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BA 160 | Second Semester AY 2018-2019

Obligations and Contracts


Title II: Contracts

I. Introduction

A. Concept and Definition

A contract is an agreement through ​meeting of the minds between two persons


whereby one binds himself, with respect to the other, to give something or to
render some service​. (1305)

A contract is one of the sources of ​obligation​. An obligation is the juridical necessity


that results when a contract is completed or perfected. ​There can be no contract if
there is no obligation, though not all obligations arise from contracts.​ The
obligation that arises from contracts is called conventional obligation.

B. Classification of Contracts

1. According to subject matter: things or services

Examples:

Contracts covering things - ​Contract of sale, deposit, pledges

Contracts covering services ​- Contract of carriage

2. According to name: nominate and innominate contracts

Innominate contracts shall be regulated by the stipulations of the parties, by


the provisions of Titles I and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of the place. (1307)

Difference between nominate and innominate contracts:

Nominate contract - ​has specific name or designation in law. Examples are


commodatum, lease, agency, and sale.

Innominate contract​ - has no specific name or designation in law; shall be


regulated by the stipulations of the parties, by the Civil Code, by the rules
governing the most analogous nominate contracts, and by the customs of the
place.
Classes of Innominate Contracts:

■ Do ut des​ (A to give one thing to B so that B will give another thing to A)


■ Do ut facias​ (A to give something to B so that B will do something for A)
■ Facio ut des (​ A to do something for B so that B will give something to A)
■ Facio ut facias​ (A to do something for B so that B will do something for A)

3. According to perfection: by mere consent or by delivery

Contracts are perfected by mere consent, and from that moment the parties
are bound ​not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law.​ (1315)

Real contracts, such as deposit, pledge and Commodatum, are not perfected
until the delivery of the object of the obligation. (1316)

4. According to its relation to other contracts: preparatory; principal; or accessory

Differences between preparatory, principal, and accessory:

Preparatory ​- ​Contracts entered into for the creation of another contract. A


good example is ​agency​; the principal gives power to the agent through a
special power of attorney

Principal ​- Contracts which can exist by themselves alone without depending


on another. Examples are sales and lease contracts.

Accessory ​- Contracts which cannot exist alone but depend on another


contract. Examples are car and mortgage contracts; they usually depend on
a loan contract

5. According to form: informal or formal

Difference between informal and formal contracts:

Informal ​- Created in any form as long as all the requisites or essential


elements for its validity are present. (E.g. loans)

Formal ​- Created in a form required by law. (E.g. donations and mortgages


of immovable property)

6. According to purpose (see types of contracts according to cause)

7. According to nature of legal tie created: unilateral, bilateral or reciprocal


Differences between unilateral and bilateral or reciprocal contracts:

Unilateral ​-​ Contracts where only one of the parties is bound to fulfill and
obligation. A is bound to fulfill an obligation towards B. (e.g. IOUs, promissory
notes)

Bilateral ​- contracts where both parties have reciprocally bound themselves


to fulfill their obligations in favor of the other. A and B are bound to fulfill their
obligations to each other (e.g. sales)

8. According to cause: onerous or gratuitous

Differences between onerous and gratuitous contracts:

Onerous ​- The purpose is the performance of an obligation by one party as


the other party performs or has performed its own obligation (e.g. A, a seller,
to deliver the sold item to B; B to pay the purchase price of the item A sold)

Gratuitous ​- ​Contracts where one of the parties gives something or renders


service to the other without receiving any equivalent or compensation​.​ It is
also called the lucrative contract because it provides gain to the other party
for free. ​(e.g. Donations, commodatum)

Remuneratory - ​The purpose is the remuneration or payment by one party


for a service or benefit previously rendered by the other party (e.g. A to pay B
Php 10,000 for fixing A’s air conditioner unit)

9. According to risk: commutative or aleatory

Difference between commutative and aleatory contracts:

Commutative ​- ​Contracts where the contracting parties contemplate the


assured fulfillment of the terms and conditions of their agreement, and there
is no risk to anticipate (e.g. Mortgage and pledge)

Aleatory ​- Contracts where the fulfillment is dependent on chance or event


which may not happen within the period stipulated, and the loss
contemplated may not happen (e.g. Insurance)

C. Characteristics

1. Obligatory Force between the Parties

The contract must bind ​both contracting parties​; its validity or compliance
cannot be left to the will of one of them. (1308)
Both parties, A and B, ​must a​ gree and bind to the terms of the contract. It is
a meeting of the minds between parties with respect to the object and cause;
there is a certain offer by one party and there is an absolute acceptance by
another party.

a. General Rule: Freedom to Contract (Art. 1306)

The contracting parties may establish such stipulations, clauses,


terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy. (1306)

Any person has the liberty to enter into a contract so long as they are
not contrary to law, morals, good customs, public order or public
policy. The legislature, under the constitution, is prohibited from
enacting laws to prescribe the terms of a legal contract.

b. Exceptions:

i. When it is inequitable

The determination shall not be obligatory if it is evidently inequitable.


In such case, the courts shall decide what is equitable under the
circumstances. (1310)

ii. Special disqualifications (Art. 87, Family Code, Arts. 1490, 1491,
1782, Civil Code)

iii. What may not be stipulated

c. Effect of contract as to third parties (Art. 1309, 1312-1314, 1177, 1381)

2. Mutuality (Art. 1308 to 1310; 1473)

3. Relativity or Privity of Contracts (Art. 1311)

a. Contracts take effect only between the parties, their assigns and heirs

b. No one may contract in the name of another (Art. 1317)

c. Stipulations in favor of third persons (Art. 1311, par. 2)


II. Essential Requisites of Contracts

A. Consent

Requisites (Art. 1319)


1. Perfection of Contract: Offer and Acceptance

a. Offer

• Offer must be certain (Art. 1319)

• what may be fixed by the offeror (Art. 1321)

• when made through an agent (Art. 1322)

• when offer becomes ineffective (Art. 1323)

• business advertisements of things for sale (Art. 1325)

• advertisements for bidders (Art. 1326)

b. Acceptance

• Acceptance must be absolute (Art. 1319)

• Kinds:

o express (Art. 1320)

o implied (Art. 1320)

o qualified (Art. 1319)

• period of acceptance (Art. 1324)

• option contract (Art. 1324)

Sample jurisprudence: Sanchez v. Rigos, 45 SCRA 368 (1972)

c. Termination of Offer

d. Perfection of Contract

• Four theories when contract is perfected:


o Manifestation theory

o Expedition theory

o Reception theory

o Cognition theory (Art. 1319 [2])

2. Legal Capacity of the Parties (Art. 1327-1328) (Sections 23 and 36, Corporation
Code)

3. Vices of Consent: Consent must be Intelligent, Free, Spontaneous and Real

a. Mistake or Error

i. Mistake of Fact

• As to substance of the object

• As to principal conditions

• As to identity or qualifications of the parties

• As to quantity, as distinguished from simple mistake of


account

ii. Mistake or Error of Law

• General Rule (Art. 3)

• Exception (Art. 1334)

iii. Mistake when one party is unable to read (Art. 1332)

iv. Inexcusable mistake (Art. 1333)

b. Violence or Intimidation (Art. 1335)

c. Undue Influence (Art. 1337)

d. Fraud or Dolo (Art. 1338)

i. Dolo causante (Art. 1338)


ii. Dolo incidente (Art. 1344 [2])

• Failure to Disclose Facts when there is a duty to reveal them


(Art. 1339)

• Usual exaggerations in trade: opportunity to know the facts


(Art. 1340)

• Mere expression of opinion (Art. 1341); Effects (Art. 1344)

e. Misrepresentation (Art. 1342- 1343)

Misrepresentation by a third person ​does not vitiate consent, unless such


misrepresentation has created substantial mistake and the same is
mutual​. (1342)

Misrepresentation made in good faith is not fraudulent but may constitute


error. (1343)

4. Simulation of Contracts

a. Kinds: Absolute and Relative (Art. 1345)

b. Effects (Art. 1346)

B. Object

1. Must be determinate as to its kind (Art. 1379)

2. What may NOT be objects of contracts (Art. 1347)

C. Cause

1. Meaning of Cause (Art. 1350)

a. in onerous contracts

b. in remuneratory contracts

c. in contracts of pure beneficence

2. Distinguished from Motive (Art. 1351)

3. Presumption: Existence and Lawfulness of Cause (Art. 1354)


4. Defective Causes and Effects:

a. Absence of Cause or Unlawful Cause (Art. 1352)

b. Statement of False Cause (Art. 1355)

c. Inadequacy of Cause or Lesion (Art. 1355)

III. Form of Contracts

A. General Rule (Art. 1356)

B. Exception (Art. 1356)

1. Kind of formalities required by law:

a. For validity (Arts. 748, 749, 1874, 2134, 1771, 1773)

b. To make it effective as to third parties (Arts. 1357 and 1358)

c. For purposes of proving existence of contract (Art. 1403)

IV. Interpretation of Contracts

A. Primacy of Intention (Arts. 1370, 1372)

B. Determining Intention (Art. 1371)

C. Rules of Contract Interpretation

1. When it contains stipulations which admit of several meanings (Art. 1373)

2. When it contains various stipulations, some of which are doubtful (Art. 1374)

3. When it contains words with different meanings (Art. 1375)

4. When it contains ambiguities and omission of stipulations (Art. 1376)

5. With respect to the party who caused the obscurity (Art. 1377)

6. When it is impossible to settle doubts using the above-cited rules (Art. 1378)
7. When doubts are cast upon the principal object so that the true intention cannot be
known (Art. 1378)

*Rules of interpretation under the Rules of Court will not be covered and will not be
part of the examination. If interested with the topic, the student may read Rule 130,
Sections 10 to 19 of the Rules of Court.

V. Reformation of Instruments

A. Requisites (Art. 1359)

B. When Reformation is not allowed (Art. 1366)

C. Implied Ratification (Art. 1367)

D. Who may ask for reformation (Art. 1368)

E. Procedure for reformation (Art. 1369)

VI. Defective Contracts

A. Rescissible Contracts

1. Kinds (Art. 1381)

2. Characteristics

a. The defect consists in injury or damage either to one of the contracting


parties of to a third person

b. Contract is valid before rescission

c. Attack may only be direct on, not collaterally

d. Attack maybe done by contracting party or by a third person who is injured


or defrauded

e. Validated only by prescription and not by ratification

3. Definition (Art. 1380): Distinguished from Rescission in Art. 1191


4. Requisites
a. Contract is rescissible

b. Party asking for rescission has no other legal means to obtain reparation
(Art. 1383)

c. He is able to return what he may be obliged to restore if rescission is


granted (Art. 1385)

5. Effect of Rescission (Art. 1385)

a. As to third persons who acquired thing in good faith (Art. 1385 [2] and [3])

b. As to third persons who acquired things in bad faith, when alienation was
in fraud of creditors (Art. 1388)

6. Extent of Rescission (Art. 1387)

7. Badges of Fraud (Art. 1387)

B. Voidable or Annullable Contracts

1. Kinds (Art 1390)

2. Characteristics

a. There is a defect in consent of one of the contracting parties

b. Binding until annulled by a competent court

c. May be validated by ratification or prescription

3. Annulment

a. Distinguished from Rescission

b. Grounds (Art. 1390)

c. Who May or May Not Institute Action for Annulment (Art. 1397)

d. Prescription (Art. 1391)

e. Effect: Mutual Restitution (Art. 1398 and 1402)

i. When on the parties is incapacitated (Art 1399)


ii. When the thing is lost through the fault of the party obliged to return
the same (Art. 1400)

f. Extinguishment of Action for Annulment

i. by ratification (Art. 1392)

ii. When the thing is lost through the fault of the person who has the
right to file the action (Art. 1401)

4. Ratification

a. Requisites

b. Forms

i. Express or tacit (Art. 1393)

ii. By the parties themselves or by the guardian in behalf of an


incapacitated party (Art. 1394)

c. Effects (Art. 1392- 1396)

C. Unenforceable Contracts

1. Characteristics

a. Valid but cannot be enforces by a proper action in court

b. Can be ratified

c. Cannot be assailed by third persons

2. Kinds (Art. 1403)

a. Unauthorized contracts (Art. 1404)

b. Contracts covered by Statute of Frauds

i. Purpose of Statute of Frauds

ii. How Ratified (Art. 1405)


iii. Right of the Parties when a Contract is enforceable but a public
document is necessary for its registration (Art. 1406)

c. Contracts executed by parties who are both incapable of giving consent

i. Ratification by the parents or guardian of one of the parties (Art.


1407)

ii. Ratification by the parents or guardian of both parties (Art. 1407)

D. Void or Inexistent Contracts

1. Characteristics

• Void from the beginning

• Produces no effect whatsoever

• Cannot be ratified (Art. 1409)

2. Kinds

a. Void Contracts

i. Those whose cause, object or purpose is contrary to law, morals,


good customs, public order or public policy (Art. 1411-1418, 1420,
1422)

ii. Those whose object is outside the commerce of man

iii. Those which contemplate an impossible service

iv. Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained

v. Those expressly prohibited by law

b. Inexistent Contracts

i. those which are absolutely simulated or fictitious (Arts 1345 to


1346)

ii. those whose cause/ object did not exist at the time of the
transaction
3. No Waiver of Defense of Illegality (Art. 1409)

4. Action or Defense for the Declaration of the Inexistence of a Contract (Art. 1410,
1421)
SPECIFIC EXAMPLES OF OBLIGATIONS

Obligations Created by Law

A. Estoppel
1. Definition (Art. 1431)
2. Kinds
a. Technical estoppel
i. by record
ii. by deed (Art. 1433)
b. Equitable estoppel or estoppel ​in pais​ (Art. 1433)
3. Persons Bound (Art. 1439)

4. Application (Art. 1434 to 1438)


B. Trusts
1. Definition (Art. 1442)
2. Parties (Art. 1440)
a. Trustor
b. Trustee
c. Beneficiary or ​cestui que​ trust
3. Kinds (Art. 1441)
a. Express trusts
i. Proof required (Art. 1443)
ii. Form (Art. 1444)
iii. Want of trustee (Art. 1445)
iv. Acceptance by the beneficiary (Art. 1441)
b. Implied Trusts
i. How established (Art 1441)
ii. How proved (Art. 1457)
iii. Specific cases (Art. 1448 to 1456)
DAMAGES

A. In general (Arts. 2195, 2196, 2198)


B. Kinds (Art. 2197)
1. Actual Damages
a. What constitutes actual damages (Arts. 2199-2202, 2205, 2206, 2208-2210)
b. When may be reduced (Art. 2203-2204, 2214, 2215)
b. Effect of insurance (Art. 2207)
2. Moral Damages
a. What constitutes moral damages (Arts. 2217, 2218)
b. When demandable (2219, 2220)
3. Nominal Damages (Arts. 2221-2223)
4. Temperate Damages (Arts. 2224-2225)
5. Liquidated Damages (Arts. 2226-2228)
6. Exemplary Damages (Arts. 2229-2235)

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