Lesson 1 General Provisions

CONTRACT
- A meeting of the minds between two persons whereby one binds
himself, with respect to the other, to give something or render some
service.

ESSENTIAL REQUISITES:
1) CONSENT
Must be free and voluntary consent; must be an intelligent
consent; must be given by a capacitated person

2) OBJECT OR SUBJECT MATTER-must be specified and determinate;

must be within the commerce of man, must not be legally or physically
impossible; must not be contrary to law, public policy, public order,
public morals and good customs

3) CAUSE OR CONSIDERATION-must be just and equitable must not be

legally or physically impossible; must not be contrary to law, public
policy, public order, public morals and good customs

STAGES OF A CONTRACT
1) PREPARATION/CONCEPTION/NEGOTIATION
2) PERFECTION OR BIRTH
3) CONSUMMATION/DEATH/TERMINATION

KINDS OF INNOMINATE CONTRACTS

-have no special or specific designation in the Civil Code, but valid contracts
governed by;
1) agreement of the parties
2) Law on OBLICON
3) rules governing the most analogous nominate contracts
4) customs of the place where the contract is constituted

**Nominate contracts are those given a special designation such as sale,

lease, loan, or insurance.

4 TYPES
1) Do ut des/barter- I give that you give
2) Do ut facias- I give that you make
3) Facio ut des- I make that you give
4) Facio ut facias- I make that you make
Basic principle or Characteristics of a Contract:
1. Freedom (or liberty) to stipulate
2. Obligatory force and compliance in good faith
3. Perfection by mere consent/ Consensuality of Contract
4. Both parties are mutually bound/ Mutuality of Contracts
5. Relatively: binding between the parties only, their assigns and heirs.

1. Liberty to contract - the contracting parties may establish such

stipulation, clauses, terms, and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order,
or public policy. This is otherwise known as the “PRINCIPLE OF AUTONOMY”.

VOID STIPULATIONS:
1. Pactum commissorium- Automatic appropriation by the creditor of the
thing pledged or mortgaged upon the failure of the debtor to pay the
principal obligation.
2. A stipulation in a mortgage contract providing for a specified price
(known as tipo or upset price) below which the mortgaged property is
not supposed to be sold at the foreclosure sale is void for being
contrary to law
3. An agreement to pay an unconscionable rate of interest is void for
being contrary to morals
- The central bank fixed the maximum nominal interest rate at 6
percent per month, or about 0.2 percent per day, and the effective
interest rate (EIR) at 15 percent per month, or about 0.5 percent per
day for covered loans which are unsecured, general purpose loans that
do not exceed the amount of P10,000 and with a loan tenor of up to
four months. SEC IMPLEMENTS INTEREST RATE CAP ON LOANS
OFFERED BY LENDING, FINANCING COMPANIES, THEIR ONLINE
LENDING PLATFORMS on 1 March 2022
4. An agreement by the debtor to work without pay until he could find
money to pay the debt is void for being contrary to morals as this
amounts to involuntary servitude
5. An agreement to hide a crime, to suppress evidence and to stifle the
prosecution of the offender is void for being contrary to public policy

2. OBLIGATORY FORCE OF CONTRACT AND COMPLIANCE IN GOOD

FAITH
Upon perfection of the contract the parties are bound to the following:
a. The fulfillment of what has been expressly stipulated
b. All the consequences which, according to their nature, may be in
keeping with good faith, usage and law.
3. Consesuality of Contract
Except:
a. In real contracts such as deposit, pledge and commodatum, which
are perfected upon the delivery of the object of the obligation
b. In formal or solemn contracts, which are required to be in form
provided by law, to be perfected, such as donation of an immovable
which must be in a public instrument together with the acceptance
thereof, otherwise the contract is void.

4. Mutuality of Contracts
The contract must bind both parties; its validity or compliance should
not be left to the will of one of them.

5. Relativity of Contracts
As a rule, the following are bound by Contracts
a. Contracting parties;
b. Their assigns; and
c. Their Heirs.

Exceptions to the “rule of Relativity”:

1. Obligation arising from contract which are not transmissible by their
nature, stipulation or provision of law (Art 1311)
a. When the law prohibits transmission of rights, as in a contract of
Commodatum
b. When the contract stipulates no transmission of rights
c. When the nature of the obligation does not permit transmission of
rights, as when the obligation is personal in nature.

2. When a contract may be enforced by or against a third person

a. Stipulation Pour Autrui” (Art 1311)
Requisites:
i) Stipulation is clearly conferred a favor upon a 3rd person
ii) 3rd person must communicate his acceptance before revocation
iii) Stipulation in favor of 3rd person should be part, not the whole, of the
contract
iv) Should not be conditioned or compensated by any kind or obligation
whatever
v) Neither of the contracting parties bears the legal representation/
authorization of the 3rd party otherwise rules on agency will apply

Example:
D obtained a loan from C amounting to P100,000.00. The parties agreed
that the loan shall bear an interest of 1% per month to be paid by D to X
until the principal is paid in full. The stipulation for the payment of interest
to X who is not a party to the contract is a stipulation pour atrui. X can sue
on the contract although he is not a party if he does not receive the interest.

b. When the third person induces another to violate his contract (Art 1314)

c. In contract 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 Registry Laws.

d. In contracts intended to defraud creditors, the law gives them protection.

This is true if the third person acted in bad faith.

Contract of Adhesion - it is ready made form of contract, which the other

party may accept or reject, but he cannot modify. The other name is “take it
or leave it” contract. (Insurance contract)

Lesson 2 Essential Requisites of a Valid Contract

Lesson 2.1 Consent

Defined- meeting of the offer and the acceptance as to the object,
consideration and the terms and conditions of the contract.

RULES ON OFFER AND ACCEPTANCE

1) Acceptance is valid and contract is perfected only from the time the
offeror HAS KNOWLEDGE of such acceptance.
2) Offeror has the right to withdraw his offer at any time before receipt of
Offeree’s acceptance.
3) Offeror cannot withdraw once he has knowledge of the offeree’s
ABSOLUTE acceptance.
4) Offeror may withdraw even before expiration of option period.
Exception if there is an option money.
Notes:
1) Offer becomes ineffective upon death, civil interdiction, insanity or
insolvency BEFORE acceptance is conveyed.
2) Option money vs. Earnest Money
No perfected contract Perfected contract
Not part of the amount to Partial
 be paid payment/downpayment
3) Offeree’s acceptance to authorized agent is equivalent to acceptance
given to principal.
4) Advertisements are mere invitations
5) Acceptance maybe express or implied

Lesson 2.2 Objects of the Contract

1) THINGS
a) Within the commerce of man
b) Shall include future things with potential existence
c) Must be specific or determinate as to it’s kind
d) Must not be legally or physically impossible
2) RIGHTS- only rights that are transmissible
3) SERVICES
NOTES:
1) Future inheritance cannot be a valid object.
2) Future things with potential existence example
a) Expected crop
b) Sugar to be produced from sugar plantation
c) Milk which cows may produce
d) Young animals still to be born, etc.
3) Goods still to be manufactured, or raised, or to be acquired after
perfection are valid objects.
4) If absolute impossibility- VOID
5) If relative impossibility- not void but effective only from the time the
relative impossibility ceases or only to the extent of what the obligor is
capable of performing.

Lesson 2.3 Cause of the Contract /Consideration

CONSIDERATION-something of value given or promised to induce one of the
parties to make the contract.
The essential reason why the party enters into a contract

NOTES:
1) Contracts w/o cause, or with unlawful cause, produce no effect.
2) There is a disputable presumption of law that a contract is presumed
to have an existing and lawful consideration, the debtor has the
burden to prove that there is no consideration.
3) Lesion or inadequacy of cause shall not invalidate the contract, unless
there has been fraud and mistake or undue influence.

Lesson 3 Forms of Contract

GENERAL RULE:
Contracts are binding and enforceable in whatever form.
Exceptions;
1) When a special form is required for the validity of contract, must be in
public instrument.
2) When special form is necessary for enforceability, must be in any form
of writing.

KINDS OF CONTRACTS WHICH MUST BE IN A PUBLIC INSTRUMENT

TO BE VALID
1) Donation of Immovable Property-both donation by donor and
Acceptance by donee must be in public instrument
2) Donation of personal property-if 5,000 or more. Donation and
acceptance must be in PI.
3) Sale of real property- contract of sale of real property must be PI
before can be registered to Register of Deeds.
4) A contract of partnership where:
a) Immovable property or real rights are contributed
b) When capital contribution is P3,000 or more in money or property
5) Sale of large cattle

KINDS OF CONTRACTS WHICH MUST BE IN ANY FORM OF WRITING

TO BE ENFORCEABLE UNDER STATUTE OF FRAUDS
1)Contract of performance of which will not be made until or w/n 1 year
from the death of contract
2) A special promise to answer for debt, miscarriage or default of another
3) An agreement made in consideration of marriage other than a mutual
promise to marry
4) An agreement for sale of goods or chattels worth P500.00 or more and
5) A lease of immovable for more than one year or sales of immovable

Lesson 4 Reformation of Contracts

It is a remedy in equity by means of which a written instrument is
made or construed so as to express to conform to the real intention of the
parties when some error or mistake has been committed.

REQUISITES
1) The contracting parties have already a meeting of the minds as to:
a) The object
b) Consideration
c) Terms and conditions
2) True intention of the parties is not expressed in the contract as written
3) Failure to express the true intention due to mistake, fraud, inequitable
conduct, or accident
Reformation is also proper in the following cases:
1) When mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement
2) Contract does not express true intent, one acted through mistake
made in good faith, while the other party
a) Acted fraudulently
b) Knowledgeable that the contract does not express true agreement
but concealed the same.
The party in good faith may ask for reformation.

3) When through ignorance, lack of skill, negligence or bad faith on the

part of the person drafting the instrument, or the clerk or the typist,
the instrument does not express the true information of the parties,
the courts may order that the instrument be reformed.
4) Where the parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property is sold
absolutely or with right of repurchase, reformation is the proper
remedy.
5) There shall be no reformation in the following cases;
a) Simple donations inter vivos wherein no condition is imposed
b) Wills
c) Contracts void ab initio
d) When one of the parties has brought an action to enforce the
contract, he cannot subsequently ask for its reformation. This is
equivalent to ratification, waiver or estoppel.

Lesson 5 Rescissible Contracts

RESCISSION
-remedy granted by law to contracting parties and even to 3rd persons, to
secure the reparation of damages caused to them by the contract, even if
the same should be valid, by the means of the restoration of things to the
condition prior to the celebration of the contract.

KINDS OF RESCISSIBLE CONTRACTS

1) Contract entered into by a guardian whenever the ward whom he
represents suffers lesion by more than ¼ of the value of the thing
which is the object thereof.
2) Contract agreed upon in representation of an absence, if the latter
suffers lesion by more than ¼ of the value of the thing which is the
object thereof.
3) Contract undertaken in fraud of creditors when the latter cannot in any
manner collect the claims due to them.
 4) Contract which refers to things under litigation if it has been entered
into by the defendant without the knowledge and approval of the
litigants or of competent juridical authority.
5) All other contracts especially declared by law to be subject to
rescission.

NOTES:
1) Requisites for rescissible payment
a) The debtor must be in a state of insolvency at the time of his
payment
b) The debt he paid is not yet due and demandable
2) The creditor must exhaust first all available legal remedies before he
can file action for rescission. Rescission is a subsidiary remedy only.
3) Rescission is the remedy to secure reparation of damages caused by
the contract by:
a) Restoring things to their former status or condition before the
contract, and
b) Returning to each other what each has received under the contract,
plus fruits and interest.
4) Prescriptive period
a) w/n 4 years from celebration of the contract
b) in guardianship, w/n 4 years from the time guardianship ceases
c) in absentee, w/n 4 years from the date the absentee re-appears or
when his domicile becomes known again.

Lesson 6 Voidable Contracts

-where consent of one of the contracting parties is vitiated:

1) by incapacity of one of the contracting parties, such as:
a) unemancipated minor
b) insane or demented person
c) deaf/mute who does know how to write
d) persons under intoxication
e) persons under hypnotic spell

2) consent of one party is secured through

a) mistake
b) violence
c) intimidation
d) undue influence
e) fraud

The party whose consent is vitiated may have the following alternative
remedies
 a) annulment, or
b) ratify

NOTES:
1) Prescriptive period for annulment
a) w/n 4 years, period shall begin:
i) Intimidation, undue influence, or violence- starts from the
time the defect ceases
ii) Mistake or fraud- time of discovery
iii) Unemancipated minors- from the time the minor reaches age
of majority(generally at the age of 18 but for contracting
marriage age of majority is 21, parents and guardians are
liable for quasi-delicts of persons who are already 18 until he
reaches 21)
iv) Incapacitated persons-when guardianship ceases
2) Ratification cleanses the contract of all of its defect, once ratified it
cannot be annulled anymore.
3) Ratification may be effected:
i) Expressly- written/oral
ii) Tacitly/implied-the person who has right to annul performs an
act w/c tends to imply that he has chosen to waive his right to
annul.
4) Ratification may be effected by the guardian of the incapacitated
person.
5) Ratification does not require the conformity of the contracting party
who has no right for annulment.
6) Who may file annulment?
a) Party whose consent is vitiated
b) Subsidiary party-parents, successors in interest or assigns
7) After annulment parties should return to each other what they have
received.
8) In case of incapacitated person whose consent is vitiated- he is
required to return only what has been beneficial to him.
9) What if after annulment the object cannot be returned because it was
lost through the fault of the person who should return the object? He
shall return:
a) Fruits of the things plus
b) Value of the thing at the time of loss, with interest.
10) If the person who has right for annulment lost the object
through his fault, he losses right for annulment. But if lost through
fortuitous event and incapacity of the other is the reason for voidability
then, the incapacitated person may still ask for annulment.
Lesson 7 Unenforceable Contracts
-cannot be enforced in court unless ratified
KINDS:
1) Contract entered into by one person for and on behalf of another, w/o
the latter’s consent and authority or the former acts beyond the scope
of the authority given to him. (Contract of Agency)
2) Contract which do not comply with Statute of Frauds
3) Contract entered into by 2 incapacitated persons

NOTES:
1) if the parent, or legal guardian of one of the incapacitated parties
ratifies, effect-voidable. If ratified by both parents/guardian, effect-
valid and enforceable.
2) Unenforceable contracts cannot be assailed or contested by 3rd persons
who are total strangers to the unenforceable contract.
3) Only applicable to Executory Contracts.

Lesson 8 Void or Inexistent Contracts

KINDS:
1) Objects, cause or purpose is contrary to law, morals, good customs,
public order, or public policy
2) Absolutely simulated or fictitious contract
3) Cause or object does not exist at the time of transaction
4) Objects outside the commerce of men
5) Impossible service
6) Where the intention of the parties relative to the principal object of the
contract cannot be ascertained
7) Those expressly prohibited by Law.
NOTES:
1) Cannot be ratified
2) When contract is illegal but does not constitute criminal offense;
a) Both parties guilty
i) Neither one can demand the return of what he has given
ii) Neither may demand performance
b) Only one is guilty
i) Guilty party cannot demand fulfillment/return of what he has
given
ii) Party not at fault may demand return of what he has given
iii) Party not at fault cannot be obliged to comply with his promise
3) Interest paid in excess of the interest allowed by the Usury Law may
be recovered by the debtor, w/ interest thereon from the date of
payment. (6% per annum effective July 1, 2013)
For Additional reading:

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