WEEK 7

CONTRACTS, continued

TITLE II – C O N T R A C T S
CHAPTER 4. – REFORMATION OF INSTRUMENTS
See Arts. 1359 - 1369

REFORMATION OF CONTRACTS – remedy to conform to real

intention of parties due to mistake, fraud, inequitable conduct,
accident

CAUSES/GROUNDS:
1. Mutual: instrument includes something w/c should not be there or omit what should be there
a. Mutual
b. Mistake of fact
c. clear and convincing proof
d. causes failure of instrument to express true intention
2. Unilateral
a. one party was mistaken
b. other either acted fraudulently or inequitably or knew but concealed
c. party in good faith may ask for reformation
3. Mistake by 3rd persons – due to ignorance, lack of skill, negligence, bad faith of
drafter, clerk, typist
4. Others specified by law – to avoid frustration of true intent
 Requisites:
a. There is a written instrument
b. There is meeting of minds
c. True intention not expressed in instrument
d. Clear and convincing proof
e. Facts put in issue in pleadings
 NOTE: prescribes in 10 years from date of execution of instrument

WHEN REFORMATION NOT AVAILABLE:

1. Simple donation inter vivos
2. Wills
3. When real agreement is void
4. Estoppel when party has brought suit to enforce it

CHAPTER 5. – INTERPRETATION OF CONTRACTS

See Arts. 1370 – 1379
Articles 1370 to 1379 of the Civil Code cover the rules on interpretation of contracts under Civil
Law. Foremost among these rules are:

 If the terms of the 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 contrary to the evident intention of the parties, intention prevails over words (Art.
1370).
 If a stipulation of any contract can have several meanings, the meaning which will be
most adequate to render the stipulation effective shall be adopted (Art. 1373).
 Words, which may have different significations, shall be understood in that which is most in
 keeping with the nature and object of the contract (Art. 1375).
 The usage or custom of the place shall be borne in mind when interpreting the ambiguities
of a contract, and shall fill the omission of stipulations which are ordinarily established (Art.
1376).

CHAPTER 6. - DEFECTIVE CONTRACTS

See Arts. 1370 - 1422

KINDS OF DEFECTIVE CONTRACTS:

1. RESCISSIBLE CONTRACTS – Those which have caused a particular economic damage
either to one of the parties or to a 3rd person and which may be set aside even if valid. It may
be set aside in whole or in part, to the extent of the damage caused'

REQUISITES:
a. Contract must be rescissible
i. Under art 1381: Contracts entered into by persons exercising fiduciary
capacity:
1. Entered into by guardian whenever ward suffers damage by more than 1/4 of value
of object
2. Agreed upon in representation of absentees, if absentee suffers lesion by
more than ¼ of value of property
3. Contracts where rescission is based on fraud committed on creditor (accion
pauliana)
4. Objects of litigation; contract entered into by defendant w/o knowledge or
approval of litigants or judicial authority
5. Payment by an insolvent – on debts w/c are not yet due; prejudices claim of others
6. Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and
1659
ii. Under art 1382 - Payments made in a state of insolvency
1. Plaintiff has no other means to obtain reparation.
2. Plaintiff must be able to return whatever he may be obliged to return due
to rescission
3. The things must not have been passed to 3rd parties who did not act in bad faith
4. It must be made within the prescribed period (of 4 years)

OBLIGATION CREATED BY THE RESCISSION OF

THE CONTRACT: Mutual Restitution
a. Things w/c are the objects of the contract and their fruits
b. Price with interest

MUTUAL RESTITUTION NOT APPLICABLE WHEN

a. creditor did not receive anything from contract
b. thing already in possession of party in good faith; subject to indemnity only; if there are
2 or more alienations – liability of 1st infractor
BADGES OF FRAUD
a. consideration of the conveyance is inadequate or fictitious
b. transfer was made by a debtor after a suit has been begun and while it is
pending against him
c. sale upon credit by an insolvent debtor
d. evidence of indebtedness or complete insolvency
e. transfer of all his property by a debtor when he is financially embarrassed or
 insolvent
f. transfer made between father and son where there is present any of the above
circumstances
g. failure of the vendee to take exclusive possession of the property

Rescission in Art 1191 Rescission Proper in Art 1381

It is a principal action it is a subsidiary remedy
retaliatory in character
Only ground is non- performance of There are 5 grounds to rescind. Non-performance by
one’s obligation or what is incumbent the other is not important
upon him
Applies only to reciprocal obligation Applies to both unilateral and reciprocal obligations
Only a party to the contract may Even a third person who is prejudiced by the contract
demand fulfillment or seek the may demand the rescission of the contract.
rescission of the contract
Court may fix a period or grant Court cannot grant extension of time for fulfillment of
extension of time for the fulfillment the obligation
of the obligation
Its purpose is to cancel the contract Its purpose is to seek reparation for the damage or
injury caused, thus allowing partial rescission of the
contract

2. VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect is due to vice
of consent or legal incapacity
 CHARACTERISTICS:
a. Effective until set aside
b. May be assailed or attacked only in an action for that purpose
c. Can be confirmed ( NOTE: confirmation is the proper term for curing the
defect of a voidable contract)
d. Can be assailed only by the party whose consent was defective or his heirs or
assigns

WHAT CONTRACTS ARE VOIDABLE:

a. Minors ( below 18 )
b. Insane unless acted in lucid interval
c. Deaf mute who can’t read or write
d. Persons specially disqualified:civil interdiction
e. In state of drunkenness
f. In state of hypnotic spell

MISTAKE
 false belief into something
 REQUISITES:
a. Refers to the subject of the thing which is the object of the contract
b. Refers to the nature of the contract
c. Refers to the principal conditions in an agreement
d. Error as to person - when it is the principal consideration of the contract
e. Error as to legal effect - when mistake is mutual and frustrates the real purpose of parties

VIOLENCE
 serious or irresistible force is employed to wrest consent
INTIMIDATION
 one party is compelled by a reasonable and well- grounded fear of an imminent and grave
danger upon person and property of himself, spouse, ascendants or descendants (moral
coercion)

UNDUE INFLUENCE
 person takes improper advantage of his power over will of another depriving latter of
reasonable freedom of choice
FRAUD
 thru insidious words or machinations of contracting parties, other is induced to enter
into contract w/o w/c he will not enter (dolo causante)

KINDS OF FRAUD IN THE PERFORMANCE OF OBLIGATION OR CONTRACTS

a. Causal Fraud (dolo causante) – deception of serious character without which the other
party would not have entered into; contract is VOIDABLE (Art.1338)
b. Incidental Fraud (dolo incidente) – deception which are not serious and without which
the other party would still have entered into the contract; holds the guilty party liable
for DAMAGES (Art. 1344)
c. Tolerated Fraud – includes minimizing the defects of the thing, exaggeration of its good
qualities and giving it qualities, it does not have; LAWFUL misrepresentation
NOTE:
 Expression of an opinion – not fraud unless made by expert and other party relied
on the former’s special knowledge
 Fraud by third person – does not vitiate consent; only action for damages except if there
is collusion between one party and the third person, or resulted to substantial mistake,
mutual between parties.

CAUSES OF EXTINCTION OF ACTION TO ANNUL

a. PRESCRIPTION - Period to bring an action for Annulment
i. Intimidation, violence, undue influence -4 years from time defect of consent
ceases
ii. Mistake, fraud – 4 years from time of discovery
iii. Incapacity – from the time guardianship ceases
b. RATIFICATION
REQUISITES
i. knowledge of reason rendering contract voidable
ii.such reason must have ceased, except in case of ratification effected
by the guardian to contracts entered into by an incapacitated,
iii. the injured party must have executed an act which expressly or
impliedly conveys an intention to waive his right
c. LOSS OF THE THING which is the object of the contract through fraud or
fault of the person who is entitled to annul the contract
• NOTE: Object is lost through a fortuitous event, the contract can still be
annulled, but the person obliged to return the same can be held liable only for
the value of the thing at the time of the loss, but without interest thereon.
• Ratification cleanses the contract of its defects from the moment it was
constituted.

3. UNENFORCEABLE CONTRACT – valid but cannot compel its execution unless

ratified; extrinsic defect; produce legal effects only after ratified

KINDS:
a. Unauthorized or No sufficient authority – entered into in the name of another
when:
i. No authority conferred
ii. In excess of authority conferred (ultra vires)
 b. Curable by Ratification - Both parties incapable of giving consent -2 minor or 2
insane persons
c. Curable by Acknowledgment - Failure to comply with Statute of Frauds
i. Agreement to be performed within a year after making contract
ii. Special promise to answer for debt, default or miscarriage of another
iii. Agreement made in consideration of promise to marry
iv. Agreement for sale of goods, chattels or things in action at price not less than
500; exception: auction when recorded sale in sales book
v. Agreement for lease of property for more than one year and sale of real
property regardless of price
vi. Representation as to credit of another

TWO WAYS OF CURING UNENFORCEABLE CONTRACTS:

a. Failure of defendant to object in time, to the presentation of parole evidence in
court, the defect of unenforceability is cured
b. Acceptance of benefits under the contract. If there is performance in either part
and there is acceptance of performance, it takes it out of unenforceable contracts;
also, estoppel sets in by accepting performance, the defect is waived

4. VOID OR INEXISTENT – of no legal effect

CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone
b. There is no action for annulment necessary as such is ipso jure. A
judicial declaration to that effect is merely a declaration
c. It cannot be confirmed, ratified or cured
d. If performed, restoration is in order, except if pari delicto will apply
e. The right to set up the defense of nullity cannot be waived
f. Imprescriptible
g. Anyone may invoke the nullity of the contract whenever its juridical
effects are asserted against him
KINDS OF VOID CONTRACT:
a. Those lacking in essential elements: no consent, no object, no cause (inexistent
ones) – essential formalities are not complied with (ex: donation propter nuptias –
should conform to formalities of a donation to be valid)
i. Those w/c are absolutely simulated or fictitious – no cause
ii. Those which cause or object did not exist at the time of the transaction – no
cause/object
iii. Those whose object is outside the commerce of man – no object
iv. Those w/c contemplate an impossible service – no object
v. Those w/c intentions of parties relative to principal object of the contract
cannot be ascertained
b. Prohibited by law
c. Those expressly prohibited or declared void by law - Contracts w/c violate any
legal provision, whether it amounts to a crime or not
d. Illegal/Illicit ones – Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy; Ex: Contract to sell marijuana
CONTRACT CONSTITUTE DOES NOT CONSTITUTE CRIMINAL
CRIMINAL OFFENSE OFFENSE but is ILLEGAL/UNLAWFUL
PER SE

a. No action for specific

Parties a. No action for specific
are in performance performance
pari b. No action for restitution on
delicto b. No action for restitution on either side. The law will leave
either side. The law will leave you where you are
you where you are c. No confiscation
c. Both shall be prosecuted
d. Thing/price to be confiscated in
favor of government
 Only a. No action for specific performance a. No action for specific performance
one
b. Innocent party is entitled to b. Innocent party is entitled to restitution
party is
guilty restitution
c. Guilty party is not entitled to restitution
c. Guiltyparty is not entitled to
restitution
d. Guilty party will be prosecuted
e. Instrumentof crime will be
confiscated in favor of gov’t.

KINDS OF ILLEGAL CONTRACTS PARI DELICTO DOCTRINE

 Both parties are guilty, no action against each other; those who come in equity
must come with clean hands; applies only to illegal contracts and not to
inexistent contracts; does not apply when a superior public policy intervenes
 EXCEPTION TO PARI DELICTO RULE - If purpose has not yet been accomplished and If
damage has not been caused to any 3rd person
 OTHER EXCEPTIONS:
a. Payment of Usurious interest
b. payment of money or delivery of property for an illegal purpose, where the party who paid
or delivered repudiates the contract before the purpose has been accomplished, or
before any damage has been caused to a 3rd person
c. payment of money or delivery of property made by an incapacitated person
d. agreement or contract which is not illegal per se and the prohibition is ensigned for the
protection of the plaintiff
e. payment of any amount in excess of the maximum price of any article or commodity fixed
by law or regulation by competent authority
f. contract whereby a laborer undertakes to work longer than the maximum number of
hours fixed by law
g. one who lost in gambling because of fraudulent schemes practiced on him is allowed
to recover his losses (Art. 313 RPC) even if gambling is prohibited.
REQUISITES OF ILLEGAL CONTRACTS:
a. Contract is for an illegal purpose
b. Contract must be repudiated by any of the parties before purpose is accomplished
or damage is caused to 3rd parties
c. Court believes that public interest will be served by allowing recovery (discretionary
upon the court ) – based on remorse; illegality is accomplished when parties entered
into contract; before it takes effect– party w/c is remorseful prevents it

WHERE LAWS ARE ISSUED TO PROTECT CERTAIN SECTORS: CONSUMER

PROTECTION, LABOR, USURY LAW
a. Consumer protection – if price of commodity is determined by statute, any person
paying an amount in excess of the maximum price allowed may recover such
excess
b. Labor – if law sets the minimum wage for laborers, any laborer who agreed to receive
less may still be entitled to recover the deficiency; if law set max working hours and
laborer who undertakes to work longer may demand additional compensation
c. Interest paid in excess of the interest allowed by the usury law may be recovered by
debtor with interest from date of payment

EFFECTS OF ILLEGAL CONTRACTS

a. If one party is incapacitated, courts may allow recovery of money, property delivered
by incapacitated person in the interest of justice; pari delicto cannot apply because an
incapacitated person does not know what he is entering into; unable to understand the
consequences of his own action
b. If agreement is not illegal per se but merely prohibited and prohibition is designated
for the protection of the plaintiff – may recover what he has paid or delivered by virtue
of
 public policy
MUTUAL RESTITUTION IN VOID CONTRACTS
 GENERAL RULE: parties should return to each other what they have given by virtue of
the void contract in case
 Where nullity arose from defect in essential elements
a. return object of contract and fruits
b. return price plus interest
 EXCEPTION: No recovery can be had in cases where nullity of contract arose
from illegality of contract where parties are in pari delicto; except:
a. incapacitated – not obliged to return what he gave but may recover what he
has given
b. other party is less guilty or not guilty

End
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