CONTRACT – meeting of minds between 2 persons to give something or to render service.

ELEMENTS OF CONTRACT
ESSENTIAL – w/o them, contract cannot exist
a. CONSENT of contracting parties
b. OBJECT CERTAIN – subject matter
c. CAUSE/CONSIDERATION
In some contracts, following are also necessary:
d. FORM- in formal contracts
e. DELIVERY- in real contracts

NATURAL – found in certain contract, presumed to exist unless stipulated otherwise

ACCIDENTAL – various particular stipulations that may be agreed upon by contracting

parties

CLASSIFICATION OF CONTRACTS
According to:
1. PERFECTION/FORMATION
a. CONSENSUAL – perfected by mere consent
b. REAL – perfected by delivery
c. FORMAL/SOLEMN – special formalities are essential before perfection of contract

2. PARTIES OBLIGATED
a. UNILATERAL – only 1 has obligation
b. BILATERAL – both parties require to render reciprocal prestations

3. CAUSE
a. ONEROUS – exchange of considerations
b. GRATUITOUS – no consideration received in exchange of what is given
c. REMUNERATORY – something is given for benefit/service that had been rendered
previously

4. RISK OF FULFILLMENT
a. COMMUTATIVE – equivalent values are given by both parties
b. ALEATORY – fulfillment of contract depends on chance (eg. insurance)

5. IMPORTANCE
a. PRINCIPAL – contract may stand alone (eg. sale, partnership)
b. ACCESSORY – existence depends on another contract (pledge, guarantee)
c. PREPARATORY – contract not an end by itself but a means thru w/c other contracts may
be made (eg. agency)

6. NAME
a. NOMINATE – contract given a particular/special name (eg. partnership)
b. INNOMINATE – not given special name (eg. I give that you may do)

7. SUBJECT MATTER
a. Contracts involving things
b. Contracts involving rights/credits
c. Contracts involving services

STAGES OF CONTRACT
1. PREPARATION/NEGOTIATION – preparatory steps to perfect contract (Offer, counter-
offer)
A. Offer-must be serious and certain (Offer made in jest or while angry is not a valid
offer)

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 B. Death, Insanity, Civil Interdiction, Insolvency of either parties before acceptance
shall be ineffective.
C. Failure to comply with the condition of the offer as to time, place, and manner of
payment-offer shall become ineffective.
D. Expiration of the period fixed in the offer for acceptance-shall also render the
offer ineffective.
2. PERFECTION/BIRTH – meeting of minds between two contracting parties (Unqualified
acceptance of offer)
-Qualified Acceptance shall be considered counter-offer

3. CONSUMMATION/TERMINATION – terms of contract are performed, & contract is fully

executed

OPTION CONTRACT (1324)

General Rule: when the offerer has allowed the offeree a certain period to accept, the offer
may be withdrawn anytime before acceptance by communicating such withdrawal.

Exception: when the option is founded upon consideration (option money).

Option Money vs. Earnest Money

-Option money a distinct and separate consideration from the purchase price.
-The contract of sale (main contract) is not yet perfected. Only option contract is perfected.

E arnest Money-Part of purchase price. It signifies perfection of contract (e.g. contract of

sale)

PRINCIPLES/CHARACTERISTICS OF A CONTRACT

PRINCIPLE OF AUTONOMY (liberty to contract)

Parties may stipulate terms, clauses, conditions provided they are not contrary to:
a. Law
b. Morals
c. Good customs
d. Public order
e. Public policy

MUTUALITY OF CONTRACTS
- the contract must bind both parties; its validity/compliance cannot be left to the will of one
of them

RELATIVITY OF CONTRACTS
- Contracts take effect only between the parties, their assigns & heirs except when there are
rights & obligations not transmissible:
Exceptions:
-stipulation pour autrui
-contracts creating real rignts
-contracts entered to defraud creditors
-contracts which have been violated at the inducement of a third person

OBLIGATORINESS OF CONTRACTS
- The contract, once perfected, has the force of law between parties which bound to comply
in good faith

CONSENSUALITY OF CONTRACTS
- Contracts are perfected by mere consent

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Exceptions:
a. REAL CONTRACTS – perfected by delivery
b. FORMAL/SOLEMN CONTRACTS – special form required for its perfection

KINDS OF INNOMINATE CONTRACTS

1. I give that you may give (no longer innominate, this is essentially barter)
2. I do that you may do
3. I give that you may do
4. I do that you may give

RULES FOR INNOMINATE CONTRACTS (what rules shall govern?)

1. Agreement of parties
2. Law on Obligations & Contracts
3. Rules on most analogous nominate contract
4. Customs of place

STIPULATION POUR AUTRUI

- stipulation in favor of 3rd person

5 REQUISITES OF STIPULATION POUR AUTRUI

1. Stipulation in favor of 3rd person
2. Stipulation is only PART, not the whole of the contract.
3. Both parties must conferred upon a favor of 3rd person
4. 3rd person must accept & say it to debtor before its revocation/cancellation
5. Neither of both parties be the legal representation/authorization of 3 rd person

CONSENT
- meeting of offer (serious and certain) & acceptance (absolute/unconditional) upon a thing

CHARACTERISTIC OF CONSENT
Must be:

1. Intelligent
2. Free and Voluntary
3. Conscious and Spontaneous

RULES ON OFFER/ACEPTANCE
1. An offer must be serious and certain.
2. Business advertisements for sale are NOT offers but ONLY invitations to make an offer.
3. Advertisements for bidders are ONLY invitations.
4. An acceptance made by letter/telegram/electronic messages does NOT
bind offeror EXCEPT from the TIME it came to his knowledge.
5. An offer made through an agent is accepted from the TIME the acceptance is done
through an agent.
6. An offer is ineffective upon death, insanity, insolvency, of EITHER party BEFORE
acceptance is made.
7. When offeror allowed offeree a certain period to accept, offer MAY be withdrawn AT
ANYTIME unless there is something PAID/PROMISED.

Persons who CANNOT GIVE a valid CONSENT to a contract (if entered into, contract
is voidable)
1. MINORS
2. INSANE/DEMENTED PERSONS (unless they acted DURING LUCID INTERVAL)
3. DEAF-MUTES who DO NOT know how to write

DEMENTED PERSON – NOT exactly insane; difficult to distinguish right from wrong
(morons)

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LUCID INTERVAL – period when an INSANE has acquired SANITY temporarily, therefore,
capacitated to enter into a valid contract

RULES on minors giving consent to a contract

1. Age of majority is 18 yrs old
2. A contract entered into by a MINOR w/o parents/guardian’s consent is voidable, except:
a. Minor MISREPRESENTS his age (estoppel)
b. Contract involves sale & delivery of necessities to minor

VICES OF CONSENT
- NOTE: When there is a DEFECTIVE CONSENT of EITHER of parties, contract is voidable;
Remedy: annulment of contract.
1. MISTAKE/ERROR
2. FRAUD/DECEIT
3. VIOLENCE
4. INTIMIDATION/THREAT
5. UNDUE INFLUENCE

1. MISTAKE/ERROR
- wrong conception & lack of knowledge upon a thing

MISTAKES W/C VITIATES CONSENT

It should refer to:
1. substance of thing that is the OBJECT of contract (Substantial and Serious)
2. conditions w/c MOVED either/both parties to enter into contract

RULES ON MISTAKE
1. Mistake to identity/qualifications of either of parties will vitiate consent ONLY when IT is
the principal cause of contract.
2. Simple mistake of account must be corrected.
3. No mistake if parties knew the risk/doubt affecting OBJECT of contract.
4. When one of parties is unable to read or the contract is in language not understood by
him, & mistake/fraud is alleged, the person enforcing the contract must FULLY explained the
terms to him.

Mistake of fact vs. Mistake of Law

The mistake contemplated w/c make the contract voidable refers to SERIOUS and
SUBSTANTIAL mistake of fact. Mistake of law, as a general rule, does not vitiate consent
because “ignorance of the law excuses no one from compliance therewith” (ignoratia legis
neminem excusat). However, in case of doubtful application of law, or difficult question of
law, this shall be considered mistake of fact under 1334, provided, the following shall
concur:

a. Error must be mutual;

b. It must be as to the legal effect of the agreement; and
c. It must frustrate the real purpose of the parties.

2. FRAUD/DOLO
- when through insidious words/machinations of one of the parties, INDUCED the other to
enter into a contract, & w/o them, he will not agree.

DOLO CAUSANTE DOLO INCIDENTE

Serious Not serious
cause induces party to NOT the cause to enter into
ENTER into contract contract

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make contract voidable contract is valid; liable for
damages

RULES OF FRAUD
1. Failure to disclose facts when these facts need to be revealed is a fraud (Concealment).
2. Fraud should be SERIOUS (dolo causante) & SHOULD NOT be done by BOTH parties to
make contract voidable (pari delicto rule)
3. Incidental fraud (dolo incidente) ONLY obliges person to PAY DAMAGES.
4. Usual exaggerations in trade, when other party know the “real” facts, is NOT FRAUD.
5. A mere expression of opinion is NOT FRAUD UNLESS made by an expert & the other party
relies on his special knowledge.
6. Misrepresentation made in good faith is NOT FRAUD but may constitute an error.
7. Misrepresentation by 3rd person DOES NOT vitiate consent UNLESS it created substantial
mistake.

3. VIOLENCE
- serious/irresistible force is employed.

RULES ON VIOLENCE
1. Serious/irresistible force is employed against his person, property, honor, his spouse,
ascendants, descendants, brothers or sisters w/c constitutes the reason why one entered
into a contract.
2. Violence ANNULS obligation although it is DONE by 3 rd person not part of contract.

4. INTIMIDATION
- One of the parties is compelled by a reasonable & well-grounded fear of an imminent &
grave evil upon his person/property to give his consent.

RULES ON INTIMIDATION
1. Age, sex, & condition of person must be considered to determine the degree of
intimidation.
2. Intimidation ANNULS obligation although it is DONE by 3 rd person not part of contract.
3. A threat to enforce one’s claim (claim must be just & legal), DOES NOT vitiate consent.

VIOLENCE INTIMIDATION
External Internal
Physical contact/coercion NO physical coercion; ONLY
MENTAL/MORAL coercion

5. UNDUE INFLUENCE
- a person takes improper advantage of his power over other’s will, depriving the other to his
reasonable freedom of choice.

RULES ON UNDUE INFLUENCE

1. There is a person who takes improper advantage of his power over other’s will, depriving
the other to his reasonable freedom of choice.
2. Undue influence ANNULS obligation although it is DONE by 3rd person not part of contract.
3. To constitute undue influence, circumstances must be considered are: (1) confidential,
family, spiritual, & other relations of parties; or (2) the aggrieved party is suffering from
mental weakness; or (3) ignorant; or (4) in financial distress.

SIMULATION OF CONTRACT
- process of INTENTIONALLY deceiving others by producing a contract not really
exist (absolute simulation), or w/c is different from true agreement (relative simulation).

KINDS OF SIMULATED CONTRACT

1. ABSOLUTE SIMULATION (the parties DO NOT intend to be bound at all)
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- completely fictitious/make-believe; VOID

2. RELATIVE SIMULATION (parties conceal their true/real agreement)

- parties are bound to real/true agreement, EXCEPT:
a. contract prejudice 3rd person
b. purpose is contrary to law, morals, good customs, public order, public policy

REQUISITES OF OBJECT OF CONTRACT

-Within the commerce of man

-Services/things must NOT be legally/physically impossible
-Determinate (kind) or determinable ( w/o the need of new contract/agreement)
-Existing or capable of existence

NO contract be entered for future inheritance UNLESS law states

REQUISITES OF CAUSE
1. It is just & equitable.
2. It exists.
3. It is lawful.
4. It is true.

-Requisite of cause and object applies to each other because depending on the
perspective in case of reciprocal obligation, the object is the cause of the other and vice
versa.

LESION
- inadequacy of price

RULES ON LESION
- Lesion DOES NOT invalidate contract, except there is:
a. Fraud
b. Mistake
c. Undue influence
-will make the contract voidable
d. In cases of situations specified under rescissible contracts
-will make the contract rescissible

FORMS OF CONTRACTS
1. Contracts in writing
2. Contracts in a public instrument

1. Contracts w/c must be IN WRITING to be valid:

a. Donation of personal property exceeds P5000.
b. Agent’s authority in sale of land/any interest.
c. Contract of antichresis.
d Stipulation to pay interest on loans.
e. Stipulation to reduce common carrier’s extraordinary diligence & to limit its liability.

2. Contracts w/c must be IN A PUBLIC INSTRUMENT to be valid:

a. Donation of real property (both the donation & acceptance).
b. Sale of real property.
c. Partnership where real property/rights is contributed;

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REFORMATION OF INSTRUMENTS
- REMEDY in equity in w/c a written instrument is made/construed to the REAL intention of
parties when there is an error/mistake.

CASES REFORMATION OF INSTRUMENT IS AVAILABLE

1. Mutual mistake of parties.
2. One party was mistaken & the other acted fraud.
3. One party was mistaken & the other knew/believed that the instrument did not state their
REAL agreement.
4. Ignorance, lack of skill, negligence, or bad faith of person drafting the instrument DOES
NOT state the TRUE INTENTION of parties
5. Two parties agree on mortgage/pledge of personal/real property BUT the instrument
states the property is sold ABSOLUTELY, or w/ the right to repurchase.

NO REFORMATION OF INSTRUMENT WHEN:

1. Simple donation inter vivos where NO CONDITION is imposed.
2. Will.
3. Real agreement is VOID.

INTERPRETATION OF CONTRACTS

-is the determination of the meaning of the terms/words used by the parties in their written
contracts.

Rules:

-When the language is clear and unambiguous, literal meaning of the words controls.
-Intention of the parties prevails over terms of contract, thus, the instrument may be
reformed.

In case of obscurity of ambiguity of terms and clauses, interpretation of contract shall be

applied by observing the following rules:

-Previous, contemporaneous, and subsequent acts relevant to determine the intention of the
parties.
-Special intent prevails over general intent
-Interpretation should be the one that will make the contract effectual/valid over the
interpretation that it would make the contract void.
-Usage/Custom/Tradition
-In case of Contract of Adhesion, should be interpreted strictly against the party who caused
the obscurity/the party who drafted the contract liberally in favor of the party who merely
sign the contract.
-In case of gratuitous contract, least transmission of rights/interest shall prevail
-In case of onerous contract, greatest reciprocity of interest

4 KINDS OF DEFECTIVE CONTRACTS

1. RESCISSIBLE – valid until rescinded; has ALL essential requisites but because
of injury/damage to one of the parties, the contract may be rescinded.
2. VOIDABLE – valid until annulled; has ALL essential requisites but because of defect in
consent, contract may be annulled.
3. UNENFORCEABLE – cannot be sued/enforced unless ratified; no effect NOW but may
take effect upon ratification.
4. VOID/INEXISTENT – NO effect at all; cannot be ratified/validated.

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RESCISSIBLE CONTRACTS
Those entered by guardians & suffered LESION by more than ¼ of value of the value that is
the OBJECT.
Those agreed upon in representation of absentees, if the absentees suffered LESION.
Those undertaken in FRAUD of creditors when the creditors cannot further claim.
If entered into contract w/o knowledge/approval of litigants under litigation.
Contracts subjected to rescission declared by law.

- May be ratified
- Injured party may bring action within four years
- Subsidiary action and only up to the extent of injury/damage

VOIDABLE CONTRACTS
One of the parties INCAPABLE of giving consent to a contract.
Those where consent vitiates by vices of consent. (MFVIU)
Those agreed in the state of drunkenness/hypnotic spell.

- May be ratified
- Injured party may bring action within four years

UNENFORCEABLE CONTRACTS
Those entered in name of other person, or who acted BEYOND his powers. (without or excess
of authority)

Those who do not comply w/ the Statute of Frauds. (Those that should be in writing for its
enforceability, not for validity because they are essentially valid contracts but cannot be
enforced by court action)
-Agreement not to be performed in within one year
-Promise to answer for the debt, default, or miscarriage of another
-Agreement in consideration of marriage other than mutual promise to marry
-Agreement of sales of goods at a price not less than 500.00
-Agreement for leasing for a longer period than one year
-Agreement for sale of real property or an interest therein
-Representation as to the credit of a third person

Both parties are incapable of giving consent to a contract.

-applies to executory contracts

-May be ratified

7 VOID/INEXISTENT CONTRACTS
1. Those w/c are ABSOLUTELY simulated/fictitious.
2. Those w/c contemplate an impossible service.
3. Those whose OBJECT is outside the commerce of man.
4. Those whose CAUSE/OBJECT did not exist at time of transaction.
5. Those whose CAUSE/OBJECT/PURPOSE is contrary to law, morals, good customs, public
order, or public policy.
6. Those where INTENTION of parties to principal object CANNOT be ascertained.
7. Those expressly prohibited/declared VOID by law.

-Cannot be ratified

-Imprescriptible (The party may set up the defense of the nullity of the contract without any
time limit)