II.

CONTRACTS
A. General Provisions

a) Contracts Defined

Art. 1305
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. 1159
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

Contract
● A meeting of the minds between two contracting parties (Art. 1305) which takes place
when an offer by one party is accepted by the other. (Art. 1319)
● One or more persons bind himself or themselves with respect to another or others, or
reciprocally to the fulfillment of a prestation to give, to do, or not to do.
● Its rational and juridical basis is the limitation of man and his insufficiency to obtain by
himself the means necessary for the fulfillment of his purposes. (De Leon, p. 467)
● Generally, there must be at least two persons or parties in a contract.
○ Exception: 1 person can form a contract with himself/herself if he/she is an
agent/represents the interest of multiple parties
● Methods of terminating/cancelling or suspending a contract:
○ Mutual desistance - A contract is a meeting of the minds/arises from mutual
consent; thus a contract may also be terminated due to the mutual desistance of
the contracting parties.
○ Compromise agreement
○ By stipulation, at the option of one party - as long as it is not against public
policy/violates mutuality of contracts; or both parties can unilaterally exercise
right to terminate
○ Termination by one party with conformity of the other
○ Suspension of contract by the government

Termination vs. Rescission of a contract

Rescission - void in its inception and to put an end to it as though it never were; also involves
the duty of mutual restitution - to restore the parties to their relative positions which they would
have occupied had no contract ever been made.
Termination - valid until before its termination; would entail enforcement of its terms prior to the
declaration of its cancellation; also no duty of mutual restitution

Contracts vs. Agreements

All contracts are agreements, but not all agreements are contracts.
Contracts - Agreements enforceable through legal proceedings
Agreement - mutual assent of the parties; may be legally enforceable (contracts) or not legally
enforceable (moral or social agreements)

DOCTRINES/SUMMARY
Characteristics of Contracts
1) Freedom or autonomy of contracts (Art. 1306)
2) Obligatoriness of contracts (Art. 1159, Art. 1315)
3) Mutuality of contracts (Art. 1308)
4) Consensuality of contracts (Art. 1315)
5) Relativity of contracts (Art. 1311)

SUMMARY
Classification of contract (De Leon, p. 468)
1) According to name or designation
2) According to perfection
3) According to cause
4) According to form
5) According to obligatory force
6) According to person obliged
7) According to dependence to another contract
8) According to status
9) According to dependence of part of contract to other parts
10) According to risks

DOCTRINE
FREEDOM/AUTONOMY OF CONTRACTS
- Art. 1306
- Both a constitutional (Art. III, Sec. 10) and statutory right (Art. 1306)
- The constitutional/statutory prohibition against impairing the autonomy of contracts only
applies to legally valid contracts; meaning it cannot be invoked against void contracts,
such as those under Art. 1409, or those that miss requisites of a valid contract under Art.
1318.

Valid contracts
Those that meet all the legal requirements for the type of agreement involved (Art. 1318) and
the limitations on contractual stipulations (Art. 1306) and are therefore legally binding and
(subject to the Statute of Frauds [Art. 1403]) enforceable.

For a contract to be valid under Art. 1306:

1) Not contrary to law
Law
A rule of conduct, just, obligatory, promulgated by legitimate authority, and of common
observance and benefit (Sanchez Roman cited in De Leon 474)
 2) Subject to police power
When there is no law or the law is silent; or if it is not expressly or impliedly said in the laws, the
will of the parties prevails unless their contract contravenes the limitation of morals, good
customs, public order, or public policy. In such cases, the State may exercise police power in
order to repress these contracts, in the interest to promote and protect public order/welfare.
3) Not contrary to morals
Morals
Deals with norms of good and right conduct evolved in a community. These norms may differ at
different times and places with each group of people.
Morals or good customs are often defined in law, but the morals or good customs referred to in
Art. 1306 must refer to those not expressed in legal provisions.
4) Not contrary to good customs
Customs
Consist of habits and practices which through long usage have been followed and enforced by
society or some part of it as binding rules of conduct. It has the force of law when recognized
and enforced by law, if it is proven as fact, according to the rules of evidence. (Art. 12; Art.
1376)
“Good customs” often overlap with morals, but sometimes they do not.
5) Not contrary to public order
Public order
Refers principally to public safety but also considered to mean to the public weal/public good.
6) Not contrary to public policy
Public policy
Broader than public order, because it refers not only to the public safety but also to the
considerations which are moved by the public good.

b) Autonomy of contracts

Art. 1306
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.

c) Nominate v. Innominate contracts

Art. 1307
Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules of governing the most analogous nominate contracts,
and by the customs of the place.

d) Mutuality of contracts

Art. 1308
The contract must bind both contracting parties; its validity of compliance cannot be left to the
will of one of them.

Art. 1309
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. 1310
The determination shall not be obligatory if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the circumstances.

e) Relativity of contracts

Art. 1177
The creditors, after having pursued the property in possession of the debtor to satisfy their
claims, may exercise all the rights and bring all the actions of the latter for the same purpose,
save those which are inherent in his person; they may also impugn the acts which the debtor
may have done to defraud them.

Art. 1178
Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has
been no stipulation to the contrary.

Art. 1311 (Relativity of contracts)

Contracts take effect only between the parties, their assigns, and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred benefit upon a third person.

Art. 1314 (Tortious interference)

Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party.

f) Consensual v. Real Contracts

Art. 1315 (Consensual contracts)
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 keeping with good faith, usage, and law.
Art. 1316 (Real contracts)
Real contracts, such as a deposit, pledge, and Commodatum, are not perfected until the
delivery of the object of the obligation.

B. Essential Requisites of Contracts: General Provisions

Art. 1318 (Elements of contract)

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

C. Essential Requisites of Contracts: Consent

a) Offer and Acceptance; Option Contracts and Rights of First Refusal

Art. 1319 (Consent, Offer, and Acceptance)

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.

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.

Art. 1320 (Express or Implied Acceptance)

Acceptance may be express or implied.

Art. 1321
The person making the offer may fix the time, place, and manner of acceptance, all of which
must be complied with.

Art. 1322
An offer made through an agent is accepted from the time acceptance is communicated to him.

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.
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.

Consent
The conformity of wills and with respect to contracts, it is the agreement of the will of one
contracting party with that of another or others, upon the object and cause of the contract.

Offer
A proposal made by one party (offerer) to another to enter into a contract. It is more than an
expression of desire or hope. It is really a promise to act or refrain from acting on condition that
the terms thereof are accepted by the person (offeree) to whom it is made.
- The offer must also be certain or definite and clear, and not vague or speculative so that
the liability or rights of the parties may be exactly fixed because it is necessary that the
acceptance be identical with the offer to create a contract without any further act on the
part of the offeror.
- The offer must also be seriously intended; an offer made in jest or in anger, or while
emotionally upset or in other ways indicating that the same was not seriously intended is
not a valid offer.
- But lack of serious intent to enter into a contract where such a condition was not
apparent to the offeree who honestly believed that the offer was seriously intended, does
not invalidate the offer.

Acceptance
The manifestation by the offeree of his assent to the terms of the offer. Without acceptance,
there can be no meeting of the minds between the parties. (Art. 1305) A mere offer produces no
obligation.
Even if the offer is accepted, no contract can come into existence if it is not certain or definite.
- The acceptance of an offer must be absolute, unconditional, or unqualified, that is it must
be identical in all respects with that of the offer so as to produce the consent or meeting
of the minds necessary to perfect the contract.
- General rule: If the acceptance is qualified, as when it is subject to a condition, ot
modifies or varies the terms of the offer, it merely constitutes a counter-offer or a new
proposal which, in law, is considered a rejection of the original offer and an attempt by a
party to enter into a contract on a different basis.
- A qualified acceptance must be in turn, accepted absolutely for there to be a
contract. The original offeree becomes the new offeror, and the original offeror,
the new offeree.
- Exception: Requests for some changes is not necessarily a counter-offer
 - if the offer is positively and unequivocally accepted, even if the request
wouldn’t be granted
- If the terms do not materially change
- If the changes are mere clarifications or qualifications
- The offeror may impose the manner of acceptance to be done by the offeree. (Art. 1321)
If the offeree accepts the offer in a different manner, it constitutes a counter-offer.
- Acceptance of complex offers: partial acceptance is possible in the following 2 situations:
- 1 offer involving 2 or more contracts
- 1 contract involving various things

b) Incapacity to Consent and Vices of Consent

Art. 1327 (Persons incapable of giving consent)

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.

Art. 1328
Contracts entered into during a lucid state are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.

Art. 1329
The incapacity declared in Art. 1327 is subject to the modifications determined by law, and is
understood to be without prejudice to special disqualifications established in the laws.

Art. 1330 (Grounds for vitiated consent)

A contract where consent is given through mistake, violence, intimidation, undue influence, or
fraud is voidable.

Art. 1331
In order that mistake may invalidate consent, it should refer to the substance of the thing which
is the object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.

Art. 1332
When one of the parties is unable to read, or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms
thereof have been fully explained to the former.
Art. 1333 (When mistake does not vitiate consent)
There is no mistake if the party alleging it knew the doubt, contingency, or risk affecting the
object of the contract.

Art. 1334 (Mutual error vitiates consent)

Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent.

Art. 1335 (When violence and intimidation is present)

There is violence when in order to wrest consent, serious or irresistible force is employed.

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.

To determine the degree of intimidation, the age, sex, and condition of the person shall be
borne in mind.

A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not
vitiate consent.

Art. 1336
Violence or intimidation shall annul the obligation, although it may have been employed by a
third person who did not take part in the contract.

Art. 1337 (When undue influence is present)

There is undue influence when a person takes improper advantage of his power over the will of
another, depriving another of a reasonable freedom of choice. 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.

Art. 1338 (Fraud)

There is fraud 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.

c) Simulation of contracts

Art. 1345 (Simulated contracts are absolute or relative)

Simulation of a contract may be absolute or relative. The former takes place when the parties do
not intend to be bound at all; the latter when the parties conceal their true agreement.

Art. 1346 (When simulated contracts are void)

An absolutely simulated or fictitious contract is void. A relative simulation, when 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 binds the parties to their real agreement.

D. Essential Requisites of Contracts: Objects

Art. 1347 (What things may be the object of a contract?)

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.

No contract may be entered into upon future inheritance except in cases expressly authorized
by law.

Art. 1348 (Impossible things or services)

Impossible things or services cannot be the object of contracts.

Art. 1349
The object of every contract must be determinate as to its kind. The fact that the quantity is not
determinate shall not be an obstacle to the existence of the contract, provided it is possible to
determine the same without need of a new contract between the parties.

Essential Requisites of Contracts: Consideration

Art. 1350 (Forms of consideration)

In onerous contracts, the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other; in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.

Art. 1351 (Motive differs from cause)

The particular motives of the parties in entering into a contract are different from the cause
thereof.

Art. 1352 (Contracts without cause or with unlawful cause have no legal effect)
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 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. 1354 (Cause is presumed to exist and be lawful)

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.

F. Forms of Contracts

Art. 1356 (Contracts are valid and obligatory in whatever form)

Contracts shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites from their validity are present, However when the law requires that a
contract be in some form in order to be valid and enforceable, or that a contract be proved in a
certain way, the requirement is absolute and indispensable. In such cases, the right of the
parties stated in the following article cannot be exercised.

Art. 1357
If the law requires a document or other special form, as in the acts of 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,
and extinguishment of real rights over immovable property; sales of real property or of
an interest therein governed by Articles 1403, No. 2 and 1405;
2) The cession, repudiation, or renunciation of hereditary rights 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 P500 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.

G. Reformation of Instruments
Art. 1359 (When should reformation be applied?)
When, there having been a meeting of the minds of the parties to a contract, their true intention
is not expressed in the instrument, purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.

Art. 1360
The principles of the general law on reformation of instruments are hereby adopted insofar as
they are not in conflict with provisions of this Code.

Art. 1361 (Mutual mistake as a ground for reformation)

When a mutual mistake of the parties causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed.

Art. 1362
If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for reformation of the
instrument.

Art. 1363
When one party was mistaken and the other knew or believed that the instrument did not state
their real agreement, but concealed that fact from the former, the instrument may be reformed.

Art. 1364 (Ignorance, lack of skill, negligence, or bad faith of the drafter as a ground for
reformation)
When through the ignorance, lack of skill, negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the instrument does not not express the true
intention of the parties, the courts may order the instrument be reformed.

Art. 1365
If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right of repurchase, reformation of the
instrument is proper.

Art. 1366 (When reformation does not apply)

There shall be no reformation in the following cases:
1) Simple donations inter vivos wherein no condition is imposed;
2) Wills;
3) When the real agreement is void.

Art. 1367
When one of the parties has brought an action to enforce the instrument, he cannot
subsequently ask for its reformation.

Art. 1368
Reformation may be ordered at the instance of either party or his successors in interest, if the
mistake was mutual; otherwise upon petition of the injured party, or his heirs and assigns.

Art. 1369
The procedure for the reformation of instruments shall be governed by rules of court to be
promulgated by the Supreme Court.

H. Interpretation of Contracts

Art. 1370 (verba legis and ratio legis)

If the terms of the contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former.

Art. 1371 (How to determine the intent of the contracting parties)

In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered.

Art. 1372
However general the terms of a contract may be, they shall not be understood to comprehend
things that are distinct and cases that are different from those upon which the parties intended
to agree.

Art. 1373
If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

Art. 1374
The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.

Art. 1375
Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.

Art. 1376
The usage and custom of a place shall be borne in mind in the interpretation of the ambiguities
of a contract, and shall fill the omission of stipulations which are ordinarily established.

Art 1377 (contra proferentem)

The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.

Art. 1378
When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be
settled in favor of the greatest reciprocity of interests.

If doubts are cast upon the principal object of the contract in such a way that it cannot be known
what may have been the intention of the parties, the contract shall be null and void.

Art. 1379
The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be
observed in the construction of contracts.

I. Rescissible Contracts

Art. 1380
Contracts validly agreed upon may be rescinded in the cases established by law.

Art. 1381 (Rescissible contracts)

The following contracts are rescissible:
1) Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than 1/4 of the value of the things which are the object thereof;
2) Those agreed upon in representation of absentees, if the latter suffer the lesions 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
defendants 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. 1382
Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not
be compelled at the time they were effected, are also rescissible.

Art. 1383
The action for rescission is subsidiary; it cannot be instituted except when the party is suffering
damage has no other legal means to obtain reparation for the same.

Art. 1384
Rescission shall be only to the extent necessary to cover the damages caused.

Art. 1385 (Mutual restitution)

Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interests; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of a third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

Art. 1386
Rescission referred to in Nos. 1 and 2 of Art. 1381 shall not take place with respect to contracts
approved by the courts.

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 rendered in any instance or some writ of attachment has been issued.
The decision or attachment need not refer to the property alienated, and need not have been
obtained by the party seeking rescission.

In addition these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

Art. 1388
Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter
damages suffered by them on account of the alienation, whenever, due to any cause, it should
be impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Art. 1389
The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall not being in
until the termination of the former’s incapacity, or until the domicile of the latter is known.

J. Voidable Contracts

Art. 1390 (Grounds to annul a contract)

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;
2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence,
or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.
Art. 1391 (Prescription for annulment)
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 of 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.

Art. 1392 (Ratification of voidable contracts)

Ratification extinguishes the action to annul a voidable contract.

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.

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

Art. 1395
Ratification does not require the conformity of the contracting party who has no right to bring the
action for annulment.

Art. 1396
Ratification cleanses the contract from all its defects from the moment it was constituted.

Art. 1397
The action for annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily. However, persons who are capable cannot allege the incapacity of
thoses with whom they contracted; nor can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their action upon these flaws of the
contract.

Art. 1398 (Mutual restitution)

An obligation having been annulled, the contracting parties shall restore to each other the things
which have been the subject matter of the contract, with their fruits, and the price with its
interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages.
Art. 1399
When the defect of the contract consists in the incapacity of one of the parties, the incapacitated
person is not obliged to make any restitution except insofar as he has been benefited by the
thing or price received by him.

Art. 1400
Whenever the person obliged by the decree of annulment to return the thing cannot do so
because it has been lost through his fault, he shall return the fruits received and the value of the
thing at the time of the loss, with interest from the same date.

Art. 1401
The action for annulment of contracts shall be extinguished when the thing which is the object
thereof is lost through the fraud or fault of the person who has a right to institute the
proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss
of the thing shall not be an obstacle to the success of the action, unless said loss took place
through the fraud or fault of the plaintiff.

Art. 1402
As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is
incumbent upon him.

K. Unenforceable Contracts

Art. 1403
The following contracts are unenforceable, unless they are ratified:
1)Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;
2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
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
P500, 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 for 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.
3) Those where both parties are incapable of giving consent to a contract.

Art. 1404
Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of
this Book.

Art. 1405
Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the
failure to object to the presentation of oral evidence to prove the same, or by the acceptance of
benefits under them.

Art. 1406
When a contract is enforceable under the Statute of Frauds, and a public document is
necessary for its registration in the Registry of Deeds, the parties may avail themselves of the
right under Article 1357.

Art. 1407
In a contract where both parties are incapable of giving consent, express or implied ratification
by the parent or guardian, as the case may be, of one of the contracting parties shall give the
contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting
parties, the contract shall be validated from the inception.

Art. 1408
Unenforceable contracts cannot be assailed by third persons.

L. Void or Inexistent Contracts

Art. 1409
The following contracts are inexistent and void from the beginning:
1) Those whose cause, object, or purpose is contrary to law, morals, good customs, public
order, or public policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of the transaction;
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service;
6) Those where the intention of the parties relative to the principal object cannot be
ascertained;
 7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.

Art. 1410 (Prescription)

The action or defense for the declaration of inexistence of a contract does not prescribe.

Art. 1411
When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.

Art. 1412
If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he
has given by virtue of the contract, or demand the performance of the other's
undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised him.
The other, who is not at fault, may demand the return of what he has given without any
obligation to comply his promise.
Art. 1413
Interest paid in excess of the interest allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of the payment.

Art. 1414
When money is paid or property delivered for an illegal purpose, the contract may be repudiated
by one of the parties before the purpose has been accomplished, or before any damage has
been caused to a third person. In such case, the courts may, if the public interest will thus be
subserved, allow the party repudiating the contract to recover the money or property.

Art. 1415
Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if
the interest of justice so demands allow recovery of money or property delivered by the
incapacitated person.

Art. 1416
When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law
is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced,
recover what he has paid or delivered.

Art. 1417
When the price of any article or commodity is determined by statute, or by authority of law, any
person paying any amount in excess of the maximum price allowed may recover such excess.

Art. 1418
When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a
contract is entered into whereby a laborer undertakes to work longer than the maximum thus
fixed, he may demand additional compensation for service rendered beyond the time limit.

Art. 1419
When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is
agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the
deficiency.

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.