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DEVT BANK OF THE PHILIPPINES *it is essential that such insidious words or machinations
[Topic] Fraud: Requisites must be prior to or contemporaneous with the birth or
perfection of a contract
Art. 1338. There is fraud when, through insidioua words or VOCABULARY:
machinations of one of the contracting parties, the other is Fraud will render the contract voidable;
induced to enter into a contract which, without them, he
would not have agreed to. SHORT ANSWERS:
1. Who was chasing who: Alejandro Tankeh was chasing
Art. 1344. In order that fraud may make a contract Ruperto Tankeh
voidable, it should be serious and should not have been 2. Where did the problem start: When Alejandro Tankeh
employed by both contracting parties. Incidental fraud only wrote a letter to Ruperto Tankeh saying that he was severing
obliges the person employing it to pay damages. all ties and terminating his involvement with Sterling
Shipping Lines
*1338 - fraud in performance of a contract employed by a 3. What is the contract in question: Assignment of
party to the contract in securing the consent of the other Shares of Stock with Voting Rights
*1170 fraud in performance of an obligation employed by FACTS:
the obligor in the performance of a pre-existing obligation. Sometime in 1980, Alejandro was approached by his
brother, Ruperto (president of SSL) informing him that the
Kinds of Fraud latter was operating a new shipping line business and
Dolo Causante refers to those deceptions or offered him 1000 shares worth P1M to be a director of the
misrepresentations of a serious character employed by one business. Alejandro accepted the offer based on the
party and without which the party would not have entered promised that he be part of the admin staff so that he can
into the contract. oversee the operation of the business plus his son, who is a
practicing lawyer would be given a position in the company.
Dolo Incidente deceptions or misrepresentations which A loan was applied from DBP for financing of an
are not serious in character and without which the other ocean-going vessel with the conditions that the first
party would still have entered into the contract. mortgage is obtained over the vessel, the future earnings of
the mortgage including proceeds should be assigned to DBP
Requisites: and DBP is assigned to no less than 67% of the voting
(1) Fraud or insidious words or machinations must have shares of the company. Alejandro signed the Assignment of
been employed by one of the contracting parties; Shares of Stock with Voting Rights and the promissory note
(2) The fraud or insidious words must have been serious; making him liable jointly and severally for the amount of the
(3) The fraud or insidious words must have induced the loan. After the vessel is acquired, a deed of assignment was
other party to enter into the contract; and executed in favor of DBP. On 1983, upon realizing that he
(4) The fraud should not have been employed by both of was only being made a tool to realize the purposes of
the contracting parties or by third persons. Ruperto, Alejandro officially informed the company by
means of letter that he has severed his connection with the
company and asking the board to pass a resolution to
released him from his liabilities with DBP and notify the and dolo causante or fraud serious enough to render a
latter about this. contract voidable. If there is fraud in the performance of the
On 1986, the account of SSL in the DBP were contract, then this fraud will give rise to damages. If the
transferred to Asset Privatization Trust by virtue of fraud did not compel the imputing party to give his or her
Presidential Proclamation No. 50. The asset including loan in consent, it may not serve as the basis to annul the contract,
favor of DBP were ordered to be transferred to the national which exhibits dolo causante. However, the party alleging
government. Despite the assignment and cash equity the existence of fraud may prove the existence of dolo
contribution of SSL to cover part of the acquisition cost of incidente. This may make the party against whom fraud is
the vessel and the like, the promissory note still subsisted. alleged liable for damages.
Hence, Alejandro is still bound as a debtor because of the Article 1340 of the Civil Code recognizes the reality of some
promissory note. exaggerations in trade which negates fraud. It reads: The
Alejandros contention: The promisorry note must be usual exaggerations in trade, when the other party had an
declared as null and void and he be absolved from any opportunity to know the facts, are not in themselves
liability. Ruperto exercised deceit and fraud in causing him fraudulent.
to bind himself jointly and severally to pay DBP the amount
of the mortgage loan. All the money supposedly invested by Given the standing and stature of the petitioner, he was in a
him were put by Ruperto, hence he had never invested any position to ascertain more information about the contract.
money. He was invited to attend the board meeting only The following facts show that petitioner was fully aware of
once and he was never compensated by SSL for being called the magnitude of his undertaking: First, petitioner was fully
director and stockholder. None of the promises of Ruperto aware of the financial reverses that SSL had been
was complied with. undergoing, and he took great pains to release himself from
the obligation. Second, his background as a doctor, as a
ISSUE: bank organizer, and as a businessman with experience in
WON the fraud perpetrated by Ruperto is serious enough to the textile business and real estate should have apprised
warrant annulment of the contract? him of the irregularity in the contract that he would be
undertaking. This meant that at the time petitioner gave his
HELD: consent to become a part of the corporation, he had been
No. Only incidental fraud exists in this case. Therefore it is fully aware of the circumstances and the risks of his
not sufficient to warrant the annulment of the contracts participation. Intent is determined by the acts. Finally, the
petitioner entered into but respondent Ruperto is liable to records showed that petitioner had been fully aware of the
pay him damages. The distinction between fraud as a effect of his signing the promissory note. The bare assertion
ground for rendering a contract voidable or as basis for an that he was not privy to the records cannot counteract the
award of damages is provided in Article 1344: In order that fact that petitioner himself had admitted that after he had
fraud may make a contract voidable, it should be serious severed ties with his brother, he had written a letter seeking
and should not have been employed by both contracting to reach an amicable settlement with respondent Rupert.
parties. Incidental fraud only obliges the person employing it Petitioners actions defied his claim of a complete lack of
to pay damages. awareness regarding the circumstances and the contract he
had been entering.
There are two types of fraud contemplated in the
performance of contracts: dolo incidente or incidental fraud
The required standard of proof clear and convincing However, in refusing to allow petitioner to participate in the
evidence was not met. There was no dolo causante or management of the business, respondent Ruperto V. Tankeh
fraud used to obtain the petitioners consent to enter into was liable for the commission of incidental fraud. In
the contract. Petitioner had the opportunity to become Geraldez, this Court defined incidental fraud as "those which
aware of the facts that attended the signing of the are not serious in character and without which the other
promissory note. He even admitted that he has a lawyer-son party would still have entered into the contract. Although
who the petitioner had hoped would assist him in the there was no fraud that had been undertaken to obtain
administration of Sterling Shipping Lines, Inc. The totality of petitioners consent, there was fraud in the performance of
the facts on record belies petitioners claim that fraud was the contract.
used to obtain his consent to the contract given his personal
circumstances and the applicable law.