The Law on Contracts PDF

The Law on Contracts ACREV 424 THE LAW ON CONTRACTS Prepared and owned by: Atty. Rosemarie Pitan Areno (for the USE only of Saint Louis University) ELEMENTS 1. Essential- for...

The Law on Contracts ACREV 424 THE LAW ON CONTRACTS Prepared and owned by: Atty. Rosemarie Pitan Areno (for the USE only of Saint Louis University) ELEMENTS 1. Essential- for validity a. Consent, object, consideration (consensual contracts) – Ex: sale except sale by agent of land of principal which needs a written authority in order for sale to be valid (formal), guaranty, agency, partnership except where real property or real rights over immovable is contributed (formal), real estate mortgage, employment contract. Note 1. The requirement that sale, lease of real property for more than 1 year, and guaranty must be in writing is only a requirement for enforceablility. Note 2. The requirement that a real estate mortgage must be in a public instrument and registered is only a requirement to affect 3rd persons not party to the contract. b. Delivery (in real contracts) – Ex: loans (mutuum and commodatum), pledge, deposit, contract of carriage Note 1. The requirement that the pledge must be registered is only to affect 3rd parties. Note 2. Agreement to enter into a future real contract is binding (consensual) and becomes a real contract upon delivery of object c. Formalities required (formal contracts) – Ex: chattel mortgage must be registered to be valid, antichresis must be in writing to be valid, agreement to pay interest must be in writing to be valid, partnership where immovable or real rights over immovables is contributed must be in a public instrument and registered to be valid, in sale of land by agent of principal the authority of agent must be in writing for the sale to be valid, donation (personal property worth >5k in writing, real property in public instrument) d. Price certain (contract of sale) 2. Natural- in some contracts only, presumed to exist. Example: warranties in sale 3. Accidental- other stipulations of parties STAGES 1. Preparation/conception- negotiation 2. Perfection/birth- meeting of minds Note: delivery essential for perfection of REAL contracts and formality for formal contracts 3. Performance/death- execution, termination, consummation PRINCIPLES AND CHARACTERISTICS 1. Autonomy/liberty to contract- provided they are not contrary to law, morals, good customs, public order, public policy Examples: pactum commissorium, pactum non aliendo, pactum leonine, fixing of upset price in sale by public auction, free services as “servant”/no consideration, waiver for future fraud 2. Mutuality of contracts- binds both parties, both parties set terms Atty. Rosemarie Pitan Areno Page 1 of 11 The Law on Contracts 3. Obligatory/ with force of law between parties- damages for breach 4. Relativity of contracts- as a rule affects only parties, compulsory heirs and assigns (privity of contracts) Exceptions: a. Personal obligations or those not transmissible by law, agreement, nature of obligation (LAN) b. Law authorizes creditor to sue on contracts of debtor (accion pauliana or accion directa) c. Stipulation pour autrui Requisites: Stipulation (may also be inferred from the contract, no specific form) Parties clearly and deliberately confer benefit to a 3rd person Incidental benefit not sufficient (ex. Dr paid Cr and with that Cr also paid his own Cr) 3rd person communicates his acceptance before revocation No agency relationship between the parties and the 3rd person d. 3rd person induces another to violate his/her contract e. 3rd person adversely affected by contract to which he is not a party. Example: CBA agreements, contracts publicly registered CLASSIFICATIONS OF CONTRACT 1. Formation/Perfection (see previous discussion) a. Consensual b. Real c. Formal 2. Degree Of Dependence a. Preparatory (ex. Agency, Partnership) b. Principal (ex. Sale, loan, agency, partnership) c. Accessory (ex. Mortgage, pledge, antichresis) 3. Parties Obligated a. Unilateral (ex. Commodatum, donation) b. bilateral 4. Cause/Equivalence of Value of Prestation a. Onerous- exchange of equivalent valuable consideration b. Gratuitous- free, generosity is the consideration c. Remunerative- for a benefit or service PREVIOUSLY rendered (ex. cancellation of indebtedness for services rendered) 5. Risk Involved (Fulfillment) a. Commutative- parties contemplate a real fulfillment therefore equivalent values are given. b. Aleatoy- fulfillment depends on chance therefore the values vary because of the risk 6. Name/Designation a. Nominate (ex. Bank deposit is loan) b. Innominate Do ut des (but this is actually barter) Atty. Rosemarie Pitan Areno Page 2 of 11 The Law on Contracts Facio ut des Facio et facias Do et facias 7. Time of Performance a. Executory- at the time of perfection, obligations are still to be complied with by the parties b. Executed- at the time of perfection, obligations were already complied with c. Partially executed 8. Number of Persons Actually & Physically Entering Into The Contract a. Ordinary- two parties represented by different persons (ex. Sale) b. Auto-contracts- only one person represents two opposite parties, in different capacities Ex. Agent sells car of principal to himself as buyer (this is not prohibited under the law on agency) Ex. Agent authorized to borrow may become the lender. However, by express provision of the law, when agent is authorized to lend, he cannot himself be the borrower. 9. Number Of Persons Who Participated In The Drafting Of The Contract a. Ordinary b. Contract of adhesion (ex. Insurance, bill of lading, sale of lot on installment basis, bank loans) CONSENT Presupposes legal capacity If no/absent consent, contract is VOID If consent is vitiated/defective, contract is VOIDABLE Meeting of the minds- there is manifestation of concurrence between the OFFER and ACCEPTANCE regarding the object and consideration. Requisites for meeting of minds: 1. Offer which is certain – not vague, misleading (“intention” or “willingness” is not a certain offer) 2. Acceptance is unqualified and absolute Ex. A went to a store, offered to buy a certain watch for 100 thousand. Seller said he is willing to sell for 120 thousand. Buyer turned to walk away. Seller called him back and said he is willing to sell for 100 thousand. There was no acceptance. There was a counter-offer. May Seller compel A to buy at 100 thousand? NO. Acceptance may be express or implied Acceptance with a statement that the party accepted the agreement against his better judgment is valid. Acceptance through correspondence (letter/telegram) COGNITION THEORY- Acceptance through letter or telegram does not bind the offerer EXCEPT from the time it came to his knowledge. Contract in such case is presumed to have been entered into in the place where the OFFER was made. Atty. Rosemarie Pitan Areno Page 3 of 11 The Law on Contracts Knowledge may be actual or constructive. Example, if letter is received in the house of the offerer. CASES: 1. Feb. 1 Offer sent Mar. 3 Acceptance sent Mar. 4 Letter of withdrawal of the offer. No receipt of acceptance letter yet. There is no perfected contract. 2. Feb. 1 Offer sent Mar. 3 Acceptance sent Mar. 5 Acceptance revoked. Sent Mar. 6 Acceptance received Mar. 8 Revocation received There is a perfected contract. OTHER THEORIES: a. Manifestation theory – perfected when acceptance is manifested or declared b. Expedition theory – when acceptor transmits his acceptance c. Reception theory – when acceptance is in the hands of the offeror Offer made through agent is accepted from the time it is communicated to him (agent). Offer becomes ineffective upon the death, civil interdiction, insanity, insolvency of either of the parties BEFORE acceptance is conveyed. Feb. 1 Offer sent Mar. 3 Acceptance sent Mar. 5 Acceptor died (offer becomes ineffective) Mar. 6 Acceptance received by offeror No perfected contract. VICES OF CONSENT 1. MISTAKE Must be substantial Must refer to the principal conditions which have principally moved one or both parties to enter into the contract. May also refer to the identity or qualifications of one of the parties IF such identity or qualifications have been the principal cause of the contract. May also refer to the legal effect of an agreement when the real purpose of the parties is frustrated and the same is MUTUAL. 2. FRAUD Recall dolo causante vs dolo incidente (must be dolo causante) Insidious words or machinations moved one of the contracting parties to enter into the contract. Failure to disclose facts when there is duty to reveal them may also constitute fraud. Atty. Rosemarie Pitan Areno Page 4 of 11 The Law on Contracts Fraud must be serious and should not have been employed by BOTH the parties to the contract 3. VIOLENCE Serious or irresistible force is employed Even if employed by a third person 4. INTIMIDATION There is reasonable and well-grounded fear of an imminent and grave evil upon the person or property, or upon the person or property of the spouse, descendants or ascendants of one of the parties. A valid threat to enforce a legal claim is NOT intimidation. 5. UNDUE INFLUENCE There improper advantage of the power over the will of another. OBJECT OF THE CONTRACT Must be within the commerce of men Transmissible Not contrary to law, moral, good customs, public order or public policy. Not impossible Determinate as to its kind (no need to be specific object) CAUSE OF CONTRACT Must exist Must be lawful Must be true Cause and motive distinguished Lesion (inadequacy of price) does not invalidate the contract except when there is fraud, mistake, or undue influence, or in cases as provided for by the law, such as in the case of rescissible contracts. ------------------------------------------------------------------------------------------------------------------------- FORM OF CONTRACT: 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. Therefore, general rule: ANY FORM Exceptions: When a certain form/formality is required- 1. For validity (see notes on “formal contracts”) If no form, contract is void. Cannot be ratified. Must only be declared void. 2. For enforceability (under the Statute of Frauds, certain contracts must be in writing to be enforceable) If no form, contract is only unenforceable. Cannot compel performance or even the execution (writing) of the contract. Remedy is ratification or voluntary performance of obligation. Ratification – express or implied (acceptance of benefit or performance by the other party, failure to object to the presentation of oral evidence) Once ratified, it is already be enforceable (compel performance of obligation). Atty. Rosemarie Pitan Areno Page 5 of 11 The Law on Contracts Applies only to “executory” contracts (see kinds of contracts) Under the Statute of Frauds, these are the contracts which must be in WRITING (any form of writing) in order to be enforceable: 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 (guaranty); c. An agreement made in consideration of marriage, other than a mutual promise to marry; 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 for 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. CASE: S verbally sold land to B. No payment or delivery yet (executor). ▪ Contract is unenforceable. S cannot compel B to pay. B cannot compel S to deliver. Neither may compel the other to execute the form (written instrument) required. ▪ If one S voluntarily delivers or B voluntarily pays and the other accepts delivery or payment, contract has been ratified. It is already enforceable (demand full performance and/or execution of the required written agreement) 3. To affect 3rd persons (for efficacy) The contract is valid, binding, and enforceable as between the parties even without the form requirement. The form is required only if 3rd persons are to be affected by the terms and conditions of the contract. The form requirement is a PUBLIC INSTRUMENT. The following are contracts which MUST be in a PUBLIC instrument to bind or affect 3rd persons: a. 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 the Statute of Frauds (Exception No. 2 above). b. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; c. 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; d. The cession of actions or rights proceeding from an act appearing in a public document. NOTE: All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sale of goods, chattels or things in action is governed by the Statute of Frauds. Atty. Rosemarie Pitan Areno Page 6 of 11 The Law on Contracts Requirements for VALIDITY (1) and ENFORCEABILITY (2) are indispensable. There is one provision which states: If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. Meaning, a party may force the other party to execute the “form required”. The above remedy applies to EXCEPTION No. 3 (Public instrument to affect 3rd persons) only because as mentioned earlier, form requirements for validity (1) and enforceability (2) are indispensable. ------------------------------------------------------------------------------------------------------------------------------ REFORMATION OF INSTRUMENTS: A remedy available, provided: 1. There has been meeting of the minds (perfected contract) 2. TRUE INTENTION is NOT EXPRESSED in the contract 3. Reasons: Mistake (simple), fraud, accident, relative simulation, inequitable conduct NO REFORMATION OF: 1. Simple, unconditional donation inter vivos 2. Wills (donation mortis causa) 3. Agreement which is void (example: absolutely simulated contract) ------------------------------------------------------------------------------------------------------------------------------ INTERPRETATION OF CONTRACTS: Terms and conditions must be strictly followed Conflict between words and intent, latter prevails Several meanings – that meaning that would render contract effectual Stipulations must be read together Usage and custom also to be borne in mind -------------------------------------------------------------------------------------------------------------------------------- RESCISSIBLE CONTRACTS: 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; ▪ 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 donor did not reserve sufficient property to pay all debts contracted before the donation. ▪ Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. 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. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected. 6. All other contracts specially declared by law to be subject to rescission. Atty. Rosemarie Pitan Areno Page 7 of 11 The Law on Contracts No rescission for nos. (1) and (2) above if already approved by the courts. The action for rescission is subsidiary. The injured party has no other remedy. Rescission shall be only to the extent necessary to cover the damages caused. Rescission creates the obligation to return the object, fruits, price, and interest. No rescission if party asking for it cannot restore to the other party what he had received. No rescission if object is legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. Ratification is NOT a remedy. ---------------------------------------------------------------------------------------------------------------------------- VOIDABLE CONTRACTS: 1. Those where one of the parties is incapable of giving consent to a contract; 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. Valid and binding until annulled by a proper action in court. They are susceptible of ratification. 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. When the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. Ratification extinguishes the action to annul. Ratification may be express or implied (tacit). 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. Ratification may be effected by the guardian of the incapacitated person. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. 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. Consequence of annulment: the contracting parties shall restore to each other the object, fruits, price, and interest. The incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. The action for annulment shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. -------------------------------------------------------------------------------------------------------------------------- UNENFORCEABLE CONTRACTS: 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; Atty. Rosemarie Pitan Areno Page 8 of 11 The Law on Contracts 2. Those that do not comply with the Statute of Frauds. 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; c. An agreement made in consideration of marriage, other than a mutual promise to marry; 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 for 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. Contracts infringing the Statute of Frauds above 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. When a contract is enforceable (when ratified like when there has been voluntary performance already) under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may compel each other to execute the required form. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. Unenforceable contracts cannot be assailed by third persons. -------------------------------------------------------------------------------------------------------------------------------------- VOID AND INEXISTENT CONTRACTS: 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. Cannot be ratified. Neither can the right to set up the defense of illegality be waived. Action to declare nullity of contract does not prescribe. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code Atty. Rosemarie Pitan Areno Page 9 of 11 The Law on Contracts relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. If only one is guilty, the innocent party may claim what he has given, and shall not be bound to comply with his promise. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: a. If both parties are at fault, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; b. When only one is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The innocent party may demand the return of what he has given without any obligation to comply his promise. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or property delivered by the incapacitated person. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. The defense of illegality of contract is not available to third persons whose interests are not directly affected. A contract which is the direct result of a previous illegal contract is also void and inexistent. TABLE OF SUMMARY RESCISSIBLE VOIDABLE UNENFORCEABLE VOID Atty. Rosemarie Pitan Areno Page 10 of 11 The Law on Contracts Defect 1. In fraud of 1. Incapacity of 1. In the name of 1. Contrary to law, creditors when latter one party another, without illegal can no longer collect 2. Vitiated consent authority from the 2. Absolutely 2. Lesion by more latter. simulated than ¼ of value of 2. There is excess of 3. No cause or property authority consideration 3. Things under 3. Both parties 4. Object outside litigation-by incapacitated commerce of men defendant without 4. Non-compliance 5. Impossible approval with the Statute of object, service 4. Payment by Frauds 6. Declared void by insolvent who, at law that time, cannot be 7. Intention as to compelled to pay object cannot be ascertained Damage to a Necessary Not necessary Not necessary Not necessary party Legal effect VALID until VALID until INOPERATIVE unless NO LEGAL EFFECT rescinded annulled ratified Remedy Rescission within 4 Annulment within Ratification- by the Declaration of years- by the party or 4 years- by parties parties ONLY Nullity- No 3rd person prejudiced obliged (but prescription capacitated or Rescission only party who By parties or 3rd when demanding employed MFVIU persons directly party can return cannot allege as affected what was received his defense the Cannot be ratified incapacity of the other Noannulment if object is lost through fault of the party entitled to annul Mayalso be RATIFIED -END OF MODULE_2- Atty. Rosemarie Pitan Areno Page 11 of 11