SC Notes

STATUTORY CONSTRUCTION REVIEWER l NIKKI T.
SIA | WLC SCHOOL OF LAW
STATUTORY CONSTRUCTION
LEGISLATIVE PURPOSE
-
DEFINITION
It is the art of seeking the intention of the legislature in

enacting a statute and of applying it to a given state of facts.
SCOPE OF CONSTRUCTION
AMBIGUITY
Defined as the doubtfulness, doubleness of meaning,
indistinctness, or uncertainty of meaning of the
expression used in a written instrument.
A condition of admitting 2 or more meanings.
Susceptible of more than one interpretation.
REMEDY FOR COURTS IN CASE OF AMBIGUITY
JUDICIARY HAS SOLE POWER TO INTERPRET THE LAW
Reason why particular statute was enacted by

legislature.
Legislation is an active instrument and
government which, for the purpose of
interpretation means that laws have ends to be
achieved.
LEGISLATIVE MEANING
-
Is what the law, by its language means

What it comprehends
Legislation is an active instrument and
government which, for the purpose of
interpretation means that laws have ends to be
achieved.
What it confines and limits
What is covers and embraces
divided CASE
ILLUSTRATIVE
PURPOSE OF CONSTRUCTION
-
Tools to ascertain the meaning and intention of the

legislature so that they may be enforced.
In order to expound the meaning and intention of the
authors of the law, where that intention rendered
doubtfully reason of ambiguity in its language or of
the facts that given case is not explicitly provided for
in the law.
Is the drawing of warranted conclusions beyond
direct expression of the text expressions which are in
spirit though not within the text.
It involves judicial choice by the judiciary
Construction
Interpretation
Process
of
drawing
warranted conclusion not
always included in direct
expressions, or determining
the application of words to
facts in litigation
Art of finding the true sense

of meaning and sense of
any form of words.
FEDERATION OF FREE FARMERS VS. COURT OF

APPEALS
G.R. No. 41162 Sept. 10, 1981
RA 809 SUGAR ACT OF 1952
SEC. 1 In the absence of a written milling agreements
bet. Planters and millers in any sugar district in the Phils.
Sugar and its by-product and derivatives, shall be divided
bet. them. In the proportion therein specified.
SEC. 9 the proceeds in any increase participation
granted the planters under this act and above their
present share shall be divided 60% - labourer and 40% planters.
ISSUES:
1. WON RA 809 applies even if majority of the
planters have existing written agreements with
the millers with a different stipulation of dividing
the proceeds?
2. WON the legislative intent should be given
effect?
HELD:
1.
RULES OF CONSTRUCTION
-
Rules of statutory construction are tools used to

ascertain certain legislative intent
Not rules of law but axioms of experience
(widely accepted as true)
In enacting statute, legislature is presumed to
know the rules of statutory construction, in case
of doubt, it shall be construed in accordance
with the settled principles of interpretation.
Legislature also defines to ascertain the meaning
of vague, broad words or terms.
LEGISLATIVE INTENT
-
Essence of the law

It is the spirit which gives life to legislative
enactment.
It must be enforced
when
ascertained, although it may not be consistent
with the strict letter of the statute.
Determination of purpose and object of the law.
2.
SC INTENT OF THE LAW, THE SACADA SHOULD

BE GIVEN THEIR DUE, IRREGARDLESS OF THE
PRESENCE OF AN AGREEMENT.
YES.
LEGAL HERMENEUTICS
- branch of science which establishes principles & rules of
interpretation and construction of written rules.
- Is the systematic body of rules which are recognized as
applicable to the construction and interpretation of legal
writing.
Take Note:
EXEGESIS application of said principles and rules.
UNDERSTANDING THE LAW.
DIFFERENT KINDS OF INTERPRETATION
CLOSE INTERPRETATION - literal interpretation
STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW
EXTENSIVE INTERPRETATION - it adopts a more

comprehensive signification of the words. Liberal purpose
of the law.
EXTRAVAGANT INTERPRETATION substituting to true
meaning evidently beyond the true one and therefore not
genuine interpretation.
FREE AND UNRESTRICTED INTERPRETATION
proceeds simply on the general principles of
interpretation in good faith, not bound by any specific or
superior principle
LIMITED
OR
RESTRICTED
INTERPRETATION
influenced by other principles than the strictly

hermeneutics ones.
PREDESTINED INTERPRETATION takes place when
the interpreter, labouring under a strong bias mind,
makes the text subservient to his pre-conceived views
and desires.
COURT NOT BE INFLUENCED BY QUESTION OF

WISDOM
- courts must must not take these matters into account in
interpreting the law. (necessity, adequacy, wisdom,
reasonableness, and expediency of any law)
- has the final say to what the law means .
SUBJECTS OF CONSTRUCTION
1.
2.
3.
4.
5.
6.
CONSTITUTION
STATUTES
ORDINANCES
RESOLUTIONS
EXECUTIVE ORDERS
DEPARTMENT CIRCULARS
CONSTITUTION
-Fundamental law of the land which all other laws
must conform.
-body of rules
-Where the powers of sovereignty are habitually exercised
WHO HAS AUTHORITY TO CONSTRUE

PHILIPPINE CONSTITUTION
Judiciary
- has final say to what the law means.
(JUDICIAL FUNCTION)
- it construes laws as it decides cases based on
facts and the laws involved.
- laws are interpreted in the context of a peculiar
factual situation of each case.
- circumstances of time, place, event, person
and particularly attendant circumstances and
actions before, during and after the operative
fact have taken their totality so that justice can
be rationally and fairly dispensed.
Take Note:
Legislative makes the law
Executive enforces the law
MOOT AND ACADEMIC purpose has become stale; no
practical relief can be granted;
erelief has no practical effect.
GENERAL RULE : dismissal of the case
-written instrument
-fundamental powers of the government are established,
limited, and defined.
-by which these powers are distributed among the
different departments
-for their safe and useful exercise
-for the benefit of the public.
NATURE OF CONSTITUTION
-
Public interest requires its resolution

Rendering a decision on the merits
would be of practical value.
SC - last bulwark of democracy.

Impeachment in cases of the SC exceeds it
powers
It is a framework of the governmental machinery

Its contents are reflections of pre-existing laws,
rights, habits, and modes of thought.
DIFFERENCE BET. CONSTITUTION AND STATUTES
Exception : if capable of repetition, yet evading

review
It is not the origin of private rights, neither is it

the grantor of any, nor the beginning of the
government.
It only recognizes and declares the inherent
rights or pre-existing rights and prerogatives of a
free-people
CONSTITUTION
Lays
down
general
foundation of government
Permanent of character
STATUTES
Set in detail its purposes or
subject matter of which it
treats
Tentative in nature, in the
nature of temporary
expedients
LIMITATIONS ON THE POWER TO CONSTRUE

COMMON PARTS OF CONSTITUTION
Judicial legislation
- stretch the meaning of the statues to the point that it is
outside for the bounds of the statute.
- paradox cannot legislate.
JUDICIAL LEGISLATION
- An encroachment upon legislative prerogative to define
wisdom of the law.
- courts must administer the law as they find it without
regards to consequences
1.
2.
CONSTITUTION OF LIBERTY prescription of

fundamental civil rights and political rights of
citizen with correlative limitations on the power
of government
as means of securing full
enjoyment of those rights
CONSTITUTION OF GOVERNMENT set of
provisions
setting
up
governmental
framework
3.
CONSTITUTION OF SOVEREIGNTY set of

provision setting or prescribing the procedure
for amending the constitution.
1.
PUBLIC STATUTE
interest of the public
universal rule. In the
entire territory or to
state.
laws which concerns the

at large. It need not be a
sense it is applied to the
all the people in a given
2. PRIVATE STATUTE law which relates to concerns

and affects the particular individuals.
TYPES OF PUBLIC STATUE:
KINDS OF CONSTITUTION
1. WRITTEN CONSTITUTION where the provisions

of which are embodied in a single formal document
or set of documents. It is product of a deliberate
effort to lay down the fundamental principles in
accordance with which the government shall be
organized and conducted.
2. UNWRITTEN CONSTITUTION where the
provisions of which are not reduced in writing and
formally embodied in a single or set of documents.
It consists largely of mass of customs, usages, and
judicial decision together with a few legislative
enactments of a fundamental character.
3. CUMMULATIVE CONSTITUTIONwhose origin lies
mainly in customs, common law, judicial decisions,
and the like.
4. CONVENTIONAL/ENACTED CONSTITUTION
which is formulated either by a constitutional
convention or a royal proclamation.
5. RIGID CONSTITUTION which legally stand over
and above ordinary laws which may be amended
only thru proceedings different from the ordinary
legislative proceedings.
6. FLEXIBLE CONSTITUTION has no legal force
and authority than the ordinary legislative
enactments.
STATUTES
- An act of legislature
- a written will of the legislature solemnly expressed according
to the required form to constitute a law of a state.
- is an expression of the public will and a mandate of the
people acting thru the representatives.
DIFFERENCE BET. STATUTE AND STATUTE LAW
STATUTE
Law enacted by congress
STATUTE LAW
Broader term, as it includes
nt only statutes but also the
judicial interpretation and
application of such statutes.
Take Note:
STARE DECISES doctrine of precedence.
CLASSIFICATION OF STATUTES
GENERAL STATUTE law which affects all the

people of the state or operates equally to all
person in the same classification.
SPECIAL STATUTE law which relates either to a
particular person or thing of a class of which
operates on a portion of class instead of all the
class.(limited in scope)
LOCAL STATUTE law which operates over a
particular locality instead of over the entire state.
LEGISLATIVE POWER
The power or authority to make laws, and to alter
or repeal them.
-Embraces all subjects
-extends the manner of general concerns or common
interest
CONSTITUTIONAL BASIS FOR THE LEGISLATIVE
POWER OF CONGRESS
Sec. 1 Art. 6 Composition and election of
Representatives.
TN: party-list or sectoral reps. Are filled by
selection/election except religious groups.
BILL
-a proposed law signed by the author of the bill
-filed with the secretary of the house.
-foe enactment into law
-appropriation, revenue, tariff
-bills authorizing increase of public debt
-bills of local application and private bill are exclusively
for the lower house.
Tolentino vs. Secretary of Finance
Facts:
-Several bill introduced in the house of representatives to
expand the tax base of VAT system and enhance its
administration by amending the National Internal
Revenue Code (NIRC).
- these were refered to the committee to the house of
ways and menas committee which consolidated a bill and
recommended its approval.
-after the approval, it went to the senate and referred to
its committee on ways and means.
- senate approval after it was recommended by its
committee.
-The conference committee bill was then approved by
both houses and afterwards approved by the president
into law.
Take note:
All appropriations, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively
in the house of the representatives, but senate may
propose or concur with amendments.
Held:
A bill originating in the lower house may undergo
extensive changes in the senate that it may result even
to the rewriting of the entire bill.
HOW A BILL BECOMES A LAW
First reading
-reading of number and the title of the bill
-referral to the appropriate committee for study and
recommendation for calendar for second reading
Composition of committee:
-Experts in the subject under their jurisdiction
Committee Stage:
-hold public hearing on the proposed bill
-scrutinizes the bill
-committee may approve, with or without amendments,
rewrite the entirely, report it favourably or without
recommendation.
-committee reports and recommends for coalendar for
second reading.
Second reading
-read to be in full with the amendments proposed by the
committee, unless if copies of the bill has been
distributed and reading is dispense with.
-debates, pertinent motions and amendments.
-after approved for reading it shall be included in the
calendar of bills for third reading.
Those affecting the public for due process and right to

information
Exception:
For administrative purposes (internal consumption)
ORDINANCE POWER OF THE PRESIDENT
IMPLEMENTING RULES AND REGULATION:
SUPPLIES THE DETAILS FOR OTHERS TO FOLLOW
1. PUBLICATION IS INDISPENSIBLE
2. UP LAW CENTER (can be override as long as
provided)
Requisite for delegation of legislative power to supply
details:
a. Germane to the object and purpose of the law
b. Regulation be not in contradiction with, but
conform to, standards that the law prescribes
c. Law must be complete in itself to provide in
details.
Presumption of constitutionality
very statute is presumed valid
-lies on how a law is enacted
-due to respect to the legislation who passed and
executive who approved
- to doubt is to sustain its constitutionality
Requisite for judicial review
- actual case of contrive
- locus standi
- lis mota crux of the matter
- issue must be resolved at earliest possible time
Third reading
-as approved by vote of yeas and nays and entered into
the journal. (Art 6, Section 26)
Francisco Jr. Vs. House of the Representative

- Case file against CJ Davide
- another complaint file
Authentication of the bill

-signing by the speaker and senate president
-printed copy of the approved bill
-certified by respective house secretaries
Political question wisdom

Decided by people by their sovereign capacity
Doctrine of judicial restraint declare
unconstitutional .
3 WAYS A BILL BECOMES A LAW:

a. President signs the bill.
b. Vetoed by the president and returned to
congress and passed by 2/3 votes.
c. Inaction of the president after 30 calendar days.
PARTS OF THE STATUTE
Take note:
Vetoed bills objection are recorded in the journal.
3 readings on separate reading may be dispensed when
the presidents certifies to the necessity of its
immediate enactment like emergency and crisis
situations.
Political question- involve presidents discretion is beyond
question unless if there is grave abuse.
Tolentino vs. Comelec internal rules can be dispensed
with as long it does not work against of the constitution.
Conference committee
-third body of the legislature. Jurisdiction not only limited
to harmonizing the bill but also create a compromise
-mechanism to harmonize differences between both
houses in the passage of a bill into a law.
-it may produce result beyond its mandate.
PRESIDENTIAL ISSUANCES
Which require issuances:
the
law
Title
-one title one subject in order to prevent conglomeration
and logrolling as well as surprise and fraud.
-couch in the language sufficient to notify the legislators
and the public.
Take note:
Logrolling combination of multiple propositions in one
proposal.
*In effect the entire proposal is nullified, not only the
subject matter.
Preamble prefatory explanation
Enacting clause state the authority by which the act is
enacted.
Definition section defines terms
Administrative section enforcement of the body
Sanction penalties
Transitory provisions temporary provisions of
transition
Separability clause- state the is any provision of the
law is deemed invalid, the remainder shall not be
affected.
Repealing clause is not a legislative finding that the
earlier law is unconstitutional
Date of efficacy time it takes effect or if not indicated
usually 15 days following completion of publication.
*even leap year 365 days
Phil. Veterans Bank Employees Union vs. Vega

Facts:
-bank under liquidation proceedings before the court,
while pending, Congress enacted a law to rehabilitate the
bank.
-judge assail that the law was still not ineffect.
Effectivity of Presidential issuances, rules, and
regulations.
Publication is required before they take effect.
Exception:
Interpretative or internal in nature not concerning the
general public.
Presidential issuances, basis.
Ordinance power of the president
Authority to issue executive orders, proclamations,
administrative orders, memorandum, circulars, general or
special orders.
Effectivity
of
Implementing
Regulations(IRR)
-Penal
-Publication
-Filing in the UP Law Center
Except:
When law dispenses with the filing
But now dispense publication
rules
and
Nature of administrative rules and regulations

-they partake the nature of a statute
Rule making power of the public administrative
agency
Delegated legislative power.
Test of validity of delegation of rule-making power.
The law must be: complete in itself
Fix a standard, the limits are sufficiently determinate or
determinable
Types of Administrative rules and regulations
Enforce the law - IRR
Interprets the rule - LOI
Test of validity of administrative rules and
regulations.
Germane to the object of the law
Conforms to standards prescribed by law
Sole purpose of carrying into effect general provisions of
the law
Effectivity of local ordinances.
10 days from the date of posting
In bulletin boards and 2 other conspicuous
If ordinance is penal, published in a newspaper of general
circulation
Highly urbanized areas and independent component
citites posted and published
Manner of computing time.
Exclude
Year
Month
Day
Night
Week
the first day and last day included

- 365 day
- 30 days
- 24 hours
- sunset to sunrise
- 7 consecutive days
A.
Common or informal those which require no

particular form. Example Loan
B.
Special or formal those which require some

particular form. Examples Donations, chattel
mortgage
IV. According to their purpose

A.
B.
C.
Transfer of ownership ex. Sale

Conveyance of use ex. Commodatum
Rendition of services ex. Agency
V. According to their subject matter

A.
B.
Things ex. Sale, deposit, pledge

Services ex. Agency, lease of services
VI. According to the nature of the vinculum
A.
Unilateral those which give rise to an obligation

for only one of the parties. Examples
Commodatum, gratuitous deposit
B.
Bilateral those which give rise to reciprocal

obligations for both parties. Examples Sale, lease
VII. According to their cause

A.
Onerous those in which each of the parties aspires

to procure for himself a benefit through the giving of
an equivalent or compensation. Example Sale
B.
Gratuitous those in which one of the parties

proposes to give to the other a benefit without any
equivalent
or
compensation.
Example
Commodatum
VIII. According to the risks involved

A.
Commutative those where each of the parties

acquires an equivalent of his prestation and such
equivalent is pecuniarily appreciable and already
determined from the moment of the celebration of the
contract. Example Lease
B.
Aleatory those where each of the parties has to his

account the acquisition of an equivalent of his
prestation, but such equivalent, although pecuniarily

appreciable, is not yet determined at the moment of
the celebration of the contract, since it depends upon
the happening of an uncertain event, thus charging the
parties with the risk of loss or gain. Example
Insurance.
IX. According to their names or norms regulating them
A.
Nominate those which have their own individuality

and are regulated by special provisions of law.
Examples Sale, lease
B.
Innominate those which lack individuality and are

not regulated by special provisions of law.
FREEDOM TO CONTRACT
1306. The contracting parties may establish such

stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
RIGHT TO CONTRACT
The contracting parties are free to establish any stipulation,
clause, term or condition, so long as they are not against law,
good customs, public order or public policy.
Both a statutory and constitutional right
The freedom to contract is both a constitutional and statutory
right. Hence, to uphold this right, the courts should move with
all the necessary caution and prudence in holding contracts
void.
LIMITATIONS
The right however is not absolute in character. It is subject to
several limitations. Consequently, the stipulations, clauses,
terms and conditions established by the parties must not be
contrary to:
1.
2.
3.
4.
5.
Law
Morals
Good customs
Public order
Public policy
1st Not contrary to law

The most important of the limitations. The laws referred are:
A.
B.
C.
Those which are mandatory or prohibitive in

character
Those without being mandatory or prohibitive,
nevertheless, expressive of fundamental principles of
justice
Those which impose essential requisites without
which the contract cannot exist
Examples:
1.
2.
Pactum commissorium (a clause providing that the

mortgagee will automatically own the property
mortgaged if the debt is not paid at maturity) is null
and void.
A stipulation that all judicial and extrajudicial acts
necessary under the terms thereof shall take place in
a certain municipality. (Right to fix jurisdiction of
courts can only be fixed by the legislative branch)
2nd Not contrary to morals

The most difficult to ascertain because in subjecting
obligations to moral precepts, there must be a careful effort
not to erase the distinction between moral and the juridical

order.
Morals those principles which are incontrovertible and are
universally admitted and which have received social and
practical recognition.
Examples:
1. A penalty clause providing for the payment of P5 for
each days delay after the maturity of a loan for P465
was held immoral inequitable, shocking to the human
conscience, and void.
2. A promise of marriage based on a carnal
consideration is immoral and, therefore, void.
3. The agreement to work without pay is immoral and
void since this would amount to involuntary
servitude.
3rd Not contrary to good customs
The spheres of morals and good customs frequently overlap
each other but sometimes they do not. It must be admitted,
however, that if a moral precept or custom is not recognized
universally, but is sanctioned by the practice of a certain
community, then it shall be included within the scope or
sphere of good customs.
4th Not contrary to public order
Under the present Civil Code, it would seem that public order
can only refer to the safety, as well as to the peace and order,
of the country or of any particular community. This can be
implied from the report of the Code Commission which states
that public order is not as broad as public policy, as the latter
may refer not only to public safety but also to considerations
which are moved by the common good. However, in the
Spanish Civil Code, both are considered synonymous.
5th Not contrary to public policy
A contract is contrary to public policy if it has a tendency to
injure the public, is against the public good, or contravenes
some established interest of society, or is inconsistent with
sound policy and good morals, or tends clearly to undermine
the security of individuals rights.
Examples:
1. Those denying access to the courts
2. Those which encourage fraud
3. A stipulation bargaining away or surrendering for a
consideration the right to vote and to run for public
office. These are rights conferred not for individual or
private benefit or advantages but for the public good
and interest.
4. Those which tend to stifle the prosecution of a person
charged with a crime, for a pecuniary or other
valuable consideration
5. Those exempting a carrier from liability for gross
negligence
Stipulations exempting a common carrier from liability
Three kinds of stipulations ordinarily made in a bill of lading:
A.
Exempting the carrier from any and all liability for

loss or damage occasioned by its own negligence
Effect: Contrary to public policy.
B.
Providing for an unqualified limitation of such liability

to an agreed valuation
Effect: Contrary to public policy, except if it can be
shown to be reasonable under the circumstances,
and had been fairly and freely agreed upon, then it is
perfectly valid
C.
Limiting the liability of the carrier to an agreed

valuation unless the shipper declares a higher value
and pays a higher rate of freight
Effect: Perfectly valid and binding
Contracts which tend to restrain business or trade

They are perfectly valid, provided that:
A.
B.
There is a limitation upon either time or place

The restraint must be reasonably necessary for the
protection of the contracting parties
Ysmael & Co. v. Barreto

Facts:
Defendant received 164 cases of silk from plaintiff to be
shipped to Surigao. There was a stipulation in the bill of lading
that the carrier shall not be liable for loss or damage from any
cause beyond an amount exceeding P300 for each single
package. Four cases of silk, each valued at P2, 500 were lost.
Defendant argued that his liability shall extend only to the
amount agreed upon in the bill of lading.
Held:
Such a limitation of value is unconscionable and void against
public policy. A carrier cannot limit its liability for injury or loss
of goods shipped as caused by its own negligence. A contract
that undertakes to relieve the carrier from any liability would
in legal effect nullify the contract.
Ferrazzini v. Gsell
Facts:
Parties agreed that the plaintiff should not (1) engage in any
business enterprise similar to or in competition with those
operated by the defendant or (2) enter into the employment
of any enterprise in the Philippines, except after obtaining the
written permission of the defendant. Plaintiff agreed to pay
P10, 000 to defendant as liquidated damages for each breach
of a clause of the contract.
Issue: Whether the stipulation is valid and binding upon the
plaintiff.
Held:
The contract is an undue and unreasonable restraint of trade
and therefore against public policy. It is limited as to time and
space but not as to trade. It would force the plaintiff to leave
the Philippines in order to obtain a livelihood in case the
defendant declined to give him the written permission to work
elsewhere in the country.
Del Castillo v. Richmond
Facts:
Parties agreed that plaintiff should not (1) open or own nor
have any interest directly or indirectly in any other drugstore
either in his own name or in the name of another, (2) have
any connection with or be employed by any other drugstore
either as pharmacist or in any capacity in any drugstore within
a radius of 4 miles from the municipality of Legaspi, so long as
the defendant or his heirs may own or have an interest in a
drugstore in the said municipality.
Issue: Whether the agreement is valid and binding upon the
plaintiff
Held:
A contract in restraint of trade is valid and not considered
against the benefit of the state, provided there is a limitation
upon either time or place and that the restraint is necessary
to protect the interest of the parties. Considering the nature of
the business in which the defendant is engaged, in relation
with the limitation place upon the plaintiff both as to time and
place, such limitation is legal and reasonable and not contrary

to public policy.
Sy Suan v. Regala
Facts
Sy Suan, president of Price, Inc. executed a special power of
attorney in favour of Regala authorizing him to prosecute an
application for a license with the Import Control Office (ICO)
for the importation of industrial starch for candy manufacture.
There was a verbal agreement that as compensation for
Regalas service, he would be paid 10% of the total value of
the amount that would be approved by the ICO. Regala was
able to prosecute the approval successfully. Sy Suan refused
to pay the 10% commission as agreed upon contending that
the agreement is contrary to public policy. Regala countered
by saying that there is no showing that the contract violated
any public policy.
Held:
The contract is contrary to good customs, public order and
public policy. The contract sprouted as a result of the controls
imposed by the government on imports and dollars
allocations, despite the enunciated government policy that
applications for imports should be considered strictly on the
basis of merit, without intervention of intermediaries that
would only influence or corrupt the judgment of public officials
performing services connected with the issuance of import
licenses. Also, actual injury need not be shown. It is enough if
the potentialities for harm are present.
Cui v. Arellano University
Facts:
Cui took up law at Arellano University where he was a
constant recipient of scholarship grants. During his stay, he
was made to sign a waiver of his right to transfer to another
school unless he refunds to the University the equivalent of
his scholarship grants. In his last semester of his fourth year,
he transferred to Abad Santos Law School. Consequently,
when he applied for the Bar exams, he was required to furnish
a copy of his transcript from Arellano University to which the
university refused to give unless he makes the refunds, which
Cui did, under protest. Subsequently, Cui brought an action to
recover the amount which he paid. Will the action prosper?
Held:
Yes, since the waiver signed by Cui is contrary to public policy
and therefore null and void. Scholarship grants are awarded in
recognition of merit and not to attract and keep brilliant
students in school for their propaganda value To look at such
grant as a business scheme
designed to increase the
business potential of a school is not only inconsistent with
sound public policy but also good morals.
Compromise Agreements
A contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one already
commenced.
General rule: A compromise has upon the parties the effect
and authority of res judicata. This holds true even if the
agreement has not been judicially approved. From the time a
compromise is validly entered into, it becomes the source of
the rights and obligations of the parties thereto.
Exception: To have the force of res judicata, the compromise
agreement must be approved by final order of the court. To be
valid, it must be based on real claims and actually agreed
upon in good faith.
NOMINATE AND INNOMINATE CONTRACTS
1307. Innominate contracts shall be regulated by the

stipulations of the parties, by the provisions of Titles I and II of
this Book, by the rules governing the most analogous
nominate contracts, and by the customs of the place.
NOMINATE CONTRACTS
Those which have their own distinctive individuality and are
regulated by special provisions of law.
Examples:
1. Sales
7. Antichresis
2. Barter or exchange
8. Compromise &
arbitration
3. Lease
9. Guaranty
4. Partnership
10. Pledge
5. Agency
11. Mortgage
6. Aleatory contracts
12. Deposit
(i.e. insurance, gambling and life annuity)
INNOMINATE CONTRACTS
Those which lack individuality and are not regulated by
special provisions of law.
Four kinds of innominate contracts:
A.
B.
C.
D.
do ut des (I give that you may give)

do ut facias (I give that you may do)
facio ut des (I do that you may give)
facio ut facias (I do that you may do)
Governing rules for innominate contracts:

A.
B.
C.
D.
Stipulations
Titles I and II of Book IV Obligations and Contracts
Rules on the most analogous nominate contracts
Customs of the place
Perez v. Palomar
1310. The determination shall not be obligatory if it is

evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances.
MUTUALITY OF CONTRACTS
This Article stresses the principle of mutuality of contracts
that is, both parties are bound. The principle is based on the
essential equality of the parties. It is repugnant to bind one
party, and yet leave the other free.
Consequences of mutuality
1. The validity or fulfillment of a contract cannot be left to
the will of one of the contracting parties. What is
prohibited is:
a) The power to determine whether or not the
contract shall be valid
b) The power to determine whether or not the
contract shall be fulfilled
2. The validity or fulfillment may be left to the will of a third
person whose decision shall only be binding when it has
been made known to each of the contracting parties,
provided that it is not evidently unequitable.
3. The validity or fulfillment can be left to chance.
PROHIBITIONS NOT FALLING UNDER ART 1308
There are certain agreements which will in effect render the
mutuality of contracts illusory because one of the contracting
parties is placed in a position of superiority with regard to the
determination of the validity of the contract but which,
however, do not fall within the purview of the prohibition in
Art 1308.
1.
Obligor promises to pay a certain amount which is

not determined, but the contract itself specifies the
manner by which the amount may be determined
such as by the exercise of the judgment and
discretion of the obligor.
2.
Fulfillment of the contract is left to the will of one of

the contracting parties in the negative form of
rescission.
Facts:
Plaintiff rendered services to defendant as interpreter during a
certain period. However, it does not appear that any express
contract was ever entered into.
Issue:
Whether there is a binding contract which will justify a court of
law in fixing a just compensation for the plaintiff.
Held:
Whether the service was solicited or offered, the fact remains
that Perez rendered to Pomar services as interpreter. Without
any evidence that the same was rendered gratuitously,
defendant is obligated to pay a just compensation by virtue of
the innominate contract facio ut des (I do that you may give)
because no one should unjustly enrich himself to the damage
of another.
MUTUALITY OF CONTRACTS
1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them.
1309. The determination of the performance may be left to a
third person, whose decision shall not be binding until it has
been made known to both contracting parties.
Liebenow v Phil Vegetable Oil Co.

Facts:
Plaintiff instituted an action to recover a sum of money which
he considered himself entitled by way of bonus in addition to
his salary while employed by the defendant. The basis of his
claim is a letter from the president of the company promising
to pay him in addition to his salary such further amount as
the Board of Directors may see fit to grant. It was established
that plaintiff in fact received P4, 500 in installments which the
defendant contends is the bonus which the Board of Directors
had seen fit to grant. However, the plaintiff maintains that it is
merely an addition to his salary and that the bonus has not
yet been paid.
Held:
A promise of this character creates a legal obligation binding
upon the promisor, although in its actual results it may not
infrequently prove to be illusory. Such promise is not nugatory
under Article 1182 of the Civil Code, as embodying a condition
dependent exclusively upon the will of the obligor. Nor can it
be held invalid under Article 1308 which declares that the
validity and performance of a contract cannot be left to the
will of one of the contracting parties. The uncertainty of the
amount to be paid by way of bonus is also no obstacle to the
validity of the contract, since the contract itself specifies the
manner in which the amount payable is to be determined,
namely, by the exercise of the judgment and discretion of the

employer.
Taylor v. Uy Tieng Piao
Facts:
Plaintiff was employed by defendant as superintendent of an
oil factory. One of the stipulations in the contract of
employment was the following clause: It is understood that
should the machinery to be installed in the said factory fail to
arrive within a period of 6 months, this contract may be
cancelled, the cancellation not occurring before the expiration
of 6 months Because of the failure of the machinery to
arrive, the defendant cancelled the contract. Subsequently,
plaintiff filed for breach of contract, claiming that the validity
of a contract cannot be left to the will of one of the
contracting parties (Art 1308) and that a condition shall be
deemed fulfilled if the obligor intentionally prevents its
fulfillment (Art 1186).
Held:
Art 1309 creates no impediment to the insertion in a contract
for personal service of a resolutory condition permitting the
cancellation of the contract by one of the parties. It is entirely
licit to leave the fulfillment to the will of either of the parties
in the negative form of rescission for in such supposed case
neither is the article infringed, nor is there any lack of equality
between the persons contracting, since they remain with the
same faculties in respect to fulfillment.
RELATIVITY OF CONTRACTS
1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received from
the decedent.
If a contract should contain some stipulation in favour of a
third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favour upon a third person.
RELATIVITY OF CONTRACTS
This article stresses the principle of relativity that is
contracts are generally effective only between the parties,
their assigns, and their heirs. Rationale: Res inter alios acta
aliis neque nocet prodest. (The act, declaration, or omission
of another, cannot affect another)
PERSONS BOUND BY CONTRACT
General rule: Contracts can take effect only between the
parties, their assigns and heirs. Therefore, generally, its terms
cannot determine the rights of third persons.
A.
B.
Even though the contract may have been executed

ostensibly in the name of another person, it shall
produce effect only insofar as the real contracting
party is concerned, provided, that such fact was
known to the other party.
An assignment or transfer has the effect of
subrogating the assignee to all of the rights and
obligations of the assignor.
Take note:
Monetary obligations that the decedent might have incurred
during his lifetime CANNOT be transmitted to his heirs
through succession. Hence, the heirs cannot be charged
directly with the payment of such obligations.
Reason: Rules of Court such obligations must be liquidated

in the testate or intestate proceeding for the settlement of the
estate of the decedent.
Exceptions
The rule that an assignee or heir shall be bound by the terms
of a contract IS NOT ABSOLUTE in character. The rule is not
applicable if the rights and obligations arising from the
contract are NOT transmissible:
1.
By their nature, as when the special or personal

qualification of the obligor constitutes one of the
principal motives for the establishment of the contract
2.
By stipulation of the parties, as when the contract

expressly provides that the obligor shall perform an act
by himself and not through another
3.
By provision of law, as in the case of those arising from

a contract of partnership or of agency
EFFECT OF CONTRACTS ON THIRD PERSONS

General rule: Since contracts can take effect only between
the contracting parties, as well as their assigns or heirs, it
follows as a general rule that it CANNOT produce any effect
whatsoever as far as third persons are concerned. Hence, he
who is not a party to a contract has no legal capacity to
challenge its validity, even if the same is voidable.
Exceptions: Instances where a contract may produce effect
either directly or indirectly on third persons:
1. Where the contract contains a stipulation in favour of a
third person
2. Where the third person comes into possession of the
object of a contract creating a real right
3. Where the contract is entered into in order to defraud a
third person
4. Where the third person induces a contracting party to
violate his contract
STIPULATIONS IN FAVOUR OF THIRD PERSONS
A stipulation in a contract, clearly and deliberately conferred
by the contracting parties in favour upon a third person, who
must have accepted it before it could be revoked. In effect,
such third person may demand its fulfillment.
Kinds of beneficial stipulations:
A.
Those where the stipulation is intended for the sole

benefit of the third person
B.
Those where an obligation is due from the promise to

the third person which the former seeks to discharge
by means of such stipulation
Requisites:
1. There must be a stipulation in favour of a third person
2. The stipulation must be a part, not the whole of the
contract
3. The contracting parties must have clearly and
deliberately conferred a favour upon a third person, not
a mere incidental benefit or interest
4. The third person must have communicated his

acceptance to the obligor before its revocation (express
or implied)
5. Neither of the contracting parties bears the legal
representative or authorization of the third party
Test of beneficial stipulation
How to determine whether the interest of a third person in a
contract is a stipulation our autrui or merely an incidental
interest?
Answer: Rely upon the intention of the parties as disclosed by
their contract. Did the contracting parties deliberately insert
terms in their agreement with the avowed purpose of
conferring a favour upon such third person?
Kauffman v. Phil National Bank
Facts:
Defendant bank, for a valuable consideration paid by the
Philippine Fiber and Produce Co., agreed to cause a certain
sum of money to be paid to the plaintiff in New York City.
However, the bank cabled its representative in NYC to
withhold payment of the amount to plaintiff. This led the
plaintiff to file an action to recover the amount.
Issue:
Whether or not the lack of privity with the contract on the part
of the plaintiff is fatal to the maintenance of this action.
Held:
The fairest test in this jurisdiction whereby to determine
whether the interest of a third person in a contract is a
stipulation pour autrui or merely an incidental interest, is to
rely upon the intention of the parties as disclosed by their
contract. The right of the plaintiff to maintain the present
action is clear enough, for it is undeniable that the banks
promise to cause a definite sum of money to be paid to the
plaintiff in New York City is a stipulation in his favour within
the meaning of the paragraph above quoted; and the
circumstances under which the promise was given disclose an
evident intention on the part of the contracting parties that
the plaintiff should have that money upon demand in New
York City.
Coquia v. Fieldmens Insurance Co.
Facts:
Fieldmens Insurance Co issued in favour of Manila Yellow
Taxicab Co, a common accident insurance policy which
stipulates that the company will indemnify the insured in the
event of accident against all sums which the insured will
become legally liable to pay for death or bodily injury to any
fare-paying passenger, including the driver, conductor or
inspector. Subsequently, as a result of a vehicular accident,
Carlito Coquia was killed (driver of one of the vehicles covered
by the said policy). The company and the insured failed to
agree with respect to the amount to be paid to the heirs of the
drivers. Hence, the parents of Carlito brought an action
against the company. The company contends that the parents
have no cause of action because they have no contractual
relation with the company.
Held:
It is true that as a general rule, only the parties to a contract
may bring an action based thereon. However, the same
admits of some exceptions, one of which is 2 nd par of Art 1311
which states that the enforcement of contracts pour autrui
may be demanded by a third party for whose benefit it was
made, although not a party to the contract. The policy
provides that the company will indemnify any authorized
driver of the insured and in the event of death of said driver,
his personal representatives. Clearly, the policy is typical of
contracts pour autrui. Therefore, the heirs of Coquia have a

direct cause of action against the company.
Constantino v. Espiritu
Facts:
A and B are legally married. A executed a fictitious deed of
sale of a two-storey house and four subdivision lots in favour
of his mistress, M, who was pregnant at that time, with the
understanding that M should hold the properties in trust for
their unborn illegitimate child.
After securing a new COT in her name, M mortgaged the
properties twice to a bank, and subsequently tried to sell
them. A then brought an action for preliminary injunction
restraining M from further properties and for judgment
ordering her to convey the properties to their illegitimate
child, X, who at that time was already 5 years old.
A motion to dismiss was filed on the ground that the
illegitimate child who is the beneficiary of the trust is not
included as the party-plaintiff and the action is unenforceable
under the Statute of Frauds. Hence, A amended his complaint
to include X as party-plaintiff. The same was dismissed. A
raised the case by direct appeal to the Supreme Court.
Issue:
Is there a valid cause of action?
Held:
Yes, there is a valid cause of action. The contract between
appellant and appellee was a contract pour autrui although
couched in the form of an absolute deed of sale, and the
action of appellant was one for specific performance. Since
the contract involved a stipulation pour autrui, the third
person for whose benefit the contract was entered into may
also demand its fulfillment, provided he communicated his
acceptance to the obligor before the stipulation is revoked.
CONTRACTS CREATING REAL RIGHTS
1312. In contracts creating real rights, third persons who
come into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and
the Land Registration Laws.
AN EXCEPTION
This article constitutes one of the exceptions to the general
rule that a contract binds only the contracting parties.
Reason: Because a real right binds the property over which it
is exercised.
CONTRACTS CREATING REAL RIGHTS
Real right A right belonging to a person over a specific
thing, without a passive subject individually determined,
against whom such right may be personally enforced. Such a
right, therefore, is enforceable against the whole world.
Effect: A third person who comes into the possession of the
object of a contract creating a real right will have to be bound
by such right, subject to the provisions of:
1.
2.
Mortgage Law
Land Registration Laws
Examples:
1. A mortgaged his house and lot to PNB to secure P20,
000 and such mortgage is registered in the Registry of
Property. Subsequently, the house and lot was sold to
B. Consequently, the contract of mortgage between A
and PNB will be binding upon B.
2.
If A should purchase an apartment from the owner but

there is a lease thereon, A must respect the lease if the
same is registered in the Registry of Property.
CONSENSUALITY OF CONTRACTS
This Article stresses the consensuality of contracts
perfection by mere consent.
or
CONTRACTS IN FRAUD OF CREDITORS

1313. Creditors are protected in cases of contracts intended
to defraud them.
AN EXCEPTION
This Article represents another instance when a third person
can interfere with anothers contract.
HOW CONTRACTS ARE PERFECTED

The perfection of a contract refers to that moment in the life
of a contract when there is finally a concurrence of the wills of
the contracting parties with respect to the object and the
cause of the contract.
Kinds of contracts according to perfection:
CONTRACTS IN FRAUD OF CREDITORS

Although a third person cannot ask for the annulment of a
contract, nevertheless, if he is a creditor of one of the
contracting parties, and it can be established that the contract
was entered into with the intention of defrauding him, he may
ask for its rescission.
A.
Consensual contracts perfected by mere agreement

or consent on the subject matter and the cause or
consideration. (Example: Contract of sale)
B.
Real contracts perfected by delivery (Examples:

Deposit and Pledge)
Example
If A gratuitously gives B a parcel of land, and A has no other
property or cash left to satisfy his creditors, said creditors may
ask for the rescission of the contract, to the extent that they
have been prejudiced.
C.
Formal or Solemn contracts A special form is

required for perfection (Example: A simple donation
inter vivos of real property must be in public
instrument to be valid and perfected)
INTERFERENCES WITH CONTRACTUAL RELATIONS

1314. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting
party.
AN EXCEPTION
This Article gives an instance when a stranger to a contract
can be sued in view of his unwarranted interference. Whoever
is injured may properly sue for damages.
INTERFERENCES WITH CONTRACTUAL RELATIONS
Any third person who induces another to violate his contract
shall be liable for damages to the other contracting party.
Rationale: The right to perform a contract and to reap the
profits resulting from such performance, and also the right to
performance by the other party, are property rights which
entitle each party to protection, and to seek compensation by
an action in tort for any interference therewith
Example:
S, a movie actress, has a one-year contract with XYZ Studio. If
F, a friend of S induces her, without any justifiable cause, to
break the contract, then XYZ Studio can sue F for damages.
Requisites
Before the third person who induces another to violate his
contract can be held liable for damages, it is essential that the
following requisites must concur:
1. Existence of a valid contract
2. Knowledge on the part of the third person of the
existence of the contract
3. Interference by the third person without legal
justification or excuse (malice is implied)
CONSENSUAL CONTRACTS
1315. Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage, and law.
Consequences of perfection
1.
2.
The parties are bound to the fulfillment of what has

been expressly stipulated and compliance thereof
must be in good faith
The parties are bound to all the consequences which,
according to their nature, may be in keeping with
good faith, usage and law.
Salvador Malbarosa v. CA
A contract is perfected only from the time an acceptance of
an offer is made known to the offeror.
REAL CONTRACTS
1316. Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the
object of the obligation.
PERFECTION OF REAL CONTRACTS
Real contracts, to be perfected, require:
A.
B.
C.
D.
The real
1.
2.
3.
Consent
Subject matter
Cause or consideration
Delivery
contracts referred to in this Article are:
Deposit
Pledge
Commodatum
Delivery as a requisite
Delivery is required of the very nature of the contract. For
example, a depositary cannot be expected to comply with his
obligation of keeping the object safely unless and until it is
delivered to him.
FUTURE REAL CONTRACTS ARE CONSENSUAL
CONTRACTS
A contract to make a deposit, to make a pledge or to make a
commodatum is a consensual contract. After delivery, it
becomes a real contract.
Example:
A agreed to lend B his car on April 8. If on April 8, A refuses to
deliver the car, may B sue him for damages?
Yes, because of the consensual contract to make a

commodatum. If A had delivered the car and B, through
negligence, damages the car, A can sue him because of the
real contract of commodatum.
The Contract of Carriage
A.
The contract to carry (at some future time) is

consensual and is perfected by mere consent.
B.
The contract of carriage is a real contract, for not

until the carrier is actually used can we consider the
contract perfected, that is, til the moment of actual
use, the carrier cannot be said to have already
assumed the obligation of a carrier.
share of her minor children in the property involved in this

case. The powers given to her by the laws as the natural
guardian covers only matters of administration and cannot
include the power of disposition. The appellee minors never
ratified this Deed of Extrajudicial Partition and Sale. Hence,
the contract remained unenforceable or unauthorized.
Effect of ratification
Ratification cleanses the contract from all its defects from the
moment the contract was entered into. Hence, there is a
retroactive effect.
Take note: There can be no more ratification if the contract
has previously been revoked by the other contracting party.
Take note: The real contract of carriage is perfected

even if the passenger has not yet paid, in fact, even
if he has no money for his fare.
CONTRACTS IN NAME OF ANOTHER
1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right
to represent him. A contract entered into in the name of
another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the
other contracting party.
CONTRACTS IN NAME OF ANOTHER
General rule:
No person may enter into a contract in the name of another.
Effect: The contract is unenforceable.
CHAPTER 2. ESSENTIAL REQUISITES OF

CONTRACTS
Take note: The principle enunciated is a logical corollary to the

principles of the obligatory force and the relativity of
contracts. It is also the basis of the contract of agency
Exceptions:
1. He has been duly authorized
2. He has by law a right to represent him
3. The contract has been subsequently ratified (implied
or express) by the person in whose benefit it has
been executed, before the revocation of the other
party
Unenforceable v. Voidable
Unenforceable cannot be sued upon or enforced, unless
ratified
Voidable binding unless annulled by proper action in court
Badillo v. Ferrer
Facts:
Macario died intestate in 1966, leaving a widow (Clarita) and 5
minor children. He left a parcel of land and in 1967, the wife in
her own behalf and as natural guardian of the minor plaintiff,
executed a deed of extra-judicial partition and sale of the
property through which he sold the property to Gregorio.
Held:
A contract entered into in the name of another by one who
has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf
it has been executed, before it is revoked by the other
contracting party.
Clearly, Clarita has no authority or has acted beyond her
powers in conveying to the appellants that 5/12 undivided
GENERAL PROVISIONS
REQUISITES OF CONTRACTS IN GENERAL
1318. There is no contract unless the following requisites
concur:
1.
2.
3.
Consent of the contracting parties

Object certain which is the subject matter of the
contract
Cause of the obligation which is established
Take note: These are the common essential elements of

contracts.
Section 1 CONSENT
Articles 1319 1346
CONCEPT OF CONSENT
1319. Consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made.
CONCEPT OF CONSENT
The most important element, which constitutes the very heart

and soul of contracts, is, unquestionably, the consent of the
contracting parties.
Consent - The concurrence of the wills of the contracting
parties with respect to the object and the cause which shall
constitute the contract.
Requisites
1. The consent must be manifested by the concurrence
of the offer and the acceptance
2. The contracting parties must possess the necessary
legal capacity
3. The consent must be intelligent, free, spontaneous,
and real
Where the defendant said that he is in a position and is

willing to entertain the purchase of a yacht, there was no
perfected contract since the words applied were not certain
and are merely positions to deliberate whether to perform or
not perform the said act.
Acceptance In order that there will be a perfected contract,
the acceptance must be:
1.
Illustration:
Where plaintiff ordered to the defendant certain
machineries in exchange for tractors and the latter
answered stating we are willing to accept the
proposition there was not perfected contract or
barter since the phrase used does not mean
acceptance but simply a disposition to accept the
offer in principle.
Take note: The first requisite is expressly stated in the Code,

while the others are implied.
When contracts are perfected
Contracts are perfected from the moment there is
manifestation of the concurrence between the offer and the
acceptance with respect to the object and the cause which
shall constitute the contract.
MANIFESTATION OF CONSENT
Before there is consent, it is essential that it must be
manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the
contract.
Effect: Once there is a manifestation of the concurrence of the
wills of the contracting parties, the period of negotiation is
terminated. Therefore, the contract, if consensual, is
perfected.
De Lim v. Sun Life Assurance Co.
Facts:
Luis Lim applied to the defendant company for a policy of life
insurance in the sum of P5, 000, where he designated his
wife, Pilar de Lim (plaintiff) as beneficiary. The first premium
of P33 was paid and upon payment, the company issued a
provisional policy accepting the application, provided that
the company shall confirm this agreement by issuing a policy
on said application when the same shall be submitted to the
Head Office. It was agreed that should the company not issue
the policy, then such agreement is null and void. Also, a
period of 4 months from the date of application was stated as
period within which the company shall issue the policy.
Luis Lim however died a month later after he filed his
application after the issuance of the provisional policy but
before approval of the application by the head office.
Thereafter, the wife brought an action for the recovery of P5,
000 stated in the provisional policy.
Issue: Whether or not the contract has been perfected.
Held:
A contract of insurance, like other contracts, must be
assented to by both parties, either in person or by their
agents. So long as an application for insurance has not been
either accepted or rejected, it is merely an offer or proposal to
make a contract. There can be no contract of insurance unless
he minds of the parties have met in agreement.
CHARACTER OF OFFER AND ACCEPTANCE
Offer a proposal to make a contract. In order to constitute a
binding proposal, the offer must be certain or definite.
Illustration:
Certain and definite
2.
Absolute in character
unconditional)
(Must
be
plain
and
Illustration:
Where defendant offered to the plaintiff an option for
3 months to buy a certain land and the latter
answered by accepting the offer but subject to
certain modifications with regards to the terms of
payment there is no perfected contract because
there is no concurrence between the offer and the
acceptance.
Take note: In consensual contracts, the acceptance of the
offer must be absolute and must not qualify the terms of the
offer. It must be plain, unequivocal, unconditional and without
variance of any sort from the proposal. A qualified acceptance
constitutes a counter-offer and is a rejection of the original
offer. Consequently, such acceptance is not sufficient to
generate consent because any modification from the terms of
the offer annuls the same.
Requisites for the meeting of the minds
1. An offer that must be certain an definite
2. An acceptance that must be certain, absolute and
unqualified.
Take note: If the acceptance is qualified, this merely
constitutes a counter-offer.
ACCEPTANCE OF COMPLEX OFFERS
The rules regarding acceptance are modified in case of
complex offers.
Acceptance of one is sufficient
Where the offeror proposes to lease one part and to sell
another part, acceptance of one of the offeree would
ordinarily result in a perfected contract, unless the offeror
made one offer dependent upon the other.
Acceptance of one is insufficient
However, prospective contracts comprised in a single offer
may be so interrelated in such a way that the acceptance of
one would NOT at all result in a perfected contract.
Illustration:
In an offer involving a prospective contract of loan and the
mortgage which will secure it, acceptance by the future
debtor of the proposed loan alone would not give rise to a
perfected contract.
ACCEPTANCE BY LETTER OR TELEGRAM
When would there be a perfected contract if acceptance is
made by letter or by telegram?
General rule: Acceptance made by letter or telegram does not

bind the offeror, except from the time it came to his
knowledge
Issue:
Whether or not the contract of life annuity had already been
perfected
Exception: Art 54 Code of Commerce - applicable to purely

commercial contracts, such as join accounts, maritime
contracts, etc. Here, contracts entered into by correspondence
shall be perfected from the moment an answer is made
accepting the offer.
Held:
It is Art 1319 of the Civil Code and not Art 54 of the Code of
Commerce that will apply to the end that acceptance made by
letter or telegram does not bind the offeror except from the
time it came to his knowledge. Consequently, the contract
was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came
to the knowledge of the applicant.
Four theories:
1.
Manifestation Theory the contract is perfected from

the moment the acceptance is declared and made.
Followed by the Code of Commerce.
2.
Expedition Theory the contract is perfected from

the moment the offeree transmits the notification of
acceptance to the offeror, as when the letter is
placed in the mailbox. Followed by majority of
American courts.
3.
Reception Theory the contract is perfected from the

moment the notification of acceptance is in the hand
of the offeror in such a manner that he can, under
ordinary conditions, procure knowledge of its
contents, even if he is not able to actually acquire
such knowledge by reason of absence, sickness or
some other cause. Followed by the German Civil
Code.
4.
Cognition Theory the contract is perfect from the

moment the acceptance comes to the knowledge of
the offeror. Followed by the Spanish Civil Code.
Take note:
We follow the Cognition Theory acceptance made by
letter or telegram DOES NOT bind the offeror EXCEPT
from the time it came to his knowledge. Hence, the
contract is presumed to have been entered into in the
place where the offer was made.
This rule equally applies to cases in which the

acceptance is made by a person who is not in the
presence of the offeror.
Case illustrating Cognition Theory

Enriquez v. Sun Life Assurance Co
Facts:
On September 24, 1917, Joaquin Herrer applied to the
defendant company for a life annuity through its local office in
Manila. He paid the sum of P6, 000 and was issued a
provisional receipt. The application was immediately
forwarded to the head office in Canada.
On November 26, the head office gave notice of acceptance
by cable to Manila. Whether notice of this acceptance was
sent to Herrer by the Manila office is a disputed question. On
December 4, the policy was issued at Montreal. However, on
December 18, the lawyer of Herrer wrote to the Manila office
that Herrer desired to withdraw his application.
Francisco v. GSIS
Facts:
Plaintiff offered a compromise with respect to the settlement
of an obligation which had already matured, which was
accepted by the GSIS by means of a telegram signed by the
Board Secretary. For a year, GSIS receipted payment made
pursuant to the compromise agreement.
Issue:
Is there a perfected contract of compromise despite the fact
that the General Manager of GSIS denied that he authorized
the Board Secretary to send the telegram?
Held:
There is already a perfected contract of compromise applying
Art 1319 of the Civil Code. It is a familiar doctrine that if a
corporation knowingly permits one of its officers to do acts
within the scope of an apparent authority and holds him out to
the public as possessing the power to do those acts, the
corporation will be estopped from denying his authority,
against anyone who dealt with the corporation through such
officer in good faith.
Effect of constructive knowledge
2ND par Art 1319 Acceptance made by letter or telegram
does not bind the offeror except from the time it came to his
knowledge.
General rule:
There should be actual knowledge of the acceptance. (There
is a clear implication that such offeror must have read the
contents of the letter or telegram accepting his offer)
Take note: Mere receipt of the letter or telegram is NOT
sufficient, although there arises the presumption that he has
read the contents thereof.
Exception:
if it is possible that he might not have been able to do so, like
when he was absent or incapacitated at the time of the
receipt of the letter. Hence, he cannot be bound by the
acceptance.
Exception to the exception:
If being able to do so, he refused to open the letter because
for some reason he has already changed his mind or has
decided to revoke his offer.
The local office replied stating that the policy had been issued
and called attention to the notification of November 26. This
letter was received by the lawyer on December 21. Herrer
however died on December 20.
Withdrawal of offer
Question: Can the offeror, after the offer has been made,
withdraw his offer or not? Yes, he may still withdraw his offer,
provided he still has NO knowledge of the acceptance by the
offeree.
This action was commenced to recover the sum of P6, 000

from the defendant company, which the latter contends that
the same cannot be recovered on the ground that the contract
of life annuity had already been perfected.
Laudico v. Arias
Facts:
On Feb. 5, 1919, Arias wrote Laudico a letter, offering a lease
contract. On Mar. 6, 1919, Laudico wrote a letter of complete
acceptance, which was received by Arias that same afternoon.

But that same morning Arias had already written Laudico a
letter withdrawing the offer.
Issue:
Whether or not there was a perfected contract.
Held:
There was no contract perfected. Art 1319 provides that an
acceptance does not have any effect until it comes to the
knowledge of the offeror. Therefore, before he learns of the
acceptance, he is not yet bound by it and can still withdraw
the offer. Though both the offer and the acceptance existence,
they did not meet to give birth to a contract.
Withdrawal of acceptance
Question: A, residing in Manila, has offered to lease a parcel of
land for a certain price to B, who is residing in Baguio. B finally
decides to accept the offer so he writes a letter of acceptance
to A. The letter is mailed. Can he revoke it by using a more
rapid means of communication in order to counteract the
acceptance?
A. Manresa No. From the moment the offeree accepts, he
loses the power to retract such acceptance since the right
to withdraw between the time and acceptance and its
communication is a right expressly limited by law to the
offeror. There may seem to be inequality between the
contracting parties, however, since the offeree is the first
person who knows of the concurrence of wills of the
parties, the obligation as far as he is concerned, must
also commence earlier as a consequence.
B. Dr. Tolentino Yes. The acceptance may be revoked
before it comes to the knowledge of the offeror because
there is still no meeting of the minds. To hold otherwise
would then make two moments when a consensual
contract is perfected first, when the offeree transmits
his acceptance to the offeror, and second, when the
offeror has knowledge of the acceptance. Legally, this is
not possible. (More logical view)
Concurrence of offer and acceptance
Gigi offered to construct the house of Chito for a very
reasonable price of P1 Million, giving the latter 10 days within
which to accept or reject the offer. On the fifth day, before
Chito could make up his mind, Gigi withdrew the offer. What is
the effect of the withdrawal of Gigis offer?
Answer:
The withdrawal of Gigis offer will cause the offer to cease in
law. Hence, even if subsequently accepted, there could be no
concurrence of the offer and the acceptance. In the absence
of concurrence of offer and acceptance, there can be no
consent. Without the consent, there is no perfected contract
for the construction of the house of Chito.
FORM OF ACCEPTANCE
1320. An acceptance may be express or implied.
FORM OF ACCEPTANCE
1. Express
2. Implied from conduct or acceptance of unsolicited
services
3. Presumptive when there is silence in certain cases as
would tend to mislead the other party and thus places
the silent person in estoppel.
Perez v. Pomar
Facts:
Defendant contended that there was no perfected contract
entered into between him and the plaintiff because there was
no proof that he accepted the services of the latter as
interpreter.
Held:
Not only is there an express and tacit consent which produces
true contracts, but there is also a presumptive consent which
is the basis of quasi-contracts, thus giving rise to the multiple
juridical relations which result in obligations for the delivery of
a thing or rendition of a service.
THINGS THAT MAY BE FIXED BY THE OFFERER
1321. The person making the offer may fix the time, place,
and manner of acceptance, all of which must be complied
with.
THINGS THAT MAY BE FIXED BY THE OFFERER
1.
2.
3.
Time
Place
Manner of acceptance
Take note: Any act contrary to the prescribed terms

constitutes a counter-offer or counter-proposal
Contract to purchase
A contract to purchase which does not give specific
description of the objects to be purchased nor the price or
rate of exchange to be used, is a mere preliminary agreement.
ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT
1322. An offer made through an agent is accepted from the
time acceptance is communicated to him.
ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT
A.
This Article applies when both the offer and

acceptance are made through an agent, who is an
extension of the personality of the principal.
B.
Any other intermediary is merely a sort of

messenger, who must communicate to the person
who sends him, otherwise, there is as yet no meeting
of the minds.
Illustration:
Suppose the principal himself made the offer, and the
acceptance is made to the agent, would there be a meeting of
the minds?
As a general rule, there would be no meeting of the minds for
the agent may be an ordinary one, not authorized to receive
the acceptance. However, if the agent was expressly
authorized to receive the acceptance, the contract is
perfected.
WHEN OFFER BECOMES INEFFECTIVE

1323. An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
WHEN OFFER BECOMES INEFFECTIVE
An offer becomes ineffective when either party, before

acceptance is conveyed, suffers from:
1.
2.
3.
4.
Death
Civil interdiction
Insanity
Insolvency
Conveyed refers to that moment when the offeror has

knowledge of the acceptance by the offeree.
Problem 1:
A, residing in Manila, wrote to his friend B, residing in
Cotabato, stating in the letter that he is donating to him one
new car worth P25k. Upon receipt of the letter, B called A by
long distance telephone telling him that he is accepting the
donation. The same day, B wrote and mailed a letter to A
accepting the donation. Immediately after mailing the letter B
died of a heart failure. Who is entitled to the car now, A or the
heirs of B?
Answer:
A is entitled to the car, since the donation in the case cannot
produce any effect whatsoever. According to Art 748, if the
value of the personal property donated exceeds P5, 000, the
donation and acceptance shall be in writing, otherwise the
donation is void. According to Art 1323, an offer becomes
ineffective upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is conveyed.
Problem 2:
A donated a piece of land to B in a donation inter vivos. B
accepted the donation in a separate instrument but A
suddenly died in an accident before the acceptance could be
communicated to him. Is the donation valid?
Answer:
Even assuming that both the donation and the acceptance
was made in a public instrument, the same is still not valid for
the following reasons:
1. Art 734 a donation is perfected from the moment the
donor knows of the acceptance by the donee. It is
obvious that in the instant case, A never came to know
of the acceptance by B because he suddenly died.
2. Art 1323 an offer becomes ineffective upon the death,
civil interdiction, insanity or insolvency of either party
before acceptance is conveyed.
B, interested in a car at a car exchange company, asks S for

the price to which the latter said P3M. S gave B a week to
make up his mind while reserving the car for the meantime.
Before the week is over, can S withdraw the offer?
Yes, provided B has not signified his acceptance of the offer to
sell yet and provided further that S communicates such
withdrawal to B.
Exception:
When the option is founded upon a consideration as
something paid or promised.
Example:
If, in the preceding example, B gave S P20, 000 in
consideration for the option, S cannot withdraw the offer to
sell until after the expiration of the one week period.
Take note:
If the option is without a consideration, it is a mere offer to
sell which is not binding until accepted, and therefore can be
withdrawn. If, however, acceptance is made before a
withdrawal, it constitutes a binding contract of sale. There is
already a concurrence of both offer and acceptance.
PERIOD OF ACCEPTANCE: OPTIONS
Effect of an option which is without a consideration and effect
of one which is founded upon a consideration insofar as the
right of the offeror to withdraw his offer is concerned.
If option is without any consideration offeror may

withdraw his offer by communicating such
withdrawal at any time before acceptance.
If option is founded upon a consideration offeror

cannot withdraw his offer.
BUSINESS ADVERSTISEMENTS
1325. Unless it appears otherwise, business advertisements

of things for sale are not definite offers, but mere invitations
to make an offer.
BUSINESS ADVERTISEMENTS
Are business advertisements of things for sale definite offers?
Answer: IT DEPENDS.
A.
OPTIONS & PERIOD FOR ACCEPTANCE

1324. When the offerer has allowed the offeree certain period
to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid
or promised.
OPTION
It is a contract granting a person the privilege to buy or not to
buy certain objects at any time within the agreed period at a
fixed price. The contract of option is a separate and distinct
contract from the contract which the parties may enter into
upon the consummation of the contract. Therefore, an option
must have its own cause or consideration.
General Rule: If the offeror has allowed the offeree a certain
period to accept, the offer may be withdrawn anytime before
acceptance (of the thing being offered), by communicating
such withdrawal.
Example:
If it appears to be a definite offer containing all the

specific particulars needed in a contract, then it is a
definite offer.
Example: For sale: 900 sqm lot with a brand new 2
storey house at 1445 Paco Manila for 10 million cash.
(This is a definite offer, from the advertiser cannot
back out, once it is accepted by another)
B.
If important details are left out, the advertisement is

not a definite offer, but a mere invitation to make an
offer.
Example: For sale: 900 sqm lots at 100 million to 150
million at South Forbes Park. Tel No. 4440962 (This is
clearly merely an invitation to make an offer, which
the advertiser is free to accept or reject)
ADVERSTISEMENT FOR BIDDERS
1326. 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.
ADVERTISEMENT FOR BIDDERS

General rule: The advertiser is not bound to accept the
highest or lowest bidder.
Problem 1:
In an advertisement for bidders, there was no reservation by
the advertiser that he could reject any and all bids. Now then,
is he still given the right to reject even the highest bidder (for
offer to sell) or the lowest bidder (offer to buy)?
Answer: Yes, for the rule is that, the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary
appears.
Problem 2:
K and Co. published in the newspaper an Invitation to Bid
inviting proposals to supply labour and materials for a
construction project described in the invitation. L, M and N
submitted bids. When the bids were opened, it appeared that
L submitted the lowest bid. However, K and Co. awarded the
contract to N, the highest bidder, on the ground that he was
the most experienced and responsible bidder. L brought an
action against K and Co. to compel the award of the contract
to him and to recover damages. Is Ls position meritorious?
Answer:
Ls position is not meritorious. According to the Civil Code,
advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the
highest or lowest bidder unless the contrary appears. It is
clear that the general rule applies in the instant case. In its
advertisement, K and Co. did not state that it will award the
contract to the lowest bidder. Therefore, in awarding the
contract to N, the defendant company acted in accordance
with its rights.
Exceptions:
1. When it is entered into by a minor who misrepresents his
age
2. When it involves the sale & delivery of necessaries to
the minor
3. When it involves a natural obligation and such is fulfilled
voluntarily by the minor, provided that he is between 18
and 21 years old
4. When it is a marriage settlement or donation propter
nuptias, provided that he is between 20 and 21 (if male),
or between 18 and 21 (if female)
5. When it is a life, health or accident insurance taken on
the life of the minor, provided that he is 18 and above
and the beneficiary appointed is the minors estate, the
father, mother, husband, wife, child, brother or sister.
Take note:
Misrepresentation by unemancipated minors with regard to
their age when entering into a contract shall bind them in the
sense that they are estopped subsequently from impugning
the validity of the contract on the ground of minority. It is,
however, necessary that the misrepresentation must be
active, not merely constructive
Braganza v. Villa Abrille
Facts:
1944, Braganza and her two minor sons borrowed from Abrille
P70, 000 in Japanese military notes, promising to pay the
latter solidarily P10, 000 in legal currency of the Philippines as
soon as International Exchange has been established two
years after the cessation of hostilities. For failure to pay in
1949, Abrille filed this action.
Issue: Whether or not the minors can be held liable.
LEGAL CAPACITY OF CONTRACTING PARTIES
Held:
No. The minors failure to disclose their minority does not
follow that they will not be permitted thereafter to assert it.
Mere silence when making a contract as to age does not
constitute a fraud. To hold the minor liable, the fraud must
actual and not constructive. They cannot however absolve
themselves entirely from monetary liability.
1327. The following cannot give consent to a contract: (1)

Unemancipated minors; (2) Insane or demented persons, and
deaf-mutes who do not know how to write.
Even if the contract is voidable, they shall make restitution to

the extent that they may have profited by the money they
received, in accordance with the Ballantyne Schedule.
LEGAL CAPACITY OF CONTRACTING PARTIES

The capacity of the contracting parties is an indispensable
requisite of consent. It is impossible to speak of an effective
consent without presupposing the capacity to give it.
Insane or demented persons

Any person, who, at the time of the celebration of the
contract, cannot understand the nature and consequences of
the act or transaction by reason of any cause affecting his
intellectual or sensitive faculties, whether permanent or
temporary.
Acceptance of a bid
The mere determination to accept the proposal of a bidder
does not constitute a contract. The decision must be
communicated to the bidder.
Effect: The contract is defective.
If only one of the parties is incapacitated to give his

consent, the contract is voidable.
Take note: They cannot give their consent to a contract,

unless they acted during a lucid interval
If both of them are incapacitated to give their consent,

the contract is unenforceable.
Question: What is the nature and extent of the mental

capacity which will incapacitate a person from giving his
consent to a contract?
INCAPACITATED PERSONS
Persons incapacitated to give their consent to a contract:
1. Unemancipated minor
2. Insane or demented persons
3. Deaf-mutes who do not know how to write
It is sufficient that at the time of the celebration of the

contract, one of the contracting parties was not capable of
understanding with reasonable clearness the nature and
effect of the transaction in which he was engaged.
Unemancipated minor
These are the minors who have not been emancipated by
marriage, attainment of the age of majority, or by parental or
judicial authority.
Mental incapacity as a question of fact

Mental incapacity to enter into a contract is a question of fact
which must be decided by the courts. There is however a
disputable presumption that every person of legal age
possesses the necessary capacity to execute a contract.
General rule: The contract is either voidable or unenforceable.
Carillo v. Jaoco
Facts:
The vendor of several parcels of land was declared insane by
a competent court 9 days after the execution of the contract
of sale.
1.
Held:
The fact that 9 days after the execution of the contract, Carillo
was declared mentally incapacitated by the court DOES NOT
prove that she was so when she executed the contract. The
burden of proof that she was mentally incapacitated prior or
during the execution of the contract is upon her who affirms
said incapacity. If no sufficient proof to this effect is presented,
her capacity must be presumed.
3.
Deaf-mutes
There is a need to distinguish between the effect of a contract
entered into by a deaf-mute who:
Knows how to write. (effect: Valid)

Does not know how to write. (effect: Voidable or
unenforceable)
Take note: If the deaf-mute does not know how to
write but knows how to read, he is capacitated.
Other incapacitated persons

Incompetents who may be placed under guardianship:
A.
B.
C.
D.
E.
F.
Persons suffering from civil interdiction

Hospitalized lepers
Prodigals
Deaf and dumb who are unable to read and write
Unsound mind, even though they have lucid intervals
Those who by reason of age, weak mind and other
similar causes, cannot without outside aid, take care
of themselves and manage their property becoming
thereby an easy prey for deceit and exploitation
Take note: An incompetent can enter into a contract
only through his guardian. Otherwise, the contract is
voidable.
Problem:
Is a person of advanced years or age or by reason of physical
infirmities incapacitated to enter into a contract? No, unless
such age and infirmities impair his mental faculties to the
extent that he is unable to properly, intelligently and fairly
understand the provisions of said contract.
Take note:
The mere fact that a person is classified as an incompetent
in does not necessarily mean that he cannot give his consent
to a contract, nor does the mere fact that he is not under
guardianship mean that he can give his consent to a contract.
Consequently, whether or not they can give their consent to a
contract becomes a matter of proof.
VOIDABLE CONTRACTS BY REASON OF INCAPACITY

1328. Contracts entered into during a lucid interval are valid.
Contracts agreed to in a state of drunkenness or during a
hypnotic spell are voidable.
VOIDABLE CONTRACTS BY REASON OF INCAPACITY
The voidable contracts referred to are those entered into by:
2.
Insane or demented persons (unless they acted

during a lucid interval)
Those in the state of drunkenness (which temporarily
results in complete loss of understanding and may
therefore be equivalent to temporary insanity)
Those entered into during a hypnotic spell or during
somnambulism
Lucid intervals
Even if a person has already been judicially declared insane,
and is actually now under guardianship, he may still enter into
a valid contract, provided that it can be shown that at the
time of contracting, he was in a lucid interval. Of course here,
he is already presumed insane, and therefore the sanity must
be proved.
DISQUALIFICATIONS TO CONTRACT
1329. The incapacity declared in Article 1327 is subject to the
modifications determined by law, and is understood to be
without prejudice to special disqualification established in the
laws.
DISQUALIFICATIONS TO CONTRACT
The persons specially disqualified mentioned in Art 1329 refer
to those who are prohibited from entering into a contract with
certain persons with regard to certain property under certain
circumstances AND NOT to those who are incapacitated to
give their consent to a contract.
Examples:
1. Contracts entered into with non-Christians are void,
unless approved by the governor or his representative.
2. A person declared insolvent before he is discharged is
prohibited from entering into a contract.
3. Husband and wife cannot sell nor donate to each other.
4. Persons disqualified because of fiduciary relationship,
such as guardian who is not allowed to purchase the
property of his ward, or judge with reference to the
property under litigation.
DISTINGUISHED FROM INCAPACITY TO CONTRACT
Disqualification to contract must not be confused with
incapacity to give consent to a contract.
Incapacity
Disqualification
Restrains the exercise of the

right to contract
Restrains the very right itself
Can still enter into a contract

through his parent or
guardian
Absolutely disqualified from

entering into a contract
Based upon subjective

circumstances of certain
persons which compel the
law to suspend for a
in/definite period their right
to contract
Merely voidable (unless both
the contracting parties are
Based upon public policy and

morality
Void
incapacitated
unenforceable)
Absence of the fourth requisite either void or valid,

depending upon whether the simulation is absolute or
relative.
NATURE OF A VOIDABLE CONTRACT

A voidable contract is binding and valid, unless annulled by a
proper action in court. It is however susceptible of ratification
before annulment.
Take note:
There must be clear and convincing evidence of the presence
of vitiated consent. Mere preponderance of evidence on this
matter is NOT sufficient.
VITIATED CONSENT
MISTAKE WHICH VITIATE CONSENT
1330. A contract where consent is given through mistake,
violence, intimidation, undue influence, or fraud is voidable.
VICES WHICH MAY VITIATE CONSENT
1331. In order that mistake may invalidate consent, it should

refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved
one or both parties to enter into the contract.
Vices of will
1. Mistake
2. Fraud
3. Violence
4. Intimidation
5. Undue influence
Mistake as to the identity or qualifications of one of the parties

will vitiate consent only when such identity or qualifications
have been the principal cause of the contract. A simple
mistake of account shall give rise to its correction.
Vices of declaration
1. All forms of simulated contracts
MISTAKE
VICES DEFINED
A. Violence when in order to wrest consent, serious or
irresistible force is employed.
B. Intimidation when one of the contracting parties is
compelled by a reasonable & well-grounded fear of an
imminent & grave evil upon his person or property, or
upon the person or property of his spouse, descendants
or ascendants, to give his consent.
C. Mistake should refer to the substance of the thing
which is the object of the contract, or to those conditions
which have principally moved one or both parties to
enter into the contact. (Exception: Mutual error)
D. Fraud when, through insidious words or machinations
of 1 of the contracting parties, the other is induced to
enter into a contract which, without them, he would not
have agreed to.
E. Undue influence when a person takes improper
advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
F. Simulation of Contracts when the contracting
parties do not intend to be bound by the contract at all.
Thus, an absolutely simulated contract is VOID.
REQUISITES OF CONSENT OBJECTIVELY CONSIDERED
1.
2.
3.
4.
Intelligent (vitiated by mistake)

Free (vitiated by violence, intimidation and undue
influence)
Spontaneous (vitiated by fraud)
Real (vitiated by simulation)
Effects
Absence of any of the first three requisites voidable.
1. The wrong conception of a thing and

2. The lack of knowledge with respect to a thing
Take note: The Code does not distinguish between mistake
and ignorance.
Effect: Contract is voidable.
MISTAKE WHICH VITIATE CONSENT
Two general kinds of mistakes:
1.
Mistake of fact when one or both of the contracting

parties believe that a fact exists when in reality it
does not
2.
Mistake of law when one or both of the contracting

parties arrive at an erroneous conclusion regarding
the interpretation of a question of law or the legal
effects of a certain transaction.
General rule: Only mistake of fact will vitiate consent, thus

rendering the contract voidable. Reason: Ignorance of the law
excuses no one from compliance therewith.
MISTAKE OF FACT
Classifications of mistake of fact which vitiate consent:
1. Mistake as to object (error in re)
The mistake referred to in the 1st paragraph.
A. Error re the object of the contract when the thing
which constitutes the object of the contract is
confused with another thing.
Example: A person signed a contract of sale
thinking it was only a contract of loan.
B. Error in substance or quality necessary that such
mistake should refer to the material out of which
the thing is made, and to the nature which

distinguishes it from all others.
Example: A person buys a fountain pen thinking it to
be made of solid gold when it is merely gold-plated.
C. Error re the conditions of the thing provided that
such conditions have principally moved one or both
parties to enter into the contract.
Example: Error in knowledge about the
boundaries of a parcel of land offered for sale.
true
D. Error in quantity provided that the extent or

dimension of the thing was one of the principal
reasons of one or both of the parties for entering
into the contract.
Example: A person desiring to buy land consisting of
100 hectares discovers the land has only 60
hectares.
1332. When one of the parties is unable to read, or if the

contract is in a language not understood by him, and mistake
or fraud is alleged, the person enforcing the contract must
show that the terms thereof have been fully explained to the
former.
REASON FOR THE ARTICLE
This rule is especially necessary in the Philippines where
unfortunately there is still a fairly large number of illiterates,
and where documents are usually drawn up in English or
Spanish.
This Article is intended for the protection of a party to a
contract who is at a disadvantage due to his illiteracy,
ignorance, mental weakness or other handicap.
What the article contemplates
A situation wherein a contract has been entered into, but the
consent of one of the parties is vitiated by mistake or fraud
committed by the other contracting party.
Take note: Not to be confused with mistake of

account or calculation. Not voidable.
Asiaian v. Jalandoni
Facts:
Plaintiff offered to sell to defendant a certain hacienda for
P55, 000 where he told that latter that it contained between
25 and 30 hectares and that the sugarcane then planted
would produce 2, 000 piculs of sugar. Defendant accepted the
offer and paid P30, 000 of the purchase but it turned out that
the land was only about 18 hectares and the cane only about
800 piculs of sugar. Because of this, he refused to pay the
balance of the purchase price. Hence, the plaintiff filed an
action to recover the balance, and the defendant filed a
counter-complaint asking that the contract be annulled.
Held:
This was not a contract of hazard. It was a sale in gross where
there was a mutual mistake as to the quantity of the land sold
and as to the amount of the standing crop. In effect, the
agreement is inoperative. The ultimate result is to put the
parties back to the original status.
2. Mistake as to person (error in persona)

Refers to the error with regard to the identity or
qualifications of one of the contracting parties.
Mistake must be either with regard to the

identity or with regard to the qualification of one
of the contracting parties
B.
Such identity or qualification must have been

the principal consideration for the celebration of
the contract.
Take note: Mistake with regard to the name of one or

both of the parties will NOT invalidate the contract.
Example: Hiring a pre-bar reviewer, a particular singer for
a concert, contracts involving partnership, agency, and
deposit. (These require trust and confidence)
Take note: If any painter or singer would do, error as to
the identity would be immaterial.
RULE WHERE A PARTY IS ILLITERATE
Consent vitiated by mistake mistake should refer to

the substance of the thing which is the object of the
contract or to those conditions which have principally
mmoved one or both parties to enter into a contract.
Coonsent vitiated by fraud when one of the parties

induced another to enter into a contract through
insidious words or machinations, which without them,
he would not have agreed to.
PRESUMPTION
That one always acts with due care and signs with full
knowledge of all the contents of a document.
When presumption does not apply
1. When one of the parties is unable to read (including a
blind person)
2. If the contract is in a language not understood by one
of the parties.
Take note: In both cases, the person enforcing the contract
must show that the terms thereof have been fully explained to
the former.
Examples:
1. A person who cannot read and write, signed a document
which she thought was merely a promise to pay certain
expenses but which turned out to be an absolute deed of
sale of two parcels of land voidable.
Requisites:
A.
2. When a blind person affixed his thumbmark to a deed

which they thought was a deed of mortgage but rather a
deed of sale voidable.
\\
KNOWLEDGE OF DOUBT OR RISK
1333. There is no mistake if the party alleging it knew the

doubt, contingency or risk affecting the object of the contract.
KNOWLEDGE OF RISK DOES NOT VITIATE CONSENT
It is to be assumed here that the party was willing to take the
risk. This is particularly true in contracts which are evidently
aleatory in nature.
Example:
A bought a fountain pen which was represented as possibly

being able to write even underwater. A also knew that the
pens ability was questionable, and yet A bought said pen.
Here, A cannot allege mistake since he knew beforehand of
the doubt, risk, or contingency affecting the object of the
contract.
MUTUAL ERROR
1334. Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated, may vitiate
consent.
Prevents the expression of

the will substituting it with a
material act dictated by
another
Influences the operation of

the will, inhibiting it in such a
way that the expression
thereof is apparently that of a
person who has freely given
his consent
Physical compulsion
Moral compulsion
MUTUAL ERROR
Examples: If a person signs a contract only because a gun is

pointed at him, this is intimidation because he is afraid he
would be killed. But if he signs because his left hand is being
twisted painfully, this is violence or force.
General rule: Mistake of law will not vitiate consent.
Requisites of violence to vitiate consent
Exception: Mutual error as to the effect of an agreement when

the real purpose of the parties is frustrated, may vitiate
consent.
Reason: Mistake of law does not generally vitiate consent,
BUT when there is a mistake on a doubtful question of law, or
on the construction or application of law, this is analogous to
a mistake of fact, and the maxim ignorance of the law excuses
no one from compliance therewith should have no proper
application.
Requisites:
1. Mistake must be with respect to the legal effect of an
agreement
2. Mistake must be mutual
3. Real purpose of the parties must have been frustrated
Example:
A and B entered into a contract, which they intended should
result in a co-ownership between them, but which turned out
later to be a mortgage, as a result of their mutual error as to
the legal effect of the agreement. Here the contract is
voidable.
1. Force employed must be serious and irresistible

2. It must be the determining cause for the party upon
whom it is employed in entering into the contract
Requisites of intimidation to vitiate consent
1. One of the contracting parties is compelled to give his
consent by a reasonable and well-grounded fear of an
evil
2. The evil must be imminent and grave
3. Upon his person, property or upon the person or
property of his spouse, descendants or ascendants
4. The evil must be unjust
3. The evil must be the determining cause for the party
upon whom it is employed in entering into the contract
CHARACTER OF INTIMDATION
Well-grounded fear of evil
For intimidation to be sufficient to render a contract voidable,
one of the parties should be compelled by a reasonable and
well-grounded fear of an imminent and grave evil upon his
person or property or upon the person or property of his
spouse, descendants or ascendants.
The threat or intimidation must be:
VIOLENCE AND INTIMIDATION

1335. There is violence when in order to wrest consent,
serious or irresistible force is employed.
There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon
the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of the intimidation, the age, sex and
condition of the person shall be borne in mind.
A threat to enforce ones claim through competent authority,
if the claim is just or legal, does not vitiate consent.
1336. Violence or intimidation shall annul the obligation,
although it may have been employed by a third person who
did not take part in the contract.
VIOLENCE AND INTIMIDATION
Violence
Intimidation
External
Internal
1.
2.
3.
4.
Actual
Serious
Possible of realization
The actor can and still will carry out his threat
Example:
A threat during the Japanese occupation to deliver the person
to the Japanese military authorities would constitute
intimidation. (TN: Mere knowledge that severe penalties might
be imposed is not enough)
Distinguished from reluctant consent
Consent given through intimidation must not be confused with
consent given reluctantly and even against good sense and
judgment. Legally speaking, a person acts voluntarily and
freely when he acts against his better judgment as compared
to when he acts in conformity with them
Martinez v. Hongkong and Shanghai Bank
Facts:
Under the contract, the plaintiff agreed to convey several
properties to the bank as settlement of their claims against
her and her husband, who escaped to Macao where there is
not extradition treaty in order to escape criminal charges. It
was established that during the period of negotiations, she
was told that if she assented to the requirements, the civil suit
against herself and her husband would be dismissed and the
criminal chargers, withdrawn. But if she refused, her husband
must either spend the rest of his life in Macao or be criminally
prosecuted. This is an action to annul a contract on the

ground that plaintiffs consent thereto was obtained under
duress.
When a person takes improper advantage of his power over

the wil of another, depiving the latter of a reasonable freedom
of choice.
Issue:
Whether or not there was duress which would invalidate the
contract.
WHAT VITIATES CONSENT

The influence which deprives a person of his free agency.
Held:
In order that the contract be annulled, it must be shown that
the plaintiff never gave her consent to the execution thereof.
It is necessary to distinguish between real duress and the
motive which is present when one gives his consent
reluctantly. A contract is valid even though one of the parties
entered into it against his wishes and desires or even against
his better judgment.
Imminent and Grave evil
To determine the degree of intimidation, these shall be borne
in mind:
1. Age
2. Sex
3. Condition of the person intimidated resolute or weak
character capacity or culture, position, financial
condition
Take note: When the evil which threatens is directed not
against the party but against his spouse, descendant or
ascendant consider their conditions as well.
Effect of just or legal threat
A threat to enforce ones claim through competent authority,
if the claim is just or legal, does not vitiate consent.
Examples:
1.
2.
If a man marries a girl who threatened to report him to

the Courts for immorality, and thus prevent his
admission to the bar, the marriage cannot be annulled
on the ground of intimidation because here the girl had
the legal right to do what she threatened.
A threat to prosecute unless the debtor signs a contract
is not intimidation.
Take note: The right to enforce ones claim thru competent

authority must not by itself constitute an unlawful act.
Example: A witness to a crime threatens to report the criminal
to the police unless said criminal gives money to him. This is a
clear case of blackmail.
VIOLENCE OR INTIMIDATION BY A THIRD PERSON
Even if a third person exercised the violence or intimidation,
the contract may be annulled. This is because the consent is
still vitiated. (De Asis v. Buenviaje)
UNDUE INFLUENCE
1337. There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties, or the fact
that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in
financial distress.
UNDUE INFLUENCE
Take note:
To vitiate consent, the influence must be undue. if the
influence is due or allowable, as when caused by solicitation,
importunity, argument and persuasion, same is not prohibited
by law, morals, or equity. The line between due and undue
influence must be with full recognition of the liberty due every
person to enter into a contract according to his own free
choice.
Test of undue influence
Whether or not the influence exerted has so overpowered or
subjugated the mind of a contracting party as to destroy his
free agency, making him express the will of another rather
than his own.
Circumstanes
to consider in determining undue
influence
Confidential, family, spiritual, other relations between
the parties
Mental weakness
Ignorance
Financial distress
FRAUD
1338. There is fraud when, through insidious words or
machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he
would not have agreed to.
FRAUD
Fraud which will render a contract voidable refers to those
insidious words or machinations employed by one of the
contracting parties in order induce the other to enter into a
contract which, without them, he would not have agreed to.
Kinds of fraud
The fraud referred to in Art 1338 must not be confused with
the fraud in Arts 1170 and 1171 o fthe Code.
1. Fraud in the performance of an obligation (Art 1170)
employed by the obligor in the performance of a preexisting obligation
2. Fraud in the perfection of a contract (Art 1338)
employed by a party to the contract in securing the
consent of the other party.
A. Dolo
causante
those
deceptions
or
misrepresentations
of
a
serious
character
employed by one party and without which the
other party would not have entered into the
contract. (This is the fraud reffered to in this
article)
Effect: Contract is voidable
B. Dolo
incidente
those
deceptions
or
misrepresentations which are not serious in
character and without which, the other party would
still have entered into the contract. (Fraud referred
to in Art 1344)
Effect: Contract is valid but there can be an action

for damages.
As to
nature
As to
cause
As to
effect
Causal fraud
Incidental fraud
FAILURE TO DISCLOSE FACTS
Serious in character
Not serious
1339. Failure to disclose facts, when there is a duty to reveal

them, as when the parties are bound by confidential relations,
constitutes fraud.
Fraud is the cause

which induces the to
enter into the
contract
Fraud is not the

cause
Voidable
Valid but party liable

of fraud is liable for
damages
FAILURE TO DISCLOSE FACTS

A. Failure to disclose facts (concealment) constitutes fraud,
when there is a duty to reveal them.
B. There is a duty to reveal in the following cases, for
example: when the parties are bound by confidential
relations as in the case of partners.
Take note: Non-disclosure of a fact when there is no duty
to reveal it does not constitute fraud.
Requisites:
1. Fraud or insidious words or machinations must have
been employed by one of the contracting parties
2. The fraud must have been serious
3. The fraud must have induced the other party to enter
into the contract
4. The fraud should not have been employed by both of the
contracting partes or by third persons
NATURE OF FRAUD
Deception or misrepresentation employed by one of the
contracting parties to secure the consent of the other.
Insidious words or machinations broad enough to cover

any kind of deception, such as false promises, fictitious
names, qualifications or authority.
Take note: All the forms of deception which may delude
a contracting party to give his consent, without
necessarily constituting estafa or some other offense in
our penal laws.
Before a contract can be invalidated because of fraud

1. There must be proof of concrete facts constituting the
fraud employed by one of the contracting parties, by
virtue of which the other was induced to enter into the
contract, without which, he would not have agreed to.
2. Such insidious words or machinations must be prior to or
contemporaneous with the birth or perfection of the
contract.
Eguaras v. Great Eastern Life Assurance Co.
Facts:
Albay filed an application for insurance on his life with the
defendant company. However, since Albay was in poor health,
the person who presented himself for medical examination to
the company physician was not Albay, but Castor Garcia who
posed as Albay. As a result of the favourable report the
physician, the company executed the contract of insurance. A
short time thereafter, Albay died. The company contends that
the contract should be annulled on the ground of fraud.
Held:
The fraud which gave rise to the mistaken consent given by
the company to the insurance application is unquestionable.
The fraud consisted in the substitution at the examination of
Castor Garcia in place of the insured and as the deceit is of a
serious nature, the same is alos voidable in accordance with
the provision of Art 1334.
Examples:
1. Defendant who is a manager of a certain corporation
and owner of about of the shares of the capital
stock thereof, bought through an agent 800 shares of
capital stock from the plaintiff without disclosing the
fact that he had just negotiated the sale of valuable
properties to the government, thus enhancing he
value of the capital stocks of the company.
Poss v. Gottlieb
Facts:
A and B were real estate partners. A heard of a possible
purchaser of a certain parcel of land owned by the firm. But A
did not inform B. Instead, A persuaded B to sell to him (A) Bs
share at a nominal amount, after which A sold the whole
parcel at a big profit. B sued A for damages for alleged deceit.
As defense was that he after all had not been asked by B
about possible purchasers.
Held:
A is liable, for he should not have made any concealment.
Good faith not only requires that a partner should not make
any false concealment, but he also should abstain from all
concealment.
Opponents in a Litigation
There would seem to be no duty to disclose facts, as between
opponents in a litigation for their relations, far from being
friendly or confidential, are openly antagonistic.
EXAGGERATIONS IN TRADE
1340. The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent.
EXAGGERATIONS IN TRADE
This Article stresses the rule of caveat emptor (let the buyer
beware) A buyer must be on his guard. It is his duty to check
the title of the seller, otherwise the buyer gets the object at
his own risk.
Dealers talk
The usual exaggerations in trade (dealers talk) constitute
tolerated fraud, when the other party had an opportunity to
know the facts. Experience teaches that it is exceedingly risky
to accept it at its face value. A man who relies upon an
affirmation made by a person whose interest might so readily
prompt him to exaggerate the value of his property, does so
at his own risk. He must therefore take the consequences of

his own imprudence.
EXPRESSION OF OPINION
1341. A mere expression of an opinion does not signify fraud,
unless made by an expert and the other party has relied on
the formers special knowledge.
EXPRESSION OF OPINION
General rule: A mere expression of an opinion does not signify
fraud.
Exception: When made by an expert and the other party has
relied on the formers special knowledge.
Examples:
1. A, on buying a watch, was assured by the seller that it
was a good watch, and could run without rewinding for
one week, in the opinion of the seller. This is a mere
expression of opinion that is not fraudulent.
Except: If the seller was a watch expert, and the only
reason why A bought the watch was this opinion of the
seller, the contract is voidable on the ground of fraud.
2. If a seller says that in his opinion his land is first class, but
it turns out to be second class, the sale is not fraudulent,
particularly when the buyer had opportunity to examine
the land for himself.
Songco v. Sellner
Facts:
Songco estimated that the crop would yield 3, 000 piculs of
sugar, however it produced only 2, 017 piculs. The issue is
whether such representation is fraudulent that would
invalidate the contract.
Held:
No, such representation can only be considered as a mere
expression of an opinion and the same is not an actionable
deceit.
MISREPRESENTATION BY THIRD PERSONS
1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
substantial mistake and the same is mutual.
MISREPRESENTATION BY THIRD PERSONS
General Rule:
Misrepresentation by a third person does not vitiate consent.
Example:
A and B entered into a contract with X. As consent was
obtained only because B had deceived or defrauded him. May
A ask for annulment of the contract with X? NO, because X
was not a party to the fraud.
Exception:
When such misrepresentation has created substantial mistake
and the same is mutual.
Take note: In this case, the contract may be annulled, not
principally on the ground of fraud, but on the ground of
mistake.
Example:
C, an old and ignorant woman, was helped by V in obtaining a
loan of P3, 000 from X Rural Bank, secured by a mortgage on
her house and lot. On the day she signed the promissory note
and the mortgage contract, she also signed several
documents. One of these documents was a promissory note of
V for a loan of P3, 000 also secured by a mortgage on her
house and lot. Years later, she was informed that her property
shall be sold at public auction to satisfy the two obligations.
She then filed a suit for annulment of her participation as comaker in the obligation contracted by V on the ground of
fraud and mistake. Upon filing of the complaint, she deposited
P3, 383 in court as payment of her personabl obligation plus
interests.
Issues:
1. Can C be held liable for the obligation of V?
2. Was there a valid and effective consignation considering
that there was no previous tender of payment made by C
to the Bank?
Held:
1.
2.
No, C cannot be held liable for the obligation of V

because of mistake. (not fraud because the bank was
not a participant in the fraud committed by V) There
was substantial mistake on the part of both C and the
Bank mutually committed by them as a consequence
of the fraud employed by V.
Notwithstanding the absence of a previous tender of
payment made directly to the Bank, the consignation
was valid and effective. The deposit was attached to
the record of the case and the Bank had not made
any claim thereto. Therefore, C was right in thinking
that it was useless for her to make a previous offer
and tender of payment directly to the Bank.
MISREPRESENTATION IN GOOD FAITH
1343. Misrepresentation made in good faith is not fraudulent

but may constitute error.
MISREPRESENTATION IN GOOD FAITH
Example:
Tanya bought a certain article from Feds. The article was
needed for Tanyas radio. Feds honestly but mistakenly
assured Tanya that the article was the proper object. May the
contract be annulled?
Yes, but not on the ground of fraud because the
misrepresentation was honest, but on the ground of
substantial error.
MAGNITUDE OF FRAUD
1344. In order that fraud may make a contract voidable, it
should be serious and should not have been employed by
both contracting parties. Incidental fraud only obliges the
person employing it to pay damages.
FRAUD TO VITIATE CONSENT
There are two requisites for fraud as a ground for annulment
given in this Article:
1. The fraud must be serious
2. The parties must not be in pari delicto (mutual guilt),
otherwise the contract is valid and neither party may
ask for annulment.
Serious character of fraud
Refers not to its influence, but to its importance or magnitude.
Hence, a contract cannot be annulled just because of the
presence of:
A.
Minor or common acts of faud whose veracity could

easily have been investigated
B.
Ordinary deviations from the truth which are almost

inseparable from ordinary commercial transactions
especially those taking place in fairs or markets
RELATION BETWEEN FRAUD AND CONSENT

The fraud must be the principal or causal inducement for the
consent of the party who is deceived in the sense that he
would never have given such consent were it not for the
fraud.
Take note: If the fraud is merely incidental in the sense that
the party who is deceived would have agreed to the contract
even without it, his consent is not vitiated. The contract is
therefore valid. Its only effect is to render the fraudulent party
liable for damages.
Woodhouse v. Halili
Facts:
Plaintiff and defendant entered into a contract where it was
agreed that they shall organize a partnership for the bottling
and distributon of Mission soft drinks. Plaintiff as industrial
partner and manager, and defendant as capitalist partner.
Plaintiff was to secure the franchise for and in behalf of the
partnership and he was to receive 30% net proftits of the
business. Defendant failed to comply with the contract after
the bottling plant was already in operation. Hence, plaintiff
filed a case praying for the execution of the agreed upon
partnership.
Defendants contention he alleged that his consent to the
contract was secured through the plaintiffs false
representation that he had the exclusive bottling franchise of
the Mission Dry Corp in the Phils.
Issues:
1.
2.
WON the plaintiff had falsely represented that he had

the exclusive franchise to bottle Mission beverages in
the Phils
Whether this false representation, if its existed,
annuls the agreement to form a partnership.
Held:
It is true that the defendant was led to believe by the plaintiff
that the latter had the exclusive franchise and the same is to
be transferred to the partnership. However, the principal
obligation that the plaintiff assumed was to secure said
franchise for the partnership. Hence, if ever there was false
misrepresentation on the part of the plaintiff, such
misrepresentation was not the causal inducement that led
defendant to enter into the partnership agreement. On the
other hand, this supposed ownership of an exclusive franchise
was only the consideration plaintiff gave in exchange for the
share of 30%.
In other words, the plaintiff, by pretending that he had the
exclusive franchise and promising to transfer it to defendant,
obtained the consent of the latter to give him a big slice in the
net profits (and not the latters consent to the partnership
agreement itself) This is just dolo incidente because it was
used to get the other partys consent to a big share in the
profts, an incidental matter in the agreement.
Since there was breach of contract on the part of the
defendant as well as misrepresentation on the part of the
plaintiff set off damages
SIMULATION OF CONTRACTS
1345. Simulation of a contract may be absolute or relative.

The former takes place when the parties do not intend to be
bound at all; the latter, when the parties conceal their true
agreement.
1346. An absolutely simulated or fi ctitious contract is void. A
relative simulation, when it does not prejudice a third person
and is not intended for any purpose contrary to law, morals,
good customs, public order, or public policy binds the parties
to their real agreement.
SIMULATION OF CONTRACTS
It is the process of intentionally deceiving others by producing
the appearance of a contract that really does not exist
(absolute simulation) or which is different from the true
agreement (relative simulation).
Two kinds of simulation:
A. Absolute
when there is colorable contract but it has

no substance because the contracting parties do not
intend to be bound by the contract at all.
Example: Debtor simulates the sale of his properties to a
friend in order to prevent their possible attachment by
creditors or when A, as a joke, executed a deed of sale
although they did not intend to be bound at all by the
contract.
Basic characteristic: Contract is not desired or intented
to produce legal effects
Effect: Inexistent and void.
Cruz v. Bancom Finance Corp
Facts:
Although the Deed of Sale between petitioners and
Candelaria Sanchez stipulated a consideration of
P150,000, there was actually no exchange of money
between them.
Held:
The Deed of Sale were absolutely simulated, hence, null
and void. This being so, petitioners would be in the same
position as they were before they executed the
simulated Deed of Sale in favor of Sanchez; they are still
the owners of the property.
B. Relative
when the contracting parties state a false

cause in the contract to conceal their true agreement.
Example: When a person conceals a donation by
simulating a sale of the property to the beneficiary for a
fictitious consideration.
Effect: Binding and enforceable between the parties and
their successors in interetest to the real agreement,
except
1.
2.
If the contract should prejudice a third person

If the purpose is contrary to law, morals, etc.
Take note: The apparent or ostensible contract is the one

valid.
Reason: The contracting parties are in estoppel and
should be penalized for their deception.
Test in determining the nature of a contract
The intention of the parties as determined from the express
terms of their agreement as well as from their
contemporaneous and subsequent acts.
Presumption of validity of contracts

The legal presumption is in favour of the validity of contracts.
Hence, the party who impugns the validity and regularity of a
contract has the burden of proving his allegation.
possible to determine the same, without the need of a new

contract between the parties.
CONTRACTS OF ADHESION
Where the terms thereof are prepared by only one party while
the other merely affixes his signature signifying his adhesion
thereto.
General rule: All things or services may be the object of

contracts.
Effect: Valid because the one who adheres to the contract is

in reality free to reject it entirely. If he adheres, he gives his
consent.
Exception: If the weaker party is reduced to the alternative of
taking or leaving it, completely deprived of the opportunity to
bargain in equal footing.
Spouses Reyes v. BPI Family Savings Bank
Facts:
Petitioner spouses executed a real estate mortgage on their
property in favour of BPI-FSB to secure the P15M loan of
Transbuilders Resources and Devt Corp to BPI.
Held:
While the stipulation proved to be onerous to the petitioners,
the courts will not extricate a party from an unwise or
undesirable contract entered into with all the required
formalities and with full awareness of its consequences.
Petitioners voluntarily executed the REM and they cannot be
allowed to repudiate their obligation to the bank after
Transbuilders default. Contracts of adhesion are not invalid
per se.
Section 2 OBJECT OF CONTRACT
Articles 1347 - 1349
CONCEPT OF OBJECT
OBJECT
The subject matter of the obligation which is created or
established.
WHAT MAY BE THE OBJECT OF CONTRACTS
Exceptions:
1.
2.
3.
4.
5.
6.
Those outside the commerce of men

Intransmissible rights
Future inheritance, except in cases authorized by law
Services which are contrary to law, morals, etc.
Impossible things or services
Those not possible of determination as to its kind
REQUISITES
1. The object must be within the commerce of men
2. Must be real or possible exists at the moment of the
celebration of the contract or at least can exist
subsequently or in the future
3. Must not be contrary to law, morals, public policy, etc.
4. Must be transmissible
5. Must be determinate, or at least determinable as to its
kind
WITHIN THE COMMERCE OF MAN
Two requisites:
1. Must be susceptible of appropriation
2. Must be transmissible from one person to another
Take note: Those things, rights or services which do not
possess these conditions or characteristics are outside the
commerce of men.
Examples:
1.
Take note: Objects of contracts and that of obligations are

identical.
Those things which are such by their very nature (i.e.

air, sea, sacred things, res nullius, property belonging
to public domain)
2.
Importance of object
The most indispensable, if not the most fundamental
requisite, in order to have at least the shadow of a contract.
Those which are made such by special prohibitions

established by law (i.e. poisonous substances, drugs,
arms, explosives, and contrabands)
3.
Those rights which are intransmissible because they

are:
Why? Because without cause, an agreement is possible,

although inexplicable. Without consent, it is at least possible
to have the appearance of a contract. But without an object
there is nothing.
A.
Purely personal n character (i.e. those

arising from the relationship of husband and
wife jus consortium, or from the
relationship pf paternity and filiation patria
potestas)
B.
Honorary or political in character (i.e. right

to suffrage and to hold public office)
OBJECT OF CONTRACT
1347. All things which are not outside the commerce of men,
including future things, may be the object of a contract. All
rights which are not intransmissible may also be the object of
contracts. No contract may be entered into upon future
inheritance except in cases expressly authorized by law. All
services which are not contrary to law, morals, good customs,
public order or public policy may likewise be the object of a
contract.
1348. Impossible things or services cannot be the object of
contracts.
1349. The object of every contract must be determinate as to
its kind. The fact that the quantity is not determinate shall not
be obstacle to the existence of the contract, provided it is
Take note: Communal things, such as public plazas, sidewalks,

streets, rivers, fountains, etc. for public use cannot be sold or
leased because they are by their very nature, outside the
commerce of men.
EXISTENCE OF OBJECT
The object must be in existence at the moment of the
celebration of the contract or at least, it can exist
subsequently or in the future. Hence, even future things may
be the object of contracts.
Things which have perished

If at the time of the contract, the thing which is the object of
the contract has been entirely lost, the contract shall be
without any effect.
Future things
A future thing may be the object of a contract. (except future
inheritance) Such contract may be interpreted in two possible
ways:
A.
Conditional contract if its efficacy should depend

upon the future existence of the thing
B.
Aleatory contract if one of the contracting parties

should bear the risk that the thing will never come
into existence.
Take note: In case of doubt, it must be deemed to be

conditional because doubts should be resolve in favour of the
greatest reciprocity of interests.
Example:
Future harvest of sugarcane in a specific field may be sold,
but by express provision of law, said future property cannot be
donated.
Rule with respect to future inheritance
General rule:
A future thing may be the object of a contract.
Exception:
Future inheritance any property or right NOT in existence or
capable of determination at the time of the contract that a
person may in the future acquire by sucession. (where source
of the property is still alive)
Reason: There would be the possibility that one of the
contracting parties may be tempted to instigate the death of
the other in order that the inheritance will become his, or that
fraud and prejudice may be committed.
Examples:
1. An agreement for the partition of the estate of a
living person, made bwteen those who, in case of
death, would inherit the same is null and void.
2.
Vendor undertook to convey to the vendee his

participation in the property left by his deceased
father. The part of the property belonging to his
mother, who is still living, cannot be affected by the
conveyance since his interest in the property of his
mother was a future inheritance.
Take note: However, after the death of the decedent, anyone

of the co-heirs may enter into a contract with respect to the
inheritance even before partition has been effected. This is
because the rights to succession are transmitted at the
moment of the decedents death.
Blas v. Santos
Facts:
Simeon Blas married Marta Cruz in 1898 and had 3 children. A
year after Martas death, Simeon contracted a second
marriage with Maxima no children. During the second
marriage, no liquidation of the properties of the first marriage
was made. Dec 26, 1936 Simeon executed a will declaring
all of his properties as conjugal and giving thereof to
Maxima as her share. On the same day, Maxima signed a
notarized document, promising to convey by will of the
share given to her to the children of Simeon by his previous
marriage. A week after, Simeon died. As a result, the children
of the first marriage brought an action against the estate of
Maxima asking for the enforcement of the promise contained

in the document.
Maxima contends that the promise is not enforceable because
it lacks a sufficient cause or consideration and since it is a
contract with respect to future inheritance, the same falls
within the prohibition of Art 1347.
Held:
The execution of the document by Maxima was ordered by the
testator to prevent his heirs by his first marriage from
contesting his will and demanding liquidation of the conjugal
properties acquired during his first marriage. Therefore, it has
a sufficient cause or consideration. Also, the prohibition in Art
1347 does not apply. What is prohibited is a contract that
deals with properties not in existence at the time of the
contract, that a person may in the future acquire by
succession. In the case, the subject matters of the contract
signed by Maxima are well-defined properties existing at the
time of the agreement.
Exceptions to the exception:
Instances where future inheritance may be the object of the
contract
1. Art 130 In the case of marriage settlements allows
future spouses to give or donate to each other in their
marriage settlement their future property to take effect
upon the death of the donor
2. Art 1080 In case of partitions of property inter vivos,
provided that the legitime of compulsory heirs is not
prejudiced.
Illustrations:
1.
When his father died, but before the delivery of the

property to him, a son sold his share of the property
inherited. Is the sale valid?
YES. The inheritance is not future, but existing
inheritance, although as yet undelivered.
2.
While his father was still alive, A sold to B the

property he expected to receive from his father. Is
the sale valid?
NO, because the object of the contract is future
inheritance since the father is still alive, and it does
not fall under of the exceptions to the prohibition.
3.
Some future heirs divided the property they expected

to inherit from their mother, at a time when she was
still alive. Is such partition valid?
NO, because the contract relates to a future
inheritance since the mother is still alive, and does
not come under the contegory of those contract
authorized by law concerning future inheritance.
Impossible things or services

A. Absolute impossibility arises from the very nature or
essence of the act or service itself
Example: Contract to deliver a mythical bird to to travel
to a distant galaxy.
Effect: Contract is void.
B. Relative impossibility arises from the qualifications or
circumstances of the obligor rendering him incapable of
executing the act or service
Examples: In a contract of partnership where one of the

partners obligates himself to contribute to the common
fund an amount beyond his means, the contract is not
void because the impossibility may disapper.
Effect: Allows the perfection of the contract, although
the fulfillment is hardly probable.
Take note: If the impossibility is permanent, although relative
only, the same is still void. (ex. Blind person entering into a
contract which requires the use of eyesight)
Impossibility not to be confused with difficulty
Impossibility must not be confused with difficulty. Hence, a
showing of mere inconvenience, unexpected impediments, or
increased expenses is not enough.
LICITNESS OF OBJECT
The object of the contract must be lawful and licit. Hence, it
must not be contrary to any of the following:
A.
B.
C.
D.
E.
Law
Morals
Good customs
Public order
Public policy
DETERMINABILITY OF OBJECT
The object must be determinate, or at least determinable as

to its kind, without need of a new agreement.
Determinate
The genus of the object should be expressed although there
might be no determination of the individual species.
Consequently, there need not be any specification of the
qualities and circumstances of the thing which constitutes the
object of the contract.
Illustration:
Granting there is a specification as to the class or genus to
which the object belongs but no specification as to quantity, is
the contract valid?
YES. The fact that the quantity is not determinate, shall not be
an obstacle to the existence of the contract, provided it is
possible to determine the same, without need of a new
contract. (2nd sen 1349)
Examples: needs of a family, provisions needed for a factory,
materials for a particular work, etc.
Aurora Fe Camacho v. CA
Held:
Arts 1349 and 1460 provide the guidelines in determing
whether or not the object of the contract is certain. In this
case, the object is a 5, 000 sqm portion of lot 261, Balanga
Cadastre. The failure of the parties to state the exact location
in the contract is immaterial. This is a mere error, which does
not indicate the absence of the principal object as to render
the contract void. The description of the property subject of
the contract is sufficient to validate the same.
Section 3 CAUSE OF CONTRACT
Articles 1350 1355
CONCEPT OF CAUSE
1350. In onerous contracts the cause is understood to be, for

each contracting party, the prestation or promise of a thing or
service by the other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts of pure
beneficence, the mere liberality of the benefactor.
CAUSE DEFINED
The essential reason which moves the contracting parties to
enter into the contract. In other words, it is the immediate,
direct or most proximate reason which explains and justifies
the creation of an obligation through the will of the
contracting parties.
Contract
Cause
Prestation or promise of a thing
Onerous contracts
or service by the other
Gratuitous contracts
Liberality of the benefactor
Remuneratory
Service or benefit which is
contracts
remunerated
Distinguished from consideration
Cause and consideration are used interchangeably in this
jurisdiction. Causa is merely the civil law term, while
consideration is the common law term.
Distinguished from object
A. For remuneratory contracts
Cause the service or benefit which is remunerated.
Object thing given in remuneration
B. For gratuitous contracts
Cause liberality of the donor or benefactor
Object the thing given or donated
C. For onerous contracts
Cause for each contracting party, the prestation or
promise of a thing or service by the other
Object the thing or service itself
Illustration for onerous contracts:
If Tanya sells a car to Feds for P20, 000, what is the cause and
what is the object of the contract?
Three views:
1. Manresa and Castan
Cause: For Tanya, the cause is the promise of Feds to
pay her P20, 000. For Feds, the cause is the promise of
Tanya to deliver the car to him.
Objects: The car and the P20, 000.
2. Dr. Padilla
Cause: P20, 000
Object: Car
3. Dr. Tolentino
Cause: For Tanya, the cause is the promise of Feds to
pay her P20, 000. For Feds, the cause is the promise of
Tanya to deliver the car to him.
Object: The car because it is the starting point of the
agreement, without which the negotiation would never
have begun. (The more logical view)
CAUSE IN ONEROUS CONTRACTS
The cause is for each contracting party, the prestation or
promise of a thing or service by the other.
Example:
A logging company by contract designated a certain agency
as its distributor to export logs to Korea and Europe at the
best market price obtainable on condition that it would pay

the latter a commission of 13% of the gross value of the logs.
Cause for the logging company: Distribution of its logs in the
areas agreed upon which the latter undertook to accomplish
Cause for the agency: Its commitment to sell or export the
logs for onerous consideration.
Accessory contracts
Cause of accessory contracts is identical with that of the
principal contract.
Examples:
1. A mortgage as an accessory contract its cause is the
very cause of the principal contract from which it
receives its life, and without which it cannot exist an
independent contract, although it may secure an
obligation incurred by another.
2. Where one of the signers of a promissory note was
indebted to the payee in the amount of P2,000 and to
secure its payment the defendant signed the note
together with said debtor in solidum, the said debt is
sufficient consideration for the execution of the note as
to the defendant.
Moral obligations
May a moral or natural obligation constitute a sufficient cause
or consideration to support an onerous contract?
IT DEPENDS.
Where the moral obligation arises wholly from ethical

considerations, unconnected with any civil obligation
not demandable in law but only in conscience and
cannot constitute a sufficient cause to support an
onerous contract
Where such moral obligation is based upon a previous
civil obligation which has already been barred by the
statute of limitations at the time when the contract is
entered into constitutes a sufficient cause or
consideration.
Fisher v. Robb
Facts:
Robb was one of the organizers of Philippine Greyhound Club,
Inc which was formed for the purpose of introducing dog
racing in the Philippines, while Fisher was one of those who
invested money in the venture. When the venture failed, Robb
sent a letter to Fisher explaining the critical condition of the
company and stated that he felt a moral responsibility for
those who has sent in the second payment of their
subscription and that he shall reimburse Fisher using his
personal funds. Fisher then brought an action to enforce the
obligation.
Issue:
Whether there is a sufficient cause or consideration to justify
the promise made by Robb in his letter.
Held:
The contract sought to be enforced is onerous in character
because it supposes the deprivation of the latter of an amount
of money which impairs his property, and for it to be valid, it
should have a consideration consisting in the lending or
promise of a thing or service by such party. Robb is required to
reimburse, but Fisher has not promised anything to Robb to
compel him to make such payment. The promise by Robb of
reimbursement was prompted by a feeling of pity and is
purely moral not demandable in law but only in conscience.
Villaroel v. Estrada
Facts:
Kalaw obtained a loan from spouses Estrada in the amount of
P1, 000 payable after 7 years. Unfortunately, Kalaw and
spouses Estrada died, all survived by their sons. In 1930,
Villaroel, son of Kalaw, executed a document acknowledging
the debt, thereby assuming the obligation. The heirs of
spouses Estrada now files an action to enforce the obligation.
Issue:
Whether or not the action will prosper considering that the
debt incurred by the defendants mother had already
prescribed.
Held:
The present action is not founded on the original obligation
contracted by the mother of Villaroel, which had already
prescribed but on that contracted by the defendant in 1930
when he assumed the obligation which had already
prescribed. In effect, the same gave rise to a new obligation. It
was a moal obligation which is a sufficient consideration to
create and make effective and demandable the obligation
which he had voluntarily contracted in 1930.
CAUSE IN REMUNERATORY CONTRACTS
Remuneratory contract one in which one of the
contracting parties remunerates or compensates the service
or benefit rendered or given by the other party, although such
service or beneft does not constitute a demandable debt.
Cause: the service or benefit which is renumerated
Example: A gives a property in accordance with the formalities
prescribed by law to his lawyer friend B, in remuneration for
legal services rendered to him freely by the latter in the past.
Cause of A legal services rendered by B, although such
services do not constitute a demandable debt.
MOTIVES
1351. The particular motives of the parties in entering into a
contract are different from the cause thereof.
MOTIVES
I buy a gun from a store for P50,000 because I want to kill
myself. The cause of the contract is the gun (for me), the
money (for the seller). My motive, however, is the killing of
myself. Motives do not enter at all in the validity or invalidity
of cause or consideration.
Distinguished from motives
One may purchase an article not because it is cheap but
because he may have some particular use to which it may be
put, because of a particular quality which the article has, or
the relation which it will bear, etc. These circumstances may
constitute the motive which induces the purchase. The
motives are as different or complex and as capable of infinite
variety as the individual circumstances which may move men
to acquire things or to make money.
Cause
Direct or most proximate
reason of a contract
Objective or juridical
reason of a contract
Always known
Always the same
Legality or illegality of the
cause will affect the
Motive
Indirect or remote reasons
Psychological or purely
personal reasons
Unknown to the other
Differs for each contracting
party
Will not affect the lexistence
existence or
validity of a contract
of a contract
Illegal cause distinguished from illegal motive

An illegal cause makes a contract void, whereas an illegal
motive does not necessarily render the transaction void.
Example: If I buy a gun to kill my neighbour, the purchase is
still valid.
Instances when the line between motive and cause
disappears
When the motive of one of the contracting parties
predetermines the purpose of the contract and such motive is
illegal or immoral, then the same becomes the illegal causa
thus rendering the contract void from the very beginning.
Examples:
1. A mother sold 2 fishponds to a daughter and the latter
in turn resold the same fishpoing to the mother and her
stepfather. As a consequence of which, the ponds were
converted into conjugal properties. It is clear that the
motive or purpose is to circumvent the law against
donations between spouses. This motive is the illegal
causa which makes the contract void.
2.
A Filipino leased a parcel of land to an alien for 99

years with an option to buy the property within 50
years, provided that the latter shall become a Filipino
citizen. The motive of the agreement which resulted in
the virtual transfer of ownership is to circumvent the
Constitutional prohibition to transfer lands to aliens.
The motive is the illegal causa, thus contract is void.
Liquez v. Court of Appeals
Facts:
Salvador Lopez, a married man, donated a land to a 16-year
old (Conchita Liquez), subject to the condition that she will
cohabit with him as his mistress. After Lopezs death, Conchita
sought to get the land from his heirs, but said heirs refused on
the ground that the cause of the donation was illegal, hence
void. Conchita contended that while the motive might have
been immoral, still the cause which is the liberality of the
donor was proper. Hence, the donation is valid.
Held:
The donation was null and void. While it is true that motive
differs from cause, still a contract that is conditioned upon the
attainment of an immoral motive should be considered void,
for here motive may be regarded as cause when it
predetermines the purposes of the contract. Here, Lopez
would not have conveyed the property in question had he
known that Liguez would not cohabit with him; it follows that
the cohabitation was an implied condition to the donation, and
being unlawful, the donation itself must be considered
unlawful.
The liberality of the donor is deemed causa only in contracts
of pure liberality, that is to say contracts in which the idea of
self-interest is totally absent on the part of the transferor. In
the case, the donation was not moved exlusively by the desire
to benefit Conchita but also to gratify his sexual impulse.
Therefore, the donation was but one part of an onerous
transaction. Thus considered, the conveyance was clearly
predicated upon an illicit causa. Nevertheless, had Lopez been
alive, he could not have invoked the immorality of the
donation because it was he who was at fault. Thus Conchita is
entitled to the land.
1352. Contracts without cause, or with unlawful cause,

produce no effect whatsoever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public
policy.
REQUISITES OF CAUSE
1.
2.
3.
The cause should be in existence at the time of the

celebration of the contract
The cause should be licit or lawful
The cause should be true
Take note: If the contract has no cause, or even if it has, if the

same is unlawful or false shall not produce any effect,
inexistent and void from the very beginning.
EFFECT OF LACK OF CAUSE
General rule: It shall not produce any effect, whatsover.
Examples:
1. If the purchase price in a contract of sale was never in
fact paid by the purchaser inexistent for lack of a
cause or consideration.
2. Conveyance or transfer of property is simulated without
any cause or consideration
Exceptions:
A. Failure to pay the full amount of the property, even if
there be a stipulation that full payent shall be made at
the time of the celebration of the contract
B. Where the consideration is only P1.
Reason is because there is a consideration
The contract may be voidable because of the
inadequacy of the cause or consideration
But it is never void or inexistent
Carantes v. Court of Appeals
Facts:
The heirs of a deceased person assigned in 1939 their Right
to Inheritance in favor of a co-heir in consideration It was
alleged later, in an action to nullify the assignment, that the
deed of assignment was void, there being no consideration
therefor.
Held:
It is total absence of cause or consideration that renders a
contract absolutely void and inexistent. In the case at bar,
consideration was not absent. The sum of P1 appears in the
document was one of the considerations for the assignment of
inheritance.
Questions
1. In order that the cause shall be considered as existing, is
it necessary that it should be stated in the contract?
NO, even if the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor
proves the contrary. This is true even where the contract
falls within the purview of the Statute of Frauds.
2. If instead of an absolute lack of cause or consideration,
there s leasion or inadequacy of casue, shall this
invalidate the contract?
EFFECT OF LACK OF CAUSE
NO, Art 1355 lesion or inadequacy of cause shall not

invalidate a contract, unless there has been fraud,
mistake, etc. However, the party who has suffered the
lesion or damage is given the remedy of rescission.
consideration thereof is the dismissal of the estafa case which

is contrary to public policy.
EXISTING CAUSE
The cause must exist at the time of the perfection of the
contract. It need not exist later.
Held:
Yes, for its cause or consideration was not the dismissal of the
estafa case, but the pre-existing debt of Melegrito in the
amount of P1, 770.
Serrano v. Miave
Facts:
On Jan. 5, A sold and delivered his truck together with the
corresponding certificate of public convenience to B for the
sum of P1.6 million, payable within 60 days. Two weeks after
the sale, and while the certificate of public convenience was
still in the name of A, the certificate was revoked by the Land
Transportation Commission thru no fault of A. Upon the
expiration of the 60-day period, A demanded payment of the
price from B. B refused to pay, alleging that the certificate of
public convenience which was the main consideration of the
sale no longer existed. Is the contention of B tenable?
Held: No, for the certificate was in existence at the time of the
perfection of the contract. Its subsequent revocation is of no
consequence insofar as the validity of the contract is
concerned. Besides, B was negligent in not having caused the
immediate transfer of the certificate to his name. After all, it
had already been delivered to him.
LAWFUL CAUSE
The cause is unlawful when it is contrary to law, morals, etc.
Effect: Void ab initio.
Examples:
1. A promissory note to cover a gambling debt or to cover
accumulate usurious debts
2. A promise of marriage based on carnal consideration
3. A contract to stifle criminal prosecution is void because
it is contrary to public policy and due administration of
justice.
Velez v. Ramas
Facts:
An employee in a pawnshop named Restituta Quirante
embezzled a sum of money from said pawnshop, and in order
that she would not be prosecuted, her father and her husband
signed a promissory note to pay the amount embezzled, with
interest to the victim. When they did not pay, the victim
instituted this action to recover the said amount.
Issue: Can recovery be made?
Issue: Is the promissory note valid?
Effect if the cause is illegal

A.
If one party is innocent, he cannot be compelled to

perform his obligation and he may recover what he has
already given.
B.
If both parties are guilty neither can sue the other,

the law leaving them as they are.
FALSE CAUSE
1353. The statement of a false cause in contracts shall render

them void, if it should not be proved that they were founded
upon another cause which is true and lawful.
GENERAL RULE
Statement of a false cause in contracts shall render them
void, except if proved that they were founded upon another
cause which is true and lawful.
Example: A deed of sale which expressly states that the
purchase price has been paid when it fact it has never been
paid void because the same is a simulated contract.
However, it can either be absolute or relative simulation.
Hence, if the contract is relatively simulated, it does not
necessarily follow that it is inexistence or void, provided that
it can be establisehed that it is in reality founded upon
another cause which is true and lawful.
PRESUMPTION THAT CAUSE EXISTS
1354. Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves
the contrary.
PRESUMPTION THAT CAUSE EXISTS
It is necessary that the cause must exist, but it is NOT
necessary to state the cause in the contract. Reason: it is
presumed that the cause exists and is lawful, unless the
debtor proves the contrary.
Held:
No recovery can be made because the cause of consideration
is illicit, namely, to prevent a prosecution for a crime. This was
clearly the purpose of the father, and also the purpose of the
husband. It is contrary to public policy to allow agreements
designed to prevent or stifle prosecutions for crime. The
machinery for the administration of justice cannot be used to
promote an unlawful purpose.
This is true even where the contract falls within the purview of
the Statute of Frauds.
Mactall v. Melegrito
Illustration:
A made a promissory note in Bs favour. A, however, alleged
that the cause was his gambling losses in a prohibited game.
Who has the burden of proving that the game was indeed a
prohibited one?
Facts:
Mactal gave Melegrito P1,770 to purchase palay, with the
obligation of returning the amount within 10 days, if not spent
for said purpose. The agent neither bought the palay nor
returned the money. Mactal thus accused him of estafa.
Melegrito persuaded Mactal to drop the case, and in turn he
(Melegrito) executed a promissory note in favor of the other
for the amount involved. However, he was unable to comply
with his promise despite repeated demands. Hence, Mactal
brought an action to recover the P1,770. Melegrito now
contends that the promissory note is void because the
Statute of Frauds
Under this, certain agreements have to be in writing. Now
then, in these agreements, is it essential to put down the
cause or consideration in writing? NO, because the
presumption still applies.
A, because under the law, the presumption is that the cause is

lawful.
LESION OR INADEQUACY
1355. Except in cases specified by law, lesion or inadequacy

of cause shall not invalidate a contract, unless there has been
fraud, mistake or undue influence.
LESIONS
It is inadequacy of cause, like an insufficient price of the thing
sold.
General rule:
Lesion of price does not invalidate a contract.
Exceptions:
1. When, together with lesion, there has been fraud,
mistake or undue influence.
2. In cases expressly provided by law (In the following, the
contracts may be rescinded)
A. Those entered into by guardians whenever the
wards they represent suffer lesion by more than
of the value of the things which are the objects
thereof
B. Those agreed upon in representation of absentees
if the latter suffer the lesion stated in the
preceding no.
C. Partition among co-heirs, when anyone of them
received things with a value less by at least than
the share to which he is entitled.
Illustrations:
1. Guardian of A sold As mansion worth P120M for
P60M. May the contract be rescinded on the ground
of lesion?
YES, such a case is expressly provided for by law as
one of the contracts that may be rescinded on the
ground of lesion
2.
A sold his mansion worth P120M to B for only P60M

because A did not know the true value of the house.
May the contract be rescinded?
NO. As a rule, lesion or inadequacy of price, by itself,
does not invalidate a contract. But if A had sold it
only for this amount because of fraud or mistake or
unude influence, the contract may be annulled.
Lesion as evidene of vitiated consent

Lesion may be evidence of the presence of fraud, mistake, or
undue influence.
CHAPTER 3. FORMS OF CONTRACTS

FORMS OF CONTRACTS
1356. Contracts shall be obligatory, in whatever form they
may have been entered into, provided all the essential
requisites for their validity are present. However, when the
law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable.
In such cases, the rights of the parties stated in the following
article cannot be exercised.
FORMS OF CONTRACTS
General rule
The form in which a contract is executed has no effect upon
its obligatory force, provided all of the essential requisites for
its validity are present.
Exceptions
1. When the law requires that the contract must be in a
certain form in order to be valid
certain form to be enforceable
certain form for the convenience of the contracting
parties or for the efficacy of the contract
FORMALITIES FOR VALIDITY
Contracts for which the law prescribes certain forms for their
validity.
A.
B.
C.
Those which must appear in writing

Those which must appear in a public document
Those which must be registered
Contracts which must appear in writing

Non-compliance shall render the contract void.
1. Donations of personal property whose value exceed P5,
000
(Art 748 donation and acceptance shall be in writing)
2. Sale of land or any interest therein through an agent
(Art 1874 authority of the agent shall be in writing)
3. Agreements regarding payment of interest in contracts
of loan
(Art 1956 no interest shall be due unless it has been
expressly stipulated in writing. The validity of the
contract of loan, however, is not affected)
4. Antichresis
(Art 2134 amount of the principal and of the interest
shall be specified in writing)
Contracts which must appear in a public document
Non-compliance shall reneder the contract void.
1. Donations of immovable property
(Art 749 donation must be in public document. The
acceptance, however, may be made in the same deed of
donation or in a separate public document. If made in a
separate document, the donor shall be notified in an
authentic form, and this shall be noted in both
instruments)
2. Partnership where immovable property or real rights are
contributed to the common fund
(Arts 1771 and 1773 must appear in a public
instrument and there must be an inventory of the
immovable property or real rights, signed by the
partners and attached to the public instrument)
Contracts which must be registered
1. Chattel mortgages
(Art 2140 personal property is recorded in the Chattel
Mortgage Register as a security for the performance of
an obligation. If the same is delivered instead of being
registered, the contract is a pledge)
2. Sales or transfers of large cattles
(Cattle Rgistration Act sale and transfer mst be duly
registered and a certificate of transfer must be secured)
FORMALITIES FOR ENFORCEABILITY

There are contracts which are unenforceable by action, unless
they are in writing and properly subscribed, or unless
evidenced by some note or memorandum, which must also be
in writing and properly subscribed. These contracts are
governed by the Statute of Frauds.
Purpose of Statute of Frauds
To prevent fraud, and not to encourage the same. Thus,
certain agreements are required to be in writing so that they
may be enforced.
RIGHT OF ONE PARTY TO COMPEL EXECUTION OF THE
FORM
1357. If the law requires a document or other special form, as
in the acts and contracts enumerated in the following article,
the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the
contract.
RIGHT TO COMPEL THE EXECUTION OF THE FORM
The Article applies only when form is needed only for
convenience, not for validity or enforceability. In other words,
before the contracting parties may be compelled to execute
the needed form, it is essential that the contract be:
A.
B.
Perfected
Enforceable under the Statute of Frauds
Take note:
Art 1356 says that when the law requires that a contract be in
some form in order that it may be valid and enforceable, such
requirement is absolute and indispensable. In such cases, the
right of the parties stated in this article the right to compel
CANNOT be exercised.
Examples:
1. A donated land to B in a private instrument. B accepted
in the same private instrument. B then wanted to have
the donation registered but the registration requires a
public instrument. So B requested A to put down the
donation in a public instrument. But A refused. B then
sued to compel A to observe the necessary form.
Decide.
A cannot be compelled under Art 1357 because the
donation is not valid.
2. Same as the first problem, except that the land has
already been actually delivered to B. May A be
compelled to execute the needed public instrument?
NO, for the simple reason that the donation is null and
void.
3. A sold to B in a private instrument his land. Later B
wanted to have the sale registered, but registration
requires a public instrument. May B compel A to execute
the needed public instrument?
YES, because the contract is both valid and enforceable
under the Statute of Frauds.
4. Same as the preceding problem, except that the sale
was made orally. May B compel A to execute the needed
public instrument?
IT DEPENDS.
If the contract is still executory NO because the

contract is not enforceable under the Statute of
Frauds, which requires sales of real property to be
in writing to be enforceable by court action.
If the price has been paid or the land has been
delivered YES, because here the contract is both
valid and enforceable.
FORMALITIES FOR EFFICACY
1358 CONTRACTS
DOCUMENT
MUST
APPEAR
IN
PUBLIC
1. Acts and contracts which have for their object the

creation, transmission, modification or extinguishment
of real rights over immovable property; sales of real
property or of an interest therein.
2. The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains
3. The power to administer property, or any other power
which has for its object an act appearing or which should
appear in a public document, or should prejudice a third
person
4. The cession of actions or rights proceeding from an act
appearing in a public document.
Take note: All other contracts where the amount involved
exceeds five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action are
governed by Arts 1403 & 1405.
FORMALITIES FOR EFFICACY
General rule: Contracts shall be obligatory in whatever form
they may ave been entered into.
Exception: Contracts falling under this Article, which should be
executed in accordance with certain formalities, by reason of
their importance in order to insure their efficacy and to
protect the interests of the contracting parties as well as that
of third persons.
Art 1357 grants the corercive power to contracting parties
by which they can reciprocally compel the observance of the
required form.
Principles
1. Arts 1357 and 1358 require the execution of the contract
either in a public or in a prvate document not in order to
validate or enforce it, but only to insure its efficacy, so
that after its existence has been admitted, the party
bund may be compelled to execute the necessary
document.
2. Both articles presuppose the existence of a contract
which is valid and enforceable.
3. When the contracting parties invokes Arts 1357 and
1358, the effect is to place the existence of the contract
in issue.
4. Art 1357 does not require that the action to compel the
execution of the necessary document must precede the
action upon the contract. Both may proceed
simultaneously.
5. Although Art 1357, in connection with Ar 1358 do not
operate against the validity of the contract, once the
contracting parties invoke the same, the execution of

the required document must precede the determination
of the other obligations derived from the contract.
Dauden-Hernaez v. De los Angeles
Facts:
Marlene Dauden, a movie actress, filed a complaint against
Hollywood Far East Productions and its President and General
Manager, to recover P14, 700 as the balance of her
compensation as leading actress in two motion pictures.
Lower court dismissed the complaint since the contract price
exceeded P500, the same should have been evidenced by a
written instrument, in violation of Art 1358.
Held:
As a general rule, contracts are valid and binding from their
perfection regadless of the form, whether they be oral or
written. There are only two exceptions first, when the
contractual form is needed for its validity, and second, for its
enforceability. The contract for her services falls under neither
exception. It is true that it appears to be included in the last
clause of Art 1358, but nowhere does it state that the absence
of written form will make the agreement invalid or
unenforceable.
Problem
Spouses Robert and Yollie wanted to sell their house and
found a prospective buyer, Nina. Yollia negotiated with Nina
for the sale of the property. They agreed on a fair price of
P2M. Nina sent a letter confirming her intention to buy the
property. Nina prepared a deed of sale to be signed by the
couple and a managers check for P2M. After receiving the
P2M, Robert signed the deed of sale however, Yollie was not
able to sign because she changed her mind. Yollie then filed
for nullification of the deed of sale. Does Nina have a cause of
actoin against Robert and Yollie?
Answer: Considering that the contract has already been
perfected and taken out of the operation of the statute of
frauds, Nina can compel Robert and Yollie to observe the form
required by law in order for the property to be registered in
her name, which can be filed together with the action for the
recovery of the house.
CHAPTER 4. REFORMATION OF INSTRUMENTS

DOCTRINE OF REFORMATION OF INSTRUMENTS
1359. When, there having been a meeting of the minds of the
parties to a contract, their true intention is not expressed in
the instrument purporting to embody the agreement, by
reason of mistake, fraud, inequitable conduct or accident, one
of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has
prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of
the contract.
DOCTRINE OF REFORMATION OF INSTRUMENTS
When the true intention of the parties to a valid contract are
not expressed in the instrument purporting to embody their
agreement by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the
instrument so that such true intention may be expressed.
Requisites
1. Meeting of the minds of the parties
2. Their true intention is not expressed in the
instrument
3. Such failure to express their true intention is due to
mistake, fraud inequitable conduct or accident
Take note:
When there has been meeting of the minds, but there is
mistake, fraud, inequitable conduct or accident in the
contract as written remedy is reformation.
When there has been no meeting of the minds because

of vitiated consent proper remedy is annulment.
Illustration:
If the seller was selling for P1,000,000 but the buyer thought
he was buying for P500,000 and the contract states
P1,000,000, there has been no meeting of the minds and the
remedy is annulment; but if both agreed on P500,000 and the
contract as written states P1,000,000, the remedy is
reformation, because here, there has been a meeting of the
minds.
Rationale of the doctrine
Equity orders the reformation of an instrument in order that
the true intention of the contracting parties may be
expressed. The courts do not attempt to make another
contract for the parties. The rationale is that it would be
unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting
of the minds of the parties.
Distinguished from annulment of contracts
Reformation of instrument
Annulment of contract
Presupposes a perfectly valid

contract where there has
been meeting of the minds
Based on a defective contract

in which there has been no
meeting of the minds
because consent has been
vitiated
Take note: If mistake, fraud, inequitable conduct or accident

has prevented the meeting of the minds of the parties
proper remedy is annulment of the contract and NOT
reformation.
Example:
Buyer has been led to enter into a contract of sale through
fraud or misrepresentation on the part of the seller that the
property he was buying was unregistered land annulment.
RULE IN CASE OF CONFLICT
1360. The principles of the general law on the reformation of
instruments are hereby adopted insofar as they are not in
confl ict with the provisions of this Code.
RULE IN CASE OF CONFLICT
In case of conflict between the Civil Code and the principles of
the general law on reformation, the Civil Code prevails. The
latter will have only suppletory effect.
WHEN CAN THERE BE REFORMATION
WHEN CAN THERE BE REFORMATION
1. Art 1361 When a mutial mistake of the parties causes
the failure of the instrument to disclose their real
agreement
2. Art 1362 If one party was mistaken and the other
acted fraudulenty or inequitably in such a way that the
instrument does not show their true intention, the
former may ask for the reformation.
3. Ar 1363 When one party was mistaken and the other

knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former.
4. Art 1364 When through the ignorance, lack of skill,
negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the
instrument does not express the true intention of the
parties, the courts may order the reformation.
5. Art 1365 If two parties agree upon the mortage or
pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right
of repurchase
WHEN CAN THERE BE NO REFORMATION
1. Art 1366
A. Simple donations inter vivos where no condition is
imposed
B. Wills
C. When the real agreement is void
2. Art 1367 When one of the parties has brought an
action to enforce the instrument, he cannot
subsequently ask for its reformation.
WHO CAN ORDER REFORMATION
Ar 1368 Reformation may be ordered at the instance of:
A.
B.
If mutual mistake Either party or his successors in

interest
If not mutual upon petition of the injured party, or
his heirs and assigns
WHAT SHALL GOVERN REFORMATION PROCEDURE

Art 1369 The procedure for the reformation of instruments
shall be governed by rules of court to be promulgated by the
Supreme Court.
MUTUAL MISTAKE
1361. When a mutual mistake of the parties causes the
failure of the instrument to disclose their real agreement, said
instrument may be reformed.
MUTUAL MISTAKE
Reformation may be asked because of mutual mistake.
Example:
A sold to B orally a house at 16 San Isidro Malate. In the
written public document, both forgot the true number of the
house and instead wrote on the contract No. 18 San Isidro
Malate. Since there was mutual mistake, reformation of the
instrument is proper.
Requisites:
1. Mistake should be of a fact
2. The mistake should be proved by clear and convincing
evidence
3. The mistake should be mutual
UNILATERAL MISTAKE + FRAUD
1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for the
reformation of the instrument.
UNILATERAL MISTAKE PLUS FRAUD

The Mistake is unilateral but the other party acted
fraudulently or inequitably. TN: Only the mistaken party can
ask for reformation.
Example:
It was agreed that A would be loaned P10M by B. In the
contract signed by A and B, it was stated that A was selling
his house to B for said amount. A signed the contract in the
belief that it was really a contract of loan. Who, if any, may
ask for the reformation of the instrument if B had acted
fraudulently?
Answer: A may ask for the reformation of the instrument
because after the meeting of the minds, one party (B) acted
fraudulently or inequitably in such a way that the contract
does not show their real intention. In such a case, the law
provides that the person who acted by mistake may ask for
the reformation of the instrument.
Ong Chua v. Carr, et al.
Facts:
Teck sold his land to Ong with the right to repurchase within 4
years. Ong sold the land to Carr with the understanding that
Carr was buying it, subject to the right to repurchase on the
part of Teck. At that time, Carr did not have enough money. So
Carr asked for a loan from an Association. The Association
offered to give a loan provided Carr could offer, as security,
land of which he was the absolute owner, that is, land which
would not be subject for example to repurchase.
With the help of a lawyer who drafted the deed, Carr and Ong
(who did not know English) signed a contract in which Carr
was made out to be the absolute owner of the land, and the
words regarding the right to repurchase omitted. Later Teck
was repurchasing the property from Ong, and Ong demanded
the reconveyance of the property from Carr. Carr refused on
the ground that he (Carr) was the absolute owner of the land.
Hence, Ong brought this action against Carr.
Issue:
May the contract be reformed? If so, may Ong now demand
the land from Carr so that it would be resold to Teck?
Held:
Yes, the contract may be reformed because if one party was
mistaken and the other acted fraudulently or inequitably in
such a way that the instrument does not show their true
intention, the former may ask for the reformation of the
instrument. It follows, therefore, that Ong may now demand
the reconveyance of the property to him so that the land may
be repurchased by Teck.
UNILATERAL MISTAKE + CONCEALMENT
1363. When one party was mistaken and the other knew or
believed that the instrument did not state their real
agreement, but concealed that fact from the former, the
instrument may be reformed.
UNILATERAL MISTAKE PLUS CONCEALEMENT
The mistake is unilateral but the other party is guilty of
concealment. TN: Only the party in good faith can ask for
reformation.
FAILURE TO CONVEY THE TRUE INTENT
1364. When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the instrument
or of the clerk or typist, the instrument does not express the
true intention of the parties, the courts may order that the
instrument be reformed.
FAILURE TO CONVEY THE TRUE INTENT

The court may order the reformation of the instrument if the
instrument does not convey the true information of the parties
because of the:
A.
B.
C.
Exception: After the death of the testators, errors or

imperfections in descriptions may be corrected under
Art 789, but not the manner of property disposal.
3.
Void agreements
Reason: Because such a procedure would be useless
because the agreement is void in the first place. Once
reformation is made, the new instrument would be void
precisely because the true agreement and intention is
void.
Ignorance
Lack of skill or
Bad faith
(of the drafter of the instrument, the clerk or the typist)
ESTOPPED TO ASK FOR REFORMATION
Manila Engineering Co v. Cranston and Heacock

In a contract, although the original draft read in dollars, the
contract was made out in pesos through the typists fault. May
the instrument be reformed?
Yes. It conclusively appears from the collateral facts and
surrounding circumstances that it was intended that the dollar
sign was to be used and that defendant knew or in the
ordinary course of business should have known that a mistake
was made. The contract will be reformed and the dollar sign
substituted for the peso sign.
INTENT TO HAVE A MORTGAGE OR PLEDGE
1365. If two parties agree upon the mortgage or pledge of
real or personal property, but the instrument states that the
property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
INTENT TO HAVE A MORTGAGE OR PLEDGE
Example:
B wanted to borrow from C, so he offered his land by way of
mortgage as security. Both parties agreed on this point but
the contract drafted contained an absolute sale. May the
instrument be reformed?
YES, otherwise, the true intention of the parties would be
frustrated.
How to judge the parties intent
Intention of the parties can be
contemporaneous or subsequent acts.
judged
from
their
1367. When one of the parties has brought an action to

enforce the instrument he cannot subsequently ask for its
reformation.
EFFECT OF AN ACTION TO ENFORCE THE INSTRUMENT
When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.
Rationale: Estoppel, waiver or ratification.
Example:
A sold B a house. A fraudulently made the contract one of
mortgage instead of sale. Both signed the contract of
mortgage, with B believing all the time that it was a contract
of sale. B, therefore, has the right to bring an action for the
reformation of the instrument. But if B brings an action to
foreclose the mortgage, he is thereby enforcing the
instrument. He cannot, therefore, subsequently ask for the
reformation of the instrument to make it one of sale.
PLAINTIFFS IN ACTION FOR REFORMATION
1368. Reformation may be ordered at the instance of either
party or his successors in interest, if the mistake was mutual;
otherwise, upon petition of the injured party, or his heirs and
assigns.
PLAINTIFFS IN AN ACTION FOR REFORMATION

A.
If the mistake is mutual

Either party or his successors in interest
B.
In all other cases

Injured party, his heirs and assigns
WHEN REFORMATION IS NOT ALLOWED

1366. There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition is
imposed; (2) Will; (3) When the real agreement is void.
WHEN REFORMATION IS NOT ALLOWED
1.
Donations inter vivos wherein no condition is

imposed
Reason: Because donations are essentials acts of pure
liberality.
Exception: If donation is conditional reformation may
be resorted to so that the true conditions intended by
the donor might be brought out. In case the donation is
an onerous one, reformation is very much in order.
2.
Wills
Reason: Because the making of a will is strictly a
personal act, which is free. Moreover, a will may be
revoked at any time.
Problem
A and B agreed on a certain contract, but A fraudulently made
a document reciting another kind of contract. Later, both A
and B died.
1. May the son of B bring an action to reform the
instrument?
Yes, because he is the heir of the injured party.
2. May the son of A bring an action to reform the
instrument?
No, as it was his father who caused the fraud.
Query: Supposing the son of A wanted to correct the
fraud made by his father? This is okay but in such a
case, no court action is needed anyone, since both
parties can agree to reform the instrument by
themselves.
What complaint must allege

Before reformation can be granted, the complaint must allege:
A.
That the instrument to be reformed does not express

the real agreement or intention of the parties
B.
What the real agreement or intention was
Take note:
It is not the function of the remedy of reformation to make a
new agreement, but to establish and perpetuate the teu
existing one.
PROCEDURAL RULES
1369. The procedure for the reformation of instruments shall
be governed by Rules of Court to be promulgated by the
Supreme Court.
PROCEDURAL RULES
These procedural rules are supposed to be promulgated by
the SC.
CONTRACTS OF ADHESION
CONTRACT OF ADHESION
One in which one of the parties imposes a ready made form of
contract, which the other party may accept or reject, but
which the latter cannot modify.
Ayala Corporation v. Ray Burton Devt Corp.
A contract of adhesion in itself is not an invalid agreement.
This is binding as a mutually executed transaction. The one
who adheres to the contract is in reality free to reject it
entirely, and if he adheres, he gives his consent.
Philippine American General Insurance v. Sweet Lines Inc
Not even an allegation of ignorance of a party excuses noncompliance with the contractual stipulations since the
responsibility for ensuring full comprehension of the
provisions of a contract of carriage (contract of adhesion)
devolves not on the carrier but on the owner, shipper or
consignee as the case may be.
Contracts of adhesion stand out from other contracts
Contracts of adhesion stand out from other contracts which
are bilaterally drafted by the parties in a sense that the
former is accorded inordinate vigilance and scrutiny by the
courts in order to shield the unwary from deceptive schemes
contained in ready-made contracts.
Qua Chee Gan v. Law Union and Rock Insurance
The courts cannot ignore that nowadays, monopolies, cartels
and concentration of capitals manage to impose cunningly
prepared agreements that the weaker party may not change
his participation thereof being reduced to the alternative to
take it or leave it, depriving them to bargain on equal footing.
Hence, these contracts (i.e. insurance and bill of lading) call
for greater strictness and vigilance for the courts to protect
the weaker party from abuses and prevent their becoming
traps for the unwary.
Ayala Corp v. Ray Burton Devt Corp

In the instance case, the stipulations in the Deed Restrictions
and Special Conditions are plain and unambiguous which
leave no room for interpretation. Moreover, there was even no
attempt on the part of RBDC to prove that in the execution of
the Deed of Sale on the subject lot, it was a weaker or a
disadvantaged party on account of its moral dependence,
ignorance, etc. On the contrary, the latteris a realty firm and
has been engaged in realty business for several years already.
Hence RBDC was not an unwary party in the subject
transaction. It was in fact a knowledgeable realty firm
experienced in real estate business, as testified by Edwin Ngo,
President of RBDC.
Spouses Reyes v. BPI Family Savings Bank
Facts:
Petitioner spouses executed a real estate mortgage on their
property in favour of BPI-FSB to secure the P15M loan of
Transbuilders Resources and Devt Corp to BPI.
Held:
While the stipulation proved to be onerous to the petitioners,
the courts will not extricate a party from an unwise or
undesirable contract entered into with all the required
formalities and with full awareness of its consequences.
Petitioners voluntarily executed the REM and they cannot be
allowed to repudiate their obligation to the bank after
Transbuilders default. Contracts of adhesion are not invalid
per se.
CONTRACTS OF CREDIT CARDS
CONTRACTS OF CREDIT CARDS
Contracts between cardholders and credit card companies are
contracts of adhesion because their terms are prepared by
only one party while the other merely affixes his signature
signifying his adhesion thereto.
Unauthorized purchases through lost credit card
For the cardholder to be asolved from liability for unauthorized
purchases made through his lost or stolen card, two steps
must be followed: (Ermitano v. CA)
A.
B.
The cardholder must give written notice to the credit

card company
The credit card company must notify its member
establishments of such loss or theft, which naurlly, it
may only do upon receipt of a notice from the
cardhoplder
Take note: Both the cardholder and company have a

responsibility to perform, in order to free the cardholder from
any liability arising from the use of a lost or stlen credit card.
What absolves the cardholder
Prompt notice by the cardholder to the company of the loss or
theft of her card should be enough to relieve her from any
liability occasioned by the unauthorized use of her lost card.
Does the cardholder need to wait until the company has
notified all its member establishments?
Basis: Article 24 NCC In all contractual, property or other

relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence,
tender age, mental weakness, etc, the courts must be vigilant
for his protection.
NO, because it would be unfair and unjust to put the

cardholder at the mercy of the company which may delay
indefinitely the notification of its members to minimize if not
eliminate the possibility of incurring loss from unauthorized
purchases. (against public policy)
What shall determine its validity and/or enforceability

The peculiar circumstances obtaining in each case and the
situation of the parties concerned.
Emmanuel Aznar v. Citibank

The terms and conditions of Citibanks mastercard constitute
a contract of adhesion. Par 7 of the contract states that
Citibank is not responsible if the card is not honoured by any

merchant affiliate for any reason. Though the bank may have
no control of all the actions of its merchant affiliates, it is not
right however to give it blanket freedom from liability if its
card is dishonoured by any merchant affiliates for any reason.
Such phrase renders the statement vague and as the said
terms constitute a contract of adhesion any ambiguity mst
be construed against the party who prepared the contract.
Par 15 thereof also limits its liability to P1,000 or the actual
damage proven, whichever is lesser. Again, such stipulation is
not valid for the same is unconscionable as it precludes
payment of a larger amount even though damage may be
clearly proven.
Take note: The Supreme Court is not precluded from ruling
out blind adherence to the terms of a contract if the attendant
facts and circumstances show that they should be ignored fro
being obviously too one-sided.
CHAPTER 5. INTERPRETATION OF CONTRACTS

PRIMACY OF INTENTION OF PARTIES
1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal
meaning of its stipulations shall control. If the words appear to
be contrary to the evident intention of the parties, the latter
shall prevail over the former.
REASON FOR INTERRETATIO OF CONTRACTS
What is the use of interpreting a contract? Should we not just
apply the terms thereof?
It is true that we must apply the terms of the contract but only
when they are so clear that there is no doubt regarding the
intention of the contracting parties. In other cases, we should
apply the rules of interpretation.
PRIMACY OF INTENTION OF PARTIES
Cardinal rule in the interpretation of contracts
To effect that the intention of the contracting parties should
always prevail because their will has the force of law between
them.
If the terms are clear and leave no doubt as to the

intention of the contracting parties literal sense of its
stipulations must be followed.
If the words appear to be contrary to the evident

intention of the contracting parties the intention shall
prevail.
Take note: Once the intention has been ascertained, it

becomes an integral part of the contract as though it had
been originally expressed therein in unequivocal terms.
Manila Banking Corp v. Teodoro Jr
The character of the transaction between the parties is to be
determined by their intention, regardless of what language
was used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be
construed as a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit
of the property as collateral security.
Philippine National Construction Corp v. CA
The contract between parties is the formal expression of the
parties rights, duties and obligations. It is the best evidence
of the intention of the parties. Thus, when the terms of an

agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be ,
between the parties and their successors in interest, no
evidence of such terms other than the contents of the written
agreement. Furthermore, it is a rule that if the terms of a
contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulation
shall control. The contract is the law between the parties and
when the words of the contract are clear and can easily be
understood, there is no room for contruction.
Rule in case of conflict
In case of conflict between the words of the contract and the
evident intention of the parties, which one must prevail?
The intention must prevail. Let us interpret not by the letter
that killeth but by the spirit that giveth life. But where the
words are clear as to leave no doubt as to the intention of the
contracting parties, the literal meaning shall control. Hence,
there is no room for interpretation.
Examples:
1. A promissory note stated that it was payable upon
receipt of the debtor of cash payment from a certain
estate, or upon demand. Is the obligation demandable at
once? YES, because of the clear import of the words
upon demand.
2. A and B entered into a so-called contract of lease,
whereby B would pay certain regular amounts as rentals
and at the end of the lease, B would become the
absolute owner of the property. Is this really a lease or a
sale in installments?
This contract is really a sale in installments for such was
the evident intention of the contracting parties.
Although in the contract, Exhibit A, the usual words
lease, lessee, and lessor were employed, that is not
obstacle to holding that said contract was a sale on
installments, for such was the evident intention of the
parties in entering into said contract.
3. In a written contract, it was agreed that all legal actions
may be brought to the jurisdiction of the proper courts in
the City of Manila. May the parties sue in courts outside
Manila? YES, because the clause in question being
permissive only in view of the use of the word may.
HOW TO JUDGE INTENT OF PARTIES
1371. In order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be
principally considered.
HOW TO JUDGE INTENT OF THE PARTIES
General rule: Contract is interpreted in the precise terms in
which they are expressed. But the courts, are called upon to
admit direct circumstantial evidence necessary for their
interpretation with the purpose of making the true intention of
the parties prevail. Consequently, the courts should consider:
1.
2.
Contemporaneous acts
Subsequent acts
Take note: This is without prejudice to the consideration of

other factos determined by other rules of interpretation in the
Civil Code and the Rules of Courts.
Manila Electric Co v. Commissioners
Facts:
When the Meralco obtained a franchise from the City of
Manila, free transportation was granted in the franchise to
employees of the City of Manila wearing offi cial badges.

The question to determine is: What should be the proper
interpretation of wearing, wearing so that it could be seen,
or wearing the badge, without the badge being seen? Or
should the term include both? To properly solve the question,
the Supreme Court had to look into the actions of the
contracting parties at the time of and subsequent to the
granting of the franchise. It was proved to the satisfaction of
the court that for nine years the parties interpreted the
phrase to mean the wearing of the offi cial badges so that
they could be seen.
Held: Such interpretation of the parties should be th
interpretation by the court, because the courts are NOT at
liberty to adopt a construction opposed to that which the
parties have placed on their contract.
EFFECT OF USE OF GENERAL TERMS
1372. However general the terms of a contract may be, they
shall be understood to comprehend things that are distinct
and cases that are different from those upon which the parties
intended to agree.
EFFECT OF USE OF GENERAL TERMS
Example: A sold B his house including all the furniture
therein. Suppose part of the furniture belonged to a relatie of
A who had asked him (A) for permission to leave them there
temporarily. Should such furniture be included?
NO, because although the term all is general, it should still
not be understood to comprehend things that are distinct and
cases that are different from those upon which the parties
intended to agree.
Special intent prevails over a general intent
Just as a special provision controls a general provision, a
special intent prevails over a general intent.
STIPULATION ADMITTING OF SEVERAL MEANINGS
1373. If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual.
STIPULATION ADMITTING OF SEVERAL MEANINGS
A wife exchanged her house for a diamond ring. Now the
wife had a house which was her paraphernal property and
another house, which however, belonged to the conjugal
partnership. The contract entered into by the house was
against the consent of the husband. To which house shoud
her house refer?
To the paraphernal house, because this would validate the
contract. If the other interpretation would be followed, the
exchange would not be valid since the husband had not given
consent.
STIPULATIONS TO BE READ TOGETHER
1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.
STIPULATIONS TO BE READ TOGETHER
Bank of the P.I. v. Ty Camco Sobrino
Facts:
A mortgaged his property to B. In the contract, it was stated
that a second mortgage was prohibited, except with the
written consent of B. The contract further stated that the

penalty for such a violation would be that B can immediately
foreclose the mortgage. Without the consent of B, A
mortgaged the property a second time to C. Has B the right to
consider the second mortgage null and void?
Held:
No, B has no right to consider the second mortgage null and
void. His only right is to foreclose the fi rst mortgage right
now. The whole mortgage contract must be read. Said the
Supreme Court: The mortgage contract should be read in its
entirety. If so read, it is at once seen that while the making of
the second mortgage except with the written consent of the
mortgagee is prohibited, the contract continues and states the
penalty for such a violation, namely, it gives the mortgagee
(B) the right to immediately foreclose the mortgage. It does
not give the mortgagee the right to treat the second
mortgage as null and void.
WORDS WITH DIFFERENT SIGNIFICATIONS
1375. Words which may have different significations shall be
understood in that which is most in keeping with the nature
and object of the contract.
INTERPRETED TO BE IN KEEPING WITH NATURE AND
OBJECT
If a word is susceptible to two or more meanings, what
meaning should be used?
A.
B.
That in keeping with the nature and object of the

contract.
If this cannot be determined, then the terms of a
writing are presumed to have been used in their
primary and general acceptation
Example:
If authority is given to exact payment by legal means, does
this include authority to file actions in court to recover sums
of money?
Yes. The clause in question means the power to exact
payment of debts due the concerned by means of the
institution of suits for their recovery. If there could be any
doubt as to the meaning of this language taken by itself, it
would be removed by a consideration of the general scope
and purpose of the instrument in which it concurs.

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What are the different types of statutory interpretation?

What are the different types of statutory interpretation?

What are the rules of statutory construction?

What are the rules of statutory construction?

STATUTORY CONSTRUCTION REVIEWER l NIKKI T.

SIA | WLC SCHOOL OF LAW

It is the art of seeking the intention of the legislature in

Reason why particular statute was enacted by

Is what the law, by its language means

Tools to ascertain the meaning and intention of the

Art of finding the true sense

FEDERATION OF FREE FARMERS VS. COURT OF

Rules of statutory construction are tools used to

Essence of the law

SC INTENT OF THE LAW, THE SACADA SHOULD

CLOSE INTERPRETATION - literal interpretation

STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW

EXTENSIVE INTERPRETATION - it adopts a more

influenced by other principles than the strictly

COURT NOT BE INFLUENCED BY QUESTION OF

WHO HAS AUTHORITY TO CONSTRUE

Public interest requires its resolution

SC - last bulwark of democracy.

It is a framework of the governmental machinery

DIFFERENCE BET. CONSTITUTION AND STATUTES

Exception : if capable of repetition, yet evading

It is not the origin of private rights, neither is it

LIMITATIONS ON THE POWER TO CONSTRUE

CONSTITUTION OF LIBERTY prescription of

STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW

CONSTITUTION OF SOVEREIGNTY set of

laws which concerns the

2. PRIVATE STATUTE law which relates to concerns

1. WRITTEN CONSTITUTION where the provisions

GENERAL STATUTE law which affects all the

STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW

Those affecting the public for due process and right to

Francisco Jr. Vs. House of the Representative

Authentication of the bill

Political question wisdom

3 WAYS A BILL BECOMES A LAW:

PARTS OF THE STATUTE

STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW

*even leap year 365 days

Phil. Veterans Bank Employees Union vs. Vega

Nature of administrative rules and regulations

the first day and last day included

STATUTORY CONSTRUCTION REVIEWER l NIKKI T. SIA | WLC SCHOOL OF LAW

Common or informal those which require no

Special or formal those which require some

IV. According to their purpose

Transfer of ownership ex. Sale

V. According to their subject matter

Things ex. Sale, deposit, pledge

VI. According to the nature of the vinculum

Unilateral those which give rise to an obligation

Bilateral those which give rise to reciprocal

VII. According to their cause