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Philippine contract law

The Philippines is a mixed law jurisdiction, shaped primarily by Spanish civil law and American common law as codified in the Philippine Civil Code. The Philippine Civil Code defines a contract as "a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service". Parties to an innominate contract have a high degree of contractual freedom and "may establish such stipulations, clauses, terms and conditions as they may deem convenient" only subject to the requirement that "they are not contrary to law, morals, good customs, public order, or public policy". A contract under Philippine law is only valid if it is binding upon both parties and, as such, a contract whose associated obligations are subject to one party's discretion is invalid. If a contract contains a provision benefitting a third-party beneficiary, the beneficiary may compel its performance provided that they communicated their assent to the promissor before any attempt by the latter to revoke or alter the benefit pursuant to the contract. Except where a provision of law requires that a contract take a particular form, a contract is binding regardless of the form it takes. In order for a contract to exist, the following criteria must be met:

Where a written instrument purporting to embody a contract does not adequately represent the true intention of the parties due to mistake, fraud, inequitable conduct, or accident; any party may seek reformation. Where one party was mistaken and the other either acted fraudulently or inequitably, or was aware of the defect in the instrument, the first party may seek reformation. Additionally, reformation may be sought where the defect in the document is caused by "ignorance, lack of skill, negligence, or bad faith on the part of the person drafting the instrument". The Supreme Court has the authority to determine the rules governing reformation under its Rules of Court. A party who takes legal action to enforce a contract is estopped from seeking reformation.

Valid contracts may only be rescinded in cases provided for by law. This includes fraudulent conveyances as well as contracts concluded by an individual's guardian or agent if an individual suffers lesion by more than one quarter of the value of the assets or services alienated, contracts alienating assets subject to litigation without the consent of the litigants, and other categories of contract expressly designated by statute. Rescission may not be sought except where it is the only means by which a party can obtain reparation for the damages caused to them by the contract and is only permitted to the extent necessary to cover such damages. Under Philippine law, rescission creates an obligation to return anything that was the object of the contract as well as any profit derived therefrom, and rescission is consequently available only where the party seeking the remedy is able to return or provide reparation for such things. Additionally, rescission is prohibited where the items that are the object of the contract are in the possession of a holder in due course who acted in good faith. Aside from rescission, a contract under Philippine law may be voided where a party did not possess the capacity to consent or where the consent was given due to mistake, violence, intimidation, undue influence, or fraud.

Certain contracts under Philippine law, while valid, are unenforceable unless ratified. This includes contracts concluded by an agent who acted without or beyond authority, contracts where both parties lack capacity to consent, and contracts that violate the Statute of Frauds as applicable under the Philippine Civil Code. Additionally, a contract is void ab initio if its cause, object, or purpose is contrary to law, morals, good customs, public order or public policy; it is absolutely simulated or fictitious; its cause or object did not exist when it was concluded, is impossible, or is "outside the commerce of men"; the intention of the parties cannot be determined; or it is expressly prohibited or declared void by law. A contract that is void ab initio may not be ratified.

Philippine contract law takes a middle ground between the common law and civil law approaches to liquidated damages or penalty clauses. While such provisions are lawful and enforceable, a court may reduce such damages if it finds their effect to be iniquitous or unconscionable. Additionally, if the breech of contract litigated is one that was not contemplated by the parties when the contract was concluded (e.g. force majeure), the appropriate level of damages will be determined by the court without regard to the provision.