CONTRACTS

ATTY. RENZ GERALD J. GRAN, R.N.

GENERAL PROVISIONS
Art. 1305. A contract is a meeting of minds between two
persons whereby one binds himself, with respect to the other,
to give something or to render some service.
Contract
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.

Parties to a contract
The term "persons" actually refers to the parties to the contract.

A person may be a natural person or an artificial person like a

partnership or a corporation.
Elements of a contract
a. Essential elements - Those without which there will be
no contract.
1. Consent of the contracting parties;
2. Object certain which is the subject matter contract.
3. Cause of the obligation which must be established.
b. Natural elements — Those found in certain contracts
and are presumed to exist, unless set aside or suppressed by
the parties (such as warranty against eviction and warranty
against hidden defects in a contract of sale).

c. Accidental elements - Those that refer to particular

stipulations that may be agreed upon by the parties (such as
the terms of payment, interest rate and place of payment).
Classification of contracts
1) According to perfection or formation
1) Consensual — Those that are perfected by the mere
consent of the parties (such as sale, barter and lease).
2) Real — Those that are perfected by the delivery of the
object of the contract (such as depositum, pledge and
commodatum).
3) Formal or solemn — Those that must be in the form
provided by law so that they may be perfected (such as
the donation of an immovable which, together with the
acceptance of done, must be in a public instrument).
2)According to cause
1) Onerous — Those where there is an exchange of
valuable consideration (such as sale, lease and barter).
2) Gratuitous — Those where one party receives no
equivalent consideration (such as donation and
commodatum). The cause of which is the liberality of
the benefactor.
3) Remunerative or remuneratory — Those where one
prestation is given for a benefit or service previously
rendered. The cause of these contracts is the service or
benefit remunerated.
3 As to form
1) Express — One in which the terms are fully and
explicitly stated in words, whether oral or written.
2) Implied — One that can be inferred from the conduct of
the parties.

4. According to importance or dependence of one upon another

3) Principal - One that can stand independently by itself
4) Accessory - One whose existence depends upon another
contract
5) Preparatory - One which serves as a means by which
other contracts may be entered into.
5) According to name or designation
1) Nominate — Those that have a special name under the
law (sale, lease, barter and partnership).
2) lnnominate — Those that do not have a special name
under the law.

6) According to risk or fulfillment

3) Commutative — Those where the parties give equal or
almost equal values (sale and barter).
4) Aleatory — Those whose fulfillment depends upon
chance; thus, the values given by the parties vary
because of the risks involved.
7) According to the parties obligated
1) Unilateral — Those where only one of the parties is
obligated to give or do something (commodatum).
2) Bilateral – those where both parties are required to give
or do something (sale and barter).

8) According to subject matter

3) Contracts involving things (Sales and barter).
4) Contracts involving rights (Usufruct and assignment of
credits
5) Contracts involving services (Agency and lease of
service).
9) According to the time of fulfillment
1) Executed - One fully performed on both sides.
2) Executory - One that has not been performed.
Contract of Adhesion
• One in which one of the parties imposes a ready-made
form of contract, which the other party may accept or
reject, but which the latter cannot modify.
• It give no room for negotiation and deprives the latter
the opportunity to bargain on equal footing.
• Adhesion contracts are viewed as traps for the weaker
party whom the courts of justice must protect.
• Not necessarily void per se, but they are construed
strictly against the one who prepared such contract.
Stages of a contract
a) Preparation or conception- Involves preliminary
negotiation and bargaining and discussion of terms
and conditions, with no arrival yet of a definite
agreement.
b) Perfection or birth - The point when there is a meeting
of minds between the parties on a definite subject
mattered and a valid cause or consideration.
c) Consummation or death or termination - This occurs
when the parties fulfill or perform the terms agreed
upon in the contract, culminating in the extinguishment
thereof.
Art. 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Autonomy of Contracts or Freedom to Stipulate
• The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem
convenient.
• This freedom, however, is not absolute. It is subject to
the limitation that such stipulations, clauses, terms and
conditions are not contrary to law, morals, good custoins,
public order or public policy.
• Any stipulation, clause, term or condition that is contrary
to law, morals, good customs, public order or public
policy is void.
Limitations on the freedom to contract
a. Law
• Contracts must respect the law because the law is
deemed incorporated in the contract.
• Thus, a stipulation that the creditor shall appropriate for
himself the thing pledged or mortgaged upon failure of
the debtor to pay at maturity (pactum commissorium) is
void for being contrary to law: (Art. 2088)
b. Morals
• Morals relate to the generally accepted standard of
rightness of human conduct.
• Thus, an agreement by the debtor to work as servant
without pay until he could find money to pay the debt is
void for being contrary to morals as this amounts to
involuntary servitude.
• An agreement between a man and woman to live
together as husband and wife without the benefit of
marriage being contrary to morals is likewise void.
c. Good customs
• Custom refers to a rule of conduct formed by repetition
of acts, uniformly observed (practiced) as social rule,
legally binding and obligatory.

d. Public order and public policy

• Public order signifies public safety.
• Public policy refers not only to public safety but to
considerations which are moved by the public good.
• A contract is contrary to public policy "if it has a
tendency to be injurious to the public or against the
public good." (Ferrazini vs. Gsell, supra)
The following agreements have been held to be contrary to
public policy and are considered void:
• An agreement to hide a crime, to suppress evidence and
to stifle the prosecution of the offender is void because
the public has interest in the prosecution and
punishment of criminals.
• An agreement that encourages the commission of fraud.
• An agreement exempting a carrier from liability for gross
negligence.
• An agreement that constitutes an undue or unreasonable
restraint of trade, such as the prohibition to engage in
any business within a period of five years after leaving
the services of the employer.
• An agreement not to compete without any restriction as
to the time and place, as this will be considered in
restraint of trade.
Art. 1307. Innominate contracts shall be regulated by the
stipulations of the parties, by the provisions of Titles I and
II of this Book, by the rules governing the most analogous
nominate contracts, and by the customs of the place.
Innominate contract
One that has no particular name under the law. It is a contract
that does not follow any prescribed class, but is recognized by
law.

Kinds of innominate contracts

a. Do ut des (I give and you give)
b. Do ut facias (I give and you do)
c. Facio ut des (I do and you give)
d. Facio ut facias (I do and you do)
Rules governing innominate contracts
a. Stipulations of the parties
b. Titles I and II of Book IV - Obligations and Contracts
c. Rules governing the most analogous nominate contracts
d. Customs of the place.
Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
Principle of mutuality of contracts
• Since it is the result of an agreement, a contract must
bind both contracting parties.
• After a party has voluntarily entered into a contract, he
cannot revoke or renounce it without the consent of the
other.
• The mere fact that he had made a poor bargain is not a
ground to, set aside the contract.
• A party cannot unilaterally disregard the contract
because its validity or compliance cannot be left to the
will of one of them.
• The binding effect of a contract is based on the principle
that obligations arising from contracts have the force of
law between the contracting parties, and there must be
mutuality between them based essentially on their
equality.
• The ultimate purpose is to render void a contract
containing a condition which makes its fulfillment
dependent solely upon the uncontrolled will of one of
the contracting parties.
• Thus, if the fulfillment of the suspensive condition of an
obligation depends upon the sole will of the debtor, the
obligation and the condition are void since compliance is
dependent upon him alone.
Art. 1309. The determination of the performance may be left to
a third person, whose decision shall not be binding until it
has been made known to both contracting parties.

Art. 1310. The determination shall not be obligatory if it is

evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances.
Determination of performance by a third person.
• An agreement whereby the determination of the
performance of a contract is left to a third person is
valid.
• The decision of the third person shall be binding upon
the parties after it has been made known to both of
them, except when it is evidently inequitable.
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received
from the decedent.

If a contract should contain some stipulation in favor of a

third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (1257a)
Art. 1312. In contracts creating real rights, third persons who
come into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and
the Land Registration Laws. (n)

Art. 1313. Creditors are protected in cases of contracts

intended to defraud them. (n)

Art. 1314. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting
party.
Principle of relativity of contracts
• A contract is generally effective only between the
parties, their assigns and their heirs.
• Accordingly, only the parties can maintain an action to
enforce the rights and obligations arising from the
contract.
• As regards obligations, the heirs shall not be liable
beyond the value of the property they receive from the
decedent.
When a contract does not take effect among the assigns and
heirs
a. When the rights and obligations arising from the
contract are not transmissible by their nature.
b. When the parties stipulated against the transmissions
c. When the law prohibits the transmission of the rights
and obligation

Thus, in a contract of partnership, the rights of a general

partner are not transmitted to his heirs upon his death as
provided by law. Likewise, the death of a principal or of the
agent extinguishes the contract of agency and there rights are
not passed on to their heirs.
When a contract may be enforced by or against a third person

a. If the contract should contain some stipulation clearly and

deliberately conferring a favor upon a third person
(stipulation pour autrui). A mere incidental benefit or interest
of person is not sufficient.

In order that the third person can demand the fulfillment of

the stipulation, he must communicate his acceptance to the
obligor before its revocation. Acceptance may be in the form
of demand.
b. In contracts creating real rights, third person who come in
to the possession of the object of the contract are bound
thereby, subject to the provision of the Mortgage Law and the
Land Registration laws.

c. In contracts intended to defraud creditors.

d. If the contract has been violated by a party by reason of

the inducement of a third person.
The third person who induced the party to violate his contract
shall be liable to the other contracting party although such
third person was not a party to it.

The basis of liability of the third person is unwarranted

interference with the contract.
Art. 1315. Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law.

Art. 1316. Real contracts, such as deposit, pledge and

Commodatum, are not perfected until the delivery of the
object of the obligation.
Principle of Consensuality of contracts
Contracts are perfected by mere consent, i.e., when there is a
meeting of minds with respect to the subject matter and the
cause of the contract.

Real Contracts:
• Deposit- A contract constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same.
(Art. 1962).
• Pledge - A contract whereby a person delivers a movable
property as security for the payment of a principal
obligation. (Art. 2093)
 • Commodatum - This is a contract whereby one of the
parties delivers to another something not consumable so
that the latter may use the same for a certain time and
return it. (Art. 1933)

b. Formal or solemn contracts - These contracts must be in the

form provided by law for their perfection, such as the
donation of a real or movable property.

Principle of obligatory force of contracts and compliance in

good faith; consequences of perfection
Obligations arising from contracts shall have the force of law
between the contracting parties and should be complied with
in good faith.
Upon the perfection of the contract, the parties are bound by
the following:
a. The fulfillment of what has been expressly stipulated.
b. All the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Art. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right
to represent him.

A contract entered into in the name of another by one who has

no authority or legal representation, or who has acted beyond
his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has
been executed, before it is revoked by the other contracting
party.
Contracts entered into in the name of another.
As a general rule, no one may contract in the name of another
EXCEPTIONS:
a. When he is authorized by the party in whose name the
contract was entered into (contract of agency).
b. When he has by law a right to represent the person in
whose name the contract was entered into.

Effect if contract is unauthorized

A contract entered into by one who has no authority or who
has acted beyond his powers, shall be unenforceable, unless it
is ratified, expressly or impliedly, by the person in whose
behalf it has been executed, before it is revoked by the other
contracting party.
Ratification, concept and effect
• Ratification refers to the adoption by a person of an act
performed by another
• Ratification cleanses the contract from all its defects
from the moment the contract was entered into.
• Thus, there is a retroactive effect, which means that it
was as if the contract was authorized from the start.
ESSENTIAL REQUISITES OF CONTRACTS

GENERAL PROVISIONS
Art. 1318. There is no contract unless the following requisites
concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

Essential requisites of a contract
a. Consent of the contracting parties.
b. Object certain which is the subject matter of the
contract.
c. Cause of the obligation which is established.

In real contracts and formal or solemn contracts, the following,

in addition to the said three elements, must be present in order
for the contract to be perfected:
d. Real contracts - The object of the contract must be
delivered. (See Art. 1315.)
e. Formal contracts - The object must be in the form
provided by law, such as a written instrument which
may either be public or private.
CONSENT
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.

Acceptance made by letter or telegram does not bind the

offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered into
in the place where the offer was made.
Consent
Consent is the manifestation of the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract.

Characteristics of consent
a. The consent must be given by two or more parties.
b. It must be intelligently given.

Consent is intelligently given if the parties are capable or

capacitated. Thus, if one party is insane, the contract is
voidable because an insane person "is not possessed of mind
and reason equal to a full and clear understanding of his act,"
or "there is a complete absence of power to discern".
 c. It must be freely, voluntarily and consciously
given.

Thus, if consent is given because of violence, intimidation or

undue influence, or if by means of fraud or mistake, the
contract is voidable.

d. The person giving his consent should not be

suffering from any legal disability.

Requisites for the meeting of minds

a. The offer must be certain.
• An offer is a proposal to enter into a contract.
• It is the signification by one person to another of his
willingness to enter into a contract with him on the
terms specified in the offer.
• The person making the proposal or offer is known as the
offerer, while the person to whom it is made is known as
the offeree.
• The offer must be definite, complete and intentional. It
must be certain so that the liability of the parties may be
fixed. If it is indefinite, its acceptance will not give rise
to a contract.
• Thus, "I will sell to you my car" is an offer that is
uncertain because the price is not stated. Likewise, "I
will try to consider the purchase of your lot for
P100.000.00' is an indefinite offer because there is no
resolution to perform the act. But "I will buy your cell
phone for P3,000.00 cash" is an offer that is certain and
will give rise to a contract if accepted.
b. The acceptance must be absolute.
• Acceptance is the act of agreeing either expressly or by
conduct to the offer of another so that a contract is
concluded and the parties become legally bound.
• The acceptance must be absolute. To conclude an
agreement, the acceptance must in every respect meet
and correspond with the terms and conditions of the
offer. This requirement on acceptance is referred to as
the "mirror image rule" which provides that the terms of
the acceptance must exactly match or "mirror" the terms
of the offer.
• An acceptance that varies or modifies any term or
condition of the offer becomes a qualified acceptance. If
the acceptance is qualified, there is no concurrence of
minds. There is merely a counter-offer.
Acceptance by letter or telegram
a. When it binds the offerer
• Acceptance by letter or telegram binds the offerer from
the time it comes to his knowledge.
• Knowledge may be actual or constructive. In the case of
constructive knowledge, this takes place when the letter
or telegram is received in the house or office of the
offerer by a person of reasonable discernment.

b. Place of perfection
• If the acceptance is by letter or telegram, the contract is
deemed to have been perfected in the place where the
offer was made.
• Any question concerning the contract shall be governed
by the laws of the place where the offer was made.
c. Effect of revocation of offer or acceptance
• If the offer was revoked before the offerer came to know
of the acceptance, no contract is perfected because there
was no meeting of minds.
• If the acceptance was given but it is revoked by the
offeree before the acceptance came to the knowledge of
the offerer, no contract is likewise perfected because
there was no meeting of minds.
Art. 1320. An acceptance may be express or implied.
Form of Acceptance
a) Express - This may be oral, or written such as by letter
or telegram.
b) Implied - This can be inferred from the conduct of the
offeree showing his intention to accept.
Art. 1321. The person making the offer may fix the time, place,
and manner of acceptance, all of which must be complied
with.
Time, place and manner of acceptance
• The person making the offer may fix the time, place and
manner of acceptance, all of which must be complied
with.
• If the acceptance is not in conformity with what the
offerer wants, the acceptance becomes a counter-offer or
counter-proposal
Art. 1322. An offer made through an agent is accepted from the
time acceptance is communicated to him.
The provision applies when both the offer and the acceptance
were made through an agent. The knowledge of the agent of
the acceptance is deemed knowledge of the principal because
the agent is merely an extension of the personality of the
principal.

If the offer was made by the principal, but the acceptance was
communicated to the agent, such knowledge by the agent
results in the perfection of the contract if the agent was duly
authorized to receive the acceptance. Otherwise, the contract is
not perfected until the agent has communicated the acceptance
to the principal.
Art. 1323. An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
When offer becomes ineffective
If the offerer has made an offer, such offer becomes ineffective
upon his or the offeree's death, civil interdiction, insanity, or
insolvency before the offerer comes to know of the acceptance.

• Death of a person extinguishes his civil personality;

• civil interdiction, an accessory penalty for the commission
of an offense, deprives the offender during the time of his
sentence of the right to manage his property and to dispose
of it by any act or conveyance inter vivos:
• insanity deprives a person of his legal capacity to act; and
• insolvency, modifies or limits his capacity to enter into a
contract.
Other instances when offer becomes ineffective:
a. Lapse of the period given to the offeree to signify his
acceptance of the offer.
b. Destruction or loss of the subject matter of the contract.
c. Supervening illegality of the object of the contract or of
the object itself by reason of legislation subsequent to
the offer.
d. Acceptance which deviates from the terms of the offer,
or rejection by the offeree of the offer.
e. Revocation by the offerer of the offer.
Art. 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as
something paid or promised.
Option contract
• A contract whereby the offerer grants the offeree the
privilege to accept the offer within a certain period of
time.
• The period granted to the offeree within which to accept
the offer is called option period, while the money paid
or promised to be paid by the offeree as consideration
for the option is known as option money, which is
separate and distinct from the purchase price.
• The cause or consideration for the option may, however,
be the liberality of the offerer.
When the offer may be withdrawn if there is an option
a) If the option is not founded upon a valuable
consideration, the offer may be withdrawn at anytime
before acceptance by communicating such withdrawal.
b) If the option is founded upon a valuable consideration,
there was option money paid or promised to be paid by
the offeree, the offer may not be withdrawn before the
lapse of the option period. Otherwise, the offerer can be
held liable for damages for breach of contract.
Option money distinguished from earnest money
• Earnest money is the money given as part of the
purchase price and as proof of the perfection of the
contract of the sale.
• It is likewise a proof of commitment by the buyer to the
contract of sale.

• Option money is separate and distinct from the purchase

price.
• It is the consideration given to bind the offerer in the
contract of option.
• The giving thereof does not necessarily result in a
contract of sale because the offeree may decide not to
accept the offer of the offerer to sell.
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
Nature of business advertisements
• Business advertisements of things for sale are not
definite offers, but mere invitations to make an offer.
(Art. 1325)
• However, when the advertisement contains all the
specific particulars required of a contract, the
advertisement is a definite offer.
Art. 1326. Advertisements for bidders are simply invitations to
make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears.
Nature of advertisements for bidders
Advertisements for bidders are mere invitations to make
proposals. When the proposals are submitted, the advertiser is
not bound to accept any of them, whether they be the highest
or lowest, or even the only, bidder. The advertiser may
consider other factors such as the financial capability,
reputation and experience of each bidder. The invitation to
make proposals, however, may indicate a contrary intention.
Art. 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not

know how to write.
Persons incapable of giving consent
a) Unemancipated minors.
• A minor is a person under 18 years of age. Emancipation
takes place by the attainment of majority which
commences at the age of 18 years.

b) Insane or demented persons.

• An insane or demented person is one who is not
possessed of mind and reason equal to a full and clear
understanding of his act.
• Previous declaration of insanity by the court is not
required for as long as it is shown that the insanity
existed at the time the contract was entered into.

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

Effect of incapacity on the contract
a) If only one of the parties is incapacitated, the contract is
voidable, (Art. 1390)
b) If both parties are incapacitated, the contract is
unenforceable. (Art. 1403)
Art. 1328. Contracts entered into during a lucid interval are
valid. Contracts agreed to in a state of drunkenness or during a
hypnotic spell are voidable.
Contracts entered during a lucid interval
• Lucid interval refers to the period of temporary sanity of
a person known to be insane.
• The contract entered into by a person known to be
insane during such period is valid.

Contracts agreed to in a state of drunkenness or during a

hypnotic spell
• Voidable by reason of a complete loss of understanding
on the part of the one giving consent. Such persons are
incapable of giving intelligent consent.
• In intoxication, it must be shown that the intoxicated
person's reasoning and judgment were impaired to the
extent that he did not comprehend the legal
consequences of his act. If despite the intoxication, he
understands such consequences, the contract will be
valid and enforceable against him.
Art. 1329. The incapacity declared in Article 1327 is subject to
the modifications determined by law, and is understood to be
without prejudice to special disqualifications established in
the laws.
Modifications as to incapacity
• The incapacity declared in article 1327 is not absolute. It
is subject to modifications determined by law thereby
enabling the incapacitated person to validly enter into a
contract.
• Thus, where necessaries are sold to a minor or other
person without capacity to act, the sale is valid and he
must pay a reasonable price therefor. Necessaries are
those indispensable for sustenance, dwelling, clothing,
medical attendance, education and transportation.
Special disqualifications
Article 1327 lists the persons incapable of giving consent.
However, there are persons who, although not included in the
enumeration and thus considered capable, cannot give consent
to certain contracts because they are specially disqualified by
law. Such persons include the following:

a. The husband and wife who, as a rule, cannot sell

property to each other (Art. 1490), or donate to each other. (Art.
87, Family Code) The sale or donation is considered void.

b. The guardian, who cannot acquire by purchase the

property of the person or persons under his guardianship.
[Art. 1491 (1)]
c. Agents, who cannot acquire by purchase the property
whose administration or sale has been entrusted to them,
unless the principal gives his consent. [Art. 1491 (2)]

d. Executors and administrators, who cannot acquire by

purchase the property of the estate under their administration.
[Art. 1491 (3)]

e. Public officers and employees, who cannot acquire by

purchase the property of the State or any subdivision thereof,
the administration of which has been entrusted to them. [Art.
1491 (4)]
f. Justices, judges, prosecuting attorneys and other
officers and employees connected with the administration of
justice, cannot acquire by purchase property and rights in
litigation. [Art. 1491 (5)]

Note: For items (b), (c) and (d), the sale is voidable since only
private interests are involved. For items (e) and (f), the sale is
void since the contracts are imbued with public interest.
Art. 1330. A contract where consent is given through mistake,
violence, intimidation, undue influence, or fraud is voidable.
Causes that vitiate consent
a. Mistake (or error)
b. Violence (or physical coercion)
c. Intimidation (or moral coercion)
d. Undue influence
e. Fraud (or deceit or misrepresentation)

Effect on contract when consent is vitiated

The contract is voidable if consent was given through mistake,
violence, intimidation, undue influence or fraud.
Art. 1331. In order that mistake may invalidate consent, it
should refer to the substance of the thing which is the object
of the contract, or to those conditions which have principally
moved one or both parties to enter into the contract.

Mistake as to the identity or qualifications of one of the

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

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

Mistake
The mistake that vitiates consent is that which involves the
absence of knowledge with respect to a thing or a wrong
conception about said thing.

When mistake invalidates consent

a. If the mistake refers to the substance of the thing which
is the object of the contract. (Art. 1331)
b. If the mistake refers to the conditions which have
principally moved one or both parties to enter into the
contract (Art. 1331)
c. If the mistake refers to the identity or qualifications of
one of the parties when the same have been the
principal cause of the contract. (Art. 1331)
d. If the mistake refers to the legal effect of an agreement
when the real purpose of the parties is frustrated and the same
is mutual. (Art: 1334)
• This refers to mistake of law which does not generally
vitiate consent because of the maxim that "Ignorance of
the law excuses no one from compliance therewith." This
is so because a mistake on a doubtful question of law is
analogous to mistake of fact.
• However, the contract shall be voidable if the mistake as
to the legal effect of an agreement is mutual and
frustrates the real purpose of the parties.
When mistake does not invalidate consent
a. When the mistake refers to a simple mistake of account.

A simple mistake of account refers to error in computation or a

mathematical error. The mistake does not vitiate consent but
will only be corrected.

b. If the party alleging the mistake knew the doubt,

contingency or risk affecting the object of the contract.

Here, there is no mistake because the party entered into the

contract with knowledge of the risks involved.
Art. 1332. When one of the parties is unable to read, or if the
contract is in a language not understood by him, and mistake
or fraud is alleged, the person enforcing the contract must
show that the terms thereof have been fully explained to the
former.
When a party is unable to read or cannot understand language
of contract
• Where one of the contracting parties is illiterate, a
presumption that there is fraud or mistake in obtaining
his consent arises.
• However, he must show by clear and convincing
evidence that he was unable to read at the time of the
execution of the contract. Once proved, the burden will
shift to the other party to show that the terms of the
contract were fully explained to him who is unable to
read.
• He who is seeking to enforce the contract must therefore
show that the other party fully understood the terms of
the contract.
Art. 1333. There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the contract.

Art. 1334. Mutual error as to the legal effect of an agreement

when the real purpose of the parties is frustrated, may vitiate
consent.
Art. 1335. There is violence when in order to wrest consent,
serious or irresistible force is employed.

There is intimidation when one of the contracting parties is

compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon
the person or property of his spouse, descendants or
ascendants, to give his consent.

To determine the degree of intimidation, the age, sex and

condition of the person shall be borne in mind.

A threat to enforce one's claim through competent authority, if

the claim is just or legal, does not vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall annul the obligation,
although it may have been employed by a third person who
did not take part in the contract.
Violence or physical coercion
a. When it invalidates consent
• There is violence when in order to wrest consent, serious
or irresistible force is employed. (Art. 1335) The physical
force employed is the reason why the victim gives his
consent. This is true whether it has been employed by
the other contracting party or by a third person who did
not take part in the contract. (Art. 1336)
Intimidation or moral coercion
a. When it invalidates consent
• The act threatened to be done must be serious and
unlawful and must produce a reasonable and well-
grounded fear.
• The fear arises from the fact that the person making the
threat is capable of carrying out the threatened evil.
• Hence, a mere fear of displeasing a person to whom
respect and obedience are due will not vitiate consent.
Thus, there is no intimidation it an employee signs a
document lest he incurs the displeasure of his employer.

Intimidation exists although it may have been employed by a

third person who did not take part in the contract.
Factors to be considered in determining degree of intimidation
on person giving consent.
• To determine the degree of the intimidation, the age, sex
and condition of the person shall be borne in mind. (Art.
1335, par.

When intimidation does not exist

There is no intimidation if consent is given because of a threat
to enforce through a competent authority a claim that is just or
legal. (Art. 1335, par. 4) In other words, a threat to do a lawful
act or to enforce a right will not constitute intimidation that
will invalidate consent.
Art. 1337. There is undue influence when a person takes
improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential,
family, spiritual and other relations between the parties, or the
fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in
financial distress.
When undue influence invalidates consent
• Undue influence vitiates consent when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of
choice. (Art. 1337)
• For undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of a
contracting party as to destroy his free agency, making
him express the will of another rather than his own.
• Solicitation, importunity, argument and persuasion, the
same not being prohibited by law, morals, or equity, do
not constitute undue influence and a contract is not to be
set aside merely because one party used these means to
obtain the consent of the other.
Undue influence employed by a third person vitiates consent,
just like in the case of violence and intimidation.

Factors to consider in determining undue influence

a. Confidential, family, spiritual, and other relations
between the parties;
• Thus, the relation between a physician and his patient, a
lawyer and his client, a pastor and member of his flock,
or between an elderly member and a younger member of
a family, may be considered in determining the presence
of undue influence in a contract entered into between
them.
b. Mental weakness;
c. Ignorance: and
d. Financial distress of the party alleged to have been
unduly influenced.

In the foregoing instances, the party in position of dominance

is likely the one who will exert unfair persuasion upon the
other party to give his consent.
Art. 1338. There is fraud when, through insidious words or
machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he
would not have agreed to. (1269)

Art. 1339. Failure to disclose facts, when there is a duty to

reveal them, as when the parties are bound by confidential
relations, constitutes fraud. (n)
Fraud
Fraud consists of some deceitful practice or willful device,
resorted to with intent to deprive another of his right, or in
some manner to do him. injury. It is always positive and
intentional.

Kinds of fraud at the time of the celebration of the contract

a. Causal fraud or dolo causante
• This refers to fraud without which consent would not
have been given. It is a deception employed by one party
prior to or simultaneous to the contract in order to secure
the consent of the other.
• It renders the contract voidable.
• It is committed through any of the following means:
1) By use of insidious words or machinations.
Insidious words or machinations cover any form of
deception such as false representation, trickery, plot
or scheme which may induce a party to give his
consent. This is also referred to as active fraud.
2) By the failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by
confidential relations. (Art. 1339).This is fraud by
concealment and referred to as passive fraud.
Incidental fraud or dolo incidente
• This refers to fraud without which consent would have
still been given but the person giving it would have
agreed on different terms.
• The contract is valid but the party employing the fraud
shall be liable for damages. (See Art. 1344, par. 2)

Requisites of causal fraud or dolo causante

a. There must be misrepresentation or concealment of a
material fact.
b. The fraud must be serious. (Art. 1344, par. 1)
The fraud is serious when it is sufficient to impress, or to lead
an ordinarily prudent person into error or to influence or
induce a party to give his consent.

c. The fraud must have been employed by only one of the

contracting parties upon the other.

If both parties employed fraud, the bad faith of one will

negate the bad faith of the other. The contract will be valid;
hence, neither one may ask for its annulment.

d. There must be a deliberate intent to deceive the other

party.

e. The fraud must have induced the party enter into the
When no fraud exists
a. In case of the usual exaggerations in trade, when the
other party had an opportunity to know the facts. (Art.
1340)
b. In case of a mere expression of an opinion, unless made
by an expert and the other party has relied upon the
former's special knowledge. (Art. 1341)
c. In case of misrepresentation of a third person, unless
such misrepresentation has created substantial mistake
and the same is mutual. (Art. 1342)
d. If the representation was made in good faith. However,
the same may constitute error. (Art. 1343)
Art. 1340. The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are not in
themselves fraudulent.
Usual exaggerations in trade
Refers to dealer's talk or sales talk. It is natural for sellers to
exaggerate the characteristics of their products in order to
make a sale at a high price. Hence, the law allows a
considerable latitude to dealer's talk. A man who accepts such
talk at face value does so at his peril, and he cannot annul the
contract on the ground of fraud, provided that he had an
opportunity to verify the affirmations made by the seller.
Art. 1341. A mere expression of an opinion does not signify
fraud, unless made by an expert and the other party has relied
on the former's special knowledge.
Mere expression of opinion
• As a general rule, a mere expression of an opinion, even
if it turns out to be false, does not constitute fraud.
• However, when the opinion comes from an expert, it is
like a statement of fact, and if it turns out not to be true,
the contract can be annulled on the ground of fraud if
the other party has relied upon such opinion.
• But if a contracting party hired his own expert whose
opinion turned out to be false, such party cannot ask for
the annulment of the contract because the expert is
considered his own employee.
Art. 1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial
mistake and the same is mutual.
Misrepresentation by a third person
Misrepresentation by a third person will not render a contract
voidable, except in the following cases:
a. If the misrepresentation has created substantial mistake
and the same is mutual. The contract may be annulled
not principally on the ground of fraud, but on the
ground of error or mistake.
b. If the third person connives with a contracting party in
the commission of fraud against the other party. The
conniving party in effect committed the fraud against
the other party.
Art. 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error.
Misrepresentation in good faith (innocent misrepresentation)
• In order that fraud may exist, there should be a
deliberate intent to deceive.
• If the misrepresentation was made by a party in good
faith, no fraud is committed.
• The other party, however, may ask for the annulment of
the contract on the ground of mistake.
Art. 1344. In order that fraud may make a contract voidable, it
should be serious and should not have been employed by both
contracting parties.

Incidental fraud only obliges the person employing it to pay

damages.

Art. 1345. Simulation of a contract may be absolute or relative.

The former takes place when the parties do not intend to be
bound at all; the latter, when the parties conceal their true
agreement. (n)
Art. 1346. An absolutely simulated or fictitious contract is
void. A relative simulation, when it does not prejudice a third
person and is not intended for any purpose contrary to law,
morals, good customs, public order or public policy binds the
parties to their real agreement.
Simulation
Simulation is the declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for
purposes of deception, the appearance of a juridical act which
does not exist (absolute simulation) or is different from that
which is really executed (relative simulation).

Kinds of simulated contracts

a. Absolutely simulated contract
• The parties here do not intend to be bound at all. (Art.
1345)
• Being fictitious, the contract is void. (Art. 1346)
• In absolute simulation, there is a colorable contract but it
has no substance as the parties have no intention to be
bound by it.
• The main characteristic of an absolute simulation is that
the apparent contract is not really desired or intended to
produce legal effect or in any way alter the juridical
situation of the parties.
• As a result, an absolutely simulated contract is void, and
the parties may recover from each other what they may
have given under the contract.
• The simulation must be on the part of both parties.
Where only one simulates, there is deceit or fraud, and
the contract is regarded as voidable, not void.
b. Relatively simulated contract
• This takes place when the parties conceal their true
agreement. (Art. 1346)
• There are in effect two agreements: the ostensible or
apparent agreement which they make it appear to have
been entered into (the relatively simulated contract);
and the hidden agreement which shows their real or
true agreement.
• If the parties state a false cause in the contract to conceal
their real agreement, the contract is only relatively
simulated and the parties are still bound by their real
agreement.
• Hence, where the essential requisites of a contract are
present and the simulation refers only to the content or
terms of the contract, the agreement is absolutely
binding and enforceable between the parties and their
successors in interest.
In a relatively simulated contract, the parties are bound by
their real agreement, except in the following cases, where the
parties will be bound by their ostensible agreement:
1. If the real agreement is prejudicial to a third person.
The parties here are estopped from asserting the real
agreement against the third person.
2. If the purpose of the real agreement is contrary to law,
morals, good customs, public order or public policy.
OBJECT OF CONTRACTS
Art. 1347. All things which are not outside the commerce of
men, including future things, may be the object of a contract.
All rights which are not intransmissible may also be the
object of contracts.

No contract may be entered into upon future inheritance

except in cases expressly authorized by law.

All services which are not contrary to law, morals, good

customs, public order or public policy may likewise be the
object of a contract. (1271a)
Art. 1348. Impossible things or services cannot be the object of
contracts.

Art. 1349. The object of every contract must be determinate as

to its kind. The fact that the quantity is not determinate shall
not be an obstacle to the existence of the contract, provided it
is possible to determine the same, without the need of a new
contract between the parties.
Object of contract
• The object of a contract is its subject matter.
• The object of a contract is the creation or extinguishment
of an obligation involving a thing, right or service.
• In effect, the object of a contract is a thing, right or
service.
Requisites of object of a contract
a. It must be within the commerce of men. (Art. 1347)

• An object is within the commerce of men if it is capable

of being owned or appropriated.
b. It must be existing or capable of coming into existence.

• When a future thing is the object of a contract, the

contract is subject to the condition that the thing will
come into existence.
• Future things include those that are to be manufactured,
raised or acquired (Art. 1462), or have a potential
existence. (Art. 1461)
• By way of exception, no contract may be entered into
upon future inheritance, except in cases expressly
authorized by law. (Art. 1347, par. 2)
• An inheritance is a future inheritance if at the time the
contract involving the inheritance was entered into the
person from whom the inheritance will come from was
still alive.
A contract involving future inheritance is void when the
following requisites concur:
(a) The succession has not been opened;
(b) The object of the contract forms part of the inheritance;
(c) The promisor has, with respect to the object, an
expectancy or right which is purely hereditary in
nature.

However, the following contracts, though involving future

inheritance, are valid:

1) Marriage settlement (Art. 74, Family Code), otherwise

known as ante-nuptial agreement, executed by a husband and
wife at the time of celebration of the marriage, which will
govern their property relationship during the marriage.
2) Partitions of property inter vivos by a person prior to
his death. (Art. 1080)

c. It must be transmissible. (Art. 1347)

• This requirement refers to right. Rights that are

intransmissible by their nature, or by stipulation, or by
provision of law, cannot be the object of contracts.
d. It must not be impossible. (Art. 1348)

• The impossibility may be physical (when the obligation

is not capable of physical performance), or legal (when
the performance is contrary to law, morals, good
customs, public order or public policy).

e. It must be determinate as to its kind. (Art. 1349)

CAUSE OF CONTRACTS
Art. 1350. In onerous contracts the cause is understood to be,
for each contracting party, the prestation or promise of a thing
or service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure
beneficence, the mere liberality of the benefactor.
Cause
The cause of a contract is the immediate, direct and proximate
reason which justifies the creation of an obligation through
the will of the contracting parties.

Classification of contracts according to cause

a. Onerous contracts
• Onerous contracts are those where there is an exchange
of valuable considerations. For each contracting party,
the cause is the prestation or the promise of a thing or
service by the other. (Art. 1350)
b. Gratuitous contracts

• Gratuitous contracts are those where one party receives

no equivalent consideration. These contracts are referred
to as contracts of pure beneficence, the cause of which is
the liberality of the benefactor. (Art. 1350).

c. Remunerative or remuneratory contracts

• Remunerative or remuneratory contracts are those where

one prestation is given for a benefit or service
previously rendered.
• The cause of these contracts is the service or benefit
remunerated. (Art. 1350)
 • The past service or benefit is by itself not a recoverable
debt to distinguish it from an onerous contract where
there is a prestation of service which by itself is a
recoverable debt.

Requisites of cause
a. It must exist.
• It is presumed that the cause of a contract exists even if
it is not stated in the contract, unless the debtor proves
the contrary. (Art. 1354)
• Contracts without cause produce no effect whatsoever;
(Art. 1352), i.e., the contract is void.
b. It must be lawful
• Contracts with unlawful cause, produce no effect
whatsoever.
• The cause is unlawful if it is contrary to law, morals,
good customs, public order or public policy. (Art. 1352)
• It is presumed that the cause of a contract is lawful,
unless the debtor proves the contrary. (Art. 1354)

c. It must be true.
• The cause is false if the contract states a consideration
but the statement is not true.
• The statement of a false cause in a contract shall render
it void. However, the contract is valid if it is proved that
it is founded upon another cause which is true and
lawful. (Art. 1353)
Art. 1351. The particular motives of the parties in entering into
a contract are different from the cause thereof.
Motive
• Motive is the private or secret reason or intention of a
party in entering into a contract.
• It is different from cause which is the essential reason
that moves the contracting parties to enter into the
contract.

Distinctions between cause and motive

a. Cause is the essential reason of the contract, while
motive is the private or secret reason of a party in entering
into a contract.

b. The illegality of the cause makes the contract void,

while the illegality of the motive does not affect the validity
of the contract.
c. The cause of a contract is always known to the
contracting parties, while the motive of one party may not be
known by the other.
Art. 1352. Contracts without cause, or with unlawful cause,
produce no effect whatever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public
policy.

Art. 1353. The statement of a false cause in contracts shall

render them void, if it should not be proved that they were
founded upon another cause which is true and lawful.
Art. 1354. Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves
the contrary.

Art. 1355. Except in cases specified by law, lesion or

inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence.
Lesion
• Lesion refers to the insufficiency or inadequacy of cause.
• There is inadequacy of cause if the consideration is not
commensurate with or less than the value of the thing,
such as when the price is insufficient for the thing sold.

Rule in case of inadequacy of cause

• As a general rule, lesion or inadequacy of cause does not
invalidate a contract.
• The following are the exceptions:
a. When lesion was accompanied by fraud, mistake or
undue influence.
b. In cases expressly specified by law.
Thus, in a partition among the heirs, when any one of them
received things whose value is less than one-fourth than the
share to which he is entitled, the contract may be invalidated
on the ground of lesion.
FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever form they
may have been entered into, provided all the essential requisites
for their validity are present. However, when the law requires
that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the
right of the parties stated in the following article cannot be
exercised.
Form
• A contract may be oral, in writing, partly oral and partly in
writing, or it may be inferred from the conduct of the
parties.
• If a contract is in writing, the writing may be a public
instrument or a private instrument.
• A private instrument becomes a public instrument if the
person executing it appears before and acknowledges to a
notary public that the instrument he had executed is of his
own voluntary act and deed and such notarial
acknowledgement is indicated in the instrument itself.
• Registration in the proper recording office requires that
the instrument must be a public instrument.
 • In certain cases, registration is required for the validity of a
contract such as in the case of the contract of chattel
mortgage which requires recording in the Chattel
Mortgage Register. (See Art. 2140.)

Rule on what form is required

As a general rule, form is not essential since contracts are
obligatory in whatever form they may have been entered into
provided all the essential requisites for their validity are present.
However, form is important in the following cases:
a. For validity
• If form is required by law for the validity of the contract,
that form is indispensable.
• If the required form is not followed, the contract is void.
The following are some examples of contracts that are
required to be in a certain form to be valid:
1) Contract of donation of immovable property
2) Contract of donation of personal property
3) The authority of an agent to sell a piece of land
must be in writing; otherwise, the sale is void. (Art.
1874)
 4. Contract of partnership where immovable property
is contributed must be in a public instrument to which
shall be attached a signed inventory of the immovable
property, otherwise, the contract is void.

5. A stipulation to pay interest must be in writing:

otherwise, no interest is payable. (Art. 1956)

b. For enforceability
• The contracts that are enumerated under the Statute of
Frauds (See Art. 1403.) are required to be in writing and
signed by the party sought to be charged. Otherwise, the
contracts are unenforceable and are not allowed to be
proved.
 • The required writing may, however, be waived by the
failure to) object to the presentation of oral evidence to
prove them, or by the acceptance of benefits under them.
(Art. 1405)

c. For convenience
The contracts enumerated under Art. 1358 are required to
be in a certain form for the convenience of the parties.
Art. 1357. If the law requires a document or other special form,
as in the acts and contracts enumerated in the following article,
the contracting parties may compel each other to observe that
form, once the contract has been perfected. This right may be
exercised simultaneously with the action upon the contract.
Right of a contracting party to compel the other to observe form
• This right is available only if the form is needed for the
convenience of the parties, and not for validity or
enforceability.
• In other words, this right can be availed of by a party only
if the contract is valid and enforceable.
Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights

or of those of the conjugal partnership of gains;

(3) The power to administer property, or any other power which

has for its object an act appearing or which should appear in a
public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act
appearing in a public document.

All other contracts where the amount involved exceeds five

hundred pesos must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by
Articles, 1403, No. 2 and 1405.
Form for convenience of parties
• The contracts enumerated in Art. 1358 are valid and
enforceable between the parties even if the required form,
public document (par. 1) or private writing (par. 2), is not
observed.
• The law does not require the accomplishment of the said
acts and contracts in a public instrument or writing to
validate the act or contract but only to insure their efficacy.
• The embodiment of the said contracts in a public
instrument, is only for convenience, and registration of the
instrument only adversely affects third parties.
• Formal requirements are, therefore, for the benefit of third
parties.
 • Noncompliance therewith does not adversely affect the
validity of the contract nor the contractual rights and
obligations of the parties.

When public document required for convenience

The following contracts are required to appear in a public
document for the convenience of the parties and so that they
may be registered in the proper recording office to be binding
against third persons:

a. Acts and contracts which have for their object the

creation, transmission, modification or extinguishment of real
rights over immovable property.
b. The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains.

c. 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.

d. The cession of actions or rights proceeding from an act

appearing in a public document.
When any writing required for convenience
All other contracts where the amount involved exceeds P500.00
must appear in writing, even a private one. However, the sales of
goods, chattels or things in action at a price of at least P500.00 are
governed by articles 1403, No. 2 and 1405.
When any writing required for convenience
All other contracts where the amount involved exceeds P500.00
must appear in writing, even a private one. However, the sales of
goods, chattels or things in action at a price of at least P500.00 are
governed by articles 1403, No. 2 and 1405.
REFORMATION OF INSTRUMENTS
Art. 1359. When, there having been a meeting of the minds of
the parties to a contract, their true intention is not expressed in
the instrument purporting to embody the agreement, by
reason of mistake, fraud, inequitable conduct or accident, one
of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has

prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of
the contract.
Reformation
Reformation is a remedy in equity by means of which a written
instrument is made or construed so as to express or conform to
the real intention of the parties when some error or mistake has
been committed.

Requisites of reformation
a. There must be a meeting of minds of the parties to the
contract.
b. The true intention of the parties is not expressed in the
instrument.
c. The failure of the instrument to express the true intention
of the parties is due to mistake, fraud, inequitable
conduct or accident.
When an instrument may be reformed
a. When a mutual mistake of the parties, causes the failure
of the instrument to disclose their real agreement. (Art. 1361)

b. If one party was mistaken and the other acted

fraudulently or inequitably in such a way that the instrument
does not show their true intention. (Art. 1362)

c. When a party was mistaken and the other knew or

believed that the instrument did not state their real agreement,
but concealed the fact from the former. (Art. 1363)
d. When through 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)

e. If two parties agree upon the mortgage or pledge of real

or personal property, but the instrument states that the property
is sold absolutely or with right of repurchase. (Art. 1365)
Distinctions between reformation and annulment

a. Reformation is the remedy when there has been a

meeting of minds but the true intention of the parties is not
expressed in the instrument by reason of mistake, fraud,
inequitable conduct or accident. Annulment is the remedy when
the mistake, fraud, inequitable conduct or accident has
prevented the meeting of minds of the parties.

b. Reformation does not invalidate a contract. Annulment

invalidates a contract.
Art. 1360. The principles of the general law on the reformation
of instruments are hereby adopted insofar as they are not in
conflict with the provisions of this Code.

Art. 1361. When a mutual mistake of the parties causes the

failure of the instrument to disclose their real agreement, said
instrument may be reformed.
Mutual mistake
• The mistake shared by both parties must be of fact.
• Such mistake of fact exists when the written evidence of
the agreement includes something which should not be
there, or omits from such instrument something that
should be there, or so expresses their agreement that it sets
something different from what was intended.
Art. 1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for the
reformation of the instrument.

Art. 1363. When one party was mistaken and the other knew or
believed that the instrument did not state their real agreement,
but concealed that fact from the former, the instrument may be
reformed.
Unilateral mistake
• In both Articles 1362 and 1363, the mistake is committed
by only one of the parties.
• In order, however, that reformation may be availed of by
the party who committed the mistake, the other party must
have acted fraudulently or inequitably in such a way that
the instrument does not show their true intention, or had
knowledge or believed that the instrument did not state
their real agreement, but concealed such fact from the
other party.
Art. 1364. When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the instrument or
of the clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the instrument
be reformed.

Art. 1365. If two parties agree upon the mortgage or pledge of

real or personal property, but the instrument states that the
property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
Property mortgaged or pledged but stated in the instrument, as
sold
• Reformation is proper when property mortgaged or
pledged as intended by the parties is shown in the
instrument to have been sold.
• This is so because in a contract of mortgage or pledge, the
mortgagor or pledgor retains ownership of the property
which was merely given as security for a principal
contract, whereas in sale, the ownership is transferred to
the other party.
Art. 1366. There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition is
imposed;
(2) Wills;
(3) When the real agreement is void.

Art. 1367. When one of the parties has brought an action to

enforce the instrument, he cannot subsequently ask for its
reformation.
When reformation is not available:

A. In the case of the following contracts:

1) Simple donations inter vivos (i.e., one taking effect
during the lifetime of the donor) wherein no condition is
imposed.
• This is so because a donation is an act of liberality on the
part of donor whose desire must be respected.
• However, if the donation is conditional and the condition
does not reflect the true intention of the donor,
reformation is allowed so as to show such real intent.
• In case of donation mortis causa (i.e., one taking effect
upon the death of the donor), the same may be reformed
because it partakes of the nature of a testamentary
disposition or one made in a will.
2) Wills
• The reason is that the making of a will is strictly a
personal act which is free and the testator may revoke the
will any time. (See Arts. 784, 828 and 839.)
• Upon the death of the testator, the will shall also be
scrutinized in the proceedings for the settlement of the
estate and any error in descriptions may be corrected.

3) When the real agreement is void.

• If the agreement is void, it is inexistent, and so there is
nothing to reform.
B. When one of the parties has brought an action to enforce
the contract, he cannot subsequently ask for reformation. (Art.
1367)
• Enforcement of the contract by a party is equivalent to
ratification, waiver or estoppel; hence, reformation is no
longer allowed.
Art. 1368. Reformation may be ordered at the instance of either
party or his successors in interest, if the mistake was mutual;
otherwise, upon petition of the injured party, or his heirs and
assigns.

Art. 1369. The procedure for the reformation of instrument shall

be governed by rules of court to be promulgated by the Supreme
Court.
Who may ask for reformation
a. If the mistake was mutual, either party or his successors
in interest, such as his heirs or assigns.
b. In other cases, the injured party or his heirs and assigns.
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning
of its stipulations shall control.

If the words appear to be contrary to the evident intention of the

parties, the latter shall prevail over the former.
Interpretation of terms of contract
• When the terms of the contract are clear and leave no
doubt as to the intention of the parties, the terms are to be
understood literally as they appear in the contract.
• Accordingly, there is no justification to read into any
alleged intention outside of the contract.

When terms are contrary to evident intention

• If the words appear to be contrary to the evident intention
of the parties, the intention of the parties shall prevail.
Court interpretation of terms of contract
• The article talks about "plain meaning rule" which
assumes that the intent of the parties to an instrument is
"embodied in the writing itself, and when the words are
clear and unambiguous, the intent is to be discovered only
from the express language of the agreement.
• Also resembles the "four corners rule," a principle which
allows courts in some cases to search beneath the semantic
surface for clues to meaning.
• A court's purpose in examining a contract is to interpret
the intent of the contracting parties. as objectively
manifested by them.
• The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract
before it is ambiguous.
• A contract provision is ambiguous if it is susceptible of
two reasonable alternative interpretations.
• Where the written terms of the contract are not
ambiguous, and can only be read in one way, the court
will interpret the contract as a matter of law.
• If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve
the ambiguity in the light of intrinsic evidence.
Art. 1371. In order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be
principally considered.
Determination of intent of parties
In determining the intention of the parties, their
contemporaneous and subsequent acts, as well as the
circumstances surrounding the execution of the contract, should
be considered.
Art. 1372. However general the terms of a contract may be, they
shall not be understood to comprehend things that are distinct
and cases that are different from those upon which the parties
intended to agree.
General terms exclude distinct things not intended
Although a contract may use general terms, they shall be
interpreted as excluding things that are distinct from what the
parties intended to agree.
Art. 1373. If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that import
which is most adequate to render it effectual.
Interpretation of stipulation with several meanings
If a stipulation in a contract admits of an interpretation that
makes it valid and legal and another that will make it invalid
and illegal. the former interpretation must prevail.
Art. 1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.
Contract to be interpreted in its entirety
• The various stipulations in a contract should not be
interpreted separately but they should be construed in
relation to one another so as to arrive at the true meaning
of the whole contract.
• To ascertain the meaning of a contract, the whole of it and
not mere portions thereof must be considered.
Art. 1375. Words which may have different significations shall
be understood in that which is most in keeping with the nature
and object of the contract.
Interpretation of words with different significations
• Words with different meanings shall be interpreted in the
sense that is most in keeping with the nature and object of
the contract.
• If there is doubt as to the meaning of the language of the
contract taken by itself, the general scope and purpose of
the instrument should be considered.
Art. 1376. The usage or custom of the place shall be borne in
mind in the interpretation of the ambiguities of a contract, and
shall fill the omission of stipulations which are ordinarily
established.
Usage or custom to be considered in interpreting ambiguity
• If a contract contains stipulations that are ambiguous, the
usage or custom of the place where the contract was
executed shall be considered in clearing the ambiguity
and shall fill the omission of stipulations that are
ordinarily established in such kind of contract.
Art. 1377. The interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity.
Interpretation when obscurity was caused by a party
When a contract contains words or stipulations that are obscure,
their interpretation shall not favor the party who caused the
obscurity since he should be made responsible therefor.
Art. 1378. When it is absolutely impossible to settle doubts by
the rules established in the preceding articles, and the doubts
refer to incidental circumstances of a gratuitous contract, the
least transmission of rights and interests shall prevail. If the
contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in
such a way that it cannot be known what may have been the
intention or will of the parties, the contract shall be null and
void.
When doubt is impossible to settle under preceding provision
a. When the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights and
interests shall prevail.
b. When the doubts refer to the incidental circumstances of
an onerous contract, the doubt shall be resolved in favor
of the greatest reciprocity of interests.
c. If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may
have been the intention of the parties, the contract shall
be null and void.
Art. 1379. The principles of interpretation stated in Rule 123 of
the Rules of Court shall likewise be observed in the
construction of contracts.
Application of the Rules of Court on interpretation
The principles of interpretation in the Rules of Court, now
provided by Rule 130 from Section 10 to 19, are to be observed
in a suppletory character, in the construction of contracts.

The rules are as follows:

a. The language of a writing is to be interpreted according

to the legal meaning it bears in the place of execution, unless
the parties intended otherwise. (Sec. 10)

b. In the construction of an instrument where there are

several provisions or particulars, such construction is, if
possible, to be adopted as will give effect to all. (Sec. 11)
c. In the construction of an instrument, the intention of the
parties is to be pursued, and when a general and a particular
provision are inconsistent, the latter is paramount to the former.
So a particular intent will control a general one that is
inconsistent with it.

d. For the proper construction of an instrument, the

circumstances under which it was made, including the situation
of the subject thereof and of the parties to it, may be shown, so
that the judge may be placed in the position of those whose
language he is to interpret. (Sec. 13)
e. The terms of a writing are presumed to have been used in
their primary and general acceptation, but evidence is
admissible to show that they have a local, technical, or -
otherwise peculiar signification, and were so used and
understood in the particular instance, in which case the
agreement must be construed accordingly. (Sec. 14)

f. When an instrument consists partly of written words and

partly of a printed form, and the two are inconsistent, the
former controls the latter. (Sec. 15)
g. When the characters in which an instrument is written
are difficult to be deciphered, or the language is not understood
by the court, the evidence of persons skilled in deciphering the
characters, or who understand the language, admissible to
declare the characters or the meaning of the language. (Sec. 16)

h. When the terms of an agreement have been intended in a

different sense by the different parties to it, that sense is to
prevail against either party in which he supposed the other
understood it, and when different constructions of a provision
are otherwise equally proper, that is to be taken which is the
most favorable to the party in whose favor the provision is
made. (Sec. 17)
i. When an instrument is equally susceptible of two
interpretations, one in favor of a natural right and the other
against it, the former is to be adopted. (Sec. 18)

j. An instrument may be construed according to usage, in

order to determine its true character. (Sec. 19)