Civil Law Rabuya Contracts PDF

172 {70} (70.1) (70.2) ‘CIVIL LAW REVIEWER rights of the person who has been subrogated in his place in virtue of the partial payment of the same credit, he shall be preferred over that of the person who has been partially subrogated. tions and novation by substitution of the debtor: When the principal obligation is extinguished in consequence of a novation by changing the object or principal condi tions or by substitution of the person of the debtor, cessory obligations, as a rule, are also extinguished. However, if there is a stipulation in favor of third persons, accessory obligations subsist insofar as they may benefit such third persons who have not given their consent to the novation.™ In novation by subrogation: As discussed in Section 69.5.1, the new creditor, as a rule, is also entitled to the exercise of the accessory rights, such as the right to the mortgage or pledge. Hence, such accessory obligations are not extinguished upon the extinguishment of the principal obligation in consequence of subrogation. However, as discussed in Section 69.5.2, the parties may, by express agreement, modify the effects mentioned in Section 69.5.1 in the case of conventional subrogation. Art. 1904, NCC, "8 Manresa 441 md, Part Two: CONTRACTS DEFINITION, CLASSIFICATION, AND DISTINCTIONS (71] Contract, In General: (71.11 (71.2) (71.3] Definition: A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.* It may also be defined as “a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do."* Distinguished from conventions: its derivative sense, the word “contract” (cum traho) simply means an agreement or convention. Although a contract is a convention, or agreement of wills, not every convention is a contract. Convention is broad enough to include any kind of agreement which may create, modify or extinguish patrimonial and contract, on the other hand, i which produce patrimonial lial Implied Contract: [71.3.1] Contract can exist_by implication: While Article 1805 of the NCC speaks of “meeting of the minds,” it does not mean that contracts, can exist only by express agreement. A contract can also exist by implication. “Art, 1805, NCC. Sardine Davies, Inc. v. CA, 29 SCRA 684, 692-694, citing 4 Sancher Roman 148-149, "IV Tolentino, Civil Code of the Philippi ‘Jurado, Obligations & Contracts, 1987 HIV Tolentino, Civil Code of the Philippi “Id., citing Arroyo v. Azur, 76 Phil. 493. 373m4 (71.4] Distinguished from obligation: CIVILLAW REVIEWER, {71.3.2] Implied contract, defined: An implied contract, in the proper sense, is a contract which arises where the intention of the parties is not expressed, bul an agreement in fact, creating an obligation, is implied or presumed from their acts, or where there are circumstances , according to the ordinary course of dealing and the common understanding of men, show a mutual intent to contract.’ [71.8.8] Distinguished _from_quasi-contract: An implied contract differs from a quasi-contract, as follows — » d contract requires consent of whereas, a quasi-contract is not predicated on consent, being a unilateral act. 2) The basis of an implied contract is the will of the parties; whereas, the basis of a quasi-contract is law to the end that there be no unjust enrichment." contract is an agreement which creates an obligation. Thus, under the Code contract is one of the sources of obligation.”® There is therefore a distinction between the contract itself in that the contract is the cause, tion is the result. whereas the obli [71.5] Meeting of the minds: The definition of contract under Article 1305 of the NCC lays stress on the meeting of the minds of the contracting parties. 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 As a rule, therefore, a contract 172.2], According to manner of perfection: CHAPTER ONE 105 OBLIGATIONS & CONTRACTS is perfected by mere consent." It does not require any special form, as a rule,” and is binding from the moment that the essential requisites are present." Thus, the meeting of the minds between the parties gives rise to a binding contract although they have not affixed their signatures lo its written form." (72) Classification of Contracts: . (72.1] According to degree of dependence: It is either — [72.1.1] Principal: That which can exist independently of other contracts. An example of which is a contract of loan. (72.1.2) Accessory: That which cannot exist without a valid principal contract. Under our laws, the term accessory contract is synonymous with contracts of guaranty, such as guaranty ~ proper, surety, pledge, mortgage, etc. These contracts exist merely to secure the fulfillment of principal obligation. [72.1.3] Preparatory: That which is not an end by itself but only a means for the execution of another contract. A contract of agency is an example of a preparatory contract, as agency does not stop with the agency because the purpose is to enter into other contracts." is either — 72.2.1] Consensual: That which is perfected by mere consent. An example of which is a contract of sale” (72.2.2) "Swedish Bast Asia Co. v. Manila Port Servico, 26 SCRA 699 (1968); sve also Pacmae, Inc. v. Vulean Manufacturing Co., CV-57311, August 12, 1985. iggested Answer to Q No. 8, 1989 Bar, UP Law Center. C.S, 637, 118712), NCC. stan v, CA, 266 SCRA 663, 670. ‘Dation v. CA, 182 SCRA 872176 CIVIL LAW REVIEWER contracts are classified as real contracts — deposit, pledge, mutuum and commodatum.' (72.3) According to nature of obligation produced: It is either — (72.8.1) (72.3.2) Bilateral: That which creates obligations on both sides or on both parties, A contract of sale is an example of a bilateral contract which creates obligations on the part of the buyer and the seller. Unilateral: That which creates obligations only on one side or on the part of only one of the contracting parties. An example of a unilateral contract is the contract of commodatum or a contract of gratuitous deposit. [72.4] According to their name: It is either — (72.4.1) (72.4.2 (72.5) According to cause: I 1725.1) Nominate (nominado): That which is distin guished by a particular or special name in the Givil Code. Examples of nominate contracts are sale, lease, and deposit. Innominate Gnnominada): That which is recognized in the Civil Code, but not specially named or classified in the said Code. These contracts shall be regulated by the stipulation of the parties, by the provisions of Obligations and Contracts, by the rules governing the most analogous nominate contracts, and by the customs of the place." There are four ‘kinds of imominate contracts: 1) do ut des —I give that you give; 2) dout facias — 1 give that you do; 3) facio ut des —1 do that you give; and 4) facio ut facias —1 do that you do. ‘ther — Onerous: That where the cause is understood tobe, for each contracting party, theprestation “Aris. 1316, 1934, 1963, and 2093, NCC, “Art. 1807, NCC, (72.5.2) (72.5.3) CHAPTER ONE ant OBLIGATIONS & CONTRACTS or promise of a thing or service by the other.” ‘An example of which is a contract of sale. Remuneratory: That where the cause is the serviee or benefit for which the remuneration is given” A donation given in consideration of a past service which does not constitute a demandable debt, for example, is classified as. a remuneratory donation. Gratuitous: That where the cause is the mere liberality of the benefactor.” For example, the contract of commodatum is essentially gratuitous. (72.6) According to risk involved: It is either — (72.6.1) (72.6.2) Commutative: ‘That in which each of the contracting parties gives and receives an equivalent or there is a mutual exchange of relative values. A good example is the contract, of sale where the seller gives the thing sold in exchange for the purchase price and buyer pays the price in exchange of the thing sold, Aleatory: That in which each of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to oceur at an indeterminate time." Here, the element of risk dependent on chance is predominant. ‘A good example is the contract of insurance. (72.1] According to requirement of form or solemnity: (72.7.1) Art 1950, NCC. oe} Art, 726, NCC. Art. 1850, NCC. Common; That which does not require any form. As a rule, contracts are obligatory in whatever form they may have been entered Art, 1933, par. 3, NCC, Art, 2010, NCC.178 CIVIL LAW REVIEWER into, provided all the essential requisites for their validity are present." (72.7.2] Special or solemn: That which requires certain formalities either for its validity or enforceability. For example, a donation of real property, together with its acceptance, is required to be embodied in a public instrument, otherwise, the donation is void.” [72.8] According to purpose: It is either — (72.8.1) To transfer ownership: Such as sale* or bar- ter” {72.8.2] To convey the use: Such as commodatum™ or Tease.” [72.8.3] Togivesecurity: Such as pledge“ or mortgage. (72.8.4) Torender some service: Such as agency. [72.9] According to their subject-matter: [72.9.1] Things: Examples are sale, pledge or mortgage. [72.9.2] Services: Such as lease of services or agency. [72.9.3] Rights: Provided they are not personal or intransmissible. (72.10) According to their defects: [72.10.1] Perfectly valid — That which is not suffering from any defect. (72.10.2}Rescissible (Art. 1380, NCC) [72.10.3] Voidable (Art. 1890, NCC) Ant 1958, NCC. "Art 749, NCC, "rt. 1458, NCC. *Art. 1638, NCC. Art 1985, NCC. “Ant 1643, NCC. Art. 2008, NCC. Art 2124, NCC. “Art 1868, NCC. CHAPTER ONE 179 OBLIGATIONS & CONTRACTS: (72.10.4] Unenforceable (Art. 1408, NCC) [72.10.5] Void or inexistent (Art. 1409, NCC) CHARACTERISTICS OF CONTRACTS [73] Characteristics of Contracts: Every contract has four fandamental characteristics — 1) The obligatory force or character of contracts; 2) The autonomy of contracts; 3) The mutuality of contracts; and 4) The relativity of contracts. [74] Principle of Obligatory Force of Contracts: (74. (74. 1] Statement of the principle: It is a fundamental principle in contract law that “obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” This is known as the principle of the obligatory force of contracts, 2] Consequence: From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which, according to their nature, may with good faith, usage and law. Also, between the parties, courts have no alternative but to enforce them as they were agreed upon and written.” 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 he was doing. Courts have no power to relieve parties from their obligations voluntarily assumed, simply Art, 1168, NCC. *Pangilinan v, CA, 279 SCRA 590; ee also Art. 1815, NCC. "1a,(74.3) CIVIL LAW REVIEWER, because their contracts turned out to be disastrous deals or unwise investments." ‘Requisites for application of principle: Before a contract, may be considered obligatory, it is necessary that — 1) Itis perfected; 2) Itisvalid; and 3) Itis enforceable. (75] Principle of Autonomy of Contracts: (75.1) (75.2) ‘Statement of the principle: The contracting parties are accorded the liberality and freedom to establish such stipulations, clauses, terms and conditions as they may deem convenient, provided the same are not contrary to law, morals, good customs, public order or public policy: In the law on contraets, such fundamental principle is known as the autonomy of contracts. Freedom of contract. protected: The right to enter into lawful contracts constitutes one of the liberties of the people of the state. If that right be struck down or arbitrarily interfered with, there is a substantial impairment of the liberty of the people under the constitution." Such freedom is protected by the following provisions in the Constitution: 1) No person shall be deprived of life, liberty or property without due process of law.* (due process clause) 175.2.1] Due process clause: The Constitution guaran- tees the free exercise of the right of property, and the freedom to contract is such right, of which the possessor cannot be deprived with- CHAPTER ONE 181 OBLIGATIONS & CONTRACTS out due process of law. But the liberty to contract, associate business activities, may be subjected, in the interest of the general welfare under the police power, to restric- tions varied in character and wide ranging in scope as long as due process is observed. It is, easily understandable why the regulation of practice of medicine; limitation of the hours of labor; imposition of price control; requirement, of separation pay for one month as well as a social security scheme cannot be impugned as unconstitutional. * Timber licenses, permits, and license agreements are the principal instruments by which the State regulates the utiliza- tion and disposition of forest resource: the end that public welfare is promoted, And it can hardly be gainsaid that they merely evidence a privilege granted by the State to qualified entities, and do not ‘vest in the latter a permanent or irrevoca- ble right to the particular concession area and the forest products therein. They may be validly amended, modified, replaced, or rescinded by the Chief Executive when national interests so require. Thus, they are not deemed contracts within the purview of the due process of law clause.” 75.2.2] Non-impairment clause: While non-impair- ‘ment of contracts is constitutionally guaran- teed, the rule is not absolute, since it has to be reconciled with the legitimate exercise of police power. As long as the contract affects “National Labor Union, Ine. v. The Court of Industrial Relations, G.R. No. “Felipe Yamael, Jr. & Co,, Inc. v. Deputy Executive Secretary, 190 SCRA 673, 684 (1990). “Ortigas & Co, Limitod Partnership v. Feati Bank and Trust Co, 84 SCRAthe public welfare one way or another so as to require the interference of the State, then must the police power be asserted, and prevail, over the impairment clause.” Elsewise stated, non-impairment of contracts or vested rights clauses will have to yield to the supe- rior and legitimate exercise by the State of police power to promote the health, morals, peace, education, good order, safety, and general welfare of the people." 75.3] Limitations on freedom of contract: The principle of party autonomy in contracts is not, however, an absolute principle. The rule in Article 1906 of our Civil Code is that the contracting parties may establish such stipulations as they may deem convenient, “provided they are not contrary to law, morals, good customs, public order or public policy.” {75.3.1] Law, as limitation: The parties cannot stipu- late against the law, because the law is supreme and is always deemed to be an integral part of every contract. The principle is well- settled that an existing law enters into and forms part of a valid contract without need for the parties’ expressly making reference to it ‘Thus, the parties are charged with knowledge of the existing law at the time they enter into contract and at the time it is to become oper- ative A contract that, violates the Constitu- tion and the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all." Laws, which the terms of a contract must not contravene, are those: “Suarez v. CA, 214 SCRA 475, 480. “Presley v. Bel-Air Village Association, Inc., 201 SCRA 13, 18-19. “Pakistan International Airlinos Corp. v. Ople, 190 SCRA 90, 99 1999). “Lakas ng Manggagawang Makabayan (LMM) v. Abierra, 36 SCRA 437, 444. ‘Communication Materials and Design, Inc. v. CA, 260 SGRA 673,693 (1996) “Chavez v. Presidential Commission on Good Government, 807 SCRA 394, OBLIGATIONS & CONTRACTS 1) Which expressly declare their obligatory character; or 2) Which are prohibitive; 3) Which express fundamental principles of justice which cannot be overlooked by the contracting parties; 4) Which impose essential requisites without which the contract cannot exist. [75.3.2] Public order and public policy: Public order, as correctly stated by Manresa (Cammentaries, vol. 8, p. 606), does not mean the actual keeping of the public peace, but signifies the public weal — that which is permanent and essential in institutions. It is the equivalent of the term “public policy” as used in the law of the United States.* Thus, according to Senator Tolentino, “public order” is synonymous to «Freedom of contract is subject binding and will not be enforced. (76] Principle of Mutuality of Contracts: [76.1] Principle, explained: Article 1308 of the presses what is known in law as the prin tuality of contracts. It provides that the “contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them.” This binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant 1 Manrons 600; td in 4 Tolentino, 1001 Ed p. 16.(76.3) CIVIL LAW REVIEWER, to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncon- trolled will of one of the contracting parties.” (76.2] Determination _of performance _by third person: While the validity of a contract or ‘compliance thereto cannot be left to the will of one of the contracting parties, the determination of performance, however, may be left to a third person." The determination of the performance by a third person shall be obligatory upon both contracting parties from the moment it is made known to them, provided that such determination is not evidently inequitable. Contract of adhesion: [76.3.1] Definition: It is one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contracts while the other party merely affixes his signature or his “adhesion” thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. Such contracts are called contracts of adhesion, because the only participation of the party is the affixing of his signature or his “adhesion” thereto. (76.3.2] Generally valid: Contracts of adhesion have ‘been declared as binding as ordinary con- “Allied Banking Corporation v. CA, 264 SCRA 357, 363-364 (1998). Art 1910, NOC. Commercial and International Bank v. CA, supra, at 306. Gare lon GA 290 SCRA 290, 390-01 (1008) CHAPTER ONE 185 OBLIGATIONS & CONTRACTS tracts, the reason being that the party who adheres to the contract is free to reject it en- tirely.« (76.3.3) When invalid: It has been declared that contract. of adhesion may be struck down as void and unenforceable, for being subversive to public policy, only when the weaker party is imposed upon in dealing with the dominant, ining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on ity thereof the circumstances under which the stipuiation is intended to apply. (76.3.4] Unilateral increase of interest rate: Even assuming that the loan agreement between the creditor and the debtor gave the former a license to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s participation being reduced to the alternative “to take it or leave it.” Contract changes must be made with the consent of the contracting parties. ‘The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, the rate of interest is always a vital component, for it ‘can make or break a capital venture. Thus, SEhilpine Commercial and Inieratona Bank ¥ CA, 55 SORA 209, 308, pine Nations! Bank v.CA, 196 SCRA 536, 544-548 (1991)186 CIVIL LAW REVIEWER ‘any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.” (76.3.5) Strictly construed: While it is true that an adhesion contract is not necessarily void, it. must nevertheless be construed strictly against the one who drafted the same. This is especially true where the stipulations are printed in fine letters and are hardly legible." (77] Principle of Relativity of Contracts: (77.2) 177.1] Principle, explained: The principle of relativity of contracts provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof." In consonance with the axiom “res inter alios acta aliis neque nocet prodes,” a contraet can only obligate the parties who had entered into it, or their successors who assumed their personalities or juridical positions, and that, concomitantly, a contract can neither favor nor prejudice third persons. ira: The general rule is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not. transmissible by (1) their nature, (2) stipulation or (3) provision of law.” As a rule, therefore, he who contracts does so for himself and his heirs.* Thus, if the predecessor was duty-bound to reconvey land to another, and at his death the reconveyance had not been made, the heirs can be compelled to execute the proper deed for reconveyance. ‘This was grounded upon the principle that heirs cannot CHAPTER ONE 187 OBLIGATIONS & CONTRACTS. escape the legal consequence of a transaction entered into by their predecessor-in-interest because they have inherited the property subject to the liability affecting their common ancestor.* * A contract of lease is, therefore, generally transmissible to the heirs of the lessor or lessee. It involves a property right and, as such, the death of a party does not excuse non- performance of the contract. The rights and obligations pass to the heirs of the deceased and the heir of the deceased lessor is bound to respect the period of the lease. The same principle applies to the option to renew the lease. As a general rule, covenants to renew a lease are not personal but will run with the nd, Consequently, the successors-in-interest of the lessee are entitled to the benefits, while that of the lessor are burdened with the duties and obligations, which said covenants conferred and imposed on the original parties.” (77.2.1) Rulewithcespectto monetary debts: The heirs of the deceased are not liable for the debts be may leave at the time of his death. Such debts are chargeable aguinst the property or assets left by the deceased.#* Thus, Article 1311 of the Civil Code provides that “the heir is not liable beyond the value of the property he received from the decedent." In other words, the heirs are no longer personally liable for the debts of the deceased; such debts must be collected only from the property left upon his death, and if it should not be sufficient to cover all of them, the heirs cannot be made to pay the uncollectible balance.” “Carilo v. Salak de Paz, 91 Phil. 265 (1952). NC "Estate of Llenado v. Llonado, G-R. No. 145736, March 4, 2008, Separate Opinion, J. Vitug in Lagandoun v. CA, 290 SCRA 830 (1998). jes, 1979 Bd, p. 776, “Art. 1911, par. 1, NCC; DKC Holdings Corporation v. CA, $29 SCRA 656, , 8 Phil. 70; Suiliong & Co. v. Chio-Tuysan, 12 Phil. 13; 672 (2000) Centenera v. Sotto, 78 Phil. 432. izegui v. Lawn Tennis Club, 2 Phil. 309, 813 (1903),188 ‘CIVIL LAW REVIEWER (77.3) Exceptions to principle of relativity: The following are the well-recognized exceptions to the principle of relativity — 1) Exceptionally, a contract may confor benefits to a third person or what are otherwise known as “stipulation pour autrui.”* 2) In contracts creating real right, third persons who come into possession of the object of the contract may be bound thereby under the provisions of mortgage laws and land registration laws." 8) Creditors are protected in cases of contracts intended to defraud them. 4) Accion directa is allowed by law in certain cases. 5) Any third person who induces another to violate his contract can be made liable for dam- ges to the other contracting party. (7.3.1) Stipulation pour autrui: (77.3.1.1] Concept, explained: A stipulation pour autrui isa stipulation in favor ofa third person conferring a clear and deliberate favor upon him, and which stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the third person, and such third person may demand its fulfillment provided that he communicates his acceptance to the obligor before it is revoked. Separate Opinion, Justice Vitug in Lagandoan v. CA, supra “Art. 1911, par. 2, NCC. Art. 1312, NCC. Are 1913, NCC. See Nec. C. v. Encarnacion, &r.,79 SCRA 198, 201 (1977); Associated Bank v. (CA, 291 SCRA 611 (1998). CHAPTER ONE. 7 189 OBLIGATIONS & CONTRACTS (77.3.1.2] Requisites: The requisites of a stipulation pour autrui or a stipulation in favor of a third person, are the following: = 1) There must be a stipulation in favor of a third person; 2 ‘The stipulation must be a art, not the whole of the contract; 3) The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; 4) The third person must have communicated his acceptance to the obligor before its revocation; and Neither of the contracting parties bears the legal representation or authorization of the third party." NOTE: The fairest test to determine whether the interest of third person in a contract is a stipulation pour ‘autrui or merely an incidental interest, is ta rely upon the intention of the parties as disclosed by their contract. In applying this test, it matters not whether the stipulation is in the nature of a gift or whether there is 5) Young v. CA, 169 SCRA 213, 219 (1980), citing Florentino v. Encarnacion, Sr, supra.(77.3.2) (17.3.8) (77.3.4) CIVIL LAW REVIEWER an obligation owing from the promise to the third person. That no such obligation exists may in some degree as- sist in determining whether the parties intended to benefit a third person." Contracts creating real right: Third persons may be affected by contracts creating real rights when they come into possession of the object of the contract,” as for example, a recorded lease is binding upon the purchaser who did not take any part in the execution of the lease contract. Similarly, a contract of mortgage duly registered is binding upon third persons.® Contracts in fraud of creditors: Creditors, in order to satisfy their claims, may: (1) pursue properties in the possession of the debtor; (2) exercise all the rights and bring all the actions of the debtor, except those purely personal to such debtor; and (3) impugn the acts which the debtor may have done to defraud them." In case of the latter, the ereditors are protected.* They can ask for the rescission of such contracts." Tort interference: (7.3.4.1) Rule: A contract confers certain rights on the person with whom it is made, and not only binds the parties to it by the obligation entered into, but also imposes on “Florentine v, Encarnacion, Sr. 79 SCRA 199, 201 1977, "Arta. 2135, par. 1 and 2128, NCC. Art. 1177, NCC. Sart. 1913, NCO. See Art. 198103), NCC. wart. 1314, NCC. (CHAPTER ONE. 191 ‘OBLIGATIONS & CONTRACTS all the world the duty of respecting that contractual obligation. Thus, any third person who induces another to violate his contract shall be liable for damages to the other contracting party." (7.3.4.2) Elements of tort interference: In order that an action against a third person for contractual interference can be maintained, the following elements must be present — 1) ‘The existence of a valid con- ‘tract; 2) Knowledge on the part of the third person of the existence of contract; and 8) Interference of the third person is without legal justifica- tion or excuse.” (7.3.4.3) Identity of injured party not re: ‘quired: A third person can be held liable for tort interference even if he does not know the identity of one of the contracting parties. The interference with lawful contracts by strangers thereto gives rise to an action for damage in favor of the injured person. The law does not require that the responsible person shall have known the identity of the injured person™ 46 Am Jur 24, pp. 280-281. “So Ping Bun v. CA, 314 SCRA 751, 758 (1999), *Gilehrist v. Cuddy, 29 Phil. 42.CIVIL LAW REVIEWER PERFECTION OF CONTRACTS [78] Stages of Contracts: A contract undergoes three distinct stages — a) Negotiation —it begins from the time the prospective contracting parties manifest their interest in the contract and ends at the moment of agreement of the parties; Perfection — or birth of the contract takes place when the parties agree upon the essential elements of the contract; Consummation — which is the last stage, wherein the parties fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof” b) a {79] Perfection of Contracts: 179.11 Concept: The stage of the birth of a contract is referred to as its perfection. Prior to perfection, no contract is created. Thus, until « contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation.” 179.2] Manner of perfecting contracts: [79.2.1] Consensual contract: A contract which is con- ‘sensual as to perfection is so established upon amere meeting of minds, i., the concurrence of offer and acceptance, on the object and on the cause thereof. Thus, the rule is that 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 "Bugatti v. CA, 343 SCRA 825, 346 (2000), citing Ang Yu Asuncion v. CA, 298 SCRA 602 (1994). eang Yu Asuncion v. CA, id, at 611. CHAPTER ONE 193 OBLIGATIONS & CONTRACTS which, according to their nature, mi keeping with good faith, usage and I * A contract of sale is consensual contract, which means that the sale is perfected by mere consent.” + A compromise agreement is perfected upon the meeting of the minds of the parties to the contract. And from that moment not only does it become binding upon the parties, it also has upon them ~ the effect and authority of res judicata, even if not judicially approved.” [79.2.2] Real _contract: It is perfected not by mere consent, but by the delivery of the object of the contraet. Under the Civil Code, there are four contracts which require delivery for their perfection — ~ (79.22.11 Commodatum and mutuum: An accepted promise to deliver something by way of commodatum or simple loan (mutuum) is binding not be perfected until the delivery of the object of the contract.™ (79.2.2.21 deposit itself is not perfected until the delivery of the thing.™ (79.2.2.3] Pledge: It is necessary, in order to ‘constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, NCC. ‘GA, 182 SCRA 872, 877; Balatbat v. CA, 261 SCRA 128, 138-199 263 SCRA 569, 576 (1996), fayuga v. CA, 154 SCRA 309, 320 (1987), Sanchez v. CA, 279 SCRA 647, ‘wart. 1963, NCC; ae also Art. 1916, NCC.194 (CIVIL LAW REVIEWER ‘CUAPTER ONE 196 OBLIGATIONS @ CONTRACTS or of a third person by common agreement. A. Essential Requisite: CONSENT [81] Basic Concepts on Consent: [81.1] Importance of consent: It is elementary that consent is an essential element for the existence of a contract, ESSENTIAL REQUISITES OF CONTRACTS and where it is wanting, the contract is non-existent. [80] Elements of Contracts, In General: ’ ‘The elements of contracts It is the essence of a contract." There can be no con- may either be — tract in the true sense in the absence of the element of [80.1] Essential elements: The eszential elements are those agreement, or of mutual assent of the parties." necessary for the very existence of the contract itself. + ined: nt it . ‘The absence of any one of these essential elements will {BRAT Goneagt axplainadl Consent se conformally of will, prevent the creation or existence of a contract. In other the will of one contracting party with that of another words, the contract is “inexistent” in the absence of any or others, upon the object and terms of the contract. of these essential elements. Under Article 1318 of the ‘The essence of consent is the conformity of the parties Civil Code, there is no contract unless the following on the terms of the contract, the acceptance by one of the offer made by the other." [81.3] Elements ofconsent: Consent presupposes the following These three requisites are, therefore, the essential elements of a consensual contract. In real contracts, however, in addition to the above, the delivery of the requisites — object of the contract is required as a further requisite. 1) plurality of subjects; Hence, in real contracts, the essential elements are: (1) consent; (2) object; (3) cause; and (4) delivery of the 2) capacity; object of the contract. 3) intelligent and free will; [80.2] Natural elements: These elements are not essential 4) express or tacit manifestation of the will; and for the existence of a contract but they are presumed 5). to exist in certain contracts unless there is an express oufimnlty of tha debersal will and manifeec stipulation to the contrary. A good example is “warranty in case of eviction” in a contract of sale. Warranty [814] Manifestation of consent: Consent is manifested by the against eviction is a natural element of a contract of meeting of the offer and acceptance upon the thing and sale, although the contracting parties may increase, ‘the cause which are to constitute the contract." Thus, diminish or even suppre an offer that is not accepted does not give rise to consent, [80.3] Accidental elements: Thes and the contract does not come into existence. the parties expressly p1 for them. These are the clauses, terms, and conditions that the parties may een deem convenient, provided they are not contrary to law, "Salonga v:Farrales, 105 SCRA 989, 368 (198). morals, good customs, public order or public policy." jalanro v. Custodio, 92 Phil. 1063, Unreported. ements exist only when ™ Art. 2098, NCC; see also Art. 1916, NCC. Castan 603; cited in 4 Tolentino, 1991 Rd, p. 447. 1319, NCC, jamboa v. Gonzales, 17 Phil. 381.196 (81.5) CIVIL LAW REVIEWER Founs of consent: Consent may either be express or implied. Note that acceptance of the offer may either be express or implied." {82] Offer in Contract Law: (82.1 (92.2) Concept, explained: In contract law, an offer is defined as an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed. The party who makes the offer is called the offeror while the parly to whom an offer is made is called the offeree. Requisites for effective offer: For an offer to be effective, it must satisfy the following requisites — 1) The offeror must have a serious intention to become bound by his offer. 2) ‘The terms of the offer must be reasonably certain,” definite and complete, so that the parties and the court can ascertain the terms of the offer. 3). The offer must be communicated by the offeror to the offeree, resulting in the offeree’s knowledge of the offer. [82.2.1] Seriousness of the offer: Under American jurisprudence, mutual assent is judged by ‘an objective standard, looking to the express words the parties used in the contraet.!® Following the objective theory of contracts, the seriousness of the intention of the offeror is to be determined by what a reasonable person in the offeree’s position would conclude the offeror’s words and actions meant and not "Morene v: Private Mangement Office, CR. No. 159978, November 16, 2006, clung Deputy v. Lehman Brot, Ine, 245 F.3d 44, 62 Fed. R. Evid Serv, 965 (7th ‘CHAPTER ONE, at OBLIGATIONS & CONTRACTS by the subjective intentions or beliefs of the offeror." Thus, under the objective theory of contract, understandings and beliefs are effective only if shared. (82.2.2) Certainty of offer: An offer to be effective must be definite, complete and certain. There is an offer in the context of Article 1319 of the Civil Code only if the contract can come into existence by the mere acceptance of the offer without any further act on the part of the offeror.™ If a new or further agreement is necessary to clarify what has been agreed upon, clearly there is no perfection of the contract. [82.2.3] Communication of the offer: The offeree cannot accept an offer which has not been communicated to him; and, therefore, as a rule, an uncommunicated offer, whether by words or acts, cannot result in a contract. Sueh uncommunicated offer may be withdrawn at any time, 182.3] Cases which are NOT considered as offers: [82.3.1] Advertisement of things for sale: As a rule, business advertisements of things for sale are not offers but mere invitations to make an offer. ‘The positive response to such advertisement is what may be considered as the offer. However, such advertisement may become an offer if it is expressly and clearly provided therein. [82.3.2] Advertisement for bidders: Are not also considered as offers but simply invitations to "ELeonard ¥. Pepsico, Inc, 88 F. Supp2d 116 (S.D.N.Y. 1996), United States198, (82.3.3) CIVILLAW REVIEWER make proposals. Hence, as a rule, the adver- tiser is not bound to accept any bid, whether it may be the highest or lowest," unless the advertisement contains language subject to the interpretation that the intention is to let, the contract to the highest or lowest bidder. Here, the bid proposals or quotations submitted by the prospective suppliers are the offers, and the reply of the proposer, the acceptance or rejection of the offers. Auction sale: In an auction, the auctioneer’s call for bids is not considered as an offer but simply an invitation to make proposals. Here, the bid proposal submitted by the bidder is, the offer. Ordinarily, the sale is considered perfected only when the auctioneer announe- s its perfection by the fall of the hammer, or in other customary manner." Until such an- nouncement is made, any bidder may retract, his bid; and the auctioneer may withdraw the goods from sale unless the auction has been announced to be without reserve. (82.4] Termination of offer: (824.11 Ari. 1925, NCC. od, yd, drawal of offer: At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn or revoked by the offeror, as a rule." The power to revoke is implied in the criterion that no contract exists until the acceptance is known. As the tie or bond springs from the meeting or concurrence of the minds, since up to that moment. there exists only a unilateral act, it is evident irdine Davies, Ine. v. CA, 388 SCRA 684 (2000). "Art. 14762), NCC. Ang Yu Asuncion v. CA, 238 SCRA 602, 613 (1994), citing Laudico v. Arios, 43 Phil. 27 CHAPTER ONE, 199 OBLIGATIONS & CONTRACTS that he who makes it must have the power to revoke it by withdrawing his proposition.’ Upon the revocation or withdrawal of the offer, the same is considered terminated. 182.4.1.1] Revocation prior to perfection of sontract: The contract is perfect ed only from the time an acceptance of an offer is made known to the offeror. Unless the offeror knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and acceptance." Hence, as a rule, the offeror may withdraw its offer and revoke the same before acceptance thereof by the offeree.* But where a period is given to the offeree within which to accept the offer and the same has a separate consideration, a contract of “option” is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period." ‘The concept of option contract is discussed in Section 82.5 of this Chapter. [824.12] Time of effectivity of revocation: In contracts between absent persons, the Civil Code adopted the theory holding that an acceptance ter of an offer has no effect wie comen tothe knowledge of the offerer. It means that, before the acceptance is known, the *SLaudico v. Arias, 43 Phil. 27 Art. 1319, par. 2, NCC; Malbarosa v. CA, 402 SCRA 168 (2005), ‘tMalbarosa v. CA, id. ian ‘Ang Yu Asuncion v. CA, ewpra. ‘tart 1B19, par. 2, NCC; Laudico v. Arias, supra.200 (CIVIL LAW REVIEWER, offer can be revoked, it not being necessary, in order for the revocation to have the effect of impeding the perfection of the contract, that it be known by the accoptant.» Stated otherwise, the revocation or withdrawal of the offer is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal." 182.4.21 By action of offeree — rejection of offer: An i offer is terminated when the offeree rejects it. After the rejection of the offer, any subsequent t attempt by the offeree to accept the same is tantamount to a new offer which the original t offeror (now the offeree) is free to accept or i eject, unless the original offeror is willing to renew his offer (82.4.2.1) Counter-offer: An important form of rejection is what is known as counter-offer. A counter-offer_ is | a fejection of the original offer I and the simultancous making i of a new offer. The original offer is therefore terminated and the ' original offeree now becomes the new offeror. 182.4.3] By operation of law: The offer is also terminated in the following situations — 182.4.3.1] Lapse_of time: The offeror may fix the time of acceptance which must be complied with." Where a ‘time is stated in an offer for its acceptance, the offer is terminated at the expiration of the time given "*Laudico v. Arias, 48 Phil. 27. seSwodish Match, AB v. CA, G:R. No. 128120, October 20, 2004; see also Ang ‘Yu Asuncion v. CA, 238 SCRA 602, 613 (1904), citing Laudicav. Arias, id. Mart, 1821, NCC. (CHAPTER ONE, 201 OBLIGATIONS & CONTRACTS (82.4.3.2) [82.4.3.3) (82.4.3.4) “Villanueva v. CA, 244 SCRA 396, “See Restatement (Second) of Contr "Id, provided, the offortormin, ter the lapse of a reasonabl However, an offer mad praesentes (or made to a person resent) must be accepted immediately" when the offeror has not fixed a period for acceptance. Bitact of sent oti insanity_or insolvency: The contract is perfected only from the time an acceptance of an of either party or his loss of capacity before perfection prevents the contractual tie from being formed. ‘Supervening illegality of proposed contract: The termination of the offer likewise occurs when a leg- islative enactment or a court decision makes the offer illegal after ithas been made.” Destruction _of_subject_smatter: ‘The offer is likewise terminated if the specific subject matter thereof is destroyed before the offer is accepted." =CIVIL LAW REVIEWER (82.5) Option Contract: [82.5.1] Definition: An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, whether or not to enter into a prineipal contraet. Tt binds the party who has given the option, not to enter into the principal contract with any other person during the period designated, and, within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinet from the contract which the parties may enter into upon the consummation of the option. If the transaction is one of sale, an option may he defined as a contract granting a privilege to buy or sell within an agreed time and at 4 delermined price. It is a separate and contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. An option contract conforms with the second paragraph of Article 1479 of the Civil ishing characteristic is ig obligation on the ais Code. Its distin, that it imposes no person holding the option, as consideration for the offer. Until aceeptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms. [82.5.1.1] Distinguished _from_contract of sale: The option, however, is an “SCarceller v.CA, 302 SCRA 718, 724 (1599). '\Adelfa Properties, Inc. v. CA, 240 SCRA 565, 579 (1996). ae [82.5.2] CHAPTER ONE 203 OBLIGATIONS & CONTRACTS. independent contract by itself, and it is to be distinguished from the projected mi (subject matter of whi is that an option is an unaccept- ed offer.’* The optionee has the right, but not the obligation, to buy." The option states the terms and conditions on which the own- i ig to sell the property, if ee elects to accept them within the time limited. If the optionee does so elect, he must give notice to the other party, and the accepted offer thereupon becomes a valid and binding contract (of Ifan acceptance is not made in the time fixed, the owner is no longer bound by his offer, and the option is at an end. A contract. of sale, on the other hand, fixes obligations of both par time of its execution. and the acceptance are coneur- rent, since the minds of the contracting parties meet in the terms of the agreement Where a period is given to the offeree within which to accept the offer and the same is founded upon or supported by a separate consideration, a contract of “option” is deemed perfected.’ If “Ang Yu Asuncion v. CA, 288 SCRA 602, 613 (1994) i. ‘Adelfa Properties, Inc. v. CA, supra. ‘Ang Yu Asuncion v. CA, supra.CHAPTER ONE 205 204 CIVIL LAW REVIEWER OBLIGATIONS & CONTRACTS the contemplated contract is one of sale, an (82.5.3.1] Withdrawal must not be arbitrary accepted unilateral promise which specifies ‘ox_whimsical: The right to with- the thing to be sold and the price to be paid, draw, howaver, mast not be exar- when coupled with a valuable consideration ized whimetcally or arbitrarily; distinet and separate from the price, is otherwise, it could give rise to a what may properly be termed a perfected damage claim under Article 19 of contract of option, which is different. from the Civil Code which ordains that the contemplated ‘contract of sale." Since “every person must, in the exer- the option becomes a contract, the offeror cise of his rights and in the per- is bound by the agreement and may not formance of his duties, act with withdraw the offer during the period agreed justice, give everyone his due, and upon. Thus, it will be a breach of that contract. observe honesty and good faith." (of option) to withdraw the offer during the While the law permits the offeror ‘agreed period. The option, however, is an to withdraw the offer at any time independent contract by itself, and it is to before acceptance even before the be distinguished from the projected main period has expired, some writers agreement (subject matter of the option) hold the view, that the offeror can which is obviously yet to be concluded. If, in not exercise this right in an arbi- faet, the optioner-oiferor withdraws the offer ry or capricious manner. This before its acceptance (exercise of the eption) ipon the principle that an offer by the optionee-offeree, the latter may not iplies an obligation on the part sue for specific performance on the proposed of the offiror to maintain in such contract (‘object” of the option) sinee it has ene of eve an fo Desnatt te of failed to reach its own stage of perfection. The ieren, fo desde whether in. eecert er-fferor, however, renders himself i es nal eee connor ae le for damages for breach of the option." a rary rege oeitie ofterzwitcs ag ti being liable for damages which {82.6.3] When_option_not binding: If the period is the offeree may suffer. A contrary not itself founded upon or supported by a view would remove the stability consideration, the option does not become a and security of business transac- contract. Thus, the offeror is still free and tone. has the right to withdraw the offer before (8253.2) Acceptance prior to withdrawal its acceptance, or, if an. acceptance has been of offar: While an option not sup- ‘made, before the offeror’s coming to know of ported by a consideration is not such fact, by communicating that withdrawal 7 binding upon the promisor and to the offeree." he may, therefore, withdraw his offer, pending the notice of withdrawal, however, such option par- "hag Yu Asuncion v.CA, 258 SCRA 602 (1994). oad — 2Ang Yu Amunelon v. CA, aupra, citing Art 1824, Civil Cade and Atkins, Krall ‘Mise Yu Anuncio v.CA 258 SCRA 602 (1964 £2co. us, 102 P96 ee la ral Bunk of Purabagu, Ine Remelad, 138 are ie Guin Ono in Sen Rg, pret Gamer ‘SCRA.409; Sanches v. Rigs, 45 SCRA 968,(82.5.4) (92.5.5) "Sanches v. Rigos, 45 SCRA S68 CIVIL LAW REVIEWER takes of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.” ‘Consideration in option contract: By the very nature of an option contract, the same is an onerous contract for which the consideration must be something of value, although its kind may vary."* The consideration nocd not be monetary but could consist of other things or undertakings. However, if the consideration is not monetary, these must be things or undertakings of value, in view of the onerous nature of the contract of option. Furthermore, when a consideration for an option contract is not monetary, said consideration must be Clearly specified as such in the option contract or clause. Consideration in option may not be presumed: The provision in Article 1364 of the Civil Code that the existence of consideration is to be presumed in a contract does not apply to the contract of option or to “an accepted unilateral promise io buy or sell,” which is specifically governed by Article 1479 of the Civil Code. In order that said unilateral promise may be binding upon the promisor, Article 1479 requires the concurrence of a condition, namely, that the promise be “supported by a consideration distinct from the price.” Accordingly, the promisee can not compel the promisor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee hes the burden of proving such consideration. ‘=Villamor v. CA, G.R- No, 97382, October 10, 1991, 202 SCRA 607, 615; Bible Baptist Church v. CA, 444 SCRA 899 (2004); Eulogio v. Sps. Apeles, G.R. No. 167884, January 20, 2008. ‘Bible Baptist Church v. CA, id. ‘Sancher v. Rigas, supra. CHAPTER ONE, 207 OBLIGATIONS & CONTRACTS [82.5.6] Option_money_and_earnest_money, distin: guished: Earnest money is something of value to show that the buyer was really in earnest, and given to the seller to bind the bargain, and whenever earnest money is given in a contract of sale, it is considered as part of the purchase price and proof of the perfection of the contract.’* An earnest money differs from an option money, as follows: 1) Earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; 2) Earnest money is given only where there is already a sale, while option money applies to a sale not yet per- fecteds and 3) When earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives the option money, he is not required to buy.” [83] Acceptance of Offer: [83.1] Requirement of acceptance: To produce a contract, there must be acceptance, which may be express or implied, but must not qualify the terms of the offer.’ Where there is merely an offer by one party, without the acceptance of the other, there is no consent."® An acceptance concludes the making of a contract; nothing further is required. The effect of an unqualified acceptance of the offer is to perfect a contract. An agreement presupposes a meeting of the minds and when that point is reached in the negotiations between the parties intending to enter into a contract, the purported "[afortaza v. Machuca, 938 SCRA 643 (2000) Tne. v. CA, 240 SCRA 565, 584 (1995). 2. v. CA, 939 SCRA 84. "Gamboa v. Gonzales, 17 Phil. 381, cited in Salonga v, Farvales, 106 SCRA(83.2) CIVIL LAW REVIEWER, contract is deemed perfected and none of them may thereafter disengage himself therefrom without being liable to the other in an action for specific performance.” Acceptance must be absolute: To be effective, an acceptance must be absolute."" In other words, there must be no condition or qualification. Only an absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract.” To convert the offer into a contract, the aceeptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without vari- ance of any sort from the propos [83.2.1] Effect_of qualified acceptance: A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer™ and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer."* In other words, a proposal to accept or an acceptance, introducing new conditions or terms varying from those offered amounts to a rejection of the offer and the submission of a counter- proposal and puts an end to the negotiations without forming a contract unless the party making the offer renews it or agrees to the suggested modifications." [83.2.2] Mirrorsimage rule: This rule is a common law concept which states that in order for there to be an acceptance, the offeree must accept the terms as stated in the offer. Our "°City of Gabu v. Heirs of Candido Rubi, 306 SCRA 408, 418 (1998). ‘"°ABS-CBN Broadcasting Corp. v. CA, supra 17 0.4.8. 688 WLimketkal Sons Milling, Inc. v, CHAPTER ONE, 208 OBLIGATIONS & CONTRACTS courts are likewise adhering to the “mirror- image” rule. Thus, it has been ruled in this jurisdiction that the acceptance must be identical in all respects with that of the offer s0 as to produce consent or meeting of the minds.” Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer.’ When any of the elements of the contract is modified upon acceptance, such alteration amounts to a counter-offer.'* But where the alleged changes made in the acceptance are not material but merely clarificatory of what had previously been agreed upon, then there is no rejection of the original offer.” Also, even if a letter performed and implemented, they are not to be considered as conditions for the perfection hence, the same is not a [83.3] Manner and form of acceptance: 183.3.1) Manner of acceptance: In his offer, the offeror may fix the time, place and manner of acceptance, all of which must be complied with. If an offeror prescribes the exclusive manner in which acceptance of his offer shall be indieated by the offeree, an acceptance of the offer in the manner prescribed will bind the offeror. On the other hand, an attempt on the part of the offeree to accept the offer in a 255 SCRA 626 (1996 ARS.CBN210 CIVIL LAW REVIEWER, different manner does not bind the offeror as the absence of the meeting of the minds on the altered type of acceptance. If the parties be an express acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance by the offeree of the offer. 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. [83.3.2] Form of acceptance: An acceptance may be express or implied, unless the law specifically requires a particular format or manner of expressing such consent." The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct ‘communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduet, or words of the accepting party that clearly manifest a present intention or determination to accept the offer. Thus, acceptance may be shown by the acts, conducts, or words of a party recognizing the existence of a contract." But if the parties intended that there should be an express acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance by the offerce of the offer. [83.3.3] Acceptance through agent: Ifan offer has been. made through an agent, jeemed accepted. Steel & Conveyor's, Inc. Bank v. Angeles, 497 SCRA 264, 269 (2006). 4'See Adelfa Properties, Inc. v. CA, 240 SCRA 565, 580. eMalbarosa v. CA, supra. CHAPTER ONE aun OBLIGATIONS & CONTRACTS from the time acceptance is communicated to said agent," since by legal fiction, the agent is the extension of the personality of the principal." In other words, one who makes an. offer through a particular channel or agency impliedly authorizes an acceptance through the same channel or agency.” This is the rule unless the contrary is provided in the terms of the offer. [83.4] When acceptance binds offeror — cognition theory: The acceptance of an offer must be made known to the offeror." Unless the offeror knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and acceptance.” The contract is perfected only from the time an acceptance of an offer is made known to the offeror." This is known as the cognition theory being followed by the Civil Code. Hence, when the acceptance is made by letter or telegram, the same does not bind the offeror except from the time it came to his knowledge. [83.5] Withdrawal of acceptance: For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or revoked before it is made known to the offeror." B. Capacity to Give Consent [84] Contractual Capacity: (84.1) Essential element of consent: The legal capacity of the parties is an essential element for the existence of the “Are, 1922, NCC. Padilla, Civil Code of the Philippines, 1967 Ed. pp. 599-600, CIS. 690. “Malbaroas y. CA, supra, citing Jardine Davies, Ine. ¥. CA, ef a, $83. SCRA » citing Enriquez v. Sun Life Assurance, 41 Phil. 269. Art. 1319,212 CIVIL LAW REVIEWER (CHAPTER ONE a3 OBLIGATIONS & CONTRACTS contract because it is an indispensable condition for [85.2] Effect upon the contract: A contract entered into by a the existence of consent." There is no effective consent minor is not void, but merely voidable™ The law gives in law without the capacity to give such consent. In the minor the right to annul the contract entered into other words, legal consent presupposes capacity. by him upon his attalnment of the age of majority [e42) eat ot. The contrast mut he must bring the action for annulment within is not void. If only one of the contracting parties is fone seni Fram hie Sbssinmment of the aay of maboriiye incapable of giving consent to a contract, the same is Henge cre Renee Wn fe baered be the matate of merely voidable.* However, where both parties are idabl 7 aes i shing the eof ratify the incapable of giving consent to a contract, the same is soldable contrpct, upon reaching the.agnof majority: unenforceable. [85.3] Effect of misrepresentation by the minor: Where the minors who entered into the contract have alread; (84.3) Pemons incapable of giving consent: The following are pasied te Age of puberty. asd. edaleccsacs in’stchy incapable of giving valid consent to a contrac way that they could misrepresent and actually did 1) Unemancipated minors; misrepresent themselves as having reached the age of majority, they cannot, upon reaching the age of 2) Insane or demented persons; majority, annul the contract on the ground of minority 3) Deaf-mutes who do not know how to write; inasmuch as they are already in estoppel But this ruling applies only if the minor was guilty of active 4) Persons suffering from interdiction; and misrepresentation as when the document signed by the 5) Incompetents under guardianship. minor specifically stated that he was of age.» Thus, if the minor was guilty merely of constructive or passive [84.4] Presumption of capacity: The law presumes that every misrepresentation, or when the document signed person is fully competent to enter into a contract by him did not contain such statement, he may still until satisfactory proof to the contrary is presented. annul the contract upon reaching the age of majorit The burden of proof is on the i Where the minor did not pretend to be of age at lack of capacity to contract, and time when the contract was made and his minority was characterized as requiring for its satisfaction clear and well known to the other party, the contract may still be convincing evidence.** annulled." [85] Minority: {86} Insanity: Concept, defined: Minority is defined as the state of a [86.1] Concept, defined: Insanity is a manifestation, in lan- [85.1] person who is under the age of legal majority and a minor is a person below 18 years of age since majority guage or conduct, of disease or defect of the brain, or a Soemmences upon. attaining ie aap of 18 years” “=*Armentiav. Patriarca, 125 Phil. 382; Art. 1990(1), NCC imDeloe Reyes v. CA, 918 SCRA G22, 642 (190), citing Salonga v. Farraes, "Braganca v. Villa-Abrille, 105 Phil. 456. ard. eos 450 SCRA 459,455 2005), ™Bambalan v. Maramba, 51 Phil. 417 (1928). “Art. 244, FC, as amended by RA 6809.24 (CIVIL LAW REVIEWER more or less permanently diseased or disordered condition of the mentality, functional or organic, and characterized by perversion, inhibition, or disordered fune- tion of the sensory or of the intellective faculties, or by implied or disorder volition.» (86.2] Effect of insanity upon the contract: A contract entered into by an insane or demented person is not void, but during a period of Lucid interval is that intervals occurring in the me life of an insane person during which he is completely restored to the use of his reason, or so far restored that CHAPTER ONE: 215 OBLIGATIONS & CONTRACTS mentally incapacitated by the court. The burden of proving such incapacity at the time of the execution of the contract rests upon he who alleges it; ifno sufficient proof to this effect is presented, his capacity will be presumed, If the contracting party, on the other hand, is under guardianship by reason of insanity, there is naturally a presumption of insanity. This presumption. of insanity is, however, only prima facie and may be rebutted by evidence. Thus, it may he shown that he executed the contract during lucid interval." [87] Civil Interdiction, Old Age and Illiteracy: he has sufficient intelligence, judgment, and will to (87d. Chal iplerdtan definition and effects: Mis an ac enter into contractual relations, or perform other leg Seoers penalty impoeed Epon at aecubed winds eu sot, withont diqnalisention ky ron ofhe dine tenced to a principal penalty not lower than reclusion temporal which is a penalty ranging from 12 years (86.3) : Not every and one day to 20 years. Civil interdiction deprives the kind of insanity will annul consent. It is only that offender during the time of his sentence of the following insanity which prevents a person from knowing the rights: (1) parental authority, or guardianship, character of the act that he is performing as well as its as to the person or property of any ward; (2) m: legal effects which will be a ground for annulment. (3) management of his property; and (4) dis- Thus, monomania, which is insanity on a certain point, of his property by any act or any conveyance does not necessarily annul a contract except when the vos. Thus, a person suffering from the acces- contract refers to that point where the person concerned sory penalty of civil interdiction may not validly enter is insane" into contracts involving disposition of his property if lena « Bho nwepnesumee Sinko the same will take effect during his lifetime. person is of sound mind, in the absence of proof to the (87.21 sal infirmity: A person is not contrary." There is a presumption that every person of incapacitated to contract merely because of advanced legal age possesses the necessary capacity to execute years or by reason of physical infirmities, Only when the contract,» but the presumption is prima facie and such age or infirmities impair his mental faculties may be rebutted. This presumption of sanity is not, to such extent as to prevent him from properly, however, overthrown by the fact that nine days after insilteently, and deriv prplscing Mie\property Tights the execution of the contract, the vendor was declared ‘that:ho is,considered incapacitated. [87.3] Effectofilliteracy: An illiterate is notincapable of giving consent to a contract, However, when an illiterate a alleges mistake or fraud in the giving of his consent, Bagh v. Doo, 47 Phil. 760. ‘art 1390(1), NCC. _ ar, 1828, NCC. ‘Black's Law Dictionary, 6th Ba, 854. ‘= arilo v. Faojco, 46 Phil, 957 21 Caguioa, Ciil Code ofthe Philippines, 1967 EA., 79-80. ="Dumaguin v. Reynolds, 92 Phil. 66 *°Standard Oil Company of New York v, Arenas, 19 Phil. $65, art 800, par. 1, NCC. ‘Standard Oil of New York v. Arenas, supra. art. 41, RPC. Art 34, RPC. =WTayola'v. CA, 326 SCRA 288.CIVIL LAW REVIEWER, CHAPTER ONE a7 OBLIGATIONS & CONTRACTS the burden is on the party interested in enforcing [87.3.3] Article 1332 applies where the contract. is the contract to prove that the terms thereof are fully merely voidable: Article 1332 was intended explained to the former in a language understood by for the protection of a party to a contract who him= is at a disadvantage due to his illiteracy, ig- n mental weakness or other handicap. 3.1] Burden of proof: I rule is that who- jorance, ment r a : (67.3.1) Burda alleges, af The general Fue soem This article contemplates a situation wherein action must substantiate his allegation since dees & 4 it is presumed that a person takes ordinary sent of one of the parties is vitiated by the care for his concerns and that private trans- other contracting party. Hence, this provi- fetions have been fair and regular. sion does not cover a situation where there is is especi applied when fraud or @ complete abeance of consent. leged to annul notarial documents are clothed with the prima facie presumy of regularity and due execution. Neverthe C. Essential Requisite: OBJECT OF CONTRACTS: the general rule admits of exceptions, one of [88] Object of Contracts: which is Article 1332 of the Civil Code. Under 1] What. may be the object of contracts: = provision, where a party oa contract (60) ‘The following 1) All things which are not outside the commerce of men, including future things; burden is on the party interested in enforcing i " Art. 84, PC, srt, 1847, par. 2, NOC. “+Arrogante v. Duliarto, G.R, No, 152192, July 24, 2007. =4].L'T Agr, Inc. v. Balansag, GR. No. 141882, March 11, 2005, ‘8).L°7, Agro, Ine. ¥. Balansag, eupra.220 CIVIL LAW REVIEWER [88.5] Impossibility of abject: With respect to service, the impossibility may either be absolute or relative — [88.5.1 ibility: The service js absolutely impossible when nobody can perform it. Absolute impossibility nullifies the contract. A contract which contemplates of an impossible service is void." [88.5.2] Effect of relative impossibility: The service is relatively impossible when due to the special conditions or qualifications of the debtor it cannot be performed. Relative impossibility, if temporary, does not nullify the contract, such as when a partner agrees to contribute to the partnership a sum more than what his means allow. But if the relative impossibility is permanent, it nullifies the contract, such as blindness in contracts which require the use of eyesight (88.6) Object must be determinate: It is required that the ‘object be determinate as to its kind™ The law does not require, however, that the object of the contract, be already particularly designated or physically segregated from all others of the same class. It is sufficient that the object be determinable at the time of the perfection of the contract. As to quanti sufficient that the same is determinable need of a new contract between the parties. D, Essential Requisite: CAUSE 189} Cause or Consideration: (89.1) Concept, explained: The consideration is “the why of the contracts, the essential reason which moves the contracting parties to enter into the contract. Cause AR. 140966), NOC. 28 Manresa 685, cited in IV Padilla, Civil Code of the Philippines, 1967 Ed., 667. |, 67 Phil. 682; Villamor v. CA, 202 SCRA 601 ¥.CA, 367 SCRA 368, 379 (2001); Bible Baptist Church v. CA, 444 SCRA Enlogiov. Apeles, 678 SCRA 561 (2000) (CHAPTER ONE 2a OBLIGATIONS & CONTRACTS is the essential reason which moves the contracting parties to enter into it — it is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. (89.2) Kinds of contracts with regard to cause: 1) Onerous — the cause is understood to be, for ‘each contracting party, the prestation or promise of a thing or service by the other.** An example of which is a contract of sale. 2) Remuneratory — the cause is the service or benefit for which the remuneration is given. A donation given in consi debt, for example, is classified as a remuneratory donation. Gratuitous — the cause is the mere liberality of the benefactor. For example, the contract ofcommodatum is essentially gratuitous. 189.3] Requisites for cause or consideration: The cause of a ‘contract must have the following requisites — al 2) It must be true. 8) It must be licit. [89.3.1] Cause must exist: Ifa contract has no cause, it does not produce any effect whatsoever and is inexistent or void from the beginning" ‘The law says that a contract whose cause did not exist at the time of the transaction is void from the beginning. Uy v, CA, 814 SCRA 69 (1909), Sart. 1350, NCC. ord, Art. 1933, par. 2, NCC. mart, 1352, NCC. “tNeugene Marketing, Ine. v. CA, 308 SCRA 296 (1999), Art. 1409(3), NCC. Art. 140913), NCC.222 CIVIL LAW REVIEWER [89.3.1.1] Want of cause: There is want of ‘cause when there is no consideration whatever or there is total absence of consideration. Want or lack of consideration is different, however, from failure to pay the tract while the former prevents the existence of a valid contract.» ‘Thus, it is not the act of payment of price that determines the validity of a contract of sale. 189.3.1.2] Cange is presumed to exist: Al- ‘though the cause is not stated in the contract, itis presumed to exist unless the contrary is proved." ‘The burden to prove the contrary rests on the party who claims that the contract has no valid or true consideration. (69.3.2) Cause must_be te: The statement of a false cause in contracts shall render them void,** unless it can be proven that they were founded upon another cause which is true and lawful." If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. Hence, a deed of sale, in which the stated consideration had not in faet: been paid, is null and void.#* *=Buonavoniura v. CA, $16 SCRA 263 (2003); eee aloo Balatbat v. CA, 261 SCRA 128 (1996), id, >*Are. 1954, NCC. "Art. 1353, NCC; Javier v. CA, 189 SCRA 171. Id, "Art 1471, NCC. *"Rongavilla v. CA, 294 SCRA 289 (1998); Yu Bun Guan v. Ong, October 18, 2001; Ocejo, Prez & Co. v. Flores, 40 Phil 921. CHAPTER ONE, 228 OBLIGATIONS & CONTRACTS (89.3.8) (89.3.4) [89.4] (89.4.1 "Ark, 140001), NCC. Cause must be licit: A contract where the cause is contrary to law, morals, good customs, public order or public policy is void™ and produces no effect whatever." However, although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.” Effect of lesion or inadequacy of cause: Lesion or inadequacy of cause does not invalidate a contract, unless there has been fraud, mistake or undue influence." But in the following cases, lesion is a ground for rescission of the contract — 1) When the ward suffers lesion by more than one-fourth of the value of the property in contracts entered into by guardians on behalf of wards; 2) When the absentee suffers lesion by more than one-fourth of the value of the property in contracts entered into by legal representatives on behalf of absentees;"" 3) In partition among co-heirs, when any one of them received things whose value is less than one-fourth than the share to which he is entitled.*= General_rule: The particular motives of the parties in entering into a contract are different from the cause thereof.” Cause is the essential reason for the contract, while motives are the particular reasons of a act. 1351, NCC.728 Manresa 618-629, cited in Gonzales v, Trinidad, 67 Phil FWUy v. CA, 814 SCRA 69 (1999). 2B, Razon, Inc. v, Philippine Porte Authority, 151 SCRA ™ Philippine National Construction Corp. v. CA, 272 SCRA 189 (1997). tart. 14091), NCC. CIVIL LAW REVIEWER contracting party which do not affect the other party and which do not preclude the existence of a different consideration. To clarify by an example: A thing purchased constitutes the consideration (cause) for the purchaser and not the motives which have influenced his mind, like its usefulness, its perfection, its relation to another, the use thereof which he may have in mind, etc., a very important distinction, which precludes the annulment of the contract by the sole influence of the motives, unless the efficacy of the former had been subordinated to compliance with the latter as conditions."* Ordinarily, therefore, a party's motives for entering into a contract do not affect the contract. [89.4.2] Exception to the rule: The motive may be ‘regarded as causa when it predetermines the purpose of the contract.» Stated otherwise, the motive may be regarded as the causa when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. In this situation, the illegality of the motive shall render the contract void" because the motive is also the cause. 1987). CHAPTER ONE. 225 OBLIGATIONS & CONTRACTS FORMS OF CONTRACTS: [90] Requirement of Form in Contracts: (90.11 [90.2 General rule: Contracts are obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present.’ ‘Thus, no form is required, as a rule, in order to make the contract binding and effective between the parties thereto. Exceptions: The rule that contracts may be entered into in any form is not al "Where are two groups of contracts where the requirement of form is absolute and indispensable: (1) those which are required to be in some form in order that they may be valid; and (2) those which are required to be in some form in order that they may be enforceable or in order that they may be proved in a certain way.* [91] Contracts Which Require Form for Validity: (91.11 {91.2} Effect of non-compliance. with formality: In this group of contracts, the law expressly declares the contract to be void or invalid if the formality required by law is not complied with. While the contract may have been perfected because all the essential requisites are present but if the same is not executed in the form provided by the law creating it, it is void even as between the parties. Contracts which require form for validity: The following contracts require form for the purpose of their validity — 1) Donation of personal property where the value exceeds P5,000; 2) 3) Donation propter nuptias; Donation of real property; “Art, 1356, NCC. a.CIVIL-LAW REVIEWER 4) Contract of partnership, when real property is contributed as capital; 51 Sale of a parcel of land or any interest therein by an agent; 6) Stipulation limiting common carrier's liability for loss, destruction or deterioration of goods; 7 8 9 Contract of antichresis; Sole or transfer of large cattle; and Chattel mortgage contraet. 191.3] Donation of personal property: [91.3.1] Value does not exceed P5,000: The law does not require any form, the donation and its acceptance may be made orally or in writing. But an oral donation requires the simultane- ‘ous delivery of the thing or of the document representing the right donated + [91.3.2] Value exceeds P5,000: Both the donation ‘and the acceptance are required to be made in writing. Otherwise, the donation is void For example, where the subject matter of the donation is the purchase money in a contract of sale in the amount of P3,297,800, the donation must comply with the mandatory requirements of Article 748 of the Civil Code. Hence, both the donation and the acceptance should be in writing [91.4] Donation of real property: [91.4.1] Formality required: Regardless of the value of the property, both the donation and the acceptance are required to be embodied in a public document in order that the donation may be valid’ ‘The donation and the acceptance may *Art. 748, pars. 1 and 2, NCC. art. 748, par. 3, NCC. ‘'Moretio-Lentive v. Wolf, 441 SCRA 584 (2004), “Art. 749, NCC. CHAPTER ONE. 207 OBLIGATIONS & CONTRACTS be embodied in a single document or in separate documents but, in the case of the latter, the donor is required to be notified thereof in ‘an authentic form and such step is required to be noted in both instrumenta” [91.4.2] Effect of absence of notification and notation: As a rule, if the notification and notation are not complied with, the donation is void ‘However, this rule applies only in the absence of evidence that the claimed donation had been aceepted.* Thus, if the donor was not unaware of the acceptance for she in fact confirmed it later and requested that the donated land be not registered during her lifetime, the Court held that it cannot in conscience declare the donation ineffective simply because there ‘was no notation for that would be placing too much stress in mere form over substance." 191.5] Donation propter nuptias: [91.5.1] Special kind of donation: It is a special kind of donation which requires the presence of the following requisites: 1) it must be made before the celebration of the marriage; 2) it must be made in consideration of the marriage; and 3) it must be made in favor of one or both of the future spouses. [91.5.2] Formalities required: Donations _propter nuptias are also governed by the rules on ordinary donations, insofar as these rules are not modified under the Family Code.” Hence, the formalities mentioned in Sections 91.3 and 91.4 above also apply to this kind of donation. "Ant. 749, NCC. ‘*Sumpita v. Banga, 436 SCRA 521, 528-529 (2004). "See Legasto v. Verzoxn, 54 Phil. 766 and Santos v. Robledo, 28 Phil. 246, ‘Pajarillo v. Intermediate Appellate Court, 176 SCRA 340 (1989); see also{91.6} CIVIL LAW REVIEWER uted as capital (91.6.1) (91.6.2) Formality required: As a rule, a contract of partnership may be constituted in any form® and need not be formally reduced into writing since the law allows the oral constitution of a partnership. However, whenever immovable property is contributed thereto, it is necessary. that there must be an inventory of said property, signed by the parties, and attached to the public instrument. If this formality is, not followed, the contract of partnership is void" Rule qualified: The requirement of form in Article 1773 of the Civil Code is intended primarily to protect third persons. Hence, when the case does not involve third parties who may be prejudiced, as when the action is between the partners themselves, they cannot, deny the existence of a partnership simply because of violation of Article 173." {91.7] Agency to sell parcel of land or any interest therein: (91.7.1) [91.7.2] Eormality required: If the sale of a parcel of land or any interest therein is made through an agent, it is necessary that the authority of the agent be in writing. Otherwise, the the land belonging to the principal is void." Ifalleged agent has no authority: If an alleged agent sold a parcel of land belonging to another, without the latter's knowledge and consent, the sale is also void applying the rule mentioned above.” "Delow Reyes v. CA, $13 SCRA 632.1999). ‘CHAPTER ONE. 229 OBLIGATIONS & CONTRACTS (91.8) [91.8.1] Formality required: In order for a stipulation and the shipper for the loss, destruction or deterioration of ‘the goods to a degree less than extraordinary diligence to be valid, the same must be in writing, signed by the shipper or owner.” [91.9] Contract of antichresis: [91.9.1] Concept: By tho contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. {81.9.2} Formality required: In order for the antichresis to be valid, it is necessary that the amount of the principal and of the interest of the principal obligation which it secures be specified in writing.» The law does not require, however, that such specification be made in the contract of antichresis itself. Thus, the requirement is already satisfied if such specification is made in the principal contract of loan. This will be discussed further in the Chapter on Credit ‘Transactions. [91.10] Sale or transfer of large cattle: (91.1.1) Formality required: The sale or transfer is required to be registered with the city/ municipal treasurer and a certificate of transfer is required to be issued, otherwise, the sale or transfer is not valid." Thus, if the record of such transfer is not registered and the certificate obtained, the ownership of the cattle does not pass. It is implicitly required,230 {92; "1d, see United St ] CIVIL LAW REVIEWER of course, that the sale or transfer be made in a public document since only a public document may be accepted for registration. (91.10.2] Meaning of “large cattle”: Large cattle includes carabaos, horses, mules, asses and all members of the bovine family. [91.11] Chattel mortgage contract: [91.11.11 Formality required: Article 2140 of the Civil Code makes the recording of the contract of chattel mortgage before the chattel mortgage registry as an indispensable requirement for the existence of the contract itself, Hence, an unrecorded chattel mortgage is not valid even as between the contracting parties. It is implicitly required, of course, that the contract be in a public document since only a public document may be accepted for registration. [91.11.2] Contrary view: However, in Filipinas Marble Corporation v. Intermediate Appellate Court, the Court held that an unregistered chattel mortgage is nevertheless valid between the parties thereto. But this seems to be an erroneous ruling since the basis of the decision is Article 2125 of the Civil Code, a provision which governs the contract of real estate mortgage and inapplicable to a chattel mortgage contract. It is clear in Article 2141 of the Civil Code that what applies to chattel mortgage, in a suppletory character, are the provisions of the Code on pledge and not those of real estate mortgage. This will be discussed further in the Chapter on Credit Transactions. i i fc vility: These contracts are grouped together in Article 1403, par. 2, of the Civil Code, or what is known as the Philippine Statute of Frauds. jeri, G.R. No. L-11779, February 23, 1917, "142. SCRA 180, 986). 192.1] (92.2) [92.3] Phd. 274., eiting Domalogan v. Bolifer, 33 Phil. 471 (1916). Art. 1403, par. 2, NCC. CHAPTER ONE 231 OBLIGATIONS & CONTRACTS ‘The Statute of Frauds: The term “statute of frauds” in ine setting is descriptive of statutes which require certain classes of contracts to be in writing to be ‘The statute simply provides the method by which the contracts enumerated therein may be proved but does not declare them invalid because they are not reduced to writing Effect.of failure to comply with the formality required: ‘The effect of non-compliance with the requirement of the Statute of Frauds is simply that no action can be enforced unless the requirement is complied with. As such, the Statute is used as a defense whenever a party to an alleged contract falling within the operation of the Statute attempts to enforce the agreement. In this situation, the party against whom the enforcement is sought may object lo the presentation of oral evidence to prove the existence of the contract. Clearly, the form required under the Statute is for evidentiary purposes Hence, if the parties permit a contract to be proved, without any objection, it is then just as binding as if the Statute has been complied with." Formality required_under the Statute of Frauds: ‘Agreements covered by the Statute shall be unenforceable by action, unless the agreement itself, or some note or memorandum thereof, be in writing, and subscribed by the party charged or his agent.” The Statute does not require that the contract itself be in writing. It is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent, suffices to make232 Paredes v. Espino, 22 SCRA 1000, 1002. (CIVIL LAW REVIEWER the verbal agreement enforceable, taking it out of the operation of the Statute.» [92.3.1] | haere ime ercapaenmen eevee) document: The note or memorandum need. ed in a single document; nor, in two or more papers, need each paper to be sufficient as to contents and signature to satisfy the statute." Two or more writings properly connected may be considered together; matters missing or uncertain in one may be supplied or rendered certain by another, and their sufficiency will depend on whether, taken together, they meet the requirement of the statute as to contents and the requirements of the statute as to signature. Thus, in one case, the Supreme Court held that the exchange of written correspondences between the parties may constitute sufficient writing to evidence the agreement for purposes of complying with the Statute of Frauds. (92.8.2) Note or memorandum must be complete in itself For a note or memorandum to satisfy the Statute, it must be complete in itself and cannot rest partly in writing and partly in parol. The note or memorandum must: contain the name of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification.» Such note or memorandum must contain the essential elements of the contract expressed with certainty that may be ascertained from the note or memorandum itself, or some other writing to which it refers Berg v. Magdalena Estate, Inc., 92 Phil. iting 37 C.J.S., 653-654. od, “City of Cebu v. Heirs of Rubi, 306 SCRA 408 (1999). “Swedigh Match, eal. v. CA, supra. “id., citing Litonjua v. Fernandez, 427 SCRA 478 (2004). CHAPTER ONE 233 OBLIGATIONS & CONTRACTS or within which it is connected, without resorting to parol evidence.* [92.3.8] Note or memorandum must be signed by the party charged: To be binding on the persons to be charged, such note or memorandum must also be signed by the said party or by his agont duly authorized in writing” [92.4] Basic principles governing the Statute of Frauds: [92.4.1] Applicable only to purely executory contracts: The Statute of Frauds applies only to executory contracts and not to contracts which are either partially or totally performed.” [92.4.2] Notapplicable to actions which are neither for Statute of Frauds does not apply to actions which are neither for violation of a contract nor for the performance thereof. Thus, the statute was held inapplicable where the verbal contract was adduced, not for the purpose of enforcing performance thereof, but as the basis of the lawful possession of the applicants in a regi entitling them to have the registered in their names. The statute was likewise held inapplicable in an action to compel the defendant to execute a public instrument in respect of the land sold to the plaintiff with the right to repurchase within. a certain period so that the said instrument could properly be registered. Match, AB v. CA, 441 SCRA 1 (2004). vv. Fernandez, supra. “Averia, 436 SCRA 459, 466; see also Inigo v. Estate of Maloto, 21 Pafio, 205 SCRA 458, 467 (1992), citing Facturan ind Eusebio v. Sociedad Agricola del Balarin, 16 1 Monserrat, 48 Phil. 67 and Pascual v. Realty Investments, Ine, “See Coxjin v. Libo, 91 Phil. 777.234 (CIVIL LAW REVIEWER {92.4.3] Defense maynotbe availed ofby third persons: The defense of the Statute of Frauds can be relied upon only by the parties to the contract or their representatives or privies, or those whose rights are directly controlled by the statute." Under the Civil Code, unenforceable contracts, including those which infringe the Statute of Frauds, cannot be assailed by third persons.** [92.4.4] Defense may be waived: The defense of the Statute of Frauds can be waived either by: (1) failing to object to the presentation of oral evidence to prove the contract; or (2) accepting benefits under the contract." These are the two ways by which the defect of the contract is ratified. [92.4.5] Limited tospecific transactions: The statute of frauds refers to specific kinds of transactions and cannot apply to any other transaction that is not enumerated in Article 1403, paragraph 2. For example, not all agreements “affecting land” must be put in writing to attain enforceability." Thus, the following are not covered by the Statute of Frauds: 1) An agreement creating an easement of right-of-way since it is not a sale of real property or of an interest therein.” 2) An agreement for the setting up of boundaries, hence, an oral testimo- ny to prove such agreement is admissible. 37 C.IS., Statute of Frauds, Soc. 220 (1943), ‘Aart, 1408, NCC. “Art, 1405, NCC. Cruz v. IM. Tuason & Co, Ine., 76 Phil. 543, 855 (197); Western Mindanao Lumber Co., Ine. v. Modalle, 79 SCRA 703, 706 (1977); Rosencor Development Corp. v. Inquing, G.R. No. 140479, March 8, 2001. “Hernandez v. CA, 160 SCRA 821, 826 (1988). ‘“'Wostern Mindanto Lumber Co., ine. v. Medalle, supra, 707. “Hernandez v.CA, supra. (CHAPTER ONE 238 OBLIGATIONS & CONTRACTS. 3) An oral partition of real property is enforceable since partition is not a conveyance of property but simply a segregation and designation of the part of the property which belongs to the co-owners.” 4) A right of first refusal need not be written to be enforceable and may be proven by oral evidence sinco it is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first re- fasal over the property sought to be sold." 5) When one of the parties is trying to enforce the delivery to him of 3,000 square meters of land which he claims the defendant orally prom- ised to do in consideration of his services as mediator or intermediary in effecting a compromise of a certain civil case since such contract is in no sense a “sale of real property or of any interest therein." 6) The Statute of Frauds is not applicable to wills" or to renunciation of inheritance, these transactions not being contracts of conveyance. 7) Ithas also been held to have no application to an innominate contract, “Vda. de Bspina v. Abaya, 196 SCRA 312, 319 (1991). “Roseneor Development Corp. v. Inquing, supra; see also Estate of Llenado v. Llenado, G.R. No. 145736, March 4, 2008. Cruz v. J:M, Tuason & Co,, Ine, supe. Quinto v. Morata, 54 Phil. 81 “Barcelona v. Barcelona, 53 0.G. 378; Andal v. Hernandez, 78 Phil. 198.CIVIL LAW REVIEWER, as where an interpreter rendered services for an inconsiderable num- ber of times; to employment of an attorney or an authority to employ an attorney; or to a cot which a deed is delivered in escrow.” [92.5] Specific contracts covered by the Statute: {92.5.1] Agreements not he performed within a year: ‘An agreement that by its terms is not to be performed within a year from the making thereof is required to be in writing to be enforeeable under the Statute of Frauds. [92.5.1.1] Test! The test to determine whether an oral contract is enforceable under the one-year rule of the Statute of Frauds is whether, under its own terms, performance is possible within a year from the making thereof. If 80, the contract is outside of the Statute of Frauds and need not be in writing to be enforceable. The fact that the performance actually may have taken more than one year after the making of the contract is immaterial as long as performance is possible in less than a year under the terms of the contract, It is said that the one- year period begins to run from the day the contract is made. [92.5.1.2] Applies only to agreements not to be performed on either side: The broad view is that the Statute CHAPTER ONE 237 OBLIGATIONS & CONTRACTS of Frauds applies only to agreements not to be performed on either side within @ year from the making thereof" Agreements to be fully performed on one side within a year are taken out of the operation of the statute." 192.5.1.8] Effect_of partial_performance: Contracts which by their terms are not to be performed within one year may be taken out of the Statute of Frauds through performance by one party thereto. In ‘order, however, that a partial performance of the contract may take the case out of the operation of the statute, it must appear clearly that the full performance has been made by one party within one year, as otherwise, the statute would apply. To be taken out of the operation of the Statute of Frauds, the agreement must be fully performed on one side within one year from the making thereof® (92.5.2] Special promise to answer for debt of another: Any special promise to answer for the debt, default or miscarriage of another is required to be in writing or to be evidenced by some note or memorandum signed by the promisor tobe enforceable against the latter. Thus, the contracts of guaranty proper and suretyship are covered by the Statute, “Peren v. Pomar, 2 Phil. 682. National Bank v. Philippine Vegetable Oil Co, 49 Phil. 857, 867 (1927). ‘fan Lua . OBrien, £6 Phi 53, ai Ong Chua i. 95. jabao v. Ane anotatay NCC. Roxas, 395 SCRA “U8 -Blue Valley Creamery Co, v. Consolidated Producta Co, C.C.A. Ma. 8 ‘F.2d 182, ¥ 7 “art. 1403(2Kb), NCC.238 (92.5.3) (92.5.4) CIVIL LAW REVIEWER, [92.5.2.1] ast: The true test as to whether ‘a promise is within the statute has been said to lie in the answer to the question whether the promise is an original or a collateral one. If the promi: or an independent the promisor becomes thereby primarily liable for the payment of the debt, the promise is not within the statute. But, on the other hand, if the promise is collateral to the agreement of another and the promisor becomes thereby merely a surety, the promise must be in writing. Agreements in consideration of marriage" ‘A marriage settlement is an example of an agreement in consideration of marriage which is required tobe in writing under the Statuteof Frauds. A donation propier nuptias, however, isno longer governed by the Statute of Frauds but by the formalities required in ordinary donations. See the previous discussions in Section 91.5 of this Chapter. Sale_of goods, chattels _or things in_action at_price_not_less_than P50: The Statute covers both tangible and intangible personal property.* It also covers the assignment of choses in action, hence, an assignment of a credit over P500 is governed by the Statute of Frauds.” Art 1403, par. 2), NCC. CHAPTER ONE 239 OBLIGATIONS & CONTRACTS (92.5.5.1) Lease.ofreal property for aver ane year: The Statute of Frauds also covers renewals of the lease contract. Thus, an alleged verbal assurance of renewal of a lease is in- admissible to qualify the terms of tho written lease agreement under the parole evidence rule and umenforceable under the Statute of Frauds." (92.6.5.2] Sale of real property or any interest therein: Sale is a consensual contract and is perfected by mere consent, which is manifested by a meeting of the minds as to the offer and acceptance thereof on three elements: subject matter, price and terms of payment of the price.” It does not requi sale of a parcel of land through an agent where the law requires the authority of the agent to be in writing in order for the sale to be valid. Under the Statute of Frauds, however, an agreement for the sale of real property oF of an interest therein to be enforceable must be in writing and subscribed by the party charged or by an agent thereof" Thus, a contract of sale of realty cannot be proven by means of witnesses, but TRomanden v. CA, 166 SCRA §77 (1998); Inter-Asia Services Corp. (Lnternational) v. CA, 263 SCRA 408 (1996). Lobregat, 498 SCRA 22, 35 (2004), in Section 91.9. Soe Art. 1874, NCC, *Diwa ¥. Donato, 284 SCRA 608 (1994); Jovan Land, Ine. v. CA, 268 SCRA240, CIVIL LAW REVIEWER must necessarily be evidenced by a written instrument, duly subscribed by the party charged, or by his agent, or by secondary evidence of their contracts." (92.5.6) Representation as to credit of third persons:* To bring the case within the operation of the Statute of Frauds, the representation must have been made by a stranger to the contract, in which credit was extended, or, as otherwise stated, the representation must relate to a third person's credit." Thus, representations as to the credit of the person making the representation are not within the Statute.” {92.6] Other contracts or agreements which require to be in some _form_to be enforceable (but not covered by the Statute of Frauds): [92.6.1] Express trust_over immovable: An express ‘trust concerning an immovable or any interest therein may not be proved by parol evidence." Hence, it must be in writing to be enforceable. An implied trust concerning real property, on the other hand, may be proved dy oral evidence." [92.6.2] Agreement on payment of interest: No interest shall be due unless it has been expressly stipulated in writing. Hence, a verbal agreement on the payment of interest may not be enforced against the borrower against. his ‘However, if the borrower pays th luntarily when there has been no si ‘Walba Vda. de Raz v. CA, 314 SCRA 96 (1999). Art. 1405, par. 20, NCC. "Mass, Des Brisay v. Foss, 162.N.E. 4, 264 Mass, 102; Medbury v. Watson, 6 Mete, 246, 39 Am.D. 726; cited in 97 C.S'S. 582. "*Mfass.-Sibley v. Hulbert, 15 Gray 609; ited in 97 C.J.S. 662, [93] 193.1] [98.21 (93.3) (CHAPTER ONE pan ‘OBLIGATIONS & CONTRACTS lation therefore, the payment is valid and the creditor is authorized to retain the payment." Bagi c sia 198 “oe*cuel Gate? There are ceriain contracts which are required to be in a public document under Article 1358 of the Civil Code. However, the provision of Article 1858 of the Civil Code on the necessity af a public document is only for convenience, not for validity or enforceability. Non- compliance with formal requisites does not adversely affect the validity of the contract or the contractual rights and obligations of the parties." Thus, the non- appearance of the parties before the notary public who notarized the deed does not necessarily nullify nor Tender the parties’ transaction void ab initio ‘Effect of non-recording of the instrument: Article 1358 of the Civil Code which requires the embodiment of certain contracts in a public instrument, is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties, Non- compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder.” Contracts required to be ina public document for ‘convenience: 1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; but sales of real property or of an interest therein are governed by the Statute of Frauds; ‘SAFE. 1960, in relation to Art. 1423, NCC. ‘SCRA 892; Caoili v. CA, 314 SCRA 345 (1990); Cenido v. 9; Agasen vA, 26 SCRA 504 (20005 Peas “Sqgmren Y CA. supra: Landres ¥CA, 394 SCRA 133. ““Penalosa v. Santos, supra "Pale v. CA, 286 SCRA 098, 712-713CIVIL LAW REVIEWER 2) ‘The cession, repudiation or renunciation of he- reditary rights or of those of the conjugal partnership of gains; 3) ‘The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; 4) The cession of actions or rights proceeding from an act appearing in a public document. (93.4) Remedy granted under Article 1357: For contraets which are required to be in a certain form, such as those enumerated in Article 1358 which are required to be in a public document, the contracting parties may compel each other to observe that form and this right may be exercised simultaneously with the action upon the contract." But in order for this remedy to be exercised, it is necessary that the following requisites must concur: (1) the contract must have already been perfected;* (2) the contract must have been valid as to form; and (8) the contract must have been enforceable under the Statute of Frauds." Thus, when a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1857." [93.4.1] Illustration: When the sale of a parcel of land is evidenced by a private instrument signed by both parties, the contracting parties may ‘compel each other to execute the formal public document of sale as required in Article 1358 of the Civil Code since the private instrument has made the sale enforceable and outside of the purview of the Statute of Frauds. Here, the sale is valid and effective as between CHAPTER ONE, 243 OBLIGATIONS & CONTRACTS the parties. Under Article 1357 of the Civil Code, its enforecability is recognized as each contracting party is granted the right to compel the other to execute the proper public instrument so that the valid contract of sale of registered land can be duly registered and can bind third persons. REFORMATION and ‘CONTRACT INTERPRETATION [94] Reformation of Instruments: [94.1] [94.21 194.3) Concept, defined: 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.» The rationale of the doetrine of reformation is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. Requisites_of reformation: In order that an action for reformation of instrument may prosper, the following requisites must be satisfled — 1) There must be 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.” Effect_of mutual mistake of parties: When a mutual mistake of the parties cause the failure of the instrument to disclose their real agreement, said instrument wid. Sve Vda. de Jomoc v. CA, G-R, No. 92871, August 2, 1991. ®Huibontioa ¥. CA, 320 SCRA 625 (1990). ces “National Irrigation Administration v. Gamit, 215 SCRA 436 (1902), "1d,CIVILLAW REVIEWER may be reformed." However, when the mutual error of the parties relates to the legal effect of their agreement which frustrates the real purpose of the contract, the consent is vitiated” and the remedy is not reformation of the instrument but the annulment of the contract." But in order for reformation of the instrument by reason of mutual mistake to be applicable, it is necessary that — 1) The mistake should be of fact; 2) The same should be proved by clear and con- vineing evidence; and 3) The mistake should be common to both parties to the instrument.” (94.4) Instances whore instrument may be reformed: 1) When a mutual mistake of the parties causes a failure of the instrument to disclose their real agreement. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention. 3) 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." When through the ignorance, lack of skill, neg- ligence or bad faith on the part of the person drafting the instrument or of the clerk or typist and the instrument does not express the true intention of the parties.» 2, 4 5) (CHAPTER ONE 248 OBLIGATIONS & CONTRACTS If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase." [94.5] Instances where instrument may not be reformed: t 2) 3) -4) 5) 6 If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties. Here, the remedy is annulment of the contract and not reformation.” In simple donations inter vivos wherein no condition is imposed; In wills; ‘When the real agreement is void; ‘When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation; ‘When the contract is unenforceable because of failure to comply with the Statute of Frauds. [94.6] Effect of simulation of contracts: [94.6.1] Concept: Simulation is defined as the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act which does not exist or is dif- feront from that which was really executed." Its requisites are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose Wan Iwai Nec. Ark 1265, NCC, . mart. 1359, par. 2, NCC TAS aH 8 aie te ‘Bank of “Art. 1361, NCC. sart, 1362, NCC. i “art, 1363, NCC. scr, Art, 1364, NCC. Ae OO e Talands v. Fidelity & Suroty Co, 51 Phil. 57. 1807, NCC. ‘Santos, 363 SCRA 545, 556 (2001); Mendezona v, Ozami, 376CIVIL LAW REVIEWER is to deceive third persons." Characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties, [94.6.2] Kinds and effect of simulation: Simulation of a contract may be absolute or relative." {94.6.2.1] Absolute simulation: Simulation is absolute when the parties do not have any intention to be bound at all. A fictitious and absolutely simulated agreement lacks valid consent so essential to a valid and enforceable contract." Thus, an absolutely simulated or fictitious contract is void or inexistent."* Absolute simulation implies that there is no existing contract, no real act executed, hence, the remedy is an action to declare the contract void or inexistent,"" (94.6.2.2] Relative simulation: Simulation is relative when the parties simply conceal their true agreement. When it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy, the contract binds the parties to their real agreement” Iverio, 466 SCRA 438 (2005), citing TV Tolentino, (Civil Code of the Philippines, 1991 Ed., 617-518. ‘Art, 1845, NCC, art. 1346, NCC. CHAPTER ONE 27 OBLIGATIONS & CONTRACTS and the remedy is reformation of mutual, either party or his successor-i demand for reformation. If the mistake was not mutual, only the injured party or his heirs and assigns may demand for reformation," However, the party who has brought an action to enforce the instrument cannot subsequently ask for its reformation. [95] Rules in Contract Interpretation: [95.1] Cardinal rule in contract interpretation: The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting parties should always prevail because their will has the force of law between them. The intention of the parties is primordial and once the intention of the parties has been ascertained, that element is deemed as an integral part of the contract as though it has been originally expressed in unequivoeal terms." [95.1.1] When terms are clear: If the terms of @ contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shalll control.” [95.1.2] When words and intention are in conflict: If the words appear to be contrary to the evident intention of the parties, the intention shall prevail over the words." (95.1.3] How to determine intention: In order to judge the intention of the contracting parties their aacapaga -Remorin@:R.No 168300, May 1, 2006; Buenaventura. CA, "IKasilag v. Rodriguez, 69 Phil. 217 "Lorenzo Shipping Corp. v. Bal. Marthel International, Inc, 443 SCRA 163, 1970, par. 1, NOC. “Art, 1370, par. 2, NCC.(95.2) {95.3] CIVIL LAW REVIEWER contemporaneous and subsequent acts shall be principally considered." Bi f ‘i Pursuant to this principle which is basie in contract, interpretation, where two interpretations of the same contract language are possible, one interpretation having the effect of rendering the contract meaningless while the other interpretation would give effect to the contract as a whole, the latter interpretation must be adopted. In other words, what will prevail is that interpretation which is most adequate to render the contract effective. Various stipulations construed together: To ascertain the intent of the parties in a contractual relationship, it is imperative that the various stipulations provided for in the contracts be construed together, consistent with the parties’ contemporaneous and subsequent acts as regards the execution of the contract. Ambiguous stipulations should be so construed as to conform to the sense that would result if all the provisions are comprehended jointly. (95.3.1] Complementary-contracts-construed-togeth= er-dactrine: Under the “complementary-contracts-construed-together” doctrine, an accessory contract must be read in its entirety and together with the principal agreement. Applying this doctrine, a promissory note and a deed of chattel mortgage must be construed together" and the surety contract is merely an accessory contract and must be interpreted with its principal contract, which in this case was the loan agreement.'* Art 1971, NCC. “Philippine National Bank v. Utility Assurance & Surety Co., Ine.,177 SCRA 398 (1989). ‘Art. 1373, NCC, Cruz v. CA, 456 SCRA 165; Careeller v. CA, 302 SCRA 718 (1999). 14, NCC; Philippine National Construction Corp. v. Mars Construction. 1 325 SCRA 624, “Philippine Bank of Communications v. Lim, 455 SCRA. 714 (2006). ‘Rigor v, Consolidated Orix Leasing end Finance Corp., 387 SCRA 270 (2002). "Vasquez v. CA, June 30, 1998. CHAPTER ONE, 249 OBLIGATIONS & CONTRACTS (95.4] Other rules in contract interpretation’ (95.4.1) (95.4.2) [95.4.3] (95.4.4) (95.4.5) "art. 1977, NCC. In-contract of adhesion: Should there be ambiguities in a contract of adhesion, such ambiguities are to be'construed against the party that prepared it. However, if the stipulations are clear and leave no doubt: on the it of the parties, the literal m¢ lations must be held controll tions: To be interpreted against the party who caused the obscurity." Ambiguities in a contract are interpreted against the party that caused the ambiguity, the party that drafted and caused the inclusion of the sub- Ject clause. General terms exclude things that are distinct: However general the terms of a contract may be, they shall not be understood to include things that are distinct and cases that are different from those upon which the parties intended to agree.* In other words, a particular intent will control a general one that is inconsistent. with it Words having different significations: Shall be understood in the sense which is most in keeping with the nature and object of the contract." - Usage_or custom: The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. Wood Technology Corp. v. Equitable Banking Corp., 451 SCRA 724; Litonjua VL & R Corp., 328 SCRA 796, ‘=Philippine Integrated Labor Assistance Corp. v. NLRC, 264 SCRA 418, (1986),250 196] (97) CIVIL LAW REVIEWER [95.4.6] Incase doubt is not resolved by.other rules in sontract interpretation: (95.4.6.1] And contract is gratuitous: That 195.4.6.2] And contract is onerous: That interpretation which permits great- er reciprocity of interests is to be adopted." DEFECTIVE CONTRACTS Defective Contracts: The Civil Code classifies defective contracts, into, first, the rescissible contracts, which are the least infirm; followed by, second, the voidable contracts; then, third, the unenforceable contracts; and, finally, fourth, the worst of all or the void and inexistent contracts.’ A. Rescissible Contracts Rescission, In General: 197.1] Concept: It is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract. It implies a contract, which even if initially valid, produces a lesion or a pecuniary damage to someones "An. 1378, NCC. “ld. pinion in Equatorial Realty Development, Ine. v. CHAPTER ONE 251 OBLIGATIONS & CONTRACTS: (97.21 Article 1191 of the Civil Code refers to rescission applicable to reciprocal obligations or those obligations which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.t The rescission under Article 1191 is more accurately called “resolution.”* It differs from the rescission under Article 1381, as follows: (97.2.1] As to nature of remedy: Rescission under Article 1191 is a principal remedy which is based on breach of faith by the other party that violates the reciprocity; while rescission cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. [97.2.2] As to basis or ground: In the rescission by reason of lesion or economic prejudice under Article 1381, the cause of action subordinated to the existence of that prejudi economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties.’ [97.2.3] As to applicability to kinds of obligations: In Article 1381, the rescission applies to all kinds of obligations arising from contracts, whether the same are reciprocal in character or not; while in Article 1191, the rescission applies exclusively to reciprocal obligations. “Ong v. CA, $10 SCRA 1, 9 See Cannus v. Galang, 469 SORA 80, 93. sCannu v, Galang, id, 9% Iringan ©. CA,366SCRA 41, 49; Ongv. CA, supra, 2. *Goncurring Opinion of J.B.L. Reyes in Universal Food Corporation v. CA, 23 SCRA 1, 22-23 (1970),197.3) (97.2.4) [97.2.6] (97.2.6) [97.2.7] CIVIL LAW REVIEWER, party: In Article 1381, the action may be availed of even by a third party, as in the case of accion pauliana; while in Article 1191, the action can be availed of only by a party to the contract. As to prescriptive period: In the rescission under Article 1381, the prescriptive period for the action to claim rescission is four years.* ‘On the other hand, the prescriptive period in rescission under Article 1191 is either 10 years from accrual of the right of action, for ‘written contracts,” or six years, for verbal contracts.” As to extent of power of court: In the rescission under Article 1881, so long as any of the grounds enumerated therein exists, the court has no discretionary power not to grant the rescission; while in the rescission undor Article 1191, the court has the discretionary power not to grant the rescission, if there be just cause for the fixing of the period for the performance of the obligation." As to nature of contract: In the rescission under Article 1381, the contract is classified as defective; while in the rescission under Article 1191, the contract is not defective or is perfectly valid. Rescission_distinguished_from_mutual_dissent_and termination of contracts: (97.3.1) CArt, 1389, NCC. Art. L144(1), NCO; oe Iringan v. CA, supra. Distinguished from mutual dissent: Rescission should be distinguished from a case where the parties agree to cancel their contract and mutually return the things they may have received under it. In situation, the parties have, in legal effect, simply entered Art. 1145(1), NCC; se Iringan v. CA, supra. "See Art. 1191, par. 3, NCC. CHAPTER ONE 258 OBLIGATIONS & CONTRACTS into another contract for the dis: previous one,"*and its effects, in rel contract. s0 dissolved, should be by the agreement of the parties, or by the application of other legal principles, but not by Article 1385 of the Civil Code. [97.3.2] Distinguished from termination of contracts: When an agreement is terminated, it is deemed valid at inception." The parties in a case of termination are not restored to their original situation; neither is the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with their contractual obligations. Only after the contract has been sd will they be released from their obl 13." The consequences of termination may be anticipated and provided for by the contract and the same shall be respected by the courts as long as the terms of the contract are not contrary to law, morals, good customs, public order or public policy. On the other hand, when a contract is rescinded, it is deemed inexistent, and the parties are returned to their status quo ante.” Hence, there is mutual restitution of benefits {98] Rescissible Contracts under Article 1981: [98.1] Characteristics of rescissible contracts under Article ‘1381: A rescissible contract possesses the following characteristics — 1) These contracts are valid and enforceable until they are rescinded by a competent court.” “Flore Raterprises, Inc. v.CA, 248 SCRA 354, 359 (1995). “Aquino v. Tafodo, 89 Phil. 617. ‘trace Corporati © Pslipine Amasonsst and Gaming Corporation, 8(CIVIL LAW REVIEWER Hence, the rescission in Article 1381 presup- Poses contracts validly entered into.* While they are valid, they cause pecuniary lesion or prejudice to one of the contracting parties or to a third person." 8) The defect may not, however, be cured by ratification although the right of action for rescission may be lost by way of extinctive prescription. 2 4) The defect of a rescissible contract cannot be attacked collaterally. An action for rescission must be set up in and only after a blown trial. An indepen- sssary to prove that the con- 198.2] Requisites for rescission to prosper: In order for an action to rescind the contract under Articles 1381 and 1382 may prosper, the following requisites must concur — 1) The action for rescission must originate from any of the causes specified in Articles 1881 and 1382.2 ‘The party suffering damage and who is asking for rescission has no other legal means to obtain reparation for the damage suffered by him 3) The person demanding rescission must be able to return what he may be obliged to restore if rescission is granted by the court.* 2) ™Ong v. CA, 910 SCRA 1, 8; Causapin v. CA, 298 SCRA 615. Aquino v. Tadtedo, 31 Phil. 517. “Air France v. CA, 245 SCRA 465 (1995), Art 1380, NCC; See also Aquino ¥. Tafiedo, supra and Rongo v. Abastillas, 14 Phil. 176. "Ast, 1883, NCC. Art. 1385, Ist par., NCC. CHAPTER ONE, 255 OBLIGATIONS & CONTRACTS 4) The things which are the object of the contract must not be legally in the possession of third persons who did not act in bad faith. 5) The action for rescission must be filed within four years from accrual of the right of action.” [99] Specific Contracts Which Are Rescissible Under Articles 1381. and 1382: (99.1) {99.21 [99.1.2] Contracts by guardian in behalf of ward: Contracts entered into by guardians in behalf of their wards are roscissible whenover the latter suffer lesion by more than one-fourth of the value of the things which are the object of the contract. [99.1.1] But not when approved by the court: If the contract was approved by the court there is no ground for rescission, even if the ward suffers lesion to the extent provided for in paragraph 1 of Article 1381.” brance of real property of ward: The sale or encumbrance of the real property of the ward must be with prior court approval” as the guardian has no authority to sell real estate of his ward merely by reason of his general powers." A sale of the ward's realty by the guardian without authority from the court is void, even when no damage was suffered by the ward. fof : Contracts agreed upon in representation of absentees whenever the latter suffer lesion by more than one- sd par., NCC. NCC. art. 1386, NCC See Bec. 4, Rule 95, Rules of Court, aton v. Quintana, 81 Phil. 97 oud,256 CIVIL LAW REVIEWER fourth of the value of the things which are the object of the contract." [99.2.1] But not when approved by the court: If the contract was approved by the court there is, no ground for rescission, even if the absentee suffers lesion to the extent provided for in paragraph 2 of Article 1381. [99.2.2] Rule with respect to disposition and encum: mentioned in Section 99.1.2 also appli dispositions or encumbrance made by legal representatives of the real property of the absentee because the powers and obligations of such legal representatives are to be regulated by the same rules concerning guardians pursuant to Article 382 of the Civil Code. [99.3] Contracts in fraud of creditors: Contracts undertaken in fraud of creditors are rescissible when the latter cannot in any manner collect the claims due them.* ‘The rescissory action to set aside contracts in fraud of creditors is known as accion pauliana.” 199.3.11 Distinguished from absolutely simulated sontracts: The remedy of accion pauliana is available when the subject matter is a conveyance, otherwise valid, undertaken in fraud of creditors.” In other words, contracts which are rescissible under the third paragraph of Article 1381 are valid contracts, albeit undertaken in fraud of creditors. If the contract, therefore, is absolutely simulated, the contract is not merely rescissible but inexistent, albeit undertaken as well in fraud of creditors.* In the former, the remedy is rescission; while in the latter, the remedy is an action to Art, 1381(2), NCC. Sart, 1386, NCC. “art, 1381(3), NCC. *Siguan v. Lim, 318 SORA 725, 795. Manila Banking Corporation v, Silverio, 466 SCRA 438, 454, “Id, (99.3.2) (CHAPTER ONE, 257 OBLIGATIONS & CONTRACTS declare the contract inexistent which action is imprescriptible. The distinctions between an absolutely simulated contract and a rescissible contract are as follows — 1) In absolute simulation, there is no existing contract because an absolutely simulated or fictitious contract is void. On the other hand, a rescissible contract in fraud of creditor presupposes the existence of a valid contract.“ 2) In the former, the contract can be attacked by any creditor, including one subsequent to the contract; whereas, in the latter, the contract can be assailed only by the creditors who became such before the alienation.“ 3) In the former, the insolvency of the debtor making the simulated transfer is not a prerequisite to the nullity of the contract; whereas, in the latter, the action to rescind requires that the creditor cannot recover in any other manner what is due him." 4) In the former, the action to declare a contract absolutely simulated does not prescribe; whereas, in the latter, the ‘accion pauliana to rescind a fraudulent alienation prescribes in four years.* 4ccion pauliana is a remedy of last resort: Since an accion pauliana is a subsidi remedy, it is necessary that the following successive measures must be taken by a creditor before he may bring an action for258 (99.3.3) CIVIL LAW REVIEWER rescission of an allegedly fraudulent contract: (1) exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana).* Requisites of accion pauliana: In order for ‘an accion pauliana to prosper, the following requisites must be satisfied — nD if asking for rescission has a the alienation, although 2) The debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 8) The creditor has no other legal remedy to satisfy his claim; 4) The act being impugned is fraudulent; 5) The third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud; and 6) The conveyance must not be absolutely {99.3.4) simulated. Existence of fraud or intent to defraud: [99.3.4.1] Presumption of fraud: Fraud is presumed in the following instances — 1) There is alienation of property by gratuitous title by the “WAdorable v. CA, 319 SCRA 200,207. ~~ “Siguan v. Lim, 318 SCRA 726, 735. “See Manila Banking Corporation v. Silverio, 466 SCRA 438, 454, CHAPTER ONE, 259 OBLIGATIONS & CONTRACTS debtor who has not reserved sufficient property to pay his debts contracted before such alienation; or 2) ‘There is alienation of property by onerous title made by a debtor against whom some judgment has been rendered in any instance or some writ, of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking rescission.* (99.3.4.2] Badges of fraud: The Supreme Court considered the following instances as “badges of fraud” — 1) The fact that the consideration of the conveyance is fictitious or is inadequate. 2) A transfer made by a debtor after suit has begun and while it is pending against him. 8) Asale upon credit by an insol- vent debtor. 4) Evidence of large indebted- ness or complete insolvency. 5) The transfer of all or nearly all of his property by a debtor, financially. 6 ‘The fact that the transfer is made between father and son, “ht, 1987, NCC; China Banking Corporation v. CA, 327 SCRA 878, 886.260 CIVIL LAW REVIEWER, when there are present other of the above circumstances. 7) The failure of the vendee to take exclusive possession of all the property. [99.3.5] ‘Test to determine whether or not conveyance is fraudulent: The test as to whether or not a conveyance is fraudulent is, does it prejudice the rights of creditors? In other words, for a conveyance to be considered not in fraud of creditors, two requisites must be satisfied: (1) there must be a valuable consideration; and (2) the transaction must have been made bona fide. [99.3.6] Right of first refusal: {99.3.6.1] Concept of right of first refusal: A right of first refusal is « eon tractual grant, not of the sale of a property, but of the first priority to buy the property in the event the owner sells the same." Thus, when a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed to accept it, The lessee has a right that the lessor's first offer shall be in his favor." The basis of the right of the first refusal must be the cur- rent offer to sell of the seller or of jokden Horizon Realty Corp., 615 citing Rosencor Development Corporation v. Inquing, 354 “Polytechnic University of the Philippines v. CA, 368 SCRA 691, 708 (2001); ‘Tenay Recreation Center and Development Corp. v. Fausto, 455 SCRA 436, 443. CHAPTER ONE, 261 OBLIGATIONS & CONTRACTS. [99.3.6.2] fer to purchase of any prospective buyer It is only after the grantee fails to exercise its right of first priority under the same terms and within the period contemplated, could the owner validly offer to sell the property to a third person, again, under the same terms as offered to the grantee." refusal: The contractual grant of a right of first refusal is enforceable, and following an earlier ruling in Equatorial Realty Development, Ine. v. Mayfair Theater, Ine.,* the execution of such right consists in directing the grantor to comply with his obligation according to the terms at which he should have offered the property in favor of the grantee and at that price when the offer should have been made 199.3.6.2.1] If grantor has entered into__contract with third person: The prevailing doctrine in this jurisdiction is that a contract of sale entered into in violation of a right of first refusal of another person is rescissible be cause it is in fraud of vy. CA, 268 SCRA 727 (1997). 3 ¥. CA, supra, 708-708. “Polytechnie University of the Philippines v. Golden Horizon Realty Corp., ‘*Reconcor Development Corp. v. Inquing, 354 SCRA 119, 136; Coneulada v. (G4, 967 SCRA 164, 172; Riviera Filipina, Ine v. CA, 380 SCRA 245, 260,CIVIL LAW REVIEWER CHAPTER ONE, 268 ‘OBLIGATIONS & CONTRACTS, creditor, invoking the of the existence of the provision of the third right of first refusal. paragraph of Article In Rosencor Develop- 1381 of the NCC. The ment Corporation ». status of creditors can Inquing" however, be validly accorded to the Court did not or- grantees of the right der the rescission of of first refusal for the contract of sale they have substantial becanse the buyer interests that will be was presumed to have prejudiced by the con- acted in good faith, veyance of the prop- the grant of the right erty subject matter of ~ of first refusal having their right of first re~ ' been made verbally. fusal” And since the In the latter case, the contract is rescissible, remedy of the grantee the requisites enu- is simply an action for merated in Section damages against the 98.2 of this Chapter grantor. must also be present 99.3.6.2.21 eine 1canitact instal Pett a refusal_is_rescinded: ‘After the rescission of t in viola- v. Bonnevie* Equato- the contract in viola- S tion of the grantec’s rial Realty and Devel right of first refusal, the grantor may now be directed to comply with his obligation ‘tha to sell the property to the grantee under the same terms and conditions that it had been sold to a third person. In other Corporation,” Court ordered the rescission of a contract of sale entered into in violation of a right of first refusal because the third person (buy- words, there should er) acted in bad faith be identity of terms for having knowledge and conditions to be offered to the buyer "Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992). Supra. Supra. “8944 SCRA 119, 186, 320 SORA 405 (1999).CIVIL LAW REVIEWER holding the right of first refusal. But in the case of Tanay Rec- reation Center and Development Corp. v. Fausto, this rule was not followed because the property was sold hy the mother (grant- or) to her daughter for a measly sum, In- stead, the Court ruled therein that the offer to the grantee should be under reasonable terms and conditions, taking into account the fair market value of the property at the time that it was sold to the daughter. [99.8.6.8] RFR, not_covered by Statute of Frauds: The question as to whether a right of first refusal may be proved by parole evidence has been answered in the affirmative by the Court in Rosencor Develop- ment Corporation. v. Inquing* It. was held therein that a right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, lication of Article 1403, the NCC presupposes tence of a perfected, albeit unwritten, contract of sale. A right of first refusal, however, is not by any means a perfected Paraiaque Kings Enterprises, Inc. v. CA, 268 SCRA 727 (1997). CHAPTER ONE, 265, OBLIGATIONS & CONTRACTS (99.3.6.4] contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold. It is thus evident that the statute of frauds does not con- template cases involving a right of first refusal, As such, a right of first refusal need not be written to be enforceable and may be proven by oral evidence. drawn_if_founded_on_consider- ation: A party to a contract cannot unilaterally withdraw a right of first refusal that stands upon valuable consideration ‘The Court had categorically ruled that it is not correct to say that there is no consideration for the grant of the right of first refusal if such grant is embodied in the same contract of lease. Since the stipulation forms part of the «1 lease contract, the consider for the lease includes the consideration for the grant of the right of first refusal. In entering into the contract, the lessee is in effect, stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also consents that, should it sell the leased property, then, the lessee shall be given the right to “Cited in Estate of Orlando Lienado and Wenifroda Llenado v. Llenado, 580 jen Horizon Realty Corp, 615 ity of the Philippines. v. CA,CIVIL LAW REVIEWER [99.3.6.5] match the offered purchase price and ta buy the property at that price. option or an offer would require, among other things, a clear certainty on both the object and the cause or consideration of the envi- sioned contract.* In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with yet to be later firmed up. From ‘the foregoing, it is thus clear that of first refusal in that in the former, the option granted to the offeree is for a fixed period and at a determined price. Lacking these two essential requisites, option to purchase clause in the lease contract subject matter of that case was a mere right of first refusal because no definite period "fd., cling Luerative Realty and Development Corporation. v. Bernabe, Jn, GR. No, 148514, 392 SCRA 679, November 26, 2002. “Ang Yu Asuncion v. CA, Q.R. No, 109125, 238 SCRA 602, December 2, 1994. ©Id., cited in Polytechnic University of the Philippines v. Golden Horizon Realty Corp., 618 SORA 478, supra. — ‘oPuazon v. Del Rosario, 637 SCRA 723, December 1, 2010, “Supra. CHAPTER ONE 287 OBLIGATIONS & CONTRACTS within which the leased premises will be offered for sale to the lessee and the price is made subject to negotiation and determined only at the time the option to buy is exercised. On the other hand, the case of Tuazon v. Del Rosario™ involves an option contract and not a right of first refusal because one of the parties was granted a fixed period to buy the subject property at a price certain. (99.4) Contracts relating to things under litigation: Contracts relating to things under litigation are also rescissible, ifthey have been entered into by the defendant without the knowledge and approval of the litigants or of the competent judicial authority. [99.51 Payments made in state of insolvency: Payments made ina state of insolvency for obligations to whose fulfill ment the debtor could not be compelled at the time they were effected, are also rescissible.” [99.6] Other contracts specially declared by law to he subject to rescission: 1) Rescission of a contract of partition on the 2) a) "07 SORA 72 2010) ground of lesion;"" Rescission in case one of the obligors in a reciprocal obligation should not comply with what is, incumbent upon him; Rescission of contract with damages if through the creditor’s acts, the debtor cannot make a choice in an alternative obligation.”4 5) 6) D 8) 9) 10) aw CIVIL LAW REVIEWER Right to rescind the sale by the unpaid seller of goods." Rescission by vendee when inferior value of the real estate sold exceeds one-tenth of the price agreed upon,” or when the lack in area be not Jess than one-tenth of that. stated,” or when vendee would not have bought had he known of its smaller area or inferior qual Rescission of contract of sale of immovable for le price if vendee does not accede to the to deliver what has been stipulated. fai Rescission on account of eviction of a substan tial portion of the property sold, or loss of one of the things sold jointly for a lump sum. Rescission of contract of sale of an immovable if encumbered with non-apparent burden or ser- vitnde.s Rescission of the contract of lease if either the lessor or the lessee should not comply with their respective obligations. Rescission of adoption by the adopted on any of the grounds provided in Section 19 of Republic Act No. 8552, otherwise known as the Domestic Adoption Act. If, in an obligation to give subject to a suspensive condition, the thing deteriorates through the fault of the obligor. Wart. 1526, par. 1, No. 4; see afso Art. 1534, NCC. art, 1539, pars. 3 and 4, NCC. “Art, 118914), NCC. (CHAPTER ONE. 269 ‘OBLIGATIONS & CONTRACTS. [100] Prescriptive Period: [100.1] Period: The action to claim rescission must be com- 1200.21 ‘menced within four years. This period applies only to rescission as a subdidiary remedy under Article 1381 and does not apply to rescission as a principal remedy in Article 1191." The prescriptive period of the latter is either ten years, for written contracts, or six years, for oral contracts. Commencement of period of prescription: {00.2.1} For contracts by guardians in behalf of ward: The four-year period begins only from the termination of the ward's incapacity. {100.2.2] For contracts by representatives in behalf of absentees: The four-year period begins from the time that the domicile of the absentee is known." [100.2.3] For_contracta_in_fraud_of creditors: The period accrues only when the creditor dis- covers that he has no other the issuance by the trial court of a wi ‘execution for the satisfaction of the judgment; and 3) the failure of the sheriff to enforce and satisfy the judgment of the court” [101] Effects of Rescission: (101.13 According to jurisprudence: In Ocampo v. CA” the Court explained that “to reseind is to declare a 2001 and Pryce Corporation v. Philippine Amusement and Gaming Corporation, 458 SCRA 164, 166 (2005).270 (01.2) CIVIL LAW REVIEWER contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever been made.” (CONTRA: Rescissible contracts are not void ab initio, and the principle, “quod nutlum est nullum producit effectum,” in void and inexistent contracts is inapplicable. Until set aside in an appropriate action rescissible contracts are respected as being legally valid, binding and in force. It would be wrong to say that rescisible contracts produce no legal effects whatsoever and that no acquisition or loss of rights could meanwhile occur and be attributed to the terminated contract. The effects of the rescission, prospective in nature, can come about only upon its proper declaration as such.™] According_to Civil Code: Rescission creates the ‘obligation to return the things which were the abject: of the contract, together with their fruits, and the price with its interests. Under the Code, therefore, inception of the contra made. Hence, rescission has also been defined as “the unmaking of a contract, or its undoing from the beginning, and not merely its termination.” As a consequence of this rule, it is necessary that the person demanding rescission must be able to return, whatever he may be obliged to restore if rescission is, granted by the court.” CHAPTER ONE. mm OBLIGATIONS & CONTRACTS [101.2.1} Applicability of Article 1385, par. 1: This provision applies only to rescission on the ground of lesion and not to rescission on the ground of fraud because in the latter, there ean be no obligation on the part of the plaintiff-creditor to restore anything since he has not received anything." 1101.2.2] Effect of rescission if object of contract is ‘now in possession of third persons: Rescis- sion cannot 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." If the object of the contract is a real property, its acquisition by a third person becomes an obstacle to the efficaciousness of the action for rescission only when the following two requisites are present: (1) that such ‘third person is in lawful possession of the realty, that is to say, that he is protected by the law against said action by the registration in the registry of property; and (2) that he did not act in bad faith.= [01.2.8] Extent of rescission: Rescission shall be only to the extent necessary to cover the damage caused. Applicability: The right of rescission is statutorily recognized in recip! igations.” Under the law, when the obligor fails to comply with a reciprocal obligation, the remedies of the injured party are: (1) “Dissenting Opinion of J. Vitug in Equatorial Realty Development, Ine. v. Mayfair Theater, Inc, G.R No. 133879, November 21, 2001. "Jurado, Obligations and Contracts, 1987 BA, p. 503, citing 8 Manresa, Sth Art, 1585, par. 1, NCC. Ba, Bk. 2, p. 878, Pryce Corp. ¥. PAGCOR, supra “Ar. 1886, par. 2, NCC. Republic v. David, 436 SCRA 577, 692 (2004). Art 1985, par. 9, NCC. s*Sce Pryce Corp. v. PAGCOR, supra, citing Block's Law Dictionary, 6th Bi. ‘Cordoverov. Villara, 46 Phil 473, p.1306, Aart 1385, NCC. Art 1886, par. 1, NCC. "Chua v, Vielorio, 428 SCRA 447, 452 2008)272 (CIVIL LAW REVIEWER, specific performance; or (2) j rescission in Article 11 same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other." ‘They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other." [102.2] Right to rescind is implied: In reciprocal obligations the right to rescind is implied such that absent any provision providing for a right to rescind, the parties may nevertheless rescind the contract’ should the other obligor fail to comply with its ol The right, however, must be invoked j . ion: There is nothing in Article 1191 which prohibits the parties from entering into an agreement that a of the contract would cat without court intervention. for automatic revocation, judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission was proper. Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not itself the revocatory act."" [102.31 ‘Benito v. Saquitan-Ruiz, 394 SCRA 250, 258 (2002), "Ong v. CA, 310 SCRA 1, 9 (1999), mae nngilinan v. CA, 279 SCRA 690, 597 (1997); Heirs of Late Justice Jose BL. Reyes v, CA, 338 SCRA 282; algo in Reisenbeck v. Maceren, Jr., 480 SORA 962, 376 2006). ‘wPangilinan v.CA, id. CHAPTER ONE, 213 OBLIGATIONS & CONTRACTS [102.4] Rescission in Article 1191. not_an_absolute right: ‘The right to rescind in cases of reciprocal obligations is not an absolute right. Thus, rescission will be ordered only where the breach complained of is substantial as to defeat the object of the parties and not where the breach is merely slight or casual." the fixing of period. (102.51 1885 of the Civil Code is also applicable to the rescission under Article 1191. Thus, mutual restitution is also required in cases involving rescission under Ar- ticle 1191." (102.6] Article 1191 does not apply to contract to.sell: The remedy of rescission under Article 1191 of the Civil Code does not apply to contract to sell."* Otherwise stated, there can be no res of an obligation that is non-existent, considering that suspensive condition has not yet happened, NOTE: In a contract to sell, title remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive suspensive condition. Fail- ure to pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force." ita Motor Corp. v. Genuino, 170 SCRA 29 (1989); Ang ¥. CA, 170 SCRA srl v. Solid Homes, Ine, 460 SCRA 878, 985 (2008); see also Velarde v. 1999); Pangilinan v. CA, 279 SCRA 590 (1997); Rillo "98 SCRA 434 (2000); Gonzales v. Heirs of Thomas and274 CIVIL LAW REVIEWER, (102.7) Effect. of breach _by_both_parties_in_reciprocal [102.71] Ifitcan be determined who the first in: fractor is: The first infractor is liable for damages while the second infractor is not Hiable for damages at all; the damages for the second breach, which would have been. payable by the second infractor to the first, by infractor, being compensated inste: the mitigation of the first infract bility for damages arising from his earl breach.\” Otherwise stated, while the first infractor is liable for damages, the same shall be equitably tempered by the courts, since the second infractor also derived or thought he would derive some advantage by his own act or neglect." [102.7.2] If it cannot be determined who the first infractor is: The obligation is deemed extinguished, and each shall bear his own damages. B. Voidable Contracts (103) Voidable Contracts, In General: [103.1] Concept: A contract is voidable when all of the essential requisites for the perfection of the contract are present but the element of consent is defective either because of want of capacity to contract with respect to one of the parties thereto or because of vitiation of consent by reason of mistake, violence, tion, undue influence, or fraud. (103.2) 2) 3) 4) 5) 108.3] Annulment. explained: ‘GHAPTER ONE 275 OBLIGATIONS & CONTRACTS: of a competent court in an action for annulment. However, it suffers from a defect in the form of vitiation of consent by reason of want of capacity, error, violence, intimidation, undue influence, or deceit. It may be rendered perfectly valid by ratification, which can be express or implied, such as by accepting and retaining the benefits of a contract.’ It is also susceptible of convalidation by prescription since the action for annulment is sub- It ean be assailed only in a direet proceeding for that purpose and not collaterally." no effect; to nullify; to abolish; to do away with. Hence, a contract that is annulled presupposes that it subsists but later ceases to have legal effect when it is terminated through a court action.” In annul- is the judgment of the court that produces the invalidity of the contract. [108.3.1] Distinguished from declaration of nullity ‘of void contracts: Null and void means that something does not exist from the beginning. Thus, a void contract is in from the beginning and in declaring its nullity the court simply declares a status "Art, 1890, par. 1, NCC; Suntay v. Conjuangeo-Suntay, 200 SCRA 760, 771 11305 (1966), ri werd, it. 1980, NCC. Herrera, 382 SCRA 317 (2002; see aleo Art. 1380, par. 2, NCC. Bayadog, 328 SCRA 122. ‘Suntay v. Conjuangeo-Suntay, supra, citing Nuguid v. Nuguid, 123 Phil.26 CIVIL LAW REVIEWER (103.32) or condition which already exists from the very beginning. Distinguished _from_rescission: Although the effect of annulment and rescission is identical, in that both render the contract inefficacious,™ they differ, as follows: 1) Annulment declares the inefficacy which the contract already carries in itself, while rescission merely produces that inefficacy, which did not exist essentially in the contract.’ Stated otherwise, the defect is in- trinsic because it consists of a vice h vitiates consent, while in a ible contract the defect is ex- ternal because it consists of damage or prejudice either to one of the contracting parties or to a third person. 2) Inthe former, the annulability of the contract is based on the law, while in the latter the rescissibility of the contract is based on equity. Hence, annulment is not only a remedy but le rescission is merely “Thus, in the former, the of the public interest in the latter, private interest predominates. 3) In the former, the contract is an nullable even if there is no damage or prejudice, while in the latter the contract is not rescissible if there is no damage or prejudice. CHAPTER ONE mr OBLIGATIONS & CONTRACTS 4) Inthe former, the nullity is based on. a vice of the contract which invali- dates it, while the latter is compat- ible with the perfect validity of the contract. 5) Inthe former, the contract is susceptible of ratification, while in the latter, it is not. 6) Annulment may be invoked only by a contracting party, while rescission may be invoked either by a contracting party or by a third person who is prejudiced.» [108.4] Personality to file action for annulment: Before a party can have the necessary standing to institute the action for annulment, he must either be — 1) The party obliged principally or subsidiarily in the contract which he seeks to annul. Exception: A person-who is not a party obliged or subsidiarily under a contract ise an action for annulment of the prejudiced in his rights with respect o one of the contracting parties; he can show detriment which would ly result to him from the contract in which he has no intervention." 2) ‘The party suffering from incapacity to give consent or the vietim of intimidation, violence, undue influence, fraud or mistake. Thus, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence or undue influence, or employed fraud, or caused intay ¥. Conjuangco-Suntay, 300 SCRA 760, 771. i IV Tolentino, Civil Cade of the Philippines, 1981 Ha., $96. | 2td,, at 97, Jurado, Obligations and Contracts, 1987 Fa, p. 519, Code of the Phitippines, 1991 Ba., 887, ara, 1 and Contracts, 1987 Ed, p. 520. Id, see atso 1V Tolentin were. fede of the Philippines, 1991 Kd. at 697.103.5) [103.6] CIVIL LAW REVIEWER mistake base their action upon these flaws of tthe contract. Prescriptive period of action for annulment: prescriptive period is four years and the period ‘commences to run — 1) _ In cases of intimidation, violence or undue influence — from the time the defect of the contraet ceases. 2) In cases of mistake or fraud — from the time of the discovery of the same. 3) In cases of incapacity to give consent — from the time the guardianship ceases.’ Grounds for annulment: Contracts that are voidable or annullable, even though there may have been no damage to the contracting parties, are the following: 1) Those were one of the parties is incapable of giving consent to a contract; and 2) ‘Those were the consent is vitiated by mii take, violence, intimidation, undue influ- ‘ence or fraud." NOTE: Where only one of the contracting parties is incapable of giving consent to a contract, the same is merely voidable."* If both contraet- ing parties are incapable of giving consent to a contract, the same is unenforceable. [104] Voidable Contract_by Reason_of Want_of Capacity: See discussions in Sections 84 to 87 of this Chapter. £105) (105.1) Effect of vitiation of consent: A contract where consent is given through mistake, violence, intimida- “She, 1887, NCC. ‘east, 1201, NCC. v. CA, 286 SCRA 698 (1998). [105.21 CHAPTER ONE 219 OBLIGATIONS & CONTRACTS tion, undue influence, or fraud is voidable. These circumstances are defects of the will, the existence of which impairs the freedom, intelligence, spontane- ity and voluntariness of the party in giving consent to the agreement. ‘Mistake or error: (105.2.1] Character of mistake which anpuls consent: In order that mistake may invalidate consent, it should either refer to: a) the substance of the which is the object of the contract; or b) those conditions which have principally moved one or both parties to enter into the contract; or ¢) those mistake as to the identity or qualifications of one of the parties, but only when such identity or qualifications have been the principal cause of the contract.'* A simple mistake of account, however, shall only give rise to its correction.” © To invalidate a contract, mistake must refer to the substance of the thing that is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract.” An example of mistake as to the object of the contract is the substitution of a specific thing contemplated. by the parties with another." * 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 iBule v. CA, pra.280 CIVIL LAW REVIEWER CHAPTER ONE 281 OBLIGATIONS & CONTRACTS who made it in order to annul vitiate consent, the following his contract. requisites must be present — ‘+ Misrepresentation made in good 1) The mi it Merprecede neta est Peat aie Fe constitute error or mistake. of an agreement; plains that the concept of error in Article 2 TS ung se mast Pe me 1331 of the Civil Code must include both ’ ignorance, which is the absence of know- 3) The real purpose of the ledge with respect to a thing, and mistake parties must have been frustrated. existence of some circumstances, fact, or {05.81 Fraud! event, which in reality does not exist. In (105.3.1] Kind of fraud which will annul consent: both cases, there is a lack of full and cor. ‘Dhe kind of fraud that will vitiate a con- rect knowledge about the thing. tract refers to those insidious words or 1052.91 Mi ; machinations resorted to by one of the -2.3] Mistake must be with respect to facts and ‘contracting parties to induce the other to notlaw: enter into a contract which without them [105.2.3.1} Rule: As a rule, mistake of law he would not have agreed to - the fraud dossustciaks weonivact vold- must be the determining cause of the con- ‘able, beeause ignorance of the tract, or must have caused the consent to be given.” The fraud referred to is causal fraud. Dolo causante or causal fraud is basically a deception employed by one party prior to or simultaneous to the consent thus rendering the contract in order to secure the consent of the tract voidable. other." (105.2.3.2] Exception: Mutual error as to 1105.3.1.1] Dolo Causante and Dolo Inci- the legal effect of an agree- dente: Dolo causante (causal ment when the real purpose of fraud) refers to those insidious the parties is frustrated may words or machinations resort- vitiate consent. But in order ed to by one of the contracting for mutual error of law may parties to induce the other to enter into a contract without them, he would not have ‘Walcanid v. CA, 237 SCRA 419 (1994), aes aA 1988, NCC; Rural Bank 1989); Reyes “Lane v, Linatoc, 74 Phil. 16. (1994), 1384, NC ‘Samson v. C m mart 1334, NOC. ‘tamson v. CA, 288 SCRA 397 (1984), Muriu, Pangasinan v. CA, 314 SCRA 1992), Periquet, dr, v. TAC, 238 SCRA 697CIVIL LAW REVIEWER, CHAPTER ONE 283 OBLIGATIONS & CONTRACTS agreed to. Dolo incidente 1) It must have been employed by (incidental fraud), on the oth- one contracting parties upon the er hand, refers to deceptions others cor’ misrepresentasions ‘which, 2) It must have induced the other are not serious in character i : and without whieh the other Berty:to enterdnto theicontrack; party would still have entered 8) It must have been serious; and iniie te-amutznde THY, S23 4) Tt must have resulted in damage upttniewistied from: eacly off and injury to the party seeking er, as follows — cauainests 1) The first is serious in f (105.3.2.1] First requisite: The fraud cae, oflarthe ses: which vitiates consent must fondant have been employed by one of 2) The first is the cause the contracting parties only which induces the other and should not have been contracting party to enter employed by both of them; into a contract with the otherwise, the contract is not one who employed it, voidable.* Also, the fraud while the second is not must have been employed by because even without it a contracting party upon an- the other would still have other and not by third per- entered into the contract; son. Misrepresentation by a and third person does not vitiate consent, unless such mis- 3) ‘The first renders the com representation has created eect voidable) mille the substantial mistake and the second renders the person note etmek employing it only liable for damages." + Acontract may be invali- dated by substantial mis- [105.3.2] Requisites of annulment. based on fraud: take mutually committed In order that the consent of a party to a by the contracting parties contract may be vitiated by fraud, it is as a consequence of the essential that the following requisites fraud and misrepresenta- must eoncur — tion committed by a third party. Stated otherwise, a contract may be annulled Art 1238, NCC. jurado, Obligations and Contracts, 1987 Ed, p. 496. "—“wAicasid v. CA, 237 SCRA 419 (1994), Constanting v. CA, 264 SCRA 418 (1986), ‘wart. 1344, par. 1, NCO. mart. 1342, NCC.284 CIVIL LAW REVIEWER on the ground of vitiated consent if deceit by a third person, even without con- nivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract. (105.3.2.2] Second requisite: In order to vitiate consent, fraud must be the determining cause of the contract, or must have caused the consent to be given." If the fraud is not the determin- ‘ing cause of the contract, it is merely incidental and obliges the person employing it to pay damages, but may not make a contract. voidable.** [105.3.2.8) Third requisite: In order that fraud may make a contract voidable, it should be serious (causal fraud). If the fraud is not serious but merely inei- dental, it obliges the person employing it to pay damages but may not make a contract voidable.” 1105.3.3] Other rules governing fraud: (105.8.8.1] Rule on silence or conceal: ment: Silence or concealment, by f, does not constitute fraud, unless: “Rural Bank of Calooean, Inc. v. CA, 104 SCRA 151 (1981); Co v. CA, 193, SCRA 198 (1991). ‘art, 1388, NCC; Rural Bank of Sta. Maria, Pangasinan v. CA, $14 SCRA 255 (1990); Reyes v. CA, 216 SCRA 152 (1992); Periquet, Jr. v. IAC, 238 SCRA 697 CHAPTER ONE 285 OBLIGATIONS & CONTRACTS 1) There is a special duty to disclose facts, as when the parties are boun fidential relations; 2) According to good faith and usages of commerce, tho communication should be made." {105.3.3.2] Rule on commerce: 1) Silence or concealment is fraudulent when according to usages of commerce the communication should be made; or 2) Usual exaggerations in trade, when the other party had an opportunity to know the facts, are not fraudulent. [105.3.3.31 Rule on expression of opin: ion: A mere expression of an ‘opinion does not signify fraud, unless two requisites are satisfied — 1) It is made by an expert; and 2) The other party has relied on the former's special knowledge." (105.3.4) Burden of proof in cases of mistake or fraud: inn, Ine. v. CA, $80 SCRA 246 (2002); Rural Bank of Sta. Maria, . 314 SCRA 256 (1998), weart. 1340, NCC, Art. 1941, NCC.298 CIVIL LAW REVIEWER CHAPTER ONE, 287 ‘OBLIGATIONS & CONTRACTS: [105.3.4.1] General rule: Whosoever al- a language not understood by leges fraud or mistake in any him, It is the party invoking must substanti- the benefits of Article 1332 legation, since it is who has the burden of prov- that a person takes ing that he really is unable ordinary care for his concerns to read or that the contract and that private transactions is written in a language not have been fair and regular." understood by him. Only after sufficient proof of such facts may the burden of proving that the terms of the contract had been explained to the dis- Tanguage in which the con- ¢ tact is ween, the burden is advantaged be shifted to the [105.3.4.2] Exception: Where a party ta a contract is illiterate, or ean- not read nor understand the on the party interested in en- Beaty eniticetag the controct > forcing the contract to prove (105.3.4.4) Effect if party enforcing the that the terms thereof are contract failed to overcome the fully explained to the former burden: If the party enforcing in a language understood by the contract failed to prove him;™ otherwise, mistake or that he had fully explained fraud is presumed. Hence, the the terms thereof to the il- principle that a party is pre- literate, the contract is con ‘sumed to know the import of a sidered voidable and not void document to which he affixes or inexistent. Article 1332 of his signature is modified by the Civil Code assumes that Article 1332 of the Civil Code. the consent of the contracting The burden rests upon the party imputing the mistake party who seeks to enforce the or fraud was given, although contract to show that the oth- vitiated, and does not cover er party fully understood the _ a situation where there is a contents of the document. complete absence of consan (105.3.4.3] Requirement_for_application Intimidation and Violence: of Article 1332: Before Article {05.41 . 1832 may be invoked, it must 1105.4.1) intimidation_exists: There is in- be convincingly established timidation when one of the contracting that the disadvantaged party parties is compelled by a reasonable and is unable to read or that the well-grounded fear of an imminent and contrat involved is written in grave peril upon his person or property, or "Rural Bank of Sta, Maria, Pangasinan v. CA, supra. —Tecles w CA, 211 SCRA 858, 864 (1992), Dela Cruz v. Dela Cruz, 419 SCRA Art. 1392, NCC; Cayabyah v. Intermediate Appellate Court, 22 SCRA 1, sant ‘™Hlemedes v. CA, 316 SCRA 347 (1999). {ayor v. Bolon, 430 SCRA 561 (2004)CIVIL LAW REVIEWER upon the person or property of his spouse, descendants or ascendants, to give his consent." {1064.2} Requisites of annulment based on intimidation: The requisites that intimidation may vitiate consent and render the contract invalid are the following — 1) That the intimidation must be the determining cause of the contract, or must have caused the consent to be given; 2) That the threatened act be unjust or unlawful; ‘That the threat be real and serious, there being an evident dis- proportion between the evil and the resistance which all men can offer, leading to the choice of the contract as the lesser evil; and 3) 4) ‘That 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." * The fact that respondents were “forced” to sign the documents does not amount to vitiated consent. Be- ing forced into a situation does not amount to vitiated consent where it is not shown that the party is deprived of free will and choice." [105.4.3] ‘Threat to enforce one’s claim: A threat to enforce one's claim through competent CHAPTER ONE 289 OBLIGATIONS & CONTRACTS (105.4.4] (105.4.5] authority, if the claim is just or legal, does not vitiate consent. When_violence exist: There is violence when in order to wrest consent, serious or irresistible foree is employed. Even if the force employed to wrest consent is merely serious, and not irresistible, there is still violence, because consent is not free, Ifemployed by a third person: [105.4.5.1] Rule in violence and intimidation: Although the violence or intimidation has been employed by a third person who did not take part in the contract, the same may still vitiate consent and may render the contract voidable. 1105.4.5.2] Compared to rule in fraud: The misrepresentation of a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual." [105.5] Undue influence: [05.5.1] ‘Start. 1386, par. 4, NCC. When undue influence exist: 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 shalll be considered: the confidential, family, spiritual, and other relations between the parties, or the fact, “Art. 1996, par. 2, NCC. 1OC; De Leon v. CA, 186 SCRA 345 (1 . Broblo, 684 SCRA 851, Octaber 20, Padilla, Cuil Code ofthe Philippines, 1967 Fé. p. 628. rt. 1386, NCC. vart. 1342, NCC. citing DBP v. CA, 494(CIVIL LAW REVIEWER, (105.5.2) Art. 1897, NCC. that the person alleged to have been un- duly influenced was suffering from mental weakness, or was ignorant or in finan- cial distress. ‘Requisites of annulment based on undue influence: The following elements must be established in order for undue influence iate consent — 1) A person who can be influenced; 2) The fact that improper influence: was exerted; and 3) Submission to the overwhelm- ing effect of such unlawful conduet.” * To be sufficient to vitiate consent, the influence exerted must be of a kind that so overpowers and subju- gates the mind of the person upon whom it is employed as to destroy his free aj and make him express the will of another, rather than his own. ‘+ To prove a confidential relationship from which undue influence may arise, the relationship must reflect a dominant, overmastering influence which controls over the dependent person. Influence obtained by rgument, or by appeal ions is not prohibited either in law or morals, and is not obnoxious even in courts of equity. CHAPTER ONE 201 OBLIGATIONS & CONTRACTS. [106] Effects of Annulment of Contract: [106.1] [106.21 (106.3) ‘Mutual restitution: Upon annulment, the parties should be restored to their original position by mutual restitution. As a consequence, as long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (106.1.1] In cbligations to give: The annulment of ‘the contract creates an obligation on the part of the parties to restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest.” [106.1.21 In obligations to do: The value of the service shall be the basis for damages™ in complying with the parties obligation of making mutual restitution. tution: When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. Effect of loss.of the thing which is the object of the contract: [106.3.1] Iflost by the person who has the right to annul (plaintiff: a) And it is lost through his fraud or fault — the action for annulment is extinguished, even if at the time of the loss the plaintiff was stil suffering from incapacity. "Cadwallader & Co. v. Smith, Bell & Co., 7 Phi). 461CIVIL, LAW REVIEWER b) And it is lost without his fault or fraud — the contract may still be annulled if the plaintiff offers to pay the value of the thing at time of the loss, as a substitute for the thing itself, but without the obligation to pay interest. [106.3.2] If lost by the person obliged to return the thing (defendant): a) And itis lost through his fault — he must return the fruits received and the value of the thing at the time of the loss, with interest from the same date. b) And itis lost without his fault — the action for annulment is not extinguished and the defendant shall pay the value of the thing at the time of its loss, but without interest there- one (107) Ratification or Confirmation: (107.11 (207.2) Concept: Ratification or confirmation refers to the act of or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. ‘Reauisites of ratification: The following requisites must concur — 1) The contract has all the essential requisites, but it is tainted with a vice which is susceptible of being cured. 2) It should be effected by the person who is entitled to do 50 under the law. The par- PIV Tolentino, Civil Cade ofthe Philippines, 1991 FA. p. 613. 3 Manresa, 1987 Ed, p. 533. ‘Code of the Philippines, 1991 Ed. p. 614 «Bk, 2, p. 685, cited in Jurado, Obligations and Contracts, 1107.3] [107.4] CHAPTER ONE, 298 OBLIGATIONS & CONTRACTS ty who has the right to ratify the defect of the contract is the party who has the right to bring the action for annulment, although the ratification may be effected by the guardian of the incapacitated person.™ The conformity of the contracting party who hes no right to bring the action for annulment is not required. 3) It should be effected with the knowledge of the vice or defect.» Also, before a contract can be ratified, knowledge of its existence must be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. 4) The cause of the nullity or defect should have already disappeared." ‘Manner of effecting ratification: Ratification may be effected expressly or tacitly. A tacit ratification is the execution of an act which necessarily implies an intention to waive the right to annul,* such as by accepting and retaining the benefita of a contract. Effects _of ratification: Ratification cleanses the contract from all its defects from the moment it was constituted, thereby extinguishing the action to annul avoidable contract. Tt results, therefore, that after a contract is validly ratified, no action to annul the same can be maint jased upon defects relating to its original vali "Arta, 1804 and 1395, NCC. wart 1594, NCC. Art 1398, NCC. art. 1898, NCC. Yu Chuck v. Kong Li Po, 46 Phil. 608, seArt, 1399, NCC, and SUR rancisco v. Herrera, 992 SCRA 317 (2002). Art, 1896, NCC. Bart, 1392, NC. Tang Ah Chan und Kwong Kam Koon v, Gonzales, 52 Phil. 180,204 CIVIL LAW REVIEWER, CHAPTER ONE. 205 OBLIGATIONS & CONTRACTS C. Unenforceable Contracts 4) They cannot he assailed by third persons. = [108] Unenforceable Contracts, In General: [108.1] Nature of unenforceable contract: Unenforceable contracts cannot be sued upon or enforced by a prop- [109] Contracts Made Without or in Excess of Authority: [109.1] Status of the contract: A contract entered into in er court action, unless they are ratified," as distinguished from rescissible and voidable contracts which are binding unless rescinded or annulled by 2 proper action in court." [108.2] ‘Three kinds of unenforceable contracts: 1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;** 2) ‘Those that do not. comply with the Statute of Frauds} and 3) ‘Those where both parties are incapable of giving consent to a contract. [108.3] Characteristics of unenforceable contracts: 1) They are valid contracts but which cannot bbe enforced by a proper action in court. 2) They are susceptible of ratification.* 3) The defect of an unenforceable contract is of permanent nature and it will exist as Jong as the contract is not duly ratified. ‘The mere lapse of time cannot. give effi- caey to such a contract. The defect is such that it cannot be cured except by the subsequent ratification of the unenforceable contract. 1407, NEC. 8 v. CA, G.t. No, 108921, April 12, 2000, citing Tipton v. 913 SCRA 632 (1998), the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. [109.1.1] Not inexistent if it = ity: Obviously, a contract entered into by one in behalf of another without authority is made without the consent of the latter. Nonetheless, the contract is not inexistent nor void, but unenforceable. An inexistent or void contract may not be ratified, but this kind of contract is subject to ratification. Even if the alleged principal did not ratify the contract made in his behalf without authority, the contract does not become void but cannot simply be enforced against him. ICONTRA: In Heirs of William Sevilla v. , We find that the same is void 4b initio and not merely unenforceable. In Delos Reyes v. CA," which is a case involving the sale of a lot by a person who is neither the owner nor the legal repre- we declared the contract void was held that one of the req- valid contract under Article(109.2) CIVIL LAW REVIEWER the capacity to give consent of the parties to the contract. The legal capacity of the parties is an essential element for the existenee of the contract because it is an indispensable condition for the existence of consent. There is no effective consent in law without the capacity to give such consent, In other words, legal consent presupposes capacity. Thus, there is said to be no consent, and consequently, no contract when the agreement is entered into by one in behalf of another who has never given him authorization therefor unless he has by law a right to represent the latter.” COMMENT: In Delos Reyes v. CA, the contract is declared void because of failure to comply with the form: required in Article 1874, and not merely because of the absence of consent of the alleged principal.] [109.12] alleged principal, the contract is void and not merely unenforceable. This is because Article 1874 of the Civil Code requires the authority of the agent to be in writing in est therein; otherwise, the sale is void. As discussed in Scetions 99.1.2 and 99.22 of this Chapter, the sale or encumbrance of the real property of the ward or the absentee must be with prior court approval as the guardian or legal representative hhas no authority to sell real estate of his ward or the absentee merely by reason of their general powers." Delon Reyes v. CA, supra; Litonjua v, Fernandez, 427 SCRA 478(2004). "See Sec. 4, Rale 95, Rules of Court. >Inton v. Quintana, Bt 97. CHAPTER ONE. 207 OBLIGATIONS & CONTRACTS A sale of the realty of the ward or the absentee by the guardian or legal representative without authority from the court is void," not merely unenforceable. [110] Contracts Which Do Not Comply with Statute of Frauds: See discussions in Section 92 of this Chapter. [111] Contracts Where Both Parties Are Incapacitated: (111.1) (111.2 Effect_of incapacity to give consent: Where only one of the contracting parties is incapable of giving consent to a contract, the same is merely vaidable.* Where both parties are incapable of giving consent to a contract, the same is unenforceable. Effect_of ratification: In a contract which is unenforceable because both parties are incapable of giving consent, express or implied ratification by the parent or guardian, as the case may be, of one of the contracting parties, shall give the contract the same effect as if only one of them wore incapacitated.™ Thus, the contract becomes voidable. But if the ratification is made by the parents or guardians, as the case may be, of both the contracting parties, the contract shall be validated from the ineeption.=* D. Void Or Inexistent [412] Void and Inexistent Contracts: [112.1] Void and inexistent contracts, distinguished: They are distinguished, as follows — 1) A void contract is a perfected contract because all the essential requisites for the existence of a contract are present, but the contract is invalid from its inception; while an inexistent contract is a contract, which does not exist because any of the Sea a eee: Art, 1407, par. 2, NCC.

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