Contracts PDF

CONTRACTS What is a contract? A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service (Art. 1305) I. Four (4) Most Essential Characteristics 1. Obligatory force/character of contract -the principle that...

CONTRACTS What is a contract? A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service (Art. 1305) I. Four (4) Most Essential Characteristics 1. Obligatory force/character of contract -the principle that once a contract is perfected, it shall be obligatory upon both of the contracting parties. - It constitutes the law as between the parties. 2. Autonomy of Contracts - the contracting parties may establish such stipulations, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. 3. Mutuality of contracts - the contracts must bind both contracting parties; its validity or compliance must not be left to the will of one (1) of them. Hence, its validity or compliance cannot be left to the will of one of them. This principle is based on the essential equality of the parties. It is elementary rule that no party can renounce or violate the law of the contract without the consent of the other. (11 Manresa 380) 42 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Example, Gaya and Laura entered into a contract to sell whereby Gaya binds herself to sell her only parcel of land to Laura if Gaya decides to leave for States. The contract is void because the fulfillment of the condition depends on the will of Gaya. 4. Relativity of contracts - contracts take effect only between the parties, their assigns and heirs. Exceptions: Art. 1311. Xxx If a contract should contain some stipulation in favor of a third person, (STIPULATION POUR AUTRUI) he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. 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. Example, Gaya mortgaged her parcel of land in favor of Laura as collateral for her debt. The mortgage is duly registered. Later on, Gaya sold the same land to Tito. In this case, Tito bought the land subject to the mortgage constituted thereon. Tito, although a stranger in the mortgage, being a real right follows the property on the right of Laura to the mortgage Art. 1313. Creditors are protected in cases of contracts intended to defraud them. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. II. Essential Requisites 1. Consent of the contracting parties; 2. Object certain which is the subject matter of the contract; and 43 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3. Cause of the obligation which is established (Art. 1318) - absent any of the essential requisites/elements in a contract, will make the said contract void CONSENT What are the requisites of consent? 1. Must be manifested by the concurrence of the offer and acceptance (Art. 1319-1326); 2. Parties must possess the necessary legal capacity (Art. 1327); and 3. Must be intelligent, free, spontaneous and real (Art. 1330-1346). Note: 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 (Art. 1319). Cognition Theory - the contract is perfected from the moment the acceptance comes to the knowledge of the offeror. - An offer becomes ineffective upon the death,civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. Art. 1324 - When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is rounded upon a consideration, as something paid or promised. - Art.1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. - Art. 1326. Advertisement for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. - Art. 1327 The following cannot give consent to a contract: - 1.) Unemancipated minors; 44 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. - 2.) Insane or demented persons, and deaf-mutes who do not know how to read and write. (1263a) - Art. 1328 Contracts entered into during a lucid interval are valid, contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (see below discussion on Voidable contracts): OBJECT What are the requisites of a valid object of a contract? 1. Must be within the commerce of man; 2. Should be real or possible; 3. Should be licit; and 4. Should be determinate, or at least possible determination as to its kind. of CAUSE What are the requisites of cause? 1. Existing at the time of the celebration of the contract; 2. Licit or lawful; and 3. True. Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if is contrary to law, morals, good customs, public order or public policy. (1275a)Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were rounded upon another cause which is true and lawful. Stages of A Contract 1. Preparatory or conception – process of formation such as bargaining, negotiation to arrive at a definite contract. 2. Perfection or birth – there is now a meeting of minds to arrive at a definite agreement as to the subject matter, cause or consideration, terms and conditions of contract. 3. Consumption or death – which is the fulfillment or performance of the terms and conditions agreed upon in the contract may be said to have been fully accomplished or executed. III. Kinds of Contracts As to Perfection: A. Consensual Contracts When is a consensual contract perfected? Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the 45 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. consequences which, according to their nature, may be in keeping with good faith, usage and law (Art. 1315). B. Real Contracts When is a real contract perfected? Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation (Art. 1316). Example: Deposit, pledge, or commodatum. As to dependence to other contract. a. Principal – one which can stand alone. Ex. A contract of sale, lease. b. Accessory – those which are dependent upon another contract. Ex. Contract of mortgage, pledge or guaranty. c. Preparatory – those which are created in order that a future transaction or contract may be entered into by the parties. Ex. Contract of partnership or agency. According to name or designation a. Nominate – one which has particular name or designation such as sale, agency, etc. b. Innominate – those without particular name. According to the nature of obligation a. Unilateral – where only one has an obligation to perform. Ex. Contract of donation b. Bilateral – where both parties have reciprocal obligation to perform. Ex. Sale. According to risk involved a. Commutative - where there is an exchange of values, such as lease. b. Aleatory - one which the fulfillment of the obligation depends upon chance. Ex. Contract of insurance. According to cause a. Onerous – one which imposes valuable consideration such as sale, mortgage. b. Gratuitous – one which one of the parties does not receive any valuable consideration, such as commodatum, donation, usufruct, etc. According to form a. Oral – by word of mouth of the parties b. Written – the agreement which is reduced in writing which may be public or private document 46 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. IV. Formality What form is required in a contract in order to be valid? The general rule is that contracts are obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. The exceptions are: 1. When the law requires that a contract be in some form in order that it may be valid or enforceable; or 2. When the law requires that a contract be proved in a certain way. What are the contracts that must be in a public instrument? Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or 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 property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. What are the rules as to formal requirements of a donation? Art. 748. The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing, otherwise, the donation shall be void. 47 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. V. Defective Contracts What are the distinctions between a void, voidable, rescissible and unenforceable contracts? VOID The defect is caused by: 1. LACK OF ESSENTIAL ELEMENTS OF A CONTRACT; 2. ILLEGALITY VOIDABLE The defect is caused by VICE OF CONSENT RESCISSIBLE The defect is caused by INJURY/DAMAGE either to one of the parties or to a third person The contract does not, as a general rule, produce any legal effect The contract is valid and enforceable until it is annulled by court The contract can be ratified Assailed only by a contracting party and not by third persons The contract is valid and enforceable until rescinded by court The contract cannot be ratified Can be challenged or assailed by: 1. a contracting party; and 2. a third party whose interest is The contract need not be ratified Can be challenged or assailed by a contracting party and a third person who is prejudiced or damaged by the contract UNENFORCEABLE The defect is caused by LACK OF FORM, AUTHORITY, or CAPACITY OF BOTH PARTIES not cured by prescription The contract cannot be enforced by a proper action in court The contract can be ratified Assailed only by a contracting party and not by third persons 48 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. directly affected. Example: There is a deed of sale in favor of B involving A’s multi-million house and lot in Tagaytay. In the said contract, the price declared is only PHP10,000.00. In this case, the price is simulated, hence, it is void. Example: A executed a deed of sale involving his condominium unit in favor of B while the latter points a gun to him. In this case, the contract is voidable. It is valid until annulled. Example: Bruce’s parents died. He inherited their mansion worth PHP40,000,000.00. Bruce was still a minor so Alfred was appointed as his guardian. Later, Alfred sold the mansion on behalf of Bruce for PHP29,000,000.00. In this case, Alfred sold the mansion for a lower price by more than onefourth (1/4) of its market value to the prejudice of Bruce. Bruce can ask for the rescission of the sale. Example: A represented herself as the representative of B, the owner of the farm which is the subject of sale in favor of C. It turned out however, that A is not authorized by B to enter into a contract of sale involving his property. In this case, the contract is unenforceable. A. RESCISSIBLE CONTRACTS What contracts are rescissible? Art. 1481. The following contracts are rescissible: (1) 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; (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; Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the 49 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. (4) 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; (5) All other contracts specially declared by law to be subject to rescission. Additional: (6) A contract of sale entered into in violation of a right of 1st refusal of another person, while valid is rescissible. What are the requisites of rescission? 1. The contract must be rescissible under Art. 1381 and 1382; 2. Party asking for rescission must have no other legal means to obtain reparation for the damages suffered by him (Art. 1382); 3. Person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385); 4. Things which are the object of the contract must not have passed legally to the possession of a third person acting in good faith (Art. 1385); and 5. Action must be brought within four (4) years. B.VOIDABLE CONTRACTS What are voidable contracts? 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; and 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 50 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: Voidable contracts are binding, unless they are annulled by a proper action in court. These contracts are susceptible of ratification (Art. 1390) Incapacitated Who are those persons incapacitated to give consent to a contract? 1. Minors; 2. Insane or demented persons, and deaf-mutes who do not know how to read and write (Art. 1329); and 3. Person in a state of drunkenness or during a hypnotic spell (Art. 1328). Mistake Mistake of Fact When one or both contracting parties believe that a fact exists when in reality it does not, or that such fact does not exists when in reality it does Mistake of Law When one or both parties arrive at an erroneous conclusion regarding the interpretation of a question of law or the legal effects of certain act or transaction Note: As a general rule, it is only mistake of fact which will vitiate consent thus rendering the contract voidable. Mistake of law, does not render the contract voidable because of the well-known principle that “Ignorance of the law excuses no one from compliance therewith” or “Ignorancia legis nemenem excusat”. Violence When is there violence? There is violence when in order to wrest consent, serious or irresistible force is employed (Art. 1335). Intimidation When is there intimidation? 51 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind (Art. 1335). Undue Influence When is there undue influence? Art. 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. Fraud When is there fraud? Art. 1338. 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. Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. Art. 1341. A 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. 52 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. When can fraud make a contract voidable? Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. When should an action for annulment be brought? Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. What is ratification and what are its effects in action to annul a voidable contract? Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. Note: Art. 1392. Ratification extinguishes the action to annul a voidable contract. What are kinds of ratification? 53 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Who are the persons who may institute an action for the annulment of contracts? Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. C. UNENFORCEABLE CONTRACTS What are the instances when a contract is unenforceable? Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; 54 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. (c) An agreement made in consideration marriage, other than a mutual promise to marry; of (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. Note: The Statute of frauds is applicable only to executory contracts and not to totally or partially performed contracts. What is the form of ratification of unenforceable contracts? Art. 1317. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. 55 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: Art. 1408. Unenforceable contracts cannot be assailed by third persons. D. VOID CONTRACTS What is the difference between void contracts and inexistent contracts? Void Contracts Inexistent Contracts Void contracts are those where all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or contract itself is prohibited or declared void by law. Inexistent contracts are those where one or some or all of those requisites which are essential for the validity of a contract are absolutely lacking, such as those which are absolutely simulated or fictitious, or those where the cause or object did not exist at the time of the transaction. Void contracts do not allow Inexistent contracts are open to either party thereto to be heard attack even by the parties and invoke its unlawful character thereto. as a ground for relief. Enumerate the void and inexistent contracts: Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; 56 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. (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. Note: These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. What is the principle of In Pari Delicto? When the defect of a void contract consists in the illegality of the cause or object of the contract, and both parties are at fault or in pari delicto, the law refuses them every remedy and leaves them where they are. 57 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws.