General Provisions on Contracts

V.
GENERAL PROVISIONS ON CONTRACTS

I. GENERAL PROVISIONS ON CONTRACTS
NATURE, DEFINITION AND ELEMENTS OF A CONTRACT
Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other,
to give something or to render some service. (1254a)
NATURE OF CONTRACTS
‣ TOLENTINO —
‣ A contract, broadly speaking, is an agreement on the declaration of a common will. It has been defined in other codes
as “a bilateral legal transaction to create, modify, or terminate a legal tie between the parties.” Our code however,
follows a more restrictive definition, giving emphasis to the obligatory concept of contracts. The error in our definition,
however, lies in imperfect phraseology. It seems to limit the definition to cases, where one party binds himself to
perform a presentation in favour of another, excluding cases or reciprocal prestations.
‣ A better definition is given by Sanchez-Roman, who defines it as a “juridical convention manifested in legal form, by
virtue of which one or more persons bind themselves in favour of another or others, or reciprocally, to the fulfilment of
a prestation to give, to do, or not to do.”
‣ Some authors define contract as “an express convention”, but this is not accurate, because a contract can exist by
implication, as an attorney-client relationship when an attorney actually rendered legal services for another who is a
close friend.
‣ As a consensual relation, a contract must be shown to exist, as a fact, clearly and convincingly.
‣ Contract distinguished from other conventions —
‣ Although a contract is a convention, or agreement of wills, not every convention is a contract. A contract is limited
to agreements which product patrimonial liabilities. Contracts, therefore, are distinguished from other acts based
on the consent of two or more persons such as marriage, donation, adoption, and succession, in the following
ways —
1. A contract creates obligations which are more particular, concrete, and transitory, because it establishes a
relation which is more limited by reason of persons, effects, and importance.
2. In contract, the freedom to stipulate predominates over the necessity of the act, in other words, the intention of
the parties is the determining factor in contracts, while the meeting of the minds is merely secondary in the
other acts.
3. The law is the principal source of rights and obligations in the other acts mentioned, but in contracts, the law
has only a suppletory effect.
‣ Contract distinguished from other terms —

1. Perfect promise — is distinguished from a contract, in that the latter establishes and determines the obligations
arising therefrom,. while the former tends only to assure and pave the way for the celebration of a contract in the
future; until the contract is actually made, the rights and obligations are not yet determined.
2. Imperfect promise — designated also as policitacion, constitutes a mere unaccepted offer.
3. Pact — is a special part of the contract, sometimes merely incidental and separable from the principal agreement.
4. Stipulation — is similar to a pact. When a contract is in an instrument, a stipulation refers to the essential and
dispositive part, as distinguished from the exposition of the facts and antecedents from which it is based.
PARTIES TO A CONTRACT
‣ TOLENTINO —
‣ Number of Parties — the Code requires “two persons” for the existence of a contract, obviously, what is meant by
the law is “two parties”. For a contract to exist, therefore, there must be two parties to it. Hence, if one of the
supposed parties to the contract, was, at the time of its execution, already dead, the contract does not exist. Neither
can there be a contract when one of the parties to it is a supposed corporation that has no legal existence.
‣ Husband and Wife as Parties — Under Art. 1490, the husband and wife cannot sell property to each other, unless
there is a separation of property between them. Although that article applies expressly only to sales, it has not been
construed restrictively. Sale being the prototype or model of bilateral contracts, and the intent of the legislator being to
CLARENCE TIU OBLIGATIONS AND CONTRACTS

ATENEO LAW 4B, BATCH 2017 1 CIVIL LAW REVIEWER
V. GENERAL PROVISIONS ON CONTRACTS
extend it to contracts with the same purpose, jurisprudence has applied it to other contracts. The purpose behind the
prohibition is to protect the conjugal partnership. However, the husband and wife can enter into a contract of agency.
‣ One person as two parties (Auto-contracts) — Is it necessary for the existence of a contract that two distinct
persons enter into it, or is an auto-contract, where one person contracts with himself, valid? In other words, can the
same person make a contract, acting in the name of another in one capacity, and in his own name or that of a different
person in another capacity? Under our law, there is no general prohibition, but only special prohibitions, such as those
found in Art. 1491 and 1890 (for guardians, agents, executors, administrators, public officers and employees, etc.)
Thus, the validity of auto-contracts in our law is generally accepted. The existence of a contract is not determined by
the number of persons who intervene in it, but by the number of parties thereto, not by the number of individual wills,
but by the number of declarations of will. A contract, requires, not two persons, but two parties, not two wills, but two
declarations of will. The effective element is not in the formation of the will but in its declaration. In the auto-contract,
there are two declarations although made by the same person. So long as there are two distinct patrimonies, even if
they are represented by the same person, a juridical relation can be created between them. The declaration of will may
be made only by one person, but so long as he represents two different personalities, a contract can arise, because
the declaration manifests two distinct wills. This may take place (1) when a person, in his capacity as a representative
of another, contracts with himself, or (2) when as a representative of two different persons, he brings about a contract
between his principals by contracting with himself. In the absence of a general prohibition on such auto-contracts,
they must be held to be valid, except when there is a conflict of interest or a possibility of injury, and except when the
law expressly prohibits it in specific cases.
CHARACTERISTICS OF A CONTRACT
1. Obligatory force and compliance in good faith — a contract constitutes the law as between the parties (Arts. 1159 and
1315)
2. Autonomy — the parties have the freedom to decide and stipulate the terms and conditions of their contract, provided
not contrary to law, morals, good customs, public order, or public policy. (Art. 1306)
3. Mutuality — a contract’s validity and performance cannot be left to the will of only one of the parties. (Art. 1308)
4. Relativity — a contract is generally binding only upon the parties and their successors. (Art. 1311)
5. Consensuality (as a general rule) (Art. 1315)
ELEMENTS OF A CONTRACT
1. Essential elements — those without which there can be no contract
a. Consent
b. Subject matter
c. Cause or consideration
2. Natural elements — those found in certain contracts, and presumed to exist, unless the contrary has been stipulated. It
exists as part of the contract even if the parties do not provide for them, because the law, as suppletory to the contract,
creates them.
‣ Such as — warranty against eviction and against hidden defects in the contract of sale
3. Accidental elements — These are the various particular stipulations that may be agreed upon by the contracting parties
in a contract. They are called accidental, because they may be present or absent, depending upon whether or not the
parties have agreed upon them. They cannot exist without being stipulated.
‣ Such as — the stipulation to pay credit; the stipulation to pay interest; the designation of the particular place for
delivery or payment.
STAGES OF THE LIFE OF A CONTRACT

1. Preparation (or Conception or “Generacion”) — Here the parties are progressing with their negotiations; they have not
yet arrived at any definite agreement, although there may have been a preliminary offer and bargaining.
2. Perfection (or birth) — Here the parties have at long last came to a definite agreement, the elements of definite suject
matter and valid cause have been accepted by mutual consent.
3. Consummation (or death or termination) — Here the terms of the contract are performed, and the contract may be said
to have been fully executed.

ATENEO LAW 4B, BATCH 2017 111 OF 185 CIVIL LAW REVIEWER
CLASSIFICATION OF CONTRACTS
1. AS TO PERFECTION OR FORMATION
a. Consensual — perfected by mere consent
‣ Such as — sale
b. Real — perfected by delivery
‣ Such as — depositum, pledge, commodatum

c. Formal or solemn — those where special formalities are essential before the contract may be perfected
‣ Such as — donation inter vivos of real property requires for its validity a public instrument
2. AS TO CAUSE OR EQUIVALENCE OF THE VALUE OF PRESENTATIONS
a. Onerous — where there is an interchange of equivalent valuable consideration
b. Gratuitous or lucrative — this is free, thus one party receives no equivalent prestation except a feeling that one has
been generous or liberal
‣ Such as — donation, commodatum

c. Remunerative — one where one prestation is given for a benefit or service that had been rendered previously
3. A S TO IMPORTANCE OR DEPENDENCE OF ONE UPON ANOTHER
a. Principal — where the contract may stand alone by itself
‣ Such as — sale, lease, loan

b. Accessory — this depends for its existence upon another contract
‣ Such as — a real estate mortgage as an accessory contract to a loan

c. Preparatory — where the parties do not consider the contract as an end by itself, but as a means through which
future transaction or contracts may be made
‣ Such as — agency, partnership

4. AS TO THE PARTIES OBLIGATED
a. Unilateral — where only one of the parties has an obligation
‣ Such as — commodatum (like the borrowing of a bicycle)

b. Bilateral (or synalagmatic) — where both parties are required to render reciprocal prestations
5. AS TO THE GOVERNING AUTHORITIES (AS TO THEIR NAME OR DESIGNATION)
a. Nominate (Special Contracts)— where the contract is given a particular or special name which is governed by a
particular set of provisions of law
‣ Such as — commodatum, partnership, sale, agency, deposit

b. Innominate (Contratos Innominados) — those not given any special name and is governed by the general laws on
contracts
‣ Such as —“do ut des,” meaning “I give that you may give”

6. AS TO THE RISK OF FULFILMENT
a. Commutative — where the parties contemplate a real fulfillment; therefore, equivalent values are given
‣ Such as — sale, lease

b. Aleatory — where the fulfillment is dependent upon chance; thus the values vary because of the risk or chance
‣ Such as — insurance contract

7. AS TO THE TIME OF PERFORMANCE OR FULFILMENT
a. Executed — one completed at the time the contract is entered into, that is, the obligations are complied with at this
time
‣ Such as — a sale of property which has already been delivered, and which has already been paid for. (In the case of
personal property, this results in tangible property itself, a “chose in possession.”)
‣ NOTE — If the whole or a part of the property or the price has been delivered, the contract may be said to be
“partially executed.”

b. Executory — one where the prestations are to be complied with at some future time
‣ Such as — a perfected sale, where the property has not yet been delivered, and where the price has not yet been
given) (In the meantime, there is only a “chose in action.”)
8. AS TO SUBJECT MATTER
a. Contracts involving things

b. Contracts involving rights or credits (provided these are transmissible)
‣ Such as — contract of usufruct, or assignment of credits

c. Contracts involving services
‣ Such as — agency, lease of services, a contract of common carriage, a contract of carriage (simple carriage)
9. AS TO OBLIGATIONS IMPOSED AND REGARDED BY THE LAW
a. Ordinary — like sale; the law considers this as an ordinary contract

b. Institutional — like the contract of marriage; the law considers marriage also as an “inviolable social institution.”
‣ NOTE — Under Art. 1700 of the Civil Code, the law says that “the relations between capital and labor are not
merely contractual. They are so impressed with public interest that labor contracts must yield to the common
good.
10. AS TO THE EVIDENCE REQUIRED FOR ITS PROOF
a. Those requiring merely oral or parol evidence
b. Those requiring written proof (such as contracts enumerated under the Statute of Frauds)
11. AS TO THE NUMBER OF PERSONS ACTUALLY AND PHYSICALLY ENTERING INTO THE CONTRACTS
a. Ordinary — where two parties are represented by different persons, such as a sale.
b. Auto-contracts — where only one person represents two opposite parties, but in different capacities
‣ Such as — an agent representing his principal sells a specific car to himself, as a buyer
12. AS TO THE NUMBER OF PERSONS WHO PARTICIPATED IN THE DRAFTING OF THE CONTRACT
a. Ordinary — where both parties participate in the draft and deciding the terms and conditions of the contract, like an
ordinary sale
b. Contract of adhesion — where only one party decides and drafts the terms and conditions of the contract, and the
other simply “adheres” to it.
‣ Such as — one prepared by a real estate company for the sale of real estate; or one prepared by an insurance
company. Here, the buyer, or the person interested in being insured, signifies his consent by signing the contract. If
he does not desire to enter into the contract, it is his privilege to refuse.
CONTRACTS OF ADHESION
‣ What are “contracts of adhesion”?
‣ It is one in which one of the parties imposes a ready-made form of contract, which the other party may accept or
reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his
signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing. (Premiere Development Bank v. Central Surety & Insurance Company 2009)
‣ Such as — in the case of employment, banking or transportation contracts
‣ Are contracts of adhesion valid?
‣ YES. “Contracts of Adhesion” and have been generally recognized by the Supreme Court as valid and legally binding
in a long line of cases. “They are not invalid per se and are not entirely prohibited, the rationale being, the one who
adheres to the contract is, in reality, free to reject it entirely, if he adheres, he gives his consent.
‣ The rule is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against
the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the
intention of the parties, the literal meaning of its stipulations must be held controlling. A contract of adhesion is just as
binding as ordinary contracts. It is true that this Court has, on occasion, struck down such contracts as being
assailable when the weaker party is left with no choice by the dominant bargaining party and is thus completely
deprived of an opportunity to bargain effectively. Nevertheless, contracts of adhesion are not prohibited even as the
courts remain careful in scrutinizing the factual circumstances underlying each case to determine the respective
claims of contending parties on their efficacy. (Pilipino Telephone Corporation vs Tecson 2004)

AUTONOMY OF CONTRACTS
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a)
Article 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity. (4a)
1987 CONSTITUTION
ARTICLE 3 — BILL OF RIGHTS
Section 10. No law impairing the obligation of contracts shall be passed.
FREEDOM TO ENTER INTO LAWFUL C ONTRACTS
‣ Art. 1306 stresses the principle of freedom. The free entrance into contracts generally without restraint is one of the
liberties guaranteed to the people. (People v. Pomar) The contract is the law between the contacting parties. And where
there is nothing in the contract which is contrary to law, morals, good customs, public order, or public policy, the validity
of the contract must be sustained.
‣ TOLENTINO —
‣ The right to enter into lawful contracts constitutes one of the liberties of the people of the state. If that right be struck
down or arbitrarily interfered with, there is a substantial impairment of the liberty of the people under the Constitution.
The legislature, under the Constitution, is not permitted to prescribe the terms of a legal contract and thereby deprive
the citizens of the state from entering freely into such contracts according to their own convenience and advantage,
so long as the contracts entered into are not prohibited by law, public policy or morals. To enter into contracts freely
and without restrains, is one of the liberties guaranteed to the people of the state.
‣ The policy of the law is that the freedom of persons to enter into contract should not be lightly interfered with, and
courts should move with all the necessary caution and prudence in holding contracts void.
‣ Save in limited and exceptional situations provided by the law itself, courts have no authority to prescribe the terms
and conditions of a contract for the parties.
PRINCIPLE OF AUTONOMY OF CONTRACTS

‣ RULE — THE CONTRACTING PARTIES MAY ESTABLISH SUCH STIPULATIONS, CLAUSES , TERMS AND CONDITIONS AS THEY MAY
DEEM CONVENIENT, PROVIDED THEY ARE NOT CONTRARY TO EITHER —
1. LAW
‣ This pertains only to —
a. Mandatory or prohibitive laws — The law which the terms of a contract must not contravene are those
which expressly declare their obligatory character, or which are prohibitive, or which express fundamental
principles of justice which cannot be overlooked. Directory and suppletory laws need not be complied with,
since these are either discretionary, or merely supply the omissions of the parties. (See Art. 5)
b. Laws in force at the time of the perfection of the contract — The contract of the parties must conform
with the law in force at the time the contract was executed. Statutes generally have no retroactive effect and
only the laws existing at the time of the execution of the contract are applicable to the transaction. (Relate this
with the non-impairment clause)
‣ Contracts must respect the law, for the law forms part of the contract. Indeed, the provisions of all laws are
understood to be incorporated in the contract.
2. M ORALS
‣ Morals deal with right and wrong (De los Reyes v. Alojado) and with human conscience. (Ibarra v. Aveyro)
‣ These are generally accepted principles of morality which have received some kind of social and practical
confirmation.
‣ There are certain matters with respect to which, in consonance of our concept of life under our social and
economic conditions, man must have freedom or decision, as to them, there cannot validly be bound by an
contractual stipulations.
‣ Examples of provisions which are contrary to morals —

‣ A promise to marry or not to marry, to secure legal separaton, to adopt a child
‣ A promise to change citizenship, profession, religion, or domicile
‣ A promise not to hold public office or which limits the performance of official duties
‣ A promise to enter a particular political party or separate from it
‣ A contract not to engage in work or labor
‣ A penalty clause providing for the payment of excessive interests which is immorally inequitable, shocking to
the human conscience.
‣ A promise of marriage based on a carnal consideration
‣ A contract to pay a sum in money in consideration of a crime
3. G OOD CUSTOMS
‣ TOLENTINO — This has the same meaning as “morals”. It is redundant.

‣ PARAS — Good customs are those that have received for a period of time practical and social confirmation.
According to the Code Commission, good customs and morals “overlap each other; but sometimes they do not.”
4. PUBLIC ORDER
‣ Public order signifies the public weal, and includes public safety.
‣ Every contract affecting public interest suffers a con- genital infirmity in that it contains an implied reservation of
the police power as a postulate of the existing order. This power can be activated at any time to change the
provisions of the contract, or even abrogate it entirely, for the promotion or protection of the general welfare. Such
act will not militate against the impairment clause, which is subject to and limited by the paramount police power.
(Villanueva v. Castañeda, Jr. 1987)
5. PUBLIC POLICY
‣ Public policy, which varies according to the culture of a particular country, is the “public, social and legal interest in
private law.” It is said to be the manifest will of a State.
‣ A contract is contrary to public policy if it “has a tendency to injure the public, is against the public good, or
contravenes some established interest of society, or is inconsistent with sound policy and good morals, or tends
clearly to undermine the security of individual’s rights.” (Gabriel v. Monte de Piedad)
‣ Examples of agreements which are contrary to public policy —
‣ Those denying access to the courts. (Manila Electric Co. v. Pasay Transportation)
‣ Those which tend to stifle the prosecution of a person charged with a crime, for a pecuniary or other valuable
consideration. (Arroyo v. Berwin) (NOTE: In a few cases, a compromise is, however, permitted.)
‣ Those exempting a carrier from liability for gross negligence. (Heacock v. Macondray)
‣ Those which encourage fraud. (Bough v. Cantiveros)
‣ Those which authorize any attorney selected by the creditor to state before the court, should suit for collection
be brought, that the debtor recognizes the existence and validity of the debt. (These are called “warrants of
attorney to confess judgment.” These are void because they deprive the debtor of his day in court.) (National
Bank v. Manila Oil Refining Co.)
‣ Those which constitute an undue or unreasonable restraint of trade, such as a prohibition to engage in any
enterprise (whether similar or not with the enterprise of the employer) within a period of five years after leaving
the service of the employer. (Ferrazzini v. Gsell) (If the restraint is reasonable, it should be given effect.)
(Ollendorf v. Abrahamson)
‣ A stipulation bargaining away or surrendering for a consideration the right to vote and to run for public office.
These are rights conferred not for individual or private benefit or advantages but for the public good and
interest. (Saura v. Sindico)
LAW WHICH GOVERNS CONTRACTS
Article 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II
of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n)

KINDS OF CONTRACTS AS TO THE GOVERNING AUTHORITIES
1. Nominate contracts (Special Contracts) — where the contract is given a particular or special name which is governed
by a particular set of provisions of law
‣ Such as —
a. Contract of sale
b. Contract of loan
c. Contract of lease
d. Contract of agency
e. Contract of partnership
f. Contract of usufruct
g. Contract of mortgage
h. Contract of guaranty
i. Contract of suretyship
‣ Governing authorities — In the order of preference —

a. Specific law under the civil code (law on sales, law on agency, etc.)
b. Law on obligations and contracts
2. Innominate contracts (Contratos Innominados) — those not given any special name and is governed by the general
laws on contracts
‣ Classes of innominate contracts —

a. I give and you give (Do ut des)
b. I give and you do (Do ut facias)
c. I do and you give (Facio ut des)
d. I do and you do (Facio ut facias)
‣ Governing authorities — In the order of preference —

a. Law on obligations and contracts
b. Rules governing the most analogous nominate contracts
c. Customs of the place
OBLIGATORY FORCE OF CONTRACTS
Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. (1091a)
Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law.
‣ Once contracts are perfected —

1. It has the force of law between the contracting parties
2. It should be complied with in good faith and in keeping with usage and law
‣ TOLENTINO — The binding force of contracts are not limited to what is expressly stipulated, but extends to all
consequences which re thee natural effect of the contract, considering its true purpose, the stipulation it contains, and
the object involved. This extension is not determined by the name which the contracting parties may have given to the
contract, for the exact qualification of a contract is one of the limitations which are imposed on the liberty of the parties.
Contracts are not what the parties choose to call them, but what they really are as determined by principles of laws.

MUTUALITY OF CONTRACTS
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them. (1256a)
Article 1309. The determination of the performance may be left to a third person, whose decision shall not be binding
until it has been made known to both contracting parties. (n)
Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances. (n)
‣ RULE — THE CONTRACT MUST BIND BOTH CONTRACTING PARTIES, ITS VALIDITY OR COMPLIANCE CANNOT BE LEFT TO THE WILL
OF ONE OF THEM
‣ The principle is based on the essential equality of the parties. It is repugnant to bind one party, and yet leave the other
free. (Garcia v. Rita Legarda)
‣ The ultimate purpose of the principle of mutuality is to render void a contract containing a condition which makes its
fulfilment dependent exclusively upon the uncontrolled will of one of the parties.
‣ Consequences of the principle of mutuality —
1. Unilateral cancellations are NOT allowed — A party cannot revoke or renounce a contract without the consent
of the other, nor can it have it set aside on the ground that he had made a bad bargain. (Fernandez v. MRR)
‣ Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no
party can renounce if unilaterally or without the consent of the other. It is a general principle of law that no one
may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary
thereto, to the prejudice of the other party. The unilateral act of one party in terminating the contract without
legal justification makes it liable for damages
‣ BUT — an agreement of the parties that either one of them may terminate the contract upon a
reasonable period of notice is valid.
‣ A judicial action for the cancellation or resolution of the contract is NOT necessary where the contract
provides that it may be revoked and cancelled for the violation of any of its terms and conditions.
‣ It is perfectly legal to leave the fulfilment of the contract to the will of either parties in the negative form of
rescission, a case which is frequent in certain contracts, for in such case neither is the principle of mutuality
violated, nor is there any lack of equality between the persons contracting, since they remain with the same
facilities in respect to fulfilment. Such cancellation of the contract is in accordance with the contract is as
much in the fulfilment of the contract as any other act which may have been subject of agreement.
2. Potestative suspensive conditions are void — When the fulfillment of the suspensive condition depends upon
the sole will of the debtor, the conditional obligation is void (Art. 1182)
‣ BUT — a potestative resolutory condition is valid. It is all right for the contract to expressly give to one party
the right to cancel the same. This is because, when the contract is thus cancelled, the agreement is really
being fulfilled.
DETERMINATION BY A THIRD PERSON

‣ RULE — WHILE THE VALIDITY OR COMPLIANCE CANNOT BE LEFT TO THE WILL OF ONE OF THE PARTIES, THE DETERMINATION
OF THE PERFORMANCE MAY BE LEFT TO A THIRD PERSON
‣ NOTE — The decision the third person shall NOT be binding until it has been made known to BOTH contracting
parties.
‣ Examples —
‣ In a contract of sale, the fixing of the price and the delivery date can be left to a third person.
‣ An arbitration clause — If in a contract, there is a stipulation for arbitration, and one party, in case of dispute,
refuses to submit the matter to arbitration, the aggrieved party who goes to court to request it to order the other
party to submit the matter to arbitration, should NOT anymore present to the court the merits of the disputed
matters. The decision on said merits will be up to the arbitrator. The only function of the Court in this case would be
to decide whether or not the parties should proceed to arbitration. (Maguindanao Portland Cement Corp. v.
McDonough 1967)

‣ BUT — The determination of such third person shall NOT be obligatory if it is evidently inequitable
‣ What is equitable is a question of fact, to be ascertained from the attendant circumstances.
‣ The court is called upon to decide what is equitable.
RELATIVITY OR PRIVITY OF CONTRACTS
Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The he ir
is not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a)
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no
stipulation to the contrary. (1112)
Article 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are
bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. (n)
Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
Article 1314. Any third person who induces another to violate his contract shall be liable for damages to the other
contracting party. (n)
‣ RULE — CONTRACTS TAKE EFFECT AND BIND ONLY THE FOLLOWING PERSONS , AND THEY CANNOT AFFECT THIRD PERSONS —
1. THE PARTIES TO THE CONTRACT THEMSELVES
‣ Contracts product the effect as between the parties who execute them.
‣ Even when the contract is ostensibly in the name of one person, if the other party knew that the person named did
not have any legal existence or any real interest in the contract, but that another person had the interest in and
was the real party to the contract, such contract will product effect with respect to the latter.
2. THE PARTIES’ SUCCESSORS- IN- INTEREST (ASSIGNEES AND HEIRS )
‣ Generally, rights and obligations arising from contract are transmissible in nature. (Art. 1178)
‣ EXCEPT — they are in transmissible when either —
a. The law provides otherwise;
b. The contract provides otherwise
c. The obligation is purely personal in nature
‣ Only parties and their successors-in-interests may sue to enforce the contract — only they can maintain an
action to enforce the obligations arising under the contract. Further, only they can ask for the declaration of its nullity
or annulment.
‣ Third persons are NOT bound or affected by the contract to which they are not a party of — The rights of a
person cannot be prejudiced by the act, declaration or omission of another. A contract cannot be binding upon and
cannot be enforced against one who is not a party to it, even if he is award of such contract and has acted with
knowledge thereof.
‣ It is a basic principle in civil law that, with certain exceptions not obtaining in this case, a contract can only bind
the parties who had entered into it or their successors who assumed their personalities or their juridical positions,
and that, as a consequence, such contract can neither favor nor prejudice a third person. The obligation of
contracts is limited to the parties making them and, ordinarily, only those who are parties to contracts are liable for
their breach. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to
the contract, and, in any event, in order to bind a third person contractually, an expression of assent by such
person is necessary. (Quano v. CA 1992)
‣ EXCEPT — IN THE FOLLOWING CASES, THIRD PERSONS WHO ARE NOT PARTIES TO A CONTRACT MAY BE BOUND OR AFFECTED
BY IT —

1. Stipulation pour autrui (Art. 1311)
2. Contracts creating real rights (Art. 1312)
3. Contracts executed to defraud creditors (Art. 1313)
4. Tortious interference (Art. 1314)
5. Where the law authorizes the creditor to sue on a contract entered into by his debtor (accion directa)
6. Where in some cases, third persons may be adversely affected by a contract where they did not participate or assent
to.
EXCEPTIONS TO THE PRINCIPLE RELATIVITY OF CONTRACTS (WHEN THIRD PERSONS ARE BOUND)
1. STIPULATION POUR AUTRUI (ART. 1311)
‣ 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.
‣ Stipulation pour autrui — is a stipulation in favor of a third person conferring a clear and deliberate favor upon him,
and which stipul tion is merely part of a contract entered into by the parties, neither of whom acted as agent of the
third person.
‣ REQUISITES —
a. There must be a stipulation in favor of a third person
b. The stipulation must be a part, not the whole, of the contract.
c. The contracting parties must have clearly and deliberately conferred a favor upon a third person, NOT a mere
incidental benefit or interest.
d. The third person must have communicated his acceptance (expressly or impliedly) to the obligor before its
revocation (revocation of the contract or the stipulation by the original parties)
e. Neither of the contracting parties bears the legal representation or authorization of the third party.
‣ Examples —
‣ D purchased C’s land for P10,000,000. It was also agreed that only P8,000,000 would be given to C, because the
remaining P2,000,000 would be given by D to X, a creditor of C. If X communicates his acceptance of the
stipulation to D, X can demand its fulfillment.
‣ Insurance taken by a taxi company in favor of its passengers.
‣ Insurance taken by the employer in favour of his employees
‣ When a bank enters into a contract with retail establishment to give honour the creditor card purchases of the
bank’s credit card holders
‣ A stipulation in a contract stating that the fruits of a certain parcel of land will be used for expenses connected with
specified religious festivities
‣ A stipulation in a contract whereby a letter of credit is opened in favor of a third party
‣ NOTE —
‣ A stipulation pour autrui need not be in any particular form, and may even be inferred from the fact that the
beneficiary has enjoyed the same for a considerable period. (Florentino v. Encarnacion, Sr.)
‣ After acceptance of the stipulation by the third person, and there is non-performance, he can sue for action for
specific performance, resolution, and/or damages.
‣ Since the right of the third person is based directly on the contract, it is also subject to all the defences available
against the contract, such as those affecting the validity of the contract. Thus, the right of the third person does
not exist if the contract is void, and it disappears if it is annulled or rescinded.
2. CONTRACTS CREATING REAL RIGHTS (ART. 1312)
‣ In contracts creating real rights, third persons who come into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws.
‣ A real right directly affects the property subject to it, hence whoever comes into possession of such proper must
respect that real right.
‣ Real rights over real property must be respected by third persons if either —
a. Such real rights are registered

b. If the third person has actual knowledge of the existence of such rights (actual knowledge being equivalent to
registration)
‣ Examples —
‣ A leased his land to B. The lease right was duly recorded in the Registry of Property. If A subsequently sells the
land to C while the lease still subsists, must C respect the lease? Yes, even if C did not participate in the lease
contract. This is because the land has now come into his possession, and there being a duly registered real right
thereon, he must respect said real right.
‣ A mortgages his land to B and subsequently registers the mortgage, and then sells it to C. The mortgage contract
creates a real right over the property, and if duly registered is binding on C. Although C is not a party to the
mortgage contract, he has to respect the mortgage in favour of B.
3. CONTRACTS EXECUTED TO DEFRAUD CREDITORS (ART. 1313, 1177, 1381, 1387)
‣ When a debtor enters into a contract in fraud of his creditors, such as when he alienates property gratuitously without
leaving enough for his creditors, the latter, although not parties to the contract of alienation, may ask for its rescission.
4. TORTIOUS INTERFERENCE (ART. 1314)
‣ A third person may be held liable for damages because he has induced a party to the contract to violate the terms
thereof. An injured party may recover damages for unlawful interference with the contract by a third party.
‣ REQUISITES —
1. The existence of a valid contract
2. Knowledge by the third person of the existence of the contract
3. Interference by the third person in the contractual relation without legal justification
‣ Example — S, a movie actress, has a one-year contract with XYZ Studio. If F, a friend of S induces her, without any
justifiable cause, to break the contract, then XYZ Studio can sue F for damages.
‣ Is “malice” an essential element?
‣ It depends on the remedy sought. If the remedy sought is merely an injunction, whether mandatory (to compel) or
prohibitory (to prohibit), malice is NOT an element. BUT, if damages is sought, then malice is an element in tort
interference. (So Ping Bun vs CA, 1999; See also Gilchrist vs Cuddy)
‣ TOLENTINO — YES. Malice in some form is generally supposed to be an essential ingredient in cases of
interference with contract relations. But upon authorities it is enough if the wrongdoer, having knowledge of the
existence of the contract relation, in bad faith, sets about to break it up. Whether his motive is to benefit himself or
gratify his spite by working mischief to the other party to the contract, is immaterial. Malice in the sense of ill-will or
spite is not essential.
‣ Is actual knowledge of the existence of the contract or the identity of the injured person required?
‣ NO. It is not necessary to prove actual knowledge on the part of the defendant, but he must nonetheless be aware of
the facts which, if followed by a reasonable inquiry, will lead to a complete disclosure of the contractual relations and
rights of the parties in the contract. (Lagon vs CA 2005)
‣ Knowledge of the identity of the injured person is NOT required. Nothing in Art. 1902 (provision on quasi-delict
under the old Civil Code) requires as a condition precedent to the liability of a tort-feasor that he must know the
identity of a person to whom he causes damages. In fact, the chapter wherein this article is found clearly shows
that no such knowledge is required in order that the injured party may recover for the damage suffered. (Gilchrist
vs Cuddy 1915)
‣ What is the liability of the person liable for tortious interference?
‣ He is solidarily liable with the party obligated under the contract as joint-tortfeasors. The rule is that the defendant
found guilty of interference with contractual relations cannot be held liable for more than the amount for which the
party who was inducted to break the contract can be held liable. (Go vs Cordero 2010)
‣ The stranger cannot become more extensively liable in damages for the nonperformance of the contract than the
party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could be
recovered against the immediate party to the contract would lead to results at once grotesque and unjust. (Daywalt
v. Corporacion de PP Agustinos Recoletos 1919)
5. WHERE THE LAW AUTHORIZES THE CREDITOR TO SUE ON A CONTRACT ENTERED INTO BY HIS DEBTOR (ACCION DIRECTA)
‣ Examples —
‣ Even if a lessor does not have to respect a sublease, still the “sub-lessee is subsidiarily liable to the lessor for any
rent due from the lessee.” (Here is an instance where the lessor can sue the sub-lessee.) (Art. 1652). Moreover,
“without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the lessor for all acts which

refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the
lessee.” (Art. 1651)
‣ That given under Art. 1729 of the Civil Code which states: “Those who put their labor upon or furnish materials for
a piece of work undertaking by the contractor have an action against the owner up to the amount owing from the
latter to the contractor at the time claim is made. However, the following shall not prejudice the laborers,
employees, and furnishers of materials: (1) Payment made by the owner to the contractor before they are due; (2)
Renunciation by the contractor of any amount due him from the owner. This article is subject to the provisions of
special laws.”
‣ A house owner, even if he did not participate therein, is bound by the contracts entered into between contractors
on the one hand, and laborers or materialmen on the other hand, such that the owner may be held liable for
payment by such laborers or materialmen. This is an exception to the rule on privity of contracts enunciated in Art.
1311, and is justified by the provision of Act 3959 and Art. 2242(3 and 4). (Velasco vs CA 1980)
6. WHERE IN SOME CASES AUTHORIZED BY LAW, THIRD PERSONS MAY BE ADVERSELY AFFECTED BY A CONTRACT WHERE THEY
DID NOT PARTICIPATE OR ASSENT TO
a. Contracts creating real rights (Art. 1312)

b. Collective contracts
‣ This is clearly evident in the case of “collective contracts”. These are cases where there law authorizes the will of
the majority to bind a minority to an agreement notwithstanding the opposition of the latter, when all have a
common interest in the juridical act.
‣ The basis of the rule on collective contracts is that a co-ownership is legally presumed among the persons having
a common interest, hence the rule of the required majority is imposed on the minority.
‣ Examples —
‣ In collective bargaining contracts by labor organizations under the Labor Code
‣ In suspension of payments and compositions under the Insolvency Law.
c. In the quasi-contract of “negotiorum gestio,” some contracts entered into by the unauthorized manager
(gestor) may bind the owner. (Arts. 2150-2151)
d. In a contract which creates a status, the whole world must respect such status
‣ Example — when X marries Y, the whole world must realize that the marriage subsists, and that to have carnal
knowledge with the wife would not result in the commission of adultery
PERFECTION OF CONTRACTS
Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. (1258)
Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object
of the obligation. (n)
EFFECT OF PERFECTION OF C ONTRACTS
‣ The perfection of a contract is the moment from which it exists, the juridical tie and obligatory force of the contract
between the parties arises from that time.
KINDS OF CONTRACTS AS TO THE MODE OF PERFECTION

1. Consensual contracts — that referred to in Art. 1315, these are contracts which are perfected by mere consent, which
is the meeting of the minds of the parties upon the terms of the contract. The consent may be made expressly or
impliedly. They are are perfected from the moment there is agreement (consent) on the subject matter, and the cause or
consideration.
2. Real contracts — that referred to in Art. 1316, these are contracts which are not perfected by mere consent perfected
but such perfection also requires the delivery of the object of the contract.
‣ Such as — deposit, pledge and commodatum

3. Formal or solemn contracts — contracts which require compliance with special external formalities for the validity and
perfection of the contract
‣ Such as — A simple donation inter vivos of real property, to be valid and perfected, must be in a public instrument (Art.
749)
CONTRACTS MADE BY A PERSON ON BEHALF OF ANOTHER
Article 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a
right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it
has been executed, before it is revoked by the other contracting party. (1259a)

VI. ESSENTIAL REQUISITES OF CONTRACTS
II. ESSENTIAL REQUISITES OF CONTRACTS
IN GENERAL
Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)
ESSENTIAL REQUISITES OF CONTRACTS

1. Consensual contracts
a. Consent — of the contracting parties
b. Object— the subject-matter of the contract, which should be an object certain
c. Cause or consideration — of the obligation which is established
2. Real contracts
a. Consent
b. Object
d. Delivery — of the object of the contract
3. Formal or solemn contracts
a. Consent
b. Object
d. Compliance with the formalities prescribed by law
CONSENT OBJECT CAUSE
REQUISITES 1. There must be a meeting of the 1. It must be within the commerce 1. It must exist
minds of man
2. It must be
2. There must be at least two parties 2. It must be licit, or not contrary to true
to the contract who are legally law, morals, good customs
3. It must be licit
capacitated to give consent public order or public policy
3. It must be voluntarily, freely, 3. It must be possible
wilfully, and intelligently given
4. It must be an object certain such
(there must be no mistake, fraud,
that it is determinate at least as
violence, intimidation or undue
to its kind
influence)
4. It must have been intended and
truly given (intent to be bound)
EFFECT OF 1. Contract is void — if the first

ABSENCE IN requisite is absent, such that there
THE is no meeting of the minds
REQUISITES Contract is void
2. Contract is merely voidable — if
the second or third requisite is
absent

A. C ONSENT OR M EETING OF THE M INDS
A. CONSENT OR MEETING OF THE MINDS
CONSENT IN GENERAL
REQUISITES OF CONSENT IN GENERAL

1. There must be a meeting of the minds — culminating in the knowledge of the unconditional acceptance of the offer
‣ NOTE — The acceptance may be subject to a suspensive condition, in such case, the ultimate contract is perfected
only upon the fulfilment of the suspensive condition. (Such as a contract to sell)
2. There must be at least two parties to the contract who are legally capacitated — this must not be confused with the
number of persons. A single person can represent two parties, and one party can be composed of two or more persons.
Also, the parties must be legally capacitated under the law.
3. It must be voluntarily, freely, wilfully, and intelligently given — there must be no vitiation of consent
4. It must have been intended and truly given (intent to be bound) — the consent must not have been simulated and the
parties must have intended to be bound. There should be a conformity of the internal will and its manifestation.
EFFECT OF ABSENCE IN THE REQUISITES

1. Contract is void — if the first requisite is absent, such that there is no meeting of the minds
2. Contract is merely voidable — if the second or third requisite is absent
‣ NOTE — Only the absence of the first requisite renders consent inexistent, the other two requisites, if absent, only
renders the consent defective but nonetheless existent. Thus, the 2nd and 3rd requisites are not really requisites to the
validity of the contract but merely to a perfect or non-defective contract as they only render the contract voidable in their
absence.
MEETING OF THE MINDS — OFFER AND ACCEPTANCE; STAGES IN THE PERFECTION OF A

CONTRACT
Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which
are to constitute the contract. The offer must be certain and the acceptance absolute. XXXXXX
Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be
complied with.
(n)
Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before
acceptance is conveyed. (n)
Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as
something paid or promised. (n)
Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere
invitations to make an offer. (n)
Article 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary appears. (n)
Article 1320. An acceptance may be express or implied. (n)

Article 1319. XXXX The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter -
offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a)
Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n)
CONCEPT AND NATURE OF CONSENT
‣ The essence of consent is the conformity of the parties on the terms of the contract, the acceptance by one of the offer
made by the other.
‣ It is the concurrence of the minds of the parties on the object and the cause which shall constitute the contract. The area
of agreement must extend to all points that the parties deem material or there is no consent.
‣ When there is merely an offer by one party without an acceptance by the other there is no consent.
STAGES IN THE PERFECTION OF A CONTRACT; HOW CONSENT IS ACHIEVED

1. STEP 1 — There is an offer initiated and made by one of the parties which is certain, definite, complete and intentional
2. STEP 2 — There is an unconditional acceptance by the other party
3. STEP 3 — Knowledge of the acceptance by the offeror
STAGES IN THE PERFECTION OF A CONTRACT (EXPOUNDED)

1. STEP 1 — THE OFFER — THERE IS AN OFFER INITIATED AND MADE BY ONE OF THE PARTIES WHICH IS CERTAIN, DEFINITE ,
COMPLETE AND INTENTIONAL
‣ An offer is a unilateral proposition which one party makes to the other for the celebration of the contract. It exists only if
the contract can come into existence by the mere acceptance by the offer, without any further act on the part of the
offeror. It must be —
a. Certain or definite — the offer must be definite, so that upon acceptance an agreement can be reached on the
whole contract. The offer must be distinguished from mere communications indicating that a party is disposed to
enter into a certain contract, or inviting the other to make an offer.
b. Complete — the offer must indicate with sufficient clearness the kind of contract intended and definitely stating
the essential conditions of the proposed contract, as well as the non-essential ones desired by the offeror. Thus, in
a contract of sale, the offer must specify the object and price.
c. Intentional — an offer without seriousness made in such manner that the other party would not fail to notice such
as lack of seriousness is absolutely without juridical effects and cannot give rise to a contract. These are those
made for fun or in jest, or as merely for courtesy, or as examples in teaching or apparent promises whose
inconsistency for the promisor is evident, etc.
‣ BUT — If by reason of the form or the circumstances surrounding it, or because of the fault of the offeror, the
offer is induced to take it seriously, it becomes necessary to determine whether the real intention or the
manifested intention should prevail.
‣ In order that an offer can be considered certain, it must not be vague, misleading, or made as a joke. Therefore, a
declaration of a person of “his intention to enter into a contract” is not an offer that is certain. If the offer is
withdrawn before it is accepted, there is no meeting of the minds.
‣ If the offer is not definite or complete, it is merely an “invitation to make an offer” and NOT an offer —
‣ Such as — Business advertisements of things for sale are not definite offers, but mere invitations to make an offer.
(Art. 1325) 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. (Art. 1326)
‣ When the offer becomes ineffective —
a. When either any of the following occurs against either party before acceptance is conveyed. (Art. 1324) —
i. Death
ii. Civil interdiction
iii. Insanity

iv. Insolvency
b. When the offeree expressly or impliedly rejects the offer.
c. When the offer is accepted with a qualification or condition (for here, there would merely arise a counter-offer).
d. When before acceptance is communicated, the subject matter has become illegal or impossible.
e. When the period of time given to the offeree within which he must signify his acceptance has already lapsed.
f. When the offer is revoked in due time (that is, before the offeror has learned of its acceptance by the offeree).
‣ Examples —
‣ A makes an offer to B on Jan. 1. B makes known his acceptance in a letter received at the house of A on Jan. 5.
However, on Jan. 4, A had died. Here, the offer is ineffective because there was no meeting of the minds.
‣ A makes an offer to B on Jan. 1. B writes a letter on Jan. 3, accepting the offer. This letter is received by A on
Jan. 5. But on Jan. 4, B had died. Here the offer is also ineffective, because there was no meeting of the minds.
‣ NOTE — If one of the parties at the time of making the offer OR the acceptance was already insane, it may
be said that there is a meeting of the minds, in a sense, because the contract is not void, but merely
VOIDABLE, that is, it is valid until annulled.
‣ The offeror determines how the offer should be accepted — The person making the offer may fix the time, place,
and manner of acceptance, all of which must be complied with (Art. 1321)
a. Period or time for acceptance — when the offeror has stated a fixed period for acceptance, the offeree may
accept at any time until such period expires.
‣ Examples —
‣ B, interested in a particular car at a car exchange company, asked S for the price. S said: “P3,500,000.” B
however could not make up his mind whether to buy or not. So S told B, “B, I’ll give you a week to make up
your mind. In the meantime, I will reserve this car for you.” Before the week is over, can S withdraw the offer
to sell the car for P3,500,000? Yes, provided B has not yet signified his acceptance of the offer to sell, that
is, B has not yet bought the car, and provided that S communicates such withdrawal to B. Thus, S may,
without liability to B, sell to another.
‣ A offered to sell his house and lot for P10M to B, who was interested in buying the same. In his letter to B, A
stated that he was giving B a period of one month within which to raise the amount, and that as soon as B is
ready, they will sign the deed of sale. One week before the expiration of the one-month period, A went to B,
and told him that he is no longer willing to sell the property unless the price is increased to P15M. May B
compel A to accept the P10M first offered, and execute the sale? Reasons. No, because here the promise
to sell (or the option granted B to buy) had no cause or consideration distinct from the selling price. (Arts.
1479 and 1324
b. No period or time for acceptance — the offer must accept immediately, otherwise, the offer becomes
ineffective.
c. Offeror may grant an option contract — this is a preparatory contract in which the offeror grants to the offeree,
for a fixed period and under specified conditions, the power to decide whether or not to enter into a principal
contract.
‣ It must be supported by an independent consideration, and the grant must be exclusive. It binds the party who
has given the option not to enter into the principal contract with any other person during the period designated,
and, within that period, to enter into such contract with the one to whom the option was granted if the latter
should decide to use the option.
‣ An option is a contract granting a person the privilege to buy or not to buy certain objects at any time within
the agreed period at a fixed price. The contract of option is a separate and distinct contract from the contract
which the parties may enter into upon the consummation of the contract. Therefore, an option must have its
own cause or consideration, a cause distinct from the selling price itself.
‣ NOTE — If there is an option contract, the offeror can still withdraw the offer but is liable for damages based on
the breach of the option contract —
i. Acceptance after withdrawal — a contract CANNOT arise, but the grantor is liable for damages on the
basis of breach on the option contract
ii. Acceptance before withdrawal — there is already a perfected contract
‣ BUT — If the option is NOT supported by an independent consideration, the offer can withdraw the privilege at
any time by communicating the withdrawal to the other party, even if the option had already been accepted.
This is particularly so in a promise to buy and sell, for under Art 1479 “an accepted unilateral promise to buy or

sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a
consideration distinct from the price. This means that the option can still be withdrawn even if accepted if the
same is not supported by any consideration.
‣
NOTE — Option money is NOT earnest money. Option money is the consideration of an option contract, while
earnest money is considered part of the price in a contract of sale and can be a proof of the perfection of the
contract of sale
2. STEP 2 — THE ACCEPTANCE — THERE IS AN UNCONDITIONAL ACCEPTANCE BY THE OTHER PARTY
‣ If there is completely no acceptance or if the offer is expressly rejected, there is no meeting of the minds.
‣ Form of acceptance (Art. 1320) — Acceptance may either be —
a. Express
b. Implied — from conduct, or acceptance of unsolicited services
c. Presumed — presumed by law as when there is failure to repudiate hereditary rights within the period fixed by
law (See Art. 1057); or when there is silence in certain specific cases as would tend to mislead the other party,
and thus place the silent person in estoppel.
‣ Qualified acceptance — To produce a contract, the acceptance must not qualify the terms of the offer. There is no
acceptance sufficient to product consent, when a condition in the offer is removed, or a pure offer is accepted with a
condition, or when a term is established, or changed, in the acceptance, or when a simply obligation is converted by
the acceptance into an alternative one. In other words, something else is desired which is not exactly what is
proposed in the offer.
‣ There may be a conditional acceptance by the other party this is considered as a “counter-offer” subject again to
unconditional acceptance by the other. If the acceptance be qualified or not absolute, there is no concurrence of
minds. There merely is a counter-offer.
‣ Example — A went to a store and offered to buy a certain watch for P100,000. The seller said he was willing to give
it for P120,000. Whereupon, A turned to go away because he did not want to pay that price. The seller called him
back and said he was willing to sell the watch for P100,000. Is A allowed not to buy said watch? Yes. A’s offer was
P100,000. This was not accepted. Or granting that the proposal of P120,000 was a sort of acceptance, the
statement that the buyer could have it for P120,000 was not absolute. It was a qualified acceptance and hence,
under the law, constitutes a counter-offer. Hence, when the seller said P120,000, he was not really accepting the
offer to buy. Now, when he was going to give it for P100,000, he was not really accepting the offer of A, but was
making another offer, a counter-offer since the offer made by A previously had been rejected by him (the seller).
‣ Offer and acceptance made through another person —
a. Agent — an offer made through an agent is accepted from the time acceptance is communicated to such agent
(In this case, the agent is specifically empowered to act for the offeror)
b. Intermediary —an intermediary who has no power to bind either the offeror or the offer is not an agent, his
situation is similar to that of a letter carrier. The communication of the acceptance to him does not perfect the
contract, this occurs only when he in turn communicates such acceptance to the offeror.
‣ What if the principal himself made the offer, and acceptance is communicated to the agent, would the
Article apply? In other words, would there already be a meeting of the minds?
‣
PARAS — It is submitted that as a general rule, there would as yet be no meeting of the minds, for the agent
may be an ordinary one, not authorized to receive the acceptance for the PARTICULAR transaction. However, if
the agent was expressly authorized to receive the acceptance, or if the offeree had been told that acceptance
could be made direct with the agent, who would then be given freedom to act or to proceed, there can be a
meeting of the minds and a perfection of the contract.
3. STEP 3 — KNOWLEDGE OF ACCEPTANCE — KNOWLEDGE OF THE ACCEPTANCE BY THE OFFEROR
‣ A contract is perfected only from the time an acceptance of an offer is made known to the offeror.
‣ Even if there bas been an unconditional acceptance of the offer by the offer, no contract will arise unless that
acceptance is made known to the offeror. Unless the offeror knows of the acceptance, there is no meeting of the
minds of the parties, no real concurrence of offer and acceptance.
‣ This is known as the “cognition theory”
‣ Knowledge may be actual or constructive — The knowledge may be actual or constructive (as when the letter of
acceptance has been received in the house of the offerer by a person possessed of reasonable discernment). If actual
knowledge be required, proof of this would be almost impossible, for even when the letter containing the answer has
been opened and read, the offerer can always claim, in some cases truthfully, that while he was reading the same, his
mind was elsewhere, and he did not actually know the contents of said answer.

WITHDRAWAL OF THE OFFER OR ACCEPTANCE

‣ Both the offer and the acceptance can be revoked before the contract is perfected.
‣ Since the contract is perfected only from the time the acceptance is known to the offeror, it is clear that said offeror
may withdraw his offer at any time before he learns of the acceptance, even if such acceptance has already been
made, but not made known to him.
‣ The acceptance may also be revoked before it comes to the knowledge of the offeror. Thus, where the offer has sent
his acceptance, but then sends a rejection or a revocation of the acceptance, which reaches the offeror before the
acceptance, there is no meeting of the minds, because the revocation has cancelled or nullified the acceptance which
thereby ceased to have any legal effect.
‣ TOLENTINO — An offer without a period must be considered as become ineffective after the lapse of more than the time
necessary for its acceptance, taking into account the circumstances and social conditions.
LEGAL INCAPACITY OF THE PERSONS TO GIVE CONSENT
Article 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)
Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable. (n)
Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, a nd is understood
to be without prejudice to special disqualifications established in the laws. (1264)
Article 1403. The following contracts are unenforceable, unless they are ratified:XXXXX
(3) Those where both parties are incapable of giving consent to a contract.
Article 1489. XXXX Where necessaries are those sold and delivered to a minor or other person without capacity to act, he
must pay a reasonable price therefor. Necessaries are those referred to in article 290.
Article 38. Minority, insanity or imbecility, the state of being a deaf-mute, prodigality and civil interdiction are mere
restrictions on capacity to act, and do not exempt the incapacitated person from certain obligations, as when the latter
arise from his acts or from property relations, such as easements. (32a)
Article 39. The following circumstances, among others, modify or limit capacity to act: age, insanity, imbecility, the state
of being a deaf-mute, penalty, prodigality, family relations, alienage, absence, insolvency and trustees hip. The
consequences of these circumstances are governed in this Code, other codes, the Rules of Court, and in special laws.
Capacity to act is not limited on account of religious belief or political opinion.
NATURE OF VOIDABLE CONTRACTS

‣ A voidable contract is binding and valid, unless annulled by a proper action in court.
‣ It is, however, susceptible of ratification before annulment. (Art. 1390) Annulment may be had even if there be NO damage
to the contracting parties. (Art. 1390)
TWO CLASSES OF VOIDABLE CONTRACTS

‣ Art. 1327 to 1344 cover two classes of voidable contracts —
1. THOSE WHERE ONE PARTY IS INCAPACITATED TO GIVE CONSENT
‣ TOLENTINO — Consent of the contracting parties is an essential element for the validity of a contract, while Art.
1327 says that the persons indicated “cannot give consent to a contract”. The logical consequence is that the a

contract entered into by one of these persons would be wanting in consent, and hence inexistent and void. This is
incorrect. The contract will either be unenforceable or voidable.
a. Both parties are NOT capable of giving consent — unenforceable
b. Only one party is incapable of giving consent — voidable
2. THOSE WHERE THE CONSENT OF ONE PARTY HAS BEEN VITIATED
‣ Such as by error, fraud, violence, intimidation, and undue influence)
PERSONS INCAPACITATED TO CONSENT

1. UNEMANCIPATED MINORS (ART. 1327)
‣ These are persons under 18 years of age.

‣ The contracts that are entered by a minor is voidable
‣ EXCEPT — in the following cases the contract is rendered valid despite the defect—
a. Upon reaching the age of majority, they ratify the same.
b. They were entered into thru a guardian, and the court having jurisdiction had approved the same.
c. They were contracts where the minor misrepresented his age, and pretended to be one of major age
and is, thus, in estoppel. (Marcelo v. Espiritu)
‣ It is, however, essential here that the other party must have been misled. (Bambalan v. Maramba)
d. Where necessaries are those sold and delivered to a minor or other person without capacity to act, he
must pay a reasonable price therefor. (Thus, the contract here is valid) (Art. 1489)
‣
Necessaries include everything that is indispensable for sustenance, dwelling, clothing, and medical
attendance.
2. INSANE OR DEMENTED PERSONS (ART. 1327)
‣ EXCEPT — If they acted during a lucid interval (Art. 1328)

‣ It is not necessary that there be a previous judicial declaration of mental incapacity in order that a contract entered
into by a mentally defective person may be annulled. It is enough that the insanity existed at the time the contract was
made. In the case of lunatics, it is possible that there are lucid intervals, and a contract executed during such lucid
interval is valid.
‣ There mere fact that a person, days after the execution of a contract, was declared mentally incapacitated by a
competent court, does NOT automatically mean that she was incapacitated at the time of the execution of the
contract. The burden of proving such incapacity at the time of execution rests upon he who alleges it, if no sufficient
proof to this effect is presented, his capacity will be presumed.
3. DEAF-MUTES WHO DO NOT KNOW HOW TO READ AND WRITE (ART. 1327)
‣ PARAS — If they know how to read, but do not know how to write, it is submitted that the contract is valid, for then
they are capable of understanding, and therefore capacitated to give consent.
‣ TOLENTINO — Being a deaf-mute is NOT by itself alone a disqualification for giving consent. The law refers to the
deaf-mute who does not know how to write. But the old doctrine that a deaf-mute was presumed too be an idiot no
longer previails, and such persons are now held capable of entering into contracts if shown to have sufficient mental
capacity.
4. ALCOHOL AND DRUG INTOXICATION (ART. 1328)
‣ TOLENTINO —This ground courts the use of intoxicants such as alcohol and drugs. The mere use of alcohol and
drugs does not incapacitate a person to give consent, it must be at such a degree as to obscure completely the
faculties and almost extinguish the consciousness of acts of the person giving such consent to be a sufficient ground
for annulment.
5. HYPNOTISM AND SONAMBULISM (ART. 1328)
‣ TOLENTINO — Although the law mentions only hypnotism as avoiding a contract, the same is true of somnambulism
(sleepwalking). The utter want of understanding is a common element in both.
6. OTHER GROUNDS PROVIDED BY LAW (ART. 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.
‣ Under the Rules of Court, the following are considered incompetents, and may be placed under guardianship —

a. Those under civil interdiction
b. Hospitalized lepers
c. Prodigals (spendthrifts)
d. Deaf and dumb who are unable to read and write
e. Those of unsound mind even though they have lucid intervals
f. Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aid, take care
of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.
‣ TOLENTINO — If these persons have not been [placed under guardianship, there is a presumption in favour of
their capacity to contract. However, even if there is no guardianship over such other incompetents, if it can be
shown that at the time of the contract they do not have the necessary understanding of the nature and
consequences of their agreement, by reason of age, diseases, weakness of mind, then their contract is voidable
for lack of capacity. Principles on the mental incapacity of a person to make a will can be applied by analogy.
SPECIAL DISQUALIFICATIONS
‣ PARAS — There are people who are specially disqualified in certain things. Here, the transaction is VOID because the
right itself is restricted, that is, the right is withheld. (In the case of mere legal incapacity, the transaction is voidable
because the right itself is not restricted, but merely its exercise, that is, it can still be exercised but under certain
conditions, such as when the parents of an unemancipated minor consent.
‣ TOLENTINO — There is a distinction between the incapacity to give consent to contracts, and the special
disqualifications to enter into contracts. The former is a restriction upon the exercise of the right, while the latter is a
restriction on the very right itself. The incapacity renders the contract merely voidablee, but the disqualification makes it
void.
1. As a general rule, the husband and wife cannot sell to each other (Art. 1490) nor can they donate to each other.
Violations are considered VOID contracts.
2. Insolvents before they are discharged cannot, for example, make payments.
3. Persons disqualified because of fiduciary relationship, such as the guardian, who is not allowed to purchase the
property of his ward; or judges, with reference to the property under litigation. (Art. 1491)
VITIATION OF CONSENT
Article 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is
voidable. (1265a)
Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object
of the contract, or to those conditions which have principally moved one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction. (1266a)
Article 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained
to the former. (n)
Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the
contract. (n)
Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may
vitiate consent. (n)
Article 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable and well -grounded fear of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. (1267a)
Article 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person
who did not take part in the contract. (1268)
Article 1337. There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The following circumstances shall be conside red: the confidential,
family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in financial distress. (n)
Article 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to. (1269)
Article 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed
by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential
relations, constitutes fraud. (n)
Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in
themselves fraudulent. (n)
Article 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has
relied on the former's special knowledge. (n)
Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (n)
Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)
CAUSES OF VITIATED CONSENT

1. CAUSES AFFECTING THE INTELLECT AND COGNITION
a. Mistake
b. Fraud
2. CAUSES AFFECTING THE WILL OR VOLITION
a. Violence
b. Intimidation
c. Undue influence
CAUSES OF VITIATED CONSENT (EXPOUNDED)

1. MISTAKE (ART. 1331-1334)
‣ It is a false belief about something.
‣ REQUISITES —
a. THE ERROR MUST BE SUBSTANTIAL REGARDING ANY OF THE FOLLOWING—
‣ NOTE — The error is substantial if because of it, the party gave his consent. Therefore, if a party would still
have entered into the contract even if he had known of the error, the error is NOT substantial.

i. The object of the contract
‣ Such as — A person signed a contract of sale thinking it was only a contract of loan.
ii. The conditions which principally moved or induced one of the parties (error in quality or in quantity)
‣ Such as — Error in knowledge about the true boundaries of a parcel of land offered for sale; A person buys
a fountain pen thinking it to be made of solid gold when as a matter of fact, it is merely gold- plated; A
person buys a CD record thinking it to be Stateside, but it turns out to be merely a local imitation, a pirated
one; A person desiring to buy land consisting of 100 hectares discovers that the land has only 60 hectares.
iii. Identity or qualifications (error in personae), but only if such was the principal cause of the contract
‣ This vitiates consent only when such identity or qualifications have been the principal cause of the contract.
‣ Such as — Hiring of a pre-bar reviewer, a particular singer for a concert, contracts involving partnership,
agency, deposit — since these require trust and confidence.
b. THE ERROR MUST BE EXCUSABLE (NOT CAUSED BY NEGLIGENCE )
‣ The error does not vitiate consent if the party in error was negligent, or if having had an opportunity to
ascertain the truth, he did not do so.
c. THE ERROR MUST BE A MISTAKE OF FACT, AND NOT OF LAW
‣ The error must be one of fact, not of law. This is because ignorance of the law does not excuse anyone from
compliance therewith
‣ EXCEPT — Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent (Art. 1334)
‣ Example — A and B entered into a contract, which they intended should result in a co-ownership between
them, but which turned out later to be a mortgage, as a result of their mutual error as to the legal effect of
the agreement. Here the contract is voidable.
‣ BUT — The following mistakes do NOT vitiate consent —
a. Mistake is not substantial
b. Mistake is inexcusable and negligent
c. Mistake is one of law (Except in Art. 1334)
d. Mistake as to personal motive (Example — a boy buys an engagement ring in the false belief that his girl loves
him.)
e. Mistake in accounting or computation caused for example by wrong arithmetical computation, would ordinarily
give rise merely to correction, and not annulment of the contract.
f. If the party alleging it knew the doubt, contingency or risk affecting the object of the contract (Art. 1333) — It is to
be assumed here that the party was willing to take the risk. This is particularly true in contracts which are
evidently aleatory in nature. (Example — A bought a fountain pen which was represented as possibly being able to
write even underwater. A also knew that the pen’s ability was questionable, and yet A bought said pen. Here, A
cannot allege mistake since he knew beforehand of the doubt, risk, or contingency affecting the object of the
contract.)
2. FRAUD (ART. 1338 — 1344)
‣ TEST — 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. (Art. 1338)
‣ BUT — Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential
relations, constitutes fraud. (Art. 1339)
‣ Fraud is every kind of deception, whether in the form of insidious machinations, manipulations, concealments, or
misrepresentations, for the purpose of leading another party into error and thus execute a particular act. It must have
a determining influence on the consent of the victim Error of one party is produced by the bad faith of the other
contracting party, it presupposes an illicit act.
‣ Kinds of Fraud —
a. Fraud in the Perfection of the Contract — This is fraud employed in obtaining consent
i. Dolo causante (causal fraud) — Here, were it not for the fraud, the other party would not have consented.
(This is the fraud referred to in Art. 1338). The effect is that the contract is voidable
ii. Dolo incidente (incidental fraud) — Here, even without the fraud the parties would have agreed just the
same, hence the fraud was only incidental in causing consent. Very likely though, different terms would have
been agreed upon. The effect is that the contract is still valid, but there can be an action for damages.
b. Fraud in the Performance of the Obligations Stipulated in the Contract — this kind of fraud presupposes the
existence of an already perfected contract. It is the fraud referred to in Art. 1170 and 1171. It merely gives rise to
an action for damages.
‣ Example — Although real vinegar was sold, what was really delivered was diluted vinegar.
‣ NOTE — The fraud contemplated in Art. 1338 to 1344 which vitiates consent is dolo causante
‣ REQUISITES — For dolo causante to exist the following must be present —
a. The fraud must be material and serious, that is, it really induced the consent. (Art. 1344)
b. The fraud must have been employed by only one of the contracting parties, because if both committed fraud, the
contract would remain valid. (Art. 1344)
c. There must be a deliberate intent to deceive or to induce; therefore, misrepresentation in GOOD FAITH is not
fraud. (Art. 1343)
d. The other party must have relied on the untrue statement, and must himself not be guilty of negligence in
ascertaining the truth.
‣ Examples of dolo causante —

‣ A wanted to have himself insured, but because he was afraid he could not pass the medical examination, he had
another person examined in his place. Here the contract of insurance is voidable
‣ Concealment by the applicant for insurance that he had suffered from a number of ailment, including incipient
pulmonary tuberculosis, and of the name of the hospital and of the physician who had treated him.
‣ Misrepresentation by the vendor of the boundaries of his land by showing valuable properties not really included in
his title.
‣ Misrepresentation of law.
‣ The following are NOT fraud in themselves —
a. The usual exaggerations in trade, when the other party had an opportunity to know the facts (Art. 1340)
b. A mere expression of an opinion (Art. 1341)
‣ EXCEPT — when made by an expert and the other party has relied on the former's special knowledge (Art.
1341)
c. Misrepresentation by a third person (Art. 1342)
‣ EXCEPT — when such misrepresentation has created substantial mistake and the same is mutual. (Art. 1342)
‣ BUT — In this case, the contract may be annulled, not principally on the ground of fraud, but on the
ground of error or mistake.
‣ NOTE — Distinguish this from the fact that force or intimidation by a third person already makes the contract
voidable
d. Misrepresentation made in good faith (Art. 1343)
‣
BUT — It may be considered as mistake (Art. 1343)
3. VIOLENCE (ART. 1335, 1336)
‣ Violence refers to physical coercion; intimidation, to moral coercion.

‣ Example — If a person signs a contract only because a gun is pointed at him, this is intimidation because he is afraid
he would be killed. But if he signs because his left hand is being twisted painfully, this is violence or force
‣ REQUISITES —
a. Employment of serious or irresistible force
b. It must have been the reason why the contract was entered into
‣ NOTE — Even if a third person exercised the violence or intimidation, the contract may be annulled. This is because
the consent is still vitiated
4. INTIMIDATION (ART. 1335, 1336)
‣ REQUISITES —
a. Reasonable and well-grounded fear — Whether the fear is reasonable and well-grounded or not depends upon
many circumstances, including the age, condition, and sex of the person concerned.
b. The fear is of an imminent and grave evil upon his person, property, or upon the person or property of his
spouse, descendants, or ascendants
c. It must have been the reason why the contract was entered into — If the person concerned would have
entered into the contract even without the presence of intimidation, it is clear that the contract should be
considered valid, for the consent certainly cannot be considered vitiated.
d. The threat must be of an unjust act, an actionable wrong
‣ A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate
consent. (Art. 1335). A threat to prosecute is not considered as intimidation.
‣ If a contract is signed merely because of “fear of displeasing persons to whom obedience and respect are
due,” the contract is still valid, for by itself reverential fear is not wrong.
‣ NOTE — Even if a third person exercised the violence or intimidation, the contract may be annulled. This is because
the consent is still vitiated
5. UNDUE INFLUENCE (ART. 1337)
‣ REQUISITES —
a. Improper advantage
b. Power over the will of another
c. Deprivation of the latter’s will of a reasonable freedom of choice
‣ Circumstances to be Considered —
a. Confidential, family, spiritual, and other relations between the parties
b. Mental weakness
c. Ignorance
d. Financial distress
‣ PARAS — Undue influence exercised by a third party vitiates consent, just like in the case of violence and intimidation.
RULE IN CASE OF INABILITY TO READ OR UNDERSTAND
‣ RULE — The person enforcing the contract must show that the terms thereof have been fully explained to the
former
‣ This applies when —
1. When one of the parties is unable to read OR if the contract is in a language not understood by him; and
2. Mistake or fraud is alleged
‣ RATIONALE — This rule is especially necessary in the Philippines where unfortunately there is still a fairly large number of
illiterates, and where documents are usually drawn up in English or Spanish
ABSOLUTE AND RELATIVE SIMULATION OF CONTRACTS
Article 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend
to be bound at all; the latter, when the parties conceal their true agreement. (n)
Article 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third
person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the
parties to their real agreement. (n)
NATURE OF SIMULATION OF CONTRACTS
‣ Simulation is the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the
purposes of deception, the appearance of a juridical act which does not exist or is different from that which was really
executed. Simulation of a contract involves a defect in declaration.
‣ REQUISITES — for simulation in general to exist —
1. An outward declaration of will different from the will of the parties

2. The false appearance must have been intended by mutual agreement
3. The purpose is to deceive third persons.
KINDS OF SIMULATION OF CONTRACTS

1. ABSOLUTE SIMULATION
‣ There is a color of a contract, without any substance thereof, the parties not having any intention to be bound. Here is
absolutely no valid contract at all
‣ Example — As a joke, A and B executed a deed of sale although they did not intend to be bound at all by the contract.
‣ Can the parties to an absolutely simulated contract recover what they have given to each other?
‣ YES. If the absolute simulation does not have an illicit purpose, the parties to the contract may prove the
simulation in order to recover whatever may have been given under such simulated act.
‣
BUT — if the simulated contract has an illegal object, the provisions on Art. 1411 and 1412 on pari delicto will
apply.
2. RELATIVE SIMULATION
‣ The parties have an agreement which they conceal under the guise of another contract. Here there is a void contract
(the simulated contract) and a valid contract (the concealed contract unless it is void for different reasons). There are
two juridical acts involved in relative simulation —
a. Ostensible (apparent or fictitious) act — which is the contract that the parties pretend to have executed
b. Hidden (real) act — which is the true agreement between the parties.
‣ Example — a deed of sale of a piece of law is executed by the parties to conceal their true agreement which is a
donation
‣ Can the hidden contract be enforced by the parties?
‣ YES. The concealed or hidden act is enforceable provided that —
a. The essential requisites for validity are present
b. It does not prejudice third persons; and
c. It is not intended for any purpose contrary to law, morals, good customs, public order, or public policy
‣ Are there cases when relative simulation is presumed by law?

‣ YES. Such as in Art. 1602 where it presumes as an equitable mortgage, a contract of sale with a right to
repurchase under the mentioned circumstances.
EFFECT OF SIMULATION AS TO THIRD PERSONS

‣ What is the effect of the simulated contract on third persons?
‣ TOLENTINO — A third person may avail himself of the conduct of the parties to the simulated contract which is most
favourable to himself. The simulated contract will therefore be binding if it is favourable to him to consider it so. This is
not only a protection to him who has relief in good faith upon appearances, but a penalty to those who conceal their
act from innocent persons. A third person, if he is prejudiced, may invoke the nullity of a simulated contract. This, a
creditor may ask for the declaration of nullity of an absolutely fictitious sale made by his creditor, or of a sale in which
a much lower price than that agreed upon is made to appear.
‣ For registered real properties — apply doctrines in land titles on good faith or bad faith of the buyer of the title
depending on if he had knowledge of the simulation or not
ABSOLUTE SIMULATION DISTINGUISHED FROM FRAUDULENT ALIENATION
‣ NOTE — Fraudulent alienation may and probably involves a relative simulation as the parties would want to make it
appear like a legitimate transfer

B. OBJECT OR SUBJECT -MATTER
ABSOLUTE SIMULATION FRAUDULENT ALIENATION
Implies that there is no existing contract, no real act There is a true and existing transfer or contract
executed
Can be attacked by any creditor, including one Can only be assailed by the creditors before the
subsequent to the contract alienation
The insolvency of the debtor making the simulated The action to rescind, or accion pauliana, requires that the
transfer is not a prerequisite to the nullity of the contract creditor cannot recover in any other manner what is due
to him
Imprescriptible Prescribes in 4 years
B. OBJECT OR SUBJECT-MATTER
Article 1347. All things which are not outside the commerce of men, including future things, may be the object of a
contract. All rights which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases expressly authorized by law.
All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object
of a contract. (1271a)
Article 1348. Impossible things or services cannot be the object of contracts. (1272)
Article 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate
shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need
of a new contract between the parties. (1273)
NATURE OF THE OBJECT AS AN ESSENTIAL ELEMENT OF CONTRACTS
‣ The object of the contract is its subject-matter. It is the thing, right, or service which is the subject-matter of the obligation
arising from the contract.Hence, it is said that under the Code, the object of the contract and the object of the obligation
cerated thereby are identical.
‣ REQUISITES— In order that a thing, right or service may be a valid object of contracts, it is necessary that the following
requisites concur —
1. The object must be within the commerce of man (Art. 1347)
2. It must be licit, or not contrary to law, morals, good customs, public policy, or public order (Art. 1347)
3. It must be possible (Art. 1348)
4. It must be determinate as to its kind (generic at least) (Art. 1349)
REQUISITES OF THE OBJECT (EXPOUNDED)

1. T HE OBJECT MUST BE WITHIN THE COMMERCE OF MAN (ART. 1347)
‣ REQUISITES —
a. The object must be in existence at the time of the perfection of the contract OR it has the possible or
potentiality of coming into existence at some future time.
‣ Thus, even future things can be the object of contracts.

‣ Future things — those which do not belong to the obligor at the time the contract is made, and may be made,
raised or acquired by the obligor after the perfection of the contract. It includes not only material objects but
also future rights. In this case, the coming into being of the future thing is a suspensive condition.
‣ Emptio rei speratae is a conditional sale. There is a suspensive condition. If the future thing does not come
into existence, then there is no contract of sale.

B. OBJECT OR SUBJECT -MATTER
‣ Emptio spei is the sale of a hope. Even if the future thing does not materialize, the buyer must pay since the
buyer is taking a chance. Hope is a present thing. (Such as the sale of lotto ticket).
‣ EXCEPT — Future inheritance (one where the source of property is still alive) cannot be the subject of a
contract
‣ EXCEPTIONS TO EXCEPTION — It is a valid object in the case of partitions of property inter vivos by the
deceased. (Art. 1080)
b. It must be susceptible of appropriation
c. It must be transmissible
‣ What are things outside the commerce of man?

‣ TOLENTINO — All kinds of things and interests whose alienation or free exchange is restricted by law or
stipulation, which party cannot modify at will. It comprehends things who are —
a. Not susceptible of appropriation or of private ownership
‣ Such as — sidewalks, public plazas public bridges, lands of the public domain, the right to present one’s
candidacy for a public office, services which imply an absolute submission by those who render them
(slavery or perpetual servitude), public offices,
b. Not transmissible
‣ All rights which are not intransmissible may be the object of contracts. But strictly political rights or strictly
personal rights cannot be the subject of a contract.
‣
Such as — personal rights, parental authority, the right to vote,
2. IT MUST BE LICIT (ART. 1347)
‣ The object must not contrary to law, morals, good customs, public policy, or public order
3. IT MUST BE POSSIBLE (ART. 1348)
‣ Things are impossible when they are not susceptible of existing or they are outside the commerce of man.
‣ Personal services or acts are impossible when they are beyond the ordinary strength or power of man.
‣ The impossibility must be actual and contemporaneous with the making of the contract, and not subsequent thereto.
‣ Kinds of impossibility —
a. Absolute or objective impossibility — when nobody can perform it. This nullifies the contract all the time.
b. Relative or subjective impossibility — when due to special conditions or qualifications of the debtor, it cannot
be performed. This nullifies the contract only if it it is permanent and NOT temporary
i. Permanent — If a blind man enters into a contract which requires the use of his eyesight (unless in the future,
blindness can be cured)
ii. Temporary — when a partner agrees to contribute to the partnership at an amount more than permissible by
his means
‣ NOTE — Impossibility must not be confused with difficulty. Hence, a showing of mere inconvenience, unexpected
impediments, or increased expenses is not enough
4. IT MUST BE DETERMINATE AS TO ITS KIND (GENERIC AT LEAST) (ART. 1349)
‣ The object need not be specific or determinate but it must be determinate as to its kind or species.
‣ Such as — a horse, a cow, a car
‣ The quantity of the object may be indeterminate so long as the right of the creditor is not rendered illusory, provided it
is possible to determine the same, without the need of a new contract between the parties

C. CAUSE OR CONSIDERATION
NATURE AND KINDS OF CAUSES
Article 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of
a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure
beneficence, the mere liberality of the benefactor. (1274)
NATURE OF CAUSE OR CONSIDERATION
‣ The cause of the contract is the “why” of it. It is the immediate and most proximate purpose of the contract, the essential
reason which impels the contracting parries to enter into it and which explains and justifies the creation of the obligation
through such contract
‣ It may or may not be tangible. It can take different forms, such as a prestation or promise of a thing or service by another.
It can be the giving of sum of money, an object or even an expectation of profits from a subdivision project.
‣ What is the difference between the cause and object?
‣ PARAS — The difference is only a matter of viewpoint in some way, because what may be the subject matter for one
party will be the cause or consideration for the other party.
‣ Example — A is obliged to sing at a concert, in return for which she will receive a car from B. Regarding A, the
subject matter is the singing; the cause is the car. Regarding B, the subject matter is the car; the cause is the
singing. Hence, we can form this general conclusion: In reciprocal contracts, the subject matter for one is the
cause for the other, and vice versa.
‣ TOLENTINO — There are some who believe that the objects of the contract are inversely the cause of the contract
from the viewpoint of the other party. However, it is believed that the subject-matter or object in onerous contracts is
the thing, service or act, which forms the basis of the entire contract, the starting point of agreement, without which
the negotiations or bargaining between the parties would never even have begun. Thus, while the object of the
onerous contract is the same as to both parties and determined irrespective of them, the cause is different with
respect to each party for it is the impelling or essential reason for his entering into the contract.
‣ Example — If a particular piano is sold for P500,000 what is the object and what is the cause?
‣ MANRESA AND PARAS — for the seller the object is the piano and the cause is the price; for the buyer the object
is the price and the cause is the piano.
‣ TOLENTINO — for both the seller and the buyer, there is just one object, namely, the piano. The cause for the
seller is the price; the cause for the buyer is the delivery of the piano.
K INDS OF C AUSES
1. Onerous — here the cause is, for each contracting party, the prestation or promise of a thing or service by the other.
‣ Example — contract of sale

2. Remuneratory — the past service or benefit which by itself is a recoverable debt.
‣ Example — A gives B a piece of law in consideration of services rendered by B in saving A from drowning on some
previous occasion
3. Gratuitous (or contracts of pure beneficence) — here, the cause is the mere liability of the benefactor.
‣ Example — pure donation
CAUSE VS MOTIVE
Article 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n)
‣ RULE — THE PARTICULAR MOTIVES OF THE PARTIES IN ENTERING INTO A CONTRACT ARE DIFFERENT FROM THE CAUSE

‣ The fundamental distinction between cause and motive is that cause os the objective, intrinsic and juridical reason for
the existence of the contract itself, while motive is the psychological, individual, or personal purpose of a party to the
contract.
‣ The cause is the objective of a party in entering into the contract, while the motive is a person’s reason for wanting to
get such objective.
‣ The cause in each contract is the same, while the motive differs with each person.
‣ The motive of a person may vary although he enters into the same kind of contract; the cause is always the same.
‣ The motive may be unknown to the other; the cause is always known.
‣ The presence of motive cannot cure the absence of cause.
‣ The motives which impel one to a sale or purchase are not always the consideration (cause) of the contract as that
term is understood in law. One may purchase an article not because it is cheap, for in fact, it may be dear, but
because he may have some particular use to which it may be put because of a particular quality which that article
has or the relation to which it will be associated. These circumstances may constitute the motive which induces the
purchase, but the real consideration of the purchase is the money which passed. With one’s motives the law cannot
deal in civil actions of this character, while with the consideration the law is always concerned.” (De Jesus v. G. Urrutia
& Co)
‣ Examples —
‣ I buy a gun from a store for P50,000 because I want to kill myself. The cause of the contract is the gun (for me); the
money (for the seller). My motive, however, is the killing of myself. Motives do not enter at all in the validity or
invalidity of cause or consideration.
‣ In a contract of sale, the objective of the seller is to receive the price, but one seller may want it in order to pay his
debts, while a different seller may want it for buying other property. On the other hand, the objective of the buyer is
to get the thing, but he may want ti because of some particular use he intends for it, or because of a particular
quality thereof which appeals to him, or because of the relation it will bear to other articles with which it will be
associated.
‣ The cause in a contract of loan for the borrower is the acquisition of money, and for the lender, the right to require
payment. If at all, payment of interest may be considered as a motive of the lender, which is different from the
cause thereof.
‣ EXCEPT — THE MOTIVE MAY BE CONSIDERED AS THE CAUSE WHEN IT PREDETERMINES THE PURPOSE OF THE CONTRACT
‣ As a general principle, motive or particular purpose of a party in entering into a contract does not affect the validity or
the existence of a contract. An exception is when the realisation of such motive or particular purpose has been made a
condition upon which the contract is made to depend. (PNCC vs CA)
‣ In this case, the motive is part of the contract as a condition
EFFECT OF MOTIVE
‣ RULE — THE MOTIVES OF THE CONTRACT DO NOT AFFECT THE VALIDITY OR EXISTENCE OF THE CONTRACT
‣ The mere presence of motives cannot cure the absence of consideration. Thus a simulated contract, not having any
consideration, cannot be sustained simply because the vendor had some motives in agreeing to such contract, such
as the desire to evade the effects of execution or attachment.
‣ An illegal cause makes a contract void; an illegal motive does not necessarily render the transaction void —
Example — If I buy a knife to kill X, the purchase is still valid. But if the purpose is to stifle a criminal prosecution, the
contract is void.
‣ EXCEPT — IN THE FOLLOWING CASES, THE MOTIVES MAY AFFECT THE CONTRACT —
1. When a motive of a debtor in alienating the property is to defraud his creditors, the alienation is rescissble
2. When the motive of a person in giving his consent to avoid a threatened injury, as in case of intimidation, the
contract is voidable
3. When the motive of a person induced to him to act on the basis of fraud or misrepresentation by the other party,
the contract is voidable.
4. When the motive may be considered as the cause when it predetermines the purpose of the contract
REQUISITES OF A VALID CAUSE

Article 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is
contrary to
law, morals, good customs, public order or public policy. (1275a)
Article 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were
founded upon another cause which is true and lawful. (1276)
Article 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor
proves the contrary. (1277)
Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there
has been fraud, mistake or undue influence. (n)
REQUISITES OF THE CAUSE

1. IT MUST BE PRESENT AND EXISTING (ART. 1352, 1354)
‣ This is presumed
‣ Contracts with no cause produce NO EFECTS whatsoever
‣ Consent necessarily means the agreement as to the cause, therefore there can be no consent if there is no cause .
‣ The cause must exist at the time of the perfection of the contract but it need not exist later. (Juan Serrano v. Federico
Miave 1965)
‣ Example — On Jan. 5, A sold and delivered his truck together with the corresponding certificate of public convenience
to B for the sum of P1.6 million, payable within 60 days. Two weeks after the sale, and while the certificate of public
convenience was still in the name of A, the certificate was revoked by the Land Transportation Commission thru no
fault of A. Upon the expiration of the 60-day period, A demanded payment of the price from B. B refused to pay,
alleging that the certificate of public convenience which was the main consideration of the sale no longer existed. Is
the contention of B tenable? No, for the certificate was in existence at the time of the perfection of the contract. Its
subsequent revocation is of no consequence insofar as the validity of the contract is concerned. Besides, B was
negligent in not having caused the immediate transfer of the certificate to his name. After all, it had already
2. IT MUST BE TRUE (ART. 1353, 1354)
‣ If the cause is false, the contract is not valid unless some other cause which is lawful really exists
‣ The parties are given a chance to show that a cause really exists, and that said cause is true and lawful.
‣ NOTE — In this case, apply the rules on simulation of contracts (whether absolute or relative)
3. IT MUST BE LICIT (ART. 1352, 1354)
LESION OR ADEQUACY OF THE CAUSE

‣ Lesion — it is inadequacy of cause, like an insufficient price for a thing sold.
‣ This is NOT an essential element of the cause. It does not invalidate a contract
‣ EXCEPT — If there has been fraud, mistake or undue influence.
‣ In this case, apply the rules in rescission relating to lesion

VII. OTHER PROVISIONS ON CONTRACTS
III. OTHER PROVISIONS ON CONTRACTS
A. FORM OF CONTRACTS
Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential
requisites for their validity are present. However, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.
In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)
Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the
following article, the contracting parties may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon the contract. (1279a)
Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights
over immovable property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and
1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object an act appearing or which should
appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one.
But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405. (1280a)
B. REFORMATION OF INSTRUMENTS
Article 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not
expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be
expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy
is not reformation of the instrument but annulment of the contract.
Article 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are
not in conflict with the provisions of this Code.
Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement,
said instrument may be reformed.
Article 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for the reformation of the instrument.
Article 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real
agreement, but concealed that fact from the former, the instrument may be reformed.
Article 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the
instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order
that the instrument be reformed.

VII. OTHER PROVISIONS ON CONTRACTS
Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that
the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.
Article 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed; (2) Wills;(3) When the real agree ment is void.
Article 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its
reformation.
Article 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was
mutual; otherwise, upon petition of the injured party, or his heirs and assigns.
Article 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by
the Supreme Court.
C. INTERPRETATION OF CONTRACTS
Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)
Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. (1282)
Article 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon which the parties intended to agree. (1283)
Article 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual. (1284)
Article 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly. (1285)
Article 1375. Words which may have different significations shall be understood in that which is most in keeping with the
nature and object of the contract. (1286)
Article 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which are ordinarily established. (1287)
Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity. (1288)
Article 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the
doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall
prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have
been the intention or will of the parties, the contract shall be null and void. (1289)
Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the
construction of contracts. (n)

VIII. DEFECTIVE CONTRACTS
IV. DEFECTIVE CONTRACTS
KINDS OF DEFECTIVE CONTRACTS

1. Rescissible contracts — a contract that has caused a particular damage to one of the parties or to a third person, and
which for equitable reasons may be set aside even if it is valid. There is a sort of extrinsic defect consisting of an
economic damage or lesion.
2. Voidable or annullable contracts — a contract in which the consent of one party is defective, either because of want of
capacity or because it is vitiated, but which contract is valid until set aside by a competent court. It cannot be annulled,
however, if there has been a ratification. The defect is more or less intrinsic, as in the case of vitiated consent.
3. Unenforceable contracts — a contract that for some reason cannot be enforced, unless it is ratified in the manner
provided by law. In a way, it may be considered as a validable transaction, that is, it has no effect now, but it may be
effective upon ratification.
4. Void or inexistent contracts — an absolute nullity and produces no effect, as if it had never been executed or entered
into. It cannot be ratified or validated.
5. Relatively ineffective contracts — contracts which are ineffective only with respect to certain parties, but are effective
as to other persons.
‣ TOLENTINO — The code commission failed to provide expressly under a separate class those contract which are
relatively ineffective. A relatively ineffective contract is distinguished form the voidable contract in that its
ineffectiveness, with respect to the party concerned, is produced ipso jure, while a voidable contract does not
become inoperative unless an action to annul it is instituted and allowed. It differs from the void or inexsitence
contract, in that the ineffectiveness of the latter is absolute, because it cannot be ratified, while the relatively
ineffective contract can be made completely effective by the consent of the person as to whom it is ineffective, or by
the cessation of the impediment which prevents its complete effectiveness
‣ Such as —
‣ an assignment of the lease by the lessee without the consent of the lessor is ineffective only as regards the lessor
‣ the transfer of the debt by the debtor to another, without the consent of the creditor, is ineffective as to the latter
‣ the payment by a debtor to his creditor after the credit has been garnished or attached by a third person, is
ineffective as to the latter
RESCISSIBLE CONTRACTS VOIDABLE CONTRACTS UNENFORCEABLE VOID CONTRACTS

CONTRACTS
Requisites 1. There must be a valid 1. There is a valid ground for As long as the As long as the contract falls
ground for rescission (Art. annulment contract falls under the under the grounds for nullity
1380) grounds for under Art. 1409, it is void.
2. Action has not prescribed
unenforceability under
2. The party asking for
3. Must be brought by the Art. 1403 and provided
rescission must have no
proper parties and is NOT ratified, it
other legal means to obtain
is unenforceable
reparation for the damages 4. The party capacitated to
suffered by him. (Art. 1383) bring the action for
annulment must NOT
3. Generally, the person
have lost the thing he
demanding rescission must
received as the object of
be able to return whatever
the contract through his
he may be obliged to restore
fault (Art. 1401)
if rescission is granted. (Art.
1385)
4. The things which are the
object of the contract must
not have passed legally to
the possession of a third
person acting in good faith.
(Art. 1385)
5. Action has not prescribed

CONTRACTS
Grounds 1. Contracts which cause lesion 1. Incapacity to consent — 1. Unauthorized 1. Those whose cause, object
or economic damage (of 1/4 Those where one of the contracts — or purpose is contrary to
of the value of the thing) parties is incapable of those entered into law, morals, good customs,
giving consent to a in the name of public order or public
a. Contracts which are
contract another person by policy;
entered into by
one who has
guardians 2. Vitiated consent — Those 2. Those which are absolutely
either —
where the consent is simulated or fictitious;
b. Contracts agreed upon
vitiated by either — a. Been given no
in representation of 3. Those whose cause or
authority or
absentees a. Mistake object did not exist at the
legal
time of the transaction;
2. Contracts which defraud b. Violence representation
creditors 4. Those whose object is
c. Intimidation b. Acted beyond
outside the commerce of
3. Things in litigation his powers
d. Undue influence men;
4. All other contracts specially 2. Contracts that fail
e. Fraud 5. Those which contemplate
declared by law to be subject to comply with the
an impossible service;
to rescission Statute of Frauds
6. Those where the intention
5. Payments made in a state of 3. Contracts where
of the parties relative to the
insolvency for obligations to both parties are
principal object of the
whose fulfillment the debtor incapable of giving
contract cannot be
could not be compelled at consent
ascertained;
the time they were effected.
(Art. 1381, 1382) 7. Those expressly prohibited
or declared void by law
How 1. Can be made directly by an action for such purpose, or It is not an action but a 1. May be made in proper
availed of defense that should be and direct action filed for
2. Indirectly by way of defense to an action (but it should be set
claimed at the earliest such purpose, or
up as a counterclaim) instance
2. It may be claimed as an
affirmative defense (but it
need not be a
counterclaim)
Prescriptiv 4 years N/A Imprescriptible (Art. 1410)

e Period
When 1. Generally — From the date 1. Intimidation, violence, N/A

prescripti the contract was entered or undue influence —
on into and all legal remedies form the time the defect
commenc have been exhausted of the consent ceases.
es
2. For minors — Within four 2. Mistake or fraud —
years after attaining the age from the time of the
of majority and all other discovery of the same
legal remedies have been
3. Contracts entered into
exhausted
by minors or other
3. For absentees — when he incapacitated persons
learns of the contract (when — from the time the
his domicile is known) and guardianship ceases
all legal remedies have been
exhausted
4. For contracts in fraud of
creditors — From the time
the fraud is discovered and
all other legal remedies have
been exhausted
5. Things in litigation — after
knowledge of the
transaction and all other
legal remedies have been
exhausted

CONTRACTS
Who can 1. The person who is injured by The person who has interest in Only the parties to the 1. Contracting parties
file the rescissible contract or is a party to the contract, contract can assert its
2. Third persons who
provided he must be the unenforceability and
a. Ward or absentee in the interests are directly
victim, and NOT the party NEVER third persons
case of lesion affected (Art. 1421)
responsible for the defect (Art. 1408)
b. Plaintiff in a case where
a thing in litigation is
alienated by the
defendant
c. Defrauded creditors in
case of an accion
pauliana
2. The heirs of these persons
3. The debtor’s creditors by
virtue of their right granted by
Art. 1177 (accion
subrogatoria)
Ratificatio May be ratified by lapse of time 1. May be ratified either 1. In the case of Cannot be ratified
n due to prescription expressly or impliedly by the Statute of
the party who is Frauds it may be
incapacitated or whose ratified by —
consent is vitiated
a. Partial
2. May be ratified by lapse performance
of time due to of the
prescription obligation
arising from
the contract
b. Non-
objection
during the
trial when oral
evidence is
presented
2. In the case of
other grounds —
Ratification either
expressly or
impliedly by the
proper parties

CONTRACTS
Effects 1. Rescission shall be only to The contracting parties shall The contract cannot The contract cannot be given
the extent necessary to restore to each other the be given effect effect and both parties may
cover the damages caused following — generally recover what each
(Art. 1384) has given
1. Things which have been
2. Creates the obligation to the subject matter of the EXCEPT —
return and/or pay (mutual contract
1. No recovery is allowed —
restitution) the following (Art.
2. Fruits when the nullity proceeds
1385) —
from the illegality of the
3. The price with its interest
a. Things which were the cause or object of the
(Art. 1398)
object of the contract or contract AND both parties
the price paid are guilty (pari delicto)
b. Fruits EXCEPT — In the following ‣ EXCEPT — See
cases, a party is NOT obliged exceptions in Art.
c. Interest
to return fully or partially 1414, 1415, & 1416
‣ BUT — Mutual 1. In cases provided by law (recovery by one party)
restitution ONLY applies here is allowed)
(Art. 1398)
to— 2. Partial recovery (recovery
2. When the defect of the by one party) is allowed —
i. Defective contracts
contract consists in the When the nullity proceeds
causing lesion in
incapacity of one of the from the illegality of the
numbers 1 and 2 of
parties, the incapacitated cause or object of the
Art. 1381 (by
person is not obliged to contract BUT only one
guardians and
make any restitution party is guilty
administrators)
except insofar as he has
ii. Mutual dissent been benefited by the
thing or price received by
iii. Resolution or him (Art. 1399)
cancellation or
reciprocal 3. When the principle of
obligations under unjust enrichment applies
Art. 1191 (Tolentino)
3. In case the objects of the
contract are legally in the
possession of third persons
in good faith, then damages
instead should be paid by
the party causing the loss

A. RESCISSIBLE CONTRACTS
NATURE OF RESCISSION
Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages
in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with
articles 1385 and 1388 and the Mortgage Law. (1124)
Article 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the
fulfillment of said conditions, shall return to each other what they have received. XXXXX
Article 1193. XXXX Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
XXXX
KINDS OF RESCISSION UNDER THE CIVIL CODE

1. Rescission of rescissible contracts (Art. 1380)
2. Rescission by means of resolution or cancellation
a. Resolution of reciprocal obligations due to non-performance or substantial improper performance (Art. 1191)
b. Resolution of obligations due to the fulfilment of a resolutory condition (Art. 1190)
c. Resolution by mutual dissent or consent (See Aquino vs Tanedo)
C ONCEPT OF R ESCISSION OF RESCISSBLE C ONTRACTS
‣ Rescission is a process designated to render inefficacious a contract validly entered into and normally binding, by reason
of external conditions, causing an economic prejudice to a party or to his creditors.
‣ This is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages
caused to them by contract, even if this should be valid, by means of the restoration of things to their condition at the
moment prior to the celebration of said contract.
‣ It is a relief 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 right created by the contract.
‣ It implies a contract, which even if initially valid, produces lesion or pecuniary damage to someone.
‣ It sets aside the act or contract for justifiable reasons of equity.
‣ Rescission is perfectly compatible with the validity of the contract, but it does not require such validity as an essential
condition. Hence, a voidable contract may also be rescinded.
‣ Judicial Action to Rescind Required — Rescindible contracts are not void, and until set aside in a rescissory action, they
are legally effective, convey title, and cannot be attacked collaterally upon the grounds for recsission in a land registration
proceeding. (Borja v. Addison)
REQUISITES FOR RESCISSION OR RESCISSIBLE CONTRACTS (IN GENERAL)

1. The contract must be a rescissible contract, such as those mentioned in Art. 1381 and 1382
2. The party asking for rescission must have no other legal means to obtain reparation for the damages suffered by him.
(Art. 1383)

3. The person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted.
(Art. 1385)
4. The things which are the object of the contract must not have passed legally to the possession of a third person acting in
good faith. (Art. 1385)
5. The action for rescission must be brought within the prescriptive period of 4 years. (Art. 1389)
RESCISSION OF RESCISSIBLE CONTRACTS (ART. 1380) VS RESCISSION OF RECIPROCAL OBLIGATIONS (ART. 1191)
‣ Similarities —
‣ Both presuppose contracts validly entered into and existing (or at least voidable)
‣ Both require mutual restitution when declared proper
‣ Differences —
RESCISSION UNDER ART. 1380 RESCISSION UNDER ART. 1191
May be demanded by a third party prejudiced by the May be demanded only by a party to the contract
contract
May not be denied by the court if the conditions for May be denied by the court when there is sufficient
rescission are present. The courts cannot grant a period reason to justify extension of time to the defendant in
or term within which to comply which to perform
There are various reasons of equity provided as grounds Non-performance or substantial improper performance is
for rescission under Art. 1381 and 1382. The non- the basis for rescission
performance by the other party is immaterial.
Applies whether the contract produces unilateral or Applies only to reciprocal obligations where one party has
reciprocal obligations and even when the contract has not performed and the other is ready to comply with his
been fully fulfilled obligation
Must be rescinded by judicial action May be done extra-judicially if there is a stipulation
RESCISSION OF RESCISSIBLE CONTRACTS VS MUTUAL DISSENT

‣ Rescission should also be clearly distinguished from mutual dissent.
‣ Mutual dissent — is an agreement of the parties to cancel their contract and mutually return the object and cause thereof.
‣ In mutual withdrawal, it is the will of the parties that constitutes the basis, whereas in rescission (properly called), it is
the law that constitutes the basis.
‣ Example — when the purchaser returned the thing purchased from the vendor, saying that he was no longer able to
pay for it, and the vendor took possession thereof, the contract is rescinded (or resolved), and the vendor cannot
recover the balance of the purchase price from the vendee.
GROUNDS FOR RESCISSION
Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)
Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible. (1292)

Article 1098. A partition, judicial or extra-judicial, may also be rescinded on account of lesion, when any one of the co-
heirs received things whose value is less, by at least one-fourth, than the share to which he is entitled, considering the
value of the things at the time they were adjudicated. (1074a)
Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved
by the courts. (1296a)
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may
exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor may have done to defraud them. (1111)
Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
Article 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 de cision or attachment need not refer to the
property alienated, and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the
law of evidence. (1297a)
G ROUNDS FOR R ESCISSION

1. Contracts which cause lesion or economic damage (of 1/4 of the value of the thing)
a. Contracts which are entered into by guardians
b. Contracts agreed upon in representation of absentees
c. Partition, judicial or extra-judicial
2. Contracts which defraud creditors
3. Things in litigation
4. All other contracts specially declared by law to be subject to rescission
a. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the
time they were effected. (Art. 1382)
b. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, and the
thing deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its
fulfillment, with indemnity for damages in either case. (Art. 1189)
c. Right of the unpaid seller of goods to rescind, notwithstanding that the ownership in the goods may have passed to
the buyer. (Art. 1526, 1534)
d. Buyer of real estate may rescind when the inferior value of the thing sold exceeds one- tenth of the price agreed upon.
Also, if the vendee would not have bought the immovable had he known of its smaller area of inferior quality, he may
rescind the sale. (Art. 1539)
5. Sale by the seller violative of a person’s right of first refusal (Riviera Filipina vs CA 2002)
G ROUNDS FOR R ESCISSION (EXPOUNDED )

1. CONTRACTS WHICH CAUSE LESION OR ECONOMIC DAMAGE (ART. 1381 [1,2], 1098)
a. Contracts which are entered into by guardians — whenever the wards whom they represent suffer lesion by more
than 1/4 of the value of the things which are the object thereof
b. Contracts agreed upon in representation of absentees — if the latter suffer the lesion by more than 1/4 of the value
of the things which are the object thereof
c. Partition, judicial or extra-judicial — when any one of the co-heirs received things whose value is less, by at least
1/4, than the share to which he is entitled, considering the value of the things at the time they were adjudicated.
‣ What does “lesion” mean?

‣ “Lesion” — is the injury which one of the parties suffers by virtue of a contract which is disadvantageous for him.
Its is generally, disparity between the price and the value.
‣ TOLENTINO — To give rise to rescission must be known or could have been known at the time of making the
contract, and not due to circumstances subsequent thereto or unknown to the parties. In view of the basis of
lesion, great difficulties arise in its actual determination and appreciation because of its eminently subjective
character. The idea is to establish parity between the value of the thing and its price, so that if the price is less than
the true value of the thing at the time of perfection of the contract, there is lesion.
‣ JBL REYES — Modern legislation generally does not favor rescission on account of lesion, because “goods do not
have a fixed true value; value is always variable and fluctuating, being a function of supply and demand. The
modern codes tend to view lesion of certain proportions (1/4, 1/2, etc.) as merely raising a presumption of undue
influence that vitiates consent and renders the contract voidable whenever the lesion is coupled with exploitation
by the others.
‣ Indeed, mere inadequacy of price, unless shocking to the conscience, is not a sufficient ground for setting aside a
sale, if there is no showing that, in the event of a resale, a better price can be obtained. (Tayengco v. Sydecohautea
1965)
‣ Contracts for Absentees — The powers and duties of a legal representative of an absentee, appointed by the court
are the same as those of guardians. Thus, the discussion of guardians are applicable.
‣ EXCEPT — Rescission will NOT take place if the contract is approved by the courts (Art. 1386)
‣ Effect of contracts entered into in behalf of wards —
a. If an act of ownership — court approval is required; otherwise, contract is unenforceable (Art. 1403) whether
there is lesion or not.
b. If merely an act of administration —
i. if with court approval — valid, regardless of lesion. (Art. 1386).
ii. if without court approval — rescissible, if lesion is more than one-fourth. (Art. 1381)
‣NOTE — Rescission only applies if the contract entered into by the guardian or administrator was an act of
administration and it was without court approval
2. CONTRACTS WHICH DEFRAUD CREDITORS (ART. 1381[3], 1177, 1313)
‣ The action to rescind contracts made in fraud of creditors is called “accion pauliana.”
‣ REQUISITES —
a. The that plaintiff asking for rescission has a credit prior the alienation, even if it is not yet due (EXCEPT — In
case of anticipatory fraud where the debtor had fraudulently disposed of his properties prior to incurring the debt.
This can be rescinded if the alienation was made precisely in view of such future obligation [Tolentino])
b. That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person
c. That the creditor no other legal remedy to satisfy his claim, but would benefit by the rescission of the
conveyance to the third person.
d. That the act being impugned is fraudulent
e. That the third person who received the property conveyed is in bad faith — that is, he knew that damages
would be caused his creditors whether or not he intended to cause such damage. (BUT — If by gratuitous title, the
third person need not be in bad faith for rescission to prosper since he gave nothing and will not be prejudiced
[Tolentino])
f. At the time the action pauliana is being brought, the credit must already be due and demandable.
‣ PARAS — An action to rescind may be brought even if the debtor has not been judicially declared insolvent and even
if the creditor has not yet brought an action to collect his credit. Since the law makes no distinction, both secured and
unsecured creditors may bring the action; the important thing is that they be prejudiced.
‣ TOLENTINO — These are contracts executed with the intention to prejudice the rights of creditors and should not be
confused with those entered into without such intention, even if, as a consequence thereof, some particular damage
may be caused to a creditor. The existence of the intention to prejudice creditors should be determined, either by the
presumption established in Art. 1387 or by proof presented in trial. And, since the patrimony of the debtor includes not
only things but also rights, the remission of credits should be considered as included within the provision of law.
‣ Rules and Presumptions of Fraud
‣ Generally, the party desiring to rescind must show that the conveyance or alienation was fraudulent. He has the
burden of proof. The design to defraud creditors may be proved in any other manner recognized by the law of
evidence. (Art. 1387)
‣ EXCEPT — in the following cases when there is a presumption of fraud —
i. Alienation by gratuitous title — are presumed fraudulent when the donor did not reserve sufficient property to
pay all debts contracted before the donation.
ii. Alienations by onerous title — are presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued.
‣
NOTE — The decision or attachment need NOT refer to the property alienated, and need not have been
obtained by the party seeking the rescission.
3. THINGS IN LITIGATION (ART. 1381 [4])
‣ Contracts involving things under litigation if they have been entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority.
‣ Example — A sues B for recovery of a diamond ring. Pendente lite, B sells the ring to C without the approval of A or of
the court. The sale to C is rescissible at A’s instance in case A wins in the original litigation, unless C is in good faith.
‣ PARAS — The property is said to be in litigation here after the defendant has received the service of summons. To
protect himself, the plaintiff must register his claim in the registry of property, pending litigation, if the suit is about real
property. This is the notice of lis pendens. The purpose is to give notice to the whole world. If personal property is
involved, the property may be levied upon by a writ of preliminary attachment or else, it may be placed in the hands of
a receiver.
‣ TOLENTINO — As in the case of a contract in fraud of creditors, the remedy of rescission in this case is given to a
third person who is not a party to the contract. Essentially the purpose is the same in both cases, it is to prevent injury
to the plaintiff. But while in the rescission of a contract in fraud of creditors, a personal right is protected by giving it
the guaranty of the debtor’s proper, in the rescission on things in litigation, a real right is rendered effective with
respect to particular property.
‣ TOLENTINO — Importance of the nature of the transfer —
a. Good faith of the transferee is a defense in onerous transfers — Where the claim of the plaintiff in the pending
litigation has not been registered, and there is nothing in the register of deeds showing any legal obstacles to the
transfer, the transferee of a property in litigation, who acquires the same in good faith and for valuable
consideration, without knowledge or notice of the litigation or claim of the plaintiff cannot be deprived of such
property by a rescissory action. The good faith of the transferee protects him. But where the transferee knew of the
claim of the plaintiff, either actually or constructively (through a notice of lis pedens) he acts in bad faith, and the
transfer can be rescinded.
b. Good faith of the transferee is immaterial in gratuitous transfers — if the transfer is gratuitous, the transferee
loses nothing by the rescission, and the contract may be rescinded even if he acted in good faith. The right of the
plaintiff being prior to his, the former should prevail as it causes no injury to the transferee.
‣ NOTE — This distinction by Tolentino has no legal basis, in fact Art. 1385 says that rescission cannot take place
when the things which are the object of the contract are legally in the possession of third persons who did not act
in bad faith (without distinction as to onerous or gratuitous transfers).
4. A LL OTHER CONTRACTS SPECIALLY DECLARED BY LAW TO BE SUBJECT TO RESCISSION (ART. 1381 [5])
a. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled
at the time they were effected. (Art. 1382)
‣ Insolvent debtor— debtor whose liabilities exceed his asset.

‣ Insolvency may not be insolvency in fact which requires judicial proceedings on insolvency. It is a matter of
evidence and can be established by proving that the debtor did not have properties with which to satisfy his
creditors except that which was given payment for the debt which has not yet matured
‣ Art. 1386 contemplates a situation where an insolvent debtor pays off a creditor whose credit is not yet due, such
payment may be rescinded
‣ REQUISITES —
i. The debtor-payer must have been insolvent (the insolvency need not be a judicially declared one)
ii. The debt was not yet due and demandable
‣ PARAS — Art. 1382 does not exactly speak of a contract; it refers to a payment; hence, it is not included under
Art. 1381.
‣ SEE — Asia Banking Corporation v. Corcuera 51 Phil. 781
‣ The Lichauco Corporation owed Noble Jose P70,000. The Corporation was involvent and although the debt
was not yet enforceable, the Corporation gave to Noble Jose a deed of sale to one of its properties (the value

of which was much greater than the debt) in payments for the debt. At the same time, the Corporation paid off
a certain Corcuera its debt of P24,000 by giving him a piece of land. This latter debt was already due and
demandable at the time payment was made. Are the two transactions rescindable?
‣ The first is rescindable because it was made in a state of insolvency for an obligation to whose fulfillment the
debtor could not be compelled at the time it was effected. But the second debt is not rescindable because at
the time of payment, even if the Corporation was already insolvent, the debt was already due, owing and
enforceable.
‣ NOTE — Where the transfer of property was made after an insolvency proceeding was filed with the competent
court, and where such transfer was also claimed as in fraud of creditors, the SC said that the transfer was not
rescissible but VOID under the Insolvency law. (De La Paz vs Garcia)
b. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give,
and the thing deteriorates through the fault of the debtor, the creditor may choose between the rescission of
the obligation and its fulfillment, with indemnity for damages in either case. (Art. 1189)
c. Right of the unpaid seller of goods to rescind, notwithstanding that the ownership in the goods may have
passed to the buyer. (Art. 1526, 1534)
d. Buyer of real estate may rescind when the inferior value of the thing sold exceeds one- tenth of the price
agreed upon. Also, if the vendee would not have bought the immovable had he known of its smaller area of
inferior quality, he may rescind the sale. (Art. 1539)
e. Sale by the seller violative of a person’s right of first refusal
‣ SEE — Riviera Filipina v. CA, GR 117355, April 5, 2002

‣ The prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the
lessee and all other prospective buyers. And a contract of sale entered into in violation of a right of first refusal
of another person, while valid, is rescissible.
‣ SEE — Equatorial Realty vs Mayfair Theatre (1996)
‣ Rescission is a relief allowed for the protection of one of the contracting parties and even third persons from all
injury and damage the contract may cause or to protect some incompatible and preferred right by the contract
‣ BUT —Rescission CANNOT be granted if the third person was in good faith or that he is NOT in bad faith (he did
not know that the grantee had a right of first refusal)
RESCISSION AS A REMEDY OF LAST RESORT
Article 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. (1294)
‣ The plaintiff asking for rescission must prove that he has no other legal means to obtain reparation. Where he does not
show that he has no other legal recourse to obtain satisfaction of his claim, he is not entitled to the rescission asked. The
action for rescission is but a subsidiary remedy, available only when the aggrieved party has no the legal means to obtain
reparation for damages suffered.
‣ Rescission is not a principal remedy; it is only subsidiary and may only be availed of by the injured party if it has no other
legal means of seeking redress or reparation for the damages caused. If, therefore, it is found out that the debtor has no
other property than that which is the object of the rescindable contract, rescission may merely be applied provided that all
the essential requisites for rescission are present. (Regalado v. Luchsinger)
EXTENT AND EFFECTS OF RESCISSION
Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)
Article 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 contract are legally in th e 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. (1295)
Article 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 successive ly. (1298a)
RULES ON THE EXTENT AND EFFECTS OF RESCISSION

1. RESCISSION SHALL BE ONLY TO THE EXTENT NECESSARY TO COVER THE DAMAGES CAUSED
‣ This means that rescission is only in favour of the plaintiff creditor, and NOT all the creditors. Only the creditor who
has asked for rescission, not the other creditors, benefits from the rescission.
‣ The extent of revocation is only to the amount of the prejudice suffered by the creditor. As to the excess, the alienation
is maintained.
‣ Thus, when a debtor has sold all his properties in fraud of creditors, the rescission can be applied only to such as
may be necessary to cover the credit. And if the transferee is willing to pay the amount of such credit, rescission
will not lie.
‣ PARAS — Art. 1384 makes partial rescission a possibility, since after all, the only purpose of rescission is to repair or
cover the damages caused. Complete rescission will not therefore be allowed, if it is not justified by the circumstances
of the case. Insofar as it is not rescinded, the alienation is valid.
2. RESCISSION CREATES THE OBLIGATION TO RETURN AND/ OR PAY (MUTUAL RESTITUTION) THE FOLLOWING —
a. Things which were the object of the contract or the price paid
b. Fruits
c. Interest
‣ Rescission can be carried out only when he who demands rescission can return whatever he may be obliged to
restore.
‣ TOLENTINO — This rule ONLY applies to rescission involving —
i. Defective contracts causing lesion in numbers 1 and 2 of Art. 1381 (by guardians and administrators)
ii. Mutual dissent
iii. Resolution or cancellation or reciprocal obligations under Art. 1191
iv. Fulfilment of a resolutory condition
‣ BUT — in the case of a resolutory condition, treatment on the “fruits and interest” is different. In this case,
apply the rules in Art 1187 —
a. Reciprocal obligations — no need to return, apply principle of mutual compensation
b. Unilateral obligations — they should be returned
‣ PARAS — The obligation of restitution does not obviously apply to creditors who seek to impugn fraudulent
transactions of their debtors. The obligation of mutual restitution applies to others so that the status quo may be
restored.
3. IN CASE THE OBJECTS OF THE CONTRACT ARE LEGALLY IN THE POSSESSION OF THIRD PERSONS IN GOOD FAITH , THEN
DAMAGES INSTEAD SHOULD BE PAID BY THE PARTY CAUSING THE LOSS (A RT. 1385, 1388)
‣ Rescission cannot be effected when the things which are the object of the contract are legally in the possession of
third persons who did not act in bad faith. In this case, an the action is converted into an action for damages.
‣ REQUISITES — For the third person to claim the defense against rescission —
a. Such third person is in lawful possession of the property
b. He did not act in bad faith
‣ EXCEPT — If the transfer is gratuitous, even if the third person is in good faith, rescission can prosper
‣ TOLENTINO — The right of the transferee (third person) to retain the property fraudulently alienated by the debtor
depends upon the nature of the transfer and upon the complicity of the former in the fraud. If the transfer is

gratuitous, the creditor will have aa better right than the transferee who has given nothing and who would unjustly
be enriched at the expense of the creditor if the transfer was upheld. The rescission will, therefore, be allowed,
irrespective of the good or bad faith of the transferee. But if the transfer was by onerous title, the transferee in
good faith is protected. As far as prejudice is concerned, the creditor and the transferee would be in the same
position, hence the transferee, who acquired ownership by tradition, must be maintained in his rights. To deprive
the transferee of the thing in such case would cause him injury to the extent of the consideration he has paid,
because he cannot recover this from the insolvent debtor. Besides, as between two persons who both stand to
suffer loss, the possessor of the property should be preferred in that possession, the ownership having been
transferred by delivery. To permit rescission when the alienation is by onerous title, the transferee must be a party
to the fraud, that is he must have knowledge that the transfer to him would prejudice existing creditors of the
transferor.
‣ NOTE — This opinion of Tolentino on gratuitous transfers to persons in good faith still being rescissible seems to
have no legal basis.
‣ What if there are successive transfers?
‣ If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (Art. 1388)
‣ DEAN DEL CASTILLO — The alienation can only be rescinded against a transferee in bad faith, if the alienation is
subsequently made to a transferee in good faith, then rescission does not apply anymore, even if the transfer in
good faith subsequently transfers it to a person in bad faith. Once the alienation is made to a transferee in good
faith, rescission is cut-off, regardless of subsequent transfers.
EXAMPLES
‣ A bought real property from B. A brought action to rescind the contract on the ground of non-delivery of the property.
Does B have to give also the fruits received in the meantime? No, the fruits received need not be given to A because the
right takes place only when “delivery of the thing sold has been made.” (Hodges v. Granada)
‣ A sold to B a piece of land in fraud of his (A’s) creditors. B took legal possession. If no other means are found to exact the
satisfaction of the credits owing the creditors, may the sale to B be rescinded? It depends upon whether B was in good
faith or in bad faith. If B was in good faith, rescission cannot take place, because the object of the contract is legally in the
possession of a third person who did not act in bad faith. If B was in bad faith, rescission is proper.
‣ To defraud his creditors A sold to B a piece of land. B is an innocent purchaser in good faith, who takes legal possession
of the land. Since the creditors cannot rescind the contract, what is their remedy? Their remedy in this case would be to
demand indemnity for damages from the person causing the loss.
‣ To really protect himself against rescission, what should an innocent third party, who in good faith purchases real property,
do after having acquired the property? He must register the realty purchased in the registration office.
‣ To defraud his creditor, A sold his property to B (who is in good faith). Later B sold the property to C, who is in bad faith.
May the creditor rescind, although the property is now in the possession of C? No, for it does not matter whether C is in
good or bad faith, since he obtained the same from B who is in good faith. It is B’s good faith that is important.
PRESCRIPTIVE PERIOD FOR RESCISSION
Article 1389. The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the
former's incapacity, or until the domicile of the latter is known. (1299)
PRESCRIPTIVE PERIOD FOR RESCISSION

‣ RULE — The action to claim rescission must be commenced within 4 years
‣ When does prescriptive period commences or when does the cause of accrue?
1. Generally — From the date the contract was entered into and all legal remedies have been exhausted
2. For minors — Within four years after attaining the age of majority and all other legal remedies have been exhausted
3. For absentees — when he learns of the contract (when his domicile is known) and all legal remedies have been
exhausted
4. For contracts in fraud of creditors — From the time the fraud is discovered and all other legal remedies have been
exhausted
5. Things in litigation — after knowledge of the transaction and all other legal remedies have been exhausted

B. VOIDABLE CONTRACTS
‣ Examples —
‣ Five years after a rescindable contract was made, action was brought for its rescission. The person who asked for the
rescission was neither a ward nor an absentee at the time of the transaction of the rescindable contract. Will rescission
still be allowed? No, the rescission will no longer be allowed because the action has already prescribed. “The action to
claim rescission must be commenced within four years.” (1st paragraph, Art. 1389, Civil Code).
‣ At the time he was 12 years old, A was under a guardian who sold, in behalf of the ward but without judicial authority,
the harvest of the ward’s farm, and in so doing the ward suffered a lesion of more than one-fourth of the property. How
many years will be given the ward to rescind the contract? The ward will be given 4 years after reaching the age of
majority (the time the guardianship ceases); hence, before reaching 22 years of age, the former ward should already
have sued for the rescission of the contract.
W HO MAY B RING THE A CTION FOR R ESCISSION

1. The person who is injured by the rescissible contract — such as the —
a. Ward or absentee in the case of lesion
b. Plaintiff in a case where a thing in litigation is alienated by the defendant
c. Defrauded creditors in case of an accion pauliana
2. The heirs of these persons
3. The debtor’s creditors by virtue of their right granted by Art. 1177 (accion subrogatoria)
NATURE OF VOIDABLE CONTRACTS
‣ Voidable or annullable contacts are existent, valid, and binding, although they can be annulled because of want of
capacity or vitiated consent of one of the parties, but before annulment, they are effective and obligatory between the
parties. Hence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose. They can
be confirmed and ratified.
RESCISSIBLE VS VOIDABLE CONTRACTS
RESCISSIBLE CONTRACTS VOIDABLE CONTRACTS
Renders the contract inefficacious
The defect did not exist essentially in the contract Declares the inefficacy which the contract already carries
itself, from the start
The basis here is lesion The basis here is vitiated consent or incapacity to
consent
The defect here is external or intrinsic The defect here is intrinsic (in the meeting of the minds)
The action is subsidiary The action is principal
This is a remedy. This is a sanction
Private interest governs Public interest governs
Equity predominates Law predominates
Plaintiff may be a party or a third person Plaintiff must be a party to the contract (whether bound
principally or subsidiarily)
There must be damage to the plaintiff Damage to the plaintiff is immaterial
If plaintiff is indemnified, rescission cannot prosper Indemnity here is no bar to the prosecution of the action

RESCISSIBLE CONTRACTS VOIDABLE CONTRACTS
Compatible with the perfect validity of the contract in Here, a defect is presupposed on the essential elements
relation to the essential elements of contract
To prevent rescission, ratification is not required To prevent annulment, ratification is required
GROUNDS FOR ANNULMENT OF CONTRACTS
Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n)
G ROUNDS FOR ANNULMENT

1. Incapacity to consent — Those where one of the parties is incapable of giving consent to a contract
2. Vitiated consent — Those where the consent is vitiated by either —
a. Mistake
b. Violence
c. Intimidation
d. Undue influence
e. Fraud
‣ NOTE — Repentance at having entered into the transaction is NOT a ground for annulment. It is not the function of the
law to protect or relieve a man from the consequences of a bad bargain.
PRESCRIPTIVE PERIOD FOR ANNULMENT
Article 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the
guardianship ceases. (1301a)
‣ RULE — THE ACTION FOR ANNULMENT SHOULD BE BROUGHT WITHIN 4 YEARS
‣ Extinctive prescription applies not only to the action for annulment, but also to the defense of nullity. Hence, if the
period of prescription has already expired, the nullity of the contract can no longer be set up as a defense to an action
to enforce the same.
‣ After the action has prescribed, the contract is deemed valid, thus, the contract can no longer be set aside.
‣ When does prescriptive period commences or when does the cause of accrue?
1. Intimidation, violence or undue influence — from the time the defect of the consent ceases.
2. Mistake or fraud — from the time of the discovery of the same.
‣ Examples —
‣ A was intimidated into signing a contract on June 1, 1999. The intimidation continued until Sept. 1, 2001. From what
time should we compute the four-year period for annulment? From Sept. 1, 2001, the time the intimidation ceased.

‣ On June 1, 2005, A entered into a contract with B. On Jan. 4, 2006, A discovered that fraud had been present at the
time he entered into the contract. Such a fraud vitiated his consent. Within what time must A bring the action for
annulment? Within 4 years from Jan. 4, 2006 A must bring action for annulment; otherwise, his right to sue for said
annulment will have prescribed. Jan. 4, 2006 should be the starting point because it was on this date that the fraud
was discovered.
‣ In the case of contracts entered into by minors or incapacitated persons, from what time will the period within which to
bring the annulment begin? From the time the guardianship ceases.
RATIFICATION OF VOIDABLE CONTRACTS
Article 1390. XXXXX These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification. (n)
Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)
Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)
Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right
to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a)
Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)
Article 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for
annulment. (1312)
D ISTINCTIONS BETWEEN C ONFIRMATION, R ATIFICATION, AND A CKNOWLEDGMENT
‣ TOLENTINO — The present code makes no more distinction between information ratification, and acknowledgement, but
technically and properly speaking, the following terms must be distinguished—
1. Confirmation — the act by which a person, entitled to bring an action for annulment, with knowledge of the cause of
annulment and after it has ceased to exist, validates the contract either expressly or impliedly. (Art. 1396)
2. Ratification — the act of approving a contract entered into by another without authorization of the person in whose
name it was entered into, or beyond the scope of authority of the former. (Arts. 1317, 1405)
3. Acknowledgment — to remedy a deficiency of proof (Art. 1405) (thus, an oral loan may be put in writing, or when a
private instrument is made a public instrument). (Luna v. Linatoc)
‣ TOLENTINO — Confirmation is proper in voidable contracts, while ratification applies to unenforceable contracts. When a
contract entered through error is approved by a party discovering the error, there is confirmation. But when what has
been agreed upon orally, or put in writing, or when a private document is converted into a public instrument there is
acknowledgment.
‣ PARAS — Under the New Civil Code, all the three terms are now uniformly called RATIFICATION. Thus, a sale made to a
buyer by a seller who would be entitled to the land only when a certain suspensive condition is fulfilled, but which sale
was made prior to the fulfillment of said condition is confirmed when, after the fulfillment of the condition, the seller
executes an affidavit acknowledging the transfer of the property to the buyer. (Dalay v. Aquiatin)
EFFECTS OF RATIFICATION
1. The action to annul is extinguished (Art. 1392)
‣ Thus, the contract becomes a completely valid one.

‣ After a contract has been validly ratified, no action to annul the same can be maintained based upon defects relating
to its original validity.
2. The contract is cleansed of its defect from the beginning. (Art. 1396)

‣ Ratification is merely declaratory of the waiver of the right to ask for annulment. Hence, its effects retroact to the
moment when the contract was entered into.
‣ BUT — Although there is a retroactive effect, the rights of innocent third persons must not be prejudiced
‣ Example — A minor sold his land to X. When he became 22 years old, he became indebted to Y. To avoid paying Y,
the former minor decided to ratify the sale of the land. He then had no other property. May Y still rescind the sale
although at the time it was made he was not yet a creditor? Yes. Although ratification has a retroactive effect, still
his rights as an innocent third person must not be prejudiced.
REQUISITES OF RATIFICATION
1. The contract must be a voidable one.
2. The person ratifying must know the reason for the contract being voidable (that is, the cause must be known).
3. The cause must not exist or continue to exist anymore at the time of ratification.
4. The ratification must have been made expressly or by an act implying a waiver of the action to annul.
5. The person ratifying must be the injured or proper party
‣ NOTE —
‣ The right to ratify is transmitted to the heirs of the party entitled to such right.
‣ Ratification does NOT require the conformity of the contracting party who has no right to bring the action for
annulment.
KINDS OF RATIFICATION
1. Express ratification — any oral or written manifestation of the person entitled to ask for annulment that he agrees to be
bound by the contract or that he will not seek its annulment
2. Implied or tacit ratification — ratification implied from the conduct or acts of the party entitled to ask for annulment. Any
act evincing an intent to abide by the contract is evidence of the affirmance of the contract and a waiver of the right to
ask for annulment.
‣ This may take diverse forms, such as by silence or acquiescence, by acts showing approval or adoption of the
contract, or by acceptance and retention of benefits flowing therefrom.
‣ Examples —
‣ A minor bought land, but sold the same, after reaching 21 years of age, to a 3rd person.
‣ A minor sold land, and upon reaching majority age, collected the unpaid balance of the selling price
‣ Use of the proceeds by a person who had been previously intimidated into selling his property.
‣ Voluntary performance by the injured party of his own obligation, after the cause of the nullity was known to him.
WHO MAY EFFECT RATIFICATION

1. The guardian of the incapacitated person
2. The injured party himself, provided he is capacitated, or has become capacitated
‣ The right to ratify pertains to the incapacitated person, hence, during the existence of incapacity, it may be exercised by
the guardian for him.
WHO MAY BRING AN ACTION FOR ANNULMENT
Article 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can
those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action
upon these flaws of the contract. (1302a)
‣ RULE — FOR A PARTY TO BRING AN ACTION FOR ANNULMENT, HE MUST HAVE THE FOLLOWING REQUISITES —

1. He must have an interest in or is party to the contract — a person who is not principally or subsidiarily bound
cannot attack the validity of an annullable contract, he has no legal capacity to challenge such contract.
‣ Thus, the creditors of the victim cannot ask for annulment for they are not bound by the contract.
‣ Example — A was forced by B to sign a contract. C, a creditor of A, wants to annul the contract. Is C allowed to do
so? No, C is not allowed to do so. If the contract prejudices him, and A has no other property, then C may ask for
the rescission of the contract, not its annulment. C cannot ask for annulment because he is not obliged by the
terms of said contract, either principally or subsidiarily.
2. He must be the victim, and NOT the party responsible for the defect — one who has capacity to contract may not
invoke the incapacity of the party with whom he has contracted as a defense against performance. This is consistent
with the principle that he who comes to court must come with clean hands.
‣ Example — A minor forces X to sign a contract. May the minor later on ask for annulment? No, because he himself
is at fault.
MISREPRESENTATION OF CAPACITY
‣ If a minor misrepresents his age and the other party is misled as to his age, may the minor later on sue for
annulment?
‣ NO, because of estoppel. (Mercado v. Espiritu, Sia Suan & Chao v. Alcantara)
‣ EXCEPT — When the other party had reason to believe that the person he was dealing with was not really a minor
EFFECTS OF ANNULMENT
Article 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have
been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages. (1303a)
Article 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. (1304)
Article 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 int erest
from the same date. (1307a)
Article 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 s hall not be
an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a)
Article 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. (1308)
‣ RULE — WHEN ANNULMENT IS DECREED, THE CONTRACTING PARTIES SHALL RESTORE TO EACH OTHER THE FOLLOWING —
1. Things which have been the subject matter of the contract
2. Fruits
3. The price with its interest (Art. 1398)
‣ EXCEPT — IN THE FOLLOWING CASES, A PARTY IS NOT OBLIGED TO RETURN FULLY OR PARTIALLY —
1. In cases provided by law (Art. 1398)
2. 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
(Art. 1399)
‣ NOTE — This only applies if the ground for annulment is incapacity

‣ Here restitution is only to the extent of enrichment (pecuniary or otherwise).
‣ The law does not presume this enrichment or benefit; therefore, the capacitated person has the burden of showing
such enrichment. Just because the property had been delivered, it does not necessarily follow that there was
enrichment.
3. When the principle of unjust enrichment applies
‣ TOLENTINO — The principle of mutual restitution cannot be applied to all contract. The principle against unjust
enrichment must be taken into account. If one of the contracting parties received some benefit and he has not
given anything for it to the other, it is only equitable that he should return the amount by which he was unjustly
enriched. Example, in a contract of lease, if a piece of land is leased for one year, with the land delivered and the
rent paid in advance for the full period, and then the contract is annulled after 4 months, the mutual restitution
cannot be total. The lessee has to return the land, but the lessor should not be obliged to return the full amount of
rent received by him but only the rent corresponding to the unexpired portion of 8 months.
RULES WHEN THE OBJECT OF THE VOIDABLE CONTRACT HAS BEEN LOST OR DESTROYED
1. LOSS OF THE THING RECEIVED BY THE PLAINTIFF (PERSON ENTITLED TO ANNUL THE CONTRACT_
a. Loss due to his fault — action for annulment is extinguished and cannot be brought (Art. 1401)
b. Loss without his fault — action for annulment is extinguished and cannot be brought because of Art. 1402
‣ EXCEPT —
i. If the right of action is based upon the incapacity of any one of the contracting parties (Art. 1401)
‣ Example — A, a minor, was sold a house by B. The house was destroyed by a fortuitous event. May A still
annul the contract so as to recover from B the price (and interest) he (A) had given? Yes. As a rule, if the right of

C. UNENFORCEABLE CONTRACTS
‣ action is based upon the incapacity of anyone of the contracting parties, the loss of the thing shall not be an
obstacle to the success of the action. Here, the minor was not guilty of fraud or fault. (Art. 1401, 2nd par.)
ii. When he offers to give the value of the thing (Paras and Tolentino)
‣
PARAS — Suppose the innocent party cannot restore because of a loss thru a fortuitous event, may he still
compel the other to return what he had given? It would seem that the answer is NO, because before
annulment, the contract is valid, and the innocent party, being the owner of the thing lost by a fortuitous event,
must bear the loss. There is however an exception, and it occurs when he offers to give the value of the thing.
(He does not have to give interest in view of the fortuitous event.) He must be allowed this remedy; otherwise,
he would be in a worse position than one who had destroyed the thing thru his fault. Once he exercises this
remedy, he can recover from the other what has been previously given.
2. LOSS OF THE THING RECEIVED BY THE DEFENDANT ( PERSON NOT ENTITLED TO ANNUL THE CONTRACT)
‣ This is when the person obliged by the decree of annulment to return the thing can not do so because it has been lost
a. Loss due to his fault — he shall return the fruits received and the value of the thing (damages) at the time of the loss,
with interest from the same date (Art. 1400)
b. Loss without to his fault — he must pay the value of the thing at the time of its loss by fortuitous event, but without
interest (Tolentino)
‣ NOTE — In both cases, annulment should still prosper
NATURE OF UNENFORCEABLE CONTRACTS
‣ An unenforceable contract is one which cannot be enforced unless it is first ratified in the manner provided by law. It is
distinguished from the rescissible and the annullable contracts in that the latter two contracts produce legal effects unless
they are set aside by a competent court, while the unenforceable contract does not product any effect unless it is ratified.
‣ As regards the degree of defectiveness, voidable or annullable contracts are farther away from absolute nullity than
unenforceable contracts. In other words, an unenforceable contract occupies an intermediate ground before between the
voidable and the void contract.
GROUNDS FOR UNENFORCEABILITY
Article 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or
who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in
writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless
the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in
action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made
by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property s old, terms of sale,
price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest
therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.

Article 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.
Article 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a
right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it
has been executed, before it is revoked by the other contracting party. (1259a)
Article 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence.
KINDS OF UNENFORCEABLE CONTRACTS

1. UNAUTHORIZED CONTRACTS (ART. 1403[1]), 1317)
‣ These are those entered into in the name of another person by one who has either —
a. Been given no authority or legal representation
b. Acted beyond his powers
‣ When a person enters into a contract for and in the name of another, without authority to do so, the contract does not
bind the latter, unless he ratifies it. The agent who has entered into the contract in the name of the purported principal,
but without authority from him, is liable to third persons upon the contract, it must have been the intention of the
parties to bind someone, and, as the principal was not bound, the agent should be.
‣ NOTE — Unauthorized contracts are governed by —
a. Article 1317 — it may be ratified, expressly or impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.
‣ NOTE — Ratification is retroactive. The ratification of a contract by the person in whose name it has been
entered into without authority, validates the act from the moment of its celebration and not merely from the
time of its ratification, for the ratification operates upon or applies to the act already performed.
b. Laws on Agency
‣
When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in
writing; otherwise, the sale shall be void.” (Art. 1874). It is “void,” not merely unenforceable.
2. CONTRACTS THAT FAIL TO COMPLY WITH THE STATUTE OF FRAUDS
‣ The term “statute of fraud” is descriptive of statutes which require certain classes of contracts to be in writing
— This statute does not deprive the parties of the right to contract with respect to the matters therein involved, but
merely regulates the formalities of the contract necessary to render it enforceable.
‣ A contract falling under the statute of frauds cannot be proved without the writing or memorandum thereof —
Hence, an oral contract of sale of real property cannot be enforced, even if at the time of the suppose sale the vendor
had delivered to the vendee the possessory information title covering the property. Neither can such an oral contract
be made the basis of an action for damages caused by non-performance thereof.
‣ TOLENTINO — A note or memorandum is evidence of the agreement, and is used to show the intention of the
parties. No particular form of language or instrument is necessary to constitute a memorandum or note as a
writing under the statute of frauds. It may consist of any kind of writing, from a solemn deemed to a mere hasty
note or memorandum in books or papers, and may be in ink, or in pencil, typed or printed. It meets the
requirement of statute of frauds if it contains the names of the parties, the terms and conditions of the agreement,
a description of the subject-matter sufficient to render it capable of identification, the date and place of the making
of the agreement and the signature of the party assuming the obligation. If there are two or more writings which
are properly connected, they may be considered together; omissions in one may be supplied or clarified by the
other, and their sufficiency will depend as to whether or not, when construed together, they are able to satisfy the
requirement of the Statute of Frauds as to signature. (Berg v. Magdalen)
‣ RATIONALE — The purpose of the statute of frauds is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence upon the unassisted memory of witness by requiring certain enumerated contracts and
transactions to be evidenced by a writing signed by the party to be charged.
3. CONTRACTS WHERE BOTH PARTIES ARE INCAPABLE OF GIVING CONSENT
‣ Where both contracting parties do not have the capacity to consent, the contract is unenforceable.

‣ BUT — the ratification of one party, converts the contract into a voidable contract, voidable at the option of the party
who has not ratified, the latter can enforce the contract against the party who has ratified.
BASIC AND FUNDAMENTAL PRINCIPLES CONCERNING THE STATUTE OF FRAUDS

1. THE STATUTE OF FRAUDS APPLIES ONLY TO EXECUTORY CONTRACTS (CONTRACTS WHERE NO PERFORMANCE HAS YET BEEN
MADE) AND NOT PARTIALLY OR COMPLETELY EXECUTED (CONSUMMATED CONTRACTS)
‣ Since the statute of frauds was enacted for the purpose of preventing frauds, it should not be made the instrument to
further them. Thus, where one party has entirely performance his obligation under an oral contract, equity would agree
that all evidence by admitted to prove the alleged agreement.
‣ Performance of the contract takes it out the operation of the statute.
‣ The statute of frauds is not applicable to contracts which are either totally or partially performed, on the theory that
there is a wide field for the commission of frauds in executory contracts which can only be prevented by requiring
them to be in writing, a fact which is reduced to a minimum in executed contracts because the intention of the parties
becomes apparent by their execution and execution concludes, in most cases, the rights of the parties.
‣ Examples —
‣ A sold to B real estate for a stipulated price. The agreement was oral. A has not yet delivered the real estate. B has
not yet paid the price. B offered to buy, but A refused to go ahead with the agreement. Under the Statute of
Frauds, to be enforceable, an agreement for the sale of real estate must be in writing (Art. 1403, [2e]); B sued for
specific performance. A’s attorney objected, setting up the Statute of Frauds as the reason for the objection. May
the contract be proved by oral evidence? No. The agreement being merely executory, the agreement cannot be
proved. Therefore also, A cannot be compelled to deliver. (See Santos v. Rivera) BUT — Had A’s attorney not
objected, the defense would have been waived, and specific performance could have been ordered.
‣ Suppose the price had already been paid, would your answer be the same? No, the answer would not be the
same. Here the objection of A’s lawyer will not prosper. The Statute of Frauds will not apply because the
contract has already been executed or performed, at least on the side of B
‣By virtue of an oral contract of sale, seller delivered to buyer a piece of land which was partially paid. May seller
recover balance of price? Yes, since the contract has already been partially executed
2. THE STATUTE OF FRAUDS CANNOT APPLY IF THE ACTION IS NEITHER FOR DAMAGES BECAUSE OF THE VIOLATION OF AN
AGREEMENT NOR FOR THE SPECIFIC PERFORMANCE OF SAID AGREEMENT
‣ Examples —
‣ Tenant and landlord had an oral contract of lease for two years. [Under the Statute, to be enforceable, this must be
in writing (Art. 1403, No. 2).] It was also orally agreed that half of the crops should belong to the tenant; the other
half, to the landlord. Landlord, in violation of this agreement, sold all the crops and refused to give tenant the
latter’s share. Statute of Frauds in defense. ANS: Tenant can recover. While it is true that the lease should have
been in writing, tenant is not asking for damages because of the breach of the contract of lease. (As a matter of
fact, he was occupying the land.) Rather, the tenant is asking for damages, because of the violation of the
agreement regarding the crops. Statute of Frauds is not therefore applicable. (Lim v. Lim)
‣Landlord orally agreed with tenant that the former would sell for a certain price the house occupied by tenant to the
latter, at the end of the lease. Because of said agreement, tenant introduced improvements amounting to P4,500.
When lease expired, landlord wanted a higher rent. Ten- ant refused. Tenant wants to recover the value of the
improvements, and tries to prove the oral agreement of sale. Landlord sets up the Statute of Frauds. ANS: Tenant
can prove by parol (oral) evidence the oral agreement of sale; after all he was not interested in the sale, but merely
brought it out to justify his claim for reimbursement for the improvements introduced. (Robles, et al. v. Lizarraga)
3. THE STATUTE OF FRAUDS IS EXCLUSIVE, THAT IS, IT APPLIES ONLY TO THE AGREEMENTS OR CONTRACTS ENUMERATED IN ART.
1403 (INCLUDING ART. 1443)
a. A contract that by its terms is not to be performed within a year from the making thereof
b. A special promise to answer for the debt, default, or miscarriage of another
c. A contract made in consideration of marriage, other than a mutual promise to marry
d. An contract for the sale of personal property (goods, chattels or things in action), at a price not less than P500
e. A contract of lease of real property for a longer period than one year
f. An contract of sale of real property or of an interest therein
g. A representation as to the credit of a third person
h. Express trusts concerning an immovable or any interest therein (Art. 1443)

4. THE DEFENSE OF THE STATUTE OF FRAUDS MAY BE WAIVED. (ART. 1405)
‣ In an oral executory contract, if one party fails to timely object to oral evidence presented by the other, it is as if there
was a waiver, and the agreement can be considered completely valid, provided all the other essential requisites for the
transaction are present.
‣ There are two ways to waive this defense —
a. Timely failure to object to the presentation of oral evidence to prove the oral agreement.
b. Acceptance of benefits under them (as when contract is totally or partially performed).
5. T HE S TATUTE OF F RAUDS IS A PERSONAL DEFENSE , THAT IS, A CONTRACT INFRINGING IT CANNOT BE ASSAILED BY THIRD
PERSONS . (ART. 1408)
‣ Example — Tenant was occupying landlord’s house on a lease contract when landlord sold the house to a buyer orally.
The buyer has not yet given the price and the seller has not delivered the house. If buyer asks tenant to pay the rent to
him, and tenant refuses on the ground that the sale is unenforceable, will the tenant’s contention prosper?No, because
not being a party to said sale, he cannot set up the Statute of Frauds.
6. C ONTRACTS INFRINGING THE S TATUTE OF F RAUDS ARE NOT VOID; THEY ARE MERELY UNENFORCEABLE . (ART. 1403)
‣ It simply provides for the manner in which contracts under it shall be proved. It does not attempt to make such
contracts invalid if not executed in writing, but only makes ineffective the action for specific performance. the contract
exists and is valid, though it may not be clothed with the necessary form, and the effect of non-compliance with the
statute is simply that no action can be proved unless the requirement is complied with.
7. THE STATUTE OF FRAUDS IS A RULE OF EXCLUSION
‣ Oral evidence might be relevant to the agreements enumerated therein and might therefore be admissible were it not
for the fact that the law or the statute excludes said oral evidence. It does not determine the credibility or weight of
evidence. It merely concerns itself with the admissibility thereof.
8. THE STATUTE OF FRAUDS DOES NOT APPLY IF IT IS CLAIMED THAT THE CONTRACT DOES NOT EXPRESS THE TRUE AGREEMENT
OF THE PARTIES
‣ As long as the true or real agreement is not covered by the Statute of Frauds, it is provable by oral evidence. (Cayugan
v. Santos)
CONTRACTS WHICH ARE COVERED UNDER THE STATUTE OF FRAUDS

1. A CONTRACT THAT BY ITS TERMS IS NOT TO BE PERFORMED WITHIN A YEAR FROM THE MAKING THEREOF
‣ The “making” of an agreement, for the purpose of determining whether or not the period for performance brings the
agreement within the statute of frauds, means the day on which the agreement is made, and the time begins to run
from the day the contract is entered into, and not from the time that performance of it is entered upon.
‣ In order for this provision of the statute to be applicable, it must appear that the parties intended when they
made the contract that it should not be performed within a year — In other words, that a contract cannot be
performed within 1 year means not a natural or physical impossibility, but an impossibility by the terms of the contract
itself, or by the understanding and intention of the parties to the contract. A contract is within the statute if the time for
the full performance of the contract exceeds a year, although the excess is ever so little.
‣ The broad view is that the statute of frauds applies only to agreements not to be performed “on either side"
within a year form the making thereof — Agreements to be fully performed on one side within the year are taken
out of the operation of the statute. (Nat. Bank v. Phil. Veg. Oil Co.)
‣ Partial performance removes the contract from the operation of the statute — in order that partial performance
of the contract may take the case out of the operation of the Statute, it must appear clearly that full performance
had been made by one party within one year. All that is required is complete performance has been made by one
party, no matter how many years may have to elapse before the agreement is performed by the other party, but
nothing less than full performance by one party will suffice. If anything remains still to be done after the expiration of
the year besides the mere payment of money, the Statute will apply. (Babao vs Perez 1957)
‣ PARAS — It would seem from this case that while in general partially executed contracts are NOT covered by the
Statute of Frauds, still under “No. 1, specific agreement,” only full or complete performance by one side will take
the case out of the operation of the Statute.
‣ Where no time is fixed by the parties for the performance of their agreement, and there is nothing in the agreement
itself to show that it cannot be performed within a year according to its terms and understanding of the parties, the
agreement is NOT within the statute of frauds.
‣ Examples —

‣ A and B, neighbors, orally agreed that A would sell and B would buy A’s transistor radio for P200 three years from
the date of the agreement. At the end of three years, A refused to hand over the radio although B was willing to
pay. Is the agreement enforceable under the Statute of Frauds? No, because under the terms of the contract, the
sale was to be performed at the end of three years. It should have been, therefore, made in writing. The Statute
recognizes the frailty of man’s memory, and apparently only 1 year is the limit. Had the agreement been that
performance would be made within three months, the agreement, even if oral, would have been enforceable.
‣ A and B, neighbors, orally agreed that from that day, B would not erect a garage on his property till after three
years. A week later, B began to erect the garage in violation of the agreement. A complains and B sets up the
Statute of Frauds. Decide. A is correct in complaining. This agreement does not come under the Statute of Frauds,
because here the performance was to begin right on that day they agreed, namely, the obligation not to construct.
This is not an agreement that will be performed after a year; performance was to begin right away.
‣ A servant had an oral contract which allowed him P10 a month salary. He served continuously for twelve years.
Master refused payment on the ground that the contract having lasted for more than 1 year, the same should have
been in writing to be enforceable. Question: Is the servant entitled to be paid? Yes. Firstly, the Statute of Frauds
(Art. 1403, No. 2-a) is not applicable because here the performance began right away; there was no postponement
of performance for a year. Secondly, the Statute is not applicable to executed or partially executed contracts.
Thirdly, the Statute was designed to prevent, not foster, fraud. To prevent the servant from collecting would be to
encourage the commission of fraud
‣ A and B orally agreed in 2006 to marry each other in 2000. When 2010 came, A refused to marry B, who now seeks
damages. Question: Would B be allowed to prove the oral agreement? No, because since the performance was to
be made 4 years after the agreement, it had to be in writing to be enforceable. Having been made orally, it cannot
be proved over and above the objection of A or A’s counsel. [See Atienza v. Castillo: J. Moran dissented on the
ground that in a mutual promise to marry, it does not matter how long the marriage is deferred because the first
agreement in the Statute is not applicable but the third agreement does apply — “An agreement made in
consideration of marriage, other than a mutual promise to marry” (no period of time being stated).]
2. A SPECIAL PROMISE TO ANSWER FOR THE DEBT, DEFAULT, OR MISCARRIAGE OF ANOTHER
‣ This is defined as an undertaking by a person, not before liable, for the purpose of securing or reframing the same
duty which the original debtor continues to be liable.
‣ RATIONALE — Because it is so obviously just that a promisor receiving none of the benefit for which the debt was
incurred should be bound only by the exact terms of his promise.
‣ “Special promise” refers to a subsidiary or collateral promise to pay, like a contract of guaranty.
‣ The special promise need not state the consideration, it is presumed.
‣ The terms “default or miscarriage” include liability for tort and are not to be restricted to defaults or miscarriages
arising out of contracts.
‣ TEST — The test as to whether a promise is within the statute has been said to lie in the answer to the question
whether the promise is an original or a collateral one.
a. If the promise is an original or an independent one (that is, if the promisor becomes thereby primarily liable for
the payment of the debt) — the promise is not within the statute.
b. If the promise is collateral to the agreement of another and the promisor becomes thereby merely a surety
— the promise must be in writing.
‣ TOLENTINO — it has been held that if the person for whose benefit the promise is made was himself liable at all,
the promise of the defendant must be in writing.
‣ Examples —
‣ A borrowed money from B, with C as guarantor. The contract of guaranty between B, the creditor, and C, the
guarantor, must be in writing to be enforceable.
‣ A was having his house repaired by B, who needed certain materials. So A told storeowner (of materials), “Give B
the materials. I shall be responsible. I shall stand good.” This was orally made. Is this a special promise? Is this oral
agreement enforceable? This is not a special promise. This is not a guaranty. Only A obligated himself. Since this is
not a guaranty, the contract is enforceable, so that the seller can properly sue A and prove the oral agreement by
parol evidence, over and above A’s objection.
‣ A asked B to purchase certain properties from C who was orally assured by A that he (A) would pay for them. Later
C sued A, who pleaded in defense the Statute of Frauds. Decide. The promise is enforceable even if orally made,
for A was not guaranteeing another’s debt. He merely promised to pay HIS OWN debt. (Colbert v. Bachrach)
3. A CONTRACT MADE IN CONSIDERATION OF MARRIAGE, OTHER THAN A MUTUAL PROMISE TO MARRY

‣ When the law says “in consideration of marriage,” it really means “by reason of the marriage.” Thus, the cause of the
donation propter nuptias is not the marriage but the liberality or the generosity of the giver.
‣ Examples —
‣ Marriage settlements
‣ Donations propter nuptias — BUT — this is governed by the law on donations, thus it must be in writing for
validity
‣ Note that the law says “other than a mutual promise to marry.” Hence, an oral mutual promise to marry is NOT
embraced by the Statute of Frauds. The injured party may present oral evidence of the promise in an action to obtain
actual damages for breach thereof
‣ Example — A and B mutually promised to marry each other. The promise need not be in writing unless the
marriage be deferred till after the lapse of one year from the agreement. (See Atienza v. Castillo, et al., 71 Phil.
589). For breach of a mutual promise to marry, the groom may sue the bride for actual damages and oral evidence
of such mutual promise is admissible.
4. AN CONTRACT FOR THE SALE OF PERSONAL PROPERTY (GOODS, CHATTELS OR THINGS IN ACTION), AT A PRICE NOT LESS THAN
P500
‣ This covers both tangible and intangible property for a price not less than P500. It also covers the assignment of
choses in action. Thus, an assignment of a credit over P500 is governed by the provision of the statute of frauds
which requires the sale of choses in action over a certain amount to be in writing.
‣ Things in action — incorporated or intangible personal property
‣ NOTE — if the price is exactly P500, the contract must be in writing to be enforceable.
‣ EXCEPT — when the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of
such things in action or pay at the time some part of the purchase money
‣ In this case there is partial delivery or payment, removing the contract from the operation of the statute of frauds.
‣ Rule in case of auction sale — When a sale is made by auction and entry is made by the auctioneer in his sales
book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers
and person on whose account the sale is made, it is a sufficient memorandum.
5. A CONTRACT OF LEASE OF REAL PROPERTY FOR A LONGER PERIOD THAN ONE YEAR
‣ NOTE — If lease of real property is exactly one year, the contract may be oral, since here the period does not exceed
one year.
6. AN CONTRACT OF SALE OF REAL PROPERTY OR OF AN INTEREST THEREIN
‣ “Interest” in real property may include easement or usufruct.

7. A REPRESENTATION AS TO THE CREDIT OF A THIRD PERSON
‣ TOLENTINO — A representation made by a stranger to the contract with the intent that the person for whom it is
made should obtain credit thereby, must be in writing in order to be a basis of an action for damages against the party
who made the representation, if this turns out to be false or incorrect. The representation that must be in writing are
limited to those which operate to induce the person to whom they are made to enter into contractual relations with the
third person, but not to those representations tending to induce action for the benefit of the person making them.
‣ BUT — The representations must NOT be made with intent to defraud. The statutes of frauds does not embrace
representations that are deceitfully made for it was not intended to protect wrongdoers. It was designed to protect
persons who honestly and in good faith make assurances respecting the credit or standing of another.
‣ DEAN DEL CASTILLO — This is not really a contract, it is not a surety or guaranty agreement. It is merely a
representation or warranty.
‣ PARAS — This must not be confused with a guaranty. Here no promise to answer for another’s debt is made; there is
merely an assurance that somebody has a certain amount of credit, made with the intention of enabling the person in
whose favor it is made to obtain credit by virtue of such assurance or representation.
‣ JBL REYES — The basis of liability here is not contract, but really, tort.
‣ Example — A was borrowing money from B, and gave C as his reference. When C was asked regarding A’s credit C
said: “You can safely lend money to A because A is the owner of a parcel of land and I have the title deeds in my
possession.” This was made orally. Incidentally, A was C’s client, C being a lawyer. This representation by C is not
enforceable against him because it is not in writing. A representation as to the credit of a third person must be in
writing to be enforceable.
8. EXPRESS TRUSTS CONCERNING AN IMMOVABLE OR ANY INTEREST THEREIN (ART. 1443)

‣ PARAS — It will be observed that while the Statute of Frauds makes no mention of it, still under Art. 1443 of the Civil
Code, “no express trusts concerning an immovable or any interest therein may be proved by parol (oral) evidence.”
Hence, we can safely conclude that the Statute of Frauds also applies to such express (conventional) trust.
RATIFICATION OF UNENFORCEABLE CONTRACTS
Article 1317. XXXXX A contract entered into in the name of another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other contracting party. (1259a)
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure to
object to the
presentation of oral evidence to prove the same, or by the acceptance of benefit under them.
Article 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the
parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only
one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be
validated from the inception.
1. RATIFICATION OF UNAUTHORIZED CONTRACTS (ART. 1317)
‣ It may be ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by
the other contracting party.
2. RATIFICATION OF CONTRACTS THAT FAIL TO COMPLY WITH THE STATUTE OF FRAUDS (ART. 1405)
a. Failure to object — if the parties to the action make no objection (such as does not file a motion to dismiss) to the
admissibility of oral evidence to support a contract covered by the statute of frauds, and thereby permit such
contract to be proved orally, it will be just as binding upon the parties as if it had been reduced in writing. Cross-
examination of the witnesses testifying orally on the contract also amounts to a waiver or to a failure to object.
b. Acceptance of benefits — the statute of frauds cannot be invoked when the contract has already been partly
executed, it applies only to executory contracts.
3. RATIFICATION OF CONTRACTS WHERE BOTH PARTIES ARE INCAPABLE OF GIVING CONSENT (ART. 1407)
‣ There may be express or implied ratification by the parent, or guardian

‣ Example — A and B, both 15 years old, entered into a contract. The contract is unenforceable because both parties
cannot give consent. Now if the guardian or parent of A ratifies expressly or impliedly the contract, it becomes
voidable, valid unless annulled by the guardian or parent of B. However, if the guardian or parent of B also ratifies, the
contract is validated right from the time it was first entered into.
RIGHT OF ONE PARTY TO COMPEL THE OTHER TO EXECUTE THE NEEDED INSTRUMENT
Article 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its
registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.
‣ NOTE — the right of one party to have the other execute the public document needed for convenience in registration, is
given only when the contract is both valid and enforceable.
‣ Example — A sale of realty in a private instrument is not valid and enforceable; hence, a public document may be
executed so that the sale could be registered. An oral sale of real property is not enforceable; hence, one party cannot
compel the other to execute the public document. However, if said oral sale of real property has been ratified, then it is
now both valid and enforceable, and a public document may be made so that the sale can be registered.

UNENFORCEABILITY AS A PERSONAL DEFENSE
Article 1408. Unenforceable contracts cannot be assailed by third persons.
‣ The defense of the statute of frauds is personal to the party to the agreement. It is like minority, fraud, mistake and other
similar defences, which may be asserted or waived by the party affected. Hence, it can be relied upon only by the parties
to the contract or their representatives and cannot be set up by strangers to the agreement.
‣ Just as strangers cannot attack the validity of voidable contracts, so also they cannot attack a contract because of its
unenforceability. Indeed, the Statute of Frauds cannot be set up as a defense by strangers to the transaction.

D. V OID AND INEXISTENT C ONTRACTS
D. VOID AND INEXISTENT CONTRACTS
NATURE OF VOID CONTRACTS
‣ A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been
rendered into, and which cannot be validated either by time or ratification.
‣ These kinds of contract include not only those contracts in which one of the essential requisites is totally wanting, but
also those which are declared void by positive provision of law or statute.
‣ A void contract is equivalent to nothing, it is absolutely wanting in civil effects.
‣ Characteristics of Void Contracts —
1. It produces no effect whatsoever either against or in favour 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
4. If it has been performed, the restoration of what has been given is in order
5. Any person may invoke the inexistent of the contract whenever its juridical effects are asserted against him
6. The right to set up the defense of illegality cannot be waived
7. A contract which is the direct result of a previous illegal contract is also void and inexistent
‣ Ratification by new contract — If a new and valid contract is entered into about the same thing, the new contract is of
course binding, but this is not technically the “ratification” referred to in the law. Thus, a donation of land in a private
instrument is void, but if a month later the same donation is made in a public instrument, the donation becomes valid, but
this time, the new contract becomes valid and effective, not from the date of the original agreement, but from the date of
the new agreement, for technically there has been no ratification
VOID VS VOIDABLE CONTRACTS
VOID CONTRACTS VOIDABLE CONTRACTS
cannot be ratified may be ratified
generally, effects are not produced at all produces effects until anulled
the defect here is that ordinarily, public policy is militated defect is due to incapacity or vitiated consent
against
void from the very beginning so generally, no action is valid until annulled
required to set it aside, unless the contract has already
been performed
cannot be cured by prescription may be cured by prescription
defense may be availed of by anybody, whether he is a defense may be invoked only by the parties (those
party to the contract or not, as long as his interest is principally or subsidiarily liable), or their successors in
directly affected. interest and privies
referred to as absolute nullity referred to as relative or conditional nullity
VOID VS UNENFORCEABLE CONTRACTS
VOID CONTRACTS UNENFORCEABLE CONTRACTS
cannot be ratified may be ratified

VOID CONTRACTS UNENFORCEABLE CONTRACTS
no contract at all there is a contract but it cannot be enforced by a court

action
cannot be assailed by third parties can be assailed by anybody directly affected
VOID VS RESCISSBLE CONTRACTS
VOID CONTRACTS RESCISSIBLE CONTRACTS
Defect is inherent in the contract itself Defect is in the effect of the contract
The nullity is a matter of law and public interest It is a matter of equity and private interest
There are no legal effects even if no action is taken to set If no action is taken to set it aside, it remains valid and
it aside produces all its effects
imprescriptible may prescribe
GROUNDS FOR NULLITY OF CONTRACTS
Article 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
1. LACK OF ESSENTIAL REQUISITES
a. Those which are absolutely simulated or fictitious

i. Absolute simulation — the contract is void for utter lack of consent.
ii. Relative simulation — hidden or intended contract is generally binding but the apparent contract is void
c. Those whose cause or object did not exist at the time of the transaction
‣ PARAS — This is not exactly correct because there can be valid contracts involving future property, such as sale of
future or after-acquired property. This should be read as “objects which could not come into existence”
d. Those which contemplate an impossible service
e. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained
2. CONTRACTS DECLARED ILLEGAL OR VOID BY LAW
a. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy
b. Those whose object is outside the commerce of men
c. Those expressly prohibited or declared void by law
IMPRESCRIPTIBILITY OF VOID CONTRACTS

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
‣ If a contract is null and void, the action to declare it null and void or to declare its non-existence is imprescriptible. On the
other hand, the illegality of the contract can always be set up as a defense, despite the passage of time.
‣ Thus, the defect is incurable either by ratification or prescription. The only way to cure it is of course to enter into a
new but valid contract
DECLARATION OF NULLITY — EFFECTS AND CONSEQUENCES
Article 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 effe cts or instruments of a crime shall
be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and
shall not be bound to comply with his promise. (1305)
Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or
ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what
he has given without any obligation to comply his promise. (1306)
Article 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.
Article 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.
Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed
for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
Article 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.
Article 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person
paying any amount in excess of the maximum price allowed may recover such excess.
Article 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.
Article 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.
Article 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced.

VOID CONTRACTS WHICH HAVE NOT BEEN EXECUTED
‣ RULE — IN VOID CONTRACTS , NEITHER PARTY MAY BE COMPELLED TO PERFORM OR COMPLY WITH HIS UNDERTAKING
‣ The nullity of the contract may be asserted as a defense against a demand or action filed by the other party
PARTIALLY OR FULLY EXECUTED VOID CONTRACTS — RULES ON RECOVERY

‣ RULE — WHEN A VOID CONTRACT HAS BEEN PARTIALLY OR FULLY PERFORMED, THE PARTIES MAY FILE AN ACTION FOR TO
DECLARE ITS NULLITY AND FULLY RECOVER WHAT HAS BEEN GIVEN
‣ This rule particularly applies to a case where the nullity is based on the absence of any of the essential elements
‣ TOLENTINO — There is no need of an action to set aside a void or inexistent contract, in fact, such action cannot
logically exist. However, an action to declare the non-existence of the contract can be maintained, and in the same
action, the plaintiff may recover what he has given by virtue of the contract. The power to ask for the declaration of
non-existence of the contract cannot be assigned.
‣ A transferor can recover the object of a void contract (void due to absence of the essential requisites) by accion
reividicatoria and any possessor may refuse to deliver it to the transferee, who cannot enforce the transfer. (Modina vs
CA)
‣ EXCEPT — IN THE FOLLOWING CASES, THERE IS NO FULL RECOVERY —
1. NO RECOVERY IS ALLOWED — WHEN THE NULLITY PROCEEDS FROM THE ILLEGALITY OF THE CAUSE OR OBJECT OF THE
CONTRACT AND BOTH PARTIES ARE GUILTY (ART. 1411, ART. 1412[1]))
‣ This is regardless of whether the act constitutes a criminal offense or NOT

‣ Effects —
a. In these cases, neither party may recover, each must bear the consequences of his own acts
b. Since they are in pari delicto, they shall have no action against each other.
c. Both shall be prosecuted.
d. The effects or the instruments of the crime (things or price of the contract) shall be confiscated in favor of
government.
‣ Examples —
‣ Criminal offense — both entered into a contract for smuggling or importation of contraband
‣ Not a criminal offense — A Filipino sold land to a Chinese after the effective date of the Constitution.
‣ It is based on the principle of pari declito — “in equal fault” It is a legal term used to indicate that two persons or
entities are equally at fault.
‣ EXCEPTION TO EXCEPTION — In the following cases, even if both parties are guilty, recovery may be
allowed —
a. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the
parties before the purpose has been accomplished, or before any damage has been caused to a third person.
In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the
contract to recover the money or property. (Art. 1414)
b. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of
justice so demands allow recovery of money or property delivered by the incapacitated person. (Art. 1415)
c. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for
the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or
delivered. (Art. 1416)
2. PARTIAL RECOVERY IS ALLOWED (RECOVERY ONLY ON THE PART OF ONE PARTY) — WHEN THE NULLITY PROCEEDS FROM
THE ILLEGALITY OF THE CAUSE OR OBJECT OF THE CONTRACT BUT ONLY ONE PARTY IS GUILTY (ART. 1411, ART. 1412[2])
‣ This is regardless of whether the act constitutes a criminal offense or NOT

‣ PARAS — This also applies where, even if both are guilty, they are not equally guilty, therefore, “not in pari delicto”,
“not in equal guilt”.
‣ In this case, pari delicto does NOT apply as only one of the parties was at fault
‣ Effects —
a. The guilty party will be prosecuted.

b. The guilty party cannot recover what he has given by reason of the contract, or ask for the fulfillment of what
had been promised him.
c. The instrument of the crime (or object of the contract) will be confiscated (as in the case of government
property illegally sold).
d. The innocent party demand the return of what he has given, without any obligation to comply with his promise.
‣ Examples —
‣ Criminal offense — X sold government property to Y, who was in good faith; or where a person of age gave a
donation to a minor for the purpose of illicit sexual intercourse.
‣ Not a criminal offense — A husband and his wife executed a void contract dividing their conjugal properties, as
a result of which the wife was given a certain parcel of land. A certain Bough, who wanted to get the land, lied
to the wife and told her falsely that her husband was in town and was going to contest the deed of property
separation, in an attempt to induce her to transfer the land to him (Bough), so that the husband could not get
hold of the properties. So, the wife agreed to fictitiously transfer the land to him. Later, Bough brought this
action to recover the land and presented as proof the deed of sale to him. The wife, on the other hand, asked
for the declaration of the sale as null and void. Although the wife was in delicto, she was not in pari delicto with
Bough who, by fraud, induced her to enter into an agreement that was against public policy. Therefore, Bough
cannot get the land, and the wife will retain possession of the same.
EXCEPTIONS TO THE PARI DELICTO RULE

‣ NOTE — These are also cases where partial recover (recovery by one party is allowed)
1. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the
parties before the purpose has been accomplished, or before any damage has been caused to a third person. In
such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to
recover the money or property. (Art. 1414)
‣ REQUISITES — recovery can be done only if —

1. If the purpose has not yet been accomplished; and
2. If damage has not been caused any third person
‣ Example — For a reward, A promised to kill C for B. B gave the reward. Before A could kill C, B repudiated the
contract. Is B allowed to do so? Yes, because here, the purpose has not yet been accomplished and no damage has
as yet been caused to a third person. May B recover what he has paid? It depends on the discretion of the court. If
public interest allows the party repudiating the contract to recover the money or property given. If, however, the
repudiation took place after the crime has been done, such repudiation is invalid and both parties will be guilty.
‣ NOTE — This rule also applies if the parties are not equally guilty, and where public policy would be advanced by
allowing the suit for relief. (Bough v. Cantiveros)
2. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of
justice so demands allow recovery of money or property delivered by the incapacitated person. (Art. 1415)
‣ Example — An insane man gave money to another to kill X. May the insane man recover what he has paid? Yes, since
the interest of justice so demands.
3. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for
the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
(Art. 1416)
‣ Art. 1416 distinguishes between void contracts that are —

a. Illegal per se — are those forbidden because of public interest.
b. Merely prohibited contracts — forbidden because of private interests
‣ Recovery in case of merely prohibited contracts is allowed if —

a. The prohibition is designed for the protection of the plaintiff; and
b. Public policy would be enhanced by allowing the recovery.
‣ Example — A donated to B everything that he (A) possessed and owned, leaving nothing for himself. This is
prohibited but not illegal per se. Since public policy is hereby enhanced, A will be allowed to recover, at least that
necessary for his own support and the support of his relatives.
‣ Art. 1413, 1417 to 1419 are really cases of merely prohibited contracts designed for the protection of one of the
parties, in such cases, such party may recover —

a. 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. (Art. 1413)
b. When the price of any article or commodity is determined by statute, or by authority of law, any
person paying any amount in excess of the maximum price allowed may recover such excess. (Art.
1417)
‣ Example — If the ceiling price for a pack of cigarettes is pegged at P300.00 a carton and you
paid P400.00 for it, you may recover the excess of P100.00.
c. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a
contract is entered into whereby a laborer undertakes to work longer than the maximum thus
fixed, he may demand additional compensation for service rendered beyond the time limit. (Art.
1418)
d. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is
agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the
deficiency. (Art. 1419)
NULLITY AS A DEFENSE BY THIRD PARTIES
Article 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.
‣ The right to set up the nullity of a void or non-existent contract is not limited to the parties, as in the case
of annullable or voidable contracts, it is extended to third persons who are directly affected by the contract.
Thus, where a contract is absolutely simulated, third persons who may the prejudiced thereby may set up
its inexistence.
‣ Third persons whose interests are served by the nullity of the contract may attack it, especially creditors
of those who dispose of their property under a void contract. The creditor may attach the property thus
alienated, asserting the nullity of the alienation.
CONTRACT RESULTING FROM A VOID CONTRACT
Article 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.
‣ Example — A promised to give B a car as a reward after B has killed C. Later, after the killing, the contract
was changed to a lease of a big house for a certain period. The second contract here is the direct result of
a previous illegal contract and is, therefore, null and void.


General Provisions on Contracts

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General Provisions on Contracts

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V.

GENERAL PROVISIONS ON CONTRACTS

NATURE, DEFINITION AND ELEMENTS OF A CONTRACT

‣ Contract distinguished from other terms —

CLARENCE TIU OBLIGATIONS AND CONTRACTS

STAGES OF THE LIFE OF A CONTRACT

CLARENCE TIU OBLIGATIONS AND CONTRACTS

a. Consensual — perfected by mere consent

‣ Such as — depositum, pledge, commodatum

a. Onerous — where there is an interchange of equivalent valuable consideration

‣ Such as — donation, commodatum

a. Principal — where the contract may stand alone by itself

‣ Such as — sale, lease, loan

‣ Such as — a real estate mortgage as an accessory contract to a loan

‣ Such as — agency, partnership

a. Unilateral — where only one of the parties has an obligation

‣ Such as — commodatum (like the borrowing of a bicycle)

‣ Such as — commodatum, partnership, sale, agency, deposit

‣ Such as —“do ut des,” meaning “I give that you may give”

‣ Such as — sale, lease

‣ Such as — insurance contract

CLARENCE TIU OBLIGATIONS AND CONTRACTS

a. Contracts involving things

‣ Such as — contract of usufruct, or assignment of credits

a. Ordinary — like sale; the law considers this as an ordinary contract

CLARENCE TIU OBLIGATIONS AND CONTRACTS

FREEDOM TO ENTER INTO LAWFUL C ONTRACTS

PRINCIPLE OF AUTONOMY OF CONTRACTS

CLARENCE TIU OBLIGATIONS AND CONTRACTS

‣ TOLENTINO — This has the same meaning as “morals”. It is redundant.

LAW WHICH GOVERNS CONTRACTS

CLARENCE TIU OBLIGATIONS AND CONTRACTS

‣ Governing authorities — In the order of preference —

‣ Classes of innominate contracts —

‣ Governing authorities — In the order of preference —

OBLIGATORY FORCE OF CONTRACTS

‣ Once contracts are perfected —

CLARENCE TIU OBLIGATIONS AND CONTRACTS

DETERMINATION BY A THIRD PERSON

CLARENCE TIU OBLIGATIONS AND CONTRACTS

RELATIVITY OR PRIVITY OF CONTRACTS

CLARENCE TIU OBLIGATIONS AND CONTRACTS

CLARENCE TIU OBLIGATIONS AND CONTRACTS

CLARENCE TIU OBLIGATIONS AND CONTRACTS

a. Contracts creating real rights (Art. 1312)

EFFECT OF PERFECTION OF C ONTRACTS

KINDS OF CONTRACTS AS TO THE MODE OF PERFECTION

‣ Such as — deposit, pledge and commodatum

CLARENCE TIU OBLIGATIONS AND CONTRACTS

CONTRACTS MADE BY A PERSON ON BEHALF OF ANOTHER

CLARENCE TIU OBLIGATIONS AND CONTRACTS

Article 1318. There is no contract unless the following requisites concur:

ESSENTIAL REQUISITES OF CONTRACTS

CONSENT OBJECT CAUSE

EFFECT OF 1. Contract is void — if the first

CLARENCE TIU OBLIGATIONS AND CONTRACTS

A. CONSENT OR MEETING OF THE MINDS

REQUISITES OF CONSENT IN GENERAL

EFFECT OF ABSENCE IN THE REQUISITES

MEETING OF THE MINDS — OFFER AND ACCEPTANCE; STAGES IN THE PERFECTION OF A

Article 1320. An acceptance may be express or implied. (n)

CLARENCE TIU OBLIGATIONS AND CONTRACTS