Law Contracts

CONTRACTS Prepared by: Raymond Andes Sources: The New Civil Code of the Philippines; commentaries by Paras, Suarez, and Tolentino; reviewer published by Soriano; reviewers prepared by UP Law Bar-Ops Commission and Karichi Santos of UP Law B2012; and some personal inferences. Definition according to the Civil Code of the Philippines: 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. We can infer from the very definition of Contract that obligations would always naturally exist upon the perfection of a contract. In short, when there is a contract, there will always be an obligation but when there is obligation, there isn’t always a contract. Elements of a Contract 1. Essential Elements – without these elements, there is no contract. A defect in any of these elements causes a defect in the contract. a. Consent of the parties – most important of all elements. This is the meeting of minds between parties on the object and cause of the contract b. Object – the subject matter of the contract c. Cause – the essential and impelling reason why a party assumes an obligation. 2. Accidental Elements – those that which exist only upon stipulations in the contract (such as terms of payment, place of payment, conditions, etc.) 3. Natural Elements – those that even without stipulations, they exist (such as warranty against hidden defects and warranty against eviction). However, parties can stipulate waiver of such elements. Classifications of Contracts 1. According to perfection or formation a. Consensual – those perfected upon mere consent (such as sales) b. Real – those perfected upon delivery of the object (such as depositum, pledge, and commodatum) c. Formal or Solemn – those that can only be valid through compliance with the formalities of law (such as donation of a real property) 2. According to cause a. Onerous – where there is exchange of valuable considerations b. Gratuitous – where one party receives no equivalent consideration c. Remuneratory – the cause is the service remunerated 3. According to dependence upon another contract a. Principal – one that stand by itself b. Accessory – one whose existence depends another contract known as the principal contract (such as mortgage and pledge) c. Preparatory – one which serves as a means in which other contracts may be entered (such as agency and partnership) 4. According to parties obligated a. Unilateral – those where only one of the parties are required to accomplish the determinative conduct b. Bilateral or synalagmatic – those where both parties are required to accomplish their own determinative conducts 5. According to time or fulfillment a. Executed – one which has already been performed b. Executory – one that has not yet been performed

6. According to the number of persons physically entering into the contract a. Ordinary – where the two parties are represented by two different persons b. Auto-contract – where the two parties are represented by only one person (such as in agency where the agent lends money to his principal who he represents as the borrower) Stages of a Contract 1. Preparation or Conception – involves preliminary negotiations, discussion of terms and conditions wherein agreement has not yet occurred. 2. Perfection or Birth – the point at which there is finally a meeting of minds between parties as to the object and the valid cause. 3. Consummation or Death or Termination – the point at which the terms of the contract have been fulfilled resulting in its accomplishment Basic Principles of a Contract 1. Liberty of contract or freedom to stipulate – the parties have the liberty to contract and stipulate. This is one of the liberties guaranteed by the laws of the land to the people. However, this is subject to limitations as follows: law, public policy, good customs, public order and morals. 2. Mutuality of contracts – the parties are both bound to one another. The validity or compliance of the contract cannot be left to the will of one of them. 3. Relativity of contracts – contracts take effect only within the contracting parties, their assigns and heirs, except where the rights and obligations are not transmissible. 4. Consensuality of contracts – contracts are usually perfected by mere consent of the parties except if the contracts are real and formal/solemn. 5. Obligatory force of contract and compliance in good faith – all contracts have the force of law between the contracting parties and should be complied with in good faith.

ESSENTIAL REQUISITES OF CONTRACTS (expounded) CONSENT Consent is manifested by the meeting of the offer and the acceptance upon the object and the cause which are to constitute the contract. In plain language, it is the meeting of minds of both parties. Consent has two parts: Offer and Acceptance. Upon communication of acceptance of one of the parties towards the other, the contract is usually perfected. What happens if…

Answer

…the offer is vague? Will there still be a contract?

There wouldn’t be meeting of minds, therefore contract will not exist.

…a seller advertised his products to the public? Is there already an offer?

At this point, offer does not exist yet. Advertisements are mere invitations to make an offer. However, if all details needed are conveyed to the public, advertisement becomes an offer.

…one of the parties dies, is civilly

The offer becomes ineffective. Thus,

interdicted, insane or incapacitated before acceptance is conveyed? What happens to the offer? …an offerer gives the offeree a certain period of time to accept, can the offerer withdraw the offer?

there is no contract.

…after the offerer has given the offeree a certain period of time to accept, the latter gives the former an option money, can the offerer withdraw the offer?

No. Because, in effect, the offeree has bought the time period given by the offerer. The former is entitled to compel the latter not to withdraw the offer until the prescription of the period of time. However, if the offeree failed to give the option money, the offeror has the liberty to withdraw the offer. It is as if there is no such option contract. (Q: Using inference, what kind of contract as to perfection is an option contract?)

Yes, as long as he communicates such withdrawal before the acceptance has been communicated.

Major Rule on Consent There is no consent until there has been agreement between two parties. Contract is perfected upon the point at which acceptance is communicated to the offerer. Example May 31, 10:45 pm Kent texts Karen: “Hoy Bakla, bilhin mo naman make-up ko from Avon, maganda na mura pa. 15,000 pesos lang. Bukas, dalhin ko na.” May 31, 10:46 pm Karen receives Kent’s text message. She replies: “Sige, go! Pero, pwede 10,000 pesos na lang?” May 31, 10:48 pm Kent receives text message. He takes his calculator and tried to compute his profit. He shakes his head then sends back a message: “Hay naku gurl, mahal yan. Di basta-basta yan. Gaganda ka lalo…” May 31, 11:37 pm Due to problems in signal, Karen receives text message at this late. She makes a reply: “Pano ba ako nakakasigurong totoo yang sinasabi mo eh lalake ka?” May 31, 11:50 pm Kent thought for awhile. He remembers something, then makes a reply: “Alala mo ba kahapon kung ano itsura ko?” May 31, 11:51 pm

Karen: “Absent ka kahapon so pano ko malalaman?” May 31, 11:53 pm Kent: “Akala mo lang yun! Present ako no… ako yung naka-blue with stripes of white kahapon…” May 31, 11:55 pm Karen: “Huh? Di mo naman kamukha si Piolo Pascual at di mo rin kamukha si Diether Ocampo!” May 31, 11:56 pm Kent: “That’s the point! Linagay ko make-up from avon kaya on my left side, kamuka ko si Diether at pagtingin mo sa kabila, kamuka ko na rin si Piolo!” May 31, 11:57 pm Karen: “May magic ang make-up mo???!!!” May 31, 11:58 pm Kent: “Ano pa ba sa tingin mo?” May 31, 11:59 pm Karen: “Sige, go! Bilhin ko na. Willing ako!” June 1, 12:01 am Kent receives Karen’s last text message and replies: “Okay.” June 1, 12:03 am Karen receives Kent’s last text message and finally rests her head on the bed and starts sleeping. Question: At what time was there a meeting of minds? At what time was there perfection of the contract? Answer June 1, 12:01 am. Meeting of minds occurs at the moment the offeror receives the offeree’s acceptance. Capacity Parties entering into a contract must have the legal capacity to do so. Reason: To protect incapacitated persons from damages that may be caused by the other party. Contracts entered into by incapacitated persons are VOIDABLE if only one of the contracting persons is incapacitated and UNENFORCEABLE if both parties are incapacitated.

Who are the incapacitated persons? 1. Minors – those aged below 18 (RA 6805). Exceptions: (1) if the contract is entered into for the purpose of acquiring necessaries; or (2) when the minor misrepresents his age (the reason for this is to protect the other party from harm that may be caused by such misrepresentation. However, if the other party knows such misrepresentation, contract remains voidable). 2. Insane or demented persons, unless they contract during lucid interval. 3. Deaf-mutes who do not know how to read and write, unless guided by another person. Vices of Consent 1. Mistake – inadvertent and inexcusable disregard of a circumstance material to the contract (JBL Reyes). 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. 2. Intimidation – happens 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 (Art. 1335). 3. Violence – irresistible force used to extort consent (JBL Reyes) 4. Undue Influence – happens 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). 5. Fraud – happens 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). Query: Is there Fraud in the following circumstances? 1. Offeror failed to disclose certain important facts to the offeree and the former has the duty to reveal them. 2. Usual exaggerations in trade made by the seller and the other party had an opportunity to know the facts. 3. Seller expresses an opinion and the buyer believes such opinion. 4. Expert expresses an opinion. A) the expert was hired by the seller; B) the expert was hired by the buyer. Simulation of Contracts: Declaration of a non-existent will producing the appearance of a transaction that does not exist, or which is different from the one that actually arose. (Reyes) Kinds of Simulated Contracts 1. Absolutely Simulated Contract – contract which provides for a transaction that does not exist. This contract is void.

2. Relatively Simulated Contract – contract which provides for a transaction that differs from the one that actually arose. True agreement is concealed for some reasons. The validity and effects of this contract will be governed by the rules applicable to the “intended” contract, and not by those applicable to the “appearing” contract. However, if a 3rd person is benefited by the “appearing” contract, it will be binding. This is, however, dependent on w/n the 3rd person is in good faith. Absolute No real transaction intended Fictitious contract Void

Relative Real transaction is hidden Disguised contract Bound as to hidden agreement, so long as it does not prejudice a 3rd person and is not contrary to law, morals, public policy, customs or public order

OBJECT Object is the thing, right or service which is the subject matter of the obligation arising from the contract. Requisites: 1. Lawful: Not contrary to law, morals, good customs, public order or public policy. 2. Actual or possible 3. Transmissible: within the commerce of man. Things that are outside the commerce of man are those things that are not susceptible of appropriation or of private ownership, and which are not transmissible. Examples: property that pertain to public dominion such as roads and plazas; common things like the air and the sea. 4. At least determinate as to its kind. If the object is merely “something” or “an animal,” the species is not determined, the contract would be void. In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. A future thing may be the object of a contract, such contract may be interpreted as a: • •

Conditional Contract: where its efficacy should depend upon the future existence of the thing. Aleatory Contract: where one of the parties assumes the risk that the thing will never come into existence, e.g. insurance.

Q: Can future inheritance be the object of a contract? It depends. If the object is a specific property you are expecting to inherit from an ascendant, the sale is void. But if the object is merely the future hereditary rights without specification of the properties, the sale is valid because this is permitted by law (Art. 1630).

CAUSE Cause is the impelling reason for which a party assumes an obligation

Requisites: (1) Existing; (2) Licit/Lawful; (3) True*. Query: What is the cause and what is the object in a sale of land? Answer: It depends on which perspective. Party

Cause

Object

vendOR

Cash (wants to profit)

Land

vendEE

Land (wants to acquire land)

Land

According to Tolentino, the object in onerous contracts is the thing, service or act which forms the basis of the entire contract, the starting point of the agreement, without which the negotiations or bargaining between the parties would never even have begun. Cause and Object in Other Types of Contract Remuneratory Definition

Cause Object

It is a contract where a party gives something to another because of some service or benefit given or rendered by the latter to the former, where such service or benefit was not due as a legal obligation. (Tolentino)* The service or benefit which is remunerated Thing given in exchange for the service or benefit

Gratuitous Agreements to give something or to lend something.

Mere liberality of the benefactor or giver Thing given (for donation) or thing lent (commodatum)

What is Motive? It is the psychological, individual and personal reason which induces a party to enter into a contract. Example: Jerelyn bought a piece of land from Daila because she wants that piece of land used for constructing a vacation house (the land is located in Caramoan). The cause is the piece of land she wants to own while the motive is Jerelyn’s desire to have a place for relaxation. Circumstance

Defined

Lack of Cause Illegality of Cause

Absence or total lack of cause

Falsity of Cause

Lesion or Inadequacy

Contrary to law, morals, good customs, public policy and public order Cause is stated but is untrue

Cause is not proportionate to object.

Effect Contract is null and void Null and void Void if it should NOT be proved that it was founded upon another cause which was true and lawful. •

Shall not invalidate the contract except when there is fraud,

of Cause

mistake, or undue influence May rescind the contract under some instances(see rescissible contracts)

FORMS OF CONTRACTS GENERAL RULE: Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. EXCEPTIONS 1. When the law requires that a contract be in some form to be valid. Such contract is a formal contract. a. Must be in public instrument to be valid: i.donation of real property ii.Contribution of immovable property by a partner in a partnership b. Must be in writing: i.Donation of personal property exceeding P5,000 ii.Authority of an agent in sale of land 2. When the law requires that contract be in some form to be enforceable. (Statute of Frauds) Failure to abide by this provision does not render the contract void, it merely renders the contract unenforceable. a. Must be in writing to be enforceable: ii.Agreement that by its terms is not to be performed within a year from the making thereof iii.Special promise to answer for the debt, default, or miscarriage of another iv.Agreement made in consideration of marriage, other than mutual promise to marry v.Sale of goods, chattels, or things in action, at a price not less than P500. vi.Leasing for a period more than one year. vii.Sale of real property or of an interest therein viii.Representation to the credit of a 3rd person

DEFECTIVE CONTRACTS The following are defective contracts: 1. Rescissible Contracts – valid until rescinded. They are valid because there is no defect in any of the essential requisites BUT the law allows a party to rescind (or cancel) the contract because of the damage received by such party. This is based on the EQUITABLE REASONS. 2. Voidable Contracts – valid until annulled. They are valid because the party injured can ratify the contract but the law gives such party the right to annul the same. These contracts are voidable because of a defect in the consent. 3. Unenforceable Contracts – valid but cannot be enforced unless ratified. 4. Void Contracts – void from the beginning.

RESCISSIBLE CONTRACTS Rescissible contracts are entirely valid as to essential elements (consent, object and cause). However, harm or damage is caused or being caused against a party (be it one of the contracting parties or any 3rd party). For equitable reasons, the law gives the injured party the right to rescind (cancel) the contract. In effect, the validity of this contract is set aside for justifiable reasons of equity. Kinds of Rescissible Contracts 1. Entered into by guardians whenever the wards suffer lesion by more than ¼ of value of things · Guardian: authorized only to “manage” ward’s property, no power to dispose without prior approval of court. Only includes those which are “ordinary course” of management of estate of the ward, because if sale, mortgage and other encumbrance AND not approved by court, it becomes unenforceable. 2. Agreed upon in representation of absentee, suffer lesion by more than ¼ of the value of things · Absentee is a person who was lost for an indefinite period of time due to some freak accident, natural calamities, wars, or any other reason that have caused him to be absent for a period of time. · This type of contract is usually entered into by a person other than the absentee who has the right of representation but entered into such contract that caused damage of more than ¼ of the value of the things. Example: Jerelyn was abducted by aliens. She was absent for several years. Her wife (assume that gay marriage is already legal) later gained the right of representation and then sold Jerelyn’s beach resort for 75% below its appraised value. The sale of beach resort can be rescinded by Jerelyn. 3. In fraud of creditors who cannot collect claims due them (Accion Pauliana) · Requisites of Accion Pauliana 1. Plaintiff asking for rescission (subsidiary action) has a credit prior to the alienation 2. Debtor has made subsequent contract, giving advantage to a 3rd person 3. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd person (last resort) 4. Act being impugned is fraudulent 5. 3rd person who received the property is an accomplice in the fraud

Who can rescind?

Contracts entered by GUARDIANS

Contracts in representation of ABSENTEES

In general, by the injured party. But can be done also by guardian ad tem (new guardian) of ward during incapacity of ward in an action against the original guardian.

By absentee

Contracts entered into to DEFRAUD existing creditors By creditor(s)

When?

W/in 4 years from (re)gaining capacity

How to cure defect?

Ratification by injured party w/in 4 years from gaining capacity

W/in 4 years from knowledge of domicile* of absentee Ratification by absentee w/in 4 years from knowledge of domicile* of absentee or knowledge of fraudulent contract

W/in 4 years from knowledge of fraudulent contract Ratification by defrauded creditor w/in 4 years from knowledge of fraudulent contract

VOIDABLE CONTRACTS Voidable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of one of the parties; but before the annulment, they are effective and obligatory between the parties. Hence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose (Llacer v Munoz, 12 Phil. 328). Kinds of Voidable/Annullable Contracts (Although no damage to contracting parties): 1. Want of capacity 2. Vitiated consent (Violence, Intimidation, Fraud, Mistake or Undue Characteristics of Voidable/Annullable Contracts: 1. Their defect consists in the vitiation of consent of one of the contracting parties 2. They are binding until they are annulled by a competent court 3. They are susceptible of convalidation by ratification or by prescription NULLITY (Voidable)

RESCISSION (Rescissible)

Declares inefficiency which contract already carries in itself (intrinsic defect)

Merely produces inefficiency, which did not exist essentially in the contract (external defect i.e. pecuniary damages or prejudice to one of the contracting parties or 3rd persons)

Requires act of ratification to be cured

Needs no ratification to be effective

Based on a vice of the contract which invalidates it

Compatible with the perfect validity of the contract

Annulment is a sanction based on law

Rescission is a remedy based on equity

Demanded only by the parties to the contract

Demanded even by third parties affected by it

Prescription of Action for Annulment – after prescription, contract can no longer be annulled Art 1391 - Within 4 years

Period shall begin: 1. Intimidation, violence or undue influence: from the time consensual defect ceases 2. Mistake or fraud: from the time of discovery of the same 3. Incapacity: from the time guardianship ceases * Applies to the parties of to the contract, but NOT to third persons Effects of Annulment: 1. Mutual restitution of the things delivered, along with fruits and price paid with interest. 2. Damages to be paid by the party who caused defect of the contract.

UNENFORCEABLE CONTRACTS Unenforceable contract is one which cannot be enforced unless it is first ratified in the manner provided by law. It is distinguished from the rescissible and the annullable contracts in that the latter two contracts produce legal effects unless they are set aside by a competent court, while the unenforceable contract does not produce any effect unless it is ratified. Kinds of Unenforceable Contracts 1. Entered into in the name of another person by one who has no authority or no legal representation OR acted beyond his powers 2. Do not comply with Statute of Frauds, which are agreements unenforceable unless in written memorandum and subscribed by the party charged: i.Agreement that by its terms is not to be performed within a year from the making thereof ii.Special promise to answer for the debt, default, or miscarriage of another iii.Agreement made in consideration of marriage, other than mutual promise to marry iv.Sale of goods, chattels, or things in action, at a price not less than P500. v.Leasing for a period more than one year. vi.Sale of real property or of an interest therein vii.Representation to the credit of a 3rd person •

If the contract has been executed, even partly, the contract’s status as unenforceable ceases as execution is considered by law as a form of ratification.

3. Both parties are incapable of giving consent to contract • • •

Ratification can be done by either parties or their guardians. Ratification by one party (or its guardian) makes the contract voidable. Ratification made by both parties (or their guardians) makes the contract perfectly valid.

VOID CONTRACTS A void contract is one which has no force and effect from the very beginning, as if it had never been entered into, and which cannot be validated either by time or by ratification. The maxim is “no contract at all.”

Characteristics of Void/Inexistent Contracts 1. Void from the beginning 2. Produces no effect whatsoever nullity exist ipso jure, judgment of nullity is merely declaratory 3. Cannot be confirmed or validated (by prescription OR ratification), neither can the right to set up the defense of illegality be waived Art 1409 Action to Declare Nullity – necessary because nobody can take the law into his own hands DISTINCTIONS VOID

RESCISSIBLE

Defect is inherent in the contract itself

Defect is in their effects, either to one of the parties or to a 3rd party

Matter of law and public interest

Based on equity and more a matter of private interest

No legal effects even if no action is taken to set it aside

No action, remains valid and produces all its effects

Action to declare nullity of void contracts never prescribes VOID

Action to rescind prescribes in 4 years

VOIDABLE

One of those essential requisites is wanting, either in fact or in law or is declared void by statute Not susceptible of ratification Action to declare nullity of void contracts never prescribes VOID

Essential requisites for validity is present, BUT consent is vitiated May be rendered perfectly valid by ratification May be rendered perfectly valid by ratification UNENFORCEABLE

Both are ineffective at its birth Can never be ratified and become enforceable There is no contract at all

Can be ratified and thereafter enforced There is a contract which, however, cannot be enforced unless properly ratified

Examples of Void Contracts •

One whose cause, object or purpose is against law, morals, public policy, public order or good customs.

• • •

One whose cause is totally absent. One whose object is impossible or cannot be done. Absolutely-simulated contracts