Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
LAW ON CONTRACTS
General Principles
A contract is a meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some service. (Art. 1305).
Meeting of the minds – intention of the parties in entering into the contract respecting the
subject matter and consideration thereof. As a rule, therefore, a contract is perfected by mere
consent. It does not require any special form, as a rule, and is binding from the moment that the
essential requisites are present. Thus, the meeting of the minds between the parties rise to the
binding contract although they have not affixed their signature to its written form.
Obligation v. Contract
While a contract is one of the sources of obligations, an obligation is the legal tie or relations
itself that exists after a contract has entered into.
Here, there can be no contract if there is no obligation. But an obligation may exist without a
contract.
Duty of courts in interpreting contracts
Its duty is confined to the interpretation of the one which they have made for themselves without
regard to its wisdom or folly as the court cannot supply material stipulations into the contract
words which it does not contain.
Stage, Characteristics
Stages in the making of a contract (CPC)
1.
Conception or Generation – where parties begin their initial negotiation and bargaining
for the formation of the contract ending at the moment of agreement of the parties
2.
Perfection or Birth – here, the parties had a meeting of minds as to the object, cause or
consideration and other terms and conditions of the contract
3.
Consummation or Fulfillment – the last stage which consists in their performance or
fulfillment by the parties of their obligations under the term of the perfected contract
Characteristics of a contract (AMOR)
1.
Autonomy (Art. 1306)
2.
Mutuality (Art. 1308)
3.
Obligatoriness and consensuality (Art. 1315)
4.
Relativity (Art. 1311)
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Relativity of Contracts
Principle of relativity or Principle of limited effectivity of contracts GR: Contracts take effect
only between the parties or their assigns and heirs.
XPNs:
1.
Rights or obligations that are not transmissible by their nature, or by the stipulation or by
provisions of law
2.
Contracts containing a stipulation in favor of a third person (Stipulation pour autrui)
3.
Contracts containing real rights
4.
Contracts entered into in fraud of creditors
5.
Contracts which have been violated at the inducement of third persons
6.
Quasi-contract of negotiorum gestio
Requisites of stipulation pour autrui
1.
Stipulation in favor of a third person
2.
Stipulation is just part and not the whole obligations of the contract
3.
Contracting parties must have clearly and deliberately conferred a favor upon a third
person
4.
Favor or benefit conferred is not just an incidental benefit or interest
5.
Third person must have communicated his acceptance
6.
Neither of the contracting parties bears the legal representation of the third person
Obligatory force of contracts
Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for validity are present (Art. 1356)
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith (Art. 1159)
Requisites for the application of the principle:
1.
It is perfected
2.
It is valid
3.
It is enforceable
Mutuality of contracts
The contract must bind both contracting parties and its validity or compliance cannot be left to
the will of one of them (Art. 1308)
The binding effect of any agreement between parties to a contract is premised on two settled
principles:
1.
That any obligation arising from contract has the force of law between the parties 2.
That there must be mutuality between parties based on their essential equality.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Any favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
Contract of Adhesion
It is a contract in which one of the parties prepares the stipulations in the form of a ready-made
contract, which the other party must accept or reject, but not modify, by affixing his signature or
his “adhesion” thereto; leaving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing.
Validity of Contract of Adhesion
It is not entirely prohibited since the one who adheres to the contract is, in reality, free to reject it
entirely, and if he adheres, he gives his consent.
Autonomy of Contracts/Liberty of Contracts
It is the freedom of the parties to contract and to stipulate provided the stipulations are not
contrary to law, morals, good customs, public order or public policy (Art. 1306)
Courts cannot make for the parties better or more equitable agreements than they themselves
have been satisfied to make, or rewrite contracts because they operate harshly or inequitably as
to one of the parties, or alter them for the benefit of one party and to the detriment of the other,
or by construction, relieve one of the parties from terms which he voluntarily consented to, or
impose on him those which he did not. (Bautista v. CA; 299 SCRA 481)
Essential Requisites of a Contract
1.
Natural elements – those which are derived from the very nature of the contract and as a
consequence, ordinarily accompany the same
2.
Essential elements – those without which there can be no contract.
3.
Accidental elements – those which exist only when the contracting parties expressly
provide for them.
Essential Requisites of a Contract (COC)
1.
Consent
2.
Object or subject matter
3.
Cause or consideration
Note: These three requisites are, therefore, the essential elements of a consequential contract. In
real contracts, however, in addition to the above, the delivery of the object of the contract is
required as a further requisite.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
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Consent
Consent – manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Note: Consent is essential to the existence of a contract; where it is wanting, the contract is nonexistent.
Requisites of consent
1.
Legal capacity of the contracting parties (parties must have full civil capacity);
2.
Manifestation of the conformity of the contracting parties (manifestation may be in
writing bearing the signature or marks of the parties, or it may be implied from the conduct of
the parties like the acceptance of payment);
3.
Parties’ conformity to the object, cause, terms, and condition of the contract must be
intelligent, spontaneous and free from all vices of consent (intelligence in consent is vitiated by
error; freedom by violence, intimidation or undue influence; and spontaneity by fraud; and
4.
The conformity must be real.
Offer
Offer – an expression of willingness to contract on certain terms, made with the intention that it
shall become binding as soon as it is acepted by the to whom it is addressed.
Elements of a valid offer and acceptance
1.
Definite - unequivocal
2.
Intentional
3.
Complete – unconditional
Note: We follow the cognitive theory and NOT the mailbox theory. Under our Civil Law, the
offer and acceptance concur only when the acceptance has reached the knowledge of the offer
(actual knowledge), and not at the time of sending the acceptance.
Offer
Requisites of an effective offer
1.
The one offering must have a serious intention to become bound by his offer;
2.
The terms of the offer must be reasonably certain, definite and complete, so that the
parties and the court can ascertain the terms of the offer; and
3.
The offer must be communicated by the offeror to the offeree, resulting in the offeree’s
knowledge of the offer.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
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Grounds that would render the offer ineffective
1.
Death, civil interdiction, insanity or insolvency of either party before acceptance is
conveyed;
2.
Express or implied revocation of the offer by the offeree;
3.
Qualified or conditional acceptance of the offer, which becomes a counter-offer;
4.
Subject matter becomes illegal or impossible before acceptance is communicated;
5.
Period given to the offeree to signify his acceptance has already lapsed
Acceptance
Period for acceptance
1.
Stated fixed period in the offer
a.
Must be made within the period given by the offeror
b.
As to withdrawal of the offer:
i.
GR: it can be made by communicating such withdrawal at any time before the
acceptance is made
ii.
XPN: when the option is founded upon consideration (something paid or
promised since partial payment of the purchase price is considered as proof of the
perfection of the contract)
2.
No stated period
a.
Offer is made to a person present – acceptance must be made immediately
b.
Offer is made to a person absent – acceptance may be made within such time that,
under normal circumstances, an answer can be expected from him
Notes: if there was an acceptance already, the offeror cannot just withraw his offer
unilaterally, he will be liable for damages
Acceptance
Requisites of a valid acceptance
1.
Must be absolute
2.
No specified form but when the offeror specifies a particular form, such must be
complied with.
Notes: Offer or acceptance, or both, expressed in electronic form, is valid, unless
otherwise agreed by the parties (electronic contracts).
A conditional acceptance is a counter-offer which extinguishes the offer. If not accepted
by the offeror, there is no contract..
An acceptance may be express or implied.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Option Contract
It is a contract between the offeror and the offeree whereby the former grants the latter, for a
valuable consideration, the privilege to buy or not to buy certain objects at anytime within a
specified period and for a fixed price.
Note: The privilege granted to the offeree must be supported by a consideration, the option is just
considered an “offer to sell” to the offeree which is not binding until accepted.
Persons incapacitated to give consent (DIM)
1.
Deaf-mutes who do not kow how to read and write (illiterates)
2.
Insane or demented persons, unless the contract was entered into during a lucid interval 3.
Minors (Art. 1327), except:
a.
Contracts for necessaries (Art. 1489);
b.
Contracts by guardians or legal representatives and the court having
jurisdiction had approved the same;
c.
When there is active misrepresentation on the aprt of the minor (minor is
estopped)
d.
Contracts of deposit with the Postal Saving Bank provided that the minor
is over 7 years of age;
e.
Contract of an insurance for life, health and the accident on the minor’s
life;
f.
Upon reaching age of majority – they ratify the same.
Note: Because the law incapacitates them to give their consent to a contract, the only way by
which any one of those enumerated above can enter into a contract is to act through a parent or
guardian. If this requirement is not complied with, the result is a defective contract. If only one
of the contracting parties is incapacitated to give his consent, the contract is voidable. If both of
them are incapacitated to give their consent, the contract is unenforceable.
Vices of consent
1.
Mistake
2.
Intimidation
3.
Violence
4.
Undue influence
5.
Fraud
MISTAKE
GR: Mistake as a vice of consent refers to mistake of facts and not of law, thus rendering the
contract voidable.
XPN: When mistake of law involves mutual error as to the legal effect of an agreement when the
real purpose of the parties is frustrated (Art. 1334)
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Kinds of mistake
1.
Mistake as to the nature of the contract;
2.
Mistake as to object of the contract;
3.
Mistake as to the quality or principal conditions of the thing;
4.
Mistake or error in quantity;
5.
Mistake as to identity of the person;
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.
INTIMIDATION – there is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants or ascendants, to give his consent. [Art.
1335 (2)]
Requisites of intimidation (CICU)
1.
One of the parties is compelled to give his consent by a reasonable and well-grounded
fear of an evil;
2.
The evil must be imminent and grave;
3.
It must be unjust; and
4.
The evil must be the determining cause for the party upon whom it is employed in
entering into the contract (Art. 1335)
Note: To determine the degree of the intimidation, the age, sex and condition of the person shall
be borne in mind. (Art. 1335)
VIOLENCE – there is violence when in order to wrest consent, serious or irresistible force is
employed.
Requisites of violence
1.
Physical force employed must be serious or irresistible; and
2.
The determining cause for the party upon whom it is employed in entering into the
contract.
Note: Violence or intimidation shall annul the obligation, although it may have been employed
by a third person who did not take part in the contract. (Art. 1336)
UNDUE INFLUENCE – 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 (Art.
1337)
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
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Circumstances to be considered for the existence of undue influence
1.
Confidential, family, spiritual and other relations between the parties;
2.
Mental weakness;
3.
Ignorance;
4.
Financial distress
Note: The enumeration is NOT exclusive. Moral dependence, indigence, mental weakness,
tender age or other handicap are some of the circumstances to consider undue influence.
Determination of undue influence
The test to determine whether or not there is undue influence which will invalidate a contract is
to determine whether or not the influence exerted has so overpowered and subjugated the mind
of the contracting party as to destroy his free agency, making him express the will of another
rather than his own.
FRAUD – there is fraud when through the 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 (Art. 1338)
Requisites of fraud to vitiate consent
1.
It was applied or utilized by one contracting party upon the other;
2.
It must be serious deception;
3.
It must have induced the victim to enter the contract without which he would not have
agreed to;
4.
It must have resulted in damage or injury.
Basis
Dolo Causante (Art. 1338)
Dolo Incidente (Art. 1344)
Gravity of fraud
Serious in character
Not serious
Efficient cause
Efficient cause which induces
the party to enter into a
contract
Not the efficient cause
Effect on the status of
the contract
Renders the contract voidable
Does not affect the validity of the
contract
Remedies
Annulment with damages
Contract remains valid. Remedy is
claim for damages
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Acts considered not fraudulent
1.
The usual exaggerations in trade and the other party had an opportunity to know the facts
are not themselves fraudulent;
2.
A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party had relied on the former’s special knowledge;
3.
Misrepresentation by a third person, unless such misrepresentation has created substantial
mistake and the same is mutual;
4.
Misrepresentation made in good faith is not fraudulent but may constitute error
Simulation of contract – it is the declaration of a fictitious will, deliberately made by agreement
of the parties, in order to produce, for the purposes of deception, the appearance of a juridical act
which does not exist or is different from that which was executed.
Kinds of simulation of contract
1.
Absolute (simulados) – the contracting parties do not intend to be bound by the contract
at all, thus the contract is void. The main characteristics 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 or fictitious contract is void,
and the parties may recover from each other what they may have given under the contract. They
lack the element of true consent.
2.
Relative (disimulados) – the contracting parties conceal their true agreement; binds the
parties to their real agreement when it does not prejudice third persons or is not intended for any
purpose contrary to law, morals, good customs, public order or public policy. If the concealed
contract is lawful, it is absolutely enforceable, provided it has all the essential requisites:
consent, object, and cause
Object – it is the subject matter of the contract. It can be a thing, right or service arising from a
contract.
Requisites of an object (DELiCT)
1.
Determinate as to kind (even if not determinate, provided it is possible to determine the
same without the need of a new contract);
2.
Existing or the potentiality to exist subsequent to the contract;
3.
Must be licit;
4.
Within the commerce of man; and
5.
Transmissible
Note: The most evident and fundamental requisite in order that a thing, right or service may be
the object of a contract, is that it should be in existence at the moment of the celebration of the
contract, or at least, it can exist subsequently or in the future.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Object of contracts
GR: All things or services may be the object of contracts
XPNs:
1.
Things outside the commerce of men
2.
Untransmissible rights
3.
Future inheritance, except in cases expressly authorized by law
4.
Services which are contrary to law, morals, good customs, public order or public policy
5.
Impossible things or services
6.
Objects which are not possible of determination as their kind
Cause – the essential reason which moves the parties to enter into the contract. It is the
immediate, direct and proximate reason which justifies the creation of an obligation through the
will of the contracting parties.
Requisites of a cause
1.
Exist
2.
True
3.
Licit
Kinds of cause
1.
Cause of onerous contracts – the prestation or promise of a thing or service by the other
(e.g. contract of sale)
2.
Cause of remuneratory contracts – the service or benefit remunerated (e.g. donation in
consideration of a past service which does not constitute a demandable debt)
3.
Cause of gratuitous contracts – the mere liberality of the donor or benefactor
4.
Accessory – identical with cause of principal contract, the loan which it derived its life
and existence (e.g. mortgage or pledge)
Formalities required in specific contracts
1.
Donations
2.
Partnership where real property contributed
a.
There must be a public instrument regarding the partnership
b.
The inventory of the realty must be made, signed by the parties and
attached to the public instrument
3.
Agency to sell real property or an interest therein – authority of the agent must be in
writing
4.
Stipulation to charge interest – interest must be stipulated in writing
10 | P a g e
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary
diligence:
a.
Must be in writing, signed by shipper or owner;
b.
Supported by valuable consideration other than the service rendered by the
common carrier
c.
Reasonable, just and not contrary to public policy
6.
Chattel mortgage – personal property must be recorded in the Chattel Mortgage Register
(Art. 2140)
5.
Contracts which must be in writing to be valid
1.
Donation of personal property whose value exceeds P5,000.00 – the donation and
acceptance must be in
writing
2.
Sale of a piece of land or any interest therein through an agent – the authorrity of the
agent shall appear in
writing
3.
Agreements regarding payment of interest in contracts of loan
4.
Antichresis – the amount of the principal and the interest shall be specified in writing
Contracts which must appear in a public document
1.
Donation of real properties (NCC, Art 719);
2.
Partnership where immovable property or real rights are contributed to the common fund
(NCC, Arts. 1171 & 1773);
3.
Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property: sale of real property or of an
interest therein is governed by Arts. 1403, No. 2, and 1405 [NCC, Art 1358(1)};
4.
The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains [NCC, Art 1358(2));
5.
The power to administer property or any other power which has for its object an act
appearing or which should appear in a public document or should prejudice a third
person; [NCC, Art 1358(3)];
6.
The cession of actions or rights proceeding from an act appearing in a public document
[NCC, Art 1358(4)].
Kinds of Contracts
According to perfection or formation:
1.
Consensual contracts – which are perfected by the mere meeting of the minds of the
parties (NCC, Art 1305). eg. Sale, Lease.
11 | P a g e
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
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2.
3.
Real contracts are those which require for their perfection both the consent of the parties
and the delivery of the object by one party to the other. (e.g., creation of real rights over
immovable property must be written, deposit and pledge.)
Solemn contracts - contracts which must appear in writing, such as donation of real estate
or of movables if the value exceeds P5,000.00
According to the degree of dependence:
1.
Principal - that which can exist independently of their contracts; e.g., contract of loan.
2.
Accessory - that which cannot exist without a valid principal contract; e.g., guaranty,
surety, pledge, mortgage.
3.
Preparatory that which is not an end by itself but only a means for the execution of
another contract; e.g., contract of agency as agency does not stop with the agency
because the purpose is to enter into other contracts.
According to their form:
1.
Common or Informal Contracts - are those which require no particular form; e.g., Loan.
2.
Special or Formal Contracts - are those which require a particular form; e.g., Donations,
Chattel Mortgage.
Kinds of Contracts
According to their purpose:
1.
Transfer of Ownership; e.g., Sale.
2.
Conveyance of Use; e.g., Usufruct, Commodatum.
3.
Rendition of Services; e.g., Agency
According to the nature of the vinculum which they produce:
1.
Unilateral Contracts - are those which give rise to an obligation only to one of the
parties; e.g., Commodatum
2.
Bilateral Contracts - are those which give rise to reciprocal obligations for both parties;
e.g., Sale.
According to their cause:
1.
Onerous; e.g., Sale
2.
Gratuitous; e.g.commodatum
3.
Remuneratory
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
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According to the risks involved:
1.
Commutative Contracts – are those where each of the parties acquire an equivalent of his
prestation and such equivalent is peculiarly appreciable and already determined from the
moment of the perfection of the contract; e.g., Lease.
2.
Aleatory Contracts - are those which are dependent upon the happening of an uncertain
event, thus, charging the parties with the risk of loss or gain; e-g. Insurance.
Rescissible Contracts
A rescissible contract is one which has all the essential requisites of a contract but which may be
set aside by reason of equity on account of damage to one of the parties or upon a third person.
The following are rescissible contracts (Art. 1381):
1.
Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object
thereof; (e.g., G, the guardian of M, sold the corn harvested fro M’s farm for P40,000.00.
The value of the corn is P60,000.00. The sale is rescissible because the lesion of
P20,000.00 is more than ¼ of P60,000.00.)
2.
Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;
3.
Those undertaken in fraud of creditors when the latter cannot in any other manner collect
the claims due them;
4.
Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;
5.
All other contracts specially declared by law to be subject to rescission. (1291a)
Rescissible Contracts
Rescission, concept – the remedy allowed 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 it should be
valid, by means of the restoration of things to their condition at the moment prior to the
celebration of said contract.
Requisites for rescission:
1.
The party suffering damage must have no other legal means to obtain reparation for the
same;
2.
The party demanding rescission must be able to return whatever he may be obliged to
restore;
3.
The thing object of the contract must not be legally in the possession of a third person
who acted in good faith;
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
4.
The action for rescission must be brought within the period allowed by law. (For persons
under guardianship – 4 years from termination of incapacity; For absentees – 4 years
from the time the absentee’s domicile is known)
Extent of rescission
Rescission shall only be to the extent necessary to cover the damages caused.
Voidable contract, concept – one which is defective by reason of the incapacity or vitiated
consent of one of the parties. It is binding unless annulled by a proper action in court. It is
susceptible of ratification.
The following are voidable or annullable contracts:
1.
Those where one of the parties is incapable of giving consent to a contract;
2.
Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
3.
Those where consent is given in a state of drunkenness (Art. 1328)
4.
Those where consent is given during a hypnotic spell (Art. 1328)
Annulment, concept – the action brought to set aside a voidable contract
Annulment
Rescission
Brought to declare the inefficiency inherent in
the contract
Availed of to produce the inefficiency which
did not exist in the contract
Based on vitiated consent; damage is
immaterial
Based on lesion or damage
The action is principal.
The action is subsidiary.
A sanction where the law predominates.
Remedy where equity predominates.
Available only to the parties, whether bound
principally or subsidiarily.
Available not only to the contracting parties
but also to third persons whose interests are
affected.
Ratification is required to prevent annulment.
Ratification is not required to prevent
rescission.
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Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Rules on annulment of voidable contracts
1.
When action must be brought (prescriptive period); otherwise, the contract can no longer
be set aside. The action for annulment must be brought within four (4) years which period
shall begin:
a.
In cases of intimidation, violence or undue influence, from the time the
defect in the consent ceases.
b.
In case of mistake or fraud, from the time of discovery of the same.
c.
In case of minority or other incapacity of a party, from the time the
guardianship ceases.
2.
Who may bring action for annulment; The action for annulment may be instituted by all
who are thereby obliged principally or subsidiarily.
a.
Guardians;
b.
Incapacitated person after he has attained capacity;
c.
Party whose consent is vitiated by mistake, violence, intimidation, undue
influence, or fraud.
Effects of annulment
1.
In obligations to give, the contracting parties shall restore to each other the things which
have been the subject matter of the contract with their fruits, or the price with its interest;
2.
In obligations to render service, the value thereof shall be the basis of damages;
3.
Restitution when one of the parties is incapacitated;
4.
When the thing is lost through the fault of the party obliged by the decree of annulment to
return it, the said party shall return (1) the fruits received, (2) value of the thing at the
time of the loss, (3) interest from the time of the loss;
5.
Mutual restitution
Ratification, concept – the adoption or affirmation of a contract which is defective because of a
party’s vitiated consent or incapacity.
Rules on ratification
1.
How ratification is made
a.
Express – orally or in writing
b.
Implied or tacit – if with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person, who has a
right to invoke it executes an act which necessarily implies an action to
waive his right
2.
Who may ratify (the same persons who may annul the contract)
15 | P a g e
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
3.
Effects of ratification
a.
It extinguishes the action to annul a voidable contract
b.
It cleanses the contract from all its defects from the moment it was
constituted. In other words, the contract is validated from inception.
Unenforceable Contracts
Unenforceable contract, concept – one that cannot be enforced unless ratified.
Right to defense of unenforceability – this right is available only to the contracting parties.
Unenforceable contracts cannot be assailed by third persons (Art. 1408)
The following are unenforceable contracts
1.
Those entered into in the name of another person by one who has been given no authority
or legal representation, or who has acted beyond his powers;
2.
Those that do not comply with the Statute of Frauds;
3.
Those where both parties are incapable of giving consent to a contract.
Statute of Frauds
In the following cases, an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged,
or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or
a secondary evidence of its contents:
1.
An agreement that by its terms is not to be performed within a year from the making
thereof;
2.
A special promise to answer for the debt, default, or miscarriage of another;
3.
An agreement made in consideration of marriage, other than a mutual promise to marry;
4.
An agreement for the sale of goods, chattels or things in action, at a price not less than
five hundred pesos, unless the buyer accept and receive part of such goods and chattels,
or the evidences, or some of them, of such things in action or pay at the time some part of
the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers and person on whose account the sale
is made, it is a sufficient memorandum;
5.
An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
6.
A representation as to the credit of a third person.
Void or Inexistent Contracts
A void contract is one which has no force and effect from the very beginning, as if it had never
been entered into, and which cannot be validated either by time or ratification.
16 | P a g e
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Characteristics of a void contract
1.
A void contract cannot be ratified;
2.
The right to set up the defense of illegality cannot be waived;
3.
The action or defense for the declaration of the inexistence of a contract does not
prescribe;
4.
The defense of illegality of contracts is not available to third persons whose interests are
not directly affected;
5.
A contract is void and inexistent if it is the direct result of a previous illegal contract;
The following contracts are void from the very beginning:
1.
Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;
2.
Those which are absolutely simulated or fictitious;
3.
Those whose cause or object did not exist at the time of the transaction;
4.
Those whose object is outside the commerce of men;
5.
Those which contemplate an impossible service;
6.
Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained;
7.
Those expressly prohibited or declared void by law.
a.
A contract of donation between spouses during the marriage (except
moderate ones made on the occasion of a family rejoicing);
b.
A contract of sale between spouses (except when there is separation of
property)
c.
A contract which stipulates that household service shall be without any
compensation;
d.
A contract upon future inheritance (except in cases provided by law such as in the
marriage settlements)
17 | P a g e
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
DEFECTIVE CONTRACTS
BASIS
Origin of the defect
Necessity of
Damage/Prescription
RESCISSIBLE
VOIDABLE
UNENFORCEABLE
VOID/INEXISTENT
Economic
damage or
lesion to either
one of the
parties or to 3rd
persons;
declaration by
law.
Suffered by
either on the
parties or 3rd
person.
Incapacity of
one of parties
to give
consent or
vitiated
consent.
Entered without
authority or in excess
thereof; noncompliance with Statue
of Frauds; incapacity
of both parties to give
consent.
Illegality (void) or absence of
any of essential requisites of a
contract (inexistent).
As to the
other
contracting
party – not
necessary
Curable
Not necessary
Not necessary
Not curable
Not curable
Valid &
legally
enforceable
until
judicially
annulled.
Annulment of
contract.
Direct action
needed.
Contracting
party
Inoperative until
ratified; not
enforceable in court
without proper
ratification.
None
Only personal defense
Susceptible
Susceptible
Declaration of nullity of
contract.
Can be attacked directly or
indirectly.
3rd persons cannot file unless
their interest are directly
affected.
Not Susceptible
Action for
annulment
prescribes
after 4 years.
Action for recovery;
specific performance
or damages prescribes
(10 years if based on a
written contract; 6
years if unwritten).
Curable by
Prescription
Legal effect
Curable
Remedy
Rescission or
rescissory action
Must be a direct
action
GR: Contracting
party;
XPN: Defrauded
Susceptible but
not of
ratification
proper.
Action for
recission
prescribes after
4 years.
Nature of action
Who can file the
action
Susceptibility of
ratification
Susceptibility
prescription
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Valid & legally
enforceable until
judicially
rescinded.
Indirect attack allowed
Contracting party
Action for declaration of
nullity or putting of defense of
nullity does not prescribe.
Notes in Regulatory Framework for Business Transactions (RFBT)
Prepared by: Dominador B. Billones III, BS Accountancy
Disclaimer: The whole contents of this material are extracted from excerpt of several books and known sources. This is limited to, in so far as for
educational purposes. Moreover, the contents of this material are protected by the Fair Use guidelines mentioned in the R.A. 8293, otherwise
known as Intellectual Property Code of the Philippines. All rights reserved to the copyright owners.
Reformation of Instruments: it is a remedy to conform to the real intention of the parties due to
mistake, fraud, inequitable conduct, accident (NCC, Art 1359).
Reformation is a remedy in equity by means of which a written instrument is made or construed
S0 as to express or confirm the real intention of the parties when some error or mistake
committed. (Pineda, 2009)
Rationale: It would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting of the minds of the parties.
Requisites in reformation of instruments:
1.
Meeting of the minds to the contract;
2.
True intention is not expressed in the instrument;
3.
By reason of: (MARFI)
a.
Mistake;
b.
Accident;
c.
Relative simulation;
d.
Fraud; or
e.
Inequitable conduct
4.
Strong, clear and convincing proof of MARFI.
Prescriptive period in reformation of instruments - 10 years from the date of the execution of
the instrument.
Persons who can ask for the reformation of the instrument:
It may be ordered at the instance of:
1. Either party or his successors in interest (if the mistake is mutual);
2. Upon petition of the injured party; or
3. His heirs and assigns.
Operation and effect of reformation
It relates back to, and takes effect from the time of its original execution, especially as between
the parties. Reformation of instruments may be availed of judicially or extra judicially.
Interpretation of Contracts
1.
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.
2.
If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former (NCC, Art 1370).
3.
In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered (NCC, Art 1371).
4.
If some stipulation of any contract should admit of several meanings, it shall be
understood as hearing that import which is most adequate to render it effectual (NCC, Art
1373).
Non scholae sed vitae discimus.
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