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Definition of Law and Business Law

Body of rules which regulates the rights and duties
Law is an ordinance of reason, promulgated for the
arising from the relationship between the State and its
common good by one who has authority over society.
inhabitants.
(as defined by St. Thomas Aquinas)
It includes the following:
It is that mass of rules of conduct formulated by the
1. International Law consists of those rules and
legitimate power of the State for common observance
principles which govern the relations and dealing
and benefit.
of nations with each other.
2. Constitutional Law It simply governs the relations
The most basic, simple and concise definition of law
between the State and its citizens.
was defined by Sanchez Roman, a Spanish Civilist and
3. Administrative Law it fixes the organization and
he defined Law as:
determines the competence of the authorities that
A RULE OF CONDUCT , JUST AND
execute the law and indicates to the individual
OBLIGATORY
PROMULGATED
BY
LEGITIMATE
remedies for the violation of his rights.
AUTHORITY FOR THE COMMON OBSERVANCE AND
4. Political Law deals with the organization and
BENEFIT.
operation of the governmental organs of the State
Sources of Law
and defines the relations of the state with the
inhabitants of its territory.
1. CONSTITUTION
5. Criminal Law guaranties the coercive power of
the law so that it will be obeyed. Governs the
The fundamental law that governs a nation in its
methods of trial and punishment of crimes.
relation to its citizens. All laws must conform and
comply with the provisions of the Constitution,
B. INDIVIDUAL or PRIVATE LAW
otherwise it becomes unconstitutional.
2.

ADMINISTRATIVE
OR
EXECUTIVE
REGULATIONS AND RULINGS

ORDERS,

The fundamental law that governs a nation in its

relation to its citizens. All laws must conform and
comply with the provisions of the Constitution,
otherwise it becomes unconstitutional.
3.

CUSTOM

It consists of those habits and practices which through

long
and
uninterrupted
usage
have
become
acknowledged and approved by society as binding rule
of conduct. Thus, it has been a custom for a person to
enter and exit a door. Once a person uses the window
for his entrance and exit, it runs counter to the
custom of use of the door. Even our Lord said as a
good shepherd, if a person does not pass the gate, he
is a thief for a marauder.
5.

It includes the following:

1.

JUDICIAL DECISIONS OR JURISPRUDENCE

Judicial decisions or interpreting the laws or the

Constitution shall form a part of the legal system of
the Philippines. (Art. 8, New Civil Code) Judicial
decisions, though, are part of the legal system in the
Philippines still are not laws for if this were so, the
Courts exists for stating what the law is, but not for
giving it. Judicial decisions, though not law, are
evidence of what the law means. This is why they are
part of the legal system in the Philippines. So, f an
interpretation is placed by the Supreme Court upon a
law, it constitute in a way, part of the law since the
Courts interpretation merely establishes the legislative
intent.
4.

Those law which govern the private relation person.

OTHER SOURCES

To add, the principle of justice and equity, decisions of

foreign tribunals, opinions of text writers and even
religion may also be sources of law.
Classifications of Human Law
A. GENERAL or PUBLIC LAW

2.

3.

Civil Law branch of law which has for its double

purpose the organization of the family and the
regulation of property. It is defined as the mass of
precepts which determines and regulate the
relation of assistance, authority and obedience
among the members of a society for the protection
of private interests.
Commercial Law defined as a whole body of
substantial jurisprudence applicable to the rights,
intercourse and relation of persons engaged in
commerce, trade or mercantile pursuits. (Blacks
law dict. 338)
Procedural Law defined as the branch of law
which prescribes the method of enforcing rights or
obtaining redress for their invasion, Procedural law
otherwise known as Remedial Law, as
distinguished from Substantive law which creates,
defines and regulate rights.

Purpose of Law
Law creates rights as well as obligations. Where there
is a right, there is also an obligation.
A right is a legally demandable claim by a person
against another. Violation of a right entitles a person to
a remedy under the law.
An obligation is a legal necessity to do or not to do an
act.
Development of the Civil Code - Prior to the Civil Code
of August 30, 1950 (Republic Act 386) was the old Civil
Code of 1889. This in turn was derived from the
Spanish Civil Code and the Napoleonic or French Civil
Code.
The Civil Code is divided into four books:
Book I : Persons and Family relations
Book II - Property and Property rights

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Book III: Different Modes of Acquiring Ownership
Book IV : Obligations and Contracts

OBLIGATIONS AND CONTRACTS (Book IV, Civil Code of the Philippines)

DEFINITION OF OBLIGATION (ART. 1156, NCC)
An obligation is a juridical necessity to give, to do or
not to do (Art. 1156, NCC).
OBLIGATION originate from the latin word obligatio,
means tying or binding. The term obligatio was derived
from the words ob and ligare which means to bind or
tie together. Ligare is the source of several common
words such as ligament and ligation.
An obligation is a juridical relation whereby a person
(called the creditor) may demand from another (called
the debtor), the observance of a determinate conduct
(the giving, doing, or not doing), and in case of
breach, may demand the satisfaction from the assets
of the latter (Arias Ramos).
A legal relation established between one person and
another, whereby the latter is bound to the fulfillment
of a prestation which the former may demand of him.
(Jurado, 12th ed, 2010)
ELEMENTS OF AN OBLIGATION
1.

b.

Negative personal obligation or the obligation

not to do or not to give.

Example: A binds himself not to build an edifice on

a portion of his land so as not to obstruct Bs right
of way over said land.
CLASSIFICATION OF OBLIGATIONS
1. Pure and Conditional Obligations
(Arts. 1179-1192);
2. With a Period
(Arts. 1193-1198);
3. Alternative and Facultative
(Arts. 1199-1206);
4. Joint and Solidary Obligations
(Arts. 1207-1222);
5. Divisible and Indivisible Obligations
(Arts. 1223-1225);
6. With a Penal Clause (Arts. 1226-1230).
KINDS OF OBLIGATIONS

An active subject (obligee or creditor) the party

who is entitled to demand the fulfillment of the
obligation; the one who has a right; the party in
whose favor the obligation is constituted.

2.

A passive subject (obligor or debtor) the party

who is bound to fulfill the obligation; the one who
has the duty of giving, doing, or not doing;

3.

The object or prestation (the subject matter of

the obligation) the conduct or service to be
observed by the debtor;

4.

The efficient cause (the vinculum or juridical tie)

that which binds the parties to the obligation; the
cause or source of the
CIVIL
obligation.
OBLIGATION
(Art. 1156)
Obligation being a Juridical
Based on positive law
Necessity
It is a juridical necessity because
in case of non-compliance, the
courts of justice may be called
upon to force its fulfillment or in
default thereof, the economic value

Example: A binds himself to paint the fence of B.

Enforceable by court
action or
power/authority

A. Viewpoint of Sanction
1. Civil obligations give a right of action to
compel their performance.
2. Natural obligations not based on positive
law but on equity and natural law; do not grant a
right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they
authorize retention of what has been delivered or
rendered by reason thereof.
3.

Moral obligations those that cannot be

enforced by court action but which are binding on
the party who makes it in conscience and natural
law.
NATURAL OBLIGATION
(Art. 1423)
Based on equity and
natural law
Not enforceable by court
action

Civil and Natural

Obligation
Distinguished

that it represents.

Prestation
An obligation; more specifically, it is the subject matter
of an obligation and may consist of giving a thing,
doing or not doing a certain act.
DIFFERENT KINDS OF PRESTATIONS
1. Real obligation (obligation to give), one in which
the subject matter is a thing which the obligor must
deliver to the obligee.
Example: Seller binds himself to deliver a car to
buyer.
2. Personal obligation (obligation to do or not to do),
is that in which the subject matter is an act to be
done or not to be done.
Two kinds of personal obligation:
a. Positive personal obligation or obligation to
do or to render service.

NATURAL OBLIGATIONS
(ARTS. 1423 -1430, NCC)
Definition of Natural Obligations
Those based on equity and natural law, which do not
grant a right of action to enforce their performance,
but after voluntary fulfillment by the obligor, authorize
the retention of what has been delivered or rendered
by reason thereof (Art. 1423, NCC).
They are obligations without a sanction, susceptible of
voluntary performance, but not through compulsion by
legal means (4 Tolentino, Civil Code).

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NOTE: The binding tie of these obligations is in the
conscience of man, for under the law, they do not have
the necessary efficacy to give rise to an action.

Natural and Civil Obligations Distinguished

NATURAL
OBLIGATION
Based on equity and
natural law.

CIVIL
OBLIGATION
Based on positive law.

Not enforceable by court

action.

Enforceable
action.

by

court

Natural and Moral Obligations Distinguished

NATURAL
OBLIGATION
There is a juridical tie
between
the
parties
which is not enforceable
by court action.
Voluntary fulfillment of a
natural obligation by the
obligor produces legal
effects which the courts
will
recognize
and
protect.

MORAL OBLIGATION
There is no juridical tie
whatsoever.
Voluntary fulfillment of a
moral obligation does not
produce any legal effect
which
courts
will
recognize and protect.

Examples of natural obligations enumerated

under the Civil Code
1 Performance after the civil obligation has
prescribed;
2 Reimbursement of a third person for a debt that
has prescribed;
3 Restitution by minor after annulment of contract;
4 Delivery by minor of money or fungible thing in
fulfillment of an obligation;
5 Performance after an action to enforce civil
obligation has failed;
6 Payment by heir of debt exceeding the value of
property inherited; and
7 Payment of legacy after a will has been declared
void.
B.Viewpoint of Subject Matter
1. Personal obligation to do or not to do;
2. Real obligation to give;
3. Determinate or specific when the object is
particularly designated or physically segregated
from all others of the same class;
4. Generic when the object is designated merely
by its class or genus;
5. Limited generic thing when the generic
object are confined to a particular class, e.g., an
obligation to deliver one of my horses
(Tolentino, Volume IV, p. 91).
D.Viewpoint of Person Obliged
1. Unilateral only one party is bound;
2. Bilateral both parties are bound.
SOURCES OF OBLIGATIONS (ARTS. 1156 - 1157,
NCC)
Sources: (LACQQ)
1. Law (Art. 1158, NCC);
2. Acts or omissions punished by law (obligations ex
delicto) (Art. 1161, NCC);
3. Contracts obligations arising from contracts which
have the force of law between the contracting

4.
5.

parties and should be complied with in good faith

(Art. 1159, NCC);
Quasi-contracts (Art. 1160, NCC);
Quasi-delicts (tort or culpa aquiliana) (Art. 1162,
NCC).

EXTRA-CONTRACTUAL OBLIGATIONS
Extra-Contractual obligations (Arts. 2142-2175). or
Quasi-contracts
1. Negotiorum Gestio
(unauthorized management) or the voluntary
management of the property or affairs of another
without the knowledge or consent of the latter.
2. Solutio Indebiti
(undue payment) or that juridical relation which
arises when something is received where there is no
right to demand it and it was unduly delivered
through mistake.
Innominate Contacts
a. Do ut des I give that you may give.
b. Do ut facias I give that you may do.
c. Facio ut des I do that you may give.
d. Facio ut facias I do that you may do.
Quasi-delict
A fault or act of negligence (or omission of care) which
causes damage to another, there being no pre-existing
contractual relations between the parties.
Requisites to hold a person liable under quasidelict (FDD)
1. There must be fault or negligence attributable to
the person charged;
2. There must be damage or injury; and
3. There must be direct relation of cause and effect
between the fault or negligence on the one hand
and the damage or injury on the other hand
(proximate cause).

FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance
Other instances where stranger may be adversely
affected:
1. Quasi-contract of negotiorum gestio, some
contracts entered into by the unauthorized
manager (gestor) may bind the owner.
CONTRACTS
GENERAL PROVISIONS
(Arts. 1305 1317, NCC)
CONTRACT
It is a juridical convention manifested in
legal form, by virtue of which one or more persons
bind themselves in favor of another or others, or
reciprocally, to the fulfillment of a prestation to give, to
do or not to do (4 Sanchez Roman 146).
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 (Art.
1305)
EFFECTS OF CONTRACTS (ART. 1311. NCC)
General rule: Contract takes effect only between the
parties, their assigns and heirs. Consequently, they
cannot produce any effect upon third persons.
Exceptions: When obligation arising from the
contract are not transmissible by their nature, by
stipulation, or by provision of law.
Examples: contract of partnership or contract of
agency; death of partner, of the principal, or of the
agents ends the contract, and the heir does not step
into the shoes of the deceased.
STIPULATION POUR ATRUI - stipulation in favor of
a third person.
Requisites:
1. There must be stipulation in favor of third person;
2. Contracting parties must have clearly and
deliberately conferred a favor upon third person;
3. Mere incidental benefit or interest of a person is not
sufficient;
4. Stipulation must be PART of the contract;
5. Third person communicated his acceptance to the
obligor before its revocation;
6. No relation of agency between either of the parties
and the third person.
Where third person induces another to violate
his contract (Art. 1314, NCC)
Requisites:
1. Existence of a valid contract;
2. Knowledge of contract by third person;
3. Interference by third person without justification.
Third persons may be adversely affected by a
contract where they did not participate.
Example: collective contracts, where majority naturally
rules over the minority.

2.

In a contract which creates a status, the whole

world must respect the status. Example:
marriage.
Real rights over real property must be respected
by third person if said rights are registered or if
the third person has actual knowledge of the
existence of such rights, actual knowledge being
equivalent to registration (Art. 1312, NCC).

3.

Where the law authorizes the creditor to sue on

a contract entered into his debtor (Accion directa)
Example: Even if a lessor does not have to respect a
sublease, still the sub-lessee is subsidiarily liable to the
lessor for any rent due from the lessee. (Here is an
instance where the lessor can sue the sub-lessee)
Where the contract is entered into to defraud a
third person (Art. 1313)
Example: A gratuitously gives B a parcel of land, and A
has no other property or cash left to satisfy his
creditors, said creditors may ask for the rescission of
the contract, to the extent that they have been
prejudiced.
ELEMENTS OF CONTRACTS
a.

Natural elements those found in certain

contracts, and presumed to exist, unless the
contrary has been stipulated.
Example: warranty against eviction and against
hidden defects in the contract of sale

b.

Accidental elements those are the various

particular stipulations that may be agreed upon
by the contracting parties in a contract. May be
present or absent depending upon whether or
not the parties have agreed upon them.
Example: Stipulation to pay interest

CLASSIFICATION OF CONTRACTS
According to their relation to other contracts
1. Preparatory those which have for their object
the establishment of a condition in law which is
necessary as a preliminary step towards the

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celebration of another subsequent contract (e.
g., partnership, agency);
2. Principal

those
which
can
subsist
independently from other contracts and whose
purpose can be fulfilled by themselves (e. g.,
sale, lease);
3. Accessory those which can exist only as a
consequence of, or in relation with, another prior
contract (e. g., pledge, mortgage).
According to their perfection
1. Consensual those which are perfected by the
mere agreement of the parties (e. g., sale,
lease);
2. Real those which require not only the consent
of the parties for their perfection, but also the
delivery of the object by one party to the other
(e.g., commodatum, deposit, pledge);
3. Formal or solemn those where special
formalities are essential before contract may be
perfected.
According to their form
1. Common or informal those which require no
particular form (e. g., loan);
2. Special or formal those which require some
particular form (e. g., donations, chattel
mortgage).
According to their purpose
1. Transfer of ownership (e. g., sale);
2. Conveyance of use (e. g., commodatum);
3. Rendition of services (e. g., agency).
According to their subject matter
1. Contract involving things (e. g., sale, deposit,
pledge);
2. Contract involving services (e. g., agency,
lease of services);
3. Contract involving rights or credits
provided these are transmissible (e. g., usufruct,
assignment of credit).
According to the parties obligated
1. Unilateral those which give rise to an
obligation for only one of the parties
(e. g., commodatum, gratuitous deposit);
2. Bilateral those which give rise to reciprocal
obligations for both parties (e. g., sale, lease).
According to their cause or equivalence of value
of prestation
1. Onerous those in which each of the parties
aspire to procure for himself a benefit through
the giving of an equivalent or compensation (e.
g., sale);
2. Gratuitous those in which each of the parties
proposes to give to the other a benefit without
any equivalent or compensation (e. g.,
commodatum);
3. Remunerative where one prestation is given
for a benefit or service that had been rendered
previously.
According to the risks of fulfillment
1. Commutative here the parties contemplate
a real fulfillment; therefore, equivalent values
are given ( e. g., lease);
2. Aleatory here the fulfillment is dependent
upon chance; thus the values vary because of
the risk or chance (e. g., insurance).
According to their names or norms regulating
them

1.
2.

Nominate contracts that are given a

particular or special name (e. g., sale, lease);
Innominate contracts that do not have
special name (e. g. do ut des, meaning I
give that you may give.

The latter are regulated by the stipulations of the

parties by the general provisions of the Civil Code on
obligations and contracts, by rule governing the most
analogous nominate contracts and by the customs of
the place (Art. 1307, NCC).
According to the time of performance or
fulfillment
1. Executed one completed at the time the
contract is entered into, that is, the obligations
are complied with at this time; (e. g. a sale of
property which has been delivered, and which has
already been paid for).
2. Executory one where prestation are to be
complied with at some future time; (e. g. a
perfected sale, where the property has not yet
been delivered, and where price has not yet been
given).
According to obligation imposed and regarded by
the law
1. Ordinary (e. g. sale: the law consider this as
an ordinary contract);
2. Institutional (e. g. contract of marriage).
According to the evidence required for its proof
1. Those requiring merely oral or parol
evidence;
2. Those requiring written proofs.
According to the number of persons actually and
physically entering into the contracts
1. Ordinary where two parties are represented by
different persons; (e. g. sale).
2. Auto-contract where only one person
represents two opposite parties, but in different
capacities; (e. g. an agent representing his
principal sells a specific car to himself, as buyer).
According to the number of persons
participated in the drafting of the contract
1. Ordinary;
2. Contract of adhesion (e. g. insurance).

who

BASIC PRINCIPLES OR CHARACTERISTICS OF

CONTRACT
(ROMAC)

Relativity of Contract (Art. 1311, NCC);

Obligatory Force and Compliance in Good Faith

(Arts. 1159 and 1315, NCC);
Both Parties are Mutually Bound (Mutuality)
(Art. 1308, NCC);

Autonomy, Freedom or Liberty to Stipulate

(provided not contrary to law, morals, good
customs, public order, or public policy) (Art.
1306, NCC);
Perfection by Mere Consent (Consensuality)
(Art. 1315, NCC).
Relativity of Contracts
Contracts can only bind the parties who had entered
into it or their successors who have assumed their
personality or their judicial position, and that as a
consequence, such contract can neither favor nor
prejudice third person.

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Obligatory Force and Compliance in Good Faith
Before contract can be enforced, it must be first valid,
and it cannot be valid if it is against law. Obligations
arising from contract have the force of law between
the parties, but this does not mean that the law is
inferior to contracts.

Mutuality of Contracts must bind both parties; its

validity or compliance must not be left to the will of
one of them (Art. 1308, NCC).
Consequences of Mutuality
1. A party cannot revoke or renounce a contract
without the consent of the other, nor can it have
it set aside on the ground that he had made a
bad bargain.
2. When the fulfillment of the condition depends
upon the sole will of the debtor, conditional
SUSPENSIVE obligation is void, if RESOLUTORY,
the obligation is valid.
NOTE: Free exercise of religious beliefs is superior to
contractual rights.
Autonomy of Contracts
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
(Art. 1306, NCC).

Perfection (or birth) which is the moment

when the parties come to agree on the termsof
the definite agreement, the elements of
definite subject matter and valid cause have
been accepted by mutual consent.

Consummation (or death or termination)

which is the fulfillment or performance of the
terms agreed upon in the contract (ABS-CBN
Broadcasting Corp. vs. CA, G. R. No. 128690,
January 21, 1999).
ESSENTIAL REQUISITES OF CONTRACT (ARTS.
1318 1355, NCC)

1.
2.
3.

Consent;
Object or subject matter;
Cause or consideration.
CONSENT
(ARTS. 1319 1346, NCC)

It is the meeting of the minds between the parties on

the subject matter and the cause of the contract, even
if neither one has been delivered.
It is the manifestation of the meeting of the offer and
acceptance upon the thing and the cause which are to
constitute the contract (Art. 1319, 1st par).

Limitation imposed by Law

1. Contractual stipulations must not be contrary to
mandatory and prohibitive laws;
2. Contracts must respect the law, provision of all
laws are understood to be incorporated in the
contract.

Requisites of Consent:
1. There must be two or more parties;
2. The parties must be capable or capacitated;
3. There must be no vitiation of consent;
4. There must be no conflict between what was
expressly declared and what was really intended;
5. The intent must be declared properly (that is,
whatever legal formalities are required must be
complied with).

Limitation imposed by Morals

Morals deal with right and wrong
conscience.

NOTE: Under our civil law, the offer and acceptance

concur only when the offeror comes to know, and not
when the offeree merely manifests his acceptance.

and

human

Limitation imposed by Good Customs

Good customs are those that have received for a
period of time practical and social confirmation.
Limitation imposed by Public Order
Public order deals with the public weal and includes
public safety.
Limitation imposed by Public Policy
1. Manifest will of the State.
2. Has a tendency to injure the public, is against the
public good, or contravenes some established
interest of the society, or is inconsistent with
sound policy and good morals, or tends clearly to
undermine the security of individuals right.
Consensuality of Contracts
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 consequences which, according to their
nature may be in keeping with good faith, usage and
law (Art. 1315, NCC).

STAGES OF CONTRACTS
1 Preparation (or Conception or Generacion)
which is the period of negotiation and bargaining,
they have not yet arrived at any definite
agreement, although there may have been
preliminary offer and bargaining.

Requisites of Meeting of Minds:

1. An offer that must be certain;
2. And an acceptance that must be unqualified and
absolute.
Character of Offer and Acceptance
OFFER a proposal made by one party to another to
enter into a contract. In order to constitute a binding
proposal, the offer must be certain and definite (Art.
1319, par. 1, NCC).
Elements of Valid Offer:
1. Definite
2. Complete
3. Intentional
ACCEPTANCE manifestation by the offeree of his
assent to the terms of the offer.
In order that there will be a perfected contract, the
acceptance must also be certain or definite. It must be
absolute in character. It must be plain and
unconditional. Consequently, if it involves a new
proposal or if it is qualified, it constitutes a counteroffer (Ibid).
Elements of Valid Acceptance:
1. Unequivocal
2. Unconditional
Acceptance thru Correspondence

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Acceptance made by letter or telegram does not bind
the offeror 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.
The law requires actual knowledge of the acceptance.
Mere receipt of the letter or telegram is not sufficient.
The knowledge may be actual or constructive.
Form of Acceptance
1. May be express or implied (Art. 1320, NCC);
2. Presumed (by law) as when there is silence in
certain cases as would tend to mislead the other
party, and thus the silent person is in estoppel.
Instances When Offer Becomes Ineffective
1. Death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed.
2. When the offeree expressly or impliedly rejects the
offer.
3. When the offer is accepted with a qualification or
condition (counter-offer).
4. When before acceptance is communicated, the
subject matter has become illegal or impossible.
5. When the period of time given to the offeree within
which he must signify his acceptance has already
lapsed.
6. When offer is revoked in due time (that is, before
the offeror has learned of its acceptance by the
offeree) (Paras, 2008)
Period for Acceptance
(Art. 1324, NCC)
1. stated fixed period in the offer
2. If no stated fixed period
a.
b.

offer is made to a person present

acceptance must be made immediately.
offer is made to a person absent
acceptance may be made within such time
that, under normal circumstances, an
answer can be received from him.

3. If the option is without consideration the

offeror may withdraw his offer by communicating
such withdrawal to the offeree at any time before
acceptance.
4. If the option is founded upon a consideration
the offeror cannot withdraw his offer.
Option it is a contract granting a person the
privilege to buy or not to buy certain objects at any
time within the agreed period at a fixed price.
The contract of option is a separate and distinct
contract from the contract which the parties may enter
into upon the consummation of the contract.
Option may be withdrawn anytime before acceptance
is communicated but not when supported by a
consideration other than purchase price: Option
money.
Earnest money part of the purchase price. (e. g.
down payment)
INCAPACITATED PERSONS
(Art. 1327, NCC)
The following cannot give their consent to a contract:
1. Unemancipated minors

General rule: Unemancipated minors cannot give

their consent to a contract.
Exceptions:
a. When it is entered into by a minor who
misrepresents his age;
b. When it involves the sale and delivery of
necessaries to the minor;
c. When it involves a natural obligation
and
such obligation is fulfilled voluntarily by the
minor, provided that such minor is between 18
and 21 years of age;
d. When it is a marriage settlement or donation
propter nuptias, provided that the minor is
between 20 and 21 years of age, if male, or
between 18 and 21 years of age, if female;
e. When it is a life, health or accident insurance
taken on the life of the minor, provided that
the minor is 18 years old or more and the
beneficiary appointed is the minors estate, or
the minors father, mother, spouse, child,
brother or sister.
2. Insane or demented persons
Includes any person, who at the time of the
celebration of the contract cannot understand the
nature and consequences of the act or transaction
by reason of any cause affecting his intellectual or
sensitive
faculties,
whether
permanent
or
temporary.
NOTE: A contract entered into during a lucid
interval is valid (Art. 1328, NCC).
3. Deaf-mutes
4. Persons suffering from civil interdiction
5. Incompetents who are under guardianship

CAUSES OF VITIATED CONSENT

(Art. 1330, NCC)
1. MISTAKE 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 (Art.
1331, NCC).
Kinds of Mistakes
a. Mistake of fact when one or both parties
believe that a fact exists when in reality it does
not or that such fact does not exist
when in reality it does; it vitiates consent thus,
rendering the contract voidable.
b. Mistake of law - when one or both parties arrive
at an erroneous conclusion regarding the
interpretation of a question of law or the legal
effects of a certain act or transaction.
General rule: Mistake of law will not vitiate
consent.
Exception: Mutual error as to the legal effect of
an agreement when the real purpose of the
parties is frustrated may vitiate consent (Art.
1334, NCC).

Requisites:
1. The mistake must be with respect to the legal
effect of an agreement;

8
2.
3.

It must be mutual; and

The real purpose of the parties must have been
frustrated.

2. VIOLENCE refers to physical coercion. There

is violence when in order to wrest consent, serious
or irresistible force is employed (Art. 1335, par. 1,
NCC).
Requisites:
1. The force employed to wrest consent must be
serious or irresistible;
2. It must be the determining cause for the party
upon whom it is employed in entering into the
contract.
3. INTIMIDATION refers to moral coercion.
There is intimidation when one of the contracting
parties is compelled by a reasonable and wellgrounded fear of an imminent and grave evil upon
his person or property, or that of his spouse,
descendants or ascendants, to give his consent
(Art. 1335, par. 2, NCC).
4. 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 (Art. 1337, NCC).
Requisites:
1. Improper advantage;
2. Power over the will of another;
3. Deprivation of the latters will of a reasonable
freedom of choice.
5. 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 (Art.
1338, NCC).
KINDS OF FRAUD
1. Fraud in the celebration of the contract
a. Dolo causante (causal fraud) were it not
for the fraud, the other party would not have
consented.
b. Dolo incidente (incidental fraud) even
without the fraud the parties would have
agreed just the same; hence the fraud was
only incidental in causing consent.
2. Fraud in the performance of the obligations
stipulated in the contract

Effect of Expression of Opinion

A mere expression of opinion does not signify fraud,
unless made by an expert and the other party has
relied on the formers special knowledge (Art. 1341,
NCC).
SIMULATION OF CONTRACTS process of
intentionally deceiving others by producing the
appearance of a contract that really does not exist or
which is different from true agreement.
a

Absolute Simulation when the contracting

parties do not intend to be bound by the contract
at all, as when a debtor simulates the sale of his
properties to a friend in order to prevent their
possible attachment by creditors; an absolutely
simulated contract is void.
Relative Simulation when the contracting
parties conceal their true agreement, as when a

person conceals a donation by simulating a sale of

the property to the beneficiary for a fictitious
consideration, a relatively simulated contract binds
the parties to their real agreement when it does
not prejudice third persons and is not intended for
any purpose contrary to law, morals, good
customs, public order or public policy.
OBJECT OF CONTRACTS (ARTS. 1347 1349, NCC)
The object of the contract is really to create or to end
obligation which, in turn, may involve things or
services.
Requisites: (CL-PD)
1. It must be within the commerce of man;
2. It must be licit or not contrary law, morals,
good customs, public order or public policy;
3. It must be possible;
4. It must be determinate as to its kind.
CAUSE OF CONTRACTS (ARTS. 1350 1355, NCC)
It is the essential and impelling reason why a party
assumes an obligation (8 Manresa 677).
Cause and Motive Distinguished
CAUSE
It is the direct or most
proximate reason of a
contract.
It is the objective or
juridical reason of a
contract.
It is always the same for
each contracting party.
Its legality or illegality
affects the existence of
the contract.

MOTIVE
It is the indirect or
remote reason.
It is the psychological or
purely personal reason.
It differs for each
contracting party.
Its legality or illegality
does not affect the
existence of the contract.

Requisites of Cause: (LET)

1. The cause should be licit or lawful;
2. The cause should be in existence at the time of the
celebration of the contract;
3. The cause should be true.
Classification of Contracts as to Cause
1. 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 (Art.
1350, NCC);
2. In remuneratory contracts, the service or
benefit which by itself is a revocable debt (Ibid);
3. In contracts of pure beneficence, the mere
liberality of the benefactor (Ibid).
Presumption That Cause Exists
1. It is necessary that the cause must exist, but it is
not necessary to state the cause in the contract.
2. Under the Statute of Frauds, certain agreements
have to be in writing.
LESION it is inadequacy of cause, like an insufficient
price for a thing sold.
Rules on Lesion
General rule: lesion or inadequacy of price does not
invalidate a contract.
Exceptions:
1. When, together with lesion, there has been fraud,
mistake or undue influence.
2. In cases expressly provided by law;
a. Those which are entered into by guardians
whenever the wards they represent suffer

b.
c.

lesion by more than one-fourth of the value of

the thing which are the objects thereof;
Those agreed upon in representation of
absentees, if the latter suffer the lesion stated
in the preceding number;
Partition among co-heirs, when anyone of them
received things with a value less by at least
one-fourth than the share to which he is
entitled.
KINDS OF CONTRACTS
CONSENSUAL

Those which are perfected by the mere agreement of

the parties (e. g.,sale, lease).
Consequence of Perfection
1. The parties are bound to the fulfillment of what has
been expressly stipulated and compliance thereof
must be in good faith.
2. The parties are also bound to all the consequences
which, according to their nature, may be in keeping
with good faith, usage and law.
REAL
Those which require not only the consent of the parties
for their perfection, but also the delivery of the object
by one party to the other (e.g., commodatum, deposit,
pledge).
Delivery as a Requisite
Delivery is required of the very nature of the contract.
e. g. a depositary cannot be expected to comply with
his obligation of keeping the object safely unless and
until it is delivered to him.
Future Real Contracts as Consensual Contracts
A contract to make a deposit, to make a pledge, or to
make a commodatum is a consensual contract. After
delivery, the contract becomes a real contract.
SOLEMN
Those where special formalities are essential before
the contract may be perfected. (e.g., donation inter
vivos of real property shall appear in public instrument
for its validity).
FORMAL OR SOLEMN CONTRACTS
DONATIONS
Movable property maybe made orally or in writing.
1. Oral donation simultaneous delivery of the thing
or of the document representing the right.
2. If exceeding five thousand pesos the donation
and the acceptance shall be made in writing.
Immovable property must be made in a public
document, specifying the property donated and the
value of the charges which the donee must satisfy.
PARTNERSHIP
Partnership may be constituted in any form.
(Art. 1771,NCC)
Contract of partnership shall appear in public
instrument in the following instances:
1. Where immovable property or real rights are
contributed (Art. 1771, NCC);
2. Whenever immovable property is contributed,
inventory of said property must be made signed
by the parties and attached to the public

3.

instrument, otherwise, contract of partnership is

void;
Contract of partnership having a capital of three
thousand pesos or more, in money or property
must also be recorded in the Office of the
Securities and Exchange Commission (Art. 1772,
NCC).

ANTICHRESIS
Amount of principal and interest shall be specified in
writing, otherwise antichresis is void (Art. 2134, NCC).
AGENCY TO SELL REAL PROPERTY OR AN
INTEREST THEREIN
Authority of the agent shall be in writing; otherwise,
the sale shall be null and void (Art. 1874, NCC).
STIPULATION TO CHARGE INTEREST
Must be in writing, otherwise, no interest is due. (Art.
1956, NCC).
STIPULATION LIMITING COMMON CARRIERS
DUTY OF EXTRAORDINARY DILIGENCE TO
ORDINARY DILIGENCE
Such stipulation is valid provided it is:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other than
the service rendered by the common carrier; and
3. Reasonable, just and not contrary to public policy
(Art. 1744, NCC)
CHATTEL MORTGAGE
Personal property must be recorded in the Chattel
Mortgage Register as a security for the performance of
an obligation.

SALE OF LARGE CATTLE

The sale must appear in a public document (De Leon)
and requires the transfer of the certificate of
registration (Paras, 2008).

FORMALITIES
(ARTS. 1356, 1357, 1358)
General rule: Form is not required for the validity of
contract. It is enough that there be consent, subject
matter, and cause.
Exceptions:
1. Formal contract requires a certain specified form,
in addition to consent, subject matter and cause.
2. Real contract requires DELIVERY to be valid as a
real contract even as between parties, in addition
to consent, subject matter and cause.
NOTE: Parties may compel each other to comply with
the form required once the contract has been perfected
(Art. 1357, NCC).
When Form is Important
1. Validity for formal or solemn contracts.
2. Enforceability for agreements enumerated under
the Statute of Frauds.
3. Convenience for both parties.
STATUTE OF FRAUDS
The following must appear in a public document:

10
1.

2.
3.

4.

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 a governed
by Articles 1403, No. 2, and 1405;
The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
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;
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 shall be governed by Articles 1403, No. 2 and
1405(Art. 1358, NCC).
The term Statute of Frauds is descriptive of
statutes that require certain classes of contracts to be
in writing; and that does not deprive the parties of the
right to contract with respect to the matters therein
involved, but merely regulates the formalities of the
contract necessary to render it enforceable.
The object is to prevent fraud and perjury in the
enforcement of obligations depending, for evidence
thereof, on the unassisted memory of witnesses by
requiring
certain
enumerated
contracts
and
transactions to be evidenced by a writing signed by the
party to be charged. The effect of noncompliance with
this requirement is simply that no action can be
enforced under the given contracts (The Municipality
of Hagonoy, Bulacan vs. Dumdum, Jr. G.R. No.
168289, March 22, 2010).
Basic Principles Concerning Statute of Fraud
1. Statute of Frauds applies only to executed
contracts (contracts where no performance yet has
been made) and not partially or completely
executed (consummated contracts) (Cordial vs.
Miranda, G. R. 135492, Dec. 14, 2000).
2. Statute of Frauds cannot apply if the action is
neither for damages because of the violation of an
agreement nor for the specific performance of said
agreement.
3. Statute of Frauds is exclusive; it applies only to
contracts enumerated in Art. 1358.
4. The defense of the Statute of Frauds may be
waived.
5. The Statute of Frauds is a personal defense; a
contract infringing it cannot be assailed by third
persons.
6. Contracts infringing the Statute of Frauds are not
void; they are merely unenforceable.
7. The Statute of Frauds is a Rule of Exclusion, i. e.,
oral evidence might be relevant to the agreements
enumerated therein and might therefore be
admissible were it not for the fact that the law or
the statute excludes said oral evidence.
8. The Statute of Frauds does not determine the
credibility or weight of evidence. It merely
concerns itself with the admissibility thereof.
9. The Statute of Frauds does not apply if it is
claimed that the contract does not express the true
agreements of the parties. As long as the true or
real agreement is not covered by the Statute of
Frauds, it is provable by oral evidence.
Act 8792 (E-Commerce Act) provides that the
formal requirements to make contracts effective as
against third persons and to establish the existence of
a contract are deemed complied with provided that the

electronic document is unaltered and can

authenticated as to be usable for future reference.

be

DEFECTIVE CONTRACTS
RESCISSIBLE CONTRACTS
Rescissible contracts are valid until rescinded; there is
a sort of extrinsic defect consisting of an economic
damage or lesion.
A contract which is valid because it contains all of the
essential requisites prescribed by law, but which is
defective because of injury or damage to either of the
contracting parties or to third persons, as a
consequence of which it may be rescinded by means of
a proper action for rescission.
A remedy granted by law to the contracting parties,
and even to third persons, to secure the reparation of
damages caused to them by a contract, even if the
same should be valid, by means of the restoration of
things to their condition prior to the celebration of the
contract.
Requisites for Rescission:
1. There must be at the beginning either a valid or a
voidable contract (not void);
2. But there is an economic or financial prejudice to
someone (a party or a third person);
3. Requires mutual restitution;
4. The person demanding rescission must be able to
return whatever he may be obliged to restore if
rescission is granted (Art. 1385, par. 1, NCC).
5.

6.

7.

The things which are the object of the contract

must not have passed legally to the possession of
a third person acting in good faith (Art. 1385, par.
2, NCC);
The action for rescission must be brought within
the prescriptive period of 4 years. For persons
under guardianship and for absentees, the period
of 4 years shall not begin until the termination of
the formers incapacity, or until the domicile of the
latter is known (Art. 1389, NCC);
There must be no other legal remedy (Art. 1383).

Extent of Rescission
The rescission does not necessarily have to be total in
character, it may also be partial. Rescission shall be
only to the extent necessary to cover the damages
caused (Art. 1384, NCC).
Mutual Restitution
The obligation of restitution does not apply to creditors
who seek to impugn fraudulent transactions of their
debtors. The obligation of mutual restitution applies to
others so that the status quo may be restored.

Characteristics of Rescissible Contracts

1. Their defect consists in injury or damage either to
one of the contracting parties or to third persons;
2. Before rescission, they are valid and therefore,
legally effective;
3. They can be attacked directly only, and not
collaterally;
4. They can be attacked only either by a contracting
party or by a third person who is injured or
defrauded;
5. They are susceptible of convalidation only by
prescription, and not by ratification.
Enumeration of Rescissible Contracts:

11
1. Those entered into by guardians where the ward
suffers lesion of more than of the value of the
things which are objects thereof;
a. Lesion damage or injury to the party asking
for rescission (disparity between the price and
the value).
b.

1.

Effect of Contracts Entered into in Behalf of

Ward
i.
If an act of ownership, (e. g. sale or
mortgage of minors property) the court
approval is required; otherwise, contract
is unenforceable whether there is lesion
or not(Art. 1403);
ii.

2.
3.
4.
5.

If merely an act of administration (e. g.

buying of fertilizers for land cultivation)

6.

If with court approval valid,

regardless of lesion (Art. 1386);
If without court approval rescissible,
if lesion is more than one-fourth (Art.
1381, No. 1).

2. Those agreed upon in representation of absentees,

if the latter suffer lesion by more than of the
value of the things which are subject thereof;
3. Those undertaken in fraud of creditors when the
latter cannot in any manner collect the claims due
them;
a. The action to rescind contracts made in fraud
of creditors is accion pauliana.
b. Requisites before accion pauliana can be
brought:
i.
There must be a creditor who became such
prior to the contract sought to be rescinded
(whether the party asking for rescission is a
judgment creditor already or not, is
immaterial).
ii.
There must be an alienation made
subsequent to such credit.
iii.
The party alienating must be in bad faith.
iv.
There must be no other remedy for the
prejudiced creditor.
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 and
the court;
a. The property is said to be in litigation after the
defendant has received the service of
summons.
b. To protect himself, the plaintiff must register
his claim on real property in the registry of
property, pending litigation.
If personal property is involved, the property may
be levied upon by a writ of preliminary attachment
or place on receivership.
5. All other contracts especially declared by law to be
subject to rescission (Art. 1381, NCC);
Examples of agreements referred are the
following:
a. Partition (Art. 1098, NCC);
b. Result of deterioration (Art. 1189, NCC);
c. Right given to an unpaid seller (Arts.1525 and
1534, NCC);
d. Sale of real estate (Art. 1539, NCC);
6.

Badges of Fraud
Circumstances indicating that certain alienation have
been made in fraud of creditors

Payments made in a state of insolvency on

account of obligations not yet enforceable (Art.
1382, NCC).

7.

The cause or consideration of the conveyance

is inadequate or fictitious;
A transfer was made by a debtor after a suit
has been begun and while it is pending against
him;
A sale on credit by an insolvent debtor;
Evidence of large indebtedness or complete
insolvency;
The transfer of all his property by a debtor
when he is financially embarrassed or
insolvent;
The transfer is made between father and son,
where there is present any of the above
circumstances;
The failure of the vendee to take exclusive
possession of all the property.
VOIDABLE CONTRACTS

Voidable contracts are valid until annulled. It cannot be

annulled if there has been ratification. The defect is
more or less intrinsic, as in the case of vitiated
consent.
Those in which all of the essential elements for validity
are present, although the element of consent is
vitiated either by:
1.
2.

Lack of legal capacity of one of the contracting

parties; or
Mistake, violence, intimidation, undue influence or
fraud (Art. 1390, NCC).

Characteristics of Voidable Contracts

1. Their defect consists in the vitiation of consent of
one of the contracting parties;
2. They are binding until annulled by a competent
court;
3. They are susceptible of convalidation by ratification
or prescription;
4. Their defect or voidable character cannot be
invoked by third persons.
Rescissible and Voidable Contracts Distinguished
Rescission
Annulment
The basis is lesion
The basis is vitiated
(damage).
consent or incapacity to
consent.
The defect is external or
The defect is intrinsic (in
intrinsic.
the meeting of minds).
The action is subsidiary.
The action is principal.
This is a remedy.
This is a sanction.
Private interest governs.
Public interest governs.
Equity predominates.
Law predominates.
Plaintiff may be a party
Plaintiff must be a party
or a third person.
to the contract (whether
bound principally or
subsidiarily).
There must be damage
Damage to the plaintiff is
to the plaintiff.
immaterial.
If plaintiff is indemnified, Indemnity is no bar to
rescission cannot
the prosecution of the
prosper.
action.
Compatible with the
Defect is presupposed.
perfect validity of the
contract.
To prevent rescission,
To prevent annulment,
ratification is not
ratification is required
required.
(Paras, 2008).
CAUSES OF EXTINCTION OF ACTION TO ANNUL

12
1.
2.
3.

Prescription;
Ratification;
By the loss of the thing which is the object of the
contract through fraud or fault of the person who is
entitled to annul the contract.

PRESCRIPTION - the action must be commenced

within 4 years from:
1. The time the incapacity ends;
2. The time the violence, intimidation or undue
influence ends; or
3. The time the mistake or fraud is discovered (Art.
1391, NCC).
Effect of Prescription
If the action has prescribed, the contract can no longer
be set aside.
RATIFICATION the act or means by virtue of which
efficacy is given to a contract which suffers from a vice
of curable nullity (Art. 1392, NCC).
Requisites of Ratification
1. The contract must be a voidable one;
2. The person ratifying must know the reason for
the contract being voidable (that is, the cause
must be known);
3. The cause must not exist or continue to exist
anymore at the time of ratification;
4. The ratification must have been made expressly
or by an act implying a waiver of the action to
annul;
5. The person ratifying must be the injured party.
Kinds of Ratification (Art. 1393, NCC)
1. Express 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 expressly declare his
desire to convalidate it, or what amounts to the
same thing, to renounce his right to annul the
contract.
2. Tacit - 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.
Effects of Ratification
1. It extinguishes the action to annul the contract;
2. It cleanses the contract of its defects from the
moment it was constituted (Arts. 1392, 1396,
NCC).
Confirmation,
Distinguished

Ratification,

2. Where loss is due to fault of plaintiff.

The action for the annulment shall be extinguished
(Art. 1400, NCC.
3. Where loss is due to fortuitous event.
The contract can still be annulled but the
defendant can be held liable only for the value of
the thing at the time of the loss, but without
interest thereon as the loss was not due to his fault
(4 Tolentino, NCC).
Who May Institute Action for Annulment
The victim (principal or subsidiary party) may ask for
annulment, not the guilty person or his successor (Art.
1397, NCC).
Requisites of Annulment:
1. The plaintiff must have an interest in the contract;
2. The victim and not the party responsible for the vice
or defect must be the person who must assert the
same.
EFFECTS OF ANNULMENT
Obligation of Mutual Restitution
1. If
the
prestation
thereof
consisted
in
obligations to give the 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
(Art. 1398, par. 1, NCC).
2. If the prestation thereof consists in obligations
to do or not to do there will be an apportionment
of damages based on the value of such prestation
with corresponding interests (Art. 1398, par. 2,
NCC).
If the contract has not been complied with, the
parties are excused from their obligations.
Rule in case of Incapacity
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 (Art. 1399, NCC).

UNENFORCEABLE CONTRACTS
Unenforceable contract cannot be sued upon or
enforced, unless it is ratified. In a way, it may be
considered as a validable transaction, that is, it has no
effect now, but it may be effective upon ratification.

Acknowledgment

Art. 1403. The following contracts are unenforceable,

unless they are ratified:

Confirmation to cure a defect in a voidable

contract.

(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;

Ratification to cure the defect of lack of authority in

an authorized contract (entered into by another).
Acknowledgment to remedy a deficiency of proof
(e. g. an oral loan may be put in writing).
BY THE LOSS OF THE THING WHICH IS THE
OBJECT OF THE CONTRACT THROUGH FRAUD OR
FAULT OF THE PERSON WHO IS ENTITLED TO
ANNUL THE CONTRACT
1. Where loss is due to fault of defendant.
He shall return the fruits received and the value of
the thing the time of the loss, with interest from
the said date (Art. 1400, NCC).

(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 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.
b.

An agreement that by its terms is not to be

performed within a year from the making thereof;
A special promise to answer for the debt, default,
or miscarriage of another;

13
c.
d.

e.

f.

An agreement made in consideration of marriage,

other than a mutual promise to marry;
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;
An agreement of the leasing for a longer period
than one year, or for the sale of real property or of
an interest therein;
A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving

consent to a contract.
Characteristics of Unenforceable Contracts
1. They cannot be enforced by a proper action in
court;
2. They are susceptible of ratification;
3. They cannot be assailed by third persons.
Unenforceable and Rescissible Contracts
Distinguished
UNENFORCEABLE
CONTRACT
It cannot be enforced by
a proper action in court.

RESCISSIBLE
CONTRACT
It can be enforced,
unless it is rescinded.

It is susceptible of
ratification.

It is not susceptible of
ratification.

It cannot be assailed by
third persons.

It may be assailed by
third persons who are
prejudiced.

Unenforceable and Voidable Contracts

Distinguished
UNENFORCEABLE
CONTRACT
It cannot be enforced by
a proper action in court.

VOIDABLE CONTRACT
It can be enforced,
unless it is rescinded.

Kinds of Unenforceable Contacts

1. Unauthorized contracts;
2. Those that fail to comply with the Statute of
Frauds;
3. Those where both parties are incapable of giving
consent to a contract.
Unauthorized Contracts those entered into in the
name of another person by one who has been given no
authority or legal representation, or who has acted
beyond his powers.
Statute of Frauds certain agreements are required
to be in writing so that they may be enforced to
prevent fraud and not to encourage the same.

Contracts where both parties are incapacitated

Contracts where both parties are legally incapacitated
are also unenforceable (Art. 1403, No. 3, NCC). If only
one of the parties is incapacitated, the contract is
voidable (Art. 1390, NCC).
Ratification of Contracts Infringing the Statute of
Frauds
1. Failure to object to the prestation of oral evidence
(waiver).
2. Acceptance of benefits under them.
VOID OR INEXISTENT CONTRACTS
Void contract is one that has no effect at all; it cannot
be ratified or validated.
Kinds of Void Contracts
1. The inexistent ones (where essential formalities
are not complied with, e. g. donation of land in a
private document; this produces no legal effect).
2. The illegal or illicit ones (donation made because of
an immoral condition, such as illicit sexual
intercourse; the donation produces some effect in
that he who gave the donation cannot get back
what he has given.)
Characteristics of Void or Inexistent Contracts
1. As a general rule, they produce no legal effects
whatsoever;
2. They are not susceptible of ratification;
3. The right to set up the defense of inexistence or
absolutely nullity cannot be waived or renounced;
4. The action or defense for the declaration of their
inexistence or nullity is not affected by prescription;
5. The inexistence or absolute nullity of a contract
cannot be invoked by a person whose interests are
not directly affected;
6. Cannot give rise to a contract; thus a contract
which is the direct result of a previous illegal
contract is also void and inexistent.;
7. Generally, no action to declare them void is needed,
since they are inexistent from the very beginning.
Contracts which are Void or Inexistent
(Art. 1409, NCC)
1. Those whose cause, object or purpose is contrary to
law, morals good customs, public order or public
policy;
2. Those whose object is outside the commerce of
men;
3. Those which contemplate an impossible service;
4. Those where the intention of the parties relative to
the principal object of the contract cannot be
ascertained; and
5. Those expressly prohibited or declared void by law.
PRINCIPLE OF IN PARI DELICTO (Arts. 1411
1412, NCC)
IN PARI DELICTO DOCTRINE - both parties are
guilty, no action against each other; those who come
in equity must come with clean hands; applies only to
illegal contracts and not to inexistent contracts; does
not apply when a superior public policy intervenes.
General rule: When the defect of a void contract
consists in the illegality of the cause or object of the
contract and both of the parties are at fault or in pari
delicto, the law refuses them every remedy and leaves
them where they are.
Exceptions:

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1. Payment of usurious interest;
2. Payment of money or delivery of property for an
illegal purpose, where the party who paid or
delivered repudiates the contract before the purpose
has been accomplished, or before any damage has
been caused to a third person;
3. Payment or delivery made by an incapacitated
person;
4. Agreement or contract which is not illegal per se and
the prohibition is designed for the protection of the
plaintiff;
5. Payment of any amount in excess of the maximum
price of any article or commodity fixed by law;
6. Contract whereby a laborer undertakes to work
longer than the maximum number of hours fixed by
law;
7. Contract whereby a laborer accepts a wage lower
than the minimum wage fixed by law.
RULES WHEN ONLY ONE OF THE PARTIES IS AT
FAULT
1. Executed Contracts
a. Guilty party is barred from recovering what he
has given to the other party by reason of the
contract;
b. Innocent party may demand for the return of
what he has given.
2. Executory Contracts
Neither of the contracting parties can demand for the
fulfillment of any obligation from the contract nor may
be compelled to comply with such obligation.

Requisites for the Action for Reformation:

1. There must be meeting of the minds;
2. The true intention is not expressed in the
instrument;
3. There must be clear and convincing proof thereof;
4. It must be brought within the proper prescriptive
period;
5. The document must not refer to a simple
unconditional donation inter vivos, or to wills, or to
a contract where real agreements are void.
Reformation and Annulment of Contract
Distinguished
REFORMATION
It
presupposes
a
perfectly valid contract in
which there has already
been a meeting of the
minds of the contracting
parties.

Instances Where Reformation May Be Made:

1. When a mutual mistake of the parties causes the
failure of the instrument to disclose their real
agreement (Art. 1361, NCC);
2.

MUTUAL RESTITUTION IN VOID CONTRACTS

General rule: Parties should return to each other
what they have given by virtue of the void contract in
case where nullity arose from defect in essential
elements.
1 return object of contract & fruits;
2

3.

4.

return price plus interest.

Exception: No recovery can be had in cases where

nullity of contract arose from illegality of contract
where parties are in pari delicto; except:
1. incapacitated not obliged to return what he
received but may recover what he has given;
2. other party is less guilty or not guilty.

REFORMATION OF INSTRUMENTS
(Arts. 1359 1369, NCC)
Reformation is that remedy in equity by means of
which a written instrument is made or construed so as
to express or conform to the real intention of the
parties when some error or mistake has been
committed.
When the true intention of the parties to a perfected
and valid contract is not expressed in the instrument
purporting to embody their agreement by reason of
mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the
instrument so that such true intention may be
expressed.

ANNULMENT OF
CONTRACT
It
is
based
on
a
defective
contract
in
which there has been no
meeting of the minds
because the consent of
one or both of the
contracting parties has
been vitiated.

5.

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 (Art.
1362, NCC);
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 (Art. 1363, NCC);
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 (Art. 1364, NCC);
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 (Art. 1365, NCC).
NOTE: 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 (Art. 1368, NCC).

Instances Where There Can Be No Reformation:

1. Simple, unconditional donation inter vivos;
2. Wills;
3. When the real agreement is void (Art. 1366, NCC);
4. When one of the parties has already brought an
action to enforce the instrument (Art. 1367, NCC).

DISTINCTIONS OF DEFECTIVE CONTRACTS

RESCISSIBLE
What
is
defect?

the

1.
2.

Lesion
Transfer in fraud
of creditors

VOIDABLE
1.
2.

Incapacity
Consent is
vitiated by
fraud,

UNENFORCEABL
E
1. In excess or
without
authority,
2. Violation of

VOID
1.
2.

Absence
of
requisites,
Illicit nature.

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3.

What
is
effect?

the

Can
it
be
ratified? (cured
of
vice
or
defect)
Who can assail
the contract?
What
is
the
prescriptive
period for filing
the case?

How can it be
assailed,
directly
or
collaterally?

Transfer by
insolvent before
due date.

violence,
intimidation,
undue
influence.

3.

Binding
and
enforceable
unless
rescinded.
Cannot be ratified.

Valid and binding

until annulled.

Statute of
Frauds, or
Incapacity of
both parties.
No
effect
produced.

Can be ratified.

Cannot be
enforced unless
ratified or waived.
Can be ratified.

Contracting party and

third persons who are
prejudiced.

Contracting parties
only.

Contracting parties
only.

Contracting parties
and third persons
whose
interests
are affected.

4
years
from
termination
of
incapacity lesion in
guardianship.

4 years from the

time intimidation,
violence, or undue
influence stops.

No prescriptive
period is provided
because the same
is not
applicable .

4 years until the

domicile of absentee
is known.

4 years from the

discovery of fraud.

Directly

Directly
collaterally

4 years from the

time guardianship
of the minor and
other
incapacity
ceases.
or

Prescription cannot
cure the defect.

Directly or
collaterally

is

Cannot be ratified.

Action
for
declaration
that
the contract is void
is
imprescriptible.

Directly
collaterally

or