CONTRACTS

(FOR EXCLUSIVE USE OF UNIVERSITY OF SAN AGUSTIN COLLEGE OF

LAW)
CONTRACTS
DEFINITION:

A contract is a meeting of the minds

between two persons whereby one binds
himself, with respect to the other, to give
something or to render some service.
WHAT IS THE PRINCIPLE OF
LIBERALITY OF CONTRACTS?
ANSWER:

It means the right of parties to enter into such

stipulations or terms and conditions in their
contracts. However, it is subject to certain
limitations imposed by law and that 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.
 Daisy B. Tiu versus Platinum Plans Phil., Inc. (G.R. No.
163512, February 28, 2007)

 FACTS:

 Platinum Plans Philippines, Inc. is a domestic corporation engaged

in the pre-need industry. From 1987 to 1989, Daisy B. Tiu was its
Division Marketing Director.

 On January 1, 1993, respondent re-hired petitioner as Senior

Assistant Vice-President and Territorial Operations Head in charge
of its Hongkong and Asean operations. The parties executed a
contract of employment valid for five years.

 On September 16, 1995, petitioner stopped reporting for work. In
November 1995, she became the Vice-President for Sales of
Professional Pension Plans, Inc., a corporation engaged also in the
pre-need industry.
 Consequently, respondent sued petitioner for damages before the
RTC of Pasig City, Branch 261. Respondent alleged, among others,
that petitioner’s employment with Professional Pension Plans, Inc.
violated the non-involvement clause in her contract of employment,
to wit:

8. NON INVOLVEMENT PROVISION – The EMPLOYEE further

undertakes that during his/her engagement with EMPLOYER and
in case of separation from the Company, whether voluntary or for
cause, he/she shall not, for the next TWO (2) years thereafter,
engage in or be involved with any corporation, association or
entity, whether directly or indirectly, engaged in the same
business or belonging to the same pre-need industry as the
EMPLOYER. Any breach of the foregoing provision shall render
the EMPLOYEE liable to the EMPLOYER in the amount of One
Hundred Thousand Pesos (P100,000.00) for and as liquidated
damages
 Petitioner countered that the non-involvement clause was
unenforceable for being against public order or public policy: First,
the restraint imposed was much greater than what was necessary to
afford respondent a fair and reasonable protection. Petitioner
contended that the transfer to a rival company was an accepted
practice in the pre-need industry. Since the products sold by the
companies were more or less the same, there was nothing peculiar
or unique to protect. Second, respondent did not invest in
petitioner’s training or improvement. At the time petitioner was
recruited, she already possessed the knowledge and expertise
required in the pre-need industry and respondent benefited
tremendously from it. Third, a strict application of the non-
involvement clause would amount to a deprivation of petitioner’s
right to engage in the only work she knew.
ISSUE:

Whether or not the non-involvement

clause is valid.
 RULING:

 In Consulta v. Court of Appeals, the SC considered a non-

involvement clause in accordance with Article 1306 of the Civil
Code. While the complainant in that case was an independent agent
and not an employee, she was prohibited for one year from
engaging directly or indirectly in activities of other companies that
compete with the business of her principal. The SC noted therein
that the restriction did not prohibit the agent from engaging in any
other business, or from being connected with any other company,
for as long as the business or company did not compete with the
principal’s business. Further, the prohibition applied only for one
year after the termination of the agent’s contract and was therefore a
reasonable restriction designed to prevent acts prejudicial to the
employer.

 Conformably then with the aforementioned pronouncements, a non-

involvement clause is not necessarily void for being in restraint of
trade as long as there are reasonable limitations as to time, trade,
and place.
 In this case, the non-involvement clause has a time limit: two years
from the time petitioner’s employment with respondent ends. It is
also limited as to trade, since it only prohibits petitioner from
engaging in any pre-need business akin to respondent’s.

 More significantly, since petitioner was the Senior Assistant Vice-

President and Territorial Operations Head in charge of respondent’s
Hongkong and Asean operations, she had been privy to confidential
and highly sensitive marketing strategies of respondent’s business.
To allow her to engage in a rival business soon after she leaves
would make respondent’s trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, the SC finds the
non-involvement clause not contrary to public welfare and not
greater than is necessary to afford a fair and reasonable protection
to respondent.

 In any event, Article 1306 of the Civil Code provides that parties to a
contract 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.
 Article 1159 of the same Code also provides that obligations arising
from contracts have the force of law between the contracting parties
and should be complied with in good faith. Courts cannot stipulate
for the parties nor amend their agreement where the same does not
contravene law, morals, good customs, public order or public policy,
for to do so would be to alter the real intent of the parties, and would
run contrary to the function of the courts to give force and effect
thereto. Not being contrary to public policy, the non-involvement
clause, which petitioner and respondent freely agreed upon, has the
force of law between them, and thus, should be complied with in
good faith.
What is the Principle of Mutuality
of Contracts?
ANSWER:

It means that the contracts are binding between

parties. Its validity or compliance cannot be left
to the will of one of them. For a contract is a
contract. Once agreed upon and the essential
elements are present, it is valid and binding
between parties.

A party cannot revoke or renounce a contract

without the consent of the other, nor can it have
it set aside on the ground that he had made a
bad bargain. (Fernandez vs. MRR, 14 Phil. 274)
 On January 26, 1995, respondent filed with the MTC Branch 78,
Parañaque City a complaint for a sum of money against petitioners.
However, the case was dismissed holding that it is for specific
performance cognizable by the Regional Trial Court (RTC).

 On appeal by respondent, the RTC, Branch 258, Parañaque City

rendered its Decision dated November 19, 1996 affirming the MTC
judgment dismissing the complaint "not on the ground of lack of
jurisdiction, but for lack of cause of action.“

 The Court of Appeals on appeal held that respondent’s complaint is

for a sum of money, the Contract to Sell being a "unilateral
acknowledgment of an existing debt" on petitioners’ part.
ISSUE:

Whether or not petitioners are liable to

pay interest on the balance of the
purchase price.
 RULING:

 Petitioners insist that they are not liable to pay interest since the
loan proceeds were released, not to petitioners, but directly to
respondent; and that pending the release, no interest should accrue.

 Petitioners’ arguments are misplaced.

 Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. We
must look into the terms of the contract to determine the respective
obligations of the parties thereto. If the terms of a contract are clear
and leave no doubt upon the contracting parties’ intention, then
such terms should be applied in their literal meaning.
 Philippine National Bank v. AIC Construction Corp., Sps. Rodolfo C.
Bacani & Ma. Aurora C. Bacani [G.R. No. 228904, October 13, 2021,
(Leonen, J.)]

 ISSUE: Whether the interest charges imposed by PNB against AIC and the
spouses Bacani are usurious and unconscionable and whether the CA erred
in applying legal interest to the loan.

 The SC ruled that the CA correctly applied the legal rate of interest to the
loan. Article 1308 of the Civil Code states: "The contract must bind both
contracting parties; its validity or compliance cannot be left to the will of
one of them." The principle of mutuality of contracts is premised on the
condition that there must be an essential equality between the parties so
that obligations arising from contracts may have the force of law between
them. If a condition in the contract depends solely on the will of one of the
contracting parties, it is void. This principle applies to interest rates.

 Monetary interest is always agreed upon by the parties and they are free to
stipulate on the rates that will apply to their loans. However, if there is no
true parity between the parties, courts may equitably reduce iniquitous or
unconscionable interest charges. The facts of this case are similar to the
facts in Spouses Silos v. PNB.
 The interest rates are yet to be determined through a subjective and one-
sided criterion and are no longer subject to the approval of respondents.
The parties did not agree on the interest rate, but the interest rate was
imposed by PNB and respondents were left with no choice but to agree to it.
This arrangement violates Republic Act No. 3765 or the Truth in Lending
Act, which requires creditors to fully disclose to the debtor all amounts
incidental to the extension of the credit, including interests, discounts or
fees, to protect debtors from a lack of awareness of the true cost of credit.
Interest and penalties cannot be charged to unjustly enrich a person at the
expense of another.

 Thus, the Court of Appeals correctly applied the legal rate of 738 Phil. 156
(2014) interest in the credit agreement. The computation of interest on the
principal loan obligation of P65 million shall be at the rate of 12% per
annum, computed from effectivity of the loan agreement up to November 17,
2003, the date of issuance of the certificate of sale by the Ex-Officio Sheriff
of Mandaluyong City. Interest rate on the conventional interest shall be at
the rate of 12% per annum from January 21, 2002, the date of judicial
demand, to November 17, 2003. (PNB v. AIC Construction Corp., Sps
Rodolfo C. Bacani & Ma. Aurora C. Bacani)
Essential Elements / Requisites of a Contract
(Absent any element, there is NO contract to speak of)

(a) CONSENT;

(b) SUBJECT MATTER; and

(c) CAUSE OR CONSIDERATION.

CONSENT

It is the meeting of the minds between the

parties on the subject matter and the cause of
the contract, even if neither one has been
delivered.
 It is the manifestation of the meeting of the
offer and the acceptance upon the thing and the
cause which are to constitute the contract. (Art.
1319)
Requisites:

1. There must be two or more parties;

2. The parties must be capable or capacitated;

3. There must be no vitiation of consent;

4. There must be no conflict between what was

expressly declared and what was really intended;

5. The intent must be declared properly.

Requisites for the Meetings of the
Minds:

(a) An offer must be certain;

(b) And the acceptance that must be

unqualified and absolute.
IF THERE IS AN OFFER AND THERE IS AN
ACCEPTANCE WITH CONDITION/S, IS
THERE A PERFECTED CONTRACT?
ANSWER:

NONE. An offer must be clear and

definite while an acceptance must be
unconditional and unfounded in order that
their concurrence can give rise to a
perfected contract.
Offer becomes ineffective:

 1. Upon death, civil interdiction, insanity or insolvency of

either party. (Art. 1323);

 2. When the offeree expressly or impliedly rejects the offer;

 3. When the offeree accepted with a qualification or condition;

 4. When before the acceptance is communicated, the subject

matter has become illegal or impossible;

 5. When the period of time given to the offeree within which he

must signify his acceptance has already lapsed;

 6. When the offer is revoked in due time.

TAKE NOTE:

Unless the offeror knows of the acceptance, there is NO

meeting of the minds of the parties, NO real
concurrence of the offer and acceptance. The contract is
PERFECTED only from the time an acceptance of an
offer is made known to the offeror. An acceptance which
is NOT MADE in the manner prescribed by the offeror
is not effective but constitutes a counter-offer which the
offeror may accept or reject. Acceptance by the offeree
of the offer after knowledge of the revocation as
withdrawal of the offer is INEFFICACIOUS. When the
offeror has not fixed a period for the offeree to accept
the offer, and the offer is made to a person present, the
acceptance must be made immediately. [Malbarosa
vs. Court of Appeals, 402 SCRA 168 (2003)]
WHAT IS A CONTRACT OF OPTION?
ANSWER:

It is a contract granting a person the privilege to

buy or not to buy certain objects at anytime
within the agreed period at a fixed price. The
contract of option is 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. Therefore, an option
must have its own cause distinct from the
selling price itself.
WHAT IS AN EARNEST MONEY?
ANSWER:

Also called “ARRAS” - it is something of

value to show that the buyer is really
serious and given to the seller to bind the
bargain.
Distinguish an Option Money
from and Earnest Money.
Option Money Earnest Money

1. A cause distinct from the 1. Part of the selling / contract

selling price; price;

2. May not be returned or 2. May be returned unless there

refunded in case the contract of is a contrary agreement;
sale is not consummated;

3. No perfection of the contract 3. Sale is already perfected

of sale.
Two Classes of Voidable Contracts:

(a) Those where one party is incapacitated to give

consent;

(b) Those where consent of one party has been

vitiated (such as error, fraud, violence, intimidation
and undue influence – vices of consent)

Nature of Voidable Contracts – is binding and

valid, unless annulled or declared void by a competent
court. It is, however, susceptible of ratification before
annulment. Annulment may be had even if there be no
damage to the contracting parties.
Causes of Vitiated Consent:

 (1) Error or mistake – false belief about something.

 Ex. A person signed a contract of sale thinking that it was only a
contract of loan.

 (2) Violence & intimidation– refers to physical coercion,
intimidation or moral coercion.

 (3) Undue influence – Requisites: (a) Improper advantage;
(b) power over the will of another; and (c) deprivation of the latter’s
will undue influence of a reasonable freedom of choice.

 (4) Fraud – use of 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.
 1. ERROR OR MISTAKE

 DEFINITION: It is a false belief about something.

 Requisites for Mistake to Vitiate Consent:

 a) The error must be substantial regarding:

 1. The object of the contract;
 2. The conditions which principally moved or induced one of the
parties (error in quality or in quantity);
 3. Identity or qualifications but only if such was the principal
cause of the contract.

 b) The error must be excusable;

 c) The error must be a mistake of fact and not of law.

 Spouses Theis vs. Court of Appeals (G.R. No. L-126013,
February 12, 1997)

 Private respondent Calsons Development Corporation is the owner

of three (3) adjacent parcels of land covered by Transfer Certificate
of Title (TCT) Nos. 15515 (parcel no. 1), 15516 (parcel no. 2) and
15684 (parcel no. 3), with the area of 1,000 square meters, 226
square meters and 1,000 square meters, respectively. All 3 parcels
of land are situated along Ligaya Drive, Barangay Francisco,
Tagaytay City. Adjacent to parcel no. 3, is a vacant lot denominated
as parcel no. 4.

 In 1985, private respondent constructed a two-storey house on

parcel no. 3. The lots denominated as parcel no. 1 and parcel no. 2,
respectively, remained idle.

 However, in a survey conducted in 1985, parcel no. 3, where the two-

storey house stands, was erroneously indicated to be covered not
by TCT No. 15684 but by TCT No. 15515, while the two idle lands
(parcel nos. 1 and 2) were mistakenly surveyed to be located on
parcel no. 4 instead (which was not owned by private respondent)
and covered by TCT Nos. 15516 and 15684.
 On October 26, 1987, unaware of the mistake by which private
respondent appeared to be the owner of parcel no. 4 as indicated in
the erroneous survey, and based on the erroneous information
given by the surveyor that parcel no. 4 is covered by TCT No. 15516
and 15684, private respondent, through its authorized
representative, one Atty. Tarcisio S. Calilung, sold said parcel no. 4
to petitioners.

 Upon execution of the Deed of Sale, private respondent delivered

TCT Nos. 15516 and 15684 to petitioners who, on October 28, 1987,
immediately registered the same with the Registry of Deeds of
Tagaytay City. Thus, TCT Nos. 17041 and 17042 in the names of the
petitioners were issued.

 In the early part of 1990, petitioners returned to the Philippines.

When, they went to Tagaytay to look over the vacant lots and to plan
the construction of their house thereon, they discovered that parcel
no. 4 was owned by another person. They also discovered that the
lots actually sold to them were parcel nos. 2 and 3 covered by TCT
Nos. 15516 and 15684. respectively. Parcel no. 3, however, could not
have been sold to the petitioners by the private respondents as a
two-storey house, the construction cost of which far exceeded the
price paid by the petitioners, had already been built thereon even
prior to the execution of the contract between the disputing parties
ISSUE:

WHETHER THE CONTRACT CAN BE

ANNULLED ON THE GROUND OF
MISTAKE.
 DECISION:

 In the case at bar, the private respondent obviously committed an

honest mistake in selling parcel no. 4. It is quite impossible for said
private respondent to sell the lot in question as the same is not
owned by it. The good faith of the private respondent is evident in
the fact that when the mistake was discovered, it immediately
offered two other vacant lots to the petitioners or to reimburse them
with twice the amount paid. That petitioners refused either option
left the private respondent with no other choice but to file an action
for the annulment of the deed of sale on the ground of mistake.

 Tolentino explains that the concept of error in this article must

include both ignorance, which is the absence of knowledge with
respect to a thing, and mistake properly speaking, which is a wrong
conception about said thing, or a belief in the existence of some
circumstance, fact, or event, which in reality does not exist. In both
cases, there is a lack of full and correct knowledge about the thing.
The mistake committed by the private respondent in selling parcel
no. 4 to the petitioners falls within the second type. Verily, such
mistake invalidated its consent and as such, annulment of the deed
of sale is proper.
 2. VIOLENCE AND INTIMIDATION

 DEFINITION:Violence refers to physical coercion; intimidation to

moral coercion.

 Requisites of VIOLENCE to Vitiate Consent:

 (a) Employment of serious and irresistible force;

 (b) It must have been the reason why the contract was entered
into.
 Requisites of Intimidation to Vitiate Consent:

 (a) Reasonable and well-grounded fear;

 (b) of an imminent and grave evil;

 (c) Upon his person, property, or upon the person, or property

of his spouse, descendants or ascendants;

 (d) It must have been the reason why the contract was entered
into;

 (e) The threat must be of an unjust act and actionable wrong.

What is REVERENTIAL FEAR?
ANSWER:

When a contract is signed merely

because of “fear of displeasing persons to
whom obedience and respect are due”,
the contract is still valid, for by itself
reverential fear is not wrong.
 3. UNDUE INFLUENCE

 There is undue influence when a person takes improper advantage

of his power over the will of another, depriving the latter of a
reasonable freedom of choice. 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. (Art.1337)

 Requisites of Undue Influence to Vitiate Consent:

 (a) Improper advantage;

 (b) Power over the will of another;

 (c) Deprivation of the latter’s will of a reasonable freedom of

choice.
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.
 4. FRAUD

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.

 Requisites for FRAUD to Vitiate Consent:

(a) The fraud must be serious;

(b) The parties must not be in pari delicto otherwise,

neither party may ask for annulment. The contract
would therefore be considered valid.
What is a Simulation of
Contract?
ANSWER:

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)

 Requisites of simulation:

 (a) An outward declaration of will different from the will of the

parties;

 (b) The false appearance must have been intended by mutual

agreement;

 (c) The purpose is to deceive third persons.

Kinds of SIMULATED CONTRACT:

 (a) Absolutely Simulated (simulados) fictitious contracts:

 1) Here, the parties do not intend to be bound;
 2) Effect: Contract is VOID.

 (b) Relatively Simulated (disimulados) disguised contracts:

 1) Here, the parties conceal their true agreement;
 2) Effect: The parties are bound to the real or true agreement
except –

 2.1. If the contract should prejudice a third person;

 2.2. or if the purpose is contrary to law, morals, good customs,

public order, or public policy.
Absolutely Simulated (simulados) fictitious
contracts.

Example.

Bongbong and Sarah jokingly executed a deed of sale

involving a property owned by the former in Ilocos
Norte although they did not intend to be bound at all
by the contract. An absolutely simulated contract is
inexistent and VOID.
Relatively Simulated (disimulados) disguised
contracts.

Example.

Although a deed of sale was made, the parties, really

intended a donation but they wanted to conceal the
existence of the donation (simulation of the NATURE
of the contract); or a true sale at a different price had
really been agreed upon (simulation of the CONTENT
or TERMS of the contract.
Kinds of Fraud:
 Dolo Causante – without the fraud the other party would not have
consented (Contract is voidable).
 Requisites:
 1. The fraud must be material and serious, that is, it really
induced the consent;
 2. The fraud must have been employed by only one of the
contracting parties because if both committed fraud, the
contract would remain valid;
 3. There must be deliberate intent to deceive or to induce,
therefore, misrepresentation in Good Faith is not fraud;
 4. The other party must have relied on the untrue statement
and must himself not be guilty of negligence in ascertaining the
truth.

 Dolo Insidente – without the fraud the parties would have agreed
just the same, hence, the fraud was only incidental in causing the
consent. The contract is valid but there can be an action for
damages.
Persons Incapacitated to Give Consent.

1. Minors;

2. Insane or demented persons (unless they acted

during lucid interval,) drunks and those hypnotized;

3. Deaf-mutes who do not know how to write & read(

If they know how to read but do not know how to
write the contract is valid.);
SUBJECT MATTER / OBJECT OF
CONTRACTS

The object of a contract is really to create or to

end obligations which in turn may involve things
or services. Hence, elliptically, it may be said
that the object of a contract is a thing or service.
Requisites:

1) The thing or service must be within the commerce

of man;

2) Must be transmissible;

3) Must not be contrary to law, morals, good

customs, public order, or public policy;

4) Must not be impossible;

5) Must be determinate as to its kind or determinable

without the need of a new contract or agreement.
CAUSE or CONSIDERATION

Definition: It is essential and impelling reason why a

party assumes, an obligation.

 Requisites:

 a. It must be present at the time the contract was entered into;

 b. It must be true;

 c. It must be lawful.

 d. No cause - the contract is VOID.

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. (Art. 1350)
IS NON-PAYMENT OF THE CONTRACT
PRICE BY THE BUYER EQUIVALENT
TO ABSENCE OF CAUSE OR
CONSIDERATION?
 JULITA ROBLEZA and JESUS ROBLEZA versus HON. COURT
OF APPEALS (Fifth Division) and INTER-ISLAND FISHING
GEAR & EQUIPMENT, INC. (G.R. No. L-80364 June 28, 1989)

 FACTS:

 On June 24, 1979, in General Santos City, petitioner Julita A. Robleza,

with the consent of her husband, petitioner Jesus Robleza, sold to
spouses Elpedio and Marianne Tan Lot No. 4735 covered by TCT No.
T-14255 and Lot No. 4736 covered by TCT No. P-1348;
 It also found that the titles over the two lots were given to Elpedio
Tan who, on June 28, 1979, was able to have two new titles in his
name, to wit: TCT No. T-14304 for Lot No. 4735 and TCT No. T-14305
for Lot No. 4736. Further, it held that on July 29, 1979 in Bacolod City,
Elpedio Tan executed in favor of respondent corporation a
promissory note in the sum of P 228,362.10 and on July 31, 1979, he
executed a deed of mortgage over the two lots to secure payment of
said promissory note. The mortgage was registered on August 3,
1979.
 Petitioners, claiming that they did not receive a single centavo from
the Tans and maintaining that the purchase price of P l0,000.00
appearing on the face of the deed of sale was not the true purchase
price, presented in evidence two checks issued by Elpedio Tan
which represented the actual stipulated price. The first check, RCBC
Check No. 5027253 dated October 30, 1979, is in the amount of P
50,000.00 and the other check, RCBC Check No. 5027254 dated
November 30, 1979, is for P 44,000.00. Both checks were dishonored
when for reason of "account closed." Thereafter, petitioners saw
Elpedio Tan who assured them that he would pay the amount of the
checks upon the release of his loan from the DBP. However, Elpedio
Tan failed to make good his promise. When it became clear to
petitioners that the Tan spouses did not really intend to pay the
agreed price of the subject lots, they demanded the return of their
certificates of title. It was at this juncture that Elpedio Tan admitted
to petitioners that he had transferred the titles to the lots in his name
and that he had mortgaged the lots and turned over his certificates
of title to respondent corporation. Petitioner Jesus Robleza
demanded confirmation of that information and so he and Elpidio
Tan proceeded to the office of respondent corporation in Bacolod
City.
 That was sometime before February 5, 1980. as confirmed by Romeo
Uy, the general manager of respondent corporation, petitioner found
out that the two lots were used as collaterals and that the certificates
of title were in the possession of the private respondent. Apprised of
the true facts on the status of the said two lots and the non-payment
of the purchase price by the Tan spouses, said general manager of
respondent corporation refused to return the certificates of title but
signified his willingness to accept other collaterals provided a partial
payment of P 50,000.00 would first be made by Elpedio Tan.

 After the trip to Bacolod City, Jesus Robleza met with Elpedio Tan on
February 5, 1980 when the former signed as a witness in a deed of
sale over Lot No. 4736, Ts-217 which was executed by Tan in favor of
a certain Jong See in order to raise the amount of P 50,000.00 to be
used as partial payment for Tan's loan with respondent corporation.
However, the transaction failed when Jong See refused to make
payment unless the certificate of title to the lot would first be given
to him.
 For failure of the Tans to pay their outstanding obligation to private
respondent, the mortgage on the two lots was foreclosed and the
same were sold on June 17, 1981 to respondent corporation in a
public auction sale conducted by the City Sheriff of General Santos
City. On August 26, 1982, one year after the registration of the
sheriff's sale, ownership was consolidated in the name of
respondent corporation and new titles, namely, Transfer Certificate
of Title No. T-19726 for Lot No. 4735 and Transfer Certificate of Title
No. T-19727 for Lot No. 4736, were issued in its name.

 On May 16,1983, petitioners filed Civil Case for the nullification of the
aforesaid deed of sale for want of consideration and for the
cancellation of the transfer certificates of title issued to private
respondent. Petitioners claim that they have always been in
possession of the subject property, that neither the Tan spouses nor
private respondent ever took possession thereof and that
respondent corporation acted in bad faith.

 After trial, the court a quo rendered judgment in favor of herein

petitioners but was reversed on appeal by the CA.
ISSUE:

WHETHER OR NOT THERE WAS A

CAUSE OR CONSIDERATION IN THE
DEED OF ABSOLUTE SALE EXECUTED
BETWEEN ROBLEZAS AND THE
TANS.
 Ruling:

 Basic is the rule that if the contract has no cause, it shall not
produce any effect whatsoever and, therefore, it is inexistent or void
from the beginning. It is the total absence of cause or
consideration that renders such contract absolutely void
and inexistent. Where the parties agreed upon a price but the
vendee did not in fact pay or failed to pay in full the purchase price,
the contract may still be supported by some other consideration. The
fact of payment or non-payment is not the controlling criterion in
declaring the contract null and void for want of consideration. Non-
payment of the contract price results in a breach of contract for non-
performance and warrants an action for rescission or specific
performance under Article 1191 of the Civil Code. In like manner,
where the parties intended to be bound by the contract except that it
did not reflect the actual purchase price of the property, as in the
case at bar, there is only a relative simulation of the contract which
remains valid and enforceable, but the parties shall be bound by
their real agreement.
 The present contract cannot be declared null and void or inexistent
from the beginning since it does not fall under the category of an
absolutely simulated or fictitious contract the basic characteristic of
which is that the apparent contract is not really desired or intended
to produce legal effects or to alter in any way the juridical situation
of the parties.
What is LESION?
ANSWER:

It is inadequacy of cause, like an insufficient price for

a thing sold.

Rules on Lesion – Lesion or inadequacy of price

does not invalidate the contract. Exceptions: If there
is Fraud, mistake or undue influence
Cause and Subject Matter distinguished:

The difference is only a matter of viewpoint in

some way, because what may be the subject
matter for one party will be the cause or
consideration for the other party.

Hence, we can form this general conclusion: In

reciprocal contracts, the subject matter for one
is the cause for the other and vice versa.
Classification of Contracts as to Cause:

1. Onerous – The cause for each contracting party, the

prestation or promise of a thing or service by the other.
Ex. Contract of Sale.

2. Remuneratory – the past service or benefit which

by itself is a recoverable debt.
Ex. Service was rendered without any expectation in
return.

3. Gratuitous or contract of pure beneficence –

the cause is mere liberality of the benefactor.
Ex. Donation.
Natural Elements (those found in certain contracts, and
presumed to exist, unless the contrary has been stipulated)

 Ex. Warranty against eviction and against hidden defects in the

contract of sale.

Accidental elements (these are the various particular

stipulations that may be agreed upon by the contracting parties
in a contract. They are called accidental, because they may be
present or absent depending upon whether or not the parties
have agreed upon them.

 Ex. The stipulations to pay interest, the designation of particular

place for delivery of payment.
ESSENTIAL CHARACTERISTICS OF A
CONTRACT
1. Contract has the obligatory force or
character.

The principle that once a contract is perfected,

it shall be of obligatory force upon both of the
contracting parties.
 2. The autonomy of contracts.

The principle that the contracting parties

are free to enter into a contract and to
establish stipulations, clauses, terms and
conditions as they may deem convenient.
 3. The mutuality of contracts.

The essential equality of contracting

parties whereby the contract must bind
both of them.
 4. The relativity of contracts.

The principle that the contract takes

effect only between the parties, their
assigns and heirs.

PRINCIPLE OF RELATIVITY OF
CONTRACTS

A contract can only be binding to parties who

had entered into it or their successors who
assumed their personalities or their juridical
positions, and that, as a consequence, such
contract can neither favor nor prejudice a third
person. (Quano vs. CA et. al., G.R. No. 95900,
July 23, 1992)
 WILLIAM UY and RODEL ROXAS versus
COURT OF APPEALS, HON. ROBERT BALAO and NATIONAL
HOUSING AUTHORITY (G.R. No. 120465 ,September 9, 1999)
 FACTS:

 Petitioners William Uy and Rodel Roxas are agents authorized to

sell 8 parcels of land by the owners thereof. By virtue of such
authority, THEY offered to sell the lands, located in Tuba,
Tadiangan, Benguet to NHA to be utilized and developed as a
housing project.

 On February 14, 1989, the NHA Board passed a resolution

approving the acquisition of said lands, with an area of 31.8231
hectares, at the cost of P23.867 million, pursuant to which the
parties executed series of Deeds of Absolute Sale covering the
subject lands. Of the 8 parcels of land, however, only 5 were paid
for by NHA because of the report it received from the Land
Geosciences Bureau of the DENR that the remaining area is located
at an active landslide area and therefore, not suitable for
development into a housing project.
 On 22 November 1991, the NHA issued a resolution cancelling the
sale over the 3 parcels of land. The NHA, through another resolution
subsequently offered the amount of P1.225 million to the
landowners as daños perjuicios.

 On 9 March 1992, petitioners filed before the Regional Trial Court

(RTC) of Quezon City a Complaint for Damages against NHA and its
General Manager Robert Balao.

 After trial, the RTC rendered a decision declaring the cancellation of

the contract to be justified. The trial court nevertheless awarded
damages to plaintiffs in the sum of P1.255 million, the same amount
initially offered by NHA to petitioners as damages.

 On appeal by petitioners, the CA reversed the decision of the trial

court and entered a new one dismissing the complaint. It held that
since there was "sufficient justifiable basis" in cancelling the sale,
"it saw no reason" for the award of damages. The CA also noted that
petitioners were mere attorneys-in-fact and, therefore, not the real
parties-in-interest in the action before the trial court.
 Petitioners claim that they lodged the complaint not in behalf of
their principals but in their own name as agents directly damaged
by the termination of the contract. The damages prayed for were
intended not for the benefit of their principals but to indemnify
petitioners for the losses they themselves allegedly incurred as a
result of such termination. These damages consist mainly of
"unearned income" and advances. Petitioners, thus, attempt to
distinguish the case at bar from those involving agents or
apoderedos instituting actions in their own name but in behalf of
their principals. Petitioners in this case purportedly brought the
action for damages in their own name and in their own behalf.
ISSUE:

Whether or not petitioners can

bring an action for damages in
their own name and in their
own behalf.
 RULING:

 The applicable substantive law in this case is Article 1311 of the

Civil Code, which states:
 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. . . .
 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.
(Emphasis supplied.)

 Petitioners are not parties to the contract of sale between their

principals and NHA. They are mere agents of the owners of the land
subject of the sale. As agents, they only render some service or do
something in representation or on behalf of their principals. The
rendering of such service did not make them parties to the contracts
of sale executed in behalf of the latter.
 Since a contract may be violated only by the parties thereto as
against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either be
parties to said contract. Neither has there been any allegation,
much less proof, that petitioners are the heirs of their principals.

 Petitioners, have not shown that they are assignees of their

principals to the subject contracts. While they alleged that they
made advances and that they suffered loss of commissions, they
have not established any agreement granting them "the right to
receive payment and out of the proceeds to reimburse [themselves]
for advances and commissions before turning the balance over to
the principal[s]."

 Finally, it does not appear that petitioners are beneficiaries of a

stipulation pour autrui under the second paragraph of Article 1311
of the Civil Code. Indeed, there is no stipulation in any of the Deeds
of Absolute Sale "clearly and deliberately" conferring a favor to any
third person.
 That petitioners did not obtain their commissions or recoup their
advances because of the non-performance of the contract did not
entitle them to file the action below against respondent NHA.

 As petitioners are not parties, heirs, assignees, or beneficiaries of a

stipulation pour autrui under the contracts of sale, they do not,
under substantive law, possess the right they seek to enforce.
Therefore, they are not the real parties-in-interest in this case.

 Petitioners not being the real parties-in-interest, any decision

rendered herein would be pointless since the same would not bind
the real parties in-interest.
Exceptions to the Principle of Relativity:

 a. Where the obligations arising from the contract are not

transmissible by their nature, by stipulation or by provision of
law;

 b. Where there is a stipulation pour autrui (a stipulation in favor

of a third party);

 c. Where the third person induces another to violate his

contract;

 d. Where in some cases, third persons may be adversely
affected by a contract where they did not participate;

 e. Where the law authorizes the creditor to sue on a contract

entered into by his debtor.
Requisites of a stipulation pour autrui :

 a. There must be a stipulation in favor of a third person;

 b. The stipulation must be a part, not the whole of the

contract;

 c. The contracting parties must have clearly and deliberately

conferred a favor upon a third person, not a mere incidental benefit
or interest;

 d. The third person must have communicated his acceptance

to the obligor before its revocation;

 e. Neither of the contracting parties bears the legal

representation or authorization of the third party.
Examples of CONTRACTS POUR AUTRUI:

1) A the owner of a passenger bus entered into a

contract with B Insurance Corp. whereby the insurer
agreed to pay all damages that may result to the vehicles
of A in any type of accident. The insurance contract also
provides that the insurer will pay any damage to any
passenger in an accident involving the vehicle of A.

2) ABC Credit Card Corp. entered into an agreement with

Z Department Store whereby the store agreed to honor
the credit card of ABC that may be presented by a
customer in case the customer wants to purchase goods
on credit.
Who may be the 3rd party beneficiary in a
stipulation pur autrui?

1. A donee beneficiary;

2. A creditor beneficiary;

3. An accidental beneficiary.

What are the Stages of a Contract?

This Photo by Unknown Author is licensed under

CC BY-SA
Stages of a Contract

a. Preparation or Negotiation – here the parties

are progressing with their negotiations; they have not
yet arrived at any definite agreement, although
there may have been a preliminary offer, and
bargaining;

b. Perfection – Here the parties have at long last

came to a definite agreement, the elements of
definite subject matter and valid cause have been
accepted by mutual consent;

c. Consummation – here the terms of the contract

are performed, and the contract may be said to have
been fully executed.
Limitations on the Nature of
Stipulations under a contract;

a. Law;

b. Morals;

c. Good Customs;

d.
This Photo by Unknown Author is licensed under CC BY-NC-ND

Public Order; or

e. Public Policy.

 LAW
Ex. Parties cannot deprive a competent court
of its jurisdiction, because jurisdiction is
fixed by law, and not by the will of the
parties. However, venue or the place where
the action may be brought can be the
subject of a stipulation.

Ex. In a mortgage contract, a pactum

commisorium is null and void.
 MORALS

Ex. The agreement to work without pay is

immoral and void since this would amount to
involuntary servitude. (De los Reyes vs. Alojado,
16 Phil. 499)
 GOOD CUSTOMS

Good customs are those that have received for a

period of time practical and social confirmation.
 PUBLIC ORDER
Ex. Every contract affecting public interest
suffers a congenital infirmity in that it contains
an implied reservation of the police power as a
postulate of the existing order. This power can
be activated at any time to change the
provisions of the contract, or even abrogate it
entirely, for the promotion and protection of the
general welfare. Such act will not militate against
the impairment clause, which is subject to and
limited by the paramount police power.
(Villanueva vs. Castaneda Jr., G.R. No. 61311,
Sept. 21, 1987)
 PUBLIC POLICY

Ex. A contract is contrary to public policy if it

has a tendency to injure the public, is against
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 individual
rights. (Gabriel vs. Monte de Piedad, 71 Phil. 500)
Gonzalo vs. Ternate (G.R. No. 160600, January 15,
2014)
 According to Article 1412 (1) of the Civil Code, the guilty parties to an
illegal contract cannot recover from one another and are not entitled
to an affirmative relief because they are in pari delicto or in equal
fault. The doctrine of in pari delicto is a universal doctrine that holds
that no action arises, in equity or at law, from an illegal contract; no
suit can be maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money agreed to be
paid, or damages for its violation; and where the parties are in pari
delicto, no affirmative relief of any

 Nonetheless, the application of the doctrine of in pari delicto is not

always rigid. An accepted exception arises when its application
contravenes well-established public policy. In this jurisdiction, public
policy has been defined as "that principle of the law which holds that
no subject or citizen can lawfully do that which has a tendency to be
injurious to the public or against the public good."
 Unjust enrichment exists, according to Hulst v. PR Builders, Inc.,
"when a person unjustly retains a benefit at the loss of another, or
when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience." The
prevention of unjust enrichment is a recognized public policy of the
State, for Article 22 of the Civil Code explicitly provides that "[e]very
person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the
same to him." It is well to note that Article 22 "is part of the chapter
of the Civil Code on Human Relations, the provisions of which were
formulated as basic principles to be observed for the rightful
relationship between human beings and for the stability of the social
order; designed to indicate certain norms that spring from the
fountain of good conscience; guides for human conduct that should
run as golden threads through society to the end that law may
approach its supreme ideal which is the sway and dominance of
justice."
 There is no question that Tarnate provided the equipment, labor and
materials for the project in compliance with his obligations under the
subcontract and the deed of assignment; and that it was Gonzalo as
the contractor who received the payment for his contract with the
DPWH as well as the 10% retention fee that should have been paid to
Tarnate pursuant to the deed of assignment. Considering that
Gonzalo refused despite demands to deliver to Tarnate the stipulated
10% retention fee that would have compensated the latter for the use
of his equipment in the project, Gonzalo would be unjustly enriched
at the expense of Tarnate if the latter was to be barred from
recovering because of the rigid application of the doctrine of in pari
delicto. The prevention of unjust enrichment called for the exception
to apply in Tarnate’s favor.
WHAT IS A CONTRACT OF
ADHESION?
ANSWER:

A contract of adhesion is so called because its

provisions are drafted by only one party, usually
a corporation, and the only participation of the
other party is to sign his name, his signature or
his adhesion to the contract. Insurance
contracts, bills of lading, contracts of sale of
lots on installments plan fall into this category.
 Spouses Luis M. Ermitaňo and Manuelita C. Ermitaňo vs.
The Court of Appeals & BPI Express Card Corp. (G.R. No.
127246, April 21, 1999)

 FACTS:

 Luis Ermitaño applied for a credit card from BPI Express Card Corp.
(BECC) on October 8, 1986 with his wife, Manuelita, as extension
cardholder. The spouses were given credit cards with a credit limit
of P10,000.00. They often exceeded this credit limit without protest
from BECC.

 On August 29, 1989, Manuelita's bag was snatched from her as she
was shopping at the Greenbelt Mall in Makati, Metro Manila. Among
the items inside the bag was her BECC credit card. That same night
she informed, by telephone, BECC of the loss. The call was
received by BECC offices through a certain Gina Banzon. This was
followed by a letter dated August 30, 1989. She also surrendered
Luis' credit card and requested for replacement cards.
 In her letter, Manuelita stated that she "shall not be responsible for
any and all charges incurred [through the use of the lost card] after
August 29, 1989.

 However, when Luis received his monthly billing statement from

BECC dated September 20, 1989, the charges included amounts for
purchases made on August 30, 1989 through Manuelita's lost card.
Two purchases were made, one amounting to P2,350.05 and the
other, P607.50. Manuelita received a billing statement dated October
20, 1989 which required her to immediately pay the total amount of
P3,197.70 covering the same (unauthorized) purchases. Manuelita
again wrote BECC disclaiming responsibility for those charges,
which were made after she had served BECC with notice of the loss
of her card.

 Despite the spouses' refusal to pay and the fact that they
repeatedly exceeded their monthly credit limit, BECC sent them a
notice dated December 29, 1989 stating that their cards had been
renewed until March 1991.
 Notwithstanding this, however, BECC continued to include in the
spouses' billing statements those purchases made through
Manuelita's lost card. Luis protested this billing in his letter dated
June 20, 1990.

 However, BECC, in a letter dated July 13, 1990, pointed out to Luis
the following stipulation in their contract:

 In the event the card is lost or stolen, the cardholder agrees to

immediately report its loss or theft in writing to BECC . . . purchases
made/incurred arising from the use of the lost/stolen card shall be for
the exclusive account of the cardholder and the cardholder continues to
be liable for the purchases made through the use of the lost/stolen BPI
Express Card until after such notice has been given to BECC and the
latter has communicated such loss/theft to its member establishments.

 Pursuant to this stipulation, BECC held Luis liable for the amount of
P3,197.70 incurred through the use of his wife's lost card, exclusive
of interest and penalty charges.
 In his reply dated July 18, 1990, Luis stressed that the contract
BECC was referring to was a contract of adhesion and warned that
if BECC insisted on charging him and his wife for the unauthorized
purchases, they will sue BECC for damages. This warning
notwithstanding, BECC continued to bill the spouses for said
purchases.

 On April 10, 1991, Luis used his credit card to purchase gasoline at
a Caltex station. The latter, however, dishonored his card. In reply
to Luis' demand for an explanation, BECC wrote that it transferred
the balance of his old credit card to his new one, including the
unauthorized charges. Consequently, his outstanding balance
exceeded his credit limit of P10,00000. He was informed that his
credit card had not been cancelled but, since he exceeded his
credit limit, he could not avail of his credit privileges.

 Once more, Luis pointed out that notice of the lost card was given
to BECC before the purchases were made.
 Subsequently, BECC cancelled the spouses' credit cards and
advised them to settle the account immediately or risk being sued
for collection of said account.

 Constrained, petitioners sued BECC for damages. The trial court

ruled in their favor, stating that there was a waiver on the part of
BECC in enforcing the spouses' liability.

 The trial court opined that the only purpose for the suspension of
the spouses' credit privileges was to compel them to pay for the
unauthorized purchases. The trial court ruled that the latter portion
of the condition in the parties' contract, which states that liability
for purchases made after a card is lost or stolen shall be for the
account of the cardholder until after notice of the loss or theft has
been given to BECC and after the latter has informed its member
establishments, is void for being contrary to public policy and for
being dependent upon the sole will of the debtor. Moreover, the trial
court observed that the contract between BECC and the Ermitaños
was a contract of adhesion, whose terms must be construed strictly
against BECC, the party that prepared it.
 But, on appeal this decision was reversed. The Court of Appeals
stated that the spouses should be bound by the contract, even
though it was one of adhesion. It also said that Luis, being a lawyer,
had "all the tools to drive a hard bargain had he wanted to.
ISSUE:

Whether or not the stipulation on

notice required by private respondent
in case of loss or theft of a BECC-
issued credit card is valid despite the
fact that it is a contract of adhesion.
 RULING:

The contract between the parties in this case is indeed a

contract of adhesion, so-called because its terms are
prepared by only one party while the other party merely
affixes his signature signifying his adhesion thereto.
Such contracts are not void in themselves. They are as
binding as ordinary contracts. Parties who enter into
such contracts are free to reject the stipulations entirely.
The Supreme Court, however, will not hesitate to rule
out blind adherence to such contracts if they prove to
be too one-sided under the attendant facts and
circumstances. Because of the peculiar nature of
contracts of adhesion, the validity thereof must be
determined in light of the circumstances under which
the stipulation is intended to apply.
 For the cardholder to be absolved from liability for unauthorized
purchases made through his lost or stolen card, two steps must be
followed: (1) the cardholder must give written notice to BECC, and
(2) BECC must notify its member establishments of such loss or
theft, which, naturally, it may only do upon receipt of a notice from
the cardholder. Both the cardholder and BECC, then, have a
responsibility to perform, in order to free the cardholder from any
liability arising from the use of a lost or stolen card.
 In this case, the cardholder, Manuelita, has complied with what was
required of her under the contract with BECC. She immediately
notified BECC of the loss of her card on the same day it was lost
and, the following day, she sent a written notice of the loss to
BECC.
 Having thus performed her part of the notification procedure, it was
reasonable for Manuelita — and Luis, for that matter — to expect
that BECC would perform its part of the procedure, which is to
forthwith notify its member-establishments.
 Clearly, what happened in this case was that BECC failed to notify
promptly the establishment in which the unauthorized purchases
were made with the use of Manuelita's lost card.

 Prompt notice by the cardholder to the credit card company of the

loss or theft of his card should be enough to relieve the former of
any liability occasioned by the unauthorized use of his lost or
stolen card. The questioned stipulation in this case, which still
requires the cardholder to wait until the credit card company has
notified all its member-establishments, puts the cardholder at the
mercy of the credit card company which may delay indefinitely the
notification of its members to minimize if not to eliminate the
possibility of incurring any loss from unauthorized purchases. Or,
as in this case, the credit card company may for some reason fail to
promptly notify its members through absolutely no fault of the
cardholder. To require the cardholder to still pay for unauthorized
purchases after he has given prompt notice of the loss or theft of
his card to the credit card company would simply be unfair and
unjust. The Court cannot give its assent to such a stipulation which
could clearly run against public policy.
 The 4 KINDS OF INNOMINATE CONTRACTS:

(a) Do ut Des – I give what you may give;

(b) Do ut Facias – I give what you may do;

(c) Facio ut Des – I do what you may give;

(d) Facio ut Facias – I do what you may do.

What is CONSENSUALITY OF
CONTRACTS?
ANSWER:

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. (Art.
1315)
E-COMMERCE ACT:

The primary objective of the RA 8792 is to provide a

secure legal framework and environment for electronic
commerce. It seeks to protect the integrity of electronic
documents and electronic signatures as well as its
transmission and communication so as to build and
ensure the trust and reliance of the public on electronic
transactions.

 Section 3 of RA 8792 provides that the Act aims to facilitate

domestic and international dealings, transactions, arrangements,
agreements, contracts and exchanges and storage of information
through the utilization of electronic, optical and similar medium,
mode, instrumentality and technology, to recognize the authenticity
and reliability of electronic documents related to such activities and
to promote the universal use of electronic transactions in the
government and by the general public.
Basic Legal Principles

1.Electronic Communications shall be the Functional Equivalent of

Paper Documents. The foremost principle is that electronic
communications shall be the functional equivalent of paper
documents. This is based on an analysis of the purposes and
functions of the traditional paper-based requirement to determine
how those purposes or functions could be fulfilled through electronic-
commerce techniques;

2.Autonomy of contracts. The E-commerce law is not intended to

apply and does not in fact apply to the substantive terms and
conditions of the parties’ transactions, but only seeks to ensure the
integrity and reliability of their contractual stipulations expressed or
embodied in the form of electronic documents. Although the parties
may use existing technology to ensure the authenticity and integrity
of their electronic communication, and may in fact be well advised to
do so, they are not precluded from agreeing on their own method of
verification of the authenticity and integrity of communication.
 3. Voluntariness of the use of electronic communication. The Model
law and the E-Commerce law both recognize that legal requirements
prescribing the use of traditional paper-based documentation
constitute the main obstacle to the development of modern means of
communication. To encourage electronic commerce, the Model law and
the E-Commerce law only extends the notions of “writing”, “signature”
and “original”, to include computer-based techniques and electronic
communication.
 4. Solemnity of contracts and the primacy of statutory requirements
and judicial pronouncements respecting formalities of contracts. No
provision of the Act shall apply to vary any and all requirements of
existing laws and relevant judicial pronouncements respecting
formalities required in the execution of documents for their validity.
 5. Primacy of consumer protection laws. The UNCITRAL Model
recognizes the consumer protection laws may take precedence over
the provisions in the Model law. The E-Commerce law provides that
“violations of the R.A. No. 7394 and other pertinent laws through
transactions covered by or using electronic data messages or
electronic documents, shall be penalized with the same penalties as
provided in those laws.”
 6. Voluntary Use of Digital Signatures. The E-Commerce Act is
applicable to commercial and non-commercial transactions, this is
conditioned upon the parties’ own decision to have their
commercial or non-commercial transactions covered by this Act.
Thus, there is nothing in the law that requires a person to use or
accept information contained in electronic data messages,
electronic documents, or electronic signatures, but a person’s
consent to do so may be inferred from the person’s conduct.”

 7. Encouraging the Use of Cryptography to Promote E-Commerce.

The primary intent under the Organisation for Economic Co-
operation and Development (OECD) Guidelines for Cryptography
Policy is to promote the use of cryptography in order to promote
global electronic commerce by building confidence in electronic
networks and providing data security and privacy protection.
Summary of Salient features of Republic Act
8792:

 1. It gives legal recognition of electronic data messages, electronic

documents, and electronic signatures. (section 6 to 13);
 2. Allows the formation of contracts in electronic form. (section 16);

 3. Makes banking transactions done through ATM switching

networks absolute once consummated. (section 16);
 4. Parties are given the right to choose the type and level of
security methods that suit their needs. (section 24);
 5. Provides the mandate for the electronic implementation of
transport documents to facilitate carriage of goods. This includes
documents such as, but not limited to, multi-modal, airport, road,
rail, inland waterway, courier, post receipts, transport documents
issued by freight forwarders, marine/ocean bill of lading, non-
negotiable seaway bill, charter party bill of lading. (section 25 and
26)
 6. Mandates the government to have the capability to do e-commerce
within 2 years or before June 19, 2002. (section 27);
 7. Mandates RPWeb to be implemented. RPWeb is a strategy that
intends to connect all government offices to the Internet and provide
universal access to the general public. The Department of
Transportation and Communications, National Telecommunications
Commission, and National Computer Center will come up with
policies and rules that shall lead to substantial reduction of costs of
telecommunication and Internet facilities to ensure the
implementation of RPWeb. (section 28);
 8.. Made cable, broadcast, and wireless physical infrastructure within
the activity of telecommunications. (section 28);
 9. Empowers the Department of Trade and Industry to supervise the
development of e-commerce in the country. It can also come up with
policies and regulations, when needed, to facilitate the growth of e-
commerce. (section 29);
 10. Provided guidelines as to when a service provider can be liable.
(section 30);
 11. Authorities and parties with the legal right can only gain access
to electronic documents, electronic data messages, and electronic
signatures. For confidentiality purposes, it shall not share or
convey to any other person. (section 31 and 32);

 12. Hacking or cracking, refers to unauthorized access including

the introduction of computer viruses, is punishable by a fine from
100 thousand to maximum commensurating to the damage. With
imprisonment from 6 months to 3 years. (section 33);

 13. Piracy through the use of telecommunication networks, such as

the Internet, that infringes intellectual property rights is punishable.
The penalties are the same as hacking. (section 33);

 14. All existing laws such as the Consumer Act of the Philippines
also applies to e-commerce transactions. (section 33)
Difference between and Electronic Signature
and Document;

 “Electronic signature" refers to any distinctive mark, characteristic

and/or sound in electronic form, representing the identity of a
person and attached to or logically associated with the electronic
data message or electronic document or any methodology or
procedures employed or adopted by a person and executed or
adopted by such person with the intention of authenticating or
approving an electronic data message or electronic document.

 "Electronic document" refers to information or the representation

of information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may
be proved and affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced electronically. Throughout
these Rules, the term "electronic document" shall be equivalent to
and be used interchangeably with "electronic data message."
 MCC Industrial Sales Corp. vs. Ssangyong Corporation
((G.R. No. 170633, October 17, 2007)

 There is no question then that when Congress formulated the term

"electronic data message," it intended the same meaning as the
term "electronic record" in the Canada law. This construction of the
term "electronic data message," which excludes telexes or faxes,
except computer-generated faxes, is in harmony with the Electronic
Commerce Law's focus on "paperless" communications and the
"functional equivalent approach" that it espouses. In fact, the
deliberations of the Legislature are replete with discussions on
paperless and digital transactions.

 Facsimile transmissions are not, in this sense, "paperless," but

verily are paper-based.
 In Garvida v. Sales, Jr., the SC explained the unacceptability of filing
pleadings through fax machines, we ruled that:

 A facsimile or fax transmission is a process involving the

transmission and reproduction of printed and graphic matter by
scanning an original copy, one elemental area at a time, and
representing the shade or tone of each area by a specified amount
of electric current. The current is transmitted as a signal over
regular telephone lines or via microwave relay and is used by the
receiver to reproduce an image of the elemental area in the proper
position and the correct shade. The receiver is equipped with a
stylus or other device that produces a printed record on paper
referred to as a facsimile.

 x x x A facsimile is not a genuine and authentic pleading. It is, at

best, an exact copy preserving all the marks of an original. Without
the original, there is no way of determining on its face whether the
facsimile pleading is genuine and authentic and was originally
signed by the party and his counsel. It may, in fact, be a sham
pleading.
 Accordingly, in an ordinary facsimile transmission, there exists an
original paper-based information or data that is scanned, sent
through a phone line, and re-printed at the receiving end. Be it noted
that in enacting the Electronic Commerce Act of 2000, Congress
intended virtual or paperless writings to be the functional equivalent
and to have the same legal function as paper-based documents.
Further, in a virtual or paperless environment, technically,
there is no original copy to speak of, as all direct
printouts of the virtual reality are the same, in all
respects, and are considered as originals. Ineluctably, the
law's definition of "electronic data message," which, as aforesaid, is
interchangeable with "electronic document," could not have included
facsimile transmissions, which have an original paper-based copy as
sent and a paper-based facsimile copy as received. These two copies
are distinct from each other, and have different legal effects. While
Congress anticipated future developments in communications and
computer technology when it drafted the law, it excluded the early
forms of technology, like telegraph, telex and telecopy (except
computer-generated faxes, which is a newer development as
compared to the ordinary fax machine to fax machine transmission),
when it defined the term "electronic data message.“
 Ellery March G. Torres vs.
Philippine Amusement and Gaming Corporation,
represented by Atty. Carlos R. Bautista Jr. (G.R. No. 193531
December 14, 2011)

 Petitioner received a copy of the letter/notice of dismissal on

August 4, 2007; thus, the motion for reconsideration should have
been submitted either by mail or by personal delivery on or before
August 19, 2007. However, records do not show that petitioner had
filed his motion for reconsideration. In fact, the CSC found that the
non-receipt of petitioner's letter reconsideration was duly
supported by certifications issued by PAGCOR employees.

 Even assuming arguendo that petitioner indeed submitted a letter

reconsideration which he claims was sent through a facsimile
transmission, such letter reconsideration did not toll the period to
appeal. The mode used by petitioner in filing his reconsideration is
not sanctioned by the Uniform Rules on Administrative Cases in the
Civil Service. As we stated earlier, the motion for reconsideration
may be filed only in two ways, either by mail or personal delivery.
 Moreover, a facsimile transmission is not considered as an
electronic evidence under the Electronic Commerce Act. In MCC
Industrial Sales Corporation v. Ssangyong Corporation, We
determined the question of whether the original facsimile
transmissions are "electronic data messages" or "electronic
documents" within the context of the Electronic Commerce Act, and
We said:

 We, therefore, conclude that the terms "electronic data message"

and "electronic document," as defined under the Electronic
Commerce Act of 2000, do not include a facsimile transmission.
Accordingly, a facsimile transmission cannot be considered as
electronic evidence. It is not the functional equivalent of an original
under the Best Evidence Rule and is not admissible as electronic
evidence
 National Power Corp.vs.
Hon. Ramon G. Codilla Jr. Presiding Judge, RTC of Cebu,
Br. 19, Bangpai Shipping Company, and Wallem Shipping,
Inc. (G.R. No. 170491 ,April 4, 2007)
 The focal point of this entire controversy is petitioner’s obstinate
contention that the photocopies it offered as formal evidence before
the trial court are the functional equivalent of their original based on
its inimitable interpretation of the Rules on Electronic Evidence.

 Petitioner insists that, contrary to the rulings of both the trial court
and the appellate court, the photocopies it presented as
documentary evidence actually constitute electronic evidence based
on its own premise that an "electronic document" as defined under
Section 1(h), Rule 2 of the Rules on Electronic Evidence is not
limited to information that is received, recorded, retrieved or
produced electronically. Rather, petitioner maintains that an
"electronic document" can also refer to other modes of written
expression that is produced electronically, such as photocopies, as
included in the section’s catch-all proviso: "any print-out or output,
readable by sight or other means".
 An "electronic document" refers to information or the representation
of information, data, figures, symbols or other models of written
expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced electronically. It includes
digitally signed documents and any printout, readable by sight or
other means which accurately reflects the electronic data message
or electronic document.

 The rules use the word "information" to define an electronic

document received, recorded, transmitted, stored, processed,
retrieved or produced electronically. This would suggest that an
electronic document is relevant only in terms of the information
contained therein, similar to any other document which is presented
in evidence as proof of its contents. However, what differentiates an
electronic document from a paper-based document is the manner by
which the information is processed; clearly, the information
contained in an electronic document is received, recorded,
transmitted, stored, processed, retrieved or produced electronically.
 A perusal of the information contained in the photocopies
submitted by petitioner will reveal that not all of the contents
therein, such as the signatures of the persons who purportedly
signed the documents, may be recorded or produced electronically.
By no stretch of the imagination can a person’s signature affixed
manually be considered as information electronically received,
recorded, transmitted, stored, processed, retrieved or produced.
Hence, the argument of petitioner that since these paper printouts
were produced through an electronic process, then these
photocopies are electronic documents as defined in the Rules on
Electronic Evidence is obviously an erroneous, if not preposterous,
interpretation of the law. Having thus declared that the offered
photocopies are not tantamount to electronic documents, it is
consequential that the same may not be considered as the
functional equivalent of their original as decreed in the law.
FORM OF CONTRACTS:

In general, form does not matter for the

validity of a contract. It is enough that
there be consent, subject matter and
cause. This rule applies however to
CONSENSUAL CONTRACTS.
Classification of Contracts according to
perfection or form:
1. CONSENSUAL (perfected by mere consent);
 Ex. Contract of Sale

2. REAL (perfected by delivery);

 Ex. Deposit and pledge.

3. FORMAL OR SOLEMN (those where special

formalities are essential before the contract may be
perfected).
 Ex. A simple donation inter vivos of real property, to be valid and
perfected, must be in a public instrument.
FORMAL CONTRACTS (SOLEMN CONTRACTS) –
require a certain specified form in addition to consent,
subject matter and cause.

Form may be important:

a. For Validity (This is true in formal or solemn
contract)

b. For Enforceability;

c. For Convenience.

 Examples of Formal Contracts:

 (a) Donations of real property (These require a public

instrument);

 (b) Donations of personal property (These require a written

contract or document if the donation exceeds P5,000.00);

 (c) Stipulation to pay interest on loans, interest for the USE of

money (said stipulation must be in writing);

 (d) Transfer of large cattle (This require the transfer of the

certificate of registration);

 (e) Sale of land thru an agent (The authority of the agent must
be in writing, otherwise the sale is null and void.);

 (f) Contracts of antichresis (The principal loan; and the interest

if any, must be specified in writing, otherwise the contract of
antichresis is void.)
 Meliton Gallardo and Teresa Villanueva vs.
Hon. Intermediate Appellate Court, Marta Villanueva Vda.
De Agana, Visitacion Agana Kipping, Pedro V. Agana,
Marcelo V. Agana Jr., Teresita Agana Santos and Jesus V.
Agana (G.R. No. L-67742, October 29, 1987)

 FACTS:

 The subject matter of this controversy involves a parcel of land

situated in Cavinti, Laguna consisting of 81,300 square meters, more
or less, initially covered by an OCT No. 2262, owned and registered
in the name of the late Pedro Villanueva.
 GALLARDO & TERESA VILLANUEVA were nephew and niece of the
late Pedro Villanueva and first cousin of the private respondent
Marta Villanueva vda. de Agana, the latter being the daughter of
Pedro Villanueva.
 On August 10, 1937, GALLARDO & TERESA VILLANUEVA claimed
that the aforestated land was sold to them in a private document, by
the late Pedro Villanueva conveying and transferring the property in
question in their favor.
 Subsequently, the OCT was cancelled on the basis of the private
document of sale and a new certificate of title was issued in the
name of GALLARDO & TERESA VILLANUEVA covered by TCT No.
RT- 6293 (No. 23350) on January 4, 1944.

 During the Second World War, the records as well as the Office of
the Register of Deeds of Laguna, where the original of their new
transfer certificate of title was kept, were completely burned.
Accordingly, by virtue of an Affidavit of Reconstitution dated
December 2, 1958 and upon presentation of the Owner's Duplicate
Certificate of Title, the title was administratively reconstituted and
the Register of Deeds of Laguna issued Transfer Certificate of Title
No. RT-6293 (No. 23350) in the name of GALLARDO & TERESA
VILLANUEVA .

 On November 17, 1976, defendant Marta Villanueva together with

Pedro Villanueva, Jr., and Restituto R. Villanueva executed and filed
an Affidavit of Adverse Claim with the Office of the Register of
Deeds of Laguna.
 However, on December 6, 1976 a joint affidavit was filed by Pedro G.
Villanueva, Jr. and Restituto Villanueva withdrawing their adverse
claim on the said parcel of land.

 When GALLARDO & TERESA VILLANUEVA learned of this Affidavit

of Adverse Claim, attempt was made to settle said controversy
amicably. Several demands made by herein GALLARDO & TERESA
VILLANUEVA upon private respondents Marta Vda. de Agana to
withdraw her adverse claim, failed.

 On December 9, 1976, said private respondent executed a Deed of

Conveyance and Release of Claim. However, when private
respondent Marta Villanueva vda. de Agana refused to sign an
Affidavit of Quit-claim, GALLARDO & TERESA VILLANUEVA
instituted court suit against the private respondent and her
husband, Dr. Marcelo S. Agana, Sr. by filing a complaint for Quieting
of Title and Damages with the Court of First Instance of Laguna on
February 3, 1977, demanding that their title over the questioned
land be fortified by a declaration of ownership in their favor and
avoiding the aforecited Deed of Conveyance and Release of Claim.
 Accordingly, private respondents in their answer countered that the
Deed of Sale in Tagalog and petitioners' title over the land be
declared void ab initio, among other demands.
ISSUE:

Whether or not a private

instrument can be considered as a
valid instrument for effecting the
alienation by way of sale of a
parcel of land registered under the
Torrens System.
 RULING:

 A private conveyance of registered property is valid as between the

parties. However, the only right the vendee of registered property in
a private document is to compel through court processes the vendor
to execute a deed of conveyance sufficient in law for purposes of
registration. Plaintiffs-appellants' reliance on Article 1356 of the Civil
Code is unfortunate. The general rule enunciated in said Art. 1356 is
that contracts are obligatory, in whatever form they may have been
entered, provided all the essential requisites for their validity are
present. The next sentence provides the exception, requiring a
contract to be in some form when the law so requires for validity or
enforceability. Said law is Section 127 of Act 496 which requires,
among other things, that the conveyance be executed "before the
judge of a court of record or clerk of a court of record or a notary
public or a justice of the peace, who shall certify such
acknowledgment substantially in form next hereinafter stated.“
 Such law was violated in this case. The action of the Register of
Deeds of Laguna in allowing the registration of the private deed of
sale was unauthorized and did not lend a bit of validity to the
defective private document of sale.
 Diampoc vs. Buenaventura et. al. (G.R. No. 200383, March 19, 2018)

 Petitioner's arguments center on the claim that the deed of sale suffers
from defects relative to its notarization, which thus render the deed
ineffective, if not null and void. Petitioner claims that the deed was not
signed by the parties before the notary public; that it was notarized in her
and her husband's absence; that there was only one Community Tax
Certificate used for both petitioner and her husband; and that
Buenaventura failed to present the notary public as her witness.

 It must be remembered, however, that "the absence of notarization of the

deed of sale would not invalidate the transaction evidenced therein"; it
merely "reduces the evidentiary value of a document to that of a private
document, which requires proof of its due execution and authenticity to be
admissible as evidence." "A defective notarization will strip the document
of its public character and reduce it to a private instrument. Consequently,
when there is a defect in the notarization of a document, the clear and
convincing evidentiary standard normally attached to a duly-notarized
document is dispensed with, and the measure to test the validity of such
document is preponderance of evidence."
Right to compel Execution of a Needed
Instrument.

The right may be availed only if the following conditions

are present:

a. The contract must be valid (perfected) (Art. 1357); and

b. The contract must be enforceable under the Statute of

Frauds. (Art. 1356)
The following must appear in a public
document: (Art. 1358)

 a. 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;

 b. The cession, repudiation or renunciation of hereditary rights

or those of the conjugal partnership of gains;

 c. 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;

 d. The cession of actions or rights proceeding from an act

appearing in a public document;
 e. All other contracts where the amount involved exceeds
P500 must appear in writing, even a private one. But sales of
goods, chattels or things in action are governed by Art. 1403 No. 2
and Art. 1405.
The necessity for the public document in
the contracts enumerated under Art. 1358
is only for convenience, not for validity or
enforceability.
CONTRACT FORMALITY REQUIRED

1. Donation of Real Property: (Art. 749); Public Instrument

2. Donation of personal property exceeding

Must be in writing;
P5,000.00 (Art. 748)

3. Stipulation that interest should be paid on

Must be in writing.
loans. (Art. 1956)

4.Agency to sell land (Art. 1874) Must be in writing.

A signed inventory must be attached to the

5. Partnership where real property is
public instrument that evidence the
contributed. (Art. 1773)
partnership cointract.

6. An agreement limiting the diligence of

common carriers over goods to less than Must be in writing.
extraordinary diligence (Art. 1774)

The principal amount and the interest to be

7. Contract of Antichresis. (Art. 2134)
paid must be in writing.
REAL CONTRACTS
 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.

Requisites:
a. Consent;
b. Subject Matter
c. Cause or consideration;
d. Delivery.

 Types of Real Contract (Art. 1316)

 a. Deposit;
 b. Commodatum, a loan where the identical object must be
returned( Ex. Loan of a car)
REFORMATION OF INSTRUMENTS

REFORMATION – is that remedy in equity by

means of which a written instrument is made or
construed so as to express or conform to the
real intention of the parties when some error or
mistake has been committed.
Requisites of REFORMATION:

1. There must be a meeting of the minds of the

parties to the contract;

2. The true intention is not expressed in the

instrument / contract;

3. There must be clear and convincing proof thereof;

4. The failure of the contract to express the true

intention of the parties is due to mistake, fraud,
inequitable conduct or accident.
Instances were reformation is allowed:

1. A owns two parcels of land specifically known as Lot

Nos. 1 & 2. A sold Lot No. 1 to B. Both A & B thought
that Lot No. 1 is the property located near SM City when
in fact it is actually Lot No. 2. A deed of sale was
subsequently executed. In this case, there can be
reformation because the instrument executed by both
parties does not express the true agreement.

2. A sold a car to B. They agreed that there is a right to

repurchase for a period of one year. They did not notice
however that the period that was inserted in the
document is only for 6 months. reformation is allowed in
this case.
When a mutual mistake of the parties
causes the failure of the instrument to
disclose their real agreement, said
instrument may be reformed.(Art. 1361)
REFORMATION in Unilateral Mistake:

(1) If one party was mistaken and the other acted

fraudulently or inequitably; (Art. 1362)

(2) 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. (Art. 1363)
REFORMATION caused by a third person who
drafted the instrument:

The reason why the document does not express the true
agreement of the parties maybe:

1) Ignorance;

2) Lack of Skill;

3) Negligence; or

4) Bad faith.

 NO REFORMATION in the following cases: (Art. 1366)

 1. Simple donation inter vivos wherein no condition is

imposed.
 Donations are essentially acts of pure liberality. However, if the
donation is conditional, reformation may be resorted to, so that the
real or true conditions intended by the donor might be brought out.
In case the donation is an onerous one, reformation is very much in
order inasmuch as in this case said donation would partake very
much of the nature of the contract.

 2. Will;
 The making of a will is strictly a personal act which is free.

 3. When the real agreement is void.

 Reformation is not allowed in case the real agreement is void
because such a procedure would be useless. Once reformation is
made, the new instrument would be void precisely because the true
agreement and intention are void.
Plaintiffs in action for REFORMATION

a. If the mistake is mutual, either party or his

successors-in-interest;

b. In all other cases;

b.1. the injured party;
b.2. his heirs and assigns.
 RITA SARMING et. al. vs. CRESENCIO DY, et. al. (G.R. No.
133643, June 6, 2002)

 FACTS:

 Petitioners are successors-in-interest of original defendant Silveria

Flores, while respondents Cresencio Dy and Ludivina Dy-Chan are
the successors-in-interest of the original plaintiff Alejandra Delfino,
the buyer of one of the lots subject of this case. They were joined in
this petition by the successors-in-interest of Isabel, Juan, Hilario,
Ruperto, Tomasa, and Luisa and Trinidad themselves, all surnamed
Flores, who were also the original plaintiffs in the lower court. They
are the descendants of Venancio and Jose, the brothers of the
original defendant Silveria Flores.

 After the death of Valentina Unto Flores, her three children, namely:
Jose, Venancio, and Silveria, took possession of Lot 5734 with each
occupying a one-third portion. Upon their death, their children and
grandchildren took possession of their respective shares.
 The other parcel, Lot 4163 which is solely registered under the name
of Silveria, was sub-divided between Silveria and Jose. Two rows of
coconut trees planted in the middle of this lot serves as boundary
line.

 In January 1956, Luisa, Trinidad, Ruperto and Tomasa,

grandchildren of Jose and now owners of one-half of Lot 4163,
entered into a contract with plaintiff Alejandra Delfino, for the sale of
one-half share of Lot 4163 after offering the same to their co-owner,
Silveria, who declined for lack of money. Silveria did not object to
the sale of said portion to Alejandra Delfino.

 Before preparing the document of sale, the late Atty. Deogracias

Pinili, Alejandra's lawyer, called Silveria and the heirs of Venancio to
a conference where Silveria declared that she owned half of the lot
while the other half belonged to the vendors; and that she was
selling her three coconut trees found in the half portion offered to
Alejandra Delfino for P15.
 When Pinili asked for the title of the land, Silveria Flores, through
her daughter, Cristita Corsame, delivered OCT No. 4918-A, covering
Lot No. 5734, and not the correct title covering Lot 4163. At that
time, the parties knew the location of Lot 4163 but not the OCT
Number corresponding to said lot.

 Believing that OCT No. 4918-A was the correct title corresponding to
Lot 4163, Pinili prepared a notarized Settlement of Estate and Sale
duly signed by parties on January 19, 1956. As a result, OCT No.
4918-A was cancelled and in lieu thereof, TCT No. 5078 was issued
in the names of Silveria Flores and Alejandra Delfino, with 1/2 share
each. Silveria Flores was present during the preparation and signing
of the deed and she stated that the title presented covered Lot No.
4163.

 Alejandra Delfino immediately took possession and introduced

improvements on the purchased lot, which was actually ½ of Lot
4163 instead of Lot 5734 as designated in the deed.
 Two years later, when Alejandra Delfino purchased the adjoining
portion of the lot she had been occupying, she discovered that what
was designated in the deed, Lot 5734, was the wrong lot. She sought
the assistance of Pinili who approached Silveria and together they
inquired from the Registry of Deeds about the status of Lot 4163.
They found out that OCT No. 3129-A covering Lot 4163 was still on
file. Alejandra Delfino paid the necessary fees so that the title to Lot
4163 could be released to Silveria Flores, who promised to turn it
over to Pinili for the reformation of the deed of sale. However,
despite repeated demands, Silveria did not do so, prompting
Alejandra and the vendors to file a complaint against Silveria for
reformation of the deed of sale with damages.

 In her answer, Silveria Flores claimed that she was the sole owner of
Lot 4163 as shown by OCT No. 3129-A and consequently,
respondents had no right to sell the lot. According to her, the
contract of sale clearly stated that the property being sold was Lot
5734, not Lot 4163. She also claimed that respondents illegally took
possession of one-half of Lot 4163. She thus prayed that she be
declared the sole owner of Lot 4163 and be immediately placed in
possession thereof.
ISSUE:

Whether or not reformation of

the subject deed is proper by
reason of mistake in
designating the correct lot
number.
 RULING:

 Reformation is that remedy in equity by means of which a written

instrument is made or construed so as to express or conform to the
real intention of the parties. As provided in Article 1359 of the Civil
Code:
 Art. 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.
 An action for reformation of instrument under this provision of law
may prosper only upon the concurrence of the following requisites:
(1) there must have been a meeting of the minds of the parties to the
contact; (2) the instrument does not express the true intention of the
parties; and (3) the failure of the instrument to express the true
intention of the parties is due to mistake, fraud, inequitable conduct
or accident.
 All of these requisites, are present in this case. There was a meeting
of the minds between the parties to the contract but the deed did not
express the true intention of the parties due to mistake in the
designation of the lot subject of the deed. There is no dispute as to
the intention of the parties to sell the land to Alejandra Delfino but
there was a mistake as to the designation of the lot intended to be
sold as stated in the Settlement of Estate and Sale.

 While intentions involve a state of mind which may sometimes be

difficult to decipher, subsequent and contemporaneous acts of the
parties as well as the evidentiary facts as proved and admitted can
be reflective of one's intention. The totality of the evidence clearly
indicates that what was intended to be sold to Alejandra Delfino was
Lot 4163 and not Lot 5734. There are enough bases to support such
conclusion. The SC particularly note that one of the stipulated facts
during the pre-trial is that ½ of Lot 4163 is in the possession of
plaintiff Alejandra Delfino "since 1956 up to the present.” Now, why
would Alejandra occupy and possess one-half of said lot if it was
not the parcel of land which was the object of the sale to her?
 Besides, as found by the CA, if it were true that Silveria Flores was
the sole owner of Lot 4163, then she should have objected when
Alejandra Delfino took possession of ½ thereof immediately after
the sale. Additionally, the SC finds no cogent reason to depart from
the conclusion of both the CA and the trial court, based on the
evidence on record, that Silveria Flores owns only ½ of Lot 4163.
The other half belongs to her brother Jose, represented now by his
grandchildren successors-in-interest. As such, the latter could
rightfully sell the land to Alejandra Delfino.

 Furthermore, on record, it has been shown that a spot investigation

conducted by a duly licensed surveyor revealed that Lot 4163 is
subdivided into two portions, one belonging to Silveria Flores and
the other to the heirs of Jose Flores. As found by the trial court, if
indeed it was Lot 5734 that was sold, then Silveria Flores was
occupying more than her share of the inherited lot. As a matter of
fact, the trial court also found that in spite of her title over Lot 4163,
Silveria recognized the right of Jose's grandchildren over one-half
portion of the property.
 Emilio vs. Rapal [G.R. NO. 181855, March 30, 2010, (617 SCRA
199)]
 For an action for reformation of instrument to prosper, the following
requisites must concur: (1) there must have been a meeting of the
minds of the parties to the contract; (2) the instrument does not
express the true intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.

 Petitioner having admitted the existence and execution of the

instrument, what remains to be resolved is whether the contract
expressed the true intention of the parties; if not, whether it was due
to mistake, fraud, inequitable conduct or accident. The onus
probandi is upon the party who insists that the contract should be
reformed.

 Notarized documents, like the deed in question, enjoy the

presumption of regularity which can be overturned only by clear,
convincing and more than merely preponderant evidence. This
petitioner failed to discharge.
REFORMATION ANNULMENT

1. Where there has been a meeting 1. When there is no meeting of the

of the minds, but there is a minds, because of vitiated
mistake, fraud, inequitable consent;
conduct or accident in the
contract as written;

2. Does not invalidate the 2. Invalidates the contract.

contract.
“REFORMATION” vis-a-vis “ANNULMENT”.

Example:

If DIGONG is selling for P1M his house and lot but
VITALIANO thought he was buying for P100,000.00 and
the contract states the contract price at P1M, there has
been no meeting of the minds and the remedy is
ANNULMENT. But if both DIGONG and VITALIANO
agreed on P100,000.00, as contract price and the
contract states it is P1M, the remedy is REFORMATION
because there has been a meeting of the minds or
consent.
Prescriptive Period:

The action for reformation of the instrument

must be filed within TEN (10) years from the
execution of the contract.
INTERPRETATION OF CONTRACTS:

If the terms of a contract are clear and leave no

doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
former. (Art. 1370)

The interpretation of obscure words or

stipulations in a contract shall not favor the party who
caused the obscurity. (Art. 1377)
Contracts which are not ambiguous are to be interpreted
according to their literal meaning and should not be
interpreted beyond their obvious intendment. Thus,
where the intent of the parties has been shown
unmistakably with clarity by the language used, the
literal meaning shall control. Correspondingly,
stipulations in the mortgage document constitute the
law between the parties, which must be complied with
faithfully. (Mojica vs. Court of Appeals, G.R. No. 94247,
September 11, 1991)
 Abad vs. Goldloop Properties Inc. (G.R. No. 168108, April 13,
2007)
 In our jurisdiction, the rule is thoroughly discussed in Bautista v.
Court of Appeals:

 The rule is that where the language of a contract is plain and

unambiguous, its meaning should be determined without reference
to extrinsic facts or aids. The intention of the parties must be
gathered from that language, and from that language alone. Stated
differently, where the language of a written contract is clear and
unambiguous, the contract must be taken to mean that which, on its
face, it purports to mean, unless some good reason can be assigned
to show that the words should be understood in a different sense.
Courts cannot make for the parties better or more equitable
agreements than they themselves have been satisfied to make, or
rewrite contracts because they operate harshly or inequitably as to
one of the parties, or alter them for the benefit of one party and to the
detriment of the other, or by construction, relieve one of the parties
from the terms which he voluntarily consented to, or impose on him
those which he did not.
  Anent the 18% interest rate compounded annually, while it is true that
the contract provides for an interest at the current bank lending rate in
case of delay in payment by the Owner, and the promissory note
charged an interest of 18%, the said proviso does not authorize
plaintiffs to unilaterally raise the interest rate without the other party’s
consent. Unlike their request for price adjustment on the basic contract
price, plaintiffs never informed nor sought the approval of defendant for
the imposition of 18% interest on the adjusted price. To unilaterally
increase the interest rate of the adjusted price would be violative of the
principle of mutuality of contracts. Thus, the Court maintains the legal
rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the
recommendation of the TCGI Engineers as to the price adjustment
would be binding on the parties, it was established, however, that part
of the adjusted price demanded by plaintiffs was already disbursed as
early as 28 February 1992 by defendant bank to their suppliers and
laborers for their account.

 A perusal of the assailed decision shows that the CA made a

distinction between the consent given by the owner of the project
for the liability for the price adjustments, and the consent for the
imposition of the bank lending rate.
 Thus, while the CA held that petitioners consulted respondent for
price adjustment on the basic contract price, petitioners,
nonetheless, are not entitled to the imposition of 18% interest on
the adjusted price, as petitioners never informed or sought the
approval of respondent for such imposition.
ISSUE:

WHETHER OR NOT THE COURT OF

APPEALS ERRED IN REQUIRING
RESPONDENT TO GIVE ITS
CONSENT TO THE IMPOSITION OF
INTEREST BEFORE PETITIONERS
CAN HOLD RESPONDENT LIABLE
FOR INTEREST AT THE CURRENT
BANK LENDING RATE.
 RULING:

 The CA went beyond the intent of the parties by requiring respondent

to give its consent to the imposition of interest before petitioners can
hold respondent liable for interest at the current bank lending rate.
This is erroneous. A review of Section 2.6 of the Agreement and
Section 60.10 of the General Conditions shows that the consent of the
respondent is not needed for the imposition of interest at the current
bank lending rate, which occurs upon any delay in payment.
 When the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its
stipulations governs. In these cases, courts have no authority to alter
a contract by construction or to make a new contract for the parties.
The Court’s duty is confined to the interpretation of the contract which
the parties have made for themselves without regard to its wisdom or
folly as the court cannot supply material stipulations or read into the
contract words which it does not contain. It is only when the contract
is vague and ambiguous that courts are permitted to resort to
construction of its terms and determine the intention of the parties.
 The escalation clause must be read in conjunction with Section 2.5
of the Agreement and Section 60.10 of the General Conditions
which pertain to the time of payment. Once the parties agree on the
price adjustment after due consultation in compliance with the
provisions of the escalation clause, the agreement is in effect an
amendment to the original contract, and gives rise to the liability of
respondent to pay the adjusted costs. Under Section 60.10 of the
General Conditions, the respondent shall pay such liability to the
petitioner within 28 days from issuance of the interim certificate.
Upon respondent’s failure to pay within the time provided (28 days),
then it shall be liable to pay the stipulated interest.

 This is the logical interpretation of the agreement of the parties on

the imposition of interest. To provide a contrary interpretation, as
one requiring a separate consent for the imposition of the
stipulated interest, would render the intentions of the parties
nugatory.
 Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. Therefore, payment of
monetary interest is allowed only if:
 (1) there was an express stipulation for the payment of interest; and

 (2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of
monetary interest.

 In case of default, the consent of the respondent is not needed in

order to impose interest at the current bank lending rate.

 The written agreement entered into between petitioners and

respondent provides for an interest at the current bank lending rate
in case of delay in payment and the promissory note charged an
interest of 18%.
 To prove petitioners’ entitlement to the 18% bank lending rate of
interest, petitioners presented the promissory note prepared by
respondent bank itself. This promissory note, although declared
void by the lower courts because it did not express the real
intention of the parties, is substantial proof that the bank lending
rate at the time of default was 18% per annum. Absent any evidence
of fraud, undue influence or any vice of consent exercised by
petitioners against the respondent, the interest rate agreed upon is
binding on them.
 When it is absolutely impossible to settle doubts
by the rules established in the preceding articles, and
the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the
doubt shall be settled in favor of the greatest reciprocity
of interests.

If the doubts bare cast upon the principal object of

the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the
contract be null and void. (Art. 1378)

Doubt as to the Principal Object – contract is VOID

Ex. X promised to give Y this _______________. Since
the object is unknown, it is clear that there could not
have been a meeting of the minds.

If gratuitous, apply the rule of “least

transmission of rights and interests”

Ex. If A needs a pen, and B gives it to him freely, is this a

mere donation or a commodatum.
ANS. A mere commodatum (loan) for this would transmit
lesser rights than a donation.
If onerous, apply the rule of the “greatest
reciprocity of interests”

Ex. When what has been received for his house by a

person needing money is very much less than the value
of the house, the Courts will be inclined to interpret the
transaction more as an equitable mortgage, than as a
sale with right of repurchase, the reason being that in an
equitable mortgage there is in this case greater
reciprocity of interests, considering the amount of
money received.
 WHAT
IS
CONTRA PROFERENTEM DOCTRINE?
CONTRA PROFERENTEM DOCTRINE (AMBIGUITY
DOCTRINE)

Provides that in the interpretation of documents,

ambiguities are to be construed against the drafter. By
its very nature, the precept assumes the existence of an
ambiguity in the contract, which is why contra
proferentem is also called the ambiguity doctrine.
(Cahayag vs. Commercial Credit Corporation,
et. al. (G.R. Nos. 168078 & 168357, January 13, 2016)
What are the Four Kinds of
Defective Contracts?
Four Kinds of Defective Contracts:

1. Rescissible Contract;
 Is valid until rescinded; there is a sort of extrinsic defect consisting
of an economic damage or lesion.

2. Voidable Contract;
 Is valid until annulled. It can be annulled. It cannot be annulled
however if there has been a ratification. The defect is more or less
intrinsic, as in case of vitiated consent.

3. Unenforceable Contract;
 Cannot be sued upon or enforced, unless it is ratified. In a way, it
may be considered as a validable transaction, that is, it has no effect
now but it may be effective upon ratification.

4. Void Contract (which may be inexistent or illegal)

 Is one that has no effect at all; it cannot be ratified or validated.
RESCISSIBLE CONTRACT
RESCISSION – is a process designated to
render inefficacious a contract validly entered
into and normally binding by reason of external
conditions, causing an economic prejudice to a
party or to his creditors.
Rescission is a remedy granted by law to both
contracting parties and to the third persons in
order to secure reparation of damages caused
them by a contract, even if the contract be valid,
by means of the restoration of things to their
condition prior to the celebration of said
contract. (Manresa)
Requisites:

a. There must be at the beginning either a

valid or voidable contract;

b. But there is an economic or financial

prejudice to someone (a party or a third
person);

c. Requires mutual restitution.

Spouses Serrano vs. CA (G.R. No. 133883,
December 10, 2003)

Generally, the rule is that to rescind a contract is not

merely to terminate it, but to abrogate and undo it from
the beginning; that is, not merely to release the parties
from further obligations to each other in respect to the
subject of the contract, but to annul the contract and
restore the parties to the relative positions which they
would have occupied if no such contract had ever been
made. Rescission necessarily involves a repudiation of
the contract and a refusal of the moving party to be
further bound by it.
The following contracts are rescissible: (Art.
1381)
1. Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;

2. Those agreed upon in representation of absentees, if the latter

suffer the lesion;

3. Those undertaken in fraud of creditors when the latter cannot in any

other manner collect the claims due them;

4.Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;

5. All other contracts specially declared by law to be subject to

rescission.
 Ex. Art. 1098 (partition); Art. 1189 (result of deterioration), Arts. 1526
and 1534 (right given to unpaid seller) and Art. 1539 (sale of real
estate)
LESION

Injury suffered by one who does not received a

full equivalent for what he gives in a
commutative contract.
Requisites:

(1) The lesion suffered is more than 1/4 of the value of

the thing;

(2) The contract was entered into by a guardian or a

representative of an absentee;

(3) The contract was entered into on behalf of the

ward or the absentee involving the ward or absentee’s
property; and

(4) The contract does not require approval of the

court and / or there is no approval of the court.
Contract is to DEFRAUD Creditors:

The action to rescind the contract for being in

fraud of creditors is called ACCION PAULIANA.
ACCION PAULIANA
Requisites:

a.There must be a creditor who became such prior to the

contract sought to be rescinded;

b. There must be an alienation made subsequent to such

credit;

c. The party alienating must be in bad faith;

d.There must be no other remedy for the prejudiced

creditor – “inability to collect the claims due them”.
(Thus, rescission is merely a subsidiary remedy.)
Problem:

To defraud his creditor, A sold his house

to X. When however, the creditor wanted
to collect his credit, somebody lent A
enough money. Should the sale of the
house still be rescinded?
ANSWER:

No, it should not be rescinded, because

here the creditor can collect the claim due
him.
Example of contracts involving things under
litigation entered into by the defendant without
the knowledge and approval of litigants or of
competent judicial authority .

A sues B for recovery of a diamond ring.

Pendent elite, B sells the ring to C without the
approval of A or the Court. The sale to C is
rescissible at A’s instance in case A wins in the
original litigation, unless C is in good faith.
The 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. (Art.
1383) – NOT A PRINCIPAL
REMEDY.
PROBLEM:

ADRIEN obtains a loan from MANNY in the

amount of $1M. As a security for the payment of
the obligation, ADRIEN executed a real estate
mortgage involving his palatial house in Beverly
Hills, California, USA, with the condition that if
ADRIEN fails to pay, MANNY can foreclose the
mortgage. In case ADRIEN failed to pay the loan,
can MANNY rescind the contract? Why?
ANSWER:

NO, The action for rescission is subsidiary, it

cannot be instituted except when the party
suffering damage has no other legal means to
obtain reparation.
 Rescission creates the obligation to return the
things which were the object of the contract, together
with their fruits, and the price with its interest;
consequently, it can be carried out only when he who
demands rescission can return whatever he may obliged
to restore.
Neither shall rescission take place when the things
which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss. (Art. 1385)
Requisites Before the Action of Rescission can be
brought under Article 1385: MUTUAL RESTITUTION

 (a) Generally, the plaintiff must be able to RETURN

what has been received by virtue of the rescissible
contract; (Exception: prejudiced creditors);

(b) The thing-object of the contract is not in the legal

possession of 3rd persons in good faith; (Example:
of legal possession; registration in the Registry of
Property.);

(c) There must be no other legal remedy;

(d) The action must be brought within the proper

prescriptive period.
What should be returned in rescinding a
contract?

ANSWER:

(1) The object of the contract, with its fruits,

must be returned;

(2) The price, with its interest, must be

returned.
PROBLEM:

A sold to B a piece of land in fraud of

A’s creditors. B took legal
possession. If no other means are
found to exact the satisfaction of the
credits owing the creditors, may the
sale to B be rescinded?
ANSWER:

 It depends whether B was in

good faith or in bad faith.
PROBLEM:

To defraud his creditors, JUAN sold

to JOSE a piece of land. JOSE is an
innocent purchaser in good faith, who
takes legal possession of the land.
Since the creditors cannot rescind the
contract, what is their remedy?
ANSWER:

 Their remedy in this case would be

to demand indemnity for damages
from the person causing the loss.
PROBLEM:

To defraud his creditor, BBM sold his

property to SARA (who is in good faith).
Later SARA sold the property to BATO,
who is in bad faith. May the creditor
rescind, although the property is now in
the possession of BATO?
ANSWER:

 No, for it does not matter whether BATO

is in good faith or in bad faith. It is SARA’s
good faith that is important.
What is the Doctrine of
Anticipatory Fraud?
 PRESUMPTIONS OF FRAUD; (Art. 1387)

 (1) Gratuitous alienations

 When the debtor did not reserve sufficient property to pay all debts
contracted before the donation.
 Exception: Doctrine of Anticipatory Fraud – rescission may
still prosper if it can be shown that the donation had been
deliberately made beforehand to avoid the payment of debts still to
be contracted.

 (2) Onerous alienations
 Presumed fraudulent – when made by persons:
 a. Against whom some judgment has been rendered in any
instance (thus, even if not yet final judgment);
 b. Or against whom writ of attachment has been issued.
PROBLEM:

A brought an action against B, his debtor. A

won. After judgment, B sold his property to C. X,
another creditor of B, wants to rescind this sale
to C. Both C and B claim that X does not have
the right to interfere because after all, it was A,
not X, who had won a judgment against B. Are C
and B justified?
ANSWER:

 No, C and B are not justified. It is true

that it was A, not X who won the judgment,
but this is immaterial since the law says
that the decision need not have been
obtained by the party seeking the
rescission.
BADGES OF FRAUD
 The following are some circumstances attending sales which have
been denominated by courts as badges of fraud:

 1. Consideration of conveyance is fictitious or inadequate;

(disparity in the value and amount paid);

 2. Transfer made by the debtor after suit has begun and during its
pendency;

 3. Sale on credit by an insolvent debtor;

 4. Transfer of all or nearly all property by the debtor when he is

insolvent;

 5. Evidence of large indebtedness or complete insolvency;

 6. Transfer is made between parents and children;

 7. The failure of the vendee to take exclusive possession of all the

property.
Necessity of a Direct Action for
Rescission: Validity of a contract
cannot be attacked collaterally.
RULES ON SUBSEQUENT TRANSFERS:

1. If the first transferee is in good faith, the

good and bad faith of the next transferee is
not important;

2. If the first transferee is in bad faith, the

next transferee is liable only if he /she is also in
bad faith.
Prescriptive period of Rescission – 4 years from
the date the contract was entered into.

Exceptions:

a. Persons under guardianship – 4 years from

termination of incapacity;

b. Absentees – 4 years from the time domicile is

known.
 Movido vs. Pastor (G.R. No. 172279, February 11, 2010)

 FACTS:

 Pastor and Movido executed a kasunduan sa bilihan ng lupa where

the latter agreed to sell a parcel of land located in Paliparan,
Dasmarinas, Cavite. Another kasunduan was later executed
supplementing the kasunduan sa bilihan ng lupa. It provided that, if
a Napocor power line traversed the subject lot, the purchase price
would be lowered to P200/sq. m. beyond the distance of 15 meters
on both sides from the center of the power line while the portion
within a distance of 15 meters on both sides from the center of the
power line would not be paid. Respondent likewise claimed that
petitioner undertook to cause the survey of the property in order to
determine the portion affected by the Napocor power line.
 Lastly, respondent alleged that he already paid petitioner P5 million
out of the original purchase price of P8.4 million stated in the
kasunduan sa bilihan ng lupa. He was willing and ready to pay the
balance of the purchase price but due to petitioner's refusal to have
the property surveyed despite incessant demands, his unpaid
balance could not be determined with certainty.

In his answer, petitioner alleged that the original negotiation for the
sale of his property involved the entire area of 22,731 sq. m. However,
as respondent was not sure whether a Napocor power line traversed
the property, they then executed the kasunduan. After respondent
personally inspected the property, a final agreement--the kasunduan
sa bilihan ng lupa--was executed where the area to be sold was
21,000 sq. m. for P400/sq. m. for a total sum of P8.4 million. The final
agreement also listed a schedule of payments of the purchase price
and included a penalty clause in case of default.

Petitioner also charged respondent with delay in paying several

installments due and did not pay the 7th installment in the amount of
P1 million. This was allegedly a material breach because they agreed
that the survey of the property would only be done after respondent
would have paid the 7th installment.
 Due to respondent's failure to fulfill his obligations, petitioner
claimed that he had no choice except to rescind the kasunduan sa
bilihan ng lupa. He, however, was willing to reimburse 50% of
whatever respondent had paid him so far.
ISSUE:

WHETHER OR NOT THERE IS A

VALID GROUND FOR RESCISSION OF
CONTRACT.
 RULING:

 Rescission is only allowed when the breach is so substantial and

fundamental as to defeat the object of the parties in entering into the
contract. We find no such substantial or material breach.

It is true that respondent failed to pay the 7 th and 8th installments of

the purchase price. However, considering the circumstances of the
instant case, particularly the provisions of the kasunduan,
respondent cannot be deemed to have committed a serious breach.
In the first place, respondent was not in default as petitioner never
made a demand for payment.

Moreover, the kasunduan sa bilihan ng lupa and the kasunduan

should both be given effect rather than be declared conflicting, if
there is a way of reconciling them. Petitioner and respondent would
not have entered into either of the agreements if they did not intend
to be bound or governed by them. Indeed, taken together, the two
agreements actually constitute a single contract pertaining to the
sale of a land to respondent by petitioner.
 Their stipulations must therefore be interpreted together, attributing
to the doubtful ones that sense that may result from all of them taken
jointly. Their proper construction must be one that gives effect to all.

In this connection, the kasunduan sa bilihan ng lupa contains the

general terms and conditions of the agreement of the parties. On the
other hand, the kasunduan refers to a particular or specific matter,
i.e., that portion of the land that is traversed by a Napocor power line.
As the kasunduan pertains to a special area of the agreement, it
constitutes an exception to the general provisions of the kasunduan
sa bilihan ng lupa, particularly on the purchase price for thatportion.

Under both the kasunduan sa bilihan ng lupa and the kasunduan,

petitioner undertook to cause the survey of the property in order to
determine the portion excluded from the sale, as well as the portion
traversed by the Napocor power line. Despite repeated demands by
respondent, however, petitioner failed to perform his obligation.
Thus, considering that there was a breach on the part of petitioner
(and no material breach on the part of respondent), he cannot
properly invoke his right to rescind the contract.
 Spouses Carmen S. Tongson & Jose C. Tongson
Substituted by his children namely: Jose Tongson, Jr.,
Raul Tongson, Tita Tongson, Gloria Tongson, Alma
Tongson vs. Emergency Pawnshop Bula, Inc. & Danilo R.
Napala. (G.R. No. 167874, January 15, 2010).
 FACTS:
 In May 1992, Napala offered to purchase from the Spouses Tongson
their 364-square meter parcel of land, situated in Davao City and
covered by Transfer Certificate of Title (TCT) No. 143020, for
P3,000,000. Finding the offer acceptable, the Spouses Tongson
executed with Napala a Memorandum of Agreement dated 8 May
1992.

On 2 December 1992, respondents' lawyer Atty. Petronilo A.

Raganas, Jr. prepared a Deed of Absolute Sale indicating the
consideration as only P400,000. When Carmen Tongson "noticed
that the consideration was very low, she [complained] and called the
attention of Napala but the latter told her not to worry as he would
be the one to pay for the taxes and she would receive the net
amount of P3,000,000.”
 To conform with the consideration stated in the Deed of Absolute
Sale, the parties executed another Memorandum of Agreement,
which allegedly replaced the first Memorandum of Agreement,
showing that the selling price of the land was only P400,000.

Upon signing the Deed of Absolute Sale, Napala paid P200,000 in

cash to the Spouses Tongson and issued a postdated Philippine
National Bank (PNB) check in the amount of P2,800,000,
representing the remaining balance of the purchase price of the
subject property. Thereafter, TCT No. 143020 was cancelled and TCT
No. T-186128 was issued in the name of EPBI.

When presented for payment, the PNB check was dishonored for the
reason "Drawn Against Insufficient Funds." Despite the Spouses
Tongson's repeated demands to either pay the full value of the
check or to return the subject parcel of land, Napala failed to do
either. Left with no other recourse, the Spouses Tongson filed with
the Regional Trial Court, Branch 16, Davao City a Complaint for
Annulment of Contract and Damages with a Prayer for the Issuance
of a Temporary Restraining Order and a Writ of Preliminary
Injunction.
 In their Answer, respondents countered that Napala had already
delivered to the Spouses Tongson the amount of P2,800,000
representing the face value of the PNB check, as evidenced by a
receipt issued by the Spouses Tongson. Respondents pointed out
that the Spouses Tongson never returned the PNB check claiming
that it was misplaced. Respondents asserted that the payment they
made rendered the filing of the complaint baseless.
ISSUE:

WHETHER OR NOT THE

CONTRACT IS RESCISSIBLE.
 RULING:

 A contract is a meeting of the minds between two persons, whereby

one is bound to give something or to render some service to the
other. A valid contract requires the concurrence of the following
essential elements: (1) consent or meeting of the minds, that is,
consent to transfer ownership in exchange for the price; (2)
determinate subject matter; and (3) price certain in money or its
equivalent.

In the present case, there is no question that the subject matter of

the sale is the 364-square meter Davao lot owned by the Spouses
Tongson and the selling price agreed upon by the parties is
P3,000,000. Thus, there is no dispute as regards the presence of the
two requisites for a valid sales contract, namely, (1) a determinate
subject matter and (2) a price certain in money.
 The problem lies with the existence of the remaining element, which
is consent of the contracting parties, specifically, the consent of the
Spouses Tongson to sell the property to Napala. Claiming that their
consent was vitiated, the Spouses Tongson point out that Napala's
fraudulent representations of sufficient funds to pay for the property
induced them into signing the contract of sale. Such fraud,
according to the Spouses Tongson, renders the contract of sale
void.

On the contrary, Napala insists that the Spouses Tongson willingly

consented to the sale of the subject property making the contract of
sale valid. Napala maintains that no fraud attended the execution of
the sales contract.
 Under Article 1338 of the Civil Code, 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. In order that fraud may vitiate consent, it
must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract. Additionally,
the fraud must be serious.

The SC finds no causal fraud in this case to justify the annulment of

the contract of sale between the parties. It is clear from the records
that the Spouses Tongson agreed to sell their 364-square meter
Davao property to Napala who offered to pay P3,000,000 as
purchase price therefor. Contrary to the Spouses Tongson's belief
that the fraud employed by Napala was "already operational at the
time of the perfection of the contract of sale," the misrepresentation
by Napala that the postdated PNB check would not bounce on its
maturity hardly equates to dolo causante. Napala's assurance that
the check he issued was fully funded was not the principal
inducement for the Spouses Tongson to sign the Deed of Absolute
Sale. Even before Napala issued the check, the parties had already
consented and agreed to the sale transaction.
 The Spouses Tongson were never tricked into selling their property
to Napala. On the contrary, they willingly accepted Napala's offer to
purchase the property at P3,000,000. In short, there was a meeting
of the minds as to the object of the sale as well as the consideration
therefor.

However, while no causal fraud attended the execution of the sales

contract, there is fraud in its general sense, which involves a false
representation of a fact, when Napala inveigled the Spouses
Tongson to accept the postdated PNB check on the representation
that the check would be sufficiently funded at its maturity. In other
words, the fraud surfaced when Napala issued the worthless check
to the Spouses Tongson, which is definitely not during the
negotiation and perfection stages of the sale. Rather, the fraud
existed in the consummation stage of the sale when the parties are
in the process of performing their respective obligations under the
perfected contract of sale.
 Indisputably, the Spouses Tongson as sellers had already performed their
obligation of executing the Deed of Sale, which led to the cancellation of
their title in favor of EPBI. Respondents as buyers, on the other hand, failed
to perform their correlative obligation of paying the full amount of the
contract price. While Napala paid P200,000 cash to Spouses Tongson as
partial payment, Napala issued an insufficiently funded PNB check to pay
the remaining balance of P2.8 million. Despite repeated demands and the
filing of the complaint, Napala failed to pay the P2.8 million until the present.
Clearly, respondents committed a substantial breach of their reciprocal
obligation, entitling the Spouses Tongson to the rescission of the sales
contract. The law grants this relief to the aggrieved party, thus:

Article 1191 of the Civil Code provides:

“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 payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.”
 Article 1385 of the Civil Code provides the effects of rescission, viz:

“ART. 1385. Rescission creates the obligation to return the

things which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return
whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.
While they did not file an action for the rescission of the sales
contract, the Spouses Tongson specifically prayed in their
complaint for the annulment of the sales contract, for the immediate
execution of a deed of reconveyance, and for the return of the
subject property to them. The Spouses Tongson likewise prayed
"for such other reliefs which may be deemed just and equitable in
the premises." In view of such prayer, and considering respondents'
substantial breach of their obligation under the sales contract, the
rescission of the sales contract is but proper and justified.
 Accordingly, respondents must reconvey the subject property to the
Spouses Tongson, who in turn shall refund the initial payment of
P200,000 less the costs of suit.

Napala's claims that rescission is not proper and that he should be

given more time to pay for the unpaid remaining balance of
P2,800,000 cannot be countenanced. Having acted fraudulently in
performing his obligation, Napala is not entitled to more time to pay
the remaining balance of P2,800,000, and thereby erase the default
or breach that he had deliberately incurred. To do otherwise would
be to sanction a deliberate and reiterated infringement of the
contractual obligations incurred by Napala, an attitude repugnant to
the stability and obligatory force of contracts.
RESCISSION under Arts. 1380- RESCISSION (RESOLUTION)
1389 under Art. 1191

1) Predicated on economic injury or 1) On breach of obligations;

lesion;

2) Subsidiary action. 2) A principal one, retaliatory in

character.
VOIDABLE CONTRACTS
What are the Grounds for
ANNULMENT of Contracts?
Grounds for ANNULMENT:

1. Incapacity to consent

2. Vitiated consent

Consent, as an element of contracts, must be
intelligent and free. If either attribute is impeded or
impaired, then consent is said to be vitiated and the
contract VOIDABLE.

FACTORS that impair intelligence:

(1) Minority (Art. 1327, par. 1);

(2) Insanity, deaf-mutism coupled with illiteracy,

intoxication, and hypnotic spell (Arts. 1327 par. 2 and
1328);

(3) Mistake (Arts. 1331 and 1334)

To vitiate consent, the MISTAKE or ERROR must
relate to:

(a) The substance of the thing;

(b) The principal conditions of the contract;

(c) The identity or qualifications of one of the parties

when such constituted the principal cause of the
contract; or

(d) The legal effect of the agreement, if the error is

mutual and results in the frustration of the parties’
purpose.
FRAUD, as a vitiating factor of consent, is equivalent to
and synonymous with DECEIT and is not to be
confused with Fraud under Art. 1170, which consists in
the deliberate and intentional evasion of the normal
fulfillment of obligation. That other fraud is synonymous
with malice or bad faith. Moreover, fraud as deceit is
antecedent to or at least simultaneous with the birth of
the contract and for that reason vitiates consent, which
must exist when the contract is entered into. On the
other hand, fraud as malice occurs subsequent to the
constitution of the obligation and results, not in the
annulment of the obligation but in liability for damages.
FRAUD as deceit, in order to vitiate consent, must be
SERIOUS (Dolo Causante). Dolo Causante vitiates
consent; Dolo Incidente only gives rise to liability for
damages.

 Requisites of Dolo Causante:

 (1) It must be serious;

 (2) It must have been employed by one party upon the other;

 (3) It must have had the effect of inducing one of the parties to
enter into the contract;

 (4) It must have resulted in damage or injury.

 Nilo R. Jumalon vs. Court of Appeals, Hon. Ruben D.
Torres, in his capacity as Executive Secretary, HLURB,
and Ma. Asuncion de Leon (G.R. No. 127767, January 30, 2002)
 FACTS:

 On 16 July 1991, De Leon and Jumalon, executed a Conditional

Sales Agreement whereby the former purchased from the latter a
house and lot located at Block 20, Lot 24-A, Bathaluman St., Doña
Amada Subdivision, Rosario, Pasig, consisting of 102 square
meters at a price of P500,000.00. On 24 July 1991, Jumalon
executed in favor of De Leon a Deed of Absolute Sale. Title was
transferred to De Leon on 29 July 1991.

 Of the P500,000.00 total purchase price, P135,000.00 was paid in

cash by De Leon on different occasions. Vendee De Leon likewise
obtained a loan in the amount of P280,000.00 using the house and
lot as collateral from Majalco Finance and Investments Inc. (or
Majalco). Majalco’s rights and interest in the loan and its collateral
was subsequently assigned and transferred to the National Home
Mortgage Finance Corporation (NHMFC).
 De Leon learned from neighboring residents that the presence of
high-tension wires generate tremendous static electricity and
produce electric sparks whenever it rains. Such that on 13 March
1992, De Leon made an inquiry with MERALCO regarding the
danger posed by the wires over the property. In a letter dated 3 April
1992, MERALCO informed De Leon that the high-tension electrical
wires:

 "x x x was erected sometime in 1930 and a 30-meter wide right-of-way

was secured from the landowner at that time, the document of right-of-
way granted having been burned or destroyed during the World War II."

 "In this connection, please be informed that the building of any

structures underneath the high tension wires is prohibited because the
line carries 115,000 volts which is hazardous to life and property."
 Through inquiries to the HLURB Enforcement Center, De Leon was
informed that construction of houses and buildings of whatever
nature is strictly prohibited within the right-of-way of the
transmission line; that HLURB requires subdivision
owners/developers to first secure clearance from the National
Power Corporation (NPC) before their application for a subdivision
project within MERALCO’s right-of-way easement can be acted
upon; that Jumalon’s subdivision project is not, per HLURB record,
registered with the Board; and, that Jumalon never applied for
development permit project, nor secured subdivision plan
approved.

 Consequently, sometime in November 1992, De Leon filed a case

for declaration of nullity or annulment of sale of real property
before the RTC which was subsequently dismissed on 18 August
1993. Within the same period or on 16 March 1993, De Leon filed a
complaint before the HLURB seeking the rescission of the
Conditional Sales Agreement and the Absolute Deed of Sale.
 The complaint alleged that vendor Jumalon with fraud and evident
bad faith misrepresented: a) that the property is free from all liens
and encumbrances when the same lies within the 30-meter right-of-
way of the Manila Electric Company (Meralco); b) that the existence
of the high-tension wires posed no serious risks on the property
and/or its occupants when Meralco itself certified the same is
hazardous to life and property; and, c) that Jumalon had the
necessary license to sell from the HLURB when in fact he had none.

 The HLURB Arbiter rendered decision in favor of de Leon which

was affirmed by the Board of Commissioners of the HLURB and the
Office of the President likewise affirmed the decision. The case was
elevated before the CA which likewise affirmed the decision.
ISSUE:

WHETHER OR NOT THERE IS FRAUD

IN THE EXECUTION OF THE
CONTRACT.
RULING:

de Leon was entitled to annul the sale. There was fraud
in the sale of the subject house. It is not safely
habitable. It is built in a subdivision area where there is
an existing 30-meter right of way of the Manila Electric
Company (Meralco) with high-tension wires over the
property, posing a danger to life and property. The
construction of houses underneath the high tension
wires is prohibited as hazardous to life and property
because the line carries 115,000 volts of electricity,
generates tremendous static electricity and produces
electric sparks whenever it rained.
 Isabel Rubio Alcasid, assisted by her husband Domingo
A. Alcasid vs. The Hon. Court of Appeals & Rufina L. Lim
(G.R. No. 104751, October 7, 1994)

 FACTS:

 Petitioner is one of the co-owners of two parcels of land located in

Calamba, Laguna. Private respondent offered to purchase from
petitioner and her co-owners the abovementioned property.
Petitioner was willing to sell her share for P4,500,000.00 and only if
all her co-owners would sell their respective shares of the said
land.

 Petitioner engaged the services of Atty. Antonio A. Fernandez for

the purpose of negotiating the sale, without knowing (allegedly)
that he was also representing private respondent.

 In March 1990, Atty. Fernandez confirmed to petitioner that all her

co-owners were already amenable to sell their shares for
P1,500,000.00.
 On March 4, 1990, petitioner signed a Deed of Sale drafted by
Atty. Fernandez. Subsequently, petitioner learned that the other co-
owners did not agree to sell their shares over the subject property.
 On November 4, 1990, petitioner filed a complaint in the Regional
Trial Court, Branch 34, Calamba, Laguna, for annulment of the
contract of sale and damages with a prayer for temporary
restraining order or writ of preliminary injunction against private
respondent.

 Private respondent filed a motion to dismiss on the grounds that

the complaint stated no cause of action. The trial court denied the
motion to dismiss.

 On August 20, 1991, a motion to declare private respondent in

default was filed by petitioner. This was granted by the trial court.

 Private respondent appealed the said orders of the trial court to the
Court of Appeals, which reversed the decision of the trial court and
held that the complaint stated no cause of action.
ISSUE:

WHETHER OR NOT THERE IS

FRAUD, MISTAKE AND UNDUE
INFLUENCE IN THE EXECUTION OF
CONTRACT.
 RULING:

 Petitioner alleges that her complaint for annulment of contract is

based upon fraud, mistake and undue influence which vitiated her
consent. According to her, were it not for the misrepresentation of
private respondent and Atty. Fernandez that her co-owners had
agreed to sell their share to private respondent, petitioner would
not have agreed to sell her share.

 Private respondent, on the other hand, claims the complaint is in

the nature of malpractice suit against Atty. Fernandez and not
against her.

 Petitioner contends that she was not aware that Atty. Fernandez
was also representing private respondent, but a letter dated March
4, 1990 sent by Atty. Fernandez to the petitioner belied her
allegation.
 On the matter of fraud, Article 1338 of the Civil Code of the
Philippines provides:
 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 (Art. 1338, Civil
Code).

 In order that fraud may vitiate consent and be a cause for

annulment of contract, the following must concur:
 1.) It must have been employed by one contracting party upon the other
(Art. 1342 and 1344);

 2.) It must have induced the other party to enter into the contract (Art.
1338);

 3.) It must have been serious (Art. 1344);

 4.) It must have resulted in damage and injury to the party seeking
annulment .
 As to the alleged mistake, Article 1331 of the Civil Code of the
Philippines provides:

 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.

 To invalidate consent, the error must be real and not one that could
have been avoided by the party alleging it. The error must arise
from facts unknown to him. He cannot allege an error which refers
to a fact known to him or which he should have known by ordinary
diligent examination of the facts. An error so patent and obvious
that nobody could have made it, or one which could have been
avoided by ordinary prudence, cannot be invoked by the one who
made it in order to annul his contract.

 Petitioner could have avoided the alleged mistake had she exerted
efforts to verify from her co-owners if they really consented to sell
their respective shares.
 As to undue influence, Article 1337 of the Civil Code of the
Philippines provides:

 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, therefore, is any means employed upon a party

which, under the circumstances, he could not well resist and which
controlled his volition and induced him to give his consent to the
contract, which otherwise he would not have entered into. It must in
some measure destroy the free agency of a party and interfere with
the exercise of that independent discretion which is necessary for
determining the advantages or disadvantages of a proposed
contract. If a competent person has once assented to a contract
freely and fairly, he is bound thereby.
 The finding of the Court of Appeals that petitioner executed the
contract of her own free will and choice and not from duress is fully
supported by the evidence. Such finding should not be disturbed
(Martinez v. Hongkong & Shanghai Bank, 15 Phil. 252 [1910]).

 Private respondent did not commit any wrongful act or omission

which violated the primary right of petitioner. Hence, petitioner did
not have a cause of action.
Factors that impair freedom of consent:

(1) Violence;

(2) Intimidation;

(3) Undue Influence (Duress)

ELEMENTS OF VIOLENCE as a vitiating
factor:

(a) It must be irresistible or serious force;

(b) It must be causal or it must be the

operative cause of the giving of consent.
 ELEMENTS of INTIMIDATION:

 (a) Must be the determining cause of the contract, or must have

caused the consent to be given;

 (b) The threatened act must be unjust or unlawful;

 (c) The threat be real and serious, there being an evident

disproportion between the evil and the resistance which all men
can offer, leading to the choice of the contract of lesser evil;
and

 (d) It produces a reasonable and well-grounded fear from the

fact that the person from whom it comes has the necessary
means or ability to inflict the threatened injury.
WHAT IS REVERENTIAL FEAR?
REVERENTIAL FEAR

If a contract is signed merely because of “fear

of displeasing persons to whom obedience and
respect are due,” the contract is still VALID, for
by itself reverential fear is not wrong.
UNDUE INFLUENCE

Is any means employed upon a party which, under the

circumstances, he could not well resist and which
controlled his volition and induced him to give his
consent to the contract, which otherwise he would not
have entered into. It must in some measure destroy the
free agency of a party and interfere with the exercise of
that independent discretion which is necessary for
determining the advantages or disadvantages of a
proposed contract.
 On March 10, 1987, respondent filed with the RTC of Manila, Branch
21, a complaint for annulment of the Deed of Absolute Sale. He
averred that his brother Miguel, Atty. Balguma and Inocencio Valdez
convinced him to work abroad. They even brought him to the NBI
and other government offices for the purpose of securing
clearances and other documents which later turned out to be
falsified. Through insidious words and machinations, they made him
sign a document purportedly a contract of employment, which
document turned out to be a Deed of Absolute Sale. By virtue of the
said sale, brothers Edgardo and Leopoldo, Jr., were able to register
the title to the property in their names. Respondent further alleged
that he did not receive the consideration stated in the contract. He
was shocked when his sister Agueda Katipunan-Savellano told him
that the Balguma brothers sent a letter to the lessees of the
apartment informing them that they are the new owners. Finally, he
claimed that petitioners, with evident bad faith, conspired with one
another in taking advantage of his ignorance, he being only a third
grader.
 In their answer, petitioners denied the allegations in the complaint,
alleging that respondent was aware of the contents of the Deed of
Absolute Sale and that he received the consideration involved; that
he also knew that the Balguma brothers have been collecting the
rentals since December, 1985 but that he has not objected or
confronted them; and that he filed the complaint because his sister,
Agueda Savellano, urged him to do so.

 Twice respondent moved to dismiss his complaint (which were

granted) on the grounds that he was actually instigated by his sister
to file the same; and that the parties have reached an amicable
settlement after Atty. Balguma, Sr. paid him P2,500.00 as full
satisfaction of his claim. In granting his motions for reconsideration,
the trial court was convinced that respondent did not sign the
motions to dismiss voluntarily because of his poor comprehension,
as shown by the medical report of Dr. Annette Revilla, a Resident
Psychiatrist at the Philippine General Hospital. Besides, the trial
court noted that respondent was not assisted by counsel in signing
the said motions, thus it is possible that he did not understand the
consequences of his action.
 The trial court dismissed the complaint, holding that respondent
failed to prove his causes of action since he admitted that: (1) he
obtained loans from the Balgumas; (2) he signed the Deed of
Absolute Sale; and (3) he acknowledged selling the property and
that he stopped collecting the rentals. When appealed before the CA
the decision was reversed and aside.
ISSUE:

WHETHER OR NOT THE CONTRACT

IS VOIDABLE.
 RULING:

 A contract of sale is born from the moment there is a meeting of

minds upon the thing which is the object of the contract and upon
the price. This meeting of the minds speaks of the intent of the
parties in entering into the contract respecting the subject matter
and the consideration thereof. Thus, the elements of a contract of
sale are consent, object, and price in money or its equivalent. Under
Article 1330 of the Civil Code, consent may be vitiated by any of the
following: (a) mistake, (2) violence, (3) intimidation, (4) undue
influence, and (5) fraud. The presence of any of these vices renders
the contract voidable.

 The circumstances surrounding the execution of the contract

manifest a vitiated consent on the part of respondent. Undue
influence was exerted upon him by his brother Miguel and Inocencio
Valdez and Atty. Balguma. It was his brother Miguel who negotiated
with Atty. Balguma. However, they did not explain to him the nature
and contents of the document. Worse, they deprived him of a
reasonable freedom of choice.
 It bears stressing that he reached only grade three. Thus, it was
impossible for him to understand the contents of the contract
written in English and embellished in legal jargon. Even the trial
court, in reinstating the case which it earlier dismissed, took
cognizance of the medical finding of Dr. Revilla (presented by
respondent’s counsel as expert witness) who testified during the
hearing of respondent’s motion for reconsideration of the first order
dismissing the complaint. According to her, based on the tests she
conducted, she found that respondent has a very low IQ and a mind
of a six-year old child. In fact, the trial court had to clarify certain
matters because Braulio was either confused, forgetful or could not
comprehend. Thus, his lack of education, coupled with his mental
affliction, placed him not only at a hopelessly disadvantageous
position vis-à-vis petitioners to enter into a contract, but virtually
rendered him incapable of giving rational consent. To be sure, his
ignorance and weakness made him most vulnerable to the deceitful
cajoling and intimidation of petitioners. The trial court obviously
erred when it disregarded Dr. Revilla’s testimony without any reason
at all. It must be emphasized that petitioners did not rebut her
testimony.
 In the case of Archipelago Management and Marketing Corp. vs.
Court of Appeals,penned by Justice Artemio V. Panganiban, this
Court sustained the decision of the Court of Appeals annulling the
deed of sale subject thereof. In that case, Rosalina (the owner) was
convinced by her second husband to sign several documents,
purportedly an application for the reconstitution of her burned
certificate of title. However, said documents turned out to be a Deed
of Absolute Sale where it was stipulated that she sold her property
for P 1,200,000.00, a consideration which she did not receive. The
Court ruled that Rosalina, who was quite old at that time she signed
the deed, was tricked by her own husband, who employed fraud and
deceit, into believing that what she was signing was her application
for reconstitution of title.
RESCISSION ANNULMENT (VOIDABLE)

a. The basis here is lesion (damage) a.The basis here is vitiated consent or
or breach (Art. 1191); incapacity to consent;

b. The defect here is external or b. The defect here is intrinsic (in the
intrinsic; meeting of the minds)

c. The action is subsidiary and may c. The action is principal;

also be principal;

d. This is a remedy; d. This is a sanction;

e. Private interest governs; e. Public interest governs;

f. Equity predominates; f. Law predominates;

RESCISSION ANNULMENT (VOIDABLE)

g. Plaintiff may be a party or a third g. Plaintiff must be a party to the

person; contract (whether bound principally or
subsidiary)

h. There must be damage to the h. Damage to the plaintiff is

plaintiff; immaterial;

i. If plaintiff is indemnified, rescission i. Indemnity here is no bar to the

cannot prosper; prosecution of the action;

j. Compatible with the perfect validity j. Here, a defect is pre-supposed;

of the contract;

k. To prevent rescission, ratification is k. To prevent annulment ratification is

not required. required.
PRESCRIPTION: 4 years from,

a. In cases of intimidation, violence or undue

influence from the time the defect of the consent
ceases;

b. In case of mistake or fraud from the time of

discovery;

c. In action refers to contracts entered into by minors

or other incapacitated persons from the time the
guardianship ceases.
 When period
Commences or
DEFECT PERIOD
when it starts
to run

Consent vitiated From the time

by intimidation, intimidation,
VOIDABLE 4 Years
violence, or undue violence, or undue
influence. influence ceases.

From the
Consent vitiated
VOIDABLE 4 Years discovery of
by fraud
fraud.

From the time

guardianship of
Incapacity due to
the minor and
VOIDABLE minority and other 4 Years
other
grounds
incapacitated
ceases.
VOIDABLE CONTRACTS can be RATIFIED

 Requisites of Ratification:

 a. The contract must be a voidable one;

 b. The person ratifying must know the reason for the contract
being voidable;

 c. The cause must not exist or continue to exist anymore at the

time of ratification;

 d. The ratification must have been made expressly or by an act

implying a waiver of the action to annul;

 e. The person ratifying must be the injured party.

Effects of Ratification:

(a) The action to annul is extinguished thus,

the contract becomes a completely valid one;

(b) The contract is cleansed of its defect from

the beginning.
Kinds of Ratification: (Art. 1393)

(a) Express (oral or written);

(b) Tacit (implied – as from conduct implying a

waiver)
If with knowledge of the reason which renders the
contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an
act which necessarily implies an intention to waive his
right.
The victim (principal or subsidiary party) may ask for
annulment, not the guilty person or his successor.
Reason: He who comes to equity must come with clean
hands.

Example:
A minor contracted with X. X’s heir Y sues for annulment
on the ground that the other party was a minor.

HELD:
Annulment cannot prosper, for just as X has no right to
sue, being a capacitated party, so also Y, who merely
derives any right he has from his predecessor in interest
X.
Effects of Annulment:

(1) If the contract has not yet been complied with, the
parties are excused from their obligations;

(2) If the contract has already been performed, there

must be mutual restitution (in general) of;
2.1. The thing with fruits;
2.2. The price, with interest.

In the duty of mutual restitution, the value of the thing

with interest substitutes for the thing itself that was lost
thru the party’s fault.
Whenever the person obliged by the decree of
annulment to return the thing can not do so
because it has been lost through his fault, he
shall return the fruits received and the value of
the thing at the time of the loss, with interest
from the same date. (Art. 1400)
 POINTS TO BEAR IN MIND REGARDING VOIDABLE
CONTRACTS:

 (1) They are binding unless and until set aside;

 (2) They may be assailed only by a proper action in court

brought within the specified prescriptive period;

 (3) They are capable of confirmation or ratification;

 (4) The action for annulment can be maintained ONLY by or in

behalf of the incapacitated party, never by any other party;

 (5) Like in Rescission, the general rule in annulment of voidable

contracts is mutual restitution.
UNENFORCEABLE CONTRACTS
What are the Three (3) Kinds
of Unenforceable Contracts?
Kinds of Unenforceable Contracts:

1. Unauthorized contracts;

2. Those that fail to comply with the Statutes

of Frauds;

3. Those where both parties are incapable of

giving consent to a contract.
 (1) Unauthorized Contracts;

Those entered into in the name of another person by one

who has been given authority or legal representation, or
who has acted beyond his powers.
Without ratification the agents assumes personal
liability.

Example:
Without my authority, my brother sold my car, in my
name to X. The contract is unauthorized and cannot
affect me unless I ratify the same expressly or implicitly,
as by accepting the proceeds of the sale.
 (2) Those that fail to comply with the
Statutes of Frauds;

 The term Statute of Frauds is descriptive of those laws, statutes, or

provisions which require certain agreements to be in writing before
they can be enforced in a judicial action. The law considers the
memory of man unreliable, hence, the need for the writing. The
statute was designed to prevent fraud and the commission of
perjury.

 The Statute of Frauds applies only to executory contracts

(contracts where no performance has yet been made) and not
partially or completely executed (consummated).;

 The Statute of Frauds is a personal defense, that is a contract

infringing it cannot be assailed by third persons;
A public instrument or one that is notarized is
not required. It may be in any form so long as it
is in writing and subscribed by the person
charged or his agent. Exchange of
correspondence may even be sufficient.
However, if a public instrument is required for
registration, an action to compel the execution of
the public instrument may be filed.
 Take Note!

 Contracts that are within Statutes of Frauds:

(1) Agreements that is not to be performed within a

year;

(2) Special promise to answer for the debt, default or

miscarriage of another;

(3) Agreement in consideration of marriage;

(4) Sales of Goods the price is not less than P500.00;

(5) Lease for more than one year;

(6) Sale of Real property or an interest therein;

(7) Representation as to credit of 3rd person.

The Statute of Frauds cannot apply if
the action IS NEITHER for damages
because of the (a) violation of an
agreement nor (b) for the specific
performance of said agreement.
(a) An agreement that by its terms
is not to be performed within a
year from the making thereof;
Example:

 A and B are neighbors, orally agreed that A would sell

and B would buy A’s radio for P200, three years from the
date of the agreement. At the end of 3 years, A refused to
hand over the radio although B was willing to pay. Is the
agreement enforceable under the Statute of Frauds?

ANSWER:

NO, because under the terms of the contract, the sale

was to be performed at the end of 3 years. It should have
been therefore made in writing. The Statute recognizes
the frailty of man’s memory, and apparently only 1 year is
the limit.
(b) A special promise to answer for
the debt, default, or
miscarriage of another;
Example.

A borrowed from B, with C as a guarantor.

The contract of guaranty between B, the
creditor, C, the guarantor must be in
writing to be enforceable.
(c) An agreement made in
consideration of marriage other
than a mutual promise to marry.
Example.

Agreements made in consideration of marriage;

(1) marriage settlements; (No longer included in view of

FC Art. 77)

(2) donations propter nuptias.

(d) An agreement for the sale of goods, chattels, or
things in action at a price not less than P500 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 the 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;
Example.

A sold B his car for P4,000 orally. Contract was

still executory. This is unenforceable unless B
gets the car or pays fully or partially for the
price.
(e) An agreement for the leasing
for a longer period than one
year, or for the sale of real
property or of an interest
therein;
Two kinds of agreements;

(1) lease of real property for more than 1 year (not of

personal property); and

(2) sale of real property (regardless of price).

Example.

A is B’s tenant. Lease is for 6 months. If oral, lease is still

enforceable for the period does not exceed 1 year. If
exactly 1 year the contract may be oral.
Not Included:

(a) An agreement to give another person a right of way

to the land. (Western Mindanao Lumber Co., Inc.
vs. Medalle, G.R. No. L-23213, October 28, 1977);

(b) An agreement allowing the right of repurchase of a

parcel of land if there is a written deed of sale; the
deed of sale and the verbal agreement allowing the
right of repurchase are considered integral parts of
the whole.(Mactan Cebu International Airport
Authority vs. Court of Appeals, 263 SCRA 736 [1996])

(c) Partition of real estate since this is not a sale nor

lease of property; it is merely a division of property.
(Gaglucot-aw vs. Maglucon, G.R. No. 132518, March
20, 2000)
(f) A representation as to the
credit of a third person.
Example.

A was borrowing money from B and gave C as his

reference. When C was asked regarding A’s credit C
said: “You can safely lend money to A because A is the
owner of a parcel of land and I have the title deeds in my
possession.” This was made orally. Incidentally, A was
C’s client, C being a lawyer. This representation by C is
not enforceable against him because it is not in writing.
A representation as to the credit of a 3rd person must be
in writing to be enforceable.
 (3) Those where both parties are
incapable of giving consent to a
contract.

Example.

 A and B both 15 years old entered into a

contract. The contract is unenforceable because
both parties cannot give consent.
The confirmation by one of the
incapacitated parties does not convalidate
the contract; it merely raises the contract
one rung higher – to the level of a
voidable contract.
PROBLEM:

Can an oral sale of land be judicially

enforced as between contracting parties,
if the land has not been delivered but the
buyer has paid 10 percent of the purchase
price?
ANSWER:

Yes, an oral sale of land where the land has not

been delivered but the buyer has paid 10% of
the purchase price may be judicially enforced.
Well-settled is the rule that the Statute of Frauds
by virtue of which oral contracts are
unenforceable by court action is applicable only
to those contracts which are executory and not
to those which have been consummated either
totally or partially. The reason is obvious. In
effect there is already a ratification of the
contract because of acceptance of benefits.
Ratification of Contracts Infringing the Statute
of Frauds:

(a) failure to object to the presentation of oral

evidence (This is deemed a waiver);

(b) acceptance of benefits under them (Thus,

the statute does not apply to executed or
partially executed or performed contracts).
 Anthony Orduňa, Dennis Orduňa, and Antonita Orduňa
vs. Eduardo J. Fuentebella, Marcos S. Cid, Benjamin F.
Cid, Bernard G. Banta, and Armando Gabriel, Jr. (G.R. No.
176841, June 29, 2010)

 FACTS:

 Sometime in 1969 or thereabouts, Gabriel Sr. sold the subject lot to

petitioner Antonita Orduña, but no formal deed was executed to
document the sale. The contract price was apparently payable in
installments as Antonita remitted from time to time and Gabriel Sr.
accepted partial payments. One of the Orduñas would later testify
that Gabriel Sr. agreed to execute a final deed of sale upon full
payment of the purchase price.

 As early as 1979, however, Antonita and her sons, Dennis and

Anthony Orduña, were already occupying the subject lot on the
basis of some arrangement undisclosed in the records and even
constructed their house thereon.
 They also paid real property taxes for the house and declared it for
tax purposes, as evidenced by Tax Declaration No. 96-04012-111087
in which they place the assessed value of the structure at P20,090.
 After the death of Gabriel Sr., his son and namesake, respondent
Gabriel Jr., secured TCT No. T-71499 over the subject lot and
continued accepting payments from petitioners. On December 12,
1996, Gabriel Jr. wrote Antonita authorizing her to fence off the said
lot and to construct a road in the adjacent lot. On December 13, 1996,
Gabriel Jr. acknowledged receipt of a P40,000 payment from
petitioners. Through a letter dated May 1, 1997, Gabriel Jr.
acknowledged that petitioner had so far made an aggregate payment
of P65,000, leaving an outstanding balance of P60,000. A receipt
Gabriel Jr. issued dated November 24, 1997 reflected a P10,000
payment.
 Despite all those payments made for the subject lot, Gabriel Jr. would
later sell it to Bernard Banta obviously without the knowledge of
petitioners. this led to the execution of a Deed of Sale dated June 30,
1999 and the issuance later of TCT No. T-72782 for subject lot in the
name of Bernard upon cancellation of TCT No. 71499 in the name of
Gabriel, Jr.
 Subsequently, Bernard sold to the Cids the subject lot for P80,000.
Armed with a Deed of Absolute Sale of a Registered Land dated
January 19, 2000, the Cids were able to cancel TCT No. T-72782 and
secure TCT No. 72783 covering the subject lot. Just like in the
immediately preceding transaction, the deed of sale between
Bernard and the Cids had respondent Eduardo J. Fuentebella as
one of the instrumental witnesses.

 Marcos and Benjamin, in turn, ceded the subject lot to Eduardo

through a Deed of Absolute Sale dated May 11, 2000. Thus, the
consequent cancellation of TCT No. T-72782 and issuance on May
16, 2000 of TCT No. T-3276 over subject lot in the name of Eduardo.

 As successive buyers of the subject lot, Bernard, then Marcos and

Benjamin, and finally Eduardo, checked, so each claimed, the title
of their respective predecessors-in-interest with the Baguio
Registry and discovered said title to be free and unencumbered at
the time each purchased the property. Furthermore, respondent
Eduardo, before buying the property, was said to have inspected
the same and found it unoccupied by the Orduñas.
 Sometime in May 2000, or shortly after his purchase of the subject
lot, Eduardo, through his lawyer, sent a letter addressed to the
residence of Gabriel Jr. demanding that all persons residing on or
physically occupying the subject lot vacate the premises or face the
prospect of being ejected.
 Learning of Eduardo’s threat, petitioners went to the residence of
Gabriel Jr.There, they met Gabriel Jr.’s estranged wife, Teresita,
who informed them about her having filed an affidavit-complaint
against her husband and the Cids for falsification of public
documents on March 30, 2000. According to Teresita, her signature
on the June 30, 1999 Gabriel Jr.–Bernard deed of sale was a forgery.
Teresita further informed the petitioners of her intent to honor the
aforementioned 1996 verbal agreement between Gabriel Sr. and
Antonita and the partial payments they gave her father-in-law and
her husband for the subject lot.

 On July 3, 2001, petitioners, joined by Teresita, filed a Complaint for

Annulment of Title, Reconveyance with Damages against the
respondents specifically praying that TCT No. T-3276 dated May 16,
2000 in the name of Eduardo be annulled.
 Corollary to this prayer, petitioners pleaded that Gabriel Jr.’s title to
the lot be reinstated and that petitioners be declared as entitled to
acquire ownership of the same upon payment of the remaining
balance of the purchase price therefor agreed upon by Gabriel Sr.
and Antonita.

 The RTC dismissed the case and one of the basis cited is that the
conveyance of real property is unenforceable because it was not in
writing. The decision was affirmed by the CA on appeal.
ISSUE:

WHETHER OR NOT THE SALE OF

THE SUBJECT LOT BY GABRIEL SR.
TO ANTONITA IS UNENFORCEABLE
UNDER THE STATUTES OF FRAUDS.
 RULING:

 It is undisputed that Gabriel Sr., during his lifetime, sold the subject
property to Antonita, the purchase price payable on installment
basis. Gabriel Sr. appeared to have been a recipient of some partial
payments. After his death, his son duly recognized the sale by
accepting payments and issuing what may be considered as
receipts therefor. Gabriel Jr., in a gesture virtually acknowledging
petitioners’ dominion of the property, authorized them to construct
a fence around it. And no less than his wife, Teresita, testified as to
the fact of sale and of payments received.

 Pursuant to such sale, Antonita and her two sons established their
residence on the lot, occupying the house they earlier constructed
thereon. They later declared the property for tax purposes, as
evidenced by the issuance of TD 96-04012-111087 in their or
Antonita’s name, and paid the real estates due thereon, obviously
as sign that they are occupying the lot in the concept of owners.
 Given the foregoing perspective, Eduardo’s assertion in his Answer
that "persons appeared in the property" only after "he initiated
ejectment proceedings" is clearly baseless. If indeed petitioners
entered and took possession of the property after Eduardo
instituted the ejectment suit, how could they explain the fact that he
sent a demand letter to vacate sometime in May 2000?
 The Statute of Frauds expressed in Article 1403, par. (2), of the Civil
Code applies only to executory contracts, i.e., those where no
performance has yet been made. Stated a bit differently, the legal
consequence of non-compliance with the Statute does not come
into play where the contract in question is completed, executed, or
partially consummated.
 The Statute of Frauds, in context, provides that a contract for the
sale of real property or of an interest therein shall be unenforceable
unless the sale or some note or memorandum thereof is in writing
and subscribed by the party or his agent. However, where the verbal
contract of sale has been partially executed through the partial
payments made by one party duly received by the vendor, as in the
present case, the contract is taken out of the scope of the Statute.
 The purpose of the Statute is to prevent fraud and perjury in the
enforcement of obligations depending for their evidence on the
unassisted memory of witnesses, by requiring certain enumerated
contracts and transactions to be evidenced by a writing signed by
the party to be charged. The Statute requires certain contracts to be
evidenced by some note or memorandum in order to be
enforceable. The term "Statute of Frauds" is descriptive of statutes
that require certain classes of contracts to be in writing. The Statute
does not deprive the parties of the right to contract with respect to
the matters therein involved, but merely regulates the formalities of
the contract necessary to render it enforceable.

 Since contracts are generally obligatory in whatever form they may

have been entered into, provided all the essential requisites for
their validity are present, the Statute simply provides the method by
which the contracts enumerated in Art. 1403 (2) may be proved but
does not declare them invalid because they are not reduced to
writing. In fine, the form required under the Statute is for
convenience or evidentiary purposes only.
 There can be no serious argument about the partial execution of the
sale in question. The records show that petitioners had, on separate
occasions, given Gabriel Sr. and Gabriel Jr. sums of money as
partial payments of the purchase price. These payments were duly
receipted by Gabriel Jr. To recall, in his letter of May 1, 1997, Gabriel,
Jr. acknowledged having received the aggregate payment of P65,000
from petitioners with the balance of P60,000 still remaining unpaid.
But on top of the partial payments thus made, possession of the
subject of the sale had been transferred to Antonita as buyer. Owing
thus to its partial execution, the subject sale is no longer within the
purview of the Statute of Frauds.
 A contract that infringes the Statute of Frauds is ratified by the
acceptance of benefits under the contract. Evidently, Gabriel, Jr., as
his father earlier, had benefited from the partial payments made by
the petitioners. Thus, neither Gabriel Jr. nor the other respondents—
successive purchasers of subject lots—could plausibly set up the
Statute of Frauds to thwart petitioners’ efforts towards establishing
their lawful right over the subject lot and removing any cloud in their
title. As it were, petitioners need only to pay the outstanding balance
of the purchase price and that would complete the execution of the
oral sale.
 BASIC PRINCIPLES CONCERNING STATUTE OF FRAUDS:

 1. Statute of Frauds applies only to executory contracts (contracts

where no performance has yet been made) and not partially or
completely excuted. (consummated contracts);

 2. Statute of Frauds cannot apply if the action is neither for

damages because of the violation of an agreement nor for the
specific performance of said agreement;

 3. Statute of Frauds is exclusive, it applies only to agreements or

contracts specifically enumerated;

 4. Defense of Statute of Frauds may be waived.

 5. Statute of Frauds is a personal defense or a contract infringing it

cannot be assailed by 3rd persons.
 6. Contracts infringing the Statute of Frauds are not void; they are
merely unenforceable;

 7. Statute of Frauds is a Rule of Exclusion. Oral evidence might be

relevant to the agreements enumerated therein and might, therefore,
be admissible were it not for the fact that the law or the statute
excludes said oral evidence;

 8. Statute of Frauds does not determine the credibility or weight of

evidence. It merely concerns itself with the admissiblity thereof;

 9. Statute of Frauds does not apply if it is claimed that the contract

does not express the true agreement of the parties. As long as the
true agreement is not covered by the Statute of Frauds, it is
provable by oral evidence; and

 10. The application of the Statute of Frauds presupposes the

existence of a perfected contract.
UNENFORCEABLE VOIDABLE

(1) Cannot be enforced by a proper (1) Are binding and enforceable

action in court. unless they are annulled by a proper
action in court.
UNENFORCEABLE RESCISSIBLE

(1) Cannot be enforced by a proper (1) Are valid and enforceable unless
action in court; they are rescinded;

(2) Susceptible to ratification; (2) Are not susceptible to ratification;

(3) Cannot be assailed by 3rd persons. (3) May be assailed by 3rd persons
who are prejudiced.
VOID OR INEXISTENT CONTRACTS
QUESTION:

Is GOOD FAITH material / relevant /

important / vital in determining whether
a contract is void or not?
ANSWER:

NO, GOOD FAITH of a party in entering into a

contract is immaterial in determining whether it
is valid or not. GOOD FAITH, not being an
essential element of a contract, has no bearing
on its validity. No amount of good faith can
validate an agreement which is otherwise void. A
contract which the law denounces as void is
necessarily no contract at all and no effort or act
of the parties to create one can bring about a
change in its legal status. (Ballesteros vs. Abion,
G.R. No. 143361, February 9, 2006)
UNENFORCEABLE VOID

(1) Some unenforceable contracts are (1) Do not produce, as a general rule,
valid and, therefore, may produce any effect whatsoever;
effects, although they cannot be
enforced by a proper action in court;

(2) Are susceptible to ratification. (2) Cannot be ratified.

UNEFORCEABLE VOID

(3) May be ratified; (3) Cannot be ratified;

(4) There is a contract but it cannot be (4) No contract at all;

enforced by a court action;

(5) Cannot be assailed by third (5) Can be assailed by anybody

parties. directly affected.
 FOLLOWING CONTRACTS ARE VOID (Art. 1409)

 (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 which 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.

PROBLEM:

What is the prescriptive period in an

action or defense for the declaration of
a contract as void?
The action or defense for the declaration of the
inexistence of a contract does not prescribe.
(Art. 1410)
Characteristics of VOID Contracts:
 (1) They produce no effect whatsoever either against or in favor
of anyone. (quod nullum est nullum producit effectum);

 (2) No action for annulment is necessary. Their nullity exists

and therefore any judgment of nullity is merely declaratory;

 (3) They can neither be confirmed nor ratified;

 (4) If performance is made, restoration of what has been

delivered is required, except when pari delicto is applicable;

 (5) The right to set up the defense of nullity cannot be waived;

 (6) The action or defense of nullity does not prescribe;

 (7) The defense of nullity may be invoked by anyone against

whom the effects of the contract are asserted.
VOIDABLE VOID
(1) May be ratified; (1) Cannot be ratified;

(2) Produces effects until annulled; (2) Generally effects are not produce at all;

(3) Defect is due to incapacity or vitiated (3) The defect here is that public policy is
consent; militated against;

(4) Valid until annulled; (4) Void from the beginning so generally no
action is required to set it aside, unless the
contract has already been performed;

(5) May be cured by prescription; (5) Cannot be cured by prescription;

(6) Defense may be invoked only by the (6) Defense may be availed of by anybody,
parties (those principally or subsidiarily whether he is a party to the contract or not,
liable), or their successors-in-interest and as long as his interest is directly affected;
privies;

(7) Referred to as relative or conditional (7) Referred to as absolute nullity.

nullity.
QUESTION:

C husband of D, sold paraphernal

property in her name without her D’s
consent. Was such sale valid, void,
voidable, rescissible or unenforceable?
ANSWER:

Unenforceable (Art. 1403 No. 1)

SIMULATED CONTRACTS:

(a) If absolutely simulated, the contract is

VOID for utter lack of consent, subject
matter and cause;

(b) If relatively simulated, the hidden or

intended contract is generally binding.
 Manuel O. Fuentes and Letecia L. Fuentes vs.
Conrado G. Roca, Annabelle R. Joson, Rose Marie R.
Cristobal and Pilar Malcampo (G.R. No. 178902, April 21, 2010)

 FACTS:

 Sabina Tarroza owned a titled 358-square meter lot in Canelar,

Zamboanga City. On October 11, 1982, she sold it to her son,
Tarciano T. Roca but Tarciano did not for the meantime have the
registered title transferred to his name.

 Six years later in 1988, Tarciano offered to sell the lot to petitioners
Manuel and Leticia Fuentes. They arranged to meet at the office of
Atty. Romulo D. Plagata whom they asked to prepare the documents
of sale. They later signed an agreement to sell that Atty. Plagata
prepared dated April 29, 1988, which agreement expressly stated
that it was to take effect in six months.
 A new title was issued in the name of the spouses who immediately
constructed a building on the lot. On January 28, 1990 Tarciano
passed away, followed by his wife Rosario who died 9 months
afterwards.

 8 years later in 1997, the children of Tarciano and Rosario, namely,

respondents Conrado G. Roca, Annabelle R. Joson, and Rose Marie
R. Cristobal, together with Tarciano’s sister, Pilar R. Malcampo,
represented by her son, John Paul M. Trinidad, filed an action for
annulment of sale and reconveyance of the land against the Fuentes
spouses before the RTC of Zamboanga City. The Rocas claimed that
the sale to the spouses was void since Tarciano’s wife, Rosario, did
not give her consent to it. Her signature on the affidavit of consent
had been forged.

 The spouses Fuentes denied the Rocas’ allegations. They presented

Atty. Plagata who testified that he personally saw Rosario sign the
affidavit at her residence in Paco, Manila. He admitted, however, that
he notarized the document in Zamboanga City four months later.
 All the same, the Fuentes spouses pointed out that the claim of
forgery was personal to Rosario and she alone could invoke it.
Besides, the 4-year prescriptive period for nullifying the sale on
ground of fraud had already lapsed.

 Both the Rocas and the Fuentes spouses presented handwriting

experts at the trial. Comparing Rosario’s standard signature on the
affidavit with those on various documents she signed, the Rocas’
expert testified that the signatures were not written by the same
person. Making the same comparison, the spouses’ expert
concluded that they were.

 The RTC rendered judgment, dismissing the case. It ruled that the
action had already prescribed since the ground cited by the Rocas
for annulling the sale, forgery or fraud, already prescribed under
Article 1391 of the Civil Code 4 years after its discovery. On appeal,
the Court of Appeals (CA) reversed the RTC decision.
ISSUES:
1. Whether or not Rosario’s signature on the
document of consent to her husband Tarciano’s
sale of their conjugal land to the Fuentes
spouses was forged;

2. Whether or not the Rocas’ action for the

declaration of nullity of that sale to the
spouses already prescribed; and

3. Whether or not only Rosario, the wife

whose consent was not had, could bring the
action to annul that sale.
 RULINGS:

 FIRST:

 The CA found that Rosario’s signature had been forged. The CA

observed a marked difference between her signature on the affidavit
of consent and her specimen signatures. The CA gave no weight to
Atty. Plagata’s testimony that he saw Rosario sign the document in
Manila on September 15, 1988 since this clashed with his
declaration in the jurat that Rosario signed the affidavit in
Zamboanga City on January 11, 1989.

 The Court agrees with the CA’s observation that Rosario’s signature
strokes on the affidavit appears heavy, deliberate, and forced. Her
specimen signatures, on the other hand, are consistently of a lighter
stroke and more fluid. The way the letters "R" and "s" were written
is also remarkably different. The variance is obvious even to the
untrained eye.
 SECOND:

 When Tarciano sold the conjugal lot to the Fuentes spouses on

January 11, 1989, the law that governed the disposal of that lot was
already the Family Code.

 In contrast to Article 173 of the Civil Code, Article 124 of the Family
Code does not provide a period within which the wife who gave no
consent may assail her husband’s sale of the real property. It simply
provides that without the other spouse’s written consent or a court
order allowing the sale, the same would be void. Article 124 thus
provides:

 Art. 124. x x x In the event that one spouse is incapacitated or otherwise

unable to participate in the administration of the conjugal properties, the
other spouse may assume sole powers of administration. These powers
do not include the powers of disposition or encumbrance which must
have the authority of the court or the written consent of the other
spouse. In the absence of such authority or consent, the disposition or
encumbrance shall be void. x x x
 Under the provisions of the Civil Code governing contracts, a void
or inexistent contract has no force and effect from the very
beginning. And this rule applies to contracts that are declared void
by positive provision of law, as in the case of a sale of conjugal
property without the other spouse’s written consent. A void contract
is equivalent to nothing and is absolutely wanting in civil effects. It
cannot be validated either by ratification or prescription.
 But, although a void contract has no legal effects even if no action
is taken to set it aside, when any of its terms have been performed,
an action to declare its inexistence is necessary to allow restitution
of what has been given under it. This action, according to Article
1410 of the Civil Code does not prescribe. Thus:
 Art. 1410. The action or defense for the declaration of the inexistence of
a contract does not prescribe.

 Here, the Rocas filed an action against the Fuentes spouses in 1997
for annulment of sale and reconveyance of the real property that
Tarciano sold without their mother’s written consent. The passage
of time did not erode the right to bring such an action.
 The Fuentes spouses of course argue that the RTC nullified the sale
to them based on fraud and that, therefore, the applicable
prescriptive period should be that which applies to fraudulent
transactions, namely, 4 years from its discovery. Since notice of the
sale may be deemed given to the Rocas when it was registered with
the Registry of Deeds in 1989, their right of action already
prescribed in 1993.
 But, if there had been a victim of fraud in this case, it would be the
Fuentes spouses in that they appeared to have agreed to buy the
property upon an honest belief that Rosario’s written consent to the
sale was genuine. They had 4 years then from the time they learned
that her signature had been forged within which to file an action to
annul the sale and get back their money plus damages. They never
exercised the right.
 If, on the other hand, Rosario had agreed to sign the document of
consent upon a false representation that the property would go to
their children, not to strangers, and it turned out that this was not
the case, then she would have 4 years from the time she discovered
the fraud within which to file an action to declare the sale void.
 But that is not the case here. Rosario was not a victim of fraud or
misrepresentation. Her consent was simply not obtained at all. She
lost nothing since the sale without her written consent was void.
Ultimately, the Rocas ground for annulment is not forgery but the
lack of written consent of their mother to the sale. The forgery is
merely evidence of lack of consent.

 THIRD:

 As stated above, that sale was void from the beginning.

Consequently, the land remained the property of Tarciano and
Rosario despite that sale. When the two died, they passed on the
ownership of the property to their heirs, namely, the Rocas. As
lawful owners, the Rocas had the right, under Article 429 of the Civil
Code, to exclude any person from its enjoyment and disposal.
 When the nullity proceeds from the illegality of
the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other,
and both shall be prosecuted. Moreover, the provisions
of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things
or the price of the contract.
This rule shall be applicable when only one of the
parties is guilty; but the innocent one may claim what he
has given, and shall not be bound to comply with his
promise. (Art. 1411)
 If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the
following rules shall be observed:

(1) When the fault is on the part of both contracting

parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the
other's undertaking;

(2) When only one of the contracting parties is at

fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault, may
demand the return of what he has given without any
obligation to comply his promise. (Art. 1412)
Illegal and Criminal Contracts:

 (a) Those where both parties are guilty (in pari delicto);

 (b) Those where only one is guilty and the other is innocent.

 IF BOTH ARE GUILTY:

 (1) Since they are in pari delicto they shall have no action
against each other;

 (2) Both shall be prosecuted;

 (3) The effects or the instruments of the crime (things or price

of the contract) shall be confiscated in favor of the
government.
 THOSE WHERE ONLY ONE IS GUILTY:

 (1) The guilty party will be prosecuted;

 (2) The instrument of the crime (or object of the contract) will
be confiscated (as in the case of government property illegally
sold);

 (3) The innocent one may claim what he has given (like the
price he paid for the government property); or he has not yet
given anything, he shall not be bound to comply with his promise.
 The CA declared that the Deed of Assignment is void and the
contract entered into by parties is actually a loan with mortgage.
ISSUES:

1. WHETHER OR NOT THE CONTRACT

BETWEEN THE PARTIES IS A
CONTRACT OF LOAN WITH
MORTGAGE;

2. WHETHER OR NOT PETITIONER CAN

RECOVER THE MARKET STALL FROM
RESPONDENT.
 SECOND ISSUE:

 The records show that Market Stall No. CTD 1583 is owned by the
City Government of Marawi. Indeed, the RTC and the CA correctly
held that it was the City Government of Marawi, not respondent, that
owned Market Stall No. CTD 1583. Respondent, as a mere grantee of
the subject stall, was prohibited from selling, donating, or otherwise
alienating the same without the consent of the City Government;
violation of the condition shall automatically render the sale,
donation, or alienation null and void. Thus, we sustain the CA in
declaring the Deed of Assignment null and void, but we cannot
abide by the CA’s final disposition.

 A void contract is equivalent to nothing; it produces no civil effect. It

does not create, modify, or extinguish a juridical relation. Parties to
a void agreement cannot expect the aid of the law; the courts leave
them as they are, because they are deemed in pari delicto or in
equal fault. To this rule, however, there are exceptions that permit
the return of that which may have been given under a void contract.
 One of the exceptions is found in Article 1412 of the Civil Code,
which states:
 Art. 1412. If the act in which the unlawful or forbidden cause consists
does not constitute a criminal offense, the following rules shall be
observed:
 (1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the other's undertaking;
 (2) When only one of the contracting parties is at fault, he cannot
recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at fault,
may demand the return of what he has given without any obligation to
comply with his promise.

 Respondent was well aware that as mere grantee of the subject stall,
he cannot sell it without the consent of the City Government of
Marawi. Yet, he sold the same to petitioners. The records, however,
are bereft of any allegation and proof that petitioners had actual
knowledge of the status of respondent’s ownership of the subject
stall. Petitioners can, therefore, recover the amount they had given
under the contract.
 RESCISSIBLE VOIDABLE UNENFORCEABLE VOID

(1) Incapacity
or (2)
(1) Lesion, or (2) (1) In excess or (1)
consent is
Transfer in fraud without authority, Absence
vitiated by
What is the of creditors, or (2) violation of of
fraud,
defect? (3) Transfer by Statute of Frauds, requisites;
violence,
insolvent before or (3) incapacity of or (2) Illicit
intimidation
due date. both parties. nature.
& undue
influence.

Binding and
Valid and Cannot be No effect
What is the enforceable
binding until enforced unless is
effect? unless
annulled. ratified or waived. produced.
rescinded.

Can it be Cannot be Can be Cannot be

Can be ratified.
ratified? ratified. ratified. ratified.
 RESCISSIBLE VOIDABLE UNENFORCEABLE VOID

Contracting
Contracting parties and
Who can
party and 3rd Contracting Contracting parties 3rd persons
assail the
persons who parties only. only. whose
contract?
are prejudiced. interests are
affected.

Action for
No prescriptive
What is the declaration
period is provided
prescriptive that the
because the same is
period for 4 Years 4 Years contract is
not applicable.
filing of the void is
Prescription cannot
case? imprescripti
cure the defect.
ble.

How can the

contract be
Directly or Directly or Directly or
assailed, Directly.
collaterally. collaterally. collaterally.
directly or
collaterally?
NATURAL OBLIGATIONS
NATURAL OBLIGATIONS

Are those based on equity and natural law, which are

not enforceable by means of a court action, but which,
after voluntary fulfillment by the obligor, authorize the
retention by the obligee of what has been delivered or
rendered by reason thereof. In other words, they refer to
those obligations without a sanction, susceptible of
voluntary performance, but not through compulsion by
legal means.
Examples of Natural Obligations:

(1) Payment of the prescribed obligations;

(2) reimbursement to Third Persons;

(3) Voluntary Performance after Dismissal of Case;

(4) Excess payment by Heir;

(5) Void Will.

Cite the DIFFERENCE between SOLUTIO
INDEBITI (Undue Payment) and NATURAL
OBLIGATION.
ANSWER:

(a) Not knowing the obligation has prescribed, I can

recover what I have paid on the ground of UNDUE
PAYMENT.

(b) Knowing the obligation has prescribed, I cannot

recover for this would be a case of NATURAL
OBLIGATION.
NATURAL OBLIGATIONS CIVIL OBLIGATIONS

(1) Are based on equity and natural (2) Based on positive law;
law;

(2) Are not enforceable by court (2) Are enforceable by court action.
action.
PROBLEM:

DIGONG borrowed from IMEE P1M which

amount the latter failed to collect. After the
debt had prescribed, DIGONG voluntarily paid
IMEE who accepted the payment. After a few
weeks, being in dire need of money, DIGONG
demanded the return of the P1M on the ground
that there was a wrong payment, the debt
having already prescribed. IMEE refused to
return the amount paid. May DIGONG succeed
in collecting if he sues IMEE in court?
ANSWER:

DIGONG will not succeed in collecting P1M if he sues

IMEE in court. The case is expressly covered by Art.
1424 of the Civil Code which declares that when a right
to sue upon a civil obligation has lapsed by extinctive
prescription, the obligor who voluntarily performs the
contract cannot recover what he has delivered or the
value of the service he has rendered.
Because of extinctive prescription, the obligation of
DIGONG to pay his debt of P1M to IMEE became a
natural obligation. While it is true that a natural
obligation cannot be enforced by court action,
nevertheless, after voluntary fulfillment by the obligor,
under the law, the obligee is authorized to retain what
has been paid by reason thereof.
When without the knowledge or against
the will of the debtor, a third person pays
a debt which the obligor is not legally
bound to pay because the action thereon
has prescribed, but the debtor later
voluntarily reimburses the third person,
the obligor cannot recover what he has
paid. (Art. 1425)
ESTOPPEL
Art. 1431.

Through estoppel an admission or

representation is rendered conclusive
upon the person making it and cannot be
denied or disproved as against the person
relying thereon.
EXAMPLE.

If a husband in a sworn declaration

constituting a family home has stated in
said documents that he was married,
naming his wife, he cannot thereafter be
heard to say that he and the girl are not
married. Therefore, the family home
should be considered as conjugal
property.
Kinds of Estoppel:

1) Estoppel IN PAIS (Equitable

Estoppel);

2) Estoppel BY DEED (Technical

Estoppel);
 1) Estoppel IN PAIS
 It arises when one by his acts, representations or admission, or by
his silence when he ought to speak out intentionally or through
culpable negligence, induces another to believe certain facts to
exist, and such other rightfully relies and acts on such belief, so that
he will be prejudiced if the former is permitted to deny the existence
of such facts.

 (a) By conduct or acceptance of benefits;

 (b) By representation or concealment;
 (c) By silence;
 (d) By omission;
 (e) By laches (unreasonable delay in suing).
Example.

If a vendee a retro agrees to accept a check in

payment of the repurchase price, he cannot
afterwards allege that the check is not a legal
tender, he is bound by his own act.

If the real owner of a house pretends to be

merely a broker in the sale thereof, he is
estopped from asserting ownership over the
same.
 (2) Estoppel BY DEED

It is a bar which precludes a party to a deed and his

privies from asserting as against the other and his
privies any right or title in derogation of the deed, or
from denying the truth of any material fact asserted in it.

(a) Estoppel by deed proper (written instrument may

also be in the form of a bond or a mortgage).

(b) Estoppel by judgment as a court record. (this

happens when there could have been res judicata)
Example.

If a shipper has his goods valued at only

P200, he cannot later on recover damages
for its value more than what he has
declared in the bill of lading, even if the
value of the goods be worth much more
for he is in estoppel.
 When in a contract between third persons concerning immovable
property, one of them is misled by a person with respect to the
ownership or real right over the real estate, the latter is precluded
from asserting his legal title or interest therein, provided all these
requisites are present: (Art. 1437)

 (1) There must be fraudulent representation or wrongful

concealment of facts known to the party estopped;

 (2) The party precluded must intend that the other should act
upon the facts as misrepresented;

 (3) The party misled must have been unaware of the true facts;
and

 (4) The party defrauded must have acted in accordance with the
misrepresentation.
Art. 1439.

Estoppel is effective only as between the

parties thereto or their successors-in-
interest
The doctrine of estoppel may not be
invoked to validate a void contract. As
between parties to a contract, validity
cannot be given to it by estoppel if it is
prohibited by law or against public policy.
(Prudential Bank vs. Panis, G.R. No. 50008,
August 31, 1987)
The doctrine of estoppel DOES NOT
APPLY when the Government sues as a
sovereign or asserts governmental rights.
[Republic vs. Sandiganbayan, 406 SCRA
190 (2003)]
TAKE NOTE!

Estoppel cannot give validity to an act that

is prohibited by law or one that is against
public policy and neither can the defense
of illegality be waived.
ISSUES:

Whether of not the imposition of

interest at the rate of six percent (6%)
to seven percent (7%) is contrary to
law, morals, good customs, public order
or public policy.

Whether or not the "Acknowledgment of

Debt" is an inexistent contract that is
void from the very beginning pursuant
to Article 1409 of the New Civil Code.
 RULINGS:

 FIRST ISSUE:

 The disputed 6% to 7% monthly interest rate IS NOT iniquitous or

unconscionable vis-à-vis the principle laid down in Medel vs. CA.
Noteworthy is the fact that in Medel, the defendant-spouses were
never able to pay their indebtedness from the very beginning and
when their obligations ballooned into a staggering sum, the
creditors filed a collection case against them. In this case, there
was no urgency of the need for money on the part of Jocelyn, the
debtor, which compelled her to enter into said loan transactions.
She used the money from the loans to make advance payments for
prospective clients of educational plans offered by her employer. In
this way, her sales production would increase, thereby entitling her
to 50% rebate on her sales. This is the reason why she did not mind
the 6% to 7% monthly interest. Notably too, a business transaction
of this nature between Jocelyn and Marilou continued for more than
five years. Jocelyn religiously paid the agreed amount of interest
until she ordered for stop payment on some of the checks issued to
Marilou.
 The checks were in fact sufficiently funded when she ordered the
stop payment and then filed a case questioning the imposition of a
6% to 7% interest rate for being allegedly iniquitous or
unconscionable and, hence, contrary to morals.

 It was clearly shown that before Jocelyn availed of said loans, she
knew fully well that the same carried with it an interest rate of 6% to
7% per month, yet she did not complain. In fact, when she availed
of said loans, an advance interest of 6% to 7% was already
deducted from the loan amount, yet she never uttered a word of
protest.

 After years of benefiting from the proceeds of the loans bearing an

interest rate of 6% to 7% per month and paying for the same,
Jocelyn cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the
conscience of man. "This is so because among the maxims of
equity are (1) he who seeks equity must do equity, and (2) he who
comes into equity must come with clean hands.
 As can be seen from the records of the case, Jocelyn has failed to
prove her claim that she was made to sign the document
"Acknowledgment of Debt" and draw the seven Bank of Commerce
checks through force, threat and intimidation. As earlier stressed,
said document was signed in the office of Jocelyn, a high ranking
executive of CAP, and it was Jocelyn herself who went to the table
of her two subordinates to procure their signatures as witnesses to
the execution of said document. If indeed, she was forced to sign
said document, then Jocelyn should have immediately taken the
proper legal remedy. But she did not.

 It is provided, as one of the conclusive presumptions under Rule

131, Section 2(a), of the Rules of Court that, "Whenever a party has,
by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing to be true, and
to act upon such belief, he cannot, in any litigation arising out of
such declaration, act or omission, be permitted to falsify it." This is
known as the principle of estoppel.
 More significantly, Jocelyn already availed herself of the benefits of
the "Acknowledgment of Debt," the validity of which she now
impugns. As aptly found by the RTC and the CA, Jocelyn was
making a business out of the loaned amounts. She was actually
using the money to make advance payments for her prospective
clients so that her sales production would increase. Accordingly,
she did not mind the 6% to 7% interest per month as she was
getting a 50% rebate on her sales.

 Clearly, by her own acts, Jocelyn is estopped from impugning the

validity of the "Acknowledgment of Debt." "[A] party to a contract
cannot deny the validity thereof after enjoying its benefits without
outrage to one’s sense of justice and fairness." "It is a long
established doctrine that the law does not relieve a party from the
effects of an unwise, foolish or disastrous contract, entered into
with all the required formalities and with full awareness of what she
was doing. Courts have no power to relieve parties from obligations
voluntarily assumed, simply because their contracts turned out to
be disastrous or unwise investments.
TRUSTS
TRUSTS

Definition:

(a) It is the right to the beneficial enjoyment of

property, the legal title to which is vested in another;

(b) It is a fiduciary relationship concerning property

which obliges the person holding it to deal with the
property for the benefit of another, the person
holding, in view of his equitable title, is allowed to
exercise certain powers belonging to the owner of
the legal title.
Characteristics of a TRUST:

(a) It is a fiduciary relationship;

(b) Created by law or by agreement;

(c) Where the legal title is held by one, and the

equitable title or beneficial title is held by another.
TRUST STIPULATION POUR AUTRUI

(1) May exist because of a legal (1) Can arise only in the case of
provision or because of an agreement; contracts;

(2) Refers to specific property. (2) Refers to specific property or to

other things.
Parties to a Trust:

(1) Trustor or settler – he establishes the trust;

(2) Trustee – holds the property in trust for the benefit of

another;

(3) Beneficiary or cestui que trust – the person for

whose benefit the trust has been created.

(NOTE:” The trustor may at the same time be also the

beneficiary)
Elements of a Trust:

(1) Parties to the trust;

(2) The trust property or the trust estate

or the subject matter of the trust.
Classification of Trusts:

(a) EXPRESS TRUST; (Created by the

parties, or by the intention of the trustor);

(b) IMPLIED TRUST. (created by

operation of law)
Express Trust – created by parties or by the intention of the
trustor.

 No express trusts concerning an immovable or any interest therein

may be proved by parol evidence (Art. 1443)

 The requirement that the express trust be written is only for

enforceability, not for validity between the parties. Hence, this
Article may by analogy be included under the Statutes of Frauds;

 By implication, for a trust over personal property an oral agreement

is valid and enforceable between the parties;

 Regarding 3rd persons the trust must be in a public instrument and

registered in the Registry of Property, if it concerns real property.
How Express Trust is created:

(a) By conveyance to the trustee by an act

inter vivos or mortis causa (as in a will);

(b) By admission of the trustee that he holds

the property, only as trustee.
 How express Trusts are ended:
 (a) Mutual agreement by all the parties;

 (b) Expiration of the term;

 (c) Fulfillment of the resolutory condition;

 (d) Rescission or annulment (as in the contracts)

 (e) Loss of the subject matter of the trust (physical loss or legal
impossibility);

 (f) Order of the Court (as when the purpose of the trust is being
frustrated);

 (g) Merger;

 (h) Accomplishment of the purpose of the trust.

Implied Trust – created by operation of law.

Is one that, without being express, is deducible

from the nature of the transaction as a matter of
intent or which is superinduced on the
transaction by operation of law as a matter of
equity, independently of the particular intention
of the parties. It may either by resulting or
constructive trust. (Sps. Bejos vs. Cabreros, et.
al., G.R. No. 145849, July 22, 2005)
Two Kinds of IMPLIED TRUSTS:

(1) RESULTING TRUST (Bare or Passive

Trust)

(2) CONSTRUCTIVE TRUST

What is a RESULTING TRUST?

ANSWER:
Is presumed to have been contemplated by parties, the
intention is to be found in the nature of the transaction
but not expressed in the deed itself. It is based on the
equitable doctrine that valuable consideration, not legal
title, determines the equitable title or interest.

Example:
Art. 1451, where a person who inherits property registers
the same in another's name, whom he does not intend to
have any beneficial interest therein for he wants this for
himself.
 SIME DARBY PILIPINAS Inc. vs. JESUS B. MENDOZA (G.R. No. 202247, June
19, 2013)

 FACTS OF THE CASE:

 Sime Darby Pilipinas, Inc. employed Jesus B. Mendoza as sales manager to handle
sales, marketing, and distribution of the company's tires and rubber products. On 3
July 1987, Sime Darby bought a Class "A" club share in Alabang Country Club (ACC)
from Margarita de Araneta as evidenced by a Deed of Absolute Sale. The share,
however, was placed under the name of Mendoza in trust for Sime Darby since the By-
Laws of ACC state that only natural persons may own a club share. As part of the
arrangement, Mendoza endorsed the Club Share Certificate in blank and executed a
Deed of Assignment, also in blank, and handed over the documents to Sime Darby.
From the time of purchase in 1987, Sime Darby paid for the monthly dues and other
assessments on the club share.

 When Mendoza retired in April 1995, Sime Darby fully paid Mendoza his separation
pay amounting to more than P3,000,000. Nine years later, or sometime in July 2004,
Sime Darby found an interested buyer of the club share for P1,101,363.64. Before the
sale could push through, the broker required Sime Darby to secure an authorization
to sell from Mendoza since the club share was still registered in Mendoza’s name.
However, Mendoza refused to sign the required authority to sell or special power of
attorney unless Sime Darby paid him the amount of P300,000, claiming that this
represented his unpaid separation benefits. As a result, the sale did not push through
and Sime Darby was compelled to return the payment to the prospective buyer.
 DECISION:

 Sime Darby has sufficiently established its right over the subject
club share. Sime Darby presented evidence that it acquired the
Class "A" club share of ACC in 1987 through a Deed of Sale. Being a
corporation which is expressly disallowed by ACC’s By-Laws to
acquire and register the club share under its name, Sime Darby had
the share registered under the name of respondent Mendoza, Sime
Darby’s former sales manager, under a trust arrangement. Such fact
was clearly proved when in the application form dated 17 July 1987
of the ACC for the purchase of the club share, Sime Darby placed its
name in full as the owner of the share and Mendoza as the assignee
of the club share. Also, in connection with the application for
membership, Sime Darby sent a letter dated 17 September 1987
addressed to ACC confirming that "Mendoza, as Sime Darby’s Sales
Manager, is entitled to club membership benefit of the Company."
 While the share was bought by Sime Darby and placed under the
name of Mendoza, his title is only limited to the usufruct, or the use
and enjoyment of the club’s facilities and privileges while employed
with the company. In Thomson v. Court of Appeals, we held that
a trust arises in favor of one who pays the purchase price
of a property in the name of another, because of the
presumption that he who pays for a thing intends a
beneficial interest for himself. While Sime Darby paid for the
purchase price of the club share, Mendoza was given the legal title.
Thus, a resulting trust is presumed as a matter of law. The burden
then shifts to the transferee to show otherwise.

 The circumstances which occurred after the purchase of the club

share are the following; First, Mendoza signed the share certificate
and assignment of rights both in blank. Second, Mendoza turned
over possession of the documents to Sime Darby. Third, from the
time the share was purchased in 1987 until 1995, Sime Darby paid
for the monthly bills pertaining to the share. Last, since 1987, the
monthly bills were regularly sent to Sime Darby's business address
until Mendoza requested in August 2004, long after he retired from
the employ of the company, that such bills be forwarded to his
personal address starting September 2004.
 It can be gathered then that Sime Darby did not intend to give up its
beneficial interest and right over the share. The company merely
wanted Mendoza to hold the share in trust since Sime Darby, as a
corporation, cannot register a club share in its own name under the
rules of the ACC. At the same time, Mendoza, as a senior manager of
the company, was extended the privilege of availing a club
membership, as generously practiced by Sime Darby.
What is a CONSTRUCTIVE TRUST?

ANSWER:
It is created not by any word evincing a direct intention to
create trust, but by operation of law in order to satisfy the
demand of justice and to prevent unjust enrichment. It
arises contrary to an agreement or intention against one
who, by fraud, duress or abuse of confidence, obtains or
holds the legal right to property which he ought not, in
equity and good conscience, to hold.

Example:
If a person acquires property by mistake, he is
considered by the law as a trustee while he holds the
same (Art. 1456)
EXPRESS TRUST IMPLIED TRUST
1) One created by the intention of the 1) One that comes into being by operation
trustor or of the parties; of law;

2) Are those created by the direct and 2) Are those which without being
positive acts of the parties, by some expressed, are deductible from the nature
writing or deed or will or by words of the transaction by operation of law as
evidencing an intention to create a trust; matters of equity, independently of the
particular intention of the parties;

3) The intent to establish a trust is clear; 3) The intent to establish a trust is to be

taken from circumstances or other matters
indicative of such intent ;

4) No express trust concerning immovable 4) May be proved by parol evidence;

or any interest therein may be proved by
parol evidence;

5) Laches and prescription do not 5) Laches and prescription may constitute

constitute a bar to enforce an express a bar to enforce an implied trust and no
trust, at least while the trustee does not repudiation is required unless there is a
openly repudiate the trust, and make concealment of the facts giving rise to the
known to the beneficiary. trust.
PROBLEM:

DIGONG unable to pay the purchase price of a house

and lot located at Forbes Park for his residence has
requested PNOY to lend him money under one condition,
that the certificate of title be registered under the name
of PNOY, for his protection and as security of the loan.
PNOY agreed and gave money to DIGONG. Later on
PNOY mortgage the property to BDO without the
knowledge and consent of DIGONG. When the mortgage
becomes due, PNOY did not redeem the mortgage and
the property was advertised for sale. What is the most
appropriate advise will you give to DIGONG?
ANSWER:

 Article 1450 provides, “If the price of a sale of property is loaned or

paid by one person for the benefit of another and the conveyance is
made to the lender or payor to secure the payment of the debt, a
trust arises by operation of law in favor of the person to whom the
money is loaned or for whom it is paid. The latter may redeem the
property and compel a conveyance thereof to him.” However, the
mortgage of the property by PNOY to BDO is perfectly valid
inasmuch as the bank was not aware of any flaw or defect in the title
of PNOY since the right of DIGONG has not been annotated in the
certificate of title, in other words BDO acted in good faith.
Consequently, the only remedy available for DIGONG is to redeem
the mortgaged property from BDO. After this is done, DIGONG can
then institute an action to compel PNOY to reconvey the property to
him. In this action for reconveyance, the amount paid by DIGONG to
BDO in redeeming the property can then be applied to the payment
of his debt to PNOY. If there is an excess, he can recover the amount
from PNOY.
Art. 1451. When land passes by succession to
any person and he causes the legal title to be
put in the name of another, a trust is established
by implication of law for the benefit of the true
owner.

Example
 A inherited a piece of land from his father, but A
caused the legal title to be put in the name of X,
a brother, here a trust is impliedly established
with X as trustee and A as the beneficiary.
Art. 1452. If two or more persons agree to
purchase property and by common
consent the legal title is taken in the name
of one of them for the benefit of all, a trust
is created by force of law in favor of the
others in proportion to the interest of
each.
Art. 1453. When property is conveyed to a person in
reliance upon his declared intention to hold it for, or
transfer it to another or the grantor, there is an implied
trust in favor of the person whose benefit is
contemplated.

 Example.
Jose bought from Pedro a parcel of land and it was
conveyed to him (Jose) on Jose’s statement or
declaration that he would hold it in behalf of Carlos. Here
Jose is merely the trustee, while Carlos is the
beneficiary. Jose can no longer assert ownership on the
ground of estoppel.
Period of PRESCRIPTION of
an action for reconveyance
of real property based on an
implied trust.
Grounds Period
a) Annulment of a voidable contract which 4 years from the time of discovery of the
became the basis for the fraudulent fraud;
registration of the subject property; (Art.
1391, par. 4);

b) Action does not involve the annulment 10 years from the discovery of fraud;
of contract, but there was fraud in the
registration of the subject property; (Art.
1144, par. 2);

c) Action involves the declaration of the Imprescriptible

nullity or inexistence of a void or inexistent
contract which became the basis for the
fraudulent registration of the subject
property; (Art. 14010)

d) An action for quieting of title and the Imprescriptible

legitimate owner of the subject property
which was fraudulently registered has been
in possession thereof.
 Miguel J. Ossorio Pension Foundation, Inc. vs. Court of
Appeals & Commissioner of Internal Revenue (G.R. No.
162175, June 28, 2010)

 FACTS:

 Petitioner, a non-stock and non-profit corporation, was organized

for the purpose of holding title to and administering the employees’
trust or retirement funds (Employees’ Trust Fund) established for
the benefit of the employees of Victorias Milling Company, Inc.
(VMC). Petitioner, as trustee, claims that the income earned by the
Employees’ Trust Fund is tax exempt under Section 53(b) of the
National Internal Revenue Code (Tax Code).

 Petitioner alleges that on 25 March 1992, petitioner decided to

invest part of the Employees’ Trust Fund to purchase a lot in the
Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner
bought the MBP lot through VMC.
 The CTA held that under Section 53(b) [now Section 60(b)] of the
Tax Code, it is not petitioner that is entitled to exemption from
income tax but the income or earnings of the Employees’ Trust
Fund. The CTA stated that petitioner is not the pension trust itself
but it is a separate and distinct entity whose function is to
administer the pension plan for some VMC employees. The CTA,
after evaluating the evidence adduced by the parties, ruled that
petitioner is not a party in interest.
ISSUE:

WHETHER OR NOT PETITIONER IS A

TRUSTEE OF THE EMPLOYEE’S
TRUST FUND.
 RULING:

 The law expressly allows a co-owner (first co-owner) of a parcel of

land to register his proportionate share in the name of his co-owner
(second co-owner) in whose name the entire land is registered. The
second co-owner serves as a legal trustee of the first co-owner
insofar as the proportionate share of the first co-owner is
concerned. The first co-owner remains the owner of his
proportionate share and not the second co-owner in whose name
the entire land is registered. Article 1452 of the Civil Code provides:
 Art. 1452. If two or more persons agree to purchase a property and
by common consent the legal title is taken in the name of one of
them for the benefit of all, a trust is created by force of law in favor
of the others in proportion to the interest of each.
 For Article 1452 to apply, all that a co-owner needs to show is that
there is "common consent" among the purchasing co-owners to
put the legal title to the purchased property in the name of one co-
owner for the benefit of all. Once this "common consent" is shown,
"a trust is created by force of law.”
 The BIR, not being a buyer or claimant to any interest in the MBP
lot, has not relied on the face of the title of the MBP lot to acquire
any interest in the lot. There is no basis for the BIR to claim that
petitioner is estopped from proving that it co-owns, as trustee of
the Employees’ Trust Fund, the MBP lot. Article 1452 of the Civil
Code recognizes the lawful ownership of the trustor-beneficiary
over the property registered in the name of the trustee. Certainly,
the Torrens system was not established to foreclose a trustor or
beneficiary from proving its ownership of a property titled in the
name of another person when the rights of an innocent purchaser
or lien-holder are not involved. More so, when such other person,
as in the present case, admits its being a mere trustee of the trustor
or beneficiary.
 The registration of a land under the Torrens system does not create
or vest title, because registration is not one of the modes of
acquiring ownership. A TCT is merely an evidence of ownership
over a particular property and its issuance in favor of a particular
person does not foreclose the possibility that the property may be
co-owned by persons not named in the certificate, or that it may be
held in trust for another person by the registered owner.
 No particular words are required for the creation of a trust, it being
sufficient that a trust is clearly intended. It is immaterial whether or
not the trustor and the trustee know that the relationship which
they intend to create is called a trust, and whether or not the parties
know the precise characteristic of the relationship which is called a
trust because what is important is whether the parties manifested
an intention to create the kind of relationship which in law is known
as a trust.
 The fact that the TCT, Deed of Absolute Sale and the Remittance
Return were in VMC’s name does not forestall the possibility that
the property is owned by another entity because Article 1452 of the
Civil Code expressly authorizes a person to purchase a property
with his own money and to take conveyance in the name of another.
 In Tigno v. Court of Appeals, the Court explained, thus:

 An implied trust arises where a person purchases land with his own
money and takes conveyance thereof in the name of another. In such a
case, the property is held on resulting trust in favor of the one
furnishing the consideration for the transfer, unless a different intention
or understanding appears.