Title II - Contracts
Chapter 1 – General Provisions
Definition of Contracts:
There must be at least two (2) persons/parties
Article 1305. A contract is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service
Article 1307. Innominate contracts shall be regulated by
the stipulations of the parties, by the provisions of Titles
I and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of
the place.
Nominate Contracts – has specific name
Innominate Contract – no specific name or designation
in law
Contracts vs. Obligations:
➢ Do ut des – I give that you may give
-Contract. One of the sources of obligations
➢ Do ut facias – I give that you may do
-Obligation. Legal tie or relation itself that exists after a
contract has been entered into.
➢ Facto ut des – I do what you may give
Contracts vs. Agreement:
-Contract. Binding agreements enforceable through
legal proceedings in case the other party does not
comply with his obligation under the agreement.
-Agreement. Broader than a contract because it may
not have all the all the elements of a contract that
create legally enforceable obligations.
Article 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.
Limitations
Valid contracts are those that meet all the legal
requisites for the type of agreement involved and the
limitations on contractual stipulation and are therefore,
legally binding and enforceable.
Must not be contrary to
-
Law
Morals
Good Customs
Public Order
Public Policy
Article 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.
➢ Facto ut facias – I do that you may do
Contract binds both contracting parties
Article 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the
will of one of them.
Determination of Performance by a Third Person
Article 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.
Inequitable Determination
Article 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.
Persons Affected by a Contract
Article 1311. Contracts take effect only between the
parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value
of the property he received from the decedent.
If a contract should contain some stipulation in favor of
a third person, he may demand its fulfillment provided
he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a
third person
GR: Contracts take effect only between the parties,
their assigns and heirs.
EXPN:
Art. 1311 (2) – in contracts containing stipulation in
favor of a third person. (stipulation pour autrui)
Art. 1312 – in contracts creating real rights
Obligatory Force of Contracts
Article 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.
Persons Affected by a Contract
Article 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.
Stipulation pour autrui
Requisites:
Art. 1313 – in contracts entered into to defraud
creditors
Art. 1314 – In contracts which have been violated at the
inducement of a third person
-
Clearly and deliberately conferring a favor upon
a third person who has a right to demand its
fulfillment provided he communicates his
acceptance to the obligor before its revocation
by the obligee or the original parties.
Requisites:
➢ Stipulation in favor of a third person
➢ Stipulation is just part and not the whole
obligations of the contract
➢ Contracting parties must have clearly and
deliberately conferred a favor upon third
person
➢ Third person must have communicated his
acceptance
➢ Neither of the contracting parties bears the
legal representation of the third person
Article 1312. In contracts creating real rights, third
persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of
the Mortgage Law and the Land Registration Laws
Article 1313. Creditors are protected in cases of
contracts intended to defraud them
Article 1314. Any third person who induces another to
violate his contract shall be liable for damages to the
other contracting party
➢ It is perfected
➢ It is valid
➢ It is enforceable
Consensual Contracts – perfected by mere consent
Real Contracts – perfected by delivery of the thing
subject matter of the contract
Solemn Contract – requires compliance with certain
formalities prescribed by law, such prescribed form
being thereby an essential element thereof
Stages in the Life of a Contract
➢ Preparation or negotiation
➢ Perfection or birth
➢ Consummation or termination
Unauthorized Contracts are Unenforceable
Article 1317. No one may contract in the name of
another without being authorized by the latter, or
unless he has by law a right to represent him.
A contract entered into in the name of another by one
who has no authority or legal representation, or who
has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person
on whose behalf it has been executed, before it is
revoked by the other contracting party.
➢ Natural Elements – presumed to exist in certain
contracts unless the contrary is expressly
stipulated by the parties
EXPN:
➢ Ratification by the person in whose name the
contract was entered into or by his duly
authorized agent
➢ The ratification may be express or implied, but
it must be clear so as not to admit of any doubt
or vagueness
➢ The effects of ratification retroact to the
moment of celebration of the contract
When a Person is Bound by the Contract of Another
➢ When he is duly authorized by contract or by
law
➢ He must act within his power
➢ Accidental Elements – exist only when the
contracting parties expressly provided for them
Section 1 – Consent
❑ The concurrence of the wills of the contacting
parties with respect to the object and cause,
which shall constitute the contract
Article 1319. Consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer
must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his
knowledge. The contract, in such a case, is presumed to
have been entered into in the place where the offer was
made.
Chapter 2 – Essential Requisites of Contracts
Article 1318. There is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
Additional:
➢ Delivery in real contracts
➢ Compliance with the formalities required by law
in formal contracts
Classes of Elements of a Contract
➢ Essential Elements – those without which no
contract can validly exist regardless of the
intentions of the parties.
▪
▪
Common – those present in all
contracts, namely, consent, object, and
cause
Special – present only in, or peculiar to,
certain specified contracts
Requisites of Consent
➢ Legal capacity of the contracting parties
➢ Manifestation of the conformity of the
contracting parties
➢ Parties’ conformity to the object, cause, terms
and condition of the contract must be
intelligent, spontaneous and free from all vices
of consent
-
The conformity must be real
Offer
❑ Proposal made by one party (offerer) to another
(offeree), indicating a willingness to enter into a
contract
❑ Expression of willingness to contract on certain
terms, made with the intention that it shall
become binding as soon as it is accepted by the
person to whom it is addressed.
❑ Offer must be communicated and received by
the offeree
Elements of an Effective Offer
➢ Definite – unequivocal
➢ Intentional
➢ Complete - unconditional
Acceptance
-
Manifestation by the offeree of his assent to all
the terms of the offer
An acceptance departing from the terms of the
offer constitutes counter-offer
Elements of a Valid Offer and Acceptance
➢ Definite – unequivocal
➢ Intentional
-
Complete – unconditional
Article 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers,
but mere invitations to make an offer.
Article 1326. Advertisements for bidders are simply
invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the
contrary appears
Article 1327. The following cannot give consent to a
contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who
do not know how to write.
❑ Unemancipated Minor - Those persons who
have not reached the age of majority (18 years)
and are still subject to parental authority.
Article 1321. The person making the offer may fix the
time, place, and manner of acceptance, all of which
must be complied with.
❑ Insane or demented persons – condition must
exist at the time of contracting. Must be
proven.
Article 1320. An acceptance may be express or implied
❑ Deaf-mutes who do not know how to read and
write – persons who are deaf and dumb
Article 1323. An offer becomes ineffective upon the
death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed
Article 1322. An offer made through an agent is
accepted from the time acceptance is communicated to
him.
Article 1324. When the offerer has allowed the offeree
a certain period to accept, the offer may be withdrawn
at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
Option Contract
❑ One giving a person for a consideration a
certain period within which to accept the offer
of the offerer.
❑ Separate and distinct from the contract which
will be perfected upon acceptance of the offer.
Article 1328. Contracts entered into during a lucid
interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.
❑ Lucid Interval – temporary period of sanity
Article 1329. The incapacity declared in article 1327 is
subject to the modifications determined by law, and is
understood to be without prejudice to special
disqualifications established in the laws.
Article 1330. A contract where consent is given through
mistake, violence, intimidation, undue influence, or
fraud is voidable.
Vices of Consent
➢ Error or mistake (Art. 1331)
➢ Violence or force (Art. 1335)
➢ Intimidation or threat or duress
➢ Undue influence (Art. 1337)
➢ Fraud or deceit (Art. 1338)
Characteristics of Consent
➢ It is intelligent
➢ It is free and voluntary
-
It is conscious or spontaneous
Mistake or Error
❑ False notion of a thing or a fact material to the
contract
❑ Must be Mistake of Fact, and substantial
Article 1331. In order that mistake may invalidate
consent, it should refer to the substance of the thing
which is the object of the contract, or to those
conditions which have principally moved one or both
parties to enter into the contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the
contract.
A simple mistake of account shall give rise to its
correction
Mistake of Fact
➢ The substance of the thing which is the object
of the contract
➢ Conditions which have principally moved one or
both parties to enter into contract
➢ The identity or qualifications of one of the
parties provided the same was the principal
cause of the contract
Mistake or Fraud
GR: when a person signs a document, the presumption
is that so he does it with full knowledge and
understanding of the contents of the same.
EXPN:
Article 1332. When one of the parties is unable to read,
or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms
thereof have been fully explained to the former.
Effect of Knowledge of Risk
Article 1333. There is no mistake if the party alleging it
knew the doubt, contingency or risk affecting the object
of the contract.
Mistake of Law
Article 1334. Mutual error as to the legal effect of an
agreement when the real purpose of the parties is
frustrated, may vitiate consent
GR: Ignorance of the law excuses no one from
compliance therewith.
EXPN: mistake on a doubtful question of law, or on the
construction or ap[plication of law.
Requisites:
➢ The error must be mutual
➢ It must be as to the legal effect of an agreement
➢ It must frustrate the real purpose of the parties
Violence or Intimidation
Article 1335. There is violence when in order to wrest
consent, serious or irresistible force is employed.
There is intimidation when one of the contracting
parties is compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his person or
property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex
and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent
authority, if the claim is just or legal, does not vitiate
consent.
Nature of Violence
➢ Requires the employment of force
➢ Must be serious or irresistible
Article 1336. Violence or intimidation shall annul the
obligation, although it may have been employed by a
third person who did not take part in the contract
Nature of Intimidation or Threat
➢ It must produce a reasonable and wellgrounded fear of an evil
Causal Fraud vs. Incidental Fraud
Basis
Causal Fraud
Incidental Fraud
Gravity of
Fraud
Serious in
character
Not serious
Efficient
Cause
Efficient cause
which induce the
party to enter into
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 to
claim for damages.
➢ The evil must be imminent and grave
➢ The evil must be upon his person or property, or
that of his spouse, descendants or ascendants
➢ It is the reason why he enters into contract
Undue Influence
Influence of a kind that so overpowers the mind of a
party as to prevent him from acting understandingly
and voluntarily to what he would have done if he had
been left to exercise freely his own judgment and
discretion
Article 1337. There is undue influence when a person
takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of
choice. The following circumstances shall be considered:
the confidential, family, spiritual and other relations
between the parties, or the fact that the person alleged
to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial
distress.
Causal Fraud
Fraud committed by one party before or at the time of
the celebration of the contract to secure the consent of
the other
Article 1338. There is fraud when, through insidious
words or machinations of one of the contracting parties,
the other is induced to enter into a contract which,
without them, he would not have agreed to.
Article 1339. Failure to disclose facts, when there is a
duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
Article 1344. In order that fraud may make a contract
voidable, it should be serious and should not have been
employed by both contracting parties.
Incidental fraud only obliges the person employing it to
pay damages
Acts Considered not Fraudulent
Dealer’s Talk – does not appear in the face of the
contract
Article 1340. The usual exaggerations in trade, when
the other party had an opportunity to know the facts,
are not in themselves fraudulent
Expression of Opinion – misrepresentation must refer
to facts, not opinion
Article 1341. A mere expression of an opinion does not
signify fraud, unless made by an expert and the other
party has relied on the former's special knowledge.
Fraud by a Third Person – misrepresentation must refer
to facts, not opinion
Article 1342. Misrepresentation by a third person does
not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.
Misrepresentation Made in Good Faith – The person
making the false statement believed it to be true
Article 1343. Misrepresentation made in good faith is
not fraudulent but may constitute error.
Simulation of Contract
Article 1345. Simulation of a contract may be absolute
or relative. The former takes place when the parties do
not intend to be bound at all; the latter, when the
parties conceal their true agreement
Article 1346. An absolutely simulated or fictitious
contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real
agreement.
Section 2. – Objects of Contracts
❑ The subject matter of the contract. It can be a
thing, right or service arising from a contract
Article 1347. All things which are not outside the
commerce of men, including future things, may be the
object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized by law.
All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be
the object of a contract.
Article 1348. Impossible things or services cannot be
the object of contracts.
Requisites:
Article 1349. The object of every contract must be
determinate as to its kind. The fact that the quantity is
not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to
determine the same, without the need of a new
contract between the parties.
Section 3. – Cause of Contracts
❑ The essential reason or purpose which the
contracting parties have in view at the time of
entering into the contract
❑ Every contract is presumed to have a cause and
such cause is lawful
Article 1350. In onerous contracts the cause is
understood to be, for each contracting party, the
prestation or promise of a thing or service by the other;
in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the
mere liberality of the benefactor.
Requisites, it must:
➢ Exist
➢ Be true
➢ Licit/legal
Kinds of Cause:
➢ Onerous contracts – the prestation or promise
of a thing or service by the other
➢ Remuneratory contracts – the service or benefit
remunerated
➢ Gratuitous contracts – mere liberality of the
donor or benefactor
➢ Determinate as to kind (even if not
determinate, provided it is possible to
determine the same without the need of a new
contract)
Article 1352. Contracts without cause, or with unlawful
cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs,
public order or public policy.
➢ Existing or the potentiality to exist subsequent
to the contract
Article 1353. The statement of a false cause in contracts
shall render them void, if it should not be proved that
they were founded upon another cause which is true
and lawful.
➢ Must be licit/lawful
➢ Within the commerce of man
➢ Transmissible
Article 1354. Although the cause is not stated in the
contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary.
Article 1355. Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue
influence.
Rules relating to cause on contracts:
➢ Absence of cause – confers no right and
produces no legal effects
➢ Failure of cause – does not render the contract
void
➢ Illegality of cause – contract is null and void
➢ Falsity of cause – contract is void; unless the
parties shows that there is another cause which
is true and lawful
➢ Lesion or inadequacy of cause – does not
invalidate the contract, uness:
▪
There is fraud, mistake or undue
influence
▪
When the parties intended a donation
or some other contracts
▪
In cases specified by law
Motive vs. Cause
❑ Purely personal or private reason which a party
has in entering into a contract
Article 1351. The particular motives of the parties in
entering into a contract are different from the cause
thereof.
Basis
Cause
Motive
As to
proximate
reason in
a contract
Direct and most
proximate reason
of a contract
Indirect or remote
reason to a contract
As to the
kind of
reason in
the
contract
Objective and
juridical reason of
contract
Psychological or
purely personal
reason
As to the
legal
effect to
the
contract
Legality or illegality
of cause affects the
existence or validity
of the contract
does not affect the
existence or validity
of the contract
As to the
parties
Cause is always the
same for each
contracting party
Motive differs for
each contracting
party