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CONTRACTSA. IN GENERAL DEFINITION – Art. 1305 Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a)Definition by Sanchez Roman: juridical convention manifested in legal form, by virtu...

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CONTRACTS A.

IN GENERAL

1.

DEFINITION – Art. 1305

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

Definition by Sanchez Roman: 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. Criticisms in the definition provided under Art. 1305: a. b. c.

“to give something or to render some service” – connotes that obligation not to do is not covered, which is wrong. E.g., contract not to put up a fence or not to sell products of a competitor company, or in the case of Honda cars prohibiting conversion of the cars to taxicabs. “whereby one binds himself” – connotes that only one is obligated, which is wrong as well. Most of the contracts are actually reciprocal or bilateral. “Two persons” – connotes that a contract cannot be perfected if there is only one person, which is wrong. Auto-contracts involve only one person, although such person represent different interests.

AUTO-CONTRACTS

Auto-Contracts: one person is responsible for the perfection of the contract but this person is acting in two capacities, one in behalf of himself, one in behalf of another.

Generally valid: the number of parties is not determinative of the existence of a contract; what is important is that there be at least 2 declaration of wills. Example of a valid auto-contract: Art. 1890. If the agent has been empowered to borrow money, he may himself be the lender at the current rate of interest. If he has been authorized to lend money at interest, he cannot borrow it without the consent of the principal.

Examples of an auto-contract which is considerd void: 1. 2.

Sale of property of a person under guardianship where the buyer is the guardian Lease contract concerning the property belonging to an estate, where the lessee is the executor thereof.

2.

ELEMENTS OF CONTRACTS a. Essential - those without which the contract cannot exist, i.e., Consent, object, consideration. In some contracts, form and delivery is essential too. b. Natural - those which exist as part of the contract even if the parties do not stipulate it because the law is deemed written therein. Example: Warranty against eviction in a contract of sale or the warranty agains hidden defects. c. Accidental - those which are agreed upon by the parties and which cannot exist without being stipulated. Example: stipulation for interest.

3.

STAGES OF A CONTRACT a.

NEGOTIATION (PREPARATION OR CONCEPTION OR GENERACION) – here the arties are progressing with their negotiations; prior to the arrival on a definite agreement. Here is where the parties provide for their offers and bargain with each other.

b.

PERFECTION (OR BIRTH) – when the parties have already came to a definite agreement and all the essential elements are present (which includes form or delivey in some).

c.

CONSUMMATION (OR DEATH OR TERMINATION) – the terms of the contract have already been performed.

B.

ESSENTIAL ELEMENTS OF CONTRACTS

1.

CONSENT OF CONTRACTING PARTIES

Consent: the meeting of the offer and the acceptance upon the thing and tthe cause which are to constitute the contract. Offer and Acceptance: a. b. c. d. e. f. g.

The offer must be certain The acceptance must be absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made An acceptance may be express or implied. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

Option Agreement: When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. Advertisements: Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. ILLUSTRATION: X posted in his lot “For sale, 1,000 sqm. Lot, P1,000,000” In this case, the advertisement is a definite offer and X cannot back-out once somebody accepts such offer. Had it read “For sale, 1,000 sqm. Lot, P1,000,000 to P1,200,000” Here, it is merely an invitation to make an offer. SITUATIONS CONCERNING CONSENT OF THE PARTIES: a. Both parties gave consent their consent as to the essential elements of the contract – the contract is valid. b.

Simulation: when one or both the parties did not intend to be bound by the contract (absolute simulation), the same is void. Otherwise, if the parties merely conceal their true agreement (relative simulation), they shall be bound by their real agreement.

c.

Incapacity of one of the parties: Kinds of Capacity: (1) Juridical capacity - is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death. If incapacity pertains to juridical capacity the contract is void. (2) Capacity to act (or legal capacity) - is the power to do acts with legal effect, is acquired and may be lost. If incapacity pertains to capacity to act or legal capacity, it can be: i. Absolute Incapacity – the party cannot give consent in any contract, with anyone, in whatever capacity, over anything.

The a. b. c. d.

following cannot give consent to a contract: Unemancipated minors; Insane or demented persons (except if consent is given during lucid interval); Deaf-mutes who do not know how to write; and Drunks or hypnotized.

Here the contract would be voidable as to the party who is incapacitated. Those who are “incompetent” under the Rules of Court who may be placed under guardianship: a. Those suffering civil interdiction b. Hospitalized lepers c. Prodigals d. Deaf and dum who are unable to read and write e. Those of unsound mind even though they have lucid intervals f. Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aid, take care of themselves and manage their property, becoming thereby an ease prey for deceit and exploitation. Note that these people (save for those suffering the penalty of civil interdiction) can still enter into contracts if not placed under guardianship. However, it can still be proven that intelligent consent was not given and thus, may still render the contract voidable. ii.

Relative Incapacity – a person may be prohibited from entering specific contracts or that in a contract, he may be prohibited in a certain capacity, i.e., prohibited to be the buyer, or to specific things, or to specific persons. Examples: • An alien is prohibited under the Constitution from acquiring private lands. EXCEPT: when acquired through (1) succession; or (2) sale of residential land to a former natural born Filipino citizen. • Husbands and wives cannot enter into a contract of sale, unless they agreed to a Separation of Property marital property regime or they have been legally separated.

d.

Both are incapacitated: the contract is unenforceable.

e.

Both parties gave their consent, but such consent was vitiated: Vices of consent: would render the contract voidable. Like: a.

Mistake -must be that of (a) the object of the contract, or to (b) those conditions which have principally moved one or both parties to enter into the contract. (1) Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. (2) Mistake or error as to motive does not vitiate consent. (3) A simple mistake of account shall give rise to its correction. (4) There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (5) Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.

b.

Violence - when in order to wrest consent, serious or irresistible force is employed.

c.

Intimidation - when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.

d.

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

e.

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: Rules on Fraud: (1) Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (2) The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (3) A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge (4) Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (5) In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. (6) Incidental fraud only obliges the person employing it to pay damages. (7) Misrepresentation made in good faith is not fraudulent but may constitute error.

2.

OBJECT CERTAIN WHICH IS THE SUBJECT MATTER

Object (Subject Matter) of the Contract: is really to create or to end obligations, which, in turn, may involve things, righs or services. Requisites: a. b. c. d. e.

The thing, right or service must be within the commerce of man; It must be transmissible; It must not be contrary to law, morals, good customs, public order or public policy; It must not be impossible; It must be determinate as to its kind or determinable without the need of a new contract or agreement.

Future Inheritance: cannot be the subject matter of a valid contract. This is because the seller owns no inheritance while his predecessor lives. Public policy demands that if you’re going to sell, you have the right to do so, but not necessarily requiring that the seller is the owner. 3.

CAUSE

Cause is the essential or impelling reason why a party assumes an obligatin. Strictly speaking, there is no cause of contract, but there is a cause for an obligation.

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) Rules on Cause: A. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy B. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. C. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.

D.

As a rule, inadequacy of the price will not affect the contract. Except: (1) When expressly provided by law, e.g., rescissible contracts; (2) When there has been fraud, mistake or undue influence. ILLUSTRATION: W’s land was sold by his guardian G to B for P1M where the fair market value was P2M. In this instance, the contract is rescissible since it resulted in a lesion or economic damage to W by more than ¼ of the value of the thing. If, however, S sold his land to B for P1M, where the fair market value thereof was P2M. Here, there is inadequacy of the price, which as a rule will not affect the validity of the contrat. If, however, S sold it for such a price because of fraud or mistake, then it is a voidable contract.

E.

The particular motives of the parties in entering into a contract are different from the cause thereof. ILLUSTRATION: A bought a gun to kill B and he was able to do so. Was the sale valid? Answer: Yes. Here the cause as to A is the gun, as to B, the purchase price. As a rule, motive does not affect the validity of a contract since motive is different from cause and the illegality of motive does not affect the validity of the contract. Exception: if it predominates the purpose of the party to enter into a contract. E.g., sale to defraud creditors.

4.

OTHER ESSENTIAL ELEMENTS: in some cases, delivery is required for the perfection of the contract; in others, there are formal requirements.

Real Contracts: are those which are perfected by delivery, which include: 1. 2. 3. 4. C.

Deposit Pledge Commodatum Loan

FORMS OF CONTRACT

GENERAL RULE: no form is required for the validity or perfection of a contract. Exceptions: 1. Donations of real property which requires a public instrument. 2. Donations of personal property which exceeds P5,000 which requires that the donation be written. 3. Stipulation to pay interests on loans or for the use of money, which must be in writing. 4. Sale or transfer of large cattle which requires that it be in a public instrument, registered and that there should be a certificate of transfer.

Formalities required for enforceability (STATUTE OF FRAUDS): The following are unenforceable, unless they are in writing, or some note or memorandum and 1. 2. 3. 4.

5. 6.

subscribed by the party charged, or by his agent: 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; 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.

Formalities required for convenience: to bind third persons, the following are required to appear in a public instrument: 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 the Statute of Frauds. 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.

Remedy to require a specific form: if the law requires a document or other special form, as in the acts and contracts required to be to appear in a public instrument for convenience, the contracting parties may compel each other to observe that form, once the contract has been perfected. REFORMATION OF INSTRUMENTS

Reformation: is the remedy by means of which a written instrument is made or construed so as to express or conform to the true intention of the parties when some error or mistake has been committed. Requisites: 1. 2. 3.

There is a meeting of the minds; There is a written instrument; and The written instrument does not reflect the true intention of the parties.

When may reformation be had: 1.

2. 3. 4.

Mutual mistake of the parties If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument 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. Ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist. 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.

Who can ask for reformation: 1. 2.

If the mistake was mutual, reformation may be ordered at the instance of either party or his successor in interest; Otherwise, the injured party, or his heirs and assigns.

No reformation: a. b. c.

Simple donations inter vivos wherein no condition is imposed; Wills; When the real agreement is void.

Likewise, when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. D.

FUNDAMENTAL CHARACTERISTICS/ PRINCIPLES OF CONTRACTS

1.

CONSENSUALITY OF CONTRACTS

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

Perfection of a contract: is generally by the meeting of the minds or consensual, save for some cases where delivery or form is required for its perfection.

Contract entered into by an unauthorized person: is unenforceable since the rule is that no one may contract in the name of another without being authorized by the latter, such as an agent, or unless he has by law a right to represent him, such as a guardian. The same is true if the person, while authorized or has legal representation, acted beyond his powers. Unless, in both cases, the contract is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. CONTRACT OF ADHESION - one where there is already a prepared form containing the stipulations d...