Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo TITLE II CONTRACTS

CHAPTER 1 General Provisions Article 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. (1254a) Concept of Contracts - Simply means an agreement or convention - 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 fulfillment of a prestation to give, to do or not to do. Distinguished from other terms Ordinary Contract Parties may be 2 or more persons of the same or different sexes The nature, consequences and incidents of the contract are governed primarily by the agreement of the parties Once the contract is executed, the result is a contract Can be terminated or dissolved by the mere agreement of the parties In case of breach, the usual remedy is for the injured party to institute an action against the other party for damages Marriage It is necessary that the parties must be one man and one woman Governed by law

Once marriage is celebrated, the result is a status Cannot The usual remedy is for the injured party to institute a civil action against the other party for legal separation or a criminal action for adultery or concubinage

The Basic Duties of Persons when entering into Contracts - All men are presumed to be sane and normal and subject to be moved by substantially the same motives. - Men must depend upon themselves upon their own abilities, talents, training, senses, acumen, judgment. - The fact that one may be worsted by another, of itself, furnishes no cause of complain. - There must be, in addition, a violation of law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it. The duty of the Courts in interpreting Contracts - It is not the province of the court to alter a contract by construction or to make a new contract for the parties. - Duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain. Elements of Contracts (1) Essential those without which there can be no contract a. Common present in all contracts, such as the CONSENT of the contracting parties; OBJECT certain which is the subject of the contract; and CAUSE of the obligation which is established. b. Special present only in certain contracts, such as delivery in real contracts or form in solemn ones. c. Extraordinary peculiar to a specific contract, such as price in a contract of sale. (2) Natural those which are derived from the nature of the contract and ordinarily accompany the same. They are presumed by the law, although they can be excluded by the contracting parties if they so desire.

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

(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. Ex. Conditions, terms, modes. Parties to a contract - A person cannot enter into a contract with himself. - However, auto-contract may be created wherein said party merely acts on the name and for the account of two distinct contracting parties. Characteristics of Contracts 1. Obligatory force or character of contracts - Once the contract is perfected, it shall be of obligatory force upon both of the contracting parties - Such contracting parties are bound, not only to the fulfillment of what has been expressly stipulated, but also to all of the consequences thereof. 2. Autonomy of contracts 3. Mutuality of contracts - Contract must be binding upon both parties. - Its validity or compliance cannot be left to the will of one of them. 4. Relativity of contracts - Contracts take effect only between the parties, their assigns and heirs. - They cannot, as a general rule, produce any effect upon third persons, in conformity with the principle of res inter alios acta aliss nege noced prodest. Breach of Contract Defined - 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. Life of Contracts - Generation 1. The preliminary or preparation, conception or generation, which is the period of negotiation, bargaining, ending at the moment of agreement of the parties. - Perfection 1. The moment when the parties come to agree on the terms of the contract - Consummation 1. The fulfillment or performance of the terms agreed upon in the contract. Classification of Contracts 1. According to their relation to other contracts: a. Preparatory a necessary preliminary step towards the celebration of another subsequent contract (partnership, agency) b. Principal those which can subsist independently from other contracts and whose purpose can be fulfilled by themselves (sale, lease) c. Accessory those which can exist only as a consequence of, or in relation with, another prior contract (pledge, mortgage) 2. According to their perfection: a. Consensual those which are perfected by the mere agreement of the parties (sale, lease) b. Real those which require not only the consent of the parties for their perfection, but also the delivery of the object by one party to the other (commodatum, deposit, pledge) 3. According to their form: a. Common or informal those which require no particular form (loan) b. Special or formal those which require some particular form (donations, chattel mortgage) 4. According to their purpose: a. Transfer of ownership (sale) b. Conveyance of use (commodatum) c. Rendition of services (agency)

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino 5. According to their subject matter: a. Things (sale, deposit, pledge) b. Services (agency, lease of services)

De la Salle University College of Law Atty. Chato Gallo

6. According to the nature of the vinculum which they produce: a. Unilateral those which give rise to an obligation for only one of the parties (commodatum, gratuitous deposit) b. Bilateral those which give rise to reciprocal obligations for both parties (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 (sale) b. Gratuitous those in which one of the parties propose to give to the other a benefit without any equivalent compensation (commodatum) 8. According to 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 (lease) b. Aleatory those where each of the parties has to his account the acquisition of an equivalent of his prestation, but his 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 (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 (sale, lease) b. Innominate those which lack individuality and are not regulated by special provisions of law. Article 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. (1255a) Right to Contract - Freedom to contract is both constitutional and a statutory right; therefore, to uphold this right, courts should move with all the necessary caution and prudence in holding contracts void. Limitations - Stipulation, clause, term or condition established by the contracting parties must not be contrary to 1. Law 2. Morals 3. Good customs 4. Public order 5. Public policy Compromise Agreements - A contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. - An agreement between 2 or more persons, who, for preventing or putting an end to a law suit, adjust 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. Article 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. (n) Nominate Contracts - Those which have their own distinctive individuality and are regulated by special provisions of law.

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Innominate Contracts - Those which lack individuality and are not regulated by special provisions of law Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) Article 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. (n) Article 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. (n) Mutuality of Contracts The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. Prohibited by the law from being delegated to one of the contracting parties: 1. The power to determine whether or not the contract shall be valid 2. The power to determine whether or not the contract shall be fulfilled Validity or fulfillment may be left to the will of a third person However, an indispensable requisite 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 fulfillment can be left to chance. Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the 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 fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) Relativity of Contracts General principle of the civil law that a contract can only bind the parties who had entered into it or their successors who have assumed their personality or their juridical position. Such contract can neither favor nor prejudice a third person. Persons bound by contract General rule: contracts can take effect only between the parties, their assigns and heirs. Even though the contract may have been executed ostensibly in the name of another person or entity, it shall produce effect only insofar as the real contracting party is concerned, provided that such fact was known to the other party. An assignment or transfer by a contracting party has the effect of subrogating the assignee to all of the rights and obligations of the assignor. Heirs cannot be charged directly with the payment of such obligations, such obligations must be liquidated in the testate or intestate proceeding for the settlement of the estate of the decedent. It is the estate, rather than the heir, which must be considered as the continuation of the decedents personality. There are other obligations which are not monetary in character and which will, therefor, constitute a part of the inheritance. Such obligations are still chargeable against the heirs, but only to the extent of the value of the property which they may have received from the decedent. Exceptions Rule that an assignee or an heir shall be bound by the terms of a contract is not absolute in character. Rule does not apply if the rights and obligations arising from the contract are not transmissible: 1. By their nature, when special or personal qualification of the obligor constitutes the establishment of the contract; 2. By stipulation of the parties, obligor shall perform an act by himself and not through another; 3. By provision of law, as in the case of those arising from a contract of partnership or of agency.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Effect of contract on third persons General rule: it cannot produce an effect whatsoever as far as third persons are concerned. Contracts voidable character cannot be asserted by one who is not a party to the transaction or his representative. 4 exceptions where a contract may produce effect either directly or indirectly on third persons: 1. Stipulation in favor of a third person; 2. Third person comes into possession of the object of a contract creating a real right; 3. Contract is entered into in order to defraud a third person; 4. Third person induces a contracting party to violate his contract. Stipulations in favor of third persons If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. Beneficial stipulation: 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 1. Stipulation is intended for the sole benefit of the third person 2. Where an obligation is due from the promise to the third person which the former seeks to discharge by means of such stipulation. Requisites for enforcement 1. There must be a stipulation in favor of a third person; 2. Stipulation must be a part, no the whole of the contract; 3. Contracting parties must have clearly and deliberately conferred a favour upon a third person, not a mere incidental benefit or interest; 4. Third person must have communicated his acceptance to the obligor before its revocation; 5. Neither of the contracting parties bears the legal representative or authorization of the third party. Acceptance by the third person or beneficiary does not have to be done in any particular form. It may be done expressly or impliedly.

Test of beneficial stipulation Rely upon the intention of the parties as disclosed by their contract. Article 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. (n) Contracts Creating Real Rights When mortgage is registered in the Registry of Property, the effect of such registration is to create a real right which will be binding against the whole world. Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n) Contracts in fraud of creditors If he is a creditor of one of the contracting parties, and it can be established that the contract was entered into with the intention of defrauding him, he ma ask for its rescission. Article 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) Requisites: 1. Existence of a valid contract 2. Knowledge on the part of the third person of the existence of the contract 3. Interference by the third person without legal justification or excuse. Malice, in some form, is generally implied from the act of interference with contractual relations, and is declared to be an essential ingredient in such cases.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Tests WON an agreement constitutes an undue restraint of trade, and therefore, is contrary to public policy 1. Is there a limitation as to time or place? 2. Is the prohibition or restraint reasonably necessary for the protection of the contracting parties? Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment 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. (1258) Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (n) Perfection of Contracts That moment in the life of a 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: the perfection of a contract is produced by mere consent. Article 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 on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a) Unenforceable contract: cannot be sued upon or enforced, unless they are ratified. Although the contract is unenforceable, it is, however, susceptible of either express or implied ratification by the person in whose behalf it has been executed before it is revoked by the other contracting party. CHAPTER 2 Essential Requisites of Contracts General Provisions Article 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. (1261) Requisites of Contracts in General Essential elements are those without which there can be no contract Natural elements are those which are derived from the very nature of the contract Accidental elements exist only when the contracting parties expressly provide form them Essential Elements Common o Present in all contracts (consent, object and cause) Special o Present only in certain contracts (delivery in real contracts, or form in solemn ones) Extraordinary o Those which are peculiar to a specific contract o Price in a contract of sale. Law imposes the essential elements, presumes the natural and authorizes the accidental; conversely, the will of the contracting parties conforms to the first, accepts or repudiates the second and establishes the third. SECTION 1 Consent

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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 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. (1262a) Concept of Consent Most important element The very heart and soul of contracts The concurrence of the wills of the contracting parties with respect to the object and the cause which shall constitute the contract. Requisites of Consent 1. Consent must be manifested by the concurrence of the offer and the acceptance 2. The contracting parties must posses the necessary legal capacity 3. Consent must be intelligent, free, spontaneous, and real When Contracts are Perfected The moment that there is a manifestation of the concurrence between the offer and the acceptance If acceptance is made by letter or telegram: o Contract is perfected from the moment that the offeror has knowledge of such acceptance Exception: contract is perfected from the moment an answer is made accepting the offer (applies to purely commercial contracts such as joint accounts, maritime contracts, etc.) Manifestation of Consent 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 is such a manifestation of the concurrence of the wills of the contracting parties, the period or stage of negotiation is terminated. Character of Offer and Acceptance Offer: a proposal to make a contract In order to constitute a binding proposal, the offer must be certain or definite. In order that there will be a perfected contract, the acceptance must also be certain or definite. Acceptance must be absolute in character; it must be plain and unconditional. If it involves any new proposal or if it is qualified, it constitutes a counter-offer in which chase it is essential before there can be a perfected contract that there must be a definite and absolute acceptance by the original offeror of such counter-offer. Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is concurrence between the offeror and the acceptance upon the subject matter, consideration and terms of payment a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. Acceptance of complex offers If the offeror proposes to lease one part and to sell another part, acceptance of one by the offeree would ordinarily result in a perfected contract, unless of course, the offeror should have made one offer dependent upon the other. In an offer involving a prospective contract of loan and the mortgage which will secure it, acceptance by the future debtor of the proposed loan alone would not give rise to a perfected contract. Effect of constructive knowledge General rule: what is required by the law is actual knowledge of the acceptance. Mere receipt of the letter or telegram is not sufficient.

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Withdrawal of offer Rule in jurisdiction is that he may still withdraw his offer or proposal so long as he still has knowledge of the acceptance by the offeree. Withdrawal of acceptance The acceptance may be revoked before it comes to the knowledge of the offeror because in such case there is still no meeting of the minds, since the revocation has cancelled or nullified the acceptance which thereby cease to have any legal effect. Article 1320. An acceptance may be express or implied. (n) Form of Acceptance Acceptance may be express or implied. Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (n) Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n) Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) Effect of Death, Civil Interdiction, Insanity, or Insolvency Offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. Conveyed refers to that moment when the offeror has knowledge of the acceptance by the offeree. Article 1324. When the offerer 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. (n) Period of Acceptance: Options If the option is without consideration, the offeror may withdraw his offer by communicating such withdrawal to the offeree at anytime before acceptance; if it is founded upon a consideration, the offeror cannot withdraw his offer. If the option is without a consideration, it is a mere offer to sell which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. There is already a concurrence of both offer and acceptance. Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) Article 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. (n) Article 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. (1263a) Legal Capacity of Contracting Parties Indispensable requisite of consent = essential element of a contract Incapacitated Persons 1. Unemancipated minors; 2. Insane or demented persons; 3. Deaf-mutes who do not know how to write. Second is broad enough to cover state of drunkenness or under a hypnotic spell or who are suffering from any kind of mental incapacity whatsoever.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

The only way one of those enumerated can enter into a contract is to act through a parent or guardian. If this requirement is not complied with, the result is a defective contract. If only one of the contracting parties is incapacitated to give his consent, the contract is voidable. If both of them are incapacitated to give their consent, the contract is unenforceable.

Unemancipated minors Unemancipated minors cannot give their consent to a contract. However, if minor is emancipated by marriage or by voluntary concession, he shall have the power to administer his property, but he cannot borrow money or alienate or encumber real property without the consent of his father or mother, or guardian. Exceptions Unemancipated minors: 1. When it is entered into by a minor who misrepresents his age; 2. When it involves the sale and deliver of necessaries to the minor; 3. When it involves a natural obligation and such obligation is fulfilled voluntarily by the minor, provided that such minor is between 18 and 21 years of age; 4. When it is a marriage settlement or donation propter nuptias, provided the minor is between 20 and 21 years of age, if male or between 18 and 21 years of age if female; 5. When it is a life, health or accident insurance taken on the life of the minor, provided that the minor is 18 years old or more and the beneficiary appointed is the minors estate, or the minors father, mother, husband wife, child, brother, or sister. Effect of misrepresentation Based on the principle of estoppel. Where the minors who entered into the contract have already passed the age of puberty and adolescence in such a way that they could misrepresent and actually did misrepresent themselves as having reached the age of majority, they cannot, upon reaching the age of majority, annul the contract on the ground of minority inasmuch as they are already in estoppel. Well settled principle that misrepresentation by unemancipated minors with regard to their age when entering into a contract shall bind them in the sense that they are estopped subsequently from impugning the validity of the contract on the ground of minority. It is, however, necessary that the misrepresentation must be active, not merely constructive.

Insane or demented persons Include 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 intellectual or sensitive faculties, whether permanent or temporary. Art. 1328, however, provides that a contract entered into during a lucid interval is valid. Deaf-mutes Deaf-mute who knows how to write = valid Deaf-mute who does not know how to write = voidable or unenforceable depending upon whether one or both of the parties are incapacitated Other incapacitated persons Married women of age in cases specified by law; Persons suffering from civil interdiction; Incompetents who are under guardianship. 1. Persons suffering from civil interdiction; 2. Hospitalized lepers; 3. Prodigals; 4. Deaf and dumb who are unable to read and write; 5. Those who are of unsound mind, even though they have lucid intervals; and 6. Those who by reason of age, weak mind, and other similar causes, cannot, without outside aid, take care of themselves and manage their property becoming thereby an easy prey for deceit and exploitation.

Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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. (n) Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (1264) Disqualifications to Contract Sec. 145 of the Administrative Code: no contract relating to real property shall be made with any nonChristian inhabitant of Mindanao and Sulu, unless such contract shall bear the approval of the provincial governor of the province wherein the contract was executed or his representative duly authorized for such purpose in writing endorsed upon it. Insolvency Law: a person who is declared insolvent before he is discharged is prohibited from entering into a contract. Art. 133 of CC: every donation between the spouses during the marriage shall be void. This prohibition does not apply when the donation takes effect after the death of the donor. Neither does this prohibition apply to moderate gifts which the spouses may give each other on the occasion of any family rejoicing. Art. 1490: husband and wife cannot sell property to each other, except: 1. When a separation of property was agreed upon in the marriage settlement; or 2. When there has been a judicial separation of property. Art. 1491: the following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: 1. The guardian, the property of the person or persons who may be under his guardianship; 2. Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; 3. Executors and administrators, the property of the estate under administration; 4. Public officers and employees, the property of the State or any subdivision thereof, or of any GOCC, or institution, the administration of which has been entrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; 5. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon on execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession; 6. Any others specially disqualified by law. Art. 1782: persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership. Distinguished from incapacity to contract A person who is incapacitated can still enter into a contract, but he must do so through his parent or guardian, while one who is prohibited from entering into a particular contract is absolutely disqualified from entering into that contract; Incapacity is based upon subjective circumstances of certain persons which compel the law to suspend for a definite or indefinite period their right to contract, while prohibition to contract, is based upon public policy and morality; A contract entered into by an incapacitated person is merely voidable A contract entered by one against whom a prohibition is direct is void. Article 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a) Vices of Consent Vices of the will: mistake, violence, intimidation, undue influence, and fraud Vices of declaration: all forms of simulated contracts Requisites of consent Intelligent, free, spontaneous, and real. Absence of the first 3 = voidable

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Absence of the 4th = void ab initio or valid depending upon whether the simulation is absolute or relative.

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 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 qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1266a) Mistake Not only as the wrong conception of a thing, but also as the lack of knowledge with respect to a thing. Mistakes which vitiate consent 2 general kinds: mistake of fact and mistake of law General rule: it is only a mistake of fact which will vitiate consent thus rendering the contract voidable. A mistake of law, on the other hand, does not render the contract voidable because of the well-known principle that ignorance of the law does note excuse anyone from compliance therewith. Mistake of law is voidable when there is a mistake on the legal effect of law. Mistake of fact 1. Mistake as to object a. Mistake as to the identify of the thing, 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; 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, provided that the extent or dimension of the thing was one of 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, generically or specifically, from all others, such as when a person purchases a thing made of silver believing that it is made of gold. If the mistake refers only to accidental or secondary qualities, the contract is not rendered voidable. It is important that this class of mistake should be distinguished from a mistake of account or calculation. On the first, there is real mistake as to the extent of the object, on the second; there is only apparent mistake, a mere mistake in mathematical computation. The first is voidable, the second is not. 2. Mistake as to person Mistake with regard to the name of one or both of the contracting parties will not invalidate the contract. Requisites in order that the mistake as to persons shall vitiate consent: a. The mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; b. Such identity or qualification must have been the principal consideration for the celebration of the contract. Article 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. (n) Rule Where a Party is Illiterate Article contemplate a situation wherein a contract has been entered into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Art. 1330 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. Article assumes that the consent of the contracting party imputing the mistake or fraud was given, although vitiated, and does not cover a situation where there is a complete absence of consent.

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n) Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) Mistake of Law 3 requisites 1. Mistake must be with respect to the legal effect of an agreement 2. Mistake must be mutual 3. Real purpose of the parties must have been frustrated Article 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 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. (1267a) Article 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. (1268) Violence External Prevents expression of the will substituting it with a material act dictated by another Intimidation Internal Influences the operation of will, inhibiting it in such a way that the expression thereof is apparently that of a person who has freely given his consent Moral compulsion

Physical compulsion

Requisites of Violence 1. Force employed to wrest consent must be serious or irresistible 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; 2. Evil must be imminent and grave; 3. Evil must be unjust; 4. Evil must be the determining cause for the party upon whom it is employed in entering into the contract. Character of Intimidation One of the contracting parties should be compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property or upon the person or property of his spouse, descendants or ascendants. Presupposes that the threat or intimidation must be actual, serious and possible of realization. Mere knowledge of the severe penalties without any proof of direct acts showing the imminence and gravity of any injury, does not in itself establish intimidation. Distinguished from reluctant consent

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

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. Legally, 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 Age, sex and condition of the person shall be borne in mind Effect of just or legal threat Even if it can be established that the reason or motive of a party in entering into a contract was the threat of the other to proceed against him through the courts, the contract would still be perfectly valid and not voidable. Article 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. (n) 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. Undue Influence which vitiates consent 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 invalidate the contract. Test of Undue Influence WON 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. Article 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. (1269) 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 Frauds Fraud in Perfection of a Contract Employed by a party to the contract in securing the consent of the other party

Fraud in Performance of an Obligation Employed by the obligor in the performance of a pre-existing obligation

Dolo Causante / Causal Fraud (1338) Deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract. Fraud which is serious in character Cause which induces the party upon whom it is employed in entering into the contract Effect is to render the contract voidable

Dolo Incidente / Incidental Fraud (1344) Deceptions or misrepresentations which are not serious in character and without which the other party would still have entered into the contract. Not serious in character It is not the cause Render the party who employed it liable for damages

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Requisites 1. Fraud or insidious words or machinations must have been employed by one of the contracting parties; 2. Fraud or insidious words or machinations must have been serious; 3. Fraud or insidious words or machinations must have induced the other party to enter into the contract; 4. Fraud should not have been employed by both of the contracting parties or by third persons. Nature of Fraud All the thousand and one forms of deception which may delude a contracting party to give his consent, without necessarily constituting estafa or some other offense under our penal laws. Essential that there must be proof of concrete facts constituting the fraud or insidious words or machinations employed It is also essential that such insidious words or machinations must be prior to or contemporaneous with the birth or perfection of the contract. Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) However, the innocent nondisclosure of a fact, when there is no duty to reveal it, does not constitute fraud; consequently, such nondisclosure does not affect the formation of the contract or operate to discharge the parties their agreement.

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) Effect of Exaggerations in Trade When the purchases proceeds to make investigations by himself, and the vendor does nothing to prevent such investigations from being as complete as the former might wish, the purchases cannot later allege that the vendor made false representations to him. One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor as to its character and value, but after he has visited and examined it for himself, and has had the means and opportunity of verifying such statements, cannot avoid the contract on the ground that such statements were false or exaggerated. 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. (n) It is of course elementary that a misrepresentation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground for avoiding a contract as fraudulent.

Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) Article 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. (1270) Magnitude of Fraud It should be serious in character Annulment of a contract cannot be invoked just because of the presence of minor or common acts of fraud whose veracity could easily have been investigated. Annulment cannot 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 It should have induced the other party to enter into the contract.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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. (n) Article 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. (n) Simulation of Contracts Absolute 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 simulate the sale of his properties to a friend in order to prevent their possible attachment by creditors. The apparent contract is not really desired or intended to produce legal effects.

Relative 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.

Intention is determined from the express terms of their agreement as well as from their contemporaneous and subsequent acts.

Effects Absolutely simulated contract = void Relatively simulated contract binds the parties and the parties may recover from each other what they may have given under the contract. 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. The legal presumption is in favor of the validity of contracts. Contracts of Adhesion Terms are prepared by only one party while the other merely affixes his signature signifying his adhesion thereto. Just as binding as ordinary contracts. SC held that while the stipulation proved to be onerous to the petitioners, neither the law nor the courts will extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of it consequences. SECTION 2 Object of Contracts Concept of Object If not the most fundamental, the most indispensable among the requisites of a contract in order to have at least the shadow of a contact. Without a cause an agreement is possible, although inexplicable Without consent it is possible at least to have the appearance of a contract Without an object, there is nothing. Article 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 in cases expressly 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. (1271a) Article 1348. Impossible things or services cannot be the object of contracts. (1272)

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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. (1273) What May Be the Object of Contracts General Rule: all tings or services may be the object of contracts, with the following requisites: 1. Object should be within the commerce of men; 2. Object should be real or possible; 3. Object should be licit; 4. Object should be determinate or at least possible of determination The following cannot be object of contracts: 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; 6. Objects which are not possible of determination as to their kind. Appropriability and Transmissibility The thing, right or service should be susceptible of appropriation It should be transmissible from one person to another Existence of object It should be in existence at the moment of the celebration of the contract, or at least it can exist subsequently or in the future. Things which have perished These things cannot be the object of contracts because they are inexistent. Rule with respect to future inheritance No contract may be entered into with respect to future inheritance. Exceptions: 1. Art. 130: allows the future spouses to give or donate to each other in their marriage settlement their future property to take effect upon the death of the donor and to the extent laid down by the provisions of the civil code relating to testamentary succession. 2. Art. 1080: allows a person to make a partition of his estate by an act inter vivos, provided that the legitime of compulsory heirs is not prejudiced. Impossible things or services If the parties enter into a contract with respect to an impossible thing like a mythical bird or animal or with respect to an impossible thing like a mythical bird or animal or with respect to an impossible service like a trip to some distant planet or galaxy, the contract is void or inexistent. Licitness of object All services which are not contrary to law, morals, good customs, public order and public policy may be the object of a contract. Determinability of object Genus of the object should be expressed although there might be no determination of the individual specie. SECTION 3 Cause of Contracts Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n) Concept of Cause Cause is the why of the contract or the essential reason which moves the contracting parties to enter into the contract. It is the immediate, direct, or most proximate reason which explains and justifies the creation of an obligation. Distinguished from object Cause for each contracting party, is the prestation or promise of a thing or service by the other. Object of the contract is the thing or service itself. Distinguished from motives Cause Direct or most proximate reason of a contract Objective or juridical reason of a contract Is always the same Legality or illegality of the cause will affect the existence or validity of the contract Motives The indirect or remote reasons The psychological or purely personal reasons Differ from each contracting party Legality or illegality of the motives will not affect the existence of the contract Becomes the cause when it predetermines the purposes of the contract

Cause in Onerous Contracts Cause is the prestation or promise of a thing or service by the other. A promise made by one party may be a sufficient cause for a promise made by another party. It is not, therefore, necessary that the cause or consideration should pass from one party to the other at the time of the execution of the contract. Accessory Contracts Cause of the accessory contract is identical with that of the principal contract. (mortgage) 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 can not constituted 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. Cause in Remuneratory Contracts Is the service or benefit which is remunerated. A remuneratory contract then is one in which one of the contracting parties remunerates or compensates the service or benefit rendered or given by the other party, although such service or benefit does not constitute a demandable debt. (legal services) Cause in Contracts of Pure Beneficence Is the mere liberality of the benefactor (pure donation) Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a) Article 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276) Article 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. (1277)
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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. (n) Essential Requisites of Cause 1. Should be in existence at the time of the celebration of the contract; 2. Should be licit or lawful; and 3. Should be true. If there is no cause, it shall not produce any effect whatsoever, it is inexistent or void from the beginning. The same is true if the cause stated in the contract is false.

Effect of lack of cause It shall not produce any effect whatsoever It has been held that if the purchase price in a contract of sale was never in fact paid by the purchaser or vendee to the vendor, the contract is inexistent for all purposes for lack of a cause or consideration. As a matter of fact, even where the contract itself expressly states that the consideration for the sale of a piece of land is only one Peso, it does not follow that the contract or sale is void or inexistent for lack of a cause or consideration. There reason is obvious. There is consideration. The contract may be voidable because of inadequacy of the cause or consideration, but certainly, it is not void or inexistent. Effect of unlawful cause It shall not produce any effect whatsoever; it is void from the beginning Effect of false cause Statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and unlawful. CHAPTER 3 Form of Contracts Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the 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. (1278a) Forms of Contracts; General Rule Whatever may the form be, it shall be obligatory, provided all of 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. Formalities for validity There are certain contracts which the law prescribes forms for their validity: (1) those which must appear in writing; (2) those which must appear in a public document; and (3) those which must be registered. Contracts which must appear in writing, otherwise void 1. Donations of real property whose value exceeds P5,000 2. Sale of a piece of land or any interest therein through an agent; 3. Agreements regarding payment of interest in contracts of loan; no interest shall be due unless it has been expressly stipulated in writing. The validity of the contract of loan, however, is not affected. 4. Antichresis the amount of the principal and of the interest shall be specified in writing.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Contracts which must appear in a public document 1. Donations of immovable property: the acceptance, may be made in the same deed of donation or in a separate public document. If the acceptance is made in a separate public document, the donor shall be notified thereof in an authentic form. 2. Partnerships where immovable property or real rights are contributed to the common fund. Contracts which must be registered 1. Chattel mortgages. 2. Sales or transfers of large cattle. Formalities of enforceability Contracts which are governed by the Statute of Frauds (Art. 1403) Form of Contracts Required by Law 1. Those which are necessary for the convenience of the contracting parties or for the efficacy of the contract 2. Those which are necessary for the validity of the contract 3. Those which are necessary for the enforceability of the contract Article 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. (1279a) Article 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 P500 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. (1280a) Formalities for Efficacy Arts. 1357 and 1358 do not require the execution of the contract either in a public or in a private document in order to validate or enforce it but only to insure its efficacy, so that after its existence has been admitted, the party bound may be compelled to execute the necessary document. 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. From the moment one of the contracting parties invokes the provisions of Arts. 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. Art. 1357 does not require that the action to compel the execution of the necessary document must precede the action upon the contract. As a matter of fact, both actions may be exercised simultaneously. CHAPTER 4 Reformation of Instruments (n) Article 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,

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

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 contact are not expressed in the instrument purporting to embody their agreement by mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument so that such true intention may be expressed. Requisites: 1. There must be a meeting of the minds of the contracting parties; 2. Their true intention is not expressed in the instrument; 3. Such failure to express their true intention is due to mistake, fraud, inequitable conduct or accident. Rationale of doctrine Based on justice and equity Equity orders the reformation of an instrument in order that the true intention of the contracting parties may be expressed. The Courts do not attempt to make another contract for the parties. The rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. Distinguished from annulment of contracts Action for reformation of an instrument: presupposes a perfectly valid contract in which there has already been a meeting of the minds of the contracting parties. Action for annulment of a contract: based on a defective contract in which there has been no meeting of the minds because the consent of one or both of the contracting parties has been vitiated. Article 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. Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. Article 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. Article 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. Article 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. Article 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. Article 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. Article 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Article 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.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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 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. It is accorded inordinate vigilance and scrutiny by the courts in order to shield the unwary from deceptive schemes contained in ready-made covenants. Contracts of Credit Cards Contract of adhesion Court will not hesitate to rule out blind adherence to such contracts if they prove to be too one-sided under the attendant facts and circumstances. CHAPTER 5 Interpretation of Contracts Article 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. (1281) Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (1282) Primacy of Intention of Parties 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. As a rule, in the construction and interpretation of a document the intention of the parties must be sought. This is the basic rule in the interpretation of contracts because all other rules are but ancillary to the ascertainment of the meaning intended by the parties. When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. It is a rule that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. When the words of the contract are clear and can easily be understood, there is no room for construction. How to judge intention Their contemporaneous and subsequent acts shall be principally considered. General rule: documents are interpreted in the precise terms in which they are expressed, but the courts, in the exercise of their sound discretion, are called upon to admit direct and simultaneous circumstantial evidence necessary for their interpretation with the purpose of making the true intention of the parties prevail. Article 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. (1283) Article 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. (1284)

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Article 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. (1285) Article 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. (1286) Article 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. (1287) Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. (1288) Article 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. 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. (1289) Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. (n) CHAPTER 6 Rescissible Contracts Classes of Defective Contracts (RVUI) 1. Rescissible Contracts 2. Voidable Contracts 3. Unenforceable Contracts 4. Void or Inexistent Contracts Essential Features Feature
Defect

Rescissible
Damage or injury to one of the parties or third persons

Voidable
Vitiation of consent or legal incapacity of one of the parties

Unenforceable
Entered in excess of authority, does not comply with Statute of Frauds, or both contracting parties are legally incapacitated Cannot be enforced by a proper action Corresponding action for recovery may prescribe

Void or Inexistent
Essential requisites of a valid contract are lacking

Effect Prescriptibility of Action or Defense

Valid and enforceable until rescinded Action for rescission may prescribe

Valid and enforceable until annulled Action for annulment may prescribe

Susceptibility of Ratification Who may Assail

Not susceptible Contracting parties and third persons who are prejudiced Directly only

Susceptible Contracting parties only Directly or collaterally

Susceptible Contracting parties only

Do not produce any legal effect Action for declaration of nullity or defense of nullity or inexistence does not prescribe Not susceptible Contracting parties and third person who is directly affected Directly or collaterally

How to Assail

Directly or collaterally

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. Rescissible Contracts in General All of the essential requisites of a contract exist and the contract is valid By reason of injury or damage to either contracting parties or third persons, the contract may be rescinded Rescinded by proper action for rescission Direct action for rescission and cannot be attacked collaterally

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Characteristics 1. Defects consists in injury or damage 2. Valid before rescinded and are legally effective 3. Attacked directly 4. Attacked only by either contracting parties or third persons who have been injured or defrauded 5. Susceptible of convalidation only be prescription and ratification. Concept of Rescission Remedy granted by law Securing the reparation of damages Restoration of things to their condition prior to the contract Distinguished from Resolution Who may institute action Causes Rescission contracting parties and affected third persons Several causes: lesion, fraud, and others expressly specified by law No power of the courts to grant an extension of time for performance as long as there is a ground for rescission Any contract whether unilateral or reciprocal Resolution Only by the parties to the contract Only ground: failure of the parties to comply with what was incumbent upon him Courts have directionary power to grant an extension as long as there is just cause Only reciprocal contracts

Power of the Courts

Contracts which may be rescinded or resolved

Distinguished from Rescission by Mutual Consent Causes of rescission Laws applicable Effects Aquino vs. Tanedo o Aquino purchased some lands from Tanedo. After some time, the parties decided to rescind the contract and return the land and the amount paid for respectively. Question now is whether or not plaintiff is obliged to return to the defendant the products of the land which is he has collected. No. The rescission done by the parties here is of mutual consent which serves only to dissolve a previous agreement and not by rescission as a remedy to damages and injury. Art. 1381. The following contracts are rescissible: 1) Those which are entered into by the guardians whenever the wards 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; 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 or rescission. Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. Contracts in Behalf of Ward Entered into by guardians whose wards they represent suffer legion or damage more than one-fourth of the value of the things which are the object of the contract Guardian entering into a contract with respect to the property of his ward must secure the approval of a competent court Property is worth more than Two Thousand pesos (P2000)
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Judicial approval is indispensible without judicial approval, the contract is unenforceable and not rescissible However, if the guardian acts within his powers or as an administrator of such properties, express judicial approval is not necessary and the contract is rescissible

Contract in Behalf of Absentees Entered into by absentees if the latter suffer the lesion or damage more than one-fourth of the value of the thing which is the object of the contract Not rescissible if they have been approved by the courts. Powers of a legal representative and guardian are the same thus same principles apply Before a contract entered into by a guardian or legal representative can be rescinded, the following requisites apply: 1. Entered into by a guardian or legal representative 2. Suffered lesion of more than one-fourth of the value of the property 3. Entered into without judicial approval 4. No other legal means for reparation for lesion 5. Person bringing the action must be able to return whatever he may be obliged to restore 6. Object of the contract must not be legally in the possession of a third person who did not act in bad faith Note: If the object is in the possession of a third person who did not act in bad faith, the remedy available to the person suffering the lesion is indemnification for damages and not rescission. Contracts in Fraud of Creditors Personal Right Fraud of creditors o When the creditors cannot claim in any manner what is due to them Remedy afforded to a creditor after he has exhausted all efforts to claim what is rightfully his Requisites before rescission: 1. Credit existing prior to the celebration of the contract 2. Fraud, or intent to commit fraud, to the prejudice of the creditor seeking rescission 3. Creditor cannot, in any legal manner, collect his credit 4. Object of the contract must not be legally in the possession of a third person who did not act in bad faith Note: If object is legally in the possession of a third person who did not act in bad faith, the remedy available to the creditor is to proceed against the person who caused the loss for damages. Accion Pauliana Action to rescind those contracts undertaken in fraud of creditors Must exist prior to the fraudulent alienation date of judgment of enforcing is immaterial Judgment is merely declaratory with retroactive effect to the date when the credit was constituted General Rule: Rescission requires existence of creditors at the time of fraudulent alienation. Without prior existing debt, there can be no injury or fraud. Requisites: 1. Credit must exist prior to alienation 2. Debtor made subsequent contract conveying patrimonial benefit to a third person 3. Creditor has no other legal remedy to satisfy his claim 4. Act being impugned is fraudulent 5. Third person who received the property conveyed, if done by onerous title, is an accomplice to the fraud Contract Referring to Things Under Litigation Real Right 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

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

There must be an annotation at the back of the title of a property under litigation to inform the parties or whoever is interested in the property that said property is under litigation Purpose is to secure the possible effectivity of a claim Remedy of rescission is made available to a stranger to the contract

Contracts by Insolvent Payments made in state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected are rescissible Requisites: 1. Payment was made in state of insolvency 2. Obligation must have been one which the debtor could not be compelled to pay at the time such payment was effected Basis: fraud Insolvency: financial situation of the debtor by virtue of which it is impossible for him to fulfill his obligations. Judicial Declaration of Insolvency is not necessary Obligations include those with a term, a suspensive condition, and even void and natural obligations as well as those condoned or have prescribed. Priority of dates between two debts: o Obligation with a period became due before the obligation to the creditor seeking rescission became due, the latter cannot rescind the payment even if such payment was made before the expiration of the period. o Obligation with a period became due after the obligation to the creditor seeking the rescission became due, then the latter can rescind the payment. Art. 1383. The action for rescission is subsidiary; it can not be instituted except when the party suffering damage has no there legal means to obtain reparation for the same. Subsidiary Character of Action Action of rescission is subsidiary cannot be instituted except when the party suffering damage has no other legal means to obtain reparation Party must have exhausted all other means before availing of this remedy Parties Who May Institute Action 1. Person who is prejudiced 2. Representatives 3. Heirs May do so as a representative of the person who suffers from lesion or of the creditor who is defrauded Right to the legitime may be defeated by fraudulent contracts, and are superior to the will of those bound to respect them. 4. Creditors by virtue of subrogatory action defined in Article 1177 of the Code. Art. 1384. Rescission shall be only to the extent necessary to cover the damage caused. Extent of Rescission Primary purpose of rescission is reparation for the damage or injury which is suffered by either parties or a third person Does not necessarily have to be total in character, may also be partial Rescission is only 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 the rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are 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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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Effect of Rescission in Case of Lesion Applicable only to rescissory actions on the ground of lesion and not to actions on the ground of fraud Fraud: No obligation on the part of the plaintiff-creditor to restore anything since he has not received anything After rescission on the ground of lesion obligation on the part of both contract parties to return to the other the object of the contract, including fruits or interests Rescission is not possible unless he who demands it can return whatever he may be obliged to restore consideration received should be refunded If the plaintiff cannot refund the amount including interest, the action will certainly fail because of positive statutory law Fruits of the Thing natural, industrial, civil fruits, and other accessions obtained by the thing Interest legal interest Rules on possession is applied with regard to restoration of the fruits concerned. Good or bad faith is important to assess the fruits or the value thereof which must be returned Effect of Rescission Upon Third Persons Rescission shall not take place when the object of the contract is legally in the possession of a third person who did not act in bad faith. Requisites: o Thing must be in legal possession of a third person o Third person did not act in bad faith Principle of possession of moveable property acquired in good faith is equivalent to a title For immovable properties, it is indispensible that the right of the third person be registered or recorded in the proper registry before it can be legally said to be in his possession or to its equivalent action producing the same effect before he can be protected by the law If the realty that has been transferred has not been registered in the proper registry, he cannot be protected against the effects of a judgment rendered in the action for rescission Sikatuna vs. Guevara o Jacinto and Palma y Hnos leased a parcel of land to Guevara, the lessee, with an option to buy should they, the lessors, fail to exercise such right within a period of one year. The lessors did not exercise their right to purchase after said period which caused the lessee to offer to purchase the lot. The lessors declined the offer causing Guevara to bring an action to court to compel them to sell. No notice of commencement was filed with the office of the Register of Deeds. During the case, the lessors sold the land to Sikatuna and the sale was recorded. Subsequent judgment was rendered in favor of Guevara but not executed since the land was already legally sold. Can the contract of sale be rescinded between Sikatuna and lessors since the land purchased was under litigation and was sold without the approval of the litigants? No. The land was acquired in good faith thus cannot be rescinded. Note: Remedy for such a situation is to file an action for indemnity for damages against the person who caused the loss. May be direct against the guardian, representative of the absentee or litigant who transferred the thing. May also be filed against a third person who acted in bad faith. Art. 1386. Recission referred to 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 ben obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

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, du to any case, 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 Requisites need to be established for rescission of contract on the ground of fraud. Fraud may be presumed or proven. Presumptions of Fraud Alienations of property by gratuitous title o Debtor has not reserved sufficient property to pay of all debts contracted before alienation Alienations of property by onerous title o Made by any debtor with judgments against him or has some writ of attachment issued o Writ of attachment need not refer to the alienated property o Presumptions Intent to circumvent the law Prevent the judgment creditor from seizing the property Note: When no preliminary attachment exists against the debtor, the presumption is not applicable. Notes: Attachment to put a defendants property under the jurisdiction of the court. o Real Property annotation at the back of the title o Movable Property put in the possession of the court pending the case Mere pendency of the case, when a defendant sells his property, will not give rise to the presumption of fraud Cabaliw vs. Sadorra Badges of Fraud Design to defraud creditors may be proven in other manners. Test for Existence of Conveyance of Fraud (Badges of Fraud) 1. Cause or consideration is inadequate. 2. Transfer made by debtor after suit has begun and while it is pending against him 3. Sale on credit by an insolvent debtor 4. Evidence of large indebtedness or insolvency 5. Transfer of all or nearly all property by a debtor, especially when insolvent 6. Transfer is made between father and son, attended by the above circumstances 7. Failure of the vendee to take exclusive possession of all the property Acquisition by Third Person in Good Faith If the property acquired by a purchaser is in good faith and for value, the acquisition is not fraudulent Right of purchaser over property is legal and superior to any other person, even against the creditor who is prejudiced in the conveyance. Not rescissible Acquisition by Third Person in Bad Faith Contract is rescissible Creditor who is prejudiced can proceed after the property. If the acquirer in bad faith cannot return the property, he shall indemnify the creditor for any damages incurred by him. In case of multiple acquisitions, the first acquirer in bad faith shall be liable first and so on. Art. 1389. The action to claim rescission must be commence within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the formers incapacity, or until the domicile of the latter is known.
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Prescriptive Period General Rule: action for rescission of a contract must be done in within four years. Counted from: o Ward termination of the incapacity o Absentee knowledge of domicile CHAPTER 7 Voidable Contracts Voidable Contracts in General All essential elements are present but consent is vitiated by: o Lack of legal capacity o Mistake o Violence o Intimidation o Undue Influence o Fraud Binding until annulled by a competent court Two alternatives to invoke voidable character: o Attack its validity o Convalidate it through ratification or prescription Validity may be attacked: o Directly Proper action Annulment of a contract o Indirectly As a defense Annulability or relative nullity Characteristic 1. Defect: vitiation of consent of one of the contracting parties 2. Binding until annulled 3. Susceptible of convalidation by ratification or prescription Distinguished from Rescissible Contracts (will be asked in the finals) Voidable Rescissible Defect is intrinsic vitiation of consent Defect is external damage or prejudice to either one of the contracting parties or a third person Voidable even if there is no damage or Required that there be damage or prejudice prejudice against either parties or third person Annulability is based in law not just a Rescissibility is based on equity mere remedy but a sanction public interest remedy private interest Causes for annulment are different from the causes of rescission Can be ratified Cannot be ratified Annulment may be invoked only by a Rescission may be invoked by either contracting party contracting party or prejudiced third person 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.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Contracts which are Voidable Voidable Contracts affected by: o Legal Incapacity Unemancipated Minors Insane or demented persons, and deaf-mutes who do not know how to write (Art. 1327) Entered into in a state of drunkenness or hypnotic spell (Art. 1328) Those under Art. 1327 that are subject to modification as determined by law and is to be seen as without prejudice to special disqualifications (Art. 1329) o Mistake o Violence o Intimidation o Undue Influence o Fraud Even if there are no damages to either parties the contract is still voidable Even if contract has been consummated or is merely executory is immaterial; it can always be annulled by proper action. 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. And when the action refers to contracts entered into by minors or incapacitated persons, from the time the guardianship ceases. Prescriptive Period Action must be commenced within a period of four years of contracting the agreement. Contracts by Incapacitated Persons o Counted from when the guardianship ceases Contracts where there is vitiated consent by violence, intimidation, or undue influence o Counted from the time such factors disappears Contracts where consent is vitiated by mistake or fraud o Counted form the time of the discovery of the fraud If the action is not commenced within the prescriptive period, the right of the party to institute the action shall have prescribed and have ratified the contract. Art. 1392. Ratification extinguishes 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. Concept of Ratification Extinguishes action for annulment of a voidable contract. Also known as confirmation The act or means that gives efficacy to a contract that suffers a vice of curable nullity. Requisites of Ratification (VEKD) 1. Contract must be tainted with a vice that is susceptible to being cured
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Confirmation presupposes the existence of a curable vice in the contract. 2. Person ratifying the contract must be entitled by law to do so Arts. 1394 and 1395 o Incapacitated person after attaining or regaining capacity or by his guardian if capacity is not attained o Mistake, violence, intimidation, undue influence, fraud only by innocent party. 3. Effected with knowledge of the vice or defect Confirmation is a free and intelligent act o Same conditions as consent (freedom, knowledge, and clarity) o May be invalidated by mistake, violence, intimidation, undue influence, or fraud Note: If the contract has several vices like mistake and fraud, the innocent party may ratify the contract if his knowledge is only to the extent of mistake, but it does not extinguish his right to annul the contract if he finds out that there was also fraud. 4. Cause of nullity should have already disappeared. If the contract is confirmed while the cause of nullity still exists, it shall also suffer the same defect as the contract. Not applicable to contracts entered into by incapacitated persons while the incapacity exists, the guardian can confirm the contract.

Forms of Ratification No special form May be effected in two ways: o Expressly Having knowledge of the vice, the person who has the right to invoke it declares his desire to convalidate the contract Renounces his right to annul the contract o Tacit After the cause of the nullity ceases, the person who has the right to invoke it does an act which implies his intention to waive his right. Effects of Ratification Extinguishes action to annul the contract Cleanses the contract from defect 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. Who May Institute Requisites: o There must be an interest in the contract o Victim of the vice or defect must institute the action Based on the principle of equity is afforded to those who come to court with clean hands. Third person cannot institute the action for annulment. o Exception: person who is not a party to the contract may institute an action for annulment if: He is prejudiced in his rights with respect to one of the contracting parties; and He can show proof of his supposed detriment from the contract in which he is not a party of. 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.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Art. 1399. When the defect of the contract consists in the incapacity of one of the 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. Effects of Annulment If the contract has not been consummated release the parties from the obligations If the contract has been consummated rules in Arts. 1398 to 1402 shall govern. Obligation of Mutual Restitution Upon annulment of the contract: o Obligation to give Restore to each other the things which have been the subject matter of the contract with its fruits and the price with its interest except for cases provided by law. o Obligation to do or not to do Apportionment of damages based on the value of the prestation with interest Should be restored to their original position by mutual restitution Rules in Case of Incapacity Applicable only to nullity effected by the incapacity of one of the parties o Therefore, incapacitated person is not obliged to make any restitution except in cases that he has benefited by the thing or price received by him. Benefit sufficient that there was prudent and beneficial use of the thing by the incapacitated person o Important to know his necessities, social position and duties as a consequence to others. o There is benefit if the thing received is used for food, clothing, shelter, health and other things that are similar in character. o Proof of the benefit must be given by the capacitated person. o In the absence of such proof, it will be presumed that there was no such benefit accrued to the incapacitated person. Not applicable when the incapacitated person can still return the thing received o Must return the portion that remains in his possession upon attaining capacity. o After attaining capacity, fails to ask for annulment and tool part of the consideration, it is an implied ratification or confirmation. Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not 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 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 Cannot return the thing due through his fault (lost) o Return fruits received and the value of the thing at the time of the loss with interest from the same date. Thing is lost through fraud or fault of the person who has the right to institute the action o Right to institute action for annulment is extinguished. o Exception: If the right of action is based on incapacity, the loss is not an obstacle to the success of the action unless the loss is due to fault or fraud of the incapacitated person. Where Loss is Due to Fault of the Defendant

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Art. 1400 is applicable when the los of the thing is due to the fault of the party whom the action for annulment may be instituted against (defendant) o Return fruits and the price of the thing with interest. Art. 1401 applies when the loss is on the part of the plaintiff or the person who has the right to annul the contract (plaintiff) Note: Loss of the thing due by the defendant shall not extinguish the action for annulment. Difference from ordinary annulment is that the defendant can only be compelled to pay the value of the thing at the time of the loss.

Where the Loss is Due to Fault of Plaintiff If the thing due is lost due to fraud or fault of the plaintiff, the action for annulment shall be extinguished. Modes where such action may be extinguished o Prescription o Ratification o Loss of the thing due by the plaintiff through fraud or fault Where the Loss is Due to a Fortuitous Event Articles 1400 to 1401 is silent on the effect of fortuitous events General principle regarding the effects of fortuitous events may apply. If the defendant loses the thing due through a fortuitous event: o Contract may still be annulled o Defendant is held liable only for the value of the thing at the time of the loss but without interest. o Principle: defendant was the one who suffered as he was the owner of the thing when it was lost due to a fortuitous event so he is not made to pay the interest. If the plaintiff loses the thing due through a fortuitous event: o Contract may still be annulled o Plaintiff is held liable only for value of the thing at the time of the loss but without interest. CHAPTER 8 Unenforceable Contracts Unenforceable Contracts in General Those that cannot be enforced by a proper action in court unless ratified. Entered into without or in excess of authority Did not comply with the statute of frauds Both of contracting parties did not have required legal capacity Degree of effectiveness is between void and voidable contracts Classes (ASL) 1. Entered into in the name of another person by one without or in excess of authority to do so Absolutely no consent from the person whose name appears in the contract 2. Those that did not comply with the Statute of Frauds No writing, note, or memorandum to prove the contract 3. Both parties are legally incapacitated. Consent is vitiated by legal capacity of both the contracting parties First two are special types of void contracts o Susceptible of ratification Characteristics Cannot be enforced by a proper action in court Susceptible of ratification Cannot be assailed by a third person

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino Distinguished from a Rescissible Contract Unenforceable Cannot be enforced by a proper action in court

De la Salle University College of Law Atty. Chato Gallo

Rescissible Can be enforced unless rescinded

Both have different causes for defect Susceptible to ratification Not susceptible to ratification Cannot be assailed by third persons May be assailed by third persons who are prejudiced Distinguished from Voidable Contracts Unenforceable Voidable Cannot be enforced by a proper action in court Can be enforced unless annulled Both have different causes for defect **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 Statue 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) b) c) d) An agreement that by its terms is not to be performed within a year from the making thereof; A special promise to answer for the debt, default, or miscarriage of another; An agreement made in consideration of marriage, other than a mutual promise to marry; 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 the 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 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. Contracts Without or In Excess of Authority Contracts entered into in the name of another person by: o Those who have been given no authority or legal representation o Those who acted beyond his powers Such contracts shall be governed by Art. 1317 and the principles of agency in Title X of the Code. Following principles are applicable: 1. No one may enter a 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. 2. Contracts entered into without or in excess of authority given are unenforceable. 3. Such contracts may be ratified, expressly or impliedly, by the person whose name appears in the contract before the other party revokes it. Confirmation and ratification are not interchangeable o Confirmation Designate the act by which a voidable contract is cured of its vice or defect

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino o

De la Salle University College of Law Atty. Chato Gallo

Ratification Act by which a contract entered into by a person in behalf of another who has no authority or acted in excess of it is cured of its defect. Act of validating any kind of defective contract. Under the old law: Recognition Act where a defect is cured Oral agreement to a written one Private instrument is converted to a public instrument

Contracts Infringing Statute of Frauds Unenforceable due to noncompliance with the Statute of Frauds Essentially a rule of substantive law Purpose of Statute Enacted for preventing frauds Should not be made instrument to further them. Form Required by Statute Only formality required is that the contract or agreement be in writing and subscribe by the party charged or his agent. Note: Telegram advising a person about a verbal promise for the sale of a land is not a sufficient memorandum. Effect of Noncompliance with Statute Contract or agreement is unenforceable by action. Evidence of the agreement cannot be received without the writing or secondary evidence of its contents Enforceability is affected by the defect of the contract or agreement Statute of Frauds provides the method by which the contracts enumerated therein may be proved. Does not declare contracts invalid because they are not reduced to writing Contract exists and is valid even without necessary form Noncompliance with the requirement means that no action can be enforced unless the requirement is complied with Form is required for evidential purposes If parties permit a contract to be proved without objection then it is as if the contract has complied with the statute. Contracts Covered by Statute 1. An agreement that by its terms is not to be performed within a year from the making hereof. There must be no action from either side within a year Those acts which are to be fully performed by one side within a year are taken out of the operation of the statute. Hence if one of the parties has complied with the agreement within the year of the obligation, the other party cannot avoid the fulfillment of acts incumbent upon him by invoking the Statute of Frauds o Statute aims to prevent fraud and not to protect it 2. Special promise to answer for the debt, default or miscarriage of another. The promise mentioned in the above must be collateral, not independent or original. Test: promise must be merely a surety and not one that makes the other party primarily liable. Promise must be in writing. 3. An agreement made in consideration of marriage other than a mutual promise to marry. Marriage settlements and donations by reason of marriage are regulated by the Statue of Frauds. 4. An agreement for the sale of goods, chattels or things in action, at a price not less than Five hundred pesos (500). 5. An agreement for the leasing of real property for a longer period than on year, or for the sale of real property or an interest therein.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

An agreement for the leasing for a period longer than one year is unenforceable unless the same, or some note or memorandum thereof, be in writing and subscribed by the party charged, or by his agent.

Effect of Performance of Contract Rule: Statue of Fraud is applicable only to those contracts which are executor and not to those which have been consummated either totally or partially. Basis: in such cases, there is already ratification by acceptance of benefits. Ratification Contracts infringing the Statute of Frauds are susceptible of ratification. May be ratified by: o Failure to object to the prestation of oral evidence to prove the same o By acceptance of benefits under then Contracts where both Parties are Incapacitated Unenforceable If only one of the parties are incapacitated voidable May be ratified expressly or impliedly Ratification may be effected by parents or guardians of the contracting parties o Ratification by parent or guardian of one of the contracting parties or by the incapacitated person himself upon attaining capacity rules on voidable contracts o Ratification by parents or guardians of both parties or by both incapacitated persons after attaining capacity contract shall be validated from its inception 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 benefits under them. Art. 1406. When a contract is enforceable under the Statue 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 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 inception. Art. 1408. Unenforceable contracts cannot be assailed by third persons. CHAPTER 9 Void or Inexistent Contracts Void and Inexistent Contracts in General Those which lacks absolutely either in fact or law one or some of the essential elements for validity Contrary to laws, public morals, good customs, public order, policy or declared by law to be void or invalid Void Inexistent Requisites are present but are contrary to law, One or some of the essential requisites are public morals, public order, or public policy absolutely lacking In pari delicto* is applicable neither party In pari delicto is not applicable open to may be heard to invoke its unlawful character attack even by the parties thereto as a ground for relief May produce legal effects Does not produce any legal effects
*in equal fault

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino Distinguished form Rescissible Contracts Void or Inexistent No effect even if it is not set aside by a direct action Defect: absolute lack in fact or law of the essential requisites Nullity or inexistence is based on law Sanction Public interest Action is imprescriptible Cannot be assailed by third persons

De la Salle University College of Law Atty. Chato Gallo

Rescissible Valid unless rescinded Defect: in lesion or damage to one of the contracting parties Rescissibility is based on equity Remedy Private interest Action is prescriptible May be assailed by third persons

Distinguished from Voidable Contracts Void or Inexistent Voidable No effect even if it is not set aside by direct Binding unless annulled action Causes for the inexistence or absolute nullity are different from the causes of annulability or relative nullity Not susceptible of ratification Susceptible of ratification Action for declaration of nullity is Action for annulment of contract is prescriptible imprescriptible Defense of inexistence or absolute nullity is Defense for annulability is not available to third available to third persons persons Distinguished from Unenforceable Contracts Void or Inexistent No contract

Unenforceable Contract is unenforceable by a court action unless ratified Causes for inexistence or absolute nullity are different from the causes of the unenforceability of contracts Not susceptible to ratification Susceptible to ratification Can be assailed by third persons who are Cannot be assailed by third persons directly affected 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. Contracts which are Void or Inexistent Void Contracts o Cause, object or purpose is contrary to law, morals, good customs, public order or public policy o Object is outside the commerce of men o Contemplates an impossible service o Intention of the parties relative to the principal object of the contract cannot be ascertained o Expressly prohibited or declared void by law Inexistent Contracts o Absolutely simulated or fictitious o Cause or object did not exist at the time of the transaction
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Other similar contracts o Direct results of previous illegal contracts o No concurrence between the offer and accept with regard to the object and cause o Do not comply with the required form when such form is essential for its validity o No. 7 in the enumeration of Article 1409 (those expressly prohibited or declared void by law) is broad enough to include other contracts which are not included in the enumeration

Characteristics 1. Produce no legal effects (quod nullum est nullum producit effectum) 2. Not susceptible to ratification 3. Right to set up the defense of inexistence or absolute nullity cannot be waived or renounced. 4. Action or defense for the declaration of their inexistence or absolute nullity is imprescriptible. 5. Inexistence or absolute nullity of a contract cannot be invoked by a third person whose interests are not directly affected. Effects Inexistent contracts have no effect When executed, nullity of contracts due to illegal cause or object will produce the effect of barring any action by a guilty party to recover what he has already given under the contract. A Void Contract Cannot be Ratified Cannot validate an invalid act No ratification even through an amicable settlement Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. Imprescribility of Action or Defense Defect of void or inexistent contracts is more or less a permanent character Lapse of time cannot give efficacy to such contracts Nature of such defects cannot be cured by prescription Applicable to action for declaration of the inexistence or absolute nullity of the contract and to the defense 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 others 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 with his promise. Principle of In Pari Delicto Both parties are at fault of the illegality of the cause or object Law refuses to give remedy and leaves them where they are Ex dolo malo non oritur actio In pari delicto potior conditio defendantis Presumption: fault of one party is more or less equal or equivalent to the fault of the other party Applies only to cases of existing contracts with an illegal cause or object Does not apply to simulated or fictitious contracts Does not apply to inexistent contracts for lack of an essential requisite such as cause of consideration
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Effect if Only One Party is at Fault If contract has already been executed: o Guilty party barred from recovering what he has given o Innocent party may demand for the return of what he has given If contract is merely executory: o Cannot produce any legal effect o Neither party can demand for fulfillment of the obligation o Neither party can be compelled to comply Exceptions 1. Payment of usurious interest Debtor is allowed to recover the interest paid in excess of that allowed by usury laws with interest from date of payment 2. Payment of money or delivery of property for an illegal purpose where Party who paid or delivered repudiates the contract before the purpose is to be accomplished Before any damage has been cause to a third person Effect: courts may allow parties to recover what has been paid or delivered, if public interest is subserved. 3. Payment of money or delivery of property by an incapacitated person Courts may allow the recovery of what has been paid or delivered if the interest of justice demands. 4. Agreement or contract which is not illegal per se but is merely prohibited by law and such prohibition is for the plaintiff Plaintiff may recover what has been paid or delivered 5. Payment of any amount in excess of the maximum price of any article or commodity as fixed by law Buyer may recover the excess 6. Contract where laborer undertakes longer working hours than the maximum as fixed by laws Laborer may demand for overtime pay 7. Contract where laborer accepts a wage lower than the minimum prescribed Laborer may demand for deficiency Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, which interest thereon from the date of the payment. Recovery by Debtor of Usurious Interest Interest refers to the whole usurious interest Example: o A contract of loan with usurious interest consists of a principal and accessory stipulation; the principal one is to pay the debt while the accessory is to pay the interest. The two stipulations are divisible thus the illegal terms can be separated from the legal ones. In this case, only the accessory stipulation should be considered void. 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. When 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 it 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. Article Applied General Statement of the Exception (Art. 1416): Agreement is not illegal per se, but merely prohibited o Prohibition is designed for the protection of the plaintiff y o Plaintiff may recover what he paid or delivered if public policy is enhanced y

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino o

De la Salle University College of Law Atty. Chato Gallo

ILLEGAL PER SE one that by universally recognized standards is inherently or by its very nature bad, improper, immoral or contrary to good conscience. Angeles vs. Court of Appeals o In pari delicto is not applicable to a homestead which has been illegally sold in violation of the law. The policy of the law is to give land to the families and allows the homesteader to reacquire the land even if it has been sold. The right to reacquire may not be waived. Sale is null and void. Petitioner has the right to recover the homestead and the action does not prescribe. o The sale is contrary to public policy o Plaintiffs must return the value of purchase o Defendants will not be reimbursed of their improvements on the land Philippine Banking Corp. vs. Lui She o Old lady tries to go around the no land for aliens provision by giving Wong a 99 year lease and a 50 year option to purchase property. Former later changes her mind and tells her lawyer to secure annulment of the contract. Court says the contract is not illegal per se, but collectively it reveals a pattern to subvert the Constitution. A lease to an alien is valid, so is an option giving the right to buy if he gets Phil citizenship. However here, a lease and an option to buy combined shows that a virtual transfer of ownership has happened. Land is ordered to be return to Old lady Justina Santos.

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. Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. When the contract is divisible if illegal terms can be separated from legal ones, enforce latter o In case of doubt, contract is considered as divisible or separable. o EXCEPTIONS: Nature of contract requires indivisibility e.g. contract of compromise Intention of the parties is that the contract be entire e.g. if what is void be the essential part, void the entire contract. Note: Divisibility will only be followed when the nullity affects only the secondary or accessory obligations. Art. 1421. The defense of illegality of contracts 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. TITLE III 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 been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. Concept of Natural Obligations Natural Obligations o Those based on equity and natural law o Obligations without sanction, susceptible of voluntary performance, but not through compulsion by legal means
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino Distinguished from Civil Obligations Natural Obligations Based on equity and natural law Not enforceable by court action Distinguished from Moral Obligations Natural Obligations There is juridical tie between parties but is nonenforceable Voluntary fulfillment by the obligor produces legal effects which courts will recognize and protect

De la Salle University College of Law Atty. Chato Gallo

Civil Obligations Based on positive law Enforceable by court action

Civil Obligations There is no juridical tie Voluntary fulfillment does not produce any legal effect to be recognized and protected

Reasons for Regulation of Natural Obligations Side of Payor Why does the law permit a man, who fulfills his natural obligation, to change his mind and recover what has been delivered? o A broad policy justifies a legal principle that would encourage persons to fulfill their moral obligations o Equity, morality, and natural justice. Side of Payee o Payee is obliged to return what was given to him since the payor was not legally bound to deliver such payment 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. Article Applied A borrowed money from B and B failed to collect the money from A. After the debt prescribed, A still paid the amount to B. Although, after a few months, A was in need of money and demanded for his payment to B back. B refused. Will As succeed in collecting if he sues B in court? o No, as it is covered by Art. 1424 that after the lapse of the extinctive prescription, the obligor who pays his debts voluntarily will not be able to recover what has been delivered or value of service rendered. o After voluntary fulfillment by the obligor, the obligee is authorized to retain what has been paid by reason thereof. 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, he obligor cannot recover what he has paid. Art. 1426. When a minor between eighteen and twenty-one 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 twenty-one 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 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 law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

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. TITLE IV 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. Concept of Estoppel Estoppel the principle that precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination. Affords a solution to questions unforeseen by our legislation temporary remedy 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 be in pais or by deed. Kinds of Estoppel Based on common law classification of estoppels into equitable and technical estoppel Estoppel In Pais (by conduct) Arises when a party who: o Acts, representations, admissions or by silence when he should speak out o Intentionally done or through culpable negligence o Leads another party to believe a certain fact to exist. o The party deceived must rely upon the belief, acts on it; and is then prejudiced by the said act. Would not have been prejudiced if the truth were told Estoppel by Silence Inaction Arises when a party who: o Has a right or opportunity to speak or act o Has a duty to do such act under the circumstances o Intentionally or through culpable negligence induces another to believe certain facts exist o Another party relies on the belief, acts on it, and is then prejudiced Estoppel by Acceptance of Benefits Arises when a party: o Accepts benefits from a certain act or transaction o Intentionally or through culpable negligence o Induces another to believe certain facts exist o Another party relies, acts on it, and is then prejudiced Estoppel by Deed or by Record Two distinct types of technical estoppel o Estoppel by Deed Bar which precludes on party to a deed and his privies from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying the truth of any material facts asserted in it Usually written documents o Estoppel by Record Preclusion to deny the truth of matters set forth in a record, whether judicial or legislative, and also to deny the facts adjudicated by a court of competent jurisdiction. Example: conclusiveness of judgment (estoppel by judgment) on the parties to a case, which is broader than res judicata

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Estoppel by Judgment A party to a case is prevented from denying facts that are adjudicated by a court of competent jurisdiction Type of estoppel by record Bars parties from raising any question that might have been put in issue and decided in the previous litigation Res judicata makes a judgment conclusive between the same parties with regard to the matter directly adjudged. Estoppel by Laches Failure or neglect to do what is needed to be done, in exercise of due diligence, for an unreasonable length of time Negligence or omission to assert a right within a reasonable amount of time Abandonment or declination to assert a right Type of equitable estoppel Declines to enforce a right against another until such time that, when an action is finally taken, the other party is prejudiced or cannot be restored to his former state without injury Basis

Doctrine of laches or stale demands o Based on grounds of public policy o Not a mere question of time but a question of inequity or unfairness

Elements 1. Conduct on the part of the defendant which gave rise to the cause of complaint and for which the complaint seeks a remedy 2. Delay in asserting the complainants rights given that the complainant had knowledge of the defendants conduct 3. Lack of knowledge or notice to the defendant that the complainant would assert his right 4. Injury or prejudice to the defendant in the event the relief is given to the complainant or that the suit is not barred Application More applied on actions based on void contracts Renders the doctrine of imprescriptibility of such actions useless Laches Distinguished from Prescription Laches Effect of delay Question of inequity permitting a claim to be enforced Inequity is based on changes in the condition of the property or relation of parties Not statutory Applies in Equity Not based on fixed time

Prescription Fact of delay Question or matter of time

Statutory Applies at law Based on 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. Article Applied Bucton vs. Gabar o The action here although one for reconveyance is actually one for quieting of title when the plaintiff is in possession is actually imprescriptible. J.B.L. Reyes 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.

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

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 of 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. TITLE V. Trust CHAPTER 1 General Provisions Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. Concept of Trusts Legal relationship between a person having an equitable ownership in a property and another person owning the legal title to such property Three parties in the creation of trust: 1. Trustor person who establishes trust 2. Trustee confidence is given with regard to the property in benefit of another person 3. Beneficiary person whose benefit the trust has been created Trust res o Object of trust o Consist of property in actual existence o Transferable interest or title o Rule: any transferable property, either realty or personal, including undivided, future, or contingent interest therein. Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law. Kinds of Trusts Express o Created by the intention of the parties Implied o Deducible from the nature of the transaction as matters of intent o Superinduced on the transaction by operation of law as matters of equity o Independent from the will of the parties o Two kinds: Resulting Raised or created by the act or construction of law Strict Sense: implication of law and presumed always to have been contemplated by the arties Constructive
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Raised by construction of law Operation of law Not created by any words, either expressly or implied, but by the construction of equity in consideration of justice

Express and Implied Trusts Distinguished Express By intention of the parties By direct and positive acts of the parties in writing, deed, will, or words showing intent Established clearly Action to enforce cannot be barred by laches or extinctive prescription unless there is an express repudiation of the trust by the trustee made known to the beneficiary

Implied By operation of law Deducible from the nature of the transaction by operation of law Taken from indicative circumstances Action to enforce may be barred by laches.

Art. 1442. The principle of the general law of trusts, insofar as they are not in conflict with the Code, the code of Commerce, the Rules of Court and special laws are hereby adopted. CHAPTER 2 Express Trusts Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parole evidence*.
**Parole Evidence refers to extraneous evidence such as an oral agreement (a parol contract), or even a written agreement, that is not included in the relevant written document. The parol evidence rule is a principle that preserves the integrity of written documents or agreements by prohibiting the parties from attempting to alter the meaning of the written document through the use of prior and contemporaneous oral or written declarations that are not referenced in the document.

Art. 1444. No particular words are required for the creation of an express rust, it being sufficient that a trust is clearly intended. Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. Art. 1446. Acceptance by the beneficiary is necessary nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. CHAPTER 3 Implied Trusts

Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in Article 1442 shall be applicable. Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputable presumed that there is a gift in favor of the child. Art. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the done, he nevertheless is either to have no beneficial interest or only a part thereof. Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of
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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him. Article Applied X transferred a Certificate of Title to Y as a security for his debt and the title did not have an annotation. Y then later mortgaged the property to the bank without the knowledge of X. The mortgage became due and the property was advertised for sale by the bank. What are the actions available to X? o The mortgage of the property by Y is valid since the bank did not know of the flaw regarding the property since there was not annotation at the back of the title o X can redeem the property from the bank and then institute an action to compel Y to reconvey the property to him. Xs payment to the bank can be applied to his debt to Y and any excess payment done is recoverable from Y. Art. 1451. When the land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. Art. 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. Art. 1454. If an absolute conveyance or property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Article Applied Co-heirs entering into an extrajudicial settlement or partition of the hereditary estate while disregarding other co-heirs. The co-heirs who are part of the settlement are impliedly or constructively trustees for the benefit of the heirs who were not part of the contract. Prescriptibility of Actions to Enforce Trust Does not prescribe An action for reconveyance of real property based upon an implied trust resulting from fraud, may not be barred by the statute of limitations. Action may be filed form the discovery of fraud Discovery of fraud when the new certificates of title were issued exclusively in the name of the person committing fraud. Period of Prescription [for Action of Reconveyance] 1. Action involves annulment of the voidable contract which was the basis for the fraudulent registration of the property prescription period of four years (Art. 1391, par. 4 of the Civil Code) 2. Action involves declaration of nullity or inexistence of a void or inexistent contract which was the basis for the fraudulent registration of property imprescriptible (Art. 1410 of the Civil Code) 3. Action does not involve annulment of a contract but there was fraud in the registration of the subject property ten years from discovery of the fraud (No. 2 of Art. 1144 of the Civil code) 4. If the legitimate owner of the fraudulently registered property in the name of another had always been in possession thereof, the constructive notice rule cannot apply. Action for reconveyance is actually an action to quiet title imprescriptible

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Obligations and Contracts Reviewer: Contracts Guevarra | Tolentino

De la Salle University College of Law Atty. Chato Gallo

Laches may Bar Action Laches may bar an action to enforce a constructive trust Repudiation is not required unless there is a concealment of facts giving rise to the trust Acquisition of Property by Trustee Through Prescription In constructive trusts, trustee may acquire absolute ownership over the trust rest by acquiring acquisitive prescription. Example: o Where two out of four co-heirs of a parcel of land have had in their possession an inherited property for a long period of time and declaring the property for taxation purposes in their names and then subdivided the properties with transfer certificates of title, it was held that their co-heirs, who were exempted from the partition, are barred from bringing an action of reconveyance by extinctive prescription, by laches, and by valid titles over the properties which vested the defendants with the right of acquisitive prescription. Requisites for acquisition of property in Express Trusts o Trustee repudiates the right of the beneficiary o Act of repudiation must be known to the beneficiary o Evidence must be clear and conclusive o Expiration of the period is prescribed by law In implied trusts o Express repudiation is not necessary o He must only set up a title that is adverse to the beneficiary o Normal requisites for extraordinary acquisitive prescription must be present. Art. 1457. An implied trust may be proved by oral evidence.

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