NOTES IN OBLIGATIONS AND CONTRACTS

Prof. Rolando B. Faller

Title II. - CONTRACTS

CHAPTER 1
GENERAL PROVISIONS

 Art. 1305. 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. (1254a)

Notes:
1. The codal definition is restrictive one, giving emphasis to the obligatory concept
of contracts and to the consensual nature of contracts.
2. Characteristics of a contract:
a. Obligatory/Binding Force (Art. 1159)
b. Autonomy of contract (Art. 1306)
c. Mutuality (Art. 1308)
d. Relativity (Art. (Art. 1311)
e. Consensuality (Art. 1315)
3. There can be contract even if the is only one known person involved. This is called
auto-contract, where one person may represent two parties because he may act
in his own right and as a representative of another.
4. Elements of a contract
a. Essential elements – those without which, there can be no contract such as
consent, subject matter and cause.
b. Natural elements – those which usually accompany a contract and are
derived from its nature and are presumed by law, but which can be waived
by the contracting parties such as warranty in sales.
c. Accidental elements – those which can only exist when the parties expressly
so provide for the purpose of limiting or modifying the normal effects of
their rights, such as condition or a period.
Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. (1255a)
Notes:
1. Freedom to stipulate terms and conditions is the essence of the contractual system
provided such stipulations are not contrary to law, morals, good customs, public
order or public policy.
2. In Pakistan Internationl Airlines vs, Ople, 190 SCRA 90, where the airline company
and the employees entered into a contract providing stipulations regarding
employment calculated to evade the provision of the Labor Code, i.e, security of
 tenure, the SC ruled that contractual stipulations contravening provisions of law
designed to protect laborers and employees were not valid.
3. Examples
a. Stipulation renouncing action for future fraud
b. Stipulation for free domestic service
c. Stipulation for trial marriage
d. Stipulation providing right to landlord to dispossess by force the tenant from
leased premises for failure to pay rent
e. Agreement intended to prevent or stifle prosecution for a public crime.
4. Cases
a. The freedom to contract is not absolute; all contracts and all rights are subject to
the police power of the State and not only may regulations which affect them be
established by the State, but all such regulations must be subject to change from time to
time, as the general well-being of the community may require, or as the circumstances
may change, or as experience may demonstrate the necessity. (Goldenway
Merchandising Corporation v. Equitable PCI Bank, G.R. No. 195540, March 13,
2013)
b. It is a long established doctrine that the law does not relieve a party from the
effects of an unwise, foolish or disastrous contract, entered into with all the required
formalities and with full awareness of what she was doing. Courts have no power to
relieve parties from obligations voluntarily assumed, simply because their contracts
turned out to be disastrous or unwise investments. (Toledo v. Hyden, G.R. No.
172139, December 08, 2010)
c. Verily, a lawyer's compensation for professional services rendered are subject to
the supervision of the court, not just to guarantee that the fees he charges and receives
remain reasonable and commensurate with the services rendered, but also to maintain
the dignity and integrity of the legal profession to which he belongs. (Municipality of
Tiwi v. Betito, G.R. No. 171873, July 09, 2010)
d. Finally, in Consulta v. Court of Appeals, [the Court] considered a non-involvement
clause in accordance with Article 1306 of the Civil Code. While the complainant in that
case was an independent agent and not an employee, she was prohibited for one year
from engaging directly or indirectly in activities of other companies that compete with the
business of her principal. [The Court] noted therein that the restriction did not prohibit
the agent from engaging in any other business, or from being connected with any other
company, for as long as the business or company did not compete with the principal's
business. Further, the prohibition applied only for one year after the termination of the
agent's contract and was therefore a reasonable restriction designed to prevent acts
prejudicial to the employer. (Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512,
February 28, 2007; (I) Consulta v. Court of Appeals, G.R. No. 145443, March
18, 2005)
e. However, in Del Castillo v. Richmond, [the Court] upheld a similar stipulation as
legal, reasonable, and not contrary to public policy. In the said case, the employee was
restricted from opening, owning or having any connection with any other drugstore within
a radius of four miles from the employer's place of business during the time the employer
was operating his drugstore. [The Court] said that a contract in restraint of trade is
valid provided there is a limitation upon either time or place and the restraint
upon one party is not greater than the protection the other party requires. (Tiu
v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007)
f. The duty of the court is confined to the interpretation of the agreement that the
contracting parties have made for themselves without regard to its wisdom or folly as the
court cannot supply material stipulations or read into the contract words which it does
not contain. (Limpo v. Court of Appeals, G.R. No. 144732, February 13, 2006)

Art. 1307. Innominate contracts shall be regulated by the stipulations of the

parties, by the provisions of Titles I and II of this Book, by the rules governing
the most analogous nominate contracts, and by the customs of the place. (n)
Notes:
1. Innominate contracts are those which have no specific designation, unlike sale,
lease or donation. Innominate contracts may take any of the following forms:
a. Do ut des (I give that you give)
b. Facio ut des (I do that you may give)
c. Do ut facias (I give that you may do)
d. Facio ut facias (I do that you may do)
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a)
1. The reason for this article is in order to maintain the enforceability of contracts,
for otherwise the same would be illusory.
2. In Garcia vs. Rita Legarda, 21 SCRA 555, where in a contract to sell a real
property stipulated that the vendor was given the right to unilaterally rescind or
terminate the contract in the event the other failed to pay any of the required
installments of the purchase, and which the vendee complained that the contract
is void as its validity or compliance is left to the vendor, the SC held that such
provision did not violate Art. 1308 as the same merely gives the vendor the right
to declare the contract cancelled and of no effect.
3. Basic is the rule that there can be no contract in its true sense without the mutual
assent of the parties. If this consent is absent on the part of one who contracts,
the act has no more efficacy than if it had been done under duress or by a person
of unsound mind. Similarly, 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 interest rate is undeniably always a vital component,
for it can make or break a capital venture. Thus, any change must be mutually
agreed upon, otherwise, it produces no binding effect. (Philippine Savings Bank
v. Spouses Castillo, G.R. No. 193178, May 30, 2011)
4. Article 1308 of the Civil Code expresses what is known in law as the principle of
mutuality 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 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 uncontrolled will of one of the contracting parties. (Manila
International Airport Authority v. Ding Velayo Sports Center, G.R. No.
161718, December 14, 2011)
5. Escalation clauses are not void per se. However, one "which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement" is void. Clauses of that nature violate the principle of mutuality of
contracts. Article 1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them. (Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545,
December 19, 2007)
Art. 1309. The determination of the performance may be left to a third person,
whose decision shall not be binding until it has been made known to both
contracting parties. (n)
Art. 1310. The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is equitable under the
circumstances. (n)
1. The parties may constitute a third party to determine the performance of a
contract. The decision becomes effective when both of the parties already have
knowledge of the decision. This determination must not destroy the nature of
mutuality of contract, hence, the law requires that the determination must not be
evidently inequitable.
2. What is prohibited by Art. 1308 to 1310 is that the effectivity of the fulfillment of
the contract will be left to the will of one of the parties. However, the termination
of the contract may be left to the will of one of the parties in the negative form of
rescission if that is so expressly so stated in the contract.
3. Not all contracts though which vest to one party their determination of validity or
compliance or the right to terminate the same are void for being violative of the
mutuality principle. Jurisprudence is replete with instances of cases where this
Court upheld the legality of contracts which left their fulfillment or implementation
to the will of either of the parties. In these cases, however, there was a finding of
the presence of essential equality of the parties to the contracts, thus preventing
the perpetration of injustice on the weaker party. (GF Equity, Inc. v. Valenzona,
G.R. No. 156841, June 30, 2005)
4. Hence, even assuming that the P1.8 million loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there was none)
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 (the debtor) participation being reduced to the alternative "to take
it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition. (Philippine National Bank v. Court of
Appeals, G.R. No. 88880, April 30, 1991)
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the property he received from the
decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)
Notes:
1. The above article provides for the characteristic of contracts known as relativity.
The general rule is that contracts produce effect only as between the parties who
execute them. Hence, the rights of a party cannot be prejudiced by the act,
declaration or omission of another, and proceedings against one cannot affect
another, which is similar to the rule of res inter alios acta in the Rules of Evidence.
2. Three cases where contract cannot take effect with respect to the heirs or assigns:
a. When the nature of the contract does not allow transmission of right.
b. When the contract stipulates that no transmission of rights shall be allowed.
c. When the law does not allow transmission.
3. Instances where the contract may affect third persons
a. When the parties transfer to third person the rights they acquired under the
contract.
b. When the contract contains a stipulation in favor of a third person.
c. When third persons exercise the subrogatory action or accion pauliana.
d. In suspension of payments and composition under the Insolvency law.
e. In contracts creating real rights
f. In case of negotiorum gestio
4. Since the parties are bound by the contract, its enforcement or annulment may be
maintained only by a party to the contract. Likewise, a third person cannot ask for
its annulment since nullity can be asserted only by one who is a party thereto.
However, creditors may rescind, that is, impugn those contracts created in fraud
of their rights.
5. Stipulation pour autrui
a. Elements
i. There is a clear and deliberate conferment of benefit upon a third
person, that is not conditioned or compensated for any kind of
 obligation, and for whom neither of the contracting parties bears
legal representation or authorization.
ii. The stipulation must be a part, not the whole of the contract.
iii. The stipulation is communicated to the third person intended to be
benefited by the parties
iv. The third person accepts the benefit and communicates such
acceptance to the obligor before its revocation.
b. In Mandarin Villa vs. CA, 257 SCRA 538, where the owner of the restaurant
refused to honor a credit card for the purpose of payment from a customer
on the ground that its machine validating such credit card indicated that the
latter had expired, when in fact it had not expired as clearly indicated in the
card itself, the SC held that the owner of the restaurant is liable because of
its negligence as it failed to comply with the agreement it had with the
credit card company, which contains stipulations in favor of third parties,
like credit card holders.
6. Cases
a. It is clear that under Article 1311 of the Civil Code, contracts take effect only
between the parties who execute them. Where there is no privity of contract, there is
likewise no obligation or liability to speak about. The civil law 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. Since a contract may be violated only by the parties
thereto as against each other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected thereby. (Spouses
Borromeo v. Court of Appeals, G.R. No. 169846, March 28, 2008)
b. In an earlier case, Teves v. People's Homesite and Housing Corporation, this Court
also allowed the Complaint for annulment of title and the deed of sale between PHHC
and its grantee on the allegation that the deed of sale was executed contrary to public
policy and that fraud was exercised by defendants. In remanding the case to the trial
court, the High Court ruled that the plaintiff is entitled to the relief prayed for if the
allegations in the Complaint are supported by evidence. The same case likewise allowed
one who is not a party to a contract to ask for its annulment if he is prejudiced in his
rights with respect to one of the contracting parties, and can show the detriment which
would positively result to him. (National Housing Authority v. Pascual , G.R. No.
158364, November 28, 2007; (I) Teves v. People's Homesite and Housing
Corporation, G.R. No. L-21498, June 27, 1968)
c. The death of a party does not excuse nonperformance of a contract which involves
a property right and the rights and obligations thereunder pass to the personal
representatives of the deceased. Similarly, nonperformance is not excused by the death
of the party when the other party has a property interest in the subject matter of the
contract. (Spouses Santos v. Spouses Lumbao, G.R. No. 169129, March 28,
2007)
d. In any event, the compromise agreement cannot bind a party who did not
voluntarily take part in the settlement itself and gave specific individual consent. It must
be remembered that a compromise agreement is also a contract; it requires the consent
of the parties, and it is only then that the agreement may be considered as voluntarily
entered into. (Philippine Journalists, Inc. v. National Labor Relations
Commission, G.R. No. 166421, September 5, 2006)
e. The parties to a contract are the real parties in interest in an action upon it, as
consistently held by the Court. Only the contracting parties are bound by the stipulations
in the contract; they are the ones who would benefit from and could violate it. Thus, one
who is not a party to a contract, and for whose benefit it was not expressly made, cannot
maintain an action on it. One cannot do so, even if the contract performed by the
contracting parties would incidentally inure to one's benefit. (Spouses Oco v.
Limbaring, G.R. No. 161298, January 31, 2006)

Art. 1312. In contracts creating real rights, third persons who come into
possession of the object of the contract are bound thereby, subject to the
provisions of the Mortgage Law and the Land Registration Laws. (n)
Art. 1313. Creditors are protected in cases of contracts intended to defraud
them. (n)
Notes:
• The objective of a contract is to be able to bind the parties to perform a particular
obligation consistent with the provision and spirit of the contract. For this purpose,
creditors are protected with respect to contracts intended to defraud them.
Art. 1314. Any third person who induces another to violate his contract shall
be liable for damages to the other contracting party. (n)
Notes:
1. Under the above article, an injured party may recover damages for unlawful
interference with the contract by a third party who has induced one of the parties to the
contract to violate the terms thereof. The requisites of the action under this article are:
(a) the existence of a valid contract; (b) knowledge by the third person of the existence
of the said valid contract; (c) interference by the third person in the contractual relation
without legal justification.
2. To prove that respondents were guilty of malicious interference, petitioner had to
show the following: the existence of a valid contract, knowledge by respondents that
such a contract existed and acts (done in bad faith and without legal basis) by
respondents which interfered in the due performance by the contracting parties of their
respective obligations under the contract. (U-Bix Corporation v. Milliken &
Company, G.R. No. 173318, September 23, 2008)
3. In the very early case of Gilchrist v. Cuddy, the Court declared that a person is not
a malicious interferer if his conduct is impelled by a proper business interest. In other
words, a financial or profit motivation will not necessarily make a person an officious
interferer liable for damages as long as there is no malice or bad faith involved. (Lagon
v. Court of Appeals, G.R. No. 119107, March 18, 2005)
4. In the case of Lagon v. Court of Appeals, [it was] held that to sustain a case for
tortuous interference, the defendant must have acted with malice or must have been
driven by purely impure reasons to injure the plaintiff; in other words, his act of
interference cannot be justified. We further explained that the word "induce" refers to
situations where a person causes another to choose one course of conduct by persuasion
or intimidation. (Go v. Cordero, G.R. No. 164703, May 04, 2010)
5. The rule is that the defendant found guilty of interference with contractual
relations cannot be held liable for more than the amount for which the party who was
inducted to break the contract can be held liable. (Go v. Cordero, G.R. No. 164703,
May 04, 2010)
Art. 1315. Contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. (1258)
Notes:
1. This article is not applicable to all kinds of contracts. It has particular reference to
consensual contracts, since they are perfected by mere consent.
Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not
perfected until the delivery of the object of the obligation. (n)
Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party. (1259a) 

Notes:
1. The above article provides for contracts in representation or in the name of
another. This requires authority from the person represented or in whose name the
contract is entered into. This authority, however, may be given by the person represented
if sui juris, or it may be given by law as in the case of persons under guardianship. If the
contract entered into in the name of another is without the authority of the latter either
given by law or by the person involved, the contract is unenforceable, unless it is ratified,
expressly or impliedly, by the person in whose behalf it has been executed, before it is
revoked by the other contracting party. The same rule applies in case the person entering
into a contract has originally been authorized, but in the contract, he acts beyond the
limit of his powers.

CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS

GENERAL PROVISIONS

 Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)
SECTION 1. - Consent

 Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from
the time it came to his knowledge. The contract, in such a case, is presumed
to have been entered into in the place where the offer was made. (1262a)
Art. 1320. An acceptance may be express or implied. (n)
Art. 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with. (n)
Art. 1322. An offer made through an agent is accepted from the time
acceptance is communicated to him. (n)
Art. 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. (n)
Art. 1324. When the offerer has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by communicating
such withdrawal, except when the option is founded upon a consideration, as
something paid or promised. (n)

Notes:
1. Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and
the acceptance absolute (Yuviengco vs. Dacuycuy, 104 SCRA 668).
2. The Offer
The offer must be certain. The offeror may fix the time, place and manner of acceptance,
all of which must be complied with. It may be made through an agent. Unless it appears
otherwise, business advertisements of things for sale are not definite offers but mere
invitations to make an offer. Advertisements for bidders are simply invitations to make
proposals, and the advertisers is not bound to accept the highest or lowest bidder, unless
the contrary appears.
When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as something paid or promised.
4. Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602 (1994), provides the
rules in case the offeror has allowed the offeree a certain period of time to accept the
offer:
a. If the period is not itself founded upon or supported by a consideration, the offeror
is still free and has the right to withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror’s coming to know of such fact, by
communicating that withdrawal to the offeree. The right to withdraw must not be
exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under
Article 19 of the Civil Code.
b. If the period 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 option however is an independent contract by itself, and it is to be
distinguished from the projected main agreement. If the consideration is part of the
purchase price, or an earnest money, such is an evidence of perfected contract.
5. An offer becomes ineffective upon the death, civil interdiction, insanity or
insolvency of either party before acceptance is conveyed, i.e., no contract is deemed
perfected if those circumstances should arise before the offeror learns of the acceptance.
6. The Acceptance
The acceptance must be absolute. A qualified acceptance constitutes a counter-offer and
has the effect of rejecting the offer. The acceptance may be express or implied. An
acceptance made by letter or telegram does not bind the offeror except from the time it
came to his knowledge. The contract in such a case is presumed to have been entered
into in the place where the offer was made. If the offer fixes the time, place and manner
of acceptance, all such conditions must be complied with. An offer made through an
agent is accepted from the time acceptance is communicated to him.
7. Cases
a. As regards consent, "[w]hen there is merely an offer by one party without
acceptance of the other, there is no contract." The decision to accept a bidder's proposal
must be communicated to the bidder. However, a binding contract may exist between
the parties whose minds have met, although they did not affix their signatures to any
written document, as acceptance may be expressed or implied. It "can be inferred from
the contemporaneous and subsequent acts of the contracting parties. (Robern
Development Corporation v. People's Landless Association, G.R. No. 173622,
March 11, 2013)
b. The acceptance must be identical in all respects with that of the offer so as
to produce consent or meeting of the minds. Where a party sets a different purchase
price than the amount of the offer, such acceptance was qualified which can be at most
considered as a counter-offer; a perfected contract would have arisen only if the other
party had accepted this counter-offer. (Heirs of Ignacio v. Home Bankers Savings
and Trust Company, G.R. No. 177783, January 23, 2013)
c. A qualified acceptance or one that involves a new proposal constitutes a
counter-offer and a rejection of the original offer. A counter-offer is considered in law, a
rejection of the original offer and an attempt to end the negotiation between the parties
on a different basis. Consequently, when something is desired which is not exactly what
is proposed in the offer, such acceptance is not sufficient to guarantee consent because
any modification or variation from the terms of the offer annuls the offer. The acceptance
must be identical in all respects with that of the offer so as to produce consent or meeting
of the minds. (Development Bank of the Philippines v. Medrano, G.R. No.
167004, February 7, 2011)
d. An offer is a unilateral proposition made by one party to another for the
celebration of a contract. For an offer to be certain, a contract must come into existence
by the mere acceptance of the offeree without any further act on the offeror's part. The
offer must be definite, complete and intentional. In Spouses Paderes v. Court of Appeals,
the Court held that, "There is an 'offer' in the context of Article 1319 only if the contract
can come into existence by the mere acceptance of the offeree, without any further act
on the part of the offeror. Hence, the 'offer' must be definite, complete and intentional."
(Korean Air Co., Ltd. v. Yuson, G.R. No. 170369, June 16, 2010)
e. Since a bid partakes of the nature of an offer to contract with the
government, the government agency involved may or may not accept it. Moreover, being
the owner of the property subject of the bid, the government has the power to determine
who shall be its recipient, as well as under what terms it may be awarded. In this sense,
participation in the bidding process is a privilege inasmuch as it can only be exercised
under existing criteria imposed by the government itself. (National Power Corporation
v. Pinatubo Commercial, G.R. No. 176006, March 26, 2010)
f. In Keng Hua Paper Products Co., Inc. v. Court of Appeals, [the Court] held
that once the bill of lading is received by the consignee who does not object to any terms
or stipulations contained therein, it constitutes as an acceptance of the contract and of
all of its terms and conditions, of which the acceptor has actual or constructive notice.
(MOF Company v. Shin Yang Brokerage Corporation, G.R. No. 172822,
December 18, 2009)
g. Where a time is stated in an offer for its acceptance, the offer is terminated
at the expiration of the time given for its acceptance. The offer may also be terminated
when the person to whom the offer is made either rejects the offer outright or makes a
counter-offer of his own. (Villegas v. Court of Appeals, G.R. No. 111495, August
18, 2006)
h. When the offeror has not fixed a period for the offeree to accept the offer,
and the offer is made to a person present, the acceptance must be made immediately.
(Malbarosa v. Court of Appeals, G.R. No. 125761, April 30, 2003)

Art. 1325. Unless it appears otherwise, business advertisements of things for

sale are not definite offers, but mere invitations to make an offer. (n)
Art. 1326. Advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears. (n)
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to
write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable. (n)
Art. 1329. The incapacity declared in Article 1327 is subject to the
modifications determined by law, and is understood to be without prejudice to
special disqualifications established in the laws. (1264)
Notes:
1. The contracting parties must have juridical capacity and capacity to act and
in proper cases, authority and must not be otherwise disqualified. The following persons
cannot give consent:
 i. Unemancipated minors
ii. Insane or demented persons and deaf-mutes who do not know how
to write
2. In Branganza vs. De Villa Abrille, 105 Phil. 456 (1959), where two minors
signed a promissory note, without telling the creditor their ages, and where the creditor
sought to enforce the promissory note against them, the SC ruled that the minors can
set up the defense of minority to resist the claim. However, they are held liable for
restitution to the extent that they may have profited by the money they received.
3. Effect of Want of Capacity or authority and disqualification
In general, incapacity of a party would result in a voidable contract; where both
parties are incapacitated to give consent, the contract becomes unenforceable (Art.
1403). Where the issue is one of authority such as in a contract entered into by an agent,
want of authority renders the contract unenforceable, except where the party with whom
the agent acts is aware of such lack of authority in which case it is considered void unless
the principal ratifies the act entered into by the agent without or in excess of his authority.
A contract entered into by one who by law is disqualified, being prohibitory in
nature, is void.
4. Capacity to act is supposed to attach to a person who has not previously been
declared incapable, and such capacity is presumed to continue so long as the contrary be
not proved; that is, that at the moment of his acting he was incapable, crazy, insane, or
out of his mind. The burden of proving incapacity to enter into contractual relations rests
upon the person who alleges it; if no sufficient proof to this effect is presented, capacity
will be presumed. (Alamayri v. Pabale , G.R. No. 151243, April 30, 2008)
5. The law presumes that every person is fully competent to enter into a contract
until satisfactory proof to the contrary is presented. The burden of proof is on the
individual asserting a lack of proof to the contrary is presented. The burden of proof is
on the individual asserting a lack of capacity to contract, and this burden has been
characterized as requiring for its satisfaction clear and convincing evidence. (Spouses
Yason v. Arciaga, G.R. No. 145017, January 28, 2005)
6. Article 1327 of the Civil Code provides that minors are incapable of giving consent
to a contract. Article 1390 provides that a contract where one of the parties is incapable
of giving consent is voidable or annullable. (Samahan ng Magsasaka sa San Josep
v. Valisno, G.R. No. 158314, June 3, 2004)
7. A person is not incapacitated to contract merely because of advanced years or by
reason of physical infirmities. Only when such age or infirmities impair his mental faculties
to such extent as to prevent him from properly, intelligently, and fairly protecting his
property rights,is he considered incapacitated. (Loyola v. Court of Appeals, G.R. No.
115734, February 23, 2000)

Art. 1330. A contract where consent is given through mistake, violence,

intimidation, undue influence, or fraud is voidable. (1265a)
Art. 1331. In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give rise to its correction. (1266a)
Art. 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully
explained to the former. (n)
Art. 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract. (n)
Art. 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent. (n)
Notes:
1. In order that mistake may invalidate consent, it should refer to the substance of
the thing which is the object of the contract, or to those conditions which have principally
moved one or both parties to enter into the contract. Mistake as to the identity or
qualifications of one of the parties will vitiate consent only when such identity or
qualification has been the principal cause of the contract.
2. Mutual error as to the legal effect of an agreement normally would not
render the contract voidable but when the real purpose of the parties is frustrated, it may
be held to vitiate consent.
3. In Lustan vs. CA, G.R. No. 111924, Jan. 27, 1997, it was held that the deed
of sale is an equitable mortgage based on the finding that the illiterate owner of the
property was made to understand that the deed of sale signed by her merely evidenced
an indebtedness to the creditor.
4. There is no mistake if the party alleging it knew the doubt, contingency or
risk affecting the object of the contract.
5. In order that mistake may invalidate consent and constitute a ground for
annulment of contract based on Article 1331, the mistake must be material as to go to
the essence of the contract; that without such mistake, the agreement would not have
been made. The effect of error must be determined largely by its influence upon the
party. If the party would have entered into the contract even if he had knowledge of the
true fact, then the error does not vitiate consent. (Cebu Winland Development
Corporation v. Ong Siao Hua, G.R. No. 173215, May 21, 2009)
6. Mistake may invalidate consent when it refers to the substance of the thing which
is the object of the contract or to those conditions which have principally moved one or
both parties to enter into the contract. Mistake of law as a rule will not vitiate consent.
(Dandan v. Arfel Realty & Management Corp., G.R. No. 173114, September 8,
2008)
7. Where a party is unable to read or when the contract is in a language not
understood by the party and mistake or fraud is alleged, the obligation to show that the
terms of the contract had been fully explained to said party who is unable to read or
understand the language of the contract devolves on the party seeking to enforce the
contract to show that the other party fully understood the contents of the document. If
he fails to discharge this burden, the presumption of mistake, if not, fraud, stands
unrebutted and controlling. (Feliciano v. Spouses Zaldivar, G.R. No. 162593,
September 26, 2006)
8. An error so patent and obvious that nobody could have made it, or one which
could have been avoided by ordinary prudence, cannot be invoked by the one who made
it in order to evade liability, let alone annul a contract. (Olbes v. China Banking Corp.,
G.R. No. 152082, March 10, 2006)
9. Where a party is unable to read, and he expressly pleads in his reply that he signed
the voucher in question "without knowing (its) contents which have not been explained
to him," this plea is tantamount to one of mistake or fraud in the execution of the voucher
or receipt in question and the burden is shifted to the other party to show that the former
fully understood the contents of the document; and if he fails to prove this, the
presumption of mistake (if not fraud) stands unrebutted and controlling. (Leonardo v.
Court of Appeals, G.R. No. 125485, September 13, 2004)
Art. 1335. There is violence when in order to wrest consent, serious or
irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his
person or property, or upon the person or property of his spouse, descendants
or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is
just or legal, does not vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall annul the obligation, although it may
have been employed by a third person who did not take part in the contract.
(1268)
Notes:
1. Corollarily, the threat to foreclose the mortgage would not in itself vitiate
consent as it is a threat to enforce a just or legal claim through competent authority. It
bears emphasis that the foreclosure of mortgaged properties in case of default in payment
of a debtor is a legal remedy given by law to a creditor. In the event of default by the
mortgage debtor in the performance of the principal obligation, the mortgagee undeniably
has the right to cause the sale at public auction of the mortgaged property for payment
of the proceeds to the mortgagee. (Development Bank of the Philippines v. Court
of Appeals, G.R. No. 138703, June 30, 2006)

Art. 1337. There is undue influence when a person takes improper advantage
of his power over the will of another, depriving the latter of a reasonable
freedom of choice. The following circumstances shall be considered: the
confidential, family, spiritual and other relations between the parties, or the
fact that the person alleged to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial distress. (n)
Notes:
1. 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.
One who alleges any defect, or the lack of consent to a contract by reason of fraud or
undue influence, must establish by full, clear and convincing evidence, such specific acts
that vitiated the party's consent; otherwise, the latter's presumed consent to the contract
prevails. For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy his free agency,
making him express the will of another rather than his own. (Naranja v. Court of
Appeals, G.R. No. 160132, April 17, 2009)
2. For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy the latter's free
agency, making such party express the will of another rather than its own. The alleged
lingering financial woes of a debtor per se cannot be equated with the presence of undue
influence. (Development Bank of the Philippines v. Court of Appeals, G.R. No.
138703, June 30, 2006)
3. For undue influence to be established to justify the cancellation of an instrument,
three elements must be present: (a) a person who can be influenced; (b) the fact that
improper influence was exerted; (c) submission to the overwhelming effect of such
unlawful conduct. (Loyola v. Court of Appeals, G.R. No. 115734, February 23,
2000)
4. In the absence of a confidential or fiduciary relationship between the parties, the
law does not presume that one person exercised undue influence upon the other.(Loyola
v. Court of Appeals, G.R. No. 115734, February 23, 2000)
5. 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. (Loyola v. Court of Appeals, G.R. No. 115734, February 23,
2000)
Art. 1338. There is fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to. (1269)
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless made
by an expert and the other party has relied on the former's special knowledge.
(n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is
mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n)
Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
Notes:
1. Deceit is also present when one party, by means of concealing or omitting
to state material facts, with intent to deceive, obtains consent of the other party without
which, consent could not have been given. Art. 1339 of the Civil Code is explicit that
failure to disclose facts when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud.
Insidious words or machinations constituting deceit are those that ensnare, entrap, trick,
or mislead the other party who was induced to give consent which he or she would not
otherwise have given. (Spouses Lequin v. Spouses Vizconde, G.R. No. 177710,
October 12, 2009)
2. In this jurisdiction, the general rule is that he who alleges fraud or mistake in a
transaction must substantiate his allegation as the presumption is that a person takes
ordinary care for his concerns and that private dealings have been entered into fairly and
regularly. The exception to this rule is provided for under Article 1332 of the Civil Code
which provides that "[w]hen one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person enforcing
the contract must show that the terms thereof have been fully explained to the former."
(Vda. de Ape v. Court of Appeals , G.R. No. 133638, April 15, 2005)
3. More specifically, allegations of a defect in or lack of valid consent to a contract by
reason of fraud or undue influence are never presumed but must be established not by
mere preponderance of evidence but by clear and convincing evidence. For the
circumstances evidencing fraud and misrepresentation are as varied as the people who
perpetrate it in each case, assuming different shapes and forms and may be committed
in as many different ways. (Acabal v. Acabal, G.R. No. 148376, March 31, 2005)
4. In Remalante v. Tibe, this Court ruled that misrepresentation to an illiterate woman
who did not know how to read and write, nor understand English, is fraudulent. Thus,
the deed of sale was considered vitiated with substantial error and fraud.
Thus, in case one of the parties to a contract is unable to read and fraud is alleged, the
person enforcing the contract must show that the terms thereof have been fully explained
to the former. (Leonardo v. Court of Appeals, G.R. No. 125485, September 13,
2004)
5. Under the said article, where a party is unable to read or when the contract is in
a language not understood by a party and mistake or fraud is alleged, the obligation to
show that the terms of the contract had been fully explained to said party who is unable
to read or understand the language of the contract devolves on the party seeking to
enforce it. The burden rests upon the party who seeks to enforce the contract to show
that the other party fully understood the contents of the document. If he fails to discharge
this burden, the presumption of mistake, if not, fraud, stands unrebutted and controlling.
(Mayor v. Belen, G.R. No. 151035, June 3, 2004)
6. Fraud and undue influence that vitiated a party's consent must be established by
full, clear and convincing evidence, otherwise, the latter's presumed consent to the
contract prevails. (Heirs of Sevilla v. Sevilla, G.R. No. 150179, April 30, 2003)

Art. 1345. Simulation of a contract may be absolute or relative. The former

takes place when the parties do not intend to be bound at all; the latter, when
the parties conceal their true agreement. (n)
Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs, public order or public
policy binds the parties to their real agreement. (n)
Notes:
1. In absolute simulation, there is a colorable contract but it has no substance
as the parties have no intention to be bound by it. "The main characteristic of an absolute
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." "As a result, an absolutely
simulated or fictitious contract is void, and the parties may recover from each other what
they may have given under the contract." (Heirs of Intac v. Court of Appeals, G.R.
No. 173211, October 11, 2012)
2. If the parties state a false cause in the contract to conceal their real agreement,
the contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is absolutely
binding and enforceable between the parties and their successors in interest. (Heirs of
Intac v. Court of Appeals, G.R. No. 173211, October 11, 2012)
3. Article 1345 of the Civil Code provides that the simulation of a contract may either
be absolute or relative. In absolute simulation, there is a colorable contract but it has no
substance as the parties have no intention to be bound by it. The main characteristic of
an absolute 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. As a result,
an absolutely simulated or fictitious contract is void, and the parties may recover from
each other what they may have given under the contract. However, if the parties state a
false cause in the contract to conceal their real agreement, the contract is only relatively
simulated and the parties are still bound by their real agreement. (Spouses Villaceran
v. De Guzman, G.R. No. 169055, February 22, 2012)
4. Where the essential requisites of a contract are present and the simulation refers
only to the content or terms of the contract, the agreement is absolutely binding and
enforceable between the parties and their successors in interest. (Spouses Villaceran
v. De Guzman, G.R. No. 169055, February 22, 2012)
5. Article 1412 is not applicable to fictitious or simulated contracts, because they refer
to contracts with an illegal cause or subject-matter. This article presupposes the existence
of a cause, it cannot refer to fictitious or simulated contracts which are in reality non-
existent. (Heirs of Ureta, Sr. v. Heirs of Ureta, G.R. No. 165748, September 14,
2011)
6. A simulated contract of sale is without any cause or consideration, and is,
therefore, null and void; in such case, no independent action to rescind or annul the
contract is necessary, and it may be treated as non-existent for all purposes. (Heirs of
Ureta, Sr. v. Heirs of Ureta, G.R. No. 165748, September 14, 2011)
7. The most protuberant index of simulation of contract is the complete absence of
an attempt in any manner on the part of the ostensible buyer to assert rights of ownership
over the subject properties. Policronio's failure to take exclusive possession of the subject
properties or, in the alternative, to collect rentals, is contrary to the principle of ownership.
Such failure is a clear badge of simulation that renders the whole transaction void. (Heirs
of Ureta, Sr. v. Heirs of Ureta, G.R. No. 165748, September 14, 2011)
8. When the parties do not intend to be bound at all, the contract is absolutely
simulated; if the parties conceal their true agreement, then the contract is relatively
simulated. An absolutely simulated contract is void, and the parties may recover from
each other what they may have given under the simulated contract, while a relatively
simulated contract is valid and enforceable as the parties' real agreement binds them.
Characteristic of simulation is that the apparent contract is not really desired or intended
to produce legal effects, or in any way, alter the juridical situation of the parties. (Taghoy
v. Spouses Tigol, Jr., G.R. No. 159665, August 3, 2010)
9. Suffice it to state that the concept of inadequacy or non-payment of price is
irreconcilable with the concept of simulation. If there exists an actual consideration for
transfer evidenced by the alleged act of sale, no matter how inadequate it be, the
transaction could not be a "simulated sale". (Aliño v. Heirs of Lorenzo, G.R. No.
159550, June 27, 2008)
10. The legal presumption is in favor of the validity of contracts and the party who
impugns its regularity has the burden of proving its simulation. (Tating v. Marcella,
G.R. No. 155208, March 27, 2007)
11. Simulation of contract and gross inadequacy of price are distinct legal concepts,
with different effects. When the parties to an alleged contract do not really intend to be
bound by it, the contract is simulated and void. A simulated or fictitious contract has no
legal effect whatsoever because there is no real agreement between the parties. (Bravo-
Guerrero v. Bravo, G.R. No. 152658, July 29, 2005)
12. Where the essential requisites are present and the simulation refers only to the
content or terms of the contract, the agreement is absolutely binding and enforceable
between the parties and their successors in interest. (Heirs of Spouses Balite v. Lim,
G.R. No. 152168, December 10, 2004)
13. In Suntay, the Court said that the relationship between the buyer and seller
may be deemed a token of simulation because, among Filipinos, an uncle would almost
naively lend his land title to his nephew and agree to its cancellation in favor of the latter,
given the trust and intimacy between them. But this statement should be understood in
the context of the said case that a Deed of Resale was presented, and that the vendee
never exercised acts of ownership over the disputed land. (Ramos v. Heirs of Ramos,
Sr., G.R. No. 140848, April 25, 2002)
14. The requisites for simulation 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 is to deceive third persons. (Loyola v. Court of
Appeals, G.R. No. 115734, February 23, 2000)
15. In Santiago, Paula Arcega executed a deed of absolute sale of her parcel of land
in favor of Josefina Arcega and spouses Regalado Santiago and Rosita Palabyab for
P20,000.00. A new title was issued in the name of the vendees cancelling that of Paula.
Later, a four (4)-bedroom house was built on the property. The master's bedroom, with
toilet and bath, was occupied by Paula until her death despite the execution of the deed
of sale. The three (3) other bedrooms, smaller than the master's bedroom, were occupied
by the vendees. Then, an heir of Paula filed an action seeking to declare the nullity of the
deed of sale on the ground of absence of consideration and that it was merely designed
as an accommodation for the purpose of obtaining a loan from the Social Security System.
Guided by Suntay, we annulled the deed of sale and the title of the vendees and ordered
reconveyance of the property. (Reyes v. Court of Appeals, G.R. No. 127608,
September 30, 1999)
16. In Suntay, Federico Suntay applied as a miller-contractor with the then National
Rice and Corn Corporation but his application was disapproved due to several unpaid
loans. He then told his nephew Rafael to apply instead. To obtain an approval, Rafael
prepared a notarized absolute deed of sale whereby Federico, for and in consideration of
P20,000.00, conveyed to Rafael a parcel of land with all its existing structures. Federico's
title to the property was thereafter cancelled and another one issued to Rafael.
Subsequently, Federico requested Rafael to reconvey to him the property for he intended
to use it as collateral. Rafael however refused to do so, clinging to the deed of sale in his
favor. We upheld the claim of Federico as we found that the deed of sale was absolutely
simulated and therefore void. (Reyes v. Court of Appeals, G.R. No. 127608,
September 30, 1999)