CONTRACTS

CONTRACTS 

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. (Art. 1305) 

Elements of a contract 

1. Essential elements- Those without which there will be no contract a. Consent of the

contracting parties. b. Object certain which is the subject matter of the
contract. c. Cause of the obligation which must be established. (Art. 1318) 2. Natural
elements - Those found in certain contracts unless set aside or suppressed by the
parties (such as warranty against eviction and warranty against hidden defects in a
contract of sale). (Art. 1547) 3. Accidental elements -Those that refer to particular
stipulations of the parties (such as terms of payment, interest rate, place of
payment). Classification of contracts 1. According to perfection or
formation a. Consensual -Those that are perfected by mere consent (such as sale and
lease). b. Real- Those that are perfected by the delivery of the object of the contract
(such as depositum, pledge, and commodatum). (Art. 1316). c. Formal or solemn -
Those which must be in the form provided by law for their perfection (such as the
donation of an immovable which, together with the acceptance by the donee, must be
in a public instrument to be valid). 2. According to cause 

a. Onerous - Those where there is an exchange of valuable considerations (such as sale

and barter). For each contracting party, the cause is the prestation or the promise of a
thing or service by the other. (Art. 1350) b. Gratutitous or lucrative - Those where one
party receives no equivalent consideration (such as donation and commodatum). These
contracts are referred to as contracts of pure beneficence, the cause of which is the
liberality of the benefactor. (Art. 1350) c. Remuneratory- Those where the cause is the
service or benefit remunerated. (Art. 1350) 3. According to importance or dependence
of one upon another

 a. Principal -One that can stand by itself (such as sale, loan).

 b. Accessory- One whose existence depends upon another contract (such as pledge or
mortgage which is dependent upon a principal contract such as loan). c. Preparatory-
One which serves as a means by which other contracts may be entered into (such as
agency and partnership). 4. According to name or designation a. Nominate- Those
which have a name under the law (such as sale, loan and barter).
 

b. Innominate- Those without any name under the law. Authorities in Civil Law, list the
following as innominate contracts. 1. Do ut des (I give that you may give)* 2. Do ut
facias (I give that you may do) 3. Facio ut des (I do that you may give) 4. Facio ut tacias (I
do that you may do) *This may actually be barter, hence, a nominate contract. (See Art.
1636.) Rules that govern innominate contracts 1. The stipulations of the parties;2. The
provisions of Obligations and Contracts;3. The rules governing the most analogous
nominate contracts, and4. The customs of the place. (Art. 1307) 5. According to risk or
fulfillment 

a. Commutative- Those where the parties give equivalent values (such as sale and
barter), hence, there is real fulfillment. b. Aleatory-Those whose fulfillment depends
upon chance (such as an insurance contract). 6. According to the parties
obligated a. Unilateral -Those where only one of the parties is obligated to give or do
something (such as commodatum and gratuitous deposit). 

b. Bilateral (or synalagmatic) - Those where both parties are required to give or do
something (such as sale and barter). They may be reciprocal or non-reciprocal. 7.
According to subject matter a. Contracts involving things (Such as sale or barter). b.
Contracts involving rights or credits (such as usufruct or assignment of credits). c.
Contracts involving services (such as agency or lease or service. 8. According to the time
of fulfillment 

a. Executed-One which has been performed. 

b. Executory-One that has not yet been performed. 9. According to the number or
persons physically entering into the contract a. Ordinary- Where two parties are
represented by different persons (such as sale and barter)b. Auto-contract- Where only
one person represents the two opposite parties to the contract (such as when an agent
lends money to his principal whom he represents as borrower). 10. According to the
number of persons who participated in the drafting and preparation of the
contract a. Ordinary- Where both parties participated in the drafting of the contract
(such as sale). b. Contract of adhesion- Where only one party drafted the contract
(such as insurance)  It is so-called because its terms are prepared by only one party,
while the other party merely affixes his signature signifying his adhesion thereto. (Uy vs.
People, G.R. No. 174899, September 11, 2008) A contract of adhesion gives no room for
negotiation and deprives the latter the opportunity to bargain on equal footing. It
presupposes that the party adhering to the contract is a weaker party. (Saludo, Jr., vs.
Security Bank Corporation, G.R. No. 184041, October 13, 2010) Stages of a
contract  1. Preparation or conception -This involves preliminary negotiations. and
bargaining, discussion of terms and conditions, with no arrival yet of a definite
agreement. Negotiation begins from the time the prospective contracting parties
manifest their interest in the contract and ends at the moment of their
agreement. 2. Perfection or birth -This is the point when there is a meeting of minds
between the parties on a definite subject matter and valid cause. 3. Consummation or
death or termination- This occurs when the parties fulfill or perform the terms agreed
upon in the contract, culminating in the extinguishment thereof. (See Navarra vs
Planters Development Bank, G.R. No. 172674, July 12, 2007; XYST Corporation vs. DMC
Urban Properties Development, Inc., G.R. No. 1/1968, July 31, 2009.) Basic principles of
contract 1. Liberty of contract or freedom to stipulate  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. (Art. 1306)  The freedom to enter into a contract is one of the liberties
guaranteed by the State subject only to the five limitations. (People vs. Pomar, 46 Phil
440) 2. Mutuality of contracts  The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. (Art. 1308) The binding
effect of a contract on both parties is based on the principle that obligations arising
from contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant
to have one party bound by the contract while leaving the other free therefrom.

The ultimate purpose is to render void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
(Manila International Airport Authority vs. Ding Velayo Sports Center, Inc., G.R. No.
161718, December 14, 2011) Thus, if the fulfillment of the suspensive condition of an
obligation depends upon the sole will of the debtor, the obligation and the condition
are void (See Art. 1182.) since compliance is dependent upon him alone Also, after a
party has entered into a contract, he will not be permitted to renounce it unilaterally. a.
Any contract which appears to be heavily weighed in favor of one of the parties so as to
lead to an unconscionable result is void. Thus, the provision in a promissory note
authorizing the creditor to increase, decrease, or otherwise change from time to time
the rate of interest and/or bank charges "without advance notice to the borrower, "in
the event of change of interest rate prescribed by law or the Monetary Board of the
Central Bank of the Philippines, does not give the creditor bank unrestrained freedom to
charge any rate other than that which was agreed upon. Such stipulation granting the
creditor bank to make monthly upward/downward adjustment of interest rate violates
the essence of mutuality of contract. (Floirendo, Jr. vs. Metrobank, G.R No. 148325,
September 3, 2007) In loan contracts, the interest is undeniably always a vital
component, so that any change thereof must be mutually agreed upon; otherwise, it
produces no binding effect. x x x A contracting party's assent to the modifications in
interest rates cannot be implied from his/her lack of response to the means sent by the
other party. (Philippine Savings Bank vs. Sps. Castillo, G.R. NO. 193178, May 30, 2011) b.
Determination of performance by a third person  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. (Art. 1309) However, such determination shall not be
obligatory if it is evidently inequitable. in such a case, the courts shall decide what is
equitable under the circumstances. (Art. 1310) 3. Relativity of contracts  Contracts take
effect only between the parties, their assigns and heirs, except where the rights and
obligations are not transmissible: a. by law,b. by stipulation, orc. by nature. (Art.
1311) Note: With respect to the heir, he shall not be liable beyond the value of the
property he received from the decedent. (Art. 1311) Illustrative case  Llenado vs.
Llenado G.R. No. 145736, March 4, 2009 Facts: O, the owner of a lot, leased it to T for
a period of 6 years and 9 months. The lease contract provides that T, the tenant, shall
have the option to renew the lease on or before the expiration of the lease. T died a few
months before the expiration of the lease. Are the rights to enjoy the lease and to renew
it transmitted to the heirs of T? Held: Yes. A contract of lease is generally transmissible
to the heirs of the lessor or the lessee. It involves a property right and, as Such, the
death of a party does not excuse non-performance of the contract. The rights and
obligations pass to the heirs or the deceased and heirs of the deceased lessor are bound
to respect the period or the lease. The same principle applies to the option to renew the
lease. As a general rule, covenants to renew a lease are not personal but will run with
the land. Consequently, the succession-interest of the lessee are entitled to the benefits,
while that of the lessor burdened with the duties and obligations, which said covenants
Conferred and imposed on the original parties. When a contract may be enforced by or
against a third person a. Where there is a stipulation in the contract that clearly and
deliberately confers a favor upon a third person (stipulation pour autrui). Such third
person may demand its fulfillment provided he has communicated his acceptance to the
obligor before its revocation. (Art. 1311) A mere incidental benefit or interest or a
person is not sufficient.  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 autrui. X can sue on the contract
although he is not party he does not receive the interest. b. Where a third person
induces another to violate his contract, in which case, such third person may be held
liable for damages by the other contracting party. (Art. 1314)  Example: D has a contract
for 5 years With XYZ Broadcasting Company. During the second year or the contract,
RST Radio Company, with knowledge of the existing contract between D and XYZ,
induced D to XYZ may Sue RST (and also D) for damages under the contract between D
and XYZ although RST Is not a party thereto. C. 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. (Art.
1312)  Example:  D obtained a loan of P200,000.00 from C. The loan is secured by a
mortgage of D’s lot which C recorded with the Register of Deeds. Later, sold the lot to X
who was not aware of the mortgage.  When D could not pay the loan on due date, C
foreclosed the mortgage on the lot. Here, X Would be bound by the mortgage although
he was not a party thereto because the mortgage created a real right in favor of C. This
is true even if X was not aware of it since the registration of the mortgage operates as a
notice to the whole world of the existence thereof.  d. In contracts intended to defraud
creditors, the law gives them protection. (Art. 1313) This is true if the third person acted
in bad faith. (See Art. 1388.) 

Example: D owed C P100,000.00 To defraud C, D sold his only lot to X who knew of D's
fraudulent intent, i.e., in bad faith. Here, C may sue for the rescission of the sale between
D and X although he was not a party to it. 4. Consensuality of contract  Contracts are
perfected by mere consent (Art. 1315) except in the following contracts which need to
comply with additional requirements a. In real Contracts such as deposit, pledge, and
commodatum, which are perfected upon the delivery of the object of the obligation.
(Art. 1316) b. In formal or solemn contracts, which are required to be in the form
provided by law, to be perfected, such as the donation of an immovable which must be
in a public instrument together with the acceptance thereof (Art. 749), otherwise, the
contract is void. 5. Obligatory force of contract and compliance in good faith 
Obligations arising from contracts shall have the force of law between the contracting
parties and should be complied with in good faith. (Art. 116) Upon the 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 win good faith, usage and law. (Art. 1315) Example:On June 1, S and B entered
into a contract of Sale involving the horse of S for P10,000.00. The terms of the contract
provide that D must deliver the horse on June 30, while C must pay the price on June 25.
In the place of S and B, it is the usage that when one sells a horse, he must place
horseshoe on its hooves. However, is not stated in the contract. To what consequences
are the parties bound?  Answer: S must deliver the horse on June 30 as stipulated. Before
delivery, he must take care or the horse with the diligence of a good father of a family
although it was not stipulated because this is provided by law and in keeping with good
faith. He must place a horseshoe on the hooves of the horse although this was not also
stipulated because the same is required by the usage of the place where they reside.

    On the other hand, D must pay the price on June 25 also as stipulated. He must pay the
whole amount because of the requirement of the law that payment must be
complete.  ESSENTIAL REQUISITES OF CONTRACTS  Consent of the Contracting
Parties Consent, meaning  Consent is the manifestation of the meeting of the offer
and the acceptance upon the thing and the cause which are to constitute the contract.
(Art. 1319) Rules on offer 1. The offer must be certain (Art. 1319) because there could
be no meeting of minds if it is vague or not definite. It must be “definite, complete and
intentional.” (Korean Air Co., Ltd. vs. Yuson, G.R. No. 170369, June 16, 2010)  Thus, if S,
who has several lots, offers to sell his lot to B without designating which of the lots he is
selling, the offer is not certain.  Nature of advertisements  a. Business advertisements of
things for sale are not definite offers, but mere invitations to make an offer unless it
appears otherwise. (Art. 1325) 

Examples: (1) An advertisement reads: "For sale: residential house on a 200 Square meter
lot at Green valley Village for P3M. Call 723-4567" This is not an offer but a mere
invitation to make an offer. (2) For sale 3 bedroom bungalow on a 200 square meter lot
located at No. 123 Molave Street, Bgy. Mayamot, Antipolo City, for P2M cash. This is a
definite offer because it contains all the matters required of a contract.  b.
Advertisements for bidders are merely invitations to make proposals and the advertiser
is not bound to accept the highest or lowest bidder, unless the contraryappears. (Art.
1326)  2. An offer becomes ineffective upon the death, civil interdiction insanity or
insolvency of either party before acceptance is conveyed. (Art. 1323) 3. 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. (Art. 1324) Option,
concept    Option is a contract whereby the offeror gives the offeree a certain period
within which to buy or not to buy a certain object for a fixed price. It may or may not be
for a valuable consideration.

 Right of the offeror to withdraw the offer  a. If there is no consideration for the option,
the offerer may withdraw the offer at anytime within the option period provided there
has not yet been any acceptance. d. If there is a consideration, the offerer may not
withdraw the offer before the lapse of the period agreed upon (Tuason VS. Del Rosario-
Suarez, G.R. No. 168325, December 8, 2010). Otherwise, he will be liable for damages to
the offeree for breach of contract. Note: In both cases, the option is extinguished upon
the lapse or the period, unless in the meantime, the offeree has accepted the offer. 
Example: S promised to sell his car to B for P100,000.00 giving B 30 days to decide. B
accepts the promise S may withdraw his promise even before the lapse of the 30-day
period by informing B of the withdrawal. However, if B had given to S option money of
say, P1,000.00, S cannot withdraw the Offer before the lapse of the option period
because the option given to B was founded upon a consideration. Rules on
acceptance 1. The acceptance must be absolute. (Art. 1319) If the acceptance varies the
offer, there is no contract since there is no meeting of minds. 

a. If the acceptance is qualified, it constitutes a counter-offer; (Art. 1319) and has the
effect of rejecting the offer. (XYST Corporation vs. DMC Urban Properties Development,
Inc., Supra)  Example:  S offers to sell his car for P100,000.00 to B. B accepts the offer but
is willing to pay the price of P95,000.00 only. The acceptance made by B is a qualified
acceptance which constitutes a counter-offer. Accordingly, no contract is perfected.
However, If S accepts the counter-offer, then there will be a perfected contract at the
price of P95,000.00. b. If the offer fixes the time, place and manner of acceptance, all
must be complied with. (Art. 1321) Otherwise, there will no meeting of minds. 2.
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 the place where the offer was made. (Art. 1319) The second sentence is important
to determine which law will apply regarding the contract. 3. Acceptance may be express
or implied. (Art. 1320) 

  The acceptance is express if made orally or in writing. it is implied if it can be inferred

from the conduct of the parties.  Thus, if S offers to sell a kilo of his mangoes to B for
P20.00, and B, without saying anything to S, takes the mangoes and begins to eat one
and offers the rest to others, then B is deemed to have impliedly accepted the offer of
S.  

4. An offer made through an agent is accepted from the time it is communicated to him.
(Art. 1322) 

This is so because the agent is merely an extension of the personality of the

principal. Rules on consent 1. The parties must have the capacity to enter into a
contract. The following cannot give consent to a contract:  a. Unemancipated minors 
Emancipation takes place by the attainment of the age of majority which is eighteen
years. (Art. 234, Family Code, as amended)  b. Insane or demented persons  However,
contracts entered into during lucid intervals are valid. (Art. 1328) Lucid interval refers to
the period of temporary sanity of an insane person.  c. Deaf-mutes who do not know
how to write.  A contract entered into by the above-named incapacitated persons is
voidable. (Art. 1390) However, when both parties are incapable of giving consent to a
contract, the Contract IS unenforceable. (Art. 1403)  The incapacity aforementioned is
subject to the modifications determined by law, and is understood to be without
prejudice to special disqualifications established in the laws. (See Art. 1329.)  Thus, an
incapacitated person must pay a reasonable price Tor food and other necessaries sold
to him. The sale here is valid. (See Art. 1409.) On the other hand, a person may be
capacitated but is disqualified to enter into some contracts, such as in the case of the
husband and the wife who, as a general rule, are prohibited to sell to each other (Art.
1490) or donate to each other. (Art. 87, Family Code) 2. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable. (Art. 1328) This is so because
consent given in such states is not freely and intelligently given. 3. A contract where
consent is given through mistake, violence, intimidation, undue influence, or fraud is
voidable (Art 1330) These five are referred to as the causes that vitiate consent or the
vices of consent.  a. Mistake 1) When mistake will invalidate consent a. If the mistake
refers to the substance of the thing which Is the object of the contract (Art. 1331) 
Example: If B bought a lot on which he wanted to construct a factory believing that it
was situated in an industrial area, he can have the contract annulled if the lot was
actually situated in a residential area. b.) If the mistake refers to those conditions which
have principally moved one orboth parties to enter into the contract (Art. 1331) 
Example: S sold his car to B for P100,000.00 cash because he needed the money to settle
a debt. The deed of sale signed by him showed, however, that the price would be paid
in 4 equal installments. S can have the sale annulled because of a mistake as to the
condition of the contract. c.) If the mistake refers to the identity or qualifications of one
of the parties if such identity or qualifications have been the principal cause of the
contract. (Act. 1331)  Example: D donated a lot to C believing that C was his illegitimate
son. D found out later, however, that C was not his son. The identity of C was material to
the contract; hence, D can have the contract annulled on the ground of mistake as to
the identity of the donee. d.) If the mistake refers to the legal effect of an agreement
when the real purpose ofthe parties is frustrated and the same is mutual. (Art. 1334) 
This refers to mistake of law which does not generally vitiate consent because of the rule
that ignorance of the law excuses no one from compliance therewith. However, the
contract shall be voidable if the mistake as to the legal effect of the agreement is mutual
and frustrates the real purpose of the parties  Example: S and B entered into a contract
of sale with a right to repurchase believing that the contract had the same effect as a
contract of loan and mortgage. The mistake here refers to the legal effect of their
agreement. Either party may annul the contract on such ground. 2) When mistake does
not vitiate consent a. If the mistake refers to a simple mistake of account which shall
only becorrected. (Art. 1331)  Thus, if 10 books were sold at P567.80 each but the total
price was shown at P5,876.00 instead of P5,678.00, the mistake in Computation will not
render the contract voidable but will only be corrected. b. If the party alleging it knew
the doubt, Contingency or risk affecting the object of the contract. (Art. 1333)  Thus, if B
buys a brand-new car stereo for P500.00 when he knows that the price of one is
P5,000.00, he cannot allege mistake if the car stereo later turns out to have been stolen.
The fact that the car stereo was offered to him at a very low price should have put him
on guard that it might have come from an illegal source. 3.) Rule when one party is
unable to read or does not understand the language of the contract  If mistake or fraud
is alleged, the person enforcing the contract must show that the terms thereof have
been fully explained to the former. (Art. 1332)  This is an exception to the rule that he
who alleges fraud or mistake must prove the same. b. Violence or physical coercion 1.)
When violence vitiates consent  There is violence when in order to wrest consent,
serious or irresistible force is employed. (Art. 1335) This is true although it may have
been employed by a third person who did not take part in the contract. (Art 1336) 
Example: S Signed a deed of sale of his land to B because B twisted and threatened to
break his arm it he refused to sign. Consent here is given because of
violence. c. Intimidation or moral coercion 1) When intimidation vitiates consent 
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. (Art. 1335) This intimidation exists although it may have been employed by a
third person who did not take part in the contract. (Art. 1336)  Example: In the example
above, if S signed the deed of sale because B pointed a gun on his head and threatened
to shoot him if he did not sign the deed of sale, consent here is given by reason of
intimidation likewise intimidation if B threatened to burn the house of S if S did not sign
the deed of sale.  2. Factors to be considered in determining the degree of
intimidationa) age,b.) sex, andc.) Condition of the person. (Art. 1335) 3) When no
intimidation exists  No intimidation exists in case of a threat to enforce one's claim
through competent authority, if the claim is just or legal. (Art. 1335)  Example: C
threatened to sue D if he did not pay his debt to him. D, afraid of a court action, thus
made a dacion en pago by transferring his lot to C to settle his debt. Here, the contract
(dacion en pago) is not voidable as there is no intimidation when one seeks the aid of
the courts to enforce his rights. d.) Undue influence 

 1.) When undue influence vitiates consent  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. (Art. 1337) For it to be present, the influence exerted
must have so overpowered or subjugated the mind of a contracting party as to destroy
his free agency, making him express the will of another rather than his own. (Naranja vs.
Court of Appeals,G.R. No. 160132, April 17, 20009)  Example: If a church minister
improperly takes advantage of his power over a member of his congregation who
regularly confides in him by persistently telling the member to sell his property to him,
the contract if entered into will be voidable at the instance of the member on the
ground of undue influence. 2.) Factors to be considered in determining the existence of
undue influence: a.) Confidential, family, spiritual and other relations of the parties,b.)
Mental weakness,c.) Ignorance, ord.) Financial distress of the person alleged to have
been unduly influenced. (Art. 1337) e. Fraud 1) when fraud exists (dolo causante) a.)
When, through the 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. (Art. 1338) The fraud here is active fraud.   Examples: (1) S induced B to buy a
ring which Claimed was made of pure gold. However, S knew all along that the ring was
only gold-plated. B can have the contract annulled on the ground of fraud b.) When
there is a failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations. (Art. 1339) The fraud here is passive fraud. 
Example: A and B were partners in a real estate business. During the existence of the
partnership, A met X who told A that he was interested in buying a large tract of land. A
did not inform B about X’s proposal. Instead, he persuaded B to sell his share in the
partnership to him. After A became the sole owner of the business, he sold real property
to X realizing a huge profit. The contract between A and B for the sale of BS Interest is
voidable on the ground of fraud. A was duty bound to disclose the proposal of X to B
since as partners, they are bound by trust and confidence. 2) Requisites to make a
contract voidable by reason of fraud a) The fraud should be serious.  Incidental fraud
only obliges the person employing it to pay damages. b) The fraud should not have
been employed by both contracting parties(1344)  If both parties employed fraud, the
bad faith of one will negate the bad faith of the other. The law will consider both of
them in good faith, hence, the contract will be valid. 3) When no fraud exists  In case of
the usual exaggerations in trade, when the other party had an opportunity to know the
facts. (Art. 1340)  This is to give allowance to dealer's talk or sales talk such as “The
liquid soap that can wash a thousand plates" or "The fuel that can give you the extra
mile.” b.) In case of a mere expression of an opinion, unless made by an expert and the
other party has relied on the former's special knowledge. (Art. 1341)  Example: S, a
farmer, who knows nothing about gems, tells B that in his (S's) opinion, his ring is
embellished with diamond and that he is selling it. B buys the ring believing that the
ring is adorned with diamond. Later he discovers that the gemstone is really emerald.
There is no misrepresentation here because S is not an expert in gems. However, B can
have the contract annulled on the ground of mistake but if S is a gemologist (an expert
in gems). B can annul the contract on the ground of fraud.  c.) In case of
misrepresentation by a third person, unless such misrepresentation has created
substantial mistake and thee Same is mutual. (Art. 1342)  Consent will likewise be
vitiated it the third person connived with a party to the Contract in making the
misrepresentation  Example: B wants to buy the land of S because he is interested in
putting up a factory However, S and B do not know the classification of the area where
the land is located. So they consult T, a third person, who tells them that the land is
situated in an industrial area. S and B thus proceed with the sale. Later, however, B finds
out that he could not put up a factory because the land is situated in a residential area.
is the contract between S and B voidable?  Answer: Although generally,
misrepresentation by a third person does not affect the validity of the contract, the
contract in this case is voidable because the misrepresentation by 1, a third person, has
created a substantial mistake that is mutual.
 d.) If the misrepresentation was made in good faith. However, the same may constitute
error. (Art 1343)  Example: S has a ring which he honestly believes is adorned with
diamond. He offers to sell the ring to B telling B that the gemstone is diamond. B buys
the ring believing it to be so. Later, he discovers that the gemstone is emerald No fraud
exists here because S was in good faith. However, B may annul the contract on the
ground of mistake.  

4) Kinds of dolo  or fraud a) Fraud in obtaining consent 1.) Causal fraud or dolo

causante - Fraud without which consent would not have been given. It renders the
contract voidable. 2) Incidental fraud or dolo incidente- Fraud without which consent
would have still been given but the person giving it would have agreed on different
terms. The contract is valid but the party employing it shall be liable for damages. 
Example: S sold his lot P100,000.00 to B who or stated in the deed of sale that he was
married. The price was fixed by S at the said amount in consideration of B's having a
family to Support. however, B was single. If S would have sold the lot to B In reality.
whether B was married or single but that he would have given a higher price, say
P105,000.00. had he known that B was single the fraud here is only incidental. The
contract is not vitiated by fraud but S can recover damages in the amount of at least
P5,000.00. 

a) Fraud in the performance of the obligation This is the deliberate act of evading
fulfillment of an obligation in a normal manner his presupposes an existing obligation,
hence, the fraud has no effect on the validity of the contract Since it was employed after
perfection. However, the party employing it shall be liable for damages. (Art.
1170)Simulated contract, concept and kinds A contract that does not intend to have
any legal effect on or a change in the juridical situation of the parties. (Amistad vs.
Baltazar, 59635-R, Oct. 24, 1979). They are of two kinds:1.) Absolutely simulated
contract- One where the parties do not intend to be bound at all. (Art 1345). Being
fictitious it is void. (Art 1346) The parties may thus recover from each other what they
may have given under the contract (Heirs of Dr. Mario S. Intac vs. Court of Appeals, G.R.
No. 173211, October 11, 2012) The simulation must be on the part of both parties.
Where only one simulates, there is deceit or fraud, and the contract is regarded as
voidable, not void. (Bacani vs. Salvador, 60900-R, April 28, 1982) Example. Bis interested
in buying the lot of S. S tells B to show his capacity to buy the lot by asking B to present
his bank records. B, however, does not have any bank account. So he asks XYZ Bank
through the manager who is his friend to certify that B is a depositor of the bank. XYZ
Bank issues the certification when the truth is that D has never opened an account and
made a deposit in the bank. The contract of bank deposit is absolutely
Simulated.2.) Relatively simulated contract- One where the parties Conceal their true
agreement. (Art. 1345) The parties here are bound by their real agreement provided 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. (Art. 1346) Example: S and B made
it appear that S sold his car to B for P100,000.00. In reality, however, S donated the car
to B. The sale is relatively simulated. S and B will be bound by the contract of donation.
However, they will be bound by the sale if B is a public official since donation to a public
official is void for being contrary to public policy (See Art 789.), or if as a result of the
donation, the compulsory heirs of S could not receive their legitime, in which case, the
heirs can demand the price from B.Object of ContractsWhat may be the object of
contracts1. All things which are not outside the commerce of men including future
things. (Art. 1347) Thus, public plazas, streets, sidewalks may not be the object of
contracts. Future things such as the crops that may thereafter be harvested, or eggs that
may be produced by a poultry farm, may be the object of contracts, but not future
inheritance except in cases provided by law (Art. 1347) such as in the marriage
settlements or in partition of the estate by the testator.

 Contract is generally void when object is future inheritance   The contract involving future
inheritance is void when the following requisites concur:a. The succession has not been
opened.b. The object of the contract forms part of the inheritance; andc. The promissor
has, with respect to the object, an expectancy or right which is purely hereditary in
nature. (Arrogante vs. Deliarte, G.R. No. 152132, July 24, 2007) 2.) All rights which are not
intransmissible. (Art. 1347)  

Thus, a credit right may be the object of deed of assignment; so also are leasehold
rights to a certain building. However, strictly personal rights, such as parental authority,
or political rights such as the right to vote or to run for public office may not be the
object of contracts, as they are intransmissible. 3. All services which are not contrary to
law, morals, good customs, public order or public policy. (Art. 1347)  Thus, contracting
the service of person for the slaughter of a dog contrary to Animal welfare Act of 1998 is
void. 

Requisites of object of a contract 1. It must be within the commerce of men. (Art.

1347) 2.) It must be transmissible. (Art. i347) 3.) It must not be contrary to law. morals,
good customs, public order or public policy (Art. 1347 4.) It must not be impossible. (Art.
1348) 5.) It must be determinate as to its kind or if its quantity is not determinate, it
must be possible to determine the same without the need of a new contract between
the parties. (Art. 1349)  Thus, if S sells to B a "car stereo", the object is determinate as to
its kind although it has not been particularized. If the object stated in the contract is all
the pigs in the piggery the fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract because such quantity can be determined by
the parties without the need of entering into another contract. Human internal organs
as objects of a contract  R.A. No. 9208 penalizes human trafficking for the purpose of
the removal or sale of internal organs. The law provides that the human body and its
parts cannot be the subject of commercial transactions. Giving or receiving payment
including any other compensation or reward for organs is prohibited along with
advertising the need for or availability of organs, with a view to offering or seeking
payment.  Under the law, however, a living and related voluntary donor or a living and
non-related voluntary donor may be allowed to donate organs, but no living minor is
allowed to donate any organ for the purpose of transplant. Organ donations under the
said law are subject to the World Health Organization’s Guiding Principles on Human
Organ Transplantation which was forged by member countries in 1981. Under the
international agreement, organs for transplant should be removed preferably from the
bodies of deceased persons, and that adult living persons may also donate organs but
such donors should be genetically related to the recipients. Cause of ContractsIt is the
essential reason why a party enters into a contract. Cause of contracts1. Onerous
Contract- Here, the cause for each contracting party is the prestation or promise of a
thing or service by the other. (Art. 1350)  Examples. (1) S sold his car to B for
P100,000.00. The cause tor S is the payment of, or the promise to pay. P100,000.00 by B,
while the cause for B is the delivery of, or the promise to deliver, the car by S. (2) C, a
CPA, entered into a contract with B, a businessman, to audit the books of the latter, for a
professional fee of P10,000.00. The cause tor C is the payment of the professional fee of
P10,000.00, while the cause for B, is the audit of his books by C. 2.) Remuneratory
contract - Here, the cause is the service or benefit which is remunerated. (Art. 1350) 
Example: C saves D from drowning. and as a reward, D gives C P5,000.00. The saving of
D from drowning is the service remunerated. The service here is not a recoverable debt
to distinguish it from an onerous contract where there is a promise of service by a
party. 3. Gratuitous, lucrative or contract of pure beneficence-The cause is the
liberality of the benefactor. (Art. 1350) An example is donation whose cause is the
liberality of the donor, or commodatum whose cause is the liberality of the
lender. Requisites of cause1. It must exist. a. It is presumed that the cause exists and it
is lawful, even if not stated in the contract, unless the debtor proves the contrary. (Art.
1354) b. Contracts without cause produce no effect whatsoever. Art. 1352) 2. It must be
lawful.

Contracts with unlawful cause produce no effect whatsoever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public policy. (Art 1352) 3. It must
be true.

The statement of a false cause in a contract shall render them void, if it should not be
proved that they were founded upon another cause which is true and lawful. (Art.
1353) Example: A contract stated that S sold his car to B for P100,00.00. The fact,
however, is that B did not give P100,000.00 but a diamond ring. The cause of the
contract is false. However, the contract is not rendered void because the false cause, the
giving of P100,000.00, is founded upon another cause, the giving of a diamond ring,
that is true and lawful.  However, if what B gave to S was several grams of "shabu", the
contract will be rendered void. Cause and motive distinguished 1. Cause is the
essential reason of the contract, while motive is the private or secret reason or intention
of the contracting party. (Lui VS. De Ocampo, 55 O.G. 1778)2. The contract is void if the
cause is illegal; the validity of the contract is not affected by the illegality of the
motive. Example: S sold his car to B for P100,000.00 because he wanted to have funds
for the purchase of a dangerous drug. The motive of S is illegal However, its illegality
does not affect the validity of the contract which has a lawful cause, i.e., the payment of
P100,000.00. 3. The cause of a contract is always known to the contracting parties, while
the motive or one party may not be known to the other. Lesion, concept and effect on
contract. 

Lesion is the inadequacy of cause. As a general rule, lesion shall not invalidate a
contract except in the following:  

1. When there was fraud, mistake and undue influence. (Art. 1355)2. In cases provided
by law, such as when the ward or absentee suffer lesion by more than one-fourth of the
value of the object of the contract. (Art 1381)