TITLE II CHAPTER I GENERAL PROVISIONS

CHAPTER 1 GENERAL PROVISIONS DEFINITION

 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. 1305).

STAGES OF A CONTRACT
1. NEGOTIATION OR PREPARATION
1. Negotiation covers the period from the time the prospective contracting parties indicate interest
in the contract to the time the contract is concluded (perfected).

2. PERFECTION
2. The perfection of the contract takes place upon the concurrence of the essential elements
thereof

3. CONSUMMATION NEGOTIATION OR PREPARATION

3. Consummation begins when the parties perform their respective undertakings under the
contract culminating in the extinguishment thereof

ELEMENTS OF A CONTRACT
a. Essential elements
b. Natural elements
c. Accidental elements

Essential elements – no contract without the presence of the essential elements

1. Consent
2. Object
3. Cause

Natural elements exist as part of the contract even if the parties do not provide for them as the law includes
them in the contract such as warranty against eviction and warranty against hidden defects in a contract of
sale.

Accidental elements are those agreed upon by the parties and which cannot exist without being stipulated
e.g., mortgage, guaranty, bond

KINDS OF CONTRACT AS TO PERFECTION

a. Consensual contract
b. Real contracts
c. Solemn contracts

a. Consensual contract – established upon a mere meeting of minds, i.e., concurrence of offer and
acceptance, on the object and on the cause thereof such as a contract of sale
b. Real contracts – in addition to meeting of the minds, the delivery of the object of the agreement is
required such as in a pledge or commodatum
c. Solemn contracts – requires a special form for perfection which is essential in order to make the
act valid, the prescribed form being thereby an essential element thereof i.e., marriage contract
and deed of donation

PRINCIPLES RELATING TO CONTRACT

1. COMPELLABILITY
2. RELATIVITY
3. AUTONOMY
4. MUTUALITY

1. Compellability – Obligations arising from the contract have the force of law between the contracting
parties
2. Relativity – Contracts take effect only between the parties, 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 property he received
from the decedent.
 EXCEPTIONS TO RELATIVITY
- INTRANSMISSIBLE CONTRACTS
- STIPULATION POUR AUTRIU
- POSSESSION OF THE OBJECT OF CONTRACT BY THIRD PERSONS
- CREDITORS OF THE CONTRACTING PARTIES
- INTERFERENCE BY THIRD PERSONS

- INTRAMISSIBLE CONTRACTS
- Purely personal e.g., partnership and agency
- Very nature of obligation that requires special personal qualifications of the
obligor such as Payment of money debts not transmitted to the heirs but to the
estate

- STIPULATION POUR AUTRIU

- A contract containing stipulation in favor of a third person, the latter can demand
its fulfillment

- POSSESSION OF THE OBJECT OF CONTRACT BY THIRD PERSONS

- Art 1312 in contracts creating real rights, third persons who come into possession
of the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration laws

- CREDITORS OF THE CONTRACTING PARTIES

- Art 1313 Creditors are protected in cases of contracts intended to defraud them.

- INTERFERENCE BY THIRD PERSONS

- Art 1314 Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party (interference is without legal
justification).

3. Autonomy – 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
4. Mutuality – both parties are bound by their contract

 CONTRACT OF ADHESION – A contract in which one party has already prepared a form of a
contract containing stipulations desired by him and he simply asks the other party to agree to them
if he wants to enter into the contract.
 UNENFORCEABLE CONTRACT – No one may contract in the name of another without being
authorized by the latter or unless he has by law a right to represent him

TITLE II CHAPTER II ESSENTIAL REQUISITES OF CONTRACTS

Article 1318 – Essential requisites – should exist

1. CONSENT
2. OBJECT
3. CAUSE

Natural elements – presumed to exist

1. Warranty against eviction (Art. 1548)
2. Warranty against hidden defects (Art. 1561)

Accidental elements – may exist

1. Conditions
2. Period
3. Interest
4. Penalty
5. Other stipulations
SECTION 1. – CONSENT
Article 1319 to 1346

1. How consent manifested.

Meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.

Offer – proposal made by one party to another to enter in to a contract.

- Must be certain or definite with respect to the object, cause, and other circumstances
- Example of a valid offer: Dr. Dre told Snoop Dog that he was willing to sell his 2010 model
Toyota Altis Car with plate no. ABC 123 (OBEJCT) to him for P1.5M cash (CAUSE). In addition,
Dr. Dre told Snoop Dog that he must accept his offer personally on or before February 6, 2022
at 5:00 o’clock PM t his office at Room 302, GMT Building, Cebu City

Acceptance
- Expression by the offeree of his agreement to the terms of the offer made by the offeror.
- Must be absolute or unqualified (without any conditions). It must be identical to the offer.
- Example of a valid acceptance to the offer above: On February 6, 2011 at 4:30 o’clock PM,
Snoop Dog went to the office of Dr. Dre in Room 302 GMT Building, Cebu City and expressed
his willingness to buy the Toyota Altis for P1.5M cash.

2. Offer becomes ineffective:

a. When the offeror withdraws his offer before its acceptance by the offeree
b. When the offeree makes a qualified acceptance
c. Upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is
conveyed.
d. Upon expiration of the period fixed in the offer for acceptance, EXCEPT when there is option
money (no perfected contract yet until acceptance is expressed)

3. Persons incapacitated (do not have legal capacity) to give valid consent to contracts:
a. Minors – a person who has not yet reached the age of majority (18 years old).
b. Insane or demented persons – cannot validly enter into a contract, except during a lucid interval or
temporary period of sanity. (Art. 1328)
c. Persons in a state of drunkenness or under a hypnotic spell. (Art. 1328) – These conditions are
equivalent to temporary sanity and this impair the capacity of a person to give intelligent consent.

4. Status of contracts of entered into by persons who are incapacitated – VOIDABLE (Article 1390)

5. Reasons for disqualification:

- Can easily be the victims of fraud as they are not capable of understanding or knowing the nature
and consequences of their actions.
- Can enter into a contract if they are assisted by a parent or a legal guardian
Note: Incapacity is relevant only at the time of perfection.

6. Five (5) vices of consent – make the consent defective.

a. Error or mistake (Article 1331)
b. Violence or force (Article 1335)
c. Intimidation or threat or duress (Article 1335)
d. Undue influence (Article 1337); and
e. Fraud or deceit (Article 1338)

What is mistake?

- False belief of a thing or a fact which is material to the contract

- Must refer to
a. The substance of the thing which is the object of the contract
Example: intended to buy a female fish but turns out to be a male

b. Those conditions which have principally moved one or both parties into the contract
Example: intended to rent a commercial space to open a beer house but later on found out
that there is an ordinance not allowing a beer house near a school
 c. The identity or qualifications of one of the parties provided the same was the principal
cause of the contract
Example: sought the services of a civil engineer who licensed to practice was revoked

d. An excusable mistake (i.e., a mistake not caused by the negligence of the party) EXCEPT
if the party alleging it knew the doubt, contingency or risk affecting the object of the
contract
Example: the seller thought the jewelry was real diamond (action – annulment of contract)
but if the seller is an expert in jewelry (action – for damages due to fraud in getting one’s
consent)

Who proves fraud or mistake?

- the person alleging fraud or mistake
- the person signing a document is presumed he signed with full knowledge of its contents
Exception:
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

What is violence?
The consent of the injured party is obtained by the guilty party by the employment of serious or irresistible
force.

What is intimidation or threat? There is intimidation when a person is compelled to give his consent
because of a reasonable and well-grounded fear of an imminent and grave evil:
(a) Upon his person or property, or
(b) Upon the person or property of his spouse, descendants, or ascendants.
- A threat to enforce a just or legal claim does not vitiate consent. (Article 1335, par. 4)

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.

When does undue influence vitiate consent to a contract?

There is undue influence when a person takes improper advantage of his power over the will of another
person, depriving that person of a reasonable freedom of choice. (Article 1337)

The following circumstances shall be considered:

1. the confidential,
2. family,
3. spiritual and other relations between the parties, or
4. the fact that the person alleged to have been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.

When is there fraud as a vice of consent?

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.

Two kinds of fraud:

A. Causal Fraud - This is the kind of fraud referred to in Article 1338. It is committed by one party
before or at the time of the celebration of the contract to secure the consent of the other party.
B. Fraud in the performance of the obligations under the contract - This is the kind of fraud referred to
in Article 1170. The fraud here is employed after the perfection of the contract. It is in the manner
of performance of the obligation that fraud is employed by the other party. The effect of the use of
this kind of fraud is liability for damages on the part of the party employing the fraud. Annulment of
the contract is not a proper remedy because there was no defective consent on the part of both
contracting parties.

Essential requisites for fraud to vitiate consent

A. There must be misrepresentation (Art. 1338) or concealment (Art. 1339).

Misrepresentation - the guilty party uses falsehood or misleading statements to compel the
innocent party to enter into a contract.
 Concealment - there is an intentional failure on the part of the guilty party to reveal to the
innocent party important facts or details which the innocent party should have known in order to be
able to give his intelligent consent to the contract.

B. It must be serious (Art. 1344).

C. It must have been employed by ONLY ONE of the contracting parties (Art. 1344). If fraud is
employed by both parties, neither may ask for annulment as the fraud of one contracting party
offsets the fraud of the other. This rule is in accordance with the principle that "he who comes to
court, must come with clean hands."

When fraud is committed by a third person, consent is not vitiated, and the contract cannot
be annulled. Example: land appraiser

Exception - if it was used with the knowledge of the contracting party who is benefited by the
fraud (Art. 1344).

D. It must be made with intent to deceive (to trick or to cheat) the other contracting party. Example:
1. Misrepresentation in good faith - believe it to be true like inherited jewelry
2. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent (Art. 1340). Dealer's talk or trader's talk are usually
exaggerated and not exactly true.
3. The mere expression of an opinion does not signify fraud, unless made by an expert and
the other party has relied on the former's special knowledge (Art. 1341).

E. It must have induced the consent of the other contracting party

7.SIMULATION OF CONTRACT (Article 1345)

- the act of intentionally deceiving others by producing the appearance of a contract that really does
not exist (absolute simulation) or which is different from the true agreement (relative simulation).

two (2) kinds of simulation of a contract:

A. Absolute simulation - There is absolute simulation when the contract does not really exist and the
parties do not intend to be bound at all (Article 1345). Absolutely simulated or fictitious contracts
are inexistent and void (Article 1346).
Example: Sale of the properties without consideration.

B. Relative simulation - There is relative simulation when the contract entered into by the parties is
different from their true agreement (Article 1345). Here, the parties conceal their true agreement.
The parties are bound to the real or true agreement except -
(B.1) if the contract should prejudice a third person; OR
(B.2) if the purpose is contrary to law, morals, good customs, public order, or
public policy
Example: Instead of mortgage, the contract was one of sale.

Section 2 – Objects
1. subject matter
2. thing (sale), service (agency) or right (assignment of credit)

Requisites
1. within the commerce of men
2. must not be impossible (legal or physically)
3. must be in existence or capable of coming into existence
4. must be determinate or determinable without the need of a new contract between the parties

Future Inheritance - not a valid object of a contract

- not in existence or capable of determination at the time of the contract

Except:
 1. donations by reason of marriage between future spouses with respect to their future property to
take effect only in the event of death
2. in case of partition of property by act inter vivos by a person to take upon his death

Object is generic thing - Art. 1246 applies (cannot demand superior quality or deliver inferior quality)

Section 3 - Cause of Contracts

- essential purpose of entering into a contract
- consideration

Classification of contracts according to cause:

1. onerous-example: sale
2. 2) remuneratory - example: service
3. gratuitous - example: donation

Motive
- personal reason in entering into a contract
- not essential to a contract
- illegality of the motive does not render the contract void

REQUISITES OF CAUSE
1. must exist at the time the contract is entered into
Absence of cause - VOID, example simulated sale
Failure of cause - demand performance example: payment of price
Falsity of cause - erroneous (VOID, does not exist) or simulated (depends if absolute or relative)
2. lawful
3. true or real
Lesion
- inadequacy of cause
- does not invalidate contract (general rule) EXCEPT:
1. Vitiated consent
2. Cases specified by law (defect in consent or parties intended another contract)

CHAPTER 3 – FORM OF CONTRACTS 1356-1358

a. 1356 – Form of Contracts

i. General Rule: Form does not matter for the validity of a contract; it is enough that there be consent,
subject matter, and cause
ii. Exceptions:
1. For Validity Solemn or Formal Contracts requires the compliance with the formalities
required by law
2. For Enforceability - Statute of Frauds
3. For Convenience

b. 1357 – Right of One Party to Compel the Other to Execute the Necessary Form
i. Applies only to contracts for convenience.
ii. In order to be applied, the contract must be:
1. Perfected (Valid) and
2. Enforceable under the Statute of Frauds

c. 1358 – Form of Convenience

i. The following must appear in a public document:
1. Acts and contracts which have for their object the creation, transmission, modification,
extinguishment of real rights over immovable property; sales of real property or of an
interest therein are governed by Articles 1403 No. 2, and 1405;
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
3. The power to administer propert, 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;
 ii. The following must appear in writing, even private ones:
1. All other contracts where the amount involved exceeds 500 pesos. But sales of good, chattels
or things in action are governed by Articles 1403 No. and 1405.

iii. Registration of the instrument only adversely affects third parties; it benefits them.

CHAPTER 4 – REFORMATION OF CONTRACTS 1359-1369

a. 1359 – Reformation by Reason of FAMI (fraud, accident, mistake, or inequitable conduct)

i. Reformation- is a remedy in equity, by means of which a written instrument is made or construed
so as to express or conform to the real intention of the parties when some error or mistake has
been committed

ii. Reformation v. Annulment

1. Reformation is used when there has been a meeting of the minds of the parties to a contract but
the true intention was not expressed in the agreement by reason of FAMI whereas annulment is
used when there has been no meeting of the minds, because of vitiated consent.
2. Reformation does not invalidate a contract unlike annulment.

iii. Requisites of Reformation:

1. There must be a meeting of the minds
2. The true intention is not expressed in the instrument
3. There must be clear and convincing proof thereof
4. It must be brought within the proper prescriptive period
5. The document must not refer to the following:
a. A simple unconditional donation inter vivos
b. Wills
c. A contract where the real agreement is void

iv. No new contract is made when reformation is used. The courts merely inquire into the intention of
the parties and having found it, reform the instrument, and not the contents.

b. 1360 – Rule in Case of Conflict

- The Civil Code prevails over the Principles of the General Law on Reformation

c. 1361 – Reformation Because Of Mutual Mistake

- Requisites:
1. The mistake must be mutual
2. The mistake must be of fact

d. 1362 – Reformation Because Of Unilateral Mistake (Fraudulent/Inequitable)

- Requisites:
1. The mistake is unilateral
2. The other party acted fraudulently or inequitably

e. 1363 – Reformation Because Of Unilateral Mistake Also (Concealment)

- Requisites:
1. The mistake is unilateral
2. The other party is guilty of concealment
- Only the party in good faith can ask for reformation

f. 1364 – Reformation Because Of Failure To Convey The True Intent By The Drafter
- This happens when the instrument does not convey the true intention of the parties because of the:
1
1. Ignorance;
2. Lack of Skill;
3. Negligence; or
4. Bad Faith of the
a. Drafter of the Instrument; or
b. Clerk; or
c. Typist
g.1365 – Reformation Of An Intent To Have A Mortgage Or Pledge
- 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 to repurchase, reformation of the
instrument is proper.

h. 1366- When Reformation Is Not Allowed

- There shall be no reformation in the following cases:
1. Simple donations inter vivos wherein no condition is imposed
a. Because this is an act of pure liberality
2. Will
a. Because this is strictly a personal act; this may be revoked at any time
3. When the real agreement is void

i. 1367 – Effect Of An Action To Enforce The Instrument

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

j. 1368 – Who May Ask For Reformation

- If the mistake is mutual:
1. Either party; or
2. His successors in interest

- In all other cases:

1. The injured party; or
2. His Heirs; or
3. His Assigns

- What must be alleged

1. That the instrument to be reformed does not express the real agreement or intention of the parties
2. What the real agreement was

- Prescriptive Period
1. 10 years

k. 1369 – Procedural Rules

- It shall be governed by the Rules of Court to be promulgated by the Supreme Court

CHAPTER 5 – INTERPRETATION OF CONTRACTS 1370-1379

a. 1370 – Interpretation of Contracts

- If the terms are CLEAR and leave NO DOUBT for interpretation, the LITERAL meaning shall be
applied
- If the words appear to be CONTRARY to the evident interpretation of the parties, the INTENETION
shall prevail.

b. 1371 – How to Judge the Intention of the Contracting Parties

- Principal Consideration: Their contemporaneous and subsequent acts
- If the parties have themselves placed an interpretation to the terms of their contract, such
interpretation shall be generally followed
- The court may consider the relations existing between the parties and the purpose of the contract,
particularly when it was made in good faith between mutual friends.

c. 1372 – Effect of the Use of General Terms

- It shall not be understood to comprehend things that are distinct and cases that are different from
those upon which the parties intended to agree
- Special intent shall prevail over a general intent

d. 1373 – Stipulation Admitting of Several Meanings

 - It shall be understood as bearing that import which is most adequate to render it effectual
- Effect of an Interpretation Upholding the Validity of the Contract
1. If one interpretation makes a contract valid and illegal, the former interpretation shall prevail

e. 1374 – Stipulations to be Read Together

- 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

f. 1375 – Words to be Interpreted in Keeping with the Nature and Object of the Contract
- Words which may have different significations shall be understood in that which is most in keeping
with the nature and object of the contract.
- If this cannot be determined, then the “terms of a writing are presumed to have been used in their
primary and general acceptation.” (Section 12, Rule 130, Revised Rules of Court). Other meanings
may be proved such as those with a local, technical, or otherwise peculiar signification

g. 1376 – Effect of Usage or Customs of the Place

- The usage or custom of the 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.
- Pleading and Proof of Customs and Usage
- If they are general, they need not be pleaded or alleged, just proved.
- If they are local, they need to be both alleged (pleaded) and proved.

h. 1377 – Interpretation to be Against Party Who Caused Obscurity

- The interpretation of obscure words or stipulations shall not favor the party who caused the
obscurity.
- When different interpretations of a provision are otherwise equally proper, the construction is to be
taken which is the most favorable to the party in whose favor the provision was made and did not
cause the obscurity.

i. 1378 – Doubts as to Principal Object or Incidental Circumstances

- Doubt as to the Principal Object, Here, the contract is void
- Doubt as to the Incidental Circumstances
- If gratuitous, apply the least transmission of rights and interests
- If onerous, apply the rule of the greatest reciprocity of interests

j. 1379 – Suppletory Use of the Principles of Interpretation in the Rules of Court

- Language in the place of execution
1. The language of a writing is to be interpreted according to the legal meaning it bears in the
place of execution unless stated otherwise
- Meaning of words used
1. Presumption: Primary and general acceptation
2. Exceptions: Evidence is admissible to show a local, technical, or peculiar meaning
- Conflict between printed and written (not printed) words 1.
If an instrument is partly of written words and partly of a printed form, and the two are inconsistent,
the former controls the latter
- Use of experts and interpreters
1. When the characters are difficult to be deciphered, or the language is not understood by the
Court, evidence of experts may be admissible.
- Interpretation in favor of a natural right
1. When an instrument is equally susceptible of two interpretations, one in favor of a natural right
and the other against it, the former is to be adopted
- Usage or customs

CHAPTER 6 – RESCISSIBLE CONTRACTS 1380-1390

a. 1380 – Rescission
- Rescission – is a remedy granted by law to both the contracting parties and to third persons in
order to secure reparation of damages cause them by a contract, even if the contract be valid, by
means of restoration of the things to their condition prior to the celebration of said contract.
 - It is valid until rescinded; there is a sort of extrinsic defect consisting of an economic damage or
lesion.
- Requisites
1. There must be at the beginning either a valid or a voidable contract (not a void one)
2. There is an economic or financial prejudice to someone (either a party or a third person)
3. Requires a mutual restitution
- Rescission in general Article 1380
1. Rescission in general:
a. It is based on lesion or fraud upon creditors
b. Action is instituted by either of the contracting parties or by third persons
c. The courts CANNOT grant a period or term within which to comply
d. Non-performance by the other part is immaterial
2. Rescission in Article 1191
a. It is based on the non-performance or non-fulfillment of the obligation
b. Action may only be instituted by the injure party
c. In some cases, the court may grant a period or term
d. Non-performance by the other party is important
- Fictitious Contracts cannot be Rescinded
- Extrajudicial Rescission is allowed if there is a stipulation to that effect
- Effect of Rescission:
1. Rescission abrogates the contract from its inception and restores the parties to their original
positions as if not contract has been made
- Rescission is Subsidiary in Nature

b. 1381 – Rescissible Contracts

- The following are rescissible contracts:
1. Those which are entered into by the guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object thereof:
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
4. Those which refer to things in under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission

c. 1382 – Premature Payments Made in a State of Insolvency

- Requisites:
1. The debtor-payor is insolvent
2. The debt is not yet due and demandable

d. 1383 – Rescission is Subsidiary in Nature

e. 1384 – Partial Rescission

- Rescission shall be only to the extent necessary to cover the damages caused.
- Only the creditor who has asked for rescission benefits from the rescission

f. 1385 – Mutual Restitution

- Requisites before the action for rescission can be brought:
1. General Rule: Plaintiff must be able to return what he has received by virtue of the rescissible
contracts
a. The object is returned together with the fruits; the price together with the interest
i. Fruits/interest can only be demanded if there was delivery/payment
ii. If the thing is loss, indemnity for damages may be demanded
b. Exceptions: Prejudiced Creditors
2. The object of the contract is NOT in the LEGAL possession of third persons in GOOD FAITH
3. There must be no other legal remedy
4. The action must be brought within the prescriptive period.

g. 1386 – Effect if Contract are Judicially Approved

- Refers to Article 1381 (1) and (2)
 - Rescission cannot take place if judicially approved
- More rules:
1. If an act of ownership:
a. With court approval – Rescissible, if lesion is more than one-fourth
b. Without court approval – it is unenforceable whether or not there was lesion
2. If merely an act of administration:
a. With court approval – Valid, regardless of lesion
b. Without court approval – Rescissible, if lesion is more than one-fourth

h. 1387 – Presumptions of Fraud

- Applies to gratuitous alienations and onerous alienations
- Gratuitous Alienations
1. Presumed Fraudulent – when the debtor did not reserve sufficient property to pay all debts
concerned BEFORE the donation
- Onerous Alienations
1. Presumed Fraudulent – when made by persons:
a. Against whom some judgment has been rendered in any instance (thus, even if not yet
a final judgment) or
b. Against whom some writ of attachment has been issued

i. 1388 – Effect of Bad Faith

- The acquirer must return the object or indemnify the latter for damages whenever due to any cause
it should be impossible for him to return them/
1. Due to any cause includes fortuitous events
- If there are two or more alienations, the first acquirer shall be liable first, and so on successively
- Rescission must be in Direct Action
1. Before rescission, the contract is valid and its validity cannot be attacked collaterally

j. 1389 – Prescriptive Period for Rescission

- General Rule: 4 years from the date the contract was entered into
- Exceptions:
1. Persons under guardianship – 4 years from termination of incapacity
2. Absentees – 4 years from the times the domicile is known
- Who Can Bring the Action:
1. The injured party or defrauded creditor
2. His heir or successor in interest
3. Creditors of (a) and (b) by virtue of Article 1177 of the Civil Code (Accion Subrogatoria)

CHAPTER 7 VOIDABLE CONTRACTS 1390-1402

1. What is a voidable contract?

A voidable contract or annullable contract possesses all the essential requisites of a valid contract but one
of the parties is incapable of giving consent (Art. 1327), or consent is vitiated by mistake, violence,
intimidation, undue influence, fraud (Art. 1330).

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.

2. What is annulment?
1. It is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy
(ineffectiveness) of a contract based on defect or vice in the consent of one of the contracting
parties in order to restore them to their original position before the contract was executed.
2. In order to prosper, an action for annulment must be filled by the injured party WITHIN the
prescriptive period of four (4) years counted from the time:
(a) The defect of the consent ceases – in case of intimidation, violence or undue influence
(b) It is discovered – in case of mistake or fraud
 (c) The guardianship ceases – in case of contracts entered into by incapacitated persons

3. What is ratification?
The injured party in a voidable contract voluntarily approves the defective contract which, without such
subsequent approval or consent, would not be binding on him.

To be an effective ratification, it is required that:

(a) There must be knowledge of the reason which renders the contract voidable.
(b) Such reason must have ceased.
(c) The ratification must have been made expressly or impliedly.
(d) The ratification is made by the injured party. (Arts. 1394 & 1395)

Effect of ratification:
- RETROACTIVE EFFECT
- Cleanses the contract from all its defects from the time of its perfection (Art. 1396)

4. Who can make ratifications?

The ratification of a voidable contract may be made by:
Under Article 1390, No. 1
- The guardian; OR the incapacitated party himself BUT ONLY WHEN he is already capacitated
Under Article 1390, No. 2
- The party whose consent is vitiated

5. Who may ask for annulment?

Only the following can file an action for annulment under Article 1397:
(a) The incapacitated (i.e., the contracting party who was a minor or insane at the time the contract
was made); or
(b) The victim whose consent was vitiated by mistake, violence, intimidation, undue influence or fraud.

6. After a voidable contract is annulled by proper action in court, what are the obligations of the parties to
each other?
(A) Mutual Restitution - Under Article 1398, the parties are obliged to return to each other the object of the
contract with its fruits, and the consideration for the contract with legal interest. Like in rescission, the
purpose of the law in annulment is to restore or bring back the parties to their original situation by mutual
restitution.

(B) Restitution by the incapacitated party - Under Article 1399, if the ground for annulment of the contract is
incapacity under Article 1390, No. 1, the incapacitated is obliged to restore to the other party only to the
extent that he was benefited by the thing or price received by him under the contract. Therefore, even if the
incapacitated party has lost the thing object of the contract and can no longer return it to the other party,
BUT THE LOSS was WITHOUT FRAUD or FAULT on his part, the other party (the capacitated party) will
still be obliged to restore what he has received under the contract.

(C) Restitution by the defendant - The defendant in an action for annulment refers either to the capacitated
party, or the party who employed any of the vices of consent (mistake, violence, intimidation, undue
influence and fraud) on the innocent party. After a case is annulled, if the thing to be returned by the
defendant under the contract is lost (whether due to a fortuitous event or due to the fault of the defendant),
the obligation of the defendant is not extinguished but is converted into an indemnity for damages
consisting of the value of the thing at the time of the loss with interest, and the fruits received from the time
the thing was given to the defendant up to the time of its loss (Article 1400).

(D) Restitution by the complainant-The complainant in an action for annulment refers either to the
incapacitated party, or the party who suffered from any of the vices of consent (mistake, violence,
intimidation, undue influence and fraud).
Under Article 1400, if the thing to be returned by the complainant under the contract is lost DUE TO A
FORTUITOUS EVENT, his action for annulment can still prosper. The contract will be annulled but the
defendant cannot be compelled to return what he has received under the contract.

Under Article 1399, however, if the complainant is the incapacitated and has lost what he is obliged to
return due to a fortuitous event, the defendant is still obliged to restore what he has received under the
contract to the incapacitated.
Under Article 1401, if the thing to be returned by the complainant under the contract is lost DUE TO
FRAUD OR FAULT ON HIS PART, his right to file an action for annulment of the contract will be
extinguished. The same rule applies even if the complainant is the incapacitated party who has lost what he
is obliged to return due to his fault.

CHAPTER 8 UNENFORCEABLE CONTRACTS (Arts. 1403-1408)

1. What is an unenforceable contract?

- An unenforceable contract is one which cannot be enforced in court or sued upon unless it is first
ratified.
- Once ratified, it can have the effect of a valid contract.
- Unlike voidable and rescissible contracts - which are valid and binding until annulled or rescinded,
an unenforceable contract is not enforceable or cannot take effect even as between the parties to
the contract unless it is ratified.

2. What are the kinds of unenforceable contracts?

(a) Unauthorized or disauthorized contracts. [Art. 1317 & 1403(1)]
(b) Those that fail to comply with the Statute of Frauds. [Art. 1403(2)]
(c) Those where both parties are incapable of giving consent. [Art. 1403(3)]

3. What is the nature and purpose of the Statute of Frauds?

The Statute of Frauds, found in Article 1403, No. 2 of the New Civil Code, is a law which requires that all
the agreements enumerated therein [letters (a) to (f)] must be in writing and signed by the party obliged
under the contract (passive subject) and against whom the contract may be enforced. Hence, if there is no
note or memorandum of the specified agreements, said agreements cannot be enforced by the other party
(active subject) in court. This is because the court will not receive evidence of the existence of the
agreement without the writing or secondary evidence of its contents.

Remember that the failure to execute the contract in writing does NOT render the contract VOID, but only
UNENFORCEABLE.

The Statute of Frauds seeks to prevent the commission of injustice due to faulty memory and to guard
against intentional misrepresentation.

4. What are the contracts covered by the Statute of Frauds which are required to appear in writing in order
to be enforceable?
(a) An agreement which is to be executed after one (1) year from the date of perfection of the contract.
Example: A contract entered into by S with B on January 1, 2009 for the sale of S's car to B on
January 5, 2010 must be in writing to be enforceable.
(b) A special promise to answer for the debt, default or miscarriage of another. Example: D borrowed
money from C with G as guarantor. The promise of G to answer for the default of D must be in
writing so that G may be held liable by C if D fails to pay his obligation on due date.
(c) An agreement made by reason of marriage other than a mutual promise to marry. Example: M
agrees to build a house for W worth P10M if W will marry M. If W subsequently marries M, W
cannot oblige M to make good his promise if the agreement was not made in writing. NOTE:
However, a mutual promise to marry is enforceable even if merely orally entered into. At any rate,
enforceability will be to the extent of claiming damages only but not to compel the other party to
proceed with the marriage proposal because nobody can be compelled to marry against his will.
(d) An agreement for the sale of personal property where the consideration is P500 or more, unless
there has been partial delivery or payment. Example: S and B entered into a verbal contract for the
sale of a silver earring for P500.00. Delivery and payment were set on June 30, 2009.
(e) An agreement for the lease of real property where the term is more than one year. [Art. 1403(2)(e)]
Example: On January 15, 2009, O agreed to lease his building to T for a period of two (2) years
starting February 15, 2009. On February 15, 2009, if O does not allow T to take possession of the
leased property as agreed upon, T cannot compel O to do so if their lease contract is not in writing.
Note, however, that under Article 1874 of the Civil Code, "when the sale of a piece of land or any
interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale
shall be void."
(f) An agreement for the sale of real property or of an interest therein. [Art. 1403(2)(e)] Example: S
and B entered into a verbal contract for the sale of a parcel of land. Delivery and payment were set
 on June 30, 2009. On the designated execution date, if S changes his mind about the sale, B
cannot sue S to compel the latter to perform his obligation under the contract of sale which was not
put in writing; hence, unenforceable.
(g) A representation as to the credit of a third person. [Art. 1403(2)(f)] Example: D is applying for a
loan from C. Before C released the money, C asked R about the credit standing of D. R orally
assured C that D is solvent and has good credit reputation. If on due date D cannot pay, C cannot
hold R liable if the R's representation is not in writing.

5. What are some basic principles governing the Statute of Frauds?

(a) It applies only to executory contracts. It does not apply to totally or partially executed contracts.
(b) The defense under the Statute of Frauds may be waived by ratification. (Art. 1405)
(c) It is exclusive - that is, it applies only to the agreements or contracts enumerated under Article
1403 (2).
(d) The Statute of Frauds is a personal defense - that is, a contract that does not comply with the
Statute of Frauds cannot be assailed by third persons. (Art. 1408)

CHAPTER 9 VOID OR INEXISTENT CONTRACTS

What contracts are void or inexistent?

The following contracts are void or inexistent 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. (a-g, Art 1409, NCC).
8. Those which are the direct results of previous illegal contracts (Art 1422, NCC)