LECTURE - CONTRACTS

E.P.A.Peredo

TITLE II CONTRACTS
CHAPTER 1 General Provisions

*Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. (1254a)

*Article 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. (1255a)

*Article 1307. 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. (n)

*Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them. (1256a)

*Article 1309. The determination of the performance may be left to a third person, whose decision shall
not be binding until it has been made known to both contracting parties. (n)

*Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the
courts shall decide what is equitable under the circumstances. (n)

*Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received from
the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit
or interest of a person is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)

*Article 1312. In contracts creating real rights, third persons who come into possession of the object of
the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration
Laws. (n)

*Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

*Article 1314. Any third person who induces another to violate his contract shall be liable for damages
to the other contracting party.
(n)
*Article 1315. 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. (1258)

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

*Article 1317. No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked by the other contracting party.
(1259a)

Discussion
Consensual, Obligatory, Autonomous, Mutual, Relative
Art. 1305 defines a contract as “a meeting of minds between two parties whereby one binds himself
with respect to the other to give something or render some service.” The term “binds” here implies that
the contract has an obligatory force, or the force of law, between the parties. This is why it is a source of
obligation under Art. 1157. Essentially, you agreed to it, so you get bound by it.

Aside from being consensual and obligatory, contracts are also characterized by autonomy, mutuality,
and relativity. Autonomy refers to the freedom of the parties to agree on any obligation, task, term, or
condition in the contract, as long as these is not illegal, immoral, or contrary to public policy or public
order (Art. 1306). Because it is mutual, the contract’s crafting, execution, and fulfillment is determined
by all parties to it, and is not left to the control of only one of the parties (Art. 1308). But Art. 1309
allows the entry of third parties in the determination of the contract, as long as this is made known to
the parties. Impliedly, the entry of such third parties is part of the agreement, and therefore, the parties
are obliged to follow the decision of such third parties. The determination however, must be fair and
equitable, otherwise, the parties are not obliged to follow the contract’s terms. The contract loses its
obligatory force (Art. 1310).

As to exactly whom the contract is binding against, this is relative, that is, it relates only to the parties to
the contract and not anyone else outside of it (Art. 1311). The parties’ assigns and heirs are also within a
contract’s scheme of enforceability, except that an heir cannot be liable beyond what he receives from a
decedent, and except if the rights and obligations in the agreement cannot be transmitted by their
nature (such as marital obligations, which are personal), or if the parties agree, or the law states, that
not even heirs and assigns will be covered (ibid.).

Aside from heirs and assigns, who are technically representatives of a contract party anyway, another
possible exception to this principle of relativity is a person who is a beneficiary of a contract obligation
(Art. 1311, 2nd para) by way of a stipulation called “pour autrui,” which is, literally, French for “for
others.” Such third persons come within the ambit of a contract they had nothing to with by virtue of a
conferment by one or all the actual parties, a conferment which must be clear and deliberate, not vague
or accidental. The benefit mentioned here is not a mere incidental one (like, for example, a wife
benefiting from her husband’s purchase of a family car), but one that could have stood on its own
through a separate agreement. However, this conferment can be revoked, so the beneficiary must
communicate acceptance of the benefit to the contract party tasked to implement the stipulation pour
autrui in order to demand its fulfilment.

Meanwhile, Articles 1312 to 1314 show varying degrees of connection between a contract and third
parties. Art. 1312 states that third parties who come into possession of objects over which real rights
have been created by a contract, are bound by the contract. This means, for example, that a tenant has
to respect the ownership of someone who bought a property off of the former landlord.

Then, there’s Art. 1313, which prevents the parties to a contract use it to defraud a creditor. The
creditor is “not bound” by the agreement, and can even bring suit to annul it and preserve his credit.
Conversely, a third person cannot meddle in a contract in such a manner as to induce one of the parties
to violate his obligations under it; if it results in damages to the other contracting party, the inducer can
be made liable (Art. 1314)

Perfection
Contracts are generally perfected by mere agreement of the parties, and no other act or formality is
required for the perfection of such agreements. They are consensual, and from the moment of the
parties’ consent, they are bound to fulfill all stipulations, including whatever may be necessary to fulfill
such terms in keeping with good faith, usage, and law (Art. 1315). These are simple agreements that do
not require special forms or rituals such as the drafting of written documents or those that do not fall
under rules of proof under the Civil Code (the prime example would be those that are unenforceable
absent writing). A simple sale at a roadside sari-sari store can fall under this kind.

Some contracts depend on the transfer of the “res”, or the “thing”, being actually given or delivered.
Hence, they are real contracts. Art. 1316 mentions the contracts of deposit, pledge, and commodatum.
In a contract of deposit, no amount of consent, written or not, will be usefull if you do not give the
money or the thing that will be deposited. And in the loan of a thing, or commodatum, the agreement
requires that the borrower actually receive the thing to be borrowed.

And then there are solemn or formal contracts, which do not have any effect without the required
formalities even if the object or performance has been actually accomplished. This means that, absent
certain solemnities or rituals, the parties will be entitled to cause the return or undoing of the
performance or object. An example would a contract of donation of real property, or anything above
P5000. These need to be in writing, and in the case of real property, the writing must be converted into
a public document (notarized). Otherwise, even if the prospective donee has possession of the property,
no actual donation has taken place and he may be made to return it.

CHAPTER 2 Essential Requisites of Contracts

General Provisions

*Article 1318. There is no contract unless the following requisites concur:

(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. (1261)
SECTION 1
Consent
*Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his
knowledge. The contract, in such a case, is presumed to have been entered into in the place where the
offer was made. (1262a)

*Article 1320. An acceptance may be express or implied. (n) Article 1321. The person making the offer
may fix the time, place, and manner of acceptance, all of which must be complied with. (n)

*Article 1322. An offer made through an agent is accepted from the time acceptance is communicated
to him. (n)

*Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed. (n)

*Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised. (n)

*Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite
offers, but mere invitations to make an offer. (n)

*Article 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is
not bound to accept the highest or lowest bidder, unless the contrary appears. (n)

*Article 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

*Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable. (n)

*Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by law,
and is understood to be without prejudice to special disqualifications established in the laws. (1264)

*Article 1330. A contract where consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable. (1265a)

*Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.
Mistake as to the 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. A simple mistake of account shall
give rise to its correction. (1266a)

*Article 1332. When one of the parties 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. (n)

*Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting
the object of the contract. (n)

*Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent. (n)

*Article 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the person or property
of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation,
the age, sex and condition of the person shall be borne in mind.

A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate
consent. (1267a)

*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. (1268)

*Article 1337. There is undue influence when a person takes improper advantage of his power over the
will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall
be considered: the confidential, family, spiritual and other relations between the parties, or the fact that
the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant
or in financial distress. (n)

*Article 1338. There is fraud when, through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without them, he would not have agreed to.
(1269)

*Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud. (n)

*Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)

*Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the former's special knowledge. (n)

*Article 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)
*Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

*Article 1344. In order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)

*Article 1345. Simulation of a 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. (n)

*Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does
not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their real agreement. (n)

SECTION 2
Object of Contracts

*Article 1347. All things which are not outside the commerce of men, including future things, may be the
object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may
likewise be the object of a contract. (1271a)

*Article 1348. Impossible things or services cannot be the object of contracts. (1272)

*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. (1273)

SECTION 3
Cause of Contracts

*Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit
which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

*Article 1351. The particular motives of the parties in entering into a contract are different from the
cause thereof. (n)

*Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)

*Article 1353. The statement of a false cause in contracts shall render them void, if it should not be
proved that they were founded upon another cause which is true and lawful. (1276)
*Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary. (1277)

*Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence. (n)

Essential Requisites: Consent

To reiterate, formalities are generally not needed to give birth to a contract. In its most basic, a contract
is born when its three essential elements come together. These are the consent of the parties, the
object of the agreement, and the consideration for the object (Art. 1318).

Consent means the meeting of minds between the parties on the subject matter and cause of the
contract. In Art. 1319’s legalese, this is the point of concurrence of the offer (or last counter-offer) and
the acceptance. The offer must be certain and the acceptance absolute. If the acceptance is not
absolute, such as when there is a qualification, there is no consent. Such a qualified acceptance may
constitute a counter-offer which converts the original offeror into the party that must make the
acceptance.

Ideally, offers, counter-offers, and acceptances happen on a face-to-face basis. But not all contracts are
entered into face-to-face. Offers may be made in person, through an agent (Art. 1322), or remotely
through means of communication. The same is true with acceptance, although the offeror is given the
right to fix the time, place, and manner of acceptance (Art. 1321). But if the offeror does not say
anything, one can accept in person, through the offeror’s agent, or by means of remote communication
such by letter or telegram (Art. 1319, 2 nd para). If the parties are face-to-face or in a situation where the
offeror can make the observation, acceptance can be made expressly or impliedly (Art. 1320). If the
acceptance is made through the agent, the contract is created the moment the agent receives the
acceptance (Art. 1322). In case of remote communication, the offeror must have knowledge of the
acceptance (impliedly, he must have received and read the correspondence) before we can say a
contract has been made. Once he knows of the acceptance, the contract is deemed to have been
perfected in the place where the offer was made.

All these ways to accept presume that the offer is still valid, that is, the acceptance is made before the
death, civil interdiction, insanity, insolvency of either party (Art. 1323), or before the offer is withdrawn
by the offeror communicating such withdrawal (Art. 1324). 1

Contracts of course have to involve at least two parties who are capacitated and are not disqualified. In
this regard, care must be given to distinguish between an incapacitated party and a disqualified party. A
person should at least be of majority age in order to be considered legally capacitated, or for his
decisions and acts to be considered with full legal effect. But a legally capacitated person might be
specially disqualified, such as when he is prevented by a court of appropriate jurisdiction to administer
his property. Sometimes, legal capacity is not enough. There must be other special capacities particularly
required by law with regard to certain contracts, e.g., marriage, which, in the Philippines, still requires a
difference in sex, and the absence of a prior valid marriage, in addition to being of legal age.
1
Withdrawal is not possible, however, if the option to accept is “founded upon a consideration, as something paid or promised,”
(Art. 1324). This consideration is a contract in itself and even has a name – the option contract. Being a contract, the offeror
cannot unilaterally withdraw his offer prior to the exercise of the option.
Examples of persons who cannot give a valid consent, aside from minors, are insane or demented
persons, illiterates or deaf-mutes who do not know how to write (Art. 1327). Intoxicated, drugged or
hypnotized persons, while able to give valid consent, may later ask that the contract be voided because
of the way or the time they gave their consent (Art. 1328). 2 The same is true for persons acting under
honest mistake, violence, intimidation, undue influence, or those who are induced by the fraudulent
acts of the other party (Art. 1330).

Note that all the persons here have the option to ratify the contract they entered into when the time or
circumstance is proper (a minor may ratify when he reaches the age of majority, the drunk can validate
his acts after regaining sobriety, the illiterate can have a reader/interpreter explain what he signed, and
so on). Those who are really disqualified, according to law, are those under civil interdiction,
hospitalized lepers, prodigals, prodigals, and the deaf-mute who do not know how to both read and
write. Add to that those who, by reason of age, disease, weak mind and other similar causes, cannot
without outside aid, take care of themselves and manage their property, becoming an easy prey for
deceit and exploitation. If persons under this group sign a contract, that contract is automatically void.

If the party himself is not under any incapacity or disqualification as above discussed, it does not mean
that his consent to a contract is already perfect. The person giving that consent must not make any
mistake as to the substance of the thing which is the object of the contract, or to those conditions which
have principally moved one or both parties (Art. 1331). The mistake thus must be serious, as when the
thing which is the object of the contract is far from what the parties had in mind, or when a major
condition, like the identity or qualifications of one of the parties, are not what was initially thought.
Minor mistakes like in accounting are merely corrected (Art. 1330, 2nd para). The parties have to be
informed of all important details of the contract and they must understand the terms. This is crucial for
making a valid contract. If all are mistaken as to what legal effect a contract has, and the actual effect
frustrates the intention of the parties, they may have the contract avoided on the basis of vitiated
consent (Art. 1334).The law also requires that when illiterate parties or those entering into contracts
that are not in a language they can understand are saying they made a mistake, it is the burden of the
other parties enforcing it to prove that the terms were fully explained to and understood by the former
(Art. 1332).

The person giving consent must also do so freely, meaning any outside force having an effect on that
consent may potentially set the contract aside for having a defective essential element. These forces
may be in the form of violence, intimidation, or undue influence.

Violence here refers to an irresistible physical force, such as, in the movies, arm-twisting another into
signing a contract. Contrast that with someone who signs under the threat of a knife or a gun; the latter
is more properly intimidation rather than violence, intimidation involving a real threat of an unjust and
unlawful act on the person, property, or immediate family of the person signing the contract (Art.
1335).3 Meanwhile, undue influence is something less than intimidation, but not any less vitiating,

2
Insane, demented, and other persons whose mental faculties are not reliable may however have moments of mental clarity,
called lucid intervals. If made during these times, their consent is valid (Art. 1329).
3
The age, sex, and condition of the person being intimidated are important considerations. Younger people may be intimidated
by older parties. Weaker persons may be scared more easily into entering contracts. However, a threat of enforcing a claim
through competent authority is not considered a vitiation of consent (Art. 1335, 2 nd para). Even if the intimidator or person doing
violence is a third party, the party being intimidated or violated may still have the contract set aside on these grounds (Art. 1336).
because here the signing party is forced by the moral ascendancy of another person, who takes
advantage of his power over the will of another because of confidential, family, spiritual, or other
relations between the parties. Even if there are no such relations, if one of the parties is ignorant or
mentally weak, or mentally weakened by a desperate state such as financial distress, such parties do not
have “reasonable freedom of choice (Art. 1337).” In a culture where “utang na loob” prevails, for
example, a contracting party may be signing a patently unfair agreement just because the negotiator of
the other contracting party was once instrumental in securing the signing party’s job.

Finally, even if a party is reasonably capacitated to enter into a contract and is free from violence,
intimidation, or undue influence, if they fall to “insidious words or machinations” without which they
would not have been induced to enter into a contract, their consent is still vitiated, this time by fraud
(Art. 1338). Sales talk, or usual exaggerations in trade, are not fraudulent especially if the party claiming
fraud has the opportunity to know the facts (Art. 1340). Opinions are also not fraudulent unless stated
by an expert insidiously, and that expert is relied upon by the party claiming fraud (Art. 1341). But if you
kept some facts that are important for making a decision on a contract, this is fraudulent (Art. 1339).

If the parties both employed fraud, they have no recourse to legal remedies and are left to themselves ;
the contract is not voidable (Art. 1344). If the parties both employ fraud to hide the true nature of the
contract, this is called simulation, and it may be absolute or relative – absolute if the parties are only
pretending to have a contract, and relative if the parties are only hiding what their real agreement is
(Art. 1345). The first is void, while the second still binds the parties to their real intentions as long as no
third person is prejudiced by the “cover” contract, and the purpose is not illegal, immoral, or contrary to
good customs, public order, or public policy (Art. 1346).

Essential Requisites: Object

Meanwhile, the object of the contract is the prestation or the obligation involved. It is what should be
done. It is the act that is to be executed should the parties come to an agreement about it and other
terms and conditions involving it. Whatever the object is, Art. 1347 states that it should be within the
commerce of man, that is, it can be done, traded, sold, or purchased anytime by anyone, even if it is still
coming to be (future things). 4 Aside from things, services can be the objects of a contract, as long as
they are not contrary to law, morals, good customs, public order, or public policy (Art. 1347, 3 rd para).

When we say that the object can be done, we mean that it is possible physically and legally. Impossible
things and services cannot be objects of a contract (Art. 1348), and any agreement containing them will
be void for lack of an element.

It is not important for the object to be specific or perfectly specified at the time the contract is executed,
although that would be preferred for clarity. For purposes of having an agreement, it is only necessary
that the object is at the very least determinate as to its kind (Art. 1349). Conditions such as quantity can
be determined later, but if it is impossible to do so or the parties need to execute a new contract just to
be able to do that, the first contract is arguably void for want of a determinable object (ibid.).

Essential Requisites: Cause

Finally, after the consent and the object, the parties have to have a reason for coming together for a
contract. This is the cause or consideration for the contract. But we should be careful and not think that
this refers to individual reasons of the parties for entering into an agreement. It does not (Art. 1351).
4
If the future thing, however, is something you will possibly inherit, it cannot be the object of a contract, unless specifically
allowed by law (Art. 1347, 2nd para). There is nothing definite about inheritance until it actually happens.
The personal motive of a buyer may be to acquire something buy, and a seller’s may be to make profit.
These motives have nothing to do with the contract. But the contract has everything to with the buyer
making the purchase on the cause of the seller agreeing with him as regards object and price, and vice
versa.

The situation above may be said to be an example of an onerous cause, because one party gives in on
condition of the prestation or promise of a thing or service by the other party. Other contracts may be
remuneratory, i.e., you are remunerating a service or benefit that you received. Finally, some contracts
are gratuitous (of pure beneficence), e.g., a donation, because they are done out of the mere liberality
of the benefactor. (Art. 1350).

The cause of contracts is presumed, and need not be stated (Art. 1354). You need not, in the above
situation, state that you are buying because the seller has agreed to sell. Stating a false cause, as in
simulated contracts, is not allowed, and if there is no other cause that is real and legal, the contract will
be void for want of cause (Art. 1353).

Finally, it does not matter if the cause of the contract is seemingly inadequate, as when obviously
valuable property is being bought for half its fair value. The contract is after all dependent on what the
parties agree upon, and unless one proves that the seller has been defrauded, is mistaken, or unduly
influenced by the “lowballing” buyer, the contract will stand (Art. 1355). It is only when there is really
no cause, or there is an unlawful cause, that the contract is void and of no effect (Art. 1352).

CHAPTER 3
Form of Contracts

*Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law requires that a
contract be 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. (1278a)

*Article 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe that form,
once the contract has been perfected. This right may be exercised simultaneously with the action upon
the contract. (1279a)

*Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest therein
are governed by articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains;
(3) 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;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even
a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and
1405. (1280a)

Discussion: Form
As already mentioned, formalities are not really necessary for a contract to be born. Contracts are
generally consensual, and form is merely the manner in which a contract is executed or manifested. But
form may be needed in some contracts, for purposes of validity or enforceability, or proof (Art. 1356). In
these cases, the parties may compel each other to follow the form needed (Art. 1357).

Aside from validity, enforceability is also an issue in some contracts lacking form. Enforceability refers to
the consummation stage of a contract, when one binds or forces the other party to comply with his
obligation. If the contract was not in writing, there could be some problems remembering the terms and
conditions of the act. So the contract “form” may offer proof. This goes without saying that even
without the written agreement, the other party can actually ratify the claim and perform the contract
even if there is no executed form.

At times, a contract may be valid and enforceable as between the parties, but how do we make third
parties respect the contract if there is no written agreement? Once again, form may be needed for this
convenience. Considering the social comprehension of contracts, it may be easier to implement them in
the face of third parties if the latter are able to see the terms and conditions of the agreement in black
and white. An example is the transmission of power to administer properties of another. Third parties in
possession of the properties may hold suspicions and refuse the administrator if the latter does not
present the agreement with the owner of the property. Interestingly, too, the law requires that every
contract with a consideration of at least P500 must be in writing (Art. 1358, last para), but again, this is
more for the benefit of third parties rather than the contracting persons themselves.

Art. 1358 enumerates some kinds of contracts that must be writtern and notarize, converting them into
public documents:
1. Contracts creating, transmitting, changing, or ending real rights over real property, as well as
sales of real property or any interest in them; 5 (1403, 1405)
2. Agreements to concede or reject inheritance rights or those marital rights to the conjugal
partnership of gains;
3. Administration of property;
4. Any power concerning actions that may prejudice third persons or should similarly appear in
public documents; and
5. Stopping any action or right from any act that appears in a public document (like the ones
appearing in this list).

CHAPTER 4
5
Articles 1403, no. 2, and 1405 are mentioned here as the pertinent governing provisions. Art. 1405, no. 2 is known as the
Statute of Frauds. It enumerates contracts that cannot be enforced if there is no writing, because of the ease with which fraud
can be perpetrated. Art. 1405, meanwhile, is the remedy – the party trying to enforce the unwritten contract which is one of those
enumerated under Art 1405, no. 2, may instead introduce oral evidence (parol evidence), and if the other party does not
complain, the contract stands. The latter may also ratify the unwritten agreement by receiving benefits from it.
Reformation of Instruments (n)
*Article 1359. When, there having been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument
to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.

*Article 1360. The principles of the general law on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the provisions of this Code.

*Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose
their real agreement, said instrument may be reformed.

*Article 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way
that the instrument does not show their true intention, the former may ask for the reformation of the
instrument.

*Article 1363. When one party was mistaken and the other knew or believed that the instrument did
not state their real agreement, but concealed that fact from the former, the instrument may be
reformed.

*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.

*Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with a right of repurchase, reformation
of the instrument is proper.

*Article 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.

*Article 1367. When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.

*Article 1368. Reformation may be ordered at the instance of either party or his successors in interest,
if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

*Article 1369. The procedure for the reformation of instrument shall be governed by rules of court to be
promulgated by the Supreme Court

Discussion: Reformation
One obvious convenience of subjecting a contract to form is the opportunity to correct mistakes as soon
as they are detected. The contract may be reformed at the instance of one of the parties if the draft
does not embody what they really intend, whether this failure is because of mistake, fraud, unfair
conduct, or accident (Art. 1359). But this is only true if the parties had a meeting of the minds, and it’s
just a matter of clearly setting the terms out. If the mistake, fraud, inequitable conduct, or accident
result in the parties not really having an agreement, annulment and not reformation is the proper
remedy (ibid.).

In cases of mutual mistake, either party or both parties may ask for the reformation (Art. 1361). Either
or both parties may also ask for reformation in case the draft is ineffective at expressing the intention of
the parties because of the drafter’s ignorance, lack of skill, negligence, or bad faith (1364). In cases of
mistake by one party and fraud or unfair acts by the other, the party that is mistaken is considered the
injured party who may ask for reformation (Art. 1362). This is also true even if the party acting
fraudulently takes it a notch higher by concealing the fact of mistake by the other party (Art. 1363).

An example of an intention not being expressed correctly is a draft of a contract of sale (with or without
right to repurchase), when what was agreed upon was actually just a mortgage or pledge of real or
personal property (Art. 1365). If the contract involves simple donations that are pure and unconditional,
there is no need for reformation. The same is true with wills, which must instead be proven in probate
court. And of course, if the real agreement is void, no correction can make it valid. (Art. 1366)

Aside from the parties, their successors in interest may bring the action for reformation (Art. 1368). But
if an action to enforce the contract has been filed, this means that the party suing for enforcement is not
questioning the terms of the contract; hence reformation is no longer proper and will give way to the
suit for enforcement (Art. 1367).

It should just be remembered that the right to reformation prescribes in 10 years from the date of the
execution of the instrument. After that, whatever is written is deemed to be the true intention of the
parties, who may no longer introduce changes to the same.

CHAPTER 5
Interpretation of Contracts

*Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former. (1281)

*Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (1282)

*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. (1283)

*Article 1373. If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual. (1284)
*Article 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly. (1285)

*Article 1375. Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract. (1286)

*Article 1376. The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established.
(1287)

*Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity. (1288)

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

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known
what may have been the intention or will of the parties, the contract shall be null and void. (1289)

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

Discussion: Interpretation
Sometimes, a contract may not need actual reformation. It may just need proper interpretation, and if
the parties agree that a way of reading the draft is in accord with what they want to happen, that solves
everything. The parties can avail of the remedy of interpretation when the terms of the contract are not
clear and there is doubt as to the intention of the parties, which should always prevail. But if the
contract is otherwise clear, the literal meaning of the stipulations should be followed (Art. 1370).
Determining the intention of the parties may be tricky, but clues can be gleaned from their acts during
and after the execution of the contract (Art. 1371) as well as usages and customs of the place where the
contract is executed (Art. 1376).

The contract terms have to be carefully read. Generic terms should not be overstretched to cover things
and situations that are not within the parties’ intentions (Art. 1372). Ambiguous terms should be
interpreted in the most effective way to give life to the contract (Art. 1373, Art. 1375). The contract
stipulations all have to be interpreted together and related to one another, as this may help imbue
sense to provisions that are doubtful by themselves (Art. 1374). If one of the parties asked for the use of
a word or stipulation that turns out to be obscure, any interpretation of that word or stipulation should
not automatically favor him (Art. 1377).

Not everything can be solved by interpretation. When interpretation fails to settle doubts in the
understanding of the contract, especially if the doubt refers to whether the parties really intended to be
bound, the contract is best avoided (Art. 1378). If the draft is not so doubtful on the intention of the
parties to be bound, the contract is best served by settling in favor of the greatest reciprocity of rights, in
case of an onerous contract, and the least transmission of rights, in the case of gratuitous ones (Art.
1378).

DEFECTIVE CONTRACTS

CHAPTER 6
Rescissible Contracts

*Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

*Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)

*Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected, are also rescissible. (1292)

*Article 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. (1294)

*Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

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

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. (1295)

*Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to
contracts approved by the courts. (1296a)

*Article 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been obtained by the party
seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence. (1297a)

*Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify
the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it
should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a)

*Article 1389. The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the
termination of the former's incapacity, or until the domicile of the latter is known. (1299)

Discussion: Rescissible Contracts

Rescissible contracts are those which have caused a particular economic damage either to one of the
parties or to a 3rd person and which may be set aside, even if valid, in whole or in part, to the extent of
the damage caused. The particular instances of rescissibility are found in Articles 1381 and 1382:

1. Contracts where a ward (e.g., a minor or incapacited person) is represented by a guardian, and
the guardian agrees to a terms causing damage to the ward by more than 25% of the value of
the things that are the objects of the contract;
2. Contracts where authorized representatives of absentees cause damage to the latter similar to
the first situation;6
3. Contracts that end up defrauding third-party creditors, if they no longer have any other remedy;
4. Contracts on things which are the subject of pending court cases entered into by the defendant
without notifying and getting the approval of other litigants or the court itself;
5. Payments made at a time when the debtor is insolvent, which were actually not yet enforceable;
and
6. All other cases that may be specially declared rescissible by law.

The party that wants a contract rescinded must first try to get reparation for the damage using available
remedies. If there is none, then the action for rescission may be instituted (Art. 1383)., but in any case
not after a period of four years after the contract’s execution (Art. 1389). 7

The party can also not ask for more than the damage he suffered (Art. 1384). It is likewise important to
note that when the contract is rescinded, the parties are obliged to mutually restore to the other
whatever they received by virtue of the contract (Art. 1385). This refers to the things which are the
6
In situations under nos. 1 and 2, the guardian or authorized representative can protect themselves by obtaining the approval of
a court before entering into the agreement (Art. 1386).
7
If the party was a minor, incapacitated, or an absentee at the time of the execution of the contract, the counting of the four
years starts from the age of majority, termination of incapacity, or det.rmination of the domicile of the absentee (Art. 1389).
objects of the contract as well as fruits that may have arisen in the meantime. If the object is monetary,
then restitution refers to the price, with interest that may have accrued in the meantime. So if the party
that wants rescission cannot restore the above, rescission will not be granted. It will also not be granted
if the thing is already in the hands of a third person, who acquired the same in good faith, that is,
without knowing that the thing was the object of a rescissible contract. A suit for indemnity for the
damages caused will replace the suit for rescission (Ibid.).

Badges of fraud
How does one know that a contract is intended to defraud creditors, for the latter to ask for the
rescission of such agreements? There are clues. If the debtor disposes of property by gratuitous title
(e.g., donation) and he does not leave enough properties to answer for his liabilities, the creditors may
argue that the gratuitous alienation was in fact to avoid having the property pursued by the creditors
(Art. 1387).

Even if the disposition is onerous (i.e., not gratuitous), creditors are still defrauded if the debtor
alienated the property after a judgment or writ of attachment has already been promulgated against
him and his properties, even if the property disposed is not listed with them (Ibid.).

The persons who acquire the property in the above situations is of course party to the fraud, and they
should return such properties in rescission. If they can no longer do that for any reason, they are liable
for damages in favor of such creditors (Art. 1388).

CHAPTER 7
Voidable Contracts

*Article 1390. The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification. (n)

*Article 1391. The action for annulment shall be brought within four years. This period shall begin: In
cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case
of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts
entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a)

*Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

*Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should execute an act which necessarily implies an
intention to waive his right. (1311a)

*Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)
*Article 1395. Ratification does not require the conformity of the contracting party who has no right to
bring the action for annulment. (1312)

*Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.
(1313)

*Article 1397. The action for the annulment of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of
those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence,
or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

*Article 1398. An obligation having been annulled, the contracting parties shall restore to each other the
things which have been the subject matter of the contract, with their fruits, and the price with its
interest, except in cases provided by law. In obligations to render service, the value thereof shall be the
basis for damages. (1303a)

*Article 1399. When the defect of the contract consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has been benefited by
the thing or price received by him. (1304)

*Article 1400. Whenever the person obliged by the decree of annulment to return the thing can not do
so because it has been lost through his fault, he shall return the fruits received and the value of the thing
at the time of the loss, with interest from the same date. (1307a)

*Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the person who has a right to institute the
proceedings.

If the right of action is based upon the incapacity of any one 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. (1314a)

*Article 1402. As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon
him. (1308)

Discussion: Voidable Contract

While the defect of rescissible contracts has to do with the effect they have on persons who are not
involved in the contracts’ execution, the defect of voidable contracts is intrinsic, but not serious enough
to prevent the validity of their execution. There is no damage to any of the parties in following the
contract terms. But the defect is in the requisites, though complete. Specifically, if one of the parties is
not capable of giving consent, or can give consent but that consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud (Art. 1390).

Nevertheless, like rescissible contracts, voidable contracts are valid unless a suit is filed in court to annul
them (Ibid.). The action must be instituted within four years (Art. 1391). Everyone bound by the contract
whether principally or subsidiarily may file for its annulment, except that a capable party cannot file suit
as against the incapable one, and neither can the person who caused the mistake or is guilty of
intimidation, violence, undue influence, or fraud (Art. 1397).

Of course, the person whose consent is vitiated may bring suit, but as to him the four-year period begins
from the ceasing of the intimidation, violence, or undue influence ceases, the discovery of the mistake
or fraud, or from the time minors or other incapacitated persons are legally free of their guardians (Art.
1391).

If the party whose consent is vitiate instead chooses to ratify the contract 8 instead of having it annulled,
he can do so, and no action to annul the voidable contract will prosper anymore (Art. 1392). Ratifying
the contract “cleanses” it of the defect (Art. 1396), and the other contracting party who has no right to
bring annument does not have to agree to the ratification (Art. 1395). Ratificaiton may be done either
expressly by stating it, or impliedly, by acting in accordance with the contract despite knowing it’s
voidable at his instance (Art. 1393). Otherwise stated, if not ratified expressly by the aggrieved party, the
contract may be ratified by acting in accordance with the contract or through lapse of time. It is as if the
law says the aggrieved party ratifies the defective contract by not doing anything about it. If he does
want to do something about it, he should do so within four years from the time the defect in his consent
ceases, in the case of intimidation, violence, or undue influence, from the time of discovery, in the case
of mistake or fraud, or from the end of the guardianship, in cases of contracts entered into by minors or
incapacitated persons.

But if the obligation is annulled, restoration is in order. All the objects of the contract, including their
fruits, the prices plus interest, are to be returned except if law says otherwise. If the obligation involved
was a service, its value should be determined so there can be a basis for damages (Art. 1398). Any party
who cannot make any returns because the thing that was the object of the contract was lost through his
fault9 will still be obliged to return its fruits, and its value at the time of loss plus interest from the same
date (Art. 1400).10 And like in reciprocal obligations, restoration is triggered by the readiness of both
parties to restore; if one is not ready, he cannot compel the other to return (Art. 1402).

CHAPTER 8
Unenforceable Contracts (n)

*Article 1403. The following contracts are unenforceable, unless they are ratified:
(1) 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;
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or

8
If the party is incapacitated, the guardian may ratify (Art. 1394). However, this incapacity should be separate and not the same
continuing one that caused the voidability, so that the party realizes that the contract is voidable before being incapacitated again
for Art. 1394 to take place. Otherwise, the period to file the action under Art. 1391 has not arrived.

9
If the person who caused the loss is the same person who is instituting the action for annulment, the case is extinguished,
unless the basis of the action is incapacity or there is fraud perpetrated by the plaintiff (Art. 1401).
10
If the voidability is based on the incapacity of one of the parties, however, that party is not obliged to make any returns beyond
the benefit or price that he received (Art. 1399).
memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the auctioneer in his sales
book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
( f ) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.

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

*Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified
by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of
benefit under them.

*Article 1406. When a contract is enforceable under the Statute of Frauds, and a public document is
necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under
Article 1357.

*Article 1407. In a contract where both parties are incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give
the contract the same effect as if only one of them were incapacitated. If ratification is made by the
parents or guardians, as the case may be, of both contracting parties, the contract shall be validated
from the inception.

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

Discussion: Unenforceable Contracts

Unenforceable contracts are different from voidable contracts in that they have no cause to be
invalidated. In other words, they are valid and binding agreements. The only question is whether they
can be enforced or not, that is, whether the person demanding that the contract be performed has the
legal clout to have it actually accomplished without the ratification of the other party. Unenforceability
affects the parties, who can state the fact if called upon to perform the obligations under the contract.
Third parties cannot assail unenforceable contracts (Art. 1408); they are passive watchers for the
meantime.
The varieties of unenforeceability cover three general situations. The first is when one of the signatories
agreed to the contract without any or sufficient authority from the real party in interest (Art. 1317, Art.
1403, no. 1). This usually happens in the case of agents or persons with special authorities but who
acted against or in excess of those authorities. For example, a representative with a special power of
attorney or SPA may be authorized to purchase materials worth P10,000, but if he buys what is worth
P15,000, the seller may have a hard time enforcing the collection upon the actual purchaser. Obviously,
the situation involves rules on agency (see Title X).

A second variety is when both or all parties to the agreement are incapable of giving consent (Art. 1403,
no 3), such as in the case of two drunkards. Neither can enforce on the other unless there is a
memorandum of the agreement that they signed which can prove the contract as secondary evidence
thereof aside from the statement of the parties.

And the third situation is when the contract is covered under the so-called Statute of Frauds (Art. 1403,
no. 2), which requires the contracts for situations thereunder to be in writing.

The situations under the Statute of Frauds are as follows:

When the performance covered by an agreement is deferred to at least a year after making contract;
When making a special promise to answer for debt, default, or miscarriage of another;
When made in consideration of marriage aside from the mutual promise to marry;
When the contract is one of sale of goods, chattels or things in action at prices of at least P500;
When the agreement is for the lease of property for more than one year, or the sale of real property
regardless of price;
When making representations as to the credit of another.

Unenforceable contracts may still be accomplished if the parties ratify the same expressly or impliedly. If
the defect in the consent is because of the incapacity of the parties, then the parents or guardians of the
parties may make the ratification (Art. 1407). As regards contracts under the Statute of Frauds, a written
contract would be the best evidence of the terms and conditions between the parties. However, the
acceptance of a benefit under such an agreement, or the failure of the party being enforced upon to
object in time to the presentation of parol (verbal) evidence in court, will also be considered ratification
(Art. 1405). Verbal narration through his own account or that of witnesses of the real intention of the
parties may be prone to changes or failure of human memory, so if no objection may be considered
silent ratification to whatever verbal evidence is introduced.

CHAPTER 9
Void and Inexistent Contracts

*Article 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order
or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
 (6) Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained;
(7) Those expressly prohibited or declared void by law.

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

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

*Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and
the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against
each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise. (1305)

*Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply his
promise. (1306)

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

*Article 1414. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose has been accomplished, or before any damage has
been caused to a third person. In such case, the courts may, if the public interest will thus be subserved,
allow the party repudiating the contract to recover the money or property.

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

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

*Article 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor,
and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus
fixed, he may demand additional compensation for service rendered beyond the time limit.
*Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the
deficiency.

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

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

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

Discussion: Void Contracts

Void contracts may fall under two general types: those lacking in essential elements, and all others that
are prohibited by law, morals, good customs, public order or public policy. The essential elements of a
contract are the consent of the parties, an object, and a cause. Sometimes, formalities are essential, as
in the requirement of a public instrument in the case of a donation of real property, but to reiterate,
formalities are not needed for all contracts.

The void contracts in Chapter 9 are:

1. The situations under Art. 1409, to wit –
a. Contracts with objects or causes that are illegal, immoral, or against good customs,
public order, or public policy
b. Absolute simulations
c. Contracts with non-existent causes or objects
d. Contracts with objects outside the commerce of man
e. Contracts with impossible (physically or legally) service
f. Contracts where the intention of the parties relative to the contract’s principal
object cannot be determined
g. Others void under law, such as Art. 1419, in regard to contracts that are the direct
result of void contracts.
2. Partially void contracts, such as
a. Art. 1417 as to the excess in a commodity’s price that is determined by law or by
authority of law;
b. Art. 1418 as to the excess over maximum working hours set by law, unless
compensated;
c. Art. 1422 as to the inadequacy of wages where the minimum is set by law

Of all the kinds of defective contracts, it is the void contract that can be totally set aside, as it does not
have any legal effect from the beginning, even if the parties are in consensus and are capacitated.
Because it produces no effect whatsoever either against or in favor of anyone, an action for annulment
is not necessary as in the case of voidable contracts. But generally, a judicial declaration that the
contract is void is still needed.
A void contract cannot be confirmed, ratified or cured (Art. 1409, last para), unlike unenforceable
contracts.11 Neither can the parties cannot waive the defense of illegality (Ibid.). In fact, the parties can
complain anytime, because the action to declare a contract void does not prescribe (Art. 1410). Even
their heirs and assigns can question the contract. Indeed, anyone, for as along as their interests are
directly affected, may assail void contracts (Art. 1421).

If the parties perform the obligations under a void contract, restoration is in order, except when the
object or cause is illegal. If the illegal thing is at the same time a criminal offense, the pari delicto rule
applies, in which case the parties have no action against each other. “Pari delicto” means both parties
are at fault, and specifically, the rule applies when both knew that what they were agreeing upon is
illegal and a criminal offense (Art. 1411). In the sale of illegal drugs, for example, the buyer-user cannot
later on ask for the reimbursement or restoration of his payment for the reason that the transaction was
not legally valid from the very beginning. But if one of the parties is innocent of the nullity of the
contract, he or his heirs and assigns can ask for restoration anytime, even after his death ( Art. 1411, 2 nd
para). The right to raise the fact of nullity is not waived even with the lapse of time, or the silence of the
aggrieved party for a long period.

If the illegal cause is not criminal, and both parties are at fault, there is also no recovery by either of
them, nor do they have the right to demand performance by the other. If only one of the parties is at
fault, that party cannot recover what he has given or demand performance, but the innocent party may
recover what he has given without any obligation to comply with his undertaking (Art. 1412). Recovery
must be made before the illegal purpose is accomplished or before a third person suffers any damage,
unless public interest is subserved more by letting the innocent party recover (Art. 1414). An
incapacitated party may also be allowed to recover money or property he delivered (Art. 1415). Merely
prohibited (not illegal) contracts may have a recovery by the plaintiff if the prohibition by law is actually
designed to protect him.

11
But if the contract is divisible and the illegal portions can be cut out, the legal portions will be enforced (Art. 1420).