Contracts

• Consent of contracting parties

  The meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract
• Offer and Acceptance

  • The offer must be certain
  • The acceptance must be absolute
  • A qualified acceptance constitutes a counteroffer
  • Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge
  • The contract is presumed to have been entered into in the place where the offer was made
  • An acceptance may be express or implied
  • The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with
  • An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed
• Option Agreement

  When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised
• Advertisements

  Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. 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
• Situations concerning consent of the parties

  • Both parties gave consent as to the essential elements of the contract - the contract is valid
  • Simulation: when one or both the parties did not intend to be bound by the contract (absolute simulation), the same is void. Otherwise, if the parties merely conceal their true agreement (relative simulation), they shall be bound by their real agreement
• Kinds of Capacity

  • Juridical capacity - the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death
  • Capacity to act (or legal capacity) - the power to do acts with legal effect, is acquired and may be lost
• Absolute Incapacity


  The party cannot give consent in any contract, with anyone, in whatever capacity, over anything. The following cannot give consent to a contract: Unemancipated minors, Insane or demented persons (except if consent is given during lucid interval), Deaf-mutes who do not know how to write, and Drunks or hypnotized
• Relative Incapacity

  A person may be prohibited from entering specific contracts or that in a contract, he may be prohibited in a certain capacity, i.e., prohibited to be the buyer, or to specific things, or to specific persons
• Vices of consent

  • Mistake must be that of (a) the object of the contract, or to (b) 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
  • Mistake or error as to motive does not vitiate consent
  • A simple mistake of account shall give rise to its correction
  • There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract
  • Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent
  • Violence - when in order to wrest consent, serious or irresistible force is employed
  • 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
  • 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
  • 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
• Object (Subject Matter) of the Contract

  • The thing, right or service must be within the commerce of man
  • It must be transmissible
  • It must not be contrary to law, morals, good customs, public order or public policy
  • It must not be impossible
  • It must be determinate as to its kind or determinable without the need of a new contract or agreement
• Future Inheritance

  Cannot be the subject matter of a valid contract. This is because the seller owns no inheritance while his predecessor lives. Public policy demands that if you're going to sell, you have the right to do so, but not necessarily requiring that the seller is the owner
• Cause

  The essential or impelling reason why a party assumes an obligation. Strictly speaking, there is no cause of contract, but there is a cause for an obligation
• Rules on Cause

  • 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
  • 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
  • Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary
  • As a rule, inadequacy of the price will not affect the contract, except when expressly provided by law, e.g., rescissible contracts, or when there has been fraud, mistake or undue influence
• Real Contracts

  Contracts which are perfected by delivery, which include: Deposit, Pledge, Commodatum, Loan
• General rule on form of contracts

  • No form is required for the validity or perfection of a contract
• Exceptions to general rule on form

  • Donations of real property which requires a public instrument
  • Donations of personal property which exceeds P5,000 which requires that the donation be written
  • Stipulation to pay interests on loans or for the use of money, which must be in writing
  • Sale or transfer of large cattle which requires that it be in a public instrument, registered and that the certificate of transfer
• Formalities required for enforceability (Statute of Frauds)

  • 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 in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money
  • An agreement of 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
• Formalities required for convenience

  • Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property
  • The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains
  • 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
  • The cession of actions or rights proceeding from an act appearing in a public document
• Reformation of instruments

  • There is a meeting of the minds
  • There is a written instrument
  • The written instrument does not reflect the true intention of the parties
• When reformation may be had

  • Mutual mistake of the parties
  • If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention
  • When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former
  • Ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist
  • If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase
• Consensuality of contracts

  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 consequences which, according to their nature, may be in keeping with good faith, usage and law
• Reformation

  Correction of an instrument to reflect the real agreement of the parties
• Who can ask for reformation

  • If the mistake was mutual, either party or their successor in interest
  • Otherwise, the injured party, or their heirs and assigns
• When no reformation

  • Simple donations inter vivos wherein no condition is imposed
  • Wills
  • When the real agreement is void
  • If one party has brought an action to enforce the instrument, they cannot subsequently ask for its reformation
• Consensuality of Contracts

  • 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 consequences which, according to their nature, may be in keeping with good faith, usage and law
  • Perfection of a contract is generally by the meeting of the minds or consensual, save for some cases where delivery or form is required for its perfection
  • Contract entered into by an unauthorized person is unenforceable
  • Unless the contract is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party
• Contract of Adhesion

  • One where there is already a prepared form containing the stipulations desired by one party whereby the latter only asks the other party to agree to them if he wants to enter into a contract
  • Generally valid because a party who does not consent to the terms and conditions in the contract can opt not to
• Autonomy of Contracts (Freedom or Liberty to Contract)

  • 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
  • The law is deemed part of every contract and must thus be not contrary to the same
• Contrary to Law

  • Pactum Leonina - a stipulation which excludes one or more partners from any share in the profits or losses
  • Pactum Commissorium - a stipulation where the creditor appropriates the things given by way of pledge or mortgage, or dispose of them
  • Pactum de non aliendo - a stipulation forbidding the owner from alienating the immovable mortgaged
• Contrary to Public Policy

  • Refund of tuition fees during the time a student is covered by a scholarship if such student transfers schools
  • Prohibiting a losing candidate in a convention to run as an independent candidate
• Contrary to Morals

  • In a contract of loan, where the interest rate is 50%, is void for being contrary to morals, the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is usurious
• Mutuality

  • The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them
  • One party cannot revoke or renounce a contract without the consent of the other, nor have it said aside on the ground that he had made a bad bargain
  • Potestative suspensive conditions dependent upon the sole will of the debtor voids the obligation
  • The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known both contracting parties, and the determination shall not be obligatory if it is evidently inequitable
• Escalation Clause

  Where one increases/decreases compensation of one of the parties
• Unilateral determination and imposition of increased interest rates by the bank is violative of the principle of mutuality of contracts
• Obligatory Force of Contracts

  Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith
• Relativity (or Privity) of Contracts

  • The contract takes effect only between the parties, their assigns and heirs which are referred to as privies
  • Rights that are purely or strictly personal in nature, i.e., the qualifications and skills of the person have been considered in the constitution of the contract, are not transmissible
  • Rights may also not be transmissible by stipulation or provision of law
• Exceptions to Relativity of Contracts

  • Third persons who come into possession of the object of the contract are bound thereby, subject to the Mortgage Law and Land Registration Laws
  • Creditors may initiate an action against the contracting parties in cases of contracts intended to defraud them
  • Any third person who induces another to violate his contract shall be liable for damages to the other contracting party
  • Third persons may be benefited by a contract through a stipulation pour atrui
• Stipulation pour atrui

  A stipulation in favor of a third person conferring a clear and deliberate favor upon him, which stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the third person<|>Communication of acceptance to the obligor is required, and revocation cannot be done by one party alone
• Interpretation of Contracts

  • If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control
  • If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former
  • Contemporaneous and subsequent acts of the parties may be considered to determine their intention
  • When it is absolutely impossible to settle doubts, in a gratuitous contract the least transmission of rights and interests shall prevail, and in an onerous contract the doubt shall be settled in favor of the greatest reciprocity of interests
  • 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
• Other rules in interpretation of contract

  • General terms of a contract may not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree
  • If some stipulation admits of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual
  • The various stipulations shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly
  • Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract
  • The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established
  • The interpretation of obscure words or stipulations shall not favor the party who caused the obscurity
• Kinds of Contract as to Validity

  • Valid and Binding - where all the essential requisites are present and no defect or vice attended the same
  • Rescissible Contracts - which can be rendered inefficacious by reason of external conditions, causing an economic prejudice to a party or their creditors