LAW ON OBLIGATIONS AND CONTRACTS
GENERAL PROVISIONS OF CONTRACTS
CONTRACT – A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
[Art. 1305]
ELEMENTS
1. ESSENTIAL ELEMENTS [Art. 1318-1355]
 Required or always existing in any types of contracts.
a. Consent
b. Object
c. Cause
2. NATURAL ELEMENTS
 Elements that are initially present or exist in the birth of contract and
maybe removed through stipulation of the parties.
 [e.g. warranty against eviction and hidden defects in case of sales]
3. ACCIDENTAL ELEMENTS
 Not initially exist in the contract and must be stipulated by the parties.
 [e.g. stipulation such as interest in loan]
CLASSIFICATIONS
1. ACCORDING TO PERFECTION:
a. Consensual – perfected by consent, object, cause [COC]
[e.g. sales, partnership, real mortgage]
b. Real – perfected by COC + delivery
[e.g. pledge, loan, deposit]
c. Formal or Solemn – perfected by COC + formalities required by law
 Such as writing
[e.g. donation of real property, chattel mortgage, antichresis]
2. ACCORDING TO RELATION TO OTHER CONTRACT:
a. Principal – can exist on its own
[e.g. sales, loan]
b. Accessory – existence depends upon a principal contract
[e.g. pledge, mortgage, guaranty]
c. Preparatory – needed for the formation of subsequent contracts
[e.g. partnership, agency]
3. ACCORDING TO PARTIES OBLIGED:
a. Unilateral – only one party is obliged
[e.g. commodatum, donation]
b. Bilateral – both parties are obliged
[e.g. sales, barter]
4. ACCORDING TO NAME:
a. Nominate – the law gives it a special name or designation
[e.g. sales, loan, partnership, donation]
b. Innominate – the law does not give it a special name or designation
i.
Do ut des: I give that you may give
ii.
Do ut facias: I give that you may do
iii.
Facio ut facias: I do that you may do
iv.
Facio ut des: I do that you may give
When dealing with innominate contracts [Art. 1307]
i.
Stipulations of the parties
ii.
Rules governing law on obligations and contracts
iii.
Rules governing the most analogous contract
iv.
Customs of the place
5. ACCORDING TO RISKS:
a. Commutative – when the undertaking of one party is considered the
equivalent of that of the other
[e.g. sales, lease]
b. Aleatory – when it depends upon an uncertain event or contingency both
as to benefit or loss
[e.g. contract of insurance, sale of hope]
6. ACCORDING TO CAUSE:
a. Onerous – cause has valuable consideration
[e.g. sales, lease]
b. Gratuitous – cause is purely generosity
[e.g. commodatum, donation]
c. Remuneratory – cause is based on services of benefits already received
[e.g. employment contract]
7. ACCORDING TO BINDING FORCE:
a. Valid
b. Rescissible
c. Voidable
d. Unenforceable
e. Void
STAGES
1. Preparation/Conception/Generation/Negotiation
2. Perfection/Birth/Formation
3. Consummation/Death/Extinguishment
CHARACTERISTICS
1. Mutuality of contracts
 [Art. 1308] The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
 [Art. 1309] The determination of the performance may be left to a third
person, whose decision shall not be binding until it has been made known
to both contracting parties.
 [Art. 1310] The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is equitable under
the circumstances.
2. Autonomy/Liberty of contracts
 Also called liberty of contracts or freedom to stipulate in contracts
 [Art. 1306] The contracting parties may establish such stipulations, clauses,
terms, and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public policy.
3. Relativity of contracts
 [Art. 1131 par. 1] Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by stipulation or
by provision of law. The heir is not liable beyond the value of the property
he received from the decedent.
 EXCEPTIONS:
1. Stipulation Pour Autrui [Art. 1311 par. 2]
Requisites:
a. There must be a stipulation in favor of a third person
b. The stipulation must be part, not the whole of the contract
c. The contracting parties must have clearly and deliberately
conferred a favor upon a third person, NOT a mere incidental
benefit or interest
d. The third person must have communicated his acceptance to the
obligor before its revocation
e. No relation of agency exists between any of the parties and the
third person favored
2. Third persons in possession creating real rights [Art. 1312]
3. Contract is entered to defraud creditor [Art. 1313]
4. Third person induced a party to a contract to violate the contract
[Art. 1314]
4. Consensuality of contracts
 [Art. 1315] Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law.
 EXCEPTIONS: Real [Art. 1316] and Formal Contracts
5. Obligatory force of contracts
 [Art. 1159] Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith
ESSENTIAL ELEMENTS OF CONTRACTS [ART. 1318] (DETAILED)
There is no contract unless the following requisites concur:
1. Consent of the contracting parties;
REQUISITES:
a. It must be manifested by the concurrence of the offer and acceptance
[Arts. 1319-1326]
 Offer – a specific proposal to enter into an agreement with another.
Note: an offer must be intentional and certain [Art. 1319 par. 1]
Special cases of offers:
1. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with [Art. 1321]
2. An offer made through an agent is accepted from the time
acceptance is communicated to him [Art. 1322]
3. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed
[Art. 1323]
4. Advertisement for bidders are simply invitations to make offers
[Art. 1326]
 Acceptance – agreeing verbally or in writing to the terms of a contract,
which is one of the requirements to show there was a contract.
Note:
1. An acceptance must be absolute [Art. 1319]
2. Communicated to the offeror [Art. 1319 par. 2 & 1322]
3. May be express/implied
b. The contracting parties must possess the necessary legal capacity
[Arts. 1327-1329]
2 kinds of Incapacity:
1. Absolute Incapacity
 Unemancipated minors
 Except for contracts involving necessary
 Where minor misrepresented his age
 Insane or demented person
 Lucid interval
 Deaf-mutes who do not know how to write
2.



Relative Incapacity
Those under Civil interdiction for transactions inter vivos [RPC Art. 34]
Undischarged insolvents [Insolvency Law, Sec. 24]
Husband and wife: cannot donate [Art. 123 FC] to each other, nor sell if
the marriage is under ACP [Art. 1490]
c. It must be intelligent, free, spontaneous, and real (not vitiated)
[Arts.1330-1346]
Vices of consent:
 Violence
 Intimidation
 Mistake
 Fraud
 Undue influence
2. Object certain which is the subject matter of the contract;
1. Lawful: Not contrary to law, morals, good customs, public order, or public
policy
2. Actual or possible
3. Transmissible: Within the commerce of man
4. Determinate or determinable
3. Cause of the obligation which is established.
 Onerous – As to each of the contracting parties is understood to be the
undertaking or the promise of the thing or service by the other party
 Gratuitous – Mere liberality of the benefactor
 Remuneratory – The service or benefit which is remunerated
REQUISITES:
1. Existing
2. Lawful
3. True
FORMS OF CONTRACTS [ART. 1356-1358]
WHY CONTRACTS NEED TO BE IN CERTAIN FORMS?
Needed for:
1. Validity of the Contract
2. Enforceability of the Contract
3. Convenience of the parties
Contracts that needs to be in certain forms for their validity
CONTRACTS
Donation of personal property whose
value exceeds P5000 [Art. 748]
Donation of real property [Art. 749]
Partnership where immovables are
contributed [Art. 1773]
FORMALITY
Must be in writing
Must be in public instrument
Must be in public instrument with
inventory of immovable contributed
Sale of a piece of land or any interest
therein through an agent [Art. 1874]
Antichresis [Art. 2134]
Chattel Mortgage [Art. 2140]
Agreements regarding payment of
interests in contracts of loans [Art. 2314]
Contract of agency must be in writing
Must be in writing
Must be registered
Payment of interest must be in writing
Contracts that needs to be in certain forms for their enforceability [Art. 1403 par. 2]
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.
Contracts that needs to be in certain forms for convenience of the parties [Art. 1358]
1. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein are governed by articles 1403, No. 2, and
1405;
2. The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains;
3. The power to administer property, or any other power which has for its object an
act appearing or which should appear in a public document, or should
prejudice a third person;
4. The cession of actions or rights proceeding from an act appearing in a public
document.
All other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by articles, 1403, No. 2 and 1405. (1280a)
REFORMATION OF CONTRACTS [Art. 1359-1369]
REFORMATION – A remedy whereby a written instrument to the contract is amended
to conform to the true intentions of the parties.
REQUISITES: [Art. 1359 par. 1]
1. There is a valid contract
2. The written contract instrument does not conform the true intention of the parties
3. The non-conformity is due to mistake, fraud, inequitable conduct or accident
CONTRACTS THAT CANNOT BE REFORMED
1. Simple donations inter vivos wherein no condition is imposed
2. Wills
3. When the real agreement is void
WHEN A PERSON CANNOT SEEK REFORMATION?
A party who enforces the instrument representing the contract cannot
subsequently ask for its reformation. [Art. 1367]
WHO MAY SEEK REFORMATION?
Reformation may be ordered at the instance of either party or his successors in
interest, if the mistake was mutual; otherwise, upon petition of the injured party, or
his heirs and assigns. [Art. 1368]
INTERPRETATION OF CONTRACTS [Art. 1370-1379]
INTERPRETATION – is the act of making intelligible that was not before understood,
ambiguous, or not obvious.
INTENTION ALWAYS PREVAIL


The intention of the parties always prevail over the words that appear in the
instrument of a contract. [Art. 1370]
In judging the intention, subsequent acts of parties are considered [Art. 1371]
ARTICLE 1372
 However general the terms of a contract may be, they shall not be understood
to comprehend things that are distinct and cases that are different from those
upon which the parties intended to agree.
ARTICLE 1373
 If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual.
ARTICLE 1374
 The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly.
ARTICLE 1375
 Words which may have different significations shall be understood in that which
is most in keeping with the nature and object of the contract.
ARTICLE 1376
 The usage or custom of the place shall be borne in mind in the interpretation of
the ambiguities of a contract and shall fill the omission of stipulations which are
ordinarily established.
ARTICLE 1377
 The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.
ARTICLE 1378
 When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights and interests shall prevail. If the
contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.
 If the doubts are cast upon the principal object of the contract in such a way that
it cannot be known what may have been the intention or will of the parties, the
contract shall be null and void.
DEFECTIVE CONTRACTS [Art. 1380-1422]




RESCISSIBLE
VOIDABLE
UNENFORCEABLE
VOID
RESCISSIBLE
VOIDABLE
UNENFORCEABLE
VOID
VALID
/
/
/
X
BINDING
/
/
X
X
ENFORCEABLE
/
/
X
X
Why defective?
RESCISSIBLE
VOIDABLE
Causes damage Consent is
to 3rd persons
defective
Can be Ratified?
Applicable Provisions
Remedy to Avoid
Yes
Article 1381
Rescission
Yes
Article 1390
Annulment
UNENFORCEABLE
VOID
Lack of authority Missing
or form
essential
element/s
Yes
No
Article 1403
Article 1409
N/A
N/A
RESCISSIBLE CONTRACTS [Art. 1380-1389]
The following contracts are rescissible: [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;
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.
RESCISSIBLE CONRACTS VS. RESCISSIBLE PAYMENT
[Art. 1382] Payments made in a state of insolvency for obligations to whose fulfillment the
debtor could not be compelled at the time they were effected, are also rescissible.
RESCISSION
[Art. 1383] The action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same.
EXTENT OF RESCISSION
[Art. 1384] Rescission shall be only to the extent necessary to cover the damages caused.
FOR RESCISSION TO BE POSSIBLE
[Art. 1385] 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 he may be
obliged to restore.
Neither shall rescission take place 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.
In this case, indemnity for damages may be demanded from the person causing the loss.
RESCISSION NOT POSSIBLE FOR CONTRACTS APPROVED BY COURT
[Art. 1386] Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with
respect to contracts approved by the courts.
CONTRACTS PRESUMED TO BE RESCISSIBLE
[Art. 1387 par. 1] All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against
whom some judgment has been rendered in any instance or some writ of attachment
has been issued. The decision or attachment need not refer to the property alienated,
and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any
other manner recognized by the law of evidence.
ACQUISITION OF THIRD PERSON IN BAD FAITH
[Art. 1388] Whoever acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so on
successively.
PRESCRIPTION OF RESCISSION
[Art. 1389] The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin
until the termination of the former's incapacity, or until the domicile of the latter is known.
VOIDABLE CONTRACTS [Art. 1390-1402]
WHAT CONTRACTS ARE VOIDABLE? [Art. 1390]
1. When one (1) of the parties is incapable of giving consent (absolute incapacity)
Exception: When contract involves necessaries
2. When one (1) or more of the vices of consent is present
a. Violence – when in order to wrest consent, serious or irresistible force is
employed.
b. 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.
Exception: A threat to enforce one’s claim through competent authority, if
the claim is just or legal, does not vitiate consent.
c. Mistake – mistakes that refer to the substance of the object,
identity/qualification of a person, or conditions that have principally moved
one or both parties to enter into the contract.
d. Fraud – 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.
e. 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.
ANNULMENT OF VOIDABLE CONTRACTS
 Voidable contracts are valid until annulled
WHEN ANNULMENT CANNOT PROCEED
1. When the object of the contract is lost through the fault of the person who may
annul the contract
2. When the contract is ratified
WHO CAN ANNUL VOIDABLE CONTRACTS?
1. Incapacitated persons (upon ceasing of incapacity)
2. Persons whose consent were vitiated
WHEN CAN IT BE ANNULLED?
1. Within 4 years after guardianship of minors or incapacitated persons ceases
2. Within 4 years after intimidation, violence or undue influence ceases
3. Within 4 years from the time of discovery of mistake or fraud
ANNULMENT VS. RESCISSION
ANNULMENT
RESCISSION
Used to invalidate a voidable contract
Used to invalidate a rescissible contract
Principal remedy
Subsidiary remedy
Annulment is availed by parties to a Rescission is availed by injured person
contract
even if not a party to contract
WHO MAY RATIFY?
 The party who can annul a voidable contract. Ratification can be done orally, in
writing, or may be implied.
UNENFORCEABLE CONTRACTS [Art. 1403-1408]
WHAT MAKES A CONTRACT UNENFORCEABLE?
1. Unauthorized contracts
2. Both parties are incapacitated
3. Transactions under statute of fraud
STATUTE IF FRAUDS
a. Contracts not to be performed within a year
b. A special promise to answer for the debt, default, or miscarriage of another
c. Agreement in consideration of marriage
d. Sale of personal property for 500 pesos or more
e. Lease of real property for more than 1 year
f. A representation as to the credit of a third person
g. Sale of real property (Art. 1358)
EXCEPTION: Partially Executed Contracts