Obligations
3. The extinguishment of the old 1.
obligation; and
4. The birth of a valid new obligation.
(Iloilo Traders Finance, Inc., v. Heirs
of Soriano, G.R. No. 149683, June 16,
2003)
The extinctive novation would thus have
the twin effects of first, extinguishing an
existing obligation and second, creating
a new one in its stead.
b. Partial or modificatory – Original
obligation is not extinguished but
merely modified.
5. As to their origin
a. Legal novation – By operation of law.
(NCC, Art. 1300 & 1302)
b. Conventional novation – By agreement
of the parties. (NCC, Arts. 1300-1301)
6. As to presence of absence of condition
a. Pure – New obligation is not subject to a
condition.
b. Conditional – When the creation of the
new obligation is subject to a condition.
Rights of the new debtor
1. With the debtor’s consent – Right of
reimbursement and subrogation.
2. Without the consent of the old debtor or
against his will – Right to beneficial
reimbursement.
Novation by substitution of debtor
The consent of the creditor is mandatory both in
delegacion and expromission. (NCC, Art. 1293) It
may be expressed or implied from his acts but
not from his mere acceptance of payment by a
third party, for there is no true transfer of debt.
NOTE: Creditor’s consent or acceptance of the
substitution of the old debtor by a new one may
be given at any time and in any form while the
agreement of the debtor subsists. (Asia Banking
Corp. v. Elser, G.R. No. L-30266, March 25, 1929)
Requisites of delegacion
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Substitution is upon the initiative or
proposal of the old debtor himself by
proposing to the creditor the entry of
another (third person) as the new debtor
who will replace him in payment of the
obligation;
2. The creditor accepts and the new debtor
agrees to the proposal of the old debtor; and
3. The old debtor is released from the
obligation with the consent of the creditor.
Insolvency of the new debtor in delegacion
GR: Insolvency of the new debtor (delegado),
who has been proposed by the original debtor
(delegante) and accepted by the creditor
(delegatario), shall not revive the action of the
latter against the original obligor. (NCC, Art.
1295)
XPNs: Original debtor shall be held liable; if:
1. Insolvency was already existing and of
public knowledge, or known to the debtor
(NCC, Art. 1295); or
2. Insolvency of the new debtor was already
existing and known to the original debtor at
the time of the delegation of the debt to the
new debtor. (NCC, Art. 1295)
NOTE : In both cases, the creditor must NOT
know that the new debtor is insolvent ;
otherwise, the creditor would be considered
estopped.
In both cases, the insolvency must have existed
at the time the old debtor delegated his debt.
(Sta. Maria, 2017)
Requisites of expromission
1. Substitution is upon the initiative or
proposal of a third person who will step into
the shoes of the debtor;
2. Creditor must give his consent to the
proposal of the third person; and
3. Old debtor must be released from the
obligation with the consent of the creditor.
Insolvency of the new debtor in expromission
If substitution is without the knowledge or
against the will of the debtor, the new debtor’s
insolvency or non-fulfillment of the obligation
shall not give rise to any liability on the part of
the original debtor. (NCC, Art. 1294)
432
 Civil Law
NOTE: If the old debtor gave his consent and the
new debtor could not fulfill the obligation, the
old debtor should be liable for the payment of
his original obligation.
Q: The Arco and Lim allegedly agreed that
Arco would either pay Lim the value of the
raw materials or deliver to him their finished
products of equivalent value. Lim alleged
that when he delivered the raw materials,
Arco issued a post-dated check as partial
payment. When he deposited the check,
however, it was dishonored for being drawn
against a closed account. Thereafter, Arco
and Sy executed a memorandum of
agreement where Arco bound themselves to
deliver their finished products to Megapack
Container Corporation owned by Sy.
According to the memorandum, the raw
materials would be supplied by Lim. Was the
obligation between Arco and Lim novated
because of the agreement entered into by
Arco and Sy?
A: NO. Novation must be stated in clear and
unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if
the old and new contracts are incompatible on
every point. In this case, Lim was not privy to the
memorandum of agreement, thus, his conformity
to the contract need not be secured. If the
memorandum of agreement was intended to
novate the original agreement between the
parties, Lim must have first agreed to the
substitution of Sy as his new debtor. The
memorandum of agreement must also state in
clear and unequivocal terms that it has replaced
the original obligation of petitioner Arco to Lim.
Neither of these circumstances is present in this
case. Since there was no novation, petitioner
Arco’s obligation to respondent remains valid
and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full
amount. (Arco Pulp and Paper Co., Inc. And
Candida A. Santos v. Dan T. Lim, Doing Business
Under The Name and Style Of Quality Papers &
Plastic Products Enterprises, G.R. NO. 206806,
June 25, 2014 , as penned by J. Leonen)
Q: DBP guaranteed Galleon’s foreign loans. In
return, Galleon undertook to secure a first
mortgage on its five new vessels and two
second-hand vessels. Pursuant to Letter of
Instructions No. 1155, Galleon's stockholders
and NDC entered into a Memorandum of
Agreement, where NDC and Galleon
433
undertook to prepare and sign a share
purchase agreement covering 100% of
Galleon's equity for P46,740,755.00. The
share purchase agreement also provided for
the release of Sta. Ines, Cuenca, Tinio and
Construction Development Corporation of
the Philippines from the personal counter-
guarantees they issued in DBP's favor under
the Deed of Undertaking. Sta. Ines, Cuenca,
Tinio, Cuenca Investment, and Universal
Holdings claimed that DBP can no longer go
after them for any deficiency judgment since
NDC had been subrogated in their place as
borrowers, hence the Deed of Undertaking
between Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio and
DBP had been extinguished and novated."
Did the Memorandum of Agreement novated
the Deed of Undertaking executed between
DBP and Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio?
A: NO. It should be noted that in order to give
novation its legal effect, the law requires that the
creditor should consent to the substitution of a
new debtor. The general rule is that, “in the
absence of an authority from the board of
directors, no person, not even the officers of the
corporation, can validly bind the corporation.”
Aside from Ongpin being the concurrent head of
DBP and NDC at the time the Memorandum of
Agreement was executed, there was no proof
presented that Ongpin was duly authorized by
the DBP to give consent to the substitution by
NDC as a co-guarantor of Galleon’s debts. Ongpin
is not DBP, therefore, it is wrong to assume that
DBP impliedly gave its consent to the
substitution simply by virtue of the personality
of its Governor. Novation is never presumed.
The animus novandi, whether partial or total,
“must appear by express agreement of the
parties, or by their acts which are too clear and
unequivocal to be mistaken.” There was no
such animus novandi in the case at bar between
DBP and respondents, thus, respondents have
not been discharged as Galleon’s co-guarantors
under the Deed of Undertaking and they remain
liable to DBP. (Development Bank of the
Philippines vs. Sta. Ines Melale Forest Products
Corp., G.R. No. 193068, February 1, 2017, as
penned by J. Leonen)
SUMMARY
EXPROMISSIO
DELEGACION
N
 Obligations
Person who debtor was old debtor or
initiated the Old debtor Third person already against his will
substitution existing and – the new
It may be express or implied known to the debtor’s
Consent of from his acts but not from his original insolvency or
the creditor mere acceptance of payment by debtor at the non-
a third party. time of the fulfillment of
With or delegation of the obligation
With the the debt to the shall not give
without the
consent of the new debtor. rise to any
Consent of knowledge of
old debtor liability on the
the old the debtor or
(since he
debtor against the part of the
initiated the original
will of the old
substitution). debtor.
debtor.
Consent is
needed but it Q: Metro Corporation obtained a loan from
Consent of need not be Consent is Allied Bank covered by promissory notes,
third person given needed. letters of credit, and trust receipts. By way of
simultaneousl security, Metro’s officers individually
y. executed a continuing guaranty in favor of
Intention of Released from the obligation Allied Bank. Metro’s officers failed to settle
substitution with the consent of the creditor. their obligations prompting Allied Bank to
demand for payment to no avail. In order to
With the settle their debts, they offered the sale of
debtor’s Metro’s remaining assets (machines and
consent – right equipment) to the Bank which the latter
of refused. Meanwhile, Starpeak Corporation,
With the acting through Allied Bank’s counsel, entered
reimbursemen
debtor’s into an agreement with Metro to buy the
t and
consent – right machines that were reduced to mere scraps
Rights of the subrogation.
of of metals. Starpeak, unfortunately, reneged
new debtor Without the
reimburseme on its obligation to Metro. In this regard,
consent of the
nt and Metro asseverates that their failure to pay
old debtor or
subrogation. their outstanding loan obligations to Allied
against his will
– right to Bank must be considered as force majeure,
beneficial and since Allied Bank was the party, through
reimbursemen their counsel, that accepted the terms and
t. conditions of payment proposed by Starpeak,
Shall not With the petitioners must therefore be deemed to
revive the debtor’s have settled their obligations to Allied Bank.
action of the consent - If the Were the loan obligations under the
latter against old debtor promissory notes, letters of credit, and trust
the original gave his receipts have already been extinguished?
obligor. consent and
Insolvency or Original the new A: NO. Article 1231 of the New Civil Code states
nonfulfillme debtor shall debtor could that obligations are extinguished either by
nt of the be held liable: not fulfill the payment or performance, the loss of the thing
obligation of Insolvency obligation, the due, the condonation or remission of the debt,
the new was already old debtor the confusion or merger of the rights of creditor
debtor existing and of should be and debtor, compensation or novation. Starpeak
public liable for the and Metro’s agreement is a sale of assets
knowledge, or payment of his contract, while Metro’s obligations to Allied
known to the original Bank arose from various loan transactions.
debtor. obligation. Absent any showing that the terms and
Insolvency of Without the conditions of the latter transactions have been,
the new consent of the in any way, modified or novated by the terms

UNIVERSITY OF SANTO TOMAS 434

2021 GOLDEN NOTES
 Civil Law
and conditions in the Starpeak-Metro
agreement, said contracts should be treated
separately and distinctly from each other, such
that the existence, performance or breach of one
would not depend on the existence, performance
or breach of the other. The performance or
breach of the agreement bears no relation to the
performance or breach of the subject loan
transactions, they being separate and distinct
sources of obligations. Metro’s loan obligations
to Allied Bank remain subsisting for the basic
reason that the former has not been able to
prove that the same had already been paid or, in
any way, extinguished. (Metro Concast Steel
Corporation, Spouses Jose S. Dychiao And Tiuoh
Yan, Spouses Guillermo And Mercedes Dychiao,
And Spouses Vicente And Filomena Dychiao vs.
Allied Bank Corporation, G.R. No. 177921,
December 4, 2013)
Q: SDIC issued to Danilo a Diners Card (credit
card) with Jeannete as his surety. Danilo
used this card and initially paid his
obligations to SDIC. Thereafter, Danilo wrote
SDIC a letter requesting it to upgrade his
Regular Diners Club Card to a Diamond
(Edition) one. As a requirement of SDIC,
Danilo secured from Jeanette her approval
and the latter obliged. Danilo's request was
granted and he was issued a Diamond
(Edition) Diners Club Card. Danilo had
incurred credit charged plus appropriate
interest and service charge. However, he
defaulted in the payment of this obligation.
Was the upgrading a novation of the original
agreement governing the use of Danilo Alto's
first credit card, as to extinguish that
obligation?
A: YES. Novation, as a mode of extinguishing
obligations, may be done in two ways: by explicit
declaration, or by material incompatibility.
There is no doubt that the upgrading was a
novation of the original agreement covering the
first credit card issued to Danilo Alto, basically
since it was committed with the intent of
cancelling and replacing the said card. However,
the novation did not serve to release Jeanette
from her surety obligations because in the
surety undertaking she expressly waived
discharge in case of change or novation in the
agreement governing the use of the first credit
card. (Molino v. Security Diners International
Corp., G.R. No. 136780, August 16, 2001)
435
Q: J.C. Construction bought steel bars from
Matibay Steel Industries (MSI) which is
owned by Buddy Batungbacal. J.C. failed to
pay the purchased materials worth P500,000
on due date. J.C. persuaded its client
Amoroso with whom it had receivables to
pay its obligation to MSI. Amoroso agreed
and paid MSI the amount of P50,000. After 2
other payments, Amoroso stopped making
further payments.
Buddy filed a complaint for collection of the
balance of the obligation and damages
against J.C. J.C. denied any liability claiming
that its obligation was extinguished by
reason of novation which took place when
MSI accepted partial payments from
Amoroso on its behalf. Was the obligation of
JC to MSI extinguished by novation? Why?
(2014 Bar)
A: NO. Under Art. 1292 of the NCC, in order that
an obligation may be extinguished by another
which substitute the same, it is imperative that it
be so declared in unequivocal terms, or that the
old and the new obligations be on every point be
incompatible with each other. Novation by
substitution of the debtor requires the consent
of the creditor as provided in Art. 1293. This
requirement is not present in this case.
It was ruled that the mere fact that the creditor
received payment from a third person does not
constitute novation and does not extinguish the
obligation of the original debtor. Thus, the
obligation of JC to MSI subsists. (Magdalena
Estates Inc., v. Rodriguez, G.R. No. L-18411,
December 17, 1966)
Effects of novation
1. Extinguishment of principal also
extinguishes the accessory, except:
a. Mortgagor, pledgor, surety or guarantor
agrees to be bound by the new
obligation (Tolentino, 1999); or
b. Stipulation made in favor of a third
person such as stipulation pour atrui
(NCC, Art. 1311) unless beneficiary
consents to the novation. (NCC, Art.
1296)
2. If old obligation is:
 Obligations
a. Void – Novation is void. (NCC, Art. 1298)
b. Voidable – Novation is valid provided
that the annulment may be claimed only
by the debtor or when ratification
validates acts. (NCC, Art. 1298)
c. If the old obligation was subject to a
suspensive or resolutory condition, the
new obligation shall be under the same
condition, unless it is otherwise
stipulated. (NCC, Art. 1299)
3. If old obligation is conditional and the new
obligation is pure:
a. If resolutory and it occurred – Old
obligation already extinguished; no new
obligation since nothing to novate.
b. If suspensive and it did not occur – It is as
if there is no obligation; thus, there is
nothing to novate.
4. If the new obligation is:
a. Void – Original one shall subsist, unless
the parties intended that the former
relation should be extinguished in any
event. (NCC, Art. 1297)
b. Voidable – Novation can take place,
except when such new obligation is
annulled. In such case, old obligation
shall subsist.
c. Pure obligation – Conditions of old
obligation deemed attached to the new,
unless otherwise stipulated. (Tolentino,
1999)
d. Conditional Obligation:
i. If resolutory – Valid until the
happening of the condition. (NCC,
Art. 1181)
ii. If suspensive and did not materialize
– No novation, old obligation is
enforced. (NCC, Art. 1181)
NOTE: Novation does not extinguish criminal
liability. (PNB v. Soriano, G.R. No. 164051,
October 3, 2012)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Q: Will a contract of suretyship, which is
secondary to a principal obligation, be
extinguished when novation occurs?
A: IT DEPENDS. A surety is released from its
obligation when there is a material alteration of
the principal contract in connection with which
the bond is given, such as a change which
imposes a new obligation on the promising
party, or which takes away some obligation
already imposed, or one which changes the legal
effect of the original contract and not merely its
form. (Philippine Charter Insurance Corporation
v. Petroleum Distributors & Service Corporation,
G.R. No. 180898, April 18, 2012)
Furthermore, a surety is not released by a
change in the contract, which does not have the
effect of making its obligation more onerous.
(Stronghold Insurance Company, Inc. v. Tokyu
Construction Company, G.R. Nos. 158820-21, June
5, 2009) As such, a contract is only extinguished
by novation when there is a material alteration
in the principal contract or if it has the effect of
making the obligation more onerous.
Subrogation
It is the active subjective novation characterized
by the transfer to a third person of all rights
appertaining to the creditor in the transaction
concerned including the right to proceed against
the guarantors or possessors of mortgages and
similar others subject to any applicable legal
provision or any stipulation agreed upon by the
parties in conventional subrogation.
NOTE: Whoever pays on behalf of the debtor
without the knowledge or against the will of the
latter cannot compel the creditor to subrogate
him in his rights, such as those arising from a
mortgage, guaranty, or penalty. (NCC, Art. 1237)
Kinds of subrogation
1. As to their creation
a. Legal subrogation – Constituted by
virtue of a law and does not proceed
from an agreement of the parties (NCC,
Articles 1300 and 1302);
b. Voluntary or conventional subrogation –
Created by the parties by their
voluntary agreement (NCC, Art. 1300);
436
 Civil Law
NOTE: In legal subrogation, the law g law 1304 1627
which forms the basis of the The transfer of
subrogation must be clearly identified the credit or
and invoked to enforce the rights right does not
pertinent thereto. (Sta. Maria, 2017) It extinguishes extinguish or
the original modify the
c. Conventional subrogation of a third Effect obligation and obligation. The
person requires the consent of the creates a new transferee
original parties and of the third person. one. becomes the
(NCC, Art. 1301) new creditor
for the same
2. As to their extent obligation.
The consent of
a. Total subrogation – Credits or rights of the debtor is
the creditor in the transaction are The consent of not necessary.
totally transferred to the third person. Need for the debtor is Notification is
consent necessary. enough for the
b. Partial subrogation – Only part of the of debtor (NCC, Art. validity of the
credit or rights of the creditor in the 1301) assignment.
transaction are transferred to the third (NCC, Art.
person. 1626)
Begins from Begins from
NOTE: A creditor, to whom partial payment Effectivity the moment of notification of
has been made, may exercise his right for subrogation. the debtor.
the remainder and he shall be preferred to The defect in The defect in
the person who has been subrogated in his the old the credit or
place in virtue of the partial payment of the Curability obligation may rights is not
same credit. (NCC, Art. 1304) of defect be cured such cured by its
or vice that the new mere
Presumption of legal subrogation obligation assignment to
becomes valid. a third person.
GR: Legal subrogation is not presumed. (NCC, Debtor cannot
Art. 1300) set up a
The debtor can
defense
still set up the
XPN: In cases expressly mentioned in the law: against the
defense
new creditor
(available
1. When a creditor pays another creditor who Defense which he
against the old
is preferred, even without the debtor’s could have
creditor)
knowledge; availed
against the
2. When a third person, not interested in the himself of
new creditor.
obligation, pays with the express or tacit against the old
approval of the debtor; creditor.
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment NOTE: In the law of subrogation, active
of the obligation pays, without prejudice to subjective novation is stricter than passive
the effects of confusion as to the latter’s subjective novation. In the latter, the consent of
share. (NCC, Art. 1302) the old debtor is not even required in
expromission.
Conventional Subrogation vs. Assignment of
Credits Presumption of legal subrogation

CONVENTION GR: Legal subrogation is not presumed. (NCC,

ASSIGNMENT
AL Art. 1300)
BASIS OF CREDITS
SUBROGATIO
OR RIGHTS
N XPN: In cases expressly mentioned in the law:
Governin Article 1300- Article 1624-

437
 Obligations
1. When a creditor pays another creditor who
is preferred, even without the debtor’s
knowledge;
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to
the effects of confusion as to the latter’s
share. (NCC, Art. 1302)

UNIVERSITY OF SANTO TOMAS 438

2021 GOLDEN NOTES
 Civil Law
CONTRACTS
GENERAL PPROVISIONS
A contract is a meeting of minds between two
persons whereby one binds himself, with
respect to the other, to give something or to
render some service. (NCC, Art. 1305)
A contract is a meeting of the minds between
two or more parties, whereby one party binds
himself with respect to the other, or where both
parties bind themselves reciprocally, in favor of
one another, to fulfill a prestation to give, to do
or not to do. (Pineda, 2009)
Meeting of the minds
Speaks of the intention of the parties in entering
into the contract respecting the subject matter
and the consideration thereof. As a rule
therefore, a contract is perfected by mere
consent. It does not require any special form, as
a rule, and is binding from the moment that the
essential requisites are present. Thus, the
meeting of the minds between the parties rise to
the binding contract althought they have not
affixed their signature to its written form.
(Rabuya, 2017)
Obligation v. Contract
While a contract is one of the sources of
obligations, an obligation is the legal tie or
relations itself that exists after a contract has
been entered into.
Hence, there can be no contract if there is no
obligation. But an obligation may exist without a
contract. (De Leon, 2010)
Duty of courts in interpreting contracts
It is not the province of the court to alter a
contract by construction or to make a new
contract for the parties. Its duty is confined to
the interpretation of the one which they have
made for themselves without regard to its
wisdom or folly as the court cannot supply
material stipulations or red into the contract
words which it does not contain. (Cuizon v. CA,
G.R. No. 102096, August 22, 1996)
STAGES IN THE MAKING OF A CONTRACT
439
Three stages in the making of a contract (CPC) :
1. Conception or Generation – the first stage
where the parties begin their initial negotiation
and bargaining for the formation of the contract
ending at the moment of agreement of the
parties.
2. Perfection or Birth – Here, the parties had
a meeting of minds as to the object, cause or
consideration and other terms and conditions of
the contract.
3. Consumation or fulfillment – This the last
stage which consists in their performance or
fulfillment by the parties of their obligations
under the term of the perfected contract.
CHARACTERISTICS OF A CONTRACT
The following are the characteristics of a
contract (AMOR):
1. Autonomy (NCC, Art. 1306);
2. Mutuality (NCC, Art. 1308);
3. Obligatoriness and consensuality (NCC, Art.
1315);
4. Relativity (NCC, Art. 1311) ;
5. Consensuality (NCC, Art. 1315).
RELATIVITY OF CONTRACTS
(1991, 1996, 2002 BAR)
Principle of relativity or Principle of limited
effectivity of contracts (2011 BAR)
GR: Contracts take effect only between the
parties or their assigns and heirs.
Res inter alios acta aliis neque nocit prodest (a
thing done between others does not harm or
benefit others) – a contract can only obligate the
parties who entered into it, or their successors
who assumed their personalities, and that,
concomitantly, a contract can neither favor nor
prejudice third persons. (Vitug, 2006)
NOTE: With respect to the heir, he shall not be
liable beyond the value of the property he
received from the decedent. (NCC, Art. 1311)
XPNs:
1. Rights and obligations that are not
transmissible by their nature, or by the
 Contracts
stipulation or by provisions of law (NCC,
Art. 1311);
NOTE : Determine whether a contract
terminates upon the death of one of the
parties
2. Stipulation pour autrui (stipulation in
favor of a third person) – benefits
clearly and deliberately conferred by
parties to a contract upon third persons
(NCC, Art. 1311) and which stipulation is
merely part of a contract entered into
by the parties, neither of whom acted as
agents of the third person and which
favor can be demanded by the third
person if duly accepted by him before it
could be revoked;
Requisites of stipulation pour atrui:
a. Stipulation in favor of a third
person;
b. Stipulation is just part and not the
whole obligations of the contract;
c. Contracting parties must have
clearly and deliberately conferred a
favor upon a third person;
d. Favor or benefit conferred is not
just an incidental benefit or
interest;
e. Third person must have
communicated his acceptance; and
f. Neither of the contracting parties
bears the legal representation or
authorization of the third person.
(Young v. Court of Appeals, G.R. No.
79518, January 13, 1989)
NOTE: The fairest test to determine
whether the interest of third person in a
contract is a stipulation pour autrui or
merely an incidental interest, is to rely
upon the intention of the parties as
disclosed by their contract. In applying
this test, it matters not whether the
stipulation is in the nature of a gift or
whether there is an obligation owing
from the promise to the third person.
(Rabuya, 2017)
3. Third persons coming into possession of the
object of the contract creating real rights
subject to the provisions of Mortgage Law
and the Land Registration Law (NCC, Art.
1312);
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
4. Contracts entered into in fraud of creditors;
(NCC, Art. 1313);
5. When a third person induces a party to
violate the contract. (NCC, Art. 1314) (1991,
1998 BAR)
NOTE: This tort or wrongful conduct is
known as “interference with contractual
relations.”
Requisites:
a. Existence of a valid contract;
b. Third person has knowledge of such
contract;
c. Third person interferes without legal
justification or excuse. (De Leon, 2010)
It is based on quasi-delict and their liability is
solidary.
Thus, the unwarranted interference by a
stranger in the contractual relations of a
contracting party justifies a claim for damages
against the former. It is based on tort or quasi-
delict and their liability is solidary. (NCC, Art.
2194)
NOTE: A third person can be held liable for tort
interference even if he does not know the
identity of one of the contracting parties. The
interference with lawful contracts by strangers
thereto gives rise to an action for damage in
favor of the injured person. The law does not
require that the responsible person shall have
known the identity of the injured person.
(Rabuya, 2017)
Q: PCGG filed a complaint for reconveyance,
reversion, accounting, restitution, and
damages before the Sandigan Bayan against
Ferdinand and Imelda Marcos, and several of
their cronies including Benedicto and Africa.
PCGG, through its Chairman, David M. Castro,
entered into a Compromise Agreement with
Benedicto where the latter undertook to cede
to the government properties listed in the
agreement and transfer to the government
whatever rights he may have in the assets of
the corporations listed in the same
agreement. The SB dismissed the case
against Africa and ruled that since that act
being complained of constituted a quasi-
delict or tort and the obligation of the
defendants were solidary therefore the
440
 Civil Law
obligation of Africa has been extinguished by
the Compromise Agreement. Did the
Compromise Agreement between PCGG and
Benedicto extinguish the liability of Africa?
A: NO. A stipulation pour autrui to be
appreciated, it is indispensable that there be a
stipulation deliberately conferring a benefit or
favor to a third person. The requisites of a
stipulation pour autrui are the following:
1. There is a stipulation in favor of a third
person;
2. The stipulation is a part, not the whole, of
the contract;
3. The contracting parties clearly and
deliberately conferred a favor to the third
person — the favor is not an incidental
benefit;
4. The favor is unconditional and
uncompensated;
5. The third person communicated his or her
acceptance of the favor before its
revocation; and
6. The contracting parties do not represent, or
are not authorized by, the third party.
The Compromise Agreement executed between
Benedicto and PCGG does not contain any
express stipulation that confers the benefit of
absolute immunity to Africa. Absent any express
stipulation in favor of a third person, the rule on
relativity of contract must be applied i.e., that
the contract only takes effect between the
parties, their assigns or heirs. (Republic of the
Philippines v. Legal Heirs of Jose L. Africa, G.R. No.
205722, August 19, 2015)
Q: Fieldmen's Insurance issued, in favor of
MYT, a common carrier, accident insurance
policy. 50% of the premium was paid by the
driver. The policy indicated that the
Company will indemnify the driver of the
vehicle or his representatives upon his death.
While the policy was in force, the taxicab
driven by Carlito, met with an accident.
Carlito died. MYT and Carlito's parents filed a
complaint against the company to collect the
proceeds of the policy. Fieldmen’s admitted
the existence thereof, but pleaded lack of
cause of action on the part of the parents.
Decide.
A: Carlito’s parents who, admittedly, are his
sole heirs have a direct cause of action
against the Company. This is so because
441
pursuant to the stipulations, the Company will
also indemnify third parties. The policy under
consideration is typical of contracts pour autrui,
this character being made more manifest by the
fact that the deceased driver paid 50% of the
premiums. (Coquia v. Fieldmen’s Insurance Co.,
Inc., G.R. No. L-23276, November 29, 1968)
OBLIGATORY FORCE OF CONTRACTS
Contracts shall be obligatory, in whatever form
they may have been entered into, provided all
the essential requisites for validity are present.
(NCC, Art. 1356)
Obligations arising from contracts have the force
of law between the contracting parties and
should be complied with in good faith. (NCC, Art.
1159)
This provision must fall within the other
characteristic of a contract.
Requisites for the application of the principle
Before a contract may be considered obligatory,
it is necessary that:
1. It is perfected;
2. It is valid; and
3. It is enforceable. (Rabuya, 2017)
Q: Villamor borrowed a large amount from
Borromeo, for which he mortgaged his
property but subsequently defaulted.
Borromeo pressed him for settlement. The
latter instead offered to execute a
promissory note containing a promise to pay
his debt as soon as he is able, even after 10
years and that he waives his right to
prescription. What are the effects of the said
stipulation to the action for collection filed
by Borromeo?
A: NONE. The rule is that a lawful promise made
for a lawful consideration is not invalid merely
because an unlawful promise was made at the
same time and for the same consideration. This
rule applies although the invalidity is due to
violation of a statutory provision, unless the
statute expressly or by necessary implication
declares the entire contract void. Thus, even
with such waiver of prescription, considering
that it was the intention of the parties to
effectuate the terms of the promissory note,
there is no legal obstacle to the action for
 Contracts
collection filed by Borromeo. (Borromeo v. CA,
G.R. No. L-22962, September 28, 1972)
NOTE: Where an agreement founded on a legal
consideration contains several promises, or a
promise to do several things, and a part only of
the things to be done are illegal, the promises
which can be separated, or the promise, so far as
it can be separated, from the illegality, may be
valid. (Borromeo v. CA, G.R. No. L-22962,
September 28, 1972)
MUTUALITY OF CONTRACTS
The contract must bind both contracting parties
and its validity or compliance cannot be left to
the will of one of them. (NCC, Art. 1308) (2001,
2004, 2008 BAR)
If a party alleges defects in the contract so that it
could be set aside, he must prove conclusively
the existence of the defects because the validity
and fulfillment of the contract cannot be left to
the will of one of the contracting parties. (Pineda,
2009)
The binding effect of any agreement between
parties to a contract is premised on two settled
principles: (1) that any obligation arising from
contract has the force of law between the
parties; and (2) that there must be mutuality
between the parties based on their essential
equality. Any contract which appears to be
heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is void.
Any stipulation regarding the validity or
compliance of the contract which is left solely to
the will of one of the parties, is likewise, invalid.
(Sps. Juico vs. China Banking Corp., G.R. 187678,
April 10, 2013)
NOTE: A contract containing a condition whose
efficacy or fulfillment is dependent solely on the
uncontrolled will of one of the parties is void.
(Garcia v. Rita, G.R. No. L-20175, October 30,
1967; PNB v. CA, G.R. No. 88880, April 30, 1991)
However, the termination of the contract does
not necessarily require mutuality, and it can
even be validly left to one party by agreement or
under a resolutory facultative condition. (Vitug,
2006; see also PNB v. CA, 1994)
Q: The consortium of ALSONS Power
Holdings Corporation and TOMEN
Corporation entered into an Energy
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Conversion Agreement with NAPOCOR for a
50-megawatt bunker- C fired diesel-
generating power project in General Santos
City. Southern Philippines Power
Corporation assumed the obligations of the
consortium to the Energy Conversion
Agreement through the Accession
Undertaking. The cooperation period
between Southern Philippines Power
Corporation and the National Power
Corporation started when the Power Station
was declared completed.
Southern Philippines Power Corporation
requested payment in the amount of
P45,840,673.22, attributable to the
additional 10% capacity made available to
the National Power Corporation since 2005.
NAPOCOR refused to pay. Does the Petitioner
have the right to collect payment from the
project?
A: NO. Section 3.1 of the Agreement's First
Schedule, which provides for the construction of
a five (5)-engine Power Station, cannot be
construed alone. Various stipulations of a
contract must be interpreted or read together to
arrive at its true meaning. The legal effect of a
contract is not determined by any particular
provision alone, disconnected from all others,
but from the language used and gathered from
the whole instrument.
Specifically, respondent is given the right to "do
all other things necessary or desirable for the
completion of the Power Station" under the
specifications set forth in the First Schedule, as
well as to "do all other things necessary or
desirable for the running of the Power Station
within the Operating Parameters."
Although it is clear that respondent is given an
allowance of five (5)- megawatt contracted
capacity or up to a maximum of 55 megawatts, it
is not specified in the Agreement that the
additional five (5)-megawatt contracted capacity
must be produced only from the original five (5)
generating units. This omission in the
Agreement binds petitioner. (National Power
Corporation, v. Southern Philippines Power
Corporation, G.R. No. 219627, July 4,2016, as
penned by J. Leonen)
Q: DPWH and a Joint Venture entered into a
construction contract. However, during the
construction, the joint venture’s equipment
442
 Civil Law
were set on fire. Joint venture made a
demand for payment from DPWH but DPWH
could not pay them all. Hence, they decided
to mutually terminate the contract. Is the
court intervention then rendered moot and
academic?
A: NO. There is a practical use or value to decide
on the issues raised by the parties despite the
mutual termination of the Contract between
them. These issues include the determination of
amounts payable to respondent by virtue of the
time extensions, respondent's entitlement to
price adjustments due to the delay of the
issuance of the Notice to Proceed, additional
costs, actual damages, and interest on its claims.
(Department Of Public Works And Highways v.
Cmc/Monark/Pacific/Hi-Tri Joint Venture, G.R.
No. 179732, September 13, 2017, as penned by J.
Leonen)
Q: In view of a complaint for damages filed
by 1,843 Filipino claimants against the
foreign corporations—Chiquita Brands, Inc.,
Chiquita Brands International, Inc.
(collectively, Chiquita), Dow Chemical
Company, Occidental Chemical Corporation,
Shell Oil Company, Del Monte Fresh Produce,
N.A., and Del Monte Tropical Fruit Co.
(collectively, Del Monte)—the parties
entered into a worldwide settlement in the
United States with all the banana plantation
workers. The parties executed a document
denominated as the "Compromise
Settlement, Indemnity, and Hold Harmless
Agreement".
The Compromise Agreement provided,
among others, that the settlement amount
should be deposited in an escrow account,
which should be administered by a mediator.
After the claimants execute individual
releases, the mediator shall give the checks
representing the settlement amounts to the
claimants' counsel, who shall then distribute
the checks to each claimant. The Compromise
Agreement also provided that the laws of
Texas, United States should govern its
interpretation.
The Regional Trial Court approved the
Compromise Agreement by way of judgment
on compromise. Accordingly, it dismissed
Civil Case No. 95-45 in the Omnibus Order.
Shortly after the dismissal of Civil Case No.
95-45, several claimants moved for the
443
execution of the judgment on compromise.
Petitioners opposed the execution on the
ground of mootness. They argued that they
had already complied with their obligation
under the Compromise Agreement by
depositing the settlement amounts into an
escrow account, which was administered by
the designated mediator. Hence, there was
nothing left for the court to execute.
The Regional Trial Court eventually granted
the Motion for Execution because there was
no proof that the settlement amounts had
been withdrawn and delivered to each
individual claimant. Accordingly, a Writ of
Execution was issued. Is the Writ of
Execution ordering the collection of the
settlement amount directly for petitioner
valid?
A: NO. A judgment on compromise may be
executed just like any other final judgment in the
manner provided in the Rules of Court. The writ
of execution derives its validity from the
judgment it seeks to enforce and must
essentially conform to the judgment's terms. It
can neither be wider in scope nor exceed the
judgment that gives it life. Otherwise, it has no
validity. Thus, in issuing writs of execution,
courts must look at the terms of the judgment
sought to be enforced.
Under the judicially approved Compromise
Agreement, petitioners are obliged to deposit
the settlement amount in escrow within 10
business days after they receive a signed
Compromise Agreement from the counsel of the
claimants. There was nothing in the
Compromise Agreement that required
petitioners to ensure the distribution of the
settlement amount to each claimant. Petitioners'
obligation under the Compromise Agreement
was limited to depositing the settlement amount
in escrow. On the other hand, the actual
distribution of the settlement amounts was
delegated to the chosen mediator, Mr. Mills. To
require proof that the settlement amounts have
been withdrawn and delivered to each claimant
would enlarge the obligation of petitioners
under the Compromise Agreement. (Chiquita
Brands, Inc. and Chiquita Brands International,
Inc., vs. Hon. George E. Omelio, et.al., G.R. No.
189102, June 7, 2017, as penned by J. Leonen)
Contract of Adhesion (2018 BAR)
 Contracts
It is a contract in which one of the parties
prepares the stipulations in the form of a ready-
made contract, which the other party must
accept or reject, but not modify, by affixing his
signature or his “adhesion” thereto; leaving no
room for negotiation and depriving the latter of
the opportunity to bargain on equal footing.
(Norton Resources and Development Corporation
v. All Asia Bank Corporation, G.R. No. 162523,
November 25, 2009)
NOTE: Generally, contracts of adhesion are valid,
except when they are highly inequitable. The
courts will not hesitate to rule out blind
adherence to terms where facts and
circumstances will show that it is one-sided.
(Sta. Maria, 2017)
Validity of contract of adhesion
It is not entirely prohibited since the one who
adheres to the contract is, in reality, free to
reject it entirely, and if he adheres, he gives his
consent. (Premiere Development Bank v. Central
Surety & Insurance Company, Inc., G.R. No.
176246, February 13, 2009) However, it is void
when the weaker party is imposed upon in
dealing with the dominant bargaining party, and
its option is reduced to the alternative of “taking
or leaving it,” completely depriving such party of
the opportunity to bargain on equal footing.
(Keppel Cebu Shipyard, Inc. v. Pioneer Insurance
and Surety Corporation, G.R. Nos. 180880-81,
September 25, 2009)
Note: Such contracts are not void in themselves.
They are as binding as ordinary
contracts. Parties who enter into such contracts
are free to reject the stipulations entirely.
(Ermitao vs. CA, G.R. No. 127246, April 21, 1999)
Interpretation of contract of adhesion
In interpreting such contracts, however, courts
are expected to observe greater vigilance in
order to shield the unwary or weaker party from
deceptive schemes contained in ready-made
covenants. (Premiere Development Bank v.
Central Surety Insurance Company, Inc., G.R. No.
176246, February 13, 2009) In case of doubt,
which will cause a great imbalance of rights
against one of the parties, the contract shall be
construed against the party who drafted the
same. (Magis Young Achiever’s Learning Center v.
Manalo, G.R. No. 178835, February 13, 2009)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Third person may determine the
performance of a contract
The determination of the performance may be
left to a third person. However, his decision shall
not be binding until it has been known to both
the contracting parties. (NCC, Art. 1309)
Moreover, the determination made shall not be
obligatory if it is evidently inequitable. In such
case, the courts shall decide what is equitable
under the circumstances. (NCC, Art. 1310)
Unilateral increase of interest rate
Even assuming that the loan agreement between
the creditor and the debtor gave the former a
license to increase the interest rate at will during
the term of the loan, that license would have
been null and void for being violative of the
principle of mutuality essential in contracts.
(Rabuya, 2017)
AUTONOMY OF CONTRACTS / LIBERTY OF
CONTRACTS (1996, 2004 BAR)
It is the freedom of the parties to contract and to
stipulate provided the stipulations are not
contrary to law, morals, good customs, public
order or public policy. (NCC, Art. 1306)
It is the freedom of the parties to create or
establish stipulations, clauses, terms, and
conditions as they may deem convenient,
provided the stipulations are not contrary to
law, morals, good customs, public order or
public policy. (NCC, Art. 1306)
NOTE: Courts cannot make for the parties better
or more equitable agreements than they
themselves have been satisfied to make, or
rewrite contracts because they operate harshly
or inequitably as to one of the parties, or alter
them for the benefit of one party and to the
detriment of the other, or by construction,
relieve one of the parties from terms which he
voluntarily consented to, or impose on him those
which he did not. (Angel Bautista v. Court of
Appeals, G.R. No. 123655, January 19, 2000)
Courts are not authorized to extricate parties to
the consequences of their acts, and the fact that
the contractual obligations may turn out to be
financially disadvantageous will not relieve the
latter of their obligations.
444
 Civil Law
An agreement to pay unconscionable interests 2. By stipulation; or
on a loan is against morals. (Medel, et al. vs. Ca, 3. By provision of law. (NCC, Art. 1311)
299 SCRA 481)
Requisites in order that a third person may
PERFECTION BY MERE CONSENT demand the fulfillment of the contract

Contracts are perfected by mere consent, and
from that moment the parties are bound not
only to the fulfillment of what has been
expressly stipulated but also to all the
consequences which, according to their nature,
may be in keeping with good faith, usage and
law. (NCC, Art. 1315)
Note: This refers to consensual contracts.
However, real contracts are perfected by
delivery and formal contracts are perfected
upon compliance.
EFFECT OF CONTRACTS
Contracts take effect only between the parties,
and their assigns and heirs, the latter being
liable only to the extent of the property received
from the decedent. (NCC, Art. 1311)
Persons affected by a contract
GR:
1. The contracting parties must have clearly
and deliberately conferred a favor upon the
third person;
2. The third person’s interest or benefit in such
fulfillment must not be merely incidental;
and
3. Such third person communicated his
acceptance to the obligor before the
stipulations in his favor are revoked.
ESSENTIAL REQUISITES OF A CONTRACT
ELEMENTS OF A CONTRACT
1. Natural Elements – Those which are derived
from the very nature of the contract, and as
a consequence, ordinarily accompany the
same.
2. Essential Elements – Those without which
there can be no contract.
3. Accidental Elements – those which exist only
when the contracting parties expressly
provide for them. (De Leon, 2010)

1. Parties to the contract; and ESSENTIAL REQUISITES OF A CONTRACT

2. Their corresponding successors. (2005 BAR)

XPNs: The following are the essential requisites of

1. Contracts containing a stipulation in favor
of a third person (pour autrui) [NCC, Art.
1311 (2)];
2. Contracts containing real rights (NCC, Art.
1312);
3. Contracts entered into to defraud
creditors (NCC, Art. 1313);
4. Contracts which have been violated at the
inducement of 3rd persons (NCC, Art.
1314);
5. Quasi-contract of negotiorum gestio. (NCC,
Art. 2150)
Liability of heirs for the obligation
contracted by the decedent
The heirs are liable for the obligation contracted
by the decedent when the rights and obligations
arising from the contract are transmissible:
1. By their nature;
contracts (COC):
1. Consent;
2. Object certain or subject matter; and
3. Cause or consideration. (NCC, Art 1318) (See
Cathay Pacific v. Vasquez, 2003)
NOTE: These three requisites are, therefore, the
essential elements of a consensual contract. In
real contracts, however, in addition to the above,
the delivery of the object of the contract is
required as a further requisite. Solemn or formal
contracts require compliance with the
formalities provided by law.
Q: MRT thru Parsons Inc., had invited
Gammon Philippines to bid on the
construction of the Podium structure of the
MRT 3 and it later won the bidding. Then the
2 parties signed the contract where it stated
that there would be three notices that would

445
 Contracts
be sent to Gammon for the project to
proceed. But later on Parsons informed
Gammon that MRT was temporarily
rescinding the Third Notice to Proceed,
noting that it remained unaccepted by
Gammon. On June 19, 1998, Gammon
qualifiedly accepted the Fourth Notice to
Proceed. MRT treated Gammon's qualified
acceptance as a new offer. In a Letter dated
June 22, 1998, MRT rejected Gammon's
qualified acceptance and informed Gammon
that the contract would be awarded instead
to Filsystems if Gammon would not accept
the Fourth Notice to Proceed within five (5)
days. In a Letter dated July 8, 1998, Gammon
wrote MRT, acknowledging the latter's intent
to grant the Fourth Notice to Proceed to
another party despite having granted the
First Notice to Proceed to Gammon. Thus, it
notified MRT of its claims for reimbursement
for costs, losses, charges, damages, and
expenses it had incurred due to the rapid
mobilization program in response to MRT's
additional work instructions, suspension
order, ongoing discussions, and the
consequences of its award to another party.
In a letter dated July 15, 1998, MRT
expressed its disagreement with Gammon
and its amenability to discussing claims for
reimbursement. Whether or not there is a
perfected contract between MRT and
Gammon Philippines?
A: YES, there is a perfected contract between
MRT and Gammon. MRT has already awarded
the contract to Gammon, and Gammon's
acceptance of the award was communicated to
MRT before MRT rescinded the contract. The
first Letter shows that Gammon fully consented
to the contents and accepted the prestations of
the First Notice to Proceed. Gammon's
acceptance is also manifested in its undertakings
to mobilize resources, to prepare the
Performance and Advance Payment Bonds, and
to procure materials necessary for the Project.
All that remained was the formality of returning
the contract documents and the Letter of
Comfort, which eventually was complied with by
Gammon. Thus, there is already mutual consent
on the object of the contract and its
consideration, and an absolute acceptance of the
offer. (Metro Rail Transit Development
Corporation v. Gammon Philippines Inc., G.R. NO.
200401, JANUARY 17, 2018, as penned by J.
Leonen)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
CONSENT (2005 BAR)
Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause
which are to constitute the contract. The offer
must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
(NCC, Art. 1319)
It is the concurrence of the wills of the
contracting parties with respect to the object
and cause, which shall constitute the contract.
(De Leon, 2010)
NOTE: Consent is essential to the existence of a
contract; and where it is wanting, the contract is
non-existent.
Requisites of consent (LM-CR)
1. Legal capacity of the contracting parties;
NOTE: The parties must have full civil
capacity. Hence, if any one party to a
supposed contract was already dead at the
time of its execution, such contract is
undoubtedly simulated and false and,
therefore, null and void by reason of its
having been made after the death of the
party who appears as one of the contracting
parties therein. The death of a person
terminates contractual capacity. (Milagros
De Belen Vda. De Cabalu, et. al. v. Sps. Renato
Dolores Tabu and Laxamana, G.R. No.
188417, September 24, 2012)
2. Manifestation of the conformity of the
contracting parties;
Note: Manifestation may be in writing
bearing the signature or marks of the
parties, or it may be implied from the
conduct of the parties like the acceptance of
payment.
3. Parties’ Conformity to the object, cause,
terms and condition of the contract must be
intelligent, spontaneous and free from all
vices of consent; and
NOTE: Intelligence in consent is vitiated by
error; freedom by violence, intimidation or
undue influence; and spontaneity by fraud.
4. The conformity must be Real.
446
 Civil Law
The conformity must be Real and not
simulated or fictitious.
Offer
An offer is defined as an expression of
willingness to contract on certain terms, made
with the intention that it shall become binding as
soon as it is accepted by the person to whom it is
addressed. (Rabuya, 2017 citing G. H. Treitel, The
Law of Contract, 10th Ed., p.8)
NOTE: The offerer will not be bound by an
acceptance made by the acceptor in any other
manner than that specified by the offerer, unless
the offerer acquiesces in the change. (Sta. Maria,
2017)
Elements of a valid offer and acceptance
1. Definite – unequivocal
2. Intentional
3. Complete – unconditional
NOTE: It must be so complete that its absolute
acceptance will form an agreement containing
all the terms necessary and intended by the
parties. (Sta. Maria, 2017)
We follow the cognitive theory and NOT the
mailbox theory. Under our Civil Law, the offer
and acceptance concur only when the
acceptance has reached the knowledge of the
offeror (actual knowledge), and not at the time
of sending the acceptance.
Requisites of an effective offer
1. The one offering must have a serious
intention to become bound by his offer;
2. The terms of the offer must be reasonably
certain, definite and complete, so that the
parties and the court can ascertain the terms
of the offer; and
3. The offer must be communicated by the
offeror to the offeree, resulting in the
offeree’s knowledge of the offer. (Rabuya,
2017)
Q: The husband assumed sole administration
of the family’s mango plantation since his
wife worked abroad. Subsequently, without
his wife’s knowledge, the husband entered
into an antichretic transaction with a
company, giving it possession and
management of the plantation with power to
447
harvest and sell the fruits and to apply the
proceeds to the payment of a loan he got.
What is the standing of the contract? (2011
BAR)
A: It is considered a continuing offer by the
parties; perfected only upon the wife’s
acceptance or the court’s authorization.
NOTE: The person making the offer may fix the
time, place and manner of acceptance, all of
which must be complied with. (NCC, Art. 1321)
Rules on complex offer
1. Offers are interrelated – contract is
perfected if all the offers are accepted
2. Offers are not interrelated – single
acceptance of each offer results in a
perfected contract unless the offeror has
made it clear that one is dependent upon
the other and acceptance of both is
necessary.
Rules on advertisements as offers
1. Business advertisements – not a definite
offer, but mere invitation to make an offer,
unless it appears otherwise. (NCC, Art. 1325)
NOTE: If the advertisement contains all the
necessary date need in a contract, its a
definite offer for the sale of the thing
advertised. Otherwise, it is not a definite
offer, it is a mere invitation to make offer.
2. Advertisement for bidders – simply invitation
to make proposals and advertiser is not
bound to accept the highest or lowest
bidder, unless the contrary appears. (NCC,
Art. 1326)
Grounds that would render the offer
ineffective
1. Death, civil interdiction, insanity or
insolvency of either party before acceptance
is conveyed (NCC, Art. 1323);
2. Express or implied revocation of the offer by
the offeree;
3. Qualified or conditional acceptance of the
offer, which becomes counter-offer;
4. Subject matter becomes illegal or impossible
before acceptance is communicated;
 Contracts
5. Period given to the offeree to signify his
acceptance has already lapsed.
Requisites of a valid acceptance
1. Must be absolute; a qualified acceptance
constitutes a counter-offer (NCC, Art. 1319);
2. No specified form but when the offeror
specifies a particular form, such must be
complied with.
NOTE: Offer or acceptance, or both, expressed in
electronic form, is valid, unless otherwise agreed
by the parties (electronic contracts).
Acceptance not made in a manner as directed by
the offeror constitutes a counter-proposal which
extinguishes the offer and this may not be
accepted by the original offeror. (Pineda, 2009)
A conditional acceptance is a counter-offer
which extinguishes the offer. If not accepted by
the offeror, there is no contract.
An acceptance may be express or implied. (NCC,
Art. 1320)
Mirror Image Rule in law on contracts
This is a common law concept which states that
in order for there to be an acceptance, the
offeree must accept the terms as stated in the
offer. Our courts also adhere to the “mirror-
image rule.” Thus, it has been ruled that
acceptance must be identical in all respects with
that of the offer so as to produce consent of
meeting of the minds. (Rabuya, 2017 citing ABS-
CBN v. CA. 301 SCRA 592-593, 1999)
Period for acceptance
1. Stated fixed period in the offer
a. Must be made within the period given
by the offeror.
b. As to withdrawal of the offer:
GR: It can be made by communicating
such withdrawal at any time before the
acceptance is made
XPN: When the option is founded upon
a consideration (something paid or
promised since partial payment of the
purchase price is considered as proof of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the perfection of the contract). (NCC, Art
1324)
2. No stated period
a. Offer is made to a person present –
acceptance must be made immediately.
b. Offer is made to a person absent –
acceptance may be made within such
time that, under normal circumstances,
an answer can be expected from him.
NOTE: If there was an acceptance already, the
offeror cannot just withdraw his offer
unilaterally. He will be liable for damages.
(Pineda, 2009)
Option contract
It is a contract between the offeror and the
offeree whereby the former grants the latter, for
a valuable consideration, the privilege to buy or
not to buy certain objects at anytime within a
specified period and for a fixed price.
Note: The privilege granted to the offeree must
be supported by a consideration, the option is
just considered an “offer to sell” to the offeree
which is not binding until accepted. (Pineda,2009
citing Sanchez vs. Rigos, 45 scra 368)
Earnest Money
It is the payment made to a seller by the buyer to
show his good faith. It will constitute as part of
the purchase price, if the sale is finally
consummated. If the sale is not concluded, the
earnest money shall be returned to the would-
be-buyer unless there is a contrary stipulation.
Persons incapacitated to give consent (DIM)
1. Deaf-mutes who do not know how to read
and write (illiterates);
2. Insane or demented persons, unless the
contract was entered into during a lucid
interval;
3. Minors (NCC, Art. 1327) except:
a. Contracts for necessaries (NCC, Art.
1489);
b. Contracts by guardians or legal
representatives and the court having
jurisdiction had approved the same;
448
 Civil Law
c. When there is active misrepresentation
on the part of the minor (minor is
estopped);
d. Contracts of deposit with the Postal
Savings Bank provided that the minor
is over 7 years of age;
e. Contract of an insurance for life, health
and the accident on the minor’s life.
f. Upon reaching age of majority – they
ratify the same.
NOTE: Because the law incapacitates them to
give their consent to a contract, the only way by
which any one of those enumerated above can
enter into a contract is to act through a parent or
guardian. If this requirement is not complied
with, the result is a defective contract. If only
one of the contracting parties is incapacitated to
give his consent, the contract is voidable. If both
of them are incapacitated to give their consent,
the contract is unenforceable. [NCC, Art. 1390(1),
NCC, Art. 1403(3)]
Vices of consent (MI-VUF)
1. Mistake
2. Intimidation
3. Violence
4. Undue influence
5. Fraud
NOTE: A threat to enforce a just or legal claim
through a competent authority does not amount
to intimidation nor vitiate consent. (NCC, Art.
1335)
Mistake
GR: Mistake as a vice of consent refers to
mistake of facts and not of law, thus rendering
the contract voidable. (Jurado, 2010)
XPN: When mistake of law involves mutual error
as to the legal effect of an agreement when the
real purpose of the parties is frustrated. (NCC,
Art. 1334)
Mistake Distinguished from Ignorance
Mistake is a false impression on something,
while Ignorance is absence of any notion or
impression about a particular thing.
Requisites:
449
1. Mistake must be with respect to the legal
effect of the agreement;
2. It must be mutual; and
3. Real purpose of the parties must have been
frustrated.
Kinds of mistakes of fact which vitiate
consent
1. Mistake as to the nature of the contract ;
2. 2 Mistake as to object of the contract ;
3. Mistake as to the quality or principal
conditions of the thing ;
4. Mistake or error in quantity ;
5. Mistake as to identy of the person ;
6. Mistake as to the identity or qualifications of
one of the parties will vitiate consent only
when such identity or qualifications have
been the principal cause of the contract.
For mistake (as to the qualification of one of the
parties) to vitiate consent, two requisites must
concur:
a. The mistake must be either with regard to
the identity or with regard to the
qualification of one of the contracting
parties; and
b. The identity or qualification must have
been the principal consideration for the
celebration of the contract. (The Roman
Catholic Church v. Regino Pante, G.R. No.
174118, April 11, 2012)
Q: Leonardo is the only legitimate child of the
late spouses Tomasina and Balbino. She only
finished Grade three and did not understand
English. The Sebastians, on the other hand,
are illegitimate children. She filed an action
to declare the nullity of the extrajudicial
settlement of the estate of her parents, which
she was made to sign without the contents
thereof, which were in English, explained to
her. She claims that her consent was vitiated
because she was deceived into signing the
extrajudicial settlement. Is the extra-judicial
settlement of estate of Tomasina valid?
A: NO. When one of the parties is unable to read,
or if the contract is in a language not understood
by him, and mistake or fraud is alleged, the
person enforcing the contract must show that
the terms thereof have been fully explained to
the former. (Art. 1332) Leonardo was not in a
position to give her free, voluntary and
spontaneous consent without having the
 Contracts
document, which was in English, explained to
her. Therefore, the consent of Leonardo was
invalidated by a substantial mistake or error,
rendering the agreement voidable. The
extrajudicial partition between the Sebastians
and Leonardo should be annulled and set aside
on the ground of mistake. (Leonardo v. CA, G.R.
No. 125485, September 13, 2004)
NOTE : Burden rests upon the party who seeks
to enforce the contract to show that the other
party fully understood the contents of the
document. (Mayor vs. Belen, 430 SCRA 561)
Mutual Error
Mutual Error as to the legal effect of an
agreement when the real purpose of the parties
is frustrated, may vititate consent. (NCC,
Art. 1334)
Legal effect refers to the rights of the parties as
stated in legal provisions.
Intimidation
There is intimidation when one of the
contracting parties is compelled by a reasonable
and well-grounded fear of an imminent and
grave evil upon his person or property, or upon
the person or property of his spouse,
descendants or ascendants, to give his consent.
[NCC, Art. 1335(2)]
Requisites of intimidation (CICU)
1. One of the parties is compelled to give his
Consent by a reasonable and well-grounded
fear of an evil;
2. The evil must be Imminent and grave;
3. It must be Unjust; and
4. The evil must be the determining Cause for
the party upon whom it is employed in
entering into the contract. (NCC, Art. 1335)
NOTE: To determine the degree of the
intimidation, the age, sex and condition of the
person shall be borne in mind. (NCC, Art. 1335)
A threat to enforce one’s claim through
competent authority, if the claim is just or legal,
does not vitiate consent. (Sta. Maria, 2017)
Validity of a contract if consent is reluctant
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A contract is valid even though one of the parties
entered into it against his wishes and desires or
even against his better judgment. Contracts are
also valid even though they are entered into by
one of the parties without hope of advantage or
profit. (Martinez v. Hongkong and Shanghai
Banking Corp., G.R. No. L-5496, February 19,
1910)
Violence
There is violence when in order to wrest
consent, serious or irresistible force is
employed. (Art. 1335)
Requisites of violence
1. Physical force employed must be serious or
irresistible; and
2. The determining cause for the party upon
whom it is employed in entering into the
contract.
A threat to enforce one’s claim through
competent authority, if the claim is just or legal,
does not vitiate consent. [NCC, Art. 1335(4)]
NOTE: Violence or intimidation shall annul the
obligation, although it may have been employed
by a third person who did not take part in the
contract. (NCC, Art. 1336)
The contracting party who is not the subject of
the violence or the intimidation may not even
know that the other party has been coerced.
(Sta. Maria, 2017)
Undue influence
There is undue influence when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable
freedom of choice. (NCC, Art. 1337)
It must in some measure destroy the free agency
if a party and interfere with the exercise of that
independent discretion. (4 Tolentino 501)
Circumstances to be considered for the
existence of undue influence
1. Confidential, family, spiritual and other
relations between the parties;
2. Mental weakness;
3. Ignorance;
4. Financial distress. (NCC, Art. 1337)
450
 Civil Law
NOTE: The enumeration is NOT exclusive. Moral
dependence, indigence, mental weakness, tender
age or other handicap are some of the
circumstances to consider undue influence.
Determination of undue influence
1. When a legal or equitable duty is imposed
upon the dominant party to reveal certain
facts material to the transaction; and
2. When there is a confidential relationship
between the parties. (Sta. Maria, 2017)

The test to determine whether or not there is Requisites of Fraud to vitiate consent (In the
undue influence which will invalidate a contract sense of Dolo Causante)
is to determine whether or not the influence
exerted has so overpowered and subjugated the 1. It was applied or utilized by one contracting
mind of the contracting party as to destroy his party upon the other.
free agency, making him express the will of 2. It must be serious deception.
another rather than his own. (Jurado, 2011) 3. It must have induced the victim to enter the
contract without which he would not have
Due influence does not vitiate consent agreed to.
4. It must have induced the victim to enter into
When influence consists in persuasive the contract, which he would not have
arguments or in appeals to the affections which agreed to, absent the employment of such
are not prohibited by law or morals, the consent fraud.
is not vitiated at all. (Pineda, 2009) 5. It must have resulted in damage or injury.

Influence obtained by persuasion or argument Kinds of Fraud

or by appeals to the affections is not prohibited
either by law or morals and is not obnoxious
even in courts of equity. Such may be termed
“due influence.” (Martinez v. Hongkong and
Shanghai Bank, 15 Phil. 252, 270)
Reverential Fear
The fear of displeasing persons to whom respect
and obedience are due does not vitiate consent.
Fraud
There is fraud when through the 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. (NCC, Art. 1338)
NOTE: The term “insidious words” refers to a
deceitful scheme or plot with an evil design, or a
fraudulent purpose. (Pineda, 2000)
1. Fraud in the perfection of the contract
a. Causal fraud (dolo causante) - It is
employed by one party prior to or
simultaneous with the creation or
perfection of the contract to secure
the consent of the other.
b. Incidental fraud (dolo incidente) - It
is the fraud committed in the in the
performance of an obligation, and
its existence merely results in
breach of an already existing
contract, which entitles the injured
party to damages. (NCC, Art. 1170)
2. Fraud in the performance of an obligation.
(NCC, Art. 1170)
Fraud in the Performance v. Fraud in the
Perfection (Pineda, 2009)

Failure to disclose facts, when there is a duty to FRAUD IN

FRAUD IN THE
reveal them, as when the parties are bound by BASIS PERFORMANC
PERFECTION
confidential relations, constitutes fraud. (NCC, E
Art. 1339) It occurs after
the valid It occurs before
NOTE: There is fraud, under the special and Time of execution of or simultaneous
particular circumstances of the following: Occurrenc the contract. It with the creation
e is employed in or perfection of
the the obligation.
performance

451
 Contracts
of a pre- for damages against Santos for fraud and bad
existing faith, claiming that the misrepresentation
obligation. induced him to purchase the store and the
leasehold right. Decide.
Consent is
vitiated by A: Santos was not neither guilty of fraud nor bad
Consent is free
serious faith in claiming that there was implied renewal
Consent and not
deception or of his contract of lease with his lessor. The letter
vitiated.
misrepresentatio given by the lessor led Santos to believe and
n. conclude that his lease contract was impliedly
It is not a renewed, and that the formal renewal thereof
It is a ground for would be made upon the arrival of Tanya
Effect ground for
annulment of the Madrigal. Thus, from the start, it was known to
annulment of
contract. both parties that, insofar as the agreement
the contract.
Action for regarding the transfer of Santos’ leasehold right
Remedy Action for to Samson was concerned, the object thereof
annulment with
damages only. relates to a future right. It is a conditional
damages.
contract, the efficacy of which depends upon an
Dolo Causante vs. Dolo Incidente expectancy of the formal renewal of the lease
contract between Santos and lessor. The efficacy
of the contract between the parties was thus
DOLO DOLO made dependent upon the happening of this
BASIS CAUSANTE INCIDENTE suspensive condition. (Samson v. CA, G.R. No.
(ART. 1338) (ART. 1344) 108245, November 25, 1994)

Acts considered not fraudulent

Gravity of Serious in
Not serious
Fraud character 1. The usual exaggerations in trade and when
Efficient cause the other party had an opportunity to know
which induces the facts are not in themselves fraudulent
Efficient Not the (NCC, Art. 1340. Principle of Tolerated
the party to
Cause efficient cause Fraud);
enter into a
contract 2. A mere expression of an opinion does not
Effect on signify fraud, unless made by an expert and
Renders the Does not affect the other party has relied on the former’s
the Status
contract the validity of special knowledge (NCC, Art. 1341. Expert
of the
voidable the contract Opinion);
Contract
3. Misrepresentation by a third person does
Contract
not vitiate consent, unless such
remains valid.
Annulment misrepresentation has created substantial
Remedies Remedy is
with damages mistake and the same is mutual (NCC, Art.
claim for
1342);
damages.
4. Misrepresentation made in good faith is not
fraudulent but may constitute error. (NCC,
Q: Santos’ lease contract was about to expire
Art. 1343)
but it was extended and he continued to
occupy the leased premises beyond the
NOTE:
extended term. Samson offered to buy
Santos’ store and his right to the lease. Santos
The contract just the same is voidable, not
stated that the lease contract between him
because of the misrepresentation but because of
and the lessor was impliedly renewed, and
substantial error.
that the formal renewal thereof would be
made upon the arrival of a certain Tanya
Madrigal, based on the letter to him given by In order that fraud may make a contract
voidable, it should be serious, and should not
the lessor. When Samson occupied the
gave have been employer employed by both
premises, he was forced to vacate for Santos’
contracting parties.) (NCC, Art 1344)
failure to renew his lease. He filed an action

UNIVERSITY OF SANTO TOMAS 452

2021 GOLDEN NOTES
 Civil Law
Q: Alejandro filed several Complaints against
respondents to have the promissory note he
executed in favor of Sterling Shipping Lines,
Inc. to be declared as null and void and that
he be absolved from any liability. According
to him, Ruperto exercised deceit and fraud in
causing him to bind himself jointly and
severally to pay DBP the amount of the
mortgage loan. Additionally, when he was
made director and stockholder of SSL, he was
invited to attend the board meeting only
once and he was never compensated.
Furthermore, none of the conditions he set
were complied with. Can the promissory note
be declared null and void on the grounds of
deceit and fraud?
A: NO, the promissory note Alejandro executed
cannot be declared null and void as only
incidental fraud exists in this case. There was
no dolo causante or fraud used to obtain the
petitioner's consent to enter into the contract.
Petitioner had the opportunity to become aware
of the facts that attended the signing of the
promissory note. He even admitted that he has a
lawyer-son who the petitioner had hoped would
assist him in the administration of Sterling
Shipping Lines, Inc. The totality of the facts on
record belies petitioner's claim that fraud was
used to obtain his consent to the contract given
his personal circumstances and the applicable
law. However, in refusing to allow petitioner to
participate in the management of the business,
respondent Ruperto V. Tankeh was liable for the
commission of incidental fraud. In Geraldez, this
Court defined incidental fraud as "those which
are not serious in character and without which
the other party would still have entered into the
contract." Although there was no fraud that had
been undertaken to obtain petitioner's consent,
there was fraud in the performance of the
contract. The records showed that petitioner
had been unjustly excluded from participating in
the management of the affairs of the
corporation. This exclusion from the
management in the affairs of Sterling Shipping
Lines, Inc. constituted fraud incidental to the
performance of the obligation.
Simulation of contract
It is the declaration of a fictitious will,
deliberately made by agreement of the parties,
in order to produce, for the purpose of
deception, the appearance of a juridical act
453
which does not exist or is different from that
which was executed. (Tolentino, 2002)
Kinds of simulation of contract
1. Absolute (simulados) – The contracting
parties do not intend to be bound by the
contract at all, thus the contract is void.
(NCC, Arts. 1345-1346) 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. (Heirs of Dr. Mario S. Intac and
Angelina Mendoza-Intac v. CA, G.R. No.
173211, October 11, 2012)
Absolutely simulated contracts lack the
element of true consent.
2. Relative (disimulados) – The contracting
parties conceal their true agreement (NCC,
Art. 1345); and the parties are bound by
their real agreement when it does not
prejudice third persons or is not intended
for any purpose contrary to law, morals,
good customs, public order or public policy.
(NCC, Art. 1346) If the concealed contract is
lawful, it is absolutely enforceable, provided
it has all the essential requisites: consent,
object, and cause. (NCC, Arts. 1345-1346)
As to third persons without notice, the
apparent contract is valid for purposes
beneficial to them. As to third persons with
notice of the simulation, they acquire no
better right to the simulated contract than
the original parties to the same.
The primary consideration in determining the
true nature of a contract is the intention of the
parties. Such intention is determined from the
express terms of their agreement as well as from
their contemporaneous and subsequent acts.
(Tating v. Tating Marcella, et al., G.R. No. 155208,
March 27, 2007)
NOTE: If the parties state a false cause in the
contract to conceal their real agreement, the
 Contracts
contract is only relatively simulated, and the
parties are still bound by their real agreement.
Hence, where the essential requisites of a
contract are present and the simulation refers
only to the content or terms of the contract, the
agreement is absolutely binding and enforceable
between the parties and their successors in
interest.
May the owner-simulator recover?
If the absolutely simulated contract does not
have any illegal purpose, the interested party
may prove the simulation to recover whatever
he might have given under the fictitious
contract. In the event intended it is intended for
an illegal purpose, the contract is void and the
parties have no cause of action. (Pineda, 2009)
Q: Tiro is a holder of an ordinary timber
license issued by the Bureau of Forestry. He
executed a deed of assignment in favor of the
Javiers. At the time the said deed of
assignment was executed, Tiro had a pending
application for an additional forest
concession. Hence, they entered into another
agreement. Afterwards, the Javiers, now
acting as timber license holders by virtue of
the deed of assignment, entered into a forest
consolidation agreement with other ordinary
timber license holders. For failure of the
Javiers to pay the balance due under the two
deeds of assignment, Tiro filed an action
against them. Are the deeds of assignment
null and void for total absence of
consideration and non-fulfillment of the
conditions?
A: NO, they are not null and void per se. The
parties are to be bound by their real agreement.
The true cause or consideration of said deed was
the transfer of the forest concession of private
respondent to petitioners for P120,000.00. This
finding is supported by the following
considerations, viz:
1. Both parties, at the time of the execution of
the deed of assignment knew that the
Timberwealth Corporation stated therein was
non-existent;
2. In their subsequent agreement, private
respondent conveyed to petitioners his inchoate
right over a forest concession covering an
additional area for his existing forest concession,
which area he had applied for, and his
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
application was then pending in the Bureau of
Forestry for approval;
3. Petitioners, after the execution of the deed of
assignment, assumed the operation of the
logging concessions of private respondent;
4. The statement of advances to respondent
prepared by petitioners stated: "P55,186.39
advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay
P10,000.00 every after (sic) shipment. We had
only 2 shipments;” and
5. Petitioners entered into a Forest
Consolidation Agreement with other holders of
forest concessions on the strength of the
questioned deed of assignment.
The contemporaneous and subsequent acts of
Tiro and the Javiers reveal that the cause stated
in the first deed of assignment is false. It is
settled that the previous, simultaneous and
subsequent acts of the parties are properly
cognizable indicia of their true intention. Where
the parties to a contract have given it a practical
construction by their conduct as by acts in
partial performance, such construction may be
considered by the court in construing the
contract, determining its meaning and
ascertaining the mutual intention of the parties
at the time of contracting. The first deed of
assignment is a relatively simulated contract
which states a false cause or consideration, or
one where the parties conceal their true
agreement. A contract with a false consideration
is not null and void per se. Under Article 1346 of
the Civil Code, a relatively simulated contract,
when it does not prejudice a third person and is
not intended for any purpose contrary to law,
morals, good customs, public order or public
policy binds the parties to their real agreement.
(Javier v. CA, G.R. No. L-48194, March 15, 1990)
Q: On 02 July 1990, by virtue of an Order of
Branch 62 of the RTC of Makati City, a notice
of levy on attachment of real property and a
writ of attachment were inscribed on TCTs
No. 31444 (452448) and No. 45926
(452452). Edmundo alleged that as early as
11 September 1989, the properties, subject
matter of the case, were already sold to him
by Ricardo, Sr. As such, these properties
could not be levied upon on 02 July 1990 to
answer for the debt of Ricardo, Sr., who was
no longer the owner thereof. TMBC alleged,
454
 Civil Law
among other things, that the sale in favor of
Edmundo was void for being an absolutely
simulated contract, therefore, the properties
levied upon were still owned by Ricardo, Sr.
Discuss the nature of an absolutely simulated
contract.
A: An absolutely simulated contract, under
Article 1346 of the Civil Code, is void. It takes
place when the parties do not intend to be
bound at all. The characteristic of simulation is
the fact that the apparent contract is not really
desired or intended to produce legal effects or in
any way alter the juridical situation of the
parties. Thus, where a person, in order to place
his property beyond the reach of his creditors,
simulates a transfer of it to another, he does not
really intend to divest himself of his title and
control of the property; hence, the deed of
transfer is but a sham. Lacking, therefore, in a
fictitious and simulated contract is consent
which is essential to a valid and enforceable
contract. (The Manila Banking Corporation v.
Edmundo Silverio, G.R. No. 132887, August 11,
2005).
OBJECTS, CAUSE AND FORM OF CONTRACTS
OBJECT
It is the subject matter of the contract. It can be a
thing, right or service arising from a contract.
NOTE: Only rights which are not intransmissible
can be the object of the contract. (NCC, Art. 1347)
Requisites of an object (DELiCT)
1. Determinate as to kind (even if not
determinate, provided it is possible to
determine the same without the need of a
new contract);
NOTE: To qualify as an object for purposes of a
contract to exist, the object must at least be
generic.
2. Existing or the potentiality to exist
subsequent to the contract;
3. Must be Licit;
4. Within the Commerce of man; and
5. Transmissible.
NOTE: The most evident and fundamental
requisite in order that a thing, right or service
may be the object of a contract, is that it should
455
be in existence at the moment of the celebration
of the contract, or at least, it can exist
subsequently or in the future. (De Leon, 2010)
Future inheritance cannot be the object of a
contract because its extent, amount and quantity
cannot be determined. (Sta. Maria, 2017)
Object of contracts
GR: All things or services may be the object of
contracts.
XPNs:
1. Things outside the commerce of men (NCC,
Art. 1347);
2. Intransmissible rights;
3. Future inheritance, except in cases
expressly authorized by law;
4. Services which are contrary to law, morals,
good customs, public order or public
policy;
5. Impossible things or services; and
6. Objects which are not possible of
determination as to their kind.
Exceptions to the rule that no person can
enter into a contract with regard to future
inheritance
1. Under Art. 130 of the Family Code, which
allows the future spouses to give or donate
to each other in their marriage settlement
their future property to take effect upon the
death of the donor and to the extent laid
down by the provisions of the NCC relating
to testamentary succession; and
2. Under Art. 1080 of the Code, which allows a
person to make a partition of his estate
among his heirs by an act inter vivos,
provided that the legitime of the compulsory
heirs is not prejudiced. (Jurado, 2009; De
Leon 2010).
NOTE: Except in cases authorized by law, future
inheritance cannot be an object of contract
because its extent, amount or quantity is not
determinable. (Sta. Maria, 2003)
CAUSE
Cause is the essential or more proximate
purpose which moves the contracting parties to
enter into the contract. It is the immediate and
 Contracts
direct which justifies the creation of an the contract contract
obligation through the will of the contracting Legality or
Legality or
parties. illegality of
As to the illegality of
motive does not
legal effect cause affects
Requisites of a cause: affect the
to the the existence
existence or
contract or validity of
It must: validity of
the contract.
contract.
1. Exist; Cause is
Motive differs
2. Be true; and always the
As to the for each
3. Be licit. same for each
parties contracting
contracting
party.
NOTE: Although the cause is not stated in the party.
contract, it is presumed that it exists and is As to its Always May be known
lawful unless the debtor proves the contrary. knowability known to the other.
(NCC, Art. 1354)
NOTE: The motive may be regarded as the cause
Kinds of cause when the realization of such motive or particular
purpose has been made a condition upon which
1. Cause of onerous contracts – the cause is the contract is made to depend. (Phil. National
understood to be for each contracting party, Construction Corp. v. CA, 272 SCRA 183, 1997)
the prestation or promise of a thing or
service by the other. False Cause

e.g., Contract of Sale GR: A false cause in a contract makes the

contract void.
2. Cause of remuneratory contracts– the service
or benefit remunerated. XPN: If it is proven that the false cause were
founded upon another cause which is true and
e.g., Donation in consideration of a past lawful. (NCC, Art. 1353)
service which does not constitute a
demandable debt e.g. When a contract, through stating a false
consideration, has in fact a real consideration,
3. Cause of gratuitous contracts – the mere the contract is not void, and is considered valid.
liberality of the donor or benefactor; it does
not involve any material thing but rather it Rules relating to cause on contracts
involves only the generosity of the
benefactor. 1. Absence of cause – confers no right and
produces no legal effect.
4. Accessory – identical with cause of principal 2. Failure of cause – does not render the
contract, from which the accessory derived contract void.
its life and existence. 3. Illegality of cause – contract is null and void.
4. Falsity of cause – contract is void; unless the
e.g., mortgage or pledge parties show that there is another cause
which is true and lawful.
Cause vs. Motive 5. Lesion or inadequacy of cause – does not
invalidate the contract, unless:
BASIS CAUSE MOTIVE
Direct and a. there is fraud, mistake, or undue
As to
most influence;
proximate Indirect or
proximate b. when the parties intended a donation or
reason in a remote reason
reason of a some other contract; or
contract
contract c. in cases specified by law
As to the Objective and Psychological
kind of juridical or purely e.g., contracts entered by guardian with
reason in reason of a personal reason court approval, when the ward suffers

UNIVERSITY OF SANTO TOMAS 456

2021 GOLDEN NOTES
 Civil Law
lesion of more than 25%. If there is no
court approval, the contract is void
regardless of the amount of lesion.
Q: May a moral obligation constitute a
sufficient cause to support an onerous
contract?
A: Where the moral obligation arises wholly
from ethical considerations, unconnected with
any civil obligation, and as such is demandable
only in conscience, and not in law, it cannot
constitute a cause to support an onerous
contract. Where such moral obligation, however,
is based upon a previous civil obligation which
has already been barred by the statute of
limitations at the time when the contract is
entered into, it constitutes a sufficient cause or
consideration to support said contract. (Villaroel
v. Estrada, 71 Phil. 14, GR L-47362, December 19,
1940)
FORMALITY
Rules on the form of contracts
GR: Form is not required in consensual
contracts. (Provided, all the essential requisites
for their validity are present.)
XPNs: When the law requires a contract be in
writing for its:
1. Validity (formal contracts);
2. Enforceability (under Statute of Frauds); or
3. For the convenience of the parties.
NOTE: The parties may compel each other to
reduce the verbal agreement into writing. (2006
BAR)
The parties may be required to observe the
form required for their convenience
The contracting parties may compel each other
to observe the required form once the contract
has been perfected and is enforceable under the
statute of frauds. This is one of the rights of the
creditor.
The right to demand the execution of the
document required under Art.1358 is not
imprescriptible. It is subject to prescription. It
must be pursued within the period prescribed
by law, which is five (5) years. (Pineda, 2009)
457
NOTEs: The right must be exercised once the
contract has been perfected, otherwise, the
exercise will be considered as premature.
Formalities required in specific contracts
1. Donations
a. Personal property – if the value exceeds
5,000, the donation and acceptance
must both be written. (NCC, Art. 748)
b. Real property:
i. Donation must be in a public
instrument, specifying therein the
property donated and value of
charges which donee must satisfy.
ii. Acceptance must be written, either in
the same deed of donation or in a
separate instrument.
iii. Acceptance may either be in the same
deed of donation, or in a separate
public instrument, but it shall not take
effect unless it is done during the
lifetime of the donor.
iv. If acceptance is in a separate
instrument, the donor shall be
notified thereof in an authentic form,
and this step shall be noted in both
instruments. (NCC, Art. 749)
2. Partnership where real property
contributed
a. There must be a public instrument
regarding the partnership;
b. The inventory of the realty must be
made, signed by the parties, and
attached to the public instrument.
(NCC, Art. 1773)
3. Antichresis - the amount of the principal
and interest must be in writing. (NCC, Art.
2134)
4. Agency to sell real property or an
interest therein - authority of the agent
must be in writing; otherwise, the sale shall
be void. (NCC, Art. 1874)
5. Stipulation to charge interest - interest
must be stipulated in writing. (NCC, Art.
1956)
6. Stipulation limiting common carrier's
duty of extraordinary diligence to
ordinary diligence:
 Contracts
a. Must be in writing, signed by shipper
or owner;
b. Supported by valuable consideration
other than the service rendered by
the common carrier;
c. Reasonable, just and not contrary to
public policy. (NCC, Art. 1744)
7. Chattel mortgage - personal property
must be recorded in the Chattel Mortgage
Register. (NCC, Art. 2140)
Contracts which must be in writing to be
valid
1. Donation of personal property whose value
exceeds five thousand pesos. (NCC, Art. 748)
– the donation and acceptance must be in
writing.
2. Sale of a piece of land or any interest therein
through an agent. (NCC, Art. 1874) – the
authority of the agent shall appear in
writing.
3. Agreements regarding payment of interest
in contracts of loan. (NCC, Art. 1956)
4. Antichresis – the amount of the principal
and the interest shall be specified in writing.
(NCC, Art. 2134; Jurado, 2011)
Contracts which must appear in a public
document
1. Donation of real properties (NCC, Art. 719
749);
2. Partnership where immovable property or
real rights are contributed to the common
fund (NCC, Arts. 1171 1771 & 1773);
3. Acts and contracts which have for their
object the creation, transmission,
modification or extinguishment of real
rights over immovable property; sale of real
property or of an interest therein is
governed by Arts. 1403, No. 2, and 1405
[NCC, Art. 1358(1)];
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains [NCC, Art. 1358(2)];
5. 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; [NCC, Art. 1358(3)]; and
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
6. The cession of actions or rights proceeding
from an act appearing in a public document.
[NCC, Art. 1358(4)]
NOTE : Article 1358 of the Civil Code which
requires the embodiment of certain contracts in
a public instrument is only for convenience, and
the registration of the instrument only
adversely, affects third parties. Formal
requirements are, therefore, for the benefit of
third parties. Non-compliance therewith does
not adversely affect the validity of the contract
nor the contractual rights and obligations of the
parties. (Fule vs. CA, 286 CRA 700)
Contracts that must be registered
1. Chattel mortgages. (NCC, Art. 2140)
NOTE: In accordance with Article 2125 of
the Civil Code, an unregistered chattel
mortgage is binding between the parties
because registration is necessary only for
the purpose of binding third persons.
(Filipinas Marble Corporation v. Intermediate
Appellate Court, G.R. No. L-68010, May 30,
1986)
2. Sale or transfer of large cattle. (Cattle
Registration Act)
ELECTRONIC COMMERCE ACT OF 2000
(RA No. 8792)
Legal Recognition of Electronic Documents
Under Section 7 of the Act, electronic documents
shall have the legal effect, validity or
enforceability as any other document or legal
writing, and —
1. Where the law requires a document to be in
writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability, and can be authenticated so as to
be usable for subsequent reference, in that;
a. The electronic document has
remained complete and unaltered,
apart from the addition of any
endorsement and any authorized
change, or any change which arises in
the normal course of communication,
storage and display; and
458
 Civil Law
b. The electronic document is reliable in
the light of the purpose for which it
was generated and in the light of all
relevant circumstances.
2. Paragraph (a) applies whether the
requirement therein is in the form of an
obligation or whether the law simply
provides consequences for the document
not being presented or retained in its
original form.
3. Where the law requires that a document be
presented or retained in its original form,
that requirement is met by an electronic
document if —
a. There exists a reliable assurance as to
the integrity of the document from the
time when it was first generated in its
final form; and
b. That document is capable of being
displayed to the person to whom it is
to be presented, provided that no
provision of the Act shall apply to
vary any and all requirements of
existing laws on formalities required
in the execution of documents for
their validity.
KINDS OF CONTRACTS
According to perfection or formation:
1. Consensual contracts which are perfected by
the mere meeting of the minds of the
parties. (NCC, Art. 1305) (2005 BAR)
e.g., Sale, Lease.
2. Real contracts are those which require for
their perfection both the consent of the
parties, and the delivery of the object by one
party to the other.
e.g., creation of real rights over immovable
property must be written, deposit and
pledge.
3. Solemn contracts – contracts for which the
law requires that they be in some particular
form (e.g., those that must appear in
writing):
459
a. Donations of real estate or of movables
if the value exceeds P5,000;
b. Partnership to which immovables are
contributed;
c. Contract of antichresis – requires that
the amount of principal and interest be
specified;
d. Sale of piece of land or interest therein
is through an agent;
e. Stipulation to charge interest;
f. Stipulation limiting common carrier's
duty of extraordinary diligence to
ordinary diligence;
g. Chattel mortgage; or
h. Transfer of large cattle. (Sec. 22, Act No.
1147; NCC, Art. 1581)
According to the degree of dependence:
1. Principal – that which can exist
independently of other contracts;
e. g., contract of loan.
2. Accessory – that which cannot exist without
a valid principal contract;
e. g., guaranty, surety, pledge, mortgage.
3. Preparatory – that which is not the end by
itself, but only a means for the execution of
another contract.
e. g., contract of agency, as agency does not
stop with the agency because the purpose is
to enter into other contracts (Rabuya, 2017).
According to their relation to other
contracts:
1. Preparatory Contracts – are those which have
for their object the establishment of a
condition in law which is necessary as a
preliminary step towards the celebration of
another subsequent contract. They are only a
means for the execution of another contract.
e.g., Partnership, Agency.
2. Principal Contracts – are those which can
subsist and exist independently from other
contracts.
e.g., Sale, Lease.
 Contracts
3. Accessory Contracts – those which can exist 3. Remuneratory
only as a consequence of, or in relation with
another prior valid contract. According to the risks involved:

e.g., Pledge, Mortgage. 1. Commutative Contracts – are those where

each of the parties acquire an equivalent of
According to their form: his prestation and such equivalent is
pecuniarily appreciable and already
1. Common or Informal Contracts – are those determined from the moment of the
which require no particular form. perfection of the contract.

e.g., Loan. e.g., Lease.

2. Special or Formal Contracts – are those 2. Aleatory Contracts – are those which are
which require a particular form. dependent upon the happening of an
uncertain event, thus, charging the parties
e.g., Donations, Chattel Mortgage. with the risk of loss or gain.

According to their purpose: e.g., Insurance.

1. Transfer of Ownership According to their names or norms

regulating them:
e.g., Sale.
1. Nominate Contracts – are those which have
2. Conveyance of Use their own name and individuality, and are
regulated by provisions of law.
e.g., Usufruct, Commodatum.
e.g., Sale (2003 BAR).
3. Rendition of Services
2. Innominate Contracts – are those which lack
e.g., Agency. name or individuality, and are not regulated
by special provisions of law.
According to the nature of the vinculum
which they produce: Q: The Bank of the Philippine Islands issued
Rainier a pre-approved credit card. The Yulo
1. Unilateral Contracts – are those which give Spouses regularly settled their accounts with
rise to an obligation only to one of the the Bank of the Philippine Islands at first, but
parties. started to be delinquent with their payments.
They also alleged that the Bank of the
e.g., Commodatum. Philippine Islands did not fully disclose to
them the Terms and Conditions on their use
2. Bilateral Contracts – are those which give of the issued credit cards. Are the Yulo
rise to reciprocal obligations for both Spouses liable?
parties.
A: YES. When petitioners accepted respondent's
e.g., Sale. credit card by using it to purchase goods and
services, a contractual relationship was created
According to their cause: between them, "governed by the Terms and
Conditions found in the card membership
1. Onerous agreement. When the credit card provider failed
to prove its client's consent, even if the latter did
e.g., Sale. not deny availing of the credit card by charging
purchases on it, the credit card client may only
2. Gratuitous be charged with legal interest. (Spouses Rainier
Jose M. Yulo And Juliet L. Yulo v. Bank of The
e.g., Commodatum Philippine Islands, G.R. No. 217044, January 16,

UNIVERSITY OF SANTO TOMAS 460

2021 GOLDEN NOTES
 Civil Law
2019, as penned by J. Leonen) parties as to the object is vitiated.
and cause of the
REFORMATION OF INSTRUMENTS contract.
The meeting of the
It is a remedy to conform to the real intention of The instrument failed minds was prevented
the parties due to mistake, fraud, inequitable to express the true by reason of mistake,
conduct, accident. (NCC, Art. 1359) intention of the parties fraud, inequitable
due to mistake, fraud, conduct or accident
It is a remedy of amending or rectifying the inequitable conduct or perpetrated by one
instrument which purports to be the agreement accident. party against the
of the parties, so as to express their real other.
intention, when the same is not expressed The purpose of
The purpose of
therein by reason of mistake, fraud, inequitable reformation is to
annulment is to
conduct or accident. establish the true
render inefficacious
agreement of the
the contract in
Reformation is a remedy in equity by means of parties, and not to
question.
which a written instrument is made or create a new one.
construed so as to express or confirm the real
intention of the parties when some error or NOTE: When there is no meeting of the minds,
mistake is committed. (Pineda, 2009) the proper remedy is annulment, and not
reformation. (Pineda, 2000)
Rationale: It would be unjust and inequitable to
allow the enforcement of a written instrument The fundamental distinction between
which does not reflect or disclose the real reformation of an instrument and annulment of a
meeting of the minds of the parties. contract is that the first presupposes a perfectly
valid contract in which there has been a valid
Requisites in reformation of instruments meeting of the minds of the contracting parties,
while the second is based on a defective contract
1. There is meeting of the minds of the parties in which there has been no meeting of the minds
to the contract; because the consent is vitiated. (Jurado, 2010)

2. The parties’ true intention is not expressed Q: Multi-Realty Development Corporation

in the instrument; (Multi-Realty) built Makati Tuscany, a 26-
storey condominium building located at the
3. Such failure of the instrument to express the corner of Ayala Avenue and Fonda Street,
parties’ intention is by reason of: (MARFI) Makati City. Makati Tuscany had a total of
160 units, with 156 ordinary units from the
a. Mistake; 2nd to the 25th floors and four (4) penthouse
b. Accident; units on the 26th floor. It also had 270
c. Relative simulation; parking slots which were apportioned as
d. Fraud; or follows: one (1) parking slot for each
e. Inequitable conduct ordinary unit; two (2) parking slots for each
penthouse unit; and the balance of 106
4. The facts upon which relief by way of parking slots were allocated as common
reformation of the instrument is sought are areas.
put in issue by the pleadings; and
Pursuant to Republic Act No. 4726, or the
5. There is strong, clear and convincing proof Condominium Act, Multi-Realty created and
of MARFI. incorporated Makati Tuscany Condominium
Corporation (MATUSCO) to hold title over
Distinction between Reformation and and manage Makati Tuscany's common
Annulment areas. That same year, Multi-Realty executed
a Deed of Transfer of ownership of Makati
REFORMATION ANNULMENT Tuscany's common areas to MATUSCO. Multi-
There is meeting of the There is no meeting Realty filed a complaint for damages and/or
minds between the of the minds. Consent reformation of instrument with prayer for

461
 Contracts
temporary restraining order and/or
preliminary injunction against MATUSCO.
Multi-Realty alleged in its complaint that of
the 106 parking slots designated in the
Master Deed as part of the common areas,
only eight (8) slots were actually intended to
be guest parking slots; thus, it retained
ownership of the remaining 98 parking slots.
Multi-Realty claimed that its ownership over
the 98 parking slots was mistakenly not
reflected in the Master Deed "since the
documentation and the terms and conditions
therein were all of first impression,"
considering that Makati Tuscany was one of
the first condominium developments in the
Philippines. Is there is a need to reform the
Master Deed and the Deed of Transfer?
A: NO. Reformation of an instrument is a remedy
in equity where a valid existing contract is
allowed by law to be revised to express the true
intentions of the contracting parties. The
rationale is that it would be unjust to enforce a
written instrument which does not truly reflect
the real agreement of the parties. In reforming
an instrument, no new contract is created for the
parties, rather, the reformed instrument
establishes the real agreement between the
parties as intended, but for some reason, was
not embodied in the original instrument.
MATUSCO does not deny that it stayed silent
when Multi-Realty sold the parking slots on
several occasions or that it offered to buy the
parking slots from Multi-Realty on at least two
(2) occasions. It excuses itself by saying that just
like Multi-Realty, it "also labored under a
mistaken appreciation of the nature and
ownership of the ninety-eight (98) parking slots
in question."
Both parties recognized Multi-Realty's
ownership of the parking slots. MATUSCO
initially respected Multi-Realty's ownership
despite the Master Deed's and Deed of Transfer's
stipulations. It was MATUSCO that changed its
position decades after it acted as if it accepted
Multi-Realty's ownership. (Makati Tuscany
Condominium Corporation v. Multi-Realty
Development Corporation, G.R. 185530, April 18,
2018, as penned by J. Leonen)
Operation and effect of reformation
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
It relates back to, and takes effect from the time
of its original execution, especially as between
the parties. (Tolentino, 2002)
Reformation of instruments may be availed of
judicially or extrajudicially.
Basis and nature of the remedy of
reformation of instrument
The remedy of reformation of an instrument is
based on the principle of equity where, to
express the true intention of the contracting
parties, an instrument already executed is
allowed by law to be reformed. The right of
reformation is necessarily an invasion or
limitation of the parol evidence rule, since, when
a writing is reformed, the result is that an oral
agreement is by court decree, made legally
effective. The remedy, being an extraordinary
one, must be subject to the limitations as may be
provided by law. A suit for reformation of an
instrument must be brought within the period
prescribed by law, otherwise, it will be barred by
the mere lapse of time. (Bentir v. Leanda, G.R.
128991, April 12, 2000)
Reformation of instruments; when allowed
1. Mutual mistake. – When the mutual mistake
of the parties causes the failure of the
instrument to disclose their agreement
(NCC, Art. 1361);
Requisites:
a. The mistake should be of fact;
b. The same should be proved by clear
and convincing evidence;
c. The mistake should be common to both
parties to the instrument; and
d. The mistake must cause the failure of
the instrument to express their true
intention. (BPI v. Fidelity Surety, Co. 51
Phil 57, 1927)
2. Mistake on one party and fraud on the other.
– In such a way that the instrument does not
show their true intention, the party
mistaken or defrauded may ask for the
reformation of the instrument (NCC, Art.
1362);
3. Mistake on one party and concealment on the
other. – When one party was mistaken and
the other knew or believed that the
462
 Civil Law
instrument did not state their real
agreement, but concealed that fact from the
former (NCC, Art. 1363);
4. Ignorance, lack of skill, negligence or bad
faith. – 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
(NCC, Art. 1364);
5. Right of repurchase. – If the 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. (NCC, Art. 1365)
Reformation of instruments; when not
allowed
1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void (NCC, Art.
1366);
4. When an action to enforce the instrument is
filed (by doctrine of estoppel);
5. If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the
minds of the parties;
NOTE: The remedy here is annulment of
contract.
6. When the contract is unenforceable because
of failure to comply with the statute of
frauds.
Prescriptive period in reformation of
instruments
Within 10 years from the date of the execution of
the instrument, since the suit is based on a
written document.
NOTE: The prescriptive period within which to
bring an action to set aside or reform a
simulated or fictitious written deed of pacto de
retro sale starts only when the alleged vendees
made known their intention by overt acts not to
abide by the true agreement, and not from the
date of execution of contract. (Conde v. Cuenca,
G.R. No. L-643, 1956)
Persons who can ask for the reformation of
the instrument
463
It may be ordered at the instance of:
1. If the mistake is mutual: either party or his
successor-in-interest may file an action.
2. If the cause of reformation is on some
other ground (such as vitiated consent or
fraud): the injured party or his heirs and
assigns are the only person given legal
standing to sue.
NOTE: In reformation of contracts, what is
reformed is not the contract itself, but the
instrument embodying the contract. It follows
that whether the contract is disadvantageous or
not, is irrelevant to reformation and therefore,
cannot be an element in the determination of the
period for prescription of the action to reform.
(Pineda, 2000)
Action for Declaratory Relief under Rule 63
of the New Rules of Court
The special civil action for reformation. The
purpose is to secure an authoritative statement
of the rights and obligations of the parties for
their guidance in the enforcement thereof, or
compliance therewith.
INTERPRETATION OF CONTRACTS
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. (NCC, Art. 1370)
In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered. (NCC, Art.
1371)
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. (NCC, Art. 1372)
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. (NCC, Art. 1373)
 Contracts
Disfavor of Interpretation Leading to Loss of
Rights
The construction of the terms of a contract
leading to the impairment or loss of the right is
not favored.
Principle of effectiveness in contract
interpretation
Pursuant to this principle, where two
interpretations of the same contract language
are possible, one interpretation having the effect
of rendering the contract meaningless, while the
other would give effect to the contract as a
whole, the latter interpretation must be adopted.
(PNB v. Utility Assurance & Surety, Co., Inc., 177
SCRA 393, 1989)
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. (NCC, Art. 1374)
The various stipulations in a contract must be
read together to give effect to all. (North Negros
Sugar Co. v. Compania Gen. De Tabacos, G.R No. L-
9277, 1957)
Complementary-contracts-construed-
together doctrine
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. (NCC, Art. 1374)
When there are several provisions in a contract,
the construction to be adopted should be that
one which will give effect to all provisions. A
contract must be read in its entirety. (Bank of P.I.
vs. Ty Canco Sabrino, 57 Phil. 804) Piecemeal
interpratation must be avoided.
If one contract is incorporated into another,
Complementary Contracts must of course be
construed together so as to give effect as much
as possible to the provisions of both agreements.
(Shell Co. v. Firemen’s Ins., etc., et al., G.R. No. L-
8169, 1957)
Under this doctrine, an accessory contract must
be read in its entirety and together with the
principal agreement. (Rabuya, 2017) Thus, a
promissory note and a deed of chattel mortgage
must be contrued together (Rigor v. Consolidated
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Orix Leasing and Finance Corp., 387 SCRA 270,
2002); and the surety contract, being an
accessory contract, must be interpreted with its
principal contract, for instance, a loan
agreement. (Rabuya, 2017)
Words which may have different significations
shall be understood in that which is most in
keeping with the nature and object of the
contract. (NCC, Art. 1375)
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.
(NCC, Art. 1376)
The interpretation of obscure words or
stipulations in a contract shall not favor the
party who caused the obscurity. (NCC, Art. 1377)
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 interest 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.
(NCC, Art. 1378)
The principles of interpretation stated in Rule
123 of the Rules of Court shall likewise be
observed in the construction of contracts. (NCC,
Art. 1378)
NOTE: The provisions of Rule 123 of the Rules of
Court referred to are Secs. 58-67, now Secs. 8-
17, Rule 130, New Rules of Court.
Q: In response to Araneta Center Inc.’s
(“ACI”) invitation to bid on the design and
construction of the Gateway Mall under a
lump-sum, fixed price arrangement, CE
Construction Corporation (“CECON”)
submitted its proposal on 30 August 2002,
which bid was made valid for acceptance
only for ninety days. However, ACI informed
CECON that the contract was being awarded
to it only at such time that the bid had
already expired, and instructed it to proceed
with excavation work. While no formal
464
 Civil Law
documents were prepared for the contract acts shall be principally considered. It should be
although construction was already mentioned that ACI had drastically changed the
underway, ACI introduced major changes in scope and character of the agreement. To tie
the plans and specifications, changing it into down CECON to the unit prices for the proposal
a straight construction contract from a for a different scope of work would be grossly
former design-and-construct scheme. ACI unfair. Reference to prevailing industry
decided to change and take over the design, practices in the valuation of the project cost was
such as the change from concrete to also warranted and necessary because of the
structural steel framing, and took out certain absence of definitive governing instruments.
equipment from the scope of the contract. Under Articles 1375 and 1376 of the NCC, the
nature and object of the contract as well as the
Meanwhile, the price levels of cement and usage or custom of the place shall be borne in
steel products had increased, of which CECON mind in the interpretation of the ambiguities of
notified ACI, with a stern warning that the contract, and shall fill the omission of
further delays in the formal award of the stipulations which are ordinarily established.
contract might affect the contract sum. It was (CE Construction Corporation vs Araneta Center,
only on 2 June 2003 that ACI finally wrote a Inc., G.R. 192735, August 9, 2017, as penned by
letter to CECON, indicating its acceptance of Justice Leonen)
the latter’s 30 August 2002 tender, but still
no formal contracts were executed. With the
many changes to the project coupled with
ACI’s delays in delivering drawings and
specifications, CECON increasingly found
itself unable to complete the project on time,
noting that it had to file a total of 15 requests
for time extension, all of which ACI failed to
timely act on. Exasperated, CECON filed with
the Construction Industry Arbitration
Commission (“CIAC”) its request for
adjudication, praying for project cost
adjustment. In the meantime, CECON
completed the project and turned over
Gateway Mall to ACI, which had its blessing
on 26 November 2004. Could ACI insist on
the initial bid price of CECON under the
supposed lump-sum fixed price arrangement
of the construction contract?

A: NO. CECON and ACI should not be bound by

the supposed lump-sum fixed price
arrangement. There was never a meeting of
minds on the contract price, and the contention
of ACI with regard to supposed immutability of
the stipulated contract sum should fall.
Advertisements for bidders are simply
invitations to make proposals, and the
advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears. The
exchanges of offers between CECON and ACI
failed to satisfy the requirement of absolute and
unqualified acceptance as to comply with the
essential requisite of consent in the perfection of
a contract.

In order to judge the intention of the contracting

parties, their contemporaneous and subsequent

465
 Contracts
DEFECTIVE CONTRACTS
VOID
BASIS RESCISSIBLE VOIDABLE UNENFORCEABLE
/INEXISTENT

Entered without Illegality (void) or

Economic damage Incapacity of
authority or in excess absence of any of
or lesion to either one of parties
Origin of the thereof; non-compliance essential
one of the parties to give consent
defect with Statute of Frauds; requisites of a
or to 3rd persons; or vitiated
incapacity of both parties contract
declaration by law. consent.
to give consent. (inexistent).

Suffered by – As to the other

Necessity of
either one of contracting
Damage/ Not necessary Not necessary
parties or 3rd party - not
prejudice
person. necessary.

Curable by
Curable Curable Not curable Not Curable
Prescription

Valid & legally Valid & legally Inoperative until ratified;

enforceable until enforceable not enforceable in court
Legal effect None
judicially until judicially without proper
rescinded. annulled. ratification.

Rescission or Annulment of Declaration of

Remedy Only personal defense
rescissory action. contract. nullity of contract.

Can be attacked
Nature of Must be a direct Direct action
Indirect attack allowed directly or
action action. needed.
indirectly.

GR: Contracting 3rd persons cannot

Who can file party; Contracting file unless their
Contracting party
the action XPN: Defrauded party interest are
Creditors directly affected.

Susceptible but
Susceptibility
not of ratification Susceptible Susceptible Not Susceptible
of ratification
proper.

Action for recovery; Action for

Action for Action for specific performance or declaration of
Susceptibility rescission annulment damages prescribes nullity or putting
prescription prescribes after 4 prescribes (10 years if based on a of defense of
years. after 4 years. written contract; 6 years if nullity does not
unwritten). prescribe.

UNIVERSITY OF SANTO TOMAS 466

2021 GOLDEN NOTES
 Civil Law
DEFECTIVE CONTRACTS
RESCISSIBLE CONTRACTS
Requisites for Rescission
1. There must be at the beginning either a
valid or voidable one
2. There is an economic or financial prejudice
to someone.
3. Requires mutual restitution. (J. Paras, Civil
code of the Philippines Annotated :
Prescription ; Obligations and Contracts,
2016)
Two Kinds of Rescission
1. The rescission mentioned in Art. 1380 of the
New Civil Code
2. The rescssion mentioned in Art. 1391 of the
New Civil Code as the new Code used the
term "resolution." (J.Paras, Civil code of the
Philippines Annotated : Prescription ;
Obligations and Contracts, 2016)
These are contracts validly constituted but
nevertheless maybe set aside due to a particular
economic damage or lesion caused to either to
one of the parties or to a third person. It may be
set aside in whole or in part, or up to the extent
of the damage caused. (NCC, Art. 1381)
Contracts that may be rescinded
1. Under Art. 1381, those
a. Entered into by guardians whenever the
wards whom they represent suffer
lesion by more than ¼ of value of the
property [NCC, Art. 1381(1)];
If a guardian alienates properties of the
ward without judicial approval, the
contract is ”unenforceable” for lack of
authority. (NCC, Art. 1403,par. 1)
b. Agreed upon in representation of
absentees, if absentee suffers lesion by
more than ¼ of value of property [NCC,
Art. 1381(2)];
c. Contracts where rescission is based on
fraud committed on creditor and cannot
collect the claim due (accion pauliana)
[NCC, Art. 1381(3)];
467
NOTE: Contracts which are rescissible
under the third paragraph of Art. 1381
are valid contracts, although
undertaken in fraud of creditors. If the
contract is ‘‘absolutely simulated’’, the
contract is not merely rescissible but
inexistent, although undertaken as well
in fraud of creditors. (MBC v. Silverio,
466 SCRA 438, August 11, 2005) In the
former, the remedy is rescission; in the
latter, the remedy is an action to declare
the contract inexistent which action is
imprescriptible. (Rabuya, 2017)
d. Contracts where the object involved is
the subject of litigation; contract
entered into by defendant without
knowledge or approval of litigants or
judicial authority [NCC, Art. 1381(4)];
e. Payment by an insolvent – on debts
which are not yet due; prejudices the
claim of others (NCC, Art. 1382);
f. Provided for by law. (NCC, Arts. 1526,
1534, 1538, 1539, 1542, 1556, 1560,
1567 & 1659)
NOTE: C, D and E are contracts which
are not necessarily entered into by
persons exercising fiduciary capacity. In
Art. 1381 (1 & 2), the contract must be
of administration and representation.
2. Payments made in state of insolvency (NCC,
Art. 1382):
a. Plaintiff has no other means to maintain
reparation;
b. Plaintiff must be able to return
whatever he may be obliged to return
due to rescission;
c. The things must not have been passed
to third persons in good faith;
d. It must be made within 4 years. (NCC,
Art 1382)
Characteristics of rescissible contract
1. It has all the elements of a valid contract.
2. It has a defect consisting of an injury
(generally in the form of economic damage
or lesion, fraud, and alienation of the
property) to one of the contracting parties
or to a third person.
3. It is valid and effective until rescinded.
 Contracts
4. It can be attacked only directly.
5. It is susceptible of convalidation only by
prescription. (De Leon, 2010)
Nature of an action for rescission
The action for rescission is subsidiary. It cannot
be instituted except when the party suffering
damage has no other legal means to obtain
reparation for the same. (NCC, Art. 1383) Hence,
it must be availed of as the last resort, availed
only after all legal remedies have been
exhausted and proven futile. (Khe Hong Cheng v.
CA, G.R. No. 144169, March 28, 2001)
Rationale: In order not to disturb other
contracts and to comply with the principle of
relativity of contracts.
However, if it can be proven that the property
alienated was the only property of the debtor at
the time of the transaction, the action for
rescission is certainly maintainable because it is
clear that the creditor has no other remedy
under the circumstances. (Pineda, 2009 citing
Regalado vs. Luchsinger, 5 Phil. 625)
NOTE: Rescission shall be only to the extent
necessary to cover the damages. (NCC, Art. 1384)
Persons who may institute an action for the
rescission of a rescissible contract
The action for rescission may be instituted by
the following:
1. Injured party;
2. Contracts entered into by guardians – by
ward, or by guardian ad litem of ward
during the latter’s incapacity in an action
against the original guardian;
3. Contracts in representation of absentees –
by the absentee;
4. Contracts defrauding creditors – by the
creditors;
5. Contracts referring to things in litigation –
by the party litigant;
6. Their representatives;
7. Their heirs;
8. Their creditors by virtue of subrogatory
action defined in Art. 1177, NCC. (Jurado,
2009)
Prescriptive period of action for rescission
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. Under Art. 1381, no.1 – within 4 years from
the time the termination of the incapacity of
the ward;
2. Under Art. 1381, no. 2- within 4 years from
the time the domicile of the absentee is
known; or
3. Under Art. 1381, nos. 3 & 4 & Art. 1382 –
within 4 years from the time of the
discovery of fraud.
Requisites that must concur before a contract
may be rescinded on the ground of lesion
Whether the contract is entered into by a
guardian in behalf of his ward or by a legal
representative in behalf of an absentee, before it
can be rescinded on the ground of lesion, it is
indispensable that the following requisites must
concur:
1. The contract must be entered into by the
guardian in behalf of his ward or by the legal
representative in behalf of an absentee.
2. The ward or absentee suffered lesion of
more than 1/4 of the value of the property
which is object of the contract.
3. The contract must be entered into without
judicial approval.
4. There must be no other legal means for
obtaining reparation for the lesion.
5. The person bringing the action must be able
to return whatever he may be obliged to
restore.
6. The object of the contract must not be
legally in the possession of a third person
who did not act in bad faith.
Statutory presumptions of Fraud in Article
1387
1. Alienation by gratuitous title.
When a debtor donates his property
without reserving sufficient property to
pay all his pre-existing debts, the law
presumes that the gratuitous dispositions
are made in fraud of creditors.
2. Alienation by onerous title.
The contract is presumed fraudulent if at
the time of alienation, some judgement has
been rendered against him, whether it is on
appeal or has already become final and
468
 Civil Law
executory; or some writ of attachment has
been issued against him in any case.
NOTE: The decision or writ of attachment need
not refer to the very property subject of
alienation. The person who obtained the
judgement or writ of attachment need not be the
same person seeking the rescission.
These presumptions are rebuttable, which
means, they may be overcome by clear, strong
and convincing evidence.
An alienation made during the pendency of a suit
is not enough. There must be a decision or a writ
of attachment.
Requisites before a contract entered into in
fraud of the creditors may be rescinded
1. There must be a credit existing prior to the
constitution of the said fraudulent contract;
2. There must be fraud, or at least, the intent to
commit fraud to the prejudice of the creditor
seeking rescission;
3. The creditor cannot in any legal manner
collect his credit (subsidiary character of
rescission);
4. The object of the contract must not be legally
in possession of a third person in good faith.
Badges of fraud
1. Consideration for the conveyance of the
property is inadequate or fictitious;
2. Transfer was made by the debtor after a suit
has commenced and during its pending
against him;
3. Sale upon credit by an insolvent debtor;
4. The presence of evidence of large
indebtedness or complete insolvency of the
debtor;
5. Transfer of all his property by a debtor when
he is financially embarrassed or insolvent;
6. Transfer is made between father and son,
where there are present some or any of the
above circumstances; and
7. Failure of the vendee to take exclusive
possession of the property. (Oria v.
McMicking, 21 Phil. 243, G. R. No. 7003,
January 18, 1912)
Fictitious Contracts cannot be Rescinded
Rescission is not the proper remedy because
while the contract here is fictitious and,
therefore, null and void, rescission presupposes
a valid contract. (Onglengco v. Ozaeta and
Hernandez, 70 Phil. 43)
Resolution v. Rescission

NOTE: If the object of the contract is legally in RESOLUTION RESCISSION

the possession of a third person who did not act (NCC, ART. 1191) (NCC, ART. 1381)
in bad faith, the remedy available to the creditor Both presuppose contracts validly entered into
is to proceed against the person causing the loss and subsisting and both require mutual
for damages. Such person is solidarily liable with restitution when proper.
that of transferring creditor as both of them are Nature
guilty of fraud. Principal action;
Subsidiary remedy
Retaliatory in character
The action to rescind contracts in fraud of Grounds
creditors is known as accion pauliana. For this 5 grounds under Art.
action to prosper, the following requisites must Non-performance of 1381. (lesions or
be present: obligation (only fraud of creditors);
ground) Non-performance is
1. The plaintiff asking for rescission has a not important
credit prior to the alienation; Applicability
2. The debtor has made a subsequent contract Applies to both
conveying a patrimonial benefit to a third Only to reciprocal
unilateral and
person; obligations
reciprocal obligations
3. The creditor has no other legal remedy to Prescriptive Period
satisfy his claim; 10 years from accrual
4. The act being impugned is fraudulent; of right of action for
5. The third person who received the property written contracts; 4 years (NCC, Art.
conveyed, if it is by onerous title, has been 6 years for verbal 1389)
an accomplice in fraud. (Siguan vs Lim, G.R. contracts [NCC, Arts.
No. 134685, November 19, 1999) 1144 (2) and 1145 (1)]

469
 Contracts
Person who can Initiate the Action Q: Reyes (seller) and Lim (buyer) entered
Even third persons into a contract to sell a parcel of land.
Only the injured party
prejudiced by the Harrison Lumber occupied the property as
to the contract lessee. Reyes offered to return the P10
contract
Fixing of Period by the Court million downpayment to Lim because Reyes
Court may fix a period was having problems in removing the lessee
or grant extension of from the property. Lim rejected Reyes’ offer.
time for the fulfillment Lim learned that Reyes had already sold the
Court cannot grant property to another.
of the obligation when
extension of time
there is sufficient
reason to justify such Both Reyes and Lim are now seeking
extension rescission of the contract to sell. However,
Purpose Reyes does not want to deposit the 10M to
Reparation for the court because according to him, he has
damage or injury, the “right to use, possess and enjoy” of the
Cancellation of the money as its owner before the contract to sell
allowing partial
contract is rescinded. Is Reyes’ contention correct?
rescission of contract.
(Pineda, 2000)
A: NO. There is also no plausible or justifiable
NOTE: While Article 1191 uses the term reason for Reyes to object to the deposit of the
“rescission,” the original term which was used in P10 million down payment in court. The
the old Civil Code, from which the article was contract to sell can no longer be enforced
based, was “resolution.” (Ong v. CA, G.R. No. because Reyes himself subsequently sold the
97347, July 6, 1999) property. Both Lim and Reyes are seeking for
rescission of the contract. By seeking rescission,
Effect of Rescission a seller necessarily offers to return what he has
received from the buyer. Such a seller may not
1. Obligation of mutual restitution (but not take back his offer if the court deems it
absolute); equitable, to prevent unjust enrichment and
2. Abrogation of contract (Absolute); ensure restitution, to put the money in judicial
3. Obligation of third person to restore (if third deposit.
person has nothing to restore, Article does
not apply). (De Leon, 2016) NOTE: In this case, it was just, equitable and
proper for the trial court to order the deposit of
Mutual Restitution the down payment to prevent unjust enrichment
by Reyes at the expense of Lim. Depositing the
Rescission of contract creates an obligation of down payment in court ensure its restitution to
mutual restitution of the objects of the contract, its rightful owner. Lim, on the other hand, has
their fruits, and the price with interest. nothing to refund, as he has not received
anything under the contract to sell. (Reyes v. Lim,
NOTE: Rescission is possible only when the Keng and Harrison Lumber, Inc., G.R. No. 134241,
person demanding rescission can return August 11, 2003)
whatever he may be obliged to restore. A court
of equity will not rescind a contract unless there Q: Goldenrod offered to buy a mortgaged
is restitution, that is, the parties are restored to property owned by Barreto Realty to which it
the status quo ante. (NCC, Art. 1385) paid an earnest money amounting to P1
million. It was agreed upon that Goldenrod
Mutual restitution is not applicable when: would pay the outstanding obligations of
Barreto Realty with UCPB. However,
1. Creditor did not receive anything from Goldenrod did not pay UCPB because of the
contract; or bank’s denial of its request for the extension
2. Thing already in possession of third to pay the obligation. Thereafter, Goldenrod,
persons in good faith; subject to indemnity through its broker, informed Barreto Realty
only, if there are two or more alienations – that it could not go through with the
liability of first infractor. purchase of the property and also demanded
the refund of the earnest money it paid. In

UNIVERSITY OF SANTO TOMAS 470

2021 GOLDEN NOTES
 Civil Law
the absence of a specific stipulation, may the
seller of real estate unilaterally rescind the
contract and as a consequence keep the
earnest money to answer for damages in the
event the sale fails due to the fault of the
prospective buyer?
A: NO. Goldenrod and Barretto Realty did not
intend that the earnest money or advance
payment would be forfeited when the buyer
should fail to pay the balance of the price,
especially in the absence of a clear and express
agreement thereon.
Moreover, Goldenrod resorted to extrajudicial
rescission of its agreement with Barretto Realty.
Under Article 1385, rescission creates the
obligation to return the things which were the
object of the contract together with their fruits
and interest. Therefore, by virtue of the
extrajudicial rescission of the contract to sell by
Goldenrod without opposition from Barretto
Realty, which in turn, sold the property to other
persons, Barretto Realty, had the obligation to
return the earnest money which formed part of
the purchase price plus legal interest from the
date it received notice of rescission. It would be
most inequitable if Barretto Realty would be
allowed to retain the money at the same time
appropriate the proceeds of the second sale
made to another. (Goldenrod, Inc. v. CA, G.R. No.
126812, November 24, 1998)
VOIDABLE CONTRACTS (BAR 2004)
Voidable contracts are those where consent is
vitiated either by the incapacity of one of the
contracting parties or by mistake, violence,
intimidation, undue influence or fraud. These
contracts are binding, unless they are annulled
by a proper action in court. It is susceptible of
ratification. (NCC, Art. 1390)
NOTE: Annulment may be had even if there be
no damage to the contracting parties.
Characteristics of a voidable contract
1. Effective until set aside;
2. Can be ratified;
3. Can be assailed only by the party whose
consent was defective or his heirs or
assigns.
471
NOTE: Third persons may assail if they are
prejudiced. (Development Bank vs. CA, 96
SCRA 342)
4. A voidable contract, unlike unenforceable
and void contracts may be attacked
indirectly or collaterally, by way of defense
to an action under the contract by way of a
counterclaim. (De Leon, 2016)
Classes of voidable contracts
1. Those where one of the parties is incapable
of giving consent; and
NOTE: If both parties are incapacitated to
give consent, the contract is unenforceable
and not merely voidable.
2. Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence or fraud. (NCC, Art. 1390)
Q: Sometime in March 2001, Poole-Blunden
came across an advertisement of Unit 2-C of
T-Tower Condominium. The Unit was
advertised to have an area of 95 square
meters. Thinking that it was sufficient and
spacious enough for his residential needs,
Poole-Blunden won the bid and entered into
a Contract to Sell with UnionBank. Poole-
Blunden started occupying. Thereafter, he
decided to construct two (2) additional
bedrooms in the Unit. Upon examining it, he
noticed apparent problems in its dimensions.
He took rough measurements of the Unit,
which indicated that its floor area was just
about 70 square meters, not 95 square
meters, as advertised by UnionBank. Poole-
Blunden wrote to UnionBank, informing it of
the discrepancy. He asked for a rescission of
the Contract to Sell, along with a refund of
the amounts he had paid, in the event that it
was conclusively established that the area of
the unit was less than 95 square meters
which was denied by the UnionBank.
Aggrieved, he filed an action for rescission of
the Contract to Sell under Article 1390 of the
Civil Code.
Will the action prosper?
A: YES. Article 1390 of the Civil Code 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,
 Contracts
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."
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." Poole-Blunden's
contention on how crucial the dimensions and
area of the Unit are to his decision to proceed
with the purchase is well-taken. As he
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.
Therefore, there is fraud for the reason that had
Poole-Blunden was informed by the UnionBank
that the floor area was actually less than the
stipulated, he would not have entered the
Contract to Sell. (Joseph Harry Walter Poole-
Blunden v. Union Bank Of The Philippines,
Respondent, G.R. No. 205838, November 29, 2017,
as penned by J. Leonen)
Who may institute an action for annulment
1. Real party in interest. – All who are
principally or subsidiarily liable ; and
2. One not responsible for the defect of the
contract.
NOTE: An action for annulment may be
instituted by all who are thereby obliged
principally or subsidiarily. He who has capacity
to contract may not invoke the incapacity of the
party with whom he has 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.
Effects of annulment of a contract
1. If contract not yet consummated – parties
shall be released from the obligations
arising therefrom.
2. If contract has already been consummated –
rules provided in Arts. 1398-1402 shall
govern.
a. Restitution
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
GR: Mutual restitution. – the contracting
parties shall restore to each other things
which have been the subject matter of
the contract, with their fruits and the
price with its interest except in case
provided by law. In an obligation to
render services, the value thereof shall
be the basis for damages. (NCC, Art.
1398)
NOTE: No restitution. – The party
incapacitated is not obliged to make any
restitution except insofar as he has been
benefited by the thing or the price
received by him. (NCC, Art. 1399)
XPN : If and when the application of
mutual restitution will result in unjust
enrichment of one party at the expense
of another. (4 Tolentino, 607, [1991])
b. Whenever the person obliged by the
decree of annulment to return the thing
cannot do so because it has been lost
through his fault, he shall return the
fruits received and the value of the thing
at the time of the loss, with interest from
the same date. (NCC, Art. 1400)
Causes of extinction of action to annul
1. Prescription – the action for annulment must
be commenced within 4 years depending on
the ground stated.
NOTE: If the action has prescribed, the
contract can no longer be set aside.
(Villanueva v. Villanueva, 91 Phil 43)
2. Ratification – cleanses the contract of its
defects from the moment it was constituted.
(NCC, Art. 1396)
3. By loss of the thing which is the object of the
contract through fraud or fault of the person
who is entitled to annul the contract. (NCC,
Art. 1401)
4. If the minor is guilty of active
misrepresentation of his age. (Braganza v.
De Villa Abrille, 1959)
NOTE: If the right of action is based upon the
incapacity of any one of the contracting parties,
the loss of the thing shall not be an obstacle to
the success of the action, unless it took place
through the fraud or fault of the plaintiff. (NCC,
Art. 1401)
472
 Civil Law
Prescriptive period for an annulment of a
voidable contract
The action for annulment shall be brought
within 4 years, reckoned from:
1. In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases;
2. In case of mistake or fraud, from the time of
the discovery of the same;
3. And when the action refers to contracts
entered into by minors or other
incapacitated persons, from the time the
guardianship ceases. (NCC, Art. 1391)
Ratification
It is the act or means by virtue of which, efficacy
is given to a contract which suffers from a vice of
curable nullity. (Manresa)
NOTE: Ratification extinguishes the action to
annul a voidable contract. (NCC, Art. 1392)
Requisites of ratification
1. The contract involved must be voidable;
2. Person ratifying must know the reason for
the voidability;
3. The cause for the voidability must
immediately cease after the ratification; and
4. Ratification must be express or through an
act implying a waiver of the action to annul;
NOTE: Ratification entered into by the
incapacitated person may be effected by the
guardian of the incapacitated person. (NCC,
Art. 1394) However, this rule does not
pertain to a rescissible contract entered into
by the guardian in behalf of his ward.
The right to ratify is transmitted to the heirs of
the party entitled to such right. (Tolentino, 2002)
Party who may ratify
1. In contracts entered into by incapacitated
persons.
(a) guardian ;
(b) injured party himself, provided he is
already capacitated.
473
2. In contracts voidable on the ground of
mistake. – party whose consent was vitiated.
(De Leon, 2016)
Kinds of ratification
1. Express –the desire of the innocent party to
convalidate the contract, or his waiver or
renunciation of his right to annul the
contract is clearly manifested verbally or
formally in writing. (Pineda, 2000)
2. Implied (tacit) – it is the 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. (NCC, Art. 1393)
Effects of ratification
Ratification cleanses the contract from all its
defects from the moment it was constituted,
thereby extinguishing the action to annul a
voidable contract. It results therefore that after a
contract is validly ratified, no action to annul the
same can be maintained based upon defects
relating to its original validity. (Rabuya, 2017)
Retroactivity in ratification of contracts
GR: Retroactivity applies in ratification of
contracts.
XPN: When the rights of innocent third persons
will be prejudiced, ratification will not take
effect.
NOTE: Ratification does not require the
conformity of the contracting party who has no
right to bring the action for annulment.
Q: The Senior Vice President of TERP
Construction Corp., Escalona, made a
commitment to Banco Filipino Savings and
Mortgage Bank that TERP Corp. would pay
interest differentials to the same. However,
after TERP Corp. subsequently paid the
interests as agreed upon, it thereafter
refused to pay its unpaid balance because it
argues that Escalona was not authorized to
make such commitment. Is act of Escalona, as
Senior Vice President of TERP Corp. binding
upon it?
A: YES. A corporation exercises its corporate
 Contracts
powers through its board of directors. This third person
power may be validly delegated to its officers, makes the
committees, or agencies. The authority of the contract
board of directors to delegate its corporate rescissible.
powers may either be: (1) actual; or (2) As to the Damage /
apparent. Actual authority may be express or Damage is
necessity of prejudice is
implied. Express actual authority refers to the immaterial
damage material
corporate powers expressly delegated by the
Rescissibility
board of directors. Implied actual authority, on Annulability
As to the of the
the other hand, can be measured by his or her of the
source of contract is
prior acts which have been ratified by the contract is
remedy based on
corporation or whose benefits have been based on law
equity
accepted by the corporation.
As to the kind Public Private
Here, TERP Corp.'s subsequent act of twice of interest the interest interest
paying the additional interest Escalona predominates predominates predominates
committed to Banco Filipino Bank is considered
As to the Not
a ratification of Escalona's acts. Moreover, Susceptible of
susceptibility susceptible of
Escalona likewise had apparent authority to ratification
of ratification ratification
transact on behalf of petitioner. Here, Banco
Filipino Bank relied on Escalona’s apparent As to whether
It is a
authority to promise interest payments, a sanction or It is a remedy
sanction
considering that Escalona was TERP Corp.’s then a remedy
senior vice president. His apparent authority Only parties Third persons
As to who can
was further demonstrated by TERP Corp. paying to the who are
avail the
Banco Filipino Bank after Escalona promised it. contract can affected may
remedies
(Terp Construction Corporation v. Banco Filipino assail it file the action
Savings and Mortgage bank, G.R. No. 221771, It is a It is a
September 18, 2019, as penned by J. Leonen) As to the kind
principal subsidiary
of action
action action
Confirmation v. Recognition
UNENFORCEABLE CONTRACTS
CONFIRMATION RECOGNITION
It is an act whereby a
Those contracts which cannot be enforced by
defect of proof is cured
action or complaint, unless they have been
such as when an oral
It is an act by ratified by the party or parties who did not give
contract is put into writing
which a voidable consent thereto. (Jurado, 2009)
or when a private
contract is cured of
instrument is converted
its vice or defect. Characteristics of unenforceable contract
into a public instrument.
(Luna v. Linatoc, G.R. No. L-
1. It cannot be enforced by a proper action in
48403, October 28, 1942)
court;
2. It may be ratified;
Voidable contract v. Rescissible contract
3. It cannot be assailed by third person; and
4. May only be assailed as a way of defense, not
BASIS VOIDABLE RESCISSIBLE by direct action.
As to the kind 5. The defect of an unenforceable contract is of
Defect is Defect is
of defect a permanent nature and it will exist as long
intrinsic external
present as the contract is not duly ratified. The mere
The damage lapse of time cannot give efficacy to the
Vitiated contract. (Rabuya, 2017)
or prejudice
As to the consent
suffered by
source of makes the NOTE: An unenforceable contract is valid
one of the
defect contract although it produces no legal effect. (Tolentino,
contracting
voidable 2002)
parties or a

UNIVERSITY OF SANTO TOMAS 474

2021 GOLDEN NOTES
 Civil Law
Kinds of unenforceable contracts Characteristics of Void Contracts

The following contracts are unenforceable
unless they are ratified:
1. Those entered into the name of another
person by one who has been given no
authority/legal representation or acted
beyond his powers; “Unauthorized
contracts”;
NOTE: A contract of sale over a piece of land
entered by an agent whose authority is not
in writing, even if he acted beyond the scope
of his authority is void, not merely
unenforceable. (NCC, Art. 1874)
2. Those that do not comply with the Statute of
Frauds; and
3. Those where both parties are incapable of
giving consent to a contract. (NCC, Art. 1403)
VOID/INEXISTENT CONTRACTS
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 by either by time or ratification.
This definision includes not only those contracts
in which one of the essential requisites is totally
wanting, but also those which are declared by
positive provision of law or statute. A void or
inexistent contract is equivalent to nothing; it is
absolutely wanting in civil effects. (Tolentino,
2002)
1. The 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;
2. No action for annulment is necessary,
because the nullity exists ipso jure; a
judgment of nullity would merely be
declaratory;
3. It cannot be confirmed or ratified; and
4. If it has been performed, the restoration of
what has been given is in order. (Tolentino,
2002)
NOTE: The defect of inexistense of a contract is
permanent. It cannot be cured by ratification nor
prescription.
Parties affected
Any person may invoke the inexistence of the
contract whenever juridical effects founded
thereon are asserted against him. (Tolentino,
2002)

The following contracts are inexistent and

void from the beginning

1. Those whose cause, object or purpose is

contrary to law, morals, good customs,
public order or public policy;
2. Those which are absolutely simulated or
fictitious;
3. Those whose cause or object did not exist at
the time of the transaction;
4. Those whose object is outside the commerce
of men
5. Those which contemplate an impossible
service;
6. Those where the intention of the parties
relative to the principal object of the
contract cannot be ascertained;
7. Those expressly prohibited or declared void
by law.

475
 Natural Obligations
NATURAL OBLIGATIONS
Natural obligations, not being based on positive
law but on equity and natural law, do not grant
a right of action to enforce their performance,
but after voluntary fulfillment by the obligor,
they authorize the retention of what has been
delivered or rendered by reason thereof. (NCC,
Art. 1423)
Rationale of natural obligations (1947 Code
Commission)
1. On the part of the payor – It gives rise to a
moral, rather than a legal duty to pay or
perform, but the person performing feels
that in good conscience he should comply
with his undertaking, which is based on
moral grounds.
2. On the part of the payee – The payee is
obliged to return the amount received by
him because the payor was not legally
bound to make the payment
NOTE: The foundation of nautral law are equity,
morality and natural justice. (Sta. Maria, 2017)
Examples of Natural Obligations
1. Paying despite extinctive prescription
When a right to sue upon a civil obligation
has lapsed by extinctive prescription, the
obligor who voluntarily performs the
contract cannot recover what he has
delivered or the value of the service he has
rendered. (NCC, Art. 1424)
e.g. The prescriptive period to file a case
based on a written agreement is 10 years
from the time the right of the action
accrues. If the creditor does not collect the
amount of the loan after 10 years from the
time it should be paid, such creditor can no
longer collect from the debtor.
If the debtor, despite the lapse of th period
and knowing that the debt has already
prescribed, pays the creditor, such debtor
can no longer recover the payment. (Sta.
Maria, 2017)
2. 3rd person paying against the will of the
debtor
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
When without the knowledge or against the
will of the debtor, a 3rd person pays a debt
which the obligor is not legally bound to
pay because the action thereon has
prescribed, but the debtor later voluntarily
reimburses the 3rd person, such debtor can
no longer recover such payment. (NCC, Art.
1424)
3. Contract made by a minor (NCC, Arts. 1426
and 1427)
An incapacitated person is not obliged to
make any restitution except insofar as he
has been benefited by the thing or price
received by him.
NOTE: A person who is between 18 and 21
years of age is not a minor. In present time,
the age of majority is 18 (RA 6809)
However, if the law is applicable, the minor
who voluntarily makes payment or
restitution of what he has obtained by
contract even though he has no legal
obligation to make any payment or
restitution, can no longer recover what he
has returned. (Sta. Maria, 2017)
4. Performance by winning party
When, after an action to enforce a civil
obligation has failed the defendant
voluntarily performs the obligation, he
cannot demand return of what he has
delivered or the payment of the value of the
service he has rendered. (NCC, Art. 1428)
5. Voluntary payment of an heir in excess of
inherited property (NCC, Art. 1429)
E.g. A is indebted to B for P10,000.00. A
later on dies, with C as his heir who is
entitled only to P5,000.00 from the estate
of A. If C voluntarily pays B P10,000.00, C
can no longer recover such amount. (Sta.
Maria, 2017)
6. Payment of a void legacy (NCC, Art. 1430)
NOTE: Examples of natural obligations under
Title III are NOT exclusive. (Sta. Maria, 2017)
ESTOPPEL
An admission or representation is rendered
476
 Civil Law
conclusive upon the person making it, and
cannot be denied or disproved as against the
person relying thereon. (NCC, Art. 1431)

Estoppel cannot be sustained by mere

argument or doubtful inference; it must be
clearly proved in all its essential elements by
clear, convincing and satisfactory evidence.

NOTE: Estoppel is not applicable in the

following cases:

1. When a law or public policy has been

violated;

2. Against the government suing in its

capacity as sovereign or asserting
governmental rights;

3. Against the government owing to the

mistakes or erros of its officers or agents;
and

NOTE: The government is never estopped

by mistakes on the part of its agents.
(Republic v. Go Bon Lee, G.R. No. L-11499,
April 29, 1961)

4. To questions of law.

Estoppel applies only to questions of fact. If

an act, conduct or misrepresentation of the
party sought to be estopped is due to the
ignorance founded on innocent mistake,
then estopple whill not arise. (Sta. Maria,
2017)

Parties bound

Estoppel is applied only as between

1. Parties thereto; or

2. Their successors-in-interest (NCC, Art.

1439)

477
 Special Contracts - Sales
SPECIAL CONTRACTS
SALES
GENERAL PRINCIPLES
Sale
Sale is a contract where one party (seller or
vendor) obligates himself to transfer the
ownership of and to deliver a determinate thing,
while the other party (buyer or vendee)
obligates himself to pay for said thing a price
certain in money or its equivalent. (NCC, Art.
1458; 2001 BAR)
The primary consideration in determining the
true nature of a contract 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. (Heirs of Dela Rosa v. Batongbacal, et al.,
G.R. No. 179205, July 30, 2014)
ELEMENTS OF A CONTRACT OF SALE
1. Essential elements – for validity:
a. Consent – meeting of the minds to
transfer ownership in exchange for the
price;
b. Determinate subject matter –
determinate thing which is the object of
the contract; and
c. Consideration – price certain in money
or its equivalent.
2. Natural elements –inherent in the contract,
and are deemed to exist in the contract in
the absence of any contrary provision.
Examples:
a. Warranty against eviction; and
b. Warranty against hidden defects.
3. Accidental elements – dependent on parties’
stipulations;
Examples:
a. Conditions;
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
b. Payment of Interest;
c. Time and Place of Payment; and
d. Penalty.
Effect of absence of any of the essential
elements
The contract of sale is void. Absent proof of the
concurrence of all the essential elements of a
contract of sale, the giving of earnest money
cannot establish the existence of a perfected
contract of sale. (Manila Metal Container Corp. v.
PNB, G.R. No. 166862, December 20, 2006)
Valid sale against the will of the owner of the
property
1. When the property is subjected to
expropriation (NCC, Arts. 435 and 1488);
2. In case of ordinary execution sale conducted
under Section 15, Rule 39 of the Revised
Rules of Civil Procedure;
3. In case of judicial foreclosure sale under
Rule 68; and
4. In case of extra-judicial foreclosure sale
under Act 3135, as amended. (Pineda, 2010)
Effect of Reluctant Consent
Consent when reluctantly given is not vitiated
consent. There is no difference in law where a
person gives his consent reluctantly and even
against his good sense and judgment as when he
acts voluntarily and freely.
STAGES OF A CONTRACT OF SALE
1. Negotiation or Policitaion Stage – begins
from the time the prospective contracting
parties manifest their interest in the
contract and ends at the moment of
agreement of the parties. A negotiation is
formally initiated by an offer, which must be
certain;
To convert the offer into a contract, the
acceptance must be absolute and must not
qualify the terms of the offer; it must be
plain, unequivocal, unconditional and
without variance of any sort form the
proposal. (Manila Metal Container Corp. v.
PNB, G.R. No. 166862, December 20, 2006)
It is important to consider that at this stage,
there is freedom to contract, which
signifies the right to choose with whom to
478
 Civil Law
contract and what to contract. Thus, an
owner of a property is free to offer the
duty bound to sell the same to the occupant
thereof, absent any prior agreement vesting
the occupants the right of first priority to
buy. (Villanueva, 2018)
2. Perfection or birth – takes place when the
parties agree upon the essential elements of
the contract; and
NOTE: From the point of perfection, parties
may reciprocally demand performance,
subject to the provisions of the law
governing the form of contracts.
Not all contracts of sale becomes
automatically and immediately effective
upon perfection. A suspensive condition or
period suspends the demandability of the
obligation, but the contract is still perfected.
(Villanueva, 2018)
3. Consummation – occurs when the parties
fulfill or perform the terms agreed upon in
the contract culminating in the
extinguishment thereof. (SM Investments
Corp. v. Posadas, citing Swedish Match v. CA,
G.R. No. 200901, December 7, 2015)
CHARACTERISTICS OF A CONTRACT OF SALE
1. Consensual – A sale is perfected by mere
consent, which is manifested by the meeting
of the minds as to the offer and acceptance
thereof on the subject matter, price and
terms of payment.
NOTE: Delivery of the thing bought or
payment of the price is not necessary for the
protection of the contract; and failure of the
vendee to pay the price after the execution
of the contract does not make the sale null
and void for lack of consideration but results
at most in default on the part of the vendee,
for which the vendor may exercise his legal
remedies. (Rabuya, 2017)
2. Bilateral – The seller will deliver and
transfer a determinate thing to the buyer
and the latter will pay an ascertained price
(or its equivalent). It imposes obligations on
both the seller and buyer. The obligations of
each party is the cause for the obligation of
the other.
479
subject property for sale to any interested
person, and is not
Each party is simultaneously a debtor and
creditor of the other. (Villanueva, 2018)
3. GR: Commutative – The thing sold is
considered the equivalent of the price paid
and the price paid is the equivalent of the
thing sold.
NOTE: There is no requirement that the
price should be equal to the exact value of
the subject-matter of the sale. All that is
required is that the parties believed that
they will receive good value in exchange for
what they will give. (Villanueva, 2018)
XPN: Aleatory – The consideration is not
equivalent of what has been received in the
case of purchase of a lotto ticket. If the ticket
wins, the prize is much more than the price
of the ticket.
4. Principal – Its existence does not depend
upon the existence and validity of another
contract.
5. Onerous – The thing sold is conveyed in
consideration of the purchase price, and vice
versa.
6. Nominate – It has a specific name given by
law. (Pineda, 2010)
7. Title, not a mode – The contract of sale is
not a mode, but merely a title. The sale itself
does not transfer or affect ownership, what
it does is to create the obligation to transfer
ownership.
NATURE AND FORM OF CONTRACT
(2002, 2006 BAR)
The 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.
From that moment, parties may reciprocally
demand performance, subject to the provisions
of the law governing the forms of contracts.
Formal requirement for the validity of a
contract of sale
GR: A contract of sale may be made in writing, or
by word of mouth, or partly in writing and partly
 Special Contracts - Sales
by word of mouth, or may be inferred from the
conduct of the parties. (NCC, Art. 1483) Contracts
shall be obligatory, in whatever form they have
been entered into, provided all the essential
requisites for their validity are present. (NCC,
Art. 1356)
XPNs:
1. If the law requires a document or other
special form, the contracting parties may
compel each other to observe that form.
(NCC, Art. 1357)
2. Under Statute of Frauds, the following
contracts must be in writing; otherwise,
they shall be unenforceable:
a. Sale of personal property at a price
not less than P500;
b. Sale of a real property or an interest
therein;
c. Sale of property not to be
performed within a year from the
date thereof; or
d. When an applicable statute requires
that the contract of sale be in a
certain form. [NCC, Art. 1403(2)]
3. Sale of large cattle which requires that the
same be recorded with the city/municipal
treasurer and that a certificate of transfer be
issued. Otherwise, the sale is not valid. (NCC,
Art. 1581)
NOTE: The contract of sale of REAL
PROPERTIES even if not complete in form, so
long as the essential requisites of consent of the
contracting parties, object, and cause of the
obligation concur and they were clearly
established to be present, is valid and effective
between the parties.
Under Art. 1357 of the NCC, its enforceability is
recognized as each contracting party is granted
the right to compel the other to execute the
proper public instrument so that the valid
contract of sale of registered land can be truly
registered and can bind third persons. (Rabuya,
2017)
Q: On 2 August 2002, Dee Hwa Liong
Foundation Medical Center (“DHLFMC”)
entered into a contract to purchase a
GammaMed Plus Brachytheraphy machine
and a Gammacell Ellan 3000 blood irradiator
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
from Asiamed Supplies and Equipment
Corporation (“Asiamed”) at a total price of
P31,000,000.00. The machines were
delivered on 20 May 2003 and on 17 July
2003, whereupon two delivery invoices that
provided for a 12% annual interest and 25%
attorney’s fees charge on overdue accounts,
were signed by petitioner Anthony Dee
(“Dee”) and DHFLMC Vice President for
Administration.
After the demand for the collection of the
unpaid remaining balance of P25,700,000.00
went unheeded, Asiamed was constrained to
file a complaint for sum of money against the
DHLFMC and Dee before the Regional Trial
Court (“RTC”). Should DHLFMC be held liable
for 12% interest and 25% attorney’s fees
stipulated in the delivery invoices?
A: YES. DHLFMC should be held liable for the
interest and attorney’s fees stipulated in the
delivery invoices, although the attorney’s fees
should properly be reduced to 10%. These
delivery invoices formed part of the Contract of
Sale, given that a contract need not be contained
in a single writing but may be collected from
several different writings which do not conflict
with each other and which, when connected,
show the consent of the parties, subject matter,
terms and consideration, as in contracts entered
into by correspondence.
A contract may be encompassed in several
instruments even though every instrument is
not signed by the parties, since it is sufficient if
the unsigned instruments are clearly identified
or referred to and made part of the signed
instrument or instruments. Similarly, a written
agreement of which there are two copies, one
signed by each of the parties, is binding on both
to the same extent as though there had been
only one copy of the agreement and both had
signed it. (DHLFMC, et al. v. Asiamed, G.R. No.
205638, August 3, 2017, as penned by J. Leonen)
Instances where the Statute of Frauds is not
essential for the enforceability of a contract
of sale
1. When there is a note or memorandum in
writing and subscribed to by the party or his
agent (contains essential terms of the
contract);
480
 Civil Law
2. When there has been partial e. Void.
performance/execution (seller delivers with
the intent to transfer title/receives price); 5. Legality of the object:

3. When there has been failure to object to a. Licit object; and

presentation of evidence aliunde as to the b. Illicit object.
existence of a contract without being in
writing and which is covered by the Statute 6. Presence or absence of conditions:
of Frauds; or
a. Absolute; and
4. When sales are effected through electronic b. Conditional.
commerce. (Villanueva, 2014)
7. Wholesale or retail:
NOTE: Rules on forms, and of validity and
enforceability of contracts of sale, are strictly a. Wholesale; or
kept within the contractual relationship of the b. Retail.
seller and buyer pursuant to the characteristic of
relativity of every contract, and do not 8. Proximate inducement for the sale:
necessarily apply to third parties whose rights
may be affected by the terms of a sale. a. Sale by description;
b. Sale by sample; and
KINDS OF CONTRACT OF SALE c. Sale by description and sample.

As to: 9. When the price is tendered:

1. Nature of the subject matter: a. Cash sale; and

b. Sale on installment plan.
a. Sale of real property; and
b. Sale of personal property. A contract of sale may be absolute or
conditional.
2. Value of the things exchanged:
Absolute Sale
a. Commutative sale; and
b. Aleatory sale. A sale is absolute when no condition is imposed
and ownership passes to the vendee upon
3. Tangibility of the object: delivery of the thing subject of the sale. (NCC,
Art. 1497)
a. Sale of property (tangible or
corporeal); A contract of sale is absolute when the title to
the property passes to the vendee upon delivery
NOTE: A tangible object is also called of the thing sold. (Rabuya, 2017)
chose in possession.
Instance when a deed of sale considered
b. Sale of a right (assignment of a right, or absolute in nature
a credit or other intangibles such as
copyright, trademark, or good will); A deed of sale is considered absolute in nature
where there is neither a stipulation in the deed
NOTE: An intangible object is a chose that title to the property sold is reserved in the
in action. seller until the full payment of the price, nor one
giving the vendor the right to unilaterally
4. Validity or defect of the transaction: resolve the contract the moment the buyer fails
to pay within a fixed period.
a. Valid;
b. Rescissible; Conditional Sale
c. Voidable;
d. Unenforceable; and It is conditional where the sale contemplates a

481