Chapter 2

ESSENTIAL REQUISITES OF CONTRACTS

Articles 1337, 1338 & 1339
as reported by Dona M. Valbuena

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 considered: the confidential, family,
spiritual and other relations between the parties, or the fact that the person alleged
to have been unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress. (n).”

Article 1337 has no derivation from the old Spanish Civil Code, this is a
new provision.

Undue influence has been defined in Coso vs. Fernandez-Deza, 42 Phil. 596
[1921] as the influence must be of a kind that so overpowers and subjugates the
mind of a party as to destroy his free agency and make him express the will of
another, rather than his own.

Elements of undue influence to justify the cancellation of an instrument:

(1) a person who can be influenced;

(2) the fact that improper influence was exerted; and

(3) submission to the overwhelming effect of such unlawful conduct.

The following are examples of circumstances which shall be considered to

determine whether undue influence has been exercised:
 (1) confidential, family, spiritual and other relations between the parties,

(2) mental weakness,

(3) ignorance, or

(4) financial distress of the person alleged to have been unduly influenced.

ILLUSTRATION

Adele, a tenant, is in need of P5,000.00 to pay Ben, his landlord who is

seeking to eject her for failure to pay the rents. Adele tries to borrow from Charice
but the latter instead tells her to sell her piano for P5,000.00. Adele has nobody to
turn to for assistance. If Adele does not want to sell the piano but she is compelled
to sell it because of her financial condition, the sale may be avoided on the ground
of undue influence.

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).”

Synonyms of insidious (adjective), treacherous, stealthy, deceptive, secret,

ensnaring, dishonest, cunning, false, sly, alluring and artful.

Machinations (noun)

plural noun: machinations - a plot or scheme. from Old French, or Latin

machinatio-, from machinat-

‘contrived’ (adj)- manage to do something foolish or create an undesirable

situation.

According to Manresa, insidious words or machinations “include false

promises, exaggerated expectations or benefits, abuse of confidence, fictitious
names, qualities, or power; in fine, the thousand forms of fraud, which can deceive
a contracting party, producing a vitiated consent” (8 Manresa 677.), and it is not
necessary that they constitute estafa or partake of any other criminal act subject to
the penal law.

Fraud, in its general sense, embraces all multifarious means which human
ingenuity can device and which are resorted to by one individual to secure an
unfair advantage by which another is cheated.

Rabuya (2019:465) enumerates the requisites of fraud that vitiates consent

1. It must have been employed by one contracting party upon the other (Ref:
Art. 1342 & 1344)
2. It must have induced the other party to enter into the contract (Ref: Art.
1338)
3. It must have been serious (Ref: Art. 1344, paragraph 1)
4. It must have resulted in damage and injury to the party seeking annulment
(Ref: Alcasid v. CA, 237 SCRA 419 (1994); Constantino v. CA, 264 SCRA
59; RB of Sta. Maria, Pangasinan v. CA, 314 SCRA 255 270 (1999).

ILLUSTRATIVE CASE

S sold to B a house and lot, misrepresenting that the place was accessible to
means of transportation. The sale is voidable on the ground of fraud if B was
induced to give his consent because of the representation.

But if B purchased the property without any inducement from B, his

mistaken belief that it was accessible does not vitiate consent because the error
refers merely to an incidental quality or condition of the thing.

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)

The concealment contemplated in Article 1339 presupposes a purpose or

design to hide facts which the other party ought to know.

The injured party is entitled to cancel or annul a contract whether the failure
to disclose the material facts is intentional or unintentional as long as there is a
duty to reveal or disclose them or according to good faith such disclosure should
be made and the other party is misled or deceived in entering into the contract. If
the failure is unintentional, the basis of the action for annulment is not fraud but
mistake or error (Art. 1343.); if unintentional and there is no duty to make the
disclosure, the parties are bound by their contract.

ILLUSTRATION

X and Y are partners engaged in the real estate business. Here, the parties
are bound by confidential relations. X learned that C was interested in buying a
certain parcel of land owned by the partnership even for a high price. Without
informing Y, X was able to make Y sell to him (X) his (Y’s) share in the
partnership. Then, X sold the land at a big profit.

In this case, X is guilty of fraudulent concealment because he was under the

duty to make disclosure of facts having a bearing on the value of the interests of Y
in the partnership which were not known to Y. If the sale was at the initiative of Y,
and X unintentionally failed to inform Y of C’s offer, the cause for annulment is
mistake or error on the part of Y.

G.R. No. L-10436 January 24, 1916

FRANCISCA EGUARAS, plaintiff-appellee,

vs.
 THE GREAT EASTERN LIFE ASSURANCE COMPANY, LTD., and
WEST G. SMITH, defendants.

THE GREAT EASTERN LIFE ASSURANCE COMPANY, LTD.,

appellant.

Ponente-Justice Torres

ISSUE

Whether or not fraud and machinations were proven to declare the insurance
contract as null and void.

RULE

Article 1269 (Art. 1338 NCCP) of the Civil Code states :

There is deceit when by words or insidious machinations on the part of one

of the contracting parties the other is induced to execute a contract which without
them he would not have made.

APPLICATION/FACTS

November 6, 1912 - Policy No. 5592 was issued by Great Eastern Life
Assurance Company, Ltd for the insured person named “Dominador Albay” for the
sum of P5,000, payable in the event of his death to Francisca Eguaras, his mother-
in-law as his sole beneficiary

December 6, 1912 - said Policy No. 5592 being in force, the insured
Dominador Albay, died in the municipality of Santa Cruz, Laguna, and despite the
fact that the beneficiary submitted satisfactory proofs of his death and that the
defendant company investigated the event, still it refused and continues to refuse to
pay to the plaintiff the value of the policy
 April 14, 1913 - counsel for Francisca Eguaras filed a written complaint with
CFI-Laguna for the insurance company’s refusal to pay her of the death benefit.

September 14, 1914 - Great Eastern Life Assurance Company, Ltd., was
sentenced by Court of First Instance of Laguna to pay to Francisca Eguaras the
sum of P5,000, the value of the insurance policy in question, with legal interest
from April 15, 1913, the date when the complaint was filed, and the costs.

Dr. Vidal testified (in another case against Ponciano Remegio, Castor
Garcia, and Francisca Eguaras for frustrated estafa), that on October 14, 1912,
while he was in the employ of the defendant company as a physician, he proceeded
to examine, in San Pablo, Laguna, a person presented to him by the insurance
agent, Ponciano Remegio, who said that such person was named Dominador Albay
and desired to be insured; that after he had conducted the examination for the space
of about an hour the person examined by him signed the supplementary application
with the name of Dominador Albay; that the person whom he examined and who
signed the application with the name of Dominador Albay, was the individual he
saw before him was Castor Garcia.

CONCLUSION

The Court held that it was proven that the signatures on the insurance
applications reading "Dominador Albay" are false and forged; that the person who
presented himself to Dr. Vidal to be examined was not the real Dominador Albay,
but another different person; that at the time of the application for insurance and
the issuance of the policy which is the subject matter of this suit the real
Dominador Albay was informed of all those machinations, wherefore it is plain
that the insurance contract between the defendant and Dominador Albay was null
and void because it was false, fraudulent and illegal.