Contracts terms, is a stranger to the contract, and, in any event, in
Obligations & Contracts [Atty. Michael G. Aguinaldo]
I. General Provisions
A. Definition
B. Basic Principles
1. Autonomy of the will of the parties
2. Mutually
3. Relativity
Exceptions:
a. When binding only between parties
[Ouano v. CA] It is a basic principle, in civil law that, with certain
exceptions not obtaining in this case, a contract can only bind
the parties who had entered into it or their successors who
assumed their personalities or their juridical positions, and
that, as a consequence, such contract can neither favor nor
prejudice a 3rd person. It is undisputed that the charter contract
was entered into only by and between petitioner and respondent
Rafols, and the other private respondents were neither parties
thereto nor were they aware of the provisions thereof. The
aforesaid allegations of petitioner that Rafols violated the
prohibition in the contract against the sublease or sub-charter of
the vessel without his knowledge and written consent, even if true,
does not give rise to a cause of action against the supposed
sublessee or sub-charterer. The act of the charterer in sub-
chartering the vessel, in spite of a categorical prohibition may be a
violation of the contract, but the owner’s right of recourse is
against the original charterer, either for rescission or fulfillment,
with the payment of damages in either case.
The obligation of contracts is limited to the parties making
them and, ordinarily, only those who are parties to
contracts are liable for their breach. Parties to a contract
cannot thereby impose any liability on one who, under its
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
order to bind a 3rd person contractually, an expression of
assent by such person is necessary. The obligation to obtain
the written consent of petitioner before subleasing or sub-
chartering the vessel was on Rafols and not on MADE, hence the
latter cannot be held liable for the supposed non-compliance
therewith. The decision to use the M/V Don Julio Ouano in
transporting the cargo of MADE was solely that of Rafols.
b. When 3rd persons may be affected
[Bank of America NT & SA v. First Civil Cases Division, IAC]
There was a previous contractual agreement between KYOWA and
petitioner BANKAMERICA that, from time to time, KYOWA can ask
BANKAMERICA to pay amounts to a 3rd party (beneficiary) with
BANKAMERICA afterwards billing KYOWA the indicated amount
given to the beneficiary. To assure itself that an Order received
from KYOWA really comes from KYOWA, it is usually agreed that
KYOWA’s signature will be in accordance with a confidential code.
The tested telex originated from KYOWA at the behest of Tokyo
Tourist Corporation with whom ACTC had business dealings.
Minami was the liaison officer of ACTC in Japan. As the entity
responsible for the tested telex was Tokyo Tourist Corporation, it
can reasonably be concluded that if it had intended that the
US$23,595 should be credited to ACTC, upon learning that the
amount was credited to Minami, it should have gone, together with
the representatives of ACTC, in protest to KYOWA and lodged a
protest. Since that was not done, it could well be that Tokyo Tourist
Corporation had really intended its remittance to be credited to
Minami. The identity of the beneficiary should be in accordance
with the identification made by KYOWA, and ACTC cannot question
that identification as it is not a party to the arrangement between
KYOWA and BANKAMERICA. Similarly, when KYOWA asked
BANKAMERICA to pay an amount to a beneficiary (either ACTC or
Minami), the contract was between KYOWA and BANKAMERICA and
it had a stipulation pour autrui.
1
[Baluyot v. CA] Requisites of Stipulations Pour Autrui: had its own obligations, in view of conferring a favor upon

Obligations & Contracts [Atty. Michael G. Aguinaldo]

petitioners.
(1) There must be a stipulation in favor of a 3rd person;
Assuming the truth of the allegations, the Court holds that
(2) The stipulation must be a part, not the whole of the contract; petitioners have a cause of action against UP.

(3) The contracting parties must have clearly and deliberately

conferred a favor upon a 3rd person, not a mere incidental
4. Obligatory Force
benefit or interest;

(4) The 3rd person must have communicated his acceptance to the
obligor before its revocation; and II. Essential Elements of Contracts

(5) Neither of the contracting parties bears the legal A. Consent

representation or authorization of the 3rd party.
1. Requirements

a. Parties
The allegations in the following paragraphs of the amended
complaint are sufficient to bring petitioners’ action within the b. Legal Capacity
purview of the 2nd paragraph of Article 1311 on stipulations pour
autrui: 2. How manifested

1.) Par. 17, that the deed of donation contains a stipulation that a. Offer requirements
the Quezon City government, as donee, is required to transfer
b. Acceptance requirements
to qualified residents of Cruz-na-Ligas, by way of donations,
the lots occupied by them;

2.) The same paragraph, that this stipulation is part of conditions

and obligations imposed by UP, a donor, upon the Quezon City
government, as donee;

3.) Paragraphs 15 & 16, that the intent of the parties to the deed
of donation was to confer a favor upon petitioners by
transferring to the latter the lots occupied by them;

4.) Par. 19, that conferences were held between the parties to
convince UP to surrender the certificates of title to the city
government, implying that the donation had been accepted by
petitioners by demanding fulfillment thereof and that private
respondents were aware of such acceptance; and

5.) All the allegations considered together from which it can be

fairly inferred that neither of private respondents acted in
representation of the other; each of the private respondents 2

For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
[Villanueva v. CA] The insolvency of a bank and the consequent

Obligations & Contracts [Atty. Michael G. Aguinaldo]

appointment of a receiver restrict the bank’s capacity to act,
especially in relation to its property. Applying Article 1323 of the There is no evidence on record to prove that XEI or OBM and the
Civil Code, Ong’s offer to purchase the subject lots became respondents had agreed, after December 31, 1972, on the terms of
ineffective because the PVB became insolvent before the bank’s payment of the balance of the purchase price of the property and
acceptance of the offer came to his knowledge. Hence, the the other substantial terms and conditions relative to the sale.
purported contract of sale between them did not reach the stage of Indeed, the parties are in agreement that there had been no
perfection. Corollarily, he cannot invoke the resolution of the bank contract of conditional sale ever executed by XEI, OBM or
approving his bid as basis for his alleged right to buy the disputed petitioner, as vendor, and the respondents, as vendees.
properties. Nor may the acceptance by an employee of the PVB of
Ong’s payment of Php100,000 benefit him since the receipt of the
payment was made subject to the approval by the Central Bank
[Platinum Plans Phil., Inc. v. Cucueco] This case is rooted in
liquidator of the PVB. This payment was disapproved on the ground
the complaint filed by respondent Cucueco against petitioners for
that the subject property was already in custodia legis, and hence,
specific performance and damages pursuant to an alleged contract
disposable only by public auction and subject to the approval of
of sale executed by them for the purchase of a condominium unit
the liquidation court. The CA therefore erred when it held that Ong
in Valle Verde, Pasig City. In the present case, it was unnecessary
had a better right than the petitioners to the purchase of the
for the CA to distinguish whether the transaction between the
disputed lots.
parties was an installment sale or a straight sale. In the 1st sale,
there is no valid and enforceable contract to speak of. It was error
for the appellate court to rely upon Article 1482 of the Civil Code in
Under Article 1323 of the Civil Code, an offer becomes concluding that the earnest money given “would be considered as
ineffective upon the death, civil interdiction, insanity, or part of the purchase price and proof of the perfection of the
insolvency of either party before acceptance is conveyed. contract”. The Court has emphasized that it is the proof of
The reason for this is that: The contract is not perfected the concurrence of all the essential elements of the
except by the concurrence of two wills which exist and contract of sale, and not the giving of earnest money,
continue until the moment that they occur. The contract is which establishes the existence of a perfected sale.
not yet perfected at any time before acceptance is
conveyed; hence, the disappearance of either party or his
loss of capacity before perfection prevents the contractual
Contract to Sell – a bilateral contract whereby a prospective
tie from being formed.
seller, while expressly reserving the ownership of the subject
property despite its delivery to the prospective buyer, commits to
sell the property exclusively to the prospective buyer upon the
[Boston Bank of the Philippines v. Manalo] Based on the 2 fulfillment of the condition agreed upon, that is, full payment of the
letters, the determination of the terms of payment of the purchase price.
Php278,448 had yet to be agreed upon on or before December 31,
1972, or even afterwards, when the parties sign the corresponding
contract of conditional sale. So long as an essential element
A contract to sell may not be considered a contract of sale because
entering into the proposed obligation of either of the
of its first essential element of consent to transfer ownership is
parties remains to be determined by an agreement which
lacking in the former.
they are to make, the contract is incomplete and
unenforceable. The reason is that such a contract is lacking
in the necessary qualities of definiteness, certainty and
mutuality.
3

For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***

3. Options/Right of First Refusal
[Adelfa Properties, Inc. v. CA] An option is not a sale of
property but a sale of the right to purchase. He does not sell
his land; he does not even agree to sell it; but he does sell
something, that is, the right or privilege to buy at the election or
option of the other party. An option states the terms and
conditions on which the owner is willing to sell his land, if the
holder elects to accept them within the time limited. A contract of
sale, on the other hand, fixes definitely the relative rights and
obligations of both parties at the time of its execution. The offer
and the acceptance are concurrent.
Earnest Money
(a) Part of the purchase price
(b) Given only where there is already a sale
(c) When given, the buyer is bound to pay the balance
The fact that the document is entitled “Exclusive Option to
Purchase” is not controlling where the text thereof shows that it is
a contract to sell.
[Serra v. CA] In a unilateral promise to sell, where the debtor fails
to withdraw the promise before the acceptance by the creditor, the
transaction becomes a bilateral contract to sell and to buy,
because upon acceptance by the creditor of the offer to sell by the
debtor, there is already a meeting of the minds of the parties as to
the thing which is determinate and the price which is certain. In
which case, the parties may then reciprocally demand
performance. Jurisprudence has taught us that an optional
contract is a privilege existing only in one party—the
buyer. For a separate consideration paid, he is given the right to
decide to purchase or not, a certain merchandise or property, at
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Obligations & Contracts [Atty. Michael G. Aguinaldo]
Option Contract – simply a contract by which the owner of
property agrees with another person that he shall have the right to
buy his property at a fixed price within a certain time; sometimes
called an “unaccepted offer”.
The test in determining whether a contract is a “contract of
sale or purchase” or a mere “option” is whether or not the
agreement could be specifically enforced. An agreement is
only an “option” when no obligation rests on the party to make any
payment except such as may be agreed on between the parties as
consideration to support the option until he has made up his mind
within the time specified.
Option Money
(a) Money given as a distinct consideration for an option contract
(b) Applies to a sale not yet perfected
(c) When the would-be buyer gives, he is not required to buy
any time within the agreed period, at a fixed price. This being his
prerogative, he may not be compelled to exercise the
option to buy before the time expires.
Contracts of Adhesion – one wherein the party, usually a
corporation, prepares the stipulations in the contract, while the
other party merely affixes his signature or his “adhesion” thereto;
as binding as ordinary contracts because the party who adheres to
the contract is free to reject it entirely.
Article 1324 of the Civil Code provides that when an offeror has
allowed the offeree a certain period to accept, the offer may be
withdrawn at anytime before acceptance by communicating such
withdrawal, except when the option is founded upon consideration,
as something paid or promised. On the other hand, Article 1479 4
of the Code provides that an accepted unilateral promise to buy
and sell a determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration distinct
from the price.
The Court finds the contract of “LEASE WITH OPTION TO BUY”
between petitioner and respondent bank is valid, effective and
enforceable, the price being certain and that there was
consideration distinct from the price to support the option given to
the lessee.
[Ang Yu Asuncion v. CA] An accepted unilateral promise
which specifies the thing to be sold and the price to be
paid, when coupled with a valuable consideration distinct
and separate from the price, is what may properly be
termed a perfected contract of option. This contract is legally
binding, and in sales, it conforms with the 2nd paragraph of Article
1479 of the Civil Code. Observe that the option is not the contract
of sale itself. The optionee has the right, but not the obligation, to
buy. Once the option is exercised timely, i.e., the offer is accepted
before a breach of the option, a bilateral promise to sell and to buy
ensues and both parties are then reciprocally bound to comply with
their respective undertakings.
Rules applicable where a period is given to the offeree
within which to accept the offer:
(1) 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.  must
not be exercised whimsically or arbitrarily otherwise, it could
give rise to a damage claim under Article 19 of the Civil Code
(2) 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. 
care should be taken on the real nature of the consideration
given, for if, in fact, it has been intended to be part of the
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
consideration for the main contract with a right of withdrawal
Obligations & Contracts [Atty. Michael G. Aguinaldo]
on the part of the optionee, the main contract can be deemed
perfected; a similar instance would be an “earnest money” in a
contract of sale that can evidence its perfection (Art. 1482)
*The option is an independent contract by itself, and it is to
be distinguished from the projected main agreement
(subject matter of the option) which is obviously yet to be
concluded.
>If the optioner-offeror withdraws the offer before
its acceptance (exercise of the option) by the optionee-
offeree, the latter may not sue for specific performance on
the proposed contract (“object” of the option) since it has
failed to reach its own stage of perfection. The optioner-
offeror renders himself liable for damages for breach of the
option.
An option or an offer would require, among other things, a clear
certainty on both the object and the cause or consideration of the
envisioned contract. In the law on sales, the so-called “Right of
First Refusal” is an innovative juridical relation, but it cannot be
deemed a perfected contract of sale under Article 1458 of the Civil
Code. 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 another but also on terms,
including the price, that obviously are yet to be later firmed up.
Prior thereto, it can at best be so described as merely
belonging to a class of preparatory juridical relations
governed not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the Civil
Code on human conduct. Breach of a right of first refusal
decreed under a final judgment does not entitle the aggrieved
party to a writ of execution of the judgment but to an action for
damages.
[Riviera Filipina, Inc. v. CA] It all started in 1992 with Guzman,
Bocaling & Co. v. Bonnevie where the Court held that a lease with 5
a proviso granting the lessee the right of first priority “all things
and conditions being equal” meant that there should be identity of
the terms and conditions to be offered to the lessee and all other
prospective buyers, with the lessee to enjoy the right of first
priority. A deed of sale executed in favor of a third party
who cannot be deemed a purchaser in good faith, and
which is in violation of a right of first refusal granted to the
lessee is not voidable under the Statute of Frauds but
rescissible under Articles 1380 to 1381(3) of the New Civil
Code.
The Court held that in order to have full compliance with the
contractual right granting petitioner the first option to purchase,
the sale of the properties for the price for which they were finally
sold to a 3rd person should have likewise been first offered to the
former. Further, there should be identity of terms and conditions to
be offered to the buyer holding a right of first refusal if such right is
not to be rendered illusory. Lastly, the basis of the right of first
refusal must be the current offer to sell of the seller or
offer to purchase of any prospective buyer. Thus, the
prevailing doctrine is that a right of first refusal means
identity of terms and conditions to be offered to the lessee
and all other prospective buyers and a contract of sale
entered into in violation of a right of first refusal of
another person, while valid, is rescissible.
In sum, the Court finds that in the interpretation of the right of first
refusal as understood by the parties herein, the question as to
what is to be included therein or what is meant by the same, as in
all other provisions of the contract, is for the parties and not for
the court to determine, and this question may not be resolved
by what the parties might have provided had they thought about it,
which is evident from Riviera claims, or by what the court might
conclude regarding abstract fairness.
[J.G. Summit Holdings, Inc. v. CA] The Court upholds the
validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC. First of all, the right of first refusal is a
property right of PHILSECO shareholders, KAWASAKI and NIDC,
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
under the terms of their JVA. This right allows them to purchase the
Obligations & Contracts [Atty. Michael G. Aguinaldo]
shares of their co-shareholder before they are offered to a 3 rd
party. The agreement of co-shareholders to mutually grant this
right to each other, by itself, does not constitute a violation of the
provisions of the Constitution limiting land ownership to Filipinos
and Filipino corporations. As PHILYARDS correctly puts it, if
PHILSECO still owns land, the right of first refusal can be validly
assigned to a qualified Filipino entity in order to maintain the 60%-
40% ratio. This transfer, by itself, does not amount to a violation of
the Anti-Dummy Laws, absent proof of any fraudulent intent. The
transfer could be made either to a nominee or such other party
which the holder of the right of first refusal feels it can comfortably
do business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its right of
first refusal, can exceed 40% of PHILSECO’s equity. In fact, it can
even be said that if the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign stockholders’
ownership of the shares which is adversely affected but the
capacity of the corporation to own land—that is, the corporation
becomes disqualified to own land. This finds support under the
basic corporate law principle that the corporation and its
stockholders are separate juridical entities. In this vein, the right
of first refusal over shares pertains to the shareholders
whereas the capacity to own land pertains to the
corporation. Hence, the fact that PHILSECO owns land cannot
deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a
landholding corporation even if the latter will exceed the
allowed foreign equity. What the law disqualifies is the
corporation from owning land.
[Tanay Recreation Center and Dev’t Corp. v. Fausto] 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 principal bone of contention in this case refers to petitioner’s
right to purchase, also referred to as the right of first refusal.
Petitioner’s right of first refusal in this case is expressly provided
6
for in the notarized “Contract of Lease” between Fausto and 6. Vices of Consent

Obligations & Contracts [Atty. Michael G. Aguinaldo]

petitioner. Petitioner’s right of first refusal is an integral and
indivisible part of the contract of lease and is inseparable from the a. Mistake
whole contract. The consideration for the lease includes the
consideration for the right of first refusal and is built into the b. Violence and Intimidation
reciprocal obligations of the parties. It was erroneous for the CA to
c. Undue Influence
rule that the right of first refusal does not apply when the property
is sold to Fausto’s relative. When the terms of an agreement have d. Fraud
been reduced to writing, it is considered as containing all the terms
agreed upon. As such, there can be, between the parties and their i. In the performance
successors in interest, no evidence of such terms other than the
contents of the written agreement, except when it fails to express ii. In the celebration
the true intent and agreement of the parties. In this case, the
wording of the stipulation giving petitioner the right of first refusal  Dolo Causante
is plain and unambiguous, and leaves no room for interpretation. It
simply means that should Fausto decide to sell the leased property  Dolo Incidente
during the term of the lease, such sale should first be offered to
petitioner. It was only after petitioner failed to exercise its first 7. Simulated Contracts
priority could Fausto then lawfully sell the property to respondent.
a. Absolute

The rule is that a sale made in violation of a right of first
refusal is valid. However, it may be rescinded, or, as in this
case, may be the subject of an action for specific
performance.
A right of first refusal means identity of terms and conditions to be
offered to the lessee and all other prospective buyers and a
contract of sale entered into in violation of a right of first refusal of
another person, while valid, is rescissible. The basis of the right
of first refusal must be the current offer to sell of the seller
or offer to purchase of any prospective buyer.
Note: The right of first refusal must be clearly embodied in
a written contract.
b. Relative
[Dilag v. IAC] It is not disputed that at the time of the levy on
execution in Civil Case No. 8714, the Dilag spouses were still the
registered owners of Lot 288 as shown in TCT No. 30137 and they
were also the declared owners of Lot 1927 as shown in the tax
declaration. On the other hand, it is alleged by private respondent
herein and not refuted by petitioners herein that the title in the
name of herein petitioners was issued several days ahead of the
deed of sale dated August 26, 1981 on which the new title in the
name of the petitioners was based, and inscribed on August 27,
1981. Clearly, the Deed of Absolute Sale in favor of
petitioners herein executed in 1974 after the filing of the
civil case was a simulated and fictitious transaction to
defraud Arellano who obtained a money judgment against
the parents of petitioners.

4. Business Advertisements
B. Object
7
5. Bids

For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
 1. Things

Obligations & Contracts [Atty. Michael G. Aguinaldo]

a. Existing or capable of existence in the future Motive – condition of mind which incites to action, but includes
also the inference as to the existence of such condition, from an
b. Licit/Lawful external fact of a nature to produce such a condition.

c. Determined or Determinable

2. Rights In the case at bench, the primary motive of Marciliano in selling the
controverted 91-square meter lot to private respondents was to
a. Transmissible illegally frustrate petitioners’ right of inheritance and to avoid
payment of estate tax. This was unabashedly admitted by witness
3. Services
Susan Rivera, wife of respondent Manuel Rivera, on cross
a. Not contrary to law, policy, morals examination. Illegal motive predetermined the purpose of the
contract therefore the subject lot is null and void.
b. Possible

3. Absence or Illegality
C. Cause

1. Kinds
[Pangadil v. CFI of Cotabato] Admitted facts show that the
a. Onerous conveyance of the land in question in favor of the private
respondents had been effected by the father of the petitioners
b. Remunatory during his lifetime. It may not be said that in executing a deed to
ratify said transaction executed by her father, petitioners
c. Gratuitous Salandang Pangadil and Tinting Pangadil deprived their minor
brothers and sisters of their supposed shares in the inheritance
2. Difference from Motives from their deceased father. The document in question may not be
deemed absolutely simulated or fictitious. By petitioners’ own
admission, they intended to be bound thereby; they merely
[Olegario v. CA] In a contract of sale, consideration is, as a contend that they thought it was to ratify a contract of oral
rule, different from the motive of the parties. Under certain mortgage, instead of an oral sale of land. In short, it is not a
circumstances, however, the motive of the parties may be contract wherein the parties do not intend to be bound at all which
regarded as the consideration when it predetermines the purpose would thereby make it absolutely simulated and, therefore, void.
of the contract. When they blend to that degree, and the motive is Petitioners may not seek umbrage under the provision that an
unlawful, then the contract entered into is null and void. action to annul an inexistent contract is imprescriptible.

Consideration – some right, interest, benefit, or advantage
conferred upon the promisor, to which he is otherwise not lawfully
entitled, or any detriment, prejudice, loss, or disadvantage suffered
or undertaken by the promisee other than to such as he is at the
time of consent bound to suffer.
Under the law, the simulation of a contract may either be
absolute or relative. It is only when the contract is
absolutely simulated or fictitious that it is deemed void.
There is absolute simulation “when the parties do not
8
intend to be bound at all.” In case the parties merely conceal

For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
their true agreement, the simulation is relative, and the contract
with that defect is binding upon the parties unless it prejudices a
third person and is intended for a purpose contrary to law, morals,
good customs, public order or public policy. (Articles 1345 and
1346, Civil Code)
[Torres v. CA] Petitioners contend that the Joint Venture
Agreement is void under Article 1422 of the Civil Code, because it
is the direct result of an earlier illegal contract, which was for the
sale of the land without valid consideration. This argument is
puerile. The JVA clearly states that the consideration for the sale
was the expectation of profits from the subdivision project. Its first
stipulation states that petitioners did not actually receive payment
for the parcel of land sold to respondent. Consideration, more
properly denominated as cause, can take different forms,
such as the prestation or promise of a thing or service by
another.
In this case, the cause of the contract of sale consisted not in the
stated peso value of the land, but in the expectation of profits from
the subdivision project, for which the land was intended to be
used. As explained by the trial court, “the land was in effect given
to the partnership as [petitioner’s] participation therein. x x x
There was therefore a consideration for the sale, the [petitioner’s]
acting in the expectation that, should the venture come into
fruition, they [would] get 60% of the net profits.”
[Agan, Jr. v. Philippine International Air Terminals Co., Inc.]
While the service providers presently operating at NAIA Terminal I
do not have an absolute right for the renewal or the extension of
their respective contracts, those contracts who duration extends
beyond NAIA IPT III’s In-Service-Date should not be unduly
prejudiced. These contracts must be respected not just by the
parties thereto but also by third parties. PIATCO cannot, by law and
certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive
right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the
arrastre and stevedoring service providers in the case of Anglo-Fil
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Trading Corporation v. Lazaro whose contracts consist of
Obligations & Contracts [Atty. Michael G. Aguinaldo]
temporary hold-over permits, the affected service providers in the
cases at bar, have a valid and binding contract with the
Government, through MIAA, whose period of effectivity, as well as
the other terms and conditions thereof cannot be violated.
4. Effect of False Cause
5. Presumption of Cause
6. Lesion or Inadequacy of Price
III. Forms of Contracts
A. Form not essential – except:
1. Formal contracts
2. Real contracts
B. When party may require execution of form
[Clarin v. Rulona] It cannot be denied that there was a perfected
contract of sale between the parties and that such contract was
already partially executed when the petitioner received the initial
payment of Php800. The latter’s acceptance of the payment clearly
showed his consent to the contract thereby precluding him from
rejecting its binding effect. With the contract being partially
executed, the same is no longer covered by the requirements of
the Statute of Frauds in order to be enforceable. Therefore, with
the contract being valid and enforceable, the petitioner cannot
avoid his obligation by interposing that Exhibit A is not a public
document. On the contrary, under Article 1357 of the Civil
Code, the petitioner can even be compelled by the
respondent to execute a public document to embody their
valid and enforceable contract.
9
 C. For convenience
[Hechanova v. Adil] The plaintiff has no cause of action. Plaintiff
has no standing to question the validity of the deed of sale
executed by the deceased defendant Jose Servando in favor of his
co-defendants Hechanova and Masa. No valid mortgage has
been constituted in plaintiff’s favor, the alleged deed of
mortgage being a mere private document and not
registered, moreover, it contains a stipulation (pacto comisorio)
which is null and void under Article 2088 of the Civil Code. Even
assuming that the property was validly mortgaged to the plaintiff,
his recourse was to foreclose the mortgage, not to seek annulment
of the sale.
IV. Reformation
A. When available
[National Irriggation Administration v. Gamit] Equity orders
the reformation of an instrument in order that the true intention of
the contracting parties may be expressed. The courts do not
attempt to make another contract for the parties. The rigor
of the legalistic rule that a written instrument should be the final
and inflexible criterion and measure of the rights and obligations of
the contracting parties is thus tempered, to forestall the effect of
mistake, fraud, inequitable conduct or accident.
Rationale: 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 for Reformation (Article 1359 of the Civil Code):
(1) There must have been a meeting of the minds of the parties to
the contract;
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
(2) The instrument does not express the true intention of the
Obligations & Contracts [Atty. Michael G. Aguinaldo]
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.
A perusal of the complaint at bar and the relief prayed for therein
shows that this is clearly a case for reformation of instrument
under Articles 1359 and 1362 of the Civil Code of the Philippines.
Since the complaint in the case at bar raises the issue that the
contract of lease does not express the true intention or agreement
of the parties due to mistake on the part of the plaintiff and fraud
on the part of the defendant, the court a quo should have
conducted a trial and received the evidence of the parties for the
purpose of ascertaining the true intention of the parties when they
executed the instrument in question.
From the foregoing premises, the Court holds that the trial court
erred in holding that the issue in this case is a question of law and
not a question of fact because it merely involves the interpretation
of the contract between the parties. The lower court erred in not
conducting a trial for the purpose of determining the true intention
of the parties. It failed to appreciate the distinction between
interpretation and reformation of contracts. While the aim in
interpretation of contracts is to ascertain the true intention
of the parties, interpretation is not, however, equivalent to
reformation of contracts.
Interpretation – act of making intelligible what was before not
understood, ambiguous, or not obvious; a method by which the
meaning of the language is ascertained
Reformation – 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.
10
In granting reformation, equity is not really making a new contract
for the parties, but is conforming and perpetuating the real
contract between the parties which, under the technical rules of
law, could not be enforced but for such reformation.
V. Rescissible Contracts
[Naga Telephone Co., Inc. v. CA] On the issue of prescription of
private respondent’s action for reformation of contract, petitioners
allege that respondent court’s ruling that the right of action “arose
only after said contract had already become disadvantageous and
unfair to it due to subsequent events and conditions, which must
be sometime during the latter part of 1982 or in 1983 x x x” is
erroneous. In reformation of contracts, what is reformed is
not the contract itself, but the instrument embodying the
contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and
therefore, cannot be an element in the determination of
the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that
an action upon a written contract must be brought within
10 years from the time the right of action accrues. Clearly,
the 10 year period is to be reckoned from the time the right of
action accrues which is not necessarily the date of execution
of the contract. As correctly ruled by respondent court, private
respondent’s right of action arose “sometime during the latter part
of 1982 or in 1983 when according to Atty. Luis General, Jr., he was
asked by private respondent’s Board of Directors to study said
contract as it already appeared disadvantageous to private
respondent. Private respondent’s cause of action to ask for
reformation of said contract should thus be considered to have
arisen only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, 10 years have not yet
elapsed.
B. Distinguish from:
1. Annulment
2. Relative Simulation
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
C. Grounds
Obligations & Contracts [Atty. Michael G. Aguinaldo]
D. When not available
A. Nature of Defect
B. Distinguish from Resolution under Article 1191
[Pryce Corporation v. Phil. Amusement and Gaming Corp.]
Well-taken is petitioner’s insistence that it had the right to ask for
“termination plus the full payment of future rentals” under the
provisions of the Contract, rather than just rescission under Article
1659 of the Civil Code. The Court is not unmindful of the fact that
termination and rescission are terms that have been used loosely
and interchangeably in the past.
The term “rescission is found in:
1.) Article 1191 of the Civil Code, the general provision on
rescission of reciprocal obligations;
2.) Article 1659, which authorizes rescission as an alternative
remedy , insofar as the rights and obligations of the lessor and
the lessee in contracts of lease are concerned; and
3.) Article 1380 with regard to the rescission of contracts.
Termination (or cancellation)
>”end in time or existence; a close, cessation or conclusion”
Rescission (more properly, resolution)
>”unmaking of a contract, or its undoing from the beginning, and
not merely its termination”
11
>mutual restitution is required in order to bring back the parties to
their original situation prior to the inception of the contract
Prior to its termination, the parties are obliged to comply with their
contractual obligations. Only after the contract has been cancelled
will they be released from their obligations.
C. Contracts subject to rescission
1. Entered into by guardians/legal representatives with
lesion
a. Acts of ownership
b. Acts of administration
2. In representation of absentees with lesion
3. In fraud of creditors
a. When fraud exists
b. Requirements
[China Banking Corp. v. CA] Alfonso Roxas Chua sold his right of
redemption to his son, Paulino Roxas Chua, in 1988. Thereafter,
Paulino redeemed the property and caused the annotation thereof
at the back of TCT 410603. This preceded the annotation of the
levy of execution in favor of China Bank by 2 years and the
certificate of sale in favor of China Bank by more than 3 years. On
this basis, the Court of Appeals concluded that the allegation of
fraud made by petitioner China Bank is vague and
unsubstantiated. Such conclusion, however, runs counter to the
law applicable in the case at bar. Inasmuch as the judgment of the
trial court in favor of China Bank against Alfonso Roxas Chua was
rendered as early as 1985, there is a presumption that the 1988
sale of his property, in this case the right of redemption, is
fraudulent under Article 1387 of the Civil Code. The fact that
private respondent Paulino Roxas Chua redeemed the property and
caused its annotation on the TCT more than 2 years ahead of
petitioner China Bank is of no moment. As stated in the case of
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Cabaliw v. Sadorra, “the parties here do not stand in equipoise, for
Obligations & Contracts [Atty. Michael G. Aguinaldo]
the petitioners have in their favor, by a specific provision of law,
the presumption of fraudulent transaction which is not overcome
by the mere fact that the deeds of sale were in the nature of public
instruments.”
This presumption is strengthened by the fact that the conveyance
has virtually left Alfonso’s other creditors with no other property to
attach. It should be noted that the presumption of fraud or
intention to defraud creditors is not just limited to the 2
instances set forth in the 1st and 2nd paragraphs of Article
1387 of the Civil Code. Under the 3rd paragraph of the same
article, the design to defraud creditors may be proved in
any other manner recognized by the law of evidence.
Badges of Fraud (Oria v. Mcmicking):
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.
3.) A sale upon credit by an insolvent debtor.
4.) Evidence of large indebtedness or complete insolvency.
5.) The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed
financially.
6.) The fact that the transfer is made between father and son,
when there are present other of the above circumstances.
7.) The failure of the vendee to take exclusive possession of all the
property.
It bears emphasis that it is not sufficient that the
conveyance is founded on a valuable consideration. In the
case of Oria v. Mcmicking, we had occasion to state that “In 12
determining whether or not a certain conveyance is
fraudulent the question in every case is whether the
conveyance was a bona fide transaction or a trick and
contrivance to defeat creditors, or whether it conserves to
the debtor a special right. It is not sufficient that it is
founded on good considerations or is made with bona fide
intent: it must have both elements. If defective in either of
these, although good between the parties, it is voidable as to
creditors. x x x The test as to whether or not a conveyance is
fraudulent is, does it prejudice the rights of creditors?” The
mere fact that the conveyance was founded on valuable
consideration does not necessarily negate the presumption of
fraud under Article 1387 of the Civil Code. There has to be a
valuable consideration and the transaction must have been made
bona fide.
Under Article 1381(3) of the Civil Code, contracts which are
undertaken in fraud of creditors when the latter cannot in any
manner collect the claims due them, are rescissible. The
existence of fraud or intent to defraud creditors may either
be presumed in accordance with Article 1387 of the Civil
Code or duly proved in accordance with the ordinary rules
of evidence.
Hence, the law presumes that there is fraud of creditors
when:
(a) There is alienation of property by gratuitous title by the debtor
who has not reserved sufficient property to pay his debts
contracted before such alienation; OR
(b) 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
decision or attachment need not refer to the property
alienated and need not have been obtained by the party
seeking rescission.
[Coastal Pacific Trading, Inc. v. Southern Rolling Mills Co.,
Inc.] To be sure, there was undue disadvantage. The payment
scheme devised by the Consortium continued the efficacy of the
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
primary lien, this time in its favor, to the detriment of the other
Obligations & Contracts [Atty. Michael G. Aguinaldo]
creditors. When one considers its knowledge that VISCO’s assets
might not be enough to meet its obligations to several creditors,
the intention to defraud the other creditors is even more striking.
Fraud is present when the debtor knows that its actions
would cause injury.
The assignment in favor of the Consortium was a rescissible
contract for having been undertaken in fraud of creditors. Article
1385 of the Civil Code provides for the effect of rescission, as
follows: “Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits,
and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may
be obliged to restore. “Neither shall rescission take place when the
things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith. “In this
case, indemnity for damages may be demanded from the
person causing the loss.”
On the basis of the finding of fraud, the award of
exemplary damages is in order, to serve as a warning to
other creditors not to abuse their rights. Under Article
2229 of the Civil Code, exemplary or corrective damages
are imposed by way of example or correction for the public
good. By their nature, exemplary damages should be imposed in
an amount sufficient and effective to deter possible future similar
acts by respondent banks. The Court finds the amount of
Php250,000 sufficient in the instant case.
[Caltex (Philippines), Inc. v. PNOC Shipping and Transport
Corp.] PSTC is bound by the Agreement. PSTC cannot accept the
benefits without assuming the obligations under the same
Agreement. PSTC cannot repudiate its commitment to assume the
obligations after taking over the assets for that will amount to
defrauding the creditors of LUSTEVECO. It will also result in failure
of consideration since the assumption of obligations is part of the
consideration for the transfer of the assets from LUSTEVECO to
PSTC. Failure of consideration will revert the assets to LUSTEVECO13
for the benefit of the creditors of LUSTEVECO. Thus, PSTC cannot
escape from its undertaking to assume the obligations of
LUSTEVECO as stated in the Agreement.
In this case, PSTC is aware of the pendency of the case between
Caltex and LUSTEVECO. PSTC assumed LUSTEVECO’s obligations,
including specifically any obligation that might arise from Caltex’s
suit against LUSTEVECO. The Agreement transferred the
unencumbered assets of LUSTEVECO to PSTC, making any money
judgment in favor of Caltex unenforceable against LUSTEVECO. To
allow PSTC to renege on its obligation under the Agreement will
allow PSTC to defraud Caltex. This militates against the statutory
policy of protecting creditors from fraudulent contracts.
Article 1313 of the Civil Code provides that “creditors are protected
in cases of contracts intended to defraud them.” Further, Article
1381 of the Civil Code provides that contracts entered into
in fraud of creditors may be rescinded when the creditors
cannot in any manner collect the claims due them. Article
1381 applies to contracts where the creditors are not
parties, for such contracts are usually made without their
knowledge. Thus, a creditor who is not a party to a contract can
sue to rescind the contract to prevent fraud upon him. Or, the
same creditor can instead choose to enforce the contract if a
specific provision in the contract allows him to collect his claim,
and thus protect him from fraud.
Caltex may enforce its cause of action against PSTC because PSTC
expressly assumed all the obligations of LUSTEVECO pertaining to
its tanker and bulk business and specifically, those relating to AC-
G.R. CV No. 62613. While Caltex is not a party to the Agreement, it
has a real interest in the performance of PSTC’s obligations under
the Agreement because the non-performance of PSTC’s obligations
will defraud Caltex.
4. Object of litigation
5. Payment by an insolvent
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Obligations & Contracts [Atty. Michael G. Aguinaldo]
[Uy Tong v. Silva] It is a settled principle that “a debt of
the bankrupt arising prior to the bankruptcy cannot be set
off against installments of rent falling due after
bankruptcy, although the installments are payable under a
written lease in effect before the bankruptcy.” Upon this
premise, the conclusion is easily reached that the debt of
claimants which arose prior to bankruptcy cannot be set off against
the installments of rent falling due from the insolvent after
bankruptcy. The reason therefore is quite evident: with respect to
the difference between the debt of claimants Eduardo Lopez, et al.,
in the amount of Php55,000.00 plus interest, and the rentals
corresponding to the period from February 28 to May 25, 1955,
retention or controversy had been effectively commenced by third
persons upon their filing of claims in the insolvency proceedings of
which claimants Lopez, et al., had due notice. For compensation
to take place, it is necessary, among other legal requisites,
“that over neither of them (the two debts) there be any
retention or controversy, commenced by third persons and
communicated in due time to the debtor.” This essential
element of compensation being absent, the same cannot take
place.
Besides, to allow compensation to the concurrent amount
of the mutual debts and credits would in effect give
claimants Lopez, et al., undue preference over other
creditors, as such set off will totally deplete the estate of
the insolvent, a situation entirely contrary to the purpose
of insolvency proceedings, which is to effect an equitable
distribution of the insolvent’s estate among his creditors.
D. Mutual Restitution
[Floro Enterprises, Inc. v. CA] It would seem that the issue to
be resolved in this case is whether the contract entered into by
petitioner Floro, Inc. and private respondent Phil. Rabbit was one of
sale on installment basis, as found by the CA, or one of lease, as
found by the RTC. However, the Court does not see any real need 14
for resolving this issue in view of the fact that the parties had
agreed to a mutual cancellation of their transaction. As established
by both respondent appellate court and the trial court, on January
10, 1983, private respondent Phil. Rabbit wrote petitioner Floro,
Inc. asking for the cancellation of the Agreement and the latter,
through a letter dated February 4, 1983, communicated to the
former its conformity thereto. Whether the contract is
characterized as a sale or a lease, the consequences of the
cancellation would be the same. The parties are to be
restored to their original positions inter se as far as
practicable.
The dissolution or the cancellation of the original Agreement
necessarily involves restoration of the parties to the status quo
ante prevailing immediately prior to the execution of the
Agreement i.e. the computer equipment reverts back to petitioner
Floro, Inc. and private respondent Phil. Rabbit is reimbursed the
amounts it had paid to the former. However, in this case, Phil.
Rabbit cannot reasonably demand reimbursement for the full
amount it had paid to petitioner Floro, Inc. because it cannot be
gainsaid that Phil. Rabbit had utilized the computer equipment for
its operations and benefitted from such use. Phil. Rabbit cannot be
allowed to unjustly enrich itself at the expense of Floro, Inc.
Hence, respondent appellate court was correct in ordering the
parties to restore to each other what each of them had received
under the contract but taking into account the use by private
respondent Phil. Rabbit of the computer equipment. However, it
was not quite correct in invoking, in this connection, Article 1385 of
the Civil Code. Article 1385 refers to contracts that are rescissible
for causes specified in Articles 1381 and 1382 of the Civil Code but
it does not refer to contracts that are dissolved by mutual consent
of the parties. Rather, the mutual restoration is in
consonance with the basic principle that when an
obligation has been extinguished or resolved, it is the duty
of the court to require the parties to surrender whatever
they may have received from the other so that they may
have received from the other so that they may be restored,
as far as practicable, to their original situation.
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
VI. Voidable Contracts
Obligations & Contracts [Atty. Michael G. Aguinaldo]
A. Distinguished from void contracts
B. Grounds
[Alcasid v. CA] Requisites for the Annulment of Contract
based on Fraud:
(1) It must have been employed by one contracting party upon the
other (Article 1342 and 1344);
(2) It must have induced the other party to enter into the contract
(Article 1338);
(3) It must have been serious (Article 1344);
(4) It must have resulted in damage and injury to the party
seeking annulment.
To invalidate consent, the error must be real and not one that
could have been avoided by the party alleging it. The error must
arise from facts unknown to him. He cannot allege an error
which refers to a fact known to him or which he should have known
by ordinary diligent examination of the facts. An error so patent
and obvious that nobody could have made it, or one which could
have made it, or one which could have been avoided by ordinary
prudence, cannot be invoked by the one who made it in order to
annul his contract. Petitioner could have avoided the alleged
mistake had she exerted efforts to verify from her co-owners if
they really consented to sell their respective shares.
Undue influence, therefore, is any mean employed upon a party
which, under the circumstances, he could not well resist and which
controlled his volition and induced him to give his consent to the
contract, which otherwise he would not have entered into. It must
in some measure destroy the free agency of a party and
interfere with the exercise of that independent discretion
which is necessary for determining the advantages or
disadvantages of a proposed contract. If a competent 15
person has once assented to a contract freely and fairly, he
is bound thereby. The finding of the CA that petitioner executed
the contract of her own free will and choice and not from duress is
fully supported by the evidence. Such finding should not be
disturbed.
[Cayabyab v. IAC] General Rule: Whoever alleges fraud or
mistake in any transaction must substantiate his allegation, since it
is presumed that a person takes ordinary care for his concerns and
that private transactions have been fair and regular. especially
applied when fraud or mistake is alleged to annul notarial
documents which are clothed with the prima facie
presumption of regularity and due execution (Revised
Rules on Evidence, Rule 132 (B), Sec. 30)
Exceptions: Article 1332 of the Civil Code which provides: “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.” where a party
to a contract is illiterate, or cannot read nor understand
the language in which the contract is written, the burden is
on the party interested in enforcing the contract to prove
that the terms thereof are fully explained to the former in
a language understood by him. In all contractual, property or
other relations, where one of the parties is at a disadvantage on
account of his physical, mental or other handicap, the courts must
be careful and vigilant for his protection.
In the case at bench, both respondent Faustino Landingin and
Agapita Ferrer were illiterate. The latter, in fact, could only
thumbmark her signature on all the deeds of sale; and although
respondent Faustino Landingin may have affixed his signature to
the deeds of sale, he could neither read nor write and actually lost
the use of his right arm to paralysis in 1971. To make matters
worse, all the deeds were written in English while the spouses
could speak and understand only the Pangasinese and Ilocano
dialects.
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Obligations & Contracts [Atty. Michael G. Aguinaldo]
Since fraud and undue influence in the execution of the subject
deeds are alleged by respondents, the burden, under the
circumstances, shifted to petitioner to prove that the contents
thereof had been adequately explained to the vendors and that the
latter fully understood the same. As very well found by the CA,
petitioner failed to discharge this burden. The sale of the subject
lots and the execution of the deeds of sale were done
surreptitiously and in fraud of the couple and their heirs.
[Theis v. CA] In the case at bar, the private respondent obviously
committed an honest mistake in selling parcel no. 4. As correctly
noted by the CA, it is quite impossible for said private respondent
to sell the lot in question as the same is not owned by it. The good
faith of the private respondent is evident in the fact that when the
mistake was discovered, it immediately offered two other vacant
lots to the petitioners or to reimburse them with twice the amount
paid. That petitioners refused either option left the private
respondent with no other choice but to file an action for the
annulment of the deed of sale on the ground of mistake. As
enunciated in the case of Mariano v. CA: “A contract may
be annulled where the consent of one of the contracting
parties was procured by mistake, fraud, intimidation,
violence, or undue influence.
Article 1331 of the New Civil Code provides for the situations
whereby mistake may invalidate consent. It states: ‘Article 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.’ Tolentino explains that the concept
of error in this article must include both ignorance, which
is the absence of knowledge with respect to a thing, and
mistake properly speaking, which is a wrong conception
about said thing, or a belief in the existence of some
circumstances, fact, or event, which in reality does not
exist. In both cases, there is a lack of full and correct
knowledge about the thing. The mistake committed by the
private respondent in selling parcel no. 4 to the petitioners falls
16
 within the second type. Verily, such mistake invalidated its consent
and as such, annulment of the deed of sale is proper.
Note: Purchaser is entitled to recover the money paid by him
where the contract is set aside by reason of the mutual material
mistake of the parties as to the identity or quantity of the land
sold. (DBP v. CA)
C. Mutual Restitution
VII. Unenforceable Contracts
A. Unauthorized contracts
[Badillo v. Ferrer] The Deed of Extrajudicial Partition and Sale is
not a voidable or an annullable contract under Article 1390 of the
New Civil Code. Article 1390 renders a contract voidable if
one of the parties is incapable of giving consent to the
contract of if the contracting party’s consent is vitiated by
mistake, violence, intimidation, undue influence or fraud. In
this case, however, the appellee minors are not even parties to the
contract involved. Their names where merely dragged into the
contract by their mother who claimed a right to represent them,
purportedly in accordance with Article 320 of the New Civil Code.
The Deed of Extrajudicial Partition and Sale is an unenforceable or,
more specifically, an unauthorized contract under Articles 1403(1)
and 1317 of the New Civil Code.
Clearly, Clarita Ferrer Badillo has no authority or has acted beyond
her powers in conveying to the appellants that 5/12 undivided
share of her minor children in the property involved in this case.
The powers given to her by the laws as the natural guardian covers
only matters of administration and cannot include the power of
disposition. She should have first secured the permission of the
court before she alienated that portion of the property in question
belonging to her minor children.
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
The appellee minors never ratified this Deed of Extrajudicial
Obligations & Contracts [Atty. Michael G. Aguinaldo]
Partition and Sale. In fact they questioned its validity as to them.
Hence, the contract remained unenforceable or unauthorized. No
restitution may be ordered from the appellee minors either as to
that portion of the purchase price which pertains to their share in
the property or at least as to that portion which benefited them
because the law does not sanction any.
B. Statute of Frauds
[Diwa v. Donato] The trial court erred when it further held that
specific performance does not lie against respondent, by applying
the Statute of Frauds. Under said Statute, agreements for
the sale of real property “shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be
in writing, and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its
contents.” Non-compliance with this provision, while not
invalidating the contract which is not in writing, makes
ineffective the action for specific performance.
It is settled, however, that the Statute of Frauds applies
only to executory and not to completed, executed, or
partially executed contracts. Thus, as early as 1925, we
held that where the land has been delivered under the oral
contract of sale, and the vendees have already paid part of
the purchase price, the heirs of the vendor cannot invoke
the statute of frauds in a proceeding where the vendees
seek to have the land registered in their names.
In the case at bench, the agreement to sell the lot in question was
already partially executed when the present action was
commenced. No specific denial was made by either respondent
that petitioners have paid a part of the contract price, and that
possession of the land has been delivered to them. Respondent L.
Donato’s argument in his Memorandum filed on July 2, 1991 that 17
petitioners’ act of refunding the amount of Php168,000.00 covered
by a receipt dated November 19, 1986, and consigning it with the
trial court effectively revoked the contract to sell over the property
does not persuade us. In the first place, the alleged refunding is
not supported by evidence; and in the second place, even
assuming it did occur, there is still the Php168,000.00 partial
payment made by petitioners to respondent Napoleon L. Donato
that makes for the partial execution of the contract to sell. Finally,
we do not see how the trial court could have doubted our finding
as to the existence of a contract to sell.
[Litonjua v. Fernandez] In Rosencor Dev’t Corp. v. CA, the
term “statute of frauds” is descriptive of statutes which
require certain classes of contracts to be in writing. The
statute does not deprive the parties of the right to contract with
respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable.
Purpose: to prevent fraud and perjury in the enforcement of
obligations, depending for their existence on the unassisted
memory of witnesses, by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party
to be charged.
The statute is satisfied or, as it is often stated, a contract or
bargain is taken within the statute by making and executing a note
or memorandum of the contract which is sufficient to state the
requirements of the statute. The application of such statute
presupposes the existence of a perfected contract.
However, 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 names 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 or within which it is connected, without
resorting to parol evidence. To be binding on the persons
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
to be charged, such note or memorandum must be signed
Obligations & Contracts [Atty. Michael G. Aguinaldo]
by said party or by his agent duly authorized in writing. In
City of Cebu v. Heirs of Rubi, the Court held that the exchange of
written correspondence between the parties may constitute
sufficient writing to evidence the agreement for purposes of
complying with the statute of frauds.
Contrary to the petitioners’ contention, the letter of January 16,
1996 is not a note or memorandum within the context of Article
1403(2) because it does not contain the following: (a) all the
essential terms and conditions of the sale of the properties; (b) an
accurate description of the property subject of the sale; and (c) the
names of the respondents-owners of the properties. Furthermore,
the letter made reference to only one property, that covered by
TCT No. T-36755.
The failure of respondent Fernandez to object to parol evidence to
prove (a) the essential terms and conditions of the contract
asserted by the petitioners and, (b) her authority to sell the
properties for the respondents-registered owners did not and
should not prejudice the respondents-owners who had been
declared in default.
VIII. Void Contracts
A. Lack of Essential Elements
B. Prohibited Contracts
C. Illegal Contracts
1. In pari delicto – effects
[Ramirez v. Ramirez] Where the act involved constitutes a
criminal offense, the applicable provision is Article 1411: Petitioner
alleged that the signatures of Dolores on the Deed of Donation and
on the Waiver of Possessory Rights are a forgery. Respondent does
not deny this allegation. Forging a person’s signature corresponds 18
to the felony of falsification under Section 4, Title IV of the Revised
Penal Code. Hence, the act of forging Dolores’s signature
constitutes a criminal offense under the terms of Article 1411 of
the Civil Code. The Court now proceeds to determine if there is
ground to hold the parties in pari delicto under Article 1411 of the
Civil Code. Under this article, it must shown that the nullity of the
contract proceeds from an illegal cause or object, and the act of
executing said contract constitutes a criminal offense. The second
requirement has already been discussed and is found to be
present.
Object and cause are two separate elements of a donation
and the illegality of either element gives rise to the
application of the doctrine of pari delicto.
Object – subject matter of the donation
Cause – essential reason which moves the parties to enter into the
transaction
Petitioner wrongly asserts that the donated real properties are
both the object and cause of the donation. In fact, the donated
properties pertain only to the object. Therefore, while he is correct
in stating that the object of the donation is legal, his argument
misses the point insofar as the cause is concerned. The cause
which moved the parties to execute the Deed of Donation and the
Waiver of Possessory Rights, the motive behind the forgery, is the
desire to evade the payment of publication expenses and
inheritance taxes, which became due upon the death of Dolores.
Undeniably, the Deed of Donation and the Waiver of Possessory
Rights were executed for an illegal cause, thus completing all the
requisites for the application of Article 1411.
Both petitioner and respondent are in pari delicto. Neither one may
expect positive relief from the Courts from their illegal acts and
transactions. Consequently, they will be left as they were at the
time the case was filed.
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
Obligations & Contracts [Atty. Michael G. Aguinaldo]
2. Exceptions to in pari delicto
[Frenzel v. Catito] Lands of the public domain, which include
private lands, may be transferred or conveyed only to individuals
or entities qualified to acquire or hold private lands or lands of the
public domain. Aliens, whether individuals or corporations, have
been disqualified from acquiring lands of the public domain. Hence,
they have also been disqualified from acquiring private lands. Even
if, as claimed by the petitioner, the sales in question were entered
into by him as the real vendee, the said transactions are in
violation of the Constitution; hence, are null and void ab initio. A
contract that violates the Constitution and the law, is null and void
and vests no rights and creates no obligations. It produces no legal
effect at all. The petitioner, being a party to an illegal contract,
cannot come into a court of law and ask to have his illegal
objective carried out. One who loses his money or property by
knowingly engaging in a contract or transaction which involves his
own moral turpitude may not maintain an action for his losses. To
him who moves in deliberation and premeditation, the law is
unyielding. The law will not aid either party to an illegal
contract or agreement; it; leaves the parties where it finds
them. Under Article 1412 of the New Civil Code, the petitioner
cannot have the subject properties deeded to him or allow him to
recover the money he had spent for the purchase thereof. Equity
as a rule will follow the law and will not permit that to be
done indirectly which, because of public policy, cannot be
done directly. Where the wrong of one party equals that of
the other, the defendant is in the stronger position…it
signifies that in such a situation, neither a court of equity
nor a court of law will administer a remedy. The rule is
expressed in the maxims: EX DOLO ORITUR ACTIO and IN PARI
DELICTO POTIOR EST CONDITIO DEFENDENTS.
D. Mutual Restitution
[DBP v. CA] The CA, after an extensive discussion, found that
there had been no bad faith on the part of either party, and this 19
remains uncontroverted as a fact in the case at bar.
 Correspondingly, respondent court correctly applied the rule that if
both parties have no fault or are not guilty, the restoration
of what was given by each of them to the other is
consequently in order. This is because the declaration of nullity
of a contract which is void ab initio operates to restore things to
the state and condition in which they were found before the
execution thereof.
Therefore, the purchaser is entitled to recover the money
paid by him where the contract is set aside by reason of
the mutual material mistake of the parties as to the
identity or quantity of the land sold. And where a
purchaser recovers the purchase money from a vendor who
fails or refuses to deliver the title, he is entitled as a
general rule to interest on the money paid from the time of
payment.
A contract which the law denounces as void is necessarily no
contract whatever and the acts of the parties in an effort to create
one can in no wise bring about a change of their legal status. The
parties and the subject matter of the contract remain in all
particulars just as they did before any act was performed in
relation thereto. An action for money had and received lies to
recover back money paid on a contract, the consideration of which
has failed. As a general rule, if one buys the land of another, to
which the latter is supposed to have a good title, and, in
consequence of facts unknown alike to both parties, he has no title
at all, equity will cancel the transaction and cause the purchase
money to be restored to the buyer, putting both parties in status
quo. Thus, on both local and foreign legal principles, the return by
DBP to respondent spouses of the purchase price, plus
corresponding interest thereon, is ineluctably called for.
IX. Natural Obligations
X. Estoppel
XI. Trusts
For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***
[Oco v. Limbaring] Trust - the legal relationship between one
Obligations & Contracts [Atty. Michael G. Aguinaldo]
person who has equitable ownership of a property and another
who owns the legal title to the property. Trustor - one who
establishes the trust
Beneficiary - person for whose benefit the trust was created
Trustee - one in whom, by conferment of a legal title, confidence
has been reposed as regards the property of the beneficiary
Trusts may either be express or implied.
Express trusts – those created by direct and positive acts of the
parties, such as by some writing, deed or will; or by words either
expressly or impliedly evidencing an intention to create a trust
Implied trusts – those that, without being expressed, are
deducible from the nature of the transaction as matters of intent;
or that are super-induced in the transaction by operation of law as
a matter of equity, independently of the particular intention of the
parties
Respondent has presented only bare assertions that a trust was
created. Noting the need to prove the existence of a trust, the
Court has held thus: “As a rule, the burden of proving the
existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of
the trust and its elements. While implied trusts may be proved by
oral evidence, the evidence must be trustworthy and received by
the courts with extreme caution, and should not be made to rest
on loose, equivocal or indefinite declarations. Trustworthy
evidence is required because oral evidence can easily be
fabricated.”
The Civil Code states as follows: “Art. 1448. There is an implied
trust when property is sold, and the legal estate is granted to one
party but the price is paid by another for the purpose of having the
beneficial interest of the property. The former is the trustee, while 20
 the latter is the beneficiary. However, if the person to whom the

Obligations & Contracts [Atty. Michael G. Aguinaldo]

title is conveyed is a child, legitimate or illegitimate, of the one
paying the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the child.”
Under the last sentence of Art. 1448, respondent’s alleged acts—
paying the price of the subject properties and, in the titles, naming
his children as owners—raise the presumption that a gift was
effected in their favor. Respondent failed to rebut this
presumption. Absent any clear proof that a trust was
created, he cannot be deemed a real party in interest. That
he should be deemed a trustor on the basis merely of having paid
the purchase price is plainly contradicted by the presumption
based on Art. 1448 of the Civil Code “that there is a gift in favor of
the child,” not a trust in favor of the parent.

XII. Prescription

A. Acquisitive Prescription

1. Good Faith/Bad Faith

2. Tacking of Possession

B. Statute of Limitations

21

For REVIEW purposes only. ***Karell Marie G. Lascano – Ateneo Law Batch 2013***