Obligations and Contracts: by MP Casino

OBLIGATIONS AND CONTRACTS
By
MP CASINO
CONFUSION
CONFUSION - The characters of creditor and
debtor are MERGED in one and the same person by
virtue of which the obligation is extinguished. (See
Art. 1275)
Requisites of Confusion:
a.Merger must take place between the creditor
and the principal debtor (Art. 1276);
b.The very same obligation must be involved; and
c.The merger must be total or as regards the
entire obligation
2
CONFUSION
• Effects:
a. If confusion takes place in the person of the principal
debtor – the entire obligation is extinguished
b. If confusion takes place in the person of a
subsidiary/secondary debtor (e.g. guarantor and surety) –
no extinguishment of principal obligation;
c. If confusion takes place in one of the joint debtors –
principal obligation is extinguished up to the share which
corresponds to him.
d. If confusion takes place in one of the solidary debtors, the
entire obligation is extinguished. However the debtor in
whom confusion took place may claim reimbursement
from co-debtors for the share which corresponds to them.
(See Arts. 1276-1277)
3
COMPENSATION
Concept: Mode of extinguishing in the concurrent

amount of the obligation of those persons who are
RECIPROCALLY debtors and creditors of each other.
It is an abbreviated payment.
Effect : It extinguishes both debts to the extent that

the amount covered by the amount of the other.
4
COMPENSATION
Kinds of Compensation:
1. As to cause:
a. Legal - takes effect by operation of law from the moment all of the requisites
are present (See Art. 1279 and 1290)
b. Voluntary or conventional – when the parties who are mutually creditors and
debtors agree to compensate their respective obligations, even though all of
the requisites for compensation may not be present (See Art. 1282). It is
BILATERAL.
c. Judicial – takes effect by FINAL and EXECUTORY judicial decree. (See Art.
1283)
d. Facultative – when it can be claimed by one of the parties who, however, has
the right to object to it, such as when the period has been fixed for this
benefit (See also Arts. 1287 and 1288).
2. As to effect
a. Total – debts to be compensated are equal in amount
b. Partial – Debts to be compensated are not equal in amount
(See Art. 1281)
5
Compensation
Requisites of LEGAL Compensation (See Art. 1279):
a. There must be two parties, who in their own right, are principal creditors
and principal debtors of each other;
b. Both debts must consist in sum of money, or if the things due are
fungibles (consumables), they must be of the same kind and quality;
c. Both debts must be due;
d. Both debts must be liquidated and demandable;
e. There must be no retention or controversy commenced by third persons
over either of the debts and communicated in due time to the debtor;
AND
f. The compensation must not be prohibited by law (See Art. 1287 and
1288)
6
COMPENSATION
A. First requisite: The parties must be MUTUALLY
debtors and creditors of each other.
NOTES:
• A share of stock in a corporation is not a credit in favor
of the stockholder and cannot be compensated against
a debt of such a stockholder to the corporation (Garcia
vs. Li, Chin Sing, 59 Phil 562).
• There can be no compensation when one party is a
mere representative or an administrator of any of the
parties (8 Manresa 406).
• The debtor cannot set up by way of compensation
what his creditor owes his surety or guarantor.
7
COMPENSATION
Right of guarantor to set-up compensation (Art.
1280)
• The guarantor, in case the payment of the debt is
demanded from him, may set up compensation,
not only for what the creditor owes him, but also
for what the creditor owes the principal debtor.
Rule in case of rescissible or voidable debt (Art.
1284)
• Rescissible or voidable obligations may be
compensated against each other BEFORE they are
judicially rescinded or avoided.
8
COMPENSATION
B. Second Requisite: Nature of the debts - the obligations must be of the same kind.
• If one of the obligations is simple and the other is alternative or facultative, there can be no
compensation (8 Manresa 407) ).
• BUT there can be compensation even if one of the obligations has a penal clause and the other has
not (4 Salvat 320-321)
• The things must be FUNGIBLES or things that can be substituted for each other (Von Turh,
Obligaciones)
C. Third Requisite: Both debts must be DUE.

• The debts must not have been extinguished by any of the modes of extinguishing obligations;
• The obligations must be civil and NOT NATURAL;
• The debts should not be dependent upon a suspensive condition that is not yet fulfilled.
D. Fourth Requisite: Both debts are DEMANDABLE and LIQIUIDATED.

• The obligations must be enforceable in court;
• If the obligation is subject to a suspensive period, the period must have expired.
• If the obligation is subject to a suspensive condition, the condition must have been fulfilled.
• A debt is liquidated when its existence and amount are determined.
NOTE: A voidable or rescissible debt may be compensated until it is annulled or rescinded. (See
Art. 1284)
9
COMPENSATION
NOTES:
Debts which CANNOT be compensated because of legal
prohibition:
a. Debt arising from contracts of depositum or
commodatum (See Art. 1287, 1st Par.);
b. Claims for support due by GRATUITOUS title (See Art.
1287, 2nd Par.)
• Note that the law does not limit itself to legal support and thus
would include other rights which have for their purpose the
subsistence of the debtor, such as pensions;
c. Obligations arising from criminal offenses (Art. 1288)
d. Certain obligations in favor of government (e.g. taxes,
fees, duties, and others of similar nature).
11
COMPENSATION
• When the debts are purely contractual and are not of public
interest, compensation can take place.
• Facultative Compensation – Compensation which can be set up only

at the option of the creditor when legal compensation cannot take
place because of want of some legal requisites for the benefit of
the creditor.
– The latter can renounce his right to oppose the compensation and he
himself can set it up. It differs from conventional compensation
because it is unilateral while the latter depends upon the agreement
of both parties (Tolentino, Arturo M., Commentaries and
Jurisprudence on the Civil Code of the Philippines, Vol. 4, p 367 [1991]
12
COMPENSATION
Effects of assignment of rights (Art. 1285)
a. If made with consent of debtor – the debtor cannot set-up

compensation unless he reserved his right to compensation.
b. If made with knowledge but without consent of debtor – the

debtor may set-up compensation of debts maturing prior to the
assignment but not to the subsequent ones.
c. If made without knowledge of the debtor – the debtor may set-

up compensation of all credits which he may have against the
assignor and which may have become demandable until he gains
knowledge of the of the assignment. (See also Art. 1625 on the
effects of assignment)
13
COMPENSATION
Renunciation of compensation:
1. By not setting it up in the litigation;
2. By consenting to the assignment of credit under
Art. 1285; or
3. By paying the debt voluntarily with knowledge
that it had been extinguished by compensation.
NOTE: The renunciation, however, must not
prejudice third persons (2-I Ruggiero 234; See also
Art. 1382)
14
NOVATION
Concept - It is the substitution or change of an obligation by another, resulting in its
extinguishment or modification, either 1) by changing its object or principal conditions or 2)
by substituting another in place of the debtor, or 3) by subrogating a third person in rights of
the creditor (Art. 1291)
Kinds of Novation:
1. As to its essence (See. Art 1291)
a. Objective /Real- when there is change of the obligation by substituting the object with
another or changing the principal conditions .
b. Subjective / Personal – when there is substitution of debtor or by subrogation
c. Mixed- change in the object or principal condition and change in the persons of either
creditor and debtor of an existing obligation
2. As to its form/ constitution (See Art. 1292)
a. Express – When it is declared in unequivocal terms that the old obligation is

extinguished by a new one which substitutes the same.
b. Implied – when the old and new are incompatible with each other on every point.
15
Novation
3. As to extent:
a. Total
b. Partial
4. As to effect on the old obligation

a. Extinctive – when the old obligation is extinguished
by the creation of a new one.
b. Modificatory – when the old obligation subsists, as
when it is merely amended or modified to the
extent that it remains compatible with the novatory
obligation.
16
NOVATION
Requisites of Novation:
a. There must be a previous VALID and EXISTING obligation;
a. There must be an AGREEMENT between the parties (new contract)

a. Capacity of the contracting parties to the new contract (see Arts. 37, 38, 39, 1327, 1390,
1403 (3);
b. animus novandi or intent to novate (especially for implied novation and substitution of
debtors);
b. It must result in the EXTINGUISHMENT of the previous obligation;
a. There must be substantial difference between the old obligation and the new obligation
(especially for implied novation).
b. Test of incompatibility: whether or not the old and new obligations can stand together. If
there is no incompatibility, there is no novation. Changes that breed incompatibility must be
essential in nature and not merely incidental.
c. There must be a NEW and VALID obligation.
17
Novation
• Novation is NEVER presumed.
• Unless it is so declared in unequivocal terms (express) or clearly shown that the new
obligation is on every point incompatible with the old one (implied) (See Art. 1292; Ong vs.
Bognalbal, G.R. No. 149140 September 12, 2006; Ajax Marketing & Development Corp. vs.
CA, G.R. No. 118585, September 14, 1995; NAPOCOR vs. Dayrit, 125 SCRA 849), the defense
of novation CANNOT be allowed.
• There is NO novation if there was no clear agreement of the parties to the creation of a new
contract (obligation) in substitution of the existing one (Tiu Suico vs. Habana, 45 Phil. 707)
• Test of Incompatibility – Whether the old and the new obligation can stand together, each
having and independent existence. If they cannot, they are incompatible and the subsequent
obligation novates the first.
– Upon such novation, the former obligation loses all the force and effects, and only the
new obligation can be the basis of an action (Borja vs. Mariano, 33 off. Gaz. 2576)
• In implied novation resulting in the incompatibility of the old and the new obligation, the
change must refer to the OBJECT, the CAUSE, or the PRINCIPAL CONDITION of the obligation.
In other words, there must an ESSENTIAL change and not merely ACCIDENTAL (Young vs. CA,
196 SCRA 795).
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NOVATION
A. EXTINCTIVE NOVATION
• When NOT expressed, incompatibility is required (to ensure

that the parties did really intend such novation despite their
failure to express it in categorical terms.)
• The incompatibility should take place in any of the essential
elements of the obligation, like:
1.The juridical relationship or tie or principal conditions
(Soncuya vs. Azzaraga, 65 Phil. 635);
2.The object or prestation; and/or
3.Subjects, such as the substitution of the debtor (Azzaraga
vs. Rodriguez, 9 Phil. 637) or the subrogation of the
creditor (Lorenzo Shipping vs. Chubbs and Sons, 431 SCRA
266).
19
NOVATION
Illustrations of ESSENTIAL changes:
a. The change of an obligation from one to pay as sum of money to one for the delivery of some property
or the rendition of some service and vice-versa.
b. From deposit into a lease or loan or from sale to lease and vice versa;
c. When a simple obligation is change into an alternative obligation and vice-versa;
d. Where the duration of a right of way/ lease is reduced (Kabankalan Sugar vs. Pacheco, 55 Phil. 555)
e. A subsequent agreement of the parties showing the debtors extension of time to pay their obligation
and in installments novated and amended the period of payment decreed in a compromise judgement
(See Art. 2041).
f. An increase in the amount of debt creates a new obligation which includes, but is different form, the
old one (Peterson vs. Azada, 8 Phil. 432), while the reduction of the amount means only partial
remission /condonation of the same debt.
g. If a mortgage contract is replaced by a surety bond, there is novation.
Note: Mortgage is a right in rem and is inseparable from the property, while the lien of a surety is only
a personal right.
h. From joint liability to solidary liability and vice-versa.
i. Where a third person proposed to the creditor that one is paying/ consuming the entire obligation of
the debtor, and such proposal was accepted categorically by the creditor.
Hence the substitution of the third person as debtor by virtue of this agreement with the creditor,
essentially and entirely wiped out the original obligation.
20
NOVATION
B. MODIFICATORY NOVATION
NOTE: An obligation is not extinguished by accidental modifications
thereof.
• A change in the incidental elements of, or an addition of such elements
to, an obligation, unless otherwise expressed by the parties, will not
result in its extinguishment by novation (Young vs. CA, 196 SCRA 795)
• When the changes refer to secondary agreements, and not to the object
or principal conditions of the contracts, there is NO novation; such
changes will produce modifications of incidental facts, but will not
extinguish the original obligation (Tolentino, IV Civil Code p. 387)
• Alterations of the terms and conditions of the obligation would generally
result only in modificatory novation (Tiu vs. Habana, 55 Phil. 707) UNLESS
such terms and conditions are considered to be of the essence (and
thereby become essential parts of the object) of the obligation itself
(Young vs. CA, 196 SCRA 795)
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NOVATION
Illustrations of ACCIDENTAL changes:
a. Execution of a public instrument to confirm a private
document recognizing an indebtedness;
b. Substitution of the title or evidence of credit, i.e. from
promissory note to check and vice-versa;
c. Acceptance of partial payment;
d. Giving of additional security;
e. Addition of penal clause;
f. Addition or Renunciation of existing securities;
g. Change of place or manner of payment (California Bus.
Lines vs. SIHI, 418 SCRA 297; Zapanta vs. De Rotaeche, 21
Phil. 154; Ramos vs. Gibbon, 67 Phil. 371; North Negros
Sugar vs, Compana General de Tabaco, 100 Phil. 1103) )
h. Amount of partial payments;
22
NOVATION
i. Contract ratifying a voidable contract.
j. Extension of term to pay (Inchausti vs. Yulo, 34 Phil. 642) – for its affect
only the time of performance, not the creation of the obligation
l. Where under the original contract there is a debtor and a surety and
subsequently, the surety made an agreement with the creditors to be
bound as principal, and is no longer as surety in the same obligation, it was
held that there was no novation since the original debtor is not released
(Santos vs. Reyes, 10 Phil. 23)
m. When the same debt is transferred to another document with security
(Padilla vs. Levy Hermanos, 69 Phil. 681)
n. Change in the rate of interest (BPI vs. Abaladejo, 53 Phil. 14) or
compounding thereof (Garcia vs. CA, G.R. No. 80201, Nov. 20, 1990)
o. The obligation to pay a sum of money is not novated by an instrument
that expressly recognizes the old, changes only the terms of the payment,
adds other obligations not incompatible with the old ones or the new
contract (Sps. Reyes vs. BPI Family Savings Bank, GR No. 149841-41,
March 31, 2006).
23
NOVATION
NOTE:
• The principles of novation CANNOT apply to
extinguish a criminal liability (Milla vs. People of
the Philippines, G.R. No. 188726, Jan. 25, 2012)
because novation is NOT one of the means
recognized by the Revised Penal Code whereby
criminal liability can be extinguished (Abeto vs.
People, 90 Phil. 581)
• The offended party’s acceptance of a promissory
note for all or part of the amount misapplied does
not obliterate the criminal liability (Camus vs. CA,
48 OG 3898).
24
NOVATION
SUBSTITUTION - Novation by substitution of debtors - A subjective/ personal novation
consists in the putting of a new debtor in the place of the original debtor.
• Art. 1293 – Novation which consist in substituting a new debtor in the place of the
original one, may be made even without the knowledge of against the will of the
latter, but not without the consent of the creditor. Payment made by the new
debtor gives him the right mentioned in Arts. 1236 and 1237.
KINDS of substitution:
a. Expromission – substitution without the knowledge or consent of the debtor.

– The initiative emanates from the third person assuming the obligation.
b. Delegation – the debtor offers and the creditor accepts a third person who
consents to the substitution, so that the consent of these three is necessary.
25
NOVATION
NOTES:
Requisites for expromision:
a. The initiative must come from a THIRD person;
b. The NEW DEBTOR and the CREDITOR must CONSENT; and
c. The OLD debtor must be RELEASED from the obligation.
• In substituting the person of the debtor, it is NOT enough that there be a third person
who is to pay the debt. IT IS NECESSARY THAT THE OLD DEBTOR BE RELEASED. Otherwise,
there is NO novation (Rios vs. Jacinto, 49 Phil. 7)
• The fact that the creditor receives a guarantee or accepts payments from a third person
who has agreed to assume the obligation when there is NO agreement that the first
debtor shall be released from responsibility does not constitute novation, and the
creditor can still enforce the obligation against the original debtor. (Magdalena Estates,
Inc. vs. Rodriguez, 18 SCRA 967)
• If the creditor accepts partial payments by a third party for the benefit of the debtor
without further act or agreement, there is no novation by substitution (Dungo vs.
Lapena, 6 SCRA 100)
• There is no novation from the acceptance of payments, because there is no consent to
transfer the debt itself.
26
NOVATION
• Requisites for delegacion:
a. The initiative comes from the ORIGINAL debtor;
b. ALL the parties concerned (creditor, old debtor and
new debtor) must concur or agree (Adiarte vs. CA,
92 Phil. 758); and
c. The original debtor is RELEASED from the obligation.
• The consent of the creditor is necessary.
• It may be express or implied from his acts (Asia Banking Corp.
vs. Elser, 54 Phil. 994) but not from his mere acceptance of
payment by a third party without any further act, for there is
no transfer of debt (Pac. Com. Co. vs. Sotto, 34 Phil. 237)
27
NOVATION
• In substitution by expromision, the consent of

the new debtor and the creditor is necessary.
• In substitution by delegacion, the consent of
ALL the parties (delegante, delegatario,
delegado) is necessary.
• Regardless of the form, substitution requires
the consent of the creditor (GSIS vs. CA, 129
SCRA 244; See Art. 1236) This consent cannot
be presumed.
28
NOVATION
Note:
• If the original debtor is not released, there is no novation; the third person becomes merely a
co-debtor, surety or co-surety (Mercantile Insurance Co., Inc. vs. CA GR No. 85647, April 22,
1991).
• The mere fact that the creditor receives a guaranty or accepts payment from a third person
who agrees to assume the obligation, when there is no agreement that the first debtor shall
be released from responsibility, does not constitute novation, and the creditor can still
enforce the obligation against the original debtor.
Effect of insolvency of, or non-fulfillment by, new debtor (See Arts. 1294-1295)
a. Expromision – it shall NOT revive the original debtor’s liability to the creditor whether the
substitution is effected with or without the knowledge or against the will of the original
debtor.
b. Delegacion – The right of the creditor can NO longer be revived EXCEPT :
– When the new debtor’s insolvency was already existing and of public knowledge at the
time when the original debtor delegated his debt; OR
– The new debtor’s insolvency was already existing and known to the original debtor
when he delegated his debt.
NOTE: If the creditor has ACTUAL knowledge that new debtor was insolvent at the time of
delegation, the same will bar him from recovering from the old debtor. He must bear the
consequences of his acts knowingly done.
29
NOVATION
Effects of Substitution:
• If substitution is made without the knowledge and
consent of the original debtor (expromision), and
payment is made by the new debtor, and without the
knowledge and consent of the original debtor:
– There is NO subrogation.
– There is reimbursement from the original debtor only
insofar as the payment has been beneficial to such debtor
(See Arts. 1293 and 1236):
• If substition is made by delegacion-
– the new debtor can demand reimbursement from the
original debtor of the entire amount which he has paid as
well as the compel the creditor to subrogate him to all of
his rights (See Arts. 1293 and 1237)
30
NOVATION
Novation by Subrogation (Art. 1300) – TRANSFER of all the rights of
the creditor to a third person who substitutes him in his rights. It is
a personal novation affected by subrogating a third person in the
rights of the creditor.
Forms of novation by subrogation:

a. Conventional- Takes place by agreement of the original
creditor, the third person substituting the original creditor, and
the debtor (Art. 1301).
– It must be clearly established in order for it to be effective
– Capacity of all the parties is necessary
b. Legal – takes place by operation of law
a. It is NOT presumed save in cases expressly provided by law
(Art. 1302; Panganiban vs. Cuevas, 7 Phil. 477)
31
NOVATION
Conventional Subrogation and Assignment of Rights Distinguished
Assignment of Credits Conventional Subrogation
Governed by Arts. 1624-1627 Governed by Arts. 1300-1304
Debtor’s consent is not required Debtor’s consent is required
Has the effect of transmitting the rights of Has the effect of extinguishing the
the creditor to another person without obligation and giving rise to a new one
modifying/ extinguishing the obligation
Defects/vices in the old obligation are not Defect’s vices in the old obligation are
cured cured
As far as the debtor is concerned, The effects arise from the moment of
arises from the moment of novation/subrogation
notification
32
NOVATION
Legal Subrogation (See Art. 1302)
• General Rule:
– Legal Subrogation is not presumed.
• Exceptions:
a. When a creditor pays another creditor who is preferred, without debtor’s
knowledge;
b. When a third person, not interested in the obligation, pays with the express or
tacit approval (consent) of the debtor; or
a. When, even without knowledge of the debtor, a person interested in the

fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter’s share.
NOTE: The enumeration is EXCLUSIVE.
33
NOVATION
NOTE:
• There is NO legal subrogation when a solidary debtor pays the entire obligation. (See Art. 1217)
• Solidarity terminates upon payment of the whole obligation. Thus, the paying debtor DOES
NOT COMPLETELY step into the shoes of the creditor, as he cannot demand from any of his co-
debtors the compliance of the entire obligation but only the portion which pertains to each.
Effects of Subrogation (Arts. 1303-1304)
a. Total Subrogation – Transfers to the person subrogated the credit with all the rights the original
creditor had against the debtor or third persons.
a. Accessory obligations are not extinguished; the person subrogated acquires all the rights the
original creditor had against third persons and the rule is absolute with respect to legal
subrogation. In conventional subrogation, accessory obligations may be increased or reduced
upon agreement of the parties.
b. Partial Subrogation – A creditor, to whom partial payment has been made, may exercise his right
for the remainder and he shall be preferred to the person who has been subrogated in his place.
34
CONTRACTS
Definition
• Agreements and conventions
– Meeting of minds (Art. 1305)
• One of the sources of obligations (Art. 1157 (2))
• Only those agreements that produce PATRIMONIAL rights and liabilities are
considered as contracts.
• Contracts of MARRIAGE and ADOPTION are NOT included in “contracts” as
defined by Art. 1305.
– Ordinary contracts create temporary obligations and relations whereas
contracts of marriage and adoption have more or less permanent effects.
– In an ordinary contract, the same is the source of obligations and rights
the parties and the law is only suppletory. In contracts of
marriage/adoption, the law is the primary source of rights and obligations
like the Family Code, the Child and Youth Welfare Code and adoption
laws;
– An ordinary contract does not affect the civil status of the parties whereas
the consequence of contracts of marriage/adoption is change in civil
status. 36
Contracts
• Two parties/two declarations of will
– Auto contracts – only one person intervenes or signs the contract
• Possible conflict of interests (See Art. 1491, Sales; and Art. 1890,
Agency; Art. 267, Code of Commerce)
– Collective contracts – in a group or organization, the will of the
majority is binding upon the minority. Examples: collective bargaining
agreements (P.D. No. 442, The Labor Code), suspension of payments
or compositions in insolvency proceedings (R.A. No. 10142, The
Financial Rehabilitation and Insolvency Act or FRIA)
– Contracts of Adhesion – one party prepares the contract containing
the stipulations he desires and he simply asks the other party to
consent thereto. Examples: Contract for transport of passengers and
goods, insurance contracts, parking contracts, public utility contracts,
etc.
37
Principles of Contracts
• Consensuality
• Obligatory force
• Mutuality
• Autonomy
• Relativity
38
I. Consensuality
– There must be consent
– From the definition of contracts (Art. 1305)
– Kinds of contracts as to perfection:
• Consensual Contracts (Art. 1315) perfected by mere
consent, e.g. sale, lease, agency; and
• Real Contracts (Art. 1316), e.g. loan (or mutuum) and
commodatum (Art. 1933, depositum (Art. 1962), pledge
(Art. 2093 in rel. to Art. 2085), perfected by consent AND
delivery of the thing which is the object of the contract.
– Manifestation of consent (Art. 1319)
• Meeting of the offer and the acceptance upon the thing
(object/service) and the cause/consideration.
39
II. Obligatory Force
• Contracts have the FORCE OF LAW between the parties and
should be complied with in good faith (Art. 1159) and
OBLIGATORY subject to legal formal requirements (Art. 1356).
– It presupposes the validity and enforceability of the

contract.
• Or at least Rescissible (Art. 1380) or Voidable (Art.
1390).
• REASON: A party cannot be allowed to renege on his

obligation under a contract simply because he changed his
mind (RODOLFO MORLA vs. NISPEROS BELMONTE, et al. G.R.
No. 171146, December 7, 2011).
40
III. Mutuality
• Contract must bind BOTH parties
– The validity OR compliance thereof cannot be left to the will of one of
them. (Art. 1308)
• The determination of performance may be left to a third person
(Art. 1309) but shall not be obligatory if it is evidently inequitable
(Art. 1310).
– Relate this to Arts. 1180 and 1197 (re period is dependent upon the
will of the debtor) and Art. 1182 (re suspensive condition the
fulfillment of which is dependent on the sole will of the debtor)
• Reiteration of the obligatory nature of contracts. (Art. 1159)

• It renders void a contract containing a provision which makes the
performance dependent upon the UNCONTROLLED will of one of the
contracting parties. (Corpuz vs. CA, 98 SCRA 424)
• Changes or modifications in the contract 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. (See Arts. 1291 to 1304 on Novation of Obligations)
41
Mutuality, cont’d.
Illustrations:
• Lease –
– Lessee to continue possessing the property for as long as he pays the rent violates the
principle of mutuality because it would give the lessee the sole power to determine
whether the lease should continue or not (Encarnacion vs. Baldemar, 77 Phil 4700)
– Lessee given the option to renew the lease for “like term” – VALID as the lessor is free to
give or not to give the option to the lessee (Allied Banking Corporation vs. Court of
Appeals, G.R. No. 124290 January 16, 1998)
• Cancellation of the contract
– General Rule: No party can renounce the contract unilaterally or without the consent of the
other (Landoil Resources vs. Tensuan, 168 SCRA 659) just as nobody can be forced to enter
into a contract.
– Exception: An agreement that party may terminate the contract upon reasonable period of
notice or when cancellation is by reason of breach is valid (See Art. 1191; Palay, Inc. vs.
Clave, 124 SCRA 638)
• Escalation Clauses
– No unbridled right to unilaterally upwardly adjust the interest on debtor’s loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
(Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536)
42
IV. Autonomy
• Freedom to contract is both a CONSTITUTIONAL and
STATUTORY right (Section 10 Art. III, Constitution and Art.
1306, Civil Code).
– The contract is the LAW between the contracting parties.
• Unless the stipulations in a contract are contrary to law, morals, good
customs, public order or public policy, the same are binding as
between the parties (Art. 1305 in relation to Art. 5)
– Non-impairment clause is INFERIOR to the Police Power of the
State (BF United Homeowner’s Association, Inc. Vs. The City
Mayor, 515 SCRA 1 [2007]; Beltran v. Secretary of Health, 476
SCRA 168); and Freedom of Religion (Victoriano vs. Elizalde
Rope Workers’ Union, G.R. No. L-25246, September 12, 1974).
43
Autonomy, limitations
• Contrary to Law
– The stipulation/s must not be contrary to law.
• Nature of law: prohibitory and mandatory laws (Art. 5, Civil
Code)
– Illustrations:
• Waiver of an action for future fraud (Art. 1171)
• Sale of Prohibited Drugs (RA 9165)
• A stipulation whereby actions proceeding from the contract
can be filed only in a certain place and with a particular
court is VOID as the power to fix jurisdiction lies with the
legislature (Article VI, Constitution; BP No. 129).
• Pactum commissorium (Art. 2088)
44
Autonomy, cont’d.
• Against morals and good customs
– Rendition of domestic services without remuneration (De Los Reyes vs. Alojado, 16 Phil
499)
– Interest rate so high that it is so unconscionable and shocking to senses (Andal vs. PNB,
et al., G.R. No. 194201, Nov. 27, 2013)
– Penalty of PhP5.00 per day in a loan amounting to PhP500.00 (Ibarra vs Aveyro, 37 Phil.
273)
– Non-compete/involvement clauses are VALID provided the same are limited as to time,
circumstance, space and trade.
• Necessary to protect trade secrets.
•Ferrazzinni vs. Gsell (34 Phil. 697)
•Tiu vs. Platinum Plans (517 SCRA 101)
•Duncan vs. Glaxo (438 SCRA 343)
•Star Paper v. Simbol, 487 SCRA 228 [2006]
- Stipulation in the contract for legal services whereby the fee is unconscionale and not
commensurate to the services rendered.
- Agreement on a trial marriage is void for being contrary to morals.
• NOTE: good customs are more “localized” than morals. The same must be proved (See Art.
12).
45
Autonomy, cont’d.
- Doctrine of Reasonable Necessity for the stipulation (Star Paper v.
Simbol (487 SCRA 228) -
a. The stipulation (policy/code of conduct) is REASONABLY related to the
essential operation of the job involved; AND
b. There is FACTUAL BASIS for believing that all or substantially all persons
meeting the qualification would be unable to perform the duties of
the job.
- The policy of Philippine Air Lines requiring that prospective flight

attendants be single and that they will be automatically separated
from the service once they marry was declared void, it being in
violation of the clear mandate in Article 136 of the Labor Code with
regard to discrimination against married women (Zialcita, et
al. vs. Philippine Air Lines (Case No. RO4-3-3398-76; February 20,
1977).
46
Autonomy, cont’d
• Against public order
– relates to public weal, safety and health.
– Examples:
• A contract whereby one party binds himself to kill a particular person in
exchange for a sum of money.
• A contract whose object is the formation of a combination in the market
to stifle competition (R.A. 10667, Phil. Competition Law)
• A contract of lease of a building for the operation of a gambling,
prostitution or drug den.
• An agreement the purpose of which is to conceal a public offense.
• An agreement whereby a public official will intervene in a public bidding
for a government project for a commission.
• A stipulation providing that in case of the lessee’s failure to pay the rent,
the lessor can use force to retake possession of the leased property.
47
Autonomy, Cont’d
• Against public policy
– Principle of law whereby no person is allowed to do that which is injurious to
the public or against public good.
• Examples:
– Stipulation whereby a common carrier is not responsible for any loss or injury
brought about by its own negligence or that of its employees (Heacock vs.
Macondray & Co., 42 Phil. 205; Art. 1745, et seq., Civil Code)
• HOWEVER, a stipulation in the bill of lading limiting the common carrier's
liability for loss or destruction of a cargo to a certain sum, unless the shipper
or owner declares a greater value, is valid and sanctioned by law (Arts. 1749
and 1750)
– A promissory note representing a gambling debt is void and not enforceable even
in the hands of an assignee (See Art. 2014; Palma vs. Canizares, 1 Phil 602)
– Contract of sale of a land by the grantee thereof under the Agrarian Reform Law
within the five-year prohibitive period (Dinayug vs. Ugaddan, et al. G.R. No.
181623, December 5, 2012)
– Contract for the sale and purchase of votes (Saura vs. Sindico, L-13403, March 23,
1960)
– Agreement to prevent or stifle prosecution of a crime (Arroyo vs. Berwin, 38 Phil.
386)
48
Relativity
• Contracts take effect between the parties, their
assigns and heirs (Arts. 1311).
– EXCEPT when the rights and obligations are NOT
transmissible by their nature, by law or by stipulation
(Art. 1178).
– It can neither favor nor prejudice third persons (Res
inter alios acta aliis neque nocet prodest).
• Third persons cannot enforce the contract nor can they
impugn the validity thereof save in cases provided by
law. (Art. 1380 et seq. and Art. 1177 on rescissible
contracts)
49
Relativity cont’d.
• Intransmissibility
– By nature:
• When the special or personal qualifications are the principal
motives for the establishment of the contract
– By law
• Those arising from agency (Art. 1830) and partnership (Art.
1919)
– By stipulation
• As when the obligor binds himself to perform the act and
not through another
• NOTE: Even if the instrument is non-negotiable under the
Negotiable Instruments Law, it may still be transferred (See
Arts. 1625-1635, inclusive)
50
Relativity, Cont’d
• Exceptions to relativity of contracts:
a. Stipulation pour autrui (Art. 1311, 2nd Par.)
b. When the third person comes into possession of
the object of the contract creating a REAL right
(Art. 1312)
c. When the contract is entered into to defraud
creditors (Art. 1313 in relation to Art. 1381 (3)
and Art. 1177)
d. In cases of contractual interference (Art. 1314)
51
Relativity, cont’d.
• Stipulation pour autrui
– Such a stipulation is binding upon the third person although he is not a
signatory to the contract.
– The third party may be a: 1) donee-beneficiary, 2) creditor-beneficiary, or
3) incidental beneficiary
– Requisites:
a. The contract contains a stipulation in favor of (NOT imposing
obligations upon) a THIRD person
b. The stipulation is a PART, not the whole, of the contract (otherwise,
it is a donation).
c. The stipulation is NOT CONDITIONED or COMPENSATED of any kind
of obligation (otherwise, there is an onerous contract with the third
person being a party thereto, like sale or lease).
d. Neither of the contracting parties bears the legal representation or
authorization of the third person (otherwise, there is agency)
e. ACCEPTANCE by the third person before revocation.
Note: The acceptance does not have to be in any particular form nor
does it have to be made expressly and formally.
52
– The intent of the contracting parties to benefit third party by means of such
stipulations pour autrui must be clearly expressed.
• A stipulation to pay for all labor and materials cannot be construed stipulation pour
autrui available to materialmen who supplied certain materials to the contractor for
use in the performance of the latter's contract with the city (Uy Tam vs. Leonard, 30
Phil. 471 (1915).
– A clause in a motor vehicle insurance policy authorizing the owner of damaged vehicle to
contract for its repair does not mean that the repairman may collect the cost of the
repair directly the insurer, there being no clause "from which we can infer that there is an
obligation on the part of the insurance company to pay the cost of repairs directly to
them,' and that the mortgagee of the car (expressly named in the insure policy as
beneficiary of any loss payable thereunder) had better right than the repairman to the
insurance proceeds (Bonifacio Bros, Inc. vs. Mora, 20 SCRA 261 )
– The insured who is not a party or privy to insurer's reinsurance contracts cannot directly
demand enforcement of such (re)insurance contract (Artex Development Co., Inc., vs.
Wellington Insurance Co., Inc., G.R. No. L-29508 June 27, 1973)
– A compromise agreement cannot bind persons who are not parties thereto (Rebecca C.
Young vs. CA, G.R. No. 79518 January 13, 1989)
53
• Illustrations:
– A clause in the Extra-Judicial Partition between co-
heirs stating that part of the fruits of the land co-
owned will be used to defray expenses for religious
festivities is a contract with stipulation pour autrui
(Florentino vs. Encarnacion, 79 SCRA 195)
– Contract that contains an auto-debit clause.
– A stipulation in a contract of sublease that the
sublessee’s rent shall be paid directly to the principal
lessor is a stipulation pour autrui (Limitless
Potentials, Inc. Vs. Quilala, G.R. No. 157391. July 15,
2005)
54
Contracts creating real rights
• Concept - It is a real right or lien established in favor of a third
person and subsists over the property until the discharge of the
principal obligation, whoever the possessor(s) of the land
might be, subject to Mortgage Law and Land Registration Laws
(Arts. 1312, 2125 and 2126, Civil Code; See also P.D. No. 1529)
• Registration of the contract creating real right is notice to the
whole world.
– A recorded real estate mortgage is a right in rem (Paderes
vs. CA., G.R. No. 147074, July 15, 2005).
• Actual knowledge of a prior mortgage is equivalent to notice of
registration (Rehabilitation Finance Corp. v. Javillonar, et al.,
107 Phil 664, 668 (1960) in accordance with Article 2125 of the
Civil Code.
• See also Art. 1544 on Double Sales.
55
Interference
• Requisites:
a. There is a valid contract;
b. Knowledge by the third person of the
existence of such valid contract; and
c. Interference by the third person without
just cause.
• The aggrieved party can recover damages from
the interferor.
56
Elements of Contracts
I. Essential Elements –WITHOUT which there is NO contract
A. Consent
B. Object
C. Cause or Consideration
II. Natural Elements – those that exist even if the parties did
not provide for them (implied, need not be agreed
upon(See Arts. 1547 to 1581, inclusive).
A. Warranty against eviction
B. Warranty against hidden defects and encumbrances
III. Accidental Elements – those which are agreed between
the parties and which cannot exist without being
stipulated.
A. Place of payment/delivery
B. Manner of payment/delivery
57
Classification of Contracts
• According to the degree of dependence: preparatory, such as agency;
principal, such as lease or sale; and accessory, such as pledge, mortgage or
suretyship.
• According to perfection: consensual, such as purchase and sale; and real, such
as commodatum or depositum.
• According to purpose: transfer of ownership, such as sale or barter;
conveyance of use, such as commodatum; and rendition of service, such as
agency.
• According to subject matter: things (movable, immovable or incorporeal
rights) such as sale, pledge or mortgage; and services such as deposit, agency
and lease of services.
• According to nature of obligation produced: bilateral such as purchase and
sale; and unilateral such as commodatum or gratuitous deposit.
• According to cause: onerous, such as purchase and sale; and gratuitous or
lucrative, such as donation or commodatum.
• According to risk: commutative such as lease; and aleatory, such as insurance.
58
Classification of Contracts, cont’d.
• According to name, into:
1. nominate such as sale, lease, agency, etc.; and
2. innominate (those without any particular name)
such as:
– do ut des (I give and you give),
– do ut facias (I give and you do),
– facio ut facias (I do and you do), and
– facio ut des (I do and you give).
NOTE: Do ut Des is now a nominate contract and

governed by the Civil Code provisions on Barter (see
Arts. 1638-1641, inclusive)
59
Regulation of Innominate Contracts
• Innominate contracts are regulated by:
1st : The stipulations of the parties;
Because the contract is the law between the parties (Art. 1159)
2nd : Civil Code provisions on Obligations and Contracts;
3rd: Rules governing the most analogous contracts; and
4th: Customs of the place
IN THAT ORDER (Art. 1307)
60
Stages of Contracts
• Negotiation
• Perfection
• Consummation
61
Essential Elements of Contracts
A. CONSENT of the contracting parties;
B. OBJECT certain which the subject matter of

the contract; and
C. CAUSE of the obligation which is established

(Art. 1318)
62
CONSENT
• Concept –
– conformity on the terms of the contract.
– Acceptance of the offer made by the other
– Concurrence of the minds of the parties on the
object and the cause of the contract
• Manifestation of consent
– Meeting of the offer and acceptance upon the
thing and the cause which are to constitute the
contract (Art. 1319).
63
Requisites of Consent
A. Plurality of subjects – at least two parties
B. Capacity of the parties (Arts. 1323, 1327, 1390 and
1403 (3) in relation to Arts. 37, 38 and 39)
1. In some cases, Qualification (Arts 1490 and 1491); or
2. Also in some cases, Authority (Art. 1317 and 1403;
Arts. 96 and 124, Family Code)
C. Intelligent, free, spontaneous and real (Art. 1330 on
vices of consent); and
D. Express or tacit manifestation and conformity of the
internal will and its manifestation (Arts. 1319 and
1323)
64
CONSENT
NOTES:
• Want of consent – there is no contract
• Effect of incapacity (See Arts. 37, 38 and 39)
– Incapacity of one of the parties - the contract is VOIDABLE (Art. 1327 and
1390 (1)
– Incapacity of both parties – the contract is UNENFORCEABLE (Art. 1403 (3)
– Exceptions:
• when necessaries are sold AND delivered to an incapacitated person,
he must pay a reasonable price therefor (Art. 1489); and
• ESTOPPEL. Minors who misrepresent as to their age cannot impugn the
validity of the contract they entered into on the ground of incapacity
(Mercado vs. Espiritu, 37 Phil. 37; Sia Suan vs. Alcantara, G.R. No. L-
1720, March 4, 1950).
– See Young vs. Tecson (39 O.G. 953), if the person making the
misrepresentation cannot bind himself by a contract, he cannot
also be bound by any misrepresentation in connection therewith.
65
Incapacity and Disqualification
• Incapacity is the inability to do acts with legal effects (Arts. 37, 38
and 39, Civil Code and Section 2, Rule 92, Rules of Court in
relation to Art. 1329); absolute incapacity.
• Disqualification is special or relative incapacity of the parties to

enter into a particular contract by reason of 1) their relations to
each other (See Art. 1490) or 2) their relation to the object of the
contract (See Art. 1491).
• Distinctions:
a. Incapacity is a restriction upon the exercise of a right while
disqualification is a restriction upon the very right itself.
b. Incapacity renders the contract VOIDABLE under Art. 1390 (or
UNENFORCEABLE under Art. 1403, (3)) while disqualification
renders the contract VOID (See Arts. 1490 and 1491)
66
Perfection
OFFER AND ACCEPTANCE
a. Offer – unilateral proposition made by one party to the other for the celebration of
the contract.
– Requisites:
1. Definite (Art. 1319) – It must be certain that the offeror does not reserve
the right to deliberate whether to act on a proposition (see Art. 1325, on
business advertisements and Art. 1326, on advertisement for bidders);
2. Complete (Art. 1319) – it must indicate with sufficient clarity the nature of
the contract intended and the essential conditions thereof. It must contain
the cause and the object; AND
3. Intentional – it must be serious.
NOTE: It is NOT necessary that the offer be addressed to a specific person.
NOTE: Art. 1326 (Public advertisements for bidders) is NOT applicable to judicial sales as
the law mandates that the sale be awarded to the highest bidder.
67
Is there a valid offer?
68
Are there valid offers?
69
CONSENT
• ACCEPTANCE - agreeing either expressly or by conduct
to the act or offer of another so that a contract is
concluded and the parties become legally bound.
– Requisites
1. Absolute (not qualified or conditional; See Art. 1319, last
sentence, 1st Par.)
2. Intentional; and
3. Duly conveyed to the offeror (2nd Par, Art. 1319 and Art. 1323)
or his agent (1322) in the proper way, within the time given and
in accordance with the tenor of the offer (Arts. 1321 and 1324)
• If an offer is NOT accepted or rejected, there is NO
contract.
70
Theories on Perfection
of Contracts
1. Manifestation Theory – the contract is perfected the
moment acceptance is declared (Art. 54, Code of
Commerce).
2. Expedition Theory – the contract is perfected from the
moment offeree transmits his acceptance to the offeror.
3. Reception Theory – the contract is perfected when the
offeror receives notice of the acceptance (constructive
knowledge). It can be applied in this jurisdiction.
4. Cognition theory – the contract is perfected when the
offeror gains knowledge of the acceptance (Arts. 1319
and 1323).
71
Principles and Illustrations
• Period within which the offeree must accept the
offer:
– When the offeror has allowed the offeree a certain
period of time 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, something paid or promised (Art. 1324;
See also Art. 1479)
• The offer must be accepted in the following manner:
– If there is a fixed period given, any time before it expires.
– When there is a fixed period, and the offer is made to a person
present, the same must be accepted immediately.
– When the offer is made to a person absent, the acceptance may
be made within such time that, under normal circumstances, an
answer can be received
72
CONSENT
• The OFFER may be withdrawn BEFORE it is accepted.
• An offer may be withdrawn even before the expiration of the period given EVEN if
the period is founded upon a consideration.
– But the offeror shall be liable for damages.
• The ACCEPTANCE may be withdrawn BEFORE it is made known to the offeror.
• The offer becomes ineffective upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is conveyed (Art. 1323).
– Death - extinguishes personality (Art. 42)
– Civil interdiction – deprivation of the right to manage one’s property or to
dispose of the same by any act or conveyance inter vivos (Art. 34, Revised
Penal Code) but not mortis causa.
• Penalties that carry with them civil interdiction (unless remitted in the
pardon) :
– Death when not executed (Art. 40,Revised Penal Code), Reclusion
perpetua and reclusion temporal (Art. 41, Revised Penal Code)
– Insanity – state of having an unsound mind or complete deprivation of free
agency and intelligence
– Insolvency – inability to pay obligations as they fall due.
• Judicial declaration of state of insolvency is NOT necessary.
73
Consent, Cont’d
• A sale shall be considered perfected and binding as between vendor and vendee
when they have agreed as to the thing which is the object of the contract and as to
the price, even though neither has been actually paid or delivered (Roman vs.
Grimalt (6Phil. 96).
• There is no perfected contract of sale if it is subject to the approval of higher
authorities (People’s Homesite vs. Court of Appeals, L-61623, December 26, 1984).
• Sale with assumption of mortgage is NOT perfected without the mortgagee’s
consent (Chua vs Gutierrez, G.R. No. 172316, December 8, 2010) as the
mortgagee’s consent is necessary to perfect the sale with assumption of mortgage
(Binan Steel Corp. vs. CA, 439 Phil. 688).
• The Seller wanted P980.00 per square meter, but the occupants were willing to pay
only P850.00. There was no meeting of the minds between the parties regarding
the offer by private respondent to sell his property to the occupants (Virginia Pagco
vs. Court of Appeals, G.R. No. L-109236, March 18, 1994).
• A definite agreement on the manner of payment of the price is an essential
element in the formation of a binding and enforceable contract of sale. (67 Am Jur
2d Sales § 105 [1973]. (Velasco vs. Court of Appeals, 51 SCRA 439 [1973], citing
Navarro vs. Sugar Producers Cooperative Marketing Association, 1 SCRA 1180
[1961]; Raet vs. CA, G.R. No. 128016, Sept. 17, 1998).
74
Consent, Cont’d
• Option Contract
– A preparatory contract in which one party grants to another, for a
period fixed and under specified conditions, the power to decide
whether or not to enter into a principal contract. It is supported by
a consideration independent of the price of the contract. (Art.
1324. Relate this to Article 1479).
• If the offeree accepts the offer before the expiration of the period
even though the option is not supported by any consideration, there
is a contract (Sanchez vs. Rigos, 45 SCRA 368).
• The offeror is NOT bound if the offeree accepts the offer AFTER the
period given has expired, even if the same is founded upon a
consideration separate and distinct from the price.
• Option money is NOT part of the price; separate consideration
• Payment of EARNEST MONEY is part of the price and proof of
perfection of a contract of sale (Art. 1482).
75
Consent, Cont’d
NOTE:
• There is NO valid contract without a cause or consideration, and the
promisor is not bound by his promise and may, accordingly,
withdraw it. Pending notice of his withdrawal, his accepted promise
partakes, however, of the nature of an offer to sell which, if
accepted, results in a perfected contract of sale (Sanchez vs. Rigos,
45 SCRA 368). This is the prevailing doctrine, overturning the
ruling of the Supreme Court in the case of Southwestern Sugar
and Molasses Co. vs. Atlantic Gulf & Pacific Co. (51 O.G. 3447),
which says:
“The acceptance, without consideration, does not create an
enforceable obligation on the part of the defendant. The offer as
well as the acceptance, does not contemplate nor produce an
immediately binding and enforceable contract of sale.”
76
VICES OF CONSENT
• Vices of consent (Art. 1330):
1. Mistake
2. Violence
3. Intimidation
4. Undue influence
5. Fraud
77
Mistake
• Mistake and Ignorance
– Mistake is false notion of a particular matter while Ignorance is complete
absence of any notion about such matter.
• Juridically, they produce the same effect.
– "Mistake" has been defined as a "misunderstanding of the meaning or
implication of something" or "a wrong action or statement proceeding from a
faulty judgment.” (Domingo Realty vs. CA, 513 SCRA 40 [2007]
• Requisites
1. It must be substantial (it must refer to the object of the contract, the
conditions, the identity or qualifications which principally moved the parties
into entering into the contract) (Art. 1331)
2. It must be excusable; and
3. It must be a mistake of fact, and not of law. (See Art. 3)
• To invalidate consent, the error must be real and not one that could have been
avoided by the party alleging it. The error must arise from facts unknown to him
(ALCASID vs. vs. Court of Appeals, G.R. No. 104751 October 7, 1994).
78
Mistake, Cont’d.
• Mistakes of fact:
1. Error in re (Mistake as to object) – referred to by
the 1st Par. Of Art. 1331.
1. Error in corpore (Identity) – When the thing which is
the object of the contract is confused with another
thing.
2. Error in substantia or qualitate (substance or quality)
– mistake as to the substance or circumstance of the
thing.
3. Error in quantitate (quantity) - refers to extent, area
or dimension (See Arts. 1539 and 1541)
79
Mistake, cont’d.
• 2. Error in personam (Mistake as to person) – referred to
by the 1st Par. Of Art. 1331.
• Only mistake with regard to the identity or
qualifications of one of the contracting parties will
vitiate consent.
• Requisites:
1. With regard to the identity or qualification of one of the
contracting parties; and
2. Such identity or qualification must have been the principal
consideration in the celebration of the contract.
*Mistake as to the name of one or both the contracting parties
will NOT vitiate consent.
80
Mistake, Cont’d
• Art. 1332 –
• Requisites in order for a party to enforce a contract
where the other is illiterate:
a. There is a contract;
b. One of the parties is unable to read, or the contract is in a
language not understood by him;
c. Fraud or mistake is alleged; and
d. The person enforcing the contract shows that the terms and
conditions thereof have been explained to the illiterate party.
NOTE: The duty imposed by the provision does NOT apply to the
party who is NOT seeking to enforce the contract (See Tang vs.
CA, 90 SCRA 236)
– NOT applicable when there is absence of consent
81
Mistake, Cont’d
• Cases:
– Proof that the disadvantaged party, due to mental weakness,
ignorance or any handicap, could not read or that the contact
was made in a language not known to him is necessary (Bunyi
vs. Reyes, 39 SCRA 504).
• Only after such proof is the burden shifted to the party enforcing the
contract that the contract’s content was explained to the other party.
– When the party who signed the document is blind and he
affixed his signature to the instrument believing that the same
was a mortgage but which turned out to be a sale, the contract
is voidable (Transporte vs. Beltran, 51 OG 1434).
– When the party signed the document without knowing or
understanding its contents, the contract is voidable (Ayola vs
Balderama Lumber, 49 OG 980).
• Note: In both cases, the party enforcing the contract was not able to
adduce evidence that the contents of the document was explained to
the other in the language understood by him.
82
Violence
There is violence when in order to wrest
consent, serious or irresistible force is employed
(Art. 1335)
• Requisites:
1. Must be serious or irresistible or to such a
degree that the victim has no other recourse but
to submit; and
2. Must be the determining cause for the party
upon whom it is employed in entering into the
contract;
83
Intimidation:
(Art. 1335)
• Requisites:
1. The threatened act must be unjust or unlawful;
2. The threatened evil must be imminent and grave;
3. The threatened evil must be upon his person or property,
spouse, descendants or ascendants;
4. The threatened evil must be real and serious, there being
evident disproportion between the evil and the
resistance which one can offer, leading to the contract;
5. The threatened evil produces a reasonable and well-
grounded fear of a greater evil; and
6. The threatened evil is the determining cause of the
contract, or must have caused the consent to be given.
Note: Principle of choosing the lesser one between two
evils.
84
Undue Influence
• There is undue influence when a person takes improper advantage of his power
over the will of another, depriving the latter of a reasonable freedom of choice.
(Art. 1337). It destroys the free agency of a party.
• Test of undue influence:

– Whether or not the influence exerted has so overpowered or subjugated the
mind of a contracting party as to destroy his free agency, making him express
the will of another rather than his own (Coso vs. Fernandez Deza, G.R. No.
16763, December 22, 1921).
• Circumstances considered to determine whether the influence exerted is

unreasonable:
• Confidential relations
• Family relations
• Spiritual relations
• Other relations between the parties
85
Cases
• A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not vitiate
consent (Toledo vs. Hyden, G.R. No. 172139, December 8,
2010; Lee vs. CA, G.R. No. 90423 September 6, 1991).
• Threat to prosecute spouse.
– Jalbuena vs. Ledesma (8 Phil. 601) - a threat to “send back the
husband to jail” if the wife does sign a document guaranteeing
with her property the debt of her husband is voidable on
account of intimidation.
– Martinez vs HSBC (15 Phil. 252) - the fact that the wife was
“forced” to convey her property to settle the criminal complaint
filed against her husband does not amount to duress since she
was the one who offered the settlement and she was
accompanied by counsel during negotiations.
86
Fraud –
There is fraud when, through insidious words or machinations of one party, the other is
induced to enter a contract which, without them, he would not have agreed to (Art.
1338)
Kinds of Fraud:
1. Fraud in the PERFECTION of the contract
• Causal Fraud (Dolo Causante) (Art. 1338 and Art. 1344, 1st Par.)
• Incidental Fraud (Dolo Incidente) (Art. 1344, 2nd Par.)
2. Fraud in the PERFORMANCE of an obligation (Art. 1170 and 1171)
Requisites of Fraud under Art. 1338:
1. It must have been employed by one contracting party upon the other (Arts.
1338, 1342 and 1344) and NOT employed by both contracting parties
2. It must have been serious (Art. 1344);
3. It induced the other party to enter into a contract (Art. 1338); and
4. Damage or injury resulted to the other party
87
Fraud
Cases:
• There must be concrete proof of facts constituting the fraud or
insidious words or machinations employed by one of the parties (or
a third person) BY REASON OF WHICH THE OTHER PARTY WAS
INDUCED TO ENTER INTO THE CONTRACT, WHICH, WITHOUT THEM,
HE WOULD NOT HAVE AGREED TO (Ramos vs. Valencia, 47 Off. Gaz.
1978)
• There is NO fraud when the party claiming the same was fully
aware of the magnitude of his undertaking (Tankeh vs.
Development Bank Of The Philippines, G.R. No. 171428, November
11, 2013)
• When fraud is employed to obtain the consent of the other party to
enter into a contract, the resulting contract is NOT VOID but merely
a voidable contract, that is, a valid and subsisting contract until
annulled or set aside by a competent court (Abando vs.
Lozada, G.R. No. L-82564 October 13, 1989).
88
Fraud
Distinctions between Dolo Causante and Dolo Incidente
Dolo Causante Dolo Incidente

(Art. 1338) (Art. 1344)
Refers to those deceptions or Refers to those deceptions or
misrepresentations of a serious character misrepresentations which are not serious in
employed by one party and without which the character and without which the other party
other party would not have entered into the would have still entered the contract
contract
Fraud which is serious in character Fraud which is not serious in character

It is the cause that induced the party to enter It is not the cause that induced the party to
into a contract enter into a contract
Renders the contract voidable Renders the party liable for damages
89
Fraud
• Distinctions between Fraud under Arts. 1170 (and 1171) and Fraud under Art.
1338:
1. The first is present during the performance of the obligation; the second
is present only at the birth of the obligation;
2. The first is employed for the purpose of evading the normal fulfillment
of an obligation, while the second is employed for the purpose of
securing the consent of the other party to enter into the contract;
3. The first result is the non-fulfillment or breach of the obligation, while
the second, if it is the reason for the other party upon whom it is
employed for entering into the contract, results in the vitiation of his
consent;
4. The first gives rise to a right of the creditor to compel performance
and/or recover damages from the debtor or obligor (and/or rescission
plus damages under Art. 1191) , while the second gives rise to a right of
the innocent party to ask for the annulment of the contract or
fulfillment thereof if fraud is causal, or to recover damages if it is
incidental.
90
Object
• Concept
– Subject matter
• The thing, right, service or abstention from doing an act;
• The object of the contract and the object of the obligation are one
and the same EXCEPT in Barter (See Art. 1638)
• Requisites: It must be
a. within the commerce of men (Art. 1347);
b. licit, not contrary to law, morals, good customs, public
policy or public order (Art. 1347);
c. Its existence or possible of coming into existence (Arts.
1348, 1461 and 1462) but NOT future inheritance
(Art.1347, 2nd Par).
There is NO contract (of sale) if at the time of perfection the object is entirely
lost. If loss is partial, the buyer may withdraw from the contract or ask for a
proportionate reduction of the price (Art. 1493).
d. determinate as to its kind (Arts. 1349 and 1460)
• See Also Art. 1308 (re Mutuality of contracts)
91
Object
• On future inheritance (Art. 1347, 2nd Par.)
Requisites:
1. Succession has not yet been opened at the time of the
perfection of the contract;
2. The object of the contract forms part of the inheritance; and
3. The promissor has, with respect to the object, an expectancy
of a right which is purely hereditary
(See Ferrer vs. Diaz, 619 SCRA 226; Tanedo vs CA, 322 SCRA 84)
• Exceptions:
• Future spouses to donate to each other in their marriage settlement
(Art. 130, Family Code)
• Partition by a person of his estate during his lifetime (Art. 1080, Civil
Code)
• Inheritance ceases to be “future” upon the death of the
decedent.
92
CAUSE
• Concept
– Reason for or the “why” of the contract
– Essential reason why the parties enter into a contract
• Requisites:
a. It must exist at the time of the perfection of the
contract (Arts. 1352 and 1409 (2) and (3);
b. It must be licit (Arts. 1352 and 1409 (1); and
c. It must be true or real (Arts. 1345 and 1353)
NOTE: The cause is presumed to exist and is lawful even if it
is not stated in the contract (Art. 1354)
93
Cause
• Art. 1350 – Cause of contracts
– Onerous contracts – for each contracting party,
the prestation or promise of a thing or service by
the other, e.g. sale or lease
– Remuneratory contracts – the service or benefit
remunerated, e.g. contract for services
– Gratuitous contracts – liberality or generosity of
one of the contracting parties, e.g. donation
NOTE: Natural obligations may constitute a
sufficient cause to support an onerous contract
(Villaroel vs. Estrada, 71 Phil. 14) but NOT moral
obligations (Fisher vs. Robb, 69 Phil. 101)
94
Cause
• Simulated contracts (Arts. 1345, 1346, 1352,
1353, 1409 Nos. (2) and (3) and 1471)
– Absolutely Simulated Contacts
• The parties do not intend to be bound at all;
– Contract is not really desired or intended to produce any legal
effect
• Void
– Relatively Simulated Contracts (See also Art. 1471)
• The parties conceal their true agreement.
• They produce legal effect, provided that
– NO third person is prejudiced; or
– It is NOT intended for any purpose contrary to law, morals, good
customs, public policy or public order
95
Cause
• Cause is different from Motive.
– CAUSE is the direct or most proximate reason of a
contract while MOTIVE is the indirect reason.
– CAUSE is the objective or juridical reason of a contact
while MOTIVE is the psychological or purely personal
reason.
– CAUSE is always the same while MOTIVES differ for each
contracting party.
– The illegality of the CAUSE will affect the contract while
the illegality of the MOTIVE does not have any effect on
the contract
• EXCEPT when the motive predetermines the purpose of the
contract (Liguez vs. CA, 102 Phil 577; Rodriguez vs. Rodriguez,
20 SCRA 908; PBC vs. Lui She, 21 SCRA 52)
96
Cause
NOTE: Inadequacy of the cause (lesion) CANNOT
invalidate a contract
– Unless it falls under Art. 1381 (1) and (2); or
– Unless there has been fraud, mistake,
violence, intimidation or undue influence
(See Art. 1470);
See also Art. 1470 (on inadequacy of the price) in relation to

Art. 1306 (on Autonomy of Contracts).
97
Forms of Contracts
A contract may be:
a. Oral;
b. In writing; or
c. Partly oral and partly in writing
Implied-in-Fact Contract – one that can be deduced from facts and
circumstances showing a mutual intention to contract. It is not expressed but
manifested by conduct and not by direct or explicit words between parties
but is to be deduced from conduct of the parties, language used, or things
done by them, or other pertinent circumstances attending the transaction
(UP vs Philab Industries, Inc. (G.R. No. 152411, September 29, 2004)
• Note: The totality of the acts/conducts of the parties must be considered
to determine their intention. An implied-in-fact contract will not arise
unless the meeting of minds is indicated by some intelligent conduct, act
or sign.
98
Forms of Contracts
• Obligatoriness of contracts regardless of form as long as
ALL the essential requisites are present, i.e. Consent,
Object and Cause (Arts. 1159 and 1356) UNLESS the law
requires that the contract be in some form for it to be:
a. VALID;
b. ENFORCEABLE BY ACTION or TO BE PROVEN (Art.
1430, 2 on Statute of Frauds; See also Art. 1959); OR
c. EFFECTIVE AGAINST THIRD PERSONS (Convenience,
efficacy and binding effect as to third persons; See.
Art. 1358)
99
Forms of Contracts
I. Formalities for Validity:
1. Those which must appear in writing:
a. Donations of personal property whose value exceeds five
thousand pesos and acceptance thereof shall be made in
writing; otherwise, the donation be void (Art. 748, in relation to
Art. 1270, 2nd Par.)
b. Sale of a piece of land or any interest therein through an agent.
the authority of the latter shall be in writing. Otherwise, the sale
is void (Art. 1874)
c. Agreements regarding payment of interest in contracts of loan,
no interest shall be due unless it has been expressly stipulated in
writing (According to Art. 1956).
- The validity of the contract of loan, however, is NOT affected
d. Antichresis contracts the amount of the principal and of the
interest shall be specified in writing. Otherwise, the contract is
void. (Art. 2134)
100
Forms of Contracts
2. Those which must appear in a public document:
a. Donations of immovable property (regardless of its value) must
be made in a public document. The acceptance may be made in
the same deed of donation or in a separate public document.
Otherwise, the donation void (Art. 749).
b. Partnerships where immovable property or real rights are
contributed to the common fund must appear in a public
instrument and that there must be an inventory of the immovable
property or real rights, signed by the partners, and attached to the
public instrument. Otherwise, the contract is void (Arts. 1771 and
1773).
• Those which must be registered:
a. Sales or transfers of large cattle must be duly registered and a
certificate of transfer is secured. Otherwise, the same is NOT
valid. (Act No. 1147 or the Cattle Registration Act and Art. 1581)
101
Forms of Contracts
II. Contracts that must be in a public instrument:
1. Acts and contracts which have for their object the 1) creation, 2) transmission, 3)
modification, or 4) extinguishment of real rights over IMMOVABLE or REAL
PROPERTY (see Art. 415); However, SALES of real property or of an interest therein
are governed by Articles 1403, No. 2 and 1405;
2. The 1) cession, 2) repudiation or 3) 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 (Arts. 1625 and 1626 in relation to Arts. 1242 and 1285).
All other contracts where the amount involved exceeds five hundred pesos (PhP500.00)
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. (Art. 1358).
NOTE: Chattel Mortgage. By a chattel mortgage, personal property is recorded in the Chattel
Mortgage Registers as a security for the performance of an obligation. If the movable,
instead of being recorded, is delivered to a creditor or a third person, the contract is pledge
and not chattel mortgage (Art. 2140, Civil Code).
A chattel mortgage that is not recorded is valid as between the parties but VOID as to
innocent third persons (Chua Gua vs. Samahang Magsasaka, 62 SCRA 472)
102
Forms of Contracts
• Failure to comply with Art. 1358 does NOT affect the validity, binding effect or enforceability of the
contract.
• The formality is intended for greater efficacy, convenience and/or to bind third persons (Dauden-
Hernaez vs. De Los Angeles, 27 SCRA 1276)
• The parties have the right to compel each other to observe the form
– The same may be exercised simultaneously with the action to enforce the contract (Art. 1357)
• Note: Sec. 112 of PD 1529 provides that only public instruments may be registered.
• See also Art. 1312, on contracts creating real right, one of the exceptions to the principle of
relativity of contracts.
III. Proof
- Art. 1403 (2) – Statute of Frauds
- Contracts that must be in writing to be ENFORCEABLE BY ACTION
IV. Other formalities

a. Instruments to be negotiable must strictly conform to Sec. 1, Negotiable Instruments Law (Act
No. 2031)
b. Warehouse receipts need not be in any particular written form but it is required to contain the
items enumerated by Section 2 of the Warehouse Receipts Law (Act No. 2137).
- It is negotiable if it contains the words of negotiability like “order” or “bearer”
- It is non-negotiable when the goods specified therein is deliverable to the depositor or to
a specified person. (See. Sec. 4)
103
Reformation of Instruments
• Nature of the remedy
– To rectify the contract as to make it express the real intention of the
parties to prevent inequity and injustice
– The courts do not attempt to make another contract for the parties.
– Only the aggrieved party (or his heirs or assigns) may avail of the remedy.
If there is mistake and the same is mutual, either party or his successors-
in-interest may ask for reformation. (Art. 1368)
• Requisites:
a. There must be a meeting of the minds of the contracting parties;
b. Their true intention is NOT expressed in the instrument; AND
c. Such failure to express their true intention is due to mistake, fraud,
inequitable conduct, accident, ignorance, negligence, etc. (Arts. 1361
to 1368)
NOTE: The written contract must be valid or at leastvoidable or rescissible.
• Rationale for the code provisions on the remedy of reformation :
– Equity orders the reformation of an instrument in order that the true
intention of the contracting parties may be expressed.
104
See also:
1. The Best Evidence Rule – when the subject of inquiry is the content of a
document, the best evidence is the original document itself and no other
evidence (such as a reproduction, photocopy or oral evidence) is admissible
as a general rule (Section 3, Rule 130 of the Rules of Court)
– The original is preferred because it reduces the chance of undetected
tampering with the document.
2. The Parol Evidence Rule - when the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon
and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement
(Rule 130, Section 9, 1st Par., Rules of Court)
- The rule excludes EXTRINSIC evidence by which a party seeks to
contradict, vary, add to or subtract from the terms of a valid agreement
or instrument EXCEPT:
a. When there is an intrinsic ambiguity, mistake or imperfection in the
written agreement; or
b. When there is failure of the written agreement to express the true
intent and agreement of the parties thereto
xxxx (Rule 130, Section 9, 2nd Par., Rules of Court)
105
• Distinction from the remedy of annulment of contracts:

– Reformation of an instrument presupposes a perfectly
valid contract (or at least voidable or rescissible) whereas
an action for annulment is based on a defective contract
because of want of a valid consent on the part of one of
the parties.
– The grounds for reformation are mistake, fraud,
inequitable conduct, accident etc. which must be present
or employed AFTER the perfection of the contract whereas
the grounds for annulment are incapacity of one of the
parties, mistake, fraud, violence, intimidation, undue
influence (which must be present or employed AT THE
TIME OF THE CELEBRATION OF THE CONTRACT.
106
• Instruments that cannot be reformed:
1. Simple donation inter vivos with no conditions;
2. Wills
- except as allowed under Art. 789 (re
imperfect description, or when no person or
property exactly answers the description,
mistakes and omissions may be corrected);
3. When the real agreement is void;
107
DEFECTIVE CONTRACTS
1. RESCISSIBLE CONTRACT – all the essential elements are
present and the contract is valid but defective because of
damage or injury suffered by the either contracting party
(Art. 1381, Nos. 1 and 2) or by a third person (Art. 1381,
Nos. 3, 4 and 5).
2. VOIDABLE CONTRACT – because of defective consent of one
of the parties (Art. 1390 in relation to Arts. 1327, 1328, 1329
and 1330).
3. UNENFORCEABLE CONTRACT – because of lack nor excess of
authority, failure to comply with the statute of frauds or
both parties are incapacitated (Art. 1403 in relation to Art.
1317).
4. VOID AND INEXISTENT CONTRACT – because it lacks an or
some of the essential elements of a contract, or its object or
cause is illicit, contrary to public policy, etc. (Art. 1409).
108
RESCISSIBLE CONTRACTS
• Characteristics:
1. Their defects consists in the injury or damage
either to one of the parties or to third persons;
2. They are valid and effective until set aside;
3. They can only be attacked directly;
4. They can be attacked by the injured party (his
heirs or assigns) or by an injured third party (his
heirs and assigns); and
5. They are susceptible of convalidation by
prescription only and not by ratification.
109
Rescissible Contracts
Rescission under Art. 1191 Rescission under Art. 1380
1. It is required that there be a contract giving 1. Even a unilateral act may be rescinded (See
rise to reciprocal obligations Art. 1382)
2. May be availed of only by a party to the 2. May be availed of even by third persons
contract (his heirs or successors-in-interest) prejudiced by the contract.
3. Rescission may be denied by the court if 3. No such power is granted to the court by
there is a just cause to extend the period law (Arts. 1380 – 1389)
within which the defendant may perform
his obligation.
4. Breach of the obligation is the only ground 4.Lesion or economic prejudice is the only
for rescission (See Art. 1170) ground for the rescission of the contract
(Arts. 1381 and 1382)
5. The remedy is PRINCIPAL and IMMEDIATE 5. The remedy is SUBSIDIARY (Art. 1381 in
relation to Art. 1177)
6. The action prescribes in 10 years if the 6. The action prescribes in 4 years (Art. 1389)
contract is in writing (Art. 1144) or 6 years
if oral (Art. 1145)
110
• Requisites for an action for rescission to prosper:
1. The contract/act must be one of those mentioned by Arts. 1381
and 1382;
2. The party seeking the rescission must have no other means to
obtain reparation for the damages suffered by him (Art. 1383);
3. The person demanding rescission must be able to return
whatever he may be obliged to restore if rescission is granted
(Art. 1385);
4. The thing which is the object of the contract must not have
passed legally to the possession of the third person acting in
good faith (Art. 1385); AND
5. The action for rescission must be brought within four (4) years
(Art. 1389) from the time the right of action accrues (Art.
1150).
111
Resiscissible Contracts
• Rescissible contracts and acts:
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 (1381); or
(6) Payment made in a state of insolvency (Art. 1382)
NOTE: RESCISSIBLE CONTRACTS ARE NOT VOID.
– they remain legally effective until set aside in a rescissory action and may convey
title.
– The rescission of the contract is resolutory;
– They CANNOT be attacked collaterally upon the grounds for rescission in land
registration proceedings.
112
(1) LESION (Nos. 1 and 2, Art.1381)
- injury which one suffers by virtue of a contract which is disadvantageous to him
- Disparity between the price and the value at the time of the PERFECTION of the
contract.
a) Requisites:
1. The contract must be entered into ON BEHALF THE WARD/ABSENTEE and the
same is an act of administration (See Art. 1403, No. 1) or an act of ownership
with authority from the courts;
2. The ward must have suffered lesion equivalent to MORE THAN ONE-FOURTH OF
THE VALUE OF THE OBJECT of the contract;
3. The contract must have been entered into WITHOUT JUDICIAL APPROVAL (See
Art. 1386);
4. There must be NO other legal means for obtaining reparation for the lesion;
5. The person bringing the action must be able to return whatever he may be
obliged to restore; and
6. The OBJECT of the contract must NOT BE IN THE POSSESSION OF A THIRD
PERSON WHO DID NOT ACT WITH BAD FAITH (See Art. 1385).
b) Act of Administration vs. Act of Strict Dominion

- The guardian (legal representative) is only authorized to manage the estate of his
ward (absentee). He has NO power to dispose of or encumber any part thereof.
113
(2) Contracts in Fraud of Creditors (No. 3, Art. 1381 in relation to Art. 1177).
a) Requisites:
1. There must be a credit prior to the celebration of the contract;
u If there is no credit, no action for rescission can be maintained
- The fact that suit is commenced and attachment is secured does not mean that there is an
existing credit
u The credit must already be due at the time of the commencement of the action.
u Credit with a SUSPENSIVE condition that is NOT yet fulfilled or period that has
NOT yet arrived are excluded.
2. The contract must be fraudulent;
u It must NOT be absolutely simulated.;
u There must be fraud (or intent to commit fraud) to the prejudice of the creditor
seeking rescission; and
u Fraud or intent to defraud must be duly proved.
3. The creditor CANNOT in any legal manner collect his credit; and
u It presupposes that the creditor has obtained a favorable judgment and has exercised
the first two remedies under Art. 1177 but his credit remains unpaid.
4.The object of the contract must NOT be in the possession of a third person who did not
act with bad faith.
114
Rescissible Contract
• Test of Fraud – Is it a bona fide transaction founded on good consideration or merely a trick
to defeat the creditor/s OR prejudicial to the creditor/s?
• Contracts presumed by law to be fraudulent (Art. 1387)
a. Gratuitous contracts when the donor did NOT reserve sufficient property to pay all debts
contracted before the donation. Relate this to Arts. 761, 886 et seq. and the rules on
Condonation or Remission of Obligations (See Arts. 1270-1274).
b. Onerous contracts when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been issued.
• The decision or attachment need NOT refer to the property alienated, and need NOT
have been obtained by the party seeking the rescission.
• Badges of Fraud:
a. The fact that the cause or reconsideration of the conveyance is inadequate.
b. A transfer made by a debtor after suit has been begun and while it is pending against
him.
c. A sale on credit by an insolvent debtor.
d. Evidence of large indebtedness or complete insolvency.
e. The transfer of all or nearly all of his property by the debtor, especially when he is
insolvent or greatly embarrassed financially.
f. The fact that the transfer is made between father and son, when there are present other
of the above circumstances.
g. The failure of the vendee to take exclusive possession of all the property (Oria vs.
McMicking, 21 Phil. 243).
115
• Cases:
– The presumptions under Art. 1387 are rebuttable and NOT conclusive (Buencamino vs.
Bantug, 58 Phil. 521)
– Even if there is such presumption but if overcome by sufficient evidence, the burden of
proving fraud is shifted to the creditor. Without proof of fraud or intent to defraud,
rescission cannot prosper.
– If the case is NOT one for which the law establishes a presumption of fraud (Art. 1387),
the creditor seeking rescission must prove the existence of such fraud (Lee vs. Bangkok
Bank Public Company, Limited, G.R. No. 173349, February 9, 2011).
– Where the debtor alienated his only attachable property to his son after judgment
against him is rendered and a writ of execution is issued, there is a presumption that
such alienation is fraudulent (Cabaliw vs Sadorra, 64 SCRA 310)
– If NO judgment was rendered or preliminary attachment was issued against the debtor,
the legal presumption under Art. 1387 is not applicable (Panlilio vs. Victorio, 35 Phil.
706)
NOTE: Some contracts entered into to defraud creditors are VOID and not merely rescissible
(See Sec. 4, Act 3952 (Bulks Sales Law) and Sec. 52 and 58 of RA 10142 (Financial Rehabilitation
and Insolvency Act).
116
(3) Contracts referring to things under litigation.
a. Requisites:
a. There is a SUIT that involves a property; and
b. The DEFENDANT entered into a contract without the knowledge
and approval of the litigants or of competent judicial authority;
Note:
The right to institute an action for rescission pursuant to Art. 1381 (4)
is NOT preconditioned upon the court’s determination as to the
ownership of the thing subject of litigation.
Reason behind the law: The primordial purpose of Art. 1381 (4) is to secure the
possible effectivity of the impending judgment rendered by a court with respect to
the thing in litigation because there is a possibility that the same may have been
conveyed to third persons acting in good faith, rendering any judicial determination
illusory (Ada vs. Baylon, G.R. No. 182435, Aug. 13, 2012).
117
(4) All other contracts specially declared by law to be subject to rescission.
1. See Art. 1098 and 1999, Civil Code and Secs. 22and 58 of R.A. 10141 (FRIA)
2. Contracts under Arts. 1189 (4), 1526 (4) (in rel. to Art. 1534, 1538 (in rel. to
1189), 1539, 1542, 1556, 1560, 1567, 1599 and 1659 are NOT rescissible
contracts, strictly speaking.
NOTE: They can be rescinded because of BREACH and not by reason of economic
prejudice.
(5) Payments made in a state of insolvency (Art. 1382).

NOTE: Insolvency of the debtor need NOT be judicially declared
a. Requisites:
a. There is an existing credit;
b. The debtor is insolvent; and
c. The debtor pays an obligation which he could not be compelled to pay at
the time of payment.
118
• Rescission and Restitution (Art. 1385)
– Rescission can only be carried out only when he
who demands it can return whatever he may be
obliged to restore.
– Rescission cannot take place when the object of
the contract must have passed legally to the
possession of the third person acting in good faith
• NOTE: Art. 1385, on mutual restitution, is
applicable only to contracts referred to by
Nos. 1 and 2 of Art. 1381.
119
The phase “third person” may be a party to the
rescissible contract.
• Rule: The acquisition by a third person would
prevent rescission if:
1. The third person is LEGALLY in possession of the
object of the contract; AND
2. He acted in good faith.
NOTE: If the object is a personal property and the
transferee acted in good faith, rescission can NO
longer be had (see Art. 559) if the contract is
onerous.
120
• Rules if the object is land or any other REAL property:
a. Unregistered (See Section 113 (b), P.D. 1529)
• Any recording of any instrument is without prejudice to a third party
with a better right.
b. Registered (See Sec. 51, P.D. 1529)

1. By ONEROUS TITLE
• If the transferee registered the conveyance in good faith, rescission
cannot be had against him.
• If the transferee, although in good faith, did not register the
conveyance, he cannot avoid rescission.
2. By GRATUITOUS TITLE, rescission can be had IRRESPECTIVE of
good faith or bad faith on the part of the transferee.
121
• The term “Fruits” refer not only to natural,
civil or industrial fruits. It also includes
accessions and accessories.
• With respect to the obligation to deliver the
fruits, See Arts. 544, 545, 549, 1164 and
1190.
• With respect to improvements, read Arts. 546,
547, 548, 549, 551 and 1189 in relation to
Arts. 1190.
122
• Prescriptive periods:
– The action to claim rescission must be commenced within
four years (Art. 1389) from the time the cause of action
accrues (Art. 1150; See the cases of Khe Hong Cheng, et
al. vs. CA (G.R. No. 144169 March 28, 2009); Heirs Of
Sofia Quirong vs. Development Bank Of The Philippines
(G.R. No. 173441, December 3, 2009); and Anchor Savings
Bank vs. Furigay, et al. (G.R. No. 191178, March 13, 2013).
– 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 (Art. 1389)
123
Voidable Contracts
Those which possess all the essential elements for validity but the consent by lack of legal
capacity of one of the contracting parties, or when the consent of one is vitiated by
mistake, violence, intimidation, undue influence, or fraud even though there may have
been no damage to the contracting parties (See Art. 1390).
FEATURES:
1. Their defect consists in the incapacity or vitiation of the consent of ONE of the
contracting parties;
2. They are binding and effective until annulled; and
3. They are susceptible of convalidation by ratification or prescription.
• The validity of a voidable contract may only be attacked by way of a DIRECT action or by
way of defense.
- In the Answer, there must be a prayer for the annulment of the contract being
enforced.
• Even though there are no damages between the contracting parties, the contracts
enumerated in Art. 1390 are still voidable.
• If the consent is absolutely lacking or simulated, the contract is INEXISTENT, hence,

VOID under Art. 1409.
124
Voidable Contracts
• Prescription of action– Four (4) years (See Art. 1391)
1. from the time guardianship ceases, in case of contracts entered into by incapacitated
persons;
2. from the time violence, intimidation or undue influence ceases, in case the consent of
one of the parties is vitiated by violence, intimidation or undue influence; or
3. from the time of the discovery of mistake or fraud in contracts where consent is vitiated
by mistake or fraud.
NOTES and CASES:
– Extinctive prescription applies to both the action for annulment and defense of nullity.
– The running of the prescriptive period of four years CANNOT be interrupted by an
extrajudicial demand made by the party whose consent was vitiated (Miailhe vs. CA,
354 SCRA 675).
– Mistrust of the courts and of judicial processes is no excuse for their non-observance of
the prescriptive period set down by law (Phil. Free Press vs. CA, 473 SCRA 639; First
Philippine Holdings Corporation vs. Trans Middle East (Phils.) Equities Inc., G.R. No.
179505, December 4, 2009)
– Discovery of fraud must be reckoned from the time the document was registered in the
office of the register of deeds. Registration constitutes constructive notice to the whole
world. (CRISOSTOMO vs. GARCIA, JR, G.R. No. 164787, January 31, 2006; Carantes vs.
CA, G.R. No. L-33360, April 25, 1977)
125
Voidable Contracts
• RATIFICATION (Arts. 1392-1396) –
– Or Confirmation – validation of a contract either expressly or tacitly
Reason: A party cannot rely on the contract and claim rights or obligations under it and at the
same time impugn its existence or validity (Villoria vs. Continental Airlines, Inc., G.R. No.
188288, January 16, 2012)
• Effects of Ratification:
– Extinguishes the action for annulment of a voidable contract.
– Cleanses the contract of its defects from the moment it was constituted (but it should not
prejudice the rights of third persons acquired before it is effected).
• Examples:
– Filing a suit for the enforcement of the contract (Arts. 1164, 1165, 1166 and 1191) or
reformation of the instrument (Art. 1359 et seq.), or novation (Art. 1291).
– silence or acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom (MWSS vs. CA, G.R. No. 126000
October 7, 1998; Julian Francisco, Et Al. vs. Pastor Herrera, G.R. No. 13998, Nov. 21, 2002)
• Requisites of Ratification:
1. Contract is tainted with a vice susceptible of being cured;
2. Confirmation is effected by the person who is entitled to do so under the law;
3. It is effected with knowledge of the vice or defect of the contract; AND
4. Cause of the nullity or defect has already disappeared.
126
Voidable Contracts
• Notes and Cases:
– The right to ratify may be transmitted to the heirs
of the party entitled to such right (See also Art.
1311).
– It may be effected by the guardian of the
incapacitated person having such right. (Art. 1394)
– Ratification does not require the conformity of the
party who has no right to bring the action for
annulment (Art. 1395)
• Reason: as far as the other party is concerned, there is a
valid consent and a perfectly binding contract.
127
Voidable Contracts
ACTION FOR ANNULMENT (Art. 1397)
Who may institute?
• General Rule: An action for annulment may be instituted by all who are thereby obliged
principally or subsidiarily. A stranger to the contract cannot institute an action for
annulment (see Art. 1311).
– Exception: If a third person is prejudiced in his rights with respect to one of the
contracting parties, and can show detriment which would positively result to him from
the contract in which he has no intervention (DBP vs. CA, G.R. No. L-28774, February
28, 1980; Teves vs. People’s Homesite & Housing Corp., G.R. 21498, June 27, 1968).
NOTE: The rulings in the said cases are questionable. The proper remedy would be
rescission under Art. 1380.
• Requisites:
1. Plaintiff must have interest in the contract; and
2. The incapacitated party or victim (and not the party responsible for the vice or defect)
must assert the same.
- He who has capacity to contract (and his heirs or assigns) may not invoke the incapacity of
the party with whom he has contracted as a defense in the action to enforce the same (Art.
1397)
- He who employed fraud, violence, intimidation and undue influence (his heirs and
assigns) cannot have the contract annulled on these grounds (Art. 1397) EVEN IF HE IS THE
INCAPACITATED PARTY. 128
Voidable Contracts
• Effects of Decree of annulment (Arts. 1398-1399)
– If contract has NOT yet been consummated – the parties shall be released from
the obligations arising therefrom (Status quo ante).
– If contract has already been consummated – the rules provided in Arts. 1398-
1402 shall govern.
• Principle of Mutual Restitution
– Applicable only between the parties. A stranger cannot invoke the provision
(Gov’t vs. Wagner, 5 Phil. 132).
– Innocent (in good faith) third parties are not bound to restore (Peralta vs.
Heirs Of Bernardina Abalon , G.R. No. 183448, June 30, 2014; Art. 559).
– Obligation to give – The parties shall restore to each other things which have
been the subject matter of the contract with fruits and the price with interest,
except in cases provided by law.
• As to the obligation to deliver the fruits, apply Arts. 544, 545, 549
• With respect to improvements, apply Arts. 546, 547, 548, 549, 551 and
1189.
– Obligation to do or not to do - There will be an apportionment of damages
based on the value of such prestation with corresponding interests.
129
Voidable Contracts
NOTES
• MUTUAL RESTITUTION: As long as one of the parties does not restore what he is
bound to return by virtue of the decree of annulment, the other party cannot be
compelled to comply what is incumbent upon him. (Art. 1402)
• EXCEPTION to the principle of mutual restitution: When the defect of the contract
consists in incapacity of one of the contracting parties – the incapacitated person
is NOT obliged to make restitution except insofar as he has been benefited by the
thing or price received by him (Art. 1399; See also Arts. 1241 and 1489).
– No presumption of enrichment or benefit. It is presumed, in the absence of
proof, that no such benefit has accrued to the incapacitated person (8
Manresa, 5th Ed., Bk. 2, p. 647)
– Art. 1399 cannot be applied to those cases where the incapacitated person
can still return the thing which he has received. (Uy Soo Lim vs. Tan Unchuan,
38 Phil. 552)
– The capacitated person is obliged to restore whether he is benefited or not
• EXCEPTION: See Art. 1427
• The principle of mutual restitution cannot be applied to all contracts as when the
party at whose instance the contract would be unjustly enriched.
130
Voidable Contracts
EFFECTS OF FAILURE TO MAKE RESTITUTION (Arts. 1400-1402)
1. Where the defendant CANNOT return the thing (on some causes other than loss), he shall
be liable for the value and fruits thereof with interest from the time annulment is
decreed.
2. When the thing is LOST
a. Loss of the thing by the defendant
1. Due to his fault/fraud – he shall return the fruits received and the value of the thing
at the time of the loss, with interest from the same date (Art. 1400)
2. Due to fortuitous event – if the cause of annulment is incapacity or mistake and
defendant acted in good faith, he is NOT liable. If he acted in bad faith, as when he
employed fraud, violence, intimidation or undue influence, he is liable. (See also Art.
552)
b. Loss of the thing by the Plaintiff
1. Due to fault/fraud of plaintiff – the action for annulment shall be extinguished.
2. Due to fault/fraud of the incapacitated – whether the loss occurred during the
plaintiff’s incapacity or after he had acquired capacity, the action for annulment
would be extinguished (Art. 1401, par. 1)
3. Due to fortuitous event – contract can still be annulled (Art. 1401, par. 2) but the
defendant cannot be compelled to make restitution after judgment (Art. 1402)
REASON: The action for annulment by the Plaintiff cannot be extinguished by an
event or act not imputable to him.
131
Unenforceable Contracts
UNENFORCEABLE CONTRACTS
Those which CANNOT be enforced by proper action in court
unless they are ratified.
Kinds:
a) Those entered into WITHOUT OR IN EXCESS OF
AUTHORITY (No. 1, Art. 1403 in relation to Art. 1317;
See also Arts. 1647 and 1878 (8) of the Civil Code; Arts.
96 and 124 of the Family Code (the contract is void)
a) Those that do NOT comply with the statute of frauds

(No. 2, Art. 1403); and
b) Those where BOTH contracting parties are

INCAPACITATED (No. 3, Art. 1403)
132
Those that do not comply with the Statute of Frauds (Art. 1403, no. 2):
(a) An agreement that by its terms is not to be performed within one year from
the making thereof;
(a) A special promise to answer for the debt, default or miscarriage of another;
(b) An agreement made in consideration of marriage, other than a mutual

promise to marry;
(c) An agreement for the sale of goods, chattel or things in action, at a price not
less than 500 pesos;
(d) An agreement of the leasing for a longer period than one year or for the sale
of real property or interest therein; and
(e) A representation as to the credit or a third person.
NOTE: The enumeration is EXCLUSIVE.
133
NOTES:
• The Statute of Frauds applies only to the contracts enumerated by No. 2, Art. 1403 and
cannot apply to any other contracts (Facturan vs. Sabanal, 81 Phil. 512)
• The Statute of Frauds applies only to PERFECTED contracts (Villanueva vs. CA, 414 SCRA
190).
• The statute applies only to EXECUTORY CONTRACTS, not to those that are partially OR
completely FULFILLED ( See Art. 1405; Rodriguez vs. CA, 29 SCRA 419).
• The statute applies to actions which are either for specific performance of the contract
or for the violation thereof.
• The note or memorandum must contain all the essential requisites of the contract, terms
and conditions thereof and the description/identification of the property that no parol
evidence is necessary. (Swedish Match, AB vs. CA, G.R. No. 128120 October 20, 2004)
– See the provisions of RA 8792 (E-Commerce Law) on electronic documents
• The Statute of Frauds merely regulates the ADMISSIBILITY of evidence.
• The defense of unenforceability may be waived. (Art. 1405).
• The defense is personal and cannot be raised by a stranger to the contract (Art. 1408)134
Ratification of Contracts Infringing the Statute of
Frauds (Art. 1405):
1. By failure to object to the presentation of oral

evidence to prove such contracts; or
2. Acceptance of benefits under these contracts
Note: The unenforceability of a contract can only be

assailed by parties thereto (Art. 1408). This defense
is personal to the party to the agreement.
135
Void and Inexistent Contracts
VOID OR INEXISTENT CONTRACTS
• In general, They are those which lack
absolutely either in fact or in law one or some
of the elements essential for its validity.
– Void contracts are those that do not produce
effects, generally, because of some defects.
– Inexistent contracts are those that lack some or all
of the essential elements or do not comply with
the formalities required by law for their existence
and validity.
136
Features:
1. Generally, a void contract produces NO force and effect;
2. It CANNOT be cured by prescription or ratification;
- Validity cannot be given to it by estoppel if it is prohibited by law
or against public policy (Baltazar vs. Lingayen Gulf Electric
Power Co., et al., 14 SCRA 5221)
3. The right to set up the defense of illegality, nullity or
inexistence cannot be waived (Art. 1409, Par. 2).
It cannot be set up by third persons whose interests are not
directly affected by the contract (Art. 1421; Nazareno vs. CA,
343 SCRA 637)
4. It cannot give rise to a valid contract (Art. 1422).
5. If there has been performance there is no restoration,
generally.
137
Notes:
• Is an action to declare the nullity of a void or
inexistent necessary?
a. If the contract is executed/consummated, an
action is necessary.
• Judicial intervention is needed if restitution is to be
made.
• The judgment retroacts to the day of the perfection of
the contract.
b. If the contract is executory, NO such action is
necessary.
138
• Void and Inexistent Contracts
1. Those whose cause, object or purpose is contrary to
law, morals , good custom, 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;
and
7. Those expressly prohibited or declared void by the law.
(Art. 1409)
139
Void contracts/stipulations by reason of public policy, etc.:
1. Contracts in violation of Sec. 7, Art. XII of the Constitution
2. Contracts in violation of RA 8371 (IPRA)
3. Contracts in violation of RA 9700 (CARPer)
4. Contracts involving future inheritance (Art. 1347)
5. Those enumerated by Art. 1490 (sale between husband and wife) and Art. 1491
(persons disqualified to enter into a contract of sale with respect to certain property)
6. Pactum comissorium or stipulation allowing the creditor to appropriate the things
given by way of pledge or mortgage or dispose of them (Arts. 2088 2130, and 1390)
7. Stipulation forbidding the owner-mortgagor from alienating the immovable
mortgaged (Art. 2130)
8. Stipulation excluding one or more partners from any share of the profits or losses
(Art.1799)
9. Sale of animals suffering from contagious diseases (Art. 1575)
Void contracts for failure to comply with formal requirements of the law:
1. Art. 748 (on donation of personal property the value of which exceeds phP5,000.00
2. Art. 749 (on donation of real property)
3. Art. 1874 (on sale of a real property or interest therein through an agent)
4. Art. 1773 (Partnership where immovable property is contributed);
Void Contracts due to lack of written authority:
1. Art. 96, Family Code (on Sale or Encumbrance of property belonging to the absolute
community)
2. Art. 124, Family Code (on Sale or Encumbrance of property belonging to the conjugal
partnership)
140
Rules when one or both parties are guilty (Arts. 1411-1419)
General Rule: When BOTH parties to the void contract are guilty, the law leaves
them where they are (in pari delicto).
Specific Rules:
A. When the act constitutes a criminal offense and both parties are equally
guilty,
1. The parties have no action against each other;
2. Both shall be prosecuted for the criminal act; and
3. The illegal object and the price will be confiscated and disposed in
accordance with the penal laws
B. When the act is merely prohibited and does not constitute a criminal offense
when both are guilty
1. The parties have no action against each other; and
2. Neither party may recover what he had given by vitrue of the contract or
demand the performance of the other’s undertaking;
C. When only one is guilty, whether the act is criminal or not

1. He cannot recover what he has given or delivered
2. The other who is not guilty recover what he has given or delivered. 141
Note: The principle of in pari delicto is applicable
ONLY TO VOID CONTRACTS and NOT to INEXISTENT
contracts.
Rules when only one of the parties is at fault:
• Executed contracts- Guilty party is barred from
recovering what he has given to the other party
by reason of the contract. The innocent party may
ask for the return of what he has given.
• Executory Contracts- Neither of the contracting
parties can demand for the fulfillment of the
other’s obligation nor may he be compelled to
comply with his obligation.
142
Exceptions to the pari delicto rule:
– Payment of usurious interest (Art. 1413)

– Payment of money or delivery of property for an illegal purpose, where the
party who paid or delivered repudiates the contract before the purpose has
been accomplished, or before any damage has been caused to a third person
(Art. 1414)
– Payment of money or delivery of property made by an incapacitated person
(Art. 1415) ;
– Agreement or contract not illegal per se but merely prohibited by law, and the
prohibition is designed for the plaintiff’s protection ( Art. 1416);
– Payment of any amount in excess of the maximum price of any article or
commodity fixed by law (Art. 1417);
– Contract whereby a laborer undertakes to work longer than the maximum
number of hours fixed by law (Art. 1418)
– Contract whereby a laborer accepts a wage lower than the minimum wage
fixed by law (Art. 1418)
– In case of divisible contracts, the legal terms may be enforced separately from
the illegal terms (Art. 1420); and
– One who lost in gambling because of fraudulent schemes practiced on him. He
is allowed to recover his losses (Art. 2014)
143
Summary of the Distinctive Features of the Defective Contracts
Void Voidable Rescissible Unenforceable
Defect is caused by lack of form,
Defect is caused by injury authority, or capacity of both
Defect is caused by lack of essential either to one of the parties not cured by
elements or illegality Defect is caused by vice of consent parties or to a 3rd person prescription
Valid and enforceable

Do not, as a general rule produce any Valid and enforceable until annulled until rescinded by a Cannot be enforced by a proper
legal effect by a competent court competent court action in court
Corresponding action for

recovery, if there was total or
partial performance the
Action for the declatration or nullity or unenforceable contract under
inexistence or defense of nullity or Action for annulment or defense Action for rescission may No. 1 or 3 of Article 1403 may
inexistence does not prescribe annulability may prescribed prescribe prescribe
Not cured by prescription
except in case of Art. 1403 nos.
Not cured by prescription Cured by prescription Cured by prescription 1 or 3
Cannot be ratified Can be ratified Need not to be ratified Can be ratified
Assailed by a contracting
party and a third person
Assailed by a contracting party and a third who is prejudiced or Assailed only by a contracting
person whose interest is directly affected Assailed only by a contracting party damaged by the contract party
Assailed directly or collaterally Assailed directly or collaterally Assailed directly only Assailed directly or collaterally
NATURAL OBLIGATIONS
NATURAL OBLIGATIONS- Those based on equity and natural law, which do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, authorize the retention of what has been delivered or
rendered by reason thereof (Art. 1423; Ansay vs. NDC, 107 Phil. 997)
Note: The binding tie of these obligations is in the conscience of man, for under the law, they do not have the
necessary efficacy to give rise to an action.
• In order that there may be a natural obligation there must exist a juridical tie which is not prohibited by law and
which in itself could give a cause of action but because of some special circumstances is actually without legal
sanction or means of enforcing compliance by intervention of courts. (Tolentino, Arturo Commentaries and
Jurisprudence on the Civil Code of the Philippines)
TWO CONDITIONS NECESSARY FOR NATURAL OBLIGATIONS:

A. That there be a juridical tie between two persons, and;
B. That this tie is not given effect by law.
Note: The promise to perform a natural obligation is as effective as performance itself and converts it into a civil
obligation (7 Planiol and Ripert, page 307 – 308)
A natural obligation may also be converted into a civil obligation by novation (5 Vera, page 51 – 52)
As general rule, partial payment of a natural obligation does not make it civil; the part paid cannot be recovered but
payment of the balance cannot be enforced (5 Vera 52)
145
NATURAL OBLIGATIONS
Illustrations by the Civil Code:
a. Performance AFTER the civil obligation has prescribed (Art. 1424);
b. Reimbursement of a THIRD person for a debt that has prescribed (Art. 1425);
c. Restitution by a minor after the annulment of contract (or obligation) (Art.

1426)
d. Delivery by a minor (or incapacitated person) of money or fungible things in

fulfillment of obligation (Art. 1427 in relation to Art. 1239) .
e. Performance AFTER action to enforce civil obligation has failed (Art. 1428);
f. Payment by heir of debt EXCEEDING VALUE OF PROPERTY INHERITED (Art.

1429); and
g. Payment of legacy after will have been declared void for failure to comply with
the FORMALITIES required by law. (Art. 1430)
146
NATURAL OBLICATIONS
Natural Obligations Moral Obligaitons
There is a juridical tie between the parties which is not enforceable by

No juridical tie whatsoever.
the court action.
Voluntary fulfillment of such produces legal effects which the court Voluntary fulfillment of such does not produce any legal effect which
will recognize and protect. the court will recognize and protect.
Within the domain of law Within the domain of morals.
147
ESTOPPEL
ESTOPPEL - A condition or state by virtue of which an admission or representation is rendered
conclusive upon the person making it and cannot be denied or disproved as against the person relying
thereon (Art. 1434; Laurel V. vs. Civil Service Commission, 203 SCRA 195; Servicewide Specialist vs. IAC,
G.R. No. 74522, Junme 8, 1989)
NOTE: The principles of estoppel have been adopted by the Civil Code insofar as they are not in conflict
with its provisions, the Code of Commerce, the Rules of Court and special laws (Art. 1432; Cf. Lazo vs.
Republic Suretry and Ins. Co., 31 SCRA 329)
KINDS OF ESTOPPEL:
a. Estoppel in pais or by conduct (Art. 1433)
b. Estoppel by silence (e.g. Art. 1437)
c. Estoppel by acceptance of benefits (e.g. Art. 1438)
d. Technical estoppels:
a. Estoppel by deed – a party to a deed is precluded from asserting as against the other party,
material fact asserted therein.
b. Estoppel by record – a party is precluded from denying the truth of matters set forth in a
record whether judicial or legislative.
c. Estoppel by judgement – a party to a case is precluded from denying the facts adjudicated by
a court of competent jurisdiction.
d. Estoppel by laches or “state demands” - it is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it (Madeja vs. Patcho, 132 SCRA 540).
148
ESTOPPEL
I. Elements of Estoppel
A. Insofar as the party estopped (or in estoppel is
concerned), it should appear:
a. His conduct amounted to a false representation or
concealment of material facts or at least is calculated
to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party
subsequently attempts to assert;
b. There is an intent to or at least expectation that his
conduct shall be acted upon by, or at least influence
the other party; and
c. He has knowledge, actual or constructive, of the real
facts.
149
ESTOPPEL
B. Insofar as the party invoking estoppel is
concerned, it should be shown that:
a. He had lack of knowledge and of the means of
knowledge if the truth as to the MATERIAL facts;
b. He relied in GOOD FAITH, upon the conduct or
statements of the party to be estopped; and
c. His reliance thereon is of such character as to
change his position or status to his injury,
detriment or prejudice (Kalalo vs. Luz, 34 SCRA
347)
150
Estoppel
II. Kinds:
A. Estoppel in pais or by conduct
– The admission or representation arises from the
conduct of the party in estoppel such as by his act,
declaration, omission or silence.
– It is essential that before a person is barred from
asserting a fact contrary to this admission or
representation, it must be shown that such admission
or representation has been intended and would
unjustly cause harm to those who are misled if the
principle were not applied against him (Vitug,
Compendium of Civil Law and Jurisprudent, p. 570)
151
ESTOPPEL
B. Estoppel by Silence or Inaction
– Presupposes that the is an obligation or duty, not
merely a right or opportunity, to speak (19 Am Jur.
663)
– Mere innocent silence will not create this estoppel.
• There must be some element of turpitude or negligence
connected with the silence by which another is misled to his
injury based on moral and natural justice (Beronilla vs. GSIS,
36 SCRA 44)
• Its application to any case depends upon the special
circumstances of the case (Mirasol vs Mun. of Tabaco, 43
Phil. 610)
152
ESTOPPEL
C. Estoppel by deed (Art. 1434) – is the admission or
representation in an instrument or deed.
– A privy to a contract would be precluded fro asserting as
against the other party any right in derogation of the deed
or from denying the truth of any material fact found
therein (Banco de Oro vs. Equitable Bank, 157 SCRA 188).
– Not applicable to a person who affixed his signature to the
deed as a “mere instrumental witness” (as opposed to the
party who affixes his signature as proff of his consent to,
approval of, and conformity with the contents of the deed
or document (Phil. National Bank vs CA, 98 SCRA 207)
D. Estoppel by record - preclusion to deny the truth of
matters set forth in a record, judicial or legislative and
also to deny the facts adjudicated by a court of
competent jurisdiction.
153
ESTOPPEL
D. Estoppel by Laches or “Stale Demands”
- failure or neglect, for an unreasonable and unexplained length of
time, to do that which, by exercising due negligence, could or should
have been done earlier; it is negligence or omission to assert a right
within a reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert it
(Madeja vs. Patcho, 132 SCRA 540).
• Mere lapse of time cannot give efficacy to a void contract (Catindig vs.
Roque, 74 SCRA 83).
– BUT estoppel may bar a party who makes NO categorical objections to
(Northern Cement vs. IAC, 158 SCRA 408), or who fails to promptly repudiate
(Cadano vs Cadano, 49 SCRA 33; De Castro vs. Tang Queen Tan, L-31956, April
30, 1984), an invalid contract.
– Vigilantibus non dormientibus jura subveniunt (The law aids the vigilant, not
those who slumber on their rights (Miraflor vs. CA, G.R. No. 40151).
– Laches is a creation of equity and applied only to bring about equitable
results, and it is largely ADDRESSED TO THE SOUND DISCRETION OF THE
COURT (Central Azucarera del Davao vs. CA, G.R. No. 41615, June 28, 1985).
154
ESTOPPEL
Elements of Laches:
a. Conduct on the part of the defendant, or of one under whom he claims,

giving rise to the situation of which complaint is made and for which the
complaint seeks a remedy;
b. Delay in asserting the complainant’s rights, the complainant having had

knowledge or notice of the defendants conduct or having been afforded an
opportunity to institute a suit;
c. Lack of knowledge or notice on the part of the defendant that the complaint
would assert the right on which he bases his suit; and
d. Injury or prejudice to the defendant in the event relief is accorded to the

complainant, or the suit is not held to be barred.
155
ESTOPPEL
(Prescription vs. Laches)
Prescription Laches
Concerned with the fact of delay Concerned with the effect of delay
Question of equity of permitting the claim to be

Question or matter of time
enforced
Statutory Not statutory
Applies in law Applies in Equity
Cannot be availed of unless it is specifically pleaded Being a defense in equity, if need not be specifically
as an affirmative allegation pleaded
Based on a fixed time Not based on a fixed time
156
ESTOPPEL
E. Promissory Estoppel
– arises from the making of a promise, even though without consideration, if it was
intended that the promise should be relied upon, as in fact it was relied upon, and if a
refusal to enforce it would virtually sanction the perpetration of fraud or would result in
other injustice (Ramos v. Central Bank of the Philippines, No. L-29352, October 4, 1971,
41 SCRA 565.
– It presupposes the existence of a promise on the part of one against whom estoppel is
claimed (Accessories Specialist, Inc. vs. Alabanza, GR. No. 168985, July 23, 2008). The
promise must be plain and unambiguous and sufficiently specific so that the court can
understand the obligation assumed and enforce the promise according to its terms
(National Power Corporation v. Hon. Alonzo-Legasto, G.R. No. 148318, November 22,
2004, 443 SCRA 342, 371.
– In order to make out a claim of promissory estoppel, a party bears the burden of
establishing the following elements:
a. a promise was reasonably expected to induce action or forbearance;
b. such promise did, in fact, induce such action or forbearance; and
c. the party suffered detriment as a result (Mendoza v. Court of Appeals, 412 SCRA
14, 29 (2001).
157
ESTOPPEL
Illustrations/Instances of estoppel under the civil code (non-exclusive in nature):
a. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor
acquires title thereto, such title passes by operation of law to the buyer or grantee. (Article 1434)
b. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own
title as against the buyer or grantee, (Article 1435)
c. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or
bailor. (Article 1436)
d. When in a contract between third persons concerning immovable property, one of them is misled by a person
with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal
title or interest therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped;
(2) The party precluded must intend that the other should act upon the facts as misrepresented;
(3) The party misled must have been unaware of the true facts; and
(4) The party defrauded must have acted in accordance with the misrepresentation. (Article 1437.
e. One who has allowed another to assume apparent ownership of personal property for the purpose of making any
transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to
defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for
value. (Article 1438)
158
ESTOPPEL
• Agency by estoppel, where the principal is solidarily liable
with the agent even when the latter has exceeded his
authority, if the principal allowed him to act as though he
had full powers (Art. 1911).
– Requisites:
1. The principal manifested a representation of the agent’s authority or
knowingly allowed the agent to assume such authority;
2. The third person, in good faith, relied upon such representation; and
3. Relying upon such representation, such third person has changed his
position to his detriment.
• Note: An agency by estoppel, which is similar to the
doctrine of apparent authority, requires proof of reliance
upon the representations, and that, in turn, needs proof
that the representations predated the action taken in
reliance (Litonjua, Jr. v. Eternit Corp. (490 SCRA 204, 224-
225)
159
ESTOPPEL
• Partnership by estoppel - One who, by words
or conduct does any of the following:
1. Directly represents himself to anyone as a
partner in an existing partnership or in a non-
existing partnership; and
2. Indirectly represents himself by consenting to
another representing him as a partner in an
existing partnership or in a non-existing
partnership.
160
ESTOPPEL
• Corporation by estoppel under Sec. 21, Corporation
Code-
“All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use as a defense its lack
of corporate personality.”
NOTE: One who assumes an obligation to an ostensible

corporation as such, cannot resist performance thereof on the
ground that there was in fact no corporation.
161
ESTOPPEL
Estoppel by Judgment or Res judicata - rule that a final judgment or decree on the merits by a court of
competent jurisdiction is conclusive of the rights of the parties or their privies in all later suits on points and
matters determined in the former suit (Guttierez v. Court of Appeals, G.R. No. 82475 January 28, 1991, citing
Black's Law Dictionary, p. 1470 (Rev. 4th ed., 1968).
• The doctrine of res judicata is set forth in Section 47 of Rule 39 of the Rules of Court, which reads:
Sec. 47. Effect of judgments or final orders. — The effect of a judgment or final order rendered by a court
of the Philippines, having jurisdiction to pronounce the judgment or final order, may be as follows:
xxxx
(b) In other cases, the judgment or final order is, with respect to the matter directly adjudged or as to any
other matter that could have been raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and in the same capacity; and
(c) In any other litigation between the same parties or their successors in interest, that only is deemed to
have been adjudged in a former judgment or final order which appears upon its face to have been so
adjudged, or which was actually and necessarily included therein or necessary thereto.
162
ESTOPPEL
• Two distinct concepts of res judicata:
(1) BAR BY FORMER JUDGMENT (claim preclusion) - is the effect of a judgment as a bar to the
prosecution of a second action upon the same claim, demand or cause of action.
(1) CONCLUSIVENESS OF JUDGMENT - precludes the re-litigation of a particular fact of issue in another
action between the same parties on a different claim or cause of action.
• Conclusiveness of judgment finds application when a fact or question has been squarely put in issue,
judicially passed upon, and adjudged in a former suit by a court of competent jurisdiction. (Hacienda
Bigaa v. Chavez, G.R. No. 174160, April 20, 2010)
• The fact or question settled by final judgment or order binds the parties to that action (and persons
in privity with them or their successors-in-interest), and continues to bind them while the judgment
or order remains standing and un-reversed by proper authority on a timely motion or petition; the
conclusively settled fact or question furthermore cannot again be litigated in any future or other
action between the same parties or their privies and successors-in-interest, in the same or in any
other court of concurrent jurisdiction, either for the same or for a different cause of action (ibid.)
• Only the identities of parties and issues are required for the operation of the principle of conclusiveness of
judgment (Calalang v. Register of Deeds, G.R. No. 76265, March 11, 1994, 231 SCRA 88)
• While conclusiveness of judgment does not have the same barring effect as that of a bar by former judgment
that proscribes subsequent actions, the former nonetheless estops the parties from raising in a later case the
issues or points that were raised and controverted, and were determinative of the ruling in the earlier case
(Camara v. Court of Appeals, 369 Phil 858, 868 (1999).
163
ESTOPPEL
III. Persons bound by estoppel
• Estoppel is effective only as between the parties thereto,
their heirs and assigns (Art. 1439 in relation to Art. 1311).
• Neglect or omission of public officers as to their duties will
NOT work as estoppel against the State in its capacity as
sovereign or asserting government rights.
• Thus, the government is never estopped by:
– mistakes or errors of its agents (Manila Lodge vs. CA, 73 SCRA
116; CIR vs. McGrath, 111 Phil. 222);
– their wrong construction of the law (CIR vs. CA, 261 SCRA 236)
– their wrong application and enforcement of the law (PBA vs.
CA, 337 SCRA 358; Cruz, Jr. vs. CA, 194 SCRA 145)
– Their unauthorized or illegal acts (RP vs. Heirs of Caballero, 79
SCRA 177)
164
ESTOPPEL
• The immunity of the State from laches and estoppel is NOT absolute.
• When the government enters into an amicable settlement. Although the State's right of action to
recover ill-gotten wealth is not vulnerable to estoppel, it is non sequitur to suggest that a contract,
freely and in good faith executed between the parties thereto is susceptible to disturbance ad
infinitum (Republic vs. Sandiganbayan, 226 SCRA 314).
• A different interpretation will lead to the absurd scenario of permitting a party to unilaterally
jettison a compromise agreement which is supposed to have the authority of res
judicata (Article 2037, New Civil Code), and like any other contract, has the force of law
between parties thereto (Article 1159, New Civil Code; Hernaez vs. Kao, 17 SCRA 296 [1996];
6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3 Aquino, Civil Code, 1990 ed., p. 463;
• When the government enters into a contract with a private individual or entity. It is illogical and
a cruel breach of the sporting idea of fair play, if the very same government agency which
vigorously recommended, through indubitable public documents and authentic writings, the
issuance of Sales Patents to a party, would now be permitted to deny and successfully impugn in
this action its official acts (Republic vs. Mendoza. G.R. No. 153726, March 28, 2007)
• When the government fails to correct and recover the increase in the land are of a private party
for an unreasonable period of time (20 years), the principle of estoppel by laches should be
applied against the government to avoid an injustice to an innocent purchaser for value (Republic
vs. CA, 519 SCRA 148)
• The right of the government to recover lands of public domain (while imprescriptible), can be
barred by laches if not exercised within a reasonable period of time (Estate of Yuhuico vs,
Republic, 537 SCRA 513)
165
END
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OBLIGATIONS AND CONTRACTS

Concept: Mode of extinguishing in the concurrent

Effect : It extinguishes both debts to the extent that

C. Third Requisite: Both debts must be DUE.

D. Fourth Requisite: Both debts are DEMANDABLE and LIQIUIDATED.

• Facultative Compensation – Compensation which can be set up only

a. If made with consent of debtor – the debtor cannot set-up

b. If made with knowledge but without consent of debtor – the

c. If made without knowledge of the debtor – the debtor may set-

1. As to its essence (See. Art 1291)

2. As to its form/ constitution (See Art. 1292)

a. Express – When it is declared in unequivocal terms that the old obligation is

4. As to effect on the old obligation

a. There must be a previous VALID and EXISTING obligation;

a. There must be an AGREEMENT between the parties (new contract)

b. It must result in the EXTINGUISHMENT of the previous obligation;

c. There must be a NEW and VALID obligation.

• When NOT expressed, incompatibility is required (to ensure

a. Expromission – substitution without the knowledge or consent of the debtor.

• In substitution by expromision, the consent of

Forms of novation by subrogation:

Debtor’s consent is not required Debtor’s consent is required

a. When, even without knowledge of the debtor, a person interested in the

NOTE: The enumeration is EXCLUSIVE.

Effects of Subrogation (Arts. 1303-1304)

– It presupposes the validity and enforceability of the

• REASON: A party cannot be allowed to renege on his

• Reiteration of the obligatory nature of contracts. (Art. 1159)

- The policy of Philippine Air Lines requiring that prospective flight

NOTE: Do ut Des is now a nominate contract and

1st : The stipulations of the parties;

2nd : Civil Code provisions on Obligations and Contracts;

3rd: Rules governing the most analogous contracts; and

4th: Customs of the place

IN THAT ORDER (Art. 1307)

A. CONSENT of the contracting parties;

B. OBJECT certain which the subject matter of

C. CAUSE of the obligation which is established

• Disqualification is special or relative incapacity of the parties to

• Test of undue influence:

• Circumstances considered to determine whether the influence exerted is

Dolo Causante Dolo Incidente

Fraud which is serious in character Fraud which is not serious in character

See also Art. 1470 (on inadequacy of the price) in relation to

IV. Other formalities

• Distinction from the remedy of annulment of contracts:

b) Act of Administration vs. Act of Strict Dominion

(5) Payments made in a state of insolvency (Art. 1382).

b. Registered (See Sec. 51, P.D. 1529)

• If the consent is absolutely lacking or simulated, the contract is INEXISTENT, hence,

a) Those that do NOT comply with the statute of frauds

b) Those where BOTH contracting parties are

(b) An agreement made in consideration of marriage, other than a mutual

(e) A representation as to the credit or a third person.

NOTE: The enumeration is EXCLUSIVE.

– See the provisions of RA 8792 (E-Commerce Law) on electronic documents

• The Statute of Frauds merely regulates the ADMISSIBILITY of evidence.

• The defense of unenforceability may be waived. (Art. 1405).

1. By failure to object to the presentation of oral