CONTRACTS Prepared by: Raymond Andes Sources: The New Civil Code of the Philippines; Philippines; commentaries by Paras, Suare, and Tolentino; reviewer published by Soriano; reviewers prepared by !P "aw #ar$%ps Commission and &arichi Santos of !P "aw #'()'; and some personal inferences* Definition according to the Civil Code of the Philippines: Philippines: 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. We can infer from the very definition of Contract that obligations would always naturally naturally exist upon the perfection of a contract. In short, when there is a contract, there will always be an obligation but when there is obligation, there isnt always a contract. contract. Elements of a Contract !. "ssential "lements # without these these elements, there is no contract. contract. $ defect in any of these elements causes a defect in the contract. a. Consent of the parties # parties # most important of all elements. %his is the meeting of minds between parties on the ob&ect and cause of the contract b. Object # the sub&ect matter of the contract c. Cause # Cause # the essential and impelling reason reason why a party assumes an obligation. '. $ccident $ccidental al "lements "lements # those that that which exist exist only upon stipulat stipulations ions in the contrac contractt (such as terms of payment, place of payment, conditions, etc.) *. +atural "lements "lements # those that even even without without stipulations, stipulations, they exist exist (such as warranty warranty against hidden defects and warranty against eviction). owever, parties can stipulate waiver of such elements. Classifications of Contracts !. $ccord $ccording ing to perfe perfecti ction on or format formation ion a. Consensual # those perfected upon mere consent (such as sales) b. Real # Real # those perfected upon delivery of the ob&ect (such as depositum, pledge, and commodatum) c. Formal or Solemn # those that can only be valid through compliance with the formalities of law (such as donation of a real property) '. $cco $ccord rdin ing g to caus cause e a. -nerous -nerous # where where there is excha exchange nge of valuabl valuable e considera consideration tions s b. ratuit ratuitous ous # where one party party receives receives no e/uivale e/uivalent nt considera consideration tion c. 0emunera 0emuneratory tory # the the cause cause is the the service service remunera remunerated ted *. $ccording $ccording to depende dependence nce upon upon anothe anotherr contrac contractt a. Princ Principa ipall # one tha thatt stand stand by itse itself lf b. $ccessor $ccessory y # one whose existen existence ce depends depends another another contra contract ct 1nown as as the principal contract (such as mortgage and pledge) c. Prepara Preparatory tory # one which which serves serves as a means means in which which other contr contracts acts may may be entered (such as agency and partnership) 2. $ccord $ccording ing to to parti parties es obli obliga gated ted a. 3nilater 3nilateral al # those where where only only one of the parties parties are are re/uired re/uired to accomp accomplish lish the determinative conduct b. 4ilatera 4ilaterall or synalagma synalagmatic tic # those where where both parties parties are re/uire re/uired d to accomplish their own determinative determinative conducts 5. $ccord $ccording ing to to time time or fulf fulfill illmen mentt a. "xecuted "xecuted # one which which has has already already been performe performed d b. "xecutor "xecutory y # one that has not not yet yet been performe performed d
6. $ccording to the number of persons physically entering into the contract a. -rdinary # where the two parties are represented by two different persons b. $uto7contract # where the two parties are represented by only one person (such as in agency where the agent lends money to his principal who he represents as the borrower) Stages of a Contract !. Preparation or Conception # involves preliminary negotiations, discussion of terms and conditions wherein agreement has not yet occurred. '. Perfection or 4irth # the point at which there is finally a meeting of minds between parties as to the ob&ect and the valid cause. *. Consummation or Death or %ermination # the point at which the terms of the contract have been fulfilled resulting in its accomplishment Basic Principles of a Contract !. 8iberty of contract or freedom to stipulate # the parties have the liberty to contract and stipulate. %his is one of the liberties guaranteed by the laws of the land to the people. owever, this is sub&ect to limitations as follows: law, public policy, good customs, public order and morals. '. 9utuality of contracts # the parties are both bound to one another. %he validity or compliance of the contract cannot be left to the will of one of them. *. 0elativity of contracts # contracts ta1e effect only within the contracting parties, their assigns and heirs, except where the rights and obligations are not transmissible. 2. Consensuality of contracts # contracts are usually perfected by mere consent of the parties e+cept if the contracts are real and formalsolemn. 5. -bligatory force of contract and compliance in good faith # all contracts have the force of la between the contracting parties and should be complied with in good faith.
ESSENT!A" RE#$!S!TES OF CONTRACTS %e£ed' CONSENT Consent is manifested by the meeting of the offer and the acceptance upon the ob&ect and the cause which are to constitute the contract. In plain language, it is the meeting of minds of both parties. Consent has two parts: Offer and Acceptance. 3pon communication of acceptance of one of the parties towards the other, the contract is usually perfected. What happens if… the offer is vague; Will there still be a contract;
Anser %here wouldnt be meeting of minds, therefore contract will not exist.
a seller advertised his products to the public; Is there already an offer;
$t this point, offer does not exist yet. $dvertisements are mere invitations to ma1e an offer. owever, if all details needed are conveyed to the public, advertisement becomes an offer.
one of the parties dies, is civilly
%he offer becomes ineffective. %hus,
interdicted, insane or incapacitated before acceptance is conveyed; What happens to the offer; an offerer gives the offeree a certain period of time to accept, can the offerer withdraw the offer; after the offerer has given the offeree a certain period of time to accept, the latter gives the former an option money, can the offerer withdraw the offer;
there is no contract.
Major Rule on onsent %here is no consent until there has been agreement between two parties. Contract is perfected upon the point at which acceptance is communicated to the offerer. "xample 9ay *!, !=:25 pm >ent texts >aren: ?oy 4a1la, bilhin mo naman ma1e7up 1o from $von, maganda na mura pa. !5,=== pesos lang. 4u1as, dalhin 1o na.@ 9ay *!, !=:26 pm >aren receives >ents text message. Ahe replies: ?Aige, goB Pero, pwede !=,=== pesos na lang;@ 9ay *!, !=:2 pm >ent receives text message. e ta1es his calculator and tried to compute his profit. e sha1es his head then sends bac1 a message: ?ay na1u gurl, mahal yan. Di basta7basta yan. aganda 1a lalo@ 9ay *!, !!:* pm Due to problems in signal, >aren receives text message at this late. Ahe ma1es a reply: ?Pano ba a1o na1a1asigurong totoo yang sinasabi mo eh lala1e 1a;@ 9ay *!, !!:5= pm >ent thought for awhile. e remembers something, then ma1es a reply: ?$lala mo ba 1ahapon 1ung ano itsura 1o;@ 9ay *!, !!:5! pm
>aren: ?$bsent 1a 1ahapon so pano 1o malalaman;@ 9ay *!, !!:5* pm >ent: ?$1ala mo lang yunB Present a1o no a1o yung na1a7blue with stripes of white 1ahapon@ 9ay *!, !!:55 pm >aren: ?uh; Di mo naman 1amu1ha si Piolo Pascual at di mo rin 1amu1ha si Diether -campoB@ 9ay *!, !!:56 pm >ent: ?%hats the pointB 8inagay 1o ma1e7up from avon 1aya on my left side, 1amu1a 1o si Diether at pagtingin mo sa 1abila, 1amu1a 1o na rin si PioloB@ 9ay *!, !!:5 pm >aren: ?9ay magic ang ma1e7up mo;;;BBB@ 9ay *!, !!:5 pm >ent: ?$no pa ba sa tingin mo;@ 9ay *!, !!:5E pm >aren: ?Aige, goB 4ilhin 1o na. Willing a1oB@ Fune !, !':=! am >ent receives >arens last text message and replies: ?-1ay.@ Fune !, !':=* am >aren receives >ents last text message and finally rests her head on the bed and starts sleeping. Question: !t what ti"e was there a "eeting of "inds? !t what ti"e was there perfection of the contract? $nswer Fune !, !':=! am. 9eeting of minds occurs at the moment the offeror receives the offerees acceptance. Capacit( Parties entering into a contract must have the legal capacity to do so. 0eason: %o protect incapacitated persons from damages that may be caused by the other party. Contracts entered into by incapacitated persons are G-ID$48" if only one of the contracting persons is incapacitated and 3+"+H-0C"$48" if both parties are incapacitated.
Who are the incapacitated persons? !. 9inors # those aged below ! (0$ 6=5). "xceptions: (!) if the contract is entered into for the purpose of ac/uiring necessaries or (') when the minor misrepresents his age (the reason for this is to protect the other party from harm that may be caused by such misrepresentation. owever, if the other party 1nows such misrepresentation, contract remains voidable). '. Insane or demented persons, unless they contract during lucid interval. *. Deaf7mutes who do not 1now how to read and write, unless guided by another person. )ices of Consent
*+ ,ista-e # inadvertent and inexcusable disregard of a circumstance material to the contract (F48 0eyes). In order that mista1e may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions hich ha.e principall( mo.ed one or both parties to enter into the contract. /+ !ntimidation # happens when one of the contracting parties is compelled by a reasonable and well7grounded 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 ($rt. !**5). 0+ )iolence # irresistible force used to extort consent (F48 0eyes) 1+ $ndue !nfluence # happens when a person ta1es improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice ($rt. !**). 2+ Fraud # happens 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 ($rt. !**). Quer#: $s there %raud in the following circu"stances? !. -fferor failed to disclose certain important facts to the offeree and the former has the duty to reveal them. '. 3sual exaggerations in trade made by the seller and the other party had an opportunity to 1now the facts. *. Aeller expresses an opinion and the buyer believes such opinion. 2. "xpert expresses an opinion. $) the expert was hired by the seller 4) the expert was hired by the buyer. Simulation of Contracts3 Declaration of a non7existent will producing the appearance of a transaction that does not exist, or which is different from the one that actually arose. (0eyes) 4inds of Simulated Contracts !. Absolutely Aimulated Contract # contract which provides for a transaction that does not exist. %his contract is .oid.
'. Relati.ely Aimulated Contract # contract which provides for a transaction that differs from the one that actually arose. %rue agreement is concealed for some reasons. %he validity and effects of this contract will be governed by the rules applicable to the ?intended@ contract, and not by those applicable to the ?appearing@ contract. owever, if a * rd person is benefited by the ?appearing@ contract, it will be binding. %his is, however, dependent on wJn the * rd person is in good faith. Absolute +o real transaction intended Hictitious contract Goid
Relati.e 0eal transaction is hidden Disguised contract 4ound as to hidden agreement, so long as it does not pre&udice a * rd person and is not contrary to law, morals, public policy, customs or public order
OB5ECT -b&ect is the thing, right or service which is the subject matter of the obligation arising from the contract.
Re&uisites: !. 8awful: +ot contrary to law, morals, good customs, public order or public policy. '. $ctual or possible *. %ransmissible: within the commerce of man. %hings that are outside the commerce of man are those things that are not susceptible of appropriation or of private ownership, and which are not transmissible. -+amples: property that pertain to public dominion such as roads and plaKas common things li1e the air and the sea. 2. $t least determinate as to its 1ind. If the ob&ect is merely ?something@ or ?an animal,@ the species is not determined, the contract would be void. In order that a thing, right or service may be the ob&ect of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subse/uently or in the future. $ future thing may be the ob&ect of a contract, such contract may be interpreted as a: •
•
Conditional Contract: where its efficacy should depend upon the future existence of the thing. $leatory Contract: where one of the parties assumes the ris1 that the thing will never come into existence, e.g. insurance.
Q: an future inheritance 'e the o'ject of a contract? .t depends* .f the ob/ect is a specific property you are e+pectin0 to inherit from an ascendant, the sale is void* #ut if the ob/ect is merely the future hereditary ri0hts without specification of the properties, the sale is valid because this is permitted by law 1Art* )23(4*
CA$SE Cause is the impelling reason for which a party assumes an obligation
0e/uisites: (!) "xisting (') 8icitJ8awful (*) %rueL. Quer#: What is the cause and what is the o'ject in a sale of land? Answer: .t depends on which perspective* Party
Cause
.endOR
Cash (wants to profit)
8and
.endEE
8and (wants to ac/uire land)
8and
Object
$ccording to %olentino, the ob&ect in onerous contracts is the thing, service or act which forms the basis of the entire contract, the starting point of the agreement, without which the negotiations or bargaining between the parties would never even have begun. Cause and Object in Other T(pes of Contract Remunerator( 7efinition
Cause
Object
It is a contract where a party gives something to another because of some service or benefit given or rendered by the latter to the former, where such service or benefit was not due as a legal obligation. (%olentino)L %he service or benefit which is remunerated %hing given in exchange for the service or benefit
6ratuitous $greements to give something or to lend something.
9ere liberality of the benefactor or giver %hing given (for donation) or thing lent (commodatum)
What is Motie? .t is the psycholo0ical, individual and personal reason which induces a party to enter into a contract* *a"ple: Ferelyn bought a piece of land from Daila because she wants that piece of land used for constructing a vacation house (the land is located in Caramoan). %he cause is the piece of land she wants to own while the motive is Ferelyns desire to have a place for relaxation. Circumstance
7efined
"ac- of Cause !llegalit( of Cause
$bsence or total lac1 of cause
Falsit( of Cause
"esion or !nade8uac(
Contrary to law, morals, good customs, public policy and public order Cause is stated but is untrue
Cause is not proportionate to ob&ect.
Effect Contract is null and void +ull and void
Goid if it should +-% be proved that it was founded upon another cause which was true and lawful. •
Ahall not invalidate the contract except when there is fraud,
mista1e, or undue influence 9ay rescind the contract under some instances(see rescissible contracts)
of Cause
FOR,S OF CONTRACTS 6ENERA" R$"E3 Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential re/uisites for their validity are present. E9CEPT!ONS !. When the law re/uires that a contract be in some form to be valid. Auch contract is a formal contract. a. 9ust be in public instrument to be valid: i.donation of real propert( ii.Contribution of immo.able propert( by a partner in a partnership b. 9ust be in writing: i.7onation of personal propert( exceeding P2:;;; ii.Authorit( of an agent in sale of land '. When the law re/uires that contract be in some form to be enforceable. (Atatute of Hrauds) Hailure to abide by this provision does not render the contract void, it merely renders the contract unenforceable. a. 9ust be in writing to be enforceable: ii.$greement that by its terms is not to be performed within a year from the ma1ing thereof iii.Apecial promise to answer for the debt, default, or miscarriage of another iv.$greement made in consideration of marriage, other than mutual promise to marry v.Aale of goods, chattels, or things in action, at a price not less than P5==. vi.8easing for a period more than one year. vii.Sale of real propert( or of an interest therein viii.0epresentation to the credit of a * rd person
7EFECT!)E CONTRACTS %he following are defective contracts: !. Rescissible Contracts # valid until rescinded. %hey are valid because there is no defect in any of the essential re/uisites 43% the law allows a party to rescind (or cancel) the contract because of the damage received by such party. %his is based on the "M3I%$48" 0"$A-+A. '. )oidable Contracts # valid until annulled. %hey are valid because the party in&ured can ratify the contract but the law gives such party the right to annul the same. %hese contracts are voidable because of a defect in the consent. *. $nenforceable Contracts # valid but cannot be enforced unless ratified. 2. )oid Contracts # void from the beginning.
RESC!SS!B"E CONTRACTS 0escissible contracts are entirely valid as to essential elements (consent, ob&ect and cause). owever, harm or damage is caused or being caused against a party (be it one of the contracting parties or any 0rd part(). Hor e/uitable reasons, the law gives the in&ured party the right to rescind (cancel) the contract. In effect, the validity of this contract is set aside for &ustifiable reasons of e/uity. 4inds of Rescissible Contracts !. "ntered into by guardians whenever the wards suffer lesion by more than N of value of things O uardian: authoriKed only to ?manage@ wards property, no power to dispose without prior approval of court. -nly includes those which are ?ordinary course@ of management of estate of the ward, because if sale, mortgage and other encumbrance $+D not approved by court, it becomes unenforceable. '. $greed upon in representation of a'sentee, suffer lesion by more than N of the value of things O $bsentee is a person who was lost for an indefinite period of time due to some frea1 accident, natural calamities, wars, or any other reason that have caused him to be absent for a period of time. O %his type of contract is usually entered into by a person other than the absentee who has the right of representation but entered into such contract that caused damage of more than N of the value of the things. -+ample: 5erelyn was abducted by aliens* She was absent for several years* 6er wife 1assume that 0ay marria0e is already le0al4 later 0ained the ri0ht of representation and then sold 5erelyn7s beach resort for 89 below its appraised value* The sale of beach resort can be rescinded by 5erelyn* *. In fraud of creditors who cannot collect claims due them ($ccion Pauliana) O Reuisites of Accion Pauliana !. Plaintiff as1ing for rescission (subsidiary action) has a credit prior to the alienation '. Debtor has made subse/uent contract, giving advantage to a *rd person *. Creditor has no other remedy but to rescind the debtors contract to the * rd person (last resort) 2. $ct being impugned is fraudulent 5. *rd person who received the property is an accomplice in the fraud
Contracts entered b( 6$AR7!ANS
Contracts in representation of ABSENTEES
In general, by the in&ured party. 4ut can be done also by guardian ad tem (new guardian) of ward during incapacity of ward in an action against the original guardian.
4y absentee
Contracts entered into to 7EFRA$7 e&isting creditors 4y creditor(s)
WJin 2 years from (re)gaining capacity
>o to cure defect=
0atification by in&ured party wJin 2 years from gaining capacity
WJin 2 years from -noledge of domicileL of absentee 0atification by absentee wJin 2 years from 1nowledge of domicileL of absentee or 1nowledge of fraudulent contract
WJin 2 years from -noledge of fraudulent contract 0atification by defrauded creditor wJin 2 years from 1nowledge of fraudulent contract
)O!7AB"E CONTRACTS Goidable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of one of the parties but before the annulment, they are effective and obligatory between the parties. ence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose (8lacer v 9unoK, !' Phil. *'). 4inds of )oidable?Annullable Contracts ($lthough no damage to contracting parties): !. Want of capacity '. Gitiated consent (Giolence, Intimidation, Hraud, 9ista1e or 3ndue Characteristics of )oidable?Annullable Contracts3 !. %heir defect consists in the vitiation of consent of one of the contracting parties '. %hey are bindin0 until they are annulled by a competent court *. %hey are susceptible of convalidation by ratification or by prescription N$""!T@ %)oidable'
RESC!SS!ON %Rescissible'
Declares inefficiency which contract already carries in itself (intrinsic defect)
9erely produces inefficiency, which did not exist essentially in the contract (external defect i.e. pecuniary damages or pre&udice to one of the contracting parties or *rd persons)
0e/uires act of ratification to be cured
+eeds no ratification to be effective
4ased on a vice of the contract which invalidates it
Compatible with the perfect validity of the contract
$nnulment is a sanction based on law
0escission is a remedy based on e/uity
Demanded only by the parties to the contract
Demanded even by third parties affected by it
Prescription of Action for Annulment after prescription, contract can no longer be annulled $rt !*E! 7 Within 2 years
Period shall begin: !. Intimidation, violence or undue influence: from the time consensual defect ceases '. 9ista1e or fraud: from the time of discovery of the same *. Incapacity: from the time 0uardianship ceases L $pplies to the parties of to the contract, but +-% to third persons Effects of Annulment3 !. ,utual restitution of the things delivered, along with fruits and price paid with interest. '. Damages to be paid by the party who caused defect of the contract.
$NENFORCEAB"E CONTRACTS 3nenforceable contract is one which cannot be enforced unless it is first ratified in the manner provided by law. It is distinguished from the rescissible and the annullable contracts in that the latter two contracts produce legal effects unless they are set aside by a competent court, while the unenforceable contract does not produce any effect unless it is ratified. 4inds of $nenforceable Contracts !. "ntered into in the name of another person by one who has no authorit( or no legal representation -0 acted be(ond his poers '. Do not comply with Statute of Frauds, which are agreements unenforceable unless in written memorandum and subscribed by the party charged: i.$greement that by its terms is not to be performed within a year from the ma1ing thereof ii.Apecial promise to answer for the debt, default, or miscarriage of another iii.$greement made in consideration of marriage, other than mutual promise to marry iv.Aale of goods, chattels, or things in action, at a price not less than P5==. v.8easing for a period more than one year. vi.Sale of real propert( or of an interest therein vii.0epresentation to the credit of a * rd person •
If the contract has been executed, even partly, the contracts status as unenforceable ceases as execution is considered by law as a form of ratification.
*. Both parties are incapable of giving consent to contract • • •
0atification can be done by either parties or their guardians. 0atification by one party (or its guardian) ma1es the contract voidable. 0atification made by both parties (or their guardians) ma1es the contract perfectly valid.
)O!7 CONTRACTS $ void contract is one which has no force and effect from the very beginning, as if it had never been entered into, and which cannot be validated either by time or by ratification. %he maxim is ?no contract at all.@
Characteristics of )oid?!ne&istent Contracts !. Goid from the be0innin0 '. Produces no effect whatsoever nullity exist ipso &ure, &udgment of nullity is merely declaratory *. Cannot be confirmed or validated (by prescription -0 ratification), neither can the right to set up the defense of illegality be waived $rt !2=E Action to 7eclare Nullit( # necessary because nobody can ta1e the law into his own hands 7!ST!NCT!ONS )O!7
RESC!SS!B"E
Defect is inherent in the contract itself
Defect is in their effects, either to one of the parties or to a *rd party
9atter of law and public interest
4ased on e/uity and more a matter of private interest
+o legal effects even if no action is ta1en to set it aside
+o action, remains valid and produces all its effects
$ction to declare nullity of void contracts never prescribes )O!7
$ction to rescind prescribes in 2 years
)O!7AB"E
-ne of those essential re/uisites is wanting, either in fact or in law or is declared void by statute +ot susceptible of ratification
$ction to declare nullity of void contracts never prescribes )O!7
"ssential re/uisites for validity is present, 43% consent is vitiated 9ay be rendered perfectly valid by ratification 9ay be rendered perfectly valid by ratification $NENFORCEAB"E
4oth are ineffective at its birth Can never be ratified and become enforceable %here is no contract at all
Can be ratified and thereafter enforced %here is a contract which, however, cannot be enforced unless properly ratified
*a"ples of +oid ontracts •
-ne whose cause, ob&ect or purpose is against law, morals, public policy, public order or good customs.
• • •
-ne whose cause is totally absent. -ne whose ob&ect is impossible or cannot be done. $bsolutely7simulated contracts
