LAW About CIVIL-451-500

Obligations
3. The extinguishment of the old 1. Substitution is upon the initiative or

obligation; and proposal of the old debtor himself by
4. The birth of a valid new obligation. proposing to the creditor the entry of
(Iloilo Traders Finance, Inc., v. Heirs another (third person) as the new debtor
of Soriano, G.R. No. 149683, June 16, who will replace him in payment of the
2003) obligation;
2. The creditor accepts and the new debtor
The extinctive novation would thus have agrees to the proposal of the old debtor; and
the twin effects of first, extinguishing an 3. The old debtor is released from the
existing obligation and second, creating obligation with the consent of the creditor.
a new one in its stead.
Insolvency of the new debtor in delegacion
b. Partial or modificatory – Original
obligation is not extinguished but GR: Insolvency of the new debtor (delegado),
merely modified. who has been proposed by the original debtor
(delegante) and accepted by the creditor
5. As to their origin (delegatario), shall not revive the action of the
latter against the original obligor. (NCC, Art.
a. Legal novation – By operation of law. 1295)
(NCC, Art. 1300 & 1302)
XPNs: Original debtor shall be held liable; if:
b. Conventional novation – By agreement
of the parties. (NCC, Arts. 1300-1301) 1. Insolvency was already existing and of
public knowledge, or known to the debtor
6. As to presence of absence of condition (NCC, Art. 1295); or
2. Insolvency of the new debtor was already
a. Pure – New obligation is not subject to a existing and known to the original debtor at
condition. the time of the delegation of the debt to the
new debtor. (NCC, Art. 1295)
b. Conditional – When the creation of the
new obligation is subject to a condition. NOTE : In both cases, the creditor must NOT
know that the new debtor is insolvent ;
Rights of the new debtor otherwise, the creditor would be considered
estopped.
1. With the debtor’s consent – Right of
reimbursement and subrogation. In both cases, the insolvency must have existed
at the time the old debtor delegated his debt.
2. Without the consent of the old debtor or (Sta. Maria, 2017)
against his will – Right to beneficial
reimbursement. Requisites of expromission
Novation by substitution of debtor 1. Substitution is upon the initiative or

proposal of a third person who will step into
The consent of the creditor is mandatory both in the shoes of the debtor;
delegacion and expromission. (NCC, Art. 1293) It 2. Creditor must give his consent to the
may be expressed or implied from his acts but proposal of the third person; and
not from his mere acceptance of payment by a 3. Old debtor must be released from the
third party, for there is no true transfer of debt. obligation with the consent of the creditor.
NOTE: Creditor’s consent or acceptance of the Insolvency of the new debtor in expromission
substitution of the old debtor by a new one may
be given at any time and in any form while the If substitution is without the knowledge or
agreement of the debtor subsists. (Asia Banking against the will of the debtor, the new debtor’s
Corp. v. Elser, G.R. No. L-30266, March 25, 1929) insolvency or non-fulfillment of the obligation
shall not give rise to any liability on the part of
Requisites of delegacion the original debtor. (NCC, Art. 1294)
UNIVERSITY OF SANTO TOMAS 432

2021 GOLDEN NOTES
Civil Law
NOTE: If the old debtor gave his consent and the undertook to prepare and sign a share
new debtor could not fulfill the obligation, the purchase agreement covering 100% of
old debtor should be liable for the payment of Galleon's equity for P46,740,755.00. The
his original obligation. share purchase agreement also provided for
the release of Sta. Ines, Cuenca, Tinio and
Q: The Arco and Lim allegedly agreed that Construction Development Corporation of
Arco would either pay Lim the value of the the Philippines from the personal counter-
raw materials or deliver to him their finished guarantees they issued in DBP's favor under
products of equivalent value. Lim alleged the Deed of Undertaking. Sta. Ines, Cuenca,
that when he delivered the raw materials, Tinio, Cuenca Investment, and Universal
Arco issued a post-dated check as partial Holdings claimed that DBP can no longer go
payment. When he deposited the check, after them for any deficiency judgment since
however, it was dishonored for being drawn NDC had been subrogated in their place as
against a closed account. Thereafter, Arco borrowers, hence the Deed of Undertaking
and Sy executed a memorandum of between Sta. Ines, Cuenca Investment,
agreement where Arco bound themselves to Universal Holdings, Cuenca, and Tinio and
deliver their finished products to Megapack DBP had been extinguished and novated."
Container Corporation owned by Sy. Did the Memorandum of Agreement novated
According to the memorandum, the raw the Deed of Undertaking executed between
materials would be supplied by Lim. Was the DBP and Sta. Ines, Cuenca Investment,
obligation between Arco and Lim novated Universal Holdings, Cuenca, and Tinio?
because of the agreement entered into by
Arco and Sy? A: NO. It should be noted that in order to give
novation its legal effect, the law requires that the
A: NO. Novation must be stated in clear and creditor should consent to the substitution of a
unequivocal terms to extinguish an obligation. It new debtor. The general rule is that, “in the
cannot be presumed and may be implied only if absence of an authority from the board of
the old and new contracts are incompatible on directors, no person, not even the officers of the
every point. In this case, Lim was not privy to the corporation, can validly bind the corporation.”
memorandum of agreement, thus, his conformity Aside from Ongpin being the concurrent head of
to the contract need not be secured. If the DBP and NDC at the time the Memorandum of
memorandum of agreement was intended to Agreement was executed, there was no proof
novate the original agreement between the presented that Ongpin was duly authorized by
parties, Lim must have first agreed to the the DBP to give consent to the substitution by
substitution of Sy as his new debtor. The NDC as a co-guarantor of Galleon’s debts. Ongpin
memorandum of agreement must also state in is not DBP, therefore, it is wrong to assume that
clear and unequivocal terms that it has replaced DBP impliedly gave its consent to the
the original obligation of petitioner Arco to Lim. substitution simply by virtue of the personality
Neither of these circumstances is present in this of its Governor. Novation is never presumed.
case. Since there was no novation, petitioner The animus novandi, whether partial or total,
Arco’s obligation to respondent remains valid “must appear by express agreement of the
and existing. Petitioner Arco Pulp and Paper, parties, or by their acts which are too clear and
therefore, must still pay respondent the full unequivocal to be mistaken.” There was no
amount. (Arco Pulp and Paper Co., Inc. And such animus novandi in the case at bar between
Candida A. Santos v. Dan T. Lim, Doing Business DBP and respondents, thus, respondents have
Under The Name and Style Of Quality Papers & not been discharged as Galleon’s co-guarantors
Plastic Products Enterprises, G.R. NO. 206806, under the Deed of Undertaking and they remain
June 25, 2014 , as penned by J. Leonen) liable to DBP. (Development Bank of the
Philippines vs. Sta. Ines Melale Forest Products
Q: DBP guaranteed Galleon’s foreign loans. In Corp., G.R. No. 193068, February 1, 2017, as
return, Galleon undertook to secure a first penned by J. Leonen)
mortgage on its five new vessels and two
second-hand vessels. Pursuant to Letter of SUMMARY
Instructions No. 1155, Galleon's stockholders
and NDC entered into a Memorandum of EXPROMISSIO
Agreement, where NDC and Galleon DELEGACION
N
433
Obligations
Person who debtor was old debtor or
initiated the Old debtor Third person already against his will
substitution existing and – the new
It may be express or implied known to the debtor’s
Consent of from his acts but not from his original insolvency or
the creditor mere acceptance of payment by debtor at the non-
a third party. time of the fulfillment of
With or delegation of the obligation
With the the debt to the shall not give
without the
consent of the new debtor. rise to any
Consent of knowledge of
old debtor liability on the
the old the debtor or
(since he
debtor against the part of the
initiated the original
will of the old
substitution). debtor.
debtor.
Consent is
needed but it Q: Metro Corporation obtained a loan from
Consent of need not be Consent is Allied Bank covered by promissory notes,
third person given needed. letters of credit, and trust receipts. By way of
simultaneousl security, Metro’s officers individually
y. executed a continuing guaranty in favor of
Intention of Released from the obligation Allied Bank. Metro’s officers failed to settle
substitution with the consent of the creditor. their obligations prompting Allied Bank to
demand for payment to no avail. In order to
With the settle their debts, they offered the sale of
debtor’s Metro’s remaining assets (machines and
consent – right equipment) to the Bank which the latter
of refused. Meanwhile, Starpeak Corporation,
With the acting through Allied Bank’s counsel, entered
reimbursemen
debtor’s into an agreement with Metro to buy the
t and
consent – right machines that were reduced to mere scraps
Rights of the subrogation.
of of metals. Starpeak, unfortunately, reneged
new debtor Without the
reimburseme on its obligation to Metro. In this regard,
consent of the
nt and Metro asseverates that their failure to pay
old debtor or
subrogation. their outstanding loan obligations to Allied
against his will
– right to Bank must be considered as force majeure,
beneficial and since Allied Bank was the party, through
reimbursemen their counsel, that accepted the terms and
t. conditions of payment proposed by Starpeak,
Shall not With the petitioners must therefore be deemed to
revive the debtor’s have settled their obligations to Allied Bank.
action of the consent - If the Were the loan obligations under the
latter against old debtor promissory notes, letters of credit, and trust
the original gave his receipts have already been extinguished?
obligor. consent and
Insolvency or Original the new A: NO. Article 1231 of the New Civil Code states
nonfulfillme debtor shall debtor could that obligations are extinguished either by
nt of the be held liable: not fulfill the payment or performance, the loss of the thing
obligation of Insolvency obligation, the due, the condonation or remission of the debt,
the new was already old debtor the confusion or merger of the rights of creditor
debtor existing and of should be and debtor, compensation or novation. Starpeak
public liable for the and Metro’s agreement is a sale of assets
knowledge, or payment of his contract, while Metro’s obligations to Allied
known to the original Bank arose from various loan transactions.
debtor. obligation. Absent any showing that the terms and
Insolvency of Without the conditions of the latter transactions have been,
the new consent of the in any way, modified or novated by the terms

2021 GOLDEN NOTES
Civil Law
and conditions in the Starpeak-Metro Q: J.C. Construction bought steel bars from
agreement, said contracts should be treated Matibay Steel Industries (MSI) which is
separately and distinctly from each other, such owned by Buddy Batungbacal. J.C. failed to
that the existence, performance or breach of one pay the purchased materials worth P500,000
would not depend on the existence, performance on due date. J.C. persuaded its client
or breach of the other. The performance or Amoroso with whom it had receivables to
breach of the agreement bears no relation to the pay its obligation to MSI. Amoroso agreed
performance or breach of the subject loan and paid MSI the amount of P50,000. After 2
transactions, they being separate and distinct other payments, Amoroso stopped making
sources of obligations. Metro’s loan obligations further payments.
to Allied Bank remain subsisting for the basic
reason that the former has not been able to Buddy filed a complaint for collection of the
prove that the same had already been paid or, in balance of the obligation and damages
any way, extinguished. (Metro Concast Steel against J.C. J.C. denied any liability claiming
Corporation, Spouses Jose S. Dychiao And Tiuoh that its obligation was extinguished by
Yan, Spouses Guillermo And Mercedes Dychiao, reason of novation which took place when
And Spouses Vicente And Filomena Dychiao vs. MSI accepted partial payments from
Allied Bank Corporation, G.R. No. 177921, Amoroso on its behalf. Was the obligation of
December 4, 2013) JC to MSI extinguished by novation? Why?
(2014 Bar)
Q: SDIC issued to Danilo a Diners Card (credit
card) with Jeannete as his surety. Danilo A: NO. Under Art. 1292 of the NCC, in order that
used this card and initially paid his an obligation may be extinguished by another
obligations to SDIC. Thereafter, Danilo wrote which substitute the same, it is imperative that it
SDIC a letter requesting it to upgrade his be so declared in unequivocal terms, or that the
Regular Diners Club Card to a Diamond old and the new obligations be on every point be
(Edition) one. As a requirement of SDIC, incompatible with each other. Novation by
Danilo secured from Jeanette her approval substitution of the debtor requires the consent
and the latter obliged. Danilo's request was of the creditor as provided in Art. 1293. This
granted and he was issued a Diamond requirement is not present in this case.
(Edition) Diners Club Card. Danilo had
incurred credit charged plus appropriate It was ruled that the mere fact that the creditor
interest and service charge. However, he received payment from a third person does not
defaulted in the payment of this obligation. constitute novation and does not extinguish the
Was the upgrading a novation of the original obligation of the original debtor. Thus, the
agreement governing the use of Danilo Alto's obligation of JC to MSI subsists. (Magdalena
first credit card, as to extinguish that Estates Inc., v. Rodriguez, G.R. No. L-18411,
obligation? December 17, 1966)
A: YES. Novation, as a mode of extinguishing Effects of novation

obligations, may be done in two ways: by explicit
declaration, or by material incompatibility. 1. Extinguishment of principal also
There is no doubt that the upgrading was a extinguishes the accessory, except:
novation of the original agreement covering the
first credit card issued to Danilo Alto, basically a. Mortgagor, pledgor, surety or guarantor
since it was committed with the intent of agrees to be bound by the new
cancelling and replacing the said card. However, obligation (Tolentino, 1999); or
the novation did not serve to release Jeanette
from her surety obligations because in the b. Stipulation made in favor of a third
surety undertaking she expressly waived person such as stipulation pour atrui
discharge in case of change or novation in the (NCC, Art. 1311) unless beneficiary
agreement governing the use of the first credit consents to the novation. (NCC, Art.
card. (Molino v. Security Diners International 1296)
Corp., G.R. No. 136780, August 16, 2001)
2. If old obligation is:
435
Obligations
a. Void – Novation is void. (NCC, Art. 1298) Q: Will a contract of suretyship, which is
secondary to a principal obligation, be
b. Voidable – Novation is valid provided extinguished when novation occurs?
that the annulment may be claimed only
by the debtor or when ratification A: IT DEPENDS. A surety is released from its
validates acts. (NCC, Art. 1298) obligation when there is a material alteration of
the principal contract in connection with which
c. If the old obligation was subject to a the bond is given, such as a change which
suspensive or resolutory condition, the imposes a new obligation on the promising
new obligation shall be under the same party, or which takes away some obligation
condition, unless it is otherwise already imposed, or one which changes the legal
stipulated. (NCC, Art. 1299) effect of the original contract and not merely its
form. (Philippine Charter Insurance Corporation
3. If old obligation is conditional and the new v. Petroleum Distributors & Service Corporation,
obligation is pure: G.R. No. 180898, April 18, 2012)
a. If resolutory and it occurred – Old Furthermore, a surety is not released by a

obligation already extinguished; no new change in the contract, which does not have the
obligation since nothing to novate. effect of making its obligation more onerous.
(Stronghold Insurance Company, Inc. v. Tokyu
b. If suspensive and it did not occur – It is as Construction Company, G.R. Nos. 158820-21, June
if there is no obligation; thus, there is 5, 2009) As such, a contract is only extinguished
nothing to novate. by novation when there is a material alteration
in the principal contract or if it has the effect of
4. If the new obligation is: making the obligation more onerous.
a. Void – Original one shall subsist, unless Subrogation

the parties intended that the former
relation should be extinguished in any It is the active subjective novation characterized
event. (NCC, Art. 1297) by the transfer to a third person of all rights
appertaining to the creditor in the transaction
b. Voidable – Novation can take place, concerned including the right to proceed against
except when such new obligation is the guarantors or possessors of mortgages and
annulled. In such case, old obligation similar others subject to any applicable legal
shall subsist. provision or any stipulation agreed upon by the
parties in conventional subrogation.
c. Pure obligation – Conditions of old
obligation deemed attached to the new, NOTE: Whoever pays on behalf of the debtor
unless otherwise stipulated. (Tolentino, without the knowledge or against the will of the
1999) latter cannot compel the creditor to subrogate
him in his rights, such as those arising from a
d. Conditional Obligation: mortgage, guaranty, or penalty. (NCC, Art. 1237)
i. If resolutory – Valid until the Kinds of subrogation

happening of the condition. (NCC,
Art. 1181) 1. As to their creation
ii. If suspensive and did not materialize a. Legal subrogation – Constituted by

– No novation, old obligation is virtue of a law and does not proceed
enforced. (NCC, Art. 1181) from an agreement of the parties (NCC,
Articles 1300 and 1302);
NOTE: Novation does not extinguish criminal
liability. (PNB v. Soriano, G.R. No. 164051, b. Voluntary or conventional subrogation –
October 3, 2012) Created by the parties by their
voluntary agreement (NCC, Art. 1300);

2021 GOLDEN NOTES
Civil Law
NOTE: In legal subrogation, the law g law 1304 1627
which forms the basis of the The transfer of
subrogation must be clearly identified the credit or
and invoked to enforce the rights right does not
pertinent thereto. (Sta. Maria, 2017) It extinguishes extinguish or
the original modify the
c. Conventional subrogation of a third Effect obligation and obligation. The
person requires the consent of the creates a new transferee
original parties and of the third person. one. becomes the
(NCC, Art. 1301) new creditor
for the same
2. As to their extent obligation.
The consent of
a. Total subrogation – Credits or rights of the debtor is
the creditor in the transaction are The consent of not necessary.
totally transferred to the third person. Need for the debtor is Notification is
consent necessary. enough for the
b. Partial subrogation – Only part of the of debtor (NCC, Art. validity of the
credit or rights of the creditor in the 1301) assignment.
transaction are transferred to the third (NCC, Art.
person. 1626)
Begins from Begins from
NOTE: A creditor, to whom partial payment Effectivity the moment of notification of
has been made, may exercise his right for subrogation. the debtor.
the remainder and he shall be preferred to The defect in The defect in
the person who has been subrogated in his the old the credit or
place in virtue of the partial payment of the Curability obligation may rights is not
same credit. (NCC, Art. 1304) of defect be cured such cured by its
or vice that the new mere
Presumption of legal subrogation obligation assignment to
becomes valid. a third person.
GR: Legal subrogation is not presumed. (NCC, Debtor cannot
Art. 1300) set up a
The debtor can
defense
still set up the
XPN: In cases expressly mentioned in the law: against the
defense
new creditor
(available
1. When a creditor pays another creditor who Defense which he
against the old
is preferred, even without the debtor’s could have
creditor)
knowledge; availed
against the
2. When a third person, not interested in the himself of
new creditor.
obligation, pays with the express or tacit against the old
approval of the debtor; creditor.
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment NOTE: In the law of subrogation, active
of the obligation pays, without prejudice to subjective novation is stricter than passive
the effects of confusion as to the latter’s subjective novation. In the latter, the consent of
share. (NCC, Art. 1302) the old debtor is not even required in
expromission.
Conventional Subrogation vs. Assignment of
Credits Presumption of legal subrogation
CONVENTION GR: Legal subrogation is not presumed. (NCC,

ASSIGNMENT
AL Art. 1300)
BASIS OF CREDITS
SUBROGATIO
OR RIGHTS
N XPN: In cases expressly mentioned in the law:
Governin Article 1300- Article 1624-
437
Obligations
1. When a creditor pays another creditor who
is preferred, even without the debtor’s
knowledge;
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
3. When, even without the 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. (NCC, Art. 1302)

2021 GOLDEN NOTES
Civil Law
Three stages in the making of a contract (CPC) :
CONTRACTS
1. Conception or Generation – the first stage
GENERAL PPROVISIONS where the parties begin their initial negotiation
and bargaining for the formation of the contract
ending at the moment of agreement of the
A contract is a meeting of minds between two parties.
persons whereby one binds himself, with
respect to the other, to give something or to
2. Perfection or Birth – Here, the parties had
render some service. (NCC, Art. 1305)
a meeting of minds as to the object, cause or
consideration and other terms and conditions of
A contract is a meeting of the minds between
the contract.
two or more parties, whereby one party binds
himself with respect to the other, or where both
3. Consumation or fulfillment – This the last
parties bind themselves reciprocally, in favor of
stage which consists in their performance or
one another, to fulfill a prestation to give, to do
fulfillment by the parties of their obligations
or not to do. (Pineda, 2009)
under the term of the perfected contract.
Meeting of the minds
CHARACTERISTICS OF A CONTRACT
Speaks of the intention of the parties in entering
into the contract respecting the subject matter The following are the characteristics of a
and the consideration thereof. As a rule contract (AMOR):
therefore, a contract is perfected by mere
consent. It does not require any special form, as 1. Autonomy (NCC, Art. 1306);
a rule, and is binding from the moment that the 2. Mutuality (NCC, Art. 1308);
essential requisites are present. Thus, the 3. Obligatoriness and consensuality (NCC, Art.
meeting of the minds between the parties rise to 1315);
the binding contract althought they have not 4. Relativity (NCC, Art. 1311) ;
affixed their signature to its written form. 5. Consensuality (NCC, Art. 1315).
(Rabuya, 2017)
RELATIVITY OF CONTRACTS
Obligation v. Contract (1991, 1996, 2002 BAR)
While a contract is one of the sources of Principle of relativity or Principle of limited

obligations, an obligation is the legal tie or effectivity of contracts (2011 BAR)
relations itself that exists after a contract has
been entered into. GR: Contracts take effect only between the
parties or their assigns and heirs.
Hence, there can be no contract if there is no
obligation. But an obligation may exist without a Res inter alios acta aliis neque nocit prodest (a
contract. (De Leon, 2010) thing done between others does not harm or
benefit others) – a contract can only obligate the
Duty of courts in interpreting contracts parties who entered into it, or their successors
who assumed their personalities, and that,
It is not the province of the court to alter a concomitantly, a contract can neither favor nor
contract by construction or to make a new prejudice third persons. (Vitug, 2006)
contract for the parties. Its duty is confined to
the interpretation of the one which they have NOTE: With respect to the heir, he shall not be
made for themselves without regard to its liable beyond the value of the property he
wisdom or folly as the court cannot supply received from the decedent. (NCC, Art. 1311)
material stipulations or red into the contract
words which it does not contain. (Cuizon v. CA, XPNs:
G.R. No. 102096, August 22, 1996)
1. Rights and obligations that are not
STAGES IN THE MAKING OF A CONTRACT transmissible by their nature, or by the
439
Contracts
stipulation or by provisions of law (NCC, 4. Contracts entered into in fraud of creditors;
Art. 1311); (NCC, Art. 1313);
NOTE : Determine whether a contract 5. When a third person induces a party to

terminates upon the death of one of the violate the contract. (NCC, Art. 1314) (1991,
parties 1998 BAR)
2. Stipulation pour autrui (stipulation in NOTE: This tort or wrongful conduct is

favor of a third person) – benefits known as “interference with contractual
clearly and deliberately conferred by relations.”
parties to a contract upon third persons
(NCC, Art. 1311) and which stipulation is Requisites:
merely part of a contract entered into
by the parties, neither of whom acted as a. Existence of a valid contract;
agents of the third person and which b. Third person has knowledge of such
favor can be demanded by the third contract;
person if duly accepted by him before it c. Third person interferes without legal
could be revoked; justification or excuse. (De Leon, 2010)
Requisites of stipulation pour atrui: It is based on quasi-delict and their liability is

solidary.
a. Stipulation in favor of a third
person; Thus, the unwarranted interference by a
b. Stipulation is just part and not the stranger in the contractual relations of a
whole obligations of the contract; contracting party justifies a claim for damages
c. Contracting parties must have against the former. It is based on tort or quasi-
clearly and deliberately conferred a delict and their liability is solidary. (NCC, Art.
favor upon a third person; 2194)
d. Favor or benefit conferred is not
just an incidental benefit or NOTE: A third person can be held liable for tort
interest; interference even if he does not know the
e. Third person must have identity of one of the contracting parties. The
communicated his acceptance; and interference with lawful contracts by strangers
f. Neither of the contracting parties thereto gives rise to an action for damage in
bears the legal representation or favor of the injured person. The law does not
authorization of the third person. require that the responsible person shall have
(Young v. Court of Appeals, G.R. No. known the identity of the injured person.
79518, January 13, 1989) (Rabuya, 2017)
NOTE: The fairest test to determine Q: PCGG filed a complaint for reconveyance,
whether the interest of third person in a reversion, accounting, restitution, and
contract is a stipulation pour autrui or damages before the Sandigan Bayan against
merely an incidental interest, is to rely Ferdinand and Imelda Marcos, and several of
upon the intention of the parties as their cronies including Benedicto and Africa.
disclosed by their contract. In applying PCGG, through its Chairman, David M. Castro,
this test, it matters not whether the entered into a Compromise Agreement with
stipulation is in the nature of a gift or Benedicto where the latter undertook to cede
whether there is an obligation owing to the government properties listed in the
from the promise to the third person. agreement and transfer to the government
(Rabuya, 2017) whatever rights he may have in the assets of
the corporations listed in the same
3. Third persons coming into possession of the agreement. The SB dismissed the case
object of the contract creating real rights against Africa and ruled that since that act
subject to the provisions of Mortgage Law being complained of constituted a quasi-
and the Land Registration Law (NCC, Art. delict or tort and the obligation of the
1312); defendants were solidary therefore the

2021 GOLDEN NOTES
Civil Law
obligation of Africa has been extinguished by pursuant to the stipulations, the Company will
the Compromise Agreement. Did the also indemnify third parties. The policy under
Compromise Agreement between PCGG and consideration is typical of contracts pour autrui,
Benedicto extinguish the liability of Africa? this character being made more manifest by the
fact that the deceased driver paid 50% of the
A: NO. A stipulation pour autrui to be premiums. (Coquia v. Fieldmen’s Insurance Co.,
appreciated, it is indispensable that there be a Inc., G.R. No. L-23276, November 29, 1968)
stipulation deliberately conferring a benefit or
favor to a third person. The requisites of a OBLIGATORY FORCE OF CONTRACTS
stipulation pour autrui are the following:
Contracts shall be obligatory, in whatever form
1. There is a stipulation in favor of a third they may have been entered into, provided all
person; the essential requisites for validity are present.
2. The stipulation is a part, not the whole, of (NCC, Art. 1356)
the contract;
3. The contracting parties clearly and Obligations arising from contracts have the force
deliberately conferred a favor to the third of law between the contracting parties and
person — the favor is not an incidental should be complied with in good faith. (NCC, Art.
benefit; 1159)
4. The favor is unconditional and
uncompensated; This provision must fall within the other
5. The third person communicated his or her characteristic of a contract.
acceptance of the favor before its
revocation; and Requisites for the application of the principle
6. The contracting parties do not represent, or
are not authorized by, the third party. Before a contract may be considered obligatory,
it is necessary that:
The Compromise Agreement executed between
Benedicto and PCGG does not contain any 1. It is perfected;
express stipulation that confers the benefit of 2. It is valid; and
absolute immunity to Africa. Absent any express 3. It is enforceable. (Rabuya, 2017)
stipulation in favor of a third person, the rule on
relativity of contract must be applied i.e., that Q: Villamor borrowed a large amount from
the contract only takes effect between the Borromeo, for which he mortgaged his
parties, their assigns or heirs. (Republic of the property but subsequently defaulted.
Philippines v. Legal Heirs of Jose L. Africa, G.R. No. Borromeo pressed him for settlement. The
205722, August 19, 2015) latter instead offered to execute a
promissory note containing a promise to pay
Q: Fieldmen's Insurance issued, in favor of his debt as soon as he is able, even after 10
MYT, a common carrier, accident insurance years and that he waives his right to
policy. 50% of the premium was paid by the prescription. What are the effects of the said
driver. The policy indicated that the stipulation to the action for collection filed
Company will indemnify the driver of the by Borromeo?
vehicle or his representatives upon his death.
While the policy was in force, the taxicab A: NONE. The rule is that a lawful promise made
driven by Carlito, met with an accident. for a lawful consideration is not invalid merely
Carlito died. MYT and Carlito's parents filed a because an unlawful promise was made at the
complaint against the company to collect the same time and for the same consideration. This
proceeds of the policy. Fieldmen’s admitted rule applies although the invalidity is due to
the existence thereof, but pleaded lack of violation of a statutory provision, unless the
cause of action on the part of the parents. statute expressly or by necessary implication
Decide. declares the entire contract void. Thus, even
with such waiver of prescription, considering
A: Carlito’s parents who, admittedly, are his that it was the intention of the parties to
sole heirs have a direct cause of action effectuate the terms of the promissory note,
against the Company. This is so because there is no legal obstacle to the action for
441
Contracts
collection filed by Borromeo. (Borromeo v. CA, Conversion Agreement with NAPOCOR for a
G.R. No. L-22962, September 28, 1972) 50-megawatt bunker- C fired diesel-
generating power project in General Santos
NOTE: Where an agreement founded on a legal City. Southern Philippines Power
consideration contains several promises, or a Corporation assumed the obligations of the
promise to do several things, and a part only of consortium to the Energy Conversion
the things to be done are illegal, the promises Agreement through the Accession
which can be separated, or the promise, so far as Undertaking. The cooperation period
it can be separated, from the illegality, may be between Southern Philippines Power
valid. (Borromeo v. CA, G.R. No. L-22962, Corporation and the National Power
September 28, 1972) Corporation started when the Power Station
was declared completed.
MUTUALITY OF CONTRACTS
Southern Philippines Power Corporation
The contract must bind both contracting parties requested payment in the amount of
and its validity or compliance cannot be left to P45,840,673.22, attributable to the
the will of one of them. (NCC, Art. 1308) (2001, additional 10% capacity made available to
2004, 2008 BAR) the National Power Corporation since 2005.
NAPOCOR refused to pay. Does the Petitioner
If a party alleges defects in the contract so that it have the right to collect payment from the
could be set aside, he must prove conclusively project?
the existence of the defects because the validity
and fulfillment of the contract cannot be left to A: NO. Section 3.1 of the Agreement's First
the will of one of the contracting parties. (Pineda, Schedule, which provides for the construction of
2009) a five (5)-engine Power Station, cannot be
construed alone. Various stipulations of a
The binding effect of any agreement between contract must be interpreted or read together to
parties to a contract is premised on two settled arrive at its true meaning. The legal effect of a
principles: (1) that any obligation arising from contract is not determined by any particular
contract has the force of law between the provision alone, disconnected from all others,
parties; and (2) that there must be mutuality but from the language used and gathered from
between the parties based on their essential the whole instrument.
equality. Any contract which appears to be
heavily weighed in favor of one of the parties so Specifically, respondent is given the right to "do
as to lead to an unconscionable result is void. all other things necessary or desirable for the
Any stipulation regarding the validity or completion of the Power Station" under the
compliance of the contract which is left solely to specifications set forth in the First Schedule, as
the will of one of the parties, is likewise, invalid. well as to "do all other things necessary or
(Sps. Juico vs. China Banking Corp., G.R. 187678, desirable for the running of the Power Station
April 10, 2013) within the Operating Parameters."
NOTE: A contract containing a condition whose Although it is clear that respondent is given an
efficacy or fulfillment is dependent solely on the allowance of five (5)- megawatt contracted
uncontrolled will of one of the parties is void. capacity or up to a maximum of 55 megawatts, it
(Garcia v. Rita, G.R. No. L-20175, October 30, is not specified in the Agreement that the
1967; PNB v. CA, G.R. No. 88880, April 30, 1991) additional five (5)-megawatt contracted capacity
must be produced only from the original five (5)
However, the termination of the contract does generating units. This omission in the
not necessarily require mutuality, and it can Agreement binds petitioner. (National Power
even be validly left to one party by agreement or Corporation, v. Southern Philippines Power
under a resolutory facultative condition. (Vitug, Corporation, G.R. No. 219627, July 4,2016, as
2006; see also PNB v. CA, 1994) penned by J. Leonen)
Q: The consortium of ALSONS Power Q: DPWH and a Joint Venture entered into a
Holdings Corporation and TOMEN construction contract. However, during the
Corporation entered into an Energy construction, the joint venture’s equipment

2021 GOLDEN NOTES
Civil Law
were set on fire. Joint venture made a execution of the judgment on compromise.
demand for payment from DPWH but DPWH
could not pay them all. Hence, they decided Petitioners opposed the execution on the
to mutually terminate the contract. Is the ground of mootness. They argued that they
court intervention then rendered moot and had already complied with their obligation
academic? under the Compromise Agreement by
depositing the settlement amounts into an
A: NO. There is a practical use or value to decide escrow account, which was administered by
on the issues raised by the parties despite the the designated mediator. Hence, there was
mutual termination of the Contract between nothing left for the court to execute.
them. These issues include the determination of
amounts payable to respondent by virtue of the The Regional Trial Court eventually granted
time extensions, respondent's entitlement to the Motion for Execution because there was
price adjustments due to the delay of the no proof that the settlement amounts had
issuance of the Notice to Proceed, additional been withdrawn and delivered to each
costs, actual damages, and interest on its claims. individual claimant. Accordingly, a Writ of
(Department Of Public Works And Highways v. Execution was issued. Is the Writ of
Cmc/Monark/Pacific/Hi-Tri Joint Venture, G.R. Execution ordering the collection of the
No. 179732, September 13, 2017, as penned by J. settlement amount directly for petitioner
Leonen) valid?
Q: In view of a complaint for damages filed A: NO. A judgment on compromise may be

by 1,843 Filipino claimants against the executed just like any other final judgment in the
foreign corporations—Chiquita Brands, Inc., manner provided in the Rules of Court. The writ
Chiquita Brands International, Inc. of execution derives its validity from the
(collectively, Chiquita), Dow Chemical judgment it seeks to enforce and must
Company, Occidental Chemical Corporation, essentially conform to the judgment's terms. It
Shell Oil Company, Del Monte Fresh Produce, can neither be wider in scope nor exceed the
N.A., and Del Monte Tropical Fruit Co. judgment that gives it life. Otherwise, it has no
(collectively, Del Monte)—the parties validity. Thus, in issuing writs of execution,
entered into a worldwide settlement in the courts must look at the terms of the judgment
United States with all the banana plantation sought to be enforced.
workers. The parties executed a document
denominated as the "Compromise Under the judicially approved Compromise
Settlement, Indemnity, and Hold Harmless Agreement, petitioners are obliged to deposit
Agreement". the settlement amount in escrow within 10
business days after they receive a signed
The Compromise Agreement provided, Compromise Agreement from the counsel of the
among others, that the settlement amount claimants. There was nothing in the
should be deposited in an escrow account, Compromise Agreement that required
which should be administered by a mediator. petitioners to ensure the distribution of the
After the claimants execute individual settlement amount to each claimant. Petitioners'
releases, the mediator shall give the checks obligation under the Compromise Agreement
representing the settlement amounts to the was limited to depositing the settlement amount
claimants' counsel, who shall then distribute in escrow. On the other hand, the actual
the checks to each claimant. The Compromise distribution of the settlement amounts was
Agreement also provided that the laws of delegated to the chosen mediator, Mr. Mills. To
Texas, United States should govern its require proof that the settlement amounts have
interpretation. been withdrawn and delivered to each claimant
would enlarge the obligation of petitioners
The Regional Trial Court approved the under the Compromise Agreement. (Chiquita
Compromise Agreement by way of judgment Brands, Inc. and Chiquita Brands International,
on compromise. Accordingly, it dismissed Inc., vs. Hon. George E. Omelio, et.al., G.R. No.
Civil Case No. 95-45 in the Omnibus Order. 189102, June 7, 2017, as penned by J. Leonen)
Shortly after the dismissal of Civil Case No.
95-45, several claimants moved for the Contract of Adhesion (2018 BAR)
443
Contracts
It is a contract in which one of the parties Third person may determine the
prepares the stipulations in the form of a ready- performance of a contract
made contract, which the other party must
accept or reject, but not modify, by affixing his The determination of the performance may be
signature or his “adhesion” thereto; leaving no left to a third person. However, his decision shall
room for negotiation and depriving the latter of not be binding until it has been known to both
the opportunity to bargain on equal footing. the contracting parties. (NCC, Art. 1309)
(Norton Resources and Development Corporation Moreover, the determination made shall not be
v. All Asia Bank Corporation, G.R. No. 162523, obligatory if it is evidently inequitable. In such
November 25, 2009) case, the courts shall decide what is equitable
under the circumstances. (NCC, Art. 1310)
NOTE: Generally, contracts of adhesion are valid,
except when they are highly inequitable. The Unilateral increase of interest rate
courts will not hesitate to rule out blind
adherence to terms where facts and Even assuming that the loan agreement between
circumstances will show that it is one-sided. the creditor and the debtor gave the former a
(Sta. Maria, 2017) license to increase the interest rate at will during
the term of the loan, that license would have
Validity of contract of adhesion been null and void for being violative of the
principle of mutuality essential in contracts.
It is not entirely prohibited since the one who (Rabuya, 2017)
adheres to the contract is, in reality, free to
reject it entirely, and if he adheres, he gives his AUTONOMY OF CONTRACTS / LIBERTY OF
consent. (Premiere Development Bank v. Central CONTRACTS (1996, 2004 BAR)
Surety & Insurance Company, Inc., G.R. No.
176246, February 13, 2009) However, it is void It is the freedom of the parties to contract and to
when the weaker party is imposed upon in stipulate provided the stipulations are not
dealing with the dominant bargaining party, and contrary to law, morals, good customs, public
its option is reduced to the alternative of “taking order or public policy. (NCC, Art. 1306)
or leaving it,” completely depriving such party of
the opportunity to bargain on equal footing. It is the freedom of the parties to create or
(Keppel Cebu Shipyard, Inc. v. Pioneer Insurance establish stipulations, clauses, terms, and
and Surety Corporation, G.R. Nos. 180880-81, conditions as they may deem convenient,
September 25, 2009) provided the stipulations are not contrary to
law, morals, good customs, public order or
Note: Such contracts are not void in themselves. public policy. (NCC, Art. 1306)
They are as binding as ordinary
contracts. Parties who enter into such contracts NOTE: Courts cannot make for the parties better
are free to reject the stipulations entirely. or more equitable agreements than they
(Ermitao vs. CA, G.R. No. 127246, April 21, 1999) themselves have been satisfied to make, or
rewrite contracts because they operate harshly
Interpretation of contract of adhesion or inequitably as to one of the parties, or alter
them for the benefit of one party and to the
In interpreting such contracts, however, courts detriment of the other, or by construction,
are expected to observe greater vigilance in relieve one of the parties from terms which he
order to shield the unwary or weaker party from voluntarily consented to, or impose on him those
deceptive schemes contained in ready-made which he did not. (Angel Bautista v. Court of
covenants. (Premiere Development Bank v. Appeals, G.R. No. 123655, January 19, 2000)
Central Surety Insurance Company, Inc., G.R. No.
176246, February 13, 2009) In case of doubt, Courts are not authorized to extricate parties to
which will cause a great imbalance of rights the consequences of their acts, and the fact that
against one of the parties, the contract shall be the contractual obligations may turn out to be
construed against the party who drafted the financially disadvantageous will not relieve the
same. (Magis Young Achiever’s Learning Center v. latter of their obligations.
Manalo, G.R. No. 178835, February 13, 2009)

2021 GOLDEN NOTES
Civil Law
An agreement to pay unconscionable interests 2. By stipulation; or
on a loan is against morals. (Medel, et al. vs. Ca, 3. By provision of law. (NCC, Art. 1311)
299 SCRA 481)
Requisites in order that a third person may
PERFECTION BY MERE CONSENT demand the fulfillment of the contract
Contracts are perfected by mere consent, and 1. The contracting parties must have clearly
from that moment the parties are bound not and deliberately conferred a favor upon the
only to the fulfillment of what has been third person;
expressly stipulated but also to all the 2. The third person’s interest or benefit in such
consequences which, according to their nature, fulfillment must not be merely incidental;
may be in keeping with good faith, usage and and
law. (NCC, Art. 1315) 3. Such third person communicated his
acceptance to the obligor before the
Note: This refers to consensual contracts. stipulations in his favor are revoked.
However, real contracts are perfected by
delivery and formal contracts are perfected ESSENTIAL REQUISITES OF A CONTRACT
upon compliance.
ELEMENTS OF A CONTRACT
EFFECT OF CONTRACTS
1. Natural Elements – Those which are derived
Contracts take effect only between the parties, from the very nature of the contract, and as
and their assigns and heirs, the latter being a consequence, ordinarily accompany the
liable only to the extent of the property received same.
from the decedent. (NCC, Art. 1311) 2. Essential Elements – Those without which
there can be no contract.
Persons affected by a contract 3. Accidental Elements – those which exist only
when the contracting parties expressly
GR: provide for them. (De Leon, 2010)
1. Parties to the contract; and ESSENTIAL REQUISITES OF A CONTRACT

2. Their corresponding successors. (2005 BAR)
XPNs: The following are the essential requisites of

contracts (COC):
1. Contracts containing a stipulation in favor
of a third person (pour autrui) [NCC, Art. 1. Consent;
1311 (2)]; 2. Object certain or subject matter; and
2. Contracts containing real rights (NCC, Art. 3. Cause or consideration. (NCC, Art 1318) (See
1312); Cathay Pacific v. Vasquez, 2003)
3. Contracts entered into to defraud
creditors (NCC, Art. 1313); NOTE: These three requisites are, therefore, the
4. Contracts which have been violated at the essential elements of a consensual contract. In
inducement of 3rd persons (NCC, Art. real contracts, however, in addition to the above,
1314); the delivery of the object of the contract is
5. Quasi-contract of negotiorum gestio. (NCC, required as a further requisite. Solemn or formal
Art. 2150) contracts require compliance with the
formalities provided by law.
Liability of heirs for the obligation
contracted by the decedent Q: MRT thru Parsons Inc., had invited
Gammon Philippines to bid on the
The heirs are liable for the obligation contracted construction of the Podium structure of the
by the decedent when the rights and obligations MRT 3 and it later won the bidding. Then the
arising from the contract are transmissible: 2 parties signed the contract where it stated
that there would be three notices that would
1. By their nature;
445
Contracts
be sent to Gammon for the project to CONSENT (2005 BAR)
proceed. But later on Parsons informed
Gammon that MRT was temporarily Consent is manifested by the meeting of the offer
rescinding the Third Notice to Proceed, and the acceptance upon the thing and the cause
noting that it remained unaccepted by which are to constitute the contract. The offer
Gammon. On June 19, 1998, Gammon must be certain and the acceptance absolute. A
qualifiedly accepted the Fourth Notice to qualified acceptance constitutes a counter-offer.
Proceed. MRT treated Gammon's qualified (NCC, Art. 1319)
acceptance as a new offer. In a Letter dated
June 22, 1998, MRT rejected Gammon's It is the concurrence of the wills of the
qualified acceptance and informed Gammon contracting parties with respect to the object
that the contract would be awarded instead and cause, which shall constitute the contract.
to Filsystems if Gammon would not accept (De Leon, 2010)
the Fourth Notice to Proceed within five (5)
days. In a Letter dated July 8, 1998, Gammon NOTE: Consent is essential to the existence of a
wrote MRT, acknowledging the latter's intent contract; and where it is wanting, the contract is
to grant the Fourth Notice to Proceed to non-existent.
another party despite having granted the
First Notice to Proceed to Gammon. Thus, it Requisites of consent (LM-CR)
notified MRT of its claims for reimbursement
for costs, losses, charges, damages, and 1. Legal capacity of the contracting parties;
expenses it had incurred due to the rapid
mobilization program in response to MRT's NOTE: The parties must have full civil
additional work instructions, suspension capacity. Hence, if any one party to a
order, ongoing discussions, and the supposed contract was already dead at the
consequences of its award to another party. time of its execution, such contract is
In a letter dated July 15, 1998, MRT undoubtedly simulated and false and,
expressed its disagreement with Gammon therefore, null and void by reason of its
and its amenability to discussing claims for having been made after the death of the
reimbursement. Whether or not there is a party who appears as one of the contracting
perfected contract between MRT and parties therein. The death of a person
Gammon Philippines? terminates contractual capacity. (Milagros
De Belen Vda. De Cabalu, et. al. v. Sps. Renato
A: YES, there is a perfected contract between Dolores Tabu and Laxamana, G.R. No.
MRT and Gammon. MRT has already awarded 188417, September 24, 2012)
the contract to Gammon, and Gammon's
acceptance of the award was communicated to 2. Manifestation of the conformity of the
MRT before MRT rescinded the contract. The contracting parties;
first Letter shows that Gammon fully consented
to the contents and accepted the prestations of Note: Manifestation may be in writing
the First Notice to Proceed. Gammon's
bearing the signature or marks of the
acceptance is also manifested in its undertakings parties, or it may be implied from the
to mobilize resources, to prepare the conduct of the parties like the acceptance of
Performance and Advance Payment Bonds, and payment.
to procure materials necessary for the Project.
All that remained was the formality of returning
3. Parties’ Conformity to the object, cause,
the contract documents and the Letter of
terms and condition of the contract must be
Comfort, which eventually was complied with by
intelligent, spontaneous and free from all
Gammon. Thus, there is already mutual consent
vices of consent; and
on the object of the contract and its
consideration, and an absolute acceptance of the
NOTE: Intelligence in consent is vitiated by
offer. (Metro Rail Transit Development
error; freedom by violence, intimidation or
Corporation v. Gammon Philippines Inc., G.R. NO.
undue influence; and spontaneity by fraud.
200401, JANUARY 17, 2018, as penned by J.
Leonen)
4. The conformity must be Real.

2021 GOLDEN NOTES
Civil Law
The conformity must be Real and not harvest and sell the fruits and to apply the
simulated or fictitious. proceeds to the payment of a loan he got.
What is the standing of the contract? (2011
Offer BAR)
An offer is defined as an expression of A: It is considered a continuing offer by the

willingness to contract on certain terms, made parties; perfected only upon the wife’s
with the intention that it shall become binding as acceptance or the court’s authorization.
soon as it is accepted by the person to whom it is
addressed. (Rabuya, 2017 citing G. H. Treitel, The NOTE: The person making the offer may fix the
Law of Contract, 10th Ed., p.8) time, place and manner of acceptance, all of
which must be complied with. (NCC, Art. 1321)
NOTE: The offerer will not be bound by an
acceptance made by the acceptor in any other Rules on complex offer
manner than that specified by the offerer, unless
the offerer acquiesces in the change. (Sta. Maria, 1. Offers are interrelated – contract is
2017) perfected if all the offers are accepted
Elements of a valid offer and acceptance 2. Offers are not interrelated – single
acceptance of each offer results in a
1. Definite – unequivocal perfected contract unless the offeror has
2. Intentional made it clear that one is dependent upon
3. Complete – unconditional the other and acceptance of both is
necessary.
NOTE: It must be so complete that its absolute
acceptance will form an agreement containing Rules on advertisements as offers
all the terms necessary and intended by the
parties. (Sta. Maria, 2017) 1. Business advertisements – not a definite
offer, but mere invitation to make an offer,
We follow the cognitive theory and NOT the unless it appears otherwise. (NCC, Art. 1325)
mailbox theory. Under our Civil Law, the offer
and acceptance concur only when the NOTE: If the advertisement contains all the
acceptance has reached the knowledge of the necessary date need in a contract, its a
offeror (actual knowledge), and not at the time definite offer for the sale of the thing
of sending the acceptance. advertised. Otherwise, it is not a definite
offer, it is a mere invitation to make offer.
Requisites of an effective offer
2. Advertisement for bidders – simply invitation
1. The one offering must have a serious to make proposals and advertiser is not
intention to become bound by his offer; bound to accept the highest or lowest
2. The terms of the offer must be reasonably bidder, unless the contrary appears. (NCC,
certain, definite and complete, so that the Art. 1326)
parties and the court can ascertain the terms
of the offer; and Grounds that would render the offer
3. The offer must be communicated by the ineffective
offeror to the offeree, resulting in the
offeree’s knowledge of the offer. (Rabuya, 1. Death, civil interdiction, insanity or
2017) insolvency of either party before acceptance
is conveyed (NCC, Art. 1323);
Q: The husband assumed sole administration 2. Express or implied revocation of the offer by
of the family’s mango plantation since his the offeree;
wife worked abroad. Subsequently, without 3. Qualified or conditional acceptance of the
his wife’s knowledge, the husband entered offer, which becomes counter-offer;
into an antichretic transaction with a 4. Subject matter becomes illegal or impossible
company, giving it possession and before acceptance is communicated;
management of the plantation with power to
447
Contracts
5. Period given to the offeree to signify his the perfection of the contract). (NCC, Art
acceptance has already lapsed. 1324)
Requisites of a valid acceptance 2. No stated period
1. Must be absolute; a qualified acceptance a. Offer is made to a person present –

constitutes a counter-offer (NCC, Art. 1319); acceptance must be made immediately.
2. No specified form but when the offeror b. Offer is made to a person absent –
specifies a particular form, such must be acceptance may be made within such
complied with. time that, under normal circumstances,
an answer can be expected from him.
NOTE: Offer or acceptance, or both, expressed in
electronic form, is valid, unless otherwise agreed NOTE: If there was an acceptance already, the
by the parties (electronic contracts). offeror cannot just withdraw his offer
unilaterally. He will be liable for damages.
Acceptance not made in a manner as directed by (Pineda, 2009)
the offeror constitutes a counter-proposal which
extinguishes the offer and this may not be Option contract
accepted by the original offeror. (Pineda, 2009)
It is a contract between the offeror and the
A conditional acceptance is a counter-offer offeree whereby the former grants the latter, for
which extinguishes the offer. If not accepted by a valuable consideration, the privilege to buy or
the offeror, there is no contract. not to buy certain objects at anytime within a
specified period and for a fixed price.
An acceptance may be express or implied. (NCC,
Art. 1320) Note: The privilege granted to the offeree must
be supported by a consideration, the option is
Mirror Image Rule in law on contracts just considered an “offer to sell” to the offeree
which is not binding until accepted. (Pineda,2009
This is a common law concept which states that citing Sanchez vs. Rigos, 45 scra 368)
in order for there to be an acceptance, the
offeree must accept the terms as stated in the Earnest Money
offer. Our courts also adhere to the “mirror-
image rule.” Thus, it has been ruled that It is the payment made to a seller by the buyer to
acceptance must be identical in all respects with show his good faith. It will constitute as part of
that of the offer so as to produce consent of the purchase price, if the sale is finally
meeting of the minds. (Rabuya, 2017 citing ABS- consummated. If the sale is not concluded, the
CBN v. CA. 301 SCRA 592-593, 1999) earnest money shall be returned to the would-
be-buyer unless there is a contrary stipulation.
Period for acceptance
Persons incapacitated to give consent (DIM)
1. Stated fixed period in the offer
1. Deaf-mutes who do not know how to read
a. Must be made within the period given and write (illiterates);
by the offeror.
2. Insane or demented persons, unless the
b. As to withdrawal of the offer: contract was entered into during a lucid
interval;
GR: It can be made by communicating
such withdrawal at any time before the 3. Minors (NCC, Art. 1327) except:
acceptance is made
a. Contracts for necessaries (NCC, Art.
XPN: When the option is founded upon 1489);
a consideration (something paid or b. Contracts by guardians or legal
promised since partial payment of the representatives and the court having
purchase price is considered as proof of jurisdiction had approved the same;

2021 GOLDEN NOTES
Civil Law
c. When there is active misrepresentation 1. Mistake must be with respect to the legal
on the part of the minor (minor is effect of the agreement;
estopped); 2. It must be mutual; and
d. Contracts of deposit with the Postal 3. Real purpose of the parties must have been
Savings Bank provided that the minor frustrated.
is over 7 years of age;
e. Contract of an insurance for life, health Kinds of mistakes of fact which vitiate
and the accident on the minor’s life. consent
f. Upon reaching age of majority – they
ratify the same. 1. Mistake as to the nature of the contract ;
2. 2 Mistake as to object of the contract ;
NOTE: Because the law incapacitates them to 3. Mistake as to the quality or principal
give their consent to a contract, the only way by conditions of the thing ;
which any one of those enumerated above can 4. Mistake or error in quantity ;
enter into a contract is to act through a parent or 5. Mistake as to identy of the person ;
guardian. If this requirement is not complied 6. Mistake as to the identity or qualifications of
with, the result is a defective contract. If only one of the parties will vitiate consent only
one of the contracting parties is incapacitated to when such identity or qualifications have
give his consent, the contract is voidable. If both been the principal cause of the contract.
of them are incapacitated to give their consent,
the contract is unenforceable. [NCC, Art. 1390(1), For mistake (as to the qualification of one of the
NCC, Art. 1403(3)] parties) to vitiate consent, two requisites must
concur:
Vices of consent (MI-VUF)
a. The mistake must be either with regard to
1. Mistake the identity or with regard to the
2. Intimidation qualification of one of the contracting
3. Violence parties; and
4. Undue influence b. The identity or qualification must have
5. Fraud been the principal consideration for the
celebration of the contract. (The Roman
NOTE: A threat to enforce a just or legal claim Catholic Church v. Regino Pante, G.R. No.
through a competent authority does not amount 174118, April 11, 2012)
to intimidation nor vitiate consent. (NCC, Art.
1335) Q: Leonardo is the only legitimate child of the
late spouses Tomasina and Balbino. She only
Mistake finished Grade three and did not understand
English. The Sebastians, on the other hand,
GR: Mistake as a vice of consent refers to are illegitimate children. She filed an action
mistake of facts and not of law, thus rendering to declare the nullity of the extrajudicial
the contract voidable. (Jurado, 2010) settlement of the estate of her parents, which
she was made to sign without the contents
XPN: When mistake of law involves mutual error thereof, which were in English, explained to
as to the legal effect of an agreement when the her. She claims that her consent was vitiated
real purpose of the parties is frustrated. (NCC, because she was deceived into signing the
Art. 1334) extrajudicial settlement. Is the extra-judicial
settlement of estate of Tomasina valid?
Mistake Distinguished from Ignorance
A: NO. When one of the parties is unable to read,
Mistake is a false impression on something, or if the contract is in a language not understood
while Ignorance is absence of any notion or by him, and mistake or fraud is alleged, the
impression about a particular thing. person enforcing the contract must show that
the terms thereof have been fully explained to
Requisites: the former. (Art. 1332) Leonardo was not in a
position to give her free, voluntary and
spontaneous consent without having the
449
Contracts
document, which was in English, explained to A contract is valid even though one of the parties
her. Therefore, the consent of Leonardo was entered into it against his wishes and desires or
invalidated by a substantial mistake or error, even against his better judgment. Contracts are
rendering the agreement voidable. The also valid even though they are entered into by
extrajudicial partition between the Sebastians one of the parties without hope of advantage or
and Leonardo should be annulled and set aside profit. (Martinez v. Hongkong and Shanghai
on the ground of mistake. (Leonardo v. CA, G.R. Banking Corp., G.R. No. L-5496, February 19,
No. 125485, September 13, 2004) 1910)
NOTE : Burden rests upon the party who seeks Violence

to enforce the contract to show that the other
party fully understood the contents of the There is violence when in order to wrest
document. (Mayor vs. Belen, 430 SCRA 561) consent, serious or irresistible force is
employed. (Art. 1335)
Mutual Error
Requisites of violence
Mutual Error as to the legal effect of an
agreement when the real purpose of the parties 1. Physical force employed must be serious or
is frustrated, may vititate consent. (NCC, irresistible; and
Art. 1334) 2. The determining cause for the party upon
whom it is employed in entering into the
Legal effect refers to the rights of the parties as contract.
stated in legal provisions.
A threat to enforce one’s claim through
Intimidation competent authority, if the claim is just or legal,
does not vitiate consent. [NCC, Art. 1335(4)]
There is intimidation when one of the
contracting parties is compelled by a reasonable NOTE: Violence or intimidation shall annul the
and well-grounded fear of an imminent and obligation, although it may have been employed
grave evil upon his person or property, or upon by a third person who did not take part in the
the person or property of his spouse, contract. (NCC, Art. 1336)
descendants or ascendants, to give his consent.
[NCC, Art. 1335(2)] The contracting party who is not the subject of
the violence or the intimidation may not even
Requisites of intimidation (CICU) know that the other party has been coerced.
(Sta. Maria, 2017)
1. One of the parties is compelled to give his
Consent by a reasonable and well-grounded Undue influence
fear of an evil;
2. The evil must be Imminent and grave; There is undue influence when a person takes
3. It must be Unjust; and improper advantage of his power over the will of
4. The evil must be the determining Cause for another, depriving the latter of a reasonable
the party upon whom it is employed in freedom of choice. (NCC, Art. 1337)
entering into the contract. (NCC, Art. 1335)
It must in some measure destroy the free agency
NOTE: To determine the degree of the if a party and interfere with the exercise of that
intimidation, the age, sex and condition of the independent discretion. (4 Tolentino 501)
person shall be borne in mind. (NCC, Art. 1335)
Circumstances to be considered for the
A threat to enforce one’s claim through existence of undue influence
competent authority, if the claim is just or legal,
does not vitiate consent. (Sta. Maria, 2017) 1. Confidential, family, spiritual and other
relations between the parties;
Validity of a contract if consent is reluctant 2. Mental weakness;
3. Ignorance;
4. Financial distress. (NCC, Art. 1337)

2021 GOLDEN NOTES
Civil Law
NOTE: The enumeration is NOT exclusive. Moral 1. When a legal or equitable duty is imposed
dependence, indigence, mental weakness, tender upon the dominant party to reveal certain
age or other handicap are some of the facts material to the transaction; and
circumstances to consider undue influence.
2. When there is a confidential relationship
Determination of undue influence between the parties. (Sta. Maria, 2017)
The test to determine whether or not there is Requisites of Fraud to vitiate consent (In the
undue influence which will invalidate a contract sense of Dolo Causante)
is to determine whether or not the influence
exerted has so overpowered and subjugated the 1. It was applied or utilized by one contracting
mind of the contracting party as to destroy his party upon the other.
free agency, making him express the will of 2. It must be serious deception.
another rather than his own. (Jurado, 2011) 3. It must have induced the victim to enter the
contract without which he would not have
Due influence does not vitiate consent agreed to.
4. It must have induced the victim to enter into
When influence consists in persuasive the contract, which he would not have
arguments or in appeals to the affections which agreed to, absent the employment of such
are not prohibited by law or morals, the consent fraud.
is not vitiated at all. (Pineda, 2009) 5. It must have resulted in damage or injury.
Influence obtained by persuasion or argument Kinds of Fraud

or by appeals to the affections is not prohibited
either by law or morals and is not obnoxious 1. Fraud in the perfection of the contract
even in courts of equity. Such may be termed
“due influence.” (Martinez v. Hongkong and a. Causal fraud (dolo causante) - It is
Shanghai Bank, 15 Phil. 252, 270) employed by one party prior to or
simultaneous with the creation or
Reverential Fear perfection of the contract to secure
the consent of the other.
The fear of displeasing persons to whom respect
and obedience are due does not vitiate consent. b. Incidental fraud (dolo incidente) - It
is the fraud committed in the in the
Fraud performance of an obligation, and
its existence merely results in
There is fraud when through the insidious words breach of an already existing
or machinations of one of the contracting contract, which entitles the injured
parties, the other is induced to enter into a party to damages. (NCC, Art. 1170)
contract which, without them, he would not have
agreed to. (NCC, Art. 1338) 2. Fraud in the performance of an obligation.
(NCC, Art. 1170)
NOTE: The term “insidious words” refers to a
deceitful scheme or plot with an evil design, or a Fraud in the Performance v. Fraud in the
fraudulent purpose. (Pineda, 2000) Perfection (Pineda, 2009)
Failure to disclose facts, when there is a duty to FRAUD IN

FRAUD IN THE
reveal them, as when the parties are bound by BASIS PERFORMANC
PERFECTION
confidential relations, constitutes fraud. (NCC, E
Art. 1339) It occurs after
the valid It occurs before
NOTE: There is fraud, under the special and Time of execution of or simultaneous
particular circumstances of the following: Occurrenc the contract. It with the creation
e is employed in or perfection of
the the obligation.
performance
451
Contracts
of a pre- for damages against Santos for fraud and bad
existing faith, claiming that the misrepresentation
obligation. induced him to purchase the store and the
leasehold right. Decide.
Consent is
vitiated by A: Santos was not neither guilty of fraud nor bad
Consent is free
serious faith in claiming that there was implied renewal
Consent and not
deception or of his contract of lease with his lessor. The letter
vitiated.
misrepresentatio given by the lessor led Santos to believe and
n. conclude that his lease contract was impliedly
It is not a renewed, and that the formal renewal thereof
It is a ground for would be made upon the arrival of Tanya
Effect ground for
annulment of the Madrigal. Thus, from the start, it was known to
annulment of
contract. both parties that, insofar as the agreement
the contract.
Action for regarding the transfer of Santos’ leasehold right
Remedy Action for to Samson was concerned, the object thereof
annulment with
damages only. relates to a future right. It is a conditional
damages.
contract, the efficacy of which depends upon an
Dolo Causante vs. Dolo Incidente expectancy of the formal renewal of the lease
contract between Santos and lessor. The efficacy
of the contract between the parties was thus
DOLO DOLO made dependent upon the happening of this
BASIS CAUSANTE INCIDENTE suspensive condition. (Samson v. CA, G.R. No.
(ART. 1338) (ART. 1344) 108245, November 25, 1994)
Acts considered not fraudulent

Gravity of Serious in
Not serious
Fraud character 1. The usual exaggerations in trade and when
Efficient cause the other party had an opportunity to know
which induces the facts are not in themselves fraudulent
Efficient Not the (NCC, Art. 1340. Principle of Tolerated
the party to
Cause efficient cause Fraud);
enter into a
contract 2. A mere expression of an opinion does not
Effect on signify fraud, unless made by an expert and
Renders the Does not affect the other party has relied on the former’s
the Status
contract the validity of special knowledge (NCC, Art. 1341. Expert
of the
voidable the contract Opinion);
Contract
3. Misrepresentation by a third person does
Contract
not vitiate consent, unless such
remains valid.
Annulment misrepresentation has created substantial
Remedies Remedy is
with damages mistake and the same is mutual (NCC, Art.
claim for
1342);
damages.
4. Misrepresentation made in good faith is not
fraudulent but may constitute error. (NCC,
Q: Santos’ lease contract was about to expire
Art. 1343)
but it was extended and he continued to
occupy the leased premises beyond the
NOTE:
extended term. Samson offered to buy
Santos’ store and his right to the lease. Santos
The contract just the same is voidable, not
stated that the lease contract between him
because of the misrepresentation but because of
and the lessor was impliedly renewed, and
substantial error.
that the formal renewal thereof would be
made upon the arrival of a certain Tanya
Madrigal, based on the letter to him given by In order that fraud may make a contract
voidable, it should be serious, and should not
the lessor. When Samson occupied the
gave have been employer employed by both
premises, he was forced to vacate for Santos’
contracting parties.) (NCC, Art 1344)
failure to renew his lease. He filed an action

2021 GOLDEN NOTES
Civil Law
Q: Alejandro filed several Complaints against which does not exist or is different from that
respondents to have the promissory note he which was executed. (Tolentino, 2002)
executed in favor of Sterling Shipping Lines,
Inc. to be declared as null and void and that Kinds of simulation of contract
he be absolved from any liability. According
to him, Ruperto exercised deceit and fraud in 1. Absolute (simulados) – The contracting
causing him to bind himself jointly and parties do not intend to be bound by the
severally to pay DBP the amount of the contract at all, thus the contract is void.
mortgage loan. Additionally, when he was (NCC, Arts. 1345-1346) In absolute
made director and stockholder of SSL, he was simulation, there is a colorable contract but
invited to attend the board meeting only it has no substance as the parties have no
once and he was never compensated. intention to be bound by it. The main
Furthermore, none of the conditions he set characteristic of an absolute simulation is
were complied with. Can the promissory note that the apparent contract is not really
be declared null and void on the grounds of desired or intended to produce legal effect
deceit and fraud? or in any way alter the juridical situation of
the parties. As a result, an absolutely
A: NO, the promissory note Alejandro executed simulated or fictitious contract is void, and
cannot be declared null and void as only the parties may recover from each other
incidental fraud exists in this case. There was what they may have given under the
no dolo causante or fraud used to obtain the contract. (Heirs of Dr. Mario S. Intac and
petitioner's consent to enter into the contract. Angelina Mendoza-Intac v. CA, G.R. No.
Petitioner had the opportunity to become aware 173211, October 11, 2012)
of the facts that attended the signing of the
promissory note. He even admitted that he has a Absolutely simulated contracts lack the
lawyer-son who the petitioner had hoped would element of true consent.
assist him in the administration of Sterling
Shipping Lines, Inc. The totality of the facts on 2. Relative (disimulados) – The contracting
record belies petitioner's claim that fraud was parties conceal their true agreement (NCC,
used to obtain his consent to the contract given Art. 1345); and the parties are bound by
his personal circumstances and the applicable their real agreement when it does not
law. However, in refusing to allow petitioner to prejudice third persons or is not intended
participate in the management of the business, for any purpose contrary to law, morals,
respondent Ruperto V. Tankeh was liable for the good customs, public order or public policy.
commission of incidental fraud. In Geraldez, this (NCC, Art. 1346) If the concealed contract is
Court defined incidental fraud as "those which lawful, it is absolutely enforceable, provided
are not serious in character and without which it has all the essential requisites: consent,
the other party would still have entered into the object, and cause. (NCC, Arts. 1345-1346)
contract." Although there was no fraud that had
been undertaken to obtain petitioner's consent, As to third persons without notice, the
there was fraud in the performance of the apparent contract is valid for purposes
contract. The records showed that petitioner beneficial to them. As to third persons with
had been unjustly excluded from participating in notice of the simulation, they acquire no
the management of the affairs of the better right to the simulated contract than
corporation. This exclusion from the the original parties to the same.
management in the affairs of Sterling Shipping
Lines, Inc. constituted fraud incidental to the The primary consideration in determining the
performance of the obligation. true nature of a contract is the intention of the
parties. Such intention is determined from the
Simulation of contract express terms of their agreement as well as from
their contemporaneous and subsequent acts.
It is the declaration of a fictitious will, (Tating v. Tating Marcella, et al., G.R. No. 155208,
deliberately made by agreement of the parties, March 27, 2007)
in order to produce, for the purpose of
deception, the appearance of a juridical act NOTE: If the parties state a false cause in the
contract to conceal their real agreement, the
453
Contracts
contract is only relatively simulated, and the application was then pending in the Bureau of
parties are still bound by their real agreement. Forestry for approval;
Hence, where the essential requisites of a
contract are present and the simulation refers 3. Petitioners, after the execution of the deed of
only to the content or terms of the contract, the assignment, assumed the operation of the
agreement is absolutely binding and enforceable logging concessions of private respondent;
between the parties and their successors in
interest. 4. The statement of advances to respondent
prepared by petitioners stated: "P55,186.39
May the owner-simulator recover? advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay
If the absolutely simulated contract does not P10,000.00 every after (sic) shipment. We had
have any illegal purpose, the interested party only 2 shipments;” and
may prove the simulation to recover whatever
he might have given under the fictitious 5. Petitioners entered into a Forest
contract. In the event intended it is intended for Consolidation Agreement with other holders of
an illegal purpose, the contract is void and the forest concessions on the strength of the
parties have no cause of action. (Pineda, 2009) questioned deed of assignment.
Q: Tiro is a holder of an ordinary timber The contemporaneous and subsequent acts of

license issued by the Bureau of Forestry. He Tiro and the Javiers reveal that the cause stated
executed a deed of assignment in favor of the in the first deed of assignment is false. It is
Javiers. At the time the said deed of settled that the previous, simultaneous and
assignment was executed, Tiro had a pending subsequent acts of the parties are properly
application for an additional forest cognizable indicia of their true intention. Where
concession. Hence, they entered into another the parties to a contract have given it a practical
agreement. Afterwards, the Javiers, now construction by their conduct as by acts in
acting as timber license holders by virtue of partial performance, such construction may be
the deed of assignment, entered into a forest considered by the court in construing the
consolidation agreement with other ordinary contract, determining its meaning and
timber license holders. For failure of the ascertaining the mutual intention of the parties
Javiers to pay the balance due under the two at the time of contracting. The first deed of
deeds of assignment, Tiro filed an action assignment is a relatively simulated contract
against them. Are the deeds of assignment which states a false cause or consideration, or
null and void for total absence of one where the parties conceal their true
consideration and non-fulfillment of the agreement. A contract with a false consideration
conditions? is not null and void per se. Under Article 1346 of
the Civil Code, a relatively simulated contract,
A: NO, they are not null and void per se. The when it does not prejudice a third person and is
parties are to be bound by their real agreement. not intended for any purpose contrary to law,
The true cause or consideration of said deed was morals, good customs, public order or public
the transfer of the forest concession of private policy binds the parties to their real agreement.
respondent to petitioners for P120,000.00. This (Javier v. CA, G.R. No. L-48194, March 15, 1990)
finding is supported by the following
considerations, viz: Q: On 02 July 1990, by virtue of an Order of
Branch 62 of the RTC of Makati City, a notice
1. Both parties, at the time of the execution of of levy on attachment of real property and a
the deed of assignment knew that the writ of attachment were inscribed on TCTs
Timberwealth Corporation stated therein was No. 31444 (452448) and No. 45926
non-existent; (452452). Edmundo alleged that as early as
11 September 1989, the properties, subject
2. In their subsequent agreement, private matter of the case, were already sold to him
respondent conveyed to petitioners his inchoate by Ricardo, Sr. As such, these properties
right over a forest concession covering an could not be levied upon on 02 July 1990 to
additional area for his existing forest concession, answer for the debt of Ricardo, Sr., who was
which area he had applied for, and his no longer the owner thereof. TMBC alleged,

2021 GOLDEN NOTES
Civil Law
among other things, that the sale in favor of be in existence at the moment of the celebration
Edmundo was void for being an absolutely of the contract, or at least, it can exist
simulated contract, therefore, the properties subsequently or in the future. (De Leon, 2010)
levied upon were still owned by Ricardo, Sr.
Discuss the nature of an absolutely simulated Future inheritance cannot be the object of a
contract. contract because its extent, amount and quantity
cannot be determined. (Sta. Maria, 2017)
A: An absolutely simulated contract, under
Article 1346 of the Civil Code, is void. It takes Object of contracts
place when the parties do not intend to be
bound at all. The characteristic of simulation is GR: All things or services may be the object of
the fact that the apparent contract is not really contracts.
desired or intended to produce legal effects or in
any way alter the juridical situation of the XPNs:
parties. Thus, where a person, in order to place
his property beyond the reach of his creditors, 1. Things outside the commerce of men (NCC,
simulates a transfer of it to another, he does not Art. 1347);
really intend to divest himself of his title and 2. Intransmissible rights;
control of the property; hence, the deed of 3. Future inheritance, except in cases
transfer is but a sham. Lacking, therefore, in a expressly authorized by law;
fictitious and simulated contract is consent 4. Services which are contrary to law, morals,
which is essential to a valid and enforceable good customs, public order or public
contract. (The Manila Banking Corporation v. policy;
Edmundo Silverio, G.R. No. 132887, August 11, 5. Impossible things or services; and
2005). 6. Objects which are not possible of
determination as to their kind.
OBJECTS, CAUSE AND FORM OF CONTRACTS
Exceptions to the rule that no person can
OBJECT enter into a contract with regard to future
inheritance
It is the subject matter of the contract. It can be a
1. Under Art. 130 of the Family Code, which
thing, right or service arising from a contract.
allows the future spouses to give or donate
to each other in their marriage settlement
NOTE: Only rights which are not intransmissible
their future property to take effect upon the
can be the object of the contract. (NCC, Art. 1347)
death of the donor and to the extent laid
down by the provisions of the NCC relating
Requisites of an object (DELiCT)
to testamentary succession; and
1. Determinate as to kind (even if not
2. Under Art. 1080 of the Code, which allows a
determinate, provided it is possible to
person to make a partition of his estate
determine the same without the need of a
among his heirs by an act inter vivos,
new contract);
provided that the legitime of the compulsory
heirs is not prejudiced. (Jurado, 2009; De
NOTE: To qualify as an object for purposes of a
Leon 2010).
contract to exist, the object must at least be
generic.
NOTE: Except in cases authorized by law, future
inheritance cannot be an object of contract
2. Existing or the potentiality to exist
because its extent, amount or quantity is not
subsequent to the contract;
determinable. (Sta. Maria, 2003)
3. Must be Licit;
4. Within the Commerce of man; and
5. Transmissible. CAUSE
NOTE: The most evident and fundamental Cause is the essential or more proximate
requisite in order that a thing, right or service purpose which moves the contracting parties to
may be the object of a contract, is that it should enter into the contract. It is the immediate and
455
Contracts
direct which justifies the creation of an the contract contract
obligation through the will of the contracting Legality or
Legality or
parties. illegality of
As to the illegality of
motive does not
legal effect cause affects
Requisites of a cause: affect the
to the the existence
existence or
contract or validity of
It must: validity of
the contract.
contract.
1. Exist; Cause is
Motive differs
2. Be true; and always the
As to the for each
3. Be licit. same for each
parties contracting
contracting
party.
NOTE: Although the cause is not stated in the party.
contract, it is presumed that it exists and is As to its Always May be known
lawful unless the debtor proves the contrary. knowability known to the other.
(NCC, Art. 1354)
NOTE: The motive may be regarded as the cause
Kinds of cause when the realization of such motive or particular
purpose has been made a condition upon which
1. Cause of onerous contracts – the cause is the contract is made to depend. (Phil. National
understood to be for each contracting party, Construction Corp. v. CA, 272 SCRA 183, 1997)
the prestation or promise of a thing or
service by the other. False Cause
e.g., Contract of Sale GR: A false cause in a contract makes the

contract void.
2. Cause of remuneratory contracts– the service
or benefit remunerated. XPN: If it is proven that the false cause were
founded upon another cause which is true and
e.g., Donation in consideration of a past lawful. (NCC, Art. 1353)
service which does not constitute a
demandable debt e.g. When a contract, through stating a false
consideration, has in fact a real consideration,
3. Cause of gratuitous contracts – the mere the contract is not void, and is considered valid.
liberality of the donor or benefactor; it does
not involve any material thing but rather it Rules relating to cause on contracts
involves only the generosity of the
benefactor. 1. Absence of cause – confers no right and
produces no legal effect.
4. Accessory – identical with cause of principal 2. Failure of cause – does not render the
contract, from which the accessory derived contract void.
its life and existence. 3. Illegality of cause – contract is null and void.
4. Falsity of cause – contract is void; unless the
e.g., mortgage or pledge parties show that there is another cause
which is true and lawful.
Cause vs. Motive 5. Lesion or inadequacy of cause – does not
invalidate the contract, unless:
BASIS CAUSE MOTIVE
Direct and a. there is fraud, mistake, or undue
As to
most influence;
proximate Indirect or
proximate b. when the parties intended a donation or
reason in a remote reason
reason of a some other contract; or
contract
contract c. in cases specified by law
As to the Objective and Psychological
kind of juridical or purely e.g., contracts entered by guardian with
reason in reason of a personal reason court approval, when the ward suffers

2021 GOLDEN NOTES
Civil Law
lesion of more than 25%. If there is no NOTEs: The right must be exercised once the
court approval, the contract is void contract has been perfected, otherwise, the
regardless of the amount of lesion. exercise will be considered as premature.
Q: May a moral obligation constitute a Formalities required in specific contracts

sufficient cause to support an onerous
contract? 1. Donations
A: Where the moral obligation arises wholly a. Personal property – if the value exceeds
from ethical considerations, unconnected with 5,000, the donation and acceptance
any civil obligation, and as such is demandable must both be written. (NCC, Art. 748)
only in conscience, and not in law, it cannot b. Real property:
constitute a cause to support an onerous i. Donation must be in a public
contract. Where such moral obligation, however, instrument, specifying therein the
is based upon a previous civil obligation which property donated and value of
has already been barred by the statute of charges which donee must satisfy.
limitations at the time when the contract is ii. Acceptance must be written, either in
entered into, it constitutes a sufficient cause or the same deed of donation or in a
consideration to support said contract. (Villaroel separate instrument.
v. Estrada, 71 Phil. 14, GR L-47362, December 19, iii. Acceptance may either be in the same
1940) deed of donation, or in a separate
public instrument, but it shall not take
FORMALITY effect unless it is done during the
lifetime of the donor.
Rules on the form of contracts iv. If acceptance is in a separate
instrument, the donor shall be
GR: Form is not required in consensual notified thereof in an authentic form,
contracts. (Provided, all the essential requisites and this step shall be noted in both
for their validity are present.) instruments. (NCC, Art. 749)
XPNs: When the law requires a contract be in 2. Partnership where real property
writing for its: contributed
1. Validity (formal contracts); a. There must be a public instrument

2. Enforceability (under Statute of Frauds); or regarding the partnership;
3. For the convenience of the parties. b. The inventory of the realty must be
made, signed by the parties, and
NOTE: The parties may compel each other to attached to the public instrument.
reduce the verbal agreement into writing. (2006 (NCC, Art. 1773)
BAR)
3. Antichresis - the amount of the principal
The parties may be required to observe the and interest must be in writing. (NCC, Art.
form required for their convenience 2134)
The contracting parties may compel each other 4. Agency to sell real property or an
to observe the required form once the contract interest therein - authority of the agent
has been perfected and is enforceable under the must be in writing; otherwise, the sale shall
statute of frauds. This is one of the rights of the be void. (NCC, Art. 1874)
creditor.
5. Stipulation to charge interest - interest
The right to demand the execution of the must be stipulated in writing. (NCC, Art.
document required under Art.1358 is not 1956)
imprescriptible. It is subject to prescription. It
must be pursued within the period prescribed 6. Stipulation limiting common carrier's
by law, which is five (5) years. (Pineda, 2009) duty of extraordinary diligence to
ordinary diligence:
457
Contracts
a. Must be in writing, signed by shipper 6. The cession of actions or rights proceeding
or owner; from an act appearing in a public document.
b. Supported by valuable consideration [NCC, Art. 1358(4)]
other than the service rendered by
the common carrier; NOTE : Article 1358 of the Civil Code which
c. Reasonable, just and not contrary to requires the embodiment of certain contracts in
public policy. (NCC, Art. 1744) a public instrument is only for convenience, and
the registration of the instrument only
7. Chattel mortgage - personal property adversely, affects third parties. Formal
must be recorded in the Chattel Mortgage requirements are, therefore, for the benefit of
Register. (NCC, Art. 2140) third parties. Non-compliance therewith does
not adversely affect the validity of the contract
Contracts which must be in writing to be nor the contractual rights and obligations of the
valid parties. (Fule vs. CA, 286 CRA 700)
1. Donation of personal property whose value Contracts that must be registered

exceeds five thousand pesos. (NCC, Art. 748)
– the donation and acceptance must be in 1. Chattel mortgages. (NCC, Art. 2140)
writing.
NOTE: In accordance with Article 2125 of
2. Sale of a piece of land or any interest therein the Civil Code, an unregistered chattel
through an agent. (NCC, Art. 1874) – the mortgage is binding between the parties
authority of the agent shall appear in because registration is necessary only for
writing. the purpose of binding third persons.
(Filipinas Marble Corporation v. Intermediate
3. Agreements regarding payment of interest Appellate Court, G.R. No. L-68010, May 30,
in contracts of loan. (NCC, Art. 1956) 1986)
4. Antichresis – the amount of the principal 2. Sale or transfer of large cattle. (Cattle
and the interest shall be specified in writing. Registration Act)
(NCC, Art. 2134; Jurado, 2011)
ELECTRONIC COMMERCE ACT OF 2000
Contracts which must appear in a public (RA No. 8792)
document
Legal Recognition of Electronic Documents
1. Donation of real properties (NCC, Art. 719
749); Under Section 7 of the Act, electronic documents
2. Partnership where immovable property or shall have the legal effect, validity or
real rights are contributed to the common enforceability as any other document or legal
fund (NCC, Arts. 1171 1771 & 1773); writing, and —
3. Acts and contracts which have for their
object the creation, transmission, 1. Where the law requires a document to be in
modification or extinguishment of real writing, that requirement is met by an
rights over immovable property; sale of real electronic document if the said electronic
property or of an interest therein is document maintains its integrity and
governed by Arts. 1403, No. 2, and 1405 reliability, and can be authenticated so as to
[NCC, Art. 1358(1)]; be usable for subsequent reference, in that;
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal a. The electronic document has
partnership of gains [NCC, Art. 1358(2)]; remained complete and unaltered,
5. The power to administer property or any apart from the addition of any
other power which has for its object an act endorsement and any authorized
appearing or which should appear in a change, or any change which arises in
public document or should prejudice a third the normal course of communication,
person; [NCC, Art. 1358(3)]; and storage and display; and

2021 GOLDEN NOTES
Civil Law
b. The electronic document is reliable in a. Donations of real estate or of movables
the light of the purpose for which it if the value exceeds P5,000;
was generated and in the light of all b. Partnership to which immovables are
relevant circumstances. contributed;
c. Contract of antichresis – requires that
2. Paragraph (a) applies whether the the amount of principal and interest be
requirement therein is in the form of an specified;
obligation or whether the law simply d. Sale of piece of land or interest therein
provides consequences for the document is through an agent;
not being presented or retained in its e. Stipulation to charge interest;
original form. f. Stipulation limiting common carrier's
duty of extraordinary diligence to
3. Where the law requires that a document be ordinary diligence;
presented or retained in its original form, g. Chattel mortgage; or
that requirement is met by an electronic h. Transfer of large cattle. (Sec. 22, Act No.
document if — 1147; NCC, Art. 1581)
a. There exists a reliable assurance as to According to the degree of dependence:

the integrity of the document from the
time when it was first generated in its 1. Principal – that which can exist
final form; and independently of other contracts;
b. That document is capable of being e. g., contract of loan.

displayed to the person to whom it is
to be presented, provided that no 2. Accessory – that which cannot exist without
provision of the Act shall apply to a valid principal contract;
vary any and all requirements of
existing laws on formalities required e. g., guaranty, surety, pledge, mortgage.
in the execution of documents for
their validity. 3. Preparatory – that which is not the end by
itself, but only a means for the execution of
KINDS OF CONTRACTS another contract.
According to perfection or formation: e. g., contract of agency, as agency does not

stop with the agency because the purpose is
1. Consensual contracts which are perfected by to enter into other contracts (Rabuya, 2017).
the mere meeting of the minds of the
parties. (NCC, Art. 1305) (2005 BAR) According to their relation to other
contracts:
e.g., Sale, Lease.
1. Preparatory Contracts – are those which have
2. Real contracts are those which require for for their object the establishment of a
their perfection both the consent of the condition in law which is necessary as a
parties, and the delivery of the object by one preliminary step towards the celebration of
party to the other. another subsequent contract. They are only a
means for the execution of another contract.
e.g., creation of real rights over immovable
property must be written, deposit and e.g., Partnership, Agency.
pledge.
2. Principal Contracts – are those which can
3. Solemn contracts – contracts for which the subsist and exist independently from other
law requires that they be in some particular contracts.
form (e.g., those that must appear in
writing): e.g., Sale, Lease.
459
Contracts
3. Accessory Contracts – those which can exist 3. Remuneratory
only as a consequence of, or in relation with
another prior valid contract. According to the risks involved:
e.g., Pledge, Mortgage. 1. Commutative Contracts – are those where

each of the parties acquire an equivalent of
According to their form: his prestation and such equivalent is
pecuniarily appreciable and already
1. Common or Informal Contracts – are those determined from the moment of the
which require no particular form. perfection of the contract.
e.g., Loan. e.g., Lease.
2. Special or Formal Contracts – are those 2. Aleatory Contracts – are those which are
which require a particular form. dependent upon the happening of an
uncertain event, thus, charging the parties
e.g., Donations, Chattel Mortgage. with the risk of loss or gain.
According to their purpose: e.g., Insurance.
1. Transfer of Ownership According to their names or norms

regulating them:
e.g., Sale.
1. Nominate Contracts – are those which have
2. Conveyance of Use their own name and individuality, and are
regulated by provisions of law.
e.g., Usufruct, Commodatum.
e.g., Sale (2003 BAR).
3. Rendition of Services
2. Innominate Contracts – are those which lack
e.g., Agency. name or individuality, and are not regulated
by special provisions of law.
According to the nature of the vinculum
which they produce: Q: The Bank of the Philippine Islands issued
Rainier a pre-approved credit card. The Yulo
1. Unilateral Contracts – are those which give Spouses regularly settled their accounts with
rise to an obligation only to one of the the Bank of the Philippine Islands at first, but
parties. started to be delinquent with their payments.
They also alleged that the Bank of the
e.g., Commodatum. Philippine Islands did not fully disclose to
them the Terms and Conditions on their use
2. Bilateral Contracts – are those which give of the issued credit cards. Are the Yulo
rise to reciprocal obligations for both Spouses liable?
parties.
A: YES. When petitioners accepted respondent's
e.g., Sale. credit card by using it to purchase goods and
services, a contractual relationship was created
According to their cause: between them, "governed by the Terms and
Conditions found in the card membership
1. Onerous agreement. When the credit card provider failed
to prove its client's consent, even if the latter did
e.g., Sale. not deny availing of the credit card by charging
purchases on it, the credit card client may only
2. Gratuitous be charged with legal interest. (Spouses Rainier
Jose M. Yulo And Juliet L. Yulo v. Bank of The
e.g., Commodatum Philippine Islands, G.R. No. 217044, January 16,

2021 GOLDEN NOTES
Civil Law
2019, as penned by J. Leonen) parties as to the object is vitiated.
and cause of the
REFORMATION OF INSTRUMENTS contract.
The meeting of the
It is a remedy to conform to the real intention of The instrument failed minds was prevented
the parties due to mistake, fraud, inequitable to express the true by reason of mistake,
conduct, accident. (NCC, Art. 1359) intention of the parties fraud, inequitable
due to mistake, fraud, conduct or accident
It is a remedy of amending or rectifying the inequitable conduct or perpetrated by one
instrument which purports to be the agreement accident. party against the
of the parties, so as to express their real other.
intention, when the same is not expressed The purpose of
The purpose of
therein by reason of mistake, fraud, inequitable reformation is to
annulment is to
conduct or accident. establish the true
render inefficacious
agreement of the
the contract in
Reformation is a remedy in equity by means of parties, and not to
question.
which a written instrument is made or create a new one.
construed so as to express or confirm the real
intention of the parties when some error or NOTE: When there is no meeting of the minds,
mistake is committed. (Pineda, 2009) the proper remedy is annulment, and not
reformation. (Pineda, 2000)
Rationale: It would be unjust and inequitable to
allow the enforcement of a written instrument The fundamental distinction between
which does not reflect or disclose the real reformation of an instrument and annulment of a
meeting of the minds of the parties. contract is that the first presupposes a perfectly
valid contract in which there has been a valid
Requisites in reformation of instruments meeting of the minds of the contracting parties,
while the second is based on a defective contract
1. There is meeting of the minds of the parties in which there has been no meeting of the minds
to the contract; because the consent is vitiated. (Jurado, 2010)
2. The parties’ true intention is not expressed Q: Multi-Realty Development Corporation

in the instrument; (Multi-Realty) built Makati Tuscany, a 26-
storey condominium building located at the
3. Such failure of the instrument to express the corner of Ayala Avenue and Fonda Street,
parties’ intention is by reason of: (MARFI) Makati City. Makati Tuscany had a total of
160 units, with 156 ordinary units from the
a. Mistake; 2nd to the 25th floors and four (4) penthouse
b. Accident; units on the 26th floor. It also had 270
c. Relative simulation; parking slots which were apportioned as
d. Fraud; or follows: one (1) parking slot for each
e. Inequitable conduct ordinary unit; two (2) parking slots for each
penthouse unit; and the balance of 106
4. The facts upon which relief by way of parking slots were allocated as common
reformation of the instrument is sought are areas.
put in issue by the pleadings; and
Pursuant to Republic Act No. 4726, or the
5. There is strong, clear and convincing proof Condominium Act, Multi-Realty created and
of MARFI. incorporated Makati Tuscany Condominium
Corporation (MATUSCO) to hold title over
Distinction between Reformation and and manage Makati Tuscany's common
Annulment areas. That same year, Multi-Realty executed
a Deed of Transfer of ownership of Makati
REFORMATION ANNULMENT Tuscany's common areas to MATUSCO. Multi-
There is meeting of the There is no meeting Realty filed a complaint for damages and/or
minds between the of the minds. Consent reformation of instrument with prayer for
461
Contracts
temporary restraining order and/or It relates back to, and takes effect from the time
preliminary injunction against MATUSCO. of its original execution, especially as between
the parties. (Tolentino, 2002)
Multi-Realty alleged in its complaint that of
the 106 parking slots designated in the Reformation of instruments may be availed of
Master Deed as part of the common areas, judicially or extrajudicially.
only eight (8) slots were actually intended to
be guest parking slots; thus, it retained Basis and nature of the remedy of
ownership of the remaining 98 parking slots. reformation of instrument
Multi-Realty claimed that its ownership over The remedy of reformation of an instrument is
the 98 parking slots was mistakenly not based on the principle of equity where, to
reflected in the Master Deed "since the express the true intention of the contracting
documentation and the terms and conditions parties, an instrument already executed is
therein were all of first impression," allowed by law to be reformed. The right of
considering that Makati Tuscany was one of reformation is necessarily an invasion or
the first condominium developments in the limitation of the parol evidence rule, since, when
Philippines. Is there is a need to reform the a writing is reformed, the result is that an oral
Master Deed and the Deed of Transfer? agreement is by court decree, made legally
effective. The remedy, being an extraordinary
A: NO. Reformation of an instrument is a remedy one, must be subject to the limitations as may be
in equity where a valid existing contract is provided by law. A suit for reformation of an
allowed by law to be revised to express the true instrument must be brought within the period
intentions of the contracting parties. The prescribed by law, otherwise, it will be barred by
rationale is that it would be unjust to enforce a the mere lapse of time. (Bentir v. Leanda, G.R.
written instrument which does not truly reflect 128991, April 12, 2000)
the real agreement of the parties. In reforming
an instrument, no new contract is created for the Reformation of instruments; when allowed
parties, rather, the reformed instrument
establishes the real agreement between the 1. Mutual mistake. – When the mutual mistake
parties as intended, but for some reason, was of the parties causes the failure of the
not embodied in the original instrument. instrument to disclose their agreement
(NCC, Art. 1361);
MATUSCO does not deny that it stayed silent
when Multi-Realty sold the parking slots on Requisites:
several occasions or that it offered to buy the
parking slots from Multi-Realty on at least two a. The mistake should be of fact;
(2) occasions. It excuses itself by saying that just b. The same should be proved by clear
like Multi-Realty, it "also labored under a and convincing evidence;
mistaken appreciation of the nature and c. The mistake should be common to both
ownership of the ninety-eight (98) parking slots parties to the instrument; and
in question." d. The mistake must cause the failure of
the instrument to express their true
Both parties recognized Multi-Realty's intention. (BPI v. Fidelity Surety, Co. 51
ownership of the parking slots. MATUSCO Phil 57, 1927)
initially respected Multi-Realty's ownership
despite the Master Deed's and Deed of Transfer's 2. Mistake on one party and fraud on the other.
stipulations. It was MATUSCO that changed its – In such a way that the instrument does not
position decades after it acted as if it accepted show their true intention, the party
Multi-Realty's ownership. (Makati Tuscany mistaken or defrauded may ask for the
Condominium Corporation v. Multi-Realty reformation of the instrument (NCC, Art.
Development Corporation, G.R. 185530, April 18, 1362);
2018, as penned by J. Leonen)
3. Mistake on one party and concealment on the
Operation and effect of reformation other. – When one party was mistaken and
the other knew or believed that the

2021 GOLDEN NOTES
Civil Law
instrument did not state their real It may be ordered at the instance of:
agreement, but concealed that fact from the
former (NCC, Art. 1363); 1. If the mistake is mutual: either party or his
successor-in-interest may file an action.
4. Ignorance, lack of skill, negligence or bad 2. If the cause of reformation is on some
faith. – When through the ignorance, lack of other ground (such as vitiated consent or
skill, negligence or bad faith on the part of fraud): the injured party or his heirs and
the person drafting the instrument or of the assigns are the only person given legal
clerk or typist, the instrument does not standing to sue.
express the true intention of the parties
(NCC, Art. 1364); NOTE: In reformation of contracts, what is
reformed is not the contract itself, but the
5. Right of repurchase. – If the parties agree instrument embodying the contract. It follows
upon the mortgage or pledge of real or that whether the contract is disadvantageous or
personal property, but the instrument states not, is irrelevant to reformation and therefore,
that the property is sold absolutely or with a cannot be an element in the determination of the
right of repurchase. (NCC, Art. 1365) period for prescription of the action to reform.
(Pineda, 2000)
Reformation of instruments; when not
allowed Action for Declaratory Relief under Rule 63
of the New Rules of Court
1. Simple, unconditional donations inter vivos;
2. Wills; The special civil action for reformation. The
3. When the agreement is void (NCC, Art. purpose is to secure an authoritative statement
1366); of the rights and obligations of the parties for
4. When an action to enforce the instrument is their guidance in the enforcement thereof, or
filed (by doctrine of estoppel); compliance therewith.
5. If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the INTERPRETATION OF CONTRACTS
minds of the parties;
If the terms of a contract are clear and leave no
NOTE: The remedy here is annulment of doubt upon the intention of the contracting
contract. parties, the literal meaning of its stipulations
shall control.
6. When the contract is unenforceable because
of failure to comply with the statute of If the words appear to be contrary to the evident
frauds. intention of the parties, the latter shall prevail
over the former. (NCC, Art. 1370)
Prescriptive period in reformation of
instruments In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
Within 10 years from the date of the execution of acts shall be principally considered. (NCC, Art.
the instrument, since the suit is based on a 1371)
written document.
However general the terms of a contract may be,
NOTE: The prescriptive period within which to they shall not be understood to comprehend
bring an action to set aside or reform a things that are distinct and cases that are
simulated or fictitious written deed of pacto de different from those upon which the parties
retro sale starts only when the alleged vendees intended to agree. (NCC, Art. 1372)
made known their intention by overt acts not to
abide by the true agreement, and not from the If some stipulation of any contract should admit
date of execution of contract. (Conde v. Cuenca, of several meanings, it shall be understood as
G.R. No. L-643, 1956) bearing that import which is most adequate to
render it effectual. (NCC, Art. 1373)
Persons who can ask for the reformation of
the instrument
463
Contracts
Disfavor of Interpretation Leading to Loss of Orix Leasing and Finance Corp., 387 SCRA 270,
Rights 2002); and the surety contract, being an
accessory contract, must be interpreted with its
The construction of the terms of a contract principal contract, for instance, a loan
leading to the impairment or loss of the right is agreement. (Rabuya, 2017)
not favored.
Words which may have different significations
Principle of effectiveness in contract shall be understood in that which is most in
interpretation keeping with the nature and object of the
contract. (NCC, Art. 1375)
Pursuant to this principle, where two
interpretations of the same contract language The usage or custom of the place shall be borne
are possible, one interpretation having the effect in mind in the interpretation of the ambiguities
of rendering the contract meaningless, while the of a contract, and shall fill the omission of
other would give effect to the contract as a stipulations which are ordinarily established.
whole, the latter interpretation must be adopted. (NCC, Art. 1376)
(PNB v. Utility Assurance & Surety, Co., Inc., 177
SCRA 393, 1989) The interpretation of obscure words or
stipulations in a contract shall not favor the
The various stipulations of a contract shall be party who caused the obscurity. (NCC, Art. 1377)
interpreted together, attributing to the doubtful
ones that sense which may result from all of When it is absolutely impossible to settle doubts
them taken jointly. (NCC, Art. 1374) by the rules established in the preceding articles,
and the doubts refer to incidental circumstances
The various stipulations in a contract must be of a gratuitous contract, the least transmission of
read together to give effect to all. (North Negros rights and interest shall prevail. If the contract is
Sugar Co. v. Compania Gen. De Tabacos, G.R No. L- onerous, the doubt shall be settled in favor of the
9277, 1957) greatest reciprocity of interests.
Complementary-contracts-construed- If the doubts are cast upon the principal object

together doctrine of the contract in such a way that it cannot be
known what may have been the intention or will
The various stipulations of a contract shall be of the parties, the contract shall be null and void.
interpreted together, attributing to the doubtful (NCC, Art. 1378)
ones that sense which may result from all of
them taken jointly. (NCC, Art. 1374) The principles of interpretation stated in Rule
123 of the Rules of Court shall likewise be
When there are several provisions in a contract, observed in the construction of contracts. (NCC,
the construction to be adopted should be that Art. 1378)
one which will give effect to all provisions. A
contract must be read in its entirety. (Bank of P.I. NOTE: The provisions of Rule 123 of the Rules of
vs. Ty Canco Sabrino, 57 Phil. 804) Piecemeal Court referred to are Secs. 58-67, now Secs. 8-
interpratation must be avoided. 17, Rule 130, New Rules of Court.
If one contract is incorporated into another, Q: In response to Araneta Center Inc.’s

Complementary Contracts must of course be (“ACI”) invitation to bid on the design and
construed together so as to give effect as much construction of the Gateway Mall under a
as possible to the provisions of both agreements. lump-sum, fixed price arrangement, CE
(Shell Co. v. Firemen’s Ins., etc., et al., G.R. No. L- Construction Corporation (“CECON”)
8169, 1957) submitted its proposal on 30 August 2002,
which bid was made valid for acceptance
Under this doctrine, an accessory contract must only for ninety days. However, ACI informed
be read in its entirety and together with the CECON that the contract was being awarded
principal agreement. (Rabuya, 2017) Thus, a to it only at such time that the bid had
promissory note and a deed of chattel mortgage already expired, and instructed it to proceed
must be contrued together (Rigor v. Consolidated with excavation work. While no formal

2021 GOLDEN NOTES
Civil Law
documents were prepared for the contract acts shall be principally considered. It should be
although construction was already mentioned that ACI had drastically changed the
underway, ACI introduced major changes in scope and character of the agreement. To tie
the plans and specifications, changing it into down CECON to the unit prices for the proposal
a straight construction contract from a for a different scope of work would be grossly
former design-and-construct scheme. ACI unfair. Reference to prevailing industry
decided to change and take over the design, practices in the valuation of the project cost was
such as the change from concrete to also warranted and necessary because of the
structural steel framing, and took out certain absence of definitive governing instruments.
equipment from the scope of the contract. Under Articles 1375 and 1376 of the NCC, the
nature and object of the contract as well as the
Meanwhile, the price levels of cement and usage or custom of the place shall be borne in
steel products had increased, of which CECON mind in the interpretation of the ambiguities of
notified ACI, with a stern warning that the contract, and shall fill the omission of
further delays in the formal award of the stipulations which are ordinarily established.
contract might affect the contract sum. It was (CE Construction Corporation vs Araneta Center,
only on 2 June 2003 that ACI finally wrote a Inc., G.R. 192735, August 9, 2017, as penned by
letter to CECON, indicating its acceptance of Justice Leonen)
the latter’s 30 August 2002 tender, but still
no formal contracts were executed. With the
many changes to the project coupled with
ACI’s delays in delivering drawings and
specifications, CECON increasingly found
itself unable to complete the project on time,
noting that it had to file a total of 15 requests
for time extension, all of which ACI failed to
timely act on. Exasperated, CECON filed with
the Construction Industry Arbitration
Commission (“CIAC”) its request for
adjudication, praying for project cost
adjustment. In the meantime, CECON
completed the project and turned over
Gateway Mall to ACI, which had its blessing
on 26 November 2004. Could ACI insist on
the initial bid price of CECON under the
supposed lump-sum fixed price arrangement
of the construction contract?
A: NO. CECON and ACI should not be bound by

the supposed lump-sum fixed price
arrangement. There was never a meeting of
minds on the contract price, and the contention
of ACI with regard to supposed immutability of
the stipulated contract sum should fall.
Advertisements for bidders are simply
invitations to make proposals, and the
advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears. The
exchanges of offers between CECON and ACI
failed to satisfy the requirement of absolute and
unqualified acceptance as to comply with the
essential requisite of consent in the perfection of
a contract.
In order to judge the intention of the contracting

parties, their contemporaneous and subsequent
465
Contracts
DEFECTIVE CONTRACTS
VOID
BASIS RESCISSIBLE VOIDABLE UNENFORCEABLE
/INEXISTENT
Entered without Illegality (void) or

Economic damage Incapacity of
authority or in excess absence of any of
or lesion to either one of parties
Origin of the thereof; non-compliance essential
one of the parties to give consent
defect with Statute of Frauds; requisites of a
or to 3rd persons; or vitiated
incapacity of both parties contract
declaration by law. consent.
to give consent. (inexistent).
Suffered by – As to the other

Necessity of
either one of contracting
Damage/ Not necessary Not necessary
parties or 3rd party - not
prejudice
person. necessary.
Curable by
Curable Curable Not curable Not Curable
Prescription
Valid & legally Valid & legally Inoperative until ratified;

enforceable until enforceable not enforceable in court
Legal effect None
judicially until judicially without proper
rescinded. annulled. ratification.
Rescission or Annulment of Declaration of

Remedy Only personal defense
rescissory action. contract. nullity of contract.
Can be attacked
Nature of Must be a direct Direct action
Indirect attack allowed directly or
action action. needed.
indirectly.
GR: Contracting 3rd persons cannot

Who can file party; Contracting file unless their
Contracting party
the action XPN: Defrauded party interest are
Creditors directly affected.
Susceptible but
Susceptibility
not of ratification Susceptible Susceptible Not Susceptible
of ratification
proper.
Action for recovery; Action for

Action for Action for specific performance or declaration of
Susceptibility rescission annulment damages prescribes nullity or putting
prescription prescribes after 4 prescribes (10 years if based on a of defense of
years. after 4 years. written contract; 6 years if nullity does not
unwritten). prescribe.

2021 GOLDEN NOTES
Civil Law
DEFECTIVE CONTRACTS NOTE: Contracts which are rescissible
under the third paragraph of Art. 1381
RESCISSIBLE CONTRACTS are valid contracts, although
undertaken in fraud of creditors. If the
Requisites for Rescission contract is ‘‘absolutely simulated’’, the
contract is not merely rescissible but
1. There must be at the beginning either a inexistent, although undertaken as well
valid or voidable one in fraud of creditors. (MBC v. Silverio,
2. There is an economic or financial prejudice 466 SCRA 438, August 11, 2005) In the
to someone. former, the remedy is rescission; in the
3. Requires mutual restitution. (J. Paras, Civil latter, the remedy is an action to declare
code of the Philippines Annotated : the contract inexistent which action is
Prescription ; Obligations and Contracts, imprescriptible. (Rabuya, 2017)
2016)
d. Contracts where the object involved is
Two Kinds of Rescission the subject of litigation; contract
entered into by defendant without
1. The rescission mentioned in Art. 1380 of the knowledge or approval of litigants or
New Civil Code judicial authority [NCC, Art. 1381(4)];
2. The rescssion mentioned in Art. 1391 of the
New Civil Code as the new Code used the e. Payment by an insolvent – on debts
term "resolution." (J.Paras, Civil code of the which are not yet due; prejudices the
Philippines Annotated : Prescription ; claim of others (NCC, Art. 1382);
Obligations and Contracts, 2016)
f. Provided for by law. (NCC, Arts. 1526,
These are contracts validly constituted but 1534, 1538, 1539, 1542, 1556, 1560,
nevertheless maybe set aside due to a particular 1567 & 1659)
economic damage or lesion caused to either to
one of the parties or to a third person. It may be NOTE: C, D and E are contracts which
set aside in whole or in part, or up to the extent are not necessarily entered into by
of the damage caused. (NCC, Art. 1381) persons exercising fiduciary capacity. In
Art. 1381 (1 & 2), the contract must be
Contracts that may be rescinded of administration and representation.
1. Under Art. 1381, those 2. Payments made in state of insolvency (NCC,

Art. 1382):
a. Entered into by guardians whenever the
wards whom they represent suffer a. Plaintiff has no other means to maintain
lesion by more than ¼ of value of the reparation;
property [NCC, Art. 1381(1)]; b. Plaintiff must be able to return
whatever he may be obliged to return
If a guardian alienates properties of the due to rescission;
ward without judicial approval, the c. The things must not have been passed
contract is ”unenforceable” for lack of to third persons in good faith;
authority. (NCC, Art. 1403,par. 1) d. It must be made within 4 years. (NCC,
Art 1382)
b. Agreed upon in representation of
absentees, if absentee suffers lesion by Characteristics of rescissible contract
more than ¼ of value of property [NCC,
Art. 1381(2)]; 1. It has all the elements of a valid contract.
2. It has a defect consisting of an injury
c. Contracts where rescission is based on (generally in the form of economic damage
fraud committed on creditor and cannot or lesion, fraud, and alienation of the
collect the claim due (accion pauliana) property) to one of the contracting parties
[NCC, Art. 1381(3)]; or to a third person.
3. It is valid and effective until rescinded.
467
Contracts
4. It can be attacked only directly. 1. Under Art. 1381, no.1 – within 4 years from
5. It is susceptible of convalidation only by the time the termination of the incapacity of
prescription. (De Leon, 2010) the ward;
Nature of an action for rescission 2. Under Art. 1381, no. 2- within 4 years from
the time the domicile of the absentee is
The action for rescission is subsidiary. It cannot known; or
be instituted except when the party suffering
damage has no other legal means to obtain 3. Under Art. 1381, nos. 3 & 4 & Art. 1382 –
reparation for the same. (NCC, Art. 1383) Hence, within 4 years from the time of the
it must be availed of as the last resort, availed discovery of fraud.
only after all legal remedies have been
exhausted and proven futile. (Khe Hong Cheng v. Requisites that must concur before a contract
CA, G.R. No. 144169, March 28, 2001) may be rescinded on the ground of lesion
Rationale: In order not to disturb other Whether the contract is entered into by a
contracts and to comply with the principle of guardian in behalf of his ward or by a legal
relativity of contracts. representative in behalf of an absentee, before it
can be rescinded on the ground of lesion, it is
However, if it can be proven that the property indispensable that the following requisites must
alienated was the only property of the debtor at concur:
the time of the transaction, the action for
rescission is certainly maintainable because it is 1. The contract must be entered into by the
clear that the creditor has no other remedy guardian in behalf of his ward or by the legal
under the circumstances. (Pineda, 2009 citing representative in behalf of an absentee.
Regalado vs. Luchsinger, 5 Phil. 625) 2. The ward or absentee suffered lesion of
more than 1/4 of the value of the property
NOTE: Rescission shall be only to the extent which is object of the contract.
necessary to cover the damages. (NCC, Art. 1384) 3. The contract must be entered into without
judicial approval.
Persons who may institute an action for the 4. There must be no other legal means for
rescission of a rescissible contract obtaining reparation for the lesion.
5. The person bringing the action must be able
The action for rescission may be instituted by to return whatever he may be obliged to
the following: restore.
6. The object of the contract must not be
1. Injured party; legally in the possession of a third person
2. Contracts entered into by guardians – by who did not act in bad faith.
ward, or by guardian ad litem of ward
during the latter’s incapacity in an action Statutory presumptions of Fraud in Article
against the original guardian; 1387
3. Contracts in representation of absentees –
by the absentee; 1. Alienation by gratuitous title.
4. Contracts defrauding creditors – by the
creditors; When a debtor donates his property
5. Contracts referring to things in litigation – without reserving sufficient property to
by the party litigant; pay all his pre-existing debts, the law
6. Their representatives; presumes that the gratuitous dispositions
7. Their heirs; are made in fraud of creditors.
8. Their creditors by virtue of subrogatory
action defined in Art. 1177, NCC. (Jurado, 2. Alienation by onerous title.
2009)
The contract is presumed fraudulent if at
Prescriptive period of action for rescission the time of alienation, some judgement has
been rendered against him, whether it is on
appeal or has already become final and

2021 GOLDEN NOTES
Civil Law
executory; or some writ of attachment has Badges of fraud
been issued against him in any case.
1. Consideration for the conveyance of the
NOTE: The decision or writ of attachment need property is inadequate or fictitious;
not refer to the very property subject of 2. Transfer was made by the debtor after a suit
alienation. The person who obtained the has commenced and during its pending
judgement or writ of attachment need not be the against him;
same person seeking the rescission. 3. Sale upon credit by an insolvent debtor;
4. The presence of evidence of large
These presumptions are rebuttable, which indebtedness or complete insolvency of the
means, they may be overcome by clear, strong debtor;
and convincing evidence. 5. Transfer of all his property by a debtor when
he is financially embarrassed or insolvent;
An alienation made during the pendency of a suit 6. Transfer is made between father and son,
is not enough. There must be a decision or a writ where there are present some or any of the
of attachment. above circumstances; and
7. Failure of the vendee to take exclusive
Requisites before a contract entered into in possession of the property. (Oria v.
fraud of the creditors may be rescinded McMicking, 21 Phil. 243, G. R. No. 7003,
January 18, 1912)
1. There must be a credit existing prior to the
constitution of the said fraudulent contract; Fictitious Contracts cannot be Rescinded
2. There must be fraud, or at least, the intent to
commit fraud to the prejudice of the creditor Rescission is not the proper remedy because
seeking rescission; while the contract here is fictitious and,
3. The creditor cannot in any legal manner therefore, null and void, rescission presupposes
collect his credit (subsidiary character of a valid contract. (Onglengco v. Ozaeta and
rescission); Hernandez, 70 Phil. 43)
4. The object of the contract must not be legally
in possession of a third person in good faith. Resolution v. Rescission
NOTE: If the object of the contract is legally in RESOLUTION RESCISSION

the possession of a third person who did not act (NCC, ART. 1191) (NCC, ART. 1381)
in bad faith, the remedy available to the creditor Both presuppose contracts validly entered into
is to proceed against the person causing the loss and subsisting and both require mutual
for damages. Such person is solidarily liable with restitution when proper.
that of transferring creditor as both of them are Nature
guilty of fraud. Principal action;
Subsidiary remedy
Retaliatory in character
The action to rescind contracts in fraud of Grounds
creditors is known as accion pauliana. For this 5 grounds under Art.
action to prosper, the following requisites must Non-performance of 1381. (lesions or
be present: obligation (only fraud of creditors);
ground) Non-performance is
1. The plaintiff asking for rescission has a not important
credit prior to the alienation; Applicability
2. The debtor has made a subsequent contract Applies to both
conveying a patrimonial benefit to a third Only to reciprocal
unilateral and
person; obligations
reciprocal obligations
3. The creditor has no other legal remedy to Prescriptive Period
satisfy his claim; 10 years from accrual
4. The act being impugned is fraudulent; of right of action for
5. The third person who received the property written contracts; 4 years (NCC, Art.
conveyed, if it is by onerous title, has been 6 years for verbal 1389)
an accomplice in fraud. (Siguan vs Lim, G.R. contracts [NCC, Arts.
No. 134685, November 19, 1999) 1144 (2) and 1145 (1)]
469
Contracts
Person who can Initiate the Action Q: Reyes (seller) and Lim (buyer) entered
Even third persons into a contract to sell a parcel of land.
Only the injured party
prejudiced by the Harrison Lumber occupied the property as
to the contract lessee. Reyes offered to return the P10
contract
Fixing of Period by the Court million downpayment to Lim because Reyes
Court may fix a period was having problems in removing the lessee
or grant extension of from the property. Lim rejected Reyes’ offer.
time for the fulfillment Lim learned that Reyes had already sold the
Court cannot grant property to another.
of the obligation when
extension of time
there is sufficient
reason to justify such Both Reyes and Lim are now seeking
extension rescission of the contract to sell. However,
Purpose Reyes does not want to deposit the 10M to
Reparation for the court because according to him, he has
damage or injury, the “right to use, possess and enjoy” of the
Cancellation of the money as its owner before the contract to sell
allowing partial
contract is rescinded. Is Reyes’ contention correct?
rescission of contract.
(Pineda, 2000)
A: NO. There is also no plausible or justifiable
NOTE: While Article 1191 uses the term reason for Reyes to object to the deposit of the
“rescission,” the original term which was used in P10 million down payment in court. The
the old Civil Code, from which the article was contract to sell can no longer be enforced
based, was “resolution.” (Ong v. CA, G.R. No. because Reyes himself subsequently sold the
97347, July 6, 1999) property. Both Lim and Reyes are seeking for
rescission of the contract. By seeking rescission,
Effect of Rescission a seller necessarily offers to return what he has
received from the buyer. Such a seller may not
1. Obligation of mutual restitution (but not take back his offer if the court deems it
absolute); equitable, to prevent unjust enrichment and
2. Abrogation of contract (Absolute); ensure restitution, to put the money in judicial
3. Obligation of third person to restore (if third deposit.
person has nothing to restore, Article does
not apply). (De Leon, 2016) NOTE: In this case, it was just, equitable and
proper for the trial court to order the deposit of
Mutual Restitution the down payment to prevent unjust enrichment
by Reyes at the expense of Lim. Depositing the
Rescission of contract creates an obligation of down payment in court ensure its restitution to
mutual restitution of the objects of the contract, its rightful owner. Lim, on the other hand, has
their fruits, and the price with interest. nothing to refund, as he has not received
anything under the contract to sell. (Reyes v. Lim,
NOTE: Rescission is possible only when the Keng and Harrison Lumber, Inc., G.R. No. 134241,
person demanding rescission can return August 11, 2003)
whatever he may be obliged to restore. A court
of equity will not rescind a contract unless there Q: Goldenrod offered to buy a mortgaged
is restitution, that is, the parties are restored to property owned by Barreto Realty to which it
the status quo ante. (NCC, Art. 1385) paid an earnest money amounting to P1
million. It was agreed upon that Goldenrod
Mutual restitution is not applicable when: would pay the outstanding obligations of
Barreto Realty with UCPB. However,
1. Creditor did not receive anything from Goldenrod did not pay UCPB because of the
contract; or bank’s denial of its request for the extension
2. Thing already in possession of third to pay the obligation. Thereafter, Goldenrod,
persons in good faith; subject to indemnity through its broker, informed Barreto Realty
only, if there are two or more alienations – that it could not go through with the
liability of first infractor. purchase of the property and also demanded
the refund of the earnest money it paid. In

2021 GOLDEN NOTES
Civil Law
the absence of a specific stipulation, may the NOTE: Third persons may assail if they are
seller of real estate unilaterally rescind the prejudiced. (Development Bank vs. CA, 96
contract and as a consequence keep the SCRA 342)
earnest money to answer for damages in the
event the sale fails due to the fault of the 4. A voidable contract, unlike unenforceable
prospective buyer? and void contracts may be attacked
indirectly or collaterally, by way of defense
A: NO. Goldenrod and Barretto Realty did not to an action under the contract by way of a
intend that the earnest money or advance counterclaim. (De Leon, 2016)
payment would be forfeited when the buyer
should fail to pay the balance of the price, Classes of voidable contracts
especially in the absence of a clear and express
agreement thereon. 1. Those where one of the parties is incapable
of giving consent; and
Moreover, Goldenrod resorted to extrajudicial
rescission of its agreement with Barretto Realty. NOTE: If both parties are incapacitated to
Under Article 1385, rescission creates the give consent, the contract is unenforceable
obligation to return the things which were the and not merely voidable.
object of the contract together with their fruits
and interest. Therefore, by virtue of the 2. Those where the consent is vitiated by
extrajudicial rescission of the contract to sell by mistake, violence, intimidation, undue
Goldenrod without opposition from Barretto influence or fraud. (NCC, Art. 1390)
Realty, which in turn, sold the property to other
persons, Barretto Realty, had the obligation to Q: Sometime in March 2001, Poole-Blunden
return the earnest money which formed part of came across an advertisement of Unit 2-C of
the purchase price plus legal interest from the T-Tower Condominium. The Unit was
date it received notice of rescission. It would be advertised to have an area of 95 square
most inequitable if Barretto Realty would be meters. Thinking that it was sufficient and
allowed to retain the money at the same time spacious enough for his residential needs,
appropriate the proceeds of the second sale Poole-Blunden won the bid and entered into
made to another. (Goldenrod, Inc. v. CA, G.R. No. a Contract to Sell with UnionBank. Poole-
126812, November 24, 1998) Blunden started occupying. Thereafter, he
decided to construct two (2) additional
VOIDABLE CONTRACTS (BAR 2004) bedrooms in the Unit. Upon examining it, he
noticed apparent problems in its dimensions.
Voidable contracts are those where consent is He took rough measurements of the Unit,
vitiated either by the incapacity of one of the which indicated that its floor area was just
contracting parties or by mistake, violence, about 70 square meters, not 95 square
intimidation, undue influence or fraud. These meters, as advertised by UnionBank. Poole-
contracts are binding, unless they are annulled Blunden wrote to UnionBank, informing it of
by a proper action in court. It is susceptible of the discrepancy. He asked for a rescission of
ratification. (NCC, Art. 1390) the Contract to Sell, along with a refund of
the amounts he had paid, in the event that it
NOTE: Annulment may be had even if there be was conclusively established that the area of
no damage to the contracting parties. the unit was less than 95 square meters
which was denied by the UnionBank.
Characteristics of a voidable contract Aggrieved, he filed an action for rescission of
the Contract to Sell under Article 1390 of the
1. Effective until set aside; Civil Code.
2. Can be ratified;
3. Can be assailed only by the party whose Will the action prosper?
consent was defective or his heirs or
assigns. A: YES. Article 1390 of the Civil Code stipulates
that a contract is voidable or annullable even if
there is no damage to the contracting parties
where "consent is vitiated by mistake, violence,
471
Contracts
intimidation, undue influence or fraud." Under GR: Mutual restitution. – the contracting
Article 1338 of the Civil Code "[t]here is fraud parties shall restore to each other things
when, through insidious words or machinations which have been the subject matter of
of one of the contracting parties, the other is the contract, with their fruits and the
induced to enter into a contract which, without price with its interest except in case
them, he would not have agreed to." provided by law. In an obligation to
render services, the value thereof shall
The fraud required to annul or avoid a contract be the basis for damages. (NCC, Art.
"must be so material that had it not been 1398)
present, the defrauded party would not have
entered into the contract." Poole-Blunden's NOTE: No restitution. – The party
contention on how crucial the dimensions and incapacitated is not obliged to make any
area of the Unit are to his decision to proceed restitution except insofar as he has been
with the purchase is well-taken. As he benefited by the thing or the price
emphasized, he opted to register for and received by him. (NCC, Art. 1399)
participate in the auction for the Unit only after
determining that its advertised area was XPN : If and when the application of
spacious enough for his residential needs. mutual restitution will result in unjust
Therefore, there is fraud for the reason that had enrichment of one party at the expense
Poole-Blunden was informed by the UnionBank of another. (4 Tolentino, 607, [1991])
that the floor area was actually less than the
stipulated, he would not have entered the b. Whenever the person obliged by the
Contract to Sell. (Joseph Harry Walter Poole- decree of annulment to return the thing
Blunden v. Union Bank Of The Philippines, cannot do so because it has been lost
Respondent, G.R. No. 205838, November 29, 2017, through his fault, he shall return the
as penned by J. Leonen) fruits received and the value of the thing
at the time of the loss, with interest from
Who may institute an action for annulment the same date. (NCC, Art. 1400)
1. Real party in interest. – All who are Causes of extinction of action to annul
principally or subsidiarily liable ; and
2. One not responsible for the defect of the 1. Prescription – the action for annulment must
contract. be commenced within 4 years depending on
the ground stated.
NOTE: An action for annulment may be
instituted by all who are thereby obliged NOTE: If the action has prescribed, the
principally or subsidiarily. He who has capacity contract can no longer be set aside.
to contract may not invoke the incapacity of the (Villanueva v. Villanueva, 91 Phil 43)
party with whom he has contracted nor can
those who exerted intimidation, violence or 2. Ratification – cleanses the contract of its
undue influence or employed fraud or caused defects from the moment it was constituted.
mistake base their action upon these flaws of the (NCC, Art. 1396)
contract. 3. By loss of the thing which is the object of the
contract through fraud or fault of the person
Effects of annulment of a contract who is entitled to annul the contract. (NCC,
Art. 1401)
1. If contract not yet consummated – parties 4. If the minor is guilty of active
shall be released from the obligations misrepresentation of his age. (Braganza v.
arising therefrom. De Villa Abrille, 1959)
2. If contract has already been consummated – NOTE: If the right of action is based upon the
rules provided in Arts. 1398-1402 shall incapacity of any one of the contracting parties,
govern. the loss of the thing shall not be an obstacle to
the success of the action, unless it took place
a. Restitution through the fraud or fault of the plaintiff. (NCC,
Art. 1401)

2021 GOLDEN NOTES
Civil Law
Prescriptive period for an annulment of a 2. In contracts voidable on the ground of
voidable contract mistake. – party whose consent was vitiated.
(De Leon, 2016)
The action for annulment shall be brought
within 4 years, reckoned from: Kinds of ratification
1. In cases of intimidation, violence or undue 1. Express –the desire of the innocent party to
influence, from the time the defect of the convalidate the contract, or his waiver or
consent ceases; renunciation of his right to annul the
2. In case of mistake or fraud, from the time of contract is clearly manifested verbally or
the discovery of the same; formally in writing. (Pineda, 2000)
3. And when the action refers to contracts
entered into by minors or other 2. Implied (tacit) – it is the knowledge of the
incapacitated persons, from the time the reason which renders the contract voidable
guardianship ceases. (NCC, Art. 1391) and such reason having ceased, the person
who has a right to invoke it should execute
Ratification an act which necessarily implies an
intention to waive his right. (NCC, Art. 1393)
It is the act or means by virtue of which, efficacy
is given to a contract which suffers from a vice of Effects of ratification
curable nullity. (Manresa)
Ratification cleanses the contract from all its
NOTE: Ratification extinguishes the action to defects from the moment it was constituted,
annul a voidable contract. (NCC, Art. 1392) thereby extinguishing the action to annul a
voidable contract. It results therefore that after a
Requisites of ratification contract is validly ratified, no action to annul the
same can be maintained based upon defects
1. The contract involved must be voidable; relating to its original validity. (Rabuya, 2017)
2. Person ratifying must know the reason for
the voidability; Retroactivity in ratification of contracts
3. The cause for the voidability must
immediately cease after the ratification; and GR: Retroactivity applies in ratification of
4. Ratification must be express or through an contracts.
act implying a waiver of the action to annul;
XPN: When the rights of innocent third persons
NOTE: Ratification entered into by the will be prejudiced, ratification will not take
incapacitated person may be effected by the effect.
guardian of the incapacitated person. (NCC,
Art. 1394) However, this rule does not NOTE: Ratification does not require the
pertain to a rescissible contract entered into conformity of the contracting party who has no
by the guardian in behalf of his ward. right to bring the action for annulment.
The right to ratify is transmitted to the heirs of Q: The Senior Vice President of TERP
the party entitled to such right. (Tolentino, 2002) Construction Corp., Escalona, made a
commitment to Banco Filipino Savings and
Party who may ratify Mortgage Bank that TERP Corp. would pay
interest differentials to the same. However,
1. In contracts entered into by incapacitated after TERP Corp. subsequently paid the
persons. interests as agreed upon, it thereafter
refused to pay its unpaid balance because it
(a) guardian ; argues that Escalona was not authorized to
(b) injured party himself, provided he is make such commitment. Is act of Escalona, as
already capacitated. Senior Vice President of TERP Corp. binding
upon it?
A: YES. A corporation exercises its corporate
473
Contracts
powers through its board of directors. This third person
power may be validly delegated to its officers, makes the
committees, or agencies. The authority of the contract
board of directors to delegate its corporate rescissible.
powers may either be: (1) actual; or (2) As to the Damage /
apparent. Actual authority may be express or Damage is
necessity of prejudice is
implied. Express actual authority refers to the immaterial
damage material
corporate powers expressly delegated by the
Rescissibility
board of directors. Implied actual authority, on Annulability
As to the of the
the other hand, can be measured by his or her of the
source of contract is
prior acts which have been ratified by the contract is
remedy based on
corporation or whose benefits have been based on law
equity
accepted by the corporation.
As to the kind Public Private
Here, TERP Corp.'s subsequent act of twice of interest the interest interest
paying the additional interest Escalona predominates predominates predominates
committed to Banco Filipino Bank is considered
As to the Not
a ratification of Escalona's acts. Moreover, Susceptible of
susceptibility susceptible of
Escalona likewise had apparent authority to ratification
of ratification ratification
transact on behalf of petitioner. Here, Banco
Filipino Bank relied on Escalona’s apparent As to whether
It is a
authority to promise interest payments, a sanction or It is a remedy
sanction
considering that Escalona was TERP Corp.’s then a remedy
senior vice president. His apparent authority Only parties Third persons
As to who can
was further demonstrated by TERP Corp. paying to the who are
avail the
Banco Filipino Bank after Escalona promised it. contract can affected may
remedies
(Terp Construction Corporation v. Banco Filipino assail it file the action
Savings and Mortgage bank, G.R. No. 221771, It is a It is a
September 18, 2019, as penned by J. Leonen) As to the kind
principal subsidiary
of action
action action
Confirmation v. Recognition
UNENFORCEABLE CONTRACTS
CONFIRMATION RECOGNITION
It is an act whereby a
Those contracts which cannot be enforced by
defect of proof is cured
action or complaint, unless they have been
such as when an oral
It is an act by ratified by the party or parties who did not give
contract is put into writing
which a voidable consent thereto. (Jurado, 2009)
or when a private
contract is cured of
instrument is converted
its vice or defect. Characteristics of unenforceable contract
into a public instrument.
(Luna v. Linatoc, G.R. No. L-
1. It cannot be enforced by a proper action in
48403, October 28, 1942)
court;
2. It may be ratified;
Voidable contract v. Rescissible contract
3. It cannot be assailed by third person; and
4. May only be assailed as a way of defense, not
BASIS VOIDABLE RESCISSIBLE by direct action.
As to the kind 5. The defect of an unenforceable contract is of
Defect is Defect is
of defect a permanent nature and it will exist as long
intrinsic external
present as the contract is not duly ratified. The mere
The damage lapse of time cannot give efficacy to the
Vitiated contract. (Rabuya, 2017)
or prejudice
As to the consent
suffered by
source of makes the NOTE: An unenforceable contract is valid
one of the
defect contract although it produces no legal effect. (Tolentino,
contracting
voidable 2002)
parties or a

2021 GOLDEN NOTES
Civil Law
Kinds of unenforceable contracts Characteristics of Void Contracts
The following contracts are unenforceable 1. The contract produces no effect whatsoever
unless they are ratified: either against or in favor of anyone; hence it
does not create, modify, or extinguish the
1. Those entered into the name of another juridical relation to which it refers;
person by one who has been given no 2. No action for annulment is necessary,
authority/legal representation or acted because the nullity exists ipso jure; a
beyond his powers; “Unauthorized judgment of nullity would merely be
contracts”; declaratory;
3. It cannot be confirmed or ratified; and
NOTE: A contract of sale over a piece of land 4. If it has been performed, the restoration of
entered by an agent whose authority is not what has been given is in order. (Tolentino,
in writing, even if he acted beyond the scope 2002)
of his authority is void, not merely
unenforceable. (NCC, Art. 1874) NOTE: The defect of inexistense of a contract is
permanent. It cannot be cured by ratification nor
2. Those that do not comply with the Statute of prescription.
Frauds; and
3. Those where both parties are incapable of Parties affected
giving consent to a contract. (NCC, Art. 1403)
Any person may invoke the inexistence of the
VOID/INEXISTENT CONTRACTS contract whenever juridical effects founded
thereon are asserted against him. (Tolentino,
A void or inexistent contract is one which has no 2002)
force and effect from the very beginning, as if it
had never been entered into, and which cannot
be validated by either by time or ratification.
This definision includes not only those contracts
in which one of the essential requisites is totally
wanting, but also those which are declared by
positive provision of law or statute. A void or
inexistent contract is equivalent to nothing; it is
absolutely wanting in civil effects. (Tolentino,
2002)
The following contracts are inexistent and

void from the beginning
1. Those whose cause, object or purpose is

contrary to law, morals, good customs,
public order or public policy;
2. Those which are absolutely simulated or
fictitious;
3. Those whose cause or object did not exist at
the time of the transaction;
4. Those whose object is outside the commerce
of men
5. Those which contemplate an impossible
service;
6. Those where the intention of the parties
relative to the principal object of the
contract cannot be ascertained;
7. Those expressly prohibited or declared void
by law.
475
Natural Obligations
NATURAL OBLIGATIONS When without the knowledge or against the
will of the debtor, a 3rd person pays a debt
Natural obligations, not being based on positive which the obligor is not legally bound to
law but on equity and natural law, do not grant pay because the action thereon has
a right of action to enforce their performance, prescribed, but the debtor later voluntarily
but after voluntary fulfillment by the obligor, reimburses the 3rd person, such debtor can
they authorize the retention of what has been no longer recover such payment. (NCC, Art.
delivered or rendered by reason thereof. (NCC, 1424)
Art. 1423)
3. Contract made by a minor (NCC, Arts. 1426
Rationale of natural obligations (1947 Code and 1427)
Commission)
An incapacitated person is not obliged to
1. On the part of the payor – It gives rise to a make any restitution except insofar as he
moral, rather than a legal duty to pay or has been benefited by the thing or price
perform, but the person performing feels received by him.
that in good conscience he should comply
with his undertaking, which is based on NOTE: A person who is between 18 and 21
moral grounds. years of age is not a minor. In present time,
the age of majority is 18 (RA 6809)
2. On the part of the payee – The payee is
obliged to return the amount received by However, if the law is applicable, the minor
him because the payor was not legally who voluntarily makes payment or
bound to make the payment restitution of what he has obtained by
contract even though he has no legal
NOTE: The foundation of nautral law are equity, obligation to make any payment or
morality and natural justice. (Sta. Maria, 2017) restitution, can no longer recover what he
has returned. (Sta. Maria, 2017)
Examples of Natural Obligations
4. Performance by winning party
1. Paying despite extinctive prescription
When, after an action to enforce a civil
When a right to sue upon a civil obligation obligation has failed the defendant
has lapsed by extinctive prescription, the voluntarily performs the obligation, he
obligor who voluntarily performs the cannot demand return of what he has
contract cannot recover what he has delivered or the payment of the value of the
delivered or the value of the service he has service he has rendered. (NCC, Art. 1428)
rendered. (NCC, Art. 1424)
5. Voluntary payment of an heir in excess of
e.g. The prescriptive period to file a case inherited property (NCC, Art. 1429)
based on a written agreement is 10 years
from the time the right of the action E.g. A is indebted to B for P10,000.00. A
accrues. If the creditor does not collect the later on dies, with C as his heir who is
amount of the loan after 10 years from the entitled only to P5,000.00 from the estate
time it should be paid, such creditor can no of A. If C voluntarily pays B P10,000.00, C
longer collect from the debtor. can no longer recover such amount. (Sta.
Maria, 2017)
If the debtor, despite the lapse of th period
and knowing that the debt has already 6. Payment of a void legacy (NCC, Art. 1430)
prescribed, pays the creditor, such debtor
can no longer recover the payment. (Sta. NOTE: Examples of natural obligations under
Maria, 2017) Title III are NOT exclusive. (Sta. Maria, 2017)
2. 3rd person paying against the will of the ESTOPPEL

debtor
An admission or representation is rendered

2021 GOLDEN NOTES
Civil Law
conclusive upon the person making it, and
cannot be denied or disproved as against the
person relying thereon. (NCC, Art. 1431)
Estoppel cannot be sustained by mere

argument or doubtful inference; it must be
clearly proved in all its essential elements by
clear, convincing and satisfactory evidence.
NOTE: Estoppel is not applicable in the

following cases:
1. When a law or public policy has been

violated;
2. Against the government suing in its

capacity as sovereign or asserting
governmental rights;
3. Against the government owing to the

mistakes or erros of its officers or agents;
and
NOTE: The government is never estopped

by mistakes on the part of its agents.
(Republic v. Go Bon Lee, G.R. No. L-11499,
April 29, 1961)
4. To questions of law.
Estoppel applies only to questions of fact. If

an act, conduct or misrepresentation of the
party sought to be estopped is due to the
ignorance founded on innocent mistake,
then estopple whill not arise. (Sta. Maria,
2017)
Parties bound
Estoppel is applied only as between
1. Parties thereto; or
2. Their successors-in-interest (NCC, Art.

1439)
477
Special Contracts - Sales
SPECIAL CONTRACTS b. Payment of Interest;
c. Time and Place of Payment; and
SALES d. Penalty.
Effect of absence of any of the essential

GENERAL PRINCIPLES elements
Sale The contract of sale is void. Absent proof of the

concurrence of all the essential elements of a
Sale is a contract where one party (seller or contract of sale, the giving of earnest money
vendor) obligates himself to transfer the cannot establish the existence of a perfected
ownership of and to deliver a determinate thing, contract of sale. (Manila Metal Container Corp. v.
while the other party (buyer or vendee) PNB, G.R. No. 166862, December 20, 2006)
obligates himself to pay for said thing a price
certain in money or its equivalent. (NCC, Art. Valid sale against the will of the owner of the
1458; 2001 BAR) property
The primary consideration in determining the 1. When the property is subjected to

true nature of a contract is the intention of the expropriation (NCC, Arts. 435 and 1488);
parties. If the words of a contract appear to 2. In case of ordinary execution sale conducted
contravene the evident intention of the parties, under Section 15, Rule 39 of the Revised
the latter shall prevail. Such intention is Rules of Civil Procedure;
determined not only from the express terms of 3. In case of judicial foreclosure sale under
their agreement, but also from the Rule 68; and
contemporaneous and subsequent acts of the 4. In case of extra-judicial foreclosure sale
parties. (Heirs of Dela Rosa v. Batongbacal, et al., under Act 3135, as amended. (Pineda, 2010)
G.R. No. 179205, July 30, 2014)
Effect of Reluctant Consent
ELEMENTS OF A CONTRACT OF SALE
Consent when reluctantly given is not vitiated
1. Essential elements – for validity: consent. There is no difference in law where a
person gives his consent reluctantly and even
a. Consent – meeting of the minds to against his good sense and judgment as when he
transfer ownership in exchange for the acts voluntarily and freely.
price;
b. Determinate subject matter –
STAGES OF A CONTRACT OF SALE
determinate thing which is the object of
the contract; and
1. Negotiation or Policitaion Stage – begins
c. Consideration – price certain in money
from the time the prospective contracting
or its equivalent.
parties manifest their interest in the
contract and ends at the moment of
2. Natural elements –inherent in the contract,
agreement of the parties. A negotiation is
and are deemed to exist in the contract in
formally initiated by an offer, which must be
the absence of any contrary provision.
certain;
Examples:
To convert the offer into a contract, the
acceptance must be absolute and must not
a. Warranty against eviction; and
qualify the terms of the offer; it must be
b. Warranty against hidden defects.
plain, unequivocal, unconditional and
without variance of any sort form the
3. Accidental elements – dependent on parties’
proposal. (Manila Metal Container Corp. v.
stipulations;
PNB, G.R. No. 166862, December 20, 2006)
Examples:
It is important to consider that at this stage,
there is freedom to contract, which
a. Conditions;
signifies the right to choose with whom to

2021 GOLDEN NOTES
Civil Law
contract and what to contract. Thus, an subject property for sale to any interested
owner of a property is free to offer the person, and is not
duty bound to sell the same to the occupant Each party is simultaneously a debtor and
thereof, absent any prior agreement vesting creditor of the other. (Villanueva, 2018)
the occupants the right of first priority to
buy. (Villanueva, 2018) 3. GR: Commutative – The thing sold is
considered the equivalent of the price paid
2. Perfection or birth – takes place when the and the price paid is the equivalent of the
parties agree upon the essential elements of thing sold.
the contract; and
NOTE: There is no requirement that the
NOTE: From the point of perfection, parties price should be equal to the exact value of
may reciprocally demand performance, the subject-matter of the sale. All that is
subject to the provisions of the law required is that the parties believed that
governing the form of contracts. they will receive good value in exchange for
what they will give. (Villanueva, 2018)
Not all contracts of sale becomes
automatically and immediately effective XPN: Aleatory – The consideration is not
upon perfection. A suspensive condition or equivalent of what has been received in the
period suspends the demandability of the case of purchase of a lotto ticket. If the ticket
obligation, but the contract is still perfected. wins, the prize is much more than the price
(Villanueva, 2018) of the ticket.
3. Consummation – occurs when the parties 4. Principal – Its existence does not depend
fulfill or perform the terms agreed upon in upon the existence and validity of another
the contract culminating in the contract.
extinguishment thereof. (SM Investments
Corp. v. Posadas, citing Swedish Match v. CA, 5. Onerous – The thing sold is conveyed in
G.R. No. 200901, December 7, 2015) consideration of the purchase price, and vice
versa.
CHARACTERISTICS OF A CONTRACT OF SALE
6. Nominate – It has a specific name given by
1. Consensual – A sale is perfected by mere law. (Pineda, 2010)
consent, which is manifested by the meeting
of the minds as to the offer and acceptance 7. Title, not a mode – The contract of sale is
thereof on the subject matter, price and not a mode, but merely a title. The sale itself
terms of payment. does not transfer or affect ownership, what
it does is to create the obligation to transfer
NOTE: Delivery of the thing bought or ownership.
payment of the price is not necessary for the
protection of the contract; and failure of the NATURE AND FORM OF CONTRACT
vendee to pay the price after the execution (2002, 2006 BAR)
of the contract does not make the sale null
and void for lack of consideration but results The contract of sale is perfected at the moment
at most in default on the part of the vendee, there is a meeting of minds upon the thing which
for which the vendor may exercise his legal is the object of the contract and upon the price.
remedies. (Rabuya, 2017) From that moment, parties may reciprocally
demand performance, subject to the provisions
2. Bilateral – The seller will deliver and of the law governing the forms of contracts.
transfer a determinate thing to the buyer
and the latter will pay an ascertained price Formal requirement for the validity of a
(or its equivalent). It imposes obligations on contract of sale
both the seller and buyer. The obligations of
each party is the cause for the obligation of GR: A contract of sale may be made in writing, or
the other. by word of mouth, or partly in writing and partly
479
Special Contracts - Sales
by word of mouth, or may be inferred from the from Asiamed Supplies and Equipment
conduct of the parties. (NCC, Art. 1483) Contracts Corporation (“Asiamed”) at a total price of
shall be obligatory, in whatever form they have P31,000,000.00. The machines were
been entered into, provided all the essential delivered on 20 May 2003 and on 17 July
requisites for their validity are present. (NCC, 2003, whereupon two delivery invoices that
Art. 1356) provided for a 12% annual interest and 25%
attorney’s fees charge on overdue accounts,
XPNs: were signed by petitioner Anthony Dee
(“Dee”) and DHFLMC Vice President for
1. If the law requires a document or other Administration.
special form, the contracting parties may
compel each other to observe that form. After the demand for the collection of the
(NCC, Art. 1357) unpaid remaining balance of P25,700,000.00
went unheeded, Asiamed was constrained to
2. Under Statute of Frauds, the following file a complaint for sum of money against the
contracts must be in writing; otherwise, DHLFMC and Dee before the Regional Trial
they shall be unenforceable: Court (“RTC”). Should DHLFMC be held liable
for 12% interest and 25% attorney’s fees
a. Sale of personal property at a price stipulated in the delivery invoices?
not less than P500;
b. Sale of a real property or an interest A: YES. DHLFMC should be held liable for the
therein; interest and attorney’s fees stipulated in the
c. Sale of property not to be delivery invoices, although the attorney’s fees
performed within a year from the should properly be reduced to 10%. These
date thereof; or delivery invoices formed part of the Contract of
d. When an applicable statute requires Sale, given that a contract need not be contained
that the contract of sale be in a in a single writing but may be collected from
certain form. [NCC, Art. 1403(2)] several different writings which do not conflict
with each other and which, when connected,
3. Sale of large cattle which requires that the show the consent of the parties, subject matter,
same be recorded with the city/municipal terms and consideration, as in contracts entered
treasurer and that a certificate of transfer be into by correspondence.
issued. Otherwise, the sale is not valid. (NCC,
Art. 1581) A contract may be encompassed in several
instruments even though every instrument is
NOTE: The contract of sale of REAL not signed by the parties, since it is sufficient if
PROPERTIES even if not complete in form, so the unsigned instruments are clearly identified
long as the essential requisites of consent of the or referred to and made part of the signed
contracting parties, object, and cause of the instrument or instruments. Similarly, a written
obligation concur and they were clearly agreement of which there are two copies, one
established to be present, is valid and effective signed by each of the parties, is binding on both
between the parties. to the same extent as though there had been
only one copy of the agreement and both had
Under Art. 1357 of the NCC, its enforceability is signed it. (DHLFMC, et al. v. Asiamed, G.R. No.
recognized as each contracting party is granted 205638, August 3, 2017, as penned by J. Leonen)
the right to compel the other to execute the
proper public instrument so that the valid Instances where the Statute of Frauds is not
contract of sale of registered land can be truly essential for the enforceability of a contract
registered and can bind third persons. (Rabuya, of sale
2017)
1. When there is a note or memorandum in
Q: On 2 August 2002, Dee Hwa Liong writing and subscribed to by the party or his
Foundation Medical Center (“DHLFMC”) agent (contains essential terms of the
entered into a contract to purchase a contract);
GammaMed Plus Brachytheraphy machine
and a Gammacell Ellan 3000 blood irradiator

2021 GOLDEN NOTES
Civil Law
2. When there has been partial e. Void.
performance/execution (seller delivers with
the intent to transfer title/receives price); 5. Legality of the object:
3. When there has been failure to object to a. Licit object; and

presentation of evidence aliunde as to the b. Illicit object.
existence of a contract without being in
writing and which is covered by the Statute 6. Presence or absence of conditions:
of Frauds; or
a. Absolute; and
4. When sales are effected through electronic b. Conditional.
commerce. (Villanueva, 2014)
7. Wholesale or retail:
NOTE: Rules on forms, and of validity and
enforceability of contracts of sale, are strictly a. Wholesale; or
kept within the contractual relationship of the b. Retail.
seller and buyer pursuant to the characteristic of
relativity of every contract, and do not 8. Proximate inducement for the sale:
necessarily apply to third parties whose rights
may be affected by the terms of a sale. a. Sale by description;
b. Sale by sample; and
KINDS OF CONTRACT OF SALE c. Sale by description and sample.
As to: 9. When the price is tendered:
1. Nature of the subject matter: a. Cash sale; and

b. Sale on installment plan.
a. Sale of real property; and
b. Sale of personal property. A contract of sale may be absolute or
conditional.
2. Value of the things exchanged:
Absolute Sale
a. Commutative sale; and
b. Aleatory sale. A sale is absolute when no condition is imposed
and ownership passes to the vendee upon
3. Tangibility of the object: delivery of the thing subject of the sale. (NCC,
Art. 1497)
a. Sale of property (tangible or
corporeal); A contract of sale is absolute when the title to
the property passes to the vendee upon delivery
NOTE: A tangible object is also called of the thing sold. (Rabuya, 2017)
chose in possession.
Instance when a deed of sale considered
b. Sale of a right (assignment of a right, or absolute in nature
a credit or other intangibles such as
copyright, trademark, or good will); A deed of sale is considered absolute in nature
where there is neither a stipulation in the deed
NOTE: An intangible object is a chose that title to the property sold is reserved in the
in action. seller until the full payment of the price, nor one
giving the vendor the right to unilaterally
4. Validity or defect of the transaction: resolve the contract the moment the buyer fails
to pay within a fixed period.
a. Valid;
b. Rescissible; Conditional Sale
c. Voidable;
d. Unenforceable; and It is conditional where the sale contemplates a
481

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Obligations

3. The extinguishment of the old 1. Substitution is upon the initiative or

Novation by substitution of debtor 1. Substitution is upon the initiative or

UNIVERSITY OF SANTO TOMAS 432

UNIVERSITY OF SANTO TOMAS 434

A: YES. Novation, as a mode of extinguishing Effects of novation

a. If resolutory and it occurred – Old Furthermore, a surety is not released by a

a. Void – Original one shall subsist, unless Subrogation

i. If resolutory – Valid until the Kinds of subrogation

ii. If suspensive and did not materialize a. Legal subrogation – Constituted by

UNIVERSITY OF SANTO TOMAS 436

CONVENTION GR: Legal subrogation is not presumed. (NCC,

UNIVERSITY OF SANTO TOMAS 438

While a contract is one of the sources of Principle of relativity or Principle of limited

NOTE : Determine whether a contract 5. When a third person induces a party to

2. Stipulation pour autrui (stipulation in NOTE: This tort or wrongful conduct is

Requisites of stipulation pour atrui: It is based on quasi-delict and their liability is

UNIVERSITY OF SANTO TOMAS 440

UNIVERSITY OF SANTO TOMAS 442

Q: In view of a complaint for damages filed A: NO. A judgment on compromise may be

UNIVERSITY OF SANTO TOMAS 444

1. Parties to the contract; and ESSENTIAL REQUISITES OF A CONTRACT

XPNs: The following are the essential requisites of

UNIVERSITY OF SANTO TOMAS 446

An offer is defined as an expression of A: It is considered a continuing offer by the

Requisites of a valid acceptance 2. No stated period

1. Must be absolute; a qualified acceptance a. Offer is made to a person present –

UNIVERSITY OF SANTO TOMAS 448

NOTE : Burden rests upon the party who seeks Violence

UNIVERSITY OF SANTO TOMAS 450

Influence obtained by persuasion or argument Kinds of Fraud

Failure to disclose facts, when there is a duty to FRAUD IN

Acts considered not fraudulent

UNIVERSITY OF SANTO TOMAS 452

Q: Tiro is a holder of an ordinary timber The contemporaneous and subsequent acts of

UNIVERSITY OF SANTO TOMAS 454

e.g., Contract of Sale GR: A false cause in a contract makes the

UNIVERSITY OF SANTO TOMAS 456

Q: May a moral obligation constitute a Formalities required in specific contracts

1. Validity (formal contracts); a. There must be a public instrument

1. Donation of personal property whose value Contracts that must be registered

UNIVERSITY OF SANTO TOMAS 458

a. There exists a reliable assurance as to According to the degree of dependence:

b. That document is capable of being e. g., contract of loan.

According to perfection or formation: e. g., contract of agency, as agency does not

e.g., Pledge, Mortgage. 1. Commutative Contracts – are those where

e.g., Loan. e.g., Lease.

According to their purpose: e.g., Insurance.

1. Transfer of Ownership According to their names or norms

UNIVERSITY OF SANTO TOMAS 460

2. The parties’ true intention is not expressed Q: Multi-Realty Development Corporation

UNIVERSITY OF SANTO TOMAS 462

Complementary-contracts-construed- If the doubts are cast upon the principal object

If one contract is incorporated into another, Q: In response to Araneta Center Inc.’s

UNIVERSITY OF SANTO TOMAS 464

A: NO. CECON and ACI should not be bound by

In order to judge the intention of the contracting

Entered without Illegality (void) or

Suffered by – As to the other