Law on Contracts

Law on Obligations and Contracts

General Provisions

Definition of a Contract

A contract is defined as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service as detailed in Article 1305.

Requisites of a Contractual Obligation

  1. It must contain all the essential requisites of a contract as specified in Article 1318.

  2. It must not be contrary to law, morals, good customs, public order, and public policy (Article 1306).

Characteristics of Contracts

  1. Relativity of Contracts:

    • Contracts take effect only between the parties or their assigns and heirs, with exceptions where the rights and obligations are not transmissible by their nature, by stipulation, or by provision of law (Article 1311).

    • Exceptions to Relativity:

      • Rights and obligations that are non-transmissible by nature or stipulation or law.

      • Stipulation pour atrui (stipulation in favor of a third person).

      • Third persons acquiring possession of the contract's object, creating real rights.

      • Contracts entered into to defraud creditors.

      • When a third party induces a party to violate the contract.

  2. Obligatory Force of Contracts:

    • Contracts are obligatory regardless of the form they have taken, provided all requisite elements for validity are satisfied (Article 1356).

    • Exceptions to Obligatory Force:

      • Impossibility of performance in obligation to do (Article 1266).

      • Difficulty of performance (Article 1267).

  3. Mutuality of Contracts:

    • A contract must bind both contracting parties, and its validity cannot be left solely to the discretion of one party (Article 1308).

    • A contract containing a condition dependent solely on one party's uncontrolled decision is void (as seen in Garcia v Rita, G.R. No. L-20175, October 30, 1967).

    • It is permissible for a third person to determine contract performance.

  4. Contract of Adhesion:

    • This type of contract is where one party drafts the terms, leaving the other no room for negotiation, thus requiring mere acceptance or rejection (adhesion).

    • In cases of doubt leading to imbalance, the contract shall be interpreted against the drafter (as exemplified in Magis Young Achiever’s Learning Center v. Manalo, G.R. No. 178835, February 13, 2009).

  5. Freedom or Autonomy of Contracts:

    • Parties have the freedom to contract and stipulate, so long as these stipulations do not contradict the law, morals, good customs, public order, or public policy (Article 1306).

Elements of Contract

Types of Elements

  1. Natural Elements: Derived from the nature of the contract, generally accompanying it.

  2. Essential Elements: Elements without which there can be no existence of a contract. Their absence renders the contract void or non-existent:

    • Consent

    • Object (Subject-matter)

    • Cause (Consideration)

  3. Accidental Elements: Exist only if expressly provided for by the contracting parties.

Consent

  • Definition: Consent refers to the concurrence of the wills of the contracting parties concerning the object and cause, establishing the contract.

Requisites of Valid Consent

  1. It must be intelligent.

  2. It must be free.

  3. It must be spontaneous.

Offer and Acceptance

  • Offer:

    • Must be certain as per Article 1345.

    • Can be made orally or written unless a particular form is required by law.

  • Acceptance:

    • Must be absolute; qualified acceptance counts as a counter-offer (Article 1319).

    • Typically can be express or implied.

    • The offeror may fix the time, place, and manner of acceptance (Article 1321).

Rules on Advertisements as Offers

  1. Business advertisements generally represent an invitation to negotiate, not a definite offer unless specified (Article 1325).

  2. Advertisements for bidders are invitations for proposals and not obligations to accept any particular bid (Article 1326).

Grounds Rendering Offer Ineffective

  1. Death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

  2. Express or implied revocation of the offer by the offeree.

  3. A conditional acceptance which constitutes a counter-offer.

  4. The subject matter becoming illegal or impossible pre-acceptance communication.

  5. The period given for acceptance lapsing.

Period for Acceptance

  1. When a period is stipulated: must comply within the offered timeframe.

  2. If no stated period: for a present subject, acceptance must be immediate; for a future subject, responsive acceptance must meet reasonable expectations based on normal circumstances.

Persons Incapacitated to Give Consent

  1. Deaf-mutes unable to read and write.

  2. Insane or demented individuals unless during a lucid interval.

  3. Minors (Article 1327), except for:

    • Necessaries (Article 1489).

    • Contracts by guardians/legal representatives with court approval.

  4. Active misrepresentation by a minor (act of estoppel against them).

Effect of Mistake

  • General Rule: Mistakes generally pertain to facts, not law. Exception: mutual legal errors regarding the agreement's true nature frustrate its real purpose (Article 1334).

  • Requisites:

    1. Mutual mistake regarding the agreement’s legal effect.

    2. Impact on the principal aim of the parties.

Vices of Consent

  • Intimidation: Occurs when one party is compelled to consent due to reasonable fear of imminent and severe harm (Article 1335). Requisites include: urgency and unjust harm motivating the consent.

  • Violence: Stipulates that consent given through serious or irresistible force is invalid (Article 1336). Requisites demand clear physical coercion impacting decision.

  • Undue Influence: Presents when one party misuses their superior power over another, restricting free choice (Article 1337). Assess circumstances like relations, weakness, or distress in evaluating undue influence.

  • Fraud: Defined as deception that induces one party to contract; includes failure to reveal critical information when obligated (Articles 1338-1339). Requisites entail material deception impacting consent.

Kinds of Fraud

  1. Causal Fraud: Essential for entering the contract, thus voidable.

  2. Incidental Fraud: Does not impact validity but allows claims for damages.

  3. Acts like trade exaggerations or mere opinions do not typically constitute fraud unless significant reliance occurs (Articles 1340-1342).

Simulation of Contracts

Defined as a deceptive declaration by agreement, producing the appearance of a juridical act different from the executed agreement. Types include:

  1. Absolute: No binding intent, resulting in void contracts.

  2. Relative: Conceals true intentions, enforceable if no harm to third parties (Article 1345-1346).

Object of the Contract

  • Defined as the subject matter, encompassing things, rights, or services.

  • Requisites: Must be determinate or determinable, existent, lawful, commercial, and transmissible (Article 1347).

Essential Elements of Contract - Cause

  • Definition: The motivating reason behind assuming obligations in a contract.

  • Every contract entails a lawful cause; essential requisites include existence, truthfulness, and legality.

Types of Causes

  1. Onerous Contracts: reciprocal promises for goods/services.

  2. Remuneratory Contracts: return benefits/services.

  3. Gratuitous Contracts: based on donation.

  4. Accessory Contracts: tied to principal contracts (like a mortgage).

Cause vs. Motive

  • Cause: Direct reason for the contract; affects validity.

  • Motive: Could be personal reasoning; does not affect validity under the law.

Rules Regarding Cause

  1. Lack of cause fails to generate rights.

  2. Cause failure does not invalidate the contract.

  3. Illegal causes render contracts void.

  4. False causes are void unless proven true and lawful.

  5. Inadequate causes do not invalidate unless specific fraud or other conditions (e.g., substantial lesions by guardians).

Kinds of Contracts

  1. Consensual Contracts: Validated through mutual agreement alone (e.g., sale, lease).

  2. Real Contracts: Require actual delivery of the object for validity (e.g., real rights over property).

  3. Solemn Contracts: Must appear in writing for effectiveness, including specified donations, partnerships, and crucial rights (where conditions specified illegal limits are imposed).

Formalities Under the Law

  • Donations: Written documentation if over 5,000 pesos (Article 748).

  • Partnerships involving real property necessitate public instruments (Article 1773).

  • Written authorization required for agents involved with real property sales (Article 1874).

Contracts Requiring Written Validation

  1. Donations of personal property over 5,000 pesos (Article 748).

  2. Sales of land or significant interests conducted by agents must be in written form (Article 1874).

  3. Terms of interest in loans must be explicitly stated (Article 1956).

  4. Rules existing under the Statute of Frauds govern enforceability.

Reformation of Contracts

  • Defined as a remedy to align an agreement with the parties' actual intention due to flaws like mistake or fraud (Article 1359).

Requisites for Reformation

  1. Mutual intention must exist.

  2. True intention not reflected in the instrument.

  3. Error must be due to specified reasons (mistake, accident, fraud).

  4. Providing clear evidence of reasons for reformation.

Prescriptive Period for Reformation

  • Spans 10 years from the document's execution date.

Defective Contracts

Rescissible Contracts

  • Contractually valid yet subject to annulment due to economic injury or lesion, potentially applicable in total or partial extent (Article 1381).

Characteristics of Rescissible Contracts

  1. Includes elements of a valid contract.

  2. Contains defects causing injury (economic, fraud).

  3. Remains effective until rescinded.

  4. Challenged only directly.

  5. May be subject to prescription for validation.

Voidable Contracts

  • Contracts lacking valid consent through incapacity, fraud, etc.; remain binding until annulled through court actions (Article 1390).

Classes of Voidable Contracts

  1. Involving one party's incapacity.

  2. Those lacking valid consent due to various factors.

Effects of Annulment

  1. Termination prior to consummation releases parties from obligations.

  2. If consummated, parties must adhere to mutual restitution principles unless exempted (Article 1399).

Unenforceable Contracts

  • Contracts unexecutable by legal actions, needing ratification to enforce (Article 1403).

Void Contracts

  • Defined as lacking essential elements entirely, resulting in null status from inception.

Exception to Void Contracts

  • Include illegal objectives where both parties hold fault, governed under the Pari Delicto Rule.

Exceptions Under Pari Delicto Rule

  1. Property return for illegal purposes if repudiated pre-damage.

  2. Repayment allowance for incapacitated parties under just circumstances.

  3. Non-illegal contracts under specific prohibitions may allow recovery if public interest is enhanced.