Lecture Notes in Contracts PDF

Republic of the Philippines EASTERN VISAYAS STATE UNIVERSITY Dulag Campus Lecture Notes in Contracts A. General Provisions Definition of a Contract A contract is a meeting of minds between two p...

Republic of the Philippines EASTERN VISAYAS STATE UNIVERSITY Dulag Campus Lecture Notes in Contracts A. General Provisions Definition of a Contract 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 Characteristics of a contract Autonomy (1306) The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, moral, good customs, public order, or public policy (Art. 1306) Mutuality (1308) The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them Obligatoriness (1315) XXX parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Relativity (1311) Contracts take effect only between the parties, their assigns and heirs, except in case where the right and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. Consensuality (1315) Contracts are perfected by mere consent Elements of a Contract Essential elements - those without which there can be no contract Consent Object certain or subject matter; and Cause or consideration Natural Elements - those without which are derived from the very nature of the contract, and as a consequence, ordinarily accompany the same Accidental elements - those which exist only when the contracting parties expressly provide for them Basic Principles of Contracts Obligatory Force of a Contract Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (Art. 1159, NCC) The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Art. 1308, NCC) Contracts are perfected by mere consent and from that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which according to their nature may be keeping in good faith, usage, and law (Art. 1315, NCC) Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for validity are present. (Art. 1356, NCC)  Before a contract may be considered obligatory, it is necessary that: It is perfected It is valid It is enforceable Freedom to Stipulate (Autonomy of the Will) and its Limitations 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 (Art. 1306, NCC) Binding Effect of a Contract or Mutuality The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Art. 1308, NCC) Privity of Contract (Principle of Relativity) Concept The principle of relativity of contracts dictates that contractual agreements can only bind the parties who entered into them, and cannot favor or prejudice third persons, even if he is aware of such contract and has acted with knowledge thereof. As a general rule, the heirs of the contracting parties are precluded from denying the binding effect of the valid agreement entered into by their predecessors-in-interest. This is so because they are not deemed "third persons" to the contract within the contemplation of law. Exceptions to the Rule on Privity of Contracts Where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law; Stipulation pour autrui - if a contract should contain some stipulation in favor of third person. A stipulation pour autrui is a stipulation in favor of a third person. Requisites: There must be a stipulation in favor of a third person The stipulation must be a PART, not the while of the contract The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest. The third person must have communicated his acceptance to the obligor before its revocation Neither of the contracting parties bears the legal representation or authorization of the third party. Tortious interference - where a third person induces another to violate his contract, he shall be liable for damages to the other contracting parties. Elements of tortious interference: Existence of a valid contract Knowledge on the part of the third person of the existence of contract; and Interference of the third person is without legal justification or excuse. Where third persons may be adversely affected by a contract where they did not participate Accion directa - where the law authorizes the creditor to sue on a contract entered into by his debtor. Consensuality of Contracts Concept and Coverage Contracts are perfected by mere consent and from that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which according to their nature may be keeping in good faith, usage, and law, (Art. 1315, NCC) Exceptions  Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation Contracts covered under the Statute of Frauds. B. Essential Requisites of a Contract Consent Consent is manifested by 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. Requisites of consent Legal capacity of the contracting parties Manifestation of the conformity of the contracting parties Parties' conformity to the object, cause, terms and condition of the contract must be intelligent, spontaneous and free from all vices of consent; and The conformity must be Real, not simulated or fictitious. Persons incapacitated to give consent Deaf-mutes who do not know how to read and write (illiterates) Insane or demented persons, unless the contract was entered into during a lucid interval Minors, except Contract for necessaries Contracts by guardians or legal representatives and the court having jurisdiction had approved the same When there is active misrepresentation on the part of the minor (minor is estopped) Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years of age. Contract of an insurance for life, health and the accident on the minor's life; Upon reaching age of majority, they ratify the same. Object It is the subject matter of the contract. It can be a thing, right or service arising from a contract. Only rights which are not intransmissible can be the object of the contract. Requisites Determinate as to kind (even if not determinate, provided it is possible to determine the same without the need of a new contract) The object must be at least be generic Existing or has the potential to exist subsequent to the contract Must be licit Within the commerce of man transmissible Cause or Consideration Cause is the essential or more proximate purpose reason which moves the contracting parties to enter into the contract. It is the immediate and direct which justifies the creation of an obligation through the will of the contracting parties. Requisites It must Exist True Licit C. Formalities of Contracts GR: Form is not required in consensual contracts. (Provided, all the essential requisites for their validity are present) Exception: When the law requires a contract be in writing for its Validity (formal contracts) Enforceability (under Statute of Frauds); or For the convenience of the parties  Formalities Required in Specific Contracts 1. Donations Personal property – if the value exceeds P5000, the donation and acceptance must both be written (Art. 748, NCC) Real Property i. Donation must be in a public instrument, specifying therein the property donated and value of charges which done must satisfy ii. Acceptance must be written, either in the same deed of donation or in a separate instrument iii. Acceptance may either be in the same deed of donation, or in a separate public instrument, but it shall not take effect unless it is done during the lifetime of the donor iv. If acceptance is in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. (Art. 749, NCC) 2. Partnerships where real property contributed: a. There must be a public instrument regarding the partnership. b. The inventory of the realty must be made, signed by the parties, and attached to the public instrument (Art. 1773, NCC) 3. Antichresis – the amount of the principal and interest must be in writing (NCC, Art, 2134) 4. Agency to sell real property or an interest therein – authority of the agent must be in writing, otherwise, the sale shall be void (Art. 1874, NCC) 5. Stipulation to charge interest – interest must be stipulated in writing (Art. 1956, NCC) 5. Stipulations limiting common carrier’s duty of extraordinary diligence to ordinary diligence: a. Must be in writing, signed by the shipper or owner; b. supported by valuable consideration other than the service rendered by the common carrier; and c. Reasonable, just, and not contrary to public policy (Art. 1744, NCC) Contracts which must be in writing to be valid 1. Donation of personal property whose value exceeds five thousand pesos (Art. 748, NCC) – the donation and acceptance must be in writing. 2. Sale of a piece of land or any interest therein through an agent (Art. 1874, NCC) – the authority of the agent shall appear in writing. 3. Agreement regard payments of interest in contracts of loan (Art. 1956, NCC) 4. Antichresis – the amount of the principal and the interest shall be specified in writing. (Art. 2134, NCC) Contract which must appear in a public instrument 1. Donation of real properties (Art. 719-74, NCC) 2. Partnership where immovable property or real rights are contributed to the common fund (Arts. 1171&1773, NCC) 3. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sale of real property or of an interest therein is governed by Arts. 1403, No. 2 and 1405 (Art. 1358, NCC) 4. The cession, repudiation, or renunciation of hereditary rights or of those of the conjugal partnership of gains (Art. 1358, NCC) 5. The power to administer property or any other power which has for its object and act appearing or which should appear in a public document or should prejudice a third person (Art. 1358, NCC) 6. The cession of actions or rights proceeding from an act appearing in a public document. (Art. 1358, NCC) Contracts that must be registered 1. Real Estate Mortgage (Art. 2125, NCC) 2. Sale or transfer of large cattle (Cattle Registration Act) D. Reformation of Instruments It is a remedy to conform to the real intention of the parties due to mistake, fraud, inequitable conduct, accident. It is a remedy of amending or rectifying the instrument which purports to be the agreement of the parties to express their real intention, when the same is not expressed therein by reason of mistake, fraud, inequitable conduct, or accident. Requisites There is meeting of the mind of the parties to the contract The parties' true intention is not expressed in the instrument Such failure of the instrument to express the parties' intention is by reason of: Mistake Accident Relative simulation Fraud; or Inequitable conduct The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings; and There is string, clear, and convincing proof of MARFI. E. Interpretation of Contracts If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former (Art. 1370, NCC) If order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1371, NCC) However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. (Art. 1372, NCC) If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual (Art. 1373, NCC) F. Defective Contracts 1. Rescissible Contracts These are contract which contains all the essential requisites of a contract which make it valid, but by reasons of injury or damage to either of the contracting parties or to third persons such as creditors, may be rescinded. In a rescissible contract, all of the essential requisites of a contract exist and the contract is valid, but by reason of injury or damage to either of the contracting parties or to third persons, such as creditors, it may be rescinded. Requisites for rescission There must be, at the beginning, either a valid or voidable contract There is an economic or financial prejudice to someone; and Requires mutual restitution. Contract that may be rescinded 1. Under Art. 1381, those - a. Entered into by guardians whenever the wards whom they represent suffer lesion by more than 1/4 of value of the property. b. Agreed upon in representation of absentees, if the absentee suffer lesion by more than 1/4 of the value of property  c. Contracts where rescission is based on fraud committed on creditor and cannot collect the claim due (accion pauliana) d. Contracts where the object involved is the subject of litigation; contract entered into by defendant without knowledge or approval of litigants or judicial authority e. Payment by an insolvent - on debts which are not yet due; prejudices the claim of others f. Provided for by law. 2. Payments made in state of insolvency a. Plaintiff has no other means to maintain reparation; b. Plaintiff must be able to return whatever he may be obliged to return due to rescission; c. The things must not have been passed to third persons in good faith; d. It must be made within 4 years Characteristics of rescissible contracts 1. It has all the elements of a valid contract 2. It has a defect consisting of an injury (generally in the form of economic damage or lesion, fraud, and alienation of the property) to one of the contracting parties or to a third person 3. It is valid and effective until rescinded 4. It can be attacked only directly 5. It is susceptible of convalidation only by prescription Effect of Rescission Obligation of mutual restitution (but not absolute) Abrogation of contract (absolute) Obligation of third person to restore (if third person has nothing to restore, Art. Does not apply) 2. Voidable Contracts Voidable contracts are those where the consent is vitiated either by incapacity of one of the contracting parties or by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. It is susceptible of ratification. Characteristics of a Voidable contracts 1. Effective until set aside 2. Can be ratified 3. Can be assailed only by the party whose consent was defective or his heirs or assigns 4. A voidable contract, unlike unenforceable and void contracts may be attacked indirectly or collaterally, by way of defense to an action under the contract by way of a counterclaim. Classes of voidable contracts Those where one of the parties is incapable of giving consent; and Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. Effects of Annulment of a contract If contract not yet consummated - parties shall be released from the obligations arising therefrom If contract has already been consummated - rules provided in Arts. 1398-1402 ▪ Restitution GR: Mutual restitution - the contracting parties shall restore to each other things which have been the subject matter of the contract, with their fruits and the price with its interest except in case provided by law. In an obligation to render services, the value thereof shall be the basis for damages  XPN: If and when the application of mutual restitution will result in unjust enrichment of one party at the expense of another. ▪ Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of thing at the time of the loss, with interest from the same date. Causes of Extinction of Action to Annul Prescription - the action for annulment must be commenced within 4 years depending on the ground stated Ratification - cleanses the contract of its defects from the moment it was constituted By loss of the thing which is the object of the contract through fraud or fault of the person who is entitled to annul the contract. 3. Unenforceable Contracts Unenforceable contract are those contracts which cannot be enforced by action or complaint, unless they have been ratified by the party or parties who did not give consent thereto. Characteristics of Unenforceable Contracts 1. It cannot be enforced by a proper action in court 2. It may be ratified 3. It cannot be assailed by third person 4. May only be assailed as a way of defense, not by direct action; and 5. The defect of an unenforceable contract is of a permanent nature and it will exist as long as the contract is not duly ratified. The mere lapse of time cannot give efficacy to the contract. Kinds of unenforceable contracts 1. Those entered into in the name of another person by one who has been given no authority/legal representation or acted beyond his power; (Unauthorized contracts) 2. Those that do not comply with the Statute of Frauds 3. Those where both parties are incapable of giving consent to a contract. 4. Void Contracts A void or inexistent contract is one which has no force and effect from the very beginning, as if it has never been entered into, and which cannot be validated either by time or ratification. This definition includes not only those contracts in which one of the essential requisites is totally wanting, but also those which are declared by positive provision of law or statute. A void or inexistent contract is equivalent to nothing; it is absolutely wanting in civil effects. The following contracts are inexistence and void from the beginning 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy 2. Those which are absolutely simulated or fictitious 3. Those whose cause or object did not exist at the time of the transaction 4. Those whose object is outside the commerce of men 5. Those which contemplate an impossible service 6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; 7. Those expressly prohibited or declared void by law. Characteristics of Void Contracts 1. The contract produces no effect whatsoever either against or in favor of anyone; hence it does not create, modify, or extinguish the juridical relation to which it refers; 2. No action for annulment is necessary, because the nullity exists ipso jure, a judgment of nullity would merely be declaratory 3. It cannot be confirmed or ratified; and 4. If it has been performed, the restoration of what has been given is in order. This document is specifically made for BSOA 3A and 3B of EVSU Dulag for academic purposes only. Unauthorized reproduction, distribution, or dissemination of this academic content is strictly prohibited. This includes, but is not limited to, copying, scanning, uploading, or sharing through any digital or physical means without prior written consent. 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