Title II. - CONTRACTS 

CHAPTER 1 – CONTRACTS, GENERAL PROVISIONS

Article 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.

- 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

- It is a juridical convention manifested in legal form, by virtue of which, one or more persons (or parties) bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give , to do or not to do

- It is the agreement of two or more persons for the purpose of creating, modifying or extinguishing a juridical relation between them

Elements of a Contract- GR: written instrument is NOT necessarya. Essential Elements

Consent Subject matter or Object Cause or Consideration

Note: in some contracts form is also essential; still in others, delivery is likewise essential

b. Natural Elements Those found in certain contracts, and presumed

to exist, unless the contrary has been stipulated

c. Accidental Elements Stipulations that may be agreed upon by the

contracting parties in a contract. They may be present or absent, depending upon whether or not the parties have agreed upon them

Classifications of Contractsa. According to perfection or formation:

1. Consensual – perfected by mere consent2. Real – requires the 3 essential requisites plus

delivery3. Formal or solemn – those where special

formalities are essential before the contract may be perfected (ex. Donation inter vivos requires for its validity a public instrument)

b. According to cause or equivalence of the value of prestations:

1. Onerous – there is an interchange of equivalence valuable consideration

2. Gratuitous or lucrative – this is FREE, thus one party receives no equivalent prestation except a feeling that one has been generous or liberal

3. Remunerative – one prestation is given for a benefit or service that had been rendered PREVIOUSLY

c. According to importance or dependence of one upon another (according to their relation to other contracts)

1. Principal – contract may stand alone by itself, without the need of other contracts

2. Accessory – This depends for its existence upon another contract

3. Preparatory – the parties do not consider the contract as an end by itself, but as a means thru which future transaction or contracts may be made; lead to the execution of other contracts

d. According to the parties obliged1. Unilateral – only one of the parties has an

obligation2. Bilateral – both parties are required to render

reciprocal

e. According to their name or designation1. Nominate – given a particular or special name2. Innominate – contraltos innominados; not given

any special name

f. According to the risk of fulfillment 1. Commutative – parties contemplate a real

fulfillment; therefore, equivalent values are given

2. Aleatory – the fulfillment is dependent upon chance, thus the values vary because of the risk of chance (ex. Insurance)

g. According to the time of performance of fulfillment:1. Executed – one completed at the time the

contract is entered into2. Executory – one where the prestations are to be

complied with at some future time

h. According to Subject matter1. Involving Things2. Involving rights or credits (should be

transmissible)3. Involving services

i. According to Form1. Common2. Special

j. According to Purpose:1. Transfer of ownership2. Conveyance of Use3. Rendition of Services

k. According to Vinculum (nature) which they produce1. Unilateral2. Bilateral3. Onerous – exchange of value4. Gratuitous – donation

l. According to the nature of the contract:1. Personal2. Impersonal

Stages of a Contracta. Preparation or Conception or Negotiation or Generacion

- Parties are progressing with their negotiations; have not yet arrived at any definite agreement

b. Perfection or Birth - The Parties have at long last came to a definite

agreement- Elements of definite subject matter and valid cause

have been accepted by mutual consent- There is meeting of the minds; may now demand

fulfillmentc. Consummation or Death or Termination

- The terms of the contract are performed

Note: Two persons refer to two parties. While a promissory note is unilateral, still such a contract includes two parties (debtor and creditor)

Basic Principles or Characteristics of a Contract- for a contract to be binding, it must conform to this 5

general principles1. Freedom (or liberality) to Stipulate – provided not contrary to

law, morals, good customs, public order or public policy (Art. 1306)

2. Obligatory Force and Compliance in Good Faith (art. 1159, 1315) – contract is the law between parties and must be complied with in good faith.

3. Perfection by mere Consent (Consensuality) as a rule (Art. 1315) – GR: contracts are perfected by mere consent (binding)

4. Both Parties are Mutually Bond (Art. 1308)

5. Relativity (Art. 1311) – Generally, it is binding only between the parties, their assigns, and heirs)s

Article 1306The 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.

- As a general rule, whatever the parties agree upon will be binding

Principle of Freedom/Autonomy/Freedom/Liberty of Contracts- It is the free entrance into contracts generally without

restraints is one of the liberties guaranteed to the people- This refers only to contract which are LEGAL, not void or

inexistent ones

Limitations of the Nature of Stipulations1. Law2. Morals3. Good Customs4. Public Order5. Public Policy

Law- Those which are mandatory or prohibitive in character- Those which, without being mandatory or prohibitive,

nevertheless, are expressive of fundamental principles of justice, and therefore, cannot be overlooked by the contracting parties

- Those which impose essential requisites without which the contract cannot exist

- Note: Directory and Suppletory laws need not to be complied with, since these are either discretionary or merely supply the omissions of the parties

Pactum Commissiourim – a clause providing that the mortgagee will automatically own the property mortgaged if the debt is not paid at maturity is NULL and VOID

Morals- Referred to are those principles which are

incontrovertible and are universally admitted and which have received social and practical recognition

- There are some instances that the law does not prohibit but it is prohibited by laws

- It deals with right and wrong and with human conscience

Good Customs

- Those that have received for a period of time practical and social confirmation

- If a moral precept or custom is not recognized universally, but is sanctioned by practice of a certain community, then it shall be included within the scope or sphere of good customs

Public Order- Can only refer to the safety, as well as to the peace and

order, of the country or a particular community- Usually overlaps with public policy- Note: every contract affecting public interest suffers a

congenital infirmity in that it contains an implied reservation of the police power

Public Policy- A principle of law which holds that no person can lawfully

do that which has a tendency to be injurious to the public or against the public good

- This varies according to the culture of a particular country; it is the public, social and legal interest in private law

- It is the manifest will of a State

Note: With respect to contracts which tend to restrain business trade, contract in restraint of trade is valid provided that there is a limitation upon either a time or place.

A stipulation of Perpetual Restriction with regards to ownership is prohibited by law.

Note Further: The name that the party gives to the contract should not be controlling, for a contract is what the parties intended it to be, not what they call it. A contract must be judged by its character, its nature and its legal qualifications.

Article 1307Innominate contracts shall be regulated by the

stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place.

- Contemplates on innominate contracts- Regulated by the cardinal principle of autonomy:

stipulation of the parties (what they have agreed upon)- Kinds:

o Do ut des – I give that you giveo Do ut facias – I give that you doo Facio ut des – I do that you giveo Facio ut facias – I do that you do

- Regulated by

o Stipulations of the partieso By the general principles of obligations and

contractso By the rules governing the most analogous

nominate contractso By the customs of the place

Article 1308The contract must bind both contracting parties; its

validity or compliance cannot be left to the will of one of them.

- Contemplates on the Mutuality of contracts – both parties are bound

- Terms and conditions in a contract should be agreed upon by both parties.

- The principle is based on the essential equality of the parties

- Consequences of Mutualityo A party cannot revoke or renounce a contract

without the consent of the other, nor can it have it set aside on the ground that he had made a bad bargain

Note: the free exercise of religious beliefs is superior to contractual rights.

Article 1309The 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.

- Contemplates on the determination by a third person- In a contract of sale for example, one of the important

stipulation is the price which should be agreed upon by both parties. However, the determination of the price may be delegated to a third party. However, for such decision to be binding, it should first be made known to both parties. Thus, the final say is still somehow in the hands of the 2 contracting parties.

Article 1310The determination shall not be obligatory if it is

evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances.

- The court can always come incase there is an agreement which is unfair or inequitable

- Even if such has been agreed upon by both parties, there can still be a possibility that it cannot be granted.

- The court will determine what is reasonable for what is equitable is a question of fact, to be ascertained form the attendant circumstances

Article 1311Contracts take effect only between the parties, their

assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

- Contemplates on the principle of Relativity- Contract also binds the assigns and heirs - GR: contracts take effect only between the parties, their

assigns and heirs and therefore generally, its terms cannot determine the rights of third persons. Strangers, therefore, cannot generally demand the enforcement of a contract nor can they demand its annulment

- A buyer should respect the existing lease of a certain property When he is aware that there is an existing lease or when the contract of lease is registered

Note: as heirs, there is no legal obligation for you to pay a debt when you did not receive any inheritance from the principal

Note Further: in order that an heir can question the validity of contracts entered into by his predecessor, he must be a compulsory or forced heir.

- Your liability as an heir is only up to the extent of the value of the property you received from the decedent

- When a person dies, for the purpose of estate taxation, his NET ESTATE should be transmitted by the heirs to the creditors. What will be left to the heirs therefore is the gross value of properties minus the obligations.

Exceptions to the Principle of Relativity1. Where the obligations arising from the contract are not

transmissible by their NATURE, by STIPUTLATION, or by PROVISION OF LAW

2. Where there is a STIPULATION POUR AUTRUI (a stipulation in favor of a third party, thus heirs and assigns

cannot obtain that which was contemplated in the contract) – the contracting parties must have CLEARLY and DELIBERATELY conferred a FAVOR upon a third person and the stipulation must be PART of the contract. (ex. Credit card – between bank and business establishment, the credit card holder is the one who benefits)

3. Where a third person induces another to violate his contract – such third person is made liable as well for the damages caused

4. Where, in some cases, third persons may be adversely affected by a contract where they did not participate

5. Where the law authorizes the creditor to sue on a contract entered into by his debtor (Accion Directa)

Article 1312In 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.

- This article constitutes one of the exceptions to the general rule that a contract binds only the parties

- A real right binds the property over which It is exercised- Ex. A buyer should respect the existing lease of a certain

property When he is aware that there is an existing lease or when the contract of lease is registered

- Note: registration is a notice to the whole world thus makes a third person bound to respect previous mortgage or lease

Article 1313Creditors are protected in cases of contracts

intended to defraud them.

- Creditors are protected in cases of contracts intended to defraud them

- 5th exception to the principle of relativity- A creditor can ask for the rescission of a contract entered

into by his debtor with a third party which would defraud him

- Note: in a case of donation, you can only ask for the rescission of a donation if the donor has no other property to pay you

Article 1314Any third person who induces another to violate his

contract shall be liable for damages to the other contracting party.

- 3rd exception to the principle of relativity

- Contemplates on an instance when a stranger to a contract can be sued in view of his unwarranted interference. Whoever is injured may properly sue for damages

- Note: inducement presupposes bad faith! Thus misrepresentation and good faith is a valid defense

Article 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 in keeping with good faith, usage and law.

- Contemplates on the Consensuality of Contracts or perfection by mere consent

Q: How are contracts perfected?A:

a. Consensual contracts – mere consentb. Real contracts – perfected by deliveryc. Formal or solemn contracts – special form is

required

Note: Consensual contracts are perfected form the moment there is agreement (consent) on the subject matter, and the cause and consideration.

Q: What are the Consequences of Perfection?A:

1. The parties are bound to the fulfillment of what has been EXPRESSLY STIPULATED – compliance must be in GOOD FAITH

Note: if the true intention is not expressed in a written agreement, in case one has been made, the proper remedy is REFORMATION

2. The parties are ALSO bound to all the CONSEQUENCES which, according to their nature, may be in keeping with GOOD FAIT, USAGE, and LAW

Article 1316Real contracts, such as deposit, pledge and

Commodatum, are not perfected until the delivery of the object of the obligation.

- Contemplates on Real contracts- Requirements: consent, subject matter, cause or

consideration and DELIVERY- Real Contracts referred to:

o Deposito Pledge – accessory contract to a contract of

loan; delivers a personal property as a security to a loan and is personally delivered to the creditor (collateral)

o Commodatum – a loan where the identical object must be returned (between lender and borrower)

Note: A contract “to make a deposit, to make a pledge, or to make a commodatum” is a CONSENSUAL contract. After delivery, the contract becomes a REAL contract.

The Contract of Carriage

Contract to Carry (at some future time) – is CONSENSUAL and is perfected by mere consent

Contract of Carriage – is a REAL contract, fro not until the carrier is actually used can we consider the contract perfected

Note: The real contract of carriage is perfected even if the passenger has not yet paid, in fact, even if he has no money for his fair. Further, the all-important fact is that he has, with the express or implied consent of the carrier, placed a part of his body, or a portion of the goods on any part of the vehicle, such as the stepping platform or the running board.

Article 1317No 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.

- GR: No one may contract in the name of another- This article contemplates on the exception and its

requisites

Requisites for a Person to Contract in the Name of Another1. He must be duly authorized (expressly or impliedly)2. He must have by law a right to represent him (ex.

Guardian or administrator)3. The contract must be SUBSEQUENTLY RATIFIED

(expressly or impliedly, by word or by deed

Effects of Ratification- Cleanses the contract from all its defects from the

moment the contract was entered into. (retroactive effect)

- Note: there can be no more ratification if the contract has previously been REVOKED by the other contracting party

CHAPTER 2 – ESSENTIAL REQUISITES OF CONTRACTS, GENERAL PROVISION

Article 1318There is no contract unless the following requisites

concur:(1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established.

- Contemplates on how consent is manifested- Essential requisites: consent, object or subject matter,

cause or consideration- Real Contracts: 4th requisite – delivery- Solemn or Formal Contracts: 4tr requisite – compliance

with the formalities required by law

Note: consent presupposes LEGAL CAPACITY and the fulfillment of conditions, should any be attached

Effects of Non-consent:1. Ex. Joke, absolutely simulated contract – no contract;

agreement may be considered inexistent or VOID2. If there is vitiated consent – the contract is NOT VOID; it

is merely VOIDABLE

Transportation Ticket as a ContractA transportation ticket is a complete written contract

between the shipper and the passenger since it has all the elements of a complete contract:

a. Consent : passenger boards the ship and shipper accepts him

b. Cause or consideration: fare paid c. Object: transportation of the passenger

Note: An agreement on the price but a disagreement on the manner of its payment will not result in consent, thus, preventing the existence of a valid contract for lack of consent. This lack of consent is separate and distinct from lack of consideration where the contract states that the price has been paid when in fact, it has never been paid.

Section 1 – CONSENT

Article 1319Consent is manifested by the meeting of the offer

and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance 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.

- Consent is the meeting of the minds between the parties on the subject matter and the cause of the contract, even if neither one has been delivered

- Requisites of Consent :o Concurrence of offer and acceptanceo Consent must be intelligent, free, spontaneous

and realo There must be 2 or more parties o The parties must be capable or capacitatedo There must be no vitiation of consento There must be no conflict between what was

expressly declared and what was really intended

o The intent must be declared properly, that is, whatever legal formalities are required must be complied with

- Requisites for the meeting of the minds :o Offer must be CERTAINo And an acceptance that must be

UNQUALIFIED and ABSOLUTENote: if the acceptance is qualified, let us say by a condition, this merely constitutes a COUNTER-OFFER (no meeting of the minds until both parties consent)

Certain Offer – it must not be vague, misleading, or made as a joke.

Note: if the offer is withdrawn before it is accepted, there is no meeting of the minds.

If an offerer offers several distinct and separate items, and the offeree accepts one of them, the contract is perfected as to the item accepted

Acceptance Thru Correspondence

Rule: acceptance made by letter or telegram does not bind the offerer except form the time it came to his knowledge. The contract is such a case is presumed to have

The knowledge may be actual or constructive (as when the letter of acceptance has been received in the house of the offerer by a person possessed of reasonable discernment.

NOTE: what is important is when the telegram of approval was received by the offerer and he had gained knowledge about such acceptance-communication. The offeror can still withdraw his offer at anytime before he receives the letter of acceptance from C. Offeree can also withdraw his acceptance as long as the withdrawal is received first by B before the acceptance letter.

Q: Can a buyer be compelled to accept a 3rd offer?A: NO. an offer not accepted absolutely is immediately extinguished

Article 1320An acceptance may be express or implied.- Forms of Acceptance:

o Express o Implied – from conduct, or acceptance of

unsolicited serviceso Presumed by law as when there is failure to

repudiate hereditary rights within the period fixed by law; or when there is SILECE (place the silent person in estoppels)

Article 1321The person making the offer may fix the time, place,

and manner of acceptance, all of which must be complied with.

- Things that may be fixed by the Offerer:o Timeo Placeo Manner of acceptance

Note: any act contrary to the prescribed terms really constitutes a counter offer or counter-proposal.

This article also applies to an auction sale, whether private or public

Note: A “contract to purchase which does not give specific description of the objects to be purchased nor the price nor the rate of exchange to be used is a mere PRELIMINARY AGREEMENT.

Article 1322

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

- Contemplates on an offer made through an agent- If you have constituted X as an agent to sell your car,

what has been agreed upon by X and party is binding to X and the real owner of the property

- Article applies only when BOTH the offer and acceptance are made thru an AGENT

Article 1323An offer becomes ineffective upon the death, civil

interdiction, insanity, or insolvency of either party before acceptance is conveyed.

- Gives 4 circumstances when the offer becomes ineffective:

o Offer becomes ineffective upon the DEATH, o CIVIL INTERDICTION,o INSANITY, o or INSOLVENCY OF EITHER PARTY before

acceptance is conveyed- If the acceptance did reach the creditor before he died,

the heirs will be bound to the contract- “Conveyed” refers to that moment when the offeror has

knowledge of the acceptance by the offeree. Hence, the article merely means that an offer becomes ineffective upon the death , etc. of either party before the offeror has knowledge of the acceptance by the offeree

- General Effect of this article: no meeting of the minds

Other Instances when the offer becomes ineffective:1. Offeree expressly or impliedly rejects the offer2. When offer is accepted with a qualification or condition

(counter-offer)3. When before acceptance is communicated, the subject

matter has become illegal or impossible4. When the period of time given to the offeree within which

he must signify his acceptance has already lapsed5. When the offer is revoked in due tim

CONTRACT OF ADHESION- Terms are prepared by one party while the other party

merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are binding as ordinary contracts.

- In cases there are ambiguous terms, it shall be interpreted against the person who made it

- Note as well that if the terms of the contracts are also clearly iniquitous, the court can come into the picture

Article 1324When 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.

- Contemplates on a situation when the offeror gives the offeree a certain period of time to decide.

- Before the lapse of the said period, the offeror can withdraw the offer by communicating such.

- In order to bind the offeror not to withdraw, you as the offeree shall pay an OPTION MONEY/CONTRACT (this is binding because it has its own consideration; not deductable to the original price)

If the option is without a consideration – the offeror may withdraw his offer by communicating such withdrawal to the offeree at anytime before acceptance (even before expiration of the period)

If the option is with a consideration – the offeror cannot withdraw his offer within the period he has given.

Option – contract granting a person the privilege to buy or not o buy certain objects at any time within the agreed period at a fixed price. The option must have its own cause or consideration

REQUISITES BEFORE OFFER CAN BE WITHDRAW1. There is yet no acceptance by the offeree2. The offeror must communicate to the offeree the decision

to withdraw the offer3. The option must not be founded on a consideration

OPTION MONEY vs. EARNEST MONEY

OPTION MONEY EARNEST MONEYNot part of the purchase price

It is part of the purchase price (sort of a down payment)

Proof of the perfection of the option contract

Proof of the perfection of the contract (parties are already bound)

Would be buyer is not required to buy

Buyer is bound to pay the balance

Article 1325Unless it appears otherwise, business

advertisements of things for sale are not definite offers, but mere invitations to make an offer.

- Advertisements are not definite offers rather are MERE INVIATIONS TO MAKE AN OFFER

- However, if advertisement is very specific with regards to the terms and conditions, it is considered as a definite offer.

Article 1326Advertisements 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.

- 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

Article 1327The following cannot give consent to a contract:(1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write.

- Talks about the persons who DO NOT HAVE THE CAPACITY to give consent

o Unemancipated minors (now called minors)o Insane or demented person, o and deaf-mutes who do not know how to write

(note: if they know how to read, but do not know how to write, it is submitted that the contract is valid, for they are capable of understanding, and therefore capacitated to give consent)

- The capacity of contracting parties is an indispensable requisite for consent

- If any of the contracting parties is incapacitated, the contract is VOIDABLE (valid until annulled and can be subject to ratification)

- If both parties are incapacitated, then the contract is UNENFORCEABLE

EXCEPTIONS - where a contract entered into by an UNEMANCIPATED

MINOR may have all the effects of a valid contract:o When it is entered into by a minor who

misrepresents his age (Mercado vs. Espiritu, 37 Phil. 215)

o When it involves the sale and delivery of necessaries to the minor (Art. 1489, CC)

o When it involves a natural obligation and such obligation is fulfilled voluntarily by the minor, provided that such minor is between 18 and 21

years of age, if female (Art. 1425-27, CC) [NOT APPLICABLE]

o Upon reaching the age of majority, they ratify the same

o Contract entered into thru a guardian, and the court approved the same

o Contracts of life insurance in favor of their parents, spouse, children, bro, sisters (minor should be 18 years and above)

o Form of savings account (minor at least 7 years old)

Note: The mere silence when making a contract as to his age does not constitute a fraud which can be made the basis of an action for deceit. There should be an active (actual not constructive) misrepresentation.

PERSONS SPECIALLY DISQUALIFIED- Here the transaction is VOID1. Husband and Wife cannot SELL to each nor can they

DONATE to each other (only those prejudiced can assail the validity of the transaction

2. Insolvents3. Persons disqualified because of FIDUCIARY

RELATIONSHIPS (ex. Guardian cannot purchase the property of ward; judge cannot purchase property under litigation)

Article 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.

- Contemplates on lucid interval: valid- Drunk and under hypnosis: voidable- GR: a person is sane- However if you can prove the insanity, the only way to

validate the contract, is to stress that during the construction of the contract, the person is sane

Article 1329The incapacity declared in Article 1327 is subject to

the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws.

- Contemplates on modifications with regards to people who are incompetent to enter into contracts such making the contract void

- The following are considered INCOMPETENTS under the Rules of Court:

o Those under CIVIL INTERDICTION

o Hospitalized LEPERSo PRODIGALSo DEAF and DUMB who are unable to read and

writeo Those of UNSOUND MIND even though they

have lucid intervalso Those who cannot with outside aid, take care of

themselves and manage their property

Article 1330A contract where consent is given through mistake,

violence, intimidation, undue influence, or fraud is voidable.

- Enumerates the vices of consent (VITIATED CONSENT):

o Mistake (error)o Fraudo Violenceo Intimidationo Undue influence

- Makes the contract VOIDABLE however there must be clear and convincing evidence of the presence of vitiated consent

Article 1331In 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.

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.

A simple mistake of account shall give rise to its correction.

- Defines when MISTAKE can affect the consent- It should refer to the substance of the thing which is the

object of the contract or conditions which have principally moved one or both parties to enter into the contract

Ex. If a person who has a hobby of horse raising enters into a contract with a seller of horses for the purposes of racing, however the contract entered into is a horse which can barely run, and the contract has already been executed; can the buyer file for an action for annulment? Yes, there was a mistake of the very object of the contract.

- Other aspect of mistake: identity or qualification of one of the parties (if such identity is the principal cause of the contract)

- As a GR: it is only a mistake of fact which will vitiate consent thus rendering the contract voidable; a mistake of law does not render the contract voidable because ignorance of the law does not excuse anyone from compliance therewith.

REQUISITES1. Error must be substantial regarding:

a. The object of the contractb. Conditions which principally moved or induced

one of the partiesc. Identity or qualification but only is such was the

principal cause of the contract2. Error must be Excusable (not caused by negligence)3. Error must be a MISTAKE of FACT, and not of LAW

Article 1332When one of the parties is unable to read, or if the

contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

- Contemplates on the Duty of the courts to be vigilant to protect persons who are considered as an underdog

- Presumption: one always acts with due care and signs with full knowledge of all the contents of a document

- This article gives an exemption to the presumption:o When one of the parties is unable to read

(including blind person)o If the contract is in a language not understood

by one of the parties- Defense of the other part: prove that the terms thereof

have been fully explained to the former

Article 1333There is no mistake if the party alleging it knew the

doubt, contingency or risk affecting the object of the contract.

- There is NO MISTAKE if the party alleging it KNEW THE DOUBT, CONTINGENCY or RISK affecting the object of the contract

- This article assumes that the party was WILLING to take the risk (ALEATORY IN NATURE)

- Ex. If the property you bought has a pending case, whatever is the decision of the court, you are bound to such decision

- It is your responsibility to check the status of the property

Note: if mistake is caused by inexcusable negligence, the contract cannot be annulled.

Article 1334Mutual error as to the legal effect of an agreement

when the real purpose of the parties is frustrated, may vitiate consent

Nature of the contract of mortgage over a real property:- Real property is still in the possession of the debtor- As far as the fruits is concerned, debtor is still the owner- Creditor does not have any rights of the fruits of the

property, it is the debtor’s responsibility to pay the creditor

However, if the lawyer drafts a contract of ANTICHRESIS (this involves a real property. The nature of the contract is the property which was given as a collateral, the fruits over that property will now be paid to the creditor and to be applied first on the interest and the excess will be paid to the principal), and the parties thought that the contract is a mortgage – this situation is a mutual error. In which case, the consent is vitiated by mistake.

Requisite:1. Must be with respect to the legal effect of an agreement2. Mistake must be mutual3. Real purpose of the parties must have been frustrated

Article 1335There is violence when in order to wrest consent,

serious or irresistible force is employed.There is 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.

- VIOLENCE: Present when in order to wrest consent, serious or irresistible force is employed

o The manifestation of violence is physical - INTIMIDATION: one of the 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

o MORAL PRESSURE is exerted (person may not be touched at all by the other party)

o To determine the degree: take into account age, sex and condition of the person

- Last paragraph: intimidation thru legal concerns does not vitiate consent (ex. Payment of phone bills)

REQUISITE FOR VIOLENCE TO VITIATE CONSENT:1. Employment of SERIOUS or IRRESISTIBLE force2. It must have been the reason why the contract was

entered into

REQUISITE FOR INTIMIDATION TO VITIATE CONSENT:1. Reasonable and well-grounded fear2. Of an IMMINENT and GRAVE evil3. Upon his person, property or upon the person or property

of his spouse, descendants or ascendants4. It must have been the reason why the contract was

entered into5. Threat must be of an UNJUST ACT, and ACTIONALBE

WORNG (Thus, a threat to prosecute is not considered as intimidation; if claim is just or legal, it does not vitiate consent)

Note: The right to enforce one’s claim thru competent authority must not by itself constitute an unlawful act. Thus, blackmailing is considered as a vitiated consent.

Reverential Fear - Fear of displeasing persons to whom obedience and respect are due, the contract is still VALID, for by itself reverential fear is NOT WRONG

Article 1336Violence or intimidation shall annul the obligation,

although it may have been employed by a third person who did not take part in the contract.

- 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

- It is not necessary that the other party is the one who employs violence or intimidation.

VIOLENCE vs. INTIMIDATIONVIOLENCE INTIMIDATIONExternal InternalPhysical compulsion Moral compulsion

REQUISITES OF VIOLENCE1. Force employed should be serious or irresistible2. It must be the determining cause for the party upon

whom it is employed in entering the contract. Where it

not for the violence you would have not entered into the contract

REQUISITES OF INTIMIDATION1. One of the contracting parties is compelled to give his

consent by reasonable and well-grounded fear of an evil2. Evil must be unjust3. Evil must be imminent and grave4. It must be the determining cause for th te party upon

whom it is employed in entering the contract. Where it not for the violence you would have not entered into the contract

Article 1337There is 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.

- Contemplates on UNDUE INFLUENCE- It is when a person takes improper advantage of his

power over the will of another, depriving the latter of a reasonable freedom of choice

Q: What are the circumstances to be considered?A: Confidential, Family, Spiritual and other relations between the parties; or person alleged to have been unduly influenced was suffering from MENTAL WEAKNESS, or was IGNORANT or in FINANCIAL DISTRESS

REQUISEITES FOR UNDUE INFLUENCE TO VITIATE CONSENT:

1. Improper Advantage2. Power over the will of Another3. Deprivation of the latter’s will of a reasonable freedom of

choice

Note: Undue influence exercised by a third party VITIATES consent, just like in the case of violence and intimidation

Article 1338There is 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.

- Contemplates on FRAUD (deceit)

- Through insidious words or machinations- Fraud was the reason why you entered into a contract

(dolo causante)

Kinds of Frauds: 1. Fraud in the CELEBRATION of the contract2. Fraud in the PERFORMANCE of the obligations

stipulated in the contract

DOLO CAUSANTE vs. DOLO INCIDENTEDOLO CAUSANTE DOLI INCIDNTEEffect Is to render the contract voidable

Effect is to render or ask for damages

Serious in character Not seriousCause which induces the party to enter in to the contract

Not the cause

Requisites of fraud:1. Insidious words or machinations must have been

employed by one of the contracting parties (if both committed fraud, the contract would remain valid

2. Must be material and serious3. Must have induced the other party to enter into the

contract4. Should not have been employed by both of the parties or

3rd person5. There must be a deliberate intent to deceive or to induce

therefore, misrepresentation in GOOOD FAITH is not fraud

Article 1339Failure to disclose facts, when there is a duty to reveal

them, as when the parties are bound by confidential relations, constitutes fraud.

- Failure to disclose facts (concealment) when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes FRAUD

- Applicable if parties are bound by confidential relations as in the case of partners

Article 1340The usual exaggerations in trade, when the other party

had an opportunity to know the facts, are not in themselves fraudulent.

- Usual exaggeration in trade, are not in themselves fraudulent

- This is what is done in commercial (ex. Beauty products)- This article stresses the rule of “CAVEAL EMPTOR”

- Note: ordinarily what does not appear on the face of the written contract should be regarded as “TRADER’S TALK” OR “”DEALER’S TALK”

Article 1341A 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.

- 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

- Ex. Buying diamond ring in a jewel store

Note: fraud is a bit difficult to prove because it is a state of mind. You prove it according to the state of every case.

Article 1342Misrepresentation by a third person does not vitiate

consent, unless such misrepresentation has created substantial mistake and the same is mutual.

- Misrepresentation will only be considered fraud if it has created substantial mistake and the same is mutual

- Misrepresentation Done by the third person does not constitute fraud

- Ex. Broker who asks for a greater amount than what was really stipulated. You cannot annul the contract except if such representation is a substantial mistake and the same is mutual

- Ex of mutual mistake: lot which is believed to be residential when it fact it is really commercial.

Article 1343Misrepresentation made in good faith is not fraudulent

but may constitute error.

- Misrepresentation made in good faith is not fraudulent but may constitute ERROR

- This may be a ground for annulment but is due to ERROR

Article 1344In order that fraud may make a contract voidable, it

should be serious and should not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages.

- To be voidable it must be SERIOUS and SHOULD NOT HAVE BEEN EMPLOYED BY BOTH CONTRACTING PARTIES

- Incidental fraud will only result to damages

Requisite for Fraud to Vitiate Consent (for annulment)1. Fraud must be serious2. Parties must not be in PARI DELICTO or else the

contract therefore is considered VALID

Article 1345Simulation of a contract may be absolute or relative. The

former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

- Simulation is the process of INTENTIONALLY DECEIVING others by producing the or appearing of a contract

- 2 types of simulation:o ABSOLUTE – there was really no intention

thus the contract is void (circumstances will show however that the contract was absolutely simulated; ex: son “buys” the property when he has no means to pay it or when the property still remains to the seller and still posses all rights of the buyer)

o RELATIVE –parties conceal their true agreement; you are bound to the real or true agreement except:

Prejudice a third person If the purpose is contrary to law,

morals, good customs, public policy, public order

Article 1346An absolutely simulated or fictitious contract is void. A

relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

- Effects of simulation- If absolute: void- If relative: binds the party to the real agreement (take

note of exceptions)- Sale with a right to repurchase: you are the owner of the

property and you sell it. But within a period of time you are going to buy it back.

- Sometimes creditor will allow a debtor to sign a document with sale with a right to repurchase. (this is

really different from that of a mortgage) – in this case, you can ask for a reformation of the document

Note: In simulation, the contract is not really desired to produce an illegal effect or in any way alter the juridical situation of the parties; whereas an illegal contract is intended to be real and effective, and entered in such form as to circumvent a prohibited act

OBJECTS OF CONTRACTS- It may be defined as the thing, right or service which is

the subject matter of the obligation which is created or established

Article 1347All things which are not outside the commerce of

men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract.

- Contemplates on what can be considered as an object of a contract:

o Should be within the commerce of mano Should be transmissible (ex. Right as a creditor

can be assigned to someone else) o Must not be contrary to law, morals, good

customs, public order, or public policyo Must not be impossibleo Must be determinate as to its kind or

determinable without the need of a new contract or agreement

- If the object is outside the commerce of man, the contract is void

- Further, any part of your body is not a contract of sale, rather it is a donation

- Future things may be an object of a contract (ex. Next harvest of your palay)

Note: you cannot sell your right to vote or your right in the public office

- Future inheritance is allowed if it is authorized by law. Note that as far as the right to succession, it is an

inchoate right (expectancy). However for a contract to be valid, the object must be existing at the time the contract is entered into. Your right to your inheritance can only be transmitted to you upon the death of the real owner.

- Right to the property becomes vested upon the time of death. It is not necessary that it has been distributed. What is important as well is the expectancy. Upon the death, the heirs can now sell the shares but subject to the estate tax (what the heir can transmit to buyer is what she can receive in the inheritance despite the fact that the obligation have not yet been settled and estate tax has not been paid yet)

Note: what is transferred upon death is the PROPERTY, RIGHTS and OBLIGATION

- Except if authorized by law: the predecessor (owner of property) would already during his lifetime would partition the property to his heirs (in this situation, you can now sell despite the fact that he is not yet dead)

- Services can also be the subject of a contract subject to the limitation (LMPpPoGc)

Article 1348Impossible things or services cannot be the object of

contracts.

- Impossible things or services cannot be the object of contracts

- Impossibility may be o Because of the nature of the transactiono Because of the lawo Absolute (NO ONE can do it)o Relative (particular debtor cannot comply)

Note: Generally, the impossibility referred to by the law is absolute impossibility. Further, a showing of mere inconvenience, unexpected impediments, or increased expenses is not enough.

Article 1349The 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.

- Object of every contract must be determinate as to its kind or is determinable without the need of a new contract between parties

- Ex. Harvest (thoug you don’t know the quantity yet, it is still valid because it is determinable without the need of a new contract)

- Ex. Parcel of land with no description (if the seller owns 2 parcel of land and it could not be ascertained which one is the object of the contract, then this case does not satisfy the requirement that the object must be determinate or determinable of its kind; you need to enter into another contract which gives all the details)

SUMMARY OF OBJECT OT BE VALID1. Should be within the commerce of man2. Should be real or possible3. The object should be determinate, or at least, possible of

determination as to its kind4. The object should be licit or legal

CAUSE OF CONTRACTS

Article 1350In 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.

- Cause is the essential and impelling reason why a party assumes an obligation

- Classification of contracts as to its cause:o ONEROUS – cause is understood to be the

prestation of promise of a thing or service by the other 2 schools of thoughts:

Manresa – subject matter for one is the cause for the other

For both seller and buyer, there is just one object but different cause

o REMUNERATORY – ones the service or benefit which is renumerated; past service or benefit which by itself is a recoverable debt

o GRATUITOUS – mere liberality of the beneficiaries

Note: What may be the subject matter for one party will be the cause or consideration for the other party.

The contract of guaranty is gratuitous, unless there is stipulation to the contrary

Shocking cause or consideration (to the conscience) is void.

Article 1351The particular motives of the parties in entering into a

contract are different from the cause thereof.

- Motive is different from cause- Motives do not enter at all in the validity or invalidity of

cause or consideration- Look at example of book (gun example)

MOTIVE VS. CAUSEMOTIVE CAUSEIndirect or remote reason (ex.purpose in buying)

Direct of most proximate reason of a contract (ex. To get the gun)

Psychological or purely personal reason

Objective or juridical reason of a contract

Different from each contracting party

Always the same

Illegality of the motive will not affect the existence of the contract

Illegality will affect the validity of the contract

May be unknown to the other Always known

Note: the presence of motive cannot cure the absence of cause

Article 1352Contracts 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.

- Contracts without cause or with unlawful cause, produce no effect whatever

- If for example, in a fictitious sale, there is no consideration thus it is considered void

Requisites for Cause:1. It must be present at the time the contract was entered

into2. It must be true (note: if the contract is false, the contract

is not valid unless some other cause which is lawful really exists)

3. It must be lawful (note: a contract with an illegal cause may produce effects under certain circumstances where the parties are not of equal guilt

Effects if the Cause is Illegal:1. If one party is innocent he cannot be compelled to

perform his obligation, and he may recover what he has already given

2. If both parties are guilty, in general , neither can sue the other

Article 1353

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.

- Statement of a false cause in contracts shall render them void

- Except: if it can be proved that they were founded upon another cause which is true and lawful

- If there was no consideration at all or that the creditor did not receive any payment at all, it renders the contract void

- For as long as there is a real consideration which is lawful and true, then the contract will remain valid (False cause: merely revocable or voidable)

Article 1354Although the cause is not stated in the contract, it is

presumed that it exists and is lawful, unless the debtor proves the contrary.

- in a contract there is a presumption that there is cause and such is lawful

- It is not necessary to STATE the cause in the contract- Ex. Promissory note:”for value received, I promise to pay

x or bearer the sum of 10,000 pesos”. In this case, it is founded on a consideration of the amount for which he issues a promissory note. In case the statement says “I promise to pay X 10,000 on Nov. 2010.” This statement does not make any statement on what the consideration of issuing such promissory note. The law presumes that it is founded in a considerations

Article 1355Except in cases specified by law, lesion or inadequacy of

cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.

- Lesion: inadequacy of cause- The mere inadequacy in consideration does not affect

the validity of a contract, EXCEPT:o There has been FRAUDo MISTAKEo UNDUE INFLUENCE

- The person is expected to take care of his concerns, thus if one makes a bad bargain, it should not affect the validity of contract for as long as he freely gives his consent to the contract or that his consent has not been vitiated

- Except in cases specified by law (inadequacy in consideration can affect the validity of a contract):

o Rescissible Contracts (defective contracts)

Entered into by guardian involving the property of a ward and the contract has resulted to an inadequacy in consideration of more than ¼ of the value of the things which are the objects thereof

Contract entered into a representation of an absentee. If the absentee suffers lesion of more than ¼ of the value of the property

Partition among co-heirs, when anyone of them received things with a value less by at least ¼ than the share to which he is entitled

It is total absence of cause or consideration that renders a contract absolutely void and inexistent – Carantes vs. CA (76 scra 514)

FORMS OF CONTRACTS

Article 1356Contracts shall be obligatory, in whatever form they may

have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised.

- GR: Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present

- Exception : however when law requires a certain form, such exceptions are indispensible and the absence of it makes the contract is void

Q: what are the instances where form is required? (EXCEPTIONS)A:

1. Validity – formal or solemn contracts; form is essential for validity (ex. donation of real property must be in a public instrument; donation of a personal property where the amount is more than 5,000; any stipulation with respect to interest like in the contract of loan must be in writing, otherwise it is not valid)

2. Enforceability – (discuss during the defective and unenforceable contracts); there are specific contracts which says that contracts must be in writing to be enforceable; for purposes of enforcing the contract by

court action, you must be able to present at least a written contract (ex. Sale of a real property is a consensual contract which is perfected by mere consent; upon consent the contract is perfected however it is not yet consummated due to the absence of delivery; Note however that in the statute of frauds, there is the need to put the sale of real property in writing; thus if an oral agreement of sale is made you cannot compel the person to put it in a written document because it is unenforceable. The defense of unenforceability can be raised if the contract is EXECUTORY (no performance yet on either side) when neither of the parties have performed their share in the contract) [look at page 681 for further explanation: note partial payment is considered payment wherein you can no longer have the defense of unenforceability)

Note: for sale of real property, it should be in a written document even if private, to be enforceable

3. Convenience (for the purpose of registration where form is required by law; and for binding 3rd persons)– sale of a real property must be in a public document is not a requirement for validity and enforceability rather is only a requirement for convenience; this is for the full protection of your interest; to be protected, you should register your property in a public instrument; your remedy is you go to court if you are not given or the other party does not execute the public instrument (demand for the execution of the public document for as long as you have complied with the requirements for validity and enforceability)

Q: A deed of donation of real property is signed by the donor in a private document. Donee accepted such a donation in the same private document. In this situation, can the donee compel the donor to execute the registration of the property in a public document?

A: No, because in this situation, the contract is not valid because with regards to a deed of donation it should be in a public document. Thus, the contract is not valid neither is it enforceable.

DONATION OF A PERSONAL PROPERTYA private document is valid for a donation of personal property if the amount is more than P5, 000.

GR: whatever may be the form in which a contract may have been entered into, the general rule is that it shall be obligatory, provided all of the essential requisites for its validity are present.

CONTRACTS WHICH MUST APPEAR IN WRITING

1. Donations of personal property whose value exceeds 5k2. Sale of a piece of land or any interest therein through an

agent (authority must be in writing)3. Agreements regarding payment of interest in contracts of

loan4. Antichresis – involves contract of loan, fruits of property

will be applied as payment of interest then after will be applied on principal. (creditor is entitled to the fruits of the property which is made as a collateral to the payment of loan)

CONTRACTS WHICH MUST APPEAR IN A PUBLIC DOCUMENT

1. Donations of immovable property2. Partnerships where immovable property or real rights are

contributed to the common fund

CONTRACTS WHICH MUST BE REGISTERED1. Chattel mortgages2. Sale or transfer of large cattle

Article 1357If the law requires a document or other special form, as

in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

- It is not for validity or enforceability, rather for convenience alone

- Contemplates on contracts enumerated in the next article

- Contemplates on the right of one party to compel the other to execute the necessary form for convenience once they have complied with the validity and enforceability of said contract

Article 1358The following must appear in a public document:(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) 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; (4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405.

- Contracts which are to appear in a public document (for convenience only)

o Acts and contracts which have for their object the creation, transmission, modification or extinguishment of a real rights over immovable property (ex. Real estate mortgage for purposes of convenience must be in a public document; this is an accessory contract to a principal contract of a loan) – if made in a private document, it is valid for the law does not require a specific form of validity since it is a consensual contract

In the event that the owner mortgagor sells the property to another, the buyer of the property will be bound by the mortgage because the annotation of the real estate mortgage (or it is registered) is considered as a notice to the whole world.

Because placing a contract in a public document is expensive, what the creditor usually ask is that the mortgagor is to deliver to the mortgagee the owner’s duplicate property (title of the possession owner or transfer certificate title)

o The cession, repudation or renunciation of hereditary rights or those of the conjugal partnership of gains

o 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 – issue a special power of attorney

o The cession of actions or rights proceeding from an act appearing in a public document. – if you assign your right as a mortgagee to another, such assignment should be placed in a public document (real estate mortgage)

o All other contracts where the amount involved exceeds five thousand pesos must appear in

writing, even a private one (just for convenience). But sales of goods, chattels or things in action are governed by articles 1403, No. 2, and 1405

REFORMATION OF INSTRUMENTS

Article 1359When, there having been a meeting of the minds of

the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.

- Gives the concept of reformation- In reformation, there should first be the meeting of the

minds. It is the written contract which is different from what the party has primarily agreed upon

- Reason: in order that the TRUE INTENTION of the contracting parties may be expressed

REQUISITES IN ORER THAT THERE CAN BE REFORMATION1. There must be a meeting of the minds of the contracting

parties2. Their true intention is not expressed in the instrument3. Failure to express their true intention is due to mistake,

fraud, inequitable conduct or accident4. There must be clear and convincing proof thereof5. It must be brought within the proper prescriptive period6. Document must not refer to a simple unconditional

donation inter vivos, or to will, or to a contract where the real agreement is void

REFORMATION vs. ANNULMENTREFORMATION ANNULMENT Presupposes a perfectly valid contract in which there has already been a meeting of the minds of the contracting parties

Based on a defective contract in which there has been no meeting of the minds because consent has been vitiated

Does not invalidate a contract Invalidates a contract

Note: Courts do not make another contract for the parties. They merely inquire into the intention of the parties and having found it, reform the written instrument, not the content.

Article 1360The principles of the general law on the reformation of

instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code.

- What should govern in case of conflict is the civil code. Principles of the general law on reformation only have suppletory effect.

Article 1361 – 1364: instances when there can be reformation

Article 1361When a mutual mistake of the parties causes the

failure of the instrument to disclose their real agreement, said instrument may be reformed.

Q: what could be the reason why the instrument does not reflect the true agreement?A: This article contemplates on the reason of MUTUAL MISTAKE of the parties

REQUIREMENT FOR REFORMATION OF A WRITTEN INSTRUMENT TO PROSPER UPON THE GROUND OF MISTAKE (mutual):

1. Mistake should be of a FACT2. Mistake should be proved by clear and convincing

evidence3. Mistake should be common to both parties to the

instrument

Article 1362If 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.

Q: what could be the reason why the instrument does not reflect the true agreement?A: This article contemplates on the reason that there is MISTAKE on one party and the other acted FRUADULENTLY. In this case, the PERSON WHO ACTED BY MISTAKE is the proper party to raise the issue of reformation

Article 1363

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, the instrument may be reformed.

Q: what could be the reason why the instrument does not reflect the true agreement?A: This article contemplates on the reason that one of the parties CONCEALED the defects of the written instrument. Only the party in good faith can ask for reformation.

Article 1364When 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.

Q: what could be the reason why the instrument does not reflect the true agreement?A: This article contemplates on the reason that there is IGNORANCE, LACK OF SKILL, NEGLIGENCE OR BAD FAITH on the part of the person drafting the instrument (drafter of the instrument; clerk; typist)

Article 1365If 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.

- When you talk about a mortgage or a pledge, these are accessory contract. If the real agreement was such but what was executed is a deed of absolute sale, the instrument can be reformed

Q: How do you judge the Parties’ Intent?A: It can be judged from their CONTEMPORANEOUS and SUBSEQUENT acts

Article 1366There shall be no reformation in the following cases:(1) Simple donations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void.

- Where reformation is not allowed1. Donation taking effect in the lifetime of the donor

o If there is a mistake in the document here, since it is gratuitous, the donee has no right to ask the

donor to reform the instrument (you cannot demand but the donor has the option to reform it or not)

2. Will (last will and testament)o This is because making of a will is strictly a

personal act which is free. A will may also be revoked at any time

3. When the real agreement is voido This is because the new instrument would be

void as well because the true agreement and intention are void

Article 1367When one of the parties has brought an action to enforce

the instrument, he cannot subsequently ask for its reformation.

- When one of the parties has brought an action to enforce the instrument he cannot subsequently ask for its reformation

- Ex. If the person has already filed an action for the foreclosure of mortgage, you can no longer say that it should be reformed to be a sale with right to repurchase

- This article contemplates on estoppel

Article 1368Reformation may be ordered at the instance of either

party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

- who can ask for reformation:o If mistake is mutual: either party or his

successors in interesto Other cases: the injured party and/or his heirs

and assigns (not the person who committed the fraud)

Contracts of adhesion – the only participation of the other party is adhere. Take it or leave it contract

Note: you will have to go to court if the other party is not willing to have the instrument reformed. In court you have to prove the real agreement of the parties through oral evidence. Burden of prove is on your side to show that the instrument does not reflect the true agreement or intent of the parties.

Prescriptive Period for Reformation of a Contract- 10 years

Article 1369

The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.

- Procedure for reformation shall be governed by Rules of Court

INTERPRATION OF CONTRACTS

Article 1370If the terms of a contract are clear and leave no

doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

- some of the principles in statutory construction is similar to that in interpretation of contracts

- General Rule in contracts: the literal wordings of the contract shall control

- It is only when there is doubt and ambiguity that you result to interpretation of contracts

- Intention vs. wordings = intention will prevail

Note: if no beneficiary is named for the retirement benefits of a government employee, it is understood that the benefits will accrue to his estate

Article 1371In order to judge the intention of the contracting

parties, their contemporaneous and subsequent acts shall be principally considered.

Q: how do you determine the intention of the parties when they enter into a contract?A: Take into consideration the CONTEMPORANEOUS and SUBSEQUENT acts of the parties.

Thus, the real nature of a contract may be determined form the express terms of the agreement, as well as form the contemporaneous and subsequent acts of the parties thereto

Article 1372However general the terms of a contract may be, they

shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree.

- However general the terms of a contract may be, they shall be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree

- On its face it could possible that there is nothing wrong with the contract, but at the time of implementation, here comes the confusion due to ambiguity

Note: Special intent prevails over a general intent

Article 1373If some stipulation of any contract should admit of

several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.

- If one interpretation makes a contract valid and illegal, the former interpretation must prevail

Article 1374The various stipulations of a contract shall be interpreted

together, attributing to the doubtful ones that sense which may result from all of them taken jointly.

- Stipulations must be read together- In case of two or more stipulations, the proper thing to do

is to first reconcile the different stipulations

Article 1375Words which may have different significations shall be

understood in that which is most in keeping with the nature and object of the contract.

- Words in the contract should be interpreted in keeping with the nature and object of the contract

Q: if a word is susceptible of two or more meanings, what meaning should be used?A:

1. That in keeping with the nature and object of the contract2. If this cannot be determined, then the “terms of a writing

are presumed to have been used in their primary and general acceptation”

Article 1376The usage or custom of the place shall be borne in mind

in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established.

- The usage or custom of the place shall be borne in the mind in the interpretation of the ambiguities of a contract,

and shall fill the omission of stipulations which are ordinarily established

Article 1377The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity.

- The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity

- Reason: Such party should be responsible for his acts. The drafter of the terms of the contract should, therefore, be careful

Article 1378When it is absolutely impossible to settle doubts by

the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void.

- Contemplates on ambiguity of terms in gratuitous contract

o Rule to apply: the interpretation which result to the least transmission of rights and interest shall prevail

- In onerous contracto The doubt shall be settled in favor of the

greatest reciprocity of interest- If the principal object or the intention of the parties

cannot be determined, the contract shall be null and void

Article 1379The principles of interpretation stated in Rule 123 of the

Rules of Court shall likewise be observed in the construction of contracts.

- The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts

Notes: When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls the latter.

RESCISSIBLE CONTRACTS

Four kinds of Defective Contracts:1. Rescissible – there is a sort of extrinsic defect consisting

of an economic damage or lesion2. Voidable – valid until annulled but is subject to ratification3. Unenforceable – contract cannot be sued upon or

enforced, unless it is ratified; it has no effect now, but it may be effective upon ratification

4. Void (inexistent or illegal) – no effect at all; it cannot be ratified or validated

Rescission is applicable when…- Contract is valid on its face but what makes it defective is

by reason of damage or injury to any of the party or prejudice a third person

Three kinds:1. Guardian lesion2. Representation of an absentee, suffers inadequacy3. Contracts entered into to defraud the creditors

Voidable contracts- Affects the consent- Takes into account the capacity of the contracting

parties:o When cosent is vitiatedo When consent is entered into by a person who

is incapacitated

Unenforciable- Valid but cannot be enforced through court action- Ex. Unauthorized contracts; with out complying to the

requirements of statute of frauds; contract where both contracting parties are incapacitated to enter into such

Void contracts- If an essential requisite is absent, the contract is void- This cannot be ratified or validated

Article 1380Contracts validly agreed upon may be rescinded in the

cases established by law.

- Contracts validly agreed upon may be rescinded in the cases established by law

- Process designated to render inefficacious a contract validly entered into and normally binding, by reason of EXTERNAL CONDITIONS, causing an economic prejudice to a party or to his creditors

- Requisites for Rescission:o A valid or voidable contract at the beginning

o There is an economic or financial prejudice to someone

o Requires mutual restitutionTwo kinds of Rescission:

- Rescission in general (article 1380):o Is based on LESION or FRAUD upon creditorso The action is instituted by either of the

contracting parties or by third personso The courts cannot grant a period or term within

which to complyo Non-performance by the other party is

immaterial- Rescission under Article 1191 (resolution)

o Based on non-performance or non-fulfillment of the obligation

o Action may be instituted only by the injured party to the contract

o In some cases, court may grant a termo Non-performance by other party is important

Note: “Mutual Backing Out” is different from rescission. In this case, it is the will of the parties that constitutes the basis, whereas in rescission, it is the law that constitutes the basis

Rescissible contract is not void; it is valid until rescinded. It cannot be attacked collaterally (incidentally) upon the grounds for rescission in the course of another case. A direct action is required.

Fictitious contracts cannot be rescinded for they are null and void. Rescission presupposes a valid contract

Right of First Refusal- Means identity of terms and conditions to be offered to

the lessee and all other prospective buyers. - A contract of sale entered into in violation of a right of

first refusal of another person, while valid, is rescissible

Article 1381The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission.

- Rescissible Contracts:1. Entered into by GUARDIAN: ward represented suffer

lesion by more than ¼ of the value of the things which are object thereof

o Contracts which is an act of ownership: court approval is required otherwise it is unenforceable

o If merely an act of administration: with court approval is valid regardless of lesion; without court approval is rescissible is lesion is more than ¼

2. Those agreed upon in representation of ABSENTEE: latter suffer lesion as stated in number 1.

3. Those undertaken in fraud of creditorso Accion pauliana

4. Those which refer to things under litigation (entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority

5. Other contracts specially declared by law to be subject to rescission

Lesion – disparity between the price and value

Article 1382Payments made in a state of insolvency for obligations

to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible.

- Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible

- Ex. A is the debtor of B and C. A’s debt to C matured before that of B however A, before becoming insolvent paid B instead. In this case, C may ask for the rescission of the contract between A and B.

Two requisites:1. Debtor-payer must have been insolvent2. Debt was not yet due and demandable

Article 1383The action for rescission is subsidiary; it cannot be

instituted except when the party suffering damage has no other legal means to obtain reparation for the same. The

action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

- The action for rescission is SUBSIDIARY, thus it cannot be instituted unless other legal means to obtain reparation for the same has been made

Article 1384Rescission shall be only to the extent necessary to cover

the damages caused.

- Rescission shall be only to the extent necessary to cover the damages caused

- PARTIAL RESCISSION is possible because the purpose of such is to repair or cover the damage caused

Note: only the creditor who has asked for rescission, not the other creditors, benefits from the rescission.

Article 1385Rescission creates the obligation to return the

things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

- Effect of Rescission: MUTUAL RESTITUTION (return the object of the contract + fruits + price with its interest)

- However, restitution could not take effect if the object of the contract is legally in the possession of third person who did NOT ACT IN BAD FAITH. Thus what you can do is demand for damages from the person causing the loss

Requisites before Action for Rescission Can be Brought:1. Plaintiff must be able to RETURN what has been

received2. The thing object of the contract is NOT IN THE LEGAL

POSSESSION (ex. Registration in the registry of property) of third persons in GOOD FAITH

3. There must be NO OTHER legal remedy4. The action must be brought WITHIN the proper

PRESCRIPTIVE PERIOD

Article 1386Rescission referred to in Nos. 1 and 2 of Article 1381

shall not take place with respect to contracts approved by the courts.

- If the sale entered into by a guardian or representative of absentee is APPROVED by court, such cannot be rescinded despite the fact that there was LESION

Article 1387All contracts by virtue of which the debtor alienates

property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.

- Contemplates on the PRESUMPTION OF FRAUD in the cases of

o Gratuitous Alienations Presumed fraudulent when the debtor

did not reserve sufficient property to pay all debts contracted BEFORE the donation

o Onerous Alienations Presumed fraudulent when made by

persons (1) against whom some judgment has been rendered in any instances (even if not yet a final judgment); (2) against whom some writ of attachment has been issued

Thus, if the case is STILL PENDING, as long as there is no attachment issued, the sale is not presumed fraudulent.

Note: The decision or attachment need NOT refer to the property alienated, and need not have been obtained by the party seeking the rescission. Thus, even if it was not you who won the judgment but you are also a creditor, you can still ask for rescission.

Badges of Fraud – alienation has been made in fraud of creditors; indicators that there is fraud:

1. Consideration of the conveyance is fictitious or inadequate

2. A transfer made by the debtor after suit has been begun and while it is pending against him

3. A sale upon credit by an insolvent debtor4. Transfer of all or nearly all his property by a debtor when

he is insolvent or greatly embarrassed financially5. Evidence of large indebtedness or complete insolvency6. Transfer is made between father and son7. Failure of the vendee to take exclusive possession of all

the property

Article 1388Whoever acquires in bad faith the things alienated in

fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

- Contemplates on the effects of Bad Faith in purchasing something to defraud creditors:

o The acquirer must return or indemnify but only if the primary person who evaded creditors cannot pay (reason: rescission is merely a secondary remedy)

o “Due to any cause” includes a fortuitous event- Rules in Subsequent transfer:

o If the first transferee is in GOOD FAITH, the good or bad faith of the next transferee is NOT important

o If The first transferee is in BAD FAITH, the next transferee is liable only if he is also in bad faith

Bad Faith – state of mind affirmatively operating with furtive design or with some motive or self-interest or ill-will or for an ulterior purpose, and implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity

Article 1389The action to claim rescission must be commenced

within four years.For persons under guardianship and for absentees, the

period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known.

- GR: The action to claim rescission must be commenced within FOUR YEARS (4yrs)

- For guardianship and absentee: 4 years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known

Q: Who can bring the action?A:

1. The injured party (or defrauded person)2. His heir or successor in interest3. Creditors of 1 and 2 (accion subrogatoria)

VOIDABLE CONTRACTS

- Covers two situation:o Incapacity to contracto Vitiated consent

- All other essential elements are present except that of consent

- Until it is annulled by the court, the contract remains valid and binding

- 2 alternatives in event that there is a voidable contract:o You attack its validity by filing an action in courto Convalidate it either by ratification or

prescription

Characteristics of voidable contracts1. Their defect consists in the vitiation consent of one of the

contracting parties2. They are biding until annulled3. They are susceptible of convalidation by ratification or by

prescription4. Their defect or voidable character cannot be invoked by

third persons

In rescissible, there is no ratification but there can be convalidation. In this situation, a third party can raise the rescission of a contract

VOIDABLE vs. RESCISSIBLEVOIDABLE RESCISSIBLE

Defect is intrinsic Defect is externalDamage is not necessary; voidable even without damage or prejudice (basis is vitiated consent)

Rescissible only if there’s damage or prejudice (basis is lesion)

Action is Principal Action is SubsidiaryAnnulablility of contract is based on law

Is based on equity

Public interest predominates Private interest predominates – more concerned on the damage suffered by the

contracting partySusceptible of ratification Not susceptible of ratificationInvoked only by a contracting party

May be invoked either by a contracting party or by a 3rd

person who is prejudicedA defect is presupposed Compatible with the perfect

validity of the contract

Article 1390The following contracts are voidable or annullable,

even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.

- Enumerates voidable contractso One of the parties is incapable of giving consent

(minor, insane, deaf mute who does not know how to write; NOTE: presumption is that a person is sane) (if both are incapable, the contract is UNENFORCIABLE)

o CONSENT IS VITIATED BY MISTAKE, VIOLENCE, ETC.

- If consent is absolutely lacking or simulated, the contract is INEXISTENET, NOT VOIDABLE!

Article 1391The action for annulment shall be brought within

four years.This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases.

- Contemplates on prescriptive period: Within FOUR YEARS

o In cases of intimidation, violence or undue influence, form the time the defect of the consent ceases

o In case of mistake or fraud, from the time of the discovery of the same

o And when the action refers to contracts entered into by minors or incapacitated person, form the time the guardianship ceases (until age 22)

- If the action has prescribed, the contract can no longer be set aside

Note: Registration of the deeds with the Register of Deeds as registration is CONSTRUCTIVE NOTICE to the WORLD

Article 1392Ratification extinguishes the action to annul a voidable

contract.

- Ratification extinguishes the action to annul a voidable contract

CONFIRMATION – to cure a defect in a voidable contractRATIFICATION – to cure the defect of lack of authority in an authorized contractACKNOWLEDGMENT – to remedy a deficiency of proof

Effects of Ratification:1. Action to annul is extinguished (contract becomes a

completely valid one)2. The contract is cleansed of its defect from the beginning

Requisites of Ratification:1. Contract must be a voidable one2. The person ratifying must know the reason for the

contract being voidable (cause is known)3. The cause must not exist or continue to exist anymore at

the time of ratification4. Ratification is made expressly or impliedly by a waiver of

the action to annul5. The person ratifying must be the injured party

Article 1393Ratification may be effected expressly or tacitly. It is

understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

- How ratification is made:o Expressly - ex. executes a document ratifying a

sale contracted while he is still a minor (oral or writte)

o Tacitly – it is understood that there is a tacit ratification if, with the knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right (ex. Continuous demand of the balance of installment payment is an implied ratification of the sale which he transacted when he was still aminor)

Article 1394Ratification may be effected by the guardian of the

incapacitated person.- When one of the parties is incapacitated to give consent

and is under guardianship, it is the guardian who is authorized under the law to ratify in behalf of the incapacitated person

Note: Ratification can be made by the injured party himself, provided he is capacitated or he has become incapacitated

Article 1395Ratification does not require the conformity of the

contracting party who has no right to bring the action for annulment.

- Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment

- Guilty party cannot raise for annulment

Article 1396Ratification cleanses the contract from all its defects

from the moment it was constituted.

- Retroactive effect of ratification of a contract- Ratification cleanses the contract from all its defects form

the moment it was constituted Note: even if there is a retroactive effect, the rights of innocent third persons must not be prejudeced

REQUISITES OF RATIFICATION1. The contract should be tainted with a vice which is

susceptible of being cured2. The confirmation should be effected by the person who

is entitled to do so under the law3. It should be effected with knowledge the vice or defect of

the contract4. The cause of the nullity and defect should have already

disappeared

Article 1397The action for the annulment of contracts may be

instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

Q: who can file an action for annulment?A: Innocent Party, whether principal or subsidiary of the contract. Only the incapacitated party can file for annulment. If vitiated, only the innocent party aswell can file

REQUISITES TO INSITUTUE ACTION FOR ANNULMENT1. Plaintiff must have interest in the contract (principal or

subsidiary)2. The victim and not the party responsible for the vice or

defect must be the person who must assert the same

Article 1398An obligation having been annulled, the contracting

parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages.

- Effect once the contract is annulled: MUTUAL RESTITUTION

- Note: the creditor s of the victim cannot ask for annulment for they are not bougt by contractS

Article 1399When the defect of the contract consists in the

incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

- If other party is incapacitated: incapacitated person in not obliged to make any restitution except insofar as he has been benefited by the thing he got

Article 1400Whenever the person obliged by the decree of annulment

to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

- if mutual restitution cannot be done due to the persons fault, he shall return the FRUITS received and the value of the thing at the time of the loss, with interest from the same date

Article 1401The action for annulment of contracts shall be

extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

- if lost through the fraud or fault of the person who has the right to instituted proceeding: you’re right to file the action is EXTINGUISHED (contemplates on the principle of equity)

- you should be ready to return

Article 1402As long as one of the contracting parties does not

restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

- if one does not restore, the other party cannot be compelled to do so as well (reciprocal obligation of restitution has been created)