CONTRACTS

GENERAL PROVISIONS TO INTERPRETATION OF CONTRACTS

DEFINITION OF CONTRACT

• 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 (Art. 1305, NCC)
• Meeting of minds – this speaks of the intention of the parties in entering into the contract respecting the
subject matter and the consideration thereof. As a rule therefore, a contract is perfected by mere consent. It
does not require any special form, as a rule, and is binding from the moment that the essential requisites are
present. Thus, the meeting of the minds between the parties rise to the binding contract although they have
not affixed their signature to its written form (Rabuya, 2017).
OBLIGATION VS. CONTRACT

• While a contract is one of the sources of obligations, an obligation is the legal tie or relations itself that
exists after a contract has been entered into.
• Hence, there can be no contract if there is no obligation. But an obligation may exist without a contract
(De Leon, 2010).
DUTY OF COURTS IN INTERPRETING
CONTRACTS

• It is not the province of the court to alter a contract by construction or to make a new contract for the
parties; its duty is confined to the interpretation of the one which they have made for themselves
without regard to its wisdom or folly as the court cannot supply material stipulations or read into the
contract words which it does not contain. (Cuizon v. Court of Appeals, G.R. No. 102096, August 22,
1996).
THREE STAGES IN THE MAKING OF A
CONTRACT

• Conception or Generation – the first stage where the parties begin their initial negotiation and
bargaining for the formation of the contract ending at the moment of agreement of the parties.
• Perfection or Birth – Here, the parties had a meeting of minds as to the object, cause or consideration
and other terms and conditions of the contract.
• Consummation or fulfillment – This the last stage which consists in their performance or fulfillment by
the parties of their obligations under the term of the perfected contract.
CHARACTERISTICS OF A CONTRACT

• 1. Autonomy (Art. 1306, NCC);

• 2. Mutuality (Art. 1308, NCC);
• 3. Obligatoriness and consensuality (Art. 1315, NCC);
• 4. Relativity (Art. 1311, NCC)
• 5. Consensuality (Art. 1315, NCC)
PRINCIPLE OF RELATIVITY OR
PRINCIPLE OF LIMITED EFFECTIVITY OF CONTRACTS

• General Rule : Contracts take effect only between the parties or their assigns and heirs.
• Res inter alios acta aliis neque nocit prodest (a thing done between others does not harm or benefit
others) – a contract can only obligate the parties who entered into it, or their successors who assumed
their personalities, and that, concomitantly, a contract can neither favor nor prejudice third persons.
• NOTE: With respect to the heir, he shall not be liable beyond the value of the property he received from
the decedent (NCC, Art. 1311)
PRINCIPLE OF RELATIVITY OR
PRINCIPLE OF LIMITED EFFECTIVITY OF
CONTRACTS
Exceptions
• Rights and obligations that are not transmissible by their nature, or by the stipulation or by provisions of
law (Art. 1311, NCC);
• NOTE : Determine whether a contract terminates upon the death of one of the parties
• Stipulation pour autrui (stipulation in favor of a third person) – benefits clearly and deliberately
conferred by parties to a contract upon third persons (Art. 1311 , NCC) and which stipulation is merely
part of a contract entered into by the parties, neither of whom acted as agents of the third person and
which favor can be demanded by the third person if duly accepted by him before it could be revoked
PRINCIPLE OF RELATIVITY OR
PRINCIPLE OF LIMITED EFFECTIVITY OF
CONTRACTS
Requisites of Stipulation Pour Autrui:
• a. Stipulation in favor of a third person;
• b. Stipulation is just part and not the whole obligations of the contract;
• c. Contracting parties must have clearly and deliberately conferred a favor upon third person;
• d. Favor or benefit conferred is not just an incidental benefit or interest;
• e. Third person must have communicated his acceptance; and
• f. Neither of the contracting parties bears the legal representation of the third person (Young v. Court of
Appeals, G.R. No. 79518, January 13, 1989)
PRINCIPLE OF RELATIVITY OR
PRINCIPLE OF LIMITED EFFECTIVITY OF
CONTRACTS

Exceptions
• Third persons coming into possession of the object of the contract creating real rights subject to the
provisions of Mortgage Law and the Land Registration Law (Art. 1312, NCC);
• Contracts entered into in fraud of creditors (Art. 1313, NCC);
• When a third person induces a party to violate the contract (Art. 1314, NCC).
OBLIGATORY FORCE OF CONTRACTS

• Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for validity are present (Art. 1356,NCC).
• Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. (Art. 1159,NCC)
MUTUALITY OF CONTRACTS

• The contract must bind both contracting parties and its validity or compliance cannot be left to the will
of one of them (Art. 1308, NCC).
• The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid. (Sps. Juico vs. China Banking Corp., G.R. 187678, April 10, 2013)
RULES OF MUTUALITY OF CONTRACTS

• The contracts must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them. (Art 1308, NCC)
• 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. (Art 1309, NCC)
• The determination shall not be obligatory if it is evidently inequitable . In such case, the courts shall
decide what is equitable under the circumstances. (Art 1310, NCC)
Additional Law for Contract of Sale
• The fixing of the price can never be left to the discretion of one of the contracting parties. However, if
the price fixed by one of the parties is accepted by the other, the sale is perfected. (Art 1473, NCC)
CONTRACT OF ADHESION

• It is a contract in which one of the parties prepares the stipulations in the form of a ready-made
contract, which the other party must accept or reject, but not modify, by affixing his signature or his
“adhesion” thereto; leaving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing (Norton Resources and Development Corporation v. All Asia Bank
Corporation, G.R. No. 162523, November 25, 2009).
• Validity of contract of adhesion - It is not entirely prohibited since the one who adheres to the contract
is, in reality, free to reject it entirely, and if he adheres, he gives his consent (Premiere Development
Bank v. Central Surety & Insurance Company, Inc., G.R. No. 176246, February 13, 2009). However, it is
void when the weaker party is imposed upon in dealing with the dominant bargaining party, and its
option is reduced to the alternative of “taking or leaving it,” completely depriving such party of the
opportunity to bargain on equal footing (Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety
Corporation, G.R. Nos. 180880-81, September 25, 2009).
CONTRACT OF ADHESION
Interpretation of Contract of Adhesion
• In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield
the unwary or weaker party from deceptive schemes contained in ready-made covenants (Premiere
Development Bank v. Central Surety Insurance Company, Inc., G.R. No. 176246, February 13, 2009). In case
of doubt, which will cause a great imbalance of rights against one of the parties, the contract shall be
construed against the party who drafted the same (Magis Young Achiever’s Learning Center v. Manalo,
G.R. No. 178835, February 13, 2009).
Third Person May Determine the Performance of a Contract
• The determination of the performance may be left to a third person. However, his decision shall not be
binding until it has been known to both the contracting parties (Art. 1309, NCC). Moreover, the
determination made shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances (Art. 1310, NCC).
AUTONOMY OF CONTRACTS /
LIBERTY OFCONTRACTS/FREEDOM

• 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.
Art. 1306, NCC)
• NOTE: Courts cannot make for the parties better or more equitable agreements than they themselves
have been satisfied to make, or rewrite contracts because they operate harshly or inequitably as to one
of the parties, or alter them for the benefit of one party and to the detriment of the other, or by
construction, relieve one of the parties from terms which he voluntarily consented to, or impose on him
those which he did not (Angel Bautista v. Court of Appeals, G.R. No. 123655, January 19, 2000).
WHAT PARTIES CANNOT STIPULATE

Laws a contract must not contravene:

• Expressly declaring their obligatory character
• Prohibitive
• Express fundamental principles of justice which cannot be overlooked by the contracting parties
• Impose essential requisites without which the contract cannot exist
CONTRARY TO LAW:
VOID PROVISIONS ACCORDING TO THE CIVIL CODE
I. Pactum commissorium - automatic foreclosure
• Art 2088 (pledge or mortgage) The creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null and void.
• Art. 2137. (Antichresis) The creditor does not acquire the ownership of the real estate for non-payment of the
debt within the period agreed upon.
• Antichresis - Agreement where the fruits of the land under antichresis is given to the creditor until the debt is fully paid
off.
• Every stipulation to the contrary shall be void. But the creditor may petition the court for the payment of the
debt or the sale of the real property. In this case, the Rules of Court on the foreclosure of mortgages shall apply.
• The mortgage or pledge must first be foreclosed before the pledgee/mortgagee can dispose of the property in
order to get net proceeds from the sale. Note that ownership is never transferred.
CONTRARY TO LAW:
VOID PROVISIONS ACCORDING TO THE CIVIL
CODE
ii. Pactum leonina - one party bears the lion’s share of the risk
• Art 1799. A stipulation that excludes one or more parties from any share in the profits or losses is void.
• Applicable only to partnerships. o In this agreement, one or some partners either shares only in losses or only
in profits.
• Violates principle that partners should share risk in obligations.
iii. Pactum de non alienando - not to alienate
• Art 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
• However, if the owner/mortgagor is to sell the mortgaged property, he must sell with a notice of lien
against the property.
CONTRARY TO MORALS

• Man’s innate sense or notion of what is right and wrong; more or less universal.
• May be considered as meaning those generally accepted principles of morality which have received
some kind of social and practical confirmation.
CONTRARY TO GOOD CUSTOMS

• Custom pertains to certain precepts that cannot be universally recognized as moral, sometimes they
only apply to certain communities or localities
• Also considered are contracts which limit in an excessive manner the personal or economic freedom of
a person, such as contract not to engage in work or labor, or a promise to vote in a particular way, or
promise to do something at the risk of life (except for a very high purpose justifying such risk)
CONTRARY TO PUBLIC ORDER

• Consideration of the public good, will or public weal (welfare), peace and safety of the public and health
of the community
• Represents the public, social, and legal interests in private law, that which is permanent and essential in
institutions, which even if favoring some individual to whom the right pertains, cannot be left to his own
will
CONTRARY TO PUBLIC POLICY

• Court must find that the contract contravenes some established interest of the society
Examples:
• Stipulation not to engage in competitive enterprise after leaving the employment.
• Those stipulations must be limited to time, place and extent o Includes contracts involving future support and
inheritance
• an agreement not to sue for the breach of contract.
PERFECTION BY MERE CONSENT

• Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law. (Art. 1315, NCC)
• Note: This refers to consensual contracts. However, real contracts are perfected by delivery and formal
contracts are perfected upon compliance.
EFFECT OF CONTRACTS
Contracts take effect only between the parties, and their assigns and heirs, the latter being liable only to the extent of the property
received from the decedent (NCC, Art. 1311).
Persons Affected by a Contract
General Rule:
• Parties to the contract; and their
• Corresponding successors.
Exceptions:
• Contracts containing a stipulation in favor of a third person (pour autrui) (NCC, Art. 1311(2)];
• Contracts containing real rights (NCC, Art. 1312);
• Contracts entered into to defraud creditors (NCC, Art. 1313);
• Contracts which have been violated at the inducement of 3rd persons (NCC, Art. 1314);
• Quasi-contract of negotiorum gestio (NCC, Art. 2150)
LIABILITY OF HEIRS FOR THE OBLIGATION
CONTRACTED BY THE DECEDENT

General Rule: The heirs are liable for the obligation contracted by the decedent when the rights and
obligations arising from the contract are transmissible
Exceptions: Except in case where the rights and obligations arising from the contract are not transmissible
by:
• their nature;
• stipulation; or
• provision of law (NCC, Art. 1311).
REQUISITES IN ORDER THAT A THIRD PERSON MAY
DEMAND THE FULFILLMENT OF THE CONTRACT

• The contracting parties must have clearly and deliberately conferred a favor upon the third person;
• The third person’s interest or benefit in such fulfillment must not be merely incidental; and
• Such third person communicated his acceptance to the obligor before the stipulations in his favor are
revoked.
CLASSIFICATION OF CONTRACTS
According to subject matter
• Things
• Services
According to name
• Nominate - have their own individuality (names) and are regulated by special provisions of law
• Example: sale, agency, pledge, mortgage, lease, etc.
• Innominate - without particular names (Innominate contract 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 customs of the place. Art 1307 )
• Do ut des - I give and you give
• Do ut facias - I give and you do
• Facio ut facias - I do and you do
• Facio ut des - I do and you give
CLASSIFICATION OF CONTRACTS
According to perfection
• By mere consent (consensual) e.g. purchase and sale
Contracts are perfected by mere consent, and from that moment, the parties are bound not only to fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.
(Art 1315, NCC)
• By delivery of the object (real) simple loan, loan for use, real contract of deposit, real contract of pledge
Real contracts such as deposit, pledge and commodatum, are not perfected until the delivery of the object of obligation. (Art 1316, NCC)
• Simple loan (mutuum)—one party rents out his property for a monetary consideration
• Loan for use (commodatum)—one party rents out the use of his property for free.
• Real contract of deposit—one party is obliged to hold the property of another without authority to use it.
• Real contract of pledge—one party delivers his property to another as security for a debt
CLASSIFICATION OF CONTRACTS
According to its relation to other contracts, degree of dependence
• Preparatory (Example: agency, partnership)
• Principal (Example: lease or sale)
• Accessory (Example: pledge, mortgage, suretyship, guaranty, securities, antichresis)
According to form
• Common or informal (Example: loan)
• Special or formal (Example: donations and mortgages of immovable property)
According to purpose
• Transfer of ownership (Example: sale or barter)
• Conveyance of use (Example: commodatum)
• Rendition of services (Example: agency)
CLASSIFICATION OF CONTRACTS
According to the nature of the vinculum produced, nature of obligation produced
• Unilateral – (Example: commodatum or gratuitous deposit)
• Bilateral/Reciprocal e.g. purchase and sale
• Note: a contract may be bilateral, though the obligation that arises is unilateral.
According to cause
• Onerous—pecuniary interests involved
• Gratuitous or lucrative—out of mere liberality
• Remuneratory—one party intends to repay a debt of gratitude
According to risk
• Commutative—exchange of values.
• Aleatory—chance or risk involved for one of the parties.
ESSENTIAL REQUISITES
OF CONTRACTS
ELEMENTS OF A CONTRACT

• Natural Elements – Those which are derived from the very nature of the contract, and as a
consequence, ordinarily accompany the same.
• Essential Elements – Those without which there can be no contract.
• Accidental Elements – those which exist only when the contracting parties expressly provide for them
(De Leon, 2010).
ESSENTIAL REQUISITES OF A CONTRACT

• Consent;
• Object or subject matter; and
• Cause or consideration (NCC, Art 1318).
NOTE: These three requisites are, therefore, the essential elements of a consensual contract. In real
contracts, however, in addition to the above, the delivery of the object of the contract is required as a
further requisite
CONSENT

• 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. (Art. 1319, NCC)
• It is the concurrence of the wills of the contracting parties with respect to the object and cause, which
shall constitute the contract (De Leon, 2010).
• NOTE: Consent is essential to the existence of a contract; and where it is wanting, the contract is non-
existent.
REQUISITES OF CONSENT

• Legal capacity of the contracting parties

• NOTE: The parties must have full civil capacity. Hence, if any one party to a supposed contract was already dead at the time of its
execution, such contract is undoubtedly simulated and false and, therefore, null and void by reason of its having been made after
the death of the party who appears as one of the contracting parties therein. The death of a person terminates contractual capacity
(Milagros De Belen Vda. De Cabalu, et. al. v. Sps. Renato Dolores Tabu and Laxamana, G.R. No. 188417, September 24, 2012).
• Manifestation of the conformity of the contracting parties
• Note: Manifestation may be in writing bearing the signature or marks of the parties, or it may be implied from the conduct of the
parties like the acceptance of payment.
• Parties’ Conformity to the object, cause, terms and condition of the contract must be intelligent, spontaneous and free
from all vices of consent
• NOTE: Intelligence in consent is vitiated by error; freedom by violence, intimidation or undue influence; and spontaneity by fraud.
• The conformity must be Real.
OFFER

• An offer is defined as an expression of willingness to contract on certain terms, made with the intention
that it shall become binding as soon as it is accepted by the person to whom it is addressed (Rabuya,
2017).
Elements of a valid offer and acceptance
• Definite – unequivocal
• Intentional
• Complete – unconditional
REQUISITES OF AN EFFECTIVE OFFER

• The one offering must have a serious intention to become bound by his offer;
• The terms of the offer must be reasonably certain, definite and complete, so that the parties and the
court can ascertain the terms of the offer; and
• The offer must be communicated by the offeror to the offeree, resulting in the offeree’s knowledge of
the offer (Rabuya, 2017)

NOTE: The person making the offer may fix the time, place and manner of acceptance, all of which must be
complied with (Art. 1321, NCC).
RULES ON COMPLEX OFFER

• Offers are interrelated – contract is perfected if all the offers are accepted
• Offers are not interrelated – single acceptance of each offer results in a perfected contract unless the
offeror has made it clear that one is dependent upon the other and acceptance of both is necessary.
RULES ON ADVERTISEMENTS AS OFFERS

• Business advertisements – not a definite offer, but mere invitation to make an offer, unless it appears
otherwise (Art. 1325, NCC)
Note: If the advertisement contains all the necessary date need in a contract, its a definite offer for the sale of the
thing advertised. Otherwise, it is not a definite offer, it is a mere invitation to make offer.
• Advertisement for bidders – simply invitation to make proposals and advertiser is not bound to accept
the highest or lowest bidder, unless the contrary appears (Art. 1326, NCC)
GROUNDS THAT WOULD RENDER THE OFFER
INEFFECTIVE

• Death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed;
• Express or implied revocation of the offer by the offeree;
• Qualified or conditional acceptance of the offer, which becomes counter-offer;
• Subject matter becomes illegal or impossible before acceptance is communicated;
• Period given to the offeree to signify his acceptance has already lapsed
REQUISITES OF A VALID ACCEPTANCE

• Must be absolute; a qualified acceptance constitutes a counter-offer (Art. 1319, NCC).

• No specified form but when the offeror specifies a particular form, such must be complied with.
• NOTE: Offer or acceptance, or both, expressed in electronic form, is valid, unless otherwise agreed by the
parties (electronic contracts).
• A conditional acceptance is a counter-offer which extinguishes the offer. If not accepted by the offeror there is
no contract. An acceptance may be express or implied (Art. 1320, NCC).
PERIOD FOR ACCEPTANCE
Stated Fixed Period in the Offer
• a. Must be made within the period given by the offeror.
• b. As to withdrawal of the offer: GR: It can be made by communicating such withdrawal at any time before the acceptance is
made
• XPN: When the option is founded upon a consideration (something paid or promised since partial payment of the purchase
price is considered as proof ofthe perfection of the contract). (NCC, Art 1324)
No Stated Period
• a. Offer is made to a person present – acceptance must be made immediately.
• b. Offer is made to a person absent – acceptance may be made within such time that, under normal circumstances, an answer
can be expected from him.
Note: If there was an acceptance already, the offeror cannot just withdraw his offer unilaterally. He will be liable for damages.
(Pineda, 2009)
OPTION CONTRACT

• It is a contract between the offeror and the offeree whereby the former grants the latter, for a valuable
consideration, the privilege to buy or not to buy certain objects at anytime within a specified period and
for a fixed price.

NOTE: The privilege granted to the offeree must be supported by a consideration, the option is just
considered an “offer to sell” to the offeree which is not binding until accepted. (Pineda, 2009)
PERSONS INCAPACITATED TO GIVE CONSENT

• Deaf-mutes who do not know how to read and write (illiterates);

• Insane or demented persons, unless the contract was entered into during a lucid interval;
PERSONS INCAPACITATED TO GIVE CONSENT
• Minors (Art. 1327, NCC) except:
• Contracts for necessaries (Art. 1489, NCC)
• Contracts by guardians or legal representatives and the court having jurisdiction had approved the same
• When there is active misrepresentation on the part of the minor (minor is estopped);
• Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years of age
• Contract of an insurance for life, health and the accident on the minor’s life.
• Upon reaching age of majority – they ratify the same.
NOTE: Because the law incapacitates them to give their consent to a contract, the only way by which any one of those
enumerated above can enter into a contract is to act through a parent or guardian. If this requirement is not complied
with, the result is a defective contract. If only one of the contracting parties is incapacitated to give his consent, the
contract is voidable. If both of them are incapacitated to give their consent, the contract is unenforceable (Art. 1390[1]
and Art. 1403[3] NCC)
VICES OF CONSENT

• Mistake
• Intimidation
• Violence
• Undue influence
• Fraud
NOTE: A threat to enforce a just or legal claim through a competent authority does not amount to
intimidation nor vitiate consent (Art. 1335, NCC).
MISTAKE

• General Rule: Mistake as a vice of consent refers to mistake of facts and not of law, thus rendering the
contract voidable
• NOTE: Everyone is conclusively presumed to know the law. Hence, ignorance of the law excuses no one from
compliance therewith (Art. 3, NCC)
• Exceptions: When mistake of law involves mutual error as to the legal effect of an agreement when the
real purpose of the parties is frustrate (Art. 1334, NCC).
MISTAKE DISTINGUISHED FROM IGNORANCE

Mistake is a false impression on something, while Ignorance is absence of any notion or impression about a
particular thing.
Requisites:
• Mistake must be with respect to the legal effect of the agreement
• It must be mutual
• Real purpose of the parties must have been frustrated
KINDS OF MISTAKES OF FACT WHICH VITIATE
CONSENT

• Mistake as to the nature of the contract

• Mistake as to object of the contract
• Mistake as to the quality or principal conditions of the thing
• Mistake or error in quantity
• Mistake as to identity of the person
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
MUTUAL ERROR

• Mutual Error as to the legal effect of an agreement when the real purpose of the parties is frustrated,
may vititate consent. (NCC, Art. 1334)
• Legal effect refers to the rights of the parties as stated in legal provisions
INTIMIDATION

• There is intimidation when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the person or
property of his spouse, descendants or ascendants, to give his consent (Art. 1335[2], NCC)
REQUISITES OF INTIMIDATION
• One of the parties is compelled to give his Consent by a reasonable and well-grounded fear of an evil
• The evil must be Imminent and grave
• It must be unjust
• The evil must be the determining Cause for the party upon whom it is employed in entering into the contract (Art.
1335, NCC)
NOTE: To determine the degree of the intimidation, the age, sex and condition of the person shall be borne in mind
(Art. 1335, NCC)
Validity of a contract if consent is reluctant
A contract is valid even though one of the parties entered into it against his wishes and desires or even against his
better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of
advantage or profit (Martinez v. Hongkong and Shanghai Banking Corp., G.R. No. L-5496, February 19, 1910).
VIOLENCE

There is violence when in order to wrest consent, serious or irresistible force is employed. (Art. 1335, NCC)
Requisites of violence
• Physical force employed must be serious or Irresistible; and
• The determining cause for the party upon whom it is employed in entering into the contract.
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate
consent. (NCC, Art. 1335[4])
NOTE: Violence or intimidation shall annul the obligation, although it may have been employed by a third
person who did not take part in the contract (NCC, Art. 1336).
UNDUE INFLUENCE

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice (NCC, Art. 1337).
Circumstances to be considered for the existence of undue influence
• Confidential, family, spiritual and other relations between the parties;
• Mental weakness;
• Ignorance;
• Financial distress (Art. 1337, NCC).
NOTE: The enumeration is NOT exclusive. Moral dependence, indigence, mental weakness, tender age or
other handicap are some of the circumstances to consider undue influence.
FRAUD

There is fraud when through the insidious words or machinations of one of the contracting parties the
other is induce to enter into a contract which, without them, he would not have agreed to (Art. 1338, NCC).
• NOTE: Insidious words refers to a deceitful scheme or plot with an evil design, or a fraudulent purpose
(Pineda, 2000).
• Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound By
confidential relations, constitutes fraud (Art. 1339, NCC).
REQUISITES OF FRAUD TO VITIATE CONSENT

• It was applied or utilized by one contracting party upon the other

• It must be serious deception
• It must have induced the victim to enter the contract without which he would not have agreed to.
• It must have resulted in damage or injury
KINDS OF FRAUD

• Fraud in the perfection of the contract

• Causal fraud (dolo causante)
• Incidental fraud (dolo incidente)
• Fraud in the performance of an obligation
DOLO CAUSANTE V. DOLO INCIDENTE
BASIS DOLO CAUSANTE DOLO INCIDENTE
(Art. 1338) (Art 1344)
Gravity of Fraud Serious in character Not serious

Status of the Contract Renders the contract voidable Does not effect the validity of the
contract
Remedies Annulment with damages Contract remains valid.
Remedy is claim for damages.
ACTS CONSIDERED NOT FRAUDULENT

• Principle of Tolerated Fraud - The usual exaggerations in trade and the other party had an opportunity
to know the facts are not themselves fraudulent (Art.1340, NCC)
• Expert Opinion - A mere expression of an opinion does not signify fraud, unless made by an expert and
the other party had relied on the former’s special knowledge (Art. 1341, NCC)
• Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual (Art. 1342, NCC)
• Misrepresentation made in good faith is not fraudulent but may constitute error (Art. 1343, NCC)
NOTE: in order that fraud may make a contract voidable, it should be serious and should not gave been
employed by both contracting parties. (NCC, Art 1344)
SIMULATION OF CONTRACT

• It is the declaration of a fictitious will, deliberately made by agreement of the parties, in order to
produce, for the purposes of deception, the appearance of a juridical act which does not exist or is
different from that which was executed (Tolentino, 2002)
KINDS OF SIMULATION OF CONTRACT

Absolute (simulados) – The contracting parties do not intend to be bound by the contract at all, thus the
contract is void (Arts. 1345-1346, NCC). In absolute simulation, there is a colorable contract but it has no
substance as the parties have no intention to be bound by it. The main characteristic of an absolute
simulation is that the apparent contract is not really desired or intended to produce legal effect or in any
way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is
void, and the parties may recover from each other what they may have given under the contract. They lack
the element of true consent.
• Illustrative example: Neo, with the consent of Sally, sold the property to Angie, who is the favorite niece
of Neo. During the execution of the deed of absolute sale, Neo, in the presence of his nephew, Anjo,
told Angie that they were executing the deed because they wanted her loan application to be approved.
Angie gleefully left the place without handing a single centavo to her uncle. Neo and Sally stayed on the
property and continued paying the real property tax
KINDS OF SIMULATION OF CONTRACT

Relative (disimulados) – The contracting parties conceal their true agreement (NCC, Art. 1345); binds the
parties to their real agreement when it does not prejudice third persons or is not intended for any purpose
contrary to law, morals, good customs, public order or public policy (Art. 1346, NCC). If the concealed
contract is lawful, it is absolutely enforceable, provided it has all the essential requisites: consent, object,
and cause (Arts. 1345-1346, NCC).
• Illustrative example: A donor is donating a property to a donee. Instead of executing a deed of donation,
the donor instead executed a deed of sale to conceal the donation intended.
ABSOLUTE VS. RELATIVE
ABSOLUTE (simulados)
Color of contract, without any substance
thereof, the parties not having intention to be
bound
VOID - Does not legally exist. Illusory, mere
phantom, injuring 3rd persons, generally
fraudulent
RELATIVE (disimulados)
Parties have an agreement which they conceal under the guise
of another contract
VALID except when it prejudices 3 persons or has an illicit
purpose, provided it has all the essential elements of a
contract.
1. Ostensible acts - Purported Contract
• VOID
• apparent or fictitious; contract that the parties pretend to
have executed
2. Hidden act - Real Contract (not to be confused with
contracts involving real property or real rights)
• may be VALID
• real; true agreement between the parties
RECOVERY IN ABSOLUTELY SIMULATED
CONTRACTS:
• Right to recover is given if the simulation is not intended for an illegal purpose.
• In the event that it is intended for an illegal purpose, the contract is void. The act is subject to:
• If both are in pari delicto, and the act constitutes a criminal offense, both are prosecuted. If one is
innocent, the innocent may claim what he has given without any obligation to comply with the promise.
• If the act constitutes a non-criminal offense, and both are at fault, none may recover. If only one is at
fault, the innocent party may demand the return of what he has given without any obligation to comply
with the promise. (Article 1411, NCC)
• A third person or creditor who is prejudiced by the fraudulent simulated contract may attack the nullity
of the contract, if he is not in bad faith.