Obligations and Contracts EH 307 A t t y.

G r a v a d o r

Novation 1 □ new obligation is VALID even if not ratified, but voidable

Contracts 5 at the instance of the debtor
General Provisions 5 ‣ Consent of debtor constitutes implied waiver of the
Consent 11 action for nullity
Object Of Contracts 29 ‣ Defect is not completely cured in expromision
Cause Of Contracts 32 wherein debtor has not intervened or consented

NOVATION NULLITY OR VOIDABILITY OF NEW OBLIGATION

Article 1297. If the new obligation is void, the original one shall subsist,
Art. 1291. Obligations may be modified by: unless the parties intended that the former relation should be extinguished
(1) Changing their object or principal conditions; in any event.
(1) Substituting the person of the debtor;
- Original SUBSISTS, UNLESS intends extinguishment of
(2) Subrogating a third person in the rights of the creditor former in any event

N OVAT ION • Voidability of the new obligation

- extinguishment of an obligation by the substitution or change □ new obligation is VALID
of the obligation by a subsequent one which extinguishes
or modifies the first □ BUT if new obligation is annulled and set aside, original
SUBSISTS
- total or partial extinction of an obligation through the creation
of a new one which substitutes it
- this is the last mode of extinguishing an obligation SUSPENSIVE OR RESOLUTORY CONDITION OF ORIGINAL
OBLIGATION — NEW IS PURE
R EQ U ISI TES Article 1299. If the original obligation was subject to a suspensive or
1. A previous valid obligation resolutory condition, the new obligation shall be under the same condition,
unless it is otherwise stipulated.
2. Agreement of the parties to the new obligation;
3. Extinguishment of the old obligation; • If intention is merely to suppress the condition, no novation
4. Validity of the new obligation • If intention is extinguish the original obligation itself by the
creation of a new obligation, the novation does not arise
except from fulfillment of the condition from original
Article 1292. In order that an obligation may be extinguished by another obligation.
which substitute the same, it is imperative that it be so declared in □ Where the original obligation is conditional, novation
unequivocal terms, or that the old and the new obligations be on every itself must be held to be conditional also and its
point incompatible with each other. efficacy depends upon whether the condition which
affects the former is complied with or not
• Novation is not presumed
□ Suspensive condition of the original not performed,
• Express novation: expressly disclose that their object in obligation does not come into existence, cause for the
making the new contract is to extinguish the old contract new obligation is wanting
• Implied novation: no specific form is required, all that is □ Resolutory condition, same category as void obligation
needed is incompatibility between original and subsequent or one which has been extinguished
contracts
• Test of incompatibility: If the two contracts can stand together
and each one having independent existence OBJECTIVE NOVATION
• The change must refer to the object, the cause or the Principal conditions — principal conditions or terms
principal conditions of the obligations. Accidental changes ☞ Example: making the debt absolute instead of
do not produce novation. conditional and vice-versa

E FFE C TS O F NOV A T IO N • Dacion en pago is an objective novation

• Increase in amount and you can prove that the intention to
Article 1296. When the principal obligation is extinguished in consequence novate, then it will be an implied novation, but usually, it s
of a novation, accessory obligations may subsist only insofar as they may not a novation if you change the amount.
benefit third persons who did not give their consent. • Extension of time does not imply novation. But if the time
• In general — extinguishment of the original obligation and situation is reversed (shortening of the period), that is a
creation of a new one novation
• When accessory obligation may subsist only in so far as they • Convertion of an obligation to some other obligation
may benefit third person who did not give the consent to ☞ Example: obligation for contract of deposit for one of
the novation loan, or a contract of deposit to one of commodatum.

E FFE C T OF THE ST A T US O F T HE O RI G I NAL O R SUBJECTIVE NOVATION

N E W O BL IGATION C H AN G I N G T H E IR O B JE C T O R P R I NC IP AL
NULLITY OR VOIDABILITY OF ORIGINAL OBLIGATION — NEW C O N DIT IO N S ;
OBLIGATION IS VOID ☞ Example: Dacion en Pago — Instead of paying Ms. Pajao
Article 1298. The novation is void if the original obligation was void, except money, you will transfer the ownership of your lot to her.
when annulment may be claimed only by the debtor or when ratification
validates acts which are voidable. ☞ Example: A owes B money. So instead of giving B money, A
will ask B if he is agreeable to receiving furniture, for
- new obligation is VOID example.

• One of the requisites of novation is a previous valid obligation ✏ Question: What if instead of paying your debt one time, you
• Also applies to voidable that are already annulled/ agree to pay it in installments. Is this novation?
extinguished ‣ Answer: NO. Just because there is a change of
condition, that’s not necessarily novation. To be an
• Voidability of the original obligation extinctive novation, it should be with regards to a
□ new obligation is VALID if ratified before novation principal condition. In this case, it is only with regards
to an incidental condition

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

2. DE L E G AC IO N
■ Dation in Payment — paying monetary debt with another - Debtor offers and the creditor accepts a third person who
object like real property consents to the substitution so that the consent of three is
■ In dation, parties may agree that even if the object has a necessary
lesser value, it shall be deemed as full payment already. - Delegante (old debtor), delegatario (creditor) and delegate
■ Dation is a form of novation. (third person new debtor)
- presupposes the consent of the debtor
S UBS TITU TIN G THE P E R SON O F T HE D E B T OR ; - ang debtor ni propose sa creditor na naay mu assume na
third person sa debt
- there must be all the time, the consent of the creditor

• Change in the person of the debtor may be made without the REQUISITES OF DELEGATION

debtor but should always be with CONSENT OF 1. Initiative for substitution must emanate from the old debtor
CREDITOR 2. Consent of the new debtor
3. Acceptance by the creditor
Two types:
• Expromision — initiative does not come from the debtor but EFFECTS OF EXPROMISION

requires consent of the 3rd person and creditor. 1. Original debtor is released from the obligation
• Delegacion — the debtor proposed to the creditor the 2. The new debtor is subrogated in the rights of the creditor. He
substitution of the 3rd person may demand from the old debtor the entire amount if what
he has paid for the obligation (Art. 1302 Par 2)
3. GENERAL RULE: Old debtor is not liable for the insolvency
WH AT IS TO BE EXT I NG UI S HE D ? or non-fulfillment of the new debtor (Art. 1295)
1. E XPROMI SI ON — Exception:
- initiative, when the change does not come from the debtor i. He is aware of the insolvency at the time he
- may be done at the instance of the creditor or the third party delegated his debt (Art. 1295)
himself ii. At the time of the delegation, the new debtor’s
insolvency is already existing and of public
REQUISITES OF EXPROMISION
knowledge (Art. 1295)
1. Consent of two parties (new debtor and creditors)
2. Knowledge or consent of the debtor is not required ☞ Example: A owes B money. One of the ways to effect
novation is to change the person of the debtor.
✏ Question: What happens if the 3rd person becomes
✏ Question: How shall it be done?
insolvent? Does this revive the cause of action against the
original debtor? ‣ Answer: A 3rd person pays the debt even without the
‣ Answer: Art. 1294. If the substitution is without the consent of the debtor
knowledge or against the will of the debtor, the new - So we will make a new contract. Who is the “we” here? Ms.
debtor’s insolvency or non-fulfillment of the obligation Pajao (3rd person) wants to help A. So we will make a new
shall not give rise to any liability on the part of the agreement. The gist will be that A’s debt will be
original debtor. extinguished and Ms. Pajao will now assume the debt.
‣ Art 1295. The insolvency of the new debtor, who has
been proposed by the original debtor and accepted by ✏ Question: What is the obligation that is extinguished and
the creditor, shall not revive the action of the latter what is the obligation that is newly born?
against the original obligor, except when said ‣ Answer: A’s obligation is extinguished. The new
insolvency was already existing and of public obligation is between Ms. Pajao and B.
knowledge, or known to the debtor, when he delegated
his debt.
✏ Question: As a result of the new obligation, what are the legal
consequences?
Article 1293. Novation which consists in substituting a new debtor in the ‣ Answer: Extinguished by A’s obligation
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in articles 1236 Art 1295. The insolvency of the new debtor who has been proposed by the
and 1237. original debtor and accepted by the creditor shall NOT REVIVE the action of
the latter against the original obligor, EXCEPT when said insolvency was
already existing and of public knowledge OR known to the debtor when he
EFFECTS OF EXPROMISION
delegated his debt.
Article 1294. If the substitution is without the knowledge or against the will
of the debtor, the new debtor's insolvency or non-fulfillment of the General Rule: Old debtor is not liable for the insolvency or non-
obligations shall not give rise to any liability on the part of the original fulfillment of the new debtor
debtor.
— Exceptions:
1. He is aware of the insolvency at the time he delegated
1. The debtor is released from obligation his debt
2. Creditor generally cannot recourse from the old debtor if the 2. At the time of the delegation, new debtor’s insolvency is
new debtor is insolvent already existing and of public knowledge
3. If the substitution is without his knowledge or consent
a. Old debtor is not liable for the insolvency or non- SUBROGATION
fulfillment of the new debtor (Art. 1294) - The third person now assumes and exercise the rights
b. The debtor can only compel old debtor to reimburse pertaining to the creditor.
inasmuch as the payment has been beneficial to him - Stepping into the shoes.
— no subrogation takes place (Art. 1237) - This 3rd person will now assume the rights pertaining to the
4. If substitution is with knowledge and consent creditor. All the accessory undertakings are included like
a. New debtor is entitled to full reimbursement of the guarantees, securities, mortgage, etc.
amount paid and subrogation

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

S UBR O GATI NG A T HIR D PE RS O N I N T HE RI G H T S — Exception: Art. 1302

OF THE CR ED ITO R
WHEN PRESUMED

Article 1300. Subrogation of a third person in the rights of the creditor is

either legal or conventional. The former is not presumed, except in cases Article 1302. It is presumed that there is legal subrogation:
expressly mentioned in this Code; the latter must be clearly established in (1) When a creditor pays another creditor who is preferred, even without
order that it may take effect. the debtor's knowledge;
- The transfer of all the rights of the creditor to a third person (2) When a third person, not interested in the obligation, pays with the
who substitutes him in all his rights express or tacit approval of the debtor;
- Change of personality in the creditor (3) When, even without the knowledge of the debtor, a person interested in
- Stepping into the shoes the fulfillment of the obligation pays, without prejudice to the effects
of confusion as to the latter's share.
✏ Question: When shall legal subrogation arise?
‣ Answer: The law provides this is Art. 1302 of the Civil
1. WHEN A CREDITOR PAYS ANOTHER CREDITOR WHO IS
Code.
PREFERRED, EVEN WITHOUT THE DEBTOR'S
KNOWLEDGE;

C ON VEN TIO NAL SUB RO G AT I O N - preferred creditors can be found in the last articles of your
Civil Code on Concurrence and Preference of Credits
Article 1301. Conventional subrogation of a third person requires the consent
of the original parties and of the third person. - this happens when the assets of the debtor aren’t enough to
pay all the creditors so there is an order of preference
- Takes place by agreement of the parties - if you pay the more preferred creditor
☞ Example: the one higher in the order of preference, you
REQUISITES OF CONVENTIONAL SUBROGATION (ART. 1301)
now take his place. You are stepping into his shoes.
1. Consent of the old creditor — because his right is
extinguished ☞ Example: Acción Pauliana — when the insurance company
2. Consent of the debtor — old is extinguished and he pays the insured. The new creditor now is the insurance
becomes liable to a new obligation company. Because the insurance company is subrogated
3. Consent of the third person new creditor — becomes a party in the rights of the old creditor.
to the new relation
DISTINGUISHED FROM ASSIGNMENT OF CREDIT
2. WHEN A THIRD PERSON, NOT INTERESTED IN THE
OBLIGATION, PAYS WITH THE EXPRESS OR TACIT
Conventional Subrogation Assignment of Credits
APPROVAL OF THE DEBTOR;

Debtor’s consent is necessary Debtor’s consent is not required

- reimbursement and subrogation
☞ Example: A debt is secured with a mortgage or security
Extinguishes the old obligation Refers to the same right which passes
or guarantee. The 3rd person can run after the
and gives rise to a new one from one person to another mortgage or guarantor. But if the 3rd person paid
without the approval of the debtor, he can only have
The nullity of an old obligation Nullity of an obligation is not remedied beneficial reimbursement.
may be cured by subrogation by the assignment of the creditor's
such that the new obligation will right to another
be perfectly valid 3. WHEN, EVEN WITHOUT THE KNOWLEDGE OF THE DEBTOR,
A PERSON INTERESTED IN THE FULFILLMENT OF THE
OBLIGATION PAYS, WITHOUT PREJUDICE TO THE
EFFECTS OF CONVENTIONAL SUBROGATION
EFFECTS OF CONFUSION AS TO THE LATTER'S SHARE.

Article 1303. Subrogation transfers to the persons subrogated the credit with - the 3rd person here is given the right of subrogation because
all the rights thereto appertaining, either against the debtor or against he is interested in the debt
third person, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation. ✏ Question: How would you describe a person who is
interested in the fulfillment of the debt? Who is the person?
- If suspensive condition is attached, that condition must be ‣ Answer: The guarantor, the surety, the co-maker. They
fulfilled first in order the new creditor may exercise his are interested because they want the obligation to be
rights. extinguished. Co-maker is liable even if he did not
partake in the proceeds of the loan. ß more on this in
Article 1304. A creditor, to whom partial payment has been made, may Credit Transactions
exercise his right for the remainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of the partial payment of the ☞ Example: If the guarantor pays your debt, the old
same credit. creditor is taken out of the picture and the guarantor is
now your new creditor.

☞ Example: Insurance — 3rd party liability insurance

Reyes vs CA
☞ If my cargo will sink, supposedly I can claim from
BP 22
whoever is responsible for the sinking. So I am the
original creditor. But if I have insurance, the insurance
company pays me. That is written in the insurance
contract. That upon payment of the insurance to me, I
agree that I will allow subrogation. So the insurance Millar vs CA
company assumes my credit against the one who Petitioner Millar obtained a favorable judgment from CFI condemning
caused the sinking. This is CONVENTIONAL Antonio Gabriel for P1,746.9 and moved for the issuance of a writ of
SUBROGATION because the subrogation is written in execution.
the provision of the insurance contract. As a result, sheriff seized Gabriel’s jeep. Gabriel pleaded with Millar to
release the jeep under a chattel mortgage where the former, to
secure payment of the judgment debt, mortgaged the jeep in favor of
L E GAL SUB RO G ATIO N Millar. The chattel mortgage provided payment of P1,700 in two
- takes place without agreement but by operation of law installments on fixed dates
because of certain acts Gabriel failed to pay. Petitioner obtained writs of execution. Sheriff
levied on property of respondent for execution sale. Gabriel filed
motion for suspension of the execution sale on the ground of
• GENERAL RULE: Not presumed satisfaction of payment by implied novation.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Implied novation requires clear proof of complete incompatibility

between two obligations.The law requires no specific form. The test ☞ Example: If you are already released from an obligation as
is WON two oblig can stand together. when there is a 3rd person who is substituted in your person
If they cannot, incompatibility arises, and the second oblig novates the as the debtor, there is already novation. Now if the creditor
first. Where the new obligation merely reiterates the old obligation, files a case against you when supposedly you are already
such changes do not effectuate any substantial incompatibility absolved from liability, you can file a motion to dismiss on
between the 2. the ground that you are already released from that liability.
That’s why you need to know when there is effective
novation.
• Alright, so you now understand the concept of novation.
There are three ways in which the obligation is novated —
dation in payment, substituting the person of the debtor, Novation is the only defense in BP 22
subrogating the rights of the creditor. • Novation is especially important in prosecution for B.P. 22.
When the debtor says that he wants to pay the obligation in
order to stop the prosecution, will you still file a case
S UBS TITU TIO N OF D E BT O R against him when there is already the color of money here?
May be made without the consent or against the will of debtor; Of course not. So in order to protect yourself from novation,
but must be made WITH the consent of the CREDITOR check the terms of the compromise agreement. If there is a
• In the case of substitution of debtor, there must be ALL THE stipulation to the effect of novating or extinguishing the
TIME the consent of the CREDITOR. Because if the creditor original obligation, don’t sign. Or just crash that stipulation
does not consent to the substitution, there is no novation. out. Because if you want to revive the old obligation, the
other party will just say that it is already novated.
EXPRESS NOVATION

- easier; less dispute ✏ Question: Is INCREASE of amount of the debt novation?

‣ Answer: YES. But reduction is not novation.
- Ideally, for there to be novation, it is desirable that it should
be an express. The original parties should really say that
the 1st obligation should be extinguished to give way to the ☞ Example: In a labor case, one party already lost the case. So
new one. Here, there would be no legal issue because it is then the arbiter asks, “Do I need to issue a writ of execution
clear or will you just voluntarily comply with the obligation?” Then
the debtor says he wants to voluntarily comply. If the
IMPLIED NOVATION
judgment says nothing about payment in installments but
- real incompatibility you were able to convince the winning party to allow you to
pay in installments, is there novation? NO. Because when
- if it is only with regards with the incidental matters the agreement is only to provide for the method of payment
- there are questions. Because in cases of implied novation, other than that stated in the judgment, that is not novation.
you need to determine whether there is a real (Zapanta Case)
incompatibility. Because if the incompatibility is only with
regards to incidental incompatibility, then there is no
novation. □ In the Millar Case, there is already a losing party. So the
winning party executes a chattel mortgage on the vehicle of
☞ Example: Agreeing to pay in installments instead of paying
the losing party with the agreement of paying the debt in
one time. There is no real novation; only a MODIFICATORY installments instead of executing the original judgment. So
NOVATION. now when the debtor fails to pay the monthly installments,
he cannot say that the original obligation is novated
✏ Question: In what situations will the issue of novation arise? because this is only with regards to the method of payment.
‣ Answer: Even in criminal cases, novation will be relevant.
Novation is the only defense available to you if you are □ In the Reyes Case, the SC says that for there to be novation
prosecuted for violation of B.P. 22 through the change in the person of the debtor, there must
☞ Example: You issued a check. It bounced. (Oslob daw LOL) always be the consent of the creditor. NO CREDITOR’S
The procedure is when you present a check to the bank, CONSENT, NO NOVATION. Even if you add 1 hundred
there is a presumption that there is a corresponding other people to assume your debt but the creditor does not
deposit. So when you present it and there is insufficient consent to it, there is no novation. Nothing can stop the
funds, the check is said to have bounced. You are given 5 creditor from running after you. There must be consent.
days to make good of the bounced check. Now if you fail to
make good of the check, you will be sued. This is what □ In the case of Garcia vs Llamas, there is no novation
happened in Reyes. So then you will make an agreement
because the issuance of a check does not give rise to
with the offended party to just pay the amount owed in
extinctive novation. Because the other principle that you
installments. So you make a compromise agreement. If you have to remember in novation is that it is NOT PRESUMED.
know novation, you would think that you’re your signing of I’m not saying that if there is no agreement to novate, there
the compromise agreement, the original obligation is is really no novation. I’m not saying that if it is not express,
novated. But this is WRONG because this is only a there is no novation. There can be novation even if there is
MODIFICATORY MODIFICATION. But if the compromise no express extinctive novation agreed upon by the parties.
agreement says, “as a result of the signing of this But for there to be an IMPLIED NOVATION, there must be a
compromise agreement, the private complainant shall REAL INCOMPATIBILITY between the old and the new
cause the dismissal of the case…” That’s NOVATION. So if obligation. So in the case, SC said that for there to be
you fail in the new obligation, you cannot be prosecuted
novation then there must be an incompatibility. There is no
anymore for B.P. 22.
incompatibility in the promissory note and the check.

☞ Example: For example, you have lost in the case and you are • So if there is an issue about novation, check the agreement.
made to pay damages. The decision is final and exec. You If there is an explicit stipulation about novation, then that is
are made to pay 10M. You can still make an agreement EXPRESS. But if there is none, don’t lose hope. Check if
with the winning party to reduce the liability to 8M. If that is there is an incompatibility. But don’t jump to conclusions.
the compromise, there is already novation. Check if the incompatibility is on substantial matters.
Because if it is not, then that is only a MODIFICATORY
✏ Question: If you are the debtor, what is your advantage? NOVATION. But if there is an incompatibility on substantial
‣ Answer: Sometimes, when the debtor fails in the new matters, that is an EXTINCTINVE NOVATION.
obligation, it is very tempting to the creditor to file a writ
of exec on the original obligation. So he will pa execute ☞ Incompatibility Example: Obligation to pay in money vs
the 10M. If you are the judge, you cannot allow this. payment in kind; increase in amount of debt;
Because it was already novated through the
compromise agreement.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

A CC IDEN TAL/I NCI D E NT AL CHANG E S

Incidental Changes • If any essential element is absent, can file an action to
☞ Example: There is a monetary debt. So the creditor will make declare inexistence of contract; no contract
an acknowledgment of monetary debt to be notarized. The
purpose of the notarization is to do away with proving the E S S E N T IA L E LE M EN TS
signature and stuff like that. This is only a contestable
(a) CONSENT (1319)

presumption.
- is the conformity of wills and with respect to contracts, it
is the agreement of the will of the contracting parties
NOT A CASE OF NOVATION
• Cause of action known as action of recession of
1. Execution of a public instrument to recognize/ contract if one of the elements are absent.
acknowledge the debt in a private document ☞ Example: Sleepwalker signed contract → defense, there
- gipa notarize ang document was no consent.
- if private document, you have … ☞ Example: In marriage, there is also consent. Vitiated v.
- if notarized, presumed that it is your signature; if you No Consent. In sleepwalking, there is really no
say it’s not yours, you will have the burden to consent = no contract.
prove it
2. Acceptance of Partial Payment — NO (b) OBJECT (1347)
3. Giving of additional security — NO - is the subject matter, in reality object of every contract is
4. Addition of a penal clause the obligation created
- partial only; modificatory
5. Change in terms of payment — NO (c) CAUSE (1350)

- Extension: NO - essential or more proximate purpose or reason which the

- Lesser Period: YES contracting parties have
- the WHY of the contract
EFFECTS OF LEGAL SUBROGATION — ART. 1303, 1304

๏ Defective Consent — this is voidable; have it declared

Article 1303. Subrogation transfers to the persons subrogated the credit with annulled
all the rights thereto appertaining, either against the debtor or against third ๏ Absence of Consent — cause of action is declaration of
person, be they guarantors or possessors of mortgages, subject to inexistence of contract
stipulation in a conventional subrogation.
- If suspensive condition is attached, that condition must be N A T UR AL E LE M EN T S
fulfilled first in order the new creditor may exercise his
rights
- Exist as part of the contract even if the parties do not
provide for them, because the law, suppletory to the
contract, creates them
Article 1304. A creditor, to whom partial payment has been made, may - Derived from the nature of the contract, not expressly stated
exercise his right for the remainder, and he shall be preferred to the person in the contract
who has been subrogated in his place in virtue of the partial payment of the - lacking these does not render contract void
same credit. - things which are presumed to exist
- If there is something unwritten, it is something to worry
- Only written and included are the ones expressed.
Contracts - Even if you talked over it but not in the contract, you cannot
file a case (parole evidence)
GENERAL PROVISIONS
■ Parole Evidence Rules: every agreement, terms of
condition, stipulation you agree is reduced into writing; if
Article 1305. A contract is a meeting of minds between two persons
not expressly stated, they are deemed not agreed upon.
whereby one binds himself, with respect to the other, to give something or
to render some service. - In questions about contracts, if it is not included
there, raise parole evidence rule. If unwritten,
C ON TR ACT cannot be made to be enforced. Only those
written are deemed included.
- a source of obligation
- meeting of minds between two contracting parties which — Exception: Natural elements like warranty against
eviction, hidden defects, and the law which is
takes place when an offer by one party is accepted by the
deemed incorporated into the contract
other
- one or more persons bind himself or themselves with respect
to another or others, or reciprocally, to the fulfillment of a ☞ Example: Warranty against hidden defects or eviction in the
prestation to give, to do, or not to do contract of purchase or sell
- Not stated in the contract but just because it is not
stated doesn’t mean you don’t have right. They are
■ Sanchez Roman — a juridical convention manifested in legal
deemed to exist in the contract
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. A CC ID E N T AL E LE M EN T S
- Agreed upon by the parties and which cannot exist without
BINDING EFFECT OF CONTRACTS
being stipulated
1. Obligations arising from the contract have force of law - Exist only when the parties provide for them; needs to be
between the contracting parties stipulated for it to be binding, unlike natural elements
2. There must be mutuality between the parties based on their - Parole evidence rule applies here
essential equality, to which is repugnant to have one party - If not stipulated, no cause of action can be filed.
bound by the contract leaving the other free therefrom ☞Example: Granting right of way, provide reimbursement for
value of improvements, etc.
E SS E NTIAL ELEMENT S ☞Example: Mortgage, guaranty, bond; contract of lease over a
- without which there can be no contract parcel of land and allows the lessee to build a building
- necessary and indispensable; subdivided into common,
special and extraordinary.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

C ON TR ACTS WHI CH RE Q UI RE S AD D I T I O NAL ☞COMMON SITUATION: We would like to hangyo to let your
father sign a deed of sale to be notarized by us and be
R EQ UI SI TE FO R P ER FE CT I O N registered under our name because we paid already.
1. REAL CONTRACTS

- requires delivery or perfection - Okay ra basta dugangan gamay (usual answer)

☞ Example: commodatum, pledge, deposit
- How much? 100,000
- Matter of principle, di musugot because too much
• If not delivered, no cause of action, contract is not perfected.
✏ Question: What is your remedy in this?
1. File a case but NOT SPECIFIC PERFORMANCE
✏ Question: Is a written document required for contract to
exist? 2. Compel an execution of a public document
‣ Answer: No, because generally, contracts are perfected (presupposes validity of contract)
are mere consent.
CHARACTERISTICS OF CONTRACT
✏ Question: What if in suits? How shall you prove the existence - the provisions on contracts just revolved around this
of contract if it’s only perfected by mere consent and not characteristics
written?
‣ Answer: BY TESTIMONY – narrating your story in the
witness stand, both sides. Judge decides. O B LI G AT O R Y F OR CE
- has coercive power
- Rationale why contract is void when it is potestative:
☞ Example: You bought a property, a parcel of land. You paid because you are creating an illusory contract; wala mai
the down payment already. What if the other party returns sabot na usa rai magbuot
the down payment to not proceed for the sale?
- Not just one party can withdraw without the consent of the
other
✏ Question: If you bought a property, you go to the Register of - Constitutes the law as between the parties
Deeds, you will not be entertained without deed of sale.
Are you already the owner? If only without document? Are - Have the force of law between the parties and should be
you entitled to registration? complied with in good faith
‣ Answer: YES. But what will you register without - Obligations arising from contracts have the force of law.
document? (BINDING)
■ REMEDY: Compelling the other person to execute a - Consequence, a party cannot revoke without consent of the
public document. How is it done? other
‣ The court will direct clerk of court
Article 1308. The contract must bind both contracting parties; its validity or
• Presupposes that contract is valid, IF VOID, dili. compliance CANNOT be left to the will of one of them.
☞Example: Case on Rustan Pulp; delivery of paper and the
C E RTAIN TY PE OF CO NT RACT S T HAT NE E D other said they had right to stop deliveries; it was a
S OM ETH IN G I N WRI T T EN T O B E VALI D violation of obligatory force
1. DONATION OF A PARCEL OF LAND
☞Example: Lease contract where it says that lessee can stay
-must be written and notarized; public document as long as he is able to pay the rental; because lessor has
no option in that case; lessor will then just have to wait for
-if verbal agreement — VOID
the lessee since as long as he is able to pay, contract
-What if lola writes it in a yellow paper? NO. cannot terminate
-Nothing in writing, you cannot have the earlier remedy
as a recourse because that was only for valid
contracts. M UT U A LI TY
• TN: Written document is needed in donation. Must be a - binds both contracting parties
public document (notarized). - Potestative condition, void if only about debtor
- Not all lawyers are notary public. - Validity and performance cannot be left to the will of only one
of the parties
2. AGENCY
- Purpose is to render void a contract containing a condition
- appointing an agent to sell a parcel of land; which makes fulfillment dependent exclusively upon the
uncontrolled will of the one of the contracting parties
- evidence of authority must be in writing otherwise void
- Mutuality is similar with obligatory force
- If you buy a land from an agent, be cautious. Check if he
or she has authority. - law does not have to state mutuality; what is provided is the
- If there is nothing in writing, transaction is void.
☞Example: Parties agreed on a compromise agreement where
one will send land to other and other agreed he will buy;
3. PARTNERSHIP WHERE IMMOVABLE
problem is they have not determined what the purchase
- Contract of partnership where immovables are price is; so they have to constitute a committee to
contributed, must be in writing determine the fair price

4. STIPULATIONS WITH REGARD TO INTERESTS

☞Example: Signing a loan contract in a bank you do not notice
- 15% or 10% beyond legal, must be in writing that there are violations there.
- If not, legal rate → only 6% is your liability. - “interest rate adjusted from time to time” without giving
you notice — this is a violation of mutuality principle
FO RM I S N OT AN ES S E NT I AL RE Q UI RE M E NT
• Problems about proving the contract or registering a contract Article 1309. The determination of the performance may be left to a third
• Remedy → file a case to compel an execution of a public person, whose decision shall not be binding until it has been made
document. known to both contracting parties.

• Not uncommon to see where parties sign a contract but did

not notarize it. What they have is a document not notarized
→ you can never be entertained by the RoD because the
law on registration of land titles require a public document
to be registered.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Article 1310. The determination shall not be obligatory if it is evidently Art 1311. Part. 1 — Contracts take effect only between the parties, their
inequitable. In such case, the courts shall decide what is equitable under assigns and heirs, EXCEPT in case where the rights and obligations arising
the circumstances. 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.
Article 1473. The fixing of the price can never be left to the discretion of
one of the contracting parties. However, if the price fixed by one of the
• General Rule: Third persons out.
parties is accepted by the other, the sale is perfected.
- If you are questioning the personality of the party in the case
to intervene in the contract, the way to let him be out of the
■ CONTRACT OF ADHESION: A contract in which one party case is file a motion to dismiss. And your ground is “no
has already prepared a form of a contract containing cause of action because he is not a real party in interest”
stipulations desired by him and he simply asks the other - But again, not absolute.
party to agree to them if he wants to enter into the contract.
■ Third person — is one who has not taken part in a contract
GSIS vs. Court of Appeals 228 SCRA 183 and is therefore, a stranger to the contract
GSIS increased the purchase price stipulated in the Deed of Conditional ■ As a general rule a third person has no rights and obligations
Sale with the Sps., involving one of its house and lots in its village under a contract to which he is a stranger (1311 par 1) he
after the final construction costs. Because the Deed did not subject has no legal standing or capacity to demand the
the price to change, where the marginal notation of such effect was enforcement of a contract or assail its validity even if it is
only inserted, the agreement was only to pay the original price, admitted that it is defective
which obligation the Sps had already complied with and which
necessitates the execution of a Final Deed of Sale.
• Instances where third persons may seek or may validly seek
GSIS given power of “unilateral upward adjustment of purchase price” —
violates mutuality principle. Violation of Art 1473. Dili usa ra ang the enforcement of contract in their favour.
mag buot if nay changes sa contract. Dapat sabutan.
C AS E S T H A T A F FE CT S T H IR D P E R S O N:
1. Stipulations in favor of a third person
Professional Academic Plans, Inc. vs. Crisostomo 2. Contracts creating real rights
Sales associate Crisostomo negotiated with AFPSLAI and received
commission for the initial MOA contracted, involving educational 3. Contracts entered into defraud creditors
plans. When the MOA was amended, PAPI stopped her commission, 4. Contracts violated at the inducement of a third person
alledging the termination of the first MOA and hence, Crisostomo’s 5. Contracts creating status
lack of right to said commissions. However, the second MOA was
only a modification of the first since the abandonment of contracts 6. Quasi-contracts of negotium gestio,
must be mutual between the contracting parties. Crisostomo and the - The owner is bound in a proper case, by contracts
new president of AFPSLAI did not intend to rescind the contract and entered into by the “gestor”
hence, the former remains entitled to her commission.
7. In collective contracts
• When you enter a contract you sit down, you agree.
• But usually what happens is there is already drafted contract DKC Holdings Corporation vs CA
pro forma (leave in the blanks nalang). Son of land owner Encarnacion is bound to recognize the contract of
lease between his mother and DKC over his mother’s land even after
• In post-paid transactions for example, you only fill-up. They the death of her mother and even after he had inherited the same as
sole heir. Property right is transmissible and thus, under Art. 1311,
let you check it. Is this valid?
obligations arising from it binds heirs.
- This is an example of a contract of adhesion. Your only Where the service or act is of such a character that it may as well be
participation is only to adhere. Take it or leave it basis. But performed by another, or where the contract by its terms shows that
that is not necessarily void. performance by others was contemplated, death does not terminate
the contract or excuse non-performance. The death of a party does
☞ Case: Subscription contracts in phones, there includes there, not excuse non-performance of a contract which involves property
rights, and the rights and obligations thereunder pass to the
venue thing (case to be filed is in Makati).
personal representatives of the deceased. Similarly, non-
- So if I file in Cebu, Globe will file a motion to dismiss. Do performance is not excused by the death of the party when the other
not say “this is contract of adhesion!!!!” – pakauwaw party has a property interest in the subject matter of the contract
argument
- Contract of adhesion will only fly for those ignorant,
blurry eyes, etc. INTRANSMISSIBLE CONTRACTS

a. Purely personal (e.g. partnership and agency)

b. Very nature of obligation that requires special personal
R EL AT IV ITY qualifications of the obligor
- binding only upon the parties and their successors c. Payment of money debts not transmitted to the heirs but to
- So if you are a third person has no personality filing a case the estate
as a general rule regarding the enforcement of the contract
nor should be liable
- TN: locus standi (only applicable in consti). Use “real party in E XC E PT IO N S T O R E LA T I VIT Y
interest”. 1. NOT TRANSMISSIBLE BY NATURE, STIPULATION OR
- But not an absolute rule PROVISION BY LAW
- The parties include those who succeeds the right of the - purely personal obligations; obligations to do;
parties. ☞Example: Singer imong papa lain sad kayu ug ikaw mupuli
- A successor cannot have more rights than what his
predecessor have. “A SPRING CANNOT RISE ABOVE THE ■ Contract of Agency
SOURCE” ☞Example: Your father is attorney in fact and father died,
you cannot assume as an attorney in fact
☞ Example: I assign my rights to you, you are a successor in
interest. But you cannot have more rights than what I have.
■ Contract of Partnership
☞Example: You pool your resources together for business
• Contracts take effect only between the parties, their purposes
assignments and their heirs

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• Corporation: if stockholder dies, his heir replaces him. defense of “why sue? We do not have contract!” —
• Partnership: his heirs cannot step into his shoes rule of relativity applies

2. PARTIES AGREE ON SOMETHING BUT OBJECT IS TO BENEFIT • CREDIT CARD

A THIRD PERSON; (STIPULATION POUR ATRUI) - There is a contract entered between the merchant and
the credit card company(issuer)
Article 1311. Par. 2 — If a contract should contain some stipulation in favor - You are the third person it, the one who uses it.
of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere
- So if the merchant does not honor it, do you have a
cause of action? YES.
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. Florentino vs. Encarnacion Sr
Article 1312. In contracts creating real rights, third persons who come into Facts: X and Y are the common and pro-indiviso owners in fee simple of
possession of the object of the contract are bound thereby, subject to the a parcel of land. They filed with the CFI an application for the
provisions of the Mortgage Law and the Land Registration Laws. registration of the property under Act No. 496. The land has been
adjudicated to them by virtue of a deed of extrajudicial partition.
Article 1313. Creditors are protected in cases of contracts intended to According to the deed, the fruits of the property shall answer for the
defraud them. expenses of certain religious functions.
During the trial, X asked the trial court that this stipulation be included
as encumbrance on the land and that it be entered on the face of the
Pour Atrui — is a stipulation in a contract clearly and title. Y opposed the motion. The court decided for Y, ruling that the
deliberately conferring a favor upon a third person who has a stipulation was revocable at the unilateral option of the co-owners.
right to demand its fulfillment, provided, he communicates his It appears that from the time of the death of the previous owner of the
acceptance to the obligor before its revocation by the obligee property in 1941, as had always been the case since time
or the original parties immemorial, up to a year before the filing of the application in May
1964, the Church had been enjoying the benefits of the stipulation.
- That third person even if not a party, that third person can go
to court and ask for the enforcement of the contract. Issue: Whether the stipulation can be revoked or should be annotated
as an encumbrance on the face of the certificate of title.
Held: Considering its nature and purpose, the stipulation is a
Requisites of stipulation pour autiri: stipulation pour autrui. While a stipulation in favor of a third person
1. Contracting parties must have clearly and deliberately has no binding effect in itself before its acceptance by the party
conferred a favor upon a third person favored, the law does not provide when the third person must make
his acceptance. As a rule, there is no time limit; such third person
2. Stipulation should be a part and not the whole of the
has all the time until the stipulation is revoked.
contract
Here, the Church accepted the stipulation in its favor before it is sought
3. Must have communicated his acceptance to the oligor to be revoked by Y. The enjoyment of benefits flowing from the
before its revocation stipulation for almost seventeen (17) years without question from
4. Favorable stipulation should not be conditioned or any quarters can only be construed as an implied acceptance by the
compensated by any kind of obligation Church of the stipulation pour autrui before its revocation.
5. Neither of the contracting parties bears the legal
representation or authorization of the third party
☞Example: Credit card. The company and a credit card
company has a contract. You are the third person to the
General Rule: not a party, cannot ask for enforcement; contract.
— Exception: this third person even if not a party has legal
right to ask for enforcement
Villa vs CA 1996
• Before filing for enforcement, communicate acceptance to
obligor 3. THIRD PERSON INDUCES ANOTHER TO VIOLATE HIS
• Required: third person must communicate his acceptance. CONTRACT UNDER 1314

• Form of acceptance may be implied or express; not even - Tortuous interference with another’s contractual relations
required that it be in writing.

Article 1314. Any third person who induces another to violate his contract
• Unlike in donation where acceptance should always be shall be liable for damages to the other contracting party.
express, it can be implied in pour atrui.
• In donation, there are only two parties. In pour atrui, there is • Recognizes an instance when a stranger to a contract can
a third party. In both, acceptance must be made known be sued for damages for his unwarranted interference with
before its revocation or before the one conferring it the contract.
becomes incapacitated.
• Basis here is tort, not contract.

• Old case: Florentino v Encarnacion Sr. — About the church

■ Interference with contractual relations — presupposes that
as a beneficiary.
the contract interfered with is valid and the third person has
knowledge of the existence of the contract or must have
☞ Example: In my will and testament: Use this land, I will not known of it after a reasonable inquiry
transfer ownership but rentals shall be used for the church. ■ Induces — causes another to choose one course of conduct
- Contract is between me and heirs but there is a third by persuasion or intimidation.
person.
- In case heirs will not allow it, third person can enforce ☞Example: Ang katabang na nilayas, nibalhin silingan kay mas
the contract dakog sweldo, giingnan sa lain maid na ali dri nndot
sweldo dri.
• THIRD PARTY LIABILITY INSURANCE
- You cannot register your vehicle if you will not procure a • In pour atrui, example the TPL, your source of action is the
third party liability insurance. contract between company and owner. Here, the source is
- In here the insurer will indemnify the third person. a quasi-delict, a source other than the contract. So this
- With a third party liability stipulation provision should not have been an exception. The framers
committed a blatant error. Because when we say that it is
- So you have a contract with an insurance company. But exception to relativity of contracts, then the source must be
the beneficiary is the prospective third party that you
a contract. This provision is out of place
might incur damage to.
- So that third person if the insurance company refuses to
pay him, he may sue the insurance company. No

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Lagon vs CA • Existence of a contract is not determined by the number of

persons who intervene in it, but the number of parties. Not
There would be no tortous interference if the alleged interferer did not
know of existence of contract. by the number of individual wills but by the number of
declarations of will.
The interference or inducement gives rise to liabilities for damages
because it violates the property rights of a party in a contract to reap • As long as there are two distinct patrimonies, even if they are
the benefits that should result therefrom. represented by the same person.
It is sufficient that the defendant must have been driven by purely
impious reasons to injure the plaintiff. In other words his acts • If an agent has been authorized to lend money at interest, he
cannot be justified. cannot borrow it without the consent of the principal. But if
he has been authorized to borrow money, he may himself
be the lender at the current rate of interest.
☞ Example: The other maid will say na wa ko kibaw oy na naa
kai agalon. So there may be no tortous interference
☞Example: Corporation represented by the president thru a
☞ Example: Case of movie stars where Viva induces artists in board resolution and the president is also a stockholder in
Regal Films; his personal capacity
- Except when there is a provision of the law prohibiting
the transaction.
☞ Example: case of Pacquiao while he had contract with Bob
Arum he wanted to have contract with Golden Boy Dela
Joya. Bob Arum threatened him for violating contract and ☞Example: Agent cannot buy the property of the principal;
Golden Boy for inducing. lawyer cannot buy the property of the client involved in a
- Expired Contract but renewed diay. (specific litigation he is handling;
performance not a remedy, damages instead)
F R E ED O M T O CO N T R A C T
• There is no tortuous interference is not applicable if you do
not have knowledge about the contract. Only applies if you Article 1306. The contracting parties may establish such stipulations, clauses,
did it despite knowledge. terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public policy.
Article 1308. The contract must bind both contracting parties; its validity or
So Ping Bun vs CA compliance CANNOT be left to the will of one of them.
Facts: R, lessor sent a letter to E, lessee, informing the latter of a 50%
increase in rent, enclosing in the letter new lease contracts for
signing. R warned that failure of E to accomplish the contracts shall • Autonomy of Contracts
be deemed as lack of interest on the lessee’s part and agreement to
the termination of the lease. E did not answer the letter, but the - Parties are free to stipulate terms and provisions in a
lease contracts were not rescinded. contract, as long as these terms and provision are not
T, petitioner, requested formal contracts of lease with R for his own contrary to law, morals, good customs, public order and
textile business, TM. The lease contracts in favor of TM were public policy.
executed. - Parties are given discretion to stipulate on contracts or
In the suit for injunction, E pressed for the nullification of the lease anything.
contracts between R and T. E also claimed damages. - Not absolute
Tek Hua Trading through its managing partner So pek Giok entered into ■ Limitation: Not contrary to law, morals, good customs,
lease agreements with lessor Dee C. Chuan and Sons
public order, or public policy.
Contract: each had a one year term. Should the lessee continue to
occupy he premises after the term, the lease shall be on a month to
month basis The contracts expired and did not renue the contracts • Right to enter into contracts is both one of the liberties
but Tek Hua continued to occupy tge premises guaranteed to the individual by the constitution, it also
So pek giok managing partner of Tek Hua died, Giok’s grand son So Ping signifies or implies the right to choose with whom one
Bun occupied the warehouse for his own business desires to contract.
‣ Court said that this is tortuous interference. The new contract was
enjoined (no effect) but the alleged violator was not penalized for • Article III Sec 10 of the 1987 constitution — Constitution
damages. Why? It was an honest doing. Profit-motive –“ normal”
so no damages cannot be rewarded. No malice, impulse is by prohibits the passage of any law impairing the obligations
business interest. and contracts

• Legal presumption is always on the validity of contracts.

PARTIES When a contract is valid, the parties are bound by its
✏ Question: WHO MAY BE PARTIES OF A CONTRACT? provisions under the principle that a contract is the law
‣ Answer: Two individuals, artificial or artificial person
between the parties

✏ Question: A corporation can enter into a contract. How? L IMI T A T IO N S O N CO N T R A C TU AL S T I PU LAT I ON:
‣ Answer: Thru its duly authorized corporate officer. There 1. CONTRARY TO LAW

should be a board resolution authorizing you to sign. - A contract cannot be given effect if its contrary to law
- Individual must not be affected by legal capacity to act because law is superior to a contract.
- A contract intended to circumvent the law is void ab
initio
✏ Question: Can a person sign a contract by himself?
‣ Answer: YES. As long as representing different
capacities. Lawyers can even ask question and answer a) Pactum commisorrium — creditor cannot appropriate
the same(LOL). Known as auto-contract. the things given by way of pledge or mortgage or
dispose of them, any stipulation to the contrary is void
b) Pactum leonine — stipulation including one or more
A UTO -C ON TRACT parties from any share or profit or losses is void
- Necessary for the existence of a contract that two distinct c) Pactum de non alienado — stipulation forbidding the
persons enter into it owner from alienating the immovable mortgaged shall
- No general prohibitions, only special prohibitions such as be void
ART 1491 (persons who cannot acquire by purchase even
at a public or judicial auction)
2. CONTRARY TO MORALS

- Auto contracts are generally VALID Morals — deal with norms of good and right conduct
evolved in a community.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

- Man’s innate sense or notion of what is right or wrong. pointed out by the Director of the Bureau of Private Schools in
More or less universal Memorandum No. 38, are awarded in recognition of merit and not to
☞ Example: Child labor, dirty old man case attract and keep brilliant students in school for their propaganda
value. To look at such grants as a business scheme designed to
increase the business potential of an educational institution is not
3. CONTRARY TO GOOD CUSTOMS
only inconsistent with sound public policy but also good morals.
Customs — consist of habbits and practices which
through long usage have been followed and enforced by
society or some part of it as binding rules of conduct Pakistan International Airlines vs. Ople
- certain percepts that cannot be universally recognized PIA illegally dismissed Farrales and Mamasig because their termination
as moral, sometimes they only apply to certain was without clearance from MOLE. Despite the contractual
communities or localities agreement that reserved the right of termination to PIA, labor is a
matter of public policy and interests and hence, the Labor Code
applies. The Labor Code prohibits the limitation of employment for
4. CONTRARY TO PUBLIC ORDER
the purpose of circumventing security of tenure and requires MOLE
Public Order — refers principally to public safety although clearance for termination. Hence, the termination was illegal
it has been considered to mean public will because the provision in the contract is facultative, dependent solely
- consideration of the public good, will or weal (welfare), upon the will of PIA and thus preventing security of tenure of F,M,
peace and safety of the public and health of the and because the termination was made without clearance, thus
community presumed to be without cause.
☞ Example: Employment contract providing for a wage
lower than the minimum • General Rule: Courts should adopt a hands-off policy with
regards to contracts.
5. CONTRARY TO PUBLIC POLICY
• This could be abused. SC is conservative. Case of sell of
Public Policy — is broader than public order, as the former Manila Hotel. Malaysian investors won but set aside
may refer not only to public safety but also to because should be preserved (SC should have their
considerations which are moved by the common good, hands-off)
the term has been identified as the principle under which
the freedom of contract or private dealing is restricted for
the good of the community CLASSIFICATIONS:
- Court must find that the contract contravenes some 1. ACCORDING TO SUBJECT MATTER

established interest of society a) Things

☞ Example: Policy on marriage — separation-in-fact b) Services

EXAMPLES/SITUATIONS
2. ACCORDING TO NAME

1. Contrary to public policy, law — Cannot stipulate with spouse a) Nominate — have their own individuality and are
that you will have paramours regulated by special provisions of law
2. Contrary to law — employer cannot give wage lower than - which has a specific name or designation in law
the minimum wage ☞Example: commodatum, lease, agency, sale
3. Contrary to morals — but how do we determine morals? This
is difficult to prove. The problem is that society is evolving b) Innominate — without particular names, under Article
and there are borderline cases like live-ins. Is that 1307, Innominate contract shall be regulated by the
immoral? We can’t tell stipulation of the parties
4. Contrary to Public Policy — Agreement where you pay family
of victim in a criminal case, and in exchange, they will not
file against accused anymore. This is illegal. Article 1307. Innominate contracts shall be regulated by the
- but there are also things which appear to be legal but stipulations of the parties, by the provisions of Titles I and II of this
illegal such as when the mortgaged thing can be Book, by the rules governing the most analogous nominate contracts,
automatically appropriated o mortgagee; this is illegal; and by the customs of the place.
property should be opened to public auction and not
automatic appropriation (pactum commissorium)
5. You cannot prohibit one from selling his land while giprenda ■ Kinds of Innominate Contracts
niya nimo, under 2130. He should not be prohibited from 1. Do ut des (I give that you may give)
selling 2. Do ut facias (I give that you may do)
6. Shipper limits his liability arising from agreement; only 100K 3. Facio ut des (I do that you may give)
no matter what cause or value is; illegal 4. Facio ut Facias (I do that you may do)
7. Cui vs Arellano case
8. In regard to status of persons; like husband and wife agree 3. ACCORDING TO PERFECTION

na kana siya d na anak nako a) By MERE CONSENT (consensual) — Art 1315

9. In regard to jurisdiction; cannot stipulate the jurisdiction on contracts are perfected by means of consent and
courts. But you can stipulate on venue, not the jurisdiction from that moment, the parties are bound not only to
10.Bustamante vs Rosel Nov 29, 1999 fulfillment of what has been expressly stipulated but
- case of pactum commissorium also to all consequences.
- “in case of failure to pay, lender has option to buy....” ☞Example: Contract of Sale

• But there are contracts not perfected by mere

Cui vs Arellano University consent, such as when delivery is required like
Plaintiff took up law at the Arellano University. He left the University contract of deposit, pledge ( when you run out of
and enrolled for the last semester of his fourth year at the Abad money and go to a pawnshop), commodatum
Santos Law School. Subsequently, he passed the bar examinations.
During his stay at the Arellano University, he was a constant
recipient of scholarship grants. However, he was made to sign a Article 1315. Contracts are perfected by mere consent, and from that
waiver of his right to transfer to another school unless he refunds to
the University the equivalent of his scholarship grants. Since, in moment the parties are bound not only to the fulfillment of what has been
taking the bar examinations, he had to secure his transcript of expressly stipulated but also to all the consequences which, according to
records from the University, he was required to make the refund, their nature, may be in keeping with good faith, usage and law.
which he did, but under protest. Subsequently, he brought this action
to recover the amount which he had paid. Will the action prosper?
Held: The action will prosper. The waiver signed by plaintiff is contrary b) By DELIVERY OF AN OBJECT (real) — ART 1316 real
to public policy and, therefore, null and void. Scholarship grants as contracts such as deposit, pledge and commudatum,

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

are not perfected until the delivery of the object of an - parties have not yet arrived at any definite agreement
obligation - undergoing the preliminary steps towards the formation of a
valid contract
Article 1316. Real contracts, such as deposit, pledge and commodatum, are - either party may stop the negotiation or withdraw an offer
made
not perfected until the delivery of the object of the obligation.
✏ Question: Is there a cause of action here?
c) Solemn contract — requires compliance with certain ‣ Answer: violation of article 19: abuse of rights
formalities prescribed by law
☞ Example: Donation of real property

2. PE R F E CT I O N
d) Formal Contracts — requires formalities such as when - Parties have come to a definite agreement or meeting of the
made in writing; or must appear in a public document minds regarding the terms
- subject matter and cause of contract
• But there can be a contract even if there is nothing
- Concurrence of the special elements of contract
in writing; there are only certain contracts which
need to be made in contract and made in a public
document
3. C O N S UM MA T IO N O R DE A T H
- Parties have fulfilled or performed their respective
• Validity and formality are different obligations or undertakings under the contract may have
been fully accomplished or executed
☞ Examples: - Contract is deemed fulfilled already
1. Donation where value of donated property exceed
5k, it must be in writing to be valid
2. Contract of partnership and there are immovables
WITH RESPECT TO THIRD PERSONS
contributed, it must be in public document Art 1311. Part. 1 — Contracts take effect only between the parties, their
3. Agreement in regard to interest, it must be in assigns and heirs, EXCEPT in case where the rights and obligations arising
writing from the contract are not transmissible by their nature, or by stipulation
4. Donation of a real estate; must accept in a public or by provision of law. The heir is not liable beyond the value of the
document; otherwise void property he received from the decedent.

• If not in these cases, contracts are perfected by

mere consent Article 1311. Par. 2 — 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
4. ACCORDING TO ITS RELATION TO OTHER CONTRACTS
incidental benefit or interest of a person is not sufficient. The contracting
a) Preparatory — when entered into as means to an end parties must have clearly and deliberately conferred a favor upon a
☞ Example: agency, partnership third person.

b) Accessory — when it is dependent upon another

contract it secures guarantees for its existence and Article 1312. In contracts creating real rights, third persons who come into
validity possession of the object of the contract are bound thereby, subject to the
☞ Example: mortgage, guaranty provisions of the Mortgage Law and the Land Registration Laws.

c) Principal — when it does not depend for its existence

and validity upon another contract but it is an Article 1313. Creditors are protected in cases of contracts intended to
indispensable condition for the existence of an defraud them.
accessory contract
☞ Example: sale, lease
Article 1317. No one may contract in the name of another without being
5. ACCORDING TO THE NATURE OF THE VINCULUM PRODUCED
authorized by the latter, or unless he has by law a right to represent him.
a) Unilateral — when it creates an obligation on the part A contract entered into in the name of another by one who has no authority
of one of the parties or legal representation, or who has acted beyond his powers, shall be
b) Bilateral — gives rise to reciprocal obligations for both unenforceable, unless it is ratified, expressly or impliedly, by the person
parties on whose behalf it has been executed, before it is revoked by the other
c) Reciprocal contracting party.

6. ACCORDING TO CAUSE

a) Onerous Article 1318. There is no contract unless the following requisites concur:
b) Remuneratory or remunerative (1) Consent of the contracting parties;
c) Gratuitous (2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
7. ACCORDING TO RISK

a) Commutative — when the undertaking of one party is

considered the equivalent of that of the other CONSENT
☞ Example: sale, lease

Article 1319. Consent is manifested by the meeting of the offer and the
b) Aleatory — when it depends upon an uncertain event acceptance upon the thing and the cause which are to constitute the
or contingency both as to benefit or loss
contract. The offer must be certain and the acceptance absolute. A qualified
☞ Example: Insurance, sale of a hope acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from
STAGES the time it came to his knowledge. The contract, in such a case, is
1. P RE PARATIO N presumed to have been entered into in the place where the offer was made.
- includes all steps taken by prospective parties from the time
they manifest entering into contract

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

■ Consent — is the conformity of wills and with respect to ✏ Question: Can you compel him to proceed with the sale?
contracts, it is the agreement of the will of one contracting ‣ Answer: It depends on the ads. If the ad is complete,
party with that of another or others, upon the object and he can be compelled.
terms of the contract ‣ 500 sq. mt., with price per square meter. This offer is
• When there is meeting of the minds, means both parties are already very definite. This has a price already
in agreement. therefore, you may compel. Unless withdrawn
before acceptance, then it results into a perfected
REQUISITES OF CONSENT:
contract.
1. Plurality of subjects ‣ If “Lot A is for sale, interested persons contract 123”
2. Capacity – this is merely an invitation of an offer. No mention
of price yet. – meaning they will still negotiate.
3. Intelligent and free will
4. Express or Tacit manifestation of will
• In order that an offer can be considered CERTAIN, it must not
5. Conformity of the internal will and its manifestation
be vague, misleading, or made as a joke. Therefore, a
declara- tion of a person of “his intention to enter into a
MUST BE MANIFESTED contract” is not an offer that is CERTAIN. (Rosenstock v.
Burke, 46 Phil. 217)
OF FE R
■ Offer — is a proposal made by one party (offerer) to another
to enter into a contract. It is more than an expression of Rosenstock vs. Burke
desire or hope. It is really a promise to act or to refrain from Facts: Burke owned a yacht known as Bronzewing. Elser, the plaintiff,
acting on condition that the terms thereof are accepted by negotiated for the purchase of the yacht. The plan of Elser was to
the person (offeree) to whom it is made. create a yacht club and sell it afterwards for P120,000. P20,00 to be
retained by Elser and P100,000 to be paid to Burke. Elser requested
- the reason why an offer is there is for it to be accepted that a voyage be down to the south using the said yacht for purposes
or not of advertising and creating opportunities for the sale. However, the
yacht needed some repairs for the voyage thus making the plaintiff
RULES LAID DOWN BY LAW ON WHAT CONSTITUTE A VALID pay for such repair. Elser never accepted the offer for the purchase
rather requested that the engine should replaced thus asking for a
OFFER:
loan of P20, 000. After a talk with the bank manager Mr. Avery, they
- Must be definite and complete. agreed that the yacht was to be sold to Elser for the amount of
P80,000. Elser agreed but stated in the letter that he is in a position
☞ Example: I am offering my one-hectare parcel of land for sale to entertain the purchase of the said yacht. The case focuses on the
recovery of the money used to repair the yacht in the amount of
at the price of 4M. (definite)
P6,139.28 that is asked by Elser. The trial court ruled in favor of Elser
- Definite because your intention to sell is clear. and asked Burke to pay for P6,139.28 with legal interest of 6 percent
per annum as well as the Cooper Company the sume of P1,730.84
with legal interest of 6 per cent. The plaintiff is then asked to comply
☞ Example: I am planning to sell my one-hectare parcel of land. with the conditions stated in the letter. Hence this appeal coming
(not definite) from the plaintiff.
- If you file a case for specific performance, your case ISSUE:
shall not prosper because this is less definite. 1. WON the contract is valid and binding against the plaintiff
2. WON plaintiff is required to pay for the repairs of the yacht
a. MUST BE CERTAIN
HELD:
1. NO. The court looked at the intent of the plaintiff in using the
Article 1319. …The offer must be certain and the acceptance absolute… language. Instead of using clear and simple words such as I offer
to purchase, I want to purchase, or I am in the position to
purchase he used the word entertain which implies that he is in a
■ DEFINITE so that upon acceptance an agreement can be position to deliberate whether or not he would purchase such
reached on the whole contract; not definite if object is not yacht. It is a mere invitation that is discretionary upon him.
determinate 2. YES. The fact that the defendant was to ask for nothing in exchange
☞ Definite — “I am offering to you a parcel of land…” for the travel thus making the repair the only exchange that is
☞ Indefinite — “I am planning to sell my land to you…” expected.
- Disposition The petitioner is not obliged to buy the yacht but is
ordered to pay for the repairs done.
■ COMPLETE indicating with sufficient clearness the kind of
contract intended and definitely stating the essential
conditions of the proposed contract, as well as the non- b. WHAT MAY BE FIXED BY THE OFFEROR

essential ones desired by the offeror

Article 1321. The person making the offer may fix the time, place, and manner
of acceptance, all of which must be complied with.
■ INTENTIONAL should be serious and not made for fun or in
jest - time, place and manner of acceptance
✏ Question: Is there a required form in creating a contract? • Acceptance not made in the manner provided by the offeror
‣ Answer: No there is no required form. is ineffective.
• If manner of acceptance is that you must do it in writing and
✏ Question: Are you given the discretion to make the offer in a you just used a telephone to accept offer contrary to the
specific manner? And to demand that acceptance be done agreement, then there is no valid acceptance
also in a specific manner to make it an effective
acceptance? ☞Example: Bidding. There is a specific
‣ Answer: The person can fix the time, place, manner and
these must be complied.
c. OFFER WHEN MADE THROUGH AN AGENT

- this is an offer made through an agent

☞ Example: In bidding, it is always required that you submit - accepted from the time acceptance communicated to the
these following documents. agent

☞ Example: You are interested to purchase that offered ✏ Question: When is the acceptance deemed made?
property and you will approach the owner by calling the ‣ Answer: It depends upon the SPA. Look at the authority
number indicated, how do you characterize that? What if
upon contacting the owner he says that “Ay di na ko ana, di of the agent. Maybe his authority is only made to offer
and not to accept. Point here, in dealing with agents,
na ko padayon ug baligya ana”.
be cautious.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

‣ In the SPA, it enumerates the power of the agent. You

should ask if he is that person whose name appears in ☞ Not a definite offer — “For sale: 1,000 square meters lot at
the SPA. Green Plains Village, Quezon City for P5,000,000.00 — Tel.
‣ Identity, extent of power for you to be a purchaser in No. 817-12-84.”
good faith. ☞ Definite offer — “For sale: 1,000 square meters lot at Green
Plains Village, Quezon City located at the corner of
Geronimo and Magallanes Streets for P5,000,000.00 cash.
Article 1322. An offer made through an agent is accepted from the time — Tel. No. 817-12-84.”
acceptance is communicated to him.
• In business advertisement, you are manifesting that you are
• COGNITION THEORY – Malvarosa v CA (read!) ready to make an offer; but there is no offer yet. You are just
inviting to make the definite offer.
Malbarosa vs. Court of Appeals
Facts: From March 16, 1990 to April 3, 1990, petitioner had more than
two weeks to accept the offer of respondent. Although petitioner • When you sell something, it is not required that you state all
avers that he had accepted the offer of re- spondent on March 28, particularities; it is enough that object is identifiable.
1990, however, he failed to transmit to respondent the copy of the
March 14, 1990 letter-offer bearing his conformity thereto. f. ADVERTISEMENT FOR BIDDERS

Held: Unless and until the respondent received said copy of the letter-
offer, it cannot be argued that a contract had already been perfected Article 1326. Advertisements for bidders are simply invitations to make
between petitioner and respondent. proposals, and the advertiser is NOT bound to accept the highest or lowest
A contract is perfected only from the time an acceptance of an offer is bidder, unless the contrary appears.
made known to the offeror. An offer made inter praesentes must be
accepted immediately. If the parties intended that there should be an • Not applicable to judicial sale where in the highest bid must
express acceptance, the contract will be perfected only upon necessarily be accepted
knowledge by the offeror of the express ac- ceptance by the offeree • You then have no vested right just because you are the
of the offer. An acceptance which is not made in the manner lowest bidder; such as when a bidding is made by the
prescribed by the offeror is not effective but constitutes a counter- government. With the advent of Government Procurement
offer which the offeror may accept or reject. Act, just because you are lowest bidder doesn’t mean you
The contract is not perfected if the offeror revokes or withdraws its would be accepted; there are other post-qualifications.
offer and the revocation or withdrawal of the offeror is the first to Pananglitan ikaw lowest bidder pero usa ra imong pison,
reach the offeree. The acceptance by the offeree of the offer after
knowledge of the revocation or withdrawal of the offer is ang driver sa bulldozer mao pud driver sa pison. Di jud ka
inefficacious. dawaton ana

✏ Question: Agent can make offer for and in behalf of owner,

d. CIRCUMSTANCES WHEN OFFER BECOMES INEFFECTIVE
but if you want to communicate the acceptance, to whom
- Death, civil interdiction, insanity or insolvency would you communicate it? What if you made the
acceptance through the agent and there is this other buyer
Article 1323. An offer becomes ineffective upon the death, civil interdiction, who made communication directly to owner, kinsa man
insanity, or insolvency of either party BEFORE acceptance is conveyed. nakapalit ani na situation? Assuming nagdungan ug
communicate, kinsa man? Who has superior right?
‣ Answer: It would depend. When you deal with agent,
• When an offer is made, acceptance can also be immediately
made. The acceptance must be made known immediately. examine the extent of authority of agent. He may be
Here, there is no problem. authorized to make offer but not authorized to make
acceptance. Power of agent to sell must be in a
• Ideally, when an offer is made, acceptance shall be
Special Power of Attorney. Here his duties are
immediately made and made known to the offeror enumerated; if acceptance is not one among
immediately. enumerated, he has no authority to make the
acceptance. Before determining who has superior
☞ Example: Offerer sent an offer through post office. It was right, determine first extent of authority of agent.
received by the offeree a month later. Within that month, the
offerer died. The offer becomes ineffective.
A CC E PT A N C E
✏ Question: What is the rule when the offer is not accepted
☞ Example: Offeror made the offer today, February 8. immediately by the offeree?
Acceptance was sent thru a snail mail. It reached the
offeror a month after but during that one-month period the • The ideal — when offer is made, acceptance is immediately
offeree died before the knowledge of the offeror’s given. But there are transactions where you cannot expect
knowledge of the acceptance. Status of offer: ineffective. immediate acceptance.

• Same effect with civil interdiction. Person cannot perform a. MUST BE ABSOLUTE

acts with legal effects. Article 1319. …The offer must be certain and the acceptance absolute…
• Civil Interdiction — you are not allowed to perform acts with
legal effects. You cannot enter into a contract. So if you
made an offer then naabtan ug civil interdiction, so offer will - meaning there must be no further questions since those
be terminated. make a counter-offer
- offerer must accept also the counter-offer
• If these instances happen before acceptance, there can be - acceptance must be very clear
no contract. - Unless specifically required to be in a specific manner, there
is no required form.
e. BUSINESS ADVERTISEMENTS OF THINGS FOR SALE

• As to the form of offer and acceptance, offeror may prescribe

Article 1325. Unless it appears otherwise, business advertisements of
the manner of acceptance
things for sale are NOT definite offers, but mere invitations to make an
offer.
b. KINDS OF ACCEPTANCE

- not definite offers i. EXPRESS

✏ Question: Announcement on vacant lots for sale. There are Article 1320. An acceptance may be express or implied.
posters. Can they be a valid offer?
‣ Answer: It depends.
ii. IMPLIED

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

- Arise from acts or facts which reveal the intent to accept ✏ Question: Who now has the preferred right over the property?
such as the consumption of things sent to the offeree, You who was given 15 days or the other person?
or the fact of immediately carrying out the contract ‣ Answer: It depends (relate with option contract).
offered ‣ Option Money is the consideration in a contract of option.

☞ Example: from conduct, or acceptance of unsolicited

services. Southwestern Sugar and Molasses Co. vs. Atlantic
Gulf and Pacific Co.
Facts: On March 24, 1953, defendant-appellant Atlantic granted
iii. QUALIFIED (constitutes a counter-offer)
plaintiff-appellee Southwestern an option period of ninety days to
Article 1319. Acceptance made by letter or telegram does not bind the buy the formers barge No. 10 for the sum of P30,000. On May 11 of
the same year, Southwestern Company communicated its acceptance
offerer except from the time it came to his knowledge. The contract, in
of the option to Atlantic through a letter, to which the latter replied
such a case, is presumed to have been entered into in the place where the that their understanding was that the "offer of option" is to be a cash
offer was made. transaction and to be effected "at the time the lighter is available."
On June 25, Atlantic advised the Southwestern Company that since
- Not an acceptance but constitutes a counter-offer there is still further work for it, the barge could not be turned over to
the latter company.
c. IF MADE BY LETTER OR TELEGRAM
On June 27, 1953, the Southwestern Company filed this action to
compel Atlantic to sell the barge in line with the option, depositing
Article 1319. Par. 2 — Acceptance made by letter or telegram does not bind with the court a check covering the sum of P30,000, but said check
the offerer except from the time it came to his knowledge. The contract, in was later withdrawn with the approval of the court. On June 29, the
such a case, is presumed to have been entered into in the place where the Atlantic withdrew its "offer of option" with due notices to
offer was made. Southwestern Company stating that the option was granted merely
as a favor. The Atlantic contended that the option to sell it made to
Southwestern Company is null and void because said option to sell is
not supported by any consideration.
• Four theories on when the contract is perfected
The trial court granted herein plaintiff-appellee Southwestern
1. Manifestation theory — counter offeree manifest this Company’s action for specific performance and ordered herein
acceptance defendant-appellant Atlantic to pay damages equivalent to 6 per
2. Expedition Theory — sending of the letter, mailing if by centum per annum on the sum of P30,000 from the date of the filing
letter of the complaint.
3. Reception Theory — receipt of the message of Issue: Atlantic liable for specific performance and to pay damages in
acceptance favor of Southwestern Company?
4. Cognition Theory — knowledge of offer or of the Held: The Supreme Court reversed the trial court’s decision applying
Article 1479 of the new Civil Code. The Court reiterated that "an
acceptance
accepted unilateral promise" can only have a binding effect if
Art 1319 — Par 2 except from the time of his supported by a consideration, which means that the option can still
knowledge be withdrawn, even if accepted, if said option is not supported by any
consideration. The option that Atlantic had provided was without
consideration, hence, can be withdrawn notwithstanding
i. Cognition Theory Southwestern Company’s acceptance of said option.
- When you accept by letter, make sure acceptance must American jurisprudence hold that an offer, once accepted, cannot be
come to knowledge of offerer before his death or withdrawn, regardless of whether it is supported or not by a
before he becomes incapacitated consideration, but the specific provisions of Article 1479 commands
otherwise. While under the "offer of option" in question appellant
Atlantic has assumed a clear obligation to sell its barge to appellee
ii. Period of acceptance
Southwestern Company and the option has been exercised in
Article 1324. When the offerer has allowed the offeree a certain period to accordance with its terms, and there appears to be no valid or
justifiable reason for the former to withdraw its offer, the Court
accept the offer may be withdrawn at any time BEFORE acceptance by cannot adopt a different attitude because the law on the matter is
communicating such withdrawal, EXCEPT when the option is founded upon clear.
a consideration, as something paid or promised.
• Acceptance must be very clear. To be valid, an option to sell or a promise to buy or sell within the
context of Art. 1479 must be supported by an independent
consideration. Since the option can only be binding when it is
• Offeree may accept any time until such period expires. supported by a separate consideration, it follows that it can be
• Acceptance beyond the time fixed is not legally an withdrawn if it is not supported by an independent consideration
acceptance but constitutes a new offer. even if acceptance has already been made. There is no inconsistency
between Art. 1324 and 1479. Art. 1324 is the general rule, while Art.
• Acceptance not made in the manner provided by the offeror 1479 is the exception to such rule.
is ineffective.
Note: The ruling in Sanchez vs Rigos abandoned the ruling in
• If offeror has not fixed the period, the offeree must accept Southwestern Sugar.
immediately within a reasonable tacit period.
• Offer implies an obligation on the part of the offeror to Atkins, Kroll, and Co. vs. B. Cua Hian Tek
maintain it for such a length of time as to permit the offeree Facts: On Sept. 13, 1951, Atkins, Kroll and Co., Incor- porated offered to
to decide whether to accept it or not. sell to B. Cua Hian Tek 1000 cartons of sar- dines subject to reply by
Sept. 23, 1951. The respondent offeree accepted the offer
unconditionally and delivered his letter of acceptance on Sept. 21,
• Extinguishment or annulment of offer
1951. In view however of the shortage of the catch of sardines by the
- Withdrawal by the offeror California packers, Atkins, Kroll, and Co. failed to deliver the
- Lapse of the time for option period commodities it had offered for sale. Offeree now claims that
- Legally incapacitated to act acceptance of the offer only created an option to buy which, lacking
consideration distinct from the price, had no obligatory force.
- Offeree makes counter-offer HELD: The offerer is wrong. The argument is untenable, because
- Contract becomes illegal acceptance of the offer to sell by showing the intention to buy for a
price certain creates bilateral contract to sell and buy. The offeree,
upon acceptance, ipso facto assumes the obliga- tion of a buyer, so
☞ Example: I give you 15 days to decide on property worth 1
much so that he can be sued should he back out after acceptance, by
million. But on 10th day, someone comes and offers to buy either refusing to get the thing sold or refusing to receive the price
at 2 million, so the other person and I signed a deed of agreed upon. Upon the other hand, the offerer would be liable for
sale. Now you complain because I did not comply with my damages, if he fails to deliver the thing he had offered for sale.
undertaking to give you 15 days to manifest acceptance of Even granting that an option is granted which is not bind- ing for lack of
offer. consideration, the authorities hold that “if the option is given
without a consideration, it is a mere offer of a contract of sale, which
is not binding until accepted.” If however acceptance (of the sale, as

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

distinguished from the acceptance merely of the option) is made ■ Option money — is the money paid or promised to be paid
before a withdrawal, it constitutes a binding contract of sale, even if as a distinct consideration for an option contract.
the option was not supported by a sufficient consideration.” (7 ■ Earnest Money — a partial payment of the purchase price
Corpus Juris Secundum, p. 652). and is considered as proof of the perfection of the contract;
presupposes that there is already a sale (or some other
(NOTE: The rule in the instant case reverses the principle held contract) with the buyer bound to pay the balance.
in Southwestern Sugar & Molasses Co. v. Atlantic Gulf &
Pacific Co., 97 Phil. 249.)
• There is no contract of sale here; what has been paid is
only the option which is a contract distinct and separate
Sanchez vs. Rigos from the contract of sale which will be entered into later
Facts: In an instrument entitled "Option to Purchase," executed on April • But you have to pay consideration for the option contract;
3, 1961, defendant-appellant Severina Rigos "agreed, promised and otherwise, if you did not pay separate consideration for the
committed... to sell "to plaintiff-appellee Nicolas Sanchez for the option of 15 days, I can withdraw the offer even tomorrow
sum of P1,510.00 within two (2) years from said date, a parcel of land and you can’t complain
situated in the barrios of Abar and Sibot, San Jose, Nueva Ecija. It
was agreed that said option shall be deemed "terminated and • But just because you paid option money, it does not follow
elapsed," if “Sanchez shall fail to exercise his right to buy the there is already contract of sale
property" within the stipulated period. On March 12, 1963, Sanchez
deposited the sum of Pl,510.00 with the CFI of Nueva Ecija and filed • Preparatory contract in which one party grants to the other,
an action for specific performance and damages against Rigos for the
latter’s refusal to accept several tenders of payment that Sanchez for a fixed period and under specified conditions, the
made to purchase the subject land. power to decide whether or not to enter into a principal
Defendant Rigos contended that the contract between them was only “a contract
unilateral promise to sell, and the same being unsupported by any • Must be supported by an independent consideration and the
valuable consideration, by force of the New Civil Code, is null and void." grant must be exclusive
Plaintiff Sanchez, on the other hand, alleged in his compliant that,
by virtue of the option under consideration, "defendant agreed and
committed to sell" and "the plaintiff agreed and committed to Obligation if there is a valid contract of option
buy" the land described in the option. The lower court rendered • Offeror may offer to other people, but cannot sell until the
judgment in favor of Sanchez and ordered Rigos to accept the sum lapse of the time.
Sanchez judicially consigned, and to execute in his favor the • Offeree may enjoy the privilege to exercise the option within
requisite deed of conveyance. The Court of Appeals certified the case the period.
at bar to the Supreme Court for it involves a question purely of law.
Issue: Was there a contract to buy and sell between the parties or only a
unilateral promise to sell? ✏ Question: A privilege was given but the offeree did not pay
Held: The Supreme Court affirmed the lower court’s decision. The any consideration for that privilege. What can the offeror
instrument executed in 1961 is not a "contract to buy and sell," but do?
merely granted plaintiff an "option" to buy, as indicated by its own ‣ Answer: If the option is not supported by an independent
title "Option to Purchase." The option did not impose upon plaintiff consideration, offeror can withdraw the privilege at any
Sanchez the obligation to purchase defendant Rigos' property. Rigos time by communicating the withdrawal to the other
"agreed, promised and committed" herself to sell the land to Sanchez party, even if the option had already been accepted.
for P1,510.00, but there is nothing in the contract to indicate that
her aforementioned agreement, promise and undertaking is ‣ If option contract not supported by consideration, it is
supported by a consideration "distinct from the price" stipulated for not binding.
the sale of the land. The lower court relied upon Article 1354 of the
Civil Code when it presumed the existence of said consideration, but
the said Article only applies to contracts in general. Option money vs Earnest money
However, it is not Article 1354 but the Article 1479 of the same Code - Earnest money is part of the purchase price. This
which is controlling in the case at bar because the latter’s 2nd presupposes that there is already contract of sale, unlike
paragraph refers to "sales" in particular, and, more specifically, to "an option money
accepted unilateral promise to buy or to sell." Since there may be no • In sum , if there is consideration, I cannot withdraw the offer
valid contract without a cause or consideration, the promisor is not for 15 days since I will be liable. The obligation of offeree is
bound by his promise and may, accordingly, withdraw it. Pending to manifest acceptance within the 15 day period. You can
notice of its withdrawal, his accepted promise partakes, however, of accept on 16th day basta wai naka una or wa pa gi
the nature of an offer to sell which, if accepted, results in a perfected
contract of sale. Upon mature deliberation, the Court reiterates the withdraw.
doctrine laid down in the Atkins case and deemed abandoned or
modified the view adhered to in the Southwestern Company case.
OPTION MONEY EARNEST MONEY

d. CONTRACT OF OPTION
The distinct consideration in case of This is the money given to the seller
an option contract. It does not by the prospective buyer to show
Article 1324. When the offerer has allowed the offeree a certain period to form part of the purchase price that the latter is truly interested in
accept, the offer may be withdrawn at any time BEFORE acceptance by hence, it cannot be recovered if the buying the property, and its aim is
buyer did not continue with the to bind the bargain.
communicating such withdrawal, except when the option is founded sale.
upon a consideration, as something paid or promised.
Note: Option money may become It forms part of the purchase price
earnest money if the parties so which may be deducted from the
■ Contract of Option — is a contract where in the one given agree. total price. It also serves as a proof
the option is given the privilege to choose to buy or not to of the perfection of the contract of
sale. The rule is no more than a
buy within the given period of time. It is a contract in itself. disputable presumption and
prevails only in the absence of
contrary or rebuttable evidence.
■ Option contract — is a preparatory contract giving a person
for a consideration a certain period and under specified
Payment is considered option When the payment constitutes as
conditions within which to accept the offer of the offerer. It is money when it is given as a part of the purchase price. Hence,
separate and distinct from the projected main agreement separate and distinct in case when the sale did not
or principal contract itself (subject matter of the option) consideration from the purchase happen, it must be returned to the
which the parties may enter into upon the consummation of price. Consideration in an option prospective buyer.
contract may be anything or
the option or which will be perfected upon the acceptance undertaking of value.
of the offer.
■ Option — may also refer to the privilege itself given to the
offeree to accept an offer within a certain period.
■ Option period — is the period given within which the offeree
must decide whether or not to enter into the principal
contract.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

✏ Question: When you say that there must be a consideration

OPTION CONTRACT RIGHT OF FIRST REFUSAL
what are the acceptable forms of consideration?
‣ Answer: Money but could also be like stocks, etc.
- is a preparatory contract in - is a contractual grant, not of the
which one party grants to sale of a property but of the first
another, for a fixed period and priority to buy the property, in ✏
at a determined price, the the event the owner sells the same Question: So if there is a consideration that supports an
privilege to buy or sell, or to option contract, so what is the obligation of the offeror?
- While the object might be made
decide whether or not to enter determinate, the exercise of the ‣ Answer: He would wait until the period would lapse until
into a principal contract right would be dependent not only he could sell.
- It binds the party who has given on the grantor’s eventual intention
the option not to enter into to enter into a binding juridical
the principal contract with any relation with another but also on ✏ Question: So when you say wait, what can he do in the mean
other person during the period terms, including the price, that are time while he is waiting?
designated, and within that yet to be firmed up.
period, to enter into such ‣ Answer: Can do anything except sell it with another. He
contract with the one to whom can negotiate but NOT sell. Wait until the lapse of time.
the option was granted, if the
latter should decide to use the
option • It doesn’t result in any perfected contracts. But if there is
consideration, there is no option contract because the
- the option granted to the Basis: current offer to sell the of the privilege to … is given to another person
offered is for a fixed period seller or offer of the purchaser to buy
and at a determined price
- lacking of these 2 essential ✏ Question: When there is an option and founded upon a
requisites would be merely a consideration, what is the obligation of the offeree?
right of first refusal ‣ Answer: Has the privilege to buy or not to buy

✏ Question: Would it be correct that the offeree is bound to

OPTION CONTRACT CONTRACT OF SALE accept the offer?
‣ Answer: He is not bound to accept.
- option is an unaccepted offer - fixes definitely the relative rights ☞ Situation: The privilege was given but offeree did not pay any
- states the terms and conditions on and obligations of both parties at
the time of its execution
consideration for that privilege?
which the owner is willing to sell
‣ Answer: That offeror is free to recover it.
his property, if the holder elects - offer and the acceptance are
to accept them within the time concurrent, since the minds of
limited. If the holder does so the contracting parties meet in
elect, he must give notice to the the terms of the agreement
✏ Question: What if during the period, two weeks after the offer
other party, and the accepted - merely grants a privilege to buy was made, even if there was no consideration, he
offer thereupon becomes a valid or sell within an agreed time and accepted it. Is the offeror bound to enter into a formal
and binding contract. If an at a determined price contract? (acceptance before withdrawal)
acceptance is not made within
the time fixed, the owner is no ‣ Answer: It will be binding because there was already
longer bound by his offer, and meeting of the minds.
the option is at an end

✏ Question: Is there a perfected contract now?

Test: whether or not the agreement could be specifically enforced
‣ Answer: “BEFORE ACCEPTANCE” by communicating
- that the obligation of the - agreement is only an “option’’ such withdrawal.
purchaser to pay the purchase when no obligation rests on the - Meaning, even if the option is not founded upon
price is specific, definite and party to make any payment
certain and consequently, except such as may be agreed consideration but offeror failed to withdraw but offeree
binding and enforceable on between the parties as accepted, there is already a perfected contract.
consideration to support the
option until he has made up his
mind within the time specified 1479 — Law on Sales
Article 1479. A promise to buy and sell a determinate thing for a price certain
is reciprocally demandable.
☞ Example: You are asked to buy a land for several millions. It
may take several months. If an offer is made today, an An accepted unilateral promise to buy or to sell a determinate thing for a
offeror gives the offeree a three-month period to accept the price certain is binding upon the promisor if the promise is supported by
offer. a consideration distinct from the price.
☞ Q: What will happen in the mean time for that three-month - This presents a contradictory provision
period? Possibly, the offerer may be given a better offer
from another offeree. - gives us the impression that even if the promise to buy or to
sell has already been accepted but if the promise is not
- There is no perfected contract yet. No acceptance yet. supported by a consideration, it is not binding on the
But just because there is no consent yet, would that promisor
mean that the offeror has the absolute discretion to just
offer it to anybody with a better offer? - on the other hand, 1324 tells us that even if the option is not
- 1324, the offeror may withdraw as a GR anytime during supported by a consideration, but once accepted, it is
already binding
the period but except if that option is founded upon a
consideration, then he may not.
✏ Question: What is the implication?
• Option is founded upon consideration
‣ Answer: An option should have a consideration for it to
- Privilege granted by one party to buy or not to buy a be reciprocally demandable.
certain object during a period.

✏ Question: In the example given where is the option given?

✏ Question: What if there is acceptance? Does it result to
perfection?
‣ Answer: The period.
‣ Answer: NO. Because 1479 requires consideration.
- Even if accepted, if no consideration, not binding.
✏ Question: Can the option be a contract itself? But in 1324, even if no consideration, if accepted,
‣ Answer: Yes, separate and distinct. already binding.

- It is a contract in itself. It would need a consideration for its

existence and validity. Southwestern Case
What happened here was there was a withdrawal after acceptance so SC
said that the offeror was correct in his withdrawing. It was a valid
withdrawal inspite acceptance. They used 1479.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Confusing because of Eulogio vs Apeles

Sanchez vs Rigos • SC said in this case that this is an example of option contract
and therefore it needs consideration to be valid
The SC directly addressed the ruling in SOUTHWESTERN. The SC
overturned the Southwestern Case. In here, it was said that option • Par 3 of the contract: “this would be effective... and shall
not founded upon consideration is an offer that shall stand on its remain binding for 3 years. The lessor hereby gives lessee
own. Even if not founded upon consideration as long as there is an option to buy subject house..”
acceptance it results in a perfected contract.
• I do not know what your discussion will be later in sales. Some would • Difference with Equatorial? Nothing, but Equatorial was held
content that katong gi accept promise raman, not really the sale, as right of first refusal but here it is an option contract.
so lahi na sila. Even if promise is accepted, it doesn’t follow that
there is perfected contract of sale. Some say if promise is accepted,
there arises a bilateral contract of sale. So tagaan tikag option • So how do you determine? Maybe the guiding principle is
basta gi accept na nimo bisag walai consideration, dili na pede ma that in an option contract, there must already be a
withdraw. I think this is the better rule. Contract of sale na pag- decision to sell on part of owner.
accept nimo.
• Whereas in right of first refusal, no decision to sell yet. Only
states that “in the event”; only a hypothetical statement
Equatorial Realty Dev. vs. Mayfair Theater, Inc.
QUESTION WAS STILL UNSETTLED. (1324 or 1479?)
Facts: Petitioner Carmelo and Bauerman Inc. leased its parcel of land
with 2-storey building to respondent Mayfair Theater Inc. They Cases after Sanchez returned to Southwestern. (See De Leon
entered a contract which provides that if the LESSOR should desire book) But there are also those that upheld Sanchez.
to sell the leased premises, the LESSEE shall be given 30-days
exclusive option to purchase the same.
• PNOC v KEPPEL, the SC finally settled this issue.
Carmelo informed Mayfair that it will sell the property to Equatorial.
Mayfair made known its interest to buy the property but only to • In here, it was said that when an offer is supported by a
the extent of the leased premises. Notwithstanding Mayfair’s separate consideration it is a valid option contract. So if
intention, Carmelo sold the property to Equatorial. offer is not with consideration, there is no option contract.
Issue: WON the sale of the property to Equatorial is valid.
Held: The sale of the property should be rescinded because Mayfair ✏ Question: What is the status of an option contract without a
has the right of first refusal. Both Equatorial and Carmelo are in consideration and there is acceptance before withdrawal?
bad faith because they knew of the stipulation in the contract ‣ Answer: Then there is a perfected contract.
regarding the right of first refusal. The stipulation is a not an
option contract but a right of first refusal and as such the
requirement of a separate consideration for the option, has no • RULE NOW: When the option is not founded upon a
applicability in the instant case. The consideration is built in the consideration but not withdrawn before acceptance =
reciprocal obligation of the parties. perfected contract.
In reciprocal contract, the obligation or promise of each party is the
consideration for that of the other. (Promise to lease in return of the
✏ Question: How did SC justify this?
right to first refusal)
With regard to the impossibility of performance, only Carmelo can be ‣ Answer: En Banc (Sanchez, therefore controlling)
blamed for not including the entire property in the right of first refusal. - No doctrine laid down by the court in a decision
Court held that Mayfair may not have the option to buy the rendered en banc or in division may be modified
property, not only the leased area but the entire property. or reversed except by the court sitting en banc.
(July 2016, PNOC)

R IGH T O F REFUSAL • Right to first refusal — normally in contracts of lease.

• In Equatorial: Option contract vs right of first refusal
- I offer usa sa lessee before i-offer to a third person.
• Right of first refusal does not need independent
consideration because it is deemed to be built in the - So lessor asked lessee if is she interested to buy and if
contract. refused, will offer it to another.
• We can find this in a contract of lease. You are given the
privilege to refuse first. Case:
• This is a right that is enforceable; this means there is a • SC: His right to first refusal shall be respected. When you are
second contract which violated your right; the status of the the one given the right, and it is violated, you will question
second contract is that it is rescissible. the contract. What is our ground? This is a rescissible
• Why rescissible? There are 3 types of rescissible contracts. contract.
One is a contract entered into in fraud of creditors (similar • When a contract is entered by a party which violates a right
with accion pauliana) to first refusal, that contract is rescissible because that is
• If you are holder of a right of first refusal, you are likened to a “in fraud of creditors”.
creditor; • In relation to option, one of the arguments raised by the seller
• If there is violation, you can ask court that second contract was I am not liable and not bound to respect because not
be rescinded. supported by consideration! So that does not bind me, I
can withdraw before acceptance. So when I sold the
premises to another before I knew of the acceptance, that
• In Equatorial: SC said that if right of first refusal is violated, is tantamount to the offer.
the second is rescissible. If you do not contest, that the
second contract will be perfectly valid
• SC: NO. Right of first refusal is NOT AN OPTION CONTRACT.
It is part and parcel of the contract of lease. So the
IN ORDER OF DEFECT:
consideration that supports that contract of lease is the
1) Rescissible — meaning dili grabi ang defect same consideration that supports the right to first refusal.
2) Voidable — which is valid until annulled; if consent is
vitiated, and you did not take action, the contract will be • Problem here is?
validated
- The suggestion seems to be the right to first refusal is
‣ Void — even if complete, can never be validated
not an independent contract. It is part of the lease.
3) Unenforceable — pinaka-defective ang void

PNOC vs Keppel
• Right of first refusal does not need independent
Facts: Almost 40 years ago Keppel entered into a lease agreemen with
consideration because the consideration is actually what
Lusteveco covering 11 hectares of land located in Batangas. The
the lessee paid by way of rentals. lease was for a period of 25 years for a consideration of Php 2.1
• On the other hand, option is a separate and distinct contract. million. At the option of Lusteveco, the rental fee could be totally or
partially converted into equity shares in Keppel.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

At the end of the 25-year lease period, Keppel was given the “firm and
absolute option to purchase” the land for P4.09 million, provided OPTION CONTRACT CONTRACT OF SALE
that it had acquired the necessary qualification to own land under
Philippine laws at the time the option is exercised. Apparently, when
the lease agreement was executed, less than 60% of Keppel’s - right or privilege to - the subject matter is
shareholding was Filipino-owned, hence, it was not constitutionally buy (or to sell) a the determinate thing
Subject Matter determinate thing for itself
qualified to acquire private lands in the country. a price certain
Keppel remained unqualified to own private lands, the agreement
provided that the lease would be automatically renewed for - an option contract is - acceptance of the offer
another 25 years. Keppel was further allowed to exercise the option the acceptance by itself whereby the
to purchase the land up to the 30th year of the lease (or in 2006). the offeree of the offeree asserts his or
Together with Keppel’s lease rights and option to purchase, Lusteveco offeror’s promise to her right or privilege
sell (or to buy) the to buy (or to sell),
warranted not to sell the land or assign its rights to the land for the
duration of the lease unless with the prior written consent of Keppel. Consent determinate thing which constitutes as
☞ i.e,the offeree agrees his or her consent to
Accordingly, when the PNOC acquired the land from Lusteveco and took to hold the right or the sales contract
over the rights and obligations under the agreement, Keppel did not privilege to buy (or to
object to the assignment so long as the agreement was annotated sell) within a
on PNOC’s title. specified period
On 2000, Keppel wrote PNOC informing the latter that at least 60% of
its shares were now owned by Filipinos and expressed its readiness - contract may be - purchase price must
to exercise its option to purchase but PNOC did not favorably Consideration anything of value be in money or its
respond. equivalent

Keppel instituted complaint for specific performance with RTC.

PNOC countered Keppel’s claims by contending that the agreement
was illegal for circumventing the constitutional prohibition against NECESSARY LEGAL CAPACITY
aliens holding lands in the Philippines. It further asserted that the • Factors that affect the giving of proper consent. Ask yourself
option contract was void, as it was unsupported by a separate
valuable consideration. It also claimed that it was not privy to the whether the one who gave his consent is capacitated.
agreement. When you took up persons, there are some juridical acts
RTC — favored Keppel which would affect the capacity of one party.
CA — upheld Keppel’s right to acquire the land and found that since the
option contract was embodied in the agreement – a reciprocal Article 1327. The following cannot give consent to a contract:
contract – the consideration was the obligation that each of the
contracting party assumed. Since Keppel was already a Filipino- (1) Unemancipated minors;
owned corporation, it satisfied the condition that entitled it to (2) Insane or demented persons, and deaf-mutes who do not know
purchase the land. how to write.
HELD: We find that the offer to buy the land was timely accepted by
Keppel.
When the written agreement itself does not state the consideration for WH O C A N N O T GI V E C O N S E NT
the option contract, the offeree or promisee bears the burden of
proving the existence of a separate consideration for the option. The 1. UNEMANCIPATED MINORS

offeree cannot rely on Article 1354 of the Civil Code, which presumes - Cannot make contracts. But he may create a contract
the existence of consideration, since Article 1479 of the Civil Code is through his guardian. In order to have a guardian, go
a specific provision on option contracts that explicitly requires the to court and ask the court to appoint a guardian.
existence of a consideration distinct from the purchase price. - When you say minor, always unemancipated
For uniformity and consistency in contract interpretation, the better
rule to follow is that the consideration for the option contract should
be clearly specified as such in the option contract or clause. 2. INSANE OR DEMENTED PERSONS

Otherwise, the offeree must bear the burden of proving that a - Lucid interval — valid. (needs court order to be declared
separate consideration for the option contract exists. insane because everyone is presumed to be sane)
Given our finding that the Agreement did not categorically refer to any
consideration to support Keppel’s option to buy and for Keppel’s
failure to present evidence in this regard, we cannot uphold the 3. DEAF-MUTES WHO DO NOT KNOW HOW TO WRITE.

existence of an option contract in this case. - not knowing how to read not included
The absence of a consideration supporting the option contract,
however, does not invalidate an offer to buy (or to sell). An option • These cannot give consent but it did not say that they cannot
unsupported by a separate consideration stands as an unaccepted enter a contract. There has to be representatives.
offer to buy (or to sell) which, when properly accepted, ripens into a
contract to sell.
The Court en banc declared that there is no distinction between these ✏ Question: How can a minor sell a property?
two provisions because the scenario contemplated in the second ‣ Guardian must act for his behalf. How do you appoint a
paragraph of Article 1479 is the same as that in the last clause of guardian? Not merely SPA. Signing SPA is also a
Article 1324. Instead of finding a conflict, Sanchez v. Rigos contract. So guardian must go to the court or any
harmonised the two provisions, consistent with the established rules
of statutory construction. relative and ask the court for the appointment of a
guardian.
Thus, when an offer is supported by a separate consideration, a valid
‣ By operation of law, parents are guardians over minor
option contract exists, i.e., there is a contracted offer which the
offeror cannot withdraw from without incurring liability in damages. and property of minor except with regard to property,
On the other hand, when the offer is not supported by a separate there has to be BOND if value would exceed 50,000.
consideration, the offer stands but, in the absence of a binding ‣ Basta parent, no need to secure guardianship.
contract, the offeror may withdraw it any time. In either case, ‣ If you sell the property of your ward you should always
once the acceptance of the offer is duly communicated before the have authority from the court.
withdrawal of the offer, a bilateral contract to buy and sell is
generated which, in accordance with the first paragraph of Article
1479 of the Civil Code, becomes reciprocally demandable. ■ Remedy: institute guardianship proceeding
Thus, when Keppel communicated its acceptance, the offer to purchase • Article 225: Legal guardianship over property of minor child;
the Bauan land stood, not having been withdrawn by PNOC. The only thing requires is to file verified petition for approval of
offer having been duly accepted, a contract to sell the land ensued bond not less than 10% of value of property; relief is not
which Keppel can rightfully demand PNOC to comply with. that you be appointed as guardian since you are already
guardian as parent by operation of law; you are only
require to put up a bond
• Sanchez v. Rigos remains as the controlling doctrine.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

4. ALL OF THOSE DECLARED INCOMPETENT – LIKE PRODIGAL, E FF E CT : VO ID A BL E

SPENDTHRIFT
• Mistake and violence — spontaneous and intelligence
• TN: In guardianship, it is complicated, it might be tempting ■ Effect of Defects of Will — Contract is VOIDABLE (Art 1330)
that if someone is in coma you would let him sign thru
thumbmark, don’t let him sign with thumb mark! It could
raise doubt. (Not capable of giving consent CAUSES THAT VITIATE CONSENT — VOIDABLE

1. Error or Mistake (Art. 1331)

5. INSOLVENT
2. Violence or Force (Art. 1335)
3. Intimidation or Threat or Duress (Art. 1335)
6. SUFFERING FROM CIVIL INTERDICTION
4. Undue Influence (Art. 1337)
5. Fraud or Deceit (Art. 1338)
• Issue would normally arise when contract is signed by
someone in advanced age. VICES OF CONSENT
✏ Question: Can you invalidate the contract?
‣ Answer: NO. Do not conclude that if that is old, then Article 1330. A contract where consent is given through mistake, violence,
his mental faculties is already impaired. intimidation, undue influence, or fraud is voidable.
• Consent is defective because of the circumstances
Article 1329. The incapacity declared in article 1327 is subject to the
modifications determined by law, and is understood to be without ■ Status: voidable — valid until annulled; contract may be
prejudice to special disqualifications established in the laws. validated
■ Default period: 4 years
■ Remedy: Annulment
OTHER SPECIAL DISQUALIFICATIONS PROVIDED BY LAW

1. Considered incompetents and may be placed under

■ TN: Be very precise. If you are asked about the status of the
guardianship
contract, know if the contract is unenforceable,
(a) civil interdiction rescissible, voidable, etc.
(b) hospitalized lepers
(c) prodigals (spendthrifts) • Voidable — valid until annulled. Implication is, if your
(d) deaf and dumb who are unable to read and write consent is vitiated and you did not take action to have the
(e) unsound mind even if they have lucid interval contract set aside, contract will be validated.
(f) by reason of age, disease, weak mind, other similar • Void — even if the parties are okay if void, it can never be
causes, cannot take care of themselves without validated.
outside aid
☞Example of a contract where there is no consent: Forged
2. Cannot give valid consent document. (absence of consent, not merely defective)
(a) insolvents until discharged
(b) married women in cases specified by law ☞Example when consent is vitiated: Tutukan ug pusil
(c) husband and wife with respect to sale of property to
each other or donation
1. M IS T A KE O R E R R O R
(d) other persons especially disqualified by law - is the false notion of a thing or a fact material to the contract
- a wrong or false notion about such matter, a belief in the
WH E N O FFE R AND / O R A CCE P T ANCE I S M ADE existence of some circumstance, fact or event which in
• Instances that affect free giving of consent reality does not exist
- There must be wrong perception (Sps Reyes v CA)
- But not all mistake may result to invalidation of the contract
Article 1328. Contracts entered into during a lucid interval are valid. - It must be substantial.
Contracts agreed to in a state of drunkenness or during a hypnotic spell are
voidable.
☞Example: Personality of buyer not in substance
a. DURING LUCID INTERVAL — VALID

• Insane — generally cannot give consent but may during

a lucid interval; but there is a presumption of sanity Article 1331. In order that mistake may invalidate consent, it should refer to
■ Remedy: Go to court and have him declared insane then the substance of the thing which is the object of the contract, or to those
have a guardian appointed by court conditions which have principally moved one or both parties to enter into
the contract.
b. IN A STATE OF DRUNKENNESS — VOIDABLE
Mistake as to the identity or qualifications of one of the parties will vitiate
• utter want of understanding 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.
c. DURING A HYPNOTIC SPELL — VOIDABLE

• utter want of understanding

• May be made in good faith
CONSENT MUST BE INTELLIGENT, FREE, • May be mistake of fact, substance, principal conditions,
SPONTANEOUS, AND REAL identity, qualification in obligation to do

Article 1330. A contract where consent is given through mistake, violence,

intimidation, undue influence, or fraud is voidable. KINDS OF MISTAKE

1. MISTAKE OF FACT

- generally not a ground for annulment of contracts

CHARACTERISTICS OF CONSENT
- that which arises from an ignorance of some provisions
1. Intelligent — legal capacity to act of law, or from an erroneous interpretation of its
2. Freedom — no vitiation of consent by reason of violence or meaning, or from an erroneous conclusion as to the
intimidation legal effect of an agreement, on the part of one of the
parties.
3. Spontaneity — no vitiation of consent by reason of mistake,
undue influence, or fraud

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• Ground of mistake based on error is limited to cases in which ☞Example: Person says he is a doctor and he has land to
it may reasonably be said that without such error the sell; when after you bought you found out he is not, it
consent would not have been given won’t prosper since it has nothing to do with
prestation; but lahi natong case sa singer; depend on
• Effect of mistake is determined by whether the parties would nature of contract
still have entered into the contract despite knowledge of ☞Example: You buy real estate and representation was
true fact — influence upon party that this is the area but what was there is lesser area;
1542 gives the guide
For mistake of fact to vitiate consent, must refer to: 4. Error which could have been avoided by the party alleging
it
(1) The substance of the thing which is the object of the
contract; or
(2) Those conditions which have principally moved one or both • Boundary prevails over the area: if you purchase land and
parties to enter into the contract; or boundaries are stated but when there was survey and
boundaries were changed.
(3) The identity or qualifications of one of the parties, provided, ✏ Question: Is owner entitled to additional land?
the same was the principal cause of the contract.
‣ Answer: No, seller only bound to deliver those
☞ Example: modeling, boxer, architect, who misrepresent
that they are qualified but are really not mentioned in the contract within the boundaries;
boundaries already delineated
(4) As to quantity
☞ Example: Regalian Doctrine — when your land is
overcome with water, it becomes a land of public
✏ Question: Can you cancel a sale on the ground that you
dominion, but the certificate of title is not invalidated were mistaken in purchasing property?
‣ Answer: No basis to invalidate if based on motive
☞ Example: Asiain vs Jalandoni — “Mutual mistake of the
contracting parties to a sale in regard to the subject which is immaterial
matter thereof which is so material as to go to the
essence of the contract is a ground for relief and • Mistake must refer to the substance of the thing and those
recission.” conditions which have principally moved the parties to a
- mistake as to quantity must be substantial contract
- negligible mistake will not annul the contract
Alcasid Case
Representation did not invalidate consent because she could have
Invalidates consent if refers to the substance of the checked first the realities (no mistake)
thing
Substance of the object ‣
The mistake must be real mistake.
But if mistake in lot number for instance ,
remedy is only reformation of the contract

As to principal conditions
• Note/Rule in Property: Under the Torrens system, when
(essential or substantial Invalidates consent you buy a property that is registered/covered by transfer
in character) certificate title, one purchasing it doesn’t have to go
beyond that title generally. This is for easier transactions
• For identity/error as to person —
generally not, involving real estate.
EXCEPT when the qualification is the principal • Every time one deals with the property, tatakan na sa likod.
As to identity or cause of the contract especially in gratuitous
qualifications of one of contracts
Ipa-lease, tatak. Naai claim, tatak sa likod.
the parties • For qualifications • If you deal with the land and naai mga tatak dha na
— Invalidates consent
• Solvency of the party — not a cause of nullity
encumberance noted there, you are buying at your own
risk.
• Error of account is a mistake in computation — make • So if there is nothing noted there, title is said to be a clean
proper correction title.
As to quantity, as • Error as to quantity
— may vitiate a contract if the
distinguished from a primary consideration is the quantity
✏ Problem: If you buy relying only based on the face of the title,
simple mistake account ☞ e.g. buying land consisting of 100 hectares
and buyer discovers land has only 60 you are buyer in good faith. But in reality, the land was
hectares actually water, can you invalidate contract because you
were mistaken?
☞ Example of mistake in principal conditions: purchase parcel
of land and it was formerly ka-inginized ✏ Problem: There is a title which voters a parcel of land but it
- you cannot have a title over a timber or forest land turned out that parcel of land is classified as a forest land
- check first the classification of the land and you purchased it. Would that vitiate consent? If you
- principle: obtaining land title is not a mode of acquiring purchase it by mistake, can you recover what you paid?
ownership; it simply confirms ownership; so if you
really do not own, then there is nothing to confirm • If title covers a land classified as forest land, that title is
- never buy timberland, mangrove void. You are entering a contract of sale where subject
- if palit ka, goodbye to your millions matter is illegal, beyond commerce of man. If beyond
commerce of man, contract is not only voidable but VOID.

• There are mistakes which merely pertain to incidental and

accessory provisions; they do not invalidate the contract ✏ Question: Can you recover money on ground of mistake
considering it is a void contract?
‣ Answer: SO JUST RESOLVE BY YOURSELF (patay na!)
MISTAKE OF FACT WHICH DOES NOT VITIATE CONSENT

1. Error as regards the incidents of a thing or accidental

qualifications Asiain vs. Jalandoni
☞ Example: I bought from you a yellow highlighter, but by Facts: Asiain sold his 25-hectare property, “more or less” to Jalandoni,
mistake you gave me a green highlighter including the sugar canes therein. But because the actual property
2. Mistake as to the quantity or amount and produce that were delivered to Jalandoni were less than stated
(from 25 to 18 hectares, and 2000 to 800 piculs of sugar), the
☞ Example: I bought the same highlighter for 100 but it agreement is rescinded due to gross mistake. Although the sale is a
turned out to be only 70. sale in gross where the size of the property was variable, such
3. Error as regards to the motives of the contract variability was not meant to be gross that it would have been beyond
the contemplation of the parties. Hence, due to their mutual mistake
4. Mistake of the identity or qualifications of a party —
regarding such qualities of land and sugar, the contract is rescinded.
applicable in obligations to do;

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Heirs of William Sevilla vs. Sevilla • Mistake upon a doubtful provision of the law is analogous to
a mistake of fact. This is stilla ground for annulment.
Facts: Felisa donated her share of her sister’s estate to her nephew,
Leopoldo. Despite her old age and alleged sickness at the time of the (Casilag vs Rodriguez)
execution of the Deed of Donation, the donation remains valid
because of the lack of evidence to rebut the presumption of valid EXCEPTION: MUTUAL ERROR OF LAW

consent. There was no proof of specific acts that Leopold had

employed to vitiate the consent of his aunt. Also, the condition of Article 1334. Mutual error as to the legal effect of an agreement when the
Felisa was also not proven to show her susceptibility to fraud. real purpose of the parties is frustrated, may vitiate consent.

Spouses Theis vs. Court of Appeals Requisites for mutual error of law:
A mistake traceable to an erroneous survey was made in the deed of sale 1. Error must be as to the legal effect of an agreement
the identification of the parcel of land intended to be sold. (includes rights and obligations of the parties, not as
Facts: Private respondent Calsons Development Corporation is the stipulated in the contract but as provided by law)
owner of three (3) adjacent parcels of land (parcel nos.1, 2 and 3). All 2. Must be mutual
three parcels of land are situated in Tagaytay City. Adjacent to parcel 3. Real purpose of the parties is frustrated
no.3 is a vacant lot denominated as parcel no. 4. In 1985, Private
respondent constructed a two-storey house on parcel no. 3 and the
two other lots remained idle. WHEN ONE OF THE PARTIES IS UNABLE TO READ

In a survey conducted in 1985, parcel no. 3 was erroneously indicated to

be covered by the TCT of parcel no. 1, while the parcel no. 1 and Article 1332. When one of the parties is unable to read, or if the contract is in
parcel no. 2 were mistakenly surveyed to be located on parcel no. 4 a language not understood by him, and mistake or fraud is alleged, the
instead. Unaware of the mistake private respondent sold said parcel person enforcing the contract must show that the terms thereof have
no. 4 to petitioners. been fully explained to the former.
In 1990, petitioners discovered that parcel no. 4 was owned by another
person. They also discovered that the lots actually sold to them were - Burden of proof on party enforcing the contract
parcel nos. 2 and 3. To remedy the mistake, private respondent
offered parcel nos. 1 and 2 as these two were precisely the two INEXCUSABLE MISTAKE

vacant lots which private respondent owned and intended to sell.

Petitioners rejected the good faith offer. Private respondent made Article 1333. There is no mistake if the party alleging it knew the doubt,
another offer, this time the return of an amount double the price contingency or risk affecting the object of the contract.
paid by petitioners. Petitioners still refused. Private respondent was
then compelled to file an action for annulment of deed of sale and - Case of Estoppel
reconveyance of the properties subject thereof in the RTC which
ruled on their favor and on appeal, the CA affirmed the same.
• Party cannot alleged error which refers to a fact known to him
Issue: WON petitioners should be allowed to take parcel no. 3.
or which he should have known by ordinary diligent
Ruling: Petition dismissed. CA decision affirmed. examination of the facts
The SC held that private respondent obviously committed an honest
mistake in selling parcel no. 4. The good faith of the private • Courts consider not only the objective aspect of the case but
respondent is evident in the fact that when the mistake was also the subjective
discovered, it immediately offered two other vacant lots to the ☞Example: Intellectual capacity of the person who made
petitioners or to reimburse them with twice the amount paid. That the mistake; Caused by manifest negligence
petitioners refused either option left the private respondent with no
other choice but to file an action for the annulment of the deed of
sale on the ground of mistake. Alcasid vs. Court of Appeals
To allow the petitioners to take parcel no. 3 would be to countenance Facts: Private respondent offered to purchase from petitioner two
unjust enrichment. Considering that petitioners intended at the parcels of land it owns. It replied that it was willing to sell her share
outset to purchase a vacant lot, their refusal to accept the offer of if her co-owners would sell their respective shares. The petitioner
the private respondent to give them two (2) other vacant lots in engaged the services of Atty. Fernandez to negotiate the sale,
exchange, as well as their insistence on parcel no. 3, which is a house without knowing that he was also representing private respondent.
and lot, is manifestly unreasonable. Atty. Fernandez confirmed to petitioner that all her co-owners were
to sell their respective shares. Thus, petitioner signed a Deed of Sale.
however, upon learning that her co-owners did not agree to sell their
2. MISTAKE/ERROR OF LAW:
shares, petitioner filed a complaint for the annulment of the contract
of sale which TC granted but was reversed by CA on ground that the
Article 3. Ignorance of the law excuses no one from compliance therewith. complaint stated no cause of action. Hence, this petition. Petitioner
alleges that the complaint was based upon fraud and undue
influence which vitiated her consent; and were it not for the
• Mistake of law — is that which arises from an ignorance of misrepresentation of Atty. Fernandez, she would not have agree to
some provisions of law, or from an erroneous interpretation sell her share.
of its meaning, or from an erroneous conclusion as to the Decision: On the matter of fraud, to invalidate consent, error must be
legal effect of an agreement, on the part of one of the real and not one that could have been avoided by the party alleging
parties. it. Petitioner could have avoided the alleged mistake had she exerted
efforts to verify from her co-owners if they really consented to sell
their shares. As to undue influence which is a destruction of the free
• When you seek to annul contract, do not stop there. Ultimate agency of the party, the petitioner executed the contract of her own
object is to recover what you gave. free will and choice and not from duress. Hence, petitioner did not
have cause of action.
• in Kasilag vs Rodriguez, SC ruled that mistake upon a
doubtful provision of law may be a basis of good faith
• this involved sale of land covered by free patent then there 2. V IO L EN CE AN D IN T I MI DA T IO N
was a sale. - Serious or irresistible force is employed.
• SC made an exceptional ruling here that even if there is a - Compelled by a reasonable fear.
mistake but linked with interpretation of the law; nature of
interpretation is in regard to a difficult question of law; • So even if the threat is not directed to you, if against spouse,
highly exceptional because we have to stick with ignorance descendants/ascendants, it will constitute vitiated consent
of law excuses no one • If directed upon your gf, classmate, friend, -> take note of
the reason of the law. Is there intimidation? YES!!!!!! Do not
☞ Example: You signed a document which you thought was a be too literal.
contract of sale but was really a contract of loan. This could • Demand letter for example.(Undue influence, deprivation of
be annulled if the mistake is mutual. reasonable freedom of choice)

• Annulment due to duress/intimidation. It was vitiated. He is

intimidated but that intimidation is legal.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• Annulment of marriage because vitiated kunuhay because WHEN VIOLENCE VITIATES CONSENT

nakabuntis then gipugos pakasal. — valid intimidation. - There is violence when I order to wrest consent, serious or
irresistible force is employed this is true although may have
been employed nu a third person who did not take part in
Article 1335. There is violence when in order to wrest consent, serious or the contract
irresistible force is employed. ☞Example: I signed a deed of sale of my land because you hit
There is intimidation when one of the contracting parties is compelled by a me with the but of the gun and threatened to shoot me if I
reasonable and well-grounded fear of an imminent and grave evil upon refuse to sign. Consent here is vitiated because of violence
his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
INTIMIDATION

To determine the degree of intimidation, the age, sex and condition of the - When one of the parties is compelled by a reasonable and
person shall be borne in mind. well grounded fear of an imminent and grave evil upon his
A threat to enforce one's claim through competent authority, if the claim is person or property of his spouse, descendants or
just or legal, does not vitiate consent. ascendants, also exist although employed by a third
person who did not take part in the contract
• Often intimidation happens, not violence kay karaan nani siya ☞Example: I signed a deed of sale because you pointed a gun
• Prove the specific facts and make sure there was really on my head and threatened me that if I don’t sign the deed
intimidation that affected free exercise of consent of sale you will shoot me
• That’s why law says condition of person shall be borne in
mind FACTORS CONSIDERED IN DETERMINING THE DEGREE OF
INTIMIDATION

• Violence requires the employment of physical force. Under a. Age

article 1335, to make consent defective, the force b. Sex
employed must be either serious or irresistible in either c. Condition of the person
case consent is not free. Force must be the determining
cause or reason for giving consent.
Article 1335. …A threat to enforce one's claim through competent
NATURE OF INTIMIDATION AND THREAT
authority, if the claim is just or legal, does not vitiate consent.
1. It must produce a reasonable and well grounded fear of an • Threat to enforce just or legal claim — does not vitiate
evil consent, cannot constitute duress. Such a threat is proper
2. The evil must be imminent and grave within the realm of the law as a means to enforce collection
3. The evil must be upon his person or property, or that of his • General collective feeling of fear — there must be a
spouse, descendants or ascendants and specific act or acts of violence or intimidation
4. It is the reason why he enters into the contract
EFFECT OF “VIOLENCE” AND “INTIMIDATION”:

☞ Example: Wala siguro intimidation kung dako kayo ka na taw

nya si Ramoneda imong kontra, wa siguro intimidation Article 1336. Violence or intimidation shall annul the obligation, although
diha. Maybe capable lang siya ug persuading (charbaki it may have been employed by a third person who did not take part in the
haha) contract.
• This is intimidation that is not a ground
• DURESS — degree of constraint or danger either actually
inflicted (violence) or threatened and impending
☞Example: When person threatens to sue another person for
(intimidation) sufficient to overcome the mind and will of a
sexual harassment if he does not sign contract —
person of ordinary firmness
Consideration to take account: is the threat related to the
contract?
• Seriousness of the evil or wrong measured both - What I understand is that there must be a reasonable nexus
‣ Objectively (degree of harm that the evil in itself is likely between the threat and the contract.
to produce) and - For me here, there is a doubtful validity because there is no
‣ Subjectively (determining the effect of the threat upon connection. This is blackmailing pure and simple.
the mind of the victim in view of his personal
circumstances and his relation to the author of the
☞Example: You had loan with bank and you defaulted. You
intimidation)
have other properties. Then bank says we are willing to
restructure your loan but you have to put up a security
through a mortgage. Will you agree under threat that you
Violence Intimidation
will be sued for collection, violation of law? Then can you
later say that you will annul contract because there was
- Physical force or - Moral force or compulsion
compulsion intimidation? Here is there is no question that this does not
- Internal operating upon the will and induces the vitiate consent.
- External and generally performance of an act
serve to prevent an - Influences the mind to choose between two
act from being done evils, between the contract and the imminent • Reverential fear — fear of a superior; fear of displeasing a
injury person to whom respect and obedience are due, the
contract is VALID because there is an absence of actual
Requisites: Requisites: fear
1.Physical force 1.Intimidation must be the determining cause of
employed must be the contract, or must have caused the consent
• Generally, this will not vitiate consent.
irresistible or of such to be given
a degree that the 2.That the threatened act be unjust or unlawful
victim has no other
☞Example: When employee separates, hatagaan nimog
course, under the 3.That the threat be real and serious, there being pabaon. Pero you also ask employee to sign a waiver. Then
circumstances, but an evident disproportion between the evil and the employee files a case. Sadly, our labor laws are partial
to submit the resistance which all men can offer, leading to the laborer. Labor laws are oppressive to the employer.
to the choice of the contract as the lesser evil
2.That such force is the - Here, employee contends there was intimidation in
determining cause in 4.That it produces areas on able and well-
giving the consent grounded fear from the fact that the person signing the waiver. This usually prospers because
to the contract from whom it come has the necessary means employers are careless.
or ability to inflict the threatened injury
- If you ask an employee to sign that waiver, make sure it
is notarized before the Department of Labor, not the
company lawyer because there will be presumption
that it was not voluntarily signed by the employee.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

- the influence must be of a kind that so overpowers and

subjugates the mind of a party as to destroy his free
DBP vs. Court of Appeals G.R. No. 138703, June 30, 2006 agency and make him express the will of another, rather
Facts: than his own
Held: Respondents’ allegation that they had no "choice" but to sign is
tantamount to saying that DBP exerted undue influence upon them.
The Court is mindful that the law grants an aggrieved party the right Article 1337. There is undue influence when a person takes improper
to obtain the annulment of a contract on account of factors such as advantage of his power over the will of another, depriving the latter of a
mistake, violence, intimidation, undue influence and fraud which
vitiate consent. However, the fact that the representatives were reasonable freedom of choice. The following circumstances shall be
"forced" to sign the promissory notes and mortgage contracts in considered: the confidential, family, spiritual and other relations between
order to have respondents' original loans restructured and to prevent the parties, or the fact that the person alleged to have been unduly
the foreclosure of their properties does not amount to vitiated influenced was suffering from mental weakness, or was ignorant or in
consent. financial distress.
The threat to foreclose the mortgage would not in itself vitiate consent
as it is a threat to enforce a just or legal claim through
competent authority. It bears emphasis that the foreclosure of • In some measure destroy the free agency of a party and
mortgaged properties in case of default in payment of a debtor is a legal interfere with the exercise of that independent discretion
remedy given by law to a creditor. In the event of default by the which is necessary for determining the advantages and
mortgage debtor in the performance of the principal obligation, the disadvantages of a contract
mortgagee undeniably has the right to cause the sale at public
auction of the mortgaged property for payment of the proceeds to
the mortgagee. ☞Example: Jerald, Mayor of Bukidnon, improperly takes
advantage of his power over a baranggay councilor who
regularly confides in him by persistently telling the member
Lee vs. Court of Appeals 201 SCRA 405 to sell his property to him
Facts: After the discovery that the check deposited and withdrawn from • The contract if entered into will be VOIDABLE at the instance
her uncle’s account was spurious, due to the forged signature of his of the member on the ground of undue influence
uncle, Maria was confronted by the Bank’s manager and was made to
sign a withdrawal slip against her own account to pay for the
amount and an affidavit admitting her swindling. Intimidation or REQUISITES OF UNDUE INFLUENCE

force could not have been present during the confrontation despite 1. a person can be influenced;
the gender and pregnancy of Maria because she was highly 2. fact that undue or improper influence was exerted
educated and was accompanied by her sister and was able to 3. submission to the overwhelming effect of such unlawful
move about freely where the shouting of Francis was insufficient or
constant as to compel her to sign the documents. conduct
SC applied Article 1335 because case is not about violence but
intimidation: CIRCUMSTANCES TO BE CONSIDERED

Art. 1335. There is intimidation when one of the contracting parties is 1. confidential, family, spiritual and other relations between the
compelled by a reasonable and well-grounded fear of an imminent parties,
and grave evil upon his person or property, or upon the person or 2. mental weakness,
property of his spouse, descendants or ascendants, to give his
consent. To determine the degree of the intimidation, the age, sex 3. ignorance or
and condition of the person shall be borne in mind. A threat to 4. financial distress of a person alleged to have been unduly
enforce once's claim through competent authority, if the claim is just influenced
or legal, does not vitiate consent.
No Intimidation → Voluntary Consent despite Reluctance and
Protestations Undue Influence Intimidation
(a) She is highly educated and very familiar with banking procedures ~
graduate from NCBA, with a masters degree, and worked at the - There need not be an unjust or - Unlawful or unjust act which is
Insular Bank of Asia and America as a bank teller unlawful act threatened and which causes
(b) She admittedly actively participated in the deposit and withdrawal consent to be given
of the proceeds of the controversial check ~ She was even willing
to return P48k which she took since it was only up to this amount Moral Coercion
where her involvement lies ~ Only when she realized that she
would have the enormous task of reimbursing the bank the
balance of the proceeds of the forged check allegedly taken by
Carpio, she refused to cooperate any further • By analogy, undue influence by a third person may also
(c) Threat to sue is not unlawful vitiate consent (Art 1336)
(d) She was able to move freely, unguarded, from the office of Francis at
the ground floor to the office of Cruz at the mezzanine floor ☞Financial Distress Example: Employee separated but was
where her sister found her ~ Presence of many bank clients and forced by employer to sign that he will not engage in similar
bank security guards that Francis could not have manifested job for 5 years. But the person also has other expenses
overt acts to prevent her from leaving, as admitted by Maria
herself > She and her sister actually left the bank unescorted to
eat their snack and that they went home instead despite Francis’ • DBP vs CA: Saying financial distress mi mao gi-force mig
demand for their return sign sa mortgage contract; not valid argument because
(e) Alleged detention at the Bank was not due to France’s threat but bank has legitimate claim
due to Maria’s desire to prove her innocence. ~ she could have
just left the Bank but chose not to “Because I cannot just leave him • Undue influence is common in Contract of adhesion
that way,” insisting that the responsibility of one person be my
responsibility ■ Contracts of adhesion — there is already a prepared
(f) Encashment of the RCBC Time Deposit Certificate was suggested contract
by her sister and not by Francis and was accepted by Cruz (PRO) - Contracts of adhesion are not entirely prohibited;
and not by Francis cannot say there is violation of mutuality of contract
(g) Her her claim that she was denied the opportunity to read the principle
Affidavit - do not make sweeping conclusion
- you must allege invalidity with circumstances that prove
it
3. U NDU E I NFLU ENCE
- any means employed upon a party which, under the • TN: that a provision that the bank reserves the right to adjust
circumstances, he could not well resist, and which
the interest rate at its own instance VIOLATES THE
controlled his volition and induced him to give his consent
MUTUALITY PRINCIPLE
to the contract which otherwise he would not have entered
into • Validity depends on the mental weakness, ignorance,
financial distress, etc.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

MAY BE COMMITTED THROUGH

• Stipulations in transportation contract which are incorporated 1. insidious words or machinations (Art. 1338)
in a contract of adhesion; just because you sign it doesn’t 2. concealment (Art. 1339)
mean you accede to it because they are illegal 1745

Article 1338. There is fraud when, through insidious words or

DBP vs. Court of Appeals G.R. No. 138703, June 30, 2006 machinations of one of the contracting parties, the other is induced to
Facts: enter into a contract which, without them, he would not have agreed to.

Held: The financial condition of respondents may have motivated them

to contract with DBP, but undue influence cannot be attributed to INSIDIOUS WORDS OR MACHINATIONS

DBP simply because the latter had lent money. ■ Insidious Words and Machinations — include false
While respondents were purportedly financially distressed, there is no promises, exaggerated expectations or benefits, abuse of
clear showing that those acting on their behalf had been deprived of confidence, fictitious names, qualities, or power; in fine, the
their free agency when they executed the promissory notes thousand forms of fraud, which can deceive a contracting
representing respondents' refinanced obligations to DBP. For party, producing a vitiated consent
undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy
the latter's free agency, making such party express the will of another ■ Insidious Machinations — a deceitful scheme or plot with
rather than its own. The alleged lingering financial woes of a debtor an evil design, or in other words, with a fraudulent purpose
per se cannot be equated with the presence of undue influence. ■ Fraud — (general sense) embraces all multifarious means
which human ingenuity can device and which are resorted
to by one individual to secure an unfair advantage by which
Martinez vs HSBC another is cheated
“Mere general or reasonable influence is not sufficient. If gained by ■ Deceit — species of fraud; false representation of a matter of
kindness and affection or argument and persuasion, the influence fact, by false or misleading allegations or by concealment
will not vitiate consent.” which deceives or intended to deceive another
Mercedes entered into a Contract of Reparation whereby she ceded her
claim over P45k worth of notes and over 1⁄2 share to their Malate
property in favour of Aldecoa and Bank for the dismissal and CONCEALMENT

withdrawal of the latter’s civil and criminal suits against her - when there is a special duty to disclose the same, with intent
husband. The contract is valid because it was not obtained thru force to deceive, by reason of which concealment or omission,
or intimidation where she had the aid of her counsel (who were also the other party was induced to give a consent which he
her in-laws) who represented her during all the negotiations and would not otherwise have given
where she acted according to reason when she chose the Win-Win
situation of losing her property but not her husband because in
either judicial or extrajudicial way, Aldecoa and Bank would have Fraudulent nondisclosure and fraudulent concealment are
acquired the properties in question. Latter two merely allowed the of the same genre.
Sps. to choose the manner by which their action would be pursued ☞Example: A debt was fraudulent contracted if at the time
and the Sps. chose the amicable settlement to save the husband from
imprisonment. of contracting it, debtor has planned not to pay.
Fraudulent Intent
- A contract whereby reparation is made by one party for - cannot be inferred from the debtor’s mere inability to pay pr
injuries which he has willfully inflicted upon another or for comply with
that which he had misappropriated or misapplied is one
which from its inherent nature is entered into reluctantly and
against the strong desires of the party making the • If the fraud did not have the effect of causal fraud, that is, it
reparation. He is confronted with a situation in which he did not by itself alone cause the other contracting party to
finds the necessity either of making reparation or of taking give his consent, it gives rise only to an action for
the consequences, civil or criminal, of his unlawful acts. He damages
makes the contract of reparation with extreme reluctance
and only by the compelling force of the punishment REQUISITES OF CAUSAL FRAUD

threatened. Nevertheless, such contract is binding and 1. Misrepresentation or concealment by a party prior or
enforceable. (Martinez vs. Hongkong & Shanghai Bank, 15 Phil. 252 [1910].) simultaneous to the consent or creation of the contract
2. Must be serious
• TN: A threat to enforce one’s claim through competent 3. Employed by only one of the contracting parties.
authority, if the claim is just or legal, does not vitiate ‣ Fraud committed by a third person does not vitiate
consent. consent UNLESS it was practiced in connivance with or
at least with the knowledge of the favored contracting
4. FRAUD OR DO LO party
- every kind of deception whether in the form of insidious 4. Made in bad faith or with intent to deceive the other
machination, manipulations concealments, contracting party who had no knowledge of the fraud;
misrepresentation, for the purpose of leading a party into 5. It must have induced the consent of the other contracting
error and thus execute a particular act. party
- Must have a determining influence on the consent of the 6. It must be alleged and proved by clear and convincing
victim evidence, and not merely by a preponderance thereof.

CAUSAL FRAUD OR DOLO CAUSANTE

• Fraud in the performance of an obligation vs. fraud in
- is the fraud employed by one party prior to or simultaneous securing the consent of a party
with the creation of the contract to secure the consent of • Fraud in the performance: initially, the contract is valid; no
the other vice of consent but there is fraud because what was
- it is the fraud used by a party to induce the other to enter into delivered Is not the one agreed upon; fraud in 1176
a contract without which the latter would not have agreed
to, taking into account the circumstances of the case • Fraud in securing the consent
- employed by one party prior to it or simultaneous with the - 1335: There is fraud, when, through insidious words or
creation of the contract to secure the consent of the other, machinations of one of the contracting parties, the other
in here, contract is VOIDABLE is induced to enter into a contract which, without them,
he would not have agreed to
• Fraud is not just bad judgment or negligence; there is malice
here. It connotes a dishonest a dishonest purpose or there ☞Example: Insurance contract; you wanted a health insurance
is conscious doing of a wrong but since you are sick, you ask your friend to submit his
medical certificate; but then you die, the insurance

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

company then was defrauded; had insurance company

knew of your real medical condition, three would have been
no insurance contract (p.446 Jurado) Geraldez vs. Court of Appeals 230 SCRA 320
• Fraud here was dolo causante
• This fraud or dolo which is present or employed at the time of birth
• Fraud in securing consent has two kinds: dolo incidente or perfection of a contract may either be dolo causante or dolo
and dolo causante (do not equate dolo incidente with incidente. The first, or causal fraud referred to in Article 1338, are
fraud in the performance of obligation) those deceptions or misrepresentations of a serious character
employed by one party and without which the other party would
not have entered into the contract. Dolo incidente, or incidental
2 KINDS OF FRAUD
fraud which is referred to in Article 1344, are those which are not
i. Dolo causante — determines or is the essential cause of the serious in character and without which the other party would still
consent; have entered into the contract. Dolo causante determines or is the
- Ground for annulment of contract essential cause of the consent, while dolo incidente refers only to
some particular or accident of the obligation. The effects of dolo
- one which vitiates a contract causante are the nullity of the contract and the indemnification of
- fraud employed to secure the consent of the other damages, and dolo incidente also obliges the person employing it
party, which is a ground for the annulment of a to pay damages.
contract, although it may also give rise to an action for
damages; and Facts: Petitioner Geraldez filed an action for damages by reason of
☞ Example: I induced you to buy a diamond ring and contractual breach against respondent Kenstar Travel Corp.
claimed that the diamond was a Cullinan Diamond Petitioner booked the Volare 3 tour with Kenstar. The tour
(largest gem-quality rough diamond ever found, covered a 22-day tour of Europe for $2,990.00 which she paid the total
weighing 3,106.75 carats), but was fully aware the equivalent amount of P190,000.00 charged by private respondent for
entire time that it was plastic. her and her sister, Dolores. At the tour, petitioner claimed that what
was alleged in the brochure was not what they experienced.
There was no European tour manager as stated in the brochure, the
ii. Dolo incidente — does not have such a decisive influence hotels where they stayed in which were advertised as first class were
and by itself cannot cause the giving of consent, but only not, the UGC leather factory which was specifically included as a
refers to some particular or accident of the obligation; highlight of the tour was not visited and The Filipino tour guide
provided by Kenstar was a first timer thus inexperienced. The
- only gives rise to action for damages Quezon City RTC rendered a decision ordering respondent Kenstar to
- fraud likewise employed to secure the consent of the pay moral, nominal, and exemplary damages totaling P1,000,000 and
other party but which only renders the party who P50,000 attorney’s fees. On appeal, respondent Court of Appeals
employs it liable for damages deleted the award for moral and exemplary damages and reduced the
- not serious enough so as to render the original contract nominal damages and attorney’s fees to P30,000 and P10,000
respectively.
voidable
Issue: WON Kenstar acted in bad faith or with gross negligence in
discharging its obligations in the contract?
Article 1344. In order that fraud may make a contract voidable, it should be Held: Kenstar’s choice of the tour guide is a manifest disregard of its
serious and should not have been employed by both contracting parties. specific assurances to the tour group, and which deliberate omission
is contrary to the rules of good faith and fair play. Providing the Volare
Incidental fraud only obliges the person employing it to pay damages. 3 group with an inexperienced first timer as a tour guide, Kenstar
manifested indifference to the satisfaction, convenience and peace
of mind to its clients. The election of the tour guide was a deliberate
FOR CAUSAL FRAUD TO VITIATE CONSENT:
and conscious choice on the part of Kenstar in order to afford her on-
1. Should be serious the job-training making the tour group her unknowing guinea pigs,
furthermore the inability to visit the UGC leather factory is reflective
2. Should not have been employed by both parties of the ineptness and neglect of the tour guide. The failure of Kenstar
3. Should not have been known by other party to provide a European Tour Manager although it specifically
advertised and promised to do so is also a contractual breach.
Kenstar expressly stated in its advertisement that a European Tour
INSTANCES WHERE THIS COURT FOUND THE EXISTENCE OF Manager would be present.
CAUSAL FRAUD INCLUDE:
Kenstar’s contention that the European Tour Manager does not refer to
1. When the seller, who had no intention to part with her a natural person but a juridical personality does not hold because a
property, was "tricked into believing" that what she signed corporate entity could not possibly accompany the tour group. Lastly
were papers pertinent to her application for the Kenstar committed grave misrepresentation when it assured in its
reconstitution of her burned certificate of title, not a deed tour package that the hotels provided would provide complete
of sale; amenities and would be conveniently located along the way for the
daily itineraries. Testimonies by petitioner and private respondent
2. when the signature of the authorized corporate officer was show that the hotels were unsanitary and sometimes did not even
forged; or provide towels and soap. Further testimonies claim that the hotels
3. when the seller was seriously ill, and died a week after were also located in locations far from the city making it difficult to
signing the deed of sale raising doubts on whether the go to. The fact that Kenstar could only book them in such hotels
seller could have read, or fully understood, the contents of because of budget constraints is not the fault of the tour group.
the documents he signed or of the consequences of his Kenstar should not have promised such accommodations if they
act. couldn’t afford it. Kenstar should have increased the price to ensure
accommodations.

Woodhouse vs. Halili 93 Phil. 527

• Manufacture of softdrinks and the other contended that there is fraud Sierra vs. Court of Appeals 211 SCRA 785
because the other represented that he is a grantee of a franchise; Facts: Ebarles issued two promissory notes in favour of Sierra for a loan
the other said that he did not represent but merely said he will granted by the latter for the former’s cattle business. While Ebarles
secure franchise contend that the amounts therein were false, where they owe only
• SC said: this is not dolo causante kind of fraud (which is the one P20k and not P85k and P54550k, and they signed it merely on the
required) because even without the representation, the contract assurance that it was just for formality where they can just ignore
will proceed. But the other’s share in the partnership profits the suit against them and be declared in default, the notes are
should be reduced because he was not the one who gave effort to binding. There is no duress, fear or undue influence employed
secure the franchise for them to sign it. They are educated persons with business
experience. Absent proof to of vitiated consent, the notes remain
valid and effective.
• In this case, the plaintiff Charles Woodhouse entered into a written
agreement with the defendant Fortunato Halili to organize a
partnership for the bottling and distribution of soft drinks. However,
the partnership did not come into fruition, and the plaintiff filed a FAILURE TO DISCLOSE FACTS; DUTY TO REVEAL (FRAUD)

Complaint in order to execute the partnership. The defendant Article 1339. Failure to disclose facts, when there is a duty to reveal them, as
filed a Counterclaim, alleging that the plaintiff had defrauded him
because the latter was not actually the owner of the franchise when the parties are bound by confidential relations, constitutes fraud.
of a soft drink bottling operation. Thus, defendant sought the
nullification of the contract to enter into the partnership

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

General Rule: Silence or concealment does not constitute a b. Expression of an opinion (fraud) — NOT FRAUD
fraud
Article 1341. A mere expression of an opinion does not signify fraud,
— EXCEPTIONS: unless made by an expert and the other party has relied on the former's
1. There is a special duty to disclose certain facts special knowledge.
2. According to good faith and usages of commerce the
communication should have been made • So relying on mere expression, if fraudulent, depends if you
relied on the expert (camera example)
• Neglect or failure to communicate that which a party to a
contract knows ought to communicate constitute • Misrepresentation here must refer to facts not merely
concealment opinions. Mere expression of an opinion does not signify
fraud
1. Silence or concealment itself does not constitute fraud
2. Injured party is entitled to CANCEL or ANNUL a contract In order that it may amount to fraud, the following requisites
whether failure to disclose the material facts is intentional must be present:
or unintentional 1. Must be made by an expert
3. If the failure is unintentional, basis of the action for 2. Other contracting party has relied on the experts opinion
annulment is not fraud but mistake or error 3. Opinion turned out to be false o erroneous

☞ Example: Kong and Sandee were partners in a real estate ☞Example: Marc, a Chinese farmer who knows nothing about
business. During the existence of the partnership, Kong gems found a ring in the farm, he sells to Oliver the ring he
met Jerald who told Kong that he was interested I buying a has found and told the latter that in his opinion it is a
large tract of land. Kong did not inform Sandee about diamond ring. There is no fraud here because his
Jerald’s proposal. Instead, Kong persuaded sandee to sell statement is merely an opinion
her share in the partnership to him, after he became the ☞However if Ortiz, the owner of Ortiz Brothers jewelry, an
sole owner, Kong sold the real property to Jerald realizing a expert of jewelry sells the ring to Oliver saying I believe that
huge profit. The contract between Kong and Jerald is this is a diamond ring when it is not. The contract is
VOIDABLE on the ground of fraud. Kong was duty bound VOIDABLE on the ground of fraud.
to disclose the proposal of Jerald to sandee because they
are business partners, they are bound by trust and
confidence EFFECTS OF FRAUD

1. Nullity of the contract

2. Indemnification for damages
SITUATIONS WHICH DO NOT VITIATE/NOT FRAUDULENT

a. Usual exaggerations in trade: opportunity to know the

facts — NOT FRAUD • Art. 1344, NCC

Article 1340. The usual exaggerations in trade, when the other party had an Article 1344. In order that fraud may make a contract voidable, it should be
opportunity to know the facts, are not in themselves fraudulent. serious and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
• No fraud exist in case of usual exaggerations in trade, when
the other party had an opportunity to know the facts.
• Dealers talk or traders talk are representations which do not
4. M IS R E PR ES E N T A T I ON
appear on the face of the contract and these do not bind i. BY A THIRD PERSON:

either party Article 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
• Aka tolerated fraud or lawful misrepresentation (dolus bonus) same is mutual.
as long as they do not go to the extent of malice or bad • One made in good faith may constitute only error; fraudulent
faith such as changing the appearance of the thing by if made in bad faith
false devices and of preventing all verification or discovery
of truth by the other party • Even if honest mistake, it can be a ground to set aside
contract
• Caveat emptor! Do not give rise action for damages because
of their insignificance OR because the stupidity of the • Point here is that vices of consent may be actuated by good
victim is the real cause of his loss. import of opportunity to faith but if it is a vice of consent, still, the contract may be
know facts set aside
• Bad/good faith is really not a factor; not correct to say there
is no basis to void contract just because other party is in
Laureta Trinidad vs. IAC 204 SCRA 524 [no fraud] good faith.
• Case sa house na ga sigi ug baha; reklamo siya na fraudulent ang sale
because sigi ug baha • General Rule: A third person has no connection with a
• SC noted some circumstances here contract, a representation by him does not vitiate contract
• Problem here was that she was a real estate broker so she should have
known; knowledge here is aggravating circumstance; she only has
— Exception: Has created substantial mistake and the
her own negligence to blame same is mutual, it affects both parties, the contract
may be ANULLED but principally on the ground of
mistake even if deceit was without complicity with one
• Laureta purchased Vicente Francisco’s house and lot in of the parties
Commonwealth. Due to repeated flooding, she refused to continue
to pay the purchase price and sought the annulment of the sale. She
alleged to have been fraudulently induced by Vicente who • Consent is likewise vitiated if the third person connived with a
assured her that no flooding can ever happen again because party to the contract in making misrepresentation
the house had been fixed. However, such assurance does not
constitute fraud because Laureta had the opportunity to inspect
the property, which she did, before she purchased it. Her acceptance ☞Example: Jabar owns a lot and wants to construct a
of Vicente’s assurances was a risk assumed by her in taking it in commercial building, Christine wants to buy a lot to build a
face value. But the forfeiture of her payment in favor of Vicente is house. Sammy told Jabar and Christine that the area where
not warranted because Laureta did not default in payment but the land is located is a residential area, it turned out that it
merely refused to pay upon the belief of her right. Hence, it is only is a commercial zone. Sale may be ANNULLED because of
just and equitable to let her retain the property upon substantial mistake which is mutual
completion of the purchase price.

☞Example: Error or mistake. Kung masayop ka sa

apprehension of facts, not necessarily bad faith but vice

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• In accion pauliana, you can only avail of the remedy if all

☞ Example: Both parties thought a mortgage will transfer the other remedies have been exhausted. This is
ownership; or entered in a contract of sale but they thought actually a perfectly valid contract but the party
if it is a case of sale, they can retain possession over sold defrauded can rescind.
property. Different if both parties agreed that it is a sale,
they understood it was a sale, they knew the legal effects ☞Example: Show money for applying VISA; you pretend to
but the contract that reduced the agreement into writing have properties in the PH for VISA purposes.
did not reflect what they agreed
- Remedy here is not annulment because there was • Remedy/Cause of Action: Estafa; File for declaration of
meeting of minds, no vice of consent kay nullity of contract on the ground of Absolute Simulated
nagkasinabot sila; Contract for NO CONSENT.
- Proper remedy is reformation because there is only a
problem in the written instrument
c) Relative — parties conceal their true agreement
- resorted to for tax purposes
ii. MADE IN GOOD FAITH:
- when the contract entered into by the parties is different
Article 1343. Misrepresentation made in good faith is not fraudulent but from their true agreement or the parties state a false
may constitute error. cause in the contract to conceal their real agreement
- the parties are bound by their real agreement,
• If misrepresentation is made in good faith, it is not fraudulent provided, it does not prejudice a third person and is
but may constitute error
not intended for a purpose contrary to law, morals,
good customs, public order, or public policy
S IMU LATIO N O F A CO NT R ACT - contract entered into by the parties is different from their
iii. KINDS OF SIMULATED CONTRACTS: ARTICLE 1345
true agreement or the parties stated a false cause in
the contract to conceal their real agreement, still VALID
Article 1345. Simulation of a contract may be absolute or relative. The unless it prejudices a third person
former takes place when the parties do not intend to be bound at all; the - there is a contract but the true agreement is concealed
latter, when the parties conceal their true agreement.
- not necessarily void

■ Simulation of a contract — is the act of deliberately ‣ Effect — The parties are bound to the real or true
deceiving others, by feigning or pretending by agreement, agreement EXCEPT —
the appearance of a contract which is either non-existent or — (1) if the contract should prejudice a third person;
concealed or is different from that which was really
executed
— (2)  or if the purpose is contrary to law, morals,
good customs, public order, or public policy.

■ It is the process of intentionally deceiving others by ☞ Example: deed of sale is intention, what is executed is
producing the appearance of a contract that really does deed of donation
not exist (absolute simulation) or which is different from
the true agreement (relative simulation).
☞ Example: Although a deed of sale was made, the
parties really intended a donation but they wanted to
• A contract that does not intend to have any legal effect on or conceal the existence of the donation (simulation of
a change in the juridical situation of the parties the NATURE of the contract); or a true sale at a
different price had really been agreed upon
• Vices of Consent: If the aggrieved party can prove vitiation of (simulation of the CONTENT or TERMS of the contract).
consent, the sanction is that the contract will be declared
annulled. The contract is VOIDABLE meaning valid until
☞Example: If mag donate ka, bayad kag donor’s tax. If
annulled. May also be ratified by the parties. mag baligya ka, capital gains tax. When computed,
mas dako ang tax sa sale kesa sa donation. So with
• Absolutely simulated contract — defective contract; VOID that, they agree that it will be a sale instead of
because there is absolutely NO CONSENT; an essential donation. They make it appear it was a sale, they
element is wanting conceal.
- Not necessarily void; tax avoidance
a) Absolute — no intention to be bound at all
- when the contract does not really exist and the parties ☞Example: Tax avoidance — Before you die, you want
do not intend to be bound at all your land to be distributed already. So he’s now
- Absolutely simulated or fictitious contracts are choosing whether to execute a deed of sale or deed of
inexistent and void and are not susceptible of donation. The true intention is to donate. But if capital
ratification gains tax is less than the donor’s tax, so you enter into
- parties may recover from each other what they may a deed of sale.
have given under the “contract”
- When parties do not intend to be bound at all, being • This is a relatively simulated contract. But this is hard to
fictitious, it is VOID but where only one party simulates prove as in the case of a notarized document which
it is only VOIDABLE enjoys the presumption of validity, and when
‣ Effect — VOID presenting writing experts.

☞ Example: I ask you to make deed of sale as requirement ABSOLUTE SIMULATION RELATIVE SIMULATION
of my subject; you make it appear that you are selling
but I have no intention to be bound by it and you have parties do not intend to be bound at parties conceal their true agreement.
no intention to sell it, but the deed purports to be all
genuine; VOID
void does not prejudice a third person
and is not intended for any purpose
☞ Example: You have a debt. A case is filed against you. contrary to law, morals, good
So I make a deed of sale. It becomes absolutely customs, public order or public
simulated when I give it to my cousin who did not pay policy binds the parties to their
anything for it. real agreement

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• Basic Characteristics of Simulation — contract is not really • Case of absolute simulation or fraudulent alienation
desired or intended to produce legal effects or in any way - Absolute simulation is fraudulent but there are cases where
alter the juridical situation of the parties you alienate properties but not necessarily void as in the
• Nullity of a simulated contract — based on the absence of case of accion pauliana. If you do not do anything in
true consent of the parties which is essential to a valid and accion pauliana, the other contract will still be valid; the
enforceable contract party defrauded is given the right to rescind that;
• Purpose of simulation — to hide the parties’ true intent, or susceptible to cure
to deceive or defraud third persons. - in absolute simulation, not susceptible to cure; void; cannot
be ratified; action here is not accion pauliana but
Indicators of simulation: declaration of inexistence of contract
- failure of the part of the ostensible buyer to exercise acts of - in fraudulent alienation, contract is perfectly valid except
ownership in the property purchased the circumstances when we entered the contract. Unlike
absolute simulation, there is deed of sale but there was no
- the seller pays the taxes payment as consideration

REQUISITES FOR SIMULATION ARE:

Recovery under simulated contract in absolute simulation
1) an outward declaration of will different from the will of the 1. If does not have illicit purpose — prove simulation to
parties; recover what may have been given
2) the false appearance must have been intended by mutual 2. If simulated has illegal object — IN PARI DELICTO rules
agreement; and
apply
3) the purpose is to deceive third persons
• An absolutely simulated contract, under Article 1346 of the
• Primary consideration in determining the true nature of a Civil Code, is void. It takes place when the parties do not
contract — intention of the parties intend to be bound at all. The characteristic of simulation is
the fact that the apparent contract is not really desired or
intended to produce legal effects or in any way alter the
SIMULATED CONTRACTS FRAUDULENT CONTRACTS juridical situation of the parties. Thus, where a person, in
order to place his property beyond the reach of his
fictitious contracts serious, real and intended for the creditors, simulates a transfer of it to another, he does not
attainment of a prohibited result
really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham.
intended to hide the violation of law the purpose is to defraud third
persons with intent of injuring them
Lacking, therefore, in a fictitious and simulated contract is
consent which is essential to a valid and enforceable
contract.

ABSOLUTE SIMULATION FRAUDULENT ALIENATION

Manila Banking Corp. vs. Silverio 466 SCRA 438
there is no existing contract, no real there is a true and existing transfer • It is one thing to allege, it is another thing to prove. So if you say
act executed or contract fraudulent alienation intended to defraud, what are the specific
allegations that you have to make or prove? Factual circumstances
that this is case of absolute simulation? Contract was already
can be attacked by any creditor, can be assailed only by the creditors
including one subsequent to the before the alienation determined and its notarization
contract
Facts:
insolvency of the debtor making the action to rescind, or accion pauliana,
simulated transfer is not a requires that the creditor cannot
prerequisite to the nullity of the recover in any other manner what is
contract due him Suntay vs. Court of Appeals 251 SCRA 430
• In proving absolute simulation, check the circumstances; very
action to declare a contract accion pauliana to rescind a difficult to prove, the burden is upon you
absolutely simulated does not fraudulent alienation prescribes in
prescribe four years • There was a contract of Sale between Federico and Rafael whereby
former allegedly sold his property to latter so that latter can
obtain a loan agreement for former’s expansion of his rice mill.
Title was transferred to Rafael although no payment had been
EFFECTS; ART. 1346. NCC
made or demanded and Federico kept possession of the property
without any claim of possession by Rafael. Although a Deed of
Article 1346. An absolutely simulated or fictitious contract is void. A relative
Counter Sale was executed in favour of Federico over the property,
simulation, when it does not prejudice a third person and is not intended for Rafael denied its validity for not being notarized and claimed the
any purpose contrary to law, morals, good customs, public order or public validity of the Sale as genuine. Both Deeds were declared a
policy binds the parties to their real agreement. simulation, however, because the intention to retain ownership
with Federico was obvious in his continued possession of the
property and in Rafael’s lack of claim of ownership.

ABSOLUTE (SIMULADOS) RELATIVE (DISIMULADOS)

Color of contract, without any Parties have an agreement which

Umali vs. Court of Appeals G.R. No. 89561 Sept 13, 1990
substance thereof, the parties not they conceal under the guise of Foreclosure of Castillo property by ICP due to alleged failure of Slobec
having intention to be bound another contract to honor contract is void because said contract of surety has already
expired.
VOID — Does not legally exist. VALID; except when it prejudices 3rd Facts: Mauricia Castillo was the administrator of the land left by Felipe
Illusory, mere phantom, injuring 3rd persons or has an illicit purpose which was mortgaged to DBP and was about to be foreclosed.
persons, generally fraudulent 1. Ostensible acts — apparent or Santiago Rivera (nephew) proposed the convert the land into 4
fictitious; contracts that the subdivisions so they can raise money to avoid foreclosure to which
parties pretend to have Mauricia agreed. Rivera developed land through his company Slobec
executed Realty and contracted with Bormaheco for the purchase of one
2. Hidden act — real; true tractor and mortgaged the tractor in case of default and executed
agreement between the parties surety agreement as an additional security that ICP shall pay the
balance. Surety bond between ICP and Mauricia was the same parcel
of land.
• So the simulation of the sale instead of donation is not SRP defaulted in paying the tractor so Bormaheco foreclosed the tractor
necessarily illegal; this is called tax avoidance; you found but wasn’t enough so ICP paid the deficiency and latter foreclosed
a way to have lesser tax. Tax evasion is the one that is the property and sold it to PMPMC then demanded Mauricia to
illegal vacate. Mauricia died, Umali (successor), questioned the foreclosure
and alleged that transactions were void and simulated.
No fraud. The president of Bormaheco was director of PMPMC.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

☞Example: Prohibited drugs and all illicit objects; to kill a

person, etc. (illicit things or services are also outside
Cruz vs Bancom Finance GR No. 147788, March 19 2002 the commerce of men.); to get soil from planet Jupiter;
Facts: Although the Deed of Sale between petitioners and Candelaria to construct a building in one day; etc
Sanchez stipulated a consideration of P150,000, there was actually
no exchange of money between them. Respondent never offered any
evidence to refute the foregoing. On the contrary, it even admitted 2. Determinable things
that the stipulated consideration of P150,000 in the Deed of Sale had ☞Example: All the cavans of rice in a warehouse; all the
never been actually paid by Sanchez to petitioners. eggs in a basket; my land with the smallest area; the
Held: The Deed of Sale were absolutely simulated, hence, null and void. land at the corner of a particular street; etc.
Thus, it did not convey any rights that could ripen into a valid titles.
There being no valid real estate mortgage, there could also be no
valid foreclosure or valid auction sale, either. At bottom, respondent 3. Future things or rights — Things to be manufactured,
cannot be considered either as a mortgagee or as a purchaser in good raised, or acquired after the perfection of the contract
faith. This being so, petitioners would be in the same position as ☞Example: Wine that a vineyard is expected to produce;
they were before they executed the simulated Deed of Sale in favor wool that shall thereafter grow upon a sheep; rice to be
of Sanchez; they are still the owners of the property.
harvested next harvesting season; milk that a cow may
NOTE: A deed of sale, in which the stated consideration had not, in fact, yield; eggs that hens may lay; young animals not yet in
been paid, was “a false contract, “i.e., void ab initio. existence, etc.
“A contract of purchase and sale is null and void and produces no effect
whatsoever where it appears that [the] same is without cause or
consideration which should have been the motive thereof, or the 4. Intransmissible rights
purchase price which appears thereon as paid but which, in fact, has ☞Example: Political rights such as the right to vote; family,
never been paid by the purchaser to the vendor. marital, and parental rights; right to public office, or to
run for public office, etc.
✏ Question: What if the purported buyer was able to secure a
certificate of title based on the absolutely simulated a. ALL THINGS NOT OUTSIDE THE COMMERCE OF MAN

contract? • Thus public plazas, streets, sidewalks may not be the object
‣ Answer: It does not validate the deed of sale because of the contract.
the certificate of title is not a mode of acquiring
ownership. It merely confirms the ownership. So if in • Future things such as crops that may thereafter be
the first place, you do not own the land, there is nothing harvested, or eggs that may be produced by a poultry
to confirm. farm, may be object of contracts but not future inheritance
EXCEPT as provided by law (1347) such as in the marriage
settlements or in partition of the estate by testator, contract
OBJECT OF CONTRACTS is generally void when object is future inheritance

• It is subject matter, the object of the contract is the obligation • Including future things do not belong to the obligor at the
created. Thing, service or right which is the object of the time the contract is made; they may be made, raised or
obligation is also the object of the contract acquired by the obligor after the perfection of the contract
‣ Conditional — subject to the coming into existence of
R EQ U ISI TES the thing
1. the thing or service must be within the commerce of man; ‣ Aleatory — one of the parties bears the risk of the thing
2. must be transmissible; never coming into existence
3. must not be contrary to law, morals, good customs, public • In case of doubt about the nature, it is deemed to be
order, or public policy; conditional because in Art 1378, doubt shall be resolved in
4. must not be impossible; favor of the greatest reciprocity of interests.
5. must be determinate as to its kind or determinable without
the need of a new contract or agreement What does outside the commerce of man mean?
- cannot be appropriated or capable of being owned
- All kinds of things and interests whose alienation or free
WH AT MAY BE THE O BJ ECT S O F CO NT RACT S exchange is restricted by law or stipulation, which parties
1. All things not outside the commerce of man cannot modify at will
2. All rights not intransmissible
3. All services not contrary to law, morals, good customs, • State can own properties which are capable of being
public policy appropriated, so are we saying state properties can be
within commerce of man?
Article 1347. All things which are not outside the commerce of men, • Aside from not being capable of appropriation, such objects
including future things, may be the object of a contract. All rights which are are not capable of being objects of commercial
not intransmissible may also be the object of contracts. transactions.
No contract may be entered into upon future inheritance except in cases
• Regalian doctrine — all properties which are not titled are
expressly authorized by law.
owned by the state including lands you currently possess
All services which are not contrary to law, morals, good customs, public order but not titled in your name. Ownership of minerals,
or public policy may likewise be the object of a contract. seashore, forest; they can be appropriated not by private
individuals but only by the state
• Future things — no contract involving future inheritance;
General Rule: All rights may be the object of a contract
your right is only inchoate
— Exception: Intransmissible by their nature, or by
stipulation, or by provision of law.
• But other future things can be object of contract like
furniture or contracts involving sale of things that would
1. Outside the commerce of men — things of public still be manufactured, like “made to order”
ownership • Current laws allow contracts to be entered into by the state
☞ Example: sidewalks, public places, bridges, streets, and some private investors like roads, highway
etc.; things that are common to everybody such as air,
sunlight, rain, etc.
✏ Question: Can it be questioned on the ground that at the time
of perfection the object is not yet existent?
2. Impossible, physically or legally ‣ Answer: NO. Because sale transactions are perfected by
mere consent.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• Transmissible Rights:
• Future inheritance cannot be a valid object of contracts 1. Right to collect;
because there is no assurance that you can inherit 2. Right of redemption;
something. There is still a settlement of estate where the 3. Leasehold right;
creditors’ claims are still to be satisfied.
4. Right of the purchases in a public auction
✏ Question: Why is it every time we go to Baguio we pay toll
fees? That is a public highway but why do we pay private c. ALL SERVICES NOT CONTRARY TO LAW, MORALS, GOOD
people? CUSTOMS, PUBLIC POLICY

‣ Answer: We have law called Build Operate Transfer • Like prohibited drugs, illicit object, to kill a person
Law (BOT law). Not all projects can be funded by
public funds, so we invite private investors. We have to - Contract of services involving legal services.
give them time to operate the facility and allow them to - Not allowed are contracts involving prostitution
recover expenses. After some time, it will be turned
over to the state, like the NAIA. It is public facility, but
it is object of contract because there is a special law. It ✏ Question: Escort service, is that allowed?
is not really just because it is outside commerce of ‣ Answer: Not yet allowed in the Philippines
man, it cannot be an object. It can be when there is a
law
R E Q U IS IT E S
- must be determinate as to its kind
✏ Question: But why can’t we sell City Hall but we can sell
SRP?
‣ Answer: Because there are properties held by state in REQUISITES OF THINGS AS OBJECT OF THE CONTRACT

its proprietary capacity. City hall is not held in 1. Must be within the commerce of man
proprietary capacity. 2. Not be impossible, legally of physically
3. In existence or capable of coming into existence
Objects outside the commerce of men 4. Determinate or determinable without the need of a new
contract between the parties
Article 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, Determinate as to its kind
ports and bridges constructed by the State, banks, shores, Art 1349 The object of every contract must be determinate as
roadsteads, and others of similar character; to its kind. The fact that the quantity is not determinate shall
(2) Those which belong to the State, without being for public use, and not be an obstacle to the existence of the contract, provided
are intended for some public service or for the development of it is possible to determine the same, without the need of a
the national wealth. new contract between the parties.

- So a patrol car cannot be subject of lease, nor a firetruck. Di

pede ipagamit adto silag Portofino. Or ang ambulance REQUISITES OF SERVICE AS OBJECT OF THE CONTRACT

pang joyride 1. Within the commerce of men

2. Not be impossible, physically or legally
- Cannot be object, like right to vote. So ayaw pag kontrata 3. Determinate or capable of being made determinate
diha sa imong right to vote samot nag mapildi imo
kandidato diha, patay ka, transfer jud imo birthday to
November 1.
WH A T MA Y N O T B E T H E O B J E CT O F CO NT RAC TS
1. Contrary to law, morals, good customs, public policy or
public order
TN: The Civil Code is a mere statute. There is a law called 2. Indeterminable as to their kind
“Build Operate Transfer (BOT) Law” which effectively modifies
the Civil Code. The essence is that the government will not 3. Outside the commerce of man
spend anything but the private entity is allowed for a period of 4. Intransmissible rights
time to operate and collect Toll Fees. 5. Future inheritance, except when authorized by law
6. Impossible things or services
Examples of objects outside commerce of men
• Services which imply an absolute submission by those
Article 1347. …No contract may be entered into upon future inheritance
who render them, sacrificing their liberty, independence or
except in cases expressly authorized by law…
own beliefs or disregarding in any manner the equality and
dignity of persons a. FUTURE INHERITANCE

☞ Example: Perpetual servitude or slavery ■ Future inheritance — is any property or right, not in the
• Personal rights existence or capable of determination at the time of the
☞ Example: Patria postestas , marital authority, status, contract, that a person may inherit in the future by
capacity of persons, honorary titles succession
• Public offices, inherent attributes of the public authority,
political rights of individuals Requisites of inheritance to be considered future
☞ Example: right of suffrage 1. Succession has not yet been opened at the time of the
• Property while they pertain to the public dominion contract
• Sacred things 2. Object of the contract forms party of the inheritance
☞ Example: air and sea 3. Promisor has, with respect to he object, an expectancy of a
right which is purely hereditary in nature

b. ALL RIGHTS NOT INTRANSMISSIBLE

• Strictly personal rights such as parental authority, or political E XC E PT IO N S ( WH E N AU T H O R I Z E D ):

rights such as right to vote or to run for public office, may Future inheritance (one where the source of property is still
not be the object of the contracts, as they are alive) cannot be the subject of a contract EXCEPT:
intransmissible 1. in the case of marriage settlements
☞ Example: e.g. right to vote and be voted, parental authority 2. in the case of partitions of property inter vivos by the
deceased
• Rights can also be object, but must be not intransmissible.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

• There are exceptions to this rule, there are agreements • Note: If a blind man enters into a contract which requires the
recognized by law as valid even when future inheritance is use of his eyesight, the contract is void although in this
the object like partition inter vivos particular case, we have only a relative impossibility. This
is because here, the relative impossibility is not merely
• While the parents are still alive, heirs can enter into partition temporary.
inter vivos; any agreement they enter into is valid, provided
mamatay sah ang parents before effective ang agreement Example of Impossible Things
- This is even advisable; an act which does not have effect of • Not susceptible of existing
transferring the property because it is future inheritance, • Outside the commerce of man
the parent can still revoke; but the moment he dies, • Beyond the ordinary strength of power of man
partition will be respected under ART 1080.

Liability for damages

Article 1080. Should a person make partition of his estate by an act inter • Debtor knew of impossibility — liable for damages
vivos, or by will, such partition shall be respected, insofar as it does not • Debtor is ignorant of impossibility and ignorance is justifiable
prejudice the legitime of the compulsory heirs. — no liability for damages
A parent who, in the interest of his or her family, desires to keep any • Both parties have knowledge of impossibility — no liability for
agricultural, industrial, or manufacturing enterprise intact, may avail damages
himself of the right granted him in this article, by ordering that the legitime
of the other children to whom the property is not assigned, be paid in cash.
IMPOSSIBILITY MUST BE ACTUAL AND CONTEMPORANEOUS
- This qualifies the rule that there can be no object of contract WITH THE MAKING OF THE CONTRACT AND NOT
involving future inheritance (“TAKE NOTE OF THIS HA!” — SUBSEQUENT
like saying mugawas jud nis exam) • ABSOLUTE or objective — nobody can perform it
• RELATIVE or subjective — due to the special conditions or
✏ Question: When his father died, but before delivery of the qualification of the debtor it cannot be performed
property to him, a son sold his share of the property ‣ TEMPORARY — does not nullify the contract
inherited. Is the sale valid? ‣ PERMANENT — nullifies the contract
‣ Ans: Yes, the sale is valid. The inheritance here is not
future inheritance, but existing inheritance, although as
yet undelivered. DETERMINATE AS TO ITS KIND
Article 1349. The object of every contract must be determinate as to its
✏ Question: While his father was still alive, A sold to B the kind. The fact that the quantity is not determinate shall not be an obstacle
property he (A) expected to receive from his father. Is the to the existence of the contract, provided it is possible to determine the
contract valid? same, without the need of a new contract between the parties.
‣ Ans: No, because the object of the contract here is really
future inheritance, and the particular contract in this • Quantity of object of contract need not be determinate
case is not one of those authorized by law regarding • It is sufficient that it is possible to determine the same without
inheritance. the need of a new contract between the parties.

✏ Question: Some future heirs divided the property they • The object must be determinate or determinable (without
expected to inherit from their mother, at a time when she need of a new agreement).
was still alive. Is such partition of property valid? • If the object is not determinate or determinable, the
‣ Ans: No. This is a contract relating to a future inheritance contract is void for want of an essential requisite — the
(for the mother is still alive) and does not come under object of the contract.
the category of those contracts authorized by law
concerning future inheritance ☞ Example: If A promised to give B this (blank), it is clear that
there can be no obligation here.
b. IMPOSSIBLE THINGS/SERVICES

☞ Example: If A sold to B the future (2018) harvest in A’s field

Article 1348. Impossible things or services cannot be the object of contracts.
for a definite price, the contract is valid for there is no need
of a new agreement.
Impossibility may be —
(a) Because of the nature of the transaction or of the law; ☞ Example: I will enter into a contract that I will sell all the
(b) Absolute (objectively impossible) — NO ONE can do it; harvest of coconut plantation. At that point, not yet
determinate pila jud harvest, but will not violate rule that
(c) Relative (subjectively impossible) — the particular debtor
object must be determinate. But if I say I will sell to you my
cannot comply
coconut plantation and I have many coconut plantations,
there is no specific object here, contract is void.
Kinds of impossibility
1. Physical — when the thing I service in the very nature of
things cannot exist JLT Agro Inc. vs. Balansag G.R. No. 141882 March 11, 2005
Facts: The Compromise Agreement between Julian and children Josefa
a. Absolute — act cannot be done in any case so that
and Emilio where certain properties were assigned to Josefa and
nobody can perform (fly like a bird) Emilio and the rest to his 2nd wife and their children, is valid even
b. Relative — arises from special circumstances of the though it concerns future legitime because it is a partition inter
case (make payment to dead person) vivos (before death) of Julian’s estate which is valid in law as long
2. Legal — thing or service is contrary to law, morals, good as it is not prejudicial to compulsory heirs. His 2nd wife and their
children had not been prejudiced because they were assigned the
customs, public order, public policy (sell prohibited drugs)
remainder of Julian’s properties. Concerning Lot No. 63 that had
been adjudicated to 2nd wife and kids but subsequently assigned to
Effect on physical impossibility on validity of contract Agro, the right of the former to the properties did not arise until the
death of Julian as the legal effect of a partition inter vivos. Hence,
1. Absolute impossibility — NULLIFIES the contract
they cannot contend that the assignment was void due to their
2. Relative impossibility — if temporary, DOES NOT NULLIFY alleged ownership being operative upon the Compromise
Agreement, because prior to Julian’s death they only had an inchoate
• Impossibility must not be confused with difficulty. Hence, a interest but not ownership. However, the ownership of Lot No. 63 did
not validly confer to Agro due to spurious acquisition of title based
showing of mere inconvenience, unexpected impediments,
on an alleged loss of owner’s duplicate as presented to the Deed of
or increased expenses is not enough. Register and not on the assignment. HENCE, 2nd wife and kids
acquired title upon the death of Julian and without any valid transfer

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

of ownership of property prior to his death upon which their right of AS DISTINGUISHED FROM CONSIDERATION

ownership arose.
CONSIDERATION CAUSE

Reason or motive or inducement Why of contracts; essential reason that

CAUSE OF CONTRACTS by which a man is moved into compels contracting parties to
bind himself by agreement celebrate the contract

ME ANI NG OF CAUSE Requires a legal detriment to the Never rejects any cause as insufficient;
■ Cause — is the essential or more proximate purpose or promisee more than a moral duty need not be material at all and may
consist in moral satisfaction for the
reason which the contracting parties have in view at the promissory
time of entering of contract, this is the why of the contract,
the essential reason why contracting parties entered into
contract
O N E R O U S C O N T R A C TS
• Why of a contract; the immediate and most proximate ■ Onerous contract — the cause for each party is prestation
purpose of the contract, the essential reason which or promise of a thing or service of another
impels the contracting parties to enter into it and which • Prestation or promise of a thing or service by the other
explains and justifies the creation of the obligation through • Need not be adequate or an exact equivalent in point of
such contract actual value especially in dealing with objects which have
• Essential reason that moves the parties to enter into a rapidly fluctuating price
contract
Article 1350. In onerous contracts the cause is understood to be, for each
‘CAUSE’ AND ‘SUBJECT MATTER’ DISTINGUISHED
contracting party, the prestation or promise of a thing or service by the
• Matter of viewpoint in some way, because what may be the other; in remuneratory ones, the service or benefit which is remunerated;
subject matter for one party will be the cause or and in contracts of pure beneficence, the mere liberality of the
consideration for the other party. benefactor.

☞ Example: S will sell to K highlighters for Php 200.

☞ Example: Contract of sale;
• For S — subject matter is the highlighters and the cause
is the Php 200. ‣ Cause (vendor) — acquisition of the purchase price;
• For K — subject matter is the Php 200 and the cause is obligation of the vendee; it would diminish your asset
the highlighter ‣ Cause (vendee) — acquisition of the thing; obligation of
the vendor; lose money to pay for the property bought
TYPES OF CONTRACTS

☞ Example: S sells highlighters to K for Php 200, delivery and

1. Onerous — contract where one gives an equivalent value
payment on March 1.
2. Remuneratory — services which do not constitute a
‣ Cause (S) — promise of K to pay the Php 200
demandable debt or no obligation
‣ Cause (B) — promise to deliver the highlighters
☞ Example: We were together in Basilan then I saved your
life. When we got back to Cebu, to show your ‣ Object — purchase price of Php 200 and highlighters
gratitude, I transferred my property to you. The service
I rendered is not a demandable debt. Not also a ☞ Example: Jerald, a CPA entered into a contract with Vhal a
donation, not pure liberality because I did something businessman to audit the books of Vhal for a professional
to you fee of PHP 20 (baratuhon man nga CPA si Jerald) the
3. Contracts of pure beneficence — liberality; love and cause of Jerald is the payment of professional fee while the
affection cause of Vhal is the audit of his books

• Cause is different depending on whose viewpoint you adopt. • In contract of sale, the cause depends on the viewpoint of
In sale, cause for buyer is the things to be acquired and for the buyer(property) and seller (money to be paid).
seller, the money to be received

IN R EM U N ER AT OR Y CO N T R AC T S
REQUISITES OF CAUSE
■ Remuneratory contract — cause is the service of benefit
1. Must exist which is remunerated
(a) Presumed that cause exist and is lawful • One where a party gives something to another because of
(b) Contracts without cause produces no effect some service or benefit given or rendered by the latter to
whatsoever the former where such service or benefit was not due as a
legal obligation
2. Must be lawful/licit • To reward the service that had been previously rendered. But
- Contract with unlawful cause produce no effect service rendered is not demandable a demandable debt.
whatsoever. Unlawful if it is contrary to law, morals,
good customs, public order or public policy ☞ Example: Bonuses
☞ Example: Vhal saves Kong from drowning, and as a reward
3. Must be true Kong gave Vhal Php 20,000. The saving of Kong here is
- Statement of false contract shall render them VOID the service remunerated.

☞ Example: I and my friend went to travel then I met an

AS DISTINGUISHED FROM OBJECT

• Object is the starting point of agreement without which the accident like in swimming then I drown then I was saved,
negotiations or bargaining between the parties would never after the incident, I gave a reward to the one who saved
have begun me. (the one saved after CPR, said that he will reward the
lifeguard, so by next week, the lifeguard did not receive
• Object may be the one for both of the parties
anything. So, the lifeguard filed a suit. But this will not
• Cause is different with respect to each party prosper because it is not demandable)

• The service here is not recoverable debt compared to

onerous contract whereby there is a promise

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

NOTE: In a remuneratory donation, the past service or debt is • NOTE: However, a motive may predetermine a cause, and
not by itself a recoverable debt. motive may have an effect on the contract.

C ON TR ACTS OF PU RE BE NE F I CE NCE CAUSE MOTIVE

■ Gratuitous — cause of which is the mere liberality of the
benefactor or giver Objective, intrinsic and juridical Psychological, individual or personal
reason for the existence of the purpose of a party to the contract
• Essentially agreements to give donations contract itself

☞ Example: Pure donation — an act of mere liberality (no Essential reason for the contract Particular reason for a contracting party,
condition imposed just pure LOVE BOOO). Should be which does not affect the other and
which does not impede the existence
purely gratuitous. Not those where the donor imposed a of a true distinct cause
condition. Donations referred to in those cases, they are
onerous donations. Objective of a party in entering Person’s reason for wanting to get such
into the contract objective

CONTRACT CAUSE OBJECT Always the same for both parties Differs with each person

Onerous Contracts for each contracting party, thing or service itself direct or most proximate reason indirect or remote reason
the prestation or of a contract
promise of a thing or
service with the other objective or juridical reason of a psychological or purely personal
contract reason
Remuneratory Contracts service or benefit thing which is given
which is renumerated in remuneration legality or illegality of the cause legality or illegality of the motives will
will affect the existence or not affect the existence of the contract
Gratuitous Contracts liberality of the donor thing which is given validity of the contract
or benefactor or donated

• Cause is the essential reason which moves the contracting to

ONEROUS DONATION
enter into it and justifies the creation of an obligation
• In the part of the seller, consideration is the price. through their will
• Motive is the particular reason of a contracting party which
✏ Question: What if the sale is a sale on installment? And the does not affect the other party
first installment will be due 30 days after the signing of the • Motive can be considered the cause in a contract when such
contract. In short, at the time of signing of contract, there is motive predetermines the cause of the contract
no money given to the seller. Fast forward to 30 days, no
payment was made. The seller now approaches you and GENERAL RULE: Motive does not affect the validity of the
asked you, what is my cause of action here attorney? Is it contract.
okay to file an action for declaration of nullity of contract ☞ Example: You buy condo to house your paramour. That
due to absence of cause, or rescission or a plain case of is illegal but it does not invalidate the sale. As a rule,
collection of a sum of money. Explain also to me why! motive is irrelevant
‣ Ans: COLLECTION OF THE SUM OF MONEY. Because
the time of the perfection of the contract, the failure to
pay is different from the lack of consideration because — EXCEPTIONS:
failure to pay results to your right to demand. At the 1. When the motive of a debtor in alienating property is to
time of perfection, there was consideration(which is the defraud his creditors, alienation is rescissible
minimum requirement for a valid contract). 2. When the motive of a person in giving his consent is to
avoid a threatened injury, in case of intimidation the
✏ contract is voidable.
Question: Is the cause similar to motive?
‣ Ans: No, because motive does not validate a contract. 3. When the motive of a person induced him to act on the
Motive does not generally affect the contract and in basis of fraud or misrepresentation by the other party,
cause, as an essential element of a contract, in case of the contract is likewise voidable.
invalidity, it affects the contract
• Motive is always unknown to the other, unlike the cause
which is always known
AS DISTINGUISHED FROM MOTIVE

• There are however cases where the motive may

Article 1351. The particular motives of the parties in entering into a predetermine contract. It affects the contract
contract are different from the cause thereof.
☞ Example: I buy a gun from a store for P50,000 because I EXCEPTION: WHEN MOTIVE PREDETERMINES THE PURPOSE

want to kill someone. The cause of the contract is the gun • Motive may be regarded as causa when the contract is
(for me); the money (for the seller). My motive, however, is conditioned upon the attainment of the motive of either
the killing of that someone. Motives do not enter at all in the contracting party; motive becomes causa when it
validity or invalidity of cause or consideration. predetermines the purpose of the contract.

☞ Example: My neighbor bought a gun from a store in an Uy vs Court of Appeals GR No. 120465 Sept 9, 1999
amount of 60k, in this case, he bought it to kill the other
Land was for housing purposes but here comes the two agents saying
neighbor so this is illegal. However, the motive does not some lands are not suitable for housing. Motive is for housing. SC
invalidate the contract. said practically there is no cause
Facts: Uy and Roxas are agents authorized to sell 8 parcels of land
☞ Example: I bought a vehicle, hatchback because it is located in Benguet and they offered to sell it to NHA to be developed
compact and “small hmmmmm” for fuel efficiency (this is as housing project and was approved. Executed series of Deeds of
the motive) then what happened, when I was about to pay, Absolute Sale. Only 5 were paid for the remaining area is located at
an active landslide area. NHA cancelled the sale of 3 lands and
1:7 ra daw then ang representation is 1:20.
offered to pay for damages. Petitioner filed a complaint for damages.
✏ Question: Can you invalidate the contract of sale over
Held: NHA has the right to cancel the contract. Motive predetermined
the vehicle on the ground of consideration issues? the cause — the lands to be developed to a housing project. Quality
‣ Ans: No. On this ground, you cannot invalidate. Because of the land was an implied condition for NHA to enter into a
again, motive does not have any effect in the contract. contract. Not entitled for damages.

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

Liguez vs. Court of Appeals 102 Phil. 577 EFFECT OF FAILURE OF CAUSE

An old man donated to 16 y.o. minor for her to cohabit with him; illegal FAILURE OF CAUSE ABSENCE OF CAUSE
donation because the cause is illegal; it is illegal but you cannot
recover property; you cannot invoke your own illegality or guilty/ right to demand the fulfillment or prevents the existence of a valid
illegal act to benefit yourself; a case of motive predetermining the cancellation of the obligation
cause; void contract under an existing valid contract
Facts: In order to live with minor Conchita and have sexual relations
with her, married man Salvador donated a parcel of land to her. Even
if the donation was premised upon an illicit causa (sex with a minor
as a married man), manifested in his motive to cohabit with her S T A T EM E N T O F A FA LS E CA US E I N T HE
which is considered cause because it predetermined the contract, the C O N T R A CT
donation remains partly valid because Conchita was not a guilty - VOID if there is no other true and lawful cause
party since she did not participate much in the formation of the
donation and/or because even if both Salvador and Conchita were Article 1353. The statement of a false cause in contracts shall render them
guilty, they cannot invoke the donation’s illegality to null the same. void, if it should not be proved that they were founded upon another
Absent proof of illegality against a donation valid on its face because cause which is true and lawful.
it was ratified by the Justice of Peace, the donation remains valid.
However, inasmuch as the interest of wife Maria and their children in • Just because the cause stated is false does not necessarily
the conjugal property are concerned, the donation may be mean that the contract is void.
invalidated according to the prejudice against them which would still
be determined by the lower court by remand. • Reason: The parties are given a chance to show that a cause
really exists, and that said cause is true and lawful.
• Thus under this Article, it would seem that the contract with a
statement of a false cause is not void, but merely revocable
Olegario et.al. vs. CA G.R. No. 104892 November 14, 1994 or voidable.
Motive here was illegal; sold to deprive the heirs; predetermining the
cause; as rule, motive will not affect but this is exceptional case
where motive predetermined the contract. It affected the contract. L ES I O N / IN A DE Q U A CY O F CA US E
Facts: Sps Marciliano and Aurelia who were childless, owned a parcel of
land. Aurelia died at the age of 83. Marciliano then executed a deed Article 1355. Except in cases specified by law, lesion or inadequacy of cause
of absolute sale of the property to the respondents for Php 50,000 shall not invalidate a contract, unless there has been fraud, mistake or
but was not registered. Marciliano died intestate. Bonifacio and undue influence.
Adelaide were the sole heirs of the spouses and issued a Deed of
Extra-Judicial settlement of estate and was recorded in their names • What is lesion? Inadequacy of cause
who then sold the property for Php200k. - VALID unless fraud, mistake or undue influence is present
Respondent alleged that they just knew about the settlement and tried
to register it to their name 3 years after they “bought” it.
- it is the damage caused by an unjust or inadequate price.
Lesion generally, does not invalidate unless there has been
Selling of the property — primary motive of Marciliano was to frustrate fraud, mistake, or undue influence.
petitioners right of inheritance and to avoid payment of estate tax.

☞ Example: insufficient price of the thing sold

DEFECTIVE CAUSES AND THEIR EFFECTS
1. Absence of cause/unlawful cause — produce no effect ☞ Example: You are selling your property worth 10M but you
whatever (1352) signed a contract where the consideration is only 3M. – You
2. Statement of a false cause in contract — void (1353) cannot set aside the contract. ARTICLE 1355 – lesion shall
not invalidate a contract. To have this set aside, prove that
3. Lesion/inadequacy of cause (insufficient price of the thing there is fraud, mistake, or undue influence.
sold) — not invalidate a contract unless there has been
fraud, mistake or undue influence.
✏ Question: How to prove there was fraud, mistake, or undue
influence?
A BSE N CE OF CAUS E/ UNLAW F UL CAUS E ‣ Ans: Did you sign it on your own volition? No
- produces no effect whatever threats(undue influence)?
- if the cause is unlawful, the transaction is null and void
• Nalupig gani kas negotiation, you don’t go to court. The court
• If there is no cause whatsoever, the contract is VOID. does not defend the foolish. If you got mesmerized and
☞ Example: Simulated contracts. Thus, a fictitious sale is VOID. nalugi ka, you cannot say NALUGI KO!

General Rule: Lesion or inadequacy of price does not

Article 1352. Contracts without cause, or with unlawful cause, produce no invalidate a contract.
effect whatever. The cause is unlawful if it is contrary to law, morals, good
customs, public order or public policy.
— Exception:
(a) when, together with lesion, there has been:
• If the cause is false, the contract is not valid unless some 1. fraud
other cause which is lawful really exists 2. mistake
3. undue influence
☞ Example: A promissory note to cover a gambling deb, or to (b) in cases expressly provided by law
cover accumulated usurious debts, is VOID.
1. Those which are entered into by guardians
whenever the wards they represent suffer lesion
☞ Example: Promise of marriage based on sexual intercourse is by more than one-fourth of the value of the things
based on an illegal cause. which are the objects thereof. (Art. 1381, par. 1)
2. Those agreed upon in representation of
EFFECT IF THE CAUSE IS ILLEGAL
absentees, if the latter suffer the lesion stated in
• If one party is innocent — he cannot be compelled to the preceding number. (Art. 1381, par. 2)
perform his obligation, and he may recover what he has 3.   Partition among co-heirs, when anyone of them
already give. received things with a value less by at least one-
• If both parties are guilty, in general, neither can sue the other, fourth than the share to which he is entitled. (Art.
the law leaving them as they are. Certain exceptions exist 1098)

✏ Question: A guardian of A sold A’s mansion worth P120

million for P60 million. May the contract be rescinded on
the ground of lesion?

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Obligations and Contracts EH 307 A t t y. G r a v a d o r

‣ Ans: Yes, such a case is expressly provided for by the

law as one of the contracts that may be rescinded on
the ground of lesion.

✏ Question: Is Php 1 consideration VOID?

‣ Ans: Not necessarily void. There must be evidence that
there was undue influence. 1 peso consideration is
perfectly fine unless 1 peso was because of undue
influence, fraud or mistake.

Ong vs. Ong 139 SCRA 133

Facts: In deeds of conveyance that adhere to the Anglo-Saxon
practice, it is not unusual to state that the consideration given is P1,
although the actual consideration may be more. A one-peso
consideration may be suspicious; this alone does not justify one to
infer that the buyers are not buyers in good faith and for value.
Neither does such inference warrant one to conclude that the sale is
void ab initio. Bad faith and inadequacy of monetary consideration
do not render a conveyance inexistent. The assignor’s liberality
could be a sufficient cause for a valid contract.

• If the consideration of 1 peso/ no stipulation whatever in the

Deed of Sale to how much the property was sold, does his
invalidate the contract? – No, you cannot. There is a
presumption of consideration. If this is your only ground, do
not go to court.
• Consideration is 1 peso for 1 hectare contract. Uso kayo ni
sauna (Ong v. Ong) Anglo-Saxon practice. Right now, even
if lower imong pagbaligya, the BIR makes sure that it
should be the zonal value that must be followed. Wa na
ning piso2.
• This rule applies where the deed of sale does not state how
much is the selling price. Do not panic. The law states that
there is always a presumption of consideration.

Sps Buenaventura vs. Court of Appeals 416 SCRA 263

Facts: The parents sold certain lots to some of their children. The other
children assailed its validity for lack/inadequacy of the consideration
and sought the deeds’ nullity in order that the properties revert back
to their parents and thus increase their estate and subsequence
inheritance. However, the Deeds show a consideration in the form of
prices which were valid and not grossly inadequate because there is
no requirement that the price be the same as the value of the
property. Also, absent proof of fraud, inadequacy of price does not
invalidate the contract. Also, payment of the price was shown to
have been made but nevertheless, it does not affect the validity of
contracts. Lastly, the children had no cause of action because their
interest was merely inchoate while their parents are still alive.

PRESUMPTION OF THE EXISTENCE AND

LAWFULNESS OF A CAUSE,
THO UG H NO T S T A T E D I N T HE CO NT RAC T
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.
• It is necessary that the cause must exist, BUT it is not
necessary to STATE the cause in the contract.
• Reason: It is presumed that the cause EXISTS and is
LAWFUL, unless the debtor proves the contrary.

✏ Question: Under the Statute of Frauds, certain agreements

have to be in writing. Now then, in these agreements, is it
essential to put down the consideration in writing?
‣ Ans: No, because of the presumption under this Article
that the cause exists.

✏ Question: A made a promissory note in B’s favor. A, however,

alleged that the cause was his gambling losses in a
prohibited game. Who has the burden of proving that the
game was indeed a prohibited one?
‣ Ans: A because under the law, the presumption is that
the cause is lawful.

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