OBLIGATIONS AND CONTRACTS
CIVIL LAW REVIEWER
CONTRACTS
General Provisions
------------------------------------------------------------------------------Art. 1305. A contract is a meeting of minds between two
persons whereby one binds himself, with respect to the
other, to give something or to render some service.
------------------------------------------------------------------------------Contract – meeting of the minds between two persons
whereby one binds himself with respect to the other to give
something or to render some service (Art. 1305, NCC)
– A juridical convention manifested in legal form, by virtue
of which one or more persons bind themselves in favor of
another or others, or reciprocally, to the fulfilment of a
prestation to give, to do or not to do (Sanchez Roman)
Distinguished from the Special Contract of Marriage
Ordinary Contract
Marriage
As to Parties
Parties are two or more The parties must be one
persons whether of the man and one woman, both
same or different sexes
of legal age
As to what Governs
The nature, consequences The nature, consequences,
and incidents of the contract and incidents of the
are governed primarily by marriage are governed by
the agreement of the parties law
As to Result
Once executed, the result is Once executed, the result is
a contract
a status
As to Termination
Can be dissolved or Cannot be dissolved or
terminated
by
mere terminated
by
mere
agreement of the parties
agreement of the parties
As to Remedy in Case of Breach
The injured party may The injured party may
institute an action against institute a civil action
the other party for damages against the other party for
legal separation or a
criminal action for adultery
or concubinage
 Contracts must also not be confused with perfected
promises, or to policitacion (imperfect promise) which
is a mere unaccepted offer.
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 Contracts must not also be confused with pacts or
stipulations.
 Pact – an incidental part of the contract which can
be separated from the principal agreement
 Stipulation – an essential and dispositive part of
the contract (hence, not the contract itself) which
cannot be separated from such principal
agreement.
Elements of Contracts
1. Essential – those without which there can be no
contract. Essential elements, in turn are subdivided
into:
a. Common (communes) – those which are present
in all contracts, such as consent of the contracting
parties, object certain which is the subject matter
of the contract, and cause of the obligation which
is established
b. Special (especiales) – those which are present
only in certain contracts, such as delivery in real
contracts or form in solemn ones; and
c. Extraordinary or peculiar (especialisimos) –
those which are peculiar to a specific contract,
such as the price in a contract of sale or
insurable interest in a contract of insurance
2. Natural – those which are derived from the nature of
the contract and ordinarily accompany the same.
They are presumed by law although they can be
excluded by the contracting parties if they so desire.
Example is warranty against eviction in a contract of
sale which is implied although the contracting parties
may increase, diminish or even suppress it.
3. Accidental – those which exist only when the parties
expressly provide for them for the purpose of limiting
or modifying the normal effects of the contract.
 Parties to a contract – from the definition under
Article 1305, it would seem that it is necessary that
there must be two persons in order that a contract
may exist. This is however not accurate for what is
really required is that there must be two different
parties. What is therefore necessary is the existence
of two distinct and autonomous wills. The
existence of a contract is not determined by the
number of persons who intervene in it, but by the
number of parties thereto. Hence, there are certain
cases where a juridical relation, known as an autocontract, may be created wherein, apparently, there
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is only one party involved, but in reality, said party
merely acts in the name and for the account of two
distinct contracting parties.
 Auto-contract may take place (1) when a person, in
his capacity as representative of another, contracts
with himself, or (2) when as a representative of two
different persons, he brings about a contract between
his principals by contracting with himself, unless there
is conflict of interests or when the law expressly
prohibits it in specific cases.
Illustration: R is an agent of P for the sale of a parcel
of land owned by the latter. P however authorized R
to buy for himself the parcel of land if he so desires. In
this case, R may enter into a contract of sale wherein
R, in a representative capacity, sells to R, in a
principal capacity, the parcel of land. This R can do
without violating the element of contract which states
that there must be two different parties into a contract.
The law speaks of two different parties not two
persons.
Characteristics of Contracts (OMAR)
1. Obligatory force or character of contracts (Articles
1159, 1308, 1315, and 1356) – it refers to the
principle that once the contract is perfected, it shall be
of obligatory force upon both of the contracting
parties. The contracting parties are bound, not only to
the fulfilment of what has been expressly stipulated,
but also to all the consequences thereof.
2. Mutuality of contracts (Article 1308) – refers to the
position of essential equality that is occupied by both
contracting parties in relation to the contract. The
contract must be binding upon both of the parties.
Consequently, its validity or compliance cannot be left
to the will of one of them
3. Autonomy of contracts (Article 1306) – under this
principle, the contracting parties may establish such
agreements as they may deem convenient provided
they are not contrary to law, morals, good customs,
public order, or public policy.
4. Relativity of contracts (Article 1311) – this principle
states that contracts take effect only between the
parties, their assigns and heirs. Consequently, they
cannot, as a general rule, produce any effect upon
third persons.
Life of Contracts
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1. Generation – comprehends the preliminary or
preparation, conception, or generation, which is the
period of negotiation and bargaining and ending at the
moment of the agreement of the parties.
2. Perfection – the birth of the contract. It is the moment
when the parties come to agree on the terms of the
contract.
3. Consummation – comprehends the consummation or
the death of the contract, which is the fulfilment or
performance of the terms agreed upon in the contract.
Classification of Contracts
1. According to their relation to other contracts
a. Preparatory – those which have for their object
the establishment of a condition in law which is
necessary as a preliminary step towards the
celebration of another subsequent contract
(examples: partnership, agency)
b. Principal – those which can subsist independently
from other contracts and whose purpose can be
fulfilled by themselves (examples: sale, lease)
c. Accessory – those which can exist only as a
consequence of, or in relation with, another prior
contract. (examples: guaranty, pledge, mortgage)
2. According to their perfection
a. Consensual – those which are perfected by the
mere agreement of the parties (examples: sale,
lease)
b. Real – those which are perfected by the delivery of
the object of the obligation (examples:
commodatum, deposit, pledge)
3. According to their form
a. Common or informal – those which require no
particular form (example: loan)
b. Special or formal – those which require some
particular form (examples: donations, chattel
mortgage)
4. According to their purpose
a. Transfer of ownership (example: sale)
b. Conveyance of use (example: commodatum)
c. Rendition of services (example: agency)
5. According to their subject matter
a. Things (examples: sale, deposit, pledge)
b. Services (examples: agency, lease of services)
6. According to the nature of the vinculum which they
produce
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a. Unilateral – those which give rise to an obligation
for only one of the parties (examples:
commodatum, gratuitous deposit)
b. Bilateral – those which give rise to reciprocal
obligations for both parties (examples: sale, lease)
7. According to their cause
a. Onerous – those in which each of the parties
aspires to procure for himself a benefit through the
giving of an equivalent or compensation (example:
sale, lease)
b. Gratuitous – those in which one of the parties
proposes to give to the other a benefit without any
equivalent
or
compensation
(example:
commodatum)
c. Remuneratory –
8. According to the risks involved
a. Commutative – those where each of the parties
acquires an equivalent of his prestation and such
equivalent is pecuniarily appreciable and already
determined from the moment of the celebration of
the contract (examples: sale, lease)
b. Aleatory – those where each of the parties has to
his account the acquisition of an equivalent of his
prestation but such equivalent, although
pecuniarily appreciable is not yet determined at
the moment of the celebration 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: insurance)
9. According to their names or norms regulating them
a. Nominate – those which have their own
individuality
and are regulated by special
provisions of law (examples: sale, lease)
b. Innominate – those which lack individuality and
are not regulated by special provisions of law.
Breach of Contract
Breach of contract – the failure, without legal reason, to
comply with the terms of the contract; the failure, without
legal excuse, to perform any promise which forms the
whole or part of the contract.
------------------------------------------------------------------------------Art. 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy.
------------------------------------------------------------------------------Autonomy of Contracts
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The freedom to contract provided it is not contrary to law,
morals, good customs, public order or public policy, is both
a constitutional and a statutory right.
Limitations
1. Law – the laws referred to in the article are (1) those
which are mandatory or prohibitive in character; (2)
those which, without being mandatory or prohibitive,
nevertheless, are expressive of fundamental
principles of justice, and, therefore cannot be
overlooked by the contracting parties; and (3) those
which impose essential requisites without which the
contract cannot exist.
Illustration: S sold to B 20 kilograms of marijuana. In
this case the object of the contract or the sale itself is
prohibited by law. Since the sale is prohibited by law,
the contract of sale here between S and B is invalid.
Illustration: D acquired a loan of P 50,000.00 from C.
The loan is secured by a property owned by D.
However, under the stipulations of the contract, C will
acquire the property constituted as security if D failed
to pay the loan. The contract in this case is invalid as
it is against the law. The stipulation of the parties
partake the nature of a pactum commissorium which
is prohibited by law.
2. Morals – those principles which are incontrovertible
and are universally admitted and which have received
social and practical recognition.
Illustration: D acquired a loan of P 1,000.00 from C
payable within two months. The parties stipulated that
D will pay P 20.00 a day in case of non-payment of
the debt at maturity. The stipulation in this case is void
for being contrary to morals as the penalty is clearly
excessive, unconscionable, and shocking to the
senses. However, in this case, what is void is the
stipulation to pay the penalty and not the principal
contract. The stipulation to pay the penalty in this
case shall be deemed not have been agreed upon.
3. Good customs – the spheres of morals and good
customs frequently overlap each other but sometimes
they do not. It must be admitted however that if a
moral precept pr custom is not recognized universally,
but is sanctioned by the practice of a certain
community, then it shall be included within the scope
or sphere of good customs.
4. Public order – public order can only refer to the
safety, as well as to the peace and order, of the
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country or of any particular community. Public order is
not as broad as public policy. The latter may refer not
only to public safety but also to considerations which
are moved by the common good.
5. Public policy – a principle of law which holds that no
person can lawfully do that which has a tendency to
be injurious to the public or against the public good.
Illustration: T stole goods belonging to O. T was
however caught. T and O agreed that O will stifle
(suppress) the prosecution of T if T will give him P
10,000.00. The agreement in this case is against
public policy and therefore void.
Illustration: Bus Co., a bus company, posted notices
that the bus will not be liable for any loss or damage
to passengers or their properties occasioned by their
own negligence, and that the passengers will be
deemed to have accepted the condition upon buying a
bus ticket and boarding their bus. The agreement in
this case is invalid for being contrary to public policy.
Common carriers cannot escape liability by posting
notices that they will not be liable for any loss to their
passengers by reason of their (Bus Co.) own
negligence.
Compromise Agreements; effects
Compromise – a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an
end to one already commenced. It is an agreement
between two or more persons, who, for preventing or
putting an end to a lawsuit, adjusts their difficulties by
mutual consent in the manner which they agree on, and
which everyone of them prefers in the hope of gaining,
balanced by the danger of losing.
General rule: a compromise has upon the parties the
effect and authority of res judicata, with respect to the
matter definitely stated therein, or which by implication
from its terms should be deemed to have been judicially
approved.
------------------------------------------------------------------------------Art. 1307. Innominate contracts shall be regulated by the
stipulations of the parties, by the provisions of Titles I
and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of the
place.
------------------------------------------------------------------------------Nominate and Innominate Contracts
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Nominate Contracts – those which have their own
distinctive individuality and are regulated by special
provisions of law. (ex. Sale, Barter of Exchange, Lease,
Partnership, Agency, Loan, Deposit, Aleatory contracts,
Compromise and Arbitration, Guaranty, Pledge, Mortgage,
and Antichresis
Innominate Contracts – those which lack individuality and
are not regulated by special provisions of law.
Kinds of Innominate Contracts
a. Do ut des – I give and you give
b. Do ut facias – I give and you do
c. Facio ut des – I do and you give
d. Facio ut facias – I do and you do
------------------------------------------------------------------------------Art. 1308. The contracts must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
Art. 1309. The determination of the performance may be
left to a third person, whose decision shall not be binding
until it has been made known to both contracting parties.
Art. 1310. The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances.
------------------------------------------------------------------------------Mutuality of Contracts
The validity or fulfilment of a contract cannot be left to the
will of one of the contracting parties. It must be observed
however that what is prohibited by law from being
delegated to one of the contracting parties are:
1. The power to determine whether the contract shall be
valid; and
2. The power to determine whether the contract shall be
fulfilled.
Illustration: L and O entered into a contract of lease
whereby O leased to L the former’s house. It was
stipulated in the contract that L can continue
occupying the house indefinitely as long as they
should faithfully fulfil their obligation to pay rentals. In
this case, the characteristic of mutuality is violated.
The continuance and fulfilment of the contract would
depend solely and exclusively upon L’s uncontrolled
choice between continuing paying the rentals or not,
completely depriving O of all say on the matter.
 However, there are certain agreements which will in
effect render the mutuality of contracts illusory
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because one of the contracting parties is placed in a
position of superiority with regard to the determination
of the validity or fulfilment of the contract over that
occupied by the other party, but which do not fall
within the purview of the prohibition under Article
1308.
Determination by Third Person or by Chance – The
validity or fulfilment may be left to the will of a third person.
However, it is necessary that the determination made by
the third person should not be evidently inequitable. If it is
evidently inequitable, it shall not have any obligatory effect
upon the contracting parties.
 The validity or fulfilment can also be left to chance
When Stipulated – it is important to note however that an
agreement of the parties that either one of them may
terminate the contract upon reasonable period of notice is
valid. Judicial action for the rescission of a contract is not
necessary where the contract provides that it may be
revoked and cancelled for the violation of any of its terms
and conditions. This right of rescission, however, may be
waived.
------------------------------------------------------------------------------Art. 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights
and obligations arising from contract are not
transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of
the property he received from the decedent.
If a contract should contain some stipulation in favor of a
third person, he may demand its fulfilment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest or a
person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a
third person.
------------------------------------------------------------------------------Relativity of Contracts
A contract can only bind the parties who had entered into it
or their successors who have assumed their personality or
their juridical position, and that, as a consequence, such
contract can neither favor nor prejudice a third person (in
conformity with the axiom res inter alios acta aliis neque
nocet prodest)
General rule: contracts can take effect only between the
parties, their assigns and heirs.
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Exceptions: An assignee or heir shall not be bound by the
terms of the contract if the rights and obligations arising
from the contract are not transmissible:
1. By their nature, as when the special or personal
qualification of the obligor constitutes one of the
principal motives for the establishment of the contract;
or
2. By stipulation of the parties, as when the contract
expressly provides that the obligor shall perform an
act by himself and not through another; or
3. By provision of law, as in the case of those arising
from a contract of partnership or of agency
Effect of Contract on Third Persons – As a general rule,
a contract cannot produce any effect whatsoever as far as
third persons are concerned. Consequently, he who is not
a party to a contract, or an assignee thereunder, has no
legal capacity to challenge its validity.
Exceptions:
1. Where the contract contains a stipulation in favor of a
third person;
2. Where the third person comes into possession of the
object of a contract creating a real right;
3. Where the contract is entered into in order to defraud
a third person; and
4. Where the third person induces a contracting party to
violate his contract
Stipulations in Favor of Third Persons (Stipulation
pour autrui)
Stipulation pour autrui – a stipulation in a contract,
clearly and deliberately conferred by the contracting parties
as a favor upon a third person, who must have accepted it
before it could be revoked.
Kinds of Beneficial Stipulations in Favor of Third
Persons
1. Those where the stipulation is intended for the sole
benefit of the third person; and
2. Those where an obligation is due from the promise to
the third person which the former seeks to discharge
by means of such stipulation.
Requisites (FP-CAN)
1. There must be a stipulation in favor of a third person;
2. The stipulation must be a part, not the whole, of the
contract;
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3. The contracting parties must have clearly and
deliberately conferred a favor upon a third person,
not a mere incidental benefit or interest;
4. That the favorable stipulation should not be
conditioned or compensated by any kind of obligation
whatever;
5. The third person must have communicated his
acceptance to the obligor before its revocation; and
6. Neither of the contracting parties bears the legal
representative or authorization of the third party
 The acceptance by the third person or beneficiary
does not have to be done in any particular form. It
may be done expressly or impliedly.
Illustration: Insurance Co. issued in favor of Bus Co.
an accident insurance policy for a period of 1 year. It
was stipulated in the policy that Insurance Co. will
indemnify Bus Co. in the event of accident against all
sums which the insured (Bus Co.) will become legally
liable to pay for death or injury to any fare-paying
passenger, driver, conductor, or inspector, who is
riding the vehicle at the time of the accident. In this
case, the heirs of D, a driver of Bus Co. may sue
Insurance Co. and demand the fulfilment of the
contract in case D died in an accident while driving a
bus owned by Bus Co. notwithstanding the fact that D
is not a party to the contract. The stipulation in this
case is a stipulation pour autrui. (Note: the heirs of D
may sue by virtue of relativity of contracts).
 A stipulation may validly be made in favor of
indeterminate persons, provided that they can be
determined in some manner at the time when the
prestation from the stipulation has to be performed.
 The stipulation can also be in favor of future persons,
or one who is to be born after perfection of the
contract containing the stipulation.
 The acceptance is optional upon the third person
Test of Beneficial Stipulation – The test is to rely upon
the intention of the parties as disclosed by their contract.
------------------------------------------------------------------------------Art. 1312. In contracts creating real rights, third persons
who come into possession of the object of the contract
are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws.
------------------------------------------------------------------------------Contract Creating Real Rights
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A real right is a right belonging to a person over a specific
thing, without a passive subject individually determined,
against whom such right may be personally enforced.
Consequently, a third person who might come into
possession of the object of a contract creating real right will
have to be bound by such right subject to the provisions of
the Mortgage Law and the Land Registration Laws.
Illustration: A mortgaged his house and lot to the
PNB in order to secure an obligation of P 50,000.00.
The mortgage is registered in the Registry of Property.
The effect of such of registration is to create a real
right which will be binding against the whole world.
Hence, if A subsequently sold the property to S, the
contract of mortgage between A and PNDB will be
binding upon S.
------------------------------------------------------------------------------Art. 1313. Creditors are protected in cases of contracts
intended to defraud them.
------------------------------------------------------------------------------Contracts in Fraud of Creditors
A third person who is a creditor of one of the contracting
parties may ask for the rescission of the contract if it can be
established that the contract was entered into with the
intention of defrauding him.
 However, it is necessary to proved that such creditor
has no other legal means to obtain reparation.
Illustration: On December 25, 2011, D borrowed P
50,000.00 from C payable on February 25, 2012.
Upon maturity, C demanded payment of the debt but
D refused to pay. On February 28, 2012, D donated a
parcel of land to X. In this case, C may ask for the
rescission of the contract between D and X. However,
C must first establish that no other legal remedy is
available to him in order that D’s obligation to him is to
be satisfied.
------------------------------------------------------------------------------Art. 1314. Any third person who induces another to
violate his contract shall be liable for damages to the
other contracting party.
------------------------------------------------------------------------------Doctrine of Contractual Interference
A third person who induces another to violate his contract
shall be liable for damages to the other contracting party.
The right to perform a contract and to reap the profits
resulting from such performance, and also the right to
performance by the other party, are property rights which
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entitle each party to protection and to seek compensation
by an action in tort for any interference therewith.
Requisites
1. There is a valid contract;
2. The third person has knowledge of the existence of
the valid contract; and
3. There is interference by such third person without
legal justification or excuse
Illustration: Sharon is an actress. Sharon and TV5
entered into a contract whereby Sharon shall be
exclusively a TV5 actress for a period of 5 years in
consideration of P 1,000,000,000.00. Before the
expiration of the contract, GMA7 induced Sharon to
violate her contract with TV5 by appearing in GMA7
shows, without the consent of TV5. In this case,
GMA7 is liable for damages in favor of TV5.
------------------------------------------------------------------------------Art. 1315. Contracts are perfected by mere consent, and
from that moment the parties are bound not only to the
fulfilment of what has been expressly stipulated but also
to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Art. 1316. Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the
object of the obligation.
------------------------------------------------------------------------------Perfection of Contracts
Perfection of a contract refers to that moment in the life of
the contract when there is finally a concurrence of the wills
of the contracting parties with respect to the object and the
cause of the contract.
General rule: contracts are perfected by mere consent.
Exceptions: real contracts.
------------------------------------------------------------------------------Art. 1317. No one may contract in the name of another
without being 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 no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person in
whose behalf it has been executed, before it is revoked
by the other contracting party.
------------------------------------------------------------------------------Contracts in Name of Another
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The principle enunciated in Article 1317 is a logical
corollary to the principles of the obligatory force and the
relativity of contracts.
 The contract illustrated by the second paragraph is an
unenforceable contract or one which cannot be
enforced by a proper action in court, unless they are
ratified, because either they are entered into without
or in excess of authority.
 The effect of the ratification is retroactive. Hence,
ratification validates the contract from the moment of
its celebration, and not merely from the time of its
ratification.
 If the contract is not ratified by the person
represented, the representative becomes liable in
damages to the other party.
Essential Requisites of Contracts
General Provisions
------------------------------------------------------------------------------Art. 1318. There is no contract unless the following
requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the
contract;
3. Cause of the obligation which is established.
------------------------------------------------------------------------------Common Essential Elements
The elements of contracts enumerated under Article 1318
are those which are referred to us common essential
elements. As already stated, common essential elements
are those elements which are present in all contracts and
without which there can be no contract.
 The law imposes the essential elements (not just the
common essential elements), presumes the natural,
and authorizes the accidental.
 The will of the contracting parties conforms to the
essential, accepts or repudiates the natural, and
establishes the accidental.
Consent
------------------------------------------------------------------------------Art. 1319. Consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be
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certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge.
The contract, in such a case, is presumed to have been
entered into in the place where the offer was made.
Art. 1320. An acceptance may be express or implied.
Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be
complied with.
Art. 1322. An offer made through an agent is accepted
from the time acceptance is communicated to him.
------------------------------------------------------------------------------Consent
Consent – the concurrence of the wills of the contracting
parties with respect to the object and the cause which shall
constitute the contract.
In its derivative sense, consent means the agreement of
wills.
Requisites of Consent (CC-IFSR)
1. Consent must be manifested by the concurrence of
the offer and the acceptance
2. The contracting parties must possess the necessary
legal capacity
3. Consent must be intelligent, free, spontaneous, and
real
Perfection of Contracts
In general, contracts are perfected from the moment that
there is a manifestation of the concurrence between the
offer and the acceptance with respect to the object and the
cause which shall constitute the contract.
 However, if the acceptance is made by letter or
telegram:
General rule: the contract is perfected from the
moment that the offeror has knowledge of such
acceptance (Art. 1319, par. 2)
Exception: In purely commercial contracts, such as
joint accounts, maritime contracts, etc. contract is
perfected from the moment an answer is made
accepting the offer (Art. 54, Code of Commerce)
 It must be noted that 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
cause which are to constitute the contract. Once there
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is such a manifestation of the concurrence of the wills
of the contracting parties, the period or stage of
negotiation is terminated. The contract, if consensual,
is finally perfected.
Character of Offer and Acceptance
Offer – a proposal to make a contract; a unilateral
proposition which one party makes to the other contracting
party for the celebration of the contract.
In order to constitute a binding proposal, the offer must be
certain or definite.
Requisites of Offer
1. Definite – the offer must be definite, so that upon
acceptance an agreement can be reached on the
whole contract.
2. Complete – the offer must be complete indicating with
sufficient clearness the kind of contract intended and
definitely stating the essential conditions of the
proposed contract, as well as the non-essential ones
desired by the offeror.
3. Intentional – an offer without seriousness made in
such manner that the other party would not fail to
notice such lack of seriousness, is absolutely without
juridical effects and cannot give rise to a contract.
Illustration: A, in a letter, told B that the former is
willing to entertain the purchase of a house belonging
to B. In this case, the acceptance by B will not result
in a perfected contract as the offer of A to buy is not
definite.
Illustration: A offered to B the sale of an animal. In
this case, the acceptance by B would not result in a
perfected contract as the offer was not complete. The
object of the contract, which is an essential element,
is not clear.
Illustration: A told B that the former will give the latter
the moon in consideration of P 1,000,000.00. In this
case, it is obvious that the offer was not serious.
A visited the house of B. B, in welcoming A, told A
that “my house is yours.” In this case, the acceptance
by B would not result in a perfected contract (donation
in this case) as the offer was merely a customary way
of accepting guests (Also, donation of immovables
must be in a public document).
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Withdrawal of Offer – the offeror may still withdraw his
offer so long as he still has no knowledge of the
acceptance by the offeree.
Illustration: A, through a letter, told B that he is
offering his house for sale for P 500,000.00. The letter
is to be received by B the following day. The following
day, B received the letter and thereafter wrote a reply
stating his acceptance. The letter of acceptance is to
be received by A the following day. However, A
changed his mind and he is not willing to sell his
house anymore. Hence, a day after he wrote his
letter-offer (same day when B accepted the offer), A
called B using a telephone and told him that he is
withdrawing his offer. The withdrawal in this case is
valid because the acceptance made by B has not
come to the knowledge of A yet. Hence, at the time of
the withdrawal, there is no perfected contracted yet.
Acceptance – the signification of the assent of the offeree
to the proposition of the offeror. Acceptance may be
express or implied.
 Implied acceptance – implied acceptance may arise
from acts or facts which reveal the intent to accept,
such as the consumption of the things sent to the
offeree.
 Lapse of Time – an offer without a period must be
considered as becoming ineffective after the lapse of
more than the time necessary for its acceptance,
taking into account the circumstances and social
conditions.
Requisites of Acceptance
1. Certain or definite
2. Absolute or unconditional
3. Directed to the offeror
4. Made known to the offeror within a reasonable time
5. Communicated to the offeror and learned by him
Illustration: A told B that he is offering his house for
sale for P 1,000,000.00. B accepted but told A if he
can reduced the price to P 850,000.00. In this case
there is no perfected contract. The “acceptance” by B
is not absolute.
Illustration: A, through a letter, told B that he is
offering his car for sale for P 100,000.00. Upon
reading the letter, B said “Yes! I accept!” but B did not
write a reply stating his acceptance nor called A to
say his acceptance. In this case there is no perfected
81
contract. Perfection of contract requires the
concurrence of offer and acceptance. There is no
concurrence of offer and acceptance if the
acceptance is not made known to the offeror.
 A qualified acceptance constitutes a counter-offer.
Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance
is not sufficient to generate consent because any
modification or variation from the terms of the offer
annuls the offer.
 Right of the Offeror – the offeror has the right to
prescribe the manner, conditions, and terms of the
contract, and where these are reasonable and are
made known to the offeree, they are binding upon the
latter; an acceptance which is not made in the manner
prescribed by the offeror is not effective, but
constitutes a counter-offer which the offeror may
accept.
Acceptance of Complex Offers – to a certain extent the
rules regarding acceptance are modified in case of
complex offers.
Illustration: S offered to sell Blue House and to lease
Red House (both houses are owned by A) to B. B
accepted the sale of Blue House. There is a perfected
contract of sale in this case as its acceptance is not
dependent upon the acceptance of the contract of
lease. However, if S told B that he is not willing to sell
Blue House if B would not also lease Red House, then
there is no perfected contract of sale. The sale was
made to depend upon the acceptance of the lease as
well.
 However, the prospective contracts which are
comprised in a single offer may be so interrelated in
such a way that the acceptance of one would not at all
result in a perfected contract.
Illustration: D asked C if the latter could extend to the
former a loan for P 50,000.00. C told D that he is,
provided that a mortgage to secure the proposed loan
is constituted. D accepted the loan but not the
mortgage. In this case there is no perfected contract
of loan. The acceptance of the mortgage is an
essential condition for the perfection of the loan in this
case.
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Withdrawal of Acceptance – acceptance may be revoked
before it comes to the knowledge of the offeror because in
such a case there is still no meeting of the minds.
Acceptance by Letter or Telegram (MERC)
1. Manifestation theory – contract is perfected from the
moment the acceptance is declared or made (followed
by the Code of Commerce)
2. Expedition theory – the contract is perfected from
the moment the offeree transmits the notification of
acceptance to the offeror, as when the letter of
acceptance is place in the mailbox.
3. Reception theory – the contract is perfected from the
moment that the notification of acceptance is in the
hands of the offeror in such a manner that he can,
under ordinary conditions, procure the knowledge of
its contents, even if he is not able to actually acquire
such knowledge due to some reason.
4. Cognition theory – the contract is perfected from the
moment the acceptance comes to the knowledge of
the offeror (followed by the Civil Code)
------------------------------------------------------------------------------Art. 1323. An offer becomes ineffective upon the death,
civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed.
------------------------------------------------------------------------------Effect of Death, Civil Interdiction, Insanity, or
Insolvency
An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before
the offeror has knowledge of the acceptance by the
offeree.
 The word “conveyed” in the article refers to that
moment when the offeror has knowledge of the
acceptance by the offeree.
Illustration: S called B and offered to the latter the
sale of the former’s car for P 500,000.00. B could not
accept that time so he asked S some time to think
about it which S granted. 2 days thereafter, B decided
to accept the offer. Thus, he wrote a letter of
acceptance. The letter is to be received by S the
following day. However, upon mailing the letter, a
speeding car hit B causing his death. In this case
there is no perfected contract of sale as one of the
parties (B, the offeree) died before acceptance is
conveyed to the offeror. Hence, the heirs of B cannot
compel S to sell the car and invoke the relativity of
contracts as there is no contract to speak of in the first
82
place.
------------------------------------------------------------------------------Art. 1324. When the offeror has allowed the offeree a
certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
------------------------------------------------------------------------------Option Contract
Option Contract – a preparatory contract in which one
party grants to the other, for a fixed period and under
specified conditions, the power to decide whether or not to
enter into a principal contract. It must be supported by an
independent consideration and the grant must be exclusive
Like other contracts, an option contract must be supported
by a consideration which is separate and distinct from the
consideration in the principal contract (i.e., sale). If the
option is without a separate consideration, it is void as a
contract. Consequently, the promissor-offeror is not bound
by his promise and may, accordingly, withdraw it.
 However, pending notice of his withdrawal, his
promise partakes of the nature of a continuing offer
which, if accepted before withdrawal, results in the
perfection of the principal contract.
Illustration: S offered to B his car for P 500,000.00.
As B had insufficient funds at that moment, he asked
S if he could give him a time to think about it. S
granted the request and granted B an option to buy
the car for 2 months in consideration of P 1,000.00. B
accepted the option but did not pay the P 1,000.00.
Before the expiration of the 2-month period, B told S
that he is accepting the offer to buy the car. In this
case, the contract of the sale of the car is already
perfected. This is true notwithstanding that the option
contract is void for lack of separate consideration. His
promise partake the nature of a continuing offer.
Illustration: S offered to B his car for P 500,000.00.
As B had insufficient funds at that moment, he asked
S if he could give him a time to think about it. S
granted the request and granted B an option to buy
the car for 2 months in consideration of P 1,000.00. B
accepted the option but did not pay the P 1,000.00.
Before the expiration of the 2-month period and
before acceptance by B, S withdrew the offer to sell
the car. The withdrawal of the offer in this case is
valid. B cannot invoke the option granted to him by S
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as the same was void.
Withdrawal of Offer under a Valid Option
There are two conflicting views as regards this subject
matter:
 First view: if the option is founded upon a separate
consideration (and therefore valid), the offeror cannot
withdraw the principal offer.
 Second view: in an option contract, with or without a
separate consideration, the offeror may still withdraw
the principal offer, provided the withdrawal is made
before the acceptance of the principal offer. This is
because there is no perfected principal contract yet.
However, if the option is with a separate
consideration, the offeror shall be liable for damages.
 In this case, the offeree cannot compel the
offeror to enter into the principal contract. To do
so would partake to an “obligation to do” or
personal obligation. In a personal obligation, the
debtor cannot be compelled to comply with his
obligation. The only remedy of the obligee is to
file an action for damages against the obligor.
 The case should be distinguished to a case
where acceptance of the principal contract was
made known to the offeror before the withdrawal.
In this case there is already a perfected principal
contract. The obligee can therefore compel the
obligor (offeror) to comply with his obligation
under the principal contract (except of course if
the prestation under the principal contract
consists in an obligation to do)
 The second view is more in accordance with the
principles of contract.
Illustration: S offered to B his car for P 500,000.00.
As B had insufficient funds at that moment, he asked
S if he could give him a time to think about it. S
granted the request and granted B an option to buy
the car for 2 months in consideration of P 1,000.00. B
accepted the option and paid the P 1,000.00.
However, before the expiration of the 2-month period,
S sold the car to X. In this case the withdrawal of the
offer to sell the car is valid as there was no perfected
contract of sale notwithstanding the existence of a
valid option contract. However, S is liable for damages
in favor of B.
Option Contract
Distinguished
83
and
Right
of
First
Refusal,
Option Contract
Can stand on its own
(principal contract)
Requires
a
separate
consideration distinct from
that of the principal contract
in order to be valid
Not conditional
Not subject to specific
performance since there is
no perfected principal
contract yet.
Right of First Refusal
Cannot stand on its own
(accessory contract)
Does not require a separate
consideration
Conditional
Can be subjected to specific
performance
Option Money and Earnest Money, Distinguished
Option Money
Earnest Money
Money given as a distinct Money which is part of the
consideration for an option purchase price
contract
Applies to contract of sales Applies to contract of sales
not yet perfected
already perfected
The would-be buyer who The buyer who gives the
gives the option money is earnest money is bound to
not bound to buy
pay the balance
------------------------------------------------------------------------------Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers,
but mere invitations to make an offer.
Art. 1326. Advertisements for bidders are simply
invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the
contrary appears.
------------------------------------------------------------------------------Sales Advertisements
A business advertisement of things for sale may or may not
constitute a definite offer. It is not a definite offer when the
object is not determinate.
 When the advertisement does not have the necessary
specification of essential elements of the future
contract, it cannot constitute an offer.
Illustration: While watching her television, A chanced
upon a shampoo commercial by Pantene. The
advertisement stated the suggested retail price of a
sachet of a Pantene shampoo. In this case, the
advertisement is merely an invitation to make an offer
because although the suggested retail price was
specified (and this is true even if the actual price, not
merely suggested, was shown) because the quantity
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to be sold was absent. The advertiser therefore is free
to reject any offer that may be made.
Illustration: While reading an issue of Philippine Daily
Inquirer, A saw an advertisement which read states:
“For sale, 500 m2 lot located at Mendiola, Manila
corner J.P. Laurel street (just beside San Beda
College) for P 1,000,000.00. Just contact “Acong” at
800-6969.” In this case the offer is definite. A may call
Acong and tell the latter that he (A) is accepting the
offer.
Illustration: Hotel Co. published in a newspaper an
“Invitation to Bid” inviting proposals to supply labor
and materials for a construction project described in
the invitation. A Co., B Co., and C Co. C Co.
submitted the lowest bid. However, Hotel Co. awarded
the contract to A Co. on the ground that he was the
most experienced and responsible bidder. In this
case, C Co. cannot compel Hotel Co. to award the
contract in its favor. The awarding of the contract in
favor of A Co. was within the rights of Hotel Co. as the
general rule that advertisements for bidders are
simply invitations to make proposals. It would have
been different if in the advertisement, it was clearly
stated that the lowest (or highest) bidder shall be
awarded the contract.
------------------------------------------------------------------------------Art. 1327. The following cannot give consent to a
contract:
1. Unemancipated minors;
2. Insane or demented persons, and deaf-mutes who
do not know how to write.
------------------------------------------------------------------------------Legal Capacity of Contracting Parties
The capacity of the contracting parties is an indispensable
requisite of consent.
Incapacitated Persons – contracts entered into by the
following incapacitated persons are voidable, if only one of
the contracting parties is incapacitated, or unenforceable if
both contracting parties are incapacitated to give consent
to a contract. the action for annulment cannot be instituted
by the person who is capacitated since he is disqualified
from alleging the incapacity of the person whom he
contracts.
1. Minors – by virtue of Article 234 of the Family Code,
which states that: “Emancipation takes place by the
attainment of majority. Unless otherwise provided,
84
majority commences at the age of eighteen years.”
the “unemancipated minors” referred to in Article 1327
merely pertains to “minors” as there can be no
“emancipated minors” in this jurisdiction anymore.
 A minor is without capacity to give consent to a
contract, and since consent is an essential
requisite of every contract, the absence thereof
cannot give rise to a valid contract. The contract
in this case is a voidable contract (unless the
other contracting party is also incapacitated to
give consent, in which case the contract is
unenforceable).
Exceptions:
i. Where the contract involves the sale and
delivery of necessaries to the minor.
Requisites:
1. Perfection of the contract (sale);
2. Delivery of the subject matter.
Necessaries – necessaries are those which are
indispensable for sustenance, dwelling, clothing,
medical attendance, education and transportation,
in keeping with the financial capacity of the family.
ii. Where the contract is entered into by a minor
who misrepresents his age, applying the
doctrine of estoppel.
iii. When it involves a natural obligation and such
obligation is fulfilled voluntarily by the minor,
provided that such minor is between eighteen
and twenty-one years of age (No longer
applicable as an exception)
iv. When it is a marriage settlement or donation
propter nuptias, provided that the minor is
between twenty and twenty-one years of age, if
male, or between eighteen and twenty-one
years of age, if female (No longer applicable
as an exception)
v. When it is a life, health, or accident insurance
taken on the life of the minor, provided that the
minor is eighteen years old or more and the
beneficiary appointed is the minor’s estate, or
the minor’s father, mother, husband, wife, child,
brother, or sister (No longer applicable as an
exception)
2. Insane or demented persons – any person, who, at
the time of the celebration of the contract, cannot
understand the nature and consequences of the act or
transaction by reason of any cause affecting his
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intellectual or sensitive faculties, whether permanent
or temporary. However, a contract entered into during
a lucid interval is valid.
 In order to avoid a contract because of mental
incapacity, it is necessary to show that at the
time of the celebration of the contracting parties
was not capable of understanding with
reasonable clearness the nature and effect of the
transaction in which he was engaged.
 Hence, such circumstances as age, sickness, or
any other condition as such will not necessarily
justify a court of justice to interfere in order to set
aside a contract voluntarily entered into.
 Mental incapacity to enter into a contract is a
question of fact which must be decided by the
courts. There is however a prima facie
presumption that every person of legal age
possesses the necessary capacity to execute a
contract.
3. Deaf-mutes who do not know how to write – the
case must be distinguished from a contract entered
into by a deaf-mute who knows how to write, which is
perfectly valid. On the other hand, contracts entered
into by a deaf-mute who do not know how to write
may either be voidable or unenforceable.
4. Other Incapacitated Persons
a. Married women in cases specified by law;
b. Persons suffering from civil interdiction;
c. Incompetents who are under guardianship
“Incompetents” include:
i. Persons suffering from civil interdiction
(does not require guardianship to be
incapacitated);
ii. Hospitalized lepers;
iii. Prodigals;
iv. Deaf and dumb who are unable to read and
write (deaf-mutes who do not know how to
write does not require guardianship to be
incapacitated);
v. Those who are of unsound mind, even
though they have lucid intervals (insane or
demented persons does not require
guardianship to be incapacitated);
vi. Those who by reason of age, weak mind,
and other similar causes, cannot, without
outside aid, take care of themselves and
85
manage their property becoming thereby an
easy prey for deceit and exploitation.
------------------------------------------------------------------------------Art. 1328. Contracts entered into during a lucid interval
are valid. Contracts agreed to in a state of drunkenness
or during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Article 1327 is
subject to the modification determined by law, and is
understood to be without prejudice to special
disqualifications established by laws.
------------------------------------------------------------------------------Disqualifications to Contract
Persons specially disqualified are those who are prohibited
from entering into a contract with certain persons with
regard to certain property under certain circumstances and
not to those who are incapacitated to give their consent to
a contract.
Incapacity and Disqualification, Distinguished
Incapacity
Disqualification
(Absolute Incapacity)
(Relative Incapacity)
As to Nature
Impairs the exercise of the Prohibition to contract
right to contract; the restrains the very right itself;
incapacitated person may the disqualified person
still enter into a contract but cannot enter into a contract
with consent of his parent or with respect to certain types
guardian
of properties
As to Basis
Based upon subjective Based upon public policy
circumstances of certain and morality
persons which compel the
law to suspend for a definite
period, their right to contract
As to Defect
Contract entered into by an Contract entered into by a
incapacitated person is disqualified person is void
merely voidable
Disqualified Persons – contracts entered into in the
following cases by the following persons are void (not
merely voidable).
1. Spouses – the spouses cannot donate properties to
each other except donation of moderate gifts on the
occasion of any family rejoicing (Art. 87, Family
Code). The spouses cannot also sell property to each
other, except when a separation of property was
agreed upon in the marriage settlements, or when
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there has been a judicial separation of property (Art.
1490)
 Prohibition applies to common-law spouses.
 Contracts entered into in violation of Article 1490
of the Civil Code (and Article 87 of the Family
Code) are null and void (not merely voidable).
However, not anyone is given the right to assail
the validity of the transaction
Examples of Persons who cannot assail the Validity of
Contracts in Violation of the Prohibition:
a. The spouses themselves cannot assail the
validity of the contract since they are parties to
an illegal act under the principle of pari delicto,
the courts will generally leave them as they are.
b. The creditors who became such only after the
transaction (the illegal contract of sale), for it
cannot be said that they have been prejudiced by
the transaction
Persons who can assail the Validity of Contracts in
Violation of the Prohibition:
a. The heirs of either of the spouses who have
been prejudiced
b. Creditors who became such prior to the
transaction
c. The State when it comes to payment of the
proper taxes due on the transaction
2. Guardians with respect to the property of the person
under guardianship – Prohibition applies even if the
guardian did not acquire the property of the ward from
the ward directly as when there was a third person
who bought the property from the ward and that third
person sold the property in question to the guardian
Illustration: G, guardian of W, purchased a property
worth P 1,000,000.00 owned by W for P
10,000,000.00. In this case, the purchased is void
notwithstanding the fact that in the said contract is
more beneficial to W. The prohibition is absolute.
3. Agents with respect to property to whose
administration or sale may have been entrusted to
them
Exception: when the consent of the principal has
been given.
An agent of a principal is not automatically disqualified
from acquiring property from the principal. For the
prohibition to apply, the property which is the subject
86
of the contract must be the property entrusted to the
principal. Hence if the principal owns two parcels of
land and the agent was entrusted with one these
properties, the agent can acquire from the principal
the other property
Illustration: Boy Abunda is a talent agent of Kris
Aquino. Kris Aquino sold one of her houses to Boy
Abunda. The contract in this case is valid as Boy
Abunda is not the “agent” as referred to in the
prohibition.
Illustration: O owns two parcels of land, L1 and L2. O
entrusted to A, agent, the sale of L1. A purchased
from O L2. The sale in this case is valid because A
has not been entrusted with the sale of the property
he acquired (L1 is what has been entrusted to him,
not L2 which is the one he purchased). It would have
been different if the administration or sale of L2 has
also been entrusted to A.
4. Executors and Administrators with respect to the
property of the estate under administration
Note: But an executor can acquire the hereditary
rights of an heir to the estate under his administration
5. Public Officers and Employees with respect to the
property of the State or any of its subdivisions, any
Government-owned and controlled corporations, or
institution the administration of which has been
entrusted to them
6. Justices, judges, prosecuting attorneys and other
court officers and employees connected with the
administration of justice with respect to property
and rights in litigation or levied upon on execution
before the court within whose jurisdiction or territory
they exercise their respective functions
 The object is considered in litigation upon filing
of an answer. The property is in litigation from
the moment it became subject to the judicial
action of the judge, such as levy on execution
7. Lawyers – Prohibition applies only to a sale to a
lawyer of record, and does not cover assignment of
the property given in judgment made by a client to an
attorney, who has not taken part in the case nor to a
lawyer who acquired property prior to the time he
intervened as counsel in the suit involving such
property
Exceptions to prohibition:
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a. To sale of a land acquired by a client to satisfy a
judgment in his favor, to his attorney as long as
the property was not the subject of the litigation;
or
b. To a contingency fee arrangement which grants
the lawyer of record proprietary rights to the
property in litigation since the payment of said
fee is not made during the pendency of litigation
but only after judgment has been rendered
8. Aliens – aliens are disqualified from acquiring
agricultural lands (Secs. 3 and 7, Art. XII, 1987
Constitution).
 “agricultural lands” should not be interpreted
literally. Under the Constitution, only agricultural
lands may be alienated. Hence, “agricultural
lands” are those lands which can be alienated
and hence does not include lands of the public
domain. Thus, a land is “agricultural land” even if
it is located in an industrial center or is used for
residential purposes as long as it does not
belong to the public domain.
------------------------------------------------------------------------------Art. 1330. A contract where consent is given through
mistake, violence, intimidation, undue influence, or fraud
is voidable.
------------------------------------------------------------------------------Vices of Consent
Intelligent consent is vitiated by mistake or error; free
consent by violence, intimidation, and undue influence;
spontaneous consent by fraud.
a. Vices of the will – comprehends mistake, violence,
intimidation, undue influence, and fraud.
b. Vices of declaration – comprehends all forms of
simulated contracts.
 Defect or lack of valid consent, in order to make the
contract voidable, must be established by full, clear,
and convincing evidence, and not merely by a
preponderance thereof.
------------------------------------------------------------------------------Art. 1331. In order that mistake may invalidate consent, it
should refer to the substance of the thing which is the
object of the contract, or to those conditions which have
principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
87
qualifications have been the principal cause of the
contract.
A simple mistake of account shall give rise to its
correction.
------------------------------------------------------------------------------Mistake
Mistake – mistake is not only the wrong conception of a
thing, but also the lack of knowledge with respect to a
thing.
Kinds of Mistake
a. Mistake of Fact – when one or both of the contracting
parties believe that a fact exists when in reality it does
not or that such fact does not exist when in reality it
does. This is the mistake which vitiates consent.
b. Mistake of Law – when one or both of the contracting
parties arrive at an erroneous conclusion regarding
the interpretation of a question of law or the legal
effects of a certain act or transaction.
Different Kinds of Mistakes of Fact
1. Mistake as to Object (error in re) – mistake which is
referred to in the first paragraph of Article 1331.
a. Mistake as to the identity of the thing (error in
corpore), as when the thing which constitutes the
object of the contract is confused with another
thing;
b. Mistake as to the substance of the thing (error in
substantia);
c. Mistake as to the conditions of the thing,
provided such conditions have principally moved
one or both parties to enter into the contract; and
d. Mistake as to the quantity of the thing (error in
quantitate), provided that the extent or the
dimension of the thing was the principal reasons
of one or both of the parties for entering into the
contract.
 It is necessary that such mistake should refer not
only to the material out of which the thing is
made, but also to the nature which distinguishes
it, generally or specifically, from all others, such
as when a person purchases a thing made of
silver believing that is made of gold.
 If mistake refers only to accidental or secondary
qualities (error in qualitate), the contract is not
rendered voidable.
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2. Mistake as to Person (error in persona) – mistake
which may refer either to the name or to the identity or
to the qualification of a person.
Requisites:
i. The mistake must be either with regard to the
identity or with regard to the qualification of one
of the contracting parties;
ii. Such identity or qualification must have been the
principal consideration for the celebration of the
contract.
 The only mistake with regard to persons which
will vitiate consent are mistakes with regard to
the identity or the qualifications of one of the
contracting parties.
 Hence, mistake with regard to the name of one
or both of the contracting parties will not
invalidate the contract.
------------------------------------------------------------------------------Art. 1332. When one of the parties is unable to read, or if
the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully
explained to the former.
---------------------------------------------------------------------------------Rule where a Party is Illiterate
In the cases contemplated under Article 1332, the burden of
proving that the plaintiff had understood the contents of the
document was shifted to the defendant and he had failed to
do so, the presumption of mistake still stands unrebutted and
controlling.
------------------------------------------------------------------------------Art. 1333. There is no mistake if the party alleging it knew
the doubt, contingency or risk affecting the object of the
contract.
Art. 1334. Mutual error as to the legal effect of an
agreement when the real purpose of the parties is
frustrated, may vitiate consent.
------------------------------------------------------------------------------Mistake of Law
As a rule, mistake of law will not vitiate consent. However,
mutual error as to the effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent. In
other words, when there is mistake on a doubtful question
of law, or on the construction or application of law, this is
analogous to a mistake of fact, and the maxim of ignorantia
legis neminem excusat should have no proper application.
Requisites:
88
1. The mistake must be with respect to the legal effect
of an agreement;
2. The mistake must be mutual; and
3. The real purpose of the parties must have been
frustrated.
------------------------------------------------------------------------------Art. 1335. There is violence when in order to wrest
consent, serious or irresistible force is employed.
There is intimidation when one of the contracting parties
is 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, to give his consent.
To determine the degree of the intimidation, the age, sex
and condition of the person shall be borne in mind.
A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not vitiate
consent.
Art. 1336. Violence or intimidation shall annul the
obligation, although it may have been employed by a
third person who did not take part in the contract.
------------------------------------------------------------------------------Violence and Intimidation
Violence and intimidation are sometimes known as duress.
Violence
Intimidation
As to type of Compulsion
Physical
compulsion. Moral compulsion. Hence,
Hence, violence is external. intimidation is internal.
As to Effect
Violence prevents the Intimidation influences the
expression of the will operation of the will,
substituting it with a material inhibiting it in such a way
act dictated by another
that the expression thereof
is apparently that of a
person who has freely given
his consent.
Requisites of Violence:
1. The force employed to wrest consent must be serious
or irresistible; and
2. It must be the determining cause for the party upon
whom it is employed in entering into the contract.
Requisites of Intimidation:
1. One of the contracting parties is compelled to give his
consent by a reasonable and well-grounded fear of an
evil;
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2. The evil must be imminent and grave;
3. The evil must be unjust; and
4. The evil must be the determining cause for the party
upon whom it is employed in entering into the contract
Intimidation and Reluctant Consent, Distinguished
Consent given in intimidation must be distinguished from a
consent given reluctantly. In case of a consent given
reluctantly, it is still clear that one acts as voluntarily and
independently in the eyes of the law when he acts as
reluctantly and with hesitation as when he acts
spontaneously and joyously. Hence, he acts voluntarily and
freely when he acts wholly against his better sense and
judgment as when he acts in conformity with them.
Determination of Degree of Intimidation – To determine
the degree of intimidation, the age, sex and condition of the
person intimidated shall be borne in mind.
 “condition” refers not only to the resolute or weak
character of the person intimidated, but also to his
other circumstances, such as his capacity or culture,
financial condition, etc.
Effect of Just or Legal Threat – A threat to enforce one’s
claim through competent authority, if the claim is just or
legal, does not vitiate consent.
Illustration: D borrowed P 10,000.00 from C. Upon
maturity of the debt, D failed to pay. C told D that if
the latter still fails to pay, an action will be brought in
court against him. The threat in this case is valid as it
only means enforcement of the collection of the
obligation.
------------------------------------------------------------------------------Art. 1337. There is undue influence when a person takes
improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
The following circumstances shall be considered: the
confidential, family, spiritual and other relations between
the parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental
weaknesses, or was ignorant or in financial distress.
------------------------------------------------------------------------------Undue Influence
Undue Influence – there is undue influence when a
person takes improper advantage of his power over the will
of another, depriving the latter of a reasonable freedom of
choice; the influence which deprives a person of his free
agency.
89
Undue Influence which Vitiates Consent
The test in order to determine whether there is undue
influence which will invalidate a contract is to determine
whether the influence exerted has so overpowered or
subjugated the mind of a contracting party as to destroy his
free agency, making him express the will of another rather
than his own.
 Even if it can be established that a person entered
into a contract through the importunity or persuasion
of another against his better judgment, if the
deprivation of his free agency is not proved, there is
no undue influence which will vitiate consent.
------------------------------------------------------------------------------Art. 1338. There is fraud when, through insidious words
or machinations of one of the contracting parties, the
other has induced to enter into a contract which, without
them, he would not have agreed to.
------------------------------------------------------------------------------Fraud
Fraud – those insidious words or machinations employed
by one of the contracting parties in order to induce the
other to enter into a contract, which, without them, he
would not have agreed to.
Kinds of Fraud – fraud under Article 1338 must not be
confused with the fraud which is mentioned under Articles
1170 and 1171.
1. Fraud in the perfection of the contract (Art. 1338) –
the fraud which is employed by a party to the contract
in securing the consent of the other party.
a. Dolo Causante (causal fraud) – refers to those
deceptions or misrepresentations of a serious
character employed by one party and without
which the other party would not have entered into
the contract. This is the fraud which is defined in
Article 1338.
b. Dolo Incidente (incidental fraud) – refers to those
deceptions or misrepresentations which are not
serious in character and without which the other
party would still have entered into the contract.
This is the fraud referred to in Article 1344.
2. Fraud in the performance of the obligation (Art.
1170) – fraud which is employed by the obligor in the
performance of a pre-existing obligation.
Dolo Causante and Dolo Incidente, Distinguised
Dolo Causante
Dolo Incidente
As to Character
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Serious in character
Not serious in character
As to Purpose
Induces the party upon Not the cause which
whom it is employed in induces the other party into
entering into the contract
entering into the contract
As to Effect
The effect is to render the The effect is to render the
contract voidable
party who employed it liable
for damages
Requisites (OSIB)
1. Fraud or insidious machinations must have been
employed by one of the contracting parties;
2. The fraud or insidious words or machinations must
have been serious;
3. The fraud or insidious words or machinations must
have induced the other party to enter into the contract;
and
4. The fraud should not have been employed by both of
the contracting parties or by a third person.
Nature of Fraud – The essence of the fraud under the
article lies in the deception or misrepresentation employed
by one of the contracting parties to secure the consent of
the other.
 It is also essential that such insidious words or
machinations must be prior to or contemporaneous
with the birth or perfection of the contract.
------------------------------------------------------------------------------Art. 1339. Failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
Art. 1340. The usual exaggerations in trade, when the
other party had an opportunity to know the facts, are not
in themselves fraudulent.
Art. 1341. A mere expression of an opinion does not
signify fraud, unless made by an expert and the other
party has relied on the former’s special knowledge.
------------------------------------------------------------------------------Effects of Failure to Disclose Facts
Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential
relations, constitutes fraud. However, the innocent
nondisclosure of a fact, when there is no duty to reveal it,
does not constitute fraud.
Illustration: A applied for life insurance coverage with
Insurance Co. In the questionnaire, there is a question
90
as to whether the applicant has diabetes. A knows
that he has diabetes. Nevertheless, he answered “no”
to the question. In this case, the failure of A to
disclose the fact that he has diabetes constitutes
fraud.
Illustration: A applied for life insurance coverage with
Insurance Co. In the questionnaire, there is a question
as to whether the applicant drinks alcoholic drinks. A
knows that he occasionally drink alcohol.
Nevertheless, he answered “no” to the question. The
non-disclosure in this case is not fraudulent as the
answer has not the intent to defraud. The reason is
that the reality that he is an occasional drinker will not
change the decision of the insurance company to
accept the applicant under its coverage.
Effect of Exaggerations in Trade
The usual exaggerations in trade, when the other party had
an opportunity to know the facts, are not in themselves
fraudulent.
Illustration: Pizza Co. offered what according to its
advertisements is “the most delicious pizza in the
world”. A, a lover of pizza, immediately went to a
branch of Pizza Co. and ordered “the most delicious
pizza in the world”. However, he was disappointed as
the pizza is not delicious. The advertisement is not a
false representation as A had in fact an opportunity to
know that the pizza was not really the most delicious
pizza in the world. It is really an exaggeration which is
usual in trade.
Illustration: One day, A realized that he wants to eat
pork and beans. He immediately went to the nearest
supermarket and bought 12 cans of Mang Tomas’s
Pork and Beans. Upon opening his first can, he
noticed that there is no pork in the Pork and Beans. In
this case there is no false representation. A had an
opportunity to know the facts by reading all the labels
printed on the cover of the can.
Problem: Relying on the statements that “Panday 2”
is “pang-hollywood”, “pang-blockbuster”, “sobrang
ganda ng visual effects”, “ang ganda ng story”, and
“no. 1 movie this year”, A went to the nearest cinema
to watch Pandy 2. However, watching the movie
cause only disappointment. The visual effects of the
movie was indeed “pang-hollywood” some 20 to 30
years ago; the movie was indeed “pang-hollywood” as
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it was only an attempt to pirate the ideas of Hollywood
movies such as “Clash of the Titans” and “How to train
your dragon.” Can A sue GMA and Imus Productions
(the producers of the movie) for false representations?
Answer: No, A cannot sue them on the ground that
Panday 2 is the suckiest movie ever and therefore far
from the representation made that it is “panghollywood”. A had an opportunity to know that the
statements were only to promote the movie and
therefore tends to be exaggerated.
Effect of Expression of Opinion
A mere expression of an opinion does not signify fraud,
unless made by an expert and the other party has relied on
the former’s special knowledge.
Illustration: F, a farmer, found a shiny yellowish
metal which he thought to be gold. Relying on F’s
belief that the stone is gold, P bought the same from
F. However, it turned out that the metal is not gold but
just an ordinary metal that happens to be shiny. In this
case, P cannot avoid the contract of sale on the
ground of fraud. Under Article 1341, a mere
expression of an opinion does not signify fraud,
unless made by an expert and the other party has
relied on the former’s special knowledge. F is clearly
not an expert. Nevertheless, P can ask that the
contract be avoided on the ground of mistake. The
sale in this case is voidable because the consent of P
was vitiated by mistake. Under Article 1331, in order
that mistake may invalidate consent, it should refer to
the substance of the thing which is the object of the
contract, or those conditions which have principally
moved one or both parties to enter into the contract.
In this case, P and F honestly believed that the metal
was gold. It turned however that it was not. Hence,
there is clearly mistake as to the substance of the
thing sold.
------------------------------------------------------------------------------Art. 1342. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.
------------------------------------------------------------------------------Effect of Misrepresentation by Third Persons
Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
substantial mistake and the same is mutual
91
 Even without Article 1342, the rule would still be
applicable since it is a logical corollary to the principle
that in order to vitiate consent, the fraud must be
employed only by one of the contracting parties.
 The principle would not be applicable if the third
person makes the misrepresentation with the
complicity or at least, with the knowledge, but without
any objection, of the contracting party who is favored.
Hence, misrepresentation in this case vitiates
consent.
Illustration: S offered to B his laptop for P 50,000.00.
B signified his interest to buy the car but made
reservation about the high price considering that the
laptop is “second-hand.” However, X, a third person
present at the time of the negotiations, assured B that
the laptop is as good as new considering that it has
been used for only a month. S knew that the laptop is
already one year old and actually experiencing some
problem. However, he did not object to the
representation made by X. In this case, despite the
fact that the false representation was made by a third
person, the consent is vitiated. The misrepresentation
was with the knowledge of S but he did not object.
------------------------------------------------------------------------------Art. 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error.
Art. 1344. In order that fraud may make a contract
voidable, it should be serious and should not have been
employed by both contracting parties.
Incidental fraud only obliges the person employing it to
pay damages.
------------------------------------------------------------------------------Magnitude of Fraud
The serious character of fraud refers not to its influence,
but to its importance or magnitude.
 Hence, the annulment of the contract cannot be
invoked just because of the presence of a minor, or
common acts of fraud whose veracity could easily
have been investigated.
 The annulment cannot also be invoked because of the
presence of ordinary deviations from the truth,
deviations, which are almost inseparable from
ordinary commercial transactions, particularly those
taking place in fairs or markets.
Relation between Fraud and Consent – To vitiate
consent, the fraud must be the principal or causal
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inducement or consideration for the consent of the party
who is deceived in the sense that he would never have
given consent were it not for the fraud.
------------------------------------------------------------------------------Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties
conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is
void. A relative simulation, when it does not prejudice a
third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public
policy binds the parties to their real agreement.
------------------------------------------------------------------------------Simulation of Contracts
Simulation of contracts may either be absolute or relative.
a. Absolute – when there is colorable contract but it has
no substance as the contracting parties do not intend
to be bound by the contract at all, as when a debtor
simulates the sale of his properties to a friend in order
to prevent their possible attachment by creditors.
b. Relative – when the contracting parties state a false
cause in the contract to conceal their true agreement,
as when a person conceals a donation by simulating a
sale of the property to the beneficiary for a fictitious
consideration.
Effects
Simulation of contracts affects the contract in an entirely
different manner. An absolutely simulated contract is void,
while a relatively simulated contract binds the parties and
the parties may recover from each other what they may
have given under the contract, while a relatively simulated
contract is binding and enforceable between the parties
and their successors in interest to their real agreement,
when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good
customs, public order or public policy.
Contracts of Adhesion
Contract of Adhesion – a type of contract where the
terms are prepared by only one of the parties while the
other party merely affixes his signature signifying his
adhesion thereto.
 A contract of adhesion is just as binding as ordinary
contracts. Hence, they are not invalid per se. The one
who adheres to the contract is in reality free to reject it
entirely. If he adheres, he gives his consent.
92
 However, when the terms of the contract are
ambiguous, the terms thereof shall be construed
liberally in favor of the party who merely affix his
signature, and strictly against the party who cause the
ambiguity which is of course the party who prepared
the terms of the contract.
Object of Contract
------------------------------------------------------------------------------Art. 1347. All things which are not outside the commerce
of men, including future things, may be the object of a
contract. All rights which are not intransmissible may
also be the object of contracts.
No contract may be entered into upon future inheritance
except authorized by law.
All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be
the object of a contract.
Art. 1348. Impossible things or services cannot be the
object of contracts.
Art. 1349. The object of every contract must be
determinate as to its kind. The fact that the quantity is not
determinate shall not be an obstacle to the existence of
the contract, provided it is possible to determine the
same, without the need of a new contract between the
parties.
------------------------------------------------------------------------------What may be the Object of Contracts
As a general rule, all things or services may be the object
of contracts.
Requisites (LCD-R)
1. The object should be within the commerce of men;
in other words, it should be susceptible of
appropriation and transmissible from one person to
another;
2. The object should be real or possible; in other words,
it should exist at the moment of the celebration of the
contract, or at least, it can exist subsequently or in the
future;
3. The object should be licit;
4. The object should be determinate, or at least,
possible of determination, as to its kind.
Example of Things which cannot be the Object of
Contracts
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1. Things which are outside the commerce of men;
2. Intransmissible rights;
3. Future inheritance, except in cases expressly
authorized by law;
4. Services which are contrary to law, morals, good
customs, public order, or public policy;
5. Impossible things or services; and
6. Objects which are not possible of determination as to
their kind.
Illustration: S sold to B all the air which is passing on
its property. The object in this case is invalid as they
are outside the commerce of men. To be within the
commerce of man, the thing must be susceptible of
appropriation. The air is a res communes (those
belonging to everyone). Res communes cannot be
appropriated.
Illustration: B offered to buy from S a phoenix or a
mermaid in consideration of P 10,000,000.00. The
object(s) in this case are invalid. They are not real.
Illustration: S sold to B 20 kilograms of marijuana. In
this case the object of the contract is unlawful. Since
the object is not licit, the contract is not valid.
Illustration: S sold to B an animal. The object in this
case is invalid not being determinate, or at least
determinable. However, it would have been different if
what was offered was a pair of love birds, or a
Chihuahua, or a Persian cat. In such case the object
is determinate or determinable and hence valid.
Appropriability and Transmissibility
In order that a thing, right or service may be the object of a
contract, it is essential that it must be within the commerce
of men. Consequently, two conditions must concur:
1. The thing, right, or service should be susceptible of
appropriation; and
2. It should be transmissible from one person to another
 Things, rights, or services which do not possess these
conditions or characteristics are outside the
commerce of men, and therefore, cannot be the
object of contracts. These include:
i. Those things which are of their very nature, such
as common things like the air or sea, sacred
things, res nullius, and property belonging to the
public domain;
ii. Those which are made such by special
prohibitions established by law, such as
93
iii.
poisonous substances, drugs, arms, explosives,
and contrabands; and
Those rights which are intransmissible because
either they are purely personal in character
Things which have Perished – Things which have
perished cannot be the object of contracts because they
are inexistent.
Future Things – Future things may be the object of
contracts.
Future Things – those which do not belong to the obligor
at the time the contract is made; they may be made, raised,
or acquired by the obligor after the perfection of the
contract. It includes not only material objects but also future
rights.
When the contract involves future things, it may either be:
1. Conditional, or subject to the coming into existence of
the thing; or
2. Aleatory, or one of the parties bears the risk of the
thing never coming into existence.
Rule with Respect to Future Inheritance
Generally, future things may the object of contracts. The
exception to this rule is future inheritance. Inheritance
includes all the property, rights, and obligations of a person
which are not extinguished by his death.
 The reason for the rule is because if the rule were
otherwise, there would always be a possibility that one
of the contracting parties may be tempted to instigate
the death of the other in order that inheritance will
become his.
Requisites for the Prohibition:
1. The succession has not yet been opened;
2. The object of the contract forms part of the
inheritance; and
3. That the promissor has, with respect to the object,
an expectancy of a right which is purely hereditary
in nature.
Impossible Things or Services – Impossible things or
services cannot be the object of contracts. Things are
impossible when they are susceptible of existing or they
are outside the commerce of man. Personal services or
acts are impossible when they are beyond the ordinary
strength or power of man. The impossibility must be actual
and contemporaneous with the making of the contract, and
not subsequent thereto.
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 Therefore, a distinction must be made between
absolute impossibility and relative impossibility.
 Absolute impossibility renders the contract void
as it arises from the very nature or essence of
the act or service itself.
 Relative impossibility allows the perfection of the
contract although fulfilment thereof is hardly
probable as it arises from the circumstances or
qualifications of the obligor rendering him
incapable of executing the act or service.
Determinability of Object
That the thing must be determinate as to its kind simply
means that the genus of the object should be expressed
although there might be no determination of the individual
specie.
 A thing is determinate when it is particularly
designated or physically segregated from all other of
the same class (Art. 1460, par. 1)
 A thing is determinable if at the time the contract is
entered into, the thing is capable of being made
determinate without the necessity of a new or further
agreement between the parties (Art. 1460, par. 2)
 There need not be any specification as to the qualities
and circumstances of the thing which constitutes the
object of the contract.
Illustration: S offered to B his car for P 500,000.00.
The object in this case is determinate as the object is
particularly designate (i.e., S’s car). If S owns many
cars then it is determinable as the thing is capable of
being made determinate without the need to enter into
a new agreement.
Illustration: B bought 10 tons of wagwag rice from B
for P 500,000.00. In this case, the object is
determinable because at the time the contract is
entered into, the thing is capable of being made
determinate without necessity of a new or further
agreement between the parties. Nevertheless, the
thing here will be determinate at the time of delivery
because at such time, the 10 tons of wagwag rice has
already been physically segregated from all others of
the same class.
Cause of Contracts
------------------------------------------------------------------------------94
Art. 1350. In onerous contracts the cause is understood
to be, for each of the contracting party, the prestation or
promise of a thing or service by the other; in
remuneratory ones, the service or benefit remunerated;
and in contracts of pure beneficence, the mere liberality
of the benefactor.
Art. 1351. The particular motives of the parties in entering
into a contract are different from the cause thereof.
------------------------------------------------------------------------------Cause of Contracts
Cause of the Contract – it is the immediate, direct or most
proximate reason which explains and justifies the creation
of an obligation through the will of the contracting parties. It
is the “why” of the contract or the essential reason which
moves the contracting parties to enter into the contract.
Distinguished from Consideration
In this jurisdiction, cause and consideration are used
interchangeably. However, in civil law jurisdictions, causa
or cause is broader in scope than consideration in AngloAmerican jurisdictions.
Distinguished from Object
 In remuneratory contracts, the cause is the service or
benefit which is remunerated, while the object is the
thing which is given in remuneration. Remuneratory
contract is one in which one of the contracting parties
remunerates (rewards, compensates, reimburses) the
service or benefit rendered or given by the other
party, although such service or benefit does not
constitute a demandable debt.
Illustration: A is an employee of X. Due to the efforts
of A, the company of X gained a lot of profits. In
consideration of the efforts by A, X gave him a brand
new car. In this case the cause or consideration is the
efforts of A or the huge profit acquired by the
company of X, while the object is the car.
 In gratuitous contracts, the cause is the liberality of
the donor or the benefactor, while the object is the
thing which is given or donated
Illustration: A donated a parcel of land to the Global
Church. In this cause, the cause or consideration is
the mere liberality of A while the object is the parcel of
land.
 In onerous contracts, the cause is the prestation or
promise of a thing or service by the other, while the
object is the thing or service itself
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Illustration: S sold to B his car for P 500,000.00. In
this case, the cause or consideration is, as regards S,
the seller, the promise of B to deliver the purchase
price of P 500,000.00, whereas as regards B the
cause or consideration is the promise of S to deliver
the car. The object of the contract is the car.
 The cause of the accessory contract is identical with
that of the principal contract
 In moral obligations, where the moral obligation arises
wholly from ethical considerations, unconnected with
any civil obligation and, as such, is not demandable in
law but only in conscience, it cannot constitute a
sufficient cause or consideration to support an
onerous contract. But where such moral obligation is
based upon a previous civil obligation which has
already been barred by the statute of limitations at the
time when the contract is entered into, it constitutes a
sufficient cause or consideration to support the said
contract.
Distinguished from Motives
Cause is not equivalent to motive. The cause in a particular
kind of a contract is always the same whereas motive, are
as different or complex and as capable of infinite variety as
the individual circumstances which may move men to
acquire things or make money.
 However, when the motive of the contracting parties
predetermines the purpose of the contract and such
motive or purpose is illegal or immoral, it is clear that
such illegal motive or purpose becomes the illegal
causa, thus rendering the contract void ab initio.
Cause
Motive
The direct or most The indirect or remote
proximate reason of a reasons
contract
The objective or juridical The psychological or purely
reason of a contract
personal reasons
Cause is always the same
Differ for each contracting
party
------------------------------------------------------------------------------Art. 1352. Contracts without cause, or with unlawful
cause, produce no effect whatsoever. The cause is
unlawful if it is contrary to law, morals, good customs,
public order or public policy.
Art. 1353. The statement of a false cause in contracts
shall render them void, if it should not be proved that
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they were founded upon another cause which is true and
lawful.
Art. 1354. Although the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless
the debtor proves the contrary.
Art. 1355. Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake, or undue influence.
------------------------------------------------------------------------------Essential Requisites of Cause
1. The cause should be in existence at the time of the
celebration of the contract;
2. The cause should be licit or lawful; and
3. The cause should be true.
 If the cause of the contract is false, it shall produce no
effect, unless it can be proved that the contract is, in
reality, founded upon another cause which is true and
lawful.
Effect of Lack of Cause
If the contract is not founded upon any cause, then it shall
not produce any effect whatsoever.
 The rule is not applicable where the purchaser or
vendee failed to fully pay for the property, even if
there is a stipulation in the contract of sale that full
payment shall be made at the time of the celebration
thereof.
 If the contract provides for a substantially small
consideration like P 1.00 for a parcel of land, the
same is not void or inexistent. In this case, there is
still consideration. The contract is also not voidable
but the inadequacy of the consideration may be an
evidence of the presence of fraud, mistake, or undue
influence which would render the contract voidable.
Illustration: S sold to B his car for P 500,000.00. S
delivered the car to B but payment of the purchase
price will be made only after a month. In this case
even if B failed to pay the purchase price, the same
would not render the contract void. There is actually a
consideration in this case: the promise by the buyer to
give the purchase price, from the view point of the
seller, and the promise to deliver the car from the
point of view of the buyer. Moreover, in this case
ownership is already transferred to the buyer by virtue
of the delivery.
Illustration: B purchased a 1 hectare parcel of land
from S for P 1.00. In this case, the contract is valid
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and not void or voidable. It may even be argued that
the price is equivalent in value to the thing purchased
so long as the party believes that he is receiving good
value for what he transferred. However, inadequacy of
price, while not a sufficient ground for the cancellation of
a voluntary contract, it may nevertheless show vice in
consent and hence can be an evidenced which will show
that the contract is voidable (but again, the mere fact
that the consideration is inadequate is not sufficient to
make the contract voidable, much less void)
Effect of Unlawful Cause
The cause is unlawful if it contrary to law, morals, good
customs, public order or public policy. If the cause is
unlawful, the contract shall not produce any effect
whasoever.
Illustration: A promised to give B P 500,000.00 if B
would kill X. The cause in this case is unlawful.
Hence, the contract is void.
Effect of False Cause
The statement of a false cause in contracts shall render
them void unless it should be proved that they were
founded upon another cause which is true and lawful.
Illustration: S and B executed a contract of sale
where it was stated that B acquired from S a parcel of
land in consideration of P 50,000.00. However, it was
found out that B never paid a single cent for the
property and the ownership of the same property has
not been transferred to B. It was also proved that S
continued to be the actual owner of the property. In
this case the sale is fictitious. If the parties would not
be able to prove that the contract is founded upon
another consideration which is valid, then the contract
is an absolutely fictitious contract which is void.
However, if the parties can show that there is another
consideration which is valid then the contract is
relatively simulated and the parties are bound to their
true agreement. Hence, in the same example, if the
true consideration is a car which B transferred to S in
exchange for the land, then the parties are bound to
the contract of barter.
Forms of Contracts
------------------------------------------------------------------------------Art. 1356. Contracts shall be obligatory, in whatever form
they may have been entered into, provided all the
96
essential requisites for their validity are present.
However, when the law requires that a contract be in
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 right of the parties stated in the following
article cannot be exercised.
Art. 1357. If the law requires a document or other special
form, as in the acts and contracts enumerated in the
following article, the contracting parties may compel
each other to observe that form, once the contract has
been perfected. This right may be exercised
simultaneously with the action upon the contract.
Art. 1358. The following must appear in a public
document:
1. Acts and contracts which have for their object the
creation,
transmission,
modification
or
extinguishment of real rights over immovable
property; sales of real property or of an interest
therein are governed by articles 1403, No. 2, and
1405;
2. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
3. The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or
should prejudice a third person;
4. The cession of actions or rights proceeding from an
act appearing in a public document.
All other contracts where the amount involved exceeds
five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in
action are governed by articles, 1403, No. 2 and 1405.
------------------------------------------------------------------------------Form of Contract
General rule: contracts shall be obligatory whatever may
be the form they may have been entered into provided all
the essential requisites for its validity are present.
Exceptions:
1. When the law requires that the contract must be in a
certain form in order to be valid; and
2. When the law requires that the contract must be in a
certain form in order to be enforceable
Forms Required by Law
1. Formalities for Validity
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2. Formalities for Enforceability
3. Formalities for Efficacy
Formalities for Validity
There are certain contracts for which the law prescribes
certain forms for their validity. These contracts may be
classified as follows:
1. Those which must appear in writing
a. Donations of personal property whose value
exceeds five thousand pesos (P 5,000.00) (Art.
748)
b. Sale of a piece of land or any interest therein
through an agent (Art. 1874)
c. Agreements regarding payment of interest in
contracts of loan. (Art. 1956)
d. Antichresis. In a contract of antichresis, the
amount of the principal and of the interest shall be
specified in writing otherwise the contract shall be
void. (Art. 2134)
2. Those which must appear in a public document
a. Donations of immovable property (Art. 749)
b. Partnerships where immovable property or real
rights are contributed to the common fund (Arts.
1771 and 1773)
3. Those which must be registered
a. Chattel mortgages (Art. 2140)
b. Sales or transfers of large cattles (Cattle
Registration Act)
Formalities for Enforceability
There are contracts which are unenforceable by action,
unless they are in writing and properly subscribed, or
unless they are evidenced by some note or memorandum,
which must also be in writing and properly subscribed.
These contracts are governed by the Statute of Frauds
(Art. 1403)
Formalities for Efficacy
Aside from formalities for validity and enforceability, the law
also prescribes a certain form in the execution of some
contracts. The purpose of the requirement, however, is not
to validate or to enforce the contract, but merely to insure
its efficacy. Hence, contracts which failed to comply with
the requirements for efficacy are still obligatory.
Principles Applicable to Formalities for Efficacy
1. Articles 1357 and 1358 do not require the execution of
the contract either in a public or private document in
order to validate or enforce it but only to ensure its
97
efficacy, so that after its existence has been admitted,
the party bound may be compelled to execute the
necessary document.
2. Even where the contract has not been reduced to the
required form, it is still valid and binding as far as the
contracting parties are concerned. Consequently,
Articles 1357 and 1358 presupposes the existence of
a contract which is valid and binding.
3. From the moment one of the contracting parties
invokes the provisions of Articles 1357 and 1358 by
means of a proper action, the effect is to place the
existence of the contract in issue, which must be
resolved by the ordinary rules of evidence.
4. Article 1357 does not require that the action to compel
the execution of the necessary document must
precede the action upon the contract. Both actions
may be exercised simultaneously.
5. However, although the provisions of Article 1357, in
connection with Article 1358, do not operate against
the validity of the contract nor for the validity of the
acts voluntarily performed by the parties for the
fulfilment thereof, yet from the moment when any of
the contracting parties invokes said provisions, it is
evident that under them the execution of the required
document must precede the determination of the
other obligations derived from the contract.
Reformation of Instruments
------------------------------------------------------------------------------Art. 1359. When, there having been a meeting of the
minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody
the agreement, by reason of mistake, fraud, inequitable
conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true
intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has
prevented a meeting of the minds of the parties, the
proper remedy is not reformation of the instrument but
annulment of the contract.
------------------------------------------------------------------------------Doctrine of Reformation of Instruments
When the true intention of the parties to a perfected and
valid contract are not expressed in the instrument
purporting to embody their agreement by reason of
mistake, fraud, inequitable conduct, or accident, one of the
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parties may ask for the reformation of the instrument so
that such true intention may be expressed.
 The doctrine is based on justice and equity.
 Upon the reformation of the instrument, the general
rule is that it relates back to and takes effect from the
time of its original execution, especially as between
the parties.
Requisites
1. There must be a meeting of the minds of the
contracting parties. In other words, there must be a
perfected contract;
2. Their true intention is not expressed in the instrument;
and
3. Such failure to express their true intention is due to
mistake, fraud, inequitable conduct or accident.
Distinguished from Annulment of Contracts
Reformation of Contracts
Annulment of Contracts
Presupposes a valid and Based on a defective
perfected contract
contract in which there has
been no meeting of the
minds because the consent
of one or more of the
contracting parties has been
vitiated
Reformation gives life to the Annulment involves
a
contract
upon
certain complete nullification of the
corrections.
contract.
Hence, if mistake, fraud, inequitable conduct, or accident
has prevented a meeting of the minds of the parties, the
proper remedy is not reformation of the instrument but
annulment of the contract.
------------------------------------------------------------------------------Art. 1360. The principles of the general law on the
reformation of instruments are hereby adopted insofar as
they are not in conflict with the provisions of this Code.
Art. 1361. When a mutual mistake of the parties causes
the failure of the instrument to disclose their real
agreement, said instrument may be reformed.
---------------------------------------------------------------------------------Requisites of Mistake
To justify reformation under Article 1361, it must be shown
conclusively that:
1. The mistake is one of fact, as when the written
evidence of the agreement includes something which
should not be there or omits something which should
be there;
98
2. It was common to both parties; and
3. Proof of mistake must be clear and convincing which
is more than a mere preponderance of evidence.
---------------------------------------------------------------------------------Art. 1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former
may ask for the reformation of the instrument.
---------------------------------------------------------------------------------Mistake by One Party
A written instrument may be reformed where there is mistake
on one side and fraud or inequitable conduct on the other as
where one party to an instrument has made a mistake and the
other knows it and conceals the truth from him.
 Mistake of one party, under this article, must refer to the
contents of the instrument and not the subject matter or
principal conditions of the agreement; in the latter case,
an action for annulment of the contract is the proper
remedy.
---------------------------------------------------------------------------------Art. 1363. When one party was mistaken and the other
knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former,
the instrument may be reformed.
Art. 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 parties, the
courts may order that the instrument be reformed.
---------------------------------------------------------------------------------Mistake of Draftsman
Whenever an instrument is drawn with the intention of
carrying an agreement previously made, but which, due to
mistake or inadvertence of the draftsman or clerk, does not
carry out the intention of the parties, but violates it, there is
ground to correct the mistake by reforming the instrument.
---------------------------------------------------------------------------------Art. 1365. If two parties agree upon the mortgage or
pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right
of repurchase, reformation of the instrument is proper.
Art. 1366. There shall be no reformation in the following
cases:
1. Simple donations inter vivos wherein no condition is
imposed;
2. Wills;
3. When the real agreement is void.
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Art. 1367. When one of the parties has brought an action
to enforce the instrument, he cannot subsequently ask
for its reformation.
Art. 1368. Reformation may be ordered at the instance of
either party or his successors in interest, if the mistake
was mutual; otherwise, upon petition of the injured party,
or his heirs and assigns.
Art. 1369. The procedure for the reformation of
instrument shall be governed by rules of court to be
promulgated by the Supreme Court.
------------------------------------------------------------------------------Contracts of Adhesion
Contract of Adhesion – one in which one of the parties
imposes a ready-made form of contract, which the other
party may accept or reject, but which the latter cannot
modify.
Interpretation of Contracts
------------------------------------------------------------------------------Art. 1370. If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention
of the parties, the latter shall prevail over the former.
Art. 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
------------------------------------------------------------------------------Primacy of Intention of the Parties
The cardinal rule in the interpretation of contracts is to the
effect that the intention of the contracting parties should
always prevail because their will has the force of law
between them.
 If the terms of the contract are clear and leave no
doubt as to the intention of the contracting parties, the
literal sense of its stipulations shall be followed.
 If the words appear to be contrary to the evident
intention of the contracting parties, the intention shall
prevail.
 The evident intention which prevails against the
defective wording of the contract is not that of one of
the parties but the general intent, which, being so, is
to a certain extent equivalent to mutual consent,
inasmuch as it was the result desired and intended by
the contracting parties.
99
How to Judge Intention – In order to judge the intention of
the parties, their contemporaneous and subsequent acts
shall be principally considered. This is without prejudice to
the consideration of other factors as fixed or determined by
the other rules of interpretation mentioned in the Civil Code
and in the Rules of Court.
------------------------------------------------------------------------------Art. 1372. However general the terms of a contract may
be, they shall not be understood to comprehend things
that are distinct and cases that are different from those
upon which the parties intended to agree.
---------------------------------------------------------------------------------Scope of General Terms
When a general and a particular provision are inconsistent,
the latter is paramount to the former. So a particular intent will
control a general one that is inconsistent with it. The contract
cannot also be constructed so as to include matters distinct
from those with respect to which the parties intended to
contract.
---------------------------------------------------------------------------------Art. 1373. If some stipulation of any contract should
admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it
effectual.
Art. 1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.
Art. 1375. Words which may have different significations
shall be understood in that which is most in keeping with
the nature and object of the contract.
Art. 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 omission of stipulations which
are ordinarily established.
Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who
caused the obscurity.
Art. 1378. The interpretation of obscure words or
stipulations in a contract shall not favor the party who
caused the obscurity.
If the doubts are cast upon the principal object of the
contract in such 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.
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Art. 1379. The principles of interpretation stated in Rule
123 of the Rules of Court shall likewise be observed in
the construction of contracts.
-------------------------------------------------------------------------------
Defective Contracts
Classes of Defective Contracts – there are four classes
of defective contracts. They are:
a. Rescissible
b. Voidable
c. Unenforceable
d. Void or inexistent
Essential Features of Defective Contracts
1. As to Defect
a. Rescissible contracts – there is damage or injury
either to one of the contracting parties or to third
persons;
b. Voidable contracts – there is vitiation of consent
or legal incapacity of one of the contracting parties
c. Unenforceable contracts – the contract is entered
into in excess or without any authority, or does not
comply with the Statute of Frauds, or both
contracting parties are legally incapacitated
d. Void or inexistent contracts – one or some of the
essential requisites of a valid contract are lacking
either in fact or in law.
2. As to Effect
a. Rescissible contracts – considered valid and
enforceable until they are rescinded by a
competent court;
b. Voidable contracts – considered valid and
enforceable until they are annulled by a competent
court;
c. Unenforceable contracts – cannot be enforced by
a proper action in court;
d. Void or inexistent contracts – as a general rule,
produce any legal effect
3. As to Prescriptibility of Action or Defense
a. Rescissible contracts – the action for rescission
may prescribe;
b. Voidable contracts – the action for annulment or
the defense of annullability may prescribe;
c. Unenforceable contracts – the corresponding
action for recovery, if there was total or partial
performance of the unenforceable contract under
no. 1 or no. 3 of Art. 1403, may prescribe;
100
d. Void or inexistent contracts – the action for
declaration of nullity or inexistence or the defense
of nullity or inexistence does not prescribe
4. As to Susceptibility of Ratification
a. Rescissible contracts – not susceptible of
ratification;
b. Voidable contracts – susceptible of ratification;
c. Unenforceable contracts – susceptible of
ratification;
d. Void or inexistent contracts – not susceptible of
ratification
5. As to who may Assail Contracts
a. Rescissible contracts – may be assailed not only
by a contracting party but even by a third person
who is prejudiced or damaged by the contract;
b. Voidable contracts – may be assailed only by a
contracting party;
c. Unenforceable contracts – may be assailed only
by a contracting party;
d. Void or inexistent contracts – may be assailed
not only by a contracting party but even by a third
person whose interest is directly affected
6. As to how may be Assailed
a. Rescissible contracts – may be assailed directly
only, and not collaterally;
b. Voidable contracts – may be assailed directly or
collaterally;
c. Unenforceable contracts – may be assailed
directly or collaterally;
d. Void or inexistent contracts – may be assailed
directly or collaterally.
Rescissible Contracts
------------------------------------------------------------------------------Art. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law.
Art. 1381. The following contracts are rescissible.
1. Those which are entered into by guardians
whenever the ward whom they represent suffer
lesion by more than one-fourth of the value of the
things which are the object thereof;
2. Those agreed upon in representation of absentees if
the latter suffer the lesion stated in the preceding
number;
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3. Those undertaken in fraud of creditors when the
latter cannot in any manner collect the claims due
them;
4. Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of
competent judicial authority;
5. All other contracts specially declared by law to be
subject to rescission.
Art. 1382. Payments made in a state of insolvency for
obligations to whose fulfilment the debtor could not be
compelled at the time they were effected, are also
rescissible.
------------------------------------------------------------------------------Rescissible Contracts
Rescissible contract is a contract which is valid because it
contains all of the essential requisites prescribed by law,
but which is defective because of injury or damage to either
of the contracting parties or to third persons, such as
creditors, as a consequence of which it may be rescinded
by means of a proper action for rescission.
 The only way by which a rescissible contract may be
attacked is by means of a direct action for rescission
based on any of the causes expressly specified by
law. It cannot be attacked collaterally.
Characteristics of Rescissible Contracts
1. Their defect consists in injury or damage either to one
of the contracting parties or to third persons;
2. Before rescission, they are valid, and therefore,
legally effective;
3. They can only be attacked directly, not collaterally;
4. They can be attacked only either by a contracting
party or by a third person who is injured or defrauded;
5. They are susceptible of convalidation only by
prescription and not by ratification
Rescission
Rescission – a remedy granted by law to the contracting
parties, and even to third persons, to secure the reparation
of damages caused to them by a contract, even if the same
should be valid, by means of the restoration of things to
their condition prior to the celebration of the contract.
Rescission and Resolution, Distinguished
Rescission (Art. 1380)
Resolution (1191)
As to Party who may Institute the Action
May be instituted not only May be instituted only by a
by a party to the contract party to the contract (the
101
but also by a third person, injured party)
provided they suffered injury
by reason of the contract
sought to be rescinded
As to Causes
There several causes or The only ground is failure of
grounds for rescission, such one of the contracting
as rescission, fraud, and parties to comply with what
others expressly specified is incumbent upon him
by law
As to Power of the Courts
The courts has no power to The law expressly declares
grant an extension for the that courts shall have a
performance
of
the discretionary power to grant
obligation so long as there extension for performance
is a ground for rescission
provided that there is just
cause
As to Contracts which may be Rescinded or Resolved
Any contract, whether Only reciprocal contracts
unilateral or reciprocal, may may be resolved
be rescinded
As to Character
Rescission as an action is Primary.
subsidiary.
Rescission and Mutual Consent, Distinguished
Rescission
Mutual Consent
As to Causes
The causes are those which Cause is not based on the
are expressly specified by grounds for rescission but
law as ground for rescission depends upon the parites
such as lesion, fraud and
any other cause specified
by law
As to Laws Applicable
The laws applicable are The law applicable is the
Articles 1380 to 1389
stipulation of the parties. A
contracts is the law as
between the contracting
parties and should be
complied with in good faith
As to Effects
The effect is mutual Effects shall be governed by
restitution when the ground the agreement of the parties
for rescission is lesion.
as mutual consent is, in
reality, just another contract
which object is to dissolved
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a previous one
Contracts which may be Rescinded
1. Contracts in Behalf of Ward
Contracts entered into by guardians in behalf of the
ward, whenever the ward whom they represent suffer
lesion or damage by more than one-fourth of the
value of the things which are the object of the
contract, are rescissible.
 However, rescission shall not take place with
respect to contracts approved by the courts even
if the ward shall suffer the lesion stated in the
article.
 The contracts referred to under this ground are
contracts involving acts of administration and not
for acts of ownership. Acts of administration does
not require court approval for its validity.
However, as already stated, if such act was
approved by the court but the ward suffered
lesion as stated in the article, no rescission shall
take place.
 If the contract involves acts of ownership, and
hence, beyond the guardian’s powers to perform,
and no judicial approval was procured, the
contract is unenforceable and not rescissible.
2. Contracts in Behalf of Absentees
Contracts entered into by legal representatives in
behalf of the absentee, whenever the absentee whom
they represent suffer lesion or damage by more than
one-fourth of the value of the things which are the
object of the contract, are rescissible
 However, rescission shall not take place with
respect to contracts approved by the courts even
if the ward shall suffer the lesion stated in the
article
 The contracts referred to under this ground are
contracts involving acts of administration and not
for acts of ownership
 If the contract involves acts of ownership, and
hence, beyond the guardian’s powers to perform,
and no judicial approval was procured, the
contract is unenforceable and not rescissible
Requisites of Rescission on the Ground of Lesion
1. The contract must have been entered into by a
guardian in behalf of the ward or by a legal
representative in behalf of an absentee;
102
2. The ward or absentee must have suffered lesion of
more than one-fourth of the value of the property
which is the object of the contract;
3. The contract must have been entered into without
judicial approval;
4. There must be no other legal means for obtaining
reparation for lesion;
5. The person bringing the action must be able to
return whatever he may be obliged to restore; and
6. The object of the contract must not be legally in
the possession of a third person who did not act
on bad faith
3. Contracts in Fraud of Creditors
Contracts entered into in fraud of creditors when the
latter cannot in any other manner collect the claims
them are rescissible. This complements Article 1177.
 The basis for rescission here is fraud.
Requisites of Rescission of Contracts in Fraud of
Creditors
1. There must be a credit existing prior to the
celebration of the contract;
2. There must be a fraud, or at least, the intent to
commit fraud to the prejudice of the creditor
seeking the rescission;
3. The creditor cannot in any other legal manner
collect his credit; and
4. The object of the contract must not be legally in
the possession of a third person who did not act in
bad faith.
Accion Pauliana – the action to rescind contracts in
fraud of creditors. For the action to prosper, the
following requisites must concur.
1. The plaintiff asking for rescission has a credit prior
to the alienation, the date of the judgment
enforcing it is immaterial;
2. The debtor has made subsequent contract
conveying a patrimonial benefit to a third person;
3. The creditor has no other legal remedy to satisfy
his claim;
4. The act being impugned is fraudulent; and
5. The third person who received the property
conveyed, if it is by onerous title, has been an
accomplice in the fraud.
Note: actually, the requisites under “requisites of
rescission of contracts in fraud of creditors” and the
requisites here should be the same. Accion pauliana
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and rescission of contracts in fraud of creditors as an
action are the same.
4. Contracts Referring to Things under Litigation
Contracts which refer to things under litigation if they
have been entered into by the defendant without
knowledge and approval of the litigants or of
competent judicial authority may be rescinded.
 The basis for rescission here is fraud.
 The purpose here is to secure the possible
effectivity of a claim, while in No. 3 the purpose
is to guarantee an existing credit.
 Here, there is a real right involved, while in No. 3
there is a personal right.
5. Contracts by Insolvent
Payments made in a state of insolvency for
obligations to whose fulfilment the debtor could not be
compelled at the time they were effected are
rescissible.
 The basis for rescission here is fraud.
 Insolvency, as it is understood in this article,
should be understood in its popular or vulgar, not
technical, sense. Hence, it refers to the financial
situation of the debtor by virtue of which it is
impossible for him to fulfil his obligations. A
judicial declaration of insolvency is not
necessary.
Requisites
1. Payment must have been made in a state of
insolvency; and
2. The obligation must have been one which the
debtor could not be compelled to pay at the time
such payment was effected
6. Other Rescissible Contracts Expressly Specified
by Law
Contracts which can be rescinded as expressly
specified by law are:
a. Art. 1098
b. Art. 1526
c. Art. 1534
d. Art. 1539
e. Art. 1542
f. Art. 1556
g. Art. 1560
h. Art. 1567
i. Art. 1659
------------------------------------------------------------------------------103
Art. 1383. The action for rescission is subsidiary; it
cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for
the same.
------------------------------------------------------------------------------Rescission, Subsidiary
The action for rescission is subsidiary. Hence, it cannot be
instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.
 It is essential therefore that the party prejudiced has
exhausted all of the other legal means to obtain
reparation before he can avail himself of the remedy
of rescission.
Parties who may Institute the Action
1. The person who is prejudiced, such as the party
suffering the lesion, the creditor who is defrauded,
and other persons authorized to exercise the same in
other rescissory actions.
2. Their representatives.
3. Their heirs.
4. Their creditors by virtue of the subrogatory action
under Article 1177.
------------------------------------------------------------------------------Art. 1384. Rescission shall only be to the extent
necessary to cover the damage caused.
------------------------------------------------------------------------------Extent of Rescission
The primary purpose of rescission is reparation for the
damage or injury which is suffered by a party to the
contract or by a third person.
 Hence, rescission does not necessarily have to be
total in character; it may also be partial. Rescission
shall only be to the extent necessary to cover the
damages caused.
------------------------------------------------------------------------------Art. 1385. Rescission creates the obligation to return the
things which were the object of the contract, together
with their fruits, and the price with its interest;
consequently, it can be carried out only when he who
demands rescission can return whatever he may be
obliged to restore.
Neither shall rescission take place when the things which
are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded
from the person causing the loss.
-------------------------------------------------------------------------------
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Effect of Rescission in Case of Lesion
Article 1385, paragraph 1 is applicable only to rescissory
actions on the ground of lesion and not to rescissory
actions on the ground of fraud.
 In the latter, the plaintiff-creditor has no obligation to
restore anything since he has not received anything.
Once the contract is rescinded on the ground of lesion,
there arises an obligation on the part of both contracting
parties to return to the other the object of the contract,
including fruits or interests.
 “fruits of the thing” refer not only to natural, industrial,
and civil fruits but also to other accessions obtained
by the thing, while interest refers to legal interest.
Effect of Rescission upon Third Persons
Rescission shall not take place when the thing which
constitutes the object of the contract is legally in the
possession of a third person who has not acted in bad
faith. However, the following requisites must concur:
1. The thing must be legally in the possession of a third
person; and
2. Such third person did not act in bad faith.
Note: when the thing is immovable, it is indispensable
that the right of the third person must be registered in the
proper registry before it can be said that it is legally in his
possession. When the thing is movable, the principle that
possession of movable property acquired in good faith is
equivalent to a title applies.
 If the thing was really in the legal possession of a third
person who acted in good faith, the person who is
prejudiced may bring an action for indemnity for
damages against the person who caused the loss.
------------------------------------------------------------------------------Art. 1386. Rescission referred to in Nos. 1 and 2 of article
1381 shall not take place with respect to contracts
approved by the courts.
Art. 1387. All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all debts
contracted before the donation.
Alienations by onerous title are also presumed fraudulent
when made by persons against whom some judgment
has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment
need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.
104
In addition to these presumptions, the design to defraud
creditors may be proved in any other manner recognized
by the law of evidence.
Art. 1388. Whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter
for damages suffered by them on account of the
alienation, whenever, due to any cause, it should be
impossible for him to return them.
If there are two or more alienations, the first acquirer
shall be liable first, and so on successively.
------------------------------------------------------------------------------Proof of Fraud
The existence of fraud or the intent to defraud may be
either presumed in accordance with Article 1387 or duly
proved in accordance with the ordinary rules of evidence.
Presumptions of Fraud
The law presumes (disputable presumption) that there is
fraud of creditors in the following cases:
1. Alienations of property by gratuitous title if the debtor
has not reserved sufficient property to pay all his
debts contracted before such alienations;
2. Alienations of property if made by a debtor against
whom some judgment has been rendered in any
instance or some writ of attachment has been issued.
The decision or attachment need not refer to the
property alienated and need not have been obtained
by the party seeking rescission.
Badges of Fraud
The design to defraud may be proved in any other manner
recognized by the law of evidence. The following
circumstances have been denominated by the courts as
badges of fraud.
1. The fact that the cause or consideration of the
conveyance is inadequate;
2. A transfer made by a debtor after suit has been begun
and while it is pending against him;
3. A sale on credit by an insolvent debtor;
4. Evidence of large indebtedness or complete
insolvency;
5. The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
embarrassed financially;
6. The fact that the transfer is made between father and
son, when there are present others of the above
circumstances;
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7. The failure of the vendee to take exclusive possession
of all the property.
------------------------------------------------------------------------------Art. 1389. The action to claim rescission must be
commenced within four years.
For person 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
Article 1389 does not state the prescriptive period of an
action for rescission if the ground is fraud. However, it
would seem that the applicable rule is that the prescriptive
period is still four years but it will be counted from the time
of the discovery of the fraud.
Voidable Contracts
------------------------------------------------------------------------------Art. 1390. The following contracts are voidable or
annullable, even though there may have been no damage
to the contracting parties:
1. Those where one of the parties is incapable of
giving consent to a contract;
2. Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled
by a proper action in court. They are susceptible of
ratification.
------------------------------------------------------------------------------Voidable Contracts
Voidable Contracts – contracts in which all of the
essential elements for validity are present, although the
element of consent is vitiated either by lack of legal
capacity of one of the contracting parties, or by mistake,
violence, intimidation, undue influence, or fraud.
– Voidable contracts are binding until annulled.
Characteristics of Voidable Contracts
1. Their defect consists in the vitiation of consent of one
of the contracting parties;
2. They are binding until they are annulled by a
competent court;
3. They are susceptible of convalidation by ratification or
by prescription;
105
4. Their defect or voidable character cannot be invoked
by third persons.
Voidable and Rescissible Contracts, Distinguished
Voidable Contracts
Rescissible Contracts
As to Character of Defect
Defect is intrinsic because it Defect is external because it
consists of a vice which consists of damage or
vitiates consent
prejudice either to one of
the contracting parties or to
a third person
As to Necessity of Damage or Injury
Damage or injury to a Damage or injury is
contracting party or to a indispensable
third person
is
not
necessary. The contract is
still voidable even without
such damage
As to Basis
The annullability of the The rescissibility of the
contract is based on law. contract is based on equity.
Annulment is not only a Rescission is a mere
remedy but also a sanction remedy.
As to Causes
Different from rescission
Different from annulment
As to Susceptibility to Ratification
Susceptible to ratification
Not
susceptible
to
ratification
As to Persons who may Invoked
Annulment may be invoked Rescission may be invoked
only by a contracting party
by either a contracting party
or by a third person who is
prejudiced
Contracts which are Voidable
1. Those where one of the contracting parties is
incapable of giving consent to a contract;
2. Those where consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud.
------------------------------------------------------------------------------Art. 1391. The action for annulment shall be brought
within four years.
This period shall begin:
In cases of intimidation, violence or undue influence,
from the time the defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery
of the same.
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And when the action refers to contracts entered into by
minors or other incapacitated persons, from the time the
guardianship ceases.
------------------------------------------------------------------------------Prescriptive Period
The action for annulment must be commenced within a
period of four years.
a. If contract refers to one entered into by an
incapacitated person, the period shall be counted
from the time guardianship ceases;
b. If it refers to those where consent is vitiated:
 By violence, intimidation, or undue influence, the
period shall be counted from the time such
violence, intimidation, or undue influence ceases
or disappears;
 By mistake or fraud, the period shall be counted
from the time of the discovery of such mistake or
fraud.
------------------------------------------------------------------------------Art. 1392. Ratification extinguishes the action to annul a
voidable contract.
Art. 1393. Ratification may be effected expressly or
tacitly. It is understood that there is a tacit ratification if,
with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who
has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.
Art. 1394. Ratification may be effected by the guardian of
the incapacitated person.
Art. 1395. Ratification does not require the conformity of
the contracting party who has no right to bring the action
for annulment.
Art. 1396. Ratification cleanses the contract from all its
defects from the moment it was constituted.
------------------------------------------------------------------------------Ratification
Ratification – the act or means by virtue of which efficacy
is given to a contract which suffers from a vice of curable
nullity. Ratification presupposes the existence of a vice in
the contract.
Requisites of Ratification
1. The contract should be tainted with a vice which is
susceptible of being cured;
2. The confirmation should be effected by the person
who is entitled to do so under the law;
106
3. It should be effected with the knowledge of the vice or
defect of the contract;
4. The cause of the nullity of defect should have already
disappeared
Forms of Ratification
Ratification requires no specific form. Hence, it may be
effected expressly or tacitly (impliedly).
Effect of Ratification – Ratification extinguishes the action
to annul the contract. Ratification also cleanses the
contract of its defects from the moment it was constituted.
------------------------------------------------------------------------------Art. 1397. The action for the annulment of contracts may
be instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted;
nor can those who exerted intimidation, violence, or
undue influence, or employed fraud, or caused mistake
base their action upon these flaws of the contract.
------------------------------------------------------------------------------Persons who may Institute the Action
There are two requisites required to confer the necessary
capacity for the exercise of the action for annulment: (1)
that the plaintiff must have an interest in the contract; and
(2) that the victim and not the party responsible for the vice
or defect must be the person who must assert the same.
 Consequently, a third person who is a stranger to the
contract cannot institute an action for its annulment.
Exception: a third person not a party obliged
principally or subsidiarily under a contract may
exercise an action for annulment of the contract if he
is prejudiced in his rights with respect to one of the
contracting parties,a dn can show detriment which
would positively result to him from the contract in
which he has no intervention.
 Also, person capacitated cannot invoke the incapacity
of the person with whom they contracted.
------------------------------------------------------------------------------Art. 1398. An obligation having been annulled, the
contracting parties shall restore to each other the things
which have been the subject matter of the contract, with
their fruits, and the price with its interest, except in cases
provided by law.
In obligations to render service, the value thereof shall be
the basis for damages.
Art. 1399. When the defect of the contract consists in the
incapacity of one of the parties, the incapacitated person
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is not obliged to make any restitution except insofar as
he has been benefited by the thing or price received by
him.
------------------------------------------------------------------------------Effects of Annulment
Annulment of the contract, if the contract has not yet been
consummated, releases the parties from the obligations
arising from the contract.
Obligation of Mutual Restitution
Upon the annulment of the contract:
a. If the prestation consisted in obligations to give, the
parties shall restore to each other the things which
have been the subject of the contract, with their fruits,
and the price with its interest, except in cases
provided by law.
b. If the prestation consisted in obligations to do or not to
do, there will have to be an apportionment of
damages based on the value of such prestation with
corresponding interests.
Rule in Case of Incapacity
The principle of mutual restitution is modified by the rules
under Article 1399 which states that when the defect of the
contract consists in the incapacity of one of the contracting
parties, the incapacitated person is not obliged to make
any restitution except insofar as he has been benefited by
the thing or price received by him.
 Benefit means that there has been a prudent and
beneficial use by the incapacitated person of the thing
which he has received. In order to determine this, it is
necessary to determine his necessities, his social
position as well as his duties as a consequence
thereof.
 However, in the absence of proof, it is presumed that
no benefit has accrued to the incapacitated person.
------------------------------------------------------------------------------Art. 1400. Whenever the person obliged by the decree of
annulment to return the thing cannot do so because it
has been lost through his fault, he shall return the fruits
received and the value of the thing at the time of the loss,
with interest from the same date.
Art. 1401. The action for annulment of contracts shall be
extinguished when the thing which is the object thereof is
lost through the fraud or fault of the person who has a
right to institute the proceedings.
If the right of action is based upon the incapacity of any
one of the contracting parties, the loss of the thing shall
107
not be an obstacle to the success of the action, unless
said loss took place through the fraud or fault of the
plaintiff.
Art. 1402. As long as one of the contracting parties does
not restore what in virtue of the decree of annulment he
is bound to return, the other cannot be compelled to
comply with what is incumbent upon him.
------------------------------------------------------------------------------Effect of Failure to Make Restitution
As long as one of the contracting parties does not restore
what in virtue of the decree of annulment he is bound to
return, the other cannot be compelled to comply with what
is incumbent upon him.
 If the loss is due to the fault of the defendant, he shall
return the fruits received and the value of the thing at
the time of the loss, with interest from the same date.
 If the loss is due to the fault of the plaintiff, the action
for annulment shall be extinguished.
 If the loss is due to fortuitous event, the contract can
still be annulled, but the defendant can be held liable
only for the value of the thing at the time of the loss
without interest. The defendant, not the plaintiff, must
suffer the loss because the defendant was still the
owner of the thing at the time of the loss. The same is
true if it is the plaintiff who cannot return the thing
because it has been loss through fortuitous event.
Unenforceable Contracts
------------------------------------------------------------------------------Art. 1403. The following contracts are unenforceable,
unless they are ratified:
1. Those entered into in the name of another person by
one who has been given no authority or legal
representation, or who has acted beyond his
powers;
2. Those that do not comply with the Statute of Frauds
as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by
action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its
contents:
a. An agreement that by its terms is not to be
performed within a year from the making thereof;
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b. A special promise to answer for the debt, default,
or miscarriage of another;
c. An agreement made in consideration of marriage,
other than a mutual promise to marry;
d. An agreement for the sale of goods, chattels or
things in action, at a price not less than five
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, of such things in
action or pay at the time some part of the
purchase money; but when a sale is made by
auction and entry is made by the auctioneer in
his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale,
price, names of the purchasers and person on
whose account the sale is made, it is a sufficient
memorandum;
e. An agreement for the leasing for a longer period
than one year, or for the sale of real property or
of an interest therein;
f. A representation as to the credit of a third
person.
3. Those where both parties are incapable of giving
consent to a contract.
Art. 1404. Unauthorized contracts are governed by article
1317 and the principles of agency in Title X of this Book.
Art. 1405. Contracts infringing the Statute of Frauds,
referred to in No. 2 of article 1403, are ratified by the
failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefit under
them.
Art. 1406. When a contract is enforceable under the
Statute of Frauds, and a public document is necessary
for its registration in the Registry of Deeds, the parties
may avail themselves of the right under Article 1357.
Art. 1407. In a contract where both parties are incapable
of giving consent, express or implied ratification by the
parent, or guardian, as the case may be, of one of the
contracting parties shall give the contract the same effect
as if only one of them were incapacitated.
If ratification is made by the parents or guardians, as the
case may be, of both contracting parties, the contract
shall be validated from the inception.
Art. 1408. Unenforceable contracts cannot be assailed by
third persons.
------------------------------------------------------------------------------108
Unenforceable Contracts
Unenforceable Contracts – contracts which cannot be
enforced by a proper action in court, unless they are
ratified, because either they are entered into without or in
excess of authority or they do not comply with the statute of
frauds or both of the contracting parties do not possess the
required legal capacity.
Classes of Unenforceable Contracts
1. Contracts entered into in the name of another person
by one without any authority or in excess of his
authority;
2. Those which do not comply with the statute of frauds;
and
3. Those where both of the contracting parties are
legally incapacitated to give consent to a contract.
Characteristics of Unenforceable Contracts
1. They cannot be enforced by a proper action in court;
2. They are susceptible of ratification;
3. They cannot be assailed by third persons.
Unenforceable
and
Rescissible
Contracts,
Distinguished
Unenforceable Contracts
Rescissible Contracts
As to Enforceability in Court
Cannot be enforced by a Can be enforced, unless it
proper action in court
is rescinded
As to Causes
Causes for unenforceability Causes for rescissibility are
are different from causes for different from causes for
rescissibility
unenforceability
As to Susceptibility to Ratification
Susceptible of ratification
Not
susceptible
of
ratification
As to Action by Third Person
Cannot be assailed by third May be assailed by third
persons
persons who are prejudiced
Unenforceable and Voidable Contracts, Distinguished
Unenforceable Contracts
Voidable Contracts
As to Enforceability in Court
Cannot be enforced by a Can be enforced, unless it
proper action in court
is annulled
As to Causes
The
causes
for Causes for voidability are
unenforceability
are different from causes for
different from causes for unenforceability
voidability
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Contracts which are Unenforceable
1. Contracts entered into without or in Excess of
Authority
Contracts entered into in the name of another person
by one who has been given no authority or legal
representation, or one who has acted beyond his
powers are unenforceable. Such contracts shall be
governed by the principles of agency in Title X of the
Civil Code. Hence, the following principles on agency
are applicable:
a. No one may contract in the name of another
without being authorized by the latter or unless
he has a right to represent him. If he is duly
authorized, he must act within the scope of his
powers;
b. A contract entered into in the name of another by
one who has no authority or legal representation,
or who has acted beyond his powers, is
unenforceable;
c. Such contract may be ratified, expressly or
impliedly, by the person in whose behalf it has
been executed, before it is revoked by the other
contracting party.
2. Contracts Infringing the Statute of Frauds
The Statute of Frauds was enacted for the purpose of
preventing frauds. Hence, it should not be made the
instrument to further them.
 The provisions of the Statute of Frauds are
applicable only to executor contracts not to
executed contracts whether totally or partially.
Form Required by the Statute – the only formality
required under the Statute of Frauds is that the
contract must be in writing and subscribed by the
party charged or by his agent.
 “Subscribed” means signed by the party
charged.
 “Party charged” is the party defendant in the
case.
Effect of Non-Compliance – in case of noncompliance with the statute of frauds, the contract is
unenforceable by action. Therefore, what is affected
by the defect of the contract is not its validity, but its
enforceability. (Hence, unenforceable contracts are
actually valid contracts, but they are not binding as
the other party may just deny its existence).
109
Contracts Covered
a. An agreement that by its terms is not to be
performed within a year from the making thereof;
b. A special promise to answer for the debt, default
or miscarriage of another;
Illustration: D borrowed P 500,000.00 from C. In
a separate agreement, it was agreed that G will
pay the debt to C in the event that D cannot pay
the debt. In this case, the agreement with G
(contract of guaranty) must comply with the
requirements of the Statute of Frauds otherwise
the contract of guaranty is unenforceable.
Note: contract of suretyship (a contractual
relation resulting from an agreement whereby
one person, the surety, engages to be
answerable to a third person for the debt, default,
or miscarriage of another known as the principal)
need not comply with the Statute of Frauds
because unlike the guarantor, a surety binds
himself as a principal debtor.
c. An agreement made in consideration of
marriage, other than a mutual promise to marry;
Illustration: marriage settlements and donations
by reason of marriage must comply with the
Statute of Frauds.
d. An agreement for the sale of goods, chattels or
things in action, at a price not less than five
thousand pesos;
e. An agreement for the leasing of property for a
longer period than one year, or for the sale of
real property or an interest therein;
Illustration: A sold to B a parcel of land for P
500,000.00. The sale must comply with the
Statute of Frauds for it to be enforceable
because the sale involves the sale of a parcel of
land which is a real property. It must be noted
however that even if the sale in this case was
done orally and not in writing, the sale is still
valid, but it cannot be enforced by a court action.
f. A representation as to the credit of a third person
Ratification – contracts infringing the Statute of
Frauds are susceptible of ratification. They may be
ratified either (1) by the failure to object to the
presentation of oral evidence to prove the same; or
(2) by the acceptance of the benefits under them.
3. Contracts where both Parties are Incapacitated
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Contracts where both parties are legally incapacitated
are unenforceable. If only one of the parties is
incapacitated, the contract is voidable.
 Contracts of this nature may be ratified expressly
or impliedly.
 Ratification may be effected by the parents or
guardians of the contracting parties, or by the
contracting parties themselves upon attaining or
regaining capacity.
 If the ratification was effected by the guardians or
parents, the contract shall become voidable. If
the ratification was effected by the contracting
parties upon attaining or regaining capacity, the
contract is validated.
Void or Inexistent Contracts
------------------------------------------------------------------------------Art. 1409. The following contracts are inexistent and void
from the beginning:
1. Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public
policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the
time of the transaction;
4. Those whose object is outside the commerce of
men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to
the principal object of the contract cannot be
ascertained;
7. Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right
to set up the defense of illegality be waived.
Art. 1410. The action or defense for the declaration of the
inexistence of a contract does not prescribe.
------------------------------------------------------------------------------Void or Inexistent Contracts
Void or Inexistent Contract – one which lacks absolutely
either in fact or in law one or some of the elements which
are essential for its validity.
Although used interchangeably, void and inexistent
contracts are different from each other. Their distinction is
important especially in connection with the application of
the in pari delicto principle.
110
 Void contracts – those where all of the requisites of a
contract are present, but the cause, object or purpose,
is contrary to law, morals, good customs, public order
or public policy or the contract itself is prohibited or
declared by law to be void. The principle of in pari
delicto is applicable only here. Hence, void contracts
may actually produce legal effects.
 Inexistent contracts – those where one or some or
all of those requisites which are essential for the
validity of a contract are absolutely lacking, such as
those which are absolutely simulated or fictitious.
Inexistent contracts cannot produce any effect
whatsoever.
Void or Inexistent and Rescissible Contracts,
Distinguished
Void or Inexistent
Rescissible Contracts
Contract
As to Nature
As a rule, produces no Valid, unless rescinded
effect.
As to Defect
Defect consists in absolute Defect consists in lesion or
lack in fact or in law of one damage to one of the
or some of the essential contracting parties or to
elements of a contract
third persons
As to Basis
The nullity or inexistence is The rescissible character is
based in law
based on equity
As to Prescriptibility of Action
The action for
the The action for rescission of
declaration of nullity or a contract is prescriptible
inexistence
does
not
prescribe
As to Action by Third Persons
As a rule, the nullity or May be assailed by third
inexistence cannot be persons
assailed by third persons.
But their persons whose
interests
are
directly
affected may invoke the
contracts
nullity
or
inexistence
Void or Inexistent
Distinguished
Void or Inexistent
Contracts
and
Voidable
Contracts,
Voidable Contracts
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As to Nature
As a rule, produces no Binding, unless annulled
effect
As to Causes
Causes for absolute nullity Causes for annullability are
or inexistence are different different from causes for
from causes for the absolute
nullity
or
annullability
inexistence
As to Susceptibility of Ratification
Not
susceptible
of Susceptible of ratification
ratification
As to Prescriptibility of Action
The action for
the The action for annulment of
declaration of nullity or contract is prescriptible
inexistence
does
not
prescribe
As to Action by Third Persons
As a rule, the nullity or The annulability of the
inexistence cannot be contract cannot be invoke
assailed by third persons. third persons
But persons whose interests
are directly affected may
invoke the contracts nullity
or inexistence
Void or Inexistent and Unenforceable Contracts,
Distinguished
Void or Inexistent
Unenforceable Contracts
Contracts
As to Nature
There is, in reality, no There is actually a contract
contract at all
which cannot be enforced
by a court action, unless it is
ratified
As to Causes
Causes for the inexistence Causes
for
the
or absolute nullity are unenforceability
are
different from causes for the different from causes for the
unenforceability of the absolute
nullity
or
contract
inexistence
As to Susceptibility of Ratification
Not
susceptible
of Susceptible of ratification
ratification
As to Action by Third Persons
As a rule, the nullity or The unenforceability of the
inexistence cannot be contract cannot be assailed
assailed by third persons. by third persons
111
But their persons whose
interests
are
directly
affected may invoke the
contracts
nullity
or
inexistence
Contracts which are Void or Inexistent
1. Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public
policy (void);
2. Those which are absolutely simulated or fictitious
(inexistent);
3. Those whose cause or object did not exist at the time
of the transaction (inexistent);
4. Those whose object is outside the commerce of men
(void);
5. Those which contemplate an impossible service
(void);
6. Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained
(void);
7. Those expressly prohibited or declared void by law
(void)
Examples: Articles 1490, 1491, 1689, 1782, 1799,
2035, 2088, and 2130 of the Civil Code, and Article 87
of the Family Code.
Characteristics
1. As a general rule, they produce no legal effects
whatsoever;
2. They are not susceptible of ratification;
3. The right to set up the defense of inexistence or
absolute nullity cannot be waived or renounced;
4. The action or defense for the declaration of their
inexistence or absolute nullity is imprescriptible;
5. The inexistence or absolute nullity of a contract
cannot, as a rule, be invoked by a person whose
interests are not directly affected.
Effects – As far as inexistent contracts are concerned,
they produce no legal effect whatsoever. However, void
contracts where nullity proceeds from illegality of the cause
or object can produce legal effects.
 Nullity of contracts due to illegal cause or object,
when executed (and not merely executory), will
produce the effect of barring any action by a guilty to
recover what he has already given under the contract.
-------------------------------------------------------------------------------
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Art. 1411. When the nullity proceeds from the illegality of
the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and
both shall be prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or
the price of the contract.
This rule shall be applicable when only one of the parties
is guilty; but the innocent one may claim what he has
given, and shall not be bound to comply with his
promise.
Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, the
following rules shall be observed:
1. When the fault is on the part of both contracting
parties, neither may recover what he has given by
virtue of the contract, or demand the performance of
the other's undertaking;
2. When only one of the contracting parties is at fault,
he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault,
may demand the return of what he has given without
any obligation to comply his promise.
------------------------------------------------------------------------------Principle of In Pari Delicto
When the defect of a void contract consists in the illegality
of the cause or object of the contract, and both of the
parties are at fault or in pari delicto, the law refuses them
every remedy and leaves them where they are.
 The principle presupposes that the fault of one party
is more or less equal or equivalent to the fault of the
other party.
 Where the unlawful act constitutes a criminal offense,
the provisions of the Revised Penal Code relative to
the disposal of effects or instruments of a crime shall
be applied.
Effect if only One Party is at Fault
When only one of the contracting parties is at fault:
a. Contract has already been executed
The guilty party is barred from recovering what he has
given to the other party by reason of the contract.
However, the innocent party may demand for the
return of what he has given.
b. Contract merely executory
112
Neither of the contracting parties can demand for the
fulfilment of any obligation arising from the contract
nor be compelled to comply with such obligation.
------------------------------------------------------------------------------Art. 1413. Interest paid in excess of the interest allowed
by the usury laws may be recovered by the debtor, with
interest thereon from the date of the payment.
Art. 1414. When money is paid or property delivered for
an illegal purpose, the contract may be repudiated by one
of the parties before the purpose has been accomplished,
or before any damage has been caused to a third person.
In such case, the courts may, if the public interest will
thus be subserved, allow the party repudiating the
contract to recover the money or property.
Art. 1415. Where one of the parties to an illegal contract
is incapable of giving consent, the courts may, if the
interest of justice so demands allow recovery of money
or property delivered by the incapacitated person.
Art. 1416. When the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is
designed for the protection of the plaintiff, he may, if
public policy is thereby enhanced, recover what he has
paid or delivered.
Art. 1417. When the price of any article or commodity is
determined by statute, or by authority of law, any person
paying any amount in excess of the maximum price
allowed may recover such excess.
Art. 1418. When the law fixes, or authorizes the fixing of
the maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work longer
than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.
Art. 1419. When the law sets, or authorizes the setting of
a minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a lower wage, he shall
be entitled to recover the deficiency.
------------------------------------------------------------------------------Exceptions to the In Pari Delicto Principle
1. Payment of usurious interest.
 The law allows the debtor to recover the interest
paid in excess of that allowed by the usury laws,
with interest thereon from the date of payment
(Note: the effectivity of the usury law is currently
suspended)
2. Payment of money or delivery of property for an illegal
purpose, where the party who paid or delivered
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repudiates the contract before the purpose has been
accomplished, or before any damage has been
caused to a third person.
 The courts may allow such party to recover what
he has paid or delivered, if the public interest will
thus be subserved
3. Payment of money or delivery of property by an
incapacitated person.
 The courts may allow such person to recover
what he has paid or delivered, if the interest of
justice so demands.
4. Agreement or contract which is not illegal per se but is
merely prohibited by law, and the prohibition is
designed for the protection of the plaintiff;
 The plaintiff, if public policy is hereby enhanced,
may recover what he has paid or delivered.
5. Payment of any amount in excess of the maximum
price of any articles or commodity fixed by law;
 The buyer may recover the excess.
6. Contract whereby a labourer undertakes to work
longer than the maximum number of hours fixed by
law;
 The labourer may demand for overtime pay.
7. Contract whereby a labourer accepts a wage lower
than the minimum wage fixed by law.
 The laborer may demand for the deficiency.
------------------------------------------------------------------------------Art. 1420. In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter
may be enforced.
Art. 1421. The defense of illegality of contract is not
available to third persons whose interests are not directly
affected.
Art. 1422. A contract which is the direct result of a
previous illegal contract, is also void and inexistent.
-------------------------------------------------------------------------------
Natural Obligations
------------------------------------------------------------------------------Art. 1423. Obligations are civil or natural. Civil obligations
give a right of action to compel their performance.
Natural obligations, not being based on positive law but
on equity and natural law, do not grant a right of action to
enforce their performance, but after voluntary fulfillment
by the obligor, they authorize the retention of what has
113
been delivered or rendered by reason thereof. Some
natural obligations are set forth in the following articles.
------------------------------------------------------------------------------Natural Obligations
Natural Obligations – obligations based on equity and
natural law, which do not grant a right of action to enforce
their performance, but after voluntary fulfilment by the
obligor, authorize the retention of what has been delivered
or rendered by reason thereof.
– Obligations without a sanction, susceptible of voluntary
performance, but not through compulsion by legal means.
Natural and Civil Obligations, Distinguished
Natural Obligations
Civil Obligations
As to Basis
Based on equity and natural Based on positive law
law
As to Enforceability by Court Action
Not enforceable by court Enforceable by court action
action
Natural and Moral Obligations, Distinguished
Natural Obligations
Moral Obligations
As to Presence of Juridical Tie
There is a juridical tie There is no juridical tie
between the parties which
is, however, not enforceable
by court action
As to Effects of Fulfillment
Voluntary fulfilment by the Voluntary fulfilment of moral
obligor produces legal obligations
does
not
effects which the courts will produce any legal effect
recognize and protect
which courts will recognize
and protect
Reasons for Regulation of Natural Obligations
In all the specified cases of natural obligation recognized
by the Civil Code, there is a moral but not a legal duty to
perform or pay, but the person thus performing or paying
feels in good conscience he should comply with his
undertaking which is based on moral grounds.
 The law then should not permit him to change his
mind and recover what he has delivered or paid; the
law should compel him to abide by his honor and
conscience.
 After all, equity, morality, and natural justice, are the
abiding foundations of all positive law.
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 Furthermore, from the point of view of the payee, the
incorporation of natural obligations into the legal
system becomes imperative.
Natural Obligations Specified by the Civil Code
------------------------------------------------------------------------------Art. 1424. When a right to sue upon a civil obligation has
lapsed by extinctive prescription, the obligor who
voluntarily performs the contract cannot recover what he
has delivered or the value of the service he has rendered.
Art. 1425. When without the knowledge or against the will
of the debtor, a third person pays a debt which the
obligor is not legally bound to pay because the action
thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover
what he has paid.
Art. 1426. When a minor between eighteen and twentyone years of age who has entered into a contract without
the consent of the parent or guardian, after the
annulment of the contract voluntarily returns the whole
thing or price received, notwithstanding the fact that he
has not been benefited thereby, there is no right to
demand the thing or price thus returned.
Art. 1427. When a minor between eighteen and twentyone years of age, who has entered into a contract without
the consent of the parent or guardian, voluntarily pays a
sum of money or delivers a fungible thing in fulfillment of
the obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good
faith.
Art. 1428. When, after an action to enforce a civil
obligation has failed the defendant voluntarily performs
the obligation, he cannot demand the return of what he
has delivered or the payment of the value of the service
he has rendered.
Art. 1429. When a testate or intestate heir voluntarily pays
a debt of the decedent exceeding the value of the
property which he received by will or by the law of
intestacy from the estate of the deceased, the payment is
valid and cannot be rescinded by the payer.
Art. 1430. When a will is declared void because it has not
been executed in accordance with the formalities
required by law, but one of the intestate heirs, after the
settlement of the debts of the deceased, pays a legacy in
compliance with a clause in the defective will, the
payment is effective and irrevocable.
------------------------------------------------------------------------------114
Estoppel
------------------------------------------------------------------------------Art. 1431. Through estoppel an admission or
representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against
the person relying thereon.
Art. 1432. The principles of estoppel are hereby adopted
insofar as they are not in conflict with the provisions of
this Code, the Code of Commerce, the Rules of Court and
special laws.
Art. 1433. Estoppel may in pais or by deed.
------------------------------------------------------------------------------Estoppel
Estoppel – a condition or state by virtue of which an
admission or representation is rendered conclusive upon
the person making it and cannot be denied or disproved as
against the person relying thereon.
Kinds of Estoppel
1. Estoppel in Pais
2. Estoppel by Deed or by Record
3. Estoppel by Laches
Estoppel in Pais (or by Conduct)
Estoppel which arises when one by his acts,
representations, or admissions, or by his silence when he
ought to speak out, intentionally or through culpable
negligence, induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief, as a
consequence of which h would be prejudiced if the former
is permitted to deny the existence of such facts.
Elements
1. One person makes acts, representations, or
admissions, or kept his silence when he ought to
speak out;
2. And such acts, representations, admissions, or
silence, intentional or through culpable
negligence, induces another to believe certain
facts to exist;
3. Such another person rightfully relies and acts on
such belief;
4. Such another person would be prejudiced if the
person who made acts, representations, or
admissions, is permitted to deny the existence of
such facts.
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Types
a. Estoppel by Silence – a type of estoppel in
pais which arises when a party, who has a
right and opportunity to speak or act as well
as a duty to do so under the circumstances,
intentionally of through culpable negligence,
induces another to believe certain facts to
exist and such other relies and acts on such
belief, as a consequence of which he would
be prejudiced if the former is permitted to
deny the existence of such facts.
Illustration: A and B entered into a contract
of sale whereby A agreed to buy from B a
parcel of land of B for P 100,000.00. During
the negotiation as well as when the
agreement for the sale of the land was
reached, C, the true owner of the parcel of
the land was present. However, C merely
kept his silence. In this case, C is precluded
from asserting that the contract is invalid as
he did not consent thereto being the true
owner.
b. Estoppel by Acceptance of Benefits – a
type of estoppel in pais which arises when a
party by accepting benefits derived from a
certain act or transaction, intentionally or
through culpable negligence, induces another
to believe certain facts to exist and such other
relies and acts on such belief, as a
consequence of which he would be
prejudiced if the former is permitted to deny
the existence of such facts.
Estoppel by Deed or by Record
Strictly speaking, estoppel by deed and estoppel record are
two distinct types of technical estoppel.
Estoppel by Deed – a type of technical estoppel by
virtue of which a party to a deed and his privies are
precluded from asserting as against the other party
and his privies any right or title in derogation of the
deed, or from denying any material fact asserted
therein.
Estoppel by Record – a type of technical estoppel by
virtue of which a party and his privies are precluded
from denying the truth of matters set forth in a record
whether judicial or legislative.
115
Estoppel by Judgment – a type of estoppels by
record by virtue of which the party to a case is
precluded from denying the facts adjudicated by a
court of competent jurisdiction. It must not be
confused with res judicata. Estoppel by judgment
bars the parties from raising any question that
might have been put in issue and decided in the
previous litigation, whereas res judicata makes a
judgment conclusive between the same parties as
to the matter directly adjudged.
Estoppel by Laches
Laches – such neglect or omission to assert a right, taken
in conjunction with lapse of time and other circumstances
causing prejudice to an adverse party, as will operate as a
bar in equity.
– in a general sense, is failure to neglect, for an
unreasonable and unexplained length of time, to do that
which, by exercising due diligence, could or should have
been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting a presumption
that the party entitled to assert it has abandoned it or
declined to assert it.
– a type of equitable estoppel which arises when a party,
knowing his rights as against another, takes no step or
delays in enforcing them until the condition of the latter,
who has no knowledge or notice that the former would
assert such rights, has become so changed that he cannot
without injury or prejudiced, be restored to his former
stated.
Basis
The doctrine of laches or of “stale demands” is based upon
grounds of public policy which requires the discouragement
of stale claims and, unlike the statute of limitations, is not a
mere question of time, but is principally a question of the
inequity or unfairness of permitting a right or claim to be
enforced or asserted.
Elements
1. Conduct on the part of the defendant, or of one under
whom he claims, giving rise to the situation of which
complaint is made and for which the complaint seeks
a remedy;
2. Delay in asserting the complainant’s rights, the
complainant having had knowledge or notice, of the
defendant’s conduct and having been afforded an
opportunity to institute a suit;
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3. Lack of knowledge or notice on the part of the
defendant that the complainant would assert the right
on which he bases his suit; and
4. Injury or prejudice to the defendant in the event relief
is accorded to the complainant, or the suit is not held
to be barred.
Application
The doctrine of laches is applicable even in void contracts,
unlike prescription which has no application to void
contracts.
Illustration: A, a non-Christian, sold a parcel of land
to X without executive approval as required by the
Administrative Code. Despite the invalidity of the sale,
A allowed X to enter, possess and enjoy the land in
question without protest. Subsequently, A died.
However, during the 20 years after the death of A, the
successors of A remained inactive without taking any
step to revindicate the property. In this case the
successors cannot any more claim the property on the
ground that the contract between A and X is void.
They are already barred by laches.
Laches and Prescription, Distinguished
Laches
Prescription
Concerned in the effects of Concerned with the fact of
delay
delay
Principally a question of Prescription is a question or
inequity or permitting a matter of time
claim to be enforced, this
inequity being founded on
some changes in the
condition of the property or
the relation of the parties
Laches is not statutory
Prescription is statutory
Laches applies in equity
Prescription applies at law
Art. 1435. If a person in representation of another sells or
alienates a thing, the former cannot subsequently set up
his own title as against the buyer or grantee.
Art. 1436. A lessee or a bailee is estopped from asserting
title to the thing leased or received, as against the lessor
or bailor.
Art. 1437. When in a contract between third persons
concerning immovable property, one of them is misled by
a person with respect to the ownership or real right over
the real estate, the latter is precluded from asserting his
legal title or interest therein, provided all these requisites
are present:
1. There must be fraudulent representation or wrongful
concealment of facts known to the party estopped;
2. The party precluded must intend that the other
should act upon the facts as misrepresented;
3. The party misled must have been unaware of the
true facts; and
4. The party defrauded must have acted in accordance
with the misrepresentation.
Art. 1438. One who has allowed another to assume
apparent ownership of personal property for the purpose
of making any transfer of it, cannot, if he received the
sum for which a pledge has been constituted, set up his
own title to defeat the pledge of the property, made by the
other to a pledgee who received the same in good faith
and for value.
Art. 1439. Estoppel is effective only as between the
parties thereto or their successors in interest.
-------------------------------------------------------------------------------
Laches is not based on Prescription is based on
fixed time
fixed time
------------------------------------------------------------------------------Art. 1434. When a person who is not the owner of a thing
sells or alienates and delivers it, and later the seller or
grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee.
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