Me Contracts

CONTRACTS
TITLE II. — CONTRACTS
CHAPTER 1
GENERAL PROVISIONS
Art. 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.1
Concept of Contracts. — In its derivative sense, the word
“contract’’ (cum traho) simply means an agreement or convention. It
must be noted, however, that a contract is not exactly synonymous
with a convention. While the latter is broad enough to include
any kind of agreement which may create, modify or extinguish
patrimonial and even family relations, the former, on the other
hand, is limited exclusively to those agreements which produce
patrimonial obligations. It is, therefore, clear that “convention” is
the genus, while “contract’’ is the specie.2 Hence, a contract may be
defined as a juridical convention manifested in legal form, by virtue
of which one or more persons bind themselves in favor of another or
others, or reciprocally, to the fulfillment of a prestation to give, to do
or not to do.3 This restricted concept of contracts is adopted in Art.
1254 of the Spanish Civil Code — a concept which we have retained
in Art. 1305 of our Code.
Idem; Distinguished from other terms. — Contracts must
not be confused with other juridical conventions such as marriage,
adoption and succession. There are some essential differences. In
the first place, the principal source of the rights and obligations
of the parties in contracts is their agreement, while in the other
juridical conventions, it is the law itself. In the second place, rights
1
Art. 1254, Spanish Civil Code, in modified form.
2
3 Castan, 7th Ed., pp. 298-300.
3
4 Sanchez Roman 146.
354
GENERAL PROVISIONS Art. 1305
and obligations arising from contracts are concrete, limited and

transitory, while those arising from the other juridical conventions
are more or less elastic, absolute and permanent.4 As a matter of
fact, as far as an ordinary contract and a contract of marriage are
concerned, we can very well enumerate the following distinctions
between the two:
(1) In an ordinary contract, the parties may be two or more
persons of the same or of different sexes, while in a marriage
contract, it is necessary that the parties must be one man and one
woman.
(2) In the first, the nature, consequences and incidents of the
contract are governed primarily by the agreement of the parties,
while in the second, the nature, consequences and incidents of the
marriage are governed by law.
(3) In the first, once the contract is executed, the result is a
contract, while in the second, once the marriage is celebrated, the
result is a status.
(4) The first can be terminated or dissolved by the mere
agreement of the parties, while the second cannot.
(5) In the first, in case of breach, the usual remedy is for
the injured party to institute an action against the other party for
damages, while in the second, in case of breach, the usual remedy is
for the injured party to institute a civil action against the other party
for legal separation or a criminal action for adultery or concubinage.
Neither must contracts be confused with perfected or imperfect
promises. A perfected promise merely tends to insure and pave the
way for the celebration of a future contract. An imperfect promise
(policitación), on the other hand, is a mere unaccepted offer.5
Nor must contracts be confused with either pacts or stipulations.
A pact is an incidental part of a contract which can be separated
from the principal agreement, while a stipulation is an essential
and dispositive part which cannot be separated from such principal
agreement.6
4
8 Manresa, 5th Ed., Bk. 2, pp. 268-270.
5
Ibid., p. 277.
6
Ibid., pp. 277-278.
355
Art. 1305 CONTRACTS
The Basic Duties of Persons when entering into Con-

tracts. —All men are presumed to be sane and normal and subject
to be moved by substantially the same motives. When of age and
sane, they must take care of themselves. In their relations with oth-
ers in the business of life, wits, sense, intelligence, training, ability
and judgment meet and clash and contest, sometimes with gain and
advantage to all, sometimes to a few only, with loss and injury to oth-
ers. In these contests, men must depend upon themselves –– upon
their own abilities, talents, training, senses, acumen, judgment. The
fact that one may be worsted by another, of itself, furnishes no cause
of complaint. One man cannot complain because another is more
able, or better trained, or has better sense or judgment than he has;
and when the two meet on a fair field, the inferior cannot murmur if
the battle goes against him. The law furnished no protection to the
inferior simply because he is inferior, any more than it protects the
strong because he is strong. The law furnishes protection to both
alike –– to one no more or less than the other. It makes no distinc-
tion between the wise and the foolish, the great and the small, the
strong and the weak. The foolish may lose all they have to the wise
but that does not mean that the law will give it back to them again.
Courts cannot follow one every step of his life and extricate him
from bad bargains, protect him from unwise investments, relieve
him from one-sided contracts, or annul the effects of foolish acts.
Courts cannot constitute themselves guardians of persons who are
not legally competent. Courts operate not because one person has
been defeated or overcome by another, but because he has been de-
feated or overcome illegally. Men may do foolish things, make ri-
diculous contracts, use miserable judgment, and lose money by then
–– indeed, all they have in the world; but not for that alone can the
law intervene and restore. There must be, in addition, a violation of
law, the commission of what the law knows as an actionable wrong,
before the courts are authorized to lay hold of the situation and rem-
edy it. (Valles vs. Villa, 35 Phil. 769; Sps. Pascual vs. Ramos, G.R.
No. 144712, July 4, 2002.)
The duty of the Courts in interpreting Contracts. - It
is not the province of the court to alter a contract by construction
or to make a new contract for the parties. Its duty is confined to
the interpretation of the one which they have made for themselves
without regard to its wisdom or folly as the court cannot supply
material stipulations or read into the contract words which it does
not contain. (Cuizon vs. CA, 260 SCRA 645.)
356
Elements of Contracts. — The elements of a contract may be

classified as follows:
(1) Essential — The essential elements are those without
which there can be no contract. These elements, in turn are subdivided
into common (comunes), special (especiales) and extraordinary or
peculiar (especialisimos). The common elements are those which are
present in all contracts, such as consent of the contracting parties;
object certain which is the subject of the contract; and cause of the
obligation which is established.
The special elements are present only in certain contracts,
such as delivery in real contracts or form in solemn ones.
The extraordinary elements are those which are peculiar to a
specific contract, such as the price in a contract of sale.7
(2) Natural — The natural elements are those which are
derived from the nature of the contract and ordinarily accompany the
same. They are presumed by the law, although they can be excluded
by the contracting parties if they so desire.8 Thus, warranty against
eviction is implied in a contract of sale, although the contracting
parties may increase, diminish or even suppress it.9
(3) Accidental — The accidental elements are those which
exist only when the parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract.
Examples of these are conditions, terms and modes.10
Idem; Parties to a contract. — From the very definition of a
contract as enunciated in Art. 1305, it is evident that the existence
of two parties is also another essential element which is common to
all contracts and must, therefore, be added to the requirements of
consent, object certain and cause. Consequently, a person cannot
enter into a contract with himself. There are, however, certain
cases where a juridical relation, known as an auto-contract, may be
created wherein, apparently, there is only one party involved, but
in reality, said party merely acts in the name and for the account
of two distinct contracting parties. This may take place (1) when a
7
3 Castan, 7th Ed., pp. 322-324.
8
Ibid., p. 324.
9
Arts. 1547, 1548, Civil Code.
10
3 Castan, 7th Ed., p. 324.
357
Art. 1305 CONTRACTS
person, in his capacity as 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, unless there is a conflict of interests or when the law
expressly prohibits it in specific cases.11
Characteristics of Contracts. — The four most fundamental
characteristics of contracts are: first, the obligatory force or character
of contracts (obligatoriedad del contrato); second, the autonomy of
contracts; third, the mutuality of contracts, or what amounts to the
same thing, the essential equality of the contracting parties; and
fourth, the relativity of contracts (relatividad del contrato).
The principle of the obligatory force of contracts is explicitly
recognized in Arts. 1159, 1308, 1315 and 1356 of the Civil Code.
It refers to the rule so fundamental in all contracts, that once
the contract is perfected, it shall be of obligatory force upon both
of the contracting parties. Consequently, such contracting parties
are bound, not only to the fulfillment of what has been expressly
stipulated, but also to all of the consequences thereof.12
The principle of the mutuality of contracts, on the other hand,
can be deduced, not only from the very nature of contracts, but also
from Art. 1308. This principle refers to the position of essential
equality that is occupied by both contracting parties in relation to
the contract. The contract must be binding upon both of the parties.
Consequently, its validity or compliance cannot be left to the will of
one of them.13
The principle of the autonomy of contracts is expressly declared
in Art. 1306. The contracting parties may establish such agreements
as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. As a matter of
fact, this principle is guaranteed by Sec. 1, Art. 3 of the Philippine
Constitution itself.
The principle of relativity of contracts is expressly declared in
the first paragraph of Art. 1311. Contracts take effect only between
11
Tolentino, 1956 Ed., Civil Code, pp. 376-378; but see No. 2 of Art. 1491, Civil
Code.
12
See Arts. 1159, 1308, 1315, 1356, Civil Code.
13
See Art. 1308, Civil Code.
358
the parties, their assigns and heirs. Consequently, they cannot, as

a general rule, produce any effect upon third persons, in conformity
with the principle of res inter alios acta aliis negue nocet prodest.14
Breach of Contract defined. — Breach of contract is defined
as the failure ,without legal reason, to comply with the terms of the
contract. It is also defined as the failure, without legal excuse, to
perform any promise which forms the whole or part of the contract
(Sps. Edgar and Dinah Omengan vs. Philippine National Bank. et.
al., G.R. No. 161319, January 23, 2007).
Life of Contracts. — The life of a contract has three phases or
stages — generation, perfection and consummation. The first stage
comprehends the preliminary or preparation, conception or genera-
tion, which is the period of negotiation and bargaining, ending at
the moment of agreement of the parties; the second stage compre-
hends the perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract; and the
third stage comprehends the consummation or death, which is the
fulfillment or performance of the terms agreed upon in the contract.
(ABS-CBN Broadcasting Corporation vs. Court of Appeals, G.R. No.
128690, January 21, 1999.)15
Classification of Contracts. — Contracts may be classified
as follows:
(1) According to their relation to other contracts:
(a) Preparatory — or those which have for their object
the establishment of a condition in law which is necessary as
a preliminary step towards the celebration of another subse-
quent contract. Examples — partnership, agency.
(b) Principal — or those which can subsist independent-
ly from other contracts and whose purpose can be fulfilled by
themselves. Examples — sale, lease.
(c) Accessory — or those which can exist only as a conse-
quence of, or in relation with, another prior contract. Examples
— pledge, mortgage.
14
15
Ibid., pp. 279-280.
359
Art. 1305 CONTRACTS
(2) According to their perfection:

(a) Consensual — or those which are perfected by the
mere agreement of the parties. Examples — sale, lease.
(b) Real — or those which require not only the consent
of the parties for their perfection, but also the delivery of the
object by one party to the other. Examples — commodatum,
deposit, pledge.
(3) According to their form:
(a) Common or informal — or those which require no
particular form. Example — loan.
(b) Special or formal — or those which require some
particular form. Examples — donations, chattel mortgage.
(4) According to their purpose:
(a) Transfer of ownership. Example — sale.
(b) Conveyance of use. Example — commodatum.
(c) Rendition of services. Example — agency.
(5) According to their subject matter:
(a) Things. Examples — sale, deposit, pledge.
(b) Services. Examples — agency, lease of services.
(6) According to the nature of the vinculum which they
produce:
(a) Unilateral — or those which give rise to an obligation
for only one of the parties. Examples — commodatum,
gratuitous deposit.
(b) Bilateral — or those which give rise to reciprocal
obligations for both parties. Examples — sale, lease.
(7) According to their cause:
(a) Onerous — or those in which each of the parties
aspires to procure for himself a benefit through the giving of an
equivalent or compensation. Example — sale.
(b) Gratuitous — or those in which one of the parties
proposes to give to the other a benefit without any equivalent
or compensation. Example — commodatum.
360
(8) According to the risks involved:

(a) Commutative — or those where each of the parties
acquires an equivalent of his prestation and such equivalent
is pecuniarily appreciable and already determined from the
moment of the celebration of the contract. Example — lease.
(b) Aleatory — or those where each of the parties has to
his account the acquisition of an equivalent of his prestation,
but such equivalent, although pecuniarily appreciable, is
not yet determined at the moment of the celebration of the
contract, since it depends upon the happening of an uncertain
event, thus charging the parties with the risk of loss or gain.
Example — insurance.
(9) According to their names or norms regulating them:
(a) Nominate — or those which have their own
individuality and are regulated by special provisions of law.
Examples — sale, lease.
(b) Innominate — or those which lack individuality and
are not regulated by special provisions of law.16
Art. 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.17
Right To Contract. — Art. 1306 of the Civil Code enunciates
one of the most fundamental principles of the law on contracts — the
right of the contracting parties to establish any stipulation, clause,
term or condition as they may deem convenient. As a matter of fact,
this right is one of those guaranteed in the Constitution.18 Hence,
the freedom to contract is both a constitutional and a statutory
right; therefore, to uphold this right, courts should move with all
the necessary caution and prudence in holding contracts void.19
16
4 Sanchez Roman 381-387; 3 Castan, 7th Ed., pp. 310-314.
17
18
Art. IV, Sec. 11, Constitution of the Philippines.
19
Gabriel vs. Monte de Piedad, 71 Phil. 497. To the same effect: Ferrazzini vs.
Gsell, 34 Phil. 697; People vs. Pomar, 46 Phil. 440.
361
Art. 1306 CONTRACTS
Idem; Limitations. — The right, however, is not absolute

in character. It is subject to several limitations. According to Art.
1306, the stipulation, clause, term or condition established by the
contracting parties must not be contrary to (1) law, (2) morals,
(3) good customs, (4) public order, or (5) public policy. Under the
Spanish Civil Code (Art. 1255), good customs and public policy are
not included, although Spanish jurisprudence has always considered
good customs as included within the sphere of morals, and public
policy as synonymous with public order.20
Idem; id. — First limitation. — The most important of these
limitations is the first — that the agreement of the contracting
parties must not be contrary to law. The laws referred to are: first,
those which are mandatory or prohibitive in character; second,
those which, without being mandatory or prohibitive, nevertheless,
are expressive of fundamental principles of justice, and, therefore,
cannot be overlooked by the contracting parties; and third, those
which impose essential requisites without which the contract cannot
exist.21 Thus, where the parties stipulated in their contract that all
judicial and extrajudicial acts necessary under the terms thereof
should take place in a certain municipality, it is clear that such
a stipulation is contrary to law since right to fix the jurisdiction
of courts can only be exercised by the legislative branch of the
government and not by private individuals.22 Similarly, where the
parties stipulated that in case the debtor cannot pay his obligation
at maturity, the creditor may appropriate for himself the thing
which is given as security, such stipulation is null and void since
it is contrary to the provision of Art. 2088 of the Civil Code, which
prohibits pactum commissorium.23
Likewise, in the case of Bustamante vs. Rosel (November 29,
1999, 319 SCRA 413), the Court ruled that where the respondents
20
Ferrazzini vs. Gsell, 34 Phil. 697; 8 Manresa, 5th Ed., Bk. 12, p. 288; 20 Scae-
vola 505.
21
22
Molina vs. De la Riva, 6 Phil. 12.
23
Puig vs. Sellner, 45 Phil. 286; Reyes vs. Nebrija, G.R. No. L-8720, March 21,
1956. To the same effect: Warner, Barnes & Co. vs. Jaucian, 13 Phil. 4; Aguilar vs.
Rubiato, 40 Phil. 570; Pamintuan vs. Tiglao, 53 Phil. 1; Hodges vs. Regalado, 69 Phil.
588. There are other pacts, besides pactum commissorium which are prohibited by
law, such as pactum leonina under Art. 1799 of the Civil Code and pactum de non
alienado under Art. 2130 of the same Code.
362
Rosel argue that contracts have the force of law between the con-
tracting parties and must be complied with in good faith, there are,
however, certain exceptions to the rule, specifically Article 1306 of
the Civil Code, which provides: “Article 1306. The contracting par-
ties 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.’’ A scrutiny of
the stipulation of the parties reveals a subtle intention of the credi-
tor to acquire the property given as security for the loan. This is em-
braced in the concept of pactum commissorium where the elements
are as follows: (1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal ob-
ligation within the stipulated period.’’ Said concept of pactum com-
missorium is proscribed by law.
Idem; id. — Second limitation. — The second limitation is the
most difficult to ascertain, because in subjecting obligations to moral
precepts we must be careful not to erase the distinction between the
moral and the juridical order. It is evident, however, that the morals
referred to are those principles which are incontrovertible and are
universally admitted and which have received social and practical
recognition.24 Thus, where the parties stipulated in their contract
that the defendant shall be obliged to render services to the plaintiff
as a domestic servant without any remuneration whatsoever
because of a certain loan obtained by the former from the latter, it is
evident that such agreement is void on the ground that it is contrary
to morals, unless it be admitted that slavery may be established in
this country through a covenant entered into between the interested
parties.25 Similarly, where the debtors executed a promissory note in
favor of the plaintiff for P465, promising to pay a penalty of P5.00 a
day in case of non-payment of the debt at maturity, it is clear that
such a promise is immoral and, therefore, cannot be enforced.26
Idem; id. — Third limitation. — The third limitation to the
right of the contracting parties to establish such stipulations, clauses,
terms, and conditions as they may deem convenient is good customs.
24
8 Manresa, 5th Ed., Bk. 2, p. 288.
25
De los Reyes vs. Alojado, 16 Phil. 499.
26
Ibarra vs. Aveyro, 37 Phil. 273.
363
Art. 1306 CONTRACTS
The spheres of morals and good customs frequently overlap each

other but sometimes they do not.27 It must be admitted, however,
that if a moral precept or custom is not recognized universally, but
is sanctioned by the practice of a certain community, then it shall be
included within the scope or sphere of good customs.28
Idem; id. — Fourth limitation. — The fourth limitation to
the right of the contracting parties to establish such stipulations,
clauses, terms and conditions as they may deem convenient is public
order. As it is understood in the present Civil Code, it would seem
that public order can only refer to the safety, as well as to the peace
and order, of the country or of any particular community. This can
be implied from the report of the Code Commission which states
that “public order x x x is not as broad as public policy, as the latter
may refer not only to public safety but also to considerations which
are moved by the common good.”29 Under the Spanish Civil Code,
however, public order was considered synonymous with public
policy.30
Idem; id. — Fifth limitation. — The fifth limitation to the
right of the contracting parties to establish such stipulations, clauses,
terms and conditions as they may deem convenient is public policy.
The expression “public policy” is quite elastic, and consequently, is
difficult to define. American and English courts, however, define it
as a principle of law which holds that no person can lawfully do that
which has a tendency to be injurious to the public or against the
public good. It is the principle under which freedom of contract is
restricted by law for the public good.31 According to Justice Laurel:
“A contract is to be judged by its character, and courts

will look to the substance and not to the mere form of the
transaction. The freedom of contract is both a constitutional
and statutory right and to uphold this right, courts should move
with the necessary caution and prudence in holding contracts
void. (People vs. Pomar, 46 Phil. 440; Ferrazzini vs. Gsell, 34
Phil. 697.) At any rate, courts should not rashly extend the rule
27
Report of the Code Commission, p. 134.
28
29
30
Ferrazzini vs. Gsell, 34 Phil. 697; 8 Manresa, 5th Ed., Bk. 2, p. 288; 20 Scaevola
505.
31
Ferrazzini vs. Gsell, 34 Phil. 697.
364
which holds that a contract is void as against public policy. The

term ‘public policy’ is vague and uncertain in meaning, floating
and changeable in connotation. It may be said, however, that,
in general, a contract which is neither prohibited by law, nor
condemned by judicial decision, nor contrary to public morals,
contravenes no public policy. In the absence of express legislation
or constitutional prohibition, a court, in order to declare a
contract void as against public policy, must find that the contract
as to the consideration or thing to be done, has a tendency to
injure the public, is against the public good, or contravenes
some established interests of society, or is inconsistent with
sound policy and good morals, or tends clearly to undermine the
security of individual rights, whether of personal liability or of
private property.32
Thus, where the owner of stolen goods and the person respon-
sible for the theft entered into an agreement by which the former
agreed to stifle the criminal prosecution of the latter for a pecuni-
ary consideration, it is clear that such an agreement is manifestly
contrary to public policy and the due administration of justice; con-
sequently, it is void.33 The same can also be said with regard to an
agreement where a carrier is exempted from any liability for loss or
damage caused by its own negligence,34 or where an employee, after
the termination of his employment, shall neither engage or interest
himself in any business enterprise similar to or in competition with
that operated by the employer, nor enter into the employment of
any enterprise in the Philippines, except by obtaining the written
permission of such employer,35 or where an applicant for dollar al-
locations shall pay ten or fifteen or twenty per cent of the amount
to be approved by the Central Bank as fee for the services of the
“influence peddler” or “ten percenter” in securing the approval of the
foreign exchange application.36
It must be observed that in stipulations exempting a common
carrier from liability, three kinds of stipulations are ordinarily made
in a bill of lading. The first is one exempting the carrier from any and
32
Gabriel vs. Mateo, 71 Phil. 497.
33
Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787; Monterey vs.
Gomez, 104 Phil. 1059.
34
Heacock vs. Macondray & Co., 42 Phil. 205. See Arts. 1745, et seq., Civil Code.
35
Ferrazzini vs. Gsell, 34 Phil. 697.
36
Tee vs. Tacloban Electric and Ice Plant Co., 105 Phil. 168.
365
Art. 1306 CONTRACTS
all liability for loss or damage occasioned by its own negligence; the
second is one providing for an unqualified limitation of such liability
to an agreed valuation; and the third is one limiting the liability
of the carrier to an agreed valuation unless the shipper declares a
higher value and pays a higher rate of freight. According to Art. 1745
of the Civil Code, the first is contrary to public policy, and therefore,
void. As a rule, the second is also contrary to public policy, and
therefore, also void.37 However, according to Art. 1750 of the Civil
Code, if it can be shown to be reasonable under the circumstances,
and had been fairly and freely agreed upon, then it is perfectly valid
and binding. The third, on the other hand, is perfectly valid and
binding according to Art. 1749 of the Civil Code.
With regard to contracts which tend to restrain business trade,
the rule is now well established that a contract in restraint of trade
is valid provided that there is a limitation upon either time or place.
A contract, however, which restrains a man from entering into a
business or trade without either a limitation as to time or place is
invalid. The public welfare, of course, must always be considered.
Hence, in addition to the requirement that there must be a limitation
as to time or place, it is also required that the restraint must be
reasonably necessary for the protection of the contracting parties.38
Ysmael & Co. vs. Barretto

51 Phil. 90
The records show that the defendant received 164 cases of

silk from the plaintiff to be shipped to Surigao. It was stipulated
in the bill of lading that the carrier shall not be liable for loss or
damage from any cause beyond an amount exceeding P300 for
any single package of the cargo, unless the value and contents
of the packages constituting the cargo are correctly declared in
the bill of lading at the time of shipment. Four cases of silk, each
of which is valued at P2,500, were, however, lost. This action
was commenced to recover their value from the defendant.
The defendant contends that his liability shall extend only to
the amount agreed upon in the bill of lading. The question,
therefore, is whether or not the agreement is valid and binding
upon the plaintiff.
37
Heacock vs. Macondray & Co., 42 Phil. 205; Ysmael & Co. vs. Barretto, 51 Phil.
90. See Arts. 1745 to 1754, Civil Code.
38
Del Castillo vs. Richmond, 45 Phil. 679. To the same effect: Ollendorf vs. Ab-
rahamson, 88 Phil. 585.
366
Held: “The agreement above quoted places a limit of P300

‘for any single package of silk.’ The evidence shows that 164
‘cases’ were shipped, and that the value of each case was very
near P2,500. In this stipulation, the limit of defendant’s liability
for each case of silk ‘for loss or damage from any cause or for any
reason’ would put it in the power of the defendant to have taken
the whole cargo of 164 cases of silk at a valuation of P300 for
each case or less than one-eighth of its actual value. If this rule
of law should be sustained, no silk would be shipped from one
island to another in the Philippines. Such a limitation of value
is unconscionable and void as against public policy.
“By the weight of modern authority, a carrier cannot
limit its liability, for injury or loss of goods shipped, where such
injury or loss was caused by its own negligence. The rule rests
on consideration of public policy, as the contract of the carrier is
to carry and deliver the goods, and a contract that undertakes to
relieve the carrier from any liability for loss or damage accruing
or arising from its own negligence would in legal effect nullify
the contract.’’
Ferrazzini vs. Gsell

34 Phil. 697
In the contract entered into between plaintiff and
defendant the former agreed to pay P10,000 to the latter as
liquidated damages for each and every breach of a clause of the
contract which provides that during the period of employment
and for a period of five years after the termination thereof for
any cause or reason whatsoever, the plaintiff should neither
engage or interest himself in any business enterprise similar
to or incompetition with those operated by the defendant, nor
enter into the employment of any enterprise in the Philippines
except after obtaining the written permission of the defendant.
The question now arises as to whether the stipulation above set
forth is valid and binding upon the plaintiff.
Held: “The contract under consideration is clearly one in
undue or unreasonable restraint of trade and therefore against
public policy. It is limited as to time and space but not as to
trade. It is not necessary for the protection of the defendant, as
this is provided for in another part of the clause. It would force
the plaintiff to leave the Philippine Islands in order to obtain a
livelihood in case the defendant declined to give him the written
permission to work elsewhere in this country.”
367
Art. 1306 CONTRACTS
Del Castillo vs. Richmond

45 Phil. 679
The records show that in the contract entered into between

plaintiff and defendant, the former agreed that he shall not open
or own, nor have any interest directly or indirectly in any other
drugstore either in his own name or in the name of another; nor
have any connection with or be employed by any other drugstore
either as pharmacist or in any capacity in any drugstore within
a radius of four miles from the municipality of Legaspi, province
of Albay, so long as the defendant or his heirs may own or have
an interest in a drugstore in the said municipality. The question
that is raised is whether or not such an agreement is valid and
binding upon the plaintiff.
Held: “The law concerning contracts which tend to
restrain business trade has gone through a long series of
changes from time to time within the changing conditions of
trade and commerce. With trifling exceptions, said changes
have been a continuous development of a general rule. The early
cases show plainly a disposition to avoid and annul all contracts
which prohibited or restrained any one from using a lawful
trade ‘at any time or at any place’ as being against the benefit
of the state. Later, however, the rule became well established
that if the restraint was limited to ‘a certain time’ and within
‘a certain place’ such contracts were valid and not against the
benefit of the state. Later cases, and we think the rule is now
well established, have held that a contract in restraint of trade
is valid provided there is a limitation upon either time or place.
A contract, however, which restrains a man from entering into a
business or trade without either a limitation as to time or place,
will be held invalid.
“The public welfare, of course, must always be considered,
and if it be not involved and the restraint upon one party is not
greater than protection to the other requires, contracts like the
one we are discussing will be sustained. The general tendency,
we believe, of modern authority, is to make the test whether
the restraint is reasonably necessary for the protection of the
contracting parties. If the contract is reasonably necessary to
protect the interest of the parties, it will be upheld. In all cases
like the present, the question is whether, under the particular
circumstances of the case and the nature of the particular
contract involved in it, the contract is reasonable. Of course, in
establishing whether the contract is reasonable or unreasonable,
the nature of the business must also be considered.
368
“Considering the nature of the business in which the

defendant is engaged, in relation with the limitation placed upon
the plaintiff both as to time and place, we are of the opinion, and
so decide, that such limitation is legal and reasonable and not
contrary to public policy.”
Sy Suan vs. Regala

105 Phil. 1024
Sy Suan, president and general manager of Price, Inc.,
executed in favor of plaintiff Regala a special power of attorney
authorizing the latter to prosecute an application for a license
with the Import Control Office for the importation of industrial
starch for candy manufacture. It was agreed verbally that as
compensation for plaintiff’s service, he would be paid 10% of the
total value of the amount that would be approved by the Import
Control Office. As it turned out, plaintiff was able to prosecute the
approval of the application successfully. Subsequently, because
of the refusal of the defendant to pay the balance of the 10%
commission agreed upon, plaintiff brought this action against
him to recover the amount. The latter, however, contends that
the agreement is contrary to public policy, and therefore, void ab
initio. The former, on the other hand, maintains that there is no
evidence showing that the contract in question has violated any
public policy.
Held: “The contract is contrary to good customs, public
order and public policy. Judicial notice may be taken of the fact
that this kind of contract sprouted as a result of the controls
imposed by the government on imports and dollars allocations,
despite the enunciated government policy that applications for
imports and foreign exchange should be considered and acted
upon strictly on the basis of merit, without intervention of
intermediaries, which policy is revealed by Secs. 15 and 18 of
Rep. Act 650. If the granting of import licenses depends solely
upon the merits of each application, certainly the intervention
of intermediaries, such as herein respondent, would be
unwarranted and uncalled for, as such intervention would
serve no other purpose than to influence, or possibly corrupt
the judgment of the public officials performing an act or service
connected with the issuance of import licenses. Respondent,
however, claims that there is no evidence showing that the
contract in question has violated any public policy. But the
question whether a contract is against public policy depends
upon its purpose and tendency, and not upon the fact that no
harm results from it. In other words, all agreements the purpose
369
Art. 1306 CONTRACTS
of which is to create a situation which tends to operate to the

detriment of the public interest are against public policy and,
therefore, void, whether the purpose of the agreement is or
is not effectuated. For a particular undertaking to be against
public policy actual injury need not be shown; it is enough if the
potentialities for harm are present.”
Cui vs. Arellano University

2 SCRA 205
Plaintiff took up law at the Arellano University. He left the

University and enrolled for the last semester of his fourth year
at the Abad Santos Law School. Subsequently, he passed the
bar examinations. During his stay at the Arellano University,
he was a constant recipient of scholarship grants. However, he
was made to sign a waiver of his right to transfer to another
school unless he refunds to the University the equivalent of
his scholarship grants. Since, in taking the bar examinations,
he had to secure his transcript of records from the University,
he was required to make the refund, which he did, but under
protest. Subsequently, he brought this action to recover the
amount which he had paid. Will the action prosper?
Held: The action will prosper. The waiver signed by
plaintiff is contrary to public policy and, therefore, null and
void. Scholarship grants as pointed out by the Director of the
Bureau of Private Schools in Memorandum No. 38, are awarded
in recognition of merit and not to attract and keep brilliant
students in school for their propaganda value. To look at such
grants as a business scheme designed to increase the business
potential of an educational institution is not only inconsistent
with sound public policy but also good morals.
Compromise; Compromise Agreements; Effects — In the

case of Santos Ventura Hocorma Foundation, Inc. vs. Santos, G.R.
No. 123004, Nov. 4, 2004, the Court held that:
(a) Compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one already
commenced. It is an agreement between 2 or more persons, who, for
preventing or putting an end to a law suit, adjust their difficulties
by mutual consent in the manner which they agree on, and which
everyone of them prefers in the hope of gaining, balanced by the
danger of losing.
370
Under Art. 1306 of the New Civil Code, contracting parties

may establish such stipulations, clauses, terms and conditions as
they may deem convenient in a compromise agreement, provided
they are not contrary to law, morals, good customs, public order, or
public policy. Thus, a compromise agreement whereby the parties
make reciprocal concesions to resolve their differences to thereby
put an end to litigation is binding on the contracting parties and
is expressly acknowledged as a juridical agreement between them.
(National Commercial Bank of Saudi Arabia vs. Court of Appeals,
G.R. No. 124267, January 17, 2005.)
(b) The general rule is that a compromise has upon the par-
ties the effect and authority of res judicata, with respect to the mat-
ter definitely stated therein, or which by implication from its terms
should be deemed to have been included therein. This holds true
even if the agreement has not been judicially approved.
(c) Applying existing jurisprudence, the compromise agree-
ment as a consensual contract became binding between the parties
upon its execution and not upon its court approval. From the time
a compromise is validly entered into, it becomes the source of the
rights and obligations of the parties thereto. The purpose of the com-
promise is precisely to replace and terminate controverted claims.
However, in the case of National Commercial Bank of Saudi
Arabia vs. Court of Appeals, supra, the Court held that to have the
force of res judicata, however, the compromise agreement must be
approved by final order of the court. To be valid, the compromise
agreement must be based on real claims and actually agreed upon
in good faith. In the case at bar, each of the parties have manifested
their desire, by forging the Compromise Agreement, to abbreviate
the legal battle and settle the case amicably to both their satisfaction.
As the Agreement is not contrary to law, public order, public policy,
morals or good customs, is approved.
Art. 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.39
39
New provision.
371
Art. 1307 CONTRACTS
Nominate Contracts. — As we have already seen, nominate

contracts are those which have their own distinctive individual-
ity and are regulated by special provisions of law. The nominate
contracts which are defined and regulated by the Civil Code are
sales (Arts. 1458-1637), barter or exchange (Arts. 1638-1641), lease
(Arts. 1642-1766), partnership (Arts. 1767-1867), agency (Arts.
1868-1932), loan (Arts. 1933-1961), deposit (Arts. 1962-2009), alea-
tory contracts, such as insurance, gambling and life annuity (Arts.
2010-2027), compromise and arbitration (Arts. 2028-2046), guar-
anty (Arts. 2047-2084), and pledge, mortgage and antichresis (Arts.
2085-2141).
Innominate Contracts. — Innominate contracts, on the
other hand, are those which lack individuality and are not regulated
by special provisions of law. Following the Roman law classification,
there are four kinds of innominate contracts. They are:
(a) Do ut des — I give that you give.
(b) Do ut facias — I give that you do.
(c) Facio ut des — I do that you give.
(d) Facio ut facias — I do that you do.40
What law governs innominate contracts? Resolving all
doubts under the old law, Art. 1307 of the Civil Code, which is a
new provision, states that such contracts shall be regulated by the
stipulations of the parties, by the general provisions or principles of
obligations and contracts, by the rules governing the most analogous
nominate contracts, and by the customs of the place. This provision
is based on a doctrine enunciated in certain cases dealing with lease
of services decided under the old law — notably, the cases of Perez
vs. Pomar, 682, Arroyo vs. Azur, 76 Phil. 493, and Intestate Estate of
Reguera vs. Tandra, 46 Off. Gaz. 186.41
8 Manresa, 5th Ed., Bk. 2, pp. 297-298; 3 Castan, 7th Ed., pp. 313-314.
40
For a more recent case stating the same doctrine — see Dizon vs. Gaborro, 83
41
SCRA 688.
372
Perez vs. Pomar

2 Phil. 682
The evidence shows that the plaintiff rendered services to

the defendant as interpreter during a certain period. Although it
is proven that such services were accepted by the said defendant,
it does not appear that any express contract, written or verbal,
was ever entered into. The question now is whether there is a
binding contract which will justify a court of law in fixing a just
compensation for the plaintiff.
Held: “Whether the service was solicited or offered,
the fact remains that Perez rendered to Pomar services as
interpreter. As it does not appear that he did this gratuitously
the duty is imposed upon the defendant, he having accepted the
benefit of the services, to pay a just compensation, by virtue of
the innominate contract of facio ut des implicitly established.
“The obligations arising from this contract are reciprocal,
and, apart from the general provisions with respect to contracts
and obligations, the special provisions concerning contracts for
lease of service are applicable by analogy.
“In this special contract, as determined by Article 1544
(now Art. 1644) of the Civil Code, one of the parties undertakes
to render to the other services for a period certain. The tacit
agreement and consent of both parties with respect to the
services rendered by the plaintiff and the reciprocal benefits
accruing to each are the best evidence of the fact that there was
an implied contract sufficient to create a legal bond, from which
arose enforceable rights and obligations of a bilateral character.
“In contracts, the will of the contracting parties is law.
If it is a fact sufficiently proven that the defendant Pomar, on
various occasions, consented to accept an interpreter’s services,
rendered in his behalf and not gratuitously, it is but just that he
should pay a reasonable remuneration therefore, because it is a
well-known principle of law that no one should be permitted to
enrich himself to the damage of another.”
Art. 1308. The contract must bind both contracting

parties; its validity or compliance cannot be left to the will
of one of them.42
42
373
Arts. 1309-1310 CONTRACTS
Art. 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.43
Art. 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.44
Mutuality of Contracts. — One of the most fundamental

characteristics of contracts is the essential equality of the contracting
parties or what is sometimes called the mutuality of contracts. This
is deducible not only from the very nature of contracts, but also
from Art. 1308. From this principle, the law expressly or impliedly
recognizes the following consequences:
(1) The validity or fulfillment of a contract cannot be left
to the will of one of the contracting parties. This rule is expressly
declared by Art. 1308. It must be observed, however, that what is
prohibited by the law from being delegated to one of the contracting
parties are: first, the power to determine whether or not the contract
shall be valid; and second, the power to determine whether or not
the contract shall be fulfilled.
(2) The validity or fulfillment may be left to the will of a third
person. This rule is now expressly recognized in Art. 1309 which
states that the determination of the performance of a contract may
be left to the will of a third person whose decision shall not be binding
until it has been made known to each of the contracting parties.
It is, however, an indispensable requisite that the determination
made by the third person should not be evidently inequitable. If it
is evidently inequitable, it shall not have any obligatory effect upon
the contracting parties.45
(3) The validity or fulfillment can be left to chance. This can
be deduced a sensu contrario from the text of Art. 1308.46
Applying the prohibition stated in Art. 1308, if A and B, for
instance, will enter into a contract and it is expressly stipulated
43
New provision.
44
New provision.
45
Arts. 1309, 1310, Civil Code. See also Arts. 1182, 1720, and 1798, Civil Code,
for similar provisions.
46
374
GENERAL PROVISIONS Arts. 1309-1310
that whether or not such contract shall be valid (or shall be fulfilled)
shall depend exclusively upon the will of B, it is clear that such
a stipulation would be a direct violation of the prohibition stated
in the article; consequently, it is void. Thus, where it is expressly
stipulated in a contract of lease that the defendants can continue
occupying the house which is the object of the contract indefinitely
so long as they should faithfully fulfill their obligation to pay the
rentals, it is clear that the continuance and fulfillment of the contract
would then depend solely and exclusively upon their uncontrolled
choice between continuing paying the rentals or not, completely
depriving the owner of all say on the matter. Consequently, such
a stipulation cannot be set up by the defendants as a defense in
an action for ejectment instituted by the plaintiff. If this defense
is allowed, so long as defendants elected to continue the lease by
continuing the payment of the rentals, the owner would never be able
to discontinue it; conversely, although the owner should desire the
lease to continue the lessees could effectively thwart his purpose if
they should prefer to terminate the contract by the simple expedient
of stopping payment of the rentals. This, of course, is prohibited by
Art. 1308 of the Civil Code.47
It must be noted, however, that there are certain agreements
which will in effect render the mutuality of contracts illusory because
one of the contracting parties is placed in a position of superiority
with regard to the determination of the validity or fulfillment of the
contract over that occupied by the other party, but which do not fall
within the purview of the prohibition stated in Art. 1308.
In the first place, we have those agreements where the obligor
promises to pay a certain amount which is not determined, but the
contract itself specifies the manner by which the amount may be
determined, such as by the exercise of the judgment and discretion of
the obligor. Undoubtedly, a promise of this character creates a legal
obligation binding upon the promisor, although in its actual results
it may not infrequently prove to be illusory.48 In the second place,
we have those agreements where the fulfillment of the contract is
left to the will of one of the contracting parties in the negative form
47
Encarnacion vs. Baldemar, 77 Phil. 470. See also General Enterprises, Inc. vs.
Lianga Bay Logging Co., 11 SCRA 733; Garcia vs. Rita Legarda, Inc., 21 SCRA 555.
48
Liebenow vs. Phil. Vegetable Oil Co., 39 Phil. 60.
375
of rescission.49 Thus, according to Manresa, considering the text of

Art. 1308, it is perfectly licit to leave the fulfillment of a contract
to the will of one of the contracting parties in the negative form of
rescission, a case which is frequent in certain contracts (especially
in contracts involving lease of service), because in such, case neither
is the prohibition in the article violated nor is there inequality
between the parties since they remain with the same faculties with
respect to fulfillment.50
Liebenow vs. Phil. Vegetable Oil Co.

39 Phil. 60
This is an action to recover a sum of money to which the
plaintiff considered himself entitled by way of bonus in addition
to his salary while employed by the defendant. The basis of his
claim was a letter of the president of the defendant company
promising to pay him in addition to his salary “such further
amount as the Board of Directors may see fit to grant.” It was
established that the plaintiff had in fact received P4,500 by
installments from the defendant after the termination of his
services. The defendant contends that this amount is the bonus
which the Board of Directors had seen fit to grant, but the
plaintiff maintains that it is merely an addition to his salary,
and since the bonus has not yet been paid, its amount must
therefore be fixed by the court because otherwise there would be
a violation of the prohibitions imposed in Arts. 1115 and 1256
(now Arts. 1182 and 1308) of the Civil Code. Holding that the
bonus had already been paid since the contract itself specifies
that the amount thereof should depend upon the discretion of
the Board of Directors of the defendant company, the Supreme
Court, considering the nature and legal effect of the contract,
declared:
“We see no reason to doubt that a promise of this character
creates a legal obligation binding upon the promisor, although
in its actual results it may not infrequently prove to be illusory.
Such a promise is not, in our opinion, nugatory under Article
1115 (now Art. 1182) of the Civil Code, as embodying a condition
dependent exclusively upon the will of the obligor. Nor can it be
held invalid under Article 1256 (now Art. 1308) of the same Code,
49
Taylor vs. Uy Tieng Piao, 43 Phil. 873; Melencio vs. Dy Liao Lay, 55 Phil. 99;
Phil. Banking Corp. vs. Lui She, 21 SCRA 52.
50
8 Manresa, 5th Ed., Bk. 2, p. 304. See Phil. Banking Corp. vs. Lui She, 21
SCRA 52.
376
which declares that the validity and performance of a contract

cannot be left to the will of one of the contracting parties. The
uncertainty of the amount to be paid by way of bonus is also no
obstacle to the validity of the contract (Article 1273 — now Art.
1349, Civil Code), since the contract itself specifies the manner
in which the amount payable is to be determined, namely, by
the exercise of the judgment and discretion of the employer.”
Taylor vs. Uy Tieng Piao

43 Phil. 873
The records show that plaintiff was employed by the

defendant as superintendent of an oil factory which the latter
contemplated establishing in Manila. Among the stipulations
inserted in the contract of employment was the following clause:
“It is understood and agreed that should the machinery to be
installed in the said factory fail, for any reason, to arrive in the
City of Manila within a period of six months from date hereof,
this contract may be cancelled by the party of the second part
at its option, such cancellation, however, not to occur before
the expiration of such six months.” Because of the failure of
the machinery to arrive within the period stated, the defendant
cancelled the contract. Subsequently, the plaintiff filed this
action for breach of contract, relying on the provision of Art.
1256 (now Art. 1308),which says that the validity and fulfillment
of a contract cannot be left to the will of one of the contracting
parties, and Art. 1119 (now Art. 1186), which says that a
condition shall be deemed fulfilled if the obligor intentionally
prevents its fulfillment.
Held: “Article 1256 (now Art. 1308) of the Civil Code in
our opinion creates no impediment to the insertion in a contract
for personal service of a resolutory condition permitting
the cancellation of the contract by one of the parties. Such a
stipulation, as can be readily seen, does not make either the
validity or the fulfillment of the contract dependent upon the will
of the party to whom is conceded the privilege of cancellation;
for where the contracting parties have agreed that such option
shall exist, the exercise of the option is as much in fulfillment of
the contract as any other act which may have been the subject of
agreement. Indeed, the cancellation of a contract in accordance
with conditions agreed upon beforehand is fulfillment.
“In this connection, we note that the commentator Manresa
has the following observation with respect to Article 1256 (now
Art. 1308) of the Civil Code. Says he: ‘It is entirely licit to leave
377
Art. 1311 CONTRACTS
fulfillment to the will of either of the parties in the negative form

of rescission, a case frequent in certain contracts (the letting of
service for hire, the supplying of electrical energy, etc.), for in
such supposed case neither is the article infringed, nor is there
any lack of equality between the persons contracting, since they
remain with the same faculties in respect to fulfillment.’
“Undoubtedly, one of the consequences of this stipulation
was that the employers were left in a position where they could
dominate the contingency, and the result was about the same
as if they had been given an unqualified option to dispense with
the services of the plaintiff at the end of six months. But this
circumstance does not make the stipulation illegal.
“The view already expressed with regard to the legality
and interpretation of the clause under consideration disposes
of in a great measure the argument of the appellant in so far
as the same is based on Article 1119 (now Art. 1186) of the
Civil Code. This provision supposes a case where the obligor
intentionally impedes the fulfillment of a condition which would
entitle the obligee to exact performance from the obligor; and
an assumption underlying the provision is that the obligor
prevents the obligee from performing some act which the obligee
is entitled to perform as a condition precedent to the exacting of
what is due to him. Such an act must be considered unwarranted
and unlawful involving per se a breach of the implied terms of
the contract. The article can have no application to an external
contingency which, like that involved in this case, is lawfully
within the control of the obligor.’’
Art. 1311. Contracts take effect only between the parties,

their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor
of a third person, he may demand its fulfillment provided
he communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.51
51
378
Relativity of Contracts. — It is a general principle of the

civil law that a contract can only bind the parties who had entered
into it or their successors who have assumed their personality or
their juridical position, and that, as a consequence, such contract
can neither favor nor prejudice a third person (in conformity with
the axiom res inter alios acta aliis neque nocet prodest). Our Code
has chosen this doctrine of the relative and personal character of
contracts as evidenced by the provision of the first paragraph of Art.
1311.52
Idem; Persons bound by contract. — As a general rule,
contracts can take effect only between the parties, their assigns and
heirs. Thus, it has been held that even though the contract may have
been executed ostensibly in the name of another person or entity,
it shall produce effect only insofar as the real contracting party
is concerned, provided, of course, that such fact was known to the
other party.53 It has also been held that an assignment or transfer
by a contracting party has the effect of subrogating the assignee to
all of the rights and obligations of the assignor.54 To a certain extent
the same rule is also applicable to a transmission of property, rights
and obligations through either testate or intestate succession. Thus,
in the case of Mojica vs. Fernandez,55 the Supreme Court enunciated
the following doctrine:
“Article 27 of the Mortgage Law defines a ‘third person’

as anyone who has not taken part in the act or contract
recorded. Under the Civil Code, the heirs, by virtue of the right
of succession, are subrogated to all the rights and obligations
of the deceased and can not be regarded as third parties with
respect to a deceased. (Barios vs. Dolor, 2 Phil. 44.) The doctrine
was enunciated by the Supreme Court of Spain in its decision
of January 27, 1881, wherein it held that ‘both judicial and
extrajudicial acts, formally accepted by one who was a lawful
party thereto, are effective as to the heirs and successors of such
persons, who are not to be regarded as third persons for this
purpose.’
52
3 Castan, 7th Ed., p. 399; see also Salonga vs. Warner, Barnes & Co., 88 Phil.
125.
53
Tuazon & San Pedro vs. Zamora, 2 Phil. 305; Blossom & Co. vs. Manila Gas
Corp., 48 Phil. 848.
54
De la Riva vs. Escobar, 51 Phil. 243.
55
9 Phil. 403.
379
Art. 1311 CONTRACTS
“The principle on which these decisions rest is not affected

by the provisions of the new Code of Civil Procedure (now Rules
of Court), and, in accordance with that principle, the heirs of a
deceased person cannot be held to be ‘third persons’ in relation
to any contract touching the real estate of their decedent which
comes into their hands by right of inheritance; they take the
property subject to all the obligations resting thereon in the
hand of him from whom they derive their rights.’’56
It must be noted, however, that the monetary obligations that the

decedent might have incur during his lifetime cannot be transmitted
to his heirs through succession. In other words, the heirs cannot be
charged directly with the payment of such obligations. This is so,
because according to the Rules of Court, such obligations must be
liquidated in the testate or intestate proceeding for the settlement
of the estate of the decedent.57 As held in a long line of decisions, the
constant doctrine in this jurisdiction is that it is the estate or the
mass of property left by the decedent, instead of the heirs directly,
that becomes vested and charged with his rights and obligations
which survive after his death.58 For this purpose, it has been held
that it is the estate, rather than the heir, which must be considered
as the continuation of the decedent’s personality. Consequently, the
estate, represented by the executor or administrator, is a juridical
person.59 This does not mean that the heirs can no longer be bound
by contracts entered into by the decedent during his lifetime. There
are other obligations which are not monetary in character and
which will, therefore, constitute a part of the inheritance.60 Such
obligations are still chargeable against the heirs, but only to the
extent of the value of the property which they may have received
from the decedent.61
Idem; id. — Exceptions. — The rule that an assignee or
a heir shall be bound by the terms of a contract is not, however,
absolute in character. According to the first paragraph of Art. 1311,
56
To the same effect: De Guzman vs. Salak, 91 Phil. 265; Galasinao vs. Austria,
97 Phil. 82.
57
Sec. 5, Rule 86, New Rules of Court.
58
Suiliong & Co. vs. Chio-Taysan, 12 Phil. 13; Limjoco vs. Intestate Estate of
Pedro Fragante, 80 Phil. 776. See also Pavia vs. De la Rosa, 8 Phil. 70; Ledesma vs.
McLaughlin, 66 Phil. 547; Tranez vs. Vail, CA, 37 Off. Gaz. 1253.
59
Limjoco vs. Intestate Estate of Pedro Fragante, 80 Phil. 776.
60
Mojica vs. Fernandez, 9 Phil. 403; De Guzman vs. Salak, 91 Phil. 265.
61
Art. 1311, par. 1, Civil Code.
380
the rule is not applicable if the rights and obligations arising from
the contract are not transmissible:
(1) By their nature, as when the special or personal qualifi-
cation of the obligor constitutes one of the principal motives for the
establishment of the contract;62 or
(2) By stipulation of the parties, as when the contract ex-
pressly provides that the obligor shall perform an act by himself and
not through another; or
(3) By provision of law, as in the case of those arising from a
contract of partnership or of agency.63
Idem; Effect of contract on third persons. — Since a con-
tract can take effect only between the contracting parties, as well
as their assigns and heirs, it follows, as a general rule, that it can-
not produce any effect whatsoever as far as third persons are con-
cerned.64 Consequently, he who is not a party to a contract, or an
assignee thereunder, has no legal capacity to challenge its validity,
hence, even if it is admitted that a contract is voidable, nevertheless,
its voidable character cannot be asserted by one who is not a party
to the transaction or his representative.65 Thus, according to the Su-
preme Court:
“From these legal provisions (now Arts. 1390 and 1397 in

relation to Art. 1311) it is deduced that it is the interest had in a
given contract, that is the determining reason of the right which
lies in favor of the party obligated principally or subsidiarily
to enable him to bring an action for the nullity of the contract
in which he intervened, and, therefore, he who has no right in
a contract is not entitled to prosecute an action for nullity, for,
according to the precedents established by the courts, the person
who is not a party to a contract, nor has any cause of action or
representation from those who intervened therein, is manifestly
without right of action and personality such as to enable him to
assail the validity of the contract.’’66
62
Art. 1726, Civil Code. For illustrative case, see Javier Security Special Watch-
man Agency vs. Shell-Craft & Button Corp., 117 Phil. 218.
63
Arts. 1830, No. 5, 1919, No. 3, Civil Code.
64
Wolfson vs. Estate of Martinez vs. Ramos, 28 Phil. 589; Ayson vs. Court of Ap-
peals, 97 Phil. 965.
65
Wolfson vs. Estate of Martinez, 20 Phil. 340.
66
Ibañez vs. Hongkong and Shanghai Bank, 22 Phil. 572.
381
Art. 1311 CONTRACTS
There are, however, four exceptional instances under the

Civil Code where a contract may produce effect either directly or
indirectly on third persons. They are:
(1) Where the contract contains a stipulation in favor of a
third person;67
(2) Where the third person comes into possession of the object
of a contract creating a real right;68
(3) Where the contract is entered into in order to defraud a
third person;69 and
(4) Where the third person induces a contracting party to
violate his contract.70
Idem; Stipulations in favor of third persons. — The
general rule is that a contract affects only the parties and the privies
thereto. But there are exceptions to this rule and the most evident
of them is that which is declared in the second paragraph of Art.
1311.71 According to this exception, 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. Manresa says that this exception corresponds almost
always to the juridical conception of a gift or donation, it being
necessary in such case to apply the rules relating to donations in
so far as the form of acceptance is concerned. This is true where
the stipulation is for the sole benefit of the third person. But where,
for instance, a transfer of property is coupled with the purchaser’s
promise to pay a debt owing from the seller to a third person, it can
scarcely be said that the stipulation is in favor of a third person.72
A beneficial stipulation, or what is generally known as a
stipulation pour autrui, may, therefore, be defined as a stipulation
in a contract, clearly and deliberately conferred by the contracting
parties as a favor upon a third person, who must have accepted
it before it could be revoked. In Florentino vs. Encarnacion (79
67
68
Art. 1312, Civil Code.
69
70
71
Kauffman vs. Phil. National Bank, 42 Phil. 182; Bank of the P.I. vs. Concep-
cion, 53 Phil. 806.
72
Uy Tam vs. Leonard, 30 Phil. 471.
382
SCRA 192), it was defined as a stipulation in favor of a third

person conferring a clear and deliberate favor upon him, and which
stipulation is merely a part of a contract entered into by the parties,
neither of whom acted as agent of the third person, and such third
person may demand its fulfillment provided that he communicates
his acceptance to the obligor before it could be revoked.
Idem; id. — Kinds. — Beneficial stipulations in favor of a
third person may be divided into the following: first, those where the
stipulation is intended for the sole benefit of the third person; and
second, those where an obligation is due from the promisee to the
third person which the former seeks to discharge by means of such
stipulation.73
Idem; id. — Requisites. — Before such stipulation can be en-
forced, however, it is essential: (1) that there must be a stipulation
in favor of a third person; (2) the stipulation must be a part, not the
whole of the contract; (3) the contracting parties must have clearly
and deliberately conferred a favor upon a third person, not a mere
incidental benefit or interest; (4) the third person must have com-
municated his acceptance to the obligor before its revocation;74 and
(5) neither of the contracting parties bears the legal representative
or authorization of the third party.75
The acceptance by the third person or beneficiary does not
have to be done in any particular form. It may be done expressly or
impliedly. (Florentino vs. Encarnacion, supra; see also Cristobal vs.
Gomez, 50 Phil. 810; 4 Tolentino Civil Code, p. 410.)
The following hypothetical problem is illustrative:
Problem — A and B entered into a contract of compromise.

In the contract, there is a stipulation wherein the parties ceded
a house and lot to X. Upon the signing of the contract, X entered
into the possession of the property. Ten years later, after
the death of both A and B, their heirs revoked the beneficial
stipulation. Subsequently, they brought an action against X for
the recovery of the property. Will the action prosper?
Answer — The action will not prosper. The stipulation in
the instant case is a stipulation pour autrui. All of the requisites
73
Ibid.
74
75
Young vs. CA, G.R. No. 79518, Jan. 13, 1989.
383
Art. 1311 CONTRACTS
of a valid and enforceable stipulation pour autrui are present.

It is a part, not the whole, of a contract; it is not conditioned or
compensated by any kind of obligation whatever, and neither
A nor B bears the legal representation or authorization of X.
Additionally, there was an implied acceptance by X when
he entered into the possession of the property. That implied
acceptance is recognized by the law is now well-settled. Therefore,
the act of the heirs of A and B in revoking the stipulation is an
absolute nullity. Since the stipulation was accepted by X, it is
crystal clear that there was a perfected agreement, with A and
B as stipulators or benefactors and X as beneficiary, although
still constituting a part of the main contract. Consequently,
the cardinal rules of contracts, such as the obligatory force of
contracts and the mutuality of contracts based on the essential
equality of the parties are directly applicable to the beneficial
stipulation itself. It can no longer be revoked.
(Note: The above answer is based upon Florentino vs.
Encarnacion, supra, and other cases.)
Idem; id. — Test of beneficial stipulation. — The fairest

test whereby we can determine whether the interest of a third person
in a contract is a stipulation pour autrui or merely an incidental
interest, is to rely upon the intention of the parties as disclosed by
their contract. If a third person claims an enforceable interest in
the contract, that question must be settled by determining whether
the contracting parties desired to tender him such an interest. Did
they deliberately insert terms in their agreement with the avowed
purpose of conferring a favor upon such third person? In resolving
this question, of course, the ordinary rules of construction and
interpretation of writings must be observed.76
Kauffman vs. Phil. National Bank

42 Phil. 182
The defendant bank, for a valuable consideration paid by

the Philippine Fiber and Produce Co., agreed to cause a certain
sum of money to be paid to the plaintiff in New York City.
Subsequently, however, the bank cabled its representative in
New York to withhold payment of the amount to the plaintiff.
76
Uy Tam vs. Leonard, 30 Phil. 471. To the same effect: Kauffman vs. Phil. Nat.
Bank, 42 Phil. 182; Bank of the P.I. vs. Concepcion, 53 Phil. 806; Mendoza vs. Phil.
Air Lines, 90 Phil. 836.
384
Because of this development, plaintiff filed this action to recover

the amount. The question now is whether or not the lack of
privity with the contract on the part of the plaintiff is fatal to
the maintenance of this action.
Held: “The only express provision of law that has been
cited as bearing directly on this question is the second paragraph
of Article 1257 (now Art. 1311) of the Civil Code; and unless
the present action can be maintained under that provision, the
plaintiff admittedly has no case.
“In the case of Uy Tam vs. Leonard (30 Phil. 471), Justice
Trent, speaking for the Court, sums up its conclusions in the
following words:
“So, we believe the fairest test in this jurisdiction
whereby to determine whether the interest of a third
person in a contract is a stipulation pour autrui or merely
an incidental interest, is to rely upon the intention of the
parties as disclosed by their contract.
“If a third person claims an enforcible interest in the
contract, that question must be settled by determining
whether the contracting parties desired to tender him
such an interest. Did they deliberately insert terms in
their agreement with the avowed purpose of conferring
a favor upon such third person? In resolving this
question, of course, the ordinary rules of construction and
interpretation of writings must be observed.’
“Further on in the same opinion he adds: ‘In
applying this test to a stipulation pour autrui, it matters
not whether the stipulation is in the nature of a gift or
whether there is an obligation owing from the promisee
to the third person. That no such obligation exists may
in some degree assist in determining whether the parties
intended to benefit a third person.’
“In the light of the conclusions thus stated, the right
of the plaintiff to maintain the present action is clear
enough, for it is undeniable that the bank’s promise to
cause a definite sum of money to be paid to the plaintiff
in New York City is a stipulation in his favor within
the meaning of the paragraph above quoted; and the
circumstances under which the promise was given disclose
an evident intention on the part of the contracting parties
that the plaintiff should have that money upon demand in
New York City. The recognition of this unqualified right
385
Art. 1311 CONTRACTS
in the plaintiff to receive the money implies in our opinion

the right in him to maintain an action to recover it; and
indeed if the provision in question were not applicable to
the facts now before us, it would be difficult to conceive of
a case under it.
“It will be noted that under the paragraph cited
a third person seeking to enforce compliance with a
stipulation in his favor must signify his acceptance to the
bank by demanding payment; and although the Philippine
National Bank has already directed its New York agency
to withhold payment when this demand was made, the
right of the plaintiff cannot be considered to have been
prejudiced by that fact. The ‘revoked,’ as there used, must
be understood to imply revocation by the mutual consent
of the contracting parties, or at least by direction of the
party purchasing the exchange.”
Coquia vs. Fieldmen’s Insurance Co.

26 SCRA 178
On Dec. 1, 1961, the Fieldmen’s Insurance Co. issued

in favor of the Manila Yellow Taxicab Co. a common carrier
accident insurance policy, covering the period from Dec. 1,
1961 to Dec. 1, 1962. It was stipulated in said policy that “the
Company will indemnify the Insured in the event of accident
against all sums which the Insured will become legally liable
to pay for death or bodily injury to any fare-paying passenger
including the driver, conductor and/or inspector who is riding
in the motor vehicle insured at the time of accident or injury.”
On Feb. 10, 1962, as a result of a vehicular accident, Carlito
Coquia, driver of one of the vehicles covered by said policy, was
killed. Because of the failure of the Company and the Insured
to agree with respect to the amount to be paid to the heirs of
the driver, the Insured and the parents of Carlito, the Coquias,
finally brought this action against the Company to collect the
proceeds of the aforementioned policy. The latter now contends,
among others, that the Coquias have no cause of action because
they have no contractual relation with the Company.
Held: “Although in general, only parties to a contract may
bring an action based thereon, this rule is subject to exceptions,
one of which is found in the second paragraph of Art. 1311 of
the Civil Code of the Philippines. This is but a restatement of
a well-known principle concerning contracts pour autrui, the
enforcement of which may be demanded by a third party for
whose benefit it was made, although not a party to the contract,
386
before the stipulation in his favor has been revoked by the

contracting parties. Does the policy in question belong to such
class of contracts pour autrui?
“The policy provides, inter alia, that the Company ‘will in-
demnify any authorized driver who is driving the motor vehicle’
of the Insured and, in the event of death of said driver, the Com-
pany shall, likewise, ‘indemnify his personal representatives.’
“Thus, the policy is typical of contracts pour autrui, this
character being made more manifest by the fact that the de-
ceased driver, paid fifty percent of the premiums, which were
deducted from his weekly commissions. Under these conditions,
the Coquias — who, admittedly are the sole heirs of the deceased
— have a direct cause of action against the Company, and, since
they could have maintained this action by themselves, without
the assistance of the Insured, it goes without saying that they
could and did properly join the latter in filing the complaint
hereon.”
Constantino vs. Espiritu

39 SCRA 206
A, married to B, executed a fictitious deed of sale of a two-

storey house and four subdivision lots in favor of his mistress,
M, who at that time was pregnant, with the understanding that
the latter shall hold the properties in trust for their unborn
illegitimate child. After securing a new transfer certificate of title
in her name, M mortgaged the properties twice to a bank, and
subsequently, she tried to sell them. A then brought an action
against her praying for the issuance of a writ of preliminary
injunction restraining her from further alienating or disposing
of the properties and for judgment ordering her to convey the
properties to their illegitimate child, X, who by that time was
already five years old. A motion to dismiss was filed on the
ground that the illegitimate child, who is the beneficiary of the
alleged trust, is not included as a party-plaintiff, and that the
action in question is unenforceable under the Statute of Frauds.
Subsequently, A amended his complaint so as to include X as
party-plaintiff. The lower court, however, dismissed the case.
A raised the case by direct appeal to the Supreme Court on the
following questions of law:
(a) Is there a valid cause of action in the instant case?
(b) Is the action unenforceable under the Statute of
Frauds?
387
Art. 1312 CONTRACTS
Held: (a) There is a valid cause of action in the instant

case. Upon the facts alleged in the complaint, the contract
between appellant and appellee was a contract pour autrui,
although couched in the form of an absolute deed of sale,
and that appellant’s action was, in effect, one for specific
performance. That one of the parties to a contract is entitled
to bring an action for its enforcement or to prevent its breach
is too clear to need any extensive discussion. Upon the other
hand, that the contract involved contained a stipulation pour
autrui amplifies this settled rule only in the sense that the third
person for whose benefit the contract was entered into may
also demand its fulfillment provided he had communicated his
acceptance thereof to the obligor before the stipulation in his
favor is revoked.
It appearing that the amended complaint submitted by
appellant to the lower court impleaded the beneficiary under
the contract as a party co-plaintiff, it seems clear that the
three parties concerned therewith would, as a result, be before
the court and the latter’s adjudication would be complete and
binding upon them.
(b) On the other hand, the contention that the contract
in question is not enforceable by action by reason of provisions
of the Statute of Frauds does not appear to be indubitable, it
being clear upon the facts alleged in the amended complaint
that the contract between the parties had already been partially
performed by the execution of the deed of sale, the action brought
below being only for the enforcement of another phase thereof,
namely, the execution by appellee of a deed of conveyance in
favor of the beneficiary thereunder.
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.77
Contracts Creating Real Rights. — A real right is a right
belonging to a person over a specific thing, without a passive subject
individually determined, against whom such right may be person-
ally enforced.78 Such a right, therefore, is enforceable against the
whole world. Consequently, a third person who might come into the
77
New provision.
78
3 Sanchez Roman 6-8.
388
possession of the object of a contract creating a real right will have

to be bound by such right, subject, of course, to the provisions of the
Mortgage Law and the Land Registration laws.79 Thus, if A mort-
gages his house and lot to the PNB in order to secure an obligation
of P20,000, and such mortgage is registered in the Registry of Prop-
erty, the effect of such registration is to create a real right which
will be binding against the whole world.80 Hence, if the property is
subsequently sold to B, the contract of mortgage between A and the
PNB will be binding upon him. Similarly, if a third person comes
into possession by whatever title of a certain property which had
been leased by the previous owner to another person, and such lease
was recorded in the Registry of Property, such third person shall be
bound thereby.81
Art. 1313. Creditors are protected in cases of contracts

intended to defraud them.82
Contracts In Fraud of Creditors. — Although a third person
cannot ask for the annulment of a contract, nevertheless, if he is a
creditor of one of the contracting parties, and it can be established
that the contract was entered into with the intention of defrauding
him, he may ask for its rescission. This is what is meant by the
Code when it says that creditors are protected in cases of contracts
intended to defraud him.83 This rule must, therefore, be read always
in relation to the provisions of Arts. 1380, et seq., of the Civil Code,
as well as Art. 1177.
Art. 1314. Any third person who induces another to

violate his contract shall be liable for damages to the other
contracting party.84
Interferences with Contractual Relations. — Art. 1314
enunciates the doctrine that any third person who induces anoth-
er to violate his contract shall be liable for damages to the other
79
80
81
82
New provision.
83
84
New provision.
389
contracting party. The theory of this doctrine is that the right to

perform a contract and to reap the profits resulting from such per-
formance, and also the right to performance by the other party, are
property rights which entitle each party to protection, and to seek
compensation by an action in tort for any interference therewith.85
Idem; Requisites. — Before the third person who induces
another to violate his contract can be held liable for damages, it is
essential, however, that the following requisites must concur: (1)
the existence of a valid contract; (2) knowledge on the part of the
third person of the existence of the contract; and (3) interference
by the third person without legal justification or excuse.86 As far as
the third requisite is concerned, “malice, in some form, is generally
implied from the act of interference with contractual relations, and
is declared to be an essential ingredient in such cases. The lack of
scientifically accurate terminology, however, has militated against
clearness upon this point, both in conception and discussion. Thus,
the word ‘malice’ which, in its technical legal sense, is the intentional
doing of a harmful act without legal justification or excuse, is
sometimes used in the sense of ill-will, or even as denoting a desire
to harm irrespective of the presence or absence of ill-will. The malice,
however, which makes one liable for procuring a breach of contract
is malice in its legal sense, and whether a wrongdoer’s motive in
interfering is to benefit himself or to gratify his spite by working
mischief to another is immaterial; malice in the sense of ill-will or
spite is not essential.”87 Thus, if a party enters into a contract to go
for another upon a journey to a remote and unhealthful climate, and
a third person, with a bona fide purpose of benefiting the one who is
under contract to go, dissuades him from the step, no action will lie.
But if the advice is not disinterested and the persuasion is used for
“the indirect purpose of benefiting the defendant at the expense of
the plaintiff,” the intermeddler is liable if his advice is taken and the
contract broken.88
Problem — “O,” a very popular movie star, was under

contract with “P’’ Movie Productions to star exclusively in the
latter’s films for two years. “O’’ was prohibited by the contract
85
30 Am. Jur., Sec. 19, pp. 71-72.
86
Ibid., Secs. 21-23, pp. 73-75.
87
Ibid., Sec. 23, pp. 75-76.
88
Daywalt vs. Agustinos Recoletos, 39 Phil. 587.
390
to star in any film produced by another producer. “X’’ Film Co.

induced “O’’ to break her contract with “P’’ Movie Productions
by giving her twice her salary. “P’’ Movie Productions sued “X’’
Film Co. for damages. “X’’ Film Co. contended that it had a right
to compete for the services of “O” and that her contract with “P”
Movie Productions was in restraint of trade and a restriction on
her freedom of contract.
Whose contention would you sustain? (1980 Bar Problem)
Answer — The contention of “P’’ Movie Productions should
be sustained. According to the Civil Code, any third person
who induces another to violate his contract shall be liable for
damages to the other contracting party. In the law of torts, we
call this “interference with contractual relation.’’ However, in
order that it will be actionable, it is necessary that the following
requisites must concur: (a) the existence of a valid contract; (b)
knowledge on the part of the third person of the existence of
such contract; and (c) interference by the third person without
legal justification or excuse. All of these requisites are present
in the case at bar.
The contention of “X’’ Film Co. that “O’s’’ contract with “P’’
Movie Productions was in restraint of trade and a restriction of
her freedom to contract, on the other hand, cannot be sustained.
Well-established is the rule that in order to determine whether
or not an agreement of this nature constitutes an undue restraint
of trade, and therefore, is contrary to public policy, two tests are
always applied. They are first, is there a limitation as to time
or place? And second, is the prohibition or restraint reasonably
necessary for the protection of the contracting parties? If the
answer to both of these questions is in the affirmative, then
the prohibition or restraint is not contrary to public policy. It
is crystal clear that the agreement between “O’’ and “P” Movie
Productions passes both tests.
(Note: The first paragraph of the above answer is based
on Art. 1314 of the Civil Code and on Daywalt vs. Agustinos
Recoletos, 39 Phil. 587. The second paragraph, on the other
hand, is based on Art. 1306 of the Civil Code and on several
cases, the most notable of which is Del Castillo vs. Richmond,
46 Phil. 697.)
Art. 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
391
Art. 1316 CONTRACTS
all the consequences which, according to their nature, may

be in keeping with good faith, usage and law.89
Art. 1316. Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the
object of the obligation.90
Perfection of Contracts. — The perfection of a contract

refers to that moment in the life of a contract when there is finally
a concurrence of the wills of the contracting parties with respect to
the object and the cause of the contract. In the words of Manresa,
“it signifies the birth or appearance of the contract as an obligatory
tie, resulting from the concurrence of the wills of the contracting
parties.’’91
As a general rule, the perfection of a contract is produced
by mere consent.92 There are, however, certain contracts, such as
deposit, pledge and commodatum, which cannot be perfected until
after the delivery of the object by one contracting party to the other.93
It must be noted that under Arts. 1315 and 1316 of the
Civil Code, from the point of view of how they may be perfected,
contracts are classified as either consensual or real. Does not this
classification omit the so-called formal contracts where the form
prescribed by law is essential for validity, such as those dictated by
Arts. 748, 749, 1771, 1773, 1874, 1956, 2134 and 2140 of the Civil
Code? It is submitted that it does not. The contracts referred to in
the aforementioned articles are actually consensual contracts. Take
the accessory contract of chattel mortgage under Art. 2140 as an
example. According to the Code, by a chattel mortgage, personal
property is recorded in the Chattel Mortgage Register as a security
for the performance of an obligation. Suppose then that A bought a
Colt Lancer from X Motor Co. paying a down payment of P18,000
thus leaving a balance of P40,000 which he agreed to pay within
a period of two years. As security, the parties agreed that A shall
mortgage the Colt Lancer which he bought in favor of the motor
89
Art. 1258, Spanish Civil Code.
90
New provision.
91
92
93
Art. 1316, Civil Code. The four traditional real contracts, in the Roman jus
civile are commodatum, mutuum, depositum and pledge.
392
company. That was on June 15, 1980. On June 20, 1980, the deed of
chattel mortgage was signed by both parties. On June 25, 1980, the
deed was recorded in the Chattel Mortgage Register. When was the
contract perfected? Reading Art. 1319 of the Civil Code in relation
to Art. 1315, it is clear that the contract was perfected only on June
25, 1980. It was only then that there was a complete manifestation
of the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract.
Art. 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 in whose
behalf it has been executed, before it is revoked by the other
contracting party.94
Contracts in Name of Another. — The principle enunciated
in Art. 1317 of the Code is a logical corollary to the principles of the
obligatory force and the relativity of contracts. It is also the basis of
the contract of agency (Arts. 1868-1932).
Under this article, no person may enter into a contract in the
name of another unless he has been duly authorized by the latter, or
unless he has by law a right to represent him. If a person, therefore,
enters into a contract with another in the name of another person,
although he has no authority or legal representation, or even if he
has such authority or representation, if he has acted beyond the
scope of his powers, the contract is unenforceable.95 What is meant
by an unenforceable contract? According to the Code Commission:
“From various sources in Philippine laws and from deci-

sions of the Supreme Court of the Philippines, a new class of
defective contract is to a certain extent created. The term ‘un-
enforceable’ is used, as distinguished from ‘voidable.’ The latter
are binding, unless annulled by proper action in court, while the
94
95
See Arts. 1403, et seq., Civil Code.
393
Art. 1317 CONTRACTS
former cannot be sued upon or enforced, unless they are rati-

fied. As regards the degree of defectiveness, voidable contracts
are farther away from absolute nullity than unenforceable con-
tracts. In other words, an unenforceable contract occupies an
intermediate ground between a voidable and void contract.’’96
Although the contract is unenforceable, it is, however, suscep-

tible of either express or implied ratification by the person in whose
behalf it has been executed before it is revoked by the other con-
tracting party.97
Badillo vs. Ferrer

152 SCRA 407, 409
Facts: Macario died intestate in 1966, leaving a widow,

Clavita and five minor children. He left a parcel of land. In 1967,
Clarita, in her own behalf and as natural guardian of the minor
plaintiff executed a deed of extra-judicial partition and sale of
the property through which she sold the property to Gregorio.
Modesta, a sister of Macario, was able to obtain guardianship
over the property and persons of the minor children on 1968.
In 1970, Modesta caused the minor children to file a
complaint to annul the sale of their participation in the property
and asked that as co-owner they be allowed to execute the right
of legal redemption with respect to Clarita’s participation
therein. The trial court annulled the sale to Gregorio of the
minor children’s participation in the property and allowed them
to redeem the participation of their mother therein.
Held: This contention is untenable.
The Deed of Extrajudicial Partition and Sale is not a
voidable or an annullable contract under Article 1390 of the
New Civil Code. Article 1390 renders a contract voidable if one
of the parties is incapable of giving consent to the contract or if
the contracting party’s consent is vitiated by mistake, violence,
intimidation, undue influence or fraud. In this case, however,
the appellee minors are not even parties to the contract involved.
Their names were merely dragged into the contract by their
mother who claimed a right to represent them, purportedly in
accordance with Article 320 of the New Civil Code.
96
97
Art. 1317, Civil Code; see also Art. 1910, Civil Code.
394
“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.’’
Clearly, Clarita Ferrer Badillo has no authority or has
acted beyond her powers in conveying to the appellants that 5/12
undivided share of her minor children in the property involved
in this case. The powers given to her by the laws as the natural
guardian covers only matters of administration and cannot
include the power of disposition. She should have first secured
the permission of the court before she alienated that portion of
the property in question belonging to her minor children.
The appellee minors never ratified this Deed of Extra-
judicial Partition and Sale. In fact, they question its validity
as to them. Hence, the contract remained unenforceable or
unauthorized. No restitution may be ordered from the appellee
minors either as to that portion of the purchase price which
pertains to their share in the property or at least as to that
portion which benefited them because the law does not sanction
any.
395
CONTRACTS
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS
General Provisions
Art. 1318. There is no contract unless the following req-

uisites 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.1
Requisites of Contracts in General. — As we have already
seen, the elements of a contract may be either essential, natural
or accidental. The essential elements are those without which
there can be no contract; the natural elements are those which are
derived from the very nature of the contract, and as a consequence,
ordinarily accompany the same, although they can be excluded by
the contracting parties if they so desire; the accidental elements are
those which exist only when the contracting parties expressly provide
for them for the purpose of limiting or modifying the normal effects
of the contract. The essential elements, on the other hand, may
be either common (comunes), special (especiales) or extraordinary
(especialisimos). The common elements are those which are present
in all contracts, such as consent, object and cause; the special are
present only in certain contracts, such as delivery in real contracts or
form in solemn ones; the extraordinary are those which are peculiar
to a specific contract, such as the price in a contract of sale.2
1
2
3 Castan, 7th Ed., pp. 322-324; 8 Manresa, 5th Ed., Bk. 2, pp. 350-351.
396
ESSENTIAL REQUISITES OF CONTRACTS Art. 1319
Consent
The above classification can be understood better and with more

precision when considered from the viewpoint of the influence
which the two great bases of contracts — the law and the will of the
contracting parties — have over each group of elements. Thus, in the
descending order, the law imposes the essential elements, presumes
the natural and authorizes the accidental; conversely, the will of the
contracting parties conforms to the first, accepts or repudiates the
second and establishes the third.3
Section 1. — Consent
Art. 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. 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.4
Concept of Consent. — The most important element, which

constitutes the very heart and soul of contracts, is, unquestionably,
the consent of the contracting parties. In its derivative sense, the
word “consent” (cum sentire) merely means the agreement of wills.
Consequently, as applied to contracts, it may be defined as the
concurrence of the wills of the contracting parties with respect to
the object and the cause which shall constitute the contract.5
Requisites of Consent. — Under the Civil Code, in order
that there is consent, the following requisites must concur: first, the
consent must be manifested by the concurrence of the offer and the
acceptance (Arts. 1319-1326); second, the contracting parties must
possess the necessary legal capacity (Arts. 1327-1327); and third,
the consent must be intelligent, free, spontaneous, and real (Arts.
3
8 Manresa, 5th Ed., Bk. 2, 351.
4
5
3 Castan, 7th Ed., pp. 326-327; 8 Manresa, 5th Ed., Bk. 2, p. 365; 4 Sanchez
Roman 191.
397
Art. 1319 CONTRACTS
1330-1346).6 The first is expressly stated in the Code, the second and
the third are implied.
When Contracts are Perfected — In general, contracts
are perfected from the moment that there is a manifestation of the
concurrence between the offer and the acceptance with respect to
the object and the cause which shall constitute the contract. (Art.
1319, par. 1, New Civil Code.)
However, if the acceptance is made by letter or telegram, we
must distinguish. According to Art. 1319, par. 2, of the New Civil
Code, the contract is perfected from the moment that the offeror has
knowledge of such acceptance, while according to Art. 54 of the Code
of Commerce, the contract is perfected from the moment an answer
is made accepting the offer. Because of the repealing clause found in
Art. 2270 of the New Civil Code, it is submitted that Art. 54 of the
Code of Commerce can now be applied only to purely commercial
contracts, such as joint accounts, maritime contracts, etc. We can,
therefore, say that the rule found in the second paragraph of Art.
1319 of the New Civil Code is the general rule, while that found in
Art. 54 of the Code of Commerce is the exception.
Manifestation of Consent. — Before there is consent, it is
essential that it must be manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to constitute
the contract.7 Once there is such a manifestation of the concurrence of
the wills of the contracting parties, the period or stage of negotiation
is terminated. The contract, if consensual, is finally perfected.8
Thus, it was held, that even if the draft renewal contract had
not been signed by the lessor, the parties may be deemed to have
agreed to review their lease contract considering the exchanges of
letters between, and the implementing acts of the parties. (Ramon
Magsaysay Award Foundation vs. CA, G.R. No. 55998, Jan. 17,
1985.)
6
According to Castan, consent presupposes the following elements or conditions:
(1) plurality of subjects; (2) legal capacity; (3) intelligent and voluntary; (4) express
or implied manifestation; and (5) concurrence of the internal and the declared will. (3
Castan, 7th Ed., p. 327)
7
8
398
Consent
De Lim vs. Sun Life Assurance Co.

41 Phil. 263
On July 6, 1917, Luis Lim applied to the defendant

company for a policy of insurance of his life in the sum of
P5,000. In his application, he designated his wife, Pilar C.
de Lim, plaintiff herein, as beneficiary. The first premium
of P33 was paid, and upon payment, the company issued a
“provisional policy’’ accepting the application “provided that
the Company shall confirm this agreement by issuing a policy
on said application when the same shall be submitted to the
Head Office in Montreal.’’ Should the Company not issue such
a policy, “then this agreement shall be null and void ab initio x
x x .’’ A period of four months from the date of the application
was also stated as the period within which the Company shall
issue the policy. Luis Lim, however, died on August 24, 1917,
after the issuance of the provisional policy but before approval
of the application by the head office of the insurance company.
The instant action is brought by the beneficiary to recover from
the insurance company the sum of P5,000, the amount stated in
the provisional policy. The question now is whether or not the
contract has been perfected.
Held: “Our duty in this case is to ascertain the correct
meaning of the document above quoted. Certainly, language
could hardly be used which would more clearly stipulate that
the agreement should not go into effect until the home office
of the company should confirm by issuing a policy. As we read
and understand the so-called provisional policy it amounts to
nothing but an acknowledgment on behalf of the company,
that it had received from the person named therein the sum of
money agreed upon as the first year’s premium upon a policy to
be issued upon the application, if the application is accepted by
the company.
“It is of course a primary rule that a contract of insurance,
like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application
for insurance has not been either accepted or rejected, it is
merely an offer or proposal to make a contract. The contract, to
be binding from the date of the application, must have been a
completed contract, one that leaves nothing to be done, nothing
to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the
parties have met in agreement. Our view is, that a contract of
insurance was not here consummated by the parties.”
399
Art. 1319 CONTRACTS
Idem; Character of offer and acceptance. — As an element

of a contract, an offer may be defined as a proposal to make a con-
tract.9 In order to constitute a binding proposal, the first paragraph
of Art. 1319 declares that the offer must be certain or definite. Thus,
where the defendant wrote a letter to the plaintiff stating that he is
“in a position” and is “willing to entertain” the purchase of a yacht
belonging to the plaintiff under certain terms, and the plaintiff ac-
cepted all of such terms, it was held that there was no perfected
contract, since the word “entertain” applied to an act does not mean
the resolution to perform said act, but simply a position to deliber-
ate whether to perform or not to perform said act; consequently, the
letter of the defendant cannot be interpreted as a definite offer to
purchase the yacht but simply to deliberate whether or not he would
purchase the yacht.10
As far as the acceptance is concerned, although the law does
not expressly say so, it is clear that in order that there will be a
perfected contract, the acceptance must also be certain or definite.
Thus, where the plaintiff offered to the defendant certain machin-
eries in exchange for tractors and the latter answered stating “we
are willing to accept the proposition,’’ it was held that there was
no perfected contract of barter, since the phrase “willing to accept’’
does not mean acceptance, but simply a disposition to accept the
offer in principle.11 Furthermore, the acceptance must be absolute
in character.12 In other words, it must be plain and unconditional;
consequently, if it involves any new proposal or if it is qualified,
it constitutes a counter-offer — in which case it is essential before
there can be a perfected contract that there must be a definite and
absolute acceptance by the original offeror of such counter-offer.13
Thus, where the defendant offered to the plaintiff an option for three
months to buy a certain land for the price of its assessed government
valuation and the latter answered by accepting the offer, but subject
to certain modifications with regard to the terms of payment speci-
fied in the proposal, it is clear that there is no perfected contract be-
9
3 Bouvier’s Law Dictionary, 2399.
10
Rosenstock vs. Burke, 46 Phil. 217.
11
Meads vs. Lasedeco, 52 Off. Gaz. 208.
12
13
Ibid. See Beaumont vs. Prieto, 41 Phil. 670; Zayco vs. Serra, 44 Phil. 326; Ba-
tangan vs. Cojuangco, 78 Phil. 481. See also Logan vs. Philippine Acetylene Co., 33
Phil. 782; Datoc vs. Mendoza, CA, 47 Off. Gaz. 2427.
400
Consent
cause there is no concurrence between the offer and the acceptance.14

The same can also be said with regard to a case where the defendant
gave an option to the plaintiff to buy a certain sugar central for
P1,000,000, payable within three years and properly secured, and
the latter accepted the offer, placing at the defendant’s disposal the
sum of P100,000 as part payment, and at the same time, notifying
him that the Philippine National Bank had agreed to transfer the
defendant’s long term loan of P600,000 to the account of the plaintiff
who will thus assume the defendant’s liability to the said Bank for
the said amount.15
Contracts that are consensual in nature are perfected upon
mere meeting of the minds. Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration
and terms of payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the acceptance must
be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the
terms of the offer annuls the offer.’’ (ABS-CBN Broadcasting Corp.
vs. Court of Appeals, G.R. No. 128690, January 21, 1999.)
Idem; id. — Acceptance of complex offers. — To a certain
extent the rules regarding acceptance are modified in case of
complex offers. Thus, if the offeror proposes to lease one part and to
sell another part, acceptance of one by the offeree would ordinarily
result in a perfected contract, unless, of course, the offeror should
have made one offer dependent upon the other. However, the
prospective contracts which are comprised in a single offer may be
so interrelated in such a way that the acceptance of one would not
at all result in a perfected contract. Thus, in an offer involving a
prospective contract of loan and the mortgage which will secure it,
acceptance by the future debtor of the proposed loan alone would not
give rise to a perfected contract.16
14
Beaumont vs. Prieto, 41 Phil. 670, 249 U.S. 554.
15
Zayco vs. Serra, 44 Phil. 326.
16
401
Art. 1319 CONTRACTS
Idem; id. — Acceptance by letter or telegram. — If the

acceptance is made by letter or telegram, an interesting question
arises. When or at what precise moment would there be a meeting of
the offer and the acceptance upon the thing and the cause which are
to constitute the contract? As applied to consensual contracts, when
would there be a perfected contract?
There are actually four different theories which have been
advanced in order to pin-point the exact moment of perfection.17
They are:
(1) The manifestation theory (manifestación) — According to
this theory, the contract is perfected from the moment the acceptance
is declared or made. This is the theory which is followed by the Code
of Commerce.18
(2) The expedition theory (expedición) — According to this
theory, the contract is perfected from the moment the offeree
transmits the notification of acceptance to the offeror, as when the
letter is placed in the mailbox. This is the theory which is followed
by the majority of American courts.
(3) The reception theory (recepción) — According to this theory,
the contract is perfected from the moment that the notification of
acceptance is in the hand of the offeror in such a manner that he can,
under ordinary conditions, procure the knowledge of its contents,
even if he is not able actually to acquire such knowledge by reason
of absence, sickness or some other cause. This is the theory which is
followed by the German Civil Code.
(4) The cognition theory (cognición) — According to this
theory, the contract is perfected from the moment the acceptance
comes to the knowledge of the offeror. This is the theory which is
followed by the Spanish Civil Code.
Evidently, we have retained the cognition theory as embodied
in the Spanish Civil Code. According to the second paragraph of Art.
1319 of the new Code, acceptance made by letter or telegram does
not bind the offeror 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. According to the Code
17
3 Castan, 7th Ed., pp. 385-386; 2 De Diego 102-103.
18
Art. 54, Code of Commerce.
402
Consent
Commissioners in their report, the Commission deliberated at some

length on the question of whether acceptance by letter should take
effect upon the mailing of the same, as followed in American law,
or when the same comes to the knowledge of the offeror. It was,
however, finally decided to retain the old in order to avoid confusion
and litigation.19
Although the Code seems to limit the rule to acceptance by
letter or telegram only, the weight of authority is to the effect that
such rule is applicable to all cases in which the acceptance is made
by a person who is not in the presence of the offeror, (contratación
entre ausentes.)20 This is, of course, premised upon the fact that he is
not acting through an agent.21
It must be noted, however, that Art. 54 of the Code of Commerce
declares that “contracts entered into by correspondence shall be
perfected from the moment an answer is made accepting the offer
or the condition by which the latter may be modified.’’ Is this rule
still applicable? In view of the repealing clause found in Art. 2270
of the New Civil Code, it is submitted that it can be applied only to
purely commercial contracts which are still governed by the Code of
Commerce, such as joint accounts and maritime contracts. Hence,
we can very well say that the rule found in the second paragraph of
Art. 1319 of the Civil Code is the general rule, while that found in
Art. 54 of the Code of Commerce is the exception.
The cognition theory, as embodied in the second paragraph of
Art. 1319 of the Code, is very well illustrated in the case of Enriquez
vs. Sun Life Assurance Co.22 The facts of this case are as follows: The
records show that on September 24, 1917, Joaquin Herrer applied
to the defendant company through its local office in Manila for a life
annuity. He paid the sum of P6,000 and was issued a provisional
receipt. The application was immediately forwarded to the head
office of the company in Montreal, Canada. On November 26, 1917,
the head office gave notice of acceptance by cable to Manila. Whether
notice of this acceptance was sent to Herrer by the Manila office is
a disputed question. On December 4, 1917, the policy was issued
19
20
3 Castan, 7th Ed., p. 385; 8 Manresa, 5th Ed., Bk. 2, p. 373.
21
22
41 Phil. 269.
403
Art. 1319 CONTRACTS
at Montreal. On December 18, 1917, the lawyer of Herrer wrote to

the Manila office that Herrer desired to withdraw his application.
The following day the local office replied to the lawyer stating that
the policy had been issued, and called attention to the notification
of November 26, 1917. This letter was received by the lawyer on
December 21, 1917. Herrer, however, died on December 20, 1917.
This action was subsequently commenced by the administrator of
the estate of Herrer to recover the sum of P6,000 from the defendant
company. The defendant company, however, contended that the
plaintiff cannot recover the amount on the ground that the contract
of life annuity had already been perfected. Holding that it is the
provision of the second paragraph of Art. 1262 (now Art. 1319) of
the Civil Code and not Art. 54 of the Code of Commerce that will
apply, and that the letter of November 26, 1917, was never actually
mailed, and thus, was never received by the applicant, the Supreme
Court, speaking through Justice Malcolm, ruled that the contract
was not perfected because it has not been proved satisfactorily that
the acceptance of the application ever came to the knowledge of the
applicant.
The theory is also illustrated in the case of Francisco vs.
GSIS.23 In this case, the plaintiff’s offer of compromise with respect
to the settlement of an obligation which had already matured was
accepted by the Government Service Insurance System by means of
a telegram signed by the Board Secretary. For a year, the System
receipted payments made pursuant to the compromise agreement.
Is there a perfected contract in this case inspite of the fact that the
General Manager of the System denied that he authorized the Board
Secretary to send the telegram? According to the Supreme Court
there is already a perfected contract of compromise applying the
provision of the second paragraph of Art. 1319 of the New Civil Code.
It is of course a familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to do acts within the
scope of an apparent authority, and thus holds him out to the public
as possessing the power to do those acts, the corporation will, as
against anyone who has in good faith dealt with the corporation
through such agent, be estopped from denying his authority. Hence,
even if it were the Board Secretary who sent the telegram, the
corporation could not evade the binding effect which it produced.
23
117 Phil. 586.
404
Consent
Idem; id. — Effect of constructive knowledge. — Since

the Code says that the acceptance by letter or telegram does not
bind the offeror except from the time it came to his knowledge, there
is a clear implication that such offeror must have read the contents
of the letter or telegram accepting his offer. In other words, as a
general rule, what is required by the law is actual knowledge of the
acceptance. Consequently, mere receipt of the letter or telegram
is not sufficient. Of course, ordinarily, once it is established that
the offeror has received the letter or telegram, there arises a
presumption that he has read the contents thereof. But it is possible
that he might not have been able to do so, such as when he was
absent or incapacitated at the time of the receipt of the letter or
telegram. In such cases, it is quite clear that he cannot be bound
by the acceptance. It is, however, different if, being able to do so,
he refused to open the letter or telegram because for some reason
or other he has already changed his mind or he has already decided
to revoke his offer or proposal. In such case, it would be unjust to
apply the cognition theory as embodied in the Civil Code literally.
The better rule would be to say that since the offeror has already a
constructive knowledge of the contents of the letter or telegram, it
is but logical that he shall be bound by the acceptance made by the
offeree.24
Idem; id. — Withdrawal of offer. — An interesting problem
arising from the principle enunciated in the second paragraph of
Art. 1319 is whether the offeror after the offer has been made can
still withdraw it or not. Undoubtedly, the rule in this jurisdiction
is that he may still withdraw his offer or proposal so long as he
still has no knowledge of the acceptance by the offeree.25 This can
be implied from the rule that he is not bound by the acceptance
except from the time it comes to his knowledge; it is confirmed
to a certain extent by the new provision enunciated in Art. 1324.
This principle is illustrated in the case of Laudico vs. Arias.26 The
facts of this case are as follows: On February 6, 1919, defendant
wrote a letter to the plaintiff, giving him an option to lease a certain
building to a third person, and transmitting to him for that purpose
a tentative contract in writing containing the conditions upon which
24
25
26
43 Phil. 270.
405
Art. 1319 CONTRACTS
the proposed lease should be made. After certain negotiations, the

plaintiff finally wrote a letter to the defendant on March 6, 1919,
advising him that all his propositions were accepted. This letter
was received by the defendant by special delivery at 2:53 p.m. of
that day. On that same day, at 11:25 a.m., the defendant had, in
turn, written a letter to the plaintiff withdrawing the offer. This
letter was sent through a messenger and should have been received
that same morning, or at least, before the defendant had received
the letter of acceptance. Because of the refusal of the defendant to
recognize the existence of a perfected contract, plaintiff brought this
action to compel him to execute the contract of lease of the building
in question. Holding that no contract was perfected, the Supreme
Court, speaking through Justice Avanceña ruled:
“Under Article 1262, paragraph 2 (now Art. 1319, par. 2)

of the Civil Code, an acceptance by the latter does not have any
effect until it comes to the knowledge of the offeror. Therefore,
before he learns of the acceptance, the latter is not yet bound by
it and can still withdraw the offer. Consequently, when Mr. Arias
wrote Mr. Laudico, withdrawing the offer, he had the right to do
so, inasmuch as he had not yet received notice of the acceptance.
And when the notice of the acceptance was received by Mr.
Arias, it no longer had any effect, as the offer was not then in
existence, the same having already been withdrawn. There was
no meeting of the minds through offer and acceptance, which is
the essence of the contract. While there was an offer, there was
no acceptance, and when the latter was made and could have
binding effect, the offer was then lacking. Though both the offer
and the acceptance existed, they did not meet to give birth to a
contract.’’
Problem — Gigi offered to construct the house of Chito
for a very reasonable price of P1 Million, giving the latter 10
days within which to accept or reject the offer. On the fifth day,
before Chito could make up his mind, Gigi withdrew the offer.
What is the effect of the withdrawal of Gigi’s offer? (2005 Bar
Problem)
Answer — The withdrawal of Gigi’s offer will cause the
offer to cease in law. Hence, even if subsequently accepted, there
could be no concurrence of the offer and the acceptance . In the
absence of concurrence of offer and acceptance, there can be no
consent. (Laudico vs. Arias Rodriguez, G.R. No.16530, March
31, 1922). Without the consent, there is no perfected contract
for the construction of the house of Chito. (Salonga vs. Farrales,
406
Consent
G.R. No. L-47088, July 10, 1981). Article 1318 of the Civil Code
provides that there can be no contract unless the following
requisites concur : (1) consent of the parties; (2) object certain
which is the subject matter of the contract; and (3) cause of the
obligation.
Gigi will not be liable to pay Chito any damages for
withdrawing the offer before the lapse of the period granted.
In this case, no consideration was given by Chito for the option
given. Thus, there is no perfected contract of option for lack of
cause of obligation. Gigi cannot be held to have breached the
contract. Thus, he cannot be held liable for damages (Suggested
Answers to the 2005 Bar Examination Questions, Philippine
Association of Law Schools).
Idem— Withdrawal of acceptance. — As far as the offeree

is concerned, however, the rule is different. The problem may be
stated by means of an example. A, who is residing in Manila, has
offered to lease a certain parcel of land for a certain price to B, who is
residing in Baguio. B finally decides to accept the offer. So he writes
a letter to A accepting all of the terms and conditions of the offer.
The letter is mailed. Can he revoke it by using a more rapid means
of communication, let us say a telegram, in order to counteract the
acceptance?
Answering the above question in the negative, Manresa says:
“It is to be observed that although the offeror is not bound

until he learns of the acceptance, the same thing can not be said
of the offeree who, from the moment that he accepts, loses the
power to retract such acceptance since the right to withdraw
between the time of the acceptance and its communication
is a right which is expressly limited by law to the offeror.
Undoubtedly, under this rule there would exist a certain
inequality between the contracting parties during such interval;
but this is explained by the fact that since the offeree is the first
person who knows of the concurrence of wills of the parties, as a
consequence, the obligation, as far as he is concerned, must also
commence earlier.’’27
Dr. Tolentino, however, maintains that the acceptance may be

revoked before it comes to the knowledge of the offeror because in
27
407
Art. 1320 CONTRACTS
such case there is still no meeting of the minds, since the revocation
has cancelled or nullified the acceptance which thereby ceased to
have any legal effect.28 We believe that this opinion is more logical.
After all, as far as the law is concerned, there is only one decisive
moment to consider and that is the moment when the offeror has
knowledge of the acceptance made by the offeree. At any time before
that moment, the offeror is not bound by his offer; neither should
the offeree be bound by his acceptance. Otherwise, it would then
be possible to say that there are two moments when a consensual
contract is perfected — first, when the offeree transmits his
acceptance to the offeror, and second, when the offeror has knowledge
of the acceptance. Legally, this is not possible.
Problem — In an offer to sell, parties failed to agree on the

size of the land to be sold. Is there a meeting of the minds of the
parties that would perfect a contract?
Answer — There is no consent that would perfect a contract
as there is no agreement on the exact area to be sold. Contracts
that are consensual in nature are perfected upon mere meeting
of the minds. A contract is produced once there is concurrence
between the offer and the acceptance upon the subject matter,
consideration, and terms of payment. The offer must be certain.
To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer. It must
be plain, unequivocal, unconditional, and without variance of
any sort from the proposal, constitutes a counter-offer and is a
rejection of the original offer. Hence, when something is required
is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to generate consent because
any modification or variation from the terms of the offer.
Art. 1320. An acceptance may be express or implied.29

Form of Acceptance. — According to the above article, the
acceptance may be express or implied. Thus, in the case of Perez vs.
Pomar,30 where the defendant contended that there was no perfected
contract entered into between him and the plaintiff, because there
28
4 Tolentino, Civil Code, 1956 Ed., p. 418.
29
New provision.
30
2 Phil. 682.
408
Consent
was no proof that he had accepted the services of the latter as

interpreter, the Supreme Court held:
“Not only is there an express and tacit consent which

produces true contracts, but there is also a presumptive consent
which is the basis of quasi-contracts, thus giving rise to the
multiple juridical relations which result in obligations for the
delivery of a thing or the rendition of a service. Notwithstanding
the denial of the defendant, it is unquestionable that it was
with his consent that the plaintiff rendered him services
as interpreter, thus aiding him at a time when, owing to the
existence of an insurrection in the province, the most disturbed
conditions prevailed. It follows, hence, that there was consent
on the part of both in the rendition of such service as interpreter.
Such services not being contrary to law or to good customs, it
was a perfectly licit object of a contract and such a contract must
necessarily have existed between the parties, as alleged by the
plaintiff.’’
Problem — A gasoline manufacturing company (TPMC)
obatined a loan from PNB and executed a real estate mortgage
over its parcel of land in Paranque City to secure its loan. When
the loan matured, PNB sent collection letters to TPMC. In reply,
TPMC proposed to pay its obligations by way of a dacion en pago
conveying its TCT No. 122533.Instead of accepting the offer, PNB
filed a petition for extrajudicial foreclosure of the REM. TPMC
filed a complaint for annulment of extrajudicial foreclosure sale
alleging that its debt has already been extinguished by its offer
of dacion en pago. PNB contended that the proposal of TPMC to
pay by way of dacion en pago did not extinguish its obligation as
it was not accepted by PNB. Hence, the extrajudicial foreclosure
sale was proper.Was PNB correct?
Answer — Yes, TPMC has no clear right to an injunctive
relief because its proposal to pay by way of dacion en pago did
not extinguish its obligation. Undeniably, TPMC’s proposal to
pay by way of dacion en pago was not accepted by PNB.
Dacion en pago is a special mode of payment whereby
the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding obligation. The
undertaking is really one of sale, that is, the creditor is really
buying the thing or property of the debtor , payment for which
is to be charged against the debtor’s debt. As such, the essential
elements of a contract of sale, namely, consent, object certain
and cause or consideration must be present. It is only when the
409
thing offered as an equivalent is accepted by the creditor that

novation takes place, thereby, totally extinguishing the debt.
Thus, the unaccepted proposal neither novates the par-
ties’ mortgage contract nor suspends its execution as there was
no meeting of the minds between the parties on whether the
loan will be extinguished by way of dacion en pago (Technogas
Philippines Mfg. Corp. vs. Philippine National Bank, G. R. No.
161004, April 14, 2008).
Art. 1321. The person making the offer may fix the
time, place, and manner of acceptance, all of which must be
complied with.31
Art. 1322. An offer made through an agent is accepted
from the time acceptance is communicated to him.32
Art. 1323. An offer becomes ineffective upon the death,
civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed.33
Effect of Death, Civil Interdiction, Insanity, or Insolven-
cy. — According to the above article, an offer becomes ineffective
upon the death, civil interdiction, insanity, or insolvency of either
party before acceptance is conveyed. The word “conveyed” refers to
that moment when the offeror has knowledge of the acceptance by
the offeree. Hence, the article merely means that an offer becomes
ineffective upon the death, civil interdiction, insanity, or insolvency
of either party before the offeror has knowledge of the acceptance by
the offeree.
Problem No. 1 — A, who resides in Manila, wrote to his

friend B, who is residing in Cotabato City, stating in the letter
that he (A) is donating to him (B) one new car worth P25,000.
Upon receipt of the letter, B, called A by long distance telephone
telling A that he is accepting the donation. The same day B wrote
and mailed a letter to A accepting the donation. Immediately
after mailing the letter, B died of a heart failure. Who is entitled
to the car now, A or the heirs of B? Reasons. (1962 Bar Problem)
31
New provision.
32
New provision.
33
New provision.
410
ESSENTIAL REQUISITES OF CONTRACTS Arts. 1321-1323
Consent
Answer — A is entitled to the car. The reason is that

the donation in the instant case cannot produce any effect
whatsoever. According to Art. 748 of the Civil Code, if the value
of the personal property donated exceeds P5,000, the donation
and the acceptance shall be in writing; otherwise, the donation
is void. True, the acceptance by B was actually written and
mailed. But immediately after mailing the letter of acceptance,
B died. The effect is to bring into play the provision of Art. 1323
of the Civil Code which is certainly applicable here, considering
the provision of Art. 732. According to Art. 1323, an offer
becomes ineffective upon the death, civil interdiction, insanity,
or insolvency of either party before acceptance is conveyed.
Analyzing the provision, it is clear that the offer of A has become
ineffective and that the contract of donation, as a consequence,
has never been perfected.
Problem No. 2 — A donated a piece of land to B in a donation
inter vivos. B accepted the donation in a separate instrument
but A suddenly died in an accident before the acceptance could
be communicated to him. Is the donation valid? Reasons. (1971
Bar Problem)
Answer — Even assuming that both the donation and
the acceptance are contained in a public instrument, which the
law requires (Art. 749, CC), the donation is not valid for the
following reasons:
(1) Under Art. 749 of the Civil Code which enunciates
the different formalities required in the execution of donations
inter vivos, the law declares that if the acceptance is made in a
separate public instrument, the donor shall be notified thereof in
authentic form, and this step shall be noted in both instruments.
It is obvious that in the instant case the requirement of
notification of the donor in authentic form (constancia autentica)
has not been complied with. It is of course axiomatic under the
law on donations that all of the formalities prescribed in Art.
749 of the Code are essential for validity.
(2) Art. 734 of the Civil Code declares that a donation is
perfected from the moment the donor knows of the acceptance
by the donee. It is also obvious that in the instant case A never
came to know of the acceptance by B because he suddenly died
in an accident before such acceptance could be communicated to
him. Consequently, the contract of donation was never perfected.
(3) And finally, Art. 1323 of the Civil Code is decisive.
This article (which is certainly applicable here considering
411
Art. 1324 CONTRACTS
the provision of Art. 732 of the Code) declares that an offer

becomes ineffective upon the death, civil interdiction, insanity
or insolvency of either party before acceptance is conveyed.
Art. 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.34
Period for Acceptance: Options. — It is clear from the

above article that there is a very great difference between the effect
of an option which is without a consideration and the effect of one
which is founded upon a consideration as far as the right of the
offeror to withdraw his offer or proposal is concerned. If the option
is without any consideration, the offeror may withdraw his offer by
communicating such withdrawal to the offeree at anytime before
acceptance; if it is founded upon a consideration, the offeror cannot
withdraw his offer.
In the case of Beaumont vs. Prieto,35 Justice Araullo explained
the nature of an option founded upon a consideration in the following
words:
“In his Law Dictionary, Bouvier defines an option as a

contract in the following language: ‘A contract by virtue of which
A, in consideration of the payment of a certain sum to B, acquires
the privilege of buying from, or selling to B, certain securities or
properties within a limited time at a specified price.’
“From Vol. 6, page 5001, of the work ‘Words and Phrases,’
citing the case of Ide vs. Leiser (24 Pac., 695, 10 Mont., 5; 24
Am. St. Rep. 17), the following quotation has been taken: ‘An
agreement in writing to give a person the ‘option’ to purchase
lands within a given time at a named price is neither a sale nor
an agreement to sell. It is simply a contract by which the owner
of property agrees with another person that he shall have the
right to buy his property at a fixed price within a certain time.
He does not sell his land; he does not then agree to sell it; but
he does sell something; that is, the right or privilege to buy at
the election or option of the other party. The second party gets
34
New provision.
35
41 Phil. 670.
412
Consent
in praesenti, not lands, nor agreement that he shall have lands,

but he does get something of value; that is, the right to call for
and receive lands if he elects. The owner parts with his right to
sell his lands, except to the second party for a limited period.
The second party receives this right, or rather, from his point of
view, he receives the right to elect to buy.’
“But the two definitions above cited refer to a contract of
option, or, what amounts to the same thing, to a case where
there is cause or consideration for the obligation.’’
Art. 1324 standing alone, or in relation to the other articles

under this chapter of the Civil Code, is clear. However, the second
paragraph of Art. 1479 of the Civil Code under the law on sales
declares that “an accepted unilateral promise to buy or to 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.”
Interpreting this provision in relation to Art. 1324, in two cases,36 the
Supreme Court sustained the view that this provision constitutes an
exception to the general rule stated in Art. 1324. If the option is not
supported by a consideration which is distinct from the purchase
price, the offer may still be withdrawn even if the offeree has already
accepted it.
The above interpretation, however, was finally abandoned in
Sanchez vs. Rigos (G.R. No. L-25494, June 14, 1972, 45 SCRA 368).
In this case, the Supreme Court ruled that in unilateral offers to
buy or to sell, since there may be no valid contract without a cause
or consideration, the promisor is not bound by his promise and
may, accordingly withdraw it. Pending notice of his withdrawal, his
promise partakes of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale. Stated in another way, if the
option is without a consideration, it is a mere offer to sell which is
not binding until accepted. If, however, acceptance is made before
a withdrawal, it constitutes a binding contract of sale. There is
already a concurrence of both offer and acceptance. Under Art. 1319
of the Civil Code, the contract is perfected.
Problem — “A’’ agreed to sell to “B’’ a parcel of land for

P5,000.00. “B’’ was given up to May 6, 1975 within which to
36
Southwestern Sugar and Molasses Co. vs. Atlantic Gulf & Pacific Co., 51 Off.
Gaz. 3447; Navarro vs. Sugar Producers, Inc., 1 SCRA 1180.
413
Art. 1324 CONTRACTS
raise the necessary funds. It was further agreed that if “B’’

could not produce the money on or before said date, no liability
would attach to him. Before May 6, 1975, “A’’ backed out of the
agreement. Is “A’’ obliged to sell the property to “B’’? Explain.
(1975 Bar Problem)
Answer — Assuming that the offer of “A’’ to sell the land to
“B’’ is merely a unilateral offer to sell, and that there is still no
bilateral agreement in the sense that “B’’ had already agreed to
buy the land, “A’’ is not obliged to sell the property to “B.’’ In such
case, it is clear that the general rule stated in Art. 1324 and the
particular rule stated in Art. 1479, par. 2, of the Civil Code are
applicable. As a matter of fact, even if “B’’ has formally accepted
the option given to him by “A,’’ such acceptance would be of no
moment since the option is not supported by any consideration
distinct from the purchase price. “A’’ can always change his mind
at any time. The option does not bind him for lack of a cause or
consideration. It would have been different if “B’’ had accepted
the offer to sell within the period of the option before said offer
was withdrawn by “A.’’ In such a case, a contract of sale would
have been generated right then and there. As it turned out, “A’’
withdrew his offer in time. (See Sanchez vs. Rigor, 45 SCRA
368)
(Note: In Sanchez vs. Rigos, supra, the Supreme Court
finally resolved a question which arose out of the use of the word
“accepted’’ in modifying the phrase “unilateral promise to buy or
to sell’’ in Art. 1479, par. 2, of the Civil Code. “Accepted’’ refers
to the option, not to the offer, to buy or to sell; in other words, it
refers to the acceptance by either prospective vendee or vendor
of the option of, let us say, ninety days within which he shall
decide whether or not he shall buy or sell the thing. Thus, if
“A’’ offers to sell a lot to “B’’ for P200,000, and gives the latter
an option of ninety days within which to decide whether or not
he shall buy the property, and the latter accepts the option, two
possible situations may arise:
(1) In accepting the option, “B’’ pays to “A’’ an “option
money’’ of, let us say, P5,000 which is distinct from the purchase
price. In such case, there is already a perfected preparatory
contract of option. “A’’ is bound by his offer. “B’’ shall now decide
within the period of the option whether or not he shall buy the
property. If he decides to buy, he shall then pay to “B’’ the price
of P200,000; if he decides otherwise, no contract of sale will ever
be perfected.
(2) In accepting the option, “B’’ does not pay any “option
money’’ to “A’’. In such case, there is no perfected preparatory
414
Consent
contract of option for lack of a consideration. The result is a mere

offer to sell, acceptance or which will be suffcient to generate a
perfected contract of sale. But suppose that meanwhile, “A’’ has
changed his mind? The lot is no longer for sale. “B’’, on the other
hand, has decided to buy the property. What will now happen?
Under this situation, the one who is first to notify the other of
his decision emerges the victor. If “A’’ is the first to notify “B’’
of his change of mind, no contract of sale will ever be perfected;
if “B’’ is the first to notify “A’’ of his acceptance of the offer, a
contract of sale has already been perfected.)
Problem — “Q,’’ the owner of a house and lot in Quezon
City, gave an option to “R’’ to purchase said property for
P100,000.00 within ninety days from May 1, 1979. “R’’ gave “Q’’
one (P1.00) peso as option money. Before the expiration of the
ninety-day period, “R’’ went to “Q’’ to exercise his option to pay
the purchase price but “Q’’ refused because somebody wanted
to buy his property for P150,000.00 and because there was no
sufficient consideration for the option. “R’’ sued “Q’’ to compel
him to accept payment and execute a deed of sale in his favor.
Decide the case. (1980 Bar Problem)
Answer — “Q’’ should be compelled to accept the purchase
price of P100,000.00 and to execute a deed of sale of the subject
property in favor of “R.’’ The reason is that there is already a
perfected contract of sale.
Undoubtedly, in the instant case, there is a unilateral
offer of “Q’’ to sell the subject property to “R.’’ For that purpose,
the latter is given an option of ninety days from May 1, 1979
within which to exercise the option. The consideration for the
option is P1.00. According to the Civil Code, since there is a
consideration for the option, “Q’’ is now bound by his promise
to sell the property to “R’’ so long as the latter will exercise the
option within the agreed period of ninety days. “R’’ exercised his
option. Therefore, there is already a perfected contract of sale.
True, “Q’’ will suffer some sort of lesion or prejudice
if what he says about another desiring to buy the property
for P150,000.00 is established. True also, the consideration
of P1.00 for the option is grossly inadequate. The Civil Code,
however, declares that 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. Here, there is
no fraud, mistake or undue influence which would be a possible
basis for invalidating either the preparatory contract of option
or the principal contract of sale.
415
As a matter of fact, even assuming that there is no

consideration for the option, the end result would still be the
same. Since “R’’ accepted the offer before it could be withdrawn
or revoked by “Q,’’ there is already a perfected contract of sale.
(Note: The second paragraph of the above answer, which
gives the raison d’etre for what is stated in the first paragraph,
is based on Arts. 1324 and 1479, par. 2, of the Civil Code. The
third paragraph, which disposes of the contentions or defenses
of the defendant, is based on Art. 1355 of the Civil Code. The
fourth paragraph, which is a sort of obiter, is based on Sanchez
vs. Rigos, 45 SCRA 368.)
Art. 1325. Unless it appears otherwise, business adver-

tisements of things for sale are not definite offers, but mere
invitations to make an offer.37
Art. 1326. Advertisements for bidders are simply invita-
tions to make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary ap-
pears.38
Article Applied. — The above article may be illustrated by the

following problem:
Problem — “K’’ and Co. published in the newspaper an

“Invitation to Bid’’ inviting proposals to supply labor and
materials for a construction project described in the invitation.
“L,’’ “M’’ and “N’’ submitted bids. When the bids were opened,
it appeared that “L’’ submitted the lowest bid. However, “K’’
and Co. awarded the contract to “N,’’ the highest bidder, on
the ground that he was the most experienced and responsible
bidder. “L’’ brought an action against “K’’ and Co. to compel the
award of the contract to him and to recover damages.
Is “L’s’’ position meritorious? (1980 Bar Problem)
Answer — “L’s’’ position is not meritorious.
According to the Civil Code, advertisements for bidders
are simply invitations to make proposals, and the advertiser
is not bound to accept the highest or lowest bidder unless the
37
New provision.
38
New provision.
416
Consent
contrary appears. It is clear that the general rule applies in the

instant case. In its advertisement, “K’’ and Co. did not state that
it will award the contract to the lowest bidder. Therefore, in
awarding the contract to “N,’’ the defendant company acted in
accordance with its rights.
Art. 1327. The following cannot give consent to a con-

tract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who
do not know how to write.39
Legal Capacity of Contracting Parties. — The capacity of

the contracting parties is, in effect, an essential element of a contract,
or to be more exact, it is an indispensable requisite of consent. Since
it is so intimately interwoven with the latter as an antecedent is
to a consequent, and since it is impossible in law to speak of an
effective consent without presupposing the capacity to give it, it is
perfectly understandable why the Code does not expressly mention
capacity as one of the essential elements.40 The Code in Art. 1327,
however, speaks of those who are incapacitated to give their consent
to a contract.
Idem; Incapacitated persons. — According to Art. 1327, the
following cannot give their consent to a contract: (1) Unemancipated
minors; (2) insane or demented persons; and (3) deaf-mutes who
do not know how to write. The second is broad enough to cover
all cases where one or both of the contracting parties are unable
to understand the nature and consequences of the contract at the
time of its execution, such as those in a state of drunkenness or
under a hypnotic spell or who are suffering from any kind of mental
incapacity whatsoever.
Because the law incapacitates them to give their consent to a
contract, the only way by which any one of those enumerated above
can enter into a contract is to act through a parent or guardian.
If this requirement is not complied with, the result is a defective
contract. If only one of the contracting parties is incapacitated
39
40
417
Art. 1327 CONTRACTS
to give his consent, the contract is voidable.41 If both of them are

incapacitated to give their consent, the contract is unenforceable.42
Idem; id. — Unemancipated minors. — Under No. 1 of Art.
1327, unemancipated minors cannot give their consent to a contract.43
However, if a minor is emancipated by marriage or by voluntary
concession, according to Art. 399 of the Civil Code, he shall have the
power to administer his property, but he cannot borrow money or
alienate or encumber real property without the consent of his father
or mother, or guardian.
Nevertheless, there are five exceptional cases where a contract
entered into by an unemancipated minor may have all of the effects
of a valid contract. They are: first, when it is entered into by a minor
who misrepresents his age;44 second, when it involves the sale and
delivery of necessaries to the minor;45 third, when it involves a
natural obligation and such obligation is fulfilled voluntarily by the
minor, provided that such minor is between eighteen and twenty-one
years of age;46 fourth, when it is a marriage settlement or donation
propter nuptias, provided that the minor is between twenty and
twenty-one years of age, if male, or between eighteen and twenty-
one years of age, if female;47 and fifth, when it is a life, health or
accident insurance taken on the life of the minor, provided that the
minor is eighteen years old or more and the beneficiary appointed
is the minor’s estate, or the minor’s father, mother, husband wife,
child, brother, or sister.48
Idem; id. — Effect of misrepresentation. — The first
exception is based on the principle of estoppel. Thus, in the case of
Mercado and Mercado vs. Espiritu,49 the Supreme Court held that
where the minors who entered into the contract have already passed
41
Art. 1390, No. 1, Civil Code.
42
43
For legal effect of contracts entered into by unemancipated minors, see Gan
Tingco vs. Pabanguit, 35 Phil. 31; Ibañez vs. Rodriguez, 47 Phil. 554; Velayo vs. Al-
cantara, 47 Off. Gaz.
44
Mercado and Mercado vs. Espiritu, 37 Phil. 215; Sia Suan vs. Alcantara, 47
Off. Gaz. 4561.
45
46
Arts. 1425, 1426, 1427, Civil Code.
47
48
Act No. 3424, as amended, Insurance Law.
49
37 Phil. 215.
418
Consent
the age of puberty and adolescence in such a way that they could
misrepresent and actually did misrepresent themselves as having
reached the age of majority, they cannot, upon reaching the age of
majority, annul the contract on the ground of minority inasmuch
as they are already in estoppel. This doctrine was reiterated in the
cases of Sia Suan vs. Alcantara50 and Hermosa vs. Zobel.51 In his
concurring and dissenting opinion in the Alcantara case, however,
Justice Padilla declared:
“The contract of sale involved in the case of Mercado vs.

Espiritu was executed by the minors on May 17, 1890. The
law in force on this last mentioned date was not Las Siete
Partidas, which was the law in force at the time the causes of
action accrued in the cases decided by the Supreme Court of
Spain referred to, but the Civil Code which took effect in the
Philippines on December 8, 1889. As already stated, the Civil
Code requires the consent of both parties for the valid execution
of a contract (Art. 1261 — now Art. 1318, of the Civil Code). As a
minor cannot give his consent, the contract made or executed by
him has no validity and legal effect. There is no provision in the
Civil Code similar to that of Law 6, Title 19 of the 6th Partida
which is equivalent to the common law principle of estoppel.52 If
there be an express provision in the Civil Code similar to Law
6, Title 19 of the 6th Partida, I would agree to the reasoning of
the majority. The absence of such provision in the Civil Code is
fatal to the validity of the contract executed by a minor. It would
be illogical to uphold the validity of a contract on the ground of
estoppel, because if the contract executed by a minor is null and
void for lack of consent and produces no legal effect, how could
such a minor be bound by misrepresentation about his age? If
he could not be bound by a direct act, such as the execution of
a deed of sale, how could he be bound by an indirect act, such
as his misrepresentation as to his age? The rule laid down in
Young vs. Tecson, 39 Off. Gaz. 953, in my opinion, is the correct
one.’’53
50
47 Off. Gaz. 4561.
51
104 Phil. 769.
52
This was true under the Spanish Civil Code. However, the New Civil Code
(Art. 1431) now provides that through estoppel, an admission or representation is
rendered conclusive upon the person making it and it cannot be denied or disproved
as against the person relying thereon.
53
The case of Young vs. Tecson was a case decided by the Court of Appeals hold-
ing that: “The theory advanced by the appellants that misrepresentation made by the
defendant as to his age estops him from denying that he was of age, or from assert-
419
Art. 1327 CONTRACTS
Be that as it may, it is now well settled that misrepresentation

by unemancipated minors with regard to their age when entering
into a contract shall bind them in the sense that they are estopped
subsequently from impugning the validity of the contract on the
ground of minority. It is, however, necessary that the misrepresen-
tation must be active, not merely constructive.54
Braganza vs. Villa Abrille

105 Phil. 456
On Oct. 20, 1944, Rosario de Braganza and her two minor

sons, Rodolfo and Guillermo, who were then 18 and 16 years old
respectively, borrowed from Villa Abrille P70,000 in Japanese
military notes, promising to pay the latter solidarily P10,000 “in
legal currency of the Philippines, two years after the cessation of
present hostilities or as soon as International Exchange has been
established in the Philippines,’’ plus 2% interest per annum.
For failure to pay, Villa Abrille sued them in March, 1949.
Defendants, however, have interposed the minority of Rodolfo
and Guillermo de Braganza at the time when they signed the
note as a defense. Consequently, the principal questions to be
decided are: first, whether or not the minority of her co-signers
has any effect upon the liability of Mrs. Braganza; and second,
whether or not such co-signers can be held liable. The Supreme
Court held:
“Mrs. Braganza is liable because the minority of her co-
signers does not release her from liability, since it is a personal
defense of the minors. However, she can avail herself of the
defense but such defense will benefit her only as regards that
part of the debt for which the minors are responsible. (Art.
1148, now Art. 1222, Civil Code.) Therefore, she shall pay 1/3 of
P10,000 or P3,333.33, plus 2% interest from October, 1944.
“On the other hand, the Court of Appeals found the minors
liable because they did not state in the promissory note that
they are not yet of legal age and ‘when minors pretended to be
ing that he was under age, at the time he entered into the contract, for the breach of
which this action is brought is untenable, because under the principle of estoppel the
liability resulting from the misrepresentation has its juridical source in the capacity
of the person making the misrepresentation to bind himself. If the person making the
misrepresentation cannot bind himself by a contract, he cannot also be bound by any
misrepresentation he may have made in connection therewith.’’
54
Braganza vs. Villa Abrille, 106 Phil. 456.
420
Consent
of legal age, when in fact they were not, they will not later on
be permitted to excuse themselves from the fulfillment of the
obligation contracted by them, or to have it annulled.’ (Mercado,
et al. vs. Espiritu, 37 Phil. 15.) However, the Mercado case is dif-
ferent because the document signed therein by the minors spe-
cifically stated that they were of age, here, the promissory note
contained no such statement. In other words, in the Mercado
case, the minors were guilty of active misrepresentation; where-
as in this case, the minors are guilty of passive or constructive
misrepresentation. From the minor’s failure to disclose their mi-
nority, it does not follow, as a legal proposition, that they will
not be permitted there after to assert it. According to Corpus
Juris Secundum (43, p. 206), ‘mere silence when making a con-
tract as to his age does not constitute a fraud which can be made
the basis of an action for deceit. In order to hold the infant li-
able, the fraud must be actual and not constructive.’ Therefore,
the minors in the case at bar cannot be legally bound by their
signatures in the promissory note.
“They cannot, however, be absolved entirely from mon-
etary responsibility. Under the Civil Code, even if their written
contract is voidable because of non-age, they shall make resti-
tution to the extent that they may have profited by the money
they received. (Art. 1304, now Art. 1399, Civil Code.) There is
testimony that the funds were used for their support during the
Japanese occupation. Such being the case, it is but fair to hold
that they had profited to the extent of the value of such money,
which value has been established in the Ballantyne Schedule. In
October, 1944, P40 Japanese military notes were equivalent to
P1.00 of current Philippine money. Hence, they shall pay jointly
P1,666.67, plus 6% interest beginning March 7, 1949, when the
complaint was filed.”
Idem; id. — Insane or demented persons. — Under No. 2 of

Art. 1327, insane or demented persons cannot give their consent to
a contract. It is, of course, well established that “insane or demented
persons” include any person, who, at the time of the celebration of
the contract, cannot understand the nature and consequences of the
act or transaction by reason of any cause affecting his intellectual
or sensitive faculties, whether permanent or temporary. Art. 1328,
however, provides that a contract entered into during a lucid interval
is valid. Thus, according to the Supreme Court:
“Even in the execution of contracts, in the absence of

a statute to the contrary, the presumption of insanity and
421
Art. 1327 CONTRACTS
mental incapacity in a person under guardianship for mental

derangement, is only prima facie and may be rebutted by
evidence. A person under guardianship for insanity may still
enter into a valid contract and even convey property, provided
it is proven that at the time of entering into said contract, he
was not insane or that his mental defect, if mentally deranged,
did not interfere with or affect his capacity to appreciate the
meaning and significance of the transaction entered into by
him. There are many cases of persons mentally deranged who,
although they have been having obsessions and delusions for
many years regarding certain subjects and situations, still are
mentally sound in other respects. There are others who, though
insane, have their lucid intervals when in all respect they are
perfectly sane and mentally sound.55
What is the nature and extent of the mental incapacity which

will incapacitate a person from giving his consent to a contract?
In our present knowledge of the state of mental alienation such
certainty has not yet been reached in which we can determine with
precision who are those who are suffering from mental capacity and
who are those who are not. As a matter of fact, the Code considers
as a demented person, or at least, places in the same category as a
demented person anyone who is in a state of drunkenness or under a
hypnotic spell, when it declares in Art. 1328 that a contract entered
into by such person is voidable. It is, however, a well-established
rule in contractual law that in order to avoid a contract because of
mental incapacity, it is necessary to show that at the time of the
celebration of the contract one of the contracting parties was not
capable of understanding with reasonable clearness the nature
and effect of the transaction in which he was engaged. Hence, such
circumstances as age, sickness, or any other condition as such will
not necessarily justify a court of justice to interfere in order to
set aside a contract voluntarily entered into.56 Thus, where it was
established that one of the contracting parties was suffering from
monomania or delusion of wealth at the time of the execution of the
contract believing himself to be very wealthy when as a matter of
fact he is not, it was held that such fact alone will not be sufficient
to invalidate the contract so long as it was not proved that at the
55
Dumaguin vs. Reynolds, 48 Off. Gaz. 3887.
56
Cui vs. Cui, 100 Phil. 913, citing Page on Contracts, Vol. 3, Sec. 2810.
422
Consent
moment of the execution of the contract he was incapable, crazy,

insane, or out of his mind.57
Consequently, mental incapacity to enter into a contract is
a question of fact which must be decided by the courts. There is,
however, a presumption that every person of legal age possesses the
necessary capacity to execute a contract,58 but the presumption is
prima facie and may be rebutted by proper evidence. Thus, in the
case of Carillo vs. Jaoco,59 where it was established that the vendor
of several parcels of land was declared insane by a competent court
nine days after the execution of the contract of sale, the Supreme
Court still ruled:
“The fact that nine days after the execution of the contract,
Adriana Carillo was declared mentally incapacitated by the
trial court does not prove that she was so when she executed the
contract. After all this can perfectly be explained by saying that
her disease became aggravated subsequently.
“Our conclusion is that prior to the execution of the docu-
ment in question the usual state of Adriana Carillo was that of
being mentally capable, and consequently, the burden of proof
that she was mentally incapacitated at a specified time is upon
her who affirms said incapacity. If no sufficient proof to this ef-
fect is presented, her capacity must be presumed.’’
Idem; id. — Deaf-mutes. — With regard to deaf-mutes, we

must distinguish between the effect of a contract entered into by a
deaf-mute who knows how to write and that of a contract entered
into by a deaf-mute who does not know how to write. The first is
perfectly valid, while the second is either voidable or unenforceable,
depending upon whether one or both of the parties are incapacitated.
This can be inferred from No. 2 of Art. 1327 which states that deaf-
mutes who do not know how to write cannot give their consent to a
contract.
Idem; id. — Other incapacitated persons. — Besides the
persons enumerated in Art. 1327, there are others who are also
incapacitated to give their consent to a contract, such as married
57
Standard Oil Co. vs. Arenas, 19 Phil. 363.
58
Standard Oil Co. vs. Arenas, 19 Phil. 363; Dumaguin vs. Reynolds, 48 Off. Gaz.
3887.
59
423
Art. 1327 CONTRACTS
women of age in cases specified by law, persons suffering from civil

interdiction,60 and incompetents who are under guardianship.61
It must be noted that under Art 1263 of the Spanish Civil Code,
among the persons incapacitated to give their consent to a contract
are “married women in the cases specified by law,” whereas under
the present Civil Code, they are not included. This is, of course, in
conformity with the rule that a married woman, twenty-one years of
age or over, is qualified for all acts of civil life except in cases specified
by law.62 In spite of its elimination from the list, it cannot be denied
that there are still cases, although much more limited in extent than
under the old Code, where married women cannot give their consent
to a contract without first securing their husband’s consent. The
most evident example of this is that contemplated by Art. 114 of the
Code regarding acquisition by a wife of property by gratuitous title.
According to this article, the husband’s consent is necessary, unless
the property is acquired from her ascendants, descendants, parents-
in-law and relatives within the fourth degree.63
With regard to incompetents under guardianship, it must
be noted that the mere fact that a person is classified as an
“incompetent” in accordance with the New Rules of Court does not
necessarily mean that he cannot give his consent to a contract, nor
does the mere fact that he is not under guardianship necessarily
mean that he can give his consent to a contract. Under Sec. 2 of
Rule 92 of the New Rules of Court, the word “incompetent’’ includes:
(1) persons suffering from civil interdiction; (2) hospitalized lepers;
(3) prodigals; (4) deaf and dumb who are unable to read and write;
(5) those who are of unsound mind, even though they have lucid
intervals; and (6) those who by reason of age, 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. It is evident from what had already been stated
that insane or demented persons as well as deaf-mutes who cannot
write cannot give their consent to a contract, whether or not they
60
Art. 34, Revised Penal Code.
61
Rules 92-93, New Rules of Court.
62
63
With regard to contracts involving paraphernal property, see Art. 140, and
with regard to those involving conjugal property, see Art. 172, Civil Code.
424
Consent
are under guardianship.64 The same is also true with regard to those
suffering from civil interdiction.65 On the other hand, prodigals
and those who by reason of age, weak mind, and other similar
causes, cannot take care of themselves and manage their property,
before they are placed under judicial guardianship, are disputably
presumed to possess contractual capacity. Consequently, whether
or not they can give their consent to a contract becomes a matter of
proof. Hospitalized lepers, before they are placed under guardianship,
are, of course, not incapacitated. But once an incompetent is placed
upon guardianship, such incompetent can enter into a contract only
through his guardian; otherwise, the contract is voidable.
Problem — Is a person of advanced years or age or by

reason of physical infirmities incapacitated to enter into a
contract?
Answer — A person is not incapacitated to enter into a
contract merely because of advanced years or by reason of
physical infirmities, unless such age and infirmities impair
his mental faculties to the extent that he is unable to properly,
intelligently and fairly understand the provisions of said
contract (Dr. Jose and Aida Yason and Faustino Arciaga, et. al.,
G.R. No. 145017, Jan. 28, 2005).
Art. 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.66
Art. 1329. The incapacity declared in Article 1327 is subject
to the modification determined by law, and is understood to
be without prejudice to special disqualifications established
in the laws.67
Disqualifications to Contract. — It is apparent that the

persons specially disqualified mentioned in Art. 1329 refer to those
who are prohibited from entering into a contract with certain persons
with regard to certain property under certain circumstances and not
to those who are incapacitated to give their consent to a contract.
64
65
Art. 34, Revised Penal Code.
66
New provision.
67
425
Thus, Sec. 145 of the Administrative Code declares that no contract

relating to real property shall be made with any non-Christian
inhabitant of Mindanao and Sulu, unless such contract shall bear
the approval of the provincial governor of the province wherein the
contract was executed or his representative duly authorized for
such purpose in writing endorsed upon it.68 This rule is still intact
under Rep. Act No. 3872, although the sale is subject to the approval
of the Chairman of the Commission on National Integration. Any
contract executed in violation of this rule is void.69 Similarly, under
the Insolvency Law, a person who is declared insolvent before he is
discharged is prohibited from entering into a contract.70
Attention must also be called to the following provisions of the
Civil Code:
“Art. 133. Every donation between the spouses during the

marriage shall be void. This prohibition does not apply when the
donation takes effect after the death of the donor.
“Neither does this prohibition apply to moderate gifts
which the spouses may give each other on the occasion of any
family rejoicing.’’
“Art. 1490. The husband and the wife cannot sell property
to each other, except:
“(1) When a separation of property was agreed upon in
the marriage settlements; or
“(2) When there has been a judicial separation of
property under Article 191.’’
“Art. 1491. The following persons cannot acquire by
purchase, even at a public or judicial auction, either in person
or through the mediation of another:
“(1) The guardian, the property of the person or persons
who may be under his guardianship;
“(2) Agents, the property whose administration or sale
68
Act No. 2798 has extended the application of this rule to the non-Christians of
Mountain Province and Nueva Vizcaya.
69
Rep. Act No. 3872. See Porkan vs. Yatco, 70 Phil. 161; Porkan vs. Navarro, 73
Phil. 698; Madale vs. Raya, 49 Off. Gaz. 536; Miguel vs. Catalino, 26 SCRA 234; Heirs
of Lacamen vs. Heirs of Laruan, 65 SCRA 605.
70
Act No. 1956.
426
Consent
may have been entrusted to them, unless the consent of the

principal has been given;
“(3) Executors and administrators, the property of the
estate under administration;
“(4) Public officers and employees, the property of the
State or of any subdivision thereof, or of any government-owned
or controlled corporation, or institution, the administration of
which has been entrusted to them; this provision shall apply to
judges and government experts who, in any manner whatsoever,
take part in the sale;
“(5) Justices, judges, prosecuting attorneys, clerks of
superior and inferior courts, and other officers and employees
connected with the administration of justice, the property
and rights in litigation or levied upon on execution before
the court within whose jurisdiction or territory they exercise
their respective functions; this prohibition includes the act
of acquiring by assignment and shall apply to lawyers, with
respect to the property and rights which may be the object of
any litigation in which they may take part by virtue of their
profession;
“(6) Any others specially disqualified by law.”
“Art. 1782. Persons who are prohibited from giving each
other any donation or advantage cannot enter into universal
partnership.’’
Idem; Distinguished from incapacity to contract. —

Disqualification to contract or prohibition to contract, referred to in
the previous section, must not be confused with incapacity to give
consent to a contract. The two may be distinguished from each other
as follows:
(1) Incapacity restrains the exercise of the right to contract,
while prohibition to contract restrains the very right itself; in other
words, a person who is incapacitated can still enter into a contract,
but he must do so through his parent or guardian, while one who
is prohibited from entering into a particular contract is absolutely
disqualified from entering into that contract;
(2) Incapacity is based upon subjective circumstances of cer-
tain persons which compel the law to suspend for a definite or in-
definite period their right to contract, while prohibition to contract,
427
Art. 1330 CONTRACTS
which has been improperly called special incapacity by certain au-

thors, is based upon public policy and morality; and
(3) A contract entered into by an incapacitated person is

merely voidable in accordance with Art. 1390 of the Civil Code, while
that entered into by one against whom a prohibition is directed is
void in accordance with Arts. 5 and 1409, No. 7, of the Civil Code.71
Art. 1330. A contract where consent is given through

mistake, violence, intimidation, undue influence, or fraud is
voidable.72
Vices of Consent. — Art. 1330 enumerates the different vices

which may vitiate consent. In addition to the five stated in this
article, we can also include simulation of contracts.73
According to Castan, the vices of consent may be divided into
two distinct groups — vices of the will (vicios de la formacion de la
voluntad) and vices of declaration (vicios de la declaracion). The first
comprehends mistake, violence, intimidation, undue influence, and
fraud; the second comprehends all forms of simulated contracts.74
Actually, Art. 1330, according to Manresa, enumerates in a
negative way the different requisites of consent objectively considered.
These requisites are that the consent must be intelligent, that it
must be free, and that it must be spontaneous. Intelligent consent is
vitiated by mistake or error; free consent by violence, intimidation
and undue influence; spontaneous consent by fraud.75 Because of the
inclusion of simulation of contracts as one of the vices which vitiate
consent, we might add a fourth requisite — that the consent must
be real. In the absence of any of the first three requisites because
consent is given through either mistake, or violence, or intimidation,
or undue influence, or fraud, the contract is voidable; in the absence
of the fourth requisite because the contract is simulated, it may be
71
72
73
Arts. 1345-1346, Civil Code. See also 3 Castan, 7th Ed., p. 330; 8 Manresa, 5th
Ed., Bk. 2, p. 393.
74
75
428
Consent
either void ab initio or valid as far as the real agreement is concerned

depending upon whether the simulation is absolute or relative.76
Art. 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 correc-
tion.77
Mistake. — The Code does not distinguish between mistake

as such and ignorance. Consequently, as it is understood in the Civil
Code, mistake may be defined not only as the wrong conception of a
thing, but also as the lack of knowledge with respect to a thing.78
Idem; Mistakes which vitiate consent. — There are two
general kinds of mistakes — mistake of fact and mistake of law. There
is, of course, a mistake of fact when one or both of the contracting
parties believe that a fact exists when in reality it does not, or that
such fact does not exist when in reality it does. On the other hand,
there is a mistake of law when one or both of the contracting parties
arrive at an erroneous conclusion regarding the interpretation of a
question of law or the legal effects of a certain act or transaction. As
a general rule, it is only a mistake of fact which will vitiate consent
thus rendering the contract voidable; a mistake of law, on the other-
hand, does not render the contract voidable because of the well-
known principle that ignorance of the law does not excuse anyone
from compliance therewith.79
76
77
78
79
Luna vs. Linatoc, 74 Phil. 15, citing Art. 3, Civil Code, 3 Castan, 7th Ed., pp.
330-331.
429
Art. 1331 CONTRACTS
Idem; id. — Mistake of fact. — For purposes of clarity, we

shall divide the different mistakes of fact which vitiate consent into
the following classes:80
(1) Mistake as to object (error in re): This is the mistake which
is referred to in the first paragraph of Art. 1331 of the Code. It may
be subdivided into the following: (a) Mistake as to the identity of
the thing (error in corpore), as when the thing which constitutes the
object of the contract is confused with another thing; (b) mistake as
to the substance of the thing (error in substantia); (c) mistake as to
the conditions of the thing, provided such conditions have principally
moved one or both parties to enter into the contract; and (d) mistake
as to the quantity of the thing (error in quantitate), provided that
the extent or dimension of the thing was one of the principal reasons
of one or both of the parties for entering into the contract.81
In order that a contract is rendered voidable because of mistake
regarding the quantity of the thing which constitutes the object
thereof, it is necessary that such mistake should refer not only to
the material out of which the thing is made, but also to the nature
which distinguishes it, generically or specifically, from all others,
such as when a person purchases a thing made of silver believing
that it is made of gold. Consequently, if the mistake refers only to
accidental or secondary qualities (error in qualitate), the contract is
not rendered voidable.82
In case of mistake regarding the quantity of the thing (error
in quantitate), it is important that this class of mistake should be
distinguished from a mistake of account or calculation. In the first,
there is a real mistake as to the extent of the object of the contract;
in the second, there is only an apparent mistake, a mere mistake
in mathematical computation. As a consequence, in the first, the
contract is voidable; in the second, it is not. Thus, if the parties enter
into a contract with respect to a parcel of land which they believe
has an area of 100 hectares, when in reality it has an area of only
50 hectares, there is mistake as to the quantity of the thing; the
contract in this case is voidable. If, on the other hand, they enter
into a contract in which it is agreed that a parcel of land consisting
80
81
3 Castan, 7th Ed., pp. 331-332.
82
430
Consent
of 10 hectares shall be sold for P1,000 per hectare, and they thought
that the total price is only P5,000, there is a mistake of account; the
mistake in this case can only be corrected.83
Asiain vs. Jalandoni

45 Phil. 296
The records show that the plaintiff offered to sell to

the defendant a certain hacienda for P55,000. During the
negotiation, he told the defendant that it contained between 25
and 30 hectares and that the cane then planted would produce
2,000 piculs of sugar. Although doubtful of the extent of the
land, the defendant finally accepted the offer, paid P30,000 of
the purchase price and took possession of the land. While thus
in possession, he discovered that the land was only about 18
hectares and the cane only about 800 piculs of sugar. Because
of this discovery, he refused to pay the balance of the purchase
price. As a consequence, plaintiff commenced this action to
recover the said balance. To the complaint, defendant filed an
answer and a counter complaint, asking that the contract be
annulled.
Held: “Coordinating more closely the law and the facts in
the instant case, we reach the following conclusions: This was
not a contract of hazard. It was a sale in gross in which there
was a mutual mistake as to the quantity of land sold and as to
the amount of the standing crop. The mistake of fact as disclosed
not alone by the terms of the contract but by the attendant
circumstances, which it is proper to consider in order to throw
light upon the intention of the parties, is, as it is sometimes
expressed, the efficient cause of the concoction. The mistake
with reference to the subject matter of the contract is such
that, at the option of the purchaser, the contract is rescissible
(voidable). Without such mistake the agreement would not have
made and since this is true, the agreement is inoperative. It
is not deception but is more nearly akin to bilateral mistake
for which relief should be granted. Specific performance of the
contract can therefore not be allowed at the instance of the
vendor.
83
8 Manresa, 5th Ed., Bk. 2, pp. 403-404. For cases illustrating mistakes account,
see Pastor vs. Nicasio, 6 Phil. 152; Aldecoa & Co. vs. Warner, Barnes & Co., 16 Phil.
23; Gutierrez Hermanos vs. Oria Hermanos,30 Phil. 491; Oquinena & Co. vs. Muer-
tegui, 32 Phil. 261.
431
Art. 1332 CONTRACTS
“The ultimate result is to put the parties back in exactly

their respective positions before they became involved in the
negotiation and before accomplishment of the agreement. This
was the decision of the trial judge and we think that decision
conforms to the facts and the principles of equity.’’
(2) Mistake as to person (error in persona): This kind of mis-

take or error may refer either to the name or to the identity or to
the qualification of a person. It is evident from the provision of the
second paragraph of Art. 1331 that the only mistake with regard to
persons which will vitiate consent are mistakes with regard to the
identity or the qualifications of one of the contracting parties. Hence,
mistake with regard to the name of one or both of the contracting
parties will not invalidate the contract. In order that mistake as to
persons shall vitiate consent, the following requisites must, how-
ever, concur: first, the mistake must be either with regard to the
identity or with regard to the qualification of one of the contracting
parties; and second, such identity or qualification must have been
the principal consideration for the celebration of the contract. Gen-
erally, this kind of mistake occurs in obligations to do which require
special qualifications of the parties or which are based on confidence.
Examples of these obligations are those arising from remuneratory
contracts, partnership, agency, deposit, commodatum, and lease of
services.84
Art. 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.85
Rule Where a Party Is Illiterate. — The rule stated in the
above article was declared by the codifiers as “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 and Spanish.”86 Thus, where the plaintiff, who cannot
84
3 Castan, 7th Ed., pp. 334-335; 8 Manresa, 5th Ed., Bk. 2, p. 402.
85
New provision.
86
Report of the Code Commission, p. 136, cited in Ayola vs. Valderama Lumber
Co., CA, 49 Off. Gaz. 980.
432
Consent
read and write, signed with a cross a document which she thought
was merely a promise to pay certain expenses which defendant had
advanced to her in a certain law suit, but which turned out to be
an absolute deed of sale of two parcels of land and a carabao, said
document is voidable, for had she truly understood the contents
thereof, she would neither have accepted nor authenticated it by
her mark.87 Similarly, where the plaintiffs, both of whom are blind,
affixed their thumbmarks to a deed which they thought was a deed
of mortgage, but which turned out to be a deed of sale of certain
properties in favor of the defendant who is a son-in-law of one of
them, although the deed is a public document and the notary public
testified as to their due execution, since courts are given a wide
latitude in weighing the facts or circumstances in a given case and
since there exists a fiduciary relationship between the parties to the
contract, it was held that such contract is voidable.88 The same is also
true where the plaintiff had testified that he had signed a voucher
without knowing or understanding its contents. Since under Art.
1332, the burden of proving that the plaintiff had understood the
contents of the document was shifted to the defendant and he had
failed to do so, the presumption of mistake still stands unrebutted
and controlling.89
Article 1332 was intended for the protection of a party to a
contract who is at a disadvantage due to his illiteracy, ignorance,
mental weakness or other handicap. This article contemplates a
situation wherein a contract has been entered into, but the consent
of one of the parties is vitiated by mistake or fraud committed by
the other contracting party. This is apparent from the ordering of
the provisions under Book IV, Title II, Chapter 2, Section 1 of the
Civil Code, from which Article 1332 is taken. Article 1330 states
that “A contract where consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.’’ (Hemedes vs.
Court of Appeals, 316 SCRA 348.)
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. Fraud, on the other hand, is present when,
87
Dumasug vs. Modelo, 34 Phil. 252.
88
Trasporte vs. Beltran, CA, 51 Off. Gaz. 1434.
89
Ayola vs. Valderama Lumber Co., CA, 49 Off. Gaz. 980.
433
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. Clearly, Article 1332 assumes
that the consent of the contracting party imputing the mistake or
fraud was given, although vitiated, and does not cover a situation
where there is a complete absence of consent. (Hemedes vs. Court of
Appeals, supra.)
Art. 1333. There is no mistake if the party alleging it

knew the doubt, contingency or risk affecting the object of
the contract.90
Art. 1334. Mutual error as to the legal effect of an agree-
ment when the real purpose of the parties is frustrated, may
vitiate consent.91
Mistake of Law. — Mistake of law as a rule will not vitiate

consent. There is, however, an exception to this rule. According
to Art. 1334 (a new provision), mutual error as to the effect of an
agreement when the real purpose of the parties is frustrated, may
vitiate consent.92 Three requisites are, therefore, necessary in order
that such mistake will vitiate consent. In the first place, the mistake
must be with respect to the legal effect of an agreement; in the
second place, the mistake must be mutual; and in the third place,
the real purpose of the parties must have been frustrated.
Explaining the reason for the insertion of Art. 1334 in the Civil
Code, the Code Commissioners stated in their report:
“Mistake of law does not generally vitiate consent. But when
there is mistake on a doubtful question of law, or on the construction
or application of law, this is analogous to a mistake of fact, and the
maxim of ignorantia legis neminem excusat should have no proper
application. When even the highest courts are sometimes divided
upon difficult legal questions, and when one-half of the lawyers in all
90
New provision.
91
New provision.
92
The mistake referred to in this article seems to be the equivalent of what
Castan terms a mistake as to the nature of the contract (error in negocio) giving as
an example a contract in which one of the parties believes that he is selling the thing,
while the other thinks that he is merely leasing it. (3 Castan, 7th Ed., 335.)
434
Consent
controversies on a legal question are wrong, why should a layman be

held accountable for his honest mistake on a doubtful legal issue?’’93
Art. 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 the intimidation, the age,
sex and condition of the person shall be borne in mind.
A threat to enforce one’s claim through competent au-
thority, if the claim is just or legal, does not vitiate consent.94
Art. 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.95
Violence and Intimidation. — The first paragraph of Art.

1335 gives the definition of violence, while the second paragraph of
the same article gives the definition of intimidation.
Because of the similarity between violence and intimidation,
especially with regard to their effects both upon the will of the
person upon whom they are exercised and upon the contract which
is produced thereby, the two are sometimes known as duress. One,
however, must be distinguished from the other. While violence
is external, intimidation is internal; while the first prevents the
expression of the will substituting it with a material act dictated by
another, the second influences the operation of the will, inhibiting
it in such a way that the expression thereof is apparently that of a
person who has freely given his consent.96 In the terse language of
Castan, violence is physical compulsion, while intimidation is moral
compulsion.97
93
94
95
96
97
435
Idem; Requisites of violence. — In order that consent is

vitiated through violence, it is essential that the following requisites
must concur: first, the force employed to wrest consent must be
serious or irresistible; and second, it must be the determining
cause for the party upon whom it is employed in entering into the
contract.98
Idem; Requisites of intimidation. — Intimidation, on the
other hand, requires the concurrence of the following requisites:
first, one of the contracting parties is compelled to give his consent
by a reasonable and well-grounded fear of an evil; second, the evil
must be imminent and grave; third, the evil must be unjust; and
fourth, the evil must be the determining cause for the party upon
whom it is employed in entering into the contract.99
Idem; id. — Character of intimidation. — In order that
intimidation may be sufficient to render a contract voidable, Art.
1335 requires that one of the contracting parties should be 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. This presupposes that the threat
or intimidation must be actual, serious and possible of realization,
and that the actor can and still will carry out his threat.100 The
best illustrations of the application of this rule are those contracts
entered into during the Japanese occupation involving payments
in Japanese military notes, where it is established that one of the
contracting parties was compelled to give his consent to the payment
by reason of a threat to report his non-acceptance of the military
notes to the Japanese authorities. Thus, it has been held that the
threat to deliver anyone to the Kempetai or to the now infamous
Fort Santiago, for refusal to accept Japanese military notes, or for
any cause, even to intelligent persons of ordinary firmness would
surely infuse just fear of great bodily harm, should there be a refusal
considering the inquisitorial methods employed by the invaders and
what they had done.101 But the mere knowledge of the severe penalties
98
Ibid., pp. 337-338.
99
Ibid.
100
This rule, which is taken from Manresa (Vol. 8, Bk. 2, 5th Ed., p. 411), is enun-
ciated in the cases of Alarcon vs. Kasilag, CA, 40 Off. Gaz. 11th S, p. 203; De Asis vs.
Buenviaje, CA, 45 Off. Gaz. 317; Mirano vs. Mossessgeld Santiago, CA, 45 Off. Gaz.
343; Derequito vs. Dolutan, CA, 45 Off. Gaz. 1351; Valdeabella vs. Marquez, CA, 48
Off. Gaz. 719.
101
Rodriguez vs. De Leon, CA, 47 Off. Gaz. 6296.
436
Consent
imposed by the invaders upon a violation of their proclamations

and orders regarding non-acceptance of military notes, which was
common and applicable to all, without any proof of direct acts
showing the imminence and gravity of any injury, does not in itself
establish intimidation, since according to the law, such intimidation
exists only when one of the contracting parties is inspired with a
reasonable and well grounded fear of suffering an imminent and
grave injury to his person or property, or to the person or property of
his spouse, descendants or ascendants.102
Idem; id. — Distinguished from reluctant consent. —
From what had been stated, consent given through intimidation
must not be confused with consent given reluctantly and even against
good sense and judgment. There must be a distinction to be made
between a case where a person gives his consent reluctantly and
even against his good sense and judgment and where he, in reality,
gives no consent at all as where he executes a contract against his
will under a pressure which he cannot resist. It is clear that one acts
as voluntarily and independently in the eyes of the law when he acts
reluctantly and with hesitation as when he acts spontaneously and
joyously. Legally speaking, he acts voluntarily and freely when he
acts wholly against his better sense and judgment as when he acts
in conformity with them. Between the two acts there is no difference
in law.103
The test in order to determine whether consent given “under
pressure” is intimidation within the meaning of the law or not is
given by Justice Moreland in the following words:
“All men are presumed to be sane and normal and subject

to be moved by substantially the same motives. When of age
and sane, they must take care of themselves. In their resolu-
tions with others in the business of life, wits, sense, intelligence,
training, ability and judgment meet and clash and contest,
sometimes with gain and advantage to all, sometimes to a few
only, with loss and injury to others. In these contests men must
depend upon themselves — upon their own abilities, talents,
102
Valdeabella vs. Marquez, CA, 48 Off. Gaz. 719. To the same effect: Mirano vs.
Mossessgeld Santiago, CA, 45 Off. Gaz. 343; Phil. Trust Co. vs. Araneta, 46 Off. Gaz.
4254; Laraga vs. Bañez, 47 Off. Gaz. 696; Fernandez vs. Brownell, 51 Off. Gaz. 713.
103
Vales vs. Villa, 35 Phil. 769; Reyes vs. Zaballero, G.R. No. L-3561, May 23,
1951.
437
training, sense, acumen, judgment. The fact that one may be

worsted by another, of itself, furnishes no cause of complaint.
One man cannot complain, because another is more able, or bet-
ter trained, or has better sense or judgment than he has; and
when the two meet on a fair field the inferior cannot murmur if
the battle goes against him. The law furnishes no protection to
the inferior simply because he is inferior, any more than it pro-
tects the strong because he is strong. The law furnishes protec-
tion to both alike — to one no more or less than to the other. It
makes no distinction between the wise and the foolish, the great
and the small, the strong and the weak. The foolish may lose all
they have to the wise; but that does not mean that the law will
give it back to them again. Courts cannot follow one every step
of his life and extricate him from one-sided contracts, or annul
the effects of foolish acts. Courts cannot constitute themselves
guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or overcome
by another, but because he has been defeated or overcome il-
legally. Men may do foolish things, make ridiculous contracts,
use miserable judgments, and lose money by them — indeed, all
they have in the world; but not for that alone can the law inter-
vene and restore. There must be, in addition, a violation of law,
the commission of what the law knows as an actionable wrong
before the courts are authorized to lay hold of the situation and
remedy it.
“Furthermore, even if an actionable wrong be committed
in such manner as to authorize the court to intervene, the
person injured may renounce his right to take the matter to the
courts and may compromise with the wrong-doer. Or, having
been placed in a very disadvantageous position by the wrong
committed against him, he may be offered by his adversary one
or more avenues of escape. He may be required to lose more
property to his enemy or go to the court for redress. In such case
the payment of an additional sum as a means of escape is not
necessarily a payment for duress. The act was preceded by an
exercise of judgment. This much was plain to him; he had either
to let the matter stand as it was with the loss already sustained
or go to the courts to be relieved. His judgment, operating upon
this condition, told him to pay the additional sum rather than
to suffer the inconvenience and expense of an action in court.
A payment made under such conditions is not voidable. It
is a voluntary act of a sane and mature man performed upon
reflection. Not only this; it is a compromise of the original wrong
and a ratification of the relation which the wrongful act was
intended to establish between the parties.
438
Consent
“The same may be said with greater force of a case where

a person’s own voluntary act, uninfluenced by another, has put
him in a disadvantageous position — a position which another
may unjustly make use of to his injury. The failure to reduce a
contract to writing or to have witnesses present when a verbal
agreement is made, or to record an instrument, or to exclude
from the operation of its terms things verbally agreed to be
excluded, etc., may place a person in a disadvantageous position
with respect to another; but the demand that he pays to secure
his extrication is not illegal, and payment made pursuant to
such demand is not necessarily voidable. He pays for his lack of
foresight. While the demand may be reprehensible morally, it is
not illegal; and of itself is not ground for relief.
“There must, then, be a distinction to be made between
a case where a person gives his consent reluctantly and even
against his good sense and judgment, and where he, in reality,
gives no consent at all, as where he executes a contract or performs
an act against his will under a pressure which he cannot resist.
It is clear that one acts as voluntarily and indepedently in the
eyes of the law when he acts reluctantly and with hesitation,
as when he acts spontaneously and joyously. Legally speaking,
he acts as voluntarily and freely when he acts wholly against
his better sense and judgment as when he acts in conformity
with them. Between the two acts there is no difference in law.
But when his sense, judgment, and his will rebel and he refuses
absolutely to act as requested, but is nevertheless overcome
by force or intimidation to such an extent that he becomes a
mere automaton and acts mechanically only, a new element
enters, namely, a disappearance of the personality of the actor.
He ceases to exist as an independent entity with faculties and
judgment and in his place is substituted another — the one
exercising the force or making use of the intimidation. While
his hand signs, the will which moves it is another’s. While a
contract is made, it has, in reality and in law, only one party,
the one using the force or the intimidation; it is unenforceable
for lack of a second party.
“From these considerations it is clear that every case of
an alleged intimidation must be examined to determine within
which class it falls. If it is within the first class, it is not duress
in law, if it falls in the second, it is.’’104
104
Vales vs. Villa, 35 Phil. 769. To a certain extent the doctrine of absolute judi-
cial objectivity as applied to contractual relations has been humanized by the provi-
sion of Art. 24 of the New Civil Code.
439
Martinez vs. Hongkong and Shanghai Bank

15 Phil. 252
This is an action to annul a contract on the ground that
plaintiff’s consent thereto was obtained under duress. Under
this contract, she agreed to a conveyance of several properties to
Aldecoa & Co. and the Hongkong and Shanghai Bank as settle-
ment of their claims against her and against her husband, who
in order to escape criminal charges, had escaped to Macao, a
territory not covered by any extradition treaty. It was estab-
lished at the trial that during the period of negotiation, repre-
sentations were made to her by the defendants and concurred
in by her lawyers, that if she assented to the requirements of
the defendants, the civil suit against herself and her husband
would be dismissed and the criminal charges against the latter
withdrawn, but if she refused, her husband must either spend
the rest of his life in Macao or be criminally prosecuted. The
question now is whether or not there was duress which would
invalidate the contract.
Held: “In order that this contract can be annulled it
must be shown that the plaintiff never gave her consent to
the execution thereof. It is, however, necessary to distinguish
between real duress and the motive which is present when one
gives his consent reluctantly. A contract is valid even though
one of the parties entered into it against his wishes and desires
or even against his better judgment. Contracts are also valid
even though they are entered into by one of the parties without
hope of advantage or profit. A contract whereby reparation is
made by one party for injuries which he has wilfully inflicted
upon another is one which from its inherent nature is entered
into reluctantly by the party making the reparation. He is
confronted with a situation in which he finds the necessity
of making reparation or of taking the consequences, civil
or criminal, of his unlawful acts. He makes the contract of
reparation with extreme reluctance and only by the compelling
force of the punishment threatened. Nevertheless, such contract
is binding and enforceable.
“It is undisputed that the attorneys for the plaintiff in this
case advised her that, from the facts which they had before them,
facts of which she was fully informed, her husband had been
guilty of embezzlement and misappropriation in the management
of the business of Aldecoa & Co. and that, in their judgment,
if prosecuted therefor, he would be convicted. In other words,
under the advice of her counsel, the situation was so presented
to her that it was evident that in signing the agreement, she
440
Consent
had all to gain and nothing to lose, whereas, in refusing to sign

said agreement, she had all to lose and nothing to gain. In the
one case, she would lose her property and save her husband.
In the other, she would lose her property and her husband too.
The argument thus presented to her by her attorneys addressed
itself to judgment and not to fear. It appealed to reason and
not to passion. It asked her to be moved by common sense and
not by love of family. It spoke to her own interests as much as
to those of her husband. The argument went to her financial
interests as well as to those of the defendants. It spoke to her
business judgment as well as to her wifely affections. From the
opinions of her attorneys as they were presented to her upon
facts assumed by all to be true, we do not well see how she could
reasonably have reached a conclusion other than that which
she did reach. It is of no consequence here whether or not her
lawyers advised her wrongly. It is of no importance whether, as
a matter of law, she would have been deprived of her alleged
interests in the properties mentioned in the manner described
and advised by her attorneys. The important thing is that she
believed and accepted their judgment and acted upon it. The
question is not did she make a mistake, but did she consent; not
was she wrongly advised, but was she coerced; not was she wise,
but was she duressed.
“From the whole case we are of the opinion that the finding
of the court below that the plaintiff executed the contract in
suit of her own free will and choice and not from duress is fully
sustained by the evidence.’’
Idem; id. — Determination of degree of intimidation.

— According to the third paragraph of Art. 1335, to determine the
degree of the intimidation, the age, sex and condition of the person
shall be borne in mind. It is evident that this provision refers princi-
pally to the person intimidated. By condition here is meant not only
the resolute or weak character of the person intimidated, but also
his other circumstances, such as his capacity or culture, which per-
mits him to appreciate whether or not there is an imminent danger,
his position, by which he can determine whether or not it gives him
a chance to thwart the danger, his financial condition, because while
a certain amount may mean nothing to some, to others it may mean
economic ruin.105
105
8 Manresa, 5th Ed., Bk. 2, p. 418; Rodriguez vs. De Leon, CA, 47 Off. Gaz.
6296.
441
Art. 1337 CONTRACTS
But the applicability of the provision is even more evident in

the case of the spouse, descendant or ascendant of the contracting
party. When the evil which threatens is directed not against the
contracting party but against his spouse, descendant or ascendant,
we must consider not only the conditions of the contracting party,
but also the conditions of such spouse, descendant or ascendant,
because, although the evil which threatens may not be sufficiently
grave or serious to bring harm to the contracting party, it may have a
different effect upon a weak woman, an aged father, or a defenseless
child.106
Idem; id. — Effect of just or legal threat. — According
to the last paragraph of Art. 1335, a threat to enforce one’s claim
through competent authority, if the claim is just or legal, does not
vitiate consent. Consequently, even if it can be established that the
reason or motive of a party in entering into a contract was the threat
of the other to proceed against him through the courts, the contract
would still be perfectly valid and not voidable.107 Thus, where it is
established that a demand for the settlement of an obligation made
by the creditor upon the debtor was accompanied by the threat that
upon failure of the latter to do so, an action would be instituted
against him in court, it was held that such threat is proper within
the realm of the law as a means to enforce collection of the obliga-
tion, and therefore, cannot constitute intimidation which would in-
validate any settlement entered into even if the claim proves to be
unfounded so long as the creditor who made the threat believed that
it was his right to do so.108
Art. 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
106
107
Doronilla vs. Lopez, 3 Phil. 360; Martinez vs. Hongkong and Shanghai Bank,
5 Phil. 252; Jalbuena vs. Ledesma, 8 Phil. 601; Berg vs. Nat. City Bank of New York,
102 Phil. 309.
108
Berg vs. Nat. City Bank of New York, G.R. No. L-9312, Oct. 31, 1957.
442
Consent
unduly influenced was suffering from mental weakness, or

was ignorant or in financial distress.109
Undue Influence. — According to Art. 1337 of the Code, 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. Concisely stated, undue influence invalidating a
contract is that which substitutes the wishes of another for those of
a party to the contract or that which deprives the latter of his free
agency.110
Idem; Undue influence which vitiates consent. —
Although it has often been stated that undue influence is an unlawful
influence, it appears that no more is meant by the expression “undue
influence,” as used in this connection than that it is the influence
which deprives a person of his free agency. Consequently, even if it
can be established that a person entered into a contract through the
importunity or persuasion of another against his better judgment,
if the deprivation of his free agency is not proved, there is no undue
influence which will invalidate the contract. Thus, according to the
Supreme Court:
“Solicitation, importunity, argument, and persuasion are

not undue influence and a contract is not to be set aside merely
because one party used these means to obtain the consent of
the other. Influence obtained by persuasion or argument or by
appeals to the affections is not prohibited either in law or morals
and is not obnoxious even in courts of equity. Such may be termed
‘due influence.’ The line between due and undue influence when
drawn, must be with full recognition of the liberty due every
true owner to obey the voice of justice, the dictates of friendship,
of gratitude and of benevolence, as well as the claims of kindred,
and when not hindered by personal incapacity or particular
regulations, to dispose of his own property according to his own
free choice. (9 Cyc. 455, and cases there cited.)’’111
The test, therefore, in order to determine whether or not there

is undue influence which will invalidate a contract is to determine
whether or not the influence exerted has so overpowered or subjugated
109
New provision.
110
57 Am. Jur., Sec. 350, p. 258.
111
Martinez vs. Hongkong and Shanghai Bank, 15 Phil. 252.
443
Art. 1338 CONTRACTS
the mind of a contracting party as to destroy his free agency, making

him express the will of another rather than his own.112 However, in
determining whether or not there is undue influence, 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.113
Art. 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.114
Fraud. — Fraud which will render a contract voidable refers

to those insidious words or machinations employed by one of the
contracting parties in order to induce the other to enter into a
contract, which, without them, he would not have agreed to.115
Idem; Kinds of fraud. — The fraud which is defined in Art.
1338 must not be confused with the fraud which is mentioned in Arts.
1170 and 1171 of the Code.116 Fraud or dolo under the Civil Code, as
distinguished from fraud or dolo under the Revised Penal Code, may,
therefore, be classified as either fraud in the perfection of a contract
(Art. 1338) or fraud in the performance of an obligation (Art. 1170).
The first is the fraud which is employed by a party to the contract in
securing the consent of the other party, while the second is the fraud
which is employed by the obligor in the performance of a pre-existing
obligation. Fraud or dolo which is present or employed at the time
of the birth or perfection of a contract, on the other hand, may be
subdivided into dolo causante and dolo incidente. Dolo causante or
causal fraud refers to those deceptions or misrepresentations of a
serious character employed by one party and without which the
other party would not have entered into the contract. This is the
fraud which is defined in Art. 1338. Dolo incidente or incidental
112
Coso vs. Fernandez Deza, 42 Phil. 595.
113
114
115
116
See distinctions under Art. 1171, Civil Code.
444
Consent
fraud refers to those deceptions or mispresentations which are not

serious in character and without which the other party would still
have entered into the contract. This is the fraud referred to in Art.
1344. The two may be distinguished from each other as follows:
(1) The first refers to a fraud which is serious in character,
while the second is not serious.
(2) The first is the cause which induces the party upon whom
it is employed in entering into the contract, while the second is not
the cause.
(3) The effect of the first is to render the contract voidable,
while the effect of the second is to render the party who employed it
liable for damages.117
Idem; Requisites. — It is evident from the provisions of Arts.
1338 to 1344 of the Code that in order that the consent of a party
to a contract is vitiated by fraud, it is essential that the following
requisites must concur:
(1) Fraud or insidious words or machinations must have been
employed by one of the contracting parties;
(2) The fraud or insidious words or machinations must have
been serious;
(3) The fraud or insidious words or machinations must have
induced the other party to enter into the contract; and
(4) The fraud should not have been employed by both of the
contracting parties or by third persons.
Idem; id. — Nature of fraud. — According to Manresa, the
essence of this class of fraud lies in the deception or misrepresenta-
tion employed by one of the contracting parties to secure the con-
sent of the other. This is indicated by the phrase “insidious words or
machinations’’ used in Art. 1338 which is broad enough to compre-
hend any kind of deception, such as false promises, fictitious names,
fictitious qualifications, or fictitious authority — in short, all the
thousand and one forms of deception which may delude a contract-
117
8 Manresa, 5th Ed., Bk. 2, pp. 240-241; Hill vs. Veloso, 31 Phil. 160; Wood-
house vs. Halili, 49 Off. Gaz. 3374.
445
Art. 1338 CONTRACTS
ing party to give his consent, without necessarily constituting estafa

or some other offense under our penal laws.118
Before a contract can be invalidated because of fraud, it
is, however, essential that there must be proof of concrete facts
constituting the fraud or insidious words or machinations employed
by one of the contracting parties by virtue of which the other
party was induced to enter into the contract, which, without them,
he would not have agreed to.119 Furthermore, it is also essential
that such insidious words or machinations must be prior to or
contemporaneous with the birth or perfection of the contract.120
Eguaras vs. Great Eastern Life Assurance Co.

33 Phil. 263
This is an action for the collection of the value of an

insurance policy. The records show that Dominador Albay filed
an application for an insurance on his life with the defendant
company; that since Albay was in poor health, the person who
presented himself for medical examination to the company
physician was not the applicant, but Castor Garcia, who posed
as Dominador Albay; that as a result of the favorable report of
the physician, the defendant company executed the contract
of insurance; that a short time thereafter the insured died. In
this action the company contends that the contract should be
annulled on the ground of fraud.
Held: “The fraud which gave rise to the mistaken consent
given by the defendant company to the application for insurance
made by Albay and to the execution of the contract through
deceit, is plain and unquestionable. The fraud consisted in the
substitution at the examination of Castor Garcia in place of the
insured Dominador Albay, and as the deceit practiced in the
said contract is of a serious nature, the same is also ipso facto
void and ineffective (voidable), in accordance with the provision
of Article 1270 (now Art. 1344) of the Civil Code.’’121
118
8 Manresa, 5th Ed., Bk. 2, p. 423; Eguaras vs. Great Eastern Life Ass. Co., 33
Phil. 263.
119
Ramos vs. Valencia, 47 Off. Gaz. 1978.
120
Eguaras vs. Great Eastern Life Ass. Co., 33 Phil. 263.
121
To the same effect: Musngi vs. West Coast Ins. Co., 61 Phil. 864.
446
Consent
Art. 1339. Failure to disclose facts, when there is a duty

to reveal them, as when the parties are bound by confidential
relations, constitutes fraud.122
Effect of Failure To Disclose Facts. — Failure to disclose

facts, when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud.123 Thus, where the
defendant, who is the manager of a certain corporation as well as
the owner of about 3/4 of the shares of capital stock thereof, bought
through an agent 800 shares of capital stock from the plaintiff,
without disclosing the fact that he had just negotiated the sale of
valuable properties to the government thus enhancing the value
of the capital stocks of the company, such nondisclosure is clearly
fraudulent; therefore, the sale can be annulled.124 However, the
innocent nondisclosure of a fact, when there is no duty to reveal
it, does not constitute fraud; consequently, such nondisclosure does
not affect the formation of the contract or operate to discharge the
parties from their agreement.125
Art. 1340. The usual exaggerations in trade, when the

other party had an opportunity to know the facts, are not in
themselves fraudulent.126
Effect of Exaggerations in Trade. — The usual exaggera-
tions in trade, when the other party had an opportunity to know
the facts, are not in themselves fraudulent.127 Thus, according to the
Supreme Court:
“When the purchaser proceeds to make investigations

by himself, and the vendor does nothing to prevent such
investigations from being as complete as the former might wish,
the purchaser cannot later allege that the vendor made false
representations to him.
“One who contracts for the purchase of real estate in
reliance on the representations and statements of the vendor
122
New provision.
123
124
Strong vs. Gutierrez Repide, 213 U.S. 419; 41 Phil. 947.
125
Tuazon vs. Marquez, 45 Phil. 481. To the same effect: Escudero vs. Flores, 51
Off. Gaz. 3444.
126
New provision.
127
447
as to its character and value, but after he has visited and

examined it for himself, and has had the means and opportunity
of verifying such statements, cannot avoid the contract on the
ground that such statements were false or exaggerated.’’128
Art. 1341. A mere expression of an opinion does not sig-

nify fraud, unless made by an expert and the other party has
relied on the former’s special knowledge.129
Effect of Expression of Opinion. — 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.130 This
principle is illustrated in the following case:
Songco vs. Sellner

37 Phil. 254
The principal defense in this action for specific perfor-
mance relates to the false representation which, it is claimed,
was made by the plaintiff Songco with respect to the quantity
of uncut cane standing in the fields at the time the defendant
Sellner became the purchaser thereof. It is proved that Songco
estimated that the crop would yield 3,000 piculs of sugar. As
the crop turned out, it produced only 2,017 piculs of sugar. The
question now is whether such representation of the plaintiff-
vendor is fraudulent, which, under Art. 1338, would invalidate
the contract. Holding that such representation can only be con-
sidered as a mere expression of an opinion, the Supreme Court
ruled:
“It is of course elementary that a misrepresentation upon
a mere matter of opinion is not an actionable deceit, nor is it a
sufficient ground for avoiding a contract as fraudulent. We are
aware that statements may be found in the books to the effect
that there is a difference between giving an honest opinion and
making a false representation as to what one’s real opinion is.
We do not think, however, that this is a case where any such
distinction should be drawn.
128
Azarraga vs. Gay, 52 Phil. 599. To the same effect: Songco vs. Sellner, 37 Phil.
254; Puato vs. Mendoza, 64 Phil. 457.
129
New provision.
130
448
Consent
“The law allows considerable latitude to seller’s statement,

or dealer’s talk, and experience teaches that it is exceedingly
risky to accept it at its face value. The refusal of the seller to
warrant his estimate should have admonished the purchaser
that such estimate was put forth as a mere opinion; and we will
not now hold the seller to a liability equal to that which would
have been created by a warranty, if one had been given.
“Assertions concerning the property which is the subject of
a contract of sale, or in regard to its qualities and characteristics,
are the usual and ordinary means used by sellers to obtain a
high price and are always understood as affording to buyers no
ground for omitting to make inquiries. A man who relies upon
such an affirmation made by a person whose interest might
so readily prompt him to exaggerate the value of his property
does so at his peril and must take the consequences of his own
imprudence.’’
Art. 1342. Misrepresentation by a third person does not

vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.131
Effect of Misrepresentation by Third Persons. — Misrep-
resentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is
mutual.132 Even without Art. 1342, this rule would still be applicable
since it is a logical corollary to the principle that in order to vitiate
consent, the fraud must be employed only by one of the contracting
parties. Besides, it would be clearly unjust to visit upon a contract-
ing party the disastrous effects of nullity simply because the other
contracting party has indiscreetly reposed his confidence upon a
third party. The precept, however, would not be applicable if the
third person makes the misrepresentation with the complicity or, at
least, with the knowledge, but without any objection, of the contract-
ing party who is favored. Neither is it applicable if the misrepresen-
tation has created substantial mistake and the same is mutual.133
Problem — C, an old and ignorant woman, was helped by

V in obtaining a loan of P3,000.00 from X Rural Bank secured
by a mortgage on her house and lot. On the day she signed the
131
New provision.
132
133
8 Manresa, 5th Ed., Bk. 2, p. 427; Hill vs. Veloso, 31 Phil. 160.
449
promissory note and the mortgage covering the loan, she also
signed several documents. One of these documents signed by
her was promissory note of V for a loan of P3,000.00 also secured
by a mortgage on her house and lot. Several years later, she
received advice from the sheriff that her property shall be sold
at public auction to satisfy the two obligations. Immediately she
filed suit for annulment of her participation as co-maker in the
obligation contracted by V as well as of the mortgage in relation
to said obligation of V on the ground of fraud and mistake. Upon
filing of the complaint, she deposited P3,383.00 in court as
payment of her personal obligation including interests.
(a) Can be held liable for the obligation of V? Why?
(b) Was there a valid and effective consignation consid-
ering that there was no previous tender of payment made by C
to the Bank? Why?
Answer — (a) C cannot be held liable for the obligation
of V. It is crystal clear that C’s participation in V’s obligation
both as co-maker and as mortgagor is voidable not on the
ground of fraud because the Bank was not a participant in the
fraud committed by V, but on the ground of mistake. There was
substantial mistake on the part of both C and the Bank mutually
committed by them as a consequence of the fraud employed by
V. (See Rural Bank of Caloocan City vs. CA, 104 SCRA 151.)
(b) Despite the fact that there was no previous tender
of payment made directly to the Bank, nevertheless, the
consignation was valid and effective. The deposit was attached
to the record of the case and the Bank had not made any claim
thereto. Therefore, C was right in thinking that it was useless
and futile for her to make a previous offer and tender of payment
directly to the Bank. Under the foregoing circumstances, the
consignation was valid, if not under the strict provisions of the
law, under the more liberal consideration of equity. (Ibid.)
Art. 1343. Misrepresentation made in good faith is not

fraudulent but may constitute error.134
Art. 1344. In order that fraud may make a contract
voidable, it should be serious and should not have been
employed by both contracting parties.
134
New provision.
450
Consent
Incidental fraud only obliges the person employing it to

pay damages.135
Magnitude of Fraud. — The second indispensable requisite

in order that the fraud employed by one of the contracting parties
will vitiate the consent of the other is that it should be serious in
character. This requisite is expressly stated in the first paragraph of
Art. 1344 of the Code.
According to Manresa, the serious character of the fraud refers
not to its influence, but to its importance or magnitude. By virtue
of this requisite, the annulment of a contract cannot, therefore, be
invoked just because of the presence of minor or common acts of
fraud whose veracity could easily have been investigated; neither
can such annulment be invoked because of the presence of ordinary
deviations from the truth, deviations, which are almost inseparable
from ordinary commercial transactions, particularly those taking
place in fairs or markets.136
Relation Between Fraud and Consent. — The third in-
dispensable requisite in order that the fraud employed by one of
the contracting parties will vitiate consent is that it should have in-
duced the other party to enter into the contract. In other words, such
fraud must be the principal or causal inducement or consideration
for the consent of the party who is deceived in the sense that he
would never have given such consent were it not for the fraud. This
is the fraud which Spanish commentators can dolo causante (dolus
causam dans).
If the fraud is merely incidental in the sense that the party
who is deceived would have agreed to the contract even without it,
his consent is not vitiated and, as a consequence, the validity of the
contract is not at all affected. Its only effect is to render the party
who has employed it liable for damages. This is the fraud which
Spanish commentators call dolo incidente (dolus incidens).
The following case will serve to illustrate the effect of dolo
incidente:
135
136
451
Woodhouse vs. Halili

49 Off. Gaz. 3374
Plaintiff and defendant entered into a contract whereby

it was agreed that they shall organize a partnership for the
bottling and distribution of Mission soft drinks, plaintiff to act
as industrial partner and manager, and defendant as capitalist
partner; that plaintiff was to secure the Mission soft drinks
franchise for and in behalf of the partnership; and that he
was to receive 30% of the net profits of the business. Because
of the alleged failure of defendant to comply with this contract
after the bottling plant was already in operation, plaintiff
brought this action against him praying for the execution of
the agreed contract of partnership, an accounting of the profits
of the business, as well as damages amounting to P200,000.
Defendant, in his answer, alleged that his consent to the
contract was secured through plaintiff’s false representation
that he had the exclusive bottling franchise of the Mission Dry
Corporation in the Philippines and that, although such franchise
was later on obtained from the Mission Dry Corporation, it
was he, the defendant, and not the plaintiff, who obtained it.
He also presented a counterclaim for P200,000 as damages.
Consequently, the principal questions which will have to be
decided in this case are: first, whether or not the plaintiff had
falsely represented that he had the exclusive franchise to bottle
Mission beverages in the Philippines; and second, whether this
false representation, if it existed, annuls the agreement to form
a partnership. Holding that there was breach of contract on the
part of the defendant as well as misrepresentation on the part
of the plaintiff, the Supreme Court, speaking through Justice
Labrador, ruled:
“We now come to the legal aspect of the false representa-
tion. Does it amount to a fraud that would vitiate the contract?
It must be noted that fraud is manifested in illimitable number
of degrees or gradations, from the innocent praises of a sales-
man about the excellence of his wares to those malicious machi-
nations and representations that the law punishes as a crime. In
consequence, Article 1270 (now Art. 1344) of the Civil Code dis-
tinguishes two kinds of (civil) fraud or dolo — the causal fraud
which may be a ground for the annulment of a contract, and the
incidental deceit, which only renders the party who employs it
liable for damages. This Court has held that in order that fraud
may vitiate consent, it must be the causal (dolo causante), not
merely the incidental (dolo incidente), inducement to the mak-
ing of the contract. The record abounds with circumstances in-
452
Consent
dicative of the fact that the defendant was led to the belief that
plaintiff had the exclusive franchise, but that the same was to
be secured for or transferred to the partnership. The plaintiff
no longer had the exclusive franchise, or the option thereto, at
the time the contract was perfected. But while he had already
lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure
said franchise for the partnership, as the bottler and distributor
for the Mission Dry Corporation. We declare, therefore, that if
he was guilty of a false representation, this was not the causal
consideration, or the principal inducement, that led defendant
to enter into the partnership agreement. But, on the other hand,
this supposed ownership of an exclusive franchise was actual-
ly the consideration or price plaintiff gave in exchange for the
share of 30% granted him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30% share in the
net profits because he was transferring his exclusive franchise
to the partnership.
“We conclude from the above that while the representation
that plaintiff had the exclusive franchise did not vitiate
defendant’s consent to the contract, it was used by plaintiff to
get from defendant a share of 30% of the net profits; in other
words, by pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the consent
of the latter to give him (plaintiff) a big slice in the net profits.
This is the dolo incidente defined in Article 1270 (now Art. 1344)
of the Civil Code, because it was used to get the other party’s
consent to a big share in the profits, an incidental matter in the
agreement.
“The last question for us to decide is that of damages, dam-
ages that plaintiff is entitled to receive because of defendant’s
refusal to form the partnership, and damages that defendant is
also entitled to collect because of the falsity of plaintiff’s repre-
sentation. Under Article 1106 (now Art. 2200) of the Civil Code,
the measure of damages is the actual loss suffered and the prof-
its reasonably expected to be received embraced in the terms
daño emergente and lucro cesante. Plaintiff is entitled under the
terms of the agreement to 30% of the net profits of the business.
Against this amount of damages, we must set off the damage
defendant suffered by plaintiff’s misrepresentation that he had
the exclusive franchise, by which misrepresentation he obtained
a very high percentage of share in the profits.’’
453
Art. 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.137
Art. 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.138
Simulation of Contracts. — Simulations of contract, which
Castan calls vices of declaration (vicios de la declaración), may be
either absolute or relative. The simulation is absolute when there is
colorable contract but it has no substance as the contracting parties
do not intend to be bound by the contract at all, as when a debtor
simulates the sale of his properties to a friend in order to prevent
their possible attachment by creditors. The basic characteristic
of this type of simulation of contract is the fact that the apparent
contract is not really desired or intended to produce legal effects or
in any way alter the juridical situation of the parties.139 It is relative
when the contracting parties state a false cause in the contract to
conceal their true agreement, as when a person conceals a donation
by simulating a sale of the property to the beneficiary for a fictitious
consideration. The primary consideration in determining the true
nature of a contract is the intention of the parties. such intention
is determined from the express terms of their agreement as well
as from their contemporaneous and subsequent acts (Nena Lazalita
Tating vs. Felicidad Tating Marcella, et al., G.R. No. 155208, March
27,2007).
Idem; Effects. — While the other vices of consent (vicios de la
formacion de la voluntad) render the contract voidable, simulation
of contracts affects the contract in an entirely different manner.
Thus, according to Art. 1346, an absolutely simulated contract
is void, while a relatively simulated contract binds the parties and
the parties may recover from each other what they may have given
137
New provision.
138
139
Rodriguez vs. Rodriguez, 28 SCRA 229; Carrantes vs. Court of Appeals, 76
SCRA 514.
454
Consent
under the contract, while a relatively simulated contract is binding

and enforceable between the parties and their successors in interest
to their real agreement, 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 (Gaudencio Valerio et al., vs.
Vicenta Refresca, et al., G.R. No. 163687, March 28,2006). The legal
presumption is in favor of the validity of contracts. The party who
impugns the validity and regularity of a contract has the burden of
proving his allegation.
Contracts of Adhesion — In the case of Development Bank of
the Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the Court
held that:
(a) A contract of adhesion is so-called because its terms are
prepared by only one party while the other party merely affixes his
signature signifying his adhesion thereto.
A contract of adhesion is just as binding as ordinary contracts.
It is true that we have, on occasion, struck down such contracts as
void when the weaker party is imposed upon in dealing with the
dominant bargaining party and is reduced to the alternative of
taking it or leaving it, completely deprived of the opportunity to
bargain on equal footing. Nevertheless, contracts of adhesion are
not invalid per se; they are not entirely prohibited. The one who
adheres to the contract is in reality free to reject it entirely; if he
adheres, he gives his consent
In the case of Sps. Francisco and Ruby Reyes vs. BPI Family
Savings Bank, Inc., et al., G. R. Nos. 149840-41, March 31,2006,
where the petitioner spouses undertook to secure the P15M loan of
Transbuilders Resources & Development Corporation to BPI-FSB
“and other credit accomodations of whatever nature obtained by the
Borrower/Mortgagor” under the Real Estate Mortgage they executed
in favor of BPI-FSB, the SC held that while the stipulation proved
to be onerous to the petitioners, neither the law nor the courts will
extricate a party from an unwise or undesirable contract entered
into with all the required formalities and with full awareness of its
consequences. Petitioners voluntarily executed the REM on their
property in favor of BPI-FSB to secure the loan. They cannot now be
allowed to repudiate their obligation to the bank after Transbuilder’s
default . While petitioner’s liability was written in fine print and in
a contract written by BPI-FSB, it has been the consistent holding
455
of the Court that contracts of adhesion are not invalid per se. On
numerous occasions, the Supreme Court has upheld the binding
effects of such contracts.
Section 2. — Object of Contract
Concept of Object. — Of all the requisites of a contract, the

object is, if not the most fundamental, the most indispensable in
order to have at least the shadow of a contract. Without a cause an
agreement is possible, although inexplicable; without consent it is
possible at least to have the appearance of a contract; but without
an object there is nothing.
Although there are commentators who distinguish between the
juridical relations or obligations created and the prestations which
constitute the objects of these obligations, under the Civil Code,
the objects of contracts and that of obligations are identical. This
fact is recognized by the provisions of Art. 1347 in relation with the
definition of obligations in Art. 1156 of the Code.140 Consequently,
the object of a contract may be defined as the thing, right or service
which is the subject matter of the obligation which is created or
established.141
Art. 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 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.142
Art. 1348. Impossible things or services cannot be the
object of contracts.143
140
141
Adopted from the definition given by Castan (Vol. 3, 7th Ed., p. 243).
142
143
456
Object of Contract
Art. 1349. The object of every contract must be determi-

nate as to its kind. The fact that the quantity is not determi-
nate 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.144
What May Be the Object of Contracts. — As a general rule,

all things or services may be the object of contracts. It is, however,
essential that the following requisites must concur:
First: The object should be within the commerce of men; in other
words, it should be susceptible of appropriation and transmissible
from one person to another.
Second: The object should be real or possible; in other words, it
should exist at the moment of the celebration of the contract, or at
least, it can exist subsequently or in the future.
Third: The object should be licit; in other words, it should not
be contrary to law, morals, good customs, public order or public
policy.
Fourth: The object should be determinate, or at least, possible
of determination, as to its kind.145
Consequently, the following cannot be the object of contracts: (1)
Things which are outside the commerce of men;146 (2) intransmissible
rights;147 (3) future inheritance, except in cases expressly authorized
by law;148 (4) services which are contrary to law, morals, good
customs, public order or public policy;149 (5) impossible things or
services;150 and (6) objects which are not possible of determination
as to their kind.151
Idem; Appropriability and transmissibility. — In order
that a thing, right or service may be the object of a contract, it is
essential that it must be within the commerce of men. Consequently,
144
145
146
147
Ibid.
148
Ibid.
149
150
Ibid.
151
457
Art. 1349 CONTRACTS
two conditions must concur. In the first place, the thing, right or
service should be susceptible of appropriation; and in the second
place, it should be transmissible from one person to another.152 Those
things, rights or services which do not possess these conditions or
characteristics are outside the commerce of men, and therefore,
cannot be the object of contracts. These include: (1) those things
which are such by their very nature, such as common things like
the air or the sea, sacred things, res nullius, and property belonging
to the public domain; (2) those which are made such by special
prohibitions established by law, such as poisonous substances,
drugs, arms, explosives, and contrabands; and (3) those rights
which are intransmissible because either they are purely personal
in character, such as those arising from the relationship of husband
and wife, like jus consortium, or from the relationship of paternity
and filiation, like patria potestas, or they are honorary or political
in character, such as the right to hold a public office and the right of
suffrage.153
Thus, in this jurisdiction, it has been held that communal
things, such as public plazas, sidewalks, streets, rivers, fountains
and other things for public use cannot be sold or leased because they
are by their very nature outside the commerce of men.154
Idem; Existence of object. — The most evident and
fundamental requisite in order that a thing, right or service may
be the object af a contract is that it should be in existence at the
moment of the celebration of the contract, or at least, it can exist
subsequently or in the future. Hence, according to the first sentence
of Art. 1347, even future things may be the object of contracts.
Idem; id. — Things which have perished. — In principle,
these things cannot be the object of contracts because they are
inexistent. The rule declared in Art. 1493 of the Civil Code to the
effect that “if at the time the contract of sale is perfected, the thing
which is the object of the contract has been entirely lost, the contract
shall be without any effect’’ can, therefore, be generalized.155
152
6 Sanchez Roman 1281.
153
154
Mun. of Cavite vs. Rojas, 30 Phil. 602; Muyot vs. de la Fuente, CA, 48 Off.
Gaz. 4866.
155
458
Object of Contract
Idem; id. — Future things. — It is clear from Art. 1347 that

a future thing may be the object of a contract.156 Such contract, ac-
cording to Manresa, maybe interpreted in two possible ways. It may
be interpreted as a conditional contract if its efficacy should depend
upon the future existence of the thing, or as an aleatory contract if
one of the contracting parties should bear the risk that the thing will
never come into existence. In case of doubt about the nature of the
contract, it must be deemed to be conditional because of the prin-
ciple stated in Art. 1378 of the Code that the doubt shall be resolved
in favor of the greatest reciprocity of interests.157
Idem; id. — Rule with respect to future inheritance. —
There is, however, one very important exception to the rule that a
future thing may be the object of a contract. This exception is found
in the second paragraph of Art. 1347 which states that no contract
may be entered into with respect to future inheritance.158 There are
several reasons for this exception. If the rule were otherwise, there
would always be the possibility that one of the contracting parties
may be tempted to instigate the death of the other in order that the
inheritance will become his. There would also be the possibility, and
this is more probable, that fraud and prejudice may be committed or
occasioned thereby. Besides, the right to make a will would then be
subordinated to the right to enter into a contract.159
By reason of the rule that no contract may be entered into with
respect to future inheritance, it has been held that an agreement for
the partition of the estate of a living person, made between those
who, in case of death, would inherit the estate is null and void.160 It
has also been held that where the vendor undertook to convey to the
vendee his participation in the property left by his deceased father,
the part of the property belonging to his mother, who is still living,
cannot at all be affected by the conveyance, since his interest in the
property of his mother at the time of the execution of the deed of sale
was a future inheritance and could not be the subject matter of a
valid contract, pursuant to the second paragraph of Art. 1347.161 But
156
See also Arts. 1461 and 1462, Civil Code.
157
8 Manresa, 5th Ed., Bk. 2, p. 433. See Art. 1461, Civil Code.
158
This rule is complemented by Arts. 905 and 2035, No. 6, Civil Code.
159
160
Arroyo vs. Gerona, 58 Phil. 226. To the same effect: Tinsay vs. Yusay, 47 Phil.
639; Tordilla vs. Tordilla, 60 Phil. 162; Reyes vs. Reyes, CA, 45 Off. Gaz. 1836.
161
Rivero vs. Serrano, 48 Off. Gaz. 642.
459
Art. 1349 CONTRACTS
after the death of the decedent, anyone of the co-heirs may enter into
a contract with respect to the inheritance even before partition has
been effected. This is so because of the principle announced in Art.
777 of the Code that the rights to the succession are transmitted at
the moment of the death of the decedent.162
The following case, however, provides an interesting study
of the applicability or inapplicability of the rule enunciated in the
second paragraph of Art. 1347:
Blas vs. Santos

1 SCRA 899
Simeon Blas married Marta Cruz in 1898. Out of this

marriage there were three children. The following year after
Marta’s death, Simeon contracted a second marriage with
Maxima Santos. There were no children out of this marriage. At
the time of the second marriage, no liquidation of the properties
of the first marriage was made. On Dec. 26, 1936, only over a
week before his death on Jan. 9, 1937, Simeon executed a will
declaring all of his properties as conjugal and giving one-half
thereof to Maxima as her share. On the same date, Maxima
signed a notarized document, stating that she had read the will
of her husband and that she promises to convey by will one-
half of the share given to her to the children of her husband
by his previous marriage. As a result, the children of Simeon
by his first marriage brought this action against the estate of
Maxima asking for the enforcement of the promise contained
in the document. It is now contended that the promise is not
enforceable because it lacks a sufficient cause or consideration
and that, being a contract with respect to future inheritance, it
falls within the purview of the prohibition enunciated in Art.
1271 (now Art. 1347) of the Civil Code.
Held: Considering that the properties of the first marriage
had not been liquidated, and the further fact that such properties
were actually included as conjugal properties of the second
marriage, it is clear that the document signed by Maxima is the
compromise defined in Art. 1809 ( now Art. 2128) of the Civil
Code. Its execution was ordered by the testator evidently to
prevent his heirs by his first marriage from contesting his will
and demanding liquidation of the conjugal properties acquired
162
Osorio vs. Osorio, 41 Phil. 53; Ibarle vs. Po, 49 Off. Gaz. 1836.
460
Object of Contract
during his first marriage. It is, therefore, a contract with a

sufficient cause or consideration. Neither does the prohibition
enunciated in Art. 1271 (now Art. 1347) of the Civil Code
apply. What is prohibited under this article is a contract which
deals with any property or right not in existence or capable of
determination at the time of the contract, that a person may
in the future acquire by succession. Here, the subject matters
of the contract signed by Maxima are well-defined properties,
existing at the time of the agreement.
Idem; id. — Exceptions. — The prohibition enunciated in the

second paragraph of Art. 1347, however, is not absolute in character.
There are two exceptions. They are:
(1) Under Art. 130 of the Code, which allows the future
spouses to give or donate to each other in their marriage settlement
their future property to take effect upon the death of the donor and
to the extent laid down by the provisions of the Civil Code relating
to testamentary succession; and
(2) Under Art. 1080 of the Code, which allows a person to
make a partition of his estate by an act inter vivos, provided that the
legitime of compulsory heirs is not prejudiced.
Idem; id. — Impossible things or services. — According
to Art. 1348, impossible things or services cannot be the object of
contracts. Thus, if the parties enter into a contract with respect to
an impossible thing like a mythical bird or animal or with respect
to an impossible service like a trip to some distant planet or galaxy,
the contract is void or inexistent.163 It must be observed, however,
that as far as impossible services are concerned, a distinction should
be made between absolute and relative impossibility. Absolute
impossibility, which arises from the very nature or essence of the
act or service itself, renders the contract void; relative impossibility,
which arises from the circumstances or qualifications of the obligor
rendering him incapable of executing the act or service, allows the
perfection of the contract, although the fulfillment thereof is hardly
probable. Thus, as a consequence, in a contract of partnership where
one of the partners obligates himself to contribute to the common
fund an amount which is beyond his means, the contract is not void
because the impossibility may disappear. When the impossibility
163
Art. 1409, Nos. 3 and 5, Civil Code.
461
Art. 1349 CONTRACTS
is permanent, however, as in the case of a person who is unable

to perform the service which he has contracted because of total
blindness, the contract is void.164
Idem; Licitness of object. — It is also an indispensable
requisite that the object must be licit. Hence, the third paragraph of
Art. 1347 provides that all services which are not contrary to law,
morals, good customs, public order and public policy may be the
object of a contract. This provision complements the provision of Art.
1306 of the Code. Consequently, the same principles which we have
taken up under that article may also be applied here.
Idem; Determinability of object. — It is also an indispen-
sable requisite that the object is determinable, or at least, determin-
able, as to its kinds.
When Art. 1349 says that the object must be determinate as
to its kind, it simply means that the genus of the object should
be expressed although there might be no determination of the
individual specie. Consequently, there need not be any specification
of the qualities and circumstances of the thing which constitutes
the object of the contract, since anyway according to Art. 1246
of the Code: “When the obligation consists in the delivery of an
indeterminate or generic thing, whose quality and circumstances
have not been stated, the creditor cannot demand a thing of superior
quality. Neither can the debtor deliver a thing of inferior quality.
The purpose of the obligation and other circumstances shall be taken
into consideration.”165 Hence, if A and B enter into an agreement by
virtue of which the former binds himself to deliver “ten horses” to the
latter, the contract is perfectly valid since the law merely requires
that the object must be determinate, or at least, determinable, as to
its kind.
Let us, however, assume that there is no specification of the
quantity, although there is a specification of the class or genus
to which the object belongs, is the contract valid? According to
the second sentence of Art. 1349, 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
164
165
For a detailed discussion of Art. 1349, see Manresa, Vol. 8, Bk. 2, 5th Ed.,
pp. 444-448.
462
Cause of Contracts
a new contract between the parties. Consequently, so long as it is

possible to determine the quantity of the object without the necessity
of any new contract, there can be no question about the validity of
a contract in which there is no specification of the quantity. This
would occur in those cases where the contract itself has established
the basis upon which such quantity can be determined, such as the
needs of a family, the provisions needed for a factory, the materials
for a particular work, and others of a similar nature.166 This can
be determined from the purpose or motive of the contract itself. In
case of failure of any of these means, the contract is without force
whatsoever.167
In the case of Aurora Fe B. Camacho vs. CA et al., G.R.
No.127520, Feb. 9, 2007, the SC held that Arts. 1349 and 1460 of
the New Civil Code provide the guidelines in determining whether
or not the object of the contract is certain. In this case, the object of
the contract is a 5,000 sq.m.portion of Lot 261, Balanga Cadastre.
The failure of the parties to state the exact location in the contract is
of no moment. This is a mere error occasioned by the parties’ fsilure
to describe with particularity the subject property, which does not
indicate the absence of the principal object as to render the contract
void. Since in this case, Camacho bound herself to deliver a potion
of Lot 261 to Atty. Banzon, the description of the property subject of
the contract is sufficient to validate the same.
Section 3. — Cause of Contracts
Art. 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.168
Art. 1351. The particular motives of the parties in
entering into a contract are different from the cause thereof.169
Concept of Cause. — In general, cause is the why of the
contract or the essential reason which moves the contracting parties
166
Liebenow vs. Phil. Vegetable Co., 39 Phil. 63.
167
168
169
New provision.
463
to enter into the contract.170 In other words, it is the immediate,

direct or most proximate reason which explains and justifies the
creation of an obligation through the will of the contracting parties.171
In particular, 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 contracts, it is the service or
benefit which is remunerated; and in contracts of pure beneficence,
it is the liberality of the benefactor.172
Idem; Distinguished from consideration. — Actually, in
this jurisdiction, cause and consideration are used interchangeably.
After all, causa is merely the civil law term, while consideration is
the common law term. It is, however, undisputed that the causa
in civil law jurisdictions is broader in scope than consideration in
Anglo-American jurisdictions. Many agreements which cannot be
supported in Anglo-American law for want of consideration can be
enforced under the broader doctrine of causa.173
Idem; Distinguished from object. — The cause must not
be confused with the object of the contract. Of course, there can
be no question about the difference between the two in cases of
remuneratory and gratuitous contracts, it is evident that, in the
first, the cause is the service or benefit which is remunerated,
while the object is the thing which is given in remuneration, and
in the second, the cause is the liberality of the donor or benefactor,
while the object is the thing which is given or donated. In onerous
contracts, however, there is a tendency to confuse one with the other.
Nevertheless, it is clear that the cause, for each contracting party,
is the prestation or promise of a thing or service by the other, while
the object of the contract, on the other hand, is the thing or service
itself. Thus, in a contract of sale, the cause, as far as the vendor is
concerned, is the acquisition of the purchase price, while the cause,
as far as the vendee is concerned, is the acquisition of the thing,174
stated in another way, the cause of the obligation of the vendor is
170
171
3 Castan, 7th Ed., p. 347, citing 2 Planiol, 1949 Ed., Sec. 279. These definitions
have been cited with approval in General Enterprises, Inc. vs. Lianga Bay Logging
Co., 11 SCRA 733.
172
173
174
464
Cause of Contracts
the obligation of the vendee, while the cause of the obligation of the
vendee is the obligation of the vendor.175 The objects of the contract,
on the other hand, are the thing which is sold and the price which
is paid.176 This view, which is upheld by Manresa and Castan, may
be illustrated by an example. If A sells, an automobile to B for
P20,000, delivery and payment to be made at some specified date,
the cause of the contract, as far as A is concerned, is the promise of
B to pay him P20,000, while the cause, as far as B is concerned, is
the promise of A to deliver the automobile to him. The objects of the
contract, on the other hand, are the automobile and the purchase
price of P20,000. Dr. Tolentino, however, while concurring with the
opinion of Manresa and Castan that as to the vendor the cause is the
obligation of the vendee to pay the price, and as to the vendee it is the
obligation of the vendor to deliver the automobile, maintains that in
the example given, the object is the automobile itself because it is the
starting point of agreement, without which the negotiations would
never have begun. Consequently, the object of an onerous contract
is the same as to both parties, although the cause is different.177 Dr.
Padilla, on the other hand, contends that in bilateral contracts like
sale, the thing sold is the object, while the price paid is the cause.178
We believe that the view of Dr. Tolentino is the most logical.
Idem; Distinguished from motives. — Neither must the
cause be confused with the motives of the parties in entering into a
contract.179
The motives which impel one to a sale or purchase are not
always the consideration of the contract as the 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 the
article has, or the relation which it will bear, to other articles with
which it will be associated. These circumstances may constitute the
motive which induces the purchase, but the real consideration of
the purchase (as far as the vendor is concerned) is the money which
175
Dualde, “Concepto de la causa de los contratos,’’ cited by Castan, Vol. 3, 7th
Ed., p. 450.
176
177
178
Padilla, Civil Code, 1956 Ed., p. 553.
179
465
passed.180 As Castan says: “In the case of a contract of sale, the cause
as far as the vendor is concerned, is always the acquisition of the
purchase price, and as far as the vendee is concerned, it is always
the acquisition of the thing; the motives of the contracting parties,
on the other hand, are as different or complex and as capable of
infinite variety as the individual circumstances which may move
men to acquire things or to make money.’’181
Consequently, the cause of the contract and the motives of the
contracting parties may be distinguished from each other in the
following ways:
(1) While the cause is the direct or most proximate reason of
a contract, the motives are the indirect or remote reasons;
(2) While the cause is the objective or juridical reason of
a contract, the motives are the psychological or purely personal
reasons;
(3) While the cause is always the same, the motives differ for
each contracting party;182 and
(4) While the legality or illegality of the cause will affect the
existence or validity of the contract, the legality or illegality of the
motives will not affect the existence of the contract.
There are times, however, when the boundary line between
motive and cause disappears altogether. The motive may be regarded
as causa when the contract is conditioned upon the attainment of the
motive of either contracting party. In other words, motive becomes
causa when it predetermines the purpose of the contract.
The best examples are the decided cases. Thus —
(1) Where a married man of mature years donated a parcel
of land to a girl of sixteen subject to the condition that the latter
shall cohabit with him, and such condition is accepted, it is clear
that the donation is conditioned upon the attainment of the motive
of the donor; in other words, it predetermines the purpose of the
contract. Thus considered, the conveyance is clearly predicated upon
an illegal causa. Consequently, it is void. Therefore, under what is
180
De Jesus vs. Urrutia & Co., 33 Phil. 171.
181
3 Castan, 7th Ed., pp. 346-347.
182
Ibid.
466
Cause of Contracts
now Art. 1412 of the New Civil Code, there can be no recovery of
what has already been delivered. (Liguez vs. CA, 102 Phil. 577.)
(2) Where a mother sold two fishponds to a daughter
and the latter, in turn, resold the same fishponds to her and her
stepfather, as a consequence of which said fishponds were converted
into conjugal properties, it is clear that the motive or purpose is
to circumvent the law against donations between spouses (Art.
133, CC). This motive or purpose is the illegal causa rendering
the contract void. Consequently, the rule of in pari delicto non
oritur actio, now enunciated in Art. 1412 of the New Civil Code, is
applicable. (Rodriguez vs. Rodriguez, 20 SCRA 908.)
(3) Where a Filipino leased a parcel of land to an alien for 99
years with an option to buy the property within 50 years, provided
that the latter shall become a Filipino citizen, it is clear that the
motive or purpose of the arrangement, which has resulted in the
virtual transfer of ownership to the lessee, is to circumvent the
Constitutional prohibition of transfer of lands to aliens. This motive
or purpose is the illegal causa rendering the contract void. However,
it will be the provision of Art. 1416 and not of Art. 1412, of the New
Civil Code that will apply. Because of public policy, the lessor will be
allowed to recover the property. (Phil. Banking Corp. vs. Lui She, 21
SCRA 52.)
Liguez vs. Court of Appeals

102 Phil. 577
This is an action commenced by Conchita Liguez against
the widow and heirs of Salvador Lopez to recover a parcel of
land in their possession. The records show that Salvador Lopez,
a married man of mature years, donated the land to Conchita,
who was then a minor of 16, subject to the condition that she will
cohabit with him as his mistress. The donation was accepted
and Conchita became the donor’s mistress until his death.
Because defendants have advanced the defense of the nullity
of the contract by virtue of the illegality of the cause is of pure
beneficence, the cause is actually the liberality of the donor;
hence, what is illicit or illegal is the motive of such donor and
not the cause of the contract, since liberality per se can never be
illegal. The Supreme Court, however, speaking through Justice
J.B.L. Reyes, held:
“The flaw in this argument lies in ignoring the fact that
the liberality of the donor is deemed causa only in contracts of
467
pure beneficence; that is to say, contracts in which the idea of

self-interest is totally absent on the part of the transferor. Here
the facts demonstrate that in making the donation, the donor
was not moved exclusively by the desire to benefit Conchita
Liguez, but also gratify his sexual impulse. Actually, therefore,
the donation was but one part of an onerous transaction that
must be viewed in its totality. Thus considered, the conveyance
was clearly predicated upon an illicit causa.
“With respect to appellant’s contention regarding the
distinction between causa and motive, it is well to note that
Manresa himself (Vol. 8, pp. 641-642), while maintaining the
distinction, expressly excepts from the rule those contracts that
are conditioned upon the attainment of the motives of either
party. The same view is held by the Supreme Court of Spain in
its decisions of February 4, 1941, and December 4, 1946, holding
that the motive may be regarded as causa when it predetermines
the purpose of the contract. In the present case, it is scarcely
disputable that Lopez would not have conveyed the property in
question had he known that appellant would refuse to cohabit
with him; so that the cohabitation was an implied condition
to the donation and being unlawful, necessarily tainted the
donation itself.
“However, since the rule that parties to an illegal contract,
if equally guilty, will not be aided by the law but will both be left
where it finds them, has been interpreted as barring the party
from pleading the illegality of the bargain as a cause of action or
as a defense, appellant is, therefore, entitled to so much of the
donated property as may be found upon proper liquidation not
to prejudice the share of the widow or the legitimes of the forced
heirs.’’
Cause in Onerous Contracts. — 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. From this it necessarily
follows that a promise made by one party may be a sufficient cause for
a promise made by another party. It is not, therefore, necessary that
the cause or consideration should pass from one party to the other
at the time of the execution of the contract.183 Thus, where a logging
company by contract designated a certain agency as its distributor to
183
Enriguez de Cavada vs. Diaz, 37 Phil. 982; Phil. Banking Corp. vs. Lui She,
102 Phil. 577.
468
Cause of Contracts
export logs to Korea and Europe at the best market price obtainable
on condition that it would pay the latter a commission of 13% of the
gross value of the logs, it was held that for the former the cause of
the agreement is the distribution of its logs in the areas agreed upon
which the latter undertook to accomplish, whereas for the latter
the cause is its commitment to sell or export the logs for onerous
consideration.184
Idem; Accessory contracts. — In accessory contracts the

rule is that the cause of the accessory contract is identical with that
of the principal contract. Thus, it has been held that as a mortgage
is an accessory contract, its cause is the very cause of the principal
contract from which it receives its life, and without which it cannot
exist as an independent contract, although it may secure an obligation
incurred by another.185 The same principle is applicable to the case
of an accommodation party who binds himself jointly and severally
with the principal debtor for the payment of a debt by affixing his
signature to a promissory note for the accommodation of the latter.
This is so in spite of the fact that he might not have received even
a single centavo of the money given to the accommodated party.
In the words of the Supreme Court, “the consideration which sup-
ports the promise of the accommodation maker is that parted
with by the person taking the note and received by the person
accommodated.’’186
Idem; Moral obligations. — May a moral or natural obligation

constitute a sufficient cause or consideration to support an onerous
contract? The jurisprudence with respect to this question in this
jurisdiction is meager. It is, however, clear that where the moral
obligation arises wholly from ethical considerations, unconnected
with any civil obligation and, as such, is not demandable in law
but only in conscience, it can not constitute a sufficient cause or
consideration to support an onerous contract,187 but where such
moral obligation is based upon a previous civil obligation which
has already been barred by the statute of limitations at the time
184
General Enterprises, Inc. vs. Lianga Bay Co., 11 SCRA 733.
185
China Banking Corp. vs. Lichauco, 46 Phil. 460.
186
National Bank vs. Maza, 48 Phil. 207; Acuna vs. Veloso, 50 Phil. 241. But see
187
Fisher vs. Robb, 69 Phil. 101.
469
when the contract is entered into, it constitutes a sufficient cause or

consideration to support the said contract.188
Fisher vs. Robb

69 Phil. 101
The defendant was one of the organizers of a certain en-

terprise known as the Philippine Greyhound Club, Inc. which
was formed for the purpose of introducing dog racing in the
Philippines, while the plaintiff was one of those who had in-
vested a certain sum of money in the venture. It appears that
this venture did not succeed, and, as a result, the defendant
wrote a letter to the plaintiff explaining the critical condition of
the company, and, at the same time, stating that he felt “a moral
responsibility for those who had sent in the second payment of
their subscription” and that he will see to it that “stockholders
who had made such payment shall be reimbursed such amount
as soon as possible out of his own personal funds.” This action
now is brought to enforce the “obligation.” The principal ques-
tion to be decided, among others, is whether there is a sufficient
cause or consideration to justify the promise made by the defen-
dant in his letter. Answering this question in the negative, the
Supreme Court, speaking through Justice Villareal, held:
“The contract sought to be judicially enforced by the
plaintiff appellee against the defendant is onerous in character,
because it supposes the deprivation of the latter of an amount
of money which impairs his property, which is a burden, and
for it to be legally valid it is necessary that it should have a
consideration consisting in the lending or promise of a thing or
service by such party. The defendant-appellant is required to
give a thing, namely the payment of the sum of P2,000, but the
plaintiff-appellee has not given or promised anything or service
to the former which may compel him to make such payment.
The promise which said defendant-appellant has made to the
plaintiff-appellee to return to him P2,000 which he had paid to
the Philippine Greyhound Club, Inc. as a second installment
of the amount of the shares for which he had subscribed, was
prompted by a feeling of pity which said defendant-appellant
had for the plaintiff-appellee as a result of the loss which the
latter had suffered because of the failure of the enterprise. The
188
Villaroel vs. Estrada, 71 Phil. 14. Strictly speaking, the moral obligation in
this case is a natural obligation (Arts. 1423, et seq., Civil Code), as distinguished from
a purely moral obligation, such as that referred to in the case of Fisher vs. Robb.
470
Cause of Contracts
obligation which the said defendant-appellant had contracted

with the plaintiff-appellee is, therefore, purely moral, and, as
such, is not demandable in law, but only in conscience, over
which human judges have no jurisdiction.”
Villaroel vs. Estrada

71 Phil. 140
This was originally an action commenced by the plaintiff
(respondent) against the defendant (petitioner) for the purpose
of enforcing a contract entered into on August 9, 1930, by virtue
of which the defendant undertook to pay to the plaintiff a certain
debt which his deceased mother had incurred from the deceased
parents of the said plaintiff more than eighteen years ago. It is
submitted that this debt had already prescribed. The question
now is whether this action will prosper, considering that the
debt incurred by the defendant’s mother had already prescribed.
The Supreme Court, speaking through Justice Avanceña, ruled:
“The present action is not founded on the original obligation
contracted by the mother of the defendant, which had already
prescribed, but on that contracted by the defendant on August 9,
1930, in assuming the obligation which had already prescribed.
The defendant being the only heir of the original debtor with the
right to succeed in her inheritance, that debt lawfully contracted
by his mother, although it lost its efficacy by prescription, is
nevertheless now a moral obligation as far as he is concerned,
a moral obligation which is a sufficient consideration to create
and make effective and demandable the obligation which he had
voluntarily contracted on August 9, 1930.’’
Cause in Remuneratory Contracts. — According to Art.

1350, the cause in remuneratory contracts is the service or benefit
which is remunerated. From this we can say that a remuneratory
contract is one in which one of the contracting parties remunerates
or compensates the service or benefit rendered or given by the
other party, although such service or benefit does not constitute a
demandable debt.189 This may be clarified by means of an example.
If A gives a certain property in accordance with the formalities
prescribed by law to his lawyer friend, B, in remuneration for legal
services which the latter had rendered to him freely in the past and
such gift is duly accepted, the cause as far as A is concerned would
189
471
be the legal services rendered by B, although such services do not

constitute demandable debts.
Cause in Contracts of Pure Beneficence. — The cause
in contracts of pure beneficence, on the other hand, is the mere
liberality of the benefactor. Thus, if A makes a pure donation of a
certain property to B in accordance with the formalities prescribed
by law, its cause is the mere liberality (causa liberalitatis) of the
donor or benefactor. The liberality would be the equivalent of what
Manresa calls “el cariño, el desprendimiento, la admiracion, la
generosidad, el agradecimiento, la compasion.”
Art. 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.190
Art. 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.191
Art. 1354. Although the cause is not stated in the con-
tract, it is presumed that it exists and is lawful, unless the
debtor proves the contrary.192
Art. 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.193
Essential Requisites of Cause. — In order that there will

be a sufficient cause upon which a contract may be founded, it is
essential that the following requisites must concur:
First: The cause should be in existence at the time of the
celebration of the contract;
Second: The cause should be licit or lawful; and
Third: The cause should be true.194
190
191
192
193
New provision.
194
3 Castan, 7th Ed., pp. 348-351.
472
Cause of Contracts
If the contract has no cause, or even if it has, if the cause should

be illicit or unlawful, the rule is that it shall not produce any effect
whatsoever, or what amounts to the same thing, it is inexistent or
void from the beginning.195 The same is true if the cause stated in
the contract is false, unless it can be proved that the contract is, in
reality, founded upon another cause which is true and lawful.196
Idem; Effect of lack of cause. — By express provision of
Art. 1352, if the contract is not founded upon any cause, then it
shall not produce any effect whatsoever. This precept is confirmed
by Art. 1409 of the Code which declares as inexistent those contracts
which are absolutely simulated or fictitious as well as those whose
cause did not exist at the time of the transaction. Hence, it has been
held that if the purchase price in a contract of sale was never in
fact paid by the purchaser or vendee to the vendor, the contract is
inexistent for all purposes for lack of a cause or consideration.197
The same rule is applicable in cases of conveyances of property
where the conveyance or transfer is simulated without any cause
or consideration whatsoever whether the purpose of the grantor is
to defraud his creditors or to avert the possible attachment of the
property.198 However, the rule is not applicable where the purchaser
or vendee failed to fully pay for the property, even if there is a
stipulation in the contract of sale that full payment shall be made
at the time of the celebration thereof.199 As a matter of fact, even
where the contract itself expressly states that the consideration for
the sale of a piece of land is only one peso (P1.00), it does not follow
that the contract or sale is void or inexistent for lack of a cause or
consideration. The reason is obvious. There is a consideration. The
contract may be voidable because of the inadequacy of the cause
or consideration, but certainly, it is not void or inexistent. Thus,
in Carantes vs. Court of Appeals,200 speaking through Chief Justice
Fred Ruiz Castro, the Supreme Court declared:
195
Arts. 1352, 1409, Nos. 1, 2, 3, Civil Code.
196
197
Ocejo, Perez & Co. vs. Flores, 40 Phil. 921; Onejera vs. Iga Sy, 76 Phil. 580.
198
De Belen vs. Coll. of Customs, 46 Phil. 241; Gallon vs. Gayares, 53 Phil. 43;
Escutin vs. Escutin, 60 Phil. 922; Gonzales vs. Trinidad, 67 Phil. 682; Navarro vs.
Diego, CA, 40 Off. Gaz. 2106.
199
Puato vs. Mendoza, 64 Phil. 457.
200
76 SCRA 514.
473
“We do not agree with the respondent court’s legal conclu-

sion that the deed of “Assignment of Right to Inheritance’’ is
void ab initio and inexistent on the grounds that real consent
was wanting and the consideration of P1.00 is so shocking to the
conscience that there was in fact no consideration, hence, the
action for the declaration of the contract’s inexistence does not
prescribe pursuant to Article 1410 of the new Civil Code.
“Article 1409(2) of the new Civil Code relied upon by the
respondent court provides that contracts “which are absolutely
simulated or fictitious’’ are inexistent and void from the
beginning. The basic characteristic of simulation is the fact
that the apparent contract is not really desired or intended to
produce legal effects or in any way alter the juridical situation
of the parties.
“The respondents’ action may not be considered as one to
declare the inexistence of a contract for lack of consideration. It
is total absence of cause or consideration that renders a contract
absolutely void and inexistent. In the case at bar consideration
was not absent. The sum of P1.00 appears in the document as
one of the considerations for the assignment of inheritance. In
addition — and this of great legal import — the document recites
that the decedent Mateo Carantes had, during his lifetime,
expressed to the signatories to the contract that the property
subject-matter thereof rightly and exclusively belonged to the
petitioner Maximino Carantes. This acknowledgment by the
signatories definitely constitutes valuable consideration for the
contract.”
In order that the cause shall be considered as existing, is it

necessary that it should be stated in the contract? This question
must be resolved in the negative. According to Art. 1354, even if
the cause is not stated in the contract, it is presumed that it exists
and is lawful, unless the debtor proves the contrary.201 This is true
even where the contract falls within the purview of the Statute of
Frauds.202
If instead of an absolute lack of cause or consideration, there is
lesion or inadequacy of cause, shall this not invalidate the contract?
Again, this question must be resolved in the negative. This is clear
201
Azarraga vs. Rodriguez, 9 Phil. 637; Eliot vs. Montemayor, 9 Phil. 960; Stand-
ard Oil Co. vs. Arenas, 19 Phil. 211; Dumaguin vs. Reynolds, 48 Off. Gaz. 3887.
202
Bhen, Meyer & Co. vs. Davis, 37 Phil. 431. See Art. 1403, No. 2, Civil Code.
474
Cause of Contracts
from the provision of Art. 1355, which states that lesion or inadequacy
of cause, except in cases specified by law, shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.
This provision (which is new) reiterates the doctrine enunciated by
the Supreme Court in several notable cases.203 However, if it can be
established that the lesion or inadequacy of the cause was due to
fraud, mistake or undue influence, such fact will render the contract
voidable.204
Despite the fact that lesion or inadequacy of cause, in itself, can
not render the contract inexistent or void under Art. 1355 or voidable
under Art. 1330, the party who has suffered the lesion or damage is
not left without a remedy. There is always the possibility that the
contract may be rescissible in accordance with the provisions of Art.
1381 of the Code, in which case he can file an action for rescission.
Idem; Effect of unlawful cause. — According to Art. 1352 of
the Code, the cause is unlawful when it is contrary to law, morals,
good customs, public order or public policy. According to the same
article, if a contract has an unlawful cause, it shall not produce any
effect whatsoever; in other words it is void from the very beginning.205
Thus, it has been held that where the cause or consideration for
the sale of a certain property is no other than the accumulated
usurious interests which the vendor-debtor has not yet paid, the
sale is void because of the illegality of the cause or consideration.206 It
has also been held that a contract affecting the course of a criminal
prosecution is invalid, because such a contract would be manifestly
contrary to public policy and the due administration of justice.207 In
the words of the Supreme Court, “in the interest of the public it is
of the utmost importance that criminals should be prosecuted and
that all criminal proceedings should be instituted and maintained
in the form and manner prescribed by law. To permit an offender to
203
Asky vs. Cosalan, 46 Phil. 179; Gabriel vs. Mateo, 71 Phil. 497; Garcia vs.
Manas, 45 Off. Gaz. 1815.
204
See Arts. 1330, et seq., Civil Code; see also Alsua-Betts vs. Court of Appeals,
92 SCRA 332, 368.
205
See Art. 1409, No. 1, Civil Code.
206
Mulet vs. People of the Phil., 73 Phil. 63. But see Briones vs. Cammayo, 41
SCRA, 404; see also comments under Art. 1420.
207
Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787; Navarro vs.
Yuan, CA, 40 Off. Gaz. 1675; Reyes vs. Gonzales, 45 Off. Gaz. 381; Monteney vs.
Gomez, 104 Phil. 1059.
475
escape the penalties prescribed by law by the purchase of immunity

from private individuals would result in a manifest perversion of
justice.’’208 This doctrine, which has been reiterated several times in
the past, is very aptly illustrated in the case of Velez vs. Ramas.209
The facts of this case are as follows: C, wife of A and daughter of B,
while employed in a pawnshop owned by X, embezzled the amount
of more than P2,000. In order to prevent her criminal prosecution, A
and B signed a document obligating themselves jointly and severally
to pay to X the amount embezzled including interest. Because of
their failure to comply with their promise, the latter filed this action
against them. The Supreme Court, however, ruled:
“We are of the opinion that the trial court was correct in
the conclusion that an action cannot be maintained upon this
contract. In our opinion, the consideration for this agreement is
clearly illicit, which fact is apparent on the face of the contract,
and the case is accordingly governed by Art. 1275 (now Art.
1352) of the Civil Code.
“There has been no period since contract law reached
the state of consciousness, when the maxim ex turpi causa
non oritur actio was not recognized. A contract based upon
an unlawful object is and always has been void ab initio by
the common law, by the civil law, moral law, and all laws
whatsoever. It is immaterial whether the illegal character of
the contract is revealed in the matter of the consideration, in
the promise as expressed in the agreement or in the purpose
which the agreement, though legal in expression, is intended
to accomplish. If the illegality lurks in any element, or even
subsists exclusively in the purpose of the parties, it is fatal to
the validity of the contract.
“By the universal consensus of judicial opinion in all ages
it has been considered contrary to public policy to allow parties
to make agreements designed to prevent or stifle prosecutions
for crime. It is self-evident that the law cannot sanction
an engagement which is subversive of human society. The
machinery for the administration of justice cannot be used to
promote an unlawful purpose.’’
208
Arroyo vs. Berwin, 36 Phil. 386.
209
40 Phil. 787.
476
Cause of Contracts
However, the above case should be distinguished from the following

case:
Mactal vs. Melegrito

111 Phil. 363
Plaintiff gave to defendant P1,770 to be used in the

purchase of palay, with the obligation to return said amount
within 10 days, if not spent for said purpose. The latter never
bought palay nor returned said amount. As a result, the former
accused him of estafa. When the case was about to be heard, a
common friend, acting upon defendant’s request, prevailed upon
plaintiff to move for the dismissal of the case and be contented
with a promissory note to be executed by the defendant. The note
was executed and, accordingly, the criminal case was dismissed.
Defendant, however, was unable to comply with his promise
despite repeated demands. Subsequently, plaintiff brought this
action against him for the recovery of the P1,770. Defendant
now contends that the promissory note is void because the
consideration thereof is the dismissal of the estafa case which is
certainly contrary to public policy.
Held: This contention is untenable. It is admitted that
defendant had received the P1,770 from plaintiff to be used for
the purchase of palay. The cause or consideration, therefore,
for the promise was the pre-existing debt of said defendant, not
the dismissal of the estafa case, which merely furnished the
occasion for the execution of the promissory note.
It must also be noted that in applying the provision of Art. 1352

regarding the effect of an unlawful cause, it is always necessary
to consider the provisions of Arts. 1411 and 1412 of the Code. It
must be observed that these provisions presuppose the existence
of an illicit or illegal cause which is determinative of the nullity of
the contract. Accordingly, they cannot be applied to simulated or
fictitious transfers of property, where the motive of the grantor may
be either to defraud his creditors or to avert the possible attachment
of the property. As stated in a previous section, the cause of the
contract should not be confused with the motive of the contracting
parties.210 However, when the motive of one of the contracting
parties predetermines the purpose of the contract and such motive
210
Gonzales vs. Trinidad, 67 Phil. 862; Navarro vs. Diego, CA, 40 Off. Gaz. 2106.
477
or purpose is illegal or immoral, it is clear that such illegal or illicit

motive or purpose becomes the illegal causa, thus rendering the
contract void from the beginning.211
Idem; Effect of false cause. — According to Art. 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. Thus, where the deed of sale expressly
states that the purchase price has been paid when in fact it has
never been paid, it is evident that the contract of sale is invalid
in accordance with the general rule announced in Art. 1353 and
confirmed by Art. 1409, No. 2, which declares as inexistent those
contracts which are absolutely simulated or fictitious. It must be
observed, however, that the simulation of a contract may be either
absolute or relative.212 The first is inexistent from the very beginning,
while the second binds the parties to their true agreement, provided
that it does not prejudice third persons and is not contrary to law,
morals, good customs, public order or public policy.213 It is, therefore,
clear that if a contract is simulated, it does not necessarily follow that
it is inexistent or void, provided, of course, that it can be established
that it is, in reality, founded upon another cause which is true and
lawful.
211
Liguez vs. Court of Appeals, 102 Phil. 577; Rodriguez vs. Rodriguez, 20 SCRA
908; Philippine Banking Corp. vs. Lui She, 21 SCRA 52.
212
213
478
CHAPTER 3
FORMS OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever

form they may have been entered into, provided all the
essential requisites for their validity are present. However,
when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract
be proved in a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties stated
in the following articles cannot be exercised.1
Form of Contracts; General Rule. — According to the above
article, whatever, may be the form in which a contract may have
been entered into, the general rule is that it shall be obligatory,
provided all of the essential requisites for its validity are present.
We have, therefore, retained the “spiritual system” of the Spanish
Code by virtue of which the law looks more at the spirit rather than
at the form of contracts. Hence, under our legal system, the form in
which a contract is executed has no effect, as a general rule, upon its
obligatory force, provided all of the essential requisites for its validity
are present. Thus, it has been held that contracts of partnership,2 of
agency,3 and of lease of services,4 although executed verbally, are
obligatory as far as the contracting parties are concerned. It has
been also held that a verbal extrajudicial partition of property
is valid and binding among the parties thereto.5 In such a case,
1
2
Fernandez vs. De la Rosa, 1 Phil. 671; Thunga Chiu vs. Que Bentec, 2 Phil. 561.
3
Gutierrez Hnos. vs. Orense, 28 Phil. 571; Del Castillo vs. Robinson, CA, 44 Off.
Gaz. 4981.
4
Arroyo vs. Azur, 76 Phil. 493.
5
Duran vs. Cecilio, CA, 43 Off. Gaz. 2237; Hernandez vs. Andal, 44 Off. Gaz.
2672.
479
Art. 1356 CONTRACTS
however, the right of a partitioner or of his successor in interest is

merely a jus ad rem (personal), not a jus in re (real), if the partition
involves immovable property; in other words, his right over the land
which has been alloted to him or to his predecessor in interest is
personal, and, as a consequence, is enforceable only against the
other partitioners, provided that no innocent purchasers for value
are prejudiced.6
Idem; Exceptions. — It must be observed, however, that
when Art. 1356 speaks of contracts as being obligatory regardless
of the form in which they may have been entered into, it does not
include those contracts for which the law prescribes a certain form
either for validity or for enforceability. It is, therefore, evident that
there are two exceptions to the general rule. These exceptions are:
(1) when the law requires that the contract must be in a certain form
in order to be valid; and (2) when the law requires that the contract
must be in a certain form in order to be enforceable.
Commenting on these exceptions, the Code Commission de-
clared:
“The project seeks to combine the spiritual system of the

Spanish Code and the principles of Anglo-American law as
manifested in the Statute of Frauds.
“Examples when form is essential to validity are donations
of an immovable (Art. 749) and of a movable worth more than
P5,000 (Art. 748). Instances when a contract is unenforceable,
unless it be in a certain form, are those embodied in the Statute
of Frauds as formulated in Article 1403 of the project.
“These exceptions are calculated to avoid litigation.
Oral contracts frequently lead to fraud in the fulfillment of
obligations, or to false testimony. So long as the possibility of
dishonesty exists in contractual relations, the spiritual system
cannot be adopted in an unqualified manner.’’7
Idem; id. — Formalities for validity. — There are certain

contracts for which the law prescribes certain forms for their
validity. These contracts maybe classified as follows: first, those
6
Ibid.
7
Report of the Code Commission, pp. 137-138.
480
FORMS OF CONTRACTS Art. 1356
which must appear in writing; second, those which must appear in a

public document; and third, those which must be registered.
Contracts which must appear in writing are as follows:
(1) Donations of personal property whose value exceeds five
thousand pesos. According to Art. 748 of the Code, the donation and
the acceptance shall be made in writing; otherwise, it shall be void.
(2) Sale of a piece of land or any interest therein through an
agent. According to Art. 1874 of the Code, the authority of the latter
shall be in writing; otherwise, the sale shall be void.
(3) Agreements regarding payment of interest in contracts of
loan. According to Art. 1956 of the Code, no interest shall be due
unless it has been expressly stipulated in writing. The validity of the
contract of loan, however, is not affected.
(4) Antichresis. According to Art. 2134 of the Code, in
contracts of antichresis, the amount of the principal and of the
interest shall be specified in writing; otherwise, the contract shall
be void.
Contracts which must appear in a public document are as
follows:
(1) Donations of immovable property. According to Art. 749
of the Code, the donation must be made in a public document. The
acceptance, on the other hand, may be made in the same deed of do-
nation or in a separate public document. If the acceptance is made
in a separate public document, the donor shall be notified thereof in
an authentic form, and this step shall be noted in both instruments.
Noncompliance with any of these formalities shall render the dona-
tion void.
(2) Partnerships where immovable property or real rights are
contributed to the common fund. According to Arts. 1771 and 1773 of
the Code, in a contract of partnership where immovable property or
real rights are contributed to the common fund, it is necessary that
the contract must appear in a public instrument and that there must
be an inventory of the immovable property or real rights, signed by
the partners, and attached to the public instrument; otherwise, the
contract is void.
481
Art. 1357 CONTRACTS
Contracts which must be registered are as follows:

(1) Chattel mortgages. According to Art. 2140 of the Code,
by a chattel mortgage, personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation.
If the movable, instead of being recorded, is delivered to the creditor
or a third person, the contract is a pledge and not a chattel mortgage.
(2) Sales or transfers of large cattle. According to the Cattle
Registration Act, no sale or transfer of large cattle shall be valid
unless it is duly registered and a certificate of transfer is secured.8
Idem; id. — Formalities for enforceability. — There are
also certain contracts which are unenforceable by action, unless they
are in writing and properly subscribed, or unless they are evidenced
by some note or memorandum, which must also be in writing and
properly subscribed. These contracts are governed by the Statute of
Frauds.9
Form of Contracts Required by Law. — It must be noted
that it is not only in the two exceptional cases mentioned in the
preceding sections where the law prescribes a certain form in the
execution of contracts. Art. 1358 of the Code enumerates certain
kinds of contracts which must appear either in a public or in a
private document. The purpose of the requirement, however, is not to
validate or to enforce the contract, but to insure its efficacy; in other
words, the form required is neither for validity nor enforceability
but for the convenience of the contracting parties. Hence, the
forms required by law for the execution of certain contracts may be
divided into: (1) those which are necessary for the convenience of the
contracting parties or for the efficacy of the contract; (2) those which
are necessary for the validity of the contract; and (3) those which are
necessary for the enforceability of the contract. The first is governed
by Arts. 1356 to 1358 of the Code, the second by scattered provisions
of the Code and by special laws, and the third by the Statute of
Frauds.
Art. 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
8
Sec. 22, Act No. 1147; Art. 1581; Civil Code.
9
Arts. 1403, et seq., Civil Code.
482
each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with
the action upon the contract.10
Art. 1358. The following must appear in a public docu-
ment:
(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 heredi-
tary 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 gov-
erned by Articles 1403, No. 2, and 1405.11
Formalities for Efficacy. — Although, as a general rule,

contracts shall be obligatory in whatever form they may have been
entered into, yet there are certain contracts falling within the purview
or scope of this rule which, by reason of their importance, should be
executed in accordance with certain formalities in order to insure
their efficacy and to protect the interests of the contracting parties
as well as that of third persons. The Civil Code, recognizing this
necessity, enumerates in Art. 1358 the different classes of contracts
which must appear either in a public or in a private document, and
grants in Art. 1357 a coercive power to the contracting parties by
10
11
483
Art. 1358 CONTRACTS
which they can reciprocally compel the observance of the required

form.12
The following principles are clearly deducible from an exami-
nation of the cases decided by the Supreme Court in which these
provisions were applied:
(1) Arts. 1357 and 1358 do not require the execution of the
contract either in a public or in a private document in order to
validate or enforce it but only to insure its efficacy, so that after its
existence has been admitted, the party bound may be compelled to
execute the necessary document.13
(2) Even where the contract has not been reduced to the
required form, it is still valid and binding as far as the contracting
parties are concerned.14 Consequently, both articles presuppose the
existence of a contract which is valid and enforceable.15
(3) From the moment one of the contracting parties invokes
the provisions of Arts. 1357 and 1358 by means of a proper action,
the effect is to place the existence of the contract in issue, which
must be resolved by the ordinary rules of evidence.16
(4) Art. 1357 does not require that the action to compel the
execution of the necessary document must precede the action upon
the contract.17 As a matter of fact, both actions may be exercised
simultaneously.18
(5) However, although the provisions of Art. 1357, in connec-
tion with those of Art. 1358, do not operate against the validity of
the contract nor the validity of the acts voluntarily performed by the
parties for the fulfillment thereof, yet from the moment when any of
the contracting parties invokes said provisions, it is evident that un-
12
Thunga Chiu vs. Que Bentec, 2 Phil. 261; Bian Hing vs. Tan Bomping, 48 Phil.
253; Escueta vs. Pando, 76 Phil. 256; Dauden-Hernaez vs. De los Angeles, 27 SCRA
1276.
13
Doliendo vs. Depino, 12 Phil. 758; Dievas vs. Acuña, 16 Phil. 447; Hawaiian-
Philippine Co. vs. Hernaez, 45 Phil. 760.
14
Thunga Chiu vs. Que Bentec, 2 Phil. 251; Soriano vs. Cortez, 8 Phil. 459; Conlu
vs. Araneta, 15 Phil. 387; Osorio vs. Cortez, 24 Phil. 653.
15
Solis vs. Barroso, 53 Phil. 913.
16
Peyer vs. Peyer, 77 Phil. 366.
17
Rodriguez vs. Pamintuan, 37 Phil. 876.
18
484
der them the execution of the required document must precede the
determination of the other obligations derived from the contract.19
Dauden-Hernaez vs. De los Angeles

27 SCRA 1276
Marlene Dauden, a movie actress, filed a complaint against

the Hollywood Far East Productions, Inc. and its President
and General Manager, Ramon Valenzuela, to recover P14,700
representing the balance of her compensation as leading actress
in two motion pictures produced by the defendant company.
Upon motion of defendants, the lower court dismissed the
complaint because “the claim of plaintiff was not evidenced by
any written document, either public or private’’ in violation of
Art. 1358 of the New Civil Code. As a last recourse, plaintiff
appealed to the Supreme Court on the ground that the court
below had abused its discretion.
Held: We hold that there was abuse, since the ruling herein
contested betrays a basic and lamentable misunderstanding
of the role of the written form in contracts, as ordained in the
present Civil Code.
In the matter of formalities, the contractual system of our
Civil Code still follows that of the Spanish Civil Code of 1889
and of the “Ordenamiento de Alcala” of upholding the spirit
and intent of the parties over formalities; hence, in general,
contracts are valid and binding from their perfection regardless
of form, whether they be oral or written. This is plain from
Articles 1315 and 1356 of the present Civil Code. To this general
rule, the Code admits two exceptions, to wit: (1) Contracts for
which the law itself requires that they be in some particular
form in order to make them valid and enforceable (the so called
solemn contracts). Examples of these are the contracts or
agreements contemplated in Arts. 748, 749, 1744, 1773, 1874,
1956, and 2134 of the present Civil Code. (2) Contracts that the
law requires to be proved by some writing (memorandum) of its
terms, as in those covered by the Statute of Frauds, now Art.
1403(2) of the Civil Code. Their existence not being probable by
mere oral testimony (unless wholly or partly executed), these
contracts are exceptional in requiring a writing embodying the
terms thereof for their enforceability by action in court.
19
Manalo vs. De Mesa, 25 Phil. 495.
485
Art. 1358 CONTRACTS
The contract sued upon by petitioner herein does not come

under either exception. It is true that it appears included in the
last clause of Art. 1358, but it nowhere provides that the absence
of written form in this case will make the agreement invalid or
unenforceable. On the contrary, Art. 1357 clearly indicates that
contracts covered by Art. 1358 are binding and enforceable by
action despite the absence of writing.
Wherefore, the order dismissing the complaint is set aside,
and the case is ordered remanded to the court of origin for fur-
ther proceedings not at variance with this decision.
Problem — Spouses Robert and Yollie wanted to sell their
house. They found a prospective buyer, Nina. Yollie negotiated
with Nina for the sale of the property. They agreed on a fair price
of P2 Million. Nina sent Yollie a letter confirming her intention
to buy the property. Later, another couple, Marius and Ellen ,
offered a similar house at a lower price of P1.5 Million. But Nina
insisted on buying the house of Robert and Yollie for sentimental
reasons. Nina prepared a deed of sale to be signed by the couple
and a manager’s check for P2 Million. After receiving the P2
Million, Robert signed the deed of sale. However, Yollie was not
able to sign it because she was saying she changed her mind.
Yollie filed suit for nullification of the deed of sale and for moral
and exemplary damages against Nina. Does Nina have any
cause of action against Robert and Yollie? (2006 Bar Problem)
Answer — Considering that the contract has already been
perfected and taken out of the operation of the statute of frauds,
Nina can compel Robert and Yollie to observe the form required
by law in order for the property to be registered in the name of
Nina which can be filed together with the action for the recovery
of house.(Art. 1357, NCC). In the alternative, she can recover
the amount of P2 Million that she paid. Otherwise, it would
result in solution indebiti or unjust enrichment.
486
CHAPTER 4
REFORMATION OF INSTRUMENTS
Art. 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.1
Doctrine of Reformation of Instruments. — When the
true intention of the parties to a perfected and valid contract are not
expressed in the instrument purporting to embody their agreement
by reason of mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the instrument so that
such true intention may be expressed.2 In order that there can be a
reformation of the instrument, the following requisites must, there-
fore, concur:
(1) There must be a meeting of the minds of the contracting
parties;
(2) Their true intention is not expressed in the instrument;
and
1
New provision.
2
487
Art. 1359 CONTRACTS
(3) Such failure to express their true intention is due to mis-

take, fraud, inequitable conduct or accident.3
Thus, where the complaint fails to allege that the instrument
to be reformed does not express the real agreement or intention of
the parties, it is clear that no cause of action is stated therein since
such allegation is essential considering the fact that the object of an
action for reformation is to make the instrument conform to the real
agreement or intention of the parties.4
Idem; Rationale of doctrine. — The doctrine of reformation
of instruments is based on justice and equity. According to the Code
Commission:
“Equity orders the reformation of an instrument in

order that the true intention of the contracting parties may be
expressed.
“The courts do not attempt to make another contract for
the parties. The rationale of the doctrine is that it would be
unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting
of the minds of the parties. The rigor of the legalistic rule that
a written instrument should be the final and inflexible criterion
and measure of the rights and obligations of the contracting
parties is thus tempered, to forestall the effects of mistake,
fraud, inequitable conduct or accident.’’5
Idem; Distinguished from annulment of contracts. — The

most fundamental distinction between an action for the reformation
of an instrument and an action for the annulment of a contract is
that while the first presupposes a perfectly valid contract in which
there has already been a meeting of the minds of the contracting
parties, the second is based on a defective contract in which there
has been no meeting of the minds because the consent of one or
both of the contracting parties has been vitiated. Consequently,
if mistake, fraud, inequitable conduct, or accident has prevented
a meeting of the minds of the parties, the proper remedy is not
3
Ibid.
4
Garcia vs. Bisaya, 97 Phil. 609. To the same effect: Ongsiaco vs. Ongsiaco, 101
Phil. 1196.
5
488
REFORMATION OF INSTRUMENTS Arts. 1360-1365
reformation of the instrument but annulment of the contract.6

Thus, where the vendee has been led to enter into a contract of sale
through fraud or mispresentation on the part of the vendor or in
the mistaken belief, that, as stated in the deed, the property he was
buying was unregistered land, it is evident that the proper remedy
is not reformation of the deed of sale but annulment of the contract.7
Art. 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.8
Art. 1361. When a mutual mistake of the parties causes
the failure of the instrument to disclose their real agreement,
said instrument may be reformed.9
Art. 1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for
the reformation of the instrument.10
Art. 1363. When one party was mistaken and the other
knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former, the
instrument may be reformed.11
Art. 1364. When through the ignorance, lack of skill,
negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does
not express the true intention of the parties, the courts may
order that the instrument be reformed.12
Art. 1365. If two parties agree upon the mortgage or
pledge or real or personal property, but the instrument
6
7
Garcia vs. Bisaya, 97 Phil. 609.
8
New provision.
9
New provision. For illustrative cases see Philippine Sugar Estate Development
Co. vs. Gov’t. of P.I., 247 U.S. 385; Bank of the P.I. vs. Fidelity and Surety Co., 51
Phil. 57; Jardenil vs. Solas, 73 Phil. 626; De la Cruz vs. Del Pilar, 95 Phil. 444.
10
New provision. See Ong Chua vs. Carr, 53 Phil. 975.
11
New provision.
12
New provision.
489
states that the property is sold absolutely or with a right of

repurchase, reformation of the instrument is proper.13
Art. 1366. There shall be no reformation in the following
cases:
(1) Simple donations inter vivos wherein no condition
is imposed;
(2) Wills;
(3) When the real agreement is void.14
Art. 1367. When one of the parties has brought an action
to enforce the instrument, he cannot subsequently ask for its
reformation.15
Art. 1368. Reformation may be ordered at the instance
of either party or his successors in interest, if the mistake
was mutual; otherwise, upon petition of the injured party, or
his heirs and assigns.
Art. 1369. The procedure for the reformation of instru-
ments shall be governed by rules of court to be promulgated
by the Supreme Court.16
Contracts of Adhesion. — A contract of adhesion is defined

as one in which one of the parties imposes a ready made form of
contract, which the other party may accept or reject, but which the
latter cannot modify. (PCIB vs. CA, 255 SCRA 299.)
The Supreme Court ruled in the case of Ayala Corporation vs.
Ray Burton Development Corp., August 7, 1998, 294 SCRA 48, that
a contract of adhesion in itself is not an invalid agreement. This
type of contract is as binding as a mutually executed transaction.
The Supreme Court has emphatically ruled in the case of Ong Yiu
vs. Court of Appeals, et al., that “contracts of adhesion wherein one
party imposes a ready-made form of contract on the other x x x
are contracts not entirely prohibited. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres he gives
13
New provision. See Aquino vs. Deala, 63 Phil. 582; Marquez vs. Valencia, 77
Phil. 782.
14
New provision.
15
New provision.
16
New provision.
490
his consent.’’ This ruling was reiterated in Philippine American

General Insurance Co., Inc. vs. Sweet Lines, Inc., et al., wherein the
Supreme Court further declared through Justice Florenz Regalado
that “not even an allegation of ignorance of a party excuses non-
compliance with the contractual stipulations since the responsibility
for ensuring full comprehension of the provisions of a contract of
carriage (a contract of adhesion) devolves not on the carrier but on
the owner, shipper, or consignee as the case may be.’’
The Supreme Court continued to state in the above-cited case
that contracts of adhesion, however, stand out from other contracts
(which are bilaterally drafted by the parties) in that the former is
accorded inordinate vigilance and scrutiny by the courts in order to
shield the unwary from deceptive schemes contained in ready-made
covenants. As stated by the Court, speaking through Justice J.B.L.
Reyes, in Qua Chee Gan vs. Law Union and Rock Insurance Co.,
Ltd.: “The courts cannot ignore that nowadays, monopolies, cartels
and concentration of capital, endowed with overwhelming economic
power, manage to impose upon parties dealing with them cunningly
prepared ‘agreements’ that the weaker party may not change one with,
his participation in the ‘agreement’ being reduced to the alternative
to ‘take it or leave it’ labeled since Raymond Saleilles ‘contracts
by adherence’ (contracts d’ adhesion) in contrast to those entered
into by parties bargaining on an equal footing. Such contracts (of
which policies of insurance and international bill of lading are prime
examples) obviously call for greater strictness and vigilance on the
part of the courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their becoming traps
for the unwary.’’
The stringent treatment towards contracts of adhesion which
the courts are enjoined to observe is in pursuance of the mandate in
Article 24 of the New Civil Code that “(i)n all contractual, property
or other relations, when one of the parties is at a disadvantage
on account of his moral dependence, ignorance, indigence, mental
weakness, tender age or other handicap, courts must be vigilant for
his protection.’’ (Ayala Corporation vs. Ray Burton Development
Corp., 294 SCRA 48.)
The Supreme Court further ruled in the case of Ayala Corpo-
ration vs. Ray Burton Development Corp. (RBDC), that the validity
and/or enforceability of a contract of adhesion will have to be deter-
491
mined by the peculiar circumstances obtaining in each case and the

situation of the parties concerned. In the instant case, the stipu-
lations in the Deed Restrictions and Special Conditions are plain
and unambiguous which leave no room for interpretation. Moreover,
there was even no attempt on the part of RBDC to prove that, in the
execution of the Deed of Sale on the subject lot, it was a weaker or a
disadvantaged party on account of its moral dependence, ignorance,
mental weakness or other handicap. On the contrary, as testified to
by Edwin Ngo, President of RBDC, the latter is a realty firm and
has been engaged in realty business, and that he, a businessman for
30 years, represented RBDC in the negotiations and in the eventual
purchase of the subject lot from PALMCREST. Edwin Ngo’s testi-
mony proves that RBDC was not an unwary party in the subject
transaction. Instead, Edwin Ngo has portrayed RBDC as a knowl-
edgeable realty firm experienced in real estate business.
Problem — (a) What is a contract of adhesion?

(b) Are contracts of adhesion void or prohibited?
Answer — In the case of Development Bank of the
Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the Court
held that:
(a) A contract of adhesion is so-called because its terms
are prepared by only one party while the other party merely
affixes his signature signifying his adhesion thereto.
(b) A contract of adhesion is just as binding as ordinary
contracts. It is true that we have, on occasion, struck down such
contracts as void when the weaker party is imposed upon in
dealing with the dominant bargaining party and is reduced to
the. Nevertheless, contracts of adhesion are not invalid per se;
they are not entirely prohibited. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres, he
gives his consent.
In the case of Sps. Francisco and Ruby Reyes vs. BPI
Family Savings Bank, Inc., et al., G. R. Nos. 149840-41, March
31,2006, where the petitioner spouses undertook to secure
the P15M loan of Transbuilders Resources & Development
Corporation to BPI-FSB “and other credit accomodations of
whatever nature obtained by the Borrower/Mortgagor” under
the Real Estate Mortgage they executed in favor of BPI-FSB,
the Supreme Court held that while the stipulation proved to be
onerous to the petitioners, neither the law nor the courts will
492
extricate a party from an unwise or undesirable contract entered

into with all the required formalities and with full awareness
of its consequences. Petitioners voluntarily executed the REM
on their property infavor of BPI-FSB to secure the loan. They
cannot now be allowed to repudiate their obligation to the bank
after Transbuilder’s default. While petitioner’s liability was
written in fine print and in a contract written by BPI-FSB, it
has been the consistent holding of the Court that contracts of
adhesion footing are not invalid per se. On numerous occasions,
the Supreme Court has upheld the binding effects of such
contracts.
Contracts of Credit Cards. — In the case of Spouses

Ermitano vs. Court of Appeals, April 21, 1999, G.R. No. 127246, the
Supreme Court ruled that the contract between the parties is indeed
a contract of adhesion, so-called because its terms are prepared by
only one party while the other party merely affixes his signature
signifying his adhesion thereto. Such contracts are not void in
themselves. They are as binding as ordinary contracts. Parties who
enter into such contracts are free to reject the stipulations entirely.
This Court will not hesitate to rule out blind adherence to such
contracts if they prove to be too one-sided under the attendant facts
and circumstances. Because of the peculiar nature of contracts of
adhesion, the validity thereof must be determined in the light of
the circumstances under which the stipulation is intended to apply.
For the cardholder to be absolved from liability for unauthorized
purchases made through his lost or stolen card, two steps must be
followed: (1) the cardholder must give written notice to the credit
card company, and (2) the credit card company must notify its
member establishments of such loss or theft, which, naturally, it
may only do upon receipt of a notice from the cardholder. Both the
cardholder and the credit card company, then, have a responsibility
to perform, in order to free the cardholder from any liability arising
from the use of a lost or stolen card. In this case, the cardholder
has complied with what was required of her under the contract
with credit card company. Having thus performed her part of the
notification procedure, it was reasonable for the cardholder to
expect that the credit card company would perform its part of the
procedure, which is to forthwith notify its member-establishments.
Prompt notice by the cardholder to the credit card company of the
loss or theft of her card should be enough to relieve the former of
493
any liability occasioned by the unauthorized use of her lost or stolen

card. The questioned stipulation in this case, which still requires
the cardholder to wait until the credit card company has notified all
its member-establishments, puts the cardholder at the mercy of the
credit card company which may delay indefinitely the notification
of its members to minimize if not to eliminate the possibility of
incurring any loss from unauthorized purchases. Or, as in this
case, the credit card company may for some reason fail to promptly
notify its members through absolutely no fault of the cardholder.
To require the cardholder to still pay for unauthorized purchases
after he has given prompt notice of the loss or theft of her card to the
credit card company would simply be unfair and unjust. The Court
cannot give its assent to such a stipulation that could clearly run
against public policy.
In the case of Emmanuel Aznar vs. Citibank, N.A. (Philippines),
G. R. No.164273, March 28, 2007, the Supreme Court held that the
terms and conditions of Citibank’s Mastercard constitute a contract
of adhesion. It is settled that the contracts between cardholders
and the credit card companies are contracts of adhesion, so-called,
because their terms are prepared by only one party while the other
merely affixes his signature signifying his adhesion thereto. In this
case, paragraph 7 of the terms and conditions states that Citibank is
not responsible if the card is not honoured by any merchant affiliate
for any reason. While it is true that Citibank may have no control
of all the actions of its merchant affiliates, and should not be held
liable therefor, it is incorrect, however, to give it blanket freedom
from liability if its card is dishonoured by any merchant affiliate
for any reason. Such phrase renders the statement vague and as
the said terms and conditions constitute a contract of adhesion, any
ambiguity in its provisions must be construed against the party who
prepared the contract, in this case Citibank.
Citibank also invokes paragraph 15 of its terms and conditions
which limits its liability to P1,000.00 or the actual damage proven,
whichever is lesser. Again, such stipulation cannot be considered as
valid for being unconscionable as it precludes payment of a larger
amount even though damage may be clearly proven. The Supreme
Court is not precluded from ruling out blind adherence to the terms
of a contract if the attendant facts and circumstances show that they
should be ignored for being obviously too one-sided.
494
CHAPTER 5
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave

no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident inten-
tion of the parties, the latter shall prevail over the former.1
Art. 1371. In order to judge the intention of the contract-
ing parties, their contemporaneous and subsequent acts
shall be principally considered.2
Primacy of Intention of Parties. — The cardinal rule in the

interpretation of contracts is to the effect that the intention of the
contracting parties should always prevail because their will has the
force of law between them. Art. 1370 of the Civil Code consecrates
this rule and provides, further, that if the terms of contract are clear
and leave no doubt as to the intention of the contracting parties, the
literal sense of its stipulations shall be followed; and if the words
appear to be contrary to the evident intention of the contracting
parties, the intention shall prevail.3 As a rule, in the construction
and interpretation of a document the intention of the parties must
be sought. This is the basic rule in the interpretation of contracts
because all other rules are but ancilliary to the ascertainment of the
meaning intended by the parties. And once this intention has been
1
2
3
Kasilag vs. Rodriguez, 69 Phil. 317. To the same effect: Manila Engineering Co.
vs. Cranston, 45 Phil. 842; Roman vs. Asia Banking Corp., 46 Phil. 705; Valdez vs.
Sibal, 46 Phil. 930; National Bank vs. Paez, 54 Phil. 393; Abella vs. Gonzaga, 56 Phil.
132; Acosta vs. Llacuna, 59 Phil. 540; H.E. Heacock Co. vs. Buntal Manufacturing
Co., 66 Phil. 245; Jose vs. Veloso, 67 Phil. 191; Marquez vs. Valencia, 44 Off. Gaz. 895.
495
ascertained it becomes an integral part of the contract as though it

had been originally expressed therein in unequivocal terms.4
These principles were reiterated by the SC in the case of
Manila Banking Corp. vs. Teodoro, Jr. (169 SCRA 95), where it
was held: The character of the transactions between the parties is
not, however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the American
Jurisprudence (68 2d, Secured Transaction, Section 50) said: “The
character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the
form of the transfer was. If it was intended to secure the payment
of money, it must be construed as a pledge. However, even though
a transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a pledge if the
debt continues in existence and is not discharged by the transfer,
and that accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and ambiguous language
or other circumstances excluding an intent to pledge. (Lopez vs.
Court of Appeals, 114 SCRA 671 [1982].)
Further, in the case of Philippine National Construction Cor-
poration vs. The Hon. CA, et al., G.R. No. 159417, Jan.25,2007, the
Court held that the contract between parties is the formal expres-
sion of the parties’ rights, duties and obligations. It is the best evi-
dence of the intention of the parties. Thus, when the terms of an
agreement have been reduced to writing, it is considered as con-
taining all the terms agreed upon and there can be , between the
parties and their successors in interest, no evidence of such terms
other than the contents of the written agreement. Furthermore, it
is a rule that if the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning
4
Nielsen & Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.
496
INTERPRETATION OF CONTRACTS Arts. 1370-1371
of its stipulation shall control. The contract is the law between the
parties and when the words of the contract are clear and can easily
be understood, there is no room for contruction (Olivares and Robles
vs. Sarmiento, G.R. 158384, June 12, 2008).
Idem; How to judge intention. — In order to judge the in-
tention of the contracting parties, their contemporaneous and subse-
quent acts shall be principally considered. This is, of course, without
prejudice to the consideration of other factors as fixed or determined
by the other rules of interpretation mentioned in the Civil Code and
in the Rules of Courts. Hence, as a general rule, documents are in-
terpreted in the precise terms in which they are expressed, but the
courts, in the exercise of their sound discretion, are called upon to
admit direct and simultaneous circumstantial evidence necessary
for their interpretation with the purpose of making the true inten-
tion of the parties prevail.5 One pattern is to ascertain the contempo-
raneous and subsequent acts of the contracting parties in relation to
the transaction under consideration. Thus, where there is evidence
regarding the intention of the parties to extend the contract equiva-
lent to the period of suspension caused by the war and the parties
understood the suspension to mean extension, it was held that the
suspension of the agreement means the extension of the same for a
period equivalent to the suspension.6
Problem — What is the cardinal rule applicable in a case

where the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties?
Answer — It is a cardinal rule that if the terms of a
contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulation
shall control. In the case of Philippine National Construction
Corporation vs. The Hon. CA, et al., G.R. No. 159417, Jan.25,
2007, the Court held that the contract between parties is the
formal expression of the parties’ rights, duties and obligations.
It is the best evidence of the intention of the parties. Thus, when
5
Aves vs. Orillenedo, 70 Phil. 262, citing Arts. 1370 and 1371 of the Civil Code.
To the same effect: Atlantic Gulf Co. vs. Insular Government, 10 Phil. 166; Figueras
vs. Rocha, 13 Phil. 504; Tanido vs. Jumaoan, 17 Phil. 335; Soler vs. Chesley, 43 Phil.
529; Kidney vs. Carter, 43 Phil. 953; Rivero vs. Rabe, 54 Phil. 982; Gonzales vs. La
Previsora, 74 Phil. 165.
6
Nielsen & Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.
497
the terms of an agreement have been reduced to writing, it is

considered as containing all the terms agreed upon and there
can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written
agreement.
It is further required that the various stipulations of a
contract shall be interpreted together, attributing to the doubtful
ones that which may result from all of them taken jointly (Bobie
Rose V. Frias vs. Flora San Diego-Sison, G.R. No.155223, April
3, 2007).
Art. 1372. However general the terms of a contract may

be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon
which the parties intended to agree.7
Art. 1373. If some stipulation of any contract should
admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual.8
Art. 1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.9
Art. 1375. Words which may have different significations
shall be understood in that which is most in keeping with
the nature and object of the contract.10
Art. 1376. The usage or custom of the place shall be
borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which are
ordinarily established.11
Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who
caused the obscurity.12
7
8
9
10
11
12
498
INTERPRETATION OF CONTRACTS Arts. 1378-1379
Art. 1378. When it is absolutely impossible to settle

doubts by the rules established in the preceding articles, and
the doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests shall
prevail. If the contract is onerous, the doubt shall be settled
in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may
have been the intention or will of the parties, the contract
shall be null and void.13
Art. 1379. The principles of interpretation stated in Rule
123 of the Rules of Court shall likewise be observed in the
construction of contracts.14
13
14
New provision. The provisions of Rule 123 of the Rules of Court referred to are
Secs. 58-67, now Secs. 8-17, Rule 130, New Rules of Court.
499
CONTRACTS
CHAPTER 6
RESCISSIBLE CONTRACTS
Classes of Defective Contracts. — There are four classes

of defective contracts under the present Civil Code. They are: first,
rescissible contracts; second, voidable contracts; third, unenforceable
contracts; and fourth, void or inexistent contracts. Explaining
the reasons behind this new classification, the Code Commission
declared in its report:
“A great deal of confusion has been created by the faulty

terminology used by the Spanish Code as regards defective
contracts. There is no sufficient clarity as to ‘contratos nulos’
and ‘contratos anulables’ — void and voidable contracts.
“In order to put an end to the foregoing uncertainty and
other ambiguities in the Spanish Code, the project in a clear-cut
and unequivocal way classifies and defines the various kinds
of defective contracts, and states their consequences. There
are, under the recommended plan, four kinds of such contracts,
namely (in the order of defectiveness): (1) rescissible; (2)
voidable; (3) unenforceable; and (4) void or inexistent contracts.
“It is believed that with the explicit provisions of the
Project upon the subject of defective contracts, the present
nebulous state of the law will be dispelled. It is neither wise
nor just that parties should be left in doubt as to the degree of
effectiveness of their contractual relations. The legal profession
is also entitled to know in a positive and unequivocal manner
what contracts are rescissible, voidable, unenforceable, and
void. It is hoped that this clarification of the law on this most
far-reaching subject will go far toward forestalling many
controversies and litigations.’’1
1
500
Idem; Essential features. — The essential features of the

different classes of defective contracts are:
1. As to defect:
(a) In rescissible contracts, there is damage or injury
either to one of the contracting parties or to third persons;
(b) In voidable contracts, there is vitiation of consent or
legal incapacity of one of the contracting parties;
(c) In unenforceable contracts, the contract is entered
into in excess or without any authority, or does not comply with
the Statute of Frauds, or both contracting parties are legally
incapacitated;
(d) In void or inexistent contracts, one or some of the
essential requisites of a valid contract are lacking either in fact
or in law.
2. As to effect:
(a) The first are considered valid and enforceable until
they are rescinded by a competent court;
(b) The second are considered valid and enforceable
until they are annulled by a competent court;
(c) The third cannot be enforced by a proper action in
court;
(d) The fourth do not, as a general rule, produce any
legal effect.
3. As to prescriptibility of action or defense:
(a) In the first, the action for rescission may prescribe;
(b) In the second, the action for annulment or the
defense of annulability may prescribe;
(c) In the third, the corresponding action for recovery,
if there was total or partial performance of the unenforceable
contract under No. 1 or No. 3 of Art. 1403, may prescribe.
(d) In the fourth, the action for declaration of nullity
or inexistence or the defense of nullity or inexistence does not
prescribed.
501
Art. 1380 CONTRACTS
4. As to susceptibility of ratification:
(a) The first are not susceptible of ratification;
(b) The second are susceptible of ratification;
(c) The third are susceptible of ratification;
(d) The fourth are not susceptible of ratification.
5. As to who may assail contracts:
(a) The first maybe assailed not only by a contracting
party but even by a third person who is prejudiced or damaged
by the contract;
(b) The second may be assailed only by a contracting
party;
(c) The third may be assailed only by a contracting
party;
(d) The fourth may be assailed not only by a contracting
party but even by a third person whose interest is directly
affected.
6. As to how contracts may be assailed:
(a) The first may be assailed directly only, and not
collaterally;
(b) The second may be assailed directly or collaterally;
(c) The third may be assailed directly or collaterally;
(d) The fourth may be assailed directly or collaterally.
Art. 1380. Contracts validly agreed upon may be re-

scinded in the cases established by law.2
Rescissible Contracts in General. — In a rescissible
contract, all of the essential requisites of a contract exist and the
contract is valid, but by reason of injury or damage to either of the
contracting parties or to third persons, such as creditors, it may be
rescinded.3 A rescissible contract is, therefore, a contract which is
2
3
502
RESCISSIBLE CONTRACTS Art. 1380
valid because it contains all of the essential requisites prescribed

by law, but which is defective because of injury or damage to either
of the contracting parties or to third persons, as a consequence of
which it may be rescinded by means of a proper action for rescission.
Before it is rescinded, a rescissible contract is valid and,
therefore, legally effective. The only way by which it can be attacked
is by means of a direct action for rescission based on any of the causes
expressly specified by law; hence, it cannot be attacked collaterally.4
Idem; Characteristics. — Rescissible contracts, therefore,
possess the following characteristics:
(1) Their defect consists in injury or damage either to one of
the contracting parties or to third persons.
(2) Before rescission, they are valid and, therefore, legally
effective.
(3) They can be attacked directly only, and not collaterally.
(4) They can be attacked only either by a contracting party or
by a third person who is injured or defrauded.
(5) They are susceptible of convalidation only by prescription,
and not by ratification.
Idem; Concept of rescission. — Rescission 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 a contract,
even if the same should be valid, by means of the restoration of
things to their condition prior to the celebration of the contract.5
Idem; id. — Distinguished from resolution. — Rescission
of rescissible contracts must not be confused with the rescission
or resolution of reciprocal obligations under Art. 1191 of the Code.
Although there are similarities both with respect to validity and
effects, they are distinguished from each other in the following ways:
(1) As to party who may institute action: In rescission the
action may be instituted not only by a party to the contract but even
by a third person, while in resolution the action may be instituted
only by a party to the contract.
4
Borja vs. Addison, 44 Phil. 895.
5
503
Art. 1380 CONTRACTS
(2) As to causes: In rescission there are several causes or

grounds such as lesion, fraud and others expressly specified by law,
while in resolution the only ground is failure of one of the parties to
comply with what is incumbent upon him.
(3) As to power of the courts: In rescission there is no
power of the courts to grant an extension of time for performance
of the obligation so long as there is a ground for rescission, while
in resolution the law expressly declares that courts shall have a
discretionary power to grant an extension for performance provided
that there is a just cause.
(4) As to contracts which may be rescinded or resolved: In
rescission any contract, whether unilateral or reciprocal, may be
rescinded, while in resolution only reciprocal contracts may be
resolved.
Idem; id. — Distinguished from rescission by mutual
consent. — Neither must rescission be confused with rescission of
a contract by mutual consent of the contracting parties. One must
be distinguished from the other — first, with respect to the causes
of rescisssion, second, with respect to the laws applicable, and third,
with respect to the effects. The following case will serve to illustrate
these distinctions:
Aquino vs. Tañedo

31 Phil. 517
The records show that plaintiff purchased some lands
from the defendant and, as a consequence, took possession of the
same and collected their products. Subsequently, they dissolved
the contract of sale, and, as a result thereof, plaintiff returned
the lands, while defendant bound himself to return the part of
the purchase price which plaintiff has paid. The question now is
whether or not the plaintiff is obliged to return to the defendant
the products of the lands which he had collected during his
possession. The defendant contends that he is obliged, invoking
the provisions of Art. 1295 (now Art. 1385) of the Civil Code. The
Supreme Court, however, ruled:
“The rescission mentioned in the contract is not the
rescission referred to in Article 1295 (now Art. 1385). Although
the plaintiff and the defendant employed the word rescind,
it has not, in the contract executed by them, either the scope
or the meaning of the word rescission to which Article 1295
504
(now Art. 1385) refers and which takes place only in the cases
mentioned in the preceding Articles, 1291 and 1292 (now Arts.
1381 and 1382). Rescission, in the light of these provisions, is
a relief which the law grants, on the premise that the contract
is valid, for the protection of one of the contracting parties and
third persons from all injury and damage that the contract may
cause, or to protect some incompatible and preferential right
created by the contract. Article 1295 (now Art. 1385) refers to
contracts that are rescissible in accordance with law in the cases
expressly fixed thereby, but it does not refer to contracts that
are rescinded by mutual consent and for the mutual convenience
of the contracting parties. The rescission in question was not
originated by any of the causes specified in Articles 1291 and
1292 (now Arts. 1381 and 1382), nor is it any relief for the
purposes sought by these articles. It is simply another contract
for the dissolution of a previous one, and its effects, in relation
to the contract so dissolved, should be determined by the
agreement made by the parties, or by the application of other
legal provisions, but not by Article 1295 (now Art. 1385), which
is not applicable.’’6
Art. 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 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.7
6
To the same effect: Luneta Motor Co. vs. Richey, CA, 39 Off. Gaz. 1101.
7
505
Art. 1382 CONTRACTS
Art. 1382. Payments made in a state insolvency for ob-

ligations to whose fulfillment the debtor could not be com-
pelled at the time they were effected, are also rescissible.8
Contracts in Behalf of Ward. — The first of the rescissible

contracts are those which are entered into by guardians whenever
the wards whom they represent suffer lesion or damage by more
than one-fourth of the value of the things which are the object
thereof.9 This is, however, without prejudice to the provision of Art.
1386 which states that rescission shall not take place with respect
to contracts approved by the courts.
It must be noted that under the Rules of Court, a judicial
guardian entering into a contract with respect to the property of
his ward must ordinarily secure the approval of a competent court.10
This is also true in the case of a father or mother considered as a
natural guardian of the property of a child under parental authority
where such property is worth more than two thousand pesos.11 As
a matter of fact, if the contract involves the sale or encumbrance of
real property, judicial approval is indispensable.12 Consequently, if
a guardian sells, mortgages or otherwise encumbers real property
belonging to his ward without judicial approval, the contract is
unenforceable,13 and not rescissible even if the latter suffers lesion
or damage of more than one-fourth of the value of the property.
However, if he enters into a contract falling within the scope of
his powers as guardian of the person and property, or only of the
property, of his ward, such as when the contract involves acts of
administration, express judicial approval is not necessary,14 in
which case the contract is rescissible if the latter suffers the lesion
or damage mentioned in No. 1 of Art. 1381 of the Code.
Contracts in Behalf of Absentees. — The second of the
rescissible contracts are those entered into in behalf of absentees,
if the latter suffer the lesion or damage stated in the preceding
8
9
10
See Rules 95-96, New Rules of Court.
11
12
Sec. 1, Rule 95, New Rules of Court.
13
Arts. 1403, No. 1, and 1317, Civil Code.
14
Sec. 1, et seq., Rule 96, New Rules of Court. See 2 Moran, 1957 Ed., p. 506.
506
number.15 However, such contracts are not rescissible if they have

been approved by the courts.16
Since the powers and duties of a legal representative of an
absentee are exactly the same as those of a guardian,17 the principles
enunciated in the preceding section are also applicable here.
Whether the contract is entered into by a guardian in behalf of
his ward or by a legal representative in behalf of an absentee, before
it can be rescinded on the ground of lesion, it is indispensable that
the following requisites must concur:
(1) The contract must have been entered into by a guardian
in behalf of his ward or by a legal representative in behalf of an
absentee;18
(2) The ward or absentee must have suffered lesion of more
than one-fourth of the value of the property which is the object of the
contract;19
(3) The contract must have been entered into without judicial
approval;20
(4) There must be no other legal means for obtaining
reparation for the lesion;21
(5) The person bringing the action must be able to return
whatever he may be obliged to restore;22 and
(6) The object of the contract must not be legally in the
possession of a third person who did not act in bad faith.23
If the object of the contract is legally in the possession of a third
person who did not act in bad faith, the remedy available to the
person suffering the lesion is indemnification for damages and not
rescission.24
15
16
17
18
Art. 1381, Nos. 1 and 2, Civil Code.
19
Ibid.
20
21
22
23
24
507
Art. 1382 CONTRACTS
Contracts in Fraud of Creditors. — The third of the re-

scissible contracts are those undertaken in fraud of creditors when
the latter cannot in any other manner collect the claims due them.25
This complements Art. 1177 of the Code which states that one of
the remedies available to the creditor after he has exhausted all the
property in possession of the debtor is to impugn the acts which the
latter may have done to defraud him.
However, before a contract can be rescinded on the ground that
it has been entered into in fraud of creditors, it is indispensable that
the following requisites must concur:
(1) There must be a credit existing prior to the celebration of
the contract;
(2) There must be a fraud, or at least, the intent to commit
fraud, or at least, the intent to commit fraud to the prejudice of the
creditor seeking the rescission;
(3) The creditor cannot in any other legal manner collect his
credit;26 and
(4) The object of the contract must not be legally in the
possession of a third person who did not act in bad faith.27
If the object of the contract is legally in the possession of a
third person who did not act in bad faith, the remedy available to
the creditor is to proceed against the person causing the loss for
damages.28
Accion pauliana — Article 1381 of the Civil Code enumerates
the contracts which are rescissible, and among them are “those
contracts undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them.’’ The action to rescind
contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the
plaintiff asking for rescission has a credit prior to the alienation; (2)
the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person; (3) the creditor has no other legal remedy
to satisfy his claim; (4) the act being impugned is fraudulent; (5) the
25
26
27
28
508
third person who received the property conveyed, if it is by onerous

title, has been an accomplice in the fraud. The general rule is that
rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of
the judicial pronouncement setting aside the contract. Without any
prior existing debt, there can neither be injury nor fraud. While it is
necessary that the credit of the plaintiff in the accion pauliana must
exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to
the alienation, it is merely declaratory, with retraoctive effect to the
date when the credit was constituted. (Citations omitted.) (Chief
Justice Davide, Jr., First Division, Siguan vs. Lim, G.R. No. 134685,
November 19, 1999.)
Contracts Referring to Things Under Litigation. — The
fourth of the rescissible contracts are 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.29
The case contemplated in this number is different from that
contemplated in the preceding number. Here the purpose is to secure
the possible effectivity of a claim, while in the preceding number the
purpose is to guarantee an existing credit; here there is a real right
involved, while in the preceding number there is a personal right,
both of which deserve the protection of the law. They are, however,
similar in the sense that in both cases the person who can avail of
the remedy of rescission is a stranger to the contract.30
Contracts by Insolvent. — Under Art. 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.
In order that the payment can be rescinded, it is indispensable
(1) that it must have been made in a state of insolvency, and (2)
that the obligation must have been one which the debtor could not
be compelled to pay at the time such payment was effected. It is,
therefore, clear that the basis of the rescissible character of the
transaction is fraud as in the case of Nos. 3 and 4 of Art. 1381.
29
30
509
Art. 1382 CONTRACTS
Insolvency, as it is used in this article, should be understood

in its popular or vulgar, not technical, sense. Hence, it refers to the
financial situation of the debtor by virtue of which it is impossible
for him to fulfill his obligations.31 A judicial declaration of insolvency
is not, therefore, necessary.32
According to Manresa, the obligations contemplated by this
article comprehend not only those with a term or which are subject
to a suspensive condition, but even void and natural obligations as
well as those which are condoned or which have prescribed.33
An interesting question arises with respect to the payment of
an obligation which is subject to a suspensive period. Let us assume
that A is indebted to B for P10,000 and to C for P5,000. Let us say
that the obligation in favor of C is subject to a suspensive period.
While in a state of insolvency, A pays his obligation to C before the
expiration of the term or period. Can B rescind the payment? Under
Art. 1382, there is no question that the payment is rescissible, but
then this conclusion would be in direct conflict with the provision of
No. 1 of Art 1198 of the Code under which A can be compelled by C to
pay the obligation even before the expiration of the stipulated term
or period since by his insolvency he has already lost his right to the
benefit of such term or period. According to Manresa, however, the
conflict can easily be resolved by considering the priority of dates
between the two debts. If the obligation with a period became due
before the obligation to the creditor seeking the rescission became
due, then the latter cannot rescind the payment even if such payment
was effected before the expiration of the period; but if the obligation
with a period became due after the obligation to the creditor seeking
the rescission became due, then the latter can rescind the payment.34
Other Rescissible Contracts. — Besides those enumerated
in Arts. 1381 and 1382, there are also other contracts which are
specially declared by law to be subject to rescission.35 Examples of
31
Ibid., p. 561.
32
Under Sec. 70 of the Insolvency Law (Act No. 1956), any payment, pledge,
mortgage, conveyance, sale, assignment or transfer of property made by an insolvent
within one month before the filing of the petition in insolvency by or against him, is
void, except when made for a valuable consideration and in good faith.
33
34
Ibid., p. 536. This is, of course, without prejudice to the provisions of the Civil
Code regarding preference of credits. See Arts. 2241, et seq., Civil Code.
35
510
these contracts are those contemplated in Arts. 1098, 1189, 1526,

1534, 1539, 1542, 1556, 1560, 1567, and 1659 of the Code.
Art. 1383. The action for rescission is subsidiary; it can-

not be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.36
Subsidiary Character of Action. — The action for rescission
is subsidiary, consequently, it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation
for the same.37 Hence, before a party who is prejudiced can avail
himself of this remedy, it is essential that he has exhausted all of the
other legal means to obtain reparation.38 Thus, even where the fraud
charged which is the ground for an action for rescission actually did
exist, where there is no allegation or evidence that the creditor has
already exhausted all of legal remedies to obtain reparation from
the debtor, the action to rescind the sale in question made by said
debtor is not maintainable.39 Nevertheless, if it can be established
that the property which is alienated or transferred by the debtor
to another was his only property at the time of the transaction, an
action for rescission can certainly be maintained because it is clear
that in such case the creditor can have no other remedy.40
Parties Who May Institute Action. — According to Castan,
the action for rescission may be instituted by the following: (1) The
person who is prejudiced, such as the party suffering the lesion
in rescissory actions on the ground of lesion, the creditor who is
defrauded in rescissory actions on the ground of fraud, and other
persons authorized to exercise the same in other rescissory actions;
(2) their representatives; (3) their heirs; and (4) their creditors by
virtue of the subrogatory action defined in Art. 1177 of the Code.41
An heir, therefore, may institute an action for the rescission
of a rescissible contract. As a rule, he may do so as a representative
of the person who suffers from lesion or of the creditor who is
36
37
38
39
Goquiolay vs. Sycip, 9 SCRA 663.
40
Regalado vs. Luchsinger & Co., 5 Phil. 625; Guash vs. Espiritu, 11 Phil. 184;
Honrado vs. Mercayda, CA, 49 Off. Gaz. 1492.
41
511
Art. 1384 CONTRACTS
defrauded. Suppose, however, that it can be established that the

decedent, during his lifetime, entered into a contract with another
in order to defraud him of his legitime, can he institute an action for
the rescission of such contract after the death of the decedent? It is
clear that in this case the compulsory heir does not have any right
to institute the action as a representative of the decedent, since
the decedent himself does not have the right. It would, however, be
possible for him to institute the action in his own right under No.
3 of Art. 1381 of the Civil Code. This was recognized in the case of
Concepcion vs. Sta. Ana. According to the Supreme Court:
“The reason why a forced heir has the right to institute an

action of rescission is that the right to the legitime is similar to a
credit of a creditor. As Manresa correctly states in commenting
on Article 1291 (now Art. 1381) of the Civil Code: “The rights
of a forced heir to the legitime are undoubtedly similar to a
credit of a creditor insofar as the right to the legitime may be
defeated by fraudulent contracts, and are superior to the will
of those bound to respect them. In its judgment of October 28,
1897, the Supreme Court of Spain held that the forced heirs
instituted as such by their father in the latter’s testament have
the undeniable right to institute an action to annul contracts
entered into by the father to their prejudice. As it is seen the
action is called action of nullity, but it is rather an action of
rescission taking into account the purpose for which it is
instituted and the confusion of ideas that has prevailed in this
matter.’’42
Art. 1384. Rescission shall be only to the extent necessary

to cover the damages caused.43
Extent of Rescission. — It must be observed that the primary
purpose of rescission is reparation for the damage or injury which
is suffered either by a party to the contract or by a third person.
In order that this purpose may be realized the rescission does not
necessarily have to be total in character; it may also be partial.
Consequently, according to Art. 1384, rescission shall be only to the
extent necessary to cover the damages caused. This precept, which
42
Concepcion vs. Sta. Ana, 87 Phil. 787. The opinion of Manresa quoted here is
found in Vol. 8, Bk. 2, 5th Ed., pp. 555-556. See Art. 221, No. 4, Civil Code.
43
New provision.
512
was not found in the old Code, is in accordance with the doctrine
enunciated by the Supreme Tribunal of Spain on December 10, 1904,
to the effect that a contract in fraud of creditors may be partially
rescinded to an extent which is sufficient to satisfy the damage
caused to the creditor.44
Art. 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 the posses-
sion 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.45
Effect of Rescission in Case of Lesion. — It is evident

that the first paragraph of Art. 1385 is applicable only to rescissory
actions on the ground of lesion and not to rescissory actions on the
ground of fraud. This is so because in the latter there can certainly be
no obligation on the part of the plaintiff-creditor to restore anything
since he has not received anything.46
Once a contract is rescinded on the ground of lesion, there
arises an obligation on the part of both contracting parties to return
to the other the object of the contract, including fruits or interests.
Consequently, rescission is not possible, unless he who demands it
can return whatever he may be obliged to restore. Thus, where a
guardian alienates certain properties of a minor for P85,000 to a
certain person, and subsequently, the minor, upon reaching the age
of majority, brings an action for the rescission of the contract on
the ground of lesion, the effect if rescission is granted would be the
restoration of things to their condition prior to the celebration of the
contract. But if the plaintiff cannot refund the amount including
interest, the action will certainly fail because positive statutory
44
45
Art. 1295. Spanish Civil Code.
46
513
Art. 1385 CONTRACTS
law, no less than uniform court decisions, require, as a condition

precedent to rescission, that the consideration received should be
refunded.47
The “fruits of the thing” stated in Art. 1385 refer not only
to natural, industrial and civil fruits but also to other accessions
obtained by the thing, while interest refers to legal interest. It
must be observed, however, that as far as the obligation to restore
the fruits is concerned, the rules on possession shall be applied.48
Consequently, the determination of the good or bad faith of the
party obliged to restore is of transcendental importance in order to
assess the fruits or the value thereof which must be returned as well
as the expenses which must be reimbursed.49 Thus, it has been held
that as a condition to the rescission of a contract of sale of a parcel of
land, the vendor must refund to the vendees (who are in good faith)
an amount equal to the purchase price, plus the sum expended by
them in improving the land.50
Effect of Rescission Upon Third Persons. — According to
the second paragraph of Art. 1385, rescission shall not take place
when the thing which constitutes the object of the contract is legally
in the possession of a third person who did not act in bad faith. It is
evident that this rule is applicable to all kinds of rescissible contracts.
There are, however, two indispensable requisites which must concur
in order that the acquisition of the thing which constitutes the object
of the contract by a third person shall defeat an action for rescission.
These requisites are: first, that the thing must be legally in the
possession of the third person; and second, that such third person
must not have acted in bad faith. Where the thing which constitutes
the object of the contract happens to be movable property, the
concurrence of these requisites offers no difficulty because of the
principle that possession of movable property acquired in good faith
is equivalent to a title.51 Where the thing happens to be immovable
property, however, it is indispensable that the right of the third
person must be registered or recorded in the proper registry before
we can say that the thing is legally in his possession, or what
47
Uy Soo Lim vs. Tan Unchuan, 38 Phil. 522.
48
Arts. 543, et seq., Civil Code.
49
8 Manresa, 5th Ed., Bk 2, pp. 577-578.
50
Gov’t. of the P.I. vs. Wagner, 54 Phil. 132.
51
514
amounts to the same thing, before he is protected by law. Thus,

Manresa, commenting on the provision of the second paragraph of
Art. 1385, says:
“The acquisition by a third person is an obstacle to the

efficaciousness of the action for rescission, where the following
two circumstances are present, to wit, that such third person
is in lawful possession of the realty, that is to say that he is
protected by the law against said action by the registration in
the registry, and that he did not act in bad faith.’’52
Consequently, it has been held that a third person to whom the

realty has been transferred who has not registered his right in the
proper registry cannot be protected against the effects of a judgment
rendered in the action for rescission.53 However, where he has
registered his right over the realty under the Land Registration Act
(Act No. 496), there would then be no legal obstacle to the transfer
of the title of the said property, and for this special reason the said
transfer cannot be rescinded. This doctrine was enunciated by the
Supreme Court in the following case:
Sikatuna vs. Guevara

45 Phil. 371
The records show that a contract of a lease of certain lot

situated in Manila was entered into between the partnership
Jacinto, Palma y Hnos, as lessor, and Potenciana Guevara, as
lessee. This contract contained an option by which the lessor
is given the right to purchase within a period of one year from
the time of the execution thereof a house which the lessee had
constructed on the lot, but in case of failure to exercise such
right, the lessee is given the right to purchase the lot. The period
for the option having expired without the lessor exercising its
right, Guevara offered to purchase the lot, but the said lessor
refused. In view of such refusal, Guevara brought an action to
compel the lessor to sell the lot to her. There was, however, no
notice of the commencement of such action filed with the office
of the Register of Deeds. During the pendency of such case, the
aforesaid lessor sold the lot under litigation to the Sikatuna
52
8 Manresa, 5th Ed., Bk 2, pp. 379-380, quoted by the Supreme Court in Cord-
evero vs. Villaruz, 46 Phil. 473, and in Gatchalian vs. Manalo, 68 Phil. 608.
53
Cordevero vs. Villaruz, 46 Phil. 473.
515
Art. 1385 CONTRACTS
Corporation. This sale was recorded in the Registry in accordance

with Act No. 496, otherwise known as the Land Registration
Act. Subsequently, judgment was rendered in the civil case in
favor of Guevara, but it was not executed because the lot had
already been sold to the Sikatuna Corporation. Later, the new
owner ordered Guevara to vacate the premises. Having declined
to do so, the corporation commenced these proceedings against
her for unlawful detainer. In her answer, she contended that
since the contract involves the sale of property under litigation
without the approval of the litigants or of competent judicial
authority, it should be rescinded. This contention was upheld by
the lower court. The Supreme Court, speaking through Justice
Romualdez, however, ruled:
“As the appellant rightfully contends the rescission
of the sale does not lie in the present case because the
property is now in the legal possession of a third person
who has not acted in bad faith. There is no doubt but that
in this case the plaintiff corporation has the character of a
third person, and it has not been shown that it had acted
in bad faith.
“This case has a special circumstance in that it deals
with property registered under the Land Registration Act
No. 496, Section 78, which provides that acts concerning
properties registered under the law shall affect only the
parties litigant, unless a notice of the commencement of
the action is recorded, which does not appear to have been
done in the case before us. There was, therefore, no legal
obstacle to the transfer of the title of the said property,
and for this special reason the said transfer cannot be
rescinded.’’54
In spite of the impossibility of maintaining an action for the

rescission of the contract where the object thereof is legally in the
possession of a third person who did not act in bad faith, the person
who is prejudiced is not left without any remedy. He may still
bring an action for indemnity for damages against the person who
caused the loss.55 This action may be directed against the guardian,
54
From this case, it is clear that when the law speaks of “third persons,” it refers
not only to subsequent transferees who are strangers to the contract which is sought
to be rescinded, but even to the immediate transferees who are not strangers to the
contract.
55
516
RESCISSIBLE CONTRACTS Arts. 1386-1388
representative of the absentee or litigant who transferred the

thing, as the case may be.56 It may even be directed against a third
person who, in bad faith, had previously acquired the thing and,
subsequently, had alienated it to an innocent purchaser for value.57
Art. 1386. Rescission referred to in Nos. 1 and 2 of Article

1381 shall not take place with respect to contracts approved
by the courts.58
Art. 1387. All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did
not reserve sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed fraudu-
lent when made by persons against whom some judgment
has been rendered in any instance or some writ of attach-
ment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been ob-
tained 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.59
Art. 1388. Whoever acquires in bad faith the things
alienated in fraud of creditors shall indemnify the latter
for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first acquirer
shall be liable first, and so on successively.60
Proof of Fraud. — As we have seen in a previous section one

of the requisites which must be established in order that a contract
may be rescinded on the ground that it has been entered into in
56
57
58
59
60
517
fraud of creditors is the existence of fraud, or at least, the intent to

defraud. Such fraud or intent to defraud may be either presumed in
accordance with Art. 1387 of the Code or duly proved in accordance
with the ordinary rules of evidence.
Idem; Presumptions of fraud. — The law presumes that
there is fraud of creditors in the following cases:
(1) Alienations of property by gratuitous title if the debtor
has not reserved sufficient property to pay all of his debts contracted
before such alienations.61
(2) Alienations of property by onerous title if made by a
debtor against whom some judgment has been rendered in any
instance or some writ of attachment has been issued. The decision
or attachment need not refer to the property alienated and need
not have been obtained by the party seeking the rescission.62 Thus,
where the debtor alienated a certain property, which was his only
attachable property, to his son after judgment had been rendered
against him and a writ of execution had been issued, there is a
presumption that such alienation is fraudulent in accordance
with the rule stated in the second paragraph of Art. 1387.63 This
presumption becomes stronger when it is established that the
conveyance by the judgment debtor is for the purpose of preventing
the judgment creditor or other creditors from seizing the property.64
But where no judgment or preliminary attachment exists against
the debtor, the presumption is not applicable.65
Cabaliw vs. Sadorra

64 SCRA 310
Isidora Cabaliw was the wife of Benigno Sadorra by his
second marriage solemnized on May 5, 1915, before the Justice
of the Peace of Bayambang, Pangasinan. This couple had a
daughter named Soledad Sadorra. During their marriage, the
61
62
63
Regalado vs. Luchsinger & Co., 5 Phil. 25. To the same effect: see Cabaliw vs.
Sadorra, 64 SCRA 310.
64
Bachrach vs. Peterson, 7 Phil. 571. To the same effect: Panlileo vs. Victorio, 36
Phil. 706; Saavedra vs. Martinez, 68 Phil. 676; Contreras vs. China Banking Corp.,
76 Phil. 709.
65
Manila Mercantile Co. vs. Flores, 50 Phil. 759.
518
spouses acquired two (2) parcels of land situated in Iniangan,

Dupax, Nueva Vizcaya. One parcel with an area of 14.4847
hectares was acquired by a Sales Patent and covered by Original
Certificate of Title No. 1 of the Land Records of Nueva Vizcaya
issued in the name of Benigno Sadorra. The other piece of land
about 1-1/2 hectares and covered by Tax Declaration Nos. 6209
and 6642 was secured through purchase.
Having been abandoned by her husband, Isidora Cabaliw
instituted an action for support with the Court of First Instance
of Manila, entitled “Isidora Cabaliw de Orden versus Benigno
Sadorra’’ docketed therein as Civil Case No. 43193. On January
30, 1933, judgment was rendered requiring Benigno Sadorra to
pay his wife, Isidora Cabaliw, the amount of P75.00 a month in
terms of support as of January 1, 1933, and P150.00 in concept
of attorney’s fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno
Sadorra executed two (2) deeds of sale over the two parcels of
land above described in favor of his son-in-law, Sotero Sadorra,
the latter being married to Encarnacion Sadorra, a daughter of
Benigno Sadorra by his first marriage. These deeds were duly
registered and Original Certificate of Title No. 1 was cancelled
and replaced with T.C.T. No. 522 of the Register of Deeds of
Nueva Vizcaya.
Because of the failure of her husband to comply with
the judgment of support, Isidora Cabaliw filed in Civil Case
43192 a motion to cite Benigno Sadorra for contempt and the
Court of First Instance of Manila in its Order of May 12, 1937,
authorized Isidora to take possession of the conjugal property,
to administer the same, and to avail herself of the fruits thereof
in payment of the monthly support in arrears. With this order of
the Court, Isidora proceeded to Nueva Vizcaya to take possession
of the aforementioned parcels of land, and it was then that she
discovered that her husband had sold them to his son-in-law
Sotero.
On February 1, 1940, Isidora filed with the Court of First
Instance of Nueva Vizcaya Civil Case No. 449 against her
husband and Sotero Sadorra for the recovery of the lands in
question on the ground that the sale was fictitious; at the same
time a notice of lis pendens was filed with the Register of Deeds
of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.
On June 7, 1948, the above-mentioned notice of lis pendens
was cancelled by the Register of Deeds of Nueva Viscaya upon
519
the filing of an affidavit by Sotero Sadorra to the effect that Civil

Case No. 449 had been decided in his favor and that he was
adjudged the owner of the land covered by T.C.T. No. 522, but
that his copy of the decision was lost during the war.
On October 1, 1954, Isidora and her daughter Soledad
filed with the Court of First Instance of Nueva Vizcaya Civil
Case 634 to recover from the spouses Sotero and Encarnacion
Sadorra the aforementioned two parcels of land; they also
caused the annotation of a cautionary notice and notice of lis
pendens over T.C.T. 522.
On November 22, 1955, the complaint was amended
and named additional party-defendants were the children of
Benigno Sadorra by his first marriage. The amended complaint
prayed among others: (1) that the deeds of sale executed by
Benigno Sadorra be declared null and void; (2) that defendant-
spouses Sotero and Encarnacion Sadorra be directed to yield
the possession of the lands in question; and (3) that said lands
be ordered partitioned among plantiffs and defendants who
are children by the first marriage of Benigno Sadorra in the
proportions provided by law.
During the pendency of Civil Case 634 certain parties
intervened claiming that they had purchased parts of the land
covered by T.C.T. 522.
After trial, the lower court rendered judgment and among
other things: (1) declared the deed of sale executed by Benigno
Sadorra to be simulated and fictitious; (2) recognized and upheld
the rights of the intervenor-purchasers who acquired their
portions prior to the registration of the notice of lis pendens on
October 1, 1954, but dismissed the claims of the intervenors who
allegedly bought parts of the land subsequent thereto; and (3)
ordered the partition of the remaining unsold lands between
Isidora Cabaliw, Sotero Sadorra, on one hand and the children
by the first marriage of Benigno Sadorra on the other.
From the foregoing decision of the lower court in Civil
Case 634 spouses Sotero and Encarnacion Sadorra appealed to
the Court of Appeals and so did the intervenors whose claims
were dismissed. (CA-G.R. No. 26956-R.) On November 29, 1965,
the appellate court by a vote of 3 to 2 reversed the decision of
the trial court, and dismissed the amended complaint of Isidora
Cabaliw.
Hence, this petition filed by Isidora Cabaliw and her
daughter, Soledad Sadorra, for the Court to review the adverse
judgment of the Court of Appeals.
520
The Supreme Court, speaking through Justice Muñoz

Palma, held:
The Court of Appeals sustained the validity and

efficacy of the deeds of sale executed by Benigno Sadorra
in favor of his son-in-law (Exhibits I and I-1) on the
ground that these are public documents and as such are
presumed by law to have been fair and legal; that the
vendee Sotero Sadorra is presumed to have acted in good
faith, citing Art. 44, Spanish Civil Code, Art. 627, New
Civil Code; that fraud is never presumed, and it is settled
in this jurisdiction that strong and convincing evidence is
necessary to overthrow the validity of an existing public
instrument. The appellate court continued that inasmuch
as under the old Civil Code in force at the time of the sale,
the husband was empowered to dispose of the conjugal
property without the consent of the wife, the sales made by
Benigno Sadorra were valid, and the wife Isidora cannot
now recover the property from the vendee.
The judgment of the Court of Appeals cannot be sustained.
The facts narrated in the first portion of this Decision
which are not disputed, convincingly show or prove that the
conveyances made by Benigno Sadorra in favor of his son-in-law
were fraudulent. For the heart of the matter is that about seven
months after a judgment was rendered against him in Civil Case
No. 43192 of the Court of First Instance of Manila and without
paying any part of that judgment, Benigno Sadorra sold the only
two parcels of land belonging to the conjugal partnership to his
son-in-law. Such a sale even if made for a valuable consideration
is presumed to be in fraud of the judgment creditor who in this
case happens to be the offended wife.
Article 1297 of the old Civil Code (now Art. 1387 of the
New Civil Code) which was the law in force at the time of the
transaction provides:
“Contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to be made in
fraud of creditors.
“Alienations by onerous title are also presumed
fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ
of attachment has been issued. The decision or attachment
need not refer to the property alienated and need not have
been obtained by the party seeking rescission.’’ (Emphasis
supplied.)
521
The above-quoted legal provision was totally disregarded

by the appellate court, and there lies its basic error.
We agree with petitioners that the parties here do not stand
in equipoise, for the petitioners have in their favor, by a specific
provision of law, the presumption of fraudulent transaction
which is not overcome by the mere fact that the deeds of sale
in question were in the nature of public instruments. As well
said in the dissenting opinion of Justice Magno Gatmaitan, the
principle invoked by the majority opinion that to destroy the
validity of an existing public document “strong and convincing
evidence is necessary” operates “where the action was brought
by one party against the other to impugn the contract . . . but
that rule can not operate and does not, where the case is one
wherein in the suit is not between the parties inter se but is
one instituted by a third person, not a party to the contract but
precisely the victim of it because executed to his prejudice and
behind his back; neither law, nor justice, nor reason, nor logic,
should so permit, otherwise, in such case, the courts would be
furnishing a most effective shield of defense to the aggressor.”
(pp. 30-31, CA Decision)
Furthermore, the presumption of fraud established by the
law in favor of petitioners is bolstered by other indicia of bad
faith on the part of the vendor and vendee. Thus (1) the vendee
is the son-in-law of the vendor. In the early case of Regalado
vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close
relationship between the vendor and the vendee is one of the
known badges of fraud. (2) At the time of the conveyance, the
vendee, Sotero, was living with his father-in-law, the vendor,
and he knew that there was a judgment directing the latter to
give a monthly support to his wife Isidora and that his father-
in-law was avoiding payment and execution of the judgment.
(3) It was known to the vendee that his father-in-law had no
properties other than those two parcels of land which were
being sold to him. The fact that a vendor transfers all of his
property to a third person when there is a judgment against him
is a strong indication of a scheme to defraud one who may have
a valid interest over his properties.
Added to the above circumstances is the undisputed fact
that the vendee Sotero Sadorra secured the cancellation of the
lis pendens on No. O.C.T. 1, which was annotated in 1940 at
the instance of Isidora Cabaliw, and the issuance of a transfer
certificate of title in his favor, by executing an affidavit (Exhibit
H) on June 7, 1948, wherein he referred to Isidora as “the late
Isidora Cabaliw’’ when he knew for a fact that she was alive,
522
and alleged that Civil Case 449 of the Court of First Instance
of Nueva Vizcaya was decided in his favor where in truth there
was no such decision because the proceedings in said case
were interrupted by the last world war. Such conduct of Sotero
Sadorra reveals, as stated by the lower court, an “utter lack of
sincerity and truthfulness” and belies his pretensions of good
faith.
On the part of the transferee, he did not present satis-
factory and convincing evidence sufficient to overthrow the
presumption and evidence of a fraudulent transaction. His is
the burden of rebutting the presumption of fraud established
by law, and having failed to do so, the fraudulent nature of the
conveyance in question prevails.
The decision of the Court of Appeals makes mention of Art.
1413 of the old Civil Code (now Art. 166 of the New Civil Code)
which authorizes the husband as administrator to alienate and
bind by onerous title the property of the conjugal partnership
without the consent of the wife, and by reason thereof concludes
that petitioner Isidora Cabaliw can not now seek annulment
of the sale made by her husband. On this point, counsel for
petitioners rightly claims that the lack of consent of the wife
to the conveyances made by her husband was never invoked
nor placed in issue before the trial court. What was claimed all
along by plaintiff, Isidora Cabaliw now petitioner, was that the
conveyances or deeds of sale were executed by her husband to
avoid payment of the monthly support adjudged in her favor and
to deprive her of the means to execute said judgment. In other
words, petitioner seeks relief not so much as an aggrieved wife
but more as a judgment creditor of Benigno Sadorra. Art. 1413
therefore is inapplicable; but even if it were, the result would
be the same because the very article reserves to the wife the
right to seek redress in court for alienations which prejudice her
or her heirs. The undisputed facts before Us clearly show that
the sales made by the husband were merely a scheme to place
beyond the reach of the wife the only properties belonging to the
conjugal partnership and deprive her of what rightly belongs to
her and her only daughter Soledad.
PREMISES CONSIDERED, We find merit to this Petition
for Review and We set aside the decision of the appellate court
for being contrary to the law applicable to the facts of the case.
The decision of the trial court stands affirmed with costs against
private respondents.
So Ordered.
523
It must be observed, however, that the above presumptions

are disputable, and therefore, may be rebutted by satisfactory and
convincing evidence to the contrary.66 Thus, if it can be established
that the transferee acquired the property in good faith, without the
least intention of impairing the judgment obtained by the creditor
against the transferor, and that he paid the purchase price in the
belief that the latter could freely dispose of the said property, the
presumption of fraud is overthrown.67
Honrado vs. Marcayda, et al.

49 Off. Gaz. 1492, C.A.
This is an action commenced by plaintiff against the
defendants for the rescission of a contract of sale on the ground
that such contract was entered into in fraud of creditors. The
records show that Felipe Lotivio purchased a parcel of land from
Luisa Marcayda for P1,000, although at the time the contract
was executed there was already a judgment in favor of the
plaintiff against the latter with regard to the property and a writ
of attachment had already been issued. The plaintiff contends
that the sale is fraudulent in accordance with the rule stated in
the second paragraph of Art. 1297 (now Art. 1387) of the Civil
Code; the defendant Felipe Lotivio, on the other hand, contends
that he is a purchaser in good faith and for value. Consequently,
the questions upon which this case hinges are (1) whether or not
Felipe Lotivio was a purchaser in good faith and for value, and
(2) if he is, whether or not the contract of sale executed could be
rescinded.
Held: “The sale was consummated on January 6, 1936, in
consideration of P1,000. Original certificate of title No. 14567
showed that the land was free from any lien or encumbrance.
Felipe Lotivio was not, under the law, supposed to go farther to
find out whether the land has any other lien not appearing on
the face of the title as held in the cases of Reynes vs. Barrera, 68
Phil. 656; Hernandez vs. Vda. de Salas, 69 Phil. 744; Visayan
Surety and Insurance Corp. vs. Verzosa, 72 Phil. 362. It is well
settled that when the property sold on execution is registered
under the Torrens system, registration is the operative act
66
Peña vs. Mitchell, 9 Phil. 587 & Streiff vs. Coll. of Customs, 31 Phil. 643; Na-
tional Exchange Co. vs. Katigbak, 54 Phil. 599; Buencamino vs. Bantug, 58 Phil. 521;
Gatchalian vs. Manalo, 68 Phil. 708.
67
Buencamino vs. Bantug, 58 Phil. 521. To the same effect: Peña vs. Mitchell, 9
Phil. 587; Gatchalian vs. Manalo, 68 Phil. 706.
524
that gives validity to the transfer or creates a lien on the land

and a purchaser on execution is not required to go behind the
registry to determine the condition of the property, and he is
only charged with notice of the burdens of the certificate of title.
To require him to do more is to defeat one of the primary objects
of the Torrens system.
“In the present case, the writ of attachment issued by the
justice of the peace court of Daraga, Albay was not annotated
on the back of the original certificate of title. True enough that
it was filed with the office of the Register of Deeds of Albay,
but such fact is not a notice to the whole world. Consequently,
such unregistered order of attachment does not create any lien
or burden upon the land in question.
“The valuable consideration of P1,000 paid to Luisa
Marcayda by Felipe Lotivio, who does not appear to be her
relative is, in our opinion, not small for the property since its
improvements are assessed at no less than P800. It is fitting to
apply in this case the principle of ‘innocent purchaser for value’
as declared and applied in the case of Bailon vs. Cacias, et al.,
40 Off. Gaz., p. 1896, August, 1941.
“ ‘According to our Supreme Court in the case of Cui, et
al. vs. Henson, 51 Phil. 600: ‘A purchaser in good faith is one
who buys property of another without notice that some other
person has a right to, or an interest in, such property and pays a
full and fair price for the same, at the time of such purchase, or
before he has notice of the claim or interest of some other person
in the property. Good faith consists in an honest intention to
abstain from taking any unconscientious advantage of another.
Good faith is the opposite of fraud and of bad faith and its
nonexistence must be established by competent proofs.’
“Tested by these doctrines, we hold and declare that
defendant Felipe Lotivio was, under the foregoing circumstances,
a purchaser in good faith and for value; and for this reason, we
also hold that the presumption of fraud as contemplated in
Article 1297 of the old Civil Code (now Art. 1387 of the new
Civil Code) can be considered overcome and overthrown as held
in the cases of Peña vs. Mitchell, 9 Phil. 587; Guash vs. Espiritu,
11 Phil. 184; Kuenkle vs. Watson & Co., 13 Phil. 26; Golinko vs.
Monjardin, 31 Phil. 643; Asia Banking Corp. vs. Corcuera, 51
Phil. 781.
“Therefore, the contract of sale, for the reasons above
stated, is not rescissible.’’
525
Idem; Badges of fraud. — It is not, however, indispensable

that the creditor shall have to depend upon the two presumptions
established in the first and second paragraphs of Art. 1387 in order
to prove the existence of fraud or the intention to defraud. According
to the third paragraph of the same article, the design to defraud
creditors may be proved in any other manner recognized by the law of
evidence.68 Thus, in determining whether or not a certain conveyance
is fraudulent the question in every case, in the words of Justice
Moreland, is whether the conveyance was a bona fide transaction or
merely a trick or contrivance to defeat creditors. It is not sufficient
that it is founded on a good or valuable cause or consideration or is
made with bona fide intent: it must have both elements. If defective
in either of these particulars, although good between the parties,
it is rescissible as far as the creditors are concerned. The rule is
universal both at law and in equity that whatever fraud creates
justice will destroy. The test as to whether or not a conveyance is
fraudulent is — does it prejudice the rights of creditors?69
In the consideration of whether or not certain transfers or
conveyances are fraudulent, the following circumstances have been
denominated by the courts as badges of fraud.70
(1) The fact that the cause or consideration of the conveyance
is inadequate.
(2) A transfer made by a debtor after suit has been begun and
while it is pending against him.
(3) A sale on credit by an insolvent debtor.
(4) Evidence of large indebtedness or complete insolvency.
(5) The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially.
(6) The fact that the transfer is made between father and
son, when there are present others of the above circumstances.
(7) The failure of the vendee to take exclusive possession of
all the property.
68
Ayles vs. Reyes, 18 Phil. 243.
69
Oria vs. McMicking, 21 Phil. 243.
70
Ibid.
526
Thus, where it is proved that a certain corporation, which is

heavily indebted to a certain bank, sold a large tract of land worth
P400,000 to the vendee for only P36,000 in spite of the fact that at
the time of such sale it did not have any liquidated assets and that
all of its other assets were pledged or mortgaged, some of which were
for far more than their actual value, such circumstances would be
sufficient to establish the fraudulent character of the conveyance.71
Consequently, the sale can be set aside by means of an action for
rescission at the instance of the creditor. But where the sale is
founded on a fictitious cause or consideration it would be futile for
such creditor to invoke its rescission since such action presupposes
the existence of a valid, not inexistent, contract.72 The remedy of the
creditor in such case would be to ask for a declaration of nullity of
the conveyance.
Similarly, where it is proved that the person to whom the
property conveyed is a son of the transferor or a mother-in-law or a
near relative, coupled with the fact that at the time of the transfer
or conveyance the said transferor was financially embarrassed
or had no other means with which he could settle his personal
obligations, the weight of evidence would be sufficient to justify a
decree of rescission on the ground of fraud.73 The evidence becomes
more conclusive if the fact of relationship between the vendor
and the vendee is aggravated by the fact that the conveyance was
made in secrecy and for an inadequate consideration at a time
when the vendor had no other means with which he could settle
his obligations.74 It must be noted, however, that the mere fact of
relationship between vendor and vendee, as when the vendor is the
vendee’s mother, is not in itself an element of fraud, if the sale was
made for a valuable consideration and said vendor was not at the
time of the conveyance insolvent.75
71
Asia Banking Corp. vs. Nable Jose, 51 Phil. 763.
72
Onglengco vs. Ozaeta, 70 Phil. 43.
73
Gaston vs. Hernaez, 58 Phil. 823.
74
Ayles vs. Reyes, 18 Phil. 243; Alpuerto vs. Perez, 38 Phil. 785.
75
Standard Oil Co. vs. Castro, 64 Phil. 716.
527
Rivera vs. Li Tam & Co.

4 SCRA 1072
Rafael Li Tam died intestate, survived by his wife, Marcosa

Rivera, and several children by a Chinese wife. Marcosa filed
a claim for P252,658.33 against the intestate which the court
approved on the strength of a deed wherein the decedent
acknowledged said indebtedness to his wife. Thereafter,
Arminio Rivera, administrator of the estate, proceeded against
the defendant company for an accounting of the income derived
from the shares of stock owned by the decedent in said company.
In answer, defendant company alleged that the decedent was
no longer a stockholder in said company, having transferred
his shares to his children by his Chinese wife. Hence, Rivera
brought this action asking for the rescission of the transfer on
the ground that it was made in fraud of creditors.
Held: The fraudulent character of the transfer is clearly
inferable from the facts that the transferees are the decedents’
own children, that no consideration was given for the transfer,
that the corporation was the business of the decedent, and
that he has an outstanding obligation of more than P250,000
with his wife which he had invested in the corporation. And to
complete the fraudulent scheme, the defendants dissolved the
old corporation and formed a new one for no apparent reason. In
view of such fraud, the transfer is, therefore, of no effect.
Idem; id. — Acquisition by third person in good faith.

— While it is true that the test as to whether or not a conveyance
is fraudulent is to determine whether or not it is prejudicial to the
rights of the creditors, nevertheless, it is also true that such a test
would not be applicable if the conveyance is made in good faith or
with a bona fide intent and for a valuable cause or consideration.76 In
other words, if the property is acquired by a purchaser in good faith
and for value, the acquisition as far as the law is concerned is not
fraudulent. The right of such purchaser over the property is legally
superior to that of any other person even as against the creditor
who is prejudiced by the conveyance. Consequently, the contract or
conveyance is not rescissible.77
76
Oria vs. McMicking, 21 Phil. 243.
77
See Honrado vs. Marcayda, supra, for definition of “purchaser in good faith and
for value” and also for authorities
528
Idem; id. — Acquisition by third person in bad faith. —

On the other hand, if the property is acquired by one who is not a
purchaser in good faith and for value, it is clear that the contract or
conveyance is rescissible. In such case the creditor who is prejudiced
can still proceed after the property. This is so, even though the said
property may have been transferred or conveyed to other persons
who are not innocent purchasers for value. However, if for any cause
or reason, it should be impossible for the acquirer in bad faith to
return the property, he shall indemnify the creditor seeking the
rescission for damages suffered on account of the alienation. If it
happens that there are two or more alienations, the first acquirer
shall be liable first, and so on successively.78 Thus, if A, against
whom a judgment for the payment of a certain debt in favor of X has
been rendered, conveys his only property to B in fraud of X, and B,
who is aware of the fraud, in turn, conveys the property to C, and
the latter, who is also aware of the fraud, also conveys the property
to D, who is a purchaser in good faith and for value, although
the conveyance to D cannot be rescinded, yet X can still proceed
against B for damages suffered by him on account of the fraudulent
alienation, and if he fails to recover he can still proceed against C.
It must be noted, however, that if the reason for the impossibility of
returning the property acquired in bad faith is a fortuitous event,
then under the principle announced in Art. 1174 of the Code, there
can be no liability of the acquirer.79
Art. 1389. The action to claim rescission must be com-

menced 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.80
Prescriptive Period. — As a general rule, the action for the

rescission of a contract must be commenced within four years. Under
No. 1 of Art. 1391, this period must be counted from the time of the
termination of the incapacity of the ward; under No. 2, it must be
78
79
80
529
Art. 1389 CONTRACTS
counted from the time the domicile of the absentee is known; under
Nos. 3 and 4 and also under Art. 1382, it must be counted from the
time of the discovery of the fraud. In certain cases of contracts of
sale which are specially declared by law to be rescissible, however,
the prescriptive period for the commencement of the action is six
months or even forty days, counted from the day of delivery.81
81
Arts. 1543, 1571, 1577, Civil Code.
530
CHAPTER 7
VOIDABLE CONTRACTS
Voidable Contracts in General. — Voidable contracts may

be defined as those in which all of the essential elements for validity
are present, although the element of consent is vitiated either by
lack of legal capacity of one of the contracting parties, or by mistake,
violence, intimidation, undue influence, or fraud.1
The most essential feature of a voidable contract is that it is
binding until it is annulled by a competent court. Consequently,
once it is executed there are only two possible alternatives left to the
party who may invoke its voidable character — to attack its validity
or to convalidate it either by ratification or by prescription. Its
validity may be attacked either directly by means of a proper action
in court or indirectly by way of defense. The action itself is called
annulment in order to distinguish it from an action for the rescission
of rescissible contracts or from an action for the declaration of
absolute nullity or inexistence of void or inexistent contracts, while
the defense itself is called annulability or relative nullity in order
to distinguish it from the defense of absolute nullity or inexistence
in void or inexistent contracts or the defense of unenforceability in
unenforceable contracts.2
Idem; Characteristics. — Voidable contracts possess the
following characteristics:
(1) Their defect consists in the vitiation of consent of one of
the contracting parties.
1
See Art. 1390, Civil Code, and Art. 1300, Spanish Civil Code.
2
Castan calls the defect of voidable contracts (contratas anulables) “anulabi-
lidado nulidad relativa’’ in order to distinguish it from the defect of void contracts
(contratos inexistentes) which he calls “nulidad absoluta.’’ Derecho Civil, Vol. 3, 7th
Ed., pp. 409-415.
531
CONTRACTS
(2) They are binding until they are annulled by a competent

court.3
(3) They are susceptible of convalidation by ratification or by
prescription.4
Their defect or voidable character cannot be invoked by third
persons.5
Idem; Distinguished from rescissible contracts. — Void-
able and rescissible contracts may be distinguished from each other
in the following ways:
(1) In a voidable contract the defect is intrinsic because
it consists of a vice which vitiates consent, while in a rescissible
contract the defect is external because it consists of damage or
prejudice either to one of the contracting parties or to a third person.6
(2) In the former the contract is voidable even if there is no
damage or prejudice, while in the latter the contract is not rescissible
if there is no damage or prejudice.7
(3) In the former the annulability of the contract is based on
the law, while in the latter the rescissibility of the contract is based
on equity. Hence, annulment is not only a remedy but a sanction,
while rescission is a mere remedy. Public interest, therefore,
predominates in the first, while private interest predominates in the
second.8
(4) The causes for annulment are different from the causes
for rescission.9
(5) The former is susceptible of ratification, while the latter
is not.10
(6) Annulment may be invoked only by a contracting party,
while rescission may be invoked either by a contracting party or by
a third person who is prejudiced.11
3
4
Arts. 1390, 1391, 1392-1396, Civil Code.
5
6
7
Ibid.
8
9
10
Ibid.
11
532
VOIDABLE CONTRACTS Art. 1390
Art. 1390. The following contracts are voidable or an-

nullable, even though there may have been no damage to the
contracting parties:
(1) Those where one of the parties is incapable of giv-
ing consent to a contract;
(2) Those where the consent is vitiated by mistake, vio-
lence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by
a proper action in court. They are susceptible of ratification.12
Contracts Which Are Voidable. — The two general classes

of voidable contracts enumerated in Art. 1390 of the Code have
already been discussed in detail in our discussion of consent as an
essential requisite of contracts.13 Hence, it is unnecessary to discuss
them again in this chapter.
It must be observed that in a voidable contract all of the essential
requisites for validity are present, although the requisite of consent
is defective because one of the contracting parties does not possess
the necessary legal capacity, or because it is vitiated by mistake,
violence, intimidation, undue influence or fraud. Consequently, if
consent is absolutely lacking or simulated, the contract is inexistent,
not voidable.14
It must also be observed that even though there may have been
no damage to the contracting parties, the contracts enumerated in
Art. 1390 are still voidable. Hence, whether a contract which the law
considers as voidable has already been consummated or is merely
executory is immaterial; it can always be annulled by a proper
action in court.
The following decision penned by Justice Abad Santos is quite
interesting:
12
New provision superseding Art. 1300, Spanish Civil Code.
13
See comments on Arts. 1327-1329, with respect to legal incapacity, and on
Arts. 1330-1344, with respect to mistake, violence, intimidation, undue influence,
and fraud.
14
Arts. 1345, 1409, No. 2, Civil Code.
533
Art. 1390 CONTRACTS
Felipe vs. Heirs of Aldon

120 SCRA 628
Maximo Aldon married Gimena Almosara in 1936. The

spouses bought several pieces of land sometime between 1948
and 1950. In 1960-62, the lands were divided into three lots,
1370, 1371 and 1415 of the San Jacinto Public Land Subdivision,
San Jacinto, Masbate.
In 1951, Gimena Almosara sold the lots to the spouses
Eduardo Felipe and Hermogena V. Felipe. The sale was made
without the consent of her husband, Maximo.
On April 26, 1976, the heirs of Maximo Aldon, namely his
widow Gimena and their children Sofia and Salvador Aldon,
filed a complaint in the Court of First Instance of Masbate
against the Felipes. The complaint which was docketed as Civil
Case No. 2372 alleged that the plaintiffs were the owners of Lots
1370, 1371 and 1415; that they had orally mortgaged the same
to the defendants; and an offer to redeem the mortgage had been
refused so they filed the complaint in order to recover the three
parcels of land.
The defendants asserted that they had acquired the lots
from the plaintiffs by purchase and subsequent delivery to
them. The trial court sustained the claim of the defendants and
rendered the following judgment:
“a. declaring the defendants to be the lawful owners of
the property subject of the present litigation;
b. declaring the complaint in the present action to be
without merit and is therefore hereby ordered dismissed;
c. ordering the plaintiffs to pay to the defendants the
amount of P2,000.00 as reasonable attorney’s fees and to pay
the costs of the suit.’’
The plaintiffs appealed the decision to the Court of Appeals
which rendered the following judgment:
“PREMISES CONSIDERED, the decision appealed
from is hereby REVERSED and SET ASIDE, and a new one
is hereby RENDERED, ordering the defendants-appellees
to surrender the lots in question as well as the plaintiffs’-
appellants’ muniments of title thereof to said plantiffs-
appellants, to make an accounting of the produce derived
from the lands including expenses incurred since 1951,
and to solidarily turn over to the plaintiffs-appellants the
NET monetary value of the profits, after deducting the
534
sum of P1,800.00. No attorney’s fees nor moral damages

are awarded for lack of any legal justification; therefore,
No costs.”
The ratio of the judgment is stated in the following
paragraphs of the decision penned by Justice Edgardo L. Paras
with the concurrence of Justices Venicio Escolin and Mariano A.
Zosa:
“One of the principal issues in the case involves the
nature of the aforementioned conveyance or transaction,
with appellants claiming the same to be an oral contract of
mortgage or antichresis, the redemption of which could be
done anytime upon repayment of the P1,800.00 involved
(incidentally the only thing written about the transaction
is the aforementioned receipt re the P1,800). Upon the
other hand, appellees claim that the transaction was one of
sale, accordingly, redemption was improper. The appellees
claim that plaintiffs never conveyed the property because
of a loan or mortgage or antichresis and that what really
transpired was the execution of a contract of sale through
a private document designated as a ‘Deed of Purchase
and Sale’ (Exhibit 1), the execution having been made
by Gimena Almosara in favor of appellee Hermogena V.
Felipe.
“After a study of this case, we have come to the
conclusion that the appellants are entitled to recover the
ownership of the lots in question. We so hold because
although Exh. 1 concerning the sale made in 1951 of the
disputed lots is, in Our opinion, not a forgery the fact is
that the sale made by Gimena Almosara is invalid, having
been executed without the needed consent of her husband,
the lots being conjugal. Appellees’ argument that this
was an issue not raised in the pleadings is baseless,
considering the fact that the complaint alleges that the
parcels were purchased by plaintiff Gimena Almosara and
her late husband Maximo Aldon’ (the lots having been
purchased during the existence of the marriage, the same
are presumed conjugal) and inferentially, by force of law,
could not be disposed of by a wife without her husband’s
consent.”
The defendants are now the appellants in this petition
for review. They invoke several grounds in seeking the reversal
of the decision of the Court of Appeals. One of the grounds is
factual in nature; petitioners claim that “respondent Court of
Appeals has found as a fact that the ‘Deed of Purchase and Sale’
535
Art. 1390 CONTRACTS
executed by respondent Gimena Almosara is not a forgery and

therefore its authenticity and due execution is already beyond
question.’’ We cannot consider this ground because as a rule
only questions of law are reviewed in proceedings under Rule
45 of the Rules of Court subject to well-defined exceptions not
present in the instant case.
The legal ground which deserves attention is the legal
effect of a sale of lands belonging to the conjugal partnership
made by the wife without the consent of the husband.
It is useful at this point to re-state some elementary rules:
The husband is the administrator of the conjugal partnership.
(Art. 165, Civil Code) Subject to certain exceptions, the husband
cannot alienate or encumber any real property of the conjugal
partnership without the wife’s consent. (Art. 166, Idem.) And
the wife cannot bind the conjugal partnership without the
husband’s consent, except in cases provided by law. (Art. 172,
Idem.)
In the instant case, Gimena, the wife, sold lands belonging
to the conjugal partnership without the consent of the husband
and the sale is not covered by the phrase “except in cases
provided by law.” The Court of Appeals described the sale as
“invalid” — a term which is imprecise when used in relation
to contracts because the Civil Code uses specific names in
designating defective contracts, namely rescissible (Arts. 1380,
et seq.), voidable (Arts. 1390, et seq.), unenforceable (Arts. 1403,
et seq.), and void or inexistent (Arts. 1409, et seq.)
The sale made by Gimena is certainly a defective contract
but of what category? The answer: it is a voidable contract.
According to Art. 1390 of the Civil Code, among the voidable
contracts are “Those where one of the parties is incapable of
giving consent to the contract.” (Par. 1.) In the instant case
Gimena had no capacity to give consent to the contract of sale.
The capacity to give consent belonged not even to the husband
alone but to both spouses.
The view that the contract made by Gimena is a voidable
contract is supported by the legal provision that contracts
entered by the husband without the consent of the wife when
such consent is required, are annullable at her instance
during the marriage and within ten years from the transaction
questioned. (Art. 173, Civil Code.)
Gimena’s contract is not rescissible for in such contract all
the essential elements are untainted but Gimena’s consent was
536
tainted. Neither can the contract be classified as unenforceable

because it does not fit any of those described in Art. 1403 of the
Civil Code. And finally, the contract cannot be void or inexistent
because it is not one of those mentioned in Art. 1409 of the Civil
Code. By process of elimination, it must perforce be a voidable
contract.
The voidable contract of Gimena was subject to annulment
by her husband only during the marriage because he was the
victim who had an interest in the contract. Gimena, who was the
party responsible for the defect, could not ask for its annulment.
Their children could not likewise seek the annulment of the
contract while the marriage subsisted because they merely had
an inchoate right to the lands sold.
The termination of the marriage and the dissolution of
the conjugal partnership by the death of Maximo Aldon did not
improve the situation of Gimena. What she could not do during
the marriage, she could not do thereafter.
The case of Sofia and Salvador Aldon is different. After
the death of Maximo they acquired the right to question the
defective contract insofar as it deprived them of their hereditary
rights in their father’s share in the lands. The father’s share
is one-half (1/2) of the lands and their share is two-thirds (2/3)
thereof, one-third (1/3) pertaining to the widow.
The petitioners have been in possession of the lands since
1951. It was only in 1976 when the respondents filed action to
recover the lands. In the meantime, Maximo Aldon died.
Two questions come to mind, namely: (1) Have the
petitioners acquired the lands by acquisitive prescription? (2)
Is the right of action of Sofia and Salvador Aldon barred by the
statute of limitations?
Anent the first question, We quote with approval the fol-
lowing statement of the Court of Appeals:
“We would like to state further that appellees
[petitioners herein] could not have acquired ownership
of the lots by prescription in view of what we regard as
their bad faith. This bad faith is revealed by testimony
to the effect that defendant-appellee Vicente V. Felipe
(son of appellees Eduardo Felipe and Hermogena V.
Felipe) attempted in December in 1970 to have Gimena
Almosara sign a ready-made document purporting to sell
the disputed lots to the appellees. This actuation clearly
indicated that the appellees knew the lots did not still
537
Art. 1390 CONTRACTS
belong to them, otherwise, why were they interested in a

document of sale in their favor? Again why did Vicente
V. Felipe tell Gimena that the purpose of the document
was to obtain Gimena’s consent to the construction of an
irrigation pump on the lots in question? The only possible
reason for purporting to obtain such consent is that the
appellees knew the lots were not theirs. Why was there
an attempted improvement (the irrigation tank) only in
1970? Why was the declaration of property made only in
1974? Why were no attempts made to obtain the husband’s
signature, despite the fact that Gimena and Hermogena
were close relatives? All these indicate the bad faith of the
appellees. Now then, even if we were to consider appellees’
possession in bad faith as possession in the concept of
owners, this possession at the earliest started in 1951,
hence the period for extraordinary prescription (30 years)
had not yet lapsed when the present action was instituted
on April 26, 1976.
As to the second question, the children’s cause of action
accrued from the death of their father in 1959 and they had
thirty (30) years to institute it (Art. 1141, Civil Code). They filed
action in 1976 which is well within the period.
WHEREFORE, the decision of the Court of Appeals is
hereby modified. Judgment is entered awarding to Sofia and
Salvador Aldon their shares of the lands as stated in the body of
this decision; and the petitioners as possessors in bad faith shall
make an accounting of the fruits corresponding to the share
aforementioned from 1959 and solidarily pay their value to Sofia
and Salvador Aldon; costs against the petitioners.
SO ORDERED.
Note: There are others who believe that when a wife sells
or encumbers conjugal land without the consent of her husband,
the contract is unenforceable, not voidable. According to them,
the defect of the contract consists of lack of authority, not
incapacity. Therefore, No. (1) of Art. 1403 of the Civil Code is
applicable.
In the case of Guiang vs. Court of Appeals (June 26, 1998,
291 SCRA 372), the Supreme Court clearly stated that Article
1390, par. 2, refers to contracts visited by vices of consent,
i.e., contracts which were entered into by a person whose
consent was obtained and vitiated through mistake, violence,
intimidation, undue influence or fraud. In the said case, private
respondent’s consent to the contract of sale of their conjugal
538
property was totally inexistent or absent. x x x This being the

case, said contract properly falls within the ambit of Article
124 of the Family Code, which was correctly applied by the two
lower courts. x x x In the event that one spouse is incapacitated
or otherwise unable to participate in the administration of the
conjugal properties, the other spouse may assume sole powers
of administration. These powers do not include the powers of
disposition or encumbrance which must have the authority of the
court or the written consent of the other spouse. In the absence
of such authority or consent, the disposition or encumbrance
shall be void. However, the transaction shall be construed as
a continuing offer on the part of the consenting spouse and the
third person, and may be perfected as a binding contract upon
the acceptance by the other spouse or authorization by the court
before the offer is withdrawn by either or both offerors. (165a)
Art. 1391. The action for annulment shall be brought

within four years.
This period shall begin: In cases of intimidation, violence
or undue influence, from the time the defect of the consent
ceases.
In case of mistake or fraud, from the time of the discovery
of the same.
And when the action refers to contracts entered into
by minors or other incapacitated persons, from the time the
guardianship ceases.15
Prescriptive Period. — According to Art. 1391, the action for
annulment must be commenced within a period of four years. If the
action refers to contracts entered into by incapacitated persons, the
period shall be counted from the time the guardianship ceases; if it
refers to those where consent is vitiated by violence, intimidation
or undue influence, the period shall be counted from the time such
violence, intimidation or undue influence ceases or disappears; and
if it refers to those where consent is vitiated by mistake or fraud,
the period shall be counted from the time of the discovery of such
mistake or fraud. If the action is not commenced within such period,
the right of the party entitled to institute the action shall prescribe.16
15
16
Naval vs. Enriquez, 3 Phil. 699; Ullman vs. Hernaez, 30 Phil. 69; Villanueva
vs. Villanueva, 91 Phil. 43.
539
Art. 1391 CONTRACTS
Carantes vs. Court of Appeals

76 SCRA 514
This is an appeal by certiorari from the decision of the

Court of Appeals in CA-G.R. 36078-R promulgated on December
23, 1970 reversing the judgment of the Court of First Instance
of Baguio City, Branch II, in Civil Case 804, and from the
appellate court’s resolution dated March 7, 1971 denying herein
petitioner’s motion for reconsideration.
Mateo Carantes was the original owner of Lot No. 44
situated at Loakan, Baguio City, as evidenced by Original
Certificate of Title No. 3 issued in his name on September 22,
1910 by virtue of Free Patent No. 5 granted to him on the same
date. In 1913 Mateo died. He was survived by his widow Ogasia
and six children, namely, Bilad, Crispino, Maximino, Apung
and Sianang, all surnamed Carantes.
In 1930, construction of the Loakan Airport was commenced
by the Government. Because a portion of Lot No. 44 was needed
for the landing field, the Government instituted proceedings
(Civil Case 338) for its expropriation. For the purpose, Lot No.
44 was subdivided into Lots Nos. 44-A, 44-B, 44-C, 44-D, and
44-E. The portion expropriated by the Government was Lot No.
44-A.
In 1933, Special Proceedings Nos. 409 to 413 were filed
with the court for the settlement of the estate of the late
Mateo Carantes. One of his sons, herein petitioner Maximino
Carantes, was appointed and qualified as judicial administrator
of the estate. In his capacity as administrator, Maximino filed
on June 20, 1939 a project of partition wherein he listed as the
heirs of Mateo Carantes who were entitled to inherit the estate,
himself and his brothers and sisters, or the latter’s surviving
children. Apparently because negotiations were, by that time,
under way for the purchase by the Government of Lots Nos.
44-B and 44-C for the purpose of widening the Loakan Airport,
the only property listed by Maximino in the project of partition
was the remaining portion of Lot No. 44.
On October 23, 1939 a deed denominated “Assignment of
Right to Inheritance” was executed by four of Mateo Carantes’
children, namely, Bilad, Sianang, Lauro and Crispino, and
the heirs of Apung Carantes (also a son of Mateo who died in
1923), namely, Pitag, Bill, Alson, Eduardo and Juan, assigning
to Maximino Carantes their rights to inheritance in Lot No.
44. The stated monetary consideration for the assignment was
P1.00. However, the document contains a recital to the effect
540
that the said lots, “by agreement of all the direct heirs and heirs
by representation of the deceased Mateo Carantes as expressed
and conveyed verbally by him during his lifetime, rightly and
exclusively belong to the particular heir, Maximino Carantes,
now and in the past in the exclusive, continuous, peaceful and
notorious possession of the same for more than ten years.”
On the same date Maximino Carantes sold to the
Government Lots Nos. 44-B and 44-C and divided the proceeds
of the sale among himself and the other heirs of Mateo.
On February 6, 1940, upon joint petition of the heirs of
Mateo Carantes, the Court of First Instance of Baguio City
issued an Order in another proceeding — Administrative Case
No. 368 — cancelling O.C.T. No. 3. Pursuant thereto the said title
was cancelled, and in its place Transfer Certificate of Title No.
2533 was issued in the joint names of the five children of Mateo
Carantes and the children of Apung Carantes (representing
their deceased father) as co-owners pro indiviso, or one-sixth
share for each child.
On March 16, 1940, Maximino Carantes registered the
deed of “Assignment of Right to Inheritance.’’ Accordingly,
T.C.T. No. 2533 in the names of the heirs was cancelled, and
in lieu thereof Transfer Certificate of Title No. 2540 was issued
on the same date in the name of Maximino Carantes. Also on
the same date, Maximino, acting as exclusive owner of the land
covered by T.C.T. No. 2540, executed a formal deed of sale in
favor of the Government over Lots Nos. 44-B and 44-C.
On February 21, 1947, as a result of the approval of
the Subdivision Survey Plan psd-16786, and pursuant to the
deed of sale executed in 1940 by Maximino Carantes in favor
of the Government, T.C.T. No. 2540 in Maximino’s name was
cancelled, and in lieu thereof Transfer Certificate of Title No.
T-98, covering Lots Nos. 44-A, 44-B and 44-C, was issued in the
name of the Government, while Transfer Certificate of Title No.
T-99, covering the remaining Lots Nos. 44-D (100,345 square
meters) and 44-E (10,070 square meters) was issued in the name
of Maximino Carantes, who has up to the present remained the
registered owner of said lots.
On September 4, 1958, the present complaint was filed by
three children of the late Mateo Carantes, namely, Bilad, Lauro
and Crispino, and by some of the surviving heirs of Apung and of
Sianang (also children of Mateo Carantes). Maximino Carantes
was named principal defendant, and some of the heirs of Apung
541
Art. 1391 CONTRACTS
and Sianang were impleaded as parties-defendants in view of

their alleged reluctance to join as parties-plaintiffs.
In their complaint, the plaintiffs alleged inter alia that
they and/or their predecessors-in-interest executed the deed of
“Assignment of Right to Inheritance” on October 23, 1939, only
because they were made to believe by the defendant Maximino
Carantes that the said instrument embodied the understanding
among the parties that it merely authorized the defendant
Maximino to convey portions of Lot No. 44 to the Government in
their behalf to minimize expenses and facilitate the transaction;
and that it was only on February 18, 1958, when the plaintiffs
secured a copy of the deed, that they came to know that the
same purported to assign in favor of Maximino their rights to
inheritance from Mateo Carantes. The plaintiffs prayed that
the deed of “Assignment of Right to Inheritance” be declared
null and void; that Lots Nos. 44-D and 44-E covered by T.C.T.
No. T-99 be ordered partitioned into six (6) equal shares and
the defendant Maximino Carantes be accordingly ordered to
execute the necessary deeds of conveyance in favor of the other
distributees; and that the said defendant be ordered to pay the
plaintiffs the sum of P1,000 as attorney’s fees and the sum of
P200 as costs of suit.
After trial, the court rendered its decision on January
28, 1965. It was the trial court’s opinion that since an action
based on fraud prescribes in four years from the discovery of
the fraud, and in this case the fraud allegedly perpetrated by
the defendant Maximino Carantes must be deemed to have been
discovered on March 16, 1940 when the deed of assignment was
registered, the plaintiffs’ right of action had already prescribed
when they filed the action in 1958; and even assuming that the
land remained the common property of the plaintiffs and the
defendant Maximino Carantes notwithstanding the execution
of the deed of assignment, the co-ownership was completely
repudiated by the said defendant by performance of several
acts, the first of which was his execution of a deed of sale in
favor of the Government on October 23, 1939, hence, ownership
had vested in the defendant Maximino Carantes by acquisitive
prescription. The court accordingly dismissed the complaint. It
likewise dismissed the counter claim.
The plaintiffs moved for reconsideration. Their motion
having been denied in an Order dated March 8, 1965, they
appealed to the Court of Appeals.
As adverted to above, the Court of Appeals reversed the
judgment of the trial court, hence the present recourse.
542
Speaking through Chief Justice Fred Ruiz Castro, the

Supreme Court held:
“We do not agree with the respondent court’s legal

conclusion that the deed of “Assignment of Right to
Inheritance’’ is void ab initio and inexistent on the grounds
that real consent was wanting and the consideration of
P1.00 is so shocking to the conscience that there was in
fact no consideration, hence, the action for the declaration
of the contract’s inexistence does not prescribe pursuant to
Article 1410 of the new Civil Code.
“Article 1409(2) of the New Civil Code relied upon by
the respondent court provides that contracts “which are
absolutely simulated or fictitious” are inexistent and void
from the beginning. The basic characteristic of simulation
is the fact that the apparent contract is not really desired
or intended to produce legal effects or in any way alter the
juridical situation of the parties.
“The respondents’ action may not be considered
as one to declare the inexistence of a contract for lack of
consideration. It is total absence of cause or consideration
that renders a contract absolutely void and inexistent. In
the case at bar, consideration was not absent. The sum of
P1.00 appears in the document as one of the considerations
for the assignment of inheritance. In addition — and
this is of great legal import — the document recites that
the decedent Mateo Carantes had, during his lifetime,
expressed to the signatories to the contract that the
property sub matter thereof rightly and exclusively
belonged to the petitioner Maximino Carantes. This
acknowledgment by the signatories definitely constitutes
valuable consideration for the contract.
“The present action is one to annul the contract
entitled “Assignment of Right to Inheritance” on the
ground of fraud.
“Article 1390 of the new Civil Code provides that
a contract “where the consent is vitiated by mistake,
violence, intimidation, undue infuence or fraud,” is
voidable or annullable. Even Article 1359, which deals on
reformation of instruments, provides in its paragraph 2
that ‘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.’ When the consent to a contract
543
Art. 1391 CONTRACTS
was fraudulently obtained, the contract is voidable. Fraud

or deceit does not render a contract void ab initio, and can
only be a ground for rendering the contract voidable or
annullable pursuant to Article 1390 of the new Civil Code
by a proper action in court.
“The present action, being one to annul a contract
on the ground of fraud, its prescriptive period is four years
from the time of the discovery of the fraud.
“The next question that must be resolved is: from
what time must fraud, assuming that there was fraud,
be deemed to have been discovered in the case at bar?
From February, 1958, when according to the private
respondents, and as found by the respondent court, the
private respondents actually discovered that they were
defrauded by the petitioner Maximino Carantes when
rumors spread that he was selling the property for half a
million pesos? Or from March 16, 1940, when, as admitted
by the parties and found by both the trial court and the
respondent court, the deed of “Assignment of Right to
Inheritance” was registered by the petitioner in the Office
of the Register of Deeds?
“The weight of authorities is to the effect that the
registration of an instrument in the Office of the Register
of Deeds constitutes constructive notice to the whole
world, and, therefore, discovery of the fraud is deemed to
have taken place at the time of the registration. In this
case the deed of assignment was registered on March 16,
1940, and in fact on the same date T.C.T. No. 2533 in the
names of the heirs of Mateo Carantes was cancelled, and
T.C.T. No. 2540 in the name of the petitioner was issued
in lieu thereof. The four-year period within which the
private respondents could have filed the present action
consequently commenced on March 16, 1940; and since
they filed it only on September 4, 1958, it follows that the
same is barred by the statute of limitations.”
Should the defense also prescribe within the same period as

the action for annulment? Although Art. 1391 speaks only of the
action, Spanish commentators advance the view that the defense
shall also prescribe after the lapse of four years, since the basis of
the action and the basis of the defense are identical.17 In Braganza
17
3 Castan, 7th Ed., pp. 415-416, citing Manresa, De Buen and Ramos.
544
vs. Villa Abrille,18 however, the Supreme Court declared that “there
is reason to doubt the pertinency of the period fixed by Art. 1301
— now Art. 1391 of the Civil Code where minority is set up only as
a defense to an action, without the minors asking for any positive
relief from the contract.” Although this statement in the decision is
not controlling because it is based on an assumption, nevertheless,
we believe that this view is more just and logical.
It is interesting to note that the above aspect of the law was
taken up in the Bar Examinations of 1979. Thus —
Problem — Mrs. S borrowed P20,000.00 from PG. She

and her 19-year old son, Mario, signed the promissory note for
the loan, which note did not say anything about the capacity of
the signers. Mrs. S made partial payments little by little. After
seven (7) years, she died leaving a balance of P10,000.00 on the
note. PG demanded payment from Mario who refused to pay.
When sued for the amount, Mario raised the defense: that he
signed the note when he was still a minor. Should the defense
be sustained? Why?
Answer No. 1 — The defense should be sustained. Mario
cannot be bound by his signature in the promissory note. It must
be observed that the promissory note does not say anything
about the capacity of the signers. In other words, there is no
active fraud or misrepresentation; there is merely silence or
constructive fraud or misrepresentation. It would have been
different if the note says that Mario is of age. The principle of
estoppel would then apply. Mario would not be allowed to invoke
the defense of minority. The promissory note would then have
all the effects of a perfectly valid note. Hence, as far as Mario’s
share in the obligation is concerned, the promissory note is
voidable because of minority or non-age. He cannot, however, be
absolved entirely from monetary responsibility. Under the Civil
Code, even if his written contract is voidable because of minority
he shall make restitution to the extent that he may have been
benefited by the money received by him (Art. 1399, Civil Code).
True, more than four years have already elapsed from the time
that Mario had attained the age of 21. Apparently, his right
to interpose the defense has already prescribed. It has been
held, however, that where minority is used as a defense and
no positive relief is prayed for, the four-year period (Art. 1391,
18
105 Phil. 456.
545
Civil Code) does not apply. Here, Mario is merely interposing

his minority as an excuse from liability. (Braganza vs. Villa
Abrille, 105 Phil. 456.)
Answer No. 2 — The defense should not be sustained. It
must be noted that the action for annulment was instituted by
PG against Mario when the latter was already 26 years old.
Therefore, the right of Mario to invoke his minority as a defense
has already prescribed. According to the Civil Code, actions for
annulment of voidable contracts shall prescribe after four years.
In the case of contracts which are voidable by reason of minority
or incapacity, the four-year period shall be counted from the
time the guardianship ceases (Art. 1391, Civil Code). The same
rule should also be applied to the defense. In the instant case,
since more than four years already elapsed from the time Mario
had attained the age of 21, therefore, he can no longer interpose
his minority as a defense. It would have been different if four
years had not yet elapsed from the time Mario had attained the
age of 21. Since there was no active fraud or misrepresentation
on his part at the time of execution of the promissory note, it
is clear that the contract is voidable as far as he is concerned.
In such case, the defense of minority should then be sustained.
(Braganza vs. Villa Abrille, 105 Phil. 456.)
Art. 1392. Ratification extinguishes the action to annul a

voidable contract.19
Art. 1393. Ratification may be effected expressly or
tacitly. It is understood that there is a tacit ratification if,
with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has
a right to invoke it should execute an act which necessarily
implies an intention to waive his right.20
Art. 1394. Ratification may be effected by the guardian
of the incapacitated person.21
Art. 1395. Ratification does not require the conformity
of the contracting party who has no right to bring the action
for annulment.22
19
20
21
New provision.
22
546
Art. 1396. Ratification cleanses the contract from all its

defects from the moment it was constituted.23
Concept of Ratification. — Besides prescription, the action

for annulment of a voidable contract may also be extinguished by
ratification.24
Ratification or confirmation as it is known in the Spanish Civil
Code is defined as the act or means by virtue of which efficacy is
given to a contract which suffers from a vice of curable nullity.25
Requisites of Ratification. — Ratification or confirmation
requires the concurrence of the following requisites:26
First: The contract should be tainted with a vice which is
susceptible of being cured.
Second: The confirmation should be effected by the person who
is entitled to do so under the law.
Third: It should be effected with knowledge of the vice or defect
of the contract.
Fourth: The cause of the nullity or defect should have already
disappeared.
The first requisite of confirmation is that the contract should be
tainted with a vice which is susceptible of being cured. It is evident
that confirmation presupposes the existence of a vice in the contract
because otherwise it would not have any object. Furthermore, such
vice should be susceptible of being cured because otherwise the
contract would be void or inexistent and, therefore, not susceptible
of confirmation.27
The second requisite is that the confirmation should be
effected only by the person who is entitled to do so under the law.
This is implied from the provisions of Arts. 1394 and 1395. Hence,
if the contract was entered into by an incapacitated person, the
confirmation can be effected only by such person upon attaining or
23
24
Art. 1392, Civil Code. For a third mode of extinguishing the action, see Art.
1401, Civil Code.
25
26
3 Castan, 7th Ed., p. 419; 8 Manresa, 5th Ed., 2, pp. 668-671.
27
547
Art. 1396 CONTRACTS
regaining capacity or by his guardian if he has not yet attained or

regained capacity, and if the contract was executed through mistake,
violence, intimidation, undue influence, or fraud, it can be effected
only by the innocent party.28
The third requisite is that the confirmation should be effected
with knowledge of the vice or defect of the contract. This is clear
from the provision of Art. 1393. Since confirmation is above all a
form of expressing the will, as such it requires, independently of the
act to which it refers, the same conditions of freedom, knowledge and
clarity which consent also requires, although it does not require the
conformity of the other party who has no right to invoke the nullity of
the contract. Consequently, confirmation may also be invalidated by
mistake, violence, intimidation, undue influence, or fraud.29 It must
be noted, however, that the contract may be tainted with several
vices, such as when it has been executed through mistake and fraud.
In such case, if the person entitled to effect the confirmation ratifies
or confirms the contract with knowledge of the mistake, but not of
the fraud, his right to ask for annulment is not extinguished thereby
since the ratification or confirmation has only purged the contract of
mistake, but not of fraud.30
The fourth requisite is that the cause of nullity should have
already ceased or disappeared because otherwise the act of confir-
mation would also suffer from the very vice or defect which it seeks
to cure.31 It must be observed, however, that in the case of contracts
entered into by incapacitated persons, this is not indispensable in
a sense, because even while the incapacity continues to exist, the
confirmation may be effected by the guardian of the incapacitated
person.32
Forms of Ratification. — There is no special form required for
confirmation, but, as the law provides, it may be effected expressly
or tacitly. The first is not defined in the Code, but, undoubtedly,
there is an express confirmation 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 expressly declare
28
Arts. 1394-1395, Civil Code. See 3 Castan, 7th Ed., p. 419.
29
30
Ibid., p. 672.
31
32
548
his desire to convalidate it, or what amounts to the same thing,

to renounce his right to annul the contract.33 On the other hand,
there is a tacit confirmation, 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.34
Thus, where it is established that a minor who had entered
into a contract of sale, not only failed to repudiate it upon reaching
the age of majority, but also disposed of the greater part of the
proceeds after he became of age and after he had knowledge of the
facts which he now seeks to disaffirm, it was held that there was a
tacit ratification or confirmation of the contract.35 Similarly, if the
person who can effect the confirmation, instead of demanding the
annulment of a contract of sale, should proceed to collect the greater
part of the purchase price, as set out in a promissory note, it is clear
that there is already a tacit confirmation of the contract.36
Effects of Ratification. — The effects of ratification or
confirmation are clearly pointed out in Arts. 1392 and 1396. In the
first place, ratification extinguishes the action to annul the contract;
and in the second place, it cleanses the contract of its defects from
the moment it was constituted.37
Art. 1397. The action for the annulment of contracts

may be instituted by all who are thereby obliged principally
or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted;
nor can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their
action upon these flaws of the contract.38
Who May Institute Action. — From Art. 1397 of the Code it
can be inferred that two different requisites are required to confer
the necessary capacity for the exercise of the action for annulment.
33
34
35
Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552.
36
Tacalinar vs. Corro, 34 Phil. 8898.
37
Arts. 1392, 1396, Civil Code; 3 Castan, 7th Ed., p. 420.
38
549
Art. 1397 CONTRACTS
The first requisite is that the plaintiff must have an interest in the
contract. The second is that the victim and not the party responsible
for the vice or defect must be the person who must assert the same.39
Discussing the first requisite, the Supreme Court, in a leading
case, declared:
“From these legal provisions (referring to what are now

Arts. 1390 and 1397 of the Civil Code) it is deduced that it is the
interest had in a given contract, that is the determining reason of
the right which lies in favor of the party obligated principally or
subsidiarily to enable him to bring an action for the annulment
of the contract in which he intervened and therefore he who has
no right in a contract is not entitled to prosecute an action for
annulment, for according to the precedents established by the
courts the person who is not a party to a contract, or who has
no cause of action or representation from those who intervened
therein, is manifestly without right of action and personality
such as to enable him to assail the validity of the contract.’’40
Consequently, a third person who is a stranger to the contract

cannot institute an action for its annulment. There is, however, an
exception to this rule. According to the Supreme Court, a person who
is not a party obliged principally or subsidiarily under a contract may
exercise an action for annulment of the contract if he is prejudiced in
his rights with respect to one of the contracting parties, and can show
detriment which would positively result to him from the contract in
which he has no intervention.41 Thus, where the remaining partners
of a partnership executed a chattel mortgage over the properties
of the partnership in favor of a former partner to the prejudice of
creditors of the partnership, the latter have a perfect right to file the
action to nullify the chattel mortgage.42
39
8 Manresa, 6th Ed., Bk. 2, p. 639; Wolfson vs. Estate of Martinez, 20 Phil. 340.
40
Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572. To the same effect: Com-
pania General vs. Topino, 4 Phil. 33; Martell Ong vs. Jariol, 17 Phil. 244; Dy Sun vs.
Brilliantes, 93 Phil. 175.
41
Teves vs. People’s Homesite & Housing Corp., 23 SCRA 1141; De Santos vs.
City of Manila, 45 SCRA 409; Singsong vs. Isabela Sawmill, 88 SCRA 623.
42
Singsong vs. Isabela Sawmill, 88 SCRA 623. But would this not be confusing
the concept of annulment of voidable contracts with the concept of rescission of rescis-
sible contracts?
550
The second requisite, on the other hand, is based on the well-

known principle of equity that whoever goes to court must do so
with clean hands.43 Some commentators say that only the party who
is prejudiced can institute the action. This statement, however, is
misleading for the simple reason that the action for annulment is
independent of the lesion or damage suffered by the plaintiff. This is
clear from the provision of Art. 1390 which states that the contracts
enumerated therein are voidable, even though there may have been
no damage to the contracting parties.44
Problem No. 1 — X, of age, entered into a contract with Y,

a minor. X knew and the contract specifically stated the age of Y.
May X successfully demand annulment of the contract? Reason.
(1971 Bar Problem)
Answer — X cannot successfully demand annulment of
the contract. True, said contract is voidable because of the fact
that at the time of the celebration of the contract, Y, the other
contracting party, was a minor, and such minority was known to
X (Arts. 1327, No. 1, 1390 CC). However, the law is categorical
with regard to who may institute the action for annulment of the
contract. In addition to the requirement that the action may be
instituted only by the party who has an interest in the contract
in the sense that he is obliged thereby either principally or
subsidiarily, Art. 1397 of the Civil Code further requires that in
case of contracts voidable by reason of incapacity of one of the
contracting parties, the party who has capacity cannot allege the
incapacity of the party with whom he contracted. Because of this
additional requisite, it is clear that Y and not X can institute the
action for annulment.
Problem No. 2. — Pedro sold a piece of land to his nephew
Quintin, a minor. One month later, Pedro died. Pedro’s heirs
then brought an action to annul the sale on the ground that
Quintin was a minor and therefore without legal capacity to
contract. If you are the judge, would you annul the sale? (1974
Bar Problem)
Answer — If I am the judge, I will not annul the sale.
The Civil Code in Art. 1397 is explicit. Persons who are capable
cannot allege the incapacity of those with whom they contracted.
True, Pedro who sold the land to the minor Quintin is already
43
Bastida vs. Dy Buncio & Co., 93 Phil. 195.
44
551
dead, and it is his heirs who are now assailing the validity of
the sale. However, under the principle of relativity of contracts
recognized in Art. 1311 of the Civil Code, the contract takes
effect not only between the contracting parties, but also between
their assigns and heirs.
(Note: Another way of answering the above problem would
be to state the two requisites which must concur in order that
a voidable contract may be annulled. These requisites are: (a)
that the plaintiff must have an interest in the contract; and (b)
that the victim or the incapacitated party must be the person
who must assert the same. The second requisite is lacking in the
instant case.)
Art. 1398. An obligation having been annulled, the con-

tracting 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 pro-
vided by law.
In obligations to render service, the value thereof shall
be the basis for damages.45
Art. 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.46
Effects of Annulment. — If the contract has not yet been

consummated, it is evident, although the Code does not expressly
say so, that the contracting parties shall be released from the
obligations arising therefrom.47 However, if the contract has already
been consummated, the rules provided for in Arts. 1398 to 1402 of
the Code shall govern.
Idem; Obligation of mutual restitution. — Upon the an-
nulment of the contract, if the prestation thereof consisted in obliga-
tions to give, the 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. If, on
45
46
47
3 Castan, 7th Ed., pp. 416-417.
552
VOIDABLE CONTRACTS Arts. 1398-1399
the other hand, the prestation consisted in obligations to do or not

to do, there will have to be an apportionment of damages based on
the value of such prestation with corresponding interests.48 In other
words, upon annulment the contracting parties should be restored
to their original position by mutual restitution.49
There is, therefore, practically no difference between the effect
of rescission based on lesion as enunciated in the first paragraph
of Art. 1385 of the Code and the general effect of annulment as
enunciated in Art. 1398. As in the case of rescission, the question
of fruits shall be governed by the rules on possession. Interest of
course, refers to the legal interest.50
Idem; id. — Rule in case of incapacity. — The principle of
mutual restitution as enunciated in Art. 1398 is, however, modified
by the provision of Art. 1399. When the defect of the contract consists
in the incapacity of one of the contracting 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.51 It is evident
that this rule is applicable only and exclusively to those cases where
the nullity arises from the incapacity of one of the contracting
parties. Consequently, if the nullity should arise from some other
cause, the general rule enunciated in Art. 1398 shall govern.52
The benefit spoken of in Art. 1399 which obliges the incapaci-
tated person to make restitution does not necessarily presuppose a
material and permanent augmentation of fortune; it is sufficient if
there has been a prudent and beneficial use by the incapacitated per-
son of the thing which he has received. In order to determine this, it
is necessary to know his necessities, his social position as well as his
duties as a consequence thereof to others. Thus, such benefit is pres-
ent if the thing received is used for food, clothing, shelter, health,
and others of a similar character. It is, however, clear that the proof
of such benefit is cast upon the person who has capacity, since it is
presumed in the absence of proof that no such benefit has accrued
48
Art. 1398 Civil Code; 3 Castan, 7th Ed., pp. 416-417.
49
Cadwallader & Co. vs. Smith, Bell & Co., 7 Phil. 461. To the same effect: Du-
masug vs. Modelo, 34 Phil. 252; Oliveros vs. Porciongcola, 69 Phil. 305; Talag vs.
Tankengco, 92 Phil. 1066.
50
51
52
553
to the incapacitated person.53 Thus, where two minors borrowed a

certain amount from the creditor during the Japanese occupation,
and such indebtedness is evidenced by a promissory note, while it
is true that they cannot be bound by their signatures because of
their minority, they can still be compelled to make restitution to the
extent that they may have been benefited by the money which they
received. Since there is proof that the funds were used for their sup-
port during the Japanese occupation, it is but fair to hold that they
had profited to the extent of the value of such money. They must,
therefore, reimburse the creditor the value of such money, which
value must be computed in accordance with the Ballantyne Sched-
ule.54
It must be observed that Art. 1399 cannot be applied to those
cases where the incapacitated person can still return the thing
which he has received. Thus, according to the Supreme Court,
whatever difference may exist in the authorities as to the obligation
of an incapacitated person to return the entire consideration
received by virtue of a contract of sale as a condition precedent to
disaffirming the contract, they are unanimous in holding that he
must return such portion thereof as remains in his possession upon
reaching or attaining capacity. Hence, if after attaining capacity, it
is established that he not only failed to ask for the annulment of the
contract but he also squandered that part of the consideration which
remained, it is clear that there is already an implied ratification or
confirmation.55
Art. 1400. Whenever the person obliged by the decree

of annulment to return the thing can not do so because it
has been lost through his fault, he shall return the fruits
received and the value of the thing at the time of the loss,
with interest from the same date.56
Art. 1401. The action for annulment of contracts shall be
extinguished when the thing which is the object thereof is
53
Ibid., pp. 648-649.
54
Braganza vs. Villa Abrille, 105 Phil. 456.
55
Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552. See also Young vs. Tecson, CA, 39
Off. Gaz. 953.
56
554
lost through the fraud or fault of the person who has a right
to institute the proceedings.
If the right of action is based upon the incapacity of any
one of the contracting parties, the loss of the thing shall not
be an obstacle to the success of the action, unless said loss
took place through the fraud or fault of the plaintiff.57
Art. 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.58
Effect of Failure to Make Restitution. — Sometimes, for
some reason or other, the action for annulment is commenced after
the lapse of several years from the time of the consummation of the
contract. Suppose then that prior to the commencement of the action,
the thing which constitutes the object of the contract is lost, what is
the effect upon the right of the party who, ordinarily, is entitled to
institute the action for annulment? This question is resolved in part
by the provisions of Arts. 1400 to 1402 of the Code.
Idem; Where loss is due to fault of defendant. — According
to Art. 1400, when the person obliged by the decree of annulment to
return the thing cannot do so because it has been lost through his
fault, he shall return the fruits received and the value of the thing
at the time of the loss, with interest from the same date. It is evident
that this rule is applicable only when the loss of the thing is due to
the fault of the party against whom the action for annulment may
be instituted.59 This is so because if the loss is due to the fault of the
party who has a right to institute the action, the provision of Art.
1401 shall apply. The loss of the thing which constitutes the object of
the contract through the fault of the party against whom the action
for annulment may be instituted shall not, therefore, extinguish the
action for annulment. The only difference from an ordinary action
for annulment is that, instead of being compelled to restore the
thing, the defendant can only be compelled to pay the value thereof
at the time of the loss.
57
58
59
555
Art. 1402 CONTRACTS
Idem; Where loss is due to fault of plaintiff. — However,

if the loss of the thing is due to the fraud or fault of the party who is
entitled to institute the proceedings, according to the first paragraph
of Art. 1401, the action for annulment shall be extinguished.
There are, therefore, three modes whereby such action may be
extinguished. They are: (1) prescription; (2) ratification; and (3) the
loss of the thing which is the object of the contract through the fraud
or fault of the person who is entitled to institute the action.
The second paragraph of Art. 1401, on the other hand, which
at first blush seems to be an exception to the rule stated in the first
paragraph, has created a legal absurdity. Under the old Code, the
provision was as follows: “If the cause of action is the incapacity of
any of the contracting parties, the loss of the thing shall not be an
obstacle to the success of the action, unless it has occurred through
the fraud or fault of the plaintiff after having acquired capacity.”60
Hence, under the old law, if the loss of the thing was due to the fraud
or fault of the plaintiff after he had acquired capacity, the general
rule was applicable; in other words, the action was extinguished.
But if the loss was due to the fraud or fault of the plaintiff during
his incapacity, the exception was applicable; in other words, the loss
would not be an obstacle to the success of the action. However, with
the deletion of the phrase “after having acquired capacity” from the
provision of the second paragraph of Art. 1401 of the present Code,
the result is an absolute redundancy. Whether the loss occurred
during the plaintiff’s incapacity or after he had acquired capacity,
the action for annulment would still be extinguished in accordance
with the rule stated in the first paragraph.
Idem; Where loss is due to fortuitous event. — Unfortu-
nately, the Code in Arts. 1400 and 1401 does not provide for the ef-
fect of the loss of the object of the contract through a fortuitous event
upon the right to ask for the annulment of the contract. In spite of
this omission, it is, however, possible to apply the general principles
regarding the effects of fortuitous events to any problem that may
arise.
If the person obliged by the decree of annulment to return the
thing cannot do so because it has been lost through a fortuitous
event, the contract can still be annulled, but with this difference —
60
556
the defendant can be held liable only for the value of the thing at
the time of the loss, but without interest thereon. The defendant,
and not the plaintiff, must suffer the loss because he was still the
owner of the thing at the time of the loss; he should, therefore, pay
the value of the thing, but not the interest thereon because the loss
was not due to his fault.61
If it is the plaintiff who cannot return the thing because it
has been lost through a fortuitous event, the contract may still be
annulled, but with this difference — he must pay to the defendant
the value of the thing at the time of the loss, but without interest
thereon. According to Dr. Tolentino, if the plaintiff offers to pay the
value of the thing at the time of its loss as a substitute for the thing
itself, the annulment of the contract would still be possible, because,
otherwise, we would arrive at the absurd conclusion that an action
for annulment would in effect be extinguished by the loss of the
thing through a fortuitous event.62
61
4 Tolentino, Civil Code, 1956 Ed., pp. 558-559.
62
Ibid., pp. 557-558.
557
CONTRACTS
CHAPTER 8
UNENFORCEABLE CONTRACTS
Unenforceable Contracts in General. — Unenforceable

contracts are those which cannot be enforced by a proper action in
court, unless they are ratified, because, either they are entered into
without or in excess of authority or they do not comply with the
statute of frauds or both of the contracting parties do not possess
the required legal capacity.1 As regards the degree of defectiveness,
they occupy an intermediate ground between voidable and void
contracts.2
Idem; Classes. — There are three general classes of
unenforceable contracts. They are: first, those contracts entered into
in the name of another person by one without any authority or in
excess of his authority; second, those which do not comply with the
Statute of Frauds; and third, those where both contracting parties
are legally incapacitated. Under the old law, the first were considered
as a special type of void contracts — void contracts which were
susceptible of ratification as distinguished from void and inexistent
contracts which were (and still are) not susceptible of ratification.
Under the present law, they are now placed in the same category
as contracts which do not comply with the Statute of Frauds.3 Yet
there is no question that the defects from which each of these three
classes of unenforceable contracts suffers are essentially different
1
2
3
While the classification in the other defective contracts is based on the defect
from which the contracts suffer, here it is based on the consequence. As a result,
the classification found in Art. 1403 has been criticized on the ground that it places
contracts which are tainted with a vice or defect which affects not only their enforce-
ability but also their validity in the same category as contracts which are tainted with
a mere formal defect which affect only their enforcement.
558
from each other. In the first, there is absolutely no consent insofar as

the person in whose name the contract is entered into is concerned;
in the second, there is no writing, note or memorandum by which
the contract maybe proved; while in the third, consent is absolutely
vitiated by the legal incapacity of both of the contracting parties.
From these differences, consequences which are also essentially
different from each other arise.
Idem; Characteristics. — Although they are essentially dif-
ferent from each other, yet all unenforceable contracts possess the
following characteristics:
(1) They cannot be enforced by a proper action in court;4
(2) They are susceptible of ratification;5
(3) They cannot be assailed by third persons.6
Idem; Distinguished from rescissible contracts. — An
unenforceable contract may be distinguished from a rescissible con-
tract in the following ways:
(1) An unenforceable contract cannot be enforced by a proper
action in court, while a rescissible contract can be enforced, unless it
is rescinded.
(2) The causes for the unenforceable character of the former
are different from the causes for the rescissible character of the
latter.
(3) The former is susceptible of ratification, while the latter
is not.
(4) The former cannot be assailed by third persons, while the
latter may be assailed by third persons who are prejudiced.
Idem; Distinguished from voidable contracts. — An
unenforceable contract may be distinguished from a voidable
contract in the following ways:
(1) An unenforceable contract cannot be enforced by a proper
action in court, while a voidable contract can be enforced, unless it
is annulled.
4
5
Arts. 1403, 1405, 1407, 1371, Civil Code.
6
559
Art. 1403 CONTRACTS
(2) The causes for the unenforceable character of the former

are different from the causes for the voidable character of the latter.
Art. 1403. The following contracts are unenforceable,

unless they are ratified:
(1) Those entered into in the name of another person by
one who has been given no authority or legal representation,
or who has acted beyond his powers;
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by ac-
tion, 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 mar-
riage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than Five hundred
pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them,
of such things in action, or pay at the time some part of
the purchase money, but when a sale is made by auction
and entry is made by the auctioneer in his sales book, at
the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of the purchasers
and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing for a longer
period than one year, or for the sale of real property or
of an interest therein;
560
UNENFORCEABLE CONTRACTS Art. 1403
(f) A representation as to the credit of a third

person.
(3) Those where both parties are incapable of giving
consent to a contract.7
Contracts Without or in Excess of Authority. — Contracts
entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond
his powers are unenforceable. Under the old law, such contracts were
classified as void contracts, although susceptible of ratification.8
According to Art. 1404, such contracts shall be governed by Art. 1317
and by the principles of agency in Title X of the Code. Consequently,
the following principles are applicable:
(1) No one may contract in the name of another without being
authorized by the latter or unless he has a right to represent him. If
he is duly authorized, he must act within the scope of his powers.9
(2) 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, is unenforceable.10 This principle is reiterated in the law
on agency.11
(3) However, such contract may be ratified, expressly or
impliedly, by the person in whose behalf it has been executed, before
it is revoked by the other contracting party.12
It must be noted that under the old law (Spanish Civil Code),
the terms “confirmation” and “ratification” were not interchangeable.
7
New provision.
8
Tipton vs. Velasco, 6 Phil. 67; Gutierrez Hnos. vs. Orense, 28 Phil. 517; Tacali-
nar vs. Corro, 34 Phil. 898; Ibañez vs. Rodriguez, 47 Phil. 554; Zamboanga Trans. Co.
vs. Bachrach Motor Co., 62 Phil. 244; Gana vs. Archbishop of Manila, 43 Off. Gaz.
3224.
9
10
Arts. 1403, No. 1, 1317, Civil Code.
11
Art. 1898, Civil Code. “If the agent contracts in the name of the principal, ex-
ceeding the scope of his authority, and the principal does not ratify the contract, it
shall be void if the party with whom the agent contracted is aware of the limits of the
powers granted by the principal. In this case, however, the agent is liable if he un-
dertook to secure the principal’s ratification.” It must be noted that this article says
that the contract is void, whereas Art. 1403, No. 1, says that it is unenforceable. Now,
which is which? The mistake is in Art. 1898. The correct term is “unenforceable.”
12
561
Art. 1403 CONTRACTS
Confirmation was a term used to designate the act by which a voidable

contract was cured of its vice or defect, while ratification was used
exclusively to designate the act by which a contract entered into by a
person in behalf of another without or in excess of authority is cured
of its defect. Under the present Code, the term ratification is now
used to designate the act of validating any kind of defective contract.
Under the old law, it was also customary to distinguish confir-
mation and ratification from recognition. Recognition or acknowl-
edgment refers to an act whereby a defect of proof is cured, such as
when an oral contract is put in writing, or when a private instru-
ment is converted into a public instrument. Thus, according to the
Supreme Court, in the case of Luna vs. Linatoc:13
“Confirmation tends to cure a vice of nullity, and ratifi-

cation is for the purpose of giving authority to a person who
previously acted in the name of another without authority. Rec-
ognition, on the other hand, is merely to cure a defect of proof.
In recognition, there is no vice to be remedied such as fraud,
violence or mistake, so that the case is distinguished from con-
firmation. In recognition, the person acting on behalf of another
is duly authorized to do so, so the situation is different from
ratification.’’
Contracts Infringing Statute of Frauds. — The second

class of unenforceable contracts are those which do not comply with
the Statute of Frauds. The Statute of Frauds, being essentially a
rule of substantive law, is now found in No. 2 of the Art. 1403 of the
Civil Code, thus superseding the statute as enunciated in Sec. 21 of
Rule 123 of the old Rules of Court.
Idem; Purpose of Statute. — The Statute of Frauds was
enacted for the purpose of preventing frauds. Hence, it should not
be made the instrument to further them.14
Idem; Form required by Statute. — Under the Statute of
Frauds, the only formality required is that the contract or agreement
must be in writing and subscribed by the party charged or by his
74 Phil. 15.
13
Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857; Shoemaker vs. La
14
Tondeña, 68 Phil. 24.
562
agent.15 However, it has been held that a telegram advising a person

to whom a verbal promise for the sale of land had been previously
made to come at once in order to complete the purchase, but which
telegram neither describes the property nor states the purchase
price, and which is not signed by any person having authority to
bind the seller, is not a sufficient memorandum of sale to satisfy the
requirement of the statute.16
Idem; Effect of noncompliance with Statute. — In case of
noncompliance with the Statute of Frauds, the contract or agreement
is unenforceable by action. This is clear from the statute itself which
states that evidence of the agreement cannot be received without the
writing, or a secondary evidence of its contents. What is, therefore,
affected by the defect of the contract or agreement is not its validity,
but its enforceability.
The Statute of Frauds simply provides the method by which
the contracts enumerated therein may be proved. It does not declare
that said contracts are invalid because they are not reduced to
writing. A contract exists and is valid even though it is not clothed
with the necessary form. Consequently, the effect of non-compliance
with the requirement of the statute is simply that no action can be
enforced unless the requirement is complied with.17 It is, therefore,
clear that the form required is for evidential purposes only. Hence,
if the parties permit a contract to be proved, without any objection,
it is then just as binding as if the statute has been complied with.18
Idem; Contracts Covered by Statute. — There are six
classes of contracts which are covered by the Statute of Frauds.
They are:
(1) An agreement that by its terms is not to be performed
within a year from the making thereof. It is well-settled that
this refers only to agreements which by their terms are not to be
performed on either side within a year from the execution thereof.
Hence, those which are to be fully performed on one side within a
year are taken out of the operation of the statute.19 Thus, when in an
15
Jimenez vs. Rabot, 38 Phil. 378.
16
Basa vs. Raquel, 45 Phil. 655.
17
Gallemit vs. Tabilaran, 20 Phil. 241.
18
Domalagan vs. Bolifer, 33 Phil. 471.
19
Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857.
563
Art. 1403 CONTRACTS
oral contract, which by its terms is not to be performed within one

year from the execution thereof, one of the contracting parties has
already complied within the year with the obligations imposed upon
him by said contract, the other party cannot avoid the fulfillment of
those incumbent upon him under the same contract by invoking the
Statute of Frauds, because such statute aims to prevent and not to
protect fraud.20
(2) A special promise to answer for the debt, default or mis-
carriage of another. It is well-settled that a promise in order to fall
under the statute must be collateral, not independent or original.
Thus, in the case of Reiss vs. Memije,21 the Supreme Court held:
“The true 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. 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. But, on the other hand, if the promise is
collateral to the agreement of another and the promisor becomes
thereby merely a surety, the promise must be in writing.
Just what is the character of a promise as original or
collateral is a question of law and fact which must in each
case be determined from the evidence as to the language used
in making the promise, and the circumstances under which
the promise was made; and since as a general rule the parties
making a promise of this nature rarely understand the legal
and technical difference between an original and collateral
promise, the precise form of words used, even when established
by undisputed testimony, is not always conclusive. So that it is
said that ‘While, as a matter of law, a promise, absolute in form,
to pay or to be responsible or to be the paymaster is an original
promise, and while on the other hand, if the promisor says, ‘I
will see you paid,’ or ‘I will pay if he does not,’ or uses equivalent
words, the promise standing alone is collateral, yet under all
the circumstances of the case, an absolute promise to pay, or
a promise to be responsible, may be found to be collateral,
or promises deemed prima facie collateral may be adjudged
original.’’
20
Shoemaker vs. La Tondeña, 68 Phil. 24.
21
15 Phil. 350.
564
(3) An agreement made in consideration of marriage, other

than a mutual promise to marry.22 Thus, marriage settlements and
donations by reason of marriage, according to the Code, shall be
regulated by the Statute of Frauds.23
(4) An agreement for the sale of goods, chattels or things in
action, at a price not less than Five hundred pesos.24
(5) An agreement for the leasing of real property for a longer
period than one year, or for the sale of real property or an interest
therein.25
Thus, in the case of Syquia vs. CA (151 SCRA 507), the
Supreme Court ruled that an alleged oral assurance or promise of the
representatives of the lessor that the lessee should be given priority
or a renewal of the lease cannot be enforceable. This is because
under Article 1403, No. 2(e), of the New Civil Code, an agreement
for the leasing for a longer period than one year is 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. In the
subsequent case of Zaide vs. CA (163 SCRA 705), the SC reiterated
the principle enunciated in Syquia case and further ruled that the
writing be in the form of a public document, thus it held: “If the
agreement concerns “the sale of land or of an interest therein,’’ the
law requires not only that “the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged,’’ in order
that it may be enforceable by action (Article 1403 [2]), but also that
the writing be in the form of a “public document’’ (Article 1358). The
law finally provides that, “if the law requires a document or other
special form,’’ as in the acts and contracts enumerated in Article
1358, the contracting parties may compel each other to observe that
form, once the contract has been perfected and such right may be
exercised simultaneously with the action upon the contract (Article
1357).
22
For illustrative cases, see Atienza vs. Castillo, 72 Phil. 589; Cabague vs. Aux-
ilio, 48 Off. Gaz. 4823.
23
24
For illustrative case, see Robles vs. Lizarraga Hnos, 50 Phil. 387.
25
For illustrative cases, see Gorospe vs. Ilayat, 29 Phil. 21; Fernandez vs. Bayan,
62 Phil. 909; Pascual vs. Realty Investment, Inc., 91 Phil. 257; Valino vs. Medina,
CA, 49 Off. Gaz. 592.
565
Art. 1403 CONTRACTS
Western Mindanao Co. vs. Medalle

79 SCRA 703
Appeal from the order of the Court of First Instance of

Zamboanga City dismissing the complaint upon the ground
that the claim on which it is founded is unenforceable under the
Statute of Frauds and special law.
The complaint, filed on December 16, 1960, alleges that:
“2. — The Plaintiff is engaged in logging operations
in Curuan, Zamboanga City and in connection with the
said logging operation it obtained on September 8, 1955
a right-of-way through the said Lot 2136 of the Cadastral
Survey of Zamboanga from Mr. Luciano Hernandez,
then the registered owner, a copy of the agreement being
enclosed as Annex ‘A’;
“3. — The former owners of the logging concession
operated by the Plaintiff constructed and maintained the
said road through Lot 2136, but the Plaintiff improved
the said road, paying to the registered owner for all the
improvements damaged by the improvement of the road;
“4. — Long before the execution of the right-of-way
agreement on September 8, 1955, since then and up to
the present time the said road has been maintained and
used not only by the predecessor of the Plaintiff and the
Plaintiff, but also by the public;
“5. — The said Lot 2136 was purchased by the
defendants in 1958 and the said road then existed and
was in public use and the defendants did not oppose but
instead allowed the continued use and maintenance of the
road by the Plaintiff and the public;
“6. — The said road is indispensable to the business
operations of the Plaintiff, because it is the only access
from their concession to the highway;
“7. — That defendants have now sent to the
Plaintiff a notice (Annex ‘B’) of their intention to close the
road; and
“8. — The Plaintiff has the right to the continued
use of said road, the closing of which will cause injustice
and irreparable damages to the Plaintiff and the Plaintiff
is willing to post a bond for the issuance of a writ of
preliminary injunction to stop the defendants from closing
the road.”
566
xxx xxx xxx
Wherefore, the plaintiff prayed that a writ of preliminary

injunction be issued restraining the defendants from closing the
said road, and after hearing, make the injunction permanent.
It also prayed that the defendants be directed to recognize and
respect the said road right-of-way agreement. Copies of the
road right-of-way agreement and the letter of the defendants
advising the plaintiff of the closure of the road were attached
thereto. Upon the filing of a bond in the amount of P1,000.00,
a writ of preliminary injunction was issued, restraining the
defendants from closing the road.
Instead of a responsive pleading, the defendant filed a
motion to dismiss the complaint on January 4, 1961, upon the
ground that the claim on which the action or suit is founded
is unenforceable under the provisions of the Statute of Frauds
and special law, in that the first page of the said road right-
of-way agreement was not signed by both parties and their
instrumental witnesses; page two thereof is not dated, and the
signature of the plaintiff’s corporate agent does not appear;
and that said agreement is not acknowledged before a person
authorized to administer oaths.
The plaintiff opposed the motion, stating that the agree-
ment between plaintiff and Luciano Hernandez is not one of
those agreements specified in the Statute of Frauds. Neverthe-
less, the trial court granted the motion to dismiss on January
17, 1961 and dismissed the cases.
The plaintiff filed a motion for reconsideration of the
said order, insisting that the road right-of-way agreement is
not covered by the Statute of Frauds. Then, on March 4, 1961,
the plaintiff filed an Amended Complaint, accompanied by a
motion for its admission. The plaintiff therein prayed, among
others, that the Defendants be ordered to keep the road open
and to respect the right-of-way agreement and “should it be
ascertained that under the law the plaintiff is bound to pay
compensation for the right-of-way to the defendants, it is prayed
that the reasonable amount of such compensation be fixed.
After hearing the parties, the trial court issued an order
on September 6, 1961, denying the motion for reconsideration.
Whereupon, the plaintiff perfected an appeal to the Court
of Appeals. The appellate court, finding that only questions of
law are raised, elevated the appeal to this Court.
567
Art. 1403 CONTRACTS
The Supreme Court, speaking through Justice H. Concep-

cion, held:
The appeal is meritorious. The Statute of Frauds
refers to specific kinds of transactions and cannot apply
to any that is not enumerated therein. The transactions or
agreements covered by said statute are the following:
“(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 mar-
riage, other than a mutual promise to marry;
“(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred pesos
unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things
in action, or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book at the time of
the sale, of the amount and kind of property sold, terms
of sale, price, names of purchasers and person on whose
account the sale is made, it is sufficient memorandum;
“(e) An agreement for the leasing for a longer
period than one year, for the sale of real property or of an
interest therein;
“(f) A representation as to the credit of a third
person.’’
Obviously, an agreement creating an easement of right-of-
way is not one of those contracts covered by the statute of frauds
since it is not a sale of real property or of an interest therein.
The trial court, therefore erred in dismissing the case upon
the defendants’ claim that the road right-of-way agreement in
question is unenforceable under the Statute of Frauds. Besides,
the complaint, as amended, may be viewed not only as a claim for
the recognition of the existence of an easement of right-of-way on
defendants’ estate, but also a demand for the establishment of
an easement of right-of-way, if none exists, pursuant to Art. 649
of the Civil Code, in view of the plaintiff’s offer to pay reasonable
compensation for the use of the land.
WHEREFORE, the judgment appealed from is hereby
reversed and the orders of January 17, 1961 and September 6,
1961 set aside. Costs against the defendant-appellees.
SO ORDERED.
568
(6) A representation as to the credit of a third person.
Problem — “A” and “B” entered into a verbal contract

whereby “A” agreed to sell to “B” his only parcel of land for
P20,000.00 and “B” agreed to buy at the aforementioned price.
“B” went to the bank, withdrew the necessary amount, and re-
turned to “A” for the consummation of the contract. “A,” how-
ever, had changed his mind and refused to go through with the
sale. Is the agreement valid? Will an action by “B’’ against “A”
for specific performance prosper? Reason. (1982 Bar problem)
Answer — It must be observed that there are two questions
which are asked. They are:
(1) Is the agreement valid? The answer is yes. It is a
time honored rule that even a verbal agreement to sell land is
valid so long as there is already an agreement with respect to
the object and the purchase price.
(2) Will an action by “B” against “A” for specific per-
formance prosper? The answer is no, unless it is ratified. The
reason is obvious. The agreement, being an agreement of sale
of real property, is covered by the Statute of Frauds. It can-
not, therefore, be enforced by a court action because it is not
evidenced by any note or memorandum or writing properly sub-
scribed by the party charged.
(Note: The above answer is based on No. 2 of Art. 1403 of
the Civil Code and on decided cases.)
Idem; Effect of Performance of Contract. — The rule is

well established that the Statute of Frauds is applicable only to
those contracts which are executory and not to those which have
been consummated either totally or partially.26 The basis of this rule
is, of course, the fact that in such case there is already a ratification
of the contract within the meaning of Art. 1405 of the Civil Code.
There is acceptance of benefits.
26
Arroyo vs. Azur, 76 Phil. 493. To the same effect: Almirol vs. Monserrat, 48
Phil. 67; Asturias Sugar Central, Inc. vs. Montinola, 69 Phil. 725; Diana vs. Macalibo,
74 Phil. 70; Facturan vs. Sabanal, 46 Off. Gaz. 310; Carbonnel vs. Poncio, 103 Phil.
655.
569
Art. 1403 CONTRACTS
Carbonnel vs. Poncio, et al.

103 Phil. 655
The records show that plaintiff purchased from defendant
Poncio a parcel of land; that she paid part of the agreed price
with the understanding that she will pay the balance upon the
execution of the deed of conveyance; that defendant refused
to execute the deed in spite of repeated demands; and that
defendant sold the land to his co-defendants who knew of the
first sale. Defendants, however, contend that plaintiff’s claim is
unenforceable under the Statute of Frauds.
Held: “It is well settled in this jurisdiction that the Statute
of Frauds is applicable only to executory contracts (Facturan
vs. Sabanal, 81 Phil. 512), not to contracts that are totally or
partially performed. (Almirol, et al. vs. Monserrat, 48 Phil.
67, 70; Robles vs. Lizarraga Hermanos, 50 Phil. 387; Diana
vs. Macalibo, 74 Phil. 70) The reason is simple. In executory
contracts there is a wide field for fraud because unless they be
in writing there is no palpable evidence of the intention of the
contracting parties. The statute has precisely been enacted to
prevent fraud. (Moran, Comments on the Rules of Court, Vol.
III, 1957 ed., p. 178) However, if a contract has been totally
or partially performed, the exclusion of parol evidence would
promote fraud or bad faith, for it would enable the defendant to
keep the benefits already derived by him from the transaction
in litigation, and, at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him
thereby. So that when the party concerned has pleaded partial
performance, such party is entitled to a reasonable chance to
establish by parol evidence the truth of his allegation, as well as
the contract itself.”
Idem; Ratification. — Contracts infringing the Statute of

Frauds are susceptible of ratification. According to Art. 1405 of the
Civil Code, such contracts may be ratified either (1) by the failure to
object to the presentation of oral evidence to prove the same, or (2)
by the acceptance of benefits under them.
Problem — Can an oral sale of land be judicially enforced
as between the contracting parties, if the land has not been
delivered but the buyer has paid ten percent (10%) of the
purchase price? (1974 Bar problem)
Answer — Yes, an oral sale of land where the land has not
been delivered but the buyer has paid ten percent (10%) of the
purchase price may be judicially enforced. Well-settled is the
rule that the Statute of Frauds by virtue of which oral contracts
570
are unenforceable by court action is applicable only to those

contracts which are executory and not to those which have been
consummated either totally or partially. The reason is obvious.
In effect, there is already a ratification of the contract because
of acceptance of benefits. As a matter of fact, this reason is now
embodied in the New Civil Code. According to Art. 1405 of said
Code, contracts infringing the Statute of Frauds are ratified by
the failure to object to the presentation of oral evidence to prove
the same, or by the acceptance of benefits under them.
Problem — “O” verbally leased his house and lot to “L’’ for
two years at a monthly rental of P250.00 a month. After the first
year, “O” demanded a rental of P500.00 claiming that due to the
energy crisis, with the sudden increase in the price of oil, which
no one expected, there was also a general increase in prices. “O”
proved an inflation rate of 100%. When “L’’ refused to vacate the
house, “O” brought an action for ejectment. “O” denied that they
had agreed to a lease for two years.
Question No. 1 — Can the lessee testify on a verbal
contract of lease? Reason. (1981 Bar problem)
Answer — Yes, the lessee “L” may testify on the verbal
contract of lease. Well-settled is the rule that the Statute of
Frauds by virtue of which oral contracts (such as the contract in
the instant case) are unenforceable by court action is applicable
only to those contracts which have not been consummated, either
totally or partially. The reason for this is obvious. In effect, there
is already a ratification of the contract by acceptance of benefits.
Here “L’’ has been paying to “O” a monthly rental of P250.00 for
one year. The case is, therefore, withdrawn from the coverage of
the Statute of Frauds.
(Note: The above answer is based on Arts. 1403, No. 2 and
1405 of the Civil Code, and on decided cases.)
Question No. 2 — Assuming that “O” admits the two-year
contract, is he justified in increasing the rental? Why? (1981 Bar
problem)
Answer — Yes, “O’’ is justified in increasing the monthly
rental. Since it is admitted that the contract of lease is for a
definite term or period of two years, it is crystal clear that the
case is withdrawn from the coverage of the new rental law. Now
during the hearing of the case, “O” was able to prove an inflation
rate of 100%. Therefore, an increase is justified.
(Note: The above answer is based on Batas Pambansa Blg.
25.)
571
Contracts Where Both Parties Are Incapacitated. —

Contracts where both parties are legally incapacitated are also
unenforceable.27 If only one of the parties is incapacitated, the
contract is voidable.28
As in the case of those entered into in the name of another by
one without or in excess of authority, contracts where both parties
are legally incapacitated may be ratified either expressly or implied-
ly. Such ratification may be effected by the parents or guardians of
the contracting parties. Although the Code does not say so, there is
no reason why it cannot also be effected by the parties themselves
upon attaining or regaining capacity. We must, however, distin-
guish between the effect of ratification by the parent or guardian of
one of the contracting parties or by the latter himself upon attaining
capacity and the effect of ratification by the parents or guardians
of both parties or by both of such themselves upon attaining capac-
ity. In the first, the contract becomes voidable; hence, the rules on
voidable contracts shall govern. In the second, the contract shall be
validated from its inception.29
Art. 1404. Unauthorized contracts are governed by

Article 1317 and the principles of agency in Title X of this
Book.30
Art. 1405. Contracts infringing the Statute of Frauds,
referred to in No. 2 of Article 1403, are ratified by the failure
to object to the presentation of oral evidence to prove the
same, or by the acceptance of benefits under them.31
Art. 1406. When a contract is enforceable under the
Statute of Frauds, and a public document is necessary for its
registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.32
Art. 1407. In a contract where both parties are incapable
of giving consent, express or implied ratification by the par-
27
28
29
30
New provision.
31
New provision.
32
New provision.
572
ent, or guardian, as the case may be, of one of the contract-

ing parties shall give 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.33
Art. 1408. Unenforceable contracts cannot be assailed
by third persons.34
33
New provision.
34
New provision.
573
CONTRACTS
CHAPTER 9
VOID OR INEXISTENT CONTRACTS
Void and Inexistent Contracts in General. — In general,

a void or inexistent contract may be defined as one which lacks
absolutely either in fact or in law one or some of the elements which
are essential for its validity.1 Thus, if there is absolutely no consent,
object or cause, or if the formalities which are essential for validity
are not complied with, or even if there is a cause and an object, if
such cause or object is contrary to law, morals, good customs, public
order or public policy, or if the contract is expressly prohibited or
declared by law to be void, the contract is void or inexistent.
Although used interchangeably, strictly speaking, void and
inexistent contracts are different from each other. Contracts which
are void refer to those where all of the requisites of a contract are
present, but the cause, object or purpose is contrary to law, morals,
good customs, public order or public policy, or contract itself is
prohibited or declared void by law. On the other hand, contracts
which are inexistent refer to those where one or some or all of those
requisites which are essential for the validity of a contract are
absolutely lacking, such as those which are absolutely simulated or
fictitious, or those where the cause or object did not exist at the
time of the transaction. This distinction between void and inexistent
contracts, which has already been expressly recognized by the
Supreme Court,2 is important especially in connection with the
application of the in pari delicto principle as enunciated in Arts. 1411
and 1412 of the Code. This is so because if the contract is inexistent,
it is open to attack even by the parties thereto, but if the contract is
1
2
Liguez vs. Court of Appeals, 102 Phil. 577; Motion for Reconsideration, Feb.
13, 1958.
574
not inexistent but merely void or illegal, specific articles of the Civil
Code command that neither party thereto may be heard to invoke
its unlawful character as a ground for relief.3 Consequently, the two
may be distinguished from each other as follows:
(1) In a void contract, all of the requisites of a contract are
present, but the cause, object or purpose is contrary to law, morals,
good customs, public order or public policy, or the contract itself is
prohibited or declared by law to be void; in an inexistent contract,
one or some or all of those requisites which are essential for validity
are absolutely lacking.
(2) The principle of pari delicto is applicable in the first, but
not in the second. Consequently, the first may produce legal effects,
but the second cannot produce any effect whatsoever.
Idem; Distinguished from Rescissible Contracts. — A
void or inexistent contract may be distinguished from a rescissible
contract in the following ways:
(1) A void or inexistent contract produces as a rule no effect
even if it is not set aside by a direct action, while a rescissible
contract is valid, unless it is rescinded.4
(2) The defect of the former consists in absolute lack in fact
or in law of one or some of the essential elements of a contract, while
the defect of the latter consists in lesion or damage to one of the
contracting parties or to third persons.5
(3) In the former, the nullity or inexistence of the contract
is based on the law, whi1e in the latter the rescissible character is
based on equity. Hence, absolute nullity is not only a remedy but a
sanction, while rescission is a mere remedy. Public interest, therefore,
predominates in the first, while private interest predominates in the
second.6
(4) The action for the declaration of the nullity or inexistence
of a contract is imprescriptible, while the action for the rescission of
a contract is prescriptible.7
3
Ibid.
4
Art. 1380, 1409, Civil Code.
5
Ibid.
6
7
575
CONTRACTS
(5) The nullity or inexistence of a contract cannot as a rule

be assailed by third persons, while the rescissible character of a
contract may be assailed by third persons.8
Idem; Distinguished from Voidable Contracts. — A void
or inexistent contract may be distinguished from a voidable contract
in the following ways:
(1) A void or inexistent contract produces as a rule no effect
even if it is not set aside by a direct action, while a voidable contract
is binding, unless it is annulled.9
(2) The causes for the inexistence or absolute nullity of the
former are different from the causes for the annulability or relative
nullity of the latter.10
(3) The former is not susceptible of ratification, while the
latter is susceptible of ratification.11
(4) The action for the declaration of the nullity or inexistence
of a contract is imprescriptible, while the action for the annulment
of a contract is prescriptible.12
(5) The defense of inexistence or absolute nullity is available
to third persons whose interests are directly affected, while the
defense of annulability is not available to third persons.13
Idem; Distinguished from Unenforceable Contracts.
— A void or inexistent contract may be distinguished from an
unenforceable contract in the following ways:
(1) In a void or inexistent contract, there is in reality no
contract at all, while in an unenforceable contract, there is actually
a contract which cannot be enforced by a court action, unless it is
ratified.14
(2) The causes for the inexistence or absolute nullity of the
former are different from the causes for the unenforceability of the
latter.15
8
Arts. 1381, 1382, 1409, Civil Code.
9
10
Ibid.
11
Ibid.
12
13
14
15
Ibid.
576
VOID OR INEXISTENT CONTRACTS Art. 1409
(3) The former is not susceptible of ratification, while the

latter is susceptible of ratification.16
(4) The former can be assailed by third persons whose inter-
ests are directly affected, while the latter cannot be assailed by third
persons.17
Art. 1409. The following contracts are inexistent and

void from the beginning:
(1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at 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.18
Contracts Which Are Void or Inexistent. — The seven

classes of void or inexistent contracts enumerated in Art. 1409
have already been discussed in previous chapters of this text.19 It is,
therefore unnecessary to discuss them all over again in this chapter.
It must be observed, however, that Nos. 1, 4, 5, 6 and 7 refer to
contracts which are void, while Nos. 2 and 3 refer to contracts which
are inexistent.
16
Arts. 1404, 1405, 1407, 1409, Civil Code.
17
18
New provision.
19
For comments, cases and related provisions on No. 1, see those under Arts.
1306, 1346, 1347, 1352; on No. 2, see those under Arts. 1345, 1346, on No. 3, see those
under Arts. 1347, 1352; on No. 4, see those under Art. 1347; on No. 5, see those under
Art. 1348; on No. 6, see those under Art. 1378.
577
Art. 1409 CONTRACTS
Besides those enumerated in the article, we can include those

which are the direct results of previous illegal contracts,20 those
where there is no concurrence between the offer and the acceptance
with regard to the object and the cause of the contract, and those
which do not comply with the required form when such form is
essential for validity.21
No. 7, however, is broad enough to include all other contracts
which are not included in the enumeration. The first part is a
reiteration of the principle declared in Art. 5 of the Code that
acts which are executed against the provisions of mandatory or
prohibitory laws shall be void, except when the law itself authorizes
their validity. Examples of such acts are those regulated by
Arts. 133, 1490, 1491, 1689, 1782, 1799, 2035, 2088 and 2130 of the
Code.
Problem — (a) Cite an example of a contract which is

contrary to morals.
(b) Can the nullity of the stipulation on the usurious
interest affect
(i) the lender’s rights to recover the principal loan;
(ii) the terms of the real estate mortgage?
Answer — (a) Stipulations authorizing iniquitous or
unconscionable interests are contrary to morals, if not against
the law. Under Art. 1409 of the New Civil Code, these contracts
are inexistent and void from the very beginning. They cannot
be ratified nor the right to set up their illegality as a defense be
waived.
(b) The nullity of the stipulation on the usurious inter-
est does not, however, affect the lender’s right to recover the
principal loan. Nor would it affect the terms of the real estate
mortgage (REM). The right to foreclose the mortgage remains
with the creditors and said right can be exercised upon the fail-
ure of the debtors to pay the debt due. The debt due is to be con-
sidered without the stipulation of the excessive interest. A legal
interest of 12% per annum will be added in place of the excessive
interest formerly imposed.
20
21
578
But in a situation where the total amount of indebtedness

during the foreclosure proceedings is pegged in an amount
which included interest which is excessive, iniquitous and
exorbitant, the foreclosure proceedings cannot be given effect
and will be considered invalid.. If the foreclosure proceedings
were considered valid, this would result in an inequitable
situation wherein the borrowers will have their land foreclosed
for failure to pay an over-inflated loan only a small part of
which they were obligated to pay. (Heirs of Zoilo Espiritu and
Primitiva Espiritu vs. Sps. Maximo Landrito and Paz Landrito,
etc., G.R.No. 169617, April 3, 2007).
Idem; Characteristics. — In Tongoy vs. Court of Appeals,

123 SCRA 99 (1983), the Court said that the following are the most
fundamental characteristics of void or inexistent contracts:
(1) As a general rule, they produce no legal effects whatsoever
in accordance with the principle “quod nullum est nullum producit
effectum.’’22
(2) They are not susceptible of ratification.23
(3) The right to set up the defense of inexistence or absolute
nullity cannot be waived or renounced.24
(4) The action or defense for the declaration of their
inexistence or absolute nullity is imprescriptible.25
(5) The inexistence or absolute nullity of a contract cannot be
invoked by a person whose interests are not directly affected.26
Idem; Effects. — As far as inexistent contracts are concerned,
it is clear that such contracts can produce no legal effect whatsoever
in accordance with the principle “quod nullum est nullum producit
effectum.’’27 However, in the case of void contracts where the
nullity proceeds from the illegality of the cause or object, a certain
qualification must be made. Under Arts. 1411 and 1412 of the Civil
Code, nullity of contracts due to illegal cause or object, when executed
22
Ibid., p. 410.
23
24
Ibid.
25
26
Art. 1421, Civil Code; 3 Castan, 7th Ed., p. 410.
27
579
Art. 1409 CONTRACTS
(and not merely executory), will produce the effect of barring any
action by a guilty to recover what he has already given under the
contract.
The above principle is very well illustrated in the case of
Liguez vs. Court of Appeals.28 Here, the deceased, Salvador Lopez,
a married man of mature years, donated a parcel of land belonging
to the conjugal partnership to Conchita Liguez, a minor of sixteen,
subject to the condition that the latter shall become his mistress.
The donation was duly accepted. After the perfection of the donation,
Conchita became the mistress of Lopez. When Lopez died, his widow
and heirs took possession of the land. Subsequently, Conchita
commenced an action for the recovery of the property. The widow
and heirs of the deceased now maintain that since the cause of the
contract is illegal or immoral, consequently, it is inexistent, and
therefore, can produce no effect whatsoever; hence, they are entitled
to the property donated. Plaintiff, on the other hand, contends that
what is illegal is the motive of the donor and not the cause, since the
contract in this case is one of pure beneficence. Hence, the principal
questions to be resolved are: (1) What is the character of the contract
— valid, void or inexistent? (2) Assuming that the contract is either
void or inexistent, what are its effects, if any? The decision of the
Supreme Court may be summarized as follows:
(1) According to the plaintiff, the contract is valid because the
condition that she will become the mistress of the donor is merely the
motive of a party to the contract and not the causa. In other words,
according to her, the contract here is a contract of pure beneficence;
hence, the causa is the liberality of the benefactor,29 and certainly,
under the law, liberality per se can never be illegal. This contention
is untenable. The contract is onerous in character. Here the facts
clearly demonstrate that in making the donation, the donor was
not moved exclusively by the desire to benefit the donee, but also to
gratify his sexual impulse. While it is true that we must not confuse
the causa of a contract with the motives of the contracting parties,30
there is an exception. The motive may be regarded as causa when
it pre-determines the purpose of the contract. In other words, we
must except from the rule those contracts that are conditioned upon
28
102 Phil. 577.
29
30
580
the attainment of the motives of either party. In the present case, it

is scarcely disputable that the donor would not have conveyed the
property in question had the donee refused to accept the condition
that she will cohabit with him. Hence, the cohabitation was an
implied condition of the donation, and being unlawful, necessarily
tainted the donation.
Because of the illegality of the causa, according to the defendants,
the contract is inexistent. Again this contention is untenable. The
contract here is void, not inexistent. A void contract is different from
an inexistent contract. The first refers to those contracts where all
of the requisites of a contract are present, but the cause, object or
purpose is contrary to law, morals, good customs, public order or
public policy, or the contract itself is prohibited or declared by law to
be void, while the second refers to those contracts where one or some
of those requisites which are essential for validity are absolutely
lacking.
(2) Since the contract is void by reason of the illegality of the
cause, the provisions of Art. 1412 of the Civil Code are, therefore,
applicable. It must be noted, however, that the principle of in pari
delicto is not applicable here. Plaintiff was only a minor of 16 at
the time of the donation, while the donor was a married man of
mature years and experience. It is well known that minors occupy
a privileged position under our law. As a matter of fact, the law’s
tender care for them is now emphasized in Art. 1415 of the Civil
Code. Consequently, the two parties are not in pari delicto. At any
rate, even if they were in pari delicto the same rules would still apply.
Under Arts. 1411 and 1412 of the Code, nullity of contracts due to
illegal cause or object, when executed (and not merely executory)
will produce the effect of barring any action by a guilty party to
recover what he has already given under the contract. These articles
make it plain that, as far as the guilty party is concerned, his act of
conveying property pursuant to an illicit contract operates to divest
him of the ownership of the property, and to bar him from recovering
it from his transferee, just as if the transfer were through a bargain
legal from its inception. Although repugnant, “the law deems it
more repugnant that a party should invoke his own guilt as a reason
for relief from a situation which he has deliberately entered. This
serves to explain why the tainted conveyance to the extent that
it has been carried out becomes conclusive as between the guilty
parties, even if without effect against strangers without notice; and
581
Art. 1409 CONTRACTS
why a guilty party may not ask the courts for a restoration to the
status quo ante.” The same reasons can also be applied to the case
of the successors or heirs of the guilty party. They cannot attack the
validity of the donation in their quality as successors or heirs of the
donor, since it is undeniable that they cannot be placed in a better
position than their predecessor.
It must be observed, however, that the property donated is
conjugal. Does that mean that the donation made by Lopez to the
plaintiff shall not be given any effect with respect to the share of
the widow? The answer is simple. Since the donation was made
under the old law, the Civil Code of 1889 shall apply. The second
paragraph of Art. 1419 of the old Code considers the donation as
merely fraudulent, subject to collation upon liquidation of the
conjugal partnership and deduction of its value from the donor’s
share in the conjugal profits.31
Therefore, the plaintiff is entitled to so much of the donated
property as may be found upon proper liquidation not to prejudice
the share of the widow or the legitimes of the compulsory heirs.
But suppose that the above donation had been made after the
effectivity of the New Civil Code, would the same rules stated in the
decision still apply?
It is submitted that as far as the donor is concerned, the
same rules with respect to the illegality of the donation and its
consequences would still apply. The contract would still be void
because of the illegality of the causa or consideration for the reasons
stated in Liguez. It would also be void under Art. 174 of the New
Civil Code (a provision not found in the Spanish Civil Code) which
declares that “with the exception of moderate donations for charity,
neither husband nor wife can donate any property of the conjugal
partnership without the consent of the other.’’ Consequently, as
far as the donor is concerned, Art. 1412 of the Civil Code would be
applicable.
However, as far as the wife of the donor is concerned the
applicable rules would be different. Art. 173 of the New Civil Code
states: “The wife may, during the marriage and within ten years
31
The law which is now applicable is found in Arts. 173 and 174 of the New Civil
Code.
582
from the transaction questioned, ask the courts for the annulment
of any contract of the husband entered into without her consent,
when such consent is required, or any act or contract of the husband
which tends to defraud her or impair her interest in the conjugal
partnership property. Should the wife fail to exercise this right,
she or her heirs, after the dissolution of the marriage, may demand
the value of the property fraudulently alienated by the husband.”
Does this provision, which was not found in the Spanish Civil Code,
spell the remedy of the wife in Liguez? I do not think so; it only
indicates it. It must be observed that the article presupposes either
a voidable (or unenforceable) contract executed by the husband, and
not a void contract. Therefore, the remedy of the wife is to bring
an action for the declaration of absolute nullity of the contract of
donation, a remedy which will have all of the effects of an action for
reconveyance. The action would be imprescriptible because it would
be based on a void contract. If she dies without bringing the action,
her heirs in their capacity as heirs, would be able to institute the
action. The principle of pari delicto in such a case cannot be applied
because the wife or her heirs were not parties to the illegal contract.
The case of Francisco J. Chavez vs. PCGG (May 19, 1999,
307 SCRA 394) states, among others that where the Agreements
undeniably contain terms and conditions that are clearly contrary
to the Constitution and the laws and are not subject to compromise,
such terms and conditions cannot be granted by the PCGG to
anyone. Being so, no argument of the contractors will make such
illegal and unconstitutional stipulations pass the test of validity.
The void agreement will not be rendered operative by the parties’
alleged performance (partial or full) of their respective prestations.
A contract that violates the Constitution and the law is null and void
ab initio and vests no rights and creates no obligations. It produces
no legal effect at all.
A void contract cannot be ratified. — In the case of
Guiang vs. Court of Appeals (June 26, 1998, 291 SCRA 372), the
Supreme Court ruled that the trial court correctly held: “By the
specific provision of the law (Art. 1390, Civil Code) therefore, the
Deed of Transfer of Rights cannot be ratified, even by an ‘amicable
settlement.’ The participation by some barangay authorities in
the ‘amicable settlement’ cannot otherwise validate an invalid act.
Moreover, it cannot be denied that the ‘amicable settlement’ entered
into by plaintiff Gilda Corpuz and defendant spouses Guiang is a
583
Art. 1410 CONTRACTS
contract. It is a direct offshoot of the Deed of Transfer of Rights. By

express provision of law, such a contract is also void. Thus, the legal
provision, to wit: ‘Art. 1422. A contract which is the direct result
of a previous illegal contract, is also void and inexistent.’ (Civil
Code of the Philippines.) In summation therefore, both the Deed of
Transfer of Rights and the ‘amicable settlement’ are null and void.’’
Doctrinally and clearly, a void contract cannot be ratified. In the
same case, the Supreme Court also ruled that the sale of a conjugal
property requires the consent of both the husband and the wife. The
absence of the consent of one renders the sale null and void, while
the vitiation thereof makes it merely voidable. Only in the latter
case can ratification cure the defect.
Art. 1410. The action or defense for the declaration of

the inexistence of a contract does not prescribe.32
Imprescriptibility of Action or Defense. — Because of the
fact that the defect of void or inexistent contracts is of a more or
less permanent character, mere lapse of time cannot give efficacy
to such contracts. In other words, the defect is of such a nature
that it cannot be cured by prescription.33 This principle of impres-
criptibility is applicable not only to the action for the declaration
of the inexistence or absolute nullity of the contract but also to the
defense.
Castillo vs. Galvan

85 SCRA 526
Appeal from the order of the Court of First Instance of
Pangasinan dismissing the complaint filed in Civil Case No.
D-1227 and the order denying the motion for the reconsideration
of said order.
The complaint, filed on August 1, 1961, is for the annulment
of a document, denominated “DEED OF ABSOLUTE SALE,’’
executed on August 3, 1965, by and between Paulino Galvan,
professedly the predecessor-in-interest of herein plaintiffs, and
defendants Josefa Galvan and Natividad S. Galvan, and for
damages and attorney’s fees. The plaintiffs therein alleged that
Paulino Galvan, during his lifetime, was the registered owner
32
New provision.
33
Eugenio vs. Perdido, 97 Phil. 41. But how about the doctrine of stale demands
(laches) — has not this doctrine eroded entirely the provision of Art. 1410?
584
of an undivided one-half (1/2) interest over two parcels of land,

known as Lot Nos. 4541 and 4542 of the Dagupan Cadastre
and covered by OCT Nos. 3813 and 3917, respectively, of the
Register of Deeds of Dagupan City. The other undivided half
is owned by his two daughters by a first marriage, herein
defendants Josefa Galvan and Natividad Galvan. On these lots,
which are contiguous, is built the family home. On February 10,
1961, Paulino Galvan died and the plaintiffs, out of “delicadeza”
waited for the defendants to initiate the move for the settlement
of his estate. But, after waiting for some time and finding that
none was forthcoming, the plaintiffs became apprehensive, so
that they began to go over the papers concerning the properties
of the decedent. In the office of the Register of Deeds of Dagupan
City, they were surprised to find a deed of sale, signed by the
late Paulino Galvan and the plaintiff, Maria Encarnacion
Castillo, whereby they had purportedly sold for P500.00 the
one-half undivided portion of Paulino Galvan over said lots in
favor of the defendants. When apprised of the existence of a
deed of sale, plaintiff Maria Encarnacion Castillo remembered
that way back in 1953, she and her husband Paulino Galvan
were made to sign a certain document by Josefa Galvan “upon
the fraudulent misrepresentation that the said document was
only for purpose of enabling them, the co-owners of the parcels
of land in question, to have their separate tax declarations for
the respective portions owned by them so that they can pay
their respective real estate taxes separately, the said spouses
not knowing that the said document is a deed of sale for which
no consideration was even paid.’’ The plaintiffs further alleged
that Paulino Galvan could not have intented to sell his share
and participation over the lots in question during his lifetime as
he had no other residential lot to live in and there is no necessity
for him to sell the same as he and his wife had sufficient income
to sustain them. Besides, the undivided half share of Paulino
Galvan was worth around P22,500.00 so that he could not have
sold it for only P500.00. Wherefore, they prayed that the deed of
sale be declared null and void; that the plaintiffs be declared the
owners of four-sixths (4/6) of the undivided half share pertaining
to Paulino Galvan; that the defendants be ordered to pay the
amount of P1,500.00 as attorney’s fees; and to pay the costs of
suit.
The defendants filed their answer with counterclaim on
August 23, 1961 wherein they interposed negative and affirmative
defenses. As their affirmative defense, the defendants claim that
“they are the absolute and exclusive owners of whole parcels of
land described in the complaint for having acquired the portions
585
Art. 1410 CONTRACTS
belonging to their late father Paulino Galvan through legal and

valid conveyance and this fact is known to the plaintiffs long
before the filing of the complaint.”
Three years thereafter, or on August 24, 1964, but before
the case was tried, the defendants filed an amended answer with
the corresponding motion to admit it, which amended answer
contained an allegation that “the action of plaintiffs is barred by
the statute of limitations.”
The plaintiffs filed objections to the defendants’ motion
to amend their answer. Plaintiffs’ principal objection was their
contention that the defendants had waived the right to plead
the statute of limitations and were estopped from pleading it
by reason of the fact that they had tried to do so after the filing
of their answer to the complaint. The plaintiffs further contend
that the inclusion of the defense of prescription substantially
altered the defense.
Over plaintiffs’ objections, the trial court permitted the
defendants to amend their answer by adding the defense of
statute of limitations.
Then two more years later or on August 27, 1966, the
defendants filed a motion to dismiss the complaint upon the
ground that the action is barred by the statute of limitations
for the reason that the present action for the annulment of the
instrument of sale is based upon fraud which should be brought
within four (4) years from the time of the discovery of the same
in accordance with Article 1391 of the Civil Code; and fraud, as
a ground for annulment, shall be deemed to be discovered from
the date of the registration of the alleged fraudulent documents;
and considering that the deed of sale in question was registered
on August 4, 1955, while the action for its annulment was
commenced only on August 1, 1961, or after the lapse of more
than four (4) years from its registration with the Register of
Deeds, the action for annulment had prescribed.
The trial court sustained the defendants’ contention,
and, consequently, dismissed the complaint without costs, on
September 22, 1966. A motion for the reconsideration of this
order having been denied on November 2, 1966, the plaintiffs
interposed the present appeal.
On the question of extinctive prescription, the Supreme
Court, speaking through Justice H. Concepcion, ruled:
The other issue raised is whether or not the trial
court improperly dismissed the complaint on the ground
586
of prescription. In its order dated September 22, 1966,

dismissing the complaint, the trial court said:
“The complaint, among others, prays for the annul-
ment of document, which is a deed of sale dated August 3,
1955, purporting conveyance of the two parcels described
in the complaint in favor of defendants Josefa Galvan and
Natividad Galvan and Emilio Samson. Said document
(Exh. 1 for defendants) was registered on August 4, 1955
(Exhs. 1-A and 1-B). It is the contention of the defendants
that plaintiffs’ action has prescribed as the same was not
presented within four years from the registration of the
document.
“The court sustains defendants’ contention. The ba-
sis of the annulment is alleged fraud, and the action for
the annulment of the document should be brought within
4 (four) years from the discovery of fraud (Mauricio vs.
Villanueva, L-11072, September 24, 1959), and that such
discovery of fraud is deemed to have taken place when the
instrument was filed and registered with the Register of
Deeds and a new transfer certificate of title is issued in
the name of the vendee for the registration of the deed
constitutes constructive notice to the whole world (Diaz
vs. Gorricho, L-11229, March 29, 1958; Ignacio Gerona, et
al. vs. Carmen de Guzman, et al., L-19060, May 29, 1964).
“In view of the foregoing, the court resolves to dis-
miss as it hereby dismisses, the complaint without costs.”
The allegations of the complaint show, however, that the

plaintiffs’ action is to declare void and inexistent the deed of
sale executed by Paulino Galvan and Encarnacion Castillo on
August 3, 1955 in favor of Josefa and Natividad Galvan, upon the
grounds that: (a) there is fraud in securing the signatures of the
vendors in said deed of sale; and (b) there was no consideration
given at the time of the transaction. In other words, the
plaintiffs are seeking a judicial declaration that the deed of sale
in question is void ab initio, which action is impres-criptible.
The trial court erred, therefore, in dismissing the complaint for
the reasons stated.
WHEREFORE, the judgment appealed from is reversed
and the order of September 22, 1966, dismissing the complaint,
is hereby set aside. Let this case be remanded to the court of
origin for further proceedings. Without costs.
SO ORDERED.
587
Art. 1410 CONTRACTS
The concurring opinion of Justice Aquino to the above

decision is as follows:
I concur. The trial court committed a grievous error

in dismissing the complaint on the ground of prescription.
It erroneously assumed that plaintiffs’ cause of action is
for the annulment of a deed of sale on the ground of fraud.
In reality, plaintiffs’ action is to declare void or inexistent

the fictitious deed of sale of August 3, 1955 on the ground that
its consideration did not exist at the time of the transaction.
That action is imprescriptible (Arts. 1409[3] and 1410, Civil
Code).
Fraud was alleged in the complaint merely to show why
the alleged vendor (the septuagenarian father of the vendees)
signed the deed of sale.
The plaintiffs categorically alleged in paragraph 9 of the
complaint that no consideration was paid for the sale. They
prayed that the sale “be declared null and void.” (pp. 4-6, Record
on Appeal.) The thrust of the action is to secure a judicial
declaration that the sale is void ab initio.
A contract of sale is void and produces no effect whatsoever
where the price, which appears thereon as paid, has in fact never
been paid by the purchaser to the vendor (Arts. 1352 and 1353,
Civil Code; Ocejo, Perez and Co. vs. Flores and Bas, 40 Phil. 921;
Mapalo vs. Mapalo, L-21489, May 19, 1966, 17 SCRA 114, 122.)
Such a sale is nonexistent and cannot be considered
consummated. (Borromeo vs. Borromeo, 98 Phil. 432; Cruzado
vs. Bustos and Escaler, 34 Phil. 17; Garanciang vs. Garanciang,
L-22351, May 21, 1969, 28 SCRA 229.)
Plaintiffs’ cause of action is supported by the following
ultimate facts alleged in their complaint:
Paulino Galvan married twice. By his first marriage, he
begot two daughters, defendants Josefa Galvan and Natividad
Galvan. His second wife was Encarnacion Castillo with whom
he begot three children named Elisea, Patrocinio and Florangel.
Paulino Galvan was the owner of a one-half pro-indiviso
share in two parcels of land located at Burgos Street, Dagupan
City with a total area of 1,115 square meters. The other one-half
share is owned by Natividad Galvan and Josefa Galvan, his two
daughters of the first marriage.
588
Existing on those two lots is the conjugal house of the

spouses Paulino Galvan and Encarnacion Castillo. The house is
made of wood with galvanized iron roofing.
On August 3,1955, when Paulino Galvan, who did not
have much education, was already seventy-eight years old, his
daughter, Josefa, asked him and his wife, Encarnacion, also old
and not highly educated, to sign a document which, according to
Josefa, was necessary in order to have separate tax declarations
for their respective one-half portions of the two lots.
The Galvan spouses signed the document. Paulino Galvan
died on February 10, 1961 at the age of eighty-four years. He was
survived by his second wife and his five above-named children.
It was only after the death of Paulino Galvan that his
widow and their three children discovered that the document,
which Josefa had asked her father to sign, was a deed of sale,
which is in English, a language not known to the Galvan spous-
es.
Paulino Galvan could not have sold his one-half share in
the two lots for a measly sum of P500, the price stated in the
deed of sale, because in 1961 the two lots were worth P45,000,
at forty pesos a square meter. Paulino Galvan’s one-half share
was worth at least P22,500.
The action to declare the sale void was filed on August 1,
1961 against Natividad Galvan and Josefa Galvan. They pleaded
as a defense that the sale was valid. Later, they amended their
answer by pleading prescription. The trial court dismissed the
complaint on that ground.
The trial court overlooked the fact that the fraudulent
manner by which the signatures of the Galvan spouses in the
deed were obtained strengthens plaintiffs’ theory that the sale is
void or inexistent because it would appear that the said spouses
did not consent at all to the sale.
In the Mapalo case, supra, the spouses, Miguel Mapalo
and Candida Quiba, illiterate farmers, decided to donate
to Maximo Mapalo the brother of Miguel, the eastern half of
their 1,635-square meter residential land located in Manaoag,
Pangasinan.
However, they were deceived into signing on October
15, 1936 a deed of absolute sale for the entire land in favor of
Miguel Mapalo. Their signatures were procured by fraud. They
were made to believe by Maximo and the notary public that the
589
Art. 1410 CONTRACTS
document was a deed of donation covering the eastern half of

their land.
Although the deed of sale stated a consideration of P500
(as in the instant case), the said spouses did not receive anything
of value for the land. The spouses remained in possession of the
western half of the land.
On March 15, 1938 Maximo Mapalo registered the sale
and obtained a Torrens title for the entire land. On October
20, 1951 Maximo sold the entire land to Evaristo, Petronila,
Pacifico and Miguel, all surnamed Narciso. A transfer certificate
of title was issued to the Narcisos’ for the whole land. They took
possession of the eastern half of the land.
On February 7, 1952 the Narcisos’ sued the Mapalo
spouses. They prayed that they be declared the owners of the
entire land. They sought to recover possession of its western
portion. The Mapalo spouses filed a counterclaim, wherein they
prayed that the western half of the land be conveyed to them.
They alleged that their signatures to the deed of sale were
obtained through fraud. They sued the Narcisos’ in 1957. They
asked that the 1936 and 1951 deeds of sale be declared void as
to the western portion.
The Court of Appeals held that the sale was merely
voidable on the ground of fraud; that the action for annulment
should have been brought within four years from the registration
of the sale, and that, as that period had already expired, the
action had also prescribed.
This Court, reversing the decision of the Court of Appeals,
held that the 1936 sale was not merely voidable but was void or
inexistent and that the “inexistence of a contract is permanent
and incurable and cannot be the subject of prescription.’’ The
holding of the trial court that the Mapalo spouses should
be issued a Torrens title for the western half of the land was
affirmed.
The ruling in the Mapalo case is squarely applicable to
this case.
In the instant case, the plaintiffs, the widow and a child
of the first marriage, as compulsory heirs of Paulino Galvan,
the victim of the alleged fraud, have the right to sue to declare
the sale void because they were deprived of their legitime in
the estate of Paulino Galvan. (Art. 221[4], Civil Code; Reyes vs.
Court of Appeals, 95 Phil. 952; Armentia vs. Patriarca, L-18210,
December 29, 1966, 18 SCRA 1253, 1258-1260.)
590
VOID OR INEXISTENT CONTRACTS Arts. 1411-1412
It is interesting to note that the above case became the basis of

a problem asked in the Bar Examinations of 1979. The problem is as
follows:
“On the basis of a document entitled ‘Deed of Absolute

Sale’ a certain lot and building then leased by its owner, PC,
to JG with monthly rental of P1,000.00 was sold to, and thus
registered in the latter’s name. Six years after the issuance
of the title to JG, MC the sole heir of PC who had just died,
brought an action for recovery of the property alleging in his
complaint, among others, that PC then very old and with weak
eyesight was tricked by JG into signing the Deed of Absolute
Sale upon the fraudulent misrepresentation that said document
was only a renewal of the lease contract over the property; that
the price stated in the document is only P10,000.00 although the
property was then worth about P50,000.00. JG moved to dismiss
the action on the ground of prescription. Should the motion be
granted?’’
Also, in the case of Paluwagan ng Bayan Savings Bank vs.
King (172 SCRA 60), it was held that an action to declare the
nullity of a void judgment does not prescribe.
Art. 1411. When the nullity proceeds from the illegality

of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they
shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code
relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties
is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise.34
Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, the
following rules shall be observed:
(1) When the fault is on the part of both contracting
parties, neither may recover what he has given by virtue
34
Art. 1410 in relation to Art. 1409(3) of the Civil Code.
591
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 con-
tract, 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 with
his promise.35
Principle of In Pari Delicto. — When the defect of a void
contract consists in the illegality of the cause or object of the contract,
and both of the parties are at fault or in pari delicto, the law refuses
them every remedy and leaves them where they are. This rule which
is embodied in Arts. 1411 and 1412 of the Code is what is commonly
known as the principle of in pari delicto.
Thus, where the contract involves a violation of our coast-wise
trade law,36 or of our contraband laws, such as the importation of
silver into this country,37 and both of the contracting parties are in
pari delicto, it is evident that under Art. 1411 of the Code neither
party would have any remedy against the other. The rule is expressed
in the maxims: “Ex dolo malo non oritur actio’’ and “In pari delicto
potior est conditio defendantis.’’ The law will not aid either party
to an illegal agreement it leaves them where they are. Of course,
this presupposes that the fault of one party is more or less equal or
equivalent to the fault of the other party.38
Rodriguez vs. Rodriguez

20 SCRA 908
This is an appeal by Concepcion Felix Vda. de Rodriguez

from the decision of the Court of First Instance of Bulacan in
Civil Case No. 2565, which she commenced on May 28, 1962,
to secure declaration of nullity of two contracts executed on
January 24, 1934 and for the recovery of certain properties.
35
36
Perez vs. Herranz, 7 Phil. 693.
37
Iribar vs. Millat, 5 Phil. 362. For cases illustrating Art. 1411, see Go Chioco vs.
Martinez, 45 Phil. 256; Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141.
38
Bough vs. Cantiveros, 40 Phil. 209.
592
The facts of this case may be briefly stated as follows:

Concepcion Felix, widow of the late Don Felipe
Calderon, and with whom she had one living child,
Concepcion Calderon, contracted a second marriage on
June 20, 1929, with Domingo Rodriguez, a widower with
four children by a previous marriage, named Geronimo,
Esmeragdo, Jose and Mauricio, all surnamed Rodriguez.
There was no issue in this second marriage.
Prior to her marriage to Rodriguez, Concepcion
Felix was the registered owner of 2 fishponds located in
the barrio of Babañgad, municipality of Bulacan, Bulacan
province, Nos. 605 and 807. Under the date of January 24,
1934, Concepcion Felix appeared to have executed a deed of
sale conveying ownership of the aforesaid properties of her
daughter, Concepcion Calderon, for the sum of P2,500.00,
which the latter in turn appeared to have transferred
to her mother and stepfather by means of a document
dated January 27, 1934. Both deeds, notarized by Notary
Public Jose D. Mendoza, were registered in the office of
the Register of Deeds of Bulacan on January 29, 1934, as
a consequence of which, the original titles were cancelled
and TCT Nos. 13815 and 13816 were issued in the names
of the spouses Domingo Rodriguez and Concepcion Felix.
On March 6, 1953, Domingo Rodriguez died intestate,
survived by the widow, Concepcion Felix, his children Geronimo,
Esmeragdo, and Mauricio and grandchildren Oscar, Juan and
Ana, surnamed Rodriguez, children of a son, Jose, who had
predeceased him.
On March 16, 1953, the above-named widow, children
and grandchildren of the deceased entered into an extrajudicial
settlement of his (Domingo’s) estate, consisting of one-half of
the properties allegedly belonging to the conjugal partnership.
Among the properties listed as conjugal were two parcels of
land in Bulacan, Bulacan, which, together with another piece of
property, were divided among the heirs in this manner:
“WHEREAS, the parties have furthermore agreed
that the fishpond covered by TCT Nos. 13815, 13816, and
24109 of the Office of the Register of Deeds of Bulacan,
containing an area of 557,971 sq.m., which is likewise
the conjugal property of the deceased and his surviving
spouse; 1/2 of the same or 278,985.50 sq.m. belongs to
said Concepcion Felix Vda. de Rodriguez, as her share
in the conjugal property; and 3/4 of the remaining half
593
or 209,239.125 sq.m. are transferred in full ownership to

Geronimo Rodriguez. Esmeragdo Rodriguez and Mauricio
Rodriguez, share and share alike, while the other 1/4 or
69,746.375 sq.m. of the said remaining half goes in equal
shares to Oscar Rodriguez, Juan Rodriguez and Ana
Rodriguez.”
As a result of this partition, TCT Nos. 13815 and 13816
were cancelled and TCT Nos. T-11431 and T-14432 were issued
in the names of the said heirs of the deceased.
On March 23, 1953, in a power of attorney executed by the
children and grandchildren of Domingo Rodriguez, Concepcion
Felix Vda. de Rodriguez was named their attorney-in-fact,
authorized to manage their shares in the fishponds (Exh. 4).
On July 2, 1954, the heirs ended their co-ownership by
executing a deed of partition, dividing and segregating their
respective shares in the properties, pursuant to a consolidation
and subdivision plan (PCS-3702), in accordance with which,
Concepcion Felix Vda. de Rodriguez obtained TCT No. T-12910,
for the portion pertaining to her (Exh. L), while TCT No. T-12911
was issued to the other heirs, for their shares. This latter title
was subsequently replaced by TCT No. 16660 (Exh. M).
On October 12, 1954, the Rodriguez children executed
another document granting unto the widow lifetime usufruct
over one-third of the fishpond which they received as hereditary
share in the estate of Domingo Rodriguez, which grant was
accepted by Concepcion Felix Vda. de Rodriguez.
Then, in a contract dated December 15, 1961, the widow
appeared to have leased from the Rodriguez children and
grandchildren the fishpond (covered by TCT No. 16660) for a
period of 5 years commencing August 16, 1962, for an annual
rental of P7,161.37 (Exh. 5).
At about this time, it seemed that the relationship between
the widow and her stepchildren had turned for the worse. Thus,
when she failed to deliver to them the balance of the earnings
of the fishponds, in the amount of P3,000.00, her stepchildren
endorsed the matter of their lawyer who, on May 16, 1962, sent
a letter of demand to the widow for payment thereof. On May
28, 1962, Concepcion Felix Vda. de Rodriguez filed the present
action in the Court of First Instance of Manila naming as
defendants, Geronimo Rodriguez, Esmeragdo Rodriguez, Oscar
Rodriguez, Concepcion Bautista Vda. de Rodriguez, as guardian
of the minors Juan and Ana Rodriguez, and Antonio Diaz de
594
Rivera and Renato Diaz de Rivera, as guardians of the minors

Maria Ana, Mercedes, Margarita, Mauricio, Jr. and Domingo
(children of Mauricio Rodriguez who had also died).
The action to declare null and void the deeds of transfer
of plaintiff’s properties to the conjugal partnership was based
on the force and pressure on her; that the conveyances of
the properties — from plaintiff to her daughter and then to
the conjugal partnership of plaintiff and her husband — are
both without consideration; that plaintiff participated in the
extrajudicial settlement of estate (of the deceased Domingo
Rodriguez) and in other subsequent deeds or instruments
involving the properties in dispute, on the false assumption
that the said properties had become conjugal by reason of the
execution of the deeds of transfer in 1934, then laboring under
the same false assumption, plaintiff delivered to defendants, as
income of the properties from 1953 to 1961, the total amount of
P56,976.58. As alternative cause of action, she contented that
she would claim for her share, as surviving widow, of 1/5 of the
properties in controversy, should such properties be adjudged
as belonging to the conjugal partnership. Thus, plaintiff prayed
that the deeds of transfer mentioned in the complaint be declared
fictitious and simulated; that the “Extrajudicial Settlement of
Estate’’ be also declared null and void; that TCT No. 16660 of
the Registry of Deeds of Bulacan be cancelled and another one
be issued in the name of plaintiff, Concepcion Felix Vda. de
Rodriguez; that defendants be ordered to pay plaintiff the sum
of P56,976.58, with legal interest thereon from the date of the
filing of the complaint, and for appropriate relief in connection
with her alternative cause of action.
In their separate answers, defendants not only denied
the material allegations of the complaint, but also set up
as affirmative defenses lack of cause of action, prescription,
estoppel and laches. As counterclaim, they asked for payment
by the plaintiff of the unpaid balance of the earnings of the land
up to August 15, 1962 in the sum of P3,000.00, for attorney’s
fees and expenses of litigation.
On October 5, 1963, judgment was rendered for the
defendants. In upholding the validity of the contracts, the court
found that although the two documents, Exhibits A and B,
were executed for the purpose of converting plaintiff’s separate
properties into conjugal assets of the marriage with Domingo
Rodriguez, the consent of the parties thereto was voluntary,
contrary to the allegations of plaintiff and her witness. The court
also ruled that having taken part in the questioned transactions,
595
plaintiff was not the proper party to plead lack of consideration

to avoid the transfers; that contracts without consideration are
not inexistent, but are only voidable, following the ruling in
the case of Concepcion vs. Sta. Ana (87 Phil. 787); that there
was ratification or confirmation by the plaintiff of the transfer
of her property, by her execution (with the other heirs) of the
extrajudicial settlement of estate; that being a voluntary party
to the contracts, Exhibits A and B, plaintiff cannot recover the
properties she gave thereunder. Plaintiff’s alternative cause of
action was also rejected on the ground that action for rescission
of the deed of extrajudicial settlement should have been filed
within 4 years from its execution (on March 16, 1953).
From the decision of the Court of First Instance, plaintiff
duly appealed to this Court, insisting that the conveyances in
issue were obtained through duress, and were inexistent, being
simulated and without consideration.
Speaking through Justice J.B.L. Reyes, the Supreme
Court held:
We agree with the trial Court that the evidence
is not convincing that the contracts of transfer from
Concepcion Felix to her daughter, and from the latter her
mother and stepfather were executed through violence
or intimidation. The charge is predicated solely upon the
improbable and biased testimony of appellant’s daughter,
Concepcion C. Martelino, whom the trial court refused
to believe, considering that her version of violence and
harassment was contradicted by Bartolome Gualberto,
who had lived with the Rodriguez spouses from 1917 to
1953, and by the improbability of Rodriguez threatening
his stepdaughter in front of the Notary Public who
ratified her signature. Furthermore, as pointed out by the
appealed decision, the charge of duress should be treated
with caution considering that Rodriguez had already died
when the suit was brought for duress, like fraud, is not to
be lightly laid at the door of men already dead. (Cf. Prevost
vs. Gratz, 6 Wheat. [U.S.] 481, 498; Sinco vs. Longa, 51
Phil. 507.)
What is more decisive is that duress being merely a vice
or defect of consent, an action based upon it must be brought
within four years after it has ceased;39 and the present action
39
Article 1301 of the Civil Code of 1889, in force when the assailed contracts were
executed (1934).
596
was instituted only in 1962, twenty-eight (28) years after the

intimidation is claimed to have occurred, and no less than nine
(9) years after the supposed culprit died (1953). On top of it,
appellant entered into a series of subsequent transactions with
appellees that confirmed the contracts that she now tries to set
aside. Therefore, this cause of action is clearly barred.
Appellant’s main stand in attacking the conveyances in
question is that they are simulated or fictitious, and inexistent
for lack of consideration. We shall examine each purported
defect separately.
The charge of simulation is untenable, for the characteristic
of simulation is the fact that the apparent contract is not really
desired or intended to produce legal effects or in any way alter
the juridical situation of the parties. Thus, where a person, in
order to place his property beyond the reach of his creditors,
simulates a transfer of it to another, he does not really intend
to divest himself of his title and control of the property, hence,
the deed of transfer is but a sham. But appellant contends
that the sale by her to her daughter, and the subsequent sale
by the latter to appellant and her husband, the late Domingo
Rodriguez, were done for the purpose of converting the property
from paraphernal to conjugal, thereby vesting a half interest in
Rodriguez, and evading the prohibition against donations from
one spouse to another during coverture (Civil Code of 1889, Art.
1334). If this is true, then the appellant and her daughter must
have intended the two conveyances to be real and effective; for
appellant could not intend to keep the ownership of the fishponds
and at the same time vest half of them in her husband. The
two contracts of sale then could not have been simulated, but
were real and intended to be fully operative, being the means to
achieve the result desired.
Nor does the intention of the parties to circumvent by
these contracts the law against donations between spouses
make them simulated ones.
Ferrara, in his classic book “La Simulacion de los Negocios
Juridicos” (Sp. trans, 1926), pp. 95, 105, clearly explains the
difference between simulated transactions and transactions in
fraudem legis:
Otra figura que debe distinguirse de la simulacion es
el fraus legis. Tambien aqui se di una gran confucion que
persiste aun en la jurisprudencia, apegada tenazmente
a antiguos errores. Se debe a Bahr el haber defendido
con vigor la antitesis teorica que existe entre negocio
597
fingido y haber atacada la doctrina comun que hacia una

mescolanza con los dos conceptos.
“Se confunde — dice (2) —, el negocio in fraudem
legis con el negocio simulado; aunque la naturaleza de
ambos sea totalmente diversa. El negocio fraudulento no
es, en absoluto, un negocio aparante. Es perfectamente
serio: se quiere realmente. Es mas, se quiere tal
como se ha realizado, con todas las consecuencias que
corresponden a la forma juridica elegida. Muchas veces,
estas consecuencias con incomodas para una u otra de
las partes, aunque serian mucho mas incomodas las
consecuencias que llevaria consigo el acto prohibido.
xxx xxx xxx
“El resultado de las precedentes investigaciones
es el siguiente: el negocio simulado quiere producir una
apariencia; el negocio fraudulente, una realidad; los
negocios simulados son ficticios, no queridos; los negocios
in fraudem son serios, reales, y realizados en tal forma
por las partes para consequir un resultado prohibido: la
simulacion nunca es un medio para eludir la ley, sino
para ocultar su violacion. La transgresion del contenido
verbal e inmediato de la norma se encubre bajo el manto
de un negocio licito, lo cual no altera el caracter del contra
legem agere. Tan verdad es, que si se ha redactado una
contraescritura que documenta y declara la verdadera
naturaleza del negocio realizado, no queda mas que aplicar
pura y simplemente la prohibicion.
“Tambien el fraude quiere perjudicar la ley, pero
emplea para ello medios diversos y sigue distintos
caminos. No oculta el acto eterior, sino que lo deja claro y
visible, tratando de huir sesgadamente de la aplicacion de
la ley merced a una artistica y sabia combinacion de varios
medios juridicos no reprobados.”
Appellant invokes our decision in Vasquez vs. Porta, 98
Phil. 490, but to no purpose. The mortgage and foreclosure sale
involved in that case were typical simulations, merely apparent
but not really intended to produce legal effects, as proved by
the Court’s finding that the alleged creditor and buyer at the
foreclosure sale “Porta himself ostensibly acknowledged by
his inertia in allowing the doctor (alleged mortgagor debtor)
to exercise dominical power thereon without any protest on
his part “(cas. cit., p. 495). Not only this, but the mortgagor’s
wife, when her husband died “found among his papers Porta’s
598
cancellation of the mortgage in his favor and the draft of the

complaint for foreclosure.’’ Plainly, the precedent cited is here
inapplicable.
Were the two conveyances from appellant to her daughter
and from the latter to the spouses Rodriguez void ab initio or
inexistent for lack of consideration? We do not find them to be
so. In the first transaction, the price of P2,500.00 is recited in
the deed itself (Exh. A); in the second (Exh. B), the consideration
set forth is P3,000.00. Now, Article 1274 of the Civil Code of
1889 (in force when the deeds were executed) provided that —
“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.’’ (Italics supplied.)
Since in each conveyance the buyer became obligated to
pay a definite price in money, such undertaking constituted in
themselves actual causa or consideration for the conveyance
of the fishponds. That the prices were not paid (assuming ad
arguendo that Concepcion Martelino’s testimony to this effect
is true) does not make the sales inexistent for want of causa.
As ruled in Enriquez de la Cavada vs. Diaz, 37 Phil. 982, “the
consideration (causa) need not pass from one (party) to the other
at the time the contract is entered into. x x x The consideration
need not be paid at the time of the promise. The one promise is
a consideration for the other.’’
What would invalidate the conveyances now under scru-
tiny is the fact that they were resorted to in order to circumvent
the legal prohibition against donations between spouses con-
tained in Article 1334, paragraph 1, of the Civil Code of 1889,
then prevailing. That illegal purpose tainted the contracts, for
as held by the Spanish Tribunal Supremo in its decision of 2
April 1941: “ha de ser reputado ineficaz, por exigencias inelud-
ibles del caracter social y moral del Derecho, todo contrato que
persiga un fin ilicito o inmoral, sea cualquiera el medio em-
pleado por los contratantes para lograr esa finalidad, no justi-
ficada por un interes digno de ser socialmente protegido.’’ The
illicit purpose then becomes illegal causa within the terms of
the old Civil Code, for as declared by the same Spanish Court
in its decision of 14 December 1940 — “toda vez que to que car-
acteriza fundamentalmente la ilicitud de la causa es la lesion de
un interes general juridico o moral,’’ a ruling reiterated in the
decision of 2 April 1941 when the Court ruled: “El concepto de
la causa ilicita, tal como la desenvuelve y aplica con gran ampli-
tud y flexibilidad la doctrina moderna, permite cobijar, no solo
599
las covenciones ilicitas por razon de su objeto o de su motivo x x

x sino tambien multiples convenciones que no encerrando en si
ningun de directa antijuricidad son ilicitas por el matiz in moral
que reviste la operacion en su conjunto x x x.’’
Unfortunately for herein appellant, in contracts invalidat-
ed by illegal subject matter or illegal causa, Articles 1305 and
1306 of the Civil Code then in force apply rigorously the rule in
pari delicto non oritur actio, denying all recovery to the guilty
party inter se. And appellant is clearly as guilty as her husband
in the attempt to evade the legal interdiction of Article 1334 of
the Code, already cited. Wherefore, her present action to rein-
vindicate the conveyed properties was correctly repulsed by the
Court below.
“ART. 1306. If the act which constitutes the illicit con-
sideration is neither a crime nor a misdemeanor, the following
rules shall be observed:
1. When both parties are guilty, neither of them can
recover what he may have given by virtue of the contract, or
enforce the performance of the undertaking of the other party;
xxx xxx xxx
That Article 1306 applies to cases where the nullity arises
from the illegality of the consideration of the purpose of the
contract was expressly recognized by this Supreme Court in
Gustilo vs. Maravilla. 48 Phil. 449-450.40
Finally, it cannot be denied that plaintiff-appellant had
knowledge of the nullity of the contract for the transfer of her
properties in 1934, because she was even a party thereto. And yet,
her present action was filed only on May 28, 1962 and after the
breaking up of friendly relations between her and defendants-
appellees. Appellant’s inaction to enforce her right, for 28 years,
cannot be justified by the lame excuse that she assumed that the
transfer was valid. Knowledge of the effect of that transaction
would have been obtained by the exercise of diligence. Ignorance
which is the effect of inexcusable negligence, it has been said, is
no excuse for laches. (Go Chi Gun, etc., et al. vs. Co Cho, et al.,
G.R. No. L-5208, Feb. 28, 1955.) Even assuming for the sake
of argument that appellant held her peace, during the lifetime
of her husband, out of legitimate fear for her life, there is no
justification for her failure to bring the proper action after his
40
See also Liguez vs. Court of Appeals, 102 Phil. 581-582; Perez vs. Herranz, 7
Phil. 695.
600
death in 1953. Instead, she entered into a series of agreements

with herein appellees, the children of her husband by a prior
marriage, of partition, usufruct and lease of their share in
the fishponds, transactions that necessarily assumed that
Rodriguez has acquired one-half of the litigated fishponds. In
the circumstances, appellant’s cause has become a stale demand
and her conduct placed her in estoppel to question the validity
of the transfer of her properties. (Manila, et al. vs. Galvan, et
al., G.R. No. L-23507, May 24, 1967; Perez vs. Herranz, 7 Phil.
695-696.)
In view of the foregoing, the decision appealed from is
affirmed. Costs against appellant Concepcion Felix Vda. de
Rodriguez.
So ordered.
It must be observed, however, that the principle of in pari

delicto applies only to cases of existing contracts with an illegal
cause or object and not to simulated or fictitious contracts nor to
those which are inexistent for lack of an essential requisite such as
cause or consideration.41 In other words, the principle can have no
application to inexistent contracts, since such contracts are always
open to attack even by the parties thereto. But where the contract is
void because of the illegality of the cause or the object, the principle
is applicable since the Code in Arts. 1411 and 1412 commands that
neither party thereto may be heard to invoke its unlawful character
as a ground for relief.42 It must also be observed that the illegality
must be with respect to the cause or the object of the contract and
not with respect to the motives of the contracting parties. Thus, if
the plaintiff transfers to the defendant a parcel of land by means of
a fictitious deed of sale for the purpose of averting its attachment by
his creditors, it is clear that the principle, enunciated in Art. 1412 of
the Civil Code is not applicable, since what is illegal is the motive of
the transferor and not the object or the cause of the contract.43
Idem; Effect if only one party is at fault. — When only one
of the contracting parties is at fault, we must have to distinguish
between a case where the contract has already been executed
and one where it is merely executory. If the contract has already
41
Vasquez vs. Porta, 98 Phil. 490.
42
Liguez vs. Court of Appeals, supra.
43
Gonzales vs. Trinidad, 67 Phil. 682.
601
been executed, the guilty party is barred from recovering what he

has given to the other party by reason of the contract. Although
repugnant, “the law deems it more repugnant that a party should
invoke his own guilt as a reason for relief from a situation which
he had deliberately entered.’’44 The innocent party, however, may
demand for the return of what he has given.45 On the other hand, if
the contract is merely executory, it is clear that it cannot produce
any legal effect whatsoever. Neither of the contracting parties can
demand for the fulfillment of any obligation arising from the contract
nor be compelled to comply with such obligation.46
Idem; Exceptions. — The principle of pari delicto is not,
however, absolute in character. The Civil Code recognizes the
following exceptions:
(1) Payment of usurious interest. In such case, the law allows
the debtor to recover the interest paid in excess of that allowed by
the usury laws, with interest thereon from the date of payment.47
(2) Payment of money or delivery of property for an illegal
purpose, where the party who paid or delivered repudiates the
contract before the purpose has been accomplished, or before any
damage has been caused to a third person. In such case, the courts
may allow such party to recover what he has paid or delivered, if the
public interest will thus be subserved.48
(3) Payment of money or delivery of property by an
incapacitated person. In such case, the courts may allow such person
to recover what he has paid or delivered, if the interest of justice so
demands.49
(4) Agreement or contract which is not illegal per se but is
merely prohibited by law, and the prohibition is designed for the
protection of the plaintiff. In such case, such plaintiff, if public policy
is thereby enhanced, may recover what he has paid or delivered.50
44
Liguez vs. Court of Appeals, supra.
45
46
Ibid.
47
48
49
50
602
(5) Payment of any amount in excess of the maximum price

of any article or commodity fixed by law. In such case, the buyer may
recover the excess.51
(6) Contract whereby a laborer undertakes to work longer
than the maximum number of hours fixed by law. In such case, the
laborer may demand for overtime pay.52
(7) Contract whereby a laborer accepts a wage lower than the
minimum wage fixed by law. In such case, the laborer may demand
for the deficiency.53
Art. 1413. Interest paid in excess of the interest allowed

by the usury laws may be recovered by the debtor, with
interest thereon from the date of the payment.54
Recovery by Debtor of Usurious Interest. — The first

exception to the principle of pari delicto as enunciated in Arts. 1411
and 1412 is given in the above article.
It must be noted, however, that the rule enunciated in this
article, although consistent with the rule enunciated in Art. 1961,
which states that “usurious contracts shall be governed by the
Usury Law and other special laws so far as they are not inconsistent
with this Code,” is inconsistent with the rule enunciated in Art.
1175, which states that “usurious transactions shall be governed
by special laws,” and Art. 1957, which states that “the borrower
may recover in accordance with the laws on usury.’’ Insofar as the
amount recoverable by the debtor from the creditor is concerned, it
is quite evident that there is absolute incompatibility between the
provision of Art. 1961 which upholds the rule stated in Art. 1413,
and the provisions of Arts. 1175 and 1957, which incorporate by
reference the rule stated in Sec. 6 of the Usury Law (Act No. 2655).
Under Art. 1413, the debtor may recover the interest paid in excess
of the interest allowed by the Usury Law, with interest thereon from
the date of payment; under Sec. 6 of the Usury Law, on the other
hand, the debtor may recover the whole interest paid with costs and
51
52
53
54
New provision.
603
Art. 1413 CONTRACTS
attorney’s fees in such sum as may be allowed by the court in an

action against the creditor if such action is brought within two years
after such payment.
The above-stated conflict, however, is more apparent than
real. Thus, in Angel Jose Warehousing Co. vs. Chelda55 the Supreme
Court declared that, in reality, there is no conflict between the Civil
Code and the Usury Law. Under the latter, in Sec. 6, the debtor may
recover the whole interest paid. Under the Civil Code, in Art. 1413,
“interest paid in excess of the interest allowed by the usury laws
may be recovered by the debtor, with interest thereon from the date
of payment.” When the Code speaks of “interest paid in excess of
that allowed by the usury law,’’ it means the whole usurious interest.
Thus, if the loan is P1,000.00, with interest of 20% per annum or
P200 per year, and the borrower paid P200, the whole P200 is the
usurious interest. The only change effected, therefore, by Art. 1413
of the Civil Code is not to provide for the recovery of the interest
paid in excess of that allowed by law, which the Usury Law already
provided for, but to add that the same can be recovered “with interest
thereon from the date of payment.”
The Angel Jose Warehousing Co. case not only resolved all
doubts with respect to the apparent conflict between Art. 1413 of
the New Civil Code and Sec. 6 of the Usury Law; it also resolved all
doubts with respect to the question as to whether or not the creditor
will be allowed to recover the amount loaned. The factual backdrop
of this case is as follows: The action is one for the recovery of an
unpaid loan, with legal interest from the filing of the complaint,
plus attorney’s fees. Defendants interposed the defense that since
the loan is usurious and therefore void, the principle of pari delicto
as enunciated in Art. 1411 of the New Civil Code is applicable. To
strengthen this defense, they invoked the provisions of Arts. 1413 and
1961 of the Civil Code as well as the case of Sebastian vs. Bautista56
wherein the Court of Appeals held that in usurious contract,
although the Civil Code in Art. 1413 provides for an exception to the
rule of pari delicto in the case of the debtor, it does not provide for an
exception in the case of the creditor. Is this correct? According to the
Supreme Court, this is not correct. A contract of loan with usurious
interest consists of principal and accessory stipulation; the principal
55
23 SCRA 119.
56
58 Off. Gaz. 3146. See also People vs. Masangkay, 58 Off. Gaz. 3565.
604
one is to pay the debt; the accessory is to pay interest thereon. These
two stipulations are divisible. According to Art. 1420 of the New
Civil Code, “in case of a divisible contract, if the illegal terms can
be separated from the legal ones, the latter may be enforced.” In a
simple contract of loan with usurious interest, the prestation of the
debtor to pay the principal debt is not illegal; what is illegal is to
pay the stipulated interest. Hence, being separable, the latter only
should be deemed void.
Plaintiff is therefore entitled to the recovery of the principal of
the loan plus legal interest of 6% per annum from the filing of the
complaint pursuant to Art. 2209 of the New Civil Code. Attorney’s
fees, however, cannot be recovered since there is no showing that
the case falls under any of the exceptions provided for in Art. 2208
of the New Civil Code. Besides, defendants had reasons to resist
the claim since there was yet no definite ruling on the point of law
involved herein in the light of the New Civil Code.57
The above doctrine was reiterated in Briones vs. Cammayo.
In order that we shall have a complete picture of the case, we are
reproducing the entire decision penned by Justice Dizon, including
the dissenting opinion penned by Justice Castro and the concurring
opinion penned by Justice Barredo.
Briones vs. Cammayo

41 SCRA 404
DIZON, J.:
On February 22, 1962, Aurelio G. Briones filed an action
in the Municipal Court of Manila against Primitivo, Nicasio,
Pedro, Hilario and Artemio, all surnamed Cammayo, to recover
from them, jointly and severally, the amount of P1,500.00,
plus damages, attorney’s fees and costs of suit. The defendants
answered the complaint with specific denials and the following
special defenses and compulsory counterclaim:
“x x x;
By way of —
57
Angel Jose Warehousing Co. vs. Chelda Enterprises, supra.
605
Art. 1413 CONTRACTS
SPECIAL DEFENSES
Defendants Allege:
4. Defendants executed the real estate mortgage, Annex
‘A’ of the complaint, as security for the loan of P1,200.00 given to
defendant Primitivo O. Cammayo upon the usurious agreement
that defendant pays to the plaintiff and that the plaintiff reserve
and secure, as in fact plaintiff reserved and secured himself, out
of the alleged loan of P1,500.00 as interest the sum of P300.00
for one year;
5. That although the mortgage contract, Annex ‘A’ was
executed for securing the payment of P1,500 for a period of
one year, without interest, the truth and the real fact is that
plaintiff delivered to the defendant Primitivo P. Cammayo only
the sum of P1,200.00 and withheld the sum of P300.00 which
was intended as advance interest for one year;
6. That on account of said loan of P1,200.00, defendant
Primitivo P. Cammayo paid to the plaintiff during the period
from October, 1955 to July, 1956 the total sum of P330.00 which
plaintiff, illegally and unlawfully refuse to acknowledge as part
payment of the account but as in interest of said loan for an
extension of another term of one year;
7. That said contract of loan entered into between
plaintiff and defendant Primitivo P. Cammayo is a usurious
contract and is contrary to law, morals, good customs, public
order or public policy and is, therefore, inexistent and void from
the beginning (Art. 1407, Civil Code);
And as —
COMPULSORY COUNTERCLAIM
Defendants replead all their allegations in the preceding

paragraphs;
8. That plaintiff, by taking and receiving interest in
excess of that allowed by law, with full intention to violate the
law, at the expense of the defendants, committed a flagrant
violation of Act 2655, otherwise known as the Usury Law,
causing the defendants damages and attorney’s fees, the amount
of which will be proven at the trial;
9. That this is the second time this same case is filed
before this court, the first having been previously filed and
606
docketed in this court as Civil Case No. 75845 (Branch VII) and
the same was dismissed by the Court of First Instance (Branch of
Manila) on July 13, 1961 in Civil Case No. 43121 (Branch XVII)
and for repeatedly bringing this case to the court, harassing
and persecuting defendants in the manner, defendants have
suffered mental anguish and anxiety for which they should be
compensated for moral damages.’’
On September 7, 1962, Briones filed an unverified reply
in which he merely denied the allegations of the counterclaim.
Thereupon, the defendants moved for the rendition of a
summary judgment on the ground that, upon the record, there
was no genuine issue of fact between the parties. The Municipal
Court granted the motion and rendered judgment sentencing
the defendants to pay the plaintiff the sum of P1,500.00, with
interests thereon at the legal rate from February 22, 1962, plus
the sum P150.00 as attorney’s fees. From this judgment, the
defendants appealed to the Court of First Instance of Manila
where, according to the appealed decision, “defendant has
asked for summary judgment and plaintiff has agreed to the
same.” (Record on Appeal, p. 21.) Having found the motion for
summary judgment to be in order, the court then proceeded to
render judgment as follows:
“Judgment is, therefore, rendered, ordering defen-
dant to pay plaintiff the sum of P1,180.00 with interest
thereon at the legal rate from October 16, 1962 until
fully paid. This judgment represents defendant’s debts of
P1,500.00 less usurious interest of P120.00 and the addi-
tional sum of P200.00 as attorney’s fees or a total deduc-
tion of P320.00. Plaintiff shall pay the costs.”
In the present appeal defendants claim that the trial
court erred in sentencing them to pay the principal of the loan
notwithstanding its finding that the same was tainted with
usury, and erred likewise in not dismissing the case.
It is now disputed that the contract of loan in question was
tainted with usury. The only questions to be resolved, therefore,
are firstly, whether the creditor is entitled to collect from the
debtor the amount representing the principal obligation;
secondly, in the affirmative, if he is entitled to collect interests
thereon, and if so, at what rate.
The Usury Law penalizes any person or corporation who,
for any loan or renewal thereof or forbearance, shall collect or
receive a higher rate or greater sum or value than is allowed
by law, and provides further that, in such case, the debtor may
607
Art. 1413 CONTRACTS
recover the whole interest, commissions, premiums, penalties

and surcharges paid or delivered, with costs and attorney’s fees,
in an appropriate action against his creditor, within two (2)
years after such payment or delivery. (Section 6, Act 2655, as
amended by Acts 3291 and 3998.)
Construing the above provision, We held in Go Chioco
vs. Martinez, 45 Phil. 256, that even if the contract of loan is
declared usurious the creditor is entitled to collect the money
actually loaned and the legal interest due thereon.
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this
Court likewise declared that, in any event, the debtor in a
usurious contract of loan should pay the creditor the amount
which he justly owes him, citing in support of this ruling its
previous decisions in Go Chioco, supra, Aguilar vs. Rublato, et
al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.
In all the above cited cases it was recognized and held that
under Act 2655 a usurious contract is void; that the creditor
has no right of action to recover the interest in excess of the
lawful rate; but that this did not mean that the debtor may keep
the principal received by him as loan — thus unjustly enriching
himself to the damage of the creditor.
Then in Lopez and Javelona vs. El Hogar Filipino, 47
Phil. 249, We also held that the standing jurisprudence of
this Court on the question under consideration was clearly to
the effect that the Usury Law, by its letter and spirit, did not
deprive the lender of his right to recover from the borrower
the money actually loaned to and enjoyed by the latter. This
Court went further to say that the Usury Law did not provide
for the forfeiture of the capital in favor of the debtor in usurious
contracts, and that while the forfeiture might appear to be
convenient as a drastic measure to eradicate the evil of usury,
the legal question involved should not be resolved on the basis
of convenience.
Other cases upholding the same principle are Palileo vs.
Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31,
1964, 10 SCRA 199, 200-202. In the latter, We expressly held
that when a contract is found to be tainted with usury “the only
right of the respondent (creditor) x x x was merely to collect the
amount of the loan, plus interest due thereon.’’
The view has been expressed, however, that the ruling
thus consistently adhered to should now be abandoned because
Article 1957 of the new Civil Code — a subsequent law —
608
provides that contracts and stipulations, under any cloak or

device whatever, intended to circumvent the laws against usury,
shall be void, and that in such cases “the borrower may recover
in accordance with the laws on usury.’’ From this the conclusion
is drawn that the whole contract is void and that, therefore, the
creditor has no right to recover — not even his capital.
The meaning and scope of our ruling in the cases
mentioned heretofore is clearly stated and the view referred to
in the preceding paragraph is adequately answered, in Angel
Jose, etc. vs. Chelda Enterprises, etc. (L-25704, April 24, 1968).
On the question of whether a creditor in a usurious contract
may or may nor recover the principal of the loan, and, in the
affirmative, whether or not he may also recover interest thereon
at the legal rate, We said the following:
“x x x.
The court found that there remained due from

defendants an unpaid principal amount of P20,287.50;
that plaintiff charged usurious interests, of which
P1,048.15 has actually been deducted in advance by
plaintiff from the loan; that said amount of P1,048.15
should therefore be deducted from the unpaid principal of
P20,287.50 leaving a balance of P19,247.35 still payable
to the plaintiff. Said court held that notwithstanding
the usurious interests charged, plaintiff is not barred
from collecting the principal of the loan or its balance
of P19,247.35. Accordingly, it stated in the dispositive
portion of the decision, thus:
“WHEREFORE, judgment is hereby rendered,
ordering the defendant partnership to pay to the plaintiff
the amount of P19,247.35, with legal interest thereon
from May 29, 1964 until paid, plus an additional sum
of P2,000.00 as damages for attorney’s fee; and, in case
the assets of defendant partnership be insufficient to
satisfy this judgment in full, ordering the defendant
David Syjueco to pay to the plaintiff one-half (1/2) of the
unsatisfied portion on this judgment.
“With costs against the defendants.”
Appealing directly to Us, defendants raise two
questions of law: (1) In a loan with usurious interest, may
the creditor recover the principal of the loan? (2) Should
attorney’s fees be awarded in plaintiff’s favor?
609
Art. 1413 CONTRACTS
“Great reliance is made by appellants on Art. 1411 of

the New Civil Code which states:
“ART. 1411. When the nullity proceeds from the
illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in
pari delicto, they shall have no action against each other,
and both shall be prosecuted. Moreover, the provisions
of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or
the price of the contract.”
“This rule shall be applicable when only one of the
parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his
promise.’’
Since, according to the appellants, a usurious loan is void

due to illegality of cause or object, the rule of pari delicto expressed
in Article 1411, supra, applies, so that neither party can bring
action against each other. Said rule, however, appellants add,
is modified as to the borrower, by express provision of the law
(Art. 1413, New Civil Code), allowing the borrower to recover
interest paid in excess of the interest allowed by the Usury Law.
As to the lender, no exception is made to the rule; hence, he
cannot recover on the contract. So — they continue — the New
Civil Code provisions must be upheld as against the Usury Law,
under which a loan with usurious interest is not totally void,
because of Article 1961 of the New Civil Code, that: “Usurious
contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code.’’ (Italics
ours.)
We do not agree with such reasoning. Article 1411 of the
New Civil Code is not new; it is the same as Article 1305 of
the Old Civil Code. Therefore, said provision is no warrant for
departing from previous interpretation that, as provided in the
Usury Law (Act No. 2655, as amended), a loan with usurious
interest is not totally void only as to the interest.
True, as stated in Article 1411 of the New Civil Code the
rule of pari delicto applies where a contract’s nullity proceeds
from illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of
loan with usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory
stipulation is to pay interest thereon.
610
And said two stipulations are divisible in the sense that

the former can still stand without the latter. Article 1273, Civil
Code, attests to this: “The renunciation of the principal debt
shall extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force.’’
The question therefore to resolve is whether the illegal
terms as to payment of interest likewise renders a nullity the
legal terms as to payments of the principal debt. Article 1420
of the New Civil Code provides in this regard: “In case of a
divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced.’’
In simple loan with stipulation of usurious interest the
prestation of the debtor to pay the principal debt, which is the
cause of the contracts (Article 1350, Civil Code), is not illegal.
The illegality lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only shouId be
deemed void, since it is the only one that is illegal.
Neither is there a conflict between the New Civil Code and
the Usury Law. Under the latter, in Sec. 6, any person who for a
loan shall have paid a higher rate or greater sum or value than
is allowed in said law, may recover the whole interest paid. The
New Civil Code, in Article 1413 states: “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 payment.’’
Article 1413, in speaking of “interest paid in excess of the
interest allowed by the usury laws’’ means the whole usurious
interest; that is, in a loan of P1,000.00, with interest of 20% per
annum or P200.00 for one year, if the borrower pays said P200
the whole P200.00 is the usurious interest, not just that part
thereof in excess of the interest allowed by law. It is in this case
that the law does not allow division. The whole stipulation as to
interest void, since payment of said interest is illegal. The only
change effected, therefore, by Article 1413, New Civil Code, is
not to provide for the recovery of the interest paid in excess of
that allowed by law, which the Usury Law already provided for,
but to add that the same can be recovered “with interest thereon
from the date of payment.’’
The foregoing interpretation is reached with the philosophy
of usury legislation in mind; to discourage stipulations on
usurious interest, said stipulations are treated as wholly void,
so that the loan becomes one without stipulation as to payment
of interest. It should not, however, be interpreted to mean
forfeiture even of the principal for this would unjustly enrich
611
Art. 1413 CONTRACTS
the borrower at the expense of the lender. Furthermore, penal

sanctions are available against a usurious lender, as a further
deterrence to usury.
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial action. And
in case of such demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this case from the
filing of the complaint). Such interest is not due to stipulation,
for there was none, the same being void. Rather, it is due to
the general provision of law that in obligations to pay money,
where the debtor incurs in delay, he has to pay interest by way
of damages (Art. 2209, Civil Code). The Court a quo therefore,
did not err in ordering defendants to pay the principal debt with
interest thereon at the legal rate, from the date of filing of the
complaint.
In answer to the contention that the forefeiture of the
principal of the usurious loan is necessary to punish the usurer.
We say this: Under the Usury Law there is already provision
for adequate punishment for the usurer namely, criminal
prosecution where, if convicted, he may be sentenced to pay a
fine be not less than P50.00 nor than P500.00, or imprisonment
of not less than 30 days nor more than one year, or both, in
the discretion of the court. He may further be sentenced to
return the entire sum received as interest, with subsidiary
imprisonment in case of non-payment thereof. It is, of course,
to be assumed that this last penalty may be imposed only if the
return of the entire sum received as interest had not yet been
the subject of judgment in a civil action involving the usurious
contract of loan.
In arriving at the above conclusion, We also considered
our decision in Mulet vs. People, but found that the same does
not apply to the present case. The facts therein involved were as
follows:
“On July 25, 1929, Alejandra Rubillos and Especta-

cion Rubillos secured from petitioner Miguel Mulet a loan
of P550, payable within 5 years at 30 per cent interest per
annum. In the deed of mortgage executed by the Rubillos
as a security, the sum of P1,375.00 was made to appear as
capital loan of P550.00 and the total interest of P825.00
computed at 30 per cent per annum of 5 years. Within four
years following the execution of the mortgage, the debtors
made partial payments aggregating P278.27, on account
of interest. Thereafter, the debtors paid the whole capital
612
of P550.00 due to petitioner’s promise to condone the un-

paid interest upon payment of such capital. But to their
suprise, petitioner informed them that they were still in-
debted in the sum of P546.73 which represented the bal-
ance of the usurious interest. And in consideration of this
amount, petitioner pressed upon the debtors to execute
in October, 1933 in his favor, a deed of sale with pacto
de retro of a parcel of land, in substitution of the original
mortgage which was cancelled. From the date of the ex-
ecution of the new deed up to 1936, petitioner received,
as his share of the products of the land the total sum of
P480.00. Prosecuted on November 18, 1936, for the vio-
lation of the Usury Law, petitioner was convicted by the
trial court, and on appeal, the judgment was affirmed by
the Court of Appeals. The instant petition for certiorari
is directed at that portion of the decision of the appellate
court ordering petitioner to return to the offended parties
the sum of P373.27, representing interests received by
him in excess of that allowed by law.’’
It was Mulet’s claim that, as the amount of P373.27 had
been paid more than two years prior to the filing of the complaint
for usury against him, its return could no longer be ordered in
accordance with the prescriptive period provided therefor in
Section 6 of the Usury Law. Said amount was made up of the
usurious interest amounting to P278.27 paid to Mulet, in cash,
and the sum of P480.00 paid to him in kind, from the total of
which two amounts 14% interest allowed by law — amounting
to P385.00 — was deducted. Our decision was that Mulet should
return the amount of P480.00 which represented the value of
the produce of the land sold to him under pacto de retro which,
with the unpaid balance of the usurious interest, was the
consideration of the transaction — meaning the pacto de retro
sale. This Court then said:
“x x x. This last amount is not usurious interest

on the capital of the loan but the value of the produce
of the land sold to petitioner under pacto de retro with
the unpaid balance of the usurious interest (P546.73) as
the consideration of the transaction. This consideration,
because contrary to law, is illicit, and the contract which
results therefrom, is null and void. (Art. 1275, Civil Code).
And under the provisions of Article 1305, in connection
with Article 1303, of the Civil Code, when the nullity of
a contract arises from the illegality of the consideration
which in itself constitutes as felony, the guilty party shall
be subject to criminal proceeding while the innocent party
613
Art. 1413 CONTRACTS
may recover whatever he has given, including the fruits

thereof.’’ (Italics supplied.)
It is clear, therefore, that in the Mulet case, the principal
of the obligation had been fully paid by the debtor to the
creditor; that the latter was not sentenced to pay it back to the
former, and that what this Court declared recoverable by debtor
were only the usurious interest paid as well as the fruits of the
property sold under pacto de retro.
IN VIEW OF THE FOREGOING, the decision appealed
from is modified in the sense that appellee may recover from
appellant the principal of the loan (P1,180.00) only, with interest
thereon at legal rate of 6% per annum from the date of the filing
of the complaint. With costs.
Makalintal, Zaldivar, Teehankee, Villamor and Makasiar,
JJ., concur.
Concepcion, C.J., and Fernando, J., concur in the
dissenting opinion of Justice Castro.
Reyes, J.B.L., J., concurs with Justice Barredo.
Castro, J., dissents.
Barredo, Jr., concurs in separate opinion.
Castro J., dissenting:
Beyond the area of debate is the principle that in a contract
of loan of sum of money, the cause, with respect to the lender, is
generally the borrower’s prestation to return the same amount.
It is my view, however, that in a contract which is tainted with
usury, that is, with a stipulation (whether written or unwritten)
to pay usurious interest, the prestation to pay such interest
is an integral part of the cause of the contract.58 It is also the
controlling cause, for a usurer lends his money not just to have
it returned but indeed to acquire inordinate gain. Article 1957,
which is a new provision in the Civil Code, provides as follows:
“Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury.”
This article which declares the contract itself — not merely the
stipulation to pay usurious interest — void, necessarily regards
the prestation to pay such usurious interest as an integral part
of the cause, making it illegal.
58
See Articles 1933, 1950 and 1957, New Civil Code.
614
Undoubtedly, the motive of the usurer is his desire to

acquire inordinate gain; this motive becomes an integral and
controlling part of the cause because its realization can be
achieved only by compliance by the borrower with the stipulated
prestation to pay usurious interest.
The law never proscribes a contract merely because of the
immoral motive of a contracting party, for the reason that it
does not concern itself with motive but only with cause.59 An
exception is where such motive becomes an integral part of the
cause, like the stipulated usurious interest in a contract of loan.
While the old law, according to El Hogar,60 considered the
usurious loan valid as to the loan and void as to the usurious
interest, the new law, in Article 1957 of the new Civil Code,
declares the usurious loan void as to the loan and void as to
the usurious interest. What is the reason for the new law?
In my view, it is none other than its intention to regard the
usurious interest as an integral part of the cause, thus making
it illegal; otherwise, the new law would be devoid of reason.
Any interpretation that divests the new law of reason, that
declares the usurious contract void and in the same breath
permits recovery of the principal of the loan — which was the
same result under the old law, as well as under El Hogar that
considered the usurious contract valid as to the loan — renders
Article 1957 of the new Civil Code meaningless and pointless.
The prestation to pay usurious interest being an integral
and controlling part of the cause, making it illegal and the
contract of loan void, Article 1411 of the new Civil Code should
be applied. This article provides:
“When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a
criminal offense, both parties being in pari delicto, they
shall have no action against each other, and both shall
be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instrument 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.’’
59
De Jesus vs. Urrutia & Company, 32 Phil. 171.
60
Lopez and Javelona vs. El Hogar Pilipino, 47 Phil. 249.
615
Art. 1413 CONTRACTS
An exception is, however, provided in the second sentence

of Article 1957 which states: “The borrower may recover in
accordance with the laws on usury.” As an exception to the
general rule in Article 1411, the debtor is allowed in accordance
with the Usury Law to recover the amount he has paid as
usurious interest. Thus, Article 1413 explicitly authorizes that
“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 payment.” But the lender is not allowed to recover the
principal, because no such exception is made; hence, he falls
within the general rule stated in Article 1411.
In Mulet vs. People,61 the Supreme Court, in effect,
reconsidered its opinion in El Hogar. In Mulet, the plaintiff
extended a usurious loan to Rubillos. When the debtor failed to
pay the whole usurious interest, the creditor, in consideration
of the said unpaid interests, made the debtor execute a pacto
de retro sale of certain properties to him. He then sought to be
exempt from returning the value of the produce of the lands
so transferred. Mr. Justice Moran, speaking for the Supreme
Court, said:
“* * * We are of the opinion that the petitioner should

be ordered to return * * * the amount * * * of P480.00.
This last amount is not usurious interest on the capital
of the loan but the value of the produce of the land sold to
petitioner under pacto de retro, with the unpaid balance
of the usurious interest as the consideration, because
contrary to law, is illicit, and the contract which results
therefrom, is null and void.
“If the unpaid usurious interests as the consideration
of the pacto de retro sale render such sale null and void,
a fortiori, the usurious interest as consideration of the
contract of loan, also renders such loan null and void.”
In Asturias, et al. vs. Court of Appeals,62 the Supreme

Court, speaking through Mr. Justice Jesus Barrera, stressed
that: “A contract designed to hide a usurious agreement not only
violates the law but contravenes public policy. Such a contract
can not be countenanced and is therefore illegal and void from
its inception.”
61
73 Phil. 60.
62
L-17895, promulgated Sept. 30, 1963, 9 SCRA 131.
616
The ruling in El Hogar that a usurious loan was valid as

to the principal but void as to the usurious interest was based
upon the laws then in force, namely, the old Civil Code and the
Usury Law, both of which did not contain any specific explicit
provision prescribing the contract itself. I am fully persuaded
that in drafting Chapter 2, Title XI of Book IV of the new Civil
Code, the Code Commission knew of the majority opinion in El
Hogar, took note of it, and, to offset any doubt concerning the
intention of the Commission to overrule El Hogar, formulated
Articles 1957 and 1961. And it is of great significance to me
that when the Commission formulated Article 1957, knowing
that under El Hogar the usurer may recover the principal of the
loan, it omitted affirmance of the right of the lender to recover
the principal, and instead emphasized that “the borrower may
recover in accordance with the laws on usury.’’
BARREDO, J., concurring:

I concur.
I believe that this decision expresses the fair and just
intent of our usury laws and sufficiently effectuates the public
policy that should be pursued in usury cases.
I consider usury to be unchristian and inhuman,
particularly because it thrives best in the misery of people by
taking advantage of them when they are precisely in urgent need
of money to save themselves from a tight situation. Usury has
always been considered as a scourge everywhere in the world
since the time of the Holy Scriptures. All these notwithstanding,
I do not believe in condoning the whole indebtedness of a person
who borrows money, only because he has been made to agree,
directly or indirectly, to pay more interest than that authorized
by law. It is my considered view that what the law proscribes
and declares null and void is not the lending of money, but only
the collection of excessive interest. There is nothing morally
wrong in allowing a money-lender to get back the money he has
loaned because, after all, the borrower has used the same for his
own needs, and it is only fair that he should not be enriched at
the expense of another. And this, to my mind, is obvious from
the language of Article 1957 of the Civil Code which provides
that:
“Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against
usury be void. The borrower may recover in accordance
with the laws on usury. (n)’’
617
Art. 1413 CONTRACTS
Properly construed, the phrase “contracts and stipulations”

in this provision does not contemplate the totality of the
contract of loan but only the portion thereof that is “intended
to circumvent the laws against usury,” and that necessarily
is no more than any term, “cloak or device which results in
the collection of interest in excess of the rate allowed by law.
In fact, the same provision expressly provides that in spite of
the nullity it ordains, “the borrower may recover in accordance
with the laws on usury.” In other words, instead of leaving the
consequences of the declared nullity to be in accordance with
general principles, the article itself spells out in black and white
what should be done with the proceeds of the proscribed act, and
it says that the special laws on usury shall be followed in that
respect.
To the same effect is Article 1961 of the Civil Code. It
provides that:
“Usurious contracts shall be governed by the

Usury Law and other special laws, so far as they are not
inconsistent with this Code. (n)”
And I see no point of collision between the Civil Code and
the Usury Law for the simple reason that even before Art. 1957
declared usurious contracts and transactions null and void,
Section 7 of the Usury Law already provided thus:
“All covenants and stipulations, constrained in

conveyances, mortgages, bonds, bills, notes and other
contracts or evidences of debts, and all deposits of goods
or other things, whereupon or whereby there shall be
stipulated, charged, demanded, reserved, secured, taken,
or received, directly or indirectly, a higher rate or greater
sum or value for the renewal thereof or forbearance of
money, goods, or credits than is hereinbefore allowed,
shall be void: Provided, however, That no merely clerical
error in the computation of interest, made without intent
to evade any of the provisions of this Act, shall render a
contract void: And provided, further, That nothing herein
contained shall be construed to prevent the purchase by
an innocent purchaser of a negotiable mercantile paper,
usurious or otherwise, for valuable consideration before
maturity, when there has been no intent on the part of
said purchaser to evade the provisions of this Act and
said purchase was not a part of the original usurious
transaction. In any case, however, the maker of said note
shall have the right to recover from said original holder
618
the whole interest paid by him thereon and, in case of

litigation, also the costs and such attorney’s fees as may
be allowed by the Court.”
In this connection, it is to be noted that Section 6 of the
Usury Law provides:
“Any person or corporation who, for any such loan

or renewal thereof or forbearance, shall have paid or
delivered a higher rate or greater sum or value than is
hereinbefore allowed to be taken or received, may recover
the whole interest, commissions, premiums penalties and
surcharges paid or delivered with costs and attorney’s fees
in such sum as may be allowed by the court in an action
against the person or corporation who took or received
them if such action is brought within two years after such
payment or delivery: Provided, however, That the creditor
shall not be obliged to return the interest, commissions
and premiums for a period of not more than one year
collected by him in advance when the debtor shall have
paid the obligation before it is due, provided such interest,
and commissions and premiums do not exceed the rates
fixed in this Act.”
As a matter of fact, then, even as the Civil Code yields
to the Usury Law in Articles 1957 and 1413, in reality, there
is no conflict between their corresponding provisions. To say
that because these laws specify only the remedies in favor of
the borrower, they impliedly deny to the lender any remedy to
recover the principal of the loan is, I submit, a non sequitur. It
appears to me more logical to construe the provisions allowing
the borrower to recover all the interest he has paid, as Article
1413 of the Civil Code and Section 6 of the Usury Law have been
construed together to mean in Angel Jose vs. Chelda Enterprises,
cited in the main opinion, as indicating that the borrower may
not recover from the lender the amount he has paid as payment
of his principal debt, and conversely, that the lender may collect
the same if it has not been paid by the borrower.
In brief, my point is that while it is true that Article
1957 of the Civil Code declares that all usurious contracts and
stipulations are void, this is nothing new, for such has been
the law even under the Usury Law before the Civil Code went
into effect, and, moreover, it is evident that the Civil Code
itself yields to the Usury Law when it comes to the question of
how much of the loan and interests paid by the borrower may
be recovered by him, and the Usury Law is clear that he may
619
Art. 1413 CONTRACTS
recover only all the interests, including, of course, the legal part
thereof, with legal interest from the date of judicial demand,
without maintaining that he can also recover the principal he
has already paid to the lender.
As first discussed under Art. 1175, there is now no longer
any ceiling in interest rates on loans pursuant to Central Bank
Circular No. 224 issued last Dec. 1, 1982.
Problem — On Jan. 15, 1958, D borrowed P10,000 from
C. as evidence of the indebtedness, D executed a promissory
note promising to pay the entire obligation on Jan. 15, 1959,
at 24% interest per annum. As security for the payment of the
obligation, he also executed a real estate mortgage on a house
and lot registered in his name in favor of C. This mortgage
was duly registered. When the note matured, D paid the entire
obligation plus interest amounting to P2,400. Considering that
the contract is usurious, if D institutes an action against C for
the recovery of the usurious interest which he has paid, how
much can he recover? Reason.
Answer — D can recover the entire interest of P2,400
which he has paid plus 6% interest thereon from the date of
payment. This is in accordance with Sec. 6 of the Usury Law
and Art. 1413 of the New Civil Code. It must be observed that
under Sec. 6 of the Usury Law, the debtor may recover the whole
interest paid. Under the New Civil Code , in Art. 1413, “interest
paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of
payment.” When the Code speaks of “interest paid in excess of
the interest allowed by usury laws,” it means the whole usurious
interest. The two provisions, therefore, are almost identical. The
only change effected by Art. 1413, NCC, is not to provide for the
recovery of the interest paid in excess of that allowed by law,
which the Usury Law already provided for, but to add that the
same can be recovered “with interest thereon from the date of
payment.” (Angel Jose Warehousing Co. vs. Chelda Enterprises,
23 SCRA 119.)
(Note: Prior to January 1, 1983 and under the Treasury
Laws, no person shall receive a rate of interest, including
commissions, premiums, fines and penalties, higher than 12%
per annum or the maximum rate prescribed by the Monetary
Board for a loan secured by a mortgage upon real estate the
title to which is duly registered. Therefore, the 18% interest
rate plus the additional interest and penalty charges of 18% and
8%, respectively, are highly usurious. [Development Bank of the
620
Philippines vs. Perez, G.R. No. 148541, Nov. 11, 2004.] Under
Central Bank (CB) Circular No. 905, which became effective on
Jan. 1, 1983, whereby the Monetary Board is authorized to fix
interest rates, the ceiling rates under the Usury law [Act No.
2655, as amended by P.D. No. 116] have been abolished.
It should be noted that Circular No. 905 did not repeal
nor in any way amend the Usury Law but simply suspended
the latter’s effectivity. The legislation of usury is wholly the
creature of legislation. A CB Circular cannot repeal a law. Only
a law can repeal another law. Thus, retroactive application of a
CB Circular cannot, and should not, be presumed. (Development
Bank of the Philippines vs. Perez, G.R. No. 148541, Nov. 11,
2004.)
In declaring void the stipulations authorizing excessive
interest and charges, the SC declared that although the Usury
Law was suspended by CB Circular No. 905 and consequently
the parties are given wide latitude to agree on any interest
rate, nothing in the said Circular grants lenders carte blanche
authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their
assets. (Heirs of Zoilo Espiritu and Primitiva Espiritu vs. Sps.
Maximo Landrito and Paz Landrito, etc., G.R. No. 169617, April
3, 2007)
Art. 1414. When money is paid or property delivered for

an illegal purpose, the contract may be repudiated by one
of the parties before the purpose has been accomplished,
or before any damage has been caused to a third person.
In such case, the courts may, if the public interest will thus
be subserved, allow the party repudiating the contract to
recover the money or property.63
Art. 1415. When 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.64
Art. 1416. When the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is designed
63
New provision.
64
New provision.
621
for the protection of the plaintiff, he may, if public policy is

thereby enhanced, recover what he has paid or delivered.65
Article Applied. — The above exception to the principle of

pari delicto is illustrated in the following cases:
Angeles vs. Court of Appeals

102 Phil. 1006
The records show that on March 12, 1935, a homestead

patent was issued to Juan Angeles. On May 28, 1937, Angeles
sold he homestead to defendants, Gregorio Inez and Anastacia
Divino. This is now an action commenced by the heirs of Angeles
to recover the homestead from the defendants on the ground
that the sale is void since it was made within the prohibited
period of five years as enumerated in Sec. 118 of the Public Land
Law. Defendants, however, maintain that under the principle
of pari delicto, there can be no recovery. The Supreme Court,
speaking through Justice Labrado, held:
“The principle of in pari delicto is not applicable to a

homestead which has been illegally sold in violation to the
homestead law. The reason for the rule is that the policy of
the law is to give land to a family for home and cultivation;
consequently, the law allows the homesteader to reacquire
the land even if it has been sold; hence, the right may not
be waived. The sale of the homestead in the case at bar is,
therefore, null and void and petitioners have the right to
recover the homestead illegally disposed of. Consequently,
the action to recover the same does not prescribe.
“While the rule of in pari delicto should not apply to
the sale of the homestead, because such sale is contrary
to the public policy enunciated in the homestead law, the
loss of the products realized by the defendants and the
value of the necessary improvements made by them on the
land should not be excepted from the application of the
said rule because no cause or reason can be cited to justify
an exception. It has been held that the rule of in pari
delicto is inapplicable only where the same violates a well-
established public policy. The heirs of the homesteader
should, therefore, be declared to have lost and forfeited
the value of the products gathered from the land, and
65
New provision.
622
so should the defendants lose the value of the necessary

improvements that they have made thereon. With respect
to the price for the land, in view of the rule that no one
should enrich himself at the expense of another, the return
of the price by the plaintiffs should be decreed, before the
plaintiffs may be allowed to recover back the possession of
the homestead.’’66
Philippine Banking Corp. vs. Lui She

21 SCRA 52
Justina Santos and her sister Lorenza were owners in
common of a valuable piece of land located in Manila. In it are
two residential houses with entrance on Florentino Torres street
which were occupied by Justina and Lorenza and the Hen Wah
Restaurant with entrance on Rizal Avenue which was occupied
and operated by Wong Heng, a long time lessee. When Lorenza
died in 1957, Justina became the absolute owner of the property.
Then already well advanced in years, being 90 years old, blind,
crippled, and an invalid, with no other companions except 8
maids and 17 dogs, her dreary existence was brightened only
now and then by the visits of the four children of her friend,
Wong Heng. Wong, on the other hand, who had always been her
trusted man and friend, became closer to her.
On Nov. 15, 1957, “in grateful acknowledgment of the
personal services of the lessee to her,” Justina executed a
contract of lease in favor of Wong, covering the portion then
already leased to him and another portion fronting Florentino
Torres street. The lease was for 50 years at a monthly rental of
P3,120.00. Ten days later (Nov. 25), the contract was amended so
as to make it cover the entire property at an additional monthly
rental of P360.00. For his part, Wong undertook to pay out of
the rental due from him an amount not exceeding P1,000.00 a
month for the salaries of the maids and the food of her dogs. On
Dec. 21, 1957, she executed another contract giving Wong the
option to buy the leased premises for P120,000, payable within
ten years at a monthly installment of P1,000.00. The option
imposed on Wong the obligation to spend P1,800.00 a month for
the salaries of her maids and the food of the dogs. In addition,
it also imposed the condition that Wong must become a Filipino
citizen. In order that this condition would be complied with,
66
To the same effect: Santander vs. Villanueva, 103 Phil. 1; Feliceo vs. Iriola 103
Phil. 125; Ras vs. Sua, 25 SCRA 153.
623
Justina filed a petition to adopt Wong and his children on the

erroneous belief that adoption would confer on them Philippine
citizenship. The error was discovered and the proceedings were
abandoned. On Nov. 18, 1958, she executed to other contracts,
one extending the term of the lease to 99 years and another
fixing the term of the option at 50 years.
On Aug. 24 and 29, 1959, she executed two wills wherein
she bade her legatees to respect the contracts she had entered
into with Wong, but in a codicil executed on Nov. 4, 1959, she
appears to have undergone a change of heart. Claiming that the
various contracts were made by her because of machinations
and inducements practised by Wong Heng, she now directed her
executor to secure the annulment of the contracts.
On Nov. 18, 1959, the present action was filed in the Court
of First Instance of Manila. The case was heard after which
the court rendered judgment declaring all the above stated
contracts, with the exception of the lease contract of Nov. 15,
1957, null and void. From this judgment both parties appealed
directly to the Supreme Court. After the case was submitted for
decision, both parties died. Wong was substituted by his wife,
Lui She, while Justina Santos was substituted by the Philippine
Banking Corporation.
The only question that has to be resolved now in this
case is whether or not the above stated contracts are valid. The
Supreme Court, speaking through Justice Castro, held:
“With respect to the lower court’s finding that in all

probability Justina Santos could not have intended to part
with her property while she was alive nor even to lease
it in its entirety as her house was built in it, suffice it to
quote the testimony of her own witness and lawyer who
prepared the contracts in question, Atty. Alonzo: “The
ambition of the old woman, before her death, according to
her revelation to me, was to see to it that these properties
be enjoyed, even to own them, by Wong Heng because
Doña Justina told me that she did not have any relatives
near or far, and she considered Wong Heng as a son and
his children her grandchildren; especially her consolation
in life was when she would hear the children reciting
prayers in Tagalog. She was very emphatic in the care
of the seventeen (17) dogs and of the maids who helped
her much, and she told me to see to it that no one would
disturb Wong Heng from those properties. That is why we
thought of the ninety-nine (99) years lease, we thought of
624
adoption, believing that thru adoption Wong Heng might

acquire Filipino citizenship; being the adopted child of a
Filipino citizen.’
“This not to say, however, that the contracts are valid.
For the testimony just quoted, while dispelling doubt as to
the intention of Justina Santos, at the same time gives
the clue to what we view as a scheme to circumvent the
Constitutional prohibition against the transfer of lands to
aliens. ‘The illicit purpose then becomes the illegal causa67
rendering the contracts void.
“Taken singly, the contracts show nothing that is
necessarily illegal but considered collectively, they reveal
an insidious pattern to subvert by indirection what the
Constitution directly prohibits. To be sure, a lease to
an alien for a reasonable period is valid. So is an option
giving an alien the right to buy real property on condition
that he is granted Philippine citizenship. As this Court
said in Krivenko vs. Register of Deeds:68 ‘Aliens are not
completely excluded by the Constitution from the use of
lands for residential purposes. Since their residence in the
Philippines is temporary, they may be granted temporary
rights such as a lease contract which is not forbidden
by the Constitution. Should they desire to remain here
forever and share our fortunes and misfortunes, Filipino
citizenship is not impossible to acquire.’
“But an alien is given not only a lease of, but also
an option to buy, a piece of land, by virtue of which the
Filipino owner cannot sell or otherwise dispose of his
property, this to last for 50 years, then it becomes clear
that the arrangement is a virtual transfer of ownership
whereby the owner divests himself in stages, not only of
the right to enjoy the land (jus possidendi, jus utendi, jus
fruendi and jus abutendi) but also of the right to dispose
of it (jus disponendi) — rights the sum total of which
make up ownership. It is just as if today the possession
is transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of
which ownership is made up are consolidated in an alien.
And yet this is just exactly what the parties in this case did
within the space of one year, with the result that Justina
67
Rodriguez vs. Rodriguez, 20 SCRA 908.
68
29 Phil. 480-481 (1947).
625
Santos’ ownership of her property was reduced to a hollow

concept. If this can be done, then the Constitutional ban
against alien landholding in the Philippines, as announced
in Krivenko vs. Register of Deeds, is indeed in grave peril.
“It does not follow from what has been said, however,
that because the parties are in pari delicto they will be left
where they are, without relief. For one thing, the original
parties who were guilty of a violation of the fundamental
charter have died and have since been substituted by their
administrators to whom it would be unjust to impute their
guilt.69 For another thing, and this is not only cogent but
also important, Article 1416 of the Civil Code provides,
as an exception to the rule on pari delicto, that ‘When the
agreement is not illegal per se but is merely prohibited,
and the prohibition by law is designed for the protection of
the plaintiff, he may, if public policy is thereby enhanced,
recover what he has paid or delivered.’ The Constitutional
provision that ‘Save in cases of hereditary succession, no
private agricultural land shall be transferred or assigned
except to individuals, corporations, or associations quali-
fied to acquire or hold lands of the public domain in the
Philippines’70 is an expression of public policy to conserve
lands for the Filipinos.
“That policy would be defeated and its continued
violation sanctioned if, instead of setting the contracts
aside and ordering the restoration of the land to the estate
of the deceased Justina Santos, this Court should apply
the general rule of pari delicto. To the extent that our
ruling in this case conflicts with that laid down in Rellosa
vs. Gaw Chee Hun71 and subsequent similar cases, the
latter must be considered as pro tanto qualified.
“Accordingly, the contracts in question are annulled
and set aside; the land subject-matter of the contracts is
ordered returned to the estate of Justina Santos as rep-
resented by the Philippine Banking Corporation; Wong
Heng (as substituted by the defendant appellant Lui She)
is ordered to pay the Philippine Banking Corporation the
sum P56,564.35, with legal interest from the date of the
69
Cf. Concurring opinion of Justice Bengzon in Rellosa vs. Gaw Chee Hun, 93
Phil. 827, 836 (1953).
70
Const., Art. XIII, Sec. 5.
71
93 Phil. 827 (1953).
626
filing of the amended complaint; and the amounts con-

signed in court by Wong Heng shall be applied to the pay-
ment of rental from November 15, 1959 until the premises
shall have been vacated by his heirs. Costs against the
defendant-appellant.’’
Fernando, J., concurring:
“With the able and well-written opinion of Justice Castro,

I am in full agreement. The exposition of the facts leaves
nothing to be desired and the statement of the law is notable
for its comprehensiveness and clarity. This concurring opinion
has been written solely to express what I consider to be the
unfortunate and deplorable consequences of applying the pari
delicto concept, as was, to my mind, indiscriminately done, to
alien landholding declared illegal under the Krivenko doctrines
in some past decisions.
“It is to be remembered that in Krivenko vs. The Register
of Deeds of Manila,72 this Court over strong dissents held that
residential and commercial lots may be considered agricultural
within the meaning of the constitutional provision prohibiting
the transfer of any private agricultural land to individuals,
corporations or associations not qualified to acquire or hold
lands of the public domain in the Philippines save in cases of
hereditary succession.
That provision of the Constitution took effect on November
15, 1935 when the Commonwealth Government was established.
The interpretation as set forth in the Krivenko decision was only
handed down on November 15, 1947. Prior to that date there
were many who were of the opinion that the phrase agricultural
land should be construed strictly and not be made to cover
residential and commercial lots. Acting on that belief, several
transactions were entered into transferring such lots to alien-
vendees by Filipino-vendors.
“After the Krivenko decision, some Filipino vendors sought
recovery of the lots in question on the ground that the sales were
null and void. No definite ruling was made by this Court until
September of 1953, when on the 20th of said month, Rellosa vs.
72
79 Phil. 461 (1947).
627
Gaw Chee Hun,73 Bautista vs. Uy Isabelo,74 Talento vs. Mckiki,75

Caoile vs. Chiao Peng76 were decided.
“Of the four decisions in September, 1953, the most
estensive discussion of the question is found in Rellosa vs. Gaw
Chee Hun, the opinion being penned by the retired Justice
Bautista Angelo, with the concurrence only of one Justice,
Justice Labrador, also retired. Former Chief Justice Paras as
well as former Justices Tuazon and Montemayor concurred in
the result. The necessary sixth vote for a decision was given
by then Justice Bengzon, who had a two-paragraph concurring
opinion disagreeing with the main opinion as to the force to
be accorded to the two cases77 therein cited. There were two
dissenting opinions by former Justices Pablo and Alex Reyes.
“The doctrine as announced in the Rellosa case is that while
the sale by a Filipino-vendor to an alien-vendee of a residential
or a commercial lot is null and void as held in the Krivenko case,
still the Filipino-vendor has no right to recover under a civil
law doctrine, the parties being in pari delicto. The only remedy
to prevent this continuing violation of the Constitution which
the decision impliedly sanctions by allowing the alien vendees
to retain the lots in question is either escheat or reversion.
Thus: ‘By following either of these remedies, or by approving
an implementary law as above suggested, we can enforce the
fundamental policy of our Constitution regarding our natural
resources without doing violence to the principle of pari delicto.
“Were the parties really in pari delicto? Had the sale by
and between Filipino-vendor and alien-vendee occurred after
the decision in the Krivenko case, then the above view would be
correct that both Filipino-vendor and alien-vendee could not be
considered as innocent parties within the contemplation of the
law. Both of them should be held equally guilty of evasion of the
Constitution.
“Since, however, the sales in question took place prior to
the Krivenko decision, at a time when the assumption could be
honestly entertained that there was no constitutional prohibition
73
93 Phil. 827.
74
93 Phil. 843.
75
93 Phil. 855.
76
93 Phil. 861. See also Arambulo vs. Cua So, 95 Phil. 749 (1954); Dinglasan vs.
Lee Bun Ting, 99 Phil. 427 (1955).
77
Bough vs. Cantiveros, 40 Phil. 210 (1919) and Perez vs. Herranz, 7 Phil. 693
(1902).
628
against the sale of commercial or residential lots by Filipino-

vendor to alien-vendee, in the absence of a definite decision by
the Supreme Court, it would not be doing violence to reason to
free them from the imputation of evading the Constitution. For
evidently evasion implies at the very least knowledge of what is
being evaded. The new Civil Code (Art. 526) expressly provides:
‘Mistakes upon a doubtful or difficult question of law may be the
basis of good faith.’
“According to the Rellosa opinion, both parties are equally
guilty of evasion of the Constitution, based on the broader
principle that ‘both parties are presumed to know the law.’
This statement that the sales entered into prior to the Krivenko
decision were at that time already vitiated by a guilty knowledge
of the parties may be too extreme a view. It appears to ignore
a postulate of a constitutional system, wherein the words of
the Constitution acquire meaning through Supreme Court
adjudication.
“After the Krivenko decision, there is no doubt that con-
tinued possession by alien-vendee of property acquired before
its promulgation is violative of the Constitution. It is as if an
act granting aliens the right to acquire residential and commer-
cial lots were annulled by the Supreme Court as contrary to the
provision of the Constitution prohibiting aliens from acquiring
agricultural land.
“The question then as now, therefore, was and is how to
divest the alien of such property rights on terms equitable to both
parties. That question should be justly resolved in accordance
with the mandates of the Constitution not by a wholesale
condemnation of both parties for entering into a contract at a
time when there was no ban as yet arising from the Krivenko
decision, which could not have been anticipated. Unfortunately,
under the Rellosa case, it was assumed that the parties, being
in pari delicto, would be left in the situation in which they were,
neither being in a position to seek judicial redress.
“Would it not have been more in consonance with the
Constitution, if instead the decision compelled the restitution
of the property by the alien-vendee to the Filipino-vendor?
Krivenko decision held in clear, explicit and unambiguous
language that: ‘We are deciding the instant case under Section 5
of Article XIII of the Constitution which is more comprehensive
and more absolute in the sense that it prohibits the transfer
to aliens of any private agricultural land including residential
land whatever its origin might have been x x x. This prohibition
629
(Rep. Act No. 133) makes no distinction between private

lands that are strictly agricultural and private lands that are
residential or commercial. The prohibition embraces the sale
of private lands of any kind in favor of aliens, which is again
a clear implementation and a legislative interpretation of the
constitutional prohibition. x x x It is well to note at this juncture
that in the present case we have no choice. We are construing
the Constitution as it is and not as we may desire it to be.
Perhaps the effect of our construction is to preclude aliens,
admitted freely into the Philippines, from owning sites where
they may build their homes. But if this is the solemn mandate
of the Constitution, we will not attempt to compromise it even
in the name of amity or equity.78
“Alien-vendee is therefore incapacitated or disqualified
to acquire and hold real estate. That incapacity and that
disqualification should date from the adoption of the
Constitution on November 15, 1935. That incapacity and that
disqualification, however, was made known to Filipino-vendor
and to alien-vendee only upon the promulgation of the Krivenko
decision on November 15, 1947. Alien-vendee, therefore, cannot
be allowed to continue owning and exercising acts of ownership
over said property, when it is clearly included within the
Constitutional prohibition. Alien-vendee should thus be made to
restore the property with its fruits and rents to Filipino-vendor,
its previous owner, if it could be shown that in the utmost good
faith, he transferred his title over the same to alien-vendee,
upon restitution of the purchase price of course.
The Constitution bars alien-vendees from owning the
property in question. By dismissing those suits, the lots
remained in alien hands. Notwithstanding the solution of
escheat or reversion offered, they are still at the moment of
writing, for the most part in alien hands. There have been after
almost twenty years no proceedings for escheat or reversion.
“Yet it is clear that an alien-vendee cannot consistently
with the constitutional provision, as interpreted in the Krivenko
decision, continue owning and exercising acts of ownership over
the real estate in question. It ought to follow then, if such a
continuing violation of the fundamental law is to be put an end
to, that the Filipino-vendor, who in good faith entered into, a
contract with an incapacitated person, transferring ownership
of a piece of land after the Constitution went into full force
78
79 Phil. 461, 480 (1947).
630
and effect, in the light of the ruling in the Krivenko case, be

restored to the possession and ownership thereof, when he has
filed the appropriate case or proceeding. Any other construction
would defeat the ends and purposes not only of this particular
provision in question but the rest of the Constitution itself.
“The Constitution frowns upon the title remaining in the
alien-vendee. Restoration of the property upon payment of the
price received by Filipino vendor or its reasonable equivalent
as fixed by the court is the answer. To give the constitutional
provision full force and effect, in consonance with the dictates of
equity and justice, the restoration to Filipino-vendor upon the
payment of a price fixed by the court is the better remedy. He
thought he could transfer the property to an alien and did so.
After the Krivenko case had made clear that he had no right to
sell nor an alien-vendee to purchase the property in question,
the obvious solution would be for him to reacquire the same.
That way the Constitution would be given, as it ought to be
given respect and deference.
“It may be said that it is too late at this stage to hope
for such a solution, the Rellosa opinion, although originally
concurred in by only one justice, being too firmly inbedded. The
writer however sees a welcome sign in the adoption by the Court
in this case of the concurring opinion of the then Justice, later
Chief Justice Bengzon. Had it been followed then, the problem
would not be still with us now. Fortunately, it is never too late
— not even in constitutional adjudication.’’
Art. 1417. When the price of any article or commodity

is determined by statute, or by authority of law, any person
paying any amount in excess of the maximum price allowed
may recover such excess.79
Art. 1418. When the law fixes, or authorizes the fixing
of the maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work longer
than the maximum thus fixed, he may demand additional
compensation for service rendered beyond the time limit.80
Art. 1419. When the law sets, or authorizes the setting of
a minimum wage for laborers, and a contract is agreed upon
79
New provision.
80
New provision.
631
Art. 1420 CONTRACTS
by which a laborer accepts a lower wage, he shall be entitled

to recover the deficiency.81
Art. 1420. In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may be
enforced.82
Article Applied. — The above article was applied to usurious

contracts of loan in Angel Jose vs. Chelda (supra) and Briones
vs. Cammayo (supra). The doctrine is illustrated in the following
problem asked in the 1975 Bar Examinations:
Problem — A partnership borrowed P20,000.00 from “A’’

at clearly usurious interest. Can the creditor recover anything
from the debtor? Explain.
Answer — Yes, the creditor can recover from the debtor
the following: the principal, legal interest on the principal from
the date of demand (Art. 2209, CC), legal interest on the legal
interests from the time of judicial demand (Art. 2212, CC), and
attorney’s fees, if proper, under Art. 2208 of the Civil Code.
That the creditor can recover the principal from the debtor
is now well settled. (Angel Jose vs. Chelda Enterprises, 23
SCRA 119; Briones vs. Cammayo, 41 SCRA 404.) In a usurious
contract of loan, there are always two stipulations. They are:
first, the principal stipulation whereby the debtor undertakes to
pay the principal; and second, the accessory stipulation whereby
the debtor undertakes to pay a usurious interest. These two
stipulations are divisible. According to Art. 1420 of the Civil
Code, in case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced. It is
clear that what is illegal is the prestation to pay the stipulated
interest. Hence, being separable, the latter only should be
deemed void.
(Note: It must be noted that in Angel Jose vs. Chelda, it
was held that attorney’s fees cannot be awarded. The principal
reason is that, at the time when the decision was promulgated,
there was yet no definite ruling on the point of law involved.
Now, it is already well-settled that the creditor may recover
the principal. Consequently, plaintiff creditor may recover the
principal plus legal interest under Arts. 2209 and 2212 of the
Civil Code. Hence, attorney’s fees may also be awarded.)
81
New provision.
82
New provision.
632
In a dissenting opinion, however, in Briones vs. Cammayo,

the then Justice Castro (with Chief Justice Concepcion and Justice
Fernando concurring) declared:
“Beyond the area of debate is the principle that in a contract

of loan of a sum of money, the cause, with respect to the lender,
is generally the lender’s prestation to return the same amount.
It is my view, however, that in a contract which is tainted with
usury, that is, with a stipulation x x x to pay usurious interest,
the prestation to pay such interest is an integral part of the
cause of the contract. It is also the controlling cause, for a
usurer lends his money not just to have it returned but indeed
to acquire inordinate gain. x x x
“Undoubtedly, the motive of the usurer is his desire to
acquire inordinate gain; this motive becomes an integral and
controlling part of the cause because its realization can be
achieved only by compliance by the borrower with the stipulated
prestation to pay usurious interest.
“The law never proscribes a contract merely because of
the immoral motive of a contracting party, for the reason that
it does not concern itself with motive but only with cause. An
exception is where such motive becomes an integral part of the
cause, like the stipulated usurious interest in a contract of loan.
xxx
“The prestation to pay usurious interest being an integral
part and controlling part of the cause, making it illegal and the
contract of loan void, Article 1411 of the New Civil Code should
be applied. x x x
“An exception is, however, provided in the second sentence
of Article 1957 which states: “The borrower may recover in
accordance with the laws on usury.’ As an exception to the
general rule in Article 1411, the debtor is allowed in accordance
with the Usury Law to recover the amount he has paid as
usurious interest. Thus, Article 1413 explicitly authorizes that
“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 payment.” But the lender is not allowed to recover the
principal, because no exception is made; hence, he falls within
the general rule stated in Article 1411.’’
We believe that the above pronouncement is the correct law.
633
Art. 1421. The defense of illegality of contracts is not

available to third persons whose interests are not directly
affected.83
Art. 1422. A contract which is the direct result of a
previous illegal contract, is also void and inexistent.84
83
New provision.
84
New provision.
634
TITLE III. — NATURAL
OBLIGATIONS 1
Art. 1423. Obligations are civil or natural. Civil obli-

gations give a right of action to compel their performance.
Natural obligations, not being based on positive law but on
equity and natural law, do not grant a right of action to en-
force their performance, but after voluntary fulfillment by
the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof. Some natural obli-
gations are set forth in the following articles.
Concept of Natural Obligations. — According to the above

article, natural obligations are those based on equity and natural
law, which do not grant a right of action to enforce their performance,
but after voluntary fulfillment by the obligor, authorize the
retention of what has been delivered or rendered by reason thereof.
In other words, they refer to those “obligations without a sanction,
susceptible of voluntary performance, but not through compulsion
by legal means.”2 Examples of such obligations are those regulated
by Arts. 1424 to 1430 of the Code.
Idem; Distinguished from civil obligations. — While
it is true that natural obligations are now regulated by the New
Civil Code, there are still two essential distinctions between such
obligations and civil obligations.3 They are: first, natural obligations
are based on equity and natural law, while civil obligations are based
on positive law; and second, natural obligations are not enforceable
by court action, while civil obligations are enforceable by court
action.4
1
All provisions in this Title are new.
2
4 Tolentino, Civil Code, 1956 Ed., p. 588, citing Colin & Capitant.
3
See comments under Art. 1156, Civil Code.
4
635
Art. 1423 CONTRACTS
Idem; Distinguished from moral obligations. — Although

the terms “natural obligations’’ and “moral obligations’’ are used
interchangeably in this jurisdiction, strictly speaking, there are two
essential differences between the two. They are: first, in natural
obligations there is a juridical tie between the parties which is
not enforceable by court action, while in moral obligations there
is no juridical tie whatsoever,5 and second, voluntary fulfillment of
natural obligations by the obligor produces legal effects which the
courts will recognize and protect, while voluntary fulfillment of
moral obligations, on the other hand, does not produce any legal
effect which courts will recognize and protect.6
Reasons for Regulation of Natural Obligations. — The
Code Commission explains the reasons for the regulation of natural
obligations in the new Code in the following words:
“In all the specified cases of natural obligation recognized

by the new Civil Code, there is a moral but not a legal duty to
perform or pay, but the person thus performing or paying feels
that in good conscience he should comply with his undertaking
which is based on moral grounds. Why should the law permit
him to change his mind and recover what he has delivered or
paid? Is it not wiser and more just that the law should compel
him to abide by his honor and conscience? Equity, morality,
natural justice — these are, after all, the abiding foundations
of all positive law. A broad policy justifies a legal principle that
would encourage persons to fulfill their moral obligations.
Furthermore, when the question is viewed from the side
of the payee, the incorporation of natural obligations into the
legal system becomes imperative. Under the laws in force under
the old Code, the payee is obliged to return the amount received
by him because the payor was not legally bound to make the
payment. But the payee knows that by all considerations of
right and justice he ought to keep what has been delivered to
him. He is therefore dissatisfied over the law, which deprives
him of that which in honor and fair dealing ought to pertain
to him. Is it advisable for the state thus to give grounds to the
citizens to be justly disappointed?
5
See 4 Tolentino, Civil Code, 1956 Ed., p. 589.
6
See Villaroel vs. Estrada, 71 Phil. 140, and Fisher vs. Robb, 69 Phil. 101. See
also Art. 1350, Civil Code. Strictly speaking, the obligation referred to the first case
is a natural obligation, while that referred to the second case is a moral obligation.
636
NATURAL OBLIGATIONS Arts. 1424-1425
To recapitulate: because they rest upon morality and

because they are recognized in some leading civil codes, natural
obligations should again become part and parcel of Philippine
law.’’7
Art. 1424. When a right to sue upon a civil obligation

has lapsed by extinctive prescription, the obligor who vol-
untarily performs the contract cannot recover what he has
delivered or the value of the service he has rendered.
Article Applied. — The application of the above article may

be illustrated by the following:
Problem — A borrowed from B P1,000 which amount B

failed to collect. After the debt has prescribed, A voluntarily
paid B who accepted the payment. After a few months, being
in need of money, A demanded the return of the P1,000 on
the ground that there was a wrong payment, the debt having
already prescribed, B refused to return the amount paid. May
A succeed in collecting if he sues B in court? Reason out your
answer. (1970 Bar problem)
Answer — A will not succeed in collecting the P1,000 if he
sues B in court. The case is expressly covered by Art. 1424 of the
Civil Code which declares that when a right to sue upon a civil
obligation has lapsed by extinctive prescription, the obligor who
voluntarily performs the contract cannot recover what he has
delivered or the value of the service he has rendered.
Because of extinction prescriptive, the obligation of A to
pay his debt of P1,000 to B became a natural obligation. While
it is true that a natural obligation cannot be enforced by court
action, nevertheless, after voluntary fulfillment by the obligor,
under the law, the obligee is authorized to retain what has been
paid by reason thereof. (Art. 1423, Civil Code.)
Art. 1425. When without the knowledge or against the

will of the debtor, a third person pays a debt which the obligor
is not legally bound to pay because the action thereon has
prescribed but the debtor later voluntarily reimburses the
third person, the obligor cannot recover what he has paid.
7
637
Art. 1426. When a minor between eighteen and twenty-

one years of age who has entered into a contract without
the consent of the parent or guardian, after the annulment
of the contract voluntarily returns the whole thing or price
received, notwithstanding the fact that he has not been
benefited thereby, there is no right to demand the thing or
price thus returned.
Art. 1427. When a minor between eighteen and twenty-
one years of age, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum
of money or delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the same from
the obligee who has spent or consumed it in good faith.
Art. 1428. When, after an action to enforce a civil
obligation has failed, the defendant voluntarily performs
the obligation, he cannot demand the return of what he has
delivered or the payment of the value of the service he has
rendered.
Art. 1429. When a testate or intestate heir voluntarily
pays a debt of the decedent exceeding the value of the
property which he received by will or by the law of intestacy
from the estate of the deceased, the payment is valid and
cannot be rescinded by the payer.
Art. 1430. When a will is declared void because it has not
been executed in accordance with the formalities required
by law, but one of the intestate heirs, after the settlement of
the debts of the deceased, pays a legacy in compliance with
a clause in the defective will, the payment is effective and
irrevocable.
638
TITLE IV. — ESTOPPEL 1
Art. 1431. Through estoppel an admission or representa-

tion is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying
thereon.
Concept of Estoppel. — Using the above article as basis,
estoppel may be defined as a condition or state by virtue of which an
admission or representation is rendered conclusive upon the person
making it and cannot be denied or disproved as against the person
relying thereon.
The reason for the inclusion of a separate chapter in the New
Civil Code on estoppel, according to the Code Commission, is that
the principle of estoppel, which is an important branch of American
law, will afford solution to many questions which are not foreseen
in our legislation. It is, of course, true that under the old Code there
are some articles whose underlying principle is that of estoppel; but
the fact that it does not definitely recognize estoppel as a separate
and distinct branch of our legal system has not at all helped in the
solution of these problems.2
Art. 1432. The principles of estoppel are hereby adopted

insofar as they are not in conflict with the provisions of this
Code, the Code of Commerce, the Rules of Court and special
laws.
Art. 1433. Estoppel may be in pais or by deed.
Kinds of Estoppel. — The New Civil Code, in Art. 1433,

gives only two kinds of estoppel — estoppel in pais (by conduct)
and estoppel by deed. This classification is based on the common
law classification of estoppels into equitable and technical estoppel.
1
2
639
This classification, however, is too broad. Hence, in a recent case,

the Supreme Court classified estoppels into: (1) estoppel in pais, (2)
estoppel by deed or by record, and (3) estoppel by laches.3
Idem; Estoppel in pais. — Estoppel in pais or by conduct
is that which arises when one by his acts, representations, or
admissions, or by his silence when he ought to speak out, intentionally
or through culpable negligence, induces another to believe certain
facts to exist and such other rightfully relies and acts on such belief,
as a consequence of which he would be prejudiced if the former is
permitted to deny the existence of such facts.4
Idem; id. — Estoppel by silence. — Estoppel by silence or
inaction refers to a type of estoppel in pais which arises when a
party, who has a right and opportunity to speak or act as well as
a duty to do so under the circumstances, intentionally or through
culpable negligence, induces another to believe certain facts to exist
and such other relies and acts on such belief, as a consequence of
which he would be prejudiced if the former is permitted to deny
the existence of such facts.5 A good example of this type of estoppel
would be that which is contemplated in Art. 1437 of the New Civil
Code.
Idem; id. — Estoppel by acceptance of benefits. — Es-
toppel by acceptance of benefits refers to a type of estoppel in pais
which arises when a party by accepting benefits derived from a cer-
tain act or transaction, intentionally or through culpable negligence,
induces another to believe certain facts to exist and such other re-
lies and acts on such belief, as a consequence of which he would be
prejudiced if the former is permitted to deny the existence of such
facts.6 A good example of this type of estoppel would be that which is
contemplated in Art. 1438 of the New Civil Code.
Idem; Estoppel by deed or by record. — Strictly speaking,
estoppel by deed and estoppel by record are two distinct types of
technical estoppel. Thus, estoppel by deed is defined as a type of
technical estoppel by virtue of which a party to a deed and his privies
are precluded from asserting as against the other party and his
3
Tijam vs. Sibonghanoy, 23 SCRA 29.
4
31 C.J.S. 237.
5
Ibid.
6
Ibid.
640
ESTOPPEL Arts. 1431-1433
privies any right or title in derogation of the deed, or from denying

any material fact asserted therein.7 On the other hand, estoppel by
record is defined as a type or technical estoppel by virtue of which
a party and his privies are precluded from denying the truth of
matters set forth in a record whether judicial or legislative.8
Idem; id. — Estoppel by judgment. — Estoppel by judgment
refers to a type of estoppel by virtue of which the party to a case is
precluded from denying the facts adjudicated by a court of competent
jurisdiction. Actually, estoppel by judgment is merely a type of
estoppel by record. It may be defined as the preclusion of a party to
a case from denying the facts adjudicated by a court of competent
jurisdiction.9 It must not, however, be confused with res judicata.
Estoppel by judgment bars the parties from raising any question that
might have been put in issue and decided in the previous litigation,
whereas res judicata makes a judgment conclusive between the
same parties as to the matter directly adjudged.10
Idem; Estoppel by laches. — Laches, in a general sense, is
failure or neglect, for an unreasonable and unexplained length of
time, to do that which, by exercising due diligence, could or should
have been done earlier; it is negligence or omission to assert a right
within a reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert
it.11 It is, therefore, a type of equitable estoppel which arises when
a party, knowing his rights as against another, takes no step or
delays in enforcing them until the condition of the latter, who has
no knowledge or notice that the former would assert such rights, has
become so changed that he cannot without injury or prejudice, be
restored to his former state.
Idem; id. — Basis. — The doctrine of laches or of “stale
demands” is based upon grounds of public policy which requires,
for the peace of society, the discouragement of stale claims and,
unlike the statute of limitations, is not a mere question of time but
7
Ibid.
8
19 Am. Jur. 601.
9
Ibid.
10
Phil. National Bank vs. Barretto, 52 Phil. 818; Namarco vs. Macadaeg, 52 Off.
Gaz. 182.
11
Tijam vs. Sibonghanoy, supra.
641
is principally a question of the inequity or unfairness of permitting

a right or claim to be enforced or asserted.12
Idem; id. — Elements. — In order to apply the doctrine of
laches, four essential elements must be present. These elements
are: (1) conduct on the part of the defendant, or of one under whom
he claims, giving rise to the situation of which complaint is made
and for which the complaint seeks a remedy; (2) delay in asserting
the complainant’s rights, the complainant having had knowledge
or notice, of the defendant’s conduct and having been afforded an
opportunity to institute a suit; (3) lack of knowledge or notice on the
part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant
in the event relief is accorded to the complainant, or the suit is not
held to be barred.13
Idem; id. id. — Application. — The doctrine of laches has been
applied several times in actions based on void contracts practically
rendering the doctrine of imprescriptibility of such actions useless.
Thus, in Rodriguez vs. Rodriguez,14 where the plaintiff, in 1934, sold
two fishponds to a daughter by a previous marriage, and the latter,
in turn, sold the same fishponds to her mother and stepfather for the
purpose of circumventing the legal prohibition against donations
between spouses thus converting the said fishponds into conjugal
properties, in an action commenced by said plaintiff to revindicate
the conveyed properties twenty-eight years later, it was held that
the doctrine of laches is applicable.
The case of Miguel vs. Catalino15 is even more illustrative. The
factual setting of this case is as follows: The father of the plaintiffs,
a non-Christian, sold a parcel of land to the father of the defendant
in 1928 without executive approval as required by Sec. 145 of the
Administrative Code. Despite the invalidity of the sale, the former
allowed the latter to enter, possess and enjoy the land in question
without protest, from 1928 to 1943, when the former died. The
plaintiffs, who succeeded the deceased in turn, remained inactive,
without taking any step to revindicate the property from 1943 to
1962, when the present suit was finally commenced in court. Is this
12
Ibid.
13
Miguel vs. Catalino, 26 SCRA 234, and cases cited therein.
14
24 SCRA 908.
15
Supra.
642
suit now barred by laches? According to the Supreme Court, the suit
is now barred by laches. Even granting plaintiff’s proposition that no
prescription lies against their father’s recorded title, their passivity
and inaction for more than thirty-four years justifies the defendant
in setting up the equitable defense of laches. All of the four elements
of laches are present. As a result, the action of plaintiffs must be
considered barred.16
Heirs of Lacamen vs. Heirs of Laruan

65 SCRA 605
Petition for review by certiorari of a decision of the Hon-
orable Court of Appeals affirming the judgment of the Court
of First Instance of Baguio City in Civil Case No. 738 entitled
“Heirs of Batiog Lacamen vs. Heirs of Laruan’’ . . . declaring the
contract of sale between Lacamen and Laruan null and void for
[lack of approval of the Director of the Bureau of Non-Christian
Tribes] . . .’’
Petitioners-appellants are the surviving heirs of Batiog
Lacamen, while respondents-appellants are the heirs of Laruan.
Sometime on January 28, 1928, Laruan executed a Deed of
Sale in favor of Batiog Lacamen conveying for the sum of P300.00
his parcel of land situated in the sitio of La Trinidad, Benguet,
Mountain Province, comprising 86 acres and 16 centares and
covered by Certificate of Title No. 420 of the Registry of Benguet.
The deed was acknowledged before Antonio Rimando, a notary
public in the City of Baguio.
Immediately after the sale, Laruan delivered the certificate
of title to Lacamen. Thereupon, Lacamen entered in possession
and occupancy of the land without securing the corresponding
transfer certificate of title in his name. He introduced various
improvements and paid the proper taxes. His possession was
open, continuous, peaceful, and adverse. After his death in 1942,
his heirs remained in and continued possession and occupancy
of the land. They too paid the taxes.
After the last Global War, Lacamen’s heirs “started fixing
up the papers of all properties” left by him. In or about June,
1957, they discovered that Laruan’s heirs, respondents-appel-
16
To the same effect — Lucas vs. Compania, 100 Phil. 277; Lotho vs. Ice and Cold
Storage of the Phil., 113 Phil. 713; Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA
605.
643
lants, were able to procure a new owner’s copy of Certificate of

Title No. 420 by a petition filed in court alleging that their copy
has been lost or destroyed. Through this owner’s copy, respon-
dents-appellants caused the transfer of the title on the lot in
their names. Transfer Certificate of Title No. T-775 was issued
to them by the Registry of Deeds of Benguet.
Refused of their demands for reconveyance of the title,
petitioners-appellants sued respondents-appellants in the Court
of First Instance of Baguio City on December 9, 1957, praying
among other things, that they be declared owners of the subject
property; that respondents-appellants be ordered to convey to
them by proper instruments or documents the land in question;
and that the Register of Deeds of Benguet be ordered to cancel
Transfer Certificate of Title No. T-775 and issue in lieu thereof
a new certificate of title in their names.
In answer, respondents-appellants traversed the aver-
ments in the complaint and claim absolute ownership over the
land. They asserted that their deceased father, Laruan, never
sold the property and that the Deed of Sale was not thumb-
marked by him.
On 5 April 1962, the Court of First Instance of Baguio
City found for respondents-appellants and against petitioners-
appellants. Forthwith, petitioners-appellants appealed to the
Court of Appeals.
On 7 December 1966, the Court of Appeals sustained the
trial court.
The Supreme Court, speaking through Justice R. Martin,
held:
In this review, petitioners-appellants press that the
Court of Appeals erred —
I
“. . . IN DECLARING THE SALE BETWEEN LACAMEN
AND LARUAN TO BE NULL AND VOID.
II
“. . . IN APPLYING STRICTLY THE PROVISIONS
OF SECTIONS 118 AND 122 OF ACT NO. 2874 AND
SECTIONS 145 AND 146 OF THE MINDANAO AND
SULU.
644
III
“. . . IN AFFIRMING THE DECISION OF THE COURT
OF FIRST INSTANCE OF BAGUIO CITY.’’
which assignments could be whittled down into the pervading

issue of whether the deceased Batiog Lacamen and/or his heirs,
herein petitioners-appellants, have validly acquired ownership
over the disputed parcel of land.
“The 1917 Administrative Code of Mindanao and Sulu
declares in its Section 145 that no contract or agreement relating
to real property shall be made by any person with any non-
Christian inhabitant of the Department of Mindanao and Sulu,
unless such contract shall bear the approval of the provincial
governor of the province wherein the contract was executed, or
his representative duly authorized for such purpose in writing
endorsed upon it. Any contract or agreement in violation of this
section is “null and void’’ under the succeeding Section 146.
“On 24 February 1919, Act No. 2798 was approved by
the Philippine Legislature extending to the Mountain Province
and the Province of Nueva Vizcaya the laws and other legal
provisions pertaining to the provinces and minor political
subdivisions of the Department of Mindanao and Sulu, with the
specific proviso that the approval of the land transaction shall be
by the Director of the Bureau of Non-Christian Tribes.
“Then on 29 November 1919, came Act No. 2874 otherwise
known as “The Public Land Act.’’ It provided in Section 118
thereof that “Conveyances and encumbrances made by persons
belonging to the so-called ‘non-Christian tribes,’ when proper
shall not be valid unless duly approved by the Director of the
Bureau of Non-Christian Tribes.” Any violation of this injunction
would result in the nullity and avoidance of the transaction
under the following Section 122.
“During the regime of the Commonwealth, C.A. 141 oth-
erwise known as “The Public Land Act” was passed — Novem-
ber 7, 1936 — amending Act No. 2874. However, it contained a
similar provision in its Section 120 that “Conveyances and en-
cumbrances made by illiterate non-Christians shall not be valid
unless duly approved by the Commissioner of Mindanao and
Sulu.’’
“The contracting parties, Lacamen and Laruan, are
bound by the foregoing laws, since both of them are illiterate
Igorots, belonging to the “non-Christian Tribes” of the Mountain
645
Province and the Controverted land was derived from a Free

Patent or acquired from the public domain.
“The trial court did show cordiality to judicial pronounce-
ments when it avoided the realty sale between Lacamen and
Laruan for want of approval of the Director of the Bureau of
Non-Christian Tribes. For jurisprudence decrees that non-ap-
proved conveyances and encumbrances of realty by illiterate
non-Christians are not valid, i.e., not binding or obligatory.
“Nevertheless, the thrust of the facts in the case before
us weakens the gathered strength of the cited rule. The facts
summon the equity of laches.
“Laches” has been defined as “such neglect or omission
to assert a right, taken in conjunction with lapse of time and
other circumstances causing prejudice to an adverse party, as
will operate as a bar in equity.” It is a delay in the assertion of
a right “which works disadvantage to another” because of the
“inequity founded on some change in the condition or relations
of the property or parties.” It is based on public policy which,
for the peace of society, ordains that relief will be denied to
a stale demand which otherwise could be a valid claim. It is
different from and applies independently of prescription.
While prescription is concerned with the fact of delay, laches
is concerned with the effect of delay. Prescription is a matter of
time; laches is principally a question of inequity of permitting
a claim to be enforced. This inequity being founded on some
change in the condition of the property or the relation of the
parties. Prescription is statutory; laches is not. Laches applies
in equity, whereas prescription applies at law. Prescription is
based on a fixed time, laches is not.
“Laruan’s sale of the subject lot to Lacamen could have
been valid were it not for the sole fact that it lacked the approval
of the Director of the Bureau of Non-Christian Tribes. There
was impressed upon its face full faith and credit after it was
notarized by the notary public. The non-approval was the only
“drawback” of which the trial court has found the respondents-
appellants to “have taken advantage as their lever to deprive
[petitioner-appellants] of this land and that their motive is
out and out greed.” As between Laruan and Lacamen, the sale
was regular, not infected with any flaw. Laruan’s delivery of
his certificate of title to Lacamen just after the sale symbolizes
nothing more than a bared recognition and acceptance on his
part that Lacamen is the new owner of the property. Thus,
not any antagonistic show of ownership was ever exhibited by
Laruan after that sale and until his death in May 1938.
646
“From the transfer of the land on January 28, 1928,

Lacamen possessed and occupied the ceded land in concepto
de dueno until his death in April 1942. Thereafter, his heirs,
petitioners-appellants herein, took over and exercised dominion
over the property, likewise unmolested for nearly 30 years
(1928-1957) until the heirs of Laruan, respondents-appellants,
claimed ownership over the property and secured registration
of the same in their names. At the trial, petitioners-appellants
have been found to have introduced improvements on the land
consisting of houses, barns, greenhouses, walls, roads, etc., and
trees valued at P38,920.00.
“At this state, therefore, respondents-appellants’ claim of
absolute ownership over the land cannot be countenanced. It
has been held that while a person may not acquire title to the
registered property through continuous adverse possession, in
derogation of the title of the original registered owner, the heir
of the latter, however, may lose his right to recover back the
possession of such property and the title thereto, by reason of
laches.17 Much more should it be in the instant case where the
possession of nearly 30 years or almost half a century now is in
pursuance of sale which regrettably did not bear the approval of
the executive authority but which the vendor never questioned
during his lifetime. Laruan’s laches extends to his heirs, the
respondents-appellants herein, since they stand in privity with
him.
“Indeed, in a like case,18 it was ruled that —
“Courts can not look with favor at parties who, by

their silence, delay and inaction, knowingly induce another
to spend time, effort and expense in cultivating the land,
paying taxes and making improvements thereon for 30
long years, only to spring from ambush and claim title
when the possessor’s efforts and the rise of land values
offer an opportunity to make easy profit at his expense.”
“For notwithstanding the invalidity of the sale, the vendor

Laruan suffered the vendee Lacamen to enter, possess and
occupy the property in concepto de dueno without demurrer and
molestation, from 1928 until the former’s death in 1938; and
when respondents-appellants succeeded to the estate of their
17
De Lucas vs. Gamponia, 100 Phil. 277; Wright, Jr. vs. Lepanto Consolidated
Mining Co., L-18904, July 11, 1964, 11 SCRA 508.
18
Miguel vs. Catalino, L-23072, November 29, 1968, 26 SCRA 234.
647
father, they too kept si1ent, never claiming that the lot is their
own until in 1957 or after almost 30 years they took “advantage
of the [non-approval of the sale] as their lever to deprive
[petitioners-appellants] of this land’’ with a motive that was “out
and out greed.’’ Even granting, therefore, that no prescription
lies against their father’s recorded title, their quiescence and
inaction for almost 30 years now commands the imposition of
laches against their adverse claim. (Miguel, footnote 27)
“It results that as against Laruan and his heirs,
respondents-appellants herein, the late Batiog Lacamen and his
heirs, petitioners-appellants herein, have superior right and,
hence, have validly acquired ownership of the litigated land.
Vigilantibus non dormientibus sequitas subvenit.
“IN VIEW OF THE FOREGOING, the judgment of the
Court of Appeals affirming that of the trial court is hereby
reversed and set aside.
“The petitioners-appellants are hereby declared the lawful
owners of the land in question. Accordingly, Transfer Certificate
of Title No. T-775 in the name of respondents-appellants is
hereby cancelled and in lieu thereof the Register of Deeds of
Benguet is ordered to issue a new transfer certificate of title in
the name of petitioners-appellants.’’
As a matter of fact, the doctrine has even been applied to

actions for reconveyance of property held in constructive or implied
trust. Thus, where some of the co-heirs were able, through fraud,
to register a large tract of land in their names in 1937, while it is
very true that the principle is that if property is acquired through
fraud, the person obtaining it is considered a trustee of an implied
trust for the benefit of the person from whom the property comes or
to whom it belongs, nevertheless, since the action by the beneficiary
for reconveyance of the property was commenced only in 1960, it is
clear that the doctrine of laches is applicable. In other words, the
action is already barred.19
Idem; id. — Laches distinguished from prescription. —
Laches is different from prescription. Thus —
(1) Laches is concerned with the effect of delay; prescription
is concerned with the fact of delay.
19
Fabian vs. Fabian, 22 SCRA 231.
648
ESTOPPEL Art. 1434
(2) Laches is principally a question of inequity of permitting

a claim to be enforced, this inequity being founded on some changes
in the condition of the property or the relation of the parties;
prescription is a question or matter of time;
(3) Laches is not statutory, whereas prescription is statutory.
(4) Laches applies in equity, whereas prescription applies at
law.
(5) Laches is not based on fixed time, whereas prescription is
based on fixed time.20
Art. 1434. When a person who is not the owner of a

thing sells or alienates and delivers it, and later the seller or
grantor acquires title thereto, such title passes by operation
of law to the buyer or grantee.
Article Applied. — The above article is illustrated in the
following case:
Bucton vs. Gabar

55 SCRA 499
Appeal from the decision of the Court of Appeals in CA-

G.R. No. 49091-R, dated January 10, 1973, reversing the
judgment of the trial court and dismissing the complaint filed
by herein petitioners, and from said appellate court’s resolution
dated February 5, 1973, denying petitioners’ motion for
reconsideration.
The facts of the case, as found by the trial court, which
have not been disturbed by respondent Court of Appeals, are as
follows:
“Plaintiff Nicanora Gabar Bucton (wife of her co-
plaintiff Felix Bucton) is the sister of defendant Zosimo
Gabar, husband of his co-defendant Josefina Llamoso
Gabar.
“This action for specific performance prays, inter-
alia, that defendants-spouses be ordered to execute in
20
Miguel vs. Catalino, supra; Nielsen vs. Lepanto Consolidated Mining Co., 18
SCRA 1040.
649
Art. 1434 CONTRACTS
favor of plaintiffs a deed of sale of the western half of a

parcel of land having an area of 728 sq.m. covered by TCT
No. II (from OCT No. 6337) of the office of the Register of
Deeds of Misamis Oriental.
“Plaintiff’s evidence tends to show that sometime in
1946 defendant Josefina Llamoso Gabar bought the above-
mentioned land from the spouses Villarin on installment
basis, to wit, P500.00 down, the balance payable in
installments. Josefina entered into a verbal agreement
with her sister-in-law, plaintiff Nicanora Gabar Bucton,
that the latter would pay one-half of the price (P3,000)
and would then own one-half of the land. Pursuant to this
understanding Nicanora on January 19, 1946 gave her
sister-in-law Josefina the initial amount of P1,000, for
which the latter signed a receipt marked as Exhibit A.
“Subsequently, on May 2, 1948, Nicanora gave
Josefina P400. She later signed a receipt marked as
Exhibit B.
“On July 30, 1951 plaintiffs gave defendants
P1,000.00 in concept of loan, for which defendant Zosimo
Gabar signed a receipt marked as Exhibit E.
“Meanwhile, after Josefina had received in January,
1946 the initial amount of P1,000.00 as above stated,
plaintiffs took possession of the portion of the land
indicated to them by defendants and built a modest
nipa house therein. About two years later plaintiffs
built behind the nipa house another house for rent. And,
subsequently, plaintiffs demolished the nipa house and
in its place constructed a house of strong materials with
three apartments in the lower portion for rental purposes.
Plaintiffs occupied the upper portion of this house as their
residence, until July, 1969 when they moved to another
house, converting and leasing the upper portion as a
dormitory.
“In January, 1947, the spouses Villarin executed
the deed of sale of the land abovementioned in favor of
defendant Josefina Llamoso Gabar, Exhibit I, to whom
was issued on June 20, 1947 TCT No. II, cancelling OCT
No. 6337 (Exhibit D).
“Plaintiffs then sought to obtain a separate title
for their portion of the land in question. Defendants
repeatedly declined to accommodate plaintiffs. Their
excuse: the entire land was still mortgaged with the
650
ESTOPPEL Art. 1434
Philippine National Bank as guarantee for defendants’

loan of P3,500 contracted on June 16, 1947 (Exhibit D-1).
“Plaintiffs continued enjoying their portion of the
land, planting fruit trees and receiving the rentals of their
buildings. In 1953, with the consent of defendants (who
were living on their portion), plaintiffs had the entire land
surveyed and subdivided preparatory to obtaining their
separate title to their portion. After the survey and the
planting of the concrete monuments defendants erected a
fence from point 2 to point 4 of the plan, Exhibit I, which
is the dividing line between the portion pertaining to
defendants, Exhibit I-1, and that pertaining to plaintiffs,
Exhibit I-2.
“In the meantime, plaintiffs continued to insist
on obtaining their separate title. Defendants remained
unmoved, giving the same excuse. Frustrated, plaintiffs
were compelled to employ Atty. Bonifacio Regalado to
intercede; counsel tried but failed. Plaintiffs persevered,
this time employing Atty. Aquilino Pimentel, Jr. to
persuade defendants to comply with their obligation to
plaintiffs; this, too, failed. Hence, this case, which has cost
plaintiff’s P1,500.00 in attorney’s fees.
“Defendants’ evidence — based only on the testimony
of defendant Josefina Llamoso Gabar — denies agreement
to sell to plaintiffs one-half of the land in litigation. She
declared that the amounts she had received from plaintiff
Nicanora Gabar Bucton — first, P1,000 then P400 — were
loans, not payment of one-half of the price of the land
(which was P3,000.00). This defense is devoid of merit.
“When Josefina received the first amount of P1,000
the receipt she signed, Exhibit A, reads:
‘Cagayan, Mis. Or.

January 19, 1946
‘Received from Mrs. Nicanora Gabar the sum of one
thousand (P1,000) pesos, victory currency, as part payment of
the one thousand five hundred (P1,500.00) pesos, which sum is
one-half of the purchase value of Lot No. 337, under Torrens
Certificate of Title No. 6337, sold to me by Mrs. Carmen Roa
Villarin.
‘(Sgd.) Josefina Ll. Gabar.’’’
651
Art. 1434 CONTRACTS
On the basis of the facts quoted above the trial court on

February 14, 1970, rendered judgment the dispositive portion of
which reads:
“WHEREFORE, judgment is hereby rendered for

plaintiffs:
“1) Ordering defendants within thirty days from
receipt hereof to execute a deed of conveyance in favor of
plaintiffs of the portion of the land covered by OCT No. II,
indicated as Lot 337-B in the Subdivision Plan, Exhibit I,
and described in the Technical Description, Exhibit I-2;
should defendants for any reason fail to do so, the deed
shall be executed in their behalf by the Provincial Sheriff
of Misamis Oriental, or his Deputy;
“2) Ordering the Register of Deeds of Cagayan de
Oro, upon presentation to him of the above-mentioned deed
of conveyance, to cancel TCT No. II and in its stead to issue
two Transfer Certificates of Title, to wit, one to plaintiffs
and another to defendants, based on the subdivision Plan
and Technical Description above-mentioned; and ordering
defendants to present and surrender to the Register of
Deeds their TCT No. II so that the same maybe cancelled;
and
“3) Ordering defendants to pay unto plaintiffs
attorney’s fees in the amount of P1,500.00 and to pay the
costs.
“SO ORDERED.”
Appeal was interposed by private respondents with the
Court of Appeals, which reversed the judgment of the trial court
and ordered petitioners’ complaint dismissed, on the following
legal disquisition:
“Appellees’’ alleged right of action was based on the
receipt (Exh. A) which was executed way back on January
19, 1946. An action arising from a written contract does
not prescribe until after the lapse of ten (10) years from
the date of action accrued. This period of ten (10) years is
expressly provided for in Article 1144 of the Civil Code.
“From January 19, 1946 to February 15, 1968, when
the complaint was filed in this case, twenty-two (22) years
and twenty-six (26) days had elapsed. Therefore, the
plaintiffs’ action to enforce the alleged written contract
(Exh. A) was not brought within the prescriptive period of
ten (10) years from the time the cause of action accrued.
652
ESTOPPEL Art. 1434
“The land in question is admittedly covered by a

torrens title in the name of Josefina Llamoso Gabar so that
the alleged possession of the land by the plaintiffs since
1947 is immaterial because ownership over registered
realty may not be acquired by prescription or adverse
possession (Section 40 of Act 496).
“It is not without reluctance that in this case we are
constrained to sustain the defense of prescription, for we
think that plaintiffs really paid for a portion of the lot in
question pursuant to their agreement with the defendants
that they would then own one-half of the land. But we
cannot apply ethical principles in lieu of express statutory
provisions. It is by law provided that:
‘ART. 1144. The following actions must be brought within
ten years from the time the right of action accrues:
1. Upon a written contract;

2. Upon an obligation created by law;
3. Upon a judgment.’
“If eternal vigilance is the price of safety, one cannot
sleep on one’s right and expect it to be preserved in its
pristine purity.’’
Petitioners appeal is predicated on the proposition that as
owners of the property by purchase from private respondents,
and being in actual, continuous and physical possession thereof
since the date of its purchase, their action to compel the vendors
to execute a formal deed of conveyance so that the fact of their
ownership may be inscribed in the corresponding certificate of
title, had not yet prescribed when they filed the present action.
The Supreme Court, speaking through Justice Antonio,
held:
“We hold that the present appeal is meritorious.
“1. There is no question that petitioner Nicanora
Gabar Bucton paid P1,500.00 to respondent Josefina Ga-
bar as purchase price of one-half of the lot now covered
by TCT No. II, for respondent Court of Appeals found as
a fact “that plaintiffs really paid for a portion of the lot in
question pursuant to their agreement with the defendants
that they would own one-half (1/2) of the land.” That sale,
although not consigned in a public instrument or formal
writing, is nevertheless valid and binding between peti-
tioners and private respondents, for the time-honored rule
653
Art. 1434 CONTRACTS
is that even a verbal contract of sale or real estate pro-

duces legal effects between the parties.21 Although at the
time said petitioner paid P1,000.00 as part payment of the
purchase price on January 19, 1946, private respondents
were not yet the owners of the lot, they became such own-
ers on January 24, 1947, when a deed of sale was executed
in their favor by the Villarin spouses. In the premises, Ar-
ticle 1434 of the Civil Code, which provides that “[w]hen
a person who is not the owner of a thing sells or alienates
and delivers it, and later the seller or grantor acquires
title thereto, such title passes by operation of law to the
buyer or grantee,” is applicable.22 Thus, the payment by
petitioner Nicanora Gabar Bucton of P1,000.00, on Janu-
ary 19, 1946, her second payment of P400.00 on May 2,
1948, and the compensation, up to amount of P100.00 (out
of the P1,000.00 loan obtained by private respondents
from petitioners on July 30, 1951), resulted in the full pay-
ment of the purchase price and the consequential acquisi-
tion by petitioners of ownership over one-half of the lot.
Petitioners therefore became owners of the one-half por-
tion of the lot in question by virtue of a sale which, though
not evidenced by a formal deed, was nevertheless proved
by both documentary and parole evidence.
2. The error of respondent Court of Appeals in
holding that petitioners’ right of action had already
prescribed stems from its belief that the action of
petitioners is based on the receipt Exh. “A’’ which was
executed way back on January 19, 1946, and, therefore, in
the view of said appellate court, since petitioners’ action
was filed on February 15, 1968, or after the lapse of twenty-
two (22) years and twenty-six (26) days from the date
of said document, the same is already barred according
to the provisions of Article 1144 of the new Civil Code.
The aforecited document (Exh. “A’’), as well as the other
documents of similar import (Exh. “B” and Exh. “E”), are
the receipts issued by private respondents to petitioners,
evidencing payments by the latter of the purchase price of
one-half of the lot.
21
Couto vs. Cortes, 8 Phil. 459, 460 (1907); Guerrero vs. Miguel, 10 Phil. 52, 53
(1908).
22
Llacer vs. Muñoz de Bustillo, et al., 12 Phil. 328, 334; Inquimboy vs. Paez Vda.
de Cruz, 108 Phil. 1054, 1057; Castrillo, et al. vs. Court of Appeals, et al., March 31,
1964, 10 SCRA 549, 553; Estoque vs. Pajimula, L-24419, July 15, 1968, 24 SCRA 59,
62.
654
ESTOPPEL Art. 1434
“The real and ultimate basis of petitioners’ action is their

ownership of one-half of the lot coupled with their possession
thereof, which entitles them to a conveyance of the property.
In Sapto, et al. vs. Fabiana,23 this Court, speaking thru Mr.
Justice J.B.L. Reyes, explained that under the circumstances
no enforcement of the contract is needed, since the delivery
of possession of the land sold had consummated the sale and
transferred title to the purchaser, and that, actually, the action
for conveyance is one to quiet title, i.e., to remove the cloud
upon the appelee’s ownership by the refusal of the appellants to
recognize the sale made by their predecessors. We held therein
that “* * * it is an established rule of American Jurisprudence
(made applicable in this jurisdiction by Art. 480 of the New Civil
Code) that actions to quiet title to property in the possession of
the plaintiff are imprescriptible. (44 Am. Jur., p. 47; Cooper vs.
Rhea, 20 L.R.A. 930; Inland Empire Land Co. vs. Grant County,
138 Wash. 439, 245 Pac. 14.)
“The prevailing rule is that the right of a plaintiff to
have his title to land quieted, as against one who is asserting
some adverse claim or lien thereon, is not barred while the
plaintiff or his grantors remain in actual possession of the
land, claiming to be owners thereof, the reason for this
rule being that while the owner in fee continues liable to
an action, proceeding, or suit upon the adverse claim he
has a continuing right to the aid of a court of equity to
ascertain and determine the nature of such claim and its
effect on his title, or to assert any superior equity in his
favor. He may wait until his possession is disturbed or his
title in attacked before taking step to vindicate his right.
But the rule that the statute of limitations is not available
as a defense to an action to remove a cloud from title can
only invoked by a complainant when he is in possession.
One who claims property which is in the possession of
another must, it seems, invoke his remedy within the
statutory period.’ (44 Am. Jur., p. 47)’’
The doctrine was reiterated recently in Gallar vs. Husain,
et al., where we ruled that by the delivery of the possession of
the land, the sale was consummated and title was transferred
to the appellee, that the action is actually not for specific
performance, since all it seeks is to quiet title, to remove the
cloud cast upon appellee’s ownership as a result of appellant’s
refusal to recognize the sale made by his predecessor, and that
as plaintiff-appellee is in possession of the land, and the action
23
103 Phil. 683, 686-687.
655
is imprescriptible. Considering that the foregoing circumstances

obtain in the present case, we hold that petitioner’s action has
not prescribed.
“WHEREFORE, the decision and resolution of respondent
Court of Appeals appealed from are hereby reversed, and the
judgment of the Court of First Instance of Misamis Oriental,
Branch IV, in its Civil Case No. 004, is revived. Costs against
private respondents.’’
Art. 1435. If a person in representation of another sells

or alienates a thing, the former cannot subsequently set up
his own title as against the buyer or grantee.
Art. 1436. A lessee or a bailee is estopped from asserting
title to the thing leased or received, as against the lessor or
bailor.
Art. 1437. When in a contract between third persons
concerning immovable property, one of them is misled by a
person with respect to the ownership or real right over the
real estate, the latter is precluded from asserting his legal
title or interest therein, provided all these requisites are
present:
(1) There must be fraudulent representation or wrong-
ful concealment of facts known to the party estopped;
(2) The party precluded must intend that the other
should act upon the facts as misrepresented;
(3) The party misled must have been unaware of the
true facts; and
(4) The party defrauded must have acted in accordance
with the misrepresentation.
Art. 1438. One who has allowed another to assume ap-
parent ownership of personal property for the purpose of
making any transfer of it, cannot, if he received the sum for
which a pledge has been constituted, set up his own title to
defeat the pledge of the property, made by the other to a
pledgee who received the same in good faith and for value.
Art. 1439. Estoppel is effective only as between the
parties thereto or their successors in interest.
656
TITLE V. — TRUST 1
CHAPTER 1
GENERAL PROVISIONS
Art. 1440. A person who establishes a trust is called

the trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the
trustee; and the person for whose benefit the trust has been
created is referred to as the beneficiary.
Concept of Trusts. — Trust is the legal relationship between
one person having an equitable ownership in a certain property and
another person owning the legal title to such property.2
There are always three persons involved in the creation of a
trust, whether created by intention of the parties or by operation of
law. They are: first, the trustor, or the person who establishes the
trust; second, the trustee, or the one in whom confidence is reposed
as regards property for the benefit of another person; and third,
the beneficiary, or the person for whose benefit the trust has been
created.3
The object of the trust, on the other hand, is known as the trust
res. The trust res must consist of property, actually in existence, in
which the trustor has a transferable interest or title, although as a
rule, it consists of any kind of transferable property, either realty
or personalty, including undivided, future, or contingent interest
therein.4
1
2
54 Am. Jur., Sec. 4, p. 21.
3
4
54 Am. Jur., Sec. 32, p. 44.
657
Art. 1441 CONTRACTS
Art. 1441. Trusts are either express or implied. Express

trusts are created by the intention of the trustor or of the
parties. Implied trusts come into being by operation of law.
Kinds of Trust. — Trusts are either express or implied.
Express trusts are those created by the intention of the trustor or
of the parties. Implied trusts come into being by operation of law.5
Implied trusts may be either resulting or constructive.
In Ramos vs. Ramos (61 SCRA 284), the Supreme Court
adopted the following definitions:
“Implied trusts are those which, without being expressed,

are deducible from the nature of the transaction as matters
of intent, or which are superinduced on the transaction by
operation of law as matters of equity, independently of the
particular intention of the parties.” (89 C.J.S. 724.) They are
ordinarily subdivided into resulting and constructive trusts. (89
C.J.S. 722.)
“A resulting trust is broadly defined as a trust which is
raised or created by the act or construction of law, but in its
more restricted sense it is a trust raised by implication of law
and presumed always to have been contemplated by the parties,
the intention as to which is to be found in the nature of their
transaction, but not expressed in the deed or instrument of
conveyance.” (89 C.J.S. 725.) Examples of resulting trusts are
found in Articles 1448 to 1455 of the Civil Code.
“On the other hand, a constructive trust is a trust “raised
by construction of law, or arising by operation of law.” In a more
restricted sense and as contradistinguished from a resulting
trust, a constructive trust is “a trust not created by any words,
either expressly or impliedly evincing a direct intention to create
a trust, but by the construction of equity in order to satisfy the
demands of justice. It does not arise by agreement or intention
but by operation of law.” (89 C.J.S. 726-727.) “If a person obtains
legal title to property by fraud or concealment, courts of equity
will impress upon the title a so-called constructive trust in favor
of the defrauded party.” A constructive trust is not a trust in the
technical sense. (See Art. 1456, Civil Code.)”
5
658
TRUST Art. 1442
Idem; Express and implied trusts distinguished. —

Express and implied trusts may be distinguished from each other as
follows:
(1) Express trust is one created by the intention of the trustor
or of the parties, whereas an implied trust is one that comes into
being by operation of law.
(2) Express trusts are those created by the direct and positive
acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust, whereas implied trusts
are those which, without being expressed, are deducible from the
nature of the transaction by operation of law as matters of equity,
independently of the particular intention of the parties.
(3) Thus, if the intention to establish a trust is clear, the
trust is express; if the intent to establish a trust is to be taken from
circumstances or other matters indicative of such intent, then the
trust is implied.
(4) An express trust concerning an immovable or any interest
therein cannot be proved by parole evidence, whereas an implied
trust concerning an immovable or any interest therein may be
proved by parole evidence.
(5) An action to enforce an express trust, so long as there is
no express repudiation of the trust by the trustee and made known
to the beneficiary, cannot be barred by laches or by extinctive
prescription, whereas an action to enforce an implied trust, even
when there is no express repudiation of the trust by the trustee
and made known to the beneficiary, may be barred by laches or by
extinctive prescription.6
Art. 1442. The principles of the general law of trusts,

insofar as they are not in conflict with the Code, the Code of
Commerce, the Rules of Court and special laws are hereby
adopted.
6
See Cuaycong vs. Cuaycong, 21 SCRA 1192; Fabian vs. Fabian, 22 SCRA 231.
See also Arts. 1443, 1457, Civil Code.
659
CONTRACTS
CHAPTER 2
EXPRESS TRUSTS
Art. 1443. No express trusts concerning an immovable

or any interest therein may be proved by parole evidence.
Art. 1444. No particular words are required for the
creation of an express trust, it being sufficient that a trust is
clearly intended.
Art. 1445. No trust shall fail because the trustee appoint-
ed declines the designation, unless the contrary should ap-
pear in the instrument constituting the trust.
Art. 1446. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon
the beneficiary, his acceptance shall be presumed, if there is
no proof to the contrary.
660
CHAPTER 3
IMPLIED TRUSTS
Art. 1447. The enumeration of the following cases of

implied trust does not exclude others established by the
general law of trust, but the limitation laid down in Article
1442 shall be applicable.
Art. 1448. There is an implied trust when property is
sold, and the legal estate is granted to one party but the
price is by another for the purpose of having the beneficial
interest of the property. The former is the trustee, while the
latter is the beneficiary. However, if the person to whom the
title is conveyed is a child, legitimate or illegitimate, of the
one paying the price of the sale, no trust is implied by law, it
being disputably presumed that there is a gift in favor of the
child.
Art. 1449. There is also an implied trust when a donation
is made to a person but it appears that although the legal
estate is transmitted to the donee, he nevertheless is either
to have no beneficial interest or only a part thereof.
Art. 1450. If the price of a sale of property is loaned or paid
by one person for the benefit of another and the conveyance
is made to the lender or payor to secure the payment of the
debt, a trust arises by operation of law in favor of the person
to whom the money is loaned or for whom it is paid. The
latter may redeem the property and compel a conveyance
thereof to him.
Article Applied. — The above article is illustrated in the

following problem asked in the 1959 Bar Examinations:
Problem — “X’’ being unable to pay the purchase price

of a house and lot for his residence has requested “Y,’’ and “Y’’
agreed to lend him the money under one condition, that the
661
Certificate of Title be transferred to him, in Y’s own name for his

protection and as security of the loan. Later on “Y’’ mortgaged
the property to the bank without the knowledge of “X.’’ When
the mortgage became due, “Y’’ did not redeem the mortgage and
the property was advertised for sale. “X’’ retained you as his
lawyer. What advise would you give your client and what legal
ground provided by the Code would you assert to defend his
rights? Give reasons. (1959 Bar Problem)
Answer — It is clear that in the instant problem, the
provision of Art. 1450 of the Civil Code is applicable. This article
provides: “If the price of the sale of property is loaned or paid
by one person for the benefit of another and the conveyance
is made to the lender or payor to secure the payment of the
debt, a trust arises by operation of law in favor of the person
to whom the money is loaned or for whom it is paid. The latter
may redeem the property and compel a conveyance thereof to
him.” It must be observed, however, that the mortgage of the
property by “Y’’ to the bank is perfectly valid inasmuch as the
bank was not aware of any flaw or defect in the title or mode of
acquisition of “Y’’ since the right of “X’’ has not been annotated
in the Certificate of Title; in other words, the bank had acted
in good faith. Consequently, the only way by which I would be
able to help “X’’ would be to advice him to redeem the mortgaged
property from the bank. After this is done, “X’’ can then institute
an action to compel “Y’’ to reconvey the property to him pursuant
to the provision of Art. 1450 of the Civil Code. In this action for
reconveyance, the amount paid by “X’’ to the bank in redeeming
the property can then be applied to the payment of his debt to
“Y.’’ If there is an excess, he can recover the amount from “Y.’’
Art. 1451. When land passes by succession to any person

and he causes the legal title to be put in the name of another,
a trust is established by implication of law for the benefit of
the true owner.
Art. 1452. If two or more persons agree to purchase
property and by common consent the legal title is taken
in the name of one of them for the benefit of all, a trust is
created by force of law in favor of the others in proportion to
the interest of each.
Art. 1453. When property is conveyed to a person in
reliance upon his declared intention to hold it for, or transfer
it to another or the grantor, there is an implied trust in favor
of the person whose benefit contemplated.
662
IMPLIED TRUSTS Arts. 1454-1456
Art. 1454. If an absolute conveyance or property is

made in order to secure the performance of an obligation
of the grantor toward the grantee, a trust by virtue of law
is established. If the fulfillment of the obligation is offered
by the grantor when it becomes due, he may demand the
reconveyance of the property to him.
Art. 1455. When any trustee, guardian or other person
holding a fiduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be made
to him or to a third person, a trust is established by operation
of law in favor of the person to whom the funds belong.
Art. 1456. If property is acquired through mistake or
fraud, the person obtaining it is, by force of law, considered
a trustee of an implied trust for the benefit of the person
from whom the property comes.
Article Applied. — The most common application of the above
article would be those cases where after the death of the decedent,
some of the co-heirs will enter into an extrajudicial settlement or
partition of the hereditary estate with preterition of the other co-
heirs, and subsequently, will secure original or transfer certificates
of title in their names. In such a case, such co-heirs are considered
trustees of an implied or constructive trust for the benefit of the
other co-heirs who were omitted in the settlement or partition.1
Idem; Prescriptibility of actions to enforce trust. — Prior
1964, the question as to whether or not an action for reconveyance of
real property based upon an implied trust resulting from fraud may
be barred by the statute of limitations was unsettled. The majority
of cases, however, supported the view that the action cannot be
barred. Thus, where a brother, as administrator of the estate of his
parents, took advantage of the absence of his sister and registered
the properties adjudicated to his sister in his own name, in an action
commenced by the sister twenty-nine years afterwards, it was held
that the defense of prescription is clearly untenable. Public policy
demands that a person guilty of fraud, or, at least, of breach of trust,
should not be allowed to use a Torrens Title as a shield against the
consequences of his wrongdoing.2
See Fabian vs. Fabian, 22 SCRA 231, and cases cited therein.
1
Jacinto vs. Jacinto, 115 Phil. 363. To the same effect: Juan vs. Zuñiga, 114 Phil.
2
1163; Villaluz vs. Neme, 117 Phil. 25, and cases cited therein.
663
Finally, on May 29, 1964, the Supreme Court in Gerona vs. De

Guzman,3 in an excellently phrased decision penned by then Justice
Concepcion, unequivocally reaffirmed the rule, overruling previous
decisions, that “an action for reconveyance of real property based
upon an implied trust resulting from fraud, may not be barred by the
statute of limitations,” and further that “the action therefore may be
filed x x x from the discovery of the fraud,’’ the discovery in that case
being deemed to have taken place when new certificates of title were
issued exclusively in the names of the defendants therein. This rule
was subsequently reiterated in a long line of notable decisions.
Idem; id. — Period of prescription. — What is the period
of prescription for bringing an action for reconveyance based on the
implied or constructive trust which is created in Article 1456 of the
New Civil Code? It depends. Thus —
1. If the action for reconveyance involves the annulment
of the voidable contract which became the basis for the fraudulent
registration of the subject property, then the period of prescription
is four years from the discovery of the fraud. This finds codal support
in Art. 1391, par. 4, of the Civil Code, which declares that the action
for annulment of contracts which are voidable by reason of mistake
or fraud shall be brought within four years from the time of the
discovery of the mistake or fraud. It also finds support in the cases
of Gerona vs. De Guzman (11 SCRA 153), Fabian vs. Fabian (22
SCRA 231), Carantes vs. Court of Appeals (76 SCRA 514), Alarcon
vs. Bidin (120 SCRA 390), and other cases.
2. If the action involves the declaration of the nullity or
inexistence of a void or inexistent contract which became the basis
for the fraudulent registration of the subject property, then the
action is imprescriptible. This finds codal support in Art. 1410 of
the Civil Code, which declares that the action or defense for the
declaration of the inexistence of a contract does not prescribe. It also
finds support in the case of Tongoy vs. Court of Appeals (123 SCRA
99).
3. If the action does not involve the annulment of a contract,
but there was fraud in the registration of the subject property, then
the period of prescription is ten years from the discovery of the fraud.
3
11 SCRA 153.
664
This finds codal support in No. (2) of Art. 1144 of the Civil Code,
which declares that an action based upon an obligation created by
law must be brought within ten years from the time the right of
action accrues. It also finds support in the cases of Bueno vs. Reyes
(27 SCRA 1179), Varsity Hills, Inc. vs. Navarro (43 SCRA 503), Escay
vs. Court of Appeals (61 SCRA 369), Jaramil vs. Court of Appeals (78
SCRA 420), Vda. de Nacalaban vs. Court of Appeals (80 SCRA 428),
Duque vs. Domingo (80 SCRA 654), and cases.
4. If the legitimate owner of the subject property which was
fraudulently registered in the name of another had always been in
possession thereof so that, as a consequence, the constructive notice
rule cannot be applied, in reality the action for reconveyance is an
action to quiet title; therefore, the action is imprescriptible. This
finds support in the case of Caragay Layno vs. Court of Appeals (133
SCRA 718).
Idem; Laches may bar action. — In Fabian vs. Fabian,4 the
Supreme Court reiterated the rule laid down in Diaz vs. Goricho5
that laches may bar an action to enforce a constructive trust. In
the latter case, the Court, speaking through Justice J.B.L. Reyes,
declared:
“Article 1456 of the new Civil Code, while not retroactive

in character, merely expresses a rule already recognized by
our courts prior to the Code’s promulgation. (see Gayondato
vs. Insular Treasurer, 49 Phil. 244.) Appellants are, however,
in error in believing that like express trust, such constructive
trusts may not be barred by lapse of time. The American law
on trusts has always maintained a distinction between express
trusts created by the intention of the parties, and the implied
or constructive trusts that are exclusively created by law, the
latter not being trusts in their technical sense. (Gayondato vs.
Insular Treasurer, supra.) The express trusts disable the trustee
from acquiring for his own benefit the property committed to
his management or custody, at least while he does not openly
repudiate the trust, and makes such repudiation known to the
beneficiary or cestui que trust. For this reason, the old Code of
Civil Procedure (Act 190) declared that the rules on adverse
4
22 SCRA 231.
5
103 Phil. 264-265.
665
possession does not apply to ‘continuing and subsisting’ (i.e.,

unrepudiated) trusts.
But in constructive trusts, x x x the rule is that laches
constitutes a bar to actions to enforce the trust, and repudiation
is not required, unless there is a concealment of the facts giving
rise to the trust (54 Am. Jur., Secs. 580, 581; 65 C.J., Secs. 956,
957; American Law Institute, Restatement of Trusts, Section
219; on Restitution, Section 179; Stianson vs. Stianson, 6 ALR
287; Claridad vs. Beñares, 97 Phil. 973.)’’
Idem; Acquisition of property by trustee through pre-

scription. — In this jurisdiction, it is now settled that in construc-
tive trusts, the trustee may acquire absolute ownership over the
trust res by acquisitive prescription. Thus, where two of the four
co-owners of a certain parcel of land which they had inherited from
their parents, had been in adverse possession of the property since
1928 in the concept of owners, declaring the property for taxation
purposes in their names in 1929, and in 1945, they subdivided the
property into two equal parts, and two transfer certificates of title
were issued separately in their names, in an action for reconveyance
commenced by the preterited co-heirs in 1960, it was held that such
action is not only barred by extinctive prescription and by laches,
but a valid, full and complete title over the property has already
vested in the defendants by acquisitive prescription.6
It must be observed that although acquisitive prescription in
favor of the trustee is possible in both express and implied trusts,
nevertheless, in the former, before absolute title can be vested in
the trustee, the following requisites must concur: (1) The trustee
must expressly repudiate the right of the beneficiary; (2) such act of
repudiation must be brought to the knowledge of the beneficiary; (3)
the evidence thereon must be clear and conclusive; and (4) expiration
of the period prescribed by law.7 In implied trusts, however, express
repudiation of the trust by the trustee is not required. All that is
required is that he must set up a title which is adverse to that of the
beneficiary. In other words, the normal requisites for extraordinary
acquisitive prescription must be present.
6
Fabian vs. Fabian, supra.
7
See Lagura vs. Levantino, 71 Phil. 566; Salinas vs. Tunson, 55 Phil. 729; Ramos
vs. Ramos, 61 SCRA 284.
666
Idem; Illustrative cases. — The following digests of recent

cases decided by the Supreme Court will serve to clarify some of the
above-stated principles:
Fabian vs. Fabian

22 SCRA 231
The land in question was acquired by Pablo Fabian in

1909. In 1928, Pablo died survived by four children, Esperanza,
Benita I, Benita II, and Silvina. Later, in 1937, through a
series of fraudulent acts, Silvina Fabian and Teodora Fabian,
a niece of Pablo, were able to secure an original certificate of
title in their name. In 1945, they subdivided the lot into two
equal parts and as a result, two new transfer certificates of title
were issued in their names. On July 18, 1960, the other heirs of
Pablo Fabian brought an action against them for reconveyance
on the ground of the existence of an implied or constructive
trust. Defendants, however, interposed the defenses of laches,
extinctive prescription, and acquisition of absolute ownership
of the property by acquisitive prescription. From an order of
dismissal of the complaint, plaintiffs have appealed.
Held: As far as the defense of laches is concerned, appel-
lants are in error in believing that like express trust, construc-
tive trust may not be barred by lapse of time. The express trusts
disable the trustee from acquiring for his own benefit the prop-
erty committed to his management or custody, at least while he
does not openly repudiate the trust, and make such repudiation
known to the beneficiary. But in constructive trusts, the rule is
that laches constitutes a bar to actions to enforce the trust, and
repudiation is not required, unless there is a concealment of the
facts giving rise to the trust.
As far as defense of extinctive prescription is concerned, it
is well-settled in this jurisdiction that an action for reconveyance
of real property based upon a constructive or implied trust
resulting from fraud may be barred by the statute of limitations.
Upon the undisputed facts in the case at bar, not only had laches
set when the appellants instituted their action for reconveyance
in 1960, but their right to enforce the constructive trust had
already prescribed.
It logically follows from the above disquisition that
acquisitive prescription has likewise operated to vest absolute
title in the appellees, pursuant to the provisions of Section 41 of
Act 190 which was then the law in force.
667
Bueno, et al. vs. Reyes, et al.

27 SCRA 1179
The lot which is the subject matter of this litigation

originally belonged to Jorge Bueno. When he died, the property
descended by intestate succession to his three children, Brigida,
Eugenia and Rufino. Subsequently, Brigida and Eugenia died. In
1936, by agreement among the heirs, Francisco Reyes, Eugenia’s
husband, was entrusted with the job of filing the answer in the
cadastral proceedings and in obtaining title to the property for
and in behalf of the heirs of Jorge Bueno. Reyes filed the answer,
claiming the lot as property belonging to himself and to his two
brothers, Juan and Mateo. Subsequently, the lot was adjudicated
in favor of the claimants, in whose names an original certificate
of title was issued in 1939. In 1962, the heirs of Jorge Bueno,
who had always been in possession of the property, discovered
the fraud committed by Francisco Reyes. As a consequence,
they brought this action for reconveyance of the lot to them.
Defendants, however, interposed the defense or prescription of
action which was reiterated in a motion to dismiss. The trial
court a quo held that the action is predicated on the existence
of an implied trust and that such action prescribes in ten years.
Consequently, the case was dismissed. Plaintiffs appealed. The
question now is — has the action prescribed?
Held: While there are some decisions which hold that an
action based upon a trust is imprescriptible, with better rule, as
laid down by this Court in other decisions, is that prescription
does supervene where the trust is merely an implied one.
Upon the general proposition that an action for reconvey-
ance such as the present is subject to prescription in ten years
to the appellees and the court a quo are correct. The question
here, however, is: from what time should the prescriptive pe-
riod be counted? It should be remembered that the constructive
trust arose by reason of the bad faith of Francisco Reyes, com-
pounded by the connivance of his brothers. Consequently, the
cause of action upon such trust must be deemed to have accrued
only upon the discovery of such bad faith, or to put it more spe-
cifically, upon the discovery by the appellants that. Francisco
Reyes, in violation of their agreement with him, had obtained
registration of the disputed property in his own name and in the
names of his brothers? It would not do to say that the cadastral
proceeding itself, by virtue of its nature as a proceeding in rem,
was constructive notice to the appellants, for as far as they were
concerned the cadastral answer they had authorized Francisco
668
Reyes to file was not adverse to them; and neither he nor the
appellees may invoke the constructive notice rule on the basis of
their own breach of the authority thus given. On top of all these,
it was the appellants and not the appellees who were in posses-
sion of the property as owners, continuously up to 1962, when
for the first time the latter appeared upon the scene and tried
to get such possession, thereby revealing to them the fact of the
fraudulent registration.
It would be more in keeping with justice, therefore, to
afford the plaintiffs as well as the defendants the opportunity
to lay their respective claims and defenses before the court in a
full-blown litigation. Wherefore, the order appealed from is set
aside and the case is remanded for further proceedings.
De la Cerna, et al. vs. De la Cerna, et al.

72 SCRA 514
This is a direct appeal from an order of the lower court

dismissing the complaint of plaintiffs for partition and
reconveyance of property with damages on the ground that the
action has already prescribed. The factual backdrop of the case
is as follows: Narciso de la Cerna died in 1945. His widow and
their two legitimate children subsequently executed a deed of
extrajudicial partition, which they registered on September 14,
1946 in the Office of the Register of Deeds, wherein they stated
that they are the only owners of the subject property and that
one-half thereof is the share of the widow and the other one-
half is the share of the children. On the basis of such deed, a
transfer certificate of title was issued to them. Twenty years
later, plaintiffs, children of Narciso by a prior marriage, brought
the instant action against defendants. Has their right of action
prescribed?
Held: His Honor committed no error in ruling that the
action has already prescribed. It is idle to bother as to whether
the action here is one founded exclusively on fraud which
prescribed in four years or one based on constructive trust
which is barred after ten years, there being no question that the
appellees secured their title more than twenty years before the
filing of the complaint, and it is from the date of the issuance of
such title that the effective assertion of adverse title for purposes
of the statute of limitations is counted. (Gerona vs. De Guzman,
11 SCRA 153.)
669
Caragay-Layno vs. Court of Appeals

133 SCRA 718
Respondent Appellate Court, then the Court of Appeals,

affirmed in toto the judgment of the former Court of First
Instance of Pangasinan, Branch III, at Dagupan adjudging
private respondent entitled to recover possession of a parcel of
land and ordering petitioners, as defendants below, to vacate
the premises. Petitioners, as paupers, now seek a reversal of
that judgment.
It was established by a relocation survey that the Disputed
Portion is a 3,732 square-meter-area of a bigger parcel of sugar
and coconut land (Lot No. 1, Psu-24206 [Case No. 44, GLRO Rec.
No. 117]), with a total area of 8,752 square meters, situated at
Calasiao, Pangasinan. The entire parcel is covered by Original
Certificate of Title No. 63, and includes the adjoining Lots 2
and 3, issued on 11 September 1947 in the name of Mariano M.
de Vera, who died in 1951 without issue. His intestate estate
was administered first by his widow and later by her nephew,
respondent Salvador Estrada.
Petitioner, Juliana Caragay, and the decedent, Mariano
de Vera, were first cousins, “both orphans, who lived together
under one roof in the care of a common aunt.’’
As administrator, DE VERA’s widow filed in Special
Proceedings No. 4058 of the former Court of First Instance of
Pangasinan, Branch III, an inventory of all properties of deceased
which included “a parcel of land in the poblacion of Calasiao,
Pangasinan, containing an area of 5,417 square meters, more or
less, and covered by Tax Declaration No. 12664.’’
Because of the discrepancy in area mentioned in the
Inventory as 5,147 square meters (as filed by the widow) and
that in the title as 8,752 square meters, ESTRADA to the
Disputed Property and found that the northwestern portion,
subsequently surveyed to be 3,732 square meters, was occupied
by petitioners-spouses Juliana Caragay Layno and Benito
Layno. ESTRADA demanded that they vacate the Disputed
Portion since titles in the name of the deceased DE VERA, but
petitioners refused claiming that the land belonged to them,
and, before them, to JULIANA’s father Juan Caragay.
ESTRADA then instituted suit against JULIANA for the
recovery of the Disputed Portion (Civil Case No. D-2007), which
she resisted, mainly on the ground that the Disputed Portion
had been fraudulently or mistakenly included in OCT No. 63,
670
so that an implied or constructive trust existed in her favor. She

then counterclaimed for reconveyance of property in the sense
that title be issued in her favor.
After hearing, the Trial Court rendered judgment ordering
JULIANA to vacate the Disputed Portion.
On appeal, respondent Appellate Court affirmed the
Decision in toto.
Before us, JULIANA takes issue with the following finding
of respondent Court:
“Although Section 102 of Act 496 allows a Petition to

compel a trustee to reconvey a registered land to the cestui
que trust (Severino vs. Severino, 44 Phil. 343; Escobar
vs. Locsin 74 Phil. 86) this remedy is no longer available
to Juliana Caragay. Mariano de Vera’s land Lot I, Psu-
24206, was registered on September 11, 1947 (Exhibit ‘C’)
and it was only on March 28, 1967 when the defendants
filed their original answer that Caragay sought the
reconveyance to her of the 3,732 square meters. Thus, her
claim for reconveyance based on implied or constructive
trust has prescribed after 10 years. (Banaga vs. Soler,
L-15717, June 30, 1961; JM Tuason and Co. vs. Mag-
dangal, L-15539, Jan. 30, 1962; Alzona vs. Capunitan, 4
SCRA 450.) In other words, Mariano de Vera’s original
Certificate of Title No. 63 (Exhibit ‘C’) has become
indefeasible.”
We are constrained to reverse.
The evidence discloses that the Disputed Portion was
originally possessed openly, continuously and uninterruptedly
in the concept of an owner by Juan Caragay, the deceased father
of JULIANA, and had been declared in his name under Tax
Declaration No. 28694 beginning with the year 1921 (Exhibit “2-
C’’), later revised by Tax Declaration No. 2298 in 1951 (Exhibit
“2-C’’). Upon the demise of her father in 1914, JULIANA
adjudicated the property to herself as his sole heir in 1958
(Exhibit “4’’), and declared it in her name under Tax Declaration
No. 22522 beginning with the year 1959 (Exhibit “2-A’’), later
cancelled by TD No. 3539 in 1966 (Exhibit “2’’). Realty taxes
were also religiously paid from 1938 to 1972 (Exhibit “3-A’’ to
“3-H’’). Taking the previous possession of her father to her own,
they had been in actual open, continuous and uninterrupted
possession in the concept of owner for about forty-five (45) years,
until said possession was distributed in 1966 when ESTRADA
671
informed JULIANA that the Disputed Portion was registered in

Mariano DE VERA’s name.
To substantiate her claim of fraud in the inclusion of
the Disputed Portion in OCT No. 63, JULIANA, an unlettered
woman, declared that during his lifetime, DE VERA, her first
cousin, and whom she regarded as a father as he was much older
borrowed from her the Tax Declaration of her land purportedly
to be used as collateral for his loan and sugar quota application;
that relying on her cousin’s assurances, she acceded to his
request and was made to sign some documents the contents of
which she did not even know because of her ignorance, that she
discovered the fraudulent inclusion of the Disputed Portion in
OCT No. 63 only in 1966 when ESTRADA so informed her and
sought to eject them.
Of significance is the fact, disclosed by the evidence, that
for twenty (20) years from the date of registration of title in
1947 up to 1967 when this suit for recovery of possession was
instituted, neither the deceased DE VERA up to the time of his
death in 1951, not his successors-in-interest, had taken steps to
possess or lay adverse claim to the Disputed Portion. They may,
therefore be said to be guilty of laches as would effectively detail
their cause of action. Administrator ESTRADA took interest in
recovering the said portion only when he noticed the discrepancy
in areas in the inventory of property and in the title.
Inasmuch as DE VERA has failed to assert any rights over
the Disputed Portion during his lifetime, nor did his successors-
in-interest possess it for a single moment; but that, JULIANA
has been in actual, continuous and open possession thereof to
the exclusion of all and sundry, the inescapable inference is,
fraud having been unsubstantiated, that had been erroneously
included in OCT No. 63. The mistake was confirmed by the
fact that deducting 3,732 sq. ms., the area of the Disputed
Portion from 8,752 sq.ms., the area of Lot 1 in OCT No. 63, the
difference is 5,020 sq.ms., which closely approximates the area
of 5,147 sq.ms., indicated in the Inventory of Property of DE
VERA. In fact, the widow by limiting the area in said Inventory
to only 5,147 sq.ms. the effect, recognized and admitted that
the Disputed Portion of 3,132 sq.ms. did not form part of the
decedent’s estate.
The foregoing conclusion does not necessarily wreak havoc
on the indefeasibility of a Torrens title. For, mere possession of
a certificate of title under the Torrens System is not conclusive
as to the holder’s true ownership of all the property described
672
therein for however does not by virtue of said certificate

alone become the owner of the land illegally included. A land
Registration Court has no jurisdiction to decree a lot to persons
who have never asserted any right of ownership over it.
“x x x Obviously then, the inclusion of said area in the title
of Lot No. 8151 is void and of no effect for a land registration
Court has no jurisdiction to decree a lot to persons who have
put no claim in it and who have never asserted any right of
ownership over it. The Land Registration Act as well as the
Cadastral Act protects only the holders of a title in good faith
and does not permit its provisions to be used as a shield for the
commission of fraud, or that one should enrich himself at the
expense of another.
JULIANA, whose property has been wrongfully registered
in the name of another, but which had not yet passed into the
hands of third parties, can properly seek its reconveyance.
“The remedy of the landowner whose property has been
wrongfully or erroneously registered in another’s name is, after
one year from the date of the decree, not to set aside the decree,
but respecting the decree as incontrovertible and no longer open
to review, to bring an ordinary action in the ordinary court of
justice for reconveyance or, if the property has passed into the
hands of an innocent purchaser for value, for damages.
Prescription cannot be invoked against JULIANA for
the reason that as lawful possessor and owner of the Disputed
Portion, her cause of action for reconveyance which, in
effect, seeks to quiet title to the property, fall within settled
jurisprudence that an action to quiet title to property in one’s
possession is imprescriptible, her undisturbed possession over
a period of fifty-two (52) years gave her a continuing right to
seek the aid of a Court of equity to determine the nature of the
adverse claim of a third party and the effect of her own title.
Besides, under the circumstances, JULIANA’s right to
quiet title, to seek reconveyance, and to annul OCT No. 63
accrued only in 1966 when she was made aware of a claim
adverse to her own. It was only then that the statutory period
of prescription may be said to have commenced to run against
her, following the pronouncement in Faja vs. Court of Appeals,
supra, a case almost identical to this one.
“x x x Inasmuch as it is alleged in paragraph 3 of Frial’s
complaint, that Felipe Faja has been in possession of the
property since 1845 up to present for the period of 30 years,
673
her cause of action for reconveyance, which in effect seeks to

quiet her title to the property, falls within that rule. If at all,
the period of prescription began to run against Felipe Faja only
from the time she was served with copy of the complaint in 1975
giving her notice that the property she was occupying was titled
in the name of Indalecio Frial. There is settled jurisprudence
that one who is in actual possession of a piece of land claiming
to be owner thereof may wait until his possession is disturbed
or his title is attacked before taking steps to vindicate his right,
the reason for the rule being, that his disturbed possession gives
him a continuing right to seek the aid of a court of equity to
ascertain and determine the nature of the adverse claim of a
third party and its effect on his own title, which right can be
claimed only by one who is in possession. No better situation
can be conceived at the moment so as to apply this rule on equity
than that of herein petitioners whose mother, Felipa Faja, was
in possession of the litigated property for no less than 30 years
and was suddenly confronted with a claim that the land she had
been occupying and cultivating all these years, was titled in the
name of a third person. We hold that in such a situation the right
to quiet title to the property, to seek its reconveyance and annul
any certificate of title covering it accrued only from the time
the one in possession was made aware of a claim adverse to his
own, and it is only then that the statutory period of prescription
commences to run against such possessor.”
WHEREFORE, the judgment under review is hereby
REVERSED AND SET ASIDE, and another one entered
ordering private respondent Salvador Estrada, as Administrator
of the Estate of the Deceased, Mariano de Vera, because the
segregation of the disputed portion of 3,732 square meters
forming part of Lot No. 1, PSU-24206, Case No. 44, GLRO Rec.
No. 117, presently occupied by petitioner Juliana Caragay-
Layno, and to reconvey the same to said petitioner. After the
segregation shall have been accomplished, the Register of Deeds
of Pangasinan is hereby ordered to issue a new certificate of
title covering said 3,732 sq.m. portion in favor of petitioner, and
another certificate of title in favor of the Estate of the deceased,
Mariano de Vera covering the remaining portion of 5,052 square
meters. No costs.
SO ORDERED.
Even in the Bar Examinations, the subject of constructive

trust has become popular. Thus, in 1972, the following problem was
asked:
674
Problem — “X,’’ “Y’’ and “Z,’’ falsely representing that

they were the only heirs of their deceased father Juan Reyes,
executed an extrajudicial partition of the property of their
deceased parent. The extrajudicial partition was registered
and as a result thereof, the original certificate of title of their
deceased parent was cancelled and a transfer certificate of title
was issued to them. They subsequently sold 1/2 of the land to
Pedro who registered the deed of conveyance, and secured a
transfer certificate of title in his name. Fourteen years later,
“A,’’ as a legitimate heir of the deceased Juan Reyes, upon
discovering these acts of his brothers, filed an action to recover
from “X,’’ “Y,’’ “Z’’ and Pedro his 1/4 pro indiviso share in said
property. Can “A’’ recover? Decide with reasons.
Answer — “A’’ cannot recover. It must be observed that “X,’’
“Y’’ and “Z’’ are actually trustees of an implied or constructive
trust for the benefit of their co-heir “A” who was omitted in the
extrajudicial settlement. This is so, because according to Art.
1456 of the Civil Code, if property is acquired through mistake
or fraud, the person obtaining it is, by force of law, considered
a trustee of an implied trust for the benefit of the person from
whom the property comes.
In the instant case, “A,’’ as a legitimate heir of the
deceased Juan Reyes, had a perfect right to bring an action
against his co-heirs for reconveyance of his 1/4 pro indiviso
share in the property owned in common. It is different in the
case of Pedro. The sale of 1/2 of the land to him by “X,’’ “Y’’ and
“Z’’ is certainly valid because he is a purchaser in good faith
and for value and because co-owners are given the right to sell
their individual shares in the thing owned in common. (Art. 493,
Civil Code.) However, the effect thereof is limited to the portion
which may be alloted to the vendors upon the termination of the
co-ownership. (Art 493, Civil Code.) Hence, such sale shall be
respected.
However, “A’s’’ right of action against “X,’’ “Y’’ and “Z’’ is
now barred:
(1) By extinctive prescription. Well-settled is the
rule in this jurisdiction that an action for reconveyance
of real property based upon a constructive trust resulting
from fraud may be barred by prescription after ten years.
The period is counted from the date the trustee set up
a title adverse to that of the beneficiary. Normally, this
would take place at the time the deed of extrajudicial
settlement is registered and a new certificate of title is
675
issued in the name of the trustee or trustees. The basis

for this is that such registration constitutes a constructive
notice to the whole world.
(2) By laches, in constructive trusts, the rule is
likewise settled that laches constitutes a bar to enforce
the trust. All of the elements are present. There is conduct
of the defendant giving rise to the situation of which com-
plaint is made and for which the complaint seeks a rem-
edy; the plaintiff, with knowledge or notice of such con-
duct, slept on his rights; the defendants had no knowledge
or notice that the plaintiff would assert his right against
them; and finally, defendants will suffer damage or injury
if the complaint is not barred.
Problem — “HH,’’ “II,’’ “JJ’’ inherited from their parents
a large parcel of land. “HH’’ and “II’’ went abroad to reside in
Canada. In their absence, “JJ’’ applied for the registration of
the whole land in his name only. In due time, “JJ’’ obtained a
Torrens Title for the land.
When “HH’’ and “II’’ returned from Canada after seven
years, they found out what “JJ’’ did and sued him for their
respective shares. “JJ’’ contended that the decree of title can no
longer be reviewed or changed because of the lapse of more than
one year from its issuance.
In whose favor would you decide? (1980 Bar Problem)
Answer — My decision will be in favor of “HH’’ and “II.’’
In reality, the action commenced by plaintiffs against defendant
is an action for reconveyance of their respective shares in the
subject property based on the constructive trust recognized
through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of
the person from whom the property comes. Since the obligation
is created by law, the action commenced by the beneficiaries
against him shall be counted from the time of the discovery of
the fraud. When did the plaintiffs discover the fraud. Under the
constructive notice rule, they are deemed to have discovered the
fraud as of the date the trustee set up in himself a title adverse
to the title of the beneficiaries. Normally, this would be the date
the trustee (“JJ’’) obtained his Torrens Title. Since the instant
action was commenced seven years after the issuance of said
Title, it is obvious that it was commenced in time.
Problem — Explain the following concept of trust de
son tort or otherwise known as constructive trust (2007 Bar
Problem)
676
IMPLIED TRUSTS Art. 1457
Answer — A constructive trust is a form of implied trust

created by equity to meet the demands of justice. It arises
contrary to intention against one who, by fraud, duress or
mistake or breach of fiduciary duty or wrongful disposition of
another’s property, obtains or holds the legal right to property
which he is not entitled to under the law. (Huang vs. CA, G.R.
No.108525, Sept. 13,1994). An example of constructive trust
is when a property is acquired through mistake or fraud, the
person obtaining it is by force of law, considered a trustee of
an implied trust for the benefit of the person from whom the
property comes (Art.1456,NCC).
Art. 1457. An implied trust may be proved by oral

evidence.
— oOo —
677
COMMENTS and JURISPRUDENCE
on
OBLIGATIONS and CONTRACTS
By
DESIDERIO P. JURADO†
Associate Justice, Court of Appeals
Pre-Bar Reviewer, Civil Law, San Beda College, UP Law Center,
Ateneo de Manila University, Far Eastern University,
University of Santo Tomas, University of Manila,
Manila Review Center; Professor, Civil Law Review,
San Beda College, Far Eastern University,
University of Santo Tomas,
Lyceum; Lecturer, UP Law Center
TWELFTH REVISED EDITION

2010
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i
Philippine Copyright, 2010
by
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ISBN 978-971-23-5330-7
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iv
PREFACE TO THE 2010 EDITION
True to its categorization by Dr. Jovito Salonga more than for-

ty-nine (49) years ago, our father’s book exemplifies the reality that,
as put by Dr. Salonga : “ xxx the living law is not that simple, that
above the array of words and phrases, there is an area of study that
is real and fascinating, as involved as life, and as complicated as the
social process of which the law is the chief agency of control.”
This 2009 Revised Edition, again, is a testament to the living
law; a law that continues to evolve and grow with life itself. It is a
law that continues to thrive and flourish with life’s complexities.
Indeed, there is wisdom in Dr. Salonga’s conclusion that “xxx law
assumes stability only when it has not lost its capacity for growth.”
This capacity for growth is possessed by the law on Obligations and
Contracts.
In closing this Preface, we again express our eternal and deep-
est gratitude to Dr. Salonga for the inspiring and beautiful Fore-
word, and to Mr. Juanito F. Fontelera, owner and publisher of the
REX BOOK STORE, without whose support, this edition would not
have been made possible.
QUEZON CITY , Philippines

August 23, 2008
v
JUSTICE ROLAND B. JURADO
Associate Justice, Sandiganbayan, Chairman, 5th Division;
Former RTC Judge Branch 76, Malolos, Bulacan;
Former MTC Judge, Branch 2, Malolos, Bulacan;
Former Fourth Assistant City Prosecutor,
Caloocan City; Former Professor of Law – FEU, UE, MLQU and
SSC; BSC; Ll.B. (FEU)
ATTY. ROSARIO JURADO-BENEDICTO

Vice-President and Head, Bank of the
Philippine Islands, Legal Services Division
Partner, Benedicto, Verzosa, Burkley & Associate;
Former Corporate Secretary/Assistant Corporate Secretary
and Legal Officer of the Filinvest Group of Companies, and the Francisco
V. del Rosario Group of Companies; Private Practitioner, Dizon, Paculdo,
Jurado, Jurado, Vitug and Associates;
Former Professor, F.E.U. School of Business; Former Professor
of San Sebastian College of Law; A.B. and Ll.B. (U.P. Diliman)
ATTY. RUDOLF PHILIP B. JURADO

Private Practitioner, The Law Firm of R.P.B. Jurado; Former
Partner, Culvera, Waytan & Jurado Law Offices; Former Trial Lawyer,
Coronel Law Office; Professor, MLQU School of Law; Former Professor
U.E. College of Law and Lyceum College of Law; B.S.C., Ll.B. (U.E.)
ATTY. ROBERT B. JURADO

Consultant, Housing and Urban Development
and Coordinating Council (HUDCC); Private Practitioner;
Former Director, Legislative Bills and Index Services,
Senate of the Republic of the Philippines and HUDCC;
Former Consultant to the Office of the Vice President of the
Philippines; Former Trial Lawyer, Marbibi Law Office, Electrical Engi-
neering (N.U.); Ll.B. (F.EU)
and
ATTY. LEONARD PEEJAY V. JURADO

Junior Associate
Angara Abello Concepcion
Regala and Cruz Law Officers
BSC LLB — San Beda College
vi
We cannot help but read once again the Foreword that
Dr. Jovito R. Salonga has written way back in 1959. Yes, it was
written almost forty three years ago, but as we read it, we only
realize too well how true and accurate every word he has written,
more particularly when he said that:
“x x x life is complex and real, that the law which essays
to support and maintain a regime of ordered liberty, upholding
basic values and reconciling demands and interests that over-
lap and conflict, should cope with its increasing complexities,
that it cannot be inert but that it must thrive and flourish,
since history has shown that law assumes stability only when
it has not lost its capacity for growth.
x x x The subject of Obligations and Contracts pervades
the entire social structure. It has been recognized that no
society can long endure without a workable, realistic system
of liabilities. The field of contracts alone illustrates the vital
function of law in a free society, where respect for the worth
and dignity of the human personality demands that individual
volition be afforded a wide area of latitude consistent with the
demands of the social order. x x x’’
And as we write this Preface, the law on Obligations and
Contracts continue to expand and pervade even our advancing
technology, including electronic commerce. Yes, indeed, this is a
living law. It is neither simple nor easy but is rather real and as
involved as life.
We are glad that as observed by Dr. Salonga this “book sup-
plies an acute need for a manual that is well-grounded, comprehen-
sive and balanced in treatment.’’
Thus, once again, we wish to extend our increasing gratitude
to Dr. Salonga, to the Professors of Obligations and Contracts who
have been prescribing this book as their official text, to our brother,
RICHARD B. JURADO of the Philippine Senate who assisted us in
the preparation of this book and to Rex Book Store. To all of you,
thank you so much!!!
vii
JUDGE ROLAND B. JURADO
Judge, Regional Trial Court, Branch 76, Malolos, Bulacan;
Former Judge, Municipal Trial Court, Branch 2, Malolos, Bulacan;
Former Fourth Assistant City Prosecutor, Caloocan City;
Former Legal Consultant, Metro Manila Commission
Former Professor, San Sebastian College of Law;
U.E. College of Law and
M.L.Q.U. College of Law; — B.S.C., Ll.B. (F.E.U.)
ATTY. ROSARIO B. JURADO-BENEDICTO

Assistant Vice-President and Head, Documentation
and Intellectual Property Rights, Department,
Legal Services Division of the Bank of the Philippine Islands;
Partner, Benedicto, Verzosa, Gealogo, Burkley and Associates;
Former Corporate Secretary and Legal Officer of the Filinvest
Group of Companies and the Francisco V. del Rosario
Group of Companies;
Former Professor, F.E.U. School of Business;
Former Professor, San Sebastian College of Law; —
A.B., Ll.B., (U.P. Diliman)

Partner, Rudolf Philip B. Jurado Law Office, Legal Practitioner
Former Partner, Cabrera, Waytan & Jurado Law Office;
Former Trial Lawyer, Antonio P. Coronel Law Office;
Professor, MLQU College of Law;
Former Professor, University of the East
College of Law; and Lyceum of the Philippines, College of Law;
Former Executive Assistant, Court of Appeals; —
B.S.C., Ll.B. (U.E.)
and
ATTY. ROBERT B. JURADO

Chief Legal, Office of Senator Noli de Castro, Legal Practitioner
Former Director, Legislative Bills and Index Services,
Senate of the Republic of the Philippines;
Trial Lawyer, Marbibi Law Office — B.S.E.E., Ll.B. (F.E.U.)
viii
The recent decisions of the Supreme Court as well as the other

developments in the field of Obligations and Contracts have truly
supported the need to come out with a revised edition of this text.
Thus, inspired with the memory of our father, the late JUSTICE
DESIDERIO P. JURADO who so loved the study of law without
question, coupled with the unceasing care of NENA (as was affec-
tionately called by Papa) we humbly bring out this revised edition.
We dare not end this Preface without expressing or reiterating
our deepest gratitude to Dr. JOVITO R. SALONGA who wrote the
beautiful foreword for this text, to the many Professors of Obliga-
tions and Contracts who continue to prescribe this book as their of-
ficial text in the various law schools and universities, and finally to
Mr. and Mrs. FONTELERA of Rex Book Store.
Quezon City, Philippines

December, 1992
JUDGE ROLAND B. JURADO

(Judge, Municipal Trial Court, Branch 2, Malolos, Bulacan;
Former Fourth Assistant City Prosecutor, Caloocan City;
Former Legal Consultant, Metro Manila Commission
Professor, San Sebastian College of Law;
B.S.C., Ll.B. (F.E.U.)
ATTY. ROSARIO B. JURADO-BENEDICTO

(Manager, Legal Services Division,
Bank of the Philippine Island;
Partner, Ramirez, Bargas, Benedicto and Associates;
Former Corporate Secretary and Legal
Officer of the Filinvest Group of Companies and the
Francisco V. del Rosario Group of Companies;
ix
Former Professor, F.E.U. School of Business;
A.B, Ll.B., U.P.)
and

(Trial Lawyer, CORONEL LAW OFFICE;
Professor, Philippine School of Business Administration,
Manila; Former Executive Assistant, Court of Appeals; LI.B., U.E.)
x
PREFACE
It is with a sense of pride that we are bringing out once again a

revised edition of this text on Obligations and Contracts.
We would like to take advantage of this occasion to extend our
gratitude to Dr. Jovito R. Salonga, who wrote the beautiful foreword
more than twenty years ago, to Dean Florenz D. Regalado of the Col-
lege of Law of San Beda, to former Dean Emilio dela Paz of Lyceum,
to the many Professors of Obligations and Contracts who had been
prescribing this work as their official text for almost thirty years,
and, of course, to Rex Book Store without whose help and encourage-
ment, material or otherwise, this book would not be a reality.
D. P. JURADO
Manila
July 20, 1987
xi
xii
FOREWORD
For a number of years, there has been going on some kind of a

debate as to the proper method of teaching and expounding a sub-
ject for students of law. To be sure, no concrete proposition has been
drafted, no physical stage has been set. But the debate has been
raging in colleges and universities in full, though quiet, intensity.
On one side of this debate are those whose avowed mission it
is to make law simple and simplified, reducing it to a set of easy,
neat and elemental propositions, in the manner of one who promises
health and beauty in six easy lessons; on the other side are those
who would confront the student with the state of the law anywhere
— simple in form but sometimes unmanageable in essence, in other
respects involved in both style and content, assuming, when inter-
related, uncertain dimensions.
The consequence of this debate is easily recognizable: law stu-
dents in the Philippines may be divided roughly into two classes,
with some allowances for fence-sitters — those who desire and are
satisfied with the easy method of teaching, uncomplicated and en-
gagingly simple, dispensing nothing but settled principles of law
as applied to safe and settled instances, and those students who,
informed by the spirit of inquiry, see through this illusion of cer-
tainty, perceiving that the living law is not that simple, that above
the array of words and phrases there is an area of study that is real
and fascinating, as involved as life, and as complicated as the social
process of which law is the chief agency of control.
Text-writers of law books have been busy aligning themselves
with one or the other side. On one side, we have books that have
reduced the law to a simple matter of definitions, distinctions, and
enumerations, with a convenient set of examples thrown in for good
measure; on the other side, we have books that contain these and
more, reminding us that life is complex and real, that the law which
essays to support and maintain a regime of ordered liberty, uphold-
ing basic social values and reconciling demands and interests that
overlap and conflict, should cope with its increasing complexities,
xiii
that it cannot be inert but that it must thrive and flourish, since his-
tory has shown that law assumes stability only when it has not lost
its capacity for growth.
The book of Professor Desiderio P. Jurado is now involved in
this debate, and it is well that it has made its appearance. The sub-
ject of Obligations and Contracts pervades the entire social struc-
ture. It has been recognized that no society can long endure without
a workable, realistic system of liabilities. The field of contracts alone
illustrates the vital function of law in a free society, where respect
for the worth and dignity of the human demands that individual
volition be afforded a wide area of latitude consistent with the de-
mands of the social order. There is therefore more than enough room
for works such as this, and in particular, Professor Jurado’s book
supplies an acute need for a manual that is well-grounded, compre-
hensive, and balanced in treatment. It does not belong to the “easy’’
school.
Professor Jurado has brought to this book the wealth of expe-
rience he has gained as a respected scholar and teacher of law; his
years of courtroom practice are also visible all throughout. Undoubt-
edly many of his former students, now practicising lawyers in vari-
ous places of the country, will find in these pages rich opportunities
for looking back to those hours of earnest discussion in the class-
room, where honest disagreement is honored and debate on tenuous
points of law skilfully handled by the master.
We who study and teach law may not agree with all the con-
clusions set forth in this book; Professor Jurado does not expect un-
questioning assent from us on all points. But before we register our
dissent it may be well for us to consider the validity and weight of
his premises, for, indeed, this book deserves more than just a re-
reading. It is the product of a hard discipline — the discipline of fine,
unselfish scholarship.
JOVITO R. SALONGA
Dean, Institute of Law, Far Eastern University
Manila, Oct. 1, 1959
xiv
CONTENTS
BOOK IV
OBLIGATIONS AND CONTRACTS
Title I. — OBLIGATIONS
Chapter 1
GENERAL PROVISIONS
Page
Article 1156 ................................................................................ 1

Concept of Obligations ...................................................... 1
Requisites of Obligations .................................................. 2
Classification of Obligations ............................................. 3
Art. 1157 ................................................................................... 6
Sources of Obligations ....................................................... 6
Art. 1158 ................................................................................... 7
Obligations Arising from Law .......................................... 7
Art. 1159 ................................................................................... 8
Obligations Arising from Contracts ................................. 8
Art. 1160 ................................................................................... 9
Obligations Arising from Quasi-Contracts ...................... 9
Art. 1161 ................................................................................... 10
Obligations Arising from Criminal Offenses ................... 11
Idem; Enforcement of civil liability ......................... 11
Idem; id. Effect of acquittal ...................................... 14
Idem; id. Effect of independent civil actions ........... 15
Idem; id., id. Effect of failure to make
reservation ........................................................ 17
Removal of Reservation Requirement for
Independent Civil Actions ............................... 19
Art. 1162 ................................................................................... 19
Obligations Arising from Quasi-Delicts ........................... 19
xv
Idem; Persons liable ................................................. 20
Idem; Requisites of liability ..................................... 21
Idem; Quasi-delicts and crimes ................................ 21
Idem; Scope of quasi-delicts ..................................... 21
Idem; Character of remedy....................................... 23
Chapter 2
NATURE AND EFFECT OF OBLIGATIONS
Art. 1163 ................................................................................... 42

Art. 1164 ................................................................................... 42
Art. 1165 ................................................................................... 42
Art. 1166 ................................................................................... 42
Obligations to Give ............................................................ 43
Idem; Nature of right of creditor.............................. 43
Idem; Rights of creditor in determinate
obligations ........................................................ 45
Idem; Rights of creditor in generic obligations ....... 46
Idem; Obligations of debtor in determinate
obligations ........................................................ 47
Idem; Obligations of debtor in generic
obligations ........................................................ 50
Art. 1167 ................................................................................... 52
Obligations to Do; Effects of Breach................................. 52
Art. 1168 ................................................................................... 54
Obligations Not to Do; Effects of Breach.......................... 54
Art. 1169 ................................................................................... 55
Art. 1170 ................................................................................... 56
Art. 1171 ................................................................................... 56
Art. 1172 ................................................................................... 56
Art. 1173 ................................................................................... 56
Breach of Obligations ........................................................ 57
Voluntary Breach Through Default or Mora ................... 57
Idem; Default in positive obligations ....................... 58
Idem; id. When demand is not necessary ................ 59
Idem; Default in negative obligations ..................... 61
Idem; Default in reciprocal obligations ................... 61
Idem; id. Effect of default ......................................... 62
Voluntary Breach Through Fraud or Dolo ....................... 62
Idem; Effect of fraud ................................................. 64
Voluntary Breach Through Negligence or Culpa ............ 64
Idem; Kinds of negligence ........................................ 65
Idem; Negligence distinguished from fraud ............ 67
xvi
Idem; Test or negligence........................................... 68
Idem; Effects of negligence ....................................... 70
Idem; id. Regulatory power of the courts ................ 71
Idem; id.; id. Effect of good faith .............................. 71
Idem; id.; id. Effect of bad faith................................ 72
Idem; id.; id. Effect of contributory negligence ....... 72
Idem; id.; id. Other circumstances ........................... 74
Voluntary Breach Through Contravention of Tenor
of Obligation .............................................................. 74
Art. 1174 ................................................................................... 74
Concept of Fortuitous Event ............................................. 74
Classification ..................................................................... 75
Effect Upon Obligation...................................................... 76
Idem; Essential conditions ....................................... 88
Idem; Exceptions....................................................... 96
Art. 1175 ................................................................................... 101
Usurious Transactions ...................................................... 101
Art. 1176 ................................................................................... 102
Extinguishment of Interests and Prior Installments ...... 102
Art. 1177 ................................................................................... 103
Remedies of Creditor to Protect Credit ............................ 103
Idem; Exhaustion of debtor’s property .................... 103
Idem; Accion subrogatoria ........................................ 104
Idem; Accion pauliana .............................................. 105
Art. 1178 ................................................................................... 105
Transmissibility of Rights................................................. 105
Chapter 3
DIFFERENT KINDS OF OBLIGATIONS
Section 1. — Pure and Conditional Obligations
Art. 1179 ................................................................................... 107

Art. 1180 ................................................................................... 107
Pure Obligations ................................................................ 107
Conditional Obligations .................................................... 108
Idem; Classification of conditions ..................................... 109
Art. 1181 ................................................................................... 111
Suspensive and Resolutory Conditions ............................ 111
Idem; Effects ............................................................. 112
Art. 1182 ................................................................................... 115
Potestative, Casual and Mixed Conditions ...................... 115
Idem; Effect of potestative conditions...................... 115
xvii
Idem; Effect of casual conditions ............................. 118
Idem; Effect of mixed conditions .............................. 118
Art. 1183 ................................................................................... 122
Possible and Impossible Conditions ................................. 122
Idem; Effects ............................................................. 123
Art. 1184 ................................................................................... 124
Art. 1185 ................................................................................... 124
Positive and Negative Conditions .................................... 124
Idem; Effects ............................................................. 124
Art. 1186 ................................................................................... 125
Constructive Fulfillment of Suspensive Conditions ........ 125
Art. 1187 ................................................................................... 126
Art. 1188 ................................................................................... 126
Effect of Suspensive Conditions Before Fulfillment ........ 126
Effect of Suspensive Conditions After Fulfillment .......... 128
Idem; Retroactivity of effect ..................................... 128
Idem; id. In obligations to give ................................. 129
Idem; id. In obligations to do or not to do ................ 130
Art. 1189 ................................................................................... 130
Effect of Loss, Deterioration or Improvement ................. 131
Idem; Losses .............................................................. 131
Idem; Deteriorations................................................. 132
Idem; Improvements................................................. 132
Art. 1190 ................................................................................... 133
Effect of Resolutory Conditions Before Fulfillment......... 134
Effect of Resolutory Conditions After Fulfillment ........... 134
Idem; Retroactivity of effect ..................................... 134
Idem; Effect of loss, deterioration
or improvement ................................................ 135
Art. 1191 ................................................................................... 136
Concept of Reciprocal Obligations .................................... 136
Tacit Resolutory Condition ............................................... 137
Idem; Necessity of judicial action ............................ 137
Idem; Nature of Breach ............................................ 139
Idem; Alternative remedies of injured party........... 140
Idem; id. Damages to be awarded ............................ 141
Idem; Judicial discretion to decree rescission ......... 142
Idem; Effect of rescission .......................................... 142
Idem; id. Effect upon third persons ......................... 143
Art. 1192 ................................................................................... 146
Effect of Breach by Both Parties ...................................... 146
xviii
Section 2. — Obligations With a Period
Art. 1193 ................................................................................... 146
Concept of Term or Period ................................................ 146
Idem; Distinguished from condition ........................ 147
Classification of Term or Period ....................................... 147
Effects of Term or Period .................................................. 149
Idem; Effect of fortuitous event ............................... 150
Art. 1194 ................................................................................... 151
Art. 1195 ................................................................................... 151
Effect of Advanced Payment or Delivery ......................... 152
Art. 1196 ................................................................................... 152
Benefit of Term or Period .................................................. 152
Idem; Exception ........................................................ 154
Art. 1197 ................................................................................... 154
Judicial Term or Period .................................................... 155
Idem; When court may fix term ............................... 155
Idem; Nature of action .............................................. 160
Idem; Effect of judicial period .................................. 160
Art. 1198 ................................................................................... 163
Extinguishment of Debtor’s Right to Period .................... 164
Section 3. — Alternative and Facultative

Obligations
Concept ........................................................................... 167
Art. 1199 ................................................................................... 168
Art. 1200 ................................................................................... 168
Right of Choice in Alternative Obligations ...................... 168
Idem; Limitations upon right of choice.................... 168
Art. 1201 ................................................................................... 169
When Choice Takes Effect ................................................ 169
Idem; Effect upon obligation .................................... 170
Art. 1202 ................................................................................... 170
When Only One Prestation is Practicable ....................... 170
Art. 1203 ................................................................................... 171
When Choice is Rendered Impossible .............................. 171
Art. 1204 ................................................................................... 171
Art. 1205 ................................................................................... 171
Effect of Loss of Objects of Obligation .............................. 172
Idem; If right of choice belongs to the debtor .......... 172
Idem; If right of choice belongs to creditor .............. 173
Art. 1206 ................................................................................... 173
Nature of Facultative Obligations .................................... 174
xix
Idem; Distinguished from alternative obligations .. 174
Idem; When substitution takes effect ...................... 175
Idem; Effect of loss of substitute .............................. 175
Section 4. — Joint and Solidary Obligations
Concept ........................................................................... 176

Idem; Comparative jurisprudence ........................... 176
Art. 1207 ................................................................................... 178
Nature of Collective Obligations in General .................... 178
Idem; Exceptions....................................................... 179
Art. 1208 ................................................................................... 181
Joint Divisible Obligations ............................................... 181
Art. 1209 ................................................................................... 184
Joint Indivisible Obligations ............................................ 184
Idem; Effect of breach ............................................... 185
Idem; Effect of insolvency of a debtor ...................... 185
Idem; Interruption of period of prescription ........... 186
Art. 1210 ................................................................................... 187
Indivisibility and Solidarity .............................................. 187
Art. 1211 ................................................................................... 187
Kinds of Solidarity............................................................. 187
Idem; Effect of active solidarity in general ............. 188
Idem; Effect of passive solidarity in general ........... 188
Idem; id. Distinguished from suretyship ................. 188
Idem; Effect of varied conditions or periods ............ 190
Art. 1212 ................................................................................... 195
Effect of Beneficial and Prejudicial Acts .......................... 195
Art. 1213 ................................................................................... 196
Effect of Assignment of Rights ......................................... 196
Art. 1214 ................................................................................... 196
Effect of Demand By a Creditor........................................ 196
Art. 1215 ................................................................................... 197
Effect of Novation .............................................................. 197
Effect of Compensation and Confusion ............................ 199
Effect of Remission ............................................................ 199
Effect of Payment to a Creditor ........................................ 201
Art. 1216 ................................................................................... 201
Effect of Demand Upon a Debtor...................................... 201
Art. 1217 ................................................................................... 204
Art. 1218 ................................................................................... 205
Effect of Payment By a Debtor ......................................... 205
Idem; Nature of right of debtor ................................ 206
xx
Art. 1219 ................................................................................... 208
Art. 1220 ................................................................................... 208
Art. 1221 ................................................................................... 209
Effect of Loss or Impossibility of Performance ................ 209
Art. 1222 ................................................................................... 210
Defenses Available to a Solidary Debtor .......................... 210
Section 5. — Divisible and Indivisible Obligations
Concept ........................................................................... 212

Relation to Divisibility or Indivisibility of Things ........... 212
Art. 1223 ................................................................................... 213
Art. 1224 ................................................................................... 213
Effect of Divisible or Indivisible Obligations ................... 213
Idem; Breach of joint indivisible obligations ........... 214
Art. 1225 ................................................................................... 214
Determination of Divisibility or Indivisibility ................. 215
Idem; In obligations to give ...................................... 215
Idem; In obligations to do ......................................... 216
Idem; In obligations not to do .................................. 217
Section 6. — Obligations With a Penal Clause
Concept ........................................................................... 217

Purpose of Penalty............................................................. 217
Kinds of Penalty ................................................................ 218
Art. 1226 ................................................................................... 218
Effect of Penalty, General Rule ........................................ 219
Idem; Exceptions....................................................... 221
Idem; Enforceability of penalty ................................ 223
Art. 1227 ................................................................................... 224
Limitation Upon Right of Debtor ..................................... 224
Limitation Upon Right of Creditor ................................... 224
Art. 1228 ................................................................................... 225
Proof of Actual Damages ................................................... 225
Art. 1229 ................................................................................... 226
When Penalty May Be Reduced ....................................... 226
Art. 1230 ................................................................................... 229
Nullity of Obligation or Penalty; Effect ........................... 229
xxi
Chapter 4
EXTINGUISHMENT OF OBLIGATIONS
General Provisions
Art. 1231 ................................................................................... 230

Modes of Extinguishing Obligations ................................ 230
Section 1. — Payment or Performance
Art. 1232 ................................................................................... 231

Concept of Payment or Performance ................................ 231
Art. 1233 ................................................................................... 231
Art. 1234 ................................................................................... 231
Art. 1235 ................................................................................... 231
When Obligation is Understood Paid or Performed ........ 231
Art. 1236 ................................................................................... 232
Art. 1237 ................................................................................... 233
Art. 1238 ................................................................................... 233
Persons Who May Pay Obligation .................................... 233
Idem; Payment by a third person ............................ 233
Idem; id. Right of creditor ........................................ 234
Idem; id. Rights of third person ............................... 235
Idem; id.; id. Right of reimbursement ..................... 235
Idem; id.; id. Right of subrogation ........................... 237
Idem; id.; Gratuitous payments ............................... 238
Art. 1239 ................................................................................... 238
Capacity to Make Payment ............................................... 239
Art. 1240 ................................................................................... 239
To Whom Payment Must Be Made ................................... 239
Idem; Persons authorized to receive payment ........ 240
Idem; id. Payment to unauthorized persons ........... 241
Idem; id. Exceptions ................................................. 242
Art. 1241 ................................................................................... 242
Payment to Incapacitated Persons ................................... 242
Payment to Third Persons ................................................ 243
Art. 1242 ................................................................................... 244
Payment to Possessors of Credit ...................................... 244
Art. 1243 ................................................................................... 244
Payment After Judicial Order of Retention ..................... 244
Art. 1244 ................................................................................... 245
Art. 1245 ................................................................................... 245
Art. 1246 ................................................................................... 245
xxii
What Must Be Paid ........................................................... 245
Idem; Effect of dation in payment ........................... 246
Idem; Effect if object is generic ................................ 246
Art. 1247 ................................................................................... 247
Expenses of Payment ........................................................ 247
Art. 1248 ................................................................................... 247
Character of Payment ....................................................... 247
Art. 1249 ................................................................................... 248
Rule in Monetary Obligations........................................... 248
Idem; Effect of Rep. Act Nos. 529 and 4100 ............ 249
Idem; Meaning of legal tender ................................. 251
Idem; Payments with Japanese military notes ....... 251
Idem; Payments with emergency notes ................... 253
Idem; Payments with negotiable paper ................... 253
Art. 1250 ................................................................................... 261
Effect of Extraordinary Inflation or Deflation ................. 261
Idem; War-time obligations ...................................... 263
Idem; id. The Ballantyne Schedule .......................... 264
Idem; id.; id. Application .......................................... 265
Art. 1251 ................................................................................... 267
Place of Payment ............................................................... 267
Subsection 1. — Application of Payment
Art. 1252 ................................................................................... 268

Concept ........................................................................... 268
Requisites .......................................................................... 268
Idem; First requisite ................................................. 268
Idem; Second requisite ............................................. 269
Idem; Third requisite................................................ 270
Idem; Fourth requisite ............................................. 270
Right of Debtor to Make Application................................ 270
Idem; Exception ........................................................ 271
Idem; Time when right is exercised ......................... 271
Art. 1253 ................................................................................... 272
Limitation Upon Right to Apply Payment ....................... 272
Art. 1254 ................................................................................... 272
Legal Application of Payment........................................... 272
Idem; When debts are not of same burden .............. 273
Idem; When debts are of same burden .................... 274
xxiii
Subsection 2. — Payment of Cession
Art. 1255 ................................................................................... 275

Concept ........................................................................... 275
Requisites .......................................................................... 275
Kinds ........................................................................... 275
Distinguished from Dation in Payment ........................... 275
Effect ........................................................................... 276
Subsection 3. — Tender of Payment and Consignation
Art. 1256 ................................................................................... 276

Art. 1257 ................................................................................... 277
Art. 1258 ................................................................................... 277
Concept ........................................................................... 277
Distinctions ........................................................................ 277
General Requisites of Consignation ................................. 278
Special Requisites of Consignation .................................. 279
Idem; First requisite ................................................. 280
Idem; Second requisite ............................................. 280
Idem; id. Effect or valid tender of payment............. 282
Idem; Third requisite................................................ 283
Idem; Fourth requisite ............................................. 283
Idem; Fifth requisite ................................................. 283
Subject matter of Consignation ........................................ 286
Art. 1259 ................................................................................... 286
Expenses of Consignation ................................................. 286
Art. 1260 ................................................................................... 286
Art. 1261 ................................................................................... 286
Effects of Consignation ..................................................... 287
Idem; Effect of withdrawal ....................................... 287
Section 2. — Loss of the Thing Due
Concept ........................................................................... 287

Art. 1262 ................................................................................... 288
Effect of Loss in Determinate Obligations to Give .......... 288
Idem; Effect of fortuitous event ............................... 289
Art. 1263 ................................................................................... 290
Effect of Loss in Generic Obligations to Give .................. 290
Art. 1264 ................................................................................... 291
Effect of Partial Loss ......................................................... 291
xxiv
Art. 1265 ................................................................................... 291
Rule If Thing is in Debtor’s Possession ............................ 291
Art. 1266 ................................................................................... 292
Effect of Impossibility of Performance
in Obligations to do ................................................... 292
Idem; Effect ............................................................... 293
Idem; Effect in obligations not to do ........................ 295
Art. 1267 ................................................................................... 295
Effect of Relative Impossibility......................................... 295
Art. 1268 ................................................................................... 296
Rule If Obligation Arises from Criminal Offense ............ 296
Art. 1269 ................................................................................... 297
Effect of Extinguishment of Obligation............................ 297
Section 3. — Condonation or Remission of the Debt
Concept ........................................................................... 298

Requisites .......................................................................... 298
Kinds ........................................................................... 298
Art. 1270 ................................................................................... 299
Gratuitous Character of Remission .................................. 299
Necessity of Acceptance By Debtor .................................. 299
Applicability of Rules on Donations ................................. 300
Idem; Extent of remission ........................................ 300
Idem; Form of express remission ............................. 301
Idem; Form of implied remission ............................. 303
Art. 1271 ................................................................................... 303
Art. 1272 ................................................................................... 303
Effect of Delivery of Evidence of Credit to Debtor ........... 304
Art. 1273 ................................................................................... 305
Art. 1274 ................................................................................... 305
Effect of Remission in General ......................................... 305
Idem; Effect upon accessory obligations .................. 305
Idem; id. Rule in pledge ............................................ 305
Section 4. — Confusion or Merger of Rights
Art. 1275 ................................................................................... 306

Concept of Confusion ......................................................... 306
Requisites .......................................................................... 306
Kinds ........................................................................... 306
Art. 1276 ................................................................................... 307
Effect Upon Accessory Obligations ................................... 308
Art. 1277 ................................................................................... 308
xxv
Effect Upon Collective Obligations................................... 308
Effect of Revocation of Confusion ..................................... 309
Section 5. — Compensation
Art. 1278 ................................................................................... 309

Concept of Compensation.................................................. 309
Idem; Distinguished from payment ......................... 310
Idem; Distinguished from confusion ........................ 310
Idem; Distinguished from counterclaim .................. 311
Kinds of Compensation ..................................................... 311
Art. 1279 ................................................................................... 312
Requisites of Compensation.............................................. 312
Idem; As to parties.................................................... 313
Idem; id. Bound as principals .................................. 315
Idem; As to objects .................................................... 316
Idem; As to maturity ................................................ 317
Idem; As to liquidation and demandability ............. 317
Idem; As to claims of third persons ......................... 318
Art. 1280 ................................................................................... 318
Right of Guarantor to Set Up Compensation................... 318
Art. 1281 ................................................................................... 319
Art. 1282 ................................................................................... 319
Voluntary Compensation .................................................. 319
Art. 1283 ................................................................................... 319
Judicial Compensation ...................................................... 319
Art. 1284 ................................................................................... 320
Rules in Case of Rescissible or Voidable Debts ............... 320
Art. 1285 ................................................................................... 320
Effect of Assignment of Rights ......................................... 320
Idem; When compensation has taken place ............ 321
Idem; When compensation has not taken place ...... 321
Idem; id. With consent of debtor .............................. 321
Idem; id. With knowledge, but without consent,
of debtor ............................................................ 322
Idem; id. Without knowledge of debtor.................... 322
Art. 1286 ................................................................................... 323
Art. 1287 ................................................................................... 323
Art. 1288 ................................................................................... 323
Debts Which Cannot Be Compensated ............................ 323
Art. 1289 ................................................................................... 324
Art. 1290 ................................................................................... 324
Effect of Compensation ..................................................... 324
Idem; When compensation takes effect ................... 325
xxvi
Section 6. — Novation
Art. 1291 ................................................................................... 325

Concept of Novation .......................................................... 325
Requisites .......................................................................... 326
Kinds ........................................................................... 327
Idem; Objective novation .......................................... 328
Idem; id. Change of cause......................................... 328
Idem; id. Change of object ........................................ 328
Idem; id. Change of principal conditions ................. 329
Art. 1292 ................................................................................... 330
Form of Extinguishment ................................................... 330
Idem; Express novation ............................................ 333
Idem; Implied novation ............................................ 333
Art. 1293 ................................................................................... 338
Novation By Substitution of Debtor ................................. 338
Idem; Necessity of creditor’s consent ....................... 341
Idem; Effect of payment by new debtor ................... 342
Art. 1294 ................................................................................... 344
Art. 1295 ................................................................................... 344
Effect of Nonpayment By New Debtor ............................. 344
Idem; If substitution is by expromision ................... 345
Idem; If substitution is by delegacion ...................... 345
Art. 1296 ................................................................................... 345
Effect Upon Accessory Obligations ................................... 346
Art. 1297 ................................................................................... 346
Art. 1298 ................................................................................... 346
Effect If New and/or Old Obligations Are Void ............... 346
Idem; Rule if old obligation is voidable ................... 347
Art. 1299 ................................................................................... 348
Effect If Old Obligation is Conditional............................. 348
Art. 1300 ................................................................................... 349
Novation By Subrogation .................................................. 349
Art. 1301 ................................................................................... 349
Conventional Subrogation ................................................ 349
Art. 1302 ................................................................................... 350
Legal Subrogation ............................................................. 351
Art. 1303 ................................................................................... 352
Art. 1304 ................................................................................... 352
Effect of Total Subrogation ............................................... 352
Effect of Partial Subrogation ............................................ 353
xxvii
Title II. — CONTRACTS
Chapter 1
GENERAL PROVISIONS
Art. 1305 ................................................................................... 354

Concept of Contracts ......................................................... 354
Idem; Distinguished from other terms .................... 354
The Basic Duties of Persons when entering
into Contracts ........................................................... 356
The duty of the Courts in Interpreting Contracts ........... 356
Elements of Contracts ....................................................... 357
Idem; Parties to a contract ....................................... 357
Characteristics of Contracts ............................................. 358
Life of Contracts ................................................................ 359
Classification of Contracts ................................................ 359
Art. 1306 ................................................................................... 361
Right to Contract ............................................................... 361
Idem; Limitations ..................................................... 362
Idem; id. First limitation .......................................... 362
Idem; id. Second limitation ...................................... 363
Idem; id. Third limitation......................................... 363
Idem; id. Fourth limitation ...................................... 364
Idem; id. Fifth limitation .......................................... 364
Compromise; Compromise Agreements; Effects .............. 370
Art. 1307 ................................................................................... 371
Nominate Contracts .......................................................... 372
Innominate Contracts ....................................................... 372
Art. 1308 ................................................................................... 373
Art. 1309 ................................................................................... 374
Art. 1310 ................................................................................... 374
Mutuality of Contracts ...................................................... 374
Art. 1311 ................................................................................... 378
Relativity of Contracts ...................................................... 379
Idem; Persons bound by contract ............................. 379
Idem; Effect of contract on third persons ................ 381
Idem; Stipulations in favor of third persons ........... 382
Idem; id. Kinds .......................................................... 383
Idem; id. Requisites .................................................. 383
Idem; id. Test of beneficial stipulation .................... 384
Art. 1312 ................................................................................... 388
Contracts Creating Real Rights........................................ 388
Art. 1313 ................................................................................... 389
xxviii
Contracts In Fraud of Creditors ....................................... 389
Art. 1314 ................................................................................... 389
Interferences With Contractual Relations ....................... 389
Idem; Requisites ....................................................... 390
Art. 1315 ................................................................................... 391
Art. 1316 ................................................................................... 392
Perfection of Contracts ...................................................... 392
Art. 1317 ................................................................................... 393
Contracts in Name of Another .......................................... 393
Chapter 2
ESSENTIAL REQUISITES OF CONTRACTS
General Provisions
Art. 1318 ................................................................................... 396

Requisites of Contracts in General................................... 396
Section 1. — Consent
Art. 1319 ................................................................................... 397

Concept of Consent ............................................................ 397
Requisites of Consent ........................................................ 397
When Conracts are Perfected ........................................... 398
Manifestation of Consent .................................................. 398
Idem; Character of offer and acceptance ................. 400
Idem; id. Acceptance of complex offers .................... 401
Idem; id. Acceptance by letter or telegram.............. 402
Idem; id. Effect of constructive knowledge .............. 405
Idem; id. Withdrawal of offer ................................... 405
Idem; id. Withdrawal of acceptance......................... 407
Art. 1320 ................................................................................... 408
Form of Acceptance ........................................................... 408
Art. 1321 ................................................................................... 410
Art. 1322 ................................................................................... 410
Art. 1323 ................................................................................... 410
Effect of Death, Civil Interdiction, Insanity,
or Insolvency ............................................................. 410
Art. 1324 ................................................................................... 412
Period for Acceptance: Options ......................................... 412
Art. 1325 ................................................................................... 416
Art. 1326 ................................................................................... 416
Art. 1327 ................................................................................... 417
Legal Capacity of Contracting Parties ............................. 417
xxix
Idem; Incapacitated persons .................................... 417
Idem; id. Unemancipated minors............................. 418
Idem; id. Effect of misrepresentation ...................... 418
Idem; id. Insane or demented persons ..................... 421
Idem; id. Deaf-mutes ................................................ 423
Idem; id. Other incapacitated persons..................... 423
Art. 1328 ................................................................................... 425
Art. 1329 ................................................................................... 425
Disqualifications to Contract ............................................ 425
Idem; Distinguished from incapacity to contract .... 425
Art. 1330 ................................................................................... 428
Vices of Consent ................................................................ 428
Art. 1331 ................................................................................... 429
Mistake ........................................................................... 429
Idem; Mistakes which vitiate consent ..................... 429
Idem; id. Mistake of fact ........................................... 430
Art. 1332 ................................................................................... 432
Rule Where a Party is Illiterate ....................................... 432
Art. 1333 ................................................................................... 434
Art. 1334 ................................................................................... 434
Mistake of Law .................................................................. 434
Art. 1335 ................................................................................... 435
Art. 1336 ................................................................................... 436
Violence and Intimidation ................................................ 436
Idem; Requisites of violence ..................................... 436
Idem; Requisites of intimidation.............................. 436
Idem; id. Character of intimidation ......................... 436
Idem; id. Distinguished from reluctant consent ..... 437
Idem; id. Determination of degree
of intimidation .................................................. 441
Idem; id. Effect of just or legal threat...................... 442
Art. 1337 ................................................................................... 442
Undue Influence ................................................................ 443
Idem; Undue influence which vitiates consent ....... 443
Art. 1338 ................................................................................... 444
Fraud ........................................................................... 444
Idem; Kinds of fraud ................................................. 444
Idem; Requisites ....................................................... 445
Idem; id. Nature of fraud.......................................... 445
Art. 1339 ................................................................................... 447
Effect of Failure to Disclose Facts .................................... 447
Art. 1340 ................................................................................... 447
Effect of Exaggerations in Trade ...................................... 447
xxx
Art. 1341 ................................................................................... 448
Effect of Expression of Opinion ........................................ 448
Art. 1342 ................................................................................... 449
Effect of Misrepresentation By Third Persons ................ 449
Art. 1343 ................................................................................... 450
Art. 1344 ................................................................................... 450
Magnitude of Fraud........................................................... 451
Relation Between Fraud and Consent ............................. 451
Art. 1345 ................................................................................... 454
Art. 1346 ................................................................................... 454
Simulation of Contracts .................................................... 454
Idem; Effects ............................................................. 454
Contracts of Adhesion ....................................................... 455
Section 2. — Object of Contracts
Concept of Object ............................................................... 456

Art. 1347 ................................................................................... 456
Art. 1348 ................................................................................... 456
Art. 1349 ................................................................................... 457
What May Be the Object of Contracts .............................. 457
Idem; Appropriability and transmissibility ............ 457
Idem; Existence of object .......................................... 457
Idem; id. Things which have perished ..................... 457
Idem; id. Future things ............................................ 457
Idem; id. Rule with respect to future inheritance ... 457
Idem; id. Impossible things or services ................... 461
Idem; Licitness of object ........................................... 462
Idem; Determinability of object ............................... 462
Section 3. — Cause of Contracts
Art. 1350 ................................................................................... 463

Art. 1351 ................................................................................... 463
Concept of Cause ............................................................... 463
Idem; Distinguished from consideration ................. 464
Idem; Distinguished from object .............................. 464
Idem; Distinguished from motives ........................... 465
Cause in Onerous Contracts ............................................. 468
Idem; Accessory contracts ........................................ 469
Idem; Moral Obligations........................................... 469
Cause in Remuneratory Contracts ................................... 471
Cause in Contracts of Pure Beneficence .......................... 472
xxxi
Art. 1352 ................................................................................... 472
Art. 1353 ................................................................................... 472
Art. 1354 ................................................................................... 472
Art. 1355 ................................................................................... 472
Essential Requisites of Cause........................................... 472
Idem; Effect of lack of cause ..................................... 472
Idem; Effect of unlawful cause ................................. 475
Idem; Effect of false cause ........................................ 478
Chapter 3
FORMS OF CONTRACTS
Art. 1356 ................................................................................... 479

Form of Contracts; General Rule...................................... 479
Idem; Exceptions....................................................... 480
Idem; id. Formalities for validity ............................. 480
Idem; id. Formalities for enforceability ................... 481
Form of Contracts Required By Law ................................ 481
Art. 1357 ................................................................................... 482
Art. 1358 ................................................................................... 483
Formalities for Efficacy ..................................................... 483
Chapter 4
REFORMATION OF INSTRUMENTS
Art. 1359 ................................................................................... 487

Doctrine of Reformation of Instruments .......................... 487
Idem; Rationale of doctrine ...................................... 488
Idem; Distinguished from annulment
of contracts ....................................................... 488
Art. 1360 ................................................................................... 489
Art. 1361 ................................................................................... 489
Art. 1362 ................................................................................... 489
Art. 1363 ................................................................................... 489
Art. 1364 ................................................................................... 489
Art. 1365 ................................................................................... 489
Art. 1366 ................................................................................... 490
Art. 1367 ................................................................................... 490
Art. 1368 ................................................................................... 490
Art. 1369 ................................................................................... 490
Contracts of Adhesion ....................................................... 490
Contracts of Credit Cards ................................................. 491
xxxii
Chapter 5
INTERPRETATION OF CONTRACTS
Art. 1370 ................................................................................... 495

Art. 1371 ................................................................................... 495
Primacy of Intention of Parties ........................................ 495
Idem; How to judge intention................................... 497
Art. 1372 ................................................................................... 498
Art. 1373 ................................................................................... 498
Art. 1374 ................................................................................... 498
Art. 1375 ................................................................................... 498
Art. 1376 ................................................................................... 498
Art. 1377 ................................................................................... 498
Art. 1378 ................................................................................... 499
Art. 1379 ................................................................................... 499
Chapter 6
Classes of Defective Contracts.......................................... 500

Idem; Essential features .......................................... 501
Art. 1380 ................................................................................... 502
Rescissible Contracts in General ...................................... 502
Idem; Characteristics ............................................... 503
Idem; Concept of rescission ...................................... 503
Idem; id. Distinguished from resolution .................. 503
Idem; id. Distinguished from rescission
by mutual consent ............................................ 503
Art. 1381 ................................................................................... 505
Art. 1382 ................................................................................... 506
Contracts in Behalf of Ward ............................................. 506
Contracts in Behalf of Absentees ..................................... 506
Contracts in Fraud of Creditors ....................................... 508
Contracts Referring to Things Under Litigation ............. 509
Contracts By Insolvent...................................................... 509
Other Rescissible Contracts.............................................. 510
Art. 1383 ................................................................................... 511
Subsidiary Character of Action ........................................ 511
Parties Who May Institute Action.................................... 511
Art. 1384 ................................................................................... 512
Extent of Rescission .......................................................... 512
Art. 1385 ................................................................................... 513
Effect of Rescission in Case of Lesion .............................. 513
xxxiii
Effect of Rescission Upon Third Persons ......................... 513
Art. 1386 ................................................................................... 517
Art. 1387 ................................................................................... 517
Art. 1388 ................................................................................... 517
Proof of Fraud .................................................................... 517
Idem; Presumptions of fraud.................................... 518
Idem; Badges of fraud............................................... 526
Idem; id. Acquisition by third person
in good faith ...................................................... 528
Idem; id. Acquisition by third person in
bad faith............................................................ 529
Art. 1389 ................................................................................... 529
Prescriptive Period ............................................................ 529
Chapter 7
VOIDABLE CONTRACTS
Voidable Contracts in General ......................................... 531

Idem; Distinguished from rescissible contracts ...... 532
Art. 1390 ................................................................................... 533
Contracts Which Are Voidable ......................................... 533
Art. 1391 ................................................................................... 539
Prescriptive Period ............................................................ 539
Art. 1392 ................................................................................... 546
Art. 1393 ................................................................................... 546
Art. 1394 ................................................................................... 546
Art. 1395 ................................................................................... 546
Art. 1396 ................................................................................... 547
Concept of Ratification ...................................................... 547
Requisites of Ratification .................................................. 547
Forms of Ratification ......................................................... 548
Effects of Ratification ........................................................ 548
Art. 1397 ................................................................................... 548
Who May Institute Action................................................. 548
Art. 1398 ................................................................................... 552
Art. 1399 ................................................................................... 552
Effects of Annulment......................................................... 552
Idem; Obligation of mutual restitution ................... 552
Idem; id. Rule in case of incapacity ......................... 553
Art. 1400 ................................................................................... 554
Art. 1401 ................................................................................... 554
Art. 1402 ................................................................................... 555
xxxiv
Effect of Failure to Make Restitution............................... 555
Idem; Where loss is due to fault of defendant ......... 555
Idem; Where loss is due to fault of plaintiff ............ 556
Idem; Where loss is due to fortuitous event ............ 556
Chapter 8
Unenforceable Contracts in General ................................ 558

Idem; Classes ............................................................ 558
Idem; Distinguished from voidable contracts ......... 559
Art. 1403 ................................................................................... 560
Contracts Without or in Excess of Authority ................... 561
Contracts Infringing Statute of Frauds ........................... 562
Idem; Purpose of Statute .......................................... 562
Idem; Form required by Statute .............................. 562
Idem; Effect of noncompliance with Statute ........... 563
Idem; Contracts Covered by Statute ....................... 563
Idem; Effect of Performance of Contract ................. 569
Idem; Ratification ..................................................... 570
Contracts Where Both Parties Are Incapacitated ........... 572
Art. 1404 ................................................................................... 572
Art. 1405 ................................................................................... 572
Art. 1406 ................................................................................... 572
Art. 1407 ................................................................................... 572
Art. 1408 ................................................................................... 573
Chapter 9
Void and Inexistent Contracts in General ....................... 574

Idem; Distinguished from voidable contracts ......... 576
Idem; Distinguished from unenforceable
contracts ........................................................... 576
Art. 1409 ................................................................................... 577
Contracts Which Are Void or Inexistent .......................... 577
Idem; Effects ............................................................. 579
A void contract cannot be ratified..................................... 583
xxxv
Art. 1410 ................................................................................... 584
Imprescriptibility of Action or Defense ............................ 584
Art. 1411 ................................................................................... 591
Art. 1412 ................................................................................... 591
Principle of In Pari Delicto ............................................... 592
Idem; Effect if only one party is at fault.................. 601
Idem; Exceptions....................................................... 602
Art. 1413 ................................................................................... 603
Recovery By Debtor of Usurious Interest ........................ 603
Art. 1414 ................................................................................... 621
Art. 1415 ................................................................................... 621
Art. 1416 ................................................................................... 621
Article Applied ................................................................... 622
Art. 1417 ................................................................................... 631
Art. 1418 ................................................................................... 631
Art. 1419 ................................................................................... 631
Art. 1420 ................................................................................... 632
Article Applied ................................................................... 632
Art. 1421 ................................................................................... 634
Art. 1422 ................................................................................... 634
Title III. — NATURAL OBLIGATIONS
Art. 1423 ................................................................................... 635

Concept of Natural Obligations ........................................ 635
Idem; Distinguished from civil obligations ............. 635
Idem; Distinguished from moral obligations ........... 636
Reasons for Regulations of Natural Obligations ............. 636
Art. 1424 ................................................................................... 637
Article Applied ................................................................... 637
Art. 1425 ................................................................................... 637
Art. 1426 ................................................................................... 638
Art. 1427 ................................................................................... 638
Art. 1428 ................................................................................... 638
Art. 1429 ................................................................................... 638
Art. 1430 ................................................................................... 638
Title IV. — ESTOPPEL
Art. 1431 ................................................................................... 639

Concept of Estoppel ........................................................... 639
Art. 1432 ................................................................................... 639
Art. 1433 ................................................................................... 639
Kinds of Estoppel............................................................... 639
xxxvi
Idem; Estoppel in pais .............................................. 640
Idem; id. Estoppel by silence .................................... 640
Idem; id. Estoppel by acceptance of benefits ........... 640
Idem; Estoppel by deed or by record ........................ 640
Idem; id. Estoppel by judgment ............................... 640
Idem; Estoppel by laches .......................................... 641
Idem; id. Basis .......................................................... 641
Idem; id. Elements .................................................... 642
Idem; id. Application ................................................ 642
Idem; id. Laches distinguished from
prescription....................................................... 648
Art. 1434 ................................................................................... 649
Article Applied ................................................................... 649
Art. 1435 ................................................................................... 656
Art. 1436 ................................................................................... 656
Art. 1437 ................................................................................... 656
Art. 1438 ................................................................................... 656
Art. 1439 ................................................................................... 656
Title V. — TRUSTS
Chapter 1
GENERAL PROVISIONS
Art. 1440 ................................................................................... 657

Concept of Trusts............................................................... 657
Art. 1441 ................................................................................... 658
Kinds of Trusts .................................................................. 658
Idem; Express and implied trusts distinguished .... 659
Art. 1442 ................................................................................... 659
Chapter 2
EXPRESS TRUSTS
Art. 1443 ................................................................................... 660

Art. 1444 ................................................................................... 660
Art. 1445 ................................................................................... 660
Art. 1446 ................................................................................... 660
Chapter 3
IMPLIED TRUSTS
Art. 1447 ................................................................................... 661
xxxvii
Art. 1448 ................................................................................... 661
Art. 1449 ................................................................................... 661
Art. 1450 ................................................................................... 661
Article Applied ................................................................... 661
Art. 1451 ................................................................................... 662
Art. 1452 ................................................................................... 662
Art. 1453 ................................................................................... 662
Art. 1454 ................................................................................... 663
Art. 1455 ................................................................................... 663
Art. 1456 ................................................................................... 663
Article Applied ................................................................... 663
Idem; Prescriptibility of actions to enforce trust .... 663
Idem; id. Period of prescription ................................ 664
Idem; Laches may bar action ................................... 665
Idem; Acquisition of property by trustee
through prescription ........................................ 666
Idem; Illustrative cases ............................................ 667
Art. 1457 ................................................................................... 677
xxxviii

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CONTRACTS

TITLE II. — CONTRACTS

Art. 1305. A contract is a meeting of minds between

and obligations arising from contracts are concrete, limited and

The Basic Duties of Persons when entering into Con-

Elements of Contracts. — The elements of a contract may be

person, in his capacity as representative of another, contracts with

the parties, their assigns and heirs. Consequently, they cannot, as

(2) According to their perfection:

(8) According to the risks involved:

Art. 1306. The contracting parties may establish such

Idem; Limitations. — The right, however, is not absolute

The spheres of morals and good customs frequently overlap each

“A contract is to be judged by its character, and courts

which holds that a contract is void as against public policy. The

Ysmael & Co. vs. Barretto

The records show that the defendant received 164 cases of

Held: “The agreement above quoted places a limit of P300

Ferrazzini vs. Gsell

Del Castillo vs. Richmond

The records show that in the contract entered into between

“Considering the nature of the business in which the

Sy Suan vs. Regala

of which is to create a situation which tends to operate to the

Cui vs. Arellano University

Plaintiff took up law at the Arellano University. He left the

Compromise; Compromise Agreements; Effects — In the

Under Art. 1306 of the New Civil Code, contracting parties

Art. 1307. Innominate contracts shall be regulated by the

Nominate Contracts. — As we have already seen, nominate

Perez vs. Pomar

The evidence shows that the plaintiff rendered services to

Art. 1308. The contract must bind both contracting

Art. 1309. The determination of the performance may be

Mutuality of Contracts. — One of the most fundamental

of rescission.49 Thus, according to Manresa, considering the text of

Liebenow vs. Phil. Vegetable Oil Co.

which declares that the validity and performance of a contract

Taylor vs. Uy Tieng Piao

The records show that plaintiff was employed by the

fulfillment to the will of either of the parties in the negative form

Art. 1311. Contracts take effect only between the parties,

Relativity of Contracts. — It is a general principle of the

“Article 27 of the Mortgage Law defines a ‘third person’

“The principle on which these decisions rest is not affected

It must be noted, however, that the monetary obligations that the

“From these legal provisions (now Arts. 1390 and 1397 in

There are, however, four exceptional instances under the

SCRA 192), it was defined as a stipulation in favor of a third

Problem — A and B entered into a contract of compromise.

of a valid and enforceable stipulation pour autrui are present.

Idem; id. — Test of beneficial stipulation. — The fairest

Kauffman vs. Phil. National Bank

The defendant bank, for a valuable consideration paid by

Because of this development, plaintiff filed this action to recover

in the plaintiff to receive the money implies in our opinion

Coquia vs. Fieldmen’s Insurance Co.

On Dec. 1, 1961, the Fieldmen’s Insurance Co. issued

before the stipulation in his favor has been revoked by the

Constantino vs. Espiritu

A, married to B, executed a fictitious deed of sale of a two-

Held: (a) There is a valid cause of action in the instant

Art. 1312. In contracts creating real rights, third persons

possession of the object of a contract creating a real right will have