Reviewer in Law 1 (from De Leon's book) Contracts

CONTRACTS (Identification)

Chapter 1

General Provisions

1)      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.

2)      Moral or social agreements – agreements which cannot be enforced by action in the courts of justice.

3)      Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

4)      Public order – refers principally to public safety although it has been considered to mean also the public weal.

5)      Public policy – it may refer not only to public safety but also to considerations which are moved by the common good.

6)      Nominate contract – which has a specific name or designation in law (e.g., commodatum, lease, agency, sale, etc.)

7)      Innominate contract – which has no specific name or designation in law.

8)      Article 1308. The contract must bind both contracting parties, its validity or compliance cannot be left to the will of one of them.

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

10)   Stipulation pour autrui – it is a stipulation in a contract clearly and deliberately conferring a favor upon a third person who has a right to demand its fulfillment provided he communicates his acceptance to the obligor before its revocation.

11)   Real right – is binding against the whole world and attaches to the property over which it is exercised wherever it goes.

12)   Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration laws.

13)   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 the consequences which, according to their nature, may be keeping with good faith, usage and law.

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

15)   Consensual contract – which is perfected by mere consent (e.g., sale, lease, agency)

16)   Real contract – which is perfected by the delivery of the thing subject matter of the contract (e.g., depositum, pledge, commodatum)

17)   Solemn Contract – contracts required to be in some form for their validity.

18)   Preparation or conception – this includes all the steps taken by the parties leading to the perfection of the contract.

19)   Perfection or birth – this is when the parties have come to a definite agreement or meeting of the minds regarding the subject matter and cause of the contract.

20)   Consummation or termination – this is when the parties have performed their respective obligations and the contract may be said to have been fully accomplished or executed.

21)   Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party.

Chapter 2 – Essential Requisites of Contract

Section 1 – Consent

22)   Consent – is the conformity of wills (offer and acceptance) and with respect to contracts, it is the agreement of the will of one contracting party with that of another or others, upon the object and terms of the contract. It is the meeting of the minds between the parties on the subject matter and the cause which are to constitute the contract even if neither has been delivered.

23)   Offer –it is a proposal made by one party to another to enter into a contract. It is more than an expression of desire or hope. It is really a promise to act or to refrain from acting on condition that the terms thereof are accepted by the person (offeree) to whom it is made.

24)   Certain or definite – offer must be certain so that the liability or the rights of the parties may be exactly fixed because it is necessary that the acceptance be identical with the offer to create a contract.

25)   Acceptance – is the manifestation by the offeree of his assent to the terms of the offer. Without acceptance, there can be no meeting of the minds between the parties.

26)   Absolute or unqualified – the acceptance of an offer must be this, that is, it must be identical in all respects with that of the offer so as to produce consent or meeting of the minds.

27)   Qualified acceptance – when it is subject to a condition, it merely constitutes a counter-offer.

28)   Counter-offer – in law, is considered a rejection of the original offer and an attempt by the parties to enter into a contract on a different basis. It has the effect of extinguishing the offer.

29)   Article 1320. An acceptance may be express or implied.

30)   Article 1321. The person making the offer may fix the time, place, and the manner of acceptance, all of which must be complied with.

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

32)   Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

33)   Option contract – is one giving a person for a consideration a certain period within which to accept the offer of the offerer.

34)   Option – may also refer to the privilege itself given to the offeree to accept an offer within a certain period.

35)   Option period – is the period given within which the offeree must accept the offer.

36)   Option money – is the money paid or promised to be paid in consideration for the option.

37)   Earnest money – a partial payment of the purchase price and is considered as proof of the perfection of the contract.

38)   General Rule: the offer may be withdrawn as a matter of right at any time before acceptance.
Exception: when the option is founded upon a consideration, as something paid or promised.

39)   Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer.
However, if the advertisement is complete in all the particulars necessary in a contract, it may amount to a definite offer which, if accepted, will produce a perfected contract.

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

41)   In judicial sales (sales ordered by a court), the sheriff or auctioneer is bound to accept the highest bid.

42)   Capacity is presumed. Incapacity should be proven by the party who asserts it.

43)   Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.

44)   Lucid interval – is a temporary period of sanity.

45)   Mistake – it is the false notion of a thing or a fact material to the contract.

46)   The mistake contemplated by law is substantial mistake of fact, that is, the party would not have given his consent had he known of the mistake.

47)   Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated may vitiate consent.

48)   Mistake of law – arises from an ignorance of some provision of law, or from an erroneous interpretation of its meaning, or from an erroneous conclusion as to the legal effect of an agreement, on the part of one of the parties.

49)   Violence – requires the employment of physical force. The force employed must be either serious or irresistible.

50)   Reverential fear – the fear of displeasing a person to whom respect and obedience are due, the contract is valid because it does not annul consent in the absence of actual threat

51)   The threat of a court action as a means to enforce a just or legal claim is justified and does not vitiate consent.

52)   Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract.

53)   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.
If gained by kindness, affection, argument or persuasion, the influence will not vitiate consent.

54)   Causal Fraud – committed before or at the time of the celebration of the contract. It is the fraud used by a party to induce the other to enter into a contract without which the latter would not have agreed to.

55)   Concealment – a neglect or failure to communicate that which a party to a contract knows and ought to communicate

56)   If the failure is unintentional, the basis of the action for annulment is not fraud but mistake or error.

57)   Dealer’s talk or trader’s talk – are representations which do not appear on the face of the contract and these do not bind either party.

58)   Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

59)   Simulation of a contract – is the act of deliberately deceiving others, by feigning or pretending by agreement, the appearance of a contract which is either non-existent or concealed.

60)   Absolute simulation – when the contract does not really exist and the parties do not intent to be bound at all.

61)   Relative simulation – when the contract entered into by the parties is different from their true agreement.

Section 2 – Object of Contracts

62)   Object of a contract – is its subject matter.

63)   Outside the commerce of men – things of public ownership and things that are common to everybody

64)   Intransmissible rights – political rights such as the right to vote; family, marital and parental rights; right to public office or to run for public office.

65)   Future inheritance – is any property or right, not in existence or capable of determination at the time of the contract, that a person may inherit in the future.

66)   Article 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties.

Section 3 – Cause of Contracts

67)   Cause – is the essential or more proximate purpose which the contracting parties have in view at the time of entering into the contract. It is the civil code term for consideration.

68)   Motive – is the purely personal or private reason which a party has in entering into a contract.

69)   Absence or want of cause – means that there is a total lack of any valid consideration for the contract

70)   Inadequacy of cause and failure of cause – not a ground for relief and does not render a contract void.

71)   Illegality of cause – implies that there is a cause but the same is unlawful or illegal.

72)   Falsity of cause – is meant that the contract states a valid consideration but such statement is not true. It may be erroneous or simulated (relative).

73)   Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists, and is lawful, unless the debtor proves the contrary.

74)   Lesion – is any damage caused by the fact that the price is unjust or inadequate.

CHAPTER 3 – FORM OF CONTRACTS

75)   The form of a contract – refers to the manner in which a contract is executed or manifested.

76)    Statute of frauds – the law requires that they be in writing subscribed by the party charged or by his agent.

CHAPTER 4 – REFORMATION OF INSTRUMENTS

77)   Reformation – is that remedy by means of which a written instrument is amended or rectified so as to express or conform to the real agreement or intention of the parties when by reason of mistake, fraud, inequitable conduct, or accident the instrument fails to express such agreement or intention.

78)   Principles of the general law on reformation are based on the provisions of the new civil code.

79)   Art. 1362. If one party was mistaken and the other act 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.

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

81)   Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed.

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

83)   Art. 1367. When one of the parties has brought an action to enforce the instrument he cannot subsequently ask for its reformation.

84)   Will – is an act whereby a person is permitted with the formalities prescribed by law to control to a certain degree the disposition of his estate, to take effect after his death.

CHAPTER 5 – INTERPRETATION OF CONTRACTS

85)   Interpretation of a contract – is the determination of the meaning of the terms or words used by the parties in their contract.

86)   Literal Meaning Rule – contracts which are the private laws of the contracting parties should be fulfilled according to the literal sense of their stipulations. If the terms of a contract are clear and unequivocal, the parties are bound thereby.

87)   Evident Intention Rule – where the words and clauses of a written contract are in conflict with the manifest intention of the parties, the latter shall prevail over the former.
As a rule, where in a contract there are general and special provisions covering the same subject matter, the latter control over the former when the two cannot stand together.
If a word is susceptible of two or more meanings, it is to be understood in that sense which is most in keeping with the nature and object of the contract in line with the cardinal rule that the intention of the parties must prevail.

88)   Contemporaneous act rule – where the parties have placed an interpretation to the terms thereof by their conduct, as by acts in partial performance, such interpretation may be considered by the court in determining its meaning and ascertaining the intention of the parties when such intention cannot clearly be ascertained from the words used in their contract.

89)   Effectual Rule – when an agreement is susceptible of several meanings, one of which would render it effectual, it should be given that interpretation. Thus, if one interpretation makes a contract valid and the other makes it illegal, the former interpretation is one which is warranted by the rule stated in Art. 1373.

90)   Contextual Rule – a contract must be interpreted as a whole and the intention of the parties is to be gathered from the entire instrument and not from particular words, phrases, or clauses. All provisions should, if possible, be so interpreted as to harmonize with each other.

91)   Usage and customs rule – the usage or custom of the place where the contract was entered into may be received to explain what is doubtful or ambiguous in a contract on the theory that the parties entered into their contract with reference to such usage or custom. It is however necessary to prove the existence of usage or custom.

92)   Obscurity Rule – A written agreement should, in case of doubt, be interpreted against the party who has drawn it, or be given an interpretation which will be favorable to the other who, upon the faith of which, has incurred an obligation.

 CONTRACTS (Enumeration)

Chapter 1 – General Provision

1)      Limitations on contractual stipulations

·         Law – it is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute.

·         Police Power – when there is no law in existence or when the law is silent, the will of the parties prevails unless their contract contravenes the limitation of morals, good customs, public order, or public policy.

2)      Classification of contracts according to its name or designation

·         Nominate contract

·         Innominate contract

3)      Kinds of innominate contract

·         Do ut des

·         Do ut facias

·         Facto ut des

·         Facto ut facias (only innominate left)

4)      Rules governing innominate contracts

·         The agreement of the parties

·         The provisions of the Civil Code on obligations and contracts

·         The rules governing the most analogous contracts

·         The customs of the place

5)      Persons affected by a contract

·         General rule – contract takes effect only between the parties, their assigns and heirs.

·         Exceptions – cases when a contract are effective only between the parties are when the rights and obligations arising from the contract are not transmissible: a) by their nature; b) by stipulation; c) by provision of law

6)      Cases when third persons may be affected by a contract

·         In contracts containing a stipulation in favor of a third person (stipulation pour autrui)

·         In  contracts creating real rights

·         In contracts entered into to defraud creditors

·         In contracts which have been violated at the inducement of the third person

7)      Classes of stipulation pour autrui

·         Donee beneficiary – stipulation is intended for the sole benefit of third person.

·         Creditor beneficiary – an obligation is due from the promise to the third person which the former seeks to discharge by means of such stipulation, as, for instance, where a transfer of property is coupled with the purchaser’s promise to pay a debt owing from the seller to a third person.

8)      Requisites of stipulation pour autrui

·         The contracting parties by their stipulation must have clearly and deliberately conferred a favor upon a third person

·         The third person must have communicated his acceptance to the obligor before its revocation by the obligee or the original parties

·         The stipulation in favor of the third person should be a part, not the whole, of the contract

·         The favorable stipulation should not be conditioned or compensated by any kind of obligation whatever

·         Neither of the contracting parties bears the legal representation or authorization of the third party for otherwise the rules on agency will apply

9)      Classification of contracts according to perfection

·         Consensual Contract

·         Real Contract

·         Solemn Contract

10)   Stages in the life of a contract

·         Preparation or conception

·         Perfection or birth

·         Consummation or termination

11)   Effect of perfection of the contract

·         They are bound to the fulfillment of what has been expressly stipulated

·         They are bound to all the consequences which according to their nature, may be in keeping with good faith, usage and law.

12)   When a person is bound by the contract of another

·         The person entering into the contract must be duly authorized, expressly or impliedly, by the person in whose name he contracts or he must have, by law, a right to represent him.

·         He must act within his power

Chapter 2

General Provisions

13)   Art. 1318. There is no contract unless the following requisites concur:

·         Consent of the contracting parties

·         Object certain which is the subject matter of the contract

·         Cause of the obligation which is established

14)   Classes of elements of a contract

·         Essential Elements – those without which no contract can validly exist. They are also known as requisites of a contract. They may be subdivided into:

Ø Those common to all contracts, namely, consent, object, and cause

ØThose not common to all contracts

·         Natural Elements – those that are presumed to exist in certain contracts unless the contrary is expressly stipulated by the parties, like warranty against eviction or warranty against hidden defects in sale

·         Accidental elements – the particular stipulations, clauses, terms, or conditions established by the parties in their contract, like conditions, period, interest, penalty, etc.

Section 1 – Consent

15)   When offer becomes ineffective

·         Death

·         Civil Interdiction

·         Insanity

·         Insolvency

16)   Other grounds which render offer ineffective

·         Failure to comply with the condition of the offer as to time, place and the manner of payment

·         Expiration of the period fixed in the offer for acceptance

·         Destruction of the thing due before acceptance

·         Rejection of the offer

17)   The following cannot give consent to a contract

·         Unemancipated minors

·         Insane or demented persons, and deaf-mutes who cannot read and write

18)   Defective Contracts Examples:

·         Unauthorized Contract – Unenforceable

·         Contract where one of the parties is incapable of giving consent to a contract – Voidable

·         Contracts entered in state of drunkenness and hypnotic spell – voidable

·         Absolutely simulated or fictitious contracts - void

19)   Temporary insanity

·         Drunkenness

·         Hypnotic Spell

20)   Incapacity subject to modifications

·         When necessaries such as food, are sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefore.

·         A minor may contract for life, health and accident insurance, provided the insurance is taken on his life and the beneficiary appointed is the minor’s estate or the minor’s father, mother, spouse, brother or sister.

·         A contract is valid if entered into through a guardian or legal representative.

·         A contract is valid where the minor misrepresented his age and convincingly led the other party to believe in his legal capacity.

·         A contract is valid where a minor voluntarily pays a sum of money or delivers a fungible thing in fulfillment of his obligation thereunder and the obligee has spent or consumed it in good faith.

21)   Incompetents and may be placed under guardianship

·         Persons suffering the accessory penalty of civil interdiction

·         Hospitalized lepers

·         Prodigals

·         Deaf and dumb who are unable to read and write

·         Those who are of unsound mind even though they have lucid intervals

·         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 easy prey for deceit and exploitation.

22)   Characteristics of consent

·         It is intelligent – there is capacity to act

·         It is free and voluntary – there is no vitiation of consent by reason of violence or intimidation

·         It is conscious or spontaneous – there is no vitiation of consent by reason of mistake, undue influence, or fraud.

23)   Vices of consent

·         Error or mistake

·         Violence or force

·         Intimidation or threat or duress

·         Undue influence

·         Fraud or deceit

24)   Mistake of fact to which law refers

·         The substance of the thing which is the object of the contract

·         Those conditions which have principally moved one or both parties to enter into the contract

·         The identity or qualifications of one of the parties provided the same was the principal cause of the contract

25)   Mistake of fact which does not vitiate consent

·         Error as regards the incidents of a thing or accidental qualities thereof

·         Mistake as to quantity or amount

·         Error as regards the motives of the contract

·         Mistake as regards the identity or qualifications of a party

26)   Requisites for the application of Article 1334

·         The error must be mutual

·         It must be as to the legal effect of an agreement

·         It must frustrate the real purpose of the parties

27)   Requisites of Intimidation or threat

·         It must produce a reasonable and well-grounded fear of an evil

·         The evil must be imminent and grave

·         The evil must be upon his person or property, or that of his spouse, descendants, or ascendants

·         It is the reason why he enters into the contract

28)   Factors to determine degree of intimidation

·         Age

·         Sex

·         Condition of the person

29)   Circumstances to be considered in undue influence

·         Confidential, family, spiritual and other relations between the parties

·         Mental weakness

·         Ignorance

·         Financial distress

30)   How causal fraud committed

·         Insidious words

·         Machinations

·         Concealment

31)   Requisites of causal fraud

·         There must be misrepresentation or concealment

·         It must be serious

·         It must have been employed by only one of the contracting parties

·         It must be made in bad faith

·         It must have induced the consent of the other contracting party

·         It must be alleged and proved by clear and convincing evidence

32)   Expression of opinion tantamount to fraud

·         It must be made by an expert

·         The other contracting party has relied on the expert’s opinion

·         The opinion turned out to be false or erroneous

33)   Requisites of Causal Fraud

·         It should be serious

·         It should not have been employed by both contracting parties or they should not be in pari delicto

·         It should not have been known by the other contracting party

34)   Kinds of Simulation

·         Absolute simulation

·         Relative Simulation

Section 2 – Object of Contracts

35)   Kinds of object of contract

·         Things

·         Rights

·         Services

36)   Requisites of things as object of contract

·         The thing must be within the commerce of men, that is, it can legally be the subject of commercial transaction

·         It must not be impossible, legally or physically

·         It must be in existence or capable of coming into existence

·         It must be determinate or determinable without the need of a new contract between the parties

37)    Requisites of services as object of  contract

·         The service must be within the commerce of men

·         It must not be impossible, physically or legally

·         It must be determinate or capable of being made determinate

38)   Validity of contracts upon future inheritance

·         In the case of donations by reason of marriage between future spouses with respect to their future property to take effect, only in the event of death, to the extent laid down by law in testamentary succession.

·         In case of partition of property by act inter vivos by a person

Section 3 – Cause of Contracts

39)   Classification of contracts according to cause

·         Onerous – the cause of which for each contracting party is the prestation or promise of a thing or service by the other.

·         Remuneratory – the cause of which is the service or benefit which is remunerated. The purpose of the contract is to reward the service that had been previously rendered by the party remunerated.

·         Gratuitous – the cause of which is the mere liberality of the benefactor or giver.

40)   Cause distinguished from motive

·         Cause is the immediate or direct reason, while motive is the remote or indirect reason

·         Cause is always known to the other contracting party, while motive may be unknown

·         Cause is an essential element of a contract, while motive is not

·         The illegality of the cause affects the validity of a contract, while the illegality of one’s motive does not render the contract void.

41)   Requisites of cause

·         It must exist at the time the contract is entered into

·         It must be lawful

·         It must be true or real

42)   Effect of Lesion

·         General Rule – lesion or inadequacy of cause does not of itself invalidate a contract.

·         Exceptions – it will invalidate a contract when there has been fraud, mistake or undue influence and in cases specified by law (art. 1381)

CHAPTER 3 – FORM OF CONTRACTS

43)   Classification of contracts according to form

·         Informal or common contract – may be entered into whatever form as long as the essential elements are met.

·         Formal or solemn contract – required by law for its efficacy to be in a certain specified form.

44)   Form for validity of contract

·         Donation of real property – it must be in a public instrument

·         Donation of personal property the value of which exceeds P5000 – the donation and acceptance must be in writing

·         Sale of land through an agent

·         Stipulation to pay interest

·         Contract of partnership

45)   Form for the convenience of the parties

·         Creation of real rights over immovable property

·         Cession or renunciation of hereditary rights or those of conjugal partnership of gains

·         Power to administer property

·         Cession of actions or rights proceeding from an act appearing in a public document

CHAPTER 4 – REFORMATION OF INSTRUMENTS

46)   Requisites of reformation

·         There is a meeting of the minds of the parties to the contract

·         The written instrument does not express the true agreement or intention of the parties

·         The failure to express the true intention is due to mistake, fraud, inequitable conduct, or accidents

·         The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings

·         There is clear and convincing evidence of the mistake, fraud, inequitable conduct, or accident

47)   Mutual mistake as basis for reformation

·         The mistake must be of fact

·         Such mistake must be proved by clear and convincing evidence

·         The mistake must be mutual that is, common to both parties to the instrument

·         The mistake must cause the failure of the instrument to express their true intention
(If the mutual mistake of law, the remedy is annulment)

48)   Art. 1366. There shall be no reformation in the following cases:

·         Simple donations inter vivos wherein no condition is imposed

·         Wills

·         When the real agreement is void

49)   Party entitled to reformation

·         Either of the parties, if the mistake is mutual

·         In all other cases, the injured party

·         The heir or successors in interest, in lieu of the party entitled
The effect of reformation is retroactive from the time of execution of the original contract.

CHAPTER 5 – INTERPRETATION OF CONTRACTS

50)   Eight General Rules in Contract Interpretation

·         Literal Meaning Rule

·         Evident intention rule

·         Contemporaneous act rule

·         Effectual Rule

·         Contextual Rule

·         Usage and customs rule

·         Obscurity Rule

·         Last Resort Rule

51)   Last resort rule

·         If the doubts refer to incidental circumstances of a gratuitous contract, such interpretation should be made which would result in the least transmission of rights and interests.

·         If the contract in question is onerous, the doubts should be resolved in favor of the greatest reciprocity of interests.

·         If the doubt refers to the principal object of the contract and such doubt cannot be resolved thereby leaving the intention of the parties unknown, the contract shall be null and void.

·         If there is doubt in a contract of sale, which is essentially onerous, the same shall be settled in favor of the greatest reciprocity of interests.