Art. 1337.

There 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.
UNDUE INFLUENCE is similar to moral coercion. It is a means employed
upon a party which, under the circumstances, he could not well resist,
and has the effect of controlling his volition, inducing him to give his
consent to the contract, which otherwise he would not have entered into.
Undue influence is different from Intimidation although they seem to be
similar. In intimidation, the threatened act is unlawful or unjust, while in
undue influence, it need not be so.
NOTA BENE :
1. The circumstances to determine undue influence, stated in Art.
1337 are not exclusive. They are to be taken as illustrative. Other
analogous circumstances may be considered depending on the
coercive power by one party and the susceptibility to influence on
the other.
Example:
a.)

illness of one party;

b.)

gross inequality in bargaining power bet. the parties;

c.)

one party is at a disadvantage by reason of moral dependence,

ignorance, indigence or poverty, mental weakness, age or other
handicap. (Art. 24 )

2. In Contracts of Adhesion where one party alone fixes the terms of

the contract, and the other has merely to take it or leave it, there
may be economic inequality and the freedom to contract by the
other party is suppressed.

However, this is generally allowed by law as a product of modern

business development and practice. For one who adheres to the
contract has also the freedom to reject it. But contracts of adhesion
are construed strictly against the party that drew the contract.
Examples:
o Air, sea and land transportation tickets or contracts;
o public utilities contracts with water, gas and electricity,
o insurance contracts,
o some real estate contracts,
o franchise contracts.
Art. 1338. There 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. (1269)
CONCEPT OF FRAUD VITIATING CONSENT. It is every kind of deception
whether thru insidious machinations, manipulation, concealments or
misrepresentation, for the purpose of leading another party into error and
to execute an act.
INSIDIOUS WORDS OR MACHINATIONS deceitful scheme or plot, such
as false promises, concealment of material facts with intent to deceive,
exaggeration of hope and benefits, abuse of confidence, use of fictitious
names, qualifications or authority, to influence or induce the consent of
the contracting party.
REQUISITES OF FRAUD to vitiate consent and to cause annulment of
contract:
1.)

Fraud was employed by one party upon the other;

2.)

It must have induced the other party to enter the contract;

3.)

It must have been serious deception or misrepresentation;

4.)

It resulted in damage or injury to the victim-party.

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TWO KINDS OF FRAUD in the PERFECTION OF CONTRACT:

1. DOLO CAUSANTE (causal fraud) fraud that is the essential cause
of the consent without which the party would not have agreed to
the contract. This is the kind of fraud applicable in Art. 1338.
Effect: Contract is VOIDABLE
Remedy: Annulment of contract plus Damages

Example: Seller misrepresented boundaries of his land to buyer by

pointing valuable properties not included in his title, including those
already sold to others. There being serious fraud, contract is
voidable. (Marino v. Linton, 45 Phil. 652)
2. DOLO INCIDENTE (incidental fraud) fraud that is not the decisive
influence, nor the essential cause in giving the consent to the
contract as it refers only to an incident which even if not present,
the party would still agree to the contract; also called.
o Fraud committed in performance of obligation in Art. 1170, 1171
Effect: Contract remains Valid
Remedy: Claim or action for Damages only
See: Illustrative Cases where fraud is sustained and denied by
S.C. in p. 507 Tolentino, or pp. 423-425 Pineda.

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

them, as when the parties are bound by confidential relations,
constitutes fraud.
Q. When is failure to disclose facts considered fraudulent?
A. When by reason of confidential relations, the party is duty bound to
disclose the facts, but instead concealed or omitted them with intent to
deceive. Such concealment or omission of material facts constitutes fraud,
and may be a ground for annulment of contract.
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Example:
a.) Where the insured concealed the fact that he had a number of
ailments, including pulmonary tuberculosis, thus the insurance co.
accepted the risk, which it would have otherwise refused had it
known the truth. (Musngi v. West Coast Life Ins. Co., 61 Phil.
864)

b.) Where a director/manager of the corporation who negotiated and

knew that the govt. will be buying a valuable property of their corp.,
used an agent to buy more stocks from another stockholder for a
lower price. The director/manager did not disclose to the latter that
he had just negotiated a sale that would increase the value of the
corp. stocks. Had the stockholder knew about the negotiated sale,
she would not have sold her stocks yet. The court held the purchase
fraudulent and annulled the sale contract. (Strong v. Rapide, 41
Phil. 947)
NOTES:
1. Non-disclosure of material facts to persons whom the party has no
confidential relations cannot be considered fraudulent. Opponents in
litigation have no confidential relations. (Escudero v. Flores, 97 Phil.
240)

2. Where there is an innocent non-disclosure of a fact between the

parties where there is no duty to reveal it, no fraud was committed.
The legal maxim caveat emptor may be applied. (Tuason v.
Marquez, 45 Phil. 381)

Art. 1340. The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent.
USUAL EXAGGERATIONS IN TRADE OR BUSINESS (TOLERATED FRAUD)
are not fraudulent per se, especially when the other party can verify the
facts.
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Tolerated fraud includes minimizing the defects of the thing, and

exaggerating its good qualities, even giving it qualities that it may not
have.
This is known as dealers or traders talk, which by long practice in
commerce has been tolerated and deemed not to affect validity of
contract.
Exception: If the party commits act of malice and/or bad faith and
prevents verification or discovery of the truth by the other party.

Other Legal Principles related to Art. 1340:

1. OPPORTUNITY TO KNOW PRINCIPLE

Where the means of knowledge are available to both parties, one

cannot be claimed to have been deceived, and cannot thus annul the
contract on grounds of false represenation and/or exaggerations.
(Sanga v. Zaballero, 59 Phil. 101)

Where a buyer bought land based on the representatios of its seller

and has visited the land and has the chance to examine it himself
cannot later avoid the contract based on false exaggerations.
(Azarraga v. Gay, 52 Phil. 599)

Or even if buyer has did not visit the land but had the opportunity to
do so if he so desired cannot annul the contract if the first class land
turns out to be only second class. (Puato v. Mendoza, 64 Phil.
457)

2. CAVEAT EMPTOR - Principle of let the buyer beware. The buyer has the
duty to be careful and exercise prudence and diligence in his dealings for
his own protection.
o Azarraga v. Gay, 52 Phil. 599
o Dacasin v. CA, 80 SCRA 89
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Art. 1341. A 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.
EXPRESSION OF OPINION :
1.)

By an ORDINARY PERSON is a mere opinion that does not

signify fraud. Read: Songco v. Sellner. 37 Phil. 254

2.)

By an EXPERT PERSON is like a statement of fact, and if falsely

made to mislead the other party, will give rise to annulment of
contract.
o Note: If a contracting party hired an expert for his opinion which
made him enter into the contract and this turned out to be
wrong, he cannot now ask for annulment of contract as he is
bound by the act of his employee or agent.

Art. 1342. Misrepresentation by a third person does not vitiate

consent, unless such misrepresentation has created substantial
mistake and the same is mutual.
GEN. RULE: Misrepresentation by a third person inducing a party to enter
into a contract does not vitiate consent, and will NOT annul the contract.

Action for damages against the third person may however be filed by
the party injured.

Note the DIFFERENCE in the rule in ART. 1342 compared to ART. 1336
when violence or intimidation exercised by a 3 rd person who did not
participate in the contract may cause its annulment.

GROUNDS FOR EXCEPTION:

1. If one of the parties is in collusion with the third person, or

knows of the fraud of the latter and he is benefitted as a result thereof.
Both the party and the third person in this case will be solidarily liable to
the innocent party.
2. Even without connivance with the third person who
misrepresented by any of the parties, if this misrepresentation results to
substantial mistake on the part of the parties to the contract, the consent
is vitiated by mistake (not by fraud). The contract may be annulled by any
or both of the parties.
Read:

Hill v. Veloso, 31 Phil. 160

Art. 1343. Misrepresentation made in good faith is not fraudulent

but may constitute error.
Note: If the result from the misrepresentation made in good faith is
substantial and serious error or mistake, this may vitiate consent, making
the contract voidable.

Art. 1344. In 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.
WHEN FRAUD MAKES CONTRACT VOIDABLE OR NOT:
i.
ii.

1. Contract is voidable due to Fraud if:

It is serious
It is employed by one party against the other contracting party
2. Contract is not voidable if fraud is committed by both parties
against each other. Their mutual fraud compensates and neither can
ask for annulment of contract.

3. If fraud is merely incidental and not the determining cause or

reason why the party entered into the contract, this will not cause
annulment of the contract. But the guilty party may be liable for
damages.
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Art. 1345. Simulation 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.
Art. 1346. An 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.

CONCEPT OF SIMULATION OF CONTRACT:

It is the deliberate act of making a fictitious agreement by the parties

for the purpose of deception, when in fact the juridical act that appears
on the contract does not really exist or is different from what is
actually agreed upon.

It involves a defect in the declaration of will by the parties.

TWO KINDS OR CLASSES OF SIMULATION:

1.)

ABSOLUTE SIMULATION (simulados) the parties do not have any

intention to be bound by the contract. There is a color of a contract
but its not really intended to have any legal effect between the
parties.
Example: Contract of sale of a fishpond. It is made to appear that
there was a price paid when in reality, there was none. The sale
being without consideration is fictitious.
(Vda. De Catalina v.
Heirs of Catalina Roque, 74 SCRA 83)
EFFECTS:
a.)

Contract is VOID

Reason: it lacks element of true consent; generally fraudulent

2.)

b.)

It is as if there was no transfer of property & title remains with

transferor or seller

c.)

Arts. 1411 & 1412 may be applied

circumstances of absolute simulation.

depending

on

the

RELATIVE SIMULATION (dissimulados) the parties conceal their

real agreement (hidden) under the guise of another contract
(ostensible).
Example: A executed a Deed of Sale of his condo unit to his
daughter B, disguising their true agreement which is actually a
Donation.
EFFECTS: Contract may be VOID or VALID.
a.)

b.)

Q.

VOID if it is: (a) prejudicial to 3rd persons; or (b) contrary to

law, morals, good customs, public order or public policy.

VALID if (a) it does not prejudice any one; (b) it does not
have an illicit purpose and not contrary to law, morals, good
customs, public order or public policy.

Can the owner-simulator recover whatever is given under the

fictitious or simulated contract?

A. It depends.

If the absolutely simulated contract does not have any illegal purpose, the
interested party may prove the simulation to recover what has been given
under the simulated contract.

If the contract was intended for an illegal purpose, the contract is void
and the parties have no cause of action against each other. Articles 1411
and/or 1412 may be applied.

Q. What is the right of a third person prejudiced by the simulation of

contract?

A. A third person prejudiced by a fraudulent simulated contract may

attack the nullity of the contract and file an action for its rescission or
annulment.

o If the third person is in bad faith or knew of the simulation, he can

have no better right than the person from whom he had acquired title.

o If the third person is in good faith when he acquired the property

subject of the simulated contract, this third person will be protected by
law. The apparent contract which he relied upon shall be deemed as
the real contract.

ILLUSTRATE: X would like to escape the impending attachment of his land

by creditor A for his failure to pay his P5M debt. X then transferred his 5ha. land to his cousin Y thru a simulated or fictitious Deed of Sale. X and Y
were in collusion. There was no money paid for the sale.
Q. What is the remedy of creditor A in this case?
A. Creditor A who is prejudiced by a fraudulent simulated contract may
attack the nullity of the contract and file an action for its rescission or
annulment of the simulated Deed of Sale bet. X & Y.

If later, without Xs knowledge, cousin Y sold this 5-ha.land to Z, an

innocent third party buyer.
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Q. Can X recover from Z the land as the deed of sale bet. X & Y was a
fictitious contract?
A. The law will consider the apparent contract of sale between X and Y
as a true contract. Consequently, the sale to Z, a buyer in good faith, will
be sustained. This serves as a penalty for the fraud or deception by the
simulators.

ART. 1348. Impossible things or services cannot be the object of

contracts.
Q. What constitutes impossible things or services?
IMPOSSIBLE THINGS:
a.)
b.)

Not susceptible of existing;

Outside the commerce of men

IMPOSSIBLE SERVICES:
a.)

Acts beyond the ordinary power of man.

DIFFERENT KINDS OF IMPOSSIBILITY
WHICH MAY OR MAY NOT NULLIFY CONTRACTS

1. ABSOLUTE OR OBJECTIVE When nobody can perform it

Nullifies a contract
Determined objectively
2. RELATIVE OR SUBJECTIVE
When due to special condition or qualifications of the debtor it
cannot be performed.
If temporary does not nullify a contract; nullifies when
permanent
PARTIAL IMPOSSIBILITY; LEGAL EFFECTS
1. If the thing or service is partly possible and partly impossible, the
effect will depend whether it is divisible or indivisible.

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2. If it is INDIVISIBLE, by its nature or intention of the parties, there is

no contract for it was either for the whole obligation or none at all.
3. If it is DIVISIBLE, then the contract is valid as to that which is
possible to perform.
LIABILITY FOR DAMAGES
Q. Is the debtor/obligor liable for damages when the object of
the contract is impossible?
A. It depends on the good faith or bad faith of the obligor or debtor.
As a general rule when the object of the contract is impossible, the
contract if void or inexistent. No juridical relation or obligation is created.
1.)

Thus, if the obligor/debtor is ignorant of the impossibility or is

unavoidable, he is not liable for damages that may be suffered by
the creditor.

2.)

Also, if both parties have knowledge of the impossibility, no

liability for damages may be collected from obligor/debtor.

3.)

If the obligor/debtor knew of the impossibility, or could have

known it, he may be liable for the losses incurred by creditor who
relied on the contract, but not for all kinds of damages arising
from the non-performance of the contract.

DIFFICULTY OF PERFORMANCE v. IMPOSSIBILITY OF PERFORMANCE

1. Mere inconvenience, unexpected impediments or increased
expenses is not enough to relieve the debtor of the obligation.
Equity cannot relieve from bad bargains simply because it is
unfavourable to the debtor or obligor. Debtor who does not perform
in such cases must be held liable for damages.
2. But if the obstacle to the performance of the object of the contract
is so great that for the obligor to overcome it, he must do a sacrifice
that is absolutely disproportionate to the prestation of the contract,
taking into account the ethical and economic considerations
intended by the parties in good faith, then, this must be considered
impossible.

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3. It is contrary to law and public policy to force the performance of a

contract that is harmful to life, liberty and property.

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