30808261 Contracts Reviewer for CPA Aspirants

8/8/2019 30808261 Contracts Reviewer for CPA Aspirants

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CONTRACTS

Prepared by: Raymond AndesSources: The New Civil Code of the Philippines; commentaries by Paras, Suarez, andTolentino; reviewer published by Soriano; reviewers prepared by UP Law Bar-OpsCommission and Karichi Santos of UP Law B2012; and some personal inferences.

Definition according to the Civil Code of the Philippines: a contract is a meeting of mindsbetween two persons whereby one binds himself, with respect to the other, to givesomething or to render some service.

We can infer from the very definition of Contract that obligations would alwaysnaturallyexist upon the perfection of a contract. In short, when there is a contract, there will alwaysbe an obligation but when there is obligation, there isntalways a contract.

Elements of a Contract

1.Essential Elements without these elements, there is no contract. A defect in anyofthese elements causes a defect in the contract.a.Consent of the parties most important of all elements. This is themeeting of minds between parties on the object and cause of the contractb.Object the subject matter of the contractc.Cause the essential and impelling reason why a party assumes anobligation.2.Accidental Elements those that which exist only upon stipulations in the contract

(such as terms of payment, place of payment, conditions, etc.)3.Natural Elements those that even without stipulations, they exist (such as warrantyagainst hidden defects and warranty against eviction). However, parties can stipulatewaiver of such elements.Classifications of Contracts

1.According to perfection or formationa.Consensual those perfected upon mere consent (such as sales)b.

Realthose perfected upon delivery of the object (such as depositum,pledge, and commodatum)

c.Formal or Solemn those that can only be valid through compliance withthe formalities of law (such as donation of a real property)2.According to causea.Onerous where there is exchange of valuable considerationsb.Gratuitous where one party receives no equivalent considerationc.Remuneratory the cause is the service remunerated

3.According to dependence upon another contracta.


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Principal one that stand by itselfb.Accessory one whose existence depends another contract known as theprincipal contract (such as mortgage and pledge)c.Preparatory one which serves as a means in which other contracts may beentered (such as agency and partnership)

4.According to parties obligateda.Unilateral those where only one of the parties are required to accomplishthe determinative conductb.Bilateral or synalagmatic those where both parties are required toaccomplish their own determinative conducts5.According to time or fulfillmenta.Executed one which has already been performed

b.Executory one that has not yet been performed


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6.According to the number of persons physically entering into the contracta.Ordinary where the two parties are represented by two different personsb.Auto-contract where the two parties are represented by only one person(such as i

n agency where the agent lends money to his principal who herepresents as the borrower)Stages of a Contract

1.Preparation or Conception involves preliminary negotiations, discussion of termsand conditions wherein agreement has not yet occurred.2.Perfection or Birth the point at which there is finally a meeting of minds betweenparties as to the object and the valid cause.3.Consummation or Death or Termination the point at which the terms of the contrac

thave been fulfilled resulting in its accomplishmentBasic Principles of a Contract

1.Liberty of contract or freedom to stipulate the parties have the liberty to contractand stipulate. This is one of the liberties guaranteed by the laws of the land to thepeople. However, this is subject to limitations as follows: law, public policy, goodcustoms, public order and morals.2.Mutuality of contracts the parties are both bound to one another. The validity orcompliance of the contract cannot be left to the will of one of them.3.

Relativity of contracts contracts take effect only within the contracting parties, theirassigns and heirs, except where the rights and obligations are not transmissible.4.Consensuality of contracts contracts are usually perfected by mere consent of theparties except if the contracts are real and formal/solemn.5.Obligatory force of contract and compliance in good faith all contracts have theforce of law between the contracting parties and should be complied with in goodfaith.ESSENTIAL REQUISITES OF CONTRACTS (expounded)

CONSENT

Consent is manifested by the meeting of the offer and the acceptance upon the object andthe cause which are to constitute the contract. In plain language, it is the meeting ofminds of both parties.

Consent has two parts: Offer and Acceptance. Upon communication of acceptance ofoneof the parties towards the other, the contract is usually perfected.

What happens if


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the offer is vague? Will there still be acontract?

a seller advertised his products to thepublic? Is there already an offer?

one of the parties dies, is civilly

Answer

There wouldnt be meeting of minds,therefore contract will not exist.

At this point, offer does not exist yet.Advertisements are mere invitations tomake an offer. However, if all detailsneeded are conveyed to the public,advertisement becomes an offer.

The offer becomes ineffective. Thus,


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interdicted, insane or incapacitatedbefore acceptance is conveyed? Whathappens to the offer?an offerer gives the offeree a certainperiod of time to accept, can the offererwithdraw the offer?

there is no contract.

Yes, as long as he communicates suchwithdrawal before the acceptance hasbeen communicated.

after the offerer has given the offeree acertain period of time to accept, thelatter gives the former an option money,can the offerer withdraw the offer?

No. Because, in effect, the offeree hasbought the time period given by theofferer. The former is entitled to compel

the latter not to withdraw the offer untilthe prescription of the period of time.However, if the offeree failed to give theoption money, the offeror has the libertyto withdraw the offer. It is as if there is nosuch option contract. (Q: Usinginference, what kind of contract asto perfection is an option contract?)

Major Rule on Consent

There is no consent until there has been agreement between two parties. Contractis

perfected upon the point at which acceptance is communicated to the offerer.Example

May 31, 10:45 pmKent texts Karen: Hoy Bakla, bilhin mo naman make-up ko from Avon, maganda na murapa. 15,000 pesos lang. Bukas, dalhin ko na.

May 31, 10:46 pm

Karen receives Kents text message. She replies: Sige, go! Pero, pwede 10,000 pesosnalang?May 31, 10:48 pmKent receives text message. He takes his calculator and tried to compute his profit. He

shakes his head then sends back a message: Hay naku gurl, mahal yan. Di basta-basta yan.Gaganda ka lalo

May 31, 11:37 pmDue to problems in signal, Karen receives text message at this late. She makes a


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reply:Pano ba ako nakakasigurong totoo yang sinasabi mo eh lalake ka?

May 31, 11:50 pm

Kent thought for awhile. He remembers something, then makes a reply: Alala mo bakahapon kung ano itsura ko?May 31, 11:51 pm


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Karen: Absent ka kahapon so pano ko malalaman?May 31, 11:53 pmKent: Akala mo lang yun! Present ako no ako yung naka-blue with stripes of white

kahaponMay 31, 11:55 pm

Karen: Huh? Di mo naman kamukha si Piolo Pascual at di mo rin kamukha si Diether

Ocampo!May 31, 11:56 pmKent: Thats the point! Linagay ko make-up from avon kaya on my left side, kamuka ko si

Diether at pagtingin mo sa kabila, kamuka ko na rin si Piolo!May 31, 11:57 pmKaren: May magic ang make-up mo???!!!May 31, 11:58 pmKent: Ano pa ba sa tingin mo?

May 31, 11:59 pmKaren: Sige, go! Bilhin ko na. Willing ako!June 1, 12:01 amKent receives Karens last text message and replies: Okay.June 1, 12:03 amKaren receives Kents last text message and finally rests her head on the bed andstarts

sleeping.

Question: At what time was there a meeting of minds? At what time was thereperfection of the contract?

Answer

June 1, 12:01 am. Meeting of minds occurs at the moment the offeror receives theoffereesacceptance.

Capacity

Parties entering into a contract must have the legal capacity to do so. Reason:To protectincapacitated persons from damages that may be caused by the other party.

Contracts entered into by incapacitated persons are VOIDABLE if only one of thecontractingpersons is incapacitated and UNENFORCEABLE if both parties are incapacitated.


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Who are the incapacitated persons?

1. Minors those aged below 18 (RA 6805). Exceptions: (1) if the contract is entered into forthe purpose of acquiring necessaries; or (2) when the minor misrepresents his age (thereason for this is to protect the other party from harm that may be caused by suchmisrepresentation. However, if the other party knows such mi

srepresentation, contractremains voidable).2. Insane or demented persons, unless they contract during lucid interval.3. Deaf-mutes who do not know how to read and write, unless guided by another person.Vices of Consent

1. Mistake inadvertent and inexcusable disregard of a circumstance material to thecontract (JBL Reyes). In order that mistake may invalidate consent, it shouldrefer to thesubstance of the thing which is the object of the contract, or to those conditions whichhave principally moved one or both parties to enter into the contract.2. Intimidation happens when one of the contracting parties is compelled by area

sonable and well-grounded fear of an imminent and grave evil upon his person orproperty, or upon the person or property of his spouse, descendants or ascendants, to givehis consent (Art. 1335).3. Violence irresistible force used to extort consent (JBL Reyes)4. Undue Influence happens when a person takes improper advantage of his power overthe will of another, depriving the latter of a reasonable freedom of choice (Art. 1337).5. Fraud happens when through insidious words or machinations of one of the contractingparties, the other is induced to enter into a contract which, without them, he would not haveagreed to (Art. 1338).Query: Is there Fraud in the following circumstances?

1. Offeror failed to disclose certain important facts to the offeree and the for

mer has theduty to reveal them.2. Usual exaggerations in trade made by the seller and the other party had an opportunity toknow the facts.3. Seller expresses an opinion and the buyer believes such opinion.4. Expert expresses an opinion. A) the expert was hired by the seller; B) the expert washired by the buyer.Simulation of Contracts: Declaration of a non-existent will producing the appearance of atransaction that does not exist, or which is different from the one that actually arose.(Reyes)

Kinds of Simulated Contracts

1.Absolutely Simulated Contract contract which provides for a transaction thatdoesnot exist. This contract is void.


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2.Relatively Simulated Contract contract which provides for a transaction thatdiffers from the one that actually arose. True agreement is concealed for somereasons. The validity and effects of this contract will be governed by the rulesapplicable to the intended contract, and not by those applicable to theappearing contract. However, if a 3rd person is benefited by the appearing

contract, it will be binding. This is, however, dependent on w/n the 3rd personis ingood faith.

Absolute

No real transaction intendedFictitious contractVoid

OBJECT

Relative

Real transaction is hidden

Disguised contract

Bound as to hidden agreement, so longas it does not prejudice a 3rd person andis not contrary to law, morals, publicpolicy, customs or public order

Object is the thing, right or service which is the subject matter of the obligat

ion arisingfrom the contract.

Requisites:

1.Lawful: Not contrary to law, morals, good customs, public order or public policy.2.Actual or possible3.Transmissible: within the commerce of man. Things that are outside the commerceof man are those things that are not susceptible of appropriation or of privateownership, and which are not transmissible. Examples: property that pertain topublic dominion such as roads and plazas; common things like the air and the sea.4.At least determinate as to its kind. If the object is merely something or ananimal,the species is not determined, the contract would be void.In order that a thing, right or service may be the object of a contract, it should be inexistence at the moment of the celebration of the contract, or at least,it can existsubsequently or in the future.

A future thing may be the object of a contract, such contract may be interpretedas a:

Conditional Contract: where its efficacy should depend upon the future existence


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of thething.Aleatory Contract: where one of the parties assumes the risk that the thing willnevercome into existence, e.g. insurance.Q: Can future inheritance be the object of a contract? It depends. If the objectis aspecific property you are expecting to inherit from an ascendant, the sale is vo

id. But if theobject is merely the future hereditary rights without specification of the properties, the saleis valid because this is permitted by law (Art. 1630).CAUSE

Cause is the impelling reason for which a party assumes an obligation


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Requisites: (1) Existing; (2) Licit/Lawful; (3) True*.

Query: What is the cause and what is the object in a sale of land? Answer: Itdepends on which perspective.

Party Cause Object

vendOR Cash (wants to profit) LandvendEE Land (wants to acquire land) Land

According to Tolentino, the object in onerous contracts is the thing, service oract whichforms the basis of the entire contract, the starting point of the agreement, without whichthe negotiations or bargaining between the parties would never even have begun.

Cause and Object in Other Types of Contract

Definition

Cause

Object

Remuneratory

It is a contract where a party givessomething to another because ofsome service or benefit given orrendered by the latter to theformer, where such service orbenefit was not due as a legal

obligation. (Tolentino)*The service or benefit which isremunerated

Thing given in exchange for theservice or benefit

Gratuitous

Agreements to give something or tolend something.

Mere liberality of the benefactor orgiver

Thing given (for donation) or thinglent (commodatum)

What is Motive? It is the psychological, individual and personal reason which induces aparty to enter into a contract.

Example: Jerelyn bought a piece of land from Daila because she wants that piece

of landused for constructing a vacation house (the land is located in Caramoan).The cause is thepiece of land she wants to own while the motive is Jerelyns desire to have a place forrelaxation.


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Circumstance DefinedLack of Absence or total lack of causeCauseIllegality ofCauseContrary to law, morals, goodcustoms, public policy and publicorderFalsity ofCause

Cause is stated but is untrue

Effect

Contract is null and voidNull and void

Void if it should NOT be proved that itwas founded upon another causewhich was true and lawful.

Lesion or Cause is not proportionate to Shall not invalidate the contract

Inadequacy object. except when there is fraud,


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of Cause mistake, or undue influence

May rescind the contract under some

instances(see rescissible contracts)

FORMS OF CONTRACTS

GENERAL RULE: Contracts shall be obligatory in whatever form they may have beenentered into, provided all the essential requisites for their validity are present.

EXCEPTIONS

1.When the law requires that a contract be in some form to be valid. Such contractisa formal contract.

a.Must be in public instrument to be valid:i.donation of real propertyii.Contribution of immovable property by a partner in a partnership

b.Must be in writing:i.Donation of personal property exceeding P5,000ii.Authority of an agent in sale of land

2.When the law requires that contract be in some form to be enforceable. (StatuteofFrauds) Failure to abide by this provision does not render the contract void,

itmerely renders the contract unenforceable.a.Must be in writing to be enforceable:ii.Agreement that by its terms is not to be performed within a year fromthe making thereofiii.Special promise to answer for the debt, default, or miscarriage ofanotheriv.Agreement made in consideration of marriage, other than mutualpromise to marryv.Sale of goods, chattels, or things in action, at a price not less thanP500.vi.Leasing for a period more than one year.vii.Sale of real property or of an interest thereinviii.Representation to the credit of a 3rd person

DEFECTIVE CONTRACTS

The following are defective contracts:

1.Rescissible Contracts valid until rescinded. They are valid because there is nodefect in any of the essential requisites BUT the law allows a party to rescind (orcancel) the contract because of the damage received by such party. This is basedon the EQUITABLE REASONS.2.Voidable Contracts valid until annulled. They are valid because the partyinjuredcan ratify the contract but the law gives such party the right to annul thesame

. These contracts are voidable because of a defect in the consent.3.Unenforceable Contracts valid but cannot be enforced unless ratified.


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4.Void Contracts void from the beginning.


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When? W/in 4 years from(re)gaining capacityW/in 4 years fromknowledge ofdomicile* ofabsenteeW/in 4 years fromknowledge of

fraudulent contractHow to curedefect?Ratification by injuredparty w/in 4 years fromgaining capacityRatification byabsentee w/in 4years fromknowledge ofdomicile* ofRatification bydefrauded creditor w/in4 years from knowledgeof fraudulent contractabsentee orknowledge offraudulent contract

VOIDABLE CONTRACTS

Voidable contracts are existent, valid, and binding, although they can be annulled becauseof want of capacity or vitiated consent of one of the parties; but before the annulment, theyare effective and obligatory between the parties. Hence,it is valid until it is set aside and itsvalidity may be assailed only in an action for that purpose (Llacer v Munoz, 12 Phil. 328).

Kinds of Voidable/Annullable Contracts (Although no damage to contracting parties):

1. Want of capacity2. Vitiated consent (Violence, Intimidation, Fraud, Mistake or Undue

Characteristics of Voidable/Annullable Contracts:

1. Their defect consists in the vitiation of consent of one of the contracting parties2. They are binding until they are annulled by a competent court3. They are susceptible of convalidation by ratification or by prescriptionNULLITY (Voidable)RESCISSION (Rescissible)

Declares inefficiency which contract alreadyMerely produces inefficiency, whichdid notcarries existin itself (intrinsic defect) essentially in the contract (external defect

i.e.pecuniary damages or prejudice to one ofthecontracting parties or 3rd persons)Requires act of ratification to be cured Needs no ratification to be effective

Based on a vice of the contract which Compatible with the perfect validity of theinvalidates it contract

Annulment is a sanction based on law Rescission is a remedy based on equity

Demanded only by the parties to theDemanded even by third parties affected bycontract it


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Prescription of Action for Annulment after prescription, contract can no longerbeannulledArt 1391 - Within 4 years


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Period shall begin:

1. Intimidation, violence or undue influence: from the time consensual defect ceases2. Mistake or fraud: from the time of discovery of the same3. Incapacity: from the time guardianship ceases

* Applies to the parties of to the contract, but NOT to third personsEffects of Annulment:

1.Mutual restitution of the things delivered, along with fruits and price paid withinterest.2.Damages to be paid by the party who caused defect of the contract.UNENFORCEABLE CONTRACTS

Unenforceable contract is one which cannot be enforced unless it is first ratifi

ed in themanner provided by law. It is distinguished from the rescissible and the annullable contractsin that the latter two contracts produce legal effects unless theyare set aside by acompetent court, while the unenforceable contract does not produce any effect unless it isratified.

Kinds of Unenforceable Contracts

1. Entered into in the name of another person by one who has no authority or nolegalrepresentation OR acted beyond his powers2. Do not comply with Statute of Frauds, which are agreements unenforceable unless in

writtenmemorandum and subscribed by the party charged:i.Agreement that by its terms is not to be performed within a year from the making

thereof

ii.Special promise to answer for the debt, default, or miscarriage of another

iii.Agreement made in consideration of marriage, other than mutual promise to marry

iv.Sale of goods, chattels, or things in action, at a price not less than P500.

v.Leasing for a period more than one year.

vi.Sale of real property or of an interest therein

vii.Representation to the credit of a 3rd person

If the contract has been executed, even partly, the contracts status as unenforceableceases as execution is considered by law as a form of ratification.3. Both parties are incapable of giving consent to contract

Ratification can be done by either parties or their guardians.Ratification by one party (or its guardian) makes the contract voidable.


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Ratification made by both parties (or their guardians) makes the contract perfectly valid.VOID CONTRACTS

A void contract is one which has no force and effect from the very beginning, asif it hadnever been entered into, and which cannot be validated either by time

or by ratification. Themaxim is no contract at all.


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Characteristics of Void/Inexistent Contracts

1. Void from the beginning2. Produces no effect whatsoever nullity exist ipso jure, judgment of nullity ismerelydeclaratory

3. Cannot be confirmed or validated (by prescription OR ratification), neither can the right toset upthe defense of illegality be waived Art 1409Action to Declare Nullity

necessary because nobody can take the law into his own handsDISTINCTIONS

VOIDRESCISSIBLE

Defect is inherent in the contract itself Defect is in their effects, either to

one of theparties or to a 3rd party

Matter of law and public interest Based on equity and more a matter ofprivate interest

No legal effects even if no action is taken toNo action, remains valid and produces all itsset it aside effects

Action to declare nullity of void contracts Action to rescind prescribes in 4 yearsnever

prescribes

VOIDVOIDABLE

One of those essential requisites is wanting,Essential requisites for validity is present,either in fact or in law or is declared void by BUT consent is vitiatedstatuteNot susceptible of ratification May be rendered perfectly valid byratification

Action to declare nullity of void contracts May be rendered perfectly valid by

never ratificationprescribes

VOID

UNENFORCEABLE

Both are ineffective at its birth

Can never be ratified and become Can be ratified and thereafter enforcedenforceableThere is no contract at all There is a contract which, however, cannot


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be enforced unless properly ratified

Examples of Void Contracts

One whose cause, object or purpose is against law, morals, public policy, publicorder or

good customs.


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One whose cause is totally absent. One whose object is impossible or cannot be done. Absolutely-simulated contracts


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30808261 Contracts Reviewer for CPA Aspirants