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CONTRACTS

Arts. 1305-1422*1
A Summary
E.P.A.Peredo

A contract is a meeting of minds between two parties whereby one binds himself with respect to
the other to give something or render some service. The term “binds” here implies that the
contract has an obligatory force, or the force of law, between the parties. Contracts are likewise
characterized by autonomy, mutuality, and relativity. Autonomy refers to the freedom of the wills
of the parties, who can stipulate anything as long as it is not illegal, immoral, or contrary to
public policy or public order. Because it is mutual, a contract is not left to the control of only one
of the parties. Finally, it is relative, or it relates, only the parties to the contract and not anyone
else outside of it.

The only possible exception to this principle of relativity is a stipulation called “pour autrui” or a
stipulation in favor of third parties. But the parties must have clearly and deliberately conferred a
favor upon a third person, which favor should only be a part, and not the whole of the contract.
The favorable stipulation should not be conditioned or compensated by any kind of obligation
from the third party. In other words, the third party must be totally separate if not unaware of the
provision in his favor. Neither of the contracting parties bears the legal representation or
authorization of the third party, and the only connection should be the acceptance of the third
party of the grant, before it is revoked by the original parties

Contracts may be classified according to the name or designation, perfection or formation,


cause, their relation to other contracts, or the parties obliged, as follows:

As to perfection or formation
Consensual Contracts. These are perfected by mere agreement of the parties. These are
simple agreements that do not require special forms or rituals such as the drafting of written
contracts or those that do not fall under rules of proof under the Civil Code (the prime example
would be those that are unenforceable absent writing). A simple sale at a roadside sari-sari
store can fall under this kind.

Real Contracts. These depend on the transfer of the “res”, or the “thing”, being actually given or
delivered. One example would be a contract of deposit, where any written form or agreement
would be useless if you do not give the money or the thing that will be deposited. Another would
be the loan of a thing, or commodatum, which will have no effect if the borrower does not
receive the thing to be borrowed.

Formal/solemn Contracts. These contracts do not have any effect even if the object or
performance has been actually accomplished. This means that, absent certain formalities or
rituals, the parties will be entitled to cause the return or undoing of the performance or object.
An example would a contract of donation of real property, or anything above P5000. These

1Exclude 1359-1379. For 1380-1422, study just the code itself, for purposes of the Final Exam; this summary shall serve as your
commentary on that portion.
need to be in writing, and in the case of real property, the writing must be converted into a public
document (notarized).

As to cause
Onerous Contracts. Onerous contracts are burdensome contracts. This means that the object or
performance has a valuable consideration, exchange, or payment. It is therefore not strictly
unilateral.

Gratuitous Contracts. These are founded on the liberality of one of the parties, more specifically
the giver, who expects nothing in return. These are understandably unilateral. The only
response needed from the receiver would be his acceptance, as gratuitous contracts may be
deemed as donations.

Remunerative Contracts. Here, the prestation is given for service previously rendered, though
not as obligation. The obligation is the remuneration for the past service.

As to relation with other contracts


Principal Contracts. The contract may stand alone, or govern other, minor agreements. One
example would be a constructions contruct that sets standards to be followed by a subcontract,
say, for the supply of materials. The purchase of materials, to some extent, is dependent on the
major contract.

Accessory Contract. It depends on another contract for its existence, and thus may not exist on
its own. The rent of a venue, for example, would be rendered useless if the main contract to
have an artist perform at that venue does not push through. Of course, these do not prevent the
operation of penalties, if there are any, especially if there has been a reservation in favor of the
event.

Preparatory Contract. This is not an end by itself, but a means through which future contracts
may be made.

As to parties obliged
Unilateral Contract. Only one of the parties has an obligation.

Bilateral/Multilateral Contract. Both or all the parties named in or signatory to the contract are
required to render reciprocal prestations.

As to name or designation
Nominate Contracts. These are contracts with known or established names, either in the laws
that describe them, or in practice.

Innominate Contracts. These are not named. Their identity depends on the prestations involved,
to wit:
a) Do ut des – I give that you may give
b) Do ut facias – I give that you may do
c) Facio ut des – I do that you may give
d) Facio ut facias – I do that you may do
A contract is usually seen or experienced by the ordinary person as a finished product. But the
formation of a contract or the coming to an agreement by the parties can be a very tedious
process, so much so that commentators have identified three key stages in the birth of the
contract: the preparation, the perfection, and consummation.

The preparation, of course, refers to the talks between the parties prior to the contract, which
may involve the exchange of offers and counter-offers. There is no limit as to how many
counter-offers may be presented. Each small change of position by one party as regards the
object of the contract is a counter-offer that must be accepted or countered by the other party.
The exchange will only stop when one of the parties agrees to the last counter-offer. To the
ordinary person, this is better known as negotiations or, in the colloquial sense, haggling.

When one of the parties accepts the offer or last counter-offer, a contract may already be born
depending on what kind of contract is involved. If consensual, the last and final “okay” by one of
the parties seals the deal, and from that point, any of the parties may sue for breach. But if there
is another act required, such as the execution of a certain document or form, or the delivery of
the object, that agreement is only the initial part of the contract; the form has to be written, or the
thing given.

In some cases, the execution of the contract is itself the consummation. Consummation means
the performance of the object of the agreement. But in most cases, consummation follows after
the agreement or the execution of the contract.

It is not correct to say that formalities are needed to give birth to a contract. In its most basic, a
contract is born when its three essential elements come together. These are the consent of the
parties, the object of the agreement, and the consideration for the object.

Consent means here the meeting of minds between the parties on the subject matter and cause
of the contract. In terms of the negotiation process, this is the point of concurrence of the offer
or last counter-offer and the acceptance. Consent of course has to involve at least two parties
who are capacitated and are not disqualified. In this regard, care must be given to distinguish
between an incapacitated party and a disqualified party. A person should at least be of majority
age in order to be considered legally capacitated, or for his decisions and acts to be considered
with full legal effect. But a legally capacitated person might be specially disqualified, such as
when he is prevented by a court of appropriate jurisdiction to administer his property.
Sometimes, legal capacity is not enough. There must be other special capacities particularly
required by law with regard to certain contracts, e.g., marriage, which, in the Philippines, still
requires a difference in sex, and the absence of a prior valid marriage, in addition to being of
legal age.

Examples of persons who cannot give a valid consent, aside from minors, are insane or
demented persons, illiterates or deaf-mutes who do not know how to write, intoxicated or
drugged or hypnotized persons, persons acting under honest mistake, and those who are
induced by the fraudulent acts of the other party.
But the contracts entered into by these persons may not be automatically void. Note that all the
persons here have the option to ratify the contract they entered into when the time or
circumstance is proper (a minor may ratify when he reaches the age of majority, the drunk can
validate his acts after regaining sobriety, the illiterate can have a reader/interpreter explain what
he signed, and so on)

Those who are really disqualified, according to law, are those under civil interdiction,
hospitalized lepers, prodigals, prodigals, and the deaf-mute who do not know how to both read
and write. Add to that those who, by reason of age, disease, weak mind and other similar
causes, cannot without outside aid, take care of themselves and manage their property,
becoming an easy prey for deceit and exploitation. If persons under this group sign a contract,
that contract is automatically void.

If the party himself is not under any incapacity or disqualification as above discussed, it does not
mean that his consent to a contract is already perfect. The person giving that consent must do
so freely, meaning any outside force having an effect on that consent may potentially set the
contract aside for having a defective essential element. These forces may be in the form of
violence, intimidation, or undue influence. Violence here refers to an irresistible physical force,
such as, in the movies, arm-twisting another into signing a contract. Contrast that with someone
who signs under the threat of a knife or a gun; the latter is more properly intimidation rather than
violence, intimidation involving a real threat of an unjust and unlawful act on the person,
property, or immediate family of the person signing the contract. Meanwhile, undue influence is
something less than intimidation, but not any less vitiating, because here the signing part is
forced by the moral ascendancy of another person. In a culture where “utang na loob” prevails,
for example, a contracting party may be signing a patently unfair agreement just because the
negotiator of the other contracting party was once instrumental in securing the signing party’s
job.

Meanwhile, the object of the contract is the prestation or the obligation involved. It is what
should be done under the terms and conditions of the agreement. It is the act that is agreed
upon to be executed should the parties come to an agreement. Whatever the object is, it should
be within the commerce of man, that is, it can be done, traded, sold, or purchased anytime by
anyone. This goes without saying that the object must be possible, legal, known or
knowable/determinate or determinable, and transmissible.

Finally, after the consent and the object, the parties have to have a reason for coming together
for a contract. This is the cause or consideration for the contract. Again, and like the object, the
cause has to be real or at least possible, and legal. The cause is separate and distinct from
motive, which is the purely private reason of the parties into entering the contract.

A contract without any of the foregoing essential elements is void and has no effect.

As already mentioned, formalities are not really necessary for a contract to be born. Contracts
are generally consensual, and form is merely the manner in which a contract is executed or
manifested. But form is needed in some kind of contracts, for purposes of validity, enforceability,
or convenience.
The foregoing notwithstanding, it should be remembered that generally, a contract is valid and
binding in whatever form it is executed as long as the three essential elements are there. The
three mentioned circumstances are exceptional. Law, for example, requires that donations as
well as the acceptance of real property must be in a public document and not just an ordinary
writing.

Enforceability is also an issue in some contracts. Enforceability refers to the consummation


stage of a contract – how do you bind or force the other party to comply with his obligation if it
was not in writing in the first place? It is in this regard that we have said elsewhere that the form
is actually a matter of proof. However, even without the written agreement, the other party can
actually ratify the claim and perform the contract even if there is no executed form.

At times, a contract may be valid and enforceable as between the parties, but how do we make
third parties respect the contract if there is no written agreement? It is in these instances that
form may be needed for convenience, that is, considering the social comprehension of
contracts, it may be easier to implement in the face of third parties if the latter are able to see
the terms and conditions of the agreement in black and white. An example is the transmission of
power to administer properties of another. Third parties in possession of the properties may hold
suspicions and refuse the administrator if the latter does not present the agreement with the
owner of the property. Interestingly, too, the law requires that every contract with a
consideration of at least P500 must be in writing, but again, this is more for the benefit of third
parties rather than the contracting persons themselves.

If for any reason other than those that have already been stated above, the real intention of the
parties is clouded in doubt because of mistake, fraud, inequitable conduct, or accident, the
contract will not be set aside. Rather, it will be subject to reformation. Reformation is a remedy
afforded to the parties by law so that the contract may not be rendered useless. To reiterate, the
bias of the law is always towards the accomplishment of the object of the contract.

However, the right to reformation prescribes in 10 years from the date of the execution of the
instrument. After that, whatever is written is deemed to be the true intention of the parties, who
may no longer introduce changes to the same. Reformation is not also available when dealing
with a simple donation or a last will and testament, or when there has been a ratification of
sorts, as when the party asking for reformation had actually asked the courts to enforce it
before. It goes without saying that an invalid instrument for having an illegal object etc. may not
be reformed to render it valid. In this case, what theoretically happens when the parties correct
the illegal aspect is that a real contract arises; the old one never did.

In relation to defects, contracts may be rescissible, unenforceable, voidable, or void.

Rescissible contracts are those which have caused a particular economic damage either to one
of the parties or to a 3rd person and which may be set aside, even if valid, in whole or in part, to
the extent of the damage caused. The particular instances of rescissibility are found in Articles
1381 and 1382.

When the contract is rescinded, the parties are obliged to mutually restore to the other whatever
they received by virtue of the contract. This refers to the things which are the objects of the
contract as well as fruits that may have arisen in the meantime. If the object is monetary, then
restitution refers to the price, with interest that may have accrued in the meantime. The only
time that restitution will not take place is if the thing is already in the hands of a third person,
who acquired the same in good faith, that is, without knowing that the thing was the object of a
rescissible contract. Offhand, that is quite impossible to prove if the third party was not in direct
connivance with the party who took economic advantage through the contract, because
rescission is had only after presentation of proof.

Voidable contracts, meanwhile, have an intrinsic defect, but not serious enough to prevent the
validity of their execution. Thus, voidable contracts are valid until the parties or interested
persons have them annulled. Understandably, only the party whose consent was defective, or
his heirs or assigns, may sue for annulment. On the other hand, voidable contracts may instead
be confirmed by the said party.

Voidability arises where one of the parties is incapable of giving consent to the contract (e.g.,
minor, insane, drunk, etc.), or where one of the parties entered the contract with mistake,
violence, intimidation, undue influence, or fraud.

But even if there is a defect, the mere fact that voidable contracts may be ratified means that the
right to nullify them is also limited. Otherwise stated, if not ratified expressly by the aggrieved
party, the contract may be ratified through lapse of time. It is as if the law says the aggrieved
party ratifies the defective contract by not doing anything about it. If he does want to do
something about it, he should do so within four years from the time the defect in his consent
ceases, in the case of intimidation, violence, or undue influence, from the time of discovery, in
the case of mistake or fraud, or from the end of the guardianship, in cases of contracts entered
into by minors or incapacitated persons.

Unenforceable contracts are different from voidable contracts in that they have no cause to be
invalidated. In other words, they are valid and binding agreements. The only question is whether
it can be enforced or not, that is, whether the person demanding that the contract be performed
has the legal clout to have it actually accomplished without the ratification of the other party.

The varieties cover three general situations. The first is when one of the signatories agreed to
the contract without any or sufficient authority from the real party in interest. This usually
happens in the case of agents or persons with special authorities but who acted against or in
excess of those authorities. For example, a representative with a special power of attorney or
SPA may be authorized to purchase materials worth P10,000, but if he buys what is worth
P15,000, the seller may have a hard time enforcing the collection upon the actual purchaser. A
second variety is when both or all parties to the agreement are incapable of giving consent,
such as two drunkards. Neither can enforce on the other. And the third situation is when the
contract is covered under the so-called Statute of Frauds, which requires the contracts for
situations thereunder to be in writing.

The situations under the Statute of Frauds are as follows:


a. When the performance covered by an agreement is deferred to at least a year after
making contract;
b. When making a special promise to answer for debt, default, or miscarriage of
another;
c. When made in consideration of a promise to marry;
d. When the contract is one of sale of goods, chattels or things in action at prices of at
least P500;
e. When the agreement is for the lease of property for more than one year, or the sale
of real property regardless of price;
f. When making representations as to the credit of another.

Unenforceable contracts may still be accomplished if the parties ratify the same. Otherwise, the
failure of the party being enforced upon to object in time to the presentation of parol (verbal)
evidence in court may also lead to the ratification of the contract. As a general rule, a written
contract would be the best evidence of the terms and conditions between the parties, but if
nothing was written, the party enforcing may ask for permission from the court to instead narrate
through his own account or that of witnesses what the intention really is. This is parole
evidence, which, because it may be prone to changes or failure of human memory, can be
objected to by the party who is being enforced upon. If he does not object, then that may be
considered silent ratification to whatever verbal evidence is introduced.

Of course, if all the parties just go with the flow and accept benefits under the contract, that is
also a silent or implied ratification. If there is performance in either part and there is acceptance
of performance, estoppel operates, and the defect is waived.

Of all the kinds of defective contracts, it is the void contract that can be totally set aside, as it
does not have any legal effect from the beginning, even if the parties are in consensus and are
capacitated. Because it produces no effect whatsoever either against or in favor of anyone, an
action for annulment is not necessary as in the case of voidable contracts. But generally, a
judicial declaration that the contract is void is still needed.

A void contract cannot be confirmed, ratified or cured, unlike unenforceable contracts. If the
parties perform, restoration is in order, except if pari delicto will apply. Pari delicto means both
parties are at fault, as when both knew that what they were agreeing upon is illegal. In the sale
of illegal drugs, for example, the buyer-user cannot later on ask for the reimbursement or
restoration of his payment for the reason that the transaction was not legally valid from the very
beginning. But if one of the parties is innocent of the nullity of the contract, he or his heirs and
assigns can ask for restoration anytime, even after his death. The right to raise the fact of nullity
is not waived even with the lapse of time, or the silence of the aggrieved party for a long period.

Void contracts may fall under two general types: those lacking in essential elements, and all
others that are prohibited by law, morals, good customs, public order or public policy. In relation
to the first, again, the essential elements of a contract are the consent of the parties, an object,
and a cause. Sometimes, formalities are essential, as in the requirement of a public instrument
in the case of a donation of real property, but to reiterate, formalities are not needed for all
contracts.

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