TITLE II - CONTRACTS → This determination must not destroy the nature of mutuality of the
contract between the principal parties based on their essential equality. Hence, the
[1305] A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
[1306] The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are contrary to
LaMoGPuPu.
Pakistan International Airline v. Ople: The airline company and the employee
entered into a contract providing stipulations regarding employment calculated to
evade the Labor Code, the SC ruled that contractual stipulations contravening
provisions of law designed to protect laborers and employees were not valid.
[1307] Innominate contracts shall be regulated by the stipulations of the parties,
by the provisions of Titles I and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of the place.
Innominate Contracts: Are those which are not specifically governed by any
provision in the Civil Code or special law but which likewise involve the fulfillment
or accomplishment of some prestations.
Governed by the following:
1. Stipulations of the parties.
2. Provisions of the law of ObliCon under Titles I and II of the Civil
Code. Though innominate, they are still contracts which are
sources of obligations. Hence, they should follow the rules of
Obligations and Contracts.
3. Rules governing the most analogous nominate contract.
4. Customs of the place.
[1308] The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
→ MUTUALITY PRINCIPLE: is one of the characteristics of a contract,
its validity or performance or compliance of which cannot be left to the will of the
parties.
→ Refer to the Potestative Condition
→ Contract of Adhesion: is one wherein a party, usually a corporation,
prepares the stipulations in a contract, while the other party merely affixes his
signature or his “adhesion” thereto. These types of contracts are binding as ordinary
contracts. Because in reality, the party who adheres to the contract is free to reject it
entirely. (XPN: Blind adherence to terms)
[1309] The determination of the performance may be left to a third person,
whose decision shall not be binding until it has been made known to both
contracting parties.
law requires that the determination must not be evidently inequitable. (re: Art. 1310)
[1310] The determination shall not be obligatory if it is evidently inequitable. In
such case, the Court shall decide what is equitable under the circumstances.
→ In a case where a situation where the performance is so inequitable – if
the contract itself and not merely the determination of its performance is almost left
to the will of the third party and greatly favors one of the parties — the other party
can go to court which will decide what is equitable under the circumstances.
→ Court intervention is necessary in order that the intent of the parties will
not be rendered nugatory (of no value or importance) by the inequitable terms and
conditions of a third party.
[1311] Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are
NOT TRANSMISSIBLE BY THEIR NATURE, or BY STIPULATION, or BY
PROVISION OF LAW. The heir is not liable beyond the value of the property
he received from the decedent.
If a contract should contain some stipulation in favor of a third person,
he may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person.
→ NATURE OF RELATIVITY OF CONTRACTS: Generally, contracts
take effect between the immediate parties to the same. Hence, as a general rule, a
stranger cannot invoke the contract of another for his own interest or for a source of
his alleged prejudice.
A party to a contract cannot impose an obligation or liability to one who,
under its terms, is a stranger to the said contract.
Integrated Packaging Corporation v. CA: Petitioner, which was itself defaulting in
paying its supplier, sued the said supplier-respondent, allegedly for causing damage
to it in that it was not able to deliver the materials with its contract to another
company because the respondent failed to deliver the materials.
SC: Rejected the claim of damages in favor of the the company-petitioner, not only
because it was shown that the non-delivery of the materials by the respondent was
justified in view of the non-payment by the company, but also because the
supplier-respondent has absolutely nothing to do with the contract between the
petitioner and the client-corporation.
Private respondent is not a party to the said agreement (re: 2nd paragraph
of 1311). It is also not a contract pour autrui. Aforesaid contracts could not affect
third persons like private respondent because of the basic civil law principle of
relativity of contracts which provides that contracts can only bind the parties who
entered into it, and it cannot, favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.
Games and Garments Developers, Inc v. Allied Banking Corp: The bank merely
facilitated the sale of the property and provided financing for the deed of sale, the
Supreme Court stated that in a cause of action for the payment of the balance of the
purchase price in relation to the sale, the bank cannot be held liab;e as it is not a
party to the contract.
Contracts CANNOT take effect with respect to the HEIRS or ASSIGNS in three
cases:
1. When the nature of the contract does not allow transmission
— Where acts stipulated in the contract require the exercise of
special knowledge, genius, skill, taste, ability, experience, judgment,
discretion, integrity or other personal qualification of one or both parties,
the agreement is of personal nature, and terminates on the death of the
party who is required to render such service.
2. When the parties stipulate that no transmission of rights shall be
allowed
3. When the law provides non-transmission
— e.g. In a contract of voluntary deposit, the depositary cannot
deposit the thing with a third person, unless there is a stipulation to the
contrary. In a lease, it provides that “the lessee cannot assign the lease
without the consent of the lessor.
(2nd par, 1311) Principle concerning Contracts Pour Autrui – the enforcement of
which may be demanded by a third party for whose benefits it has been made,
although not a party to the contract, before the stipulation in his favor has been
revoked by the contracting parties.
→ Clear intent to benefit the third party
→ Insufficient that the third party be merely incidentally benefited.
Requisites of a stipulation pour autrui:
1. The must be a stipulation in favor of a third party
2. The stipulation must be a PART, not the whole of the contract
3. The contracting parties must have clearly and deliberately conferred a favor
upon a third person, not a mere incidental benefit or interest
4. Neither of the contracting parties bears the legal representation or
authorization of the third party
5. The favored party must have communicated his acceptance of the
stipulation to the obligor before its revocation
Mandarin Villa, Inc v. CA: Where the owner of a restaurant refused to honor a credit
card for the purpose of payment from a customer on the purpose of payment from a
customer on the ground that its machine validating such credit card indicated that
the card has expired, when in fact it had not expired as clearly indicated on the
card itself, and where the owner would have known such fact had it merely followed
the rules it agreed upon with the credit card company providing that in cases where
the machine shows that the card has expired, it must follow a certain procedures and
should examine the card itself.
SC: Found the restaurant-owner liable for damages anchoring its decision on the
latter’s negligence and on Article 1311 of NCC on pour autrui — while the private
respondent may not be a party to the said agreement, the stipulation conferred
a favor upon the private respondent, a holder of credit card validly issued by
the bank. This stipulation is called pour autrui.
[1312] In contracts creating real rights, third persons who come into possession
of the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Law.
[1313] Creditors are protected in cases of contracts intended to defraud them.
→ In Article 1381 (3) provides that a contract shall be rescissible if it is
undertaken in fraud of creditors when the latter cannot in any manner collect the
claim due them. In such a case, even if the creditor is not a party to the contract
intended to defraud him, he is given legal personality by law to terminate the
contract.
[1314] Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party.
- e.g. A was contracted by B to be the resident painter in his studio for one
year and C maliciously induces B to dishonor the contract so that he can go
to C’s studio — C can be liable for damages under Art. 1314.
So Ping Bun v. CA: Tek Hua Enterprises leased property from the lessor DCCSI.
After the lease expired, the company still occupied the premises. When the managing
partner of the company died, the son, petitioner So Ping Bun, took possession of the
premises for his own company, Trendsetter Marketing, using the leased premises as a
warehouse. Hence, Tek Hua asked So Ping Bun and Trendsetter Marketing to leave.
They refused and instead asked the lessor for the execution of formal contracts
of lease with his own corporation. The lessor agreed
Tek Hua sued for nullification of the lease contracts on the ground of
contractual interference under Article 1314 of the NCC. Tek Hua won but the
petitioner was not liable for damages, only attorney’s fees. Petitioner now claims that
since they are not liable for damages, they should not be liable with attorney’s fees,
as well.
SC: The foregoing issues involve, essentially, the correct interpretation of the
applicable law on tortuous conduct, particularly unlawful interference with
contract. Damage is the loss, hurt, or harm which results from injury, and damages
are the recompense or compensation awarded for the damages suffered.
The elements of tort interference are: 1.) Existence of a valid contract, 2.)
Knowledge on the part of the third person of the existence of the contract, 3.)
Interference of the third person is without legal justification or excuse. In the instant
case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the
warehouse to his enterprise at the expense of the respondent corporation. Though
petitioner took interest in the property of the respondent corporation and benefited
from it, nothing on the record imputes deliberate wrongful motives on malice on
him.
→ Lack of Malice precludes damages. But it does not relieve petitioner of
legal liability for entering into contracts and causing breach of existing ones.
[1315] Contracts are perfected by MERE CONSENT, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage, and law.
[1316] Real contracts, such as DEPOSIT, PLEDGE, and COMMODATUM, are
not perfected until the delivery of the object of the obligation.
→ The parties are bound to exercise the diligence of a good father of a
family with respect to the thing sought to be delivered unless there is another
standard of care stipulated by the parties or required by law.
→ They are likewise obliged to deliver with the determinate thing which is
the object of the contract, all the accessions and accessories even though they may
not have been mentioned.
→They shall be liable for a fortuitous event in the case of delay.
A contract is perfected by mere consent of the parties. However, ownership over the
object of the contract of sale is transferred only upon actual or constructive delivery.
But if in case of real contracts, it is not perfected by mere consent – the delivery of
the object of the contract is necessary.
[1317] No one may contract in the name of another without being authorized by
the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, shall be
UNENFORCEABLE, unless it is ratified, expressly or impliedly, by the person
whose behalf it has been executed, before it is revoked by the other contracting
party.
→ To contract in the name of another — must be validly constituted as his
AGENT. Laws on Agency will apply — a person binds himself to render some
service or to do something in representation or on behalf of the other, with consent or
authority of the latter.
→ The principal of the agent must comply with all the obligations which
the agent may have contracted within the scope of his authority. As for the obligation
wherein the agent has exceeded his power, the principal is NOT BOUND, except
when he expressly or impliedly ratified.
→ Even when the agent exceeded authority, principal is SOLIDARILY
LIABLE with the agent if the former allowed the latter to act as though he had
full power.
- Diligence of a Good Father of the Family (or depending on what is
required)
- Sale of a piece of land or any interest done through an agent must be IN
WRITING; otherwise, sale is VOID.
➢ The unforeseeable contract however can be ratified expressly or impliedly
by the person whose behalf it has been executed, before it is revoked by the
other contracting party.
Regal Films v. Concepcion: The agent of a certain movie actor entered into an
agreement with Regal Films designed to constitute an addendum to the original
agreements between the movie actor and Regal Films so that the lawsuit between the
parties will finally be settled. The movie actor, however, disavowed the agreement
entered into by the agent contending that, by the time the agent transacted the
addendum, she was not anymore his agent. Hence, in the preliminary conference
in Court, Regal Films intimated to the movie actor that it was willing to release him
the original contracts instead of pursuing the addendum. Thereupon, the movie actor
surprisingly accepted the addendum.
On the basis of his acceptance, a decision by way of compromise agreement
was entered into by the court.
SC: Ruled that the compromise agreement which was the basis of the decision
CANNOT be enforced. A compromise is an agreement between 2 or more persons
who, for preventing or putting end to a lawsuit, adjust their respective positions by
mutual consent in the way they feel they can live with it. Reciprocal Concessions
are the very heart and life of CAs, where each party approximates and concedes in
the hope of gaining, balanced by the danger of losing. It is, in its essence, a contract.
The elements of a valid contract are: consent, object, and cause. In this
instance, the addendum was flatly rejected by the respondent on the ground that he
did not give his consent thereto nor authorized anyone to enter in the agreement. The
outright rejection of the addendum made known to the other ended the offer.
→ When respondent later filed his Manifestation, stating that he was, after
all, willing to honor the addendum, there was nothing to accept.
ESSENTIAL REQUISITES OF A CONTRACT
[1318] There is no contract unless the following requisite concur:
1. CONSENT of the contracting parties
2. OBJECT certain which is the subject matter of the contract
3. CAUSE of the obligation which is established
→ Absence of ONE of the requisites NEGATES the contract.
→ 2 Types of Void Contract:
a. Where one of the element of 1318 is not present (void ab initio)
b. Those provided for as void under Article 1409
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
 (2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
→ These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.
CONSENT
[1319] Consent is manifested by the MEETING OF THE OFFER and
ACCEPTANCE upon the thing and the cause which are to constitute the
contract. The offer must be certain and acceptance absolute. A qualified
acceptance constitutes a counteroffer.
Acceptance made by letter or telegram does not bind the offer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in place where the offer was made.
[1320] An acceptance may be express or implied.
[1321] The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with.
[1322] An offer made through an agent is accepted from the time acceptance is
communicated to him.
→ By the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of
the latter.
→ The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority. If the agent has exceeded, the principal
is NOT bound EXCEPT when he ratifies it expressly or tacitly.
[1323] An offer becomes ineffective upon the DEATH, CIVIL INTERDICTION,
INSANITY, or INSOLVENCY of either party BEFORE ACCEPTANCE is
conveyed.
→ Offer becomes ineffective. When an offer becomes ineffective, nothing
can be accepted.
[1324] When the offeror has allowed the offeree a certain period to accept, the
offer may be WITHDRAWN at any time BEFORE ACCEPTANCE by
communicating such withdrawal, except when the option is founded upon a
consideration as something paid or promised.
→ An OPTION is a contract granting a privilege to buy and sell at a determined
price within an agreed time.
→ An OPTION MONEY (in re: option contract – contract relating to a period of
time.) As ro differentiate with EARNEST MONEY which is considered part of the
price in a contract of sale and can be a proof of the perfection of the contract of sale.
- If the buyer and seller agreed that an “earnest deposit” is not earnest
money that can be considered as a proof of perfection of the contract.
→ Consideration in an option contract may be anything of value, unlike in sale
where it must be the price certain in money or its equivalent.
→ Upon the expiration of the option period and the person given such option does
not manifest his or her acceptance, the offeror may offer the intended contract to
somebody else.
[1325] Unless it appears otherwise, business advertisement of things for sale are
NOT DEFINITE OFFERS, but mere invitation to make offer. [1326]
Advertisement for bidders xx
[1327] The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.
→ ANNULABLE OR VOIDABLE.
→ It must be important to point out that persons who are capable cannot allege the
incapacity of those with whom they contracted to annul the contract.
[1328] Contracts entered into during a lucid interval are valid. Contracts agreed
to in a state of drunkenness or during a hypnotic spell are voidable.
[1329] The incapacity declared in article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws.
[1330] A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.
[1331] In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal cause of
the contract.
A simple mistake of account shall give rise to its correction.
[1332] When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully
explained to the former.
[1333] There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract.
[1334] Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated, may vitiate consent.
[1335] There is violence when in order to wrest consent, serious or irresistible force
is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his person or
property, or upon the person or property of his spouse, descendants or ascendants, to
give his consent.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or
legal, does not vitiate consent.
[1336] Violence or intimidation shall annul the obligation, although it may have
been employed by a third person who did not take part in the contract.
[1337] There is undue influence when a person takes improper advantage of his
power over the will of another, depriving the latter of a reasonable freedom of
choice. The following circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties, or the fact that the person alleged to
have been unduly influenced was suffering from mental weakness, or was ignorant
or in financial distress.
[1338] There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them,
he would not have agreed to.
[1339] Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud.
[1340] The usual exaggerations in trade, when the other party had an opportunity
to know the facts, are not in themselves fraudulent.
[1341] A mere expression of an opinion does not signify fraud, unless made by an
expert and the other party has relied on the former's special knowledge.
[1342] Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.
[1343] Misrepresentation made in good faith is not fraudulent but may constitute
error.
[1344] In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
[1345] Simulation of a contract may be absolute or relative. The former takes place
when the parties do not intend to be bound at all; the latter, when the parties conceal
their true agreement.
[1346] An absolutely simulated or fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties
to their real agreement.
OBJECT
[1347] All things which are not outside the commerce of men, including future
things, may be the object of a contract. All rights which are not intransmissible
may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract.
[1348] Impossible things or services cannot be the object of contracts.
[1349] The object of every contract must be determinate as to its kind. The fact that
the quantity is not determinate shall not be an obstacle to the existence of the
contract, provided it is possible to determine the same, without the need of a new
contract between the parties.
CAUSE
[1350] In onerous contracts the cause is understood to be, for each contracting party,
the prestation or promise of a thing or service by the other; in remuneratory ones, the
service or benefit which is remunerated; and in contracts of pure beneficence, the
mere liberality of the benefactor.
[1351] The particular motives of the parties in entering into a contract are different
from the cause thereof.
[1352] Contracts without cause, or with unlawful cause, produce no effect whatever.
The cause is unlawful if it is contrary to law, morals, good customs, public order or
public policy.
[1353] The statement of a false cause in contracts shall render them void, if it should
not be proved that they were founded upon another cause which is true and lawful.
[1354] Although the cause is not stated in the contract, it is presumed that it exists
and is lawful, unless the debtor proves the contrary.
[1355] Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence.
FORMS OF CONTRACTS
[1356] Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it may
be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.
[1357] If the law requires a document or other special form, as in the acts and
contracts enumerated in the following article, the contracting parties may compel
each other to observe that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the contract.
[1358] The following must appear in a PUBLIC DOCUMENT
(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over IMMOVABLE PROPERTY;
SALE OF REAL PROPERTY or of an interest therein are governed by articles
1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of HEREDITARY RIGHTS or of
those of the CPG;
(3) The power to administer property, or any other power which has for its object
an act appearing or which should appear in a public document, or should prejudice
a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public
document.
All other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by Articles 1403, No. 2 and 1405.
Dauden - Hernaez v. De Los Santos: Article 1358 nowhere provides that the absence
of written form in this case will make the agreement invalid or unenforceable. On
the contrary, Article 1357 clearly indicates that contracts covered by Article 1358 are
binding and enforceable by action or suit despite the absence of writing.
REFORMATION OF INSTRUMENTS
[1359] When, there having been a meeting of the minds of the parties to a contract,
their true intention is not expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
If MFICA has prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but ANNULMENT of the contract.
→ Applies only to written contracts. Reformation connotes a valid contract – the
parties are able to have a meeting of the minds but the instrument supposed to
embody the contract does not conform to such contract.
→ 2 Fundamental Matters to be shown before Reformation may be afforded:
1.) Instrument embodying the contract does not reveal the true intention of the
parties; 2.) The existence of a real and actual contract entered into by the parties.
- Failure to prove these two matters may lead to the creation of an entirely
new contract.
→ Remember! In contract law, a bad faith party has no remedy at all.
→ Mistake – principal ground for reformation.
→ In action for reformation, the onus probandi is upon the party who insists that the
contract should be reformed.
[tbc !!! ] Interpretation of Contracts!!!
RESCISSIBLE CONTRACTS
[1380] Contracts validly agreed upon may be rescinded in the cases established by
law.
→ Rescissible Contracts: One that was entered into legally by the contracting
parties but has resulted in economic damage to one of the parties or a third party (as
a result of inequitable conduct of one party)
→ If the contract is in fraud of the creditors, there is absolutely no consideration,
hence, the contract is not rescissible, but void ab initio.
Dilag v. CA: A contract in fraud of creditors but completely simulated was
considered void ab initio, and not merely rescissible — thus, a deed of sale was
simulated since it was executed in fraud of the creditors (having been entered into
during the pendency of a Civil case). Said contract, being fictitious, is inexistent and
necessarily the adverse claim of private respondents is likewise a nullity since an
inexistent contract cannot give life to anything at all.
→ The supposed sellers who sold the lot in question to their children
(petitioners) for insufficient consideration continued exercising acts of ownership
over the lot by leasing the same.
[1381] The following contracts are rescissible:
1.) Entered into by guardians whenever the wards whom they represent
suffer lesion by more than ¼ of the value of the things which are the
object thereof;
2.) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
3.) Those undertaken in fraud of creditors when the latter cannot in any
manner collect the claim due them;
4.) Those which refer to things under litigation if they have entered into by
the defendant without the knowledge and approval of the litigants, or of
competent judicial authority;
5.) All other contracts specially declared by law to be subject to rescission.
→ Lesion: Economic Damage.
→ #1 In cases of guardians, if there is a court approval, the transaction is valid
whether or not there is lesion. In the performance of acts of administration (such as
buying materials to repair the roof) and the ward suffered economic loss because
there was, in fact, no need to make such a useless purchase, the contract entered
into by the guardian is rescissible (provided that the lesion suffered is more than ¼
of the value of the things which are object thereof).
→ #3 In cases of fraud of creditors, according to Bobis v. Provincial Sheriff of
Camarines Norte: The rule is that fraud is not presumed. As fraud is criminal in
nature, it must be proved by clear preponderance of evidence. In order that a contract
may be rescinded as in fraud of creditors, it is essential that it be shown that both
contracting parties have acted maliciously and with fraud and for the purpose
of prejudicing the creditors, and that the latter are deprived by the transaction of all
means by which they may affect collection of their claims.
Litonjua v. LR Corporation: (Right if First Refusal) where the creditor lent the
money to the debtor who, in turn, collateralized his property to secure the loan, the
SC said that the failure of the debtor to recognize or implement the stipulated
right of first refusal contained in the loan-mortgage agreement in favor of the
credito makes any sale of the property to a third party rescissible at the instance
of the creditor.
→ RIGHT OF FIRST REFUSAL: In the event debtor decides to sell his
property, he must first offer the same to the creditor. To deprive the creditor of his
RFR will surely prejudice the creditor in his substantial interests to be able to own
the property.
[1382] Payments made in a state of insolvency for obligations to whose fulfillment
the DR could not be compelled at the time theory were affected, also rescissible.
→ INSOLVENCY: State when the debtor whose liabilities already
exceeded his assets and could barely pay off his debts. If he pays off a creditor
whose credit has not yet become due, that payment can be rescinded.
[1383] The action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the
same.
→ LAST RESORT / REMEDY!
- A cause of action for rescission under this chapter can only be made in a
proper and direct action filed for that purpose and not on mere motion
incidental to another case.
- Air France v. CA: Rescission is a relief which the law grants on the premise
that the contract is valid for the protection of one of the contracting parties
and third persons from all injury and damage the contract may cause, or to
protect some incompatible and preferential rights created by the contract.
Rescissible contracts, not being void, they remain legally
effective until set aside in a rescissory action and may convey title. Nor
can they be attacked collaterally upon the grounds for rescission in a land
registration proceeding.
- LAST REMEDY — if there are other means to clam reparation, such other
means must be availed of before filing a case of rescission.
→ Accion Pauliana or action to rescind presupposes the following:
1. A judgment;
2. The issuance by the trial court of a writ of execution for the satisfaction of
the judgment;
3. The failure of the Sheriff to enforce and satisfy the judgment of the Court.
➢ It requires that the creditor has exhausted the property of the
debtor. What is important is that the credit of the plaintiff
antedates that of the fraudulent alienation by the debtor of his
property.
[1384] Rescission shall be only to the extent necessary to cover the damages caused.
[1385] Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may
be obliged to restore.
Neither shall rescission take place when the things which are the object of
the contact are legally in possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
→ RESTITUTION: The parties shall be placed in the same position where they
were before they entered into the assailed contract. The objective is to restore the
parties to their original position.
→ If the object of the contract cannot be restored because of loss, damages may be
claimed from the person responsible of the loss.
[1386] Rescission referred to in Nos. 1 (guardian) and 2 (representation of absentee)
shall NOT take place with respect to the contracts approved by the Courts.
→ Once judicially approved, can no longer be the subject of rescission.
[1387] All contracts by virtue of which the debtor alienates property by gratuitous
title are presumed to have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed fraudulent when made
by persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been obtained by the party seeking
the rescission.
In addition to these presumptions, the design to defraud creditors may be
proved in any other manner recognized by the law of evidence.
Final Q: If the property is registered (with TCT), there is one requirement – if there
is debt that is due, there must be a filing of such.
Samuel Lee v. Bangkok Bank Public Company: Alienation by onerous title has been
made “by persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued.” The presumption, however, can be
rebutted by convincing evidence to the contrary. It must be observed that an
alienation made during the pendency is not enough. There must already be a
decision or writ of attachment which must be registered if what is resolved is
registered land. Without such registration (if it involves registered land), the benefit
of presumption will not arise.
[1388] Whoever acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable first,
and so on successively.
[1389] The action to claim rescission must be commenced within four years.
 For persons under guardianship and for absentees, the period of four years
shall not begin until the termination of the former's incapacity, or until the domicile
of the latter is known.
VOIDABLE CONTRACTS
[1390] The following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties:
1. Those where one of the parties is incapable of giving consent to a contract;
2. Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.
These contracts are binding, unless they are annulled by a proper court action. They
are susceptible of ratification.
→ Valid until annulled. Any defect or infirmity causing its annullable
nature can be cured by the party aggrieved or injured (ratification).
[1391] The action for annulment shall be brought within 4 yrs.
This period shall begin: 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.) When the action refers to contracts entered
into by minors or other incapacitated persons, from the time the guardianship
ceases.
Miailhe v. CA: The petitioner claimed that, during the height of Martial Law under
Pres. Marcos, he was intimidated and forced into a contract with the DBP that led to
the forced conveyance of his property to DBP. It was shown that the cause of the
vitiation of consent ceased on Feb. 24, 1986, when Pres. Marcos left the Philippines
but the case of annulment was only filed on March 23, 1990. SC: Ruled that the
action has prescribed. This action should have been filed on or before Feb. 24, 1990.
The reconveyance of the property by the respondent could not be a determinate
conduct that can be extrajudicially demanded while the contract is considered valid
(contract is only annullable – hence, valid until annulled).
[1392] Ratification extinguishes the action to annul a voidable contract.
[1393] Ratification may be effected expressly or tacitly. It is understood that there is
a tacit ratification if, with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right.
→ Act of curing the defect which made the action to annul a voidable
contract.
[1394] Ratification may be effected by the guardian of the incapacitated person.
[1395] Ratification does not require the conformity of the contracting party who
has no right to bring the action for annulment.
[1396] Ratification cleanses the contract from all its defects from the moment it
was constituted.
[1397] The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed fraud, or caused mistake
base their action upon these flaws of the contract.
[1398] An obligation having been annulled, the contracting parties shall restore to
each other the things which have been the subject matter of the contract, with their
fruits, and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
[1399] When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except insofar
as he has been benefited by the thing or price received by him.
[1400] Whenever the person obliged by the decree of annulment to return the thing
can not do so because it has been lost through his fault, he shall return the fruits
received and the value of the thing at the time of the loss, with interest from the same
date.
[1401] The action for annulment of contracts shall be extinguished when the thing
which is the object thereof is lost through the fraud or fault of the person who has a
right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the plaintiff.
[1402] As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to comply
with what is incumbent upon him.
UNENFORCEABLE CONTRACTS
[1403] The following contracts are unenforceable, unless ratified:
1. Entered into the name of another → No authority or Legal Representation,
or acted beyond his powers;
2. Those that do not comply with Statute of Frauds (unenforceable by action
unless the same be in writing and subscribed by the party charged, or his
agent)
a. An agreement that by its terms is not to be performed within a
year from the making thereof;
b. A special promise to answer for debt, default, or miscarriage of
another;
c. An agreement made in consideration of marriage, other than
mutual promise to marry;
d. An agreement for sale of goods, chattels, or things in action (at a
price not less than P500) unless the buyer accept and receive part
of such goods and chattels, or some of them, of such things in
action, or pay at the time some part of the purchase money.
 e.An agreement for leasing for a longer period than one year, or for
the sale of real property or of an interest therein;
f. A representation as to the credit of a third person
3. Those where both parties are incapable of giving consent
[1404] Unauthorized contracts are governed by Article 1317 (1317 - No one may
contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him.)
→ A contract may have all requisites for perfection but it may still be unenforceable.
[DSM] Perfected contract, about to be executed.
- Entered without authority (Art. 1317)
- Entered into by parties who are both incapacitated to enter into a contract
[ e.g. entered into by a deaf-mute who can’t read and write and a minor
— unenforceable ]
→ If only one is incapacitated, contract will be voidable.
- Does not comply with Statute of Frauds [for certain executory contracts to
be enforceable in court of law, the only evidence that can prove such
contract is a written proof of the agreement (notes or memoranda)
→ Reason: To prevent fraud or perjury
Paredes v. Espino: Where the record shows that the defendant wrote the plaintiff a
letter stating that he (defendant) accepted the offer of the plaintiff as to the price and
object of the contract and this was followed up by telegrams.
SC: The documents presented constituted adequate memoranda of the transaction
and therefore was removed from the operation of Statute of Frauds.
Vda. de Espiritu v. CFI: Clearly the Statute of Frauds only applies to executory
contracts and not to contracts which have been consummated already or those which
have been totally or partially performed.
→ Hence, a contract of sale of real property in installment is not within the
Statute of Frauds, even though it is not in writing, if the first installment has
already been paid. In such case, there has already been a partial performance of
the contract by the buyer.
Babao v. Perez: It has also been held that an oral contract partially performed must
be clearly proven in court. Contracts which by their terms are not to be performed
within one year, may be taken out of the statute through performance by one party
thereto. All that is required in such case is complete performance within one year by
one party, however many years may have elapsed before the agreement is performed
by other party.
→ The broad view is that the SOF applies only to agreements not to be
performed on either side within a year from the making thereof. Agreements to be
fully performed on one side within the year are taken out of the operation of the
statute.
Partial Performance can also be manifested when improvements are made on the
subject property pursuant to the contract, rentals are paid, taking possession on the
basis of a verbal contract to purchase the property, payment of taxes, and
relinquishment of rights, etc.
[1405] Contracts infringing SOF are ratified by the failure to object to the
presentation of oral evidence to prove the same, or by acceptance of benefits
under them.
Abrenica v. Gonda: (Abrenica Rule) It was held that contracts infringing the SOF
are ratified when the defense fails to object, or asks questions on cross
examinations. As no timely objection or protest was made to the admission of the
testimony of the plaintiff with respect to the contract; and as the motion to strike out
said evidence came too late, and furthermore, as the defendants themselves, tacitly
waived their right to have it stricken out. The evidence, therefore, cannot be
considered as inadmissible or illegal.
→ Another form of ratification removing the contract from the purview of the SOF
is when benefits are already obtained from the agreement. If A sold to G a
particular real property and A benefited from the transaction by already obtaining
the purchase price, the contract of sale of the real property can be enforced even if
the same is not in writing.
→ SOF may only be invoked in case of violation of contracts or for specific
performance. Hence, if the only purpose of the suit is to prove lawful possession of a
real property, the absence of written evidence in order to prove violation of SOF
cannot be invoked.
[1406] When a contract is [in writing and] enforceable under SOF, and a public
document is necessary for its registration in the RD, the parties may avail themselves
of the right under Art. 1357. (1357 - If the law requires a document or other special
form, as in the acts and contracts enumerated in the following article, the
contracting parties may compel each other to observe that form, once the contract
has been perfected, this right may be exercised simultaneously with the action upon
the contract.)
Almirol v. Montserrat: (Almirol Doctrine) Where by virtue of a verbal sale, the
applicant came into actual possession of the land, and where the applicants sought
the registration of the subject lot already in their possession, and where the
oppositors claimed that oral proof of the contract cannot be adduced in court where
registration was being questioned.
SC: Parol evidence of sale is adduced not for the purpose of enforcing performance,
but on the basis of the lawful possession of the applicants entitling them to have the
land thereby sold registered in their name, the SOF is not applicable.
[1407] ANNULLABLE: In a contract where both parties are incapable of giving
consent, express or implied ratification by the parent or guardian, as the case may
be, of one of the parties shall give the same effect as if only of one them were
incapacitated.
VALID: If the ratification is made by the P/G of both contracting parties, the
contract shall be validated from the inception.
[1408] Unenforceable contracts cannot be assailed by third persons.
VOID AND INEXISTENT CONTRACTS
[1409] The following contracts are inexistent and voidable from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
[1410] The action or defense for the declaration of the inexistence of contracts does
not prescribe.
- No prescriptive period / Laches
- No need to judicially file an action to make the contract void
[1411] When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the price of the
contract.
This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply with
his promise.
→ In pari delicto doctrine applies only to contracts with illegal consideration or
subject matter (if the contract has no consideration at all, or there is a total absence of
consent, or there is an absence of object, such contract is inexistent contract – in pari
delicto rule will NOT apply)
[1412] If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he
has given without any obligation to comply his promise.
Lita Enterprises v. IAC: Parties operate under a ‘kabit system’ whereby one person
who has been granted a certificate of convenience allows another person who owns
motor vehicles to operate under such franchise for a fee. A certificate of public
convenience is a special privilege conferred by the government. Abuse of this
privilege by the grantees thereof cannot be countered.
→ Though not outrightly penalized as a criminal offense, the ‘kabit system’
is invariably recognized as being contrary to public policy, and therefore, void and
inexistent under Art. 1409. It is a fundamental principle that the court will not aid
either party to enforce an illegal contract, but will leave them both where it
finds them.
→ The defect of inexistence of a contract is permanent and incurable, and
cannot be cured by ratification or by prescription. [Eugenio v. Perfido] The mere
lapse of time cannot give efficacy to contracts that are null and void.
XPNS – (Arts. 1413-1415)
[1413] Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.
→ Under the Usury Laws, in case if usurious interest, the whole interest
will be recoverable.
[1414] When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.
De Leon v. CA: The pari delicto rule , expressed in the maxims “Ex dolo malo non
oritur actio” (A right of action cannot arise out of fraud) and “In pari delicto potior
est conditio defendentis” (refer to two persons or entities who are equally at fault,
whether the malfeasance in question is a crime or tort.) which refuses remedy to
either party to an illegal agreement, and leaves them where they are does not apply in
the case [xx] Art 1414 of the NCC, which is an XPN to the pari delicto rule, is the
proper law to apply.
Since the Letter-Agreement was repudiated before the purpose has been
accomplished and to adhere to the pari delicto rule in this case is to put a premium to
the circumvention of the laws, positive relief should be granted to Macaria. Justice
would be served by allowing her to be placed in the position in which she was before
the transaction was entered into.
[1415] Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands allow recovery of
money or property delivered by the incapacitated person.
→ If A, minor, enters into a contract with B, whereby the latter sells to said
minor shabu, the Court may allow the minor to recover the money he paid B in
purchasing the illegal drugs. This is, however, within the discretion of the Court. If
the Court does not find that public policy will be served by the return of the money, it
could opt to issue an order precisely not to return the money.
[1416] Agreement not illegal per se, but merely prohibited, and the prohibition by
the law is designed for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid for,
Ras v. Sua: Where a property acquired from the gov’t pursuant to a law designed to
give land to the landless was, in violation of the spirit of said law, leased to third
parties who refused to have the property reconveyed to the possession of the
owner-grantee despite the violation of the lease agreement, and where the third
party possessors claimed that repossession cannot be made because the parties were
in pari delicto and the proper party to file the suit was the government who granted
the land to the owner.
SC: (Affirmed the decision of the lower court allowing the owner to repossess the
property)
[1417] Where the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price may
recover the excess.
→ Law provides that it is illegal to charge an amount higher than the
statutory ceiling. Such an excess from the limit shall be recoverable.
[1418] When the law fixes, or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer undertakes to
work longer than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.
[1419] When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a lower wage,
he shall be entitled to recover the deficiency.
[1420] In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced.
[1421] The defense of illegality of contract is not available to third persons whose
interests are not directly affected.
[1422] A contract which is the direct result of a previous illegal contract, is also
void and inexistent.
TITLE III - NATURAL OBLIGATIONS (Arts. 1423-1430)
ESTOPPEL
[1431] Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person
relying thereon.
→ Only applies to questions of fact, not of law.
→ Estoppel is not applicable against the government suing in its capacity as
sovereign or asserting governmental rights.
→ Does not apply if a law or public policy will be violated.
SM Land Inc. v. Bases Conversion and Development Authority: Where a private
company was repeatedly assured by the government that it will respect the former’s
rights placing the company in so much trouble and expense—
Certificate of Successful Negotiation → Bidding (entity who conceptualized
can match the amount) → Government is liable as they acted whimsically and
capriciously, hence, cannot be barred by estoppel.)
SC: Respondents cannot also find solace in the general rule that the State is not
barred by estoppel by mistake or error of its officials or agents. The doctrine is
subject to exceptions: They must be applied with circumspection and should be
applied only in those special cases where the interest of justice clearly requires it.
[1432] The principles of estoppel are hereby adopted insofar as they are not in
conflict with the provisions of this Code, Code of Commerce, the Rules of Court,
and special laws.
[1433] Estoppel may be in pais or by deed.
Equitable Estoppel (estoppel in pais): Is a term applied usually to a situation where,
because of something which he has done or omitted to do, a party is denied the right
to plead or prove an otherwise important fact.
MIAA v. Ding Velayo Sports Center: As related to the party claiming estoppel, the
essential elements are:
1. Lack of knowledge and of the means of knowledge of the truth as the
facts in question;
2. Reliance, in good faith, upon the conduct or statements of the party to be
estopped;
3. Action or inaction based thereon of such character as to change the
position or status of the party claiming the estoppel, to his injury, detriment
or prejudice.
[1434] When a person who is not the owner of a thing sells or alienates and delivers
it, and later the seller or grantor acquires the title thereto, such title passes by
operation of law to the buyer or grantee.
→ A, who is not the owner of the car sells the same to B, the sale is unenforceable EXTRA CONTRACTUAL OBLIGATIONS
(A has no authority). However, if A himself delivers the property to B, and later A Quasi Contracts (Arts. 2142-2143)
buys the same from the real owner N, A cannot claim the property as his on the Sec. 1. Negotiorium Gestio (2144-2153)
ground that when he sold it to B, he was not the owner of the same. B shall be Sec. 2. Solutio Indebiti (2154-2163)
preferred by the law and will treat the (earlier) sale as completely valid. Sec. 3. Other Quasi-Contracts (2164-2174)

Estoque v. Pajuimula: Where a co-owner sold a land which he co-owned with two
other owners and such sale was assailed as invalid because the seller could not have
sold the interest of the co-owners without their consent. SC ruled that the sale was
VALID. Applying Art. 1434.

[1435] If a person in representation of another sells or alienates a thing, the

former cannot subsequently set up his own title as against the buyer or grantee.

→ A constituted B as his agent to sell his car. B sold the car to X. B cannot later on
claim as against X that he was the owner to invalidate the transaction.

[1436] A lessee or a bailee is estopped from asserting title to the thing leased or
received, as against the lessor or bailor.
→ Lessee cannot claim ownership over the property he is leasing because
in the contract of lease, he acknowledges that he is not the owner of the property and
he has only the peaceful possession thereof under such terms and conditions.

[1437] When in a contract between third persons concerning immovable

property, one of them is misled by a person with respect to the ownership or
real right over the real estate, the latter is precluded from asserting his legal title
or interest therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful concealment of facts
known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts as
misrepresented;
(3) The party misled must have been unaware of the true facts; and
(4) The party defrauded must have acted in accordance with the
misrepresentation.

[1438] One who has allowed another to assume apparent ownership of personal
property for the purpose of making any transfer of it, cannot, if he received the sum
for which a pledge has been constituted, set up his own title to defeat the pledge of
the property, made by the other to a pledgee who received the same in good faith and
for value.
Pledge: Constituted by the absolute owner of the thing pledged to secure
the fulfillment of a principal obligation

[1439] Estoppel is effective only as between the parties thereto or their

successors in interest.