CPA Review School Regulatory Framework Business PDF

CPA REVIEW SCHOOL OF THE PHILIPPINES Manila REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS DO DELA CRUZ/KL DELA CRUZ LAW ON OBLIGATIONS An obligation is a juridical necessity to give, to do or not to do. Obligati...

CPA REVIEW SCHOOL OF THE PHILIPPINES Manila REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS DO DELA CRUZ/KL DELA CRUZ LAW ON OBLIGATIONS An obligation is a juridical necessity to give, to do or not to do. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance but authorize the retention of what has been delivered or rendered by reason thereof. but after voluntary fulfillment by the obligor. Essential Elements or Requisites of an Obligation 1. An active subject, who has the power to demand prestation, also known as the obligee or creditor. 2. A passive subject, who is bound to perform the prestation, also known as the obligor or debtor. 3. Object or prestation, which is the promise or particular conduct to be performed in the performance of an obligation, and may consist of giving, doing or not doing a thing. 4. Efficient cause, the tie which binds the parties to the obligation, also known as juridical tie or vinculum juris. Sources of obligation 1. Law - Obligations derived from law are not presumed. Only those expressly determined in Civil Code or in special laws are demandable and shall be regulated by the precepts of the law. 2. Contract - Obligations arising from contracts have the force of law between contracting parties and should be complied with in good faith. 3. Quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral acts, to the end that no one may be unjustly enriched or benefited at the expense of another. Two Common Types of Quasi-Contracts a. Negotiorum Gestio refers to the voluntary management of the property or affairs of another without the knowledge or consent of the latter. b. Solutio Indebiti refers to the juridical relation which is created when something is received when there is no right to demand it and it was unduly delivered through mistake. 4. Quasi-delict or culpa aquiliana or torts or civil negligence refers to a source of an obligation wherein a person by act or omission causes damage to another, there being fault or negligence and no pre-existing contractual relation between the parties. 5. Crime or delict refers to any act or omission which is punishable by law. Every person criminally liable for a felony is also civilly liable. Kinds of thing or object 1. A determinate or specific thing is one that is individualized and can be identified or distinguished from others of its kind. 2. A generic or indeterminate thing is only indicated by its kind, without being designated and distinguished from others of the same kind. Obligation to give something which is determinate a. To deliver the thing b. To take care of the thing with the proper diligence of good father of a family c. To deliver all accessions and accessories Accessions include everything which is produced by a thing, or which is incorporated or attached thereto, either naturally or artificially. Accessories are those things used for the embellishment, use or their preservation of another thing or more importance. d. To pay damages in case of breach of obligation. 9701  Page 2 Obligation to give something which is indeterminate a. To deliver a thing which must be neither superior nor inferior quality. b. To pay damages in case of breach of the obligation Diligence required a. By provision of law – Extraordinary diligence is required of common carrier with respect to passengers. b. By stipulation of parties c. Diligence of a “good father of a family” means that if a person is obliged to give something, he must take good care of it as if he is the real owner. Short of that expectations, he must answer for damages. Right of creditor in an obligation to do 1. If the debtor fails to perform the obligation, the creditor may demand that the obligation be performed by the debtor himself or by a third person at the expense of the debtor. 2. If the debtor performed the obligation but in contravention of the agreement, the creditor may ask another person perform the obligation at the expense of the debtor. 3. If the obligation is poorly done, the creditor may ask that it be undone at the expense of debtor. 4. If the debtor does what has been forbidden, the creditor can ask that it be undone at the expense of the debtor with indemnification for damages. Delay, default or mora Delay/Default/Mora refers to the nonfulfillment of the obligation with respect to time and would constitute a breach of contract. The kinds of delay or mora are: 1. Mora solvendi – delay on the part of debtor 2. Mora accipiendi -delay on the part of creditor 3. Compensatio Morae – delay by both parties Requisites of mora solvendi a. The obligation must be liquidated, due and demandable. b. The debtor is guilty of nonperformance c. There was demand made either judicially or extrajudicially. Effects of mora solvendi a. The creditor may ask for damages b. The debtor is liable even if the loss is due to fortuitous event c. The debtor shall bear the risk of loss of the determinate thing Requisites of mora accipiendi a. Offer of performance by debtor b. Refusal of the creditor to accept without first cause Effects of mora accipiendi a. The creditor shall bear the risk of loss of the thing. b. All expenses for the preservation of the thing after the delay shall be borne by the creditor c. The creditor is liable for damages. Effect of compensatio mora – the delay on both parties will be compensated. 1. Specific circumstances wherein the debtor can be held liable to pay damages 2. Fraud/Dolo refers to the deliberate and intentional evasion of the normal fulfilment of obligations. 3. Negligence/Fault/Culpa is the failure to observe for the protection of the interests of another person, that degree of care, precaution and vigilance which the circumstances justly demand, whereby such person suffers injury. 4. Delay /Default/Mora refers to the nonfulfilment of the obligation with respect to time. 5. Contravention of the tenor of obligation refers to illicit act which impairs the strict and faithful fulfilment of the obligation or every kind of defective performance. 9701  Page 3 Kinds of fraud 1. Fraud in obtaining consent 2. Fraud in performing a contract 3. Future fraud cannot be renounced because the advance renunciation of the creditor would practically leave the obligation without effect 4. Past fraud can be renounced. 5. The fraud contemplated in the law is the malice or bad faith in the performance of obligation. Kinds of culpa or negligence 1. Culpa Aquiliana – the wrong or negligence committed independent of contract and without criminal intent. 2. Culpa contractual – the wrong or negligence in the performance of contract. 3. Culpa criminal – the wrong or negligence in the commission of a crime. Classifications of obligations 1. Pure and conditional 2. With a period or term 3. Alternative and facultative 4. Joint and solidary 5. Divisible and indivisible 6. With a penal clause Pure obligation – One without a condition or term and therefore, demandable at once. Conditional obligation - an obligation when there is a condition imposed on its performance. A condition is a future and uncertain event upon which an obligation is subordinated or made to depend. The essential requisites of a condition are futurity and uncertainty. Kinds of condition a. Suspensive - the fulfilment or happening of the condition will give rise to an obligation. b. Resolutory - the fulfillment or happening of the condition will extinguish the obligation. c. Potestative – the fulfilment or happening of the condition depends upon the will of one of the contracting parties. d. Casual – depends upon chance or will of a third person e. Mixed – depends partly upon chance and partly upon the will of a third person. f. Impossible – physically or legally impossible g. Positive – performance of an act h. Negative – omission of an act Effects of fulfillment of suspensive condition The fulfillment of the suspensive condition shall retroact on the day the obligation is constituted. If unilateral obligation, the fruits and interest shall insure to the benefit of to debtor, unless there is stipulation to the contrary. If reciprocal, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. Effects of fulfillment of resolutory condition a. The obligation is extinguished. b. The parties should return or restore to each other what they have received including fruits and interest. 9701  Page 4 Period A period is a certain length of time which determines the effectivity or the extinguishment of an obligation. The day certain will necessarily come whether the parties like it or not. It is presumed that period is for the benefit of both creditor and debtor in the absence of contrary agreement. ill pay a. Suspensive period or ex die – upon the arrival of the period, the obligation becomes you on demandable. dec 1 b. Resolutory period or in diem - upon the arrival of the period, the obligation is extinguished. c. Conventional or voluntary – fixed by parties d. Legal – fixed by law e. Judicial – fixed by the court Condition vs. period a. A condition is an uncertain event while a period is an event that must necessarily come. A condition may or may not happen but a period will surely come to pass. b. Condition gives rise to an obligation or extinguishes an existing obligation while a period has no effect upon the existence of an obligation but only its demandability or performance c. Condition may refer to a past event and unknown to parties while a period always refers to the future. Alternative obligation vs. facultative obligation a. In alternative obligation, there are several prestations but the fulfillment of one is sufficient and such is determined by the choice of the debtor unless the right of choice is given to the creditor, while in facultative obligation, only one thing is due, but the debtor may render another in substitution. b. In alternative obligation, the right of choice may be granted to the creditor if expressly made, while in facultative obligation, the right of choice can never be granted to creditor. Joint Obligation vs. Solidary Obligation Joint obligation - each debtor is liable only for a proportionate part of the debt and each creditor is entitled only to a proportionate share of the credit. Solidary obligation - each debtor is liable for the entire obligation and each creditor is entitled to demand the whole obligation. In joint obligation and solidary obligation, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another unless the law or the wording of the obligation provides otherwise. The indivisibility of an obligation does not imply solidarity. The solidarity of an obligation does not imply indivisibility. Synonyms for joint and solidary obligation Joint Solidary a. Prorata a. In solidum b. Proportionate b. Jointly and severally c. Mancomunada c. Individually and collectively d. Mancomunada simple d. Mancomunada solidaria 9701  Page 5 Divisible obligation vs indivisible obligation Divisible Obligation - susceptible of partial performance, that is, the debtor can legally perform the obligation by parts and the creditor cannot demand a single performance of the entire obligation. Indivisible Obligation - not susceptible of partial performance. The law provides that the performance of the obligation is indivisible or the contract provides that the performance of the obligation is indivisible. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. Obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. Obligation with a penal clause A penal clause is an accessory undertaking to assume greater liability in case of breach. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. Modes of extinguishing an obligation 1. By payment or performance 2. Loss of the thing due 3. Condonation or remission of the debt 4. Confusion or merger of the rights of creditor and debtor 5. Compensation 6. Novation Payment of performance Payment or fulfillment consists in the delivery of a sum of money or a thing, or doing a thing, or not doing something. How payment or performance is made: 1. If obligation is monetary, by delivery of the money in full 2. If obligation is a thing or an object, by delivery of the thing or object. 3. If obligation is to do something, by performance of the same undertaking. 4. If obligation is not doing a thing, to desist or refrain from doing the thing. 9701  Page 6 Payment by a third person 1. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. 2. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. 3. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. 4. Payment shall be made to the creditor or his successor in interest, or any person authorized to receive it. 5. Payment by a third person who does not intend to be reimbursed by the debtor is deemed a donation which requires the debtor’s consent but lack of this consent does not affect the validity of the payment made to the creditor who has accepted the same. Payment to a third person Payment to a third person is not valid, except: 1. When the third person is authorized to receive it. 2. When the payment to the third person has redounded to the benefit of the creditor. 3. When the third person is in possession of the credit and payment was made in good faith. Legal tender The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. Legal Tender in Philippines – refers to the currency which the creditor cannot refuse to accept as payment. a. 1 centavo, 5 centavos, 10 centavos, 25 centavos – Up to P100 only. b. P1, P5, P10 – Up to P1,000 only. c. P20, P50, P100, P200, P500, P1,000 – Unlimited legal tender power. Delivery of commercial instrument as payment 1. A check is not a legal tender even if it is a manager’s check. So, the creditor cannot be compelled to accept. 2. Acceptance of the check is equivalent to payment: a. When the creditor is in estopped or the creditor had previously promised accept the check b. When the check has lost its value because of the fault of the creditor. c. When the check has been cashed. Place of payment of an obligation 1. If there is a stipulation – at the place designated. 2. If there is no stipulation: a. Delivery of a determinate thing – at the place where the thing was at the time of perfection b. Delivery of an indeterminate thing – at the domicile of the debtor. Special modes of payment 1. Dation in payment or dacion en pago 2. Application of payment 3. Cession or assignment 4. Tender of payment and consignation 9701  Page 7 Dacion en pago Dacion en pago is the mode of extinguishing an obligation whereby the debtor alienates property in favor of the creditor in satisfaction of a monetary obligation. In short, the obligation is money and the payment is property. The other names are datio in solutum, adjusdicacion en pago and payment in kind. Application of payment Application of payment is the designation of the debt to which should be applied when payment is made by the debtor who owes several debts in favor of the same creditor. The purpose is to know which debt out of two or more debts should be extinguished. If no application of payment is made, the payment should be applied to the most onerous in case the debts are of different nature. If the debts due are of the same nature and burden, the payment shall be applied proportionately. In the payment of an obligation producing interest, when the amount being paid is not sufficient to cover principal and interest, the amount paid must apply first to the interest and the excess to the principal. Cession Payment by cession is the process by which a debtor transfers all his properties in favor of his creditors so that the latter may sell them and apply the proceeds to their credits. The debtor is released from his obligation to the extent of the net proceeds from sale. The creditors shall collect credits in order of preference as agreed upon or in the order established by law. Tender of payment and consignation Tender of payment - manifestation made by the debtor to the creditor of his willingness to comply with his obligation. Consignation – deposit of the thing or money due to the proper judicial authorities. Essential requisites of valid consignation a. The debt must be due. b. Tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it. c. Previous notice of the consignation has been given to the persons interested in the performance of the obligation. d. The amount or thing was placed at the disposal of the court. e. After the consignation, the persons interested were notified thereof. Condonation or remission It is a mode of extinguishing obligation by which the creditor renounces the enforcement of the obligation. It is essentially gratuitous and requires acceptance by the debtor. The renunciation of the principal shall extinguish the accessory obligation. The renunciation of the accessory obligation shall not extinguish the principal debt. Confusion or merger Confusion or merger is a mode of extinguishing obligation which takes place when there is meeting in one person of the qualities of creditor and debtor with respect to the same obligation. a. It must take place between the creditor and the principal debtor. b. The very same obligation must be involved c. The confusion or merger must be total or the entire obligation. Merger which takes place in the person of the principal debtor benefits the guarantor. Merger which takes place in the person of the guarantor does not extinguish the principal obligation. 9701  Page 8 Compensation Compensation - takes place when two persons, in their own right, are creditors and debtors of each other. Legal compensation is a compensation which takes place by operation of law. Facultative is a compensation whereby one party can claim compensation and the other cannot. Conventional compensation is a compensation by agreement of the parties. Judicial compensation is a compensation decreed by the court in a case where there is a counterclaim. Requisites of legal compensation or compensation by operation of law a. Each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other. b. Both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and of the same quality if the latter has been stated. c. Both debts must be due, liquidated and demandable. d. That over neither of the debts must there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. Novation Novation is the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first obligation. Obligation may be modified by: a. Changing the object or principal conditions (real novation) b. Substituting the person of the debtor (personal novation) c. Subrogating a third person in the rights of the creditor (Legal Subrogation or Conventional Subrogation) Requisites of Novation a. There must be a previous valid obligation. b. There must be agreement of all parties to the new contract. c. There must be extinguishment of the old contract. d. The new obligation must be valid. Expromission and delagacion Expromission takes place when a third person on his own initiative and without the knowledge or against the will of the original debtor assumes the obligation. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or nonfulfillment of the obligations shall not give rise to any liability on the part of the original debtor. Delegacion takes place when the creditor accepts a third person to take the place of the debtor at the instance of the latter. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original debtor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt. Subrogation Subrogation is the transfer to a third person of all the rights appertaining to the creditor, including the right to proceed against the guarantor, possessors of mortgages, subject to any legal provision or any modification that maybe agreed upon. Conventional subrogation refers to substitution of creditor by agreement of original parties and the new creditor. Legal subrogation is the substitution of new creditor in exceptional cases provided by law. It is presumed that there is legal subrogation: 1. When a creditor pays another creditor who is preferred, even without the debtor's knowledge. 2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. *Supplementary notes are largely based on the Pointers in Business Law by Atty. Carlos B. Suarez and Atty. Alexander Q. Suarez and Supplemental notes from Atty. Kenneth Dela Cruz. END 9701  CPA REVIEW SCHOOL OF THE PHILIPPINES Manila REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS DO DELA CRUZ/KL DELA CRUZ SUPPLEMENTARY NOTES – LAW ON CONTRACTS* 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. Stages of a contract a. Conception or preparation stage - involves preliminary negotiations and bargaining, discussion of terms and conditions, with no arrival yet of a definite agreement known as “bargaining point”. b. Perfection or birth stage - is the point when there is meeting of minds between the parties on a definite subject matter and valid cause. c. Termination or consummation stage - is the point when the contract has been fulfilled resulting in its accomplishment. The parties have performed their respective obligations and the contract is put to an end. Characteristics of contract 1. Freedom or liberty to stipulate – 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. 2. Obligatory force of contract - Obligations arising from contracts have the force of law between contracting parties. 3. Perfection by mere consent - Contracts are perfected by mere consent. However, real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. 4. Both parties are mutually bound - The contract must bind both contracting parties and its validity or compliance cannot be left to the will of one of them. The determination or validity or compliance of a contract cannot be left to the judgment of one o f the parties only because it violates mutuality of contract. The determination of the performance of contract may be left to a third person whose decision shall not be binding until it has been made known to both contracting parties. The determination of performance by a third person may be canceled if it is inequitable. In such a case, the court shall decide what is equitable under the circumstances. 5. Relativity of contract - 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. Exceptions to the relativity of contract: a. Obligations arising from contract which are intransmissible by their nature, stipulation or provision of law. b. Stipulation pour autrui c. When a third person induces another to violate his contract d. The right of a creditor to sue on a contract entered in to by his debtor 9702  Page 2 Stipulation “PourAutrui” It is a stipulation in favor of a third person made by the contracting parties with the clear and deliberate intention of conferring a favor upon such third person and whose fulfillment the latter may demand by communicating his acceptance to the obligor before its revocation. Requisites of pour autrui a. There must be stipulation in favor of a third person. b. The stipulation should be a part, not the whole, of the contract. c. The contracting parties must have clearly and deliberately conferred a favor upon a third person and not a mere incidental benefit or interest. d. The third person must have communicated his acceptance to the obligor before its revocation. Nominate contract is a contract which has a name under the Civil Code or special law. Examples include contract of sale and contract of partnership. pledge, barter, lease Innominate contract is a contract without any name under the Civil Code or special law. a. Do ut facias (I give that you may do.) b. Facio ut des (I do that you may give.) c. Facio ut facias (I do that you may do.) Essential elements of contracts 1. Consent of the contracting parties 2. Object of contract 3. Cause or consideration Concept of consent 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. (Cognitive theory) An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. 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. Persons incapable of giving consent a. Unemancipated minors b. Insane or demented persons c. Deaf-mutes who do not know how to write d. Person suffering from civil interdiction e. Incompetents under guardianship f. Married women of age in cases specified by law 9702  Page 3 Vitiation of consent 1. Mistake – The error must be substantial regarding the object and conditions of the contract, must be excusable and not caused by negligence, and must be a mistake of fact and not of law. 2. Violence – Serious or irresistible force is employed in order to wrest consent. There is physical coercion. 3. Intimidation – 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. There is mental or moral coercion. 4. Undue influence 5. Fraud or deceit, There is fraud, when through insidious words or machinations of one of the contracting parties the other is induced to enter into a contract without which, he would not have agreed. a. Incidental fraud or dolo incidiente – committed after the perfection of the contract. The right of the party is to ask for damages. b. Causal fraud or dolo causante – Committed before or at the time of perfection. The right of the party is to ask for annulment of contract. Caveat emptor “Let the buyer beware”. The transaction is not fraudulent because this is considered tolerable fraud. Exaggerations in trade are not in themselves fraudulent when the other party had an opportunity to know the facts. Except of course if the opinion is made by an expert and the other party has relied on such opinion. Lucid intercval Lucid interval is a temporary period of sanity. This is the period of suspension of insanity to sanity, then again to insanity. Contracts entered into during a lucid interval are valid. Contracts entered into in a state of drunkness or during a hypnotic spell are voidable. Simulation Simulation is the declaration of a fictitious intent manifested deliberately and by agreement by the parties in order to produce the appearance of a transaction which does not exist or which is different from their true agreement for the purpose of deceiving others. a. Absolute simulation – Parties do not intend to be bound and the contract is void ab initio. b. Relative simulation – Parties conceal their true agreement. 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. Object certain which is the subject matter of the contract 1. The object must be within the commerce of men. 2. It must be licit, or must not be contrary to law, morals, good customs, public order or public policy. 3. It must be possible. 4. It must be determinate as to its kind. Cause of the contract The cause of the contract is the “why of the contract” or the essential reason which impels the contracting parties to enter into the contract. The cause must exist, must be real or true and must be lawful. Kinds of contract according to cause 1. Onerous contract - the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. 2. Remuneratory contract - the cause is the service or benefit which is remunerated. 3. Contract of pure beneficence or gratuitous contract - the cause is the mere liberality of the benefactor. 9702  Page 4 Lesion Lesion is the insufficiency or inadequacy of the cause of contract. As a rule, the contract is valid, except when there is fraud, mistake or undue influence. Form of contracts Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. If the law requires a document or other special form, the contracting parties may compel each other to observe that form, once the contract has been perfected. Formal contracts 1. Donation of real property must be in a public instrument, otherwise void. 2. Donation of personal property exceeding P5,000 must be in writing, otherwise void. 3. Contribution of a partner in a partnership, if an immovable property, must be in writing, otherwise void. 4. Sale of land thru an agent, the authority of the agent to sell must be in writing, otherwise void. Reformation of an instrument 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 ask for the reformation of the instrument to the end that such true intention 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. There shall be no reformation in the following cases: a. Simple donations inter vivos wherein no condition is imposed b. Wills c. When the real agreement is void Rescission Rescission is a process to render inefficacious a contract validly entered into and normally binding, by reason of external conditions causing an economic prejudice to a party or to his creditor. Four kinds of defective contracts 1. Rescissible contract – valid until rescinded. The defect is extrinsic consisting of an economic damage or lesion. 2. Voidable contract – valid until annulled. The contract is effective now but may be invalidated. 3. Unenforceable contract – Cannot be sued upon or enforced unless ratified. No effect now, but may be effective upon ratification 4. Void contract – No effect at all. It cannot be ratified or validated. Rescissible contracts a. Those which are entered into by 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 b. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number c. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them d. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority e. All other contracts specially declared by law to be subject to rescission. 9702  Page 5 Voidable contracts Voidable contracts are those which possess all the essential requisites of a valid contract but one of the parties is incapable of giving consent, or consent was vitiated by mistake, violence, intimidation, undue influence, or fraud. Unenforceable contracts Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provided by law, unless ratified according to law. Unenforceable contracts include; a. Those executed by one in the name of another without any authority or in excess of such authority. b. Those that do not comply with the Statue of Frauds c. Those where both parties are incapable of giving consent Statue of Frauds The Statue of Frauds is the law which requires that certain contracts must be in writing, otherwise unenforceable. Contracts covered by Statue of Frauds 1. An agreement that by its terms is not to be performed within a year from the making thereof 2. A special promise to answer for the debt, default, or miscarriage of another 3. An agreement made in consideration of marriage, other than a mutual promise to marry 4. An agreement for the sale of goods, chattels or things at a price of Five Hundred pesos or more 5. An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein 6. A representation as to the credit of a third person Void contracts Void contracts are those which have absolutely no force and effect and are inexistent from the beginning. The maxim is “No contract at all” Examples of void contracts a. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy b. Those which are absolutely simulated or fictitious c. Those whose cause or object did not exist at the time of the transaction d. Those whose object is outside the commerce of men e. Those which contemplate an impossible service f. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained g. Those expressly prohibited or declared void by law Principle of “in pari delicto” Where the defect of a void contract is the illegality of the cause or object of the contract, both parties are at fault or “in pari delicto”. No remedy could be given to any of the parties and the court leaves them where they are. This is the universally accepted practice in law under the maxim he who comes to court must do so with clean hands”. *Supplementary notes are largely based on the Pointers in Business Law by Atty. Carlos B. Suarez and Atty. Alexander Q. Suarez and Supplemental notes from Atty. Kenneth Dela Cruz. END 9702