CHAPTER 5 - INTERPRETATION OF CONTRACTS

Article 1370 – 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.

Meaning of Interpretation of Contracts

Interpretation of a contract is the determination of the meaning of the terms or words used by the
parties in their contract. It is the process of ascertaining the intention of the parties from the written words
contained in their contract.

Literal Meaning Controls When Language Clear

Contracts, which are the private laws of the contracting parties, should be fulfilled according to the
literal sense of their stipulations, if the terms of a contract are clear and unequivocal. The parties are
bound by such terms. In this case, the question is not what existed in the minds of the parties but what
intention is expressed in the language used.

Evident Intention of Parties Prevails Over Terms of Contract

Where the words and clauses of a written contract are in conflict with the manifest intention of the
parties, the latter shall prevail over the former. It is a cardinal rule in the interpretation of contracts that the
intention of the contracting parties should always prevail because their will has the force of law between
them.

Article 1371 – In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.

Contemporaneous and Subsequent Acts Relevant in the Determination of Intention

Where the parties to a contract have placed an interpretation to the terms thereof by their
contemporaneous and/or subsequent conduct, as by acts partial performance, such interpretation may be
considered by the court in determining its meaning and ascertaining the intention of the parties when such
intention cannot clearly be ascertained from the words used in their contract.

Although Article1371 speaks of acts contemporaneous and subsequent to the celebration of the
contract, antecedent circumstances under which it was made may also be considered.
Article 1372 – 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.

Special Intent Prevails Over a General Intent

As a rule, where in a contract there are general and special provisions covering the same subject
matter, the latter control over the former when the two cannot stand together.
 The reason for this rule is that when the parties express themselves in reference to a particular matter,
the attention is directed to that, and it must be assumed that it expresses their intent; whereas, a reference
to some general matter, within which the particular matter may be included, does not necessarily indicate
that the parties had the particular matter in mind.

Article 1373 – If some stipulation of a contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual.

Interpretation of Stipulation with Several Meanings

When an agreement is susceptible of several meanings, one of which would render it effectual, it
should be given that interpretation. Thus, if one interpretation makes a contract valid and the other makes
it illegal, the former interpretation is one which is warranted by the rule stated in Article 1373.

Article 1374 – The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly.

Interpretation of Various Stipulations of a Contract

A contract must be interpreted as a whole and the intention of the parties is to be gathered from the
entire instrument and not from particular words, phrases, or clauses. All provisions should, if possible, be
so interpreted as to harmonize with each other.

Article 1375 – Words which may have different significations shall be understood in that which is
most in keeping with the nature and object of the contract.

Interpretation of Words with Different Significations

If a word is susceptible to two or more meanings, it is to be understood in that sense which is most in
keeping with the nature and object of the contract in line with the cardinal rule that the intention of the
parties must prevail.

Article 1376 – The usage or custom of the place shall be borne in mind in the interpretation of
the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established.

Resort to Usage or Custom as Aid in Interpretation

The usage or custom of the place where the contract was entered into may be received to explain
what is doubtful or ambiguous in a contract on the theory that the parties entered into their contract with
reference to such usage or custom.

Article 1377 – The interpretation of obscure words or stipulation in a contract shall not favor the
party who caused the obscurity.

Interpretation of Obscure Words

A written agreement should, in case of doubt, be interpreted against the party who has drawn it, or be
given an interpretation which will be favorable to the other who, upon the faith of which, has incurred an
obligation.
 The reason for the rule in Article 1377 is that the party who drafts the contract (e.g., insurance
contract the terms of which are prescribed by the insurance company in printed form), more easily than
the other, could have prevented mistakes or ambiguity in meaning of careful choice of words; and
generally, the party who causes the obscurity acts with ulterior motives.

Article 1378 – When it is absolutely impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the
least transmission of rights and interest shall prevail. If the contract is onerous, the doubt shall be
settled in favor of the greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and void.

Rules in Case Doubts Absolutely Impossible to Settle

When, despite the application of the preceding rules (Art. 1370-1377.), certain doubts still exist, such
doubts shall be resolved in accordance with the supplementary rules stated in the present article.

(1) Gratuitous Contract - if the doubts refer to incidental circumstances of a gratuitous contract, such
interpretation should be made which would result in the least transmission of rights and interests.
(2) Onerous Contract - if the contract in question is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
(3) Principal object of the Contract - if the doubt refers to the principal object of the contract and
such doubt cannot be resolved thereby leaving the intention of the parties unknown, the contract
shall be null and void.

Article 1379 – The principles of interpretation stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of contracts.

Principles of Interpretation in the Rules of Court Applicable

The rules in the Rules of Court on the interpretation of documents are now contained in Rule 130,
Section 8 to 17 thereof.
INTRODUCTION TO CHAPTERS 6, 7, 8, and 9

Kinds of Defective Contracts

There are four (4) kinds of defective contracts. They are, in the order of their defectiveness.

(1) Rescissible contracts (Chap.6.);

(2) Voidable contracts (Chap.7.);
(3) Unenforceable contracts (Chap.8.);and
(4) Void or inexistent contracts (Chap.9)
 CHAPTER 6 - RESCISSIBLE CONTRACTS

Article 1380 – Contracts validly agreed upon may be rescinded in the cases established by law.

Meaning of Rescissible Contracts

Rescissible contracts validly agreed upon because all the essential elements exist and, therefore,
legally effective, but in the cases established by law, the remedy of rescission is granted in the interest of
equity.

Binding Force of Rescissible Contracts

They are valid and enforceable although subject to rescission by the court when there is economic
damage or prejudice to one of the parties or to a third person. In a rescissible contract, there is no defect at
all but by reason of some external facts, its enforcement would cause injustice.

Meaning of Rescission

Rescission is a remedy granted by law to the contracting parties and sometimes even to third persons
in order to secure reparation of damages caused by a valid contract, by means of the restoration of things
to their condition in which they were prior to the celebration of said contract.

Requisites of Rescission

The following are the requisites before the remedy of rescission may be availed off:

(1) The contract must be validly agreed upon;

(2) There must be lesion or pecuniary prejudice to one of the parties or to a third person;
(3) The rescission must be based upon a case especially provided by law;
(4) There must be no other legal remedy to obtain reparation for the damage;
(5) The party asking for rescission must be able to return what he is obliged to restore by reason of
the contract;
(6) The object of the contract must not legally be in the position of third persons who did not act in
bad faith;and
(7) The period for filing the action for rescission must not have been prescribed.

Article 1381 – 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 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;
 (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.

Cases of Rescissible Contracts

Articles 1381 and 1382 enumerate the six types of rescissible contracts.

(1) Contracts entered into on behalf of wards - a ward is a person under guardianship by reason of
some incapacity.
(2) Contracts agreed upon in representation of absentees - an absentee is a person who disappears
from his domicile, his whereabouts unknown, and without leaving an agent to administer his
property. Likewise, the absentee must suffer lesion by more than one-fourth of the value of the
property object of the contract to entitle him to the remedy of rescission.
(3) Contracts undertaken in fraud of creditors - In order that fraud of creditors may be valid ground
for rescission, the following requisites must also be present:
(a) There must be an existing credit prior to the contract to be rescinded, although it is not
yet due or demandable;
(b) There must be fraud on the part of the debtor which may be presumed or proved; and
(c) The creditor cannot recover his credit in any other manner, it not being required that the
debtor be insolvent.

(4) contracts which refer to things under litigation.

(5) Other instances.

Article 1382 – Payments made in a state of insolvency for obligations to whose fulfillment the
debtor cannot be compelled at the time they were affected, are also rescissible.

Payments Made in a State of Insolvency

The present article speaks of "payment" not exactly of a contract. A debtor is insolvent if he does not
have sufficient properties to meet his obligations. It is not necessary that the debtor's insolvency be
judicially declared.

Under this article, the payments must have been made "for obligations to whose fulfillment the
debtor could not be compelled at the time they were affected".
Article 1383 – The action for rescission is subsidiary; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same.

Nature of Action for Rescission

Rescission is not a principle remedy. It is only subsidiary, meaning that it can be availed of only if the
injured party proves that he has no other legal means aside from rescinding the contract to obtain redness
for the damage caused even if the contract is covered by Article 1381.

Article 1384 – Rescission shall be only to the extent necessary to cover the damages caused.
Extent of Rescission

The entire contract needs to be set aside by rescission if the damage can be repaired or covered by
partial rescission. The rescission shall only be to the extent of the creditor's unsatisfied credit. The policy
of the law is to preserve or respect the contract, not to extinguish it.

Article 1385 – Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are
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.

Rescission Creates Obligation of Mutual Restitution

When the court declares a contract rescinded, the parties must return to each other (1) the object of
the contract with its fruits and (2) the price thereof with legal interest.

The purpose of rescission is to restore the parties to their original situation. The law presumes that
the party who received the object of the contract has enjoyed the fruits thereof while the other has used
the money which is the price of the object. With respect to the fruits, the rules on possession govern.

Obligation of Third Person to Restore

The clause " he who demands rescission" applies also to a third person. Of course, if the third person
has nothing to restore, the article does not apply. The law does not require the impossible.

When Rescission Not Allowed

(1) The remedy of rescission cannot be availed if the party who demands rescission cannot return
what he is obliged to restore under the contract.
(2) Neither shall rescission take place if the property is legally in the possession of a third person
who acted in good faith, that is to say, he acquired the property and registered it under the Torrens
System in the Registry of Property unaware of the flaw in his title or mode of acquisition. In such
a case, the remedy would be to demand indemnity for damages from the person who caused the
loss.

Article 1386 – Rescission referred to in Nos.1 and 2 of Article 1381 shall not take place with
respect to contracts approved by the courts.

Contracts Approved by the Courts

If a contract entered into in behalf of a ward or absentee has been approved by the court, rescission
cannot take place because it is valid whether there is lesion or not.
 The law presumes that the court is acting in the interests of the ward or absentee when it approves the
contract in spite of the lesion.

Article 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 donor did not reserve
sufficient property to pay all debts contracted before the donation.

Alienation by onerous title are also presumed fraudulent when made by persons against whom
some judgment has been rendered in any instance or some writ of attachment has been issued. The
decision or attachment need not refer to the property alienated, and need not have been obtained
by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

When Alienation Presumed in Fraud of Creditors

This provision establishes prima facie presumptions of fraud in the case of alienation by the debtor of
his property. However, the instances mentioned are not exclusive of others that may be proved in any
other manner recognized by the law of evidence.
(1) Alienation by gratuitous title.
(2) Alienation by onerous title.

Circumstances Denominated as Badges of Fraud

The following are some of the circumstances attending sales which have been dominated by the
courts as badges of fraud:

(1) The fact that the consideration of the conveyance is fictitious or inadequate;
(2) A transfer made by a debtor after suit has been began and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) The transfer of all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially;
(5) The fact that the transfer is made between father and son, when there are presents some or any of
the above circumstances;
(6) The failure of the vendee to take exclusive possession of all the property; and
(7) It was known to the vendee that the vendor had no properties other than that sold to him.

Article 1388 – 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.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Liability of Purchaser in Bad Faith

 The purchaser in bad faith, who acquired the object of the contract alienated in fraud of creditors,
must return the same if the sale is rescinded and should it be impossible for him to return it, due to any
cause, he must indemnify the former.

Article 1389 – 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.

Period for Filing Action for Rescission

As a general rule, the action to claim rescission must be commenced within four(4) years from the
date the contract was entered into. The exceptions are:
(1) For persons under guardianship, the period shall begin from the termination of incapacity; and
(2) For absentees, from the time the domicile is known.

Persons Entitled to Bring Action

The action for rescission may be brought by:

(1) The injured party or the defrauded creditor;
(2) His heirs, assigns, or successors in interest; or (3) The creditors of the
above are entitled to subrogation.

CHAPTER 7 - VOIDABLE CONTRACTS

Article 1390 – 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.

These contracts are binding, unless they are annulled by a proper action in court . They are
susceptible to ratification.

Meaning of Voidable Contracts

Voidable or annullable 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 is vitiated by mistake, violence,
intimidation, undue influence, or fraud.

Binding Force of Voidable Contracts

 They are valid and binding between the parties unless annulled by a proper action in court by the
injured party. Once ratified, they become absolutely valid and can no longer be annulled.

Kinds of Voidable Contracts

A contract otherwise legal in object and operation is voidable because of a defect caused by either:

(1) Legal incapacity to give consent, where one of the parties is incapable of giving consent to the
contract; or
(2) Violation of consent, where the vitiation is done by mistake, violence, intimidation, undue
influence, or fraud.

Meaning of Annulment

Annulment is a remedy provided by law, for reason of public interest, for the declaration of the
inefficacy of a contract based on a defect or vice in the consent of one of the contracting parties in order
to restore them to their original position in which they were before the contract was executed.

Article 1391 – The action for annulment shall be brought within four years.

This period shall begin:

In case 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.

Period of Filing Action for Annulment

The four year period for bringing an action for annulment of a voidable contract is reckoned:

(1) In cases of intimidation, violence, or undue influence, from the time the intimidation,etc., ceases.
Before that time, the consent is still being vitiated and, therefore, the victim cannot be expected
to bring an action in court.
(2) In case of mistake or fraud, from the time it is discovered. This must be so because before the
time of discovery, the innocent party is unaware of the reason which renders the contract voidable
and cannot also be expected to bring an action in court. Furthermore, the guilty party should not
be rewarded for successfully hiding the mistake or fraud.
(3) In the case of contracts entered into by minors or incapacitated persons, from the time the
guardianship ceases. An incapacitated person has no capacity to sue.

Article 1392 – Ratification extinguishes the action to annul a voidable contract.

Meaning and Effect of Ratification

 (1) Ratification means that one voluntarily adopts or approves some defective or unauthorized act or
contract which, without his subsequent approval or consent, would not be binding on him. It
indicates an intention on the part of the ratifier to be bound to the provisions of the contract.
(2) Ratification cleanses the contract from all its defects from the moment it was constituted. The
contract thus becomes valid. Hence, the action to annul is extinguished.

Article 1393 – Ratification may be affected 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.

Kind of Ratification

They are:

(1) Express - when the ratification is manifested in words or in writing; or

(2) Implied or tacit - it may take diverse forms, such as by silence or acquiescence; by acts showing
adoption or approval of the contract; or by acceptance and retention of benefits flowing
therefrom.

Requisites of Ratification

(1) The requisites for implied ratification are the following:

(a) There must be knowledge of the reason which renders the contract voidable;
(b) Such reason must have ceased;and
(c) The injured party must have executed an act which necessarily implies an intention to
waive his right.

(2) The requisites for express ratification are the same as those for implied ratification except
that the former is effected expressly.

Article 1394 – Ratification may be effected by the guardian of the incapacitated person. Who

May Ratify

(1) A contract entered into by an incapacitated person may be ratified by:

(a) the guardian; or
(b) the injured party himself provided he is already capacitated.

(2) In case the contract is voidable on the ground of mistake, etc., ratification can be made by
the party whose consent is vitiated.

Article 1395 – Ratification does not require the conformity of the contracting party who has no
right to bring the action for annulment.

Conformity of Guilty Party to Ratification not Required

 Ratification is a unilateral act by which a party waives the defect in his consent. The consent of the
guilty party is not required; otherwise, he can conveniently disregard his contract by the simple expedient
of refusing to give his conformity.

Article 1396 – Ratification cleanses the contract from all its defects from the moment it was
constituted.

Effect of Ratification Retroactive

Ratification cleanses the contract of all its defects from the moment it was executed. It extinguishes
the right of action to annul. In other words, the effect of ratification is to make the contract valid from its
inception subject to the prior rights of third persons.

Article 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 a mistake base their action upon these flaws of
the contract.

Partly Entitled to Bring an Action to Annul

Two different requisites are required to confer the necessary capacity to bring an action for annulment
of a contract, to wit:
(1) The plaintiff must have an interest in the contract; and
(2) The victim and not the party responsible for the defect is the person who must assert the same.

Right of Stranger to Bring an Action

One who is not a party to the contract or an assignee thereunder, or does not represent those who took
part therein, has, under Article 1397 , no legal capacity to challenge the validity of such contract.

Strangers, therefore, are without right or personality to bring the action for they are not obliged by
the contract, principally or subsidiarily, unless they can show detriment which would positively result to
them from the contract in which they had no intervention or participation.

Guilty Party Without Right to Bring Action

The guilty party, including his successor in interest, cannot ask for annulment. This rule is sustained
by the principle that he who comes to court must come with clean hands.

Article 1398 – An obligation having been annulled, 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 provided by law. In obligations to render service, the value thereof
shall be the basis for damages.

Duty of Mutual Restitution Upon Annulment

 (1) If the contract is annulled, the parties, as a general rule, must restore to each other the subject
matter of the contract with its fruits and the price thereof with legal interest.
(2) In personal obligations where the service had already been rendered, the value thereof with the
corresponding interest, is the basis for damages recoverable from the party benefited by the
service.

Article 1399 – When the defect of the contract consists in the incapacity of one of the parties, 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.

Restitution by an Incapacitated Person

This provision is an exception to the general rule of mutual restitution under the preceding article.
The incapacitated person is obliged to make restitution only to the extent that he was benefited by the sea
or price received by him. It results, therefore, that if he was not benefited, he is not obliged to restore
what he had received by the other contracting party and is still bound to return what he had received,
whether he was benefited or not.

Article 1400 – 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 the thing at the time of the loss, with interest from the same date.

Effect of Loss of Things to be Returned

(1) If the thing to be returned is lost without the fault of the person obliged to make restitution, there
is no more obligation to return such a thing. But in such a case, the other cannot be compelled to
restore what in virtue of the decree of annulment he is bound to return.
(2) If it is lost through his fault, his obligation is not extinguished but is converted into an indemnity
for damages consisting of the value of the thing at the time of the loss with interest from the same
date and the fruits received from the time the thing was given to him to the time of its loss.

Article 1401 – The action for annulment of contracts 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.

If the right of action is based upon the incapacity of any of the contracting parties, the loss of
the thing shall not be an obstacle to the success of the action, unless said loss took place through the
fraud or fault of the plaintiff.

Extinguishment of Action for Annulment

(1) If the person who has a right to institute an action for annulment, will not be able to restore the
thing which he may be obliged to return in case the contract is annulled because such thing is lost
through his fraud or fault, his right to have the contract annulled is extinguished. If the loss is not
due to his fault or fraud Article 1402 applies.

The action for annulment shall be extinguished only if the loss is through the fault or fraud of the
plaintiff.
 (2) Under the second paragraph, the right of action is based upon the incapacity of any one of the
contracting parties. Whether the right of action is based upon incapacity or not, the rule is the
same.

Article 1402 – As long as one of the contracting parties does not restore what in virtue of the
decree of annulment, he is bound to return, the other cannot be compelled to comply with what is
incumbent upon him.

Effect Where a Party Cannot Restore What he is Bound to Return

When a contract is annulled, a reciprocal obligation of restitution is created. The return by one party
of what he is obliged to restore by the decree of annulment may be regarded as a condition to the
fulfillment by the other of what is incumbent upon him.

CHAPTER 8 - UNENFORCEABLE CONTRACTS (n)

Article 1403 – The following contracts are unenforceable, unless they are ratified:

(1) Those entered into 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;
(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
persons on whose account the sale is made, it is 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.

Meaning of Unenforceable Contracts

Unenforceable contracts are those that cannot be enforced or given effect in a court of law or sued
upon by reason of certain defects provided by law until and unless they are ratified according to law.

Binding Force of Unenforceable Contracts

While rescissible and voidable contracts are valid and enforceable unless they are rescinded or
annulled, unenforceable contracts, although valid, are unenforceable in court unless they are cured or
ratified. Once ratified, these contracts may then be enforceable.

Kinds of Unenforceable Contracts

Under Article 1403, the following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another by one without, or acting in excess of, authority;
(2) Those that do not comply with the statute of frauds; and
(3) Those were both parties incapable of giving.

Meaning of Unauthorized Contracts

Unauthorized contracts are 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.

Statute of Frauds

(1) History - In 1677, the English parliament enacted a statute to counter the evil practice of giving
false testimony in actions founded on certain kinds of contracts. It attempted to deal with the
prevalence of successful perjury by making specified contracts unenforceable unless evidence in
a prescribed manner - in general, by a written memorandum signed by the party against whom
liability under the contract was thought to be enforced.

Since then, the statute has been called the Statute of Frauds. It has been adopted, in more or less
modified form, in the Philippines, as set forth in Article 1403.

(2) Purpose - The Statute of Frauds has been enacted not only to prevent fraud but also to guard
against the mistakes of honest men by requiring that certain agreements specified that are
susceptible to fraud must be in writing; otherwise, they are unenforceable by action in court.
(3) "Writing" under the Statute. - The statute does not require that the contract be contained in a
formal written document. The writing may be embodied in a slip of paper, a letter, a note or
memorandum by means of a pen, pencil, or any mechanical device as long as it is intelligible and
records the intent of the parties.
 (4) Application - Some fundamental principles relative to the statute of frauds are given hereunder.
(a) The Statute of Frauds is not applicable in actions which are neither for damages because
of a violation of a contract, nor for the specific performance thereof.
(b) It is applicable only to completely executory contracts and not to contracts which are
totally executed (consummated ) or partly executory ( where the contract is partially
performed).
(c) It is not applicable where the contract is admitted expressly, or impliedly by the failure to
deny specifically its existence, no further evidence thereof being required in such case.
(d) It is applicable only to the agreements enumerated therein.
(e) It is not applicable where a writing does not express the true agreement of the parties.
(f) It does not declare the contracts infringing it are void but merely unenforceable.
(g) The defense of the statute of frauds may be waived.
(h) The defense of the statute of frauds is personal to the parties and cannot be interposed by
strangers to the contract.

Agreements Within the Scope of the Statutes of Frauds

To be enforceable, a contract does not have to be in writing. In fact, most contracts made orally are
legally enforceable. However, there are agreements which fall within the scope of the statute of frauds
enumerated below, which are not legally enforceable in court although valid, unless the same be in
writing. In other words, if either party refused to comply with their agreement, the same could not be
enforced.

(1) Agreement not to be performed within one year from the making thereof.
(2) Promise to answer for the debt, default, or miscarriage of another.
(3) Agreement in consideration of marriage other than mutual promise to marry.
(4) Agreement for sale of goods, etc. at price not less than P500.
(5) Agreement for leasing for a longer period than 1 year.
(6) Agreement for the sale of real property or of an interest therein.
(7) Representation as to the credit of a third person.

Article 1404 - Unauthorized contracts are governed by Article 1317 and the principles of agency
in Title X of this Book.

Article 1405 – Contracts infringing the statute of frauds, referred to in No.2, Article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.

Modes of Ratification Under the Statute

The ratification of contracts infringing the Statute of Frauds may be effected in two(2) ways:

(1) By failure to object to the presentation of oral evidence to prove the contract.
(2) By acceptance of benefits under the contract. In this case, the contract is no longer executory and,
therefore, the Statute does not apply.
 Article 1406 – When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties may avail themselves
of the right under Article 1357.

Right of a Party Where Contract Enforceable

For the application of this provision, there must be a valid agreement and the agreement must not
infringe the Statute of Frauds.

(1) Accordingly, a party to an oral sale of real property cannot compel the other to put the contract in
a public document for purposes of registration because it is unenforceable unless, of course, it has
been ratified.
(2) Similarly, the right of one party to have the other execute a public document is not available in a
donation of realty when it is in a private instrument because the donation is void.

Article 1407 – 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.

When Unenforceable Contract Becomes a Voidable Contracts

Where both parties to a contract are incapable of giving consent, the contract is unenforceable.
However, if the parent or guardian, as the case may be, of either party, or if one of the parties after
attaining or regaining capacity, ratifies the contract, it becomes voidable.

When Unenforceable Contract Becomes a Valid Contract

If the ratification is made by the parents or guardians, as the case may be, of both contracting parties,
or by both contracting parties after attaining or regaining capacity, the contract is validated and its validity
retroacts to the time it was entered into.

Article 1408 – Unenforceable contracts cannot be assailed by third persons.

Right on Third Persons to Assail an Unenforceable Contracts

Strangers to a voidable contract cannot bring an action to annul the same; neither can they asail or
question a contract because of its unenforceability. The benefit of the Statute can only be claimed or
waived by one who is a party or privy to the oral contract, not by a stranger. It is a personal defense.

CHAPTER 9 - VOID OR INEXISTENT CONTRACTS

 Article 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;
(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

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.

Meaning of Void Contract

Void contracts are those which, because of certain defects, generally produce no effect at all.

Meaning of Inexistent Contracts

Inexistent contracts refer to agreements which lack one or some or all of the elements or do not
comply with formalities which are essential for the existence of a contract.

Characteristics of a Void or Inexistent Contracts

They are as follows:

(1) Generally, it produces no force and effect whatsoever;
(2) It cannot be ratified;
(3) The right to set up the defense of illegality cannot be waived;
(4) The action or defense for the declaration of its inexistence does not prescribe;
(5) The defense of illegality is not available to third persons whose interests are not directly affected;
and
(6) It cannot give rise to a valid contract.

Instances of Void or Inexistent Contracts

Void and inexistent contracts are not enforceable from the very beginning, regardless of the intention
of the parties.

(1) Contracts whose cause, object or purpose is contrary to law, etc.

(2) Contracts which are absolutely simulated or fictitious.
(3) Contracts without cause or object.
(4) Contract whose object is outside the commerce of men.
(5) Contracts which contemplate an impossible service.
 (6) Contracts where the intention of the parties relative to the object cannot be ascertained.
(7) Contracts expressly prohibited or declared void by law.

Article 1410 – The action or defense for the declaration of the inexistence of a contract does not
prescribe.

Action or Defense is Imprescriptible

If a contract is void, a party thereto can always bring a court action to declare it void or inexistent;
and a party against whom a void contract is sought to be enforced, can always raise the defense of nullity,
despite the passage of time.

Article 1411 – 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
relative to the disposal of effects or instruments of a crime shall be applicable to the things or the
price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.

Rules Where Contract is Illegal and The Act Constitutes a Criminal Offense

(1) Where both parties are in pari delicto. - the following are the effects of a contract whose cause or
object constitutes a criminal offense and both parties are in pari delicto, that is, equally guilty:
(a) The parties shall have no action against each other;
(b) Both shall be prosecuted; and
(c) The things or the price of the contract, as the effects of instruments of the crime, shall be
confiscated in favor of the government.

(2) Where only one party is guilty - If only one party is guilty or both parties are not equally guilty
the rule in paragraph 1 of Article 1411, applies only to the guilty party or the more guilty party.

Article 1412 – If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties 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 to him. The
other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.

Rules Where Contract is Illegal But the Act Does Not Constitute a Criminal Offense

(1) Where both parties are in pari delicto. - If the cause of the contract is unlawful or forbidden but
there is no criminal offense, the rules are as follows:
(a) Neither party may recover what he has given by virtue of the contract; and (b)
Neither party may demand the performance of the other's undertaking.
 (2) Where only one party is guilty - If only one party is guilty or both parties are not equally guilty, the
following are the rules.

(a) The guilty party loses what he has given by reason of the contract;
(b) The guilty party cannot ask for the fulfillment of the other's undertaking; (c) The
innocent party may demand the return of what he has given; and (d) The innocent
party cannot be compelled to comply with his promise.

Article 1413 – Interest paid in excess of the interest allowed by the usury laws may be recovered
by the debtor, with interest thereon from the date of the payment.

Recovery of Usurious Interest

Any rate of interest in excess of the maximum allowed under the Usury Law is usurious and if paid,
may be recovered together with interest thereon from the date of payment in a proper action for the same.

A stipulation for the payment of usurious ous interest is void. The person paying the usurious interest
can recover in a civil action only the interest in excess of that allowed by law, but the whole interest paid.

Article 1414 – 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.

Recovery Where Contract Entered into for Illegal Purpose

The following are the requisites for the application of this article:

(1) The contract is for an illegal purpose;

(2) The contract is repudiated before the purpose has been accomplished or before any damage has
been caused to a third person; and
(3) The court considers the public interest will be subserved by allowing recovery.

Article 1415 – 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.

Recovery by an Incapacitated Person

This article is another exception to the in pari delicto rule in Articles 1411-1412. Recovery can be
allowed if one of the parties is incapacitated and the interest of justice so demands.

It is not necessary that the illegal purpose has not been accomplished or that no damage has been
caused to a third person.

Article 1416 – When the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid or delivered.

Recovery Where Contract Not Illegal per se

 Article 1416 is another exception to the rule that where both parties are in pari delicto, they will be
left where they are without relief. Recovery is permitted, provided:

(1) The agreement is not illegal per se but is merely prohibited;

(2) The prohibition is designed for the protection of the plaintiff; and
(3) Public policy would be enhanced by allowing the plaintiff to recover what he has paid or
delivered.

Prohibited Sale of Land

(1) A land sold in violation of the constitutional prohibition against the transfer of lands to aliens (see
Secs. 3, 7, Art XII, Constitution of the Philippines.) may be recovered. The public policy to
conserve lands for the Filipinos would be defeated and its continued violation sanctioned if
instead of setting the contract aside and ordering the restoration of the property, the general rule
on pari delicto would be applied. And the parties will not be permitted to resort to another
transaction for the purpose of disguising the transfer in violation of the Constitution.
(2) The principle of in pari delicto is not applicable to a homestead which has been illegally sold
within the prohibited period of five (5) years in violation of the homestead law. The policy of the
law is to give land to a family for home and cultivation; consequently, the law allows the
homesteader to reacquire the land even if it has been sold. It is not within the competence of any
citizen to barter away what Public policy by law seeks to preserve.

Article 1417 – When the price of any article or commodity is determined by statute, or by
authority of law, any person playing any amount in excess of the maximum price allowed may
recover such excess.

Recovery of Amount Paid in Excess of Ceiling Price

A statute fixing the maximum price of any article or commodity is usually known as the ceiling law. It
can also be determined by authority of law, as by Executive Order of the President. Its purpose is to curb
the evils of profiteering are black marketing.

Article 1418 – 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.

Recovery of Additional Compensation of Service Rendered Beyond the Time Limit

Presidential Decree No.442 (as amended), otherwise known as the Labor Code, sets forth that the
normal hours of work of any employee shall not exceed eight hours a day.

The law applies to employees in all establishments and undertakings, whether for profit or not, but
not to:(1) government employees; (2) managerial employees; (3) field personnel; (4) members of the
family of the employers who are dependent upon him for support; (5) domestic helpers; (6) persons in the
personal service of another; and (7) workers who are paid by results.
 Article 1419 – 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.

Recovery of Amount of Wage Less Than Minimum Fixed.

If an employee receives less than the minimum wage rate, he can still recover the deficiency with
legal interest, and the employer shall be criminally liable.

Article 1420 – In case of a divisible contract, if the illegal terms can be separated from the legal
ones, the latter may be enforced.

Effect of Illegality Where Contract Indivisible/Divisible

(1) When the consideration is entire and single, the contract is indivisible so that if part of such
consideration is illegal, the whole contract is void and unenforceable.
(2) Where the contract is divisible of severable, that is, the consideration is made up of several parts,
and the illegal ones can be separated from the legal portions, the latter may be enforced. This
rule, however, is subject to the contrary intention of the parties.

Divisible Contract Distinguished Form Divisible Obligation

It must be noted that Article 1420 speaks of a divisible contract and not of a divisible obligation.

The test of the former is the divisibility of its cause while the latter, its susceptibility of partial
fulfillment. The former, therefore, refers to the cause, while the latter, to the prestation or object.

Article 1421 – The defense of illegality of contracts is not available to third persons whose
interests are not directly affected.

Person Entitled to Raise Defense of Illegality or Nullity

In voidable and unenforceable contracts, third persons are not allowed to bring an action to annul or
to assail, as the case may be, said contracts. If the contract is illegal or void, however , even a third person
may avail of the defense of illegality or set up its nullity as long as his interest is directly affected by the
contract.

Article 1422 – A contract which is the direct result of a previous illegal contract, is also void and
inexistent.

Void COntract Cannot be Novated

This provision is based on the requisites of a valid novation. An illegal contract is void and inexistent
and cannot, therefore, give rise to a valid contract.

TITLEIII NATURALOBLIGATIONS
 (Arts. 1423-1430, Civil Code.)
Article 1423 – 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 after voluntary fulfillment by
the obligor, they authorized the retention of what has been delivered or rendered by reason thereof.
Some natural obligations are set forth in the following articles.

Concept of Natural Obligations

The above article defines natural obligations.

"Natural obligations originated in the Roman law where they grew in importance in order to temper
with equity and justice to severity of the jus civile. In that ancient system of law, there were two kinds of
obligations: the civil and the natural. The latter could not be enforced by a civil action but it has certain
juridical consequences.

Civil Obligations and Natural Obligations Distinguished

Article 1423 gives the distinctions between civil obligations and natural obligations, viz.:

(1) Civil obligations arise from law, contracts, quasi contracts, delicts and quasi delicts, while natural
obligations are based not on positive law but on equity and natural law; and
(2) Civil obligations give a right of action in courts of justice to compel their performance or
fulfillment, while natural obligations do not grant such right of action to enforce their
performance.

Enumeration Not Exclusive

Note that Article 1423 says " some natural obligations x x x." This indicates that the enumeration in
the code is not exclusive. Thus, if the borrower pays interest agreed upon orally, the provisions on natural
obligations apply.

Under the law, " no interest shall be due unless it has been expressly stipulated in writing."

Article 1424 – When a right to sue upon a civil obligation has lapsed by extinctive prescription,
the obligor who voluntarily performs the contract cannot recover what he has delivered or the
value of the service he has rendered.

Performance After Civil Obligation Has Prescribed

By prescription (acquisitive ), one acquires ownership and other real rights through the lapse of time
in the manner and under the conditions laid down by law. In the same way, rights and actions are lost by
prescription (extinctive).

Article 1425 – When without the knowledge or against the will of the debtor, a third person pays
a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but
the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has
paid.

Reimbursement of Third Person for Debt That Has Prescribed

If a third person pays the prescribed debt of the debtor without his knowledge or against his will, the
letter is not legally bound to pay him. But the debtor cannot recover what he has paid in case he
voluntarily reimburses the third person.

Article 1426 – When a minor between eighteen and twenty-one years of age who has entered into
a contract without the consent of the parent or guardian, after the annulment of the contract
voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been
benefited thereby, there is no right to demand the thing or price thus returned.

Restitution by Minor After Annulment of Contract

When a contract is annulled , a minor is not obliged to make any restitution except insofar as he has
been benefited by the thing or price received by him. However , should he voluntarily return the thing or
price received although he has not been benefited thereby, he cannot recover what he has returned.

Article 1427 – When a minor between eighteen and twenty-one years of age, who has entered into
a contract without the consent of the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good faith.

Delivery by Minor of Money or Fungible Thing in Fulfillment of Obligation

By the decree of annulment, the parties, as a general rule, are obliged to make mutual restitution.
However, the obligee who has spent or consumed in good faith the money or consumable thing
voluntarily paid or delivered by the minor, is not bound to make restitution.

Article 1428 – When, after an action to enforce a civil obligation has failed, the defendant
voluntarily performs the obligation, he cannot demand the return of what he has delivered or the
payment of the value of the service he has rendered.

Performance After Action to Enforce Civil Obligation Has Failed

This article contemplates a situation where a debtor, who has failed to pay his obligation, is sued by
the creditor and instead of losing the case, he has won it. If, notwithstanding this fact, the debtor voluntarily
performs his obligation, he cannot demand the return of what he has delivered or the payment of the value
of the service he has rendered. He must be deemed to have considered it his moral duty to fulfill his
obligation.

Article 1429 – When a testate or intestate heir voluntarily pays a debt of the decedent exceeding
the value of the property which he received by will or by the law of intestacy from the estate of the
deceased, the payment is valid and cannot be rescinded by the payer.

Payment by Heir of Debt Exceeding Value of Property Inherited

 The heir is not personally liable beyond the value of the property he received from the decedent. But
if he voluntarily pays the difference, the payment is valid and cannot be rescinded by him. An heir has a
moral duty to perform or pay obligation legally contracted by his dead relatives.

Article 1430 – When a will is declared void because it has not been executed in accordance with
the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the
deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective
and irrevocable.

Payment of Legacy After Will Has Been Declared Void

Legacy is the act of disposition by the testator in separating from the inheritance for definite
purposes, things, rights or a definite portion of his property. It may be viewed also as the same portion, or
those things or special rights, which the testator separates from his inheritance for a definite purpose. The
purpose of the legacy is to reward friends, servants and others for services they have rendered, to give
alms, etc.

If a will is disallowed for non-compliance with the formalities prescribed by law, the legacy made in
the will would also be void. The effect is the same as if the deceased had died without a will, and ,
therefore , the intestate heir is not legally required to pay the legacy. If, however , he still pays the legacy,
the payment is effective and irrevocable, subject to the rights of the creditors of the deceased . Since, it
was the intention of the testator to give the legacy, it is the moral duty of the heir to carry it out.