Relativity of contracts – a contract can only bind the

parties who had entered into it or their successors who

have assumed their personality or their juridical
position.

Persons bound by contracts:

1. parties
2. their assigns
3. their heirs

Exception:
1. By their nature (special qualifications of the obligor)
2. Stipulation of the parties
3. Provision of Law
• Monetary obligation which the decedent may
have incurred during his lifetime cannot be
transmitted to his heirs through succession
• Partnership and Agency cannot be transmitted
General rule: Contracts cannot produce any effect
whatsoever as far as third persons are concerned

Exception:
1. Where the contract contains a stipulation in
favor of a 3rd person
2. where the 3rd person comes in possession of
the object of a contract creating a real right
3. Where the contract is entered into in order to
defraud a 3rd person
4. Where the 3rd person induces a contracting
party to violate his contract
5. Group contracts
Stipulation pour autrui – Stipulation in a contract, clearly and
deliberately conferred by the contracting parties as a favor
upon a 3rd person who must have accepted it before it
could be revoked and not just mere incidental interest

Requisites of pour autrui:

• Stipulation in favor of the 3rd person
• Stipulation must be part, not a whole of the contract
• Contracting parties must have clearly and deliberately
conferred a favor upon a 3rd person
• The 3rd person must have communicated his acceptance to
the obligor before its revocation
• Neither of the contracting parties bears the legal
representation of authorization from the 3rd party.
Art. 1314. Any third person who induces another to
violate his contract shall be liable for damages to the
other contracting party.

Art. 1315. 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 the consequences which, according to
their nature, may be in keeping with good faith, usage
and law.

Art. 1316. Real contracts, such as deposit, pledge and

Commodatum, are not perfected until the delivery of
the object of the obligation.
Art. 1317.
No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right
to represent him.

A contract entered into in the name of another by one

who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf
it has been executed, before it is revoked by the other
contracting party.
• No person may enter into a contract in the
name of another without the proper authority
from the latter or from law.

• Contracts entered into without being clothed

the proper authority are unenforceable.
 Chapter 2

Essential Requisites of Contracts

Art. 1318. There is no contract unless the following
requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter
of the contract;
3. Cause of the obligation which is
established.
 Sec. 1. – Consent

Consent – meeting of minds of the parties

• Consent is manifested when there is

concurrence of the offer and the acceptance
– The period or stage of negotiation is terminated.
• The offer must be certain and the acceptance
absolute
• A qualified acceptance constitutes a counter-
offer.
Art 1319.
XX XX XX

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 in the place where the offer
was made.
Cognition theory - the acceptance comes to the knowledge of
the offeror.

• Acceptance made by letter or telegram does not bind the

offeror except from the time it came to his knowledge.

Actual knowledge – required by law; offeror must have read

the contents of the letter or telegram accepting his offer.

• Cognition theory will not apply if the offeror himself

refused to open the telegram for some reason or another.

– Reception theory – the notification is in the hand of the offeror

or delivered to the offeror, in such a manner that he can procure
the knowledge of its content.
Offeror withdraws offer:
– offeror may still withdraw the offer so long as he
still has no knowledge of the acceptance by the
offeree.
Offeree withdraws acceptance:
– the acceptance may be revoked before it comes to
the knowledge of the offeror, because in such case
there is still no meeting of the minds, since the
revocation has canceled or nullified the
acceptance which thereby ceased to have any
legal effect.
Art. 1323. An offer becomes ineffective upon
the death, civil interdiction, insanity, or
insolvency of either party before acceptance is
conveyed.

Art. 1324. 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.
Option Contract - An accepted promise to buy or to sell a
determinate thing for a price certain is binding upon
the promissor if the promise is supported by a
consideration distinct from the price.

Right of first refusal – (In case of lease contract that

contains a right of first refusal) the lessor is under a
legal duty to the lessee not to sell to anybody at any
price until after he has made an offer to sell to the
latter at a certain price and the lessee has failed to
accept it.
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not
definite offers, but mere invitations to make
an offer.

Art. 1326. 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.
Who cannot give consent
Art. 1327. The following cannot give consent to a
contract:
1. Unemancipated minors;
2. Insane or demented persons, and deaf-mutes
who do not know how to write.
Unemancipated Minors

Exception :
• When it is entered into by a minor who
misrepresents his age.
• When it involves the sale and delivery of
necessaries to the minor
Insane or demented persons
• Contracting parties are unable to understand
the nature and consequences of the contract
at the time of its execution by reason of any
cause affecting his intellectual or sensitive
faculties.
Deaf-mutes who do not know how to
write
• There is no way that the stipulations in the
contract be explained to them to insure that
they understand what they are entering into.
Other incapacitated persons
• Married woman in cases specified by law
Lucid Interval - a brief period during which an
insane person regains sanity that is sufficient
to regain the legal capacity to contract, make a
will and to act on his/her own behalf.
Vices which may vitiate consent:
• Mistake
• Violence
• intimidation
• Undue influence
• Fraud
• Consent must be given intelligently, freely and
spontaneously
– Intelligent (Mistake)
– Free (Violence, Intimidation & Undue influence)
– Spontaneous (Fraud)
• Mistake – Wrong conception of a thing and
the lack of knowledge with respect to a thing.

2 kinds :
– Mistake of fact – When one or both of the
contracting parties believe that a fact exist when
in fact it does not .
– Mistake of law – When one or both of the
contracting parties arrive at an erroneous
conclusion regarding the interpretation of a
question of law or the legal effects of a certain act
or transaction.
General rule: Only mistake of fact which will
vitiate consent renders the contract voidable.
A mistake of law does not render the contract
voidable
Violence – use of irresistible force requisites:
– Force employed to wrest consent must be serious
or irresistible
– It must be the determining cause for the party
upon whom it is employed in entering into the
contract.
Intimidation – compelling by reasonable and
well grounded fear of an imminent or grave
evil upon his person, property, or upon the
person or property of his spouse,
descendants, or ascendants .
Undue influence – taking improper advantage of
one's power over the will of another, depriving
the latter of a reasonable freedom of choice.

Exception :
– Reverential Fear

The following circumstances shall be considered:

The confidential, family, spiritual and other
relations between the parties, or the fact that the
person alleged to have been unduly influenced
was suffering from mental weakness, or was
ignorant or in financial distress.
Fraud – insidious words or machinations employed by
one of the contracting parties in order to induce the
other to enter into a contract, which, without them, he
would not have agreed to.

Kinds of fraud:
• Dolo causante – causal fraud; deceptions or
misrepresentation of a serious character employed by
one party and without it, the other party would not
have entered into the agreement.

• Dolo incidente – incidental fraud; deceptions or

misrepresentation NOT of a serious character
employed by one party and without it, the other party
would still have entered into the agreement
• Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential
relations, constitutes fraud.

• The usual exaggerations in trade, when the other party

had an opportunity to know the facts, are not in
themselves fraudulent.

• A mere expression of an opinion does not signify fraud,

unless made by an expert and the other party has
relied on the former's special knowledge

• Misrepresentation by a third person does not vitiate

consent, unless such misrepresentation has created
substantial mistake.
 Art 1328 - 1346
Valid Voidable
Contracts entered into during a lucid Contracts agreed to in a state of
interval drunkenness or during a hypnotic spell
Consent is given through mistake,
violence, intimidation, undue influence, or
fraud
 Sec. 2. – Object of contract

Art. 1347. All things which are not outside the commerce of
men, including future things, may be the object of a
contract. All rights which are not intransmissible may also
be the object of contracts

Object – Most fundamental and indispensable requisite of a

contract.
– The “what” of the contract.

Requisites:
1. The object shall be within the commerce of men
2. The object should be real or possible
3. The object must be determinate as to its kind.
General rule: All things or services may be the object of
contracts.

Cannot be objects of contracts:

• Outside the commerce of men
• Intransmissible rights
• Future inheritance, except in cases expressly
authorized by law
• Services which are contrary to law, morals, good
customs, public order, public policy
• Impossible things or services
 Sec. 3. – Cause of Contracts

Cause - Juridical reason why the parties entered

into the contract

Kinds of Contracts Its consideration

Onerous contracts The prestation or promise of a

thing or service by the other

Rumenetory contracts Service or benefit which is

remunerated or compensated

Pure beneficence Liberality or generosity of the

benefactor
Essential requisites of cause:
• The cause should be in existence at the time
of the celebration of the contract.
• The cause should be licit or lawful
• The cause should be true.
Art. 1351. The particular motives of the parties
in entering into a contract are different from
the cause thereof.
– Psychological and purely personal reasons
– Differs for each contracting parties
– It’s legality or illegality does not affect the
existence of the contract
• The cause of the accessory contract is
identical with that of the principal contract.
Remunetory contracts – one in which one of the
contracting parties compensates the service
or benefit rendered by the other party,
although such service or benefit does not
constitute a demandable debt.
Art. 1352. 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.

Art. 1353. 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.

Art. 1354. Although the cause is not stated in the contract, it is

presumed that it exists and is lawful, unless the debtor proves the
contrary.

Art. 1355. Except in cases specified by law, lesion or inadequacy of

cause shall not invalidate a contract, unless there has been fraud,
mistake or undue influence.

• Inexistent cause, false, or unlawful/illicit cause produces no effect

(void ab initio)
 Chapter 3

Forms of Contracts
Art. 1356. Contracts shall be obligatory, in whatever
form they may have been entered into, provided
all the essential requisites for their validity are
present.
However, when the law requires that a contract be
in some form in order that it may be valid or
enforceable, or that a contract be proved in a
certain way, that requirement is absolute and
indispensable. In such cases, the right of the
parties stated in the following article cannot be
exercised.
• The law looks more at the spirit/intent rather
than at the forms of the contract.
• Contract may not be limited in a single
document or writing
General Rule: Contracts shall be obligatory, provided all
the essential elements of a contract are present.

Except:
1. When the law requires that the contract must be in
a certain form in order to be valid
• Must appear in writing
 Donation and acceptance of personal property whose value
exceeds P5,000.00
 Sale of a piece of land or any interest therein through an
agent
 Agreements regarding payment of interest in contract of loan
 Antichresis

• Must appear in public document

Donations of immovable properties regardless of value
Partnerships where immovable property or real rights
are contributed to the common fund
 • Must be registered
 Chattel mortgages
 Sales or transfer of large cattle

2. When the law requires that the contract must be in

a certain form in order to be enforceable.
– Covered by Statutes of Frauds
Art. 1357. If the law requires a document or
other special form, as in the acts and contracts
enumerated in the following article, the
contracting parties may compel each other to
observe that form, once the contract has been
perfected. This right may be exercised
simultaneously with the action upon the
contract.
Art. 1358. The following must appear in a public document:
1. Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and 1405;
2. The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains;
3. The power to administer property, or any other power which has
for its object an act appearing or which should appear in a public
document, or should prejudice a third person;
4. The cession of actions or rights proceeding from an act appearing
in a public document.
All other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one. But sales
of goods, chattels or things in action are governed by Articles, 1403,
No. 2 and 1405.
Public Document - any instrument authorized by
a notary public or a competent public official,
with the solemnities required by law, is a
public document. (Cacnio vs. Baens)

• Art. 1358 does not affect the validity or enforceability of the

contract. Present for mere convenience
 Chapter 4

Reformation of Instruments
REFORMATION – used when the true intention
of the parties to a perfected and valid contract
are not expressed in the instrument
purporting to embody their agreement by
reason of mistake, fraud, inequitable conduct
or accident
Requisites:
• Meeting of the minds of the contracting
parties
• True intention not expressed in the instrument
• Such failure to express their true intention is
due to mistake, fraud, inequitable conduct, or
accident.
When can one party ask for the reformation of the
contract:
• Mutual mistake of the parties (Art. 1361)
• One party was mistaken and the other party acted
fraudulently (Art. 1362)
• One party mistaken, the other knew or believed that
the instrument does not show their real intent but
concealed that fact to the former (Art. 1363)
• Through the ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the instrument
or the clerk or typist. (Art. 1364)
When there can be no reformation:
• Simple donation inter vivos wherein no
condition is imposed
• Wills
• When the real agreement is void (Art. 1366)
Contract of adhesion – one in which one of the
parties imposes a ready made form of
contract, which the other party may accept or
reject, but which the latter cannot modify.

• Its enforceability will have to be determined by the peculiar

circumstances obtaining in each case and the situation of the
parties concerned.
• In case of conflict, the contract will be interpreted against the
one who drafted the contract.
 Chapter 5

Interpretation of Contracts
• Intention of the contracting parties always prevail
because their will has the force of law between
them.

• Literal sense of the stipulations shall be followed

• Once the intention has been ascertained, it

becomes an integral part of the contract as
though it had been originally expressed therein in
unequivocal terms.
• The character of the transaction between the
parties is not determined by the language
used in the document but by their intention.
(Manila Banking Corp. vs Teodoro, Jr.)

• Contemporaneous and subsequent acts of the

parties must be considered in order to judge
the intention of the contracting parties.
(Tanguilig vs CA)
 Chapter 6

Defective Contracts
Kinds of Defective contracts

1. Rescissible contracts.
2. Voidable contracts
3. Unenforceable contracts
4. Void or inexistent contracts
Rescissible contracts – all of the essential elements of a
contract are present; contract is valid, but by reason of
injury or damage to either of the contracting parties or
to 3rd persons, it may be rescinded

Remedy:
• Rescission – remedy to secure the reparation of
damages caused to the contracting party or 3rd person
by a contract; by means of restoration of things to their
condition prior to the celebration of the contract.

Purpose of rescission: Reparation of damage or injury

suffered by one of the contracting parties or 3 rd
person
Grounds for Rescission of contracts:
1. Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission.
Art. 1383. The action for rescission is subsidiary;
it cannot be instituted except when the party
suffering damage has no other legal means to
obtain reparation for the same.
Who may institute action:
1. Person prejudiced
2. Representatives of those prejudiced
3. Heirs of those prejudiced
4. Creditors by virtue of the subrogatory action
Extent of rescission : only to that necessary to
cover the damage caused.

Effect of rescission: return the things which

were the object of the contract (Includes fruits
or interests)
Remedy rescission is impossible : Bring an
action for indemnity for damages against the
person who caused the loss.
• Art. 1387. All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did
not reserve sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom some
judgment has been issued. The decision or attachment
need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to
defraud creditors may be proved in any other manner
recognized by the law of evidence
Prescriptive period : 4 years
• This period must be counted from the time of
the termination of the incapacity of the ward.
• This period must be counted from the time
the domicile of the absentee is known
• This period must be counted from the time of
the discovery of fraud
Voidable contracts – element of consent of one of
the contracting parties is vitiated either by lack of
legal capacity of one of the contracting parties, or
by mistake, violence, intimidation, undue
influence, or fraud

Remedies:
1. Annulment
2. Ratification
3. Prescription.
Reformation of Contracts Annulment of Contracts

Presupposes a valid contract in which Based on a defective contract in which

there has already been a meeting of the there has been no meeting of the minds
mind because the consent of one or both of the
contracting parties has been vitiated.

a remedy when there has been fraud, Remedy when there has been no meeting
mistake, inequitable conduct or accident. of the minds because of mistake, fraud,
inequitable conduct, or accident
Art. 1390. The following contracts are voidable
or annullable, even though there may have
been no damage to the contracting parties:
1. Those where one of the parties is
incapable of giving consent to a contract;

1. Those where the consent is vitiated by

mistake, violence, intimidation, undue
influence or fraud.
• Art. 1391. The action for annulment shall be brought
within four years.

This period shall begin:

In cases of intimidation, violence or undue
influence, from the time the defect of the consent
ceases. In case of mistake or fraud, from the time of
the discovery of the same.

And when the action refers to contracts entered

into by minors or other incapacitated persons, from the
time the guardianship ceases.
Ratification – confirmation; act or means by
virtue of which efficacy is given to contract
which suffers from a vice of curable nullity.
Art. 1392. Ratification extinguishes the action to annul a voidable
contract. (1309a)

Art. 1393. Ratification may be effected expressly or tacitly. It is

understood that there is a tacit ratification if, with knowledge of the
reason which renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should execute an
act which necessarily implies an intention to waive his right. (1311a)

Art. 1394. Ratification may be effected by the guardian of the

incapacitated person.

Art. 1396. Ratification cleanses the contract from all its defects from
the moment it was constituted.
Consequence of Annulment:
Mutual restitution
◦ to give: Things subject matter of the contract,
its fruits, and the price with interest, except in
cases provided by law
◦ to do: Apportionment of damages based on
the value of the prestation with corresponding
interests.
Unenforceable contracts – cannot be enforced
by a proper action, unless ratified;

Characteristics of unenforceable contracts:

1. Cannot be enforced by proper action
2. Susceptible of ratification
3. Cannot be assailed by 3rd persons
Classes:
1. Contracts entered into without or in excess
of authority (Art. 1403, No.1)
• There is absolutely no consent

2. Contracts which do not comply with the

statute of frauds (Art 1403, No. 2)

3.Contracts where both the contracting

parties do not possess the required legal
capacity.
Statue of Frauds:
a) An agreement that by its terms is not to be performed within a year
from the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of
another;
c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
d) 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; but when a sale is made by auction and entry is made
by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
e) An agreement of the leasing for a longer period than one year, or for the
sale of real property or of an interest therein;
f) A representation as to the credit of a third person.
Void or Inexistent contract – lacks absolutely
either in fact or in law one or some of the
elements which are essential for its validity.
Characteristics of void and inexistent contracts:

• Produce no legal effect (quod nullum est nullum

producit effectum)
• Not susceptible of ratification
• Right to set up the defense of inexistence or
absolute nullity cannot be waived
• Action or defense for the declaration of their
inexistence or nullity is imprescriptible (art. 1410)
• Inexistence or absolute nullity cannot be invoked
by a person whose interests are not directly
affected.
Art. 1420. In case of a divisible contract, if the
illegal terms can be separated from the legal
ones, the latter may be enforced.

Art. 1421. The defense of illegality of contract is not

available to third persons whose interests are not
directly affected.

Art. 1422. A contract which is the direct result of a

previous illegal contract, is also void and
inexistent
 Rescissible Voidable Unenforceable Void or
inexistent
There is damage or There is vitiation of Contract entered Lack of one or some
injury either to 1 of consent ;or into without of the essential
the parties or to 3rd authority; requisites of a valid
persons Lack legal capacity contract.
of one of the Does not comply
parties with Statute of
Fraud;

Both parties are

legally
incapacitated
Valid and Valid and Cannot be enforced Produce no legal
enforceable until enforceable until by a proper action effect
they are rescinded they are annulled in court
by a competent by a competent
court court
May prescribe (4 May prescribe (4 May prescribe Doest not prescribe
years) years)
Cannot be ratified Can be ratified Can be ratified Cannot be ratified
Q: X has entered into a contract of donation (common property)
with his spouse Y. Is the contract valid?

A:

No, the contract is not valid.

Under the (law, civil code, laws of obligations and contracts) husband and
wife are prohibited from donating their conjugal properties to each other.

Here, since X is the husband of Y, he is prohibited from donating to the latter

their conjugal property. Hence, the contract is not valid.