3 Oblicon Prefinals PDF

OBLIGATIONS & CONTRACTS REVIEWER l PRE-FINALS l Tanya de la Cruz Ibanez l JD1 408
CHAPTER 1. GENERAL PROVISIONS DUTIES OF PERSONS WHEN ENTERING INTO CONTRACTS

Courts cannot constitute themselves guardians of persons who are not
Articles 1307-1317 legally competent. Before the courts are authorized to lay hold of the
situation and remedy the same, there must be:
CONTRACTS
1. Violation of the law
1305. A contract is a meeting of minds between two persons whereby 2. The commission of an actionable wrong
one binds himself, with respect to the other, to give something or to
render some service. DUTY OF THE COURTS IN INTERPRETING CONTRACTS
It is not the province of the court to alter a contract by construction or
to make a new contract for the parties. Its duty is confined to the
CONCEPT
interpretation of the one which they have made for themselves without
Contract means an agreement or convention. However, contract is not
regard to its wisdom or folly as the court cannot supply material
exactly synonymous with a convention.
stipulations or read into the contract words which it does not contain.
 Convention – broad enough to include any kind of agreement
PARTIES TO A CONTRACT
which may create, modify or extinguish patrimonial and even
The existence of two parties is an essential element which is common
family relations; the genus
to all contracts and must be added to the requirements of consent,
object certain and cause. Consequently, a person cannot enter into a
 Contracts – limited exclusively to those agreements which
contract with himself.
produce patrimonial obligations; the species
However there are certain cases where a juridical relation may be
Hence, a contract is a juridical convention manifested in legal form, by
created having only one party involved.
virtue of which one or more persons bind themselves in favour of
another or others, or reciprocally, to the fulfillment of a prestation to
 Auto-contract – there is only one party involved, but in reality,
give, to do or not to do.
said party merely acts in the name and for the account of two
distinct contracting parties. This takes place when:
DISTINGUISHED FROM OTHER TERMS
1. A person, in his capacity as representative of another,
Contracts v. other juridical conventions
contracts with himself
Contracts must not be confused with other juridical convention (i.e.
marriage, adoption, succession) because there are essential 2. As a representative of two different persons, he brings about
differences. a contract between his principals by contracting with
himself, unless there is a conflict of interests or when the
 As to the principal source of rights and obligations law expressly prohibits it in specific cases.
Contract – the contract itself
Others – the law
ELEMENTS OF CONTRACTS
 As to the nature of rights and obligations
Contract – concrete, limited and transitory Essential elements
Others – elastic, absolute and permanent Those without which there can be no contract
Ordinary contract v. Contract of marriage A. Common – those which are present in all contracts (i.e.
consent, object and cause)
Ordinary contract Marriage contract B. Special – present only in certain contracts (i.e. delivery in
real contracts and form in solemn ones)
May be two or more C. Extraordinary – peculiar to a specific contract (i.e. price in
As to parties Must be one man and
persons of the same a contract of sale)
one woman
or of different sexes
Natural elements
As to what Those which are derived from the nature of the contract and ordinarily
governs nature, accompany the same. They are presumed by the law, although they
Agreement of the The law
consequence and can be excluded by the contracting parties if they so desire.
parties
incidents
Example: Warranty against eviction and against hidden defects is
Result of Contract Status implied in a contract of sale, although parties may increase, diminish
execution or even suppress it.
As to possibility of By mere agreement of Accidental elements

Cannot be terminated
termination parties Those which exist only when the parties expressly provide for them for
the purpose of limiting or modifying the normal effects of the contract.
Legal separation or a Examples: conditions, terms and modes of payment
Remedy in case of Indemnity for criminal action for
breach damages adultery or CHARACTERISTICS OF CONTRACTS
concubinage
Obligatory force or character of contracts
Contracts v. Perfect or imperfect promises Once the contract is perfected, it shall be of obligatory force upon both
of the contracting parties. Consequently, they are bound to the
 Perfected promise – merely tends to insure and pave the way fulfillment of what has been expressly stipulated and to all of the
for the celebration of a future contract. consequences thereof.
 Imperfect promise – is a mere unaccepted offer. Autonomy of contracts

Contracting parties may establish such agreements as they may deem
Contracts v. Pacts or stipulations convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
 Pact – incidental part of a contract which can be separated from
the principal agreement Mutuality of contracts
Position of essential equality that is occupied by both contracting
 Stipulation – an essential and dispositive part which cannot be parties in relation to the contract. The contract must be binding upon
separated from such principal agreement. both the parties and its validity or compliance cannot be left at the will
of just one of them.
Disclaimer. This is a consolidated reviewer taken from the books of Jurado and Paras. Most words, if not all, are adopted in verbatim.
My right over this property is limited to word-processing and structuring. #transcribingblues
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 1 | P a g e
Relativity of contracts B. Gratuitous – those in which one of the parties proposes to

Contracts take effect only between the parties, their assigns and heirs. give to the other a benefit without any equivalent or
Consequently, they cannot, as a general rule, produce any effect upon compensation. Example – Commodatum
third persons, in conformity with the principle of res inter alios aliis
negue nocet prodest. VIII. According to the risks involved
A. Commutative – those where each of the parties acquires an

LIFE OF CONTRACTS
equivalent of his prestation and such equivalent is pecuniarily
appreciable and already determined from the moment of the
Generation celebration of the contract. Example – Lease
Preliminary of conception which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties B. Aleatory – those where each of the parties has to his account
the acquisition of an equivalent of his prestation, but such
Perfection equivalent, although pecuniarily appreciable, is not yet
Birth of the contract which is the moment when the parties come to determined at the moment of the celebration of the contract,
agree on the terms of the contract since it depends upon the happening of an uncertain event,
thus charging the parties with the risk of loss or gain. Example
Consummation – Insurance.
Fulfillment or performance of the terms agreed upon in the contract.
IX. According to their names or norms regulating them
CLASSIFICATIONS OF CONTRACTS
A. Nominate – those which have their own individuality and
are regulated by special provisions of law. Examples – Sale,
I. According to their relation to other contracts lease
A. Preparatory – those which have for their object the B. Innominate – those which lack individuality and are not
establishment of a condition in law which is necessary as a regulated by special provisions of law.
preliminary step towards the celebration of another
subsequent contract. Examples – partnership, agency
FREEDOM TO CONTRACT
B. Principal – those which can subsist independently from
other contracts and whose purpose can be fulfilled by 1306. The contracting parties may establish such stipulations, clauses,
themselves. Examples – sale, lease terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public
C. Accessory – those which can exist only as a consequence policy.
of, or in relation with, another prior contract. Examples –
Pledge, mortgage RIGHT TO CONTRACT
The contracting parties are free to establish any stipulation, clause,
II. According to their perfection term or condition, so long as they are not against law, good customs,
public order or public policy.
A. Consensual – those which are perfected by the mere
agreement of the parties. Examples – Sale, lease Both a statutory and constitutional right
The freedom to contract is both a constitutional and statutory right.
B. Real – those which require not only the consent of the Hence, to uphold this right, the courts should move with all the
parties for their perfection, but also the delivery of the necessary caution and prudence in holding contracts void.
object by one party to the other. Examples – Commodatum,
deposit, pledge LIMITATIONS
The right however is not absolute in character. It is subject to several
III. According to their form limitations. Consequently, the stipulations, clauses, terms and
conditions established by the parties must not be contrary to:
A. Common or informal – those which require no particular
form. Example – Loan 1. Law
2. Morals
B. Special or formal – those which require some particular 3. Good customs
form. Examples – Donations, chattel mortgage 4. Public order
5. Public policy
IV. According to their purpose
1st Not contrary to law
A. Transfer of ownership – ex. Sale The most important of the limitations. The laws referred are:
B. Conveyance of use – ex. Commodatum
C. Rendition of services – ex. Agency A. Those which are mandatory or prohibitive in character
B. Those without being mandatory or prohibitive, nevertheless,
V. According to their subject matter expressive of fundamental principles of justice
C. Those which impose essential requisites without which the
A. Things – ex. Sale, deposit, pledge contract cannot exist
B. Services – ex. Agency, lease of services
Examples:
VI. According to the nature of the vinculum 1. Pactum commissorium (a clause providing that the
mortgagee will automatically own the property mortgaged if
A. Unilateral – those which give rise to an obligation for only the debt is not paid at maturity) is null and void.
one of the parties. Examples – Commodatum, gratuitous
deposit 2. A stipulation that all judicial and extrajudicial acts necessary
B. Bilateral – those which give rise to reciprocal obligations under the terms thereof shall take place in a certain
for both parties. Examples – Sale, lease municipality. (Right to fix jurisdiction of courts can only be
fixed by the legislative branch)
VII. According to their cause
2nd Not contrary to morals
A. Onerous – those in which each of the parties aspires to The most difficult to ascertain because in subjecting obligations to
procure for himself a benefit through the giving of an moral precepts, there must be a careful effort not to erase the
equivalent or compensation. Example – Sale distinction between moral and the juridical order.
Morals – those principles which are incontrovertible and are universally

admitted and which have received social and practical recognition.
Examples: Held:
1. A penalty clause providing for the payment of P5 for each Such a limitation of value is unconscionable and void against public
day’s delay after the maturity of a loan for P465 was held policy. A carrier cannot limit its liability for injury or loss of goods
immoral inequitable, shocking to the human conscience, and shipped as caused by its own negligence. A contract that undertakes
void. to relieve the carrier from any liability would in legal effect nullify the
2. A promise of marriage based on a carnal consideration is contract.
immoral and, therefore, void.
3. The agreement to work without pay is immoral and void Ferrazzini v. Gsell
since this would amount to involuntary servitude. Facts:
Parties agreed that the plaintiff should not (1) engage in any business
3rd Not contrary to good customs enterprise similar to or in competition with those operated by the
The spheres of morals and good customs frequently overlap each defendant or (2) enter into the employment of any enterprise in the
other but sometimes they do not. It must be admitted, however, that Philippines, except after obtaining the written permission of the
if a moral precept or custom is not recognized universally, but is defendant. Plaintiff agreed to pay P10, 000 to defendant as liquidated
sanctioned by the practice of a certain community, then it shall be damages for each breach of a clause of the contract.
included within the scope or sphere of good customs.
Issue: Whether the stipulation is valid and binding upon the plaintiff.
4th Not contrary to public order
Under the present Civil Code, it would seem that public order can only Held:
refer to the safety, as well as to the peace and order, of the country or The contract is an undue and unreasonable restraint of trade and
of any particular community. This can be implied from the report of therefore against public policy. It is limited as to time and space but
the Code Commission which states that “public order is not as broad as not as to trade. It would force the plaintiff to leave the Philippines in
public policy, as the latter may refer not only to public safety but also order to obtain a livelihood in case the defendant declined to give him
to considerations which are moved by the common good.” However, in the written permission to work elsewhere in the country.
the Spanish Civil Code, both are considered synonymous.
Del Castillo v. Richmond
5th Not contrary to public policy Facts:
A contract is contrary to public policy if it “has a tendency to injure the Parties agreed that plaintiff should not (1) open or own nor have any
public, is against the public good, or contravenes some established interest directly or indirectly in any other drugstore either in his own
interest of society, or is inconsistent with sound policy and good name or in the name of another, (2) have any connection with or be
morals, or tends clearly to undermine the security of individual’s employed by any other drugstore either as pharmacist or in any
rights.” capacity in any drugstore within a radius of 4 miles from the
municipality of Legaspi, so long as the defendant or his heirs may own
Examples: or have an interest in a drugstore in the said municipality.
1. Those denying access to the courts
2. Those which encourage fraud Issue: Whether the agreement is valid and binding upon the plaintiff
3. A stipulation bargaining away or surrendering for a
consideration the right to vote and to run for public office. Held:
These are rights conferred not for individual or private A contract in restraint of trade is valid and not considered against the
benefit or advantages but for the public good and interest. benefit of the state, provided there is a limitation upon either time or
4. Those which tend to stifle the prosecution of a person place and that the restraint is necessary to protect the interest of the
charged with a crime, for a pecuniary or other valuable parties. Considering the nature of the business in which the defendant
consideration is engaged, in relation with the limitation place upon the plaintiff both
5. Those exempting a carrier from liability for gross negligence as to time and place, such limitation is legal and reasonable and not
contrary to public policy.
Stipulations exempting a common carrier from liability
Three kinds of stipulations ordinarily made in a bill of lading: Sy Suan v. Regala
Facts
A. Exempting the carrier from any and all liability for loss or Sy Suan, president of Price, Inc. executed a special power of attorney
damage occasioned by its own negligence in favour of Regala authorizing him to prosecute an application for a
license with the Import Control Office (ICO) for the importation of
Effect: Contrary to public policy. industrial starch for candy manufacture. There was a verbal agreement
that as compensation for Regala’s service, he would be paid 10% of
B. Providing for an unqualified limitation of such liability to an the total value of the amount that would be approved by the ICO.
agreed valuation Regala was able to prosecute the approval successfully. Sy Suan
refused to pay the 10% commission as agreed upon contending that
Effect: Contrary to public policy, except if it can be shown to the agreement is contrary to public policy. Regala countered by saying
be reasonable under the circumstances, and had been fairly that there is no showing that the contract violated any public policy.
and freely agreed upon, then it is perfectly valid
Held:
C. Limiting the liability of the carrier to an agreed valuation The contract is contrary to good customs, public order and public
unless the shipper declares a higher value and pays a higher policy. The contract sprouted as a result of the controls imposed by
rate of freight the government on imports and dollars allocations, despite the
enunciated government policy that applications for imports should be
Effect: Perfectly valid and binding considered strictly on the basis of merit, without intervention of
intermediaries that would only influence or corrupt the judgment of
Contracts which tend to restrain business or trade public officials performing services connected with the issuance of
They are perfectly valid, provided that: import licenses. Also, actual injury need not be shown. It is enough if
the potentialities for harm are present.
A. There is a limitation upon either time or place
B. The restraint must be reasonably necessary for the Cui v. Arellano University
protection of the contracting parties Facts:
Cui took up law at Arellano University where he was a constant
Ysmael & Co. v. Barreto recipient of scholarship grants. During his stay, he was made to sign a
Facts: waiver of his right to transfer to another school unless he refunds to
Defendant received 164 cases of silk from plaintiff to be shipped to the University the equivalent of his scholarship grants. In his last
Surigao. There was a stipulation in the bill of lading that the carrier semester of his fourth year, he transferred to Abad Santos Law School.
shall not be liable for loss or damage from any cause beyond an Consequently, when he applied for the Bar exams, he was required to
amount exceeding P300 for each single package. Four cases of silk, furnish a copy of his transcript from Arellano University to which the
each valued at P2, 500 were lost. Defendant argued that his liability university refused to give unless he makes the refunds, which Cui did,
shall extend only to the amount agreed upon in the bill of lading. under protest. Subsequently, Cui brought an action to recover the
amount which he paid. Will the action prosper?
Held:
MUTUALITY OF CONTRACTS
Yes, since the waiver signed by Cui is contrary to public policy and
therefore null and void. Scholarship grants are awarded in recognition
of merit and not to attract and keep brilliant students in school for 1308. The contract must bind both contracting parties; its validity or
their propaganda value To look at such grant as a business scheme compliance cannot be left to the will of one of them.
designed to increase the business potential of a school is not only 1309. The determination of the performance may be left to a third
inconsistent with sound public policy but also good morals. person, whose decision shall not be binding until it has been made
known to both contracting parties.
Compromise Agreements
A contract whereby the parties, by making reciprocal concessions, 1310. The determination shall not be obligatory if it is evidently
avoid litigation or put an end to one already commenced. inequitable. In such case, the courts shall decide what is equitable
under the circumstances.
General rule: A compromise has upon the parties the effect and
authority of res judicata. This holds true even if the agreement has not MUTUALITY OF CONTRACTS
been judicially approved. From the time a compromise is validly This Article stresses the principle of mutuality of contracts — that is,
entered into, it becomes the source of the rights and obligations of the both parties are bound. The principle is based on the essential equality
parties thereto. of the parties. It is repugnant to bind one party, and yet leave the
other free.
Exception: To have the force of res judicata, the compromise
agreement must be approved by final order of the court. To be valid, it Consequences of mutuality
must be based on real claims and actually agreed upon in good faith.
1. The validity or fulfillment of a contract cannot be left to the will
NOMINATE AND INNOMINATE CONTRACTS of one of the contracting parties. What is prohibited is:
a) The power to determine whether or not the contract

1307. Innominate contracts shall be regulated by the stipulations of
shall be valid
the parties, by the provisions of Titles I and II of this Book, by the
b) The power to determine whether or not the contract
rules governing the most analogous nominate contracts, and by the
shall be fulfilled
customs of the place.
2. The validity or fulfillment may be left to the will of a third person
NOMINATE CONTRACTS whose decision shall only be binding when it has been made
Those which have their own distinctive individuality and are regulated known to each of the contracting parties, provided that it is not
by special provisions of law. evidently unequitable.
Examples:
1. Sales 7. Antichresis 3. The validity or fulfillment can be left to chance.
2. Barter or exchange 8. Compromise & arbitration
3. Lease 9. Guaranty PROHIBITIONS NOT FALLING UNDER ART 1308
4. Partnership 10. Pledge There are certain agreements which will in effect render the mutuality
5. Agency 11. Mortgage of contracts illusory because one of the contracting parties is placed in
6. Aleatory contracts 12. Deposit a position of superiority with regard to the determination of the validity
(i.e. insurance, gambling and life annuity) of the contract – but which, however, do not fall within the purview of
the prohibition in Art 1308.
INNOMINATE CONTRACTS
Those which lack individuality and are not regulated by special 1. Obligor promises to pay a certain amount which is not
provisions of law. determined, but the contract itself specifies the manner by
which the amount may be determined such as by the
Four kinds of innominate contracts: exercise of the judgment and discretion of the obligor.
A. do ut des (I give that you may give) 2. Fulfillment of the contract is left to the will of one of the
B. do ut facias (I give that you may do) contracting parties in the negative form of rescission.
C. facio ut des (I do that you may give)
D. facio ut facias (I do that you may do) Liebenow v Phil Vegetable Oil Co.
Facts:
Governing rules for innominate contracts: Plaintiff instituted an action to recover a sum of money which he
A. Stipulations considered himself entitled by way of bonus in addition to his salary
B. Titles I and II of Book IV — Obligations and Contracts while employed by the defendant. The basis of his claim is a letter
C. Rules on the most analogous nominate contracts from the president of the company promising to pay him in addition to
D. Customs of the place his salary “such further amount as the Board of Directors may see fit
to grant”. It was established that plaintiff in fact received P4, 500 in
Perez v. Palomar installments which the defendant contends is the bonus which the
Facts: Board of Directors had seen fit to grant. However, the plaintiff
Plaintiff rendered services to defendant as interpreter during a certain maintains that it is merely an addition to his salary and that the bonus
period. However, it does not appear that any express contract was has not yet been paid.
ever entered into.
Held:
Issue: A promise of this character creates a legal obligation binding upon the
Whether there is a binding contract which will justify a court of law in promisor, although in its actual results it may not infrequently prove to
fixing a just compensation for the plaintiff. be illusory. Such promise is not nugatory under Article 1182 of the Civil
Code, as embodying a condition dependent exclusively upon the will of
Held: the obligor. Nor can it be held invalid under Article 1308 which
Whether the service was solicited or offered, the fact remains that declares that the validity and performance of a contract cannot be left
Perez rendered to Pomar services as interpreter. Without any evidence to the will of one of the contracting parties. The uncertainty of the
that the same was rendered gratuitously, defendant is obligated to pay amount to be paid by way of bonus is also no obstacle to the validity
a just compensation by virtue of the innominate contract facio ut des of the contract, since the contract itself specifies the manner in which
(I do that you may give) because no one should unjustly enrich the amount payable is to be determined, namely, by the exercise of
himself to the damage of another. the judgment and discretion of the employer.”
Taylor v. Uy Tieng Piao

Facts:
Plaintiff was employed by defendant as superintendent of an oil
factory. One of the stipulations in the contract of employment was the
following clause: “It is understood that should the machinery to be
installed in the said factory fail to arrive within a period of 6 months,
this contract may be cancelled, the cancellation not occurring before

the expiration of 6 months” Because of the failure of the machinery to General rule: Since contracts can take effect only between the
arrive, the defendant cancelled the contract. Subsequently, plaintiff contracting parties, as well as their assigns or heirs, it follows as a
filed for breach of contract, claiming that the validity of a contract general rule that it CANNOT produce any effect whatsoever as far as
cannot be left to the will of one of the contracting parties (Art 1308) third persons are concerned. Hence, he who is not a party to a
and that a condition shall be deemed fulfilled if the obligor intentionally contract has no legal capacity to challenge its validity, even if the same
prevents its fulfillment (Art 1186). is voidable.
Held: Exceptions: Instances where a contract may produce effect either

Art 1309 creates no impediment to the insertion in a contract for directly or indirectly on third persons:
personal service of a resolutory condition permitting the cancellation of
the contract by one of the parties. It is entirely licit to leave the 1. Where the contract contains a stipulation in favour of a third
fulfillment to the will of either of the parties in the negative form of person
rescission for in such supposed case neither is the article infringed, nor 2. Where the third person comes into possession of the object of
is there any lack of equality between the persons contracting, since a contract creating a real right
they remain with the same faculties in respect to fulfillment.’ 3. Where the contract is entered into in order to defraud a third
person
4. Where the third person induces a contracting party to violate
RELATIVITY OF CONTRACTS
his contract
1311. Contracts take effect only between the parties, their assigns
STIPULATIONS IN FAVOUR OF THIRD PERSONS
and heirs, except in case where the rights and obligations arising from
A stipulation in a contract, clearly and deliberately conferred by the
the contract are not transmissible by their nature, or by stipulation or
contracting parties in favour upon a third person, who must have
by provision of law. The heir is not liable beyond the value of the
accepted it before it could be revoked. In effect, such third person may
property he received from the decedent.
demand its fulfillment.
If a contract should contain some stipulation in favour of a third
Kinds of beneficial stipulations:
person, he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental A. Those where the stipulation is intended for the sole benefit
benefit or interest of a person is not sufficient. The contracting parties of the third person
must have clearly and deliberately conferred a favour upon a third
B. Those where an obligation is due from the promise to the
person.
third person which the former seeks to discharge by means
of such stipulation
RELATIVITY OF CONTRACTS
This article stresses the principle of relativity — that is contracts are Requisites:
generally effective only between the parties, their assigns, and their
heirs. Rationale: “Res inter alios acta aliis neque nocet prodest.” (The 1. There must be a stipulation in favour of a third person
act, declaration, or omission of another, cannot affect another)
2. The stipulation must be a part, not the whole of the contract
PERSONS BOUND BY CONTRACT 3. The contracting parties must have clearly and deliberately
conferred a favour upon a third person, not a mere incidental
General rule: Contracts can take effect only between the parties, benefit or interest
their assigns and heirs. Therefore, generally, its terms cannot
determine the rights of third persons. 4. The third person must have communicated his acceptance to the
obligor before its revocation (express or implied)
A. Even though the contract may have been executed ostensibly
5. Neither of the contracting parties bears the legal representative
in the name of another person, it shall produce effect only
or authorization of the third party
insofar as the real contracting party is concerned, provided,
that such fact was known to the other party.
Test of beneficial stipulation
How to determine whether the interest of a third person in a contract
B. An assignment or transfer has the effect of subrogating the
is a stipulation our autrui or merely an incidental interest?
assignee to all of the rights and obligations of the assignor.
Answer: Rely upon the intention of the parties as disclosed by their
Take note:
contract. Did the contracting parties deliberately insert terms in their
Monetary obligations that the decedent might have incurred during his
agreement with the avowed purpose of conferring a favour upon such
lifetime CANNOT be transmitted to his heirs through succession.
third person?
Hence, the heirs cannot be charged directly with the payment of such
obligations.
Kauffman v. Phil National Bank
Facts:
Reason: Rules of Court – such obligations must be liquidated in the Defendant bank, for a valuable consideration paid by the Philippine
testate or intestate proceeding for the settlement of the estate of the
Fiber and Produce Co., agreed to cause a certain sum of money to be
decedent.
paid to the plaintiff in New York City. However, the bank cabled its
representative in NYC to withhold payment of the amount to plaintiff.
Exceptions
This led the plaintiff to file an action to recover the amount.
The rule that an assignee or heir shall be bound by the terms of a
contract IS NOT ABSOLUTE in character. The rule is not applicable if
Issue:
the rights and obligations arising from the contract are NOT
Whether or not the lack of privity with the contract on the part of the
transmissible:
plaintiff is fatal to the maintenance of this action.
1. By their nature, as when the special or personal qualification of
Held:
the obligor constitutes one of the principal motives for the
The fairest test in this jurisdiction whereby to determine whether the
establishment of the contract
interest of a third person in a contract is a stipulation pour autrui or
merely an incidental interest, is to rely upon the intention of the
2. By stipulation of the parties, as when the contract expressly
parties as disclosed by their contract. The right of the plaintiff to
provides that the obligor shall perform an act by himself and
maintain the present action is clear enough, for it is undeniable that
not through another
the bank’s promise to cause a definite sum of money to be paid to the
plaintiff in New York City is a stipulation in his favour within the
3. By provision of law, as in the case of those arising from a
meaning of the paragraph above quoted; and the circumstances under
contract of partnership or of agency
which the promise was given disclose an evident intention on the part
of the contracting parties that the plaintiff should have that money
upon demand in New York City.
Coquia v. Fieldmen’s Insurance Co.

EFFECT OF CONTRACTS ON THIRD PERSONS
Facts: 1. A mortgaged his house and lot to PNB to secure P20, 000 and
Fieldmen’s Insurance Co issued in favour of Manila Yellow Taxicab Co, such mortgage is registered in the Registry of Property.
a common accident insurance policy which stipulates that the company Subsequently, the house and lot was sold to B. Consequently,
will indemnify the insured in the event of accident against all sums the contract of mortgage between A and PNB will be binding
which the insured will become legally liable to pay for death or bodily upon B.
injury to any fare-paying passenger, including the driver, conductor or
inspector. Subsequently, as a result of a vehicular accident, Carlito 2. If A should purchase an apartment from the owner but there is
Coquia was killed (driver of one of the vehicles covered by the said a lease thereon, A must respect the lease if the same is
policy). The company and the insured failed to agree with respect to registered in the Registry of Property.
the amount to be paid to the heirs of the drivers. Hence, the parents
of Carlito brought an action against the company. The company
CONTRACTS IN FRAUD OF CREDITORS
contends that the parents have no cause of action because they have
no contractual relation with the company.
1313. Creditors are protected in cases of contracts intended to
Held: defraud them.
It is true that as a general rule, only the parties to a contract may
bring an action based thereon. However, the same admits of some AN EXCEPTION
exceptions, one of which is 2nd par of Art 1311 which states that the This Article represents another instance when a third person can
enforcement of contracts pour autrui may be demanded by a third interfere with another’s contract.
party for whose benefit it was made, although not a party to the
contract. The policy provides that the company will indemnify any CONTRACTS IN FRAUD OF CREDITORS
authorized driver of the insured and in the event of death of said Although a third person cannot ask for the annulment of a contract,
driver, his personal representatives. Clearly, the policy is typical of nevertheless, if he is a creditor of one of the contracting parties, and it
contracts pour autrui. Therefore, the heirs of Coquia have a direct can be established that the contract was entered into with the
cause of action against the company. intention of defrauding him, he may ask for its rescission.
Constantino v. Espiritu Example

Facts: If A gratuitously gives B a parcel of land, and A has no other property
A and B are legally married. A executed a fictitious deed of sale of a or cash left to satisfy his creditors, said creditors may ask for the
two-storey house and four subdivision lots in favour of his mistress, M, rescission of the contract, to the extent that they have been
who was pregnant at that time, with the understanding that M should prejudiced.
hold the properties in trust for their unborn illegitimate child.
INTERFERENCES WITH CONTRACTUAL RELATIONS
After securing a new COT in her name, M mortgaged the properties
twice to a bank, and subsequently tried to sell them. A then brought 1314. Any third person who induces another to violate his contract
an action for preliminary injunction restraining M from further shall be liable for damages to the other contracting party.
properties and for judgment ordering her to convey the properties to
their illegitimate child, X, who at that time was already 5 years old. AN EXCEPTION
This Article gives an instance when a stranger to a contract can be
A motion to dismiss was filed on the ground that the illegitimate child sued in view of his unwarranted interference. Whoever is injured may
who is the beneficiary of the trust is not included as the party-plaintiff properly sue for damages.
and the action is unenforceable under the Statute of Frauds. Hence, A
amended his complaint to include X as party-plaintiff. The same was INTERFERENCES WITH CONTRACTUAL RELATIONS
dismissed. A raised the case by direct appeal to the Supreme Court. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party.
Issue:
Is there a valid cause of action? Rationale: The right to perform a contract and to reap the profits
resulting from such performance, and also the right to performance by
Held: the other party, are property rights which entitle each party to
Yes, there is a valid cause of action. The contract between appellant protection, and to seek compensation by an action in tort for any
and appellee was a contract pour autrui although couched in the form interference therewith
of an absolute deed of sale, and the action of appellant was one for
specific performance. Since the contract involved a stipulation pour Example:
autrui, the third person for whose benefit the contract was entered S, a movie actress, has a one-year contract with XYZ Studio. If F, a
into may also demand its fulfillment, provided he communicated his friend of S induces her, without any justifiable cause, to break the
acceptance to the obligor before the stipulation is revoked. contract, then XYZ Studio can sue F for damages.
CONTRACTS CREATING REAL RIGHTS Requisites

Before the third person who induces another to violate his contract can
1312. In contracts creating real rights, third persons who come into be held liable for damages, it is essential that the following requisites
possession of the object of the contract are bound thereby, subject to must concur:
the provisions of the Mortgage Law and the Land Registration Laws.
1. Existence of a valid contract
AN EXCEPTION 2. Knowledge on the part of the third person of the existence of
This article constitutes one of the exceptions to the general rule that a the contract
contract binds only the contracting parties. Reason: Because a real 3. Interference by the third person without legal justification or
right binds the property over which it is exercised. excuse (malice is implied)
CONTRACTS CREATING REAL RIGHTS CONSENSUAL CONTRACTS
Real right – A right belonging to a person over a specific thing, 1315. Contracts are perfected by mere consent, and from that
without a passive subject individually determined, against whom such moment the parties are bound not only to the fulfillment of what has
right may be personally enforced. Such a right, therefore, is been expressly stipulated but also to all the consequences which,
enforceable against the whole world. according to their nature, may be in keeping with good faith, usage,
and law.
Effect: A third person who comes into the possession of the object of
a contract creating a real right will have to be bound by such right, CONSENSUALITY OF CONTRACTS
subject to the provisions of: This Article stresses the consensuality of contracts or perfection by
1. Mortgage Law mere consent.
2. Land Registration Laws
Examples:
HOW CONTRACTS ARE PERFECTED

The perfection of a contract refers to that moment in the life of a CONTRACTS IN NAME OF ANOTHER
contract when there is finally a concurrence of the wills of the
contracting parties with respect to the object and the cause of the 1317. No one may contract in the name of another without being
contract. authorized by the latter, or unless he has by law a right to represent
him. A contract entered into in the name of another by one who has
Kinds of contracts according to perfection: no authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
A. Consensual contracts – perfected by mere agreement or impliedly, by the person on whose behalf it has been executed, before
consent on the subject matter and the cause or it is revoked by the other contracting party.
consideration. (Example: Contract of sale)
CONTRACTS IN NAME OF ANOTHER
B. Real contracts – perfected by delivery (Examples: Deposit
and Pledge) General rule:
No person may enter into a contract in the name of another.
C. Formal or Solemn contracts – A special form is required for Effect: The contract is unenforceable.
perfection (Example: A simple donation inter vivos of real
property must be in public instrument to be valid and Take note: The principle enunciated is a logical corollary to the
perfected) principles of the obligatory force and the relativity of contracts. It is
also the basis of the contract of agency
Consequences of perfection
Exceptions:
1. The parties are bound to the fulfillment of what has been 1. He has been duly authorized
expressly stipulated and compliance thereof must be in good 2. He has by law a right to represent him
faith 3. The contract has been subsequently ratified (implied or
2. The parties are bound to all the consequences which, express) by the person in whose benefit it has been
according to their nature, may be in keeping with good faith, executed, before the revocation of the other party
usage and law.
Unenforceable v. Voidable
Salvador Malbarosa v. CA Unenforceable – cannot be sued upon or enforced, unless ratified
A contract is perfected only from the time an acceptance of an offer is Voidable – binding unless annulled by proper action in court
made known to the offeror.
Badillo v. Ferrer
REAL CONTRACTS Facts:
Macario died intestate in 1966, leaving a widow (Clarita) and 5 minor
1316. Real contracts, such as deposit, pledge and commodatum, are children. He left a parcel of land and in 1967, the wife in her own
not perfected until the delivery of the object of the obligation. behalf and as natural guardian of the minor plaintiff, executed a deed
of extra-judicial partition and sale of the property through which he
PERFECTION OF REAL CONTRACTS sold the property to Gregorio.
Real contracts, to be perfected, require:
Held:
A. Consent A contract entered into in the name of another by one who has no
B. Subject matter authority or legal representation, or who has acted beyond his powers,
C. Cause or consideration shall be unenforceable, unless it is ratified, expressly or impliedly, by
D. Delivery the person on whose behalf it has been executed, before it is revoked
by the other contracting party.’’
The real contracts referred to in this Article are:
1. Deposit Clearly, Clarita has no authority or has acted beyond her powers in
2. Pledge conveying to the appellants that 5/12 undivided share of her minor
3. Commodatum children in the property involved in this case. The powers given to her
by the laws as the natural guardian covers only matters of
Delivery as a requisite administration and cannot include the power of disposition. The
Delivery is required of the very nature of the contract. For example, a appellee minors never ratified this Deed of Extrajudicial Partition and
depositary cannot be expected to comply with his obligation of keeping Sale. Hence, the contract remained unenforceable or unauthorized.
the object safely unless and until it is delivered to him.
Effect of ratification
FUTURE REAL CONTRACTS ARE CONSENSUAL CONTRACTS Ratification cleanses the contract from all its defects from the moment
A contract to make a deposit, to make a pledge or to make a the contract was entered into. Hence, there is a retroactive effect.
commodatum is a consensual contract. After delivery, it becomes a
real contract. Take note: There can be no more ratification if the contract has
previously been revoked by the other contracting party.
Example:
A agreed to lend B his car on April 8. If on April 8, A refuses to deliver
the car, may B sue him for damages?
Yes, because of the consensual contract to make a commodatum. If A

had delivered the car and B, through negligence, damages the car, A
can sue him because of the real contract of commodatum.
The Contract of Carriage
A. The contract to carry (at some future time) is consensual

and is perfected by mere consent.
B. The contract of carriage is a real contract, for not until the

carrier is actually used can we consider the contract
perfected, that is, ‘til the moment of actual use, the carrier
cannot be said to have already assumed the obligation of a
carrier.
Take note: The real contract of carriage is perfected even if

the passenger has not yet paid, in fact, even if he has no
money for his fare.
Held:
CHAPTER 2. ESSENTIAL REQUISITES OF CONTRACTS A contract of insurance, like other contracts, must be assented to by
both parties, either in person or by their agents. So long as an
application for insurance has not been either accepted or rejected, it is
GENERAL PROVISIONS
merely an offer or proposal to make a contract. There can be no
contract of insurance unless he minds of the parties have met in
REQUISITES OF CONTRACTS IN GENERAL agreement.
1318. There is no contract unless the following requisites concur:
CHARACTER OF OFFER AND ACCEPTANCE
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract Offer – a proposal to make a contract. In order to constitute a binding
3. Cause of the obligation which is established proposal, the offer must be certain or definite.
Take note: These are the common essential elements of contracts. Illustration:
Where the defendant said that he is “in a position” and is “willing to
Section 1 – CONSENT entertain” the purchase of a yacht, there was no perfected contract
Articles 1319 – 1346 since the words applied were not certain and are merely positions to
deliberate whether to perform or not perform the said act.
CONCEPT OF CONSENT
Acceptance – In order that there will be a perfected contract, the
1319. Consent is manifested by the meeting of the offer and the acceptance must be:
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A 1. Certain and definite
qualified acceptance constitutes a counter-offer.
Illustration:
Acceptance made by letter or telegram does not bind the offerer Where plaintiff ordered to the defendant certain machineries
except from the time it came to his knowledge. The contract, in such a in exchange for tractors and the latter answered stating “we
case, is presumed to have been entered into in the place where the are willing to accept the proposition” – there was not
offer was made. perfected contract or barter since the phrase used does not
mean acceptance but simply a disposition to accept the offer
in principle.
CONCEPT OF CONSENT
The most important element, which constitutes the very heart and soul
2. Absolute in character (Must be plain and unconditional)
of contracts, is, unquestionably, the consent of the contracting parties.
Illustration:
Consent - The concurrence of the wills of the contracting parties with
Where defendant offered to the plaintiff an option for 3
respect to the object and the cause which shall constitute the contract.
months to buy a certain land and the latter answered by
accepting the offer but subject to certain modifications with
Requisites
regards to the terms of payment – there is no perfected
1. The consent must be manifested by the concurrence of the
contract because there is no concurrence between the offer
offer and the acceptance
and the acceptance.
2. The contracting parties must possess the necessary legal
capacity
Take note: In consensual contracts, the acceptance of the offer must
3. The consent must be intelligent, free, spontaneous, and real
be absolute and must not qualify the terms of the offer. It must be
plain, unequivocal, unconditional and without variance of any sort from
Take note: The first requisite is expressly stated in the Code, while the
the proposal. A qualified acceptance constitutes a counter-offer and is
others are implied.
a rejection of the original offer. Consequently, such acceptance is not
sufficient to generate consent because any modification from the
When contracts are perfected
terms of the offer annuls the same.
Contracts are perfected from the moment there is manifestation of the
concurrence between the offer and the acceptance with respect to the
Requisites for the meeting of the minds
object and the cause which shall constitute the contract.
1. An offer that must be certain an definite
2. An acceptance that must be certain, absolute and
MANIFESTATION OF CONSENT
unqualified.
Before there is consent, it is essential that it must be manifested by
the meeting of the offer and the acceptance upon the thing and the
Take note: If the acceptance is qualified, this merely
cause which are to constitute the contract.
constitutes a counter-offer.
Effect: Once there is a manifestation of the concurrence of the wills of
ACCEPTANCE OF COMPLEX OFFERS
the contracting parties, the period of negotiation is terminated.
The rules regarding acceptance are modified in case of complex offers.
Therefore, the contract, if consensual, is perfected.
Acceptance of one is sufficient
De Lim v. Sun Life Assurance Co.
Where the offeror proposes to lease one part and to sell another part,
Facts:
acceptance of one of the offeree would ordinarily result in a perfected
Luis Lim applied to the defendant company for a policy of life
contract, unless the offeror made one offer dependent upon the other.
insurance in the sum of P5, 000, where he designated his wife, Pilar de
Lim (plaintiff) as beneficiary. The first premium of P33 was paid and
Acceptance of one is insufficient
upon payment, the company issued a “provisional policy” accepting the
However, prospective contracts comprised in a single offer may be so
application, “provided that the company shall confirm this agreement
interrelated in such a way that the acceptance of one would NOT at all
by issuing a policy on said application when the same shall be
result in a perfected contract.
submitted to the Head Office. It was agreed that should the company
not issue the policy, then such agreement is null and void. Also, a
Illustration:
period of 4 months from the date of application was stated as period
In an offer involving a prospective contract of loan and the mortgage
within which the company shall issue the policy.
which will secure it, acceptance by the future debtor of the proposed
loan alone would not give rise to a perfected contract.
Luis Lim however died a month later after he filed his application –
after the issuance of the provisional policy but before approval of the
ACCEPTANCE BY LETTER OR TELEGRAM
application by the head office. Thereafter, the wife brought an action
When would there be a perfected contract if acceptance is made by
for the recovery of P5, 000 stated in the provisional policy.
letter or by telegram?
Issue: Whether or not the contract has been perfected.
General rule: Acceptance made by letter or telegram does not bind the
offeror, except from the time it came to his knowledge
Exception: Art 54 Code of Commerce - applicable to purely commercial Issue:

contracts, such as join accounts, maritime contracts, etc. Here, Is there a perfected contract of compromise despite the fact that the
contracts entered into by correspondence shall be perfected from the General Manager of GSIS denied that he authorized the Board
moment an answer is made accepting the offer. Secretary to send the telegram?
Four theories: Held:

There is already a perfected contract of compromise applying Art 1319
1. Manifestation Theory – the contract is perfected from the of the Civil Code. It is a familiar doctrine that if a corporation
moment the acceptance is declared and made. Followed by knowingly permits one of its officers to do acts within the scope of an
the Code of Commerce. apparent authority and holds him out to the public as possessing the
power to do those acts, the corporation will be estopped from denying
2. Expedition Theory – the contract is perfected from the his authority, against anyone who dealt with the corporation through
moment the offeree transmits the notification of acceptance such officer in good faith.
to the offeror, as when the letter is placed in the mailbox.
Followed by majority of American courts. Effect of constructive knowledge
2ND par Art 1319 – Acceptance made by letter or telegram does not
3. Reception Theory – the contract is perfected from the bind the offeror except from the time it came to his “knowledge.”
moment the notification of acceptance is in the hand of the
offeror in such a manner that he can, under ordinary General rule:
conditions, procure knowledge of its contents, even if he is There should be actual knowledge of the acceptance. (There is a clear
not able to actually acquire such knowledge by reason of implication that such offeror must have read the contents of the letter
absence, sickness or some other cause. Followed by the or telegram accepting his offer)
German Civil Code.
Take note: Mere receipt of the letter or telegram is NOT sufficient,
4. Cognition Theory – the contract is perfect from the moment although there arises the presumption that he has read the contents
the acceptance comes to the knowledge of the offeror. thereof.
Followed by the Spanish Civil Code.
Exception:
Take note: if it is possible that he might not have been able to do so, like when he
 We follow the Cognition Theory – acceptance made by letter or was absent or incapacitated at the time of the receipt of the letter.
telegram DOES NOT bind the offeror EXCEPT from the time it Hence, he cannot be bound by the acceptance.
came to his knowledge. Hence, the contract is presumed to have
been entered into in the place where the offer was made. Exception to the exception:
If being able to do so, he refused to open the letter because for some
 This rule equally applies to cases in which the acceptance is reason he has already changed his mind or has decided to revoke his
made by a person who is not in the presence of the offeror. offer.
Case illustrating Cognition Theory Withdrawal of offer

Question: Can the offeror, after the offer has been made, withdraw his
Enriquez v. Sun Life Assurance Co offer or not? Yes, he may still withdraw his offer, provided he still has
Facts: NO knowledge of the acceptance by the offeree.
On September 24, 1917, Joaquin Herrer applied to the defendant
company for a life annuity through its local office in Manila. He paid Laudico v. Arias
the sum of P6, 000 and was issued a provisional receipt. The Facts:
application was immediately forwarded to the head office in Canada. On Feb. 5, 1919, Arias wrote Laudico a letter, offering a lease contract.
On Mar. 6, 1919, Laudico wrote a letter of complete acceptance, which
On November 26, the head office gave notice of acceptance by cable was received by Arias that same afternoon. But that same morning
to Manila. Whether notice of this acceptance was sent to Herrer by the Arias had already written Laudico a letter withdrawing the offer.
Manila office is a disputed question. On December 4, the policy was
issued at Montreal. However, on December 18, the lawyer of Herrer Issue:
wrote to the Manila office that Herrer desired to withdraw his Whether or not there was a perfected contract.
application.
Held:
The local office replied stating that the policy had been issued and There was no contract perfected. Art 1319 provides that an acceptance
called attention to the notification of November 26. This letter was does not have any effect until it comes to the knowledge of the
received by the lawyer on December 21. Herrer however died on offeror. Therefore, before he learns of the acceptance, he is not yet
December 20. bound by it and can still withdraw the offer. Though both the offer and
the acceptance existence, they did not meet to give birth to a contract.
This action was commenced to recover the sum of P6, 000 from the
defendant company, which the latter contends that the same cannot Withdrawal of acceptance
be recovered on the ground that the contract of life annuity had Question: A, residing in Manila, has offered to lease a parcel of land
already been perfected. for a certain price to B, who is residing in Baguio. B finally decides to
accept the offer so he writes a letter of acceptance to A. The letter is
Issue: mailed. Can he revoke it by using a more rapid means of
Whether or not the contract of life annuity had already been perfected communication in order to counteract the acceptance?
Held: A. Manresa – No. From the moment the offeree accepts, he loses
It is Art 1319 of the Civil Code and not Art 54 of the Code of the power to retract such acceptance since the right to withdraw
Commerce that will apply to the end that acceptance made by letter or between the time and acceptance and its communication is a
telegram does not bind the offeror except from the time it came to his right expressly limited by law to the offeror. There may seem to
knowledge. Consequently, the contract was not perfected because it be inequality between the contracting parties, however, since the
has not been proved satisfactorily that the acceptance of the offeree is the first person who knows of the concurrence of wills
application ever came to the knowledge of the applicant. of the parties, the obligation as far as he is concerned, must also
commence earlier as a consequence.
Francisco v. GSIS
Facts: B. Dr. Tolentino – Yes. The acceptance may be revoked before it
Plaintiff offered a compromise with respect to the settlement of an comes to the knowledge of the offeror because there is still no
obligation which had already matured, which was accepted by the meeting of the minds. To hold otherwise would then make two
GSIS by means of a telegram signed by the Board Secretary. For a moments when a consensual contract is perfected – first, when
year, GSIS receipted payment made pursuant to the compromise the offeree transmits his acceptance to the offeror, and second,
agreement. when the offeror has knowledge of the acceptance. Legally, this
is not possible. (More logical view)
Concurrence of offer and acceptance

WHEN OFFER BECOMES INEFFECTIVE
Gigi offered to construct the house of Chito for a very reasonable price
of P1 Million, giving the latter 10 days within which to accept or reject
the offer. On the fifth day, before Chito could make up his mind, Gigi 1323. An offer becomes ineffective upon the death, civil interdiction,
withdrew the offer. What is the effect of the withdrawal of Gigi’s offer? insanity, or insolvency of either party before acceptance is conveyed.
Answer: WHEN OFFER BECOMES INEFFECTIVE

The withdrawal of Gigi’s offer will cause the offer to cease in law. An offer becomes ineffective when either party, before acceptance is
Hence, even if subsequently accepted, there could be no concurrence conveyed, suffers from:
of the offer and the acceptance. In the absence of concurrence of offer
1. Death
and acceptance, there can be no consent. Without the consent, there
2. Civil interdiction
is no perfected contract for the construction of the house of Chito.
3. Insanity
4. Insolvency
FORM OF ACCEPTANCE
Conveyed – refers to that moment when the offeror has knowledge
1320. An acceptance may be express or implied. of the acceptance by the offeree.
FORM OF ACCEPTANCE Problem 1:

A, residing in Manila, wrote to his friend B, residing in Cotabato,
1. Express stating in the letter that he is donating to him one new car worth
2. Implied – from conduct or acceptance of unsolicited services P25k. Upon receipt of the letter, B called A by long distance telephone
3. Presumptive – when there is silence in certain cases as would telling him that he is accepting the donation. The same day, B wrote
tend to mislead the other party and thus places the silent person and mailed a letter to A accepting the donation. Immediately after
in estoppel. mailing the letter B died of a heart failure. Who is entitled to the car
now, A or the heirs of B?
Perez v. Pomar
Facts:
Answer:
Defendant contended that there was no perfected contract entered
A is entitled to the car, since the donation in the case cannot produce
into between him and the plaintiff because there was no proof that he
any effect whatsoever. According to Art 748, if the value of the
accepted the services of the latter as interpreter.
personal property donated exceeds P5, 000, the donation and
acceptance shall be in writing, otherwise the donation is void.
Held:
According to Art 1323, an offer becomes ineffective upon the death,
Not only is there an express and tacit consent which produces true
civil interdiction, insanity or insolvency of either party before
contracts, but there is also a presumptive consent which is the basis of
acceptance is conveyed.
quasi-contracts, thus giving rise to the multiple juridical relations which
result in obligations for the delivery of a thing or rendition of a service.
Problem 2:
A donated a piece of land to B in a donation inter vivos. B accepted
THINGS THAT MAY BE FIXED BY THE OFFERER the donation in a separate instrument but A suddenly died in an
accident before the acceptance could be communicated to him. Is the
1321. The person making the offer may fix the time, place, and donation valid?
manner of acceptance, all of which must be complied with.
Answer:
THINGS THAT MAY BE FIXED BY THE OFFERER Even assuming that both the donation and the acceptance was made
in a public instrument, the same is still not valid for the following
1. Time reasons:
2. Place
3. Manner of acceptance 1. Art 734 – a donation is perfected from the moment the donor
knows of the acceptance by the donee. It is obvious that in the
Take note: Any act contrary to the prescribed terms constitutes a instant case, A never came to know of the acceptance by B
counter-offer or counter-proposal because he suddenly died.
Contract to purchase 2. Art 1323 – an offer becomes ineffective upon the death, civil
A contract to purchase which does not give specific description of the interdiction, insanity or insolvency of either party before
objects to be purchased nor the price or rate of exchange to be used, acceptance is conveyed.
is a mere preliminary agreement.
OPTIONS & PERIOD FOR ACCEPTANCE
ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT
1324. When the offerer has allowed the offeree certain period to
accept, the offer may be withdrawn at any time before acceptance by
1322. An offer made through an agent is accepted from the time communicating such withdrawal, except when the option is founded
acceptance is communicated to him. upon a consideration, as something paid or promised.
ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT OPTION

It is a contract granting a person the privilege to buy or not to buy
A. This Article applies when both the offer and acceptance are certain objects at any time within the agreed period at a fixed price.
made through an agent, who is an extension of the The contract of option is a separate and distinct contract from the
personality of the principal. contract which the parties may enter into upon the consummation of
the contract. Therefore, an option must have its own cause or
B. Any other intermediary is merely a sort of messenger, who consideration.
must communicate to the person who sends him, otherwise,
there is as yet no meeting of the minds. General Rule: If the offeror has allowed the offeree a certain period
to accept, the offer may be withdrawn anytime before acceptance (of
Illustration: the thing being offered), by communicating such withdrawal.
Suppose the principal himself made the offer, and the acceptance is
made to the agent, would there be a meeting of the minds? Example:
B, interested in a car at a car exchange company, asks S for the price
As a general rule, there would be no meeting of the minds for the to which the latter said P3M. S gave B a week to make up his mind
agent may be an ordinary one, not authorized to receive the while reserving the car for the meantime. Before the week is over, can
acceptance. However, if the agent was expressly authorized to receive S withdraw the offer?
the acceptance, the contract is perfected.
Yes, provided B has not signified his acceptance of the offer to sell yet
and provided further that S communicates such withdrawal to B.
Exception: Answer:
When the option is founded upon a consideration as something paid or L’s’ position is not meritorious. According to the Civil Code,
promised. advertisements for bidders are simply invitations to make proposals,
and the advertiser is not bound to accept the highest or lowest bidder
Example: unless the contrary appears. It is clear that the general rule applies in
If, in the preceding example, B gave S P20, 000 in consideration for the instant case. In its advertisement, K and Co. did not state that it
the option, S cannot withdraw the offer to sell until after the expiration will award the contract to the lowest bidder. Therefore, in awarding
of the one week period. the contract to N, the defendant company acted in accordance with its
rights.
Take note:
If the option is without a consideration, it is a mere offer to sell which Acceptance of a bid
is not binding until accepted, and therefore can be withdrawn. If, The mere determination to accept the proposal of a bidder does not
however, acceptance is made before a withdrawal, it constitutes a constitute a contract. The decision must be communicated to the
binding contract of sale. There is already a concurrence of both offer bidder.
and acceptance.
LEGAL CAPACITY OF CONTRACTING PARTIES
PERIOD OF ACCEPTANCE: OPTIONS
Effect of an option which is without a consideration and effect of one 1327. The following cannot give consent to a contract: (1)
which is founded upon a consideration – insofar as the right of the Unemancipated minors; (2) Insane or demented persons, and deaf-
offeror to withdraw his offer is concerned. mutes who do not know how to write.
 If option is without any consideration – offeror may LEGAL CAPACITY OF CONTRACTING PARTIES
withdraw his offer by communicating such withdrawal at any The capacity of the contracting parties is an indispensable requisite of
time before acceptance. consent. It is impossible to speak of an effective consent without
presupposing the capacity to give it.
 If option is founded upon a consideration – offeror cannot
withdraw his offer. Effect: The contract is defective.
BUSINESS ADVERSTISEMENTS  If only one of the parties is incapacitated to give his consent,
the contract is voidable.
1325. Unless it appears otherwise, business advertisements of things  If both of them are incapacitated to give their consent, the
for sale are not definite offers, but mere invitations to make an offer. contract is unenforceable.
BUSINESS ADVERTISEMENTS INCAPACITATED PERSONS

Are business advertisements of things for sale definite offers? Persons incapacitated to give their consent to a contract:
1. Unemancipated minor
Answer: IT DEPENDS. 2. Insane or demented persons
3. Deaf-mutes who do not know how to write
A. If it appears to be a definite offer containing all the specific
particulars needed in a contract, then it is a definite offer. Unemancipated minor
These are the minors who have not been emancipated by marriage,
Example: For sale: 900 sqm lot with a brand new 2 storey attainment of the age of majority, or by parental or judicial authority.
house at 1445 Paco Manila for 10 million cash. (This is a
definite offer, from the advertiser cannot back out, once it is General rule: The contract is either voidable or unenforceable.
accepted by another)
Exceptions:
B. If important details are left out, the advertisement is not a 1. When it is entered into by a minor who misrepresents his age
definite offer, but a mere invitation to make an offer. 2. When it involves the sale & delivery of necessaries to the minor
3. When it involves a natural obligation and such is fulfilled
Example: For sale: 900 sqm lots at 100 million to 150 million voluntarily by the minor, provided that he is between 18 and 21
at South Forbes Park. Tel No. 4440962 (This is clearly years old
merely an invitation to make an offer, which the advertiser is 4. When it is a marriage settlement or donation propter nuptias,
free to accept or reject) provided that he is between 20 and 21 (if male), or between 18
and 21 (if female)
ADVERSTISEMENT FOR BIDDERS 5. When it is a life, health or accident insurance taken on the life of
the minor, provided that he is 18 and above and the beneficiary
appointed is the minor’s estate, the father, mother, husband,
1326. Advertisements for bidders are simply invitations to make wife, child, brother or sister.
proposals, and the advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears. Take note:
ADVERTISEMENT FOR BIDDERS Misrepresentation by unemancipated minors with regard to their age
when entering into a contract shall bind them in the sense that they
General rule: The advertiser is not bound to accept the highest or are estopped subsequently from impugning the validity of the contract
lowest bidder. on the ground of minority. It is, however, necessary that the
misrepresentation must be active, not merely constructive
Problem 1:
In an advertisement for bidders, there was no reservation by the
Braganza v. Villa Abrille
advertiser that he could reject any and all bids. Now then, is he still
Facts:
given the right to reject even the highest bidder (for offer to sell) or
1944, Braganza and her two minor sons borrowed from Abrille P70,
the lowest bidder (offer to buy)?
000 in Japanese military notes, promising to pay the latter solidarily
Answer: Yes, for the rule is that, the advertiser is not bound to accept P10, 000 in legal currency of the Philippines as soon as International
the highest or lowest bidder, unless the contrary appears. Exchange has been established two years after the cessation of
hostilities. For failure to pay in 1949, Abrille filed this action.
Problem 2:
K and Co. published in the newspaper an “Invitation to Bid’’ inviting Issue: Whether or not the minors can be held liable.
proposals to supply labour and materials for a construction project
described in the invitation. L, M and N submitted bids. When the bids Held:
were opened, it appeared that L submitted the lowest bid. However, K No. The minors’ failure to disclose their minority does not follow that
and Co. awarded the contract to N, the highest bidder, on the ground they will not be permitted thereafter to assert it. Mere silence when
that he was the most experienced and responsible bidder. L brought making a contract as to age does not constitute a fraud. To hold the
an action against K and Co. to compel the award of the contract to him minor liable, the fraud must actual and not constructive. They cannot
and to recover damages. Is L’s position meritorious? however absolve themselves entirely from monetary liability.
Even if the contract is voidable, they shall make restitution to the

VOIDABLE CONTRACTS BY REASON OF INCAPACITY
extent that they may have profited by the money they received, in
accordance with the Ballantyne Schedule.
1328. Contracts entered into during a lucid interval are valid.
Insane or demented persons Contracts agreed to in a state of drunkenness or during a hypnotic
Any person, who, at the time of the celebration of the contract, cannot spell are voidable.
understand the nature and consequences of the act or transaction by
reason of any cause affecting his intellectual or sensitive faculties, VOIDABLE CONTRACTS BY REASON OF INCAPACITY
whether permanent or temporary. The voidable contracts referred to are those entered into by:
1. Insane or demented persons (unless they acted during a
Take note: They cannot give their consent to a contract, unless they lucid interval)
acted during a lucid interval 2. Those in the state of drunkenness (which temporarily results
in complete loss of understanding and may therefore be
Question: What is the nature and extent of the mental capacity which equivalent to temporary insanity)
will incapacitate a person from giving his consent to a contract? 3. Those entered into during a hypnotic spell or during
somnambulism
It is sufficient that at the time of the celebration of the contract, one of
the contracting parties was not capable of understanding with Lucid intervals
reasonable clearness the nature and effect of the transaction in which Even if a person has already been judicially declared insane, and is
he was engaged. actually now under guardianship, he may still enter into a valid
contract, provided that it can be shown that at the time of contracting,
Mental incapacity as a question of fact he was in a lucid interval. Of course here, he is already presumed
Mental incapacity to enter into a contract is a question of fact which insane, and therefore the sanity must be proved.
must be decided by the courts. There is however a disputable
presumption that every person of legal age possesses the necessary
DISQUALIFICATIONS TO CONTRACT
capacity to execute a contract.
Carillo v. Jaoco 1329. The incapacity declared in Article 1327 is subject to the
Facts: modifications determined by law, and is understood to be without
The vendor of several parcels of land was declared insane by a prejudice to special disqualification established in the laws.
competent court 9 days after the execution of the contract of sale.
DISQUALIFICATIONS TO CONTRACT
Held: The persons specially disqualified mentioned in Art 1329 refer to those
The fact that 9 days after the execution of the contract, Carillo was who are prohibited from entering into a contract with certain persons
declared mentally incapacitated by the court DOES NOT prove that she with regard to certain property under certain circumstances AND NOT
was so when she executed the contract. The burden of proof that she to those who are incapacitated to give their consent to a contract.
was mentally incapacitated prior or during the execution of the
contract is upon her who affirms said incapacity. If no sufficient proof Examples:
to this effect is presented, her capacity must be presumed.
1. Contracts entered into with non-Christians are void, unless
approved by the governor or his representative.
Deaf-mutes
There is a need to distinguish between the effect of a contract entered 2. A person declared insolvent before he is discharged is prohibited
into by a deaf-mute who: from entering into a contract.
 Knows how to write. (effect: Valid) 3. Husband and wife cannot sell nor donate to each other.
 Does not know how to write. (effect: Voidable or
4. Persons disqualified because of fiduciary relationship, such as
unenforceable)
guardian who is not allowed to purchase the property of his
Take note: If the deaf-mute does not know how to write but ward, or judge with reference to the property under litigation.
knows how to read, he is capacitated.
DISTINGUISHED FROM INCAPACITY TO CONTRACT
Disqualification to contract must not be confused with incapacity to
Other incapacitated persons
give consent to a contract.
Incompetents who may be placed under guardianship:
A. Persons suffering from civil interdiction
B. Hospitalized lepers Incapacity Disqualification
C. Prodigals
D. Deaf and dumb who are unable to read and write Restrains the exercise of the right
Restrains the very right itself
E. Unsound mind, even though they have lucid intervals to contract
F. Those who by reason of age, weak mind and other similar
causes, cannot without outside aid, take care of themselves Can still enter into a contract Absolutely disqualified from
and manage their property becoming thereby an easy prey through his parent or guardian entering into a contract
for deceit and exploitation
Based upon subjective
Take note: An incompetent can enter into a contract only circumstances of certain persons
Based upon public policy and
through his guardian. Otherwise, the contract is voidable. which compel the law to suspend
morality
for a in/definite period their right
Problem: to contract
Is a person of advanced years or age or by reason of physical
infirmities incapacitated to enter into a contract? No, unless such age Merely voidable (unless both the
and infirmities impair his mental faculties to the extent that he is contracting parties are Void
unable to properly, intelligently and fairly understand the provisions of incapacitated – unenforceable)
said contract.
Take note:
The mere fact that a person is classified as an “incompetent” in does
not necessarily mean that he cannot give his consent to a contract, nor
does the mere fact that he is not under guardianship mean that he can
give his consent to a contract. Consequently, whether or not they can
give their consent to a contract becomes a matter of proof.
MISTAKE
VITIATED CONSENT
1. The wrong conception of a thing and
1330. A contract where consent is given through mistake, violence, 2. The lack of knowledge with respect to a thing
intimidation, undue influence, or fraud is voidable.
Take note: The Code does not distinguish between mistake and
VICES WHICH MAY VITIATE CONSENT ignorance.
Vices of will Effect: Contract is voidable.

1. Mistake
2. Fraud MISTAKE WHICH VITIATE CONSENT
3. Violence
4. Intimidation Two general kinds of mistakes:
5. Undue influence
1. Mistake of fact – when one or both of the contracting parties
Vices of declaration believe that a fact exists when in reality it does not
1. All forms of simulated contracts
2. Mistake of law – when one or both of the contracting
VICES DEFINED parties arrive at an erroneous conclusion regarding the
interpretation of a question of law or the legal effects of a
A. Violence – when in order to wrest consent, serious or certain transaction.
irresistible force is employed.
General rule: Only mistake of fact will vitiate consent, thus rendering
B. Intimidation – when one of the contracting parties is the contract voidable. Reason: Ignorance of the law excuses no one
compelled by a reasonable & well-grounded fear of an imminent from compliance therewith.
& grave evil upon his person or property, or upon the person or
property of his spouse, descendants or ascendants, to give his MISTAKE OF FACT
consent. Classifications of mistake of fact which vitiate consent:
C. Mistake – should refer to the substance of the thing which is 1. Mistake as to object (error in re)
the object of the contract, or to those conditions which have The mistake referred to in the 1st paragraph.
principally moved one or both parties to enter into the contact.
(Exception: Mutual error) A. Error re the object of the contract– when the thing which
constitutes the object of the contract is confused with
D. Fraud – when, through insidious words or machinations of 1 of another thing.
the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. Example: A person signed a contract of sale thinking it was
only a contract of loan.
E. Undue influence – when a person takes improper advantage
of his power over the will of another, depriving the latter of a B. Error in substance or quality – necessary that such mistake
reasonable freedom of choice. should refer to the material out of which the thing is made,
and to the nature which distinguishes it from all others.
F. Simulation of Contracts – when the contracting parties do
not intend to be bound by the contract at all. Thus, an Example: A person buys a fountain pen thinking it to be
absolutely simulated contract is VOID. made of solid gold when it is merely gold-plated.
REQUISITES OF CONSENT OBJECTIVELY CONSIDERED C. Error re the conditions of the thing – provided that such
conditions have principally moved one or both parties to
1. Intelligent (vitiated by mistake) enter into the contract.
2. Free (vitiated by violence, intimidation and undue influence)
3. Spontaneous (vitiated by fraud) Example: Error in knowledge about the true boundaries of
4. Real (vitiated by simulation) a parcel of land offered for sale.
Effects D. Error in quantity – provided that the extent or dimension of

 Absence of any of the first three requisites – voidable. the thing was one of the principal reasons of one or both of
 Absence of the fourth requisite – either void or valid, depending the parties for entering into the contract.
upon whether the simulation is absolute or relative.
Example: A person desiring to buy land consisting of 100
NATURE OF A VOIDABLE CONTRACT hectares discovers the land has only 60 hectares.
A voidable contract is binding and valid, unless annulled by a proper
action in court. It is however susceptible of ratification before Take note: Not to be confused with mistake of account or
annulment. calculation. – Not voidable.
Take note: Asiaian v. Jalandoni

There must be clear and convincing evidence of the presence of Facts:
vitiated consent. Mere preponderance of evidence on this matter is Plaintiff offered to sell to defendant a certain hacienda for P55, 000
NOT sufficient. where he told that latter that it contained between 25 and 30 hectares
and that the sugarcane then planted would produce 2, 000 piculs of
sugar. Defendant accepted the offer and paid P30, 000 of the
MISTAKE WHICH VITIATE CONSENT purchase but it turned out that the land was only about 18 hectares
and the cane only about 800 piculs of sugar. Because of this, he
1331. In order that mistake may invalidate consent, it should refer to refused to pay the balance of the purchase price. Hence, the plaintiff
the substance of the thing which is the object of the contract, or to filed an action to recover the balance, and the defendant filed a
those conditions which have principally moved one or both parties to counter-complaint asking that the contract be annulled.
enter into the contract.
Held:
Mistake as to the identity or qualifications of one of the parties will This was not a contract of hazard. It was a sale in gross where there
vitiate consent only when such identity or qualifications have been the was a mutual mistake as to the quantity of the land sold and as to the
principal cause of the contract. A simple mistake of account shall give amount of the standing crop. In effect, the agreement is inoperative.
rise to its correction. The ultimate result is to put the parties back to the original status.
2. Mistake as to person (error in persona) KNOWLEDGE OF DOUBT OR RISK

Refers to the error with regard to the identity or qualifications of
\\
one of the contracting parties.

1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract.
Requisites:
A. Mistake must be either with regard to the identity or KNOWLEDGE OF RISK DOES NOT VITIATE CONSENT
with regard to the qualification of one of the It is to be assumed here that the party was willing to take the risk.
contracting parties This is particularly true in contracts which are evidently aleatory in
nature.
B. Such identity or qualification must have been the
principal consideration for the celebration of the Example:
contract. A bought a fountain pen which was represented as possibly being able
to write even underwater. A also knew that the pen’s ability was
Take note: Mistake with regard to the name of one or both questionable, and yet A bought said pen. Here, A cannot allege
of the parties will NOT invalidate the contract. mistake since he knew beforehand of the doubt, risk, or contingency
affecting the object of the contract.
Example: Hiring a pre-bar reviewer, a particular singer for a
concert, contracts involving partnership, agency, and deposit.
(These require trust and confidence) MUTUAL ERROR
Take note: If any painter or singer would do, error as to the 1334. Mutual error as to the legal effect of an agreement when the
identity would be immaterial. real purpose of the parties is frustrated, may vitiate consent.
MUTUAL ERROR
RULE WHERE A PARTY IS ILLITERATE
General rule: Mistake of law will not vitiate consent.
1332. When one of the parties is unable to read, or if the contract is Exception: Mutual error as to the effect of an agreement when the real
in a language not understood by him, and mistake or fraud is alleged, purpose of the parties is frustrated, may vitiate consent.
the person enforcing the contract must show that the terms thereof
have been fully explained to the former. Reason: Mistake of law does not generally vitiate consent, BUT when
there is a mistake on a doubtful question of law, or on the construction
REASON FOR THE ARTICLE or application of law, this is analogous to a mistake of fact, and the
This rule is especially necessary in the Philippines where unfortunately maxim ignorance of the law excuses no one from compliance therewith
there is still a fairly large number of illiterates, and where documents should have no proper application.
are usually drawn up in English or Spanish.
Requisites:
This Article is intended for the protection of a party to a contract who 1. Mistake must be with respect to the legal effect of an agreement
is at a disadvantage due to his illiteracy, ignorance, mental weakness 2. Mistake must be mutual
or other handicap. 3. Real purpose of the parties must have been frustrated
What the article contemplates Example:

A situation wherein a contract has been entered into, but the consent A and B entered into a contract, which they intended should result in a
of one of the parties is vitiated by mistake or fraud committed by the co-ownership between them, but which turned out later to be a
other contracting party. mortgage, as a result of their mutual error as to the legal effect of the
agreement. Here the contract is voidable.
 Consent vitiated by mistake – mistake should refer to the
substance of the thing which is the object of the contract or VIOLENCE AND INTIMIDATION
to those conditions which have principally mmoved one or
both parties to enter into a contract.
1335. There is violence when in order to wrest consent, serious or
irresistible force is employed.
 Coonsent vitiated by fraud – when one of the parties
induced another to enter into a contract through insidious
There is intimidation when one of the contracting parties is compelled
words or machinations, which without them, he would not
by a reasonable and well-grounded fear of an imminent and grave evil
have agreed to.
upon his person or property, or upon the person or property of his
spouse, descendants or ascendants, to give his consent.
PRESUMPTION
That one always acts with due care and signs with full knowledge of all
To determine the degree of the intimidation, the age, sex and
the contents of a document.
condition of the person shall be borne in mind.
When presumption does not apply
A threat to enforce one’s claim through competent authority, if the
claim is just or legal, does not vitiate consent.
1. When one of the parties is unable to read (including a blind
person)
1336. Violence or intimidation shall annul the obligation, although it
2. If the contract is in a language not understood by one of the
may have been employed by a third person who did not take part in
parties.
the contract.
Take note: In both cases, the person enforcing the contract must show
that the terms thereof have been fully explained to the former. VIOLENCE AND INTIMIDATION
Examples: Violence Intimidation

1. A person who cannot read and write, signed a document which
she thought was merely a promise to pay certain expenses but External Internal
which turned out to be an absolute deed of sale of two parcels
of land – voidable.
Influences the operation of the
2. When a blind person affixed his thumbmark to a deed which Prevents the expression of the will, inhibiting it in such a way
they thought was a deed of mortgage but rather a deed of sale will substituting it with a material that the expression thereof is
– voidable. act dictated by another apparently that of a person who
has freely given his consent
Physical compulsion Moral compulsion
Examples: If a person signs a contract only because a gun is pointed Effect of just or legal threat
at him, this is intimidation because he is afraid he would be killed. But A threat to enforce one’s claim through competent authority, if the
if he signs because his left hand is being twisted painfully, this is claim is just or legal, does not vitiate consent.
violence or force.
Examples:
Requisites of violence to vitiate consent
1. If a man marries a girl who threatened to report him to the
1. Force employed must be serious and irresistible Courts for immorality, and thus prevent his admission to the
2. It must be the determining cause for the party upon whom it is bar, the marriage cannot be annulled on the ground of
employed in entering into the contract intimidation because here the girl had the legal right to do
what she threatened.
Requisites of intimidation to vitiate consent
2. A threat to prosecute unless the debtor signs a contract is not
1. One of the contracting parties is compelled to give his consent intimidation.
by a reasonable and well-grounded fear of an evil
2. The evil must be imminent and grave Take note: The right to enforce one’s claim thru competent authority
3. Upon his person, property or upon the person or property of his must not by itself constitute an unlawful act. Example: A witness to a
spouse, descendants or ascendants crime threatens to report the criminal to the police unless said criminal
4. The evil must be unjust gives money to him. This is a clear case of blackmail.
3. The evil must be the determining cause for the party upon
whom it is employed in entering into the contract VIOLENCE OR INTIMIDATION BY A THIRD PERSON
Even if a third person exercised the violence or intimidation, the
CHARACTER OF INTIMDATION contract may be annulled. This is because the consent is still vitiated.
(De Asis v. Buenviaje)
Well-grounded fear of evil
For intimidation to be sufficient to render a contract voidable, one of
UNDUE INFLUENCE
the parties should be compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his person or property or
upon the person or property of his spouse, descendants or ascendants. 1337. There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the latter of
The threat or intimidation must be: a reasonable freedom of choice. The following circumstances shall be
considered: the confidential, family, spiritual and other relations
1. Actual
between the parties, or the fact that the person alleged to have been
2. Serious
unduly influenced was suffering from mental weakness, or was
3. Possible of realization
ignorant or in financial distress.
4. The actor can and still will carry out his threat
Example: UNDUE INFLUENCE

A threat during the Japanese occupation to deliver the person to the When a person takes improper advantage of his power over the wil of
Japanese military authorities would constitute intimidation. (TN: Mere another, depiving the latter of a reasonable freedom of choice.
knowledge that severe penalties might be imposed is not enough)
WHAT VITIATES CONSENT
Distinguished from reluctant consent The influence which deprives a person of his free agency.
Consent given through intimidation must not be confused with consent
given reluctantly and even against good sense and judgment. Legally Take note:
speaking, a person acts voluntarily and freely when he acts against his To vitiate consent, the influence must be undue. if the influence is due
better judgment as compared to when he acts in conformity with them or allowable, as when caused by solicitation, importunity, argument
and persuasion, same is not prohibited by law, morals, or equity. The
Martinez v. Hongkong and Shanghai Bank line between due and undue influence must be with full recognition of
Facts: the liberty due every person to enter into a contract according to his
Under the contract, the plaintiff agreed to convey several properties to own free choice.
the bank as settlement of their claims against her and her husband,
who escaped to Macao where there is not extradition treaty in order to Test of undue influence
escape criminal charges. It was established that during the period of Whether or not the influence exerted has so overpowered or
negotiations, she was told that if she assented to the requirements, subjugated the mind of a contracting party as to destroy his free
the civil suit against herself and her husband would be dismissed and agency, making him express the will of another rather than his own.
the criminal chargers, withdrawn. But if she refused, her husband must
either spend the rest of his life in Macao or be criminally prosecuted. Circumstanes to consider in determining undue influence
This is an action to annul a contract on the ground that plaintiff’s  Confidential, family, spiritual, other relations between the parties
consent thereto was obtained under duress.  Mental weakness
 Ignorance
Issue:  Financial distress
Whether or not there was duress which would invalidate the contract.
FRAUD
Held:
In order that the contract be annulled, it must be shown that the 1338. There is fraud when, through insidious words or machinations
plaintiff never gave her consent to the execution thereof. It is of one of the contracting parties, the other is induced to enter into a
necessary to distinguish between real duress and the motive which is contract which, without them, he would not have agreed to.
present when one gives his consent reluctantly. A contract is valid
even though one of the parties entered into it against his wishes and FRAUD
desires or even against his better judgment. Fraud which will render a contract voidable refers to those insidious
words or machinations employed by one of the contracting parties in
Imminent and Grave evil order induce the other to enter into a contract which, without them, he
To determine the degree of intimidation, these shall be borne in mind: would not have agreed to.
1. Age
2. Sex Kinds of fraud
3. Condition of the person intimidated – resolute or weak character The fraud referred to in Art 1338 must not be confused with the fraud
capacity or culture, position, financial condition in Arts 1170 and 1171 o fthe Code.
1. Fraud in the performance of an obligation (Art 1170) –
Take note: When the evil which threatens is directed not against employed by the obligor in the performance of a pre-existing
the party but against his spouse, descendant or ascendant – obligation
consider their conditions as well.
2. Fraud in the perfection of a contract (Art 1338) – employed by a
party to the contract in securing the consent of the other party.
FAILURE TO DISCLOSE FACTS

A. Dolo causante – those deceptions or misrepresentations
of a serious character employed by one party and without
which the other party would not have entered into the 1339. Failure to disclose facts, when there is a duty to reveal them, as
contract. (This is the fraud reffered to in this article) when the parties are bound by confidential relations, constitutes fraud.
Effect: Contract is voidable FAILURE TO DISCLOSE FACTS
B. Dolo incidente – those deceptions or misrepresentations A. Failure to disclose facts (concealment) constitutes fraud, when
which are not serious in character and without which, the there is a duty to reveal them.
other party would still have entered into the contract.
(Fraud referred to in Art 1344) B. There is a duty to reveal in the following cases, for example:
when the parties are bound by confidential relations as in the
Effect: Contract is valid but there can be an action for case of partners.
damages.
Take note: Non-disclosure of a fact when there is no duty to
reveal it does not constitute fraud.
Causal fraud Incidental fraud
Examples:
As to nature Serious in character Not serious 1. Defendant who is a manager of a certain corporation and
owner of about ¾ of the shares of the capital stock thereof,
bought through an agent 800 shares of capital stock from
Fraud is the cause
the plaintiff without disclosing the fact that he had just
As to cause which induces the to Fraud is not the cause
negotiated the sale of valuable properties to the
enter into the contract
government, thus enhancing he value of the capital stocks of
the company.
Valid but party liable of
As to effect Voidable fraud is liable for Poss v. Gottlieb
damages Facts:
A and B were real estate partners. A heard of a possible purchaser of a
certain parcel of land owned by the firm. But A did not inform B.
Requisites: Instead, A persuaded B to sell to him (A) B’s share at a nominal
1. Fraud or insidious words or machinations must have been amount, after which A sold the whole parcel at a big profit. B sued A
employed by one of the contracting parties for damages for alleged deceit. A’s defense was that he after all had
2. The fraud must have been serious not been asked by B about possible purchasers.
3. The fraud must have induced the other party to enter into the
contract Held:
4. The fraud should not have been employed by both of the A is liable, for he should not have made any concealment. Good faith
contracting partes or by third persons not only requires that a partner should not make any false
concealment, but he also should abstain from all concealment.
NATURE OF FRAUD
Deception or misrepresentation employed by one of the contracting Opponents in a Litigation
parties to secure the consent of the other. There would seem to be no duty to disclose facts, as between
opponents in a litigation for their relations, far from being friendly or
 Insidious words or machinations – broad enough to cover any confidential, are openly antagonistic.
kind of deception, such as false promises, fictitious names,
qualifications or authority.
EXAGGERATIONS IN TRADE
Take note: All the forms of deception which may delude a
contracting party to give his consent, without necessarily 1340. The usual exaggerations in trade, when the other party had an
constituting estafa or some other offense in our penal laws. opportunity to know the facts, are not in themselves fraudulent.
Before a contract can be invalidated because of fraud EXAGGERATIONS IN TRADE

This Article stresses the rule of “caveat emptor” (let the buyer beware)
1. There must be proof of concrete facts constituting the fraud – A buyer must be on his guard. It is his duty to check the title of the
employed by one of the contracting parties, by virtue of which seller, otherwise the buyer gets the object at his own risk.
the other was induced to enter into the contract, without which,
he would not have agreed to. Dealer’s talk
The usual exaggerations in trade (dealer’s talk) constitute tolerated
2. Such insidious words or machinations must be prior to or fraud, when the other party had an opportunity to know the facts.
contemporaneous with the birth or perfection of the contract. Experience teaches that it is exceedingly risky to accept it at its face
value. A man who relies upon an affirmation made by a person whose
Eguaras v. Great Eastern Life Assurance Co. interest might so readily prompt him to exaggerate the value of his
Facts: property, does so at his own risk. He must therefore take the
Albay filed an application for insurance on his life with the defendant consequences of his own imprudence.
company. However, since Albay was in poor health, the person who
presented himself for medical examination to the company physician EXPRESSION OF OPINION
was not Albay, but Castor Garcia who posed as Albay. As a result of
the favourable report the physician, the company executed the 1341. A mere expression of an opinion does not signify fraud, unless
contract of insurance. A short time thereafter, Albay died. The made by an expert and the other party has relied on the former’s
company contends that the contract should be annulled on the ground special knowledge.
of fraud.
EXPRESSION OF OPINION
Held:
The fraud which gave rise to the mistaken consent given by the General rule: A mere expression of an opinion does not signify fraud.
company to the insurance application is unquestionable. The fraud Exception: When made by an expert and the other party has relied on
consisted in the substitution at the examination of Castor Garcia in the former’s special knowledge.
place of the insured and as the deceit is of a serious nature, the same
is alos voidable in accordance with the provision of Art 1334. Examples:
1. A, on buying a watch, was assured by the seller that it was a
good watch, and could run without rewinding for one week, in
the opinion of the seller. This is a mere expression of opinion that MISREPRESENTATION IN GOOD FAITH
is not fraudulent.
Example:
Except: If the seller was a watch expert, and the only reason why Tanya bought a certain article from Feds. The article was needed for
A bought the watch was this opinion of the seller, the contract is Tanya’s radio. Feds honestly but mistakenly assured Tanya that the
voidable on the ground of fraud. article was the proper object. May the contract be annulled?
2. If a seller says that in his opinion his land is first class, but it turns Yes, but not on the ground of fraud because the misrepresentation
out to be second class, the sale is not fraudulent, particularly was honest, but on the ground of substantial error.
when the buyer had opportunity to examine the land for himself.
MAGNITUDE OF FRAUD
Songco v. Sellner
Facts:
Songco estimated that the crop would yield 3, 000 piculs of sugar, 1344. In order that fraud may make a contract voidable, it should be
however it produced only 2, 017 piculs. The issue is whether such serious and should not have been employed by both contracting
representation is fraudulent that would invalidate the contract. parties. Incidental fraud only obliges the person employing it to pay
damages.
Held:
No, such representation can only be considered as a mere expression FRAUD TO VITIATE CONSENT
of an opinion and the same is not an actionable deceit. There are two requisites for fraud as a ground for annulment given in
this Article:
MISREPRESENTATION BY THIRD PERSONS 1. The fraud must be serious
2. The parties must not be in pari delicto (mutual guilt),
1342. Misrepresentation by a third person does not vitiate consent, otherwise the contract is valid and neither party may ask for
unless such misrepresentation has created substantial mistake and the annulment.
same is mutual.
Serious character of fraud
MISREPRESENTATION BY THIRD PERSONS Refers not to its influence, but to its importance or magnitude. Hence,
a contract cannot be annulled just because of the presence of:
General Rule:
A. Minor or common acts of faud whose veracity could easily
Misrepresentation by a third person does not vitiate consent.
have been investigated
Example: B. Ordinary deviations from the truth which are almost
A and B entered into a contract with X. A’s consent was obtained only inseparable from ordinary commercial transactions especially
because B had deceived or defrauded him. May A ask for annulment of those taking place in fairs or markets
the contract with X? NO, because X was not a party to the fraud.
RELATION BETWEEN FRAUD AND CONSENT
Exception: The fraud must be the principal or causal inducement for the consent
When such misrepresentation has created substantial mistake and the of the party who is deceived in the sense that he would never have
same is mutual. given such consent were it not for the fraud.
Take note: In this case, the contract may be annulled, not principally Take note: If the fraud is merely incidental in the sense that the party
on the ground of fraud, but on the ground of mistake. who is deceived would have agreed to the contract even without it, his
consent is not vitiated. The contract is therefore valid. Its only effect is
Example: to render the fraudulent party liable for damages.
C, an old and ignorant woman, was helped by V in obtaining a loan of
P3, 000 from X Rural Bank, secured by a mortgage on her house and Woodhouse v. Halili
lot. On the day she signed the promissory note and the mortgage Facts:
contract, she also signed several documents. One of these documents Plaintiff and defendant entered into a contract where it was agreed
was a promissory note of V for a loan of P3, 000 also secured by a that they shall organize a partnership for the bottling and distributon
mortgage on her house and lot. Years later, she was informed that her of Mission soft drinks. Plaintiff as industrial partner and manager, and
property shall be sold at public auction to satisfy the two obligations. defendant as capitalist partner. Plaintiff was to secure the franchise for
She then filed a suit for annulment of her participation as co-maker in and in behalf of the partnership and he was to receive 30% net
the obligation contracted by V on the ground of fraud and mistake. proftits of the business. Defendant failed to comply with the contract
Upon filing of the complaint, she deposited P3, 383 in court as after the bottling plant was already in operation. Hence, plaintiff filed a
payment of her personabl obligation plus interests. case praying for the execution of the agreed upon partnership.
Issues: Defendant’s contention – he alleged that his consent to the contract

1. Can C be held liable for the obligation of V? was secured through the plaintiff’s false representation that he had the
2. Was there a valid and effective consignation considering that exclusive bottling franchise of the Mission Dry Corp in the Phils.
there was no previous tender of payment made by C to the Bank?
Issues:
Held: 1. WON the plaintiff had falsely represented that he had the
1. No, C cannot be held liable for the obligation of V because of exclusive franchise to bottle Mission beverages in the Phils
mistake. (not fraud because the bank was not a participant 2. Whether this false representation, if its existed, annuls the
in the fraud committed by V) There was substantial mistake agreement to form a partnership.
on the part of both C and the Bank mutually committed by
them as a consequence of the fraud employed by V. Held:
It is true that the defendant was led to believe by the plaintiff that the
2. Notwithstanding the absence of a previous tender of latter had the exclusive franchise and the same is to be transferred to
payment made directly to the Bank, the consignation was the partnership. However, the principal obligation that the plaintiff
valid and effective. The deposit was attached to the record assumed was to secure said franchise for the partnership. Hence, if
of the case and the Bank had not made any claim thereto. ever there was false misrepresentation on the part of the plaintiff, such
Therefore, C was right in thinking that it was useless for her misrepresentation was not the causal inducement that led defendant
to make a previous offer and tender of payment directly to to enter into the partnership agreement. On the other hand, this
the Bank. supposed ownership of an exclusive franchise was only the
consideration plaintiff gave in exchange for the share of 30%.
MISREPRESENTATION IN GOOD FAITH
In other words, the plaintiff, by pretending that he had the exclusive
1343. Misrepresentation made in good faith is not fraudulent but may franchise and promising to transfer it to defendant, obtained the
constitute error. consent of the latter to give him a big slice in the net profits (and not
the latter’s consent to the partnership agreement itself) This is just
dolo incidente because it was used to get the other party’s consent to Effect: Valid because the one who adheres to the contract is in reality
a big share in the profts, an incidental matter in the agreement. free to reject it entirely. If he adheres, he gives his consent.
Since there was breach of contract on the part of the defendant as Exception: If the weaker party is reduced to the alternative of taking
well as misrepresentation on the part of the plaintiff – set off damages or leaving it, completely deprived of the opportunity to bargain in
equal footing.
SIMULATION OF CONTRACTS Spouses Reyes v. BPI Family Savings Bank

Facts:
1345. Simulation of a contract may be absolute or relative. The Petitioner spouses executed a real estate mortgage on their property
former takes place when the parties do not intend to be bound at all; in favour of BPI-FSB to secure the P15M loan of Transbuilders
the latter, when the parties conceal their true agreement. Resources and Devt Corp to BPI.
1346. An absolutely simulated or fi ctitious contract is void. A relative Held:

simulation, when it does not prejudice a third person and is not While the stipulation proved to be onerous to the petitioners, the
intended for any purpose contrary to law, morals, good customs, courts will not extricate a party from an unwise or undesirable contract
public order, or public policy binds the parties to their real agreement. entered into with all the required formalities and with full awareness of
its consequences. Petitioners voluntarily executed the REM and they
SIMULATION OF CONTRACTS cannot be allowed to repudiate their obligation to the bank after
It is the process of intentionally deceiving others by producing the Transbuilder’s default. Contracts of adhesion are not invalid per se.
appearance of a contract that really does not exist (absolute
simulation) or which is different from the true agreement (relative Section 2 – OBJECT OF CONTRACT
simulation). Articles 1347 - 1349
Two kinds of simulation:

CONCEPT OF OBJECT
A. Absolute – when there is colorable contract but it has no
substance because the contracting parties do not intend to be OBJECT
bound by the contract at all. The subject matter of the obligation which is created or established.
Example: Debtor simulates the sale of his properties to a friend Take note: Objects of contracts and that of obligations are identical.
in order to prevent their possible attachment by creditors or
when A, as a joke, executed a deed of sale although they did Importance of object
not intend to be bound at all by the contract. The most indispensable, if not the most fundamental requisite, in order
to have at least the shadow of a contract.
Basic characteristic: Contract is not desired or intented to
produce legal effects Why? Because without cause, an agreement is possible, although
inexplicable. Without consent, it is at least possible to have the
Effect: Inexistent and void. appearance of a contract. But without an object there is nothing.
OBJECT OF CONTRACT
Cruz v. Bancom Finance Corp
Facts:
1347. All things which are not outside the commerce of men,
Although the Deed of Sale between petitioners and Candelaria
including future things, may be the object of a contract. All rights
Sanchez stipulated a consideration of P150,000, there was
actually no exchange of money between them. which are not intransmissible may also be the object of contracts. No
contract may be entered into upon future inheritance except in cases
Held: expressly authorized by law. All services which are not contrary to law,
morals, good customs, public order or public policy may likewise be
The Deed of Sale were absolutely simulated, hence, null and
void. This being so, petitioners would be in the same position as the object of a contract.
they were before they executed the simulated Deed of Sale in 1348. Impossible things or services cannot be the object of contracts.
favor of Sanchez; they are still the owners of the property.
1349. The object of every contract must be determinate as to its kind.
B. Relative – when the contracting parties state a false cause in The fact that the quantity is not determinate shall not be obstacle to
the contract to conceal their true agreement. the existence of the contract, provided it is possible to determine the
same, without the need of a new contract between the parties.
Example: When a person conceals a donation by simulating a
sale of the property to the beneficiary for a fictitious WHAT MAY BE THE OBJECT OF CONTRACTS
consideration.
General rule: All things or services may be the object of contracts.
Effect: Binding and enforceable between the parties and their Exceptions:
successors in interetest to the real agreement, except – 1. Those outside the commerce of men
1. If the contract should prejudice a third person 2. Intransmissible rights
2. If the purpose is contrary to law, morals, etc. 3. Future inheritance, except in cases authorized by law
4. Services which are contrary to law, morals, etc.
Take note: The apparent or ostensible contract is the one valid. 5. Impossible things or services
Reason: The contracting parties are in estoppel and should be 6. Those not possible of determination as to its kind
penalized for their deception.
REQUISITES
Test in determining the nature of a contract 1. The object must be within the commerce of men
The intention of the parties as determined from the express terms of 2. Must be real or possible – exists at the moment of the
their agreement as well as from their contemporaneous and celebration of the contract or at least can exist subsequently or
subsequent acts. in the future
3. Must not be contrary to law, morals, public policy, etc.
Presumption of validity of contracts 4. Must be transmissible
The legal presumption is in favour of the validity of contracts. Hence, 5. Must be determinate, or at least determinable as to its kind
the party who impugns the validity and regularity of a contract has the
burden of proving his allegation. WITHIN THE COMMERCE OF MAN
CONTRACTS OF ADHESION Two requisites:

Where the terms thereof are prepared by only one party while the 1. Must be susceptible of appropriation
other merely affixes his signature signifying his adhesion thereto. 2. Must be transmissible from one person to another
Take note: Those things, rights or services which do not possess these before partition has been effected. This is because the rights to
conditions or characteristics are outside the commerce of men. succession are transmitted at the moment of the decedent’s death.
Examples: Blas v. Santos

Facts:
1. Those things which are such by their very nature (i.e. air,
Simeon Blas married Marta Cruz in 1898 and had 3 children. A year
sea, sacred things, res nullius, property belonging to public
after Marta’s death, Simeon contracted a second marriage with
domain)
Maxima – no children. During the second marriage, no liquidation of
the properties of the first marriage was made. Dec 26, 1936 – Simeon
2. Those which are made such by special prohibitions
executed a will declaring all of his properties as conjugal and giving ½
established by law (i.e. poisonous substances, drugs, arms,
thereof to Maxima as her share. On the same day, Maxima signed a
explosives, and contrabands)
notarized document, promising to convey by will ½ of the share given
to her to the children of Simeon by his previous marriage. A week
3. Those rights which are intransmissible because they are:
after, Simeon died. As a result, the children of the first marriage
brought an action against the estate of Maxima asking for the
A. Purely personal n character (i.e. those arising from
enforcement of the promise contained in the document.
the relationship of husband and wife – jus
consortium, or from the relationship pf paternity
Maxima contends that the promise is not enforceable because it lacks
and filiation – patria potestas)
a sufficient cause or consideration and since it is a contract with
respect to future inheritance, the same falls within the prohibition of
B. Honorary or political in character (i.e. right to
Art 1347.
suffrage and to hold public office)
Held:
Take note: Communal things, such as public plazas, sidewalks, streets,
The execution of the document by Maxima was ordered by the testator
rivers, fountains, etc. for public use cannot be sold or leased because
to prevent his heirs by his first marriage from contesting his will and
they are by their very nature, outside the commerce of men.
demanding liquidation of the conjugal properties acquired during his
first marriage. Therefore, it has a sufficient cause or consideration.
EXISTENCE OF OBJECT Also, the prohibition in Art 1347 does not apply. What is prohibited is a
contract that deals with properties not in existence at the time of the
The object must be in existence at the moment of the celebration of contract, that a person may in the future acquire by succession. In the
the contract or at least, it can exist subsequently or in the future. case, the subject matters of the contract signed by Maxima are well-
Hence, even future things may be the object of contracts. defined properties existing at the time of the agreement.
Things which have perished Exceptions to the exception:

If at the time of the contract, the thing which is the object of the Instances where future inheritance may be the object of the contract
contract has been entirely lost, the contract shall be without any
effect. 1. Art 130 In the case of marriage settlements – allows future
spouses to give or donate to each other in their marriage
Future things settlement their future property to take effect upon the death of
A future thing may be the object of a contract. (except future the donor
inheritance) Such contract may be interpreted in two possible ways:
A. Conditional contract – if its efficacy should depend upon the 2. Art 1080 In case of partitions of property inter vivos, provided
future existence of the thing that the legitime of compulsory heirs is not prejudiced.
B. Aleatory contract – if one of the contracting parties should Illustrations:

bear the risk that the thing will never come into existence.
1. When his father died, but before the delivery of the property
Take note: In case of doubt, it must be deemed to be conditional to him, a son sold his share of the property inherited. Is the
because doubts should be resolve in favour of the greatest reciprocity sale valid?
of interests.
YES. The inheritance is not future, but existing inheritance,
Example: although as yet undelivered.
Future harvest of sugarcane in a specific field may be sold, but by
express provision of law, said future property cannot be donated. 2. While his father was still alive, A sold to B the property he
expected to receive from his father. Is the sale valid?
Rule with respect to future inheritance
General rule: NO, because the object of the contract is future inheritance
A future thing may be the object of a contract. since the father is still alive, and it does not fall under of the
exceptions to the prohibition.
Exception:
Future inheritance – any property or right NOT in existence or capable 3. Some future heirs divided the property they expected to
of determination at the time of the contract that a person may in the inherit from their mother, at a time when she was still alive.
future acquire by sucession. (where source of the property is still alive) Is such partition valid?
Reason: There would be the possibility that one of the contracting NO, because the contract relates to a future inheritance
parties may be tempted to instigate the death of the other in order since the mother is still alive, and does not come under the
that the inheritance will become his, or that fraud and prejudice may contegory of those contract authorized by law concerning
be committed. future inheritance.
Examples: Impossible things or services

1. An agreement for the partition of the estate of a living A. Absolute impossibility – arises from the very nature or essence
person, made bwteen those who, in case of death, would of the act or service itself
inherit the same is null and void.
Example: Contract to deliver a mythical bird to to travel to a
2. Vendor undertook to convey to the vendee his participation distant galaxy.
in the property left by his deceased father. The part of the
property belonging to his mother, who is still living, cannot Effect: Contract is void.
be affected by the conveyance since his interest in the
property of his mother was a future inheritance. B. Relative impossibility – arises from the qualifications or
circumstances of the obligor rendering him incapable of
Take note: However, after the death of the decedent, anyone of the executing the act or service
co-heirs may enter into a contract with respect to the inheritance even
Examples: In a contract of partnership where one of the Distinguished from consideration

partners obligates himself to contribute to the common fund an Cause and consideration are used interchangeably in this jurisdiction.
amount beyond his means, the contract is not void because the Causa is merely the civil law term, while consideration is the common
impossibility may disapper. law term.
Effect: Allows the perfection of the contract, although the Distinguished from object
fulfillment is hardly probable.
A. For remuneratory contracts
Take note: If the impossibility is permanent, although relative only, the  Cause – the service or benefit which is remunerated.
same is still void. (ex. Blind person entering into a contract which  Object – thing given in remuneration
requires the use of eyesight)
B. For gratuitous contracts
Impossibility not to be confused with difficulty  Cause – liberality of the donor or benefactor
Impossibility must not be confused with difficulty. Hence, a showing of  Object – the thing given or donated
mere inconvenience, unexpected impediments, or increased expenses
is not enough. C. For onerous contracts
 Cause – for each contracting party, the prestation or
LICITNESS OF OBJECT promise of a thing or service by the other
 Object – the thing or service itself
The object of the contract must be lawful and licit. Hence, it must not
be contrary to any of the following: Illustration for onerous contracts:
If Tanya sells a car to Feds for P20, 000, what is the cause and what is
A. Law
the object of the contract?
B. Morals
C. Good customs
Three views:
D. Public order
E. Public policy
1. Manresa and Castan
Cause: For Tanya, the cause is the promise of Feds to pay her
DETERMINABILITY OF OBJECT P20, 000. For Feds, the cause is the promise of Tanya to deliver
the car to him.
The object must be determinate, or at least determinable as to its
kind, without need of a new agreement. Objects: The car and the P20, 000.
Determinate 2. Dr. Padilla

The genus of the object should be expressed although there might be Cause: P20, 000
no determination of the individual species. Consequently, there need Object: Car
not be any specification of the qualities and circumstances of the thing
which constitutes the object of the contract. 3. Dr. Tolentino
Cause: For Tanya, the cause is the promise of Feds to pay her
Illustration: P20, 000. For Feds, the cause is the promise of Tanya to deliver
Granting there is a specification as to the class or genus to which the the car to him.
object belongs but no specification as to quantity, is the contract valid?
Object: The car because it is the starting point of the
YES. The fact that the quantity is not determinate, shall not be an agreement, without which the negotiation would never have
obstacle to the existence of the contract, provided it is possible to begun. (The more logical view)
determine the same, without need of a new contract. (2nd sen 1349)
CAUSE IN ONEROUS CONTRACTS
Examples: needs of a family, provisions needed for a factory, materials The cause is for each contracting party, the prestation or promise of a
for a particular work, etc. thing or service by the other.
Aurora Fe Camacho v. CA Example:

Held: A logging company by contract designated a certain agency as its
Arts 1349 and 1460 provide the guidelines in determing whether or not distributor to export logs to Korea and Europe at the best market price
the object of the contract is certain. In this case, the object is a 5, 000 obtainable on condition that it would pay the latter a commission of
sqm portion of lot 261, Balanga Cadastre. The failure of the parties to 13% of the gross value of the logs.
state the exact location in the contract is immaterial. This is a mere
error, which does not indicate the absence of the principal object as to Cause for the logging company: Distribution of its logs in the areas
render the contract void. The description of the property subject of the agreed upon which the latter undertook to accomplish
contract is sufficient to validate the same.
Cause for the agency: Its commitment to sell or export the logs for
Section 3 – CAUSE OF CONTRACT onerous consideration.
Articles 1350 – 1355
Accessory contracts
CONCEPT OF CAUSE Cause of accessory contracts is identical with that of the principal
contract.
1350. In onerous contracts the cause is understood to be, for each Examples:
contracting party, the prestation or promise of a thing or service by 1. A mortgage as an accessory contract – its cause is the very
the other; in remuneratory ones, the service or benefit which is cause of the principal contract from which it receives its life, and
remunerated; and in contracts of pure beneficence, the mere liberality without which it cannot exist an independent contract, although
of the benefactor. it may secure an obligation incurred by another.
CAUSE DEFINED
2. Where one of the signers of a promissory note was indebted to
The essential reason which moves the contracting parties to enter into
the payee in the amount of P2,000 and to secure its payment
the contract. In other words, it is the immediate, direct or most
the defendant signed the note together with said debtor in
proximate reason which explains and justifies the creation of an
solidum, the said debt is sufficient consideration for the
obligation through the will of the contracting parties.
execution of the note as to the defendant.
Contract Cause
Moral obligations
Prestation or promise of a thing
Onerous contracts May a moral or natural obligation constitute a sufficient cause or
or service by the other
consideration to support an onerous contract?
Gratuitous contracts Liberality of the benefactor
Remuneratory contracts Service or benefit which is remunerated
IT DEPENDS. My motive, however, is the killing of myself. Motives do not enter at all
in the validity or invalidity of cause or consideration.
 Where the moral obligation arises wholly from ethical
considerations, unconnected with any civil obligation – not
Distinguished from motives
demandable in law but only in conscience and cannot constitute
One may purchase an article not because it is cheap but because he
a sufficient cause to support an onerous contract
may have some particular use to which it may be put, because of a
particular quality which the article has, or the relation which it will
 Where such moral obligation is based upon a previous civil
bear, etc. These circumstances may constitute the motive which
obligation which has already been barred by the statute of
induces the purchase. The motives are as different or complex and as
limitations at the time when the contract is entered into –
capable of infinite variety as the individual circumstances which may
constitutes a sufficient cause or consideration.
move men to acquire things or to make money.
Fisher v. Robb
Cause Motive
Facts:
Robb was one of the organizers of Philippine Greyhound Club, Inc Direct or most proximate
Indirect or remote reasons
which was formed for the purpose of introducing dog racing in the reason of a contract
Philippines, while Fisher was one of those who invested money in the Objective or juridical Psychological or purely
venture. When the venture failed, Robb sent a letter to Fisher reason of a contract personal reasons
explaining the critical condition of the company and stated that he felt Always known Unknown to the other
a moral responsibility for those who has sent in the second payment of Always the same Differs for each contracting party
their subscription and that he shall reimburse Fisher using his personal Legality or illegality of the cause
Will not affect the lexistence of a
funds. Fisher then brought an action to enforce the “obligation”. will affect the existence or
contract
validity of a contract
Issue:
Whether there is a sufficient cause or consideration to justify the Illegal cause distinguished from illegal motive
promise made by Robb in his letter. An illegal cause makes a contract void, whereas an illegal motive does
not necessarily render the transaction void.
Held:
The contract sought to be enforced is onerous in character because it Example: If I buy a gun to kill my neighbour, the purchase is still valid.
supposes the deprivation of the latter of an amount of money which
impairs his property, and for it to be valid, it should have a Instances when the line between motive and cause disappears
consideration consisting in the lending or promise of a thing or service When the motive of one of the contracting parties predetermines the
by such party. Robb is required to reimburse, but Fisher has not purpose of the contract and such motive is illegal or immoral, then the
promised anything to Robb to compel him to make such payment. The same becomes the illegal causa – thus rendering the contract void
promise by Robb of reimbursement was prompted by a feeling of pity from the very beginning.
and is purely moral – not demandable in law but only in conscience.
Examples:
Villaroel v. Estrada 1. A mother sold 2 fishponds to a daughter and the latter in turn
Facts: resold the same fishpond to the mother and her stepfather. As
Kalaw obtained a loan from spouses Estrada in the amount of P1, 000 a consequence of which, the ponds were converted into
payable after 7 years. Unfortunately, Kalaw and spouses Estrada died, conjugal properties. It is clear that the motive or purpose is to
all survived by their sons. In 1930, Villaroel, son of Kalaw, executed a circumvent the law against donations between spouses. This
document acknowledging the debt, thereby assuming the obligation. motive is the illegal causa which makes the contract void.
The heirs of spouses Estrada now files an action to enforce the
obligation. 2. A Filipino leased a parcel of land to an alien for 99 years with
an option to buy the property within 50 years, provided that
Issue: the latter shall become a Filipino citizen. The motive of the
Whether or not the action will prosper considering that the debt agreement which resulted in the virtual transfer of ownership is
incurred by the defendant’s mother had already prescribed. to circumvent the Constitutional prohibition to transfer lands to
aliens. The motive is the illegal causa, thus contract is void.
Held:
The present action is not founded on the original obligation contracted Liquez v. Court of Appeals
by the mother of Villaroel, which had already prescribed – but on that Facts:
contracted by the defendant in 1930 when he assumed the obligation Salvador Lopez, a married man, donated a land to a 16-year old
which had already prescribed. In effect, the same gave rise to a new (Conchita Liquez), subject to the condition that she will cohabit with
obligation. It was a moal obligation which is a sufficient consideration him as his mistress. After Lopez’s death, Conchita sought to get the
to create and make effective and demandable the obligation which he land from his heirs, but said heirs refused on the ground that the
had voluntarily contracted in 1930. cause of the donation was illegal, hence void. Conchita contended that
while the motive might have been immoral, still the cause which is the
CAUSE IN REMUNERATORY CONTRACTS liberality of the donor was proper. Hence, the donation is valid.
Remuneratory contract – one in which one of the contracting Held:

parties remunerates or compensates the service or benefit rendered or The donation was null and void. While it is true that motive differs
given by the other party, although such service or beneft does not from cause, still a contract that is conditioned upon the attainment of
constitute a demandable debt. Cause: the service or benefit which is an immoral motive should be considered void, for here motive may be
renumerated regarded as cause when it predetermines the purposes of the contract.
Here, Lopez would not have conveyed the property in question had he
Example: A gives a property in accordance with the formalities known that Liguez would not cohabit with him; it follows that the
prescribed by law to his lawyer friend B, in remuneration for legal cohabitation was an implied condition to the donation, and being
services rendered to him freely by the latter in the past. unlawful, the donation itself must be considered unlawful.
Cause of A – legal services rendered by B, although such services do The liberality of the donor is deemed causa only in contracts of pure
not constitute a demandable debt. liberality, that is to say contracts in which the idea of self-interest is
totally absent on the part of the transferor. In the case, the donation
MOTIVES was not moved exlusively by the desire to benefit Conchita but also to
gratify his sexual impulse. Therefore, the donation was but one part of
an onerous transaction. Thus considered, the conveyance was clearly
1351. The particular motives of the parties in entering into a contract
predicated upon an illicit causa. Nevertheless, had Lopez been alive, he
are different from the cause thereof.
could not have invoked the immorality of the donation because it was
he who was at fault. Thus Conchita is entitled to the land.
MOTIVES
I buy a gun from a store for P50,000 because I want to kill myself. The
cause of the contract is the gun (for me), the money (for the seller).
demanded payment of the price from B. B refused to pay, alleging that

EFFECT OF LACK OF CAUSE
the certificate of public convenience which was the main consideration
of the sale no longer existed. Is the contention of B tenable?
1352. Contracts without cause, or with unlawful cause, produce no
effect whatsoever. The cause is unlawful if it is contrary to law, Held: No, for the certificate was in existence at the time of the
morals, good customs, public order or public policy. perfection of the contract. Its subsequent revocation is of no
consequence insofar as the validity of the contract is concerned.
REQUISITES OF CAUSE Besides, B was negligent in not having caused the immediate transfer
of the certificate to his name. After all, it had already been delivered to
1. The cause should be in existence at the time of the
him.
celebration of the contract
2. The cause should be licit or lawful
LAWFUL CAUSE
3. The cause should be true
The cause is unlawful when it is contrary to law, morals, etc.
Effect: Void ab initio.
Take note: If the contract has no cause, or even if it has, if the same
is unlawful or false – shall not produce any effect, inexistent and void
Examples:
from the very beginning.
1. A promissory note to cover a gambling debt or to cover
accumulate usurious debts
EFFECT OF LACK OF CAUSE
2. A promise of marriage based on carnal consideration
3. A contract to stifle criminal prosecution is void because it is
General rule: It shall not produce any effect, whatsover.
contrary to public policy and due administration of justice.
Examples:
Velez v. Ramas
1. If the purchase price in a contract of sale was never in fact paid Facts:
by the purchaser – inexistent for lack of a cause or An employee in a pawnshop named Restituta Quirante embezzled a
consideration. sum of money from said pawnshop, and in order that she would not
2. Conveyance or transfer of property is simulated without any be prosecuted, her father and her husband signed a promissory note
cause or consideration to pay the amount embezzled, with interest to the victim. When they
did not pay, the victim instituted this action to recover the said
Exceptions: amount.
A. Failure to pay the full amount of the property, even if there be a Issue: Can recovery be made?
stipulation that full payment shall be made at the time of the
celebration of the contract Held:
No recovery can be made because the cause of consideration is illicit,
B. Where the consideration is only P1. namely, to prevent a prosecution for a crime. This was clearly the
 Reason is because there is a consideration purpose of the father, and also the purpose of the husband. It is
 The contract may be voidable because of the inadequacy of contrary to public policy to allow agreements designed to prevent or
the cause or consideration stifle prosecutions for crime. The machinery for the administration of
 But it is never void or inexistent justice cannot be used to promote an unlawful purpose.
Carantes v. Court of Appeals
Mactall v. Melegrito
Facts:
Facts:
The heirs of a deceased person assigned in 1939 their “Right to
Mactal gave Melegrito P1,770 to purchase palay, with the obligation of
Inheritance” in favor of a co-heir in consideration of P1. It was alleged
returning the amount within 10 days, if not spent for said purpose.
later, in an action to nullify the assignment, that the deed of
The agent neither bought the palay nor returned the money. Mactal
assignment was void, there being no consideration therefor.
thus accused him of estafa. Melegrito persuaded Mactal to drop the
case, and in turn he (Melegrito) executed a promissory note in favor of
Held:
the other for the amount involved. However, he was unable to comply
It is total absence of cause or consideration that renders a contract
with his promise despite repeated demands. Hence, Mactal brought an
absolutely void and inexistent. In the case at bar, consideration was
action to recover the P1,770. Melegrito now contends that the
not absent. The sum of P1 appears in the document was one of the
promissory note is void because the consideration thereof is the
considerations for the assignment of inheritance.
dismissal of the estafa case which is contrary to public policy.
Questions
Issue: Is the promissory note valid?
1. In order that the cause shall be considered as existing, is it
necessary that it should be stated in the contract? Held:
Yes, for its cause or consideration was not the dismissal of the estafa
NO, even if the cause is not stated in the contract, it is case, but the pre-existing debt of Melegrito in the amount of P1, 770.
presumed that it exists and is lawful, unless the debtor proves
the contrary. This is true even where the contract falls within Effect if the cause is illegal
the purview of the Statute of Frauds.
A. If one party is innocent, he cannot be compelled to perform his
2. If instead of an absolute lack of cause or consideration, there s obligation and he may recover what he has already given.
lesion or inadequacy of cause, shall this invalidate the contract?
B. If both parties are guilty – neither can sue the other, the law
leaving them as they are.
NO, Art 1355 lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake, etc. However,
FALSE CAUSE
the party who has suffered the lesion or damage is given the
remedy of rescission.
1353. The statement of a false cause in contracts shall render them
EXISTING CAUSE void, if it should not be proved that they were founded upon another
The cause must exist at the time of the perfection of the contract. It cause which is true and lawful.
need not exist later.
GENERAL RULE
Serrano v. Miave Statement of a false cause in contracts shall render them void, except
Facts: if proved that they were founded upon another cause which is true
On Jan. 5, A sold and delivered his truck together with the and lawful.
corresponding certificate of public convenience to B for the sum of
P1.6 million, payable within 60 days. Two weeks after the sale, and Example: A deed of sale which expressly states that the purchase price
while the certificate of public convenience was still in the name of A, has been paid when it fact it has never been paid – void because the
the certificate was revoked by the Land Transportation Commission same is a simulated contract.
thru no fault of A. Upon the expiration of the 60-day period, A
However, dit can either be absolute or relative simulation. Hence, if

the contract is relatively simulated, it does not necessarily follow that it CHAPTER 3. FORMS OF CONTRACTS
is inexistence or void, provided that it can be establisehed that it is in
reality founded upon another cause which is true and lawful. FORMS OF CONTRACTS
PRESUMPTION THAT CAUSE EXISTS 1356. Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity
1354. Although the cause is not stated in the contract, it is presumed are present. However, when the law requires that a contract be in
that it exists and is lawful, unless the debtor proves the contrary. some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and
indispensable. In such cases, the rights of the parties stated in the
PRESUMPTION THAT CAUSE EXISTS
following article cannot be exercised.
It is necessary that the cause must exist, but it is NOT necessary to
state the cause in the contract. Reason: it is presumed that the cause
exists and is lawful, unless the debtor proves the contrary. FORMS OF CONTRACTS
General rule
This is true even where the contract falls within the purview of the The form in which a contract is executed has no effect upon its
Statute of Frauds. obligatory force, provided all of the essential requisites for its validity
are present.
Statute of Frauds
Under this, certain agreements have to be in writing. Now then, in Exceptions
these agreements, is it essential to put down the cause or 1. When the law requires that the contract must be in a certain
consideration in writing? NO, because the presumption still applies. form in order to be valid
Illustration: 2. When the law requires that the contract must be in a certain
A made a promissory note in B’s favour. A, however, alleged that the form to be enforceable
cause was his gambling losses in a prohibited game. Who has the
burden of proving that the game was indeed a prohibited one? 3. When the law requires that the contract must be in a certain
form for the convenience of the contracting parties or for the
A, because under the law, the presumption is that the cause is lawful. efficacy of the contract
LESION OR INADEQUACY FORMALITIES FOR VALIDITY

Contracts for which the law prescribes certain forms for their validity.
1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or A. Those which must appear in writing
B. Those which must appear in a public document
undue influence.
C. Those which must be registered
LESIONS
Contracts which must appear in writing
It is inadequacy of cause, like an insufficient price of the thing sold.
Non-compliance shall render the contract void.
General rule: 1. Donations of personal property whose value exceed P5, 000
Lesion of price does not invalidate a contract. (Art 748 – donation and acceptance shall be in writing)
Exceptions: 2. Sale of land or any interest therein through an agent

(Art 1874 – authority of the agent shall be in writing)
1. When, together with lesion, there has been fraud, mistake or
undue influence. 3. Agreements regarding payment of interest in contracts of loan
2. In cases expressly provided by law (In the following, the (Art 1956 – no interest shall be due unless it has been expressly
contracts may be rescinded) stipulated in writing. The validity of the contract of loan,
however, is not affected)
A. Those entered into by guardians whenever the wards they
represent suffer lesion by more than ¼ of the value of 4. Antichresis
the things which are the objects thereof (Art 2134 – amount of the principal and of the interest shall be
specified in writing)
B. Those agreed upon in representation of absentees if the
latter suffer the lesion stated in the preceding no. Contracts which must appear in a public document
Non-compliance shall reneder the contract void.
C. Partition among co-heirs, when anyone of them received
things with a value less by at least ¼ than the share to 1. Donations of immovable property
which he is entitled. (Art 749 – donation must be in public document. The
acceptance, however, may be made in the same deed of
Illustrations: donation or in a separate public document. If made in a
1. Guardian of A sold A’s mansion worth P120M for P60M. May separate document, the donor shall be notified in an authentic
the contract be rescinded on the ground of lesion? form, and this shall be noted in both instruments)
YES, such a case is expressly provided for by law as one of 2. Partnership where immovable property or real rights are
the contracts that may be rescinded on the ground of lesion contributed to the common fund
(Arts 1771 and 1773 – must appear in a public instrument and
2. A sold his mansion worth P120M to B for only P60M because there must be an inventory of the immovable property or real
A did not know the true value of the house. May the contract rights, signed by the partners and attached to the public
be rescinded? instrument)
NO. As a rule, lesion or inadequacy of price, by itself, does Contracts which must be registered
not invalidate a contract. But if A had sold it only for this
amount because of fraud or mistake or unude influence, the 1. Chattel mortgages
contract may be annulled. (Art 2140 – personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an
Lesion as evidene of vitiated consent obligation. If the same is delivered instead of being registered,
Lesion may be evidence of the presence of fraud, mistake, or undue the contract is a pledge)
influence.
2. Sales or transfers of large cattles
(Cattle Rgistration Act – sale and transfer mst be duly registered
and a certificate of transfer must be secured)
FORMALITIES FOR ENFORCEABILITY 2. The cession, repudiation or renunciation of hereditary rights or

There are contracts which are unenforceable by action, unless they are of those of the conjugal partnership of gains
in writing and properly subscribed, or unless evidenced by some note
or memorandum, which must also be in writing and properly 3. The power to administer property, or any other power which has
subscribed. These contracts are governed by the Statute of Frauds. for its object an act appearing or which should appear in a
public document, or should prejudice a third person
Purpose of Statute of Frauds 4. The cession of actions or rights proceeding from an act
To prevent fraud, and not to encourage the same. Thus, certain appearing in a public document.
agreements are required to be in writing so that they may be enforced.
Take note: All other contracts where the amount involved exceeds five
RIGHT OF ONE PARTY TO COMPEL EXECUTION OF THE FORM hundred pesos must appear in writing, even a private one. But sales of
goods, chattels or things in action are governed by Arts 1403 & 1405.
1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article, the contracting FORMALITIES FOR EFFICACY
parties may compel each other to observe that form, once the contract General rule: Contracts shall be obligatory in whatever form they may
has been perfected. This right may be exercised simultaneously with ave been entered into.
the action upon the contract.
Exception: Contracts falling under this Article, which should be
RIGHT TO COMPEL THE EXECUTION OF THE FORM executed in accordance with certain formalities, by reason of their
The Article applies only when form is needed only for convenience, not importance in order to insure their efficacy and to protect the interests
for validity or enforceability. In other words, before the contracting of the contracting parties as well as that of third persons.
parties may be compelled to execute the needed form, it is essential
Art 1357 – grants the corercive power to contracting parties by which
that the contract be:
they can reciprocally compel the observance of the required form.
A. Perfected
B. Enforceable under the Statute of Frauds Principles
Take note: 1. Arts 1357 and 1358 require the execution of the contract either
Art 1356 says that when the law requires that a contract be in some in a public or in a prvate document not in order to validate or
form in order that it may be valid and enforceable, such requirement is enforce it, but only to insure its efficacy, so that after its
absolute and indispensable. In such cases, the right of the parties existence has been admitted, the party bund may be compelled
stated in this article – the right to compel CANNOT be exercised. to execute the necessary document.
Examples: 2. Both articles presuppose the existence of a contract which is

valid and enforceable.
1. A donated land to B in a private instrument. B accepted in the
same private instrument. B then wanted to have the donation 3. When the contracting parties invokes Arts 1357 and 1358, the
registered but the registration requires a public instrument. So B effect is to place the existence of the contract in issue.
requested A to put down the donation in a public instrument.
But A refused. B then sued to compel A to observe the 4. Art 1357 does not require that the action to compel the
necessary form. Decide. execution of the necessary document must precede the action
upon the contract. Both may proceed simultaneously.
A cannot be compelled under Art 1357 because the donation is
not valid. 5. Although Art 1357, in connection with Ar 1358 do not operate
against the validity of the contract, once the contracting parties
2. Same as the first problem, except that the land has already invoke the same, the execution of the required document must
been actually delivered to B. May A be compelled to execute the precede the determination of the other obligations derived from
needed public instrument? the contract.
NO, for the simple reason that the donation is null and void. Dauden-Hernaez v. De los Angeles
Facts:
3. A sold to B in a private instrument his land. Later B wanted to Marlene Dauden, a movie actress, filed a complaint against Hollywood
have the sale registered, but registration requires a public Far East Productions and its President and General Manager, to
instrument. May B compel A to execute the needed public recover P14, 700 as the balance of her compensation as leading
instrument? actress in two motion pictures. Lower court dismissed the complaint
since the contract price exceeded P500, the same should have been
YES, because the contract is both valid and enforceable under evidenced by a written instrument, in violation of Art 1358.
the Statute of Frauds.
Held:
4. Same as the preceding problem, except that the sale was made As a general rule, contracts are valid and binding from their perfection
orally. May B compel A to execute the needed public regadless of the form, whether they be oral or written. There are only
instrument? two exceptions – first, when the contractual form is needed for its
validity, and second, for its enforceability. The contract for her services
IT DEPENDS. falls under neither exception. It is true that it appears to be included in
the last clause of Art 1358, but nowhere does it state that the absence
 If the contract is still executory – NO because the contract of written form will make the agreement invalid or unenforceable.
is not enforceable under the Statute of Frauds, which
requires sales of real property to be in writing to be Problem
enforceable by court action. Spouses Robert and Yollie wanted to sell their house and found a
prospective buyer, Nina. Yollia negotiated with Nina for the sale of the
 If the price has been paid or the land has been delivered property. They agreed on a fair price of P2M. Nina sent a letter
– YES, because here the contract is both valid and confirming her intention to buy the property. Nina prepared a deed of
enforceable. sale to be signed by the couple and a manager’s check for P2M. After
receiving the P2M, Robert signed the deed of sale however, Yollie was
FORMALITIES FOR EFFICACY not able to sign because she changed her mind. Yollie then filed for
nullification of the deed of sale. Does Nina have a cause of actoin
against Robert and Yollie?
1358 CONTRACTS MUST APPEAR IN A PUBLIC DOCUMENT
Answer: Considering that the contract has already been perfected and
1. Acts and contracts which have for their object the creation,
taken out of the operation of the statute of frauds, Nina can compel
transmission, modification or extinguishment of real rights over
Robert and Yollie to observe the form required by law in order for the
immovable property; sales of real property or of an interest
property to be registered in her name, which can be filed together with
therein.
the action for the recovery of the house.
CHAPTER 4. REFORMATION OF INSTRUMENTS

WHEN CAN THERE BE REFORMATION
DOCTRINE OF REFORMATION OF INSTRUMENTS
WHEN CAN THERE BE REFORMATION
1359. When, there having been a meeting of the minds of the parties
1. Art 1361 – When a mutial mistake of the parties causes the
to a contract, their true intention is not expressed in the instrument
failure of the instrument to disclose their real agreement
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the
2. Art 1362 – If one party was mistaken and the other acted
reformation of the instrument to the end that such true intention may
fraudulenty or inequitably in such a way that the instrument
be expressed.
does not show their true intention, the former may ask for the
reformation.
If mistake, fraud, inequitable conduct, or accident has prevented a
meeting of the minds of the parties, the proper remedy is not
3. Ar 1363 – When one party was mistaken and the other knew or
reformation of the instrument but annulment of the contract.
believed that the instrument did not state their real agreement,
but concealed that fact from the former.
DOCTRINE OF REFORMATION OF INSTRUMENTS
When the true intention of the parties to a valid contract are not 4. Art 1364 – When through the ignorance, lack of skill,
expressed in the instrument purporting to embody their agreement by negligence or bad faith on the part of the person drafting the
reason of mistake, fraud, inequitable conduct or accident, one of the instrument or of the clerk or typist, the instrument does not
parties may ask for the reformation of the instrument so that such true express the true intention of the parties, the courts may order
intention may be expressed. the reformation.
Requisites 5. Art 1365 – If two parties agree upon the mortage or pledge of
1. Meeting of the minds of the parties real or personal property, but the instrument states that the
2. Their true intention is not expressed in the instrument property is sold absolutely or with a right of repurchase
3. Such failure to express their true intention is due to mistake,
fraud inequitable conduct or accident WHEN CAN THERE BE NO REFORMATION
Take note: 1. Art 1366

 When there has been meeting of the minds, but there is A. Simple donations inter vivos where no condition is imposed
mistake, fraud, inequitable conduct or accident in the contract B. Wills
as written – remedy is reformation. C. When the real agreement is void
 When there has been no meeting of the minds because of
2. Art 1367 – When one of the parties has brought an action to
vitiated consent – proper remedy is annulment.
enforce the instrument, he cannot subsequently ask for its
reformation.
Illustration:
If the seller was selling for P1,000,000 but the buyer thought he was
WHO CAN ORDER REFORMATION
buying for P500,000 and the contract states P1,000,000, there has
been no meeting of the minds and the remedy is annulment; but if
Ar 1368 – Reformation may be ordered at the instance of:
both agreed on P500,000 and the contract as written states
P1,000,000, the remedy is reformation, because here, there has been
A. If mutual mistake – Either party or his successors in interest
a meeting of the minds.
B. If not mutual – upon petition of the injured party, or his
heirs and assigns
Rationale of the doctrine
Equity orders the reformation of an instrument in order that the true
WHAT SHALL GOVERN REFORMATION PROCEDURE
intention of the contracting parties may be expressed. The courts do
not attempt to make another contract for the parties. The rationale is
Art 1369 – The procedure for the reformation of instruments shall be
that it would be unjust and inequitable to allow the enforcement of a
governed by rules of court to be promulgated by the Supreme Court.
written instrument which does not reflect or disclose the real meeting
of the minds of the parties.
MUTUAL MISTAKE
Distinguished from annulment of contracts
1361. When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement, said instrument may be
Reformation of instrument Annulment of contract
reformed.
Presupposes a perfectly valid Based on a defective contract in MUTUAL MISTAKE

contract where there has been which there has been no meeting Reformation may be asked because of mutual mistake.
meeting of the minds of the minds because consent has
been vitiated Example:
A sold to B orally a house at 16 San Isidro Malate. In the written public
Take note: If mistake, fraud, inequitable conduct or accident has document, both forgot the true number of the house and instead
prevented the meeting of the minds of the parties – proper remedy is wrote on the contract No. 18 San Isidro Malate. Since there was
annulment of the contract and NOT reformation. mutual mistake, reformation of the instrument is proper.
Example: Requisites:
Buyer has been led to enter into a contract of sale through fraud or 1. Mistake should be of a fact
misrepresentation on the part of the seller that the property he was 2. The mistake should be proved by clear and convincing evidence
buying was unregistered land – annulment. 3. The mistake should be mutual
RULE IN CASE OF CONFLICT UNILATERAL MISTAKE + FRAUD
1360. The principles of the general law on the reformation of 1362. If one party was mistaken and the other acted fraudulently or
instruments are hereby adopted insofar as they are not in confl ict with inequitably in such a way that the instrument does not show their true
the provisions of this Code. intention, the former may ask for the reformation of the instrument.
RULE IN CASE OF CONFLICT UNILATERAL MISTAKE PLUS FRAUD

In case of conflict between the Civil Code and the principles of the The Mistake is unilateral but the other party acted fraudulently or
general law on reformation, the Civil Code prevails. The latter will have inequitably. TN: Only the mistaken party can ask for reformation.
only suppletory effect.
Example:
INTENT TO HAVE A MORTGAGE OR PLEDGE
It was agreed that A would be loaned P10M by B. In the contract
signed by A and B, it was stated that A was selling his house to B for
1365. If two parties agree upon the mortgage or pledge of real or
said amount. A signed the contract in the belief that it was really a
personal property, but the instrument states that the property is sold
contract of loan. Who, if any, may ask for the reformation of the
absolutely or with a right of repurchase, reformation of the instrument
instrument if B had acted fraudulently?
is proper.
Answer: A may ask for the reformation of the instrument because after
the meeting of the minds, one party (B) acted fraudulently or INTENT TO HAVE A MORTGAGE OR PLEDGE
inequitably in such a way that the contract does not show their real
intention. In such a case, the law provides that the person who acted Example:
by mistake may ask for the reformation of the instrument. B wanted to borrow from C, so he offered his land by way of mortgage
as security. Both parties agreed on this point but the contract drafted
Ong Chua v. Carr, et al. contained an absolute sale. May the instrument be reformed?
Facts:
Teck sold his land to Ong with the right to repurchase within 4 years. YES, otherwise, the true intention of the parties would be frustrated.
Ong sold the land to Carr with the understanding that Carr was buying
it, subject to the right to repurchase on the part of Teck. At that time, How to judge the parties’ intent
Carr did not have enough money. So Carr asked for a loan from an Intention of the parties can be judged from their contemporaneous or
Association. The Association offered to give a loan provided Carr could subsequent acts.
offer, as security, land of which he was the absolute owner, that is,
land which would not be subject for example to repurchase. WHEN REFORMATION IS NOT ALLOWED
With the help of a lawyer who drafted the deed, Carr and Ong (who 1366. There shall be no reformation in the following cases: (1) Simple
did not know English) signed a contract in which Carr was made out to donations inter vivos wherein no condition is imposed; (2) Will; (3)
be the absolute owner of the land, and the words regarding the “right When the real agreement is void.
to repurchase” omitted. Later Teck was repurchasing the property
from Ong, and Ong demanded the reconveyance of the property from WHEN REFORMATION IS NOT ALLOWED
Carr. Carr refused on the ground that he (Carr) was the absolute
owner of the land. Hence, Ong brought this action against Carr. 1. Donations inter vivos wherein no condition is imposed
Issue: Reason: Because donations are essentials acts of pure
May the contract be reformed? If so, may Ong now demand the land liberality.
from Carr so that it would be resold to Teck?
Exception: If donation is conditional – reformation may be
Held: resorted to so that the true conditions intended by the donor
Yes, the contract may be reformed because “if one party was mistaken might be brought out. In case the donation is an onerous one,
and the other acted fraudulently or inequitably in such a way that the reformation is very much in order.
instrument does not show their true intention, the former may ask for
the reformation of the instrument.” It follows, therefore, that Ong may 2. Wills
now demand the reconveyance of the property to him so that the land
may be repurchased by Teck. Reason: Because the making of a will is strictly a personal act,
which is free. Moreover, a will may be revoked at any time.
UNILATERAL MISTAKE + CONCEALMENT
Exception: After the death of the testators, errors or
imperfections in descriptions may be corrected under Art 789,
1363. When one party was mistaken and the other knew or believed but not the manner of property disposal.
that the instrument did not state their real agreement, but concealed
that fact from the former, the instrument may be reformed. 3. Void agreements
UNILATERAL MISTAKE PLUS CONCEALEMENT Reason: Because such a procedure would be useless because
The mistake is unilateral but the other party is guilty of concealment. the agreement is void in the first place. Once reformation is
TN: Only the party in good faith can ask for reformation. made, the new instrument would be void precisely because the
true agreement and intention is void.
FAILURE TO CONVEY THE TRUE INTENT
ESTOPPED TO ASK FOR REFORMATION
1364. When through the ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the instrument or of the clerk
or typist, the instrument does not express the true intention of the 1367. When one of the parties has brought an action to enforce the
parties, the courts may order that the instrument be reformed. instrument he cannot subsequently ask for its reformation.
EFFECT OF AN ACTION TO ENFORCE THE INSTRUMENT

When one of the parties has brought an action to enforce the
FAILURE TO CONVEY THE TRUE INTENT instrument, he cannot subsequently ask for its reformation. Rationale:
The court may order the reformation of the instrument if the Estoppel, waiver or ratification.
instrument does not convey the true information of the parties
because of the: Example:
A sold B a house. A fraudulently made the contract one of mortgage
A. Ignorance
instead of sale. Both signed the contract of mortgage, with B believing
B. Lack of skill or
all the time that it was a contract of sale. B, therefore, has the right to
C. Bad faith
bring an action for the reformation of the instrument. But if B brings
(of the drafter of the instrument, the clerk or the typist) an action to foreclose the mortgage, he is thereby enforcing the
instrument. He cannot, therefore, subsequently ask for the reformation
Manila Engineering Co v. Cranston and Heacock of the instrument to make it one of sale.
In a contract, although the original draft read in dollars, the contract
was made out in pesos through the typist’s fault. May the instrument
PLAINTIFFS IN ACTION FOR REFORMATION
be reformed?
Yes. “It conclusively appears from the collateral facts and surrounding 1368. Reformation may be ordered at the instance of either party or
circumstances that it was intended that the dollar sign was to be used his successors in interest, if the mistake was mutual; otherwise, upon
and that defendant knew or in the ordinary course of business should petition of the injured party, or his heirs and assigns.
have known that a mistake was made. The contract will be reformed
and the dollar sign substituted for the peso sign.”
PLAINTIFFS IN AN ACTION FOR REFORMATION dependence, ignorance, indigence, tender age, mental weakness, etc,
the courts must be vigilant for his protection.
A. If the mistake is mutual –
Either party or his successors in interest What shall determine its validity and/or enforceability
The peculiar circumstances obtaining in each case and the situation of
B. In all other cases – the parties concerned.
Injured party, his heirs and assigns
Ayala Corp v. Ray Burton Devt Corp
Problem In the instance case, the stipulations in the Deed Restrictions and
A and B agreed on a certain contract, but A fraudulently made a Special Conditions are plain and unambiguous which leave no room for
document reciting another kind of contract. Later, both A and B died. interpretation. Moreover, there was even no attempt on the part of
RBDC to prove that in the execution of the Deed of Sale on the subject
1. May the son of B bring an action to reform the instrument? lot, it was a weaker or a disadvantaged party on account of its moral
Yes, because he is the heir of the injured party. dependence, ignorance, etc. On the contrary, the latteris a realty firm
and has been engaged in realty business for several years already.
2. May the son of A bring an action to reform the instrument? Hence RBDC was not an unwary party in the subject transaction. It
No, as it was his father who caused the fraud. was in fact a knowledgeable realty firm experienced in real estate
business, as testified by Edwin Ngo, President of RBDC.
Query: Supposing the son of A wanted to correct the fraud
made by his father? – This is okay but in such a case, no court Spouses Reyes v. BPI Family Savings Bank
action is needed anyone, since both parties can agree to reform Facts:
the instrument by themselves. Petitioner spouses executed a real estate mortgage on their property
in favour of BPI-FSB to secure the P15M loan of Transbuilders
What complaint must allege Resources and Devt Corp to BPI.
Before reformation can be granted, the complaint must allege:
Held:
A. That the instrument to be reformed does not express the While the stipulation proved to be onerous to the petitioners, the
real agreement or intention of the parties courts will not extricate a party from an unwise or undesirable contract
entered into with all the required formalities and with full awareness of
B. What the real agreement or intention was its consequences. Petitioners voluntarily executed the REM and they
cannot be allowed to repudiate their obligation to the bank after
Take note: Transbuilder’s default. Contracts of adhesion are not invalid per se.
It is not the function of the remedy of reformation to make a new
agreement, but to establish and perpetuate the teu existing one.
CONTRACTS OF CREDIT CARDS
PROCEDURAL RULES
CONTRACTS OF CREDIT CARDS
1369. The procedure for the reformation of instruments shall be Contracts between cardholders and credit card companies are
governed by Rules of Court to be promulgated by the Supreme Court. contracts of adhesion because their terms are prepared by only one
party while the other merely affixes his signature signifying his
adhesion thereto.
PROCEDURAL RULES
These procedural rules are supposed to be promulgated by the SC.
Unauthorized purchases through lost credit card
For the cardholder to be asolved from liability for unauthorized
CONTRACTS OF ADHESION purchases made through his lost or stolen card, two steps must be
followed: (Ermitano v. CA)
CONTRACT OF ADHESION
One in which one of the parties imposes a ready made form of A. The cardholder must give written notice to the credit card
contract, which the other party may accept or reject, but which the company
latter cannot modify. B. The credit card company must notify its member
establishments of such loss or theft, which naurlly, it may
Ayala Corporation v. Ray Burton Devt Corp.
only do upon receipt of a notice from the cardhoplder
A contract of adhesion in itself is not an invalid agreement. This is
binding as a mutually executed transaction. The one who adheres to
Take note: Both the cardholder and company have a responsibility to
the contract is in reality free to reject it entirely, and if he adheres, he
perform, in order to free the cardholder from any liability arising from
gives his consent.
the use of a lost or stlen credit card.
Philippine American General Insurance v. Sweet Lines Inc
What absolves the cardholder
Not even an allegation of ignorance of a party excuses non-compliance
Prompt notice by the cardholder to the company of the loss or theft of
with the contractual stipulations since the responsibility for ensuring
her card should be enough to relieve her from any liability occasioned
full comprehension of the provisions of a contract of carriage (contract
by the unauthorized use of her lost card.
of adhesion) devolves not on the carrier but on the owner, shipper or
consignee as the case may be.
Does the cardholder need to wait until the company has notified all its
member establishments?
Contracts of adhesion stand out from other contracts
Contracts of adhesion stand out from other contracts which are
NO, because it would be unfair and unjust to put the cardholder at the
bilaterally drafted by the parties in a sense that the former is accorded
mercy of the company which may delay indefinitely the notification of
inordinate vigilance and scrutiny by the courts in order to shield the
its members to minimize if not eliminate the possibility of incurring loss
unwary from deceptive schemes contained in ready-made contracts.
from unauthorized purchases. (against public policy)
Qua Chee Gan v. Law Union and Rock Insurance
Emmanuel Aznar v. Citibank
The courts cannot ignore that nowadays, monopolies, cartels and
The terms and conditions of Citibank’s mastercard constitute a contract
concentration of capitals manage to impose cunningly prepared
of adhesion. Par 7 of the contract states that Citibank is not
agreements that the weaker party may not change – his participation
responsible if the card is not honoured by any merchant affiliate for
thereof being reduced to the alternative to take it or leave it, depriving
any reason. Though the bank may have no control of all the actions of
them to bargain on equal footing.
its merchant affiliates, it is not right however to give it blanket freedom
from liability if its card is dishonoured by any merchant affiliates for
Hence, these contracts (i.e. insurance and bill of lading) call for greater
any reason. Such phrase renders the statement vague and as the said
strictness and vigilance for the courts to protect the weaker party from
terms constitute a contract of adhesion – any ambiguity mst be
abuses and prevent their becoming traps for the unwary.
construed against the party who prepared the contract.
Basis: Article 24 NCC – In all contractual, property or other relations,
Par 15 thereof also limits its liability to P1,000 or the actual damage
when one of the parties is at a disadvantage on account of his moral
proven, whichever is lesser. Again, such stipulation is not valid for the
same is unconscionable as it precludes payment of a larger amount the lease, B would become the absolute owner of the property.
even though damage may be clearly proven. Is this really a lease or a sale in installments?
Take note: The Supreme Court is not precluded from ruling out blind This contract is really a sale in installments for such was the
adherence to the terms of a contract if the attendant facts and evident intention of the contracting parties. “Although in the
circumstances show that they should be ignored fro being obviously contract, Exhibit A, the usual words ‘lease,’ ‘lessee,’ and ‘lessor’
too one-sided. were employed, that is not obstacle to holding that said contract
was a sale on installments, for such was the evident intention of
CHAPTER 5. INTERPRETATION OF CONTRACTS the parties in entering into said contract.”
3. In a written contract, it was agreed that all legal actions may be

PRIMACY OF INTENTION OF PARTIES brought to the jurisdiction of the proper courts in the City of
Manila. May the parties sue in courts outside Manila? YES,
1370. If the terms of a contract are clear and leave no doubt upon because the clause in question being permissive only in view of
the intention of the contracting parties, the literal meaning of its the use of the word “may”.
stipulations shall control. If the words appear to be contrary to the
evident intention of the parties, the latter shall prevail over the former. HOW TO JUDGE INTENT OF PARTIES
REASON FOR INTERRETATIO OF CONTRACTS 1371. In order to judge the intention of the contracting parties, their
What is the use of interpreting a contract? Should we not just apply contemporaneous and subsequent acts shall be principally considered.
the terms thereof?
HOW TO JUDGE INTENT OF THE PARTIES
It is true that we must apply the terms of the contract but only when
they are so clear that there is no doubt regarding the intention of the General rule: Contract is interpreted in the precise terms in which they
contracting parties. In other cases, we should apply the rules of are expressed. But the courts, are called upon to admit direct
interpretation. circumstantial evidence necessary for their interpretation with the
purpose of making the true intention of the parties prevail.
PRIMACY OF INTENTION OF PARTIES Consequently, the courts should consider:
Cardinal rule in the interpretation of contracts 1. Contemporaneous acts

To effect that the intention of the contracting parties should always 2. Subsequent acts
prevail because their will has the force of law between them.
Take note: This is without prejudice to the consideration of other
 If the terms are clear and leave no doubt as to the intention of factos determined by other rules of interpretation in the Civil Code and
the contracting parties – literal sense of its stipulations must be the Rules of Courts.
followed.
Manila Electric Co v. Commissioners
 If the words appear to be contrary to the evident intention of
Facts:
the contracting parties – the intention shall prevail.
When the Meralco obtained a franchise from the City of Manila, free
transportation was granted in the franchise to employees of the City of
Take note: Once the intention has been ascertained, it becomes an
Manila “wearing offi cial badges.” The question to determine is: What
integral part of the contract as though it had been originally expressed
should be the proper interpretation of “wearing,” wearing so that it
therein in unequivocal terms.
could be seen, or wearing the badge, without the badge being seen?
Or should the term include both? To properly solve the question, the
Manila Banking Corp v. Teodoro Jr
Supreme Court had to look into the actions of the contracting parties
The character of the transaction between the parties is to be
at the time of and subsequent to the granting of the franchise. It was
determined by their intention, regardless of what language was used
proved to the satisfaction of the court that for nine years the parties
or what the form of the transfer was. If it was intended to secure the
interpreted the phrase to mean “the wearing of the offi cial badges so
payment of money, it must be construed as a pledge. However, even
that they could be seen.”
though a transfer, if regarded by itself, appears to have been absolute,
its object and character might still be qualified and explained by a
Held: Such interpretation of the parties should be th interpretation by
contemporaneous writing declaring it to have been a deposit of the
the court, because “the courts are NOT at liberty to adopt a
property as collateral security.
construction opposed to that which the parties have placed on their
contract.”
Philippine National Construction Corp v. CA
The contract between parties is the formal expression of the parties’
EFFECT OF USE OF GENERAL TERMS
rights, duties and obligations. It is the best evidence of the intention of
the parties. Thus, when the terms of an agreement have been reduced
to writing, it is considered as containing all the terms agreed upon and 1372. However general the terms of a contract may be, they shall be
there can be , between the parties and their successors in interest, no understood to comprehend things that are distinct and cases that are
evidence of such terms other than the contents of the written different from those upon which the parties intended to agree.
agreement. Furthermore, it is a rule that if the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, EFFECT OF USE OF GENERAL TERMS
the literal meaning of its stipulation shall control. The contract is the
Example: A sold B his house including “all the furniture therein”.
law between the parties and when the words of the contract are clear
Suppose part of the furniture belonged to a relatie of A who had asked
and can easily be understood, there is no room for contruction.
him (A) for permission to leave them there temporarily. Should such
furniture be included?
Rule in case of conflict
In case of conflict between the words of the contract and the evident
NO, because although the term “all” is general, it should still not be
intention of the parties, which one must prevail?
understood to comprehend things that are distinct and cases that are
The intention must prevail. Let us interpret not by the letter that killeth different from those upon which the parties intended to agree.
but by the spirit that giveth life. But where the words are clear as to
leave no doubt as to the intention of the contracting parties, the literal Special intent prevails over a general intent
meaning shall control. Hence, there is no room for interpretation. Just as a special provision controls a general provision, a special intent
prevails over a general intent.
Examples:
1. A promissory note stated that it was payable upon receipt of the STIPULATION ADMITTING OF SEVERAL MEANINGS
debtor of cash payment from a certain estate, or upon demand.
Is the obligation demandable at once? YES, because of the clear 1373. If some stipulation of any contract should admit of several
import of the words “upon demand”. meanings, it shall be understood as bearing that import which is most
2. A and B entered into a so-called contract of lease, whereby B adequate to render it effectual.
would pay certain regular amounts as rentals and at the end of
STIPULATION ADMITTING OF SEVERAL MEANINGS may be proved in court. (Presumed to be known by the
parties)
A wife exchanged “her house” for a diamond ring. Now the wife had a
house which was her paraphernal property and another house, which 2. If the customs and usages are merely local – they have to
however, belonged to the conjugal partnership. The contract entered be both alleged and proved.
into by the house was against the consent of the husband. To which
house shoud “her house” refer? INTERPRETATION AGAINST WHO CAUSED OBSCURITY
To the paraphernal house, because this would validate the contract. If 1377. The interpretation of obscure words or stipulations in a contract
the other interpretation would be followed, the exchange would not be shall not favor the party who caused the obscurity
valid since the husband had not given consent.
INTERPRETATION AGAINST PARTY WHO CAUSED OBSCURITY
STIPULATIONS TO BE READ TOGETHER Rationale: Since he caused the obscurity, the party who drew up the
contract with ambiguous terms should be responsible therefor, so the
1374. The various stipulations of a contract shall be interpreted obscurity must be construed against him. Hence, drafters of the terms
together, attributing to the doubtful ones that sense which may result of the cotract should be careful.
from all of them taken jointly.
Govt of the Phils v. Derham Bros.
STIPULATIONS TO BE READ TOGETHER Facts:
In a contract, it was agreed that a metalled roadway would be built on
Bank of the P.I. v. Ty Camco Sobrino the street where the real property was located to “its entire length.”
Facts: The government contended that the whole street should be metalled,
A mortgaged his property to B. In the contract, it was stated that a alleging that the antecedent of “its” was the street. Upon the other
second mortgage was prohibited, except with the written consent of B. hand, the contractor said that “its” referred throughout the length of
The contract further stated that the penalty for such a violation would the real property (and not the whole street) should be metalled. It was
be that B can immediately foreclose the mortgage. Without the the government that drafted the contract.
consent of B, A mortgaged the property a second time to C. Has B the
right to consider the second mortgage null and void? Issue: Who is correct, the government or the contractor?
Held: Held: The contractor is correct. It was the government that caused
No, his only right is to foreclose the first mortgage. The mortgage the ambiguity, so the interpretation of “its” should not be in the
contract should be read in its entirety. If so read, it is at once seen government’s favour.
that while the making of the second mortgage except with the written
consent of the mortgagee is prohibited, the contract continues and DOUBTS AS TO PRINCIPAL/INCIDENTAL CIRCUMSTANCES
states the penalty for such a violation, namely, it gives the mortgagee
the right to immediately foreclose the mortgage. It does not give the 1378. When it is absolutely impossible to settle doubts by the rules
mortgagee the right to treat the second mortgage as null and void.” established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights
WORDS WITH DIFFERENT SIGNIFICATIONS and interests shall prevail. If the contract is onerous, the doubt shall
be settled in favor of the greatest reciprocity of interests.
1375. Words which may have different significations shall be
understood in that which is most in keeping with the nature and object If the doubts are cast upon the principal object of the contract in such
of the contract. a way that it cannot be known what may have been the intention or
will of the parties, the contract shall be null and void.
INTERPRETED TO BE IN KEEPING WITH NATURE AND OBJECT
If a word is susceptible to two or more meanings, what meaning
should be used? DOUBTS AS TO PRINCIPAL OR INCIDENTAL CIRCUMSTANCES
There may be doubts as to:
A. That in keeping with the nature and object of the contract. A. The principal object, or
B. If this cannot be determined, then the “terms of a writing B. Incidental circumstances (i.e. whether a sale or a mortgage
are presumed to have been used in their primary and is involved)
general acceptation”
Doubt as to the principal object
Example: Here, the contract is void.
If authority is given to exact payment by legal means, does this
include authority to file actions in court to recover sums of money? Example: X promised to Y this (___). Since the object is unknown, it is
clear that there could not have been any meeting of the minds.
Yes. The clause in question means “the power to exact payment of
debts due the concerned by means of the institution of suits for their Doubts as to the incidental circumstances
recovery. If there could be any doubt as to the meaning of this Apply the following rules:
language taken by itself, it would be removed by a consideration of the
general scope and purpose of the instrument in which it concurs.” A. If gratuitous –rule of least transmission of rights and interest
EFFECT OF USAGE OR CUSTOM OF THE PLACE Example: If A needs a fountain pen and B gives it to him
freely, is this a donation or a commodatum? A commodatum
for this would transmit lesser rights than a donation.
1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the
B. If onerous –rule of the greatest reciprocity of interests
omission of stipulations which are ordinarily established.
Example:
EFFECT OF USAGE OR CUSTOM OF THE PLACE When what has been received for his house by a person
needing money is very much less than the value of the house,
Example: A made a contract with B regarding “pesetas”. In the place the courts will be inclined to interpret the transaction more as
where the contract was made, Mexican pesetas were more commonly an equitable mortgage, than as a sale with the right of
used that Spanish pesetas. The SC held that the term pesetas should repurchase, the reason being that in an equitable mortgage,
be construed to mean Mexican pesetas. there is in this case greater reciprocity of interests, considering
the amount of money received.
Pleading and proof of customs and usages
Should customs and usages be pleaded or alleged in the pleading?
SUPPLETORY USE OF RULES OF COURTS
IT DEPENDS.
1. If the customs and usages are general – they need not be 1379. The principles of interpretation stated in Rule 123 of the Rules
pleaded. Hence, even without previously being alleged, they of Court shall likewise be observed in the construction of contracts.
CHAPTER 6. RESCISSIBLE CONTRACTS CONCEPT
CLASSES OF DEFECTIVE CONTRACTS 1380. Contracts validly agreed upon may be rescinded in
the cases established by law.
CLASSES OF DEFECTIVE CONTRACTS

RESCISSIBLE CONTRACTS IN GENERAL
A contract which is valid because it has all the essential requisites
1. Resissible contracts
prescribed by law, but which is defective because of injury or damage
2. Voidable contracts
to either of the contracting parties or to third persons, as a
3. Unenforceable contracts
consequence of which, it may be rescinded.
4. Void or inexistent contracts
Take note: A rescissible contract can only be attacked directly.
ESSENTIAL FEATURES
Characteristics
As to defect
A. Their defect consists in injury or damage either to one of the
1. Rescissible – there is damage or injury either to one of the contracting parties or to third persons
contracting parties or to third persons B. Before rescission, they are valid and legally effective.
C. They can be attacked directly only, and not collaterally.
2. Voidable – there is vitiation of consent or legal incapacity of D. They can be attacked only either by a contracting party or
one of the contracting parties by a third person who is injured or defrauded
E. They are susceptible of convalidation only by prescription,
3. Unenforceable – contract is entered into in excess or without and NOT by ratification.
any authority, or does not comply with the Statute of
Frauds, or both contracting parties are legally incapacitated CONCEPT OF RESCISSION
A remedy granted by law to parties and even to third persons, to
4. Void or inexistent – one or some of the essential requisites secure the reparation of damages caused to them by a contract, even
of a void contract are lacking either in fact or in law. if the same should be valid, by means of the restoration of things to
their condition prior to the celebration of the contract.
As to effect
Distinguished from resolution
1. Rescissible – valid and enforceable until they are rescinded Rescission of rescissible contracts should not be confused with the
by a competent court. rescission or resolution of reciprocal obligations under Art 1191.
2. Voidable – valid and enforceable until they are annulled by a As to party who may institute action
competent court
A. Rescission – by a party to the contract or a third person
3. Unenforceable – cannot be enforced by a proper action in B. Resolution – only by a party to a contract
court.
As to causes
4. Void or inexistent – do not as a general rule, produce any
legal effect. A. Rescission – several causes or grounds (i.e. lesin fraud, etc.)
B. Resolution – only ground is failure of one of the parties to
As to prescriptibility of action or defense comply with what is incumbent upon him.
1. Rescissible – action for rescission may prescribe. As to power of the courts
2. Voidable – action of annulment or defense of annulability A. Rescission – there is no power of the courts to grant an
may prescribe. extension of time for performance of the obligation so long
as there is a ground for rescission
3. Unenforceable – corresponding action for recovery, if there B. Resolution – the law expressly declares that courts shall
was total or partial performance of the unenforceable have a discretionary power to grant an extension for
contract under No 1 or No 3 of Art 1403 may prescribe. performance, provided that there is just cause.
4. Void or inexistent –does not prescribe. As to contracts which may be rescinded or resolved
As to susceptibility of ratification A. Rescission – any contract, whether unilateral or reciprocal

B. Resolution – only reciprocal contracts
1. Rescissible – not susceptible
2. Voidable – susceptible Distinguished from rescission by mutual consent
3. Unenforceable – susceptible
4. Void or Inexistent – not susceptible As to causes of rescission
As to who may assail contracts A. Rescission – Arts 1381 and 1382

B. Mutual consent – Mutual consent and convenience
1. Rescissible – by a contracting party and a third person who
is prejudiced by the contract As to laws applicable
A. Rescission – Arts 1385
2. Voidable – only by a contractingparty B. Mutual consent – other legal provisions
3. Unenforceable – only by a contracting party As to effects
4. Void or inexistent – by a contracting party and a third person A. Rescission – mutual restitution
whose interest is directly affected B. Mutual consent –determined by the agreement of the parties
As to how contracts may be assailed Aquino v. Tanedo

Facts:
1. Rescissible – only directly Plaintiff purchased land from defendant. Subsequently, they dissolved
2. Voidable – directly or collaterally the contract of sale and as a result, plaintiff returned the lands, while
3. Unenforceable - directly or collaterally defendant bound himself to return the part of the purchase price paid
4. Void or inexistent - directly or collaterally by plaintiff.
Issue: 2. The ward or absentee must have suffered lesion of more

WON plaintiff is obliged to return the products of the lands which he than ¼ of the value of the property which is the object of
had collected during his possession. the contract.
Held: 3. The contract must have been entered into without judicial
The rescission mentioned in the contract is not the rescsission in Art approval.
1385. It does not refer to contracts that are rescinded by mutual
consent and for mutual convenience of the contracting parties, as in 4. There must be no other legal means for obtaining reparation
the case at bar. for the lesion.
RESCISSIBLE CONTRACTS 5. The person bringing the action must be able to return
whatever he may be obliged to restore.
6. The object of the contract must not be legally in the
1381. RESCISIBLE CONTRACTS possession of a third person who did not act in bad faith.
1. Those entered into by guardians whenever the wards whom TN: If the object is legally in the possession of a third person who
they represent suffer lesion by more than ¼ of the value of acted in good faith, the remedy of the person suffering lesion is NOT
the things which are the object therof rescission BUT indemnification for damages.
2. Those agreed upon in representation of absentees if the CONTRACTS IN FRAUD OF CREDITORS

latter suffer the lesion stated in the preceding number
Requisites
3. Those undertaken in fraud of creditors when the latter 1. There must be a credit existing prior to the celebration of the
cannot in any manner collect the claims due them contract
4. Those which refer to things under litigation if they have 2. There must be a fraud, or at least the intent to commit fraud to
been entered into by th defendant without the knowledge the prejudice of the creditor seeking rescission
and approval of the litigants or of competent judicial
authority 3. The creditor cannot in any other legal manner collect his credit
5. All other contracts specially declared by law subject to 4. The object of the contract must not be legally in the possession
rescission of a third person who did not act in bad faith.
CONTRACTS IN BEHALF OF WARD TN: If the object is legally in the possession of a third person who did
not act in bad faith, the remedy of the creditor is to proceed against
Contracts entered into by guardians whenever the wards whom they the person causing the loss for damages.
represent suffer lesion by more than ¼ of the value of the things
which are the object therof Date of judgment is immaterial
While it is necessary that the credit must exist prior to the fraudulent
Lesion – damage or injury to the party asking for rescission. alienation, the date of the judgment enforcing it is immaterial. Even i
Generally, disparity between the price and value. the judgment be subsequent to the alienation, it is merely declaratory,
with retroactive effect to the date when the credit was constituted.
TN: Not rescissible if approved by the courts.
CONTRACTS REFERRING TO THINGS UNDER LITIGATION
RULES:
Contracts referring to things under litigation entered into by the
1. A judicial guardian entering into a contract with respect to the defendant without the knowledge and approval of the litigants or of
property of his ward must ordinarily secure the approval of a competet judicial authorit.
competent court. (Rules of Court)
TN: The property is said to be in litigation here after the defendant
Effect: A guardian who sells properties belonging to his ward has received the service of summons.
without judicial approval – unenforceable.
Distinguished from the preceding case
2. If the contract falls within the scope of his powers as guardian
of his ward (contracts involving acts of administration), judicial
approval is not necessary.
Objects under Fraudulent
litigation contracts
Effect: Contract is rescissible if the ward suffers lesion or
damage more than ¼ of the value
To secure the To guarantee an
EFFECTS OF CONTRACTS ENTERED INTO IN BEHALF OF WARD
As to purpose possible effectivity existing credit
of a claim
1. If an act of ownership – court approval is required. Otherwise,
contract is unenforceable, whether ther is lesion or not.
2. If merely an act of administration As to right Real right Personal right
A. If with court approval – valid, regardless of lesion.
B. If without court approval – rescissible, if lesion is more
As to who can A stranger to the contract
than ¼.
avail of rescission
CONTRACTS IN BEHALF OF ABSENTEES
Contracts entered into in behalf of absentees, if the absentee suffers Example:
lesion more than ¼ of the value of the thing. A sues B for recovery of a diamond ring. Pendente lite, B sells the ring
to C without the approval of A or of thesells the ring to C without the
TN: Not rescissible if approved by the courts. approval of A or of the court. The sale to C is rescissible at A’s instance
in case A wins in the original litigation, unless C is in good faith.
Requisites (Applicable to 1 & 2)
TN: To protect himself, the plaintiff must register his claim in the
1. Contract must have been entered into by a guardian in registry of property, pending litigation, if the suit is about real
behald of his ward or by a legal representative in behalf of property. This is the notice of lis pendens. The purpose is to give
an absentee. notice to the whole world. If personal property is involved, the
property may be levied upon by a writ of preliminary attachment or
else, it may be placed in the hands of a receiver.
However, if decedent during his lifetime entered into a contract with

CONTRACTS BY INSOLVENT another to deprive the heir of his liegitime, can the heir institute an
action for rescission after the death of the decedent?
1382. Payments made in a state of insolvency for obligations to
whose fulfillment the debtor could not be compelled at the time they NO, heir have no right to institute an action as a representative of the
were effected, are also rescissible. decedent since the decedent himself has no right. But he can under
No. 3 of Art 1381.
INSOLVENCY
Concepcion v. Sta Ana
Insolvency in its popular and NOT technical sense – Financial situation
The reason why a forced heir has the right to institute an action of
of the debtor by virtue of which it is impossible for him to fulfill his
rescission is that the right to the legitime is similar to a credit of a
obligations. Assets < liabilities. Judicial declaration of insolvency is
creditor, such that it may be defeated by fraudulent contracts.
NOT necessary.
Requsites EXTENT OF RESCISSION

1. Payment must have been made in a state of insolvency
2. Obligation must have been one which the debtor could not 1384. Rescission shall be only to the extent necessary to cover the
be compelled to pay at the time such payment was effected damages caused.
TN: Basis: Fraud EXTENT OF RESCISSION

Primary purpose: Reparation for the damage which is suffered by a
Obligations contemplated by this Article contracting party or by a third person.
1. Those with a term
2. Those subject to a suspensive condition TN: Need not be total in character.
3. Void and natural obligations
4. Those condoned or which have prescribed Rescission shall be only to the extent necessary to cover the damages
caused. Hence, partial rescission.
Payment of an obligation subject to a suspensive period
A is indebted to B for P10, 000 and to C for P5, 000. The obligation in
EFFECT OF RESCISSION IN CASE OF LESION
favor of C is subject to a suspensive period. While in a state of
insolvency, A pays his obligation to C before the expiration of the term.
Can B rescind the payment? 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the
YES, under Art 1382. However, this would be in direct conflict with Art price with its interest; consequently, it can be carried out only when he
1198 under which A can be compelled by C to pay the obligation even who demands rescission can return whatever he may be obliged to
before the expiration of the term since he lost his right to the benefit restore.
of such term by reason of his insolvency.
Neither shall rescission take place when the things which are the
How to reconcile this conflict? object of the contract are legally in the possession of third persons
who did not act in bad faith.
Consider the priority of dates between the two debts.
In this case, indemnity for damages may be demanded from the
 If obligation with a period became due before the obligation to person causing the loss.
the creditor seeking rescission became due (If C’s obligation
became due before that of B’s) EFFECT OF RESCISSION IN CASE OF LESION
Effect: Not rescissible even if payment was effected before the TN: Applicable only to rescissory actions on the ground of lesion and not
expiration of period on the ground of fraud.
 If obligation with a period became due after the obligation to Reason: Because in the latter, there is no obligation on the part of the
the creditor seeking rescission became due (If C’s obligation plaintiff-creditor to restore anything since he has not received anything.
became due after that of B’s)
Effect
Effect: Rescissible Mutual restitution. Obligation of both parties to return to the other the
object of the contract, including fruits or interests.
Other rescissible contracts
Articles 1098, 1189, 1526, 1534, 1542, 1556, 1560, 1567, 1659 TN: Rescission is not possible, unless he who demands it can return
whatever he may be obliged to restore.
SUBSIDIARY CHARACTER OF ACTION
Requisites
1. Plaintiff must be able to return what has been received by
1383. The action for rescission is subsidiary; it cannot be instituted
virtue of the rescissible contract. (Exception: prejudiced
except when the party suffering damage has no other legal means to
creditors)
obtain reparation for the same.
2. The object is not in the legal possession of third persons in
good faith. (i.e registration in the Registry of Property)
SUBSIDIARY CHARACTER OF ACTION 3. There must be no other legal remedy.
Before a party who is prejudiced can avail of the remedy of rescission, 4. The action must be brought within the proper prescriptive
he should have exhausted all of the other legal means to obtain period.
reparation.
What should be returned in rescinding a contract?
PARTIES WHO MAY INSTITUTE ACTION
1. Person prejudiced (Suffering lesion, defrauded, etc) A. Object of the contract, with its fruits
2. Their representatives (Fruits - refers not only to natural, industrial and civil fruits
3. Their heirs but also to other accession obtained by the thing)
4. Their creditors by virtue of subrogatory action
B. The price, with its interest
Right of an heir (Interest – refers to legal interest)
An heir may institute an action for the rescission of a rescissible
contract, as a representative of the person who suffered from lesion or Thus, the vendor in a contract of sale of land must refund to the
of the creditor who is defrauded. vendees an amount equal to the purchase price, plus the sum spent by
them in improving the land.
Illustration:
EFFECT OF RESCISSION UPON THIRD PERSONS 2. To defraud his creditor, A sold his property to B (who is in
good faith). Later B sold the property to C, who is in bad faith.
TN: This rule is applicable to all kinds of rescissible contracts. May the creditor rescind, although the property is now in the
possession of C?
Requisites
1. Thing must be legally in the possession of the third person Answer: No, for it does not matter whether C is in good or bad
2. Such third person must not have acted in bad faith faith, since he obtained the same from B who is in good faith.
It is B’s good faith that is important.
When is there legal possession
SUBSIDIARY CHARACTER OF ACTION
 Movable property – concurrence of these requisites offers no
difficulty since the possession of movable property acquired in
good faith is equivalent to a title. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not
take place with respect to contracts approved by the courts.
 Immovable property – right of the third person must be
registered or recorded in the proper registry, before we can say PRESUMPTIONS OF FRAUD
that the thing is legally in his possession, before he is protected
by law.
1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of
TN: A third person to whom the realty has been transferred who has
creditors, when the donor did not reserve sufficient property to pay all
not registered his right in the proper registery CANNOT be protected
debts contracted before the donation.
against the effects of a judgment rendered in the action for rescission.
Alienations by onerous title are also presumed fraudulent when made
Sikatuna v. Guevara
by persons against whom some judgment has been rendered in any
Facts:
instance or some writ of attachment has been issued. The decision or
A lease contract was entered into between Jacinto as lessor and
attachment need not refer to the property alienated, and need not
Guevara as lessee. The contract contained an option by which the
have been obtained by the party seeking the rescission.
lessor is give the right to purchase a house which the lessee had
constructed on the lot within a period of one year from the execution
In addition to these presumptions, the design to defraud creditors may
of the contract. But in case of failure to exercise such right, lessee is
be proved in any other manner recognized by the law of evidence.
given the right to purchase the lot. Period for the option expired
without the lessor exercising its right. Guevara offered to purchase the
lot but lessor refused. Guevera then brought an action to compel the PRESUMPTIONS OF FRAUD
lessor to sell the lot to her. This article establishes presumptions of fraud in the case of:
A. Gratuitous alienations
There was however no notice of the commencement of such action B. Onerous alienations
filed with the office of the Register of Deeds. During pendency of such
case, lessor sold the lot under litigation to the Sikutana Corp. This sale Gratuitous alienations
was recorded in the Registry in accordance with the Land Registration Preumed fraudulent – If the debtor has not reserved sufficient
Act. Thereafter, judgment was rendered in favor of Guevara, but was property to pay all of his debts contracted before the donation.
not executed because the lot had already been sold to Sikatuna.
Illustrations:
Guevara contented that since the contract involves the sale of property
under litigation without the approval of the litigant or of competent 1. A donated his land to B. Before the donation, he had several
judicial authority, it should be rescinded. debts, but he did not reserve enough property to pay all these
debts. Instead, he made the donation. Is the donation presumed
Issue: Is the contention tenable? fraudulent.
Held: Yes, the donation is presumed in fraud of creditors. But, of

NO, since the property is now in the legal possession of a third person course, this presumption may be rebutted by adequate proof.
who has not acted in bad faith. This is a special circumstance in that it
deals with property registered under the LRA which provides that acts 2. A made a donation to B. Later A contracted several debts. What
concerning properties registere under the law shall affect only the A has left as assets are much less than his present liabilities.
parties litigant, unless a notice of the commencement of the action is May the donation to B be rescinded?
recorded – which is not obtaining in this case. Hence, there was no
legal obstacle to the transfer of the title of said property. In which No, because the debts here of A were incurred after the
case, said transfer cannot be rescinded. donation had been made. As a matter of fact, the presumption
of fraud does not even arise in this case. However, under the
Proper remedy in this case doctrine of “anticipatory fraud,” rescission may still prosper if it
Indemnity for damages against the person who casused the loss. can be shown that the donation had been deliberately made
beforehand to avoid the payment of debts still to be contracted.
 Guardian, representative of the absentee or litigant who
transferred the thing. Onerous alienations
 Third person, who in bad faith, had previously acquired the Presumed fraudulent when made by persons –
thing and subsequently, alienated the same to an innocent
purchaser. A. Against whom some judgment has been rendered in any
instance (Thus, even if not yet a final judgment)
Illustrations on good faith
B. Or against whom some writ of attachment has been issued.
1. A sold to B a piece of land in fraud of his (A’s) creditors. B took
legal possession. If no other means are found to exact the Illustration:
satisfaction of the credits owing the creditors, may the sale to Debtor alienated a property to his son which was his ONLY attachable
B be rescinded? property after a judgment has been rendered against him and a writ of
execution has been issued – PRESUMED that such alienation is
Answer: It depends upon whether B was in good faith or in fraudulent.
bad faith.
TN: Where not judgment or preliminary attachment exists against the
If B was in good faith, rescission cannot take place, because debtor, presumption is NOT applicable.
the object of the contract is legally in the possession of a third
person who did not act in bad faith. If B was in bad faith,
rescission is proper.
Judgment or attachment need not refer to the property than P800. Hene, the innocent purchaser for value is applicable in this
alienated and need not have been obtained by the party case. Thus, the presumption of fraud can be considered overthrown,
seeking rescission thereby making the contract not rescissible.
Examples: BADGES OF FRAUD

There are some circumstances indicating that a certain alienation has
1. A brought an action against B, his debtor. A won. After been made in fraud of creditor. They are called badges of fraud.
judgment, B sold his property to C. X, another creditor of B,
wants to rescind this sale to C. Both C and B claim that X does The design to defraud creditors may be proved in any other manner
not have the right to interfere because, after all, it was A, not recognized by the law of evidence.
X, who had won a judgment against B. Are C and B justified?
Test of fraudulent conveyance
Answer: No, C and B are not justified. It is true that it was A, Whether the conveyance was a bona fide transaction or merely a trick
not X, who won the judgment, but this is immaterial since the or contrivance to defeat creditors. Does it prejudice the rights of
law says that the decision need not have been obtained by the creditors?
party seeking the rescission.
TN: It is not sufficient that it is founded on a good or valuable cause
2. In a case, A’s house at 11 Leveriza Street was attached by the or consideration or is made with a bona fide intent. It must have both
court. A sold his house at 22 San Miguel Street to B, after the elements.
attachment on the fi rst house had been made. C, a creditor of
A, now says that the sale is presumed fraudulent. A counters Badges of fraud
by saying that there is no such presumption because after all In the consideration of WON certain transfers are fraudulent, the
the house which had been attached was not the one sold to B. following circumstances are badges of fraud:
Is A justified? 1. The fact that the cause of the conveance is inadequate
2. A transfer made by a debto after suit has been begun and
No, A is not justified. It is true that the house he sold had not while it is pending against him
been levied upon or attached, but the fact remains that A is a 3. A sale on credit by an insolvent debtor
person against whom some writ of attachment has been 4. Evidence of large indebtedness or complete insolvency
issued. The law says that the attachment need not refer to the 5. Transfer of all or nearly all of his property by a debtor,
property alienated. especially when he is insolvent or greatly embarrassed
financially
Cabaliw v. Sadorra 6. Transfer is made between father and son, when there are
Facts: resent others of the above circumstances
After a judgment for support was rendered against a husband and in 7. Failure of vendee to take exclusive possession of all the
favor of his wife, the husband sold in a public instrument two parcels property
of conjugal land (there were only two parcels) to his son-in-law. This
was about seven (7) months after the judgment had been rendered. Rivera v. Li Tam & Co.
However, the sale was made in 1933 and, therefore, fell under the old Facts:
Civil Code which authorized in Art. 1413 thereof a husband as Li Tam died intestate, survived by his wife Rivera and several children
administrator of the conjugal partnership to alienate by onerous title by a Chinese wife. Rivera filed a claim for P250k+ against the intestate
conjugal property even without the wife’s consent. which the court approved because of a deed executed by the ecedent
acknowledging said indebetedness to his wife. Then Rivera, as
Issue: Is the sale valid? administrator of the estate, proceeded against the defendant company
for an accounting of the income derived from the shares of stock
Held: owned by the decedent.
The sale should be invalidated because it is presumed to have been
made in fraud of the judgment creditor who happens to be the wife, Company alleed that the decedent was no longer a stockholder in said
the sale having been made to avoid payment of the judgment debt for company, having transferred his shares to his children by his Chinese
support. The presumption of a fraudulent transaction established by wife. Rivera then asked for the rescission of the transder on the
specific provision of law cannot be overcome by the mere fact that the ground that it was made in fraud of creditors.
deed of sale in question is in the nature of a public instrument. The
principle that strong and convincing evidence is necessary to Held:
overthrow an existing public document does not apply to third persons The transfer is clearly fraudulent because the transferees are the
(who might be adversely prejudiced) but only to the parties to a decedent’s own children, no consideration was given for the transfer,
contract. Close relationship between the vendor and the vendee is one that the corporation was the business of the decedent, and that he has
of the known badges of fraud. an outstanding obligation of more than P250,000 with his wife which
he had invested in the corporation. And to complete the fraudulent
Presumptions are disputable scheme, the defendants dissolved the old corporation and formed a
These presumptions are disputable and may be rebutted by new one for no apparent reason. In view of such fraud, the transfer is,
satisfactory and convincing evidence to the contrary. therefore, of no effect.
Hence, if the transferee acquired the property in good faith, without EFFECT OF BAD FAITH
the least intention of impairing the judgment obtained by the creditor
against the transferor, and that he paud the price in the belief that the
1388. Whoever acquires in bad faith the things alienated in fraud of
transferor could freely dispose of said property – Presumption of fraud
creditors, shall indemnify the latter for damages suffered by them on
is overthrown.
account of the alienation, whenever, due to any cause, it should be
impossible for him to return them.
Honrado v. Marcayda
Facts:
Felipe purchased land from Marcayda for P1, 000, although at the time ACQUISITION BY THIRD PERSON IN GOOD FAITH
of the contract, there was already a judgment against Marcayda with The test of fraudulent conveyance: Does it prejudice the rights of
regard to the property and a writ of attachment had already been creditors? – NOT APPLICABLE if the conveyance is made in good faith
issued. Plaintiff contends that sale was fraudulent. Felipe contends that or with a bona fide intent and for a valuable cause or consideration.
he is a purchaser in good faith and for value.
TN: Right of purchaser over the property is legally superior to that of
Issues: any other person even as against the creditor who is prejudiced.
(1) WON Felipe was a purchaser in good faith and for value. (2) If he
is, WON the contract of sale could be rescinded. Effect: Contract of conveyance is NOT rescissible.
Held:
A purchaser on execution is not required to go behind the registry to ACQUISITION BY THIRD PERSON IN BAD FAITH
determine the condition of the property. The valuable consideration of If property is acquired by one who is NOT a purchaser in good faith
P1000 paid to Marcayda who does not appear to be her relative, is not and for value – Contract of conveyance is rescissible.
small for the property since its improvements are assessed at no less
What if the purchaser in bad faith cannot return the property?

He shall indemnify the creditor seeking the rescission for damages
suffered on account of the alienation.
Example:
X sold his house to Y, to defraud his creditors. Y knew of X’s purpose.
If the sale is rescinded, Y must indemnify, even if the house be
destroyed by a fortuitous event, but only if X himself cannot pay.
(Remember: Rescission is merely a secondary remedy available only
when X cannot pay)
Subsequent transfers
A. If the first transferee is in good faith, the good or bad faith of

the next transferee is not important.
B. If the first transferee is in bad faith, the next transferee is

liable only if he is also in bad faith.
TN: If there are two or more alienations, the first acquirer shall be
liable first, and so on.
Example:
A, against whom a judgment for payment of certain debt in favor of X
has been rendered, conveys his only property to B in fraud of X. B,
aware of the fraud, in turn conveys the property to C, and C also
aware of the fraud, conveys the property to D (purchaser in good faith
and for value)
Answer: The conveyance to D cannot be rescinded, yet X can still

proceed against B and C, successively.
Effect of fortuitous event

If the reason for the impossibility of returning the property acquired in
bad faith is a fortuitous event – NO liability of the acquirer.
PRESCRIPTIVE PERIOD
1389. The action to claim rescission must be commenced within four

years. For persons under guardianship and for absentees, the period of
four years shall not begin until the termination of the former’s
incapacity, or until the domicile of the latter is known.
PRESCRIPTIVE PERIOD
General Rule: Action for rescission must be commenced within four

years from the date the contract was entered into.
Exceptions:
1. Persons under guardianship – 4 years from termination of
incapacity
2. Absentees – 4 years from the time the domicile is known.
3. Fraud of creditors and properties under litigation – 4 years
from the discovery of the fraud
4. Others – six months or even 40 days from the time of
delivery
Example
At the time he was 12 years old, A was under a guardian who sold, in
behalf of the ward but without judicial authority, the harvest of the
ward’s farm, and in so doing the ward suffered a lesion of more than
one-fourth of the property. How many years will be given the ward to
rescind the contract?
Answer: The ward will be given 4 years after reaching the age of
majority (the time the guardianship ceases); hence, before reaching
22 years of age, the former ward should already have sued for the
rescission of the contract.
Who can bring the action

1. Injured party
2. His heir or successor-in-interest
3. Creditors of A and B by virtue of Art 1177 (accion
subrogatoria)

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OBLIGATIONS & CONTRACTS REVIEWER l PRE-FINALS l Tanya de la Cruz Ibanez l JD1 408

CHAPTER 1. GENERAL PROVISIONS DUTIES OF PERSONS WHEN ENTERING INTO CONTRACTS

As to possibility of By mere agreement of Accidental elements

 Imperfect promise – is a mere unaccepted offer. Autonomy of contracts

Relativity of contracts B. Gratuitous – those in which one of the parties proposes to

A. Commutative – those where each of the parties acquires an

Morals – those principles which are incontrovertible and are universally

a) The power to determine whether or not the contract

Taylor v. Uy Tieng Piao

this contract may be cancelled, the cancellation not occurring before

Held: Exceptions: Instances where a contract may produce effect either

Coquia v. Fieldmen’s Insurance Co.

Constantino v. Espiritu Example

CONTRACTS CREATING REAL RIGHTS Requisites

CONTRACTS CREATING REAL RIGHTS CONSENSUAL CONTRACTS

HOW CONTRACTS ARE PERFECTED

Yes, because of the consensual contract to make a commodatum. If A

The Contract of Carriage

A. The contract to carry (at some future time) is consensual

B. The contract of carriage is a real contract, for not until the

Take note: The real contract of carriage is perfected even if

Exception: Art 54 Code of Commerce - applicable to purely commercial Issue:

Four theories: Held:

Case illustrating Cognition Theory Withdrawal of offer

Concurrence of offer and acceptance

Answer: WHEN OFFER BECOMES INEFFECTIVE

FORM OF ACCEPTANCE Problem 1:

ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT OPTION

BUSINESS ADVERTISEMENTS INCAPACITATED PERSONS

Even if the contract is voidable, they shall make restitution to the

Vices of will Effect: Contract is voidable.

Effects D. Error in quantity – provided that the extent or dimension of

Take note: Asiaian v. Jalandoni

2. Mistake as to person (error in persona) KNOWLEDGE OF DOUBT OR RISK

one of the contracting parties.

What the article contemplates Example:

Examples: Violence Intimidation

Physical compulsion Moral compulsion

Example: UNDUE INFLUENCE

FAILURE TO DISCLOSE FACTS

Effect: Contract is voidable FAILURE TO DISCLOSE FACTS

Before a contract can be invalidated because of fraud EXAGGERATIONS IN TRADE

Issues: Defendant’s contention – he alleged that his consent to the contract

SIMULATION OF CONTRACTS Spouses Reyes v. BPI Family Savings Bank

1346. An absolutely simulated or fi ctitious contract is void. A relative Held:

Two kinds of simulation:

CONTRACTS OF ADHESION Two requisites:

Examples: Blas v. Santos

Things which have perished Exceptions to the exception:

B. Aleatory contract – if one of the contracting parties should Illustrations:

Examples: Impossible things or services

Examples: In a contract of partnership where one of the Distinguished from consideration

Determinate 2. Dr. Padilla

Aurora Fe Camacho v. CA Example:

Remuneratory contract – one in which one of the contracting Held:

demanded payment of the price from B. B refused to pay, alleging that

However, dit can either be absolute or relative simulation. Hence, if

LESION OR INADEQUACY FORMALITIES FOR VALIDITY

Exceptions: 2. Sale of land or any interest therein through an agent

FORMALITIES FOR ENFORCEABILITY 2. The cession, repudiation or renunciation of hereditary rights or

Examples: 2. Both articles presuppose the existence of a contract which is

CHAPTER 4. REFORMATION OF INSTRUMENTS

Take note: 1. Art 1366