesos must be in parties.
Those required for the purpose of proving the
writing.
existence of the contract such as in Statute of Frauds.
3. The failure of the instrument to express the
Contract is valid because it complied with the agreement must be due to mistake, fraud, inequitable
essential elements, but neither party can demand the conduct, or accident.
When Available not express the true intention of the parties, the courts may INTERPRETATION OF CONTRACTS
order that the instrument be reformed.
2. Art. 1361: When a mutual mistake of the parties • Written Contracts - Where the parties have reduced their
causes the failure of the instrument to disclose their real Mistake of Draftsman. Whenever an instrument with the contract into writing, the contents of the writing constitutes
agreement, said instrument may be reformed. (Mutual intention of carrying an agreement previously made, by the sole repository of the terms of agreement between the
mistake) which, due to mistake or inadvertence of the draftsman or parties.
clerk, does not carry out the intention of the parties, but
Requisites of Mistake: violates it, there is ground to correct the mistake by A contract is what the law defines it to be, and not what it is
reforming. called by the contracting parties.
1. That the mistake is one of fact
Art. 1365: If two parties agree upon the mortgage or pledge • Interpretation of terms - The language of the writing is to
2. That it was common to both parties be interpreted according to the legal meaning it bears in
of real or personal property, but the instrument states that
3. The proof of common mistake must be clear and the property is sold absolutely or with a right of repurchase, the place of its execution, unless the parties have reference
convincing (more than mere preponderance of evidence) reformation of the instrument is proper. to a different place

Who May File Action for Reformation? • Intent of the parties - In construction of an instrument,
the intention of the parties is to be pursued.
Art. 1362: If one party was mistaken and the other acted 1. 1361: Either of the parties
fraudulently or inequitably in such a way that the instrument Art. 1371: In order to judge the intention of the
does not show their true intention, the former may ask for 2. 1362: Only innocent party contracting parties, their contemporaneous and
the reformation of the instrument. subsequent acts shall be principally considered.
3. 1363: Only innocent party
Mistake of one party: A written instrument may be Determining intention
4. 1364: Only innocent party
reformed where there is a mistake on one side and fraud or The circumstances under which the contract was
inequitable conduct on the other. 5. 1365: Either of the parties made, including the situation of the subject thereof and of
The mistake of one party, under this article, must refer to When Prohibited the parties to it, may be shown, so that the judge may be
the CONTENTS OF THE INSTRUMENT, and not the subject placed in the position of those whose language he is to
matter or principal conditions of the agreement. In the latter Art. 1366: There shall be no reformation in the following interpret.
case an action for annulment of the contract is the proper cases:
Art. 1372: However general the terms of a contract
remedy. 1. Simple donations inter vivos wherein no condition is may be, they shall not be understood to comprehend things
Art. 1363: When one party was mistaken and the other imposed Wills that are distinct and cases that are different from those
knew or believed that the instrument did not state their real upon which the parties intended to agree.
2. When the real agreement is void
agreement, but concealed that fact from the former, the Scope of general terms
instrument may be reformed. 3. Art. 1367: When one of the parties has brought an
action to enforce the instrument, he cannot subsequently When a general and a particular provision are
Art. 1364: When through the ignorance, lack of skill, ask for its reformation. inconsistent, the latter is paramount to the former. So a
negligence or bad faith on the part of the person drafting particular intent will control a general one that is
the instrument or of the clerk or typist, the instrument does
inconsistent with it. favor of the party who conformed. exists between written and printed portions of a policy, the
written portion prevails.
Art. 1373: If some stipulation of any contract should Art. 1378: When it is absolutely impossible to settle doubts
admit of several meanings, it shall be understood as by the rules established in the preceding articles, and the Natural right
bearing that import which is most adequate to render it doubts refer to incidental circumstances of a gratuitous
effectual. contract, the least transmission of rights and interests shall When an instrument is equally susceptible of two
prevail. If the contract is onerous, the doubt shall be settled interpretations, one in favor of natural right and the other
Validity Favored in favor of the greatest reciprocity of interests. If the doubts against it, the former is to be adopted. The right to redeem
are cast upon the principal object of the contract in such a is a natural right, and a construction of a contract favoring
When interpreting a contract: it should be followed.
way that it cannot be known what may have been the
 If there are two possible interpretations, choose the intention or will of the parties, the contract shall be null and
one that makes the contract valid and legal. void.
FORMS OF CONTRACTS
 All parts of the contract should be considered Reciprocity of rights
together. 1. Form for Validity, as an essential element of a
Where a contract is susceptible of being interpreted contract
 Words with multiple meanings should be as a sale with right of repurchase, and as a loan with
understood in a way that aligns with the contract's mortgage, the latter interpretation is to be followed 2. Form for Enforceability, statute of frauds
nature. because it is in favor of the greater reciprocity of interests.
3. Form for Convenience
 The contract's general purpose should guide the Least transmission of rights
interpretation of unclear language.
Construction which would amount to impairment or
the loss of right is not favored; conservation and • Form for Validity - Those which are required for the
 Local customs can help clarify ambiguities in a
preservation, not waiver, abandonment or forfeiture of a validity of the contract
contract.
right, is the rule.
General rule: Contracts are binding parties regardless of
 Obscure terms should not benefit the party
Intention unknown form
responsible for the confusion.
A deed of exchange is void or inexistent where the Exceptions: Some contracts forms are essential for it to be
intention of parties relative to the objects of the exchange valid example Donation of immovable or right of
Obscure terms construed: cannot be definitely ascertained. immovable, written Donation of movable with value more
than P5000, written, Sale of land through an agent, the
The party who draws up a contract in which Art. 1379: The principles of interpretation stated in agency shall be in form of Special Power of Attorney.
obscure terms or clauses appear, is the one responsible for Rule 123 of the Rules of Court shall likewise be observed in
the obscurity or ambiguity; they must therefore be the construction of contracts. • Form for Enforceability - Those required for the purpose
construed against him. of proving the existence of the contract such as in Statute
Partly written contract of Frauds.
• Contract of adhesion: Since one party prepared the
contract, it should be construed against that party and in It is a well-settled rule that in case repugnance Contract is valid because it complied with the
essential elements, but neither party can demand the hereditary rights, powers to administer property, and said contract.
prestation because nothing is written. cession of actions. Contracts over five hundred pesos must
be in writing. It is a relief for the protection of one of the contracting
Statute of Frauds: Art. 1403.[2] parties and third persons from all injury and damage the
RESCISSIBLE CONTRACTS contract may cause, or to protect some incompatible and
(Agreements not complying with Statute of Frauds preferent right created by the contract.
are unenforceable unless in writing and signed by party or 1. Rescissible contracts
agent: Rescission is perfectly compatible with the validity
2. Voidable contracts of contract, but it does not require such validity as an
 Agreement not to be performed within a year essential condition. Hence, a voidable contract may also be
3. Unenforceable contracts
rescinded.
 Promise to answer for another's debt
4. Void or Inexistent contracts
Rescissible contracts are not void, and until set
 Agreement in consideration of marriage
aside in a rescissory action, they are legally effective,
 Sale of goods over 500 pesos without written convey title, and cannot be attacked collaterally upon the
• Rescissible Contract is a contract that has caused a grounds for rescission in a land registration proceeding.
evidence
particular damage to one of the parties or to a third person,
 Lease/sale of real property for more than a year and which for equitable reasons may be set aside even if it Requisites for Rescission:
is valid.
 Credit representations about a third person must be 1. The contract must be a rescissible contract, those
in writing. • Voidable Contract is a contract in which the consent of mentioned in articles 1381 and 1382.
one party is defective, either because of want of capacity
Effect on Statute of Frauds or because it is vitiated, but which contract is valid until set 2. The party asking for rescission must have no other
aside by a competent court. legal means to obtain reparation for damages suffered by
The statute of frauds is no impediment to the him (Art. 1383)
reformation of an instrument, whether by way of correcting • Unenforceable Contract is a contract that for some
a description which by mistake includes property other reason cannot be enforced, unless it is ratified in the 3. The person demanding rescission must be able to
than that intended, or omits the property from the manner provided by law. return whatever he may be obliged to restore if rescission
description, or conveys too much. is granted (Art. 1385)
• Void or Inexistent Contract is an absolute nullity and
• Form for Convenience produces no effect, as if it had never been executed or 4. The things which are the object of the contract must
entered into. not have passed legally to the possession of a third person
Those required to make the contract effective as acting in good faith (Art. 1385)
against third parties (Arts. 1357 and 1358). A. RESCISSIBLE CONTRACTS
5. The action for rescission must be brought within the
The contract must be NOTARIZED to create real RECESSION It is a remedy granted by law to the prescriptive period of four years (Art. 1389)
right contracting parties and even to third persons, to secure the
reparation of damages caused to them by a contract, even Rescissible Contracts:
Art. 1358 states that certain acts and contracts must be in a
if this should be valid, by means of restoration of things to 1. Lesion
public document, including those related to real property,
their condition at the moment prior to the celebration of
Art 1381(1): Those which are entered into by guardians Art. 1381(3): Those undertaken in fraud of creditors • Any sale made for fictitious or simulated
whenever the wards whom they represent suffer lesion by when the latter cannot in any other manner collect the considerations.
more than one-fourth of the value of the things which are claims due them.
the object thereof; • Any sale made for grossly inadequate
These are the contracts with the intention to considerations.
Art. 1381(2): Those agreed upon in representation of prejudice the rights of creditors.
absentees, if the latter suffer the lesion stated in the • Any sale on credit made by insolvent debtor.
preceding number; Requisite before a contract may be rescinded on ground
of fraud of creditors: • Any sale or transmission of property made after
Art. 1386: Rescission referred to in Nos. 1 and 2 of Article action is instituted against debtor.
1381 shall not take place with respect to contracts 1. That the plaintiff asking for rescission has a credit
prior to alienation, although demandable later; • Any sale where the buyer still has the exclusive
approved by the courts. possession of the things sold.
• LESION is the injury which one of the parties suffers by 2. That the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; • If the buyer knows that the property sold is the
virtue of a contract which is disadvantageous for him. only property of the vendor who is indebted.
When must Lesion exist to give rise to rescission? 3. That the creditor has no other legal remedy to
satisfy his claim, but would benefit by the rescission of the • Transfer of all properties of insolvent debtors or
The lesion must be known or could have been conveyance to the third person; debtor financially embarrassed
known at the time of making the contract, and not due to 4. Contracts for Things Under Litigation
circumstances subsequent thereto or unknown to the 4. That the act being impugned is fraudulent;
parties. 5. That the third person who received the property Art. 1381(4): Those which refer to things under
conveyed, if it is by onerous title, has been an accomplice litigation if they have been entered into by the defendant
When is a contract not rescissible even with lesion? without the knowledge and approval of the litigants or of
in the fraud.
The contract cannot be rescinded, although lesion competent judicial authority.
exists, if the guardian has secured the approval of the It refers to a contract executed by the defendant in
guardianship court for such contract (Art. 1386) When is there a presumption of fraud? a suit involving the ownership or possession of a thing,
when such contract is made without the knowledge and
Art. 1387: All contracts by virtue of which the debtor approval of the plaintiff or of the court.
1. Contracts for Absentees alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did Right of Transferee
The power and duties of a legal representative of an not reserve sufficient property to pay all debts contracted
absentee, appointed by the court, are the same as of those before the donation. Where the claim of the plaintiff in the pending
guardians. Thus, same rules on contracts of guardians. litigation has not been registered, and there are no legal
Alienations by onerous title are also presumed obstacles to the transfer, the transferee of a property in
Start of prescriptive period of four years: From the fraudulent when made by persons against whom some litigation, who acquires the same in good faith and for
discovery of lesion judgment has been issued. The decision or attachment valuable consideration, without knowledge or notice of the
need not refer to the property alienated, and need not have litigation or claim of the plaintiff, cannot be deprived of
2. In Fraud of Creditors / AccionPauliana been obtained by the party seeking the rescission. such property by a rescissory action.
 But if transfer is gratuitous: The transferee loses • Their creditors by virtue of the right granted by Art. VOIDABLE CONTRACTS
nothing by the rescission, and the contract may be 1177
rescinded even if he acted in good faith.
Art. 1385: Rescission creates the obligation to return
Example: Transfer of things in litigation whether or not there the things which were the object of the contract, together Voidable or Annullable Contracts
is notice of lispendens with their fruits, and the price with its interest; consequently, Existent, valid, and binding, although they can be
it can be carried out only when he who demands rescission annulled because of want of capacity or vitiated consent of
can return whatever he may be obliged to restore. one of the parties; but before the annulment, they are
5. Declared by Law Neither shall rescission take place when the things effective and obligatory between the parties.

Art. 1381(5): All other contracts specially declared by which are the object of the contract are legally in the The following contracts are voidable or annullable, even
law to be subject to rescission. possession of third persons who did not act in bad faith.In though there may have been no damage to the contracting
this case, indemnity for damages may be demanded from parties:
Nature and Effects of Rescission the person causing the loss.
1. Those where one of the parties is incapable of
Art. 1383: The action for rescission is subsidiary; it Mutual Restitution giving consent to a contract;
cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for The only possible application of the rule that the 2. Those where the consent is vitiated by mistake,
the same. party seeking rescission must offer to restore that which he violence, intimidation, undue influence or fraud. (Art. 1390)
has received from the other, is in contracts executed by
The plaintiff asking for rescission must prove that he guardians or administrators in Ar. 1381 (1) and (2).
has no other legal means to obtain reparation.
Prescriptive Period Rescission vs. Annulment
Art. 1384: Rescission shall be only to the extent
necessary to cover the damages caused. Art. 1389. The action to claim rescission must be Nullity, as its name implies, declares the inefficacy
commenced within four years. which the contract already carries in itself, while rescission
Extent of Rescission merely produces that inefficacy, which did not exist
Minority of Party essentially in the contract.
The rescission is only in favor of the plaintiff creditor;
not all the creditors. A minor who is a party to a contract of sale must Nullity, to be cured, requires an act of ratification,
bring the action for rescission within four years after while rescission, to be ineffective, needs no ratification.
Who May Bring Action? attaining the age of majority.
In nullity, the direct influence of the public interest is
The person who is injured by the rescissible noted, while in rescission private interest alone governs.
contract, such as the ward or absentee in the case of
lesion, the creditors prejudiced by a fraudulent alienation, Nullity based on a vice of the contract which
and the plaintiff in a case where a thing in litigation is invalidates it, while rescission is compatible with the
alienated by the defendant. perfect validity of the contract.

The heirs of these persons. Nullity is a sanction, while rescission is a remedy,

the law predominating in the former, and equity in the latter. by minors or other incapacitated persons, from the time the 1. If the plaintiff lost the object of contract, action is
guardianship ceases. barred.
While nullity can be demanded only by the parties to
the contract, rescission may be demanded even by third Application of period 2. If the defendant lost the object, he must return the
parties affected by it. value of the object.
The period of prescription provided in this article
Annulment as a Remedy applies to the parties to the contract but not to third 3. When there will be unjust enrichment
persons.
It must be declared by the court by final judgment. Ratification / Confirmation
Registered documents
It is also a sanction imposed by law who entered → It is that act or means by which efficacy is given to a
into contract by bad faith. Discovery of fraud must be reckoned to have taken place contract or an obligation which suffers from a vice of
from the time the document was registered in the office of curable nullity.
Annulment as a defense the register of deeds, for the familiar rule is that registration
is a notice to the whole world. → It extinguishes the action to annul voidable contract.
It can also be invoked as defense by defendant-innocent There is no need for juridical action for the same to take
party when sued for performance of contract. Art. 1401: The action for annulment of contracts effect.
shall be extinguished when the thing which is the object
Who may bring an action for annulment of contract? Ratification vs. Acknowledgement
thereof is lost through the fraud or fault of the person who
Only innocent party on file or his guardian or has a right to institute the proceedings. → Confirmation or ratification cures a defect of nullity,
representative while acknowledgement remedies deficiency of proof.
If the right of action is based upon the incapacity of any
Any other person with interest, such as solidary co- one of the contracting parties, the loss of the thing shall not Requisites of Confirmation
debtor, person subsidiarily liable, accommodation be an obstacle to the success of the action, unless said
mortgagors. loss took place through the fraud or fault of the plaintiff. 1. That the contract is voidable or annullable, or one in
which the consent of one party is defective, either because
What is the prescriptive period for an action for annulment What are the effects of annulment? of lack of capacity to contract or because of error, fraud,
of contract? violence, intimidation or undue influence.
The action for annulment shall be brought within 2. That the ratification is made with knowledge of the
four years. • Liability for damages
cause for nullity.
When does the prescriptive period commence? • Mutual restitution (status quo ante)
3. That at the time the ratification is made, the cause
In cases of intimidation, violence or undue influence, • It must be contemporaneous restitution. of nullity has already ceased to exist.
from the time the defect of the consent ceases. How is confirmation made?
In case of mistake or fraud, from the time of the → When mutual restitution not applicable: (as only one → Two ways: Express and Implied ratification.
discovery of the same. party will only restitute)
1. Express ratification
And when the action refers to contracts entered into Annulled contract involving incapacitated party
Clear manifestation, either oral or written, of the person  Agreement not to be performed within a year
entitled to ask for annulment that he agrees to be bound by
the contract or that he will not seek its annulment, would be UNENFORCEABLE CONTRACTS  Promise to answer for another's debt
express ratification. • An unenforceable contract is one which cannot be  Agreement in consideration of marriage, except
What are the requisites of Express ratification? enforced unless it is first ratified in the manner provided by mutual promise to marry
law.
They are the same as those for implied ratification it  Sale of goods over 500 pesos without acceptance
is only in the form that these two kinds of ratification differ. The contract is valid and there is no vice in consent, or payment
but neither of the party can enforce the same.
2. Implied ratification  Lease over one year, sale of real property or interest
Unenforceable contract vs. annullable and rescissible
It may be implied from the conduct or acts of the contracts  Representation of a third person's credit.
party entitled to ask for annulment.
Annullable and rescissible contracts produce legal
Example: effects unless they are set aside by a competent court,
Statute of Frauds
while the unenforceable contract does not produce any
1. By silence or acquiescence effect unless it is ratified. Statutes require certain contracts to be in writing to
2. By acceptance and retention of benefits derived prevent fraud and perjury. The statute does not take away
Kinds of Unenforceable Contracts
from the contract. the right to contract but regulates the formalities needed
1. Unauthorized Contracts for enforceability. The goal is to ensure contracts are
Who May Ratify? backed by written evidence signed by the party involved to
Art. 1403 (1): Those entered into in the name of prevent reliance on memory.
1. Injured party after attaining capacity another person by one who has been given no authority or
2. Guardian of injured party even if the latter is still legal representation, or who has acted beyond his powers;
incapacitated Governed by Art. 1317 and principles of agency Validity of contracts under the Statute of Frauds

 Statute of frauds outlines how contracts

must be proven, not necessarily invalidating them if
What are the effects of Ratification? When does it occur? not in writing.
→ After a contract has been validly ratified, no action to When a person enters into a contract for and in the
annul the same can be maintained based upon defects  It is specific to the parties involved, and
name of another, without authority to do so, the contract unenforceable contracts can't be challenged by
relating to its original validity. does not bind the latter, unless he ratifies the same. third parties.
Retroactivity of ratification Contracts Infringing the Statute of Frauds
 Partial performance eliminates the defense of
Its effect retroacts to the moment when the contract was Art. 1403(2): Agreements not following Statute of statute of frauds.
entered into. Frauds are unenforceable unless in writing and signed by
 It applies to fully executory contracts, not executed
the party charged or their agent. Includes:
 or partially executory ones. The action to rescind prescribes while the action to the essential requisites, is not susceptible to ratification.
declare the nullity of void contracts never prescribes.
The action for annulment of a voidable contract
Void/inexistent contract vs.unenforceable contracts: prescribes, while the action to declare the nullity of a void
contract does not prescribe.
They are similar in that they cannot be the basis of
Contracts Entered by Both Incapacitated Parties actions to enforce compliance. Characteristics of Void Contracts
Art. 1403(3): Contracts where both parties are They differ in that unenforceable contracts can be 1. The contract produces no effect whatsoever either
incapable of giving consent. ratified and thereafter enforced, while the latter can never against or in favor of anyone; hence, it does not create,
be ratified and become enforceable. modify or extinguish the juridical relation to which it refers.
 Contract cannot be enforced unless previously
ratified. In void contracts, there is no contract at all; while in 2. No action for annulment is necessary, because the
unenforceable contracts, there is a contract, which, nullity exists ipso jure; a judgment of nullity would be
 Ratification by one party makes contract voidable,
however, cannot be enforced unless properly ratified. merely declaratory.
giving option to enforce against non-ratifying party
or request annulment. Void/inexistent contract vs. voidable contracts 3. It cannot be confirmed or ratified.

Voidable contracts are those in which the essential 4. If it has been performed, the restoration of what has
elements are present, but consent is vitiated by want of been given is in order.
VOID / INEXISTENT CONTRACTS
capacity, or by error, violence, intimidation, undue
influence, or deceit; while a void contract is one in which Examples of Inexistent and Void Contracts:
• A void or inexistent contract is one which has no
force and effect from the very beginning, as if it had never one of those essential requisites is wanting, either in fact or 1. Those whose cause, object or purpose is contrary
been entered into, and which cannot be validated either by in law, or is declared void by statute. to law, morals, good customs, public order or public policy;
time or ratification. (void)
An annullable contract is valid until it is set aside
Void/inexistent contract vs. rescissible contracts and its validity may be assailed only in an action for that 2. Those which are absolutely simulated or fictitious;
purpose by a party to the contract, and never by a third (void)
In rescissible contract, the defect is in their effects, person. On the other hand, inexistent contract implies that
either to one of the parties or to a third party; while in void there is not contract but only the appearance of one, and it 3. Those whose cause or object did not exist at the
contracts, the defect is inherent in the contract itself. produces no effect even if not set aside by a direct action. time of the transaction; (inexistent)

The nullity of the inexistent contract is a matter of The nullity of a void contract can be set up against 4. Those whose object is outside the commerce of
law and public interest, while rescission is based on equity anyone who asserts a right arising from it; not only against men; (void)
and is more a matter of private interest. the first, but against all his successors who are not
protected by law. The nullity of a voidable contract can be 5. Those which contemplate an impossible service;
If no action is taken to set aside a rescissible (void)
set up only against a party thereto.
contract, it remains valid and produces all its effects; in
void contracts, there are no legal effects even if no action An annullable contract may be rendered perfectly 6. Those where the intention of the parties relative to
is taken to set it aside. valid by ratification, but an inexistent contract, not having the principal object of the contract cannot be ascertained;
(inexistent) 1. In case of In Pari Delicto undertaking

7. Those expressly prohibited or declared void by law. What is the principle of in pari delicto? 2. In case one party is innocent or disadvantaged
(void)
When the defect of a void contract consists in the illegality When only one of the contracting parties is at fault,
of the cause or object of the contract, and both of the he cannot recover what he has given by reason of the
parties are at fault or in pari delicto, the law refuses them contract, or ask for the fulfillment of what has been
Action for Declaration of Nullity every remedy and leaves them where they are. promised him. The other, who is not at fault, may demand
What is the prescriptive period? the return of what he has given without any obligation to
Neither may file an action for performance or to comply his promise.
It does not prescribe deliver what have been delivered
When is recovery allowed?
Is the action separable? Object of contract must be confiscated in favor of
the government. In a contract that stipulates for payment of usurious
If the stipulations can be separated from each other, interest.
then those which are void will not have any effect, but "Both parties are criminally liable"
those which are valid will be enforced. In case of doubt, the Contracts requiring employee to render service
2. In case one party is innocent or disadvantaged more than 8 hours or below minimum wage.
contract must be considered as divisible or separable.
The law allows recovery of what have been paid or The employee is entitled to recover overtime pay or
Who may bring the action? delivered by innocent or less guilty party. difference between actual payment and minimum wage.
• The parties to the contract; B. Prohibited (Not illegal, not a crime) Contracts involving goods in excess of price ceiling.
• Third persons directly affected by the contract. 1. In case of In Pari Delicto
Effects and remedies in illegal and prohibited contracts When the fault is on the part of both contracting
A. Illegality parties, neither may recover what he has given by virtue of
the contract, or demand the performance of the other's