UNIVERSITY OF NUEVA CACERES

COLLEGE OF BUSINESS AND ACCOUNTANCY

COMPREHENSIVE ACCOUNTING (BATCH 2019)

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

MADBOLIVAR

Handout 4

1.2.8 Formalities of contracts

General Rule: Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present.
Exceptions:
(1) When the law requires that a contract be in some form in order that it may be valid or
enforceable [Art. 1356, par. 2]
(2) When the law requires that a contract be proved in a certain way to be enforceable (Statute of
Frauds) [Art. 1356, par. 2]
(3) When the law requires a contract to be in some form for convenience [Art. 1357 and 1358]

KINDS OF FORMALITIES REQUIRED BY LAW

FOR THE VALIDITY OF CONTRACTS (SOLEMN CONTRACTS)

Formal or Solemn Contract Special Form Required by Law
Donations of Immovables Must be in a public instrument [Art. 749]
Donations of Movables Must be in a written contract if the donation
exceeds P500 [Art. 748]
Partnerships where real property is Must be in public instrument; otherwise the
contributed contract of partnership is void [Art. 1771, 1773]
Contracts of antichresis The principal loan and the interest, if any, must be
specified in writing; otherwise, the contract of
antichresis is void [Art. 2134]
Agency to sell real property or any Authority of the agent must be in writing;
interest therein otherwise, the sale is null and void [Art. 1874]
Stipulation to pay interest on loans, Must be expressly made in writing [Art. 1956]
interest for the use of money
Stipulation limiting common carrier’s Must be (1) in writing, signed by the shipper or
duty of extraordinary diligence to owner; (2) supported by a valuable consideration;
ordinary diligence and (3) reasonable, just, and not contrary to public
policy [Art. 1744]
Chattel mortgage Must be recorded in Chattel Mortgage Register
[Art. 2140]
Transfer of large cattle Requires transfer of the certificate of registration
[Rev. Adm. Code, Sec. 523]

FOR THE PURPOSE OF PROVING THE EXISTENCE OF THE CONTRACT

(AD PROBATIONEM/ STATUTE OF FRAUDS)
This article speaks of contracts that cannot be proved except by written note or memorandum,
unless the party charged waives the objection.

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This article applies to executory contracts only.
Art. 1403. The following contracts are unenforceable, unless they are ratified:
1. Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;
2. Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the same,
or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by
his agent; evidence, therefore, of the agreement cannot be received without the writing, or a
secondary evidence of its contents:
a. An agreement that by its terms is not to be performed within a year from the making thereof;
b. A special promise to answer for the debt, default, or miscarriage of another;
c. An agreement made in consideration of marriage, other than a mutual promise to marry;
d. An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient memorandum;
e. An agreement of the leasing for a longer period than one year, or for the sale of real property
or of an interest therein;
f. A representation as to the credit of a third person.
3. Those where both parties are incapable of giving consent to a contract.

FOR THE EFFECTIVITY OF THE CONTRACT AGAINST THIRD PERSONS

Art. 1358, Civil Code. The following must appear in a public document:
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;
The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
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;
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.

Article 1358 is only needed for convenience, not validity or enforceability. Registration of the
instrument only adversely affects third parties

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1.2.9 Interpretation and reformation of contracts

Reformation – remedy in equity by means of which a written instrument is made or construed so

as to express or conform to the real intention of the parties when some error or mistake has been
committed.
Rationale: It would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting of the minds of the parties.

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.

1.2.10 Defective Contracts

1.2.10.1 Recissible

1.2.10.2 Voidable

1.2.10.3 Unenforceable

1.2.10.4 Void
Distinctions among Defective Contracts
Rescissible Contract Voidable Contract Unenforceable Contract Void Contract
As to Validity Valid and binding Valid and binding Valid but unenforceable Invalid
until rescinded until annulled by court action
As to Legal Remedy Action for Action for None Action for
to injured party Rescission Annulment Declaration of
Nullity
Prescriptive period 4 years 4 years N/A No Prescriptive
of Action Period
Capability for Not subject to May be ratified May be ratified 1. Those illegal per
Ratification which ratification but may se can never be
will clean the defects be convalidated by ratified
of the contract prescription 2. The declaration
of nullity of those
which are not
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 illegal per se may
be barred by
estoppel or laches
in exceptional
cases.
Examples (1) Those which (1) Those where (1)Unauthorized (1) Those whose
are entered into one of the cause, object or
contracts – those
by guardians parties is purpose is
whenever the incapable of
entered into by one contrary to law,
wards whom they giving consentwho has no authority morals, good
represent suffer to a contract;or legal customs, public
lesion by more representation, or order or public
than one-fourth of (2) Those where who has acted policy;
the value of the the consent is beyond his powers
things which are vitiated by (2) Those which
the object thereof; mistake, (2) Those which did are absolutely
violence, not comply with the simulated or
(2) Those agreed intimidation, Statute of Frauds fictitious;
upon in undue influence
representation of or fraud. (3) Those where both (3) Those whose
absentees, if the parties are incapable cause or object
latter suffer more of giving consent to a did not exist at
than one-fourth of contract. the time of the
the value of the transaction;
things which are
the object thereof; (4) Those whose
object is outside
(3) Those the commerce of
undertaken in men;
fraud of creditors
when the latter (5) Those which
cannot in any impossible
other manner service;
collect the claims
due them; contemplate

(4) Those which an

refer to things
under litigation if (6) Those where
they have been the intention of
entered into by the parties
the defendant relative to the
without the principal object
knowledge and of the contract
approval of the cannot be
litigants or of ascertained;
competent judicial
authority; (7) Those
expressly
(5) Payments prohibited or
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made in a state of declared void by
insolvency of law
obligations to
whose fulfillment
the debtor could
not be compelled
at the time they
were effected.

(6) All contracts by

virtue of which the
debtor alienates
property by
gratuitous title
when the donor
did not reserve
sufficient property
to pay all debts
contracted before
the donation.

(7) Alienations by
onerous title when
made by persons
against whom
some judgment
has been rendered
in any instance or
some writ of
attachment has
been issued.

(8) Contacts
entered into by an
insolvent person,
if he does not
retain sufficient
property to pay his
obligations.

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