Civ2 Notes_VEM
FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
Atty. CAUribe,
Second Semester, AY 2019-2020
FORMS OF CONTRACT
ART. 1356. Contracts shall be obligatory, in
whatever form they may have been entered
into, provided all the essential requisites for
their validity are present. However, when the
law requires that a contract be in some form in
order that it may be valid or enforceable, or
that a contract be proved in a certain way, that
requirement is absolute and indispensable. In
such cases, the right of the parties stated in the
following article cannot be exercised. (1278a)
Modern law recognizes the autonomy of the will
over strict formalism in the execution of contracts.
It is only in very rare cases now that the form is
still essential to the validity of the juridical act.
Under the present code, the foundation is stull the
“spiritual system”, providing for the validity of the
contract in whatever form it may have.
However, the article provides for 2 cases where
form is absolute and indispensable:
a. when the law requires that a contract be
in some form in order that it may be valid
or enforceable
b. when the contract is unenforceable
unless it is in certain form. (1403, to be
discussed later)
These exceptions are calculated to avoid litigation.
Oral contracts frequently lead to fraud in the
fulfillment of the obligations or to false testimony.
Formalities required by Law
These formalities may be grouped into e:
a. those which are required for the validity
of the contract ad esentia, ad
solemnitatem;
b. those to make the contract effective as
against 3rd parties such as those in 1357
and 1358.
c. Those which are required for the purpose
of proving the existence of the contract or
formalities as probationem such as those
in 1403.
a. For validity of the Contract
Some provisions of the civil code:
Art. 748. The donation of a movable may be
made orally or in writing.
An oral donation requires the simultaneous
delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated
exceeds five thousand pesos, the donation and
the acceptance shall be made in writing,
otherwise, the donation shall be void. (632a)
Art. 749. In order that the donation of an
immovable may be valid, it must be made in a
public document, specifying therein the
property donated and the value of the charges
which the donee must satisfy.
The acceptance may be made in the same deed
of donation or in a separate public document,
but it shall not take effect unless it is done
during the lifetime of the donor.
If the acceptance is made in a separate
instrument, the donor shall be notified thereof
in an authentic form, and this step shall be
noted in both instruments. (633)
Art. 1744. A stipulation between the common
carrier and the shipper or owner limiting the
liability of the former for the loss, destruction,
or deterioration of the goods to a degree less
than extraordinary diligence shall be valid,
provided it be:
(1) In writing, signed by the shipper or owner;
(2) Supported by a valuable consideration other
than the service rendered by the common
carrier; and (3) Reasonable, just and not
contrary to public policy.
Art. 1773. A contract of partnership is void,
whenever immovable property is contributed
thereto, if an inventory of said property is not
made, signed by the parties, and attached to
the public instrument. (1668a)
Art. 1874. When a sale of a piece of land or any
interest therein is through an agent, the
authority of the latter shall be in writing;
otherwise, the sale shall be void. (n)
Art. 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)
Art. 2134. The amount of the principal and of
the interest shall be specified in writing;
otherwise, the contract of antichresis shall be
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FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
Atty. CAUribe,
Second Semester, AY 2019-2020
void. (n)
Section 22 of Act No. 1147, enacted May 3,
1904, provides that, "No transfer of large cattle
shall be valid unless registered, and a certificate
of transfer secured as herein provided.”
(Contract of Sale: nowhere in the Civil Code is
there a requirement of a specific form for a
contract of sale. However, under special laws,
such as the one above, transfer of large cattle
need to be in a public instrument, registered
and there must be a certificate of transfer.)
Where the validity of a contract is made to depend
upon a particular formality, an action under 1357
cannot be brought to compel the other party to
execute such formality. Art. 1357 presupposes that
existence of valid contract and cannot possibly
refer to the form required to make it valid, but
rather to that required simply to make it effective.
Article 1357. If the law requires a document or
other special form, as in the acts and contracts
enumerated in the following article, the
contracting parties may compel each other to
observe that form, once the contract has been
perfected. This right may be exercised
simultaneously with the action upon the
contract.
This article grants to each contracting party the
power to compel the other to execute the
formalities required by law, as soon as the
requisites for the validity of the contract are
present.
Far from making the enforceability of the contract
depend upon any special extrinsic form, this article
recognizes its enforceability by the mere act of
granting to the contracting parties an adequate
remedy whereby to compel the execution of a
public writing, or any other special form, whenever
such form is necessary in order that the contract
may produce the effect which is desired, according
to whatever may be its object.
This, in substance, is equivalent to establishing as
an implied condition of the very contract, that
these formal requisites shall be complied with,
notwithstanding the absence of any express
agreement by the contracting parties to that
effect, but does not subordinate the principal
action to the secondary action concerning the
form. The cause of action for both cases would be
the same, that is the existence of a valid contract.
Cause of action
This article does not impose an obligation, but
confers a privilege upon both parties, and the fact
that the plaintiff has not made use of the same
does not bar his action on the contract. Neither
this article or 1358 requires that the exercise of
the action to compel the execution of the deed
must precede the bringing of the action derived
from the contract. Hence, in the same complaint,
the plaintiff may ask for the compliance with the
required formalities in one cause of action, and the
enforcement of the contract in another cause of
action.
b. Enforceability
Note: the contracts here are valid but cannot be
enforced until ratified.
Art. 1403. The following contracts are
unenforceable, unless they are ratified:
(1) Those entered into in the name of another
person by one who has been given no authority
or legal representation, or who has acted
beyond his powers;
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the
following cases an agreement hereafter made
shall be unenforceable by action, unless the
same, or some note or memorandum, thereof,
be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of
the agreement cannot be received without the
writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making
thereof; (b) A special promise to answer for the
debt, default, or miscarriage of another; (c) An
agreement made in consideration of marriage,
other than a mutual promise to marry; (d) An
agreement for the sale of goods, chattels or
things in action, at a price not less than five
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, of such things in
action or pay at the time some part of the
purchase money; but when a sale is made by
auction and entry is made by the auctioneer in
his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale,
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FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
Atty. CAUribe,
Second Semester, AY 2019-2020
price, names of the purchasers and person on
whose account the sale is made, it is a sufficient
memorandum; (e) An agreement of the leasing
for a longer period than one year, or for the sale
of real property or of an interest therein; (f) A
representation as to the credit of a third person.
(3) Those where both parties are incapable of
giving consent to a contract.
Art. 1878. Special powers of attorney are
necessary in the following cases:
(1) To make such payments as are not usually
considered as acts of administration; (2) To
effect novations which put an end to obligations
already in existence at the time the agency was
constituted; (3) To compromise, to submit
questions to arbitration, to renounce the right
to appeal from a judgment, to waive objections
to the venue of an action or to abandon a
prescription already acquired; (4) To waive any
obligation gratuitously; (5) To enter into any
contract by which the ownership of an
immovable is transmitted or acquired either
gratuitously or for a valuable consideration; (6)
To make gifts, except customary ones for
charity or those made to employees in the
business managed by the agent; (7) To loan or
borrow money, unless the latter act be urgent
and indispensable for the preservation of the
things which are under administration; (8) To
lease any real property to another person for
more than one year; (9) To bind the principal to
render some service without compensation;
(10) To bind the principal in a contract of
partnership; (11) To obligate the principal as a
guarantor or surety; (12) To create or convey
real rights over immovable property; (13) To
accept or repudiate an inheritance; (14) To
ratify or recognize obligations contracted before
the agency; (15) Any other act of strict
dominion. (n)
c. Greater Efficacy or Convenience
Art. 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their
object the creation, transmission, modification
or extinguishment of real rights over immovable
property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and
1405; (2) The cession, repudiation or
renunciation of hereditary rights or of those of
the conjugal partnership of gains; (3) The power
to administer property, or any other power
which has for its object an act appearing or
which should appear in a public document, or
should prejudice a third person; (4) The cession
of actions or rights proceeding from an act
appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods,
chattels or things in action are governed by
Articles, 1403, No. 2 and 1405. (1280a)
This article enumerates certain contracts that must
appear in public or private documents. This
provision does not require for such form in order
to validate the act or contract but to require its
efficacy.
The reduction to writing in a public or private
document, required by this article is not an
essential requisite for the existence of the
contract but to simply a coercive power granted
to the contracting parties by which they can
reciprocally compel the observance of these
formal requisites.
Contracts enumerated by this article are therefore,
valid as between the contracting parties, even
when they have not been reduced to writing.
Except in certain cases where the public
instrument and registration are required for the
validity of the contract itself, the legalization of
the contract by means of public writing and its
entry in the register are not essential solemnities
or requisites for the validity of the contract as
between the contracting parties, but are required
for the purpose of making it effective as against
third person.
Transcribed:
Does the law require a particular form for the
validity and enforceability of contracts? As a rule,
the law does not require a particular form, except
when the law requires that a contract must be in a
certain form to be valid and enforceable then this
requirement is absolute and indispensable.
When the law requires a particular form and the
parties failed to comply, the contract is void? Not
necessarily. If the law requires a particular form,
the contract need not be void if the law did not
provide for nullity of contract.
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FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
Atty. CAUribe,
Second Semester, AY 2019-2020
What contracts would be void if the parties failed
to comply?
Donation of real property must be in a public
instrument in order to be valid, even between the
donor and the donee (Art. 749), otherwise if is
void. If the value of the personal property donated
exceeds 5 thousand pesos , the donation and the
acceptance shall be made in writing, otherwise the
donation shall be void (Art. 748).
In antichresis, the agreement as to the principal
and interest must be in writing, otherwise it is
void.
Contribution of a partner ins a partnership of an
immovable property, must be in writing,
otherwise, void (Art. 1773).
Sale of land through an agent, the authority of the
agent to sell must be in writing, otherwise void
(Art. 1874).
A creditor can only demand interest if it is in
writing.
A stipulation reducing the degree of diligence
required that should be observed by the common
carrier should be in writing.
Oral sale of large cattle, is the sale valid? The sale
is void because the anti-cattle rustling law requires
that it must be in a public instrument and must be
registered.
S sold orally to B a parcel of land for 10,000. B
needed a public instrument to register the sale at
the register of deeds. Can B compel S to execute a
public instrument of sale? No, because the
contract is unenforceable because the same is not
in writing. The requirement that a party may
compel the other to execute the necessary form is
when the contract is valid and enforceable. Since
in this case the contract is unenforceable, although
valid, the right to execute the required form
cannot be enforced.
S sold to B in writing a parcel of land for 10,000.
Later, B wanted to register the sale with the
Register of Deeds, but registration requires a
public instrument. B, therefore, requested S to
execute the public instrument of sale but the
latter refused. Can B compel S to execute the
public instrument of sale? Yes, because the
contract is valid and enforceable.
In what contracts would the law require a
particular form for enforceability of contract?
Contracts covered by statute of fraud under Art.
1403. Contracts covered by Art. 1878 -- e.g. agent
must have SPA to be enforceable against the
principal.
Sale of public land, if not in a public instrument
would that be valid and enforceable? It depends
on whether the contract of sale was only a verbal
sale or in writing but not in a public instrument. If
verbal sale it will be unenforceable because it will
be covered by the Statute of Frauds. If in writing,
even if not in a public instrument, that will already
be valid and binding at least between the parties.
If in a public instrument, it may also bind 3rd
persons because only public instruments may be
registered in the register of deeds. If private
instrument, the register of deeds has no business
of registering the instrument.
Note: The requirement of the law whereby a
public instrument is required is only for
convenience and to bind 3rd persons, not for
validity and enforceability. The contract remains to
be valid, the right of the parties is to compel each
other to execute a public instrument if made in a
private instrument.
Case Doctrines:
1. Lao Sok vs. Sabaysabay
Lao Sok made an offer which was duly accepted by
the private respondents. There was, therefore, a
meeting of the minds between two parties
whereby one bound himself with respect to the
other, to give something or to render some service
(Article 1305, Civil Code). By the unconditional
acceptance of the offer that they would be paid
separation pay, a contract was therefore
perfected. As held in the case of Herrera v. Auditor
General, (102 Phil. 875):
“x x x the Government, through the Quezon City
Engineer had as late as 1955 acknowledged the
financial obligation of the Government, and even
offered to pay it, and what is more, the offer was
duly accepted by Herrera, thereby constituting a
contract, and a renewal of the obligation.”
Petitioner contends that the contract though orally
made is unenforceable since it does not comply
with the Statute of Frauds. This contention has no
merit. Contracts in whatever form they may have
been entered into are binding on the parties
unless form is essential for the validity and
enforceability of that particular contract. (See
Lopez v. Auditor General, 20 SCRA 655). We held in
Shaffer v. Palma (22 SCRA 934):
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FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
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“x x x Whether the agreement is in writing or not is
a question of evidence. Nevertheless, even
granting that the agreement is not in writing, this
circumstance does not militate against the validity
or enforceability of said agreement, because
contracts are binding upon the parties in whatever
form they may have been entered into unless the
law requires otherwise. (Article 1356, Civil Code;
Lopez v. The Auditor General et al., L-25859, July
13, 1967; Pilar Gil Vda. de Murciano v. The Auditor
General, et al., 103 Phil. 907). It is true that Article
1358 of the Civil Code provides that contracts
involving more than P500.00 must appear in
writing, but nothing is said therein that such
requirement is necessary for their validity or
enforceability. It has been held that the writing
required under Article 1358 is merely for
convenience, (Thunga Chui v. Que Bentac, 2 Phil.
561; Ng Hoc v. Tong Ho, 52 O.G., 4396) and so the
agreement alleged in the amended complaint in
the present case can be enforced even if it may
not be in writing.”
The requirement of writing for the offer made by
Lao Sok is only for convenience and not
enforceability. In fact, the petitioner could be
compelled to put the offer in writing, a step no
longer necessary now because of this petition.
2. Gallardo vs. IAC
Petitioners claim that the sale (of parcel of lot
registered under the Torrens System) although not
in a public document, is nevertheless valid and
binding citing this Court's rulings in the cases
of Cauto v. Cortes, 8 Phil. 459, 460; Guerrero v.
Miguel, 10 Phil. 52, 53; Bucton v. Gabar 55 SCRA
499 wherein this Court ruled that even a verbal
contract of sale of real estate produces legal
effects between the parties. The contention is
unmeritorious.
As the respondent court aptly stated in its
decision:
True, as argued by appellants, a private
conveyance of registered property is valid as
between the parties. However, the only right the
vendee of registered property in a private
document is to compel through court processes
the vendor to execute a deed of conveyance
sufficient in law for purposes of registration.
Plaintiffs-appellants' reliance on Article 1356 of the
Civil Code is unfortunate. The general rule
enunciated in said Art. 1356 is that contracts are
obligatory, in whatever form they may have been
entered, provided all the essential requisites for
their validity are present. The next sentence
provides the exception, requiring a contract to be
in some form when the law so requires for validity
or enforceability. Said law is Section 127 of Act 496
which requires, among other things, that the
conveyance be executed "before the judge of a
court of record or clerk of a court of record or a
notary public or a justice of the peace, who shall
certify such acknowledgment substantially in form
next hereinafter stated."
Such law was violated in this case. The action of
the Register of Deeds of Laguna in allowing the
registration of the private deed of sale was
unauthorized and did not lend a bit of validity to
the defective private document of sale.
Section 127 of the Land Registration Act, Act
496 states:
Sec. 127. Deeds of Conveyance, ... affecting lands,
whether registered under this act or unregistered
shall be sufficient in law when made substantially
in accordance with the following forms, and shall
be as effective to convey, encumber, ... or bind the
lands as though made in accordance with the more
prolix forms heretofore in use: Provided, That
every such instrument shall be signed by the
person or persons executing the same, in the
presence of two witnesses, who shall sign the
instrument as witnesses to the execution
thereof, and shall be acknowledged to be his or
their free act and deed by the person or persons
executing the same, before the judge of a court of
record or clerk of a court of record, or a notary
public, or a justice of the peace, who shall certify
to such acknowledgement substantially in the form
next hereinafter stated. 
It is therefore evident that Exhibit " E " in the case
at bar is definitely not registerable under the Land
Registration Act.
Likewise noteworthy is the case of Pornellosa
and Angels v. Land Tenure Administration and
Guzman, 110 Phil. 986, where the Court ruled:
The deed of sale (Exhibit A), allegedly executed by
Vicente San Jose in favor of Pornellosa is a mere
private document and does not conclusively
establish their right to the parcel of land. WhiIe it
is valid and binding upon the parties with respect
to the sale of the house erected thereon, yet it is
not sufficient to convey title or any right to the
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FORMS OF CONTRACT, REFORMATION, INTERPRETATION, KINDS OF CONTRACT AS TO VALIDITY
Atty. CAUribe,
Second Semester, AY 2019-2020
residential lot in litigation. Acts and contracts
which have for their object the creation,
transmission, modification or extinguishment of
real rights over immovable property must appear
in a public document.
Upon consideration of the facts and circumstances
surrounding the execution of the assailed
document, the trial court found that said private
document (Exhibit "B") was null and void and that
it was signed by somebody else not Pedro
Villanueva. Such findings of fact besides being
based on the records, were sustained by the Court
of Appeals.
3. Paredes vs. Espino
Appellant Cirilo Paredes had filed an action to
compel defendant-appellee Jose L. Espino to
execute a deed of sale and to pay damages. The
complaint alleged that the defendant "had entered
into the sale" to plaintiff of Lot No. 67 of the
Puerto Princesa Cadastre at P4.00 a square meter;
that the deal had been "closed by letter and
telegram" but the actual execution of the deed of
sale and payment of the price were deferred to
the arrival of defendant at Puerto Princesa; that
defendant upon arrival had refused to execute the
deed of sale altho plaintiff was able and willing to
pay the price, and continued to refuse despite
written demands of plaintiff; that as a result,
plaintiff had lost expected profits from a resale of
the property, and caused plaintiff mental anguish
and suffering, for which reason the complaint
prayed for specific performance and damages.
Defendant filed a motion to dismiss upon the
ground that the complaint stated no cause of
action, and that the plaintiff's claim upon which
the action was founded was unenforceable under
the Statute of Frauds. Plaintiff opposed in writing
the motion to dismiss and annexed to his
opposition a copy of a letter purportedly signed by
defendant. The court below dismissed the
complaint on the ground that there being no
written contract, under Article 1403 of the Civil
Code of the Philippines.
Whether the dismissal proper? No.
The Statute of Frauds, embodied in Article 1403 of
the Civil Code of the Philippines, does not require
that the contract itself be in writing. The plain text
of Article 1403, paragraph (2) is clear that a
written note or memorandum, embodying the
essentials of the contract and signed by the party
charged, or his agent, suffices to make the verbal
agreement enforceable, taking it out of the
operation of the statute. 1403 par. 2 states:
The following contracts are unenforceable, unless
they are ratified: xxx (2) Those that do not comply
with the Statute of Frauds as set forth in this
number. In the following cases an agreement
hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of
the agreement cannot be received without the
writing, or a secondary evidence of its contents:
xxx (e) An agreement for the leasing for a longer
period than one year, or for the sale of real
property or of an interest therein.
In the case at bar, the complaint in its paragraph 3
pleads "that the deal had been closed by letter and
telegram" and the letter referred to was evidently
the one copy of which was appended as Exhibit A
to plaintiff s opposition to the motion to dismiss.
This letter, transcribed above in part, together
with that one marked as Appendix B, constitute an
adequate memorandum of the transaction. T hey
are signed by the defendant-appellee; refer to the
property sold as a lot in Puerto Princesa, Palawan,
covered by T.C.T. No. 62; give its area as 1826
square meters and the purchase price of four
(P4.00) pesos per square meter payable in cash.
We have in them, therefore, all the essential terms
of the contract, and they satisfy the requirements
of the Statute of Frauds. We have ruled in Berg vs.
Magdalena Estate, Inc., 92 Phil. 110, 115, that a
sufficient memorandum may be contained in two
or more documents.
Defendant-appellee argues that the authenticity
of the letters has not been established. That is
not necessary for the purpose of showing prima
facie that the contract is enforceable. For as ruled
by us in Shaffer vs. Palma, L24115, March 1, 1968,
whether the agreement is in writing or not, is a
question of evidence; and the authenticity of the
writing need not be established until the trial is
held. The plaintiff having alleged that the contract
is backed by letter and telegram, and the same
being a sufficient memorandum, his cause of
action is thereby established, especially since the
defendant has not denied the letters in question.
At any rate, if the Court below entertained any
doubts about the existence of the written
memorandum, it should have called for a
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preliminary hearing on that point, and not
dismissed the complaint.
4. Sps. Aguinaldo vs. Torres
o n March 3, 2003, petitioners filed a complaint6
for annulment of sale, cancellation of title, and
damages against respondent before the RTC. They
claimed that they are the registered owners of
three (3) lots covered by Transfer Certificates of
Title (TCT) Nos. T-93596, T-87764, and T-87765
situated in Tanza, Cavite (subject properties).7
Sometime in December 2000, they discovered that
the titles to the subject properties were
transferred to respondent who, in bad faith, and
through fraud, deceit, and stealth, caused the
execution of a Deed of Absolute Sale8 dated July
21, 1979 (1979 deed of sale), purportedly selling
the subject properties to him, for which he was
issued TCT Nos. T-305318, T-305319, and T-
3053209 (subject certificates of title). Respondent
filed his Answer with Counterclaim,10 denying
participation in the execution of the 1979 deed of
sale, and averring that the subject properties were
validly sold by petitioners to him through a Deed
of Absolute Sale11 dated March 10, 1991 (1991
deed of sale).12 He claimed that petitioners
caused the registration of the 1979 deed of sale
with the Register of Deeds of Trece Martires City,
and the transfer of title in his name, hence, they
are estopped from impugning the validity of his
title. Moreover, the action has prescribed, having
been filed beyond four (4) years from discovery of
the averred fraud, reckoned from the registration
of the said deed on March 26, 1991.13 He further
alleged that petitioners only filed the instant
baseless suit to harass him in view of their
acrimonious relationship, and thus, interposed a
counterclaim for moral damages and attorney's
fees.
in a Decision18 dated January 21, 2010, the RTC
dismissed the complaint, holding that petitioners
failed to establish their claim by preponderance of
evidence.19 It found that petitioners validly sold
the subject properties to respondent,20
considering too Nelia's admission of the sale in her
letter21 dated November 12, 1998 (November 12,
1998 letter) to respondent. Upheld by the CA.
Issue: The essential issue for the Court's resolution
is whether or not the CA committed reversible
error in ruling that there was a valid conveyance of
the subject properties to respondent and directing
petitioners to execute a registrable deed of
conveyance in his favor within thirty (30) days
from the finality of the decision. NO
In the present case, the complaint was filed
assailing the validity of the 1979 deed of sale, the
execution of which was denied by both parties.
However, while the CA found that petitioners'
signatures on the said deed were manifestly
different from their signatures on other pertinent
documents before it, and thus, declared the said
deed as spurious and did not validly transfer title
to the subject properties, it failed to nullify the
subject certificates of title issued pursuant to the
said deed. Settled is the rule that a forged deed of
sale is null and void and conveys no title. 37 Notably,
the complaint prayed for the nullification of the
said certificates of title based on the spurious 1979
deed of sale.38 Hence, finding the foregoing in
order, the CA's ruling must be modified
accordingly.
Nonetheless, save for the above modification, the
Court agrees with the CA's conclusion that a valid
conveyance of the subject properties to
respondent was established.
While respondent denied participation in the
execution of the 1979 deed of sale, he claimed
that the subject properties were validly sold by
petitioners to him through the 1991 deed of
sale.39 On the other hand, petitioners denied the
existence and due execution of the said deed,
claiming that they could not have signed the same
as they were in the USA when it was supposedly
executed.40
Thus, central to the resolution of the instant
controversy is the determination of the
authenticity of the 1991 deed of sale which,
however, is a question of fact rather than of
law.41 It bears to stress that it is not the function of
the Court to re-examine, winnow, and weigh anew
the respective sets of evidence of the
parties,42 absent a showing that they fall under
certain recognized exceptions,43 none of which are
present here.
At the outset, it should be pointed out that the
1991 deed of sale was improperly notarized,
having been signed by respondent and witness
Bucapal in Makati City and by petitioners in the
USA, but notarized in Tanza, Cavite, 44 which is in
violation of the notarial officer's duty to demand
that the party acknowledging a document must
appear before him,45 sign the document in his
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presence,46 and affirm the contents and truth of
what are stated therein.47 As aptly observed by the
CA, the evidence on record amply shows that Nelia
could not have been in the Philippines at the time
the said deed was signed.48
The improper notarization of the 1991 deed of sale
stripped it of its public character and reduced it to
a private instrument.49 Hence, it is to be examined
under the parameters of Section 20, Rule 132 of
the Rules of Court (Rules) which pertinently
provides that "[b]efore any private document
offered as authentic is received in evidence, its
due execution and authenticity must be
proved either: (a) [b]y anyone who saw the
document executed or written; or (b) [b]y
evidence of the genuineness of the signature or
handwriting of the maker."50 Emphases supplied.
In relation thereto, Section 22, Rule 132 of the
same Rules provides the manner by which the
genuineness of handwriting may be proved, i.e.:
(a) by any witness who believes it to be the
handwriting of such person because he has seen
the person write; or he has seen writing purporting
to be his upon which the witness has acted or
been charged; (b) by a comparison, made by the
witness or the court, with writings admitted or
treated as genuine by the party against whom the
evidence is offered, or proved to be genuine to
the satisfaction of the judge.
In this case, the CA made an independent
examination of petitioners' signatures on the 1991
deed of sale (questioned signatures), and
concluded that they are the same signatures found
on other pertinent documents (standard/sample
signatures),51 which is the same conclusion arrived
at by the NBI.52 The due execution and authenticity
of the said deed having been ostensibly
established by the finding that the signatures of
petitioners thereon were genuine, the burden was
shifted upon the latter to prove by contrary
evidence that the subject properties were not so
transferred53 - especially in light of Nelia's
admission of the sale54 in her November 12, 1998
letter to respondent, as well as respondent's
payment of the real property taxes for the same 55 -
which petitioners, however, failed to discharge
convincingly.
The Court has held in a number of cases that
forgery cannot be presumed and must be proved
by clear, positive, and convincing evidence, and
the burden of proof lies on the party alleging
forgery to establish his case by a preponderance of
evidence, or evidence which is of greater weight or
more convincing than that which is offered in
opposition to it.56 In this case, the claimed forgery
was ruled out by a comparison of petitioners'
questioned signatures with their standard/sample
signatures, but other than their own declaration
that their signatures on the 1991 deed of sale
were forged, petitioners failed to present any
evidence to corroborate their claim.
Although the improper notarization of the 1991
deed of sale did not affect the validity of the sale
of the subject properties to respondent, the same,
however, rendered the said deed unregistrable,
since notarization is essential to the registrability
of deeds and conveyances.57 Bearing in mind that
the legal requirement that the sale of real property
must appear in a public instrument is merely a
coercive means granted to the contracting parties
to enable them to reciprocally compel the
observance of the prescribed form,58 and
considering that the existence of the sale of the
subject properties in respondent's favor had been
duly established, the Court upholds the CA's
directive for petitioners to execute a registrable
deed of conveyance in respondent's favor within
thirty (30) days from finality of the decision, in
accordance with the prescribed form under
Articles 135759 and 135860 (1) of the Civil Code.
Notably, if petitioners fail to comply with this
directive within the said period, respondent has
the option to file the proper motion before the
court a quo to issue an order divesting petitioners'
title to the subject properties under the
parameters of Section 10 (a),61 Rule 39 of the Rules
of Court.
To be sure, the directive to execute a registrable
deed of conveyance in respondent's favor - albeit
not specifically prayed for in respondent's Answer
with Counterclaim - is but a necessary
consequence of the judgment upholding the
validity of the sale to him, and an essential
measure to put in proper place the title to and
ownership of the subject properties and to
preclude further contentions thereon. As aptly
explained by the CA, "[t]o leave the [1991 deed of
sale] as a private one would not necessarily serve
the intent of the country's land registration laws[,
and] resorting to another action merely to compel
the [petitioners] to execute a registrable deed of
sale would unnecessarily prolong the resolution of
this case, especially when the end goal would be
the same."62 In this relation, case law states that a
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judgment should be complete by itself; hence, the
courts are to dispose finally of the litigation so as
to preclude further litigation between the parties
on the same subject matter, thereby avoiding a
multiplicity of suits between the parties and their
privies and successors-in-interests.63
As a final note, it must be clarified that while the
Court has declared TCT Nos. T-305318, T-305319,
and T-305320 null and void, the duty to process
the cancellation of the said titles devolves upon
respondent's heirs. Likewise, it is the latter's duty
to register the new deed of sale as herein
compelled so as to secure the issuance of new
certificates of title over the subject properties in
their names.
The action for such relief rests in the theory that
the parties came to an understanding, but in
reducing it to writing, through mutual mistake,
fraud or some other reason, some provision was
omitted or mistakenly inserted and the action is to
change the instrument so as to make it conform to
the contract agreed upon.
Requisites of Reformation
1. There must be meeting of the minds upon
the contract
2. The instrument or document evidencing
the contract does not express the true
agreement between the parties

3. The failure of the instrument to express

the agreement must be due to mistake,
REFORMATION OF CONTRACTS fraud, inequitable conduct or accident.

Equity dictates that reformation of instrument in Distinguished from Annulment

order that the true intention of the contracting
parties may be expressed. The courts by the
Action for reformation presupposes that there is a
reformation do not attempt to make a new
valid existing contract between the parties and the
contract for the parties but to make the
document signed by them evidencing the contract
instrument express their real agreement. This is
does not correctly express the terms of their
because it would be unjust to allow the
agreement.
enforcement of a written instrument which does
not reflect or disclose the real meeting of the
On the other hand, if the minds of the parties did
minds of the parties.
not meet, or if the consent is vitiated, so that there
is no real and valid contract was made, the action
Art. 1359. When, there having been a meeting is for annulment rather that reformation.
of the minds of the parties to a contract, their
true intention is not expressed in the
Annulment involves a complete nullification of the
instrument purporting to embody the
contract while reformation gives life to it upon
agreement, by reason of mistake, fraud,
certain corrections.
inequitable conduct or accident, one of the
parties may ask for the reformation of the
instrument to the end that such true intention Retroactive effect
may be expressed.
Upon the reformation of an instrument, the
If mistake, fraud, inequitable conduct, or general rule is that it relates back to, and takes
accident has prevented a meeting of the minds effect from the time of its original execution.,
of the parties, the proper remedy is not especially as between the parties.
reformation of the instrument but annulment of
the contract. Art. 1360. The principles of the general law on
Once the minds of the parties meet, a valid the reformation of instruments are hereby
contract exists, whether the agreement is reduced adopted insofar as they are not in conflict with
to writing or not. There are instances, however, the provisions of this Code.
where in reducing the agreement to writing, the Self-explanatory
true intention of the parties are not correctly
expressed in the document either by reason of Art. 1361. When a mutual mistake of the parties
mistake or fraud or accident. In such cases, causes the failure of the instrument to disclose
reformation of instrument is proper.

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their real agreement, said instrument may be
reformed.
Requisites of mistake under this Article
a. The mistake of one of fact
b. That it was common to both parties
c. The proof of mutual mistake must be
clear and convincing.
There is a mistake of fact when the written
evidence of the agreement includes something
which should not be there, or omits something
that should be there, or expresses their agreement
that it sets forth something different from what
was intended.
Mistake must be mutual. It must appear that by
reason of the mistake something is to be done
which neither party intended; that is, the contract
must be written in terms which violate the
understanding of both parties, and the mistake
must be in reference to the same matter. The
parties must have come to an oral agreement
before they attempted to reduce it in writing,
which attempt failed by reason of mistake, and
reformation enforces the original agreement.
Parties must show that there was a valid contract
between them, which contract is not correctly set
forth in writing to be reformed.
Art. 1362. If one party was mistaken and the
other acted fraudulently or inequitably in such a
way that the instrument does not show their
true intention, the former may ask for the
reformation of the instrument
An instrument may be reformed as where one
party to an instrument has made a mistake and
the other party knows it and conceals the truth
from him. Such mistake and fraud must be at the
time of the execution of the instrument and must
be clearly shown.
Inequitable conduct consists in doing acts, or
omitting to do acts, which the court finds to be
unconscionable; as in taking advantage of one
party’s illiteracy, in drafting or having drafted an
instrument contrary to the previous understanding
of the parties and making such party believe the
instrument to be other that what actually is.
The mistake under this article must refer to the
content of the instrument, and not the subject
matter or principal conditions of the agreement,
the latter case an action for annulment is the
proper remedy.
Art. 1363. When one party was mistaken and
the other knew or believed that the instrument
did not state their real agreement, but
concealed that fact from the former, the
instrument may be reformed.
Self-explanatory.
Art. 1364. When through the ignorance, lack of
skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or
typist, the instrument does not express the true
intention of the parties, the courts may order
that the instrument be reformed.
Self-explanatory
Art. 1365. If two parties agree upon the
mortgage or pledge of real or personal
property, but the instrument states that the
property is sold absolutely or with a right of
repurchase, reformation of the instrument is
proper.
Self- explanatory
Art. 1366. There shall be no reformation in the
following cases: (1) Simple donations inter vivos
wherein no condition is imposed; (2) Wills; (3)
When the real agreement is void.
Both donations and wills are gratuitous
dispositions of property. There reason for this
article is that an action to reform a written
instrument is in the nature of an action for
specific performance and requires a valuable
consideration, an element lacking between the
donor and donee, and between the testator and
beneficiary.
Art. 1367. When one of the parties has brought
an action to enforce the instrument, he cannot
subsequently ask for its reformation.
Action for enforcement and reformation are two
inconsistent remedies, one in affirmance of the
written contract and the other in disaffirmance.
The party suing under the written contract may
be said to have ratified the same.
Art. 1368. Reformation may be ordered at the
instance of either party or his successors in
interest, if the mistake was mutual; otherwise,
upon petition of the injured party, or his heirs
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and assigns.
Art. 1369. The procedure for the reformation of
instrument shall be governed by rules of court
to be promulgated by the Supreme Court.
Transcribed:
May a verbal agreement be the subject of
reformation? No. Only instruments may be
reformed and the reason for reformation is that
the instrument does not reflect the real intention
of the parties.
Requisites for reformation of instruments in a
contract?
1. Meeting of the minds of the parties
2. Instrument does not express the real
intention of the parties
3. Failure of intention due to mistake, fraud,
inequitable conduct or accident.
4. There must be clear and convincing proof.
Note: If the mistake, fraud, inequitable conduct or
accident has prevented the meeting of the minds
of the parties, the proper remedy is annulment of
contract and not reformation of the instrument.
A delivered a sum of money to B which was
accepted by B. One year thereafter, A went back
to B and demanded the return of the money plus
interest. B asked why should I return the money,
it was a donation. A told him it is not a donation
but a loan. Is reformation a remedy? It will not be
a remedy. Reformation presupposes a meeting of
the minds. Since there is no meeting of the minds
because the parties does not know whether it is a
sale or donation, and secondly there is no
instrument to be reformed, reformation shall not
be a remedy.
If the plaintiff asked for reformation of the
instrument where it was stated “cocaine”, but the
real intention was morphine, may reformation
prosper? Yes because the real contract is not a
void contract. The content of the instrument is
being reformed.
What instances where reformation cannot
prosper?
1. Simple donations inter vivos wherein no
condition is imposed since the intentions
of the donor will prevail, because
donations reflect the liberality of the
benefactor.
2. Wills because the testator is already dead,
and the will reflect his personal
intentions.
3. When the real agreement is void. Void
contracts are inexistent, so there is
nothing to reform.
In case of conflict between intention and the
words or phrases which shall prevail? The real
intention of the parties prevail even if the words
and phrases are clear as to their meaning.
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the
evident intention of the parties, the latter shall
prevail over the former.
When the contract is reduced into writing, the
contents shall be the sole repository of the terms
of the agreement between the parties. Whatever
is not found in the writing must be understood to
have been waived and abandoned. Hence there
can be no evidence of the terms of the contract
other than the contents of the writing, unless it
can be proved that the intention of the parties is
otherwise. Note that a contract is what the law
defines it to be, and not what it is called by the
parties. The title of a contract does not
necessarily determine its nature.
Interpretation of Terms
The language of the writing is to be interpreted
according to its legal meaning it bears in the place
of its execution.
When the terms of the agreement are so clear and
explicit that they do not justify an attempt to read
into any alleged intention of the parties, the terms
are to be understood literally as they appear on
the face of the contract.
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Intention of the parties
In the construction of an instrument, the intention
of the parties is to be pursued. The true agreement
of the parties may be proved as against the terms
and stipulations appearing in a written contract
where a mistake or imperfection of the writing or
its failure to express the true intent of the parties,
is put in issue in the pleadings or there is an
intrinsic ambiguity in the writing. When the true
intent and agreement of the parties is
established, it must be given effect and prevail
over the bare words of the written contract.
The important task in contract interpretation is
always the ascertainment of the intention of the
contracting parties, and that task is to be
discharged by looking to the words they used to
project that intention in their contract.
Proof of Intention
In order that the intention of the parties prevail
against the terms of the contract, such intention
must be clear or, in other words, besides the fact
that such intention should be proved by
competent evidence, it must be of such character
as to carry in the mind of the judge an inequivocal
conviction.
See discussion in Reformation.
Case Law: Republic vs. Castelvi
Intention cannot prevail over the clear and express
terms of the lease contract. Intent is to be
deduced from the language employed by the
parties, and the terms of the contract, when
unambiguous, are conclusive in the absence of
averment and proof of mistake or fraud—the
question being not what the intention was, but
what is expressed in the language used. Moreover,
in order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered.
However general the terms of a contract may be,
they shall not be understood to comprehend
things that are distinct and cases that are different
from those upon which the parties intended to
agree.
Art. 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
For the proper construction of an instrument, the
circumstances under which it was made,
including the situation of the subject thereof and
of the parties to it, may be shown. The court may
also consider the relations existing between the
parties, their respective situations, the
surrounding circumstances and the purpose and
tenor of the whole contract.
But where the parties themselves placed an
interpretation to their contract or its terms, the
court must follow such interpretation as indicating
the intention of the parties.
Art. 1372. However general the terms of a
contract may be, they shall not be understood
to comprehend things that are distinct and
cases that are different from those upon which
the parties intended to agree. (1283)
Particular provision in a contract is paramount
over the general provision in the construction of
an instrument. So a particular intent will control a
general one that is inconsistent with it.
The contract cannot be construed so as to include
matters distinct from those with respect to which
the parties intended to contract.
Art. 1373. If some stipulation of any contract
should admit of several meanings, it shall be
understood as bearing that import which is
most adequate to render it effectual. (1284)
Where the instrument is susceptible of two
interpretations, one making it invalid and the
other will make it valid, the latter interpretation
should be adopted.
Art. 1374. The various stipulations of a contract
shall be interpreted together, attributing to the
doubtful ones that sense which may result from
all of them taken jointly. (1285)
A contract cannot be construed by parts, but its
clauses should be interpreted in relation to one
another. The whole contract must be interpreted
or read together in order to arrive at its true
meaning.
Certain stipulations cannot be segregated and then
made to control; neither do particular words or
phrases necessarily determine the character of the
contract. The legal effect of the contract is not
determined alone by any particular provision
disconnected from the others, but in the ruling
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intention of the parties as gathered form all the
language they have used and form their
contemporaneous and subsequent acts.
Provisions of the contract are to be given a
reasonable and practical interpretation so as to be
efficacious. Titles given to sections of a contract
may be resorted to in interpreting its scope. An
interpretation that gives effect to the contract as
a whole should be adopted.
Art. 1375. Words which may have different
significations shall be understood in that which
is most in keeping with the nature and object of
the contract. (1286)
When there is a doubt as to the meaning of any
particular language, it should be determined by a
consideration of the general scope and the
purpose of the instrument in which it occurs.
Art. 1376. The usage or custom of the place
shall be borne in mind in the interpretation of
the ambiguities of a contract, and shall fill the
omission of stipulations which are ordinarily
established. (1287)
An instrument may be construed according to the
usage, in order to determine its true character.
Where the contract for the lease of services did
not provide for the amount of compensation, the
rate can be determined by the rate customarily
paid in the place where the services was rendered.
Art. 1377. The interpretation of obscure words
or stipulations in a contract shall not favor the
party who caused the obscurity. (1288)
If one of the party caused the obscurity in certain
terms of the instrument, such terms must be
construed against him.
When the terms of the agreement have been
intended un a different sense by the different
parties to it, that sense is to prevail against either
party in which he supposed the other understood
it, and when different constructions of a provision
is are otherwise equally proper, that is to taken
which is the most favorable to the party in whose
the favor the provision was made.
See discussion in “Contract of Adhesion” in
fundamental characteristics.
Case Law: Lim vs. CA
—Considering the admitted fact that the contract
of sale (Exhibit “A”) was prepared in the office of
respondent company by Generoso Bongato,
Assistant to the Manager of the company, upon
instruction of General Manager Emiliano L. Abalos
who is a lawyer, and We are now confronted with
the varying or conflicting interpretations of the
parties thereto, the respondent company
contending that the stipulation “Terms: Cash upon
signing of this contract” does not mean that the
agreement was a cash transaction because no
money was paid by the petitioner at the time of
the signing thereof whereas the petitioner insists
that it was a cash transaction inasmuch as he paid
cash amounting to P142,975.00 upon the signing
of the contract, the payment having been made at
around 1:30 in the afternoon of November 13,
1970 to the cashier, Teodoro Garcia, and Manager
Abalos although the sale was agreed to in the
morning of the same day, November 13, 1970, the
conflicting interpretations have shrouded the
stipulation with ambiguity or vagueness. Then, the
cardinal rule should and must apply, which is that
the interpretation shall not favor the party who
caused the ambiguity (Art. 1377, New Civil Code).
We rule that in the instant case, the interpretation
to be taken shall not favor the respondent
company since it is the party who caused the
ambiguity in its preparation.
The above facts show contemporaneous and
subsequent acts of the parties in relation to the
transaction between them as embodied in the
Contract of Sale of Sugar (Exh. “A”) from which the
intention of the contracting parties may be judged
correctly. The trial court was correct in subsequent
to the agreement for the sale of the sugar in
question, and we sustain the trial court, applying
Art. 1371, New Civil Code.
Eastern Shipping vs. Margarina
There is a clear and irreconcilable inconsistency
between the York-Antwerp Rules expressly
adopted by the parties as their contract under the
bill of lading which sustains respondent’s claim and
the codal article cited by petitioner which would
bar the same. Furthermore, as correctly contended
by respondent, what is here involved is a contract
of adhesion as embodied in the printed bill of
lading issued by petitioner for the shipment to
which respondent as the consignee merely
adhered, having no choice in the matter, and
consequently, any ambiguity therein must be
construed against petitioner as the author.
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Art. 1378. When it is absolutely impossible to
settle doubts by the rules established in the
preceding articles, and the doubts refer to
incidental circumstances of a gratuitous
contract, the least transmission of rights and
interests shall prevail. If the contract is
onerous, the doubt shall be settled in favor of
the greatest reciprocity of interests .
If the doubts are cast upon the principal object
of the contract in such a way that it cannot be
known what may have been the intention or
will of the parties, the contract shall be null and
void. (1289)
Construction which amount to impairment or loss
of right is not favored; conservation and
preservation, not waiver, abandonment or
forfeiture of a right, is the rule.
So between a commodatum and donation, which
has the least transmission of rights?
Commodatum, why? Because there is no transfer
of ownership in commodatum. Whereas if it were
a donation, the property has left the patrimony of
the donor forever. Usufruct or the donation?
Usufruct, because the usufructuary is under
obligation to return the property.
Now, what if the contract is onerous? The doubt
shall be resolved in favor of the greatest
reciprocity of interest. So a person giving a ring to
the other person, and the other person gives
money. What is the presumption? Pledge, because
that would fall under the greatest reciprocity of
interest. Between pledge or mortgage? If there is
doubt, mortgage. Why? Because there is no
transfer of possession, but the creditor still enjoys
the interest on the money that was loaned.
Between antichresis and mortgage? Mortgage
parin.
In the last paragraph of this article, where the
intention of the parties relative to the objects of
the exchange cannot be definitely ascertained, the
deed of exchange is null and void.
Art. 1379. The principles of interpretation
stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of
contracts.
When an instrument consists partly of written
words and party of a printed form, and the two are
inconsistent, the former controls the latter.
Transcribed
If the terms of the contract is clear, the literal
meaning shall control? Not necessarily. If the
stipulation is contrary to the intention of the
parties, the intention shall prevail and the literal
meaning will not bind the parties.
How to determine the real intention of the
parties? The contemporaneous and subsequent
acts of the parties, such as the subsequent
payments and the subsequent execution of real
estate mortgage shows that there is no dation in
payment.
A stipulation in a contract of sale that payment is
deemed made upon the signing of the contract.
Despite such stipulation, seller filed an action for
recovery of purchase price. Will the action
prosper? Yes. because there is no presumption
that payment is made. By the contemporaneous
and subsequent acts of the parties, it was shown
that indeed payment was not made.
Rules in the interpretation of words and phrases
shall not favor who? The party who caused the
ambiguity. In the case of ESL vs, Margarine, the
shipper who prepared the bill of lading, it was
stipulated as to the extent of the liability of the
common carrier in case damage is sustained. The
SC held that it will be interpreted against the
shipper who prepared the document.
In a sale of one of the cars, the seller, despite the
application of the rules on interpretation of
contracts and the circumstances surrounding it,
there is ambiguity as to which car is the object of
the sale. What is the effect? The contract is void
when it is absolutely impossible to settle the
doubt.
A obliged himself to deliver and transfer
ownership over a specific car. During the
negotiation B already saw the car with stereo.
When the car was delivered, there was no stereo.
B demanded delivery of stereo. If the claim of B a
valid claim? It depends on what contract was
entered into. If gratuitous, the doubt refers only to
the incidental circumstance pertaining to the
contract, and because the principle of least
transmission of rights shall prevail. If it is an
onerous contract, the he will be entitled to the
stereo because in onerous contracts the greatest
reciprocity of interest shall govern.
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KINDS OF CONTRACTS AS TO VALIDITY
a. Valid and Binding
b. Valid but Defective
c. Void and Inexistent
Defective Contracts
a. Rescissible- a contract that has caused a
particular damage to one of the parties
or to a third person, and which for
equitable reasons may be set aside even if
it is valid.
b. Voidable/Annullable- a contract in which
the consent if one party is defective,
either because of want of capacity or
because it is vitiated, but which is valid
until set aside by a competent court.
c. Unenforceable- a contract that for some
reason cannot be enforced, unless it is
ratified in the manner provided by law.
d. Void and Inexistent- an absolute nullity
and produces no effect, as if it had never
been executed or entered into.
Relative Ineffectiveness- Those which are
ineffective only with respect to certain parties, but
are effective as to other persons.
Transcribed
Is defective contracts a good classification under
this title? No. Because the term defective contract
mean that there is an existing contract. In Void
Contracts there is no contract to speak of.
May a contract be rescissible, voidable and
unenforceable all at the same time? Yes because
the defects differ depending on the status of the
contract.
What are the four kinds of defective contracts?
1. Rescissible Contracts; Valid until
rescinded; the defect is extrinsic defect
consisting of an economic damage or
lesion.
2. Voidable Contracts; Valid until annulled.
Annullable unless ratified. If ratified, the
contract is cleansed of its defect. This
contract is effective now, but may be
invalidated.
3. Void Contracts is one that has no effect at
all; it cannot be ratified or validated. This
is called inexistent contracts
Distinguish Rescission under Art. 1191 and
Rescission under Rescissible Contracts?
1.In 1191 there must be a breach while in
Rescissible Contracts there may or may not be a
breach. 2.The prescriptive period under 1191 is 1
years while rescission under 1380 and 1381 should
be filed within 4 years from the date of the
contract. 3.The breach under Art. 1191 should be a
substantial breach or fundamental breach. Slight
breach or casual breach cannot be the basis on an
action for rescission under 1191. 4.Under 1191 it is
a principal remedy, while in 1380 and 1381, it is a
subsidiary remedy.
May the defect of the contract be void and
voidable at the same time? No, because void
contracts are inexistent while voidable contracts
exist.
May rescissible, unenforceable and voidable
contracts be ratified? Unenforceable contracts
and voidable contracts may be ratified. Rescissible
contracts cannot be ratified because it has no
inherent defect as to the requisite.
May a void contract be ratified? Yes, under Art.
1898 the principal can ratify the contract as when
the agent acted in excess of authority and the 3rd
person was aware that the agent acted in excess of
authority. However, the enumeration under Art.
1409 cannot be ratified for they are void and
inexistent from the beginning.
Rescissible Contracts
Art. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law
Rescission is a remedy granted by law to the
contracting parties and even third persons to
secure the reparation of damages caused by them
by a contract even if this should be valid, by
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means of restoration of things to their condition 5. The action for rescission must be brought
at the moment prior to the celebration of the said within the prescriptive period of four
contract. years.

It implies a contract which, even if initially valid, Art. 1381. The following contracts are
produces a lesion or pecuniary damage to rescissible:
someone. It sets aside the act or contract for
justifiable reasons of equity. (1) Those which are entered into by guardians
whenever the wards whom they represent
Rescission is not limited to contracts which are suffer lesion by more than one-fourth of the
valid. It does not require that the contract to be value of the things which are the object thereof;
rescinded in valid. Hence, a voidable contract can
be rescinded. (2) Those agreed upon in representation of
absentees, if the latter suffer the lesion stated
Rescission in Reciprocal Obligations in the preceding number;

See notes in 1191. The rescission in 1191 is (3) Those undertaken in fraud of creditors when
different to rescission of contracts. the latter cannot in any other manner collect
the claims due them;
They differ in the following respects
(4) Those which refer to things under litigation if
1380 1191 they have been entered into by the defendant
Based on lesion or Based on without the knowledge and approval of the
fraud upon creditors nonperformance or litigants or of competent judicial authority;
nonfulfillment of the
obligation (5) All other contracts specially declared by law
The action is instituted Action may be to be subject to rescission. (1291a)
by either of the instituted only by the Contracts with lesion
parties or by third injured party to the
parties; contract;
Courts cannot grant a In some cases, the
period or term w/in courts may grant a Lesion if the injury which one of the party suffers
w/c to comply term by virtue of a contract which is disadvantageous
Non-performance by Non-performance by for him. To give rise to rescission, the lesion must
other party is other party is be known or could have been known at the time of
immaterial important making the contract, and not due to circumstances
Requisites of Rescission subsequent thereto or unknown to the parties.

1. The contract must be a rescissible
contract, such as those mentioned in
articles 1381 and 1382
2. The party asking rescission must have no
other legal means to obtain reparation
for damages suffered by him
3. The person demanding rescission must be
able to return whatever he may be
obliged to restore if rescission is granted
4. The things which are the subject of
rescission must not have passed legally
to the possession of third person acted in
good faith.
The idea is to establish parity between the value of
the thing and its price, so that if the price is less
than the true value of the thing at the time of the
perfection of the contract, there is lesion.
Contracts of Guardians/Representatives
As a rule, before the guardians enter into a
contract disposing the property of the ward, he
must secure approval of the court. He is only
authorized to manage the properties of the ward,
hence he has no power to dispose any portion
thereof without such approval. Hence, if they
enter into contracts disposing a property of the
ward without prior approval of the court, the
contract is unenforceable.

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What then is the article pertaining to? The law
here must be limited to contracts which
constitutes acts of administration. Example is the
purchase of equipment for cultivation of land
belonging to the ward, the sale of the harvest from
such land, repairs of buildings. They do not require
prior approval of the court because they are made
in the ordinary course of the management of the
estate of the ward. If the required lesion exists,
the contract is rescissible. But even if such lesion
exists, the contract cannot be rescinded if the
guardian secured the approval of the court for
such contract.
Contracts in Fraud of Creditors
These contracts are executed with the intention to
prejudice the rights of the creditors, and should
not be confused with those entered into without
such intention. The existence of the intention to
prejudice the creditor should be determined.
Accion Pauliana (AP)
The action to set aside contracts in fraud of
creditors is called accion pauliana. The requisites
are:
a. The plaintiff asking for rescission has a
credit prior to the alienation, although
demandable later.
b. That the debtor has made a subsequent
contract conveying a patrimonial benefit
to a third person.
c. That the creditor has no other legal
remedy to satisfy his claim, but would
benefit by the rescission of the
conveyances to the third person
d. The act being impugned is fraudulent
e. The 3rd person who received the property
conveyed, if it is by onerous title, has
been an accomplice in the fraud.
Existence of Credit/Priority of the Credit
Only creditors can ask for the rescission of the
contract.
Rescission requires the existence of creditors at
the time of the fraudulent alienation, and this
must be proved as one of the basis of the judicial
pronouncement setting aside the contract; without
prior existing debts, there can be no injury nor
fraud.
At the time of the accion pauliana is brought, the
credit must already be due. Therefore, credits with
suspensive condition or term are excluded,
because AP presupposes a judgment and
unsatisfied execution, which cannot exist when
the debt is not yet demandable at the time the
rescissory action is brought.
Rescission is a subsidiary action, which
presupposes that the creditor has exhausted the
property of the debtor, which is impossible in
credits which cannot be enforced because of the
term and condition.
While it is necessary that the credit of the plaintiff
in the AP must be prior to the fraudulent
alienation, the date of the judgment enforcing it is
immaterial. But it is recognized that the availability
of the AP, even when the alienation is prior to the
credit, when the debtor purposely and in bad
faith deprives himself of the ability to meet the
consequences of obligation he intends to incur in
the future. The alienation can be rescinded if it
was made precisely in view of such future
obligation and for the purpose of depriving in
advance the creditor of the guaranty on which he
could have relieved.
The remedy of rescission is available to all
creditors who were already such at the time of
the fraudulent alienation, when they cannot
collect what is due them. Even secured creditors
or lienholders are entitled to the AP.
Fraudulent Conveyance
It must be shown that the conveyance was
fraudulent or with intent to prejudice the
creditors of the party making the conveyance.
The fraud may be established by presumption
(1387) or on the whole of the evidence
independent of such presumption. Even if there
are circumstances giving rise to the presumption
of fraud, is such presumption is overcome by a
sufficient evidence, the creditor must prove facts
showing actual fraudulent intent on the part of the
debtor.
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Without such proof of fraudulent intent, the
contract cannot be rescinded. Hence, a sale made
by a debtor to one of this creditors for the purpose
of cancelling his indebtedness, is valid, even if it
may be prejudicial to the other creditors. And
when the alienation is for sufficient consideration,
it cannot be said that it is fraudulent, where no
judgment or attachment exists against the debtor.
Test of Fraud
The question to ask is whether the conveyance
was a bona fide transaction or a trick or
contrivance to defeat creditors, or whether it
conserves to the debtor a special right. It is not
sufficient that it is founded on good consideration
or is made with bona fide intent; it must have
both. The test as to whether or not a conveyance
is fraudulent is, does it prejudice the rights of the
creditors?
Tolentino: Such intention is not necessary, that it is
enough that the debtor knows he would cause
injury, that is, he can foresee injury to creditors
because he knows of his own solvency which
would result from the alienation. The fraud that
justifies AP is not characterized by the intention
to injure creditor, but by knowledge that damage
would be inflicted. This knowledge exists when
the debtor knows that his property cannot be
alienated without producing injury to his
creditors with existing claims, whether they be
due or not.
Signs of Fraud
1. The consideration of the conveyance is
inadequate
2. A transfer was made after the suit has
begun and while it is pending against the
debtor.
3. A sale upon credit by an insolvent debtor
4. Evidence of large indebtedness or
complete insolvency
5. The transfer of all or nearly all of his
property by a debtor, especially when he
is insolvent or embarrassed financially
6. The fact that the transfer is made
between father and son when there are
present aby of the above circumstances
7. The failure of the vendee to take exclusive
possession of all the property
As to the transferee
As to the transferee, a distinction must be made.
When the alienation is gratuitous, the good faith
of the transferee will not protect him because he
gave nothing and so he is not prejudiced by the
rescission. But if the alienation is by onerous title,
the transferee must be a party to the fraud, if he
acts in good faith, there is no rescission, because
having given something his position would be
similar to that of the creditor, and being already in
possession his acquisition will be respected.
No other Remedy
It is necessary that the complaining creditors must
prove that they cannot recover in any other
manner what is due to them. The action for
rescission is essentially subsidiary. The alienation
must have been prejudicial to the creditor, it must
had the effect of making the creditor insolvent
having diminished his property to such extent that
he cannot pay the debt.
Creditors to be Benefitted
As a rule, the rescission should benefit only the
creditor who obtained the rescission because the
rescission is to repair the injury caused to him by
the fraudulent alienation. But there may be other
creditors who could also bring AP, the should be
given benefit of the rescission instead of requiring
them to bring other rescissory actions, if a balance
is left after satisfying the claim of the creditor who
brought the action for rescission. However,
creditors who became such only after the
fraudulent alienation, and who themselves cannot
ask for rescission cannot benefit from rescission.
They cannot get indirectly what they cannot get
directly.
Contracts in Litigation
This refers to contract executed by the defendant
in a suit involving the ownership or possession of a
thing, when such contract is made without the
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knowledge and the approval of the plaintiff or
court.
The remedy in this case is given to a third person
who is not a party to the contract. The purpose is
the same in both cases, it is to prevent injury to
the plaintiff. But while rescission of a contract in
fraud of creditors a personal right protected by
giving it the guaranty of the debtor’s property, in
rescission of a contract on things in litigation a real
right is rendered effective with respect to
particular property.
Right of the Transferee
Where the claim of the plaintiff in pending
litigation has not been registered, the transferee of
the property in litigation who acquired the same in
good faith and for a valuable consideration
without knowledge of such litigation or claim if the
plaintiff, cannot be deprived of such property by a
rescissory action. The good faith of the transferee
protects him.
In case the transfer is gratuitous, transferee losses
nothing by the rescission and the contract may be
rescinded even if he acted in good faith.
obtain reparation for the same. (1294)
The plaintiff asking rescission must prove that he
has no other legal means to obtain reparation.
Art. 1384. Rescission shall be only to the extent
necessary to cover the damages caused. (n)
The rescission is only in favor of the plaintiff
creditor; not all of the creditors. The extent of the
revocation is only to the amount of the prejudice
suffered by the creditor. As to the excess, the
alienation is maintained. And if the transferee is
willing to pay the amount of such credit, rescission
will not lie.
Under the present article, only the creditor who
brought the action can benefit from the rescission,
and only to the extent of his unsatisfied credit. S
Who may bring the Action
1. Person who is injured by the fraudulent
alienation
2. Their heirs
3. The creditors by virtue of 1177.

Art. 1385. Rescission creates the obligation to

Art. 1382. Payments made in a state of
return the things which were the object of the
insolvency for obligations to whose fulfillment
contract, together with their fruits, and the
the debtor could not be compelled at the time
price with its interest; consequently, it can be
they were effected, are also rescissible. (1292)
carried out only when he who demands
When the debtor transfers property to a creditor
rescission can return whatever he may be
allegedly in payment of the debt which has not yet
obliged to restore.
matured, at the time the debtor is insolvent, and
the consideration of the transfer is grossly
Neither shall rescission take place when the
inadequate compared to the actual value of the
things which are the object of the contract are
property, the transfer is fraudulent and can be set
legally in the possession of third persons who
aside by creditors prejudiced thereby. If the debt
did not act in bad faith.
was due at the time of the transfer, the
conveyance will not fall under the article.
In this case, indemnity for damages may be
demanded from the person causing the loss.
The insolvency referred to in this article is
(1295)
insolvency in fact, not requiring any judicial
proceeding on insolvency. Mutual Restitution

It is a matter of evidence and can be established by The only possible application of the rule is that the
proving that the debtor did not have properties party seeking rescission must offer to restore that
with which to satisfy his creditor except that which which he had received from the other, is in
was given in payment. contracts executed by guardians or
administrators in Nos. 1 and 2 in 1381. The rule
also applies in 1191.
Art. 1383. The action for rescission is subsidiary;
it cannot be instituted except when the party
Transfer to third person
suffering damage has no other legal means to

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Third person under this article include not only
one who is not a party to the rescissible contract
but also one who is a party thereto.
To be an obstacle to rescission, the following
circumstances must be present:
a. That such TP is in lawful possession of the
realty, that he is protected by law against
said action by the registration of the
transfer to him in the registry
b. He did not act in bad faith.
Thus, a valid transfer to the TP who acquires the
property in good faith is sufficient to defeat the
action for rescission. But if the TP acted in bad
faith and he cannot return the thing upon the
rescission of the contract, he will be liable for the
value of the property to the party entitled to the
rescission.
Right of transferee
As to the transferee, a distinction must be made.
When the alienation is gratuitous, the good faith
of the transferee will not protect him because he
gave nothing and so he is not prejudiced by the
rescission. But if the alienation is by onerous title,
the transferee must be a party to the fraud, if he
acts in good faith, there is no rescission, because
having given something his position would be
similar to that of the creditor, and being already in
possession his acquisition will be respected.
Art. 1386. Rescission referred to in Nos. 1 and 2
of Article 1381 shall not take place with respect
to contracts approved by the courts. (1296a)
Self-explanatory
Art. 1387. All contracts by virtue of which the
debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of
creditors, when the donor did not reserve
sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against
whom some judgment has been issued. The
decision or attachment need not refer to the
property alienated, and need not have been
obtained by the party seeking the rescission.
In addition to these presumptions, the design to
defraud creditors may be proved in any other
manner recognized by the law of evidence.
(1297a)
This article presumes the existence of fraud made
by a debtor. In the absence of evidence to the
contrary, the alienation was held fraudulent
because it was made after the judgment had been
rendered against the debtor making the alienation.
If the alienation was made before, the
presumption will not lie.
In order to overcome the presumption, it is
necessary to establish affirmatively that the
conveyance was made in good faith and for a
sufficient consideration. Proof of these
circumstances is sufficient to negate the existence
of fraud, and the presumption created will be
considered overthrown.
Proof of Fraud
See 7 items in discussion in 1381, supra
Effect of Fraud
Fraud does not necessarily make the alienation
rescissible. Fraud is only one of the requisites of
AP. If the debtor is in fraud but the transferee
acquired the thing in good faith and for sufficient
consideration, rescission will not be allowed.
Art. 1388. Whoever acquires in bad faith the
things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by
them on account of the alienation, whenever,
due to any cause, it should be impossible for
him to return them.
If there are two or more alienations, the first
acquirer shall be liable first, and so on
successively. (1298a)
The creditor can have an action against
subsequent transferees only when the action lies
against the first transferee. If the first transferee
acquired the thing in good faith, he is not liable.
If the first transferee acted in bad faith and then
he alienates the property to another, the
rescissible character of the second transfer
depends upon how the second transferee acquired
the thing. If in good faith, the transfer to him
cannot be rescinded, and since the property
cannot be returned, the first transferee will be
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liable for damages, the subsequent transferee is
not liable for damages. But if the second
transferee also acts in bad faith, he can be
required to return the property the first transferee
cannot be held liable for damages where such
return is possible.
In order to be in bad faith, it is not necessary that
he connived with the transferor to commit fraud.
It is enough that the transferee knows of the
intention of the transferor to defraud creditors.
Art. 1389. The action to claim rescission must
be commenced within four years.
For persons under guardianship and for
absentees, the period of four years shall not
begin until the termination of the former's
incapacity, or until the domicile of the latter is
known. (1299)
Self-explanatory
Transcribed
How may contracts be considered rescissible?
Contracts may only be considered rescissible
because the law so provides. If there is no law
declaring the contract to be rescissible, it is not.
What contracts are considered rescissible?
1.Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than 1/4 of the value of the things
which are the object thereof; 2.Those agreed upon
in the representation of absentees, if the latter
suffer the lesion stated in the preceding number.
3.Those undertaken in fraud of creditors when the
latter cannot in any manner collect the claims due
them; 4.Those which refer to things under
litigation if they have been entered into by the
defendants without knowledge and approval of
the litigants or competent judicial authority. 5.All
other contracts specially declared by law to be
subject to rescission (Art. 1381).
What other contracts declared by law to be
rescissible? 1.The right to rescind as provided
under Art. 1189 in case of deterioration of the
thing delivered. 2.The right to rescind given an
unpaid seller as provided for in Art. 1526. 3.The
right to rescind given to a vendee in sale of real
property per unit of measure or lump sum price.
4.Violation of warranty against hidden defects
under Art. 1567.
How to determine whether a contract is entered
into in fraud of creditors? 1.There must be an
intention to defraud creditors. 2.There must be a
pre-existing obligation at the time it was entered
into. Note: Even if the contract was entered into
before the obligation arose, it is still in fraud of
creditors when the purpose is really to defraud
creditors. 3.The existence of fraud or bad faith on
the part of the debtor which can either be
presumed or proven; and 4. The creditors cannot
recover their credits in any other manner.
In what instance may a contract be said to be in
fraud of creditor even before the obligation
arose? In a contract of loan where a person is
supposed to mortgage his property as security for
the loan. Here the debtor owns the property at the
time of the loan but before the money to be
loaned was released by the Bank, the person
disposed of the property. There was no perfected
loan but there was already fraud of creditors, even
before the money was released, the titles will
already be delivered to the bank.
How to prove fraud in (contracts in fraud of
creditors)? Creditor may prove fraud by invoking
the presumptions provided for by law. It may be
proved by proving badges of fraud.
What are some instances considered by the Court
as badges of fraud? 1.The fact that the
consideration of the conveyance is fictitious or
inadequate; 2.A transfer made by a debtor after
suit has begun and while it is pending against him;
3.A sale on credit by an insolvent debtor;
4.Evidence of large indebtedness or complete
insolvency; 5.Transfer of all or nearly all if his
property by a debtor especially when he is
insolvent or greatly embarrassed financially; 6.The
fact that the transfer is made between father and
son, when the above circumstances are present;
7.The failure of the vendee to take exclusive
possession of all the property.
May a contract be considered rescissible even
without badges of fraud? Yes, in:
1. Gratuitous contracts - Contracts entered
into by the debtor when he did not
reserve sufficient property to pay his
debts before donation are considered
fraudulent.
2. Onerous contracts:
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a. Made by a person against whom What is the prescriptive period for rescission?
some judgment has been rendered
even if not yet final. A. General Rule Within 4 years from the date
it was entered into:
b. Made by person against whom some
writ of attachment has been issued. 1.If the person is under guardianship,
The decision or attachment has been within 4 years from the time the
issued. The decision or attachment guardianship ceases;
need not refer to the property
alienated. Note: Even if the order of 2.In case of absentees, within 4 years
attachment is not yet final and the from the time the domicile is known.
executor 2 days after the issuance
disposed of it, the presumption
B. In certain contracts of sale which are
would still arise. It is not necessary
specially declared by law to be rescissible,
that the order becomes final.
the period is 6 mos. or even 4 days
counted from the day of delivery (Arts.
A donated a property worth 5M to X, and the 1543, 1571, 1577).
debt is 500k, is there a presumption that the
donation is in fraud of creditors? Not necessarily
Who are the persons who can bring the action for
because A may have reserved sufficient property
rescission? 1.the injured party 2.the heirs of the
to pay his debts.
injured party 3.the creditors if the transaction is
fraudulent
Does it matter whether the debtor was aware of
the order? It does not mater.
Two parcels of land are alienated in fraud of
creditors in one contract, may the contract be
Are the presumptions conclusive or disputable? rescinded? The contract may be rescinded by the
The presumptions are merely disputable and the restitution of both properties is not required
debtor can prove good faith. But with respect to because the restitution may only be to the extent
donations, the fraud of creditors should be to recover damages caused.
conclusive because debts should be satisfied first
before any gratuitous transactions should be made
Case Laws
by the debtor.
1. Cabaliw vs. Sadorra
Because there was lesion of 25%, is it rescissible?
Not necessarily. It is void if the guardian is the
Facts: Petitioner Isidora Cabaliw was the wife of
buyer. It is valid if it is made with judicial authority.
Benigno Sadorra by his second marriage, they had
a child, herein petitioner Soledad Sadorra. During
Because there was lesion of 25%, is rescission a
their marriage, the spouses acquired two (2)
remedy? No because there are requirements for
parcels of land situated in Iniangan, Dupax, Nueva
rescission to prosper. Rescission is merely
Vizcaya.
subsidiary and there must be prior exhaustion of
all legal remedies.
Having been abandoned by her husband, Isidora
Cabaliw instituted an action for support, which
If there is rescission, should there be a return of
required Benigno Sadorra to pay herein petitioner
what has been received? Not necessarily because
Cabaliw the amount of P75.00 a month in terms of
if the thing which is the object of the contract is
support as of January 1, 1933, and P150.00 in
legally in the possession of another who did not
concept of attorney's fees and the costs.
act in bad faith, rescission will not prosper.
Due to the failure of Benigno to comply with the
May a 3rd person pay for the damage or
judgment of support, petitioner Cabaliw filed
indebtedness of the debtor who is the seller in
another action which authorized her to take
fraud of creditors? No. The creditor can no longer
possession of the conjugal property, to administer
rescind.
the same, and to avail herself of the fruits thereof
in payment of the monthly support in arrears.

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Unknown to petitioner Cabaliw, Benigno executed
two deeds of sale and sold the subject properties
to herein private respondents. Such was fact only
discovered after the judgment which authorized
her to manage the same,
Petitioners filed an action with the trial Court to
recover the subject properties, which was ruled in
their favor. The trial Court held that the deeds of
sale executed by Benigno Sadorra to be simulated
and fictitious.
On appeal, the CA reversed the decision of the trial
Court, hence this petition.
Petitioner contend that the Honorable Court of
Appeals gravely erred in holding that the fraud
could not be presumed in the transfer of the lots in
question by the late Benigno Sadorra to his son-in-
law Sotero Sadorra, even if this transfer was done
shortly after judgment was rendered against the
former and in favor of your petitioner Isidora
Cabaliw.
Respondent Court of Appeals sustained the validity
and efficacy of the deeds of sale executed by
Benigno Sadorra in favor of his son-in-law (Exhibits
I and I-1) on the ground that these are public
documents and as such are presumed by law to
have been fair and legal; that the vendee Sotero
Sadorra, is presumed to have acted in good faith,
citing Art. 44, Spanish Civil Code, Art. 627 New Civil
Code; that fraud is never presumed, and it is
settled in this jurisdiction that strong and
convincing evidence is necessary to overthrow the
validity of an existing public instrument. The
appellate court continued that inasmuch as under
the old Civil Code in force at the time of the sale,
the husband was empowered to dispose of the
conjugal property without the consent of the wife,
the sales made by Benigno Sadorra were valid, and
the wife Isidora cannot now recover the property
from the vendee.
ISSUE: WON respondent Court of Appeals erred
when it reversed the decision of the trial Court and
held that fraud cannot be presumed in the
transaction of Benigno and herein private
respondents? YES
The facts narrated in the first portion of this
Decision which are not disputed, convincingly
show or prove that the conveyances made by
Benigno Sadorra in favor of his son-in-law were
fraudulent. For the heart of the matter is that
about seven months after a judgment was
rendered against him in Civil Case No. 43192 of the
Court of First Instance of Manila and without
paying any part of that judgment, Benigno Sadorra
sold the only two parcels of land belonging to the
conjugal partnership to his son-inlaw. Such a sale
even if made for a valuable consideration is
presumed to be in fraud of the judgment creditor
who in this case happens to be the offended wife.
Article 1297 of the old Civil Code which was the
law in force at the time of the transaction
provides:
Contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to be
made in fraud of creditors.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been rendered in any instance
or some writ of attachment has been issued. The
decision or attachment need not refer to the
property alienated and need not have been
obtained by the party seeking rescission.
The above-quoted legal provision was totally
disregarded by the appellate court, and there lies
its basic error.
We agree with petitioners that the parties here do
not stand in equipoise, for the petitioners have in
their favor, by a specific provision of law, the
presumption of a fraudulent transaction which is
not overcome by the mere fact that the deeds of
sale in question were in the nature of public
instruments. As well said in the dissenting opinion
of Justice Magno Gatmaitan, the principle invoked
by the majority opinion that to destroy the validity
of an existing public document "strong and
convincing evidence is necessary", operates
"where the action was brought by one party
against the other to impugn the contract but that
rule cannot operate and does not, where the case
is one wherein the suit is not between the parties
inter se but is one instituted by a third person, not
a party to the contract but precisely the victim of it
because executed to his prejudice and behind his
back; neither law, nor justice, nor reason, nor
logic, should so permit, otherwise, in such a suit,
the courts would be furnishing a most effective
shield of defense to the aggressor."
Furthermore, the presumption of fraud
established by the law in favor of petitioners is
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bolstered by other indicia of bad faith on the part
of the vendor and vendee. Thus (1) the vendee is
the son-in-law of the vendor. In the early case of
Regalado vs. Luchsinger & Co., 5 Phil. 625, this
Court held that the close relationship between the
vendor and the vendee is one of the known badges
of fraud. (2) At the time of the conveyance, the
vendee, Sotero, was living with his father-in-law,
the vendor, and he knew that there was a
judgment directing the latter to give a monthly
support to his wife Isidora and that his father-in-
law was avoiding payment and execution of the
judgment. (3) It was known to the vendee that his
father-in-law had no properties other than those
two parcels of land which were being sold to him.
The fact that a vendor transfers all of his property
to a third person when there is a judgment against
him is a strong indication of a scheme to defraud
one who may have a valid interest over his
properties.
Added to the above circumstances is the
undisputed fact that the vendee Sotero Sadorra
secured the cancellation of the lis pendens on
O.C.T. No. 1, which was annotated in 1940 at the
instance of Isidora Cabaliw, and the issuance of a
transfer certificate of title in his favor, by executing
an affidavit, Exhibit H, on June 7, 1948, wherein he
referred to Isidora as "the late Isidora Cabaliw'
when he knew for a fact that she was alive, and
alleged that Civil Case 449 of the Court of First
Instance of Nueva Vizcaya was decided in his favor
where in truth there was no such decision because
the proceedings in said case were interrupted by
the last world war. Such conduct of Sotero Sadorra
reveals, as stated by the lower court, an "utter lack
of sincerity and truthfulness" and belies his
pretensions of good faith.
On the part of the transferee, he did not present
satisfactory and convincing evidence sufficient to
overthrow the presumption and evidence of a
fraudulent transaction. His is the burden of
rebutting the presumption of fraud established by
law, and having failed to do so, the fraudulent
nature of the conveyance in question prevails.
The decision of the Court of Appeals makes
mention of Art. 1413 of the old Civil Code which
authorizes the husband as administrator to
alienate and bind by onerous title the property of
the conjugal partnership without the consent of
the wife, and by reason thereof, concludes that
petitioner Isidora Cabaliw cannot now seek
annulment of the sale made by her husband. On
this point, counsel for petitioners rightly claims
that the lack of consent of the wife to the
conveyances made by her husband was never
invoked nor placed in issue before the trial court.
What was claimed all along by plaintiff, Isidora
Cabaliw now petitioner, was that the conveyances
or deeds of sale were executed by her husband to
avoid payment of the monthly support adjudged in
her favor and to deprive her of the means to
execute said judgment. In other words, petitioner
seeks relief not so much as an aggrieved wife but
more as a judgment creditor of Benigno Sadorra.
Art. 1413 therefore is inapplicable; but even if it
were, the result would be the same because the
very article reserves to the wife the right to seek
redress in court for alienations which prejudice her
or her heirs. The undisputed facts before Us clearly
show that, the sales made by the husband were
merely a scheme to place beyond the reach of the
wife the only properties belonging to the conjugal
partnership and deprive her of what rightly
belongs to her and her only daughter Soledad.
2. HSBC vs. Pauli
FACTS: In Civil Case No. 32799 dated June 14,
1957, appellant filed an action against appellee
Pauli, in which its trial Court rendered in its favor.
However, the writs of execution were returned
unsatisfied because no leviable assets of Pauli
could be located by the sheriffs. Unknown to
herein appellant, Pauli had on January 8, 1957
purchased from the Philippine National Bank (PNB)
a sugar cane plantation known as Hacienda
Riverside. To avoid discovery of the transaction by
his creditors, he did not register the deed of Sale.
Six years later, on March 1, 1963, he fraudulently
sold the hacienda to his daughter, defendant-
appellee Sally Garganera, and her husband Mateo
Garganera. The sale was registered on March 5,
1963. Transfer Certificate of Title No. 34425 was
issued to the Garganeras.
In Civil Case No. 626, another creditor of Pauli, the
sale to the Garganera spouses was declared
fictitious for being in fraud of creditors by the trial
Court. In Civil Case No. 75319 dated January 13,
1969, having discovered the hidden property of
herein appellant filed for the revival of Civil Case
No. 32799, which was granted by the trial Court.
On February 17, 1971, in Civil Case No 465, herein
appellant filed another action against appellee
Pauli, praying for the annulment of Conditional
Sale as well as the Deed of Sale, of Hacienda
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Riverside to the Garganeras and also for Voidable Contracts

annulment of Garganera's Certificate of Title No. T-
34425. However, appellee Pauli filed a motion to Art. 1390. The following contracts are voidable
dismiss on the grounds of res judicata, or annullable, even though there may have
prescription, waiver and abandonment of claim, been no damage to the contracting parties:
which was granted by the trial Court on the ground
of prescription, hence this appeal. (1) Those where one of the parties is incapable
of giving consent to a contract; (2) Those where
ISSUE: WON the trial Court erred when it the consent is vitiated by mistake, violence,
dismissed Civil Case No. 465 on the ground of intimidation, undue influence or fraud.
prescription? No
These contracts are binding, unless they are
The Court held that the trial Court did no err when annulled by a proper action in court. They are
it dismissed Civil Case No. 465. Has the action for susceptible of ratification. (n)
annulment of the sale of Lot 693 to the Garganeras Voidable or annullable contracts are existent, valid
prescribed? Did prescription of the action the binding, although they can be annulled
commence to run from the registration of the sale, because of want of capacity or vitiated consent of
or from the discovery of the transaction by the one of the parties. But before annulment, they are
Bank? When a transaction involves registered land, effective and obligatory between the parties.
the four-year period fixed in Article 1391 within Hence, it is valid until it is set aside and its validity
winch to bring an action for annulment of the may be assailed only in an action for that purpose.
deed, shall be computed from the registration of They can be confirmed or ratified.
the conveyance (March 5, 1963) on the familiar
theory that the registration of the document is Difference between Annulment and Rescission
constructive notice of the conveyance to the
whole world (Armentia vs. Patriarca, 18 SCRA
Annulment Rescission
1253; Avecilla vs. Yatco, 103 Phil. 666).
Basis is vitiated Basis is lesion
consent or incapacity (damage)
Plaintiff's submission that the four-year period
to consent
commenced to run from the date when the Bank
Defect is Defect is
obtained actual knowledge of the fraudulent sale
internal/intrinsic (in external/extrinsic
of Pauli's land to the Garganeras (sometime in
the meeting of mind)
1969) and that hence the fouryear period for
Action is principal Action is subsidiary
bringing an action to annul the sale had not yet
It is a sanction It is a remedy
expired when it filed the action for annullment on
February 17, 1971, is unacceptable. That theory Law predominates Equity predominates
would diminish public faith in the integrity of Plaintiff must be a Plaintiff may be party
torrens titles and impair commercial transactions party to the contract or 3rd person
involving registered lands for it would render Damage is immaterial There is damage
uncertain the computation of the period for the Indemnity is not a bar If plaintiff is
prescription of such actions. Civil Case No. 465, the to the action indemnified;
action for annulment of the Sale is not barred by rescission will not
res judicata, specifically, the prior judgment in Civil prosper
Case No. 75319, for revival of the judgment in the Defect is presupposed Compatible w/ perfect
collection suit, Civil Case No. 32799, for the subject validity
matter and causes of action in the two cases are To prevent To prevent rescission,
different. The three (3) Identities required for the annulment, ratification is not
application of the bar by prior judgment: Identity ratification is required. required.
of parties, of subject matter and causes of action,
are lacking.
Grounds for Annulment
Nevertheless, as the plaintiff's right of action in
Civil Case No. 465 had already prescribed, the trial See discussion in “Consent” element of a contract.
court did not err in dismissing the case. supra

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How annulment is obtained
a. Directly by an action for that purpose
b. Indirectly by way of defense to an action
to enforce the same.
It is not enough that the court declare the contract
is voidable and relieve the defendant of its effects;
it must annul or set aside the contract and other
the mutual restitution in accordance with 1398.
In an action for annulment, the court has to set
aside and render ineffective by its judgment the
contract which theretofore is valid and producing
legal effect before the defendant can be exempt
from compliance therewith; hence the attack
against its validity must be directly made in an
action or in a counterclaim for the purpose with
the consequences flowing from the declaration of
nullity.
Art. 1391. The action for annulment shall be
brought within four years. This period shall
begin:
In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases.
In case of mistake or fraud, from the time of the
discovery of the same.
And when the action refers to contracts entered
into by minors or other incapacitated persons,
from the time the guardianship ceases. (1301a)
If the period of prescription has already expired,
the nullity of the contract can no longer be set up
as a defense to an action to enforce the same. The
contract can no longer be set aside.
The period in this article apply to the parties to the
contract but not to third person.
If what is being assailed is a registered document,
the period should be reckoned on the date of
registration since registration is a notice to the
whole world.
Art. 1392. Ratification extinguishes the action to
annul a voidable contract. (1309a)
Confirmation or ratification under this article is the
same. Confirmation is the act by which a person
entitled to bring an action for annulment, with
knowledge of the cause of annulment and after it
has ceased to exist, validates the contract either
expressly or impliedly. Ratification on the other
hand is the act of approving a contract entered
into by another without the authorization of the
person in whose name it was entered into, or
beyond the scope of the authority of the former.
In other words, confirmation is properly applicable
only to annullable contracts while ratification
apples to unenforceable contracts or contracts
where the consent is totally absent.
Confirmation or ratification cures a defect of
nullity.
Requisites
1. The contract is voidable or annullable
contract, or one in which the consent of
one party is defective or was vitiated.
2. That the ratification is made with the
knowledge of the cause of nullity.
3. That at the time the ratification is made,
the cause of nullity has already ceased to
exist.
Art. 1393. Ratification may be effected expressly
or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason
which renders the contract voidable and such
reason having ceased, the person who has a
right to invoke it should execute an act which
necessarily implies an intention to waive his
right. (1311a)
Express- Any oral or written manifestation of the
person entitled to ask for annulment the he agrees
to be bound by the contract or he will not seek its
annulment would be express ratification.
Implied- the ratification may be implied from the
acts of the party entitled to annul the contract. it
may take a diverse forms such as silence,
acquiescence, act showing approval or adoption of
the contract, or by acceptance and retention of
benefits flowing therefrom.
Art. 1394. Ratification may be effected by the
guardian of the incapacitated person. (n)
Self-explanatory
Art. 1395. Ratification does not require the
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conformity of the contracting party who has no
right to bring the action for annulment. (1312)
Self- Explanatory
Art. 1396. Ratification cleanses the contract
from all its defects from the moment it was
constituted. (1313)
After ratification, no action to annul the same can
be maintained based upon the defects relating to
its original validity.
Ratification is merely declaratory of the waiver of
the right to ask annulment. The effect of
ratification retroacts to the moment the contract
was entered. But this retroactivity does not
prejudice the rights of third persons acquired
before the ratification.
Art. 1397. The action for the annulment of
contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
However, persons who are capable cannot
allege the incapacity of those with whom they
contracted; nor can those who exerted
intimidation, violence, or undue influence, or
employed fraud, or caused mistake base their
action upon these flaws of the contract. (1302a)
Requisites for the Exercise of Action for
Annulment of Contracts
a. The plaintiff must have an interest in the
contract. Hence, a person who is not
principally or subsidiarily bound cannot
attack the validity of an annullable
contract, he has no legal capacity to
challenge the validity of the contract.
b. The victim and not the party responsible
for the defect is the person who must
assert the same. Hence, the successor in
interest of one who has contracted with a
minor cannot avoid the contract on the
ground of minority.
If the incapacitated person has acted with fraud in
order to induce the other party to the contract,
neither he or his legal representative can ask for
the annulment of the contract, unless he is of
tender age and wanting of discretion.
Art. 1398. An obligation having been annulled,
the contracting parties shall restore to each
other the things which have been the subject
matter of the contract, with their fruits, and the
price with its interest, except in cases provided
by law.
In obligations to render service, the value
thereof shall be the basis for damages. (1303a)
Mutual Restitution
The effect of annulment of contract is to wipe out
of existence, and to restore the parties, in so far
as legally and equitably possible, to their original
situation before the contract was entered into.
If one or both parties have already performed,
each must return to the other whatever he may
have received by reason of the contract.
The restitution may be only invoked by the parties
who are in privity with the contract.
Mutual restitution cannot be applied to all
contracts. The principle of unjust enrichment shall
be taken into account. For example, in a lease
contract. If the lease contract is annulled, the
lessee should return the leased premises but the
lessor is not obliged to give back the rents received
by him for the period the lessee used the leased
premises.
Restitution of Fruits and Interest
When the cause of the nullity is illicit, such as fraud
and violence, the party who employed those
means must be considered as possessor in bad
faith, and must be obliged to restore not only the
fruits received but also those which might have
been received; on the other hand, if the possessor
is in good faith, he should not be required to
return the fruits or pay interest.
Liability for Damages
As a rule, annulment of contracts resulting to
mutual restitution eliminates the possibility of
damage suffered. But there are cases where losses
occasioned by the contract cannot be erased or
compensated by it annulment. For example,
Gianna, before discovering the fraud has already
incurred expenses which became useless by
annulment, she should be entitled to recover
indemnity for damages.
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In the interest of justice and equity these damages Art. 1402. As long as one of the contracting
should be allowed under our law, particularly Arts. parties does not restore what in virtue of the
20 and 21 of the civil code. decree of annulment he is bound to return, the
other cannot be compelled to comply with what
Art. 1399. When the defect of the contract is incumbent upon him. (1308)
consists in the incapacity of one of the parties,
the incapacitated person is not obliged to make
any restitution except insofar as he has been Loss of the thing by the plaintiff
benefited by the thing or price received by him.
If the loss is due to his fault or fraud, he cannot ask
A person entering into a contract must see to it for annulment, because of Art. 1401, the action for
that the other party has sufficient capacity to bind annulment is extinguished in such case. The
himself. For while the general rule is that the provisions of 1400 cannot be applied.
parties are bound to restore or return the thing, if
the nullity is on account of incapacity of one of
What if the thing received was lost through
the contracting parties, the party suffering from
fortuitous event? Evidently the action for
such incapacity is only bound to return what he
annulment is not extinguished because of 1401
has profited by the thing sold or by the price
limits the extinguishment of the action to the case
received.
where the loss is due to fault or fraud of the
plaintiff. But the defendant cannot be obliged to
The profit referred to here is not necessarily a
make restitution to the plaintiff. Until the
material and permanent increase in fortune, but
annulment of the contract, it is valid and produces
any prudent and beneficial use by the
effect. Hence, the plaintiff who was in possession
incapacitated of the thing he received, for his
of the thing at that time must still be considered as
necessities or discharge of duties to others. Thus,
the owner thereof and he must bear the loss by
there is benefit even without increase in fortune if
fortuitous event, res perit domino. In this case,
the thing received is used for food, clothing,
1402 must apply.
dwelling, etc.
But if the plaintiff offers to pay the value of the
However, where the thing is still existing in the
thing at the time of loss, the defendant shall be
patrimony of the incapacitate at the time the
obliged to make restitution by applying 1400,
incapacity ceases, he will be deemed to have
except that the plaintiff need not pay interest on
benefited from it. If he asks annulment, he must
the value of the thing
return it to the other party. If he alienates it, he is
deemed to have ratified the contract.
Loss of the thing by the defendant
Art. 1400. Whenever the person obliged by the
decree of annulment to return the thing can not 1400 applies, he will return the fruits received, the
do so because it has been lost through his fault, value of the thing at time of the loss, with interest
he shall return the fruits received and the value from the same date.
of the thing at the time of the loss, with interest
from the same date. (1307a) If the thing is lost through fortuitous event, there
can be annulment of contract because 1401
applies only if the loss is due to the fault of
Art. 1401. The action for annulment of contracts
plaintiff. In this case, the defendant is required to
shall be extinguished when the thing which is
pay the value of the thing at the time of its loss by
the object thereof is lost through the fraud or
fortuitous event but without interest. 1400 is also
fault of the person who has a right to institute
applicable. The defendant must suffer the loss
the proceedings.
because he is still the owner of the thing at the
If the right of action is based upon the
time of the loss.
incapacity of any one of the contracting parties,
the loss of the thing shall not be an obstacle to
Transcribed (Voidable Contracts)
the success of the action, unless said loss took
place through the fraud or fault of the plaintiff.
What are voidable contracts? Those which
(1314a)
possess all the essential requisites of a valid
contract but one of the parties is INCAPABLE OF

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GIVING CONSENT, or CONSENT IS VITIATED by
mistake, violence, intimidation, undue influence or
fraud.
Who may avail of the remedy of annulment of a
voidable contract? Only those principally and
subsidiarily obliged can be a party. The capacitated
person cannot invoke the incapacity of the other
party. Only the incompetent party may avail of this
remedy.
May a 3rd party who is subsidiarily obliged have
the contract annulled? An action for annulment by
3rd person may be allowed if that person can show
to the court damages that he may incur if the
contract is not allowed. Guardians, guarantors or
pledgors are subsidiarily liable, they will be
benefited if annulled and prejudiced if not
annulled.
Do void contracts produces no legal effect? Void
contracts produces no legal effect whatsoever.
An action to recover from a void contract, can it
prosper? If so, there is an effect of a void contract?
It can prosper, there is a right to recover in case
the parties are in par delicto (Art. 1411, 1412,
1414, 1416). There is right to recover because the
law so provides. It is not an effect of contracts.
Case Laws:
1. Felipe vs. Aldon
In the instant case, Gimena, the wife, sold lands
belonging to the conjugal partnership without the
consent of the husband and the sale is not covered
by the phrase “except in cases provided by law.”
The Court of Appeals described the sale as
“invalid”—a term which is imprecise when used in
relation to contracts because the Civil Code uses
specific names in designating defective contracts,
namely: rescissible (Arts. 1380 et seg.), voidable
(Arts. 1390 et seq.), unenforceable (Arts. 1403, et
seq.), and void or inexistent (Arts. 1409 et seq.)
The sale made by Gimena is certainly a defective
contract but of what category? The answer: it is a
voidable contract.
The view that the contract made by Gimena is a
voidable contract is supported by the legal
provision that contracts entered by the husband
without the consent of the wife when such
consent is required, are annullable at her instance
during the marriage and within ten years from the
transaction questioned. (Art. 173, Civil Code.)
The voidable contract of Gimena was subject to
annulment by her husband only during the
marriage because he was the victim who had an
interest in the contract. Gimena, who was the
party responsible for the defect, could not ask for
its annulment. Their children could not likewise
seek the annulment of the contract while the
marriage subsisted because they merely had an
inchoate right to the lands sold.
The termination of the marriage and the
dissolution of the conjugal partnership by the
death of Maximo Aldon did not improve the
situation of Gimena. What she could not do during
the marriage, she could not do thereafter. The
case of Sofia and Salvador Aldon is different. After
the death of Maximo they acquired the right to
question the defective contract insofar as it
deprived them of their hereditary rights in their
father’s share in the lands. The father’s share is
one-half (1/2) of the lands and their share is two-
thirds (2/3) thereof, one-third (1/3) pertaining to
the widow.
This actuation clearly indicated that the appellees
knew the lots did not still belong to them,
otherwise, why were they interested in a
document of sale in their favor? Again why did
Vicente V. Felipe tell Gimena that the purpose of
the document was to obtain Gimena’s consent to
the construction of an irrigation pump on the lots
in question? The only possible reason for
purporting to obtain such consent is that the
appellees knew the lots were not theirs. Why was
there an attempted improvement (the irrigation
tank) only in 1970? Why was the declaration of
property made only in 1974? Why were no
attempts made to obtain the husband’s signature,
despite the fact that Gimena and Hermogena were
close relatives? All these indicate the bad faith of
the appellees. Now then, even if we were to
consider appellees’ possession in bad faith as a
possession in the concept of owners, this
possession at the earliest started in 1951, hence
the period for extraordinary prescription (30 years)
had not yet lapsed when the present action was
instituted on April 26, 1976.
As to the second question, the children’s cause of
action accrued from the death of their father in
1959 and they had thirty (30) years to institute it
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(Art. 1141, Civil Code.) They filed action in 1976
which is well within the period.
2. House International vs. IAC
As bases for a declaration that the conditional sale
between GSIS and CENTERTOWN is null and void
for being contrary to law or public policy, the
constitutional provisions are inapposite. Not one
of those provisions render unlawful the contract in
question. Except for the prohibition against the
taking of private property for public use without
just compensation, the other provisions require
implementing legislation to confer a legal right and
impose a legal duty which can be judicially
invoked.
P.D. 1517 which confers a preferential right to
tenants of long standing to acquire leased land on
which they have constructed their houses. This has
no application to the present case where the
property involved is land and building belonging to
the lessor.
The main thrust of the petitioner’s challenge on
the validity of the conditional sale is that the
contract is ultra vires because the respondent
CENTERTOWN is not qualified to acquire
properties under its Articles of Incorporation. The
petitioner has confused a void contract with an
ultra vires contract which is merely voidable.
Petitioner is neither a party nor a privy to the Deed
of Conditional Sale and the assignment thereof:
thus, it cannot assail the validity of the said
contracts.
3. Poole Bauden vs. Union Bank
For there to be a valid contract, all the three (3)
elements of consent, subject matter, and price
must be present.41 Consent wrongfully obtained is
defective. The party to a contract whose consent
was vitiated is entitled to have the contract
rescinded. Accordingly, Article 1390 of the Civil
Code42 stipulates that a contract is voidable or
annullable even if there is no damage to the
contracting parties where "consent is vitiated by
mistake, violence, intimidation, undue influence or
fraud."
Under Article 1338 of the Civil Code "[t]here is
fraud when, through insidious words or
machinations of one of the contracting parties, the
other is induced to enter into a contract which,
without them, he would not have agreed to."
However, not all instances of fraud enable the
voiding of contracts. Article 1344 clarifies that in
order to make a contract voidable, the fraud
"should be serious and should not have been
employed by both contracting parties."43
Thus, Tankeh v. Development Bank of the
Philippines44 explained, "There are two types of
fraud contemplated in the performance of
contracts: dolo incidente or incidental fraud
and dolo causante or fraud serious enough to
render a contract voidable."45 The fraud required
to annul or avoid a contract "must be so material
that had it not been present, the defrauded party
would not have entered into the contract."46 The
fraud must be "the determining cause of the
contract, or must have caused the consent to be
given."47
Petitioner's contention on how crucial the
dimensions and area of the Unit are to his decision
to proceed with the purchase is well-taken. The
significance of space and dimensions to any buyer
of real property is plain to see. This is particularly
significant to buyers of condominium units in
urban areas, and even more so in central business
districts, where the scarcity of space drives vertical
construction and propels property values. It would
be immensely guileless of this Court to fail to
appreciate how the advertised area of the Unit
was material or even indispensable to petitioner's
consent. As petitioner emphasized, he opted to
register for and participate in the auction for the
Unit only after determining that its advertised area
was spacious enough for his residential needs.48
Xxx
Article 1542 has nothing to do with annulling
fraudulently made sales. What it is concerned with
is the proportionate reduction of the purchase
price in relation to the measurable units of the
thing sold. Petitioner does not seek a reduction of
the purchase price. He seeks judicial relief to have
the entirety of his purchase annulled, his consent
having been fraudulently obtained. By filing an
action under Article 1390 of the Civil Code,
petitioner declared that his consent to the entire
subject matter of the contract was vitiated. What
suffices as relief is the complete annulment of the
sale, not the partial reimbursement upon which
Article 1542 is premised.
Likewise, Article 1542 does not contemplate the
seller's delivery to the buyer of things other than
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the agreed object of the sale. While it is true that
petitioner did not buy the unit on a per-square-
meter basis, it remains that what he bought was a
condominium unit. A condominium unit's bounds
are reckoned by "the interior surfaces of [its]
perimeter walls, floors, ceilings, windows and
doors."60 It excludes common areas. Thus, when
petitioner agreed to purchase the Unit at a lump-
sum price, he never consented to including
common areas as part of his purchase. Article
1542's concern with a ratable reduction of the
price delivered by the buyer assumes that the
seller correctly delivered, albeit deficiently, the
object of the sale.
In any case, for Article 1542 to operate, "the
discrepancy must not be substantial."61 Article
1542 remains anchored on a sense of what is
reasonable. An estimate given as a premise for a
sale should be "more or less" the actual area of the
thing sold.62 Here, the area advertised and
stipulated in the Contract to Sell was 95 square
meters but the actual area of the unit was only
74.4 square meters.63 By no stretch of the
imagination can a 21.68% deficiency be discounted
as a mere minor discrepancy.
By definition, fraud presupposes bad faith or
malicious intent. It transpires when insidious
words or machinations are deliberately employed
to induce agreement to a contract. Thus, one could
conceivably claim that respondent could not be
guilty of fraud as it does not appear to have
crafted a deceptive strategy directed specifically at
petitioner. However, while petitioner was not a
specific target, respondent was so callously remiss
of its duties as a bank. It was so grossly negligent
that its recklessness amounts to a wrongful
willingness to engender a situation where any
buyer in petitioner's shoes would have been
insidiously induced into buying a unit with an
actual area so grossly short of its advertised space.
In Spouses Carbonell v. Metropolitan Bank and
Trust Company,64 this Court considered gross
negligence, in relation to the fiduciary nature of
banks:
Gross negligence connotes want of care in the
performance of one's duties; it is a negligence
characterized by the want of even slight
care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but wilfully
and intentionally, with a conscious indifference to
consequences insofar as other persons may be
affected. It evinces a thoughtless disregard of
consequences without exerting any effort to avoid
them.
In order for gross negligence to exist as to warrant
holding the respondent liable therefor, the
petitioners must establish that the latter did not
exert any effort at all to avoid unpleasant
consequences, or that it wilfully and intentionally
disregarded the proper protocols or procedure . . .
and in selecting and supervising its
employees.65 (Emphasis supplied)
Banks assume a degree of prudence and diligence
higher than that of a good father of a family,
because their business is imbued with public
interest66 and is inherently fiduciary.67 Thus,
banks have the obligation to treat the accounts of
its clients "meticulously and with the highest
degree of care."68 With respect to its fiduciary
duties, this Court explained:
The law imposes on banks high standards in view
of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 ("RA 8791"), which took
effect on 13 June 2000, declares that the State
recognizes the "fiduciary nature of banking that
requires high standards of integrity and
performance." This new provision in the general
banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting
with the 1990 case of Simex International v. Court
of Appeals, holding that "the bank is under
obligation to treat the accounts of its depositors
with meticulous care, always having in mind the
fiduciary nature of their relationship.
This fiduciary relationship means that the bank's
obligation to observe "high standards of integrity
and performance" is deemed written into every
deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires
banks to assume a degree of diligence higher than
that of a good father of a family. Article 1172 of
the Civil Code states that the degree of diligence
required of an obligor is that prescribed by law or
contract, and absent such stipulation then the
diligence of a good father of a family. Section 2 of
RA 8791 prescribes the statutory diligence
required from banks — that banks must observe
"high standards of integrity and performance" in
servicing their depositors.69 (Citations omitted)
The high degree of diligence required of banks
equally holds true in their dealing with mortgaged
real properties, and subsequently acquired
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through foreclosure, such as the Unit purchased by
petitioner. In the same way that banks are
"presumed to be familiar with the rules on land
registration," given that they are in the business of
extending loans secured by real estate
mortgage,70 banks are also expected to exercise
the highest degree of diligence. This is especially
true when investigating real properties offered as
security, since they are aware that such property
may be passed on to an innocent purchaser in the
event of foreclosure. Indeed, "the ascertainment
of the status or condition of a property offered to
it as security for a loan must be a standard and
indispensable part of a bank's operations":71
When the purchaser or the mortgagee is a bank,
the rule on innocent purchasers or mortgagees for
value is applied more strictly.1âwphi1 Being in the
business of extending loans secured by real estate
mortgage, banks are presumed to be familiar with
the rules on land registration. Since the banking
business is impressed with public interest, they are
expected to be more cautious, to exercise a higher
degree of diligence, care and prudence, than
private individuals in their dealings, even those
involving registered lands. Banks may not simply
rely on the face of the certificate of title. Hence,
they cannot assume that, simply because the title
offered as security is on its face free of any
encumbrances or lien, they are relieved of the
responsibility of taking further steps to verify the
title and inspect the properties to be mortgaged.
As expected, the ascertainment of the status or
condition of a property offered to it as security for
a loan must be a standard and indispensable part
of a bank's operations. It is of judicial notice that
the standard practice for banks before approving a
loan is to send its representatives to the property
offered as collateral to assess its actual condition,
verify the genuineness of the title, and investigate
who is/are its real owner/s and actual
possessors.72 (Citations omitted)
Credit investigations are standard practice for
banks before approving loans and admitting
properties offered as security. It entails the
assessment of such properties: an appraisal of
their value, an examination of their condition, a
verification of the authenticity of their title, and an
investigation into their real owners and actual
possessors.73 Whether it was unaware of the
unit's actual interior area; or, knew of it, but
wrongly thought that its area should include
common spaces, respondent's predicament
demonstrates how it failed to exercise utmost
diligence in investigating the Unit offered as
security before accepting it. This negligence is so
inexcusable; it is tantamount to bad faith.
Even the least effort on respondent's part could
have very easily confirmed the Unit's true area.
Similarly, the most cursory review of the
Condominium Act would have revealed the proper
reckoning of a condominium unit's area.
Respondent could have exerted these most
elementary efforts to protect not only clients and
innocent purchasers but, most basically, itself.
Respondent's failure to do so indicates how it
created a situation that could have led to no other
outcome than petitioner being defrauded.
The Regional Trial Court and the Court of Appeals
gravely erred in finding that causal fraud is not
attendant in this case. Quite the contrary, it is
evident that respondent orchestrated a situation
rife for defrauding buyers of the advertised unit.
Therefore, the assailed Decision and Resolution
must be reversed, the Contract to Sell between
petitioner and respondent be annulled, and
petitioner be refunded all the amounts he paid to
respondent in respect of the purchase of the Unit.
Unenforceable Contracts
An UC is one which cannot be enforced unless it is
first ratified in the manner provided by law. It is
compared with rescissible and annullable contracts
in that the two produces effect unless set aside,
UC cannot be enforced unless ratified.
Art. 1403. The following contracts are
unenforceable, unless they are ratified: (1)
Those entered into in the name of another
person by one who has been given no authority
or legal representation, or who has acted
beyond his powers;
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the
following cases an agreement hereafter made
shall be unenforceable by action, unless the
same, or some note or memorandum, thereof,
be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of
the agreement cannot be received without the
writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making
thereof;
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(b) A special promise to answer for the debt,
default, or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to
marry; (d) An agreement for the sale of goods,
chattels or things in action, at a price not less
than five hundred pesos, unless the buyer
accept and receive part of such goods and
chattels, or the evidences, or some of them, of
such things in action or pay at the time some
part of the purchase money; but when a sale is
made by auction and entry is made by the
auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold,
terms of sale, price, names of the purchasers
and person on whose account the sale is made,
it is a sufficient memorandum;
(e) An agreement of the leasing for a longer
period than one year, or for the sale of real
property or of an interest therein;
(f) A representation as to the credit of a third
person.
(3) Those where both parties are incapable of
giving consent to a contract.
Unauthorized Contracts
When a person enters into a contract in the name
of another, without authority to do so, the
contract does not bind the latter, unless he ratifies
the same. Such person is liable to third persons
upon the contract.
Statutes of Fraud (SOF)
It requires certain classes of contracts to be in
writing. SoF does not deprive the parties of the
contract with respect to the matters therein
involved, but merely regulates the formalities of
the contract necessary to render it enforceable.
It does not apply to actions which are neither for
specific performance of the contract nor for
violation thereof.
Purpose of the SOF
To prevent fraud and perjury in the enforcement
of the obligations depending on their evidence
upon the unassisted memory of the witness by
requiring certain enumerated contracts and
transactions to be evidenced by a writing signed by
the party to be charged.
Validity of Contracts
A contract falling under the SOF cannot be proved
without writing or a memorandum (memo)
thereof. The SOF, however, simply provides for
the manner in which contracts under it shall be
proved. It does not attempt to make such
contract invalid if not executed in writing, but
only makes ineffective the action for specific
performance. The contract exists and is valid,
though it may not be clothed with the necessary
form, and the effect of noncompliance with SOF is
simply that no action can be proved unless the
requirement is complied with.
Action to Enforce
SOF is applicable to executory and not to
completed or executed contracts. Performance of
the contract takes it out of the operation of SOF.
SOF is not applicable to contracts which are either
totally or partially performed on the theory that
there is a wide field for the commission of frauds
in executory contracts which can only be
prevented by requiring them to be in writing, a
fact which is reduced to a minimum in executed
contracts because the intention of the parties
becomes apparent by their execution, and the
execution concludes, in most cases, the rights of
the parties. The partial performance must be
proved. It may be proved by either documentary
or oral evidence.
Note or Memorandum
It is the evidence of the agreement and us used to
show the intention of the parties. No particular
form or language is necessary to constitute a
memo or note as a writing under the SOF. It may
consist of any kind of writing. It meets the
requirements of SOF if it contains the names of the
parties, the terms and conditions of the
agreement, description of the subject matter, date
and place of the making of the agreement, and the
signature of the of the party assuming the
obligation.
Performance within One Year
The one year period is reckoned in the day the
contract is entered into and not from the time
that the performance of it is entered upon.
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A contract is within the SOF if the time for the full
performance of the contract exceeds one year,
although the excess is ever so little.
Where no time is fixed for the performance of
their agreement, and there is nothing in the
agreement itself to show that it cannot be
performed within a year according to its terms and
the understanding of the parties, the agreement is
not within the SOF.
Guaranty of Another’s Debt
There must be a debt or obligation of one other
than the promissor for whose default the latter
undertakes to be responsible.
The special promise need not state the
consideration. It is presumed that the contract is
supported by a consideration.
The term default or miscarriage include liability for
tort and are not to be restricted to defaults and
miscarriages arising out of contracts.
The test of guaranty is WON the promise is an
original or a collateral one. If the promise is
original or an independent one, that is if the
promissor becomes primarily liable thereby, the
promise is not within the SOF. If the promise is a
collateral one and the promissor becomes thereby
merely a surety, the promise must be in writing.
In Consideration of Marriage
Any verbal executory promise or agreement other
the mutual promise to marry, made in
consideration of marriage, is embraced within the
provisions of the SOF requiring such agreements
made upon consideration of marriage should be in
writing, and signed by the party to be charged
therewith.
Where the marriage is a mere incident, and not
the end to be attained by the agreement, the
contract is not in consideration of marriage, and
oral evidence can prove the agreement. Even
when the marriage is a consideration, but in
addition thereto there is some other consideration
sufficient to support the oral agreement, this may
be proved without the writing required by the
statute.
The requirement also applies to promises by a
third person to one of the parties contemplating
the marriage. Thus, a promise made by the father
of a prospective bride to give a gift to the
prospective husband is covered by the SOF.
Where the woman and her father promised
marriage to the man and his father provided that
the latter would improve the former’s house and
spend for the wedding and other needs of the
bride, and the groom and his father complied,
made improvements and spent P700, it was held
that the man could sue the woman for damages
for breach of promise to marry, even if the
promise was already made. But the father of the
man cannot sue on the oral contract, which as to
him, is not a mutual promise to marry.
Sale of Personal Property
This covers both tangible and intangible. It also
covers the assignment of choses of action. Hence,
an assignment of credit over 500 pesos is governed
by the SOF which requires that the sale of choses
in action over a certain amount to be in writing.
In case of a contract for the sale of goods, chattels
and things in action at a price not less than 500 is
removed from the operation of the statute of
frauds where the buyer accepts and receives part
of such goods and chattels. Neither will the SOF
applies where there has been part payment of the
purchase price.
Lease or Sale of Real Property (RP)
Evidence to prove an oral contract of sale of RP
must be disregarded if timely objections are made
to its introduction. But the SOF does not forbid
oral evidence to prove a consummated sale of RP.
This provision law refers only to executory
contracts and not to executed contracts.
It is well settled that the memo in case of a
contract to sell land, must describe the land sold.
If an insufficient description is given, or there is no
description, oral evidence is not admissible in aid
of memorandum.
In case of lease agreement, the memo must
designate the length or duration of the term and
the time when it is to begin.
Representation of Credit
A representation made by a stranger to the
contract with the intent that the person for whom
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it is made should obtain credit thereby, must be in
writing to be a basis on action for damages against
the party who made the representation if this
turns out to be false or incorrect.
The representation must not be made to with
intent to defraud. SOF does not embrace
representations that are deceitfully made for it
was not intended to protect wrongdoers. It was
designed to protect persons who are honestly and
in good faith make assurances respecting the
credit or standing of another.
Art. 1404. Unauthorized contracts are governed
by Article 1317 and the principles of agency in
Title X of this Book.
Ratification validates a contract made by a person
without authority of the principal (owner of the
property).
See notes on 1317, supra
Art. 1405. Contracts infringing the Statute of
Frauds, referred to in No. 2 of Article 1403, are
ratified by the failure to object to the
presentation of oral evidence to prove the
same, or by the acceptance of benefit under
them.
If the oral evidence to support a contract covered
by SOF was not objected to, and thereby permit
such contract to be proved orally, it will be just as
binding upon the parties as if it had been reduced
to writing.
Art. 1406. When a contract is enforceable under
the Statute of Frauds, and a public document is
necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the
right under Article 1357.
Art. 1407. In a contract where both parties are
incapable of giving consent, express or implied
ratification by the parent, or guardian, as the
case may be, of one of the contracting parties
shall give the contract the same effect as if only
one of them were incapacitated.
If ratification is made by the parents or
guardians, as the case may be, of both
contracting parties, the contract shall be
validated from the inception.
These articles are self-explanatory
Art. 1408. Unenforceable contracts cannot be
assailed by third persons.
The defense of SOF is personal to the party to the
agreement. It can be relied upon only by the
parties to the contract or their representatives and
cannot be set up by strangers to the agreement.
Transcribed (Unenforceable Contracts)
These contracts cannot be enforced through court
action unless ratified. If there is a proper objection
there is obviously no ratification. One kind of
ratification is when there is failure to properly
object, when oral evidence is presented to prove
the existence of a contract.
If both parties are incapacitated and one of the
parties ratified, what is the status of the
contract? Voidable because by then only one party
is incapacitated.
If a person entered into a contract in
representation of another but does not have the
authority of that person, is the contract
unenforceable? Not necessarily because such
person may have entered into a contract through
legal representation (authorized by law or by the
court), even if he is not authorized by the person
represented.
Is the Statute of Frauds applicable only in
Contracts of Sale and/or Lease? No. Under Art
1403 it was provided that any agreement under its
terms is not to be performed within 1 year and it is
not in writing would be unenforceable. Thus a
contract for piece of work or contract of agency, or
any contract for that matter may be covered by
the Statute of Frauds if under the terms of such
contract, is not to be performed within 1 year. It
will be unenforceable if not in writing.
What is the purpose of the law in requiring a
contract to be in writing if it is to be performed
within 1 year, is it to prevent fraud from being
committed? It is not necessarily to prevent fraud
from being committed but rather because that
even honest men may commit mistakes.
An oral partnership is valid? True, even if one of
the parties contributed an immovable property.
What the law requires is that the partnership itself
should be in writing, which require to have an
inventory of such immovable property, to be
signed by all the contracting parties. There is no
debate to the fact that the provision under ARt.
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1771 where it provides that where immovable
property or real rights are contributed thereto, a
public instrument shall be necessary. In relation to
Art. 1773 where it provides that whenever an
immovable property or real rights is contributed, if
an inventory is not made, the contract of
partnership is void. Nowhere in these two
provisions that would tell that whenever the
contract of partnership is entered and a
contribution of real property is made, if not in a
public instrument, it is void. What is void is when
there is no inventory of the real property, that
would make the contract of partnership void. It is
valid, the purpose of inventory is to notify third
persons who would enter into contracts with the
partnership.
Oral promise of guarantee is valid? An oral
guarantee is always entered into by a 3rd person.
The guarantor here is not the principal debtor. This
would fall under the statute of frauds, a special
promise to answer for the debt of another. Since it
is not in writing, it is merely an oral promise of
guaranty, it cannot be a valid and binding contract,
it will be unenforceable under Art. 1403.
Cabagui vs. Roxillo The father and his son had a
verbal agreement with another father with his
daughter, that the son and the daughter will get
married, but the father and the son will cause the
repair of the house of the father and the
daughter. Pursuant to this agreement the father
and the son had the house of the father and the
daughter repaired. They spent 700 pesos.
However, after the house of the father and the
daughter repaired, the daughter refused to marry
the son. The father and the son filed an action for
damages against the father and the daughter.
Will the action prosper? As to the cause of action
the father as against the father and the daughter,
this would be an action based on an agreement, in
consideration of marriage. Therefore, under the
statute of frauds it should be in writing, since this
is merely a verbal agreement, that agreement is
unenforceable. The action should be dismissed.
(Art. 1403) However, as to the son, the cause of
action pertains to an action under a mutual
promise to marry which is not covered by the
statute of frauds. Under the law, An agreement
made in consideration of marriage other than a
mutual promise to marry. (Art. 1403). Note: A
mere breach of a mutual promise to marry is not
actionable, but the manner by which the breach of
promise to marry may be the basis of an action for
damages.
Does the law require that for the statute of fraud
to apply it had to be in a public instrument? No. It
merely require that it be in writing to be a valid
and binding contract.
If the contract of sale involves an immovable
property, and it is not in writing, it will be
unenforceable? In sale of an immovable property
as long as it is in writing, it would be a valid and
binding contract between the parties. But it will
not bind 3rd persons, because a private
instrument cannot be registered except if such 3rd
person have actual knowledge of this contract.
Does it matter if the purchase price of the
immovable property is only 300 pesos? No. The
price in sale of immovable is irrelevant.
If A sold a bag to B, which bag he purchased 3
days ago for 3500 but he sold it to a friend today
and it is not in writing, is it covered by the statute
of frauds? Not necessarily. Even if the value of the
bag is 3500, and he sold it merely for P350, it will
not be covered by the statute of frauds. The law
on sales follow the principle that lesion does not
affect the validity of contracts.
A contract of sale involving a movable property,
wort P300, may that contract still be covered by
the statute of frauds? Yes it may still be covered
when under the terms of the contract, it is not to
be performed within one year.
In a contract of lease which is for a period of 3
years, it is merely a verbal contract, would that
be covered by the statute of frauds? Not
necessarily. Under the law an agreement for
leasing for a longer period than one year, must be
in writing to be enforceable pertains to a real
property or an interest therein. If the subject of
the lease is a personal property, then it cannot be
subject to the provision of the statute of fraud
pertaining to lease contracts.
In a contract of lease entered into by an agent,
and the contract will involve a real property and
the period is more than 1 year. What is required
for this to be enforceable? It has to be in writing
and the agent should have a special power of
attorney.
X came across an advertisement in the Manila
Daily Bulletin about the rush sale of three slightly
used Toyota Corollas model 1989 for 200k pesos
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each. Finding the price to be very cheap and in
order to be sure he gets 1 of the unit ahead of the
others, X immediately phoned the advertiser and
placed an order for 1 car. Y accepted the order
and promised to deliver the ordered unit on July
15, 1989. On the said date, however, Y did not
deliver the unit. X brings an action to compel Y to
deliver the unit. Will such action prosper? This
action will not prosper if there is a proper
objection on the part of Y. But if oral evidence is
presented to prove the existence of the contract,
and there is no proper objection on the part of Y,
then the action may prosper to prove the
existence of the contract. As stated under the
facts, the contract is a sale of a movable property
valued more than 500 pesos, hence covered by the
Statute of Frauds which require that the contract
be in writing. In this case there is only a verbal
contract.
A and B entered into a verbal contract whereby A
agreed to B to sell his only parcel of land for 20k
pesos. B agreed to buy the land on the
aforementioned price. B went to the bank to
withdraw the money to be paid to A and
immediately returned A for the consummation of
the contract. A however, changed his mind and
refused to go through with the sale. Is the
agreement valid? Will the action by B against A for
specific performance prosper? The agreement is
valid but this cannot be enforced through court
action because the facts involve a parcel of land
which is required to be in writing to be
enforceable. The action for specific performance
may prosper if there is no proper objection on the
part of A when B offered his evidence to prove the
existence of the contract, otherwise such action
will not prosper. This action may also prosper
notwithstanding the failure on the part of A to
object to the evidence when B raises the defense
of partial fulfillment. However, under the facts
there is no partial fulfillment. B just went to the
Bank and withdraw the money and returned to A.
Such fact does not prove partial performance, but
merely an act preliminary to the fulfillment of the
obligation to pay. He only planned to pay.
In an oral contract which by its terms is not to be
performed within 1 year from the execution
thereof, One of the contracting parties already
complied within the year with the obligation
imposed upon him by said contract. Can the other
party avoid fulfillment of those incumbent upon
him by invoking the Statute of Frauds? No. He can
no longer invoke the Statute of Frauds had there
been performance of the obligation by one of the
parties. The reason why a person can invoke the
Statute of Frauds is because the contract is still
wholly executory thus there is no proof of the
existence of the contract. If there had been
performance already of the contract, even if
partial, it presupposes there has been a contract in
the first place.
One half of a parcel of land belonging to A and B
was sold by X to Y for the amount of 1500. The
sale was executed verbally. One year later A and
B sold the entire land to X. Is the sale executed
verbally by X to Y, valid and binding? The sale
between X and Y being a verbal sale which involves
a parcel of land. On its face it appears to be
covered by the Statute of Frauds.
Alt. 1 But the answer would be, as suggested by
the UP Law Center, the sale is valid and binding
because of the payment, and that took the
contract outside the operation of the Statute of
Frauds. Accdg. to Professor Uribe, under the facts
there was no payment. There was no mention that
Y paid X 1500.
Alt.2 Even if X was not the owner at the time of the
sale, when he thereafter acquired ownership
because A and B sold the entire land to X, by
operation of law, ownership passes to his own
buyer (Y). The basis of which is Art. 1434. Accdg. to
Professor Uribe however, the above basis cannot
also apply because for Art. 1434 to apply the law
further requires there must have been delivery of
the thing by the seller to the buyer, even if the
seller was not the owner and no right to sell, he
must deliver the thing to the buyer in order that
ownership to automatically pass to the buyer, the
moment the seller acquires ownership over the
thing. Under the facts, there was no mention of
delivery.
Alt. 3 Since this a sale of an immovable property
and this is a verbal sale, there being no partial
fulfillment of any obligations arising from this
contract, this is unenforceable under the Statute
of Frauds. (proper answer)
An agreement or contract which involves a Real
Property is covered by the Statute of Frauds? Not
necessarily. An agreement as to the partition of a
parcel of land, but that agreement is not covered
by the Statute of Frauds. The Statute of Frauds
would be applicable if the action filed is to enforce
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a contract which is covered to claim damages
because of breach of that contract.
Where an ejectment suit was filed and the
plaintiff was about to testify as to the existence
of a contract in relation to the land to prove his
right to evict the occupant. The lawyer of the
defendant invoked the Statute of Frauds. Should
the judge sustain the objection of the defendant?
No. The action was not an action to enforce an
unenforceable contract, nor an action covered by
the Statute of Frauds, nor an action to claim
damages based on an unenforceable contract. This
involves a third person. A third person under the
law cannot assail an unenforceable contract.
If there is no partial payment or no partial
delivery, the doctrine of part performance shall
not apply, which will bring the contract outside
the coverage of the Statute of Frauds? No True.
Partial fulfillment may pertain to any obligation
arising from a verbal contract. For example in a
case decided by the Supreme Court involving a sale
of a parcel of land, as verbally agreed upon buyer
paid the real property taxes. The buyer also had
the property surveyed. The buyer also constructed
a building, more or less permanent in character.
These obligations does not have anything to do
with payment or delivery, but nonetheless the S.C.
ruled that because of partial fulfillment of the
obligations arising from that contract, the contract
was taken out of the Statute of Frauds. Fulfillment
does not necessarily be related to payment or
delivery.
If a contract is covered by the Statute of Frauds,
and the plaintiff would want to present a witness
who would testify without any document at
hand. In other words, oral testimony is being
presented, and there is an objection under the
Statute of Frauds, does it necessarily mean that
the judge should sustain the objection, because
the contract is covered by the Statute of Frauds?
It depends on the purpose of the testimony. If the
purpose of the testimony is to prove partial
fulfillment, then the Statute of Frauds is not
applicable. Partial fulfillment may be proven
wholly by oral testimony. No documentary
evidence is required in relation to partial
fulfillment. Hence, the judge should not sustain
the objection. Moreover, even if three (3)
witnesses would testify in court as to partial
fulfillment. The court should not automatically
conclude that there was in fact partial fulfillment.
The court should satisfy itself base on the
testimony that indeed there was partial fulfillment.
On the other hand the Statute of Frauds does not
pertain to the weight of evidence. The Statute of
Frauds affects the admissibility of the evidence. In
other words if the contract is covered by the
Statute of Frauds, the testimony may not even be
allowed under this objection. It goes into the
admissibility of the evidence.
How shall unenforceable contracts be ratified?
1.By acceptance of the benefits under such
contract. 2.For failure to object to the presentation
of oral evidence at the proper time.
Case Laws:
1. Ortega vs. Leonardo
While, as a general rule, an oral agreement to sell
a piece of land is not provable, however, where
there is partial performance of the sale contract,
the principle excluding evidence of parol contracts
for the sale of realty will not apply. Some
circumstances indicating partial performance of an
oral contract of sale of realty are: relinquishment
of rights, continued possession, building of
improvements, tender of payment rendition of
services, payment of taxes, surveying of the land at
the vendee's expense, etc.
2. Carbonel vs. Poncio
The Statute of Frauds is applicable only to
executory contracts, not to contracts that are
totally or partially performed. The reason is simple.
In executory contracts there is a wide field for
fraud because, unless they be in writing there is no
palpable evidence of the intention of the
contracting parties. However, if a contract has
been totally or partially performed, the exclusion
of parol evidence would promote fraud or bad
faith, for it would enable the defendant to keep
the benefits already derived by him from the
transaction in litigation, and, at the same time,
evade the obligations, responsibilities or liabilities
assumed or contracted by him thereby. So that
when the party concerned has pleaded partial
performance, such party is entitled to a reasonable
chance to ,establish by parol evidence the truth of
this allegation, as well as the contract itself. "The
recognition of the exceptional effect of part
performance in taking an oral contract out of the
statute of frauds involves the principle that oral
evidence is admissible in such cases to prove both
the contract and the part performance of the
contract"
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For obvious reasons, it is not enough for a party to
allege partial performance in order to hold that
there has been such performance and to render a
decision declaring that the Statute of Frauds is
inapplicable. But neither is such party required to
establish such partial performance by
documentary proof before he could have the
opportunity to introduce oral testimony on the
transaction. Indeed, such oral testimony would
usually be unnecessary if there were documents
proving partial performance. Thus, the rejection of
any and all testimonial evidence on partial
performance, would nullify the rule that the
Statute of Frauds is inapplicable to contracts which
have been partly executed, and lead to the very
evils that the statute seeks to prevent.
"The true basis of the doctrine of part
performance according to the overwhelming
weight of authority, is that it would be a fraud
upon the plaintiff if the defendant were permitted
to escape performance of his part of the oral
agreement after he has permitted the plaintiff to
perform in reliance upon the agreement. The oral
contract is enforced in harmony with the principle
that courts of equity will not allow the statute of
frauds to be used as an instrument of fraud. In
other words, the doctrine of part performance was
established for the same purpose for which the
statute of frauds itself was enacted, namely, for
the prevention of fraud, and arose from the
necessity of preventing the statute from becoming
an agent of fraud for it could not have been the
intention of the statute to enable any party to
commit a fraud with impunity." (49 Am. Jur., 725-
726; italics supplied.) When the party concerned
has pleaded partial performance, such party is
entitled to a reasonable chance to establish by
parol evidence the truth of this allegation, as well
as the contract itself. "The recognition of the
exceptional effect of part performance in taking an
oral contract out of the statute of frauds involves
the principle that oral evidence is admissible in
such cases to prove both the contract and the part
performance of the contract" (49 Am. Jur., 927).
3. Babao vs. Perez
Contracts which by their terms are not to be
performed within one year may be taken out of
the Statute of Frauds through performance by one
party thereto. In order, however, that a partial
performance of the contract may take the case out
of the operation of the statute, it must appear
clear that the full performance has been made by
one party within one year, as otherwise the
statute would apply.
Where the contract is vague and ambiguous, the
doctrine of part performance cannot be invoked to
take the case out of operation of the statute of
frauds. Obviously, there can be no part
performance until there is a definite and complete
agreement between the parties. In order to
warrant the specific enforcement of a parol
contract for the sale of land, on the ground of part
performance, all the essential terms of the
contract must be established by competent proof,
and shown to be definite, certain, clear and
unambiguous. (Cuyugan vs. Santos, 34 Phil., 100,
101.)
4. Cabague vs. Auxilio
According to the Rules of Court parol evidence is
not admissible to prove an agreement made upon
the consideration of marriage other than a mutual
promise to marry.1 This litigation calls for
application of that rule. In the justice of the peace
court of Basud, Camarines Norte, Felipe Cabague
and his son Geronimo sued the defendant Matias
Auxilio and his daughter Socorro to recover
damages resulting from defendants' refusal to
carry out the previously agreed marriage between
So corro and Geronimo. The complaint alleged, in
short: (a) that defendants promised such marriage
to plaintiffs, provided the latter would improve the
defendants' house in Basud and spend for the
wedding feast and the needs of the bride; (b) that
relying upon such promises plaintiffs made the
improvement and spent P700; and (c) that without
cause defendants refused to honor their pledged
word. The defendants moved to dismiss, arguing
that the contract was oral, unenforceable under
the rule of evi dence hereinbefore mentioned. And
the court dismissed the case.
On appeal to the Court of First Instance, the
plaintiffs reproduced their complaint and
defendants re-iterated their motion to dismiss.
From an order of dismissal   this  appeal   was
perfected   in  due  time.
It should be observed preliminarily that, under the
former rules of procedure, when the complaint did
not state whether the contract sued on was in
writing or not, the statute of frauds could be no
ground for de murrer. Under the new Rules
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"defendant may now present a motion to dismiss
on the ground that the contract was not in writing,
even if such fact is not apparent on the face of the
complaint. The fact may be proved by him."
(Moran Rules of Court 2d ed. p. 139 Vol. I.) There is
no question here that the transaction was not in
writing. The only issue is whether it may be proved
in court.
The understanding between the plaintiffs on one
side and the defendants on the other, really
involves two kinds of agreement. One, the
agreement between Felipe Ca bague and the
defendants in consideration of the mar riage of
Socorro and Geronimo. Another, the agreement
between the two lovers, as "a mutual promise to
marry". For breach of that mutual promise to
marry, Geronimo may sue Socorro for damages.
This is such action, and evidence of such mutual
promise is admissible.2 However Felipe Cabague's
action may not prosper, because it is to enforce an
agreement in consideration of marriage. Evidently
as to Felipe Cabague and Matias Auxilio this action
could not be maintained on the theory of "mutual
promise to marry".3 Neither may it be regarded as
action by Felipe against Socorro "on a mutual
promise to marry." Consequently, we declare that
Geronimo may continue his action against Socorro
for such damages as may have resulted from her
failure to carry out their mutual matrimonial
promises.
5. Clarin vs. Rulona
While it is true that Exhibits A and B are, in
themselves, not contracts of sale, they are,
however, clear evidence that a contract of sale
was perfected between the petitioner and the
respondent and that such contract had already
been partially fulfilled and executed. A contract of
sale is perfected at the moment there is a meeting
of minds upon the thing which is the object of the
contract and upon the price. (Article 1475, Civil
Code; Phil. Virginia Tobacco Administration v. De
los Angeles, 87 SCRA 210). Such contract is binding
in whatever form it may have been entered into.
(Lopez v. Auditor General, 20 SCRA 655).
Hence, it cannot be denied that there was a
perfected contract of sale between the parties and
that such contract was already partially executed
when the petitioner received the initial payment of
P800.00. The latter’s acceptance of the payment
clearly showed his consent to the contract thereby
precluding him from rejecting its binding effect.
(See Federation of United Namarco Distributors,
Inc. v. National Marketing Corporation, 4 SCRA
884). With the contract being partially executed,
the same is no longer covered by the requirements
of the Statute of Frauds in order to be enforceable.
(See Khan v. Asuncion, 19 SCRA 996). Therefore,
with the contract being valid and enforceable, the
petitioner cannot avoid his obligation by
interposing that Exhibit A is not a public document.
On the contrary, under Article 1357 of the Civil
Code, the petitioner can even be compelled by the
respondent to execute a public document to
embody their valid and enforceable contract.
The reasons given by the petitioner cannot
operate against the validity of the contract in
question. A contract is valid even though one of
the parties entered into it against his better
judgment. (See Lagunzad v. Vda. de Gonzales, 92
SCRA 476; citing Martinez v. Hongkong and
Shanghai Bank, 15 Phil. 252).
Finally, we agree with the lower court’s holding
that although as a co-owner, the petitioner cannot
dispose of a specific portion of the land, his share
shall be bound by the effect of the sale.
6. Bisaya Land vs. Sanchez
What then is the status of the Contracts which
Receiver Amor entered into with Sanchez, without
the approval of the court which appointed him
receiver? Even the petitioners noticeably waver as
to the exact status of these Contracts. The
petitioners alleged in their Memorandum
submitted to this Court that they are void
contracts under Article 1409(1) of the Civil Code,
whereas, in their Petition, they labelled the
contracts as unenforceable under Article 1403(1)
of the Civil Code. The determination, therefore, of
whether the questioned contracts are void or
merely unenforceable is important, because of the
settled distinction that a void and inexistent
contract can not be ratified and become
enforceable, whereas, an unenforceable contract
may still be ratified and, thereafter, enforced. The
petitioners allege that the Contracts are void,
citing Article 1409(1) of the Civil Code which
provides that contracts whose cause, object or
purpose is contrary to law, morals, good customs,
public order or public policy, are inexistent and
void from the beginning. In the case at bar, the
contracts of agency were entered into for the
management and operation of BISTRANCO's
business in Butuan City. Said Contracts necessarily
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imposed obligations and liabilities on the
contracting parties, thereby affecting the
disposition of the assets and business of the
company under receivership. But a perusal of the
Contracts in question would show that there is
nothing in their cause, object or purpose which
renders them void. The purpose of the Contracts
was to create an agency for BISTRANCO with
Marciano Sanchez as its agent in Butuan City. Even
as to the other provisions of the Contracts, there is
nothing in their cause or object which can be said
as contrary to law, morals, good customs, public
order or public policy so as to render them void.
On the other hand, paragraph 1, Article 1403 of
the Civil Code provides that contracts "entered
into in the name of another person by one who
has been given no authority or legal
representation, or who has acted beyond his
powers" are unenforceable, unless they are
ratified. In the case at bar, it is undisputed that
Atty. Adolfo Amor was entrusted, as receiver, with
the administration of BISTRANCO and its business.
But the act of entering into a contract is one which
requires the authorization of the court which
appointed him receiver. Consequently, the
questioned Contracts can rightfully be classified as
unenforceable for having been entered into by one
who had acted beyond his powers, due to Receiver
Amor's failure to secure the court's approval of
said Contracts.
Private respondent Sanchez filed his complaint in
the lower court on 28 December 1979. But on 10
January 1980, co-petitioner Benjamin G. Roa, as
Executive Vice-President of BISTRANCO, still sent
Sanchez three (3) separate letters with the
following contents: (1) reducing his passage
commission from 10%, as he used to receive in the
previous years, to 7½% "as stated in the agency
contract dated 27 July 1976;" (2) advising Sanchez
that in view of "his failure to post a bond or such
other securities acceptable to the company in the
sum of P5,000.00 pursuant to par. 8 of the
Contract executed by Sanchez the plaintiff with
BISTRANCO on 27 July 1976, we are recalling all
unused passage tickets issued your agency" and
reminding him (Sanchez) also that "pursuant to
par. 2 of aforementioned Contract, solicitation of
cargo and passengers shall be undertaken by you
strictly in accordance with the scheduled rates of
the Company"; and (3) informing Sanchez that "we
(petitioners) are abiding strictly with the terms of
the contracts executed between Marciano C.
Sanchez and Atty. Adolfo V. Amor in behalf of
BISTRANCO, etc. etc." The three (3) letters of
Benjamin G. Roa in effect recognized and gave
efficacy to the Contracts in question. The
declaration of Benjamin G. Roa that BISTRANCO
did not have any knowledge about the Contracts
before the complaint was filed on 28 December
1979 is contradicted by his own testimony that, as
early as 14 December 1979, he was already looking
for the contract, after he saw Exhibit "NN",
wherein Sanchez requested the company "to abide
with the terms of the contract which will expire on
July 1981". Besides, the pretended lack of
knowledge of Benjamin G. Roa can not be equated
with BISTRANCO's. It should be noted that Roa
started to work for BISTRANCO only on 27 April
1979, whereas, the Contracts were executed in
1976. The people who were more in a position to
know about the Contracts, like the company
officers and members of the board of directors at
the time the Contracts were entered into,
especially Antonio V. Cuenco, were never
presented as witnesses. Aside from this, the
company cannot deny its ratification of the
Contracts even before the time of Benjamin G.
Roa, because when Atty. Fulveo Pelaez succeeded
Atty. Adolfo Amor as Receiver, he was represented
by BISTRANCO's shipping manager as having taken
cognizance of these Contracts and sanctioned the
acts of Sanchez as shipping agent of BISTRANCO in
Butuan City. This is shown by a letter, dated 15,
February 1977, written by Capt. Federico Reyes,
the shipping manager of BISTRANCO at that time.
The letter states that "the Receiver (Atty. Fulveo
Pelaez) maintains that the previous agency
contract remains and (sic) basically the same
except that the rates of the agency commission
were modified". Furthermore, it is clear that
BISTRANCO received material benefits from the
contracts of agency of Sanchez, based upon the
monthly statements of income of BISTRANCO
upon which the commissions of Sanchez were
based A perusal of the Contracts will also show
that there is no single provision therein that can be
said as prejudicial or not beneficial to BISTRANCO.
Void or Inexistent Contracts
Art. 1409. The following contracts are inexistent
and void from the beginning:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy;
(2) Those which are absolutely simulated or
fictitious;
(3) Those whose cause or object did not exist at
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the time of the transaction; a. The contract produces not effect

(4) Those whose object is outside the commerce whatsoever against or in favor of anyone,
of men; hence, it does not create, modify, or
(5) Those which contemplate an impossible extinguish the juridical relation to which it
service; refers
(6) Those where the intention of the parties b. No action for annulment is necessary,
relative to the principal object of the contract because nullity exists ipso jure, a
cannot be ascertained; judgment of nullity would be merely
(7) Those expressly prohibited or declared void declaratory
by law. c. It cannot be confirmed or ratified
d. If it has been performed, the restoration
These contracts cannot be ratified. Neither can of what has been given is in order.
the right to set up the defense of illegality be
waived. Any person may invoke the inexistence of a
contract whenever juridical effects founded
Void or inexistent contract is one which has no thereon are asserted against him.
force and effect from the very beginning, as if it
had never been entered into, and which cannot be Note however that even if the contract is void, an
validated either by time or ratification. action is necessary to declare its inexistence, when
it is already been fulfilled. Nobody can take the
Voidable and Void Contracts law into his hands; hence intervention of a
competent court is necessary to declare the
Voidable Void absolute nullity of the contract and to decree the
May be ratified Cannot be ratified restitution of what have been given under it. The
Produces effect until No Effect judgment will retroact to the very day when the
annulled contract was entered.
Defect: incapacity/ Defect is ordinarily
vitiated consent against public policy If the contract is still executory, no party need to
bring an action to declare its nullity. And if any
Valid until annulled Void from the very
party should bring action to enforce it, the other
beginning; no action is
party can simply set up the defense of nullity.
required to set aside,
UNLESS contract has
The nullity of the contract is definite and cannot be
been performed
cured by ratification. The nullity is permanent even
May be cured by Cannot be cured by
if the caused thereof has ceased to exist or even
prescription prescription
when the parties have complied with the contract
Defense may be Available to anybody-
spontaneously. The ratification may however, take
invoked only by 3rd persons provided
the form of a new contract, in which case its
parties or their that their interests are
validity shall be determined only by the
successors-ininterest affected
circumstances at the time of execution of the new
contract. The causes of nullity which have ceased
to exist cannot impair the validity of the new
contract. thus, the object which was illegal at the
Unenforceable and Void time of the first contract may have already
become lawful. The ratification or second contract
Unenforceable Void would then be valid from its execution, however, it
May be ratified Cannot be ratified does not retroact from the date of the first
There is contract but it No contract at all contract.
is unenforceable;
Cannot be assailed by Can be assailed by Art. 1410. The action or defense for the
third parties anybody directly declaration of the inexistence of a contract does
affected not prescribe.

Characteristics of Void Contracts

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The defect of inexistence of a contract is
permanent and incurable, hence it cannot be
cured either by ratification or by prescription.
There is no need of an action to set aside a void
contract; in fact, such action cannot logically exist.
However, an action to declare a contract void can
be maintained and in the same action, the plaintiff
may recover what he has given by virtue of the
contract.
The power to ask for declaration of non-existence
of a contract cannot be assigned.
Art. 1411. When the nullity proceeds from the
illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both
parties being in pari delicto, they shall have no
action against each other, and both shall be
prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the
things or the price of the contract.
This rule shall be applicable when only one of
the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound
to comply with his promise. (1305)
Art. 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a
criminal offense, the following rules shall be
observed:
(1) When the fault is on the part of both
contracting parties, neither may recover what
he has given by virtue of the contract, or
demand the performance of the other's
undertaking; (2) When only one of the
contracting parties is at fault, he cannot recover
what he has given by reason of the contract, or
ask for the fulfillment of what has been
promised him. The other, who is not at fault,
may demand the return of what he has given
without any obligation to comply his promise.
(1306)
These articles are not applicable to fictitious
contracts because they refer to contracts with an
illegal cause of subject matter, whether it
constitutes an offense or whether the cause is only
rendered illegal or to contracts which are void ab
initio.
These article presupposes the existence of cause,
although such cause may be vitiated and may only
render the contract void.
Illegality common to both parties
Where the illegality is common to both parties,
was when both are co-participants, neither one of
them can recover damages from the other arising
from the illegal act, or plead the same as a cause
of action or defense. Each must bear the
consequences of his own act. This is the so called
pari delicto principle.
Where the parties are not equally guilty, and
where the public policy is considered as advanced
by allowing more excusable of the two to sue for
relief against the transaction, relief is given to him.
Art. 1413. Interest paid in excess of the interest
allowed by the usury laws may be recovered by
the debtor, with interest thereon from the date
of the payment.
Usury law repealed
Art. 1414. When money is paid or property
delivered for an illegal purpose, the contract
may be repudiated by one of the parties before
the purpose has been accomplished, or before
any damage has been caused to a third person.
In such case, the courts may, if the public
interest will thus be subserved, allow the party
repudiating the contract to recover the money
or property.
Art. 1415. Where one of the parties to an illegal
contract is incapable of giving consent, the
courts may, if the interest of justice so demands
allow recovery of money or property delivered
by the incapacitated person.
Art. 1416. When the agreement is not illegal per
se but is merely prohibited, and the prohibition
by the law is designated for the protection of
the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or
delivered.
Art. 1417. When the price of any article or
commodity is determined by statute, or by
authority of law, any person paying any amount
in excess of the maximum price allowed may
recover such excess.
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Art. 1418. When the law fixes, or authorizes the
fixing of the maximum number of hours of
labor, and a contract is entered into whereby a
laborer undertakes to work longer than the
maximum thus fixed, he may demand additional
compensation for service rendered beyond the
time limit.
Art. 1419. When the law sets, or authorizes the
setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled to
recover the deficiency.
Self- explanatory provisions
Art. 1420. In case of a divisible contract, if the
illegal terms can be separated from the legal
ones, the latter may be enforced
As a general rule, the article applies if there are
several stipulations in the contract, some are valid
and some are void. If the stipulation can be
separated from each other, then those which are
void will not have any effect, but those which are
valid will be enforced. In case of doubt, the
contract must be considered as divisible or
separable. However, the rule of divisibility will not
apply if:
a. When the nature of the contract requires
indivisibility
b. When the intention of the parties is that
the contract be entire.
The rule on divisibility under this article must yield
to the contrary intention of the parties.
Art. 1421. The defense of illegality of contract is
not available to third persons whose interests
are not directly affected.
The right to set up the nullity of the contract as a
defense is not limited to the parties, it extends to
the third persons who are directly affected
thereby.
Transcribed
Are relatively simulated contracts void? The
relatively simulated contract is void but they will
be bound to the contract or transaction which the
parties actually entered into.
The cause or object of the contract need not exist
as long as such cause has the potentiality of
existence? False. The object is not a thing, the
object is the subject matter of the contract. Such
view may be right in a contract of sale, where the
contract of sale may be valid even if the thing is
not yet in existence as long as it has the
potentiality of existence. But in contracts, there
has to be a cause or object at the time of the
transaction. If there will be no subject matter, it
lacks one of the essential requisite of a contract.
What other contracts expressly prohibited or
declared void by law? The following persons
cannot acquire by purchase, even at public or
judicial auction, either in person or through the
mediation of another: 1.The guardian, the
property of the person or person who may be
under his guardianship; 2.Agents, the property
whose administration or sale may have been
intrusted to them, unless the consent of the
principal have been given; 3.Executors and
administrators, the property of the estate under
administration; 4.Public officers and employees,
the property of the State or of any subdivision
thereof, or of any government owned and
controlled corporation, or institution, the
administration of which has been intrusted to
them; this provision shall apply to judges and
government experts who, in any manner
whatsoever take part in the sale; 5.Justices, judges,
prosecuting attorneys, clerks of superior and
inferior courts, and other officers and employees
connected with the administration of justice, the
property and rights in litigation or levied upon an
execution before the court within whose
jurisdiction or territory they exercise their
respective functions; this prohibition includes the
act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights
which may be the object of any litigation in which
they may take part by virtue of their profession;
6.Any others specially disqualified by law (Art.
1491 - law on sales).
A void contract produces no legal effect
whatsoever? True, a void contract produces no
legal effect whatsoever. Under Art. 1352,
Contracts without cause, or with unlawful cause,
produce no effect whatsoever. Secondly, a void
contract is being categorized as inexistent. If a
contract is inexistent, how can it produce any legal
effect.
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If an action is filed to enforce a void contract, will
the action prosper? No. Any action to enforce a
void contract will never proper because there is
nothing to be enforced.
If the contract is void, and pursuant to that
contract, one of the parties delivered a sum of
money or a thing to the other party, may he be
able to recover what he delivered to the other
party? Ordinarily if a contract is an illegal contract,
meaning the object or the cause is contrary to law,
morals, good customs, public order or public
policy, he can no longer deliver under the
principle of in pari delicto. The court should leave
the parties as they are, and no aid should be given
to either party to this contract.
However, under Art. 1411, 1412 , 1414, 1415 and
1416. The exceptions:
1. If one of the parties to this illegal contract
was incapacitated at the time the
contract was entered into, he may be
allowed to recover what he delivered to
the other party. Therefore, even if the
contract is illegal and therefore void, still
he should be allowed to recover if public
interest warrants what he delivered
pursuant to the void contract.
2. Despite the fact that the contract is an
illegal contract, a party to such contract
may be allowed to recover what he
delivered if he repudiated the contract
before the consummation of the contract
or before damage is caused to a third
person.
What is the distinction between an inexistent
contract and annullable contract? Inexistent are
void contract while annulable contracts are valid
contracts until annulled. Inexistent contracts
cannot be ratified; while annulable contracts can
be ratified. Inexistent contracts are void because
one of the essential elements is lacking or maybe
because the contract is contrary to law, morals,
good customs, public order or public policy.
Annulable contracts is a defective contract
because of defect in the consent either
incapacitated or there is vitiation as to his consent.
In 1950, the Bureau of Lands issued a homestead
patent to A. Three (3) years later A sold the
homestead to B. A died in 1990 and his heirs filed
an action to recover the homestead from B on the
ground that the sale of A (their father) to B is void
under sec. 118 of the Public Land Law. B contends
however, that the heirs of A cannot recover the
homestead from him because their action has
prescribed, and furthermore, A was in pari
delicto. Decide. As to prescription, it is not a good
defense because the sale made within 3 years
from the grant under the Public Land Law is a void
sale. Any alienation of the land under this law
within the 5 year prohibitory period is a void
alienation. A contract which is null and void and an
action to recover from such void contract does not
prescribe.
However, into the second defense that the heirs
cannot recover under the in pari delicto rule, as
provided in Art. 1416, that when a law declares a
contract null and void but there is no inherent
illegality (not illegal per se) in the contract and the
declaration of nullity by law is intended or
designed to protect one of the parties to that
contract, that person in whose favor the law would
so provide its nullity may recover what he sold to
the other party. The prohibition under the Public
Land Law is intended to protect the grantee and
his family because if he sell or alienate the
property within that period he would have nothing
more to cultivate himself and his family. That is
why he would still have the right to recover the
property as the contract is a void contract and the
in pari delicto rule is not applicable under the
facts.
What defense could have been proper by B under
the facts? The proper defense should have been
laches. In this case almost 40 years had elapsed.
The grantee, the seller slept on his rights, and
therefore he and his heirs may not recover, under
the principle of laches.
M an unwed mother gave her child for adoption
to a childless couple, BC for which the latter paid
20k. In the civil register of birth, the father was
listed as father unknown. Two years later after BC
learned to love the child as their own, the
adoption proceedings commenced with required
publication. F the father of the child appeared to
oppose the adoption and to seek custody of the
child. M sided with BC claiming that F had
abandoned her when he was pregnant
declararing that she wanted BC to keep the child.
Could BC recover the twenty thousand (20,000)
they had paid for either F or M? Reasons. No they
cannot recover. Effectively, M sold the child to the
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spouses BC and obviously the sale is a void sale
because the object is contrary to law, morals, good
customs, public order or public policy. The
contract being an illegal contract , the in pari
delicto rule would be applicable and whatever was
delivered by the party to the other may no longer
be recovered, as the court cannot give aid to
either party to such contract.
Case Laws
1. Clemente vs. CA and Jalandoon
Simulated contract
The Civil Code defines a contract as a meeting of
minds between two persons whereby one binds
himself, with respect to the other, to give
something or to render some service.43 Article
1318 provides that there is no contract unless the
following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of
the contract; and
(3) Cause of the obligation which is established.
All these elements must be present to constitute a
valid contract; the absence of one renders the
contract void. As one of the essential elements,
consent when wanting makes the contract non-
existent. Consent is manifested by the meeting of
the offer and the acceptance of the thing and the
cause, which are to constitute the contract.44 A
contract of sale is perfected at the moment there
is a meeting of the minds upon the thing that is the
object of the contract, and upon the price.45
Here, there was no valid contract of sale between
petitioner and Adela because their consent was
absent. The contract of sale was a mere
simulation.
Simulation takes place when the parties do not
really want the contract they have executed to
produce the legal effects expressed by its
wordings.46 Article 1345 of the Civil Code provides
that the simulation of a contract may either be
absolute or relative. The former takes place when
the parties do not intend to be bound at all; the
latter, when the parties conceal their true
agreement. The case of Heirs of Policronio M.
Ureta, Sr. v. Heirs of Liberato M. Ureta47 is
instructive on the matter of absolute simulation of
contracts, viz:
In absolute simulation, there is a colorable
contract but it has no substance as the parties
have no intention to be bound by it. The main
characteristic of an absolute simulation is that the
apparent contract is not really desired or intended
to produce legal effect or in any way alter the
juridical situation of the parties. As a result, an
absolutely simulated or fictitious contract is void,
and the parties may recover from each other what
they may have given under the
contract...48 (Emphasis supplied)
In short, in absolute simulation there appears to
be a valid contract but there is actually none
because the element of consent is lacking.49 This
is so because the parties do not actually intend to
be bound by the terms of the contract.
In determining the true nature of a contract, the
primary test is the intention of the parties. If the
words of a contract appear to contravene the
evident intention of the parties, the latter shall
prevail. Such intention is determined not only from
the express terms of their agreement, but also
from the contemporaneous and subsequent acts
of the parties.50 This is especially true in a claim of
absolute simulation where a colorable contract is
executed.
2. Hernandez vs. CA
Given the weight they deserve, the recorded facts
prove Hernandez’s entitlement to the relief
sought. The respondents’ reliance on the Statute
of Frauds to secure a contrary judgment is
misplaced. The Statute of Frauds finds no
application to this case. Not every agreement
“affecting land” must be put in writing to attain
enforceability. Under the Statute of Frauds, Article
1403(2) (e) of the Civil Code, such formality is only
required of contracts involving leases for longer
than one year, or for the sale of real property or of
an interest therein. Hernandez’s testimony is thus
admissible to establish his agreement with Fr.
Garcia as to the boundary of their estates. It is also
to be noted that the presence of Hernandez’s
tenants on the land within his side of the border,
were this to be reckoned from the “mojones,”
further buttresses his claim. The foregoing
considerations demonstrate more than adequately
that the inclusion of the 220-square-meter area in
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the Original Certificate of Title No. 8664 of the
Register of Deeds of Rizal is null and void.
3. Rubias vs. Batiller
Article 1491 of the Civil Code of the Philippines
(like Article 1459 of the Spanish Civil Code)
prohibits in its six paragraphs certain persons, by
reason of the relation of trust or their peculiar
control either directly or indirectly and "even at a
public or judicial auction," as follows: (1)
guardians; (2) agents; (3) administrators; (4) public
officers and employees; (5) judicial officers and
employees, prosecuting attorneys, and lawyers;
and (6) others specially disqualified by law.
Castan's rationale for his conclusion that
fundamental considerations of public policy render
void and inexistent such expressly prohibited
purchases (e.g. by public officers and employees of
government property intrusted to them and by
justices, judges, fiscals and lawyers of property and
rights in litigation submitted to or handled by
them, under Article 1491, paragraphs (4) and (5) of
the Civil Code of the Philippines) has been adopted
in a new article of the Civil Code of the Philippines,
viz, Article 1409 declaring such prohibited
contracts as "inexistent and void from the
beginning."
The nullity of such prohibited contracts is definite
and permanent and cannot be cured by
ratification. The public interest and public policy
remain paramount and do not permit of
compromise or ratification.
The permanent disqualification of public and
judicial officers and lawyers grounded on public
policy differs from the first three cases of
guardians, agents and administrators (Article 1491,
Civil Code), as to whose transactions, its has been
opined, may be "ratified" by means of and "in the
form of a new contract, in which case its validity
shall be determined only by the circumstances at
the time of execution of such new contract. The
causes of nullity which have ceased to exist cannot
impair the validity of the new contract. Thus, the
object which was illegal at the time of the first
contract, may have already become lawful at the
time of ratification or second contract; or the
service which was impossible may have become
possible; or the intention which could not be
ascertained may have been clarified by the parties.
The ratification or second contract would then be
valid from its execution; however, it does not
retroact to the date of the first contract.
4. Javier vs. de Cruz
Contracts; Nullity of; Lack of consent and
consideration; Where circumstances indicate that
alleged vendor did not voluntarily affix his
thumbmark on the deed of sale and did not
receive any consideration for said sale; Case at bar.
—Eusebio Cruz could not talk, was very ill and was
about to die when his thumbmark was affixed on
the deed of sale. Delfin Cruz did not have any
means of livelihood. He was only the houseboy of
Eusebio Cruz. It is obvious that on January 17,
1941 Delfin Cruz could not have raised the amount
of P700.00 as consideration of the land supposedly
sold to him by Eusebio Cruz. Although the deed of
sale purports to convey a parcel of land with an
area of only 26,577 square meters, defendants, as
heirs of Delfin Cruz, claim a much bigger land
containing an area of 182,959 square meters
assessed at P4,310.00. The consideration of
P700.00 is not only grossly inadequate but is
shocking to the conscience. No sane person would
sell the land claimed by the defendants for only
about P40.00 per hectare. In view of the foregoing,
this Court finds that Eusebio Cruz did not
voluntarily affix his thumbmark on the deed of sale
and did not receive any consideration for said sale.
5. Menil vs. CA
It cannot be claimed that there are two contracts:
One which is undisputably null and void, and
another, having been executed after the lapse of
the 5-year prohibitory period, which is valid. The
second contract of sale executed on March 3, 1964
is admittedly a Confirmatory deed of sale. Even the
petitioners concede this point. Inasmuch as the
contract of sale executed on May 7, 1960 is void
for it is expressly prohibited or declared void by
law [CA 141, Section 118], it therefore cannot be
confirmed nor ratified.
Further, noteworthy is the fact that the second
contract of sale over the said homestead in favor
of the same vendee, petitioner Potenciano Menil,
is for the same price of P415.00. Clearly, the
unvarying term of the said contract is ample
manifestation that the same is simulated and that
no object or consideration passed between the
parties to the contract. It is evident from the
whole record of the case that the homestead had
long been in the possession of the vendees upon
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the execution of the first contract of sale on May
7, 1960; likewise, the amount of P415.00 had long
been paid to Agueda Garan on that same occasion.
We find no evidence to the contrary.
6. Director of Lands vs. Alba
This contention is without merit. Article 1491
prohibits only the sale or assignment between the
lawyer and his client, of property which is the
subject of litigation. As WE have already stated:
“The prohibition in said article applies only to a
sale or assignment to the lawyer by his client of
the property which is the subject of litigation. In
other words, for the prohibition to operate, the
sale or assignment of the property must take place
during the pendency of the litigation involving the
property.”
In the instant case, the attorney’s fees of Atty.
Fernandez, consisting of one half (1/2) of whatever
Maximo Abarquez might recover from his share in
the lots in question, is contingent upon the success
of the appeal. Hence, the payment of the
attorney’s fees, that is, the transfer or assignment
of one-half (1/2) of the property in litigation will
take place only if the appeal prospers. Therefore,
the transfer actually takes effect after the finality
of a favorable judgment rendered on appeal and
not during the pendency of the litigation involving
the property in question. Consequently, the
contract for a contingent fee is not covered by
Article 1491.
7. Tongoy vs. CA
A void or inexistent contract is one which has no
force and effect from the very beginning, as if it
had never been entered into, and which cannot be
validated either by time or by ratification. A void
contract produces no effect whatsoever either
against or in favor of anyone; hence, it does not
create, modify or extinguish the juridical relation
to which it refers.
The following are the most fundamental
characteristics of void or inexistent contracts: 1) As
a general rule, they produce no legal effects
whatsoever in accordance with the principle “quod
nullum est nullum producit effectum.” 2) They are
not susceptible of ratification. 3) The right to set
up the defense of inexistence or absolute nullity
cannot be waived or renounced. 4) The action or
defense for the declaration of their inexistence or
absolute nullity is imprescriptible. 5) The
inexistence or absolute nullity of a contract cannot
be invoked by a person whose interests are not
directly affected.
Considering the law and jurisprudence on
simulated or fictitious contracts as aforestated, the
within action for reconveyance instituted by herein
respondents which is anchored on the said
simulated deeds of transfer cannot and should not
be barred by prescription. No amount of time
could accord validity or efficacy to such fictitious
transactions, the defect of which is permanent.
There is no implied trust that was generated by
the simulated transfers; because being fictitious or
simulated, the transfers were null and void ab
initio—from the very beginning—and thus vested
no rights whatsoever in favor of Luis Tongoy or his
heirs. That which is inexistent cannot give life to
anything at all.
Considering that the implied trust resulted from
the simulated sales which were made for the
purpose of enabling the transferee, Luis D. Tongoy,
to save the properties from foreclosure for the
benefit of the co-owners, it would not do to apply
the theory of constructive notice resulting from
the registration in the trustee’s name. Hence, the
ten-year prescriptive period should not be counted
from the date of registration in the name of the
trustee, as contemplated in the earlier case of Juan
vs. Zuniga (4 SCRA 1221). Rather, it should be
counted from the date of recording of the release
of mortgage in the Registry of Deeds, on which
date— May 5, 1958—the cestui que trust were
charged with the knowledge of the settlement of
the mortgage obligation, the attainment of the
purpose for which the trust was constituted.
Consequently, petitioner Francisco A. Tongoy as
successor-in-interest and/or administrator of the
estate of the late Luis D. Tongoy, is under
obligation to return the shares of his co-heirs and
co-owners in the subject properties and, until it is
done, to render an accounting of the fruits thereof
from the time that the obligation to make a return
arose, which in this case should be May 5, 1958,
the date of registration of the document of release
of mortgage.
8. Lita Enterprises vs. IAC
Unquestionably, the parties herein operated under
an arrangement, commonly known as the “kabit
system”, whereby a person who has been granted
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a certificate of convenience allows another person
who owns motor vehicles to operate under such
franchise for a fee. A certificate of public
convenience is a special privilege conferred by the
government. Abuse of this privilege by the
grantees thereof cannot be countenanced. The
“kabit system” has been identified as one of the
root causes of the prevalence of graft and
corruption in the government transportation
offices. In the words of Chief Justice Makalintal,
“this is a pernicious system that cannot be too
severely condemned. It constitutes an imposition
upon the good faith of the government.” Although
not outrightly penalized as a criminal offense, the
“kabit system” is invariably recognized as being
contrary to public policy and, therefore, void and
inexistent under Article 1409 of the Civil Code. It is
a fundamental principle that the court will not aid
either party to enforce an illegal contract, but will
leave them both where it finds them. Upon this
premise, it was flagrant error on the part of both
the trial and appellate courts to have accorded the
parties relief from their predicament. Article 1412
of the Civil Code denies them such aid.
Ex pacto illicito non oritur actio” [No action arises
out of an illicit bargain] is the timehonored maxim
that must be applied to the parties in the case at
bar. Having entered into an illegal contract, neither
can seek relief from the courts, and each must
bear the consequences of his acts.
The defect of inexistence of a contract is
permanent and incurable, and cannot be cured by
ratification or by prescription. As this Court said in
Eugenio v. Perdido, “the mere lapse of time cannot
give efficacy to contracts that are null and void.”
The principle of in pari delicto is well known not
only in this jurisdiction but also in the United
States where common law prevails. Under
American jurisdiction, the doctrine is stated thus:
“The proposition is universal that no action arises,
in equity or at law, from an illegal contract; no suit
can be maintained for its specific performance, or
to recover the property agreed to be sold or
delivered, or damages for its violation. The rule has
sometimes been laid down as though it was
equally universal, that where the parties are in pari
delicto, no affirmative relief of any kind will be
given to one against the other.” Although certain
exceptions to the rule are provided by law, We see
no cogent reason why the full force of the rule
should not be applied in the instant case.
9. Arsenal vs. IAC
Being void, the foregoing principles and rulings are
applicable. Thus, it was erroneous for the trial
court to declare that the benefit of the prohibition
in the Public Land Act “does not inure to any third
party.” Such a sweeping declaration does not find
support in the law or in precedents. A third person
who is directly affected by a void contract may set
up its nullity. In this case, it is precisely the
petitioners’ interest in the disputed land which is
in question.
As to whether or not the execution by the
respondents Palaos and Suralta of another
instrument in 1973 cured the defects in their
previous contract, we reiterate the rule that an
alienation or sale of a homestead executed within
the five-year prohibitory period is void and cannot
be confirmed or ratified. This Court has on several
occasions ruled on the nature of a confirmatory
sale and the public policy which proscribes it.
In this case, there is substantial evidence to sustain
the verdict of bad faith. We find several significant
findings of facts made by the courts below, which
were not disputed by the petitioners, crucial to its
affirmance. First of all, we agree with the lower
court that it is unusual for the petitioners, who
have been occupying the disputed land for four
years with respondent Suralta to believe, without
first verifying the fact, that the latter was a mere
mortgagee of the portion of land he occupies.
Second, it is unlikely that the entire 8.7879
hectares of land was sold to them for only P800.00
in 1967 considering that in 1957, a four-hectare
portion of the same was sold to the respondent
Suralta for P819.00. The increased value of real
properties through the years and the disparity of
the land area show a price for the land too
inadequate for a sale allegedly done in good faith
and for value.
Third, contrary to the usual conduct of good faith
purchasers for value, the petitioners actively
encouraged the respondent Suralta to believe that
they were coowners of the land. There was no
dispute that the petitioners. Without informing the
respondent Suralta of their title to the land, kept
the latter in peaceful possession of the land he
occupies and received annual real estate tax
contributions from him. It was only in 1973 when
the respondent Suralta discovered the petitioners’
title to the land and insisted on a settlement of the
adverse claim that the petitioners registered their
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deed of sale and secured a transfer certificate of
title in their favor.
—At first blush, the equities of the case seem to
lean in favor of the respondent Suralta who, since
1957, has been in possession of the land which
was almost acquired in an underhanded manner
by the petitioners. We cannot, however, gloss over
the fact that the respondent Suralta was himself
guilty of transgressing the law by entering, in 1957,
into a transaction clearly prohibited by law. It is a
long standing principle that equity follows the law.
Courts exercising equity jurisdiction are bound by
rules of law and have no arbitrary discretion to
disregard them. Equitable reasons will not control
against any well-settled rule of law or public policy
(McCurdy v. County of Shiawassee, 118 N.W. 625).
Thus, equity cannot give validity to a void contract.
If, on the basis of equity, we uphold the
respondent Suralta’s claim over the land which is
anchored on the contracts previously executed we
would in effect foe giving life to a void contract.
There is another observation worthy of
consideration. This Court has ruled in a number of
cases that the reversion of a public land grant to
the government is effected only at the instance of
the Government itself (Gacayan v. Leano, 121
SCRA 260; Gonzalo Puyat & Sons, Inc. v. De las
Ama and Aliño, 74 Phil. 3), The reversion
contemplated in the Public Land Act is not
automatic. The Government has to take action to
cancel the patent and the certificate of title in
order that the land involved may be reverted to it
(Villacorta v. Ulanday, 73 Phil. 655). Considering
that this is an ordinary civil action in which the
Government has not been included as a party and
in view of the settled jurisprudence, we rule
against the automatic reversion of the land in
question to the State.
We see, however, a distinguishing factor in this
case that sets it apart from the above cases. The
original owners in this case, the respondent Palaos
and his wife, have never disaffirmed the contracts
executed between them and the respondent
Suralta. More than that, they expressly sustained
the title of the latter in court and failed to show
any interest in recovering the land, Nonetheless,
we apply our earlier rulings because we believe
that as in pari delicto may not be invoked to defeat
the policy of the State neither may the doctrine of
estoppel give a validating effect to a void contract.
Indeed, it is generally considered that as between
parties to a contract, validity cannot be given to it
by estoppel if it is prohibited by law or is against
public policy (19 Am. Jur. 802). It is not within the
competence of any citizen to barter away what
public policy by law seeks to preserve (Gonzalo
Puyat & Sons, Inc. v. De los Amas and Aliño, supra).
Of course, this pronouncement covers only the
previous transactions between the respondents.
We cannot pass upon any new contract, between
the same parties involving the same land if this is
their clear intention. Any new transaction,
however, would be subject to whatever steps the
Government may take for the reversion of the
property to it.
10. Manotok vs. IAC
We are, therefore, led to the inevitable conclusion
that the sale between Don Vicente Legarda and
the private respondent is void ab initio, the former
being neither an owner nor administrator of the
subject property. Such being the case, the sale
cannot be the subject of the ratification by the
Philippine Trust Company or the probate court.
After the appointment of Don Vicente Legarda as
administrator of the estate of Dona Clara
Tambunting, he should have applied before the
probate court for authority to sell the disputed
property in favor of the private respondent. If the
probate court approved the request, then Don
Vicente Legarda would have been able to execute
a valid deed of sale in favor of the respondent.
Unfortunately, there was no effort on the part of t
he administra tor to comply with the above-
quoted rule of procedure nor on that of the
respondent to protect his interests or to pay the
balance of the installments to the court appointed
administrator.
11. Portugal vs. IAC
More than these, the alleged contract of sale is
vitiated by the total absence of a valid cause or
consideration. The petitioners in their complaint,
assert that they, particularly Cornelia, never knew
of the existence of the questioned deed of sale.
They claim that they came to know of the
supposed sale only after the private respondent,
upon their repeated entreaties to produce and
return the owner’s duplicate copy of the transfer
certificate of title covering the two parcels of land,
showed to them the controversial deed. And their
claim was immeasurably bolstered when the
private respondent’s co defendant below, his
brother Emiliano Portugal, who was allegedly his
co-vendee in the transaction, disclaimed any
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knowledge or participation therein. If this is so,
and this is not contradicted by the decisions of the
courts below, the inevitable implication of the
allegations is that contrary to the recitals found in
the assailed deed, no consideration was ever paid
at all by the private respondent. Applying the
provisions of Articles 1350, 1352, and 1409 of the
new Civil Code in relation to the indispensable
requisite of a valid cause or consideration in any
contract, and what constitutes a void or inexistent
contract, we rule that the disputed deed of sale is
void ab initio or inexistent, not merely voidable.
And it is provided in Article 1410 of the Civil Code,
that "(T)he action or defense for the declaration of
the existence of a contract does not prescribe.”
But even if the action of the petitioners is for
reconveyance of the parcel of land based on an
implied or constructive trust, still it has been
seasonably filed. For as heretofore stated, it is now
settled that actions of this nature prescribe in ten
years, the point of reference being the date of
registration of the deed or the date of the issuance
of the certificate of title over the property.
On the credibility of witnesses presented in court,
there is no doubt that the trial court’s findings on
this score deserves full respect and we do not have
any reason to disturb it here now. After all, the
trial court judge is in a better position to make that
appreciation for having heard personally the
witnesses and observed their deportment and
manner of testifying during the trial. The
exceptions to this time honored policy are: when
the trial court plainly overlooked certain facts of
substantial import and value which if only correctly
considered by the court might change the
outcome of the case; and, if the judge who
rendered the decision was not the one who heard
the evidence. Neither of these exceptions is
present here. Therefore, the respondent appellate
court’s ruling questioning the credibility of
petitioner Cornelia Clanor Vda. de Portugal must
be reversed.
Anent the last issue raised by the petitioner, we
have already ruled that the defense of prescription
although not raised by the defendant may
nevertheless be passed upon by the court when its
presence is plainly apparent on the face of the
complaint itself. At any rate, in view of our earlier
finding that the deed of sale in controversy is not
simply fraudulent but void ab initio, or inexistent,
our ruling on this third issue would not have any
material bearing on the overall outcome of this
petition. The petitioner’s action remains to be
seasonably instituted.
12. Yanas vs. Acaylar
We hold that the sale was fictitious and
fraudulent. Among the badges of fraud and
fictitiousness taken collectively are the following:
(1) the fact that the sale is in English, the alleged
vendor being illiterate; (2) the fact that his wife did
not join in the sale and that her name is indicated
in the deed as “Maria S. Yanas” when the truth is
that her correct name is Maria Aglimot Yanas; (3)
the obvious inadequacy of P200 as price for a 13-
hectare land (P15.40 a hectare); (4) the
notarization of the sale on the day following the
alleged thumbmarking of the document; (5) the
failure to state the boundaries of the lot sold; (6)
the fact that the governor approved it more than
two years after the alleged sale; (7) its registration
more than three years later, and (8) the fact that
the Acaylars were able to occupy only four
hectares out of the 13 hectares and were
eventually forcibly ousted therefrom by the
children and agents of the vendor. It was not a fair
and regular transaction done in the ordinary
course of business.
The grave flaws in the evidence for defendants
Acaylar are the patent contradictions in the
testimonies of Antonio L. Acaylar and lawyer
Hamoy, their principal witnesses on the validity of
the sale. Acaylar testified that he signed the deed
of sale and that one Tupas was an instrumental
witness (12-13 tsn May 4, 1970). The truth is that
Acaylar never signed the deed and Tupas was not a
witness. The instrumental witnesses were Hamoy
and Paulino Empeynado. Hamoy at first testified
on November 20, 1968 that on August 7, 1950 he
was a witness in the deed of sale (Exh. 2 and 6)
executed by Yanas who had requested him to look
for a buyer of his lot (122-124 tsn). That means
that Hamoy met Yanas in August, 1950. More than
a year later, or on June 22, 1970, Hamoy, testifying
as a rebuttal witness for Acaylar, declared on
direct and cross-examination that he last saw
Yanas in 1946 (103-106). He absurdly stated that
his name appears as an instrumental witness in the
deed of sale but he testified; “That is my name but
I did not sign that” (107)
The fact that the alleged sale took place in 1950
and the action to have it declared void or
inexistent was filed in 1963 is immaterial. The
action or defense for the declaration of the
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inexistence of a contract does not prescribe (Art.
1410, Civil Code).
13. Barsobia vs. Cuenco
There should be no question that the sale of the
land in question in 1936 by Epifania to Ong King Po
was inexistent and void from the beginning (Art.
1409 [7], Civil Code) because it was a contract
executed against the mandatory provision of the
1935 Constitution, which is an expression of public
policy to conserve lands for the Filipinos.
But the factual set-up has changed. The litigated
property is now in the hands of a naturalized
Filipino. It is no longer owned by a disqualified
vendee. Respondent, as a naturalized citizen, was
constitutionally qualified to own the subject
property. There would be no more public policy to
be served in allowing petitioner Epifania to recover
the land as it is already in the hands of a qualified
person.
While, strictly speaking, Ong King Po, private
respondent’s vendor, had no rights of ownership
to transmit, it is likewise inescapable that
petitioner Epifania had slept on her rights for 26
years from 1936 to 1962. By her long inaction or
inexcusable neglect, she should be held barred
from asserting her claim to the litigated property
(Sotto vs. Teves, 86 SCRA 157 [1978]).
14. Godinez vs. Fong
The meaning of the above provision was fully
discussed in Krivenko v. Register of Deeds of
Manila (79 Phil. 461) which also detailed the
evolution of the provision in the public land laws,
Act No. 2874 and Commonwealth Act No. 141. The
Krivenko ruling that “under the Constitution aliens
may not acquire private or agricultural lands,
including residential lands” is a declaration of an
imperative constitutional policy. Consequently,
prescription may never be invoked to defend that
which the Constitution prohibits. However, we see
no necessity from the facts of this case to pass
upon the nature of the contract of sale executed
by Jose Godinez and Fong Pak Luen—whether void
ab initio, illegal per se, or merely prohibited.** It is
enough to stress that insofar as the vendee is
concerned, prescription is unavailing. But neither
can the vendor or his heirs rely on an argument
based on imprescriptibility because the land sold
in 1941 is now in the hands of a Filipino citizen
against whom the constitutional prescription was
never intended to apply. The lower court erred in
treating the case as one involving simply the
application of the statute of limitations.
From the fact that prescription may not be used to
defend a contract which the Constitution prohibits,
it does not necessarily follow that the appellants
may be allowed to recover the property sold to an
alien. As earlier mentioned, Fong Pak Luen, the
disqualified alien vendee later sold the same
property to Trinidad S. Navata, a Filipino citizen
qualified to acquire real property.
15. Yap vs. Grageda
The rulings in Vasquez v. Li Seng Giap et al. (96
Phil. 447) and Sarosa Vda. de Bersabia v. Cuenco
(113 SCRA 547) sustain the petitioner’s
contentions. We stated in Sarosa Vda. de Bersabia:
“There should be no question that the sale of the
land in question in 1936 by Epifania to Ong King Po
was inexistent and void from the beginning (Art.
1409 [7], Civil Code) because it was a contract
executed against the mandatory provision of the
1935 Constitution, which is an expression of public
policy to conserve lands for the Filipinos. x x x “But
the factual set-up has changed. The litigated
property is now in the hands of a naturalized
Filipino. It is no longer-owned by a disqualified
vendee. Respondent, as a naturalized citizen, was
constitutionally qualified to own the subject
property. There would be no more public policy to
be served in allowing petitioner Epifania to recover
the land as it is already in the hands of a qualified
person. Applying by analogy the ruling of this
Court in Vasquez vs. Giap and Li Seng Giap & Sons:
“ ‘x x x if the ban on aliens from acquiring not only
agricultural but also urban lands, as construed by
this Court in the Krivenko case, is to preserve the
nation’s lands for future generations of Filipinos,
that aim or purpose would not be thwarted but
achieved by making lawful the acquisition of real
estate by aliens who became Filipino Citizens by
naturalization.’ ”
16. Pineda vs. Dela Rama
Whether or not the supposed cash advances
reached their destination is of no moment. The
consideration for the promissory note—to
influence public officers in the performance of
their duties—is contrary to law and public policy.
The promissory note is void ab initio and no cause
of action for the collection cases can arise from it.
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17. Liguez vs. CA
The right of the husband to donate community
property is strictly limited by law (Articles 1409,
1413, 1415, Civil Code of 1889; Baello vs.
Villanueva, 54 Phil. 213). However, the donation
made in contravention of the law is not void in its
entirety, but only in so far as it prejudices the
interest of the wife. The rule applies whether the
donation is gratuitous or for a consideration.
The forced heirs are entitled to have the donation
set aside in so far as inofficious; i.e., in excess of
the portion of free disposal (Civil Code of 1889,
Arts. 636, 654), computed as provided in Articles
818 and 819, and bearing in mind that
"collationable gifts" under Article 818 should
include gifts made not only in favor of the forced
heirs, but even those made in favor of strangers.
(Decision of the Supreme Court of Spain, May 4,
1889 and June 16, 1902.)
The rule that parties to an illegal contract, if
equally guilty, will not be aided by the law but will
both be left where it finds them, has been
interpreted by this Court as barring the party from
pleading the illegality of the bargain either as a
cause of action or as a defense.
18. Philbanking vs. Lui She
Article 1308 of the Civil Code creates no
impediment to the insertion in a contract for
personal services of a resolutory condition
permitting the cancellation of the contract by one
of the parties. Such a stipulation does not make
either the validity or the fulfillment of the contract
dependent upon the will of the party to whom is
conceded the privilege of cancellation; for where
the contracting parties have agreed that such
option shall exist, the exercise of the option is as
much in the fulfillment of the contract as any other
act which may have been the subject of the
agreement. Indeed, the cancellation of a contract
in accordance with conditions agreed upon
beforehand is fulfillment. A provision in a lease
contract that the lessee, at any time before he
erected any building on the land may rescind the
lease can hardly be regarded as a violation of
Article 1308 of the Civil Code. The consideration
need not pass from one party to the other at the
time a contract is executed because the promise of
one is the consideration for the other.
A lease to an alien for a reasonable period is valid.
So is an option giving an alien the right to buy real
property on condition that he is granted Philippine
citizenship. Aliens are not completely excluded by
the Constitution from the use of lands for
residential purposes. Since their residence in the
Philippines is temporary, they may be granted
temporary rights such as a lease contract which is
not forbidden by the Constitution. Should they
desire to remain here forever and share our
fortune and misfortune, Filipino citizenship is not
impossible to acquire.
If an alien is given not only a lease of, but also an
option to buy, a piece of land, by virtue of which
the Filipino owner cannot sell or otherwise dispose
of his property, this to last for 50 years, then it
becomes clear that the arrangement is a virtual
transfer of ownership whereby the owner divests
himself in stages not only of the right to enjoy the
land (jus possidendi, jus utendi, jus fruendi, and jus
abutendi), but also of the right to dispose of it (jus
disponendi) —rights the sum total of which make
up ownership It is just as if today the possession is
transferred, tomorrow the use, the next day the
disposition, and so on, until ultimately all the rights
of which ownership is made up are consolidated in
an alien. If this can be done, then the
constitutional ban against alien landholding in the
Philippines, as announced in Krivenko vs. Register
of Deeds (79 Phil. 461) is indeed in grave peril.
It does not follow that because the parties are in
pari delicto they will be left where they are
without relief. Article 1416 of the Civil Code
provides as an exception to the rule of in pari
delicto that “when the agreement is not illegal per
se but is merely prohibited, and the prohibition by
law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced,
recover what he had paid or delivered.’
The constitutional provision that “save in cases of
hereditary succession, no private agricultural land
shall be transferred or assigned except to
individuals, corporations, or associations qualified
to acquire or hold lands of the public domain in
the Philippines” is an expression of public policy to
conserve lands for the Filipinos.
19. Avila vs. CA
Civil Law; Property; Sale at public auction, Where
the property was purchased at public auction; the
sale is void as the purchase was prohibited under
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the Revised Administrative Code.—While it is true
that Marciana Avila, their mother and
predecessor-in-interest, purchased the questioned
property at a public auction conducted by the
government; paid the purchase price; and was
issued a final bill of sale after the expiration of the
redemption period, it is however, undisputed that
such purchase was prohibited under Section 579 of
the Revised Administrative Code, as amended. x x
x Thus, the sale to her of Lot 594 is void.
On the other hand, under Article 1409 of the Civil
Code, a void contract is inexistent from the
beginning. It cannot be ratified neither can the
right to set up the defense of its illegality be
waived.
Moreover, Marciana Avila was a party to an illegal
transaction, and therefore, under Art. 1412 of the
Civil Code, she cannot recover what she has given
by reason of the contract or ask f or the fulfillment
of what has been promised her.
Fuithermore, in a registration case, the judgment
confirming the title of the applicant and ordering
its registration in his name necessarily carries with
it the delivery of possession which is an inherent
element of the right of ownership. (Abulocio et al.
v. CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence,
a writ of possession may be issued not only against
the person who has been defeated in a registration
case but also against anyone unlawfully and
adversely occupying the land or any portion
thereof during the land registration proceedings
up to the issuance of the final decree. It is the duty
of the registration court to issue said writ when
asked for by the successful claimant. (Demorar v.
Ibanez, etc., et aL, 97 PhiL 72 [1955]; Abulocion et
al. v. CFI of Iloilo, et al., supra).
Under the circumstances, possession cannot be
claimed by petitioners, because their predecessor-
in-interest besides being at fault is not the
successful claimant in the registration proceedings
and hence not entitled to a writ of possession. As
correctly stated by the Court of Appeals when
respondent Court issued the writ of execution as
to Lot 594, there really was no legal basis for the
same, for Avila had not secured a decree, nor a
judgment of confirmation of title over said lot.
Much less can possession be claimed by private
respondents as it is undisputed that the land in
question has been the subject of a tax sale of
delinquent property with a final bill of sale.
Consequently, the situation is evidently one of
failure of ownership because of the violation of
Section 579 of the Administrative Code. Otherwise
stated, the property apparently has no owner.
Under the principle that the State is the ultimate
proprietor of land within its jurisdiction, subject
land may be escheated in favor of the government
upon filing of appropriate actions for reversion or
escheat under Section 5, Rule 91 of the Rules of
Court relative to properties alienated in violation
of any statute.
20. Teja vs. IAC
'Ex pacto illicito' non oritur actio' (No action arises
out of illicit bargain) is the time-honored maxim
that must be applied to the parties in the case at
bar. Having entered into an illegal contract, neither
can seek relief from the courts, and each must
bear the consequences of his acts." (Lita
Enterprises vs. IAC, 129 SCRA 81.)
Unquestionably, the parties herein operated under
an arrangement, commonly known as the "kabit
system" whereby a person who has been granted a
certificate of public convenience allows another
person who owns motor vehicles to operate under
such franchise for a fee. A certificate of public
convenience is a special privilege conferred by the
government. Abuse of this privilege by the
grantees thereof cannot be countenanced. The
"kabit system" has been identified as one of the
root causes of the prevalence of graft and
corruption in the government transportation
offices.
Although not outrightly penalized as a criminal
offense, the kabit system is invariably recognized
as being contrary to public policy and, therefore,
void and inexistent under Article 1409 of the Civil
Code. It is a fundamental principle that the court
will not aid either party to enforce an illegal
contract, but will leave both where it finds them.
Upon this premise it would be error to accord the
parties relief from their predicament. Article 1412
of the Civil Code denies them such aid.
The defect of inexistence of a contract is
permanent and cannot be cured by ratification or
by prescription. The mere lapse of time cannot
give efficacy to contracts that are null and void.
21. Briones vs. Cammayo
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To discourage stipulations on usurious interest,

said stipulations are treated as wholly void, so that
the loan becomes without stipulation as to
payment of interest. It should not, however, be
interpreted to mean forfeiture even of the
principal, for this would unjustly enrich the
borrower at the expense of the lender.
Furthermore, penal sanctions are available against
a usurious lender, as a further deterrence to usury.
The principal debt remaining without stipulation
for payment of interest can thus be recovered by
judicial action.

A contract of loan with usurious interest consists

of principal and accessory stipulations; the
principal one is to pay the debt; the accessory
stipulation is to pay interest thereon. And said two
stipulations are divisible in the sense that the
former can still stand without the latter. In simple
loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt,
which is the cause of the contract, is not illegal.
The illegality lies only as to the prestation to pay
the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the
only one that is illegal.

The debt earns interest from the date of demand

(in this case from the filing of the complaint). Such
interest is not due to stipulation, for there was
none, the same being void. Rather it is due to the
general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to
pay interest by way of damages (Art. 2209, Civil
Code).

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