Miko P.

Martin, 2015–01836

CONTRACTS REVIEWER
C2023
Contents
SECTION ONE: GENERAL PROVISIONS ...................................................................................................................... 1

1. Nature & Definition of Contract ....................................................................................................................... 1

2. Content & Subject Matter ................................................................................................................................ 1

3. Binding Effect .................................................................................................................................................. 4

4. Determination of Validity/Compliance/Performance ....................................................................................... 6

5. Perfection ........................................................................................................................................................ 6

6. Authority to Contract........................................................................................................................................ 6

7. Inducement to Violate/Tortious Interference ................................................................................................... 6

SECTION TWO: ESSENTIAL REQUISITES.................................................................................................................... 7

I. Consent...................................................................................................................................................................... 7

1. Requisites of Consent ..................................................................................................................................... 7

2. Vices of Consent ............................................................................................................................................. 9

3. Simulation ...................................................................................................................................................... 13

II. Object...................................................................................................................................................................... 14

1. What May Be the Object of a Contract.......................................................................................................... 14

2. What May Not Be the Object of a Contract ................................................................................................... 14

III. Cause..................................................................................................................................................................... 14

1. Kinds.............................................................................................................................................................. 14

2. Distinguished from Motive ............................................................................................................................. 15

3. Want of Cause ............................................................................................................................................... 15

4. Statement of False Cause ............................................................................................................................. 15

5. Presumed Lawful Cause ............................................................................................................................... 15

6. Inadequacy of Cause .................................................................................................................................... 15

SECTION THREE: FORMING THE CONTRACT .......................................................................................................... 16

1. Stages of Formation ...................................................................................................................................... 16

2. Form of Contracts .......................................................................................................................................... 16

3. Reformation of Instruments ........................................................................................................................... 17

SECTION FOUR: INTERPETATION OF CONTRACTS ................................................................................................ 19

1. When Literal Meaning Governs ..................................................................................................................... 19

2. Intent Over Literal Interpretation ................................................................................................................... 19

3. Distinct & Different Cases Excluded ............................................................................................................. 19

 4. Stipulation Interpreted to Be Effectual........................................................................................................... 19

5. Stipulations Interpreted Together .................................................................................................................. 20

6. Words Interpreted According to Nature & Object of Contract ....................................................................... 20

7. Ambiguities Interpreted According to Usage & Custom ................................................................................ 20

8. Interpreted Against Party Causing Obscurity ................................................................................................ 20

9. Interpreted According to Rules of Court ........................................................................................................ 21

10. When Principles Can’t Settle Doubts ............................................................................................................ 21

SECTION FIVE: RESCISSIBLE CONTRACTS................................................................ Error! Bookmark not defined.

1. Rescission ..................................................................................................................................................... 22

2. Kinds.............................................................................................................................................................. 22

3. Limitations on Rescission .............................................................................................................................. 24

4. Effect of Rescission ....................................................................................................................................... 24

5. When Rescission Improper ........................................................................................................................... 24

6. Prescription of Action .................................................................................................................................... 24

SECTION SIX: VOIDABLE CONTRACTS ..................................................................................................................... 24

I. Types of Voidable Contracts.................................................................................................................................... 24

1. Contracts with those Incapable of Giving Consent ....................................................................................... 25

2. Contracts with Vitiated Consent .................................................................................................................... 25

II. Ratification .............................................................................................................................................................. 25

1. Effect ............................................................................................................................................................. 25

2. Types ............................................................................................................................................................. 25

3. By Guardians ................................................................................................................................................. 26

4. Conformity Not Required ............................................................................................................................... 26

III. Who May Institute Action for Annulment ............................................................................................................... 26

IV. Effect of Annulment ............................................................................................................................................... 26

1. Restoration .................................................................................................................................................... 26

2. When Restoration Not Required or Possible ................................................................................................ 26

V. Prescription or Extinguishment of Action ............................................................................................................... 26

SECTION SEVEN: UNENFORCEABLE CONTRACTS ................................................................................................. 27

I. Types ....................................................................................................................................................................... 27

1. Unauthorized Contracts ................................................................................................................................ 27

2. Contracts Infringing Statute of Frauds .......................................................................................................... 27

 3. Contracts Where Both Parties are Incapable of Giving Consent .................................................................. 30

II. Who May Assail ...................................................................................................................................................... 30

SECTION EIGHT: VOID OR INEXISTENT CONTRACTS ............................................................................................. 30

1. Categories ..................................................................................................................................................... 30

2. The In Pari Delicto Doctrine .......................................................................................................................... 31

3. Defense of Illegality Not Available to 3rd Persons ......................................................................................... 33

4. No Prescription .............................................................................................................................................. 33
 SECTION ONE: GENERAL PROVISIONS
1. Nature & Definition of Contract
Remember that ART. 1157 PAR. 2 provides that “[o]bligations arise from:
2. Contracts;”
ART. 1159 provides that “[o]bligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.”
When ART. 1159 provides that “contracts have the force of law between the contracting parties…”, it provides for the
Binding Effect of Contracts, in that a Contract is treated as law between the contracting parties. ART. 1159 also provides
that “[obligations arising from contracts… should be complied with in good faith.” That Contracts must be complied with in
Good Faith is the Manner of Compliance required of Obligations arising from Contracts.
A definition for “Contracts” is found in ART. 1305, which provides that “[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.”
An alternative definition for Contracts is given by Sanchez Roman, as cited in Jurisprudence. This definition provides
that a Contract is 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 fulfilment of a prestation to give, to do, or not to do.”1

2. Content & Subject Matter

2.1. Freedom to Stipulate
ART. 1306 provides that “[t]he 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.”
What ART. 1306 establishes is the Freedom to Stipulate, also known as Freedom of Contract, in which the “[t]he
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient…”.
Such Freedom of Contract “is both a constitutional and statutory right and to uphold this right, courts should move with
all the necessary caution and prudence in holding contracts void.”2

2.2. Limitation on Stipulation

Although ART. 1306 provides for the Freedom of Contract, the Article also provides for Limitations to such freedom.
The Contracting Parties are free to stipulate whatever they wish in the Contract, “provided they are not contrary to:
- Law - Public Order, or
- Morals - Public Policy.”
- Good Customs

2.2.1. Law
In the case of PAKISTAN INTERNATIONAL AIRLINES CORP. VS. BLAS F. OPLE (G.R. NO. 61594 SEPTEMBER 28, 1990),
Respondents Farrales & Mamasig were employed by Pakistan Int’l Airlines (PIA) as Flight Attendants. Their Contract of
Employment had the following Clauses:
Clause 5 – “This agreement is for a period of three (3) years, but can be extended by the mutual consent
of the parties.”
Clause 6(b) – “… PIA reserves the right to terminate this agreement at any time by giving the employee
notice in writing in advance 1 month before intended termination or in lieu thereof, by paying the employee
wages equivalent to 1 month’s salary.”

1 SM Land, Inc. vs. Bases Conversion and Development Authority (G.R. No. 203655, March 18, 2015)
2 Leoncio Gabriel vs. Monte de Piedad y Caja de Aharros, et al. (G.R. No. L-47806, April 14, 1941)
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 Clause 10 – “This agreement shall be construed and governed under and by the laws of Pakistan, and
only the Courts of Karachi, Pakistan shall have the jurisdiction to consider any matter arising out of or under
this agreement.”
When Farrales & Mamasig questioned their Contract of Employment after being dismissed by PIA, the Court
ruled in their favor. The Court provided that “the governing principle is that parties may not contract away
applicable provisions of law especially peremptory provisions dealing with matters heavily impressed with
public interest. The law relating to labor and employment is clearly such an area and parties are not at liberty to
insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with
each other.” Thus, after reiterating that the Labor Code affords for Security of Tenure and that Labor is a matter
heavily impressed with Public Interest, the Court ruled that Farrales’s & Mamasig’s Dismissals were illegal and that
the aforementioned Clauses are void.
In the case of HERALD BLACK DACASIN VS. SHARON DEL MUNDO DACASIN (G.R. NO. 168785, FEBRUARY 5, 2010),
Petitioner Herald (American) and Respondent Sharon (Filipino) Dacasin obtained a Divorce Decree in America, the
Decree ordering that Sharon have Sole Custody over their less than 7 years-old child, Stephanie. Afterwards, Herald and
Sharon executed a Contract in Manila, stating that they would have Joint Custody over Stephanie. However, Sharon still
exercised Sole Custody over Stephanie. Now, Herald petitions that Sharon follow their Contract.
The Court ruled against Herald. The Court ruled that “[t]he relevant Philippine law on child custody for spouses
separated in fact or in law (under the SECOND PARAGRAPH OF ARTICLE 213 OF THE FAMILY CODE) is also undisputed: "no
child under seven years of age shall be separated from the mother x x x." (This statutory awarding of sole parental
custody to the mother is mandatory, grounded on sound policy consideration, subject only to a narrow exception not
alleged to obtain here.) Clearly then, the Agreement’s object to establish a post-divorce joint custody regime between
respondent and petitioner over their child under seven years old contravenes Philippine law.”

2.2.2. Morals & Good Customs

In the case of DE LOS REYES VS. ALOJADO (G.R. NO. L-5671, AUGUST 24, 1910), Alojado received a loan from De Los
Reyes. They agreed that Alojado shall serve as De Los Reyes’s Servant without any “Renumeration” until someone shall
furnish to Alojado an amount equal to the loan. It happened that Alojado left De Los Reyes’s home without having paid for
the debt. Thus, De Los Reyes filed a complaint to have Alojado pay the debt, or if unable, to return to the household as a
Servant.
The Court ruled that the Contract between Alojado and De Los Reyes was against Morals & Good Customs, in that
Alojado served as De Los Reyes’s Servant without Renumeration. The Court provided that “[d]omestic services are
always to be remunerated, and no agreement may subsist in law in which it is stipulated that any domestic
service shall be absolutely gratuitous, unless it be admitted that slavery may be established in this country through a
covenant entered into between the interested parties.” And so, the Court ruled that “the reason alleged by [De Los Reyes]
as a basis for the loan is untenable, to wit, that the defendant was obliged to render service in his house as a servant
without remuneration whatever and to remain therein so long as she had not paid her debt, inasmuch as this condition
is contrary to law and morality.”
In the case of REYES VS. SIERRA (G.R. NO. L-28658, OCTOBER 18, 1979), Vicente Reyes Jr. applied to have a piece of
land, which he inherited from his father, Vicente Reyes Sr., registered under his name. However, it was revealed that his
father first came into possession of the land after it was mortgaged to him by a certain Basilia Beltran.
The Court did not approve of Reyes Jr.’s application. The Court ruled that “[t]he act of applicant in registering the
property in his own name upon mortgagor's failure to redeem the property would amount to a pactum
commissorium which is against good morals and public policy.”
In the case of CALIMLIM-CANULLAS VS. FORTUN (G.R. NO. L-57499, JUNE 22, 1984), Fernando Canullas, who is married
to Petitioner Mercedes Calimlim-Canullas, abandoned their family and started living with Respondent Corazon Daguines.
After Fernando’s Father died, Fernando inherited his father’s land, which he now plans to sell to Corazon. As such,
Fernando and Corazon executed a Deed of Sale in favor of Corazon. Thus, Mercedes filed a complaint against Corazon.
The Court ruled in favor of Mercedes. The Court ruled that “the contract of sale was null and void for being contrary to
morals and public policy. The sale was made by a husband in favor of a concubine after he had abandoned his

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family and left the conjugal home where his wife and children lived and from whence they derived their support.
That sale was subversive of the stability of the family, a basic social institution which public policy cherishes and
protects.”

2.2.3. Public Order & Public Policy

Public Policy “that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency
to be injurious to the public or against the public good.”3
Jurisprudence provides that “[i]n 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.”4
In the case of AVON COSMETICS, INC. VS. LUNA (G.R. NO. 153674, DECEMBER 20, 2006), Leticia Luna is a Supervisor for
Avon Cosmetics, Inc. (ACI). She entered into a Supervisor’s Agreement with ACI wherein they mutually agree:
2) “That this agreement in no way makes the Supervisor an employee or agent of the Company, therefore,
the Supervisor has no authority to bind the Company in any contracts with other parties.
5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the
Company.
6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the
other.”
Soon after, Luna started selling products from another company, Sandré Philippines, Inc., as its Group Franchise
Director. She now claims that Clause No. 5 is an Unreasonable Restraint of Trade whereas Clause No. 6 should require
that Termination be with a Valid Cause.
The Court does not agree. The Court ruled that Clause No. 5 “does not affect the public at all. It is only a means by
which petitioner Avon is able to protect its investment.” The Court goes on to note that “by making her an important part of
its distribution arm, Sandré Philippines, Inc., a newly formed direct-selling business, would be saving time, effort and
money as it will no longer have to recruit, train and motivate supervisors and dealers. Respondent Luna, who learned the
tricks of the trade from petitioner Avon, will do it for them. This is tantamount to unjust enrichment.”
As for Clause No. 6, the Court ruled that it was still valid. The Court reiterated a previous ruling, in that “termination or
cancellation clauses such as that subject of the case at bar are legitimate if exercised in good faith.”
In the case of FERRAZZINI VS. GSELL (G.R. NO. L-10712, AUGUST 10, 1916), Ferazzini was a worker in Gsell’s Factories,
which produced umbrellas, hats, and matches. It happened that Ferrazzini was fired from work without the agreed 6
Months Advance Notice – Gsell fired Ferrazzini without the Advance Notice due to Ferrazzini’s unruly behavior at work.
Furthermore, their Employment Agreement stipulates that:
“… [Ferrazzini] shall not engage or interest himself in any business enterprises similar to or in
competition with those conducted, maintained or operated by the said party of the first day in the
Philippines, and shall not assist, aid or encourage any such enterprise by the furnishing of information, advice
or suggestions of any kind, and shall not enter into the employ of any enterprises in the Philippine Islands,
whatever, save and except after obtaining special written permission therefor from [Gsell].”
The Court agreed that the Stipulation in the Employment Agreement is against Public Policy. The Court provided for 2
Principal Grounds for Void Contracts in Restraint of Trade:
1. “[T]he injury to the public by being deprived of the restricted party's industry; and the other is,

3 Avon Cosmetics, Inc. vs. Luna (G.R. No. 153674, December 20, 2006)
4 Gabriel vs. De Piedad (G.R. No. L-47806, April 14, 1941)
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 2. [T]he injury to the party himself by being precluded from pursuing his occupation, and thus being prevented from
supporting himself and his family.”
In establishing these grounds, the Court ruled that Gsell imposed an Illegal Restraint of Trade on Ferrazzini. The
assailed provision in their Contract places Ferrazzini’s future employment under the sole choice of Gsell. Under their
Contract, if Gsell did not approve of Ferrazzini’s future employers, Ferrazzini would literally have to leave the country to
seek work.
Now, compare the case of FERRAZZINI VS. GSELL with the case of TIU VS. PLATINUM PLANS (G.R. NO. 163512, FEBRUARY
28, 2007). In this case, Tiu is an employee of 5 Years with Platinum Plans PH, Inc.. She eventually stopped reporting to
work and entered employment with another company, Professional Pension Plans, Inc.. Because it happened that both
Platinum Plans & Professional Pension are in the “Pre-Need Industry”, Platinum Plans now claims that Tiu is in violation of
their Contract of Employment. The Contract between Tiu and Platinum Plans stipulates that:
Clause 8 – “NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her
engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for cause,
he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation,
association or entity, whether directly or indirectly, engaged in the same business or belonging to the same
pre-need industry as the EMPLOYER.”
Now, Tiu claims that such Non-Involvement Provision is an Illegal Restraint of Trade. The Court ruled otherwise. The
Court provided that “a non-involvement clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place.” After noting that Tiu is limited to 2 Years after separating from
Platinum Plans and the confidential information she may have as Platinum Plans’s Senior Assistant Vice-President and
Territorial Operations Head, the Court ruled that the Non-Involvement Provision is in fact not contrary to Public Welfare.

3. Binding Effect
ART. 1308 provides that “[t]he contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.”

3.1. Principle of Mutuality

In the case of FLOIRENDO VS. METROBANK (G.R. NO. 148325, SEPTEMBER 3, 2007), Floirendo obtained Php
1,000,000.00 from Metrobank as a loan – To secure the loan, Floirendo mortgaged 4 Parcels of Land. The Contract
between Floirendo and Metrobank contained an Escalation Clause, which fixed the interest rate at:
“15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days
thereafter.”
Additionally, there was a penalty charge of 18% per annum “based on any unpaid principal to be computed
from date of default until payment of the obligation.”
The Court ruled that the Escalation Clause is Void for violating the Principle of Mutuality. The Court provided that
“contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important aspect of the agreement.” That the 15.446% Interest
per Annum may be adjusted by Metrobank every 30 days violated the Principle of Mutuality – The adjustments are
determined by Metrobank alone, without the consent of Floirendo.
On the other hand, the case of ALLIED BANKING CORP. VS. CA (G.R. NO. 124290, JANUARY 16, 1998) seemingly
contradicts the ruling in FLOIRENDO VS. METROBANK. In this case, Allied Banking Corp. (ABC) leased some land owned by
Spouses Tanqueco. The Contract of Lease provides that:
Clause 1 – “[T]he term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be
renewed for a like term at the option of the lessee.”
The Spouses soon donated the land to their children, and these children refused to renew the Contract of Lease with
ABC. The children now claim that the Contract of Lease is invalid for being against Public Policy.
The Court ruled in favor of ABC. The Court provides that “[t]he fact that such option is binding only on the lessor and
can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or
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not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not,
once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease
agreement.” The Court then goes on to note that “[t]his option, which is provided in the same lease agreement, is
fundamentally part of the consideration in the contract…” – In other words, in drawing up the Contract, the Spouses
Tanqueco has afforded ABC the Option to Renew, even if the Spouses never truly had to offer the Option in the first
place. Thus, the children are bound by the Option that their parents, the Spouses Tanqueco, afforded to ABC.

3.2. Principle of Relativity

3.2.1. General Rule
ART. 1311 PAR. 1 provides that “[c]ontracts 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.”
A reading of ART. 1311 PAR. 1 reveals that there are 3 Instances where the Rights and Obligations Arising from
the Contract are not Transmissible to the Assigns and Heirs of the Contracting Parties:
1. By the Nature of the Rights and Obligations;
2. By Stipulation in the Contract; and
3. By Provision of Law.
In the case of ESTATE OF K. H. HEMADY VS. LUZON SURETY (G.R. NO. L-8437, NOVEMBER 28, 1956), before he died, K.
H. Hemady was a Surety Solitary Guarantor in 20 different Indemnity Agreements, one of which is with Luzon Surety.
Now, Luzon Surety files a claim against Hemady’s Heirs, as they claim that Hemady’s Suretyship is transmissible to his
Heirs.
The Court agrees with Luzon Surety, enumerating reasons as to why Hemady’s Heirs are liable to the Indemnity
Agreement with Luzon Surety:
1. By the Nature of the Rights and Obligations – “[T]he nature of the obligation of the surety or guarantor does
not warrant the conclusion that his peculiar individual qualities are contemplated as a principal
inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it accepted
the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co.
might have to disburse on account of the obligations of the principal debtors. This reimbursement is a payment of
a sum of money, resulting from an obligation to give; and to the Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or by some one else in his behalf, so long as the
money was paid to it.”
2. By Stipulation in the Contract – “[I]ntransmissibility should not be easily implied, but must be expressly
established, or at the very least, clearly inferable from the provisions of the contract itself, and the text of
the agreements sued upon nowhere indicate that they are non-transferable.”
“Because under the law (ARTICLE 1311), a person who enters into a contract is deemed to have contracted for
himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; hence, his failure
to do so is no sign that he intended his bargain to terminate upon his death.”
3. By Provision of Law – “By contract, the articles of the Civil Code that regulate guaranty or suretyship (ARTICLES
2047 TO 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the
surety.”

3.2.2. Exceptions
- In Case of Stipulation in Favor of 3rd Party – ART. 1311 PAR. 2 provides that “[i]f 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.”
- In Case of Contracts Creating Real Rights – ART. 1312 provides that “[i]n 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.”
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- In Case of Creditors – ART. 1313 provides that “[c]reditors are protected in cases of contracts intended to defraud
them.”

4. Determination of Validity/Compliance/Performance
Recall that according to ART. 1308, the validity or compliance of a Contract “… cannot be left to the will of one of
them.”
Although, ART. 1309 does provide that “[t]he 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. 1310 provides that “[t]he determination shall not be obligatory if it is evidently inequitable. In such case, the
courts shall decide what is equitable under the circumstances.”

5. Perfection
ART. 1315 provides that “[c]ontracts 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. 1316 provides that “[r]eal contracts, such as deposit, pledge and Commodatum, are not perfected until the
delivery of the object of the obligation.”

6. Authority to Contract
ART. 1317 provides that “[n]o one may contract in the name of another without being authorized by the latter, or unless
he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it
has been executed, before it is revoked by the other contracting party.”

7. Inducement to Violate/Tortious Interference

ART. 1314, otherwise known as the Law Against Tortious Interference, provides that “[a]ny third person who
induces another to violate his contract shall be liable for damages to the other contracting party.”
In the case of GILCHRIST VS. CUDDY (G.R. NO. L-9356, FEBRUARY 18, 1915), Cuddy owns a film named “Zigomar”.
Cuddy rented the film to Gilchrist for Php 125.00 per Week for a Month. However, on the last Week of Gilchrist’s
possession of Zigomar, Cuddy returned the Php 125.00 for that week, telling Gilchrist that he received a better offer for
the film. Apparently, a certain Espejo offered Cuddy Php 350.00 for the film during Gilchrist’s last week of possessing it.
Gilchrist now claims that Espejo induced Cuddy into violating their Contract.
The Court agreed with Gilchrist. The Court first noted that Espejo knew Cuddy was booking the film but not to whom it
was booked. The Court ruled that “the only motive for the interference with the Gilchrist — Cuddy contract on the part of
[Espejo] was a desire to make a profit by exhibiting the film in their theater. There was no malice beyond this desire; but
this fact does not relieve them of the legal liability for interfering with that contract and causing its breach.”
Since the Case of GILCHRIST VS. CUDDY, the Court would go on to provide for 3 Elements of the Law Against
Tortious Interference:
1. “Existence of a valid contract;
2. Knowledge on the part of the third person of the existence of contract; and
3. Interference of the third person is without legal justification or excuse.”5

5 So Ping Bun vs. CA (G.R. No. 120554, September 21, 1999)

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 SECTION TWO: ESSENTIAL REQUISITES
There are 3 Essential Requisites to a Contract. ART. 1318 provides that “[t]here is no contract unless the following
requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established.”

I. Consent
1. Requisites of Consent
ART. 1319 provides that “[c]onsent 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.”
Thus, a reading of ART. 1219 provides 2 Requisites to Manifest Consent:
1. The meeting of the offer; and
2. The acceptance upon the thing and the cause.
However, manifesting consent does not mean that the consent itself is valid. Jurisprudence provides for the 3
Requisites of a Valid Consent:
1. “It should be intelligent, or with an exact notion of the matter to which it refers;
2. It should be free; and
3. It should be spontaneous.”6

1.1. Offer
Recall that ART. 1319 provides that “[t]he offer must be certain and the acceptance absolute.”
In the case of SANCHEZ VS. RIGOS (G.R. NO. L-25494, JUNE 14, 1972), Rigos agreed, promised & committed to sell a
parcel of land to Sanchez for Php 1,510.00. The Agreement was established as a Unilateral Promise to Sell. Sanchez was
already paying Rigos when Rigos suddenly rejected the Contract. Rigos claims that the Unilateral Promise to Sell is void
for not attaching a Valuable Consideration apart from the price. This is pursuant ART. 1479 PAR. 2, which provides that:
“An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price.”
The Court ruled against Rigos. First, the Court did agree with Rigos, in that a Consideration distinct form the price is
necessary. The Court provided that “the promisee (Sanchez) cannot compel the promisor (Rigos) to comply with the
promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the
burden of proving such consideration. Plaintiff (Sanchez) herein has not even alleged the existence thereof in his
complaint.” However, the Court noted that Rigos still accepted Sanchez’s payments – the payments being Sanchez’s
promise to complete the pay. The Court ruled that “[p]ending notice of its withdrawal, [Sanchez’s] accepted promise
partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.”

1.1.1. Acceptance of an Offer Made Through an Agent

ART. 1322 provides that “[a]n offer made through an agent is accepted from the time acceptance is
communicated to him.”

6 Leonardo vs. CA (G.R. No. 125485, September 13, 2004)

[7]
 1.1.2. Effectiveness of an Offer in Case of Death, Civil Interdiction, Insanity or Insolvency
ART. 1323 provides that “[a]n offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed.”

1.1.3. When Validly Withdrawn

ART. 1324 provides that “[w]hen 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.”

1.1.4. Advertisements
ART. 1325 provides that “[u]nless it appears otherwise, business advertisements of things for sale are not definite
offers, but mere invitations to make an offer.”
ART. 1326 provides that “[a]dvertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears.”

1.2. Acceptance
1.2.1. Requisites for a Valid Acceptance
Remember that ART. 1319 provides that “[t]he offer must be certain and the acceptance absolute.” The Article also
provides that “[a] qualified acceptance constitutes a counter-offer.”
The Court elaborates on the Article, providing that “[a] qualified acceptance or one that involves a new proposal
constitutes a counter-offer and a rejection of the original offer. A counter-offer is considered in law, a rejection of the
original offer and an attempt to end the negotiation between the parties on a different basis.”7
In the case of JARDINE DAVIES VS. CA (G.R. NO. 128066 & G.R. NO. 128069, JUNE 19, 2000), PUREFOODS set up a
bidding for companies who are willing to install generators for their workspaces. PUREFOODS eventually awarded to
project to FEMSCO – FEMSCO thus began to pay the Php 1,800,000.00 Performance Bond. Unfortunately,
PUREFOODS eventually cancelled the project with FEMSCO due to “significant factors [that] were uncovered” about
FEMSCO, thus awarding the project to Jardine Davis. And so, FEMSCO asks that PUREFOODS honor their Contract and
that Jardine Davies Cease & Desist deliveries of generators to PUREFOODS.
Upon reading a letter between PUREFOODS & FEMSCO, the Court ruled in favor of FEMSCO, in that there was
indeed a perfected Contract between the two parties. The Court reiterated that “[c]ontracts are perfected by mere consent,
upon the acceptance by the offeree of the offer made by the offeror.” Additionally, the Court noted that “[t]o produce a
contract, the acceptance must not qualify the terms of the offer. However, the acceptance may be express or implied. For
a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or
revoked before it is made known to the offeror.” Thus, the Court had to determine whether there was an offer from one
party to the other, and a valid acceptance of said offer.
“Since petitioner PUREFOODS started the process of entering into the contract by conducting a bidding, ART. 1326 OF
THE CIVIL CODE, which provides that "[a]dvertisements for bidders are simply invitations to make proposals," applies.
Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or quotations submitted by the prospective suppliers including
respondent FEMSCO, are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the
respective offers.” Thus, when PUREFOODS stated in a letter that the said letter “will confirm that PUREFOODS has
awarded to your firm (FEMSCO) the project,” PUREFOODS has accepted FEMSCO’s offer.

7 Manila Metal Container Corp. vs. PNB (G.R. No. 166862, December 20, 2006)
[8]
 1.2.2. Manner of Acceptance
1.2.2.1. Express or Implied
ART. 1320 provides that “[a]n acceptance may be express or implied.”
In the case of Rockland Construction Co. Inc. vs. Mid-Pasig Land Development Corp. (G.R. No. 164587, February 4,
2008), Rockland Construction Co. Inc. (RCCI) offered to lease a plot of land owned by Mid-Pasig Land Development
Corp. (MPLDC). On July 28, 2000, MPLDC received a Letter from RCCI containing the Terms & Conditions that RCCI
would want in the Lease Contract. Supposedly, the Letter also contained a Php 1,000,000.00 Check from RCCI, which
was its sign of readiness and good faith to enter a Lease Contract with MPLDC. On February 2, 2001, RCCI sent another
letter to MPLDC – RCCI presumes that MPLDC has accepted RCCI’s Offer, since the Php 1,000,000.00 was credited to
MPLDC’s Bank Account. MPLDC vehemently denied accepting any Check and asked that RCCI apply the Check to its
other Lease Contracts instead. Now, RCCI files for Specific Performance from MPLDC – To have MPLDC enter into the
Lease Contract with RCCI. RCCI claims that by cashing the Php 1,000,000.00 Check, MPLDC has Impliedly Accepted
RCCI’s Offer.
The Court ruled against RCCI. The Court noted that there was no concurrence between RCCI’s Offer and MPLDC’s
Acceptance – MPLDC only came to know about the Php 1,000,000.00 Check after receiving RCCI’s Letter dated
February 2, 2001. MPLDC then investigated the supposed Check and found that the Check was deposited to the wrong
Bank – The Php 1,000,000.00 was never deposited in MPLDC’s Account. As for MPLDC’s supposed Implied Acceptance,
the Court ruled that “if indeed Rockland believed that Mid-Pasig impliedly accepted the offer, then it should have taken
possession of the property and paid the monthly rentals. But it did not.”

1.2.2.2. By Letter or Telegram

ART. 1319 PAR. 2 provides that “[a]cceptance 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.”

1.2.2.3. Right of Offeror to Fix Manner of Acceptance

ART. 1321 provides that “[t]he person making the offer may fix the time, place, and manner of acceptance, all of which
must be complied with.”
In the case of MALBAROSA VS. CA (G.R. NO. 125761, APRIL 30, 2003), Malbarosa was given a Letter-Offer by his
employers SEA Development Corp. (SEADC) regarding his retirement package, the offer stating that Malbarosa may
keep the car assigned to him by the company in lieu of the money he would have received. SEADC specifically states that
the Letter-Offer must be signed to be accepted, without giving a period as to when it must be accepted. Malbarosa
declined the offer, finding the terms unacceptable, but when SEADC came to repossess the car, Marlbarosa claims to
have accepted the offer, presenting a Xerox as evidence.
The Court ruled that Malbarosa’s acceptance was not valid, stating that “[i]f an offeror prescribes the exclusive
manner in which acceptance of his offer shall be indicated by the offeree, an acceptance of the offer in the manner
prescribed will bind the offeror. On the other hand, an attempt on the part of the offeree to accept the offer in a different
manner does not bind the offeror as the absence of the meeting of the minds on the altered type of acceptance.”
Additionally, the Court stated that “[w]hen the offeror has not fixed a period for the offeree to accept the offer, and the offer
is made to a person present, the acceptance must be made immediately.”

2. Vices of Consent
ART 1330 provides that “[a] contract where consent is given through mistake, violence, intimidation, undue influence,
or fraud is voidable.” Thus, the Article provides for 5 Vices of Consent, the presence of which would make the Contract
voidable:
1. Mistake 4. Undue Influence
2. Violence 5. Fraud
3. Intimidation

[9]
 2.1. Mistake
2.1.1. Nature of Mistake Required
ART. 1331 provides that “[i]n order that mistake may invalidate consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.”
In the case of ROMAN CATHOLIC CHURCH VS. PANTE (G.R. NO. 174118, APRIL 11, 2012), The Church sold to Pante a plot
of land. 2 Years later, the Church would sell another plot of land to the Spouses Rubi. However, the plot of land that they
sold to Rubi also included the land previously sold to Pante. For their Defense, the Church claimed that the Church
mistakenly gave its consent to Pante. The Church’s Policy is to sell land only to those people that are already occupying
the said land. However, Pante used the land as a passageway between his home and the street.
The Court ruled against the Church. First, the Court provided for the 2 Requisite for Mistake to Vitiate Consent:
1. “The mistake must be either with regard to the identity or with regard to the qualification of one of the
contracting parties; and
2. The identity or qualification must have been the principal consideration for the celebration of the contract.”
The Court further noted that to determine whether Mistake did arise from misrepresenting the Church’s Policy, then
“the courts should consider both the parties’ objectives and the subjective aspects of the transaction, specifically, the
parties’ circumstances – their condition, relationship, and other attributes – and their conduct at the time of and
subsequent to the contract. These considerations will show what influence the alleged error exerted on the parties and
their intelligent, free, and voluntary consent to the contract.”
The Court noted that the Church’s Policy – to sell land to those already occupying it – was not true. In the first place,
neither Pante nor the Spouses Rubi actually occupied the land – A fact that was known to the Church. In fact, the
Contract between the Church and Pante called the subject land as “RIGHT OF WAY”, acknowledging that the land would
bridge Pante’s home and the street. Additionally, the land itself was too small for people to reside in it. Thus, the Court
noted that despite the Church’s Policy, such Policy was not a Principal Consideration when the Church and Pante entered
into the Contract.

2.1.2. In Case of Illiteracy/Unknown Language

ART. 1332 provides that “[w]hen 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.”
Additionally, Jurisprudence provides for the Level of Evidence Needed to establish that there was indeed fraud
against a less educated person. The Court has previously noted that “[a]lthough under ART. 1332 there exists a
presumption of mistake or error accorded by the law to those who have not had the benefit of a good education, one who
alleges any defect or the lack of a valid consent to a contract must establish the same by full, clear and
convincing evidence, not merely by preponderance of evidence. Hence, even as the burden of proof shifts to the
defendants to rebut the presumption of mistake, the plaintiff who alleges such mistake (or fraud) must show that
his personal circumstances warrant the application of ART. 1332.”8

2.1.3. No Mistake When There Is Knowledge

ART. 1333 provides that “[t]here is no mistake if the party alleging it knew the doubt, contingency or risk affecting the
object of the contract.”

8 Leonardo vs. CA (G.R. No. 125485, September 13, 2004)

[10]
 Tolentino, in his Commentaries on the Civil Code and as cited by Jurisprudence, provides that in order for mistake to
invalidate consent:
“[T]he error must be excusable. It must be real error, and not one that could have been avoided by the party
alleging it. The error must arise from facts unknown to him. He cannot allege an error which refers to a
fact known to him, or which he should have known by ordinary diligent examination of the facts. An
error so patent and obvious that nobody could have made it, or one which could have been avoided by ordinary
prudence, cannot be invoked by the one who made it in order to annul his contract. A mistake that is caused
by manifest negligence cannot invalidate a juridical act.”9

2.1.4. In Case of Mutual Error

ART. 1334 provides that “[m]utual error as to the legal effect of an agreement when the real purpose of the parties
is frustrated, may vitiate consent.”

2.2. Violence or Intimidation

2.2.1. Definition
ART. 1335 provides for the definitions of Violence & Intimidation. On Violence, ART. 1335 PAR. 1 provides that “[t]here
is violence when in order to wrest consent, serious or irresistible force is employed.”
On Intimidation, ART. 1335 PAR. 2 & 3 provides that “[t]here is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the
person or property of his spouse, descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.”
Meanwhile, ART. 1335 PAR. 4 provides that “[a] threat to enforce one’s claim through competent authority, if the claim
is just or legal, does not vitiate consent.”

2.2.2. If Via 3rd Person

ART. 1336 provides that “[v]iolence or intimidation shall annul the obligation, although it may have been employed by a
third person who did not take part in the contract.”

2.3. Undue Influence

2.3.1. Definition
ART. 1337 provides that “[t]here is undue influence when a person takes improper advantage of his power over the will
of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.”
In the case of LOYOLA VS. CA (G.R. NO. 115734, FEBRUARY 23, 2000), assailed is a Contract of Sale over a plot of land.
Petitioners claim that then-owner of the land Gaudencia Zarraga was unduly influenced by her niece Romana Zarraga into
giving her consent to the sale. The elderly Gaudencia was living with Romana and had to depend on Romana for her daily
needs.
The Court ruled that there was no undue influence. The Court first provided for the 3 Elements for Undue Influence
to Cancel an Instrument:
1. “A person who can be influenced;
2. The fact that improper influence was exerted; and
3. Submission to the overwhelming effect of such unlawful conduct.”
Apart from the Elements, the Court also provided that “[i]n the absence of a confidential or fiduciary relationship
between the parties, the law does not presume that one person exercised undue influence upon the other. A
confidential or fiduciary relationship may include any relation between persons, which allows one to dominate the other,

9 Domingo Realty, Inc. vs. CA (G.R. No. 126236, January 26, 2007)
[11]
with the opportunity to use that superiority to the others disadvantage.” Thus, the Court ruled that “[t]hat Gaudencia
looked after Romana in her old age is not sufficient to show that the relationship was confidential. To prove a
confidential relationship from which undue influence may arise, the relationship must reflect a dominant,
overmastering influence which controls over the dependent person. In the present case, petitioners failed to show
that Romana used her aunts reliance upon her to take advantage or dominate her and dictate that she sell her land.
Undue influence is not to be inferred from age, sickness, or debility of body, if sufficient intelligence remains.
Petitioners never rebutted the testimony of the notary public that he observed Gaudencia still alert and sharp.”

2.4. Fraud/Misrepresentation
ART. 1338 provides that “[t]here 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.”

2.4.1. Kinds of Fraud

ART. 1344 provides that “[i]n order that fraud may make a contract voidable, it should be serious and should not have
been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.”
A careful reading of the Article reveals 2 Types of Fraud in Contracts – Dolo Causante or Causal Fraud and Dolo
Incidente or Incidental Fraud:
- Dolo Causante – “Under ARTICLE 1344, the fraud must be serious to annul or avoid a contract and render it voidable.
This fraud or deception must be so material that had it not been present, the defrauded party would not have
entered into the contract.”10
Dolo Causante is also referred to in ART. 1338, when the Article provides that “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.”
Because the fraud is serious, it may render the Contract as voidable. However, it must be noted that ART. 1344
additionally requires that fraud “not have been employed by both contracting parties” for it to be truly voidable.
- Dolo Incidente – “ARTICLE 1344 also provides that if fraud is incidental, it follows that this type of fraud is not serious
enough so as to render the original contract voidable.”11
As to its effect, ART. 1344 provides that “[i]ncidental fraud only obliges the person employing it to pay damages.”
In sum, “[d]olo causante determines or is the essential cause of the consent, while dolo incidente refers only to some
particular or accident of the obligations. The effects of dolo causante are the nullity of the contract and the indemnification
of damages, and dolo incidente [only] obliges the person employing it to pay damages.”12

2.4.2. Requisites to Vitiate Consent

ART. 1344 PAR. 1 provides that “[i]n order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.”
Again, only Dolo Causante can make a Contract voidable. The Court provides that “to annul a contract on the basis of
dolo causante, the following must happen:
- First, the deceit must be serious or sufficient to impress and lead an ordinarily prudent person to error.
- Second, the standard of proof required is clear and convincing evidence.”13
As for Dolo Incidente, “[n]either law nor jurisprudence distinguishes whether it is dolo incidente or dolo causante that
must be proven by clear and convincing evidence. It stands to reason that both dolo incidente and dolo causante must be
proven by clear and convincing evidence.”14

10 Tankeh vs. DBP (G.R. No. 171428, November 11, 2013)

11 Tankeh vs. DBP (G.R. No. 171428, November 11, 2013)
12 Geraldez vs. CA (G.R. No. 108253, February 23, 1994)
13 Tankeh vs. DBP (G.R. No. 171428, November 11, 2013)
14 Tankeh vs. DBP (G.R. No. 171428, November 11, 2013)

[12]
 2.4.3. Failure to Disclose
ART. 1339 provides that “[f]ailure to disclose facts, when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitute fraud.”
Jurisprudence expands on the rule given in ART. 1339, providing that “silence or concealment, by itself, does not
constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages
of commerce the communication should be made.”15

2.4.4. Not Necessarily Fraud

- Usual Exaggerations in Trade – ART. 1340 provides that “[t]he usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves fraudulent.”
- Expression of Opinion – ART. 1341 provides that “[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.”
- Misrepresentation by a 3rd Person – ART. 1342 provides that “[m]isrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial mistake and the same is mutual.”
By “mutual”, the Article pertains to both parties of the Contract, not one of the parties and the 3 rd Person. Thus, for
Misrepresentation by a 3rd Person to vitiate Consent, the Misrepresentation must cause both parties of the Contract to
commit Mutual Error. Additionally, the Court has previously ruled that the 3rd Person need not be complicit with one of
the parties in the fraud. The Court provided that “a contract may be annulled on the ground of vitiated consent if deceit
by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error
on the part of the parties to the contract.”16
- Misrepresentation in Good Faith – ART. 1343 provides that “[m]isrepresentation made in good faith is not fraudulent
but may constitute error.”

3. Simulation
3.1. Types
ART. 1345 provides that “[s]imulation 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.”
Thus, there are 2 Types of Simulation – Absolute and Relative Simulation.
As to their respective effects, ART. 1346 provides that “[a]n 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.”
- Absolute Simulation – This Type of Simulation takes place when “the parties do not intend to be bound at all…”. As
such, a Contract that is Absolutely Simulated “is void.”
- Relative Simulation – This Type of Simulation takes place “when the parties do not intend to be bound at all…” and
would rather “conceal their true agreement.” Because the “true agreement” is concealed, the Courts must determine
what the true agreement is. As such, “when [the true agreement] does not prejudice a third person and is not intended
for any purpose contrary to law, morals, good customs, public order or public policy”, then the parties are bound to
such true agreement.
In the case of VALERIO VS. REFRESCA (G.R. NO. 163687, MARCH 28, 2006), the Spouses Valerio executed a Deed of
Sale in favor of their Children (the Petitioners) and the Refrescas Family (the Respondents), farmers who have been
cultivating the Spouses Valerio’s land for years. It happened that the Spouses Valerio passed away. After their death, the
Children claimed ownership over the land executed in favor of the Refrescas Family. The Children claim the Deed of Sale
in favor of the Refrescas Family was Absolutely Simulated, since there was no Valuable Consideration attached to the
Deed (The Refrescas still kept their Tenancy Rights over the land.). On the other hand, the Refrescas claim that the

15 Rural Bank vs. CA (G.R. No. 110672 September 14, 1999)

16 Rural Bank of Caloocan vs. CA (G.R. No. L-32116, April 21, 1981)
[13]
Consideration was unnecessary because the Spouses Valerio sold the land to the Refrescas out of generosity and
gratitude.
The Court ruled in favor of the Refrescas – there was no Absolute Simulation. Rather, there was Relative Simulation.
The Court provided that “the primary consideration in determining the true nature of a contract is the intention of the
parties. If the words of a contract appear to contravene the evident intention of the parties, the latter shall prevail. Such
intention is determined not only from the express terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties.” After the Sale, the Spouses Valerio allowed the Refrescas to retain their tenancy – They
even executed subsequent Deeds of Sale in favor of the Refrescas without extinguishing their Tenancy Rights. Thus, the
Courts ruled that there was Relative Simulation and that generosity was hidden by the Deed of Sale.

II. Object
1. What May Be the Object of a Contract
ART. 1347 provides that “All things which are not outside the commerce of men, including future things, may be the
object of a contract. All rights which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases expressly authorized by law.
All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the
object of a contract.”
As said in the Article, Things Outside the Commerce of Men cannot become the Object of a Contract. Example of
such Things are those used for Public Use. Jurisprudence provides that “plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which says: "Communal things that
cannot be sold because they are by their very nature outside of commerce are those for public use, such as the plazas,
streets, common lands, rivers, fountains, etc."”17

2. What May Not Be the Object of a Contract

2.1. Future Inheritance
ART. 1347 PAR. 2 provides that “[n]o contract may be entered into upon future inheritance except in cases expressly
authorized by law.”
Jurisprudence provides for the 3 Requisites of Contracts upon Future Inheritance, which is prohibited under Art.
1347 par. 2:
1. “That the succession has not yet been opened;
2. That the object of the contract forms part of the inheritance; and
3. That the promissor has, with respect to the object, an expectancy of a right which is purely hereditary in nature.”

2.2. Impossible Things

ART. 1348 provides that “[i]mpossible things or services cannot be the object of contracts.”

III. Cause
1. Kinds
Jurisprudence provides that “[c]onsideration, more properly denominated as cause, can take different forms, such as
the prestation or promise of a thing or service by another.”
ART. 1350 provides that “[i]n 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.”

17 Municipality of Cavite vs. Hilaria Rojas, et al. (G.R. No. L-9069, March 31, 1915)
[14]
 Thus, this Article provides for 3 Kinds of Contracts Based on their Causes:
1. Onerous Contracts – The Prestation or Promise of a Thing or Service
2. Remuneratory Contracts; and – A Remunerated Service or Benefit
3. Contracts of Pure Beneficence

2. Distinguished from Motive

ART. 1351 provides that “[t]he particular motives of the parties in entering into a contract are different from the cause
thereof.”
Because the Motive is not necessarily the Cause of the Contract, the Motive does not always affect said Contract. The
General Principle is that “the motive or particular purpose of a party in entering into a contract does not affect the
validity nor existence of the contract; an exception is when the realization of such motive or particular purpose
has been made a condition upon which the contract is made to depend.”18

3. Want of Cause
ART. 1352 provides that “[c]ontracts 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.”

4. Statement of False Cause

ART. 1353 provides that “[t]he 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.”

5. Presumed Lawful Cause

ART. 1354 provides that “[a]lthough the cause is not stated in the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary.”

6. Inadequacy of Cause
ART. 1355 provides that “[e]xcept in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.”

18 PNCC vs. CA (G.R. No. 116896, May 5, 1997)

[15]
 SECTION THREE: FORMING THE CONTRACT
1. Stages of Formation
Jurisprudence provides for 3 Stages of Forming the Contract:
1. “Preparation or negotiation;
2. Perfection; and
3. Consummation.
Negotiation begins from the time the prospective contracting parties manifest their interest in the contract and ends
at the moment of agreement of the parties. The perfection or birth of the contract takes place when the parties agree
upon the essential elements of the contract. The last stage is the consummation of the contract wherein the parties
fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof.”19

2. Form of Contracts
2.1. General Rule
ART. 1356 PAR. 1 provides that “[c]ontracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present.”

2.2. Exceptions
Apart from the General Rule on the Form of Contracts, ART. 1356 PAR. 2 provides that “[h]owever, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following
article cannot be exercised.”
- Contracts Required to Be in Writing – ART. 1358 PAR. 2 provides that “[a]ll other contracts where the amount
involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or
things in action are governed by ARTICLES 1403, NO. 2 and 1405.”
- Contracts Required to Be in a Public Document – ART. 1358 PAR. 1 provides that “[t]he following must appear in a
public document:
1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real
rights over immovable property; sales of real property or of an interest therein are governed by ARTICLES 1403,
NO. 2, and 1405;
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
3. The power to administer property, or any other power which has for its object an act appearing or which should
appear in a public document, or should prejudice a third person;
4. The cession of actions or rights proceeding from an act appearing in a public document.”
Jurisprudence provides that “[t]he provision of ART. 1358 on the necessity of a public document is only for
convenience, not for validity or enforceability.”20
In the case of MANOTOK REALTY, INC VS. CA (G.R. NO. L-35367, APRIL 9, 1987), Petitioner Manotok Realty, Inc. (MRI)
purchased a parcel of land in an auction held by the PH Trust Company. This parcel of land was once under the
Administration of a certain Vicente Legarda, before the lower courts appointed PH Trust Company as its current
Administrator. However, it was revealed that while Vicente Legarda was the Administrator, he sold the land to one
Abelardo Lucero, who began leasing the land to Respondent Apolonio Siojo. Now, Petitioner MRI files for ejectment
against Respondent Siojo. To this end, MRI claims that the sale between Vicente Legarda and Abelardo Lucero is not
valid, and so Lucero had no authority to lease out the land the Siojo.
The Court ruled in favor of MRI. “The alleged sale made by Legarda to Lucero should have been embodied in a public
instrument in accordance with ARTICLE 1358 OF THE CIVIL CODE and should have been duly registered with the Register of

19 XYST Corp. vs. DMC (G.R. No. 171968, July 31, 2009)
20 Sps. Dalion vs. CA (G.R. No. 78903, February 28, 1990)
[16]
Deeds to make it binding against third persons. The authority given by the probate court to Legarda specifically
required the execution of necessary documents.”
Note that although the General Rule is that the necessity for public documents is merely for convenience, this case of
MANOTOK REALTY, INC. VS. CA finds a probate court ordering that public documents be executed. When the court itself
requires that the Contract be in a public document, then the public document is no longer for mere convenience, but for
effectivity of the Contract.

3. Reformation of Instruments
3.1. Nature & Basis
Jurisprudence provides that “[t]he action for reformation of instrument should not be confused with the action for
annulment of contract. Reformation of instrument presupposes a valid existing contract, in which there had been a
meeting of the minds of the parties but the instrument drawn up and signed by them does not correctly express the terms
of their agreement. Annulment of a contract on the other hand, presupposes a defective contract in which the
minds of the parties did not meet, or the consent of one was vitiated.”21

3.2. Effect & Purpose

Jurisprudence provides that “[t]he equity of reformation is ordinarily limited to written agreements, and its purpose is to
establish and perpetuate the true agreement; annulment, on the other hand, is intended to declare the inefficiency which
the contract already carries in itself and to render the contract inefficacious.”22

3.3. When Proper

ART. 1359 provides that “[w]hen, 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.”

3.3.1. Specific Grounds

3.3.1.1. Mutual Mistake
ART. 1361 provides that “[w]hen a mutual mistake of the parties causes the failure of the instrument to disclose their
real agreement, said instrument may be reformed.”
Jurisprudence provides for 3 Requisites for Mutual Mistake to Reform a Contract:
1. “The mistake should be of a fact;
2. The mistake should be proved by clear and convincing evidence; and
3. The mistake should be common to both parties to the instrument.”23

3.3.1.2. Mistake by One

ART. 1362 provides that “[i]f 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.”
ART. 1363 provides that “[w]hen 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.”

21 Veluz vs. Veluz (G.R. No. L-23261, July 31, 1968)

22 Veluz vs. Veluz (G.R. No. L-23261, July 31, 1968)
23 BPI vs. Fidelity & Surety Company of the Phil. (G.R. No. L-26743, October 19, 1927)

[17]
 3.3.1.3. Error in Drafting
ART. 1364 provides that “[w]hen 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.”
In the case of HUIBONHOA VS. CA (G.R. NO. 95897 & G.R. NO. 102604, DECEMBER 14, 1999), Huibonhoa had an
unfinished Commercial Building, which the Gojoccos were willing to use. Huibonhoa had her Lawyer draft a Contract of
Lease, which the Gojoccos signed. Thus, the Gojoccos occupied the still-unfinished Commercial Building. Unfortunately,
Huibonhoa was unsatisfied with the Contract of Lease – the Contract provided that while the Commercial Building was still
unfinished, Huibonhoa cannot collect rentals from the Gojoccos. As such, Huibonhoa now seeks a Reformation of the
Contract.
The Court ruled against Huibonhoa. The Court noted that “Huibonhoa honestly admitted that there was an oversight in
the drafting of the contract by her own counsel. By such admission, oversight may not be attributed to all the parties
to the contract and therefore, it cannot be considered a valid reason for the reformation of the same contract. In
fact, because it was Huibonhoa’s counsel himself who drafted the contract, any obscurity therein should be
construed against her.”
Now, the case of HUIBONHOA VS. CA may seem to contradict ART. 1364, since the case ruled that “because it was
Huibonhoa’s counsel himself who drafted the contract, any obscurity therein should be construed against her”, whereas
ART. 1364 provides that the Contract may be reformed when the Contract does not express the true intention of the
parties due to “the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of
the clerk or typist.”
A possible answer to the contradiction is that ART. 1364 only contemplates a situation where the Contract was drafted
by the Parties themselves – NOT by the Parties’ Counsel. The Court places a higher standard on Contracts drafted by
Lawyers. As such, Error in Drafting is not considered when the Contract has been drafted by a Lawyer.

3.3.1.4. Severe Pact de Retro

ART. 1365 provides that “[i]f two parties agree upon the mortgage or pledge of real or personal property, but the
instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.”

3.4. When Improper

ART. 1366 provides that “[t]here shall be no reformation in the following cases:
1. Simple donations inter vivos wherein no condition is imposed;
2. Wills; and
3. When the real agreement is void.”
Additionally, ART. 1367 provides that “[w]hen one of the parties has brought an action to enforce the instrument,
he cannot subsequently ask for its reformation.”

3.5. Who May Order

ART. 1368 provides that “[r]eformation 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.”

3.6. Governing Law

ART. 1360 provides that “[t]he 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.”
ART. 1369 provides that “[t]he procedure for the reformation of instrument shall be governed by rules of court to be
promulgated by the Supreme Court.”

[18]
 SECTION FOUR: INTERPETATION OF CONTRACTS
1. When Literal Meaning Governs
ART. 1370 PAR. 1 provides that “[i]f 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.

2. Intent Over Literal Interpretation

ART. 1370 PAR. 2 provides that “[i]f the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.”
By “latter”, the Article is referring to the Intention of the Parties. ART. 1371 then provides that “[i]n order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.”
In the case of RIVERA FILIPINA, INC. VS. CA (G.R. NO. 117355, APRIL 5, 2002), Respondent Reyes was to lease a plot of
land to Rivera Filipina, Inc. (RFI). They entered into a Contract of Lease to establish the agreement. However, said plot of
land was foreclosed – Reyes previously mortgaged the land and defaulted on his payments. Fortunately, Reyes still had a
redemption period within which he could still pay for and recover the land. Reyes decided to offer to sell the land to RFI,
since the Contract of Lease between Reyes and RFI afforded RFI the Right of First Refusal. During negotiations, RFI
refused to pay the price proposed by Reyes. As such, Reyes offered the land to PH Cypress Development Corp.
(PHCDC), which PHCDC accepted. Now, RFI claims that Reyes violated their Contract of Lease – RFI still had the Right
of First Refusal and RFI never outright refused Reyes’s offer to sell. Thus, the sale between Reyes and PHCDC is invalid.
The Court ruled against RFI. The Court noted that “[a]nalysis and construction should not be limited to the words used
in the contract, as they may not accurately reflect the parties’ true intent. The court must read a contract as the
average person would read it and should not give it a strained or forced construction.” The Court follows the Rule
of Interpretation found in ART. 1371, in which the Court would consider the contemporaneous and subsequent acts of the
Contracting Parties. “Where the parties to a contract have given it a practical construction by their conduct as by acts in
partial performance, such construction may be considered by the court in construing the contract, determining its meaning
and ascertaining the mutual intention of the parties at the time for contracting.” Judging from the testimonies of the
Contracting Parties, the Court ruled that they understood “the Right of First Refusal” as to merely offer the land to RFI
first. RFI was repeatedly offered the land by Reyes, but because of its constant refusal, RFI’s Right of First Refusal was
deemed exercised.

3. Distinct & Different Cases Excluded

ART. 1372 provides that “[h]owever 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.”
For example, in the case of ONG LIM SING, JR. VS. FEB LEASING & FINANCE CORP. (G.R. NO. 168115, JUNE 8, 2007), the
Court ruled that “[t]he lease contract subject of the complaint speaks only of a lease. Any agreement between the parties
after the lease contract has ended is a different transaction altogether and should not be included as part of the lease.”

4. Stipulation Interpreted to Be Effectual

ART. 1373 provides that “[i]f 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.”
In the case of GONZALES VS. HEIRS OF CRUZ (G.R. NO. 131784, SEPTEMBER 16, 1999), the Heirs of Cruz has agreed to
lease parcel of land to Gonzales. The Contract of Lease stated that:
Clause 9 – “The LESSORS (Heirs of Cruz) hereby commit themselves and shall undertake to obtain a
separate and distinct T.C.T. over the herein leased portion to the LESSEE (Gonzales) within a
reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract
shall be executed by the herein parties which shall be the same in all respects with this Contract of
Lease/Purchase insofar as the terms and conditions are concerned.”

[19]
 As it turns out, the land was not even under the Heirs’ names. When Gonzales refused to pay for the land that he was
already leasing, the Heirs of Cruz filed a complaint against him. Because the land was not even under the Heirs’ names
when they offered it, Gonzales claims that the Heirs must first procure the TCT under their own name before Gonzales is
obligated to purchase it.
The Court ruled in favor of Gonzales, finding that Gonzales’s interpretation would render Clause 9 effectual, as per
Art. 1373. The Court ruled that “the ninth provision was intended to ensure that respondents would have a valid title over
the specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to
pay the sums stated in the Contract be enforced within the period stipulated.”

5. Stipulations Interpreted Together

ART. 1374 provides that “[t]he 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.”
This Rule of Interpretation also extends to Complementary Contracts – such Rule is known as the Complementary-
Contracts-Construed-Together Doctrine. “According to this principle, an accessory contract must be read in its entirety
and together with the principal agreement. This principle is used in construing contractual stipulations in order to arrive at
their true meaning; certain stipulations cannot be segregated and then made to control.”24
In the case of CAÑETE VS. SAN ANTONIO AGRO-INDUSTRIAL DEVELOPMENT CORP. (G.R. NO. L-51152 & G.R. NO. 55440,
APRIL 27, 1982), Cañete leased her land to San Antonio Agro-Industrial Development Corp. (SAAIDC). Their Contract of
Lease provides that:
Par. 3 – “That the lease shall begin in crop year 1968-69 up to and including crop year 1973-74 with an
option of another five years on the part of the LESSEE [SAAIDC] to extend.”
Par. 7 – “That the LESSEE [SAAIDC] is given an option to purchase the above-described parcels of land in
case the LESSOR [Cañete] shall be willing and desirous to sell the same and likewise the LESSEE is given
the option to lease the above parcels of land in case the LESSOR is likewise willing to lease the same
again.”
Now, SAAIDC wants to extend the Contract of Lease, but Cañete refused. SAAIDC claims that Par. 7 must follow Par.
3, in that when the Lessee (SAAIDC) is willing to extend the Contract of Lease, the Lessor (Cañete) must give the Option
to Renew.
The Court ruled against SAAIDC. The Court reiterated the Rule in ART. 1374, stating that “all the terms of a contract
must be interpreted together to give effect to the whole agreement.” The Court then ruled that “the best reconciliation
between paragraph 3 and paragraph 7 is to give effect to the latter only after the option in the former has already been
exercised, thereby avoiding conflict, contradiction and inconsistency within the four corners of the same agreement.”

6. Words Interpreted According to Nature & Object of Contract

ART. 1375 provides that “[w]ords which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.”

7. Ambiguities Interpreted According to Usage & Custom

ART. 1376 provides that “[t]he 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.”

8. Interpreted Against Party Causing Obscurity

ART. 1377 provides that “[t]he interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.”

24 PBC vs. Lim (G.R. No. 158138, April 12, 2005)

[20]
 A common obscurity that a Contracting Party may cause is drafting up obscure words in the Contract. The Court has
consistently provided that “the party who draws up the contract, in which obscure words or phrases appear, bears the
responsibility for causing the ambiguity or obscurity, and hence, these must be construed against him.”25
On Contracts of Adhesion, Jurisprudence provides that “[w]hile ambiguities in a contract of adhesion are to be
construed against the party that prepared the same, this rule applies only if the stipulations in such contract are obscure
or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.”26

9. Interpreted According to Rules of Court

ART. 1379 provides that “[t]he principles of interpretation stated in RULE 123 OF THE RULES OF COURT shall likewise be
observed in the construction of contracts.”

10. When Principles Can’t Settle Doubts

ART. 1378 provides that “[w]hen 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.”

25 Martha R. Horrigan vs. Troika Commercial, Inc. (G.R. No. 148411, November 29, 2005)
26 Rizal Commercial Banking Corp. vs. Court of Appeals, et al. (G.R. No. 133107, March 25, 1999)
[21]
 SECTION FIVE: DEFECTIVE CONTRACTS
I. Rescissible Contracts
1. Rescission
ART. 1381 provides that “[t]he following contracts are rescissible:
1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission.”

1.1. Distinguished from Art. 1191

ART. 1191 provides that “[t]he power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with ARTICLES 1385 and 1388 and THE MORTGAGE LAW.”
Between ART. 1191 and ART. 1381, for ART. 1191 to apply, Jurisprudence provides that “there must be reciprocal
prestations as distinguished from mutual obligations between or among the parties.”27
As for ART. 1381, “[w]hen a party seeks the relief of rescission as provided in ARTICLE 1381, there is no need for
reciprocal prestations to exist between or among the parties. All that is required is that the contract should be among
those enumerated in ARTICLE 1381 for the contract to be considered rescissible. Unlike ARTICLE 1191, rescission under
ARTICLE 1381 must be a subsidiary action because of ARTICLE 1383.”28
The Article mentioned, ART. 1383, provides that “[t]he action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the same.”

1.2. Distinguished from Termination

Distinguished from Termination, Jurisprudence provides that the effect of Rescission is “to declare a contract void in
its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further
obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they
would have occupied had no contract ever been made.”29

2. Kinds
2.1. Contracts With Lesion
ART. 1381 NO. 1 & 2 provide that “[t]he 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;”

27 The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd. (G.R. No. 167519, January 14, 2015)
28 The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd. (G.R. No. 167519, January 14, 2015)
29 Florencia T. Huibonhoa vs. Court of Appeals, et al. (G.R. No. 95897, December 14, 1999)

[22]
 ART. 1386 provides that “[r]escission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to
contracts approved by the courts.”

2.2. Contracts in Fraud of Creditors

ART. 1381 NO. 3 provides that “[t]he following contracts are rescissible:
3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;”
Recission under ART. 1381 NO. 3 is known as Accion Pauliana, which has 5 Requisites:
1. "The plaintiff asking for rescission has a credit prior to the alienation, although demandable later;
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 third person who received the property conveyed, if it is by onerous title, has been an accomplice in the
fraud.”30

2.2.1. Presumption of Fraud

ART. 1387 provides that “[a]ll contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has
been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by
the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by
the law of evidence.”
It must be noted that “[t]his presumption of fraud is not conclusive and may be rebutted by satisfactory and convincing
evidence. All that is necessary is to establish affirmatively that the conveyance is made in good faith and for a sufficient
and valuable consideration.”31
In the case of SAMUEL U. LEE, ET AL. VS. BANGKOK BANK PUBLIC CO., LTD. (G.R. NO. 173349, FEBRUARY 9, 2011), The
Lee family is indebted to 2 Companies – Security Bank Corp. (SBC) and Asiatrust Development Bank (Asiatrust). With
Asiatrust, the Lees agreed to a Real Estate Mortgage (REM) over their Antipolo Properties. The titles were delivered to
Asiatrust and the REM was executed on January 1998, while the Deed of Mortgage itself was notarized, registered, and
annotated on February 23, 1998. With SBC, the Lees were subject to a Civil Case for nonpayment of debts. SBC won the
case on January 30, 1998, and it was awarded a Writ of Preliminary Attachment over the Lees’ Real & Personal
properties. However, such Writ was neither registered nor annotated on the Title of the Antipolo Properties of the Lees.
Now Respondent Bangkok Bank, as yet another bank to which the Lees are indebted to, allege that there is a
Presumption of Fraud between Asiatrust and the Lees – Although the execution of the REM over the Antipolo Properties
was on January 1998, the REM was only notarized on February 23, 1998, whereas SBC obtained its Writ over all Real &
Personal Properties against the Lees on January 30, 1998. Thus, because the REM was notarized after SBC obtained its
Writ against the Lees, the execution of the REM is not valid.
The Court ruled against Bangkok Bank. The Court noted that the Writ of Preliminary Attachment was never registered
or annotated on the Title of the Antipolo Properties. The Court provided that “[t]he presumption of fraud established under
ART. 1387 does not apply to registered lands if the judgment or attachment made is not also registered.”
Additionally, the Court ruled that “[e]ven assuming that ART. 1387 OF THE CODE applies, the execution of a mortgage is
not contemplated within the meaning of alienation by onerous title under the said provision.” Thus, Bangkok Bank
cannot have the REM between Asiatrust and the Lees rescinded.

30 Maria Antonia Siguan vs. Rosa Lim, et al. (G.R. No. 134685, November 19, 1999)
31 MR Holdings, Ltd. vs. Sheriff Carlos P. Bajar, et al. (G.R. No. 138104, April 11, 2002)
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 2.2.2. Liability of Acquirer
ART. 1388 provides that “[w]hoever 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.”

2.3. Contracts Referring to Things Under Litigation

ART. 1381 NO. 4 provides that “[t]he following contracts are rescissible:
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;”

2.4. Contracts Subject to Rescission By Operation of Law

ART. 1381 NO. 5 provides that “[t]he following contracts are rescissible:
5. All other contracts specially declared by law to be subject to rescission.”

2.5. Payment Made When Insolvent

ART. 1382 provides that “[p]ayments 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.”

3. Limitations on Rescission
Rescission is a Subsidiary Action only, according to ART. 1383, which provides that “[t]he action for rescission is
subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation
for the same.”
Additionally, ART. 1384 provides that “[r]escission shall be only to the extent necessary to cover the damages caused.”

4. Effect of Rescission
ART. 1385 PAR. 1 provides that “[r]escission 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.”

5. When Rescission Improper

ART. 1385 PAR. 2 & 3 provides that “[n]either shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.”

6. Prescription of Action
ART. 1389 provides that “[t]he action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the
former's incapacity, or until the domicile of the latter is known.”

II. Voidable Contracts

1. Types of Voidable Contracts
ART. 1390 provides that “[t]he following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:
1. Those where one of the parties is incapable of giving consent to a contract;
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.”
[24]
 Compared to Rescission, Jurisprudence provides that “annulment under ARTICLE 1390 OF THE CIVIL CODE and
rescission under ARTICLE 1191 are two (2) inconsistent remedies. In resolution, all the elements to make the
contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is
consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the
process of performing their respective obligations; in annulment, the defect is already present at the time of the
negotiation and perfection stages of the contract.”32

1.1. Contracts with those Incapable of Giving Consent

Recall that ART. 1390 NO. 1 provides that “[t]he following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties:
1. Those where one of the parties is incapable of giving consent to a contract;”
ART. 1327 provides those parties who are incapable of giving consent. The Article provides that “[t]he following cannot
give consent to a contract:
1. Unemancipated minors;
2. Insane or demented persons, and deaf-mutes who do not know how to write.”
Additionally, ART. 1329 provides that “[t]he incapacity declared in ARTICLE 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special disqualifications established in the laws.”

1.2. Contracts with Vitiated Consent

Recall that ART. 1390 NO. 2 provides that “[t]he following contracts are voidable or annullable, even though there may
have been no damage to the contracting parties:
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.”
This Article merely reiterates the rule set forth in ART. 1330, which provides that “[a] contract where consent is given
through mistake, violence, intimidation, undue influence, or fraud is voidable.”

2. Ratification
Although ART. 1390 PAR. 1 mostly reiterates rules on Contracts that may be Voidable or Annulled, ART. 1390 PAR. 2
provides that such Voidable Contracts may still be ratified or rendered valid. The Article provides that “[t]hese contracts
are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.”

2.1. Effect
ART. 1392 provides that “[r]atification extinguishes the action to annul a voidable contract.”
ART. 1396 provides that “[r]atification cleanses the contract from all its defects from the moment it was
constituted.”

2.2. Types
ART. 1393 provides that “[r]atification 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.”
Thus, the Article provides for 2 Types of Ratification – Express and Tacit Ratification. The Article also provides for
what qualifies as Tacit Ratification, in that “[i]t 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.”
Because Tacit Ratification depends on an Act from the Person with the Right to Invoke Nullity which necessarily
implies a Waiver of said Right, Tacit Ratification may take different Forms, depending on the Person’s Acts. Jurisprudence

32 Sps. Fernando and Lourdes Viloria vs. Continental Airlines, Inc. (G.R. No. 188288, January 16, 2012)
[25]
provides that “[i]mplied [or tacit] ratification may take diverse forms, such as by silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.”33

2.3. By Guardians
ART. 1394 provides that “[r]atification may be effected by the guardian of the incapacitated person.”

2.4. Conformity Not Required

ART. 1395 provides that “[r]atification does not require the conformity of the contracting party who has no right
to bring the action for annulment.”

3. Who May Institute Action for Annulment

ART. 1397 provides that “[t]he 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.”

4. Effect of Annulment
4.1. Restoration
ART. 1398 provides that “[a]n obligation having been annulled, the contracting parties shall restore to each other the
things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases
provided by law.
In obligations to render service, the value thereof shall be the basis for damages.”
ART. 1402 provides that “[a]s 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.”

4.2. When Restoration Not Required or Possible

ART. 1399 provides that “[w]hen 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.”

5. Prescription or Extinguishment of Action

ART. 1391 provides that “[t]he action for annulment shall be brought within four years.
This period shall begin:
1. In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.
2. In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the
guardianship ceases.”
Other circumstances can extinguish an Action for Annulment. ART. 1401 provides that “[t]he action for annulment of
contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person
who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be
an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.”

33 Sps. Fernando and Lourdes Viloria vs. Continental Airlines, Inc. (G.R. No. 188288, January 16, 2012)
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 III. Unenforceable Contracts
ART. 1403 provides that “[t]he following contracts are unenforceable, unless they are ratified:
1. Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
2. Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement
cannot be received without the writing, or a secondary evidence of its contents:
a. An agreement that by its terms is not to be performed within a year from the making thereof;
b. A special promise to answer for the debt, default, or miscarriage of another;
c. An agreement made in consideration of marriage, other than a mutual promise to marry;
d. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property 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 of the leasing for a longer period than one year, or for the sale of real property or of an
interest therein;
f. A representation as to the credit of a third person.
3. Those where both parties are incapable of giving consent to a contract.”

1. Types
1.1. Unauthorized Contracts
Recall that ART. 1403 NO. 1 provides that “[t]he 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;”
This is a reiteration of the Rule set forth in ART. 1317, which provides that “[n]o one may contract in the name of
another without being authorized by the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other contracting party.”

1.2. Contracts Infringing Statute of Frauds

Recall that ART. 1403 NO. 2 provides that “[t]he following contracts are unenforceable, unless they are ratified:
2. Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its contents:”
What the Article provides then is a measure to prevent fraud, by requiring that certain contracts be in writing,
or in some note of memorandum, less they be unenforceable.
The Court explains that “[t]he purpose of the statute is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and
transactions to be evidenced by a writing signed by the party to be charged. It was not designed to further or
perpetuate fraud. Accordingly, its application is limited. It makes only ineffective actions for specific performance of
the contracts covered by it; it does not declare them absolutely void and of no effect. As explicitly provided for in
the above-quoted PARAGRAPH (2), ARTICLE 1403 OF THE CIVIL CODE, the contracts concerned are simply "unenforceable"

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and the requirement that they — or some note or memorandum thereof — be in writing refers only to the manner they are
to be proved.”34
Because the Statute of Frauds prevents the performance of Unenforceable Contracts, it follows that the Statute can
only be enforced against Executory Contracts, or such contracts that have not been totally nor partially fulfilled.
Jurisprudence provides that “the Statute of Frauds is applicable only to executory contracts, not to contracts that are
totally or partially performed.”35 The reason behind such Rule is that “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 denied by him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or
liabilities assumed or contracted by him thereby.”36

1.2.1. Actions for Specific Performance & Breach of Contract

In the case of RAMON PASCUAL VS. REALTY INVESTMENT, INC. (G.R. NO. L-4002, MAY 12, 1952), Ramon Pascual was a
Tenant in a land that was transferred to Realty Investment, Inc. (RCI). RCI intends to sell the land, and so Ramon Pascual
approached RCI’s Manager, a Mr. Aquino, and together entered into a Verbal Agreement, in which RCI would sell the
land to Ramon Pascual for Php 15.00 per square meter. Unfortunately, the Deed of Sale was not executed since RCI
asked for more time to prepare the necessary papers. By 1948, RCI demanded that Ramon Pascual pay Php 25.00 per
square meter instead – When Ramon Pascual agreed, RCI still failed to execute the Deed of Sale. Thus, Ramon Pascual
filed an action to compel RCI to execute the Deed of Sale in his favor. In their Defense, RCI claims that the Verbal
Agreement between Mr. Aquino and Ramon Pascual was Unenforceable, since the Statute of Frauds requires that an
Agreement to Sell Real Property must be in writing, or at least in a note or memorandum.
The Court ruled against Ramon Pascual. Ramon Pascual claimed that because of the Verbal Agreement he had with
RCI, he took possession of the land and made improvements upon it. Ordinarily, possessing the land and making
improvements upon it would have been considered as Partial Performance – The Statute of Frauds does bar Presentation
of Oral Evidence by requiring Written Evidence only for Executory Contracts, not Partially Performed Contracts. As such,
Ramon Pascual’s testimonies to the Verbal Agreement would have been tenable. However, the Court noted that “while it
is alleged that plaintiff has occupied the land since 1912, there is nothing alleged therein to the effect that he has
taken possession thereof in view of a supposed verbal contract he had with the defendant to purchase it, nor is
there any allegation that he has made improvements thereon because and as a consequence of said supposed
contract to sell.” The Court goes on to agree with RCI, in that “where a parole contract of sale is adduced not for the
purpose of enforcing it, but as a basis of the possession of the person claiming to be the owner of the land, the
statute of frauds is not applicable in the same way that it does not apply to contracts which are either totally or partially
performed upon the theory that there is a wide field for the commission of frauds in executory contracts which only
prevented by requiring them to be in writing, a fact which is reduced to a minimum in executed contracts because the
intention of the parties become apparent by their execution.”

1.2.2. Types of Transactions

1.2.2.1. Performance Not Within a Year
Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
a. “An agreement that by its terms is not to be performed within a year from the making thereof;”
In the case of BIENVENIDO BABAO, ETC. VS. FLORENCIO PEREZ, ETC., ET AL. (G.R. NO. L-8334, DECEMBER 28, 1957),
Santiago Babao married Maria Perez, who was the niece of Celestina Perez. Celestina Perez owned a plot of land, and
upon Santiago and Maria’s marriage on 1924, Celestina and Santiago entered into a Verbal Agreement. In their Verbal
Agreement, Santiago agreed to improve the Celestina’s land by planting crops and to serve as her Administrator while
she was alive. In exchange, Celestina agreed to, upon her death, convey ½ of the land and all improvements upon it to
either Santiago or Maria. In violation of the Verbal Agreement, Celestina Perez sold the land around 1945. She then died
on August 24, 1947, depriving Santiago Babao of the land promised to him via the Verbal Agreement. Florencio Perez
serves as Celestina Perez’s Administrator. Santiago Babao himself would die on January 6, 1948, with Bienvenido Babao

34 Asia Production Co., Inc., et al. vs. Ernani Cruz Paño, et al. (G.R. No. L-51058, January 27, 1992)
35 Rosario Carbonnel vs. Jose Poncio, et al. (G.R. No. L-11231, May 12, 1958)
36 Rosario Carbonnel vs. Jose Poncio, et al. (G.R. No. L-11231, May 12, 1958)

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serving as his Administrator. Now, Bienvenido Babao claims that Celestina Perez violated the Verbal Agreement and
prays that the land be conveyed to Santiago Babao’s Estate. In their Defense, Florencio Perez claims that because the
Agreement was obviously not meant to be performed upon the making of said Agreement, Parole Evidence of the Verbal
Agreement must not be accepted by the Court. This would effectively defeat Bienvenido Babao’s claims, since the
Agreement between Santiago Babao and Celestina Perez was merely a Verbal Agreement, without any written note or
memorandum whatsoever to prove the existence of the Agreement.
The Court ruled against Bienvenido Babao. There was an argument in favor of Bienvenido Babao that Santiago
Babao Partially Performed his Obligation in the Agreement, which was to improve the land and serve as Celestina’s
Administrator while she was still alive. Thus, Parole Evidence of the Verbal Agreement should have been enough.
However, the Court provided that “[c]ontracts which by their terms are not to be performed within one year, may be taken
out of the statute through performance by one party thereto. All that is required in such case is complete performance
within the year by one party, however many years may have to elapse before the agreement is performed by the other
party. But nothing less than full performance by one party will suffice, and it has been held that, if anything remains
to be done after the expiration of the year besides the mere payment of money, the statute will apply.” Thus, for Santiago
Babao’s Partial Performance to allow the use of Parole Evidence, Celestina Perez would have had to fully comply with her
Obligation within 1 year after 1924, which was when the Verbal Agreement was made. Specifically, Celestina would have
had to die and convey the land and its improvements between the years 1924 to 1925.

1.2.2.2. Special Promise to Answer for the Debt, Default, or Miscarriage of Another
Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
b. “A special promise to answer for the debt, default, or miscarriage of another;”

1.2.2.3. Contracts Made in Consideration of Marriage, Other than a Mutual Promise to

Marry
Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
c. “An agreement made in consideration of marriage, other than a mutual promise to marry;”
In the case of FELIPE CABAGUE, ET AL. VS. MATIAS AUXILIO, ET AL. (G.R. NO. L-5028, NOVEMBER 26, 1952), Matias Auxilio
agreed to have his daughter Socorro marry Felipe Cabague’s son, Geronimo. In exchange for such marriage, Felipe and
Geronimo Cabague would improve the Auxilio’s home and spend for the wedding feast and the bride’s expenses. The
Cabagues ended up spending Php 700.00 on the improvements of the home. However, the Auxilios refused to let Socorro
marry Geronimo. Thus, Felipe and Geronimo Cabague sued for Damages against Matias and Socorro Auxilio. For their
Defense, the Auxilios claimed that the Agreement was merely Verbal, and so without some written note or memorandum
of the Verbal Agreement, then the Agreement is Unenforceable.
The Court ruled against Felipe Cabague, but not Geronimo Cabague. The Court clarified that there were 2
Agreements in place – A Mutual Promise to Marry between Geronimo Cabague and Socorro Auxilios and the Agreement
to Improve and Pay between Felipe Cabague and Matias Auxilio. The Court ruled that “[f]or breach of that mutual promise
to marry, Geronimo may sue Socorro for damages. This is such action, and evidence of such mutual promise is
admissible.” However, because the Marriage no longer took place between Geronimo and Socorro, the Agreement
between Felipe Cabague and Matias Auxilio can no longer be enforced. The Court ruled that “Felipe Cabague's action
may not prosper, because it is to enforce an agreement in consideration of marriage. Evidently as to Felipe Cabague and
Matias Auxilio this action could not be maintained on the theory of "mutual promise to marry". Neither may it be regarded
as action by Felipe against Socorro "on a mutual promise to marry."”

1.2.2.4. Contracts for the Sale of Goods, Chattels, or Things in Action

Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
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

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 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;”

1.2.2.5. Contract of Lease form More than 1 Year, or for the Sale of Real Property or of
an Interest Therein
Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
e. “An agreement of the leasing for a longer period than one year, or for the sale of real property or of
an interest therein;”

1.2.2.6. Representation as to the Credit of a 3rd Person

Recall that ART. 1403 NO. 2 provides that one such Contract that does not comply with the Statute of Frauds is:
f. “A representation as to the credit of a third person.”

1.2.3. Ratification
ART. 1405 provides that “[c]ontracts infringing the Statute of Frauds, referred to in NO. 2 OF ARTICLE 1403, are ratified
by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit
under them.”

1.3. Contracts Where Both Parties are Incapable of Giving Consent

Recall that ART. 1403 NO. 3 provides that “[t]he following contracts are unenforceable, unless they are ratified:
3. Those where both parties are incapable of giving consent to a contract.”
As discussed in SECTION SIX: VOIDABLE CONTRACTS – I. Types – 1. Incapable of Giving Consent, ART. 1327 provides
that “[t]he following cannot give consent to a contract:
1. Unemancipated minors;
2. Insane or demented persons, and deaf-mutes who do not know how to write.”
In the event that such persons incapable of giving consent do enter into a contract, ART. 1407 provides that “[i]n a
contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as
the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were
incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall
be validated from the inception.”

2. Who May Assail

On who may assail an Unenforceable Contract, ART. 1408 provides that “[u]nenforceable contracts cannot be assailed
by third persons.”

IV. Void or Inexistent Contracts

1. Categories
ART. 1409 provides that “[t]he 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.”
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 Additionally, ART. 1422 also provides that “[a] contract which is the direct result of a previous illegal contract, is also
void and inexistent.”

2. The In Pari Delicto Doctrine

In Pari Delicto is Latin for “in equal fault”. The Court provides that “in pari delicto connotes that two or more people
are at fault or are guilty of a crime. Neither courts of law nor equity will interpose to grant relief to the parties, when an
illegal agreement has been made, and both parties stand in pari delicto. Under the pari delicto doctrine, the parties to a
controversy are equally culpable or guilty, they shall have no action against each other, and it shall leave the
parties where it finds them.”37
Ordinarily, parties In Pari Delicto are barred from recovering what has been given to the other party. However, “[t]his
rule… is subject to exceptions that permit the return of that which may have been given under a void contract to:
a. The innocent party (ARTS. 1411-1412, CIVIL CODE);
b. The debtor who pays usurious interest (ART. 1413, CIVIL CODE);
c. The party repudiating the void contract before the illegal purpose is accomplished or before damage is caused to
a third person and if public interest is subserved by allowing recovery (ART. 1414, CIVIL CODE);
d. The incapacitated party if the interest of justice so demands (ART. 1415, CIVIL CODE);
e. The party for whose protection the prohibition by law is intended if the agreement is not illegal per se but merely
prohibited and if public policy would be enhanced by permitting recovery (ART. 1416, CIVIL CODE); and
f. The party for whose benefit the law has been intended such as in price ceiling laws (ART. 1417, CIVIL CODE) and
labor laws (ARTS. 1418-1419, CIVIL CODE).”38

2.1. When Illegal and a Crime

ART. 1411 provides that “[w]hen the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and
both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a
crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise.”
In the case of POTENCIANO RAMIREZ VS. MA. CECILIA RAMIREZ (G.R. NO. 165088, MARCH 17, 2006), Petitioner
Potenciano Ramirez executed a Deed of Donation (Deed) and Waiver of Possessory Rights (Waiver) in favor of his
daughter, Respondent Ma. Cecilia Ramirez. On the Deed and the Waiver, both Potenciano’s and his wife Dolores’s
signatures were affixed. This should have been impossible however, since at the time, Dolores Ramirez was already
dead. Apparently, Potenciano forged his wife’s signature. Eventually, Potenciano filed to have the Deed and Waiver
annulled. Ma. Cecilia claimed that Potenciano is only having the Deed and the Waiver annulled because he had just
recently remarried. Additionally, Ma. Cecilia claimed that it was Potenciano’s idea to execute the Deed and the Waiver to
save on expenses for publication and inheritance taxes.
The Court ruled against both Potenciano and Ma. Cecilia, declaring them both In Pari Delicto. First, the Court
provided for 2 Requisites for In Pari Delicto in Criminal Offenses:
1. “[T]he nullity of the contract proceeds from an illegal cause or object, and
2. [T]he act of executing said contract constitutes a criminal offense.”
On the 1st Requisite, the Court ruled that while the Object itself, which are the transferred Real Property, are not
illegal, the Cause that moved Potenciano and Ma. Cecilia to enter into a Contract was. The Court ruled that “[t]he cause
which moved the parties to execute the Deed of Donation and the Waiver of Possessory Rights, the motive behind the
forgery, is the desire to evade the payment of publication expenses and inheritance taxes, which became due upon
the death of Dolores. Undeniably, the Deed of Donation and the Waiver of Possessory Rights were executed for an illegal
cause…”.

37 Oscar Constantino, et al. vs. Heirs of Pedro Constantino, Jr., (G.R. No. 181508, October 2, 2013)
38 Jacobus Bernhard Hulst vs. PR Builders, Inc. (G.R. No. 156364, September 3, 2007)
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 On the 2nd Requisite, the Court ruled that “Petitioner alleged that the signatures of Dolores on the Deed of Donation
and on the Waiver of Possessory Rights are a forgery. Respondent does not deny this allegation. Forging a person’s
signature corresponds to the felony of falsification under SECTION 4, TITLE IV OF THE REVISED PENAL CODE. Hence,
the act of forging Dolores’s signature constitutes a criminal offense under the terms of ARTICLE 1411 OF THE CIVIL
CODE.”

2.2. When Unlawful or Forbidden but Not a Crime

ART. 1412 provides that “[i]f the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:
1. When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other's undertaking;
2. When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the
return of what he has given without any obligation to comply his promise.”
Jurisprudence notes that “ARTICLE 1412 is not applicable to fictitious or simulated contracts, because they refer to
contracts with an illegal cause or subject-matter. This article presupposes the existence of a cause, it cannot refer to
fictitious or simulated contracts which are in reality non-existent.”39
In the case of ALFRED FRITZ FRENZEL VS. EDERLINA P. CATITO (G.R. NO. 143958, JULY 11, 2003), Alfred Frenzel, a
married Australian Citizen, met Ederlina Catito, a married Filipino Citizen. They fell in love and Frenzel began to finance
Catito’s Beauty Parlor business – He bought the land for her and even the necessary equipment. However, as an
Australian Citizen, Alfred could not own any Private Land (as per SEC. 14, ART. XIV OF THE 1973 CONST.), so he gave the
necessary funds to Catito. Catito then bought the land and equipment under her name. Eventually, Frenzel and Catito’s
relationship deteriorated, so Frenzel petitioned that the land and the money for the equipment be returned to him.
The Court ruled against Frenzel. The Court noted that the Aliens like Frenzel are barred from acquiring Private Land
in the Philippines. As such, the Court ruled that “[e]ven if, as claimed by the petitioner, the sales in question were entered
into by him as the real vendee, the said transactions are in violation of the Constitution; hence, are null and void ab initio.
A contract that violates the Constitution and the law, is null and void and vests no rights and creates no
obligations. It produces no legal effect at all. The petitioner, being a party to an illegal contract, cannot come into a
court of law and ask to have his illegal objective carried out.” Additionally, the Court ruled that “[u]nder ARTICLE 1412
OF THE NEW CIVIL CODE, the petitioner cannot have the subject properties deeded to him or allow him to recover the
money he had spent for the purchase thereof.”

2.3. When Validly Repudiated

ART. 1414 provides that “[w]hen 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.”
In the case of JACOBUS BERNHARD HULST VS. PR BUILDERS, INC. (G.R. NO. 156364, SEPTEMBER 3, 2007), Dutch
National Hulst and his wife came to the Philippines and bought a Residential Unit from PR Builders, Inc. (PRBI). However,
PRBI failed to deliver on their Contract, and so Hulst filed to have their Contract rescinded.
The Court ruled in favor of Hulst. Firstly, the Court did acknowledge that Hulst is barred from owning Private Land in
the Philippines, as provided for in SEC. 7, ART. XII OF THE 1987 CONST.. Ordinarily, both parties would have been held In
Pari Delicto – However, the Court does note that recovery is afforded to “the party repudiating the void contract before the
illegal purpose is accomplished or before damage is caused to a third person and if public interest is subserved by
allowing recovery (ART. 1414, CIVIL CODE)”. The Court goes on to rule that “[s]ince the contract involved here is a
Contract to Sell, ownership has not yet transferred to the petitioner when he filed the suit for rescission. While the
intent to circumvent the constitutional proscription on aliens owning real property was evident by virtue of the execution of

39 Heirs of Policronio M. Ureta, Sr. vs. Heirs of Liberato M. Ureta (G.R. No. 165748, G.R. No. 165930, September 14, 2011)
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the Contract to Sell, such violation of the law did not materialize because petitioner caused the rescission of the
contract before the execution of the final deed transferring ownership.”

2.4. When One Party Is Incapacitated

ART. 1415 provides that “[w]here 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.”

2.5. When Contract Is Not Illegal per se but Merely Prohibited

ART. 1416 provides that “[w]hen the agreement is not illegal per se but is merely prohibited, and the prohibition by the
law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid
or delivered.”

2.6. Of Usurious Interest

ART. 1413 provides that “[i]nterest 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.”

2.7. Of Overprice
ART. 1417 provides that “[w]hen 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.”

2.8. When Contract Violates Labor Laws

ART. 1418 provides that “[w]hen the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a
contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for service rendered beyond the time limit.”
ART. 1419 provides that “[w]hen the law sets, or authorizes the setting of a minimum wage for laborers, and a contract
is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.”

3. Defense of Illegality Not Available to 3rd Persons

ART. 1421 provides that “[t]he defense of illegality of contract is not available to third persons whose interests are not
directly affected.”

4. No Prescription
ART. 1410 provides that “[t]he action or defense for the declaration of the inexistence of a contract does not
prescribe.”

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