Contract Law: General Provisions

General Provisions

• A contract needs a meeting of minds between two people
• One binds themself to give something or render some service to the other
• Contracting parties can establish stipulations, clauses, terms and conditions as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy
• Innominate contracts are regulated by party stipulations, provisions of Titles I and II, rules governing analogous nominate contracts, and customs of the place
• A contract must bind both parties and its validity or compliance cannot be one-sided
• Performance determination may be left to a third person, whose decision shall not be binding until both parties know
• The determination isn't obligatory if evidently inequitable, leading courts to decide what is equitable
• Contracts take effect between parties, their assigns and heirs, unless rights/obligations aren't transmissible by nature, stipulation, or law
• An heir isn't liable beyond the decedent's property value
• A third person can demand fulfillment if a contract contains a stipulation in their favor and they've communicated acceptance to the obligor before revocation, not just incidental benefit
• Third parties coming into possession of an object in contracts creating real rights are bound by the contract, subject to Mortgage Law and Land Registration Laws
• Creditors are protected in cases of contracts intending to defraud them
• A third person inducing another to violate a contract is liable for damages
• Contracts are perfected by mere consent, binding parties to fulfillment of stipulations and consequences in good faith, usage, and law
• Real contracts, like deposit/pledge/commodatum, aren't perfected until the object's delivery
• Contracting in another's name requires authorization
• A contract by someone unauthorized/exceeding powers is unenforceable unless ratified by the represented party before revocation

Essential Requisites of Contracts

• No contract exists without: consent of parties; object certain in subject matter; cause of the obligation
• Consent is shown through the meeting of the offer and acceptance
• The offer must be certain and the acceptance absolute, a qualified acceptance is a counter-offer
• Acceptance via letter/telegram binds when the offerer knows and is presumed to be where the offer was made
• Acceptance may be express or implied
• The offerer can set the time, place, and manner of acceptance, which must be followed
• An offer accepted through an agent is effective when acceptance is communicated to the agent
• An offer becomes ineffective upon death, civil interdiction, insanity, or insolvency before acceptance
• An offer can be withdrawn before acceptance if communicated, unless the option has consideration

Consent

• Business advertisements aren't definite offers but are invitations to make an offer (unless otherwise stated)
• Advertisements for bidders are invitations to make proposals
• Advertisers don't have to accept the highest/lowest bidder (unless contrary appears)
• The following cannot give consent to a contract: unemancipated minors, insane/demented people, and deaf-mutes who can't write
• Contracts during a lucid interval are valid, while those in drunkenness/hypnotic spell are voidable
• Incapacity is subject to legal modifications and special disqualifications
• Contracts are voidable if consent is given through mistake, violence, intimidation, undue influence, or fraud
• Mistakes invalidate consent if they refer to the substance of the contract's object or conditions that motivated entry
• Mistake regarding party identity/qualifications voids consent if it was the contract's main cause
• Simple mistakes in account shall be corrected
• If a party can't read, or if the contract is in an ununderstood language, the enforcing party must prove terms were fully explained if mistake/fraud is alleged
• No mistake exists if the party knew the doubt/risk affecting the contract's object
• Mutual error on the legal effect that frustrates the real purpose may vitiate consent
• Violence exists when serious/irresistible force is used to wrest consent
• Intimidation happens when contracting parties are compelled by reasonable fear of imminent/grave evil on person/property to give consent
• When determining a degree of intimidation, consider the age, sex and overall condition of the person

Undue Influence and Fraud

• A threat to enforce a just/legal claim through authority doesn't vitiate consent
• Violence/intimidation annuls the obligation, even if employed by a third party
• Undue influence exists when someone improperly uses power over another's will, depriving free choice
• Undue influence should consider confidential/family/spiritual relations, or mental/financial weaknesses
• Fraud occurs when insidious words/machinations induce a contract
• Without the fraud, the other party would not have agreed
• Failure to disclose facts, when there's a duty, constitutes fraud
• Usual trade exaggerations aren't fraudulent if the other party could know the facts
• A mere opinion isn't fraud, unless by an expert relied upon
• Third-party misrepresentation doesn't vitiate consent unless it creates a substantial and mutual mistake
• Misrepresentation in good faith isn't fraudulent, but it may be an error
• For fraud to make a contract voidable, it must be serious and not used by both parties
• Incidental fraud only obliges the person employing it to damages
• Contract simulation can be absolute or relative
• Absolute simulation is when parties don't intend to be bound
• Relative simulation is when parties conceal their true agreement
• Absolutely simulated contracts are void
• Relatively simulated contracts bind parties to their real agreement if no prejudice to third parties and not contrary to law/morals/etc

Object of Contracts

• All things not outside the commerce of men (including future things) and non-intransmissible rights can be the object of contracts
• Contracts upon future inheritance are prohibited, except when authorized by law
• All services not contrary to law, morals, good customs, public order, or public policy can be the object of a contract
• Impossible things or services cannot be the object of contracts
• Every contract's object must be determinate
• Indeterminate quantity doesn't prevent contract existence if determinable without a new contract

Cause of Contracts

• Onerous contracts: the cause is the prestation/promise of a thing or service by the other party
• Remuneratory contracts: the service or benefit is remunerated
• Contracts of pure beneficence: the mere liberality of the benefactor
• Particular motives are different from the cause
• Contracts without cause or with unlawful cause produce no effect
• A cause is unlawful if contrary to law, morals, good customs, public order, or public policy
• False statements of cause render contracts void unless there's another true/lawful cause
• If the cause isn't stated, it's presumed that it exists and is lawful, unless the debtor proves otherwise
• Lesion/inadequate cause doesn't invalidate a contract unless with fraud, mistake, or undue influence

Form of Contracts

• Contracts are obligatory in any form if essential requisites are present
• Contracts that the law requires to be in a certain form must follow that form to be valid
• If the law requires a special form/document, contracting parties can compel each other to observe it once the contract is perfected
• The following must appear in a public document:
  • Acts/contracts creating, transmitting, modifying, or extinguishing real rights over immovable property
  • Cession, repudiation, or renunciation of hereditary/conjugal partnership rights
  • Power to administer property (or any power) appearing/acting in a public document, prejudicing a third person
  • Cession of actions/rights from acts in a public document
• Contracts exceeding five hundred pesos must be written
• Sales of goods/chattels are governed by specific articles

Reformation of Instruments

• When a contract's true intention isn't expressed in the agreement due to mistake/fraud/etc., a party can ask for reformation
• If there's no meeting of minds due to mistake/fraud/etc., annulment (not reformation) is the correct way to fix the issue
• General reformation principles are adopted if they don't conflict with the Code
• Mutual mistake leading to failure to disclose the real agreement lets the instrument be reformed
• If one party was mistaken and the other acted fraudulently/inequitably, the former can seek reformation
• Reformation is allowed when one party was mistaken, and the other concealed that the instrument didn't reflect their real agreement
• Courts may order reformation if an instrument doesn't express the parties' true intentions due to ignorance/negligence/bad faith of the drafter
• Reformation is proper when parties agree on mortgage/pledge, but the instrument states absolute sale/repurchase

When Reformation is Not Allowed

• Simple donations inter vivos with no conditions imposed
• Wills
• Situations when the real agreement is void
• If one party has brought an action to enforce an instrument, they can't later ask for its reformation
• Reformation can be ordered for mutual mistake by either party/successors or by injured party/heirs if not mutual

Interpretation of Contracts

• If a contract's terms are clear and unambiguous, the literal meaning controls
• If the words contradict the parties' intention, the latter prevails over the former
• To judge the intention of the parties, consider their contemporaneous and subsequent acts
• General terms shouldn't include distinct things/cases the parties didn't intend
• If a stipulation has multiple meanings, it should be understood in a way that makes it effective
• Stipulations should be interpreted together, attributing a sense that results from all of them jointly
• Words with different meanings should align with the contract's nature and object
• Local usage/customs should be considered when interpreting ambiguities
• Courts should fill omissions of stipulations that are ordinarily established
• Obscure words/stipulations shouldn't favor the party causing the obscurity

Resolving Doubts

• When impossible to settle doubts with the rules and doubts are about incidental circumstances of a gratuitous contract, the least transmission of rights and interest prevails
• If a contract is onerous, doubts favor the greatest reciprocity of interests
• A contract is null/void if doubts are about the principal object, so that intention can't be determined
• Principles of interpretation in the Rules of Court should be observed

Rescissible Contracts

• Validly agreed upon contracts may be rescinded in legally established cases
• The following contracts are rescissible
  • Contracts by guardians that cause more than one-fourth lesion to the ward
  • Contracts agreed upon in representation of absentees if the latter suffer similar lesion
  • Contracts defrauding creditors who cannot collect claims otherwise
  • Contracts referring to things under litigation entered into without approval of litigants/judicial authority
  • Contracts specially declared by law subject to rescission
• Payments during insolvency for obligations the debtor couldn't be compelled to fulfill are rescissible
• Rescission is subsidiary, used when no other legal remedy is available
• Rescission shall be only to the extent necessary to cover the damages caused
• Rescission requires returning the object, fruits, and price with interest if demanding rescission can return
• Rescission doesn't apply when objects are legally possessed by third parties in good faith

Additional Rescission Rules

• Indemnity for damages is demanded from the person causing the loss
• Rescission for lesion doesn't apply to contracts approved by courts
• Contracts alienating property gratuitously are presumed to defraud creditors if the donor didn't reserve enough for debts before donation
• Alienations by onerous title are presumed fraudulent when judgment/attachment has been issued
• Other evidence can prove the design to defraud creditors
• Acquiring things in bad faith indemnifies creditors for alienation damages
• If there are multiple alienations, the first acquirer is liable first, and so on successively
• Actions to claim rescission must start within four years
• For persons under guardianship/absentees, the four years starts from the end of incapacity or knowing the domicile

Voidable Contracts

• Contracts are voidable even without damage to contracting parties in these situations:
  • Parties lacking capacity to consent
  • Consent is vitiated by mistake, violence, intimidation, undue influence, or fraud
• Contracts are binding unless annulled by court, and they are susceptible to ratification
• Annulment must be brought within four years and this period will begin depending on the situation:
  • Intimidation/violence/undue influence: From when the defect of consent ceases
  • Mistake/fraud: From discovery
  • Minors/incapacitated: From when guardianship ceases

Contract Consequences

• Ratification extinguishes the chance to annul a voidable contract
• Ratification can be express or tacit
• Tacit ratification is shown if a person with the right to invoke action knowingly executes acts implying waiving their right after reason ceases
• Ratification can be done by a guardian of incapacitated person
• Action for annulment can be brought by those obliged or those by obligation of subsidiarity
• Those with capacity cannot allege incapacity or exert undue influence those persons cannot base their legal arguments
• An annulled obligation requires parties to restore what they received, with fruits and interest, except when otherwise provided
• Valuation is the basis of damages when obligations involve services
• An incapacitated person must only return what they were benefited when the contract defect is one party's capacity
• Restitution of the thing with interest and the fruits received must be done if it has been lost due to the person’s fault that is obliged to return the thing
• Filing for the annulment of contracts is impossible if the object thereof is lost because of fraud or fault from the person who is to institute proceedings.
• A person cannot be compelled if they are not compelled to restore the act, and the decree of annulment is one of the duties imposed upon people involved in this situation in order to comply with the demands of the situation

Unenforceable Contracts

• The following contracts are unenforceable, unless ratified:
  • Contracts entered into in another's name without authority/legal representation or exceeding powers
  • Contracts violating the Statute of Frauds i.e. agreements needing a written note
  • An agreement that will not be fulfilled within a year of making of the contract
  • Promise to answer for the debt of another
  • Agreements of marriage
  • Agreements for sale more than 500 pesos unless the buyer accept/receives, or buyer pay at the time
  • Leasing agreements for more than one year, real property or interest sale
  • Representation of a third person's credit
  • Contracts where both parties couldn't consent
• Unauthorized contracts follow specific articles in the Civil Code
• Violations of the Statute of Frauds are ratified without objection to oral evidence or acceptance of benefits
• Parties can use the right to have a public document if registration is needed and if agreements are legal under Statute of Frauds
• Express or implied permission by the parent/guardian of the contracting parties will ensure that the action has the same effect of the party giving consent had the capacity to do so
• Ratification of contracts is given by the guardians, and should be given by those that make the decisions so the contract becomes effective
• Third persons cannot assure any of these actions done by the people mentioned above

Void and Inexistent Contracts

• The following contracts are void from the beginning
  • Those that are illegal, immoral, against public order
  • Absolutely simulated or fictitious contracts
  • Lacking cause/object during the transaction
  • Object outside commerce
  • Impossible service
  • Parties’ intention is that the subject cannot be claimed, and it cannot be ascertained
  • Those expressly voided or prohibited
• These contracts cannot be enforced and ratified because the right of contract exists within the law
• Action/defense to declare a contract's inexistence doesn't prescribe
• If nullity comes from illegality and constitutes a criminal offense, both guilty parties have no action against each other and will be prosecuted
• The innocent can claim what they gave and doesn't have to comply with promises; this applies when only one party is guilty
• The following rules should be observed if the illegal act doesn't have a criminal offense
  • Neither party recovers what they gave/demands performance when both parties are at fault
  • The party at fault can't recover what they gave/ask for promised fulfillment
  • The other demand the return and has no obligation to comply without fault
• Illegality of contract defense isn't available to third parties with no direct interests
• A direct result of a previous illegal contract renders the contract void/nonexistent