CONTRACTS
00 appears in the document as one of the
A. GENERAL RULE
Article 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 right of the parties stated in the
following article cannot be exercised. (1278a)
Article 1318. There is no contract unless the following requisites concur:
Consent of the contracting parties;
Object certain which is the subject matter of the contract;
Cause of the obligation which is established. (1261)
The Code speaks of the “cause of the obligation which is established,” and not
“cause of the contract”. “Cause” is defined by Manresa as the essential reason
which impelled the contracting parties to celebrate the contract while “motive” are
the particular reasons for a contracting party which do not affect the other and do
not prevent the existence of a true and distinct cause.
Article 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. (1274)
In the case of Carantes v. CA, the heirs of the decedent assigned their
right of inheritance to Lot 44 to the eldest son of the decedent for P1.00, as it was
expressed by the decedent during his lifetime that the land belonged to said heir,
who has been in possession for more than 10years. The court held that there was
valuable consideration.
Carantes v. CA, 76 SCRA 514
Contracts; Total absence of consideration is what renders a contract absolutely
void and inexistent. – It is the total absence of a cause or consideration that
renders a contract absolutely void and inexistent. In the case at bar, consideration
was not absent. The sum of P1.
consuderations for the asignment of inheritance. In addition – and this of great
legal import – the document recites that the decedent of Mateo Carantas had,
during his lifetime, expressed to the signatories to the contract that the property
subject matter thereof rightly and exclusively belonged to the petitioner Maximo
Carantes. This acknowledgement by the signatories definitely constitutes valuable
consideration for the contract.
In the case of DBP v. Adil, an agricultural land granted in 1940 was
unpaid for 10 years. In 1961 a second promissory note was executed by the debtor
acknowledging the loan on Aptil 11, 1961, and promising to pay it on June 15.
1961. A complaint was filed on Sept. 11, 1970 to recover the amount of the second
promissory note.
The Supreme Court said that the consideration for the second promissory
note was the pre-existing obligation, as the statute of limitations bars the remedy,
but does not discharge the obligation. In the case of Bagnas v. CA, a deed of sale of
land worth P10,000 was considered false and fictitious, and hence, void. It was not
a donation, because there was no acceptance.
DBP v. Adil, 161 SCRA 307
Effects of a new express promise to pay a debt – This is not a mere case of
acknowledgement of a debt that has prescribed by a new promise to pay the debt.
The consideration of the new promissory note is the pre-existing obligation under
the first promissory note. The statutory limitations bars the remedy but does not
discharge the debt. “A new express promise to pay the a debt barred will take the
case from the operation of the statute of limitations as this proceeds upon the
ground that as a statutory limitation merely bars the remedy and does not
discharge the debt, there is something more than a mere moral obligation to
support a promise, to wit – a pre existing debt which is a sufficient consideration
for the new promise: the new promise upon this sufficient consideration constitutes,
in fact, a new cause of action.” It is this new promise, either made in express terms
or reduced from an acknowledgment as a legal implication, which is to be regarded
as reanimating the old promise, or as imparting vitality to the remedy (which by
lapse of time had become extinct) and thus enabling the creditor to recover upon
his original contract.
Bagnas v. CA, 176 SCRA 159
Civil Law: Consideration; The apparent gross disproportion between the
stipulated price and the undisputably valuable real estate allegedly sold,
demonstrates that the deeds of sale in question state a false consideration, thereby
making them not merely voidable, but VOID AB INITIO - without necessarily
according all these assertions its full concurrence, but upon the consideration
alone that the apparent gross, not to say enormous, disproportion between the
stipulated price (in each deed) of P1.00 plus unspecified and unquantified services
and the undisputably valuable real estate allegedly sold – worth at least
P10,500.00 goin only by assessments for tax purposes which, it is well known, are
notoriously low indicators of actual value – plainly and unquestionably
demonstrates that they state a false and fictitious consideration, and not other true
and lawful cause having been shown, the Courts finds both said deeds, insofar as
they purports to be sales, not merely voidable by void ab initio.
COMMENTS:
As can be gleaned from the above cases, a moral or natural obligaions may
be sufficient consideration for an onerous contract. Moreover, subsequent articles
in the Civil Code show that cause is not essential requisite for a contract:
Article 1354 provides that although the cause is not stated in the contract,
it is presumed that it exists, and is lawful unless the debtor proves the contrary.
Article 1355 provides that 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.
Article 1470 provides that gross inadequacy of prive does not affect a
contract of sale, except as it may indicate a defect in consent, or that the parties
really inteded a donation, or some other act or contract.
As can be gleaned from the above mentioned articles, “cause” need not be
proved nor is it required to be adequate. The inadequacy of the cause could only
evidence the fact that the consent of the promissor was vitiated, or that the
promissor was prompted by generosity.
The theory of cause, as the French doctrine has constructed it, has been
attacked as false and useless. In reciprocal contracts, to say that the obligation of
one is the cause of the other is false, because both obligations cannot come into
existence simultaneously. In real contracts, the obligation of the borrower, the
depository, and the pledgee arises from the act of having received the object of the
contract, an act generative of the obligation which is different from the theory of
cause; and in donations, the cause of the liberality is the will of the donor,
independent of his motive in giving.
Q: Define Contracts.
A: A contract is a meeting of minds between 2 persons whereby one binds himself,
with respect to the other, to give something or to render some service. (Art. 1305)
Q: What are the elements of a contract?
A: the elements of a contract may be classified as follows:
1. Essential – The essential elements are those without which there can be no
contract. These elements are, in turn, subdivided into common (comunes),
special (especiales) and extraordinary or peculiar (especialisimos).
The common elements are those which are present in all contracts, such as
consent, object certain and cause;
the special elements are present only in a certain contracts, such as delivery in
real contracts or form in solemn ones;
the extraordinary elements are those which are peculiar to a specific contract
such as the price in a contract of sale.
2. Natural – The natural elements are those which are derived from the
nature of the contract and ordinarily accompany the same. They are
presumed by the law, although they can be excluded by the contracting
parties if they so desire. Thus, warranty against eviction is implied in a
contract of sale, although the contracting parties may increase, diminish
or even suppress it.
3. Accidental – The accidental elements are those which exist only when the
parties expressly provide for them for the purpose of limiting or modifying
the normal effects of the contract. Example of these are conditions, terms
and modes.
Q: How are contracts perfected?
A: We must distinguish. If the contract is consensual, it is perfected by mere
consent; If the contract, however, is real, it is perfected by the delivery of the object
of the contract by one contracting party to another.
Q: What is meant by consent and what are its requisites?
A: As applied to contracts, consent signifies the concurrence of the wills of the
contracting parties with respect to the object and the cause which shall constitute
the contract; It signifies the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract.
Q: Who are incapacitated to give their consent to a contract?
A: The followin are incapacitated to give consent to a contract:
1. Unemancipated minors
2. Insane or demented persons;
3. Deaf mutes who do not know how to write
4. Married women of age in cases specified by law
5. Persons suffering from civil interdiction; and
6. Incompetents under guardianship.
B. FORM ESSENTIAL TO ITS VALIDITY
Donations (Articles 748 – 749, CC; Article 83, FC)
Article 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the
document representing the right donated.
If the value of the personal property donated exceeds five thousand pesos,
the donation and the acceptance shall be made in writing. Otherwise, the
donation shall be void. (632a)
Article 749. In order that the donation of an immovable may be valid, it
must be made in a public document, specifying therein the property
donated and the value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate
public document, but it shall not take effect unless it is done during the
lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be
notified thereof in an authentic form, and this step shall be noted in both
instruments. (633)
Partnership where real property is contributed (Art. 1773)
Article 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said property is not
made, signed by the parties and attached to the public instrument.
Agency to sell real property or interest therein. (Art. 1874)
Article 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing; otherwise
the sale shall be void.
Antichresis (Article 2134)
Article 2134. The amount of the principal and of the interest shall be
specified in writing; otherwise, the contract of antichresis shall be void.
C. FORM ESSENTIAL TO ITS ENFORCEABILITY
Statute of Frauds – Article 1403 (2)
Article 1403. The following contracts are unenforceable, unless they are
ratified:
Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
Express Trusts (Article 1443)
Article 1443. No express trusts concerning an immovable or any interest
therein may be proved by parol evidence.
The Statute of Frauds do not apply to executed or partially executed contracts,
not only because there is evidence of an overt act of the party against whom the
oral agreement is sought to be enforced, but also one should not be permitted to
invoke the Statute of Frauds to perpetuate fraud on the other party. Neither does the
Statute apply to an agreement creating an easement of right of way, it is not a sale
of an interest in real property.
D. WHEN FORM IS NOT ESSENTIAL TO ITS VALIDITY
Articles 1358, 2125, 2096
Article 1358. The following must appear in a public document:
Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property;
sales of real property or of an interest therein are governed by articles
1403, No. 2, and 1405;
The cession, repudiation or renunciation of hereditary rights or of those of
the conjugal partnership of gains;
 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;
The cession of actions or rights proceeding from an act appearing in a public
document.
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 articles, 1403, No. 2 and 1405. (1280a)
Article 2125. In addition to the requisites stated in article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that
the document in which it appears be recorded in the Registry of Property.
If the instrument is not recorded, the mortgage is nevertheless binding
between the parties.
Article 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in
a public instrument. (1865a)
1. Effect of Non compliance – article 1357
Article 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. (1279a)
Q: What are the different classes of contracts?
A: Contracts may be classified as follows:
(a) According to their relation to other contracts:
1. Preparatory – Those which have for their object the establishment of a
condition in law which is necessary as a preliminary step towards the
celebration of another subsequent contract. Examples – partnership,
agency.
2. Principal – those which can subsist independently from other contracts
and whose purpose can be fulfilled by themselves. Examples – sale, lease.
3. Accessory – those which can exist only as a consequence of, or in relation
with, another prior contract. Examples: pledge, mortgage.
(b) According to their perfection:
1. consensual – those which are perfected by the mere agreement of the
parties. Examples – sale, lease.
2. Real – those which require not only the consent of the parties for their
perfection, but also the delivery of the object by one party to the other.
Examples – commodatum, deposit, pledge.
(c) According to their form:
1. Common or informal – those which do not require some particular form.
Examples – loan, lease.
2. Special or formal – those which require some particular form. Examples –
donation, chattel mortgage.
(d) According to their purpose:
1. Transfer of ownership – ex. Sale
2. Conveyance of use. – ex. Commodatum
3. Rendition of services – ex. Agency
(e) According to their subject matter:
1. Things – ex. Sale, deposit, pledge
2. Services – ex. Agency, lease of services
(f) According to the nature or vinuculum which they produce:
1. Unilateral – those which give rise to an obligation for only one of the
parties. Ex. Commodatum, gratuitous deposit.
2. Bilateral – those which give rise to reciprocal obligation for both parties.
Ex. Sale, lease.
3. Onerous – those in which each of the parties aspires to procure for himself
a benefit through the giving of an equivalent or compensation. Ex. Sale
4. Gratuitous – Those in which one of the parties proposes to give to the
other a benefit without any equivalent or compensation. Ex.
Commodatum.
(g) According to the risks involved:
1. Commutative – those where each of the parties acquires an equivalent of
his prestation and such equivalent is pecuniarily appreciable and alreadu
determined from the moment of the celebration of the contract. Ex. Lease.
2. Aleatory – those where each of the parties has to his account the
acquisition of an 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, this chargin the parties
with the risk of loss or gain. Ex. Insurance
 (h) According to their names or norms regulating them:
1. Nominate – those which have their own individuality and are regulated by
the special provisions of law. Ex. Sale, lease.
2. Innominate – those which lack individuality and are not regulated by
special provisions of law.
II. STIPULATIONS CONTRARY TO LAW
Article 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. (1255a)
Article 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following remedies:
Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall
have no further action against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary shall be void. (1454-A-a)
Article 2087. It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment to the creditor. (1858)
Article 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
(1859a)
Article 2112. ... If at the first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction there is no sale either,
the creditor may appropriate the thing pledged. In this case he shall be obliged to
give an acquittance for his entire claim. (1872a)
Article 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper case. If the price of the sale is
more than said amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled
to recover the deficiency, notwithstanding any stipulation to the contrary.
Article 1454. If an absolute conveyance of property is made in order to secure the
performance of an obligation of the grantor toward the grantee, a trust by virtue of
law is established. If the fulfillment of the obligation is offered by the grantor when
it becomes due, he may demand the reconveyance of the property to him.
Articles 2087 – 8 prohibit what is known in Roman Law as pactum
commissorium, presumably on theory that the value of the property given as
security is very much more than the amount of the principal obligation. Therefore,
the law requires that the property be sold so that the excess should be given to the
debtor. The chanfe made by the Code Commission in Article 2115 nullifies the
rationale behind article 2087-8 because the creditor can always outbid the highest
bidder as he does not have to pay his bid due to a merger in the person of debtor
and creditor. What is the use of an auction sale when the creditor gets all the
benefits?
Article 1454 is taken from the common law, where to avoid foreclosure,
the contract is made in the form of an absolute conveyance and ownership vests in
the grantee if the obligation is not paid. Not only would this be a circumbention of
the prohibition of pactum commissorium but it is already covered y Article 1604
regarding equitable mortgatge.
INVALID STIPULATIONS:
In the case if Francisco Realty v. CA, a stipulation in the promissory note
that upon failure of respondent to pay interest, ownership over the land is
automatically transferred to the Realty and the deed of sale of the land in its
favor registered, was considered void although not embodied in a contract of
mortgage; citing several cases: where property held in trust was ceded to trustee,
upon failure to pay debt, where a pacto de retro was construed as an equitable
mortgage, and failure to redeem would vests automatic ownership in the vendee,
and where deeds of sale were registered upon failure to redeem.
Francisco Realty v. CA, 298 SCRA 349
Stipulations in the Promissory note providing that, upon failure of the maker to
pay interest, ownership of the property mortgaged would be automatically
transferred to the mortgagee and the deed of sale in its favor would be registered,
are in substance a pactum comissorium. In the case at bar, the stipulations in the
promissory notes providing that, upon failure of respondent spouses to pay interest,
ownership of the property would be automatically transferred to petitioner A.
Francisco realty and the deed of sale in its favor would be registered, are in
substance a pactum commissorium. They embody the two elements of pactum
commisorium as laid down in Uy Tong v. CA to wit: The prohibition on pactum
commissorium stipulations is provided for by Article 2088 of the Civil Code.
Article 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of the same. Any stipulations to the contrary i null
and void. The aforequoted provisions furnishes the two elements for pactum
commisorium to exits:
1. That there should be a pledge or mortgage by way of security for the
payment of the principal obligation;
2. That there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of non-payment of
the principal obligation within the stipulated period.
Nakpil v. Intermediate Appellate Court, 225 SCRA 456
An agreement whereby property held in trust is ceded to the trustee upon failure of
beneficiary to pay his debt to the former is void for being pactum commissorium.
Olea v. CA, 247 SCRA 274
Pactum Commissorium; A stipulation that the ownership of the property would
automatically pass to the vendee in case no redemption is effected within a
stipulated period is void for being a pactum commissorium which enables the
mortgagee to acquire ownership of the mortgaged property without need of
foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather than to sell the property.
Although the Usury Law was abrogatedwhen the Central Bank was given the pwer
to fix interest rates for forbearance of money, and later the Central Bank left it to
the parties to fix their rates, a stipulation in a real mortgage of interest of 6% per
month or 72% per annum was considered outgrageous and inordinate, and was
reduced to 12% per annum. A stipulation in a trust receipt agreeing to any
increase or decrease in interest rate after Central Bank floated the interest
rate was considered invalid as the rate was left to the sole will of the petitioner,
and no reference was set.
A stipulation between a student and a school that the shcolarship is good
only if he continues in the same school, and that he waives his right to transfer to
another without refunding its scholarships in case, is contrary to public policy.
Scholarships are extended in recognition of merit and to help gifted students, and
not to keep outstanding students in school to bolster prestige and increase business
potential.
VAID STIPULATIONS:
A stipulation in the contract, in the nature of an escalation clause, that if
there occurs any change in the prevailing market rate, the new interest rate shall be
the guiding rate in computing interest is considered valid, as there is a reference
rate.
Polotan v. CA, 296 SCRA 247
There is nothing inherently wrong with escalation clauses – They are valid
clauses in commercial contracts to maintain fiscal stability and to retain the value
of money in long term contracts. Be that as it may, there is nothing inherently
wrong with escalation clauses. Escalation clauses are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in
long term contracts.
A clause that simply states that the interest rate should be based on the prevailing
market rate is not an escalation clause – The contractual provision in question
states that “if there occurs any change in the prevailing market rates, the new
interest rate shall be the guiding rate in computing the interest due on the
outstanding obligation without need of serving notice to the Cardholder.” This
could NOT be considered an escalation clause for the reason that it neither states
an increase nor a decrease in interest rate. Said clause simply states that the interst
rate should be based on the prevailing market rate.
Escalation clauses are not basically wrong or legally objectionable as long as
they are not solely potestative but based on reasonable and valid grounds.
A stipulation in the Bureau of the Philippine Rating to the effect that no
member shall effect reinsurance with any underwriter not a member in good
standing of the Bureau is valid, as the purpose is to promote ethical practices
among non life insurance agencies, and does not affect the public at all.
Filipinas Compania de Seguros v. Mandanas, 17 SCRA 391
Test to determine whether an agreement constitutes unlawful machinations or
combination in restraint of trade; Article 22, Constitution of the Philippine Rating
Bureau is not illegal – The test as to whether a given agreement constitutes an
unlawful machination or a combination in restraint of trade is whether under the
particular contract involved in it, he contract is, or is not unreasonable.
Restrictions upon trade may be upheld when not contrary to the public welfare and
not greater than is necessary to affor a fair and reasonable protection to the party
in whose favor it is imposed. The question to be determined is whether the restraint
imposed is such as merely regulates and perhaps thereby promotes competition, or
whether it is such as may suppress or even destroy competition.
I. BINDING EFFECT
Article 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 favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (1257a)
Article 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party. (n)
( BAR QUESTION 1980 )
Q: “Lorna K”, a very popular movie star was under contract with “P” Movie
Productions to star exclusively in the latter’s films for 2 yrs. Lorna K, was
prohibited by the contract to star in any film produced by another producer.
Chico Film Co. induce Lorna K to break her contract with Vive Movie
Productions by giving her twice her salary. Vive MP sued Chico Film Co. for
damages. Chico Film Co. contended that it had a right to compete for the services
of Lorna K and that her contract with Vive MP was in restraint of trade and a
restriction on her freedom to contract.
Whose contention would you sustain?
A: The contention of Vive MP should be sustained. According to the NCC, any
third person who induces another to violate his contract shall be liable for damages
to the other contracting party. In the law of torts, we call this “Interference with
contractual relations”. However, in order that it will be actionable, it is necessary
that the following requisites must concur:
1. The existence of a valid contract;
2. Knowledge on the part of the third person of the existence of such
contract;
3. Interference by the third person without legal justification or excuse.
All of these requisites are present in the case at bar.
Q: What is meant by the relativity of contracts? What are the different
exceptional cases where a contract may produce effect directly or indirectly on
third persons?
A. relativity of contracts refers to the principle of law that a contract can only
bind the parties who had entered into it or their successors who have assumed
their personality or their juridical position, and that, as a consequence, sich
contract can neither favor nor prejudice a third person. Thus, Art. 1311, NCC
declares that contract takes effect only between the parties, their assigns and
heirs.
There are however, 4 exceptional cases where a contract may either favor
or prejudice a third person. They are:
1. Where the contract contains a beneficial stipulation in favor of a third
person, provided that such third person has communicated his acceptance
to the obligor before it is revoked.
2. Where a third person comes into the 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; and
4. Where the third person induces a contracting party to violate his contract.
Q: What is meant by a stipulation pour autrui? What requisites must concur in
order that such stipulation may be enforced? What is the form of acceptance by a
third person or beneficiary?
A: Using ART. 1311 (2) as basis, a stipulation pour autrui may be defined as a
stipulation in a contract, clearly and deliberately conferred by the contracting
parties as a favor upon a third person, who must communicate his acceptance of
the favor or benefit to the obligor before it could be revoked. In Florentino v.
Encarnacion, it was defined as a stipulation in favor of a third person conferring a
clear and deliberate favor upon him, and which stipulation is merely a part of a
contract entered into by the parties, neither of whom acted as agent of the third
person, and such third person may demand its fulfillment provided that he
communicates his acceptance to the obligor before it is revoked.
The requisites are:
1. that the stipulation in favor of the third person should be a part, not the
whole of the contract;
2. That the favorable stipulation should not be conditioned or compensated
by any kind of obligation whatever; and
3. Neither of the contracting parties bears the legal representation or
authorization of the third person.
There is, of course, a fourth requisit – acceptance of the benefit by the third
person communicated to the obligor before it could be revoked.
II. RECISSIBLE CONTRACTS
Article 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law. (1124)
Article 1192. In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it cannot
be determined which of the parties first violated the contract, the same shall be
deemed extinguished, and each shall bear his own damages. (n)
In the case of Central Bank v. CA, a loan of P80,000 secured by mortgage
was granted in 1965. In 1968, it became legally impossible for the bank to release
the entire loan as it become insolvent. It was able to release only P17,000, When
the debtor failed to pay the loan, the mortgage was foreclosed. As the land
mortgaged measured 100 hectares, the area was proportionately reduced and only
21.25 hectares of the mortgaged property can be foreclosed. Both committed a
breach of contract, and the debtor cannot ask for recission as he failed to pay the
loan. The mortgage on 78.75 hectares of the land must be released.
Central Bank v. CA, 139 SCRA 46
Where the bank approved a loan for P80,000 but was able to deliver only
P17,000, it is in default for P63,000 to the borrower. When Island Savings Bank
and Sulpicio Tolentino entered into an P80,000 loan agreement on Aptol 18, 1965,
they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party os the consideration for that of the other; and when one
party has performed or is ready and willing to perform his part of the contract, the
other party who has not performed or is not ready and willing to perform incurs in
delay.
The fact that the creditor is incsolvent or was stopped by the Central Bank from
granting further loans is no defense to its fulfillment to extend the loan applied
for and approved by it to the full amount. – The Monetary Board Resolution
cannot interrupt the default of the Island Savings Bank in complying with its
obligation of releasing the P63,000 balance, because said resolution merely
prohibited the Bank from making new loans and investments, and nowhere did it
prohibit Island Savings Bank from releasing the balance of the loan agreements
previously contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance. And, the mere fact of insolvency of
a debtor is never an excuse for the non fulfillment of an obligation but instead it is
taken as a breach of the contract by him.
In the case if Simon v. Adamos, a complaint for specific performance of
the sale of two lots was brought against the defendant in 1963, and judgment was
rendered in his favor in 1964. However, in another case, the previous sale of said
lots to the defendant by his vendor was annulled on May 3, 1967. Because
fulfillment of his contract became impossible, the plaintiff filed another case for
recession of the sale to him by the defendant in August 16, 1968. The period of 4
yrs for recission was counted from the finality of the judgment for annulment under
Article 1191.
Article 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors, when
the donor did not reserve sufficient property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment need not refer to the
property alienated, and need not have been obtained by the party seeking the
rescission.
In addition to these presumptions, the design to defraud creditors may be proved in
any other manner recognized by the law of evidence. (1297a)
Simon v. Adamos, 152 SCRA 459
Actions, Obligations; Prescription; Contracts; Action for recission may still be
filed after action for specific performance though successfully granted has
become impossible for realization – Article 1191 of the CC provides that the
injured party may also seek rescission if the fulfillment should become impossible.
The cause of action to clai rescission arises when teh filfillment of the obligation
became impossible when the Court of First Instance of QC declares the sale of the
land to defendants a complete nullity and ordered the cancellation of the CTC
issued on them. Since the two lots sold to plaintiff by defendants form part of the
land involved in Civil Case, it became impossible for defendant to secure and
deliver the titles to and the possession of the lors to plaintiff. But plaintiff had to
wait for the finality of the decision.
The prescriptive period for filling an action for recsission is 4 years counted from
the time judgment on prior action for specific performance, which has become
impossible to execute becomes final.
In the case of Dilag v. IAC, a fishpond was sold by the sps. In favor of
their children in 1973 after the filing of a civil case for damages against them. The
land consisted of 21 hectares and was mortgaged to DBP. The children were not in
possession of the land. The fishpond was leased by the parent to another in 1979.
The decision in the civil case became final onf Oct. 24, 1979. At the time of the
levy, the spouses was still the refistered owner. The above circumstances show that
the sale was simulated and fictitious and was done in fraud of creditors.
Redemption; Where petitioners failed to avail themselves of their rights as
registered owners to redeem their property from the buyer in the sale by public
auction within the period provided for by law, their claim as valid and legal
owners of the lot by virtue of the deed of sale executed in their favor cannot
prosper.
In the case of Khe v. CA, a cargo vessel owned by petitioner sank in 1985,
and its cargo was lost. On Dec. 20, 1989 petitioner donated all his properties to his
children. The insurance company paid the cargo owner and filed an action against
the ship owner for the recovery of the said amount. Judgment against the petitioner
was rendered in Dec. 1993. A writ of execution was issued, but no property of the
petitioner could be located. The insurance company learned of the donation only on
Feb. 25, 1997 and immediately filed the action for recission of the donation.
Actions; Rescissions; Accion Pauliana; Obligations and Contracts; Prescription;
Since Article 1389b, NCC is silent as to when the prescriptive period would
commence, the general rule i.e., from the moment the cause of action accrues,
therefore applies – Article 1389 of the Civil Code simply provides that, “The action
to claim rescission must be commenced within 4 years.” Since the provision is
silent as to when the prescriptive period would commence, the general rule, i.e.,
from the moment the cause of action accrues, therefore applies. Article 1150 of the
CC, is particularly instructive: Art. 1150. The time for prescription for all kinds of
actions, when there is no special provision which ordains otherwise, shall be
counted from the day they may be brought. Indeed, this Court enunciated the
principle that it is the legal possibility of bringing the action which determines the
starting point for the computation of the prescriptive period for the action.
Same; Requisites; An action to rescind or an accion pauliana must be of last resort,
availed of only after all other legal remedies have been exhausted and have been
proven futile – Article 1383 of the Civil Code provides as follows: Art. 1383, an
action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. It is
thus apparent that an action to rescind or an accion pauliana must be of last
resort; availed of only after all other legal remedies have been exhausted and have
been proven futile. For an accion pauliana to accrue, the following requisites must
concur:
1. That the plaintiff asking for rescission has a credit prior to the alienation,
although demandable later;
2. That the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person;
3. That the creditor has no other legal remedy to satisfy his claim, but would
benefit by rescission of the conveyance to the third person;
4. That the act being impugned is fraudulent;
5. That the third person who received the property conveyed, if by onerous
title, has been an accomplice in the fraud.
Same; Same; Same; Same; An accion pauliana then presupposes the following:
1. a judgment
2. the issuance by the trial court of a writ of execution for the satisfaction of
the judgment; and
3. the failure of the sheriff to enforce and satisfy the judgment of the court
It requires that the creditor has exhausted the property of the debtor.
III. UNENFORCEABLE CONTRACTS – Articles 1403-8, 1317
Article 1403. The following contracts are unenforceable, unless they are
ratified:
Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;
Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
 An agreement that by its terms is not to be performed within a year
from the making thereof;
 A special promise to answer for the debt, default, or miscarriage of
another;
 An agreement made in consideration of marriage, other than a mutual
promise to marry;
 An agreement for the sale of goods, chattels or things in action, at a
price not less than five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is made
by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
 An agreement for the leasing for a longer period than one year, or for
the sale of real property or of an interest therein;
( f ) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
Article 1404. Unauthorized contracts are governed by article 1317 and the
principles of agency in Title X of this Book.
Article 1405. Contracts infringing the Statute of Frauds, referred to in No.
2 of article 1403, are ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benefit under
them.
Article 1406. When a contract is enforceable under the Statute of Frauds,
and a public document is necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the right under Article 1357.
Article 1407. In a contract where both parties are incapable of giving
consent, express or implied ratification by the parent, or guardian, as the
case may be, of one of the contracting parties shall give the contract the
same effect as if only one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of
both contracting parties, the contract shall be validated from the inception.
Article 1408. Unenforceable contracts cannot be assailed by third persons.
Article 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. (1259a)
V. VOIDABLE CONTRACTS –Articles 1390 - 1402
Article 1390. The following contracts are voidable or annullable, even
though there may have been no damage to the contracting parties:
1. Those where one of the parties is incapable of giving consent to a
contract;
2. Those where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.
3. These contracts are binding, unless they are annulled by a proper
action in court. They are susceptible of ratification. (n)
Article 1402. As long as one of the contracting parties does not restore
what in virtue of the decree of annulment he is bound to return, the other
cannot be compelled to comply with what is incumbent upon him. (1308)
V. VOID OR INEXISTENT CONTRACTS – Articles 1409 - 1422
Article 1409. The following contracts are inexistent and void from the
beginning:
1. Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the
transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
 6. Those where the intention of the parties relative to the principal object
of the contract cannot be ascertained;
7. Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
1410. The action or defense for the declaration of the inexistence of a contract does
not prescribe.
In the case of Rodriguez v. Rodriguez, the wife sold her paraphernal
property consisting of 2 fishponds to her daughter for P2,500.00 on January 24,
1934, who transferred said property three days after to her mother and stepfather.
The stepfather died in March 1953. In 1962, the widow brought an action agianst
the children of the second husband for the annulment of said sale. The Supreme
Court held that, the transfer was intended to circumvent the prohibition of
donations between spouses, and therefore was executed for an illegal purpose. The
court applied the doctrine of pari delicto non oritur accion.
Same; Annulment of contract on the ground of intimidation; Prescription; Time
within which action should be brought; Estoppel – An action to annul a contract
on the ground of duress which is a mere vice or defect of consent must be brought
within 4 years after it ahd ceased. Where the intimidation ceased 28 years before
the action for annulment was filed and nine years had passed after the person, wh
allegedly employed intimidation had died, the action has prescribed.
Same; Simulated Contracts; Characteristics of simulation
The characteristics of simulation is the fact that the apparent contract is not really
desired or intended to produce legal effects or in any way alter the juridical
situation of the parties. Thus, where a person in order to place his property beyond
the reach of his creditors, simulates a transfer of it to another, he does not really
intend to divest himself of his title and control of the property; hence the deed of
transfer is but a sham.
In the case of Basic Books v. Lopez where an agent failed to account for his sales
and was charged of estafa, a third person bound himself severally with the agent to
pay his obligation in order to avoid criminal liability. The court distinguished
motive, from cause, stating that cause is the immediate, direct and proximate reason
which justified the creation of an obligation.
Basic Books v. Lopez, 16 SCRA 291
Obligations and contracts; Motive is different from cause; The agreement cannot
be declared void merely because appellant’s motive in assuming obligation
thereunder was to help save one of the defendants from a criminal case. Particular
motives of the parties in entering into a contract are different from the cause
thereof (Article 1351, NCC).
Cause is the essential reason which moves the contracting parties to enter
into the contract (General Enterprises, Inc. vs Lianga Bay, Aug. 31 1964). It is the
immediate, direct and proximate reason, which justifies the creation of an
obligation through the will of the contracting parties. In the case at bar the cause
of the agreement was the existing account of one of the defendants with appellee. It
was mere liberality or gratuitousness that moved appellant to oblige himself
severally with the said defendant.
In the case Menil v. CA, 84 SCRA 413 a lot acquired through homestead
patent was sold to the defendant within the 5 year prohibitive period. After the
lapse of said period, a secod sale was executed by the grantee in favor of the
defendant for the same prive. The sale was registered one year after. Two year
after, the grantee of the homestead borught an action to queit title.
The Supreme Court ordered reconveyance on the theory that the policy of
the Public Land Law is to preserve and keep in the family of the homesteader what
the givernment gave them. This is in accordance with the provisions of Article
1416, NCC. To the effect that when the agreement is not illegal per se but is merely
prohibited, and the prohibition by law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover what he has paid or delivered.
Same; Simulated contracts; The second contract of sale for the same
homestead in favor of the same vendee for the same price is ample manifestations
that the second sale is simulated and that no object or consideration in the second
contract of sale has passed between the parties.
In the case of United Gen. Industries v. Paler, 112 SCRA 404, the
mortgager of a chattel mortgage sold the property without the consent of the
mortgagee and was charged of estafa. Because of a promissory note executed with
the defendant as accomodation maker, the information was dropped. The Supreme
Court held that the agreement was to stifle prosecution and is contrary to public
policy. Public Policy was later changed, allowing minor criminal offenses to be
compromised on the barangay level.
In the case of Marin v. Adel, an agreement was entered in 1963 between
the heirs of different decedents exchanging what they would inherit located in
different provinces. However, one party could not comply with her agreement
because she assigned her hereditary rights to her sister. When the other party sought
to rescind their agreement in 1976, the Supreme Court, after finding that the
intention of the parties cannot be definitely ascertained because the exchange was
in anticipation of a declaration of their rights to properties, and yet it was stipulated
that the other party may take possession of certain properties upon the execution of
the agreement, held that the contract is void and the action to declare it void does
not prescribe.
Same; Prescription; Rescissory action treated as an action to declare void the
deed of exchange; An action to declare the inexistence of a contract does not
prescribe.
In the case of Cabral v. Court of appeals, a registered land belong to the
plaintiff was sold by a forger in 1948 to another. An information for falsification
was filed against the forger in 1974. The crime has prescribed. An action was filed
by the owner on May 2, 1974 to nullify the title of the vendee. The supreme court
held that an action to declare void the deed of sale is imprescribtible, and is not a
bar to a civil action under Article 1410.
In the case of Yanas v. Acaylan, a deed of sale consisting of 13 hectares
was sold by a forger in 1950 for P200.00 in English by an illeterate Subano in
Zamboanga del Norte, approved by the Governor 3 years later and registered 3
years later. The deed was thumbmarked by the alleged venfor who occupied the
land from 1946 up to his death in 1970. The actio to declare the sale void was
brought in 1963. The Supreme Court held that the action is imprescribtible.
Yanas v. Acaylan, 136 SCRA 52
Civil Law; Sales; Badges of fraud and fictitiousness; Case at bar. – We hold that
the sale was fictitious and fraudulent. Among the badges of fraud and fictitiousness
taken collectively are the following:
1. The fact that the sale is in English, the alleged vendor being illiterate;
2. The fact that his wife did not join in the sale and that her name is
indicated in the deed as “Maria S. Yanas” when the truth is that her
correct name is Maria Aglimot Yanas;
3. the obvious inadequacy of the price for a 13 hectare land;
4. the notarization of the sale on the day following the alleged thumbmarking
of the document;
5. the failure to state the boundaries of the lot sold
6. the fact that the governor approved it more than 2 years after the alleged
sale;
7. its registration more than 3 years later, and
the fact that the Acaylars were able to occupy only four hectares out of the 13
hectares and were eventually forcibly ousted threfrom by the children and
agents of the vendor. It was not a fair and regular transaction done in the
ordinary course of business.
Actions or defense for the declaration of inexistence of a contract does not
prescribe – The fact that the alleged sale took place in 1950 and the action to have
it declared void or inexistent was filed in 1963 is immaterial. The action or defense
for the declaration of the inexistence of a contract does not prescribe (Art. 1410,
CC)
VIII. INNOMINATE CONTRACTS
Article 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. (n)
The case of Dizon v. Gaborro, involved an innominate contract where the
legal right of redemption an execution sale was sold to another by the judgment
debtor, who was given by his vendee the right to redeem the property from him.
Dizon v. Gaborro, 83 SCRA 688
Innominate Contracts; Where petitioner and respondent agreed “to give and to
do” certain rights and obligations respecting the land and mortgage debts of
petitioner, but partaking the nature of antichresis, the agreement enetered into is
an innominate contract. – In view of all these considerations, the law and
jurisprudence, and the facts established, we find that the agreement between
petitioner Dizon and respondent Gaborro is one of those innominate contracts
under Art. 1307 of the NCC whereby petitioner and respondent agreed “to give and
to do” certain rights and obligations respecting the lands and the mortgages debts
of petitioner which would be acceptable to the bank, but partaking the nature of
antichresis insofar as the principal parties, petitioner and respondent are
concerned.