Chapter 3
Chapter 3
A. GENERAL RULE: Contracts shall be obligatory, in whatever form they may have been entered into, provided all
essential requisites for their validity are present. (ART 1356)
The form of contract refers to the manner in which a contract is executed or manifested.
a. The contract may be oral, or in writing, or partly oral and partly in writing billion if in writing, it may be in a
public or a private instrument
b. it may be expressed when the parties expressly set forth their intentions, or implied when their intentions
may be inferred from their actions or conducts.
B. EXCEPTION: when the law requires that a contract be in some form in order that it may be valid or enforceable.
ART 1357 – however, when the law requires that a contract 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. In
such cases, the right of the parties stated in the following article cannot be exercised.
CLASSIFICATION OF CONTRACTS ACCORDING TO FORM :
1. Informal or common or simple contract or that which may be entered into in whatever form provided all the
essential requisites for their validity or present. ( 1356), such as the contract of sale. An informal contract
may be oral or written and in fact may even be implied from the conduct of the parties and,
2. formal or solemn contract or that which is required by law for its efficacy to be in certain special form
GENERAL RULE :
Contracts are binding and therefore enforceable reciprocally by the contracting parties, whatever may be the
form in which the contract has been entered into, provided all the three essential requisites (consent, object, and cause)
for their validity are present. So, a contract may be oral or written. A written contract may consist of a letter,
memorandum, note or other instrument, without following any particular form or language, it being sufficient that the
parties clearly expressed their intentions.
2. Those required, not for the validity, but to make the contract effective as against third person, such as those
covered by article 1357 (if law requires a special form, parties may compel each other to observe that form
upon perfection of the contract) and article 1358 (documents which must appear in a public document; it
also constitutes constructive delivery)
ART 1358
a. acts and contracts that have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest there
in is governed by articles 1403, no.2 and 1405;
b. The cession, repudiation or renunciation of hereditary rights all of those off 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 preceding from an act appearing in a public document
All other contracts were the amount involved exceeds 500 pesos must appear in writing, even a private one
period but sales of goods, chattels or things in action are governed by articles 1403 no. 2 and 1405.
3. Ad probationem - those required for the purpose of proving the existence of the contract, such as those
under the statute of frauds in article 1403
REFORMATION ANNULMENT
action presupposes A valid existing contract no meeting of the minds or the consent of either
between the parties and only the document or one was vitiated by mistake or fraud
instrument which was drawn upon and signed by
them does not correctly express the terms of
agreement
gives life to the contract upon certain corrections involves a complete nullification of contracts
1. Mutual - instrument includes something which should not be there or omit what should be there
a. Mutual
b. mistake of fact
c. clear and convincing
d. causes failure of instrument to express true intention
2. unilateral
a. one party was mistaken
b. other either after fraudulently or inequitably or knew but concealed
c. party in good faith may ask for reformation
3. mistake by third persons- due to ignorance, lack of skill, negligence, bad faith of drafter, clerk or typist
4. others is specified by law- to avoid frustration of true intent
1. article 1361 when a mutual mistake of the parties causes failure of the instrument to disclose their real
agreement, said instrument may be required
2. article 1363 when one party was mistaken and the other knew or believed that the instrument did not state
their real agreement, but concealed the fact from the former, the instrument may be reformed
3. article 1364 when through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the
courts may order that the instrument be reformed
Implied ratification
article 1367 when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its
reformation.
There has been election between 2 inconsistent remedies, one in affirmance, the other in disaffirmance
Procedure of reformation
article 1369 the procedure for the Reformation of instrument shall be governed by ROC to be promulgated by the
Supreme Court.
CHAPTRER V: INTERPRETATION OF CONTRACTS
Primacy of intention
VERBA INTENTIONE NON E CONTRADEBENT INSERVARE - words ought to be subservient to the intent, not the
intent to the word
look for the contractual intent
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 a stipulations shall control.
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.
Generalia verba generaliter intellegencia - general things are too understood in a general sense
article 1371 in order to judge the intention of the contracting parties, their contemporary news and subsequent acts
shall be principally considered.
Article 1379 the principles of interpretation stated in room 123 of the rules of court shall likewise be observed in
the construction of contracts.
In between a valid and effective contracts is relatively ineffective-ineffectively only with respect to certain parties,
but are effective as to other persons.
DEFECTIVE CONTRACTS
1. RESCISSIBLE - contract that has caused a particular damage to one of the parties or to a third person and which
for equitable reasons may be set aside even if valid.
2. VOIDABLE OR ANULLABLE (contracto nulo)- contract in which consent of one of the parties is defective, either
because of WANT of capacity or because it is vitiated, but which contract is valid until judiciary set aside
3. ENFORCEABLE-contract that for some reason cannot be enforced, unless ratified in the manner provided by law
4. VOID AND NON- EXISTENT (contrato inexistente)- contract which is an absolute nullity and produces no effect, as
if it had never been executed or entered into.
1. entered into by guardians whenever the wards suffer lesion by more than 1/4 of value of the things object
Guardian: authorized only to manage ward’s property, no power to dispose without prior approval of court. Only
includes those which are ordinary course of management of the state of the ward, because if sale, mortgages
and other encumbrances and not approved by court, it becomes enforceable.
2. Agreed upon in representation of absentee, suffer lesion by more than 1/4 of the value of things object
same principle in relation to contracts by guardians
3. in fraud of creditors who cannot collect claims due them
requisites of accion pauliana
1. plaintiff asking for rescission (subsidiary action) has a credit prior to the alienation
2. debtor has made subsequent contract giving advantage to a third person
3. creditor has no other remedy but to receive the debtors contract to the third person (last resort)
4. act being impugned in fraudulent
5. third person who received the property is an accomplice in the fraud
credit must be existing at the time of the fraudulent alienation, although not yet due. But at the time of accion
pauliana, the credit must already be due because it presupposes a judgment and unsatisfied execution which
cannot exist when the debt is not yet demandable at the time the rescissory action is brought .
General rule: credit is prior to the alienation
Exception: credit is after alienation but entitled to accion pauliana because of some prior right
a. claims for acknowledged by the debtor after alienation, But origin of which antedated the alienation
b. those who become subrogated, after the alienation, in the rights of a creditor whose credits were prior to
the alienation
even secured creditors are entitled to AP
conveyance was intentionally fraudulent which may be established by the presumption in article 1387
TEST OF FRAUD: weather the conveyance was a bonafide transaction or a trick and contrivance to defeat
creditors or whether it conserves to the debtor especial right; founded on good consideration or is made with
bonafide intent. Does it prejudice the right of the creditors?
Good consideration: creditor is not prejudiced, becomes the property was merely replaced or substituted
Badges fraud applicable
4. Things under litigation, without knowledge and approval of litigant or of competent judicial authority
to secure the possible effectivity of a claim
transparency of property in good faith who acquires property for valuable consideration, without knowledge of
the litigation or claim of the plaintiff, cannot be deprived of property.
5. Specially declared by law to be subject of recession
RESCISSION
Article 1380 the contracts are validly agreed upon maybe rescinded in the cases established by law.
Definition: remedy granted by law to the contracting parties and even to the third persons, to secure the reparation of
damages cost to them by a contract, even if this should be valid, by means of the restoration of things to their condition
at the moment prior to the celebration of the said contract.
Relief for the protection of one of the contracting parties and 3rd persons from all injuries and damages the
contract may cause or protect some incompatible and preferent right created by the contract
Implies a contract which, even if initially valid, produces A lesion or pecuniary damage to someone
grounds for rescission can only be for legal cause.
Voidable contracts may also be rescinded
RESOLUTION RESCISSION
Similarities presuppose contracts validly entered into and existing
recession vs. annulment: the latter there is a defect which vitiate
/invalidates the contract
mutual restitution when declared proper
who may demand only by a party to the contract party to the contract suffering lesion
third parties prejudiced by the
contract
Grounds non performance or implied basic various reasons of equity provided by
condition in reciprocal obligation the grounds, mainly economic injury
or lesions
scope of judicial control court determines sufficiency of sufficiency of reason does not affect
reason to justify extension of time to right to ask for resolution(cannot be
perform obligation(weather slight or refused if all the requisites are
casual breach) satisfied)
kind of obligation applicable to only the reciprocal unilateral, reciprocal
even when contract is fully fulfilled
character Principal remedy secondary or subsidiary
Mutual dissent- not the same with the recision, because mutual dissent is tantamount to a simple creation of new
contract for the dissolution of the previous one. In order for rescission to take place, the requisites must first be satisfied:
REQUISITES OF RESCISSION:
Presumptions of fraud
article 1387 all contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been
entered into a 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 that fraudulent when made by persons against whom some judgment
has been issued. The decision or attachment need not refer to the property alienated, end need not have been obtained
by the party seeking the rescission.
In addition to this presumptions, the design to defraud creditors may be proved in any other manner recognized by the
law of evidence.
Badges of fraud(indicia of fraud) -rules by which fraudulent character of transaction may be determined
1. fictitious or insufficient consideration
2. Conveyance is after suit is filed and while it is pending
3. Sale on credit by insolvent debtor
4. evidence of insolvency or large indebtedness
5. transfer of All or nearly all of debtors property
6. Transfer is between father and son when some of above is present
7. Failure of vendee to take exclusive possession of the property
Liability for acquiring in bad faith the things alienated in fraud of creditors
ART1388 - whoever acquires in bad faith the things alienated and fraud of creditors, shall indemnify the latter for the
damages suffered by them on account of their 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.
1. Want of capacity
2. Vitiated consent
1. Their defect consist in the vitiation of consent of one of the contracting parties
2. They are binding until they are unnuled by a competent court
3. They are susceptible of convalidation by ratification or by prescription
ANNULMENT
NULLITY(VOIDABLE) RESCISSION(RESCISSIBLE)
declares inefficiency which contract already carries in merely produces inefficiency, which did not exist
itself(intrinsic defect) essentially in the contract(external defect i.e. Pecuniary
damages or prejudice to one of the contracting parties or
third persons)
requires app of ratification to be cured Needs now ratification to be effective
based on vice of the contract which invalidates it compatible with the perfect validity of the contract
annulment is a sanction based on law rescission is a remedy based on equity
demanded only by the parties to the contract demanded even by the third parties affected by it
public interest predominates private interest predominates
1. incapacity to consent - not a requisite sine qua non of the contract; want is only a ground for annulment
2. vices of consent: violence, intimidation, undue influence, mistake or fraud
who may and may not institute an action for annulment - article 1397
prescription of action for annulment-after prescription, contract can no longer be set aside
1. intimidation, violence,or undue influence: from the time consensual defects ceases
2. mistake or fraud: from the time of discovery of the same
3. incapacity: from the time guardianship ceases
extinctive prescription applies not only to action for annulment but also to the defense of nullity
applies to the parties of the contract but not to the third persons
effects of ANNULMENT -cleanses the Contract from all its defect from the moment it was constituted(retroactive effect),
but does not prejudice rights after the persons acquire before the ratification article 1396
a. mutual restitution article 1398 -restore to each other things which have been the subject matter of the
contract, together with fruits and the price with the interest
EXCEPT in cases provided by law(principle of unjust enrichment): compensation, services rendered in
contracts of service
ELIMINATES AWARD FOR DAMAGES but when there is loss or suffered damages, injured party maybe
entitled to recover indemnity for damages
b. article 1402 as long as one does not restore what he is bound to return, the other cannot be compelled
to return why
i. loss through plaintiff’s (party entitled to bring action) fault or fraud: action is extinguished, even
if at the time of the loss the plaintiff is still a minor or insane(article 1401)
ii. LOSS THROUGH FORTUITOUS EVENT, BUT PLAINTIFF IS WILLING TO PAY : play article 1400,
defendant should return but not including the interest because loss not due to his fault
iii. LOSS OF FRUITS AND ACCESSIONS - apply article 1400, pay value if cannot return(plaintiff and
defendant)
1. when one of the parties is incapacitated
article 1399 -not obliged to make any restitution except insofar as he has been benefited by the price or thing
received
benefit not necessarily a material AND permanent increase in fortune
proof of benefit incumbent upon the defendant, in the absence of such proof, the presumption is there is no
benefit or profit to the incapacitated person
if it's still in the patrimony at the time incapacity ceases, deemed to have been benefited. If he asks for
annulment, He must return it to the other party. If he squanders, it is ratification
2. when the thing lost is through the fault of the party obliged to return the same
article 1400 return the fruits received and the value of the thing at the time of loss, with interest from same date
LOSS THROUGH FORTUITOUS EVENT: be the value of the thing lost but not fruits and interest
extinguishment of action
A. article 1392 by ratification
confirmation or ratification: CURES a defect of NULLITY
acknowledgement: remedies deficiency of proof
B. article 1401 when The thing is lost through the fault of the person who has the right to
file the action
LOST NOTT THROUGH THE FAULT, E.G. FORTUITOUS EVENT: not extinguished because extinguishment limited
only to the loss by fault of plaintiff. Unjust enrichment if the loss is returned for the defendant to bear. Hence,
the defendant cannot be obliged to make restitution to the plaintiff because of article 1402(cannot compel to
return if the other party does not return)
cannot extinguish action for annulment by any event not imputable to the fault or fraud of the plaintiff
RATIFICATION
Requisites of ratification
forms of ratification
a. article 1 393 express or tacit; execute an app which necessarily implies an intention to waive his rights
EXPRESS: any oral or written manifestation of the person entitled to ask for annulment that he agrees to be
bound by the contract or that he will not seek its annulment.
IMPLIED
silence or acquiescence
ACTS showing approval or adoption of the contract
acceptance and retention of benefits slowing therefrom
b. article 1394 by the parties themselves or by the guardian in behalf of an incapacitated party
- during the existence of incapacity
- right to ratify is transmitted to the heirs of the party entitled to such right
Effects of ratification