Oblicon Reviewer

CONTRACTS

Article 1305. DEFINITION

Contract- is a meeting of the minds betweentwo persons whereby one binds himself to give something or rendersome service.

- there must be at least two persons or parties

DISTINGUISHED FROM OBLIGATION.

Contract is one of the sources of obligation (1157), while obligationis a legal tie that exists after a contract is entered into.

NO CONTRACT = NO OBLIGATION. But anObligation may exist without a Contract.

DISTINGUISHED FROM AGREEMENT.

Contract are enforceable agreementsthrough legal proceedings. All contracts are agreement but not vice versa.

STAGES

1. Preparation – all the steps taken by the parties leading to theperfection of the contract. Partieshave not yet arrived to an agreement.

2. Perfection – when parties have come to an agreement or meeting of the minds

3. Consummation – when the parties have performed their respective obligations

CHARACTERISTICS OF CONTRACT

1. Autonomy (Art. 1306) – where there is a sense of freedom; contracting parties may establish contract as long as it is not contrary to law, public policy, morals.

Limitations:

1. Law – contract entered into mustconform to an applicable statute

2. Police power – contract shall not contravene morals, good customs, public order or policy.

2. Consensuality (Art. 1315, sent.1) – perfected by mere consent

* Classification of contracts according to perfection

1. consensual – like sale, lease, agency

Art. 1316*2. Real – perfected by DELIVERY ofthe thing

- those that are deposit (safe keeping), pledge (sanla), commodatum (pahiram).

3. Mutuality (Art. 1308) – that contract is binding to both parties

- a contract which its fulfillment or extinguishment is dependent uponthe will of ONLY ONE of the partiesis VOID.

- no party can renounce or violate the law of the contract without theconsent of the other

4. Obligatoriness (Art. 1315) – contract is complied with good faith (Art. 1157)

- parties are also bound to all theconsequences

5. Relativity (Art. 1311) –

GENERAL RULE: Contracts take effectonly between the PARTIES, their ASSIGNS and HEIRS

EXCEPTIONS:

*STIPULATION POUR AUTRUI

1. If the contract has STIPULATION2. re IN FAVOR of a THIRD person3. the contracting parties has CLEAR AND DELIBERATE CONFERMENT OF SUCH FAVOR upon the third person4. Third person COMMUNICATED his acceptance to such stipulation

stipulation pour autrui is a stipulation in a contract clearly and deliberately conferring a favorupon a third person who has a rightto demand its fulfillment provided he communicates his acceptance to such.

Classes of stipulations pour autrui:

1. those intended for the sole benefit of a person

(ex. A leases a house and told C that ¼ of its rentals will be givento him (c) )

2. those where an obligation is duefrom the promise to the third person which former seeks to

discharge

EXAMPLE:

A owes P10,000.00 to B with a monthly interest of 14%. it was agreed upon that the P1,400 will begiven to S to whom B is indebted ofthe same amount.

ACCION DIRECTA

Art. 1313 – creditors are protectedin cases of contracts intended to defraud them

1. Lessor vs. sub lessors – Arts. 1651, 1652

Art. 1651 example:

A (lessor) leased B (lessee) a room. B find it too large for him, hence, he subsequently leased it toC (sub lessee; making B a sub-lessor). Hence, C will be liable for all the acts agreed upon originally by A and B with regards to the use and preservation of the thing leased.

2. Laborers/materialmen vs. Owner –Art. 1729

Example:

S (owner) hired X (contractor) who hired A and B (laborers) for the construction of S's building.

If X do not pay A and B their compensation, A and B and go after S.

3. Negotorium gestio – Arts. 2150, 2151

example:

A and B are two land owners. A was out of town. There came a raging storm. B, a generous neighbor, takes care of A's land while the latter's away. So B can reimburse to A to whatever laibility.

4. Article 1314

*example ni Sir, A is the exclusivedistributor ng Nike Shoes; while X,induces the contractor of A to alsoallow him sell Nike shoes in a lower price, without the knowledge/consent of A.

ARTICLE 1317 – UNAUTHORIZED CONTRACTS

– instance when the contract is entered into the name of another who is not the authorized person orrepresentative– Unenforceable in nature– but can be cured by ratification

Art. 1318 ESSENTIAL REQUISITES OF CONTRACTS- no contract unless the following elements are present:

1. CONSENT (Art. 1319)- conformity of the wills of both parties

– manifested by meeting of the offer and the acceptance

Offer – a proposal made by one party to another to enter into a contract.

Acceptance – manifestation by the

offeree of his assent to the terms of the title offer. Without it, no meeting of the minds.

Article 1320. Acceptance may be express or implied

Article 1321. the person making theoffer may fix the time, place and the manner of acceptance, all must be complied with.

Article 1322. If offer is made thruan agent, the offer is accepted from the time the same is communicated.

Article 1323. When does an offer becomes ineffective?

1. death2. civil interdiction3. insanity4. insolvency OF EITHER PARTY

Article 1324. CONTRACT OF OPTION; OPTION PERIOD; OPTION MONEY

– when the period of the offer's acceptance is certain, it is withdrawable until it is not yet accepted

Article 1325 and Article 1326. BUSINESS ADVERTISEMENTS NOT DEFINITE OFFERS, ONLY MERE INVITATION.

Who cannot give consent to a contract? (Article 1327).

1. unemancipated minors;

2. insane or demented persons;

3. deaf-mutes/illiterates

Article 1328.

– contracts entered into during lucid interval is VALID

– during drunkenness or hypnotic spell is VOIDABLE

ARTICLE 1330.Consent given thru MISTAKE (1331), VIOLENCE (1335 p.1), INTIMIDATION (1335, p.2/1336), UNDUE INFLUENCE (1337) OR FAUD (1338) is VOIDABLE!

ARTILE 1331. MISTAKE OR ERROR

– the false notion of thing or a fact material to the contract

Mistake of fact to which law refers:

1. substance of the thing which is the object of the contract;

2. conditions which have principally moved one or both parties to enter into contract;

3. the identity of one of the parties provided in the same was the principal cause of the contract

ARTICLE 1332. BURDEN OF PROOF IN CASE OF MISTAKE OR FRAUD

– THE PARTY ENFORCING THE CONTRACT has the duty to show that there is no mistake or fraud on the terms ofthe contract

– if a party knew about the doubt, contingency or risk affecting the object of the contact, it is presumed that he was willing to take a chance (ARTICLE 1333).

ARTICLE 1334. MISTAKE OF LAW- arises from an ignorance of some provision of law, or from an erroneous interpretation of its meaning

– EFFECT: does not invalidate consent

– APPLICATION:

1. when the error is mutual2. it must be as to the legal effect of an agreement3. it must frustrate the real purpose of the parties

ARTICLE 1335. VIOLENCE & INTIMIDATION TO VITIATE CONSENT

Violence – requires physical force

Intimidation – there is a reasonable and well-grounded fear of an evil that is imminent and grave upon a person or property so a person will enter into a contract

ARTICLE 1337. UNDUE INFLUENCE- when a person takes improper advantage of his power over the will of another

ARTICLE 1338. FRAUD

Causal fraud (dolo causante)- employed prior to or simultaneousto the consent or creation of the contract.

REQUISITES:

1. There must be MISREPRESENTATION (Art. 1338 – thru insidious words or machinations) or CONCEALMENT (Art. 1339 – failure to disclose facts).

2. It must be serious (Art. 1344)

- in order that fraud may make a contract VOIDABLE, it must be serious.

3. it must have been employed by only one of the contracting parties(Art. 1342)

* misrepresentation by a third person does not vitiate consent , unless it creates substantial mistake and the same is mutual.

4. it must be made in bad faith or with intent to deceive (Art. 1343)

5. it must have induced the consentof the other contracting party

(Art. 1338)

6. it must be alleged and proved byclear and convincing evidence

FRAUD BY CONCEALMENT(Art. 1339)

- a neglect or failure to communicate that which a party to acontract knows and ought to communicate constitute concealment.

- when this arises, the injured party has the right to rescind or annul the contract

Art. 1341 - Expression of opinion

- a mere expression of opinion doesnot signify consent, unless made byan expert and the other party has relied on the former's special knowledge

TWO KINDS OF FRAUD IN MAKING OF A CONTRACT (Art. 1344)

1. causal fraud – which may be a ground for annulment of a contract,but also gives rise for action for damages2. incidental fraud – renders only the party who employs it liable fordamages (Art. 1344, par. 2)

Art. 1170 – refers to incidental fraud (dolo incidente)

- Committed in the performance of an obligation (at the stage of consummation)

- Ex. When you were shown a pendant and it looked real soyou entered into buying it but the seller gave you a fake pendant instead.

It is comparable to causal fraud (dolo causante, Art. 1338) - means a fraud employed in the execution of contract which vitiates consent and makes the contract voidable- the other party is induced by word to enter into the contract (happens at the stage of perfection)

SIMULATION OF A CONTRACT (Art. 1345)

- the act of deliberately deceivingother, by feigning or pretending byagreement, the appearance of a contract which is neither inexistent or concealed.

KINDS:

1. Absolute – when the contract does ot really exist and the parties do not intend to be bound at all.

Ex.

D is indebted to C. Upon learning that C is going to enforce his credit, D pretended to sell his land to F. D did not receive any single centavo for the transaction and he continued in possession of the land as the contract was merelysimulated or fictitious.

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

Ex.C and D entered into a contract of mortgage. But wanting to hide the mortgage, it was made to appear in

the form of deed of sale.(Example ni Sir about sa kotse na kukunin din ng creditor, ibabalik lng pag nagbayad si debtor)

OBJECT OF A CONTRACT(Art. 1347)

- the subject matter- the object of every contract isthe obligation created

KINDS OF OBJECT IN A CONTRACT:

1. Things (like sale)

2. Rights (like assignment orcredit)

3. Services (like agency)

Requisites of THINGS as Object of acontract

1. must be within the commerce ofmen2. must not be impossible3. must be in existence or capableof4. must be determinate (notgeneric)

Requisites of SERVICES as Object

1. must be within the commerce ofmen2. must not be impossible3. must be determinate

RIGHTS as Object

GEN RULE: All rights may be theobject of a contract.

EXCEPTION:

When they are transmissible by

their nature, stipulation orprovision of law (1311).

Ex.

1. things outside of commerce ofmen – like things of publicownership (sidewalks, bridges,streets)

FUTURE INHERITANCE (1347, par. 2)

- any property or right, not inexistence at the time of thecontract, that a person may inheritin the future.

- unless expressly stipulated bylaw, contract concerning futureinheritance is VOID.

- inheritance ceases to be infuture upon death of the decendant

IMPOSSIBLE THINGS cannot be OBJECTof a contract (1348)

1. Physical – when the thing orservice in the very nature ofthings cannot exist

a. Absolute – when the actcannot be done in any case(ex.flying)

b. Relative – when it arisesfrom the special circumstance ofthe case (ex. To make payment to adead person)

2. Legal – when the thing orservice is contrary to publicmorals, law, good customs, publicorder or policy (ex. Sellingprohibited drugs)

EFFECT:

Absolute – nullifies the contract

Relative – if temporary, does notnullify the contract; if permanent,it annuls the contract

Art. 1349 The object of a contractmust be determinate as to its KINDbut the quantity need not bedeterminate.

CAUSE OF CONTRACTS (1350)

Causa – the essential or moreproximate purpose which contractingparties have in view at the time ofentering into a contract

CLASSIFICATION OF CONTRACTACCORDING TO CAUSE

1. Onerous- one the cause of which , for eachcontracting party, is the

prestation or promise of a thing orservice by the other.

- in this contract, both partiesare obligated to each other

Ex. B & E signed a document whichin effect stated that if T wasallowed to live with them, and Tshould marry or leave them, shewould receive ½ of their property.

Should the contract be giveneffect? YES. Because the contractis more of a donation con causeonerosa which means it is governedby the provisions of the Civil Coderelating to contracts.

2. Renumenatory – one the cause ofwhich is the service or benefitwhich is renumerated. The purposeis to give reward the service thathad been previously rendered by theparty renumerated.

3. Gratuitous – one the cause ofwhich is the mere liberality of thebenefactor or giver such ascommodatum, pure donation and thelike.

Art. 1351 – Motive- purely personal or private reasonwhich a party has in entering intoa contract

CAUSE MOTIVEJuridicalreason of acontract

Psychologicaland purelypersonal reason

Direct reason Indirect reasonAlways known tothe othercontracting

May be unknown

partyEssentialelement of acontract

Not anessentialelement

Affects thecontract'svalidity

Does not renderthe contractvoid

Art. 1352. Requisites of Cause

1. It must exist (no cause, noeffect)

2. it must be lawful – not contraryto law, moral, xxx (Art. 1354)

3. It must be true (Art. 1353)

Effect of absence of cause- contracts without cause confersno right and produce no legaleffect

Effect of inadequacy ofcause/failure of cause- does not render a contract void

Ex. failure to pay the full amountstipulated in a contract does notnullify the contract immediately.

Effect of Illegality of cause- makes the contract null and voidEx. A promise of marriage basedupon carnal connection

Effect of falsity of cause (Art.1353)- “statement of a false cause incontracts shall render them void,if it should not be proved thatthey were founded upon anothercause which is true and lawful”.

- the contract is void because thesame actually does not exist

Ex. X promised to give Y P1,000.00as payment for the past servicesallegedly rendered by Y which intruth have not been rendered. Here,the cause of X, which is therenumeration, is erroneous as it isbased upon facts believed to beexisting but really inexistent.

Is it necessary for the cause to beexpressly stated?

- No. In such instance, thepresumption is that the causeexists and is lawful, unless thedebtor proves the contrary (Art.1354)

LESION (Art. 1355)- any damage caused by the factthat the price is unjust orinadequate

Gen. Rule – does not invalidate thecontractExp. - when there has been fraud,mistake or undue influence / or incases specified by law.NOTE: Lumalabas sa exam

Various incidents of causalincidents in a contract:

1. non-existent cause- VOID (1352, 1st part)

2. False cause in an ABSOLUTELYsimulated contract- VOID (1346, 1353)

3. False cause in a RELATIVELYsimulated contract- parties are bound to their realagreement (1346, 1353)-what is their remedy? REFORMATION(1359)

4. Inadequate cause (1355)- ex. Nagbenta ka ng lupa worth 1M,binenta mo ng 100k or 1/10 of itsvalue- shall not invalidate contractunless there's fraud. Mistake orundue influence- REMEDY: Reformation (1470)- legal basis para maghabol angcreditor – Art. 1381

5. Failure of cause- if the seller failed to realizethe price or does not deliver thething to buyer = BREACH-REMEDY: Rescission

FORM OF CONTRACTS

Form of a contract – the manner inwhich a contract is executed.

- maybe in oral, writing or partlyoral and partly in writing.

- if in writing, it may be in apublic or private instrument- all its terms must be in writing

GENERAL RULE: Contracts may be inany form as long as the threeessential elements are present

WHEN IS FORM NECESSARY?

**EXCEPTIONS to the Gen. Rule:

1. When the law requires a certainform for it to be valid.

Ex.

Donation of real property – publicinstrumentDonation of personal property – inwritingSale of land thru an agent – inwritingContract of antichresis – inwritingstipulation to pay interest – inwriting, otherwise, no interest duecontract of partnership – in apublic instrumenytransfer of sale of large cattle –registered; in a public instrumentnegotiable instruments – in writing

2. when the law requires form forit to be enforceable (Art. 1403,p.2)- if the contract is not inwriting, it is valid but it cannotbe proved and cannot be enforcedunless ratified.

3. when form is required for it tobe convenient to the parties or for

the third party (Art. 1357).- an action that can be used byparties to compel each other tofollow a certain form of theircontract for their own conveniences

Art. 1358 – Documents that mustappear in a public document

REFORMATION OF INSTRUMENTS(Art. 1359)

Reformation – remedy by means ofwhich a written instrument isamended or rectified so as toexpress the real agreement when byreason of fraud, mistake or undueinfluence fails to express suchtrue intention

REQUISITES:- for reformation to be availed ofas remedy, the following should bepresent:

1. there is meeting of the minds ofthe parties;

2.written instrument that does notexpress the true agreement;

3. failure to express trueintention due to fraud, mistake,inequitable conduct or accident;

4. the relief are put in issue bythe pleadings; and,

5. there is a clear and convincingevidence of mistake, fraud, xxx.

INSTANCES when reformation is theremedy:

1. mutual mistake (1361)- when both parties causes thefailure of the instrument to

disclose their real agreement

2. unilateral mistake (1362)

3. concealment (1363)- when one party was mistaken andthe other knew that the instrumentdid not state their real agreementbut concealed it to the former.

4. mistake by a third party (1364)- when thru ignorance, lack ofskill, negligence or bad faith onthe part of the third persondrafting the instrument and thelatter does not express the trueagreement

ex. stenographer had a mistake intyping the records of the trial

5. mortgage or pledge as a sale(1365)- when two parties agreed upon themortgage or pledge of real propertybut the instrument states that theproperty is sold with right ofrepurchase.

WHEN IS REFORMATION NOT ALLOWED?(Art. 1366)

In cases of:1. simple donations2. wills3. when the real agreement is void

INTERPRETATION OF CONTRACTS

- determination of the meaning ofthe terms used by the parties intheir contract- involves a question of law

- if the language is clear, thecontract is interpreted in itsliteral meaning (Art. 1370)

- Evident intention of partiesprevail over the terms of contract

- in judging the intention of thecontracting parties, theircontemporaneous and subsequent actsshould be principally considered(1371)

- special intent prevails generalintent (1372)ex. S sold his house “including allthe furniture therein”. The term“all” should not be understood toinclude S' refrigerator which isdistinct from “furniture”.

- in contracts with stipulationwith several meanings, it shall beunderstood as bearing the importwhich is most adequate to render iteffectual (1373)

- various stipulations of acontract shall be interpretedtogether, jointly (1374)

- words which may have differentsignifications shall be understoodin that which is most in keepingthe nature and object of thecontract. (1375)

- resort to custom or usage as aidin interpretation of the contract(the usage or custom where thecontract was entered into) 1376

- the interpretation of obscurewords or stipulations in a contractshall not favor the party whocaused the obscurity (1377)

Rules in case of doubts areimpossible to settle(1378)

1. when despite application of thepreceding rules, certain doubtsstill exist, such will be resolvedin accordance with thesupplementary rules like the leasttransmission of rights andinterests shall prevail.

ex. R gave his car to E, it is notclear whether it is commodatum ordonation. Hence, it should bepresumed as mere commodatum becauseit would transmit lesser rightsthan a donation.

2. if the doubts are cast upon theprincipal object in such a way thatit cannot be known what may havebeen the intention of the parties,the contract shall be NULL AND VOID(1378, par. 2)

RESCISSIBLE CONTRACTS (Art. 1380)

Rescission – a remedy granted bylaw to the contracting parties andsometimes even to third persons inorder to secure reparation ofdamages caused them by a validcontract, by means of therestoration of things to theircondition prior to the celebrationof said contract.

Rescissible contracts – thosevalidly agreed upon because all theessential elements exist but in thecases established by law, theremedy of rescission.

Requisites of Rescission

1. the contracting parties must bevalidly agreed upon (1380)

2. there must be lesion to one ofthe parties or to a third person(1381)

* contracts that are rescissible:

1. contracts entered into in behalfof wards, the latter suffered ¼ ofthe value of the object

ward – a person under guardianshipby reason of some incapacity.

Ex. G is the guardian of W. G sellsthe property of W worth P20,000.00for only P15,000.00. The contractof sale cannot be rescinded becausethe lesion is not more than ¼ ofthe value. However, if the propertyis sold for less than P15,000, Wcan rescind the sale by properaction in court.

2. Contracts agreed upon inrepresentation of absentees; thelatter suffered ¼ of the value ofthe object

- Absentee – a person whidisappears from his domicile, hiswhereabouts unknown

**In nos. 1 & 2, when the contractentered into is approved by thecourt, rescission cannot take placebecause it is valid whether thereis lesion or not (1386).

3. Contracts undertaken in fraud ofcreditors- in order for this instance be aground, the following must bepresent:

1. there must be a credit prior tothe contract to be rescinded;

2. there must be fraud on the partof the debtor which may be presumedor proved;

3. the creditor cannot recover hiscredit in any other manner;debtor's insolvency is notrequired.

4. contracts which refer to thingsunder litigation- Ex. S sues B for the recovery ofa parcel of land. In this case, theland is a “thing under litigation”.Hence, if during the pendency ofthe case, B sells the land to Cwithout S approval, the sale isrescissible by S.

5. Other instances

RESCISSION FOR BREACH OF CONTRACTversus RESCISSION BY REASON OFLESION

1. Rescission on account of breachis not predicated on injury toeconomic interests but on thebreach of faith by the defendantthat violates the reciprocitybetween the parties. It is not asubsidiary action.

2. On the other hand, rescission byreason of lesion, the cause ofaction is subordinate to theexistence of the prejudice.

Art. 1382 Payments made in thestate of insolvency are rescissible

- a debtor is insolvent if he doesnot have sufficient properties tomeet his obligations.Art. 1383. The action forrescission is subsidiary, it cannotbe instituted except when the party

suffering damage has no other legalmeans to obtain reparation

Art. 1384. Rescission shall only beto the extent necessary to coverthe damage caused.

Ex. G, guardian of M, a minor,authorized by the court to sell 2parcels of land valued at P200keach. G sold the 2 lands for onlyP200k. In this case, the entirecontract need not be rescinded,rescission can only be applied toone parcel of land to cover thedamage caused by G.

Art. 1385 EFFECT OF RESCISSION

1. Obligation of mutual restitution- when the parties declare acontract to be rescinded, theparties must return to each other(a) the object of the contract withits fruits and (b) the pricethereof with legal interest.

2. Abrogation of contract- the party seeking rescissioncannot ask performance as to partand rescission as to remainder

WHEN RESCISSION IS NOT ALLOWED?

1. If the party who demandsrescission cannot return what he isobliged to restore under thecontract (1385, p.1)

2. if the property is legally inpossession of a third person whoacted in good faith (1385, p.2)

Art. 1387. Alienation presumed infraud of creditors

- the provision establishes fraudin case of alienation of propertyby the debtor.

- the presumption applies only whenthere has been an alienation ortransfer, whether gratuitous oronerous.

- only actual creditors can askrescission.

Ex.

1. alienation by gratuitous title- R made a donation of parcel ofland to E. before the date of thedonation, R contracted severaldebts. With the donation to E, theremaining property of R is notsufficient to pay all his debts.Hence, the said donation ispresumed fraudulent unlessotherwise proved.

Art. 1388 Liability of purchaser inbad faith

- whoever acquires in bad faith thethings alienated in fraud ofcreditors, shall indemnify thelater for damages suffered by themon account of alienation.

- if there are two or morealienations, the first acquirershall be liable first, and so onsuccessively.

Ex. S sold his car to B in order toavoid the payment of his debt to C,his creditor. B knew of S'spurpose. If the sale is rescinded,B must return the car.

Art. 1389 Prescription period forRescission

- the action to claim rescissionmust be commented within four (4)years.- the period shall be counted fromthe time the creditor has known thecontract.

- for persons under guardianshipand absentees, the period of fouryears shall not begin until thetermination of the former'sincapacity, or until the domicileof the latter is unknown.

Persons entitled to bring theaction:1. injured party or the defraudedcreditor2. his heirs, assigns, orsuccessors in interest3. creditors of the above entitledto subrogation

VOIDABLE CONTRACT(Art. 1390)- are those which possess all theessential elements of a validcontract but there is defect as tothe consent.- binding unless properly annulledand can be cured by ratification

*the following contracts arevoidable or annullable, even thoughthere may have been no damage tothe contracting parties:

1. those where one of the partiesis incapable of giving consent to acontract;

2. those where the consent isvitiated by mistake, violence,intimidation, undue influence orfraud.

**ANNULMENT – remedy granted bylaw, for reason of public interest,for the declaration of inefficacyof a contract based on a defect orvice in the consent.

Art. 1391. the action for annulmentshall be brought within four (4)years.

This period shall begin:

In case of: Start ofperiod:

Intimidation,violence orundue influence

From the timeof the defectof the consentCEASES

Mistake orfraud

From the timeof thediscovery ofthe same*

Action enteredinto by minorsor otherincapacitatedpersons

From the timetheguardianshipceases

*discovery of fraud must be reckonedto have taken place from theexecution of the contract

Art. 1392 – RATIFICATION- ratification extinguishes theaction to annul a voidable contract

Art. 1393 – Express or impliedratification

express – when the ratification ismanifested in words or writing

implied – it may take in diverseforms

Requisites of implied ratification

1. there must be knowledge of thereason which renders the contractvoidable

2. such reason must have ceased

3. the injured party must haveexecuted an act which necessarilyimplies an intention to waive hisright.

Ex. S, a minor, sold his land to B.upon reaching the age of majority,S, with full knowledge of hisrights in the premises, instead ofrepudiating the contract, collectedthe unpaid balance of the purchaseprice from B. There is a tacitratification by S.

Art. 1394 Who may effectratification?

1. In a contract entered into by anincapacitated person:- guardian, or- the injured party himselfprovided he is already capacitated

2. party whose consent is vitiated

Art. 1395. conformity of guiltyparty to ratification is notrequired

Art. 1396. Effect of ratification

- ratification cleanses thecontract from all its defects fromthe moment it is constituted

Ex. B forced S to sell the latter'shorse. Later, the horse gave birthto a colt. If S should ratify thecontract after the birth of thecolt, who is entitled to the colt?

- B, because ratification has aretroactive effect. It validatesthe contract from the date of itsexecution.

Art. 1397. Party entitled to bringaction to annul1. the plaintiff must have aninterest in the contract2. the victim and not the guiltyparty is the person who must assertthe same.

Rights of successors-in-interest tobring an action- he can sue for the annulment ofcontract

Right of strangers to bring anaction – no legal capacity tochallenge the validity of thecontractArt. 1398 duty of mutualrestitution upon annulment

- if the contract is annulled, theparties must restore to each otherthe subject matter of the contractwith its fruits and the pricethereof with legal interest.

- in obligations to render service,the value thereof shall be thebasis for damages

Art. 1399. person who is not

obliged to any restitution

- when the defect of the contractconsists in the incapacity of oneof the parties, the incapacitatedperson is not obliged to make anyrestitution

except: insofar as to what he hasbeen benefited by the thing orprice received by him

Art. 1400. effect of loss of thingto be returned

- if the thing to be returned islost without the fault o the personobliged to make restitution, thereis no more obligation to returnsuch thing.

- if it is lost through his fault,his obligation is not extinguishedbut is converted into an indemnityfor damages consisting of the valueof the thing at the time of theloss with interest with fruits.

Ex. S sold his plow carabao to B.on the petition of S, the contractwas annulled by the court. But thecarabao died in the possession of Bthru his fault. Is B liable?

Yes, under art. 1400, B must paythe value of the carabao at thetime of his death, with interestfrom the same date.

Art. 1401. Extinguishment of actionfor annulment

- if the person who has the rightto institute an action will not beable to restore the thing he isobliged to return because the thingis lost thru his fraud or fault

- if the right of action is basedupon the incapacity of any one ofthe contracting parties, the lossof the thing shall not be anobstacle to the success of theaction

except: if the said loss took placethrough the fraud or fault of theplaintiff

Art. 1402 effect where a partycannot restore what he is bound toreturn

- when a contract is annulled,reciprocal obligation ofrestitution is created.

- in effect, there will be noannulment if the party cannotrestore what he is bound toreturn.

- however, if the party who lostthe thing through a fortuitousevent offers to pay its valuewith the fruits received if any,the other can be required tomake restitution.

Ex. B forced S to sell thelatter's horse. The contract wasannulled by the court at theinstance S.

* If the horse died through thefault of B, Article 1400governs.* if the horse died due tofortuitous event, S can refuseto return the purchase price.* but if B offers to pay thevalue of the horse at the time

of its death, he can compel S toreturn the price with theinterest.

UNENFORCEABLE CONTRACTS(Art. 1403)

- those that cannot be enforcedin court or sued upon by reasonof defects provided by law untiland unless they are ratifiedaccording to law.

- unenforceable contracts,although valid, areunenforceable unless ratified.

- cannot be enforced by legalaction

KINDS:

1. Those entered into in thename of another by one without

or acting in excess ofauthority;

2. those that do not comply withthe Statute of Frauds;

3. Those were both parties areincapable of giving consent.

UNAUTHORIZED CONTRACTS- those entered into in the nameof another person by one who hasbeen given no authority or legalrepresentation or who has actedbeyond his powers.

Art. 1405. Ratification

1. by failure to object to thepresentation of oral evidence toprove the contract – tantamountto a waiver and makes thecontract binding.

2. acceptance of benefits underthe contract.

Art. 1406. Right of a partywhere contract enforceable.

Art. 1407.

When unenforceable contractbecomes a voidable contract- where both parties to acontract are incapable of givingconsent, the contract isunenforceable.

- However, if the parent orguardian, or if one of theparties after regainingcapacity, ratifies the contract,it becomes voidable.

When unenforceable contractbecomes a valid contract

- if the ratification is made bythe parents or guardians of bothcontracting parties, or by bothcontracting parties afterregaining capacity, thecontracts is VALIDATED and itsvalidity retroacts to the timeit was entered into.

Art. 1408. Unenforceablecontracts cannot be assailed bythird persons

VOID OR INEXISTENT CONTRACTS(Art. 1409)

- those which, because ofcertain defects, generallyproduce no effect at all.- considered inexistent from thevery beginning

Inexistent contracts – refer toagreements which lack one orsome or all the elements whichare essential for the existenceof a contract

CHARACTERISTICS:

1. Cannot be ratified (1409,p.2)2. the right to set-up defenseof illegality cannot be waived3. the action for thedeclaration of inexistence doesnot prescribed4. the defense of illegality isnot available to the personswhose interests are not directlyaffected5. it cannot give rise to avalid contract

INSTANCES OF VOID OR INEXISTENTCONTRACTS

1. Contracts whose cause, objector purpose is contrary to law,etc.

2. Contracts which areabsolutely simulated orfictitious- a contract of sale is voidwhere the price, which appearsthereon as paid, has in factsnever been paid.

3. Contracts without cause orobject

4. Contracts whose object isoutside the commerce of men (seeArts 1347 and 1348)

5. Contracts which contemplatean impossible service (see Arts1347 and 1348)

6. Contracts where the intentionof the parties relative to theobject cannot be ascertained

7. Contracts expresslyprohibited or declared void bylawEx. 1. contracts upon futureinheritance2. sale of property betweenhusband and wife3. purchase of property bypersons who are speciallydisqualified by law (likeguardians, agents, etc.) becauseof their position or relation

with the person or propertyunder their care.

Art. 1410. action fordeclaration of inexistence of acontract does not prescribe

- also, necessity of judicialdeclaration is not needed

Art. 1411. Rules where contractis illegal and the actconstitutes criminal offense

1. where both parties re in paridelicto (in equal fault) :- both parties shall have noaction against each other- both shall be prosecuted- the things or the price of thecontract shall be confiscated infavor of the government

Art. 1412. Rules where contractis illegal but the act is not acriminal offense

1. where both parties in paridelicto:- neither party may recover whathe has given by virtue of thecontracts- neither party may demand theperformance of the other'sundertaking

WHEN PARI DELICTO RULE NOTAPPLICABLE?

1. Breach of warranty cases2. simulated contracts

Art. 1413. Interest paid inexcess of the interest allowed

by the usury laws may berecovered by the debtor, withinterest thereon from the dateof the payment.

Art. 1414. Recovery wherecontract for an illegal purpose- allows recovery by one of theparties even both parties haveacted contrary to law

1. the contract is for anillegal purpose;2. the contract is repudiatedbefore the purpose has beenaccomplished or before thedamage has been caused to athird person;3. the court considers thatpublic interest will besubserved by allowing recoveryArt. 1415. Recovery by anincapacitated person

- Exception to the Articles1411-1412.

- recovery can be allowed if oneof the parties is incapacitated

Ex. if X is a minor or an insaneperson, the court may allow X torecover the money paid if theinterest of justice so demands.

Art. 1416. Recovery wherecontract not illegal per se

- another exception to Arts.1411-12

Recovery is permitted when:1. the agreement is not illegalper se but is merely prohibited;

2. the prohibition is designedfor the protection of theplaintiff;3. public policy would beenhanced by allowing theplaintiff to recover

Art. 1417. Recovery of amountpaid in excess of ceiling price

Art. 1418. Recovery toadditional compensation forservice rendered beyond timelimit

Ex. when in a contract, thelaborer undertakes to worklonger than the maximum periodfixed, he may demand additionalcompensation.

Art. 1419. Recovery of amount ofwage less than minimum fixed

Art. 1420. Effect of illegalitywhere contract isindivisible/divisible

1. where the consideration isentire and single the contractis indivisible, so if the partof such is illegal, the wholecontract will be void.

2. where the contract isdivisible, only the illegalparts are void.

Art. 1421. Persons entitled toraise defense of illegality ornullity

*third person may avail defenseof illegality.

Art. 1422. Void contract cannotbe novated