Law on Contracts

(Arts. 1305- 1422, Civil Code)

Outline• General Provisions (Arts. 1305 – 1317)• Essential Requisites of Contracts (Art. 1318- 1355)• Forms of Contracts (Arts. 1356- 1358)• Reformation of Instruments ( Arts. 1359- 1369)• Interpretation of Contracts (Arts. 1370- 1379)• Defective Contracts (Arts. 1380- 1422)

- Rescissible/ Voidable/ Unenforceable/ Void

Contracts (definition)

• A meeting of the minds (acceptance of offer)

• Between two or more persons

• Whereby one binds himself, with respect to the other

• To give something or to render some service

Contract vs. obligation

Can there be a contract without an obligation?

Can there be an obligation without a contract?

• Source of obligation

• Legal tie or relation

Phases/Stages in the Life of Contracts

• Preparation – Preliminary to formation

• Perfection – birth of the contract

• Consummation/termination- fulfillment

Essential Characteristics of Contracts

• 1. Obligatory – must be complied with in good faith

• 2. Autonomy/Freedom – parties are free to enter such stipulations, clauses, terms and conditions (Art. 1306)

• 3. Mutuality – contract must bind both parties  (Art. 1308)

• 4. Relativity – takes effect only between parties, their assigns and heirs (Art. 1311)

Freedom: Clauses and Conditions of Contracts (Art. 1306)

• Law (rule of conduct)

• Morals (good and right conduct)

• Good customs (habits and practices)

• Public order (public safety)

• Public policy (broader in scope: safety and common good; police power)

Classes of ContractsAccording

to:Kinds

perfection Consensual – Perfected by mere agreement of the parties Real - Requires not only consent, but also the delivery of the object Solemn- compliance with certain formalities prescribed by law

form Common – Do not require particular form Formal – Those which require particular form, like donation, mortgage

nature of vinculum

Unilateral – Obligation of one party only Bilateral – Reciprocal obligations for both parties

cause Onerous – Giving of an equivalent or compensation Gratuitous – Given without compensation, just pure liberality

risks involved

Commutative – Prestation is pecuniarily appreciable and determined at the moment of celebration of contract Aleatory – Pecuniarily appreciable but not yet determined at the moment of celebration, since it depends upon the happening of an uncertain event. Ex. Insurance

name Nominate – with specific names or designation in law Innominate – no specific name

Nominate contracts • Deed of Absolute Sale (Real Estate Property)• Contract to Sell (Real Estate Property)• Chattel Mortgage (Motor Vehicle)• Contract of Lease / Rent• Deed of Sale (Motor Vehicle)• Earnest Money Receipt Agreement• General Power of Attorney• Special Power of Attorney• Deed of Assignment & Transfer of Rights (Real Estate)• Deed of Donation• Authority to Sell / Lease (Real Estate Property)• Offer to Purchase (Real Estate Property)• Last Will and Testament

Innominate Contracts (Art. 1307)

• Regulated by (1) stipulation of the parties (2) Civil Code provisions on Obligations and Contracts (3) analogous nominate contracts (4) customs of the place

• Kinds:

1. do ut des (barter)

2. do ut facias

3. facto ut des

4. facto ut facias

Samples of innominate contracts

• Memorandum of Agreement

• Rent-to-Own Contract (Real Estate Property)

• Contract of Renovation/Construction of a House or Building

Mutuality (Arts. 1308-1310)

• General rule: cannot be left to the will of one of the contracting parties

• Exception: Determination can be left to third party, whose decision shall be binding only when communicated to both parties, unless such determination be evidently inequitable

Relativity (Art.1311)Rule: parties, assigns, heirs

Exceptions:• Stipulation pour autrui accepted by third party • Where third persons comes into possession of the

object of contract creating real rights (Art. 1312) • Where contract is to defraud a third person (Art.

1313)• Where third person induces a contracting party to

violate his contracts (Art. 1314)

Stipulation pour autrui• Parties clearly and deliberately agreed• The 3rd person must have communicated his

acceptance• Stipulation in favor of the 3rd person part not whole

of the contract • Favorable stipulation not conditioned nor

compensated by any other kind of obligation• No authorization or legal representation of the 3rd

party

Unauthorized Contracts (Art. 1317)

• not enforceable

• Cured only by ratification

• A person is bound by the contract of another:

1. duly authorized (express or implied)

2. act within his/her power

Essential requisites of contracts (Art. 1318)

Common:• Consent of the contracting parties • Object certain subject matter of the contract • Cause of the obligation which is established

Special:

- form- Subject matter

- Consideration or cause

Other elements

• Natural elements– presumed to exist (like warranty against eviction or hidden defects)

• Accidental elements – conditions, clauses, terms, penalty etc.

Elements of Consent

1. Concurrence of the offer and the acceptance

– Definite offer that may be exactly fixed – Assent to the terms without qualifications or conditions – Conveyed before the death, civil interdiction, insanity, or

insolvency – Qualified acceptance is a counter offer – Perfected when acceptance comes to knowledge of offeror – Offer can be withdrawn anytime before acceptance, unless

option is founded on consideration – If offer made thru agent, accepted when communicated to the

agent

Elements of Consent

2. By parties with legal capacity to contract – Not minors, insane or demented, deaf-mutes who

do not know how to write, incompetents under guardianship, civil interdiction

– Minor can be liable if he misrepresents his age – Prohibited by law from entering into contracts

Offer

• Offer certain -fixed time, place, manner of acceptance (Art. 1321)

• Offer made by agents (1323)

• Effect of death, civil interdiction, insanity, insolvency, other grounds

Business advertisements

• Sale: mere invitations (Art. 1325)

• Bidders: mere proposals (Art. 1326)

Acceptance

• Acceptance absolute (express or implied)

Option Contract (Art. 1324)

• Giving a person for a consideration a period within which to accept the offer

• Option period

• Option money vs. earnest money

• “promise to buy or sell”

Incapacity to give consent

• Minors

• Insane or demented persons

- lucid interval

- state of drunkenness and hypnotic spells

• Deaf mutes

Restrictions in giving consent:•  Husband and wife to each other• Insolvents•   Persons prohibited from giving donations(Adultery, concubinage; In consideration of criminal

offense;Made to public officer, spouse, by reason of office)

• Persons with fiduciary relations ( Guardian, for property under his guardianship;   Agents, for

property entrusted to them   Executor/administrator; Public officers, judges, for property under their jurisdiction)   

Modifications of incapacity

• Civil Code provisions

- guardianship

- minor misrepresented age

• Rules of Court

- civil interdiction;lepers;prodigals etc

Elements of Consent

3. Intelligently, freely given, consciously

• vices of consent:

- mistake, violence, intimidation, undue influence, or fraud

• Causes of vitiating consent vs. causes of incapacity

Mistake (Art. 1331-1334)• False notion of a thing or fact material to the contract • Mistake of fact which law refers:

1. substance of the thing which is the object of the contract/nature of the contract ;

2. conditions which have principally moved one or both parties to enter into the contract ;

3. identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract

Mistake which does NOT vitiate consent

• Error as to incidents/ accidental qualities

• Mistake as to quantity or amount

• Error as to motives of the contract

• Identity or qualifications of a party (except when the same are the principal cause of the contract)

simple mistake

• On account/calculation shall give rise to its correction

Burden of proof• Rule: the one alleges fraud/mistake must

prove it• Exceptions:

1.One party is unable to read

2.contract is in a language not understood by him

- Party enforcing the contract must show that the terms thereof have been fully explained to the other

Knowledge of risk

• No mistake – doubt, contingency, risk

Mistake of law

• Rule: “ignorantia legis non excusat”

• Exception: -Mutual error as to the legal effect of an agreement

when the real purpose of the parties is frustrated

Violence or force (Art. 1335- 1336)

• violence -order to wrest consent, serious or irresistible force is employed

• intimidation - one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil

• May be committed by a 3rd person(Art.1336)

Violence?

• Factors to determine degree of intimidation vs. reverential fear

• Threat to enforce just/legal claim

Undue influence (Art. 1337

• improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice

• Circumstances:

1. confidential, family, spiritual and other relations between the parties

2. mental weakness

3. ignorance

4. financial distress

Fraud (Arts. 1338-1344)

• Causal fraud: induced to enter into a contract which, without them, he would not have agreed to

• By insidious words or machinations of one of the contracting parties or by concealment

Elements of Causal Fraud annulling consent

1. There must be misrepresentation or concealment;

2. It must be serious;

3. It must have been employed by only 1 of the contracting parties;

4. It must be made in bad faith or with intent to deceive

5. It must have induced the consent of the other party;

6. It must be alleged and proved by clear and convincing evidence.

Fraud by concealment (Art. 1339)

• Neglect or failure to communicate that which a party to contract knows and ought to communicate

Related articles on fraud• Art. 1340 – usual exaggerations in trade• Art. 1341- expression of opinion unless

relying on an expert’s special knowledge• Art. 1342- fraud by a 3rd person unless it

created substantial mistake and the same is mutual

• Art. 1343- misrepresentation in good faith (constitute an error)

Causal Fraud vs. Incidental Fraud

CAUSAL FRAUD INCIDENTAL FRAUD

- Ground for annulment of contract

(a)It should be serious;(b)It should not have been employed by both the contracting parties (pari delicto); and (c)It should not have been known by the other contracting party

- Only renders the party who employs it liable for damages

Simulation of Contract (Art. 1345-1346)

• Deliberately deceiving others, by feigning/pretending by agreement, the appearance of a contract

• Absolute simulation vs. relative simulation

Absolute simulation vs. relative simulation

ABSOLUTE SIMULATION RELATIVE SIMULATION

-When the contract does not really exist and the parties do not intend to be bound at all - inexistent or void

-parties conceal their true agreement - parties are bound in their real agreement provided it does not prejudice a 3rd person/not contrary to law, moral, good customs, public order or public policy

Objects of Contracts (Arts. 1347-1349)

• The subject matter

(a)Things

(b)Rights

(c)Services

Requisites of things

• Within the commerce of men

• Not impossible (legal or physical)

• In existence or capable of coming into existence

• Determinate or determinable without the need of a new contract

Requirements of services

• Within the commerce of men

• Not impossible (legal or physical)

• Determinate or capable of being made

Cannot be an Object

• Intransmissible by their nature

• Stipulation

• Provision of law

Cause of Contracts (Arts. 1350-1355)

• Cause is the essential or more proximate purpose which the contracting parties have in view of the time