REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Law on Contracts
1. 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. It is one of the five sources of civil
obligations.
a) Principles on Obligations arising from Contract
i. Obligations arising from contracts have the force of law between contracting parties.
ii. Obligations arising from contracts should be complied with in good faith.
2. Stages of Contract
a) Conception or preparation stage is the first stage of contract that involves preliminary
negotiations and bargaining, discussion of terms and conditions, with no arrival yet of a
definite agreement.
b) Perfection or birth stage is the second stage of contract when there is meeting of minds
between the parties on a definite subject matter and valid cause.
c) Termination or consummation stage is the last stage of contract when the contract has
been fulfilled resulting in its accomplishment.
3. Characteristics of Contracts
a) Obligatory force of contract means that the contractual agreement constitutes the law as
between the parties.
b) Mutuality of contract means that the validity and performance cannot be left to the will of
only one of the parties.
i.
Determination of the performance of contract
1. The determination or validity or compliance of a contract cannot be left to the
judgment of one the parties only because it violates mutuality of contract.
2. The determination of the performance of contract may be left to a third person, whose
decision shall not be binding until it has been made known to both contracting parties.
3. If the determination of the performance of the contract of a third person is evidently
inequitable, the court shall decide what is equitable under the circumstances.
c) Relativity of contract means that contract is binding only upon the parties and their
successors such as heirs and assignees.
i.
Principles on Relativity of Contract
1. The heirs are liable to the debts of decedent but only up to the extent of the
property they inherited. It is only the natural obligation of the heirs to pay the unpaid
debts of their predecessors beyond the value of the properties they inherited.
2. As a general rule, rights and obligations arising from contracts are
transmissible. However, the following are the exceptional rights and obligations
arising from contracts which intransmissible
a) Those which are purely personal.
b) Those which are provided by law to be intransmissible.
c) Those which are stipulated by the party to be intransmissible.
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ii. Exceptions to Relativity of Contract – Instances wherein third parties may be
bound or may be affected by contracts
1. Stipulation in favor of third person or stipulation pour autrui
a) Requisites of stipulation pour autrui or stipulation in favor of third person
i. There must be stipulation in favor of a third person.
ii. The stipulation should be a part, not the whole, of the contract.
iii. The contracting parties must have clearly and deliberately conferred a favor
upon a third person and not a mere incidental benefit or interest.
iv. The favorable stipulation should not be conditioned or compensated by any
kind of obligation whatever.
v. The third person must have communicated his acceptance to the obligor
before its revocation.
vi. One of the contracting parties does not bear the legal representation or
authorization of the third party.
b) Concepts of Stipulation Pour Autrui
i.
A stipulation in favor of third person has no binding effect in itself before its
acceptance by the party favored.
ii. Before acceptance by the third person, the contracting parties; by mutual
agreement, may modify the contract or revoke it.
iii. A mere incidental interest or benefit is not within the doctrine of stipulation
pour autrui.
iv. The stipulation pour autrui does not exist if the contract is considered null and
void.
2. Contracts creating real rights which are registered such as registered real
estate mortgage or registered pacto de retro sale/ sale with a right to
repurchase – The registration to Registry of Property/Deeds is constructive notice to
the whole world. Any person who will acquire such property will be bound by the
annotated lien.
3. Contracts intended to defraud creditor – The defrauded creditor may file an action
for cancellation of contract entered by the debtor to defraud the creditor.
4. When third person induces a party to the contract to violate the contract – A
contracting party may file an action for damages to a third person who induced a
contracting party to violate a contract.
5. Void contract that directly affects a third person – A third person affected by a
void contract may file an action for declaration of nullity of a contract.
iii. Contracts that may be not assailed by a third person
1. Perfectly valid contract
2. Voidable contract
3. Unenforceable contract
iv. Exceptional contracts that may be assailed by a third person
1. Rescissible contract intended to defraud creditor
2. Void contract that directly affects a third person
d) Autonomy of Contract means that the parties may establish such stipulations, clauses,
terms, and conditions as they may deem convenient provided they are not contrary to any of
the following:
i. Law
ii. Morals
iii. Good customs
iv. Public order
v. Public policy
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e) Consensuality of contract means that contracts are perfected by mere consent except in
real contracts and formal or solemn contracts which require additional requirements.
f)
Legality of contract means that contracts should not be contrary to law.
4. Types of Elements of Contract
a) Essential elements refer to those which are required in order for a contract to exist. They are
necessary for validity of contract and may not be waived by the parties. Absence of any of the
essential elements will make the contract void the remedy of which of injured party is
declaration of nullity.
i.
Consensual Contract
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
ii. Real Contract
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
4. Delivery of the subject matter
iii. Solemn or Formal Contract
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
4. Formality or solemnity required by law
b) Natural elements refer to those which already exist in certain contract unless set aside or
suppressed by the parties. They may be waived by the parties as long as the waiver is made
in good faith.
i. Warranty against eviction in a contract of sale.
ii. Warranty against hidden defects in a contract of sale.
iii. Warranty for merchantability in a contract of sale.
iv. Warranty against hidden and unregistered encumbrance in a contract of sale.
c) Accidental elements refer to those that do not normally exist in a contract unless stipulated
or provided by the parties.
i. Terms of payment in a contract of sale.
ii. Conventional interest in a contract of loan.
5. Types of Contracts
a) As to Perfection of Contract
i.
Consensual contract is a contract perfected by mere consent.
1. Contract of lease
2. Contract of sale
3. Contract of partnership
4. Contract of agency
5. Contract of real estate mortgage
6. Contract of common carrier
ii.
Real contract is a contract perfected by delivery of object of contract.
1. Contract of loan or mutuum
2. Contract of commodatum
3. Contract of deposit
4. Contract of pledge
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iii.
Solemn or Formal contract is a contract perfected by the execution of the formality
required by law.
1. Negotiable instruments must be made strictly in the form provided by the
Negotiable Instruments Law in ordered to be considered negotiable.
2. Contract of marriage must have all the solemnities required by Family Code of the
Philippines for it to be valid such as marriage license, capacity of contracting parties,
authority of solemnizing officer and personal appearance of contracting parties.
3. Contract of donation of personal property in excess of P5,000 must be made and
accepted in writing to be valid.
4. Contract of donation of real property must be made and accepted in public
instruments to be valid.
5. Contract of antichresis requires that the agreement of antichresis including the
principal and interest of secured contract of loan a must be specified in writing to be
valid.
6. Agreement or stipulation to pay interest in contract of loan must be in writing in
order for such agreement to be valid.
7. Contract of chattel mortgage requires it to be registered with Chattel Mortgage
Registry to be valid.
8. Contract of partnership to which real properties or real rights are contributed must
be in a public instrument, with an inventory of real property attached thereto, for the
contract of partnership to be valid.
9. Sale of a piece of land by the agent in the name of the principal, the authority of
the agent to sell the land must be in writing for the contract sale of such land to be
valid.
10. Sale of community or conjugal property by one of the spouses, there must be
authority given by the other spouse to the selling spouse.
6. Form of Contract
a) 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 to compel the other party to observe the formality required by law for mere
convenience cannot be exercised.
b) If the law requires a document or other special form, as in the acts and contracts, for the
convenience of the contracting parties, 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.
7. Remedy to compel the other party to observe the formality required by law for mere
convenience is a legal remedy available only if the contract is valid and enforceable. This legal
action will not prosper if the contract is either unenforceable or void.
a) Contracts required to be in Public Document for mere convenience but not for validity
i.
Acts or contracts which have for their object the creation, transmission, modification or
extinguishment or real rights over immovable property.
ii. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains.
iii. 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
iv. The cession of actions or rights proceeding from an act appearing in a public document
b) Contracts required to be in written instrument, whether public instrument or private
instrument, for mere convenience but not for validity
i.
Contracts where the amount involved exceeds five hundred pesos
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8.
As to Cause of the Contract
a) Onerous contract is a contract whereby there is an exchange of valuable consideration. For
each contracting party, the cause is the prestation or the promise of a thing or service by the
other.
i.
Contract of sale
ii.
Contract of lease
iii.
Contract of barter
b) Gratuitous contract is a contract whereby one party receives no equivalent consideration.
These contracts are referred to as contracts of pure beneficence, the cause of which is the
liberality or generosity of the benefactor.
i.
Contract of donation
ii.
Contract of commodatum
c) Remuneratory contract is a contract whereby the cause here is the service or benefit
remunerated.
i.
Contract of service
ii.
Contract of employment
9.
Other Contracts
a) Principal contract is a contract that can stand by itself.
i. Contract of sale
ii. Contract of loan
b) Accessory contract is a contract whose existence depends upon another contract known as
principal contract.
i. Contract of pledge
ii. Contract of chattel mortgage
iii. Contract of antichresis
iv. Contract of real estate mortgage
v. Contract of guarantee
c) Preparatory contract is a contract which serves as a means by which other contracts may be
entered into.
i. Contract of agency
ii. Contract of partnership
d) Nominate contract is a contract which has a name under the Civil Code or special law.
i. Contract of sale
ii. Contract of agency
iii. Contract of partnership
iv. Contract of insurance
v. Contract of marriage
e) Innominate contract is a contract without any name under the Civil Code or special law.
i. Do ut des (I give that you may give.)
ii. Do ut facias (I give that you may do.)
iii. Facio ut des (I do that you may give.)
iv. Facio ut facias (I do that you may do.)
1. Order of Priority on Rules that shall govern innominate contract
a) The stipulation of the parties
b) The provisions of Obligations and Contracts
c) The rules governing the most analogous contracts
d) The customs of the place
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f) Commutative contract is a contract whereby the parties give almost equivalent values;
hence, there is real fulfillment.
i. Contract of sale
ii. Contract of lease
iii. Contract of barter
g) Aleatory contract is a contract whose fulfillment depends upon chance.
i. Contract of insurance
h) Unilateral contract is a contract whereby only one of the parties is obligated to give or to do
something.
i. Contract of commodatum (bailee)
ii. Contract of gratuitous deposit (depositary)
i) Bilateral contract is a contract whereby both parties are required to give or to do something.
i. Contract of sale
ii. Contract of lease
j) Reciprocal contract is a contract whereby the cause on the other party is the object on the
other party.
i. Contract of sale
ii. Contract of barter
k) Auto-contract is a contract wherein one person contracts with himself.
l) Contract of adhesion is a contract wherein one party has already prepared the form of the
contract, containing the stipulations he desires, and he simply asks the other party to agree to
them if he wants to enter into the contract. In case of ambiguity or doubt, it shall be construed
strictly against the preparer of the document of the contract. It is also known as “fine print
contract” or “take it or leave it contract.”
i. Contract of insurance
ii. Contract of enrollment
m) Executory contract is a contract that has not yet been performed. Certain executory contracts
are covered by Statute of Fraud and required to be in writing in order for them to be
enforceable.
n) Executed contract is a contract which has been performed. It is a contract not covered by
Statute of Fraud.
10. Moment of Perfection of Contract
a) In case of consensual contract, upon consent of contracting parties or upon meeting of
minds of contracting parties
b) In case of real contract, upon delivery of the subject matter
c) In case of formal contract or solemn contract, upon execution of formalities required by
law
11. Extent of Binding Effect of Contract
a) The parties are bound not only to the fulfillment of what has been expressly stipulated in the
contract but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law.
12. Nature of contract
a) The nature of contract is determined by the principles of law.
13. Consent is one of the essential elements of contract. It refers to the meeting of minds between
the contracting parties as regards to the object and cause of contract.
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14. Principles of Consent
a) Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.
b) The offer must be certain and the acceptance absolute.
c) A qualified acceptance constitutes a counter-offer.
d) Consent may be expressed or implied.
15. Binding Effect of Acceptance Through Telegram
a) The contract entered into through telegram is perfected from the time the acceptance came to
the knowledge of the offerer also known as Cognitive Theory.
16. Place of Perfection of Contract entered Through Telegram, Letter or Telephone
a) The place of perfection of contract entered through telegram, letter or telephone is disputably
presumed by law to be entered in the place where the offer was made.
17. Requisites of an Offer in Order to have Meeting of Minds or Consent
a) It must be definite.
b) It must be certain.
c) It must be complete.
d) It must be intentional.
18. Concepts concerning Acceptance
a) An acceptance may be expressed or implied.
b) The person making the offer may fix the time, place and manner of acceptance, all of which
must be complied with.
c) An offer made through an agent is accepted from the time acceptance is communicated to
the agent not necessarily to the principal.
d) 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, something paid or promised.
19. Instances which if happened to either Offerer or Acceptor before acceptance make the
offer ineffective resulting to nullity of contract
a) Civil interdiction
b) Insanity
c) Death
d) Insolvency
20. Principles of Acceptance
a) An option contract supported by consideration or option premium is valid and binding and
may not be withdrawn.
b) Business advertisements are mere invitations to make an offer.
c) Advertisements for bidders are simply invitations to make proposals.
21. Incapacitated Persons to give Consent to a Contract
a) Unemancipated minors or persons below 18 years of age
b) Insane except during lucid interval
c) Demented persons
d) Deaf-mutes who do not know how to write
e) Drunken person
f) Hypnotized person
22. Status of Contract entered into by Incapacitated Persons to give Consent to a Contract
a) Only one party is incapable. (Voidable on the part of incapacitated person)
b) Both parties are incapable. (Unenforceable until ratified by the guardian of the incapacitated
contracting parties)
23. Difference between contract wherein consent of either or both contracting parties is
wanting and contract wherein consent of one of the contracting parties is vitiated
a) The contract is void if the consent is wanting requiring declaration of nullity of contract.
b) The contract is voidable if the consent is vitiated requiring annulment of contract.
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24. Requisites of Consent to Make the Contract Perfect Valid and Not Voidable or
Unenforceable
a) It should be intelligent.
b) It should be free.
c) It should be spontaneous.
d) It should not be vitiated.
25. Vices of Consent (FUMIV) which make the contract voidable
a) There is violence when in order to wrest consent, serious or irresistible force is employed.
i. Requisites of violence to vitiate consent
1. There must be physical force.
2. The physical force must be irresistible.
3. The physical force must be the determining cause in giving the consent to the
contract.
b) 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.
i. Requisites of intimidation to vitiate consent
1. The intimidation must be the determining cause of the consent.
2. The threatened act must be unjust or unlawful.
3. The threat must be real and serious.
4. The threat must produce a reasonable and well-grounded fear.
c) 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.
d) There is causal 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.
i. Requisites of fraud to vitiate consent
1. It must have been employed by one of the contracting parties only.
2. It must have induced the other party to enter into the contract.
3. It must have been serious.
4. It may or may not result to damage or injury to the contracting parties. Presence of
injury on the complainant is not necessary for the action for annulment of voidable
contract to prosper.
e) Mistake which should be substantial.
i.
Mistakes that may vitiate consent resulting to voidability of a contract
1. Mistake which should refer to the substance of the thing which is the object of the
contract.
2. Mistake which should refer to those conditions which have principally moved one or
both parties to enter into the contract.
3. Mistake as to identity or qualifications of one of the parties wherein such identity or
qualifications have been the principal cause of the contract.
4. Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated.
ii. Errors that do not vitiate consent maintaining the perfect validity of a contract
1. Error as to the solvency of the other party.
2. Error as to the motive of the party.
3. Error as to estimates.
26. Difference between causal fraud (Dolo causante) and incidental fraud (Dolo incidente)
a) In causal fraud, the contract is voidable requiring annulment of contract.
b) In incidental fraud, the contract is perfectly valid but action for damages is the proper
remedy.
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27. Principles governing Vices of Consent
a) 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.
b) Failure to disclose facts, when there is duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
c) The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent.
d) 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.
28. Principles governing Causal Fraud
a) Misrepresentation by a third person does not vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual.
b) Misrepresentation made in good faith is not fraudulent but may constitute error.
c) In order that fraud may make a contract voidable, it should be serious and should not have
been employed by both contracting parties.
d) Causal fraud may entitle the injured party for annulment of contract while incidental fraud may
entitle the injured party to action for damages.
e) In case both parties use fraud reciprocally, the fraud of one compensates that of the other,
and neither party can ask for annulment of the contract because they are in pari delicto.
29. Absolutely Simulated Contract vs. Relatively Simulated Contract
a) In absolute simulation, there is color of a contract, without any substance thereof, the
parties not having any intention to be bound. The proper legal remedy is action for declaration
of nullity.
b) In relative simulation, the parties have an agreement which they conceal under the guise of
another contract. The proper legal remedy is action for reformation of instrument.
30. Object or Prestation is one of the essential elements of contract. It refers to the promise or
conduct to be performed in the fulfillment or rendition of the obligations of contract and it may
consist of giving, doing or not doing a thing.
a) Requisites of an object of a contract (Prestation)
i.
ii.
iii.
iv.
It must be within the commerce of men.
It must be licit, or not contrary to law, morals, good customs, public order or public policy.
It must be possible.
It must be determinate as to its kind.
b) Allowed object or prestation of a contract
i.
ii.
iii.
iv.
Future things
All rights which are not intransmissible
All services not contrary to law, morals, good customs, public order or public policy
Hereditary rights
c) Prohibited object or prestation of a contract
i.
ii.
iii.
iv.
v.
vi.
vii.
Immoral object or prestation
Illegal object or prestation
Impossible object or prestation
Object or prestation outside the commerce of men
Object or prestation that did not exist at the time of the transaction
Future inheritance
Vain hope
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31. Cause of contract is one of the essential elements of contract. It refers to the immediate and
proximate purpose of the contract or the essential reason which impels the contracting parties to
enter into it and which explains and justifies the creation of the obligation through such contract.
a) Causes of different types of contract
i. In onerous contract the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other. There is valuable consideration in
an onerous contract.
ii. In remuneratory contract, the cause is the service or benefit which is remunerated.
iii. In contract of pure beneficence or gratuitous contract, the cause is the mere liberality
or generosity of the benefactor.
iv. The cause of accessory contract is the very cause or consideration of the principal
contract.
32. Difference between cause and motive
a) Contracts without cause or with unlawful cause produce no effect whatever and are
considered null and void.
b) Contracts without motive or with unlawful motive remain to be valid.
33. Principles concerning cause
a) 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.
b) Although the cause is not stated in the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary.
c) As a general rule, lesion or inadequacy of cause does not invalidate a contract.
d) The particular motives of the parties in entering into a contract are different from the cause
thereof.
34. Reformation of instrument is the legal remedy available to the injured party in a contract when
the instrument or document that serves as tangible evidence of the contract does not express the
true intention of the contracting parties. However, 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.
a) Instances wherein reformation of the instrument is the proper remedy
i. When a mutual mistake of the parties results to the failure of the instrument to disclose
their real agreement.
ii. 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.
iii. 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.
iv. 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.
v. 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.
b) Documents or Instrument which cannot be reformed or reformation of instrument is
not allowed
i. Simple donation inter vivos wherein no condition is imposed or unconditional donation
inter vivos
ii. Last will and testament whether holographic will or notarial will
iii. When the real agreement is void
c) Parties who may ask for the reformation of an instrument
i. Either party if the mistake is mutual.
ii. Injured party
iii. Successors in interest, heirs and assigns of injured party
d) Action for reformation of instrument and Action to enforce the instrument are
inconsistent remedies and the complainant cannot have both.
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35. Rules on Interpretation of Contract
a) If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning shall be applied by the court.
b) If there is conflict between evident intention and words of contract, the intention of the parties
shall prevail.
c) The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.
d) Incidental circumstances of a gratuitous contract shall be interpreted with the least
transmission of rights and interest.
e) Incidental circumstances of an onerous contract shall be interpreted with greatest reciprocity
of interest.
f) In case of doubt whether the contract is one of loan with mortgage or one of pacto de retro
sale, it shall be interpreted as loan with equitable mortgage in favor of social justice.
g) 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 is void.
h) In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
i) 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.
j) If some stipulation of any contract should admit several meanings, it shall be understood as
bearing that import which is most adequate to render in effectual.
k) 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.
l) Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.
m) 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 omissions of stipulations which are ordinarily
established.
36. Types of Defective Contracts from Least Defective to Most Defective
a) Rescissible contract is a defective contract that is valid and binding until rescinded by the
court. It is a contract that has caused a particular damage to one of the parties or to a third
person, and which for equitable reasons may be set aside even if it is valid. The proper legal
remedy is action for rescission of rescissible contract.
b) Voidable or annullable contract is a defective contract that is valid and binding until
annulled by the contract. It is a contract in which the consent of one party is defective, either
because of want of capacity or because it is vitiated, but which contract is valid until set aside
by a competent court. The proper legal remedy is action for annulment of voidable contract.
c) Unenforceable contract is a defective contract that is valid although not binding until ratified.
It is a contract that for some reason cannot be enforced, unless it is ratified in the manner
provided by law. There is no legal remedy required but to leave the contract as it is.
d) Void or inexistent contract is a defective contract that is valid and therefore not binding. It is
an absolute nullity and produces no effect, as if had never been executed or entered into and
cannot be ratified. The proper legal remedy is action for declaration of nullity of void contract.
37. Rescissible contract is a defective contract that is valid and binding until rescinded by the court.
It is a contract that has caused a particular damage to one of the parties or to a third person, and
which for equitable reasons may be set aside even if it is valid. The proper legal remedy is action
for rescission of rescissible contract.
a) Characteristics of Rescissible Contracts
i. They are valid and binding until rescinded.
ii. They are not susceptible of ratification but convalidated by prescription.
iii. After the rescission, they are no longer effective and will result to mutual restitution.
iv. The prescriptive period of an action for rescssion is 4 years.
v. The proper legal remedy is action for rescission of contract.
vi. They may be assailed by a third person affected by it.
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b) Examples of Rescissible Contracts
i.
Those contracts wherein the ward or absentee suffered lesion by more than ¼ the
value of the things on the contracts entered into by their guardian or
representative.
1. Those which are entered into by guardians whenever the wards they represent suffer
lesion by more than ¼ the value of the things which are the object thereof.
2. Those agreed upon in representation of absentees, if the latter suffer lesion more
than ¼ the value of the things which are the object thereof.
ii. Those contracts entered into to defraud creditors.
1. Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them.
2. Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority.
3. Payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected.
4. All contracts by virtue of which the debtor alienates property by gratuitous title when
the donor did not reserve sufficient property to pay all debts contracted before the
donation.
5. Alienations by onerous title when made by persons against whom some judgment
has been rendered in any instance or some writ of attachment has been issued.
6. Contracts entered into by an insolvent person to defraud creditors.
c) Rescission of contract is a remedy granted by law to the contracting parties and even to
third persons, to secure the reparation of damages caused to them by a contract, even if this
should be valid, by means of the restoration of things to their condition at the moment prior to
the celebration of said contract. This action may be filed by a third person directly affected by
such rescissible contract.
i.
Requisites of an action for rescission of contract
1. The contract must be rescissible.
2. The party asking for rescission must have no other legal means to obtain reparation
for damages suffered by him.
3. The person demanding rescission must be able to return whatever he may be obliged
to restore if rescission is granted.
4. The things which are the object of the contract must not have passed legally to the
possession of a third person acting in good faith.
5. The action for rescission must be brought within the prescriptive period of four years.
d) Rules to be observed in counting the 4-year period for prescription of an action for
rescission
i. For incapacitated persons or under guardianship, 4 years shall be counted from the
termination of the ward’s incapacity.
ii. For absentee, 4 years shall be counted from the date the domicile of absentee is known.
iii. For contracts intended to defraud creditor, 4 years shall be counted from the knowledge
of the contract.
iv. For contracts intended to defraud creditor but involving immovable, 4 years shall be
counted from the registration of the sale.
e) Principles on rescission of contracts
i. The action for rescission is a remedy of last resort. It can be instituted only when the party
suffering damage has no other legal means to obtain reparation for the same.
ii. Rescission shall be only to the extent necessary to cover the damages caused.
iii. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return whatever may be obliged to
restore.
iv. Rescission will not prosper when the things which are the object of the contract are legally
in the possession of third persons who did not act in bad faith.
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v. In case rescission is not possible, the indemnity for damages may be demanded from the
person causing the loss.
38. Voidable or annullable contract is a defective contract that is valid and binding until annulled by
the court. It is a contract in which the consent of one party is defective, either because of want of
capacity or because it is vitiated, but which contract is valid until set aside by a competent court.
The proper legal remedy is action for annulment of voidable contract.
a) Characteristics of Voidable Contracts
i. They are valid and binding until annulled.
ii. They are susceptible of ratification which extinguishes the action for annulment
iii. After the annulment, they are no longer effective and will result to mutual restitution.
iv. The prescriptive period of an action for annulment is 4 years.
v. The proper legal remedy is action for annulment of contract.
vi. They cannot be assailed by a third person.
b) Examples of Voidable Contracts
i. Those where one of the parties is incapable of giving consent to a contract.
ii. Those where the consent is vitiated by fraud, undue influence, mistake, intimidation or
violence.
c) Annulment of contract is a legal remedy granted by law to the injured party to a voidable
contract to ask for its annulment because of defect in the consent of the injured party either
due to incapacity or vitiation of consent. This action does not require presence of injury or
damage to the complainant for it to prosper. This action may be filed by the injured
contracting party or guardian of incapacitated party in a voidable contract but neither by the
guilty party/capacitated party nor a third person.
d) Rules to be observed in counting the 4-year period for prescription of an action for
annulment.
i. In cases of intimidation, violence or undue influence, 4 years shall begin from the time the
defect of the consent ceases.
ii. In cases of fraud or mistake, 4 years shall begin from the time of the discovery of the
fraud or mistake.
iii. In cases of contracts entered into by wards or incapacitated persons, 4 years shall begin
from the time the guardianship or incapacity ceases.
e) Parties who may ask for annulment of voidable contracts
i. Guardian of a minor
ii. Guardian of an insane or demented person
iii. Party whose consent is vitiated
f)
Principles of Ratification of Voidable Contract
i. Ratification may be effected expressly or tacitly.
ii. Ratification may be effected by the guardian of the incapacitated person.
iii. Ratification does not require conformity of the contracting party who has no right to bring
the action for annulment.
iv. Ratification cleanses the contract from all its defects from the moment it was constituted.
g) Effects of annulment of contract
i. The contracting parties shall restore to each other the things which have been the subject
matter of the contract with their fruits and the price with interests.
ii. In obligations to render service, the value thereof shall be the basis for damages.
iii. When the defect of the contract consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has been
benefited by the thing or price received by him.
iv. Whenever the person obliged by the decree of annulment to return the thing cannot do so
because it has been lost through his fault, he shall return the fruits received and the value
of the thing at the time of the loss, with interest from the same date.
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v. One of the contracting parties may not be compelled to restore what in virtue of the
decree of annulment he is bound to return if the other does not restore what is incumbent
upon him.
vi. The action for annulment of contracts shall be extinguished when the thing which is the
object thereof is lost thorough the fraud or fault of the person who has a right to institute
the proceedings.
vii. If the loss of action is based upon the incapacity of any one of the contracting parties, the
loss of the thing shall not be an obstacle to the success of the action, unless said loss
took place through the fraud or fault of the plaintiff.
39. Unenforceable contract is a defective contract that is valid although not binding until ratified. It is
a contract that for some reason cannot be enforced, unless it is ratified in the manner provided by
law. There is no legal remedy required but to leave the contract as it is.
a) Characteristics of Unenforceable Contracts
i. They are valid but not binding and therefore not enforceable by court action.
ii. They are susceptible of ratification which makes the contract enforceable.
iii. There is no proper legal remedy but to leave the contract as it is.
iv. They cannot be assailed by a third person.
b) Examples of Unenforceable contracts until ratified
i. Those contracts entered into in the name of another person by one who has been given
no authority or legal representative or who has acted beyond his powers.
ii. Those where both parties are incapable of giving consent to a contract.
iii. Those oral executory contracts for failure to comply with Statute of Fraud
c) Executory Contracts which shall be in writing to be enforceable under Statute of Fraud
i. An agreement that by its terms is not to be performed within one year from the making
thereof.
ii. A special promise to answer for the debt, default or miscarriage of another. (Contract of
guaranty)
iii. An agreement made in consideration of marriage, other than a mutual promise to marry.
iv. An agreement for the sale of goods, chattels or things in action (movable property or
personal property) at a price not less than P500 pesos.
v. An agreement for the leasing of real property or immovable property for a longer period
than one year regardless of rent.
vi. An agreement for the sale of real property or immovable property or of an interest therein
regardless of price.
vii. A representation to the credit of a third person.
d) Motion to dismiss is a legal remedy granted by law to the defendant in an action for exact
fulfillment or specific performance filed by one of the parties in an unenforceable contract to
ask for the dismissal of the contract although valid because it is unenforceable or not binding
unless ratified by the party or parties to the contract. Once the unenforceable contract is
ratified by the appropriate party, it becomes a valid and binding contract that can be enforced
by court action.
e) Principles on Ratification of Unenforceable Contract
i. The sale of property made by a person without authority of the owner is unenforceable in
the beginning but afterwards it becomes perfectly valid by the ratification of the owner.
ii. Contracts infringing Statute of Frauds are ratified by the failure to object to the
presentation of oral evidence to prove the same or by the acceptance of benefits under
them.
iii. When a contract is enforceable under the Statute of Frauds, and a public document is
necessary for the registration in the Registry of Deeds, the parties may compel each other
to execute the required form.
iv. In a contract where both parties are incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case maybe, of one of the contracting
parties shall give the contract the same effect as if only one of them were incapacitated.
v. In a contract where both parties are incapable of giving consent and if ratification is made
by the parents or guardians, as the case may be, of both contracting parties, the contract
shall be validated from the inception.
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vi. Unenforceable contracts cannot be assailed by third persons.
40. Void or inexistent contract is a defective contract that is invalid and therefore not binding. It is
an absolute nullity and produces no effect, as if had never been executed or entered into and
cannot be ratified. The proper legal remedy is action for declaration of nullity of void contract.
a) Characteristics of void contracts
i. They are invalid and therefore not binding.
ii. The contracts produce no effect whatsoever either against in or in favor of anyone.
iii. The proper legal remedy is action for declaration of nullity of void contract.
iv. As a general rule they cannot be confirmed or ratified except that declaration of nullity of
some void contracts may be barred by reason of estoppel or laches in exceptional cases.
v. If they have been performed, the restoration of what has been given is in order.
vi. They may be assailed by a third person directly affected by it.
b) Examples of Void Contracts
i. Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy.
ii. Those which are absolutely simulated.
iii. Those whose cause or object did not exist at the time of the transaction.
iv. Those whose object is outside the commerce of men.
v. Those which contemplate impossible services.
vi. Those where the intention of the parties relative to the principal object cannot be
ascertained.
vii. Those expressly prohibited by law.
viii. Those expressly declared void by law.
c) Declaration of nullity is a legal remedy granted by law to the injured party or to a third
person to ask for the nullification of a void contract because of the absence of any of the
essential elements of contract necessary for its validity. This action may be filed by the injured
contracting party in a void contract or by a third person directly affected by such void contract.
d) Principles of Void Contracts
i. The defense of illegality of contracts is available to third persons whose interests are
directly affected.
ii. A contract which is the direct result of a previous illegal contract is also void and
inexistent.
iii. In case of a divisible contract, if the illegal terms can be separated from the legal ones,
the latter may be enforced.
iv. When the law sets or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to
recover the deficiency.
v. When the law fixes, or authorizes the fixing of the maximum number of hours of labor,
and a contract is entered into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation for services rendered
beyond the time limit.
vi. When the price of any article or commodity is determined by statute or by authority of law,
any person paying any amount in excess of the maximum price allowed may recover
such excess.
vii. When the agreement is not illegal per se but is merely prohibited, and the prohibition by
law is designed for the protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered.
viii. Where one of the parties to an illegal contract is incapable of giving consent, the courts
may, if the interest of justice so demands, allow recovery of money or property delivered
by the incapacitated person.
ix. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one the parties before the purpose has been accomplished or before any
damage has been caused to third person. In such a case, the courts may if the public
interest will thus be sub served, allow the party repudiating the contract to recover the
money or property.
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x. Interest paid in excess of the interest allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of payment. Although Usury Law has been
suspended by the BSP Monetary Board Circular allowing the contracting parties to
stipulate a conventional interest rate higher than the legal interest rate, such contractually
agreed rate should neither be unconscionable nor excessive, otherwise it will be declared
void for being contra bonus mores or being immoral.
e) Effects of nullity of contract for being illegal or criminal contract (Illegal Per Se Void
Contract)
i. When both parties are in pari delicto, they shall have no action against each other.
ii. Both criminals shall be prosecuted.
iii. They cannot recover the proceeds of the crime.
iv. The instruments of the crime shall be forfeited in favor of the government.
v. If only one of the parties is guilty, the innocent one may claim what he has given and shall
not be bound to comply with his promise.
f)
Effects of nullity of contract for being illegal but not criminal contract (Unlawful but not
illegal per se Contract)
i. When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract or demand the performance of the other’s undertaking.
ii. When only one of the contracting parties is at fault, he cannot recover what he has given
by reason of the contract or ask for the annulment of what has been promised to him.
iii. The other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.
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Distinctions of Defective Contracts
Rescissible Contract
As to Validity
Valid
and
binding
rescinded
Action for Rescission
until
As to Legal
Remedy to
injured party
Prescriptive
4 years
period
of
Action
Capability for Not subject to ratification but
Ratification
may be convalidated by
which
will prescription.
clean
the
defects
of
the contract.
As
to May be assailed by a third
assailment
person affected by it
by
third
person
As
to Required
presence of
injury
to
complainant
Examples
a.
Those
which
are
entered into by guardians
whenever the wards they
represent suffer lesion by more
than ¼ the value of the things
which are the object thereof;
b.
Those agreed upon in
representation of absentees, if
the latter suffer lesion by more
than ¼ the value of the things
which are the object thereof;
c.
Those undertaken in
fraud of creditors when the latter
cannot in any other manner
collect the claims due them;
d.
Those which refer to
things under litigation if they
have been entered into by the
defendant
without
the
knowledge and approval of the
litigants or of competent judicial
authority;
e.
Payments made in a
state
of
insolvency
for
obligations to whose fulfillment
the debtor could not be
compelled at the time they were
effected.
f.
All contracts by virtue of
which the debtor alienates
property by gratuitous title when
the donor did not reserve
sufficient property to pay all
debts contracted before the
donation.
g.
Alienations
by
onerous title when made by
persons against whom some
judgment has been rendered in
any instance or some writ of
attachment has been issued.
h.
Contracts
entered
into by an insolvent person if he
does not retain sufficient
property to pay his obligations.
Voidable
Contract
Valid and binding
until annulled
Action
for
Annulment
Unenforceable Contract
Void Contract
Valid but unenforceable
by court action
None
Invalid
4 years
N/A
No Prescriptive Period
May be ratified.
May be ratified.
May
not
be
assailed by a
third person
May not be assailed by a
third person
1) Those illegal per se can never be
ratified.
2) The declaration of nullity of those
which are not illegal per se may be
barred by estoppel or laches in
exceptional cases.
May be assailed by a third person
directly affected by it
Not required
Not required
Not
required
unless
complainant is a third person
a.
Those
entered
into in the name of
another person by one
who has been given no
authority
or
legal
representative or who has
acted beyond his powers.
b.
Those that do
not comply with the
statute of frauds.
c.
Those
where
both parties are incapable
of giving consent to a
contract.
a. Those whose cause, object or
purpose is contrary to law,
morals, good customs, public
order or public policy.
b. Those which are absolutely
simulated.
c. Those whose cause or object
did not exist at the time of the
transaction.
d. Those whose object is outside
the commerce of men.
e. Those which contemplate an
impossible services.
f. Those where the intention of the
parties relative to the principal
object cannot be ascertained.
g. Those expressly prohibited or
declared void by law.
a. Those
where one of
the parties is
incapable of
giving
consent to a
contract.
b. Those
where
the
consent
is
vitiated
by
fraud, undue
influence,
mistake,
intimidation
or violence.
Action for Declaration of Nullity
the
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