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TITLE II. CONTRACTS
Chapter 1. GENERAL PROVISIONS
1305 A contract is a meeting of minds between two persons whereby one binds
DEFINITION of contracts himself, with respect to the other, to give something or to render some service.
(1254a)
1306 The contracting parties may establish such stipulations, clauses, terms and
Characteristic of contracts: AUTONOMY conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. (1255a)
LIMITATIONS: must not be contrary to
- LAW (mandatory & prohibitive laws)
- MORALS (deal with right & wrong and
the human conscience)
- GOOD CUSTOMS (standards of justice
& decency acknowledged by society)
- PUBLIC ORDER (public weal, peace,
safety & health of the community)
- PUBLIC POLICY (idea of variable
content, depending on the stage of social
culture in the community)
1307 Innominate contracts shall be regulated by the stipulations of the parties, by the
INNOMINATE contracts GOVERNED by: provisions of Titles I and II of this Book, by the rules governing the most
- stipulations analogous nominate contracts, and by the customs of the place. (n)
- provs of Titles I & II, Book IV, CC
-rules governing the most analogous
nominate contracts
- customs
1308 The contract must bind both contracting parties; its validity or compliance cannot
Characteristic of contracts: MUTUALITY be left to the will of one of them. (1256a)
1309 The determination of the performance may be left to a third person, whose
EXCEPTION to MUTUALITY: decision shall not be binding until it has been made known to both contracting
DETERMINATION BY 3rd PERSON not parties. (n)
binding until made known to both parties
1310 The determination shall not be obligatory if it is evidently inequitable. In such
EXCEPTION to MUTUALITY: case, the courts shall decide what is equitable under the circumstances. (n)
EVIDENTLY INEQUITABLE DETERMI-
NATION not obligatory
1311 Contracts take effect only between the parties, their assigns and heirs, except in
Characteristic of contracts: RELATIVITY case where the rights and obligations arising from the contract are not
EXCEPTIONS transmissible by their nature, or by stipulation or by provision of law. The heir is
Stipulation pour autrui not liable beyond the value of the property he received from the decedent.
Third person comes into possession of
object of contract creating a real right If a contract should contain some stipulation in favor of a third person, he may
Contract entered into to defraud 3rd demand its fulfillment provided he communicated his acceptance to the obligor
person before its revocation. A mere incidental benefit or interest of a person is not
Third person induces contracting party to sufficient. The contracting parties must have clearly and deliberately conferred a
violate his contract favor upon a third person. (1257a)
1312 In contracts creating real rights, third persons who come into possession of the
EXCEPTION to RELATIVITY: 3rd object of the contract are bound thereby, subject to the provisions of the
PERSON COMES INTO POSSESSION Mortgage Law and the Land Registration Laws. (n)
OF OBJECT OF CONTRACT CREATING
A REAL RIGHT
1313 Creditors are protected in cases of contracts intended to defraud them. (n)
EXCEPTION to RELATIVITY: contract
entered into to DEFRAUD 3RD PERSON
1314 Any third person who induces another to violate his contract shall be liable for
EXCEPTION to RELATIVITY: 3RD damages to the other contracting party. (n)
PERSON INDUCES PARTY to VIOLATE
CONTRACT
1315 Contracts are perfected by mere consent, and from that moment the parties are
Characteristics of contracts: bound not only to the fulfillment of what has been expressly stipulated but also to
CONSENSUALITY all the consequences which, according to their nature, may be in keeping with
OBLIGATORY FORCE OF CONTRACTS good faith, usage and law. (1258)
& PERFORMANCE IN GOOD FAITH
1316 Real contracts, such as deposit, pledge and commodatum, are not perfected
4TH element to perfect REAL contracts: until the delivery of the object of the obligation. (n)
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DELIVERY
1317 No one may contract in the name of another without being authorized by the
REQUISITE for person to CONTRACT IN latter, or unless he has by law a right to represent him.
NAME OF ANOTHER
- DULY AUTHORIZED, or A contract entered into in the name of another by one who has no authority or
- HAS RIGHT TO REPRESENT legal representation, or who has acted beyond his powers, shall be
BY LAW unenforceable, unless it is ratified, expressly or impliedly, by the person on
- Contract subsequently RATIFIED whose behalf it has been executed, before it is revoked by the other contracting
party. (1259a)
Section 1. CONSENT
1319 Consent is manifested by the meeting of the offer and the acceptance upon the
CONSENT: meeting of the minds bet the thing and the cause which are to constitute the contract. The offer must be
parties on the subject matter & the certain and the acceptance absolute. A qualified acceptance constitutes a
cause of the contract, even if neither counter-offer.
has been delivered
Acceptance made by letter or telegram does not bind the offerer except from the
ELEMENTS (2): time it came to his knowledge. The contract, in such a case, is presumed to have
- OFFER (certain) been entered into in the place where the offer was made. (1262a)
- ACCEPTANCE (absolute & unqualified;
communicated to offeror & learned by
him)
REQUISITES (5)
- PLURALITY of parties
- CAPACITY or CAPABILITY of
parties
- NO VITIATION OF CONSENT
- INTENT PROPERLY DECLARED (in
due time & in proper form)
- NO CONFLICT bet intent &
declaration
1320 An acceptance may be express or implied. (n)
FORMS of ACCEPTANCE
1321 The person making the offer may fix the time, place, and manner of acceptance,
TERMS of the OFFER: offeror may fix all of which must be complied with. (n)
TMP
1322 An offer made through an agent is accepted from the time acceptance is
communicated to him. (n)
1323 An offer becomes ineffective upon the death, civil interdiction, insanity, or
TERMINATION of OFFER insolvency of either party before acceptance is conveyed. (n)
- REJECTION by OFFEREE
- INCAPACITY by EITHER
PARTY BEFORE ACCEPTANCE is
CONVEYED
- DEATH
- CIVIL INTERDICTION
- INSANITY
- INSOLVENCY
1324 When the offerer has allowed the offeree a certain period to accept, the offer
GENERAL RULE on OPTIONS: offer may may be withdrawn at any time before acceptance by communicating such
be withdrawn any time before acceptance withdrawal, except when the option is founded upon a consideration, as
by communicating such something paid or promised. (n)
EXCEPTIONS
1) Lesion + FRAUD/MISTAKE/UNDUE
INFLUENCE
2) CASES expressly PROVIDED BY LAW
(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;
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(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)
CONTEMPORANEOUS &
SUBSEQUENT ACTS
1372 However general the terms of a contract may be, they shall not be understood to
SPECIAL INTENT PREVAILS OVER comprehend things that are distinct and cases that are different from those upon
GEN. INTENT which the parties intended to agree. (1283)
1373 If some stipulation of any contract should admit of several meanings, it shall be
If ONE INTERPRETATION MAKES A understood as bearing that import which is most adequate to render it effectual.
CONTRACT VALID & ILLEGAL, FMR (1284)
INTERPRETATION MUST PREVAIL
1374 The various stipulations of a contract shall be interpreted together, attributing to
STIPULATIONS TO BE READ the doubtful ones that sense which may result from all of them taken jointly.
TOGETHER (1285)
1375 Words which may have different significations shall be understood in that which
WORDS TO BE INTERPRETED IN is most in keeping with the nature and object of the contract. (1286)
KEEPING W/ NATURE & OBJECT OF
CONTRACT
1376 The usage or custom of the place shall be borne in mind in the interpretation of
LOCAL CUSTOMS MUST BE ALLEGED the ambiguities of a contract, and shall fill the omission of stipulations which are
& PROVED ordinarily established. (1287)
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. (1289)
1379 The principles of interpretation stated in Rule 123 of the Rules of Court shall
SUPPLETORY USE – RULE 123 of RoC likewise be observed in the construction of contracts. (n)
to refer to RULE 130 of New Rules on
Evidence
REQUISITES
1) INITIALLY VALID CONTRACT
2) ECONOMIC OR FINANCIAL
PREJUDICE TO SOMEONE
3) Requires MUTUAL RESTITUTION
EFFECTS OF RESCISSION
1) RETURN to ORIGINAL STATUS QUO
(1385)
2) IF RETURN ISN’T POSSIBLE,
TRANSFEREE MUST PAY INDEMNITY
FOR DAMAGES (1388)
3) If there are several alienations, FIRST
ACQUIRER IS LIABLE FIRST (for
damages. Actual possessor of thing liable
fraudulently alienated will be liable for its
return) (1388, last par.)
1381 The following contracts are rescissible:
ENUMERATION of RESCISSIBLE
CONTRACTS (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
GROUNDS of RESCISSION are the object thereof;
1) LESION PROPER
- 1381(1) (2) Those agreed upon in representation of absentees, if the latter suffer the
- 1381(2) lesion stated in the preceding number;
- Partitions of inheritance when there’s
lesion of ¼ or more for one heir (CC 1098) (3) Those undertaken in fraud of creditors when the latter cannot in any other
2) BAD FAITH (fraud) manner collect the claims due them;
- 1381(3) – ACCION PAULIANA
- 1381(4) (4) Those which refer to things under litigation if they have been entered into by
- 1382 the defendant without the knowledge and approval of the litigants or of
3) SPECIAL PROVISION OF LAW competent judicial authority;
[1381(5)]
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(5) All other contracts specially declared by law to be subject to rescission.
(1291a)
1382 Payments made in a state of insolvency for obligations to whose fulfillment the
REQUISITES debtor could not be compelled at the time they were effected, are also
- Debtor-payer must’ve been insolvent rescissible. (1292)
(doesn’t need to be judicially declared)
- Debt not yet due and demandable
1383 The action for rescission is subsidiary; it cannot be instituted except when the
RESCISSION NOT A PRINCIPAL party suffering damage has no other legal means to obtain reparation for the
REMEDY same. (1294)
1384 Rescission shall be only to the extent necessary to cover the damages caused.
PARTIAL RESCISSION (n)
1385 Rescission creates the obligation to return the things which were the object of
NECESSITY OF MUTUAL RESTITUTION 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
REQUISITES before action for rescission return whatever he may be obliged to restore.
can be brought
1) Generally, PLAINTIFF able to RETURN Neither shall rescission take place when the things which are the object of the
what has been received contract are legally in the possession of third persons who did not act in bad
2) THING object of contract NOT IN faith.
LEGAL POSSESSION of 3RD PERSONS
IN GOOD FAITH In this case, indemnity for damages may be demanded from the person causing
3) NO OTHER LEGAL REMEDY the loss. (1295)
4) Action BROUGHT W/IN PROPER
PRESCRIPTIVE PERIOD
1386 Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with
respect to contracts approved by the courts. (1296a)
1387 All contracts by virtue of which the debtor alienates property by gratuitous title
PRESUMPTION OF FRAUD in are presumed to have been entered into in fraud of creditors, when the donor did
- GRATUITOUS alienations, when not reserve sufficient property to pay all debts contracted before the donation.
DEBTOR DIDN’T RESERVE
SUFFICIENT PROP. TO PAY DEBT Alienations by onerous title are also presumed fraudulent when made by
CONTRACTED BEFORE THE persons against whom some judgment has been issued. The decision or
DONATION attachment need not refer to the property alienated, and need not have been
- ONEROUS alienations, when MADE BY obtained by the party seeking the rescission.
PERSONS
a) Against whom some JUDGMENT In addition to these presumptions, the design to defraud creditors may be proved
has been rendered in any other manner recognized by the law of evidence. (1297a)
b) Against whom some WRIT OF
ATTACHMENT has been issued
SUBSEQUENT TRANSFERS If there are two or more alienations, the first acquirer shall be liable first, and so
- First transferee IN GOOD FAITH – next on successively. (1298a)
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transferee’s good or bad faith not
important
- First transferee IN BAD FAITH – next
transferee liable if he’s also in bad faith
1389 The action to claim rescission must be commenced within four years.
GEN RULE on prescriptive period: 4 YRS
from date contract was entered into 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
EXCEPTIONS the latter is known. (1299)
Second par., 1389
EFFECTS OF RATIFICATION
- ACTION to annul is EXTINGUISHED
- CONTRACT CLEANSED OF DEFECT
FROM BEGINNING
1393 Ratification may be effected expressly or tacitly. It is understood that there is a
KINDS OF RATIFICATION tacit ratification if, with knowledge of the reason which renders the contract
- EXPRESS (oral or written) voidable and such reason having ceased, the person who has a right to invoke it
- TACIT (implied) should execute an act which necessarily implies an intention to waive his right.
(1311a)
1394 Ratification may be effected by the guardian of the incapacitated person. (n)
RATIFICATION BY GUARDIAN
1395 Ratification does not require the conformity of the contracting party who has no
CONFORMITY OF GUILTY PARTY NOT right to bring the action for annulment. (1312)
NEEDED
1396 Ratification cleanses the contract from all its defects from the moment it was
RETROACTIVE EFFECT OF constituted. (1313)
RATIFICATION
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1397 The action for the annulment of contracts may be instituted by all who are
PERSONS WHO MAY ASK FOR thereby obliged principally or subsidiarily. However, persons who are capable
ANNULMENT: PARTY (principal or cannot allege the incapacity of those with whom they contracted; nor can those
subsidiary) WHOSE CONSENT WAS who exerted intimidation, violence, or undue influence, or employed fraud, or
VITIATED caused mistake base their action upon these flaws of the contract. (1302a)
ACTIVE MISREPRESENTATION BY
MINOR – can’t later on sue for annulment
1398 An obligation having been annulled, the contracting parties shall restore to each
EFFECTS OF ANNULMENT other the things which have been the subject matter of the contract, with their
1) Contract hasn’t been complied with: fruits, and the price with its interest, except in cases provided by law.
PARTIES EXCUSED FROM THEIR
OBLIGATIONS In obligations to render service, the value thereof shall be the basis for damages.
2) Contract already performed: MUTUAL (1303a)
RESTITUTION (in general) of
- THING, w/ FRUITS
- PRICE, w/ INTEREST
1399 When the defect of the contract consists in the incapacity of one of the parties,
EXCEPTION TO MUTUAL RESTITUTION the incapacitated person is not obliged to make any restitution except insofar as
PER 1398 – ONLY TO EXTENT OF he has been benefited by the thing or price received by him. (1304)
ENRICHMENT
NO PRESUMPTION OF ENRICHMENT
1400 Whenever the person obliged by the decree of annulment to return the thing can
VALUE of thing w/ interest MAY BE not do so because it has been lost through his fault, he shall return the fruits
SUBSTITUTED FOR THING ITSELF received and the value of the thing at the time of the loss, with interest from the
same date. (1307a)
1401 The action for annulment of contracts shall be extinguished when the thing which
ACTION to annul EXTINGUISHED W/ is the object thereof is lost through the fraud or fault of the person who has a
LOSS OF OBJECT THROUGH FRAUD right to institute the proceedings.
OR FAULT OF VICTIM (person who has
right to institute proceedings) If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the plaintiff. (1314a)
1402 As long as one of the contracting parties does not restore what in virtue of the
ONE CAN’T BE COMPELLED TO decree of annulment he is bound to return, the other cannot be compelled to
RESTORE IF OTHER DOESN’T – comply with what is incumbent upon him. (1308)
reciprocal obligation of restitution has
been created
This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise. (1305)
1412 If the act in which the unlawful or forbidden cause consists does not constitute a
KINDS of ILLEGAL contracts criminal offense, the following rules shall be observed:
1) Those where there is a CRIMINAL
OFFENSE (1) When the fault is on the part of both contracting parties, neither may recover
a) BOTH parties GUILTY (in pari what he has given by virtue of the contract, or demand the performance of the
delicto) other's undertaking;
- NO ACTION against each other
- BOTH PROSECUTED (2) When only one of the contracting parties is at fault, he cannot recover what
- EFFECTS/INSTRUMENTS OF he has given by reason of the contract, or ask for the fulfillment of what has been
CRIME CONFISCATED IN FAVOR promised him. The other, who is not at fault, may demand the return of what he
OF GOV’T has given without any obligation to comply his promise. (1306)
b) ONLY ONE IS GUILTY
- GUILTY PARTY PROSECUTED
- INSTRUMENT OF CRIME
CONFISCATED
- INNOCENT PARTY MAY CLAIM
WHAT HE HAS GIVEN; OR if he
hasn’t given anything yet, NOT
BOUND TO COMPLY w/ his
promise
2) Those where there is NO CRIMINAL
OFFENSE
a) BOTH parties GUILTY (in pari
delicto)
- NEITHER MAY RECOVER what
he has given or demand
performance
b) ONLY ONE IS GUILTY
- GUILTY PARTY MAY NOT
RECOVER what he has given or
demand performance
- PARTY NOT AT FAULT MAY
DEMAND RETURN of what he has
given w/o obligation to comply w/ his
promise
IN PARI DELICTO
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- DOESN’T APPLY TO ABSOLUTELY
SIMULATED contracts
- DOESN’T APPLY WHERE SUPERIOR
PUBLIC POLICY INTERVENES
- DOESN’T APPLY TO VOID
CONTRACTS SIMULATED TO
CIRCUMVENT A LAW
- INAPPLICABLE TO INEXISTENT &
VOID CONTRACTS
1413 Interest paid in excess of the interest allowed by the usury laws may be
EXCESS (strictly speaking) recovered by the debtor, with interest thereon from the date of the payment.
14% - unsecured loans
12% - secured loans w/ registered real
estate as security
2.5% per mo, 2% per mo, 14% per yr –
pawnshops
1414 When money is paid or property delivered for an illegal purpose, the contract
One CASE WHERE RECOVERY CAN BE may be repudiated by one of the parties before the purpose has been
MADE EVEN IF parties are IN PARI accomplished, or before any damage has been caused to a third person. In such
DELICTO – UNACCOMPLISHED case, the courts may, if the public interest will thus be subserved, allow the party
PURPOSE & NO DAMAGE CAUSED TO repudiating the contract to recover the money or property.
ANY 3RD PERSON
AGENCY BY ESTOPPEL
ELEMENTS
1) PARTIES to the trust
a) TRUSTOR or settler – establishes
the trust
b) TRUSTEE – holds property in trust
for another’s benefit
c) BENEFICIARY (CESTUI QUE
TRUST) – person for whose benefit
the trust has been created
CHARACTERISTICS
1) FIDUCIARY RELATIONSHIP
2) CREATED BY LAW OR BY
AGREEMENT
3) LEGAL TITLE HELD BY ONE, and
EQUITABLE/BENEFICIAL TITLE HELD
BY ANOTHER
1441 Trusts are either express or implied. Express trusts are created by the intention
CLASSES OF TRUST of the trustor or of the parties. Implied trusts come into being by operation of law.
1) EXPRESS: created by assent of the
parties, or by the intention of the trustor
2) IMPLIED: created by operation of law
a) RESULTING TRUSTS: imposed by
law to carry out actual or presumed
intent of the parties, where the express
trust fails
b) CONSTRUCTIVE TRUSTS: est. by
law, regardless of intention, to prevent
fraud, oppression, or unjust enrichment
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1442 The principles of the general law of trusts, insofar as they are not in conflict with
PRINCIPLES OF GEN. LAW OF TRUSTS this Code, the Code of Commerce, the Rules of Court and special laws are
MERELY SUPPLETORY hereby adopted.
CAPACITY
- TRUSTOR capacitated to TRANSFER
PROP
- TRUSTEE capacitated to HOLD PROP
& OBLIGATE HIMSELF
- BENEFICIARY capacitated to RECEIVE
GRATUITOUSLY FROM TRUSTOR
Resulting trust
1450 If the price of a sale of property is loaned or paid by one person for the benefit of
CONVEYANCE OF PROPERTY SO IT another and the conveyance is made to the lender or payor to secure the
MAY SERVE AS SECURITY payment of the debt, a trust arises by operation of law in favor of the person to
whom the money is loaned or for whom its is paid. The latter may redeem the
Constructive trust property and compel a conveyance thereof to him.
Resulting trust
1452 If two or more persons agree to purchase property and by common consent the
WHEN PROPERTY IS IN THE NAME OF legal title is taken in the name of one of them for the benefit of all, a trust is
ONLY ONE OF THE CO-BUYERS created by force of law in favor of the others in proportion to the interest of each.
Resulting trust
1453 When property is conveyed to a person in reliance upon his declared intention to
WHEN A PERSON DECLARES HIS hold it for, or transfer it to another or the grantor, there is an implied trust in favor
INTENT TO HOLD PROPERTY FOR of the person whose benefit is contemplated.
SOMEONE ELSE
Resulting trust
1454 If an absolute conveyance of property is made in order to secure the
ABSOLUTE CONVEYANCE MADE FOR performance of an obligation of the grantor toward the grantee, a trust by virtue
SECURITY PURPOSE of law is established. If the fulfillment of the obligation is offered by the grantor
when it becomes due, he may demand the reconveyance of the property to him.
Constructive trust
1455 When any trustee, guardian or other person holding a fiduciary relationship uses
USE OF TRUST FUNDS trust funds for the purchase of property and causes the conveyance to be made
to him or to a third person, a trust is established by operation of law in favor of
Constructive trust the person to whom the funds belong.
1456 If property is acquired through mistake or fraud, the person obtaining it is, by
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PROPERTY ACQUIRED THRU MISTAKE force of law, considered a trustee of an implied trust for the benefit of the person
OR FRAUD from whom the property comes.
Constructive trust
1457 An implied trust may be proved by oral evidence.
PROOF OF IMPLIED TRUST – applies
whether property is real or personal