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LECTURE NOTES ON OBLIGATIONS AND CONTRACTS

FOR BSA 1102; SECTIONS BMA, BFA and BGA
College of Business Administration
University of the East – Manila

ATTY. BENJAMIN R. REONAL – PROFESSOR

MODULE 13

FORM OF CONTRACTS

1. May a contract be entered into in any form?

Yes. 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 to be in some
form in order that it may be valid or enforceable, or that a contract is
proven in a certain way, that requirement is absolute and indispensable.
One exception thereto is the Statute of Frauds which requires a written
instrument for the enforceability of a contract. (Arts. 1356 and 1402).
Arrogante, et al. vs. Deliarte, et al., G.R. No. 152132, July 24, 2007).

Example:

X and Y entered into an oral contract of sale of a parcel of land. X

paid the consideration,. When he demanded the delivery of the title, Y
refused, contending that there was no written contract evidencing the
same. What right, if any, does X have as against Y to enforce his rights?

He can ask for a specific performance. Under the law, 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. This right may be exercised simultaneously with the action upon
the contract. (Art. 1357, NCC; Limketkai vs. CA, et al., G. R. No. 118509,
December 1, 1995. 66 SCAD 136).

2. Contracts or acts that must appear in a public instrument:

The following must appear in a public instrument:

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(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 thereto 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 (P500.00) must appear in writing, even a private one. But sale of
goods, chattels or things in action are governed by Articles 1403, No. 2 and
1405. Art 1358 NCC.

3. As a rule, the requirement that contracts be in a certain form does not

necessarily mean that they be so in order to be valid, but the
requirement is designed merely for purposes of enforceability. Some
laws that require contracts to be in a certain form to be valid, are,
namely:

(1) In case of donation of personal properties the value of which exceeds

P5,000.00, the law requires it to be in writing. (Art. 748, NCC).

(2) Donation of real property must be in a public instrument and

accepted to be valid. (Art. 749).

(3) In the sale of real property through an agent, the law requires the
agency to be in writing (Art. 1874 NCC).
REFORMATION OF INSTRUMENTS

4. When is reformation of instrument proper?

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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. (Article
1359, NCC).
Example:
X and Y entered into a contract of loan. X, the creditor, however
asked Y to sign a document which purported to be a sale of a parcel of land
with the assurance that the same would only be a security for the payment
of the obligation. What is the remedy of Y in case X demands the delivery
of the supposed security contending that X is now the owner of the
property?

Y can ask for specific performance. Under the law, when, there have
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. (Art. 1359; par. 1, NCC).

5. What is the concept of the principle that you do not reform the contract
but you reform the instrument evidencing it?

It simply means that the contract is binding as it is the law between

the parties, but the instrument that evidences the terms and conditions of
the contract may not be reflective of the same, hence it must be reformed
in order to reflect the true intention of the parties.

Example:
X and Y entered into a contract. X sought to enforce it by way of a
suit in court. Can he still ask for the reformation of the instrument?
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No, because when one of the parties has brought an action to

enforce the instrument, he cannot subsequently ask for the reformation.
(art. 1367, NCC).

RESCISSIBLE CONTRACTS
6. What is rescission?
Rescission is a remedy granted by law to the contracting parties and
to third persons in order to secure reparation of damages caused them by a
contract, even if the contract be valid, by means of the restoration of things
to their condition prior to the celebration of the said contract.

7. Enumeration of 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 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;
(4)All other contracts specially declared by law to be subject to
rescission (Art. 1381, NCC).

8. What is “accion pauliana?”

The action to rescind contracts made in fraud of creditors is called

“ accion pauliana.”

VOIDABLE CONTRACTS
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9. 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;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud. (Art. 1390, NCC).

10. Basic characteristics of voidable contracts.

Voidable contracts are valid until annulled. They are susceptible
of ratification. Once ratification is made, the said contracts shall be
cleansed of their defects and such ratification retroacts to the
constitution of the contracts. (Art. 1396, NCC).
Example:
A was forced by B to sign a contract. C, a creditor of A, wants to
annul the contract. Is C allowed to do so?
No, C is not allowed to do so. If the contract prejudices him, and
A has no other property, then C may ask for the rescission of the
contract, not its annulment. C cannot ask for annulment because he is
not obliged by the terms of said contract, either principally or
subsidiarily.

11. What is the obligation of each party in case of annulment of a contract?

The contracting parties shall restore to each other the things
which have been the subject matter of the contract, with their fruits,
and the price with its interest, except in cases as provided by law.
In obligations to render service, the value thereof shall be the
basis for damages.

UNENFORCEABLE CONTRACTS
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12 Why are they called unenforceable contracts?

They are called unenforceable contracts because they cannot be
sued upon or enforced unless they are ratified.
13.What are the unenforceable contracts?
Unenforceable contracts are those enumerated in Art. 1403 of the New
Civil Code.

14. Example:
A and B entered into an oral contract of sale of a parcel of land
agreeing on the price, date of payment and delivery of the title on
August30, 2003. Suppose on August 30, 2003, A will go to B’s house and
deliver the money, but B would refuse to convey the land.
(1) Can A sue B to enforce the oral contract?
(2) What is the defense of B, if any? Will it prosper?
(3) Will you answer in Nos. 1 and 2 be the same if B accepted a
down payment?
(4) Suppose A has already delivered the consideration, but B
refuses now to execute the deed of conveyance, what would be
the remedy of the aggrieved party?

(1) No, because the oral contract of sale over real property is
unenforceable if not in writing. (Hernandez vs CA, 160 SCRA 821;
Renato Cenido, et al., vs. Sps. Sta.Ana, G.R. No. 132474, November
19, 1999).

(2) The defense of B is that the oral contract is not enforceable, and it
would prosper because the requirement is that, to be enforceable,
such contract must be in writing.

(3) No more the defense in nos. 1 and 2 would no longer prosper

because if a down payment was accepted it would mean that the
contract is no longer executory but partly executed. A partly
executed contract does not fall under the Statute of Frauds.
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(4) The aggrieved party can file an action for specific performance or
rescission, and in both cases, with damages. (Art.1191, par.2, NCC).

15. If an unenforceable contract entered into between persons who are

incapable of giving consent is ratified, what is the reckoning period of its
validity?
If there is ratification of the contract by the parents or guardians of the
persons who entered into the unenforceable contract the same shall be
validated from its inception.

16. May a third person assail an unenforceable contract?

No, because under the law, unenforceable contracts cannot be assailed
by third persons. (Art. 1408, NCC).

VOID CONTRACTS

17. What are the void contracts?

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;
(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.
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These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived. (Art.1409,NCC). A void contract is equivalent to
nothing. It is absolutely wanting in civil effects; it cannot be the basis of
actions to enforce compliance. (Rep. vs. La’o, G.R. No. 141941, May 4, 2004,
489 SCRA, 424; Barcero vs. Capitol Dev. Corp., G R. No 154765, March 29,
2007).

18. Can void or absolutely simulated contracts be ratified?

No, void and absolutely simulated contracts cannot be ratified. (Art.

1409, NCC). The characteristic of simulation is the fact that the apparent
contract is not really desired or intended to produce legal effects nor in any
way alter the juridical situation. (Carino vs. CA, L-47661, July 31, 1987).

19. Is thee a need for a void contract to be declared void?

Strictly speaking, there is no use. But for purposes of convenience, or to

avoid taking the law into our own hands, there is nothing wrong in having a
void contract declared really void.

Example:

A sells B the Jones Bridge and B gives A the price. Of course, this
contract is null and void, but suppose A refuses to return to B the price, stating
that there is nothing wrong with the contract, what should B do?

B should file an action in court to declare the inexistence of the

contract. This right of B to bring the action does not prescribe. Indeed the
defect in this kind of contract cannot be cured by prescription or by
ratification. (Eugenio vs Perdido, 97 Phil. 41).
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