CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
CPA REVIEW
SUPPLEMENTARY NOTES – LAW ON CONTRACTS*
Definition
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.
Stages of a contract
a. Conception or preparation stage - involves preliminary negotiations and bargaining,
discussion of terms and conditions, with no arrival yet of a definite agreement known as
“bargaining point”.
b. Perfection or birth stage - is the point when there is meeting of minds between the
parties on a definite subject matter and valid cause.
c. Termination or consummation stage - is the point when the contract has been fulfilled
resulting in its accomplishment. The parties have performed their respective obligations
and the contract is put to an end.
Characteristics of contract
1. Freedom or liberty to stipulate – 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.
2. Obligatory force of contract - Obligations arising from contracts have the force of law
between contracting parties.
3. Perfection by mere consent - Contracts are perfected by mere consent. However, real contracts,
such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the
obligation.
4. Both parties are mutually bound - The contract must bind both contracting parties and its validity
or compliance cannot be left to the will of one of them.
The determination or validity or compliance of a contract cannot be left to the judgment of
one o f the parties only because it violates mutuality of contract.
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.
The determination of performance by a third person may be canceled if it is inequitable. In
such a case, the court shall decide what is equitable under the circumstances.
5. Relativity of contract - 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 to the relativity of contract:
a. Obligations arising from contract which are intransmissible by their nature, stipulation
or provision of law.
b. Stipulation pour autrui
c. When a third person induces another to violate his contract
d. The right of a creditor to sue on a contract entered in to by his debtor
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Stipulation “PourAutrui”
It is a stipulation in favor of a third person made by the contracting parties with the clear and
deliberate intention of conferring a favor upon such third person and whose fulfillment the
latter may demand by communicating his acceptance to the obligor before its revocation.
Requisites of pour autrui
a.
b.
c.
d.
There must be stipulation in favor of a third person.
The stipulation should be a part, not the whole, of the contract.
The contracting parties must have clearly and deliberately conferred a favor upon a third
person and not a mere incidental benefit or interest.
The third person must have communicated his acceptance to the obligor before its
revocation.
Nominate contract is a contract which has a name under the Civil Code or special law.
Examples include contract of sale and contract of partnership. pledge, barter, lease
Innominate contract is a contract without any name under the Civil Code or special law.
a. Do ut facias (I give that you may do.)
b. Facio ut des (I do that you may give.)
c. Facio ut facias (I do that you may do.)
Essential elements of contracts
1.
2.
3.
Consent of the contracting parties
Object of contract
Cause or consideration
Concept of consent
Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to
his knowledge. (Cognitive theory)
An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed.
When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn
at any time before acceptance by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.
Persons incapable of giving consent
a.
b.
c.
d.
e.
f.
Unemancipated minors
Insane or demented persons
Deaf-mutes who do not know how to write
Person suffering from civil interdiction
Incompetents under guardianship
Married women of age in cases specified by law
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Vitiation of consent
1. Mistake – The error must be substantial regarding the object and conditions of the contract, must be
excusable and not caused by negligence, and must be a mistake of fact and not of law.
2. Violence – Serious or irresistible force is employed in order to wrest consent. There is physical coercion.
3. Intimidation – 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. There is mental or moral coercion.
4. Undue influence
5. Fraud or deceit, There is fraud, when through insidious words or machinations of one of the contracting
parties the other is induced to enter into a contract without which, he would not have agreed.
a. Incidental fraud or dolo incidiente – committed after the perfection of the contract. The right of the
party is to ask for damages.
b. Causal fraud or dolo causante – Committed before or at the time of perfection. The right of the party
is to ask for annulment of contract.
Caveat emptor
“Let the buyer beware”. The transaction is not fraudulent because this is considered tolerable fraud.
Exaggerations in trade are not in themselves fraudulent when the other party had an opportunity to know the
facts. Except of course if the opinion is made by an expert and the other party has relied on such opinion.
Lucid intercval
Lucid interval is a temporary period of sanity. This is the period of suspension of insanity to sanity, then again
to insanity. Contracts entered into during a lucid interval are valid. Contracts entered into in a state of
drunkness or during a hypnotic spell are voidable.
Simulation
Simulation is the declaration of a fictitious intent manifested deliberately and by agreement by the parties in
order to produce the appearance of a transaction which does not exist or which is different from their true
agreement for the purpose of deceiving others.
a.
b.
Absolute simulation – Parties do not intend to be bound and the contract is void ab initio.
Relative simulation – Parties conceal their true agreement . A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy, binds the parties to their real agreement.
Object certain which is the subject matter of the contract
1. The object must be within the commerce of men.
2. It must be licit, or must not be contrary to law, morals, good customs, public order or public
policy.
3. It must be possible.
4. It must be determinate as to its kind.
Cause of the contract
The cause of the contract is the “why of the contract” or the essential reason which impels the contracting
parties to enter into the contract. The cause must exist, must be real or true and must be lawful.
Kinds of contract according to cause
1.
Onerous contract - the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other.
2. Remuneratory contract - the cause is the service or benefit which is remunerated.
3. Contract of pure beneficence or gratuitous contract - the cause is the mere liberality of
the benefactor.
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Lesion
Lesion is the insufficiency or inadequacy of the cause of contract. As a rule, the contract is valid, except when
there is fraud, mistake or undue influence.
Form of contracts
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.
If the law requires a document or other special form, the contracting parties may compel each
other to observe that form, once the contract has been perfected.
Formal contracts
1.
2.
3.
4.
Donation of real property must be in a public instrument, otherwise void.
Donation of personal property exceeding P5,000 must be in writing, otherwise void.
Contribution of a partner in a partnership, if an immovable property, must be in writing, otherwise void.
Sale of land thru an agent, the authority of the agent to sell must be in writing, otherwise void.
Reformation of an instrument
When, there having been a meeting of the minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the reformation of the instrument
to the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.
There shall be no reformation in the following cases:
a. Simple donations inter vivos wherein no condition is imposed
b. Wills
c. When the real agreement is void
Rescission
Rescission is a process to render inefficacious a contract validly entered into and normally binding, by reason
of external conditions causing an economic prejudice to a party or to his creditor.
Four kinds of defective contracts
1.
2.
3.
4.
Rescissible contract – valid until rescinded. The defect is extrinsic consisting of an economic damage or
lesion.
Voidable contract – valid until annulled. The contract is effective now but may be invalidated.
Unenforceable contract – Cannot be sued upon or enforced unless ratified. No effect now, but may be
effective upon ratification
Void contract – No effect at all. It cannot be ratified or validated.
Rescissible contracts
a. 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
b. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number
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. All other contracts specially declared by law to be subject to rescission.
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Voidable contracts
Voidable contracts are those which possess all the essential requisites of a valid contract but one of
the parties is incapable of giving consent, or consent was vitiated by mistake, violence, intimidation,
undue influence, or fraud.
Unenforceable contracts
Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects
provided by law, unless ratified according to law. Unenforceable contracts include;
a. Those executed by one in the name of another without any authority or in excess of such authority.
b. Those that do not comply with the Statue of Frauds
c. Those where both parties are incapable of giving consent
Statue of Frauds
The Statue of Frauds is the law which requires that certain contracts must be in writing, otherwise
unenforceable.
Contracts covered by Statue of Frauds
1.
2.
3.
4.
5.
6.
An agreement that by its terms is not to be performed within a year from the making
thereof
A special promise to answer for the debt, default, or miscarriage of another
An agreement made in consideration of marriage, other than a mutual promise to marry
An agreement for the sale of goods, chattels or things at a price of Five Hundred pesos or
more
An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein
A representation as to the credit of a third person
Void contracts
Void contracts are those which have absolutely no force and effect and are inexistent from the beginning. The
maxim is “No contract at all”
Examples of void contracts
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 or fictitious
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 service
f. Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained
g. Those expressly prohibited or declared void by law
Principle of “in pari delicto”
Where the defect of a void contract is the illegality of the cause or object of the contract, both parties are at
fault or “in pari delicto”. No remedy could be given to any of the parties and the court leaves them where they
are. This is the universally accepted practice in law under the maxim he who comes to court must do so with
clean hands”.
*Supplementary notes are largely based on the Pointers in Business Law by Atty. Carlos B. Suarez and
Atty. Alexander Q. Suarez and Supplemental notes from Atty. Kenneth Dela Cruz.
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