Title II

CONTRACTS

Chapter 1

General Provisions

Article 1305

Contracts

A meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

One of the sources of obligations. On the other hand, obligation is the legal tie or relation itself that exists after a contract has been entered into.

Agreements enforceable through legal proceedings. An agreement is broader than contract because the former may not have all the elements of a contract. All contracts are agreements but not all agreements are contract.

Article 1306

Freedom to contract guaranteed

Every person has the liberty to enter into a contract provided they are not contrary to law, morals, good customs, public order and public policy.

Limitations:

1) Law- it is a fundamental requirement that contract entered into must be in accordance with and not repugnant to an applicable statute.

2) Police power- the police force sets the limit on contractual stipulations. It is the power of the state to enact laws or regulations in relation to persons and property.

Contract must not be contrary to:

Law - rule of conduct, just obligatory promulgated by legitimate authority.

Morals deals with norms of good and right conduct evolved in community.

Customs consist of habits and practices which through the long usage have been followed and enforced by society.

Public order refers principally to public safety although it has been considered to mean also the public weal.

Public policy refers to considerations which are moved by the common good.

Article 1307

Classification of contract according to its name or designation

1) Nominate contract- has a specific name or designation in law.

2) Innominate contract- has no specific name or designation in law.

Kinds of innominate contract:

Do ut des (I give that you may give)

Do utfacias ( I give that you may do)

Facto ut des (I do that you may give)

Facto utfacias ( I do that you may do)

Rules governing innominate contracts

Innominate contracts shall be governed by:

1) The agreement of the parties 2) The provisions of the civil code on obligations and

contract 3) The rules governing the most analogous contracts 4) The customs of the place

Article 1308

Contracts bind both contracting parties

A contract is an agreement which gives rise to obligations. It must bind both parties in order that it can be enforced against either. It is a fundamental rule that no party can renounce or violate the law of the contract without the consent of the other.

Article 1309

Determination of performance by a third person

The determination of the performance of a contract may be left to a third person. The decision, however, shall bind the parties only after it has been made known to both of them.

Article 1310

Effect where determination inequitable

A contracting party is not bound by the determination if it is evidently inequitable or unjust as when the third person acted in bad faith or by mistake. In such case, the courts shall decide what is equitable under the circumstances.

Article 1311

Persons affected by a contract

General rule:

Contract takes effect only between the parties, their assigns, and their heirs.

Exceptions the cases when a contract is effective only between the parties are when the rights and obligations arising from the contract are not transmissible:

a) By their nature b) By stipulation c) By provision of law

Cases when strangers or third persons affected by a contract:

Third person is one who had not taken part in a contract and is therefore a stranger to the contract

1) In contracts containing a stipulation in favor of a third person

2) In contracts creating real rights 3) In contracts entered into to defraud creditors 4) In contracts which have been violated at the

inducement of a third person.

Stipulation pour autrui it is a stipulation in a contract clearly and deliberately conferring a favor upon a third person who has a right to demand its fulfillment provided he communicates his acceptance to the obligor before its revocation.

Classes of stipulations pour autrui (Stipulation in favor of a third person)

1) Those where the stipulation is intended for the sole benefit of such person.

2) Those where an obligation is due from the promisee to the third person which the former seeks to discharge by means of such stipulation.

Requisites of stipulation pour autrui:

The contracting parties by their stipulation must have clearly and deliberately conferred a favor upon a third person

The third person must have communicated his acceptance to the obligor before its revocation by the obligee or the original parties.

The stipulation in favor of the third person should be a part not the whole, of the contract

The favorable stipulation should not be conditioned or compensated any kind of obligation

Neither of the contracting parties bears the legal representation or authorization of the third party for otherwise, the rules on agency will apply.

Article 1312

Third person are bound by contracts; creating real rights.

Third persons who come into possession of the object of a contract, over which there is a real right, are bound thereby even if they were not parties to the contract.

Article 1313

Right of the creditor to impugn contracts intended to defraud them

The creditor is given the right to impugn the contracts of his debtor to defraud him.

Article 1314

Liability of third person responsible for breach of contract

Rule of American Law

A stranger to a contract can be sued for damages for his unwarranted interference with the contract

Article 1315

Classification of contracts according to perfection

1) Consensual contract- which is perfected by mere consent

2) Real contract- which is perfected by the delivery of the thing subject matter of the contract

3) Solemn contract- which requires compliance with certain formalities prescribed by law

Stages in the life of a contract

a) Preparation or negotiation- this includes all the steps taken by the parties leading to the perfection of the contract.

b) Perfection or birth- this is when the parties have come to a definite agreement or meeting of the minds regarding the subject matter and cause of the contract

c) Consumption or termination- this is when the parties have performed their respective obligations and the contract may be said to have

been fully accomplished or executed, resulting in the extinguishment or termination

Effect of perfection of the contract

From the moment the parties come to an agreement on a definite subject matter and valid consideration, they are bound not only

1) To the fulfillment of what has been expressly stipulated

2) To all the consequences which according to their nature, may be in keeping with good faith, usage, and law

Article 1317

Unauthorized contracts are unenforceable

As a general rule, a person is not bound by the contract of another of which he has no knowledge or to which he has not given his consent.

Unauthorized contracts can be cured only by ratification

The mere lapse of time cannot give efficacy to such a contract. The defect is such that it cannot be cured except by the subsequent ratification of the person in whose agent and not by any other person not so empowered.

When a person is bound by the contract of another

In order that a person may be bound by the contract of another, there are two requisites:

1) The person entering into the contract must be duly authorized, expressly or impliedly, by the person in whose name he contracts or he must have, by law, a right to represent him

2) He must act within his power

Chapter 2

Essential Requisites of contracts

General Provisions

Article 1318

Requisites

1) Consent of the contracting parties 2) Object certain which is the subject matter of the

contract 3) Cause of the obligation which is established

Classes of elements of a contract:

1) Essential Elements- those without which no contract can validly exist. They are subdivided into: a) Common- those present in all contracts namely: consent, object and cause b) Special those not common to all contracts or those which must be present only, in peculiar to certain specified contracts. It may be as regards to: form, subject matter and the consideration or cause.

2) Natural Elements- those are presumed to exist in certain contracts unless the contrary is expressly stipulated by the parties.

2) Accidental Elements- the particular stipulations, clauses, terms, or conditions

established by the parties in their contract like conditions, interest and penalty

Section 1

Consent

Article 1319

Consent- is the conformity or concurrence of wills and with respect to contracts. It is the meeting of minds between the parties on the subject matter and the cause which are to constitute the contract.

Offer

a proposal made by one party to another to enter into a contract

Must be certain or definite

Acceptance

The manifestation by the offeree of his assent to the terms of the offer.

It must be absolute

Article 1320

Forms of acceptance of offer:

Oral

Written

An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

Article 1321

Matters that may be fixed by the offerer

Time

Place

Manner of acceptance

Article 1322

Communication of acceptance through an agent

Agent

extension of the personality of his principal

if duly authorized the act of the agent is the act of the principal

This article only applies if the offer is made through the agent and the acceptance is communicated through him.

Article 1223

Cases when offer becomes ineffective

death

civil interdiction

insanity

insolvency

Other grounds which render offer ineffective.

failure to comply with the condition of the offer as to the time, place and manner of payment

the expiration of the period fixed in the offer for acceptance

the destruction of the thing due before acceptance

rejection of the offer

An offer maybe withdrawn before it is accepted. After acceptance, the contract is already perfected.

Article 1324

Option contract- one giving a person for a consideration a certain period within which to accept the offer of the offerer.

Option period- the period given within which the offeree must accept the offer.

Option money- the money paid or promised to be paid in consideration for the option.

Withdrawal of offer where period stipulated for acceptance.

When the offerer gives to the offeree a certain period within which to accept the offer, the general rule is that the offer may be withdrawn as matter of right at any time before acceptance.

Article 1325

Business advertisements generally not definite offers

Business advertisements of things for sale are not definite offers but are merely invitations of the reader to make an offer. However, if the advertisement is complete in all particulars necessary in a contract, it may amount to a definite offer which, if accepted, will produce a perfected contract

Article 1326

Advertisements for bidders are generally not definite offers

As a general rule, advertiser is not bound to accept the highest or the lowest bidder unless the contrary appears. In judicial sales, the sheriff is bound to accept the highest bid.

Article 1327

Capacity to give consent presumed

Civil Code defines who have no capacity, by which it can be inferred that capacity is the general rule, which exists in those, of whom law has not defined it.

Persons who cannot give consent

Unemancipated minors are persons who have not yet reached the age of majority.

Insane or demented persons are persons who are in the state of insanity at the time of contracting.

Deaf mutes are persons who are deaf and are unable to write.

Reason for disqualification

Persons mentioned can easily be victims of fraud that is why they cannot give consent. But they can enter into a contract only through a parent or guardian.

Article 1328

Lucid interval

It is a temporary period of sanity. A contract entered into by an insane or demented person during a lucid interval is valid.

Effect of drunkenness and hypnotic spell

Drunkenness and hypnotic spell impair the capacity of a person to give intelligent consent. These conditions are equivalent to temporary insanity. Therefore, contract entered during this state is voidable.

Article 1329

Incapacity declared in article 1327 subject to modifications

When necessaries such as food A minor 18 years old or above may contract

for life, health, insurance, etc. Contract valid through the guardian or legal

representatives Contract is valid where the minor

misrepresented his age and convincingly led the other party in his legal capacity

Contract is valid where a minor between 18 and 21 voluntary pays a sum of money or delivers a fungible thing in the fulfillment of his obligation

Other special disqualifications may be provided by law

Person suffering the accessory penalty of civil interdiction

Hospitalized lepers Prodigals Deaf and dumb who are unable to read and

write Those who are unsound mind even though

they have lucid intervals Those by reason of age, disease, weak mind

and other similar causes.

Article 1330

Characteristics of consent

It is intelligent- their capacity to act It is free and voluntary- there is no vitiation

of consent by reason of violence or intimidation

It is conscious or spontaneous- there is no vitiation of consent by reason of mistake undue influence

Vices of consent

Error or mistake Violence or force Intimidation or threat Undue influence Fraud or deceit

Cause vitiating consent and causes of capacity distinguished

The former are temporary while the latter are more or less permanent

The first refers to the contract itself while the second to the person into the contract

Article 1331

Mistake or error

It is the false notion of a thing or a fact material to the contract

Nature of mistake

Mistake may be of fact or law The mistake contemplated by law is

substantial mistake of fact

Mistake of fact to which law refers

In order that mistake may vitiate consent, it must refer to:

Substance of the thing which is the object of the contract

Those conditions which have principally moved one or both parties to enter into the contract

The identity or qualifications of one of the parties provided the same was the principal cause of the contract

Mistake of fact which does not vitiate consent

Error as regards the incidents of a thing Mistake as to quantity or amount Error as regards the motives of the contract Mistake as regards the identity or

qualifications of party

Effect of simple mistake of account

A simple mistake of account or calculation does not void a contract because it does not affect its essential elements requisites

Article 1332

If a person is unable to read or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

Article 1333

There is no mistake if the party alleging it knew the doubt, contingency, or risk affecting the object of the contract.

Article 1334

Mistake of law

It is that which arises from the following: o Ignorance of some provision of law o From erroneous interpretation of

its meaning o From an erroneous conclusion as

to the legal effect of an agreement

Effects of mistake of law

Mistake of law does not invalidate consent because ignorance of the law excuses no one from compliance therewith.

Mistake of law vitiates consent

When there is a mistake on a doubtful question of law, or on the construction or application of law, this is analogous to a mistake of fact, and the maxim of ignoratia legis neminem excusat should have no proper application.

Requisites for the application of article 1334

The error must be mutual

It must be as to the legal effect of an agreement

It must frustrate the real purpose of the parties

Article 1335

Violence or force

It requires the employment of physical force. It shall annul the obligation, although it may have been employed by a third person who did not take part in the contract.

Nature of intimidation or threat

It must produce a reasonable and well-grounded fears of an evil

The evil must be imminent and grave The evil must be upon his person or property It is the reason why he enters into the

contract

Factors to determine degree of intimation

If contract is signed merely out of reverential fear or the fear of displeasing a person whom respect and obedience are due, the contract is valid because reverential fear by itself does not annul consent in the absence of actual threat, unless the fear so deprives one of reasonable inference that undue influence has been exercised.

Threat to enforce just or legal claim

Threat of court action as means to enforce a just or legal claim is justified and does not vitiate contract.

Article 1336

Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract.

Article 1337

Undue influence

It is the influence of a kind that so overpowers the mind of a party as to destroy his free will and make him express the will of another.

Circumstances which shall be considered whether undue influence has been exercised

Confidential, family, spiritual and other relations between the parties

Mental weakness Ignorance Financial distress of the person alleged to

have been unduly influenced

Article 1338

Causal fraud

It is the fraud committed by one party before or at the time of the celebration of the contract to secure the consent of the other. It can be committed through insidious words or machinations.

Requisites of causal fraud

There must be misrepresentation or concealment

It must be serious It must have been employed by only one of

the contracting parties It must be in bad faith or with intent to

deceive It must have induced the consent of the

other contracting parties It must be alleged and proved by clear and

convincing evidence

Article 1339

Fraud by concealment

A neglect or failure to communicate that which a party to a contract knows and ought to communicate constituted concealment.

Article 1340

Exaggerations in trade, when the other had an opportunity to know the facts, are not themselves fraudulent.

Dealers talk or traders talk are representations which do not appear on the face of the contract and these do not bind either party.

Article 1341

Expression of opinion

In order that it may amount to fraud, the following requisites must be present: o It must be made by an expert o The other contracting party has relied

on the experts opinion o The opinion turned out to be false or

erroneous

Article 1342

Fraud by a third person

Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

Article 1343

Misrepresentation made in good faith is not fraudulent but may constitute error.

Article 1344

Two kinds of fraud

Causal fraud- ground for the annulment of the contract

Incidental fraud- renders party who employs it liable for damages.

Requisites of causal fraud

It should be serious It should not have been employed by both

contracting parties It should not have been known by the other

contracting party

Article 1345

Simulation of contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the

latter, when the parties conceal their true agreement.

Article 1346

Simulation of contract

The act of deliberately deceiving others, by feigning or pretending by agreement, the appearance of a contract which is either non-existent or concealed

Kinds of simulation

1) Absolute simulation- when the contract does not really exist and the parties do not intend to be bound at all.

2) Relative simulation- when the contract entered into by the parties is different from their true agreement.

Section 2

Objects of Contracts

Article 1347 and 1348

Object of a contract

It is the subject matter of the contract.

Kinds of object of contract

Things Rights Services

Requisites of things as object of contract

The thing must be within the commerce of men

It must not be impossible, legally or physically

It must in existence or capable of coming into existence

It must be determinate or determinable without the need of a new contract between the parties

Requisites of services as object of contract

The service must be within the commerce of men

It must not be impossible, physically or legally

It must be determinate or capable of being made determinate

Rights as object of contract

As a general rule, all rights may be the object of a contract the exceptions are when they are intransmissible by their nature, stipulation or by provision of law.

Future inheritance

It is any property or right, not existence or capable of determination at the time of the contract, that a person may inherit In the future. A contract concerning future inheritance is void.

Exceptions: o In the case of donations by reason of

marriage between future spouses with respect to their future property to take effect

o In the case of partition of property by act inter vivos by a person to take effect upon his death.

Kinds of impossibility

Physical- when the thing or service in the very nature of things cannot exist

Legal- when the thing or service is contrary to law, morals, good customs, public order, or public policy.

Article 1349

The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties.

Section 3: Cause of contracts

Article 1350

Cause- is the essential or more proximate purpose which the contracting parties have in view at the time of entering into the contract

Distinction of cause from object

In a bilateral or reciprocal contract, the cause for one is the subject matter or object for the other, or vice versa. The distinction is a matter of viewpoint.

Classification of contracts according to cause

1) Onerous- one the cause of which, for each contracting party is the prestation or promise of a thing or service by the other.

2) Remuneratory or Remunerative one the cause of which is the service or benefit which is remunerated.

3) Gratuitous- one the cause of which is the liberality of the benefactor or giver.

Article 1351

Motive- is the purely personal or private reason which a party has in entering into a contract.

Cause distinguished from motive

Cause is the immediate or direct reason while motive is the remote or indirect reason;

Cause is always known to the other contracting party, while motive may be unknown;

Cause is an essential element of a contract while motive is not; and

The illegality of the cause effects the validity of a contract, while the illegality of ones motive does not render the contract void.

Article 1352

Contracts without cause produce no effect.

Article 1353

Requisites of cause

1) It must exist at the time the contract is entered into

2) It must be lawful

3) It must be true or real

Effect of absence of cause

Contracts without cause confer no right and produce no legal effect whatever. There is a total lack of any valid consideration for the contract.

Effect of failure of cause- Failure of cause does not render a contract void.

Effect of illegality of cause- Contracts with unlawful cause are null and void

Effect of falsity of cause- if the cause if false, the contract is void. If it is simulated, it is voidable

Article 1354

The cause need not to be expressly stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves otherwise.

Article 1355

Lesion- is any damage caused by the fact that the price is unjust or inadequate

Effect of lesion or inadequacy of cause

General Rule: Lesion or inadequacy of cause does not of itself invalidate a contract, the exceptions are:

a) When there has been fraud, mistake or undue influence; and

b) In cases specified by law.

Chapter 3: Forms of contracts

Article 1356

Forms of contract- it refers to the manner in which a contract is executed or manifested.

Classification of contracts according to form

1) Informal or common contract- which may be entered into in whatever from provided all the essential requisites for their validity are present.

2) Formal or solemn contract- which is required by law for its efficacy to be in a certain specified form.

Rules regarding form of contracts

Contracts are binding, therefore, enforceable reciprocally by the contracting parties whatever may be the form in which the contract has been entered into. Exceptions:

a) When the law requires that a contract be in some form to be valid.

b) When the law requires that a contract be in some form to be enforceable.

c) When the law requires that a contract be I some form for the convenience of the parties

Form for validity of contract

a) Donation of real property- it must be in public instrument.

b) Donation of personal property the value of which exceeds 5,000- the donation and acceptance must be in writing.

c) Sale of land through an agent- the authority of the agent must be in writing

d) Stipulation to pay interest- it must be in writing. e) Contract of partnership- if immovable are

contributed, it must be in a public instrument.

Form for enforceability of contract

The law requires that they be in writing subscribed by the party charged or by his agent.

Article 1357

In certain cases, a certain form is required for the convenience of the parties in order that the contract may be registered in the proper registry.

Article 1358

Contracts which must appear in a public instrument

a) Creation of real rights immovable property b) Cession or renunciation of hereditary rights c) Power to administer property d) Cession of actions or rights

Chapter 4: Reformation of instruments

Article 1359

Reformation is that remedy by means of which a written instrument is amended or rectified so as to express or conform the real or intention of the parties when by reason of mistake, fraud, inequitable conduct, or accident.

Reason for reformation:

Equity orders the reformation of an instrument in order that the intention of the contracting parties may be expressed.

Requisites of Reformation:

1) There is a meeting of the minds of the parties to the contract;

2) The written instrument does not express the true agreement or intention of the parties;

3) The failure to express the true intention is due to mistake, fraud, inequitable conduct;

4) The facts upon which relief by way of reformation of the instrument is sough are put in issue by the pleadings; and

5) There is clear and convincing evidence of the mistake, fraud, inequitable conduct or accident.

Reformation distinguished from annulment

In reformation, there has been a meeting of the minds of the parties; hence, a contract exists. In annulment, there has been no meeting of the minds.

Article 1360

In case of conflict between the provisions of the New Civil Code and the principles of the general law on reformation, the former prevails.

Article 1361

Mutual mistake-mistake of fact that is common to both parties of the instrument which causes the failure of the instrument to express their true intention.

Requisites of mutual mistake

a) The mistake must be of fact; b) Such mistake must be proved by clear and

convincing evidence; c) The mistake must be mutual; and d) The mistake must cause the failure of the

instrument to express their true intention.

Article 1362

Mistake on one side, fraud or inequitable conduct on the other

The right for reformation is granted only to the party who was mistaken in good faith. Here, the mistake is not mutual.

Article 1363

Concealment of mistake by the other party

The remedy of reformation may be availed of the party who acted in good faith.

Article 1364

Ignorance on the part of the third person

Under the above article, neither party is responsible for the mistake hence, either party may ask for reformation.

Article 1365

True intention must prevail for the contract must be complied with in good faith.

Article 1366 and 1367

There shall be no reformation in the following cases:

1) Simple donations inter vivos where no condition in imposed;

2) Wills; 3) When the real agreement is void; and 4) When one party has brought an action to enforce

the instrument.

Article 1368

Party entitled to reformation

1. Either if the parties, if the mistake is mutual; 2. In all cases, the injured party; and 3. The heirs or successors in interest, I lieu of the

party entitled.

Article 1369

The rules of the Supreme Court govern the procedure of reformation.

Chapter 5: Interpretation of contracts

Article 1370

Interpretation of contracts- is the determination of the meaning of the terms or words used by the parties in their contract.

Evident intention of parties prevails over terns of contract

Where the words and clauses of a written contract are in conflict with eh manifest intention of the parties, the latter shall prevail over the former.

Article 1371

The subsequent or contemporary acts of the contracting parties may be considered by the court in determining and ascertaining their intentions.

Article 1372

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.

Article 1373

When an agreement is susceptible of several meanings, one of which would render it effectual, it should be given that interpretation

Article 1374

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.

Article 1375

If a word is susceptible of 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 where the contract was entered into may be received to explain what is doubtful or ambiguous in the contract.

Article 1377

In case of doubt, a written agreement should be interpreted against the party who has drawn it, or be given an interpretation which will be favorable to the other who has incurred an obligation.

Article 1378

Rules in case doubts impossible to settle

1) Gratuitous contract if the doubts refer to the incidental circumstances of a gratuitous contract. It should be interpreted which would result to a least

transmission of rights and interests.

2) Onerous contract if the contact is onerous, the doubts should be settled in favor of the greatest reciprocity of interest. In case of a contact it is essentially onerous, thus, whether the parties intended a suspensive condition or suspensive period, the doubt shall be resolve in favor of the latter, and that is, the buyers obligation is still subsist with only to its maturity postponed or deferred.

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, and the contact shall be null and void.

Article 1379

Principles of interpretation in the Rules of Court applicable

The principles of interpretation stated in Rule of Court shall likewise be observed in the construction of contract.

INTRODUCTION

To Chapters 6, 7, 8 and 9

Kinds of defective contracts

1) Rescissible contracts 2) Voidable contracts 3) Unenforceable contracts 4) Void or inexistent contracts

Rescissible contracts are valid because the requisites of contract exist but by reason of economic injury or damage to one of the parties, the contract may be rescinded.

Voidable contracts are valid until annulled unless they are ratified. The defect is caused by vice of consent.

Unenforceable contracts cannot be used unless they are ratified (approve). It occupies an intermediate ground between a voidable and void contract.

Void or inexistent contracts are absolutely null and void. It has no effect at all and cannot be ratified.

CHAPTER 6

RESCISSIBLE CONTRACTS

Article 1380

Meaning of rescissible contracts

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

Binding force of rescissible contracts

Valid and enforceable although subject to rescission by the court when there is economic damage or prejudice to one of the parties or third person. Basically, there is no defect at all but by reason of some external facts, enforcement would cause injustice.

Meaning or rescission

Rescission is a remedy granted by law to the contracting parties and sometimes to the third persons in order to secure reparation of damaged caused them by a valid contract.

Requisites of rescission

1) The contract must be validly agreed upon

2) There must be lesion or pecuniary(concerning/consisting of money) prejudice to one of the parties or the third person

3) The rescission must be based upon a case especially provided by the 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 contract

6) The object of the contact must not be legally be in the possession of the third persons who did not act in bad faith

7) The period of filing the action for rescission must not have prescribed

Article 1381

Cases of rescissible contracts

1) Contracts entered into in 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 being unknown, and without leaving an agent to administer his property. To entitle the remedy of rescission, the absentee must suffer lesion (affecting its function) by more than of the value of the property.

3) Contracts undertaken in fraud of creditors in order that fraud of creditors may be valid ground for rescission, the following requisites must be present:

a) There must be an existing credit prior to the contract to be rescinded, although not yet due and demandable

b) There must be fraud on the part of the debtor which maybe presumed or proved

c) The creditor cannot recover his credit in any other manner

4) Contracts which refer to things under litigation

Just for instance, A sues B for the recovery of a parcel of land. In this case the land is a thing under litigation. If B sold the land to C without the approval of A or the

court, the sale is rescissible in the instance that A will win the case of suit for the recovery and C is in legal possession of the land in good faith.

If the action involves personal property, A may petition the court for the issuance of an order of attachment or the appointment of the receiver to place the property in custodia legis.

5) Other instances

A partition, judicial or extrajudicial, may also rescind on account of lesion, when one of the coheirs received less by at least than the share to which he is entitled.

In case of lessor and lessee, the aggrieved party may ask for the rescission of the contract and the indemnification for damages.

Article 1382

Payments made in a state of insolvency

A debtor is said to be insolvent if he does not have sufficient properties to meet his obligation. Under this article, its speak more of a payment not exactly as a contract. The payment should have been paid to the debtor for his obligation in which the debtor could not be compelled at the time they were effected. In addition, the obligation referred to are not only those obligations that are due and demandable but also to those which cannot be legally being demanded such as natural obligations.

Article 1383

Nature of action for rescission

Rescission is not the principal remedy. It is only subsidiary that is, it can only availed only if the injured party proves that he has no other legal means aside from rescinding the contract to obtain redress(compensation) for the damages he made.

If the damage is being repaired, just like the case of the lesion (physical change in a body part that is the result of illness or injury) suffered by the ward, the rescission cannot take place.

Article 1384

Extent of rescission

The entire contract need not be aside by rescission if the damage can be repaired or can be covered by the partial rescission. With respect of the partial rescission, the rescission will only to the extent of the creditors unsatisfied credit.

Article 1385

Rescission creates obligation of mutual restitution

The purpose of rescission is to restore the parties to their original situation, thats why when the court declares a contract rescinded, the parties must return to each other (1) the object of the contract with its fruit-because the law presumes that the party who receive the object of the contract are enjoying the fruits, (2) the price

with legal interest-the party who used the money must abide with the corresponding legal interest.

Obligation of third person to restore

He who demands rescission applies also with the third person. But if the third person has nothing to restore then there is no obligation. The law does not require the impossible.

When rescission not allowed

1) The remedy of rescission cannot be availed if the party who demand rescission cannot return what is obliged in the contract

2) Rescission shall not take place if the property is legally in the possession of the third person who acted in good faith. In this case, the remedy would be to demand indemnity for damages from the person who caused the loss

Article 1386

Contracts approved by the courts

As the law provides that If the contract entered into is represented or in behalf of a ward or absentee that further approved by the court is said to be valid whether there is lesion or not. Therefore rescission cannot take place from the fact that the contract is valid.

Article 1387

When alienation presume in fraud of creditors

This provision establishes the prima facie (at first glance) presumptions of fraud in case of alienation by the debtor of his property.

1) Alienation by gratuitous title presumed to have been entered into fraud of creditors

2) Alienation by onerous title presumed fraudulent when made by persons against whom some judgment has been rendered or some writ of attachment has been issued.

Circumstances denominated as badges (identifying feature) 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 begun 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 debtor, especially when he is insolvent or greatly embarrassed financially;

5) The fact that the transfer is made between father and son;

6) The failure of the vendee to take exclusive possession of all the property;

7) It was known to the vendee that the vendor had no properties other than that sold to him.

Article 1388

Liability of purchaser in bad faith

The purchaser in bad faith, who acquired the object of the contract alienated in fraud of

creditors, that purchaser must returned the same thing if the sale is rescinded. And if in case there is impossibility to return the thing, then the purchaser paid for the indemnification to the creditor.

Article 1389

Period for filing action for rescission

As a general rule, the action to claim rescission must be commenced within four years from the date contract entered into.

The exceptions are:

1) For the person under guardianship, the period shall begin from the termination of the incapacity

2) For absentee, from the time the domicile is known

Persons entitled to bring action for rescission

1) The injured party or the defraud creditor

2) Hi heirs, assigns, or successors in interest

3) The creditors of the above entitled to subrogation

Chapter 7

VOIDABLE CONTRACTS

Article 1390

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 are incapable of giving consent

Binding force of voidable contract

They are valid and binding unless annulled by a proper action in court. Once ratified, they are absolutely valid and cannot be annulled.

Kinds of voidable contract

1) Legal incapacity to give consent, where one of the parties is incapable to giving consent to the contract

2) Violation of consent, where the vitiation ( to make something ineffective) is done by mistake, violence, intimidation, undue influence or fraud

Meaning of annulment

Annulment is a remedy provided by law, for the reason of public interest, for the declaration of the inefficacy of a contract due to defect or vice of consent

Article 1391

Period for filing action for annulment

The four - year period for bringing action for annulment of a voidable contract is reckoned (include something):

1) In cases of intimidation, violence, or undue influence, the period of filing an action for annulment is from the time the intimidation, and

etc. ceases before the time the intimidation, and etc. ceases, the consent is still vitiated (make something ineffective), therefore, the victim cannot be expected to bring an action in court

2) In case of mistake or fraud, the period of filing an action for annulment is from the time the mistake or fraud discovered

3) In case of contracts entered into by minors or incapacitated person, the period of filing an action for annulment is from the time the guardianship ceases. An incapacitated person has no capacity to sue

Article 1392

Meaning and effect of ratification

1) Ratification one voluntarily adopt some defective or unauthorized contract, which without his approval, would not be binding on him

2) Ratification cleanses the contract from all its defects from the moment it was constituted. The contract is valid, hence, the action to annul is extinguished

Article 1393

Kinds of ratification

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

2) Implied or tacit may take diverse forms such as by silence or acquiescence (agree to something passively); by acts showing adoption or approval of the contract;

Requisites of ratification

1) The requisites for implied ratification

a) There must be knowledge of the reason which renders the contract voidable;

b) Such reason must have ceased;

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 that of the requisites of implied ratification except that the express ratification is effected expressly

Article 1394

Who may ratify

1) A contact entered into by incapacitated person may be ratified by:

a) Guardian;

b) The injured party himself provided that 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

Conformity of guilty party to ratification not required

Ratification is said to be unilateral act by which a party waives the defect in his consent. It does not require the conformity of the contracting party who has no right to bring the action for annulment.

Article 1396

Effect of ratification retroactive

Ratification - cleanses the contract from all its defects from the moment it was constituted. It extinguishes the right of action to annul. Thus, the effect of ratification is to make a contract valid from its inception (beginning) subject to the prior right of third persons.

Article 1397

Party entitled to bring an action to annul

1) The plaintiff (somebody who brings civil action) must have an interest in the contract

2) The victim and not the party responsible for the defect is the person who must assert the same

Rights of strangers to bring action

Basically the third person has no legal capacity to challenge the validity of contract. Therefore, stranger are without right or personality to bring the action for they are not obliged by the contract, unless they can show detriment (disadvantage) which would passively result to them 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 is sustained in the principle that he who comes to court must come with clean hands.

Article 1398

Dual of mutual restitution upon annulment

1) If the contract is annulled, as a general rule, the parties must restore a) the subject matter of the contract with its fruits and b) the price with legal interest Like rescission, the purpose of the law is to restore the parties to its original situation by mutual restitution (giving back to rightful owner)

2) In personal obligation, where the service is already been rendered, the value thereof the corresponding interest is the basis for damages

Article 1399

Restitution by an incapacitated person

The incapacitated person is obliged to make restitution only the extent that he was benefited of

what he receive, thus it also infer that when the incapacitated person is not enjoying of what he received then he is not obliged to give it back. But for the other contracting parties whether they benefited or not, they are still rebound to return what he received.

Article 1400

Effect of loss of thing 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 thing

2) If the thing to be returned is lost with the fault of the person obliged to make restitution, the obligation is not extinguished but converted into an indemnify for the damages, plus interest and the delivery of the fruits if in case an animal gave birth.

Article 1401

Extinguishment of action for annulment

1) If the person who has right to institute an action for annulment, will not be able to restore in which are obliged to return because it is through his own fraud or fault, his right to have contract annulled is extinguished

2) 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.

Article 1402

Effect where a party cannot restore what he is bound to return

There will be no annulment arose if the party cannot restore what he is obliged to return. This is also true even if the loss is due to a fortuitous event.

Chapter 8: Unenforceable contracts

ART.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 do not comply with the Statute of frauds as set forth in this number

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 o another;

c) An agreement made in consideration of marriage, other than a mutual promise to marry;

d) An agreement for the sales of goods, chattels, of things in action, at a price not less than five hundred pesos, unless the buyers accept and receive part of such goods and chattels

e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of and 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

Unenforceable contracts- are those that cannot be enforced in court r sued upon by reason of certain defects provided by law until and unless they are ratified according to law

Kinds of unenforceable contracts

1) Those entered into in the name of another by one without, or acting in excess in authority;

2) Those that do not comply with the Statute of Frauds;

3) Those where both parties are incapable of giving

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) When execute or partially executed it is not capable in statute of frauds

2) A party cannot use oral or verbal evidence to prove the contract

3) Admissibility of evidence ,testimony is not valid

Two ways to ratify

1) Failure to object

2) Acceptance of benefit

Agreements within the scope of the Statute of Frauds

1) Agreement not 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 500

5) Agreement for leasing for a longer period than one year

6) Agreement for the sale of real property or of an interest

7) Representation as to the credit of a third person

Article 1404

Unauthorized contracts are governed by article 1317

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 under them.

Article 1406

Right of a party where contract enforceable

1) Accordingly, a party to an oral sale of real property cannot compel the other to put the contract in a public document for purpose of registration because it is enforceable 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 a private instrument because the donation is void

Article 1407

When unenforceable contract becomes a voidable contract

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 contracts becomes a valid contract

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

Article 1408

Unenforceable contracts cannot be assailed by third person.

Chapter 9: Void or Inexistent contracts

ART.1409

The following contracts are inexistent and void from the beginning

1) Those whose cause, object or purpose is contrary to law, morals good customs, public order o 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

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

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

Characteristics of a void or inexistent contract

1) It produces no 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 dose not prescribe

5) The defense of illegality is not available to third persons whose interests are not directly affected

6) It cannot give rise to a valid contract

Instances of void or inexistent contracts

1) Contracts whose cause, object o purpose is contract to law, etc.

2) Contracts which are absolutely simulated or fictitious

3) Contracts without cause or object 4) Contracts which 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 prohibited or declared void by law

Article 1410

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 o time

Article 1411

Rules where contract is illegal and the act constitutes a criminal offense

1) Where both parties are in pari delicto a) The parties shall have no

action against each other b) Both shall be prosecuted c) The things or the price of the

contract, as the effects or instruments of the crime, shall be confiscated in favor of the government

2) Where only one party is guilty

Article 1412

Rules where contract is illegal but the act does not constitute a criminal offense

1) Where both parties are in pari delicto a) Neither party may recover what he has

given by virtue of the contract b) Neither party may demand the

performance of the others undertaking 2) Where only one party is guilty

a) The guilty party loses what he has given by reason of the contract

b) The guilty party cannot task for the fulfillment of the others undertaking

c) The innocent party may demand the return of what he has given

d) The innocent party cannot be compelled to comply with his promise

Article 1413

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 payment in a proper action for the same

Article 1414

Recovery where contract entered into for illegal purpose

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

3) The court considers that public interest will be sub served 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.

Article 1416

Recovery where contract not illegal per se

1) The agreement is not per se but is merely prohibited

2) The prohibition is designed for the protection of the plaintiff

3) Public policy would be enhance by allowing the plaintiff to recover what he has paid or delivered

Article 1417

Recovery of amount paid in excess

A statute fixing the maximum price of any article o 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 or black-marketing

Article 1418

Recovery of additional compensation for service rendered beyond time limit

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

Article 1419

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.

Article1420

Effect of illegality where contract indivisible/divisible

1) When the consideration is entire the 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 o severable, that is, the consideration is made up of several parts, and the illegal ones can be separated from the legal portions, the latte may be enforced. This rule, however, is subject to the contrary intentions of the parties

Divisible contract distinguished from divisible obligation

It must not be noted that Article 1420 speaks of 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 latte, to the prestation or object

Article 1421

Persons 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 o 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

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

Title III: Natural Obligation

ART.1423

Obligation is civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law both on equity and natural law, do not grant a right of faction to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the follow articles

Civil obligations and Natural obligations distinguished

1) Civil obligation arises from law, contracts, quasi-contracts, delicts, and quasi-delicts, while natural obligations are based not on positive law but on equity and natural law

2) Civil obligations give a right of action to compel their performance, while natural obligations do not grant such right of action to enforce their performance

Article 1424

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

Reimbursement of third person for debt that has prescribed

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

Article1426

Restitution by minor after annulment

When a contract is annulled, a minor is not obliged to make any restitution except insofar as he has been benefited by the thing o 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

Delivery by minor of money or fungible thing in fulfillment of obligation

By the decree of annulment, the parties, as general rule, are obliged to make mutual restitution. However, the oblige 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

Performance after action to enforce civil obligations 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 int. If, notwithstanding this fact, the debtor voluntarily performs his obligations, 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 obligations

Article 1429

Payment by heir 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 voluntarily pays the difference, the payment is valid and cannot be rescinded by him. An heirs has a moral duty to perform or pay obligation legally contracted by hi dead relatives

Article 1430

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.